DIF III – Global Co-Investment Fund LP v Babcock & Brown International Pty Limited

Babcock & Brown Limited (BBL) was, until its collapse in 2009, a public company listed on the Australian Securities Exchange which carried on business in Australia and elsewhere as a specialist investment and advisory firm. It will be convenient to refer to the BBL Group and its members as “Babcock & Brown”.

BBL’s businesses included a funds management business carried on through the third defendant, DIF Capital Partners Limited, formerly known as Babcock & Brown Direct Investment Fund Limited (the Manager). The Manager had been established in 2003 and prior to the events giving rise to this litigation had previously established two successful private investment funds known as “DIF I” and “DIF II”. The Manager was a wholly owned (indirect) subsidiary of BBL. It did not appear at the hearing.

The Manager had an Investment Committee comprising the fourth defendant, Mr Robert Topfer, the fifth defendant, Mr Phillip Green, the sixth defendant, Mr Fergus Neilson, the seventh defendant, Mr Harry Nicholson and the eighth defendant, Professor Bob Officer. Mr Topfer was the Global Head of Corporate & Structured Finance of Babcock & Brown and a member of the Group’s Executive Committee. Mr Green was the Chief Executive Officer and Managing Director of the Group and the Chair of its Executive Committee. Mr Neilson was Chief Executive Officer of the Manager. Mr Nicholson was the Chief Investment Officer, Private Equity of the Manager. Professor Officer was an Independent Non-Executive Director of the Manager and Chair of the Investment Committee.

The first defendant, Babcock & Brown International Pty Ltd (BBIPL), was an intermediate holding company through which BBL held operating and investment subsidiaries in Australia, North America, Europe and the Asia Pacific. One such subsidiary (itself held through an intermediate holding company, Babcock & Brown Investment Holdings Pty Ltd (BBIH)) was the second defendant, Babcock & Brown LP (BBLP). BBLP was the main operating company through which BBL held assets in the United States.

In March 2007, the Manager sponsored and promoted through a Private Placement Memorandum (the PPM) a new fund. It will be convenient on occasions to refer to that fund as the DIF III Fund. Ultimately, on 30 August 2007, the first plaintiff, DIF III – Global Co-Investment Fund LP (formerly Babcock & Brown DIF III Global Co-Investment Fund LP) (the Partnership), a limited liability partnership established under the laws of Delaware, was set up to hold funds contributed by investors, who became limited partners of the Partnership. The second plaintiff, DIF III GP Limited (formerly known as Babcock & Brown DIF III GP Limited) (the General Partner), a company incorporated in the Cayman Islands, was the General Partner of the Partnership and in that capacity had sole responsibility for the Partnership’s management. Pursuant to a Management Agreement dated 6 September 2007, the Manager was appointed to manage the investments of the Partnership. It was intended that funds raised through the PPM would be invested in projects and businesses identified by Babcock & Brown and in which Babcock & Brown also proposed to acquire an interest. The target for contributions to the fund was approximately USD350 million, although subscriptions were eventually closed on 30 May 2008 with a total equity investment from investors of only USD80.7 million.

At about the same time as the PPM was issued, Babcock & Brown was approached by Deutsche Bank, one of the financial advisors of Coinmach Services Corporation, concerning the possibility of acquiring that company. Coinmach was a publicly listed Delaware corporation which was the leading provider of outsourced laundry equipment services for multi-family housing properties in North America. Its core business, known as the “route business”, involved leasing communal laundries in multi-dwelling buildings and installing and servicing laundry equipment in those buildings. Coinmach also had a laundry machine rental business, which rented out laundry and other household appliances, and a laundry equipment distribution business.

For the purposes of considering the acquisition, Babcock & Brown established the Coinmach Deal Team consisting of Ms Berry Talintyre, Mr Jake Haines, Ms Sridhara Ramachandran and Mr Justin Levi. Ms Ramachandran was an employee of BBLP. The other three members of the team were employees of Babcock & Brown Australia Pty Ltd, but were seconded to BBLP during the Coinmach transaction. The Coinmach Deal Team was supervised by Mr Topfer and ultimately the Group’s Executive Committee. The proposed acquisition was given the code name within Babcock & Brown as “Project Spin”.

On 21 March 2007, BBLP, in a letter signed by Ms Talintyre, submitted to Deutsche Bank a “preliminary non-binding indication of interest” in acquiring Coinmach.

Ultimately, BBLP’s bid was successful and agreement was reached to acquire all of Coinmach’s issued shares for a final total price of USD1,460,920,000, including transaction costs (the Coinmach Transaction). For that purpose, Babcock & Brown incorporated Spin Holdco Inc which acquired Coinmach on 20 November 2007 through the merger of its subsidiary, Spin Acquisition Co, with and into Coinmach.

In connection with the transaction, the sixteenth defendant, The Royal Bank of Scotland Plc (RBS), and Deutsche Bank agreed to provide financing for the acquisition. In addition, the seventeenth defendant, RBS Equity Corporation (RBS Equity), a wholly owned (indirect) subsidiary of RBS that was incorporated in New York, agreed to underwrite equity of USD136,000,000 in return for certain fees to be paid by Babcock & Brown. It was RBS Equity’s intention to sell down its equity as soon as possible and RBS’s intention to syndicate its debt.

The balance of the equity to acquire Coinmach came largely from various companies in the Babcock & Brown Group and the Partnership. Those companies all invested through Babcock & Brown Spinco LLC (B&B Spinco). The total equity investment of B&B Spinco was USD176.3 million. BBIPL, through BBIH, originally agreed to invest USD92 million of that amount. However, the amount of its investment was reduced to USD67 million and, following approval from the Investment Committee, the difference of USD25 million was invested by the Partnership. On completion of the transaction, BBLP was entitled to be paid an origination fee of approximately USD21.6 million.

Before the transaction completed, RBS raised concerns about it. There is a dispute about precisely what those concerns were to which it will be necessary to return. The result, however, was that on the day the acquisition completed, BBLP and RBS Equity, among others, entered into two escrow agreements by which amounts totalling USD21.5 million and USD13,479,236.82 were held in escrow by Wells Fargo Bank to compensate RBS Equity for losses it suffered on its investment in Coinmach. The amount paid into the escrow accounts included the origination fee payable to BBLP.

The investment was not a success. In late 2009, Coinmach’s debt was restructured. The result of that restructure was that the existing shareholders’ interest in Coinmach was greatly reduced in exchange for a right to receive certain deferred profits. Ultimately, the Partnership received USD1,338,805 in May 2013 and a further USD89,564 in August 2013 in respect of its investment. It claims the difference between its investment (USD25 million) plus investment costs of USD1,093,562.77 less the amount it has received from the defendants. Those claims have spawned a number of cross-claims.

Originally, Ms Talintyre and Mr Richard Umbrecht, the head of the United States Division of Babcock & Brown’s corporate finance business unit and a member of the Babcock & Brown Executive Committee who participated in some of the events giving rise to these proceedings, were also named as defendants. However, those claims were settled before the commencement of the hearing and nothing further needs to be said about them.

In addition, during final submissions, the plaintiffs settled with BBIPL and BBLP and discontinued their claims against them. However, those claims still remain relevant because of cross-claims for contribution against BBIPL and BBLP which remain on foot; and there is a question whether the release of those claims had the effect of releasing some of the claims against Messrs Topfer and Green. Also during final submissions, the plaintiffs settled with RBS and RBS Equity. At the same time, the cross-claims for contribution involving RBS and RBS Equity were discontinued and RBS discontinued a cross-claim it had against Spin Holdco that relied on an indemnity which that company had given in favour of RBS. The result is that the claims involving RBS and RBS Equity can also be put to one side.

Broadly speaking, the plaintiffs’ remaining claims are of four types.

First, it is alleged that each of the BBIPL, BBLP, Mr Topfer and Mr Green (the Promoter Defendants) were promoters of the Coinmach Transaction and in that capacity owed fiduciary duties to the Partnership in relation to its investment in Coinmach. Mr Topfer and Mr Green are also said to have owed fiduciary duties as directors of the Manager and members of the Investment Committee. In addition, Mr Topfer is said to have owed fiduciary duties as a director of the General Partner. Each is said to have breached the fiduciary duties they owed by failing to disclose to the Partnership what might neutrally be referred to as RBS’s position in relation to the transaction. As I will explain, there is a dispute concerning precisely what the plaintiffs are entitled to advance consistently with the final version of their claim, which is set out in the Second Further Amended Commercial List Statement (SFACLS).

The claim that the Promoter Defendants breached their fiduciary duties is put in two ways. First, it is alleged that each of the Promoter Defendants owed a duty to disclose to the plaintiffs RBS’s position. Second, it is alleged that each of the Promoter Defendants (and Messrs Topfer and Green by reason of the fiduciary duties arising from their other positions) were in a position of conflict arising from their knowledge of RBS’s position and their interest or duties to others in seeing the Coinmach Transaction complete. It is alleged that that position of conflict could only have been overcome with the fully informed consent of the Partnership, which was not obtained. The plaintiffs claim equitable compensation in respect of the breaches of duty calculated as the amount of the Partnership’s investment plus the costs of investment less the amount the Partnership has received.

In addition, the plaintiffs plead that each of BBIPL and BBLP knowingly assisted in Messrs Topfer and Green’s breaches of duty. They also originally claimed equitable compensation in respect of that conduct. As I have said, the claims against BBIPL and BBLP have been discontinued. They only remain relevant to claims for contribution made by Mr Topfer and Mr Green.

Second, a number of claims are made alleging that one or more defendants engaged in misleading and deceptive conduct in contravention of s 1041H of the Corporations Act 2001 (Cth) (the Corporations Act) and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act). The pleading is, to say the least, confused. However, as finally put, it appears that those claims can be divided into three categories.

First, it is alleged that each member of the Investment Committee by approving the recommendation to invest in Coinmach represented to the General Partner that the investment was commercially advisable and worthwhile. That representation is said to have been misleading and deceptive because the representation was either a representation as to a future matter or a representation that the members of the Investment Committee held the opinion that the investment was commercially advisable and worthwhile, and in either case the members of the Investment Committee did not have reasonable grounds for making the representation. Various reasons are given to which it will be necessary to return. In addition, to the extent that the representation is said to concern a future matter and the claim is made under the ASIC Act, the plaintiffs rely on s 12BB(2), which provides that a person is taken not to have had reasonable grounds for making a representation unless evidence is adduced to the contrary.

The Manager is said to be vicariously liable for the conduct of the Investment Committee. In final submissions, it was also suggested that the representation was made by the Manager by communicating the decision of the Investment Committee to the General Partner. Again, there is a question concerning whether the case as advanced in final submissions went beyond the one pleaded.

Second, it is alleged that Messrs Topfer and Green engaged in misleading and deceptive conduct by failing to disclose RBS’s position in relation to the investment. The obligation to disclose RBS’s position is said to have arisen in two ways. One is that the failure to disclose that matter made the representation arising from approval by the Investment Committee misleading. The Manager is said to be vicariously liable for that conduct. The other is that an investor would reasonably have expected Messrs Topfer and Green as promoters of the transaction to disclose RBS’s position and for that reason the failure by them to do so was misleading and deceptive.

Third, it is alleged that the Manager engaged in misleading and deceptive conduct by failing to disclose RBS’s position and that there was a substantial risk that the investment would not be commercially viable.

In each case, it is said that the Partnership would not have made the investment had the misleading and deceptive conduct not occurred. The Partnership and the General Partner on behalf of the Partnership claim damages under s 1041I of the Corporations Act and s 12GF of the ASIC Act. Again, those damages are said to be calculated as the amount of the investment plus the cost of the investment less the amount recovered. Curiously, no claim for damages under those sections is made against Mr Neilson, Mr Nicholson or Professor Officer. In final submissions, the plaintiffs contended that that was an oversight; and they made it clear that they had sought damages from those three defendants as well.

The third claim or group of claims consist of allegations that each member of the Investment Committee owed a common law duty of care in representing to the General Partner that the investment was commercially advisable and worthwhile and in providing services under the Management Agreement. Messrs Topfer and Green are said to have breached that duty of care by failing to disclose to the Partnership RBS’s position in relation to the investment. Each member of the committee is said to have breached that duty by failing properly to assess the investment in a number of respects. Those respects correspond to the matters relied on for the contention that the members of the Investment Committee did not have reasonable grounds for making the representations that form the basis of the statutory causes of action. Again, the Manager is said to be vicariously liable for the conduct complained of.

A similar case is pleaded against the Manager on the basis that:

Fourth, the plaintiffs, exercising leave granted to them under the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (the 2017 Act), seek to recover the amount for which the Manager is liable from insurers who provided professional indemnity insurance to Babcock & Brown.

Each of these claims raises a number of issues and defences to which it will be necessary to return.

In addition to the plaintiffs’ claims, the proceedings give rise to a number of cross-claims. Some of those appear to be misconceived because they are claims for contribution in respect of apportionable claims. However, as I have said, Messrs Topfer and Green do make claims for contribution against BBIPL and BBLP in respect of the breach of fiduciary duty claims against them. One issue in relation to those claims is whether they are time-barred.

There are also two remaining substantive groups of cross-claims. First, BBIPL, BBLP and Messrs Topfer, Green, Neilson and Nicholson have filed cross-claims against the insurers who provided relevant directors and officers liability insurance (the D&O Insurers) to Babcock & Brown. BBIPL and BBLP seek indemnity for costs they have incurred in funding the defences of Messrs Green, Topfer, Neilson and Nicholson and for any loss for which they are liable to indemnify those individuals. Each of BBIPL, BBLP and Messrs Topfer, Green, Neilson and Nicholson seek indemnity for their own liability. The D&O Insurers deny liability on a number of grounds.

Second, each of the Investment Committee members other than Professor Officer have filed cross-claims against the PI Insurers claiming an indemnity in respect of any liability they have to the plaintiffs together with payment of their defence costs. Those cross-claims raise similar issues to the claim made by the plaintiffs against the PI Insurers.

As I have said, the PPM was issued in March 2007. It stated that the fund was “targeting US$350 million of equity capital commitments, including co-investments by Babcock & Brown and its affiliates of 10 per cent of the total Fund commitments” and that the investment objective was “to earn a minimum net unleveraged IRR [internal rate of return] of 20% by primarily co-investing with B&B and its affiliates in “event-driven” private equity, developmental infrastructure, operating leasing and structured finance, and opportunistic real estate globally”. The term of the fund was intended to be seven years. The PPM indicated that the Manager would charge an annual fee equal to 2.0 per cent of the net invested capital.

The PPM contained a section setting out the investment process intended to be followed by the Manager. Under the heading “Screening/Due Diligence” it stated:

The PPM also stated that “the Fund” would generally consider only those transactions forecast to yield “a pre-tax, gross, unlevered IRR in excess of 23%”.

The PPM stated that all investments would be considered by a Compliance Committee “which is specifically charged with responsibility for protecting investors from conflict-of-interest risk”. Following approval by the Compliance Committee, the PPM stated that the “DIF management team” would prepare an investment recommendation addressed to the Investment Committee, which was required to review and approve each investment.

The PPM stated that investment in the Fund “involves a high degree of risk”. It went on to state “As a result, the investor may lose all of its investment” and later “An investment in the Fund should only be considered by persons who can afford a loss of their entire investment”.

The PPM also describes the possibility of conflicts in some detail. In relation to those it stated:

At about the same time as Babcock & Brown started promoting the DIF III Fund, it commenced limited due diligence investigations of Coinmach which led to the preliminary non-binding indication of interest to acquire Coinmach dated 21 March 2007.

Following that letter, Babcock & Brown commenced a more detailed due diligence of Coinmach and the Coinmach Deal Team prepared what was known within Babcock & Brown as a “Heads Up Capital Approval Request”. That document was a precursor to a formal Capital Approval Request (CAR). The Heads Up CAR was sent to Mr Topfer on 2 April 2007. It stated that it was anticipated that Babcock & Brown would pay USD14 per share for all the shares in Coinmach, which was a premium of approximately 29 per cent on the 30 day weighted average price, making a total purchase price of USD1,450 million made up of USD1,060 million in debt and USD390 million in equity. The existing net debt of Coinmach was USD645 million. It was anticipated that USD100 million would come from Babcock & Brown and USD50 million from “DIF” and further sums from other Babcock & Brown entities. The CAR commented that on these figures the expected IRR was approximately 20 per cent (30.4 per cent for Babcock & Brown assuming an investment of USD100 million and an upfront fee of USD28 million).

In connection with the due diligence process, Mr Haines created a financial model for Coinmach relying on information obtained from the due diligence process. As might be expected, the model went through a number of iterations, some of which were reviewed by Mr Topfer and Mr Green.

On 2 May 2007, Ms Talintyre distributed a CAR seeking approval for USD85 million of equity funding from Babcock & Brown for the Coinmach Transaction. That amount included USD35 million “short term bridge for DIF equity subject to DIF approval”. It observed that Babcock & Brown’s total exposure would be reduced by an upfront fee of approximately USD27 million.

The CAR contained an outline of Coinmach’s historical financial results including the following figures for revenue:

The table also contained the following figures for Free Cash Flow which was said to be “Calculated as EBITDA – Maintenance CapEx – Growth Capex (rental)”:

The CAR also contained an analysis of the main effects on revenue, which showed that the principal changes in EBITDA between the 2001 financial year and 2007 financial year (adjusted) (which ended on 31 March) were caused by a decrease in loads per machine of 3 per cent from 2001 to 2007 and an increase in “average vend price per load” from $0.93 in 2001 to $1.16 in 2007 (which was said to represent a compound annual growth rate (CAGR) of 3.8 per cent).

The CAR also contained the following projections for revenue from 2008 to 2012:

The increases in revenue were attributed to what were described as a number of “current initiatives”. The main contributing factor was described as “Tuck-In Acquisitions” which was explained in these terms in the CAR:

Other current initiatives were said to include targeted marketing to colleges, additional collection services, continued growth in the rental business and additional efficiencies from IT deployment.

The forecast IRR (pre-management fees) was approximately 21.2 per cent on the basis of an exit multiple of 7.7 times revenue in 2011.

The CAR lists a number of “Potential Upside Opportunities” including an increase in the machine base of one per cent per annum (approximately 6,600 machines per year), the acquisition of Mac-Gray, the second largest laundry facilities management business in the United States, and the provision of services for other types of modular machine systems. The one per cent increase in the machine base was said to be based on advice from management.

The CAR in a section headed “8.2 Debt Funding” stated:

The information contained in the CAR was also distributed to potential investors, including Mr Will Peterson, the portfolio manager of the Everest Babcock & Brown Opportunity Fund, which was another Babcock & Brown fund that was proposing to invest in Coinmach. In response to queries raised by Mr Peterson in relation to the assumption that there would be zero growth in loads per machine for each year of the model compared to actual declines in the period from 2002 to 2007, Mr Haines said:

Together with the CAR, Babcock & Brown prepared a PowerPoint supplement. On the summary page under the heading “Historical Performance” it stated:

The CAR supplement contained a number of other tables and charts, including an analysis showing the explanation for the change in EBITDA between 2001 and 2007 (adjusted). The supplement also included the following table:

On 7 May 2007, the Executive Committee approved the investment and, on the same day, BBLP submitted its proposal to acquire Coinmach. The offer was to acquire 100 per cent of the shares in Coinmach at USD13.55 per share in cash. The offer records that Babcock & Brown had arranged committed debt financing from RBS, Deutsche Bank and Merrill Lynch and included commitment letters from the lenders.

Babcock & Brown was selected as the preferred bidder on 10 May 2007.

During April and May 2007, Ms Talintyre circulated to potential equity investors in Coinmach a number of documents including an information memorandum and a financial model relating to Coinmach. A copy of that document was sent to Messrs Nicholson and Neilson.

It appears that Babcock and Brown were having some difficulties in raising the required equity for the transaction. It raised that matter with RBS, which on 1 June 2007 agreed to underwrite USD136 million of equity with the intention of selling all the equity pending further investigations to determine whether RBS should hold any of the shares it agreed to underwrite.

On or about 7 June 2007, one of the proposed investors in Coinmach, Hamilton Lane, encountered problems in obtaining approval to invest USD7 million. As a result, approval was sought to increase Babcock & Brown’s investment to USD92 million. That approval was given by Babcock & Brown’s Executive Committee on 8 June 2007 in the expectation that the investment would be sold down as quickly as possible.

Between 10 and 14 June 2007, a number of agreements were entered into relating to the proposed acquisition. They included a Consortium Agreement dated 10 June 2007 between Babcock & Brown, various investors, and RBS, a Merger Agreement dated 14 June 2007 between Coinmach and Spin Holdco and Spin Acquisition Co and a Commitment Letter dated 14 June 2007 from RBS Securities Corporation and Deutsche Bank Securities Inc and a number of other Deutsche Bank companies which was signed by Spin Holdco.

Under the terms of the Consortium Agreement (1) Spin Holdco would be incorporated as the vehicle to acquire Coinmach; (2) B&B Spinco LLC would be incorporated as the vehicle through which investors (other than RBS and certain senior executives of Coinmach) would invest; (3) following closing of the Coinmach Transaction, RBS would syndicate its equity stake; (4) RBS would have a period of 20 business days to determine whether it would retain any of its equity stake; (5) during the period up until 15 November 2007, Babcock & Brown would co-ordinate and arrange the sale of shares that RBS did not wish to retain; (6) RBS would obtain that right after 15 November 2007; (7) upon closing, Spin Holdco would pay BBLP an Origination Fee of 1.5 per cent of the total transaction value (defined to exclude that fee), which ultimately amounted to USD21.8 million; and (8) BBLP would pay all transaction fees, but those would be reimbursed by Coinmach on completion.

Under the terms of the Merger Agreement either party was entitled to terminate the agreement if completion had not occurred by 30 November 2007. If Spin Holdco did not complete the acquisition of Coinmach, Spin Holdco and Spin Acquisition Co agreed to pay Coinmach a fee of USD15 million together with its expenses up to USD2 million (the Cancellation Fee). Under a separate letter agreement dated 13 June 2007, Babcock & Brown agreed to reimburse Spin Holdco for those amounts. The merger was subject to approval by Coinmach’s shareholders.

Under the terms of the Commitment Letter, RBS and Deutsche Bank agreed to provide the following facilities: (1) a term loan facility of USD725 million; (2) a first lien, delayed draw term loan facility of USD50 million; (3) a first lien revolving credit facility of USD50 million; (4) a USD175 million senior bridge facility; and (5) a USD225 million senior subordinated bridge facility. The letter provided for syndication of the loans. It also contained the indemnity which was the subject of RBS’s cross-claim against Spin Holdco.

Following execution of the Merger Agreement, RBS considered its position in relation to its obligation to underwrite USD136 million of equity. It appears that it decided not to hold any equity. In addition, there were regulatory issues associated with it holding more than 19.9 per cent of the capital of Coinmach beyond the end of the year. In that context, RBS began to have some misgivings about its agreement, which increased over time. The earliest evidence of those misgivings is an email dated 17 July 2007 from Ms Lindsey McMurray, Head of Equity Finance at RBS, to Ms Laura Newman of RBS and Mr William Cumming, Managing Director of RBS Equity. In that email, Ms McMurray said:

In the SFACLS, the plaintiffs contend that, sometime prior to 14 November 2007, RBS, in the light of its concerns about its equity commitment, offered to BBLP and/or BBIPL that it would pay the whole of the Cancellation Fee on behalf of BBLP if the Coinmach Transaction did not complete. That offer is defined in the SFACLS as “the RBS Proposal”. The plaintiffs contend that that proposal was put to Mr Green by Mr Robertson on or around 22 August 2007. However, the evidence does not support that allegation.

The evidence is that there was a conversation between Mr Green and Mr Robertson on 22 August 2007. Following that conversation, Mr Robertson sent an email to Ms McMurray and others reporting on the conversation. The email relevantly said:

It appears that a report of the conversation reached Ms Talintyre who spoke to Mr Cumming and said that she understood that Mr Robertson had put the pleaded proposal to Mr Green in a telephone conversation. It seems that Mr Cumming relayed the effect of his conversation with Ms Talintyre to Mr Euan Hamilton, the Global Head of Leverage Finance of RBS, who then sent Mr Robertson an email on 23 August 2007 in which he said:

Mr Robertson replied to that email later that day saying:

At about the same time, Ms Talintyre sent an email to Mr Cumming which she copied to Mr Green saying:

It is plain from these emails that no proposal was put to Babcock & Brown by RBS of the type alleged on or about 23 August 2007.

Babcock & Brown were responsible for finding buyers for the RBS shares (up until 15 November 2007) and continued to market the investment to potential investors. For that purpose, it continued to work on the model and to prepare other documents to be provided to potential investors. One document was a PowerPoint presentation summarising the transaction. Relevantly, that presentation included a slide headed “Load volume and price increase assumptions also reconcile with history” which contained the following:

Ms Talintyre sent a copy of that PowerPoint presentation, together with a copy of the financial model, the legal and tax due diligence reports and an equity investment memorandum to Messrs Nicholson and Neilson on 6 July 2007. The equity information memorandum contained a disclaimer in these terms:

On 9 August 2007, Coinmach finalised its accounts for the first quarter of the 2008 financial year (that is, for the three months ending 30 June 2007). Those accounts showed that revenue had decreased by approximately USD2.2 million or two per cent for the three month period as compared to the prior year’s corresponding period. Most of that decline related to a two per cent decline in revenue from the route business which was primarily attributed “to a decline in same store sales attributed to increased vacancy rates in certain geographical areas”.

Mr Haines sent an email to RBS on 11 September 2007 commenting on those results. In that email he said:

On 28 August 2007, the Babcock & Brown Executive Committee met and approved an investment by Babcock & Brown in the Partnership of USD35 million.

The Partnership was formed pursuant to an agreement dated 30 August 2007 (the Partnership Agreement). On 6 September 2007, following the entry into subscription agreements with various investors, the Partnership Agreement was amended and re-stated. The agreement is expressed to be governed by the laws of the State of Delaware.

The Partnership Agreement (as amended) invests the General Partner with exclusive and full control of the business and affairs of the Partnership: cls 2.8; 6.1(a). It provides for entry into the Management Agreement with the Manager: cl 6.1(d). It also provides that the General Partner may delegate the authority to approve investments to a “committee of principals” from the General Partner called the “Investment Committee”. It also states that any delegation does not relieve the Manager or General Partner of the duties they owe to the Partnership: cl 6.1(e).

Clause 6.7 relevantly provides:

Clause 6.8 contains an indemnity by the Partnership in favour of the same persons against losses, liabilities, damages, costs or expenses which those persons may directly or indirectly become subject in connection with the General Partner or Partnership.

On 6 September 2007, the Partnership entered into the Management Agreement with the Manager. That agreement is expressed to be governed by the laws of Victoria.

Under cl 2.1, the Partnership appointed the Manager “as its exclusive agent to invest and manage the Portfolio”. “Portfolio” is defined to mean “all assets of the Partnership which the Partnership notifies to the Manager in writing to be invested and managed by the Manager under this Agreement”. There is no evidence of a written notification in accordance with this clause. However, it appears that the parties proceeded on the basis that the DIF III Fund was to be invested by the Manager in accordance with the Management Agreement; and no submission to the contrary was made in the proceedings.

Clause 3.1 of the Management Agreement relevantly provides:

Clause 4.4 provides:

It is unclear what is meant by “principals” in the expression “committee of principals from the Manager”. A similar expression is used in the Partnership Agreement. The issue was not addressed in any detail in submissions. No party submitted that the expression meant that it was intended that members of the Investment Committee act as principals rather than as agents for the Manager. It appears that the reference to “principals of the Manager” was intended to be a reference to senior employees of the Manager.

Clause 5.1(a) of the Management Agreement provides:

Clause 5.1(b) contains an indemnity by the Partnership in favour of the same persons against losses, liabilities, damages, costs or expenses to which the Indemnified Party may become subject in connection with any matter arising out of or in connection with the performance by the Manager of its services under the agreement.

Clause 11.3 relevantly provides:

Lehman Brothers collapsed in mid-September 2007, which triggered what RBS described in some of its internal correspondence as a “melt-down” in credit markets. That, in turn, prompted additional concerns about its exposure to the Coinmach Transaction. On 21 September 2007, Mr Hamilton sent an email to Ms McMurray and Mr Cumming in which he said:

On 28 September 2007, Ms Newman sent an email to various employees of RBS including material for “the report on potential distressed equity”. The material relevantly included the following:

On 1 October 2007, Ms Talintyre sent an update to a number of employees of Babcock & Brown on the financing. The update observed that the proposed financing was one of the last “covenant lite etc debt package committed to in the US before the credit meltdown”. The email went on to state:

On 2 October 2007, Mr Topfer sent an email to Mr David Crescenzi at Deutsche Bank stating:

Mr Crescenzi replied on 3 October 2007 stating that “We intend to honor our obligations as we understand them”. He also said “I’d like to review with you alternative financing structures for the Coinmach acquisition financing that can be successfully syndicated in today’s capital markets”.

On 19 October 2007, Ms Talintyre sent an email to Mr Michael Larkin, the Chief Financial Officer of Babcock & Brown, which was copied to Mr Topfer and Mr Umbrecht, in response to an email he had sent her about a delay in the settlement of the Coinmach Transaction. After pointing out that Babcock & Brown had been unable to negotiate an extension with Coinmach but had effectively obtained an extension because of delays in obtaining SEC approval, Ms Talintyre said:

On 22 October 2007, Ms Talintyre sent an email to Mr Green, Mr Topfer and Mr Umbrecht in which she relevantly said:

On 22 October 2007, Ms Talintyre sent an email to Ms McMurray and Mr Cumming in which she said:

RBS responded to that email on 24 October 2007 in these terms:

Ms Talintyre gave that confirmation in an email dated 25 October 2007.

On 26 October 2007, RBS sent Ms Talintyre an email commenting on revised “equity documents” that had been sent the previous day. The email said:

Ms Talintyre replied to that email on 26 October 2007. In that response she relevantly said:

On 30 October 2007 there was a meeting between representatives of RBS and Babcock & Brown to discuss RBS’s equity contribution. At that meeting, RBS raised two options. One was “to convert our existing $136mm into a preference tranche, at a market rate”. The other was described in these terms in an internal RBS email:

In the meantime, the Manager was pressing ahead with obtaining the Investment Committee’s approval of the investment. It was one of several investments being considered by the Partnership at the time and ultimately was the second investment made by the Partnership. The first was an investment of USD42 million in Coogee Resources.

Mr Nicholson had indicated to Ms Talintyre on or about 12 October 2007 that the Partnership should be able to make an initial investment of USD25 million or USD30 million in Coinmach. On 17 October 2007, he asked Ms Talintyre for the latest financial model, latest presentation, the latest information memorandum and information on the Babcock & Brown fee structure for the Coinmach Transaction, which were provided. It appears that subsequently Mr Haines took Mr Nicholson through the model over the telephone.

The likelihood is that during the course of that conversation Mr Nicholson asked Mr Haines to update the model so that it assumed that the investment in Coinmach would be held for a period of three and a half years and that the annual price increase per load would be 2.5 per cent, not the 2 per cent originally assumed in the model. It appears that Mr Nicholson was concerned that there would be a problem marketing the investment “if we are in a position where we have to sell at 21.5% instead of our minimum hurdle of 23%” (to quote from an email he sent to Mr Haines on 31 October 2007).

Mr Haines sent Mr Nicholson the requested model on 26 October 2007. His covering email observed:

On 26 October 2007, Mr Nicholson sent an email to the Compliance Committee outlining the transaction and seeking its approval for it. That approval was given in these terms on 29 October 2007:

On 1 November 2007, Mr Nicholson sent an internal memo to the “DIF Investment Committee” seeking approval for an investment of USD50 million (the Investment Committee Memo). The memo was also copied to Ms Simone Lander, who was the Company Secretary of the Manager. Much of the information contained in the memo was copied from the information memorandum that had been provided to Mr Nicholson.

The memo states that the target IRR was “23%++”. It sets out a summary of the historical results from 2001 to 2007. Commenting on those results it says:

The memo states that “We expect to exit this investment in three and a half years under the base case. However if opportunities in industry consolidation are still available at the end of this period, such that the target hurdle rate can be exceeded over a longer hold period, then we will pursue that course”. The memo also notes that the IRR on base case projections was 24.6 per cent.

The memo contains tables setting out the sources of funds for the investment in Coinmach. They consisted principally of a senior term loan of USD725 million and a senior bridge loan of USD400 million together with capital of USD317 million, which included USD57 million from Babcock & Brown, USD35 million from the Partnership and USD135.2 million from “others” (a reference to RBS Equity).

The memo also includes as an appendix the 5 year financial projection from the base case model, which repeated the table set out in the CAR that was provided to the Babcock & Brown Executive Committee, and indicated that the model made the following key assumptions:

The appendix also contains the following predictions of free cash flow (again calculated as EBITDA – Maintenance CapEx – Growth Capex (rental)):

The memo also includes sensitivity analyses of two “key” variables – machine attrition and load volume growth in the route business. Commenting on those analyses, the memo states:

The memo lists a number of “Upside Opportunities” including a one per cent annual growth in the machine base. It also states:

The memo also lists a number of risk factors. One related to vacancy/occupancy rates. On that, the memo said:

The memo sought approval for the investment in the same terms as the approval given by the Compliance Committee.

It appears that Mr Nicholson did not have a copy of Coinmach’s 2008 first quarter results at the time he prepared his memo. Mr Haines sent him those on 2 November 2007.

On 4 November 2007, Mr Topfer sent Mr Nicholson an email in response to Mr Nicholson’s email distributing his memo (which was copied to the other recipients of Mr Nicholson’s email) saying “i approve”. Mr Green sent an email the following day saying “Me too” and Mr Neilson sent an email on 6 November 2007 (which he did not copy to the other recipients of Mr Nicholson’s email) saying “Investment in Coinmach approved”. Professor Officer gave his approval on 7 November 2007 in an email (again copied to all the recipients of Mr Nicholson’s email) saying “I approve of the investment, although I did think the cap rate was on the high side”.

On 8 November 2007, Ms Lander, who was also the Company Secretary of the General Partner, sent (with Mr Nicholson’s approval) an email to the board members of the General Partner stating that:

The shareholders of Coinmach gave their approval to the merger on 9 November 2007. A board meeting of the General Partner was held by telephone on the same day. Present at the board meeting were Mr Neilson, Mr Topfer and Mr Andrew Huang. The Board gave its approval to an investment of USD25 million in Coinmach through Babcock & Brown Spinco LLC. The minutes of the relevant meeting record that, in giving that approval, it was noted that “the Manager, through its Investment Committee, has approved and recommended the commitment by the Partnership of US$25 million … in Coinmach Services Corporation …”. That investment was made on 15 November 2007.

The PI Insurers contend that, in giving its approval, the Investment Committee was acting as an investment committee of the General Partner. In support of that contention, they point to a statement in the PPM that “The Investment Committee of the General Partner will consist of Phillip Green, Robert Topfer, Robert Officer, Fergus Neilson and Harry Nicholson”. They also point to the fact that the Partnership Agreement contemplated the establishment of an Investment Committee to which the General Partner could delegate its responsibilities and submit that a careful analysis of the approval process contemplated by PPM, the Management Agreement and Partnership Agreement demonstrates that what was required was approval of the investment by the Investment Committee established under the Partnership Agreement and that the Manager would only be responsible for managing an investment once it was made. In addition, they say that if the Investment Committee were an investment committee of the Manager, it would have reported to the Manager and not the General Partner.

I do not accept those submissions. The Investment Committee of the Manager had been in existence for some time prior to the establishment of the DIF III Fund. Consistently with what had happened in relation to the earlier DIF funds, it was contemplated that the Manager would be responsible for the management of that fund; and that investment decisions would be taken by its Investment Committee. That is reflected in the provisions of the Management Agreement under which the Manager is appointed as the Partnership’s “exclusive agent to invest and manage the Portfolio” and the provisions of the Management Agreement permitting delegation of the Manager’s responsibilities to the Investment Committee. There is no evidence that a second investment committee of the Partnership was established; and the Partnership Agreement does not itself require the establishment of such a committee. The General Manager of the Partnership did not have any employees. On the other hand, under cl 4.4(c) of the Management Agreement it had the right to change the composition or number of persons serving on the Investment Committee of the Manager. It is apparent that Mr Nicholson was acting as an employee of the Manager in preparing the memorandum that went to the Investment Committee. He addressed his memo to the “DIF Investment Committee”, which was plainly a reference to the investment committee of the Manager. That is how Ms Lander described the committee in her email dated 8 November 2007 seeking approval for the transaction from the board of the General Partner; and that is how the committee is described in the minutes of the board meeting approving the investment. The fact that the Investment Committee did not report to the board of the Manager is consistent with a delegation of the Manager’s powers to the Investment Committee.

It may be that the individuals involved were not always careful about identifying the precise role in which they were acting. It is also true that there is no evidence of a written notification from the General Partner to the Manager stating that the funds of the Partnership were to be invested and managed by the Manager under the Management Agreement as required by the definition of “Portfolio” in that agreement. Nor is there any evidence of a delegation of the Manager’s powers to the Investment Committee. But those matters do not alter the fact that the approval of the Investment Committee of the Manager was sought and obtained and, on the basis of that approval, the board of the General Partner approved the investment. It is equally true that the PPM describes the Investment Committee as an investment committee of the General Partner. However, it is apparent that the PPM identified the members of the investment committee of the Manager and incorrectly referred to them as the investment committee of the General Partner. Mr Topfer gave evidence that the description of the Investment Committee in the PPM as an investment committee of the General Manager was a mistake. For the reasons I have given, I accept that evidence.

At the same time, negotiations with RBS continued.

On 22 October 2007, RBS informed Ms Talintyre in a telephone call that it was reassessing its options in relation to its investment in Coinmach. Ms Talintyre reported on that call to Messrs Green, Topfer and Umbrecht in an email sent on the same day. In that email, she said that the reasons given by RBS included “(a) debt/mkt turmoil, (b) whether can selldown to below 20% by end … and (c) when they will be able to exit the deal”. Ms Talintyre also sent RBS an email the same day reminding it that it had made a binding commitment. RBS responded to that email by saying that it was aware of its rights and obligations under the Consortium Agreement and “has not revoked any commitment to provide equity funding”.

On 30 October 2007, the Deal Team met representatives of RBS at which RBS presented two options for altering the terms of the deal. According to an internal email sent by Mr Cumming after the meeting, RBS “reiterated our need to be below 20% by year-end and to 0% quickly thereafter”.

On 6 November 2007, RBS distributed an internal report setting out its options in relation to the equity raising. That report set out the position as follows:

Against that background, the report set out three options. The first was to continue with the equity syndication. The report indicated that if it did so, the current analysis suggested that the loss on the sale of the equity would exceed USD17 million. The second option was to warehouse the equity and take a low return. That was said to raise two issues. One was the regulatory issue. The other was the opportunity cost of the investment. The third option was to make a further attempt to renegotiate the deal.

The report also observed:

The report concluded:

On 7 November 2007, Coinmach published its unaudited half yearly accounts for the six months ending 30 September 2007. Those accounts included the following comments on the revenue for that period:

It appears that in advance of the release of the half-yearly results, Coinmach had provided year to date figures to Babcock & Brown the previous week and those results together with a reconciliation of the forecasts for the 2008 financial year, were passed on to RBS by Mr Levi in an email dated 2 November 2007. The reconciliation itself had been prepared following considerable correspondence between principally Mr Haines and Mr Bob Doyle, an employee of Coinmach, concerning the year to date results. Commenting on the reconciliation, Mr Levi said:

On 7 November 2007, Mr Cumming sent an email to Ms Talintyre which relevantly said:

Ms Talintyre replied to that email the following day. In her reply, which was copied to Mr Topfer among others, she said:

On 9 November 2007, Mr Cumming sent an email to Ms Talintyre which was copied to Mr Topfer, among others. The email relevantly said:

Ms Talintyre responded the same day taking issue with RBS’s position.

Following further negotiations, Babcock & Brown and RBS agreed on the escrow arrangements which were put in place on 20 November 2007. Immediately after that, the Coinmach Merger Agreement settled.

The case against Messrs Topfer and Green is that:

In relation to (c), as pleaded, the matters that it was alleged Messrs Topfer and Green had failed to disclose were the RBS Proposal and what is defined in the SFACLS as “the Counter Offer” and “the RBS Preference Agreement”. The Counter Offer is said to be a counter offer by BBLP and/or BBIPL to the RBS Proposal that it would withdraw from the Coinmach deal if RBS agreed to pay both the Cancellation Fee and the Origination Fee that was payable to BBLP on completion of the transaction. The RBS Preference Agreement is defined as the two escrow agreements entered into on 20 November 2007.

At the commencement of the hearing, the plaintiffs sought leave to amend the then current Commercial List Statement to allege relevantly that Messrs Topfer and Green had also failed to disclose to the Partnership that RBS had concluded that the value of Coinmach had deteriorated below the purchase price such that RBS would likely incur a significant loss on syndication of its equity commitment and was considering whether to withdraw from the Coinmach Deal (defined in the proposed pleading as “the RBS Concerns”). The plaintiffs sought to give as particulars of those allegations a number of the documents that I have referred to. I refused leave to make that amendment. I did so principally because I accepted the unchallenged evidence from Ms Warner, the solicitor for BBLP and BBIPL, that in order to answer the new allegations, it would be necessary to undertake various investigations that could not be undertaken without an adjournment. In particular, one matter requiring investigation was what the Partnership knew about the RBS Concerns at the time that it invested in Coinmach. That required an identification of whose knowledge was to be imputed to the Partnership and what each of those individuals knew about the RBS Concerns. I accepted that that could not be done during the course of the hearing; and Mr Jackman SC, who appeared for the plaintiffs, rightly conceded that the amendment should not be allowed if the Court concluded that it necessitated an adjournment.

The plaintiffs, however, did not abandon all reliance on some of the concerns raised by RBS. Prior to the amendment application, para 51 of the Commercial List Statement contained the following allegation:

The plaintiffs submitted that the use of the connecting words “In consequence” in para 52 meant that the allegation that RBS had concluded that the value of Coinmach had deteriorated below the purchase price was part of the RBS Proposal which was not disclosed to the Partnership.

I do not accept that submission. The use of the words “In consequence” convey the idea that the RBS Proposal was made because RBS had reached the conclusion alleged in para 51. The words do not convey the idea that that conclusion formed part of the Proposal and therefore part of what was not disclosed. In order to make good the case as pleaded, the plaintiffs had to prove (1) that the RBS Proposal was made; (2) that RBS made the proposal because of the conclusion it had reached concerning the value of Coinmach; and (3) that the proposal was not disclosed to the Partnership. Far from expanding the allegation, the connecting words narrow it because they require proof not only that the RBS Proposal was made but also proof that it was made in consequence of the matters pleaded in para 51.

During final submissions, the plaintiffs abandoned reliance on the Counter Offer and the RBS Preference Agreement – in the case of the former because the evidence did not support it and in the case of the latter because the agreement was entered into after the Partnership invested in Coinmach. The result is that, in order to succeed, the plaintiffs had to prove that the RBS Proposal was made and not disclosed.

In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96-7, Mason J (in dissent, but not on this point) set out in a frequently cited passage the critical features of a fiduciary relationship in these terms:

Similarly, in a passage cited with approval by the Full Federal Court in News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 at 541, Professor P D Finn in “The Fiduciary Principle” in T G Youdan (ed) Equity, Fiduciaries and Trusts (1989) at 46 said:

Consistently with what Mason J said in Hospital Products, courts are disinclined to impose fiduciary obligations where parties have entered into ordinary and arm’s length commercial relationships that fully prescribe the respective powers and duties of those parties: see Paul Dainty Corp Pty Ltd v National Tennis Centre Trust (1990) 22 FCR 495 at 515. Similarly, courts are reluctant to impose fiduciary obligations where the parties have made a deliberate commercial decision to adopt a corporate structure in which they would owe duties, but to the corporation as directors: see Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21 at [86] per French CJ, Gummow, Hayne and Bell JJ.

Where the fiduciary duties have their foundation in contract, their scope depends on the terms of the contract. As Mason J explained in Hospital Products (at 108) in a passage cited with approval by the High Court in John Alexander Clubs Pty Ltd v White City Tennis Club Limited (2010) 241 CLR 1; [2010] HCA 19 at [91]:

Applying these principles, it is generally accepted that promoters of companies and similar entities owe fiduciary duties to the entity that they are in the process of setting up. In setting up the new entity, it is to be expected that the promoters will act in the interests of the new entity rather than their own. As the High Court explained in Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 at 241-2:

However, contrary to the submissions of the plaintiffs those principles do not apply generally to persons who might be described as “promoters” of any venture or transaction. Rather, it is necessary to examine the precise relationship between the parties to determine whether it has the features that make it a fiduciary one carrying with it the particular obligations in question: see Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd (1987) 78 ALR 193 at 234 per Gummow J.

In the present case, the question is whether Messrs Topfer and Green owed the Partnership fiduciary duties in relation to its investment in Coinmach. Plainly, that investment was not made in connection with the establishment of the Partnership. The plaintiffs contend that Messrs Topfer and Green were promoters of the transaction by seeking to become the preferred bidder, conceiving the structure for the transaction, modelling the transaction, arranging debt finance, inviting or inducing investors including the Partnership to invest, incorporating Spin Holdco and other entities, negotiating the transaction documents and being paid very substantial fees including the $21.5 million Origination Fee.

However, several points may be made about this submission. First, it fails to focus on the relationship between Messrs Topfer and Green on the one hand and the Partnership on the other, and the characteristics of that relationship which are said to give rise to fiduciary duties. As put, the case is that Messrs Topfer and Green promoted the Coinmach Transaction and that that is sufficient to give rise to a fiduciary relationship irrespective of the precise relationship between the parties. That approach misconceives the task the Court must undertake. It is only by examining the precise relationship between the parties that it is possible to determine the existence and nature of any fiduciary relationship and the duties to which it gives rise: see Hospital Products Ltd at 69 per Gibbs CJ; at 102 per Mason J; United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 11 per Mason, Brennan and Deane JJ; New Zealand Netherlands Society “Oranje” Inc v Kuys [1973] 1 WLR 1126 at 1129-30; Boardman v Phipps [1967] 2 AC 46; [1966] 3 WLR 1009 at 1066 per Lord Upjohn.

Second, if the plaintiffs are right, it is difficult to see why any “promoter” of a particular commercial transaction does not owe fiduciary duties to those to whom the transaction is promoted. Indeed, Mr Jackman SC appeared to concede as much. But that would involve a radical departure from established law. The “promoter” of a commercial transaction is normally entitled to pursue its own interests in promoting the transaction. It is not obliged to pursue the transaction for the benefit of the person to whom the transaction is promoted.

Third, many of the acts relied on were not acts of Messrs Topfer and Green. They were acts of other employees of Babcock & Brown. Moreover, it is not apparent why any of the acts engaged in by Messrs Topfer and Green should be regarded as acts done in their personal capacities rather than as acts of the relevant Babcock & Brown entities by whom they were employed or for whom they acted. It was not Messrs Topfer and Green who were “promoting” the investment, but rather Babcock & Brown. The fact that Messrs Topfer and Green held senior positions within Babcock & Brown and were, in the case of some activities at least, the persons through whom Babcock & Brown acted is not sufficient to mean that what they did they did in their personal capacities as well. Something more is required.

A similar point may be made in relation to Messrs Topfer and Green’s directorships. The Partnership was established as an entity through which individual investors could invest in investments in which Babcock & Brown also had or intended to acquire an interest. The relationship between the parties was governed by a number of agreements between them, including the Partnership Agreement and the Management Agreement. It is apparent from those agreements that any obligations owed to the Partnership were owed by the Manager and General Partner. The fact that Messrs Topfer and Green held directorships with one or more of those entities does not mean without more that they themselves owed fiduciary duties to the Partnership: see Brunninghausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199 at [41], [57] per Handley JA (with whom Priestley JA agreed). It could not be said, for example, that the Partnership placed trust and confidence in Messrs Topfer and Green. If it placed trust and confidence in anyone, it was the Manager and the General Partner. The plaintiffs do not point to any particular features of Messrs Topfer and Green’s directorships that could give rise to personal fiduciary duties on their part.

However, in my opinion, the position is different insofar as Messrs Topfer and Green were members of the Investment Committee. That committee is described in cl 4.4(a) of the Management Agreement “as a committee of principals from the Manager”. The parties proceeded on the basis that the Manager had delegated its powers under the Management Agreement to the Investment Committee – that is, to the individuals who comprised that committee. Although that delegation did not relieve the Manager of its responsibilities under the Management Agreement, it meant that the relevant decision was taken by the members of the Investment Committee in their personal capacities rather than as employees or officers of the Manager. That conclusion is consistent with the fact that the decision of the committee was communicated directly to the General Partner, which was the entity with the sole responsibility for managing the affairs of the Partnership.

The decision taken by the Investment Committee was a decision concerning the investment of the Partnership assets. The role of the Investment Committee was described in the PPM as an integral part of the decision making process by which what became the Partnership made investments. And the fact that approval of the Investment Committee was required was part of the mechanism by which it was said that investors in the DIF III Fund would be protected. Consequently, there was both vulnerability on the part of the Partnership to decisions of the Investment Committee and a degree of dependence on the decisions the committee took, which made it reasonable for the Partnership to repose trust and confidence in the members of the committee to act in the Partnership’s interests. In my opinion, those matters were sufficient to give rise to fiduciary obligations owed by the members of the Investment Committee, including Messrs Topfer and Green, to the Partnership in connection with the decision to invest in Coinmach.

The fact that the Investment Committee could only act by unanimous resolution does not alter the position. In participating in the process by which a decision of the committee was made, each individual member owed fiduciary duties to the Partnership. However, the scope and nature of those duties are determined by the factual context in which they arise.

As I have explained, the only respect in which it is alleged that Messrs Topfer and Green breached their fiduciary duties was by failing to disclose the RBS Proposal to the Partnership. The obligation of disclosure is said to arise from a positive duty of “utmost candour and honesty” and as a means of negating the consequences of placing themselves in a position of conflict.

There are, however, two principal difficulties with that contention.

First, there was no RBS Proposal. In the SFACLS, the plaintiffs give three particulars of the RBS Proposal. One is the conversation between Mr Robertson and Mr Green on or about 22 August 2007. Another is Ms Talintyre’s email dated 19 October 2007 to Mr Larkin. A third is a letter dated 9 February 2009 from Babcock & Brown Global Partners (an investor in the Coinmach deal) to BBLP.

I have already concluded that the RBS Proposal was not put in the conversation between Mr Robertson and Mr Green. Ms Talintyre, in her email dated 19 October 2007 (which is quoted in para 93 above), refers to “some brief discussions with the banks about them potentially paying us out the break fee plus our upfront fee/costs etc”. However, it is plain from the context that Ms Talintyre is referring to the conversation between Mr Robertson and Mr Green; and no proposal was put in that conversation.

The letter dated 9 February 2009 is essentially a letter of demand from Babcock & Brown Global Partners. That letter asserts that “RBS offered to pay all the cancellation fee of $17.5 million that would have been payable if the purchasers had elected to withdraw and the transaction did not complete”. However, no further details are given; and the letter itself is not direct evidence of the offer. Moreover, in particulars of the RBS Proposal that were provided by the plaintiffs following discovery, the plaintiffs identified the conversation between Mr Robertson and Mr Green. In my opinion, they should be confined to those particulars.

Second, even if there was an RBS Proposal, I do not accept that it was a breach of fiduciary duties for Messrs Topfer and Green to have failed to disclose it. Contrary to the submissions of the plaintiffs, there is no fiduciary duty of utmost candour and honesty. It is generally accepted in this country that fiduciary duties are proscriptive not prescriptive: Breen v Williams (1996) 186 CLR 71 at 95 (per Dawson and Toohey JJ); 113 per Gaudron and McHugh JJ; Pilmer v Duke Group Limited (in liq) (2001) 207 CLR 165; [2001] HCA 31 at [74] per McHugh, Gummow, Hayne and Callinan JJ.

The plaintiffs contend that an exception exists in relation to the fiduciary duties owed by promoters. But in this case, I have concluded that Messrs Topfer and Green did not owe fiduciary duties in that capacity. Moreover, the supposed exception does not exist. The plaintiffs rely principally on the following statement of Lord Chelmsford in Central Railway of Venezuela v Kisch (1867) LR 2 HL 99 at 113 concerning a prospectus:

Lord Chelmsford in the passage quoted does not identify the obligation as a fiduciary one. However, if that is the source of the obligation, the decision is inconsistent with the decisions of the High Court in Breen v Williams and Pilmer. It is also inconsistent with a number of decisions in this Court, including Community Association DP No 270180 v Arrow Asset Management Pty Ltd & Ors [2007] NSWSC 527 at [216] and [226] per McDougall J; Meriton Apartments Pty Ltd v The Owners Strata Plan No 72381 [2015] NSWSC 202 at [381]f per Slattery J; The Owners – Strata Plan 74602 v Eastmark Holdings Pty Ltd [2015] NSWSC 1981 at [67]ff per Stevenson J.

In Fitzwood, Finkelstein J, having stated the duty as a positive duty of “utmost candour and honesty” said:

Against that background, it is not easy to understand this aspect of the plaintiffs’ case. The case appears to be that a conflict arose or undisclosed benefits would arise from the Partnership’s investment in Coinmach that could only be overcome by full disclosure of what Messrs Topfer and Green knew about the RBS Proposal. However, what connection existed between the conflict or unauthorised benefits and disclosure of the RBS Proposal was never explained. Messrs Topfer and Green undoubtedly had to disclose the conflicts they had and the benefits that other companies in which they had an interest would derive from the transaction as a means of avoiding the obligations imposed on them as fiduciaries. But there was no connection between a proposal put by RBS (assuming it was put) in August 2007 that went nowhere, and the conduct of Messrs Topfer and Green in approving the investment in November 2007. Whatever conduct was proscribed by Messrs Topfer and Green’s fiduciary duties, disclosure of the RBS Proposal could not relieve them of those obligations. Therefore, it could not be said that Messrs Topfer and Green had a derivative obligation to disclose the RBS Proposal as a means of avoiding those obligations. As I have said, they may have had “obligations” to disclose potential conflicts and profits that Babcock & Brown expected to make from the transaction. But it is not alleged that they breached those obligations. Nor could it have been. Those matters were fully disclosed in the PPM and the documents relating to the Coinmach Transaction.

It is common ground that in order to recover equitable compensation for Messrs Topfer and Green’s alleged breaches of fiduciary duty it was necessary for the plaintiffs to prove that the loss they suffered was caused by the breaches. It also appeared to be common ground that that question turned on whether the failure to disclose the RBS Proposal (assuming for present purposes that it was made) was material to the decision of the General Partner to approve the investment in Coinmach, since sole responsibility for management of the Partnership was vested in the General Partner.

The question of causation itself raises two issues. The first is whether the General Partner knew of the RBS Proposal. Obviously, if it did, it could not be said that the non-disclosure of the proposal caused the General Partner to approve the investment. The second is whether the non-disclosure was material to the decision of the General Partner.

In relation to the first question, Mr Topfer submits that he was a director of the General Partner; that absent fraud (which was not present in this case) his knowledge should therefore be imputed to the General Partner; that he knew of the RBS Proposal; and that therefore so did the General Partner.

I do not accept that submission. The decision to invest was one taken by the Board of the General Partner. Consequently, the question is whether the Board knew of the RBS Proposal. Mr Topfer’s knowledge cannot be imputed to the Board. The Board could only know the relevant fact if each member of the Board knew it. Mr Topfer also submits that it may be inferred that the Board knew of the RBS Proposal because the directors of the General Partner participated in Babcock and Brown corporate finance meetings, where the proposal is likely to have been raised, and from the failure of the plaintiffs to call any of the board members to deny that they knew of the RBS Proposal. However, it is Messrs Topfer and Green who assert that the non-disclosure of the RBS Proposal was irrelevant because it was already known. They therefore bear the onus of proof on that issue. In my opinion, they have not discharged that onus.

There is a degree of unreality in considering the materiality of the RBS Proposal to the General Partner’s decision arising from the way in which the case is pleaded. As pleaded, the only remaining question is whether the RBS Proposal taken in isolation was material to the decision of the General Partner. For the purposes of answering that question, subsequent events concerning RBS to the extent that they were not known by the General Partner (or its board) must be ignored, since there is no allegation that they had to be disclosed. The RBS Proposal was a proposal put in August 2007 that RBS pay the break fee if Babcock & Brown did not proceed with the Coinmach Transaction. Presumably, as part of the disclosure, it would also have been necessary to disclose that the RBS Proposal was not accepted by Babcock & Brown and the proposal went no further. Why those matters would have been relevant to the General Partner (or its board) is not apparent. Any proposal put by RBS in August 2007 to get out of its equity commitment was motivated by concerns that it would not be able to sell down its investment by the end of the year, which would give rise to regulatory issues relating to its capital structure. Those concerns were not relevant to the General Partner; and to a large extent they had been overtaken by events, including the collapse of Lehman Brothers. Moreover, from the Partnership’s point of view, RBS was still willing to proceed with the transaction in November 2007. Why it would be material for the Partnership to know that RBS had a concern in August 2007 based largely on considerations which were irrelevant to it and resulted in no relevant decision by RBS is not apparent. For those reasons, in my opinion, the plaintiffs have not established that the General Partner or Partnership would have acted any differently had the RBS Proposal been disclosed.

As to loss, if the plaintiffs had otherwise made out this aspect of their case, I would have concluded that they were entitled to equitable compensation in the amount that they claim. There is a question whether the loss claimed by the plaintiffs is an appropriate measure for the damages they are said to have suffered as a consequence of a breach of the statutory causes of action or a breach of a duty of care, to which it will be necessary to return. However, in the case of the claim for equitable compensation, I can see no reason why that compensation should not be assessed as at the date of judgment. The amount the Partnership invested together with the costs it incurred less the amount it has received (together with interest) represents the loss they have suffered as at that date. Consequently, that is the amount I would have permitted them to recover if this aspect of their case had succeeded

By a settlement agreement dated 5 March 2019, the plaintiffs released BBIPL and BBLP from any claim the plaintiffs had that were raised in these proceedings. It is well accepted that the release of one party with joint liability or joint and several liability releases all: Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574 at 608 per Gummow J; XL Petroleum Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448 at 456 per Gibbs CJ; Baxter v Obacelo Pty Ltd (2001) 205 CLR 635 at [26] per Gleeson CJ and Callinan J. The only question in this case is whether BBIPL and BBLP’s liability was a joint or joint and several liability.

In this context, on the findings I have made, any liability that Messrs Topfer and Green had as fiduciaries arose from the fact that they were members of the Investment Committee and in that capacity they failed to disclose the RBS Proposal to the General Partner. It could not be said that BBIPL and BBLP were jointly or jointly and severally liable for that conduct, since plainly they were not members of the committee.

The position may be different if each of Messrs Topfer and Green and BBIPL and BBLP were held liable as promoters or even if BBIPL and BBLP were held liable as knowing assistants in a dishonest and fraudulent design of Messrs Topfer and Green: see Edgewater Homes Pty Ltd v Donohoe [2019] NSWSC 44 at [22]ff per Stevenson J; Grimaldi v Chameleon Mining NL (No 2) (2012) FCR 296; [2012] FCAFC 6 at [553] per Finn, Stone and Perram JJ. However, having regard to the conclusions I have reached, it is unnecessary to consider these issues further.

Messrs Topfer and Green claim equitable contribution from BBIPL and BBLP in respect of the claims for breach of fiduciary duty against them. Having regard to the conclusions I have reached, those claims do not arise. Moreover, it is difficult to deal with them in any sensible fashion because the analysis may vary depending on the basis on which (contrary to the conclusions I have reached) Messrs Topfer and Green are held to be liable. However, in deference to the extensive submissions put to me on the issue, I should say something about them.

The claim for contribution raises three issues. The first is whether BBIPL and BBLP are themselves liable for breach of fiduciary duty – either as principals or because they knowingly assisted Messrs Topfer and Green in their breaches of duty. The second is whether, if BBIPL and BBLP are liable for breach of fiduciary duty, Messrs Topfer and Green are entitled to equitable contribution from them. The third is whether the claim for equitable contribution is time-barred.

Even assuming that Messrs Topfer and Green are liable for breach of fiduciary duties, I would not have found that BBIPL and BBLP were also liable. The only basis on which it is said that BBIPL and BBLP owed the Partnership fiduciary duties was as promoters of the investment in Coinmach. However, in this respect their position is relevantly similar to the position of Messrs Topfer and Green and for the reasons I have already given they did not owe fiduciary duties in that capacity. The sense in which they might be said to have been “promoters” of the Coinmach Transaction is not a sense which without more gives rise to fiduciary duties.

Nor did BBIPL and BBLP have any liability as knowing assistants in Messrs Topfer and Green’s breaches of duty. In order to be liable on that basis, BBIPL and BBLP must have knowingly assisted Messrs Topfer and Green in a dishonest and fraudulent design – relevantly in this context, a dishonest and fraudulent breach of their fiduciary duties: Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230 CLR 89; [2007] HCA 22 at [179]-[180]. Knowledge in this context includes actual knowledge, a wilful shutting of eyes to the obvious, a wilful and reckless failure to make enquiries that an honest and reasonable person would make and knowledge of circumstances that would indicate the facts to an honest and reasonable person: Farah Constructions at [174]ff; Baden v Société Générale pour Favoriser le Dévelopment due Commerce et de l’Industrie en France [1992] All ER 161 at 235, 242-3.

However, there is no evidence – let alone sufficient evidence that would satisfy the requisite standard having regard to the seriousness of the allegation: see Evidence Act 1995 (NSW), s 140(2); Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-2 per Dixon J – that any breach of fiduciary duties by Messrs Topfer and Green was dishonest and fraudulent. If Messrs Topfer and Green were liable for breach of fiduciary duties, it was because they failed to disclose the RBS Proposal to the Partnership or they acted in a position of conflict that could only be overcome by the disclosure of the RBS Proposal. However, there are no features of the RBS Proposal and any failure to disclose it from which it might be inferred that the failure to disclose it (if there was one) resulted from a deliberate and dishonest decision on their part. As might be expected, Messrs Topfer and Green did not advance a positive case that they had been dishonest. Instead, they effectively adopted the plaintiffs’ submissions on this aspect of the case. But nowhere do the plaintiffs explain why the Court should conclude that Messrs Topfer and Green had been dishonest. In their closing written submissions (completed before the case against BBIPL and BBLP was settled), they simply assert that so much was clear from the evidence; and the evidence they rely on is all the dealings between Babcock & Brown and RBS. But a bear assertion in relation to a far broader set of facts than those that are pleaded is proof of nothing. For that reason alone, the claim that there was a dishonest and fraudulent design in which BBIPL and BBLP knowingly participated must fail.

Assuming BBIPL and BBLP are liable for breach of fiduciary duties either as principals or as knowing assistants, the next question is whether Messrs Topfer and Green are entitled to equitable contribution from them. That raises the question whether they shared a common obligation or co-ordinate liability to make good the same loss. As French CJ, Gummow, Hayne and Bell JJ explained in Friend v Booker (2009) 239 CLR 129; [2009] HCA 21 at [39]-[40]:

BBIPL and BBLP submit that for various reasons they are not liable to contribution. They are not liable for any loss because any claim against them has been released. Any liability they had was not co-ordinate because their liability arose out of different circumstances. In addition, Messrs Topfer and Green are not entitled to contribution because they do not have clean hands.

I do not accept these submissions; or at least not in the absolute terms in which they are put. A right of contribution arises at the time the causes of action on which it is based arise and normally it cannot be defeated by subsequent events, such as a release of the party from whom contribution is sought: see QBE Insurance (Australia) Ltd v Lumley General Insurance Ltd (2009) 24 VR 326; [2009] VSCA 124 at [70].

It may be that if BBIPL and BBLP’s liability arose from the fact that they were knowing participants in Messrs Topfer and Green’s breaches of duty that their liability was not co-ordinate, since, as Gummow ACJ, Hayne, Crennan and Bell JJ pointed out in Michael Wilson & Partners Limited v Nicholls (2011) 244 CLR 427; [2011] HCA 48 at [106] “the relief that is awarded against a defaulting fiduciary and a knowing assistant will not necessarily coincide in either nature or quantum”. However, the same could not be said to the extent that the liability of all of them might arise because they were all promoters of the Coinmach Transaction, particularly in circumstances where at least some of the acts BBIPL and BBLP did as promoters were acts of Messrs Topfer and Green.

A similar point may be made in relation to BBIPL and BBLP’s point based on clean hands. To the extent that Messrs Topfer and Green engaged in a dishonest and fraudulent design, it appears that their lack of clean hands would disentitle them to make a claim for contribution: see Burke v LFOT Pty Ltd (2002) 209 CLR 202 at [143] per Callinan J. However, the same is not true if the liability of each arose from the fact that they were each promoters and owed fiduciary duties in that capacity.

It appears to be common ground that all causes of action in the proceedings arose on 20 November 2007, which is the date on which the Coinmach Transaction settled. The cross-claims for contribution were not made until 7 March 2019. No specific limitation period applies to an equitable claim for contribution. The question, then, is whether equity would apply a common law limitation period by analogy. BBIPL and BBLP submit that it would. Their submission has two steps. First they submit that a claim for equitable contribution is analogous to a claim for contribution under s 5 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). Section 26(1) of the Limitation Act 1969 (NSW) (the Limitation Act) relevantly provides for a limitation period of four years running from the date of the expiration of the limitation period for the principal cause of action. Second, they submit that the principal cause of action (a claim for equitable compensation for breach of fiduciary duties) is analogous to a claim in tort. Section 14(1)(b) of the Limitation Act provides for a limitation period of six years from the date the cause of action first accrues. On that basis, the limitation period expired on 20 November 2013.

Messrs Topfer and Green resist that conclusion on three bases. First, they claim that no right of contribution could arise until payment (or, more accurately, overpayment of their just proportion) by them has been made or is sufficiently imminent: Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21 at [52]. Second, they rely on an exception to the application of a limitation period by analogy where it would be unconscionable to do so: see Gerace v Auzhair Supplies Pty Ltd (2014) 87 NSWLR 435; [2014] NSWCA 181 at [70] per Meagher JA (with whom Beazley P and Emmett JA agreed). Third, they claim that no limitation period applies by analogy.

Messrs Topfer and Green’s first point is no answer if a limitation period applies by analogy, since that limitation period operates by reference to the date on which the underlying cause of action first accrues. No reason is advanced for why it would be unconscionable to apply a limitation period in this case. To the extent that the underlying claim is a claim for breach of fiduciary duties, there appears to be a sufficient analogy between that claim and a claim in tort for a six year limitation period to be applied. The position is different to the extent that the claim against BBIPL and BBLP is that they knowingly assisted in a fraudulent and dishonest design. The claim in respect of which contribution is sought has dishonesty as an essential element of the claim. It is true that in a strict sense the dishonesty is not dishonesty on the part of BBIPL and BBLP, but that does not alter the essential characteristic of the claim; and in those circumstances there is an insufficient analogy for the limitation period in respect of simple torts to apply. That conclusion is consistent with the decision of the Court of Appeal in Lewis Securities Ltd (in liq) v Carter [2018] NSWCA 118, which refused to apply the limitation period set out in s 1317K of the Corporations Act to a claim based on knowing assistance in a director’s dishonest and fraudulent design.

Two further issues are raised in relation to the claim for breach of fiduciary duties. One is whether Messrs Topfer and Green are relieved of the consequences of any breaches of their fiduciary duties by cls 6.7 and 6.8 of the Partnership Agreement or cls 5.1(a) and 5.1(b) of the Management Agreement. The other is whether they are entitled to be excused under s 1318 of the Corporations Act. That section gives the Court power to excuse relevantly an officer or employee of a corporation for negligence, default, breach of trust or breach of duty where the person has acted honestly and the Court, having regard to all the circumstances of the case including those connected with the person’s appointment, considers the person ought fairly to be excused wholly or partly from liability on such terms as the Court thinks fit. Having regard to the conclusions I have reached, it is unnecessary to address these questions. However, I should say something about them.

The Partnership Agreement is governed by the laws of Delaware; and the evidence is that under those laws any person entitled to the benefit of cls 6.7 and 6.8 is entitled to rely on and enforce them notwithstanding that he or she is not a party to the contract. The Management Agreement is governed by the laws of Victoria and there is a question whether Messrs Topfer and Green, who are not parties to it, are entitled to enforce it.

Clause 6.7 of the Partnership Agreement is drafted very broadly. It applies to the General Partner, the Investment Committee (of the General Partner) and relevantly any “manager, … director, officer, employee, agent, advisor [or] representative …” of those entities. Except in the case of fraud, gross negligence or wilful misconduct, it excludes any liability those persons have to the Partnership “for any action taken, or failure to act, with respect to the Partnership”. Any act or omission in connection with an investment decision concerning the Partnership’s funds must be an action or failure to act with respect to the Partnership. Moreover, in my opinion, the members of the Investment Committee (of the Manager) fall within the description of an agent or representative of the Manager. The members of the Investment Committee are persons who acted in place of the Manager in discharging the Manager’s obligations under the Management Agreement. In that sense, they can be described as “agents” of the Manager. Having regard to the breadth of the clause, it would make no sense to interpret it in a way which would deny its benefits to members of the Investment Committee, when those benefits are available to the Manager and any of its employees and to the Investment Committee of the General Partner. Similar considerations apply to cl 6.8. It follows that Messrs Topfer and Green are entitled to the benefits of cls 6.7 and 6.8 of the Partnership Agreement.

The plaintiffs submit that, even if Messrs Topfer and Green fall within the scope of cls 6.7 and 6.8, those clauses are rendered void by s 12EB of the ASIC Act. I address that question below, when dealing with the claim based on breach of the Management Agreement. For reasons explained in that context, I have concluded that cls 6.7 and 6.8 are not rendered void by that provision.

Messrs Topfer and Green also contend that they are entitled to the benefits of cl 5.1(a) of the Management Agreement either in accordance with the principles stated in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; [1988] HCA 44 or on the basis that the Manager acted as their agent in contracting for the benefit contained in cl 5.1(a): see Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, which was applied by Yeldham J in Celtherne Pty Ltd v WKJ Hauliers Pty Ltd [1981] 1 NSWLR 606 at 610ff. See also Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (1977-1978) 139 CLR 231 at 240ff per Barwick CJ.

I do not accept that submission. The difficulty in seeking to apply Trident to the current case is that only three members of the High Court decided that case on the basis of an exception to the doctrine of privity (Mason CJ and Wilson J at 123–4, Toohey J at 172). Gaudron J decided the case on restitutionary principles (at 173) and the other members of the Court dissented. Trident was a case involving liability insurance; and although the plurality expressed their reasoning in terms that were not limited to contracts of that type, there remains a question as to how broadly the principle they stated should be applied. In my opinion, it would not be appropriate for a judge sitting at first instance to seek to apply the decision in Trident beyond the field of insurance.

It is also difficult to see how the Manager could be regarded as Messrs Topfer and Green’s agent, when there is no evidence of agency and no suggestion that the Manager disclosed that it was acting as their agent in entering into the Management Agreement: cf Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (1977-1978) 139 CLR 231, where the relevant clause expressly stated that the contracting party “is or shall be deemed to be acting as agent or trustee on behalf of and for the benefit of all persons who are or might be his servants or agents from time to time … and all such persons shall to this extent be or be deemed to be parties to the contract …” (at 270 per Mason and Jacobs JJ). The clause considered in Celtherne Pty Ltd v WKJ Hauliers Pty Ltd [1981] 1 NSWLR 606 was to similar effect.

It nonetheless follows from cls 6.7 and 6.8 of the Partnership Agreement that Messrs Topfer and Green would only be liable for any breaches of fiduciary duty they owed to the General Partner if those breaches were fraudulent, grossly negligent or arose from wilful misconduct. There must be a serious question whether the conduct of Messrs Topfer and Green satisfied that requirement. I do not accept that any breach of fiduciary duty by them was deliberate so that it could be said that their conduct was fraudulent or involved wilful misconduct. It does not strike me as useful to attempt to resolve the question whether any breach of fiduciary duty arose from gross negligence when, on the conclusions I have reached, there was no such breach and when any attempt to resolve the question would necessarily involve making assumptions concerning liabilities that I have found not to exist.

As to s 1318 of the Corporations Act, it is difficult to see how Messrs Topfer and Green would be entitled to relief under that section if they were otherwise held to be liable for breach of fiduciary duties. No reason was advanced for why relief should be granted under that section in this case. If Messrs Topfer and Green were liable for breach of fiduciary duties, it is difficult to describe their conduct as mere inadvertence. It would be a failure that went to the heart of their duties as directors and as members of the Investment Committee.

The claims based on the Investment Committee approval raise the following issues:

The claims also raise issues concerning causation (reliance by the General Partner) and loss. However, it is convenient to deal with those issues separately, after considering all the conduct that is said to amount to a contravention of the statutory provisions relating to misleading and deceptive conduct.

In my opinion, there are two difficulties with the Investment Committee Representation. The first is that the representation was not made to the General Partner. The second is that the approval did not convey a representation that the investment was commercially advisable and worthwhile. At most, it conveyed a representation that the person giving approval had formed the opinion that the investment was an appropriate one for the Partnership having regard to the types of investment that the DIF III Fund was established to make.

As to the first of these points, each member of the Investment Committee (apart from Mr Nicholson) sent an email to Mr Nicholson recording his approval of the investment. Some of those emails were copied to Ms Lander, clearly in her capacity as the Company Secretary of the Manager. On 8 November 2007, Ms Lander, who was also the Company Secretary of the General Partner, sent an email to the board members of the General Partner stating that the Investment Committee had approved the investment. Presumably, in that case, she did so as the Company Secretary of the General Partner. The fact that the email was addressed to the board members, rather than the General Partner itself, suggests that it was intended to be an internal email within the General Partner.

It is not easy to see how the emails recording the approval of the Investment Committee could be treated as a representation to the General Partner. If the Investment Committee had approved the investment at a meeting and their approval had been minuted, it could not be said that those minutes amounted to a representation to the General Partner. Rather, the minutes would be part of an internal process by which the decision of the committee was recorded. The emails were no different. In some cases, they were only sent to Mr Nicholson. In others, they were copied to other committee members and the Manager’s Secretary. In either case, they were part of an internal process by which a decision of the committee was recorded. They could not be regarded as a representation to a third party.

It was not pleaded that Ms Lander’s email dated 8 November 2007 to the board of the General Partner contained any representation. For the reasons I have given, that too appears to be an internal email. But even if that is wrong, the most that could be said is that it conveyed a representation by the Manager to the General Partner that the Investment Committee had approved the investment, which was obviously true.

In my opinion, no particular representation was conveyed by the emails. There can be no doubt that approval by the Investment Committee was an essential part of the process by which the Manager made recommendations to, or decisions for, the General Partner and that in making those recommendations and decisions the Manager owed contractual duties and, on the findings I have made, the Investment Committee owed fiduciary duties to the Partnership. However, it does not follow that in undertaking the functions given to it by the Management Agreement, members of the Investment Committee should be taken to have made any representations to the General Partner concerning an investment for which its approval was sought and given, let alone a representation as vague and amorphous as a representation that the investment was commercially advisable and worthwhile.

At most, it might be said that by giving their approval, members of the Investment Committee represented that it was their opinion that the investment was an appropriate one for the Partnership having regard to the types of investment that the DIF III Fund was established to make. But that is not the pleaded representation; and there is no suggestion that the members of the committee did not honestly form that opinion.

Assuming that the Investment Committee Representation was made, the plaintiffs’ case has six steps:

The plaintiffs also plead that the Investment Committee Representation was false because the investment in Coinmach was likely to, and did, result in a catastrophic loss. However, understandably that allegation was all but abandoned during the hearing. The fact that the investment did result in a catastrophic loss at some later time cannot make the representation misleading at the time it was made; and no evidence was led that would support the allegation that the investment was likely to lead to a catastrophic loss at the time it was made. Consequently, that allegation can be put to one side.

The plaintiffs also contend that, even if the representation was not a representation concerning the future, it was a representation of opinion that carried with it an implied assertion that the opinion was reasonable and it was not.

I do not accept that the representation was a representation concerning the future. On its face, the representation can be no more than a statement of opinion about the suitability of a particular investment, which depends on an assessment of the risks and potential rewards associated with the investment at the time the representation was made. That opinion is no doubt based on expectations about the performance of the investment in the future, but the statement itself is not a statement about what will or will not happen or was likely to happen in the future. Rather, it represents an assessment of probabilities as they existed at the time the investment was made and a conclusion about the investment having regard to that assessment.

It follows that s 769C of the Corporations Act and s 12BB of the ASIC Act do not apply.

Even if that conclusion is wrong, I do not accept that Messrs Nicholson, Neilson and Officer have failed to discharge the evidential onus placed on them by s 12BB of the ASIC Act. It is not necessary for them to give evidence to discharge that onus. The onus could be discharged in other ways. In the present case, it is apparent from the evidence that Messrs Nicholson, Neilson and Officer knew that Babcock and Brown had decided to invest in Coinmach and they were entitled to assume that Babcock and Brown had conducted due diligence on the investment and concluded that it was an appropriate one to make. They were also supplied with Mr Nicholson’s memorandum which provided financial and other information about the investment which, if accepted, provided a rational basis for proceeding with the investment. It may be inferred that Messrs Nicholson, Neilson and Officer considered that information. That is sufficient for them to discharge the evidentiary onus.

On the other hand, I accept that the Investment Committee Representation (if it was made) was a representation of opinion. I also accept that if it was made and if it was made to the General Partner, then it carried with it an implied representation that the opinion was based on reasonable grounds: see Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25 at [32] per French CJ. The Investment Committee was a specialist committee established for the purpose of making recommendations or decisions concerning investments by the Partnership (among others). It may be inferred that its members had specialist qualifications and training. The PPM stated that the committee was required to review and approve all investment recommendations by, relevantly, the DIF III Fund. Its review was an important part of the due diligence process that the Manager was to undertake in relation to each investment. In that context, it is to be expected that the committee would have reasonable grounds for any representations it made concerning the investments recommended or made by the Manager.

The plaintiffs do not specifically plead in the alternative that the representation was a representation of opinion. However, they embraced that possibility at the final hearing; and although not specifically pleaded I can see no reason why they should not be entitled to advance a case on that basis. Apart from the possible shifting of an evidential onus in relation to reasonable grounds, such a case raises the same issues as a case based on an allegation that the representation is one concerning the future.

The plaintiffs advance various reasons for why there were no reasonable grounds for the Investment Committee Representation (assuming it was made). As pleaded, the case is that there were no reasonable grounds for making the representation because the Manager failed to do certain things and “the Investment Committee knew or ought to have known of these deficiencies by virtue of the Investment Committee Memo” (SFACLS para 111). The allegations concerning what the Manager failed to do are somewhat repetitive but in substance they amount to allegations that it failed to do the following:

During the hearing, the plaintiffs sought to refine and add to those particulars so that their case was that there were no reasonable grounds for making the representation because:

That case itself was modified somewhat in final submissions. In their final written submissions, the plaintiffs contended that their case for statutory misleading or deceptive conduct (and negligence) rested on the version of the model provided to Mr Nicholson and the Investment Committee Memo. They say that “The plaintiffs’ case is that it was plain on the face of the Model and the Investment Committee Memo that there was no reasonable basis for the investment in Coinmach being regarded as commercially advisable and worthwhile”. A significant amount of the submissions is devoted to demonstrating that the assumptions made in the model were plainly unsupportable. Those submissions rely heavily on expert accounting evidence given by Mr Andrew Ross, who expresses the opinion that the growth forecasts in the model could not be supported by the historical results.

The defendants to whom the issue of reasonable grounds were relevant to varying degrees all objected to the plaintiffs’ reformulation of their case, although each of them goes on in their written and in some cases oral submissions to deal with it.

In my opinion, there is force in those objections. As originally pleaded, the case was that the Manager had failed to do various things and the members of the Investment Committee knew or ought to have known of that from the Investment Committee Memo. Although in substance four things are identified, it is difficult to make much sense of the allegation referred to in paras 215(b) and 215(c) above, and no submissions were made in support of the allegations referred to in those paragraphs. Consequently, the plaintiffs’ pleaded case effectively is that the Manager failed to take into account more recent results and deteriorating market conditions and that was apparent from the Investment Committee Memo. Now it appears to be asserted that the Manager and members of the Investment Committee failed to take account of a range of matters. Had those allegations been raised earlier, it would have been open to the PI Insurers (who are affected by the allegations against the Manager) and members of the Investment Committee to conduct further investigations and lead additional evidence in relation to them. For example, they may have conducted further investigations and sought to lead additional evidence, including expert evidence, on the reasonableness of some of the assumptions in the model. It follows that I would not permit the plaintiffs to go beyond the pleaded case.

There is a further difficulty with the way the plaintiffs now appear to put their case. The case no longer seems to be that the Manager failed to do certain things and that the members of the Investment Committee did not have reasonable grounds because they knew of the Manager’s failure from what they were told in the Investment Committee Memo. Instead, the case appears to be that objectively there were no reasonable grounds for the investment and that that was sufficient to make the representation false. Again, however, that is not the way the case is pleaded. Moreover, the same case is put against each member of the Investment Committee notwithstanding their different levels of knowledge. The likelihood is that Professor Officer knew nothing more about the transaction than what was contained in the Investment Committee Memo. It is unclear precisely what was known by the other members, although it seems likely that of the other four, Mr Topfer knew the most and Mr Neilson knew the least. The underlying assumption in the plaintiffs’ submissions is that the members of the Investment Committee knew or ought to have appreciated that the Investment Committee Memo provided an inadequate justification for the investment and taking account of other matters they knew or ought to have found out, there were no reasonable grounds for their decision. However, no submissions were addressed to what each member of the committee knew and why it is they ought to have made further enquiries or what those enquiries would have revealed.

Even taking the plaintiffs’ reformulated case on reasonable grounds on its face, there are difficulties with it.

The first matter the plaintiffs point to is that the members of the Investment Committee ought to have appreciated that the growth assumptions set out in the model and repeated in the Investment Committee Memo were overly ambitious having regard to historical performance.

Prior to the acquisition, Coinmach’s businesses had been producing stable revenue and profit levels over an extended period of time. However, the model forecast an average increase in revenue from 2008 to 2012 of 6.0 per cent and an average increase in EBITDA of 6.8 per cent. It is apparent from the Investment Committee Memo that the forecast increases were based on a number of proposed changes to the business (described as “current initiatives” in the memo) including the addition of machines through organic growth and growth resulting from acquisitions, the addition of new services, IT-related costs savings and “cost based leverage”.

Based on Mr Ross’s report, the plaintiffs take issue with the forecast increases on two bases. First, the model assumes no net attrition in machines between 2008 and 2017. However, the historic results showed declines in every year from 2001 to 2007, with those declines averaging 0.5 per cent. The model also assumed no net reduction in loads per machine between 2008 and 2017, whereas the historic result showed declines averaging 3.3 per cent during the period 2001 to 2007.

The memo does not contain the historical figures. However, it explains the base case assumptions of zero attrition in customers and loads per machine on the basis that “price per load growth has been set conservatively with respect to historical growth, and … load volume is protected on the downside due to decrease in vacancy rates following the sub-prime meltdown”. It also contains a sensitivity analysis in respect of both machine attrition and loads per machine, which is said to demonstrate that “preventing machine attrition due to poor management or enhanced competitor activity is the most critical feature of the business”.

In my opinion, there are two main difficulties with the plaintiffs’ submissions on this aspect of the case.

First, the submissions do not grapple with the view, expressed in the Investment Committee Memo, that increased revenue and EBITDA was expected to come from changes to the business following Babcock & Brown obtaining control of it, including “~US$25m of acquisitions per annum”. The Investment Committee Memo explained that the market was fragmented and for that reason it was expected that Coinmach would have no difficulty in making further acquisitions at that level. Those acquisitions were expected to be a major source of additional revenue.

During the course of the hearing, there was debate about whether those changes were already in the process of being implemented at the time the memo was written. Certainly some statements made at the time, including the statement in the memo itself describing the changes as “current initiatives”, suggest that the changes had been or were in the process of being made. It is apparent that some changes were in the process of being made in anticipation of control passing to Babcock & Brown. For example, in an email dated 26 June 2007 that Ms Talintyre sent to Mr Topfer and others she reports on an opportunity for Coinmach to acquire a business based in Texas with approximately 100,000 machines and also refers to another potential acquisition of 11,000 machines in Portland, Oregon. But it is evident that at most those changes had only just commenced. Babcock & Brown was not in control of the business at that time. The business had not been refinanced; and although it appears that some acquisitions were in the process of being made, there is no reason to believe that their effects had yet been felt (for example, that the acquisitions had settled).

It is plain that the Coinmach Deal Team had conducted an extensive due diligence of the business and had had discussions with Coinmach’s management. The model and the assumptions it contained were prepared on the basis of the information the team had obtained. Although Mr Cumming of RBS had been critical of Ms Talintyre in an email, that does not provide sufficient evidence that members of the team were incompetent. Mr Topfer gave evidence to the contrary. Some members of the Investment Committee – Mr Topfer, in particular – had knowledge of the due diligence undertaken by the team; and it was reasonable for other members of the committee to proceed on the basis that the information supplied to them was based on that due diligence. Consequently, it was reasonable for them to assume that the proposed changes to the business and the financial consequences they would produce were achievable. Nothing that Mr Ross says undermines that point. He is not an expert on the relevant market in the United States (either now or then). Consequently, he is not in a position to express an opinion on the practicality of the proposed changes to the business and the likely financial consequences of those changes.

Second, the Investment Committee Memo contained a sensitivity analysis in respect of both machine and loads per machine attrition. The base case for each was zero attrition, but the sensitivity analysis included attrition rates of up to 1.0 per cent in both cases. More significantly, it included a short explanation for the choice of the base cases – conservative price increases and the global financial meltdown, which were expected to have a positive effect given the nature of the buildings (multi-dwelling, lower grade buildings) taking Coinmach’s Services. The view that price increases “below 3% [did] not appear to have a material impact on load volumes” (a view recorded in the presentation referred to in para 71 above) itself was based on an analysis undertaken by Babcock & Brown. The plaintiffs were critical of that analysis. However, without full details of the analysis and expert evidence in relation to it, in my opinion there is no reason not to accept the conclusions based on the analysis. It follows that there were reasonable grounds for adopting the assumptions that were adopted, notwithstanding the historical results.

The shortfall on budget for the quarter ending 30 June 2007 was $2 million in EBITDA. The shortfall was largely attributed to a shortfall in revenue in the route business which was said by Mr Haines in his email to RBS on 11 September 2007 to be caused “by the run-rate effect of machine losses in Q407 (continuation of strategy to purge below hurdle rate contracts) and a decline in number of phones serviced”. Another contributing factor was a delay in introducing price increases. At the time, the Coinmach Deal Team was told that management still expected Coinmach to meet its full year budget.

The results for the second quarter became public on 7 November 2007. Revenue decreased by approximately $0.8 million, or approximately one per cent, for the three-month period ended 30 September 2007, as compared to the prior year’s corresponding period. Revenue decreased by approximately $3.0 million, or approximately one per cent, for the six-month period ended 30 September 2007 compared to the prior year’s corresponding period. The main explanation for the decrease was an increase in vacancy rates in certain geographic areas.

It is not entirely clear how these results are said to be relevant to the absence of reasonable grounds. There is no evidence that Mr Neilson or Professor Officer knew the results. In the absence of any information in the Investment Committee Memo, they were entitled to assume the results were not relevant to the decision – that is, that they were consistent with the projections. Mr Nicholson received the first quarter results, but there is no evidence that he saw the second quarter results before the Investment Committee made its recommendations. Having regard to their positions with Babcock & Brown, it may be inferred that Mr Topfer and Mr Green were aware of the results; and they were cross-examined on that basis.

Relying on evidence given by Mr Ross, the plaintiffs submit that the results point strongly to the conclusion that the growth assumptions made in the model and the Investment Committee Memo were unachievable. I accept that that was so in relation to the 2008 financial year. But I do not think it follows from that that members of the Investment Committee did not have reasonable grounds for believing that the investment was commercially advisable and worthwhile. I have already dealt with the position of Mr Neilson and Professor Officer. In the case of Mr Topfer and Mr Green, both gave evidence, which I accept, that the departure from forecast or previous year results was not material. Consequently, the first quarter or half yearly 2008 results did not point to an underlying problem with the business. Mr Topfer’s position was that the original version of the model was prepared at a time when it was expected that Babcock & Brown would obtain control of Coinmach and introduce changes earlier than it in fact did. Consequently, his view of the model and the Investment Committee Memo was that they still accurately reflected the potential benefits and value of the transaction, albeit that those benefits would not be realised until a later point in time, when Babcock & Brown had obtained control and had implemented its strategies for improving the business and when the expected changes resulting from changes in financial conditions took effect. Mr Green did not put the position in precisely those terms. However, the position he took was consistent with it. Again, that appears to be a reasonable position to take.

The forecast cash flows taking account of interest expenses were not referred to in the Investment Committee Memo.

It is apparent that the strategy behind the investment was to buy Coinmach, to increase its size, largely through further acquisitions which were to be funded in part by two facilities of USD50 million each (said to be “for capex/acquisitions”) and the reinvestment of profits; and then to sell the expanded business after three and a half years or so, at a profit. The return was to come from the profit on sale, not from income earned from the business during the time that it was held by Babcock & Brown. It is not surprising that the model assumed in that case that the business would not generate any significant profits. The critical matter was whether Coinmach would generate the predicted revenue. If it did not, that would have an effect on the ability of Coinmach to make further acquisitions, and consequently an effect on the ability of Coinmach to achieve the growth which underpinned the expected IRR. It would not necessarily affect Coinmach’s viability. The Investment Committee Memo recognised that there was a risk that Coinmach would not be able to generate the anticipated growth. It also pointed to the potential for up-side. The question for the Investment Committee was whether the benefits of the transaction justified the investment notwithstanding the risks. The profit was irrelevant to that analysis.

A similar point can be made in relation to the plaintiffs’ submission that there was an absence of reasonable grounds because the model demonstrated that Coinmach would make losses for the first few years.

As both Mr Topfer and Mr Green pointed out in cross-examination, accounting profits themselves were irrelevant to the investment. Given the basis of the investment, what was important was EBITDA.

This issue has largely been dealt with above. The evidence is that vacancy rates had been higher than usual over recent years. That corresponded to a time when the economy was doing well and housing was increasingly affordable, in part at least due to the availability of sub-prime mortgages. The view expressed in the Investment Committee Memo was that the sub-prime melt down was likely to arrest that decline. The Investment Committee Memo simply makes a brief reference to the point. However, it must be borne in mind that its audience was financially sophisticated and were able to form their own views on the point without additional analysis. No explanation is given for why that was not a reasonable view to take.

This issue has also largely been dealt with above. The particulars refer specifically to a slide from the Project Spin CAR Supplement, which indicates that in 2005 there was a change in average “Vend Price” of 1.3 per cent with a corresponding “Change in Adjusted Loads Per Machine” (adjusted to take account of changes in vacancy rates) of -2 per cent. Those figures are said to demonstrate that a change in price of less than 2.5 per cent still produced a reduction in loads per machine.

The difficulty with that submission is that the following slide has a heading “Historical data suggests load volumes are insulated from price increases of less than 3% but are negatively impacted by price increases above those levels”. Underneath that heading is a graph which is said to illustrate that point; and it is plain from that document and others that the conclusion stated in the heading was based on an analysis which went beyond the figures for 2005. For example, on 31 July 2007, Mr Haines sent an email to potential investors, which was copied to Ms Talintyre and Mr Levi, which said in part:

The Investment Committee Memo does not specifically deal with the relationship between price increases and revenue per machine. However, Mr Topfer and Mr Green must have read the CAR Supplement containing that information; and the likelihood is that that information was conveyed to Mr Nicholson by Mr Haines when they discussed the model and that an assumption of price increases of 2.5 per cent per annum was chosen on that basis. There is no reason why Messrs Topfer, Green and Nicholson were not entitled to accept what they were told. Nor was there any reason why Mr Neilson and Professor Officer were not entitled to accept that the base case of no reduction in revenue per machine was not achievable, given what they were told about price increases.

This particular has largely been dealt with in the case based on breach of fiduciary duty.

There is no evidence that Messrs Neilson, Nicholson and Officer knew about RBS’s position. For that reason alone, it cannot be the case that they lacked reasonable grounds because they did not take RBS’s position into account.

Messrs Topfer and Green did know of RBS’s position. However, it is difficult to see why its position, rather than the objective facts relating to the investment, was relevant to the question of reasonable grounds. As I have explained, RBS’s situation was unique because there were regulatory issues if it held equity in Coinmach past the end of the year. And against that had to be weighed the fact that, notwithstanding the concerns it had, it remained willing to and did advance very large sums of money in connection with the transaction.

It is difficult to understand the relevance of this particular and what it adds to the other particulars. The question is whether the matters raised by the other particulars provide a basis for saying there were no reasonable grounds. If they do, particular 8 adds nothing. If they do not, it is difficult to see how the failure of the Investment Committee Memo to deal with them could itself mean that there was an absence of reasonable grounds.

In their final submissions, the plaintiffs advance two other reasons for why there was an absence of reasonable grounds. Again, neither was pleaded. The first was that the projected revenue in the appendix to the Investment Committee Memo did not correspond to the revenue projected in the final version of the model provided to Mr Nicholson. The second is that the Investment Committee Memo contained an internal inconsistency because in one part it states that the projected growth was predominantly generated through growth in the machine base by way of acquisitions, whereas later under the heading “Upside Opportunities” the memo states that bid model does not include any net growth in the route machine base.

In my opinion, neither of these matters establishes an absence of reasonable grounds.

The revenue stated in the model and in the Investment Committee Memo was as follows:

It is unclear what the explanation for this discrepancy is. Although some members of the Investment Committee had access to the model, it is doubtful that it was unreasonable of them not to have picked up the discrepancy.

In any event, there is no reason to think that the discrepancy was material. In earlier years the projected revenue is greater in the memo. In later years it is less. The greatest disparity is $13.3 million in 2008. There is no evidence that that discrepancy was material.

As to the second point, the Investment Committee Memo is poorly expressed. However, it is clear that the projections assume an increase in the machine base arising from acquisitions. It appears that the apparent upside was thought to arise from organic growth in the machine base. Again, the point does not indicate an absence of reasonable grounds.

The only active parties with an interest in the answer to this question (apart from the plaintiffs) are the PI Insurers. Their primary submission is that the Investment Committee was a committee of the General Partner and that consequently any representation made by the committee was not made on behalf of the Manager. I have already rejected the submission that the Investment Committee was a committee of the General Partner. The PI Insurers do not advance any separate argument that the representation was made on behalf of the Manager. On that basis, had I concluded that the representation was made, I would have concluded that it was made on behalf of the Manager.

It is alleged that Messrs Topfer and Green engaged in misleading and deceptive conduct by failing to disclose the RBS Proposal. As I explained in the Introduction, that non-disclosure is said to be misleading and deceptive for two reasons. The first is that the non-disclosure made the Investment Committee Representation false. The second is that their non-disclosure was misleading having regard to their role as promoters and what could reasonably be expected of them in that capacity.

The first way that this aspect of the case is put appears to have been overtaken and expanded by the revised particulars provided by the plaintiffs of the allegation that the Investment Committee did not have reasonable grounds for making the Investment Committee Representation. I have dealt with it in that context.

The second way in which the plaintiffs put their case is similar to the way in which they put their case that Messrs Topfer and Green breached their fiduciary duties as promoters by failing to disclose the RBS Proposal. It must fail for similar reasons. There was no RBS Proposal. Even if there was one, it was irrelevant to the decision of the General Partner to invest because it was overtaken by events. The label “promoter” in this context provides no assistance in determining the nature and extent of the obligations placed on Messrs Topfer and Green.

At a practical level, the question whether silence is misleading or deceptive is normally answered by asking whether the person who claims to be misled had a reasonable expectation that the undisclosed matter would be disclosed: Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 41 per Gummow J; Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; [2010] HCA 31 at [20] per French CJ and Kiefel J. The question in this case is whether the General Partner could have had a reasonable expectation that Messrs Topfer and Green would tell it about the RBS Proposal (assuming that it existed). I cannot see that they would have. To the extent that Messrs Topfer and Green were “promoters” of the transaction, they engaged in those activities as senior executives of Babcock & Brown; and the question must be whether the General Partner could have had a reasonable expectation that persons in that position would disclose to it matters relevant to the investment. The answer to that question must be in the negative. A structure was put in place by which investment decisions for the DIF III Fund were made, which was reflected in the contractual relationship between the parties. It is difficult to see how the General Partner could have a reasonable expectation that senior executives of Babcock and Brown would disclose matters relevant to an investment decision outside that structure.

The claim that the Manager engaged in misleading and deceptive conduct in substance is as follows:

In my opinion, the first step in this argument is put too broadly. I do not accept the second.

The Manager was ultimately responsible for making investment decisions on behalf of the Partnership. It could delegate that responsibility to the Investment Committee, but that delegation did not relieve it of its obligations under the Management Agreement. Consequently, the Partnership (and the General Partner, which was exclusively responsible for managing the affairs of the Partnership) must have had a reasonable expectation that the Manager would tell them if it knew of facts which called into question the Investment Committee’s decision. In the normal course of events, it might be expected that the Manager would first raise those matters with the Investment Committee. But if, for any reason, the Investment Committee refused to act on those facts, it is to be expected that the Manager would say something to the General Partner. The failure of it to do so would give the impression that it was not aware of anything affecting the reliability or appropriateness of the Investment Committee’s recommendation, which would be misleading in the circumstances.

However, I do not accept that it follows that it was misleading of the Manager not to disclose the two matters relied on. I have already dealt with the RBS Proposal. As to the suggestion that it was misleading of the Manager not to disclose that there was a substantial risk that the investment would not be commercially viable, that allegation is put at a level of generality that denudes it of substance. Investors in the DIF III Fund were given ample warning that an investment in the fund involved risks and should not be made unless the investor could afford to lose the total amount of its investment. It necessarily follows that individual investments by the fund were risky. The General Partner and Partnership must have appreciated that to be the case. If that is all that it is said should have been disclosed, then disclosure in those terms was unnecessary since it was already known. On the other hand, if it is said that some additional risk attached to the investment in Coinmach, it would be necessary to identify that risk with more precision. The plaintiffs’ real case in this respect seems to be that the investment was risky because the projections on which it was based were flawed. If that is the plaintiffs’ case, it must fail for the reasons already discussed.

I have already dealt with causation in relation to disclosure of the RBS Proposal in the context of the breach of fiduciary duty case. No different issues arise in this context.

Having regard to the conclusions I have reached, it is not easy to deal with the other aspects of causation. In broad terms, the allegation is that one or more members of the Investment Committee or the Manager ought to have disclosed to the General Partner that one or more critical or important assumptions on which the recommendation to make the investment was based were flawed so as to have a serious and adverse effect on the economics of the investment. In my opinion, if a case along those lines had been made out, then I would have concluded that the relevant misleading and deceptive conduct was a cause of the decision of the General Partner to approve the transaction, and therefore a cause of the loss.

Some of the defendants point to the fact that no director of the General Partner was called to give evidence of reliance. However, I accept the plaintiffs’ submission that reliance can be inferred in this case. As Kiefel J (with whom Wilcox J agreed) explained in Hanave Pty Ltd v LFOT Pty Ltd (formerly Jagar Projects Pty Ltd) [1999] FCA 357 at [45]:

In the present case, an important aspect of the investment in Coinmach was that it was projected to produce an IRR in excess of 23 per cent over its expected life of three and a half years. That is consistent with what the PPM said. And it also explains why Mr Nicholson asked Mr Haines to amend the model to assume price increases of 2.5 per cent rather than 2.0 per cent, since it is that change to the model that justified the statement in the Investment Committee Memo that the target IRR was “23%++”. It seems to me inherently probable that if the General Partner had appreciated that the IRR was likely to be substantially less than the 23 per cent target because one or more of the assumptions on which that IRR was based were false, then it would not have approved the investment because the whole point was to make an investment that had reasonable or good prospects of making a return of that order.

It is no answer to this point to say that Messrs Topfer, Green and Neilson had approved the investment as members of the Investment Committee. The position of Messrs Topfer and Green in substance is that those matters were not material because for one reason or another they did not have a material effect on the reasonableness of the projections on which the Investment Committee Memo was based. I have accepted that submission. But the question in this context is whether the General Partner would have approved the investment knowing that the projections were wrong. For the reasons I have stated, I do not think that it would have. The fact that Messrs Topfer and Neilson formed a majority of the board of the General Partner and had already approved the investment is beside the point. The question is whether the board of the General Partner knowing the true facts would have approved the investment. There is no evidence that Messrs Topfer and Neilson in approving the investment were acting fraudulently. Absent fraud on their part, there is no reason to think that knowing the true facts they would still have approved the investment, whatever they had done as members of the Investment Committee.

The defendants submit that the plaintiffs loss should be assessed as the difference between the price paid and the true value of the shares at the time the Partnership made the investment in accordance with the principles stated in Potts v Miller (1940) 64 CLR 282. Applying that principle, the relevant defendants submit that the plaintiffs have led no evidence of the value of the shares in Coinmach at the time they acquired them. Consequently, they have not proved that they suffered any loss.

However, as the defendants recognise, the rule in Potts v Miller is not an inflexible one. In assessing the true value as at the date of acquisition, the Court may take into account subsequent events which shed light on the true value as at that date: HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54 at [38]-[39]. Moreover, in some cases it may be more appropriate to assess damages at the date of trial, such as where the asset is not readily saleable: see ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1; [2014] FCAFC 65 at [960]ff; Wyzenbeek v Australasian Marine Imports Pty Ltd (No 2) [2018] FCA 1517 at [224]ff per Derrington J.

In the present case, the plaintiffs did not invest directly in Coinmach. Rather, they acquired shares in B&B Spinco. Clause 12.1 of the Babcock & Brown Spinco LLC Amended and Restated Limited Liability Company Agreement stated “No Member shall have any right to withdraw from the Company without the prior written consent of the Managing Members”. Consequently, there were no ready means by which the Partnership could have disposed of its interest in Coinmach. In those circumstances, in my opinion, the way in which the plaintiffs seek to calculate their claim for damages is appropriate; and had they otherwise succeeded on their statutory claims, I would have awarded them damages in the amount that they claim.

One or more of the relevant defendants raise four affirmative defences to the statutory claims.

First, each member of the Investment Committee contends that his liability is excluded by cl 6.7 of the Partnership Agreement or cl 5.1(a) of the Management Agreement (both of which purport to exclude liability to the Partnership for any conduct unless that conduct constitutes fraud, gross negligence or wilful misconduct) or that they are entitled to be indemnified by the Partnership for any liability they have under cl 6.8 of the Partnership Agreement or cl 5.1(b) of the Management Agreement. Second, each member of the Investment Committee seeks to be excused under s 1318 of the Corporations Act. Third, each relevant defendant raises a defence that each other relevant defendant is a concurrent wrongdoer, that the statutory claims are apportionable claims under s 1041L of the Corporations Act and s 12GP of the ASIC Act (as the case may be) and that therefore they are only liable for that proportion of the claim that the Court considers just having regard to the extent of that defendant’s responsibility for the damage or loss: Corporations Act, s 1041N; ASIC Act s 12GR. Fourth, Professor Officer and the PI Insurers raise defences of contributory negligence under s 1041I(1B) of the Corporations Act and s 12GF(1B) of the ASIC Act.

With one important qualification, the first defence raises similar issues to those raised by the relevant clauses in the context of the claim based on breach of fiduciary duties. If the members of the Investment Committee engaged in the conduct complained of, then they did so as “agents” of the Manager. Moreover, the conduct was conduct “with respect to the Partnership” because it was conduct concerning an investment by the Partnership. Consequently, both cls 6.7 and 6.8 of the Partnership Agreement apply. That raises the question whether the relevant conduct falls within one of the qualifications contained in the clauses – a question that is difficult to answer without knowing the nature of the conduct said to be misleading or deceptive.

The important qualification relates to the issue whether liability under the statutory provisions can be excluded or modified by contract. Mr Topfer submits that it can, provided the exclusion is not in a contract that was induced by the misleading and deceptive conduct. However, that submission does not sit easily with the following statement of Lockhart J (with whom Burchett and Foster JJ agreed) in Henjo Investments Pty Limited v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546 at 561 in relation to the operation of what was then s 52 of the Trade Practices Act 1974 (Cth):

The plaintiffs also contend that cls 5.1(a) and 5.1(b) of the Management Agreement and cls 6.7 and 6.8 of the Partnership Agreement are rendered void by s 12ED of the ASIC Act. Having regard to the conclusions I have reached, it is not necessary to deal with this issue in this context. I return to the issue below, when dealing with the contractual claim.

As to the defence based on s 1318 of the Corporations Act, it is not easy finally to determine the availability of that defence without knowing precisely how it is said that the defendants relying on it engaged in misleading and deceptive conduct. But as in the case of the claim based on breach of fiduciary duties, it is difficult to see how the defence could succeed in this case. No reason was advanced for why members of the Investment Committee should be excused. If they engaged in misleading and deceptive conduct, that conduct went to the heart of the task they were required to undertake because it was concerned with the advisability of making the investment which required the committee’s approval. It is difficult to see why that conduct should be excused.

As to the proportionate liability defence, it is not possible to apportion liability without knowing who is liable and on what basis. There are so many possible combinations that it is not a task that can be undertaken absent findings of liability.

As to the contributory negligence defence, I would not have concluded that the Partnership was guilty of contributory negligence. The claim that it was is based on the fact that the General Partner was exclusively responsible for managing the affairs of the Partnership, and the directors of the General Partner included Mr Topfer. That claim raises a number of issues including the question whether Mr Topfer’s knowledge is to be imputed to the General Partner for this purpose and the question whether the defence is available in circumstances where the responsibility for making recommendations in relation to investments was the contractual responsibility of the Manager. But even assuming those issues were decided against the plaintiffs, I do not accept that the Partnership was responsible for any contributory negligence of the General Partner; and it is the Partnership that has suffered the loss.

Many of the issues raised by the claim based on breach of statutory duties are also raised by the claim in negligence – such as causation and loss and the defences of concurrent liability and contributory negligence. It is unnecessary to repeat what I have said in relation to those issues. In this section, I only deal with those issues which are specific to the claim for negligence.

Three cases are advanced based on negligence. The first is that the Investment Committee Representation was a negligent misstatement for which members of the Investment Committee are liable and the Manager is vicariously liable.

Second, it is said that the members of the Investment Committee owed the Partnership a duty of care in discharging their duties under the Management Agreement. It is said that they breached their duty of care because each of them failed properly to enquire into and to consider, in the case of Messrs Topfer and Green, all of the matters that gave rise to an absence of reasonable grounds and, in the case of the other Investment Committee members, all of those matters other than RBS’s threatened withdrawal from the transaction (see para 216 above). Again, it is said that the Manager was vicariously liable for that conduct.

Third, it is said that the Manager owed a duty of care in discharging its obligations under the Management Agreement and that it breached that duty of care in the following ways:

I am prepared to accept that, to the extent that the members of the Investment Committee made the Investment Committee Representation to the Partnership or General Partner, they owed the Partnership a duty to take reasonable care in doing so, on the basis that the members of the Investment Committee must have known and intended that the Partnership and General Partner would rely on any representation made by the committee concerning the investment in Coinmach and it was reasonable for the Partnership and General Partner to do so having regard to the responsibility of the Investment Committee to approve the investment: see Tepko Pty Ltd v Water Board (2001) 206 CLR 1; [2001] HCA 19 at [47] per Gleeson CJ, Gummow and Hayne JJ; at [75]-[76] per Gaudron J; [139] per Kirby and Callinan JJ.

However, the claim based on negligent misstatement raises similar issues to the claim based on misleading and deceptive conduct and must fail for similar reasons. In particular, the representation was not made. Nor was it false, if it was made.

It is pleaded in para 129 of the SFACLS that the members of the Investment Committee “owed a common law duty to the Partnership to exercise reasonable care and skill in providing services under the Management Agreement, including in relation to causing the Partnership to make the Investment [that is, the investment in Coinmach]”. The particulars of the breach of that duty are the same as the particulars of the absence of reasonable grounds.

I do not accept that members of the Investment Committee owed the Partnership a duty of care of the type alleged for two reasons. First, I do not accept that the members of the Investment Committee owed the Partnership a duty of care. Second, even if that is wrong, I do not accept that the scope of the duty was as wide as contended for by the plaintiffs.

It was not suggested that the relationship between the Investment Committee and the Partnership fell into a recognised category of where a duty of care has been found to exist. In those circumstances, the relevant principles to be applied in determining whether a duty of care was owed were summarised by Allsop P (with whom Simpson J agreed) in Caltex Refineries (Qld) Pty Limited v Stavar (2009) 75 NSWLR 649; [2009] NSWCA 258 at [102]-[103] in these terms:

In the present case, there are a number of features about the relationship between the Investment Committee and the Partnership that suggest that members of the Investment Committee owed the Partnership a duty of care. Under cl 2.1 of the Management Agreement, the Partnership appointed the Manager as “its exclusive agent to invest and manage the Portfolio”. In fact, the Partnership treated any decision of the Investment Committee of the Manager as a recommendation that had to be approved by the General Partner, which, under the Partnership Agreement, had the exclusive responsibility for managing the affairs of the Partnership. Nonetheless, it is apparent that the Partnership and the General Partner were heavily dependent on the Manager to invest the Partnership’s funds. The Manager took responsibility for considering any proposed investment and making recommendations to the General Partner. Although the General Partner had an experienced board, it had no staff of its own and undertook no investigation itself in relation to potential investments. In that respect, the Partnership was both reliant on the Manager to make appropriate investment decisions and vulnerable to those decisions. The Manager and members of the Investment Committee must have understood that to be the case.

The Investment Committee was established as a specialist committee of the Manager to which investment decisions were delegated. However, as I have explained, it was not a mere internal organ of the Manager by which the Manager made decisions. It was a separate independent body, the size and members of which could be determined by the Partnership. It was a body to whom the Manager could and did delegate the responsibility of making investment decisions. As a consequence of the delegation, the Partnership was reliant on and vulnerable to those decisions, as members of the Investment Committee must have appreciated. The fact that the decisions of the Investment Committee had to be unanimous does not alter the position. The Partnership was still reliant on the decision of each member of the committee. Those matters suggest that members of the Investment Committee did owe the Partnership a duty of care.

However, there is a fundamental difficulty with the suggestion that members of the Investment Committee owed the Partnership a duty of care. In Central Trust Co v Rafuse (1986) 31 DLR (4th) 481 at 522; [1986] 2 SCR 147 at 205 Le Dain J, speaking for a unanimous Supreme Court of Canada, in a passage quoted with approval by Mason CJ and Deane and Gaudron JJ in Bryan v Maloney (1994-1995) 182 CLR 609 at 622 said:

In my opinion, that principle applies in this case. Clause 5.1(a) of the Management Agreement specifically limits the liability of the Manager and relevantly the liability of “other agents” for Loss (as defined) from any act or omission “arising out of or in connection with the performance by the Manager … of its services under this Agreement”. In my opinion, the members of the Investment Committee must be “other agents” for the purposes of this limitation. The members of the Investment Committee are persons who acted in place of the Manager in discharging the Manager’s obligations under the agreement. In that sense, they can be described as “agents” of the Manager. It does not matter whether the members of the Investment Committee are entitled to enforce the provisions of cl 5.1(a) themselves or not. In my opinion, it would be sufficient for the principle stated in Central Trust Co v Rafuse to operate if the apparent intention of the clause was to limit the liability of the committee, even if it is not enforceable by them. The clause forms part of the framework governing the relationship between the parties. That framework was established by sophisticated parties who were in a position to protect their own interests. The Court should not impose a duty which is inconsistent with that framework.

In any event, the scope of any duty of care owed by the Investment Committee must be limited to the tasks that were delegated to it. It is apparent that, in this case, the task of the committee was to make a recommendation or decision based on the material placed before it – that is, the material in the Investment Committee Memo. That memo was prepared primarily by Mr Nicholson. There is no suggestion that in preparing the memo that he was acting as a member of the committee. There is no evidence, for example, that he prepared the memo on instructions from the committee. Rather, Mr Nicholson prepared the memo as an employee of the Manager; and it is apparent that the Manager retained the responsibility for determining what information should be placed before the committee and checking its accuracy. It may be that the members of the Investment Committee owed a duty to raise with the Manager any obvious defects or inaccuracies in the Investment Committee Memo. However, as I have said, their principal duty was to form an opinion on the investment on the basis of the information supplied to them.

The members of the Investment Committee are said to have been negligent for the same reasons they are said to have lacked reasonable grounds for the Investment Committee Recommendation. I have already pointed out that those particulars stray impermissibly beyond the pleaded case. On the conclusions I have reached, those particulars do not appear to be proper particulars of negligence, since they do not focus on the information contained in the Investment Committee Memo and why it was negligent of the committee to recommend the investment in the light of that information. In any event, the allegations of negligence must fail for the same reasons as the allegation that the committee lacked reasonable grounds.

The PI Insurers concede that the Manager owed a duty of care to the Partnership which was co-extensive with its contractual obligations. The plaintiffs do not assert in final submissions that the duty owed by the Manager was broader than its contractual obligations. In those circumstances, it is best to deal with this aspect of the case when dealing with the contractual claim against the Manager. The allegation of negligence appears to add nothing to the contractual claim.

The plaintiffs rely on the express terms of the Management Agreement contained in cls 3.1(a), 3.1(g), 11.3(a) and 11.3(b). They also rely on the terms implied by s 12ED of the ASIC Act, which relevantly provides:

A person is taken to have acquired particular financial services as a “consumer” if, relevantly, the services were acquired for use or consumption in connection with a small business and the services were of a kind ordinarily acquired for business use or consumption: see s 12BC(1)(c). A “small business” is relevantly a business employing fewer than 20 people: s 12BC(2)(b).

The terms implied by s 12ED may not be excluded by agreement. Section 12EB provides:

The Subdivision appears to assume that s 12EB operates by reference to contracts the proper law of which is the law of any part of Australia. That operation is modified by s 12EA, which provides:

The breach of contract claim raises four main issues:

The plaintiffs submit that the terms are to be implied on the basis that the Partnership was a small business because it employed fewer than 20 persons. In fact, the evidence is that it had no employees at all.

Although the issue primarily concerns the PI Insurers, the only parties specifically to take issue with the proposition that the Partnership was a small business, albeit in the context whether cls 6.7 and 6.8 of the Partnership Agreement and cls 5.1(a) and 5.1(b) of the Management Agreement are rendered void by s 12EB of the ASIC Act, are Messrs Topfer and Green, who both submit that the Partnership was not a consumer because it did not engage in a business. It was merely a passive investment vehicle through which its limited partners made investments.

I accept that submission. There is no reason not to give the expression “business” its ordinary and popular meaning, which is an entity that engages in activities for the purpose of profit on a continuous and repetitive basis: see Hope v Bathurst City Council (1980) 144 CLR 1 at 8-9 per Mason J (with whom Gibbs and Stephen, Murphy and Aickin JJ agreed). The Partnership was not a business in this sense. It might be thought that the Partnership was a business because it engaged in the activity of accepting funds from investors (the limited partners) and investing those funds on their behalf and that it engaged the Manager under the Management Agreement to assist it in carrying on that business. However, that is not an accurate characterisation of the relationship between the parties. The Partnership was established as the vehicle through which investors in the DIF III Fund invested. The fund was established by the Manager and investors were sought well before the Partnership was established. It was the Manager that was paid a fee and earned a profit from investing the funds of investors, not the Partnership. Although under Delaware law, the Partnership was a distinct legal entity from the limited partners, its business was not relevantly distinct from their business and it earned no profit as a result of their investments.

These clauses, or some of them, are said to be rendered void by s 12EB of the ASIC Act. The operation of that section depends on a term being implied by s 12ED. I have already concluded that that section does not imply a term in the Management Agreement. Nor do I think that the section implies a term in the Partnership Agreement, for similar reasons. It might be said that under the terms of the Partnership Agreement, the General Partner provides financial services to the Partnership. But even if that is correct, for the reasons I have given, the Partnership is not a “consumer” because it was not a small business.

If that conclusion is wrong in relation to the Management Agreement, then plainly cl 5.1(a) is rendered void by s 12EB. In my opinion, cl 5.1(b) would also be rendered void because its effect is to modify the application of the terms implied by s 12ED.

The position in relation to cls 6.7 and 6.8 of the Partnership Agreement is more complicated. Assuming that s 12ED of the ASIC Act implies terms in the Partnership Agreement, in my opinion cls 6.7 and 6.8 are not rendered void by s 12EB. As I have said, the Subdivision in which s 12EB appears is drafted on the basis that s 12EB applies to contracts the proper law of which is the law of some part of Australia, but the means of determining the proper law is modified by s12EA. However, that modification has no effect in this case. Even ignoring the express choice of law clause in the Partnership Agreement, it seems to me that the proper law of that agreement is Delaware law. In the absence of an express choice by the parties of the applicable system of law, the proper law of the contract is the law with which the contract has the closest and most real connection: see Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418 at 434 per Toohey, Gaudron and Gummow JJ; Bonython v Commonwealth (1950) 81 CLR 486 at 498; [1951] AC 201 at 219 per Lord Simonds. The Partnership was established in accordance with the law of Delaware; and its nature and structure is determined in accordance with that law. The Partnership Agreement is primarily concerned with regulating the rights and liabilities of the Partnership. It does so against the background of Delaware law. In those circumstances, it is the system of law with which the agreement has the closest and most real connection.

On the other hand, I cannot see how cls 6.7 and 6.8 of the Partnership Agreement could be interpreted as modifying the contractual rights of the parties under the Management Agreement. If an express or an implied term of the Management Agreement imposes obligations on the Manager and if those terms are not modified by other terms of the Management Agreement (because, for example, those terms are void), I cannot see how they could be modified by the terms of another agreement not governed by Australian law. If the other terms did have that effect, then they would be terms (not set out in the contract) which purport to, or have the effect of, modifying a contract governed by Australian law and therefore would be void.

On the conclusions I have reached the only relevant terms of the Management Agreement are the express terms. Three substantive terms are relied on. One requires the Manager to “exercise all due diligence and vigilance” (cl 3.1(g)). A second requires the Manager to have “the skill, facilities, capacity and staff necessary to perform the duties and obligations under this Agreement” (cl 11.3(a)). A third requires the Manager to have “sufficient competent investment management staff” and to maintain close supervision of “the investment and management of the Portfolio” (cl 11.3(b)). However, on the conclusions I have reached, the obligations imposed by those terms are qualified by cl 5.1(a). The effect of that clause is that the Manager will not be liable unless it has at least been grossly negligent. “Gross negligence” is not a term with a precise meaning; and its meaning is to be ascertained from the context in which it is used. In some cases, it has been held to encompass more than mere negligence: see James Thane Pty Ltd v Conrad International Hotels Corp [1999] QCA 516 at [74] per Williams J (with McMurdo P and Thomas JA agreeing); Red Sea Tankers Ltd v Papachristidis (The “Hellespont Ardent”) [1997] 2 Lloyd’s Rep 547 at 586 per Mance J. However, any distinction between gross negligence and mere negligence is one of degree and not of kind: Armitage v Nurse [1998] Ch 241 at 254 per Millett LJ. In other cases, the word “gross” has been found to add no additional meaning in the circumstances: see Sucden Financial v Fluxo-Cane Overseas Ltd [2010] EWHC 2133 (Comm) at [54] per Blair J.

In the present case, in my opinion the phrase “gross negligence” encompasses more than mere negligence, but it would at least include a deliberate decision not to undertake enquiries or investigations required by the contract.

The terms of the Management Agreement are said to have been breached in various ways, corresponding to the ways in which it is said the Manager was negligent. The breaches of contract (and negligence) may be classified into three categories. First, it is alleged that the Manager did not undertake any analysis or investigations of its own in relation to the investment. Second, it is alleged that the Manager failed to reconsider the investment in the light of developments between May 2007, when the Coinmach Deal Team had largely completed its due diligence, and November 2007, when the Partnership committed to the Investment. Third, it is said that the Manager failed adequately to consider how the Origination Fee may have influenced the Model's projections on the value of Coinmach.

It is unnecessary to examine these allegations in any detail, since the PI Insurers admit that the Manager “failed to carry out any adequate due diligence into the commercial, financial and structural terms of the Coinmach Deal” and “failed to carry out adequate oversight of the Coinmach Deal Team particularly in light of the conflicts involved”.

It is not clear that the second of these admissions is a proper admission of a breach of an express term of the Management Agreement. The Coinmach Deal Team was not employed by the Manager and no obligation was placed on the Manager by the Management Agreement to supervise it. The admission must be understood as being consistent with other contentions the PI Insurers seek to advance in relation to the insurance aspects of the claim against them. On the other hand, the first admission goes to the heart of the case against the Manager and is a clear admission that the Manager failed to exercise any due diligence in undertaking its functions in breach of cl 3.1(g) of the Management Agreement.

The PI Insurers do not rely on cl 5.1(a) of the Management Agreement; and it was for them to plead it if they intended to rely on it. In any event, in my opinion, the Manager’s conceded breach amounts to more than mere negligence. It must have reflected a deliberate decision on the part of the Manager to rely on the work of the Coinmach Deal Team rather than to undertake any substantive enquiries of its own in relation to the investment. In taking that deliberate decision in breach of its contractual obligations, it was at least grossly negligent, with the result that the exclusion in cl 5.1(a) did not apply.

The plaintiffs do not specifically address the issue of damages for breach of contract. They do plead in para 133 of the SFACLS that but for each of the breaches they rely on including the Manager’s breach of contract, they would not have made the investment. On that basis, the damages they claim are the same as the damages they claim in respect of the other causes of action.

Perhaps relying on that pleading, the PI Insurers proceed on the basis that the causal chain is the same irrespective of the cause of action relied on. In each case, causation depends on establishing that the General Partner relied on the Investment Committee in approving the investment. In answer to that case, the PI Insurers contend that the directors of the General Partner did not rely on the Investment Committee approval but instead relied on their own knowledge of the transaction. I have already rejected that contention.

However, at least in the case of the breach of contract claim, that is not the end of the matter. The underlying assumption of the plaintiffs’ claim based on breach of contract is that if the Manager had exercised due diligence, it would have placed different information before the Investment Committee than the information that was placed before the committee. In other words, had it investigated the underlying assumptions of the model and made its own enquiries of Coinmach’s management and undertaken further investigations of the impact of the changed financial conditions on Coinmach’s business, it would have come to different conclusions to the Coinmach Deal Team and Babcock & Brown. There is a question of what it would have done having reached those different conclusions. If it had placed different information before the Investment Committee and the board of the General Partner, there is a question whether either of those bodies would have acted any differently. But there is a prior question, not specifically addressed by the parties and on which the plaintiffs must bear the onus of proof, of whether having conducted additional investigations, the Manager would have reached different conclusions or made different recommendations from those that it did.

Implicit in the plaintiffs’ case appears to be the assumption that in exercising due diligence the Manager would have come to the conclusion that the model on which Babcock & Brown relied was defective for the reasons identified by the plaintiffs in their particulars of the absence of reasonable grounds and for why members of the Investment Committee were negligent. However, if that is what is said, then the claim for damages suffers from the same faults as the other claims based on those particulars and must fail.

As I have said, the plaintiffs have a direct claim against the PI Insurers under the 2017 Act. In addition, each of the Investment Committee defendants other than Professor Officer seeks an indemnity from the PI Insurers in respect of any liability he has to the plaintiffs and in respect of his defence costs.

There are a number of relevant PI insurance policies. The primary policy has a limit of $25 million. There are three excess policies which together with the primary policy provide cover of up to $150 million. The policies are relevantly in the same terms. It is not necessary to distinguish between the different policies and insurers and it will be convenient to refer to the various policies as “the PI Policy” and to continue to use the expression “PI Insurers” to refer to all insurers under the primary and excess policies.

Before identifying the issues that arise in relation to the claim against the PI Insurers, it is convenient to set out the terms of the PI Policy and the relevant factual background.

The Insuring Clause of the PI Policy provides:

The Policy Period is the period from 1 September 2008 to 1 September 2009. It is not disputed that each of the Manager and Messrs Topfer, Green, Nicholson and Neilson is an “Assured” within the meaning of the policy.

“Loss” relevantly includes “the legal liability of the Assured to pay any damages for financial loss and costs awarded against the Assured” and “Defence Costs and Expenses”, which is defined to include “all reasonable and necessary professional fees and expenses incurred by the Assured, with the prior written consent of Underwriters (which shall not be unreasonably withheld), in the defence of any Claim for Civil Liability”.

“Civil Liability” is relevantly defined to mean actual or alleged:

“Financial Services” is defined to mean:

Condition 2 of the policy provides for a deductible of $6.5 million. Condition 2(c) states:

Condition 7 relevantly provides:

The PI Insurers rely on two exclusions: Exclusion 17 and Exclusion 28. Exclusion 17 excludes liability in respect of:

Exclusion 28 excludes liability in respect of:

The plaintiffs rely on a number of documents which are said to be notice of a claim against the Manager or evidence that the “Assured’s Management” first became aware during the Policy Period of a “fact, circumstance or event which could reasonably be anticipated to give rise to a Claim”.

The first is an email dated 13 November 2008 from Mr Alexander Stahel of Babcock & Brown Global Partners (BBGP), which was copied to Mr Nicholson, which describes the investment in Coinmach as “distressed” and states “Sadly, the above urgency is news for BBGP. In October, we explained to our LPs [limited partners] on the basis of Berry’s [Ms Talintyres’s] input at our AGM that the company is performing in line with expectations and that we will hold the investment long term to realise value through EBITDA growth. Now we know that this is impossible”. BBGP had invested approximately USD70 million in Coinmach through its wholly owned subsidiary, BBGP Coinmach Holdings Limited.

Second, the plaintiffs rely on an email dated 17 November 2008 from Mr Edward Hanson, who was a director of the General Partner from 23 August 2007 to 28 May 2009 and also a director of BBGP, to Mr Larkin in which Mr Hanson refers to problems with the investment in Coinmach generally and RBS’s concerns with it and in which Mr Hanson says, among other things, that “The concerning issue here is the concealment of information that has been imperative to flow through to us, and that has clearly been confined at the BNB [Babcock & Brown] team level. Given the conversations we have had with Coinmach management and the banks it would seem that certain risks and information was known by BNB prior to closing the deal”. The email refers to what was said to have been the RBS offer to pay the break costs of USD17 million and Babcock & Brown’s decision to refuse that offer so it could collect its fees.

Third, the plaintiffs rely on an email dated 27 November 2008 from Mr Stahel to Mr Nicholson in which Mr Stahel says he was told of an email supposedly sent by Ms Talintyre in which Ms Talintyre “stated that the Coinmach deal should go ahead – although agreeing it being un-commercial – purely for the reason of collecting a substantial fee from BBGP and other satellite fund investors”.

Fourth, the plaintiffs rely on a letter dated 9 February 2009 from Mr Hanson to BBLP, BBL, Mr Trevor Loewensohn, who was a director of the Manager between 7 February 2006 and 5 November 2008, and others. The letter is somewhat confused but it refers to what was said to have been the offer by RBS to pay the USD17.5 million Cancellation Fee in relation to the Coinmach transaction and Babcock & Brown’s counter offer to accept the payment of that fee and the fees it would have earned on the transaction. The letter asserts that the amounts paid into the Escrow Account “totalling some $34,879,238.32” were funded out of the sums paid by BBGP and the equity investors other than RBS. It alleges that “At no stage was BBGP informed of this “discount” to the price for the equity … which discount RBS required if RBS was to proceed to completion”. In addition, the letter states that “the RBS offer meant that the BBGP Investment Committee was not given the opportunity to review the decision to invest in Coinmach in light of the changed economic conditions and the reduction in equity value (as indicated by RBS)”. It asserts that there was a conflict between the interests of BBLP because of the fees it would earn on completion and the interests of BBGP in accepting RBS’s offer and that therefore “The failure to inform BBGP of the RBS offer was … a breach of the fiduciary and other duties owed by [BBGP] and other members of the Group to BBGP”. It asserts that, as a result, the money held in the Escrow Account that had been contributed by BBGP was held on trust for it.

Fifth, the plaintiffs rely on a letter dated 28 August 2009 from Mr Gavin White, Babcock & Brown’s Group Insurance Manager, to InterRisk Australia Pty Ltd, the insurance broker which arranged the policy, and Integro Insurance Brokers Limited, the relevant Lloyd’s broker. That letter sought to give notice of a range of possible claims. In relation to BBGP and Babcock & Brown European Infrastructure Fund (BBEIF), the letter gave notice in the following terms:

The plaintiffs also rely on an email dated 7 January 2014 from InterRisk to Integro and a number of the PI Insurers attaching a press release giving notice of the commencement of these proceedings in the Supreme Court of Victoria and a letter dated 7 November 2014 to Integro and InterRisk from Herbert Smith Freehills referring to earlier notifications and attaching four writs that had been issued in the Supreme Court of Victoria. As the PI Insurers point out, these documents shed no light on what was known or notified during the policy period and cannot advance the case.

Lastly, the plaintiffs rely on the fact that the Partnership’s investment in Coinmach was written down to nil by 5 February 2009.

Messrs Topfer, Green, Nicholson and Neilson identify two other documents in their cross-claims as relevant to the question of notification, but neither of those documents was the subject of submissions and neither adds anything to the documents already referred to.

The PI Insurers deny liability to the plaintiffs and cross-claimants on five grounds:

There is also an issue concerning the question whether there is one or more claims for the purposes of the application of the Deductible.

The primary cover provided by the PI Policy is in respect of claims made against the Assured during the Policy Period. However, as is usual with claims made policies, the policy contains an extension in respect of circumstances notified during the Policy Period. In order to fall within the extension, (1) the “Assured’s Management” must (2) relevantly, become aware of any fact, circumstance or event which could reasonably be anticipated to give rise to a Claim; (3) notice of those circumstances must be given by the Assured at the earliest practical moment, but in any event within 30 days of the expiration date of the Policy Period and (4) the subsequent legal proceedings in respect of which indemnity is sought (that is, these proceedings) must be a direct result “of any matter or matters for which written notice has been given under … (c) above” – that is, any of the facts, circumstances or events of which the Assured’s Management was aware and which could reasonably be anticipated to give rise to a Claim.

There is a question of how the first of these requirements (that is, knowledge of the “Assured’s Management”) applies in this case. The PI Insurers contend, correctly in my opinion, that the policy must be read distributively. Consequently, the reference to the “Assured’s Management” must be read as a reference to the management (as defined) of the assured who makes the claim for indemnity. In the present case, the Assured who make claims are the Manager and each of Messrs Topfer, Green, Nicholson and Neilson. It is easy to apply the definition of “Assured’s Management” to corporate entities, such as the Manager. Its application to individuals is less obvious. However, it is not necessary to resolve that issue in this case. It was not suggested that the knowledge of Messrs Topfer, Green, Nicholson and Neilson was relevantly different from the knowledge of the Manager’s Management (as defined).

There is also a question of how s 54 of the Insurance Contracts Act applies in this case. That section relevantly provides:

It is now well settled that s 54 applies to the failure to give notice of circumstances under an extension in a claims made policy: see FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38. However, it does not apply to restrictions which are inherent in the claim itself. One such restriction in the present case is that the Assured’s Management must first become aware during the Policy Period of facts, circumstances, or events which could reasonably be anticipated to give rise to the Claim in respect of which indemnity is sought: see Australian Hospital Care at [43] per McHugh, Gummow and Hayne JJ; [84] per Kirby J. Section 54 applies to the failure to give notice. However, it cannot apply to the absence of awareness.

In the present case, that raises the question whether the Assured’s Management first became aware of facts, matters or events during the Policy Period which could reasonably be anticipated to give rise to the Claim in respect of which indemnity is now sought. The PI Insurers have not led any evidence that they have suffered prejudice as a consequence of late notice of any such fact, matter or event. Consequently, there can be no question that the consequence of any such failure is cured by s 54.

The plaintiffs have sought to prove the facts, circumstances and events of which the Manager’s Management was aware by pointing to the correspondence referred to earlier. However, none of that correspondence establishes that the claim in respect of which indemnity is sought is a direct result of matters known to the Manager’s Management during the Policy Period.

The question is whether the facts and matters disclosed in that correspondence were known to the Manager’s Management and whether it could reasonably have been anticipated from those facts and matters that claims would be made against the Manager by the plaintiffs arising from the Manager’s own conduct or from the conduct of the Investment Committee or Messrs Topfer and Green in relation to the General Partner’s investment in Coinmach.

One difficulty is that it is far from obvious that much of the information contained in the correspondence was known to the Manager’s Management. The clearest indication of a possible claim was the letter dated 9 February 2009 from Mr Hanson. However, there is no evidence that the information contained in that letter was known to anyone who formed part of the Manager’s Management. The plaintiffs rely on the fact that Mr Loewensohn was a recipient of the letter and was a director of the Manager between 7 February 2006 and 5 November 2008. But all the letter establishes is that Mr Loewensohn knew the relevant facts on or shortly after 9 February 2009, by which time he had ceased to be a director of the Manager. His knowledge at that time cannot be attributed to the Manager.

Each of Mr Topfer and Mr Green gave evidence, but neither gave evidence of what facts they knew before the expiration of the Policy Period (on 1 September 2009) from which it might reasonably be concluded that the plaintiffs would make a claim of the type that they now make. Both Mr Nicholson and Mr Neilson served affidavits and were represented at the hearing. However, neither of them were called to give evidence of the facts that they knew. In the absence any relevant evidence, there is no reason to infer that any of them knew anything other than what is apparent from the documents.

A second problem is that there is no suggestion in any of the correspondence that the plaintiffs might make a claim or that that possible claim arose out of the conduct of the Manager or its Investment Committee. The fact that the investment performed badly is not itself a reason for concluding that the plaintiffs would make a claim against the Manager or members of the Investment Committee. Most of the correspondence is directed at a possible claim by BBGP against BBLP or possibly other related companies. None of the correspondence suggests any dissatisfaction with anything done by the Manager or the Investment Committee. The email dated 27 November 2008 from Mr Stahel to Mr Nicholson, refers to a suggestion that Ms Talintyre had stated the acquisition was uncommercial and that the only reason it proceeded was to enable BBLP to collect a substantial fee from BBGP and “other satellite fund investors”. Presumably, the reference to a “substantial fee” is a reference to the origination fee payable by Spin Holdco to BBGP. It is difficult to see how that fact alone formed a reasonable basis for concluding that a claim would be brought in respect of the payment of that fee. In any event, it provided no basis for thinking that the claim would be brought against the Manager or members of the Investment Committee.

For those reasons alone, all the claims against the PI Insurers must fail.

I accept the PI Insurers’ submissions that the definition of “Civil Liability” must be read as a whole and that the express inclusion of dishonest etc acts of employees (only) must mean that the other heads of Civil Liability are intended to be heads of liability (whether actual or alleged) that do not involve dishonesty. If it were otherwise, the specific head of liability in respect of the dishonest etc acts of employees would be redundant.

Mr Green takes issue with the conclusion of the previous paragraph because the cover in respect of claims based on misleading and deceptive conduct (in para (f) of the definition of “Civil Liability”) specifically states that it applies to conduct “(not being deliberate or fraudulent)”. Consequently, it is said that the cover in respect of breach of fiduciary duty, which does not contain a similar qualification, must be understood as extending to fraudulent breaches of duty. I do not accept that submission. The fact that the limitation in respect of misleading and deceptive conduct is put in parentheses indicates that the limitation was thought to be implicit and that the words in parentheses were included out of an abundance of caution. Moreover, if Mr Green is correct, the policy would purport to provide cover not only in respect of alleged dishonest breaches of fiduciary duty but actual breaches of that type. There is a question whether cover of that type would be unenforceable as contrary to public policy: see Fire & All Risks Insurance Co Ltd v Powell [1966] VR 513. In any event, in my opinion, it would require clear words in an insurance policy to interpret it as providing cover to a person who has engaged in a dishonest breach of duty.

Allegations of dishonesty were certainly made against Messrs Topfer and Green in connection with the knowing assistance case. However, with that exception, none of the allegations against them involved an allegation of dishonesty on their part. Consequently, the allegations of dishonesty on their part only formed a small aspect of the overall case brought against them and the Manager. In those circumstances, had the plaintiffs succeeded in other aspects of the case, that success would still be success in respect of Civil Liability as defined. Moreover, to the extent that legal costs were incurred by the Manager or Messrs Topfer and Green that related to claims other than the knowing assistance claims, the limitation contained in the definition of “Civil Liability” would not prevent recovery of those legal costs. In that event, it would be necessary to apportion the relevant legal costs between those incurred in respect of insured claims and those that were not. Before any such apportionment occurred, it would be necessary to give the parties an opportunity to adduce further evidence and make submissions on the question of apportionment.

The PI Insurers submit that the Directorial Act exclusion applies. It is not easy to follow their submissions on this aspect of the case. They appear to accept that the exclusion only has application to individual Investment Committee members who seek coverage in respect of successful claims against them (of which, of course, on the findings I have made there are none).

The submission depends on treating the acts of the Investment Committee members in approving the investment in Coinmach as “acts, errors or omissions by any Director (whether so described or deemed to be) of the Assured in his or her capacity as such”. The “Assured” is the Manager. The question, therefore, is whether the acts of members of the Investment Committee in approving the investment can be described as acts of directors of the Manager in that capacity. In my opinion, it is plain that they cannot. The Investment Committee is distinct from the board of the Manager. It is a body to whom certain functions were delegated. The members of the Committee were not necessarily members of the board. Moreover, the General Partner had control over who was a member of the Investment Committee. Those facts alone make it plain that members of the Investment Committee were in no sense members of the board of the Manager or making decisions in that capacity. The fact that they made decisions which, but for the delegation, would otherwise be taken by the board does not alter the position. To suggest otherwise is to ignore the delegation.

The question raised by the conflicts exclusion is whether “[a]ny liability, loss or expense” claimed against the PI Insurers arises out of, is based upon or is attributable to “directly or indirectly, any conflicts of interest arising out of, based upon, relating to or in connection with investment banking activities or any research report”.

The application of the exclusion does not depend on the character of the claim but rather on the objective facts – that is, the connection between the “liability, loss or expense” on the one hand and the conflicts of interest on the other. Each of the connecting phrases (“arising out of”, “based upon”, “attributed to”) suggests a causal connection, but of a broad kind. The broad nature of the connection is emphasised by the words “directly or indirectly”. Consequently, the loss, liability or expense must in some broad sense be caused by the conflicts of interest. The conflicts of interest must relate to “investment banking activities” or “any research report”. Again, broad words of connection are used. “[I]nvestment banking activities” is not defined. “[R]esearch report” is, although the definition is unclear. It must be a written or electronic communication that appears to have three elements. The first is that it must include “an analysis of equity securities or debt of individual companies or industries”. Second, it must provide information which is or is intended to be sufficient to make a decision. Third, it must include a recommendation.

The causal chain by which the Partnership made the investment in Coinmach involved the preparation of the Investment Committee Memo, the consideration of that memo by the members of the Investment Committee and the approval of the investment following that consideration, and then the approval of the investment by the board of the General Partner in light of the Investment Committee Memo and Investment Committee approval.

The PI Insurers submit that the Investment Committee Memo was a “research report” within the meaning of the exclusion. I do not accept that submission. The report contained an analysis of the value of Coinmach and inferentially the value of its shares. It provided information that was intended to be sufficient for the Investment Committee to make a decision. However, it contained no recommendation. It simply sought approval from members of the committee.

On the other hand, I accept that the process by which the investment was approved was connected with investment banking activities. In broad terms, the DIF III Fund was established by a Babcock & Brown entity to raise funds from investors, to invest those funds and to charge fees for doing so. In my opinion, those activities are investment banking activities as ordinarily understood. The process by which the investment in Coinmach was approved occurred as part of those activities. In my opinion, that is a sufficient connection between the investment banking activities and the approval process.

The question, then, is whether the activities that occurred as part of the approval process could be said to involve a conflict of interest which in some broad sense could be said to have caused the liability, loss or expense in respect of which the Manager (through the plaintiffs) and Messrs Topfer, Green, Nicholson and Neilson seek indemnity.

The PI Insurers identify three conflicts. The first was between principally BBLP, which stood to earn a substantial fee from the investment in Coinmach together with other benefits said to flow from the investment (whatever the merits of the investment), and the Partnership, whose only interest was in the merits of the investment. The second was between Babcock & Brown, which had an interest in giving effect to the arrangement by which USD25 million (originally USD35 million) of its proposed investment in Coinmach would be novated to the Partnership, and the Partnership, whose only interest was making an investment in Coinmach on the merits as they existed at the time the investment was made. The third was between the Manager which stood to earn fees calculated by reference to the net invested capital of the Partnership, and the Partnership, whose only interest was the merits of the investment.

The PI Insurers provided lengthy written submissions on the various ways in which it was said that these conflicts caused the loss or liability in respect of which the plaintiffs sue. It is not easy to follow these submissions. However, in substance two strands of reasoning run through them. The first takes as its starting point success by the plaintiffs and seeks to demonstrate that that success must be attributed at least in part to the conflicts of interest. Having regard to the conclusions I have reached on the plaintiffs’ primary claims, it is neither necessary nor, given the number of possible alternative findings, practical to address this aspect of the case.

Independently of the findings of the Court on the plaintiffs’ case, the PI Insurers submit that the conflicts of interest contributed to the decision by the Investment Committee to approve the investment in Coinmach and the decision of the board of the General Partner to the same effect, which led to the plaintiffs’ claims and the liability and expenses in respect of which indemnity is sought. However, I am not satisfied that that is the case. It is true that the Manager did not undertake any of its own investigations of the investment and relied on material that was provided to it by Babcock & Brown. But it is not clear that that came about because of the conflicts that existed or that a different conclusion would have followed had the Manager undertaken its own investigations. Babcock & Brown itself was making a very substantial investment in Coinmach. It undertook extensive due diligence. The evidence is that that due diligence cost several million dollars. It would have been beyond the financial resources of the Manager to repeat that work, having regard to the ultimate size of the DIF III Fund and the amount that it proposed to invest. Although the interests of Babcock & Brown were different from those of the Partnership because Babcock & Brown expected to earn additional income from the fees that it charged, they were also closely aligned because both had an interest in not making the investment unless they were satisfied that the potential rewards outweighed the risks; and in each case those rewards depended largely on the success of the investment. Unlike the Partnership, Babcock & Brown faced substantial downside risks if the Coinmach Transaction did not proceed, including the payment of the break fee to Coinmach and the loss of fees. But eventually it was prepared to forego its Origination Fee so that the transaction could proceed and it chose to proceed with the transaction rather than negotiate an arrangement with RBS by which RBS paid or contributed to the break fee. Against that background, I am not satisfied that Messrs Topfer and Green, in approving the investment as members of the Investment Committee, and Mr Topfer, in approving the investment as a member of the board of the General Partner, were affected by the conflicts identified by the PI Insurers. If they were not motivated by the interests of Babcock & Brown at least in part in approving the investment by the Partnership, it is difficult to see that Messrs Nicholson and Neilson were. And if the conflicts were not a factor in their decision-making process, it cannot be said that that the conflicts, even in some broad sense, caused the loss or expense in respect of which the relevant claimants sue.

In cross-examination it was put to Mr Topfer that it would have been cheaper for the Partnership to acquire an interest in Coinmach from RBS, which plainly was willing to sell down its interests at a discount. Mr Topfer rejected that proposition at least partly on the basis that it would have been unfair for the Partnership to take the benefit of the due diligence undertaken by Babcock & Brown when that due diligence was undertaken in the expectation that the DIF III Fund would provide capital towards the acquisition of Coinmach. However, a case that it was open to the Investment Committee to reject the investment in Coinmach because the Partnership could have acquired shares in Coinmach more cheaply from RBS and that the Investment Committee did not take that course because of the position of conflict they were in was not pleaded and was not the subject of specific submissions. Had the case been raised in the pleadings, it is one that would have required investigation. It is too late for it to be raised now.

The PI Insurers submit that a separate deductible applies to each of the claims against the Manager and each member of the Investment Committee.

Had it been necessary, I would have rejected that submission. Under paragraph (c) of Condition 2 (dealing with the deductible), a series of third party claims are treated as a single claim for the purposes of the application of the deductible if they “result from a single act or omission (or related series of acts or omissions)”. The claim against the Manager and the members of the Investment Committee and Mr Topfer as a director of the General Partner all arise from the approval of the investment in Coinmach based on the Investment Committee Memo and the failure to undertake further investigations of one sort or another or the failure to consider information known to one or more of the Investment Committee members. That decision and those failures fall within the description of a “related series of acts or omissions”. Consequently, they are to be treated as a single claim.

The primary D&O policy was issued by American Home Assurance Company (AIG) to BBL. As is usual, it is a claims made policy which provides cover both to relevant directors and officers and to any Company which has indemnified a director or officer against an insured loss. It provides cover in respect of the period from 1 September 2008 to 1 September 2009. There are a number of excess policies providing cover on substantially the same terms. The cover under the primary policy of $25 million has been eroded in full and consequently any liability would be that of the excess insurers. It will be convenient to refer to the terms of the primary policy and to the excess policies together as “the D&O Policy” and to continue to refer to the excess insurers as the “D&O Insurers”.

The members of the Investment Committee (other than Professor Officer) seek indemnity in respect of any liability they have to the plaintiffs together with defence costs they have incurred. In addition, BBIPL seeks indemnity under the policy in respect of its liability to indemnify those persons. It is apparent that on the findings I have made the only issue is whether the D&O Insurers are liable to indemnify BBIPL and members of the Investment Committee (other than Professor Officer) in respect of defence costs those persons have incurred or for which they are liable.

The D&O Policy provides cover in the following terms:

“Insured Person”, as a result of an endorsement which became effective at 4.00 pm on 6 May 2009 (before it is suggested that any claim was made under the policy), is defined to mean:

“Claim” relevantly includes a written demand or civil proceeding for any “Wrongful Act”. “Wrongful Act” is relevantly defined to mean:

The Related Claims clause provides:

The D&O Policy contains the following relevant exclusions:

“Outside Entity” is relevantly defined in Endorsement Nine (and then subsequently Endorsement Eighteen) to mean:

In accordance with Endorsement Nine (which was replaced by Endorsement Eighteen) an Insured Person serves or served in accordance with the “Outside Directorships” extension if the person is a “representative of any Company who is or was appointed as a director, officer, trustee, authorised person or manager of an Outside Entity at the specific request or approval of the Company”.

The D&O Insurers deny liability on five grounds:

The relevant claimants rely principally on a letter dated 28 August 2009 from BBIPL to AIG Australia and InterRisk which was in substantially the same terms as the letter of that date to InterRisk and Integro giving notice to the PI Insurers (which is quoted in para 333 above). Mr Topfer (whose submissions are adopted by Messrs Nicholson and Neilson) also relies on the letter dated 9 February 2009 from Mr Hanson, which was copied to the D&O Insurers on 2 November 2009 (outside the policy period) and a copy of the Statement of Claim which was sent to Allianz (one of the D&O Insurers) on 3 January 2014, although that notification is not pleaded as notification under the policy.

The notification issue raises similar issues to those raised in relation to the claim under the PI Policy. There is a question whether all or some of the D&O Insurers received the 28 August 2009 letter before the expiration of the policy. However, the D&O Insurers accept that any late notification is cured by s 54 of the Insurance Contracts Act. Their point is that the claim in respect of which indemnity is sought (these proceedings) was not “based upon or attributable to any fact alleged in, or Wrongful Act which is pertinent to a … circumstance reasonably expected to give rise to a Claim … which was notified …” to the insurers. Consequently, the claim does not fall within the circumstances notified extension in the policy.

In the case of the D&O Policy, unlike the PI Policy, the knowledge of the claimant of the circumstances is irrelevant. The only question is whether the claim that was made arises out of the circumstances that were notified (whether late or not). The connection between what is notified and the claim in respect of which indemnity is provided (based upon or attributable to any fact alleged in, or Wrongful Act which is pertinent to, a circumstance of the requisite character) is expressed in terms which make limited grammatical sense. It seems evident, however, that the connection is intended to be a broad one. Even so, I do not accept that there is a sufficient connection in this case. The difficulty is that what was notified was a potential claim by BBGP. That claim depended on the relationship and conduct between BBGP and those against whom the claim might be brought. On the other hand, the claims in this case depend on the relationship and conduct between the plaintiffs and a different, although perhaps overlapping, group of potential defendants. In my opinion, it could not reasonably be expected that the plaintiffs would bring a claim based on the way in which the Partnership’s investment was managed because there were circumstances that suggested some other entity might bring a claim because of the way its investment in the same company (Coinmach) was managed.

In this case, Mr Topfer also relies in his written closing submissions on notice of the proceedings, which was given on 3 January 2014. As I have explained, the D&O Policy, unlike the PI Policy, does not take as the starting point for the circumstances notified extension that the circumstances be known to the insured (or some other identified group). It simply gives the person seeking an indemnity an option to notify circumstances within the policy period and treats any claim arising from those circumstances as a claim within the policy period. Section 54 of the Insurance Contracts Act cures any late notice provided the insurer is not prejudiced. It may, therefore, be arguable that s 54 applies even to the notice given on 3 January 2014. However, as I have said, that notice was not pleaded. If it had been, it would have raised the question whether the D&O Insurers were prejudiced by notice that late. For those reasons, it cannot be relied on now.

It follows that the claims that are made do not arise out of circumstances that were either notified during the policy period or later notifications in respect of which relief under s 54 of the Insurance Contracts Act is available. For that reason alone, all the claims against the D&O Insurers must fail.

The D&O Insurers contend that the members of the Investment Committee, when they gave their approval to the investment in Coinmach, were not acting as “Insured Persons” as required by the definition of “Wrongful Act” because in taking that decision they were not acting as a director etc or taking part in the management of any Company – specifically, the Manager. The analogy they sought to draw was with a solicitor in a law firm advising a client about a transaction, who plainly when doing so was not participating in the management of the law firm.

I do not accept that submission, at least in the broad way that it is put. The task of the Court is to interpret the words used having regard to “the commercial circumstances which the document addresses, and the objects which it is intended to secure”: McCann v Switzerland Insurance Australia Ltd & Ors (2000) 203 CLR 579 at [22] per Gleeson CJ; Wilkie v Gordian Runoff Ltd & Anor (2005) 221 CLR 522 at [15] per Gleeson CJ, McHugh, Gummow and Kirby JJ. The present policy was negotiated between sophisticated parties. BBL was represented by an insurance broker. Directors and officers liability insurance is normally obtained separately from professional indemnity insurance; and it is to be expected that where they are, as in this case, both policies will be drafted to reduce the possibility of overlap. The insuring clause and the exclusion in respect of third party professional services should be interpreted having regard to that context.

The insuring clause provides cover to different categories of person concerned with the management of “a Company” – in this case, principally the Manager. The cover provided is against “Claims”. A “Claim” includes a demand or proceeding for a “Wrongful Act”. A “Wrongful Act” is any actual or alleged breach of duty of various types “done by an Insured Person in their capacity as such”. The claims against Messrs Topfer and Green include allegations that they breached fiduciary duties they owed as directors of the Manager. To that extent at least, the claims against them are claims for Wrongful Acts as directors of the Manager and therefore are covered. Similarly, the General Partner is a “Company” within the meaning of the policy. Consequently, to the extent that claims are made against Messrs Topfer and Green as directors of the General Partner, they too must be covered.

The position is less clear in relation to claims against Messrs Topfer, Green, Nicholson and Neilson insofar as it is alleged that they breached duties they owed as members of the Investment Committee and Messrs Topfer and Green insofar as they are said to owe duties as promoters of the Coinmach Transaction.

Messrs Topfer and Green are “Insured Persons” because they are directors of the Manager (and a number of other “Companies”). They are not “Insured Persons” on any other basis. In particular, they are not “Employees” who satisfy the requirements of para (iii) of the definition of “Insured Person” because, as directors of the Manager, they are excluded from the definition of “Employee”. Consequently, the question (required by the definition of “Wrongful Act”) that must be asked in relation to them is whether the claims against them are claims for breach of duty etc done by them in their capacity as directors. But what does that mean? One possibility is that they are only covered where they perform functions that only a director of the relevant Company could perform. But that interpretation seems overly restrictive and would exclude many claims that are obviously intended to be covered by the policy – such as claims arising from management decisions taken by executive directors outside board meetings that could be taken by others occupying senior management roles who were not directors. The only other obvious interpretation is that it covers all acts that are usually undertaken by a director in the position the relevant director was in.

The D&O Insurers submit that the acts that are covered are those that are taken in connection with the management of the relevant Company (in this case, the Manager). However, that is not the effect of the definition of Wrongful Act; and in my opinion, there is no basis for reading such a limitation into the definition. A person is covered once he or she is identified as a director. And such a person is covered in respect of all acts that person does in that capacity. Once the narrow interpretation is rejected, there is no reason to limit those acts except by reference to the types of acts a director would normally do; and “director” in this context must include an executive as well as a non-executive director.

If the definition of “Wrongful Act” is given the broader interpretation, in my opinion, it would cover conduct undertaken by Messrs Topfer and Green as promoters of the Coinmach Transaction and as members of the Investment Committee. A common aspect of the role of a director of a company is to promote transactions in which the company has an interest. Similarly, it is common for directors of a company to serve on important committees of the company. Consequently, when Messrs Topfer and Green served as members of the Investment Committee it could be said that they did so in their capacity as directors of the Manager because it was that capacity which made them appropriate appointees to the committee.

Messrs Nicholson and Neilson were undoubtedly employees of the Manager. Consequently they were “Insured Persons” if it could be said that they fell within para (iii) of the definition of “Insured Person” – that is, if it could be said that they were concerned with or took part in the management of the Manager. Assuming it could, the question then arises whether the claims against them were claims for breach of duty etc done by them in that capacity.

Both Messrs Nicholson and Neilson occupied senior positions with the Manager. Both were members of the Manager’s senior management team. Consequently, both were concerned with or took part in the management of the Manager and were, therefore, “Insured Persons”.

In the case of Messrs Nicholson and Neilson, it might more readily be said that a claim against them was only a claim in respect of a “Wrongful Act” if it arose from acts performed by them in connection with the management of the Manager, on the basis that those acts are the only acts they perform “as such”. However, that would mean that the cover available to them was narrower than the cover available to Messrs Topfer and Green. In my opinion, it is doubtful that that is what the parties to the policy intended. Instead, the extension to employees engaged in management should be read in the same way as the cover available to directors. The first task is to determine whether they are Insured Persons. The answer to that question is clear. They are because they are employees who were concerned with or took part in the management of the Manager. The only question, then, is whether the claim against them is brought against them in respect of an alleged or actual breach of duty etc done by them in that capacity. That question is to be answered by asking whether the relevant acts were acts that might normally be expected to be performed by an employee involved in the management of the company. In this case, it seems clear that they were. It would be normal for senior employees engaged in the management of a company to serve on a committee such as the Management Committee. That is sufficient to say that they undertook that function as employees engaged in the management of the Company.

It follows from what I have said that if cover under the D&O Policy depended solely on the question whether the claims were against Insured Persons “as such”, then the claims against Messrs Topfer, Green, Nicholson and Neilson would be covered. They would be entitled to recover the legal fees they have incurred in defending the claims brought against them and BBIPL would be entitled to recover any such costs in respect of which it had provided an indemnity.

The question raised by the Professional Services exclusion is whether the Claim made by the plaintiffs is one “arising out of, based upon or attributable to … the provision of third party professional services of any kind”. Broadly speaking, the claimants submit that the exclusion does not apply for two reasons. First, the relevant services are not “third party … services”. Second, they are not “professional services”.

As to the first of these issues, the claimants submit that the relevant services are the services provided by members of the Investment Committee. Those services were provided to the Manager, not the Partnership. The Manager was not a third party. I do not accept that submission. The Manager had power to and did delegate the task of approving investments to the Investment Committee. The Investment Committee was distinct from the Manager; and as I have pointed out, its composition could be controlled by the General Partner. As the PPM emphasised, its approval was an important mechanism by which the interests of investors in the DIF III Fund were protected. The approval of the Investment Committee was communicated directly to the General Partner and the claims in respect of which indemnity is sought arise out of the decision of the Investment Committee and the communication of that decision to the General Partner as agent for the Partnership. The activities of the Investment Committee occurred as part of a broader process by which the Manager managed the funds of the Partnership. But in the particular circumstances of the case, I do not think it is correct to say that the services provided by the Investment Committee were provided to the Manager. They were provided by the members of the Investment Committee to the Partnership through the General Partner. The Partnership was plainly a third party in that context.

Although it was submitted that Messrs Topfer and Green were liable to the Partnership on other bases, in each case that liability is said to have arisen because they owed personal duties to the Partnership. It is difficult to see how, if those personal duties arose, they were not breached in connection with the provision of services to the Partnership rather than, for example, the Manager. Consequently, the conclusion of the previous paragraph applies equally to the other claims made against Messrs Topfer and Green.

As to the second issue, the claimants focussed on the role of the Investment Committee. They rely heavily on the following definition of professional services given by the Full Federal Court in Chubb Insurance Company of Australia Ltd v Robinson (2016) 239 FCR 300; [2016] FCAFC 17 at [150]:

Applying that definition, they submit that members of the Investment Committee were not involved in the provision of professional services because the relevant services did not fall within a vocational discipline which is generally regarded as a profession.

I do not accept that submission. The expression “professional services” is often used in professional indemnity insurance policies as part of the description of cover. It is also used in exclusions from cover contained in various types of policy, including directors and officers liability insurance, as in this case. Courts frequently give the expression a broader meaning in the former context than they do in the latter; and the decision in Chubb is an example of that general approach. Having said that, the task of the Court remains to interpret the words used in the context in which they appear and unless the words used and the context in which they appear are substantially the same, the decisions of other cases are of limited utility.

On the conclusions I have reached, the insuring clause covers a broad range of activities. It is to be expected that the exclusion in respect of professional services would have some operation so as to reduce the degree of overlap between the cover provided by the D&O Policy and the cover that it could be expected BBL would obtain under a professional indemnity policy. In the present case, the business of the Manager involved managing the investment of a number of funds, including the DIF III Fund. In connection with that business it made decisions or recommendations on how the funds were to be invested; and, at least in the case of the DIF III Fund, delegated those aspects of its business to the Investment Committee. The task of evaluating particular investments and making recommendations to, or decisions for, others on those investments involved the application of skill and judgment of a professional nature. The exclusion in this case applied to professional services of any kind. It is difficult to see that the exclusion would have any application at all if it did not apply to the types of services the Investment Committee performed. It was not suggested that Babcock & Brown engaged in other activities that could be described more obviously as the provision of professional services. For those reasons, in my opinion, the exclusion applied to the services provided by the Investment Committee.

The conduct exclusion relevantly applies to “any Claim arising out of, based upon or attributable to … any criminal, dishonest or fraudulent acts or omissions”. The application of the exclusion does not depend on the form of the Claim but whether it could be said as a matter of fact that the Claim arose out of etc a criminal etc act or omission.

On the conclusions I have reached, there was no breach of duty; and if there was, it did not involve any criminal, dishonest or fraudulent conduct. Consequently, this exclusion would not have prevented the claimants from recovering under the policy the legal fees they have incurred.

This exclusion relevantly applies to “any US Claim which is brought by or on behalf of any Company or any Insured Person. “US Claim” is defined to mean “a Claim brought or maintained within the jurisdiction of, or based upon acts in or any laws of the United States of America, its states, localities, territories or possessions”.

In my opinion, this exclusion does not apply for two reasons.

First, the D&O Insurers have not established that the claim is a US Claim. Plainly the claim is not brought in the United States. Nor is it based on the laws of the United States. Therefore, it could only be a US Claim if it was based upon acts in the United States. The D&O Insurers submit that the claim was based upon acts in the United States because that is where the negotiations to acquire the shares in Coinmach took place and where the Partnership acquired an indirect interest in Coinmach. But they are not the relevant acts. The relevant acts are the approval of members of the Investment Committee of the investment in Coinmach and what is alleged to be a failure by Messrs Topfer and Green to disclose certain matters. The D&O Insurers do not submit or seek to prove that those acts occurred in the United States.

Second, the claim is brought by or on behalf of the Partnership. The Partnership is not a “Company” or “Insured Person”. The fact that the General Partner is a Company cannot alter the position. It does not bring the claim in its own right. Consequently, the claim could not be said to be brought by it for the purposes of the exclusion.

It follows that the proceedings (including all cross-claims) must be dismissed.

I will hear the parties on the question of costs at a time fixed with my Associate.