INFORMATION FOR SHAREHOLDERS

THE DUKE GROUP LIMITED (IN LIQUIDATION)
Australian Company Number: 007 554 690

Overview

John Sheahan was appointed as liquidator of The Duke Group Limited (“TDGL”) by order of the Supreme Court of South Australia in July 1989. TDGL had no apparent significant tangible assets. Significant recoveries have been made as a result of the pursuit of legal claims against parties involved in transactions which contributed to the failure of TDGL and its ultimate liquidation. This has enabled creditors to be paid in full in relation to debts due at the date of liquidation. Since that time further recovery actions have been pursued for the benefit of creditors entitled to interest and shareholders.

Directions have been made by the Full Court of the Supreme Court of South Australia that all valid claims for post-liquidation interest (“PLI”) in respect of creditors' debts must be paid prior to any distribution to shareholders.

Previously it had been determined that there would not be a surplus available for distribution to shareholders following a pro rata distribution to creditors entitled to PLI. This determination followed the decision of the High Court of Australia in May 2001, canvassed in more detail below, which significantly reduced the damages award to which TDGL was entitled from the accountant defendants in that litigation.

However a decision of the High Court of Australia in Sons of Gwalia Limited (Subject to Deed of Company Arrangement) v Margaretic [2007] HCA 1 (discussed below) suggests that, in particular circumstances, shareholders may be entitled to file claims against an insolvent company in their capacity as creditors and hence rank pari passu with other creditors. Accordingly Mr Sheahan applied to the Supreme Court of South Australia for directions as to how he should proceed in relation to any potential claims from TDGL shareholders. Following the recent receipt of directions Mr Sheahan has written to shareholders as well as advertised, both nationally and internationally, inviting them to file proofs against this administration should they believe that they have such valid claims and allowing them a period of 12 weeks within which to submit such claims.

Set out below is an overview of the most significant recent aspects of this administration.

Post-Liquidation Interest/Shareholders

As noted above, claims against TDGL as at the date of Mr Sheahan's appointment as liquidator have been paid in full. The question then arose as to whether creditors with contractual or statutory entitlements to interest were entitled to payment of PLI.

Claims for PLI are significant, currently estimated to be in the order of A$56m. The claims raise a number of complex legal issues. For some time, Mr Sheahan was unable to distribute funds to PLI creditors in part satisfaction of these claims due, in part, to uncertainties as to the moneys available to TDGL and the need to seek Court clarification on whether PLI must be paid in this administration.

Directions were given by the Full Court of the Supreme Court of South Australia requiring the payment of PLI claims following the hearing of a 'special case' which was referred to the Full Court for that purpose. TDGL's largest shareholder, Duke Holdings Limited (In Liquidation), made submissions at the hearing that PLI was not payable in the administration, and that accordingly any surplus in the administration should be available for distribution to shareholders. Two creditors claiming substantial PLI were also heard at the hearing, making submissions that PLI must be paid.

In June 2004, the Full Court determined that any surplus held by this administration must firstly be applied toward payment of PLI claims. On this basis, shareholders will only become entitled to receive a distribution in their capacities as shareholders should the quantum of the surplus be sufficient to meet admitted claims for PLI in full, which is unlikely to be the case.

Now that the Court has determined that PLI is payable, there may be issues concerning the individual creditor claims that will need to be resolved by negotiation or litigation. In late 2004 Mr Sheahan called for fresh proofs of debt in relation to creditors' claims for PLI calculated to 31 December 2004. Claims from seven creditors were admitted. However, Mr Sheahan determined that three of those claims were overstated and rejected part of those claims. Ordinarily, a creditor who wishes to challenge a liquidator's adjudication on a claim would be required to apply to the Court to have that decision overturned. Such an application by the creditors whose claims were partially rejected would potentially have led to considerable delays and the expenditure of funds in responding to that challenge to the liquidator's decision. In order to avoid such delay and expense, Mr Sheahan sought and obtained the agreement of the three affected creditors to the distribution of a first PLI dividend on the basis of his adjudication while preserving their rights to challenge his decisions in relation to their claims in future. As a result of all of the above he was able to distribute a first interim dividend of $8 million on account of PLI in June 2005.

Mr Sheahan is presently holding approximately $10m in this administration which will ultimately be distributed to any shareholders with valid Sons of Gwalia-type claims as creditors (see below) and/or to PLI creditors.

Sons of Gwalia v Margaretic

In January 2007 the High Court of Australia handed down its decision in the matter of Sons of Gwalia Limited (Subject to Deed of Company Arrangement) v Margaretic [2007] HCA 1. In that case a shareholder of Sons of Gwalia sought to claim as a creditor in the administration of the company on the grounds that he had purchased his shares in the company in reliance on misleading information about the company's financial position. The Court held that shareholders who have suffered loss as a result of the decline in the value of shares purchased in reliance on deceptive conduct by the company may be entitled to prove as unsecured creditors in the administration of that company.

The possibility exists that there may be some shareholders of TDGL who could make out a similar claim to be a creditor of the company. Any such valid claims would rank ahead of PLI claims. Accordingly, any shareholder with a valid Sons of Gwalia-type claim would stand to participate in any future dividend paid in this liquidation.

Shareholders should note that the above description of the Sons of Gwalia decision is no more than an outline of the facts and matters that were held by the High Court to give rise to a claim in that case. Whether any shareholder might have a valid claim in the liquidation of TDGL will depend on the particular facts and circumstances of each case.

Mr Sheahan sought directions from the Supreme Court of South Australia in relation to his obligations to provide notification to shareholders in relation to these matters. Genoa Resources and Investment Limited (In Liquidation) and LFD Limited made submissions in their capacities as PLI creditors of TDGL. On 26 November 2007 the Supreme Court made orders that it was sufficient for the liquidator to discharge his duties to notify creditors by advertising and sending notices to a particular class of shareholders whom it was considered might have claims admissible under subsection 438(2) of the Companies (South Australia) Code. That subsection governs claims admissible in the winding up of an insolvent company.

A number of claims were received in response to those notices. However, all such claims were rejected. A number of the claims were rejected because they did not fall within the category of admissible claims under subsection 438(2). Three claimants filed appeals with the Court against the liquidator's rejection of their claims. The largest such claim, by Duke Holdings Ltd (In Liquidation) was for an amount of $18.6m. That appeal was dismissed on 7 December 2009. The remaining appeals were discontinued by the claimants in May 2010.

As a consequence of resolving all such claims, TDGL is no longer considered to be an insolvent company for the purposes of further dividends, as all pre-liquidation claims have been paid in full. Accordingly, Mr Sheahan is now required to consider whether there might be claims admissible under subsection 438(1) of the Companies (South Australia) Code, which governs claims in a “solvent” liquidation.

The liquidator has received advice that the class of potential claimants under subsection 438(1) is wider than those potentially admissible under subsection 438(2). Both current and former shareholders may have such claims. In September 2010, Mr Sheahan made an application to the Court seeking further directions in relation to his obligations in relation to such claims. On 12 November 2010, the Court made the following orders: