Aidzan Pty Ltd (in liq) v K. & A. Laird [2024] NSWCA 185 | Case summary

Court of Appeal (NSW)|2023-12-05|Before: Ward P, Meagher JA, Adamson JA, Black J

Consideration

The success of KAL's claim depended on it establishing a beneficial entitlement to the Sunnyholt Property. If it could do so, then, subject to any limitation bar, there could be no basis upon which Aidzan could assert an entitlement to retain rents paid to it by KAL under the Sunnyholt Lease after repayment of the Michell Facility on 30 June 2005.
In the light of the conclusion reached on grounds of appeal 1 to 3 that KAL's claim to a beneficial entitlement to the proceeds of sale of the Sunnyholt Property is not barred, ground of appeal 4 must be rejected.
This leaves the respondent's cross-appeal, which contends that the primary judge erred in restricting the Sunnyholt Surplus Rent claim to the period after 12 December 2008.
The relevant finding of the primary judge is at J[148]: On the findings that I have reached above [as to beneficial ownership of the Sunnyholt Property], KAL benefited or partly benefited from its occupancy of the Sunnyholt Property under the Sunnyholt Lease and the substantial tax deductions it received for payment of rent under that lease and [the directors'] knowledge of the terms of that lease and the circumstances surroundin[g] its entry and of the payment of rent to Aidzan should be attributed to KAL as it occurred. Neither party suggested that the position was different for the long period in which KAL continued to occupy the property after the term of the Sunnyholt Lease had expired. I accept that this claim is properly characterised as a trust claim and it is therefore barred by s 47(1)(e) of the Limitation Act, but only for rent paid before 11 December 2008.
For the reasons given above, this analysis does not correctly identify the approach to attribution in the context of a claim by a company against its director for breach of duty, where the attribution is relied on as a defence or bar to that claim.
It is not necessary to consider KAL's alternative argument, which assumed the application of the "fraud exception" and turned on whether Peter's conduct, considered as a whole, was not in "total fraud" of KAL. Had it been necessary to do so, I would have upheld that argument. Although KAL did receive benefits in the form of occupancy of the Sunnyholt Property and tax deductions in respect of rental payments made to Aidzan, those benefits were to be viewed in the broader context of Peter's conduct. That conduct involved Peter causing Aidzan to purchase the Sunnyholt Property using KAL's funds or loan funds obtained by the assignment of KAL's undertaking to pay rent to Aidzan for use of the Sunnyholt Property. The fact that KAL was entitled to tax deductions on those rental payments did not alter the fact that, taken as a whole, the transaction was designed to benefit Aidzan (and, in turn, Peter) at the expense of KAL. Those tax deductions merely reduced the loss suffered by KAL as a result of that scheme. This was not a case like Bluemine where the very impetus of the scheme was the obtaining of taxation benefits in fraud of the Commissioner of Taxation.
The result is that KAL did not discover the facts giving rise to its claim to the Sunnyholt Surplus Rent until, at the earliest, the appointment of its liquidator in August 2018. This meant the entirety of its claim was brought within the limitation period prescribed by s 47(1)(e) of the Limitation Act. The cross-appeal should be allowed and judgment for the respondent increased from $1.2 million to $2,094,545.

Claim to the Superannuation Payment (Grounds of appeal 6-8)

Background

In early 1993, Peter established the Aidzan Superannuation Fund and the PAL Property Trust. Aidzan was appointed as trustee of both. Peter was the sole member of that fund, which was the sole unitholder in the trust.
Much later, in around 2007, Peter caused KAL to pay $1 million of its funds to the Aidzan Superannuation Fund. The evidence was that he initially intended this to be a superannuation contribution made by him. Subsequently, in around 2012, on the advice of his accountant, the payment was "recharacterised" as a loan made by KAL to Peter in 2007 and treated accordingly in KAL's accounts from that time.
It was accepted that this conduct of Peter was a breach of his fiduciary duties owed to KAL and involved a misappropriation of its funds. Two issues arose. The first was whether KAL's equitable claim was barred by the application of the six-year limitation period in s 15 of the Limitation Act by analogy. The primary judge held that it was not. The Superannuation Payment was not wholly or partly for KAL's benefit because the payments on which Peter relied "would, at best, reduce KAL's loss rather than giving rise to any benefit to it" (J[177]). That meant time did not commence running until KAL's liquidator discovered in 2018 the fact of the $1 million payment in 2007. This conclusion is the subject of grounds of appeal 6 and 7.
The second issue was whether the amount of compensation payable to KAL should be reduced by two "loan repayments" of $100,000 and $680,000 said to have been made by Peter in 2012. The primary judge held that only the $100,000 sum should be applied in reduction of that liability (J[174]). This conclusion is the subject of ground 8.
In the result the primary judge awarded equitable compensation of $900,000 to KAL (J[179]). Although KAL had sought a declaration that this sum was held on constructive trust, his Honour declined to make that order in respect of the funds of a regulated superannuation fund (J[178]).

Limitation defence (Grounds 6 and 7)

The relevant appellants are Peter and Nazdia. Their primary argument in relation to the Superannuation Payment remains that Peter's promise to repay the $1 million sum to KAL with interest meant that KAL obtained a partial "benefit" from his conduct and, accordingly, that Peter's knowledge of his conduct should be attributed to KAL from at latest 22 January 2012 (ground 6). It was said to follow that s 55 of the Limitation Act could not be applied by analogy to suspend the running of the limitation period under s 15, with the result that KAL's claim to the Superannuation Payment was barred.
That argument must be rejected for the reasons that the argument on grounds of appeal 1 to 3 was rejected. The language in s 55(1) is not relevantly different to that used in s 47(1)(e). Whether KAL obtained any "benefit" from Peter's promise to repay the Superannuation Payment is not relevant to whether Peter's knowledge of his breach of duty should be attributed to KAL. That knowledge would not be attributed to KAL so as to prevent the suspension of the running of the six-year limitation period; and it was not otherwise submitted that s 55 would not apply.
Even if the rule of attribution was as formulated and applied by the primary judge, there was no error in the conclusion that KAL did not benefit wholly or in part from Peter's conduct. The relevant conduct was Peter's misappropriation of $1 million of KAL's funds. That occurred in 2007. It was a breach of his fiduciary duty. His "promise" to repay that sum, made five years later, did no more than recognise KAL's entitlement to be compensated for Peter's earlier breach. Similarly, the "promise" to pay interest on that amount did no more than reflect KAL's entitlement to be compensated for being kept out of its moneys over the previous five years.
Grounds of appeal 6 and 7 should be rejected.

Whether amount of equitable compensation should be reduced by the $680,000 payment (Ground 8)

The appellants submit that the primary judge erred in failing to treat the payment of $680,000 made by Peter to KAL on 29 June 2012 as reducing the amount of equitable compensation to which KAL was entitled.
There is no dispute that this sum was paid. The appellants bore the onus of establishing that the payment was to be applied in reduction of the "loan". In circumstances where Peter was the controlling mind of KAL, it was necessary to establish that it was Peter's intention, actual or to be inferred, that when paid the money was to be applied in that way. It was not Peter's case that, at some point after the payment had been made, there was a consensus between him and KAL that KAL's liability to him in respect of that payment should be set off against the "recharacterised" loan amount.
Peter's evidence was that, after being reminded by KAL's liquidator in October 2020 of the payment of $680,000, he "established" that this was a payment by him against his "outstanding loan". He first claimed that to be the position in an email of February 2021. When cross-examined about that payment being a "repayment of a loan", he maintained that "it absolutely was".
In the absence of any specific evidence from Peter that in late June 2012 he had given actual consideration to the fact that this payment was to be applied in reduction of the existing "loan", the appellants' argument relied upon an inference being made to that effect from the circumstances in which the payment was made. Those circumstances included the existence of the partly repaid "loan" with a balance outstanding of $900,000, and the fact that Peter had made a significant payment to KAL of $680,000 for no apparent consideration. It was said to defy "ordinary human experience" that a person would pay such a sum without having any reason to do so. KAL's position was that, in circumstances where Peter had paid $680,000 to KAL and then caused KAL to make various payments either to him or for his benefit, the Court could not be satisfied that the payment was made in reduction of that "loan".
The critical findings of the primary judge are set out at J[170]-[172]: [170] The position as to the second "repayment" of $680,000 is more difficult. [Peter's] evidence is that he "repaid" $680,000 of the balance of $900,000 on 29 June 2012. He did not take that position in the solvency declaration dated 23 August 2018 in support of the members voluntary winding up, which acknowledged that he then owed KAL $900,000 in respect of "trade debtors & interest unknown". In a subsequent examination by the liquidator on 3 August 2020, he referred only to the initial repayment of $100,000 made against the purported loan in respect of the superannuation, and accepted that he owed $900,000 to KAL in respect of that "loan" and interest on that amount since 30 June 2007. While I recognise that [Peter] has suffered significant health issues from time to time, and in this period, I find it difficult to see that he could have forgotten a payment of that size, while apparently able to advance his own interests in respect of the distribution of [Dorothy's] estate and issues arising in the winding up. [171] By letter dated 9 October 2020, Mr Hayes [KAL's liquidator] then sought information from [Peter] as to a deposit of $680,000 into KAL's ANZ account on 29 June 2012. [Peter] did not respond until 16 February 2021, and he then observed that: 'I have since established that the deposit of $680,000.00 was a payment by me against my outstanding loan. I have recently obtained a copy of my bank statement verifying this payment. Should you require a copy of this statement please let me know.' [172] It seems to me that, at best, this information was so incomplete as to be misleading, where [Peter] referred to his payment to KAL without referring to substantial payments made by KAL to his associated entities at about the same time that had funded that payment, and his review of the bank statement to which he referred would have raised an obvious question as to the connection between those transactions. (Citations omitted.)
That analysis identifies two inconsistencies in Peter's account with respect to the $680,000 payment. The first is his failure to mention that payment in his 2018 solvency declaration and in his 2020 examination by KAL's liquidator. Indeed, when asked by the liquidator at that time whether he accepted that he owed $900,000 to KAL, Peter responded, "absolutely". The second is his failure, upon being told of the $680,000 payment by the liquidator in October 2020, to refer in his response to any of the payments totalling $468,000 which on the same day he had caused KAL to make either to him, the Aidzan Superannuation Fund (of which he was sole beneficiary) or the PAL Property Trust (in which that fund was the sole unitholder).
In the result the primary judge considered that it was "possible" that Peter had paid the $680,000 to KAL in reduction of the Superannuation Payment recharacterised as a loan, but concluded that on the evidence he was not satisfied of that fact on the balance of probabilities (J[174]). Accordingly, his Honour did not treat the $680,000 payment as reducing the compensation to which KAL was entitled.
At this point it is necessary to set out more fully the circumstances in which the $680,000 was paid.
In 2007, Peter caused KAL to make the Superannuation Payment. Sometime in early 2012 he was advised by his accountant that this payment should not have been made or treated as a superannuation contribution. In early 2012, the Superannuation Payment was retrospectively recorded in KAL's books as a "loan at call". Peter transferred a sum of $100,000 to KAL "shortly after" receiving that advice and that amount was applied in reduction of that loan. As a result, the value of the "loan at call" was recorded in KAL's financial statements from 30 June 2008 as $900,000, albeit that those financial statements were prepared in or after January 2012 and are not available for periods after FY2010.
On or around 29 June 2012, a series of transactions took place between Peter, KAL, the Aidzan Superannuation Fund and the PAL Property Trust. The evidence did not explain the order in which these transactions occurred or were to be taken as having occurred (J[173]). Of the $680,000 paid to KAL, payments totalling $468,000 were made by it to three parties, one of whom was Peter. Another of those parties, the superannuation fund, paid Peter an amount of $560,000.
More specifically, Peter's bank statement records that on 29 June 2012 three sums of $120,000, $160,000 and $400,000 were deposited into his account. The $120,000 sum was transferred from KAL's account. Peter's evidence was that this sum represented his post-tax salary for FY2012. As for the other two amounts totalling $560,000, Peter's evidence was that his accountant had told him that the superannuation fund could distribute those amounts to him "as his pensions" for the previous two financial years (FY2011 and FY2012). That fund's bank statements were not in evidence but a document headed "The Aidzan Superannuation Fund Detailed Schedule of Fund Assets for the year ended 30 June 2012" records two debits of $160,000 and $400,000 on 30 June 2012.
Also on 29 June 2012, Peter's bank statement (with the ANZ bank) records a debit of $680,000. A corresponding credit entry of $680,000 is recorded in KAL's bank statement (with the same bank) for that day.
KAL's bank statement also records three debits on 29 June 2012. The first is the salary payment of $120,000 to Peter. The second is a payment of $18,000 to the Aidzan Superannuation Fund, said to be an employer superannuation contribution made on Peter's behalf (J[175]). The third is a payment of $330,000, which Peter said was rent paid to the PAL Property Trust for KAL's use of the Sunnyholt Property during FY2012. The PAL Property Trust's accounts for FY2012 show the "rent received" as $600,000 and that this amount was distributed in that financial year to the sole unitholder in that trust, Peter's superannuation fund.
The outcome of this series of 'end-of-financial-year' transactions was that, from the $680,000 paid by Peter to KAL, Peter caused KAL to discharge "obligations" to pay Peter's annual salary ($120,000), KAL's annual employer superannuation contribution for Peter ($18,000), and rent due to the PAL Property Trust ($330,000).
The evidence does not establish what happened to the balance of $212,000 (being the $680,000 received less the $468,000 paid away). In oral submissions before the primary judge, KAL's counsel submitted: And the fact that there's another [$212,000], which he didn't pay out on that day, doesn't much matter because … your Honour sees that there are, over the course of time, lots of debits in substantial amounts of money and the 212 - there's no evidence as to what the 212 was, but it'd be inferred that he was paying the money in because he thought he had some obligation to pay KAL an extra 212,000. He was funding 468 to himself, and put in another 212, presumably because he understood that he was making up for some other amount that had been taken out at some other time. There are debits all through the course of those accounts…
KAL's bank statements in evidence before the primary judge were, for the most part, not reproduced in the appeal books. They were bank statements for periods before and after 29 June 2012, although the evidence suggested KAL finally ceased trading in about 2013. Only three of those bank statements were before this Court, being for the weeks 25 June 2010 to 5 July 2010, 25 June 2012 to 2 July 2012 and 30 December 2013 to 6 January 2014. These statements show that KAL's account balance decreased from $462,055.15 to $112,828.37 between 5 July 2010 and 25 June 2012, and from $349,110.66 to $114,595.40 between 29 June 2012 and 30 December 2013.
The books and records of KAL, the PAL Property Trust and the Aidzan Superannuation Fund that were in evidence were incomplete, it would seem for reason that they were kept at the Sunnyholt Property in a safe which was stolen from that property in around 2016.
It should also be noted at this point that the primary judge accepted that Peter had suffered "significant health issues from time to time" (J[170]), including around the time the $680,000 payment was made. Nevertheless, the primary judge did not consider those health issues sufficient to explain how Peter could have forgotten in 2018 and again in 2020 that he had repaid $680,000 of his "loan" in June 2012, which was five months after the $1 million superannuation contribution was 'rebadged' as a loan (J[170]).
KAL also pleaded an alternative claim for compensation against Peter, which alleged breaches of various equitable and common law duties in causing KAL to incur rental obligations to the PAL Property Trust and salary obligations to Peter after 30 June 2007, when it is said KAL should have ceased trading. As finally made, this claim was limited to the period from 2008 to 2010 because KAL had insufficient documentary evidence to make out its trading losses incurred from 2011 to 2013. In respect of the payment of rent, the compensation sought was also part of the Sunnyholt Surplus Rent claim, and accordingly was only pressed in the event that claim was unsuccessful. In relation to the salary payments, KAL would have been entitled to relief but for the primary judge's conclusion at J[195]-[196] that a limitation defence was available (which was not, in that respect, challenged).
The primary judge considered the interaction between that alternative claim to the rent and salary payments and the $680,000 payment by Peter as follows (at J[175]): For completeness, to the extent that $120,000 was then paid by KAL to [Peter] as salary, it will be recoverable by KAL only to the extent that it falls within KAL's claim for salary paid out by reason of [Peter's] failure to close the business at an earlier date. There is no challenge to [Peter's] entitlement to retain the amount of $18,000 paid to him, purportedly as a superannuation contribution, on his evidence in cross-examination. The third purported "repayment" of $330,000, funded by [sic] a purported rent payment by KAL to Aidzan as trustee for the PAL Property Trust, falls within its claim as to the Sunnyholt Surplus Rent, which I have addressed above.
This reasoning of the primary judge raised a risk of double recovery by KAL. $468,000 of the moneys paid by Peter to KAL had funded the satisfaction of salary, superannuation and rental "obligations" of KAL, which as to salary had been, and which as to rent continued to be, the subject of claims to recover compensation. But it was not contended before the primary judge or in this Court that any part of the $680,000 was to be taken into account in calculating moneys due under any other claim for rent or salary payments.
In this context, counsel for KAL, Mr Leopold SC, submitted to this Court that the payment of $680,000 was one of many credits and debits between KAL and Peter before and after the payment was made: LEOPOLD: But the argument propounded by Peter at trial amounted to taking a large credit entry in the accounts and it could have applied to any, over the years, any number of large credit payments that went into that account. There were - there were debits and credits happening every second day, often of a very considerable amount. That one was latched on to - MEAGHER JA: So his Honour's finding assumes in a sense that the money was somehow accounted for in the books. Doesn't it? LEOPOLD: I'm not sure if it assumes it was accounted for in the books. His Honour just looked at the deposit [and] said he wasn't satisfied because the evidence wasn't sufficiently transparent, that it was a reduction of Peter's liability, that it could have been anything and particularly, given that he only ever claimed that there'd been a $100,000 reduction liability, his Honour wasn't persuaded on the balance of probabilities on the evidence that it was not $100,000 but 780. It's just - it was just one of a number of deposits made very frequently into account.
Addressing the 'round robin' of cheques and payments on 29 June 2012, of which the $680,000 payment from Peter to KAL formed a part, the analysis above shows that the payments made between Peter, KAL, the PAL Property Trust and the Aidzan Superannuation Fund were part of end-of-financial-year taxation and superannuation adjustments between those parties. That analysis also shows that, from Peter's perspective at least, some of those payments were made to enable the discharge by KAL of "obligations" to pay rent, salary and an employer superannuation contribution.
Two further matters are significant. The first is that the payment to KAL exceeded the sum of KAL's "obligations" by $212,000. There is an absence of any documentary evidence as to why that excess amount was paid to KAL and how those funds were subsequently applied by it. The second is that the amount of $680,000 paid to KAL was the sum of the three payments made into Peter's account on that day. At least one of those payments could not have been made to Peter if KAL had not paid $330,000 to the PAL Property Trust.
The question remains whether Peter's payment to KAL was to be applied in partial satisfaction of the $900,000 liability in addition to its being a payment in a series of end-of-year payments made to generate the distributions to Peter which in fact occurred, driven by financial and taxation advice received by him and the other entities. In this regard it is significant that the total amount received by Peter and paid by him to KAL in the 'round robin' was the same.
From Peter's perspective, there appear to be four possibilities as to what occurred in relation to the payment of the $680,000. The first is that, as between Peter and KAL, it was to be applied in reduction of his outstanding "loan" balance of $900,000, and that the $680,000 was to be used by KAL to make payments in accordance with the relevant financial and taxation advice. The second is that it was paid in accordance with such advice to enable the end-of-financial-year transactions to occur; but that the question as to how that payment would be treated in the books of KAL was not addressed. The third possibility is that it was proposed that the money as paid was to be applied in repayment of some other existing or anticipated liability of Peter to KAL. The final possibility, which is most unlikely, is that Peter intended the money be paid to KAL as a gift.
Dealing then with the first possibility, KAL's financial statements for the year ended 30 June 2012 were not in evidence. At the same time it was not suggested (because of their theft) that they were available, but had not been tendered. However, KAL's financial statements from 30 June 2008 were in evidence and recorded the balance in the relevant loan account as $900,000. When questioned by reference to those earlier balance sheets in the August 2020 liquidator's examination, it was put to Peter that "no repayments had been made [to that loan] at all; is that right?". He responded: A. There was one initial payment of 100,000. Because I think the loan was originally $1 million. Q. I see. A. So I'm sure I paid $100,000 plus interest. Q. And as I understand your position, you accept today that you owe $900,000 to the company; is that right? A. Absolutely.
Peter's response is firm, although given eight years after the relevant events. In the face of this evidence, in conjunction with Peter's declaration of solvency in 2018, which referred to the same amount, and the absence of any contemporaneous or later record showing that the $680,000 was applied in reduction of the recharacterised loan, it was open to the primary judge to be sceptical as to the reliability of Peter's evidence on this subject. That is particularly so given that Peter gave no evidence before the primary judge suggesting that the accounting or other treatment of this amount had been discussed with his accountant or that he had otherwise formed an intention in June 2012 to treat the moneys in the way now contended for.
From Peter's perspective, the significance of the payment was as one to be made at the end of the financial year, no doubt at a time when the focus was on the way in which taxable and non-taxable income would be produced by KAL and the superannuation fund before the financial year end. There is nothing in these circumstances and Peter's evidence which makes it more probable than not that he intended that the money when advanced was to be treated as applied in reduction of the earlier "loan". The other realistic possibilities included that the money was paid to KAL with the question as to its accounting treatment as between KAL and Peter being left unaddressed; or that at the time it was expected that the $900,000 loan would be repaid in some other way.
In the result the primary judge is not shown to have erred in not being satisfied that the $680,000 when paid was to be applied as Peter contends. It follows that the compensation awarded for the Superannuation Payment claim was not to be reduced by that amount. Ground 8 should be dismissed.

Respondent's notice of contention

Having found for the respondent on each of the grounds of appeal and on the cross-appeal, it is unnecessary to consider the other points raised by its notice of contention.

Conclusion

For these reasons the appeal should be dismissed, the cross-appeal allowed, and the appellants/cross-respondents ordered to pay the costs of the proceeding in this Court.
The orders I propose be made are: 1. Dismiss the appeal. 2. Allow the cross-appeal. 3. Set aside orders 6 and 7 made by Black J on 4 July 2023 and instead order: 1. that Peter Laird, Aidzan Pty Ltd (in liq) and Nazdia Pty Ltd pay to K. & A. Laird (N.S.W.) Pty Ltd (in liq) the amount of $2,094,545 in rent paid to Aidzan Pty Ltd (in liq) in relation to the Sunnyholt Property for the period from 1 July 2005; and 2. that Peter Laird, Aidzan Pty Ltd (in liq) and Nazdia Pty Ltd pay to K. & A. Laird (N.S.W.) Pty Ltd (in liq) interest, pursuant to s 100 of the Civil Procedure Act 2005 (NSW), on the sum of $2,094,545 in the sum of $1,889,254.70. 1. Peter Laird, Aidzan Pty Ltd (in liq) and Nazdia Pty Ltd as appellants/cross-respondents pay K. & A. Laird (N.S.W.) Pty Ltd (in liq) as respondent/cross-appellant's costs of the appeal and cross-appeal.
ADAMSON JA: I have had the benefit of reading the reasons of Meagher JA in draft. I agree with the orders proposed by Meagher JA, largely for the reasons given by his Honour.
As his Honour's review of the authorities demonstrates, the question whether the knowledge of a director will be imputed to a company is to be answered by reference to the context, with particular regard to the identity of the plaintiff and the defendant in the proceedings and the nature of the claim. The law has a concern to prevent a party from profiting from his or her own breach, including in the context of the Limitation Act 1969 (NSW). As Deane J said in Hawkins v Clayton (1988) 164 CLR 539 at 590; [1988] HCA 15: "If a wrongful action or breach of duty by one person not only causes unlawful injury to another but, while its effect remains, effectively precludes that other from bringing proceedings to recover the damage to which he is entitled, that other person is doubly injured. There can be no acceptable or even sensible justification of a law which provides that to sustain the second injury will preclude recovery of damages for the first."
This statement was made in a case where a solicitor, Clayton, who had negligently failed to locate Hawkins, the executor of a will (who was also the residuary beneficiary), sought to resist liability on the basis of s 14(1) of the Limitation Act 1969 (NSW) as Hawkins had not commenced proceedings until more than six years after the testatrix's death. While Brennan and Gaudron JJ found that time did not begin to run until Hawkins assumed the office of executor, Deane J held that Hawkins' cause of action did not accrue until the expiration of the period in which the wrongful act itself (not informing Hawkins of the will of which he was executor) effectively precluded the bringing of proceedings.
The principle articulated by Deane J - that a party ought not be permitted to profit from his or her own breach - is one of general application. It underpins the statements extracted by Meagher JA of Lord Mance in Bilta (UK) Ltd (in liq) v Nazir (No 2) [2016] AC 1 at [38] that "… it is certainly unjust and absurd to suggest that the answer to a claim for breach of a director's (or any employee's) duty could lie in attributing to the company the very misconduct by which the director or employee has damaged it" and of Baroness Hale in Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd [2020] AC 1189 at [30] that "where a company has been the victim of wrongdoing by its directors, the wrongdoing of the directors cannot be attributed to the company as a defence to a claim brought against the directors - and their co-conspirators - by the company's liquidator for the loss suffered by the company as a result of the wrongdoing."
Thus, in the present case, where the wrongdoer, Peter, is a director and the injured party, the respondent, is the company of which the wrongdoer was a director, the authorities which Meagher JA has addressed recognise that it would be wrong and illogical to attribute the director's knowledge of the wrongdoing to the company, since to do so would be to doubly wrong the company and permit the director to profit from his own breach.
The ebb and flow of the law from the articulation of general principle to the statement of a rule with exceptions and back again to general principle represents an attempt to articulate, with greater or less precision, how multifarious fact situations ought be decided consistently: see, for example, in the context of torts: Australian Safeway Stores Pty Ltd v Zaluzna (1987) 162 CLR 479 at 486-488 (Mason, Wilson, Deane and Dawson JJ); [1987] HCA 7. It was open to the primary judge to decide the matter by referring to principles derived from well-established authority which used the language of "fraud exception". However, for the reasons given by Meagher JA, it may generally be preferable to avoid such terms because of the difficulties of incorporating the requisite nuance as to context and circumstances in the expression of a so-called general rule subject to a "fraud exception".

Amendments 08 August 2024 - Medium neutral citation for Beach Petroleum NL v Johnson (1993) 43 FCR 1 removed from headnote and [2]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 August 2024

(Limitation Act 1969(NSW)

In the matter of K. & A. Laird (N.S.W.) Pty Ltd (in liq) [2022] NSWSC 510 Kennedy v Green (1834) 3 My & K 699 Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 Moulin Global Eyecare Trading Ltd (in liq) v Commissioner of Inland Revenue (2014) 17 HKCFAR 218; [2014] HKCFA 22 Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd [2020] AC 1189 Stone & Rolls Ltd (in liq) v Moore Stephens (a firm) [2009] 1 AC 1391 Texts Cited: P Watts, 'Imputed Knowledge in Agency Law - Excising the Fraud Exception' (2001) 117 LQR 300 P Watts and F Reynolds, Bowstead & Reynolds on Agency (22nd ed, 2021, Sweet & Maxwell) Category: Principal judgment Parties: Aidzan Pty Ltd (in liq) in its own capacity and in its capacity as trustee of the Peter Laird Trust and the Peter Alan Laird Property Trust (First Appellant/First Cross-Respondent) Nazdia Pty Ltd in its capacity as trustee of the Aidzan Superannuation Fund (Second Appellant/Second Cross-Respondent) Peter Alan Laird (Third Appellant/Third Cross-Respondent) K. & A. Laird (N.S.W.) Pty Ltd (in liq) (Respondent/Cross-Appellant) Representation: Counsel: D Studdy SC and J Nixon (Appellants/Cross-Respondents) A Leopold SC and J Tobin (Respondent/Cross-Appellant)

Solicitors: Ashurst (Appellants/Cross-Respondents) Andersen Legal and Consulting Pty Ltd (Respondent/Cross-Appellant) File Number(s): 2023/222134 Publication restriction: Nil Decision under appeal Court or tribunal: Supreme Court Jurisdiction: Equity - Corporations List Citation: [2023] NSWSC 603 Date of Decision: 07 June 2023 Before: Black J File Number(s): 2020/351691

HEADNOTE [This headnote is not to be read as part of the judgment] The respondent, K. & A. Laird (N.S.W.) Pty Ltd (in liq) (KAL), operated a steel merchant business. It brought claims against its sole director, Peter Laird (Peter, the third appellant), for breaches of fiduciary duty and against two companies controlled by Peter, Aidzan Pty Ltd (in liq) (first appellant) and Nazdia Pty Ltd (second appellant), for knowing receipt. The critical issue was whether KAL's claims were statute barred. This raised a question of attribution: namely, when was KAL, a company, taken to have first discovered the facts giving rise to its claims (Limitation Act 1969 (NSW), s 47(1)(e)). Applying von Doussa J's formulation of the "fraud exception" in Beach Petroleum NL v Johnson (1993) 43 FCR 1 at [22.34], the primary judge rejected the appellants' limitation defence in respect of KAL's claim to the proceeds of sale of a property (the Sunnyholt Trust claim); allowed the defence in respect of KAL's claim for recovery of rental payments (the Sunnyholt Surplus Rent claim); and rejected a similar defence turning on the application by analogy of ss 15 and 55(1) in respect of KAL's claim for misappropriation of funds (the Superannuation Payment claim). His Honour did so treating each claim separately and by asking whether Peter had acted "totally in fraud" of KAL so that "by design or result" it had not benefitted from his conduct. The correctness of that approach is the subject of grounds of appeal 1 to 7 and also of KAL's cross-appeal. A further issue arose as to the quantum of the Superannuation Payment claim. In 2007, Peter caused KAL to pay $1 million to his superannuation fund. He subsequently treated that payment as a "loan" made by KAL to him and claimed to have made payments of $100,000 and $680,000 in reduction of that "loan". Only $100,000 was reflected in KAL's financial statements. Although it was accepted $680,000 had been paid by Peter to KAL, the primary judge was not satisfied that it was paid in further reduction of the "loan". That conclusion is the subject of ground of appeal 8. The Court (Meagher JA, Ward P and Adamson JA agreeing) dismissed the appeal and allowed the cross-appeal, holding: As to the Sunnyholt Trust claim: (1) Where a company brings a claim against a director for fraud or breach of duty, or against companies controlled by that director in respect of their involvement in the director's fraud or breach of duty, the knowledge of that director will not be attributed to the company as or in support of a defence to the company's claim: [1] (Ward P); [68]-[71] (Meagher JA); [136] (Adamson JA). Beach Petroleum NL v Johnson (1993) 43 FCR 1, explained. Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250; Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1; [1999] NSWCA 408; Moulin Global Eyecare Trading Ltd (in liq) v Commissioner of Inland Revenue (2014) 17 HKCFAR 218; [2014] HKCFA 22; Bilta (UK) Ltd (in liq) v Nazir (No 2) [2016] AC 1; Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd [2020] AC 1189; All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Ltd (No 2) [2021] FCA 782, considered. Bluemine Pty Ltd (in liq) v AKA (Civil) Pty Ltd [2022] NSWCA 160, distinguished. (2) That outcome can be explained by reference to the particular application of a "fraud exception" to a general rule as to attribution. The preferable approach is to recognise that the rules and principles as to the attribution of corporate knowledge in a given case depend on the nature of the claim and purpose for which that attribution is sought: [1] (Ward P); [70]-[72] (Meagher JA); [136] (Adamson JA). Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500; Bilta (UK) Ltd (in liq) v Nazir (No 2) [2016] AC 1; Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd [2020] AC 1189; All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Ltd (No 2) [2021] FCA 782; Anderson v Canaccord Genuity Financial Ltd (2023) 113 NSWLR 151; [2023] NSWCA 294, considered. (3) Separately, as a matter of construction, s 47(1)(e) of the Limitation Act could not be satisfied by the attribution of Peter's knowledge to KAL. The fixing of the limitation period from the time when a plaintiff "first discovers" or could reasonably have discovered the relevant facts assumes that thereafter the plaintiff, in the case of a company by its officers or agents, has the opportunity to determine in its own interests whether or not to commence proceedings. Where the prospective defendant is the only director or agent of the company with actual knowledge of the relevant facts, there is no rational reason to believe that defendant would cause proceedings to be commenced against themselves: [1] (Ward P); [73]-[78] (Meagher JA); [136] (Adamson JA). Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541; [1996] HCA 25, referred to. (4) Accordingly, in respect of the Sunnyholt Trust claim, time did not commence running until the appointment of KAL's liquidator in August 2018: [1] (Ward P); [78] (Meagher JA); [136] (Adamson JA). (5) Whether the knowledge of a director will be imputed to a company is to be answered by reference to the context, with particular regard to the identity of the plaintiff and the defendant in the proceedings and the nature of the claim. The law has a concern to prevent a party from profiting from his or her own breach. That principle is of general application and informs the authorities recognising that, in a claim such as the present, it would be wrong and illogical to attribute the director's knowledge of the wrongdoing to the company: [1] (Ward P); [133]-[136] (Adamson JA). Hawkins v Clayton (1988) 164 CLR 539; [1988] HCA 15, considered. As to the Sunnyholt Surplus Rent claim: (6) The success of the appeal in respect of this claim, and of the cross-appeal, depended on the outcome of the question as to attribution of Peter's knowledge to KAL. For the above reasons, the entirety of KAL's claim to the Sunnyholt Surplus Rent was brought within the time prescribed by s 47(1). Judgment for KAL on that claim should be increased from $1.2 million to $2,094,545: [1] (Ward P); [83]-[84], [87], [89] (Meagher JA); [136] (Adamson JA). As to the Superannuation Payment claim: (7) The language used in Limitation Act, s 55(1) is relevantly the same as that used in s 47(1)(e). Accordingly, for the above reasons, Peter's knowledge as to the circumstances of the Superannuation Payment claim was not to be attributed to KAL, with the result that the claim was not barred by analogy: [1] (Ward P); [96] (Meagher JA); [136] (Adamson JA). (8) The primary judge did not err in not being satisfied that the $680,000 payment was made in reduction of the $1 million "loan": [1] (Ward P); [124]-[128] (Meagher JA); [136] (Adamson JA).

The issue

The appellants submit that the general rule (derived from agency principles) is that a director's knowledge is attributed to the company provided the director is acting within the scope of his or her authority. That rule is said to be subject to an exception described generally as the "fraud exception", which only applies if the director acted "totally in fraud" of the company so that the company did not "by design or result" obtain a benefit from the director's conduct. In support of this formulation, the appellants cite Beach Petroleum v Johnson at [22.34], and cases in which that formulation of the exception has been applied, including Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [282]-[285]; Bluemine Pty Ltd (in liq) v AKA (Civil) Pty Ltd [2022] NSWCA 160 at [235]-[240] and Gerace v Auzhair Supplies Pty Ltd (2014) 87 NSWLR 435; [2014] NSWCA 181 at [78].
KAL makes two responses to the appellants' reliance on that exception. First, it is said that the "fraud exception" so formulated could not apply to the present case, because there can be no attribution of a director's knowledge of his or her own breaches of duty where the attribution is sought to defeat the company's claim against that director for those breaches. Secondly, even if this were a case for applying a general rule of attribution subject to the "fraud exception" as formulated by von Doussa J, there should have been no attribution because KAL did not "by design or result" obtain a "benefit" from Peter's conduct.

Bilta v Nazir

The need for a "fraud exception" to a more general rule governing the attribution of knowledge to corporations was rejected by a majority of the Supreme Court of the United Kingdom in Bilta (UK) Ltd (in liq) v Nazir (No 2) [2016] AC 1 ('Bilta v Nazir'). Two directors of Bilta had conspired with various corporate defendants in a fraudulent scheme involving the trading of offshore carbon credits. The effect of the scheme was that Bilta was left with the entirety of the VAT obligations and with no funds with which to meet that liability. The defendants (Bilta's directors and other parties involved in the fraud) pleaded that Bilta was prevented from recovering any loss because of an illegality defence. It was said that Bilta, as a party to the fraudulent scheme, could not rely on the circumstances of that fraud to make good its claim. That argument was unanimously rejected, partly on the basis that the knowledge of the two directors could not be attributed to Bilta.
Lords Toulson and Hodge viewed the "fraud exception" as "simply an instance of a wider principle that whether an act or a state of mind is to be attributed to a company depends upon the context in which the question arises" (at [181]). Lord Neuberger (at [9]) and Lord Mance (at [37]-[44]) agreed, the former framing the overarching principle to be applied in the form of an "open" question: [W]hether or not it is appropriate to attribute an action by, or a state of mind of, a company director or agent to the company or the agent's principal in relation to a particular claim against the company or the principal must depend on the nature and factual context of the claim in question.
Lord Sumption considered that, while the agency-based rules of attribution applied "regardless of the nature of the claim or the parties involved", the "fraud exception" (which he labelled the "breach of duty exception") operated as a rule of public policy to prevent attribution only in certain circumstances (at [86]). He later qualified that position, saying that the "technique of applying the general rules of agency and then an exception for cases directly founded upon a breach of duty to the company is a valuable tool of analysis, but … no more than that" (at [92]).
Addressing Lord Sumption's position, Lord Neuberger (at [9]) and Lords Toulson and Hodge (at [181]) agreed that the circumstances in which the "fraud exception" had historically been applied were not limited to cases of fraud, but extended to breaches of duty by a director.
Each of their Lordships agreed that there should be no attribution of a director's knowledge to a company as a defence or bar to the company's claim against that director for fraud or breach of duty. For Lord Sumption, such a claim was "the paradigm case for the application of the breach of duty exception" (at [89]). Lords Toulson and Hodge described it as "the classic example of non-attribution" (at [181]). Lord Mance observed (at [38]): … it is certainly unjust and absurd to suggest that the answer to a claim for breach of a director's (or any employee's) duty could lie in attributing to the company the very misconduct by which the director or employee has damaged it.

Two subsequent Australian decisions

In Anderson v Canaccord Genuity Financial Ltd (2023) 113 NSWLR 151; [2023] NSWCA 294, this Court (Gleeson, Leeming and White JJA), having referred to the decisions in Bilta v Nazir and Singularis and to [22.34] of von Doussa J's judgment in Beach Petroleum v Johnson, observed (in dicta): [255] But this analysis [of von Doussa J] must be reconciled with later authority. It is to be steadily borne in mind that the rules of attribution are context-dependent. The circumstances in which a company is treated as liable by reason of the conduct and knowledge of the natural persons through whom it acts depends upon the particular statute or rule of common law or principle of equity. This cannot easily be reconciled with an inflexible "fraud exception", that immunises a company from attribution irrespective of the relevant statutory or common law or equitable rule, in cases where a director has acted "in total fraud" upon the company and the company has not obtained a benefit. [256] The point may be illustrated by contrasting liability in equity for knowing receipt and knowing assistance. An element of liability for knowing receipt is that the third party has received a benefit (ordinarily, property). It would seem to follow that the "fraud exception" as formulated in Beach Petroleum NL v Johnson, which turns on the absence of the company obtaining a benefit, would never be available.
The Court also agreed (at [257]) with the observations of Allsop CJ (sitting at first instance) in All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Ltd (No 2) [2021] FCA 782: [167] The judgment of the Supreme Court in Bilta [2015] UKSC 23; [2016] AC 1 is to the effect that there is no general fraud exception to imputation, rather the question is an open one: whether or not it is appropriate to attribute an action by, or a state of mind of, a company director or agent to the company or the agent's principal in relation to a particular claim against the company or the principal must depend on the nature and factual context of the claim in question: Bilta at 11 [9] per Lord Neuberger, see also 18-19 [41]-[45] per Lord Mance JSC, 64-73 [180]-[209] per Lord Toulson and Lord Hodge JJSC, cf Lord Sumption JSC at 38 [86]; P Watts and FMB, Bowstead and Reynolds on Agency (21st ed, Sweet & Maxwell, 2018) at [8-214]. [168] Drawing upon the Court's reasoning in Bilta, the UK Supreme Court in Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50; [2020] AC 1189 held at 1205 [34] that the question as to whether knowledge of a particular officer of a company should be attributed to the company depends on the particular context in which the question of attribution arises. …
The reasoning in these English and Australian authorities explains clearly why, in a case like the present, where the substantive claim is by the company against its director for breach of duty, the director's knowledge will not be attributed to the company for the purpose of defeating or barring the company's claim. That leaves open the possibility that, in a particular context, some special rule of attribution, including one arising by statute, might apply. For that reason, in the present case the meaning of "first discovers" as used in s 47(1)(e) of the Limitation Act with respect to a corporate plaintiff must be addressed. However, in view of the way in which this appeal was argued, it is first necessary to consider the relevance to the present case of von Doussa J's formulation of the "fraud exception" in Beach Petroleum v Johnson at [22.34] and the decisions informing or applying the principles to which his Honour there refers.

Attribution for the purpose of Limitation Act, s 47(1)(e)

The language of and purpose underlying s 47(1)(e) of the Limitation Act is wholly consistent with there being no attribution where the facts said to be discovered are facts known only to a director who relies on a limitation defence in answer to the company's claim against him or her for breach of duty arising from those facts.
Under s 47(1)(e), time does not commence running until "the plaintiff … first discovers … the facts giving rise to the cause of action and that the cause of action has accrued". A plaintiff company "first discovers" facts when those facts are taken to be known to the company by the exercise of legal attribution. That exercise is ordinarily informed by principles of agency.
The "first discovers" provision identifies for the purpose of the running of the relevant limitation period the time from which it is reasonable to require that a prospective plaintiff consider commencing proceedings. After the expiry of that period, that plaintiff's claim is "not maintainable". As McHugh J observed in Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 at 553; [1996] HCA 25, the limitation period "represents the legislature's judgment that the welfare of society is best served by causes of action being litigated within the limitation period, notwithstanding that the enactment of that period may often result in a good cause of action being defeated".
The fixing of the limitation period from the time when the relevant facts are first discovered, or might with reasonable diligence have been discovered, assumes that thereafter a plaintiff, in the case of a company by its officers or agents, has the opportunity to form a view, and take advice, as to whether to commence proceedings. If the prospective defendants are the only natural persons with actual knowledge of the relevant facts, there is no rational reason to believe that from a plaintiff company's perspective those defendants would cause proceedings to be commenced against themselves. In such a case, the company remains without any director, officer, or authorised agent having actual knowledge of the relevant facts who might pursue its interests by the commencement of proceedings or who, having made reasonable inquiries, would have had such knowledge.
In this context the reference to when a plaintiff "first discovers" facts giving rise to a cause of action is, in the case of a claim by a company against a director or officer, to be construed as concerned with knowledge, necessarily attributed, which is capable of being acted upon by a director or officer other than the person against whom the claim is brought. Accordingly, as a matter of construction, s 47(1)(e) would not be satisfied by the attribution of Peter's knowledge to KAL where that knowledge was of his own wrongdoing. Whether the knowledge of some other natural person of those same facts could be attributed to the company would remain to be considered separately, and does not arise in this case.

(2023) 113 NSWLR 151

Aidzan Pty Ltd (in liq) v K. & A. Laird

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