Boros v Pages Property Investments Pty Ltd

Boros v Pages Property Investments Pty Ltd - [2021] NSWCA 288 - NSWCA 2021 case summary — Zoe

[3]

HEADNOTE [This headnote is not to be read as part of the judgment] Pages Event Hire was a business founded by Mr Gregory Page and run through a number of corporate entities for the benefit of the Pages Family Trust, the trustee of which was the respondent, Pages Property Investments Pty Ltd (PPI). The appellant, Mr Attila Boros, was employed by Mr Page in the 1980s, and was appointed a director of Pages Equipment Holdings Pty Ltd (PEH) on 17 December 1999. He became the director of PPI on 3 March 2008, following the death of the founder. The hire business was run from premises in Burwood, Sydney, owned by PPI. PPI leased the premises to PEH, which owned the assets of the business. Another manager of the business, Mr Thatcher, was also a director of PEH. A third company operated the business. On 12 September 2016, Mr Boros was removed as director of PPI by the company's sole shareholder, Mrs Mary Page, and replaced by her son, Mr Timothy Page. The incoming director caused PPI to commence proceedings against Mr Boros and others, alleging breaches of fiduciary duty as a director of PPI and duties imposed under the Corporations Act 2001 (Cth). Mr Boros remained a director of PEH. On 17 September 2020, judgment was given in the Equity Division against Mr Boros and PEH. The trial judge held, first, that Mr Boros breached his duty to PPI in failing as a director of PPI to ensure that PEH paid to PPI all the rent due and payable under the lease from PPI. The judge held that the rent payable under the lease increased automatically annually under a rent review clause and that acting reasonably Mr Boros should have understood this to be so. Judgment was given against Mr Boros and PEH for the outstanding rental. Secondly, the trial judge found that there had been a breach of fiduciary duty in relation to an increased borrowing by PPI under a loan facility with ANZ Bank, the funds from which were used to pay down PEH's debt to the Bank. Finally, Mr Boros had contravened s 180 in failing to ensure PPI kept true and fair accounts while he was the director and secretary. Mr Boros was ordered to pay $2,538,656 to PPI in compensatory damages, PPI's costs for engaging an accountant to reconstruct PPI's financial records, and 60% of PPI's legal costs, as not all claims by PPI had succeeded at trial. Mr Boros appealed from the adverse findings. The principal issues before this Court were whether the appellant had breached his duties to PPI: (1) in failing to ensure that PEH paid the full amount of the rent due under the lease; (2) by increasing PPI's facility with ANZ Bank to pay down PEH's liability; and (3) in failing to ensure that PPI kept proper financial records. Held by Basten JA (Bell P and Meagher JA agreeing), upholding the appeal: Issue (1) - failure to ensure that PEH paid the full amount of rent due (1) There was an issue as to whether the rent review clause in the lease operated automatically, or required that a rent review be undertaken and a new figure obtained. No claim was pleaded that Mr Boros was negligent in failing to obtain legal advice as to the operation of the clause, or in failing to initiate a rent review: [36]-[41]. (2) Given that the lease was executed three years prior to his appointment as director of PPI, he did not act unreasonably in continuing existing procedures, which had not involved an annual increase in rent: [20]; [42]. (3) On 15 June 2009, some 15 months after he became a director, the term of the lease expired and the lessee was thereafter holding over. There was no finding that a director who believed that the rent review provision did not continue to operate during the holding over period failed to act with due care: [43]-[44]. (4) PPI did not demonstrate that Mr Boros acted unreasonably in failing to ensure that PPI obtained rental payments calculated. Further, while a greater sum may have been payable as rent if calculated pursuant to the rental review formula, PPI obtained a benefit as a 50% shareholder of PEH by not insisting upon the rent increases: [45]; [48]. There was no breach of duty by Mr Boros with respect to the increased rental claim. Corporations Act 2001 (Cth) s 180(1), referred to. Issue (2) - increase in PPI's facility with ANZ Bank (5) The challenged finding as to the loan facility rested on a breach of the general law obligation of a fiduciary to avoid a conflict of duty with personal interest. The scope of the duty depends on the circumstances in which it arises. There must be more than a theoretical conflict. A real and sensible conflict must be identified, which in a joint enterprise may need to be assessed having regard to common interests, the reasonable beliefs of the director as to the benefits to the company and whether the director in fact obtained a benefit. Walker v Wimborne (1976) 137 CLR 1; [1976] HCA 7; Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146; [1990] HCA 32; Equiticorp Finance Ltd (In liq) v Bank of New Zealand (1993) 32 NSWLR 50; Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd (2001) 38 ACSR 404; [2001] NSWSC 448; The Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; 70 ACSR 1; Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36 applied. (6) PEH was owned as to 50% by PPI, 25% each by companies controlled by Mr Boros and Mr Thatcher respectively. The evidence did not establish a financial benefit flowing indirectly to Mr Boros from his interest in his company's shareholding. The evidence established that the refinanced loan benefitted the whole group by a reduction in outgoings: [73]-[75]; [80]. (7) Mr Boros was entitled to have regard to the common interests of PPI and PEH. The transaction was to be viewed as part of interlocking financing and security arrangements to which all members of the group were party and of which Mr Boros was a guarantor. Arranging an increase in PPI's facility with ANZ Bank could not be said to constitute a breach of fiduciary duty: [76]; [78]-[79]; [81]. Issue (3) - keeping proper financial records (8) Directors have responsibilities to ensure companies maintain proper records under s 286 of the Corporations Act. The trial judge found the records of PPI were deficient. There was no challenge to this finding: [85]. Any resulting loss was the cost of reconstructing the records. The costs of the expert witness, Ms Bateman, who undertook that task were treated as recoverable as costs of the proceedings. However, a substantial amount of her work was done for other companies or with respect to other claims, and should not be charged against Mr Boros. Due to Mr Boros' success on the appeal, the costs order should be set aside to the extent that it relates to him: [88]-[91]. Corporations Act 2001 (Cth) ss 180, 189, 286, 1317S, 1318, referred to.

[4]

Judgment

BELL P: I agree with Basten JA.
BASTEN JA: In 1957 Gregory Vincent Page started up an event equipment hire business known as "Pages Hire". In the 1980s, the appellant, Attila Boros, and Mr Stephen Thatcher joined the business. The business was run through a number of corporate entities primarily for the benefit of the Page Family Trust of which the trustee was Pages Property Investments Pty Ltd ("PPI").
PPI was registered on 9 November 1998 by Mr Gregory Page. He remained the sole director until his death in July 2003. He was also the sole holder of the 12 issued shares in the company, which shareholding passed to his widow, Mary Therese Page, on his death. From 28 July 2003 until 3 March 2008 Mrs Page was the sole director of the company as well as the sole shareholder and a beneficiary of the trust.
On 3 March 2008 she resigned as director and appointed Mr Boros in her place. It appears that Mr Boros and Mr Thatcher ran the business from then until September 2016. The business experienced financial difficulties in about 2014. On 12 September 2016 Mrs Page exercised her power as the shareholder of PPI to remove Mr Boros from his dual positions of director and secretary of PPI and appointed in his place Timothy Page, her son, as sole director and secretary. Under Mr Timothy Page's control, PPI commenced proceedings against Mr Boros and six other defendants, of which four were other corporate entities within the Page group of companies. The two other individual defendants were Mr Boros' wife and Mr Thatcher: however claims against them were settled before the hearing. The case went to hearing in the Corporations List, PPI alleging various breaches of duty by Mr Boros in contravention of his fiduciary obligations as a director of PPI and duties imposed under the Corporations Act 2001 (Cth).
The proceedings were heard over eight days from late July until 12 August 2020 by Black J, attended, as the transcript revealed, by the difficult circumstances which were occurring with some remote hearings. With admirable expedition, a lengthy and comprehensive judgment was delivered on 17 September 2020. [1] The orders included the winding up on the just and equitable ground of each of the corporate defendants, together with a judgment in favour of PPI on some of its claims as against Mr Boros. Judgment was also given against the second defendant which was a corporate entity within the Page group, Pages Equipment Holdings Pty Ltd ("PEH").
PEH was also registered by Mr Gregory Page on 9 November 1998 with himself as the sole director. However, on 17 December 1999 both Mr Boros and Mr Thatcher were appointed as directors of PEH and remained in those positions at the date of the trial. The issued capital comprised 12 shares of which six were held by PPI and three by each of Hun Enterprises Pty Ltd (a company associated with Mr Boros) and Thatcher Group Pty Ltd (a company associated with Mr Thatcher).
The event hire business involved the manufacture and supply of pavilions, stages, lighting and other infrastructure for events. PPI owned the land at Belmore Road, Punchbowl from which the business was conducted. PEH owned the equipment, vehicles and other assets used in the hire business. Before the increased borrowing by PPI referred to below, PEH's non-current liabilities included hire purchase and other liabilities in respect of equipment and vehicles. From 2015, the retail hiring operations of the business were undertaken by Pages Sales Pty Ltd. Before then they had been conducted by Phire Pty Ltd, known as Pages Hire Centre (NSW) Pty Ltd from 1999 to 2015. PEH's revenue was generated from the wholesale hire of equipment to Phire, and later Pages Sales. The Punchbowl property was the subject of a lease to PEH. However, the accounting records of PEH and Phire (and then Pages Sales) recorded that rental payments were made from funds of the latter.
At the heart of PPI's case was a claim that Mr Boros as director of PPI had a conflict of duty and interest in relation to dealings between PPI and PEH. That was found to have resulted in a breach of fiduciary duty in relation to an increased borrowing by PPI under a facility with the ANZ Bank, which funds were used to pay down debts of PEH. Separately, it was alleged that Mr Boros, as director of PPI, failed to take sufficient steps to ensure that PEH paid to PPI all of the rental due and payable under PEH's lease of a property owned by PPI. This conduct was held to have involved a contravention of s 180(1) of the Corporations Act. Mr Boros was also found liable for contravening s 180 in failing to keep true and fair accounts of PPI, while he was both the director and secretary. He was ordered to pay compensation to PPI for amounts totalling $2,538,656, together with the costs incurred by PPI in engaging an accountant to reconstruct the financial records of PPI. Various other claims made by PPI failed, as a result of which Mr Boros and PEH were required to pay part only (60%) of the legal costs incurred by PPI.
Final orders were made in a second judgment delivered on 23 October 2020. [2] Mr Boros appeals from those orders.

[5]

A Issues on appeal

The orders made by the trial judge on 23 October 2020 were as follows: "1. Judgment entered for the Plaintiff against the First Defendant [Mr Boros] in the amount of $2,538,656. 2. Judgment entered for the Plaintiff against the Second Defendant [PEH] in the amount of $2,617,085. 3. Subject to order 4 below, and except so far as costs are the subject of previous costs orders, the First Defendant and the Second Defendant pay 60% of the Plaintiff's costs of the proceedings, as agreed or assessed, on the ordinary basis. 4. The First Defendant and the Second Defendant pay the Plaintiff's reasonable costs of engaging Fiona Bateman as an expert in the proceedings (to the extent that those costs have not been included in Order 3), as agreed or as assessed."
The amended notice of appeal challenged orders 1, 3 and 4, omitting order 2 as to the liability of PEH which was not an appellant. PEH (then in liquidation) was added as a second respondent, but took no part in the proceedings. The grounds of appeal were drafted on the basis that there was only one respondent, PPI, and were in the following terms: "1 The Court Below erred in holding that s 180 of the Corporations Act required the Appellant to himself ensure that the rent under the First Lease was paid in accordance with its terms where there were other personnel within the group of companies of which Respondent formed part with express responsibility for such matters. 2 In the absence of evidence that the short payment of rent was drawn to the attention of the Appellant, the Court Below should not have found that the Appellant breached his said statutory duty. 3 Alternatively, the Court Below should not have held that the Appellant had failed to establish that payments totalling $1,358,266 made by PEH to the Respondent should be set [off] against any liability which PEH otherwise had for a shortfall in rent. 4 The Court below should have found that payments totalling $1,358,266 were made by PEH to the Respondent thereby reducing the amount of any liability that the Appellant might otherwise have for any breach of unpaid rent. 5 The Court Below erred in holding that the Respondent was entitled to an order for compensation for the whole of the amount by which the Respondent's Asset Finance Facility with ANZ was increased on 21 March 2016 namely $1,658,931.43. 6 The Court Below ought to have found that the proper measure of any compensation involved consideration of: (a) the fact that prior to the changes effected by the letter of 21 March 2016, the terms of the ANZ facility, entitled ANZ to pursue the Respondent for the debt then owed by PEG without first pursuing PEH; (b) the fact that by repaying PEH's debt to the ANZ, PEH became indebted to the Respondent in an equivalent amount."
There was no ground expressly addressing costs, or more particularly order (4). The setting aside of those orders was treated as consequential on success on the substantive issues. For reasons discussed in Part D, that assumption needs to be examined.
The major parts of the judgments against Mr Boros and PEH were in the form of compensation with respect to an increase in the borrowings of PPI from the ANZ Bank. The judgment against Mr Boros comprised an amount of $2,081,376 with respect to the increased debt owed to the ANZ Bank and a further amount of $457,280 on account of unpaid rental under a lease between PPI and PEH. (The judgment against PEH was for similar amounts, assessed for the same losses; it is clear that PPI could not recover two amounts in respect of one loss.)
Two broad issues arise with respect to the order for payment of compensation. First, it is apparent that both amounts relate to intra-group arrangements which require that careful attention be given to the loss suffered from any apparent conflict of interest where two companies have a common directorship, although not necessarily a common shareholding. Secondly, if the borrowing is for the benefit of the group, careful attention must be paid to the inter-related obligations of companies within the group, which may be joint borrowers or may have provided guarantees for loans to particular members of the group. In other words, the fact that Mr Boros was a director of PPI, but had no interest in the company as shareholder or a beneficiary of the trust for which it was the trustee, may not mean that he will have a conflict in relation to any dealing between PPI and PEH of which he was also a director and in which he had a 25% indirect shareholding (through his own family company) and in which PPI held a 50% interest by way of shareholding.
A separate issue in relation to the calculation of losses arose because the ultimate beneficiary of the business was a family trust, of which the sole (or principal) beneficiary was Mrs Page. The business being operated through the trustee, inadequate accounting arrangements may not give rise to an actual loss where some payments were made to the trust or its sole beneficiary, but not attributed to a particular obligation between the companies.
Grounds 1 to 4 in the notice of appeal addressed the finding that Mr Boros had breached his duties to PPI in failing to ensure that PEH paid the full amount of the rent due under a lease. Grounds 1 and 2 denied the liability, but grounds 3 and 4 contended that account should be taken of payments made by PEH otherwise than pursuant to a legal obligation under the lease. Grounds 5 and 6 were concerned with the ANZ loan facility. Mr Boros' case was that the group needed the additional funds, which were available to PPI because it owned a property against which the lending could be secured. The fact that the business was carried on in other entities, not PPI, did not mean that PPI suffered a loss from the increased borrowing in circumstances where it was the ultimate beneficiary of the business operations.

[6]

(1) Basis of claim

There were two leases of PPI's property to PEH. The first lease was executed in June 2004; a second lease commenced on 1 July 2016. In considering the claim which was upheld, in relation to the first lease, it is important to have regard to the circumstances in which it was executed, before Mr Boros was a director of the lessee.
In 2001 PPI purchased the Punchbowl property for use in the event hire business. In June 2004, that is some four years before Mr Boros became a director of PPI, PPI executed a lease in favour of PEH for a period of five years, with two further options of five years renewal. The lease was not renewed, but continued for a further seven years with PEH holding over, until the execution of a second lease in June 2016.
The allegation of underpayment was based on the proposition that although the first lease provided for monthly rental of $20,000, it contained a rent review clause which the judge found operated automatically and on an annual basis. The clause, the judge concluded, did not require the carrying out of a review, nor did he find that, if he were wrong in that respect, there would have been a breach of duty in not carrying out a review. The consequence of this approach was that not only was Mr Boros liable to compensate PPI for his failure to ensure that the full amount of rental was paid on a monthly basis, over a period of some six years, but PEH was also found liable in debt for the unpaid rental, although its landlord had never made a demand upon it for additional rental, nor quantified the rental at any point between the first anniversary of the entry into the lease (14 June 2005) and the date on which the second lease was entered 11 years later. That is a surprising result, but is not the subject of an appeal because PEH does not challenge the order against it.
PPI's claim against Mr Boros was for a contravention of ss 180, 181 and 182 respectively of the Corporations Act. The judge upheld the claim under s 180 (failure to exercise powers and discharge duties with a reasonable degree of care and diligence) but rejected the claims under s 181 (failure to act in good faith in the best interests of the corporation) and under s 182 (acting improperly to gain an advantage for himself or someone else).
As to the appellant's challenge to the findings of liability, four factors must be borne in mind. First, when the lease was entered into, the sole shareholder of PPI and its sole director was Mrs Page. The appellant took over a little short of four years after the lease commenced. If Mr Boros was in breach of duty to PPI, Mrs Page must also have been in breach of duty. Mr Boros merely continued a practice which he inherited.
Secondly, although the operation of the companies involved the carrying on of a business, it is not uncommon for trustees of family trusts to lease premises to either a related company or to a member of the family. Rental may be fixed and payments arranged in a manner which satisfies the tax obligations of the parties, but is otherwise convenient to the ultimate beneficiary of the family trust.
Thirdly, the finding that the rental increased on an annual basis without any steps being taken by the landlord or the tenant turned on the correct legal construction of the lease. The judge expressed his opinion that, "[o]n balance, it seems to me that 'review' took place without the need for further action of the parties to initiate it, since the new rent was determined by the formula specified in the first lease." [3] It did not follow, however, that a director who had taken a different view of the construction of the lease had failed to discharge his duty under s 180 of the Corporations Act. The judge did not find that the breach arose from a failure to obtain legal advice: the breach arose because of the construction given to the lease by the judge.
Fourthly, the judge concluded that the obligation continued from the date when Mr Boros became a director of PPI until the date he was removed in September 2016. Indeed, the amount appears to have been calculated for a period continuing until September 2016, although the lease terminated with the signing of a second lease which commenced on 1 July 2016. [4]

[7]

(2) Legal principles

The trial judge upheld the respondent's claim on the basis of a breach of s 180(1) of the Corporations Act. That section provides: 180 Care and diligence - civil obligation only Care and diligence - directors and other officers (1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation's circumstances; and (b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer. Note: This subsection is a civil penalty provision (see section 1317E).
Section 180(2) sets out the "business judgment rule", which was invoked unsuccessfully at trial and need not be addressed. Section 180(1) has two characteristics. First, it broadly reflects general law principles requiring a person to exercise reasonable care, skill and diligence in the exercise of a power or function, or conduct generally. That may involve taking steps to avoid harm, or affirmative steps to achieve a particular outcome.
Secondly, context is important. Context includes both the "corporation's circumstances" and the functions exercised by the director within the corporate structure. Context is often critical in analysing the standard required. Statements as to the standard required made in other cases and other circumstances should be viewed with a degree of circumspection having regard to the fact-specific nature of the inquiry. The trial judge adopted principles which he had earlier articulated in another case, [5] which in turn extracted statements from earlier cases, including cases under the Corporations Law. However, judicial statements as to the scope of a provision based on principles of interpretation, not directed to the circumstances of the case, may provide limited assistance.
Thirdly, as Spigelman CJ stated in Vines v Australian Securities and Investments Commission, [6] in relation to the equivalent provision in the Corporations Law: "[136] It is clearly the case that the Parliament did have reference to the existence of a duty at common law for purposes of enacting the statutory standard. Nevertheless, when a common law formulation is incorporated as a provision in a statute, its legal nature is altered. The words must now be interpreted as statutory language, albeit having regard, in an appropriate way, to the origins of the statutory formulation. The whole of the law of statutory interpretation must be applied including, relevantly, the statutory context which provides for a structure of sanctions for breach of the statutory standard. … [142] As a starting point I would accept that Parliament, when it used language, albeit in a slightly modified form, plainly derived from the civil case law, had in mind a standard of care of a similar character. Nevertheless, Parliament must be taken to have acted on the basis that the law of statutory interpretation will be applied. That may lead to a different conclusion. [143] As the above outline of the statutory scheme makes clear, the consequences that may flow from a finding of contravention of a civil penalty provision are of a different order of severity to the consequences that may flow from a successful action for breach of the civil duty of care by company directors or officers. Although such a contravention does not invoke, directly, the particular stigma of a finding of criminal conduct, nevertheless the consequences to an individual by way of penalty and or disqualification may be as severe as any likely criminal sentence, save for a term of imprisonment. The law of statutory interpretation requires this Court to have regard to these consequences."
The structure of the Corporations Act is relevantly the same as that of the Corporations Law. Section 180(1) is a civil penalty provision under s 1317E(1); the court may order a person to compensate a corporation "for damage suffered by the corporation" resulting from a contravention of a civil penalty provision: s 1317H(1).
After giving careful consideration to the operation of the civil penalty provisions, Spigelman CJ concluded that the inclusion of the compensation provisions demonstrated an intention to avoid multiplicity of proceedings and "would not have that effect if the standard of care applicable in proceedings in tort for negligence was different from the standard of care applicable in the case of compensation orders under the Act". [7]

[8]

(3) Elements of claim by PPI

The pleading with respect to payment of rent was found in the fifth further amended statement of claim in the following terms: "66. During the period from 3 March 2008 until 30 June 2016, the first defendant failed to ensure that PPI collected the full amount of the rent payable by PEH under the First Lease, indexed in accordance with the provisions referred to in paragraph 34 above. Particulars (a) PEH paid rent of only $20,000 per month for some (or perhaps all) of the months of its tenancy, not the amount increased by the CPI index as referred to in paragraph 34 above."
The trial judge correctly found that the pleading of a duty to "ensure" that rental income was obtained did not reflect the obligation under s 180. Rather, the judge stated that he read the claim as an allegation that "Mr Boros did not act with sufficient care and diligence in taking steps to ensure that PPI, as lessor, received the benefit of the indexed rent payments". [8] The dispositive findings were as follows: "[104] Mr Boros submits, in response to this claim, that the rent payable under the First Lease was $240,000 per annum (a contention which as I noted above, neglects the annual increases in that rent) and was paid directly into the PPI's bank account; he relies on the 'top up payments' made to PPI which I address below and contends that PPI did not suffer a loss; and he submits that the claim in respect of the alleged contravention of statutory duties was brought more than 6 years after the alleged contravention and that it is time barred by operation of section 1317K of the Act. [105] It seems to me that a director, in exercising care and diligence to the requisite standard under s 180 of the Act, would have informed himself of the terms of the First Lease and taken steps to ensure that the rent was paid in accordance with the indexing provisions in the lease, including when PEH was holding over under the lease, where there is no suggestion that PEH did not then have the financial capacity to make those payments, or would have required a staff member to attend to those matters and then satisfied himself or herself that that was done. I find that Mr Boros breached his statutory duty in respect of the unpaid rent under the First Lease, from 4 April 2011 (the commencement of the limitation period …) until the date of his removal as a director of PPI on 12 September 2016. It is not necessary to address any question as to breach as to outgoings where PPI has not established non-payment of those outgoings, for the reasons noted above."
The reference in the last passage quoted above to the breach extending until 12 September 2016 was ambiguous. The first lease was replaced by a second lease which commenced on 1 July 2016. The calculation of unpaid rent must have ceased on that date.
The judge dealt separately with the defences raised by Mr Boros. These were dealt with in the following passages: "[108] I should also address Mr Boros' defences to this claim. Mr Boros pleads (Defence [66A]) that no rent reviews were undertaken under the First Lease, but that is not to the point where the lease provided a formula setting the increased rent payable without the need for the parties separately to initiate such a review. Mr Boros also pleads (Defence [66A(g)]) that he carried on an earlier practice from the period before his appointment as a director, but that is not an answer to any breach of his duty by adopting that practice while he was a director of PPI. Mr Boros also pleads (Defence [66A(h)]) that the ability to carry on a rent review was 'proscribed' in the holding over period. I do not accept that submission, as a matter of construction of the First Lease, as I have noted above. That is not an answer to the pleaded breach, where, as I noted above, the First Lease provided a formula setting the increased rent payable without the need for that review, which continued in the holding over period. [109] Mr Boros also pleads (Defence [66B(a)]) an arrangement that PEH would make payments on behalf of PPI for specified purposes and relies on these payments to 'set off' the rent obligations shortfall. That arrangement is alleged to be partly oral and partly implied. It is not established, where I do not accept Mr Boros' evidence of that matter and the bare fact of payments by PEH to PPI does not support an implication of the particular arrangement alleged. Mr Boros also pleads (Defence [66B(b)]) that PPI received further amounts from 1 January 2006 to 31 December 2016 of $1,358,266 which he also contends should be set off against any shortfall in payments under the First Lease. That defence has not been established where Mr Boros' schedule of those payments was admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) as a submission only and, to the extent that bank records establish those payments, the basis for a set-off against rental liabilities is not established."
It may be noted that the judge rejected allegations of breaches of s 181 and s 182 of the Corporations Act and a claimed breach of fiduciary duty, in the following passage: "[106] It seems to me that the breaches of ss 181 and 182 of the Act pleaded by PPI are not established in respect of this claim. I recognise that PEH, and indirectly its shareholders including companies associated with Mr Boros and Mr Thatcher, likely obtained an advantage by the financial saving to PEH from not paying the indexed increase in the rental. However, it seems to me that a failure to exercise Mr Boros' powers as a director in good faith in the best interests of PPI and for a proper purpose or an element of impropriety have not been established, where the short payment of the rent and any issue as to outgoings more likely reflects the failure to establish an adequate process for payment of those amounts."
Two points should be made in relation to this reasoning. First, a matter which will be significant in considering a breach of fiduciary duty discussed below, the recognition that two of the shareholders would obtain a benefit from the financial saving to PEH as a result of not paying an increased rental, omits reference to the fact that PPI was a 50% shareholder in PEH and thus itself obtained a benefit. If there were a breach of duty, the failure to take into account that indirect benefit to PPI would cast doubt upon an order for compensation simply calculated by reference to the unpaid rental. However, it is necessary next to have regard to the challenge to the finding as to liability. It should be borne in mind that, as appears in the last sentence set out above, the judge's finding reflected "the failure to establish an adequate process for payment" of the additional rental. That failure the judge described as part of the "day-to-day inter-company transactions" or "day-to-day dealings between the two companies". [9] The judge further explained: "[107] … The contrary view would lead to the unreasonable result that, from the moment that Mrs Page as PPI's shareholder placed Mr Boros in that position, he would potentially be liable for breach of fiduciary duty in respect of all such day to day dealing between the companies, since the same conflict would exist in all such dealings, unless he obtained formal ratification of each such dealing in general meeting or by all shareholders of both companies. It was plain that PEH and its shareholders including PPI did not expect that the companies' business would be conducted in that manner, at least in respect of day-to-day dealings as distinct from major transactions."

[9]

(4) Challenge to judge's findings - rental payments

As appears from the passages set out above, the trial judge proceeded on the basis that the rent payable under the lease was an amount which increased annually in accordance with a formula in the lease. That conclusion was reached on the basis of the following provisions in the lease: "3. Rent (a) The Tenant must pay the Rent to the Landlord without demand by equal monthly instalments in advance. … 4. Rent Review 4.1 Rent review The rent will be reviewed on the first and each subsequent anniversary of the Commencing date of the term. The rent payable by the tenant for the year following each date of review will be determined: (a) In the case of the first review, by multiplying the rent payable on the Commencing date of the term by a fraction the numerator of which will be the Price Index applicable on the date of review and the denominator of which will be the Price Index applicable on the Commencing date of the term; and (b) In the case of each and every review subsequent to the first review, by multiplying the rent payable for the year immediately prior to the date of review by a fraction [calculated in the same manner]. The rent payable for the year following the date of review will in no case [be] less than the rent payable immediately proceeding the date of review. In the clause Price Index means [followed by reference to various forms of CPI]."
Pursuant to item 6 in the reference schedule to the lease, the rent was "$218,181.82 pa plus GST payable monthly in advance on 15th of the month." The commencing date was 15 June 2004.
There could be two views about how cl 4.1 of the lease operated. The judge made a finding of law in that regard expressed in the following terms: "[97] … On balance, it seems to me that 'review' took place without the need for further action of the parties to initiate it, since the new rent was determined by the formula specified in the First Lease." The judge further noted that, pursuant to cl 13.3, PEH was required to pay interest on any rent (or other money payable to the landlord) and unpaid for 10 business days.
As noted by the trial judge in the passage at [104] set out above, Mr Boros submitted that the rent payable under the lease was, in effect, the sum specified in the schedule, namely $20,000 per month. He did not understand that the rent automatically increased on each anniversary of the commencement date, or that it increased without any rent review being undertaken.
There may well have been two views reasonably open as to how cl 4.1 operated. The judge's finding, though not expressed in these terms, was that a reasonable person in the position of Mr Boros would understand that the lease operated in the way described in the judgment. However, a finding of law as to the proper construction of cl 4.1, fairly prefaced by "[o]n balance it seems to me", is quite consistent with another view being reasonably open. That view is that the rent does not increase unless a review is undertaken and a new figure is identified. The fact that the exercise is one which can be undertaken arithmetically, once the appropriate CPI figures have been identified, does not render that view untenable. Further, the fact that cl 4 does not say that the rent does increase by a calculable amount each year, but rather that the rent will be "reviewed" on each anniversary is consistent with the view that one party, implicitly the landlord, will carry out a review and notify the tenant of the outcome.
PPI did not plead and the trial judge did not find that Mr Boros was negligent in not carrying out such a review, nor that, to the extent that the proper construction of the clause was open to doubt, he was negligent in not obtaining legal advice as to its operation.
Further, Mr Boros was appointed by and took over from the sole shareholder of PPI, Mrs Page. She had been the director of PPI when the lease was executed and continued to be the sole director of PPI through three anniversary dates, namely 15 June 2005, 15 June 2006 and 15 June 2007. (Mr Boros took over in March 2008.) In short, Mr Boros continued a practice which had been in operation for more than three years prior to his appointment as director.
Mr Boros also submitted that the rent review provision did not continue to operate in the holding over period which commenced on 15 June 2009. By construing the contract, the judge held that the rent review clause continued to operate during the holding over period. Clause 2.2 of the lease provided that where the tenant continued to occupy the premises as a monthly tenant, it was required to pay to the landlord a monthly rent equal to one-twelfth of the rent payable immediately before the terminating date. Clause 2.2 gave the landlord the right to increase the monthly rent at any time and in any amount, on giving one month's notice; it further provided that "[i]f the Landlord increases the monthly Rent then the provisions about review of Rent do not apply": cl 2.2(6). The judge concluded that the provision for annual review on the anniversary of the commencement date continued to apply during the holding over period, because 2.2(6) assumed that to be the case, absent the landlord fixing a rent increase.
There might be different views as to precisely how cl 2.2 operated in the holding over period where there had not been any rent increase required by the landlord. However, again, there was no finding that a director who took the view that the rent review provision did not continue during the holding over period, and failed to enforce payment by the lessee on that basis was failing to act with due care in the interests of PEH.
Thirdly, the fact that PPI itself obtained a benefit as a shareholder of PEH, through its failure to insist upon the rent increases was itself relevant to the conclusion reached by a reasonable person acting as a director of PPI.
Fourthly, there is the question of the so-called "top up" payments made by PEH to PPI over the relevant years. These will be dealt with further below, but they are relevant to the question whether a reasonable person acting as a director of PPI would insist on the rent increases. There is no doubt that payments well in excess of the unpaid rental calculated on the basis accepted by the trial judge were paid to PPI by PEH over the relevant years. Whether those payments were accounted for as part payments of rental, as loans or in some other way may have had tax consequences for either PPI or PEH or both, but the fact that such payments were made, with a degree of flexibility, could be taken into account by a person acting as director of PPI as a basis for not insisting on payments being made on account of increased rental obligations.
It appears from the evidence, although there was no finding in this respect, that payments made to PPI by PEH were used to make payments to Mrs Page, presumably as a beneficiary of the family trust. PPI had two sources of income, which were not entirely independent. On the one hand, it obtained income from the lease of the property which it owned and leased to PEH. Secondly, it obtained income as a shareholder of the various companies which operated the event hire business. One of those companies was PEH. The fortunes of PPI (and the other shareholders of the operating companies) turned on the fortunes of the business. If the business became unprofitable, both sources of income might dry up. If the business got into difficulty, there might be little benefit in PPI insisting on a higher rental for the lease of the property, if PEH could not afford to pay both the rental and third party creditors. So long as the rental was adequate to satisfy the Tax Commissioner that it was fixed at a commercial rate, there may well have been benefits to PPI in allowing PEH the flexibility to provide money, when available, by way of payments not tied to the obligations under the lease.

[10]

(5) Conclusions - rental payments

Once these factors are taken into account, the proper conclusion is that PPI did not demonstrate that Mr Boros acted without reasonable care and diligence in failing to ensure that increased rental payments were made to PPI by PEH. For these reasons, the finding of breach of s 180(1) in relation to the rental payments under the first lease should be set aside.
There is, however, a second basis upon which this conclusion can be supported. As noted by the judge at [104], Mr Boros relied on the "top up payments" made to PPI as demonstrating that PPI did not suffer a loss. The judge found, at [109], that the arrangement to make such payments was "not established" and "the bare fact of payments by PEH to PPI does not support an implication of the particular arrangement alleged." It appears that the judge required that to take the payments into account Mr Boros had to establish that the payments were made as "a set off against rental liabilities".
It may be accepted that there was no such "arrangement", if only because neither Mrs Page (as the sole shareholder of PPI throughout the relevant period) nor Mr Boros (during the period when he was the director) believed that there was any obligation on PEH to pay an increased rental. The point is rather that the payments were apparently made to satisfy particular needs of PPI for cash. However, in the absence of any evidence to the contrary, it may reasonably be inferred that PPI's needs for cash would have been lowered by whatever amount extra was paid by way of rental, so that the additional payments would have been lower and the rental higher. For the reasons explained above, this was largely an accounting exercise. The fact that PPI received additional payments from PEH of approximately $1.4 million during a period when the unpaid rental amounted to less than $500,000 demonstrates that there was in fact no loss suffered by attributing these payments to some other "arrangement" rather than to a rental obligation under the lease or by way of substitution for increasing the rent. It follows that, even if there was negligence on the part of Mr Boros in not ensuring that an increased rental was paid by PEH to PPI, PPI has failed to demonstrate that it suffered a loss.
Although the judge referred to a schedule of payments as having been admitted only as a submission, the bank records which supported the making of the payments were in evidence and were in evidence before this Court.
On either of the bases set out above, the conclusion that PPI demonstrated a breach of s 180(1) of the Corporations Act, entitling it to compensation did not establish a loss of $457,280 as found by the trial judge. Accordingly the judgment for PPI against Mr Boros must be reduced by that amount.

[11]

(1) Pleaded case

The uncontroversial facts were that PPI's purchase of the Punchbowl property in March 2001 was financed by a loan from the ANZ Bank in an amount of some $3.6 million. The Bank took a registered mortgage over the property. [10]
PPI pleaded that Mr Boros caused the total amount secured by the mortgage to increase to approximately $8.5 million as at 22 November 2016 and caused PPI to secure loans and facilities for entities other than PPI. [11] Ironically, the particulars to that claim identified an amount in excess of $5.4 million being attributed to PPI's own loan facility. However, facilities of PEH and Pages Sales Pty Ltd were also identified, although only $200,000 was then secured on account of a single PEH facility.
No claim for breach of duty by securing the loan facilities of PEH and Pages Sales was pursued. Rather, a separate claim was raised by reference to an increase of $1,705,000 on 10 March 2016 in PPI's indebtedness to the Bank. The indebtedness was said to have increased from $3.86 million to $5.565 million. Accordingly, to the extent that the property secured a debt of some $2.84 million owed by Pages Sales, no claim was pursued. The basis of the claim was that the bulk of the increase in PPI's facility was used to repay the balance owing by PEH to the Bank under PEH's asset finance facility. [12] The pleading as to the liability of Mr Boros was identified as follows: "119. By causing the ANZ to draw $1,658,931.43 against PPI's facility and using those funds to repay the debt then owed by PEH to the ANZ, the first defendant contravened his statutory director's duties referred to in paragraphs 45(b) and 45(c) above. Particulars (a) In increasing PPI's indebtedness and liability to ANZ Bank, the first defendant did not act in the best interests of PPI. (b) In increasing PPI's indebtedness and liability to ANZ Bank, the first defendant caused a detriment to PPI. (c) The first defendant used his position as the director of PPI to gain an advantage for PEH and, indirectly, himself. 120. By causing the ANZ to draw $1,658.931.43 against PPI's facility and using those funds to repay the debt then owed by PEH to the ANZ, the first defendant breached his fiduciary duties referred to in paragraphs 46(a) 46(c) and 46(d) above. Particulars (a) The first defendant did not act in good faith and in the best interests of PPI. (b) The first defendant preferred the interests of PEH, the third defendant, and his own interests, over the interests of PPI. (c) The first defendant failed to avoid a conflict of interest in his dealings with the ANZ between his own interests and those of PPI."
The primary elements of Mr Boros' defence were as follows: "116A. Further, the first defendant refers to and repeats the allegations in paragraph 82A above and say further: a. From about 1999 until about 2014, Phire conducted the trading operations of the Pages Group of companies; b. On 9 September 2015, voluntary administrators were appointed to Phire; c. On 5 November 2015, a deed of company arrangement was entered into by Phire; d. Following the appointment of voluntary administrators to Phire, the ANZ Bank required the Pages Group of companies to commence paying down their facilities, which resulted in a strain on the cashflow of the business; e. As a result of, inter alia, the appointment of voluntary administrators to Phire, the instalments required to be paid under the deed of company arrangement entered into by Phire, and the ANZ Bank's decision referred to in the preceding subparagraph (d), Mr Boros decided to reorganise the banking facilities held with the ANZ Bank; f. Whilst the Cash Advance Facility, which replaced the Commercial Fixed Rate Bill Facility, was increased by $1,705,000.00 under the terms of the ANZ Facility Letter dated 10 March 2016: (i) The increase was applied by the ANZ Bank to repay the balance owing by PEH under its Asset Financial Facility and did not result in any additional funds being advanced by ANZ Bank. (ii) As PPI was a guarantor of PEH's facilities including the Asset Financial Facility and PEH was a guarantor of PPI's facilities, including the Cash Advance Facility, both PPI's and PEH's combined liabilities (as principal and guarantor) remained the same. (iii) As the ANZ Bank was prepared to accept interest only repayments on debt for which PPI was a borrower, this enable a reduction of cash outlays from the business of approximately $100,000 per month; (iv) The restructuring of the ANZ facilities as referred to above enabled the Pages Group of companies to reduce monthly recurring costs to ANZ Bank by $100,000.00 and to continue to operate."
There is no need to refer to par 82A referred to in the chapeau to par 116A. Mr Boros' further responses in his affidavit were summarised by the trial judge in passages set out below.

[12]

(2) Reasoning of trial judge

In March 2016 PPI increased the limit of its borrowing facility with the ANZ Bank by an amount of $1,705,000. The increase allowed PPI to pay out a separate facility involving PEH and the ANZ Bank by payment to the bank of an amount of $1,658,931.43. PPI claimed that Mr Boros, as director of PPI, breached his duty to PPI in authorising the payment on behalf of PEH. The judge's conclusion was expressed in the following terms: "[124] In any event, I am satisfied that Mr Boros breached his fiduciary duty in respect of this transaction. Mr Boros at least breached the rule against conflict of duty and interest, since he had a real and sensible conflict between his duty owed to PPI and his substantial economic interest in PEH in determining whether an additional borrowing should be made by PPI, in which he had no economic interest, and then applied to reduce the liability of PEH in which his associated entities had a significant interest. That transaction had the obvious capacity to (and did) advantage PEH at PPI's expense, by imposing additional interest obligations on PPI and reducing PEH's interest obligations."
With respect, there is an element of artificiality involved in this reasoning. As Mr Boros asserted in his evidence which was accepted by the trial judge, the operation of the group needed to be considered as a whole. Indeed, immediately before reaching the conclusion set out above, the judge expressly recognised that it was "not self-evident that the transaction was not in PPI's interests, and that PPI did not obtain a commercial benefit from funding PEH in which it had a substantial interest." [13]
The judge also noted a separate matter which had originally constituted a claim by PPI of breach of duty, but which was not pursued. That matter provided important contextual material for considering the 2016 dealing. The judge explained: "[115] … In his affidavit dated 30 January 2018, Mr Boros referred to PPI's Fixed Rate Commercial Bill Facility with ANZ which he characterised as 'part of the package of cross-collateralised facilities advanced by ANZ to the Pages Group of companies'. He referred to a letter of offer dated 22 April 2009, by which ANZ renewed the Page Group facilities totalling $9,933,500 comprising $4,314,000 advanced to PEH; $1,519,500 advanced to Phire and $4,100,000 advanced to PPI, and to the securities provided in that respect. PPI no longer presses the claims for any breach of duty arising from these matters, which are now relied on only as background to other pleaded claims."
There was evidence of the package of cross-collateralised facilities. No doubt each company in the group had its own assets, but the land from which the business operated appears to have constituted the major fixed asset against which the bank obtained security. The land was owned by PPI. The evidence did not reveal that PPI had any source of funds by which to pay interest or pay down debt other than the income generated by the businesses operated by the companies in the group, including rental from PEH for the leased premises.
As to the transactions in March 2016, the judge set out Mr Boros' evidence and submissions in the following passages: "[118] Mr Boros' evidence, in his affidavit dated 30 January 2018, was that, following the appointment of a voluntary administrator to Phire, he was informed by ANZ that it was no longer willing to advance further cash to the Pages business and that the Pages Group companies must commence paying down their facilities, resulting in a significant strain on the cashflow of the business …. He refers to steps that he took to reorganise the companies' facilities with ANZ, with effect that PPI's Cash Advance Facility, which replaced an earlier Commercial Fixed Rate Bill Facility, was increased by $1,705,000 from $3,860,000 to $5,565,000. Mr Boros recognised that that increase was applied 'to repay the balance owing by PEH under its Asset Finance Facility' …. Mr Boros contended (in evidence admitted as submission only) that PPI's and PEH's combined liabilities as borrower and guarantor to ANZ remained the same, because PPI was a guarantor of PEH's facility under the Asset Finance Facility …. That submission did not recognise that, whether or not the transaction affected the extent of PPI's liability as guarantor, it significantly increased the principal amount to which PPI was liable and the interest costs which it incurred, and significantly reduced the amount [for] which PEH was liable and the interest payable by it to the possible disadvantage of PPI and the plain advantage of PEH. Mr White points out that submission also did not recognise other legal and practical differences between a debt owed as a principal and a contingent liability as one of several co-guarantors, including a right of contribution from the others for any call made on a guarantee. Mr Boros' evidence, also admitted with a limiting order under s 136 of the Evidence Act as submission, was that the increase in PPI's loan benefited it for several reasons. That is not an answer to the claim brought by PPI against Mr Boros alleging a breach of the no conflict rule in respect of the transaction, which I address below. [Emphasis added.] [119] Mr Boros was cross-examined as to the increase in PPI's liability and accepts that he had no recollection of telling Mrs Page of that matter (T365) and his evidence was that the reduction of the debt in PEH was determined by Ernst & Young, the chief financial officer of PEH and ANZ to ensure that PEH did not become insolvent, and this allowed the Pages Group to reduce its monthly repayments to ANZ (T366)."
The passage at [119] effectively denied Mr Boros the protection for which he had contended on the basis that the sole shareholder of PPI had approved or ratified the expenditure of the loan moneys to pay down PEH's debt: neither prior approval nor subsequent ratification had been sought. The italicised passages in [118] will be addressed shortly.

[13]

(3) Legal principles

The position of a director of one company in a group of companies has been considered in a number of cases addressing the duty to act in good faith and for a proper purpose (both at common law and pursuant to the Corporations Act, s 181) and not to use the position as director improperly to gain an advantage for the director or someone else, or cause detriment to the corporation (s 182). However, in the present case the judge did not identify a breach of those provisions, but rather relied on the general law fiduciary duty, stating: "[123] PPI contends that Mr Boros breached the statutory duties that he owed to PPI under ss 181-182 of the Act in respect of this transaction. It is not necessary to determine whether a contravention of s 181 of the Act is established, given the finding of breach of fiduciary duty that I reach below. I also recognise that is not self-evident that the transaction was not in PPI's interests, and that PPI did not obtain a commercial benefit from funding PEH in which it had a substantial interest. It is also not necessary to determine whether the pleaded claim against Mr Boros under s 182 of the Act is established. I recognise that PEH, and indirectly its shareholders including PPI and companies associated with Mr Boros and Mr Thatcher, obtained an advantage from reduction in PEH's debt to ANZ, and it was arguably an improper one given the conflict of duty and interest which I find below. On the other hand, PPI has not shown that its own interests as a shareholder in PEH were not served by the reduction in that debt, so far as it improved PEH's financial position."
The breach of fiduciary duty, as found at [124] set out at [59] above, derives from an abstract identification based on Mr Boros' shareholding in PEH. There was no finding that Mr Boros obtained an actual financial benefit from the loan made by PPI to PEH. Nor was there any finding that Mr Boros was motivated by self-interest in arranging the loan from PPI to PEH. It is necessary, therefore, to consider the manner in which the director of the principal shareholder in a group of associated companies should operate when making decisions affecting both its interests and interests of a subsidiary in which the director holds shares. As explained in Austin, Ford and Ramsey, Company Directors - Principles of Law and Corporate Governance: [14] "In respect of loans from the parent company to a subsidiary or the parent guaranteeing a loan to a subsidiary, it can usually be seen that the transaction is made in the interests of the parent since the financial return to the parent through dividends from the subsidiary may be enhanced by a transaction that adds to the subsidiary's resources." The trial judge accepted that that might be so in the present case. If that were all to be considered, the finding of breach of fiduciary duty would not have been made. Accordingly, the question is whether that result is altered because the director of the parent company has a financial interest in the partly owned subsidiary which benefits from the transaction.
In Walker v Wimborne, [15] Mason J stated: "The word 'group' is generally applied to a number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control. In such a case the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder in company B if that company is enabled to trade profitably or realize its assets to advantage. Even so, the transaction is one which must be viewed from the standpoint of company A and judged according to the criterion of the interests of that company."
In Northside Developments Pty Ltd v Registrar-General [16] a question arose as to whether a creditor could rely upon a guarantee from a third party. Noting that the creditor would ordinarily be put on inquiry in such a case, Brennan J observed: [17] "Of course, the circumstances may show that the giving of such a guarantee and supporting security … is for the company's benefit. For example, it may be for the benefit of solvent companies within a group to guarantee the liabilities of a holding company in order to benefit the guarantor companies as well as other members of the group."
Acknowledging these principles, Clarke JA and Cripps JA in Equiticorp Finance Ltd (In liq) v Bank of New Zealand [18] observed: "A particular difficulty arises when the directors of the particular company enter into the transaction on behalf of that company because they consider that the transaction is of benefit to the group as a whole and do not give separate consideration to the benefit of their company. It was this difficulty which faced Pennycuick J in Charterbridge. [19] He referred … to the submission of counsel for the company saying: '… Mr Goulding contended that in the absence of separate consideration, they must, ipso facto, be treated as not having acted with a view to the benefit of Castleford. That is, I think, an unduly stringent test and would lead to really absurd results, ie, unless the directors of a company addressed their minds specifically to the interest of the company in connection with each particular transaction, that transaction would be ultra vires and void, notwithstanding that the transaction might be beneficial to the company.' Having considered the competing contention his Lordship went on to say: '… The proper test, I think, in the absence of actual separate consideration, must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company.'"
Clarke and Cripps JJA noted they had "reservations" about the test so proposed, stating: [20] "The directors are bound to exercise their powers, bona fide, in what they consider is in the interests of the company and not for any collateral purpose. Whether they did so or not is a question of fact. The traditional approach of the courts to this question is best explained by Viscount Finlay's statement in Hindle v John Cotton Ltd [21] which was cited in Howard Smith Ltd v Ampol Petroleum Ltd: [22] 'Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon that question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye motive, possibly of personal advantage, or for any other reason.' … Accordingly there seems to us to be difficulties in substituting an objective test (How would an intelligent and honest man have acted?) for the factual question raised in the proceedings. … [I]t it would usually be possible to discern whether in deciding to take certain action for the benefit of the group the directors perceived, and were justified in their perception, that in so doing they were acting for the benefit of the particular company. On the other hand it may be possible to discern that the directors embarked on a course to support the group unconcerned about the detrimental effect of the action on the particular company or were prepared to sacrifice that company for the good of the other companies in the group."
In Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd [23] Bryson J noted that Charterbridge was not concerned with the liability of directors but the validity of the exercise of a corporate power. [24] Bryson J continued: "[185] … Except for its utility as an illustration from a different field it does not bear on the liability of directors for breach of fiduciary duty. The legal test which is established by authority is the judicial approach approved in Howard Smith and cited by the majority in Equiticorp Finance, in which the question is the state of mind of the directors and whether they acted honestly in the discharge of their powers in the interests of the company; if they acted for any other reason this constituted an abuse of the power conferred on them as directors. In my opinion the preferable view referred to by Clarke and Cripps JJA at 148 is the correct view, and the breach has no consequences if the transaction was, objectively viewed, in the interests of the company. In my opinion this is what principle requires. If directors take a company into a transaction in the interests of a group of which it was part, or of a parent company, or of a subsidiary company and what they did was, objectively viewed, in the interests of the company, they incurred no liability."
In The Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 9), [25] Owen J observed: "[4508] The test for ascertaining a possible conflict is objective. It is not necessary to establish fraud, dishonesty or bad faith: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 137. In order to assess whether or not there is a real or substantial possibility of conflict the court must adopt the position of the reasonable person looking at the relevant facts and circumstances of the particular case. Nonetheless, in the case of a company, a director may act with a personal interest even though the director has not freed his or her mind of that personal interest when so acting, provided that his personal interest was not the actuating motive. Rather, the actuating motive must be some bona fide concern for the benefit of the company as a whole or for fairness as between members: ASIC v Adler, [735] (Santow J). … [4512] One way of ascertaining whether the interest of the fiduciary is remote or insubstantial is to ask whether the interest is such that a reasonable person would think there was a real or substantial possibility of the fiduciary being swayed by it. In this way, tests for the identification of the 'interest' and for the 'possibility of a conflict' would be applied bearing in mind a similar rationale."
There is, as Owen J noted, overlap between general duties and the statutory obligations of directors: "[4383] This case is about alleged breaches of general law duties. The plaintiffs do not advance a cause of action based on the consequences of a breach of a statutory duty. The reason for tracing the legislative history is to show that the legislature has recognised, and not abrogated, the underlying principles on which directors' general law duties are based. It is important to bear this in mind because many of the authorities arise from alleged breaches of the statutory duties."
Further, as Deane J emphasised in Chan v Zacharia, [26] the equitable principle underlying the no conflict duty is: "…concerned not so much with the mere existence of a conflict between personal interest and fiduciary duty as with the pursuit of personal interest by, for example, actually entering into a transaction or engagement 'in which he has, or can have, a personal interest conflicting … with the interests of those whom he is bound to protect' (per Lord Cranworth L.C., Aberdeen Railway Co. v. Blaikie Brothers) or the actual receipt of personal benefit or gain in circumstances where such conflict exists or has existed."

[14]

(4) Application of principles

The nature of Mr Boros' interest in the transaction requires attention. It is of a kind identified by the Hon Paul Finn as "the indirect interest created through membership in a company." [27] The trial judge was alert to the fact that the test "must be applied realistically to a state of affairs which discloses a real conflict of duty and interest and not to some theoretical or rhetorical conflict". [28]
The trial judge described the conflict as "real and sensible" and involving a "substantial economic interest in PEH". [29] However, there are two aspects of this analysis which cast doubt on the conclusion. First, while Mr Boros held a 25% interest in PEH, PPI held a 50% shareholding. Secondly, there was no evidence, or no evidence relied upon by the trial judge, as to what benefit flowed to Mr Boros in practical terms from the 25% shareholding. If the group as a whole were found to be in financial trouble, the evidence did not reveal that the transaction (the loan to PEH) would not benefit the group and, therefore as Mr Boros asserted, PPI.
There was, thus, an element of imprecision in identifying any immediate detriment to PPI in the arrangement. The amount of the further draw-down on PPI's loan facility increased its liability as principal debtor to the Bank, but was not a "loss". The funds were provided to PEH as a loan or investment in an asset of PPI, namely its 50% owned subsidiary. The funds were used to pay down PEH's indebtedness to the Bank, which significantly reduced the monthly payments it had been making, with significant benefits to PPI in terms of the solvency of the business and likely improved returns as a shareholder of PEH. If it were proven to be a bad investment PPI would suffer a loss, but not because of a breach of a fiduciary duty owed by Mr Boros. On the other side of the record, there was no proof of a financial benefit to Mr Boros personally which he could be required to disgorge. There was a strong sense in which his interests and PPI's were aligned.
Groups of associated companies may operate in different ways. It is common practice for different subsidiaries to be created to operate discrete aspects of a business or, as in the construction industry, discrete projects. This was not so in relation to the Pages Hire business. There was a single integrated operation which was carried out by Phire (and later Pages Sales) using equipment, vehicles and other assets owned by PEH, held on a single set of premises owned by PPI and leased to PEH. There was a single financier of the group, ANZ Bank. Various financial facilities were established within the separate entities. Although there were changes in the facilities over time, they were "cross-collateralised", meaning that there was an interlocking network of guarantees involving all the companies and Mr Thatcher and Mr Boros. The consequence was that the discharge of liabilities of PEH from moneys borrowed by PPI from the Bank would not have had any effect on the contingent liability of Mr Boros as guarantor.
Mr Boros gave evidence (which was not contradicted so far as appears from submissions in this Court) to the effect that the group as a whole benefited from the change in the loan arrangements in March 2016 because the Bank accepted interest only payments on the loan to PPI, thereby reducing the group's monthly recurring costs by $100,000. This was accepted by the trial judge at [117]. The judge noted that "the transaction did not increase PPI's combined liabilities as principal and guarantor". However, in the course of cross-examination suggesting that, contrary to his written evidence, there had been no pressure from the ANZ Bank to restructure the finances in March 2016, Mr Boros stated that the arrangements in fact reduced the overall indebtedness of the group by $500,000. Mr Boros stated in his affidavit that, "[a]s the plaintiff was a guarantor of PEH's facilities including the asset finance facility (just as PEH was a guarantor of the plaintiff's facilities including the cash advance facility) both the plaintiff's and PEH's combined liabilities as borrower and guarantor to ANZ remained the same". Although the judge admitted this statement only as a submission, the fact was not in dispute.
What was in dispute, as noted by the judge at [118] in the passages emphasised in the extract set out above, was the legitimacy of treating the loan facilities as a single liability. Legally it was entirely correct to say that there were important distinctions between a debt owed as a principal and a contingent liability as one of several co-guarantors, including as to the availability of a right of contribution in the latter case; however, in the circumstances of the Pages Hire business, as described above, it was the practical consequences which were of significance. If the retail operating business undertaken by Pages Sales and PEH failed, it was likely that all of the assets, including the Punchbowl property, would be liquidated and each of the companies, including PPI, wound up.
In considering a breach of fiduciary duty, and to the extent that an objective test was to be applied to the conduct of Mr Boros, it was not demonstrated (and there was no finding) that treating the financial liabilities of the group as a consolidated liability was not commercially realistic. There was no finding that it was not undertaken in good faith. Mr Boros' evidence demonstrated that he had regard to the interests of PPI and PEH. For a business with liabilities to the bank of less than $9 million, a monthly reduction of the repayments of $100,000 (being $1.2 million over a year) must have been a significant benefit to the group as a whole in terms of its trading position. At least it was not demonstrated by PPI that that was not so.
The reasoning of the trial judge focused upon the structure of the group. Because Mr Boros was a director of two companies (PPI and PEH) but held shares indirectly in one (PEH), the reasoning suggested that any business relationship between the two companies which was not objectively more beneficial to PPI than to PEH would constitute a breach of fiduciary duty. Indeed, that appears to have been the underlying premise of PPI's claims with respect to rental income, the ANZ loan in 2016 and other aspects of the business which do not arise on the appeal. However, no authority was relied upon to support such a stringent statement of duty. The establishment of the corporate structure, which occurred when Mr Page was in charge, was based on the assumption that there would be commercial transactions between the members of the group, undertaken by common directors. These were not to be assessed by some fine appreciation of where the net benefit lay within the corporate structure.
Importantly, there was no finding by the trial judge that Mr Boros disregarded the interests of PPI. Such a finding would have required the rejection of his explanation for entering into the transaction: there was no such finding as to that.

[16]

D Failure to ensure that PPI failed to keep proper financial records

PPI alleged that Mr Boros had breached his obligations as a director under s 180 of the Corporations Act by failing to ensure that PPI's financial records were properly kept in accordance with s 286 of the Act. The judge noted: "[69] … PPI claims that it has suffered loss and damage and is entitled to compensation by reason of this contravention … but the only particularised loss and damage which is the subject of any evidence is the cost of engaging Ms Bateman to review the financial records of PPI and its related companies to ascertain PPI's true financial position."
The judge noted further difficulties with the claim, stating: "[75] During Mr White's oral closing submissions for PPI, I raised the need for PPI to identify, with greater clarity, the material complaints that were pressed as to the accuracy of the financial records of each of the companies (PPI, Sales, PEH and Phire) and said to found the contravention of s 286 of the Act."
Despite the fact that Mr Boros was self-represented, PPI was given leave at that late stage to particularise the complaints. That leave was availed of, but the results were still unsatisfactory and required further directions from the judge. The revised version of the schedule led to the judge to conclude: "[79] … It seems to me that the evidence on which PPI now relies does establish at least inconsistencies within the financial statements maintained by PPI, and also establishes a failure to keep financial records that presented a true and fair view of PPI's financial position."
That finding made no reference to the records of the other companies for which a director of PPI could not have been responsible. Nor did it deal with the responsibility of a director for other officers maintaining proper records. The judge returned at [88] to the director's responsibilities for ensuring compliance with s 286. This reasoning was not challenged on the appeal.
After rejecting Mr Boros' defences based on reliance on information supplied by others (s 189), the exercise of appropriate business judgment (s 180(2)), relief under ss 1317S or 1318, the judge turned to the question of PPI's loss. The loss claimed was noted as $200,101. The judge did not accept that the whole of that amount was recoverable as it plainly involved "a substantial amount of work directed to companies other than PPI". He noted that the evidence allowed no basis to allocate the amounts between those matters. The judge then concluded: "[98] … Little may turn on this, where the reasonable costs of Ms Bateman's reports would properly be recoverable as disbursements in the proceedings, where those reports were plainly relevant to and were read in the proceedings. I reach that conclusion notwithstanding that not all of PPI's legal costs may be recoverable in the proceedings, for the reasons noted below."
In a second judgment, delivered on 23 October 2020, [30] the judge returned to the question of Ms Bateman's fees. Mr Boros submitted that he should be required to pay 15% of Ms Bateman's costs: second judgment at [20]. He also submitted that "a substantial amount of her work was directed to other companies": second judgment at [21]. However, the judge accepted a submission by PPI identified in the following terms: "[21] PPI submits that it would not have been exposed to the significant costs of obtaining accounting evidence from Ms Bateman but for Mr Boros' failure to ensure that PPI complied with its obligations under s 286 of the Act to maintain proper accounting records. It seems to me that that is relevant to the costs of the proceedings, so far as it plainly made the task of leading expert accounting evidence more expensive for PPI than it would otherwise have been."
It was clear from this reasoning that the judge accepted that the costs of obtaining Ms Bateman's evidence were recoverable as costs of the proceedings and not on any other basis. However, the judge did not reject the proposition that time spent preparing accounts for other companies could not be charged against Mr Boros. Nor did he take into account the extent to which Ms Bateman's work went to claims which had been rejected. (Had he done that, he would not have included order 4.)
The intended operation of order 4 is not entirely clear. The order appears to assume that 60% of Ms Bateman's fees, assessed on a party and party basis will be covered by order 3, leaving any excess within the concept of "reasonable costs" of her engagement as an expert witness (as opposed to other aspects of her engagement), which may be recovered under order 4. If the justification for the order was a breach of duty on the part of Mr Boros, in ensuring that PPI maintained proper accounts over the six years prior to the commencement of the proceedings, it is unclear why PEH should bear any portion of those expenses.
As noted above, no ground in the amended notice of appeal was directed to this finding. Setting aside the costs orders should therefore be approached on the basis that such a step is sought as a consequence of success on the appeal. Accordingly, Mr Boros having been successful in challenging both elements of the claim which made up the substantive judgment against him, the costs order against him should be set aside. In so far as the judge intended the costs of Ms Bateman's reports, or a proportion thereof, should be recoverable as costs of an expert witness, the favourable order made at trial must also be set aside.
There being no notice of contention seeking to support the order on any different basis, and there being no claim for recoupment of any part of Ms Bateman's costs other than as costs of the proceedings, order 4 should be set aside so far as it relates to Mr Boros. Mr Boros will not be liable for any part of the costs of obtaining her evidence in circumstances where he is not liable for the costs of the trial.

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Judgment (18 paragraphs)

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