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[2011] NSWCA 109
Court of Appeal (NSW)
2011-03-23
Hodgson JA, Young JA, Whealy JA
Original judgment source is linked above.
HEADNOTE [THIS HEADNOTE DOES NOT FORM PART OF THE COURT'S JUDGMENT] This was an appeal from a decision of White J in litigation arising from the insolvency and liquidation of Buzzle Operations Pty Ltd, a company formed through the merging of six resellers of Apple products. The merger occurred on 13-14 September 2000 and, as the primary judge held, Buzzle was insolvent from at least 6 November 2000. Apple appointed receivers on 31 March 2001. In order for the six resellers to merge and transfer their stock to Buzzle, they had to receive permission from Apple who had a charge over the unsold Apple stock the resellers were transferring. Apple consented and entered into a new reseller agreement with Buzzle, taking a charge over Buzzle's assets. The merger deeds provided for repayment of the transferred assets by Buzzle to the resellers according to two time frames. With regards to the transfer of stock, Buzzle was required to make payment by no later than 31 October 2000. The remaining amount owed was to be paid according to cl 6.5(b) of the Merger Deeds: "Payment of the remaining Cash Component by Buzzle Operations to the Vendors will be deferred until the earlier of: (i) the float of Buzzle on ASX; or (ii) the directors of Buzzle forming the view on reasonable grounds that Buzzle Operations has adequate cash flows to pay amounts owing to all Vendors on a pro-rata basis or in accordance with the requirements of that Vendor to pay its creditors." Buzzle made four payments from October to December 2000 to Apple on behalf of the resellers. The first two, in October, satisfied the debt owed to the resellers for the stock portion of the assets. The second two, $1 016 827.64 on 6 November and $108 623.55 on 8 December, must have been, as the evidence demonstrated, for amounts to be repaid according to cl 6.5(b) of the Merger Deeds. When Buzzle encountered financial difficulties, the expertise of Apple's financial director, Mr James Likidis, was offered and he worked closely with Buzzle's CEO and two of its directors. The applicable law at all relevant times was the Corporations Law as the Corporations Act 2001 (Cth) had yet to come into force . There were two major issues on appeal:
Judgment 1HODGSON JA: The facts giving rise to this appeal and the issues it raised are set out in the judgment of Young JA, and I will not repeat them. I will also adopt abbreviations used by Young JA. 2I agree with the orders proposed by Young JA, and subject to what I say below, I agree substantially with his reasons. 3On the question of uncommercial transactions, I agree with Young JA that the primary judge was in error in stating, at [222], that Buzzle incurred no detriment from entering into the relevant transactions. I agree with Young JA that, for Buzzle to make a payment to Apple on behalf of Resellers, when Buzzle had no obligation either to the Resellers or to Apple to make such a payment and was in need of cash flow for its own operations, would amount to a detriment to Buzzle. 4In my opinion, evidence before the primary judge did establish that the events referred to in pars (i) and (ii) of clause 6.5(b) of the Merger Deed had not occurred when the payments in question were made, and did not occur at any later date. In my opinion, the words "in accordance with the requirements of that Vendor to pay its creditors" in par (ii) were merely an alternative to "owing to all Vendors on a pro rata basis"; and that for either of these alternatives to apply, the directors of Buzzle Limited had to form a view on reasonable grounds that Buzzle had adequate cash flow to pay the amounts in question. There was no evidence that the directors of Buzzle Limited ever formed that view, other than the actual making of the payments; and in my opinion, the evidence justified a conclusion that, even if such a view had been formed, it could not have been on reasonable grounds. 5In my opinion, the primary judge's conclusion as to satisfaction of s.588FB(1) of the Corporations Law was materially affected by this error, making it necessary for this Court either to reach its own view or to send the matter back for a re-trial, if this were otherwise justified. The evidence does not suggest any particular benefits to Buzzle of making the payments, other than such as might flow from assisting Resellers and/or discharging possible future liabilities. There was the detriment to Buzzle identified above. The transaction had benefits to the Resellers in that their debts were paid, and to Apple in that it received payment without having to pursue the Resellers. I do not understand any other relevant matter to be suggested. In all these circumstances, I would have been inclined to hold that the payments in question were uncommercial transactions. 6However, it is not necessary to reach a final view on this, because in my opinion Young JA is correct in holding that the defence under s.588FG(2) succeeds, for the reasons he gives. 7Turning to the other claim, for insolvent trading, the crucial issue is whether the directors of Buzzle were at material times "accustomed to act in accordance with the ... instructions or wishes" of Apple or Mr Likidis. 8I agree substantially with the reasons of Young JA for holding that no error is shown in the decision of the primary judge on this point. 9I agree that influence exercised on directors of a company by a mortgagee acting in its own interests, particularly if supported by contractual rights in its mortgage documents, would not generally constitute the mortgagee a shadow director. While in such a case the directors may on many occasions act in accordance with the instructions or wishes of the mortgagee, this will generally be so because the directors make their own decision that to do so is in the interests of the company, rather than because they defer to decision-making by the mortgagee on behalf of the company. In my opinion, the statutory formula contemplates the directors being accustomed to act in accordance with the instructions or wishes of a person, in the sense of treating those instructions or wishes as themselves being a sufficient reason so to act, rather than making their own decisions in which those instructions or wishes are merely taken into account as one factor, external to the management of the company, bearing on what is in the best interests of the company. 10However, in my opinion, a mortgagee could satisfy the statutory formula if it appeared that, at least for some decisions, the directors were treating the mortgagee's instructions or wishes as themselves being a sufficient reason so to act. In the present case, if it had been proved that the directors made one or more important decisions that were not in the interests of Buzzle, such as a decision to continue trading while insolvent, because Apple instructed or wished it to do so, that might have supported a conclusion that the directors were deferring to decision-making by Apple rather than making their own decisions in the interests of Buzzle. However, this was not proved; and in particular the primary judge at [319] explicitly did not find that the decision made in January for Buzzle to continue trading was influenced by any instruction or wish from Apple or Mr Likidis. 11YOUNG JA: This is an appeal from a decision of White J sitting in the Equity Division in complicated litigation concerning the validity of payments made to a creditor shortly before the first appellant company went into liquidation. 12There were a number of issues before the primary judge which occupied about 15 hearing days. The principal issue was whether a charge given by the first appellant to the first respondent was void. 13The primary judge found all issues against the appellants who have brought this appeal to challenge, some, but by no means all, of the primary judge's findings. In particular, it must be noted that the appellants accept the decision that the charge is not void. This acceptance has meant that the argument on some of the other aspects of the case has severely changed focus. 14The appeal came on for hearing on 21 March 2011 and lasted almost three days. Mr David Jackson QC with Mr LV Gyles SC and Ms J Shepard appeared for the appellants and Mr Bernard Coles QC, Mr C R C Newlinds SC and Ms R C Higgins appeared for the respondents. 15Mr Jackson put that the appellants' contentions were in two broad areas viz: A. Whether there had been uncommercial transactions, and B. Whether the respondents were liable to repay monies under s 588M of the Corporations Law (because they were directors involved in insolvent trading). However, these issues involved numerous sub-issues which will be discussed below. 16I have structured these reasons as follows: A. Background, non-contested facts and questions of credibility B. Uncommercial Transactions C. Insolvent Trading and related issues D. Other matters E. The result of the Appeal and proposed Orders.
A. Background, non-contested facts and credibility 17I will first set out the basic facts as found by the primary judge which, unless I note otherwise, are not challenged on appeal. I will endeavour to state the facts in the words used by the primary judge as he stated them so clearly. 18The appellants are Buzzle Operations Pty Ltd (in liquidation) ("Buzzle") (1 st Appellant) and its liquidator, Andrew Hugh Jenner Wily (2 nd Appellant). The respondents are Apple Computer Australia Pty Ltd ("Apple") (1 st Respondent), its finance director, Mr James Likidis (2 nd Respondent), Colin McIntosh Nicol and Scott Bradley Kershaw ("the Receivers") (3 rd and 4 th Respondents) who are the receivers appointed by Apple in reliance on its charge. 19Although the Receivers are still noted as respondents to the appeal, as there is no longer any challenge to the validity of the charge, there is no longer any challenge to their status or actions. 20It is convenient merely to refer to the two appellants as "the appellants" as they are both in the same interest. I will refer to the 1 st Respondent by the tag that I have given it in a previous paragraph. 21Buzzle was incorporated on 3 July 2000. It acquired the stock and businesses of six retailers (called Apple Resellers) of Apple Computer products. The Apple Resellers took shares in Buzzle's holding company, Buzzle Limited. I will refer to these people as "the Resellers". They expected that the merged business would be more profitable than the sum of the individual businesses. They intended that a short time after Buzzle had established the merged business, its holding company would be floated on the Australian Securities Exchange and shares would be issued to members of the public. 22The abbreviated names of the Resellers and the person who was their principal representative and usually their director on the Board of Buzzle are as follows: Choice Connections---Mr Donald Hartono Designwyse---Robert Kloester* GM Computer---George Mekrizis Mac's Place---Scott Thompson Manning Computer & Technology---David Ford Next Byte---Crawford Giles Status Graph---Lindsay McComb* (The two asterisked persons were not appointed as one of the team of five directors appointed on incorporation). 23Next Byte pulled out of the proposed Merger on 27 July 2000 and Mr Giles resigned from the Board. 24Mac's Place had serious financial troubles and it was sold to Mr Wing Liu. Mr Liu and Mr Kloester became directors of Buzzle in the place of Messrs Giles and Thompson. 25Each of the Resellers had entered into Reseller Agreements with Apple pursuant to which the Reseller purchased stock on credit. Each Reseller had given a charge over its assets to Apple. As part of the merger, the Resellers transferred their stock, plant and equipment and the goodwill of their businesses to Buzzle. The stock transferred consisted partly of stock purchased from Apple and partly other stock. Each of the principals of the companies whose businesses were merged into Buzzle became a director of Buzzle but there were few board meetings. 26Apple's consent to the merger was needed because Apple had a charge over the assets to be transferred to Buzzle. The Resellers were also dependent on Apple's agreeing to enter into a Reseller Agreement with Buzzle. Apple consented to the merger. It entered into a Reseller Agreement with Buzzle pursuant to which it provided stock on credit. It took a charge over Buzzle's assets. 27The proposed float did not proceed. Buzzle's business failed. Apple appointed receivers on 31 March 2001. On 28 November 2001, an application was filed for the winding-up of Buzzle. On 15 February 2002, an order was made for Buzzle to be wound up. Andrew Hugh Jenner Wily was appointed liquidator. 28I should note here that as the relevant events occurred before the Corporations Act 2001 (Cth) came into effect, the governing legislation is the Corporations Law. However, in most cases the provisions are identical to the corresponding sections of the current legislation 29At first instance, the appellants (then the plaintiffs) contended that Apple was closely involved in the merger. The merger was implemented on 13 and 14 September 2000. The charge Buzzle gave Apple is dated 14 September 2000. The appellants contended that the charge was void pursuant to s 267(1) of the Corporations Law. Section 267 of the Corporations Law as it existed in 2000 corresponds to s 267 of the Corporations Act 2001 (Cth) as presently in force. 30The consideration for the transfer of the stock, plant and equipment and businesses of each of the Resellers to Buzzle was the payment of cash and the issue of shares in Buzzle Limited, Buzzle's holding company, which was the company whose shares were proposed to be listed on the stock exchange. The amount of cash to be paid depended upon valuations of each Reseller's stock, plant and equipment. Buzzle was required to pay for stock acquired from each Reseller by no later than 31 October 2000. That obligation applied to all stock acquired by Buzzle. 31The remaining cash component of the consideration was deferred until the earlier of the float of Buzzle Limited on the stock exchange, or its directors "forming the view on reasonable grounds that Buzzle had adequate cash flow to pay amounts owing to all Vendors on a pro rata basis or in accordance with requirements of that Vendor to pay its creditors" (Merger Deeds clause 6.5). Buzzle also agreed with Apple, for its benefit, to repay all amounts owing by it to the vendors pursuant to clause 6.5(a) of the Merger Deeds by 31 October 2000. 32Clause 6.5(b) of the Merger Deeds is said to be significant, so I will set it out in full. The clause deals with Buzzle's obligations to make payments to the Resellers. Sub-clause (a) deals with that part of the Cash Component of the payments as is attributable to Stock and then (b) is as follows :- "(b) Payment of the remaining amount of the Cash Component by Buzzle Operations to the Vendors will be deferred until the earlier of: (i) the float of Buzzle on ASX; or (ii) the directors of Buzzle forming the view on reasonable grounds that Buzzle Operations has adequate cash flows to pay amounts owing to all Vendors on a pro-rata basis or in accordance with the requirements of that Vendor to pay its creditors." 33Apple issued invoices on 16 October 2000 to Buzzle for the value of the Apple stock which the Resellers had transferred to Buzzle. This value was established by valuations as part of the merger. Each Reseller was entitled to be paid by Buzzle by no later than 31 October 2000 for the value of the stock transferred to Buzzle. The value of Apple stock transferred by the Resellers to Buzzle was $6,298,139. Each of the Resellers was indebted to Apple for stock supplied to the Reseller. At the time of the merger, the Apple Resellers owed Apple $15,242,925. At the same time Apple debited Buzzle with $6,298,139, it credited the Resellers with their respective proportions of the value of the stock each had transferred to Buzzle. Thus, the combined debts owed by the vendor Resellers to Apple were reduced to $8,944,786. 34Between 3 October 2000 and 8 December 2000, Buzzle made four payments to Apple on behalf of the vendor Resellers. It paid $1,595,000 on 3 October 2000, $2,168,088.71 on 31 October 2000, $1,016,827.64 on 6 November 2000, and $108,623.55 on 8 December 2000. All of these amounts were credited by Apple to the vendor accounts. None were credited to Buzzle's account with Apple. In other words, none of the payments reduced the debt payable by Buzzle to Apple for the Apple stock valued at $6,298,139. Nor were any of the payments credited against the cost of goods supplied by Apple to Buzzle after 13 September 2000. 35This appeal focuses on the payment of 6 November 2000 ("the November Payment") and that of 8 December 2000 (the "December Payment"). 36The liquidator contended that, prior to the payment of 6 November 2000, all of the debts then due and payable by Buzzle to the vendors for non-Apple stock had been satisfied. He contended that the only outstanding debts owed by Buzzle to the vendors which might be satisfied by the payments made on 6 November 2000 and 8 December 2000 related to the value of the plant and equipment acquired by Buzzle from the vendors. But those debts would only be payable at the time of the float, or if the directors of Buzzle Limited formed the view on reasonable grounds that Buzzle had adequate cash flows to pay those amounts, or if the payments were needed by a vendor to pay its creditors. The appellants said that the November and December Payments by Buzzle to Apple did not discharge any debt then due and payable by Buzzle to the vendors. 37The appellants contended that, as at 6 November 2000 and 8 December 2000, Buzzle was insolvent (within the meaning of s 95A of the Corporations Law) and that the payments on those dates were uncommercial transactions within the meaning of s 588FB of the Corporations Law. The liquidator sought an order pursuant to s 588FF directing Apple to pay to Buzzle the amounts of the November and December Payments plus interest. 38Apple disputed that the transactions were uncommercial transactions. It also relied on s 588FG and said that it received the payments from Buzzle in good faith, it did not believe Buzzle to be insolvent, it had no reasonable grounds for suspecting that Buzzle was insolvent at the time or would become insolvent, and that a reasonable person in its circumstances would have had no grounds for so suspecting. 39Apple's standard credit terms were 45 days. Apple did not insist on payment of any of its invoices prior to 1 December 2000. The evidence did not establish how and when this arrangement was made, but it was common ground that such an arrangement had been made. The parties conducted themselves on the basis of such an arrangement. 40As at 30 November 2000, Buzzle owed Apple $23,965,078. This included the debt of $6,298,139 for Apple stock acquired by Buzzle from the Resellers. No payments had been made prior to this date and no debt to Apple had become due and payable. Apple calculated that the debt payable as at 1 December 2000 was $9,731,346.88. On 1 December 2000, Buzzle paid Apple $4,300,000. After that payment and after allowance for various credits (which probably included rebates) Apple calculated that as at 1 December 2000, it was owed by Buzzle $4,770,470.23 which was due and unpaid. 41On 8 December 2000 a further amount of $438,496.84 became payable. The next payment was not made until 15 January 2001 in an amount of $5 million. However, over $11 million had become due and payable by 5 January 2001. 42The appellants contended that, by and from 1 January 2001, Apple and its finance director, Mr James Likidis, were "shadow directors" of Buzzle. That is, the appellants alleged that the directors of Buzzle were accustomed to act in accordance with the instructions or wishes of Apple and Mr Likidis, otherwise than by merely acting on advice given by them in the proper performance of functions attaching to their business relationship with the directors of Buzzle (para (b)(ii) of the definition of "director" in s 9). 43The appellants also alleged that Buzzle was insolvent at all times after 1 January 2001. They further alleged that between 1 January 2001 and 30 March 2001 Buzzle incurred debts of $12,327,256 which remained outstanding when Buzzle's liquidation commenced. Of this amount $5,776,048 was due to third party creditors, that is, to creditors other than Apple. 44The appellants further said that between January and March 2001 Buzzle incurred debts to Apple, which remained unpaid, of $6,551,208. The appellants further said that Apple and Mr Likidis contravened s 588G of the Corporations Law by failing to prevent Buzzle from incurring debts after 1 January 2001 when it was insolvent and sought declarations to that effect. The liquidator claimed both amounts from Apple and Mr Likidis as compensation under s 588M. 45Apple and Mr Likidis denied that either was a shadow director of Buzzle. If either was a shadow director of Buzzle, there was an issue as to whether Buzzle was insolvent for the whole of the period from 1 January 2001, and as to the time at which Apple and Mr Likidis became aware that there were grounds for suspecting that Buzzle was insolvent or a reasonable person in a like position would have been so aware (ss 588G(1) and (2) and 588H(2)). Apple and Mr Likidis contended that Buzzle had not been shown to be insolvent prior to 16 February 2001. 46There was also an issue as to the quantum of debts incurred by Buzzle during this period which were unpaid. The respondents contended that the liquidator did not prove what debts were incurred between 1 January and 31 March 2001. There was also an issue as to how payments were to be taken to have been appropriated, that is, whether to debts incurred in that period or to earlier debts. 47Between 5 January 2001 and 30 March 2001, Buzzle made payments to Apple totalling $11,842,128. The appellants claimed that these payments were unfair preferences made when Buzzle was insolvent and sought to avoid these payments under s 588FF. The payments were made more than six months before the relation-back day of 28 November 2001. 48The appellants relied upon s 588FE(4) pursuant to which an insolvent transaction is voidable if entered into with a related entity of the company within four years of the relation-back day. The appellants contended that Apple was a related entity of Buzzle because it was a shadow director. As well as raising questions about whether Buzzle was insolvent at the time and whether the payments were received by Apple in good faith when it had no reasonable grounds for suspecting that Buzzle was insolvent, this claim depended upon the plaintiffs establishing that the Apple debts paid during this period were wholly or partly unsecured. 49Apple lodged a proof of debt in the liquidation of Buzzle in the amount of $12,003,500. It pleaded that that proof had not been adjudicated upon and it sought to set off such sum as might be found to be owing to it by Buzzle against any amount for which Buzzle would otherwise be entitled to recover from it, other than compensation under s 588M for insolvent trading. 50Apple and Mr Likidis also pleaded that if either of them was found by the Court to have been a director at any time of Buzzle and either of them had a consequential liability to the plaintiffs, then they ought fairly to be excused from such liability pursuant to s 1318 of the Corporations Law. 51I should note here that there was an issue before the primary judge as to whether any preference was involved with any of these payments. That issue was decided in favour of Apple and there is no appeal. 52The primary judge considered that it was convenient to deal with the issues in the following order and determined them as noted in brackets:
B. Uncommercial Transactions 68The debate focuses on the two payments which I have designated the November Payment and the December Payment. 69Section 588FB of the Corporations Law provided: "(1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to: (a) the benefits (if any) to the company of entering into the transaction; and (b) the detriment to the company of entering into the transaction; and (c) the respective benefits to other parties to the transaction of entering into it; and (d) any other relevant matter. (2) A transaction may be an uncommercial transaction of a company because of subsection (1): (a) whether or not a creditor of the company is a party to the transaction; and (b) even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency." 70Buzzle contends that the November and December payments were uncommercial transactions. 71Mr Jackson set out four sub-issues to be considered under this head. I will first deal (i) with the background facts and contentions and then with those four sub-issues namely: (ii) Whether Apple gave full consideration for the Payments and the significance of full consideration; (iii) The significance of the fact that some obligations of the Resellers to Buzzle were not payable unless a contingency occurred; (iv)The relevance of the situation of non-Apple Creditors; and (v) Miscellaneous matters. I will also need to deal with (vi) the defence of "good faith". 72(i) The primary judge held that at 3 November 2000, there were monies owing to Apple from both the Resellers for pre-merger transactions and from Buzzle itself. 73The primary judge noted that it appeared from the bank statements of both Buzzle and Apple that the payment of $1,016,827.64 was made to Apple's bank account on 6 November with a direction from Buzzle " Old co. Balance pay ". He held, for reasons set out in [218] that it was clear that the words " Old co. Balance pay " was intended by Buzzle to mean, and was understood by Apple to mean, that the payment was for the balance of the debts owed by the old companies, that is the Resellers, to Apple. Apple was entitled and obliged to appropriate the payment as directed by the payer. 74In the case of the payment of $108,623.55 made on 8 December, there was an express appropriation by Buzzle that the payment should be credited to the debt owed by Mac's Place (one of the Resellers) to Apple. Apple was bound to act on that appropriation. 75After reviewing the financial circumstances of Buzzle and the Resellers, the primary judge concluded at [220] that: it cannot be said that a reasonable person in Buzzle's circumstances would not have entered into the transaction having regard to the benefits to it from doing so, the detriment to it from doing so, and the respective benefits to the other parties to the transaction. Whilst Buzzle did not then owe to the vendor Resellers debts which were immediately due and payable in the amount of $1,016,827.64, it did owe debts to the vendors of more than that amount, albeit debts that were not immediately payable. In paying that sum it reduced its debts to the vendors. If it had not, the vendors would have been liable to reimburse it for the moneys which it paid on their behalf. 76In addition, the primary judge found at [223] that Apple had no reasonable grounds to suspect Buzzle's insolvency at the date of either payment. Mr Newlinds put that a significant factor which reinforced the view of the primary judge was that, right from the beginning of the communication of the idea that the Resellers should merge and float, there was an undertaking by the major Resellers that they would make good any deficiency in cash flow by an injection of up to two million dollars. 77These undertakings were still being repeated in December 2000. 78The undertakings were never realised and the primary judge at [149] held that they were not binding. However, I agree that the significant matter is that they were made and Apple appears to have given them some credence. 79(ii) The primary judge held at [221] that in his view, as the December payment was for full consideration, it was not an uncommercial transaction. 80The appellants challenge the finding that the December payment was made for full consideration. Their principal support for this is that the payment to Apple was made in respect of monies which were not yet due and payable between the Resellers and Buzzle and, indeed, may never have become payable. These matters are dealt with in detail below in B(iii). 81The challenge here is on both fact and law. The challenge to fact relies on the payments not yet being due and payable (addressed below in B(iii) at [93] et seq). So far as the point of law is concerned, the appellants cite the obiter dictum of Giles JA, with whom McColl and Hodgson JJA agreed, in Lewis v Doran Constructions Pty Ltd [2005] NSWCA 243; 54 ACSR 410 at [136]. His Honour pointed out that s 588FB was focused on the balancing of benefit and detriment only in the broadest sense involving undervalue. 82Even in statutes aimed at taxing gifts, it has been held that, when considering "full consideration", a court is not looking for exact equivalents. Full consideration is given if there is a fair equivalence between what is given and what is received, see eg Perpetual Trustee Co Ltd v Commissioner of Stamp Duties (1970) 72 SR (NSW) 453 . 83In the instant case, it is significant that a reasonable person of business would not necessarily be thinking in terms of the corporate veil but would act on the basis that there was a very real link between the Resellers' obligations to Apple and those of Buzzle and that relief of the Resellers' obligations to Apple would assist Buzzle's operations. 84However, whatever weight one gives to this dicta in Lewis v Doran , the fact that a transaction is assessed at being for full value or full consideration takes the parties a fair way along the track in avoiding their transaction being termed "uncommercial". 85Thus, I can adopt the submission that the primary judge overstated the position in finding that full consideration renders the transaction commercial, but I do not consider that that necessarily requires review of his decision. Buzzle satisfied a genuine debt albeit one that may not yet have been payable. 86However, even if so far as Apple was concerned the transaction was for full consideration, if the transaction was not so on Buzzle's part and was to Buzzle's detriment, that would be a significant factor supporting the conclusion that a reasonable person would not have entered into the transaction because of the detriment that it would cause to the company. I will return to this thought in B(iii). 87(iii) Buzzle contends that, at the time these payments were made, it owed no debt to the Resellers that had become due and payable. 88The primary judge at [207] said that the total amount owed by Buzzle to the Resellers for the stock it acquired on the merger was $10,826,511.43. This included both Apple and non-Apple stock. The debt for $6,298,139.07 for Apple stock became payable by Buzzle to Apple either by an implied assignment or novation. This left a debt owed for stock of $4,528,372.36. 89The Buzzle organisation was documented inter alia by six Merger Deeds between Buzzle, Buzzle Ltd and each of the Resellers. 90The Merger Deeds provided for an adjustment of the purchase price for the assumption by Buzzle of 66 per cent of the entitlements of employees of the vendor Resellers for long-service leave and other future entitlements. The Merger Deeds were silent as to whether the reduction of the purchase price in respect of such entitlements should be allocated to stock or other parts of the cash component of the purchase price. 91Taking into account adjustments about which there was no dispute, the primary judge held at [208] that, after credit for the debt assigned or novated to Apple and credit for the amount of employee entitlements, the amount owed by Apple to the vendor Resellers under clause 6.5(a) of the Merger Deeds, payable to the vendors by 31 October 2000, was $4,027,127.36. 92Prior to the two impugned payments, Buzzle made payments to Apple on behalf of the Resellers totalling $4,113,000. There was thus an overpayment of about $95,961 over and above what was due under obligations other than (a) two sums of $44,941.80 owing to Choice Connections and $41,187.80 due to Mac's Place. These two cancel out the overpayment. Thus the remaining obligation from Buzzle to the Resellers was totally with respect to the obligation under cl 6.5(b) of the Merger Deeds. 93The appellants contend that this clause provides a challenge in fact as to whether the payments were for full consideration. The payments could only be in respect of cl 6.5(b) obligations and these were not then payable and, indeed, might never become payable as they could only have reduced amounts owed with respect to non-stock assets and those amounts were contingent on certain events which might never happen. 94The primary judge rejected this and, finding the payments were for full consideration at [221], said at [222] that the only reason for the payments being impugned was that Buzzle was insolvent at the time the transactions were entered into. He continued: It is clear that the fact that a transaction is entered into by a company when it is insolvent is not itself sufficient to make the transaction an uncommercial transaction within the meaning of s 588FB. In terms of s 588FB, the benefits to Buzzle of entering into the transaction was that it reduced its debts to the vendors, albeit that the debts had not then become due and payable. Buzzle, as distinct from its creditors, incurred no detriment from entering into the transactions. 95The appellants challenge this statement. They say that, at the time, Buzzle was insolvent. Furthermore, it owed large amounts to outside creditors and depriving itself of funds to pay some of these was itself a detriment. I would agree. I will take up this matter again in B(iv). 96Again the appellants put that Buzzle's failing computer system, Navison, was in urgent need of attention and funds were needed to fix it. A reasonable person in Buzzle's position would not have diverted funds to pay another person's debts where at best there would be an offset of a contingent debt which might not ever be payable. 97Mr Jackson puts that Buzzle needed ready cash to fix the Navison system and that no reasonable person would have paid a "debt" that was not yet payable instead of meeting priority expenses. 98In my view, that conclusion does not necessarily follow. Buzzle was dealing principally with Apple products. A reasonable person might well take the view, especially when the Resellers were liable to pay Apple themselves, that it was appropriate to make the December Payment to Apple. 99This view is reinforced by the fact that Buzzle's accounting systems were in chaos as a result of its failed Navison computer system so that no-one would know whether the directors of Buzzle could make a certification as required by cl 6.5(b) of the Merger Deeds. 100However, the principal submissions made on this issue focus on cl 6.5(b) of the Merger Deeds and rely on the provision that it was only on the pre-condition that Buzzle's directors formed the view on reasonable grounds that Buzzle had adequate cash flows to pay the Resellers, that Buzzle was obliged to pay certain monies to them. 101Mr Jackson puts that, although there was no express finding on the point, it was clear from all the evidence that the Buzzle directors could not have formed the relevant opinion at the time. Further, as this condition might never be fulfilled, there was no obligation of Buzzle to pay monies to Apple and thus, it cannot claim that there was full consideration. 102It must not be overlooked that cl 6.5(b) ends with the words, "or in accordance with the requirements of that Vendor to pay its creditors". This pre-condition was likely to become the governing one in November/December 2000 as one Reseller could not pay its debts and Buzzle had become insolvent. 103Mr Newlinds, who mounted some argument for the respondents on this aspect of the case, put that this submission of Mr Jackson's was really a furphy. The Resellers still owed Apple for their stock, etc. The monies paid over to Apple by Buzzle were on the Resellers' account and reduced the Resellers' debt to Apple. 104He puts that the Merger Deeds did not affect the fact that each Reseller owed debts to Apple and that Apple could seek to recover them whenever it wished: Buzzle merely made over with cash to discharge some of this indebtedness. 105In what at first appeared to be over exuberance, Mr Newlinds went further and put that what I have called the November and December payments were not payments by Buzzle to Apple at all, indeed not even on their own transactions, let alone uncommercial transactions. 106However, as appears later, this submission was meant seriously and is dealt with in B(vi). 107Mr Newlinds relies on the primary judge's finding at [215] viz: 315 There is nothing to indicate that anyone at Apple turned his or her mind to the question of what debts owed by Buzzle to the vendor Resellers were then due and payable and what debts were deferred until the float, or until the directors of Buzzle Limited considered that the company had adequate cash flows to make the payments, or that the vendors needed to receive payments in order to pay creditors. There is no evidence that Apple had the means of knowing the answer to that question. There is no evidence that Apple considered or had information from which it could have determined, for example, what payments the vendor Resellers might have made on behalf of Buzzle after merger. 108The appellants challenge this. They say that, whilst Apple was not a party to the Merger Deeds, the relevant documents were reviewed by its officers and their lawyers and the Deeds' terms, at least in outline, were well known. Mr Likidis even illustrated their effect in a flow chart. 109I do not consider that the factors examined in this section of my reasons mean that the appeal on this aspect of the case needs to be allowed. 110This position makes it unnecessary to consider questions which would amuse a postgraduate class in law, such as whether a debt deferred is still extinguished at law (see Ford v Beech (1846) 11 QB 842, 867; 116 ER 689, 698) and exists only in equity, or what is the position of the Resellers if their debt to Apple was extinguished by Buzzle's payment which was then declared to be void in a suit to which they were not parties. 111There is also no need to examine whether the Merger Deeds meant that there was a contract that the 'Debt' under cl 6.5(b) was only able to be recovered when the condition was fulfilled (see Head v Kelk [1963] SR (NSW) 340, 345) or whether it could be recovered presently subject to an action for breach of contract for calling up the debt earlier than promised, see Ford v Beech (supra). 112Further, there is no need to enter into any discussion of what are the legal relations between A, B & C when A pays B's debt to C. The authorities show that slight changes in facts can produce different results from B being subrogated to C's securities, to A making a gift to B and many in between. These matters were not discussed during argument. I merely mention them because the assumption that Buzzle paid out monies before it had to do so, might not be correct. 113(iv) Mr Jackson points out that, at the time of November and December payments, Buzzle had non-Apple creditors who were owed over a million dollars. He says that a reasonable person would not have paid Apple monies that it was not obliged to pay (because the contingency had not occurred) ahead of those outside creditors. He supports this assertion by reference to the obiter dictum of Giles JA in Lewis v Doran at [136]. 114To a degree this submission is linked with that considered under B(ii) & B(iii). However, I need to deal briefly with the question as to whether Buzzle suffered a detriment by the November or December payments. 115The primary judge held at [222] that Buzzle (as distinct from its creditors) suffered no detriment from the relevant transaction. 116With respect this cannot be correct. It is true, as the primary judge stated, that in making the payments Buzzle reduced its debts to the Resellers. However, that was not the whole picture. Buzzle had limited resources and to deprive itself of liquidity before it legally had to do so, where it had other pressing creditors and a need to expend monies on its computer accounting system amounted to a detriment. 117"Detriment" in the section is not limited to a detriment that can necessarily be measured in money terms. The word refers to commercial detriment. 118Thus in Willers v R (1995) 81 A Crim R 219, a police superintendent was charged that he had corruptly acted to the detriment of a corporation. The brief facts were that his daughter had been dismissed by a motel; and he had then threatened the owner and manager that they would pay for that act which he considered unfair. He then arranged for Random Breath Test Units to be parked outside the licensed motel and instructed his police to go thoroughly through the motel's books and lay a charge in respect of any irregularity. The Western Australian Court of Criminal Appeal had no doubt that these actions constituted detriment to the corporation. 119However, I do not consider that the above ( [115]) statement of the primary judge affected the result of his consideration of this aspect of the case. Nor do I consider that the primary judge overlooked the matters I have just been discussing when he was considering the whole of the evidence as to whether there were uncommercial transactions. 120Indeed, in [204] of his judgment, the primary judge found that with the problems in its accounting system, and with other "teething difficulties", it was not apparent to Apple that Buzzle was experiencing serious trading losses nor was Apple in a position for it to be apparent. 121(v) Miscellaneous matters. The primary judge said at [220] that 'there was no evidence that at that time the vendors would not have been able to satisfy such a liability.' The appellants challenge this citing the pressing demands made by other creditors, especially creditors of Mac's Place. 122In support of the primary judge's finding, the respondents drew attention to the repeated assurances (mentioned before at [76]-[78] ) of the directors of Buzzle that they would make capital contributions to assist with cash-flow. 123The appellants' riposte was that, by December 2000, all must have realised that no such capital contributions would be forthcoming. 124I do not consider that we can take that view in the light of the judge's finding noted above and in the light of evidence that the possibility of such contributions was still circulating during December. 125(vi) The primary judge held at [223] that in any event: Apple is entitled to the benefit of s 588FG(1)(b). It received the payments in good faith and without reasonable grounds for suspecting Buzzle's insolvency. The only basis for the plaintiffs' contending that Apple did not act in good faith is that the plaintiffs say in relation to the November payment that Buzzle directed the payment to be made towards the debt for stock. If that were so, there would be no need to seek relief under s 588FB and 588FF. Buzzle would be entitled to have the payment credited towards its debt to Apple. But there was no such appropriation. 126Further, in the case of the November payment, the appellants did not dispute that Apple had no reasonable grounds for suspecting that Buzzle was insolvent when the payment was made, and a reasonable person in its circumstances would have had no such grounds for so suspecting. The primary judge found at [223] that Buzzle also had no such grounds when it received the payment of 8 December, and a reasonable person in its circumstances would have had no reasonable grounds for so suspecting. 127Appeal Ground 24 alleges an error by the primary judge in holding that Apple had no reasonable grounds for suspecting Buzzle's insolvency when it received the December payment. 128The appellants say that it was clear that Mr Kidd, who had a watching brief over the Apple Resellers, questioned whether Buzzle was able to meet its debts as of 8 December 2000. 129Mr Kidd's knowledge was Apple's knowledge, as the primary judg e appeared to accept at [165]. 130There is no doubt that Apple knew that Buzzle had trouble with its accounting system which created problems in reconciling the cash banked against debtors and had not processed invoices so that it had difficulty in identifying and therefore collecting its debts. However, the primary judge did not consider that this pointed to insolvency as it could be what he called a temporary "teething" difficulty [204]. 131The primary judge also did not consider at [204] that: the delay by 8 December in paying the debt which was due on 1 December created reasonable grounds to raise an actual apprehension or fear or mistrust as to Buzzle's ability to pay its debts as they became due and payable, other than a temporary inability to do so which could reasonably be attributed to those teething difficulties. The evidence does not establish that by 8 December Apple had identified that Buzzle was suffering serious trading losses or that it was in a position to do so. In my view, as at 8 December 2000, Apple has established that it did not suspect and had no reasonable grounds for suspecting that Buzzle was insolvent at that time, or would become insolvent by making the payment of $108,623.55 on behalf of Mac's Place. A reasonable person in its circumstances would have had no such grounds for so suspecting. 132However, at [205], the primary judge noted that the position was different a few days later and by the end of the month there was default in paying the moneys due on 8 December and a series of further defaults. He said: No payment plan had been proposed, or at best, the only proposal was for a payment to be made by 15 January 2001. I infer from Mr Kidd's misleading email of 11 December and Mr McElduff's email of 12 December that Apple's executive team then suspected that Buzzle was insolvent. There were reasonable grounds to suspect insolvency by 31 December. Apple by that time had information and had formed its own assessment that Buzzle was suffering trading losses in the order of $2 million per month. The problems with the implementation and operation of the Navision system had been shown to be more than temporary. I conclude that by 31 December 2000 and at all times thereafter Apple had reasonable grounds to suspect that Buzzle was insolvent, and did so suspect. Conversely, at all material times from 31 December 2000 Apple did not have reasonable grounds to expect, and did not expect, that Buzzle was solvent and would remain solvent if it incurred the debts it was incurring from 1 January 2001. 133The respondents say that it follows from the primary judge's findings, to which there can be no realistic challenge, that the respondents must succeed under s 588FG even if they otherwise fail. 134Thus I must now turn to consider whether Apple acted in good faith and the significance of that fact if it did so act. 135The primary judge, and indeed both sets of counsel, cited s 588FG(1). However, that section only applies to "non-parties" to the alleged uncommercial transaction and Apple may not be in that category. 136Apart from Mr Newlind's opening exuberant submissions, it appeared to me that the parties were not disputing that Apple was a party to the relevant transactions and that s 588FG(1)(b) was the focus of their submissions. 137When I became concerned that this apparent assumption might not be correct as drafts of these reasons were being prepared, an email was sent to counsel providing an opportunity to make further submissions on the point. 138The further submissions of the respondent put that Apple was never a party to the relevant transaction and thus s588FG(1) was the relevant subsection. 139The submission is that the only "transaction" to which Apple was a party was to receive payment from the Resellers which discharged a pre-existing debt. 140"Transaction" is defined in s 9. It makes it clear that the term includes a conveyance made by a body, a payment made by a body or a loan made to a body. The definition does not include the situation where a payment is made to a body. However, the definition makes it clear that the specific instances noted in the definition are given as examples only and are not exhaustive. 141The appellants put that "transaction" in s 588FG(1) denotes a transaction which is sought to be the subject of relief under s 588FF. That is the focus of the transaction that is sought to be undone. 142As a general rule, a transaction is a dealing with two or more parties in different interests. The prefix "trans" with the word "action" denotes an activity which crosses amongst parties. 143Thus, if a payment by a corporation is a transaction, the parties to the transaction include at least the person to whom the monies are paid. 144Thus, here it was the moneys of Buzzle that were paid to Apple. The fact that Buzzle may have been making the payments on behalf of a third party is of peripheral relevance to that fact. Buzzle made a payment, the payment was a transaction, another party to that transaction was Apple which received the payment. 145In any event, the proposition that the payment is not really from Buzzle to Apple, but rather from Buzzle to the Resellers to Apple, satisfying debts due and payable by the Resellers, involves an oversimplification of the commercial relationships involved and a confusion of the payment made. Whatever the account being satisfied, it is clear that money was transferred from Buzzle to Apple. Apple was aware of the source of the payment and able to correspondingly direct its assessment of the commerciality of the transaction. 146Thus, I must treat Apple as a party to the transaction and thus s 588FG(1) cannot apply. 147I now focus on s 588FG(2) which is as follows: "(2) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that: (a) the person became a party to the transaction in good faith; and (b) at the time when the person became such a party: (i) the person had no reasonable grounds for suspecting that the company was insolvent at the time or would become insolvent as mentioned in paragraph 588FC(b); and (ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and (c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction." 148The primary judge noted in parenthesis at [164] that: "The potential separate defence under s 588FG(2) was not relied on, presumably because it would not be made out if the defence under s 588FG(1) was not made out". 149The appellants submit that, in view of this, the respondent should not now be permitted to rely on s 588FG(2). 150In my view, in the circumstances there was no more than a conditional abandonment of the defence under s 588FG(2). Thus, reliance on s 588FG(1) being unavailable in a way not anticipated, the respondents should now be permitted to rely on (2). The core point of "Good Faith" was squarely raised both here and below. 151Thus I consider that we should evaluate the defence of good faith within the confines of s 588FG(2). 152As can be seen, sub-paragraph (b) refers to reasonable grounds for suspecting insolvency and sub-paragraph (c) to valuable consideration or a change of position in reliance on the transaction. 153As to (b), the appellants say that to satisfy this requirement, a person needs to satisfy both the good faith aspect and the aspect of not having reasonable grounds for suspecting insolvency. They say that, on the evidence, when one takes into account what Mr Kidd knew, Apple must have had reasonable grounds for suspecting insolvency. 154Broadly speaking, where a creditor receives payment of a genuine debt, prima facie it acts in good faith and that situation holds unless displaced. 155It was not displaced in the instant case. Mr Kidd's activities, to which I have already referred, did not displace it. He merely actioned what Buzzle had directed, by making the appropriate entries in Apple's books. 156The appellants say that in s 588FG, the legislature has separated (a) the matter of good faith from (b) the matter of not having reasonable grounds for suspecting insolvency. Thus, it is put that the two sets of matters are not identical. 157Mr Newlinds' response was that there has never been a reported decision where a finding of lack of good faith has been made in the absence of suspicion of insolvency. It is clear, he puts, that a person who acts in good faith is a person who does not intend to benefit itself at the expense of other creditors or join with the debtor in prejudicing creditors. 158However, the appellants say that the defence under s 588FG(1)(a) cannot succeed as Apple received the benefit of the transaction even if it was in good faith. This may be correct, but is irrelevant under s 588FG(2). It must be noted that Mr Newlinds did not seek to support the proposition that Apple received no benefit. In my view, Apple did benefit in that a significant part of its distribution empire was kept intact and it actually received a significant amount in cash instead of an obligation to repay on persons who might not be able to honour them. 159The primary judge's finding of good faith should stand, as should his finding of no reasonable grounds on Apple's part for suspecting the insolvency of Buzzle at the time of the relevant payments. 160Turning now to sub-paragraph (c), the respondents say that the condition within (c) contains two disjunctive elements, one of which must be satisfied before this limb of the defence is made out. The elements are either valuable consideration or change of position in reliance on the transaction. 161It is first necessary to deal with what is covered by the term "valuable consideration" in s 588FG(2)(c). 162It must first be noted that s 588FG(2)(c) does not require Apple to establish that it gave "full consideration" but just that it provided "valuable consideration". 163The respondents submit that there is ample authority for the proposition that satisfaction and release of an antecedent debt is valuable consideration and that that is the situation in the present case as Apple, as it was bound to do as a result of Buzzle's direction, discharged the Resellers' debt. 164The appellants say that this principle only applies where it is the debt of the payer that is released whilst here it was the debt of a third party. 165No authority was proffered for that submission and I do not accept it. The consideration that moved from the promisee, Apple, was the detriment it suffered at Buzzle's request. 166In my view the respondents' submission is clearly correct. 167The respondents further put that the second element of (c) is also established. In reliance on the transaction, Apple changed its position by releasing securities it previously held over certain interests of the Resellers. 168The appellants' answer is that there is no evidence of any such release. My belief is that whilst there might not be direct evidence of a release, there is material to infer that what the respondents say is or approximates to the required change of position as submitted. 169There is an argument that, because of the words "it is proved", Apple bears the onus of proof of showing that all elements in s 588FG(2) have been established. 170Assuming this is so, I consider that the material before the primary judge and his findings show the elements have all been proved. 171Thus the defence under s 588FG(2) must succeed. 172In order to check that I have covered the points that the appellants wish to present to the court, I will briefly review the stated Grounds of Appeal 20-26. 173Ground 20 merely states that the primary judge's decision on the uncommercial transaction point was wrong and Ground 26 restates this in a different form. Ground 21 raises the 'full consideration' point which I have considered in B(ii) and (iii). Ground 22 focuses in the same area based on whether Buzzle suffered a detriment and is also considered in B(ii) and (iv). I have considered Grounds 23 & 25 challenging the primary judge's decision on good faith in B(vi). Ground 24 challenging the finding that Apple had no reason for suspecting Buzzle's insolvency is also considered in B(vi). 174The Notice of Contention also seeks exoneration under s 1318 of the Corporations Law. I will consider this in Section D(i) below.
C. Insolvent Trading and Related Issues 175Section 588M applies where a director has contravened s 588G. In such a case, the liquidator can recover the amount equal to the loss or damage suffered by the company. 176In the present case, the liquidator seeks to recover $8,5056,757.42, being amounts paid to Apple after 1 January 2001 and before 31 March 2001. 177Section 588G provides that a person who is a director of a company which trades whilst insolvent incurs liability for insolvent trading. 178The appellants allege that in the circumstances Apple and Mr Likidis were "shadow directors" of Buzzle. 179The definition of "director" in s 9 of the Corporations Law in 2000 was as it is currently, that is, as follows: "director of a company or other body means: (a) a person who: (i) is appointed to the position of a director; or (ii) ..... (b) unless the contrary intention appears, a person who is not validly appointed as a director if: (i) they act in the position of a director; (ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes. Subparagraph b(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person's professional capacity, or the person's business relationship with the directors of the company or body." 180A person who fits within paragraph b(i) can be termed a "de facto director". A person who fits within b(ii) may be termed a "shadow director", though in argument in the present case the phrase "a b(ii) director" was frequently used. 181I will examine the authorities in due course including those decided in England. However, there were submissions before us that the difference in wording in the corresponding Australian and English definitions might be extremely important. I will address this submission now. Before the current definition was adopted in 1999, the corresponding definition in s 60 of the Corporations Law was "a person in accordance with whose directions or instructions the directors of the body are accustomed to act". Thus, the definition was changed to delete "directions" and substitute "wishes". 182The corresponding English provision was recently examined by the English Supreme Court in Revenue and Customs Commissioners v Holland: In re Paycheck Services 3 Ltd [2010] 1 WLR 2793; [2011] 1 All ER 430 (hereafter referred to as " Paycheck"). 183The current English provision equivalent to b(ii) of the Australian definition is contained in s 741(2) of the English Companies Act 1985 (UK) and s 251 of the English Companies Act 2006 (UK), viz: "In relation to a company, 'shadow director' means a person in accordance with whose directions or instructions the directors of the company are accustomed to act. However, a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity.'" 184Again one can see the key words are "directions or instructions" rather than "instructions or wishes". 185The change to the Australian definition was effected by Act No 156 of 1999 (the CLERP Act). That Act inserted in the dictionary of the Corporations Law a definition of "officer" and this included a person in accordance with whose instructions or wishes the directors are accustomed to act. The definition of "director" was adjusted to be in the same words. However, why "wishes" was chosen to replace "directions" has not been revealed in either my own researches or those of counsel. 186My theory is that the definition of "officer" was introduced into the legislation to cure the problem that emerged in some of the cases such as Commissioner for Corporate Affairs (Vic) v Bracht [1989] VR 821; (1988) 14 ACLR 728 where (in that case) a father in law, or in other cases a husband, makes his wishes known to a family member whom he correctly expects will carry them out rather than a person making a formal direction where a family relationship is absent. 187However, it would seem from treatment in cases decided after 2000 and in leading texts such as Austin, Ford & Ramsay Company Directors (Butterworths, Sydney 2005) (see [5.10]) virtually no significance has been given to the change. If there is any significance, it is that "wishes" covers a wider field than "directions". 188The issues of insolvent trading and shadow directors were considered by the primary judge in [225]-[332] of his reasons. 189The grounds of appeal really fall into three contentions, viz that the primary judge erred (i) in not holding that Apple and Mr Likidis were shadow directors, (ii) in holding that the directors of Buzzle made no delegation of their powers to the "Sub-Group" consisting of Messrs Hartono, Liu and Mekrizis and (iii) in failing to hold that Apple and/or Mr Likidis contravened s 588G(2) of the Corporations Act . I will deal with each of these in turn. 190The primary judge accepted at [241] the analysis of Millett J in Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 at 183 as to what was required to establish that a person was a shadow director. 191The primary judge said: "241 In Re Hydrodam (Corby) Ltd , Millett J also said (at 183) that: "To establish that a defendant is a shadow director of a company it is necessary to allege and prove: (1) who are the directors of the company, whether de facto or de jure; (2) that the defendant directed those directors how to act in relation to the company or that he was one of the persons who did so; (3) that those directors acted in accordance with such directions; and (4) that they were accustomed so to act." With that statement, there can be no quarrel. His Lordship continued: "What is needed is first, a board of directors claiming and purporting to act as such; and secondly, a pattern of behaviour in which the board did not exercise any discretion or judgment of its own, but acted in accordance with the directions of others." This is not so obvious, but I generally agree. The qualification is that it is not necessary that the instructions or wishes (or in the United Kingdom, directions) of the shadow director be given over the whole field of corporate activity for which the directors are responsible and therefore there is no inconsistency with a person being a shadow director, and on the other hand the board exercising some discretion or judgment in areas in respect of which the shadow director does not give instructions or express a wish. 242 I would add the following. For the definition to be satisfied the directors of the company must be accustomed to act as directors of the company in accordance with the person's instructions or wishes as to how they should so act. Thus the plaintiffs do not establish that the directors of Buzzle were accustomed to act on the instructions of Apple by demonstrating that when they conducted their business as Resellers prior to the merger, Apple had significant control over important decisions of the Resellers which the directors of the Resellers felt constrained to make to meet targets needed to obtain rebates, which in turn were necessary to achieve realistic margins. That is so for two reasons. First, the directors were not then acting as directors of Buzzle. Secondly, a person or company is not within the definition in para (b)(ii) merely because that party imposes conditions on his or her commercial dealings with the company with which the directors feel obliged to comply. A lender who is entitled to demand repayment of a loan and appoint a receiver can say, for example, that it will stay its hand only if the borrowing company sells certain assets. A supplier or buyer might impose conditions and because of its superior bargaining power, the directors of the company with whom it deals might feel they have no choice but to comply with the conditions imposed. It has been uniformly held that this is not sufficient to make the third party who exercises such powers in his dealings with the company a shadow director, even though the directors of the company are accustomed to comply with its demands ( Re PFTZM Ltd (in liq); Jourdain v Paul [1995] 2 BCLC 354 at 368; Emanuel Management Pty Ltd (in liq) v Foster's Brewing Group Ltd at [268], [269], [314], [315], [324]; Ultraframe (UK) Ltd v Fielding at [1268]; Sir P Millett Shadow Directorship - a Real or Imagined Threat to Banks", (1991) 1 Insolvency Practitioner 14 at 15). 243 In my view the reason that third parties having commercial dealings with a company who are able to insist on certain terms if their support for the company is to continue, and are successful in procuring the company's compliance with those terms over an extended period, are not thereby to be treated as shadow directors within the definition, is because to insist on such terms as a commercial dealing between a third party and the company is not ipso facto to give an instruction or express a wish as to how the directors are to exercise their powers. Unless something more intrudes, the directors are free and would be expected to exercise their own judgment as to whether it is in the interests of the company to comply with the terms upon which the third party insists, or to reject those terms. If, in the exercise of their own judgment, they habitually comply with the third party's terms, it does not follow that the third party has given instructions or expressed a wish as to how they should exercise their functions as directors. 192I generally agree with what his Honour said and it is consistent with the mainstream line of authority. 193A difficulty arises, both in shadow director cases such as the instant and de facto director cases, when one comes to identifying actions that are properly characterised as those of a director. In Paycheck at [91], Lord Collins discusses "the very difficult problem of identifying what functions were in essence the sole responsibility of a director or board of directors." 194While there are a number of guidelines in the cases, it is clear that the question of whether certain activities are board activities or managerial decisions remains one of fact. Indeed Madgwick J in Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565 at 570 says: The variety of commercial and corporate life is such that it seems to me unprofitable to attempt a general statement as to what is meant by "acting as a director". Whether a person does so act will often be a question of degree, and requires a consideration of the duties performed by that person in the context of the operations and circumstances of the particular company concerned. 195However, in relation to cases involving creditors and financial matters, there is some additional guidance found in the authorities. I will examine the most significant of these shortly. 196In relation to the requirement that the directors are "acting in accordance with those instructions or wishes", the primary judge considered the matter in some detail at [244] et seq. 244 Another question is whether, in order for the directors of a company to act "in accordance with", the instructions or wishes of a putative shadow director, it must be shown that there is a causal connection between the putative shadow director giving the instruction or expressing the wish and the directors acting on it. In the present case, many of the things about which Apple or Mr Likidis gave instructions, or expressed a wish, are things which the directors who gave evidence said they would do in any event. For example, the plaintiffs allege that Apple instructed the directors to arrange for Buzzle's employees to prepare financial reports, prepare a plan for collection of Buzzle's accounts receivable, and employ resources for debt collection. These were basic steps for the operation of any business and things that the directors were in any event attempting to do. Can it be said that by attempting to do those things after Apple expressed a wish or gave an instruction for the things to be done, that Buzzle's directors were thereby acting "in accordance with" Apple's instructions or wishes within the meaning of para (b)(ii) of the definition? 245 The Oxford English Dictionary definition of "accordance" is that it is " the action or state of agreeing; agreement; harmony; conformity ". Ordinary usage of the phrase "in accordance with" does not necessarily require a causal connection between the expression of a wish by A and the action of B. To take a homely example I advanced during argument, if on a Wednesday I decide to take my son or daughter to his or her football game on Saturday, and on Friday my wife asks me to take the child to football on Saturday, to which I agree, in performing that task I am acting in accordance with my wife's wish (or instruction). I am acting in agreement, harmony or conformity with her wish, even though I have already determined on that course of action. 246 But that is not how the definition in para (b)(ii) and cognate definitions have been approached. In Australian Securities Commission v AS Nominees Pty Ltd , Finn J (at ALR 53) posed the relevant question as being where the locus of " effective decision making " was situated. In Re Unisoft Group Ltd (No. 3) [1994] 1 BCLC 609, Harman J (at 620) spoke of a shadow director as being a " puppet master controlling the actions of the board. " In Re Hydrodam (Corby) Ltd , Millett J (at 183) said that what was needed was that the board not exercise any discretion or judgment of its own, but act in accordance with the directions of others. In Secretary of State for Trade and Industry v Deverell , Morritt LJ said (at 354 [35]) that the purpose of the legislation was to identify those other than professional advisors who had real influence in the company's affairs. In Ultraframe (UK) Ltd v Fielding , Lewison J said (at [1272]) that the legislative policy was to subject those who effectively control the company's activities to the statutory duties and liabilities of a de jure director. 247 For the reasons I have already given, I do not accept that to establish that person is a shadow director, it must be shown that the directors of the company do not exercise any discretion of their own. Nonetheless, the authorities provide powerful support for the defendants' submission that there must be a causal connection between the instruction or wish of the shadow director and the act taken by the directors. There is good reason for this. If a person is a shadow director, he, she or it owes statutory duties to act in good faith in the best interests of the company, and with the reasonable care and diligence of a director of the company. A shadow director is also liable to statutory liabilities, such as the liability of a director for insolvent trading. When the definition is construed in the light of the purpose of subjecting a person who is not appointed, and does not (or might not) act as a director, to the statutory duties and liabilities of a director, it makes good sense that there must be a causal connection between the acts of the directors and the instructions of the putative shadow director for the definition to be satisfied. I accept the defendant's submissions that such a causal connection is necessary. 248 For Apple or Mr Likidis to be a shadow director, the directors of Buzzle must have been "accustomed to act" in accordance with its or his instructions or wishes. This requires habitual compliance over a period of time ( Ultraframe (UK) Ltd v Fielding at [1273]). A shadow director is not subject to the statutory duties and liabilities of a shadow director for things done by the company in accordance with the shadow director's instructions or wishes before the directors of the company became accustomed to act in accordance with those instructions or wishes ( Ultraframe (UK) Ltd v Fielding at [1273]-1278]). It follows that if the directors of Buzzle had not become accustomed to act on the instructions or wishes of Apple or Mr Likidis before 1 January 2001, but acted on such instructions or wishes after that date, they would not be liable under s 588G for the debts incurred by Buzzle until such time as the directors so frequently acted in accordance with their instructions or wishes that they could be said to have become accustomed to do so. 249 The definition of "director" in para (b)(ii) assumes that the giving of advice may constitute the giving of an instruction or the expression of a wish. It is only if the advice is given in the proper performance of functions attaching to a person's professional capacity or business relationship with the directors or the company that the qualification is satisfied, excluding the acting on advice as being sufficient to satisfy the definition. In the present case the plaintiffs say that if what the defendants call suggestions as to how Buzzle should act could be characterised as advice, the advice was not given in the proper performance of functions attaching to Apple's business relationship with Buzzle because Apple, for reasons of its own, wanted to avoid putting Buzzle into liquidation or administration even though it was trading whilst insolvent. It is said that such "advice" was not proper and that Apple and Mr Likidis for that reason cannot rely on the qualification. For the reasons below, it is not necessary to deal with that contention. 250 For a person to be a shadow director, the directors collectively must be accustomed to act on that person's instructions or wishes. I accept that it is sufficient that a governing majority is so accustomed (see para [235] above). It is not sufficient that executives who are not directors may be accustomed to act on the person's instructions or wishes. Depending upon the circumstances, a person who gives instructions or expresses wishes to executives of a company, and has them obeyed, might be a de facto director under para (b)(i), but he or she is not on that account a shadow director. I also agree with the view of Sangster J in Harris v S (1976) 2 ACLR 51 at 72 that instructions given or wishes expressed to a director in his or her capacity as a working executive, as distinct from an instruction or wish relating to the director's performance of his or her function as a director, is not relevant. Thus I agree with the view of Millett J in Re Hydrodam (Corby) Ltd at 183 quoted at [241] above that what is needed is a " board of directors claiming and purporting to act as such ". I understand that to mean that it is the directors collectively in the exercise of their powers of management who must be accustomed to act on the instructions or wishes of the putative shadow director for the definition to be satisfied. 197I cannot see any fault in this analysis. In particular, whilst the fact the directors were intending to do something in any event that was also in accordance with the alleged instructor's wishes is significant, it is not decisive. 198With regards to "accustomed", the primary judge was correct at [248] quoted above - see Harris v S (1976) 2 ACLR 51 at 72, also Ultraframe (UK) Ltd v Fielding & Ors [2005] EWHC 1638 (Ch); All ER (D) 397 (Jul) . It should be noted that the pattern of behaviour should be established from acting in accordance with instructions relating to director matters and should not be established from acting in accordance with wishes re: management matters. 199The appellants puts in para 25 of p 8 of the orange book that if it can be shown that the directors in their executive capacity are not following the wishes and instructions of their own Board, but are following the wishes and instructions of another then they have surrendered their discretion, as directors, to follow another's. They reject the primary judge's suggestion that the appropriate question to ask in that situation is whether the person has become a shadow director. They argue that this alters the focus of the inquiry and leads to examination of the whole conduct of the putative director. 200This submission seems to reject, or at least avoid, the argument that appealed to Lords Hope, Collins & Saville in Paycheck . 201Mr Jackson submitted that because there is different legislation in England and because Paycheck focused on de facto directors, it is not relvant to the proceedings. With respect I disagree. Paycheck is a decision of the highest court of England which discusses wider relevant issues than who in England should be classed as a de facto director. However, the task of evaluating Paycheck is made very difficult because the reasons of Lords Hope, Collins and Walker all read so convincingly, yet, in the case of Lord Walker, reach a different result. I will return to this point. 202We were referred to a number of Australian cases where the problem of de facto or shadow directors has been considered, including ASC v AS Nominees Ltd (1995) 133 ALR 1 (henceforth " AS Nominees ") , Emanuel Management Pty Ltd (in liq) v Foster's Brewing Group Ltd [2003] QSC 205; 178 FLR 1 and Ho v Akai Pty Ltd ( in liq ) [2006] FCAFC 159; 24 ACLC 1,526, as well as the English decision of Secretary of State for Trade and Industry v Deverell [2001] Ch 340 . These are authority for the proposition that the court does not necessarily look for directions over the "whole field" of director decisions. 203It is also useful to note that Gordon J of the Federal Court said in a slightly different connection in ASIC v Murdaca [2008] FCA 1399; 68 ACSR 66 at [11] that the truth is not to be found in names and labels, but rather "what is required is a critical assessment of the way in which a corporation is managed". 204However, in the present case, the solution is not to be found by merely looking at what happens at management level. The definition of "shadow director" requires the focus to be on the acts of the directors qua directors. 205Having listened carefully to the analysis of the authorities given to us by counsel, I am of the view that one must approach this subject with an eye to the ultimate question and not rely overmuch on one line statements such as those which say that the shadow director need not overawe the whole board nor need he or she seek to control all the company's activities. These utterances may be true sub modo, but their limits must not be exceeded. 206A good place to commence is with the decision of Finn J in AS Nominees. 207AS Nominees was a case where the Regulator sought to wind up a company in the public interest. It appeared that one Windsor, though not formally appointed a director, was the controlling force behind the company and that his actions should be considered to be the acts of the company. 208Finn J said at p 53 that the question was, "Where, for some or all purposes, is the locus of the effective decision making?" He said this as he only needed to show that acts of Windsor on particular matters were to be considered the acts of the company. 209However, at p 52 his Honour laid down the following general proposition: "The reference in the section to a person in accordance with whose directions or instructions the directors are "accustomed to act" does not in my opinion require that there be directions embracing all matters involving the board. Rather it only requires that as and when the directors are directed or instructed, they are accustomed to act as the section requires." 210The English Court of Appeal considered the applicable principles in Deverell . 211In that case, Morritt LJ gave the leading judgment with which Potter LJ and Morison J agreed. 212The case was one where the Regulator sought to disqualify persons from being directors and needed to show that their activities in previous failed companies were as directors. 213Morritt LJ at p 354 [35] laid down five basic propositions which can be summarized as follows:- (i) The definition is to be construed in the normal way bearing in mind that the court is to give effect to parliament's intention shown by the words used; (ii) The legislation is protective of the public thus it should not be strictly construed despite its quasi-penal context; (iii) Whether any particular communication is to be construed as an instruction is a question of fact to be decided on all the evidence; (iv) Non professional "advice" may be an instruction; (v) It is not necessary to go so far as to show that the de jure directors were subservient or had surrendered their roles. 214It may be that his Lordship's point (ii) might not be so strong outside the field of disqualification of directors. 215In Re Lo-Line Electric Motors Ltd [1988] Ch 477 (hereafter "Lo-Line" ), Browne-Wilkinson VC held that, for the purpose of considering the conduct of a person as a director with respect to whether a disqualification order should be made, the court can take into account the conduct as a de facto director. The effect of this change of focus was that in what became the common case of considering whether a "director" should be disqualified, it did not matter whether the person was a de facto or a shadow director and that the courts were confronted with the very difficult problem of identifying what tasks were the essence of being a director. 216In Emanuel Management at [264], Chesterman J said: It is, I think significant that there is no reported case in which a secured creditor has been held a de facto or shadow director of the borrowing company despite there being innumerable examples over the decades of creditors who have taken a keen interest in, and exercised a marked degree of supervision over, the affairs of their debtors. 217Millett J (as he then was) made a similar point in his article, "Shadow Directorship - A Real or Imagined Threat to Banks" (1991) Insolvency Practitioner (Winter-January) 14 at 15. 218In Paycheck at [94] , Lord Collins considered that the test was probably whether the alleged shadow director assumed such a role with respect to the subsidiary companies that he was part of the corporate governing structure and that role imposed on him the fiduciary duties of a director. 219In his reasons for decision , Lord Collins traced the development of the law relating to de facto directors through the cases from the problems first recognised in Mangles v Grand Collier Dock Co (1840) 10 Sim 519; 59 ER 716. 220By way of a slight digression, it would seem that there were de facto officer cases before 1840. In The King v Corporation of Bedford Level (1805) 6 East 356, 368; 107 ER 1323, 1328, Lord Ellenborough said, "An officer de facto is one who has the reputation of being the officer he assumes to be, and yet is not a good officer in point of law." 221Lord Collins at [82] pointed out that it was significant that, prior to 1988 (ie prior to Lo-Line ), virtually all the reported cases on the point involved persons who had acted as directors without being validly appointed as such or cases where a person had continued to act as a director after his de jure capacity had ceased. It is only after 1988, that there are cases in the disciplinary area of disqualification. 222In the USA, it was thought that one could not be a de facto director if one was a usurper: one was only such if one had some colour of right to back up the assertion that one was a director, see Lattin Jennings, Cases and Materials on Corporations , 3 rd ed (Callaghan & Co,1959) p 348 citing inter alia, Vaccari v Maxwell 3 Blatchf 368 (28 Fed Cas 862) (SD NY 1855), "...the decisions in relation to the acts of officers de facto are reasonably to be restricted to those who hold office under some degree of notoriety, or are in the exercise of continuous official acts or are in possession of a place which has the character of a public office." 223Thus, traditionally, a de facto director was a person who appeared to all and sundry to be a director whilst a shadow director was a person who might have tried his or her best to remain in the background, but his or her activities showed that in reality he or she was a directing force in the corporation. 224In Paycheck Lord Collins said at [91] that, in view of the recent authorities, the distinction between de facto directors and shadow directors had been eroded. Now, with both categories, it was necessary for the court to focus on "such matters as the taking of major decisions by the individual, which might be through instructions to the de jure directors, and the evaluation of his real influence in the affairs of the company." 225Lord Hope noted at [26] that the term "de facto director" had been in use for a long time. He referred with approval to the judgment of Millett J in Re Hydrodam at 184 that if company A is a director of company B and Mr Z is a director of company A, Z does not become a de facto director of company B merely because of that fact nor merely because he actually gave instructions to company B in his role as director of company A. So much followed from the law as laid down in Salomon's case ( Salomon v A Salomon & Co Ltd [1897] AC 22). 226Lord Walker, in dissent, said the court must look to see what the alleged shadow director (Mr Holland) actually did. Did Mr Holland undertake functions in the subsidiary companies which could properly be discharged only by a director? It was quite plain that Mr Holland was the controlling voice of the whole empire and the only person who could take the key decisions for each of the companies. People in that position should not be permitted to hide behind formalities. 227There is probably little to be gained by exhaustively trawling through other cases. Circumstances are infinitely variable, from the company which has as the owner of the group a figure whose presumed whim is law to the ordinary case of a bankrupt who has his wife and children registered as directors, but runs the company as before his bankruptcy. 228However, it seems to me that various principles emerge from the leading authorities. 229First, not every person whose advice is in fact heeded as a general rule by the board is to be classed as a de facto or shadow director. 230Secondly, if a person has a genuine interest of his or her or its own in giving advice to the board, such as a bank or mortgagee, the mere fact that the board will tend to take that advice to preserve it from the mortgagee's wrath will not make the mortgagee, etc a shadow director. 231Thirdly, the vital factor is that the shadow director has the potentiality to control. The fact that he or she does not seek to control every facet of the company or the fact that from time to time the board disregards advice is of little moment. 232Fourthly, Millett J's proposition that the evidence must show "something more" than just being in a position of control must be shown. The whole of the facts of the case must be shown to see whether that power to control was put into practice. The emphasis that one must judge on the whole of facts and circumstances is made many times over in the leading cases, see eg Secretary of State for Trade and Industry v Tjolle [1998] 1 BCLC 333, 343-4 and Re Kaytech International plc [1999] 2 BCLC 351, 423-4. 233Fifthly, although there are problems with cases where the board of the company splits into a majority and minority faction, so long as the influence controls the real decision makers, the person providing the influence may be a shadow director. 234The primary judge decided the case bearing these propositions in mind, particularly proposition 4 and I find it difficult to see error in his approach. 235(ii) I should deal in detail with one particular submission which appeared to be a core part of the appellants' case. 236The appellants in their Statement of Contested Factual Findings (Orange 20) challenge the primary judge's finding that no delegation was made by the Buzzle Board to the Sub-Group. 237It is difficult to see why it really matters whether there was a delegation or not. 238The primary judge at [307] correctly said that what needs to be shown is that the governing majority of the directors must act in accordance with the third party's wishes or instructions if there is to be a finding that the third person is a shadow director. "Directors" does not necessarily mean all the directors, a governing majority suffices ( Ultraframe at [1272]) and it is not necessary that the influence extend over the whole field of corporate activities ( AS Nominees at 52 ; Deverell ). However, the influence must be in what would be within the field of a director not just a manager ( Ultraframe ) . 239It is clear that there was never any formal resolution of delegation to the Sub-Group or any of its members. However, the appellants put that there had been a delegation of responsibilities between the directors, at least at an operational level. 240The primary judge did not accept this and I do not consider he was in error in so doing. The directors were scattered and each was in charge of his own discrete business before the merger. 241It is clear that particular directors had responsibility for particular areas of Buzzle's operations. Further, there were few and irregular meetings of the whole board and a considerable amount of the managerial functions were left in the hands of Mr Qureshi, Buzzle's CEO. 242It is not uncommon in companies for one director or a small committee of directors to be given day to day responsibility for a particular aspect of the company's business. The judge was entitled to look at the global picture. 243As the respondents' submissions remind us, there is a significant difference between a board assigning responsibility for the day to day running of certain activities and formally delegating its collective responsibility for decision making in those areas. The facts in the present case have the present matter in the former category. 244(iii) There is no need to examine the effect of s 588G(2), as it is clear that even if it had been shown that Apple or Mr Likidis was a director, Buzzle was insolvent at the relevant time. Thus, short of any applicable defence, the claim would succeed.
D. Other issues 245The remaining matters I need to consider are: (i) Whether, if all else fails, Apple and Mr Likidis should be excused from liability under s 1318 of the Corporations Law; (ii) Has this Court got any discretion not to make an order against Apple and Mr Likidis even if it finds the question of liability against them? (iii) If the appeal succeeds to any material degree, what remedy should be given? (iv) How, if at all, the result of this case may affect the Resellers who are not parties; (v) Whether there can be any set-off of an order in these proceedings against monies owing by Buzzle to Apple; (vi) Alleged defects in pleadings; (vii) Procedural matters. 246In view of my previous findings, none of these issues really arise for decision. However, in accordance with the pronouncements of the High Court, I must briefly deal with each of them. 247(i) Section 1318 of the Corporations Law empowers the court to give relief where civil proceedings are taken against a person who may be held liable, yet that person has acted honestly and ought fairly to be excused. Section 1317S makes a similar provision where the proceedings are for a civil penalty under s 588M. 248In the light of the foregoing, it is unnecessary to deal with the question as to whether, had liability been found, it would be appropriate for the court to excuse the respondents. However, I must briefly consider the matter. 249The appellants say that the sections do not apply to the uncommercial transaction aspect of the appeal. The respondents dispute that proposition. 250The appellants' submission is that an action to recover in respect of uncommercial transactions is neither an eligible proceeding under s 1317S nor is it a civil proceeding for default under s 1318. I agree with the first half of the proposition, but not the second. In my view the word "default", at least in s 1318, covers the case of a breach in respect of an uncommercial transaction. This approach is consistent with what Austin J said in ASIC v Vines [2005] NSWSC 1349; 65 NSWLR 281, 287 [22] (affirmed (2007) 73 NSWLR 451). 251The respondents say that the sections are satisfied and list the matters which they say show that it should be held that Apple and Mr Likidis acted honestly. 252The list can be summarised thus -
E. The result of the appeal and proposed orders 285In my view, for the above reasons, the appeal should be dismissed with costs. 286WHEALYJA: I have had the advantage of reading the draft judgments of Young and Hodgson JJA. 287On the question of uncommercial transactions, I agree with the qualifications expressed in the observations of Hodgson JA. In all other respects, I agree with Young JA and with the orders he proposes.
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: 09 May 2011
Buzzle Operations Pty Ltd (in liq)
Apple Computer Australia Pty Ltd
[2003] QSC 205
[2006] FCAFC 159
(1995) 133 ALR 1
(1996) 80 FCR 1
(2007) 73 NSWLR 451
(1997) 80 FCR 1