Supreme Court of SA|2003-12-05|Before: Doyle CJ, Vanstone JJ

CARABELAS & ANOR v SCOTT No. SCCIV-97-409 [2003] SASC 389 (5 December 2003)

1 DOYLE CJ: This is an appeal against a decision by a Judge of this Court.

3 ALS claimed compensation in the sum of $474,950 under s 229(7) of the Companies (South Australia) Code ("the Code") and alternatively by way of damages for breach of a duty of care owed by the defendants as directors of ALS at common law, or for breach of a fiduciary duty owed by the directors to ALS. The Judge found in favour of ALS under s 229(7). Having so found, the Judge did not have to deal with the alternative basis for the claim. The significance of that on appeal is that the basis upon which the claim succeeded might affect the question of whether the claim was out of time.

4 The liquidator claimed that the books of ALS recorded three transactions that were unfair preferences, within the meaning of s 588 FA(1) of the Corporations Law, given by ALS to the defendants. The liquidator claimed an order that the defendants pay the amount involved in each transaction to ALS, on the basis that each transaction was an insolvent transaction (s 588 FC) and was voidable (s 588 FE). The Judge found in his favour.

5 Three main issues were argued on appeal. First, whether the Judge was right in finding that the defendants were in breach of subsections (1) and (2) of s 229 of the Code, and accordingly liable to make payment to ALS in the sum ordered. This raised issues of fact and law. The second main issue is a complicated issue of whether the claim is out of time. The third main issue is whether the book entries on which the preference claim is based effected a transaction at all, or at least a transaction within the period before and ending on the relation back day. If they did, as I understand the submissions, it is not denied that there was an unfair preference. The appellants submit that the relevant entries are nullities, to be disregarded, and so no unfair preferences have been given. Alternatively, the appellants submit that any relevant transaction occurred only after the winding-up of ALS began.

6 On the first and third issues the evidence before the Judge was quite limited. There are a number of matters which, I would have thought, could have been dealt with in more detail. This causes some difficulty, but the court has to decide the appeal on that limited material.

7 Mr and Mrs Carabelas were, as I have said, the only directors and shareholders of ALS. They were also the only directors and shareholders of five other companies ("the other companies"). I will refer to ALS and the other companies together on occasions as "the group".

8 ALS owned a property at Angas St Adelaide. The Hindmarsh Building Society ("HBS") had a registered mortgage over this property securing money owed to HBS by ALS.

9 In July 1988 ALS granted to Commonwealth Bank of Australia ("CBA") a mortgage in consideration of advances to be granted at the request of ALS to Mr Carabelas, the mortgage securing all monies already advanced or thereafter to be advanced by CBA to Mr Carabelas. The grant of the mortgage was alleged by ALS to be a breach of s 229 of the Code. ALS alleged that it was not in its interests for it to secure borrowings by Mr Carabelas.

10 Later in July 1988 CBA advanced $1,750,000 to Mr Carabelas. Mr Carabelas then advanced $435,040 to ALS, with which ALS discharged its debt to HBS. The mortgage to HBS was discharged. This transaction was recorded in the accounts of ALS for the year ended 30 June 1989 as money borrowed by Mr Carabelas from CBA and "on lent" by him to ALS. The Judge's findings do not indicate what happened with the balance of the money borrowed by Mr Carabelas from CBA.

11 In October 1989 ALS sold the Angas St property for $910,000. Under its mortgage CBA took the entire proceeds.

12 The records of ALS for the year ended 30 June 1990 record the debt owed by ALS to Mr Carabelas as having been paid by appropriating $435,040 of the money taken by CBA to pay off that debt.

13 As to the balance of the sale proceeds, an amount of $474,960, a journal entry of 30 June 1990 recorded this amount less commission and certain costs (a balance of $446,710.31), as debited to Mr Carabelas' loan account with ALS.

14 The Judge found that a further journal entry dated the same day, but apparently made after the former journal entry, changed the situation and recorded that same amount as owed to ALS by the other companies, attributing particular amounts to each of those other companies, and a small amount ($15,501.59) to Mr Carabelas. The journal entry carried the notation that it was a "correction" of the earlier posting. The other companies had no ability at the time to repay the money that they were treated as owing to ALS, and never did repay that money. Some time later ALS wrote the debts off.

15 ALS alleges that this further journal entry was a breach of s 229 of the Code. ALS pointed to the fact that the entry purported to relieve Mr Carabelas of his liability to ALS, replacing it with a worthless liability owed by the other companies. ALS contended that there was no valid commercial reason to do this.

16 ALS sued to recover the whole amount, alleging that the grant of the mortgage, the payment of the sale proceeds to CBA and the release of Mr Carabelas caused it to lose the amount in question.

17 Mr and Mrs Carabelas denied liability. Mr Carabelas contended that in borrowing $1,750,000 from CBA he acted, as between himself and the group, as an agent, although he was a principal as between himself and CBA His case was that the group were engaged in a joint venture arrangement under which, for convenience, he borrowed money from CBA for the use of the group, allocated it to members of the group as required for their own purposes (investing in property), each member of the group being liable jointly and severally to indemnify him for the total borrowing. Accordingly, each member of the group was liable to indemnify him for the full amount. The mortgage granted by ALS to CBA to secure all borrowings by Mr Carabelas reflected the arrangement, as did the payment of the whole of the sale proceeds by ALS to CBA. Mr Carabelas contended that he was never liable to ALS for the money borrowed, and that the entry that treated the balance of the sale proceeds as an advance to him was incorrect and was rightly corrected by the second journal entry. The Judge rejected this submission.

18 On appeal Mr Whitington QC, counsel for Mr and Mrs Carabelas, submitted that ALS could not complain of the decision by the directors of ALS to grant the mortgage to CBA. He submitted that the directors' conduct was authorised, in effect, by Mr and Mrs Carabelas, who were the sole shareholders. Accordingly, any complaint that otherwise might have been made by ALS about the directors' decision could no longer be made. He submitted that the transactions had been entered into with the agreement of all shareholders and accordingly the company could not now resile from the transaction on the basis that the directors were not authorised to enter into it. He argued that this principle was established by the decision in Re Duomatic Ltd [1969] 2 Ch 365.

19 Mr Whitington further submitted that the Corporations Act 2001 (Cth) which took effect on 15 July 2001 ("the Corporations Act") imposed a time limit for the bringing of the claim, by deeming the proceedings to be proceedings under the Corporations Act. The claim had not been brought within the required time, and the Corporations Act made no provision for an extension of time. Nor could s 48 of the Limitation of Actions Act 1936 (SA) ("the LAA") be used to grant an extension of time under Commonwealth legislation. The Judge rejected the submission.

20 ALS was wound up pursuant to an order of the court on 24 April 1994. It was common ground, as I understand it, that the relation back date, or the beginning of the preference period was 16 March 1994.

21 The books of ALS were not up to date when the order was made. The Judge found that Mr Vlassis, who had been the accountant for Mr Carabelas for several years, and who had prepared annual accounts of a number of the companies in the group, prepared accounts for ALS for the years ending 30 June 1992 and 30 June 1993. This was done at the request of Mr Carabelas. The accounts were prepared after the winding-up order was made. Mr Carabelas gave Mr Vlassis some very general instructions, but largely left the matter to Mr Vlassis to exercise his professional discretion. Mr Vlassis aimed to prepare the accounts of ALS and other members of the group to present a result that would enable the companies to be de-registered, on the basis that they had no assets requiring administration. The accounts were provided to the liquidator as the accounts of the plaintiff.

22 Mr Carabelas was recorded in the books of ALS as a creditor and in the books of other companies in the group as a debtor. Mr Vlassis engaged in the process of "netting off" amounts owing by Mr Carabelas to members of the group and amounts owing to Mr Carabelas by members of the group and amounts owed between members of the group. The Judge identified the relevant journal entries in the accounts of the relevant companies. The journal entries had not been shown to Mr Carabelas by Mr Vlassis.

23 The first transaction attacked by the liquidator as a preference involved entries in the records of ALS and another company, the effect of which is that ALS reduced by $71,787.22 the amount of a debt that it owed to Mr and Mrs Carabelas by paying a debt that they owed to another group member. This involved a like reduction in an amount owed by the other company to ALS.

24 The second transaction involved a series of entries the effect of which was that ALS reduced the debt that it owed to Mr and Mrs Carabelas by $67,826.00 by paying a debt that they owed to another member of the group. Again, an amount owed by the other company to ALS was reduced by the same amount.

25 The third transaction involved entries the effect of which was that ALS reduced the debt that it owed to Mr and Mrs Carabelas by paying a debt in the sum of $93,763.75 that ALS owed to another group member.

26 These transactions did not involve any money changing hands, or any cheques being drawn. They involved nothing more than entries in the records of the various companies.

27 The Judge said at [107] that the apparent justification for this process was:

"...an assumption that the dealings by George with CBA and the companies abovementioned involved some common enterprise. However that assumption (if it has been made) is not supported by the facts as I have found them to be."

" The journal entries are evidence of transactions which occurred before the winding up of ALS commenced. They are transactions whereby the defendants in each case have obtained an advantage, namely the use of their monies as unsecured creditors for a purpose of their own choice. They are bound by the accounts (including the journal entries) because they authorised Mr Vlassis to make the relevant entries."

The Judge summarised the transactions as follows at [112]-[113]:

"In the case of the first and second preferences, balances standing to the credit of the defendants in ALS have been used to satisfy debts owed to ALS, to Blackcroft and to Carprop by "netting out" those credit balances against the monies owed by the defendants to Blackcroft or Carprop. The defendants as creditors of ALS have thus had the use of their money ahead of other creditors in circumstances where ALS is insolvent.

In the case of the third preference, the defendants have used their credit balance in ALS to reduce a debt due to ALS from Blackcroft. In that instance the defendants have again had the use of their money to the prejudice of the general body of the unpaid ALS creditors; the effect of that transaction is that the defendants have used their funds to reduce a debt due to ALS by its debt to Blackcroft."

28 The argument before the Judge and on appeal is that the relevant book entries do not record or reflect an event that occurred before the commencement of the winding-up. Mr Whitington submits that the liquidator's claim rests on book entries made by Mr Vlassis in 1994, on the basis of general instructions from Mr Carabelas, intended to bring about a situation in which the companies in the group had no assets. There are no transactions to which these entries relate. The entries do not bind Mr or Mrs Carabelas. They are a nullity that can be disregarded, returning the position of each company to its position before the "netting off" was carried out.

29 I mention here that the Judge said that he would not allow the reversal of the relevant entries unless the other companies affected were joined as parties in the case. He gave Mr and Mrs Carabelas the opportunity to do so, but they declined to do so.

30 Mr Whitington made the further point that once the order for winding-up was made, the directors had no power to authorise the transactions that Mr Vlassis recorded in the accounts, if there were any such transactions. He argued that the liquidator was relying on the entries themselves and they occurred after the commencement of the winding-up, and therefore outside the preference period. The entries were simply void.

31 The Judge rejected the claim that Mr Carabelas borrowed the money in question from CBA, as between himself and the group, acting as agent for members of the group, and that he was entitled to be indemnified by each of them as to the whole amount. The Judge said at [70]:

" In my opinion, all this evidence (and in particular the way in which the accounts for 30 June 1989 were prepared) strongly suggests that George was borrowing from the bank and then supplementing these funds from other sources as necessary to support a particular project. In my opinion, the evidence does not sustain the defendants' contention that George had merely some subsidiary role as agent for a joint venture between a number of companies. I find that there was not a joint venture."

He went on to find that the correcting entry by Mr Vlassis, on which the defendants relied, was "prepared for the purpose of shielding George from liability": at [72].

32 At trial, ALS proved the relevant entries. It called Mr Vlassis as its witness, but his evidence in chief was directed mainly to the preference claim. ALS also tendered evidence given by Mr Vlassis on an earlier examination before a Master of the court. That evidence dealt with the entries and events the subject of the compensation claim.

33 In the tendered evidence Mr Vlassis referred in rather general terms to an arrangement under which Mr Carabelas borrowed funds from CBA as a matter of convenience, rather than each company in the group borrowing on its own account. He said that the money borrowed by Mr Carabelas was for use by a member of the group for a particular purpose or purposes, if CBA so agreed. His practice was to record payments to a particular company as an on-lending by Mr Carabelas to the relevant company. He said that the "true intention" was to lend to the relevant company, Mr Carabelas being a convenient way of doing that. He tried to track separately the money received in this way by the company, by a reference to CBA in the relevant entry. He treated borrowings by Mr Carabelas from CBA as a kind of clearing account. It is not clear how much of this evidence is surmise on his part, how much is based on instructions from Mr Carabelas and how much, if any, is based on direct knowledge of relevant events. The evidence is general.

34 On this aspect of the case, apart from tendering the evidence given before the Master, ALS asked no questions of Mr Vlassis in chief. In cross-examination by counsel for Mr Carabelas Mr Vlassis said that each member of the group had granted a mortgage to CBA to secure the whole amount borrowed by Mr Carabelas. He was allowed to give evidence as to the basis on which he had prepared the accounts. He said that he prepared them on the basis that Mr Carabelas borrowed from CBA with a view to on-lending to members of the group.

35 Mr Whitington makes the point that ALS called Mr Vlassis, did not suggest to him that the "correction" was not genuine and did not challenge, by questions to Mr Vlassis, the tenor of the tendered evidence that Mr Carabelas was borrowing on behalf of the group.

36 Mr Carabelas was called as a witness for the defence. He said that it was more convenient for all borrowing to be done by him. In answer to a leading question, he said that he borrowed on behalf of the companies. He said that each company that got funds in this way gave CBA security for the full amount of the borrowings by Mr Carabelas. He was not able to explain the journal entries, including the correcting entry.

37 The evidence is sketchy and rather confusing. The central issue, whether the members of the group joined in an arrangement under which Mr Carabelas borrowed from CBA for their use, each member providing security to the CBA for the balance owed by Mr Carabelas at any time, was raised with Mr Vlassis and Mr Carabelas only in very general terms, and rather indirectly.

38 The Judge considered the accounting records of ALS, such as they were. He said that they did not indicate an arrangement of the type suggested. In particular he seems to have been influenced by the fact that in the relevant records each company was treated as borrowing and liable for only the amount advanced to that particular company, not the whole amount of the borrowing at any one time.

39 I agree that the matter is finely balanced. It does not turn on an assessment of credit, but on the effect of the records, such as they were, and of some vague and general evidence by Mr Vlassis and Mr Carabelas.

40 The Judge was not required to give any weight to Mr Vlassis' evidence about the arrangement between the members of the group. His evidence suggests that what he said was surmise or assumption on his part. The claimed "correcting" entry had no special status. It also rested on surmise or assumption. I am not persuaded that the Judge erred. If there was an arrangement of the type indicated, I would have expected Mr Carabelas to be a good deal clearer about it than he was, bearing in mind that he is a solicitor. Although he did not claim any expertise in accounting matters, the basic point at issue is not a subtle one. There is no suggestion that there are any resolutions of directors or other records supporting the existence of the claimed arrangement. I gather from the Judge's finding that financial records of the company are consistent with each company being liable for the amount advanced to it, and for nothing more.

41 It was open to the Judge to find, as he did, that the suggested arrangement did not exist, and accordingly that in granting the mortgage to secure any advances made by CBA to Mr Carabelas, and in paying to CBA the full amount of the net proceeds of sale of the Angas St property, the directors permitted Mr Carabelas to make improper use of his position to gain an advantage for himself or for another company, this being to the detriment of ALS.

42 In considering this aspect of the matter it is important to bear in mind that the submission by Mr Whitington was aimed at a finding that the grant of the mortgage by ALS to CBA was not a breach of duties owed by the defendants to ALS. The submission proceeded on what I understand to be an unchallenged basis that when the mortgage was granted, ALS was solvent and there was no reason to anticipate insolvency. Nor is there a claim by ALS that a joint venture of the kind that was claimed to exist, had it existed, would have involved a breach of duty or impropriety by the directors. ALS simply alleged that there was no such joint venture. When the mortgage was granted the only shareholders in ALS were Mr and Mrs Carabelas. The mortgage was granted with their knowledge and assent. The submission appears to rest on the fact that the common seal of ALS has been placed on the mortgage by them in their capacity as director and secretary respectively. Mr Whitington did not point to any particular event to support his claim that the grant of the mortgage was authorised by all of the shareholders.

43 There is no doubt that in certain situations a company is bound by a decision of, or by conduct of, directors within its legal capacity or power if the decision was made, or the conduct undertaken, with the unanimous assent of its shareholders, even though, but for that assent, the company would have a claim against the directors for breach of a duty owed to the company. In some situations, the relevant principle does no more than cure a lack of formality in the decision-making process in the company. In the decision on which Mr Whitington's submission was based, Re Duomatic Ltd, the directors of the company drew sums from company funds as remuneration, although no resolution of the Board of Directors, or of a general meeting of shareholders, authorised them to do so. The drawings were made with the knowledge and consent of the shareholders. When the company went into liquidation, the liquidator sought to recover the payments as unauthorised. The claim failed. Buckley J applied a principle to the effect that where the relevant transaction is within power and honest, and especially if it is for the benefit of the company, it cannot be upset if the assent of all the corporators is given, whether it is given at different times or simultaneously, formally or informally: at 372.

44 This is not a case in which there is a need to cure a lack of formality in the decision making process. The mortgage was duly executed pursuant to a resolution of the directors.

45 The issue here is whether the fact that the shareholders of ALS assented to the grant of the mortgage means that ALS cannot now complain that the grant of the mortgage was a breach by the directors of their duty under subsections (2) and (4) of s 229 of the Code, as found by the Judge.

46 The breach of duty lay in the use of company assets to secure borrowings by Mr Carabelas in his own right, and in the consequent use of company assets to reduce his debt to CBA.

47 I mention here that a breach of each of those provisions is, by operation of the Code, capable of being an offence, in the former case attracting a fine and in the latter case attracting a fine or imprisonment for five years, or both. The claim by ALS is to enforce a right of action conferred by s 229 (7) of the Code, founded on a contravention of these provisions.

48 The cases indicate that in some situations the assent of all shareholders, or ratification after the event, will mean that a company cannot later complain of conduct by its directors that otherwise would involve a breach of their duty to the company. The issue is, how wide is this principle? When is the assent of the shareholders effective to prevent a company claiming that the decision or act in question is a breach of duty owed to the company?

49 In Miller v Miller and Another (1995) 16 ACSR 73, in a context far removed from the present, Santow J attempted a general summary of the position which, with respect, appears to me to be correct. He said at 89:

"Ratification is not available where it would constitute a fraud on the minority (Ngurli Ltd v McCann [1953] HCA 39; (1953) 90 CLR 425), or misappropriation of company resources (Hurley v BGH Nominees Pty Ltd (1982) 6 ACLR 791), or was entered into by an insolvent company to the prejudice of creditors (Kinsella v Russell Kinsella Pty Ltd (in liq) (1986) 4 NSWLR 722), or defeated a member's personal right (Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4)) (supra), or was oppressive or where the majority in general meeting acted for the same improper purpose as directors (Residues Treatment & Trading Co Ltd).

It is also clear enough that ratification cannot cure a breach of statutory duty, more especially one imposing criminal liability. The most I can do is remove from the scope of technical dishonesty such actions as issuing shares for a purpose which is not a proper one, in the sense of not being for the benefit of the company as a whole."

However, while I respectfully agree with this as a general summary, further consideration of these general propositions is required, in their application to the facts of this case.

50 In the present case it might be said that the grant of the mortgage by ALS involves a misappropriation of company resources, because the mortgage charged a company asset to secure a borrowing by Mr Carabelas, and authorised the application of company funds to reduce borrowings by Mr Carabelas. It can be said that the grant of the mortgage was an exercise of power for an improper purpose, mainly for the benefit of Mr Carabelas, rather than for the benefit of ALS. It can be said that the grant of the mortgage involved a breach of a statutory obligation, possibly giving rise to criminal liability, because in granting it the directors were in breach of s 229 of the Code.

51 The relevant principle was given a wide reach in Attorney General for the Dominion of Canada v The Standard Trust Company of New York [1911] UKLawRpAC 28; [1911] AC 498. It was alleged there that promoters and directors of a company caused the company to buy a railway at an excessive price. When the company became insolvent, a proof in insolvency for the balance owed on the purchase price was challenged on the basis that the directors and vendors of the railway (the directors were the vendors) acted in breach of a fiduciary duty owed to the company. In dismissing an appeal against a decision that the proof must be allowed, Viscount Haldane, speaking for the Privy Council, said at 504-505:

"The only persons beneficially interested in the company were the four members of the syndicate. The law gave them the complete control of its action. Under that control the company gave effect to the policy of the only persons who had any beneficial interest in its capital. The case is not one in which the apparent procedure can be said to have been unreal, or to have been a cloak under which a conspiracy to defraud was concealed. Under these circumstances, their Lordships are of opinion that the company, notwithstanding that no general meeting, apart from the meeting of directors, appears to have been held for the purpose, was completely bound by the transactions sought to be impeached, and that the appellant, who has certainly no title higher than that of the company against the assets of which he claims, is bound likewise."

52 Another illustration of the principle is provided by Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258. In that case, leave to serve proceedings on foreign defendants was refused on the basis that the claim made in the proceedings was bound to fail. The plaintiff was a company that traded in liquefied gas. It sued for loss suffered in business transactions. The foreign defendants were oil companies that had combined to form the plaintiff company, and were its shareholders and appointed its directors. The plaintiff alleged that decisions that caused it to suffer loss were made at the direction of the oil companies. At 269 Lawton LJ said:

"When approving whatever their nominee directors had done, the oil companies were not, as the plaintiff submitted, relinquishing any causes of action which the plaintiff might have had against its directors. When the oil companies, as shareholders, approved what the plaintiff's directors had done there was no cause of action because at that time there was no damage. What the oil companies were doing was adopting the directors' acts and as shareholders, in agreement with each other, making those acts the plaintiff's acts.

It follows, so it seems to me, that the plaintiff cannot now complain about what in law were its own acts."

Dillon LJ expressed similar views at 288 - 291. May LJ dissented. He was not satisfied that the shareholders could preclude the company from enforcing a cause of action that it might have.

53 That there must be limits to the principle is illustrated by Macleod v R [2003] HCA 24: (2003) 197 ALR 333. There a director of a company was charged with fraudulently taking or applying property of the company for his use and benefit, or for a use or purpose other than that of the company. The property was money provided by investors, to be held by the company in a trust account to be used for the purpose of film production. The director used the money for his own purposes. The company was in breach of the trust. The director was the sole shareholder of the company. His defence was that there was no offence because, through him, the company had consented to the taking of the money. It was argued that there could be no contravention of the relevant provision "where the taking or application occurred with the unanimous consent of the shareholders": at [26]. This submission was rejected by the High Court. Gleeson CJ, Gummow and Hayne JJ said that developments in the understanding of the distinct legal identity of a corporation were relevant. They said at [28]:

"The scope and operation of the provisions necessarily move with those developments; their construction is informed by the proposition that a company has rights, interests and duties which differ from those of its directors, officers and members. The conduct or state of mind of the latter is not always to be attributed to the former; this is particularly evident upon an insolvent winding-up."

"The self-interested "consent" of the shareholder, given in furtherance of a crime committed against the company, cannot be said to represent the consent of the company."

54 To a like effect are the remarks by McPherson J in ANZ Executors & Trustee Company Limited v Quintex Australia Limited [1991] 2 Qd R 360 at 367. He said:

"But a shareholder's freedom to exercise his vote as he pleases does not mean that in law he can accomplish everything that takes his fancy. The right to vote is, it is true, a species of property that can be exercised at will, and it may confer control over the affairs and property of the company; but it does not follow that the holder may always do whatever he pleases with the corporate assets. For they are the property of the company and not of the shareholder, who has no legal or equitable interest in them: Macaura v Northern Insurance Co [1925] A.C. 619, at 626. That is the inescapable consequence of treating the company in law as an entity distinct from its members."

He went on to give illustrations of things that shareholders cannot do. In particular he referred to a company confronted by insolvency, and apparently approved of a number of decisions treating the consent of shareholders as effective as being supportable on the basis that at the time in question the company in question was solvent and the decision in question was a business decision made in good faith.

55 Another relevant decision is Winthrop Investments Ltd and Another v Winns Ltd and Others [1975] 2 NSWLR 666. That was a case in which the directors of a company, on becoming aware that the company was the target of a takeover bid, set out to defeat the takeover by entering into negotiations for a merger with another company involving the purchase by the target company of assets from that other company and the issue of shares in the target company to the other company. The offeror for the shares of the target company sought an injunction to restrain the directors and the target company from proceeding with the arrangement. An appeal to the Court of Appeal of New South Wales was successful in restoring an injunction, the decision resting on the fact that when the conduct in question was approved by the shareholders at an extraordinary general meeting, full and proper disclosure was not made to them. But the premise of the reasoning of the members of the court was that although the conduct of the directors was motivated by an improper purpose (resistance to the takeover), rather than a permissible purpose, an informed and unanimous consent by the shareholders would have authorised what would otherwise have been a breach of fiduciary duty to the company: Glass JA at 674, Samuels JA at 684, Mahoney JA at 703- 704. In Kinsela and Another v Russell Kinsela Pty Ltd (In Liq) (1986) 4 NSWLR 722 Street CJ considered a number of the relevant cases, including Winthrop and summarised the position as follows at 730:

"In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through that medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration."

56 This line of authority suggests that the informal assent by the shareholders of ALS to the grant of the mortgage to CBA is sufficient to prevent ALS complaining that in granting the mortgage the directors acted in breach of their duty to the company. The company was not insolvent at the time. There were no other shareholders. There was no other person with a claim to the property in question. There is no allegation that this was a dishonest or fraudulent transaction, although it is to be noted that it was alleged that there was no commercial advantage to ALS in the grant of the mortgage, beyond securing the money required to repay HBS. It is true that the grant of the mortgage contemplated the use of company assets to discharge a liability of Mr Carabelas, and in that sense contemplated a misappropriation of ALS' assets. But this was not a misappropriation contrary to the interests of any other person: cf Macleod v R. Also, the consent of the shareholders is relied on to cure a breach of the provisions of s 229 of the Code, which breach is capable of being an offence.

57 In relation to the latter point, I note that in Miller (above), Santow J expressed the view that ratification cannot cure a breach of statutory duty, in particular one imposing a criminal liability. A contrary but tentative view was expressed by Debelle J in Pascoe Ltd (in liq) v Lucas (1998) 27 ACSR 737 at 772. He said :

"But, as the statutory duties reflect the duties of a director at common law and in equity, I do not think there is any impediment to the shareholder excusing a breach of a statutory duty."

58 In Marson Pty Ltd v Pressbank Pty Ltd & Ors (1987) 12 ACLR 465 at 472 McPherson J appears to have expressed a view similar to that of Santow J. He said:

"...I should not be understood to mean that disclosure to and ratification by shareholders is effective to relieve a director of the liability imposed by s 229(7), although the fact of such disclosure may very well be relevant to the question whether a director has acted honestly in terms of s 229(1)."

He was there referring to the provisions of the Queensland Code. For completeness I mention that when Pascoe went on appeal to the Full Court, Lander J, with whom the other members of the court agreed, referred to a number of the relevant decisions and then summarised the position. In Pascoe Limited (in liquidation) v Lucas [1999] SASC 519; (1999) 75 SASR 246 he said at [265]-[266]:

"In this case there being only one shareholder the approval by that shareholder in advance of the transaction, in my opinion, could amount to an authority by that shareholder for the company to enter into the transaction even if the entry into that transaction gave rise to a breach of fiduciary duties on the part of the director.

However that proposition is subject to qualification. First the company must be solvent. In my opinion, for the reasons I have already given the company was solvent. Secondly the transaction itself must be intra vires. Thirdly the directors must make full disclosure to the shareholders. Fourthly the directors must be acting in good faith."

He went on to say that an informal consent might suffice: at [270]. He said that authorisation or ratification might not protect directors if they acted "recklessly and their recklessness amounts to fraud": at [272].

59 It is difficult to reconcile all of the observations made by judges on this topic, and the decisions. Doing the best I can, I conclude that the only obstacle to acceptance of the submission by Mr Whitington lies in the fact that a breach of s 229 of the Code is the basis of the claim by ALS. None of the other qualifications or limits on the ability of all of the shareholders to assent to or acquiesce in a transaction that would otherwise involve a breach of duty by the directors, the assent or acquiescence preventing the company from complaining of that breach, apply here. As to the impact of s 229 of the Code, my view is that the shareholders implicitly authorised in advance the grant of the mortgage to CBA, because it was given with their knowledge and apparent approval. That being so, I conclude that there was in fact no breach of s 229. The grant of the mortgage cannot be regarded as a breach of s 229, because of the antecedent acquiescence or assent by all of the shareholders of ALS. This is not a case in which a breach of s 229 has been established, and there is an attempt to rely upon a later resolution of the shareholders, or later conduct by the shareholders, to absolve an established breach of the section.

60 For those reasons I would allow the appeal and set aside the order that ALS recover from the defendants the amount of the payment made to CBA.

61 In relation to that order, I would wish to hear the parties on the question of costs. If it is the case that this argument was not raised before the Judge, that may affect the question of the appropriate order as to costs.

62 ALS granted the mortgage to CBA on 4 July 1988. The Judge found the grant of the mortgage to be an act of misfeasance.

63 The supposed "correcting" journal entry was apparently made on 30 June 1990. By that entry the directors purported to replace a claim by ALS against Mr Carabelas for monies advanced to him with a worthless claim against the other companies. The other companies were then insolvent. The Judge found that to be an act of misfeasance.

64 Accordingly, on the Judge's findings there were breaches of s 229 of the Code in July 1988 and in June 1990.

65 The action was commenced on 13 March 1997 as a claim by the liquidator against the directors for recovery of payments that were a preference. By amendment made on 23 March 1999 ALS was added as a plaintiff and the statement of claim was amended to include its claim against the directors for misfeasance. When that amendment was made no order was made as to the date from which the claim by ALS was taken to be made.

66 There is authority for the view that when existing proceedings are amended to permit a plaintiff to include a new cause of action, the amendment will "relate back" to the date on which the proceedings were first instituted unless the court otherwise orders: see the review of authorities by von Doussa J in Brook v Flinders University (1988) 47 SASR 119 at 122-126. In light of this, there is a question as to whether the action by ALS is taken to have commenced in March 1997 or in March 1999.

67 The Code does not fix a time limit within which a claim under s 229 (7) must be brought.

68 The Judge said that for the purposes of the LAA the claim by ALS was an "action founded on tort" and so, by s 35 (c) of the LAA, subject to a time limit of six years. The Judge so concluded on the basis that s 229 "only provides a summary mode of enforcing rights which otherwise must have been enforced by the court's ordinary jurisdiction" and further that s 229 "provides a convenient method of enforcing rights which would otherwise exist": at [30] and [31]. That six-year time limit expired at the latest in June 1996. The Judge granted an extension of time, exercising the power conferred by s 48 (3) of the LAA: at [78]. The Judge found that facts material to ALS's claim were not ascertained by the liquidator until Mr Vlassis gave evidence on his examination on 2 September 1998, and further on the basis that the proceedings were commenced within 12 months after the ascertainment of those facts: see s 48 (3)(b)(i).

69 However, and this is material for the purposes of the appeal, if the claim by ALS is deemed to have been instituted in March 1997, it was instituted before those material facts were ascertained by the plaintiff, and there is a difficulty then with the grant of an extension of time. The difficulty is that the action was not commenced within 12 months after the ascertainment of the material facts. This is a problem alluded to by von Doussa J in Brook at 126.

70 In the statement of claim (as amended) ALS sought an extension of time on this basis: para 24A. In their defence the defendants do not appear to have raised the point that an extension of time was not available. The Judge made no reference to the difficulty just alluded to. I gather that the point was not taken before him.

71 It should also be noted that the judge rejected a submission that the claim by ALS was an action upon "specialty" for the purposes of s 34 of the LAA, and accordingly subject to a time limit of 15 years: also at [30] and [31].

72 As I understand his submissions, Mr Whitington was content to accept that the action was an action founded on tort, and subject to a six-year time limit. He argued that the Judge erred in granting an extension of time, because the action was to be taken as having been commenced in March 1997, and so ALS was caught by the difficulty identified by von Doussa J in Brook at 122-125.

73 In my opinion there are two answers to this submission. The first is that the statement of claim (as amended) claimed an extension of time in respect of the misfeasance claim. That being so, common sense requires that the application to amend the statement of claim be treated as an application to amend with effect from the date when the amendment was made, rather than with effect from the date of institution of the proceedings. I appreciate that ALS may not have averted to this point at the time but it seems to me unreasonable to treat the application to amend as one which, the instant it was granted, became self-defeating because of the date from which the amendment operated. Accordingly, I would treat the grant of leave to amend as, implicitly, a grant on the basis that the amendment would operate from the date of the amendment: cf Brooke at 126.

74 There is a question whether the defendants should now be allowed to take this particular point. Had it been taken before the trial Judge, the grant of leave to amend could have been revisited, and were it necessary to make an order as to the date from which the amendment should operate, such an order should be made. It may be that that order could be made now on appeal, and if that is so I can see no reason why the order should not be made. The amendment was made on the basis that ALS would pursue its application for an extension of time at trial. It is consistent with that to make an order that would preserve that situation. Be that as it may, had this point been raised before the Judge the matter could have been dealt with by the Judge, and I consider that it may be unfair to allow the defendants to secure an advantage by raising on appeal a point not taken at trial.

75 In any event, and contrary to the view of the Judge, I consider that the action is an action on specialty for the purposes of s 34 of the LAA. In that event it was commenced within time.

76 The claim made under s 229 of the Code is one that rests entirely on s 229. The provisions of s 229 largely restate or replicate what would be the duty of a director at common law. But it must be borne in mind that sub-s (1) and sub-s (4) of s 229 each create an offence, punishable by fine, and imprisonment in the case of sub-s (4). Judgment was entered for ALS under s 229 (7), which confers the right to recover loss suffered as a result of a contravention of s 229. The claim by ALS is not a claim for a common law remedy in respect of a breach of a statutory duty. Nor is it a claim for a breach of duty owed at common law, the duty being in some way modified by a statutory provision. Nor is the claim merely affected in some way by the statutory provision. Both the right and the remedy are to be found within s 229. It is no answer to this to say that the claim is one that might have been made apart from the provisions of s 229, or that s 229 is a convenient method of enforcing rights which would exist had s 229 not been enacted. In my respectful opinion the answer to those observations is that in the present case both the right and the remedy are based wholly on the statute.

77 I am persuaded by the approach of Commissioner Williams QC in State Government Insurance Commission v Teal [1990] 2 WAR 105 at 118, and I agree also with the view of Master Bredmeyer in Blakeley v BMP Pty Ltd (1998) 29 ACSR 469 that a claim for compensation under s 229 of the Code is an action on specialty. I am content to adopt the reasoning of each of them. I agree with the observation of Commissioner Williams that it should not be necessary to delve into the legal complexities that arise in considering this issue these days. This is a matter that calls for statutory reform.

78 Mr Whitington further argued that, in any event, a new statutory time limit has been imposed and that the action falls outside that time limit.

79 The Corporations Law came into operation on 1 January 1991. It replaced the Code. Section 85 of the Corporations (South Australia) Act 1990 (SA) relevantly provides as follows:

_"_85.(1) This section provides for the national scheme laws of this jurisdiction to supersede the co-operative scheme laws, which are to continue to operate of their own force only in relation to:

(a) matters arising before the commencement of this section; and

(b) matters arising, directly or indirectly, out of such matters

in so far as the national scheme laws or the Corporations Legislation do not deal with those matters."

The Corporations Law is one of the national scheme laws referred to: s 60. The Code is a co-operative scheme law: s 84.

The effect of that provision is that s 229 continued to operate of its own force in relation to the events the subject of the proceedings by ALS. Those events were matters that arose before the commencement of s 85, of the Corporations (South Australia) Act and the proceedings were matters that arose out of those matters.

80 The Corporations Act 2001 (Cth) came into operation on 15 July 2001. Chapter 10 of the Corporations Act contains transitional provisions. Relevant provisions are found in part 10.1.

81 Mr Whitington founds his submission on s 1383 of the Corporations Act. The effect of this provision is to treat existing proceedings, if they fall within s 1383, as a proceeding equivalent to the existing proceeding, brought in a court exercising federal jurisdiction, and under a provision of the Corporations Act that corresponds to the legislative provision relied on. But, relevantly, s 1383 applies only if the proceeding was "under a provision of the old corporations legislation of a state...": s 1383(1)(b)(i). In s 1371(1) "old corporations legislation" is defined in terms that refer to the Corporations Law and that do not refer to the Code.

82 Putting that point to one side for the moment, Mr Whitington pointed to s 1317 K of the Corporations Act, which fixes a time limit of six years for the starting of proceedings for a compensation order. I agree that if the present proceedings fall within s 1383, they are proceedings for a compensation order.

83 Mr Whitington submits that the proceedings were not started "no later than six years after the contravention" relied upon, and that as the Corporations Act makes no provision for the grant of an extension of time, none can be granted and accordingly the claim is out of time.

84 The answer to that submission is that because the proceedings are not proceedings under the "old corporations legislation" they are not referred to by s 1383. This may be an odd result, because it leaves proceedings under the Code outside the time limits imposed by the new Corporations Act. But the terms of s 1383 are clear. I reject the submission that s 1370 of the Corporations Act, which states the object of part 10.1, namely "to provide for a smooth transition" from the former regime to the new regime, requires a different answer. To my mind it is not self-evident that a "smooth transition" requires the result for which Mr Whitington contends. In any event, it is question begging to argue that s 1383 must embrace the claim under the Code, because otherwise there will not be a smooth transition. That simply assumes that result is required for a smooth transition.

85 In this context I have considered also the provisions of the Corporations (Ancillary Provisions) Act 2001 (SA). I consider that that Act, and in particular s 6, draws the same distinction between the Code and the Corporations Law.

86 I should add that I also reject the submission by Mr Whitington that the present proceedings are brought under "the old corporations legislation" on the basis that s 85 of the Corporations Law provides for the proceedings to continue as proceedings under the Code. I consider that s 85(1) simply permits the Code to operate of its "own force" in relation to the matters the subject of the present proceeding. Section 85(1) retracts or withdraws the Corporations Law from these matters.

87 The Judge held that even if Mr Whitington's submission was correct, s 79 of the Judiciary Act 1903 (Cth) applies s 48 of the LAA to the present case, so that ALS can nevertheless obtain an extension of time.

88 This conclusion by the Judge raises an aspect of the operation of s 79 on which there was a division of opinion within the High Court in John Robertson & Co Limited (in liquidation) v Ferguson Transformers Pty Ltd and Others [1973] HCA 21; (1973) 129 CLR 65. It is usually desirable that an intermediate court of appeal resolve all issues that might become significant, should the High Court grant special leave to appeal in the matter. However, before us this point was argued very briefly, with only passing reference to one or two decisions. No consideration was given to the latest High Court decision touching on s 79, John Pfeiffer Pty Ltd v Rogerson [2000] HCA 36; (2000) 203 CLR 503. Nor was any reference made to other High Court decisions that might bear on the point. After the court heard the appeal the New South Wales Court of Appeal handed down this decision in Air Link Pty Ltd v Paterson (No 2) [2003] NSWCA 251. That decision refers to a number of decisions in the High Court and in state courts that are relevant to the application of s 79 in the present case.

89 These decisions were not referred to in argument. Under those circumstances, in my view it is unwise to express a view on this aspect of the matter, without the benefit of full submissions. Accordingly, it not being necessary for the purposes of this decision to express a view on the application of s 79, I refrain from doing so.

90 Finally, ALS contended, by way of a notice of contention, that in the alternative its claim could be supported as a claim for breach of fiduciary duty, and that there is no time limit applicable to such a claim, either directly or by analogy.

91 I do not accept the submission by Mr Whitington that at trial ALS abandoned any claim that it might have in equity, as distinct from its claim under the Code. It is clear enough from what happened at trial that ALS did no more than indicate to the Judge that it was content to have its claim disposed of under s 229 of the Code if that claim succeeded, and did not require the Judge to consider separately a claim for breach of a Common Law duty of care or for breach of fiduciary duty. Should I be wrong in deciding that the claim under s 229 is not out of time, it will become necessary to consider the alternative bases for the claim.

92 However, if that is to occur, I consider that further argument is called for. The Judge in question has now retired, and it might not be convenient to refer back to the trial Judge, the question of whether ALS is entitled to judgment for breach of a duty of care or for breach of a fiduciary duty. However the matter is dealt with, before the question of time limits affecting such a claim can properly be considered, it is necessary to identify with reasonable precision the question of whether such a claim is to succeed, and the basis upon which it succeeds. For those reasons, while it is desirable for a court in the position of this Court to resolve all matters, it is undesirable to decide upon the application of the LAA, or time limits applicable by analogy, without the court having first determined whether any, and if so what claims succeed on that alternative basis. I add that the assent by the shareholders to the grant of the mortgage to CBA is as much an obstacle to the success of this claim as it is to the success of a claim under the Code.

93 For all those reasons my conclusion is that the submission that the claim by ALS is out of time fails.

94 I agree with the submission by Mr Whitington that I outlined above, when outlining the issues that arise on this aspect of the appeal.

95 The Judge found that the journal entries in question were made after 26 June 1993, the date on which the Corporations Law came into operation. However, as I understand it the argument on appeal does not depend on a decision as to which statutory regime governed the relevant events.

96 The journal entries were unquestionably made after the winding-up began. The Judge found that Mr Carabelas employed Mr Vlassis as his agent to prepare the accounts, and was bound by Mr Vlassis' acts: [89]. He found that Mr Carabelas and Mrs Carabelas by their conduct had accepted the accuracy of the accounts: [99]. In general terms I agree. The present case is unlike Manzi and Others v Smith and Another [1975] HCA 35; (1975) 132 CLR 671 in that respect. Here, the relevant journal entries were made with the assent of Mr and Mrs Carabelas. On that point, see also Temple Wholesale Flower Supplies Pty Ltd v Federal Commissioner of Taxation [1991] FCA 162; (1991) 99 ALR 479 at 487-488.

"The journal entries are evidence of transactions which occurred before the winding-up of ALS commenced."

At this point I disagree with the Judge's reasoning.

98 My understanding of the evidence is that the journal entries reflect a decision made, after the commencement of the winding-up, about how the accounts of ALS and of the other companies should be presented. There is no suggestion of a decision or transaction at an earlier stage to which these entries are referable, other than a very general reference by Mr Vlassis to an earlier realisation by Mr Vlassis that the companies should be deregistered, and that to that end their accounts should record them as having no assets. There was also an attempt to refer them to the suggested joint venture: [107]. The Judge had found there was no such joint venture, and even if it existed I do not understand how it could be said to give rise to the transactions that the Judge said underlay the entries.

99 It appears that the Judge has decided that Mr and Mrs Carabelas should not be permitted to impeach or to attack the journal entries by denying that they are properly made, and by denying that they evidence an earlier decision or transaction that would support those entries. I understand the Judge's reluctance to allow Mr and Mrs Carabelas to disavow the entries when it suits them to do so, and his concern about the implications for the accounts of other members of the group.

100 However, in my view the evidence indicates that there was no transaction before the winding-up began, that these entries record or reflect.

101 In my respectful opinion, the Judge has not identified any basis for doing what he did. No estoppel or other principle has been relied upon by the Judge. I appreciate that if the entries are to be disregarded, a consequence may be that Mr and Mrs Carabelas are creditors of ALS, debtors of other members of the group, and other members of the group are debtors or creditors of ALS. But I find no basis for the inference that the Judge drew. Nor, in my respectful opinion, is it appropriate to hold that unless the accounting consequences for other members of the group are resolved in these proceedings, the entries must remain binding. As I see it, the accounting consequences of the Judge's decision for other members of the group are a matter for another day. They are not parties to these proceedings.

102 My difficulty with the Judge's reasoning is in drawing the inference that the entries reflect transactions that occurred before the winding-up of ALS began, when all the evidence indicates that they do not, and when I can find no basis for preventing Mr and Mrs Carabelas from relying on the truth of the matter.

103 What is the effect of the entries in the books of ALS? I accept the submission by Mr Whitington that they are of no effect, in the sense that although they altered the manner in which ALS' accounts were expressed, they had no effect on the amounts owed to or owed by ALS; cf Manzi v Smith at 675 Jacobs J. The entries do not bind ALS. They were made after the winding-up commenced. Neither Mr Vlassis nor Mr or Mrs Carabelas had the authority or capacity to cause ALS to agree to the transactions that the journal entries purported to record.

104 In the circumstances, these entries do not constitute payments that are avoided by s 468 of the C_orporations Law_ because they were made after the winding-up began. The journal entries have no effect at all. To the extent that it might be said that the journal entries do record transactions or payments, the answer is that they are avoided by s 468 of the Corporations Law. They are avoided by treating the journal entries as ineffective, not by ordering repayment of the amounts the subject of the entries.

105 For those reasons I would allow the appeal to the extent of setting aside the order made by the Judge on the claim by the liquidator that the liquidator have judgment for $234,576.97 against Mr and Mrs Carabelas.

106 In the course of the submissions on appeal Mr Whitington suggested that in deciding the misfeasance claim the Judge had erred in finding in favour of ALS for the amount that he did find. The submission appeared to be that the Judge failed to give credit to the defendants for an amount in respect of which ALS was indebted to Mr Carabelas. Mr Whitington suggested that if ALS were to succeed, the amount of the liability was $257,512.00, and not $474,950.00.

107 This point was not taken before the trial Judge, nor was it raised in the notice of appeal. Mr Whitington raised it during the course of argument.

108 My understanding of the application is that it would require the evidence, and in particular the accounting records, to be revisited in some detail. There is a real possibility that it would require the giving of further evidence.

109 In those circumstances, I consider that it is now too late for the point to be raised, and I would refuse leave to amend the grounds of appeal to raise the further point.

110 For those reasons I would allow the appeal, set aside the orders made by the court, and order that there be substituted an order dismissing the claim by each plaintiff against the defendants.

111 That is subject to the question of whether the court should hear further submissions on the alternative claim by ALS for breach of a common law duty or breach of an equitable duty. However, my tentative view is that each of those claims would fail because the shareholders of ALS assented in advance to the grant of the mortgage to CBA. If that is so, there appears to be little point in the court hearing further submissions on the matter.

112 PRIOR J: I agree with the reasons given by the Chief Justice. Subject to the question of whether there should be further submissions on the alternative claims, the appeal should be allowed and the claims dismissed.

113 VANSTONE J: I agree with the reasons given by the Chief Justice.

CARABELAS & ANOR v SCOTT No. SCCIV-97-409 [2003] SASC 389

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Judgment (140 paragraphs)

CARABELAS & ANOR v SCOTT No. SCCIV-97-409 [2003] SASC 389 (5 December 2003)

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Cases Cited (9)