Carr v Resource Equities Limited [2010] NSWCA 286 | Case summary

Carr v Resource Equities Limited [2010] NSWCA 286 | Case summary | Zoe

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Directors' Fees 7 His Honour's finding that an amount of $88,000 was overpaid to Mr Purves is not challenged. However, his Honour's disallowance of a payment of $167,000 to Mr Carr, over and above what his Honour found to be a reasonable amount of $33,000, is challenged. 8 Some years before, shareholders had carried a resolution that directors' fees be capped at $200,000 per annum. The board of REL had carried a resolution which, on one interpretation, imposed a further limit on directors' fees. 9 Clause 13.10 of REL's Constitution provided that, in addition to remuneration for services as directors, directors could be compensated if they were called upon "to perform extra services or make any special exertions on behalf of the company or the business thereof". Mr Carr relied upon this provision. This reliance was based in part on his own evidence, which as I have noted above, was rejected by his Honour. However, reference was made to some objectively verifiable evidence in the form of solicitors' invoices. 10 McDougall J expressly rejected the assertions by Mr Carr in his evidence that he had done such additional work (see [86], [87]). His Honour also rejected the attempt to reconstruct the work alleged to have been done by Mr Carr by reference to the solicitors' work, on the basis that the solicitors' work did not indicate work by Mr Carr (see [87]). Furthermore, his Honour held that a substantial amount of the solicitors' work was undertaken for the Fox transaction, to which I will refer below. This transaction was found to breach Mr Carr's duties as a director, and not to be undertaken for the benefit of REL but, substantially, for the benefit of Mr Carr and Cosmos Ltd ("Cosmos") (see [87]). 11 There is nothing in the written submissions identifying how his Honour erred in drawing any of these conclusions. The bald submission is made that his Honour ought to have found that the time was in fact spent on the matters to which Mr Carr referred in his evidence. The wholesale rejection of that evidence by his Honour was not, as I have mentioned, challenged in any way. 12 This basis of appeal should be rejected.

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The Fox Transaction 13 Fox was a company whose principal asset was an Eftpos system under development. REL entered into the Fox transaction on 14 July 2003, initially subscribing $200,000 for 20 percent of Fox's issued capital and committing to advance loans of up to a further $1.44 million. REL also gave a charge to Fox's then lender over all of REL's assets to secure the performance of Fox's obligation. There were subsequent variations to the amounts advanced by loans and some of the loans were converted to equity. 14 The Fox transaction was initiated at a meeting on 20 March 2003 where Mr Carr purported to agree to an arrangement on behalf of REL of a character which would not give REL any equity in the project. Rather the shares to be issued to REL would be held on trust for Cosmos, which installed Eftpos terminals in pharmacies in Australia. It was said that the technology under development by Fox would enable Cosmos to enhance the commercial value of its existing business. 15 This proposed trust did not eventuate and REL acquired the direct beneficial interest in shares in Fox. Although his Honour made findings about the conflicts of interest that arose by reason of Mr Carr and Mr Purves' association with Cosmos, his Honour's findings with respect to the transaction, as originally proposed, should be understood by way of background to the challenge to the arrangement as it was in fact implemented. 16 The written submissions with respect to the Fox transaction are in a narrow compass. They set out a number of facts and matters and on the basis of those facts and matters submit, without any detailed analysis, that: The directors of REL did not breach their statutory duties and/or fiduciary duties. The business judgment rule in s 181(2) of the Corporations Act should have been applied. The appellants ought to be excused pursuant to s 1318 of the Corporations Act . 17 Furthermore, the written submissions assert that any loss was occasioned by the fact that the ultimate sale price was less than the original investment and that the appellants had nothing to do with that transaction. They further assert that his Honour should have allowed an amendment of their case so as to raise a further issue of causation. 18 It is pertinent to note that his Honour made findings against the appellants for breach of their duties under each of ss 180, 181 and 182 of the Corporations Act - namely the duty of care and diligence, the duty to act in good faith and the duty not to make improper use of position. The business judgment rule, upon which the appellants rely, applies only to the duty of care and diligence under s 180(1). 19 The facts and matters upon which the appellants rely for each of the propositions advanced are as follows: The technology was in an advanced developmental stage and had strong potential to make significant profits. In March 2003, Fox was in an advanced stage of negotiation with Westpac for licensing the Fox technology, which occurred in April 2004. The second respondent, Mr Thomas, by his actions, particularly by investing his own money, affirmed the possible success of the technology. The Fox investment was eventually sold on an arms' length basis for a substantial amount, albeit at a loss. 20 Two reports were prepared by independent accountants, commissioned to assess the financial position of Fox at the time of the transaction. The appellants downplayed their significance. The reports were significantly negative. However, the appellants submitted that reports on past financial performance would not provide any insight into the potential of the technology or the financial performance to be expected of it. 21 The first matter to refer to in this respect is that, save in relation to the evidence of the second respondent and his confidence in the Fox technology, the appellants rely exclusively on their own evidence, which was rejected by his Honour with respect to each of the propositions advanced. 22 The second is that McDougall J found each of the appellants was in a position of conflict of interest. He held that Mr Carr was both an investment adviser to, and an agent of, Cosmos. This created a clear conflict with his statutory and fiduciary obligations to REL with respect to the Fox transaction. His Honour also found that Mr Carr's conflicts went even further on the basis of an expectation that he would personally be allotted shares upon a proposed IPO of Fox and that he would receive a substantial fee upon the future listing of Fox. Mr Purves became a director of Cosmos which also created a relevant conflict. 23 Some of the findings of conflict were made by McDougall J in the context of discussing the original arrangements. However, his Honour expressly held that, even after the final agreement, when Cosmos no longer had a beneficial interest in shares standing in the name of REL, Cosmos would still derive a substantial benefit from the development and implementation of the Fox technology. 24 As I have indicated, some due diligence was undertaken with respect to the Fox transaction. A firm of chartered accountants, Armstrong Wily & Co was instructed to investigate the financial statements of Fox. The two reports prepared by that firm indicate that the accounts of Fox could not be relied upon for any purpose and that there were significant doubts about several aspects of them. It is unnecessary to set out the details. 25 His Honour rejected the evidence of Mr Carr and Mr Purves with respect to the deficiencies identified in these reports. He also rejected their evidence as to their involvement. His Honour found that in his evidence Mr Carr "sought consciously, and untruthfully, to minimise the extent of his involvement in and understanding of a due diligence process". His Honour also rejected Mr Purves' attempts to justify the transaction. His Honour concluded that the investigations carried out by the appellants "were lamentably insufficiently" (at [183]). 26 His Honour also held that, as at the date of the signing of the final agreement, there was no reason to believe that the technology would be developed and marketable before the time that REL's cash investment would be exhausted and that this was another example of why the Fox transaction was, from REL's perspective, "improvident". 27 McDougall J reached the above conclusions on the basis of the objective facts. His Honour indicated that an alternative basis for reaching those conclusions arose from the conflicts of interest duty of each of the appellants and concluded: "[188] … The transaction was plainly improvident, as it was plainly motivated by self-interest. Messrs Carr and Purves were plainly afflicted by severe conflicts of duty, or of duty and interest, at the times relevant to the actions of each of them committing REL to the Fox transaction. Neither Mr Carr nor Mr Purves could give any acceptable explanation of the decision." 28 Furthermore, in the context of rejecting the defence under the business judgment rule pursuant to s 180(2) of the Corporations Act, his Honour held: "[192] … I do not regard the decision as having been made in good faith or for a proper purpose. It was made substantially for the benefit of Cosmos, and of Mr Carr, not for any proper purpose of REL … Messrs Carr and Purves each had a material personal interest in the subject matter of the transaction." 29 When rejecting the application for exoneration under s 1318 of the Corporations Act his Honour rejected the proposition that the appellants acted honestly and held: "[219] … The actions of each of them were marked with conspicuous dishonesty, having regard in particular to their conflicts of duty (or duty and interest)." 30 No basis is advanced in the submissions for challenging these findings with respect to the impropriety of the motives of each appellant. Furthermore, nothing in the submissions challenges his Honour's findings: That the Fox transaction was not undertaken in good faith and for a proper purpose within the meaning of s 181 of the Corporations Act ; or That the appellants improperly used their position to gain an advantage for themselves or for Cosmos within the meaning of s 182 of the Corporations Act .

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Asia Iron Proceeds 34 With respect to the findings concerning the distribution of the proceeds of sale of the Asia Iron shares, the appellants contend in their written submissions that: No loss was caused to REL, because REL will be liquidated and its creditors paid and, accordingly, all that will happen is that the monies have been distributed to shareholders sooner than would otherwise have been the case. His Honour erred in finding that the distribution to shareholders had the effect of making REL insolvent. His Honour erred in refusing the application of the appellants to agitate an issue of causation with respect to the alleged loss. If there was any loss, REL acted unreasonably in not seeking to recover payments from shareholders and the appellants should not be held liable for the amounts paid to shareholders. 35 The appellants also submit that they should be exonerated under s 1318 on the basis that: They were innocent of any knowing breach of the law, believing on reasonable grounds they were giving effect to the lawful wishes of shareholders. In this regard they note that the administrator appointed after the directors lost control continued to make payments from the proceeds of sale of the Asia Iron shares. There was no prejudice to REL because it was and is "in winding up mode and the surplus money available on payment of creditors will be distributed to shareholders who will therefore be paid the same money twice". There was no prejudice to any previous creditors because REL was solvent at the time the distributions were made. 36 McDougall J's judgment contains a detailed analysis on the issue of breach of duty, explaining why the payments could only be justified if they were a dividend or a return of capital. His Honour concluded that they were neither. The payments were, accordingly, not lawful. This was the basic finding with respect to breach of duty and there is no challenge to it. That is sufficient to dispose of the appeal, subject only to s 1318 exoneration. 37 His Honour's finding that the distributions had the effect of making REL insolvent, which is challenged, was directed to an alternative argument put by the appellants to the effect that the distributions did not materially prejudice the ability of REL to pay its creditors. This was a subsidiary argument to the issue of whether or not the payment was justifiable as a return on capital. 38 His Honour's primary finding was that the company simply did not comply with the requirements of s 256B of the Corporations Act, pursuant to which a return of capital may be made. The fact that s 256B(1)(b), which requires that such a return not materially prejudice the ability to pay creditors, was itself not satisfied does not, in the event, matter. This is because there was no challenge to the finding that the reduction was not approved by shareholders and, accordingly, that s 256B(1)(c) was not satisfied. 39 In any event, there was evidence in the form of a report from the administrator that the payments did cause REL's insolvency. The only submission made by the appellants in this respect is that his Honour should not have relied on the administrator's report. However, there is no explanation or submission as to why his Honour's reliance was in any way erroneous. 40 With respect to causation of loss, his Honour applied the reasoning of Giles J in Segenhoe Ltd v Akins (1990) 29 NSWLR 569. No objection is taken to that reasoning. It is applicable and his Honour applied it. 41 The further submission on the question of causation of loss turns on the proposition that, because REL will be liquidated, all that has happened is that the monies were distributed to shareholders sooner than they would otherwise be distributed. However, as Mr R Newlinds SC, who appeared for REL, pointed out in his written submissions, there is no evidence that REL will be liquidated, the written submissions of the appellant do not suggest that there is any such evidence, and the proposition that REL would be liquidated was not pleaded. As he further submitted, the company has been through a successful voluntary administration and deed of company arrangement. That deed is now terminated and the company is controlled by its directors. REL has carried on business for over five years since the distributions in issue. The appellants made no submissions in reply to any of these propositions advanced in the REL submissions. They should be accepted. 42 Furthermore, the proposition that REL acted unreasonably by not seeking to recover payments from its then shareholders raises a point that was rejected in Segenhoe (supra at 582-588). No reasons are advanced in the appellants' written submissions for adopting a different position in this respect. The submissions of the appellant amount to no more than bald assertion, without any consideration of relevant legal principles. 43 With respect to the submission that the appellant should be exonerated under s 1318, the written submissions at least descend to some level of particularity. However, it is a condition of the exercise of the discretion in s 1318(1) that it must appear to the Court that the person seeking exoneration "has acted honestly". McDougall J expressly found to the contrary. He said: "[271] … I do not think that their conduct, in causing REL to make the payments, can be characterised as honest. On the contrary, I think, it was conduct engaged in for the benefit of, in particular, Mr Carr and Mr Adler through their respective companies." 44 There is no challenge to this finding in terms. The closest that the written submissions come is to assert that the appellants did not know that they were breaching the law and believed on reasonable grounds that they were giving effect to the lawful wishes of the shareholders. The submissions do not identify any basis for this assertion. Insofar as it may have been based on evidence of either of the appellants, and there was no express reference to any such evidence, the Court would not take it into account on the basis of his Honour's rejection of the credibility of each of the appellants. 45 This is sufficient on its own to dispose of the challenge to his Honour's rejection of the application for exoneration under s 1318. However, his Honour went on to give further reasons as to why he would not conclude that the appellants ought fairly to be excused within the meaning of s 1318. He said: "[272] This is not a case of some accidental oversight, or failure to comprehend fully the requirements of some complex legislative regime. It is instead a case of gross or wholesale dereliction of duty." 46 His Honour went on to support that characterisation by reference to "the nature and circumstances of the breaches of duty". There is no challenge to his Honour's finding in this respect. 47 His Honour reinforced the finding he would make on this basis by reference to two additional considerations. One was to the effect that the payments would leave REL in a position where it was, or would soon, become insolvent. Although this is challenged in the written submissions, nothing other than an assertion is propounded as to why his Honour erred in relying upon the administrator's report in this respect. 48 The second reason given by his Honour was the significant threat to the business of REL that arose by reason of the payments made. REL was registered as a pooled development fund ("PDF") pursuant to the Pooled Development Funds Act 1992 (Cth) ("the PDF Act"). Two of the requirements for registration is that loans made to a company in which investments are held should not exceed 20 percent of the PDF company's shareholders' funds and that, without the approval of the Registration Board, no investment should exceed 30 percent of the PDF company's shareholders' funds. (See ss 20B(2) and 25 of the PDF Act) 49 The effect of the distribution made following the Asian Iron share sale was that REL's only substantive asset was the investment in Fox. Loans to Fox exceeded 20 percent of REL's paid up capital and its shareholding in Fox exceeded 30 percent of REL's paid up capital. The breaches in this respect were drawn to the attention of at least Mr Carr by the solicitors acting for REL at the time. The Registration Board also wrote to Mr Carr warning of the breach. 50 His Honour concluded that the characterisation of the payments as a "gross or wholesale dereliction of duty" was supported by the possible effect that REL became at risk of losing its PDF registration. There is no challenge to this finding. There was some evidence in Mr Thomas' affidavit suggesting that this risk was not high, but the appellants' written submissions did not rely on it. 51 In the circumstances there is no basis upon which this Court would interfere with the formulation by McDougall J of the judgment for which s 1318(1) of the Corporations Act calls.

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Litigation Expenses 52 The final aspect of the appeal against REL arises from his Honour's finding that payments by way of litigation and the expenses and costs of voluntary administration were also made in breach of duty. The written submissions are in a narrow compass. The appellants submit that his Honour's finding in these respects was based on the proposition that the issue of shares in REL to Cosmos was a sham. The appellants submit that if it is established that the transaction was not a sham then the basis of McDougall J's findings "falls away". In this respect the appellants invoke case law setting out the legal requirements for characterising a transaction as a "sham", referring to Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530 and Snook v London & West Riding Investments Ltd [1967] 2 QB 786. 53 The background to the issue of shares to Cosmos was a change in effective control of the company arising from the fact that Mr Thomas had, in effect, switched sides. The slight majority of votes available to Mr Carr and to Mr Purves, to ensure their continued control of the Board of REL, had disappeared. An extraordinary general meeting was held on 28 September 2004 in which, after a proxy battle, resolutions to remove Messrs Carr, Purves and Thomas from the board were lost. A Board meeting held later on 28 September 2004 resolved to issue 6,351,000 shares to Cosmos E-C, which shares would ensure that Messrs Carr, Purves and Garrett retained the support of a majority of shareholders, notwithstanding the change in allegiance of Mr Thomas. 54 At the AGM held on 29 October 2004 the appellants and their supporters retained control of the Board, in part because Mr Carr as chairman rejected sufficient proxies from the opposing interests. The shares purportedly issued to Cosmos E-C were not voted, by reason of undertakings given by REL to the Supreme Court of Western Australia. In the event, the Supreme Court made findings that rejection of one of those proxies was a fraud on Mr Carr's powers as chairman. (See Western Ventures Pty Ltd v Resource Equities Ltd [2005] WASC 53; (2005) 53 ACSR 568 at 574 [30].) 55 At a further extraordinary general meeting on 2 November 2004 the shares that had been issued to Cosmos E-C were voted, together with the shares of Mr Carr and his supporters, to defeat motions for the removal of Messrs Carr, Purves and Garrett as directors and the appointment of others, including Mr Thomas, in their place. McDougall J found that, had the Cosmos E-C shares not been voted, the motions would have been passed. Proceedings were instituted seeking declarations that the motions purportedly defeated had in fact been passed. In the event, the Supreme Court of Western Australia made those orders in the proceedings identified as Proceeding No 357. The litigation expenses, which are the subject of this aspect of the appeal, were in large measure incurred with respect to Proceeding No 357. 56 McDougall J made the following findings in the course of which he referred to the two transactions as a "sham". He did so on four separate occasions. It is relevant to set out the whole of his Honour's reasoning: "[284] In substance, the issue in proceeding 357 was whether Messrs Carr, Purves and Garrett, or Mr Thomas and his associates, should control REL. That was not an issue in which REL had any proper interest. It was not an issue that REL should have defended, for the benefit of Messrs Carr, Purves and Garrett. If Messrs Carr, Purves and Garrett wished to assert that they remained directors of REL, and that Mr Thomas and his associates had not been appointed, they should have applied to be joined to the proceedings and should have funded that claim themselves. [285] In any event, the defence of the proceeding depended on the validity of the share issue to Cosmos Commerce. For the reasons that I have already given, that share issue was a sham. Cosmos Commerce did not pay for the shares. For the reasons given at [47] to [49] above, I find that it had not even tendered a cheque in payment for the shares prior to the meeting. The better inference, from the fact that the cheque was retained and never banked, is that it was never intended that Cosmos Commerce should pay for the shares. That supports the inference that the issue was a sham. Further and powerful support for that inference is derived from the fact that Cosmos Commerce was not among the beneficiaries of the dividend, or reduction of capital, paid out of the proceeds of sale out of the Asia Iron shares. If it were a shareholder, it was entitled to participate. It did not participate, and did not protest. The purpose of the placement had been achieved, and there was no need (at least, so long as no further EGMs were called) for Cosmos Commerce to be regarded as a shareholder. [286] Thus, it was doubly wrong for Messrs Carr, Purves and Garrett to cause REL to defend proceeding 357. It was wrong, first, because it represented the use of REL's funds to defend their positions, and their private interests. It was wrong, secondly, because the whole basis of the defence - the majority achieved through the voting of the Cosmos Commerce shares - was a sham. They must have known this. For each of these reasons, the decision to cause REL to defend the proceeding, and to incur costs in so doing, was a breach of their several duties. [287] Equally, the decision to offer indemnity to Cosmos Commerce was a breach of their several duties. As to Mr Carr, it was a breach of duty because it represented the expense of REL's funds to attempt to uphold what he must have known was a sham transaction. For Messrs Purves and Garrett, it was a breach of duty for that reason, and also because of their conflict of interest as, respectively, a director and group corporate counsel of the Cosmos Group; and Mr Purves was then as well the sole director of Cosmos Commerce." 57 It is pertinent to note the circumstances in which his Honour used the word "sham". Paragraph [285] begins with the words "In any event" and par [286] indicates that the defence of the proceedings was "doubly wrong". It is clear that his Honour came to the conclusions of breach on two alternative bases. 58 First, because the company REL had no legitimate interest in determining who controlled the company at the shareholder level. This is quite trite law. Expenditure of corporate funds for the purpose of directors retaining control of the corporation is impermissible and would constitute a breach of directors' duties under each of ss 181 and 182. Indeed such conduct is the quintessential example of improper purpose. 59 No submission directed to this part of his Honour's reasons is advanced by the appellants. Insofar as the appellants' submissions assert that his Honour's finding in connection with the litigation expenses was in some way based on his Honour's characterisation of the transaction as a "sham", the submission is wrong. For this reason alone, the appellants' submissions in this respect should be rejected. 60 In any event, his Honour was not using the word "sham" in the technical sense for which the appellants contend. His Honour had used the word "sham" on several earlier occasions in his judgment (see, eg, [44], [45], [53], [56]). On each of those occasions his Honour did not use the word in a technical sense. In the passages upon which the appellants rely, his Honour appears to me to be using the word "sham" in the sense that the shares were not really paid for, in circumstances that it is unnecessary to set out. There was no suggestion in McDougall J's reasons that his Honour was intending to convey the suggestion that the shares were not in fact issued. Indeed, the purpose of their issue, which his Honour found to exist, namely to cast a vote, is contrary to any such submission. 61 In the further alternative, his Honour found that the defence, with respect to which the litigation expenses had been incurred, had no reasonable prospects of success. That conclusion was based on advice given by senior counsel and reported by REL's solicitors in the Western Australian proceedings. Those solicitors had given advice on prospects of success to the effect that "REL has no realistic prospect of succeeding" on the issues at trial. I note that their letter of advice in this respect itself referred to the word "sham" in the sense which I have identified (see [295]). There is no challenge to this alternative basis for his Honour's conclusion of breach of duty. 62 There is a reference in the appellants' written submission to the payment of an amount to an administrator, appointed by the board at the time it was controlled by the appellants. A compromise was reached as to the amount of remuneration to be paid to that administrator. The written submissions on behalf of the appellants are in a narrow compass. They simply state that REL was insolvent by that time and "it had been envisaged at all relevant times that REL would, in any event, be wound up". No other submission is made. 63 The appellants make no attempt to engage with the reasoning of McDougall J which rejected the submissions in this respect before his Honour. His Honour found: Following advice that REL had little prospect of success in Proceedings 357 the appointment was made prior to the judgment of the Supreme Court. (at [302]) It was open to the board to conclude that REL was insolvent as at the time of the appointment, but that was because of the actions taken by the appellants "in stripping it [REL] of cash and leaving it unable to meet its obligations". (at [307]) Accordingly, there was a causal link between the wrongful actions of the appellants in distributing the proceeds of the sale of the Asia Iron shares and the appointment of the administrator because "the payments rendered REL incapable of meeting its obligations to Fox and its creditors". (at [309]) His Honour reiterated the proposition that the insolvency was the product of the wrongful acts of the appellants in distributing the proceeds of sale of the Asia Iron shares. (at [310] (3) and (5)) 64 His Honour concluded: "[311] It follows, in principle that each of the appointments was the result, immediately or mediately, of the wrongful acts of Messrs Carr, Purves and Garrett. Thus, in principle, they should be held liable to compensate REL for the loss sustained as a result of those breaches of duties: namely, the expenses of administration." 65 There is no challenge to any of these findings, nor to the causal link his Honour identified between the wrongful conduct involved in distributing the Asia Iron share sale proceeds and the expenditure incurred with respect to the administration. There is no proper basis for this Court to intervene with his Honour's judgment in this respect.

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Contribution: Overpayment 67 With respect to the overpayment to directors, as I have noted above, there was a longstanding shareholders' resolution limiting directors' remuneration to $200,000 per annum. There was also a resolution of the board on 26 February 2003 which, on one interpretation, limited the remuneration of each director to $1,000 per month. Before McDougall J REL contended that this constituted a restriction on the maximum permitted by the shareholders' resolution. His Honour found that the directors' resolution did not have the construction for which REL contended. 68 Mr Martin SC did not make any oral submissions on the overpayment issue. The only substantive submission made in the written submissions was based on Mr Thomas' attendance at the meeting of 26 February 2003. However, there is no challenge to Justice McDougall's finding that the resolution did not have the asserted effect. 69 Furthermore, McDougall J found that the payments made to Mr Thomas were reasonable, so that there was no overpayment to him. There is no challenge to that finding. 70 The substantially greater payments made to Mr Carr and Mr Purves were held to be overpayments. His Honour expressly found: "[364] I find that Mr Thomas … did not know of the amounts claimed by or paid to Messrs Carr and Purves; and that he did not participate in the approval or payment of the amounts claimed by Messrs Carr and Purves." 71 His Honour went on to hold: "[366] Apart from the resolution of 26 February 2003, there was no reason for Mr Thomas to think that the payment to him (and, as he might have thought, equivalent payments to each of Messrs Carr and Purves) would be in breach of duty. That is because, as he explained, those payments would have been within the $200,000.00 cap. If REL is right about the proper construction of the resolution, and the $200,000.00 cap is irrelevant, it does not follow that Mr Thomas acted in breach of his duties simply because he, understandably enough, took a different view of the resolution. [367] Alternatively, and even if (contrary to what I have just said) some breach of duty could be spelled out of the facts as I have found them, it would be appropriate for Mr Thomas to be relieved under s 1318. In my view, he acted honestly. In the circumstances that I have outlined, and taking into account the fact that Mr Thomas has effectively expressed contrition by reaching a settlement with REL, the circumstances require that he be excused from the consequences of this hypothetical breach of duty. Apart from anything else, not to excuse him would leave him exposed to liability, at the suit of Messrs Carr and Purves, in circumstances where Mr Thomas will gain no benefit from any payment that they might make to REL. He would gain no benefit from any such payment because (as a result of the settlement that he has reached) the payment will not go in reduction of, or in any way alleviate, his liability to REL." 72 There was no challenge to his Honour's finding of fact that Mr Thomas played no part in the approval of the payment to Messrs Carr and Purves and that he was in fact unaware of those payments. Nothing was drawn to the attention of the Court which would suggest that Mr Thomas was ever given cause for inquiry about the amounts which his Honour had identified as overpayments to directors made in breach of statutory and fiduciary duties. Nor is there any challenge to his Honour's finding that the relevant restriction on directors' remuneration was the shareholders' resolution limiting the total amount to $200,000. 73 In these circumstances there is no basis for this Court to come to a different conclusion to that of McDougall J and conclude that, in some manner, Mr Thomas was in breach of his duties as a director in any relevant respect. There is, accordingly, no basis for a finding of a co-ordinate liability of a character required to order contribution. I do not find it necessary to consider the appellants' submissions with respect to his Honour's alternative ground for dismissing the application for contribution on the basis of an order exonerating Mr Thomas under s 1318.

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Contribution: Fox Transaction 74 The second issue that arises with respect to the contribution issue concerns Mr Thomas' involvement in the Fox transaction. In an amended notice of appeal the appellants sought an order that Mr Thomas pay an amount equivalent to one third of the appellants' liability to REL with respect to the Fox transaction. This appears to be based on the proposition that he is one of three relevant directors. 75 There is no doubt, on the evidence, that Mr Thomas was a supporter of the REL's investment in Fox. Indeed, he invested a substantial amount of his own money on the basis of that belief. In this respect, it is necessary to set out McDougall J's reasons for rejecting the claim for contribution and also to outline in some more detail his Honour's reasons for finding breaches on the part of the appellants with respect to the Fox transaction. 76 His Honour accepted the evidence of Mr Thomas that: "[371] … (1) Mr Carr dealt with the Registration Board and, in general, compliance with the PDF Act ; (2) Mr Purves was assigned, and undertook, responsibility for the financial due diligence (in conjunction with Armstrong Wily); and (3) in effect, he left it to them to take the investment forward. [372] Further, Mr Thomas said, no one told him of Cosmos' interest in the Fox technology, or of the arrangements, as between REL and Cosmos, recorded in the letter of 20 March 2003. [373] Indeed, Mr Thomas said, he was so convinced of the merits of the investment in Fox that he caused his family company Glamont to subscribe for a placement of 3 million shares in REL at $0.05 per share. [374] I accept Mr Thomas' account of his knowledge and involvement …" 77 The reference in par [372] to the letter of 20 March 2003, relates to the phase of the proposal when it was proposed that REL would merely be a trustee of the shares in Fox. That, as I have indicated above, was not the proposal eventually approved. 78 His Honour went on to make the following findings with respect to the claim for contribution: "[375] In essence, the only breach of duty that could be found against Mr Thomas is that he was too trusting of Messrs Carr and Purves, and failed to apply his mind independently to the Fox transaction. [376] If some such breach of duty is to be spelled out then, again, Mr Thomas ought be excused under s 1318. Again, I find, he acted honestly. Again, when one takes into account all of the circumstances of the case, he ought fairly to be excused. In this context, again, I take into account not only the facts as I have found them in relation to the Fox transaction but also the fact that Mr Thomas has settled the claim made by REL against him. [377] It follows that there can be no joint or concurrent liability for any of the claims. As to some, that is so simply because Mr Thomas, having been excluded from involvement in the affairs of REL, was not involved in the relevant activities. As to the others, it is because even if some breach of duty could be made out against him, it is a breach for which he ought be excused under s 1318." 79 As Mr Martin SC submitted to this Court, it is not entirely clear whether his Honour made a finding that there was no breach of duty on the part of Mr Thomas. As his Honour made clear in par [377], with respect to some aspects of the contravention Mr Thomas was not involved at all. However, with respect to other aspects, which his Honour did not specify in this part of the reasons, even if there had been a breach his Honour thought that Mr Thomas ought to be excused. 80 By reason of the lack of clarity in this part of the reasons, it is appropriate to proceed to assess the submissions made to this Court as to the existence of a breach of duty on the part of Mr Thomas and to determine whether or not that breach could be said to give rise to a concurrent liability on the part of Mr Thomas with respect to the findings of contravention on the part of Messrs Carr and Purves. 81 I set out his Honour's findings with respect to the Fox transaction that are relevant to the issue of contribution. I do not repeat his Honour's detailed analysis of the conflicts of interest in which the appellants placed themselves. His Honour said: "[169] It is notable that REL did not obtain, and Messrs Carr and Purves individually did not obtain, any independent analysis, verification or valuation of the Fox technology. The most that appears to have happened was that it was demonstrated on EFTPOS terminals to produce simulated transactions, or outcomes: the booking of theatre tickets and of airline seats. There was nothing in that demonstration to provide any assurance (at least, to someone professing no skills in the relevant discipline) that the technology would work in the real world. [170] Messrs Carr and Purves did cause REL to undertake some "due diligence". Mr Purves instructed a firm of chartered accountants, Armstrong Wily and Co, to undertake some form of financial due diligence. Each of Mr Carr and Mr Purves sought to minimise his involvement in this process, and to attribute primary responsibility to the other or to Mr Thomas. Mr Thomas denied that he was involved. I accept his denial, and do not accept the evidence of Messrs Carr and Purves to the contrary. I find that it was Mr Purves who was principally reasonable for the accounting due diligence (hardly surprising, given his qualifications and experience) but that Mr Carr, despite his denials, was well aware of the outcome of that process." 82 His Honour went on to set out the details of the Armstrong Wily & Co reports, to which I have referred above, and the knowledge and involvement of the appellants with respect to those reports. His Honour concluded: "[183] … (1) the investigations, or 'due diligence', that Messrs Carr and Purves carried out, or caused to be carried out, were lamentably insufficient; and (2) on the basis of the information available to them, Messrs Carr and Purves had no reason whatsoever for believing that the Fox transaction, either as it was initially structured in the letter of 20 March 2003 or as it was finally documented in the agreements of 30 June and 14 July 2003, was in the best interests of REL." 83 His Honour went on to state: "[186] … under the agreement signed on 14 July 2003 between REL and Fox, REL was committed to providing substantial amounts of cash to fund Fox's development of its technology. Mr Purves accepted that Fox was running at a cash loss of about $100,000.00 monthly, so that REL would be required to inject about $100,000.00 monthly. He appeared to accept further that REL had sufficient cash to fund the activities of Fox for about six months. There was no reason to think that the technology would be developed, and marketable, in that time. Nor was there any assurance available to REL that it could obtain further funds, from other sources, to enable it to continue to fund the development of the technology. This is yet another demonstration of the proposition that the Fox transaction was, from REL's perspective, improvident. [187] The conclusions that I have reached are supported simply by an analysis of the Fox transaction, and the information available to Messrs Carr and Purves at the time they decided to commit REL to it. It is unnecessary to go further, and consider the implications of the conflicts of duty under which each laboured (Mr Carr, at all material times; and Mr Purves, from 5 May 2003). It is sufficient to say that the existence and substance of those conflicts, and the actions of Messrs Carr and Purves in continuing to drive forward REL's investment in Fox, provide an alternative basis for finding the breaches of duty to which I have referred. [188] … The transaction was plainly improvident, as it was plainly motivated by self-interest. Messrs Carr and Purves were plainly afflicted by severe conflicts of duty, or of duty and of interest, at the times relevant to the actions of each of them in committing REL to the Fox transaction. Neither Mr Carr nor Mr Purves could give any acceptable explanation of the decision. In those circumstances, there was no point in REL's incurring the expense of expert evidence."

[38]

Purves replied with words to the effect: "PURVES: 'We are aware that Fox has experienced some cash flow pressures but there are no material issues and the bridging facility should be adequate.'" 91 This response is clearly a misleading representation of the Armstrong Wily & Co report. In substance that report found that the financial statements of Fox were so inadequate that no assessment of its financial position could be made at all. Mr Thomas, as a director, did not seek access to a copy of the reports but, it appears, relied on what Mr Purves had told him. This, no doubt, is the basis of his Honour's reference set out above to the effect that the only breach of duty capable of being identified on the evidence with respect to Mr Thomas is that, to repeat: "He was too trusting of Messrs Carr and Purves and failed to apply his mind independently to the Fox transaction". 92 I note further that prior to REL entering into the agreement with respect to its investment in Fox, which occurred on 14 July 2003, Mr Thomas' family company subscribed $150,000 for its shares in REL in which he stated in an affidavit was "to provide finance for REL for contingencies, such as the possible investment in Fox". Although the test for care and diligence under s 180(1) is an objective test, Mr Thomas' conduct is relevant in a number of respects to which I will refer. 93 Mr Martin SC relied on events relating to the Fox transaction that occurred long after the commitment had been made. He did not explain how this subsequent conduct was relevant to establishing breach of duty by entering into the Fox transaction in July 2003. Specifically, reliance was placed on Mr Thomas' involvement in May and June 2004 when he put forward proposals arising out of a concern he expressed about the lack of financial control and legal documentation to protect REL's interest. Mr Martin SC said that this indicated that "Mr Thomas was intimately involved in the investment by REL to Fox, and was advising in relation to the form of the agreements that should be entered into". Although some further loan funds were advanced after this time it was not suggested that these were not in accordance with obligations undertaken by REL. I cannot see how Mr Thomas' involvement in mid 2004 indicates anything about his care and diligence with respect to the time that the Fox transaction occurred. 94 Similarly, I would place no weight on Mr Martin SC's reliance on subsequent documents and board minutes in the second half of 2004, which do not appear to me to be pertinent to the issue of breach of duty on the part of Mr Thomas. 95 With respect to the specific propositions set out as (i)-(vi) at [86] above, I would reject all but two as entitled to weight when determining breach of duty. 96 The proposition identified as (iii), that Mr Thomas failed to determine that the Fox transaction was for the benefit of REL, is based on a paragraph in his Honour's reasons where his Honour is considering the position of Mr Carr at the time that the proposal was for REL to hold the shares in trust for Cosmos. Mr Thomas never had any knowledge of this proposal. This finding is of little relevance to the ultimate agreement. 97 In any event, there is no proper basis for making any such finding in the case of Mr Thomas. This is so not least by reason of the fact that he himself invested his own funds in a substantial amount in REL on the basis of the prospective Fox transaction. He must have determined that that transaction was for the benefit of REL. In any event, it was not suggested in this Court that Mr Thomas was cross-examined with the suggestion that he failed to determine that the transaction was for REL's benefit. 98 The proposition identified as (iv), that he failed to determine "on the basis of available information" that there was no reason for believing the Fox transaction was in the best interests of REL, refers to a finding by his Honour which is not expressed in terms of "available information". It was expressed only in terms of "information available to Messrs Carr and Purves". This information encompassed matters not known to Mr Thomas, notably, the conflicts of interest in which each of them was engaged and, in the case of Mr Purves, the Armstrong Wily & Co information which was not "information available" to Mr Thomas. 99 With respect to proposition identified as (v), that he failed to determine the transaction was improvident by reason of the cash burn rate and the cash funds available to REL, this finding by his Honour was based on the evidence given by Mr Purves during the trial. There is no finding that Mr Thomas was aware of this. Nor was any evidence to this effect drawn to the attention of the Court. Nor was it suggested in this Court that any of these propositions were put to Mr Thomas in cross-examination. There is no basis for concluding that Mr Thomas was aware, at the time of agreeing to the Fox transaction, that the Fox cash burn rate was $100,000 or that REL could only support that rate for six months. It should be noted that the sale of Asia Iron shares occurred in November 2004, ie, almost a year and a half after the decision to invest in Fox, when all but a small proportion of the funds had already been advanced to Fox. 100 As to the proposition identified as (vi), namely the failure to determine that the investment in Fox was made for a proper purpose on behalf of REL, this was a finding made by Justice McDougall in the context of determining the absence of good faith and the existence of an improper purpose on the part of the appellants. This finding has no relevance to Mr Thomas. There was no suggestion in the evidence that he somehow failed to determine that the investment was for a proper purpose. It was not suggested that anything like this was put to him in cross-examination. 101 His Honour accepted Mr Thomas' denials that he knew about the conflicts of interests on the part of the appellants. Mr Martin SC did suggest that Mr Thomas was aware of a conflict that existed with respect to Mr Carr. The only evidence to which the Court's attention was drawn in this respect was the fact that a principal of Fox drew Mr Thomas' attention to the possibility of a conflict in April 2004. That was well after the investments had been made. Furthermore, it was in response to that information that Mr Thomas took certain steps to ensure that amendments were made with respect to financial control and documentation of the arrangement. 102 Of the conduct identified by Mr Martin SC as constituting breach of duties, set out at [86] above, the only ones remaining are failure to obtain an independent analysis, verification or valuation of the Fox technology and failure to determine that the Fox technology had some merit and some prospects of commercial realisation within a finite period. 103 The former finding is contained in McDougall J's judgment at [169] set out at [81] above. I have not previously set out the latter finding. It is to the following effect: "[191] Someone with an ordinary degree of prudence could perhaps have seen fit to invest in Fox. In my view, however, no one of ordinary prudence would have done so without first taking steps to satisfy themselves that the technology had some merit, and some prospects of commercial realisation within a finite period of time. Those are inquiries that on any view Messrs Carr and Purves failed to pursue in a reasonable way." 104 Mr Martin SC submitted that Mr Thomas contravened the duties under s 181 and s 182. This submission was based on two propositions. First, that "there was no reason whatsoever based on the available information for believing that the Fox transaction was in the best interests of REL", referring to McDougall J's finding at [183] set out at [82] above. Secondly, that he "failed to determine that the investment in Fox had been made for a proper purpose on behalf of REL" referring to McDougall J's finding at [192]. I have rejected each of these contentions at [98] and [100] above. 105 There is, in my opinion, no conceivable basis, in view of the findings of fact made by his Honour about Mr Thomas' honesty and his involvement and motivation, to make any finding of contravention of s 181 and s 182. The position with respect to s 180 may at least be arguable, as his Honour envisaged. 106 As I have indicated above, the appellants did not abandon their appeal from the finding by McDougall J that each had breached their duties. The oral submissions in this Court focused only on the issue of contribution. There is an obvious inconsistency between the proposition that neither of the appellants was in breach of their duty and the detailed analysis propounded in oral submissions in this Court asserting a breach on the part of Mr Thomas. There comes a time when attempting to maintain contradictory submissions in the alternative stretches credulity too far. This is such a time.

[40]

It is not, in this context, appropriate to make a finding that the Fox transaction should have been regarded by Mr Thomas as also "plainly improvident". 111 By reason of the limited scope of the evidence at trial directed to the issue of any alleged breach by Mr Thomas, the appellants were reduced to seeking to adopt his Honour's findings of breach made against themselves. As a result there were no submissions of the kind usually made in such a case, based on facts pertinent to the person accused of negligence. For example, there was no reference to what Mr Thomas was told about the technology or about the state of negotiations with Westpac. There was evidence that he was briefed on both matters, but no evidence about the content of the briefing, let alone about whether he could or should have made further inquiries. 112 His Honour correctly identified that the highest case capable being put against Mr Thomas was that "he was too trusting of Messrs Carr and Purves and failed to apply his mind independently to the Fox transaction". 113 Mr Thomas took steps to familiarise himself with the project. He was given information about the interests of Westpac in the technology. He made inquiries of Mr Purves about the financial due diligence process and was given assurances, false assurances, but assurances nevertheless. 114 With the benefit of hindsight, when an investment fails, it is always apparent that more could have been done than was done. Insofar as McDougall J held that more detailed investigations were required, in my opinion, his Honour should be understood as holding, although his findings were not expressed in this way, that by reason of the conflicts of interests to which the appellants were subject, they were required to manifest a higher level of care and diligence than would ordinarily be required of a non-executive director. 115 It is the case that Mr Thomas did not require a detailed assessment of the technology, its prospects and the timing of its delivery. Nevertheless, in all of the circumstances, I am not prepared to hold that he was in breach of his obligation of care and diligence under s 180. The evidence to which this Court's attention was drawn, and the submissions which were able to be made, were in far too narrow a compass to discharge the appellants' onus of proof that a breach of duty had occurred. 116 Alternatively, the appellant did not establish causation. The appellants did not make any submissions to the Court as to how it could be said that Mr Thomas' breach of duty, if any, caused any loss, in the sense of making a material contribution to the decision to invest. By reason of the determination of the majority of the board of directors to invest in the Fox transaction - influenced, as his Honour found, by their conflicts of interests - there is no reason to believe that Mr Thomas' opposition, if he had come to that view, would have had any effect on the decision. The possible chain of events was neither explored in evidence, nor the subject of submissions. 117 Furthermore, his Honour's conclusion on causation was based on the combined effect of contravention by the appellants of three distinct duties: care and diligence, good faith and proper purpose. There is no conceivable argument, in my opinion, that Mr Thomas' liability could have gone beyond the first. Hence, it is the only respect in which there could have been a coordinate liability for purposes of ordering contribution. Neither the evidence, nor his Honour's findings enable this Court to distinguish the different elements. No submissions were made in this regard. 118 In this respect also, the appellants have not discharged the onus of proving that any breach of duty materially contributed to the loss. 119 The appellants seek an order by way of equitable contribution from Mr Thomas. It is well established that equitable contribution is an equitable remedy subject to all of the principles for the grant of such remedies including the circumstances in which a discretion to grant relief will not be exercised. That includes the principles often referred to in terms of the maxim: "He who comes to equity must come with clean hands". (See Dering v Earl of Winchelsea (1787) 1 Cox 318; (1787) 29 ER 1184 at 1184-1185.) 120 In Burke v LFOT Pty Ltd [2002] HCA 17; (2002) 209 CLR 282 the joint judgment of Gaudron ACJ and Hayne J referred to the observations in BP Petroleum Development Ltd v Esso Petroleum Co Ltd [1987] SLT 345 at 348 to the effect that the right of contribution depends on whether the liability was "of the same nature and to the same extent" (at [15]). 121 Their Honours continued: "[16] The notion of 'co-ordinate liability' is one that depends on common interest and common burden. Perhaps because, at common law, there was no general right of contribution between tort-feasors, the notion of 'co-ordinate liability' has not traditionally been expressed in terms requiring equal or comparable culpability or a requirement that the acts or omissions of the persons in question be of equal or comparable causal significance to the loss in respect of which contribution is sought. However, the requirement that liability be 'of the same nature and to the same extent', as stated in BP Petroleum , is apt to include notions of equal or comparable culpability and equal or comparable causal significance. [17] Culpability, as a factor bearing on the right to equitable contribution, clearly explains the requirement that for there to be contribution between co-trustees, the co-trustees must be in pari delicto . So, too, it explains the rule that a person who has been guilty of fraud, illegality, wilful misconduct or gross negligence is not entitled to contribution from his partners." 122 Similarly Callinan J concluded on the facts of that case: "[143] … The respondents certainly would not be entitled to contribution in equity because they do not have clean hands. That fraud, illegality, wilful misconduct or gross negligence will deny a perpetrator relief by way of contribution from partners just as unclean hands will similarly bar relief by a trustee against co-trustees, serves to show that, even though the doctrine of contribution is common to both law and equity, certain types of conduct can still operate to defeat a claim for contribution in law or under statute. Indeed it is likely that in modern times whatever would have provided a defence to a claim in equity for contribution would equally provide a defence in law."

Carr v Resource Equities Limited

At a glance

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Before

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Judgment (43 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (8)