Discussion about breach
91 I accept that Mr Ralph honestly believed that $110,000 was payable by Diakyne to Colorado. Insofar as Diakyne's statement of claim alleged to the contrary, the evidence does not establish that Mr Ralph knew that the bonus was not payable to Colorado but decided to take the steps he did to ensure its payment irrespective of the known lack of entitlement. Indeed, any conclusion to that effect would be inconsistent with the way in which Diakyne presented its case at the hearing. For example, Diakyne did not put to Mr Ralph that he knew that Colorado was not entitled to the bonus payment. Rather, Diakyne's primary case was to the effect that no reasonable person exercising the powers and discharging the duties as a director of Diakyne would have authorised or directed the payment to be made to Colorado in the circumstances as at 30 November 2007.
92 I do not accept the respondents' submission that, by its statement of claim, Diakyne assumed the onus of proving that Mr Ralph knew that the bonus was not payable to Colorado and could not attempt to avoid that onus. The way in which Diakyne put its case was clear from the opening submissions made on its behalf. The assertion in the statement of claim of actual knowledge on Mr Ralph's part of Colorado's lack of entitlement to the payment formed part of a more general allegation that Mr Ralph, on reasonable enquiry, ought to have known that the Colorado was not entitled to the payment (paragraph 27) and an express allegation that that no reasonable person exercising the powers and discharging the duties as a director of Diakyne would have authorised or directed the payment to be made to Colorado (paragraph 29). In these circumstances, Diakyne was entitled to press its case in the form it did. No unfairness to the respondents has thereby arisen.
93 Accordingly, the starting point for the discussion is that Mr Ralph honestly believed that Colorado was entitled to the payment of $110,000 under the Colorado contract. The application of the statutory standards must be considered on the basis of the existence of that honest belief.
94 With respect to s 180 of the Corporations Act, the relevant standard of conduct by which Mr Ralph is to be judged is objective in the sense that it involves asking what an ordinary director of ordinary prudence, with the knowledge and experience of Mr Ralph (and holding an honest belief that the bonus was payable), might be expected to have done with respect to Colorado's claim for payment of the bonus in all of the circumstances as at 30 November 2007 if acting on their own behalf. The following circumstances are of particular relevance to the application of that standard.
95 The evidence establishes that at all material times $110,000 was a substantial sum of money for Diakyne. Although the payment of $110,000 would not make Diakyne insolvent, Diakyne's financial situation was parlous and was known by Mr Ralph to be as such. He thus knew that the payment of such a sum would be of significance to Diakyne's finances.
96 Mr Ralph, in his own words, was "a bit miffed" by the fact that (as he saw it) people had reneged on the deal which they had with him, thus leading to the tender of his resignation from MediVac's board on 30 November 2007. He tendered his resignation on the basis that in the lead-up to the meeting of MediVac shareholders it was clear to all, including Mr Ralph, that Mr Ralph no longer controlled sufficient votes to remain on MediVac's board. For this reason also (namely, his "miffed" state), after leaving at the end of the meeting of MediVac shareholders in the afternoon of 30 November 2007 (a Friday), Mr Ralph did not speak to any of the other directors of MediVac.
97 Mr Ralph denied having arranged the payment of the bonus to Colorado because he was "a bit miffed" and denied having felt insecure about his continued position as a director and the managing director of Diakyne. He noted that the Colorado contract was in place under which he was managing director of Diakyne but conceded that he did not feel "totally secure". Moreover, Mr Ralph agreed that, when taking the steps he did to secure the payment of $110,000 from Diakyne to Colorado, he considered that it would be difficult for him to deal with Mr Copulos and Mr McPherson as "they would just want to argue the toss about my contract per se and want it switched over to MediVac as Mr Copulos had done before". He also conceded that he "may have thought" that Mr Copulos and Mr McPherson would be concerned about a payment of $110,000 from Diakyne to Colorado.
98 This evidence, I note, is inconsistent with the respondents' submission to the effect that no one at the relevant time, and until this proceeding, had communicated to Mr Ralph any problem with the payment of the bonus to Colorado.
99 Consistent with Mr Ralph's awareness at the time that Mr Copulos and Mr McPherson would want to "argue the toss" about the Colorado contract, the evidence does not support an inference that the only issue of concern ever raised with Mr Ralph by the other board members of MediVac was the validity and enforceability of the contract. Validity and enforceability were major issues but, equally, the evidence supports the inference that Mr Ralph knew that the other members of MediVac's board had concerns about the whole question of Colorado's total remuneration, including potential bonus payments. Mr Copulos's emails in particular disclose that he had a real issue with the potential bonus payments at all times. I infer that Mr Copulos forwarded the chart of Colorado's total entitlements under various scenarios to Mr McPherson and Mr Radojev on 1 October 2007 because Mr Copulos considered the total potential remuneration uncommercial. So much is obvious from the terms of the email Mr Copulos sent on 15 October 2007. Moreover, it is not possible to construe an email saying "I disagree with all of your comments" (which appears to be Mr Copulos's final words to Mr Ralph on the subject on 18 October 2007) as meaning Mr Copulos disagreed with Mr Ralph's comments except for the bonus which Mr Copulos accepted was payable (as the respondents attempted to submit). It would have been equally clear to Mr Ralph that while Colorado's contract was with Diakyne and not MediVac, MediVac owned all of the shares in Diakyne.
100 I do not accept the evidence of Mr Ralph and Ms Liu that, at the meeting of MediVac's board on 11 October 2007, Mr Copulos said words to the effect "there's no dispute, you're owed the money". Mr Copulos denied making this or any other statement to the same effect at any time. Such a statement would have been inconsistent with everything Mr Copulos had written before that date, as summarised above. Further, and in any event, by this time Mr Copulos was in possession of legal advice apparently to the effect that the Colorado contract was invalid and unenforceable. It is implausible that Mr Copulos would have agreed that Colorado was owed the money when Mr Copulos had reason to believe the Colorado contract was invalid on the basis of legal advice to that effect. The email Mr Copulos subsequently sent on 18 October 2007 disagreeing with everything Mr Ralph had said confirms the implausibility of Mr Copulos having made statement to the effect that Diakyne owed Mr Ralph (via Colorado) a bonus payment on 11 October 2007. Moreover, as Diakyne submitted, had Mr Copulos made such a statement then Mr Ralph had a strong interest in ensuring its inclusion in the minutes of the meeting which he signed as true and correct. Yet no statement to that effect appears in the minutes.
101 Ms Liu's evidence about this issue can be discounted. Ms Liu was not in fact present at the meeting on 11 October 2007 (but confusion about dates and the sequence of events is unsurprising given the vagaries of human memory). Ms Liu had been told by Mr Ralph on 30 November 2007 that the bonus to Colorado was due (in fact, overdue). Further, Ms Liu acknowledged that when giving evidence she was doing her best to recall the terms of her affidavit and not the actual events in question. Thus Ms Liu's recollections of events from some time ago should not be accepted when weighed against the other available evidence, particularly evidence from contemporaneous documents and surrounding circumstances which are unaffected by the pressures of this litigation. In these circumstances, whilst accepting Ms Liu as a witness of credit, her evidence of statements made by other MediVac board members about the bonus payment to Colorado should be given little weight.
102 Mr Ralph's evidence about these matters is subject to the same difficulties as that of Ms Liu. In addition, it should not be overlooked that Mr Ralph's acknowledgement that he was "miffed" about the events leading up to 30 November 2007 needs to be recognised as an understatement. His belief that the bonus was and had been payable since 5 August 2007 but had not been paid while others, whom he perceived as far less competent than he was, had been paid, must also be factored in to the assessment of the weight to be given to his evidence. It would be surprising if Mr Ralph's recollections remained unaffected by his sense of grievance.
103 For these reasons, I do not accept Mr Ralph's evidence about statements said to have been made by Mr Copulos on 11 October 2007 (or at any other time) to the effect that the bonus was payable. I accept Mr Copulos's evidence to the contrary. Mr Copulos's evidence, in contrast to that of Mr Ralph, generally accorded with the substance of contemporaneous documents and was inherently plausible.
104 I am satisfied that from no later than September 2007 onwards Mr Ralph was aware that the other directors of MediVac (particularly Mr Copulos) were concerned about the not only the validity and enforceability of the Colorado contract, but also Colorado's total potential remuneration having regard to the bonus payments. Further, I am satisfied Mr Ralph was aware from no later than September 2007 that, if and when Colorado presented its invoice for the bonus payment to Diakyne, there was a real chance that the other directors of MediVac (noting that MediVac owned all shares in Diakyne) would take steps to dispute payment if possible.
105 Mr Ralph denied that this awareness prompted him to take the steps he did during the afternoon of 30 November 2007. According to Mr Ralph, he considered the views of the MediVac directors to be irrelevant as Colorado's contract was with Diakyne. I do not accept that this evidence provides an accurate and complete picture of Mr Ralph's state of mind at the time. As Mr Ralph knew, MediVac owned all of the shares in Diakyne. Mr Ralph also must have known that if his position on MediVac's board was undermined, his continued role as a director of Diakyne and its managing director would be under direct threat. It is not inconsistent with the decision in Walker v Wimborne (1975) 137 CLR 1 (referred to by the respondents as negating any concept of a group of companies in Australian law) to acknowledge the practical reality which confronted Mr Ralph and of which he must have been fully aware at the time.
106 Examination of the circumstances as they existed at 30 November 2007 leads inevitably to the inference that, contrary to his denials, Mr Ralph's awareness of these potential difficulties prompted his actions on 30 November 2007. This conclusion is not inconsistent with my acceptance that Mr Ralph honestly believed that Colorado was entitled to the payment. It merely recognises that the existence of such an honest belief, of itself alone, cannot and does not explain Mr Ralph's actions on 30 November 2007.
107 In particular, the meeting of MediVac shareholders started at 2.30pm on 30 November 2007. 30 November 2007 was a Friday. It is not clear how long the meeting lasted but it is known that Mr Ralph stayed for the whole meeting before returning to Diakyne's office and meeting Ms Liu at about 4.30pm. Mr Ralph knew that UBS Warburg did not accept any instructions to pay if received after midday. Nevertheless, Mr Ralph took each of the steps identified in [21] above during the afternoon of 30 November 2007.
108 Mr Ralph knew that Ms Liu was very busy in the late afternoon on 30 November 2007 as she was trying to finish the Diakyne board reports. Yet he requested Mr Liu to consider the draft Diakyne resolution he had prepared authorising payment "now". Although Mr Ralph gave Ms Liu a copy of the Colorado services agreement, in his words to make sure the payment was "tickety-boo", he was aware that she did not have time to check any of the calculations. Thus, rather than Ms Liu doing so, Mr Ralph advised her to the effect that Diakyne's shareholder capital was about $2.5 million and the Diakyne acquisition was at about $8.1 million, which was "easily three times".
109 Whether or not, as he said, Mr Ralph thought Ms Liu was joking about not being able to do the calculations, Mr Ralph also knew at this time that the opening words of paragraph 1 of the bonus provision (referring to the requirement for a listing of Diakyne shares on a national stock exchange) "could have been better worded". Although he thought the intention was clear, he did not bring any issue with the wording to Ms Liu's attention as he thought the trade sale requirement had also been satisfied.
110 Further, Mr Ralph had obtained no advice about Colorado's entitlement to the payment (legal, accounting or otherwise). He did not recommend or suggest to Ms Liu that she could obtain or should consider obtaining any advice about Colorado's entitlement to the payment. He did not himself consider or provide Ms Liu with the share sale agreement or the Bird Cameron report relating to the transaction between Diakyne and MediVac. Insofar as Mr Ralph was aware, Ms Liu had not read any of the documents associated with the transaction between Diakyne and MediVac in the context of the request Mr Ralph made of Ms Liu on 30 November 2007.
111 These circumstances must be considered together with the fact that this is not a case of searching for ambiguity in the Colorado contract. The ambiguities in paragraph 1 of the bonus provision are patent. Any person acting in Diakyne's interests, confronted with an invoice for $110,000, would have seen those ambiguities. For example, while Mr Ralph stressed the difference between consideration (price) and value, the fact is, as discussed above, paragraph 1 of the provision itself uses value interchangeably with consideration. Mr Ralph himself considered that the reference to a listing of Diakyne's shares on a national stock exchange could have been better worded. As to GST, Mr Ralph assumed a common intention that GST would be payable by Diakyne on the bonus payment irrespective of the words actually used. Nor did Mr Ralph turn his mind to the share sale agreement or the RTS Bird Cameron report or, indeed, any other transaction document to ascertain their potential relevance to Colorado's entitlement to the bonus payment. Again, he assumed that his view of the bonus provision, under which all such documents were irrelevant, must be correct.
112 While not conclusive, the evidence discloses the steps that Mr Ralph took about the payment of other invoices related to the same transaction as the Colorado invoice. Hence, Mr Ralph obtained advice about and disputed Gadens' bill to MediVac with a view to reducing the amount of the bill if possible. Similarly, he disputed the amount of the bill from RTS Bird Cameron. Both bills were for amounts substantially less than the $110,000 in the Colorado invoice ($66,000 and $27,500 respectively). The contrast with Mr Ralph's actions to secure the payment of $110,000 from Diakyne to Colorado on 30 November 2007 is obvious.
113 The respondents' submission was that the relevant difference between the invoices of Gadens and RTS Bird Cameron and of Colorado is that Mr Ralph (via Colorado) was not a party to an agreement with either of the former. This submission tends to support Diakyne's case. With respect to the bills of Gadens and RTS Bird Cameron, Mr Ralph had no conflict of interest and acted to protect the interests of the company of which he was a director (MediVac). With respect to the Colorado bill, Mr Ralph had a conflict of interest and took no steps to protect the interests of the company of which he was a director (Diakyne).
114 Mr Ralph gave evidence of an (apparently total) reliance on Ms Liu on 30 November 2007 stating that she, and not he, had made the determination that the bonus was payable to Colorado. The respondents submitted that Ms Liu's conduct established that at least one other director considered the making of the payment reasonable, thereby undermining any suggestion that Mr Ralph acted as no reasonable director would have done. I accept Diakyne's submission to the contrary. If (as he appears to have contended in parts of his evidence) Mr Ralph did not bring any of his own independent thought processes to bear upon Colorado's entitlement to payment then that fact alone would be sufficient to establish a breach of s 180(1) of the Corporations Act in the circumstances of this case. However, I do not accept that Mr Ralph brought no independent thought to bear. Mr Ralph's references to Ms Liu having made the determination appear to be a product of his view that, despite the steps he took on 30 November 2007, he was not responsible for authorising or directing the making of the payment to Colorado.
115 As discussed, Mr Ralph knew that Ms Liu was under time pressure yet asked her to deal with the Colorado invoice "now". He knew she had done no calculations to support the payment. He knew that neither he nor she had obtained advice that Colorado was entitled to the payment. Whatever Mr Ralph's state of mind on 30 November 2007, Ms Liu's actions on that day, in the circumstances to which I have referred, do not establish that Mr Ralph's actions were reasonable. It follows that Ms Liu's decision to co-sign the resolution with Mr Ralph provides no support for the respondents' case.
116 Contrary to his denials, the inescapable inference is that Mr Ralph was aware that if Colorado presented an invoice to Diakyne for the bonus payment and the directors of MediVac controlled Diakyne's decision-making (rather than Mr Ralph himself) those directors were likely to "argue the toss" about his contract and thus dispute Colorado's entitlement to the payment. Mr Ralph's belief that the bonus was payable (indeed, overdue for payment) leads to the obvious inference that he wanted to ensure that Colorado was paid in full without any debate or dispute. This explains why he took the steps he did and when he did on 30 November 2007. Despite his evidence that it did not particularly matter when Colorado presented the invoice, I am satisfied that Mr Ralph's desire to ensure that Colorado was paid in full without any opportunity for debate or dispute by Diakyne was his "actuating motive" (Adler at [735(3)]) for acting as he did on 30 November 2007.
117 The respondents said that it cannot be the case that every time a company pays an invoice it has to give consideration to whether or not that invoice is payable. That proposition may be accepted. It is, however, immaterial to the circumstances which confronted Mr Ralph on 30 November 2007. Mr Ralph had a personal interest in the payment of the Colorado invoice. He prepared the invoice after he knew that his position on MediVac's board was at and end and his position on Diakyne's board and as its managing director was insecure. He took steps the effect of which was to ensure full and immediate payment of Colorado's invoice while he was still on Diakyne's board and was still its managing director. He did so knowing that it was likely his control of Diakyne would be relatively short-lived and knowing that there was a real chance those likely to succeed him would debate or dispute the making of the payment.
118 The respondents said that the payment of an invoice which Mr Ralph reasonably believed was honouring a contractual obligation and which discharged an existing debt is something that has to be in the interests of Diakyne, unless it would cause an actual event of insolvency. The making of the payment, according to the respondents, avoided the need for litigation. The respondents thus asked "why does a director who honestly believes that he is owed - or a company associated with him is owed money, have to become a plaintiff?" Insofar as this submission might have been intended to engage the notion of a balance between the potential harm and benefit to Diakyne by reason of the making of the payment, I adopt in answer the submission made by counsel for Diakyne that this is:
…not a proposition that sits well in the mouth of Mr Ralph in circumstances where what he's in effect saying is, well, I decided I should pay myself - I should pay Colorado this money to spare Diakyne the trouble of me instructing or causing Colorado to sue Diakyne.
119 In short, there was no benefit to Diakyne by the making of immediate and full payment of the Colorado invoice on its presentation by Mr Ralph. The only benefit from so doing was to Colorado and the only harm was to Diakyne. Mr Ralph must be taken to have intended this inevitable consequence of his actions and I am satisfied that he did so intend. At the least, any reasonable person in his position at the time would have understood the inevitable consequence of his actions to be to advantage Colorado by securing immediate payment to it in full whilst disadvantaging Diakyne be removing any opportunity to debate or dispute the making of the payment.
120 Contrary to the respondents' submissions, this is not a case which can be reduced to the assertion that a director's decision at the time should not be able to be second-guessed merely because later directors may wish to take issue with it. For the reasons already given, this assertion does not accurately reflect the full circumstances known to Mr Ralph as at 30 November 2007.
121 Similarly, the fact that Diakyne has not proved that Mr Ralph had any special knowledge or expertise over and above that of an ordinary director of a company such as Diakyne is no answer. Diakyne accepted that the relevant test under s 180(1) of the Corporations Act was what an ordinary person of ordinary prudence, with the knowledge and experience of Mr Ralph, might be expected to have done with respect to Colorado's claim for payment of the bonus in all of the circumstances as at 30 November 2007 if he or she was acting on their own behalf.
122 The respondents' submission about the lack of proof of harm or damage to Diakyne is also unsustainable. It is not necessary that a payment render a corporation insolvent or nearly insolvent for the corporation to suffer harm. The making of a payment to which Colorado was not entitled (whether as to the principal or GST) involved harm to Diakyne. Further, and consistent with Diakyne's case, even if the respondents' construction of the Colorado contract were correct, the making of an immediate payment of the full amount caused harm to Diakyne. As discussed, ambiguities were apparent on the face of the contract. Mr Ralph had disputed the bills from others involved in the same transaction (and, apparently, had succeeded in having the amount of at least one of them reduced by a third). Diakyne's financial situation was poor and $110,000 was a substantial sum to it. In these circumstances it is "so plain, so manifest, and so simple of appreciation" (Vrisakis at 212 citing Overend & Gurney Co v Gibb (1872) LR 5 HL 480 at 486-487) that any ordinary person of ordinary prudence would not have made an immediate payment to Colorado of the full amount claimed and thereby removing Diakyne's opportunity to negotiate a commercial resolution more favourable to its interests, even if they honestly believed the claim was authorised by the contract.
123 The respondents also sought to make something of the fact that, at the time of the meeting of Diakyne's shareholder (MediVac) on 4 December 2007, at which a resolution was passed removing Mr Ralph and Ms Liu from their positions as directors of Diakyne, the MediVac board did not know about the payment of the $110,000 to Colorado. As the respondents put it, the decision had been made to remove Mr Ralph irrespective of the payment of the $110,000. As I understand the respondents' submission, this should lead to an inference that the bonus provision in the Colorado contract was of no particular concern to those directors. I do not accept that submission. The fact that the directors decided to remove Mr Ralph from his position as director on 3 December 2007, when they did not know about the payment, merely confirms that Mr Ralph's position as a director and managing director of Diakyne was untenable. This supports, rather than undermines, the findings I have made above. For the same reasons the terms of the letter dated 17 December 2007 do not undermine Diakyne's case.
124 Accordingly, and by way of conclusion, Mr Ralph, on 30 November 2007, exercised his power as a director of Diakyne to sign a resolution of Diakyne's board which resolved "to pay the prescribed bonus of $100,000 to [Colorado] as per the Colorado [contract]". Mr Ralph also exercised his power as a director of Diakyne to sign an instruction to UBS Warburg authorising a payment of $110,000 from Diakyne to Colorado. These actions of Mr Ralph contravened the duty imposed by s 180(1) of the Corporations Act to exercise powers with the degree of care and diligence that a reasonable person would exercise if they were a director of Diakyne in the circumstances.
125 No reasonable person in Mr Ralph's position would have signed the documents on 30 November 2007 despite the existence of an honest belief on their part that the payment was due and owing to Colorado. Mr Ralph knew that he had a material personal interest in the making of the payment. Mr Ralph also knew that $110,000 was a significant sum of money given Diakyne's perilous financial situation. Any reasonable person in Mr Ralph's position at that time would have appreciated that Colorado's entitlement to the payment (as to the whole and as to the GST) was at least arguable because of the ambiguities within the Colorado contract and the bonus provision. Further, and as discussed, any reasonable person in the circumstances also would have appreciated (as I consider Mr Ralph in fact did) that if the payment was not made immediately those likely to control Diakyne in the near future would be likely to debate or dispute the making of the payment.
126 In these circumstances, any reasonable person would have known that the consequence of authorising and directing the payment on 30 November 2007 would be to ensure Colorado received the money without Diakyne having any opportunity to debate or dispute the making of the payment. Knowledge of this consequence alone would establish a breach of s 180(1) in the circumstances described. In the present case, however, I am satisfied also that Mr Ralph in fact intended to achieve this consequence on 30 November 2007. Accordingly, Mr Ralph contravened s 180(1) of the Corporations Act on 30 November 2007.
127 The same findings lead to my conclusion that Mr Ralph contravened ss 181(1) and 182(1) of the Corporations Act on 30 November 2007. In exercising his power as a director of Diakyne to sign a resolution of Diakyne's board which resolved "to pay the prescribed bonus of $100,000 to [Colorado] …as per the Colorado [contract]" and an instruction to UBS Warburg authorising a payment of $110,000 from Diakyne to Colorado, Mr Ralph did not act in good faith for the best interests of Diakyne and for a proper purpose and did improperly use his position to gain an advantage for Colorado (and, thereby, for himself). Mr Ralph intended to and in fact gained an advantage for Colorado by ensuring Colorado received the money without Diakyne having any opportunity to debate or dispute the making of the payment. The actions of Mr Ralph, assessed against the objective standard of impropriety, warrant that description
128 As Diakyne submitted, these conclusions follow whether or not the construction of the Colorado contract which I have adopted is correct. Even if that construction is incorrect, the same propositions apply, particularly given the conclusion that Diakyne suffered harm by reason of the fact that Mr Ralph's actions deprived it of any opportunity to negotiate about the payment by reason of the ambiguities on the face of the Colorado contract. In other words, the question of construction is of relevance to damages or compensation but, given my findings, not to contravention of ss 180(1), 181(1) and 182(1) of the Corporations Act.