Dimension Data Australia Pty Ltd v Kepper

Cross-Respondent to the First and Second Cross-Claim

Introduction 1 On 4 December 1998 Dimension Data Australia Pty Ltd ("Dimension Data") commenced proceedings in this Court ("the principal application") relating to its acquisition of shares in Datacraft Ltd ("Datacraft"). Five parties were named as respondents. In those proceedings Datacraft became a cross-respondent and later a cross-applicant in a cross-claim against accountants PriceWaterhouseCoopers ("the Accountants"). This judgment concerns an application by the Accountants for an order striking out that cross-claim.

Background 2 It is sufficient, for present purposes, to describe, in a summary way, the events leading to this strike out application by reference to the facts alleged in the pleadings. Datacraft was a publicly listed company and in late 1997 had on issue over 100,000,000 shares and over 5,000,000 options. In September 1997 Dimension Data purchased by way of public takeover all the shares in Datacraft at a price of $3.00 per share. Mr George John Kepper, the first respondent in the principal application and Mr Joseph Alexander Skryzynski, the second respondent, were directors of Datacraft. Both directors owned a significant number of shares in Datacraft through investment companies. Keppers' investment companies were KFT Investment Pty Ltd ("KFT") and Masaki Pty Ltd ("Masaki") and Skrzynski's investment company was Australian Mezzanine Investment Pty Ltd ("Mezzanine"). In the statement of claim filed by Dimension Data in the principal application, it is alleged that various representations were made by Kepper, Skryzynski, KFT, Masaki and Mezzanine to Dimension Data prior to the takeover of Datacraft concerning the commercial position of that latter company. One form the representations took was a public announcement on 19 August 1997 through the Australian Stock Exchange made up of a preliminary final statement and dividend announcement and preliminary final report. In the statement of claim it is alleged Kepper and Skrzynski caused to be prepared, and provided to Dimension Data, financial information concerning Datacraft including that the company had an operating profit of 11.8 million dollars for the 1997 financial year and that in the 1998 financial year, Dimension Data would be operating in a rapidly developing market with great growth potential and had commenced the year with a strong backlog. These representations were compendiously described in the statement of claim as "the Preliminary Announcement representations". It was pleaded in the alternative that Kepper and Skrzynski caused Datacraft to prepare and provide to Dimension Data the same information. Paragraph 30 of the statement of claim states: "30. Insofar as the Preliminary Announcement representations were made by the Company [Datacraft]: (a) in contravention of s 52 of the TPA, each of Kepper and Skrzynski was a person involved in each contravention within the provisions of s 75B of the TPA; and (b) in contravention of s 995 of the [Corporations] Law, each of Kepper and Skrzynski was a person knowingly concerned in each contravention within the provisions of s 1324(1) of the Law." 3 On 30 March 1999 Kepper and Skrzynski filed a cross-claim against Datacraft alleging that their conduct said by Dimension Data to give rise to liability, was engaged in by them in their capacity as directors of Datacraft. They both sought indemnity under article 170 of the Articles of Association and Consitution of Datacraft and, on Skryzynski's part, also under a deed of agreement of 30 September 1997 between Skrzynski and Datacraft. Kepper and Skrzynski allege that the conduct relied upon by Dimension Data which exposed them to liability as pleaded, was conduct performed by them in good faith. 4 On 6 July 1999 Datacraft filed a cross-claim against the Accountants alleging breach of their retainer as auditors of Datacraft and also alleging negligence. In relation to these matters the cross-claim states: "28. By reason of the claims made against Datacraft in the proceedings, Datacraft has or will suffer loss and damage by reason of [the Accountants'] breach of the Retainer Agreement or, alternatively, its Duty of Care or both." The cross-claim went on to plead that the conduct of the Accountants constituted conduct in contravention of s 42 of the Fair Trading Act 1987 (NSW).

The submissions 5 The gravamen of the submission of senior counsel for the Accountants in support of an order striking out the cross-claim against them is that the cross-claim is directed to recouping any amount Datacraft might be required to pay Kepper and Skrzynski under the indemnities. However, it was submitted, s 241(1) and (2) of the Corporations Law deny a power to indemnify a director in relation to conduct which involves a lack of good faith. Section 241 relevantly provides: "241 (1) A company or a related body corporate must not: (a) indemnify a person who is or has been an officer or auditor of the company against a liability incurred by the person as such an officer or auditor; or (b) exempt such a person from such a liability. (1A) A constitution or any other instrument, or an agreement or arrangement, is void in so far as it provides for a body corporate to do something that subsection (1) prohibits. (2) Subsection (1) does not prevent a person from being indemnified against a liability to another person (other than the company or a related body corporate) unless the liability arises out of conduct involving a lack of good faith. (3) …" It was submitted the liability of Kepper and Skryzynski, upon which any indemnity might operate, was accessorial liability for the conduct of Datacraft arising under s 75B of the Trade Practices Act 1974 (Cth). Reference was made to Yorke v Lucas (1984) 158 CLR 661. It was submitted that accessorial liability depended upon Kepper and Skrzynski having aided, abetted, counselled or procured the contravening conduct of Datacraft. Any conduct of the directors giving rise to accessorial liability could not be conduct involving good faith. It followed, it was submitted, Datacraft, by operation of s 241, could not be liable to indemnify Kepper and Skrzynski for any conduct giving rise to their liability and accordingly Datacraft would not suffer loss for which the Accountants might be liable. 6 Counsel for Datacraft first took issue with whether the relevant liability of Kepper and Skrzynski was accessorial liability only. Even if it was, it was submitted, conduct which gave rise to accessorial liability was not necessarily conduct which was lacking in good faith of the type referred to in s 241(2). It would be necessary to investigate the facts before any conclusion on that issue could be reached. Conclusion 7 It is unnecessary to investigate in detail the basis or bases on which Kepper and Skrzynski might be liable on the case as pleaded and the basis or bases upon which Datacraft might be liable to indemnify them for any loss they suffer. That is because I do not accept the basic premise advanced by senior counsel for the Accountants. That is, I do not accept that it is self evident that conduct of directors of a company giving rise to accessorial liability under s 75B is, ipso facto, conduct involving a lack of good faith. The nature of the conduct which attracts s 75B was discussed by French J in Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd (1994) ATPR 41-315. His Honour said at 42,204: "The application of that section [s 84(2) of the TPA] and the common law to the relationship between the conduct of the officers of a corporation and that conduct which is attributed to the corporation was discussed by the Full Court in Wheeler Grace and Pierucci Pty Ltd v Wright (1989) ATPR 40-940 at 50,255-50,257 [16 IPR 189 at 208-209] (per Lee J with whom Neaves and Burchett JJ agreed). And as is apparent from that decision, the officers of a corporation whose conduct is attributed to the corporation and in respect of which the corporation is in contravention of s. 52 may, by that conduct, be themselves "involved in the contravention" within the meaning of s. 75B. Such an involvement does require knowledge of the essential elements of the contravention - Yorke v. Lucas (1984) ATPR 40-622 at 47,056-47,057 and 47,060-47,061; (1984) 158 CLR 661 at 670 and 677. That knowledge does not require knowledge or awareness that the conduct has the capacity to mislead nor knowledge that it may be a contravention of s. 52. What must be shown to be possessed is knowledge of the elements of a contravention: Wheeler Grace and Pierucci Pty Ltd v Wright (supra) at p. 50,257." 8 In Wheeler Grace & Pierucci Pty Ltd v Wright (1989) 16 IPR 189, the Court considered the accessorial liability of an employee of a company which was a financial consultant and investment advisor. That company had held a meeting of potential investors, conducted by the employee, at which statements had been made about a trust which was to operate a gold mine. As to the accessorial liability of the employee, Lee J said at 209: "According to his Honour's findings, the acts which constituted the contravention of s 52 were the appellant's [the company's] statement to potential investors in the course of inviting such persons to invest in the special units of the trust that such investors would receive a return of the premiums paid on their investment within a few months without informing those potential investors of any qualifications on the prospect of repayment of the premiums. Obviously Collins [the employee] was fully aware of those elements being the person conducting the meeting on behalf of the appellant and the person who made the statement for the appellant without qualification. His Honour found that Collins was aware, prior to the meeting, that such a statement would require qualification because Collins had participated in a resolution of the board of directors of Carbon Gold on 26 April 1985 that the speculative nature of the investment should be continually stressed to prospective unit holders. It followed from that finding that Collins possessed knowledge of the circumstances that gave the conduct of the appellant a misleading character. It is immaterial whether Collins understood the import of those circumstances or held a positive belief as to the truth of the assertion he had made for the appellant." [Emphasis added] See also Richardson & Wrench (Holdings) Pty Ltd v Ligon No. 174 Pty Ltd (1994) 123 ALR 681 and Westbay Seafoods (Aust) Pty Ltd v Transpacific Standardbred Agency Pty Ltd [1996] FCA 630. 9 I have been unable to find any recent authorities discussing s 241 in its present form which was enacted in 1994. However in a comparatively recent commentary on s 241 in Kyrou, "The Year 2000 - Implications for Indemnities and Insurance for Directors" (1998) 10 ILJ 62 the following is said (at 67): "Section 241(2) also prohibits indemnities in respect of liabilities arising out of conduct involving a lack of good faith. Once again, this is a statutory prohibition which overrides anything to the contrary in the articles of association or a deed of indemnity. The expression "lack of good faith" has not been the subject of any judicial analysis in the context of s 241 and there is therefore some uncertainty as to its precise meaning. The best way to predict how the courts will interpret the expression is to look at how courts have interpreted the expression "good faith" in other contexts. Unfortunately, the cases that have considered the expression "good faith" have adopted two competing interpretations, namely a subjective interpretation and an objective interpretation. Under the subjective interpretation, a director will be held to have acted without good faith if he or she acted dishonestly. Under the objective interpretation, a director will be held to have acted without good faith if he or she fails to exercise the caution and diligence to be expected of an honest person of ordinary prudence, even though the director was honest in a subjective sense. In other words, dishonesty is required under the subjective interpretation whereas something less than dishonesty is sufficient under the objective interpretation. What appears to be emerging more recently is a hybrid approach, namely, that a director will be held to have acted without good faith where he or she acted dishonestly or did not make a real or genuine attempt to meet the standard of care required of him or her. Based on the above principles, it is likely that, in the context of s 241, the courts will interpret the expression "lack of good faith" as including the following situations: · where there is fraud; · where there is dishonesty; · where there is malice; · where there is an intentional breach of duty, that is, where a director deliberately does an act or refrains from doing an act knowing that the act or omission constitutes a breach of duty; · where there is recklessness, that is, where a director does an act or refrains from doing an act without caring whether or not the act or omission constitutes a breach of duty; · where there is an improper purpose, that is, where a director exercises his or her power for a purpose alien to the purposes for which the power was endowed, even though there is no dishonesty; and · where a director acts honestly but fails to make a real or genuine attempt to discharge his or her duties." 10 In the present application there was a fairly perfunctory analysis by counsel of the scope of s 241(2). In my opinion this matter is not one where it is appropriate to endeavour to ascertain the precise scope of s 241(2) on what would effectively be a final basis, without an investigation of the facts. It is not obvious to me that conduct to which s 75B is directed is necessarily conduct to which the concluding words of s 241(2) are also directed. The cause of action pleaded in the cross-claim against the Accountants, in my opinion, is not untenable and so hopeless as to warrant summary dismissal of that cross-claim. 11 I dismiss the strike out application with costs. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore.

Counsel for PriceWaterhouseCoopers B W Rayment QC & T G R Parker

Solicitor for PriceWaterhouseCoopers: Coudert Brothers

Counsel for Datacraft Ltd: D J Hammerschlag

Solicitor for Datacraft Ltd: Cowley Hearne

Counsel for George John Kepper, Joseph Alexander Skrzynski, KFT Investments Pty Ltd, Masaki Pty Ltd: Dr A S Bell

Solicitor for George John Kepper, Joseph Alexander Skrzynski, KFT Investments Pty Ltd, Masaki Pty Ltd: Atanaskovic Hartnell

Date of Hearing: 8 October 1999

Date of Judgment: 22 October 1999