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[2013] NSWCA 455
Court of Appeal (NSW)
2013-06-27
Meagher JA, Ward JA, Emmett JA
Original judgment source is linked above.
EQUITY - knowing receipt - where statement of claim did not seek relief from knowing recipient - where primary judge awarded relief against knowing recipient as well as directors in breach from whom the statement of claim had sought relief - where knowing receipt complained at first instance that relief not pleaded against her - where primary judge did not give leave to plaintiffs to amend statement of claim and did not advert to the issue in awarding relief against knowing recipient
EQUITY - knowing receipt - whether individual was a knowing recipient - where individual who was both wife and daughter respectively of the two directors in breach of their directors' duties received shares transferred in breach of the two directors' duties to the company - whether individual had knowledge - whether individual knew of circumstances that reasonably indicated the fact of the breaches - whether individual, if liable for knowing receipt, could be excused under s 85 of the Trustee Act 1925
REMEDIES - at equity and under Corporations Act for breach of directors' duties - where primary judge ordered enquiry as to damages or compensation to be awarded to company in relation to transfer of shares at undervalue - whether primary judge erred in not immediately assessing the equitable compensation to be paid by reference to the difference between the amount the company received as consideration for the shares and the findings made by her Honour as to the value of the shares as at the time of transfer - whether in calculating statutory compensation under s 1317H of the Corporations Act the shares were to be valued as at the time of transfer or as at time of assessment of compensation Legislation Cited: Bankruptcy Act 1966 (Cth), Pt X Civil Procedure Act 2005, s 22, 56, 90 Conveyancing Act 1919, s 37A Corporations Act 2001 (Cth), ss 79(c), 180, 181, 182, 232, 233, 556(1)(a), 1317H, 1317HD (repealed), 1318 Supreme Court Act 1970, s 63 Trustee Act 1925, s 85
Uniform Civil Procedure Rules 2005, rr 6.12(1), 36.1, Pt 19 Cases Cited: Atkinson v Australian Rural Group Ltd [2002] NSWSC 1232 Barnes v Addy (1874) 9 Ch App 244 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 287 ALR 22 Wicks v Bennett [1921] HCA 57; (1921) 30 CLR 80 Category: Principal judgment Parties: In CA 2012/259522:
Gerard Cassegrain & Co Pty Limited (ACN 000 342 174) (in liquidation) by its Liquidator Chris Chamberlain - appellant Claude Cassegrain - first respondent Felicity Cassegrain - second respondent Anthony Blake Sarks - third respondent
Claude Cassegrain - first appellant Anthony Blake Sarks - second appellant Denis Cassegrain - first respondent Catherine Dunn - second respondent Patrick Cassegrain - third respondent John Cassegrain - fourth respondent Gerard Cassegrain & Co Pty Limited - fifth respondent Felicity Cassegrain - sixth respondent
Felicity Cassegrain - appellant Denis Cassegrain - first respondent Catherine Dunn - second respondent Patrick Cassegrain - third respondent John Cassegrain - fourth respondent Gerard Cassegrain & Co Pty Limited - fifth respondent Claude Cassegrain - sixth respondent Anthony Blake Sarks - seventh respondent Representation: Counsel:
MA Ashhurst SC with Mr G Colyer and Ms J Wright for Gerard Cassegrain & Co Pty Limited, Denis Cassegrain, Catherine Dunn, Patrick Cassegrain and John Cassegrain D Grieve QC with Mr P Bolster for Claude Cassegrain and Anthony Blake Sarks JJ Garnsey QC with Mr R Raffell for Felicity Cassegrain Solicitors:
McCabes (for Gerard Cassegrain & Co Pty Limited, Denis Cassegrain, Catherine Dunn, Patrick Cassegrain and John Cassegrain) Oliveri Lawyers (for Claude Cassegrain and Anthony Blake Sarks) Peter Condon & Associates (for Felicity Cassegrain) File Number(s): CA 2012/259522 CA 2012/256538 CA 2012/253268 Publication restriction: Nil Decision under appeal Citation: [2012] NSWSC 403 Date of Decision: 2012-04-27 00:00:00 Before: Bergin CJ in Eq File Number(s): 2008/281625
Judgment 1MEAGHER JA: I agree with the reasons and proposed orders of Emmett JA. 2WARD JA: I agree with Emmett JA. 3EMMETT JA: These three appeals are concerned with the affairs of Gerard Cassegrain & Co Pty Limited (the Company). They arise out of proceedings brought in the Equity Division by Mr Denis Cassegrain, Mrs Catherine Dunn, Mr Patrick Cassegrain and Mr John Cassegrain (together the plaintiffs), who are shareholders of the Company. The plaintiffs complained about the conduct of Mr Claude Cassegrain and Mr Anthony Sarks, the Company's only two directors, in causing the Company to transfer shares held by it in two other companies, Cassegrain Tea Tree Oil Pty Limited (CaTTO) and Oceania Agriculture Pty Limited (Oceania), to Felicity Cassegrain. 4Felicity Cassegrain is the wife of Claude Cassegrain and daughter of Anthony Sarks. The plaintiffs asserted that the transfers of shares in CaTTO and Oceania to Felicity Cassegrain (the Transfers) were effected at an undervalue and that, in causing the Company to effect the Transfers, Claude Cassegrain and Anthony Sarks acted in breach of their fiduciary duties to the Company.
Relevant Corporate Entities 5Mr Gerard Cassegrain incorporated the Company in 1960 and carried on a logging business through it. Over time, the Company acquired extensive landholdings in the Port Macquarie area. Mr Denis Cassegrain, Mrs Catherine Dunn, Mr Patrick Cassegrain, Mr John Cassegrain, Mrs Anne-Marie Cameron and Mr Claude Cassegrain are siblings, being the children of Mr Gerard Cassegrain. There has been bad blood amongst them for some time and the proceedings out of which these appeals arise are not the first involving them and the Company. With no disrespect intended, to avoid undue repetition I will refer to all parties by their first names. 6At relevant times, the issued share capital of the Company consisted of 20 ordinary shares and 100 A class shares. Claude owned all 20 ordinary shares, entitling him to demand a poll at any general meeting and to command the majority of votes on such a poll. Claude also owned 10 A class shares. Claude and Felicity jointly owned 40 A class shares. Denis, Catherine, Patrick, John and Anne-Marie each owned 10 of the other 50 A class shares. 7CaTTO was incorporated in November 1989 with an issued capital of two shares, one owned by Claude and the other by the Company (the CaTTO share). At relevant times, Claude and Anthony were the only directors of CaTTO. Since February 1990, CaTTO has been the registered proprietor of a property situated at Bill Hill Road, The Hatch, New South Wales (the Property). 8Oceania was incorporated in November 1996 as an unlisted public company. In July 2003, it became a proprietary company. It was a wholly owned subsidiary of the Company. After October 2003, Claude was the only director of Oceania. 9From 1995, Claude and others promoted a managed investment scheme (the Scheme) involving the establishment of a tea tree plantation on the Property. In April 1997, CaTTO, as owner of the Property, entered into a project deed with Oceania relating to the establishment of the proposed tea tree plantation. A second project deed between CaTTO, as owner, and Oceania, as manager, was entered into in February 1998. 10Under the project deeds, Australian Rural Group Limited (the Scheme Trustee) was to act as the trustee of the Scheme. Oceania was to act as the Scheme manager, responsible for planting, maintaining and harvesting tea trees on the plantation to be established on the Property. CaTTO leased the Property to the Scheme Trustee, which in turn sublet it to Oceania. Oceania licensed allotments of the Property to investors in the Scheme (Investors). 11Agricultural and Rural Finance Pty Limited (AR Finance) was incorporated in 1997 in connection with the Scheme, with Anthony as a director. In May 1997, Oceania and AR Finance entered into an arrangement under which Oceania was to lend funds to AR Finance. AR Finance was then to make loans to Investors to enable them to pay for part of the initial licence and management fees payable in connection with the Scheme. Oceania agreed to indemnify Investors who borrowed from AR Finance for the amounts they owed to AR Finance. Under the indemnity agreements, Oceania agreed that, in certain circumstances, it would indemnify an Investor in respect of any liability of the Investor to repay the loans to AR Finance. 12Between April 1997 and June 1999, AR Finance entered into loan agreements with approximately 230 Investors and at the same time each Investor entered into an indemnity agreement with Oceania. As at 30 June 2000, AR Finance owed Oceania $9,875,000 in respect of such loans. 13On 30 June 1997, in accordance with the first project deed, CaTTO leased the Property to the Scheme Trustee, which sublet it to Oceania. The tea tree plantation was commenced and was managed by Oceania as contemplated by the project deeds. 14In September 2002, the Scheme Trustee was placed into voluntary administration. In November 2002, the administrators of the Scheme Trustee advised Oceania that the Scheme Trustee had retired as of 27 October 2002. The projects deeds provided that if the office of trustee became vacant and a new trustee was not appointed within 60 days, the projects, and thus the Scheme, would terminate. Accordingly, on 12 November 2002, Oceania informed the Investors that the retirement and non-replacement of the Trustee meant that the Scheme would terminate as of 26 December 2002. 15As at January 2003, the Investors owed AR Finance in excess of $11.6 million. On 6 January 2003, AR Finance made written demands on the Investors for repayment of their loans. However, many of the Investors claimed indemnity from Oceania under the indemnity agreements. 16In February 2003, Claude received written advice from his solicitors that the Investors could not enforce the indemnity agreements. However, in May 2003, Claude received advice from senior counsel that the Investors could enforce the indemnity agreements if they had made payments punctually in accordance with them. 17In June 2003, AR Finance, with Oceania's consent, commenced proceedings in the Equity Division against 206 Investors, seeking to recover outstanding amounts under the loans of some $10 million. On 19 March 2004, the Court ordered that the issues raised by the claims made by AR Finance against Mr Bruce Gardiner, one of the defendants, be determined separately, with the other Investors undertaking to be bound on common questions (the Gardiner Proceedings). 18On 26 November 2004, Mr Gardiner filed an amended cross-claim against Oceania claiming indemnity from it under the relevant indemnity agreement. Oceania's defence to the cross-claim asserted that defaults on the part of Mr Gardiner in the punctual payment of moneys invalidated the indemnity, consistent with the advice of senior counsel. 19Thus, by late 2004, it was uncertain whether the indemnity agreements were enforceable and, if so, whether Oceania would be held liable to indemnify the Investors in respect of their liabilities to AR Finance of approximately $10 million. 20CTK Engineering Pty Limited (CTK) was formed in 1966 to take over a business of carrying timber. CTK carried on a logging business for several years and later became involved in civil engineering works, sand mining and restoration works. It no longer carries on those activities but owns several parcels of land near land owned by the Company. In about 1988, a proposal was conceived under which CTK's land and the Company's land might become the subject of a major development. The proposal came to nothing and CTK subsequently sold part of its landholdings. 21By January 2003, the tea tree plantation on the Property was ripe for harvest. During 2003, Claude developed a proposal by which CTK would harvest the tea tree crop. At that stage, Claude was one of CTK's two directors. The other director agreed to Claude's proposal. CTK entered into a machinery lease agreement with Oceania, by which it agreed to pay to Oceania $70,200 per annum for the use of certain plant and equipment owned by Oceania and for the right to enter the Property and harvest the tea tree crop. CTK harvested about a quarter of the tea tree crop from November 2003 to February 2004. 22The harvesting recommenced on 3 August 2004. However, on 2 August 2004, two of CTK's shareholders commenced proceedings seeking a declaration that its affairs were being conducted in a manner oppressive to them and for an order that it be wound up. The shareholders relied on evidence of Mr Robin Humphreys that CTK's tea tree harvesting operation was causing it to incur substantial losses and that the business was speculative and not financially viable. 23On 12 November 2004, in the light of Mr Humphreys' evidence, Windeyer J appointed Mr John Lord as provisional liquidator of CTK. Mr Lord agreed with Mr Humphreys about the lack of viability of the harvesting operation. As a consequence, he caused CTK's conduct of that operation to be terminated between 13 and 21 December 2004. 24Claude and Anthony were not convinced that the unharvested tea tree crop had no value. In February 2005, CaTTO, which still owned the Property, took over the harvesting business from CTK. In 2005, Claude prepared a document for CaTTO described as a Business Plan. He sent the Business Plan to a prospective financier in support of an application for finance. The Business Plan recorded that in excess of $10 million had been spent in developing the tea tree plantation on the Property and in purchasing machinery. The Business Plan said that, from August 2003 to December 2003, CTK had managed the plantation as Oceania's sub-contractor and that CaTTO, as landowner, had taken over the operation from 21 December 2004. 25The Business Plan included a gross profit budget for the periods 1 January 2005 to 31 December 2005 and 1 January 2006 to 31 December 2006. The predicted available amount for "stock, capital, depreciation, interest, profit & tax" for the 2005 period was $433,400 and for the 2006 period $602,500. Tax invoices in the amount of $27,637.50, $76,960, $22,200 and $28,992.42 were attached to the Business Plan.
The Transfers 26On 15 June 1999, the Commonwealth Bank of Australia (the Bank) appointed receivers and managers to the Company (the Receivers). The Receivers were appointed under the provisions of charges granted by the Company to the Bank as security for its obligations under facilities that the Bank had provided to the Company. 27On 7 September 2004, the Receivers wrote to Claude, referring to recent discussions concerning "proposed refinance of the remaining debts" owed by the Company to the Bank. The Receivers told Claude that if the Company could not refinance its debt, the Bank would expect it to sell assets under its control, the most valuable being the Property. The Receivers also informed Claude that the Bank would require payment in full of all outstanding debts, which they estimated to be $357,492, including all expenses. 28As at 22 September 2004, the trustee of the Cassegrain Family Trust (the Cassegrain Trust) owed the Company $721,892. On 29 September 2004, the trustee of the Cassegrain Trust paid $215,000 of that liability by paying that sum to the Bank on behalf of the Company, thereby reducing the amount owing by the Company to the Bank. 29On 21 December 2004, Claude wrote to the Receivers proposing that a bank cheque for $194,249, being the payout figure for them to retire, be deposited with the Bank in exchange for documentary proof of their resignation and of the Bank's discharge of the charges under which they were appointed. On that day, Felicity deposited a bank cheque in the sum of $194,249 to the credit of the Company's account with the Bank. 30Also on 21 December 2004, Claude, acting as a director of the Company, wrote to Felicity saying that the Company "hereby" provided a charge in her favour to secure all moneys she had advanced to the Company and saying that the Company would provide formal charges to be registered with the Australian Securities and Investments Commission. 31Claude gave evidence that he had prevailed upon Felicity to provide the funds of $194,249 necessary to pay out the Bank and that she was initially disposed to do so by way of secured loan to the Company. He said, however, that after further discussions Felicity instead decided to apply the funds to acquire the Company's shares in CaTTO and Oceania (together the Shares) at their book value and to advance the balance of the funds by way of loan, on the condition that the purchase price for the Shares be subject to later review. 32It is not clear when the discussions about how Felicity would assist the Company occurred. Claude and Anthony contend that that question was irrelevant to the central issue in the proceedings, namely, whether the Shares were sold at a substantial undervalue (the undervalue question). However, whether the undervalue question was in fact a central issue is an important question to be determined. Much of the dispute between the various parties depends upon whether the primary judge's finding that the Transfers were effected at an undervalue was necessary for her Honour's findings of breach of statutory and fiduciary duty against Claude and Anthony. Claude and Anthony contend that the finding about the undervalue question was a necessary condition for the breaches, whereas the plaintiffs contend it was not. 33At some stage, a document purporting to be minutes of a meeting of the Company's directors held on 21 December 2004 was created. Claude and Anthony were shown as present at the meeting. The purported minutes noted that the Receivers had advised that the Bank required payment of $194,249.19 for the Receivers to retire and recorded that Felicity had offered to provide that sum. The minutes recorded that it was agreed that:
The purported minutes recorded that the consideration for the Shares was their value as disclosed in special purpose financial reports for each of CaTTO and Oceania for the year ended 30 June 2004. 34Documents purporting to be minutes of meetings of Oceania and CaTTO held on 21 December 2004 record the same matters as in the Company's purported minutes. In addition, Oceania's purported minutes record that the Investors were currently suing Oceania and that the outcome of that litigation was uncertain. 35On 18 January 2005, the Administrative Appeals Tribunal dismissed the Company's appeal against objection decisions of the Commissioner of Taxation in respect of tax assessments for the Company for the years 1994 and 1996 of, respectively, $1,904,292.25 plus interest and penalties and $230,423.08 plus interest and penalties. That may have had a significant effect on the Company's solvency. 36A share transfer form by which the Company transferred the CaTTO share to Felicity for $60,423, signed by Claude and Anthony, bears the date 19 January 2005. A share transfer form by which the Company transferred its shares in Oceania to Felicity for $71,450, signed by Claude and Anthony, bears the date 20 January 2005. Each transfer was registered in the register of members of the respective companies.
The claims made in the proceedings 37In their second further amended further statement of claim filed on 20 June 2011 (the Statement of Claim), the plaintiffs sought a series of declarations in relation to the Transfers. They sought three declarations in relation to each of CaTTO and Oceania, to the following effect:
38The first and third declarations relied on s 232 and s 233 of the Corporations Act 2001 (Cth) (the Corporations Act), which provide that the Court may grant appropriate relief if the conduct of a company's affairs be either contrary to the interests of the members as a whole or is oppressive to, unfairly prejudicial to or unfairly discriminatory against certain members. The relief may include an order that the company be wound up and an order for the purchase of any shares by any member. 39In addition, the plaintiffs sought a declaration that each of the Transfers was a voidable transaction under s 37A of the Conveyancing Act 1919 and a declaration that the Transfers were void as against the Company's creditors to the extent necessary to satisfy those claims. Section 37A relevantly provides that every alienation of property made with the intent to defraud creditors is voidable at the instance of any person thereby prejudiced. The provision does not apply to any estate or interest in property alienated to a purchaser in good faith who, at the time of the alienation, had no notice of the intent to defraud creditors. 40The plaintiffs also sought orders that the Company do all things necessary to avoid the disposition of the Shares and that Felicity do all things necessary to retransfer the Shares to the Company. Finally, the plaintiffs sought an order that, upon the avoidance of the Transfers, Claude and/or Felicity acquire all of the plaintiffs' shares in the Company at a price determined by the Court. 41In the alternative to the orders avoiding the Transfers and requiring retransfer of the Shares to the Company, and for purchase of the plaintiffs' shares in the Company by Claude and Felicity, the plaintiffs sought further declarations and orders. First, the plaintiffs sought declarations that each of Claude and Anthony:
42In addition, the plaintiffs sought declarations that when Felicity received the Shares she knew of the breaches of fiduciary duty and so held them on trust for the Company absolutely, such that she was liable for receiving property that she knew was transferred to her in breach of fiduciary duty (see Barnes v Addy (1874) 9 Ch App 244). 43The plaintiffs also sought orders:
44Thus, the plaintiffs sought two orders in relation to compensation. Both referred to compensation "as a consequence of the foregoing contraventions of the Corporations Act". No specific order was sought for equitable, as opposed to statutory, compensation. Nothing, however, turns on that, as some of the statutory breaches clearly overlapped with some of the fiduciary breaches. Of critical significance, however, is that neither of the two orders seeking compensation mentioned Felicity. Orders for equitable or statutory compensation were sought only against Claude and Anthony. 45Finally, the Statement of Claim included a prayer for such further or other order as the Court may see fit. That prayer is significant as one of Felicity's complaints in her appeal is that the primary judge granted relief against her that had not been sought by any specific prayer in the Statement of Claim. 46It is desirable to set out in some detail the allegations made in the Statement of Claim against Claude, which mirror those made against Anthony. They may be stated as follows: On 19 January 2005, Claude executed a transfer of the CaTTO share to Felicity for the sum of $60,423. No independent valuation was obtained of the Property or the CaTTO share before the transfer. As at 19 January 2005, Claude knew certain things about the CaTTO share. On 20 January 2005, Claude executed a transfer of the Company's Oceania shares to Felicity for the sum of $71,450. No independent valuation was obtained of the Oceania shares before the transfer. As at 20 January 2005, Claude knew certain things about the Oceania shares. Claude's decisions to execute the Transfers were made not for the benefit of the Company but for the benefit of Felicity, contrary to the interests of the Company's minority shareholders, and with the intention of removing the Shares from the possible reach of the Company's creditors. When Claude caused the Company to dispose of the Shares to Felicity, he was aware that the sales were at a significant undervalue. Claude placed himself in a position of conflict between his duty to the Company and the interests of his wife, Felicity, by causing the Company to dispose of the Shares to her without obtaining the fully informed consent of all the Company's shareholders. Claude's decisions to cause the Company to sell the Shares to Felicity were not made in the interests of the Company but instead made for the improper purposes of removing valuable assets from the Company and transferring them to Felicity, thus placing the assets beyond the reach of the Company's creditors. Causing the Company to dispose of the Shares knowing that the sales were occurring at significant undervalue, placing himself in a position of conflict between his duty and interests and causing the Company to sell the Shares for improper purposes each constituted a separate breach of Claude's fiduciary duty to the Company. As a consequence of the above matters, Claude breached s 181 and s 182 of the Corporations Act. Alternatively, when Claude caused the Company to dispose of the Shares to Felicity, he should have been aware that the Transfers were at significant undervalues and, in the circumstances, he contravened s 180 of the Corporations Act. 47The breaches of fiduciary duty and the statutory breaches may be grouped into three different kinds of breach:
The Primary Judge's Conclusions 54The primary judge was satisfied that the Transfers were effected at a substantial undervalue. Her Honour was satisfied that both the CaTTO share and the Oceania shares were transferred to Felicity for considerations well under their true value. The primary judge held that both Claude and Anthony owed fiduciary duties to the Company and were bound to protect the Company's interests and to subordinate their own interests. Her Honour found that each of them had placed himself in a position of conflict in authorising the Transfers and that that was a breach of duty. The primary judge thus held that the conflict breach was made out in relation to each of Claude and Anthony. 55The primary judge concluded that the Company had not given its fully informed consent to their actions. They were thus not excused from their breaches of fiduciary duty. Her Honour considered that the removal of assets from the Company upon the retirement of the Receivers, at a time when Claude and Anthony were not aware of the real financial position of the Company, was not in the Company's best interests. 56The primary judge found that Claude and Anthony effected the Transfers at a significant undervalue without the consent of the minority shareholders and without obtaining an independent valuation of the Shares. Her Honour was satisfied that they were both in breach of their fiduciary duty to the Company in failing to obtain an independent valuation of the Company's Shares in CaTTO and Oceania before their transfer to Felicity. The primary judge thus held that the undervalue breach was made out in relation to each of Claude and Anthony. 57The primary judge was also satisfied that each of Claude and Anthony caused the Transfers for the illegitimate purpose of enabling Claude and Felicity to gain control of the assets necessary to conduct the tea tree business on the Property and to gain control of Oceania's capacity to prosper from the outcome of the proceedings for recovery of the loans to the Investors. Her Honour also found that they had the improper purpose of removing the risk of the minority shareholders appointing a provisional liquidator to the Company. 58The primary judge found that there was no real commercial benefit to the Company in transferring the shares to Felicity, in circumstances where, as a result of the Transfers, the Company lost its contingent asset consisting of an entitlement to recover moneys from the Investors in the Scheme. Her Honour considered that there was no commercial imperative for the Transfers, as Felicity had previously agreed to lend to the Company all moneys necessary to pay out the Bank, in exchange for a charge over assets of the Company's. The Company could have provided Felicity with security over land and other assets available to it. The primary judge thus held that the improper purpose breach was made out in relation to each of Claude and Anthony. 59The primary judge concluded that the disposition of the Shares at a significant undervalue was contrary to the interests of the Company's members as a whole, as it depleted the asset pool of the Company for the benefit of Felicity, the wife and daughter of Claude and Anthony respectively. Her Honour considered that that conduct amounted to commercial unfairness and was oppressive, unfairly prejudicial to and unfairly discriminatory against the plaintiffs, as minority shareholders of the Company. Her Honour was satisfied that the conduct of Claude and Anthony was oppressive within the meaning of s 232 of the Corporations Act. 60Her Honour was also satisfied that in participating in the transfer of the Shares to his wife, Claude had breached s 180, s 181 and s 182 of the Corporations Act. Her Honour was also satisfied that in participating in the transfer of the Shares to his daughter, Anthony was also in breach of those provisions. In summary, each of the conflict breach, improper purpose breach, undervalue breach alleged against Claude and Anthony were made out in relation to both of them and all the statutory and fiduciary breaches were made out in relation to both of them. 61The primary judge made final declarations and orders on 24 July 2012. The declarations may be summarised as follows:
The Appeals 62The three appeals were heard together. The first appeal is by the Company, acting through its liquidator. The second appeal is by Claude and Anthony. The third appeal is by Felicity. The plaintiffs are respondents in the second and third appeals, as is the Company. The plaintiffs and the Company have filed notices of contention in both of those appeals. 63The issues raised in the three appeals are to some extent interrelated. Nevertheless, it is convenient to deal with them separately. I propose to deal first with Felicity's appeal, then the appeal by Claude and Anthony and finally with the Company's appeal.
Felicity's Appeal 64In her notice of appeal filed on 22 October 2012, Felicity relied on a number of grounds common to the appeal by Claude and Anthony. It will be convenient to deal with those grounds when dealing with that appeal.
65The Company and the plaintiffs filed notices of contention in both Felicity's appeal and Claude and Anthony's appeal. However, all four of those notices of contention raise the same grounds, relating to asserted errors in the valuation of the Shares. It is convenient also to deal with those matters when dealing with Claude and Anthony's appeal, which is essentially concerned with the undervalue question. 66The grounds that concern Felicity's interests separately from those of Claude and Anthony may be grouped into two main headings, to which I shall refer respectively as the Pleading Issue and the Knowledge Issue, as follows: (1)The primary judge erred in finding and declaring that Felicity was jointly and severally liable with Claude and Anthony to compensate the Company for any loss arising from the transfer of the Shares and, in particular, by reason of the following: (a)No such relief was sought against Felicity in the Statement of Claim or in any version of it. (b)Such relief was sought against Felicity only in the plaintiffs' written submissions filed on 18 June 2012 and the reasons of 24 July 2012 were delivered without Felicity being heard in that respect, despite a request to that effect. (c)Such relief against Felicity should have been refused as a matter of discretion. (d)The only relief that should have been ordered against Felicity was that she retransfer the Shares to the Company, subject to compensation for or restitution of the moneys paid as consideration for the transfers, in such amount as the Court should find just and equitable. (2)The primary judge erred in finding and declaring that Felicity acquired the Shares knowing of the breach of duty on the part of Claude and Anthony and in finding that she had knowledge of circumstances that would indicate the facts of any breach of duty, in particular the sale of the Shares at an undervalue.
The Pleading Issue 67Neither the Statement of Claim nor any version of it made an express claim for equitable or statutory compensation against Felicity. The first question to be decided in Felicity's appeal is whether, in those circumstances, it was open to the primary judge to award compensation against her. 68In the course of the hearing of the appeals, senior counsel for the plaintiffs and the Company propounded a proposed third further amended statement of claim containing an additional prayer for relief, being an order that Claude, Anthony and Felicity jointly pay to the Company such equitable compensation as the Court may determine to be appropriate. It was made clear that the additional prayer was intended to be an alternative to the prayers for the avoidance of the Transfers, not a prayer consequential upon such avoidance. The proposed third further amended statement of claim also seeks to extend the enquiry to determine the amount of compensation payable by Felicity to the Company, as well as by Claude and Anthony, and to extend the order to compensate the Company for damage suffered by reason of the contraventions to Felicity, as well as Claude and Anthony. 69If the allegations made in the Statement of Claim were established, it would follow, although it has never been pleaded expressly, that Felicity contravened the provisions of s 181 and s 182 of the Corporations Act, insofar as she was knowingly involved in Claude and Anthony's contraventions. Felicity's knowing involvement under s 79(c) of the Corporations Act was pleaded against her (see para [53] above). However, the absence of an express allegation that by reason of her knowing involvement Felicity was herself a contravener, coupled with the absence of any prayer for an order for compensation under s 1317H(1) against her, indicate that no claim was being made against Felicity beyond the prayers that the Transfers be set aside. 70There was apparently no reference to Felicity paying either equitable or statutory compensation in the course of the trial. Nevertheless, the Company relies upon the way the proceedings were conducted as justifying an order for compensation against Felicity, despite the failure to claim such relief in the final iteration of the Statement of Claim. It is therefore necessary to say something about the proceedings below. 71On 13 October 2011, shortly before the evidence ended, counsel for Claude and Anthony said that, on his understanding of the case, it would be necessary for the primary judge to make a determination of the value of the Shares if her Honour were of the view that there was a sale at a significant undervalue. Counsel referred to the fact that the relief sought was compensation and that even if that claim for compensation was for a buyout order at a particular price, rather than a money amount, her Honour could not grant it "without getting down to tin tacks on the figures". Counsel said that he was not sure how the plaintiffs were putting their case procedurally and said that, if they were able to persuade her Honour that there was a sale at an undervalue, the question would be "[w]hat next?". Counsel said that he was not sure what the plaintiffs' answer to that question would be but, in any event, his clients wanted the opportunity of having the submissions in writing. 72Senior counsel for the plaintiffs responded by saying that there was evidence as to the value of the Shares. He said that even if the primary judge were to determine their value, it would not necessarily be determinative of the equitable compensation payable. He pointed out that a separate order for a damages enquiry was claimed in the Statement of Claim. The primary judge observed that that was a different question and that the plaintiffs were asking the Court to look at the question of value to decide whether the Transfers were at an undervalue. Senior counsel for the plaintiffs accepted that to do so the Court would need to ascertain the true value of the Shares. 73At that point, senior counsel for Felicity intervened, indicating that he supported what counsel for Claude and Anthony had said. He said, however, that the case against Felicity was a little more complex in that it depended on imputed or constructive notice of matters that may or may not be breaches of fiduciary duty. He said that putting aside the allegation of intent to defraud creditors, and assuming oppression be found, there was a question as to whether the Court should grant relief tailored to Felicity. He said that the appropriate course would be for the plaintiffs to provide final written addresses and for Felicity to be entitled to respond. 74In the course of argument on the following day, counsel for the plaintiffs said that he had not yet dealt with the relief that his clients were actually seeking. He said that he was still awaiting final instructions but expected that the plaintiffs would seek the orders in the derivative proceedings, namely, that equitable compensation be paid to the Company by each of the defendants and that the Company be wound up and a liquidator appointed. Counsel for Claude and Anthony asked that a timetable for written submissions as to relief be fixed. Counsel for Felicity joined in asking for a timetable on the basis that the case against her was not spelt out to enable her properly to meet it. He said that the submission on behalf of the plaintiffs that had just finished was "a fairly broad brush". Counsel for Felicity did not respond to counsel for the plaintiffs' suggestion that his clients would be seeking orders that equitable compensation be paid to the Company by "each of the defendants". The reference to "each of the defendants" would logically include Felicity. 75It appears to have been accepted by the parties that the question of relief would be deferred until after the primary judge had reached her conclusions as to whether there had been breaches of fiduciary and statutory duties and oppressive conduct under the Corporations Act. While no formal orders were made to that effect, the fact that no written submissions were made on the question of relief immediately following the completion of the evidence is consistent with there having been a common understanding that the question of relief would be deferred. In her reasons of 27 April 2012, the primary judge directed "[a]s requested" that the matter be listed again for the parties to make submissions as to the appropriate relief. 76A directions hearing was held on 17 May 2012. Before that directions hearing, the plaintiffs and Claude and Anthony had prepared draft orders, but Felicity had not. At that directions hearing, senior counsel who had represented Felicity at trial was unable to attend, though junior counsel at trial did so. The primary judge asked counsel for Claude and Anthony, in relation to the date for the next directions hearing, whether it mattered that senior counsel for Felicity would again be away as "he is going to support your [Claude and Anthony's] submissions anyway". Counsel for Claude and Anthony said that he did know if that were the case. Junior counsel for Felicity then said that he also was "not so sure about that", as Felicity's "interest is slightly different to [Claude and Anthony's] because she wasn't a director and whether she is jointly and severally liable to each of the three components of damages is a question". 77The primary judge fixed the next directions hearing for the later date of 12 June 2012, when senior counsel for Felicity could attend and after written submissions were exchanged, rather than simply disposing of the matter after oral argument without senior counsel for Felicity being able to attend. Her Honour directed that junior and senior counsel for Felicity together propound their suggested orders and serve them on the other parties and send them to her Honour's chambers in the next few weeks. 78Thus, written submissions were exchanged concerning the competing versions of the proposed orders. The plaintiffs' submissions outlined the differences between the proposed orders. On the one hand, Claude and Anthony proposed a retransfer of the Shares and an enquiry as to any loss suffered by the Company, which would take into account allowances in favour of the defendants, as an alternative to equitable compensation. On the other hand, the plaintiffs contended that they were entitled to elect for equitable relief and that compensation orders were the most appropriate remedy since if the Company reacquired the CaTTO share, so that it owned half of CaTTO, it would be tied to a business controlled by Claude as a director of CaTTO and as the owner of the only other share in CaTTO. The plaintiffs also referred to the separate matter of compensation orders under the Corporations Act, indicating that such orders should be made for the reasons given in relation to equitable compensation. 79In her written submissions of 11 June 2012, Felicity pointed out that she was not a director, employee or agent of the Company, and that she herself did not breach any fiduciary duty as a director or officer of the Company. Rather, she said, she received the Shares as transferee and paid the consideration fixed. She said that there was no conduct on her part that affected the value of the Shares either before or after the Transfers. In those circumstances, she contended, an order for retransfer of the Shares was the only appropriate order against her. 80Felicity also submitted that the compensation for breach of fiduciary duty would be the amount required to restore the assets that the beneficiary was deprived of by the defaulting fiduciary. She submitted that that amount should be assessed as at the date when the restoration was to be effected, whether the value of the relevant assets to be restored had risen or fallen. She contended that the plaintiffs were not entitled to the declarations and orders in the form sought against her by the plaintiffs. 81Felicity asserted that the plaintiffs had not presented any case or adduced any evidence to the effect that the Company would and could have realised the Shares at the date of the Transfers at the value now proposed. She said that, at best, the plaintiffs were entitled merely to an order for an enquiry based on the present value of the Shares, rather than a declaration as to the quantum of compensation. She also pointed out that there were no specific findings of knowing involvement in relation to her under s 79(c) of the Corporations Act and contended that the principles of equitable compensation applied to compensation under s 1317H. 82Thus, it is clear that Felicity resisted the plaintiffs' claim that she was liable to pay equitable or statutory compensation to the Company. However, she made no complaint at that stage in the proceedings that that relief was not available because of a pleading deficiency. 83At the further hearing on 12 June 2012, counsel for Claude and Anthony said, in relation to the question of whether there should be an order for compensation, that a retransfer of the Shares was appropriate, coupled with an order for an enquiry as to the appropriate compensation. That was consistent with their written submissions. Counsel for Felicity adopted what counsel for Claude and Anthony had said, but not all of the orders proposed. Counsel for Claude and Anthony supported Felicity's position by saying that if there were to be an enquiry it should be confined to Claude and Anthony, as they were the directors of the Company and any breach was by them alone. 84Counsel for Felicity submitted that she should not be made a party to any enquiry for equitable compensation and that the only relief against her should be for retransfer of the Shares, with appropriate allowances. He said that if the primary judge were minded to order an enquiry, Felicity adopted Claude and Anthony's submissions as to the nature of the enquiry and that equitable compensation was to be assessed as at the end of the enquiry when the order is made. 85The primary judge observed that even if an order were made under s 1317H, it was difficult to accept that that was the damage suffered by the Company. Her Honour said that the plaintiffs' difficulty was the parties' approach at trial, namely, that the Court should receive all the evidence, make findings and only then allow the parties to argue for the appropriate relief. Her Honour said that the finding that the Transfers were at an undervalue was not a finding of damage under s 1317H(2). After a further exchange with her Honour concerning the question of profits, counsel for the plaintiffs agreed to provide the Court with a note on the question of timing of compensation under the Corporations Act. Her Honour said that she would require some assistance as to the way in which s 1317H(1) operated. 86Again, it was clear that Felicity was opposing any order that she pay compensation. Again, however, no complaint was made about any pleading deficiency. Indeed, it is fairly arguable that her opposition could only have been on the basis that Felicity's counsel understood the issue to have been fairly joined at that point, such that it would be possible for the primary judge to order compensation against her. 87The plaintiffs made a further written submission in relation to s 1317H on 13 June 2012. That prompted a response from Felicity on 14 June 2012, in which the pleading deficiency was raised for the first time. Counsel for Felicity asserted that the plaintiffs were not entitled to the orders sought against her under s 1317H because no order for equitable compensation or compensation under 1317H had ever been sought against her or litigated. Counsel for Felicity also said that no such order had ever been sought or litigated against Claude or Anthony either. The response said that there was no issue in the proceedings that any compensation or damages at all, or in any particular amount, should be ordered against or paid by Felicity to the Company. 88Counsel for the plaintiffs replied with a further written submission on 18 June 2012, asserting that no leave had been sought by Felicity to make submissions on whether orders for compensation were ever sought or litigated against her. The reply asserted that she had made numerous submissions on the topic and had even used that topic to make a belated claim for costs. The reply said that if submissions had been made at the appropriate time, during the hearing on the orders for final relief, the plaintiffs would have responded by referring to s 90(1) of the Civil Procedure Act 2005, r 36.1 of the Uniform Civil Procedure Rules 2005 and prayer 14 of the Statement of Claim for "such further or other order as the Court may see fit". 89Counsel for Felicity rejoined with a further written submission on 18 June 2012, saying that the plaintiffs appeared to be seeking to have orders made on the basis of a proposed further amendment to the Statement of Claim. He said that Felicity wished to be heard in relation to any proposed further amendment. 90In her further reasons of 24 July 2012, the primary judge concluded that the appropriate order in the circumstances was for the Company to be wound up, rather than for the Shares to be retransferred to the Company. Her Honour does not appear to have adverted to the dispute concerning the adequacy of the prayers for relief in the Statement of Claim. 91Her Honour dealt with the issue of the compensation order by saying that there was an issue as to whether, in the light of the judgment of 27 April 2012, an order for equitable compensation should be made at all. Her Honour was not satisfied that it was appropriate to order equitable compensation for the difference between the consideration that Felicity paid and the value of the Shares, as referred to in the earlier reasons. Rather, her Honour considered that there should be an enquiry in relation to the amount of compensation to be paid to the Company. 92Her Honour then referred to the issue as to the compensation sought by the plaintiffs under s 1317H against Claude and Anthony, and against Felicity. Her Honour referred to Felicity's submission that she had not been found liable under s 79(c) of the Corporations Act, despite the finding of knowing receipt being made against her, so that the orders under s 1317H could not involve her. Her Honour accepted that submission. However, her Honour does not appear to have addressed Felicity's complaint that no order for compensation should be made against her at all, whether statutory or equitable, as none had been pleaded. 93It is true that it was not until the heel of the hunt that Felicity complained that compensation was never claimed against her in any iteration of the Statement of Claim. However, a fair reading of it discloses no intention on the part of the plaintiffs to seek any such relief from her. True, there were suggestions in the course of argument that the claims for compensation made by the plaintiffs might extend to her, as well as to Claude and Anthony. Further, in arguing that compensation should not be ordered against Felicity, because she was no more than a third party to the breaches, counsel for Felicity could be taken, at least implicitly, to have accepted that compensation could be ordered against her. On the other hand, any failure by counsel for Felicity to respond to suggestions that the claims for compensation might extend to her must be considered in the context of the complete absence of any suggestion in the Statement of Claim, or any version of it, that such relief was being sought against Felicity. 94The relevant claim for relief against Felicity was for the avoidance of the Transfers and for her to retransfer the Shares to the Company. Curiously, there was a prayer for an order that Claude and Felicity purchase the shares in the Company itself. That relief, however, was not pursued. The alternative relief was for declarations that Felicity held the Shares on trust for the Company, together with an enquiry to determine the amount of compensation payable by Claude and Anthony to the Company. 95Under r 6.12(1), a statement of claim or summons must specifically state the relief claimed by the plaintiff. However, that requirement is not strictly enforced having regard to the provisions of the Civil Procedure Act 2005. Section 56 requires the just, quick and cheap resolution of the real issues in dispute, and s 22 and s 90 permit the Court to give such judgment as the nature of the case requires. More important still is r 36.1, which permits the Court at any stage of the proceedings to give such judgment or make such order as the nature of the case requires, whether or not the claim for relief extending to that judgment or order is included in any statement of claim or summons, that is to say, notwithstanding failure to comply with r 6.12(1). Further, s 63 of the Supreme Court Act 1970 requires the Court to determine proceedings finally and to grant all the remedies to which the parties are entitled. The effect of these various provisions, as well as the amplitude of the power of amendment in Pt 19 of the Rules, is generally that a party's failure to claim a particular form of relief in an originating process will not necessarily disentitle it from obtaining an appropriate order. 96Further, where parties agree about enlarging the scope of the dispute, the pleadings are not to be strictly enforced. For instance, fresh evidence that does not relate to the pleadings as they stand can be adduced. The governing principles are procedural fairness and not taking up too much of the Court's resources in a way that would be unjust to other litigants. It would not be unfair if submissions were made contemplating that relevant relief could be sought (see Wicks v Bennett [1921] HCA 57; 30 CLR 80 at 100). 97There was no express allegation in the Statement of Claim that Felicity contravened the Corporations Act. There was, however, the assertion, in para [155] of the Statement of Claim (see para [53] above), that she was liable for knowing involvement in Claude's and Anthony's breaches under s 79(c) of the Corporations Act. 98Under s 181(2), a person who is involved in a contravention of s 181(1) contravenes s 181(2). Under s 182(2) a person who is involved in the contravention of s 182(1) contravenes s 182(2). Section 1317H(1) then provides that a court may order a person to compensate a corporation if the person has contravened a civil penalty provision in relation to the corporation. Sections 181 and 182 are civil penalty provisions for that purpose. Thus, if Felicity was, by the operation of s 79, involved in the contraventions of s 181 and s 182 by Claude and Anthony, she could be the subject of an order under s 1317H. 99However, no such claim was made against her in the Statement of Claim. While it is the function of the Court, once a complaint is established, to formulate and mould the appropriate relief, it is necessary to have regard to the terms of the complaint as it is formulated in the relevant pleadings. In the present case, the only complaint made against Felicity, on a proper reading of the Statement of Claim, is that the Transfers to her should be set aside because she was knowingly involved in breaches of fiduciary duty or contraventions of the Corporations Act by Claude and Anthony. The complaint against Claude and Anthony, by stark contrast, is that they caused loss and damage to the Company. I do not consider that the function of the Court to mould and formulate the appropriate relief to give effect to the complaint against Felicity, that she received the Shares knowing that the Transfers involved breaches of fiduciary duty or contraventions of the Corporations Act, extended to granting relief in respect of a complaint, which had never been made, that Felicity had caused or occasioned damage or loss to the Company. 100It appears that the plaintiffs first made their claim for damages and compensation against Felicity in their written submissions after the evidence was complete. They did not ask the primary judge for leave to amend their prayers for relief to include claims for equitable damages or statutory compensation against Felicity. As I have indicated above, her Honour did not deal with Felicity's complaint that no such claim for relief was made against her, and it is not entirely clear why her Honour did not address that question. 101In this Court, the plaintiffs proffered an amendment to the Statement of Claim, whereby they sought the relief granted by the primary judge. Had that amendment been proffered to her Honour, it may well have been open to her Honour to grant leave to amend, on the ground that the amended pleading more fairly reflected the basis upon which the proceedings had been conducted. However, I am not persuaded that the proceedings were conducted on a basis different from that expressed in clear and unequivocal terms in the Statement of Claim. 102On the other hand, an appellate court is not in as favourable a position as the trial court when such questions arise. It is not always possible for an appellate court to perceive the nuances of the parties' conduct in a long trial in a way that would be apparent to a trial judge. While I do not consider that it was open to the primary judge to grant the relief on the basis of the pleadings as they stood, the tardiness of Felicity's complaint creates some disquiet. Clearly, the primary judge would be in a better position than this Court to determine whether leave should be granted to the plaintiffs to amend the Statement of Claim. 103In the circumstances, I consider that the order for an enquiry as to the existence and quantum of any loss to the Company should be set aside, insofar as it is for the purposes of making orders for equitable damages or statutory compensation to be paid by Felicity. The matter should be remitted to the primary judge for the purpose of considering any application for leave to amend that may be made on behalf of the plaintiffs. If leave to amend be refused, it would follow that there should be no order against Felicity for the payment of damages or compensation. If leave to amend were to be granted, it would then be open to the primary judge to make a further order for Felicity to pay equitable damages or statutory compensation, following an enquiry. Any further question as to the costs of the proceedings at first instance would be a matter for her Honour.
The Knowledge Issue 104Felicity also contended that if she is to be held liable for having knowingly received property transferred to her in breach of a fiduciary duty, she should be excused from any personal liability under s 85 of the Trustee Act 1925. On the one hand, that question does not arise in the light of the conclusion I have reached on the Pleadings Issue. On the other hand, that conclusion is not determinative of whether Felicity should be entitled to retain the benefit, if any, that she received by reason of the Transfers. 105If, as the primary judge found, the Shares were transferred to her at a significant undervalue, she obtained a substantial benefit. In those circumstances, the appropriate relief would have been orders avoiding the Transfers and requiring Felicity to retransfer the Shares to the Company in exchange for appropriate restitution of the consideration. That relief was sought in the Statement of Claim. Whether that would suit the Company would depend on the current value of the Shares, which could only be known after an enquiry. 106However, the primary judge was not asked to avoid the Transfers or to order the retransfer of the Shares to the Company. In the light of the conclusion that I have reached in relation to relief against Felicity, the appropriate course would be to afford to the Company, through its liquidator, the opportunity, after any relevant enquiry has been conducted, of electing for retransfer of the Shares. That is to say, the enquiry would investigate the value of the Shares both at the time of transfer and at the present time. There may be complications because of changes in the financial position of CaTTO and Oceania since the Transfers took place. That may give rise to difficulties in comparing the values at the two relevant dates. However, those considerations would be relevant for the purposes of confirming whether the Company would elect to set aside the Transfers, in addition to receiving compensation or equitable damages from Claude and Anthony. 107Nevertheless, given the parties' submissions on the question, it is appropriate to deal with the substantive issue as to whether Felicity was liable for receiving the Shares when she knew that Claude and Anthony were transferring them in breach of fiduciary duty. The plaintiffs point out that undervalue was not necessary for the findings of breach of fiduciary duty. Claude and Anthony were also found to have been in a position of conflict when they caused the Company to transfer the Shares to Felicity without the informed consent of the shareholders. They were also found to have caused the Shares to be sold for the improper purposes of removing them from the reach of a provisional liquidator and to ensure that Claude and Felicity derived any benefits flowing from ownership of the Shares. 108The plaintiffs say that, regardless of the undervalue question, Felicity was thus liable for knowing receipt, since she actually knew of both the conflict breach and improper purpose breach. Thus, even if she were not aware that the consideration for the Transfers was considerably less than their fair value, she would still be liable. 109The plaintiffs accept that if the Shares had not been sold at an undervalue the Company was unlikely to have suffered any financial detriment. However, they say that financial detriment is not a necessary element of a breach of fiduciary duty. Nor does one have to know of that financial detriment to be liable for knowing receipt of property transferred in breach of fiduciary duty. They point to the allegations of the conflict breach and the improper purpose breach in the Statement of Claim. 110The plaintiffs emphasise that the primary judge held Claude, Anthony and Felicity liable, regardless of the undervalue question. The primary judge made it clear that the plaintiffs' claim against Claude and Anthony did not depend on a finding that the Transfers were at an undervalue, even if her Honour also found that they did in fact take place at an undervalue. 111Felicity contends that the primary judge erred in concluding that she knowingly participated in any breach of fiduciary duty, in circumstances where her Honour made no finding that she knew of any such breach. There was no finding that she actually knew of a breach, knew of circumstances indicative of a breach or had constructive knowledge of a breach. Thus, she says, there ought to have been a finding that she did not knowingly receive the shares as a result of a breach of duty. 112The primary judge observed that Felicity admitted that she knew that her husband wished to prevent his siblings from commencing further litigation against him and that she knew that the purpose of the Transfers was to prevent the appointment of a provisional liquidator to the Company. Her Honour considered that that was a tactic in a long history of litigation between "warring siblings" of which Felicity was well aware. 113In the circumstances, I am not persuaded that the primary judge erred in concluding that Felicity knew of the breach of fiduciary duty committed by her husband and father in causing the Company to transfer the Shares to her, knowing as she obviously did her relationship with them and the fact that they, as directors, were in a position where their interest in transferring the Shares to her was clearly potentially in conflict with their duty as directors of the Company. Nor was there any error on the part of her Honour in finding that Felicity knew that one aim of the Transfers was to remove them from the control of the Company. The primary judge found expressly that Felicity knew that her husband wanted to avoid the appointment of a provisional liquidator and wanted the assets to be beyond the reach of his siblings. If it were necessary, I would conclude that Felicity has not established a case for being excused under s 85 of the Trustee Act.
Claude's and Anthony's Appeal 114There were several grounds of appeal common to both Felicity's appeal and Claude and Anthony's appeal. Those common grounds include the following:
The CaTTO share 122In their notice of appeal, Claude and Anthony rely on several grounds concerning the value of the CaTTO share, as follows:
The Oceania shares 135In their notice of appeal, Claude and Anthony rely on several grounds concerning the value of the Oceania shares. They may be summarised as follows:
Section 1318 147Section 1318 of the Corporations Act relevantly provides that if, in any civil proceeding against a director for negligence, default, breach of trust or breach of duty in a capacity as a director, it appears to the Court that the director is or may be liable in respect of the negligence, default or breach but that the director has acted honestly and that, having regard to all the circumstances of the case, the director ought fairly to be excused for the negligence, default or breach, the Court may relieve the director either wholly or partly from liability on such terms as the court thinks fit. 148Claude and Anthony say that their belief that it was commercially viable to harvest the tea tree crop on the Property was one of the two factors that motivated them in causing the Transfers to take place. The other factor was that they considered that it was in the interests of the shareholders of the Company for the Company's debt to be paid out so that the receivers would resign, thereby relieving the Company of the continuing expense involved in their continued appointment. 149In support of their claim for relief under s 1318, Claude and Anthony submitted to the primary judge that the Transfers were effected as part of a commercial arrangements designed to bring about the retirement of the Receivers from the Company. Her Honour accepted that that was the purpose of the transaction. However, her Honour found that that step had to be taken in any event before the Shares could be transferred to Felicity. Her Honour found that there was absolutely no need to transfer the Shares in terms of the commercial arrangement itself because, as Claude accepted, there were two sources from which the loan to the Company by Felicity could be repaid. 150Those sources were the real property owned by the Company, although the extent of the holdings was not known in December 2004, and the real property that was to be transferred to the Company by the Cassegrain Trust. Her Honour found that the commercial arrangement that had been reached on 21 December 2004 was to treat Felicity's advance to the Company as a loan for 12 months, with the provision of a fixed and floating charge over the assets of the Company to secure the loan. 151Claude and Anthony placed reliance on the fact that it had been contended in the CTK proceedings that the tea tree plantation was not viable and there was uncertainty attached to the value of the Property. Her Honour accepted that there was no doubt that the question of the enforceability of the Leases was under consideration and that there was doubt concerning the outcome of the Gardiner Proceedings. However, her Honour found, sensible steps had been taken to obtain both legal advice and a valuation of the Property. At that time, the Company was owed nearly $750,000 by the Cassegrain Trust, which had agreed to advance $200,000 with the promise of transfer of the real property in due course. 152Claude and Anthony also referred the primary judge to the financial pressure under which the Company found itself and submitted that all contemporaneous evidence pointed to Claude holding a genuine belief that the Shares had no greater value than the book value recorded in the accounts of the Company. They also contended that the evidence demonstrated that, before inviting Felicity to buy the Shares, Claude had attempted to find funding elsewhere. 153Her Honour accepted that Claude claimed both to Ms Gibson and Mr McCarron that there was either no value in the Shares or that they should be transferred at book value. However, her Honour said, that claim was made in the face of advice from Ms Gibson that he should obtain independent valuation of the Shares. He did not do so. Her Honour also concluded that the attempt to obtain funding from elsewhere was for the purpose of funding the litigation rather than to enable the Company to retire the Receivers. 154Claude and Anthony also relied upon the short timeframe within which decisions had to be made. There were threats of litigation connected with the CTK winding-up proceedings, the half harvested tea tree crop on the Property and the possibility that an ongoing receivership would weaken the Company's financial position further. However, her Honour found it is to be expected that when directors are put under pressure, by reason of financial or other circumstances, they must nevertheless adhere to their fiduciary obligations and not enter into related party transactions without notice and then purport to rely on minutes of meetings that do not reflect the reality of the transaction. In the circumstances, her Honour was not satisfied that any relief should be granted to either Claude or Anthony under s 1318 of the Corporations Act. 155It is clear from the above that the submissions advanced on behalf of Claude and Anthony did not challenge the findings made by the primary judge that their actions in effecting the Transfers involved a breach of fiduciary duty, irrespective of the value at which the Shares were transferred. Her Honour found, and there is no challenge to the finding, that they allowed themselves to engage in the transaction in circumstances where their personal interests were in conflict with their duty to the Company. Her Honour also found that they were motivated by an improper purpose, namely, to ensure that those assets would cease to be under the control of the Company, so as to be available for the unsecured creditors of the Company. 156There may have been errors in the approach of the primary judge in assessing the extent of the undervalue of the Shares, as mentioned above. However, whether or not Claude and Anthony honestly believed that the value of the Shares was not relevantly in excess of the consideration Felicity paid, there is no apparent challenge to the primary judge's findings that there were breaches of fiduciary duty on their part in permitting themselves to be in a position where their interest, as the husband and father of the proposed transferee, was in conflict with their duty to the Company as directors. Her Honour also found that they caused the Transfers to be effected for an improper motive. In those circumstances, I consider that, notwithstanding any error that might have been made her Honour in assessing the value of the Shares, no case is made out for the grant of relief under s 1318.
The Company's Appeal 157Having found in favour of the Company in relation to the statutory derivative claims, the primary judge adjourned the proceedings to enable the parties to make submissions on the appropriate relief. On 24 July 2012, her Honour made orders that Claude, Anthony and Felicity were jointly and severally liable to compensate the Company for any loss arising from the Transfers. 158By its notice of appeal filed on 24 October 2012, the Company appeals from certain of the final orders on several grounds, which may be summarised as follows:
Conclusion 178The appeal by Claude and Anthony should be dismissed. Anthony and Claude should pay the costs of the first to fifth respondents of that appeal. The Company's appeal should also be dismissed. The Company should pay the costs of Claude, Anthony and Felicity of that appeal. 179It follows that there must be an enquiry as to the quantum of compensation or damages. That quantum will depend upon the value of the Shares. The values assessed by the primary judge in concluding that the Transfers were at an undervalue will not be binding on the parties so far as the assessment of the compensation or damages is concerned. 180Felicity's appeal should be allowed with costs. The first to fifth respondents should pay Felicity's costs of that appeal. The orders made against Felicity should be set aside. The matter should be remitted to the primary judge for the purpose of considering any application on behalf of the plaintiffs for leave to amend the Statement of Claim in terms of the draft pleading provided to this Court and for the making of appropriate orders depending upon the outcome of any such amendment application. The orders would deal with the following:
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 January 2014
Gerard Cassegrain & Co Pty Ltd (in liquidation)
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