DISPOSITION
Application of s267(1) of the Act
64 Section 267(1) of the Corporations Act and the attendant definition of "relevant person" contained in s267(7) are quoted earlier.
65 Section 267, read literally, applies to the present circumstances. Thus the charge was "in favour of" Messrs Labraga and Pomfret, both directors of the charger, though describing themselves as trustees for the estate and advancing monies on behalf of the estate. They subsequently caused the charge to be enforced within six months of its creation without seeking court leave.
66 The question is whether that literal reading should give way to an interpretation which relies on Messrs Labraga and Pomfret taking the charge as trustees so as to fall outside s267. To answer that question requires some exegesis of s267.
67 Section 267 does not invalidate a charge created in favour of directors of the chargor unless also the chargee purports to take a step in its enforcement within six months of creation and does so without obtaining court leave. Under s267(3), the court may give leave for the charge to be enforced if satisfied as to two matters: "(a) immediately after the creation of the charge, the company that created the charge was solvent; and (b) in all the circumstances of the case, it is just and equitable for the court to do so".
68 Where s267 avoids the security, the actual debt previously secured becomes unsecured but it is not otherwise affected.
69 The purpose of s267 is explained in para 259 of the Explanatory Memorandum to the Companies and Securities Legislation (Miscellaneous Amendments) Act 1985 (Cth). The provision is aimed at the mischief of a failing company giving a charge to an officer so as to be able to have a friendly receiver appointed in such a way as to impede a liquidator seeking to obtain the company's books.
70 The appellant's written submissions made much of the reason for obtaining the security; that the estate was in great jeopardy of having its assets exposed to immediate enforcement proceedings by an external lender when the principal debtor, Exception Holdings, was in default to Westpac. Thus at para 5 of those submissions it is said that "Section 267 operates in respect of the charge not the advance, and once the decision had been taken to commit the estate's assets in this fashion it was clearly the duty of the executors, in their representative capacity, to obtain proper security for the estate".
71 But this misses the point of s267. The vice was not in taking security. It was in enforcing it within six months without court leave, as I explain below.
72 It was submitted by the respondents that repayment of the Westpac advance personally benefited Messrs Labraga and Pomfret in that it relieved them of their liability to Westpac pursuant to their guarantees. At the same time Messrs Pomfret and Labraga incurred a liability to the Estate for contribution in respect of the Estate's repayment of the Westpac loan. The granting of the charge by the first respondent in January 2005 benefited Labraga and Pomfret in that it secured the repayment to the Estate of its advance to the first respondent and therefore reduced the likelihood of the Estate seeking contribution from Messrs Pomfret and Labraga.
73 But this too misses the point of s267. The section is not directed in its terms to personal benefit to directors, though its operation may have a prophylactic effect in that regard.
74 I shall assume for the purpose of the argument that the appellant's proposition is correct, namely that it was the duty of the executors in their representative capacity to obtain as trustees for the estate proper security for the estate from Exception Holdings. That, however, is not the point. The mischief at which the section is aimed is not eliminated by the fact that a charge is given in favour of a director of the charger who takes its benefit as executor. Once Messrs Labraga and Pomfret take enforcement steps without first seeking court approval, they thereby gain the capacity to have a friendly receiver appointed in such a way as for example to impede a liquidator seeking to obtain the company's books. Were the Court satisfied that there was no such intent to interfere and assuming that it were otherwise just and equitable to do so, then so long as the company were solvent immediately after the creation of the charge the Court's leave, though discretionary, if sought could ordinarily have been anticipated. It was not sought, with the result that the safeguards that attend such an exercise of curial discretion were not engaged.
75 Moreover, what is at issue here is not the receipt of a payment such as may constitute a preference pursuant to s122 of the Bankruptcy Act 1966. That was the subject of Melsom v Vanpress Pty Ltd (supra). Rather it concerns the taking of security with its concomitant security powers now vested in the two directors of the chargor, Messrs Labraga and Pomfret. It is unreal to suppose that the mischief no longer exists to which s267 is directed because Messrs Labraga and Pomfret take enforcement steps in their capacity as executor in each case. They may still take advantage of their control over the security with its attendant rights over Exception Holdings, so as to disadvantage other creditors lacking that advantage.
76 It was said that because the executors had a duty to obtain such security, they would be denied the capacity to fulfil that duty in a fully effective fashion by this interpretation of s267. I do not agree. They could have refrained from enforcing within six months or else sought court leave to do so. They could, before taking the charge have resigned as directors and had others replace them. Or they could have resigned as executors and had others replace them to take the charge. Accordingly, arguments based upon averting adverse consequences for the estate by taking the security or enforcing it are beside the point.
77 It is necessary to consider paragraph (b) of the definition of "relevant person" in s267(7). That definition, in relation to a charge created by a company, catches "a person associated, in relation to the creation of the charge, with an officer of the company".
78 The appellant correctly points out that Messrs Labraga and Pomfret stood in the shoes of the deceased (Mr Highland) and exercised the powers of his estate. These were powers which Mr Highland exercised while he was alive. Because Mr Highland had ceased, by death some eighteen months before September 2004, to have a governance or ownership stake in the chargor there could be no association through Mr Highland as a relevant officer.
79 That still leaves to be considered whether there was an association between the relevant persons qua directors of Exception Holdings on the one hand and qua executors of the estate on the other, insofar as they acted in concert in granting the charge and obtaining its benefit. It will be apparent that we are here dealing with the self-same Messrs Labraga and Pomfret, differentiated only because of their different capacities. That may be said to be wholly artificial. But it is the differentiation pressed for by the appellant. Were that differentiation justified, a proposition I reject, the question of such an association could arise. What follows is on the assumption of that differentiation.
80 The primary judge described the mode of execution as peculiar and bizarre in these terms:
"12 The document was executed in a very peculiar way. It was said to be executed as a deed in Sydney by Julio Labraga and Philip Pomfret as trustees for the estate of Richard Lawrence Highland, but Mr Labraga was said to sign by Mr Pomfret, his attorney. Mr Pomfret signed on his own behalf. The plaintiff company signed by Mr Pomfret, who signed as director/secretary and also signed for Julio Labraga acting as Mr Labraga's attorney under power. There is no doubt that Mr Labraga did give Mr Pomfret a general power of attorney of 28 June 2002, but that power of attorney did not confer any authority at all on Mr Pomfret to sign, either for Mr Labraga in his capacity as a trustee, or as Mr Labraga in his capacity as a director of Exception Holdings Pty Ltd. The effect of the bizarre execution is not however a matter that is before me for decision in the present proceedings." (Red, 30)
81 However, this very clearly points to Messrs Pomfret and Labraga acting in concert in their respective capacities; on the one hand to give the charge and on the other to take its benefit.
82 Thus it could be said that Mr Pomfret, acting as director/secretary in causing Exception Holdings to execute the charge, was an associate of himself and Mr Labraga as executors and trustees in receiving the benefit of the charge. This is because they clearly were acting in concert pursuant to s15(1)(a) of the Corporations Act in the granting and taking of the security. None of the exclusions from s15 found in s16 apply. Clearly enough the association, if it be found, is "in relation to the creation of the charge".
83 To this it may be said that it is quite artificial to differentiate between Mr Pomfret (or Mr Pomfret and Mr Labraga) as director on the one hand and on the other Messrs Pomfret and Labraga as executor and trustee, when it comes to determining whether they were, in their different capacities, capable of acting in concert. But that differentiation is no more artificial than that sought to be made in construing s267(1) with the definition of "relevant person"; that is, to construe "an officer of the company" as if it were qualified by words such as "acting in that capacity", so as to exclude an officer who claims to take the benefit of a charge in some other capacity.
84 It is not necessary to resolve this question definitively since on either basis s267 applies. I would moreover conclude that s267 would apply even were there no particular advantages to Messrs Labraga and Pomfret from the loan transaction by the estate made possible by the charge. I refer here to the fact that but for repaying Westpac's loan, their guarantees would not have been discharged and the likelihood of any call for contribution reduced.
85 The test for applying s267 is not whether the charge favours the company's directors but whether it is in their favour. An interpretation to the contrary would lend itself to ready abuse. If the argument holds good that it is necessary for the charge to be in favour of a person in his or her capacity as a director of the company granting the charge, then it would equally follow that the section would be readily avoided if, for example, the director concerned took the benefit of the charge for the benefit of a discretionary trust. While the latter may be an associate of that director so as still to be caught, avoidance of that outcome might still be contrived. It is only by giving a purposive reading to s267, which here accords with its literal terms, that potential anomalies of this kind are avoided.
86 Indeed that example highlights the purpose of s267. It recognises that a charge in favour of directors of the charge giving company, whatever the capacity in which they take it but nonetheless as insiders, gives them, through early exercise of its enforcement powers, the capacity to take unfair advantage of their favoured position over other creditors, particularly those unsecured and any liquidator representing their interests. Obtaining the Court's leave to enforce is the safeguard against such abuse. With leave there is then no constraint on early enforcement. These directors, whether from lack of awareness or otherwise, failed to seek that leave, thereby losing what would otherwise have been perfectly good security for the estate.