Supreme Court of SA|2003-12-11|Before: Debelle J, Mullighan J

KERRY STIRLING HANEL & ANOR v JOHN O'NEILL No. SCCIV-03-143 [2003] SASC 409 (11 December 2003)

1 MULLIGHAN J The factual circumstances of this matter are set out in the reasons for judgment of Debelle J. I mention only those matters which are relevant to the conclusions which I have reached.

2 Section 197 of the Corporations Act 2001 (Cth) provides for the circumstances in which directors of a corporate trustee are liable for debts and other obligations incurred by the corporation in that capacity. The first question on this appeal is whether s 197(1) provides the basis of personal liability of the appellant to the respondent.

3 At all material times the appellant was the sole director of Daroko Pty Limited ("Daroko"), the trustee for the Daroko Unit Trust. Forcett Pty Limited ("Forcett") was the trustee of the Kerry Hanel Investments Trust and is a beneficiary of the Daroko Unit Trust. No rent was paid by Daroko to the respondent after 22nd August 2001 when $1,000 was paid and was expressed to be the "final payment" under the lease. Before 30th June 2001, the Daroko Unit Trust made a profit of $512,617 and Daroko paid that amount to Forcett Pty Limited as trustee for the Kerry Hanel Investment Trust on or before 30th June 2001 with the consequence that Daroko and the Daroko Unit Trust are without assets. The appellant and members of his family are the directors of Forcett. As the sole director of Daroko, the appellant caused that payment to be made. At that time the lease of the premises was extant and Daroko had not been discharged from liabilities under the lease even though there were no arrears of rent. Daroko could not unilaterally bring the lease to an end before the term had expired as the respondent was not in breach of the lease.

4 The respondent asserted that the purpose of the payment was to defeat his rights as a creditor of the Daroko Unit Trust. The learned Magistrate did not make any finding about that assertion as such a finding was not necessary for the purposes of her decision.

5 On 24th January 2002 the appellant wrote to the respondent and informed him that Daroko had not traded for 18 to 20 months and had no funds and no assets. There was further correspondence between the parties. The appellant alleged that he and his family had lost a substantial sum when the Wendy's franchise was lost which was the reason for purporting to terminate the lease.

6 The respondent commenced legal proceedings in the Magistrates Court against Daroko on 26th June 2002 claiming $23,132.62 for the costs associated with obtaining a replacement tenant for the property which Daroko had leased from the respondent. The respondent obtained judgment in default, presumably of appearance, for that amount against Daroko on 30th July 2002. On 12th September 2002 the appellant informed the Magistrates Court that Daroko was unable to pay that judgment sum and the appellant commenced proceedings against the appellant and Forcett in the Magistrates Court on 8th November 2002, claiming that judgment sum, $13,937.51 for alleged shortfall of rent under the lease and $1,991.00 for interest, making a total of $39,061.13. The judgment under appeal is a summary judgment entered by the learned Magistrate against the appellant for the amount of the default judgment against Daroko.

7 I turn to s 197 of the Corporations Act 2001 which provides:

"197 Directors liable for debts and other obligations incurred by corporation as trustee

(1) A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation:

(a) has not, and cannot, discharge the liability or that part of it; and

(b) is not entitled to be fully indemnified against the liability out of trust assets.

This is so even if the trust does not have enough assets to indemnify the trustee. The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection.

(2) The person is not liable under subsection (1) if the person would be entitled to have been fully indemnified by 1 of the other directors against the liability had all the directors of the corporation been trustees when the liability was incurred.

(3) [Not applicable]

(4) [Not applicable]."

In the circumstances, s 197(2) has no application as the appellant is the sole director of Daroko.

8 The appellant was a director of Daroko when it incurred the liability to the respondent and it did so while acting as trustee for the Daroko Unit Trust. The liability was not discharged. The issue is whether Daroko was entitled to be fully indemnified against the liability out of trust assets.

9 Clause 21 of the trust deed of the Daroko Unit Trust provides:

"The Trustee is entitled to be indemnified out of the assets for the time being comprising the Trust Fund against liabilities incurred by the Trustee in the execution or attempted execution of or as a consequence of the failure to exercise any of the trusts, authorities, powers and discretions hereof or by virtue of being the Trustee."

10 The respondent claims that this provision excludes the appellant from personal liability for the debt due to the respondent because Daroko was entitled to be fully indemnified against the liability out of the assets of the Daroko Unit Trust. The first three conditions for personal liability under s 197(1) were clearly established.

11 In my view, whether Daroko was entitled to be indemnified out of the assets of Daroko Unit Trust is not merely a matter of law to be determined from the trust deed. It is a matter of mixed law and fact. Certainly, Clause 21 provides a legal basis for the indemnity. However, the undisputed facts establish that, at the relevant times, there were no such assets in the Daroko Unit Trust due to the conduct of the appellant. He had caused all of the assets to be paid to Forcett. It was the unilateral act of the appellant which resulted in the Daroko Unit Trust being without the funds to discharge the liability to the respondent. It would be a strange result if s 197(1)(b) was to be interpreted so that a director could escape personal liability by reason of that provision merely by ensuring that a provision, such as Clause 21, was contained in the trust deed and could thereby operate as a shield against personal liability, even though the director causes the trust to be without funds to avoid paying the debt.

12 The clear intention of the section is that a director of a corporate trustee is liable to discharge the liability where it is not entitled to be fully indemnified out of the assets of the trust: Australian Corporations Law 3.2.0490.

13 I accept the argument of Mr Cudmore, that if there are no assets comprising the Trust Fund, there is no entitlement to be indemnified.

14 This is the approach taken by the learned Magistrate and, in my view, she was correct. She was correct in her conclusion that the appellant was liable for the respondent for the losses caused by Daroko.

16 It is necessary to consider the defence of the appellant that the appellant had failed to mitigate the loss of The O'Neill Family Trust No 2, which is the second question on this appeal. As the learned Magistrate was concerned with an application for summary judgment, a defence had not been filed by the appellant or Forcett. However, the basis of the defence is set out in the affidavit of the appellant which was before the learned Magistrate.

17 The alleged factual basis of the defence is that Daroko had paid the rent and met all of the obligations under the lease up to and including 30th June 2001. The appellant informed the respondent that a firm of accountants who leased another part of the property would accept an assignment of the lease held by Daroko as from 1st July 2001 at the same rent and on the same terms and conditions contained in the lease provided that Daroko, or the appellant, paid the rent for the month of July 2001. He informed the respondent accordingly by letter dated 27th June 2001 and that he would pay the rent for the month of July. He wrote to the respondent on 2nd July 2001 on behalf of Daroko seeking approval for the assignment. If those allegations are correct and the respondent should have accepted the proposed assignment of the lease, costs associated with obtaining a tenant would have been minimal and there would be no basis for the default judgment.

18 Mr Keen, who appeared for the appellant, submits that the learned Magistrate could not grant summary judgment without dismissing this defence. It appears from her reasons for judgment that she did not consider it. Mr Keen submitted that this defence must be considered at the stage of an application for summary judgment because the liability of Daroko had to be established before s 197 had application.

19 Mr Cudmore, who appeared for the respondent, contends that the alleged obligation to act reasonably by mitigating the loss does not arise in the action against the appellant because the liability of Daroko crystallised when the default judgment was entered and the liability of the appellant could be no less than the liability of Daroko. I reject that submission. In an action against the appellant, the true liability of Daroko must be established. I do not regard the default judgment as having done so. That judgment was obtained when Daroko was insolvent and had not been trading for some considerable time. It had no assets. There was no commercial sense in the appellant, as the sole director of Daroko, taking steps to defend the claim and incurring the expense in doing so. However, the position changed when the respondent sought to attach personal liability to him. In the case against him, any available defence which has merit should be considered.

20 If there is any doubt about the ability of the appellant to raise the defences against the judgment in default, he may have to consider Daroko making an application to set aside that judgment if Daroko is procedurally able to do so. I do not know if it still exists.

21 The appellant is required to show that he has a bona fide intention of defending the action and that there is a "reasonably clear and bona fide case of merits" or that he has an arguable defence: Watson v Anderson (1976) 13 SASR 329 per Bray CJ at 335, Battiste v Mulvaney (Doyle CJ, unreported S6419, 7th November 1997 at 9-10). Clearly, he passes those tests.

22 If the matters asserted by him are established, Daroko would not have owed any rent to the respondent or that liability would have been substantially reduced. The respondent would not have acted reasonably in the circumstances and the loss to The O'Neill Family Trust No 2 would not have been incurred or would have been substantially reduced. This failure to act reasonably, sometimes described as a failure to mitigate loss, is in the nature of a defence to the respondent's claim. It goes to the extent of the liability of Daroko. The liability of the appellant could not be greater than the liability of Daroko. It is not a counterclaim and therefore summary judgment could not be given for the amount of the claim leaving the appellant to make out a counterclaim.

23 There is another way of categorising this defence. If the allegations of the appellant are correct, the respondent caused his own loss. It did not flow from any breach of contract by Daroko. Indeed, there was no breach of contract because the respondent could not unreasonably refuse to accept an assignment of the lease.

24 The defence raised by the appellant should have been considered by the learned Magistrate and she erred in not doing so.

25 I would allow the appeal and set aside the summary judgment of $23,132.62. I would remit the claim of the respondent to the learned Magistrate for trial.

26 DEBELLE J Pursuant to s 40(3) of the Magistrates Court Act 1991, this appeal from a decision of a magistrate was referred to the Full Court for hearing and determination. The issues essentially turn on the meaning and operation of s 197 of the Corporations Act 2001 (Cth).

27 The appeal is from an order made on an application for summary judgment. The facts leading to the application for summary judgment are as follows.

28 The respondent, Mr John O'Neill ("O'Neill"), owns a shopping centre on Belair Road, Kingswood. Daroko Pty Ltd ("Daroko") was a tenant in the shopping centre. The appellant, Mr Kerry Hanel ("Hanel"), is and was at all material times the sole director of Daroko. Daroko is the trustee of the Daroko Unit Trust.

29 The lease held by Daroko was to expire on 30 September 2003. By letter dated 15 March 2001, Hanel gave notice on behalf of Daroko that Daroko intended to vacate the premises on 30 June 2001. That was some two years and three months before the expiry of the lease. On 30 June 2001 Daroko vacated the premises.

30 On 30 July 2002, O'Neill obtained judgment in the Adelaide Magistrates Court in the sum of $23,132.62, being the costs associated with obtaining a tenant to replace Daroko which had acted in breach of the lease arrangement.

31 O'Neill sought to enforce his judgment. On 12 September 2002, in the Adelaide Magistrates Court, Hanel claimed

(a) that Daroko had no assets in its own right or as trustee of the Daroko Unit Trust;

(b) that Daroko Unit Trust had no assets and was unable to meet the judgment; and

The parties have agreed the following additional facts. The financial accounts for the Daroko Unit Trust for the year ending 30 June 2001 show that the Daroko Unit Trust earned a total income of $607,642. After payment of expenses the Daroko Unit Trust earned a profit for the year ending 30 June 2001 of $512,617. This sum was distributed to the Kerry Hanel Investment Trust. The consequence of this agreed fact is that Daroko has no assets to which it can have recourse for the purpose of discharging its liability to the respondent.

32 It is necessary to note one other agreed fact. Clause 21 of the trust deed of the Daroko Unit Trust provides an indemnity to Daroko in these terms:

"The Trustee is entitled to be indemnified out of the assets for the time being comprising the Trust Fund against liabilities incurred by the Trustee in the execution or attempted execution of or as a consequence of the failure to exercise any of the trust, authorities, powers and discretions hereof or by virtue of being the Trustee."

An Action Seeking Order that Director is Liable

33 As Daroko had failed to discharge its liability to him, O'Neill issued proceedings out of the Adelaide Magistrates Court on 28 November 2002 claiming an order pursuant to s 197 of the Corporations Act that Hanel pay the judgment debt of $23,132.62 and a further debt of $15,928.51, being a shortfall of rent. On 13 December 2002, Hanel applied for summary judgment in respect of the claim for $23,132.62. The application was heard on 31 January 2003. The magistrate ordered that O'Neill was entitled to summary judgment against Hanel in the sum of $23,132.62. Hanel has appealed to this Court from that judgment. He contends that the judgment should be set aside.

34 Counsel for the plaintiff relied on s 197 of the Corporations Act and submitted that, as Daroko had no assets to discharge the liability to O'Neill, Hanel, as sole director of Daroko, was personally liable for the debt. The magistrate upheld that contention and ordered that Hanel was personally liable to discharge the judgment debt of $23,132.62.

The Meaning of Section 197(1)

35 For the purposes of this appeal, it is sufficient to refer only to s 197(1) and (2). They provide:

"197 Directors liable for debts and other obligations incurred by corporation as trustee

(1) A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation:

(a) has not, and cannot, discharge the liability or that part of it; and

(b) is not entitled to be fully indemnified against the liability out of trust assets.

This is so even if the trust does not have enough assets to indemnify the trustee. The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection.

(2) The person is not liable under subsection (1) if the person would be entitled to have been fully indemnified by 1 of the other directors against the liability had all the directors of the corporation been trustees when the liability was incurred."

The last two sentences in s 197(1) have all the hallmarks of an explanatory note but plainly do not serve that function. They form part of s 197(1) and effect must be given to them. The issues in this case turn on the effect to be given to the sentence,

"This is so even if the trust does not have enough assets to indemnify the trustee."

For present purposes, it is unnecessary to refer to the last sentence in s 197(1). For convenience, I will refer to the sentence just quoted as "the sentence".

36 The manifest purpose of s 197 is to displace the principle of separate corporate personality for the limited purpose of making a director liable for the debts of the corporation of which he is a director in the circumstances specified in the section. The effect of s 197(1) is that a director is liable for the debts of the corporation where

(1) the corporation incurs a liability while acting or purporting to act as a trustee,

(2) the corporation has not and cannot discharge the liability, and

(3) the corporation is not entitled to be fully indemnified against the liability out of the trust assets.

The operation of s 197(1)(b) depends upon an entitlement to indemnity - not upon whether the indemnity is in fact provided. Thus, the effect of s 197(1) is that in those cases where a corporation is acting as a trustee, is unable to pay its debts, and has no entitlement to be indemnified out of the trust assets, the directors of the company are liable to discharge the debts of the corporation.

37 The meaning of the sentence, "This is so even if the trust does not have enough assets to indemnify the trustee", is not immediately apparent. It is as if the corporate veil which was drawn back to impose a liability in the prescribed circumstances on a director of a corporation acting as a trustee was replaced by the veil of obscurity.

38 As a matter of syntax, the word "this" refers to the whole of the preceding part of s 197(1). However, that does not immediately clarify the meaning of the sentence. If a director is liable because of the operation of the first part of s 197(1), that liability will exist because, among other things, the corporation is not entitled to be indemnified out of the trust. Thus, the statement, "This is so even if the trust does not have enough assets to indemnify the trustee", adds nothing. It has nothing on which to operate because the corporation is not entitled to an indemnity. If the director is liable, he is liable, and the sentence adds nothing to that liability.

39 I think, therefore, that the sentence is intended to apply to the obverse effect of the terms of s 197(1), that is to say, to those instances where a director of a corporation acting as trustee will not be liable for the debts of the corporation because the corporation is entitled to be fully indemnified out of the assets of the trust. The meaning and effect of the sentence is that the director will continue not to be liable for the debts of the corporation even if the trust does not have sufficient assets to provide a complete indemnity to the corporation.

40 Section 197 is the statutory successor of the repealed s 233 of the Corporations Law. It is necessary to refer only to subsections (1) and (2) of s 233. They provided:

"233(1) [Certain directors liable] Where:

(a) a relevant body corporate while acting or purporting to act in the capacity of trustee of a trust, incurs a liability:

(i) in the case of a company - whether within or outside Australia; or

(ii) in the case of a registered foreign company - within Australia; or

(iii) otherwise - within this jurisdiction; and

(b) the relevant body corporate is for any reason not entitled to be fully indemnified out of the assets of the trust in respect of the liability; and

(c) the relevant body corporate has not discharged, and is unable to discharge, the liability or a part of the liability;

the relevant body corporate and the persons who were directors of the relevant body corporate when the liability was incurred and were not innocent directors in relation to the incurring of the liability are jointly and severally liable to discharge the liability or the undischarged part of the liability, as the case may be.

233(2) [Trust defined] For the purposes of this section, a trustee of a trust shall not, merely because:

(a) the trust has not assets; or

(b) the assets of the trust are insufficient to indemnify the trustee in respect of the liability concerned;

be taken not to be entitled to be fully indemnified out of the assets of the trust in respect of a liability."

The effect of s 233(1) is that a director of a company which acts as trustee is liable for the debts of the corporation where:

(1) the corporation incurs a liability: subsection (1)(a);

(2) the corporation is not entitled to be fully indemnified out of the assets of the trust in respect of that liability: subsection (1)(b); and

(3) the corporation has not paid the liability or is unable to pay part of that liability: subsection (1)(c).

Section 233(2) states that the corporation will not be deemed to be not entitled to be fully indemnified out of the trust assets merely because the trust has not assets or the assets of the trust are insufficient to indemnify the corporation for the relevant liability. In other words, where the company is entitled to be indemnified out of the trust assets, the director will not be liable merely because the assets of the trust are insufficient to indemnify the corporation for the relevant liability. It will be seen, therefore, that s 197(1) has the same meaning and effect of s 233(1) and (2). In other words, s 233 has been re-enacted, albeit in different and obscure terms. If Parliament intended that s 197 should alter the operation of s 233, it would have been easily done in clear and unambiguous terms.

41 Mr Cudmore, who appeared for O'Neill, submitted that the sentence is intended to add to the liability created by the preceding part of s 197(1). Thus, he contended, a director is also liable if the corporation is not able to be fully indemnified out of the assets of the trust. However, this contention fails to have due regard to the two conditions spelled out in paras (a) and (b) of s 197(1) which qualify the liability of the director.

42 Mr Cudmore also submitted that, because the Commonwealth Parliament had repealed s 233 and re-enacted it in s 197, the new provision was intended to have a different operation from the repealed s 233. Where a legislative provision has been repealed and re-enacted, the meaning of the new provision may sometimes be ascertained by reference to the repealed provision: Mathieson v Burton [1971] HCA 4; (1971) 124 CLR 1 per Windeyer J at 14 - 15. However, it cannot be assumed that the Parliament necessarily intended to alter the law. The fact that s 197(1) is expressed in terms which are different from s 233 does not require the conclusion that Parliament intended to alter the law. The real question is what the words in s 197(1) mean and, on examination, it is apparent that they substantially re-enact s 233.

43 Mr Cudmore also submitted that, if the appellant's contention were to prevail, a company entitled to be indemnified out of trust assets could dispose of those assets and so defeat its creditors. That, he said, is what had occurred here. That argument cannot prevail over the clear terms of the section.

44 Once the meaning of s 197(1) has been ascertained, the only issue in this appeal is quickly resolved. As already noted, Daroko is entitled to be indemnified out of the trust assets. The condition expressed in para (b) of s 197(1) is not satisfied with the consequence that O'Neill cannot rely on s 197 to impose any liability on Hanel for the debts of Daroko. It follows, therefore, that the magistrate erred in holding that Hanel was liable for the indebtedness of Daroko to O'Neill.

45 For these reasons, the appeal must be allowed and the summary judgment entered on 30 January 2003 must be set aside.

46 GRAY J This is an appeal by a defendant from an order of a magistrate entering summary judgment for part of a claim. The appeal has been referred to this Court. The substantive issue that arises is the proper construction of section 197 of the Corporations Law Act 2001 (Cth).

47 By memorandum of lease dated 22 April 1999, Daroko Pty Ltd was granted a lease of a commercial property by Illalong Nominees Pty Ltd. Daroko Pty Ltd was the trustee of the Daroko Unit Trust and held its interest in the lease as lessee on behalf of the Daroko Unit Trust.

48 Kerry Stirling Hanel was the sole director of Daroko Pty Ltd and a director of Illalong Nominees Pty Ltd. Forcett Pty Ltd was a unit holder and beneficiary of the Daroko Unit Trust. Mr Hanel was a director of Forcett Pty Ltd. Forcett Pty Ltd was the trustee of the Kerry Hanel Investment Trust.

49 Mr Hanel signed the memorandum of lease both as a director of the lessor Illallong Nominees Pty Ltd and the lessee Daroko Pty Ltd. The lease was for a term of five years commencing on 1 October 1998 and expiring on 30 September 2003.

50 On or about 29 April 1999, Illalong Nominees Pty Ltd sold the property to John O'Neill as trustee of the O'Neill Family Trust. As a consequence the rights of the lessor in the reversion of the lease were assigned to Mr O'Neill. Daroko Pty Ltd became liable to pay rent and outgoings under the lease to Mr O'Neill. Daroko Pty Ltd proceeded to make payments to Mr O'Neill.

51 On 15 March 2001 Mr Hanel on behalf of Daroko Pty Ltd wrote to Mr O'Neill advising that Daroko Pty Ltd intended to vacate the property on 30 June 2001. As early observed the lease was not due to expire until 30 September 2003. Daroko Pty Ltd met its obligations pursuant to the lease until 30 June 2001.

52 On or about 9 August 2000 Daroko Pty Ltd transferred its net profit for the year ending June 2000 to Forcett in its capacity as trustee of the Kerry Hanel Investment Trust. As a result Daroko Pty Ltd was left without assets.

53 Mr O'Neill issued proceedings against Daroko Pty Ltd claiming $23,132.62 said to be the costs associated with finding a new tenant. Default judgment was entered. On 12 September 2002 Mr Hanel informed the Court that Daroko Pty Ltd was unable to pay the judgment. The accounts of the Daroko Unit Trust for the year ending 30 June 2001 were produced. The judgment remains unsatisfied.

54 Mr O'Neill then commenced the present proceedings against Mr Hanel and Forcett Pty Limited. Mr O'Neill claimed that he was entitled to recover the judgment debt entered against Daroko Pty Ltd as well as the rental shortfall and interest. The total claim against both defendants was for $39,061.13. The claim against Mr Hanel alleged a liability pursuant to s 197 of the Corporations Act. It was pleaded that:

By virtue of section 197 of the Corporations Act, Kerry Hanel is, as a director of a company (Daroko) acting, or purporting to act, as a trustee which has been unable to pay its judgment debt of $23,132.62 to the plaintiff, personally liable for Daroko Pty Ltd's judgment debt.

55 The claim for the rental shortfall and interest totalling $15,928.51. This was said to result from Daroko Pty Ltd's breach of lease. The claim alleged:

Kerry Hanel has informed the plaintiff that Daroko has no assets and is unable to discharge its liabilities to the plaintiff under the lease.

By virtue of Section 197 of the Corporations Act, Kerry Hanel is, as a director of a company (Daroko), acting or purporting to act, as a trustee which is unable to discharge its liabilities to the plaintiff, personally liable for the debt of $15,928.51 to the plaintiff.

56 Further claims were advanced against Forcett Pty Limited:

That net profit of $512,617 was distributed by the Daroko Unit Trust to Forcett in its capacity as trustee of the Kerry Hanel Investment Trust. The purpose and effect of the distribution by the Daroko Unit Trust to the Kerry Hanel Investment Trust of the amount of $512,617 was to defeat the rights of the plaintiff as a creditor of the Daroko Unit Trust and was done, in contravention of subsection 96(1) of the Law of Property Act 1936, with the intention of defrauding the plaintiff.

The distribution by the Daroko Unit Trust of the amount of $512,617 is voidable against the plaintiff and the plaintiff does by this pleading avoid a distribution pursuant to section 86(1) of the Law of Property Act 1936.

By reason of its being the unit holder and beneficiary of the Daroko Unit Trust, Forcett, as the trustee of the Kerry Hanel Investment Trust, is liable to indemnify Daroko and the plaintiff in respect of the liabilities which Daroko has to the plaintiff including:

The judgment debt $23,132.62

The rental shortfall $13,937.51

Interest $ 1,991.00

Total $39,061.13

57 Clause 21 of the Trust Deed for Daroko Unit Trust provided:

The Trustee is entitled to be indemnified out of the assets for the time being comprising the Trust Fund against liabilities incurred by the Trustee in the execution or attempted execution of or as a consequence of the failure to exercise any of the trusts, authorities, powers and discretions hereof or by virtue of being the Trustee.

where the lessee vacates the property prior to the expiry of the lease the lessor has a duty to mitigate and endeavour to lease the property at a reasonable rent on reasonable terms. When assessing any damage as a result of the lessee's breach, the lessor attempts to mitigate should be taken into consideration.

An affidavit filed by Mr Hanel opposing summary judgment alleged there had been a breach of duty to mitigate.

In or about May and June 2001, I had discussions with Mr Robert Stevens of Hood and Stevens Accountants, who at that time leased a portion of the Property. These discussion were for the purpose of assigning Daroko's remaining obligations under the Lease to Hood and Stevens. Mr Stevens had indicated that Hood and Stevens would be prepared to accept such assignment, effective as of 1 July 2001, on rent and terms identical to those contained in the Lease, provided that I paid the rent for July 2001.

In about July 2001 I became aware that Mr O'Neill had not renewed Hood and Stevens' existing lease over the part of the Property then occupied by it. As detailed in paragraph 9.2 herein, I was aware that Mr Stevens had indicated to me that Hood and Stevens would be prepared to take over the Lease. I therefore wrote to Mr Stevens setting out the terms of the assignment of the Lease, which was to commence 1 July 2001.

On or about 24 November I received a letter addressed to Daroko from Mr O'Neill advising me that a tenant had been secured for the Property and that the new tenants lease would be commencing on 2 December 2001.

59 Application was made for summary judgment for the full amount claimed against both defendants. The application was supported by an affidavit of Mr O'Neill. Mr Hanel filed an affidavit in opposition. Mr Hanel asserted that Section 197 of the Corporations Act did not apply as the trust deed contained a right indemnity in the trustee against the assets of the trust. It was said that the transfer of the nett profit from the Daroko Unit Trust to Forcett was a legitimate commercial transaction pursuant to the terms of the trust deed. The transaction was undertaken with a view to meeting obligations that arose under a bank charge. Finally it was said that Mr O'Neill had not complied with his duty under the lease to mitigate.

60 When the application came on for hearing Mr O'Neill sought summary judgment only against Mr Hanel for the judgment debt entered against Daroko Pty Ltd. The magistrate concluded that Mr O'Neill was entitled to summary judgment against Mr Hanel in the amount of $23,132.62. The Magistrate reasoned:

I am asked to take into account that the first defendant was the sole director of Daroko. I am also asked to take into account that the first defendant does not dispute liability in relation to the default judgment and says no more than that the company Daroko cannot pay the default judgement. I am asked to rule that in these circumstances the Corporation Act renders the first defendant, Mr Hanel, as director, liable pursuant to s.197 of the Corporation Act

It is submitted that the first defendant, Mr Hanel, has an individual liability to the plaintiff even though it is a shared liability or a joint liability with Daroko.

In the affidavit of Mr O'Neill, and in particular attachment 7, there are a number of financial records including a document entitled 'Profit and Loss Statement for the Year Ending 30th June 2001'. The document discloses the profit of the Daroko Unit Trust being $607,642. The document outlines expenditure and also outlines that the Daroko Unit Trust had a net profit of $512,617. It is not in dispute that as of 30 June 2001 the first defendant had a distribution from the Daroko Unit Trust of $512,617 which was distributed to it care of the Kerry Hanel Investment Trust.

It is the first defendant's contention that because of that term of the trust he is entitled to be indemnified out of the assets of the trust fund and, as such, he is not liable under the term of s.197 of the Corporation Law.

The plaintiff, however, does not accept that contention and submits that Mr Hanel has treated the trust fund in such a way that Daroko was not able or entitled to indemnify him against the liability of the trust assets. It is the plaintiff's contention that Mr Hanel is saying that the trustee is entitled to be indemnified but that he has come to court and said that that cannot occur because the trust has not got the assets to provide the indemnity and that is a situation in which he as been involved. It is the plaintiff's contention that there is nothing in the affidavit material before the court to disclose a proper defence. There s nothing in the affidavit material which prevents the plaintiff being entitled to summary judgment.

I accept the plaintiff's submission that they have satisfied the requirements of s.197 of the Corporation Law.

61 Counsel for the appellant complained that the magistrate erred. It was said that the trust deed provided an indemnity to the trustee from the trust assets and that in this circumstance section 197 had no application. It was contended that in any event the primary indebtedness the subject of the judgment against Daroko Pty Ltd had not been established in the present proceedings. An analogy was drawn to the case of proceedings against a guarantor and the need for a claimant to prove the indebtedness of the primary debtor. Finally it was argued that the magistrate had failed to consider the obligation of Mr O'Neill to mitigate. It was said that a positive case of a failure to mitigate had been established. This issue should have been determined before judgment was entered.

62 The primary object of statutory interpretation was addressed by the High Court in Project Blue Sky v Australian Broadcasting Authority[1] by McHugh, Gummow, Kirby and Hayne JJ in the following terms:

The primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute. The meaning of the provision must be determined "by reference to the language of the instrument viewed as a whole". In Commissioner for Railways (NSW) v Agalianos, Dixon CJ pointed out that "the context, the general purpose and policy of a provision and its consistency and fairness are surer guides to its meaning than the logic with which it is constructed". Thus, the process of construction must always begin by examining the context of the provision that is being construed.

A legislative instrument must be construed on the prima facie basis that its provisions are intended to give effect to harmonious goals. Where conflict appears to arise from the language of particular provisions, the conflict must be alleviated, so far as possible, by adjusting the meaning of the competing provisions to achieve that result which will best give effect to the purpose and language of those provisions while maintaining the unity of all the statutory provisions. Reconciling conflicting provisions will often require the court "to determine which is the leading provision and which the subordinate provision, and which must give way to the other". Only by determining the hierarchy of the provisions will it be possible in many cases to give each provision the meaning which best gives effect to its purpose and language while maintaining the unity of the statutory scheme.[2] [footnotes removed]

63 Section 197 of the Corporations Act started its legislative life as section 229A of the Companies (South Australia) Code. It was then renumbered as section 233 of the Corporations Law, with minor amendment. Section 233 was repealed and replaced by section 197 of the Corporations Act in 1998.

64 Section 233 provided:

(1) Where:

(a) a relevant body corporate while acting or purporting to act in the capacity of trustee of a trust, incurs a liability:

(i) in the case of a company - whether within or outside Australia; or

(ii) in the case of a registered foreign company - within Australia; or

(iii) otherwise - within this jurisdiction; and

(b) the relevant body corporate is for any reason not entitled to be fully indemnified out of the assets of the trust in respect of the liability; and

(c) the relevant body corporate has not discharge, and is unable to discharge, the liability or a part of the liability;

the relevant body corporate and the persons who were directors of the relevant body corporate when the liability was incurred and were not innocent directors in relation to the incurring of the liability are jointly and severally liable to discharge the liability or the undischarged part of the liability, as the case may be.

65 It is clear from the wording of section 233 (2) that the section was not intended to make directors liable merely if there were insufficient assets in the trust to satisfy a trustee company's liability.

66 The 1998 repeal and re-enactment did not enact a section directly comparable to section 233(2). A question that arises on this appeal is whether the legislature intended to alter the liability of directors of corporate trustees by the repeal of section 233 and the enactment of section 197 [3].

67 Section 197 provides:

(1) A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation:

(a) has not, and cannot, discharge the liability or that part of it; and

(b) is not entitled to be fully indemnified against the liability out of trust assets.

This is so even if the trust does not have enough assets to indemnify the trustee. The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection.

(2) The person is not liable under subsection (1) if the person would be entitled to have been fully indemnified by one of the other directors against the liability had all the directors of the corporation been trustees when the liability was incurred.

(3) This section does not apply to a liability incurred outside Australia by a foreign company.

(4) This section does not apply to a liability incurred by a registrable Australian body outside its place of origin.

Section 197 does not appear to have been the subject of judicial interpretation[4].

68 Both counsel accepted that the word 'This' immediately following sub-paragraph 197(1)(b) was a reference to the liability of the director, the subject of s 197(1).

69 Section 197(1) imposes a statutory liability on a director of a corporation which acts as a trustee. The section contemplates the circumstance where a corporate trustee has incurred a liability. In the event of the corporate trustee being unable to discharge the incurred liability and the corporate trustee not being entitled to be fully indemnified against the incurred liability out of trust assets a director of the corporate trustee incurs a liability. That liability is an individual liability and also a joint liability with the corporate trustee. The section provides that the director's liability arises when sub-sections (1a) and (1b) are satisfied "even if the trust does not have enough assets to indemnify the trustee".

70 Counsel for Mr Hanel submitted that section 197(1) simply re-enacted section 233 by the use of different words. It was suggested that this was confirmed by the absence of any reference in the explanatory memorandum to the section. This submission should be rejected. No explanation was offered as to why the legislature would completely redraw the sub‑section if all that was intended was to repeat earlier works that had a settled meaning. The fact that a new sub‑section was introduced replacing the old sub‑section in its entirety suggests that a legislative change was intended. This submission would also leave the words 'This is so even if the trust does not have enough assets to indemnify the trustee' as insignificant, superfluous and with no work to do. As was said in Project Blue Sky by McHugh, Gummow, Kirby and Hayne JJ:

...[A] court construing a statutory provision must strive to give meaning to every word of the provision. In The Commonwealth v Baume Griffith CJ cited R v Berchet to support the proposition that it was "a known rule in the interpretation of Statutes that such a sense is to be made upon the whole as that no clause, sentence, or word shall prove superfluous, void or insignificant, if by any other construction they may all be made useful and pertinent".[5]

71 Counsel for Mr O'Neill submitted that section 197(1) was introduced with a view to providing further protection to creditors. It was said that it should be presumed there was reason for the repeal and re-enactment and that the construction advanced provided that reason[6]. The common law liability of directors of corporate trustees had been modified in part by section 233 the repealed section. The change that occurred in 1998 was said to represent an extension to the liability of directors of corporate trustees.

72 The word 'This' following sub‑paragraphs (1)(a) and (1)(b) is a reference to director's liability. That director's liability is circumscribed by the words that precede the word 'This'. There is no reason to treat the word 'This' as referring only to paragraph (b). Sub-paragraphs (1) (a) and (b) must both be satisfied before liability under section 197 arises. When sub-paragraphs (1a) and (1b) are satisfied the liability cannot be avoided. The fact that the underlying trust did not have sufficient assets to indemnify the trustee does not avoid or negate the liability.

73 An alternative approach is to consider the meaning of the word 'entitled'. The submission of counsel for O'Neill conflated the concepts of entitlement and an entitlement that the trust has the capacity to be satisfied. The words "This is so even if the trust does not have enough assets to indemnify the trustee" support the argument that the draftsman contemplated that there could be no "entitlement to be fully indemnified" if there were no or no sufficient trust assets.

74 The construction contended for by counsel for Mr O'Neill would ensure that the director of a corporate trustee had a personal liability in circumstances where a debt was incurred and there were insufficient trust assets to meet the debt. Such a result is not unfair nor unreasonable. Section 197 represents an extension to the liability of the director of a trustee company.

75 Counsel for Mr Hanel submitted that in any event primary corporate indebtedness had to be proved in proceedings against a director. Counsel drew attention to the wording of section 197(1) and in particular that a pre-condition to the director's liability was that the corporate trustee had incurred a liability. The agreed facts did not establish the corporate trustee had in fact incurred a liability. This submission should be accepted. The situation is directly comparable to the position of the guarantor of a debt. In proceedings against the guarantor the liability to the principal debtor is a material fact to be pleaded and proved. The position is the same in regard to a liability under section 197(1). The fact that the corporate trustee had incurred a liability that had not been met is a material fact to be pleaded and proved.

76 Counsel for Mr Hanel further submitted that the alleged breach of the duty to mitigate raised an arguable defence. The affidavit material earlier referred to suggests that Mr O'Neill ignored the possibility of entering into a tenancy arrangement with a firm of accountants. This submission should be accepted. This is a matter that can only be resolved on evidence at trial. The magistrate appears not to have considered the question of mitigation.

77 For these reasons this appeal should be allowed. The matter should be remitted for trial.

[2] (1998) 145 CLR 355 at 381 - 389

[3] The explanatory memorandum to the Corporate Law Economic Reform Program 1998 did not refer to the proposed section 197.

[4] Professor Ford has provided the following commentary:

Section 197(1) assets that the director is liable to discharge the corporation's liability if conditions (a) and (b) are met, and then says, "This is so even if the trust does not have enough assets to indemnify the trustee." The word "This" is ambiguous. It could be taken to refer to the proposition that the director is liable in the stated circumstances. If that construction were adopted, the quoted sentence would be a statement of the obvious point that the director's liability is not diminished by the trust's lack of sufficient assets to indemnify the corporation. Alternatively, the word "This" might refer only to condition (b), the condition that the director is not liable unless the corporation is not entitled to a full indemnity out of trust assets. On that construction, the quoted sentence asserts that condition (b) is satisfied in a case where the trustee has an undiminished entitlement to an indemnity out of trust assets although its entitlement cannot be satisfied because of a deficiency of assets. That was clearly stated to be the position under the former s 233(2). Although the drafting of s 197(1) is uncertain and tortuous, it is probably that the latter construction was intended, in view of the legislative history.

[5] Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 355 at 382

[6] Craies on Statute Law, 5th Edition 1952, p137

see also Timothy v Munro [1970] VicRp 69; [1970] VR 528 at 531

KERRY STIRLING HANEL & ANOR v JOHN O'NEILL No. SCCIV-03-143 [2003] SASC 409

At a glance

Court

Decision date

Before

Source

Judgment (122 paragraphs)

KERRY STIRLING HANEL & ANOR v JOHN O'NEILL No. SCCIV-03-143 [2003] SASC 409 (11 December 2003)

Parties

Cases Cited (4)