Linton v Telnet Pty Ltd

Linton v Telnet Pty Ltd - [1999] NSWCA 33 - NSWCA 1999 case summary — Zoe

[4]

COUNSEL : Appellant - B W Walker SC & S P Gullotta Respondent - I V Gzell QC & F G Lever SOLICITORS : Appellant - Michell Sillar, Sydney Respondent - Barry Lazarus, Sydney CATCHWORDS : BREACH OF FIDUCIARY DUTY - regard by directors to interests of group not particular company - whether Charterbridge test to be applied.(1); BREACH OF FIDUCIARY DUTY - regard by directors to interests of creditors - when required.(2); WHETHER DISREGARD OF INTERESTS OF CREDITORS PART OF CASE AT TRIAL - was not - leave to file notice of contention involving that case refused.(3); PARTICIPATION IN BREACH OF FIDUCIARY DUTY - knowing receipt case - whether knowledge or notice - on any version of the requisite knowledge or notice, no.(4) (1) Charterbridge Corporation Limited v Lloyds Bank Limited (1970) 1 Ch 62 Reid Murray Holdings Limited (In Liquidation) v David Murray Holdings Pty Limited (1972) 5 SASR 386 Australian National Industries v Greater Pacific Investments Pty Limited (In Liquidation) (No 3) (1992) 7 ACSR 176 Northside Developments Pty Limited v Registrar General (1990) 170 CLR 146 Equiticorp Finance Limited v Bank of New Zealand (1993) 32 NSWLR 50 referred to. (2) Walker v Wimborne (1976) 137 CLR 1 Kinsela v Russell Kinsela Pty Limited (1986) 4 NSWLR 722 Nicholson v Permakraft (NZ) Limited (1985) 3 ACLC 453 referred to. CASES CITED: (3) Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 Coulton v Holcombe (1986) 162 CLR 1 Multicon Engineering Pty Ltd v Federal Airports ion NSWCA 15 October 1987 unreported applied. (4 ) Barnes v Addy (1874) 9 Ch App 244 Ninety Five Pty Ltd v Banque Nationale de Paris (1988) WAR 132 Agip (Africa) Ltd v Jackson (1990) Ch 265 Royal Brunei Airlines Sdn Bhd v Ming (1995) 2 AC 378 Equiticorp Industries Group Ltd v The Crown (1996) 3 NZLR 586 Koorootang Nominees Pty Ltd v Meldrum Jeffriess Group Pty Ltd (1998) 3 VR 16 Baden Delvaux and Lecuit v Société General pour Favoriser le Dèveloppement du Commerce et de l'Industrie en France SA(1983) BCLC 325 (1992) 4 All ER 161 referred to. DECISION : Appeal allowed and cross-appeal dismissed; Declaration and orders 2, 3, 5 & 7 made by Hulme J on 24 June 1998 set aside, and in lieu thereof order that the summons be dismissed and the plaintiff pay the defendant's costs of the proceedings before Hulme J; Order that the respondent pay the appellant's costs of the appeal and the cross-appeal; Appellant to have a certificate under the Suitors Fund Act if qualified; liberty to apply within 14 days.

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13 The substance of the accepted evidence of Mr Linton was as follows: (a) In late 1991 Mr Linton was dissatisfied with the return he was receiving for years of effort in the Osborne group, and could see no point in continuing. He told Mr Falinski that he proposed to return to England. (b) Mr Falinski asked what it would take for Mr Linton to stay. Mr Linton said that the current business plan should deliver between $3,000,000 and $4,000,000 in gross profits, that he wanted his share, and that his share would be a minimum of $1,000,000. Mr Falinski said, "Well, as long as we make that sort of money I have no problem in making the commitment that we will make a shareholders' distribution and you will get the money that you are entitled to". (c) In early 1992 Mr Linton told Mr Falinski that if the latter did not honour the agreement "I will not be here on 1 July". (d) As the year progressed there were other conversations in which Mr Linton insisted on payment and asked Mr Falinski whether arrangements had been made to pay a dividend. (e) In June or July 1992 Mr Falinski said that he did not wish to pay the sum under consideration as a dividend, and that it would be better to make a loan pending the sale of the company, something then in contemplation, interest free and for five years. A document was created to record this. (f) In early August 1992 Mr Linton said that he must have the money immediately, and the cheque for $1,060,000 was provided payable in the manner indicated by Mrs Linton's solicitor. 14 The evidence included an unexecuted form of agreement dated 3 July 1992 providing for payments to Jalana for Mr Linton's services and Jalana's copyright material until 30 June 1997. It included - "5) Provision of Interest Free Loan a) In recognition of the irreplaceable value of John Linton to the achievement of the previous 5 years results and the planned next 5 years results it is agreed that Stanley Falinski will procure an interest free loan to John Linton of $A1,000,000,00 [sic] for a period of 5 years. b) These loan monies will be made available through Telnet but will be sourced directly from an equivalent amount of money loaned to Telnet from other parties. The sources of these funds will be from loans made to Nimari Pty Ltd by Tunmoss Pty Ltd and Fernik Pty Ltd. c) This loan of $A1,000,00 [sic] will not become payable until 25th July 1997 unless Telnet Pty Ltd is sold in whole or in part to a third party. In that event any monies received by John Linton or by his assignees, are to be repaid to Tunmoss Pty Ltd and Fernik Pty Ltd up to a maximum of $A1,000,000. d) At the end of the loan period the loan monies are to be repaid directly to Tunmoss Pty Ltd and Fernik Pty Ltd." 15 Nimari Pty Ltd was an earlier name of OCC. The parts played by Tunmoss Pty Ltd and Fernick Pty Ltd were not explained, save that it seems that they were Falinski companies. Hulme J said, correctly, that the evidence relating to this document was slight; it had been given to the administrator of Telnet by Mr Linton's solicitor in July 1995, and that it was the document created as referred to in (e) above could be inferred but was far from clear.

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32 I have already noted the report to creditors and the financial statements of Telnet, which were or can be regarded as evidence led by Telnet. There was otherwise no evidence led by Telnet to establish insolvency or concern for solvency as at August 1992, or the effect on Telnet's ability to pay its creditors of the loan of $1,060,000, for example by an accountant's report. Endangering of creditors called for evidence directed to those issues with reasonable clarity. The material time was August 1992, and the Osborne group did not fail until mid-1995. As can be seen from the figures for the group in the judgment of Hulme J, the group might have been thought to be in a reasonably sound position as at 30 June 1992, and its sales and gross profit increased during 1993. While the net loss for the year ended 30 June 1993 could later be seen as the beginning of its decline, peril to creditors on a group basis as at August 1992 did not leap out from the figures. Telnet itself had a small deficiency in net assets and a small operating loss as at 30 June 1992, and its fortunes certainly declined markedly thereafter, but that did not necessarily mean peril to its creditors as at August 1992 if a loan of $1,060,000 was made to Mr Linton. Telnet had to get in money from which it could make the loan. The unexecuted form of agreement of 3 July 1992 provided for the money to be got in from Tunmoss Pty Ltd and Fernik Pty Ltd through OCC. I have already referred to the uncertain status of that document, but there was no evidence that the money was got in in that way, or of how it was got in at all. It may have been, indeed it might be thought likely, that Telnet's creditor for $1,060,000 was OCC or some other Falinski company, a creditor which (through Mr Falinski's eyes) did not regard its interests as in danger or was willing to accept the position and which was willing to stand behind other creditors. The number, extent and nature of Telnet's creditors as at August 1992 was not the subject of evidence. Investigation of all this would be very material to a finding of breach of fiduciary duty on the ground for which Telnet sought to contend by the proposed contention.

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Those figures were taken from financial statements produced much later, in 1995. Whether there were management accounts which would have revealed the position to Mr Falinski and Mr Linton in August 1992 was not investigated in the evidence, although, of course, it could be said that as directors they should have known that the financial position was as the accounts later prepared revealed. Mr Linton was not asked about that. There was undoubtedly a grave deterioration in the 1993 year, but it must not be forgotten that the relevant time was August 1992. When was the deterioration evident? It was said in the financial statements that they had been prepared on a going concern basis on the basis of support from a major creditor. There was no investigation of who the major creditor was - inference, or perhaps only speculation, might suggest OCC. Who the creditor was, and what the support was, were material to the interests of creditors, both the major creditor and the other creditors. 37 There are two ways of seeing the application to amend the notice of contention in the light of what I have said in the preceding paragraphs. One way is that, in the absence of particularisation or other express confinement, Telnet's case for breach of fiduciary duty was at large, so that it was entitled to rely before Hulme J on disregard of the interests of creditors and should therefore not be precluded from relying on appeal on disregard of the interests of creditors in accordance with the proposed contention. The other way is that, although not confined by particulars or express statement, Telnet's case before Hulme J was so conducted that it was not open to it, even before his Honour, to mount a case of disregard of the interests of creditors of the kind now sought to be put forward, and so in accordance with the principles considered in Suttor v Gundowda Pty Ltd (1950) 81 CLR 418; Coulton v Holcombe (1986) 162 CLR 1, and Multicon Engineering Pty Ltd v Federal Airports Corporation (CA, 15 October 1987, unreported) it should not be permitted to mount that case on appeal. In my opinion the latter way is to be preferred. Because of the basis on which he found breach of fiduciary duty Hulme J did not address the issue so delicately proffered, but not backed up, by the reference to creditors in Telnet's written submissions, but if he had I consider he would have been obliged to decline to entertain a case founded on disregard of the interests of creditors as now put on appeal.

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