Supreme Court of SA|1995-01-19|Before: King CJ

LUCIANO CENTOFANTI v EEKIMITOR PTY LTD No. SCGRG 94/1044 Judgment No. 4924 Number of pages - 20 Corporations - management and administration (1995) 65 SASR 31 [1995] SASC 4924 (19 January 1995)

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA KING CJ(1) MOHR(3) AND OLSSON(2) JJ

CWDS Corporations - management and administration - directors and other officers

fiduciary position - Appellant director of respondent company - respondent in financial difficulties, primarily because the tenant of commercial premises owned by it not paying rent due and because respondent liable as guarantor far debts of tenant - appellant, as part of plan to alleviate respondent's financial troubles, lent money to respondent and arranged for a family company, Benevino, to take over the lease and business conducted from the premises - business failed and Benevino defaulted in paying rent - while appellant obtained judgment for funds lent to respondent, the latter successfully counterclaimed damages for breach of appellant's duty as a director in respect of the leasing of premises to Benevino - trial judge found breach of duty arose from failure to inform shareholders of risks of transaction.

By virtue of statutory provisions and articles of respondent the appellant under duty to disclose conflict of interest to directors only and not shareholders - appellant required simply to disclose nature of interest, not to advise of risks of transaction - once appellant had disclosed his interest and refrained from voting, it was for other directors to assess merits of proposal - trial judge in-error in drawing inference, that, contrary to what documentation revealed, disclosure not made - allegation of respondent on appeal that trial judge ought to have found further breaches of duty by appellant not made out. companies (South Australia) code ss228 and 535. Woolworths Ltd v Kelly (1991) 22 NSWLR 189, applied. Hurley and Anor v B G H Nominees Pty Ltd and Ors (No 2) (1984) 37 SASR 499, discussed.

Solicitors for respondent: Minter Ellison Baker O'Loughlin

JUDGE1 KING CJ I have reached the conclusion that the appeal should be allowed, that the judgment on the counterclaim should be set aside and that in lieu thereof there should be judgment for the appellant dismissing the counterclaim. I would dismiss the cross-appeal. In general I agree with the reasons expressed by Olsson J for reaching these conclusions. I wish, however, to state my own views on the question of disclosure of the appellant's interest in the transaction.

A director's relationship with the company of which he is a director, is fiduciary in nature. A consequence of the fiduciary nature of the relationship is that a director may not, unless the Articles of Association otherwise provide, enter into a contract with the company; Aberdeen Railway Co v Blaikie Bros (1954) 1 Macq 461. Likewise a contract between the company and another company in which the director also has an interest would, unless authorized by the Articles, be a breach of the fiduciary duty. A contract which would otherwise be a breach of fiduciary duty may, however, be approved by the members of the company after full disclosure of the nature of the director's interest; Furs Ltd v Tomkies [1936] HCA 3; (1936) 54 CLR 583 at 592. Approval by the directors, in lieu of the members, will be effectual only if authorized by the Articles and only if any conditions imposed by the Articles have been strictly complied with; Woolworths Ltd v Kelly (1991) 22 NSWLR 189.

Superimposed upon these rules of the general law is a further obligation, carrying penal consequences, imposed by s228(1) of the Companies Code which was in force at the relevant time, to disclose the nature of the interest to a meeting of the directors. This obligation is in addition to and not in derogation of the operation of the rules of the general law restricting a director from having an interest in contracts with the company; s228(8). A director must therefore make disclosure to the Board of Directors to comply with s228 and also, unless absolved from doing so by the Articles, make disclosure to a meeting of the members to comply with his fiduciary duty; Duties and Responsibilities of Company Secretaries and Directors in Australia (CCH, 1987), p239.

A complication in the present case is that the company is a trustee company. The property which is the subject of the contract is trust property in which the company has no beneficial interest. If loss has resulted from the contract in which the plaintiff has an interest, it must be loss to the cestui que trust. No question arises in these proceedings as to any breach of trust which might be involved on the part of the respondent company in entering into the transaction with one of its directors; In re James, Deceased [1949] SAStRp 8; (1949) SASR 143. Nevertheless, if the matter were not governed by relevant provisions in the Articles, the rules of the general law as to disclosure might have to be applied in a manner which would take into account the fact that this is a company whose members have no financial interest in the contract or property.

The relevant Article of the respondent is as follows: "87 A Director shall be entitled to vote in respect of any contract or proposed contract with the company in which he is interested, or any matter arising thereout, notwithstanding such interest provided that he shall have first complied with the provisions of section 228 of the Code."

This Article does not expressly authorize the making of a contract in which a director is interested. Its express concern is only with voting. In Woolworths Ltd v Kelly supra, however, it was held that an Article prohibiting a director from voting in respect of a contract in which he was interested assumed that a contract of that kind might be dealt with by the Board and therefore impliedly authorized the Board to do so. A provision authorizing the interested director to vote must have the like effect.

The authority for the Board to deal with the matter is conditional upon compliance with s228. To give meaning to the Article, it must be understood as referring to the specific requirements of the section and not to the rules of the general law the applicability of which are preserved by subsection (8). For the reasons given by Olsson J I am satisfied that the plaintiff declared the nature of his interest as required by s228(1) and therefore complied with the section.

Having made proper disclosure to the Board, was the plaintiff under any further fiduciary obligation? The nature and extent of any obligation remaining on an interested director after making disclosure, must depend upon the circumstances. If he votes, he must exercise his vote with due regard to his obligation to exercise his powers for the benefit of the company. If he does not vote, the circumstances may be such that he can deal at arms length with the company, consulting his own interests and leaving to the other, apparently competent and fully informed, directors the assessment of any risks and the merits of the proposal from the standpoint of the company. Where, however, the director conducts the day to day operations of the company or is otherwise possessed of knowledge relevant to the decision, which his co-directors do not posses, he may not be free to act in that way but may be obligated to act in a way which protects the interests of the company.

The plaintiff did not vote. He was not peculiarly responsible for the day to day operations of the company. He was in no better position than the other directors to assess the risks. He was at all times, as the judge found, acting honestly and for the purpose of salvaging the trust property from the threatened loss and not with a view to gaining an advantage at the expense of the company from his position as director. He hoped, no doubt, that the business would be successful and that his company Benevino Pty Ltd would thereby derive a profit, but that profit would not be at the expense of the respondent or the trust.

In those circumstances, I consider that the plaintiff's fiduciary duty was fully and properly discharged by making disclosure to the Board, and that the resolution of the Board operated to absolve him from any breach of duty which the contract might otherwise have constituted.

JUDGE2 OLSSON J These are an appeal and cross appeal against judgments entered by the Chief Judge on a claim and counterclaim in a civil action tried in the District Court. That action arose from a sequence of events related to a series of commercial transactions. It is therefore necessary, at the outset, to attempt a distillation of the outline narrative facts.

The key dramatis personae involved in the proceedings were members of the family of Francesco Centofanti (now deceased) and certain of their professional advisers.

The members of the family involved were Rina Centofanti, the widow of Francesco, her children Luciano, Alma (Henwood), Giovanni and Orlinda.

Also involved in the scenario were Barrie Lloyd (who was accountant for Rina, Luciano, Giovanni and Orlinda, as well as the respondent company ("Eekimitor") and Benevino Pty Ltd ("Benevino") (a company owned and controlled by Luciano and his wife)) and Robert Wyly (who acted as solicitor for Luciano and Eekimitor).

Eekimitor was, at most relevant times, the trustee of the R and F Marane Trust ("the Trust"). Its directors were Luciano, Rina, Giovanni and Orlinda - together with other "outside" persons for a time. The Trust was a family trust, the potential beneficiaries being all members of the Centofanti family, other than Luciano.

The evidence led at trial established the fact that the Trust was established on 24 March 1983. Eekimitor became trustee of it on 21 May 1985. At, or immediately prior to that time, the assets of the Trust comprised five shops at Henley Beach and eight residential units in a housing development at Greenacres.

All of those trust assets were sold in February 1986 and the proceeds used to purchase a commercial property at 233 Henley Beach Road, Torrensville ("the subject premises"). Eekimitor became the registered proprietor of the subject premises on 11 February 1986.

On 6 June 1986 a company known as Perfect Trade Pty Ltd ("Perfect") was incorporated. Its directors were Giovanni and a person called Antonio Turco. It was brought into existence with a view to carrying on business as a wholesale liquor merchant on the subject premises.

At that stage the subject premises were the sole asset of Eekimitor, which was necessarily reliant on the rental income from it to pay all outgoings in respect of those premises, such as rates, taxes and so on.

Eekimitor permitted Perfect to become a tenant of the subject premises immediately after its incorporation. The latter commenced to trade from them as a wine merchant, upon entry into the requisite leasing arrangement, which provided for payment of what seems to have been a relatively modest rental. That tenancy persisted from about mid 1986 to mid 1989. The evidence led suggests that, throughout that period, Giovanni Centofanti had the day to day management of Eekimitor. It followed that, prima facie at least, he was in a classic conflict of interest situation.

Be that as it may, it is beyond dispute that, as time went by, serious problems arose with the tenancy of Perfect. Its business did not prosper. Rental fell into arrear for a protracted period. The learned trial judge found that, in order to provide working capital, Perfect arranged to borrow $60,000 from National Australia Bank Ltd ("NAB") on 22 September 1986. NAB required this advance to be the subject of various guarantees. As the learned trial judge expressed the situation:- "... The bank required, however, that the repayment of the loan be guaranteed by guarantors approved by it. Mr. Giovanni Centofanti, Mr. Theodore Iuliano (who was later to become a director of Perfect Trade Pty. Ltd.) and, for reasons which are not altogether clear, the defendant became guarantors of the repayment of the moneys that were borrowed from the bank by Perfect Trade Pty. Ltd.. Having no other assets of substance than the subject premises, it is apparent that the defendant relied heavily upon prompt payment of its obligations by Perfect Trade Pty. Ltd. if the

defendant's financial position was to remain secure."

To make good that guarantee, at least in part, Eekimitor caused a first mortgage over the subject premises to be executed in favour of NAB. It was registered on the title of the subject premises on 25 September 1986. The evidence indicates that the affixing of the common seal of Eekimitor on the mortgage was attested by Giovanni and Rina Centofanti.

The business conducted by Perfect did not improve. Indeed its financial situation continued to deteriorate and rental arrears escalated. This, in turn, precipitated an acute financial problem for Eekimitor, which was left without funds with which to meet rates, taxes and other outgoings in respect of the subject premises. In late February 1988 Orlinda Centofanti and Alma Henwood were appointed additional directors of Eekimitor, but no other positive remedial action was taken. Giovanni continued in effective management control of that company.

Rental arrears thereafter continued to escalate.

Further meetings were held later in the year, at one of which two other "outside" directors of Eekimitor were appointed - although for what purpose does not emerge. Nothing positive emerged from those meetings.

Various, somewhat inconclusive, discussions subsequently took place within the Centofanti family in the early part of 1989, it becoming obvious that Perfect was unlikely to survive in the conduct of its business. As the learned trial judge put it, the possibility of a forced sale of the subject premises began to loom large. Rina Centofanti appealed to her son Luciano, the appellant, to assist in what was rapidly emerging as a rescue operation.

Matters were brought to a head when, on 8 June 1989, NAB wrote to Perfect foreshadowing an enforcement of its rights in relation to the balance then owed to it.

In light of that situation the appellant agreed to participate in what was, by then, truly a salvage situation. He, his wife and Rina Centofanti caused a company known as Benevino Pty Ltd ("Benevino") to be formed. It was incorporated on 14 June 1989, the appellant and his wife being its directors.

On 7 July 1989 NAB served a formal notice of demand upon all guarantors for payment of the advances to Perfect and interest accrued in respect of them. By then a "rescue package" had been formulated, with the concurrence of the appellant. The details of this were set out in a letter prepared by the witness Lloyd and expressed in these terms:- "Re : Eekimitor Pty Ltd As you are aware, your company is the owner of rent producing property at 233 Henley Beach Road, Torrensville. This property is under lease to a company called Perfect Trade Pty Ltd for a rental figure of $150.00 per week. The company Perfect Trade Pty Ltd, is unable to continue its lease and will cease trading on Tuesday, 18th July 1989. We have an offer to lease the premises from a group known as Benevino Pty Ltd, on the following terms:- 1. Rent to commence on Wednesday, 19th July 1989 at the rate of $800 per calendar month for the first three months, i.e. 19th July 1989 to 19th October 1989. 2. Rent to increase to $1,000 per month for the following three months i.e. 20th October 1989 to 19th January 1990. 3. A further rental increase from 20th January 1990 to $1,200 per month to 30th June 1990. 4. Rent will then be subject to annual review, based on C.P.I. 5. Rent to be for a period of five years, plus the right of renewal for a further five years. 6. The lessee has the right of purchasing the property at market value but not exceeding $350,000 within the lease period.

You should also be aware that one of your directors, Mr Luciano Centofanti, has an interest in Benevino Pty Ltd and is a director of that company. The request is to seek your approval to this proposal. Therefore, could you please indicate your intentions and return the attached memorandum in the self addressed envelope. (Signed) L. Centofanti By Order of the Board"

The memorandum referred to in the letter was in the following form:- "EEKIMITOR PTY LTD Proposal as explained to rent property at 233 Henley Beach Road, Torrensville. 1. We approve 2. We do not approve ............................. Signed by Shareholder"

The evidence did not ever satisfactorily establish how and to whom that letter was delivered. All that was indicated by the evidence was that, at some point, Rina Centofanti and Orlinda Centofanti signed copies of the memorandum, expressing their approval of the proposal. They also signed a document couched in these terms:- "EEKIMITOR PTY LTD At a duly convened meeting of Eekimitor Pty Ltd at 12.00 noon on the 7th July 1989, it was resolved that the Board approve the leasing of premises at 233 Henley Beach Road, Torrensville to Benevino Pty Ltd for a period of five years with the right of renewal for a further five years. (Signed) O.M. Centofanti .......................... Director Orlinda Centofanti (Signed) R. Centofanti .......................... Secretary Rina Joyce Centofanti"

It is to be borne in mind that, as at July 1989, the shareholders of Eekimitor were Rina, Luciano, Orlinda and Giovanni Centofanti and also Alma Henwood. They were directors of the company as well. As I understand the situation, the two "outside" directors appointed on 28 October 1988 may still have been on the Board.

On 7 July 1989 Mr Wyly, a solicitor, was instructed by the appellant and the witness Lloyd to take steps to put the proposed plan into effect. He accepted instructions to act both for the appellant and Eekimitor.

The rescue proposal actually envisaged four successive steps, namely, that:- (1) the appellant would borrow necessary funds from Westpac Banking Corporation ("Westpac"); (2) these would be utilised, inter alia, to pay out NAB on behalf of Eekimitor, to discharge its liability to the bank as surety;

(3) Benevino would acquire the business of Perfect; (4) It would thereafter conduct it on the subject premises as a lessee of Eekimitor.

In the event, Perfect determined that it would have to cease trading on 18 July 1989. This precipitated a need for urgent action on the part of Benevino. For that reason an agreement was perpetrated for the sale, on 17 July 1989, by Perfect of its business to Benevino. On the following day a lease, in the terms contemplated in the memorandum of 7 July 1989, was executed by Eekimitor to Benevino, the affixing of the seal of the former being attested by Orlinda and Rina Centofanti. The authority for so doing was a purported resolution of the Board of Eekimitor said to have been passed on 7 July 1989, as to which the appellant had notified his interest and refrained from voting. (There may be some doubt as to whether the relevant meeting was ever actually duly convened and held and the resolution lawfully passed, but the document signed by Orlinda and Rina Centofanti certainly certifies that it was.)

The appellant made application to Westpac for a loan of $100,000 to provide funds for a loan to Eekimitor to enable it to satisfy its liabilities and to cover the establishment costs for the business taken over by Benevino. A separate application was made for a loan of $20,000 for use by Benevino as working capital. Ultimately these applications were both approved in favour of Benevino, with the appellant agreeing to act as guarantor for that company.

In the above context a formal meeting of the directors of Eekimitor, was convened by a notice drafted by Wyly and signed by Rina Centofanti on 4 August
According to Wyly the meeting was originally intended to be held on 11 July 1989 but was in fact held a month later. It is necessary to note the full terms of that document. It read as under:- "NOTICE TO THE DIRECTORS OF EEKIMITOR PTY LTD TO CONVENE A MEETING OF DIRECTORS (pursuant to Article 85(2) of the Articles of Association of Eekimitor Pty Ltd) TO BE HELD AT THE OFFICES OF MESSRS SPEAR WALTERS LLOYD and Co Chartered Accountants, Data House, 43 Greenhill Road, Wayville S.A. ON THE 11th day of July, 1989 AT 11 a.m. 1) Disclosure of Interest For the purpose of such meeting Luciano Centofanti hereby pursuant to the provisions of section 228 of the Companies

(South Australian) Code declares that he has an interest in the subject matter of the business to be raised at the said directors meeting and in the moving and passing of the resolutions set out herein. The nature of the said interest is that he is a party to the contracts set out therein (both in this (sic) own name and in the name of Benevino Pty Ltd). Rosalina Centofanti, Frank Centofanti and Rina Centofanti are also shareholders of Benevino Pty Ltd - and to the extent of their conflict be (sic) being involved with Benevino Pty Ltd they hereby disclose such involvement. Any other director seeking further and better particulars of this interest may do so at the said meeting or previously by a request in writing. 2) Background

On the 22nd September, 1982 (sic) Eekimitor Pty Ltd ('the company') entered into a guarantee and indemnity agreement with the National Australia Bank whereby the company and Giovanni Centofanti and Theodore Iuliano did all jointly and severally guarantee the obligations of Perfect Trade Pty Ltd ('Perfect Trade') to the said Bank. The company mortgaged its land at 233 Henley Beach Road, Torrensville, South Australia to the said bank in support of the guarantee. Perfect Trade as at the 7th day of July, 1989 was in debt to the said bank in the sum of $63,936.83. Interest on this amount continues to be added to that amount. Perfect Trade is unable to pay the bank any of that amount and is unlikely to be able to do so within the next few weeks - if at all. Perfect Trade has ceased to trade. The shareholders and directors of Perfect Trade are at the time of the issue of this notice divided as to the resolution of the affairs of Perfect Trade - these divisions may not be rectified in the near future or at all. Litigation may ensue in that regard and if so such litigation may not be resolved for some time to come. Giovanni Centofanti, a director and shareholder of Perfect Trade, is no longer involved with Perfect Trade on a day to day basis. Luciano Centofanti at the request of Giovanni Centofanti has become involved with Perfect Trade in order to try to resolve the divisions and has via a company that he is a director of and shareholder in (called Benevino Pty Ltd - together with Rosalina Centofanti, Frank Centofanti and Rina Centofanti) has taken over certain of the operations of Perfect Trade (including taking a transfer of its wholesale liquor licence and some items of plant and equipment and stock). The details as to the payment of the consideration for this purchase is still to be finally resolved but may well take into account the writing off of debts owed to Giovanni Centofanti by Perfect Trade (the sum of which exceeds the value of the said wholesale liquor licence and the items of plant and equipment and stock). Certain unpaid rent to the company will in all probability be written off. On the 7th day of July, 1989 the said bank demanded the company pay $63,936.83 plus interest and costs to the bank. This demand was also made to Giovanni Centofanti and Theodore Iuliano. Theodore Iuliano has indicated that he will pay out the other trade creditors of Perfect Trade. Giovanni Centofanti can not contribute at this time.

The net result is that if Perfect Trade were to be liquidated then the value of its assets (prior to the involvement of Luciano Centofanti) would have been in the order of $15,000. Of this sum about $7,500 would have been paid to the liquidator for his fees. The remaining sum may be applied towards legal fees to resolve certain matters. Any remaining funds may not have been (sic) distributed for

some time - perhaps 12-24 months. The creditors of Perfect Trade may have got nothing or at best very little - perhaps

a few cents in the dollar. In any event that bank would not wait for the liquidation and will, in the absence of any other proposal, sell the companies (sic) property. At this time due to the depressed real estate market if the bank sold the property (a 'forced sale') it is likely that the price for the property would be substantially less than a price on the open market at a later time. The company also has a separate debt to the said bank in about the sum of $35,000 which falls due to be paid in the next few months. In order to avoid the bank selling the property Luciano Centofanti has offered to loan to the company sufficient funds to pay the said bank out. This will avoid the forced sale. To do this Luciano Centofanti will have to mortgage his own property. Luciano Centofanti offers to make this loan to the company for the same interest as he will pay for the funds he has to borrow to be paid monthly in arrears. If this offer is accepted then the loan is to be re-paid in the following manner: 'The principal sum shall be repaid to the lender within six months of receipt of written demand from the lender made from time to time requesting re-payment of the principal sum or any of it PROVIDED THAT:

(a) the lender may not make more than 2 demands per year, and (b) so long as the principal sum outstanding exceeds the sum of $20,000 the sum demanded shall never be in excess of 25% of the principal sum outstanding at the time of the last of

the bank settlements, or the sum of $25,000 whichever is the greater. The borrower may in its discretion re-pay to the borrower the principal sum at any time so long as such payments are in multiples of $10,000 (or part thereof in order to make a final payment).' (The lender is Luciano Centofanti, the principal sum is the same as the total to be paid to the said bank, and the bank settlement are the times of payment to the said bank.) Luciano Centofanti seeks that the money he proposes to loan to the company be secured by a debenture (mortgage) over the company and a mortgage over its land property. The proposed contracts regarding these transactions are available to be read at the offices of the aforesaid accountants if any director wishes to read them prior to the meeting. Otherwise they will be available at the board meeting. In order to enable Benevino Pty Ltd to operate the liquor business Benevino Pty Ltd seeks an option to acquire the property at $350,000 for (sic) $350,000 with Consumer Price Index increases. (3) The Resolutions At the said board meeting it is proposed to initially put two procedural resolutions namely: (1) that the Board consent to Barrie Lloyd being appointed as an alternate director for Giovanni Centofanti effective forthwith. (2) that the Board appoint Luciano Centofanti as the Chairman of Directors. (or resolutions in substantially the same terms) In order for the board to accept or decline the proposition referred to herein the following resolutions (or resolutions in substantially the same terms) will be put to the board, together with any other general business or resolutions that may be lawfully brought forward at that meeting: 'The directors have read the contracts tabled, namely: 1. loan agreement between Luciano Centofanti and the company, 2. debenture in favour of Luciano Centofanti to secure the loan, 3. mortgage over the real property in favour of Luciano Centofanti to secure the loan, 4. option to purchase the real property and have discussed the terms thereof, and have considered the effect thereof, and bearing in mind that the effect of these contracts will save the National Bank having to sell the companies (sic) property, and in the absence of any

other viable alternative being put to this board by any other board member, the directors do hereby resolve to accept the terms contained therein and resolve to affix the Common Seal of the company to those said agreements and to update the companies (sic) seal register and register of charges and to do all things necessary to lodge with the Corporate Affairs Office and the Land Titles Office such of those agreements as may be required by law and any ancillary matters consequent thereon.' Any other director seeking to move any other resolution may do so at the time of the board meeting - however it is preferable that such director advise the secretary of such resolution (with reasons and explanations if possible) so that all directors can be informed of such proposal prior to the board meeting. By the Order of: (Signed) R. Centofanti 4/8/1989 Company Secretary"

It is particularly to be observed that the resolutions contemplated the appointment of the appellant as chairman of the Board.

A meeting of directors of Eekimitor was, in fact, held on 11 August 1989. It was attended by Rina and Orlinda Centofanti, the appellant and Messrs Wyly and Lloyd. The learned trial judge was disposed to accept the evidence of Wyly as to what transpired at that meeting. He found that neither appellant nor Lloyd (in his capacity as alternate director for Giovanni Centofanti, then resident in Western Australia) sought to exercise any voting rights.

The proposals before the meeting were agreed to and relative documents thereupon executed. No opposition was voiced by anyone. Messrs Wyly and Lloyd thereupon proceeded to implement the new arrangement. Inter alia, on 18 August 1989, the appellant caused a cheque for $76,671.54 to be drawn direct to Mr Wyly from the Westpac borrowing. This was utilised to discharge Perfect's indebtedness to NAB (insofar as Eekimitor had guaranteed it) and to defray legal costs and disbursements. On 18 September 1989 the appellant drew a cheque for $36,500 on his personal account to Mr Wyly, which was used to settle a debt of almost that amount due by Eekimitor to NAB in respect of the overdraft of the former.

The trustees of the estate of Francesco Centofanti deceased (one of whom was Rina Centofanti) had vested in them the power of appointment of trustees of the Trust. On 24 October 1989 (i.e. only some two months after the transactions which I have just recited) the appellant caused a company known as Heathridge Pty Ltd ("Heathridge") to be incorporated. The trustees of the estate thereupon exercised their power of appointment to remove Eekimitor as trustee of the Trust and replace it with Heathridge, the directors of which were the appellant and Rina Centofanti. Eekimitor therefore had no further direct legal responsibility for the administration of the subject premises as a trust asset, although no steps were ever taken to transfer the title of them to Heathridge. Presumably, however, debits for rates, taxes and other outgoings in relation to the subject premises still came to Eekimitor.

The evidence is quite unclear as to why this change was effected, other than that it was advised by Wyly and/or Lloyd.

Following the takeover of the wholesale wine business by it, Benevino paid the stipulated rent to Eekimitor until February or March 1990. Unfortunately Benevino had little more success than Perfect in operating the wine business. It did not trade profitably. Eventually its financial position deteriorated to the point at which, on 20 April 1993, a winding up order was made in respect of it.

Over the whole period of the two tenancies of the subject premises they had been allowed to deteriorate significantly, with the result that considerable time had to be spent and expense had to be incurred in cleaning them up and rendering them in a fit state for sale. Much of that was attended to by Orlinda Centofanti.

Eventually arrangements were made to sell the subject premises for a sum of $220,000. That sale was effected on 27 May 1993.

Against such background, proceedings were initiated by the appellant in the District Court against Eekimitor claiming a total of $170,842.14 plus accruing interest, being moneys said to be due by it to him in terms of a Deed executed by those parties on 11 August 1989. That Deed ("the Deed") evidenced the transaction whereby the appellant had caused moneys to be advanced to Eekimitor to enable it to discharge its liabilities to the NAB when Benevino took over the wine wholesaling business.

Eekimitor filed a defence and counterclaim in which it asserted that the appellant had breached his fiduciary duty to Eekimitor in relation to the Benevino transaction, as a consequence of which loss had been sustained by it, in its capacity as trustee of the Trust. It was also pleaded that the appellant had caused certain bearer bonds to the value of $35,000, which were assets of the Trust, to be appropriated to his own use and benefit on about 24 October 1989, contrary to the interests of Eekimitor, in its capacity as trustee of the Trust. The defence and counterclaim further sought to impeach certain aspects of the transaction whereby Benevino acquired the wine business from Perfect, alleging an improper acquisition of the assets of the latter on a basis which profited Benevino contrary to the interests of Eekimitor.

Various sums were counterclaimed, by way of damages, in respect of the alleged breaches of duty.

It should be said at the outset that, on the appeal, a finding made by the learned trial judge that, at the time of the Benevino transactions in August 1989, the appellant stood in a conflict of interest situation was not disputed. Equally, it must be noted that it is implicit from the reasoning of the learned trial judge that, at all material times, the appellant's motives were of the best. A family crisis situation had developed and he was placed under considerable pressure, particularly by his mother, to mount a rescue operation to preserve the subject premises as the sole asset of the Trust. All of his actions were clearly dictated by a desire to achieve that result, rather than to obtain any improper gain for himself.

In the event the learned trial judge held that the appellant had made good its primary claim against Eekimitor. He entered judgment in favour of the appellant on the claim in the sum of $179,343.62.

On the other hand he also found that certain aspects of the counterclaim had been established.

As I understand the reasoning of the learned trial judge in relation to the counterclaim, it was to the following effect:- - he was not satisfied that either a general meeting of the members of Eekimitor was properly convened on 7 July 1989,

or that all shareholders informally consented to the proposal of the lease to Benevino. - whilst the appellant had not been shown to be in sole, day to day, control of the affairs of Eekimitor, nevertheless, his position was such that his fiduciary duty required that he make the fullest possible disclosure to all of the shareholders and directors and that the onus was upon him to prove that the shareholders gave fully informed consent to the proposed transaction. - he was not satisfied that all shareholders, or all directors, of Eekimitor were aware of and approved of the actions taken in relation to the lease to Benevino. - the appellant was therefore liable to account to Eekimitor for any improper gain made by him, or loss incurred by Eekimitor as a consequence of his breach of fiduciary duty. - no gain on the part of the appellant had been demonstrated. On the other hand the failure of the appellant to inform the shareholders of Eekimitor of the financial risks attendant upon pursuing the lease to Benevino, by way of contrast with other possible options did result in loss as a consequence of the breach of duty.

the appellant had not been in breach of his duty in relation to the loan transactions, as to which full and frank disclosure had been made to the shareholders and directors.
- no case had been made out, on the evidence, of a breach of duty in relation to the purchase of the business by Benevino from Perfect and, certainly, no loss by Eekimitor arising from that transaction had been demonstrated.
- there was no evidence to support the proposition that the appellant had wrongfully converted the bearer bonds to his own use.

In the result the learned trial judge entered judgment on the counterclaim against the appellant and in favour of Eekimitor for a sum computed as under:- Unpaid rental $46,700.00 Unpaid council rates $ 4,867.57 State Land Tax $ 459.90 E and W S Rates $ 900.40 Cleaning of premises
$ 4,683.67 $57,611.54

To that he added lump sum interest of $15,650, giving rise to an all up total of $73,261.54.

By his appeal the appellant challenges the propriety of allowing any of those sums on the counterclaim and contends that it ought wholly to have been dismissed. For its part Eekimitor sought leave to cross appeal so as to challenge both the allowance of the claim and the rejection of certain items of the counterclaim.

As Mr McNamara, of counsel for the appellant, correctly identified, the appeal raised three specific questions of law, namely:- (1) Given that a conflict of interest situation patently arose in relation to the entry by Eekimitor into the lease with Benevino, to whom was the appellant bound to disclose that conflict? (2) What was the extent of the disclosure required by the appellant having regard to his position as a director of Eekimitor? (3) With what formality was that disclosure required and was what was done adequate?

(It should also be recorded that Mr McNamara also faintly sought to argue that, in the event that his client was adjudged guilty of any compensable breach of duty, then the appellant ought to be relieved of the consequences of it pursuant to section 535 of the Companies (South Australia) Code. All that need be said as to this is that this point was raised for the first time on the prosecution of the present appeal and, for that reason, Eekimitor was necessarily deprived of the opportunity of relevant cross examination and/or the right to lead pertinent evidence. On well established principle it is simply not proper to permit such an issue to be raised at this stage. (See, for example, authorities such as Price v Humphries (1958) 2 QB 353, Crawford Earthmovers Pty Ltd v Fitzsimmons (1972) 4 SASR 116, Coulton v Holcombe [1986] HCA 33; (1986) 60 ALJR 470 and Tyson v Brisbane Market Freight Brokers Pty Ltd [1994] HCA 67; (1994) 68 ALJR 304.))

As to the first point it seems obvious from the reasons expressed by the learned trial judge that he was of the opinion that the duty of disclosure was owed both to the directors and the shareholders of Eekimitor. In my opinion Mr McNamara is correct when he argues that such a conclusion is plainly unsustainable.

Section 228 of the Companies (South Australia) Code, which was then in force, contained a general requirement that a director in a conflict of interest situation was required, as soon as practical after the existence of the relevant conflict came to his knowledge, "to declare the nature of his interest at a meeting of the directors of the Company". Elsewhere in the same section, it was stipulated that:- "228(8) (Operation of section) Except as provided in sub-section (3), this section is in addition to, and not in derogation of, the operation of any rule of law or any provision in the articles restricting a director from having any interest in contracts with the company or from holding offices or possessing properties involving duties or interests in conflict with his duties or interests as a director."

(Subsection (3) had no relevance to the issue presently under consideration.)

Such a provision reflects the practical situation that it is the directors, and not the members, who have the responsibility for the management and day to day control of the operations of a company.

Those statutory provisions must be read and applied in light of the express provisions of the Articles of Association of Eekimitor. Specifically article 87 read as follows:- "87. A Director shall be entitled to vote in respect of any contract or proposed contract with the Company in which he is interested, or any matter arising thereout, notwithstanding such interest provided that he shall have first complied with the provisions of Section 228 of the Code."

As Mr McNamara correctly identified, the significance of article 87 was that, given that the statutory obligation was limited to disclosure to the directors (and not the members), it even clearly envisaged the right of the interested director, actively, to participate in the entry into transactions in which there was a disclosed interest.

Such then was the authority conferred by article 87 that I fail to see how there remained room for the operation of any more general non statutory obligation, if there was one, to secure informed consent of the shareholders in general meeting.

The learned trial judge seems to have extracted the existence of such an obligation from what fell from Walters J in Hurley and Anor v B G H Nominees Pty Ltd and Ors (No 2) (1984) 37 SASR 499 at 506 when he said:- "Thus a fiduciary is not bound to account for a benefit or gain derived in virtue of his position if he can show that the party for whom he is a fiduciary gave his 'fully informed consent' to the benefit or gain derived (Queensland Mines Ltd v Hudson (1978) 52 A.L.J.R. 399, at p.404). In the case of a director standing in a fiduciary relation to his company, I would think that ordinarily he would need the consent of the shareholders acting formally in general meeting, but it may well be that in the case of a small company, informal consent - evidenced by express or tacit agreement or by a course of dealing - may be given without a

general meeting of shareholders. However, in the light of the conclusion that I have reached on the facts, I find it unnecessary for the purpose of the present case, to express any concluded opinion as to the manner in which 'a fully informed consent' may be given; whether it must proceed from a resolution of the shareholders in general meeting, or, at least, from a resolution of the directors in formal meeting."

I do not consider that Walters J was attempting to expound a general principle of all embracing operation. Whilst there may be situations in which it is necessary, or at least prudent, to secure the informed consent of shareholders in general meeting, it must firmly be borne in mind that directors do not occupy a general fiduciary relationship to shareholders. As the learned author of Ford, "Principles of Corporations Law" 6th Edn at p493 expresses the concept - "their office imports fiduciary duties owed only to the company". Hence the existence of the statutory obligation to make disclosure of interest to the Board and the ultimate supremacy of the Articles of Association.

It is only in special circumstances that what has been described by Ford as an "ad hoc" fiduciary obligation of fair dealing arises as between the directors and the shareholders. Classic examples of this type of situation relate to proposals by directors to buy out shareholders, where the latter may necessarily depend upon information and advice of which the directors have peculiar knowledge.

There is undoubtedly a general equitable principle that a company in general meeting should give an informed consent to a transaction involving a conflict of interest and may even ratify a completed act in breach of duty. However, such a process is not necessary where Articles of Association, as here, expressly permit a director to act, despite having a conflict of interest. (See, for example, Re Automotive and General Industries Ltd [1975] VicRp 44; (1975) VR 454.) The principle is, of course, overtaken by the operation of statutory provisions such as section 228 of the Code.

In my view the sole obligation of the appellant in the instant case was to make proper disclosure of the nature and extent his interest only to the Board and it seems to me that the evidence indicated that he in fact probably did so as to the leasing transaction. Indeed it is clear that he was, in effect, actually being urged to enter into the transaction by the members of the family as a rescue operation.

As to the second point, the appellant's obligation, clearly, was merely to disclose the nature of his interest - in the case at bar that he was a shareholder and director of Benevino and proposed to continue the business of Perfect on the subject premises, with a view to attempting to make a commercial profit by so doing - given the terms of the proposed lease. I can perceive no warrant for the proposition that he was under a duty to spell out to the Board the inherent risks in the proposed commercial activities and the possible financial consequences if Benevino was not successful.

Nor was it his obligation, at least in the particular circumstances of this case, to act as "Devil's Advocate" to propound a need for alternative transactions to be explored by the Board. This was the more so as he did not exercise his right to vote and those matters must have been as obvious to the other directors as to him.

In this regard it cannot be stressed too strongly that the requirement of the statute and of Article 87 was merely to "declare the nature of his interest" and no more. It therefore becomes unnecessary to explore the question of the risks and benefits attendant on the transaction. As was pointed out by the Chief Justice, in the course of argument, disclosure having been made, the interested director is then dealing at arms length with the company. He refrains from voting and, as to the particular transaction under consideration, divorces himself from what would otherwise be his obligation to act in the interest of the company. It is for the other directors to then assess relevant risks and make their management decisions on behalf of the company.

The foregoing appears to me to be consistent with what fell from Samuels JA in Woolworths Ltd v Kelly (1991) 22 NSWLR 189 at 211, where he said:- "The requirement for disclosure seems therefore to be intended not to protect the company against bad bargains or the consequences of arrangements into which they enter as a result of the partisan interest of a director, but simply to ensure that the honesty and integrity which should inform corporate dealings and, in particular, the internal management of corporations is scrupulously observed. '... The amount of detail required must depend on the nature of the contract or arrangement proposed and the context in which it arises. ... His declaration must make his colleagues 'fully informed of the real state of affairs' (see Imperial Mercantile Credit Ass'n v Coleman (1873) LR 6 HL 189 at 201, per Lord Chelmsford). If it is material to their judgment that they know not merely that he has an interest, but what it is and

how far it goes, then he must see to it that they are informed ...' In other and more general words the requirement is to make full disclosure of the nature and extent of the interest."

There can be little doubt that the formal notice convening the relevant meeting of directors adequately disclosed the situation to all directors.

This was a notice drafted by Lloyd and, in absence of any suggestion to the contrary, it is to be inferred that the document was duly sent or came to the notice of the various directors, particularly having regard to the document signed by two of them.

It is true that, as the learned trial judge pointed out, the evidence was far from clear as to precisely what was done in relation to the due promulgation of the notice of meeting. No doubt Giovanni was then resident in Western Australia, but it is to be borne in mind that, at least at one stage, Lloyd was his proxy. Moreover, the evidence clearly indicated that most of the directors were directly aware of and involved in the transaction.

Insofar as the defendant sought positively to aver that no meeting had been held and/or all directors had not become aware of the proposed transaction and the appellant's interest in it when, on the face of matters, there is evidence and documentation to suggest that it had, in any event, been overtaken by the meeting of 11 August 1989, the notice of which fully traversed the narrative factual background.

The defendant bore the evidentiary onus of making good its suggestion. In my opinion it fell far short of satisfying such an onus. On the contrary, quite apart from the prima facie inference arising on the material which was before the learned trial judge the plain fact is that, over a long period of time, no one ever asserted that the alleged meeting was a sham and never held at any stage, or protested that he or she had not been informed of the situation or of the appellant's interest in it. True it is that, as the learned trial judge pointed out, none of the witnesses to whom he referred had any memory of the meeting. However, the significance of that scenario is to be arrived at in light of the fact that the memories of the various witnesses as to many matters of detail was poor in the extreme. With respect I find myself unable to draw the inference, as to this aspect of the case, which he expressed in his reasons.

It follows that, on the reasoning set out above, I am driven to the conclusions that the learned trial judge founded his conclusions as to the counterclaim on the wrong legal test and, in any event, draw an inappropriate factual inference from the evidence.

I am satisfied that the counterclaim in this action was not made good. I would allow the appeal as to the judgment on the counterclaim and set aside that judgment. In lieu there should be judgment for the appellant on the counterclaim.

This brings me to the cross appeal, which sought, in effect, to agitate a number of issues which were also applicable to the appeal.

All that need be said is that the evidence unequivocally pointed to a situation in which, as the learned trial judge pointed out, full disclosure was made by the appellant to the other directors of the nature and extent of his interest in the transaction in the notice of meeting given. He did not vote at what was a duly convened meeting. As the Chief Judge said in the course of his reasons:- "I am satisfied that, in respect of the decisions taken on the 11th August, 1989, full and frank disclosure was made to the shareholders and directors of the defendant and that on this occasion the plaintiff was not in breach of either his common law or his statutory duties as a director of the defendant. He not only acted in good faith in the best interests of the defendant as he saw those interests, but he made a full and frank disclosure of the nature and extent of his interest so that all of the other shareholders were in a position to make a fully informed decision as to whether or not to proceed. In the result, I am satisfied that the plaintiff is entitled to succeed in respect of his claim for moneys owing."

Moreover, in my view, it was the situation that the transaction sought to be impeached was clearly for the benefit and in the best interest of Eekimitor, given the problems with which it was confronted at the time. What was under consideration was a salvage operation in which the appellant came to the rescue. The proposal was clearly proper and reasonable and involved no breach of duty on the part of the appellant. Eekimitor simply did not establish the existence of any situation which amounted to a breach of duty on the part of the appellant, or which can give rise to any legal bar to the recovery of the moneys the subject of the judgment against it.

LUCIANO CENTOFANTI v EEKIMITOR PTY LTD No. SCGRG 94/1044 Judgment No. 4924 Number of pages - 20 Corporations - management and administration

At a glance

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Decision date

Before

Source

Judgment (103 paragraphs)

LUCIANO CENTOFANTI v EEKIMITOR PTY LTD No. SCGRG 94/1044 Judgment No. 4924 Number of pages - 20 Corporations - management and administration (1995) 65 SASR 31 [1995] SASC 4924 (19 January 1995)

Parties

Cases Cited (7)