McCracken v Phoenix Constructions

SUPREME COURT OF QUEENSLAND

CITATION: McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 129

PARTIES: JARROD McCRACKEN (appellant) v PHOENIX CONSTRUCTIONS (QLD) PTY LTD (respondent)

FILE NO/S: Appeal No 6056 of 2011 / SC No 5615 of 2006

DIVISION: Court of Appeal

PROCEEDING: General Civil Appeal

ORIGINATING COURT: Supreme Court at Townsville

DELIVERED ON: 18 May 2012

DELIVERED AT: Brisbane

HEARING DATE: 29 February 2012

JUDGES: Fraser and White JJA and Applegarth J / Separate reasons for judgment of each member of the Court, each concurring as to the orders made

ORDERS: 1. Allow the appeal with costs. / 2. Set aside the orders made in the Trial Division on 15 June 2011 and on 13 July 2011. / 3. Order instead that: / (a) The plaintiff’s claim against the third defendant is dismissed. / (b) The third defendant pay the plaintiff’s costs, including reserved costs, of prosecuting the proceedings against the first defendant and of defending the first defendant’s counterclaim, up until 21 July 2010. / (c) The third defendant pay 70 per cent of the plaintiff’s costs, including reserved costs, of and incidental to the proceedings against the third defendant.

CATCHWORDS: CORPORATIONS – GENERALLY – CORPORATIONS LEGISLATION – where respondent is creditor of corporation of which appellant is director – where trial judge found appellant in contravention of s 182(1) Corporations Act 2001 (Cth) and awarded damages to respondent pursuant to s 1324(10) – where appellant argued s 1324(10) does not confer right of damages upon creditor for contravention of s 182 – where appellant argued award of damages under s 1324(10) would amount to preference over other unsecured creditors – where respondent argued damages available under s 1324(10) – where respondent argued jurisdiction for granting injunction sufficient to enliven award of damages under s 1324(10) – whether trial judge erred in awarding damages under s 1324(10) / EVIDENCE – ADMISSIBILITY AND RELEVANCY – FACTS SHOWING STATE OF MIND – INTENTION – where the appellant sought to rely on affidavit at trial as evidence of understanding or agreement between appellant and his wife in relation to proper construction of joint venture agreement – where trial judge concluded that the affidavit evidence was not admissible – where appellant argued evidence admissible on different ground that it showed appellant’s purpose of entering into deed of amendment – where respondent argued that affidavit not tendered as evidence of appellant’s purpose, but evidence of conduct – whether the trial judge erred in not admitting the affidavit evidence / EVIDENCE – GENERAL – OTHER GENERAL MATTERS – where trial judge awarded damages equal to respondent’s contractual claim against appellant for contravention of s 182(1) Corporations Act 2001 (Cth) – where appellant argued respondent failed to prove alleged loss due to existence of unsecured creditors and no evidence of financial position – where respondent argued contention should not be considered because not pleaded, not subject of any disclosure, not subject of evidence, and because appellant was only person capable of doing so – whether appellant not giving evidence could justify drawing adverse inference – whether respondent failed to prove claimed loss / Corporations Act 2001 (Cth), s 182(1), s 555, s 556, s 1317E, s 1317G(1), s 1317H, s 1317J, s 1317K, s 1324(1), s 1324(2), s 1324(10) / Equity Act 1867 (Qld), s 62 (repealed) / Uniform Civil Procedure Rules 1999 (Qld), r 5(3), r 155, r 361, r 681, r 684(1) / Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249; [1981] HCA 75, considered / Allen v Atalay (1994) 12 ACLC 7, considered / Broken Hill Proprietary Company Ltd v Bell Resources Ltd (1984) 2 ACLC 157, cited / Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11; [2009] FCFCA 147, cited / Colgate Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225; [1993] FCA 536, cited / Executor Trustee Australia Ltd v Deloitte Haskins & Sells (1996) 135 FLR 314; (1996) 22 ACSR 270; [1996] SASC 5874, considered / Gracia Pty Ltd v QCAPT Pty Ltd (1998) 16 ACLC 1134; [1998] WASC 102, distinguished / Oates v Hawkins [2010] NSWSC 491, cited / Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11, cited / Phoenix Constructions (Queensland) Pty Ltd v Coastline Constructions Pty Ltd & Ors [2011] QSC 167, overruled / Phoenix Constructions (Queensland) Pty Ltd v Coastline Constructions Pty Ltd & Ors (unreported, Supreme Court of Queensland, SC No 5615 of 2006, 13 July 2011), related / QIW Retailers Ltd v Davids Holdings Pty Limited (No 2) (1992) 37 FCR 57; [1992] FCA 344, cited / The Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54, considered / Truth About Mortorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd (2000) 200 CLR 591; [2000] HCA 11, cited / Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285; [1987] HCA 11, cited

COUNSEL: D J S Jackson QC, with D D Keane, for the appellant / D A Savage SC, with A J Moon, for the respondent

SOLICITORS: Walsh Halligan Douglas Lawyers for the appellant / Connolly Suthers Lawyers for the respondent

1. FRASER JA: Mr McCracken has appealed against a judgment in the Trial Division for damages of $1,495,208.71 plus interest of $530,003.46 in favour of the respondent (“Phoenix”) pursuant to s 1324(10) of Corporations Act 2001 (Cth) (“the Act”).

2. Phoenix had a valid contractual claim for damages against Coastline Constructions Pty Ltd (“the company”). Mr McCracken was the sole director of the company. After the company went into liquidation, Phoenix claimed that it was entitled to recover the same damages against Mr McCracken pursuant to s 1324(10) for Mr McCracken’s contravention of s 182(1) of the same Act by the improper use of his position as a director.

3. Section 182(1) of the Act provides:

“(1)A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a)gain an advantage for themselves or someone else; or

(b)cause detriment to the corporation”

4. Pursuant to s 1324(1), where a person has engaged in conduct that constitutes a contravention of the Act, the Court may, on the application of a person whose interests have been affected by the conduct, grant an injunction restraining the first mentioned person from engaging in the conduct and requiring that person to do any act or thing. Section 1324(10) provides:

“(10)Where the Court has power under this section to grant an injunction restraining a person from engaging in particular conduct, or requiring a person to do a particular act or thing, the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person.”

5. The appeal raises the following questions:

(a) Should the trial judge’s finding that Mr McCracken contravened s 182(1) be set aside on the ground that evidence was wrongly excluded?

(b) Did s 1324(10) empower the trial judge to award the claimed damages to Phoenix for Mr McCracken’s contravention of s 182(1)?

(c) Did Phoenix prove that it suffered the claimed loss?

6. I will discuss these questions after I have summarised the factual and statutory background and the trial judge’s reasons.

Background

7. In 2002, Mrs McCracken purchased land in Townsville. In August 2004, Mrs McCracken and the company, by Mr McCracken, executed a joint venture agreement for the development of Mrs McCracken’s land. Clause 3 expressed the objectives of the joint venture as being, in summary, the development and construction of a unit or community titles development on the “Joint Venture Land” and causing the developed lots to be sold to obtain a return for the joint venturers. Schedule 1 identified Mrs McCracken’s land as the “Joint Venture Land”.

8. The joint venture agreement gave the company very extensive powers to deal with that land in addition to its powers to develop it and sell the resulting units. For example, Mrs McCracken could be required to mortgage the land to secure joint venture borrowings. The express terms of the joint venture agreement did not require the company to account to Mrs McCracken for any of the proceeds of such sales, but she may have been entitled to recover the value of the land she contributed to the joint venture as a “Joint Venture Cost” under cl 16.3. The trial judge held that under the joint venture agreement the company acquired “rights over and in respect of” Mrs McCracken’s land; that the land could “only be used for the purposes of a joint venture”; and that it was arguable that the company had a beneficial interest in the land.¹

9. Clause 16.1 of the joint venture agreement provided that Mrs McCracken “shall following development of the Land pursuant to this Agreement, retain ownership of the Lots shown marked on the development plan reproduced in Schedule 2 (the ‘Retained Units’)”. Schedule 2 was left blank. Thus the apparent effect of the express terms of the joint venture agreement was that upon completion of the joint venture development Mrs McCracken would not be entitled to retain any of the units.

10. Mr McCracken caused the company to enter into a construction management agreement with Phoenix for the purpose of constructing a unit complex on the land in accordance with the joint venture agreement. Disputes subsequently arose about the amount the company owed Phoenix under the construction management agreement. In June 2006, Phoenix served a creditor’s statutory demand on the company and Phoenix subsequently commenced proceedings in the Trial Division for damages for breach of the construction management agreement. The trial judge found that Phoenix had a valid damages claim against the company. Mr McCracken abandoned the ground of his appeal which challenged that finding.

11. During the course of a mediation of the parties’ disputes in January 2007 Mr McCracken said to a director of Phoenix that “I will not be paying anything and I can close the company down if I need to.”² The mediation was unsuccessful. In February 2007, Mr McCracken caused the company to enter into a deed of amendment of the joint venture agreement with Mrs McCracken. By this time all but six of the units developed by the company under the joint venture agreement had been sold. The deed amended Schedule 2 of the joint venture agreement by including reference to those six unsold units, to which the deed ascribed a total value of $7,385,000. The trial judge accepted Phoenix’s case that, by the amendment deed, Mr McCracken caused the company to abandon its contractual interest under the joint venture agreement in those six units, thereby diminishing the company’s assets and denying Phoenix recourse to the company’s assets to that extent.

“3.Further or alternatively, and pursuant to Section 1324 of the Corporations Act 2001, an injunction requiring the Third Defendant to procure from the Second Defendant a transfer to the First Defendant a/or requiring the Second Defendant to transfer to the First Defendant that real property identified by and referred to at paragraph 59 of the Statement of Claim an injunction restraining the Third Defendant from causing the First Defendant to enter into transactions which prevent it from performing or substantially diminish its ability to perform the obligations imposed on it by the Contract pursuant to section 1324(1) of the Corporations Act 2001;

4.Further or alternatively, damages of $1,230,614.79 pursuant to section 1324(10) of the Corporations Act 2001”.

The trial judge’s reasons

14. The trial judge’s reasons for finding that Phoenix had established its damages claim against Mr McCracken may be summarised as follows:

(a) In causing the company to enter into the amendment deed, Mr McCracken contravened s 182(1) of the Act by improperly using his position to cause detriment to the company and to gain an advantage for Mrs McCracken, namely, the company’s abandonment in favour of Mrs McCracken of its contractual interest in the six units identified in Schedule 2 of the amendment deed.⁵

(b) There was no evidence that the company had any other assets which could have satisfied its indebtedness to Phoenix.⁶ It was not open to Mr McCracken to argue that Phoenix had not demonstrated that, but for the diminution in the value of the company’s assets effected by the amendment deed, Phoenix would have received its entitlement under the construction management agreement.⁷

(c) “The plaintiff as a creditor is a person whose interests are affected by the third defendant’s breach of s 182 and thus comes within s 1324(1) of the Act, see Allen v Atalay (1993) 11 ASCR 753 and Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 23 ASCR 715.”⁸

(d) The court had jurisdiction to grant an injunction in this case under s 1324(6).⁹ The claim for damages was not defeated by the fact that the “exclusion of the lands” by the deed of amendment occurred before Mr McCracken became a party.¹⁰ The inclusion of the claim for an injunction against Mr McCracken when he was added as a defendant was sufficient for the purposes of maintaining the claim for damages.¹¹

(a) Contravention of s****182(1)

15. Mr McCracken contended that the finding that he contravened s 182(1) should be set aside because the trial judge erred in excluding evidence relevant to that issue. The evidence was contained in affidavits of Mr and Mrs McCracken, an affidavit of Mr Kern, a solicitor who advised the McCrackens and the company in relation to the joint venture agreement and the deed of amendment, and an affidavit of those parties’ accountant, Mr Crofts.

16. Mr McCracken sought to adduce that evidence in support of a case that the amendment deed reflected an earlier understanding or agreement between Mr and Mrs McCracken that, upon completion of the joint venture, she would own the units which were subsequently identified in the deed of amendment. Mr McCracken argued that the evidence was admissible because it was relevant to the proper construction of the joint venture agreement and to an issue under s 182(1) whether the deed of amendment in fact resulted in any advantage for Mrs McCracken or any detriment to the company. Apart from matters concerning the form of the evidence, the main ground of Phoenix’s objection to it was that it concerned only the subjective intentions or understandings of the parties.

17. In this appeal, Mr McCracken did not challenge the trial judge’s conclusion that the evidence in question was not admissible in the proper construction of the joint venture agreement. Nor did Mr McCracken contend that the evidence was relevant to the issue under s 182(1) which had been identified at the trial. Rather, senior counsel for Mr McCracken submitted that the evidence was admissible on the different ground that it tended to show that Mr McCracken’s purpose in entering into the deed of amendment was not simply to give away the company’s property so as to make it unavailable to meet Phoenix’s claim. Whitehouse v Carlton Hotel Pty**Ltd¹² was cited for the proposition that the evidence of the director’s awareness or belief was relevant to the issue under s 182 whether the director had used that position to gain an advantage for the director or someone else or caused detriment to the corporation.

18. As was submitted for Phoenix, at the trial Mr McCracken did not tender the evidence for that purpose. Indeed, the transcript reveals that Mr McCracken’s trial counsel made it clear that the evidence was not tendered as evidence of the parties’ purpose, but only as evidence of their conduct. Furthermore, after ruling that the evidence was not admissible in the proper construction of the joint venture, the trial judge expressly left open the question whether the evidence was admissible for some other purpose. It was not then submitted that the evidence could be admitted for the purpose which is now advocated, or for any other purpose. Subsequently, the parties’ senior counsel informed the trial judge of the particular paragraphs of the affidavits which should be struck out to reflect the trial judge’s ruling

[20] Mr McCracken did not advance any other challenge to the trial judge’s conclusion that, by causing the company to enter into the deed of amendment, Mr McCracken contravened s 182(1) by improperly using his position as a director of that corporation to gain an advantage for Mrs McCracken and a corresponding detriment to the corporation.

(b) Did s 1324(10) empower the trial judge to award the claimed damages to Phoenix for Mr McCracken’s contravention of s 182(1)?

[21] The damages awarded by the trial judge equated Phoenix’s loss resulting from Mr McCracken’s contravention of s 182(1) with the amount of Phoenix’s contractual claim against the company.

[22] Mr McCracken contended that s 1324(10) does not confer a right to damages upon a creditor for that creditor’s loss suffered by reason of a contravention of s 182, for the reasons given in Executor Trustee Australia Ltd v Deloitte Haskins & Sells.¹⁴ Mr McCracken also argued that s 1324(10) should not be construed as conferring such a power in a case of this kind, because Phoenix’s receipt of the damages would amount to a preference over other unsecured creditors of the company, depleting the capital of the company and offending the scheme in ss 555 and 556 of the Act under which unsecured creditors take pari passu. He advanced the alternative submissions that the power to award damages was not engaged because, the company being in liquidation and Mrs McCracken being bankrupt, an injunction could not have been granted under s 1324(1); and, the insolvency of a company not being an element of the allegation of contravention of s 182(1), Phoenix was not a person whose interests were affected by the alleged conduct and thus had no standing to claim damages under s 1324(10). Mr McCracken also argued that Phoenix had not suffered loss of a kind which was recoverable as damages.

[23] Phoenix submitted that the trial judge’s reasons were correct and that its entitlement to damages under s 1324(10) was supported by authority. It submitted that it was irrelevant for a claim under s 1324(10) that the injunction might have been refused on discretionary grounds, that it was sufficient that the Court had jurisdiction to grant the injunction, and the circumstance that an injunction might only have been granted at a time earlier than the date of judgment was not determinative. Phoenix submitted that there was no constitutional requirement that s 1324 must be construed as requiring that a claimant possess a pre-existing right to damages,¹⁵ and that no such requirement should be implied. It emphasised the absence of any express requirement to that effect in the statutory text.

[24] The relevant statutory context includes that s 1324 is in Pt 9.5, which, consistently with the terms of the section, is headed “Powers of Courts”. As Perry J pointed out in Executor Trustee Australia Ltd & Anor v Deloitte Haskins & Sells¹⁶ in relation to an indistinguishable enactment, s 574(8) of the Companies (SA) Code, the focus of the section is upon the power to grant injunctions and its exercise, rather than the creation of rights to damages. Perry J made the point that construing the provision in the way now propounded by Phoenix would produce the incongruous result that damages might be awarded only where the Court’s power to grant an injunction was engaged and where the claimant had applied for an injunction rather than for damages.

[25] Perry J identified additional considerations which are opposed to Phoenix’s construction, including the presence in the Act of many other specific provisions which confer specific remedies for certain contraventions. In this case, for example, the entitlement to claim and recover compensation for contravention of s 182(1) (and other “civil penalty” provisions) is created by Pt 9.4B of the Act, which immediately precedes the part of the Act in which s 1324 is found. The topic of Pt 9.4B is indicated by its heading, “Civil consequences of contravening civil penalty provisions”. In relation to the contravention of s 182(1) found by the trial judge, Pt 9.4B empowers a Court to make three different kinds of orders. First, s 1317E(1) provides for a “declaration of contravention”. Secondly, s 1317G(1) provides for an order that a person pay the Commonwealth a pecuniary penalty of up to $200,000 if a declaration of contravention by the person has been made under s 1317E and the contravention materially prejudices the interests of the corporation, or materially prejudices the corporation’s ability to pay its creditors, or is “serious”. Thirdly, s 1317H provides:

“Compensation for damage suffered

(1)A Court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if:

(a) the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and

(b) the damage resulted from the contravention.

The order must specify the amount of the compensation.

Damage includes profits

(2)In determining the damage suffered by the corporation or scheme for the purposes of making a compensation order, include profits made by any person resulting from the contravention or the offence.

Damage includes diminution of value of scheme property

(3)In determining the damage suffered by the scheme for the purposes off making a compensation order, include any diminution in the value of the property of the scheme.

(4)If the responsible entity for a registered scheme is ordered to compensate the scheme, the responsible entity must transfer the amount of the compensation to scheme property. If anyone else is ordered to compensate the scheme, the responsible entity may recover the compensation on behalf of the scheme.

Recovery of damage

(5)A compensation order may be enforced as if it were a judgment of the Court.”

[26] Section 1317J provides that ASIC is empowered to apply for any one of those three remedies, the corporation (or the responsible entity for a registered scheme) is empowered to apply only for a compensation order, and no other person may apply for any of those remedies. Pt 9.4B includes other provisions regulating proceedings for such orders, including the provision in s 1317K that a proceeding for any such order “may be started no later than 6 years after the contravention.”

[27] Pt 9.4B is difficult to reconcile with a construction of s 1324(10) under which any person whose interests are adversely affected by the contravention of a civil penalty provision might be awarded damages for that adverse effect where the Court has power to grant to an injunction. The difficulty is starkly illustrated by reference to the effect of s 1317J of denying any entitlement to claim compensation to anyone except ASIC and the corporation. More generally, such a construction would make a dead letter of the provisions in Pt 9.4B which create and regulate the power to award compensation. Phoenix argued that these provisions could co-exist because there is a distinction between “damages” in s 1324(10) and “compensation” under s 1317H, but the terms of the latter provision demonstrate that this is a distinction without a difference.

[28] There is another reason why the right to compensation created by s 1317H is opposed to Phoenix’s construction. One meaning of the word “damages” is “a sum of money paid in compensation for damage suffered or vindication of a claimant’s rights in contract and tort actions”.¹⁷ In a case of the present kind, the creditor’s claimed loss is merely derivative of the company’s recoverable loss. In such a case, the conventional view is that the creditor suffers no such loss as justifies an award of damages, the diminution in the value of the company’s assets being replaced by the corporation’s chose of action (under s 1317H(1) in this case) of at least equal value.¹⁸ The construction of s 1324(10) advocated by Phoenix would then produce the very surprising result that, even though the creditor’s claim is merely derivative upon the corporation’s recoverable loss, either there might be double recovery (recovery by the creditor and the corporation) at the expense of the officer who contravened s 182(1), or the creditor might recover damages at the expense of the corporation.¹⁹ It seems obvious that the first alternative cannot have been an intended result of s 1324(10). The latter alternative is also unlikely to have been intended. As was submitted for Mr McCracken, it would reduce the corporation’s capital, by depriving it of its chose in action against the delinquent officer, and it would offend the scheme in ss 555 and 556 of the Act under which unsecured creditors take pari passu.

[29] Another surprising result of Phoenix’s construction is that s 1324(10) would confer upon every creditor adversely affected by a contravention of a statutory duty, which Pt 9.4B implies is not owed to the creditor, a right to claim damages, even though recovery of damages by one creditor might very often prejudice the interests of other creditors (and contributories). Phoenix’s responsive arguments - that other creditors and the corporation should be notified of the creditor’s claim, thereby ensuring that their interests would be taken into account, or that the corporation or other creditors might subsequently vindicate their rights by bringing proceedings against a creditor who had recovered damages against the corporation - do not find any foothold in any provision in the Act.

[30] There is no necessary correlation between the liberality of the test in s 1324(1) for standing to apply for an injunction and the entitlement to recover damages under s 1324(10). Although the latter subsection empowers the Court to award damages “to any other person” and does not define the nature of those “damages”, it does not follow that the Court might award any measure of damages to any person for any effect upon that person’s interests. The very unlikely results of Phoenix’s construction discussed in preceding paragraphs of these reasons may be avoided by taking into account the statutory context, including the conventional function of “damages” and the expression in s 1324(10) “either in addition to or in substitution for the grant of the injunction”. In the case of a contravention of the Act, the subsection may be seen as conferring power to award damages only as a substitute remedy, or supplementary remedy, for an injunction to remedy, or partly remedy, the adverse effect upon interests which are protected by the provision of the Act which has been contravened. In this case, for example, the claimed injunction required Mr McCracken to cause Mrs McCracken to transfer to the company the real property which was alleged to have been diverted from the company by Mr McCracken’s contravention of the duty he owed under s 182(1).²⁰ Such an injunction, if it were effective, would appropriately have remedied the adverse effect upon the company’s interests which are protected by s 182(1) (as is evidenced also by Pt 9.4B of the Act). If the injunction could not be granted, a substitute remedy would be to award damages in favour of the company by way of compensation for the irretrievably lost property; if only part of the property could be returned to the company pursuant to an injunction, a supplementary remedy (damages “in addition” to the injunction) might provide compensation for the value of the part of the property irretrievably lost as a result of the contravention. An award of damages in favour of the respondent creditor would not be a substitute or supplementary remedy for the claimed injunction in that way.

[31] In Executor Trustee Australia Ltd & Anor v Deloitte Haskins & Sells Perry J referred to the effect of Lord Wilberforce’s speech in Johnson v Agnew,²¹ which was referred to with approval in Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd,²² as being that, with certain limited exceptions, Lord Cairns’ Act did not create a right to damages which did not previously in law exist, as opposed to creating a jurisdiction in equity to award damages in accordance with the common law.²³ In Queensland, Lord Cairns’ Act was re-enacted as s 62 of the Equity Act of 1867:

“62.In all cases in which the Supreme Court in equity has jurisdiction to entertain an application for an injunction against a breach of any covenant contract or agreement or against the commission or continuance of any wrongful act or for the specific performance of any covenant contract or agreement it shall be lawful for the same court it is shall think fit to award damages to the party injured either in addition to or in substitution for such injunction or specific performance and such damages may be assessed in such manner as the court shall direct.”

[32] On the construction of s 1324(10) which Perry J preferred, it serves a similar function, empowering the Court to award damages for which a legal basis already exists, in lieu of, or in addition to, an injunction. However, the analogy with s 1324(10) is incomplete. In addition to the very different context and subject matter of s 1324(10), it does not include any text analogous to the words in s 62 “against a breach of any covenant contract or agreement or against the commission or continuance of any wrongful act or for the specific performance of any covenant contract or agreement…”. The absence of any express qualification in s 1324(10) upon the Court’s power to award damages (other than the existence of power to order an injunction) for contravention of any provision of the Act does lend some support to Phoenix’s argument that s 1324(10) should not be read down by the implication of a requirement that the person affected by the contravention must possess an entitlement to damages otherwise than under s 1324(10). As Phoenix submitted, the High Court has stressed that provisions conferring jurisdiction or granting powers to a court should not be read down by imposing limitations not found in the express words.²⁴

[33] However the express words of the provision do not clearly empower the award of damages of the nature claimed by the respondent in this case. It is also not necessary here to decide whether a pre-existing entitlement to damages in the claimant for an injunction is a prerequisite for an award of damages under s 1324(10) in all cases. At least where the Act (here, s 1317H) provides for compensation for ASIC and the corporation, to the exclusion of any other interested persons, for contravention of a provision (here, s 182(1)) which protects the corporation’s interests, s 1324(10) does not empower the Court to award damages to a creditor which are merely derivative of the corporation’s loss.

[34] The cases cited by Phoenix which hold that the injunctive power is very broad do not bear upon the issue in this appeal.²⁵ Some of the other cited cases concern the nature of the interest which a person must possess in order to be entitled to apply for an injunction. That turns upon the meaning of the expression in s 1324(1) “a person whose interests have been, are or would be affected by the conduct”, and the meaning of a similar expression in s 1324(2). The weight of authority supports a broad construction of those expressions (Broken Hill Proprietary Co Ltd v Bell Resources Ltd,²⁶ QIW Retailers Ltd v Davids Holdings Pty Limited (No 2),²⁷ Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd,²⁸ and Oates v Hawkins²⁹), but it does not follow that s 1324(10) empowers the Court to award damages of any nature in favour of every person who is entitled to apply for an injunction.

[35] Phoenix referred to three cases which arguably bear directly upon the present issue. The first, Allen v Atalay,³⁰ a case to which the trial judge referred, is distinguishable on the ground that the plaintiff in that case invoked s 1324(10) in the context of a pleaded case that the value of the debt owed by the company was diminished by the directors’ breach of a duty allegedly owed to the plaintiff;³¹ thus there was alleged to be a pre-existing right to damages at common law. After noting that, in relation to the necessary standing of a claimant under s 1324, it had been held that the section should be given a wide interpretation, Hayne J observed:³²

“Now if the interests referred to in the section are (as was held in The Broken Hill Pty Co Ltd v Bell Resources Ltd) interests of any person which go beyond the mere interest of a member of the public and if it is not necessary that personal rights of a proprietary nature or rights analogous thereto are or may be affected, it is in my view arguable that a creditor having a right to prove in the liquidation of a company may be a person whose interests are affected by a contravention which is alleged to have led to the diminution in the value of his claim against the company. That being so, I consider that the plaintiff’s claim is arguable and that it is not appropriate to strike out his claim or terminate the action summarily.”

[36] Hayne J expressly refrained from stating any final view upon the questions which were argued, deciding only that the point sought to be raised by the plaintiff was arguable.

[37] The second relevant case mentioned in Phoenix’s submission, to which the trial judge also referred, was Airpeak Pty Ltd & Ors v Jetstream & Anor.³³ The question whether Jetstream was entitled to recover damages under s 1324(10) was not in issue in that case, since Jetstream only sought orders requiring the alleged contravener to cause money and property to be returned to the corporation. Einfeld J’s conclusion that standing to seek injunctions for contravention of the Corporations Law was conferred in wide terms by s 1324 does not support Phoenix’s argument that s 1324(10) confers a general power to award damages to any person who has standing to seek an injunction.

[38] In the third case, Gracia Pty Ltd v QCAPT Pty Ltd,³⁴ Bredmeyer M discussed an aspect of the decision in Executor Trustee Australia Ltd & Anor v Deloitte Haskins & Sells which I have not so far mentioned, namely, Perry J’s conclusion that the power to award damages under s 574(A) of the Code does not exist independently of an application for an injunction.³⁵ After referring to Permanent Trustee Australia Ltd v Perpetual Trustee Co Ltd,³⁶ Bredmeyer M said:

“Faced with this conflict of authority I am not convinced that a pleading which seeks damages under subs(10) that fails to seek an injunction under subs(1) or (2) is so bad that it ought to be struck out. Until this matter is decided by an appellate court the plea is not so ‘manifestly groundless’ or so ‘obviously untenable’ that it cannot possibly succeed and I propose to let the pleading in paras 16-20 stand.

Also when I look at s 1324 myself I ask why should it not be given a wide interpretation? Consider, for example, a director who has engaged in conduct which contravened the Law (subs(1)), and the applicant is a person whose interests have been affected by that conduct (subs(1)). Let me suppose further that the conduct is a ‘one-off’ thing - e.g. the sale of a company asset and the director pocketed the money; clearly the director gained a benefit for himself and not for the company. If the misconduct is complete it is too late to apply for an injunction to restrain him from engaging in that conduct under subs(1). If he has sold the asset, there is no point in seeking a mandatory injunction under the last few words of subs(1) or under subs(2) ordering him to transfer the asset back to the company. Why, I ask, must the applicant plead a case for an injunction when he does not want one, before he can ‘in substitution for’, obtain damages? Although the section is headed ‘INJUNCTIONS’, and the granting of injunctions under it may well be its principal use, it is perfectly arguable in my view that the aim of the section is to provide remedies of injunction and/or damages to those whose interests have been affected by directors who have contravened the Law in the circumstances prescribed in the section.

I also propose to let the prayers for relief stand as I consider it is arguable that damages can be obtained under the section without even seeking an injunction. …”

[39] Perry J’s reasoning on the point discussed in the first quoted paragraph has been adopted in subsequent decisions.³⁷ The question whether s 1324(10) confers a general power to award damages for a contravention of a civil penalty provision to a claimant whose own interests are not protected by the provision and who otherwise possesses no entitlement to recover compensation for its contravention does not seem to have been in issue in Gracia Pty Ltd v QCAPT Pty Ltd. If the decision in that case is opposed to the construction I prefer, I would respectfully decline to follow it for the reasons I have given.

[40] I conclude that s 1324(10) did not empower the trial judge to award the damages claimed by Phoenix. The judgment should be set aside for that reason.

(c) Did Phoenix prove that it suffered the claimed loss?

[41] As I have mentioned, the damages awarded by the trial judge equated Phoenix’s loss resulting from Mr McCracken’s contravention of s 182(1) with the amount of Phoenix’s contractual claim against the company. Phoenix might have suffered that loss only if, taking into account any other liabilities of the company, the company retained sufficient assets to meet the whole of Phoenix’s claim before the company entered into the deed of amendment and the effect of Mr McCracken’s contravention was to deprive the company of any capacity to meet any part of Phoenix’s claim.

[42] Mr McCracken contended that Phoenix failed to prove its alleged loss, because the company had unsecured creditors and there was no evidence of its financial position. Phoenix argued that this contention should not be considered because it was not pleaded, it was not the subject of any disclosure, and it was not the subject of any evidence; and this in circumstances in which Mr McCracken was the only person who might have pleaded the point, made disclosure about it, and given evidence of the facts. Phoenix pointed out that no evidence was adduced that the company had any creditors other than Phoenix and that, although the company was in liquidation at the time of the trial, there was no evidence that it was insolvent. Phoenix argued that the trial judge had correctly rejected Mr McCracken’s same contention at the trial on the basis that it was for Mr McCracken to prove that the company had insufficient assets to pay all of its creditors and Mr McCracken failed to do so.

[43] The trial judge considered this issue in the following passage of his Honour’s reasons:³⁸

“Senior counsel for the third defendant raised in his outline a contention that the court should not accept the case for damages as advanced by the plaintiff because it has not been demonstrated that the plaintiff would have received the benefit of any entitlement as calculated by Mr Shahady given the supervening liquidation of the first defendant and the absence of any evidence as to what if anything creditors would have received in the winding up of the company.

As senior counsel for the plaintiff pointed out, this was not raised at any time prior to the outline and there is no evidence on the subject.

I was referred to the judgment of the High Court in The Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64.

Where as here a party to a contract who alleges breach by the other party of its terms adduces evidence of the expenditures made or costs incurred or losses suffered the onus then moves to the defaulting party to displace these claims. See Mason CJ and Dawson J at page 14.

Here there was no evidence that would displace the plaintiff’s entitlement to the amounts claimed.”

[44] In my respectful opinion The Commonwealth of Australia v Amann Aviation Pty Ltd is not on point. Mr McCracken and Phoenix were not in any contractual relationship. Nor, if it be relevant, did Mr McCracken owe any duty of care in tort to Phoenix to consider its interests when procuring the company to enter into the deed of amendment.³⁹

[45] It was necessary for Phoenix to plead the nature and amount of the damages claimed and to give particulars in the pleading of the nature of the loss or damage suffered, the exact circumstances in which the loss or damage was suffered and the basis on which the amount claimed had been worked out or estimated.⁴⁰ Phoenix pleaded that the execution of the deed of amendment “[p]revented [the company] from performing or substantially diminished the [company’s] ability to perform…” the contractual obligation; and thereby exposed the company “…to an inability to pay its creditors as and when debts to those creditors fell due” and that Phoenix suffered loss and damage “…to the extent that it cannot recover the debt owed by [the company]”.⁴¹ Mr McCracken denied those allegations. He gave as his explanation for the denial matters which were unrelated to Phoenix’s allegations that the company had become exposed to an inability to pay its creditors and that Phoenix had thereby suffered loss to the extent that it could not recover the debt owed by the company.

[46] If, as Phoenix submitted, Mr McCracken’s denials amounted to deemed admissions,⁴² the relevant admissions were only of Phoenix’s allegations that the execution of the deed of amendment either prevented the company from performing “or substantially diminished” its ability to perform its contractual obligations to Phoenix, that the company was thereby exposed to an inability to pay “its creditors”, and that Phoenix had suffered loss and damage “to the extent” that it could not recover the debt owed by the company. In that state of the pleadings it was open to Phoenix to adduce evidence about the extent to which the contravention diminished the company’s ability to pay the debt owed to Phoenix, but the admissions were plainly insufficient to sustain any particular finding on that topic. The admissions therefore supplied an insufficient basis for quantification of the prejudicial effect of Mr McCracken’s contravention. That could not be done without evidence of the company’s financial position, including the state of the company’s accounts with its creditors. The fact that Mr McCracken did not give evidence could not justify drawing an inference adverse to him in the absence of any evidence which was capable of supporting that inference.

[47] It follows that Phoenix failed to prove that it suffered its claimed loss.

Disposition and orders

[48] The appeal should be allowed, the judgment given on 15 June 2011 should be set aside, and it should be ordered instead that the plaintiff’s claim against the third defendant is dismissed.

[49] Phoenix conceded that Mr McCracken was entitled to the costs of the appeal. There is no basis for Mr McCracken’s contention that those costs should be ordered on an indemnity basis. Phoenix, having obtained a judgment in the Trial Division in its favour, did not act unreasonably in seeking to sustain that judgment.

[50] In the event, which I favour, that the appeal be allowed, Phoenix submitted that Mr McCracken should be ordered to pay Phoenix’s costs in the Trial Division on the standard basis including:

(a) Phoenix’s costs of prosecuting its claim against the company up until that company went into external administration; and

(b) Phoenix’s costs of defending the company’s counter-claim up until that company went into external administration.

[51] Those orders reflect similar costs orders made by the trial judge on 13 July 2011:⁴³

1. That the third defendant pay the plaintiff’s costs, including reserved costs, of and incidental to the action by the plaintiff against the third defendant to be assessed.

2. That the plaintiff recover from the third defendant the plaintiff’s costs of prosecuting the proceedings against the first defendant up until the order to wind up the first defendant to be assessed.

3. That the plaintiff recover from the third defendant the costs of defending the first defendant’s counterclaim up until the making of the winding up order to be assessed.

[52] In relation to those orders, the trial judge said:⁴⁴

“[11]The preparation of its case against the first defendant [the company] involved the engagement of experts and the preparation of substantial affidavit material. It was necessary to investigate and report upon who bore responsibility for the various delays and non compliances and to quantify losses flowing therefrom.

[12]The adding of the third defendant [Mr McCracken] as a party was the consequence of the first defendant entering into an agreement with [Mrs McCracken] the effect of which was to exclude from the joint venture agreement which had been entered into between the plaintiff and the first defendant certain lands which at the trial it was found were included in the original joint agreement. As a consequence of this occurring there were no assets of the first defendant to which the plaintiff as a creditor could have recourse to satisfy any judgment which it obtained.

[13]Whilst it was at all times an essential part of the plaintiff’s case that the first defendant was in breach of its obligations under the contract with the plaintiff and that the plaintiff was entitled to substantial damages in respect of losses flowing therefrom, the liability alleged against the third defendant was in relatively narrow compass. It involved two claims under the Corporations Law. One was that the third defendant had improperly used his position as a director of the first defendant to gain an advantage for [Mrs McCracken] and/or to cause detriment to the first defendant and the other was that the plaintiff was a person whose interests had been or are affected by the third defendant’s conduct and who had the right to claim damages under sub-section 10 of s 1324 of the Act.

[14]The third defendant was found to have made a threat to the plaintiff’s director, Mr Evenett on 16 January 2007 to ‘shut down’ the first defendant. The variation to the joint venture agreement was signed on 19 January 2007. Subsequently on 21 July 2010 the first defendant was placed in administration and subsequently a winding up order was made.

[15]The breaches alleged against the first defendant and the losses said to have resulted therefrom were largely uncontested at the trial although in issue on the pleadings.

[16]In 2007 an application was made to the court for the appointment of an expert for the purposes of preparing the necessary documentation relating to the damages claimed against the first defendant. It appears that the defendants had engaged an expert for these purposes without notifying the solicitors for the plaintiff. The plaintiff says that in those circumstances it was necessary for it to proceed to engage an expert and prepare reports on the issue of responsibility for the delays which occurred and the losses flowing from them.

[17]As I have said substantial expense was incurred by the plaintiff in the preparation of this aspect of the matter. This also includes the costs of defending the first defendant’s counterclaim.

[18]I am told that shortly prior to the trial the solicitors for the third defendant informed the plaintiff’s solicitors that the claim which the plaintiff made against the first defendant would no longer be contested. The trial was largely conducted on this basis.

[19]As I have said the third defendant at all times controlled the first defendant and the conduct of the proceedings on its behalf was in his hands. The manner in which the litigation developed and ultimately proceeded was a consequence of the actions of the third defendant in relation to the first defendant and the plaintiff’s attempts to obtain a worthwhile judgment.

20. In these circumstances I think that it is appropriate that an order be made that the plaintiff recover from the third defendant its costs of prosecuting the claim against the first defendant and of defending the first defendant’s counterclaim. However this should be limited until the making of the winding up order.”

[53] Mr McCracken opposed the costs orders sought by Phoenix. He argued that the appropriate orders were that Phoenix pay Mr McCracken’s costs of the trial on an indemnity basis, or on a standard basis up to 26 November 2010 (when he offered to settle the proceedings on the basis that Phoenix discontinue the claim against him and pay his costs assessed on a standard basis) and on an indemnity basis thereafter.

[54] Mr McCracken argued that costs should follow the event. He referred to the provision in r 681 of UCPR that costs “are in the discretion of the court but follow the event, unless the court orders otherwise”, and to the reasons for that general rule expressed in Oshlack v Richmond River Council.⁴⁵ The submission overlooked the provision in r 684(1) that the Court may make an order for costs in relation to a particular question in, or a particular part of, a proceeding, and the significance of the statement in r 681(1) that costs “are in the discretion of the court”.

[55] As a result of Mr McCracken putting Phoenix to proof of its pleaded loss, Phoenix was obliged to prove against Mr McCracken the building case which Phoenix had originally brought against the company. There is no challenge to the trial judge’s finding that the trial ultimately was largely conducted on the basis that Mr McCracken did not contest the amount of Phoenix’s entitlement in it’s building case against the company, but that in the meantime Phoenix had been required to obtain an expert report and reports about responsibility for the delays in construction and consequential losses. Mr McCracken adduced no evidence on these questions at trial. He has offered no explanation for having put them in issue in the first place. As was submitted by Phoenix, the inference should be drawn that Mr McCracken simply put Phoenix to the cost of proving the building case without ever having had any intention of contesting it at the trial. There is no doubt that the costs of litigating the building case vastly exceeded the costs of litigating the other issues in Phoenix’s claim against Mr McCracken. Accordingly, the proper conclusion is that most of the costs Phoenix incurred in its claims against Mr McCracken, and in its claim against the company and in defending the company’s counterclaim up until 21 July 2012 (when the company was placed in administration), were attributable to Mr McCracken’s breach of his implied undertaking, and his having caused the company to breach its implied undertaking, “…to proceed in an expeditious way”.⁴⁶

[56] Those circumstances, and the other circumstances to which the trial judge referred, justify awarding costs of the building case issue to Phoenix. I reject Mr McCracken’s argument that “the quantum of Phoenix’s claim against the company was simply irrelevant to any claim against Mr McCracken” and that Mr McCracken “…cannot be charged with failing to admit an irrelevancy”.⁴⁷ Proof by Phoenix of the quantum of its building case against the company was an element of its pleaded claim against Mr McCracken, which Mr McCracken put in issue. Similarly, it is not a ground for declining to order Mr McCracken to pay those costs that Phoenix was obliged to incur them in its case against the company, which was solvent at the time, and which might also have been ordered to pay the costs up to 21 July 2012.

[57] In support of the application for indemnity costs, Mr McCracken argued that Phoenix’s claim to recover from Mr McCracken the entirety of Phoenix’s contractual claim against the company involved “allegations which ought never to have been made or the undue prolongation of a case by groundless contentions …”.⁴⁸ Although I have concluded that Phoenix’s claim should be rejected, it is impossible to regard it as having been without prospects in light of an earlier decision in the Trial Division refusing Mr McCracken’s application to strike-out the statement of claim under r 171 of UCPR, the decision after a trial in favour of Phoenix, and the refusal of a stay of judgment pending appeal in this Court. Where Mr McCracken quite inappropriately and unnecessarily put Phoenix to proof of the quantum of its claim against the company, it is not unjust that he be required to bear both his own and Phoenix’s costs of that exercise.

[58] Mr McCracken’s arguments about the trouble, inconvenience and cost to which he was put in defending the proceedings against him and his ultimate success on appeal, as I would hold, must be understood in that light. His references to Phoenix having brought enforcement proceedings and bankruptcy proceedings, despite knowing of Mr McCracken’s appeal against the judgment, do not bear upon the exercise of the discretion to order costs of the proceedings in the Trial Division. Mr McCracken contended also that Phoenix should be deprived of costs because it failed to comply with the appeal timetable and it unsuccessfully applied to adjourn the appeal. Those matters are also irrelevant to the costs of the proceedings in the Trial Division. If the costs of the appeal were thereby increased, that may be taken into account in the assessment of those costs.

[59] In relation to Mr McCracken’s offer of 26 November 2010, he relied upon r 361 of UCPR . It provides:

“(1)This rule applies if—

(a)the defendant makes an offer to settle that is not accepted by the plaintiff and the plaintiff obtains a judgment that is not more favourable to the plaintiff than the offer to settle; and

(b)the court is satisfied that the defendant was at all material times willing and able to carry out what was proposed in the offer.

(2)Unless a party shows another order for costs is appropriate in the circumstances, the court must—

(a)order the defendant to pay the plaintiff’s costs, calculated on the standard basis, up to and including the day of service of the offer to settle; and

(b)order the plaintiff to pay the defendant’s costs, calculated on the standard basis, after the day of service of the offer to settle.”

[60] In light of the reference to “the standard basis” in r 361(2)(b), Phoenix’s mere failure to accept the offer does not itself justify an order for indemnity costs. For the reasons already given, “another order for costs is appropriate” in relation to the building case issue. Mr McCracken also relied upon an “imprudent refusal”⁴⁹ of the offer. In the absence of any binding authority concerning the effect of s 1324(10), I do not regard Phoenix’s decision to pursue the litigation, rather than accept the offer, as amounting to such imprudence as should preclude costs being ordered according to the results of the separate issues.

[61] Mr McCracken submitted that he should not be ordered to pay Phoenix’s costs of the building case because “Phoenix has already recovered and compromised its costs against the company and now it seeks double recovery of those costs.”⁵⁰ The compromise was a compromise only of Phoenix’s claim for costs against the company. It is not a reason for declining to order Mr McCracken to pay Phoenix’s costs of the building case, although, as Phoenix accepted in its outline of submissions,⁵¹ such costs as it has recovered from the company must be taken into account in the recovery of costs under any costs order against Mr McCracken.

[62] Mr McCracken also contended that the proceedings in the Trial Division were protracted by Phoenix’s “numerous attempts to produce satisfactory pleadings”.⁵² If that is so and if it increased Phoenix’s costs, it might be taken into account in the assessment to the extent that is relevant.

[63] In the result, Phoenix should recover the costs of prosecuting its proceedings against the company and of defending the company’s counterclaim up to 21 July 2010, when the company was placed in external administration. Phoenix should also recover its costs of prosecuting the building case against Mr McCracken, but Phoenix should pay Mr McCracken’s costs on the much narrower issues upon which I hold that Phoenix failed. The costs of the building case must have nearly overwhelmed the costs of the essentially legal issues concerning the proper construction and application of s 1324(10), but also taking into account Mr McCracken’s ultimate success in the litigation I would order that Mr McCracken pay 70 per cent of Phoenix’s costs of the claim against him in the Trial Division.

Proposed orders

[64] The following orders are appropriate:

1. Allow the appeal with costs.

2. Set aside the orders made in the Trial Division on 15 June 2011 and on 13 July 2011.

3. Order instead that:

(a) The plaintiff’s claim against the third defendant is dismissed.

(b)The third defendant pay the plaintiff’s costs, including reserved costs, of prosecuting the proceedings against the first defendant and of defending the first defendant’s counterclaim, up until 21 July 2010.

(c)The third defendant pay 70 per cent of the plaintiff’s costs, including reserved costs, of and incidental to the proceedings against the third defendant.

[65] WHITE JA: I have read the reasons for judgment of Fraser JA with which I respectfully agree. I agree with the orders which his Honour proposes, both as to the disposition of the appeal and the costs orders.

[66] APPLEGARTH J: I have had the advantage of reading the reasons of Fraser JA with which I respectfully agree. I also agree with the orders which his Honour proposes.

Footnotes

1. [2011] QSC 167 at [35]. ↩

2. [2011] QSC 167 at [38]-[39]. ↩

3. [2011] QSC 167 at [44]. ↩

4. [2011] QSC 167 at [52]. ↩

5. [2011] QSC 167 at [48]. ↩

6. [2011] QSC 167 at [44]. ↩

7. [2011] QSC 167 at [61]-[62]. ↩

8. [2011] QSC 167 at [53]. ↩

9. [2011] QSC 167 at [57]. ↩

10. [2011] QSC 167 at [56(c)]. The trial judge cited Spry on Equitable Remedies (8th ed) at 626 and Wentworth v Woollahara Municipal Counsel & Ors (1982) 42 ALR 69 at 73-74. ↩

11. [2011] QSC 167 at [54] and [56(b)], citing authority concerning the right to claim damages in addition to or in lieu of equitable relief under s 62 of the Equity Act of 1867 (“Lord Cairns’ Act”): Barbagallo & Anor v J & F Catelan Pty Ltd & Ors [1996] 1 Qd R 245 at 250-1 and Meagher, Gummow and Lehane’s “Equity Doctrines and Remedies”, 4th ed, at para 2309. ↩

12. (1987) 162 CLR 285. ↩