R v Byrnes

High Court of Australia|1995-08-23|Before: McHugh JJ, Gaudron JJ

High Court of Australia Brennan, Deane, Toohey, Gaudron and McHugh JJ R v Byrnes [1995] HCA 1

Set aside the order of the South Australian Court of Criminal Appeal quashing the conviction on the count based on s 229(4) of the Companies (South Australia) Code.

Remit the matter to the South Australian Court of Criminal Appeal to be dealt with in accordance with the reasons for judgment of this Court.

Remit the matter to the South Australian Court of Criminal Appeal to be dealt with in accordance with the reasons for judgment of this Court.

Byrnes v The Queen The application for special leave to appeal to this Court is stood over generally.

23 August 1995 Brennan, Deane, Toohey and Gaudron JJ.

Jeffcott Investments Ltd (Jeffcott), a public company listed on the Adelaide Stock Exchange, was in need of cash to repay its borrowings. By early December 1988 it owed the Normandy group of companies about $4.2 million and on 15 December 1988 a loan by Mr and Mrs Douglas-Hill ($2 million plus interest) was to fall due for repayment. Jeffcott's directors, including Mr Byrnes and Dr Hopwood (the present respondents), resolved that Jeffcott should make an issue of $1 convertible notes to its shareholders. If fully subscribed, the issue would raise slightly more than $6 million which could be used to repay these debts. The underwriter to the issue, Jarden Morgan Australia Ltd, required Jeffcott to procure a sub-underwriter for 100 per cent of the issue. This appeal relates to the steps which Byrnes and Hopwood took to satisfy Jarden Morgan's requirements and to ensure the success of the issue of the convertible notes.

The following summary is derived from the findings of fact made by the trial judge and adopted by the Court of Criminal Appeal.

On 30 June 1988, Jeffcott (through a wholly-owned subsidiary) had acquired either directly or through an intermediate company, Ausmintec Ltd, a significant shareholding in Magnacrete Ltd. Byrnes and Hopwood were appointed to the board of Magnacrete in July 1988 and, in September 1988, Byrnes became the chairman of Magnacrete. Both men also became directors of Ausmintec. The Jeffcott investment in Magnacrete and Ausmintec was described by the trial judge as "imprudent and ill-considered".

However, Magnacrete had cash reserves of about $5 million. By early October 1988, Byrnes and Hopwood saw a reverse takeover of Jeffcott by Magnacrete as being "the best way in which they could resolve the financial predicament of Jeffcott". Byrnes discussed the proposal with the other directors of Magnacrete, namely, Messrs Douglas-Hill, Young and Paior. Mr and Mrs Douglas-Hill had been the vendors of the interests in Ausmintec and Magnacrete which Jeffcott acquired and it was in those transactions that Jeffcott had incurred the debt of $2 million plus interest. A Magnacrete takeover of Jeffcott was not attractive unless Jeffcott's debts were paid out of the sum raised by a successful convertible notes issue. The key to the success of the issue was a scheme for sub-underwriting.

In early December 1988, Byrnes devised a sub-underwriting scheme after consulting Mr Stephen Chapman, a director of Baron Partners Ltd, a merchant bank. A company, Vicksburg Pty Ltd, was set up with shares held by Magnacrete - 45 per cent, Baron Fund Managers Ltd ("Baron Managers", a subsidiary of Baron Partners) - 45 per cent, and Mr Chapman - 10 per cent. Vicksburg was to borrow $1.7 million from the Commonwealth Bank and lend the money to Baron Managers. Baron Managers would subscribe for the convertible notes not taken up and assign them to Vicksburg as security for the money lent by Vicksburg. As at 21 November 1988, Jarden Morgan had expected a shortfall in subscriptions for the notes issue of $1.2 million to $1.5 million, an estimate that was later increased to a maximum of $1.6 million. The loan from the Commonwealth Bank to Vicksburg was to be supported by Magnacrete's guarantee and by its depositing with the Bank at interest $2 million of its cash reserves. Magnacrete was to receive a fee of $40,000 from Vicksburg. A condition of Baron Partners' participation in the scheme was that it did not incur any liability on the bank loan to Vicksburg. The scheme was to be contained in an agreement between the Vicksburg shareholders and in an agreement between Vicksburg and Magnacrete that Magnacrete would provide a guarantee and other security to the Commonwealth Bank in respect of the proposed loan to Vicksburg.

On 13 December 1988, the offer of the convertible notes was despatched by Jeffcott to its shareholders. Dr Hopwood's family company owned about 50 per cent of the Jeffcott shares and it borrowed $2.4 million from its banker to subscribe for the convertible notes on the understanding that the reverse takeover of Jeffcott was imminent and that, after the takeover, Magnacrete's cash reserves would be available to redeem the convertible notes. Thus the loan could be repaid. Dr Hopwood's family company subscribed promptly and its prompt subscription allowed Jeffcott to pay $2,111,000 on 16 December 1988 to discharge its liability to Mr and Mrs Douglas-Hill.

On 15 or 16 December 1988, an agreement between Magnacrete and Vicksburg was executed whereby Magnacrete undertook to guarantee the proposed Commonwealth Bank loan of $1.7 million to Vicksburg and Vicksburg undertook to pay Magnacrete a fee of $40,000 for the guarantee. An agreement was also executed between the Vicksburg shareholders relating to the constitution of the Vicksburg board and the conduct of its business. Both agreements were executed under Magnacrete's seal and were signed by one of Byrnes and Hopwood and countersigned by the other as directors. Magnacrete's other directors had no knowledge of these agreements.

The trial judge found that Byrnes and Hopwood could not risk putting the scheme before the Magnacrete board for approval because of the likelihood that Douglas-Hill would challenge the proposal. "Therefore, they decided to take a chance and to execute the Shareholders' Agreement and the Agreement to Guarantee under the common seal of Magnacrete in the hope that what they had done would not come to light before the takeover [that is, the Magnacrete takeover of Jeffcott] was completed, and in the expectation that once the takeover was completed it could be successfully covered up or ratified."

On or about 18 January 1989 Byrnes and Hopwood, without consulting the other directors, affixed the seal of Magnacrete to a deed of guarantee of $2 million to the Commonwealth Bank as security for the loan to Vicksburg. They signed and countersigned the deed as directors of Magnacrete. Similarly, they affixed the Magnacrete seal and countersigned the affixation to an authority to the Bank to deduct from Magnacrete's term deposits any moneys due to the Bank as the result of the loan to Vicksburg. Finally, Byrnes wrote a letter to the bank on behalf of Magnacrete authorising it to purchase some bank bills held by Magnacrete, the proceeds of which were to be lodged as term deposits subject to the authority earlier given. On this security the Bank granted a facility for the borrowing by Vicksburg of $1.7 million.

Towards the end of January 1989 the secretary of Magnacrete discovered the existence of the Vicksburg borrowing facility and notified Douglas-Hill. On 31 January 1989 Douglas-Hill sent a fax to Byrnes requesting "immediate advice, "if any significant transactions, which in the normal course of events would warrant discussion at board level, are contemplated" ". In response Byrnes sent a memorandum dated 3 February 1989 to all directors of Magnacrete. It described Vicksburg as a joint venture between Baron Partners and Magnacrete. The memorandum described the proposal thus:

Baron's contribution to the joint venture will be to identify and make available to Vicksburg opportunities which cross its path, which are suitable for secure, short term gains. Magnacrete's contribution will be to procure overdraft facilities for Vicksburg. We have in mind 1.5 to 2 million dollars in facilities. In return, Magnacrete will be paid a facility fee. As you will see from the proposal, Magnacrete will not provide any money to Vicksburg. Rather it will simply procure that Magnacrete's bankers provide the facility to Vicksburg. The fee is in effect a fee for Magnacrete guaranteeing Vicksburg's overdraft. Obviously Magnacrete continues to earn interest on its monies which are not touched.

The joint venture company will only invest in opportunities specifically agreed to by both Magnacrete and Baron. Thus there will be no investments or commitments made unless both sides agree.

The memorandum sought "formal authority to proceed" from the directors. It did not mention the participation of Vicksburg in the Jeffcott notes issue. The trial judge found that "Byrnes had expressed the memorandum in futuristic terms to hide the fact that Vicksburg was already committed to financing the purchase of the Jeffcott notes".

A meeting of the Magnacrete board was called on 3 February 1989. Hopwood was not present. The minutes of the meeting show that there was no reference to the Jeffcott convertible notes issue. The meeting accepted the proposal for the making of investments by Vicksburg as a joint venture with Baron Managers, but the directors (other than Byrnes and Hopwood) did not know that Vicksburg had already agreed to Baron Managers drawing up to $1.7 million under its agreement with Vicksburg in order to purchase Jeffcott convertible notes. The trial judge found that although the Vicksburg joint venture was "dressed up so as to make it appear that it encompassed general investment opportunities which Baron could generate for Vicksburg, it was only ever intended, and pursued, as a vehicle to provide de facto sub-underwriting for the shortfall in the Jeffcott note issue Such a de facto underwriting, albeit disguised, was its sole purpose, and the only reason for its existence".

The convertible notes issue was partially subscribed by the Jeffcott shareholders. In early February 1989, a shortfall of 2,035,575 notes was taken up by Baron Managers and other minor sub-underwriters. The reverse takeover of Jeffcott by Magnacrete was approved at a shareholders' meeting on 9 March 1989. The takeover was successful but Magnacrete went into liquidation in late 1989.

The trial judge rejected a submission that the whole scheme was a " "scam" as if it was inherently improper". He found:

On the evidence before me, and assuming that there was no breach of s 129 (a company dealing in its own shares) and s 230 (impermissible loans to a company related to a director), there appears to be no reason in law why the Vicksburg joint venture could not have been used to underwrite the convertible note issue of Jeffcott if the boards of Magnacrete and Vicksburg had acted properly in authorising the necessary transactions. He concluded: Thus any improper conduct of the accused must relate to the manner in which the transactions were carried out and not to the nature of the transactions themselves.

Byrnes and Hopwood were charged with an offence under s 229(4) of the Companies (South Australia) Code. Byrnes was also charged on two counts of furnishing misleading information under s 564(1) of the Code. This appeal concerns only the count based on s 229(4). That sub-section provides as follows [11] :

An officer or employee of a corporation shall not make improper use of his position as such an officer or employee, to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to the corporation.

Penalty: $20,000 or imprisonment for five years or both.

The particulars of the offence were as follows: Martin Francis Byrnes and Timothy Paul Hopwood between about the 12th day of December, 1988 and about the 1st day of February, 1989, at Adelaide in the said State, being directors of Magnacrete Limited, ("Magnacrete") made improper use of their positions as directors by (a) executing for Magnacrete a Shareholders Agreement and an Agreement to Guarantee relating to a joint venture between Magnacrete and Baron Fund Managers Limited; (b) executing for Magnacrete a Deed of Guarantee whereby Magnacrete guaranteed to the Commonwealth Bank of Australia, the repayment of a loan made by the said bank to Vicksburg Pty Ltd; (c) authorising the term deposit of $2,000,000 of the funds of Magnacrete with the Commonwealth Bank of Australia to support the guarantee referred to in paragraph (b) herein; to gain an advantage for Jeffcott Investments Ltd. Further particulars were given: The conduct particularised in paragraphs (a), (b) and (c) of Count 1 of the Information ("the conduct") constitutes the use of position as director of Magnacrete Ltd.

(1) the purpose, or the substantial purpose, of the conduct was a purpose other than that of Magnacrete Ltd, namely to enable an issue of Jeffcott Investment Ltd convertible notes to be fully subscribed and thereby cause an advantage to Jeffcott Investments Ltd;

(2) the conduct occurred without the authority of the Board of Directors of Magnacrete Ltd and occurred without the knowledge of the members of the Board of Directors of Magnacrete Ltd, except Martin Francis Byrnes and Timothy Paul Hopwood;

(3) (Each accused) was a director of Jeffcott Investments Ltd and by engaging in the conduct, he put himself in a position where his interest in, and duty to, Jeffcott Investments Ltd and his duty to Magnacrete Ltd were in conflict or potential conflict.

The use of position was improper for each and every one of these reasons (1) to (3) separately and also in any combination of them. Both respondents were convicted on this count after a trial before a judge alone in the District Court. Byrnes was also convicted on the two counts of furnishing misleading information. The respondents appealed to the Court of Criminal Appeal against their respective convictions on a number of grounds. Their appeals against conviction on the count of improper use of position as a director to gain an advantage for Jeffcott succeeded and their convictions on that count were quashed. Special leave to appeal to this Court was granted (Brennan and Dawson JJ, Deane J dissenting) in order to canvass the basis on which the Court of Criminal Appeal quashed the convictions. Byrnes' appeal on one of the counts of furnishing misleading information was allowed but his appeal on the other count was dismissed. 1. Section 229(4) of the Companies Code was superseded on 1 January 1991 by s 232(6) of the Corporations Law which commenced operation on that day. However, s 1317FA of the Corporations Law, which came into effect on 1 February 1993, requires proof of dishonesty or an intention to deceive or defraud for a conviction under s 232(6).

The judgment of the Court of Criminal Appeal (Legoe, Mohr and Bollen JJ) was delivered by Bollen J who accepted, for the purpose of the judgment, the findings made by the trial judge. Although some of those findings were challenged on the appeal to the Court of Criminal Appeal, it was not necessary for his Honour to dispose of that challenge. In his Honour's opinion, the findings made by the trial judge were inconsistent with convictions of the respondents on the first count. Bollen J said:

The learned trial Judge did not ignore intention. But, in my respectful opinion, he reached conclusions about intention which are inimical to conviction. I repeat the important fact that the idea that this was, as the Crown suggested, a total "scam" was rejected by the learned trial Judge. His Honour made these further findings, each vital to the result. His Honour said:

(i) "While accepting that each accused believed that what was done by him was not harming Magnacrete, and was likely to be for its ultimate financial profit, I am satisfied that each accused had significantly breached his fiduciary duty to Magnacrete in executing the documents in question and that in the light of that breach of fiduciary duty the actions of each were sufficiently morally blameworthy when assessed objectively to be properly categorised in law as improper." and

(ii) "I accept that each accused believed that it would be in the financial interests of Magnacrete to enter into the Vicksburg transaction for the purpose of underwriting the Jeffcott note issue because it would receive the $40,000 guarantee fee and 45 per cent of the profit made by Baron Managers on the execution fee on the purchase. They were reinforced in such a belief by at least informal advice from Chapman. However, their belief was undoubtedly coloured by their expectations for Jeffcott to make good its financial position and their determination to succeed in that without giving proper objective consideration to the risks involved in Magnacrete being called upon to honour its guarantee and in the risk of Vicksburg being left with unsecured Jeffcott notes if for other reasons Jeffcott should get into financial difficulties. On the evidence I am not prepared to find that Byrnes and Hopwood were mistaken in this belief that at the time of the transaction it was a good thing for Magnacrete. However, that does not go to the matters which are set out in the preceding paragraph as the bases of the breaches of duty. Magnacrete and Vicksburg were treated very generously in the transaction, and certainly better than the other sub-underwriters, because it would assist Byrnes and Hopwood in justifying their actions if they were ever brought to account. However, that could not cure the breach of duty which existed." I emphasise the italicised sentence.

"The fact that he expected that there would be a subsequent board meeting before the money was taken by Vicksburg from the Commonwealth Bank shows that he did not then believe that there was proper formal approval of the directors for what was being done. Rather he believed that when it was ultimately put before the board Young and Paior were likely to approve it even if Hill opposed it."

That is to say, Hopwood had a belief that a majority of the Board would ratify what had been done.

These findings including, as I repeat, the rejection of the idea of a "total scam" are, in my opinion, inconsistent with criminal intention on the part of either appellant. Intention is, I repeat, relevant. If we return to the first quoted finding above which begins "While accepting ", we see that His Honour has travelled to conclusion by the road of "moral blameworthiness". And he has assessed that objectively. In my opinion, both the use of that road and the assessing of moral blameworthiness (if it has any place here) was erroneous. The question was not whether there has been moral blame but whether, even granting the intention to do the relevant acts, either accused had the relevant mens rea, the relevant criminal intention. The finding that the transaction was not a total "scam", the belief that what was being done would not harm Magnacrete, the possibility that they were not mistaken and the belief on the part of Hopwood in likely ratification, together with the fact that any vice was said to have existed in how something was done and not what was done, all amount to an absence of criminal intent or at least to the reasonable possibility of that absence.

To answer the question now to be determined, it is helpful to identify the salient facts as they were found by the trial judge and adopted as correct by the Court of Criminal Appeal. First, it is clear that neither Byrnes nor Hopwood had the authority of Magnacrete or its board to do any of the acts specified in the particulars of the charge at the times when those acts were done. That is, they had no authority to execute the Vicksburg shareholders' agreement, the agreement by Magnacrete to guarantee the proposed Commonwealth Bank loan to Vicksburg and the deed guaranteeing the repayment to the Commonwealth Bank of its loan to Vicksburg, nor to authorise the making of a term deposit of $2 million of Magnacrete's funds with the Commonwealth Bank. The fact that Hopwood expected that these steps would be ratified confirms the absence of any prior authority. Second, it appears that Byrnes and Hopwood believed that Jeffcott would "make good its financial position" and, on that hypothesis, believed that the transaction "was likely to be for [Magnacrete's] ultimate financial profit". Thus the transaction was not a "scam".

The conclusion reached by the Court of Criminal Appeal purported to be based on, or at least to be consistent with, a passage taken from the majority judgment in this Court in Chew v The Queen [1] :

The accused's state of mind is relevant not only to the requirement of purpose but also to the element of improper use of his or her position. If, for example, an accused person reasonably but mistakenly believed that a particular transaction which he or she authorised was genuinely for the benefit of the corporation, that belief may, in an appropriate case, be material in determining whether the accused person can be held criminally responsible for using his or her position in a manner which would objectively be seen to be improper. With respect, the Court of Criminal Appeal has misunderstood this passage. 1. (1992) 173 CLR 626 at 634.

In Chew, the question was whether the phrase in s 229(4) "to gain an advantage for himself or for any other person or to cause detriment to the corporation" imported a purpose on the part of the offender to effect either of those consequences as an element of the offence. A majority held that it did, saying [2] : "s 229(4) expressly declares purpose to be an element of the offence and purpose, in the context of that sub-section, is the equivalent of a specific intention." So construed, s 229(4) does not require proof that an advantage has in fact been gained by the offender or any other person or that detriment has in fact been caused to the corporation [3] .

Chew (1992) 173 CLR 626 at 633. 2. Chew (1992) 173 CLR 626 at 633.

In ascertaining whether an accused had one or other of the proscribed purposes in mind when he made use of his position, it is relevant to consider his appreciation of the circumstances at the relevant time. His appreciation of the circumstances may be relevant not only to the purpose for which he acted but also to the propriety of the use he made of his position in acting as he did. A vote on a proposal at a board meeting may be entirely proper though the proposal favours a third party, but if the director fails to consider the interests of the corporation and votes for the proposal merely in order to benefit a third party, his state of mind is relevant both to the propriety of his action and to the purpose for which he used his position as a director in voting for the proposal. In other words, impropriety in the use of a position may consist in an abuse of the power or authority which the position confers. If there be an abuse of power for the purpose of gaining an advantage for himself or another person or of causing detriment to the corporation, both elements of the offence are established albeit there is a single act voluntarily committed with a single state of mind. The passage above cited from the majority judgment in Chew points out that a single state of mind with which an act is done might establish both impropriety in the use of position and the proscribed purpose (or intention) with which the position was improperly used.

The Court of Criminal Appeal appears to have understood Chew as holding that, if there be no intent to cause detriment to the corporation, there is no improper use of position. There are two fallacies in that reasoning. The first fallacy flows from a failure to appreciate that "improper use" and purpose (or intention) are different elements of the offence and may be established by evidence of different circumstances. Although evidence of the same mental state may suffice in some cases to establish both elements, it does not follow that the element of improper use cannot be established unless there is evidence of a state of mind that detriment will be caused to the corporation.

The second fallacy is that an absence of purpose to cause detriment to the corporation negates the existence of a purpose to gain an advantage for the alleged offender or another person. In Edwards v The Queen [4] which was decided at the same time as Chew, the difference between the two proscribed purposes was clearly pointed out. Edwards had been convicted of being knowingly concerned in the commission by one Lloyd of an offence against s 229(4). Lloyd's purpose was said to have been to cause detriment to the relevant corporation. In allowing the appeal, Mason CJ, Brennan, Gaudron and McHugh JJ said [5] :

It would have been a different matter had Lloyd been charged under the other limb of s 229(4) with making improper use of his position for the purpose of gaining an advantage for Rothwells or the Bank and had the appellant been charged with being "knowingly concerned" in that offence. In that event, the Crown would have had no difficulty in establishing, on the facts of the present case, a purpose on the part of Lloyd to gain an advantage for Rothwells or the Bank and knowledge on the part of the appellant of that purpose. 1. (1992) 173 CLR 653. 2. Edwards (1992) 173 CLR 653 at 659.

Here, the Court of Criminal Appeal appears to have reasoned that the absence of a purpose to cause detriment to the corporation meant that the respondents ought not to have been convicted. That was erroneous. If the execution of the documents specified in the particulars and the authorising of the deposit of $2 million of Magnacrete's funds with the Commonwealth Bank amounted to improper uses of the respective positions of Byrnes and Hopwood, the purpose of gaining an advantage for Jeffcott - clearly found by the trial judge - meant that the offence was complete even though Byrnes and Hopwood did not intend to cause detriment to Magnacrete and did not expect that such detriment would be caused. That is not to say that the absence of an intent to cause detriment and a belief that the transaction would be to Magnacrete's advantage are irrelevant to the assessment of the gravity of the offence.

"Improper" is an indefinite term, not commonly used in the criminal law. Counsel for Hopwood submitted that "improper use" should be understood to mean a deliberate use of position for a proscribed purpose "without giving any consideration at all to the interests of the company". No doubt such a use of position by a director would be improper: it would be an abuse of the power or authority conferred by the position. But, contrary to counsel's submission, that case does not exhaust the categories of impropriety.

Impropriety in the context of s 229(4) and its statutory antecedents has not been understood to be limited to conscious impropriety on the part of the offender. Thus in Grove v Flavel [6] , Jacobs J said:

The word "improper" is not a term of art. It is to be understood in its commercial context to refer to conduct which is inconsistent with the "proper" discharge of the duties, obligations and responsibilities of the officer concerned. He also said: It seems to me, therefore, that what is "improper" for the purposes of s 124(2) cannot be determined by reference to some common, uniform, or inflexible standard which applies equally to every person who is an officer, but rather must be determined by reference to the particular duties and responsibilities of the particular officer whose conduct is impugned. In Chew [7] , Dawson J said in reference to "improper use" in s 229(4) that "an objective standard must be applied in determining what amounts to impropriety". His Honour added: It is clear enough that a director of a company may act improperly with no intention of acting dishonestly or otherwise than in the best interests of the company as a whole. He gave Whitehouse v Carlton Hotel Pty Ltd [8] as an example. Also in Chew, Toohey J said [9] : The expression is, as the appellant accepted, one to be determined objectively; essentially the issue is whether the conduct impugned is inconsistent with the proper discharge of the duties of the office in question. To resolve that issue it will be necessary to look at all relevant circumstances, including, for instance, the extent of a director's awareness of the financial stability of the corporation [10] . But that does not mean that the test of "improper use" is subjective; it simply indicates the range of considerations that may have to be taken into account. It was unnecessary for the other judgments to expound the meaning of "improper use" [11] but that case has rightly been taken to approve an objective test of impropriety [12] . Impropriety does not depend on an alleged offender's consciousness of impropriety. Impropriety consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case. When impropriety is said to consist in an abuse of power, the state of mind of the alleged offender is important [13] : the alleged offender's knowledge or means of knowledge of the circumstances in which the power is exercised and his purpose or intention in exercising the power are important factors in determining the question whether the power has been abused. But impropriety is not restricted to abuse of power. It may consist in the doing of an act which a director or officer knows or ought to know that he has no authority to do. 1. (1986) 43 SASR 410 at 420. 2. (1992) 173 CLR 626 at 640. 3. (1987) 162 CLR 285. 4. Chew (1992) 173 CLR 626 at 647. 5. See, by way of illustration, Wright v Frisina (1983) 7 ACLR 532; Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722. 6. See Chew (1992) 173 CLR 626 at 634, 636. 7. R v Yuill (1994) 34 NSWLR 179 at 193-194; see also R v Donald; Ex parte Attorney-General (Q) [1993] 2 Qd R 680. 8. Hindle v John Cotton Ltd (1919) 56 SLR 625 at 630-631.

In the present case, the conduct of the respective respondents which was specified in the particulars as an improper use of position consisted in "executing for Magnacrete" three instruments (the Vicksburg shareholders' agreement, the Vicksburg-Magnacrete agreement to guarantee and the Magnacrete guarantee to the Commonwealth Bank) and in "authorising" the term deposit of $2 million with the Commonwealth Bank to support the guarantee. The deposit of $2 million with the Commonwealth Bank was authorised by letter signed by Byrnes. Byrnes and Hopwood authorised the Bank to apply the deposit of $2 million to satisfy Magnacrete's obligations under the guarantee. That authority was contained in a document which they executed in the same manner as they had executed the other three instruments specified in the particulars. Magnacrete's articles of association contained the following:

80(2) The seal shall only be used by authority of the Directors, or of a committee of the Directors authorised by the Directors to authorise the use of the seal, and every document to which the seal is affixed shall be signed by a Director and be countersigned by another Director, a Secretary or another person appointed by the Directors to countersign that document or a class of documents in which that document is included. On their face, the instruments executed by Byrnes and Hopwood under seal appear to have been executed in conformity with art 80. But neither of them had obtained the authority of the directors as a board nor the authority of a committee of the directors to execute any of the four instruments prior to their respective execution.

If, pursuant to the constitution of a corporation and the manner in which its business is conducted, a director has an authority to execute an instrument so as to bind the company but that authority is conditioned on the approval or concurrence of all or some other directors, it is improper to purport to exercise that authority without that approval or concurrence. Where prior authority is required for the execution of an instrument, the person executing the instrument may knowingly fail to obtain the authority for any of a number of reasons: that person may fail to seek the authority or the authority may be given by directors who, to the knowledge of the alleged offender, cannot effectively give the authority required (for example, where their powers are sterilised by a conflict of interests or duties), or where the authority, for some other reason known to the alleged offender, has not been effectively given by the person or persons empowered to give it. In any of these cases, the person executing the instrument, whether a director or officer, is guilty of impropriety. The test of impropriety is not whether the corporation would be bound by the instrument nor whether a third party would be entitled to rely on it [14] . It is the character of the conduct of the director or officer in relation to the internal management of the corporation that is in question.

See Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146.

In the present case, neither Byrnes nor Hopwood sought any approval save their own. Yet art 62(1) of Magnacrete's articles provided:

Subject to the Code and to any other provisions of these Articles, the business of the Company shall be managed by the Directors, who may exercise all such powers of the company as are not, by the Code or by these Articles, required to be exercised by the Company in general meeting. The reference to "the Directors" in that article is clearly a reference to the board of directors acting as such. Even if it could be assumed in favour of Byrnes and Hopwood that, either by express resolution of the board or by the board's concurrence in the ordinary conduct of Magnacrete's business, Byrnes and Hopwood ordinarily had authority to affix and to attest the affixing of the Magnacrete seal, the assumption would be unavailing in this case since it would not extend to circumstances where, as the trial judge here found, the moving purpose [15] of the Vicksburg joint venture was the sub-underwriting of Jeffcott's issue of convertible notes. 1. Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at 293-294.

Each of Byrnes and Hopwood was in a position of conflicting fiduciary duties: they were directors of both Magnacrete and Jeffcott. The interests of those companies did not necessarily coincide. They devised the Vicksburg joint venture and they executed the relevant instruments in order to commit the resources of Magnacrete for the benefit of Jeffcott. Whatever authority Byrnes and Hopwood might otherwise have had to execute instruments under seal so as to bind Magnacrete, it was not an authority to be exercised for the moving purpose of benefiting Jeffcott. A company is entitled to the unbiased and independent judgment of each of its directors [16] . A director of a company who is also a director of another company may owe conflicting fiduciary duties [17] . Being a fiduciary, the director of the first company must not exercise his or her powers for the benefit or gain of the second company without clearly disclosing the second company's interests to the first company and obtaining the first company's consent. Nor, of course, can the director exercise those powers for the director's own benefit or gain without clearly disclosing his or her interest [18] . and obtaining the company's consent [19] . A fiduciary must not exercise an authority or power for the personal benefit or gain of the fiduciary or a third party [20] to whom a fiduciary duty is owed without the beneficiary's consent.

Imperial Mercantile Credit Association v Coleman (1871) LR 6 Ch App 558 at 567-568; Victors Ltd v Lingard [1927] 1 Ch 323 at 330; Richard Brady Franks Ltd v Price (1937) 58 CLR 112 at 137. 2. Ford v Andrews (1916) 21 CLR 317 at 322. 3. Liquidators of Imperial Mercantile Credit Association v Coleman (1873) LR 6 HL 189 at 205-207. 4. Chan v Zacharia (1984) 154 CLR 178 at 198, 204; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 103-104. 5. By "third party", we mean a party whose interests are not coincident with the interests of the fiduciary's beneficiary.

However, the articles of a company may permit - they frequently do permit - a director who is interested in a proposed transaction to take the benefit of the transaction if he discloses his interest to the other members of the board and takes no part in the decision of the board on the transaction. In such a case, the quorum of the board required to deal with the transaction will ordinarily be interpreted as excluding directors whose interests preclude them from voting [21] . If the director makes that disclosure and abstains from taking part in the decision, the validity of the transaction is not impaired. But a director who takes part in a decision to enter into a transaction in which the director or a third party in whom the director has an interest or to whom the director owes a fiduciary duty stands to gain an advantage or benefit but who does not make an adequate disclosure of his interest acts improperly.

A M Spicer & Son Pty Ltd (In liq) v Spicer (1931) 47 CLR 151 at 186-187; Richard Brady Franks Ltd v Price (1937) 58 CLR 112 at 140.

The respondents in this case failed to disclose their interests in Jeffcott which stood principally to gain the benefit of the Vicksburg joint venture. Nor did Byrnes abstain from voting at the board meeting on 3 February. However, that was not a particular of the offence charged. Both Byrnes and Hopwood exercised their powers as directors with respect to the affixing of the Magnacrete seal to the instruments specified in the particulars and they attested its affixation as directors without having any authority to do so. Even if their actions in executing the instruments could have been authorised by a resolution passed by the other members of the board of Magnacrete, they did not seek such authorisation. To the contrary, they sought to conceal the true nature of the Vicksburg joint venture from the other members of the board until the subscription to the Jeffcott issue of convertible notes had been made. When the Commonwealth Bank loan to Vicksburg became known and a meeting of directors was held on 3 February 1989, the approval then given to the loan to Vicksburg was obtained by concealing the purpose of the transaction. That was not an approval on which either Byrnes or Hopwood could rely as ratification of their antecedent conduct in executing the Magnacrete instruments for implementing the scheme for the sub-underwriting of the Jeffcott issue of convertible notes. Byrnes' letter to the Bank authorising the placing of $2 million on deposit was also unauthorised by Magnacrete. The moving purpose of the letter was the advancement of the Vicksburg joint venture - a venture which neither Byrnes nor Hopwood was authorised to advance by use of Magnacrete's assets.

The execution of those instruments was improper, and it was done for the purpose of gaining an advantage for Jeffcott. The elements of the offence created by s 229(4) were thus established by the findings of the trial judge on which the judgment of the Court of Criminal Appeal was based. The appeal must be allowed.

However, it does not follow that the conviction must be restored. Both Byrnes and Hopwood, by the grounds attached to their respective applications for leave to appeal to the Court of Criminal Appeal against their convictions, challenged findings of fact made by the trial judge. The challenge related not only to the conviction of the respondents on the first count but also to the conviction of Byrnes on that count of furnishing misleading information for which his conviction still stands. As the Court of Criminal Appeal allowed the appeals of both respondents against their convictions on the first count (offences against s 229(4) of the Companies Code) without determining the challenges to the findings of fact, the allowing of the appeal to this Court must result in a remittal to the Court of Criminal Appeal of the appeal to it against convictions on the first count. That Court must determine whether the material facts found by the trial judge and hitherto adopted by the Court of Criminal Appeal were correctly found. Following on that determination, the Court of Criminal Appeal must decide whether on the facts as that Court determines them to be, the principles expressed in the reasons for judgment of this Court require the convictions to be quashed or affirmed.

If, in the light of these reasons for judgment and the order now made, the parties are in agreement that the matter of the conviction of Byrnes on the remaining count of furnishing misleading information should also be remitted to the Court of Criminal Appeal for the purpose of determining the challenge to the trial judge's findings of fact, an appropriate consent order can be filed and will be made by this Court. Otherwise, Byrnes' application for special leave to appeal in that matter must be listed for further argument.

The question in this appeal is whether the Full Court of the Supreme Court of South Australia erred in setting aside convictions of the respondents for breaches of s 229(4) of the Companies (South Australia) Code. That sub-section provides:

The Full Court held that the respondents had not made improper use of their positions as directors of a corporation because of "an absence of criminal intent". In my opinion, the Court erred in setting aside the convictions on this ground, and the appeal must be allowed.

The charge against the respondents was heard without a jury by Judge Lunn in the District Court of South Australia. The charge alleged that they had made improper use of their positions as directors of Magnacrete Ltd (Magnacrete) by executing two documents and authorising a term deposit of $2 million of funds of Magnacrete for the purpose of gaining an advantage for Jeffcott Investments Ltd (Jeffcott), a company of which they were also directors. The prosecution alleged that the purpose, or the substantial purpose, of their conduct in executing the documents and authorising the term deposit was not a purpose, or substantial purpose, of Magnacrete. The purpose of their conduct was identified by the trial judge as maximising the chance that an issue of Jeffcott convertible notes would be fully subscribed. The prosecution also alleged that the respondents engaged in the conduct without the authority of the board of directors of Magnacrete and without the knowledge of the members of that board, except the respondents. The particulars of the charge alleged that each respondent had put himself in a position where his interest and duty to Jeffcott and his duty to Magnacrete were in conflict or potential conflict.

One of the respondents was also charged with two offences of furnishing misleading information under s 564(1) of the Code. But those charges are not relevant in this appeal.

The learned trial judge found that each respondent made use of his position "for the purpose of gaining directly or indirectly an advantage for Jeffcott". His Honour also found that the execution of the documents was an integral and essential part of a wider scheme, the purpose of which was to give an advantage, directly or indirectly, to Jeffcott. The judge held that each respondent intended that the result of the use of his position would be for the advantage of Jeffcott. However, Judge Lunn rejected the prosecution's submission that the whole scheme was a scam. He made the following findings:

Each respondent was in a situation of conflict of interest. Each actively promoted the interests of Jeffcott against the interests of Magnacrete which he had a duty to protect. Each respondent was well aware of the situation of conflict. His clear duty was to allow the remainder of the Board of Magnacrete - which was independent of Jeffcott - to make the decision whether it was in the best interests of Magnacrete to enter into the transactions in the circumstances.

The purpose of each respondent was to maximise the chance that Jeffcott would obtain the finance that it needed through the convertible note issue.

Under the articles of Magnacrete, the respondents "had no right to act unilaterally and independently of the Board as a whole as they did".

The other Board members had the right to know what each respondent was doing in the name of Magnacrete. But the respondents deliberately did not inform them of what they were doing.

His Honour said that, while he accepted "that each accused believed that what was done by him was not harming Magnacrete, and was likely to be for its ultimate financial profit each [respondent] had significantly breached his fiduciary duty to Magnacrete in executing the documents in question and that in the light of that breach of fiduciary duty the actions of each were sufficiently morally blameworthy when assessed objectively to be properly categorised in law as improper".

His Honour held that the mere fact that a director reasonably but mistakenly believed that a particular transaction was for the benefit of the company did not necessarily mean that his conduct was not improper. It was only a matter to be taken into account in an appropriate case. He said that he accepted that each accused believed that it would be in the financial interests of Magnacrete to enter into the transactions for the purpose of underwriting the Jeffcott note issue. He also said that on the evidence he was "not prepared to find that Byrnes and Hopwood were mistaken in this belief that at the time of the transaction it was a good thing for Magnacrete". His Honour said, however, that that did not affect the respondents' breaches of duty. Accordingly, his Honour found the charge against each of them had been proved.

The Full Court set aside the convictions. Bollen J, who gave the leading judgment, said that the trial judge did not ignore intention but that he had reached conclusions about intention which were "inimical to conviction".

Bollen J held that the following findings of the trial judge meant that the appellants were not guilty of the "improper use" of their position:

Each respondent believed that what was done by him was not harming Magnacrete and was likely to be for its ultimate profit.

Each respondent believed that it would be in the financial interest of Magnacrete to enter into the transaction for the purpose of underwriting the Jeffcott note issue.

Judge Lunn was not prepared to find that the appellants "were mistaken in this belief that at the time of the transaction it was a good thing for Magnacrete".

The question was not whether there had been moral blame but whether, even granting the intention to do the relevant acts, either accused had the relevant mens rea, the relevant criminal intention. The finding that the transaction was not a total "scam", the belief that what was being done would not harm Magnacrete, the possibility that they were not mistaken and the belief on the part of Hopwood in likely ratification, together with the fact that any vice was said to have existed in how something was done and not what was done, all amount to an absence of criminal intent or at least to the reasonable possibility of that absence.

I do not think that either appellant should have been found guilty of an offence against s 229(4).

In its context, this passage suggests that Bollen J thought that it is a condition of liability under s 229(4) that the accused intended to cause detriment to the corporation or believed that what he or she was doing was improper. However, such an intent or belief is not a condition of liability under the sub-section. The essential elements of the offence are an improper use of position by an officer or employee of a corporation and a purpose of obtaining gain or causing detriment. In Chew v The Queen [22] , counsel for the accused accepted, correctly in my view, that the question whether the use of a position was improper was an objective one [23] . In my opinion, it will be improper if the officer or employee uses his or her position in a way that is inconsistent with the discharge of the duties arising from that office or employment. In Grove v Flavel [24] , Jacobs J pointed out that what was improper had to be "determined by reference to the particular duties and responsibilities of the particular officer whose conduct is impugned".

(1992) 173 CLR 626. 2. In R v Yuill (1994) 34 NSWLR 179 at 193-194, the New South Wales Court of Criminal Appeal accepted that Chew was decided on the basis that the test of "improper use" is an objective one. 3. (1986) 43 SASR 410 at 416-417.

In determining whether the use of a position is improper, the mental state of the officer or employee is often relevant because the propriety of the use often depends on the purpose for which the office or employment is used. Many uses of an office or employment will be proper if done for one purpose and improper if done for another purpose. Purpose is as relevant on the issue of improper use as it is on the issue whether the use of the position was made to secure a gain or cause a detriment [25] . However, the use of an office or employment can be improper even though it is for the purpose or with the intention of benefiting the company. As Dawson J said in Chew [26] :

It is clear enough that a director of a company may act improperly with no intention of acting dishonestly or otherwise than in the best interests of the company as a whole. His Honour gave Whitehouse v Carlton Hotel Pty Ltd [27] as an example. There the governing director of a company thought that an allotment of shares was in the best interests of the company. However, the allotment was improper because it was made for the impermissible purpose of defeating the voting power of the existing shareholders. 1. Chew (1992) 173 CLR 626 at 634. 2. (1992) 173 CLR 626 at 640. 3. (1987) 162 CLR 285.

It will often be difficult to determine whether or not a particular use of a position is improper. But, in my opinion, officers or employees who act in breach of their fiduciary duties to secure a gain for themselves or others or to cause detriment to the corporation always make improper use of their position unless they are honestly and reasonably mistaken as to the facts which give rise to the duties or their breach. In the absence of a mistake of that kind, it is difficult to see how officers or employees who use their positions in breach of fiduciary duty to secure such a gain or cause such a detriment can escape a finding of improper use of their position. Certainly, they cannot escape a finding of improper use of position merely because they believed that what they were doing was in the interests of the corporation. Nor can they escape that finding by claiming that they believed that the breach of fiduciary duty would be ratified any more than a clerk can escape a finding of embezzlement by claiming that he or she thought the employer would ratify the unlawful takings.

In the present case, the respondents put the property of the company at risk by executing the documents and placing the sum of $2 million on term deposit. They did this to advance the conflicting interests of Jeffcott of which they were directors and shareholders, and they did it without authority and without the knowledge of their fellow directors at Magnacrete. They were well aware of their conflict of duty. Yet each of them actively promoted the interests of Jeffcott against the interests of Magnacrete. Moreover, they deliberately refrained from informing the other board members of what they were doing in the name of Magnacrete. In doing these things, they were acting in breach of the fiduciary duties that they owed to Magnacrete in order to secure a gain for a company in which they had substantial interests. Given the findings of the learned trial judge, his conclusion that the respondents made improper use of their positions as directors of Magnacrete was inevitable.

The Full Court erred in thinking that the respondents' beliefs that the transactions were not contrary to the interests of the company prevented their conduct from being improper. In Chew [28] , Mason CJ, Brennan J, Gaudron J and I expressly said "that conduct could amount to improper use of that position even if the person concerned believed it to be in the interests of the company". The Full Court's finding that the respondents had not made improper use of their positions as directors appears to be the result of a misunderstanding of another passage that occurs in the joint judgment of Mason CJ, Brennan J, Gaudron J and myself in Chew [29] . In that passage we said:

The accused's state of mind is relevant not only to the requirement of purpose but also to the element of improper use of his or her position. If, for example, an accused person reasonably but mistakenly believed that a particular transaction which he or she authorised was genuinely for the benefit of the corporation, that belief may, in an appropriate case, be material in determining whether the accused person can be held criminally responsible for using his or her position in a manner which would objectively be seen to be improper. 1. (1992) 173 CLR 626 at 634. 2. (1992) 173 CLR 626 at 634.

However, this passage was intended to do no more than indicate that in some cases entry into a transaction that might appear objectively to be an improper use of position will not be an improper use if the director or employee was acting to benefit the company but made an honest and reasonable mistake as to what would be the commercial effect of the transaction. An example is a case where the directors of a public company enter into a fixed term contract to purchase goods from one of their number at prices that are well in excess of the current market value of such goods. Objectively, making such a contract appears to be an improper use of the directors' powers for the benefit of one of the directors. If it were established, however, that the directors had entered into the contract only because of the mistaken but honest and reasonable belief that the contract was necessary to ensure the supply of such goods to the business, a finding that they had made improper use of their position probably could not be sustained.

The passage from Chew has no relevance in the present case where the respondents, in breach of their fiduciary duties, intended to benefit Jeffcott. The fact the respondents also believed that the transaction was for the benefit of Magnacrete, had no intent to harm that company and no belief in the impropriety of their actions could not convert what was done without authority, for an improper object, and in breach of fiduciary duty into a proper use of their position. This is not a case where there was an honest and reasonable but mistaken belief as to the commercial effect of a transaction entered into solely for the benefit of the company. Here the learned trial judge found that the respondents actively promoted the interests of Jeffcott against the interests of Magnacrete and that their purpose in entering into the scheme was to maximise the chance that Jeffcott would obtain the finance that it needed.

The appeal should be allowed. I agree that the outstanding grounds of appeal and the special leave application of Byrnes should be dealt with in accordance with the judgment of Brennan, Deane, Toohey and Gaudron JJ.

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Judgment (96 paragraphs)

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Cases Cited (12)