Re S & D International Pty Ltd (No 4) [2010] VSC 388 (2 September 2010)

Re S & D International Pty Ltd (No 4) [2010] VSC 388 (2 September 2010) - VSC 2010 case summary — Zoe

[163]

S&D International Unit Trust (the Trust) T/tee for

S&D International Pty Ltd (the company)

(ABN 59 903 547 433)

Statement of Assets and Liabilities

I, Sheela Tiwari, of 580 Barkly Street, West Footscray VICTORIA - 3012, Australia do solemnly state that:

1. The Company/Trust documents show that I am the only shareholder of S&D International Unit Trust (the Trust) trustee for S&D International Pty Ltd (the Company)

2. The documents also show that I am the sole director and secretary of the Company.

3 The Company owns and holds properties, businesses and other interests.

4. The properties of the Trust and/or Company include along with commercial interests and properties, residential properties and chattels as well.

5. Despite what the documents show and contrary to the very obvious, the fact is that all assets, shares and other interests held and managed by the Company or the Trust and everything I have personally acquired and own, are owned equally (and jointly), fifty per cent each, between myself and Mr Dinesh Malhotra who currently lives with me at the above address and has been associated with the company in various capacities and with myself and business even before the company was formed.

6. Unless explicitly documented otherwise, any future acquisitions of the Company and/or the Trust and anything I acquire personally or for my children (or household) with finances used from the Trust or the Company directly or indirectly, will be held and owned as equal (and joint) owners as stated in clause 5.

7. There is no other claim or claimant to the above assets. In case of a claim being waged, of any sort, by my children or my own family members (brother(s) or anyone) or my first husband Mr Markandey Tiwari, the litigation will involve and confine only my share of the assets.

8. I will continue to hold in trust anything and everything Mr Dinesh Malhotra entrusts me with, from time to time.

9. The fact of his association with the company implicit, explicit (as part time manager or director) or otherwise and/or even no association at all, does not and never will compromise his right of ownership as stated above.

[181]

[174] Jack Yacoub is Lebanese and it was not suggested that he was related to either of the parties. He is a Certified Practising Accountant and has been the accountant for the business since its inception. He said that Dinesh Malhotra was always the controlling partner. He owned the business for one year after the original three-member partnership and then in 1993 instructed Mr Yacoub that it was to be transferred to Sheela Tiwari, and this was done. However, Mr Yacoub's understanding from then on was that it was a partnership between them. After 1993 Dinesh Malhotra consulted him on many issues, including investment issues and how to improve the business. He never understood Dinesh Malhotra to be an employee of Sheela Tiwari; from 1993 onwards he was always a partner. He never gave the impression of being an employee and always said that he was part owner of the business.

[175] He said that in 1994-5 he advised Dinesh Malhotra to establish a corporate body for taxation reasons and to minimise personal liability. When the purchase of 580 Barkly Street was proposed, he advised that it should be purchased by the company. They agreed to establish a company as trustee for a unit trust. The initial meeting was with Dinesh Malhotra, and later he and Sheela Tiwari attended in Mr Yacoub's office to discuss the matter. They discussed in his presence calling the company S&D International, for the initials of Sheela and Dinesh. He spoke to both of them in English. Sheela Tiwari's English was "reasonably understandable". It was Dinesh Malhotra who was liaising and instructing him.

[176] He said that Dinesh Malhotra decided that the units in the unit trust should be in the name of Sheela Tiwari because the business was in her name, and she should be the sole director of the company. He advised Dinesh Malhotra that he should be an equal shareholder, but Dinesh said that he trusted Sheela and she would not do anything to hurt him. He observed a level of very good and solid trust between them. He continued to believe that they were really partners, and that they were the actual owners of 580 Barkly Street. He had prepared taxation returns for each of them since 1991 and continued to do so and to prepare returns for the company and the unit trust until 2001.

[177] He said that in 2002 Sheela Tiwari came to see him and wanted him to transfer all of the units in the unit trust to Dinesh Malhotra, because she was upset that he was going overseas to be married. She was crying, and explained that there was a relationship between them, which Mr Yacoub had not known before. He said to her that he acted for both of them, and could not transfer 100 per cent of the units, because she was entitled to 50per cent. It was left that they would meet again when Dinesh Malhotra returned from overseas. As a result of this discussion he prepared a transfer of one share in the company to Dinesh, minutes of a directors' meeting appointing him a director and a document intended to transfer 50 per cent of the units in the unit trust to him, and forwarded those documents to Sheela Tiwari.

[178] He said that when the purchase of the Hillside property was discussed he suggested to Dinesh Malhotra that it should be bought in the name of the unit trust.

[179] I have no reason not to accept the evidence of Mr Yacoub.

[390]

Under s 229(2), however, there is no reference to damage suffered by the company, and an offence may notionally be committed under that section without any damage having been sustained. The question is merely whether the defendant director has exercised a reasonable degree of care and diligence in the exercise of his powers in the discharge of his duties. Nevertheless, a criminal offence will not have been committed if an omission to take care did not carry with it a foreseeable risk of harm to the company. No act of commission or omission is capable of constituting a failure to exercise care and diligence under s 229(2) unless at the time thereof it was reasonably foreseeable that harm to the interests of the company might be caused thereby. That is because the duty of a director to exercise a reasonable degree of care and diligence cannot be defined without reference to the nature and extent of the foreseeable risk of harm to the company that would otherwise arise.

Further, the mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. The management and direction of companies involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry and commerce. The legislature undoubtedly did not intend by s 229(2) to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity. Accordingly, the question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.

The proper test to be applied in determining whether directors have exercised a reasonable degree of care and diligence in accordance with the requisite standard is that laid down more than a century ago by Lord Hatherley LC in Overend & Gurney Co v Gibb (1872) LR 5 HL 480 at 486-7 and referred to by Romer J in Re City Equitable Fire Insurance Company at 428, namely whether:

... they (ie the directors) were cognisant of circumstances of such a character, so plain, so manifest, and so simple of appreciation, that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into.

It was put this way by Pidgeon J (with whom Franklyn and Walsh JJ agreed) in ASC v Gallagher (1993) 10 ACSR 43:

The test is basically an objective one in the sense that the question is what an ordinary person with the knowledge and experience of the defendant might be expected to have done in the circumstances if he was acting on his own behalf.

Inherent in this test is the balancing exercise, to which I have referred, involving the risk of harm (on the one hand) and potential benefits (on the other).

[405]

I will try now to summarise what I see as the relevant legal principles that must be brought to bear in deciding these questions:

(1) The test whether directors acted bona fide in the interests of the company as a whole is largely (though by no means entirely) subjective. It is a factual question that focuses on the state of mind of the directors. The question is whether the directors (not the court) consider that the exercise of power is in the best interests of the company.

(2) Similar principles apply in ascertaining the real purpose for which a power has been exercised.

(3) It is the directors who make business decisions and courts have traditionally not pronounced on the commercial justification for those decisions. The courts do not substitute their own views about the commercial merits for the views of the directors on that subject.

(4) Statements by the directors about their subjective intention or belief are relevant but not conclusive of the bona fides of the directors.

(5) In ascertaining the state of mind of the directors the court is entitled to look at the surrounding circumstances and other materials that genuinely throw light upon the directors' state of mind so as to show whether they were honestly acting in discharge of their powers in the interests of the company and the real purpose primarily motivating their actions.

(6) The directors must give real and actual consideration to the interests of the company. The degree of consideration that must be given will depend on the individual circumstances. But the consideration must be more than a mere token: it must actually occur.

(7) The court can look objectively at the surrounding circumstances and at the impugned transaction or exercise of power. But it does so not for the purpose of deciding whether or not the there was commercial justification for the decision. Rather, the objective enquiry is done to assist the court in deciding whether to accept or discount the assertions that the directors make about their subjective intentions and beliefs.

(8) In that event a court may intervene if the decision is such that no reasonable board of directors could think the decision to be in the interests of the company.[292]

At a glance

Court

Decision date

Before

Source

Judgment (669 paragraphs)

Legislation Cited (5)

Cases Cited (24)