Saffron Sun Pty Limited v Perma-Fit Finance Pty Ltd

Corporations Act 2001 s197(1) Fisher & Lightfoot Law of Mortgage 2nd Australian Ed 2005, at paragraph 42.19 Sheldon: Law of Subrogation 2nd ed 1892 Meagher Gummow and Lehane: Equity Doctrines and Remedies 4th ed at 9-005 LEGISLATION CITED : Usury Bills of Lading and Written Memoranda Act 1902 Local Government Act 1993 s550 Water Management Act 2000 Water Management Act s355

Aetna Life Insurance Co v Middleport 124 US 534 (1887) Armentrout v Gibbons 30 Gratt. (Va.) 632 Challenger Managed Investment Limited v Direct Money Corporation Pty Limited in (2003) 12 BPR 22257 Corbally v Hughes 59 Ga 493 In re Kirkland 14 NBR 139 Hays v Dalton, 5 Lea (Tenn.) 555 Cheltenham & Gloucester plc v Appleyard (2004) EWCA Civ 291 Flureau v Thornhill [1776] 2 WmB 1078; 96 ER 635 CASES CITED : In Re Daniel; Daniel v Vassall [1917] 2 Ch 405 Groongal Pastoral Company Limited v Falkiner (1924) 35 CLR 157 In re Airedale Co-operative Worsted Manufacturing Society Limited [1933] 1 Ch 639; In Re Wrexham, Mold and Connah's Quay Railway Company [1899] 1 Ch 440 D & J Fowler (Aust) Ltd v Bank of NSW [1982] 2 NSWLR 879 Hanel v O'Neill [2003] 180 FLR 360 Intagro Projects Pty Limited v Australian and New Zealand Banking Group Limited [2004] 50 ACSR 224. Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 Edwards v The Attorney General (2004) 60 NSWLR 667

Saffron Sun Pty Limited (Plaintiff) Perma-Fit Finance Pty Limited (in liquidation) (First Defendant) PARTIES : Linda Christine Bower (Second Defendant)

Mr G P McNally (Plaintiff) No Appearance (First Defendant) COUNSEL : Mr B Debuse (Second Defendant)

Norman Waterhouse (Plaintiff) SOLICITORS : No Appearance (First Defendant) Tregenza Forbes & Associates (Second Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4913/03 SAFFRON SUN PTY LIMITED v PERMA-FIT FINANCE PTY LIMITED (in liquidation) & ORS JUDGMENT 1 This case raises interesting questions on subrogation and s197(1) of the Corporations Act 2001 . Is a purchaser of land who pays more than the purchase price in order to obtain discharge a security over that land subrogated to the rights of the discharging mortgagee?; if this would ordinarily be the case, is there any right of subrogation where a release of land, but not a full discharge at least on its wording, is obtained?; do rights obtained by subrogation extend to statutory rights against persons other than the debtor or guarantors of the mortgage debt?; and does s197(1) of the Corporations Act apply to a case where the trust deed gives a right of full indemnity to a corporate trustee borrower, but full indemnity is, in fact, not possible through deficiency of assets? 2 If this were a case without appellate decision I would answer the final question "No" and that would the end to the matter. Had that been the only question it might have been possible to transfer the matter immediately to the Court of Appeal for determination, but this was not possible as the other issues required determination in the event the Court of Appeal decided in favour of the plaintiff on the s197 issue. Basic Facts 3 The plaintiff, Saffron Sun Pty Limited (Saffron Sun) agreed to purchase property 286 Main Road, Toukley (the property) from Perma-Fit Finance Pty Limited (Perma-Fit), the defendant for $270,000 under contract of sale dated 6 June 2002. At that date the property was mortgaged to the National Australia Bank under registered mortgage. Linda Christine Bower (Bower), the second defendant, was a director of Perma-Fit. The contract was not completed. An order for specific performance was made on 12 November 2003, which could not be carried into effect as the amount owing to the National Australia Bank secured on the property was more than the sale price and Perma-Fit had no other assets. Perma-Fit was the trustee of a trust and held the property as one of the trust assets. When the order for specific performance was made, the question of damages was stood over for some further determination if necessary. The contract was completed on 25 June 2004 by payment by Saffron Sun of the full amount claimed by the bank, namely $336,641.85. On 5 July 2004 orders were made to join the second and third defendants as defendants and for the matter to proceed on pleadings. Thus while the plaintiff's damages claim against the vendor remained on foot, the effect of the leave was to enable an entirely new claim to be brought against the second and third defendants, the directors of Perma-Fit at the relevant times. These new claims were for the difference between the purchase price and the amount paid on settlement, together with the amount of outstanding rates on the property at settlement of $14,860.73. The claims were pleaded, first as a claimed right of subrogation aided by s197(1) of the Corporations Act and second as a claim for damages for breach of contract by the vendor Perma-Fit, again aided by s197(1) of the Corporations Act . 4 There was put into evidence an agreed statement of facts which became exhibit "D" in the proceedings. Those agreed facts are as follows: SAFFRON SUN PTY LIMITED -V- PERMA-FIT FINANCE PTY LTD and BOWER STATEMENT OF AGREED FACTS

Perma-Fit Finance Pty Limited was incorporated on 23 April 1997.

Linda Christine Bower appointed a director of Perma-Fit Finance Pty Limited on 23 April 1997.

On 16 December 1997, Perma-Fit Finance Pty Limited was appointed as trustee of the Harrison No.2 Family Trust ("the Trust").

On 31 August 1999, an "all monies" mortgage was entered into between National Australia Bank Limited and Perma-Fit Finance Pty Limited as trustee of the Trust and secured by the property 286 Main Road, Toukley ("the Property").

On 6 June 2002, the Plaintiff agreed to purchase and Perma-Fit Finance Pty Limited agreed to sell as trustee of the Trust, the Property for $270,000.00.

On 21 May 2003, the Plaintiff served a Notice to Complete in respect of the Property.

On 18 June 2003, Perma-Fit Finance Pty Limited was removed as trustee of the Harrison No.2 Family Trust.

On 18 June 2003, Afrotak Pty Limited was appointed as trustee of the Harrison No.2 Family Trust.

On 18 June 2003, a voluntary administrator was appointed to Afrotak Pty Limited.

On 7 October 2003, a voluntary administrator was appointed to Perma-Fit Finance Pty Limited.

On 25 November 2003, the Plaintiff obtained a specific performance order in relation to its purchase of the Property.

On 23 December 2003, a liquidator was appointed to Perma-Fit Finance Pty Limited. 13. On 23 December 2003, a liquidator was appointed to Afrotak Pty Limited.

On 15 April 2004 Benloz Pty Limited lodged a Caveat on the Property's title.

On 11 June 2004, Supreme Court ordered the withdrawal of Caveat placed on the Property's title by Benloz Pty Limited.

On 25 June 2004, the sale of property was completed.

On completion of the sale of the Property, the Plaintiff paid the amount of $336,641.85 to National Australia Bank.

The payment of $336,641.85 by the Plaintiff on settlement of the sale of the Property discharged the following liabilities of Perma-Fit Finance Pty Limited incurred as trustee of the Trust: · Account no. 082-847 46 650 in the amount of $47,969.00 · Account no, 082-847 649 9253 in the amount of $208,095.00 · Lease account no. 46 949 2540 in the amount of $59,154.54

As at 25 June 2003, Perma-Fit finance Pty Limited was in indebted to Wyong Shire Council in the sum on $14,860.73 in respect of rates and charges relating to the Property, which was a statutory charge on the Property.

The Plaintiff has paid all outstanding rates and charges to Wyong Shire council in the sum of $14,860.73.

At all material times, the only asset of the Trust was the Property. 5 There is also agreement as to amounts owing at 7 October 2003, being the date of appointment of the administrator to Perma-Fit, on the three accounts set out in paragraph 18 of the agreed facts, and as to the rates due under paragraph 20. The total of the three amounts in paragraph 18 is $315,218.54. The additional amount of $21,423.31 to make up the $336,641.85 paid on settlement was in respect of costs claimed to be incurred by the mortgagee and an amount claimed to be due to the mortgagee bank under a guarantee. 6 The claim against the third defendant has been dismissed. I was told that he was bankrupt. It is not admitted, but I think it is clear from the administrator's report to creditors of Perma-Fit that the company has no assets itself as legal owner. The only trust asset was the property. Claims 7 The claim against the second defendant is based wholly upon the claimed right of the plaintiff under s197(1) of the Corporations Act which provided at the relevant time:

197 Directors liable for debts and other obligations incurred by corporation as trustee

(1) A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation: (a) has not, and cannot, discharge the liability or that part of it; and (b) is not entitled to be fully indemnified against the liability out of trust assets. This is so even if the trust does not have enough assets to indemnify the trustee. The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection. 8 The claim of the plaintiff is put in two ways. The first claim is a contract claim. The second claim is based on subrogation. I deal first with the contract claim. Clause 14 of the contract for sale of the property provides for adjustment of rates to be made on completion. Clause 16.3 provides " normally , on completion the vendor must cause the legal title to the property to pass to the purchaser free of any mortgage or interest …". These obligations are said to give rise to "liabilities" within s197(1). 9 The plaintiff says the rates were not adjusted but should have been. More importantly, it says that the vendor could not transfer free of mortgage as the purchase moneys were not sufficient to pay out the bank; that there were no other moneys available; that the vendor was thus in breach of the contract; that to obtain the benefit of the contract it was obliged to pay an additional amount of $66,641.85 and the outstanding rates not adjusted and that because Perma-Fit cannot pay Saffron Sun can claim that amount from the second defendant under s197(1). 10 This claim can, I think, be dealt with quite quickly. The rights of the purchaser under the contract were to seek specific performance or to bring the contract to an end and claim damages for breach or, in the present case, to seek damages in addition to specific performance as the vendor could not comply with the order for performance. As leave was given to file an amended statement of claim it is not necessary to go into the procedural requirements to enable damages to be claimed after an order for specific performance. Damages in such case for breach of contract for the sale of land are not the amount a purchaser pays to discharge liabilities on the property purchased under the contract. Indeed, unless there has been some fraudulent or other improper behaviour of the vendor, in a case where the vendor is unable to show a good title, damages will be restricted to recovery of costs of investigating the title and interest on the deposit. Flureau v Thornhill [1776] 2 WmB 1078; 96 ER 635. Where there is an inability to convey as opposed to inability to show a good title the damages may be more extensive: In Re Daniel; Daniel v Vassall [1917] 2 Ch 405, and may extend to any difference between the value of the property to an ordinary purchaser and its purchase price, in which case the costs of investigating title will not be allowed. But if the purchaser chooses to expend more on acquiring the property than the price he has contracted to pay that is a matter for him; that figure does not establish the value of the property. There is no evidence of the value of the property at contract date or settlement date. In these circumstances it is not necessary to consider whether the obligations of the vendor under the contract were a liability under s197 of the Corporations Act . However, if it were I do not consider the damages would fall within the section. 11 So far as the rates claim is concerned it is necessary to determine whether a contractual provision requiring adjustment of rates on completion gives a right to a s197(1) claim without subrogation. While the rights under this provision do not merge on completion I consider the liability upon which the section operates is a liability for rates not an obligation to adjust. The contractual claim fails. The subrogation claim 12 This is not a case where a person on paying out a secured creditor of "A" is entitled to be subrogated to the security of that creditor. A legal owner of land cannot hold a mortgage over that land. However, subrogation is not limited to proprietary rights; most mortgages create proprietary and personal rights and a person with an interest in paying out the mortgage is, if entitled to subrogation, entitled to both rights. 13 Australian law does not embrace all of the thirteen point summary of subrogation enunciated by Neuberger LJ in Cheltenham & Gloucester plc v Appleyard (2004) EWCA Civ 291 and in particular does not embrace the acceptance there that equitable subrogation is a remedy to reverse unjust enrichment: See report of Challenger Managed Investment Limited v Direct Money Corporation Pty Limited in (2003) 12 BPR 22257 at 22269 and see the discussion in Fisher & Lightfoot Law of Mortgage 2nd Australian Ed 2005, at paragraph 42.19. In any event even if unjust enrichment on its own without attachment to a particular circumstance were sufficient to found the right, a company in liquidation which has no assets other than the sole asset it holds as trustee, namely the property sold for $270,000 over which there are secured creditors well in excess of that figure and which company has unsecured creditors of about $637,000, cannot really be said to be enriched by payment out of the first mortgagee. The first mortgagee was enriched; no other creditor secured or unsecured got any benefit from the payment and neither did the company. 14 The plaintiff's claim as articulated is based on certain paragraphs in the United States text Sheldon: Law of Subrogation 2nd ed 1892 as follows: s 1 Definition of subrogation --- … It is broad enough to include every instance in which one party pays a debt for which another is primarily answerable, and which, in equity and good conscience, should have been discharged by the latter; but it is not to be applied in favour of one who has, officiously and as a mere volunteer, paid the debt of another, for which neither he nor his property was answerable, and it is not allowed where it would work any injustice to the rights of others.

s 2 Definition in the Civil Law --- In the civil law, the definitions of which have in the main been followed by our courts, subrogation has been defined as that change by which another person is put into the place of a creditor, so that the rights and securities of the creditor pass to the person who, by being subrogated to him, enters into his right. It is a legal fiction, by force of which an obligation extinguished by a payment made by a third person is treated as still subsisting for the benefit of this third person, who is thus substituted to the rights, remedies, and securities of another. The party who is subrogated is regarded as entitled to the same rights, and indeed as constituting one and the same person with the creditor whom he succeeds. It takes place for the benefit of a person who, being himself a creditor, pays another creditor whose debt is preferred to his by reason of privilege or mortgages, being obliged to make the payment, either as standing in the situation of a surety, or that he may remove a prior incumbrance from the property on which he relies to secure his payment.

s 3 Who will be subrogated --- Subrogation, as a matter of right, independently of agreement, takes place for the benefit of insurers; of one who, being himself a creditor, has satisfied the lien of a prior creditor; or a purchaser who has extinguished an incumbrance upon the estate which he has purchased; of a co-obligor or surety who has paid the debt which ought, in whole or in part, to have been met by another … and there will be no subrogation unless the payment was made either under compulsion or for the protection of some interest of the party making the payment, and in discharge or an existing liability.

As is pointed out in Meagher Gummow and Lehane: Equity Doctrines and Remedies 4th ed at 9-005 this formulation was approved in Aetna Life Insurance Co v Middleport 124 US 534 (1887) and although the textbook does not necessarily approve that passage it does not appear to cast any doubt upon the categories of factual circumstances where subrogation is available. That circumstance relevant to the present action is subrogation being available for the benefit of a purchaser who has extinguished an encumbrance on the estate purchased. While none of the English and Australian authorities and texts I have been able to find refer to this category, the first and second editions of Sheldon note a number of cases where the right of subrogation has been applied in such circumstances, namely In re Kirkland 14 NBR 139; Corbally v Hughes 59 Ga 493; Armentrout v Gibbons 30 Gratt. (Va.) 632; Hays v Dalton , 5 Lea (Tenn.) 555. Generally speaking these are cases where a purchaser of land which has been taken in execution pays off the execution creditor and is held entitled to set off the amount so paid against the purchase price of the land, which has the same effect as being subrogated to the rights of the execution creditor. However In re Kirkland was a case where a purchaser of goods in bond, paid the whole of the purchase price on the undertaking of the vendor to pay the duties due to the Government of the United States. The vendor failed to pay the full amount, and the purchasers paid to the United States government the balance due to obtain the goods. The purchaser making the payment of the duty was held subrogated to the priority of the United States in the bankruptcy of the vendor. This was not a set off against moneys remaining payable but subrogation as a result of a payment over and above the purchase price is to the same effect. 15 After consideration I have come to the view that this line of authority should be followed and the fact that a person claiming subrogation has paid more to obtain discharge of a security over the land he has purchased than the purchase price payable for that land should not prevent that purchaser from being subrogated to the rights of the original creditor. That is because as a matter of contract the vendor was bound to deliver an unencumbered title and was at the same time indebted to the mortgagee over the property for an amount greater than the purchase price. The purchaser paying out the security was not an interfering busybody nor a volunteer but a person with the proper interest in obtaining a discharge. 16 It would of course be necessary for the purchaser claiming subrogation to deduct from the amount paid to discharge the security, the amount payable to the vendor as balance purchase money under the contract. Bank discharge 17 It is next necessary to consider the form of discharge given by the National Australia Bank on settlement. The discharge is in evidence and is in the form which has been used by major trading banks for many years. The relevant wording after setting out the names of the mortgagee and mortgagor and the land being the title to the property and the mortgage discharged is as follows: "The mortgagee discharges the mortgage referred to above so far as it effects the land specified above, but this discharge does not affect the mortgagee's rights and remedies against the mortgagor or any other person personally or against any body which remains subject to that mortgage".

It was, I think, the decision in Groongal Pastoral Company Limited v Falkiner (1924) 35 CLR 157 which brought about that particular wording. 18 In the correspondence between the solicitors for the National Australia Bank and the solicitors for Perma-Fit it was stated on a number of occasions the bank was prepared to discharge its mortgage insofar as it related to the land if it received a bank cheque for a particular amount. The amount naturally varied as time went past. The evidence does not establish that Saffron Sun knew of that correspondence but of course it saw the form of discharge taken on settlement. 19 The mortgage to the National Australia Bank was an all moneys mortgage. It might be possible to conclude from the correspondence that the bank obtained on discharge, payment of all amounts which it could find due to it. There is no evidence that there were no other amounts. But on its wording and assuming that there can be subrogation to a partial right, all that Saffron Sun was entitled to be subrogated to was the right of National Australia Bank against the security which it purchased. If that is the position that does not assist the claim here as the claim was not for a proprietary right but for subrogation to a personal right. For this reason it is not necessary to add to the discussion as to whether subrogation is available of a proportionate part of security. See Fisher and Lightfoot para 42.18 and Meagher Gummow and Lehane para 9-065. Subrogation does extend to personal rights: In re Airedale Co-operative Worsted Manufacturing Society Limited [1933] 1 Ch 639; In Re Wrexham, Mold and Connah's Quay Railway Company [1899] 1 Ch 440. 20 While the discharge document on its face might lead one to the conclusion it was not a full discharge, I consider the facts lead to another. It is obvious this was the bank's last chance to obtain payment. Once it lost its security its personal rights were of no value except perhaps its rights under s197. The bank, even if it proved for some additional amount, which I was told it had not, would have got no dividend. There is no point in a mortgagee retaining personal rights to recover some amount which may become due in the future under an all moneys clause where the mortgagor company is in liquidation. The amount paid covered all moneys the bank knew could be claimed. It should be treated as a full discharge so as to bring about an entitlement to subrogation. Rights acquired by subrogation 21 The usual statement is that a person paying off a creditor in a case where subrogation comes into play steps into the shoes of the creditor and becomes entitled to enforce all rights which the original creditor had prior to payment of that creditor's debt. Such rights are not limited to rights against the debtor; for instance the person subrogated to the right of the original creditor could take action against a guarantor to the original creditor of the obligations of that debtor: see D & J Fowler (Aust) Ltd v Bank of NSW [1982] 2 nswlr 879 a decision on s8A of the Usury Bills of Lading and Written Memoranda Act 1902 but relevant to subrogated rights of the debtor. I consider the rights under s197(1) are capable of being exercised pursuant to a right of subrogation. Subrogation claim - council rates paid 22 Council rates are a charge on the rateable land: Local Government Act 1993 s550. Rates payable under the Water Management Act 2000 are a charge on the relevant land: Water Management Act s355. The total agreed amount paid by the purchaser/plaintiff was $14,860.73. I consider that in accordance with normal principles the plaintiff, having paid out the amount of the charge would be entitled by way of subrogation to the rights of the council against Perma-Fit. 23 While it might be said that after the appointment of a new trustee it was the new trustee company which became liable for rates, Perma-fit remained on title as registered proprietor liable for the rates. It may be that the position changed on the appointment of a voluntary administrator but the rates for the year commencing 1 July 2003 had been levied by then. I am of the view that Perma-fit incurred the liability for rates as landowner. The incurring of this liability brought the claim within the possible scope of s197(1). Trust Deed - right to indemnity 24 Clause 12 of the Trust Deed of the Harrison No 2 Family Trust is as follows: Liability of trustee 12. Any trustee purporting to act in the execution of this trust and the powers and discretions hereof shall be entitled to be fully indemnified out of the assets of the trust and shall not be liable for loss not attributable to the dishonesty of the trustee or of its servants or agents or to the wilful commission or omission by the trustee or its servants or agents of any act known to be a breach of trust, such indemnity as aforesaid to operate in favour of the trustee notwithstanding any such breach of trust has not previously been made good.

There is not suggestion of dishonesty or wilful breach of trust. There is an entitlement to full indemnity. Corporations Act s197(1) 25 That part of the section which causes the problem is the sentence "This is so even if the trust does not have enough assets to indemnify the trustee". I will call this "the sentence". 26 In Hanel v O'Neill [2003] 180 FLR 360 a majority of the Full Court of the Supreme Court of South Australia held that liability of directors arose if the other provisions were satisfied and if the assets of the trust were not sufficient to enable them to be fully indemnified against the liability incurred. Mulligan J accepted the argument of counsel for the respondent that if there were no assets comprising the trust fund there was no entitlement to indemnity. He held that the magistrate's decision appealed from was correct on that question. Gray J traced the history of the legislative predecessors of s197. He concluded that s233(2) of the Corporations Law , which was the predecessor of s197(1) of the Corporations Act , made it clear that directors of corporations acting as trustees were not liable merely because there were insufficient assets to satisfy the liability so that there was an inability to be fully indemnified. He concluded that s197(1) was not just a re-enactment, in words intended to be more simple, of the previous s233 of the Law, even though the explanatory memorandum accompanying the bill made no mention of any change or intended change. The conclusion was that if no change were intended there was no purpose in including the sentence which caused the problem. He accepted one or both of the arguments of counsel, the first being that "this" in the sentence was a reference to the directors' liability and once sub-paragraphs 1(a) and 1(b) were satisfied, liability could not be avoided. The other argument was that "entitlement" required a capacity to satisfy. He concluded by saying at paragraph 74: 74. The construction contended for by counsel for Mr O'Neill would ensure that the director of a corporate trustee had a personal liability in circumstances where a debt was incurred and there were insufficient trust assets to meet the debt. Such a result is not unfair or unreasonable. Section 197 represents an extension to the liability of the director of a trustee company. 27 Debelle J was in the minority. I will not set out his argument but he came to the conclusion that the words relied upon meant that if a director would not be liable if the conditions of 1(b) were not satisfied then that director would continue not to be liable if the trust did not have sufficient assets to provide a complete indemnity to the director. This seems to me with respect to be a somewhat adventurous construction. 28 There was a very detailed consideration of the section and sentence and the decision in Hanel by McDougall J in Intagro Projects Pty Limited v Australian and New Zealand Banking Group Limited [2004] 50 ACSR 224. This was a judgment on an interlocutory application to amend a cross-claim to join additional parties. His Honour concluded if the decision in Hanel were correct then the claim proposed to be brought pursuant to the amendment was not bound to fail. It was his view that the decision in Hanel was incorrect, but he felt bound by the direction given in Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 to follow the Full Court decision in Hanel as he was not prepared to say that it was plainly wrong. In other words, although the decision was not binding on him he thought that he should not depart from it. It is, I think, to be borne in mind that McDougall J was determining an interlocutory application. In general it is preferable to have these matters decided on a proper issue raised and if necessary decided by separate hearing rather than determine them on an interlocutory basis. 29 The Corporations Act is a Commonwealth Act operative throughout Australia. In the interests of orderly justice as well as comity a trial judge ought to be extremely cautious if not reluctant to decide a case contrary to a decision of an appellate court of another state or territory in such a matter although not technically bound by it. I do not intend to embark on a detailed discussion of the decision in Intagro . It may be that what was decided in Hanel on s197(1) was obiter because the matter had to be remitted to the magistrate for other reasons. The headnote in the Federal Law Report of the case would seem to indicate that the reporter there thought that to be the position. It may be that the facts in Hanel were so stark that the action of the director ensuring there were no trust assets pointed to the desirability of an extension of the liability of the directors in such a case although in considering the matter the Judges in the majority did not say anything to show they had considered that their decision would have the effect of extending liability of directors of companies acting as trustees well beyond the liability of ordinary directors for insolvent trading. None of this really matters. The decision should be followed unless I consider it to be plainly wrong. 30 In paragraph [57] of his judgment in Intagro McDougall J said: If I were considering the construction of s197(1) without the instruction of the majority decision in Hanel , I would conclude that it effected no change to the pre-existing law. I would conclude that subs (1) should be construed as if the word "only" were inserted after the word "liability" where it appears for the second time, so that the introductory words read: A person who is a director of a corporation when it incurs a liability while acting, or purporting, to act, as trustee, is liable to discharge the whole or a part of the liability only if the corporation …

I consider the conclusion of McDougall J as to the proper construction or meaning of s197(1) is correct. I consider s197(1) an unfortunate attempt to re-write s233 in fewer and more simple words and I consider there is every reason to think there was no intention to extend liability beyond that known to exist as no mention was made of any intended expansion of liability. While it is correct to construe legislative instruments on the basis that all words used have a purpose and effect, there has to be some limit to this in considering the proper construction of a section as badly drafted as s197(1) is, or was. If the meaning found in Hanel had been intended the simple way to accomplish it would have been to omit the sentence and to insert the words "and able" after "entitled" in s197(1)(b). In those circumstances it is reasonable to interpret it as McDougall J would have, had he thought himself able, so as to make it sensible. The construction attributed to the sentence by the majority might I think have been an available one had the word "even" not been in the sentence. The inclusion of that word in my view makes it an impossible construction. The sentence shows one of the difficulties in elliptical wording. It is the type of sentence that one would expect to see in commentary on a section in an annotated Corporations Act not an act of parliament. When one looks at it from that point of view it is reasonably clear I think that there was no intention to alter the law as it previously existed under s233 of the Corporations Law . 31 With respect to those who decided it, I have come to the conclusion that the decision in Hanel is wrong and should not be followed. If that means that I am required to come to the conclusion that it is plainly wrong then I must do so. As I said at the commencement this is a matter which I would have far preferred to have decided by the Court of Appeal in the first instance on the basis that there were conflicting views on an important point and because in Edwards v The Attorney General (2004) 60 NSWLR 667 Young CJ in Eq at page 694 made it perfectly clear that he considered the decision wrong. I therefore conclude that Saffron Sun in exercise of subrogated rights has no claim against the second defendant pursuant to s197(1) of the Corporations Act . Nor would it have had any claim based on contractual rights if any such rights existed. It follows that the plaintiff's claim should be dismissed with costs. 32 In light of this decision it is not necessary to determine whether the right of subrogation extended to the sum of $21,423.31 paid as part of the discharge moneys for costs and a liability under a guarantee. There was obviously a liability for costs. The amount claimed under the guarantee was not challenged by vendor or purchaser. If it were necessary I would hold the rights of subrogation extended to the full amount paid out on settlement. I would also have determined that liability continued and was not crystallised in amount on appointment of an administrator nor on appointment of a new trustee. 33 Finally s197 has been amended: that is not relevant to the rights determined here. Orders

1. Judgment for the second defendant on the plaintiff's claim.

2. Plaintiff to pay the costs of the second defendant. **********

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