TALBOT V. NRMA LIMITED [2000] NSWSC 608

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

JUDGMENT INTRODUCTION 1 HIS HONOUR: On 18 May 2000, Santow J in this Court gave approval under s.411(4) of the Corporations Law for a radical restructuring of the NRMA Group. Mr Richard Talbot, a director of NRMA Limited, which I will call NRMA or the Association, has applied for leave to appeal to the Court of Appeal from that decision. If leave is granted, the appeal would need to be heard and decided by 24 July, because after that day the alteration of the details of the registration of companies in the NRMA Group will not be reversible by a court: see Corporations Law s.164(7). 2 In these proceedings, commenced on 28 June 2000, Mr Talbot seeks declarations to the effect that NRMA should pay his costs of the appeal and indemnify him against any costs ordered against him. NRMA has put on a cross-claim seeking declarations inter alia that Mr Talbot is acting in breach of his duties, and seeking an injunction against him continuing the application in the Court of Appeal. 3 At the outset of the hearing, which took place on 29 and 30 June 2000, I expressed the view that any entitlement of Mr Talbot to payment of costs or an indemnity would depend in part on an assessment of the objective reasonableness of his conduct, and that it would not be possible to decide that question in this hearing, both because it would involve consideration of the merits of the proposed appeal and because of time constraints. The application to the Court of Appeal is before that court for directions tomorrow, and plainly that application must proceed rapidly to a hearing if the appeal is to be of any use. Accordingly, I excluded from this hearing any question relating to the reasonableness of Mr Talbot's conduct, and I indicated that if possible I would formulate some issue for separate determination at the conclusion of this case. 4 Mr Talbot relied on Rules 92 and 159 of the NRMA Constitution. 92. Each Director shall also be entitled to be paid all travelling and other expenses incurred or to be incurred by him or her in connection with his or her attendance at meetings of the Board of Directors, and meetings of members or otherwise in connection with the business of the Association. 159. Except as by the Law precluded, every officer, auditor or agent of the Association shall be indemnified by the Association against any liability incurred by that person in that capacity. 5 He contended that expenses incurred by him in connection with the proceedings in the Court of Appeal were incurred in connection with the business of the association within Rule 92, and that any costs he paid or was ordered to pay in connection with those proceedings were liabilities incurred by him in his capacity as an officer of the Association within Rule 159. 6 NRMA relied, inter alia, on Rule 52A of the NRMA Constitution, which was inserted as part of the restructure of the group. 52A (1) The purpose of this rule 52A is to impose, after the Effective Date, certain duties and obligations upon the Directors and thereby to curtail their freedom of action and to define and limit the powers allocated to them under this constitution in such a way and to such an extent that, subject to rule 52A(5),powers of the Association exercisable by the Directors in relation to matters referred to in rule 52A(2): (a) must not, after the Effective Date, be exercised in any way which is contrary to rules 52A(2) or (3); and (b) must, after the Effective Date, be exercised in the ways required by rules 52A(2) and (3).

(2) Subject to rule 52A(5), it is the duty of the Directors, after the Effective Date, to cause to be done everything which it is necessary for the Association and the Directors to do in order to implement and to conclude according to its terms the NRMA Insurance Restructure and, without limiting the generality of the foregoing, the Directors must, after the Effective Date (but subject to rule 52A(5)); (a) cause to be passed such resolutions of the Directors; (b) cause to be given by the Association such consents; and (c) cause to be executed under the common seal of the Association such instruments of consent as are necessary under the constitution of NRMA Insurance to enable variation or abrogation, to the extent and in the manner provided for in the NRMA Insurance Restructure, of the powers and rights of the Association in its capacity as a member of NRMA Insurance which are declared by the constitution of NRMA Insurance to be: (d) given to the board of directors of the Association as agent for the Association; and (e) class rights which may only be varied in the manner specified in rule 6A(a)(iii) of the constitution of NRMA Insurance.

(3) Subject to rule 52A(5), a consent which the Directors cause the Association to give pursuant to rule 52A(2)(b) must be unconditional and, once given, must not be revoked unless revocation is permitted by the NRMA Insurance Restructure.

(4) Rules 52A(1), (2) and (3) have precedence over rule 52 but will cease to have effect if any of the schemes of arrangement referred to in the definition of 'Effective Date' in rule 52A(6) is terminated for any reason.

(5) Nothing in rules 52A(1), (2) and (3) requires or permits any Director individually or collectively to act in a way which would be in breach of any duty owed by that Director or which would be unlawful.

(6) For the purposes of this rule 52A: 'Effective Date' means the earliest day on which all the schemes of arrangement set out in the documents referred to in the definition of 'NRMA Insurance Restructure' in this rule 52A(6) have become effective according to their terms. 'NRMA Insurance' means NRMA Insurance Limited (ACN 000 016 722). 'NRMA Insurance Restructure' means the scheme or plan defined as the 'Proposal' in clause 1 of Part II . of the documents entitled 'Schemes fo Arrangement pursuant to section 411 of the Corporations Law between NRMA Limited (ACN 000 010 506) and its members and certain classes of them' and 'Schemes of Arrangement pursuant to section 411 of the Corporations Law between NRMA Insurance Limited (ACN 000 016 722) and classes of its members' appearing on pages 64 to 67 and 96 to 99 of the information memorandum dated 14 February 2000 issued with the notices convening certain meetings of members of the Association and members of NRMA Insurance, including the meeting of members of the Association at which the special resolution adopting this rule 52A was passed. 7 Mr Talbot claims Rule 52A is invalid, because it is part of an invalid restructure process. That contention is the subject of the proceedings in the Court of Appeal, and I indicated that it would not be dealt with in these proceedings; so that issue also has been excluded from this hearing. However, Mr Talbot also alleges that Rule 52A is invalid because it would fetter directors in the exercise of their discretions, and that issue has been the subject of this hearing. 8 Mr Talbot gave evidence of his reasons for taking the proceedings in the Court of Appeal, and of his lack of assets to finance the proceedings or to meet any costs that should be ordered against him. No issue has been raised as to his bona fides. SUBMISSIONS 9 Mr Shand QC for Mr Talbot submitted that Rule 52A was invalid because it purported to fetter the future exercise of directors' discretions, and he referred to Lipton & Herzberg Understanding Company Law (5th Ed), p.349, Ford Company Law (7th Ed), paras.8180, 8190, Thorby v Goldberg (1965) 112 CLR 597 at 605 and 616, and ANZ v Quintex (1990) 2 ACSR 676 at 688. 10 He submitted that Mr Talbot as a director had a duty to act bona fide in what he considered to be in the best interests of the company as a whole; and he referred me to Corporations Law ss.180 and 181, Advance Bank v FAI (1987) 9 NSWLR 464, AWA v Daniels (1993) 9 ACSR 383, BGJ Holdings v Touche Ross (1988) 6 ACLC 449. 11 In taking these proceedings in the Court of Appeal, Mr Shand submitted, Mr Talbot was doing no more than fulfilling that duty. Mr Shand submitted that the expenses referred to in Rule 92 were not limited to travel expenses. He submitted that a director was entitled to take independent legal advice on difficult issues, and that if a director became aware of improper conduct by other directors, the director had a duty to try and stop that conduct and to incur expenses in doing so. Mr Shand referred to Fraser v NRMA Holdings (1994) 52 FCR 1, (1995) 55 FCR 452 at 481, Gambotto v WCP Limited (1995) 182 CLR 432 at 446 and Castlereagh Motels v Davies-Roe (1966) 67 SR(NSW) 279 at 284-5. He submitted that in taking the proceedings in the Court of Appeal Mr Talbot was acting as a director of NRMA. He submitted that it was a continuation of a consistent course of conduct which Mr Talbot had taken as a director, and Mr Shand referred me to some of these steps in minutes of the company. He referred me to paragraph 117 of Santow J's judgment of 18 May 2000, where Mr Talbot's position as director was acknowledged. 12 Mr McDougall QC for NRMA has provided a written outline of submissions which I will leave with the papers. 13 He submitted that, because the court could not make a determination of the reasonableness of Mr Talbot's conduct, it could not possibly make any declarations as sought in the amended summons. Though those declarations referred to entitlement to reasonable costs and disbursements, reasonableness there was only a matter of quantification, and did not take account of the question of reasonableness of Mr Talbot's conduct in incurring those costs and disbursements. The court should not attempt to formulate some different declaration, and in particular should not make a hypothetical declaration: University of New South Wales v Moorhouse (1975) 133 CLR 1 at 9-11, 19 and 24. 14 Mr McDougall submitted that to be entitled to expenses, whether under Rule 92 or otherwise, those expenses must be incurred both in the capacity of a director and in connection with the business of the association. He submitted that it could not be action taken in the capacity of a director and in connection with the business of the association to bring proceedings against the company, where there was no taint of criminality or lack of probity in the actions of the majority, nor where the only issue was a difference of opinion concerning a business decision. Plainly there was no authorisation from the company to Mr Talbot to bring the proceedings, and in fact the proceedings were brought contrary to instructions contained, inter alia, in Rule 52A. Mr Talbot, he submitted, was not acting as a director pursuing some corporate purpose, but rather as a representative of a minority of members. It was insufficient that he may be acting bona fide: Advance Bank v FAI at 485. 15 Mr McDougall submitted that Rule 52A was valid. The company may commit functions to the board, and may withhold functions from it. Rule 52A in effect withheld from the board and from each director any function inconsistent with the implementation of the restructure. Although Mr Talbot may be able to bring an appeal as a member, Rule 52A meant that he could not do so as a director. There was no improper fettering of discretion, since appropriate discretion had been exercised at the time of the adoption of the rule: Thorby; Davidson v Smith (1989) 15 ACLR 732 at 734. The NRMA Constitution, including Rule 52A, bound directors as well as members by reason, inter alia, of s.140 of the Corporations Law. 16 Mr McDougall also submitted that the reconstruction, now having the approval of Santow J, was binding on all members. Santow J's judgment had not been stayed. Mr Talbot was therefore bound by it, and could not seek to appeal.

DECISION 17 This case illustrates a tension that exists between, on the one hand, giving support to a director acting honestly in what he or she considers the best interests of the company and, on the other hand, the undesirability of the company's resources being squandered because the view of a single director is different from those of other directors and the majority of members. 18 I will consider the matter first on the basis of general principles, without reference to particular sections of the Corporations Law or the Constitution of NRMA or the effect of Santow J's judgment. I will then consider the impact, on the situation according to general principles, of each of those three matters. 19 It is the duty of a director of a corporation to act bona fide in the interests of the corporation. This requires both a proper purpose and absence of conflict of interests, and also some measure of objective reasonableness. 20 A director as an agent and fiduciary is entitled to be indemnified against losses and expenses properly incurred in the due performance of the office: Young v Naval Military and Civil Service Cooperative Service of South Africa (1905) 1 KB 687 at 693. The position of directors is not dissimilar from that of trustees, as set out in Jacobs Law of Trusts in Australia (5th Ed), paras.2105, 2107 and 2109. 21 This applies where a director is carrying out duties in the normal course, including attending meetings, and in the case of an executive director performing executive functions; although as the case of Young shows, if the director is remunerated there will be a question whether the remuneration is intended to cover such expenses. 22 Apart from carrying out duties in the normal course, there may be situations where a director honestly and reasonably believes that his or her duties require the incurring of expense in the interests of the company. For example, if a director becomes aware that other directors are misappropriating the company's property, and incurs costs, for example in getting an order against a bank to stop this misappropriation, then the director would be entitled to the expenses of taking that action. 23 The case of Gambotto suggests another circumstance where this might be the case. A single director may consider it his or her duty to take proceedings against the company to prevent the unfair expropriation of a minority by the majority of directors and shareholders. If those proceedings are successful, then as a successful party the director would be entitled to costs. However, in addition, because this would be shown to be action properly taken by a person in a position of a fiduciary, it is quite likely that the director would get those costs on an indemnity basis. However, the problem really arises where proceedings such as that are unsuccessful, and particularly where proceedings such as that are unsuccessful at first instance, and the director wishes to appeal the first instance decision. 24 In my opinion it is clear that it is insufficient that the director honestly believes that this action is required: the director must also be acting reasonably. That is the position in relation to trustees: Re Knox's Trust (1895) 2 Ch 483, MacGregor v McGregor (No 2) (1919) NZLR 286. 25 In my opinion, in cases like these, before taking the extreme step of bringing legal proceedings against the company, a director must take into account not only the director's own view of what is in the company's interests, but also the views of others; and in that regard the director should not be too ready to attribute dishonesty or unreasonableness to other persons, and the director should take into account his or her own fallibility. The director should also take into account all the consequences of bringing proceedings against the company, including the consequences of the court decision going either way, and the costs of litigation. However, if, having done all these things, the director believes that it would be in the interests of the company that the company be subject to litigation, and that he or she would be in breach of his or her own duties as a director if the proceedings were not taken, and if those beliefs are both honest and reasonable, then it seems to me that the bringing of the proceedings should be regarded as due performance of the director's office, so that the director would be entitled to expenses and an indemnity from the company. 26 It will be seen that I have included in these requirements that the director must go so far as to believe that it would be a breach of the director's own duty if the proceedings were not brought. In my opinion, it is insufficient that the director merely believes that the course preferred by the director would be in the interests of the company, and insufficient that the director merely believes that the bringing of the proceedings would be in the interests of the company. Certainly, it would be insufficient that the director believes that the bringing of the proceedings would advance the interests of the minority, or give the interests of the minority a fair representation. I think that this element is necessary, because what is involved here is not merely the exercise of a discretion in the ordinary course of the director's duties, but the taking of drastic positive action outside that ordinary course. 27 I included in the statement of the requirements a requirement that the beliefs in question must be reasonable. I intend this as a shorthand statement of an objective criterion, about which much more could be said. However, I think the elaboration of that criterion could take place more appropriately in the context of a full examination of particular facts, which I am not undertaking in this hearing. 28 There is of course a further element in this case, namely, the decision at first instance. A Supreme Court judge has in effect decided that the majority have not been acting otherwise than in the interests of the company as a whole, so that Mr Talbot, as a single director seeking to justify an appeal, would have to have consider very carefully whether, taking into account the view of the judge as well as the majority of directors and members, and still having regard to his own fallibility, he would nevertheless still be in breach of his own duty to the company, and not just as a representative of a minority, if he did not appeal. 29 He would also have to take into account that, if the appeal is successful, it would appear that expenditure of about $60 million would have been wasted. By the same token, this consideration in a sense may cut both ways. It appears that there is still a further $40 million to be expended on the reconstruction, and it might be considered that the costs of an appeal are relatively small in comparison with the scale of the reconstruction. 30 Having outlined what I think is the general law position, I now turn to consider whether any particular provision of the Corporations Law affects this. 31 Section 181 of the Corporations Law deals with the exercise of powers and discharge of duties as a director. In my opinion, if a duty requires positive action, then an omission to act could be a breach of a director's duties as encapsulated in s.181. 32 Section 180 in effect provides that, if a business decision is made in good faith for a proper purpose and if there is no conflict of interests, and if the director takes steps to be properly informed, then the director will not be in breach in deciding in accordance with an honest belief, unless the belief is one that no reasonable person in their position could hold. 33 In my opinion, plainly this does not mean that a director could reason that his or her duty can require the drastic action of court proceedings only if no reasonable person could think otherwise. In my opinion, although a court would find that a director has breached a duty of making a proper business judgment only if that test is not met, I do not think a director should identify the director's own duty by considering what other persons might reasonably think. Although an action against a director based on lack of rational belief will not succeed unless the proved belief was one no reasonable person could hold, where a director brings an action against a company seeking expenses, in my opinion the director is required to prove that the expenses were properly incurred; and where the step taken was the extraordinary step of taking proceedings against the company, in my opinion the elements that I discussed earlier still have to be proved. 34 So it seems to me that ss.180 and 181 do not affect the principles I discussed earlier. 35 Section 199A of the Corporations Law is in the following terms:

199A.(1) Exemptions not allowed A company or a related body corporate must not exempt a person (whether directly or through an interposed entity) from a liability to the company incurred as an officer or auditor of the company. (2) When indemnity for liability (other than for legal costs) not allowed A company or a related body corporate must not indemnify a person (whether by agreement or by making a payment and whether directly or through an interposed entity) against any of the following liabilities incurred as an officer or auditor of the company: (a) a liability owed to the company or a related body corporate (b) a liability for a pecuniary penalty order under section 1317G or a compensation order under section 1317H (c) a liability that is owed to someone other than the company or a related body corporate and did not arise out of conduct in good faith. This subsection does not apply to a liability for legal costs. (3) When indemnity for legal costs not allowed A company or related body corporate must not indemnify a person (whether by agreement or by making a payment and whether directly or through an interposed entity) against legal costs incurred in defending an action for a liability incurred as an officer or auditor of the company if the costs are incurred: (a) in defending or resisting proceedings in which the person is found to have a liability for which they could not be indemnified under subsection (2); or (b) in defending or resisting criminal proceedings in which the person is found guilty; or (c) in defending or resisting proceedings brought by ASIC or a liquidator for a court order if the grounds for making the order are found by the court to have been established; or (d) in connection with proceedings for relief to the person under this Law in which the Court denies the relief. Paragraph (c) does not apply to costs incurred in responding to actions taken by ASIC or a liquidator as part of an investigation before commencing proceedings for the court order. (4) For the purposes of subsection (3), the outcome of proceedings is the outcome of the proceedings and any appeal in relation to the proceedings. 36 That means that, if a court orders a director to pay the costs of proceedings between the director and the company, then the company cannot indemnify the director against that liability. Of course, the court which decides the case between the director and the company would first, before ordering costs, take into account principles of the type I have discussed. However, so far as the costs of the proceedings in the Court of Appeal are concerned, that is a matter to be considered by the Court of Appeal. In my opinion, s.199A does mean that I cannot in these proceedings order that Mr Talbot be indemnified against any costs that the Court of Appeal may order to be paid by him. 37 I turn to the effect of the NRMA Constitution. 38 In my opinion, Rules 92 and 159 do no more than express the principles that I have held would apply in any event. 39 As regards Rule 52A, there is a general principle that directors cannot fetter future exercises of discretion. Mr McDougall sought to overcome that principle, first by suggesting that Rule 52A was no more than a withholding by the company from directors of part of the directors' function. In my opinion that submission is inconsistent with s.198A of the Corporations Law. That section is in the following terms: 198A. (1) The business of a company is to be managed by or under the direction of the directors.

(2) The directors may exercise all the powers of the company except any powers that this Law or the company's constitution (if any) requires the company to exercise in general meeting. 40 Under that section, directors are empowered to exercise all the powers of a company, except any powers that the Law or the company's Constitution requires the company to exercise in general meeting. In my opinion, that section rules out the possibility of directors being prevented from exercising powers in certain ways, at least unless the possibility of exercising powers in those ways is given to the general meeting. 41 The other argument for the validity of Rule 52A turns on the principles discussed in the Thorby case. That case confirms that the directors can make contracts binding the company, and in certain circumstances may make contracts binding themselves individually as to how they should act as directors in the future. However, the case in its terms does not establish that, having made such contracts, the directors would necessarily be in breach of their fiduciary duties to the company in failing to carry them out. Indeed, in my opinion the case leaves open the possibility that in extreme circumstances it could still be a breach of a director's fiduciary duty to a company if the director carries out such a contract. Certainly however, the existence of such a contract would be a very important matter to be taken into account by the director in the exercise of fiduciary duties. 42 Rule 52A purports not merely to bind directors contractually, but to affect the director's duties to the company and, indeed, purports to affect the duty of directors who did not agree to the insertion of Rule 52A. Apart from the effect of subr.(5), in my opinion Rule 52A cannot validly do this. 43 Turning to the effect of subr.(5), as noted earlier directors have a duty to act in good faith in the best interests of the corporation. In my opinion, if Rule 52A would deflect a director from doing that, it would require a director to act in breach of duty. That in turn, in my opinion, engages subr.(5); and subr.(5) therefore means, that for the director to act in good faith in what the director considers the best interests of the corporation, would not be a breach of Rule 52A. 44 For those reasons I think Rule 52A, with subr.(5), is valid; but I think also that it does not affect the general principles I discussed earlier, except in the sense that Rule 52A itself will be a weighty factor to be taken into account in the exercise of the director's duty. 45 Finally, I turn to the question of whether Santow J's orders affect the situation. The orders have been made under s.411(4) of the Corporations Law, and also lodged under s.411(10), so the restructure is binding on members of the NRMA. However, the right of a person affected by a court decision to appeal, or to apply for leave to appeal, from that decision is a very fundamental right. In my opinion, that right cannot be taken away other than by statute; and in my opinion, it cannot be taken away by statute unless by clear words. In my opinion, the Corporations Law, combined with Santow J's orders, cannot take away any right that Mr Talbot would otherwise have to seek leave to appeal from the decision. 46 For these reasons, I would first of all decide that Mr Talbot is not entitled in these proceedings to an order that he be indemnified against costs which may be ordered in favour of the company. That is a question in my opinion that only the Court of Appeal can deal with; and I think that s.199A(1) of the Corporations Law precludes me from dealing with that question. 47 Otherwise, to be entitled to expenses concerning an appeal to the Court of Appeal, it must be the case both that Mr Talbot believes that it would be a breach of his own duty if he did not take those proceedings, and that this belief is reasonable. As I have indicated, I cannot declare either that this is or is not the case, unless and until the question of reasonableness can be addressed. 48 As regards the capacity in which Mr Talbot brings the proceedings, it seems to me that, if it is the case that he believes it would be a breach of his director's duty if he did not take the proceedings and if that belief is reasonable, then the proceedings are brought in his capacity of a director. If those conditions are not satisfied, then it does not matter one way or the other in what capacity the proceedings are brought, because he would not be entitled to his expenses in any event. 49 I have decided that Rule 52A does not prevent Mr Talbot bringing the appeal. It is the effect of my decision that, if the conditions I have referred to are satisfied, then Rule 52A does not make it a breach of Mr Talbot's duty to bring the appeal, nor would it disentitle him to expenses. 50 Accordingly, the orders and declarations which can be made as a result of this hearing are I think the following. Firstly, that Mr Talbot is not entitled to be indemnified against such costs order as the Court of Appeal may make. Secondly, that Rule 52A does not disentitle him to appeal. This means that the application for an injunction in the cross-claim, in so far as it is based on Rule 52A, would be dismissed. The order would contain some appropriate definition of a separate question which has been determined. 51 I think it would be appropriate to stand the remainder of the proceedings over until after the Court of Appeal decision. If, for example, the Court of Appeal were to dismiss the appeal but make no order as to costs, then in the light of these reasons it would still be open to Mr Talbot, in these proceedings, to pursue a claim that his costs be paid. 52 I would not at this stage propose to make any order as to the costs of either party to these proceedings.

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