Consolidated with CIV 2182 of 2000 by Order made 20/11/2000

Pleading - Illegal contract - Whether unenforceable - Public company giving a financial benefit to a related party

Corporations Law, s 103, s 243H, s 243K, s 243ZE, s 1317HA, s 1317HD

Dalgety Australia Ltd v Rubin, unreported; SCt of WA; Library No 5485; 24 August 1984

Henderson v Amadio Pty Ltd (1996) 140 ALR 596

Kimberley Downs Pty Ltd v Western Australia, unreported; SCt of WA; Library No 6414, 25 August 1986

1 MASTER BREDMEYER: This is an application by the plaintiffs to strike out par 23(d) of the consolidated defence of 30 November 2000 which reads:

"23. Further, or in the alternative, to the matters pleaded hereto the Defendant pleads as follows:

(a) the Defendant is, and was at all material times to this action, a public company listed for quotation on the Australian Stock Exchange;

(b) the First Plaintiff is, and was at all material times to this action, a company which is controlled by the Second Plaintiff;

(c) between 6 May 1987 and 20 April 1999, the Second Plaintiff was a director of both the First Plaintiff and the Defendant;

(d) by reason of the matters pleaded at paragraph 23(as), (b) and (c) hereof, and in consequence of sections 243H (as it existed prior to 13 March 2000) and 1470 of the Corporations Law of Western Australia, the Defendant is not permitted to give a financial benefit to the First and Second Plaintiffs on the basis being claimed by the First and Second Plaintiffs in this action."

2 This plea is in relation to those parts of the consolidated statement of claim whereby the plaintiffs claim sums of money from the defendant as management fees. The second plaintiff, Mr Remta, is a director of the first plaintiff, and up to 20 April 1999 he was a director of the defendant which is a public company. By written agreement made on 14 October 1997 between the first plaintiff and the defendant, the defendant agreed to pay the first plaintiff a fee of $13,500 per month for certain management services. Mr Remta also had an agreement with the defendant to pay management fees. His agreement was an oral one made in February 1996 whereby the defendant agreed to pay him a salary of $120,000 per annum, a fee as chairman of directors of $15,000 per annum and superannuation entitlements of $7,500 per annum. The plaintiffs were paid some of this money and have sued for the unpaid portions. There is no dispute that the plaintiffs are related parties to the defendant within the meaning of the Corporations Law.

3 Section 243H(1) of the Corporations Law as it existed prior to 13 March 2000 stated:

"SECTION 243H PROHIBITED FINANCIAL BENEFITS TO RELATED PARTIES OF PUBLIC COMPANIES

243H(1) [Public company prohibition] A public company must not give a financial benefit to a related party except as permitted by Part 2E.4 or 2E.5."

4 Part 2E.4 is headed "GENERAL EXCEPTIONS" and s 243K(1) and (2) provide:

"SECTION 243K REMUNERATING OFFICERS

243k(1) [Remuneration to officers] A body corporate may pay or provide remuneration to a person in a capacity as an officer of the body if it is reasonable for a body corporate in the body's circumstances to pay or provide that remuneration to an officer in the person's circumstances.

243K(2) [Remuneration required by contract or reasonable] A body corporate may pay or provide remuneration to a person in a capacity as an officer of the body if:

(a) the body does so as required by a contract between the body and the person; and

(b) it was reasonable for a body corporate in the body's circumstances to make the contract with an officer in the person's circumstances."

5 Part 2E.5 is headed "FINANCIAL BENEFITS APPROVED BY GENERAL MEETING OF PUBLIC COMPANY" and provides certain exceptions from the prohibitions where financial benefits to related parties have been approved by a general meeting of the public company. There was no such approval in this case.

6 Part 2E.6 is headed "ENFORCEMENT" and s 243ZE sets out the consequences of giving a financial benefit when not permitted. It expressly provides that where there is a contravention of s 243H, that the public company is not guilty of an offence, but is subject to the civil penalty provision set out in Part 9.4B of the Corporations Law. The related party is also subject to the same civil penalty provisions. Included in that part is s 1317HA which provides that on an application for a civil penalty order, the court may order compensation as a result of the contravention. The compensation can include loss or damage to the corporation in relation to which the contravention was committed. By s 1317HD the court can also order the recovery of profits and compensation for loss resulting from the contravention. By that section if a person contravenes a civil penalty provision in relation to a corporation, he must account to the corporation for any profit made because of the contravention or, if the corporation has suffered loss and damage as a result of the contravention, he can be ordered to pay an amount equal to that loss or damage.

7 Another relevant provision is s 103 of the Corporations Law headed "EFFECT OF CERTAIN CONTRAVENTIONS OF THIS LAW" which I quote:

"(1) This section has effect except so far as this Law otherwise provides;

(2) An act, transaction, agreement, instrument, matter or thing is not invalid merely because of:

(a) A contravention of section ... 243H ...; or

(b) ...

(3) ...

(4) In this section 'invalid' includes void, voidable and unenforceable;

(5) Nothing in this section limits the generality of anything else in it."

8 The plaintiffs' application to strike out par 23(d) of the defence is out of time, but satisfactory reasons have been given for the lateness and I propose to allow it to be brought out of time.

9 The pleading of this defence is tricky. The defendant wants to plead that the plaintiffs' claim should be denied because of s 243H. There is a problem with that because the section is not a total prohibition against a financial benefit going to a related party of a public company. The related party can be given a financial benefit from a public company if the deal is permitted by Part 2E.4 or 2E.5 of the Law. Who should plead that the agreements relied on by the plaintiffs fall outside those permitted exceptions? Should it be the defendant or should the plaintiffs plead in their reply that they come within the permitted exceptions? The second problem is that the defendant, because of s 1031, cannot simply plead that the transactions under which the plaintiffs seek to recover monies are void or unenforceable. The defendant would like to argue that the transactions are not permitted and that, although not expressly void or unenforceable by any provision in the Law, the court should in its discretion not allow the plaintiffs to enforce the agreements.

10 It is not of great moment from a pleading point of view whether the plaintiffs plead that the agreements come within one of the exceptions or the defendant pleads that they do not, but in this case I think it fair to impose that burden on the defendant because s 243H is not a simple prohibition that "a public company must not give a financial benefit to a related party." It reads:

"A public company must not give a financial benefit to a related party except as permitted by Part 2E.4 or 2E.5."

11 In this case it is common ground that the financial benefit does not come within Part 2E.5. There was no resolutions passed at general meetings of the public company approving the arrangements. I consider the defendant should plead that this was not a financial benefit permitted by Part 2E.4 and should give particulars of that. It is not an unfair burden because, after all, the arrangement between the plaintiffs and the defendant involved all parties. This is not a case where the plaintiffs have particular knowledge of how the transactions come within the exception, and the defendant does not. Both were parties to the agreements. I will require the defendant to give particulars. For example, if it is the defendant's case that the agreements for remuneration to the related parties were not reasonable, it should say that with brief grounds.

12 Secondly, I consider the defendant should spell out what relief he seeks from the court. I consider that the defendant has a remedy. As previously stated, a prohibition of s 243H amounts to a civil penalty and, if the monies had been paid out to the plaintiffs, then, on a proper application, the court could order the refund of those monies. The sections dealing with civil penalties do not envisage the situation in this case where monies, the subject of the plaintiffs' claim in this action, have not yet been paid out. But I consider the court has implied powers under those sections to make a declaration that, because the agreements are prohibited, the plaintiffs should not recover. I agree with the defendant's submissions on this. An illegal contract is not automatically unenforceable as Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd [1978] HCA 42; (1978) 139 CLR 410 illustrates. But it may be. The court may, in its discretion, choose not to enforce the contract. At least I think that is arguable in this case. I think it arguable that s 103(2), which I have quoted above, and which in essence says that an agreement is not invalid merely because of a contravention of s 243H, means that the agreement is not automatically invalid because of the contravention, but may be if the court so decides. I understand that counsel were unable to find any case on the effect of a prohibited transaction under s 243H.

13 I will require the defendant to add a brief counterclaim that because of the breach of s 243H, the defendant will ask the court for a declaration that the agreements are unenforceable for illegality. I will strike out par 23(d) of the defence. The defendant has leave to replead. He should say that the transactions were prohibited by s 243H and did not fall within the exceptions of Parts 2E.4 or 2E.5 with particulars as to why the transactions do not come within the exceptions provided in Part 2E.4.. In addition, as just stated, there needs to be a counterclaim asking for the declaration as mentioned.

14 I give leave to bring the application out of time. I will strike out par 23(d) of the consolidated defence of 30 November 2000. The defendant has leave to replead within 14 days. The defendant is to pay the plaintiffs' costs of this application, including any reserved costs, in any event.