Aidzan Pty Ltd (in liq) v K. & A. Laird (N.S.W.) Pty Ltd (in liq)

[2024] NSWCA 185

Court of Appeal

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Aidzan Pty Ltd (in liq) v K. & A. Laird (N.S.W.) Pty Ltd (in liq) [2024] NSWCA 185

Hearing dates:

4-5 December 2023

Date of orders:

30 July 2024

Decision date:

30 July 2024

Before:

Ward P at [1];
Meagher JA at [2];
Adamson JA at [132]

Decision:

(1) Dismiss the appeal.

(2) Allow the cross-appeal.

(3) Set aside orders 6 and 7 made by Black J on 4 July 2023 and instead order:

(a) that Peter Laird, Aidzan Pty Ltd (in liq) and Nazdia Pty Ltd pay to K. & A. Laird (N.S.W.) Pty Ltd (in liq) the amount of $2,094,545 in rent paid to Aidzan Pty Ltd (in liq) in relation to the Sunnyholt Property for the period from 1 July 2005; and

(b) that Peter Laird, Aidzan Pty Ltd (in liq) and Nazdia Pty Ltd pay to K. & A. Laird (N.S.W.) Pty Ltd (in liq) interest, pursuant to s 100 of the Civil Procedure Act 2005 (NSW), on the sum of $2,094,545 in the sum of $1,889,254.70.

(4) Peter Laird, Aidzan Pty Ltd (in liq) and Nazdia Pty Ltd as appellants/cross-respondents pay K. & A. Laird (N.S.W.) Pty Ltd (in liq) as respondent/cross-appellant’s costs of the appeal and cross-appeal.

Catchwords:

LIMITATION OF ACTIONS – breaches of fiduciary duty by director – claims by company for equitable relief against director and associated third parties – when company “first discovers” facts giving rise to claim for purposes of Limitation Act 1969 (NSW), s 47(1)(e) – principles applicable to attribution of director’s knowledge to company – whether those principles involve application of general rule in favour of attribution subject to “fraud exception” turning on whether company received benefit from director’s conduct – director’s knowledge of circumstances of breaches not attributed to company where attribution sought to defeat company’s claims

EQUITY – equitable remedies – where director misappropriates company funds – where director subsequently characterises payment to him of company funds as a “loan” – whether later payment by director to company should be treated as reducing amount of equitable compensation to which company entitled – not established that later payment when made was to be applied in reduction of “loan”

Legislation Cited:

Civil Procedure Act 2005 (NSW), s 100

Limitation Act 1969 (NSW), ss 11, 14, 15, 47, 55

Cases Cited:

All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Ltd(No 2) [2021] FCA 782

Anderson v Canaccord Genuity Financial Ltd (2023) 113 NSWLR 151; [2023] NSWCA 294

Australian Safeway Stores Pty Ltd v Zaluzna (1987) 162 CLR 479; [1987] HCA 7

Barnes v Addy (1874) LR 9 Ch App 244

Beach Petroleum NL v Johnson (1993) 43 FCR 1

Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1; [1999] NSWCA 408

Belmont FinanceCorporation Ltd v Williams Furniture Ltd [1979] Ch 250

Bilta (UK) Ltd (in liq) v Nazir (No 2) [2016] AC 1

Bluemine Pty Ltd (in liq)v AKA (Civil) Pty Ltd [2022] NSWCA 160

Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541; [1996] HCA 25

Canadian Dredge & Dock Co Ltd v The Queen [1985] 1 SCR 662

Gerace v Auzhair Supplies Pty Ltd (2014) 87 NSWLR 435; [2014] NSWCA 181

Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6

Hawkins v Clayton (1988) 164 CLR 539; [1988] HCA 15

In re Hampshire Land Company [1896] 2 Ch 743

In the matter of K. & A. Laird (N.S.W.) Pty Ltd (in liq) [2022] NSWSC 510

Kennedy v Green (1834) 3 My & K 699

Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500

Moulin Global Eyecare Trading Ltd (in liq) v Commissioner of Inland Revenue (2014) 17 HKCFAR 218; [2014] HKCFA 22

Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd [2020] AC 1189

Stone & Rolls Ltd (in liq) v Moore Stephens (a firm) [2009] 1 AC 1391

Texts Cited:

P Watts, ‘Imputed Knowledge in Agency Law – Excising the Fraud Exception’ (2001) 117 LQR 300

P Watts and F Reynolds, Bowstead & Reynolds on Agency (22nd ed, 2021, Sweet & Maxwell)

Category:

Principal judgment

Parties:

Aidzan Pty Ltd (in liq) in its own capacity and in its capacity as trustee of the Peter Laird Trust and the Peter Alan Laird Property Trust (First Appellant/First Cross-Respondent)
Nazdia Pty Ltd in its capacity as trustee of the Aidzan Superannuation Fund (Second Appellant/Second Cross-Respondent)
Peter Alan Laird (Third Appellant/Third Cross-Respondent)
K. & A. Laird (N.S.W.) Pty Ltd (in liq) (Respondent/Cross-Appellant)

Representation:

Counsel:
D Studdy SC and J Nixon (Appellants/Cross-Respondents)
A Leopold SC and J Tobin (Respondent/Cross-Appellant)

Solicitors:
Ashurst (Appellants/Cross-Respondents)
Andersen Legal and Consulting Pty Ltd (Respondent/Cross-Appellant)

File Number(s):

2023/222134

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court

Jurisdiction:

Equity – Corporations List

Citation:

[2023] NSWSC 603

Date of Decision:

07 June 2023

Before:

Black J

File Number(s):

2020/351691

HEADNOTE

[This headnote is not to be read as part of the judgment]

The respondent, K. & A. Laird (N.S.W.) Pty Ltd (in liq) (KAL), operated a steel merchant business. It brought claims against its sole director, Peter Laird (Peter, the third appellant), for breaches of fiduciary duty and against two companies controlled by Peter, Aidzan Pty Ltd (in liq) (first appellant) and Nazdia Pty Ltd (second appellant), for knowing receipt.

The critical issue was whether KAL’s claims were statute barred. This raised a question of attribution: namely, when was KAL, a company, taken to have first discovered the facts giving rise to its claims (Limitation Act 1969 (NSW), s 47(1)(e)). Applying von Doussa J’s formulation of the “fraud exception” in Beach Petroleum NL v Johnson (1993) 43 FCR 1 at [22.34], the primary judge rejected the appellants’ limitation defence in respect of KAL’s claim to the proceeds of sale of a property (the Sunnyholt Trust claim); allowed the defence in respect of KAL’s claim for recovery of rental payments (the Sunnyholt Surplus Rent claim); and rejected a similar defence turning on the application by analogy of ss 15 and 55(1) in respect of KAL’s claim for misappropriation of funds (the Superannuation Payment claim). His Honour did so treating each claim separately and by asking whether Peter had acted “totally in fraud” of KAL so that “by design or result” it had not benefitted from his conduct. The correctness of that approach is the subject of grounds of appeal 1 to 7 and also of KAL’s cross-appeal.

A further issue arose as to the quantum of the Superannuation Payment claim. In 2007, Peter caused KAL to pay $1 million to his superannuation fund. He subsequently treated that payment as a “loan” made by KAL to him and claimed to have made payments of $100,000 and $680,000 in reduction of that “loan”. Only $100,000 was reflected in KAL’s financial statements. Although it was accepted $680,000 had been paid by Peter to KAL, the primary judge was not satisfied that it was paid in further reduction of the “loan”. That conclusion is the subject of ground of appeal 8.

The Court (Meagher JA, Ward P and Adamson JA agreeing) dismissed the appeal and allowed the cross-appeal, holding:

As to the Sunnyholt Trust claim:

(1)  Where a company brings a claim against a director for fraud or breach of duty, or against companies controlled by that director in respect of their involvement in the director’s fraud or breach of duty, the knowledge of that director will not be attributed to the company as or in support of a defence to the company’s claim: [1] (Ward P); [68]-[71] (Meagher JA); [136] (Adamson JA).

Beach Petroleum NL v Johnson (1993) 43 FCR 1, explained.

Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250; Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1; [1999] NSWCA 408; Moulin Global Eyecare Trading Ltd (in liq) v Commissioner of Inland Revenue (2014) 17 HKCFAR 218; [2014] HKCFA 22; Bilta (UK) Ltd (in liq) v Nazir (No 2) [2016] AC 1; Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd [2020] AC 1189; All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Ltd (No 2) [2021] FCA 782, considered.

Bluemine Pty Ltd (in liq) v AKA (Civil) Pty Ltd [2022] NSWCA 160, distinguished.

(2)  That outcome can be explained by reference to the particular application of a “fraud exception” to a general rule as to attribution. The preferable approach is to recognise that the rules and principles as to the attribution of corporate knowledge in a given case depend on the nature of the claim and purpose for which that attribution is sought: [1] (Ward P); [70]-[72] (Meagher JA); [136] (Adamson JA).

Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500; Bilta (UK) Ltd (in liq) v Nazir (No 2) [2016] AC 1; Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd [2020] AC 1189; All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Ltd (No 2) [2021] FCA 782; Anderson v Canaccord Genuity Financial Ltd (2023) 113 NSWLR 151; [2023] NSWCA 294, considered.

(3) Separately, as a matter of construction, s 47(1)(e) of the Limitation Act could not be satisfied by the attribution of Peter’s knowledge to KAL. The fixing of the limitation period from the time when a plaintiff “first discovers” or could reasonably have discovered the relevant facts assumes that thereafter the plaintiff, in the case of a company by its officers or agents, has the opportunity to determine in its own interests whether or not to commence proceedings. Where the prospective defendant is the only director or agent of the company with actual knowledge of the relevant facts, there is no rational reason to believe that defendant would cause proceedings to be commenced against themselves: [1] (Ward P); [73]-[78] (Meagher JA); [136] (Adamson JA).

Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541; [1996] HCA 25, referred to.

(4)  Accordingly, in respect of the Sunnyholt Trust claim, time did not commence running until the appointment of KAL’s liquidator in August 2018: [1] (Ward P); [78] (Meagher JA); [136] (Adamson JA).

1. )  Whether the knowledge of a director will be imputed to a company is to be answered by reference to the context, with particular regard to the identity of the plaintiff and the defendant in the proceedings and the nature of the claim. The law has a concern to prevent a party from profiting from his or her own breach. That principle is of general application and informs the authorities recognising that, in a claim such as the present, it would be wrong and illogical to attribute the director’s knowledge of the wrongdoing to the company: [1] (Ward P); [133]-[136] (Adamson JA).

   Hawkins v Clayton (1988) 164 CLR 539; [1988] HCA 15, considered.

As to the Sunnyholt Surplus Rent claim:

1. ) The success of the appeal in respect of this claim, and of the cross-appeal, depended on the outcome of the question as to attribution of Peter’s knowledge to KAL. For the above reasons, the entirety of KAL’s claim to the Sunnyholt Surplus Rent was brought within the time prescribed by s 47(1). Judgment for KAL on that claim should be increased from $1.2 million to $2,094,545: [1] (Ward P); [83]-[84], [87], [89] (Meagher JA); [136] (Adamson JA).

As to the Superannuation Payment claim:

(7)  The language used in Limitation Act, s 55(1) is relevantly the same as that used in s 47(1)(e). Accordingly, for the above reasons, Peter’s knowledge as to the circumstances of the Superannuation Payment claim was not to be attributed to KAL, with the result that the claim was not barred by analogy: [1] (Ward P); [96] (Meagher JA); [136] (Adamson JA).

(8)  The primary judge did not err in not being satisfied that the $680,000 payment was made in reduction of the $1 million “loan”: [1] (Ward P); [124]-[128] (Meagher JA); [136] (Adamson JA).

JUDGMENT

1. WARD P: I agree, broadly for the reasons Meagher JA has given, with the orders proposed by his Honour. I also agree with the observations of Adamson JA.

2. MEAGHER JA: The respondent company, K. & A. Laird (N.S.W.) Pty Ltd (KAL), made claims against its sole director, Peter Laird (Peter, the third appellant), and two companies controlled by him for breaches of fiduciary duty and knowing receipt of property. The principal question in the appeal is whether Peter’s knowledge of the facts giving rise to those claims was to be attributed to the company (KAL) for the purpose of determining when the company “first discovers” them (see Limitation Act 1969 (NSW), s 47(1)(e)). The primary judge held that attribution turned on the application of the “fraud exception” as formulated by von Doussa J in Beach Petroleum NL v Johnson (1993) 43 FCR 1 at [22.34] (which is extracted at [52] below). If that exception was not engaged, Peter’s knowledge was to be attributed to KAL and in consequence would trigger the running of that 12-year limitation period.

3. The limitation defences of Peter and his two associated companies were rejected by the primary judge (Black J) in respect of the company’s claim to the proceeds of sale of a property; allowed in respect of the company’s claim for recovery of rental payments; and rejected in relation to the company’s claim for the misappropriation of its funds (K. & A. Laird (N.S.W.) Pty Ltd (in liq) v Aidzan Pty Ltd (in liq) [2023] NSWSC 603). In relation to this last equitable claim, Peter and an associated company relied on the application by analogy of s 15 of the Limitation Act; and in reply KAL relied on the suspending provision in s 55(1).

4. In so concluding, his Honour asked in relation to each of those claims, in accordance with von Doussa J’s formulation of the “fraud exception”, whether Peter had acted “totally in fraud” of the company so that “by design or result” the company had not benefitted from his conduct. If the company had benefitted, the “fraud exception” was not engaged.

5. It is to be noted at the outset that the focus of the argument before the primary judge was whether KAL had obtained a benefit from Peter’s conduct. That argument necessarily assumed that the “fraud exception” as formulated by von Doussa J applied, notwithstanding that the purpose of the attribution sought was to provide a limitation defence to a company’s claim against its director. For the reasons which follow, and having had the benefit of argument on the English and Australian decisions in this Court, it is plain that that approach was not correct. The rules and principles of attribution to be applied depend on the nature of the claim in issue and purpose for which attribution is sought or to be made. Those rules and principles do not have as their starting point a single general rule in favour of attribution which is subject to an inflexible “fraud exception”.

The parties

6. Since the 1950s, KAL operated a family steel merchant business from premises in Blacktown, NSW. It was placed in voluntary liquidation by its members in 2018.

7. Throughout the 1980s, the managing director of KAL was Henry Alan Laird (Alan). KAL had two other directors: Alan’s wife, Dorothy Laird (Dorothy), and their son, Peter. Upon Alan’s death in 1987, Peter became managing director. Dorothy remained a director until her death in 2009, at which point Peter became KAL’s sole director. As managing director, Peter operated the business on a day-to-day basis to Dorothy’s “exclusion”, her role being limited to signing documents on an as-and-when-needed basis (J[63], [207]).

8. The ultimate holding company of KAL is Alan Laird (Holdings) Pty Ltd (ALH), the shares in which were and remain held by various members of the Laird family. A consequence of this ownership structure was that Peter could not cause an ordinary resolution to be passed at a meeting of ALH’s members without the support of at least one of his siblings.

The proceeding below

9. The underlying proceeding was commenced by KAL’s liquidator in December 2020 against Peter, Aidzan Pty Ltd (in liq) (Aidzan, the first appellant) and Nazdia Pty Ltd (Nazdia, the second appellant). Aidzan was sued in its own capacity and in its capacities as trustee of the Peter Laird Trust and the Peter Alan Laird Property Trust (PAL Property Trust). Nazdia was sued in its capacity as trustee of the Aidzan Superannuation Fund, having replaced Aidzan as trustee on 18 February 2019.

10. Three of the claims advanced remain relevant in the appeal. The first and second relate to a property on Sunnyholt Road, Blacktown (Sunnyholt Property). KAL claimed that Peter breached his fiduciary duty owed to KAL by diverting the opportunity to purchase that property from KAL to Aidzan, as trustee of the Peter Laird Trust, of which Peter was the sole beneficiary. On that basis KAL asserted beneficial ownership in the net proceeds of sale of the Sunnyholt Property (the Sunnyholt Trust claim) and also sought to recover $2.4 million in rent which had been paid by KAL to Aidzan from 1 July 2005 (the Sunnyholt Surplus Rent claim). The third claim was that Peter breached his fiduciary duty as a director of KAL in causing KAL to pay $1 million to the Aidzan Superannuation Fund in 2007, purportedly as a contribution by Peter (the Superannuation Payment claim).

Issues on appeal

11. Ground 5 of the notice of appeal was abandoned. With the exception of ground 8, which is directed to the quantum of the Superannuation Payment claim, the critical question is whether Peter’s knowledge of his own breaches of duty was to be attributed to KAL so as to commence the running of the relevant limitation period at the time those breaches occurred, thereby providing the appellants with a defence to some or all of KAL’s claims.

12. As to the Sunnyholt Trust claim, the appellants by grounds 1 to 3 contend that in applying the “fraud exception” the primary judge erred in treating Aidzan’s acquisition of the Sunnyholt Property separately from KAL’s subsequent occupation of the property and payment of rent. It is said that, in the circumstances viewed as a whole, KAL received a partial “benefit” from Peter’s conduct, with the result that the “fraud exception” did not apply to any of the claims; and with the further result that the Sunnyholt Trust claim was statute barred.

13. Ground 4 concerns the Sunnyholt Surplus Rent claim and is contingent upon the appellants’ success on grounds 1 to 3. KAL leased the Sunnyholt Property from Aidzan in June 1990 for a term of four years, with an option to renew (Sunnyholt Lease). The rent was applied in reduction of a loan facility taken to enable Aidzan to complete the acquisition of the property. That loan facility was fully repaid by 1 July 2005. The appellants contend that if KAL’s claim to a beneficial interest in the proceeds of sale is statute barred then there is no basis for recovery of the rent, KAL having had no relevant interest in the property.

14. Conversely, by ground 1 of its amended notice of cross-appeal, KAL contends in relation to the application of the limitation provisions that Peter’s knowledge was not to be attributed to it. If it was successful on that ground, KAL was entitled to recover compensation for the rent paid between 1 July 2005 and 11 December 2008, an additional $894,545.

15. As to the Superannuation Payment claim, by grounds 6 and 7, Peter and Nazdia challenge the primary judge’s finding that KAL’s entitlement to equitable compensation was not barred by the application by analogy of s 15 of the Limitation Act. Alternatively, by ground 8, they submit that the primary judge ought to have treated a sum of $680,000 paid by Peter to KAL on 29 June 2012 as paid in reduction of the amount for which equitable compensation was sought.

16. KAL has also filed a notice of contention. By ground 1, it maintains that Peter’s knowledge cannot be attributed to KAL because in entering into the relevant transactions Peter was acting in his capacity as a director of Aidzan as purchaser and borrower and not within the scope of his authority as a director of KAL. By grounds of contention 2 and 3, it says that, regardless of whether Peter’s knowledge is attributable to KAL, the relevant knowledge was not that of KAL but rather that of its liquidator, appointed in 2018. Finally, by ground of contention 4, KAL says that its claims were brought within the 12-year limitation period because the duties which Peter breached were continuing duties, the breach of which also continued beyond 12 December 2008.

Claim to proceeds of sale of Sunnyholt Property (Grounds of appeal 1 to 3)

Undisputed findings of fact

17. In 1989, Peter decided that KAL should relocate its steel operations to the Sunnyholt Property to give it access to undercover storage. Peter initially intended for KAL to acquire the Sunnyholt Property but was advised by Mr Burges, a solicitor, to acquire the property through “another structure”. To that end, Peter acquired Aidzan, a shelf company. It was not controversial that KAL had the financial capacity to purchase the Sunnyholt Property in early 1990, either in its own name or as held beneficially for it (J[97]).

18. On 16 January 1990, Peter and Dorothy were appointed as Aidzan’s directors. Peter was issued two shares and Dorothy the remaining share, which she held on trust for Peter. Peter subsequently became sole director of Aidzan (from 2009) and is sole director of Nazdia. Also on 16 January, the Peter Laird Trust was settled with Aidzan as trustee and Peter as sole beneficiary (J[96], [105]).

19. On 18 January 1990, Peter caused Aidzan as trustee of the Peter Laird Trust to exchange contracts for the acquisition of the Sunnyholt Property. The purchase price was $3.083 million. As Aidzan had never traded and had no assets of its own, Peter caused KAL to pay $1.283 million from its funds towards the purchase price. The balance was funded by Michell NBD Pty Ltd (Michell) under a credit facility dated 23 March 1990 (Michell Facility). KAL was a co-borrower with Aidzan and each guaranteed the repayment of the liability of the other.

20. So that Aidzan could repay the Michell Facility, Peter caused KAL to enter into the Sunnyholt Lease. Although the lease was not executed until 19 June 1990, it took effect from 24 March 1990 for a term of four years with an option to renew. Rent was $420,000 per annum. On 23 March 1990, Peter caused KAL to enter a Deed of Assignment of Rentals with Michell and Aidzan. Aidzan assigned its right to receive rental payments under the lease to Michell, with those payments to be applied in reduction of the Michell Facility (J[10]).

21. The effect of Peter’s conduct was that the entirety of the funds used to purchase the Sunnyholt Property came from KAL. Despite that, upon repayment of the Michell Facility and discharge of the corresponding mortgage, the title to the property vested in Aidzan as trustee of the PAL Property Trust. That trust had acquired the Sunnyholt Property, subject to the mortgage, from Aidzan as trustee of the Peter Laird Trust on 26 May 1993. The sole unitholder in the PAL Property Trust was Aidzan as trustee of the Aidzan Superannuation Fund, of which Peter was the sole beneficiary.

Reasoning of the primary judge

22. The Sunnyholt Property was sold in 2019 by Aidzan’s liquidators. The net proceeds of the sale were $6,992,444 (J[88]) and the Commonwealth Bank of Australia accounts in which they were held were made, on KAL’s application, the subject of a freezing order (In the matter of K. & A. Laird (N.S.W.) Pty Ltd (in liq) [2022] NSWSC 510). KAL’s primary claim was that those moneys were held by Aidzan (and by Nazdia as successor trustee of the Aidzan Superannuation Fund) subject to a constructive trust, each having received them knowing of Peter’s breaches of duty (Barnes v Addy (1874) LR 9 Ch App 244).

23. The primary judge held that Peter had breached his fiduciary duty to KAL (at J[105]):

… Aidzan’s acquisition of the Sunnyholt Property, initially as trustee for the Peter Laird Trust, amounted to a breach of the no conflict rule, where [Peter] had a material conflict between his duty owed to KAL to determine whether to acquire the Sunnyholt Property on its behalf on the one hand and, on the other, his duty as a director of Aidzan and his interests as a shareholder of Aidzan and the sole beneficiary of the Peter Laird Trust in acquiring that property for the trust. It is no answer to a claim for conflict of interest, by diversion of corporate opportunity, that KAL could not or would not have acquired the property, by reason of Mr Burges’ advice, had Aidzan not done so. In any event, an entity other than KAL could have acquired the property in a manner that provided a corresponding economic interest to ALH, WE and the ultimate shareholders in ALH, the other members of the Laird family, in the Sunnyholt Property where KAL had, as a matter of reality, funded the acquisition of that property.

24. With respect to the accessorial claim against Aidzan and Nazdia, his Honour concluded (at J[117]):

I am satisfied that the elements of a claim for knowing receipt are established as against Aidzan and Nazdia. I have held above that the relevant breach of fiduciary duty by [Peter] has been established, and Aidzan and then Nazdia received the Sunnyholt Property by reason of and knowing (through [Peter]) the facts of that breach.

25. Peter, Aidzan and Nazdia pleaded limitation defences to each of KAL’s claims and it was common ground that the claim to the net proceeds of sale, taking account of the extended definition of “trust” in s 11, was subject to s 47(1) of the Limitation Act (J[122]):

11   Definitions

(1)   In this Act, unless the context or subject matter otherwise indicates or requires—

…

Trust includes express implied and constructive trusts, whether or not the trustee has a beneficial interest in the trust property, and whether or not the trust arises only by reason of a transaction impeached…

47   Fraud and conversion; trust property

(1)   An action on a cause of action—

(a)   in respect of fraud or a fraudulent breach of trust, against a person who is, while a trustee, a party or privy to the fraud or the breach of trust or against the person’s successor,

…

(c)   to recover trust property, or property into which trust property can be traced, against a trustee or against any other person, …

…

is not maintainable by a trustee of the trust or by a beneficiary under the trust or by a person claiming through a beneficiary under the trust if brought after the expiration of the only or later to expire of such of the following limitation periods as are applicable—

(e)   a limitation period of twelve years running from the date on which the plaintiff or a person through whom the plaintiff claims first discovers or may with reasonable diligence discover the facts giving rise to the cause of action and that the cause of action has accrued, …

26. The appellants argued that Peter’s knowledge of those facts was to be attributed to KAL with the result that KAL first discovered the facts giving rise to its claims when they occurred in 1990.

27. As Peter was acting within the scope of his authority as director, it was said that, subject only to the “fraud exception”, his knowledge was to be attributed to the company. Adopting von Doussa J’s formulation of that exception in Beach Petroleum v Johnson, it was submitted (J[131]):

… that the acts of [the directors] in committing KAL to the course they did in March 1990 was an act the knowledge of which is imputed to KAL. … [However] any knowledge of [the] directors of KAL is not imputed to KAL where that knowledge was obtained in the course of a fraud on the company. However, … the fraud exception to imputed knowledge does not apply if the company obtains a benefit from the transaction, even if the director is also, in that transaction obtaining a personal benefit in breach of duty, and that the director’s conduct must be in “total fraud” of the company for the fraud exception to imputed knowledge to apply: Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [284]; Gerace v Auzhair Supplies Pty Ltd [2014] NSWCA 181 at [78].

28. The appellants identified three respects in which KAL was said to have benefitted from Peter’s conduct in acquiring the Sunnyholt Property through Aidzan and then leasing it to KAL. They were the tax deductions obtained by KAL for rental payments made under the Sunnyholt Lease, KAL’s occupancy of the Sunnyholt Property under a registered lease for a term of four years with an option to renew, and KAL’s having access to undercover storage at those premises.

29. The primary judge concluded at J[138]:

With a degree of hesitation, I consider that I should treat KAL’s occupancy of the Sunnyholt Property and the tax deductions that it received from payment of rent to Aidzan as a benefit to KAL, although that benefit was achieved at the cost of the payment of an above-market rental to Aidzan for a considerable period. However, that does not seem to me to establish that Aidzan’s acquisition of that property (as distinct from entry into the Sunnyholt Lease and occupation of that property) delivered a benefit or part benefit to KAL to allow [the directors’] knowledge of the relevant facts of that acquisition to be attributed to KAL in 1990 or thereafter. KAL obtained no real or apparent benefit from the arrangements formed in January 1990, by which Aidzan acquired the Sunnyholt Property and KAL assumed liabilities in respect of that acquisition, although I recognise that [Peter] (and likely [Dorothy]) then planned that KAL would in future occupy that property and pay rent on it so as to fund Aidzan’s acquisition of that property. It seems to me that KAL only obtained any potential benefit from its lease of that property under the Sunnyholt Lease executed some six months after Aidzan contracted to acquire the property, and any actual benefit only from its occupation of that property two years later, in early 1992. I accept that [the directors’] knowledge of the terms of the Sunnyholt Lease and the fact that Aidzan had leased the property to KAL as trustee for the Peter Laird Trust should be attributed to KAL, but that is not sufficient to disclose that the transaction had been structured so that KAL’s shareholders and the other Laird siblings had been excluded from any economic interest in the property. (Emphasis added.)

30. In short, his Honour reasoned that any “benefit” obtained by KAL sufficient to disentitle it from relying on the “fraud exception” was not obtained through Peter’s initial breach of duty in causing Aidzan to acquire the Sunnyholt Property instead of KAL, but rather through Peter’s subsequent breach in causing KAL to enter into the Sunnyholt Lease. On that basis, the primary judge rejected the submission that the limitation period with respect to the Sunnyholt Trust claim commenced in 1990, holding that KAL did not first discover the relevant facts until its liquidator became aware of them on 24 August 2018. As the underlying proceeding was commenced in December 2020, KAL’s claims to the proceeds of sale were brought within the 12-year limitation period.

The relevant principles of attribution

The issue

31. The appellants submit that the general rule (derived from agency principles) is that a director’s knowledge is attributed to the company provided the director is acting within the scope of his or her authority. That rule is said to be subject to an exception described generally as the “fraud exception”, which only applies if the director acted “totally in fraud” of the company so that the company did not “by design or result” obtain a benefit from the director’s conduct. In support of this formulation, the appellants cite Beach Petroleum v Johnson at [22.34], and cases in which that formulation of the exception has been applied, including Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [282]-[285]; Bluemine Pty Ltd (in liq) v AKA (Civil) Pty Ltd [2022] NSWCA 160 at [235]-[240] and Gerace v Auzhair Supplies Pty Ltd (2014) 87 NSWLR 435; [2014] NSWCA 181 at [78].

32. KAL makes two responses to the appellants’ reliance on that exception. First, it is said that the “fraud exception” so formulated could not apply to the present case, because there can be no attribution of a director’s knowledge of his or her own breaches of duty where the attribution is sought to defeat the company’s claim against that director for those breaches. Secondly, even if this were a case for applying a general rule of attribution subject to the “fraud exception” as formulated by von Doussa J, there should have been no attribution because KAL did not “by design or result” obtain a “benefit” from Peter’s conduct.

Bilta v Nazir

33. The need for a “fraud exception” to a more general rule governing the attribution of knowledge to corporations was rejected by a majority of the Supreme Court of the United Kingdom in Bilta (UK) Ltd (in liq) v Nazir (No 2) [2016] AC 1 (‘Bilta v Nazir’). Two directors of Bilta had conspired with various corporate defendants in a fraudulent scheme involving the trading of offshore carbon credits. The effect of the scheme was that Bilta was left with the entirety of the VAT obligations and with no funds with which to meet that liability. The defendants (Bilta’s directors and other parties involved in the fraud) pleaded that Bilta was prevented from recovering any loss because of an illegality defence. It was said that Bilta, as a party to the fraudulent scheme, could not rely on the circumstances of that fraud to make good its claim. That argument was unanimously rejected, partly on the basis that the knowledge of the two directors could not be attributed to Bilta.

34. Lords Toulson and Hodge viewed the “fraud exception” as “simply an instance of a wider principle that whether an act or a state of mind is to be attributed to a company depends upon the context in which the question arises” (at [181]). Lord Neuberger (at [9]) and Lord Mance (at [37]-[44]) agreed, the former framing the overarching principle to be applied in the form of an “open” question:

[W]hether or not it is appropriate to attribute an action by, or a state of mind of, a company director or agent to the company or the agent’s principal in relation to a particular claim against the company or the principal must depend on the nature and factual context of the claim in question.

35. Lord Sumption considered that, while the agency-based rules of attribution applied “regardless of the nature of the claim or the parties involved”, the “fraud exception” (which he labelled the “breach of duty exception”) operated as a rule of public policy to prevent attribution only in certain circumstances (at [86]). He later qualified that position, saying that the “technique of applying the general rules of agency and then an exception for cases directly founded upon a breach of duty to the company is a valuable tool of analysis, but … no more than that” (at [92]).

36. Addressing Lord Sumption’s position, Lord Neuberger (at [9]) and Lords Toulson and Hodge (at [181]) agreed that the circumstances in which the “fraud exception” had historically been applied were not limited to cases of fraud, but extended to breaches of duty by a director.

37. Each of their Lordships agreed that there should be no attribution of a director’s knowledge to a company as a defence or bar to the company’s claim against that director for fraud or breach of duty. For Lord Sumption, such a claim was “the paradigm case for the application of the breach of duty exception” (at [89]). Lords Toulson and Hodge described it as “the classic example of non-attribution” (at [181]). Lord Mance observed (at [38]):

… it is certainly unjust and absurd to suggest that the answer to a claim for breach of a director’s (or any employee’s) duty could lie in attributing to the company the very misconduct by which the director or employee has damaged it.

38. In so concluding, their Lordships referred with approval to the following reasoning of Lord Walker NPJ, sitting in the Hong Kong Court of Final Appeal, in Moulin Global Eyecare Trading Ltd (in liq) v Commissioner of Inland Revenue (2014) 17 HKCFAR 218; [2014] HKCFA 22 at [80]:

The situation to which [the “fraud exception”] most squarely applies (and some would say, the only situation to which it should properly be applied) is where a director or senior employee of a company seeks to rely on his own knowledge of his own fraud against the company as a defence to a claim by the company against him (or accomplices of his) for compensation for the loss inflicted by his fraud. The injustice and absurdity of such a defence is obvious, and for more than a century judges have had no hesitation in rejecting it.

39. In his reasons, Lord Sumption identified the central “problem” posed by earlier authorities (prior to the Court of Appeal’s decision in Biltav Nazir) as being that they had “generally treated the imputation of dishonesty to a company as being governed by tests dependent primarily on the nature of the company’s relationship with the dishonest agent, the result of which is then applied universally” (at [86]).

40. Bilta v Nazir was followed in Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd [2020] AC 1189, Baroness Hale noting (at [30]):

This court [in Bilta v Nazir] held unanimously that where a company has been the victim of wrongdoing by its directors, the wrongdoing of the directors cannot be attributed to the company as a defence to a claim brought against the directors – and their co-conspirators – by the company’s liquidator for the loss suffered by the company as a result of the wrongdoing. The court explained that the key to any question of attribution was always to be found in considerations of the context and the purpose for which the attribution was relevant.

41. The approach of the Court in Bilta v Nazir was much influenced by Lord Hoffmann’s analysis in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, which emphasised that the answer to a question as to whose act or knowledge is to count as the act or knowledge of the company depends on the context in which and purpose for which such attribution is relevant. Baroness Hale summarised Lord Hoffmann’s analysis of the different rules (including those created by statute) by reference to which acts and knowledge are attributed to a company at [28]:

[Lord Hoffmann] identified three levels of attribution (at pp 506-507). The primary rule is contained in the company’s constitution, its articles of association, which will typically say that the decisions of the shareholders or of the board of directors are to be the decision of the company on certain matters. But this will not cover the whole field of the company’s decision-making. For this, the ordinary rules of agency and vicarious liability, which apply to natural persons just as much as to companies, will normally supply the answer. However there will be some particular rules of law to which neither of these principles supplies the answer. The question is not then one of metaphysics but of construction of the particular rule in question.

Two subsequent Australian decisions

42. In Anderson v Canaccord Genuity Financial Ltd (2023) 113 NSWLR 151; [2023] NSWCA 294, this Court (Gleeson, Leeming and White JJA), having referred to the decisions in Bilta v Nazir and Singularis and to [22.34] of von Doussa J’s judgment in Beach Petroleum v Johnson, observed (in dicta):

[255] But this analysis [of von Doussa J] must be reconciled with later authority. It is to be steadily borne in mind that the rules of attribution are context-dependent. The circumstances in which a company is treated as liable by reason of the conduct and knowledge of the natural persons through whom it acts depends upon the particular statute or rule of common law or principle of equity. This cannot easily be reconciled with an inflexible “fraud exception”, that immunises a company from attribution irrespective of the relevant statutory or common law or equitable rule, in cases where a director has acted “in total fraud” upon the company and the company has not obtained a benefit.

[256] The point may be illustrated by contrasting liability in equity for knowing receipt and knowing assistance. An element of liability for knowing receipt is that the third party has received a benefit (ordinarily, property). It would seem to follow that the “fraud exception” as formulated in Beach Petroleum NL v Johnson, which turns on the absence of the company obtaining a benefit, would never be available.

43. The Court also agreed (at [257]) with the observations of Allsop CJ (sitting at first instance) in All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Ltd (No 2) [2021] FCA 782:

[167] The judgment of the Supreme Court in Bilta [2015] UKSC 23; [2016] AC 1 is to the effect that there is no general fraud exception to imputation, rather the question is an open one: whether or not it is appropriate to attribute an action by, or a state of mind of, a company director or agent to the company or the agent’s principal in relation to a particular claim against the company or the principal must depend on the nature and factual context of the claim in question: Bilta at 11 [9] per Lord Neuberger, see also 18-19 [41]-[45] per Lord Mance JSC, 64-73 [180]-[209] per Lord Toulson and Lord Hodge JJSC, cf Lord Sumption JSC at 38 [86]; P Watts and FMB, Bowstead and Reynolds on Agency (21st ed, Sweet & Maxwell, 2018) at [8-214].

[168] Drawing upon the Court’s reasoning in Bilta, the UK Supreme Court in Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50; [2020] AC 1189 held at 1205 [34] that the question as to whether knowledge of a particular officer of a company should be attributed to the company depends on the particular context in which the question of attribution arises. …

44. The reasoning in these English and Australian authorities explains clearly why, in a case like the present, where the substantive claim is by the company against its director for breach of duty, the director’s knowledge will not be attributed to the company for the purpose of defeating or barring the company’s claim. That leaves open the possibility that, in a particular context, some special rule of attribution, including one arising by statute, might apply. For that reason, in the present case the meaning of “first discovers” as used in s 47(1)(e) of the Limitation Act with respect to a corporate plaintiff must be addressed. However, in view of the way in which this appeal was argued, it is first necessary to consider the relevance to the present case of von Doussa J’s formulation of the “fraud exception” in Beach Petroleum v Johnson at [22.34] and the decisions informing or applying the principles to which his Honour there refers.

Scope of any “fraud exception”

45. Where applied to a general rule of attribution, the so-called “fraud exception” has not been limited to circumstances involving actual fraud or dishonesty of a director upon the company (Bluemine at [219]).

46. That accords with the reasoning in In re Hampshire Land Company [1896] 2 Ch 743, to which the exception is commonly traced (cf P Watts, ‘Imputed Knowledge in Agency Law – Excising the Fraud Exception’ (2001) 117 LQR 300, which identifies as that source the decision of Lord Brougham LC in Kennedy v Green (1834) 3 My & K 699). The Hampshire Land Company borrowed money from a building society. The notice calling the general meeting in which the borrowing had been authorised was defective. The secretary of the company, who was also secretary of the building society, knew of the defect. The building society later attempted to prove for the amount of the loan in the company’s winding-up. That was resisted on the basis that the knowledge of the common secretary should be imputed to the building society so as to prevent its relying on the internal management rule.

47. Delivering an ex tempore judgment, Vaughan Williams J rejected the suggestion that “the knowledge of [a] common officer is always the knowledge of the two companies” (at 748), instead identifying the relevant agency questions as being:

First, was it within the scope of the duty of the officer to give notice to the other company of the information he had got; and, secondly, was it within the scope of his duty, as the officer of the company sought to be affected by notice, to receive such notice?

48. Observing that this was “not at all the case here”, his Honour referred to an “exception to the general rule”, namely that if the common officer had been guilty of a fraud that officer’s knowledge of that fraud would not have been imputed to the society, reasoning as follows (at 749-750):

…because common sense at once leads one to the conclusion that it would be impossible to infer that the duty, either of giving or receiving notice, will be fulfilled where the common agent is himself guilty of fraud. It seems to me that if you assume here that Mr. Wills was guilty of irregularity — a breach of duty in respect of these transactions — the same inference is to be drawn as if he had been guilty of fraud. … but whether his conduct amounted to fraud or to breach of duty, I decline to hold that his knowledge of his own fraud or of his own breach of duty is, under the circumstances, the knowledge of the [society]. (Emphasis added.)

49. As Lord Sumption noted in Bilta v Nazir at [72], Hampshire Land Company did not in fact involve any allegation of fraud; and the exception to which Vaughan Williams J was referring applied to prevent the attribution to a principal of its agent’s knowledge of his or her own breach of duty, whether or not the breach involved actual fraud (at [71]). It was for that reason that Lord Sumption described the exception as the “breach of duty exception” rather than the “fraud exception”.

The importance of context and purpose in resolving questions of attribution

50. In Bilta v Nazir, for the purpose of assisting an analysis directed to the nature and factual context of the claim in question, Lords Toulson and Hodge at [204] (and to a similar effect, Lord Sumption at [87]) identified three categories of case in which a question as to attribution might arise:

It is helpful in the civil sphere, to consider the attribution of knowledge to a company in three different contexts, namely (i) when a third party is pursuing a claim against the company arising from the misconduct of a director, employee or agent, (ii) when the company is pursuing a claim against a director or an employee for breach of duty or breach of contract, and (iii) when the company is pursuing a claim against a third party.

51. In respect of the second category, whereas Lords Toulson and Hodge limited it to a claim by the company against a director or employee, Lord Sumption included “third parties acting in concert” with the director. However, this difference is of no moment because Lords Toulson and Hodge equally recognised that, where the claim by the company against a third party arises from that third party’s involvement as an accessory in the director’s breach of duty or fraud, “there is no good policy reason to attribute to the company the act or the state of mind of the director who was in breach of his fiduciary duty” (at [207]). In other words, the rule of attribution in respect of a claim by the company against a related party (including one liable as an accessory) of the defaulting director is the same as that which applies to the claim by the company against the defaulting director.

52. Beach Petroleum v Johnson is an example of a case in which claims falling into more than one of the above categories were made, with different outcomes. The corporate plaintiff, Beach, brought claims against its directors and against three companies controlled by the same directors, Spargos Mining NL, Enterprise Gold Mines NL and Jingellic Minerals NL (the “SEJ companies”) for conspiracy by unlawful means. The SEJ companies argued that the common directors’ knowledge should not be attributed to them because of the “fraud exception”. Thus the case was one in which a third party (Beach) was pursuing a claim against those companies arising from the misconduct of their directors (the first of the categories referred to above). In that context, von Doussa J described the “fraud exception” as follows (at [22.34]):

Provided that the director is acting within the scope of his or her authority, in civil proceedings the state of mind of a director ordinarily will be attributed to the company where there is a duty on that director to communicate his or her knowledge to the company. The exception to this rule is where the director is acting totally in fraud of the company, that is, where all the director's activities are directed against the interests of the company, and not partly for the benefit of the company. If the director is guilty of fraudulent conduct which is not totally in fraud of the corporation, and by design or result the fraud partly benefits the company, the knowledge of the director in the transaction will be attributed to the company. (Emphasis added.)

53. The reference to a “benefit” obtained “by design or result” is taken from the Supreme Court of Canada’s decision in Canadian Dredge & Dock Co Ltd v The Queen [1985] 1 SCR 662. The question there was whether the companies, having received contracts, subcontracts and other benefits in the course of their directors’ illegal scheme, could be attributed with the directors’ knowledge for the purpose of establishing criminal liability against those companies. Von Doussa J considered that Estey J’s statement of the law (at 712-713) provided “compelling guidance”. His Honour reasoned (at [22.32]):

If, for the purposes of criminal responsibility, a company is imputed with the knowledge and intention of a person who is the directing mind of the company, acting in the field of operation assigned to him, when his actions are not totally in fraud of the company and by design or result are partly for the benefit of the company, the imputation of the knowledge and intention of that person to the company for the purposes of civil responsibility should be no less extensive…

54. The relevance of attribution to the claims in Beach Petroleum v Johnson referred to in [52] above was in determining the civil liability of the SEJ companies to Beach, as distinct from determining whether those companies had a defence to a claim brought by Beach, the success of which would have turned on Beach’s knowledge. Similarly, but in the context of a criminal prosecution, in Canadian Dredge the purpose for the attribution was in determining whether the companies were criminally liable for the acts of persons who were their directing minds. The issue in the present case is quite different, and is whether Peter’s knowledge of his breaches of duty should be attributed to KAL for the purpose of making out his limitation defence to its claim.

55. In Beach Petroleum v Johnson, a further and separate issue of attribution arose which was much closer to the circumstances of the present case. Beach made a claim against the SEJ companies for misleading or deceptive conduct. Here, the SEJ companies argued that their conduct was not causative of Beach’s loss because in the relevant counterfactual, had the knowledge of the fraudulent directors been communicated to Beach, it would not have acted any differently because those directors (as its directors) were already aware of the true facts. Beach’s response was that, where all of its directors were party to the fraud, the only way proper disclosure could have been made to it was by way of notice to the company in general meeting. Von Doussa J agreed, rejecting the argument that in a causation counterfactual involving “proper” disclosure that disclosure could be achieved by attribution of the fraudulent directors’ knowledge to Beach (at [22.76]):

In my opinion it is unrealistic to assert that if there had been a proper disclosure of the true position to Beach that would not have led to a different outcome. To remove the misleading and deceptive character of the conduct in question, a full and proper disclosure of the true position to Beach would be required. A statement of the true position by the fraudulent agents of SEJ in that capacity to themselves in the capacity as agents of Beach would be no disclosure at all. As a matter of law Beach had no knowledge of the fraud because, being the victim, it was not imputed with the knowledge of those acting on its behalf. Notice of the true position, if it were to be effective notice, would have to be given to someone other than the parties to the fraud. As the only directors of Beach in June 1989 were Messrs Fuller, Cummings and Main, notice could not be given effectively to a director. The only organ of the company to whom effective notice could be given would be the shareholders. Had the shareholders been told the true position, it is beyond doubt that the transactions would not have occurred. (Emphasis added; citation omitted.)

56. Similar reasoning applies to the attribution sought in the present case. As KAL’s controlling, and later sole, director, Peter was the only natural person with knowledge of his wrongdoing who could have caused KAL to commence proceedings in relation to his wrongdoing. However, there was no realistic possibility of that occurring, as to which see below at [76].

57. Von Doussa J’s reasoning at [22.76] for rejecting the SEJ companies’ causation argument is informed by the agency rules referred to at [22.22]:

The reasoning in Re Hampshire Land Company and Houghton is expressed in terms reflecting principles of agency. The officer or director whose knowledge was in question was considered as a representative of the company. By the time of those decisions it was well established that a principal was not imputed with the knowledge of facts known to the agent where the agent was committing a fraud upon the principal and the information known to the agent was relevant to the fraud. The Belmont Finance cases provide a more recent example of the application of the principle… (Emphasis added; citations omitted.)

58. The first of the Belmont Finance cases referred to by von Doussa J is Belmont FinanceCorporation Ltd v Williams Furniture Ltd [1979] Ch 250. There, Belmont’s directors, in breach of their fiduciary duties (and in unlawful contravention of s 54 of the Companies Act 1948), sought to extract value from Belmont by causing it to buy the shares of another company at a considerable overvalue. Belmont brought proceedings against its directors who had authorised the transaction and for an account against three companies associated with the directors for knowing receipt. The three companies relied on an illegality defence, which for its success required that the knowledge of the directors be attributed to Belmont so as to render Belmont a co-conspirator in the unlawful conduct. Belmont’s claim against its directors and their related companies was within Lord Sumption’s second category (see [51] above). As to the question of attribution, Buckley LJ said (at 261-262):

… in my view such knowledge should not be imputed to the company, for the essence of the arrangement was to deprive the company improperly of a large part of its assets. … I think it would be irrational to treat the directors, who were allegedly parties to the conspiracy, notionally as having transmitted this knowledge to the company; and indeed it is a well-recognised exception from the general rule that a principal is affected by notice received by his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal.

59. Applying the same reasoning in the present case would mean that Peter’s knowledge would not be attributed to KAL for the purpose of making good his and the other appellants’ limitation defences.

60. In answer to the difficulties which the analysis to this point presents for their argument, the appellants submit that the reasoning of von Doussa J at [22.34] adopts a stricter and narrower form of the “fraud exception” than has been adopted in other jurisdictions, including the United Kingdom. In support they cite Lord Mance’s observation in Stone & Rolls Ltd (in liq) v Moore Stephens (a firm) [2009] 1 AC 1391 at 1535 (par (i) in the Annex referred to in [248]) that “the phraseology developed in [Canadian Dredge] … indicates a test which is both more rigid and more extreme than that which English law would adopt, particularly since the Privy Council’s decision in Meridian”. They also rely on the following statement of Lord Walker NPJ in Moulin Global Eyecare at [91]:

The Supreme Court of Canada adopted a rather different test involving the notion of an act being ‘totally in fraud of the corporate employer and where the act is intended to and does result in benefit exclusively to the employee-manager.’ That test has had some influence in Australia but has not been adopted in England or Hong Kong.

61. It is said to follow that, in Australia, and notwithstanding the position in other jurisdictions, there is a single “fraud exception”, the application of which depends, in every case, on whether the company has by design or result partly benefitted from the director’s fraud or breach of duty. If it has benefitted, the director’s knowledge is attributed to the company, irrespective of the context in which, and purpose for which, attribution is sought.

62. The authorities relied on by the appellants tend to involve either a third party pursuing a claim against the company in respect of misconduct of its director (the first category referred to in Bilta v Nazir) or the company pursuing a claim against an unrelated third party such as an insurer (the third category, noting the qualification above at [51]). None squarely considers the position where a director seeks to attribute his or her knowledge to the company for the very purpose of defeating a claim by the company against them for breach of duty or wrongdoing.

63. Bluemine is a case in the first category. The liquidator of Bluemine and Earth Civil brought claims against several individual and corporate defendants in relation to a complex fraudulent scheme. An aspect of the fraud involved the two AKA companies recording substantial payments and management fees to Bluemine and Earth Civil in order to obtain taxation benefits in the form of GST input credits. Bluemine and Earth Civil were left with significant taxation liabilities which they were unable to meet. The director of the AKA companies had knowledge of the fraudulent scheme. The question was whether his knowledge could be attributed to the AKA companies to render them liable as accessories. The answer was that it could. Both companies had obtained taxation benefits from the scheme, meaning the director’s activities “were not in total fraud of the AKA companies and were partly for [their] benefit” (at [264]).

64. All Class Insurance Brokers is an example of the third category of case. The company’s claim was against a third-party insurer for losses arising from its director’s fraudulent conduct. The issue was whether the director’s knowledge of that conduct should be attributed to the company in determining whether it had made adequate disclosure to the insurer. The insurer succeeded in its argument as to attribution on the basis that the director was “misusing property of the company impressed with trust obligations to others to seek to benefit the company (and, perhaps, through the company, himself)”. That meant his dishonesty was “at least in material part, not in fraud of the company, but designed to benefit the company” (at [178]). The outcome was that the insurer’s non-disclosure defence succeeded.

65. Such a case requires a balancing of the interests of the company, and specifically the members of the company, with the interests of the innocent third party against whom the claim is brought. In this way it relevantly differs from a case like the present where the company claims against the director and no issue as to the interests of any (innocent) third party arises. So much is evident from the comments of Allsop CJ at [164]:

The knowledge of a person in either category, whether the “directing mind and will” or an agent, may not be imputed to the corporation where that person’s knowledge is an element of his or her fraud against the corporation: Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250 at 261-262; Beach Petroleum NL v Abbott Tout Russell Kennedy [1999] NSWCA 408; 48 NSWLR 1 at 99 [473]-[476]; Macleod v The Queen [2003] HCA 24; 214 CLR 230 at 264 [128]; cf Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd (1996) 40 NSWLR 543 at 610-614. Lord Neuberger in Bilta (UK) Ltd (in liquidation) v Nazir (No 2) [2015] UKSC 23; [2016] AC 1 at 10 [7] stated the principle as follows:

… Where a company has been the victim of wrong-doing by its directors, or of which its directors had notice, then the wrong-doing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors by the company’s liquidator, in the name of the company and/or on behalf of its creditors, for the loss suffered by the company as a result of the wrong-doing, even where the directors were the only directors and shareholders of the company, and even though the wrong-doing or knowledge of the directors may be attributed to the company in many other types of proceedings.

66. These remarks are consistent with the analysis in Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1; [1999] NSWCA 408 (a related proceeding to Beach Petroleum v Johnson). Beach argued that its solicitors had breached their fiduciary duties by acting for various companies in the group. The solicitors argued that Beach had given them its fully informed consent in relation to these potentially conflicting engagements. In response Beach submitted that its directors’ knowledge as to the potential conflicts could not be attributed to it in circumstances where those directors were actively defrauding it. Addressing that submission, the Court (Spigelman CJ, Sheller and Stein JJA) said (at [474]):

Those cases stand for the propositions that in a claim by a company against directors, who have conspired to defraud it, the knowledge of the conspiring directors is not imputed to the company because it would be irrational to do so; Belmont Finance Corporation Limited at 261-2; and that, where a third party claims a company is estopped by conduct amounting to acquiescence, the knowledge of directors acting in fraud of the company and outside their authority will not be treated as knowledge of the company, for reasons of justice and commonsense; J C Houghton & Co at 14-15 and 19; see Beach Petroleum NL v Johnson (1993) 43 FCR 1. Such claims are quite different from those where solicitors are seeking to establish a defence of fully informed consent.

67. This reasoning focuses on the nature of the claim in question and, in respect of a claim such as that in the present case, is wholly in agreement with the position stated in Bilta v Nazir as summarised at [37] above.

68. The Australian and English authorities discussed above make clear that where a claim is brought by a company against its director for fraud or breach of duty, that director’s knowledge is not to be attributed to the company as or in support of a defence to the company’s claim. The outcome is the same where the company’s claim is brought against companies associated with or controlled by that director and those companies seek to attribute the director’s knowledge to the plaintiff company so as to defeat its claim. See Beach Petroleum v Johnson at [22.22] and [22.76], Beach Petroleum v Kennedy at 474, and All Class Insurance Brokers at [164]; and Belmont Finance v Williams Furniture at 261-262, Bilta v Nazir, and Singularis at [30]. It necessarily follows that the appellants’ argument that, irrespective of the context in which and purpose for which it is sought, attribution of a director’s knowledge is to be determined by the application of a single “fraud exception” which turns on whether the company has partly benefitted from the director’s fraud or breach of duty must be rejected.

69. As the reasoning in Bilta v Nazir shows, the outcome for the present case is capable of being explained by the application of an exception to a general rule, informed by the principles of agency, that a director’s knowledge acquired in the scope of his or her duty is that of the company. In relation to attribution sought where the claim is by the company against a director for a breach of duty or fraud, and for the purpose of defeating the claim, the application of such an exception is not qualified by reference to whether the company receives some benefit or whether the conduct is not in “total fraud” of the company.

70. The alternative, and preferable, approach is to recognise that the rules and principles of attribution applicable in a given case depend on the nature of the claim and purpose for which the attribution is sought. In the present case, that the claims are for breaches of duty and that the attribution is sought to support a limitation defence leads inevitably to the conclusion that there should be no attribution. Borrowing from the language of Lord Mance (at [42]) in Bilta v Nazir, where an illegality defence was raised to a company’s claim for breach of duty on the basis that the directors’ illegal conduct was that of the company, and applying his language in the present case, it is “self-evidently” impossible that Peter should be able to argue that KAL “either committed or knew about the breach[es] of duty, simply because [Peter] either committed or knew about [them]”. To proceed otherwise would “ignore the separate legal identity of the company” and “empty the concept of duty of content”.

71. An approach which focuses on context and purpose in applying any agency-based rules of attribution permits greater regard to be had to the underlying reasons for which the exercise of legal attribution is invoked and the interests of the different parties concerned in the outcome of that exercise. This was the conclusion of the majority in Bilta v Nazir (at [9], [37]-[44] and [181]). In doing so, reference was made to the views expressed in an earlier edition of Bowstead & Reynolds on Agency, the current edition of which makes the same point at [8-214] (P Watts and F Reynolds, Bowstead & Reynolds on Agency (22^nd ed, 2021, Sweet & Maxwell)):

The putative defence that the exception is used to rebut is premised on the fallacy that a principal is prima facie deemed to know at all times and for all purposes that which his agents know. As observed already, imputation has never operated in such a way. Before imputation occurs, there needs to be some purpose for deeming the principal to know what the agent knows. There is none in this type of case. Reasoning of this sort has now been adopted in the Bilta case; there is no exception, rather there is no reason to impute knowledge in these cases. (Emphasis added; footnotes omitted.)

72. That approach also has the support of the observations of this Court in Anderson v Canaccord at [255].

Attribution for the purpose of Limitation Act, s 47(1)(e)

73. The language of and purpose underlying s 47(1)(e) of the Limitation Act is wholly consistent with there being no attribution where the facts said to be discovered are facts known only to a director who relies on a limitation defence in answer to the company’s claim against him or her for breach of duty arising from those facts.

74. Under s 47(1)(e), time does not commence running until “the plaintiff … first discovers … the facts giving rise to the cause of action and that the cause of action has accrued”. A plaintiff company “first discovers” facts when those facts are taken to be known to the company by the exercise of legal attribution. That exercise is ordinarily informed by principles of agency.

75. The “first discovers” provision identifies for the purpose of the running of the relevant limitation period the time from which it is reasonable to require that a prospective plaintiff consider commencing proceedings. After the expiry of that period, that plaintiff’s claim is “not maintainable”. As McHugh J observed in Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 at 553; [1996] HCA 25, the limitation period “represents the legislature’s judgment that the welfare of society is best served by causes of action being litigated within the limitation period, notwithstanding that the enactment of that period may often result in a good cause of action being defeated”.

76. The fixing of the limitation period from the time when the relevant facts are first discovered, or might with reasonable diligence have been discovered, assumes that thereafter a plaintiff, in the case of a company by its officers or agents, has the opportunity to form a view, and take advice, as to whether to commence proceedings. If the prospective defendants are the only natural persons with actual knowledge of the relevant facts, there is no rational reason to believe that from a plaintiff company’s perspective those defendants would cause proceedings to be commenced against themselves. In such a case, the company remains without any director, officer, or authorised agent having actual knowledge of the relevant facts who might pursue its interests by the commencement of proceedings or who, having made reasonable inquiries, would have had such knowledge.

77. In this context the reference to when a plaintiff “first discovers” facts giving rise to a cause of action is, in the case of a claim by a company against a director or officer, to be construed as concerned with knowledge, necessarily attributed, which is capable of being acted upon by a director or officer other than the person against whom the claim is brought. Accordingly, as a matter of construction, s 47(1)(e) would not be satisfied by the attribution of Peter’s knowledge to KAL where that knowledge was of his own wrongdoing. Whether the knowledge of some other natural person of those same facts could be attributed to the company would remain to be considered separately, and does not arise in this case.

78. In the end the disposition of grounds of appeal 1 to 3 is straightforward, as is the disposition of grounds of appeal 4, 6 and 7 and ground 1 of the cross-appeal (which are dealt with below). KAL makes claims against its director, Peter, and Aidzan and Nazdia as accessories to Peter’s breach of duty. There is no controversy as to Peter’s breach. There is no controversy as to the liability of Aidzan and Nazdia for knowing receipt. Although Peter as the primary wrongdoer was aware of the relevant facts from 1990, his knowledge is not to be attributed to KAL. At the earliest, the limitation period ran from the appointment of KAL’s liquidator in August 2018. It follows that KAL’s claims to beneficial ownership in the proceeds of sale of the Sunnyholt Property were not statute barred.

79. Accordingly, grounds of appeal 1 to 3 should be rejected.

Claim to Sunnyholt Surplus Rent (Ground of appeal 4; Ground of cross-appeal 1)

Background

80. It will be recalled that, in 1990, Peter caused KAL to enter into the Sunnyholt Lease with Aidzan. The right to rents received from KAL was assigned by Aidzan to a third-party lender, Michell, in order to repay a loan taken out to fund part of the acquisition of the Sunnyholt Property. The initial term of the Sunnyholt Lease was four years. KAL remained as lessee beyond the expiration of that initial term.

81. KAL continued to pay rent beyond the time when the Michell Facility (which had been refinanced by ANZ in 1998) was fully repaid. That was taken to have occurred on 30 June 2005. KAL stopped paying rent after FY2012.

82. At trial, KAL sought an order that the appellants pay it $2.4 million, being the amount of rent it alleged had been paid between 1 July 2005 and 30 June 2013. That amount has since been revised to $2,094,545.

Consideration

83. The success of KAL’s claim depended on it establishing a beneficial entitlement to the Sunnyholt Property. If it could do so, then, subject to any limitation bar, there could be no basis upon which Aidzan could assert an entitlement to retain rents paid to it by KAL under the Sunnyholt Lease after repayment of the Michell Facility on 30 June 2005.

84. In the light of the conclusion reached on grounds of appeal 1 to 3 that KAL’s claim to a beneficial entitlement to the proceeds of sale of the Sunnyholt Property is not barred, ground of appeal 4 must be rejected.

85. This leaves the respondent’s cross-appeal, which contends that the primary judge erred in restricting the Sunnyholt Surplus Rent claim to the period after 12 December 2008.

86. The relevant finding of the primary judge is at J[148]:

On the findings that I have reached above [as to beneficial ownership of the Sunnyholt Property], KAL benefited or partly benefited from its occupancy of the Sunnyholt Property under the Sunnyholt Lease and the substantial tax deductions it received for payment of rent under that lease and [the directors’] knowledge of the terms of that lease and the circumstances surroundin[g] its entry and of the payment of rent to Aidzan should be attributed to KAL as it occurred. Neither party suggested that the position was different for the long period in which KAL continued to occupy the property after the term of the Sunnyholt Lease had expired. I accept that this claim is properly characterised as a trust claim and it is therefore barred by s 47(1)(e) of the Limitation Act, but only for rent paid before 11 December 2008.

87. For the reasons given above, this analysis does not correctly identify the approach to attribution in the context of a claim by a company against its director for breach of duty, where the attribution is relied on as a defence or bar to that claim.

88. It is not necessary to consider KAL’s alternative argument, which assumed the application of the “fraud exception” and turned on whether Peter’s conduct, considered as a whole, was not in “total fraud” of KAL. Had it been necessary to do so, I would have upheld that argument. Although KAL did receive benefits in the form of occupancy of the Sunnyholt Property and tax deductions in respect of rental payments made to Aidzan, those benefits were to be viewed in the broader context of Peter’s conduct. That conduct involved Peter causing Aidzan to purchase the Sunnyholt Property using KAL’s funds or loan funds obtained by the assignment of KAL’s undertaking to pay rent to Aidzan for use of the Sunnyholt Property. The fact that KAL was entitled to tax deductions on those rental payments did not alter the fact that, taken as a whole, the transaction was designed to benefit Aidzan (and, in turn, Peter) at the expense of KAL. Those tax deductions merely reduced the loss suffered by KAL as a result of that scheme. This was not a case like Bluemine where the very impetus of the scheme was the obtaining of taxation benefits in fraud of the Commissioner of Taxation.

89. The result is that KAL did not discover the facts giving rise to its claim to the Sunnyholt Surplus Rent until, at the earliest, the appointment of its liquidator in August 2018. This meant the entirety of its claim was brought within the limitation period prescribed by s 47(1)(e) of the Limitation Act. The cross-appeal should be allowed and judgment for the respondent increased from $1.2 million to $2,094,545.

Claim to the Superannuation Payment (Grounds of appeal 6-8)

Background

90. In early 1993, Peter established the Aidzan Superannuation Fund and the PAL Property Trust. Aidzan was appointed as trustee of both. Peter was the sole member of that fund, which was the sole unitholder in the trust.

91. Much later, in around 2007, Peter caused KAL to pay $1 million of its funds to the Aidzan Superannuation Fund. The evidence was that he initially intended this to be a superannuation contribution made by him. Subsequently, in around 2012, on the advice of his accountant, the payment was “recharacterised” as a loan made by KAL to Peter in 2007 and treated accordingly in KAL’s accounts from that time.

92. It was accepted that this conduct of Peter was a breach of his fiduciary duties owed to KAL and involved a misappropriation of its funds. Two issues arose. The first was whether KAL’s equitable claim was barred by the application of the six-year limitation period in s 15 of the Limitation Act by analogy. The primary judge held that it was not. The Superannuation Payment was not wholly or partly for KAL’s benefit because the payments on which Peter relied “would, at best, reduce KAL’s loss rather than giving rise to any benefit to it” (J[177]). That meant time did not commence running until KAL’s liquidator discovered in 2018 the fact of the $1 million payment in 2007. This conclusion is the subject of grounds of appeal 6 and 7.

93. The second issue was whether the amount of compensation payable to KAL should be reduced by two “loan repayments” of $100,000 and $680,000 said to have been made by Peter in 2012. The primary judge held that only the $100,000 sum should be applied in reduction of that liability (J[174]). This conclusion is the subject of ground 8.

94. In the result the primary judge awarded equitable compensation of $900,000 to KAL (J[179]). Although KAL had sought a declaration that this sum was held on constructive trust, his Honour declined to make that order in respect of the funds of a regulated superannuation fund (J[178]).

Limitation defence (Grounds 6 and 7)

95. The relevant appellants are Peter and Nazdia. Their primary argument in relation to the Superannuation Payment remains that Peter’s promise to repay the $1 million sum to KAL with interest meant that KAL obtained a partial “benefit” from his conduct and, accordingly, that Peter’s knowledge of his conduct should be attributed to KAL from at latest 22 January 2012 (ground 6). It was said to follow that s 55 of the Limitation Act could not be applied by analogy to suspend the running of the limitation period under s 15, with the result that KAL’s claim to the Superannuation Payment was barred.

96. That argument must be rejected for the reasons that the argument on grounds of appeal 1 to 3 was rejected. The language in s 55(1) is not relevantly different to that used in s 47(1)(e). Whether KAL obtained any “benefit” from Peter’s promise to repay the Superannuation Payment is not relevant to whether Peter’s knowledge of his breach of duty should be attributed to KAL. That knowledge would not be attributed to KAL so as to prevent the suspension of the running of the six-year limitation period; and it was not otherwise submitted that s 55 would not apply.

97. Even if the rule of attribution was as formulated and applied by the primary judge, there was no error in the conclusion that KAL did not benefit wholly or in part from Peter’s conduct. The relevant conduct was Peter’s misappropriation of $1 million of KAL’s funds. That occurred in 2007. It was a breach of his fiduciary duty. His “promise” to repay that sum, made five years later, did no more than recognise KAL’s entitlement to be compensated for Peter’s earlier breach. Similarly, the “promise” to pay interest on that amount did no more than reflect KAL’s entitlement to be compensated for being kept out of its moneys over the previous five years.

98. Grounds of appeal 6 and 7 should be rejected.

Whether amount of equitable compensation should be reduced by the $680,000 payment (Ground 8)

99. The appellants submit that the primary judge erred in failing to treat the payment of $680,000 made by Peter to KAL on 29 June 2012 as reducing the amount of equitable compensation to which KAL was entitled.

100. There is no dispute that this sum was paid. The appellants bore the onus of establishing that the payment was to be applied in reduction of the “loan”. In circumstances where Peter was the controlling mind of KAL, it was necessary to establish that it was Peter’s intention, actual or to be inferred, that when paid the money was to be applied in that way. It was not Peter’s case that, at some point after the payment had been made, there was a consensus between him and KAL that KAL’s liability to him in respect of that payment should be set off against the “recharacterised” loan amount.

101. Peter’s evidence was that, after being reminded by KAL’s liquidator in October 2020 of the payment of $680,000, he “established” that this was a payment by him against his “outstanding loan”. He first claimed that to be the position in an email of February 2021. When cross-examined about that payment being a “repayment of a loan”, he maintained that “it absolutely was”.

102. In the absence of any specific evidence from Peter that in late June 2012 he had given actual consideration to the fact that this payment was to be applied in reduction of the existing “loan”, the appellants’ argument relied upon an inference being made to that effect from the circumstances in which the payment was made. Those circumstances included the existence of the partly repaid “loan” with a balance outstanding of $900,000, and the fact that Peter had made a significant payment to KAL of $680,000 for no apparent consideration. It was said to defy “ordinary human experience” that a person would pay such a sum without having any reason to do so. KAL’s position was that, in circumstances where Peter had paid $680,000 to KAL and then caused KAL to make various payments either to him or for his benefit, the Court could not be satisfied that the payment was made in reduction of that “loan”.

99. The critical findings of the primary judge are set out at J[170]-[172]:

[170] The position as to the second “repayment” of $680,000 is more difficult. [Peter’s] evidence is that he “repaid” $680,000 of the balance of $900,000 on 29 June 2012. He did not take that position in the solvency declaration dated 23 August 2018 in support of the members voluntary winding up, which acknowledged that he then owed KAL $900,000 in respect of “trade debtors & interest unknown”. In a subsequent examination by the liquidator on 3 August 2020, he referred only to the initial repayment of $100,000 made against the purported loan in respect of the superannuation, and accepted that he owed $900,000 to KAL in respect of that “loan” and interest on that amount since 30 June 2007. While I recognise that [Peter] has suffered significant health issues from time to time, and in this period, I find it difficult to see that he could have forgotten a payment of that size, while apparently able to advance his own interests in respect of the distribution of [Dorothy’s] estate and issues arising in the winding up.

[171] By letter dated 9 October 2020, Mr Hayes [KAL’s liquidator] then sought information from [Peter] as to a deposit of $680,000 into KAL’s ANZ account on 29 June 2012. [Peter] did not respond until 16 February 2021, and he then observed that:

‘I have since established that the deposit of $680,000.00 was a payment by me against my outstanding loan. I have recently obtained a copy of my bank statement verifying this payment. Should you require a copy of this statement please let me know.’

[172] It seems to me that, at best, this information was so incomplete as to be misleading, where [Peter] referred to his payment to KAL without referring to substantial payments made by KAL to his associated entities at about the same time that had funded that payment, and his review of the bank statement to which he referred would have raised an obvious question as to the connection between those transactions. (Citations omitted.)

104. That analysis identifies two inconsistencies in Peter’s account with respect to the $680,000 payment. The first is his failure to mention that payment in his 2018 solvency declaration and in his 2020 examination by KAL’s liquidator. Indeed, when asked by the liquidator at that time whether he accepted that he owed $900,000 to KAL, Peter responded, “absolutely”. The second is his failure, upon being told of the $680,000 payment by the liquidator in October 2020, to refer in his response to any of the payments totalling $468,000 which on the same day he had caused KAL to make either to him, the Aidzan Superannuation Fund (of which he was sole beneficiary) or the PAL Property Trust (in which that fund was the sole unitholder).

105. In the result the primary judge considered that it was “possible” that Peter had paid the $680,000 to KAL in reduction of the Superannuation Payment recharacterised as a loan, but concluded that on the evidence he was not satisfied of that fact on the balance of probabilities (J[174]). Accordingly, his Honour did not treat the $680,000 payment as reducing the compensation to which KAL was entitled.

106. At this point it is necessary to set out more fully the circumstances in which the $680,000 was paid.

107. In 2007, Peter caused KAL to make the Superannuation Payment. Sometime in early 2012 he was advised by his accountant that this payment should not have been made or treated as a superannuation contribution. In early 2012, the Superannuation Payment was retrospectively recorded in KAL’s books as a “loan at call”. Peter transferred a sum of $100,000 to KAL “shortly after” receiving that advice and that amount was applied in reduction of that loan. As a result, the value of the “loan at call” was recorded in KAL’s financial statements from 30 June 2008 as $900,000, albeit that those financial statements were prepared in or after January 2012 and are not available for periods after FY2010.

108. On or around 29 June 2012, a series of transactions took place between Peter, KAL, the Aidzan Superannuation Fund and the PAL Property Trust. The evidence did not explain the order in which these transactions occurred or were to be taken as having occurred (J[173]). Of the $680,000 paid to KAL, payments totalling $468,000 were made by it to three parties, one of whom was Peter. Another of those parties, the superannuation fund, paid Peter an amount of $560,000.

109. More specifically, Peter’s bank statement records that on 29 June 2012 three sums of $120,000, $160,000 and $400,000 were deposited into his account. The $120,000 sum was transferred from KAL’s account. Peter’s evidence was that this sum represented his post-tax salary for FY2012. As for the other two amounts totalling $560,000, Peter’s evidence was that his accountant had told him that the superannuation fund could distribute those amounts to him “as his pensions” for the previous two financial years (FY2011 and FY2012). That fund’s bank statements were not in evidence but a document headed “The Aidzan Superannuation Fund Detailed Schedule of Fund Assets for the year ended 30 June 2012” records two debits of $160,000 and $400,000 on 30 June 2012.

110. Also on 29 June 2012, Peter’s bank statement (with the ANZ bank) records a debit of $680,000. A corresponding credit entry of $680,000 is recorded in KAL’s bank statement (with the same bank) for that day.

111. KAL’s bank statement also records three debits on 29 June 2012. The first is the salary payment of $120,000 to Peter. The second is a payment of $18,000 to the Aidzan Superannuation Fund, said to be an employer superannuation contribution made on Peter’s behalf (J[175]). The third is a payment of $330,000, which Peter said was rent paid to the PAL Property Trust for KAL’s use of the Sunnyholt Property during FY2012. The PAL Property Trust’s accounts for FY2012 show the “rent received” as $600,000 and that this amount was distributed in that financial year to the sole unitholder in that trust, Peter’s superannuation fund.

112. The outcome of this series of ‘end-of-financial-year’ transactions was that, from the $680,000 paid by Peter to KAL, Peter caused KAL to discharge “obligations” to pay Peter’s annual salary ($120,000), KAL’s annual employer superannuation contribution for Peter ($18,000), and rent due to the PAL Property Trust ($330,000).

113. The evidence does not establish what happened to the balance of $212,000 (being the $680,000 received less the $468,000 paid away). In oral submissions before the primary judge, KAL’s counsel submitted:

And the fact that there's another [$212,000], which he didn't pay out on that day, doesn't much matter because … your Honour sees that there are, over the course of time, lots of debits in substantial amounts of money and the 212 - there's no evidence as to what the 212 was, but it’d be inferred that he was paying the money in because he thought he had some obligation to pay KAL an extra 212,000. He was funding 468 to himself, and put in another 212, presumably because he understood that he was making up for some other amount that had been taken out at some other time. There are debits all through the course of those accounts…

114. KAL’s bank statements in evidence before the primary judge were, for the most part, not reproduced in the appeal books. They were bank statements for periods before and after 29 June 2012, although the evidence suggested KAL finally ceased trading in about 2013. Only three of those bank statements were before this Court, being for the weeks 25 June 2010 to 5 July 2010, 25 June 2012 to 2 July 2012 and 30 December 2013 to 6 January 2014. These statements show that KAL’s account balance decreased from $462,055.15 to $112,828.37 between 5 July 2010 and 25 June 2012, and from $349,110.66 to $114,595.40 between 29 June 2012 and 30 December 2013.

115. The books and records of KAL, the PAL Property Trust and the Aidzan Superannuation Fund that were in evidence were incomplete, it would seem for reason that they were kept at the Sunnyholt Property in a safe which was stolen from that property in around 2016.

116. It should also be noted at this point that the primary judge accepted that Peter had suffered “significant health issues from time to time” (J[170]), including around the time the $680,000 payment was made. Nevertheless, the primary judge did not consider those health issues sufficient to explain how Peter could have forgotten in 2018 and again in 2020 that he had repaid $680,000 of his “loan” in June 2012, which was five months after the $1 million superannuation contribution was ‘rebadged’ as a loan (J[170]).

117. KAL also pleaded an alternative claim for compensation against Peter, which alleged breaches of various equitable and common law duties in causing KAL to incur rental obligations to the PAL Property Trust and salary obligations to Peter after 30 June 2007, when it is said KAL should have ceased trading. As finally made, this claim was limited to the period from 2008 to 2010 because KAL had insufficient documentary evidence to make out its trading losses incurred from 2011 to 2013. In respect of the payment of rent, the compensation sought was also part of the Sunnyholt Surplus Rent claim, and accordingly was only pressed in the event that claim was unsuccessful. In relation to the salary payments, KAL would have been entitled to relief but for the primary judge’s conclusion at J[195]-[196] that a limitation defence was available (which was not, in that respect, challenged).

118. The primary judge considered the interaction between that alternative claim to the rent and salary payments and the $680,000 payment by Peter as follows (at J[175]):

For completeness, to the extent that $120,000 was then paid by KAL to [Peter] as salary, it will be recoverable by KAL only to the extent that it falls within KAL’s claim for salary paid out by reason of [Peter’s] failure to close the business at an earlier date. There is no challenge to [Peter’s] entitlement to retain the amount of $18,000 paid to him, purportedly as a superannuation contribution, on his evidence in cross-examination. The third purported “repayment” of $330,000, funded by [sic] a purported rent payment by KAL to Aidzan as trustee for the PAL Property Trust, falls within its claim as to the Sunnyholt Surplus Rent, which I have addressed above.

119. This reasoning of the primary judge raised a risk of double recovery by KAL. $468,000 of the moneys paid by Peter to KAL had funded the satisfaction of salary, superannuation and rental “obligations” of KAL, which as to salary had been, and which as to rent continued to be, the subject of claims to recover compensation. But it was not contended before the primary judge or in this Court that any part of the $680,000 was to be taken into account in calculating moneys due under any other claim for rent or salary payments.

120. In this context, counsel for KAL, Mr Leopold SC, submitted to this Court that the payment of $680,000 was one of many credits and debits between KAL and Peter before and after the payment was made:

LEOPOLD:   But the argument propounded by Peter at trial amounted to taking a large credit entry in the accounts and it could have applied to any, over the years, any number of large credit payments that went into that account. There were – there were debits and credits happening every second day, often of a very considerable amount. That one was latched on to—

MEAGHER JA:   So his Honour’s finding assumes in a sense that the money was somehow accounted for in the books. Doesn’t it?

LEOPOLD:   I’m not sure if it assumes it was accounted for in the books. His Honour just looked at the deposit [and] said he wasn’t satisfied because the evidence wasn’t sufficiently transparent, that it was a reduction of Peter’s liability, that it could have been anything and particularly, given that he only ever claimed that there’d been a $100,000 reduction liability, his Honour wasn’t persuaded on the balance of probabilities on the evidence that it was not $100,000 but 780. It’s just – it was just one of a number of deposits made very frequently into account.

121. Addressing the ‘round robin’ of cheques and payments on 29 June 2012, of which the $680,000 payment from Peter to KAL formed a part, the analysis above shows that the payments made between Peter, KAL, the PAL Property Trust and the Aidzan Superannuation Fund were part of end-of-financial-year taxation and superannuation adjustments between those parties. That analysis also shows that, from Peter’s perspective at least, some of those payments were made to enable the discharge by KAL of “obligations” to pay rent, salary and an employer superannuation contribution.

122. Two further matters are significant. The first is that the payment to KAL exceeded the sum of KAL’s “obligations” by $212,000. There is an absence of any documentary evidence as to why that excess amount was paid to KAL and how those funds were subsequently applied by it. The second is that the amount of $680,000 paid to KAL was the sum of the three payments made into Peter’s account on that day. At least one of those payments could not have been made to Peter if KAL had not paid $330,000 to the PAL Property Trust.

123. The question remains whether Peter’s payment to KAL was to be applied in partial satisfaction of the $900,000 liability in addition to its being a payment in a series of end-of-year payments made to generate the distributions to Peter which in fact occurred, driven by financial and taxation advice received by him and the other entities. In this regard it is significant that the total amount received by Peter and paid by him to KAL in the ‘round robin’ was the same.

124. From Peter’s perspective, there appear to be four possibilities as to what occurred in relation to the payment of the $680,000. The first is that, as between Peter and KAL, it was to be applied in reduction of his outstanding “loan” balance of $900,000, and that the $680,000 was to be used by KAL to make payments in accordance with the relevant financial and taxation advice. The second is that it was paid in accordance with such advice to enable the end-of-financial-year transactions to occur; but that the question as to how that payment would be treated in the books of KAL was not addressed. The third possibility is that it was proposed that the money as paid was to be applied in repayment of some other existing or anticipated liability of Peter to KAL. The final possibility, which is most unlikely, is that Peter intended the money be paid to KAL as a gift.

125. Dealing then with the first possibility, KAL’s financial statements for the year ended 30 June 2012 were not in evidence. At the same time it was not suggested (because of their theft) that they were available, but had not been tendered. However, KAL’s financial statements from 30 June 2008 were in evidence and recorded the balance in the relevant loan account as $900,000. When questioned by reference to those earlier balance sheets in the August 2020 liquidator’s examination, it was put to Peter that “no repayments had been made [to that loan] at all; is that right?”. He responded:

A.   There was one initial payment of 100,000. Because I think the loan was originally $1 million.

Q.   I see.

A.   So I’m sure I paid $100,000 plus interest.

Q.   And as I understand your position, you accept today that you owe $900,000 to the company; is that right?

A.   Absolutely.

126. Peter’s response is firm, although given eight years after the relevant events. In the face of this evidence, in conjunction with Peter’s declaration of solvency in 2018, which referred to the same amount, and the absence of any contemporaneous or later record showing that the $680,000 was applied in reduction of the recharacterised loan, it was open to the primary judge to be sceptical as to the reliability of Peter’s evidence on this subject. That is particularly so given that Peter gave no evidence before the primary judge suggesting that the accounting or other treatment of this amount had been discussed with his accountant or that he had otherwise formed an intention in June 2012 to treat the moneys in the way now contended for.

127. From Peter’s perspective, the significance of the payment was as one to be made at the end of the financial year, no doubt at a time when the focus was on the way in which taxable and non-taxable income would be produced by KAL and the superannuation fund before the financial year end. There is nothing in these circumstances and Peter’s evidence which makes it more probable than not that he intended that the money when advanced was to be treated as applied in reduction of the earlier “loan”. The other realistic possibilities included that the money was paid to KAL with the question as to its accounting treatment as between KAL and Peter being left unaddressed; or that at the time it was expected that the $900,000 loan would be repaid in some other way.

128. In the result the primary judge is not shown to have erred in not being satisfied that the $680,000 when paid was to be applied as Peter contends. It follows that the compensation awarded for the Superannuation Payment claim was not to be reduced by that amount. Ground 8 should be dismissed.

Respondent’s notice of contention

129. Having found for the respondent on each of the grounds of appeal and on the cross-appeal, it is unnecessary to consider the other points raised by its notice of contention.

Conclusion

130. For these reasons the appeal should be dismissed, the cross-appeal allowed, and the appellants/cross-respondents ordered to pay the costs of the proceeding in this Court.

131. The orders I propose be made are:

1. Dismiss the appeal.

2. Allow the cross-appeal.

3. Set aside orders 6 and 7 made by Black J on 4 July 2023 and instead order:

1. that Peter Laird, Aidzan Pty Ltd (in liq) and Nazdia Pty Ltd pay to K. & A. Laird (N.S.W.) Pty Ltd (in liq) the amount of $2,094,545 in rent paid to Aidzan Pty Ltd (in liq) in relation to the Sunnyholt Property for the period from 1 July 2005; and

2. that Peter Laird, Aidzan Pty Ltd (in liq) and Nazdia Pty Ltd pay to K. & A. Laird (N.S.W.) Pty Ltd (in liq) interest, pursuant to s 100 of the Civil Procedure Act 2005 (NSW), on the sum of $2,094,545 in the sum of $1,889,254.70.

4. Peter Laird, Aidzan Pty Ltd (in liq) and Nazdia Pty Ltd as appellants/cross-respondents pay K. & A. Laird (N.S.W.) Pty Ltd (in liq) as respondent/cross-appellant’s costs of the appeal and cross-appeal.

132. ADAMSON JA: I have had the benefit of reading the reasons of Meagher JA in draft. I agree with the orders proposed by Meagher JA, largely for the reasons given by his Honour.

133. As his Honour’s review of the authorities demonstrates, the question whether the knowledge of a director will be imputed to a company is to be answered by reference to the context, with particular regard to the identity of the plaintiff and the defendant in the proceedings and the nature of the claim. The law has a concern to prevent a party from profiting from his or her own breach, including in the context of the Limitation Act 1969 (NSW). As Deane J said in Hawkins v Clayton (1988) 164 CLR 539 at 590; [1988] HCA 15:

“If a wrongful action or breach of duty by one person not only causes unlawful injury to another but, while its effect remains, effectively precludes that other from bringing proceedings to recover the damage to which he is entitled, that other person is doubly injured. There can be no acceptable or even sensible justification of a law which provides that to sustain the second injury will preclude recovery of damages for the first.”

134. This statement was made in a case where a solicitor, Clayton, who had negligently failed to locate Hawkins, the executor of a will (who was also the residuary beneficiary), sought to resist liability on the basis of s 14(1) of the Limitation Act 1969 (NSW) as Hawkins had not commenced proceedings until more than six years after the testatrix’s death. While Brennan and Gaudron JJ found that time did not begin to run until Hawkins assumed the office of executor, Deane J held that Hawkins’ cause of action did not accrue until the expiration of the period in which the wrongful act itself (not informing Hawkins of the will of which he was executor) effectively precluded the bringing of proceedings.

134. The principle articulated by Deane J – that a party ought not be permitted to profit from his or her own breach – is one of general application. It underpins the statements extracted by Meagher JA of Lord Mance in Bilta (UK) Ltd (in liq) v Nazir (No 2) [2016] AC 1 at [38] that “… it is certainly unjust and absurd to suggest that the answer to a claim for breach of a director’s (or any employee’s) duty could lie in attributing to the company the very misconduct by which the director or employee has damaged it” and of Baroness Hale in Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd [2020] AC 1189 at [30] that “where a company has been the victim of wrongdoing by its directors, the wrongdoing of the directors cannot be attributed to the company as a defence to a claim brought against the directors – and their co-conspirators – by the company’s liquidator for the loss suffered by the company as a result of the wrongdoing.”

135. Thus, in the present case, where the wrongdoer, Peter, is a director and the injured party, the respondent, is the company of which the wrongdoer was a director, the authorities which Meagher JA has addressed recognise that it would be wrong and illogical to attribute the director’s knowledge of the wrongdoing to the company, since to do so would be to doubly wrong the company and permit the director to profit from his own breach.

136. The ebb and flow of the law from the articulation of general principle to the statement of a rule with exceptions and back again to general principle represents an attempt to articulate, with greater or less precision, how multifarious fact situations ought be decided consistently: see, for example, in the context of torts: Australian Safeway Stores Pty Ltd v Zaluzna (1987) 162 CLR 479 at 486-488 (Mason, Wilson, Deane and Dawson JJ); [1987] HCA 7. It was open to the primary judge to decide the matter by referring to principles derived from well-established authority which used the language of “fraud exception”. However, for the reasons given by Meagher JA, it may generally be preferable to avoid such terms because of the difficulties of incorporating the requisite nuance as to context and circumstances in the expression of a so-called general rule subject to a “fraud exception”.

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Amendments

08 August 2024 - Medium neutral citation for Beach Petroleum NL v Johnson (1993) 43 FCR 1 removed from headnote and [2].

Decision last updated: 08 August 2024