Angas Law Services Pty Ltd & Anor v Carabelas & Anor

[2004] HCATrans 295

[2004] HCATrans 295

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A8 of 2004

B e t w e e n -

ANGAS LAW SERVICES PTY LTD (IN LIQUIDATION)

First Applicant

ALAN SCOTT

Second Applicant

and

GEORGE CARABELAS

First Respondent

VIRGINIA CARABELAS

Second Respondent

Application for special leave to appeal

McHUGH J
GUMMOW J
KIRBY J

TRANSCRIPT OF PROCEEDINGS

AT ADELAIDE ON WEDNESDAY, 11 AUGUST 2004, AT 2.49 PM

Copyright in the High Court of Australia

__________________

MR G. GRIFFITH, QC:   If the Court please, I appear with my learned friend, MR N.W. MORCOMBE, QC, for the applicants.  (instructed by Cowell Clarke)

MR R.J. WHITINGTON, QC:   May it please the Court, I appear with my learned friend, MR M.B. MANETTA, appear for the respondent.  (instructed by Von Doussas)

McHUGH J:   Yes, Mr Griffith.

MR GRIFFITH:   Your Honour, there are two issues here.  The principal issue I will concern myself with is the issue of the doctrine of unanimous assent as it might apply to appropriation of a company’s property in circumstances, your Honour, where the company may be regarded as the equivalent as being in sole ownership where there are two directors, husband and wife, two shareholders, husband and wife, with the husband acting for all purposes as if he is the director and the member and also the company.  The application, your Honour, concerns the limits of the doctrine to unanimous assent, which we say are uncertain and need the clarification of the Court.

McHUGH J:   Well, it is a question of how far the Duomatic principle goes.

MR GRIFFITH:   Yes, your Honour, that is the essence of it, your Honour.  When I was writing my thesis in Oxford, Duomatic came out, I think in 1969, and it surprised me, your Honour, that it is a bit like a broken washing machine, nothing much has happened to it since.  We are still uncertain where it is.  Your Honour, our submission is that this case is a perfect vehicle for the Court to illuminate what has been exposed by the judgment of a Chief Justice, your Honour, of a wilderness of statements.

GUMMOW J:   I understand that.  What was the nature of the proceeding?  There was an application partly under the Code?

MR GRIFFITH:   Yes, your Honour, yes.

GUMMOW J:   And also under the general law, was there?

MR GRIFFITH:   Yes, your Honour.  It was - the issue whether or not, your Honour, the two transactions constituted by the mortgage for the entire debt and a second transaction, your Honour, whereby the balance which establishes a loan account on the discharge of the mortgage was transferred at some time prior to the winding‑up from being money owed by the sole shareholder to a debt owed by companies, five companies, who already were defunct companies constituted, your Honour, firstly misappropriation of all the companies’ property, and it was held by the Full Court that it was, your Honour.  That appears at paragraph 50 page 63.

GUMMOW J:   All I am saying is I notice the draft notice of appeal, and this seems to be right.  The draft notice of appeal fixes on 229 of the Code.

MR GRIFFITH:   Your Honour, can I give you a better notice of appeal that expresses with greater clarity?  Your Honour, this notice has been prepared on the basis we do not wish to be diverted by the issue that your Honour Justice Gummow has identified, and wish to expose the principle of what are the limits of the doctrine of unanimous assent.  So our ground with respect to that is just stated shortly in ground 1 that I hand to your Honours.

Ground 2 deals with the other issue, your Honour, which we do not put as one for which special leave should be granted on its own, but associated with the principal issue, and that arises, we say, out of the plain error by the Full Court in making a contrary finding of fact with respect to the ‑ ‑ ‑

GUMMOW J:   Is this the retroactive book entry point?

MR GRIFFITH:   Yes, your Honour.  So that is a matter of incidental addition to the appeal.  The principal application, your Honour, is that covered by ground 1 which we seek, just to go straight to the point to say where there is a breach which is held to be a misappropriation of all the companies’ property, as held in paragraph 50 of the Chief Justice’s judgment, it was a misappropriation for improper purposes, namely for the benefit of the director – I will use the singular – and the detriment of the company.  That appears in the Chief Justice’s judgment in paragraphs 41 and 50.  The breach is a statutory breach “possibly giving rise to criminal liability”.  That appears at paragraph 50 of the Chief Justice’s judgment, and the two directors are the sole shareholders ‑ ‑ ‑

GUMMOW J:   What do you say about the Chief Justice’s point at 59?

McHUGH J:   That is the key paragraph you have to deal with.

MR GRIFFITH:   What we say, your Honour, are two things.  One, we say, your Honour, is that the Chief Justice is in error.  The other thing we say, your Honour, the Chief Justice failed to consider the second book entry.  Our submission is that his judgment is entirely directed, and one picks that up from paragraph 59 itself, to the issue of the first transaction, the mortgage.  His Honour does not deal with the issue of the effect of the transaction which itself caused the loss, namely the making of the book entry, the transfer which was a perfectly good book debt owed by Mr Carabelas, we say, as equivalent of the sole director, and transferred that at a time when the other five companies were defunct, and were about to be struck off as defunct companies, as being a liability apportioned over those companies.

It was that second book entry, your Honour, which resulted in the loss to the company because instead of having a book debt owed by Mr Carabelas, whatever he is worth – we assume he is worth something, your Honour – it was transferred to five companies which admittedly, and were proved to be, because they were established for that purpose by Mr Carabelas himself at that time as being hopelessly insolvent and defunct and liable to be deregistered as such.

McHUGH J:   But the book entry does nothing.  All it can do is reflect some underlying transaction.

MR GRIFFITH:   Exactly.  Your Honour, what we say – and that is the point about chronology – do your Honours have the chronology which we handed to your Honours this morning?

McHUGH J:   Yes.

MR GRIFFITH:   The function of the chronology, your Honour, is to indicate that these events occurred, and it is the book entry that reflects the transaction which occurred before the winding‑up.  We say, your Honours, it does not matter for the purpose of our argument whether or not the book entry was made before or after the liquidation.  What is plain from this chronology, your Honours, is that the G10 entry, which was made after the GJ2 entry, as appears on our sheet, your Honour, had the effect of transferring what was a book debt for $446,710 owed by the sole director – I call him a sole director – to five companies which were admittedly then defunct.  It is only the effect of that transaction, your Honour, which enables Mr Carabelas to say he is not liable for that debt, which is what he says - underlying his whole defence of the action.  Were he liable for it, your Honour, well then he no doubt would have paid it or would have had judgment against him for it.

McHUGH J:   Well, one thing that concerns me is whether or not this is a suitable vehicle.  It is very difficult to judge from the judgments what the evidence is in this particular case.

MR GRIFFITH:   May I deal with that, your Honour, that concern?

McHUGH J:   Yes.

MR GRIFFITH:   Your Honour, there is no concern about that when one has regard to the issue that the loss arose out of the second transaction.  The judgment of the Full Court is entirely concerned with the first transaction.  When one has regard to the second book entry, your Honour, which has the effect of eliminating Mr Carabelas’ debt to the company, and transferring it to these five defunct companies, your Honour, one has a very simple undeniable fact situation that the transaction had the effect of ‑ ‑ ‑

McHUGH J:   What are you describing as the transaction?

MR GRIFFITH:   The transaction was the removal of the debt of being a debt of Mr Carabelas and substituting a debt to five defunct companies.

McHUGH J:   Yes, but when did that transaction arise?

MR GRIFFITH:   Your Honour, the function of our chronology is to demonstrate that it must have occurred before the winding‑up because, your Honour, Mr Carabelas arranged for the defunct companies to be presented to the bank as having no assets so he then could make an arrangement with the bank to be forgiven the substantial part of his debt – as appears in the second last entry in the chronology “23 June 1993”.  This is all a year or so before the winding‑up.

So the course of conduct, your Honour, was that the debt was transferred to the defunct companies.  There was a statutory declaration made by Mr Carabelas for the purpose of the compromise with the Commonwealth Bank.  That appears from the third last entry in the chronology that the “amounts due to George . . .  from ALS and other companies” and that all the other companies were insolvent and were being deregistered.

McHUGH J:   So you say that however it was done that somehow before 26 March 1993 these transactions had taken place.

MR GRIFFITH:   Yes, your Honour.

McHUGH J:   And whether the book entry ‑ ‑ ‑

MR GRIFFITH:   And whether the book entry was made later or not, it was done, your Honour, otherwise George would not have been able to have walked before the winding‑up.  So, your Honour, once one has that fact situation we say that there is a very simple underlying fact situation which says if you owe say half a million dollars to a company of which you are effectively the sole director and shareholder, if you do a book entry and transfer that debt from you, which gives you the benefit of half a million dollars, to someone else, particularly if that someone else is undoubtedly insolvent at the time and will never pay it, you get half a million dollars benefit for yourself.  You take half a million dollars from the company because it gets a worthless chose in action of the five choses in action against defunct companies.  You have contravened section 229, you have acted for your own purposes.

It is a full house, with respect, your Honours, of matters where we would say whether it be expressed on the basis of misappropriation as a limit, improper purpose as a limit, whether or not a statutory breach can be condoned not by even the express action by all the members as being the entire membership, but just because it is done by persons who are regarded as the members we say, with respect, your Honour, you are turning corporation law on its head and you are, in effect, saying if you have a one or two person company those persons can do anything they like with the company’s assets, treat it as their own, and whether or not otherwise – as the Chief Justice held in paragraph 59 – it would be a contravention of section 229 and a criminal offence, the mere fact that the complete owners are doing it, as the Chief Justice said, is sufficient to render perfect and not unlawful and not misfeasance and not a misappropriation and not ‑ ‑ ‑

McHUGH J:   The company had a liability to capital gains tax at that stage.

MR GRIFFITH:   Yes, your Honour, perhaps GST as well.

McHUGH J:   Yes.

MR GRIFFITH:   But, your Honour, this is magic pudding stuff, with respect.  What we say, your Honours, is that paragraph 59 firstly suffers from the deficiency that his Honour is only referring to the original mortgage for the entire debt and failing to have any regard, your Honour – and one picks that up quite specifically when one goes to the judgment of the Chief Justice, particularly paragraph 59, that he is referring only to the first transaction.  Once one looks at the second transaction, with respect, his Honour’s decision in the result must be wrong.  With respect, your Honour, it must be as a matter of principle that if you owe a company, of which you are the owner, half a million dollars it is impermissible for you to make a book entry to transfer that to some other body ‑ ‑ ‑

McHUGH J:   It is not the book entry that transfers it.  For 40 years I have been hearing lawyers say that.

MR GRIFFITH:   I am sorry.  I withdraw that, your Honour.  For you to act in the way that transfers the debt to someone else, so you walk free.  Mr Carabelas has walked free, your Honour.  He denies he owes that book debt, which is the first entry J2; established, we would say, on the basis that he did owe it because it was the balance received on the settlement of the sale of the profit of the company.  Of course that profit, your Honour, gave rise to a liability for capital gains taxation income tax.  The Tax Commissioner has not been paid.  The effect of this transaction, your Honour, is that that book debt, which quite correctly was a debt owed by the proprietor of the company, was eliminated by a transaction.  The actual book entry, your Honour, whether it was made before or after the winding‑up, merely reflects that transaction which had the magic pudding effect that Mr Carabelas was no longer liable for half a million dollars.  The company had a claim against companies which were defunct, and we say that makes a very simple fact situation, with respect, your Honours ‑ ‑ ‑

GUMMOW J:   Mr Griffith, what you are talking about would found a compensation order under 229(7), would it not?

MR GRIFFITH:   It would, your Honour, yes.

GUMMOW J:   And the primary judge awarded $474,000.

MR GRIFFITH:   With interest, yes, your Honour.

GUMMOW J:   Yes.  He also awarded $234,000 under 588F, that is the preference clause.

MR GRIFFITH:   Yes, your Honour, that is a separate issue.

GUMMOW J:   That is a separate issue, is it not?

MR GRIFFITH:   Yes, your Honour.

GUMMOW J:   Have you come to that yet?

MR GRIFFITH:   I will, your Honour, yes.  I have indicated firstly, your Honour ‑ ‑ ‑

McHUGH J:   To some extent it has already been dealt with, has it not?

MR GRIFFITH:   Your Honour, I have indicated the error that the Chief Justice made, we submit.  What we say, your Honour, is that when one looks at the Chief Justice’s judgment ‑ ‑ ‑

GUMMOW J:   But to get your preference claim up you do not need ground 2 of your draft notice of appeal, do you?  You only need 1, ground 1, to get both?

MR GRIFFITH:   If we get both on ground 1 we are content, your Honour.  Ground 2 was intended specifically to deal with it if your Honour regards it as otiose, we would accept that, but it was intended to be directed to it, your Honour.

GUMMOW J:   I am not sure how the breach of 299 leads to a successful preference claim under 588.

MR GRIFFITH:   Your Honour, I am happy to say it is under both.  That is the point we wish to raise.  Could I indicate to your Honour precisely where we say our preference claim comes from, and that is a factual issue.  In paragraph 98, appeal book 73, his Honour the Chief Justice, speaking for the Full Court, your Honour, makes a finding that the journal entries reflect a decision made after the commencement of the winding‑up.

Now, your Honours, we say firstly that is flatly in contradiction to the reasoned findings of facts by the trial judge, particularly in paragraphs 107, paragraph 99 and paragraph 105.  We say, your Honours, secondly, it flies in the face of the chronology, which we say is undisputed, your Honour, indicating that these transactions were things which occurred necessarily, anterior to the winding‑up itself because they were necessary for Mr Carabelas to put this in place or otherwise, your Honours, at the time of winding‑up he would still owe the $446,000 to the company.

So, your Honour, on the preference issue it is an issue which does require us to demonstrate that the Chief Justice in that paragraph, in making a finding of fact contrary to the finding of the trial judge, fell into error.  We say we can do that in five minutes.  We say, your Honour, once we do that it follows that the Full Court failed to consider the preference issue as a matter of law because it did so on a basis of a factual finding which was not open to it and was incorrect.  It is as short as that, your Honours.  It is not in itself ‑ ‑ ‑

GUMMOW J:   Well, the question would be whether we would send the preference issue back ‑ ‑ ‑

MR GRIFFITH:   You could send it back, your Honour.

GUMMOW J:   You would say no because it would be sorted out on ‑ ‑ ‑

MR GRIFFITH:   Your Honour, I cannot ask for special leave on the preference issue.

GUMMOW J:   Yes.

MR GRIFFITH:   If we get special leave on the issue identified, we say it is a simple point, the correction of obvious error.  Whether the Court sends it back or not is a matter of discretion of the Court, your Honour.  It is not on any view something which would detain the Court more than five or 10 minutes, with respect.  Our submission is that the facts as found make it plain; the chronology is intended to demonstrate that.  So, your Honours, that leaves the unanimous assent issue.  What we say, your Honours, for the purpose of this Court, apart from the exposure in Macleod ‑ ‑ ‑

McHUGH J:   We might call in your opponent.

MR GRIFFITH:   If your Honour pleases.

McHUGH J:   Yes, Mr Whitington.

MR WHITINGTON:   If the Court pleases.  First of all can I make it clear that the transactions, the subject of the so‑called unanimous consent, or misfeasance claim, had absolutely nothing to do with the preference transactions.  They were entirely separate and distinct, and questions about writing them up at different times relate to quite separate events.  That is the first point.

Secondly, my learned friend refers to what is called the “magic pudding”, in effect.  He says that leave is really critical in respect of that aspect of the matter.  Can I explain that?  The relevant facts are these.  Mr Carabelas borrowed in his own name from the Commonwealth Bank $1.75 million.  He had six companies in his group; each was a stand‑alone property company, each owned its own property.  He then caused the proceeds of the loan to be disbursed to those separate companies in several amounts to fund their activities.

In the case of the company we are concerned with, ALS, he paid something – a little under $500,000 to that company to refinance a loan.  Each company, as I say, gave a mortgage in common terms, which permitted the bank – or granted the bank a kind of mortgage security for the whole amount of Mr Carabelas’ indebtedness.  It is said that that is the first misfeasance, that he should pledge, if you like, or secure that company’s assets for the entirety of his borrowing, in excess of the amount that he had on‑lent to that company.

He did that in July 1988.  In October 1989 that property was sold.  It realised $910,000.  The company repaid Mr Carabelas, in effect, on his loan account for the amount he had advanced, $474,000.  That left a net surplus of about $436,000, realising the proceeds of sale of that property.  The bank swept that money up under its mortgage, as it was entitled to do, and put it against Mr Carabelas’ loan.  Now, what the primary judge called the second step involved the accountant writing up that second aspect of the transaction, the taking of the surplus for Mr Carabelas’ benefit.  The accountant initially wrote that up - in what my learned friend has called journal GJ2 - quite correctly as a debit to Mr Carabelas’ loan account.  In other words, it was to reflect the fact that Mr Carabelas owed the company the money paid for his benefit.

The magic pudding entry that my learned friend refers to was an entry made later - and on the finding of the trial judge – by the accountant, not by Mr Carabelas, by the accountant – probably of his own motion – whereby he reconstructed the loan accounts so that, in effect, instead of Mr Carabelas owing that money, the companies in the group were said to owe that money.

Now, that was called in the case run at trial a novation, and the proposition that is now being put and sought to be agitated on appeal is directly in conflict with the case run at trial, because the case run at trial was that the novating entries stood and because of the novation the debts had, in effect, been assigned to the companies in the group who did not have the wherewithal to repay, either at the time of the assignment or later.

The applicant now wants to run an entirely different case and to resile from the proposition of novation.  The trial judge – I withdraw that.  The evidence disclosed that the accountant undertook the so‑called novation because he considered it reflected the reality of the matter; that is, that the moneys had really been borrowed by Mr Carabelas as agent for the companies.  So they in reality owed the money to the bank, so they had had the benefit of the repayment to the bank by ALS.

McHUGH J:   Yes, but how do you deal with the fact that as at 30 June 1990 your client was a creditor of ALS for $446,000.  When he prepares the statutory declaration on 26 March he is now owed $234,000 by him, is he not?

MR WHITINGTON:   Well, can I pause here, your Honour.  He was a debtor, not a creditor, at 30 June 1990.

McHUGH J:   Yes.

MR WHITINGTON:   He was debtor by virtue of the first transaction in the amount of the surplus repaid to the bank.

McHUGH J:   Yes.

MR WHITINGTON:   But after the novation his debt was, in effect, eliminated and the other companies in the group then stood as the debtors.  But you see can I just complete this point.  The trial judge found that the underlying rationale motivating the accountant to make the entries was not sustained by the evidence; that was that there was a joint venture between all these companies or a partnership or an agency arrangement.  So the trial judge held that the correcting entry, the magic pudding entry, that my learned friend wants to agitate on appeal, could be disregarded.  If it is disregarded the accounts are set back in their statement condition that they were at the time of the first entry; that is that Mr Carabelas owes on his loan account, or at least there is a debit charge to his loan account in the amount of the surplus payment.

Now, that may give rise to a claim in debt or it may not, depending on the state of the loan account because there were other credits in the loan account.  But the liquidator for the company chose never to sue in debt.  He chose to sue on the basis that the entries, the novation – the magic pudding entry – stood, and that by novating two companies who did not have powder and shot, Mr Carabelas had caused the primary company, ALS, loss.  The trial judge found that novation could not stand – he disregarded it.  That is why the Chief Justice in paragraph 59 has no regard to it, because it is no longer a relevant ground of misfeasance because it has not caused any loss because, in effect, the misfeasance has been disregarded, the debt – if there is a debt – is reconstituted, revived or the accounts are put back in their former condition.  So the only question of misfeasance then, when one peels it back, becomes the granting of the mortgage by Mr Carabelas in the two years before.  Now, my learned friend, as I say, has hitched his wagon very much to the second ground of misfeasance, which simply cannot arise on appeal.

McHUGH J:   Why not?

MR WHITINGTON:   Well, your Honour, for this reason.  The company now has the benefit of a finding that the transaction, if you like – I withdraw that.  The entries were not justified by the underlying relationship, by any underlying transaction and, therefore, they can be disregarded or ignored.  We disputed that on appeal.  We said that there was justification in the underlying commercial arrangements.  The Full Court was against us.  We are not seeking to agitate the contrary.  So we are stuck with a finding which is contrary to the company’s novation case at trial, but nonetheless a finding that came out in the evidence, apparently in favour of the company at trial, that the magic pudding entry can be disregarded.

Once one disregards it one can see it cannot ground misfeasance because no loss arises from it.  The debit is restored in Mr Carabelas’ loan account, and if there is a net debit leading to a claim in debt the company could have sued.  It has never sued – and this is going back to 1990.  So the only issue here – and, of course, it would be too late to sue now because of the Anshun principle and a time bar – so the only issue, therefore, is the question of the mortgage.  As to that ‑ ‑ ‑

McHUGH J:   Why would it be too late to sue?

MR WHITINGTON:   Because there is a six‑year time limit, your Honour.

McHUGH J:   Yes, but ‑ ‑ ‑

MR WHITINGTON:   Well, I withdraw that, your Honour.  That is academic.  If the company wants to now sue, well and good; they can endeavour to do so, and if Mr Carabelas – if there is a net balance in his loan account in favour of the company Mr Carabelas will do about that what he will.  He may take a time bar point, he may take an Anshun point.

McHUGH J:   Well, a time bar point would be very difficult.  The money was not repayable on a specified date.  It was in the account, stood there to be paid on demand ‑ ‑ ‑

MR WHITINGTON:   And in that case time runs from the date of the liability, which in this case would be, at the latest, 30 June 1990.  We are standing here now in 2004, 14yrs later.

McHUGH J:   The time does not run.  The time would run from the demand for the payment.

MR WHITINGTON:   Well, unless it is a debt payable on demand, your Honour, in which case no demand is required for time to run; it is action waste.  But in any event, I need not debate that with your Honours now because the point we make is that the applicant has the benefit of findings from the trial judge that the magic pudding entry was never justified by the underlying relationship between the parties and, therefore, is to be disregarded, and was disregarded.

GUMMOW J:   Yes, but you were explaining to us why the mortgage branch can have the legs to it.

MR WHITINGTON:   Yes.  As to that, your Honour, that is the so‑called Duomatic or shareholder assent point.  There, if the Court pleases, what we say is that the court applied a perfectly orthodox and well‑established principle.  Lord Davey said as long ago as 1896 in Salomon v Salomon that a company is bound in matters intra vires by the unanimous agreement of its members.  The same thing was said by the Court of Appeal in, I think, 1986 in Kinsela v Kinsela in the reasons of the Chief Justice.  He said:

In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise.  If, as a general body, they authorise or ratify a ‑ ‑ ‑

GUMMOW J:   Yes, we are familiar with Kinsela, but what is this other body of authority that is said to conflict with it?

MR WHITINGTON:   I am sorry, your Honour?

GUMMOW J:   There is said to be authorities that conflict with it.

MR WHITINGTON:   There are not any authorities that conflict ‑ ‑ ‑

McHUGH J:   Well, there is the statement of Justice McPherson, is there not in a Queensland case concerning breach of statutory duty.  The argument that is put against you is that you cannot avoid the operation of 229(4) by all the shareholders agreeing to do something which would otherwise have been a breach of 299(4).

MR WHITINGTON:   Yes, well there are two points there, with respect, your Honour.  The first is that there is an exception in the case of insolvency – and his Honour Justice McPherson was dealing with a case which raised the issue of insolvency.  Secondly, as to breach of statute, we say a number of things.  First of all, criminal liability is one thing and civil liability is another.  Secondly, it depends ‑ ‑ ‑

GUMMOW J:   Well, this section is a hybrid.

MR WHITINGTON:   Exactly, yes.  Exactly, your Honour.  But that was really the next point I was going to make, your Honour, because it will depend on the terms of the section.  Now, the Chief Justice refers to this Court’s decision in Macleod’s Case, but that was a particular and very special provision.  That was a provision which distinguished between the members and the company by its very terms and provided that for a director or any person to appropriate the property of the company was a criminal offence.  It made it clear that no assent of members would absolve the director.

The majority in Macleod’s Case also made the point that the statute had its roots in early statutory provisions which predated the conception elucidated in Salomon’s Case of the distinction between the members of a company and the company as a corporate entity.  Now, it is important to bear in mind that section 229 comes out of the post‑Salomon environment and it reflects the post‑Salomon conception of a company’s identity.

McHUGH J:   But both in Miller and in the ANZ Case did not Justice Santow and Justice McPherson, respectively, suggest that the Duomatic principle does not assist when it is alleged to be a breach of 229(7), picking up 229(4) or 229(2)?

MR WHITINGTON:   Your Honour, first of all, Justice Santow in Miller’s Case was dealing with a will and the construction of a will.  So it really is far removed from a critical decision, and, indeed, Justice McPherson was also dealing in a civil context.  But we say the Chief Justice was right to draw distinction between prospective assent and ratification.  It may be that a criminal provision, to the extent that section 229 was a criminal provision, precludes ex post facto ratification, but it is a different thing if the director is authorised by the unanimous assent of the members in advance of the transaction, to carry out the transaction, because in that case the cases say there is no breach of duty because the duty is, in effect, waived away.

McHUGH J:   But it seems a curious result that there is a breach of 229(4) for the purpose of the criminal law, but there is not a breach for the purpose of the action brought under 229(7).

MR WHITINGTON:   Your Honour, we say that is for this reason, that there is a public interest in the criminal law, and that is a matter that goes beyond the relationship between the company and its director, whereas on the civil side there is purely a private interest or a private right as between the company and its director.  So the ultimate result might be even in the case of a statutory offence such as section 229, that there could be criminal liability but an absence of civil liability, and we say that is not anomalous at all.  There would be an absence of civil liability because, in accordance with this line of authorities that starts with Salomon v Salomon, the members have authorised the conduct of the director which would otherwise be in breach.

Now, if we are wrong about that then the question is begged immediately, why have not all the courts, over the last 20 years for instance – which have upheld this principle – said the principle cannot any longer stand in the face of section 232 of the Corporations Law or section 229 of the Code or any predecessor provision?  It has never been suggested that the attachment of an ancillary criminal liability to the statutory expression of the civil duty in any way destroys what we have been calling the Duomatic or unanimous assent principle.  The accepted reservations on the Duomatic principle are that the transaction must not jeopardise the solvency of the company ‑ ‑ ‑

GUMMOW J:   How do you apply the Duomatic principle to the constitutive words in 229 that say what the breach is?  You have to read some words in, do you not?

MR WHITINGTON:   To say what the breach is?

GUMMOW J:   To say what it is not.  You say it is not because of Duomatic.

MR WHITINGTON:   Yes.  We would say in 229(4), for instance, which is the section that the Chief Justice appears to have found underpinned liability, we would say there is no improper use because the use, or the transaction, has been approved by all the members.  At the relevant time in question ‑ ‑ ‑

GUMMOW J:   You see a lot of these earlier cases were ultra vires cases, were they not?

MR WHITINGTON:   We say, with respect, no because – we say no.  It was always a reservation that the transaction must be intra vires.  So the older cases proceed on the assumption that the transaction is intra vires ‑ ‑ ‑

GUMMOW J:   But an abuse of power.

MR WHITINGTON:   Exactly, your Honour, yes, exactly.  Later, of course, when the doctrine was abolished the issue of intra vires – ultra vires was removed, but it was only ever a question of abuse of power, or misuse of power, by a fiduciary director.  As I say, that ‑ ‑ ‑

GUMMOW J:   And you attach that to the words “now improper” in 229?

MR WHITINGTON:   Yes.  As I say, it might be held in an extreme case that the criminal liability exists nonetheless because the members cannot absolve a director from a public duty, if you like, or a duty in which there is a public interest, but as a matter of private right it has always been accepted that the members, being the company for these purposes, can grant absolution to the directors from a prospective breach.  So we say there is absolutely nothing unorthodox about the Chief Justice’s reasons.  They are perfectly consistent with principle, and we say further than that, that they are right.

Now, can I move briefly, because time is running short, to the preference action.  In relation to that matter the clear finding was that the instruction – an instruction was given in the most general terms by Mr Carabelas to the accountant.  The accountant came to Mr Carabelas - and the finding of the trial judge was that this occurred after liquidation – and said, “We need to put these companies in a condition to deregister them.  We need to therefore remove assets from the balance sheet to do so.”  Mr Carabelas said, “Do what you have to do.” 

Then Mr Vlassis, the accountant, of his own motion, undertook some round robin entries that had the effect of discharging the company’s liability to Mr Carabelas and his wife as creditors in the company.  He undertook the round robin entries of his own volition without any notice to Mr Carabelas.  Mr Carabelas had no knowledge of them – and the entries were undertaken after liquidation.  So we put to the Full Court, and the Full Court accepted, simply that (a) there was no transaction in any event.  There was no agreement on anything, in accordance with Manzi there was no transaction.  Secondly, and in any event, even if there was a transaction it post‑dated liquidation.  They are our submissions, if the Court pleases.

McHUGH J:   Yes.  Yes, Mr Griffith.

MR GRIFFITH:   Your Honours, we say firstly the exchange between my learned friend and members of the Bench confirms that there is a matter calling out for the direction of this Court.  We say that this case is an eminently suitable vehicle for that.  Our submission is, your Honours, that merely the issue that one sees from paragraph 59 of his Honour the Chief Justice’s judgment with respect to the application of section 229(4) in itself is a matter which requires authoritative direction of this Court rather than remaining uncertain with respect to the capacity to assume merely - because it is a one-man company that any action that otherwise would be a contravention ‑ ‑ ‑

GUMMOW J:   There is an equivalent of 229, is there not, in the present Corporations Act?

MR GRIFFITH:   Yes there is, your Honour, yes.  Your Honours, we say that, in effect, my learned friend’s submission is that there is a second magic pudding here.  He says we can walk away from this transaction because we say we rely on the Chief Justice finding it occurred after the winding‑up, and we can walk away from the liability of 446,000 because we say he did not claim it back on the basis you ignore the transaction.

Now, your Honours, with respect, that cannot be right.  It must be the case either that this liability continues for the reasons that we say,

your Honour, or else the result that happened in the Full Court is one which lawfully can be obtained, namely you can transfer your own liability to an insolvent company and in that way cause a detriment to the company, a corresponding benefit to yourself in circumstances which otherwise, we say, appear as a criminal offence.

With respect to the issue of the preference claim, your Honours, we say that is a very simple issue, that the trial judge in paragraph 36 of the application book, paragraph 110 and also paragraphs 100 to 102, found the journal entries were evidence of transactions which occurred before the winding‑up of the company.  That is confirmed as one picks up from the chronology, your Honours, and paragraph 12 page 5 of the appeal book, that by 26 March 1993 all five companies were in the process of being deregistered, and George had made his statutory declaration, which is extracted by the trial judge in paragraph 12 of his judgment.  At that time George and the CBA agreed to a settlement.

The transcript of Vlassis the accountant’s evidence appears at appeal book 36 paragraph 108, George authorised the “no assets on the balance sheet” result.  It was authorised not after the winding‑up, your Honours, but at the time of the transaction in making the settlement with the bank – that was executed 23 June 1993 – and, your Honours, it was found by the trial judge at paragraph 107 on application book 35 that the “netting off” had the effect that the no assets on the balance sheet was done on the assumption of all the companies being a joint venture and George being an agent of them.  That was rejected by the trial judge.  In those circumstances, your Honour, we say the statement by the Full Court that the evidence reflect a decision made after the commencement of the winding‑up, as appears at application book 73 paragraph 98, is one which is in error, with respect.

We say, your Honour, the facts as they are set out in those paragraphs of the trial judge indicate, and the chronology conferred with your Honours, that the only explanation is that these were transactions as part of the arrangements made with the bank for the forgiveness of the debts some 12 months before – or nine months before; certainly anterior to the winding‑up.  On that basis, your Honours, there is no particular issue of fact that arises that may disturb the Court from its consideration of the principle of the principal issue.  As we indicate, your Honour, the preference issue is one which would not detain the Court and one, for the reasons stated, we have demonstrated error in the Full Court.  If the Court pleases.

McHUGH J:   Yes, there will be a grant of special leave in this matter.

AT 3.32 PM THE MATTER WAS CONCLUDED