Chameleon Mining NL v Murchison Metals Limited

[2010] FCA 1129

FEDERAL COURT OF AUSTRALIA

Chameleon Mining NL v Murchison Metals Limited [2010] FCA 1129

Citation:

Chameleon Mining NL v Murchison Metals Limited  [2010] FCA 1129

Parties:

CHAMELEON MINING NL
v MURCHISON METALS LIMITED
(ACN 078 257 799),
PHILLIP FELICE GRIMALDI,
GREGORY BENNETT BARNES,
CROSSLANDS RESOURCES LTD
(ACN 061 262 397),
PINNACLE NOMINEES PTY LTD
(ACN 008 928 443) and
JACK HILLS HOLDINGS PTY LTD (ACN 127 384 696)

File number(s):

NSD 2355 of 2007

Judge:

JACOBSON J

Date of judgment:

20 October 2010

Catchwords:

CORPORATIONS – directors’ duties – whether company officer a de facto director - five extraordinary transactions – whether transactions in breach of directors’ duties – whether another entity knowingly concerned in breaches – Corporations Act remedies – indemnification of officers in breach of duties

EQUITY – directors’ duties – whether company officer a de facto director – five extraordinary transactions – whether transactions in breach of directors’ duties – whether another entity liable for breaches as accessory under the first and second limbs of Barnes v Addy – equitable remedies considered – no constructive trust over shares – nature of benefit or profit – account of profits ordered  

Legislation:

Corporations Act 2001 (Cth) ss 9, 180, 181, 182, 710, 711, 728
Evidence Act 1995 (Cth) ss 136, 140
Federal Court of Australia Act 1976 (Cth) s 54A
Federal Court Rules O 22 r 4(2)

Cases cited:

Advance Bank Australia Limited v FAI Insurances Limited (1987) 9 NSWLR 464 cited
Albion Insurance Co v GIO (NSW) (1969) 121 CLR 342 cited
Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 referred to
Australian Postal Corp v Lutak (1991) 21 NSWLR 584 cited
Australian Securities Commission v AS Nominees (1995) 133 ALR 1 cited
Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35 cited
Barnes v Addy (1874) LR 9 Ch App 244 followed
Beach Petroleum NL v Johnson (1993) 43 FCR 1 applied
Beatty v Guggenheim Exploration Co (1919) 225 NY 380 cited
Blackwell v Moray (1991) 5 ACSR 255 cited
Boardman v Phipps [1967] 2 AC 46 cited
Briginshaw v Briginshaw (1938) 60 CLR 336 cited
Burke v LFOT Pty Limited (2002) 209 CLR 282 referred to
Chan v Zacharia (1984) 154 CLR 178 cited
Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35 cited
Baden v Societe Generale pour Favoriser le Developpement du Commerce et de L’Industrie en France SA [1993] 1 WLR 509 followed
Canson Enterprises Ltd v Boughton [1996] 1 WWR 412 discussed
Cement Australia Ltd v Australian Competition and Consumer Commission [2010] FCAFC 101 referred to
Chew v R (1992) 173 CLR 626 cited
Colbeam Palmer Limited v Stock Affiliates Pty Limited (1968) 122 CLR 25 discussed
Commissioner of Taxation v Macquarie Health Corp Limited (1998) 88 FCR 451 cited
Consul Development Pty Limited v DPC Estates Pty Limited (1975) 132 CLR 373 discussed
Corporate Affairs Commission v Drysdale (1978) 141 CLR 236 discussed
Coulton v Holcombe (1986) 162 CLR 1 referred to
Cowan de Groot Properties Ltd v Eagle Trust Plc [1992] 4 All ER 700 distinguished
Daly v The Sydney Stock Exchange Limited (1986) 160 CLR 371 discussed
Dart Industries Inc v Décor Corporation Pty Limited (1993) 179 CLR 101 referred to
Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565 followed
Emanuel Management Pty Limited (in liq) v Foster’s Brewing Group Limited (2003) 178 FLR 1 cited
Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230 CLR 89 followed
Farrow Finance Co Limited (in liq) v Farrow Properties Pty Limited (in liq) (1997) 26 ACSR 544 cited
Foskett v McKeown [2001] 1 AC 102 discussed
Giumelli v Giumelli (1999) 196 CLR 101 referred to
Hagan v Waterhouse (1992) 34 NSWLR 308 discussed
Hall v Poolman (2007) 65 ACSR 123 cited
Harlowe’s Nominees Pty Limited v Woodside (Lakes Entrance) Oil Company No Liability (1967) 121 CLR 483 cited
Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 discussed
Harris v S (1976) 2 ACLR 51 cited
Ho v Akai Pty Limited (in liq) (2006) 24 ACLC 1,526 cited
Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 discussed
Howard Smith Limited v Ampol Petroleum Limited [1974] AC 821 cited
John Alexander’s Clubs Pty Ltd v White City Tennis Club Limited (2010) 266 ALR 462 cited
Jones v Dunkel (1959) 101 CLR 298 cited
Kalls Enterprises Pty Limited (in liq) v Baloglow (2007) 63 ACSR 557 cited
Katingal Pty Limited v Amor (1999) 30 ACSR 545 cited
Maronis Holdings Limited v Nippon Credit Australia Pty Limited (2001) 38 ACSR 404 cited
Mavaddat v Lee (2007) 34 WAR 67 referred to
McNally v Harris (No 3) [2008] NSWSC 861 followed
McNeil v Fultz (1906) 38 SCR 198 not followed
Mills v Mills (1938) 60 CLR 150 cited
Mistmorn Pty Limited (in liq) v Yasseen (1996) 21 ACSR 173 followed
Murphy v Overton Investments Pty Limited (2004) 216 CLR 388 referred to
Natcomp Technology Australia Pty Limited v Graiche (2001) 19 ACLC 1,117 cited
National Australia Bank Ltd v Nobile (1988) 100 ALR 227 referred to
News Limited v Australian Rugby Football League Limited (1996) 64 FCR 410 cited
Ngurli Limited v McCann (1953) 90 CLR 425 cited
Nominal Defendant v Owens (1978) 22 ALR 128 cited
Nudrill Pty Limited v La Rosa [2010] WASCA 158 referred to
O’Halloran v RT Thomas & Family Pty Limited (1998) 45 NSWLR 262 discussed
Orr v Ford (1989) 167 CLR 316 discussed
Paul A Davies (Australia) Pty Limited v Davies [1983] 1 NSWLR 440 discussed
Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 109 cited
Pilmer v Duke Group Ltd (2001) 207 CLR 165 discussed
Polly Peck International plc v Nadir (No 2) [1992] 4 All ER 769 cited
Qantas Airways Limited v Gama (2008) 247 ALR 273 cited
Re Dawson; Union Fidelity Trustee Co Limited v Perpetual Trustee Co Limited [1966] 2 NSWR 211 discussed
Re Goldcorp Exchange Limited (In Receivership) [1995] 1 AC 74 discussed
Re Hampshire Land Co [1896] 2 Ch 743 referred to
Re HIH Insurance Limited (in prov liq) and HIH Casualty and General Insurance; ASIC v Adler (2002) 41 ACSR 72 followed
Re Lo-Line Electric Motors Limited [1988] Ch 477 cited
Re Richborough Furniture Limited [1996] BCC 155 discussed
Re Unisoft Group (No 3) [1994] 1 BCLC 609 referred to
Robins v Incentive Dynamics Pty Limited (in liq) (2003) 45 ACSR 244 applied
Richardson & Wrench (Holdings) Pty Limited v Ligon No 174 Pty Limited (1994) 123 ALR 681 cited
Royal Brunei Airlines Sdn v Tan Bhd [1995] 2 AC 378 followed
Scott v Scott (1963) 109 CLR 649 cited
Short v Crawley (No 30) [2007] NSWSC 1322 referred to
Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160 applied
Swindle v Harrison [1997] 4 All ER 705 cited
Target Holdings Ltd v Redferns [1996] 1 AC 421 followed
Tesco Supermarkets Ltd v Nattrass [1972] AC 153 cited
The Bell Group Limited v Westpac Banking Corporation (No 9) (2009) 70 ACSR 1 discussed
The Duke Group Ltd (In Liq) v Almain Investments Ltd [2003] SASC 415 cited
Timber Engineering Co Pty Ltd v Anderson (1980) 2 NSWLR 488 cited
United States Surgical Corporation v Hospital Products International Pty Limited [1983] 2 NSWLR 157 discussed
Yorke v Lucas (1985) 158 CLR 661 cited
Youyang Pty Limited v Minter Ellison Morris Fletcher (2003) 212 CLR 484 discussed

Date of hearing:

29 & 30 September 2009; 1, 2, 6 - 9, 12 - 15 & 19 - 23 October 2009; and 3 - 5 February 2010

Date of last submissions:

12 October 2010

Place:

Sydney

Division:

GENERAL DIVISION

Category:

Catchwords

Number of paragraphs:

1133

Counsel for the Applicant:

Mr N Hutley SC with Mr S Habib SC and Mr C Withers

Solicitor for the Applicant:

Lavan Legal (Piper Alderman until 14 September 2010)

Counsel for the First, Fourth and Sixth Respondents:

Mr J Karkar QC with Mr S Penglis

Solicitor for the First, Fourth and Sixth Respondents:

Freehills

Counsel for the Second Respondent:

Mr M Watts

Solicitor for the Second Respondent:

MJ Woods & Co

Counsel for the Third and Fifth Respondents (Cross Respondent from 5 February 2010):

Mr J Sheahan SC with Mr H Stowe

Solicitor for the Third and Fifth Respondents (Cross Respondent from 5 February 2010):

Jackson McDonald

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 2355 of 2007

BETWEEN:

CHAMELEON MINING NL
Applicant

AND:

MURCHISON METALS LIMITED
ACN 078 257 799
First Respondent

PHILLIP FELICE GRIMALDI
Second Respondent

GREGORY BENNETT BARNES
Third Respondent

CROSSLANDS RESOURCES LTD
(ACN 061 262 397)
Fourth Respondent

PINNACLE NOMINEES PTY LTD
(ACN 008 928 443)
Fifth Respondent

JACK HILLS HOLDINGS PTY LTD
(ACN 127 384 696)
Sixth Respondent

JUDGE:	JACOBSON J
DATE OF ORDER:	20 OCTOBER 2010
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. Leave is granted to the Applicant to file and serve a Fourth Further Amended Statement of Claim in the form annexed to the Applicant’s Notice of Motion filed 6 October 2010.

2. The parties bring in short minutes of order to reflect the reasons for judgment herein.

3. The parties be heard briefly on the question of costs.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 2355 of 2007

BETWEEN:

CHAMELEON MINING NL
Applicant

AND:

MURCHISON METALS LIMITED
(ACN 078 257 799)
First Respondent

PHILLIP FELICE GRIMALDI
Second Respondent

GREGORY BENNETT BARNES
Third Respondent

CROSSLANDS RESOURCES LTD
(ACN 061 262 397)
Fourth Respondent

PINNACLE NOMINEES PTY LTD
(ACN 008 928 443)
Fifth Respondent

JACK HILLS HOLDINGS PTY LTD
(ACN 127 384 696)
Sixth Respondent

JUDGE:	JACOBSON J
DATE:	20 OCTOBER 2010
PLACE:	SYDNEY

REASONS FOR JUDGMENT

CHAPTER 1 - INTRODUCTION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[1]
Background........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[7]
The Parties........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[7]
An outline of the transactions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[21]
The New Millennium Transaction........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[21]
The March 2004 Placement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[34]
The Cadetta Transaction........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[41]
The July 2004 Placement and the provision of cheques to the Iron Jack Vendors...	[50]
The August 2004 Placement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[61]
Winterfall’s acquisition of the Iron Jack Project and the negotiations between NiCu and Zuks........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[64]
Structure of the Judgment........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[79]
CHAPTER 2 – RELEVANT LEGAL PRINCIPLES........ ........ ........ ........ ........ ........ ...	[84]
Introduction........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[84]
The Corporations Act definition of a director........ ........ ........ ........ ........ ........ ........ .......	[86]
Section 9(b)(i): de facto directors........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[87]
Section 9(b)(ii): shadow directors........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[93]
Section 9: officers........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[100]
Section 180(1): The duty of reasonable care and diligence........ ........ ........ ........ .......	[103]
Section 181: The duty to act in good faith and in the best interests of the company........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[105]
The duty to act for a proper purpose........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[110]
The duty not to improperly use the position........ ........ ........ ........ ........ ........ ........ ........ .	[113]
Fiduciary duties........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[116]
Barnes v Addy........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[119]
The degree of knowledge in Barnes v Addy........ ........ ........ ........ ........ ........ ........ ........ ..	[129]
CHAPTER 3 – MANAGEMENT OF CHAMELEON........ ........ ........ ........ ........ ........ ..	[133]
When did Mr Barnes become a director of Chameleon?........ ........ ........ ........ ........ ....	[134]
Was Mr Grimaldi a de facto director?........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[142]
Dealings with the Priders........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[182]
Perception of Outsiders........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[200]
Consultant........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[202]
Shadow director........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[209]
Officer........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[212]
CHAPTER 4 – THE NEW MILLENNIUM TRANSACTION........ ........ ........ ........ ....	[213]
The factual basis of the claim........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[213]
The background facts:  July 2001 to February 2002........ ........ ........ ........ ........ ........ ...	[218]
Mr Greeve’s reservations:  February 2002........ ........ ........ ........ ........ ........ ........ ........ ...	[226]
Chameleon agrees to withdraw in favour of Weboz:  February/March 2002........ ..	[230]
Weboz arranged to purchase properties from Mr Barnes........ ........ ........ ........ ........ ..	[244]
The sale agreement between New Millennium and Weboz and the on-sale to Chameleon........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[246]
Issue of shares in Weboz to New Millennium, Pinnacle and Triumph........ ........ ......	[255]
Weboz announces a profit on the New Millennium Transaction........ ........ ........ .......	[260]
Whether the dishonest agreement has been proved........ ........ ........ ........ ........ ........ .....	[261]
New Millennium was not a real opportunity for Chameleon........ ........ ........ ........ ......	[271]
The reason why Weboz was interposed........ ........ ........ ........ ........ ........ ........ ........ ........	[277]
The benefits to Weboz and Mr Grimaldi........ ........ ........ ........ ........ ........ ........ ........ ......	[285]
The sale of Old Hall Creek and Christmas Creek........ ........ ........ ........ ........ ........ .......	[299]
The transfer of 1.4 million shares to Triumph........ ........ ........ ........ ........ ........ ........ .....	[301]
Jones v Dunkel does not assist........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[305]
Conclusion on the New Millennium Transaction........ ........ ........ ........ ........ ........ ........ .	[307]
Ratification........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[309]
CHAPTER 5 – THE MARCH PLACEMENT........ ........ ........ ........ ........ ........ ........ .......	[311]
The case as pleaded........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[311]
The background facts........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[317]
Mr Roberts’ evidence of the loan account........ ........ ........ ........ ........ ........ ........ ........ ....	[322]
No breach of duty proved in the March Placement........ ........ ........ ........ ........ ........ .....	[333]
CHAPTER 6 – FEBRUARY / JUNE 2004: THE INTRODUCTION OF THE IRON JACK / WINTERFALL ACQUISITION TO MURCHISON........ ........ ........ ...	[344]
Overview:  the case as pleased and conducted........ ........ ........ ........ ........ ........ ........ .....	[344]
Winterfall’s agreements with the Iron Jack Vendors........ ........ ........ ........ ........ ........ ..	[354]
February/March 2004:  Events following execution of the agreement........ ........ ......	[361]
The Windsor Hotel meeting........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[368]
Mr Zuks negotiates a second extension........ ........ ........ ........ ........ ........ ........ ........ ........ .	[375]
Heads of Agreement between NiCu and Winterfall........ ........ ........ ........ ........ ........ ....	[378]
May/June 2004:  NiCu fails to pay; Addendum to NiCu/Winterfall Heads of Agreement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[382]
NiCu’s financial situation in the period February to June 2004........ ........ ........ ........ .	[392]
Conclusions on the introduction of the Iron Jack/Winterfall acquisition to Murchison........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[394]
CHAPTER 7 – THE CADETTA TRANSACTION........ ........ ........ ........ ........ ........ ......	[401]
Pleadings & Overview........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[401]
Mr Scook’s evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[412]
Mrs Hardie’s evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[433]
Mr Evans’ evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[439]
The Cadetta Heads of Agreement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[455]
The transfer of 5 million Chameleon shares to NiCu and the sale of the shares.......	[461]
Value of the Cadetta tenements........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[470]
Factual findings........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[482]
Chameleon’s claims of breach of duty against Mr Grimaldi and Mr Barnes........ ...	[498]
The 5 million Chameleon shares as a commission........ ........ ........ ........ ........ ........ .....	[501]
Application for leave to amend the Statement of Claim........ ........ ........ ........ ........ ......	[517]
Conclusions on the claims advanced in relation to the Cadetta Transaction........ .....	[533]
Claim against Murchison........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[544]
CHAPTER 8 - THE JULY 2004 PLACEMENT AND PROVISION OF CHEQUES FOR $152,750 TO THE IRON JACK VENDORS........ ........ ........ ........ ....	[545]
Pleadings........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[545]
The background facts........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[558]
Mr Roberts’ evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[590]
Mr Zuks’ evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[601]
Factual findings........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[613]
Knowledge of Mr Grimaldi, Mr Barnes and Mr Zuks........ ........ ........ ........ ........ ........	[655]
Claims against Mr Grimaldi and Mr Barnes........ ........ ........ ........ ........ ........ ........ ........	[667]
Claims against Murchison........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[695]
The claim against Winterfall........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[709]
CHAPTER 9:  THE AUGUST PLACEMENT........ ........ ........ ........ ........ ........ ........ ......	[732]
Pleading........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[732]
Background facts and evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[739]
Chameleon’s submissions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[755]
The respondents’ submissions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[759]
Chameleon’s submissions in reply........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[764]
Findings........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[767]
CHAPTER 10:  THE REVERSE TAKEOVER OF WINTERFALL AND THE ISSUE OF SHARES TO PINNACLE........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[786]
Pleadings........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[786]
The evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[789]
Findings........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[799]
CHAPTER 11:  THE ROYALTY PAYMENT TO THE IRON JACK VENDORS.	[811]
The relevance of the royalty payment........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[811]
Whether the royalty is relevant........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[815]
Valuation of the royalty:  Introduction........ ........ ........ ........ ........ ........ ........ ........ ........ .	[827]
Mr Zuks’ evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[843]
Mr Kopejtka’s evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[846]
Mr McGuiness’ approach:  the adjustment factor........ ........ ........ ........ ........ ........ .......	[855]
Mr Adams’ evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[870]
Mr Lonergan’s evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[878]
Mr Gray’s evidence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[907]
Conclusion on valuation of royalty........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[911]
CHAPTER 12:  RELIEF........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[918]
Overview........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[918]
The relevant legal principles........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[930]
Payment of the cash consideration to the Iron Jack Vendors........ ........ ........ ........ .....	[944]
Expenditure on development of the Iron Jack tenements........ ........ ........ ........ ........ ...	[960]
Delay:  The facts........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[968]
No constructive trust over Murchison’s shares in Winterfall........ ........ ........ ........ .....	[977]
The profit principle........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[979]
The tracing principle........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[1011]
Laches........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[1021]
Account of profits in relation to Murchison’s shares in Winterfall........ ........ ........ ....	[1032]
Allowance in favour of Murchison........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[1040]
Equitable compensation payable by Murchison........ ........ ........ ........ ........ ........ ........ ..	[1049]
The Pinnacle Shares........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[1071]
Mr Grimaldi is liable to account for the 10 million shares in Murchison........ ........ ...	[1076]
The measure of Mr Grimaldi’s liability to account........ ........ ........ ........ ........ ........ ......	[1080]
Whether Murchison is liable to account for the 10 million shares........ ........ ........ ......	[1085]
Relief against Winterfall........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[1098]
Corporations Act remedies........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[1101]
Conclusions on relief........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[1106]
CHAPTER 13:  CROSS CLAIMS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[1113]
Overview........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[1113]
The claim for contribution against Mr Grimaldi........ ........ ........ ........ ........ ........ ........ .	[1118]
The cross-claim against Mr Barnes........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[1122]
Cross-claim by Mr Grimaldi........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[1127]
ORDERS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[1132]

CHAPTER 1 - INTRODUCTION

The applicant (“Chameleon”) claims that three of its former directors and a fourth person who is said to have been a de facto or shadow director, were guilty of serious breaches of their fiduciary duties to the company.

The three former directors are Mr Landan Roberts, Mr Dick Whitbread and Mr Gregory Barnes.  The alleged de facto or shadow director is Mr Phillip Grimaldi.  The conduct and role of each of Mr Grimaldi and Mr Barnes in the affairs of Chameleon is at the heart of the case.

The gravamen of Chameleon’s case is that through a number of extraordinary transactions, Mr Grimaldi and Mr Barnes “siphoned” shares and cash from Chameleon for their own benefit and for the benefit of the first respondent (“Murchison”).  Mr Grimaldi was a director of Murchison and held approximately 20% of the shares in that company.  Mr Barnes also held a substantial number of shares in Murchison.

The critical transactions occurred in 2004.  Their relevance to the proceeding is that they are said to be the means by which Murchison obtained desperately needed funds to acquire a 60% shareholding in the fourth respondent, referred to in these reasons as Winterfall, and through it, a controlling stake in an iron ore tenement in Western Australia.  The tenement is known as Iron Jack and is now thought to be worth in the order of $1 billion.

Chameleon contends that, through Grimaldi, Murchison had knowledge of the breaches of fiduciary duty by the directors or officers of Chameleon so as to be liable for knowing receipt of the funds or knowing assistance in the breaches under the first and second limbs of Barnes v Addy (1874) LR 9 Ch App 244.

Chameleon makes a number of claims for relief including a constructive trust or an account of profits or equitable damages in respect of Murchison’s interest in the Iron Jack tenement.

Background

The Parties

Chameleon was incorporated on 16 November 2001.  It was listed on the Australian Securities Exchange (“ASX”) shortly after 16 April 2003.

There is an issue in the proceeding as to precisely when Mr Barnes became a director of Chameleon.  This is relevant to his liability for alleged breaches of duty in relation to a transaction that took place in 2002.  He was a director of Chameleon at all other relevant times.

Mr Barnes and Mr Whitbread were directors of Chameleon from, or about, the date of its incorporation.  Mr Roberts remained as a director until 11 January 2006.  Mr Whitbread remained a director until 15 November 2002.  Neither of them is a party to the proceeding but Mr Roberts gave evidence for Chameleon. 

There were two other directors of Chameleon who held office from 15 November 2002 until 11 January 2006.  They were Mr Nicholas Dondas and Mr Sullana Niurou.  They are not parties to the proceeding.

Chameleon was ordered to be wound up in December 2004 but it subsequently entered into a Deed of Company Arrangement and was eventually reinstated to the ASX’s official list in September 2007. 

Mr Grimaldi was never formally appointed as a director of Chameleon.  However, Chameleon contends that from early 2002 until about September 2004 Mr Grimaldi participated in decisions that affected substantial parts of the business of Chameleon, as well as its financial standing.  Chameleon also contends that during the same period Mr Roberts and Mr Barnes were accustomed to act in accordance with Mr Grimaldi’s instructions.  Mr Grimaldi is the second respondent in the proceeding.

Mr Barnes was the third respondent in the proceeding until shortly before closing addresses.  At that time, Mr Barnes and the fifth respondent (Pinnacle), a company owned and controlled by him, settled the claims against them, without admission of liability on terms that require them to pay $6 million to Chameleon 

I granted leave to Chameleon on 3 February 2010 to discontinue the proceeding against Mr Barnes and Pinnacle.  Mr Barnes remains as a cross-defendant to a claim for contribution made against him by Murchison and Winterfall.

Murchison is a public company whose shares are listed on the ASX.  It was incorporated in 1997 under the name Weboz Limited and later changed its name to NiCu Metals Limited before a further name change to Murchison.  It was suspended from trading on the ASX in late 2001 for failure to maintain a sufficient spread of shareholders and was not relisted until March 2005. 

I will usually refer to Murchison by that name but it is sometimes convenient to refer to it by the names Weboz or NiCu, depending upon the date of the event in question.

Winterfall was known by that name during the critical period in these proceedings namely from early 2004 to October 2004.  It then changed its name to Iron Jack Limited, and later to Crosslands Resources Ltd. At least until about June 2004, Mr Nikolajs Zuks was the beneficial owner of all or most of the shares in Winterfall. 

The sixth respondent, Jack Hills Holdings Pty Limited (“JHH”) was joined as a respondent after the close of evidence.  It is a wholly owned subsidiary of Murchison and was joined following a late disclosure of documents by Murchison which revealed that in about September 2007 JHH took a transfer of Murchison’s shares in Winterfall.

No complaint was made about the late disclosure or the late joinder of JHH as a party.  Chameleon claims that JHH took its transfer of Murchison shares in Winterfall with notice of Chameleon’s beneficial interest in the shares. 

With the consent of all parties, the claim against JHH was deferred pending the determination of the claims against Murchison, Mr Grimaldi and Winterfall and the cross-claim against Mr Barnes.  I made an order under O 29 r 2 of the Federal Court Rules giving effect to the deferral on 3 February 2010.

An outline of the transactions

The New Millennium Transaction

The first transaction relied upon by Chameleon is known as the New Millennium transaction.  It took place over a period commencing in late 2001 and was completed in about April 2002.  The cash and funds obtained by Murchison under the transaction were not employed directly in the acquisition of an interest in the Jack Hills project.

Nevertheless, Chameleon relies on the transaction as an important part of the background against which Murchison acquired its interest in Winterfall.  Chameleon also points to the involvement of Mr Grimaldi in the New Millennium transaction as evidence of his role in the management of Chameleon.  In addition, Chameleon relies upon certain benefits obtained under the transaction by Mr Grimaldi (through his shareholding in Murchison) and by Mr Barnes (through his shareholding in Pinnacle) as well as by Mr Whitbread through his interest in a company called Triumph Industries Limited (“Triumph”).

The substance of the New Millennium transaction is that Murchison acquired for itself a corporate opportunity that is said to have been available to Chameleon and from which Murchison acquired 7 million shares in Chameleon and $250,000 in cash.  Murchison is said to have received that property with actual knowledge (through Mr Grimaldi) that the shares were obtained by breaches of duty by Mr Barnes and Mr Whitbread.  Chameleon claims that Murchison and Mr Grimaldi are liable for the receipt of that property under the first and second limbs of Barnes v Addy.

Full details of all the transactions which are the subject of this proceeding are to be found in the detailed narrative chronology in the Appendix to this judgment.  I will set out in this section a brief description of the main facts of the New Millennium transaction.

In late 2001 Chameleon began negotiating with New Millennium Resources Ltd (“New Millennium”) for the acquisition of certain mining interests in Western Australia.  The negotiations appear to have been reasonably advanced in early 2002.  They involved the acquisition of New Millennium’s mining interests in return for a share issue of 3.2 million Chameleon shares.

However, in February 2002, one of New Millennium’s directors expressed concerns about the transaction and suggested that New Millennium try to find another buyer. 

An alternative proposal was then put forward by Mr Grimaldi to Chameleon under which Weboz would acquire the mining interests from New Millennium for 3.2 million Weboz shares and on-sell the mining interests to Chameleon.

On 1 March 2002, Chameleon withdrew its offer to New Millennium in favour of its “closely related” company, Weboz.  This enabled Weboz to acquire two properties from New Millennium. 

At about the same time, Mr Barnes and Mr Grimaldi arranged for Pinnacle to sell two of its properties to Weboz for 2.4 million Weboz shares. 

Shortly afterward, Chameleon agreed to purchase the four mining properties (that is to say the two properties acquired by Weboz from New Millennium and the two acquired from Pinnacle) for 7 million Chameleon shares and $250,000 cash, payable by “progressive payments”. 

Thus, the effect of these transactions was that Chameleon acquired from Weboz the properties it was negotiating to purchase from New Millennium (together with two other properties) for a larger consideration than it was negotiating with New Millennium.  Chameleon also agreed to pay cash to Weboz, notwithstanding that there was no cash component in the proposed acquisition from New Millennium.

Moreover, Mr Barnes obtained 2.4 million shares in Weboz for properties that are said to have been over-valued, and 1.4 million of those shares were transferred to Mr Whitbread’s nominee, Triumph.

Two additional facts should be noted.  As a result of the transaction, Weboz, on 12 September 2002 announced a profit of approximately $1.6 million on the sale of the four mining tenements to Chameleon.  Weboz also increased its spread of shareholders by allotting shares directly to the shareholders of New Millennium in consideration for the acquisition of the tenements.   

The March 2004 Placement

The March 2004 Share Placement involved a somewhat unusual placement of shares by Chameleon.  It was authorised by a resolution of directors of Chameleon dated 28 February 2004 for the purposes of raising $750,000 to meet the acquisition and other costs associated with the acquisition of a gold mine known as the Palm Springs Gold Mine. 

However, after the resolution was passed, the principal of a Delaware company who had previously told Mr Roberts that he would be able to introduce investors to Chameleon, informed Mr Roberts that he was unable to do so. 

Shortly afterward, Mr Grimaldi identified persons or companies to whom the shares would be issued, but for purposes different from those which were authorised by the Board resolution.  In particular, Mr Grimaldi identified Weboz as one of the allottees of the shares that were to be the subject of the Placement. 

At Mr Grimaldi’s direction, 750,000 shares were allotted to Weboz at 10 cents per share, that is to say, for a consideration of $75,000.  Also, at Mr Grimaldi’s direction, Mr Roberts credited the sum of $75,000, being the consideration for the share issue, to Weboz’s loan account with Chameleon.  Mr Roberts did so even though he was not aware of the balance of the loan account. 

Chameleon contends that prior to the Placement, Chameleon had discharged its debt to Weboz arising out of the New Millennium transaction and that no money (or, at most an insignificant sum) was owing by Chameleon to Weboz on the loan account. 

The net effect of the transaction, for present purposes, is therefore said by Chameleon to be that Weboz received 750,000 shares in Chameleon for no consideration. 

The effect of the respondents’ submission is that the credit of the $75,000 to the Weboz loan account is the beginning and the end of the matter because that was the consideration.

The Cadetta Transaction

Stripped to its bare essentials, the Cadetta Transaction involved the sale to Chameleon by a dealer in mining interests of a prospecting licence and three applications for exploration licences, in consideration for an issue of shares in Chameleon. 

The vendor was Mr Dean Scook, or interests associated with him.  Mr Scook gave evidence that he attended meetings with, inter alia, Mr Barnes and Mr Grimaldi about the negotiations.  The effect of his evidence, and that of his business partner, Mrs Carole Hardie, was that Mr Scook agreed to sell the four mining interests to Chameleon in return for the issue of 8 million Chameleon shares.

However, according to Mr Scook, he learned from Mr Barnes or Mr Grimaldi that Chameleon proposed to “write up” the transaction showing a purchase price of 13 million shares but he was not concerned about who received the additional 5 million shares because he was very satisfied to receive 8 million shares for the mining interests.

Chameleon’s acquisition of the mining interests was effected through a takeover of a company called Cadetta Resources Limited (“Cadetta”).  The shareholders of Cadetta included Jamora Nominees Pty Limited (“Jamora”) which appears to have been associated with Mr Scook. 

In May 2004, 13 million Chameleon shares and an equal number of options, were issued by Chameleon to Cadetta’s shareholders, including Jamora.  Five million of those shares were then transferred by Jamora to NiCu for “nil” consideration. 

The net effect of the transaction was that Chameleon acquired (or was intended to acquire) the mining interests and NiCu received 5 million shares in Chameleon for no stated consideration.

The respondents made a strong attack on Mr Scook’s credit but there is no escape from the proposition that NiCu received 5 million shares in Chameleon for no apparent consideration.

The effect of the respondents’ submission is that the allotment of the 5 million shares to NiCu was, to the knowledge of all relevant parties, a fee or commission payable to Mr Grimaldi for introducing the Cadetta Transaction to Chameleon.

The Cadetta transaction is of particular importance to the central issue in the case because, immediately after the allotment of the five million Chameleon shares to NiCu, Mr Grimaldi arranged for the sale of the shares.  The proceeds of the sale of the shares were then provided by NiCu to Winterfall.  Those funds were used by Winterfall to meet an instalment of the purchase price due to the Iron Jack Vendors. 

The July 2004 Placement and the provision of cheques to the Iron Jack Vendors

The July 2004 Placement and the provision by Chameleon to the Iron Jack Vendors of two cheques totalling approximately $152,000 are the most critical transactions in the proceeding.

These transactions are to be viewed against the background of certain Heads of Agreement dated 30 May 2004 between NiCu, Winterfall and Mr Zuks under which NiCu agreed to pay $350,000 to Winterfall.  Those funds were, in turn, required by Winterfall to meet its obligations to the Iron Jack Vendors to secure Winterfall’s investment in the Iron Jack Project.  The Heads of Agreement also provided for NiCu to take over Winterfall in return for an issue of shares in NiCu to the shareholders of Winterfall.

I will set out later in Chapter 1 an overview of the contractual arrangements under which Winterfall acquired its interest in the Iron Jack Project and the arrangements which provided for NiCu to acquire its majority interest in Winterfall.  These arrangements demonstrate the parlous financial position of NiCu and its desperate need for funds to enable it to meet its commitments to Winterfall.

The arrangements also show Winterfall’s urgent need for funds to meet its obligations to the Iron Jack Vendors and the pressure that was applied by Mr Zuks to Mr Grimaldi for NiCu to meet its commitment to Winterfall.

These matters are critical to an appreciation of the significance of the July 2004 Placement and the provision of the cheques to the Iron Jack Vendors, as well as to the claims of breach of duty in relation to those transactions.

The July 2004 Placement was suggested by Mr Grimaldi in late June 2004 and announced to the ASX on 12 July 2004.  It was for a capital raising of $360,000 by the issue of eight million shares in Chameleon at 4.5 cents per share.  The stated purpose was exploration activity at the Palm Springs Gold Mine.

On 9 July 2004, Mr Barnes signed a cheque for $56,250 on Chameleon’s account payable to one of the Iron Jack Vendors.  The cheque was drawn before amounts thus far raised from investors in the July 2004 Placement had been cleared and, on 12 July 2004 the cheque was dishonoured.

The cheque for $56,250 was re-presented later in July, together with a further Chameleon cheque for $96,500 signed by Mr Barnes in favour of another of the Iron Jack Vendors.  The two cheques, totalling $152,750 were debited to Chameleon’s bank account on 29 July 2004.

Mr Zuks was concerned that Chameleon and NiCu may be related parties and he asked Mr Grimaldi and/or Mr Barnes for evidence that NiCu was permitted to use Chameleon’s funds for NiCu’s corporate purposes.

Consideration of certain documents which were prepared by Mr Grimaldi and/or perhaps others on behalf of Chameleon, purporting to authorise the drawing of the cheques as a loan by Chameleon to NiCu, bear upon the question of knowledge of breach of the directors’ fiduciary duties in relation to this transaction.

The amount of $152,750 paid out of Chameleon’s bank account to the Iron Jack Vendors represented a substantial part of Chameleon’s available cash.

The August 2004 Placement

On 11 August 2004 Chameleon announced that it had issued five million shares to professional investors at $0.05 per share to raise $250,000.  As with the other placements, the stated purpose was to meet costs associated with the development of the Palm Springs Gold Mine. 

At the direction of Mr Grimaldi, Chameleon issued NiCu with 4,175,000 shares, as part of the August 2004 Placement.  However, it appears that Chameleon did not receive any payment from NiCu for the allotment of the 4,175,000 shares.

Chameleon relies upon the August 2004 Placement as one of the essential transactions grounding its claim for a constructive trust over Murchison’s interest in the Iron Jack Project.  It contends that part of the proceeds were used to discharge a debt due from Murchison to Winterfall. 

Winterfall’s acquisition of the Iron Jack Project and the negotiations between NiCu and Zuks

Winterfall acquired its interest in the Iron Jack Project under an agreement made in February 2004 with a number of persons and companies described in this proceeding as the Iron Jack Vendors.  The agreement provided that the purchase price was $1 million, payable in three instalments.  The agreement also provided for payment by Winterfall to the Iron Jack Vendors of a royalty of $0.80 per tonne of iron ore. 

Mr Zuks paid the first instalment himself but he was not in a position to pay the second instalment of $400,000 which was due in April 2004.  He raised part of that money from two other persons to whom I will refer later, but his over-riding purpose was to locate a listed public company through which the acquisition of the Iron Jack Project could be completed. 

In mid-April 2004 Mr Zuks obtained an extension of time for the payment of the second instalment to the Iron Jack Vendors.  At about the same time, Mr Zuks had a meeting with Mr Barnes and Mr Grimaldi in the course of which Mr Grimaldi said he had the money and would like NiCu to “do the Winterfall deal”. 

The “deal” which Mr Zuks wished to put in place was for Winterfall to be sold to a public company which could provide the balance of the purchase price for the Iron Jack Project and the necessary capital to develop it.  Mr Zuks’ intention was that he and his partners would hold 40% of the public company. 

At some time during the negotiations Mr Barnes and Mr Grimaldi told Mr Zuks that they wanted a “spotter’s fee” for introducing the transaction to NiCu. 

On 30 May 2004 NiCu entered into a written agreement with Winterfall under which NiCu agreed to pay Winterfall the sum of $350,000 “on signing” the agreement.  That sum was required by Winterfall to meet the next instalment due by it to the Iron Jack Vendors.

The agreement, which was described as a Heads of Agreement, also reflected the arrangements proposed by Mr Grimaldi to Mr Zuks for a “reverse takeover” of Winterfall by NiCu.  Winterfall was to be converted to a public company to be acquired by NiCu, and Mr Zuks and his partners were to receive 40% of NiCu upon the completion of the takeover.

NiCu failed to pay to Winterfall the $350,000 that was due immediately upon signing the Heads of Agreement.  Notwithstanding this, NiCu and Winterfall signed an Addendum to the Heads of Agreement in early June 2004 under which Winterfall agreed to issue shares to:

… nominees of Philip Grimaldi at nil cost in consideration for introducing NiCu Metals to Winterfall. 

NiCu’s failure to pay the $350,000 due to Winterfall on signing the Heads of Agreement left Winterfall in the position that it was unable to meet the instalment of the purchase price due to the Iron Jack Vendors on 5 June 2004. 

Mr Zuks was able to obtain an extension of time for the payment to 1 July 2004 but only upon conditions that required Winterfall to pay an additional $110,000 to the Iron Jack Vendors.  Mr Grimaldi agreed to provide the additional funds to Winterfall. 

Those additional funds appear to have been obtained by Mr Grimaldi during June 2004 out of the proceeds of sale of some of the five million Chameleon shares that NiCu received on completion of the Cadetta Transaction. 

I will deal with the “tracing” question in more detail later in my reasons.  It is sufficient to say by way of introduction that the proceeds of sale of some of NiCu’s Chameleon shares received from the Cadetta Transaction appear to have been paid to Winterfall and applied by Winterfall to meet the penalty extracted by the Iron Jack Vendors for the failure of Winterfall to pay the second instalment on time.  Also, a small part of the proceeds of sale of those shares, namely $20,000, seems to have been provided by NiCu to Winterfall toward the $350,000 payment which was still outstanding under the Heads of Agreement.

Importantly, the two cheques totalling $152,750 drawn by Mr Barnes (and arranged by Mr Grimaldi) in favour of the Iron Jack Vendors in July 2004 were handed to Winterfall after the extended date for payment of the second instalment of the purchase price payable to the Iron Jack Vendors.

Ultimately, NiCu was able to meet its obligation to Winterfall under the Heads of Agreement in late July 2004.  NiCu did so by raising funds from various sources but the two cheques totalling $152,750 obtained from Chameleon comprised more than 40% of the funding.  I will refer in more detail later to the sources of the funds obtained by NiCu.

The reverse takeover of Winterfall was completed on 11 November 2004.  Shareholders of Winterfall received a total of 80 million shares and more than 30 million options in NiCu (by then known as Murchison) in exchange for their shares in Winterfall.  Ten million of those shares and some millions of options were issued for the benefit of Mr Barnes and Mr Grimaldi in exchange for the ten million free shares which had been allotted to them in Winterfall, apparently as their “spotter’s fee”.

Structure of the Judgment

I have divided the judgment into chapters as set out in the Table of Contents.  The next chapter contains a brief statement of the applicable legal principles.  I have set out a narrative chronology which contains a full account of the relevant facts as an Annexure to this judgment.  A first draft of the narrative chronology was prepared by counsel for Chameleon.  Counsel for Murchison, Winterfall and JHH proposed a number of amendments which were agreed to by counsel for Chameleon and all other parties.  Accordingly, the narrative chronology which appears as the Annexure has been taken directly from the document which was agreed between the parties.

Chapter 3 is entitled Management of Chameleon.  It addresses the question of when Mr Barnes became a director and, in particular, whether Mr Grimaldi was a de facto or shadow director.

Chapters 4, 5, 6, 7, 8, 9, 10 and 11 address each of the transactions alleged to involve breaches of duty by the directors of Chameleon.  I will set out my findings of fact as to each transaction, as well as my conclusions in respect of the liability of the directors.

Chapter 12 deals with relief.

Chapter 13 deals with the cross-claim made by Murchison and Winterfall against Mr Grimaldi.

CHAPTER 2 – RELEVANT LEGAL PRINCIPLES

Introduction

There was very little dispute between the parties as to the applicable legal principles.  Much of what follows is drawn from Chameleon’s submissions, but with some amendments to take account of observations made in the written submissions of the respondents.

The general law and statutory duties of directors, which lie at the heart of this proceeding, apply equally to directors who are validly appointed, and to “de facto” directors, “shadow directors” and “officers”;  see Austin RP, Ford HAJ, Ramsay IM, Company Directors (LexisNexis Butterworths, Sydney, 2005) at [8.8].

The Corporations Act definition of a director

Section 9 of the Corporations Act 2001 (Cth) (“Corporations Act”) extends the definition of a “director” to persons who are not validly appointed as directors if:

• they act in the position of a director (s 9(b)(i)); or

• the directors of the company are accustomed to act in accordance with their instructions or wishes (s 9(b)(ii)).

Section 9(b)(i):de facto directors

The extended definition of a “director” in s 9(b)(i) appears to be a codification of the common law concept of a “de facto” director.  The legislative history of the definition was discussed in Corporate Affairs Commission v Drysdale (1978) 141 CLR 236 by Mason J at 242ff and by Aickin J at 248ff.

The effect of what was said in Corporate Affairs Commission v Drysdale at 243, 255, is that a person who acts as a director, though not validly appointed or described as a director, is subject to the same statutory duties to the company as are owed by directors validly appointed to office.

The same position applies in English law.  There, the relevant statutory definition has been held to include a case where a person has acted as a director, even though not validly appointed, or even if there has been no appointment at all:  Re Richborough Furniture Limited [1996] BCC 155; see also Austin, Ford, Ramsay Company Directors at [5.9].

Whether a person is acting as a director of a company will depend upon the nature of the functions and powers which are exercised and the extent to which they are exercised.  It is a question of fact which may often be one of degree.  It requires consideration of the duties performed by the person in the context of the operation and circumstances of the company:  Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565 at 569-570 (Madgwick J); Natcomp Technology Australia Pty Limited v Graiche (2001) 19 ACLC 1,117 at [13] (NSW Court of Appeal) per Stein JA.

The circumstances which bear on the question include the size of the company, its internal practices and structure and how the alleged de facto director is perceived by outsiders who deal with the company:  Deputy Commissioner of Taxation v Austin at 570.

The question is not answered by looking at the label which the alleged director adopts as a description of his or her corporate capacity.  Rather, it is necessary to see what actions he or she did, not what euphemism the person applied to those actions:  Mistmorn Pty Limited (in liq) v Yasseen (1996) 21 ACSR 173 at 182 (Davies J).

Section 9(b)(ii):  shadow directors

The definition of a “director” in s 9(b)(ii) of the Corporations Act extends to “shadow directors”.  The following propositions emerge from the authorities.

First, the purpose of the definition is to identify the persons, other than professional advisers, who have real influence or control over the corporate affairs of the company:  Ho v Akai Pty Limited (in liq) (2006) 24 ACLC 1,526 at 1,531 (Finn, Weinberg and Rares JJ).

Second, what is required is customary compliance with the wishes of the shadow directors by the Board rather than by an individual director:  Re Lo-Line Electric Motors Limited [1988] Ch 477 at 488; Emanuel Management Pty Limited (in liq) v Foster’s Brewing Group Limited (2003) 178 FLR 1 (“Emanuel”) at [265] (Chesterman J).

Colourful metaphors have been applied so as to illustrate this requirement.  For example, the shadow director must be in effect the puppet master controlling the actions of the Board; the directors must be the cat’s paw of the shadow director; Emanuel at [266] citing Re Unisoft Group (No 3) [1994] 1 BCLC 609 (“Unisoft”) at 620 (Harman J).

Third, it is not necessary that the shadow director’s instructions or directions cover the entire field of the company’s corporate activities; rather s 9(b)(ii) only requires that, as and when the Board is instructed or directed, it is accustomed to act in accordance with the shadow director’s instructions or wishes: Australian Securities Commission v AS Nominees (1995) 133 ALR 1 at 52 (Finn J).

Fourth, the reference to the directors being “accustomed to act” requires acts, not on one individual occasion, but over a period of time and as a regular course of conduct:  Emanuel at [266]; Unisoft at 620.

Fifth, it is not necessary to show that formal instructions or directions be given in those matters in which the shadow director has been involved; the underlying concept is that the third party plays the tune and the directors “dance” to it in their capacity as directors:  Australian Securities Commission v AS Nominees Ltd at 52 citing Harris v S (1976) 2 ACLR 51 at 64 per Wells J.

Section 9:  officers

The definition of an “officer” of a corporation includes a director or secretary of a corporation but it extends to other categories of persons including those described in the definition in s 9(b)(i), (ii) and (iii). These are persons:

• who make or participate in making decisions that affect the whole or a substantial part of the business of the corporation; or

• who have the capacity to affect significantly the corporation’s financial standing; or

• in accordance with whose instructions or wishes the directors are accustomed to act.

The first and second of these categories are concerned with identifying persons who are involved in the management of the corporation.  They focus upon the extent of the relevant person’s participation, the nature of the decisions in which the person participated and the capacity of the person to affect the company’s standing:  Re HIH Insurance Limited (in prov liq) and HIH Casualty and General Insurance; ASIC v Adler (2002) 41 ACSR 72 (“Re HIH”); Re Dwyer v Lippiatt (2004) 50 ACSR 333.

The third category is concerned with shadow officers: Austin RP, Ramsay IM Ford’s Principles of Corporations Law (13^th ed, LexisNexis Butterworths, Sydney, 2007) at [8.020]; Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35 at [480] – [481]. The definition of shadow officers appears to be interchangeable with that of shadow directors.

Section 180(1):   The duty of reasonable care and diligence

The duty of care and diligence is stated in s 180(1) of the Corporations Act.  The applicable principles are well settled.  They were conveniently summarised by Santow J in Re HIH at [372].

It is sufficient for present purposes to refer only to the fourth of fifteen principles stated by Santow J.  This is, that in determining whether a director has exercised reasonable care and diligence one must ask what an ordinary person with the knowledge and experience of the defendant might be expected to have done if he or she were acting on their own behalf:  Re HIH at [372(4)], citing inter alia, Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 109.

Section 181:  The duty to act in good faith and in the best interests of the company

The good faith and best interests duty is stated in s 181(1)(a). As with the duty of care and diligence, the principles are well travelled. They need not be stated in any detail.

The principles are summarised in Re HIH at [735]. They include the fiduciary duty of a director not to promote his or her personal interest by making or pursuing a gain in circumstances where there is a conflict, or a real or substantial possibility of a conflict, between the director’s personal interests and those of the company.

More recently, Owen J summarised the principles in The Bell Group Limited v Westpac Banking Corporation (No 9) (2009) 70 ACSR 1 (“Bell Group”) at [4619]. His Honour observed that the question of whether a director acted bona fide in the best interests of the company contains both a subjective and an objective element.

The factual enquiry focuses on the state of mind of the director, but the court is entitled to look at surrounding circumstances that throw light on any assertions made by a director that he or she was acting honestly:  Bell Group [4619(1), (5) and (7)]; see also Maronis Holdings Limited v Nippon Credit Australia Pty Limited (2001) 38 ACSR 404 (“Maronis Holdings”) at [188] per Bryson J.

A director must give real and actual consideration to the interests of the company.   A mere general sense of honesty of purpose is not sufficient: Bell Group at [4619(6)]; Blackwell v Moray (1991) 5 ACSR 255 at 271 per Cohen J.

The duty to act for a proper purpose

The proper purpose duty is stated in s 181(1)(b). It has been explained in a number of well known authorities.

The essential principle is that the powers and funds of a company may be used only for the purposes of the company and not for a collateral purpose: Advance Bank Australia Limited v FAI Insurances Limited (1987) 9 NSWLR 464 at 493, applying Mills v Mills (1938) 60 CLR 150 and Ngurli Limited v McCann (1953) 90 CLR 425; see also Harlowe’s Nominees Pty Limited v Woodside (Lakes Entrance) Oil Company No Liability (1967) 121 CLR 483; and see Maronis Holdings at [189]; Emanuel at [1187].

The court is to determine as a matter of law the purpose for which the power may be exercised.  It is also to decide whether, as a matter of fact, the purpose for which the power was exercised was within the category of permissible purposes:  Howard Smith Limited v Ampol Petroleum Limited [1974] AC 821 at 835; see the discussion in Austin, Ford, Ramsay Company Directors at [7.18].

The duty not to improperly use the position

Section 182(1) provides that directors must not improperly use their position to gain an advantage for themselves or someone else or to cause detriment to the corporation.

The subsection imposes an objective standard of impropriety and a director may act improperly without any intention of acting dishonestly or otherwise than in the best interests of the company:  Chew v R (1992) 173 CLR 626 at 640; R v Byrnes (1995) 183 CLR 501 at 514 (Brennan, Deane, Toohey & Gaudron JJ).

Some examples of cases in which it has been found that a director contravened

s 182(1) or its predecessor are collected in Austin, Ford, Ramsay Company Directors at [9.18].  The examples include Robins v Incentive Dynamics Pty Limited (in liq) (2003) 45 ACSR 244 (“Robins”).  There, an officer lent funds of the company to another company which he controlled and the loan conferred no benefit on the company giving it.  Nor was there any proper loan documentation or security and no steps were taken to cause the loan to be repaid.

Fiduciary duties

In Austin, Ford, Ramsay Company Directors at [8.5], the authors identify five closely related equitable rules which apply to conflicts of interest on the part of directors and senior officers.  The rules were considered and discussed by Owen J in Bell Group at [4496]ff.

It is unnecessary to repeat the discussion of the principles set out in full in Bell Group.  It is sufficient to say by way of introduction that Chameleon pleads and relies upon the fiduciary duties owed by the directors (including Mr Grimaldi) and appears to rely on each of the five applicable rules.

The five applicable rules are the conflict of interest rule, the conflict of duties rule, the misappropriation rule, the profit rule and the business opportunity rule.  I will refer to the rules in more detail, to the extent necessary, when considering my findings.

Barnes v Addy

As Owen J observed in Bell Group at [4629], the jurisprudence surrounding the principle in Barnes v Addy is disparate and complex.  Nevertheless, his Honour’s analysis of the principles, and the decision of the High Court in Farah Constructions Pty Limitedv Say-Dee Pty Limited (2007) 230 CLR 89 (“Farah”), enable me to state the relevant propositions quite succinctly.

The principle under which persons who are not trustees should be made responsible as constructive trustees for the breaches of trust committed by a trustee were stated by Lord Selborne LC in Barnes v Addy (1874) LR 9 Ch App 244 at 251-252. The relevant passage is to be found in Farah at [111] and Bell Group at [4633].

It is unnecessary to repeat the passage.  As is well known, the first limb involves “knowing receipt” and renders third parties liable where they receive and become chargeable with some part of the trust property.  The second limb involves “knowing assistance” but parties are not liable under this limb:

… unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.  Farah at [111] – [112].

Unless and until the High Court says otherwise, there is ample authority for the proposition that the first limb of Barnes v Addy is not confined to persons dealing with trustees but extends to dealings with other fiduciaries, in particular company directors:  Kalls Enterprises Pty Limited (in liq) v Baloglow (2007) 63 ACSR 557 at [152] – [159]; cf Farah at [113].

The second limb of Barnes v Addy renders a defendant liable if the defendant assists a fiduciary with knowledge of a dishonest and fraudulent design on the part of a fiduciary; the principle is not confined to trustees but also applies knowing assistance to other types of fiduciaries:  Farah at [160].

In determining whether liability is established under the second limb, Australian courts are to apply Lord Selborne’s formulation rather than the general principle of accessory liability stated in Royal Brunei Airlines Sdn v Tan Bhd [1995] 2 AC 378. The position in Australia is that defendants are not liable unless they assist with knowledge in a dishonest and fraudulent design: Farah at [162] – [163].

Although the High Court said little about the meaning of the phrase “dishonest and fraudulent design”, their Honours emphasised that any breach of trust or breach of fiduciary duty relied upon must be dishonest and fraudulent.  The test appears to incorporate objective standards of “ordinary decent people”:  Farah at [173], [179]; Bell Group at [4725] – [4727].

An allegation that a party was a knowing participant in a dishonest and fraudulent design is a serious one which should be pleaded and particularised; it is to be proved to the Briginshaw v Briginshaw (1938) 60 CLR 336 standard: Farah at [170]; Bell Group at [4728].

An essential difference between the first and second limbs of Barnes v Addy is that, under the first limb, a stranger can only be liable for knowing receipt if property has come into his or her hands whereas the second limb, or knowing assistance, does not necessarily involve a transfer of property to the third party:  Bell Group at [4737].

As Owen J observes in Bell Group at [4737], this may explain a distinction which has been recognised, at least in English authority, between the two limbs.  This is that under the first limb, a knowing receipt case does not require that the misapplication of trust funds should be fraudulent, whereas under the second limb the fiduciary must have acted fraudulently:  see discussion of the authorities in Bell Group at [4735] – [4737], in particular Polly Peck International plc v Nadir (No 2) [1992] 4 All ER 769.

The degree of knowledge in Barnes v Addy

As Owen J observes in Bell Group at [4740], the question of what a stranger implicated in a breach of trust must “know” in order to be liable has created significant controversy.

The position in relation to the degree of knowledge required for the second limb of Barnes v Addy has been settled in Australia by the High Court:  Farah at [177]. What is required is knowledge falling within any of the first four categories stated by Peter Gibson J in Baden v Societe Generale pour Favoriser le Developpement du Commerce et de L’Industrie en France SA, decided in 1983 and in [1993] 1 WLR 509 (“Baden”) at 575 - 576, 582.

The relevant passage from Baden enumerating the categories is set out in Farah at [174]. I do not need to reproduce it.

The position in relation to the degree of knowledge required to attract liability under the first limb is less clear.  However, the analysis of the authorities in Bell Group at [4743] – [4745] supports the view expressed by Owen J that, at least for the time being, the test for knowledge under both limbs is the same.

CHAPTER 3 – MANAGEMENT OF CHAMELEON

Two issues arise.  First, when did Mr Barnes become a director of Chameleon?  Second, whether Mr Grimaldi was a de facto or shadow director of Chameleon within the extended definition of “director” in s 9 of the Corporations Act, or alternatively whether he was an “officer” of Chameleon.  Related to this is, during what period was Mr Grimaldi a “director”.

When did Mr Barnes become a director of Chameleon?

Mr Barnes contends, in his Amended Defence, that he did not become a director of Chameleon until 27 November 2002.  He filed lengthy written submissions to the effect that the evidence does not support a finding that he was a director prior to July 2002.  The submissions analyse at some length the corporate records, such as they are, of Chameleon, some of which record that Mr Barnes was appointed as a director at the time of the company’s incorporation on 16 November 2001, whilst others suggest that he was appointed at a later date. 

I do not consider it necessary to engage in the exercise suggested by Mr Barnes.  This is because he has on two occasions admitted that he was appointed as a director of Chameleon on 16 November 2001 and, notwithstanding his denials of the accuracy of that proposition, he has failed to enter the witness box to give evidence of, inter alia, the date of his appointment.

The first admission was contained in Mr Barnes’ defence filed on 15 April 2008.  It is true that Mr Barnes purported to withdraw that admission in his Amended Defence filed on 11 May 2009 after Chameleon amended its Statement of Claim to raise the New Millennium transaction.  But, at least prima facie, leave was required to withdraw the admission:  Federal Court Rules O 22 r 4(2). 

Not only was leave to withdraw the admission never sought, as I have said, Mr Barnes did not enter the witness box to seek to explain his altered stance. 

The conflicting documentary evidence to which Mr Barnes referred is not a basis for ignoring the admission, particularly where a public record of Chameleon, apparently signed by Mr Barnes, is to the same effect as the admission contained in his original defence.

The second admission is to be found in Chameleon’s Annual Report for the year ending 30 June 2003.  The Annual Report states, in two places, that Mr Barnes was appointed as a director of Chameleon on 16 November 2001.  It appears to bear the signature of Mr Barnes.

The suggestion made in Mr Barnes’ written submissions that he may not have signed the Annual Report cannot be supported in the absence of evidence from him.  The Annual Report is an important public record.  On its face it bears a signature which appears to be that of Mr Barnes.  It is clear that if Mr Barnes wishes to contend otherwise, he was required to give evidence in support of that contention.

In those circumstances I find that, on the balance of probabilities, Mr Barnes was appointed as a director of Chameleon on 16 November 2001.  He was therefore a director of Chameleon when the New Millennium transaction took place, and during the period relevant to the other transactions which are in issue in these proceedings.

Was Mr Grimaldi a de facto director?

As Madgwick J said in Austin at 569 - 570, companies come in many shapes and sizes and, in determining whether a person is a de facto director, it is necessary to consider the duties performed by the person in the context of the company’s operations and circumstances.

Chameleon’s operations were described in its prospectus dated 21 January 2003 for the issue of 37,500,000 fully paid shares and attached options.  Chameleon was said to be a “junior” exploration company which was incorporated in November 2001 for the purpose of consolidating a portfolio of exploration areas in the Kimberley region of Western Australia and certain Fijian mining properties previously owned by interests associated with Mr Robert McLennan.

According to the prospectus, if the capital raising was fully subscribed, Chameleon would have a market capitalisation of $14.4 million.  As at January 2003, it had twenty shareholders of whom twelve were not promoters or related parties.  The shareholders then included Weboz but Weboz’s seven million shares were to be distributed to its 663 shareholders, thereby apparently providing a sufficient spread of shareholders to obtain listing on the ASX. 

The narrative chronology shows that from about February 2002, Mr Grimaldi played a significant role in the acquisition of the Kimberley prospects, which Chameleon acquired through the New Millennium transaction, and in the acquisition by Chameleon of the Fiji properties from Mr McLennan.  Mr Grimaldi also assisted in the preparation of the prospectus and the listing of Chameleon.

Counsel for Chameleon submitted that Mr Grimaldi had a “pervasive” role in most of Chameleon’s activities from about February 2002 to about November 2004.  Their written submissions listed 22 instances in which Mr Grimaldi was said to have been involved in the affairs of Chameleon during the period in question.  The 22 instances were said to demonstrate that Mr Grimaldi directed Chameleon’s corporate strategy in a number of significant matters.  The submissions went on to list eleven instances in which Mr Grimaldi was said to have involved himself in the day to day running of the company.

It is clear from the discussion in Austin, and from the terms of the first limb of the extended definition of “director” in s 9(b)(i), that what must be demonstrated is that the alleged de facto director acted as a director.  Ordinarily, this will involve the carrying out of management functions or tasks that would typically be expected of a director:  Austin at 570; Mistmorn at 182 - 183; Austin, Ford, Ramsay Company Directors at [5.9].

Some of the actions to which counsel for Chameleon referred were not acts of Mr Grimaldi qua director.  Examples of these are “instructions” or “directions” given by Mr Grimaldi to Mr Roberts to prepare management accounts or to find investors.  I do not accept that these were instructions or directions in the ordinary sense.  Rather, they were statements made by Mr Grimaldi to Mr Roberts.

Those statements have to be considered in light of the evidence that Mr Roberts and Mr Grimaldi were, at the relevant time, close friends.  Indeed, they shared accommodation from October 2002.  Statements such as these are explicable on the basis that Mr Grimaldi counselled and advised Mr Roberts on many matters relating to the affairs of Chameleon.  No doubt Mr Grimaldi realised that it was to his advantage to see Chameleon “cashed up” and listed on the ASX.  But it does not follow that he acted as a director in advising Mr Roberts as to each and every step to take.

Similar observations apply to Mr Grimaldi’s involvement in the New Millennium transaction.  He was a director and substantial shareholder of Weboz.  The transaction was of some benefit to Weboz (and to Mr Grimaldi).  This explains the steps taken by Mr Grimaldi to influence Mr Roberts and other directors of Chameleon to adopt and implement the terms of the New Millennium transaction which conferred benefits on Weboz and Mr Grimaldi.

Nevertheless, there are a large number of other actions carried out by Mr Grimaldi which, in my view, constitute the performance of tasks that would typically be expected of a director of Chameleon.  In coming to this view, I have taken into account the circumstances of the company.  These were that it was a “start up” junior mining explorer, with very limited funds, whose affairs were managed in an informal (indeed unorthodox) manner.

The first action of Mr Grimaldi which was an act qua director of Chameleon was his negotiation for the acquisition by Chameleon of the Fijian mining interests of Mr McLennan’s company, Rupert Company Limited (“Rupert”).  The Board of Chameleon authorised Mr Grimaldi to negotiate the purchase at a meeting recorded in minutes dated 16 May 2002.  The negotiations were completed in July 2002.

I was not referred to Chameleon’s Articles of Association or Constitution in relation to this or any other of the acts that were relied upon. However, I consider that it is open to me to find that this was a function which would ordinarily be expected to be undertaken by the directors. It was a fundamental part of the rationale for the business operations of Chameleon as stated in its prospectus. Moreover, it involved the exercise of a discretion as to the form and amount of the consideration to be provided.

It is true that a Board of Directors may delegate some part of their functions of management to a delegate, with full discretion to act independently of instructions from the Board:  Tesco Supermarkets Ltd v Nattrass [1972] AC 153 at 171. But the negotiations for the acquisition of Rupert’s mining properties involved an essential plank of Chameleon’s business operations. The consideration provided to Rupert gave it more than 49% of the issued capital of Chameleon. The carrying out of that transaction is not one which would ordinarily be delegated by a Board to a person who was not a director. This is especially so where Mr Grimaldi did not put forward any written (or oral) agreement indicating that the functions undertaken by him were strictly circumscribed or subject to Board control.

Second, on 31 May 2002 Chameleon engaged a company known as Chameleon Ventures Ltd (“Chameleon Ventures”) to prepare a prospectus for Chameleon’s proposed capital raising.  Importantly, the minutes of the meeting of 31 May 2002 noted that Chameleon Ventures sought the assistance of Mr Grimaldi in the preparation of the prospectus.  Thereafter, Mr Grimaldi and Mr Roberts were engaged, through Chameleon Ventures, in the preparation of Chameleon’s prospectus.

The disclosure requirements and content of a prospectus are regulated by Division 4 of Part 6D.2 of the Corporations Act, in particular ss 710 and 711. There are serious consequences for mis-statements and omissions in a prospectus: s 728 of the Corporations Act.  The disclosure requirements include a statement of fees paid or payable to persons named in the prospectus as performing a function in a professional, advisory or other capacity in connection with the preparation of a prospectus.

These provisions assume that persons will be engaged in a professional or advisory capacity to assist a company in the preparation of a prospectus.  Commonly such persons are members of a due diligence committee which plans and verifies the content of the prospectus:  Austin, Ford, Ramsay Company Directors at [13.13].

But there was nothing to suggest that Mr Grimaldi’s functions were limited to professional or advisory duties that were part of the overall planning and verification process.  Indeed, Mr Roberts’ evidence on this topic was that Mr Grimaldi decided the contents of the prospectus and dealt with external service providers including registries, sponsoring brokers, vendors and valuers.  The force of that evidence was not reduced in cross-examination by counsel for Mr Grimaldi. 

Third, following completion of the prospectus, Mr Grimaldi told Mr Roberts that Chameleon’s next task was to find investors in order to raise capital and achieve the minimum spread of shareholders required for listing.  From January 2003 until March 2003, Mr Grimaldi and Mr Roberts were engaged in that task. 

Fourth, in September 2003, Mr Grimaldi wrote to Mr Trevor Prider of Zenith Development Company Ltd (“Zenith”) about the provision of funding for Chameleon.   Shortly afterward, on 7 October 2003, Mr Grimaldi wrote to Mr Ian Prider about a meeting stating inter alia that:

… we believe … it would be a good idea for Zenith to have a representative on the board of (Chameleon) …

I will organise a directors [sic] resolution to approve your appointment … 

Fifth, at about the same time, on 27 September 2003, Mr Ian Prider’s law firm, Prider & Co Lawyers wrote a letter of advice to Mr Grimaldi about a statutory demand which had been served on Chameleon.  The letter responded to an earlier letter to Prider & Co from Mr Grimaldi.  Mr Prider’s letter was addressed to “Phillip Grimaldi, Chameleon Mining NL”.

The letter from Mr Grimaldi to Prider & Co, and the response from Prider & Co, provide evidence of Mr Grimaldi carrying out management tasks that would ordinarily be performed by a director or senior officer of a company.  The fact that Prider & Co’s letter of advice was addressed to Mr Grimaldi at Chameleon is evidence that Mr Grimaldi was reasonably perceived by an outsider dealing with the company to be a director or senior officer of Chameleon.

Sixth, on 13 January 2004 Mr Grimaldi wrote directly to Mr McLennan telling him to withdraw his legal action against Chameleon and settle the matter commercially.

Seventh, during February and March 2004 Mr Grimaldi oversaw the issue of shares in Chameleon’s March Placement.

Mr Grimaldi’s involvement in the Placement came about when the principal of another company informed Mr Roberts that he was unable to deliver on commitments previously made to introduce investors to Chameleon.

What seems to me to take Mr Grimaldi’s involvement in the process beyond that of an adviser was his identification of the parties to whom the Placement shares would be issued and his determination of the amounts to be allotted to persons taking up shares in the Placement.  In my opinion, that constituted the exercise of “top level management functions” which would ordinarily be exercised by a director.

The eighth instance is Mr Grimaldi’s involvement in the Cadetta Transaction.  The central issue in that transaction is whether, as Chameleon alleges, Mr Barnes and Mr Grimaldi dishonestly orchestrated the transaction so as to procure the transfer of 5 million Chameleon shares to Weboz. 

That question turns largely upon whether I accept the evidence of Mr Scook and I will deal with it in more detail later.  However, Chameleon also submitted that Mr Grimaldi and Mr Barnes acted as directors of Chameleon in negotiating the Cadetta Transaction with Mr Scook.

Mr Grimaldi contested the allegation that he acted as a director of Chameleon although he gave no evidence.  He submitted that he was a “dealmaker” and, because he was successful, NiCu received 5 million shares in Chameleon, presumably as a success fee or commission.

There are real difficulties characterising the role played by Mr Grimaldi in the Cadetta Transaction.  On any view of the evidence of the negotiations, there was no mention of a fee or commission payable to NiCu.  The only suggestion of any payment to be made to Mr Grimaldi was the evidence of Mr Evans that Mr Scook said that Mr Grimaldi would be “looked after”.  Mr Evans said he understood this to mean that Mr Grimaldi was “part of the deal process” and would be “rewarded for that role”. 

The evidence of the witnesses who gave evidence of the negotiations indicates that Mr Grimaldi attended all the critical meetings with Mr Scook.  The evidence does not make any mention of the capacity in which Mr Grimaldi attended.  Mr Scook said he formed the view that Mr Grimaldi was a director of Chameleon and that he was working with Mr Barnes on the Cadetta Transaction. 

The question of whether Mr Grimaldi and/or Murchison are liable to account for the 5 million Chameleon shares will be considered in full later.  I will therefore defer consideration of the precise role occupied by Mr Grimaldi.

It is sufficient to observe that there is force in the view that Mr Grimaldi’s role in the negotiations of the Cadetta Transaction was one that would typically be carried out by a director.  It is clear in my view that he was acting on behalf of Chameleon in negotiating the transaction. Whether he was a director or a consultant, he owed fiduciary duties to Chameleon and the question of liability to account for the shares is better considered under that head.

Ninth, according to Mr Roberts, Mr Grimaldi negotiated the acquisition of a copper mine in Chile known as Cerro Negro Copper Mine on behalf of Chameleon and made all the decisions on Chameleon’s strategy occasionally asking Mr Roberts to do specific administrative tasks in relation to the deal.  It is true that this evidence was given in the form of a conclusion but its probative value is supported by emails from Mr Grimaldi to Mr Evans dated 30 July 2004 and 10 October 2004.

The acquisition was completed in the form of a takeover by Chameleon of a company known as Chalceus Limited.  That transaction was announced to the ASX on 28 July 2004 after Mr Grimaldi informed Mr Roberts that he had reached agreement for the acquisition of Chalceus. 

Tenth, Mr Grimaldi drafted the ASX announcement of Chameleon’s July Placement.  This is clear from his email to Mr Barnes’ secretary dated 12 July 2004 and the attachment.  The text of those documents is set out in the narrative chronology (see [300] – [301]).  The email reveals that Mr Grimaldi’s role in the July Placement went so far as to include depositing funds raised from the Placement into Chameleon’s bank account.

Eleventh, during August 2004 Mr Grimaldi suggested to Mr Roberts that Chameleon should do a further share placement.  Mr Grimaldi also told Mr Roberts how many shares should be issued and to whom, and in what numbers the shares should be allotted.  The placement was announced to the ASX on 11 August 2004.

It is unnecessary to consider each of the eleven examples relied upon in [96] of Chameleon’s written submissions as evidence that Mr Grimaldi was involved in the day to day running of the company.  Three of the examples are sufficient.

First, as I mentioned above, in September 2003 Mr Grimaldi corresponded with lawyers who were then acting for Chameleon, about a statutory demand that had been served on the company.  The lawyers, Prider & Co, wrote a letter of advice addressed to “Phillip Grimaldi, Chameleon Mining NL”.  Mr Grimaldi’s reply to the letter instructed Prider & Co how to deal with the demand. 

Second, on 12^th and 14^th January 2004 Mr Grimaldi sent ASX announcements to Mr Barnes’ secretary with instructions to send them to the ASX.

Third, on 6 March 2004, Mr Grimaldi provided comments and draft text for inclusion in an announcement to be made by Chameleon to the ASX.

Dealings with the Priders

A further matter on which Chameleon relied to support a finding that Mr Grimaldi was a de facto director was his role in Chameleon’s dealings with Mr Trevor Prider and Mr Ian Prider and their companies, Zenith Development Company Limited (“Zenith”) and ACN 103 850 406 (“ACN”).

That matter was not related to any of the five transactions with which the case is concerned.  Nevertheless, the dealings were relevant to the role of Mr Grimaldi in the management of Chameleon, and to the question of Chameleon’s financial position.

The dealings arose out of steps taken by Chameleon to satisfy a condition imposed by the ASX in April 2003 for the inclusion of the company on its official list, namely that Chameleon obtain subscriptions for $3.2 million under its prospectus.

Here, it seems to me to be plain that any increase in the value of the Iron Jack tenements over the amount paid by Winterfall to the Iron Jack Vendors is largely attributable to the development of the Project.  The evidence establishes that, even before Chameleon announced its claims to the public in September 2007, Winterfall had spent many millions of dollars in the development of the Project.  By November 2007 more than $52 million had been spent on it.

The expenditure of these funds seems to me to be a most important factor.  It is true that but for the use which was made of Chameleon’s funds, Murchison would not have been able to take over Winterfall and, through it, to pursue the Project.  It is also true that the misuse of Chameleon’s funds was serious and attracted the operation of both limbs of Barnes v Addy.  Murchison had actual knowledge, through Mr Grimaldi, of the dishonesty that was involved in the misapplication, or malapplication of the funds.

But when the proceeds of the Cadetta Transaction and the cheques for $152,750 are put in their full context, even if the shares in Winterfall can be said to represent Chameleon’s property, the significance of the funds in relation to the “profit” is reduced to a very small amount.

This in my opinion is an example of a case where it appears that a “significant proportion of an increase in (the) profits has been generated by the skill, efforts, property and resources” of Murchison and Winterfall:  Warman at 561. It is, for the most part, not a case where risks have been taken to which Chameleon’s property was exposed. Rather, almost all of the risks are attributable to the expenditure of a sizeable sum of capital on the development of the Project.

Thus, if there were to be an account of profits referrable to a 24% interest in the Project, as contended by Chameleon, there would be an allowance against that interest to reflect, in particular, the substantial investment of funds contributed to the Project by or on behalf of Murchison.  It seems to me that this would be likely to produce a similar figure to that which would result from the accounting exercise to which I referred above.

Equitable compensation payable by Murchison

As an alternative to an account of profits, Chameleon is entitled at its election, to equitable compensation for the misapplication of its funds.

Mr Grimaldi used his illicit commission, and he and Mr Barnes caused the cheques for $152,750 to be misapplied in breach of their fiduciary duties to Chameleon.  Murchison was an accessory to their breaches of duty.  It follows from this that relief in the form of equitable compensation must, at very least be payable by Mr Grimaldi.  Chameleon no longer seeks relief from Mr Barnes but the question which arises is whether equitable compensation is payable by Murchison and the measure of that compensation.

In Maguire v Makaronis the Court cited with apparent approval the following observation of Lord Browne-Wilkinson in Target Holdings Ltd v Redferns [1996] 1 AC 421 at 434:

… the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss.

The observations of the High Court in Youyang Pty Limited v Minter Ellison Morris Fletcher (2003) 212 CLR 484 (“Youyang”) at [35]ff are to similar effect.

There is no equitable by-pass to the need for Chameleon to establish causation of loss but on questions of causation it is important to focus on the relevant equitable duty:  Youyang at [44] citing Mummery LJ in Swindle v Harrison [1997] 4 All ER 705 at 733, 734.

The authorities were comprehensively reviewed by Spigelman CJ in O’Halloran v RT Thomas & Family Pty Limited (1998) 45 NSWLR 262 (“O’Halloran”) at 272 - 278. His Honour’s review addresses Australian, English and Canadian authorities as well as academic articles and other writing on the subject of equitable compensation. The review does not include reference to Youyang which was decided later but I do not consider that anything in that case alters the statements of principle to be found in Spigelman CJ’s judgment.

The following principles emerge from O’Halloran:

• The object of equitable compensation is to restore persons who have suffered loss to the position in which they would have been if there were no breach of the equitable obligation.

• The defendant’s wrongful act must relevantly cause the damage complained of and the plaintiff is to be put in the same position it would have been if it had not sustained the wrong.  It follows from this that the defendant is only liable for the consequences of the wrong and it is not required to pay by way of compensation more than the loss suffered from the wrong.

• The plaintiff’s actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight but the losses to be made good are only those which, on a common sense view of causation, were caused by the breach.

• The common sense formula should not be treated as a single formulation of the test for causation because causation in equity is not susceptible to the formulation of a single test.

• What is required is the identification of criteria which supply an adequate or sufficient connection between the equitable compensation and the breach of fiduciary duty.

• There is a sufficient connection where the loss would not have occurred if there had been no breach of duty.

• The preferable approach is to look to the policy behind compensation for beach of fiduciary duty and to determine the remedy that best furthers that policy.

• Directors who misapply, or are parties to the misapplication of the funds or other property of that company are liable to recoup the company for a loss thereby obtained.

In the present case, Mr Grimaldi obtained a benefit in the form of a commission by the use of his fiduciary position.  Also, the cheques for $152,750 were drawn and misapplied by Mr Grimaldi and Mr Barnes in circumstances in which they obtained a benefit when there was a conflict between their fiduciary duty to Chameleon and their personal interest in the introduction fee.  I will return to the question of whether Messrs Grimaldi and Barnes are liable to account for the “introduction fee”, namely the shares in Winterfall (or the Murchison shares for which they were exchanged).  I will also deal later with the question of the liability of Murchison to account, as an accessory, for the benefits obtained by Messrs Grimaldi and Barnes.

It is sufficient to say at this stage that the principles to which I referred above show that Mr Grimaldi is liable to Chameleon to make equitable compensation for the receipt of his commission and the misapplication of the cheques.  Mr Barnes would also have been liable in relation to the cheques if Chameleon’s claims against him had not been compromised.

The analysis referred to in Chapter 10 shows that Messrs Grimaldi and Barnes breached the profit rule.  The objective of that rule is to prevent the fiduciary from being swayed by considerations of personal interest and from misusing the fiduciary position for its personal advantage: Warman at 557 - 558. Yet that was precisely what Mr Grimaldi did in obtaining his commission and what Messrs Grimaldi and Barnes did in drawing or procuring the cheques.

Their misapplication of the cheques was for their personal advantage.  The circumstances in my view show that they exercised their powers dishonestly.  I am reinforced in that view by their failure to give evidence.  They are to be held to exacting standards and are liable for losses caused to Chameleon in the same way as a trustee of a traditional trust:  O’Halloran at 278.

That said, the difficulty which arises in determining the loss is that Chameleon did not seek to make out a claim of loss to the company other than the deprivation of its funds.  It was not suggested that the company lost the benefit of any item of property, or investment opportunity, other than the moneys themselves.  Rather the focus of the case was upon the claim for a constructive trust or an account of profits.

It was not suggested that Chameleon lost an opportunity to make such an investment by reason of the misapplication of the cheques or by the issue of the 5 million shares in the Cadetta Transaction.

It seems to me therefore that, subject to what I have to say below in relation to the claim over Pinnacle’s shares in Winterfall, the only loss relevantly caused to Chameleon by the misapplication of the cheques was the loss of the use of that money.

Also, no loss has been demonstrated by the issue of the 5 million shares in the Cadetta Transaction, although of course Mr Grimaldi is liable to account for the benefits received from his commission.

The only question which then arises is what rate of interest ought to apply.  There are two rates of interest which are relevant.  The first is “the trustee’s” rate which applies where the trustee has not profited from the breach of trust or been guilty of serious misconduct.  The second rate is the “mercantile rate” which applies to the most serious cases where the trustee has been guilty of acts of misconduct contributing to the loss of trust funds: Re Dawson at 218; see also Ford HAJ, Lee WA, Principles of the Law of Trusts (Thomson Reuters, subscription service) at [17.2230] (update 73).

The Court’s jurisdiction in selecting the appropriate rate is exercisable only for compensatory purposes: Re Dawson at 218. Nevertheless, this is plainly a case which falls within the higher category and ought to carry the “mercantile rate”. That is a rate which should reflect the reality of the market place: Hagan v Waterhouse (1992) 34 NSWLR 308 at 393 per Kearney J.

In addition, compound interest is to be applied.  This is because as Kearney J said in Hagan v Waterhouse at 393 citing earlier authority, a trustee will normally be charged compound interest not only where he or she has used the money for his own commercial purposes but also where the trustee has been guilty of fraud or serious misconduct.

His Honour also referred at 393 to an earlier edition of Ford & Lee, Principles of the Law of Trusts, as authority for the proposition that an award of compound interest is a device of equity to minimise the possibility that any profit can remain in the trustee’s hands.

The assessment of compensation payable by an accessory to a breach of trust will ordinarily be assessed on the same principles as apply to a defaulting trustee because the accessory is treated as if it were a trustee:  McNally v Harris (No 3) [2008] NSWSC 861 at [22].

It follows in my view that Mr Grimaldi and Murchison are liable to Chameleon for equitable compensation in the sum of $152,750 together with interest at commercial rates.  There was evidence in an affidavit of Ms Banton as to the applicable rates of interest but in the event of any disagreement, I will determine the rate.

Compound interest is to be payable.  The approach adopted by Kearney J in Hagan v Waterhouse at 394 was to provide for compound interest on annual rests. It seems to me that where an errant fiduciary has had the benefit of its principal’s funds, compound interest ought to be payable on monthly rests. That seems to me to accord with modern commercial practice and it achieves the purpose to which Kearney J referred.

The Pinnacle Shares

It is clear from the findings I made in Chapter 10 that the use of the proceeds from the Cadetta Transaction and the drawing of the cheques for $152,750 resulted in the conferral of personal benefits on Mr Grimaldi and Mr Barnes in the form of the “introduction fee”.  That was a benefit they received by reason of their breaches of fiduciary duty to Chameleon.

The principles to which I referred earlier make it plain that Messrs Grimaldi and Barnes would have been liable to account to Chameleon for the benefit in the form of the 10 million shares in Winterfall which were issued to Pinnacle in satisfaction of the payment of the introduction fee.

The 10 million Winterfall shares were then exchanged by Pinnacle for 10 million shares in Murchison on completion of the reverse takeover.  The 10 million shares in Murchison “represented” the shares in Winterfall for which Messrs Grimaldi and Barnes were liable to account to Chameleon.

The evidence suggests that Pinnacle no longer holds the 10 million shares in Murchison.  Some were allotted or transferred to Mr Grimaldi or his nominees and others to Mr Barnes or his nominees.

In the absence of Mr Barnes and Pinnacle as respondents to Chameleon’s claim, the following questions arise:

• First, what is the liability of Mr Grimaldi to account for the benefits and, in particular, is this to be at the highest value of the shares between the date of breach and the date of judgment?

• Second, is Murchison liable to account for the 10 million shares and, if so, on what basis?

Mr Grimaldi is liable to account for the 10 million shares in Murchison

Mr Grimaldi did not receive all of the 10 million shares in Murchison but it seems to me that he is liable to Chameleon to account for the whole of that parcel of shares.

The shares which Mr Grimaldi received in his own right were the dishonest benefit derived by him by reason of his receipt of the commission and his procurement of the cheques for $152,750.  It is plain on the principles I have previously discussed that Mr Grimaldi is liable to account for those shares, either as a constructive trustee or by way of an account of profits.

It is also clear in my view that Mr Grimaldi is liable to account for the remaining shares as an accessory or to pay equitable compensation in respect of those shares:  McNally v Harris at [22].

I will refer below in more detail to the principles upon which an accessory may be liable to an order for an account of profits.  That question arises in relation to the claim that Murchison is liable to account to Chameleon for Mr Grimaldi’s profits.

The measure of Mr Grimaldi’s liability to account

A question arises as to whether Mr Grimaldi is liable to account to Chameleon for the value of the 10 million shares at the highest price obtained between the date of breach and the date of judgment.

Some support for the proposition may be found in the decision of the Supreme Court of Canada in McNeil v Fultz (1906) 38 SCR 198 at 205. However, the analysis of the authorities undertaken by White J in McNally v Harris at [27]ff shows that McNeil v Fultz does not contain an accurate statement of the law in Australia or England.

The position in Australia was stated by White J in McNally v Harris at [41] as follows:

The general principle in relation to the making of presumptions against wrongdoers on questions of assessment of value, or of damages, is not simply that every presumption is to be made against a wrongdoer.  Rather it is that a Court can resolve questions of value against a wrongdoer whose actions have made the assessment of damages problematic.  [Citations omitted]

It seems to me that the principle stated in McNeil v Fultz is based upon a conceptual approach that has been rejected in modern authorities.  There is no irrebuttable presumption that but for the breach, the trust property would have been disposed of at its highest value.

Such an approach is inconsistent with the view stated in Target Holdings and followed in O’Halloran by Spigelman CJ, and by the High Court in Youyang, that the quantum of equitable compensation is to be fixed at the date of judgment in accordance with no fixed formula but having regard to hindsight.  I do not see that an account of profits ought to be approached on a different basis.  The account of profits is ordered to strip the errant fiduciary of its profits, not as a vehicle for the unjust enrichment of the plaintiff:  Warman at 561.

Whether Murchison is liable to account for the 10 million shares

The essential question which arises in Chameleon’s claim to an account of profits in respect of the 10 million Winterfall shares (and the 10 million Murchison shares for which they were exchanged) is whether a participant in a breach of fiduciary duty is also liable to account for the profits made by the fiduciary.

As the learned authors of Meagher Gummow & Lehane’s Equity Doctrines & Remedies (4th ed) observe at [5-245] p 202, a knowing participant in the fiduciary’s breach of duty must account for the profits made by the participant.  But is the participant also liable to account for the profits by the fiduciary?

In the Hospital Products litigation at first instance, McLelland J appeared to give some support to the proposition that the participant may be jointly liable with the fiduciary to account to the beneficiary for any benefit obtained by the fiduciary as a result of the breach:  United States Surgical Corporation v Hospital Products International Pty Limited [1982] 2 NSWLR 766 at 817.

However, the effect of statements made by the High Court as to the basis upon which an order for an account is made suggest that strictly, each respondent must account for its own profits and not those made by other respondents.

This seems to follow from what the High Court said in Warman at 569 - 570. Also, as the High Court said in Dart Industries at 111:

An account of profits is confined to profits actually made, its purpose being not to punish the defendant but to prevent unjust enrichment.

The statement of Windeyer J in Colbeam Palmer Limited v Stock Affiliates Pty Limited (1968) 122 CLR 25 at 34 is to the same effect. His Honour said that the errant fiduciary is:

… stripped of profits he had made which it would be unconscionable that he retain.

The learned authors of Meagher Gummow & Lehane’s Equity Doctrines & Remedies (4th ed) also refer at [5-245] p 204, to the decision of the British Columbian Court of Appeal in Canson Enterprises Ltd v Boughton [1996] 1 WWR 412 as an example of a case where an accessory who knew that the fiduciary was making secret profits was not liable to account for the profits because it had not shared in them.

It seems to me that the proper approach in the present case is that Murchison ought not to be liable to Chameleon to account for the 10 million Winterfall shares or the 10 million Murchison shares because that was not a profit made by Murchison.  To order Murchison to account seems to me to be contrary to the approach stated by the High Court in the authorities mentioned above.

I do not consider that this issue turns upon whether Mr Grimaldi’s actions constituted a fraud on Murchison; see Re Hampshire Land.  Accordingly, it is not necessary to consider the question.

It is true that I have concluded that Mr Grimaldi is liable to account as an accessory for the profit made on the 10 million shares obtained by Pinnacle.  But that is because he shared in the profits.  He may not have shared in all of the profits but his failure to give evidence entitles me to presume against him that he shared in all of them.

In my view, this follows from the fact that the introduction fee arose from the discussions between Mr Grimaldi and Mr Barnes and Mr Zuks which culminated in the NiCu/Winterfall Heads of Agreement and the Addendum thereto.  The Addendum provided for the issue of the shares to Mr Grimaldi or his nominees.

The evidence establishes that those shares were ultimately crystallised as the 10 million Winterfall shares allotted to Pinnacle but it is clear that Pinnacle was merely the vehicle through which those shares were to be distributed to Mr Grimaldi and Mr Barnes.  In the absence of any evidence from either of them, I am entitled to assume against Mr Grimaldi as a wrongdoer, in assessing the benefit he received, or the quantum of compensation, that he shared in the benefits flowing from the issue of the 10 million shares.

The position is quite different in relation to the accessory liability of Murchison which, clearly, did not share in or receive any benefit from the issue of the 10 million shares.

Relief against Winterfall

I found in Chapter 8 that Winterfall, through Mr Zuks, had the requisite degree of knowledge to attract liability for “knowing receipt” of the cheques for $152,750 under the first limb of Barnes v Addy.

Winterfall is therefore liable to account for the benefit received by it from the use of those funds.  The relevant benefit is, as stated in relation to Murchison, the benefit of the investment of the funds as part of a pool of working capital, comprising debt and equity.  The account is therefore to be determined on the same basis as for Murchison but limited to the contribution of $152,750.

Chameleon is also entitled, at its election, to equitable compensation and interest at mercantile rates on the use of those funds.

Corporations Act remedies

Mr Grimaldi contravened ss 181(1)(a) and (b) and 182(1) of the Corporations Act by the receipt of his commission in the Cadetta Transaction and by the misapplication of the cheques for $152,750.

Chameleon has discontinued its claim against Mr Barnes and I therefore do not need to consider whether he contravened the Corporations Act in relation to those transactions.

The findings of knowledge which I made against Murchison are sufficient to support a finding that Murchison was “knowingly concerned” in Mr Grimaldi’s breaches pursuant to s 79(c) of the Corporations Act.

Accordingly, I have power under s 1317H(1) of the Corporations Act to order Mr Grimaldi and Murchison to compensate Chameleon for damage suffered by the contraventions of ss 181 and 182 to which I have referred.

For the purposes of making a compensation order, the damage suffered by Chameleon includes the profit made by Mr Grimaldi or Murchison resulting from the contraventions.

Conclusions on relief

For reasons set out above, Murchison and Winterfall are liable to account to Chameleon for the profits obtained by them through the breaches of duty to which I have referred in relation to the Cadetta Transaction and the misapplication of the cheques.

The effect of this is that there will be an order for Murchison and Winterfall to account for the income received by them as a consequence of the investment of Chameleon’s funds of $277,840 in the Iron Jack Project from 28 July 2004 to date.

I have power under s 54A the Federal Court of Australia Act 1976 (Cth) to appoint a referee to carry out the taking of accounts and my strong preliminary view is that I would so order.

Mr Grimaldi, as the perpetrator of the breaches, is liable to account for the profits obtained by him through the investment of those funds.

Mr Grimaldi is also liable to account to Chameleon for the 10 million shares in Murchison obtained by Pinnacle on completion of the reverse takeover of Winterfall by Murchison.

The profits in respect of those shares are to be assessed at the prices quoted for Murchison shares on the ASX at the date of judgment unless it be shown that Pinnacle or Mr Grimaldi or his nominees disposed of the shares at an earlier date.  In that event, the profits are to be determined by reference to the sale price of those shares.

At Chameleon’s election, Murchison, Mr Grimaldi and Winterfall are liable for equitable compensation in respect of the sum of $152,750 from 28 July 2004 to date at mercantile rates of interest, compounded on monthly rests.

CHAPTER 13:  CROSS CLAIMS

Overview

Murchison and Winterfall cross-claim against Mr Grimaldi for an indemnity or contribution in equity in respect of any judgment which may be entered against Murchison and/or Winterfall.  The claim is made upon the ground that Mr Grimaldi is co-ordinately liable to Chameleon for the losses claimed by Chameleon against Murchison and Winterfall.

A corresponding claim is made against Mr Barnes in [145] of the cross-claim.

It is well established that the principle of equitable contribution requires that those who are jointly or severally liable for the same loss or damage should contribute to the compensation payable in respect of the loss or damage, either equally, or proportionately where the amount of their liability differs:  Albion Insurance Co Limited v GIO (NSW) (1969) 121 CLR 342 at 346, 349-350; Burke v LFOT Pty Limited (2002) 209 CLR 282 (“Burke”) at [14], [15], [38], [88].

The usual test is that parties are required to make contribution where they share “co-ordinate liabilities” or a “common obligation” to “make good the one loss”;  Burke at [15], [38].

The right of contribution is founded on concepts of fairness and justice or “natural justice” which requires that if one of several persons has paid more that his or her proper share toward discharging a common obligation, he or she is entitled to contribution from those who have not:  Burke at [22], [38].

The claim for contribution against Mr Grimaldi

The liabilities for which Mr Grimaldi and Murchison have a common obligation are the liability to account for the profits obtained from the breaches of duty in relation to the Cadetta Transaction and the liability to account for the misapplication of the cheques.

It is clear that the liability of Murchison is based on breaches of duty by Mr Grimaldi to Chameleon.  In those circumstances, Mr Grimaldi is liable to make contribution to the sum found to be due by Murchison on the taking of accounts.

The usual principle is that equity is equality and I do not see any basis to depart from it.

The same result follows in respect of any order for equitable compensation in relation to the cheques.

The cross-claim against Mr Barnes

It follows from what I said in relation to the cross-claim against Mr Grimaldi that subject to what I say below Mr Barnes ought also be liable to Murchison to contribute to the sum found to be due on the taking of accounts.

A difficulty arises on the cross-claim against Mr Barnes.  I was satisfied that he would have been liable to Chameleon in relation to the misapplication of the cheques.  However, it was unnecessary for me to determine whether he had any primary or accessory liability in relation to Mr Grimaldi’s commission under the Cadetta Transaction.  This was because of Chameleon’s discontinuance of its claim against Mr Barnes.

To the extent that it is necessary for me to determine the question of Mr Barnes’ liability under the Cadetta Transaction for the purpose of the cross-claim, I do not consider that this question was fully addressed.

I would therefore be inclined to the view that the order for contribution against Mr Barnes should be limited to a sum found to be due on the taking of the accounts in relation to the “investment” of $152,750.

Mr Barnes has paid $6 million to Chameleon without admission of liability in satisfaction of the claims against him by Chameleon.  That amount may be in excess of his share of the sum found to be due on the taking of accounts.  That should be reflected in the orders I will make.

Cross-claim by Mr Grimaldi

Mr Grimaldi claims an indemnity from Murchison in respect of his liabilities to Chameleon.

The entitlement (if any) of Mr Grimaldi to be indemnified by Murchison arises from clauses 19.1 and 19.2 of Murchison’s Constitution.  The effect of those provisions, as referred to in Murchison’s submissions, is that Mr Grimaldi is entitled to an indemnity against any liability incurred by him in or arising from the discharge of his duties of office, but only to the extent that Murchison is not precluded by law from indemnifying him.

The provisions of s 199A of the Corporations Act are therefore enlivened. Section 199A(2) precludes Murchison from indemnifying Mr Grimaldi against liabilities incurred by him as an officer, including the liability that is owed to Chameleon, that did not arise out of conduct in good faith.

Section 199A(3) relevantly provides that a company must not indemnify a person against legal costs incurred in defending or resisting proceedings in which the person is found to have a liability for which he or she could not be indemnified under

s 199A(2).

Mr Grimaldi’s liability arises out of conduct which was not conduct in good faith:  Hall v Poolman (2007) 65 ACSR 123 at [318] – [327], [412]. He is therefore not entitled to indemnity.

ORDERS

The parties are to bring in short minutes of order to reflect my reasons for judgment.

I will hear the parties briefly on the question of costs.

I certify that the preceding one thousand one hundred and thirty-three (1133) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

Associate:

Dated:       20 October 2010

Annexure A