Circle Petroleum (Qld) P/L v Greenslade
[1998] QSC 172
•31 August 1998
IN THE SUPREME COURT
OF QUEENSLAND
No 1792 of 1992
Before the Hon. Mr Justice Muir
[Circle Petroleum (Qld) P/L v Greenslade]
BETWEEN:
CIRCLE PETROLEUM (Q'LAND) PTY LIMITED
ACN 010 676 570
Plaintiff
AND:
PETER OWEN GREENSLADE
Defendant
BY ORIGINAL ACTION
AND:
PETER OWEN GREENSLADE
Plaintiff
AND:
CIRCLE PETROLEUM (Q'LAND) PTY LIMITED
ACN 010 676 570
First Defendant
AND:
ANTONY KEITH RAPSON
Second Defendant
AND:
BARRY MALCOLM O'HALLORAN
Third Defendant
AND:
ROBERT ERNEST GAY
Fourth Defendant
AND:
ALAN RUSSELL ABRAHAMS
Fifth Defendant
BY COUNTERCLAIM
CATCHWORDS: COMPANIES - Directors' duties - liability of (managing) director for breach of duty to exercise reasonable care and diligence - duty to exercise skill - s.229(2) Companies (Queensland) Code - failure to observe directions of resolutions of board - meaning of “resolution” and “direction” - credit extended to third party where repayment doubtful - defences - Companies (Queensland) Code, s.535 - allegations of breach of duty by co-directors.
Counsel:Mr J.C. Bell QC, with him Mr P.P. McQuade for the plaintiffs (defendants by counterclaim)
Mr D.R. Cooper for the defendant
Solicitors:Blake Dawson Waldron for the plaintiff
Purcell Chadwick for the defendant
Hearing dates: 1 to 9 June 1998
REASONS FOR JUDGMENT - MUIR J.
Judgment delivered 31 August 1998
The plaintiff in this action, Circle Petroleum (Q'land) Pty Limited claims against its former managing director, Peter Owen Greenslade, for breach of the terms of a service agreement dated 1 April 1987 (“the service agreement”) and/or for breach of his duties as managing director of the plaintiff. The allegations arise out of the trading activities of the plaintiff between about July 1989 and February 1991 in the course of which the plaintiff, by virtue of decisions taken by the defendant, sold petroleum products to Promco International Corporation Pty Ltd (“Promco”) and permitted Promco to incur indebtedness to the plaintiff on its trading account. That indebtedness rose from $146,897 in July 1989 to $2,206,593 by February 1991.The business of the plaintiff at relevant times was the acquisition of petroleum products in bulk and their resale to petroleum retailers such as Promco.
Promco became insolvent and was ordered to be wound up on 16 August 1991.
In broad terms, the plaintiff alleges that the defendant in permitting the plaintiff to extend credit to Promco in the manner in which it did -
(a)failed to exercise a reasonable degree of care and diligence in the exercise of his powers and discharge of his duties as managing director of the plaintiff; and
(b)breached his obligations under the service agreement by failing to observe directions given by the plaintiff's board of directors concerning the extending of credit to Promco.
Defence and counterclaim
The defendant -
(a)denies that, under the service agreement, he had any obligation to comply with directions of individual members of the board of directors of the plaintiff;
(b)denies that the board gave the directions which the plaintiff alleges were given; and
(c)alleges that the plaintiff failed to mitigate its damages by rejecting offers from time to time by Promco to transfer to the plaintiff some of its assets in part satisfaction of its debt to the plaintiff.
The defendant alleges also that, if he is liable to the plaintiff, he is entitled to an indemnity against all or part of any damages payable by him to the plaintiff pursuant to article 66.1 of the plaintiff's articles of association.
By way of counterclaim, the defendant alleges that -
(a)pursuant to s.535 of the Companies (Queensland) Code he ought be excused from liability; and
(b)if he breached his duty of care to the plaintiff, each of the defendant's directors breached their respective duties to the plaintiff which caused it to suffer damage “in the same amount as it suffered by any reason of any breaches of duty by the defendant”.
The alleged breaches of duty by the defendant directors are -
“(b)each was aware that there was a risk that Promco would fail to repay its indebtedness to the plaintiff;
(c)each failed to take any or any sufficient steps
(i)to cause the board to direct the plaintiff not to extend further credit to Promco;
(ii)to mitigate any loss which the plaintiff might suffer by the non-payment by Promco of its debts to the plaintiff, as referred to in paragraph 10(i);
(iii)otherwise to cause the debt to be secured.
(d)each acted as alleged in paragraph 19(c)(ii) for the purpose of complying with the wishes of one of the shareholders of the company, Ampol Limited, not to acquire any further interest in assets relating to the retail distribution of petroleum products, and not in the interest of the plaintiff.”
The plaintiff's trading activities and the defendant's role in that regard
Prior to the events in question in these proceedings the defendant had some 20 years experience in the petroleum industry. He established the business (which subsequently became the plaintiff's business) in 1981. The initial turnover of the business was about 3 to 4 million litres a year. Ampol Australia Limited (“Ampol”) acquired one-half of the issued share capital of the plaintiff in April 1987. Simultaneously with that acquisition the plaintiff acquired the business from another company controlled by the defendant, then called Circle Petroleum Pty Ltd. The value attributed to the business by Ampol and the defendant was $4,329,002.
The petroleum industry was a high volume, low margin and high risk business. After Promco's accounts were opened, Promco became the plaintiff's largest customer and also its largest creditor. The plaintiff's turnover in its first full year after Ampol acquired shares in its capital was to the order of 35 million litres. In broad terms, turnover increased to around 45 million litres in 1988, 80 million litres in 1989, 100 million litres in 1990 and 120 million litres in 1991.
The plaintiff's bad debts, according to its books, were as follows-
1988 approximately $73,000
1989 approximately $25,000
1990 approximately $11,000
Transactions with Promco under consideration in this action resulted in a bad debt of over $2,000,000.
The defendant said that he took over direct management of credit control on the Promco accounts in about 1990 after he became particularly concerned with the risk inherent in the accounts. He said “I knew the consequences, that it was a very, very big account and the potential damage it could do”. In fact, he always had control of the accounts and issued instructions that he was to approve any further purchasing by Promco once it went outside its credit terms.
At the time the plaintiff opened trading accounts for Promco in July 1989 he was aware that Promco was having difficulties with its existing supplier or suppliers and that Promco was concerned by the amount of interest it was having to pay to its existing lender the Bank of New Zealand. He took the action he did in extending credit to Promco, at least in part, with a view to facilitating the purchase of Promco's business. Prior to the plaintiff's commencing to trade with Promco, he informed its directors that a requirement of the plaintiff would be security “in excess of $1 million”. As later appears, no such security was ever provided by Promco.
The Service Agreement
The plaintiff was employed as managing director by the defendant, for a term of five years commencing on 1 April 1987, under a service agreement which relevantly provided that -
the defendant was employed as managing director of the plaintiff for a term of 5 years commencing on 1 April 1987
the defendant was obliged -
“(b)in the discharge of such duties and in the exercise of such powers (to) conform to observe and comply with all resolutions regulations and directions from time to time made or given by the board.”
The company
At relevant times after Ampol acquired its half interest in the plaintiff the share capital of the plaintiff was divided into equal numbers of “A” and “B” class shares. The issued shares of each class ranked equally. The holders of the “A” class shares and of the “B” class shares were each entitled to appoint and remove two directors. At the date of the adoption of a new set of articles of association on 1 April 1987, the “A” class directors named in the articles were Mr O'Halloran and Mr Rapson.
Ampol held all the issued shares of one class and Greenslade Nominees Pty Ltd (“Greenslade”), a company controlled by the defendant, held all the issued shares of the other class.
Article 35.6 provided-
“In the event that and for so long as the holders of the ‘A’ class shares and the ‘B’ shares are different persons a fifth director shall be appointed from time to time by the senior partner (from time to time) of the firm of Messrs Hall Chadwick & Co., chartered accountants ...”.
Where “A” and “B” class directors were appointed the presence of at least one director of each class was required to constitute a quorum.
Article 48 relevantly provided -
“4.8.1 Contents of minutes. the Directors shall cause minutes to be made and faithfully entered in books provided for that purpose:
...
48.1.2 of all proceedings at all meetings of the Company and of the Directors and of committees of Directors.
Such minutes shall be signed by the Chairman of the meeting at which the proceedings were held or by the Chairman of the next succeeding meeting.
48.2 Evidence. The minutes of a meeting signed by the Chairman thereof as provided in Article 48.1 shall be sufficient evidence without proof of the facts therein stated.”
Article 66.1 provides -
“Indemnity by Company. Every Director, Executive Director, agent, Auditor, Secretary and other officer for the time being of the Company shall be indemnified out of the funds of the Company against all costs, charges, losses, damages and expenses which he shall incur or be put to or become liable to pay in the execution of his office, or by reason or on account of any contract, act, deed, matter or thing which shall be made, done, permitted, entered into or executed by him on behalf of or bona fide in the interests of or with the view of benefitting the Company or otherwise within the scope of his duties or what he believes to be the scope of his duties notwithstanding that the same may be ultra vires in point of law or occasioned by any mistake, error, oversight or omission on his part or not PROVIDED THAT no person shall be entitled to any indemnity pursuant to this paragraph in respect of his own negligence, default, breach of duty or breach of trust.”
Composition of the board of directors at relevant times
During the period under consideration the board was composed as follows -
Mr John Nagel, Chairman - a nominee of Hall, Chadwick & Co. Mr Nagel had acted as the plaintiff's solicitor prior to his appointment as director. He was appointed on 1 April 1987 and resigned on 1 April 1992.
The defendant, Managing Director and a nominee of Greenslade. He was appointed on 1 April 1987 and resigned on 1 April 1992.Mr Adams, the manager of the company and a nominee of Greenslade.
Mr O'Halloran, a nominee of Ampol from 1 April 1987 to 23 May 1990.
Mr Gay, a nominee of Ampol from 23 May 1990 to 15 September 1993.
Mr Rapson, a nominee of Ampol from 1 April 1997 to 31 January 1993.
Mr Abrahams, an alternative director and a nominee of Ampol.
The way in which the minutes of directors' meetings were kept
All relevant minutes were kept by Mr Adams. After each meeting Mr Adams caused a copy of his draft minutes to be circulated to the directors present at the meeting so as to afford them an opportunity to consider the draft and comment on its accuracy, if thought necessary. At each meeting, the board generally followed the practice of considering and approving (with or without amendment) minutes of the previous meeting of directors. The practice was by no means inflexible. On occasions, minutes of previous meetings were not available for the board's consideration. The chairman of directors did not have a practice of signing the minutes of the previous meeting.
The minutes tended to record most matters of substance which transpired in the course of meetings, at least in a general way. In some cases courses of action or decisions reached by the board were recorded as resolutions but more often than not such matters were dealt with by notation in the minutes that a matter had been “accepted” or by using language such as “the general consensus of the board” or “the board felt that”. On occasions, a director would query the accuracy of a matter or matters in the minutes but no great attention was paid by directors to the way in which the minutes recorded topics discussed at meetings. Also, little or no regard was had by the directors to Mr Adam's description of decisions reached or determinations made by directors. In other words, directors, generally, were not concerned to identify their decisions in terms of resolutions, agreements or otherwise. The other directors accepted Mr Adam's presentation. This informal approach arose, at least in part, from the nature of the composition of the board. It was akin to a joint venture between the defendant's interests and Ampol and the representatives on each side were concerned to maintain good relations with the other.
It is now proposed to trace the sequence of events which give rise to the plaintiff's claim.
Events prior to the meeting of directors on 26 September 1989
On 21 July 1989 the defendant caused the plaintiff to open two accounts for Promco - No 210147 (Brisbane) and 280105 (Woombye) with credit limits of $300,000 and $110,000 respectively.
On 25 August 1989 Promco executed a mortgage in favour of the plaintiff. Clause 4.02(g) of the mortgage provided that the mortgage was intended to be a third mortgage and that it not be registered until Promco had failed to remedy default under the mortgage within 14 days of receiving notice from the plaintiff specifying the default.
On 8 September 1989 a Promco cheque for $61,775.92 was returned to the plaintiff endorsed “present again”.
On 30 September 1989 the debit balance of Promco's accounts was $607,323.04. The accounts were thus beyond approved credit limits.
Minutes of directors' meeting of 26 September 1989
Directors present - Messrs Nagel, Greenslade, Rapson, O'Halloran and Adams.
The minutes contain the following reference to Promco -
“PROMCO
Peter Greenslade detailed negotiations held re the purchase of Promco at $10.68M on which we made an offer of $7.5M, the offer was rejected. Peter increased the offer to $8.5M. This was also rejected.
Securities covering continuation of trade with Promco were in our solicitors' hands.”
Discussion at the meeting and other relevant matters not recorded expressly in the minutes
In the course of discussion at the meeting, Mr O'Halloran expressed some doubt about the values being placed on its business by Promco and mentioned that Ampol had had difficulties in obtaining payment by Promco in the past. In 1986 O'Halloran had had discussions with directors of Promco with a view to assessing whether it was worth Ampol's while to purchase Promco's business. He inspected the assets of Promco's business and reached the conclusion “that there was no real value in the assets for Ampol”. Mr Rapson had had some peripheral involvement with Mr O'Halloran in that exercise. He shared Mr O'Halloran's view of the value of Promco's business. Nevertheless, neither he nor Mr O'Halloran urged the defendant at the meeting to discontinue his investigations into the feasibility of acquiring Promco's business.
The defendant said in the course of his evidence that if he had been told at the meeting that Ampol was not interested in negotiating with Promco the plaintiff would have stopped trading with it immediately.
Events between the meetings of 26 September 1989 and 23 January 1990
On 1 November 1989 Mr Schrauf, a partner of Mr Nagel in the firm of John Nagel & Co had a telephone conversation with the defendant in which -
·Mr Schrauf advised that although an unregistered mortgage afforded some priority over general and secured creditors there was a risk that Promco could offer a registered mortgage to another creditor which would take priority over the unregistered mortgage given to the plaintiff;
·the defendant said that he agreed with Promco to accept unregistered mortgages but that, when he did so, he was unaware of the implications of that course;
·the plaintiff said he would negotiate further with Promco in an endeavour to obtain its agreement to registration.
On 13 November 1989 the defendant wrote to Promco noting that a “total takeover at this time has been put on hold” and offering to purchase two service station sites.
On 21 November 1989 Promco wrote to the defendant proposing that the plaintiff acquire half the “petroleum assets” of Promco for $4,250,000 and enter into a joint venture with Promco with respect to Promco's business.
The defendant sent a copy of the letter which he wrote to Promco setting out his proposals for a joint venture with Promco to Mr Thakenesse of Ampol on 28 November 1989.
The debit balance of the Promco accounts on 30 November 1989 was $1,030,302.80.
On 12 December 1989 Mr Schrauf wrote to the defendant confirming his advice in relation to the unregistered mortgage and stating that he awaited further instructions. The mortgage, which had been prepared by Promco's solicitors, was never registered. There is no evidence that Promco ever consented to its registration. Nor is there any evidence of the defendant causing the plaintiff to give Promco a notice under the mortgage requiring it to remedy default.
Mr Schrauf heard nothing further from the defendant on the mortgage/security matter until 8 February 1990. I consider it probable that the defendant broached the question of registration of the mortgage with a director of Promco but was discouraged from pursuing the matter.
The debit balance of Promco's accounts on 31 December 1989 was $1,286,350.60.
On 2 January 1990 a Promco cheque for $208,645.62 was returned to the plaintiff endorsed “present again”.
On 15 January 1990 Promco forwarded to the defendant a proposed schedule for payment of the moneys owed by Promco to the plaintiff in excess of Promco's credit limit. The schedule contemplated that Promco would be back within its approved trading terms by the end of April 1990.
Minutes of meeting of directors of 23 January 1990
Directors present - Messrs Nagel, Greenslade, Rapson, O'Halloran and Adams.
The minutes contain references to Promco which include the following -
“J. Nagel raised the question of Promco - outstanding moneys as at this date of approximately $700,000.
P. Greenslade advised that Promco will bring this amount down and into agreed trading terms by April 1990.
Discussion on the following points ensued -
-Possible deal for buy out of Promco.
-Schedule for repayment of money outstanding on trading account.
...
-Potential for recovery of money should Promco be forced into a ‘fire sale’ situation.
...
-General concern over past trading practices by Promco was expressed.
-The general consensus of the board was that the securities over the two service stations be registered as soon as possible and that strict guidelines be adhered to on trading terms. Also the board requested management to obtain signed contracts of sale on these two properties.
P. Greenslade requested that the existing schedule of repayments be followed until 31 Jan. 91, when after negotiation, all previous detail be applied where practicable or possible.
The board felt that :
1) C.P.Q. not buy or offer to buy Promco.
2) C.P.Q. investigate the possible purchase of the two secured service stations.
3) Discontinue trading with Promco in most areas as soon as possible.” (emphasis supplied)
Discussion at the meeting not recorded expressly in the minutes and other relevant considerations
When the defendant revealed the size of Promco's debt at the meeting, Messrs O'Halloran and Rapson both expressed concern and annoyance. Mr O'Halloran said words to the effect-
“How on earth could we let a debt like that go when I said to be very careful about dealing with Promco, particularly in the light of the past history that Ampol had in trying to collect this money.”
The defendant said words to the effect that he took responsibility for the debt but that he knew Eustace and Butler (directors of Promco) personally and was confident that the account would come back into terms. There was discussion about the desirability of permitting or assisting Promco to trade out of its predicament. In that context the defendant produced the schedule of proposed repayments which Promco had sent to him on 15 January. In cross-examination, the defendant contended that there was no resolution of directors to the effect that Promco's debt not be permitted to increase. However he conceded that “... the sense of the meeting was it shouldn't go up”. He said in respect of the schedule, “After some discussion they decided that we should go along with it”.
In discussion about Promco's proposal a consensus was reached to the effect that Promco not be allowed any additional credit. Mr Rapson professes a recollection of saying, at the meeting, words to the effect that the debt should be frozen. Whether or not Mr Rapson (or Mr O'Halloran) used such terminology, it is plain that the understanding of those present at the meeting was that no additional credit was to be extended to Promco but that it was to be obliged to reduce its debt in accordance with the schedule of repayments. The board's conclusion, expressed in the minutes, that the plaintiff “should discontinue trading with Promco in most areas as soon as possible” is also consistent with a decision that the plaintiff not extend further credit to Promco. I accept Mr Rapson's evidence that these words recorded a consensus arrived at at the meeting that there be no further trading on credit. No alternative meaning was suggested by the defendant in his evidence.
At the meeting the Ampol directors made it plain that they were not interested in giving further consideration to the plaintiff's acquiring the assets of Promco. Prior to the meeting the defendant had been pursuing the acquisition by the plaintiff of the business of Promco or of an interest in that business. He was optimistic that such a transaction would be effected. He was of the opinion, based on his industry knowledge and information received from Promco, that its assets relating to its petroleum business were worth some millions of dollars. Prior to 26 September 1989 he had been prepared to recommend that the plaintiff pay $8,500,000 for Promco's business. Promco provided the defendant with a balance sheet as at 30 June 1989 and a profit and loss account for the year ended 30 June 1989. The former showed “property - at valuation” at $16,973,000, a surplus of assets over liabilities of $10,364,799 and the latter, a net profit (for the Promco Group) of $196,379. Some of the assets in the balance sheet related to a motel business carried on by Promco. There is no evidence that the defendant ever sought audited accounts or attempted to ascertain Promco's financial viability beyond obtaining general assurances as to the prospective asset sales and re-financing from Promco. The assurances concerning re-financing were supported from time to time (after 26 February 1991) by written assertions by third parties. The defendant also had some knowledge of Promco's service station sites and he had obtained a valuation of some of its assets when negotiating to buy all or part of the assets.
Events between the meetings of 23 January 1990 and 23 May 1990
The debit balance of the Promco account on 31 January 1990 was $1,299, 651.70.
On 6 February 1990 Mr Butler of Promco sent the defendant a letter together with copies of a proposed mortgage of a service station site at Coolum owned by Promco or one of its subsidiaries. The letter and the accompanying mortgage documents were received by Mr Schrauf on 12 March 1990.
The mortgage (“the Coolum mortgage”) was executed by Promco and Messrs Eustace and Butler as guarantors and dated 6 February 1990. It contained a clause 4.82(g) in identical in terms to the corresponding clause in the mortgage mentioned earlier save that it was stated that the Coolum mortgage was intended to be a second mortgage and there was no express right reserved to Promco to give a second mortgage to a third party. Again, that documentation was drawn by Promco's solicitors.
The debit balance of Promco's accounts on 28 February 1990 was $1,231.121.40.
On 12 March 1990 Mr Nagel wrote to Mr Harrison QC providing instructions and seeking advice as follows -
that in the view of the solicitors and of the defendant the unregistered mortgages “do not constitute a satisfactory form of security”;
Promco would sell to the plaintiff or grant to the plaintiff an option to acquire what were described as the Kunda and Albany Creek properties for a consideration equal to a sum said by Promco to be owing to Bank of New Zealand Limited (“BNZ”) on the basis that the consideration for contracts would be paid to BNZ and “would constitute a reduction of Promco's running account”;
Promco did not wish the set off arrangement to appear in the contract;
Would the proposed transaction be seen as giving rise to a preference should Promco go into liquidation?
The true value of the property to be sold was asserted by Promco to be approximately $800,000 more than the debt to BNZ.
The debit balance of Promco's accounts on 31 March 1990 was $1,369,795.
In February, March and April a number of Promco's cheques were returned to the plaintiff endorsed “present again”. A cheque for $50,000 was dishonoured on 5 March 1990, a cheque for $60,000 was dishonoured on 3 April 1990 and another cheque for $60,000 was dishonoured on 5 April 1990. Four more cheques were dishonoured in April.
The debit balance of Promco's accounts on 30 April 1990 was $1,563,374.40.
On 2 July 1990 the defendant faxed to Mr Schrauf three sheets of handwriting setting out proposals which he had received from or discussed with Mr Butler under which nine of Promco's sites were to be held by Promco under a sub-lease from the plaintiff. The fax referred to information supplied by Mr Butler to the effect that Promco expected to be able to effect a refinancing by “late this month”.
Throughout this period the defendant was in frequent contact with representatives of Promco with a view to finding a solution to the problem of Promco's indebtedness.
Minutes of meeting of directors of 23 May 1990
Directors present - Messrs Nagel, Greenslade, Rapson, Gay and Adams.
The minutes contain the following -
“Promco
Mr Greenslade tabled the bases on which C.P.Q. would achieve a satisfactory conclusion to the problem of Promco's outstanding indebtedness to CPQ. As at 23rd May the debt was $1.6M approx.
He said there were two solutions to the problem.
viz.1. Investigate steps to wind-up Promco
2.To secure an asset by way of leases over various sites and then to resume trading with a strictly adhered to upper credit limit.
On the matter of winding-up Promco the board discussed the issue in depth with both Mr Nagel and Mr Greenslade expressing the view that the present securities held were totally inadequate and would have very little if any impact on the amount outstanding.
...
After further discussion the board resolved the following:
that management investigate the stance the banks would take in regard to this proposal and that upon an answer being obtained a decision be made as to which avenue C.P.Q. would explore to resolve the question of the outstanding debt.
Management with legal consultation investigate the legality of the trigger arrangement. That is should Promco default upon reaching the set upper credit limit would an automatic lease turnover be legal.” (emphasis supplied)
Discussion at the meeting not recorded expressly in the minutes
At the meeting the defendant revealed that the Promco debt had now increased to approximately $1.6 million.
Mr Rapson reacted angrily. He expressed dismay and disappointment saying, in effect, that the defendant had disregarded a previous direction of the board in relation to the debt. He asked the defendant what he was going to do about the problem. The defendant said words to the effect that it was his fault and that he accepted full responsibility for the problem. He said that the plaintiff had stopped supplying Promco eight weeks ago.
Events between the meetings of 23 May 1990 and 24 October 1990
On 23 July 1990 the defendant and Mr Schrauf had a conversation in which -
·there was discussion of the proposed head lease arrangement
·the defendant advised that Promco's debt to the plaintiff was approximately 1.6 million dollars which represented “in essence two months trade”;
·the defendant said that in usual circumstances any potential customer intending to purchase $800,000 of fuel per month on 30 day credit terms would be required to provide security for that amount but that in this case there was no security available as all of Promco's properties were mortgaged to the hilt and that any arrangement entered into with Promco “... will not actually provide a security giving a preference of priority over other creditors. However it might ease the pain of any losses in the event that Promco goes into liquidation before discharging in full the debt due to Circle.”
·BNZ had not been approached to give its consent to the proposed arrangement and that, so far as the defendant was aware, BNZ did not know that the plaintiff was a creditor of Promco. He understood that Promco's balance sheets did not disclose that the plaintiff was a creditor.
·Mr Schrauf advised that the bank's consent would be necessary to each of the proposed mortgages and he queried the commercial realism of expecting BNZ to provide its consent;
·Promco were currently negotiating overseas “trying to put together a financial package to reduce the interest considerably and to perhaps provide an injection of loan funds. If that comes to fruition it may be that Circle will be paid a substantial portion of the debt...”.
The debit balance of Promco's accounts on 31 May 1990 was $1,625,384.40 and on 31 July 1990, $1,625,484.20.
On 2 August the defendant telephoned a person at Mr Nagel's office advising that Promco claimed that it would have refinanced by 26 August 1990 at which time the plaintiff would be given either $500,000 or evidence that $500,000 would be forthcoming.
On 9 August Mr Schrauf wrote to Promco's solicitors with a view to furthering the proposed head lease transaction. There was some further minor activity on the part of the defendant in relation to this proposed transaction in August and September.
In 12 October 1990 the defendant spoke to Mr Schrauf and requested him to expedite the transaction. On 16 October 1990 the defendant met with Messrs Schrauf and Nagel concerning the transaction. On 17 October the three of them attended a conference with Mr Harrison QC in which the proposed head lease transaction was discussed. In particular, Mr Harrison's advice was sought on the question of whether the arrangement could be regarded as having been effected by way of security and attacked as a priority. Mr Harrison advised that it would be preferable for a shelf company to be acquired and for the plaintiff to supply fuel to that company which would in turn re-supply it to Promco on the basis that Promco would enter into the head lease transaction.
The debit balance of Promco's accounts on 31 August 1990 and on 31 September 1990 was $1,615,181.53.
On 18 October 1990 the defendant informed Mr Schrauf that Promco may have obtained approval for an overseas loan. He instructed Mr Schrauf to proceed with the documentation for the proposed head lease transaction but not to acquire the shelf company for the time being. On 23 October 1990 Promco's solicitors sent signed transfer documents back to Mr Schrauf.
On 24 October 1990 the defendant instructed Mr Schrauf to proceed to obtain the shelf company. On 24 October 1990 Mr Schrauf sent documents relating to the proposed transaction to Mr Harrison QC for settling.
Minutes of meeting of directors of 24 October 1990
Directors present - Messrs Nagel, Greenslade, Rapson and Abrahams.
The meeting was called to discuss Promco's outstanding indebtedness to the plaintiff.
These minutes refer to advice from Senior Counsel to the effect that -
“... if CPQ were able to obtain the approval of the Bank of New Zealand to substitute CPQ as a head lessor there was a good chance that this situation would stand up in the event that Promco was liquidated. Then for this reason it was a good idea to endeavour to keep Promco ‘going’. Another proposition involved accepting a transfer of the lease of Promco's site in Yamanto for a consideration of $300,000.”
The minutes continued:
“The directors appreciated that this move could have the effect of keeping Promco trading long enough to enable the documentation to be approved by BNZ and for CPQ to be put in place (sic) the head lessor with adequate protection in the event of there being a failure of Promco and a consequential receivership or liquidation.
The board approved the course of action of proceeding with the head lease arrangement as advised by counsel ... and also the lease of property of Yamanto.”
The substance of the discussion concerning the payment of the sum of $300,000 was that it may serve the purpose of keeping Promco trading and avoid its going into liquidation. There was no suggestion at the meeting that the plaintiff extend any credit beyond the sum of $300,000 or that the general resolve of the board to contain and reduce Promco's indebtedness had been weakened in any way.
Events between the 24 October 1990 meeting and the 13 December 1990 meeting
On 29 October 1990 Mr Schrauf wrote to the defendant concerning transfers of shares in the shelf company then being acquired.
The debit balance of Promco's accounts on 30 October 1990 was $1,615,181.
On 9 November 1990 the defendant caused to be re-opened account No. 210147 (Eagle Farm) and No. 280105 (Woombye). On 12 November the defendant, in a conversation with Mr Schrauf said that Mr Butler, who had returned from overseas, wished to draw on $150,000 credit facility afforded under the agreement just entered into and further that Mr Butler had expressed the view that there was no need for him to obtain BNZ's consent to the leases and sub-leases. Mr Schrauf advised that this did not accord with his understanding.
The plaintiff and Promco executed a deed dated 14 November 1990 under which -
Promco acknowledged indebtedness to the plaintiff in the sum of $1,615,171;
Promco agreed to repay the debt on demand and to pay interest on the outstanding moneys at a specified rate.
A deed dated 19 November 1990 was entered into between Promco, Queensland Oil Distributors Pty Ltd (a company controlled by Messrs Eustace, Butler) and Marthlow Pty Ltd (a shelf company)) under which Promco and Queensland Oil Distributors, in consideration of Marthlow agreeing to supply petroleum products, agreed to grant or procure to be granted to Marthlow leases of some 5 service station sites.
The debit balance of the Promco accounts on 30 November 1990 was $1,715,911.01.
Minutes of meeting of directors of 13 December 1990
Directors present - Messrs Nagel, Greenslade, Rapson, Abrahams and Adams.
The first major item on the agenda concerned Promco. The minutes record-
“The major question related to the provision for future bad debts of Promco ... Mr Hook explained that although the debt had been noted no action for writing it off had yet been taken.
Mr Hook undertook to inform Ampol's auditors of the effect of the financial statements of the provisions for Promco's bad debt.
Mr P. Greenslade produced a letter supplied by Promco detailing the avenues they were using to refinance their company and thus repay the debt.
He also advised that C.P.Q. had acquired the assignment of a head lease held by Promco and a service station site at Yamanto, Ipswich. But this time C.P.Q. is in occupation and is operating the site ...
Mr A. Rapson requested P. Greenslade to determine how long it would be before a final decision is made to take action against Promco for the recovery of outstanding moneys.
The Board resolved that if the condition of Promco's outstanding debt is not satisfactorily concluded by 31st January 1991 appropriate action will be taken.”
On 5 February 1991 Mr Nagel wrote to Mr Adams of the plaintiff stating inter alia-
“The advice we have received from Mr Harrison was discussed at length, the advice being that if we were able to obtain the approval of the BNZ Bank to the substitution of Circle Petroleum as the head lessor, there was a good chance that this situation would stand up in the event that the company Promco was liquidated and it was for this reason a good idea to endeavour to keep Promco ‘going’.
It was then discussed the proposition of accepting a transfer of the lease of Promco's site at Yanmanto for a consideration of $300,000 which consideration would be by the delivery of fuel to the company.
It was appreciated by the directors that this may have the effect of keeping Promco going for a sufficient length of time to enable the documentation to be approved by BNZ and for Circle to be put in place as the head lessor with adequate protection in the event of there being a failure of the company in a consequential receivership or liquidation. The board approved the course of action of proceeding with the head lease arrangement as advised by counsel ... and also the lease of the property at Yanmanto.”
On 21 December 1990 the defendant informed Mr Schrauf that he had copies of 2 separate offers of finance made to Promco for amounts of $10 million and $11 million, respectively. He requested the solicitors not to do anything further to implement the head lease transaction apart from registration of the transfer of the lease of the Yamanto premises.
In December, 8 Promco cheques were dishonoured and 13 endorsed “return to drawer” or “present again”. A similar pattern continued throughout January and February 1991.
The debit balance of Promco's accounts on 31 December 1990 and 31 January 1991 was $1,966,648 and $1,918,467 respectively.
Account 210147 (Eagle Farm) was closed on 31 January 1991.
On 18 February 1991 Mr Schrauf wrote to the plaintiff confirming that the transfer of the Yanmanto lease had been effected.
21 February 1991
Directors' meeting of the plaintiff.
Directors present - Messrs Nagel, Greenslade, Rapson, Adams and Abrahams.
The meeting was concerned almost entirely with the Promco debt. The minutes record that-
the defendant advised that the outstanding balance of the Promco account as at 21 February was $2,206,593.
Mr Greenslade produced copy correspondence in relation to Promco's proposed refinancing.
The minutes then record-
“Deep concern was registered by the Board members as to Promco not disclosing to their bankers the real position of their balance sheet.
On this point P. Greenslade produced a letter from J. Butler (Promco director) indicating the company's intention to pay C.P.Q. $500,000 at the first draw down of funds on the loan.
P. Greenslade advised that as at 31 January, 1991 cheques presented to C.P.Q. for payment for fuel purchases were not being met on presentation to Promco's bank.
Prolonged discussed ensued as to what course of action should be taken to obtain the best possible result.”
Mr Nagel then advised as to the likely sequence of events in the event that the plaintiff took no proceedings against Promco. It was decided that a meeting should be had with directors of Promco with a view to ascertaining “... Promco's cash flow projections, how loans are to be repaid and when will C.P.Q. be paid if at all”.
Discussion at the meeting not recorded expressly in the minutes
Mr Rapson, in particular, expressed annoyance when the defendant revealed at the meeting that Promco's debt was now to the order of $2.2 million. He sought an explanation for the increase having regard to previous decisions by the board that the debt not be increased and that the only further trading to be permitted was that in respect of the credit of $300,000 in relation to the Yamanto transaction. The defendant was apologetic saying again, in effect, that he took full responsibility for the increase in the level of the debt.
25 February 1991
Meeting of the Board of directors of the plaintiff.
Directors present - Messrs Nagel, Greenslade, Rapson, Adams and Abrahams.
The meeting was held immediately after a meeting between directors and Messrs Butler and Eustace of Promco. The minutes record that -
“The Board endeavoured to have Promco set a time frame into which repayments to CPQ would fit.
J. Butler and N. Eustace then agreed to produce a letter guaranteeing the residual balance of moneys due to C.P.Q., after an initial payment of $500,000 within seven days of the first draw down of the loan from PBC.
As a result of the detailed discussions the following resolution was put.
The Board resolves to notify Promco that should Promco not have performed as expected by 21 March 1991 CPQ will issue winding up proceedings on 22nd March, 1991 and reserve the right in the interim to commence proceedings if considered desirable.”
On 21 March 1991 the defendant, by facsimile transmission, requested Mr Nagel to issue a section 364 notice in respect of Promco.
Credibility issues
Mr Cooper, who appeared for the defendant, explored in cross-examination the lack of any reference in minutes of meetings of directors or in notes taken at those meetings by Ampol directors, to any complaint against the defendant's conduct or, for that matter, to the freezing of credit to Promco. He submitted that these matters shed considerable doubt on the version of events given by the Ampol directors who gave evidence. The reference to “Ampol directors” is, of course, a reference to the directors appointed by Ampol to the board of the plaintiff. Messrs Nagel and Adams were not called as witnesses by either party. These matters raised by Mr Cooper have caused me some concern. However, I found each of Messrs O'Halloran, Gay, Rapson and Abrahams a more reliable witness than the defendant. The evidence of the plaintiff's witnesses had a consistency which gave some support to their respective versions of events. I found nothing inherently improbable in those versions.
I now turn to a consideration of the plaintiff’s allegations of breach of duty.
Breaches of the service agreement
I have reached the conclusion that there was a “resolution” or “direction” at the meeting of directors held on 23 January 1990 to the effect that Promco not be permitted to exceed the existing credit limits except in so far as was contemplated by the schedule of repayments to be followed by Promco.. There is nothing of that nature described as a resolution in the minutes. However, the defendant presented Promco's debt reduction schedule to the meeting. The minutes record - “P. Greenslade advised that Promco will bring this amount down and into agreed trading terms by April 1990.” It is clear that the board, unanimously, accepted that the schedule be put into effect. The minutes further record -
“The general consensus of the Board was that ... strict guidelines be adhered to on trading terms ...
P. Greenslade requested that the existing schedule of repayments be followed until 31 January, 91, when after negotiation, all previous detail be applied where practicable or possible.
The Board felt that:
...
3) Discontinue trading with Promco in most areas as soon as possible.”
As noted earlier, there is evidence, which I accept, that the latter reference was to the cessation of trading with Promco on a basis which permitted the extending of any credit additional to that already extended. The only “guidelines” in relation to “trading terms” under discussion at the meeting were ones in which the schedule of repayments was to be adhered to so as to bring Promco back within authorised trading limits and the decision not to give any additional credit.
As the learned authors of Palmer's Company Law 22 ed Vol 1 remark at 60-05 -
“It is not, however, essential for the validity of a director's resolution that the determination should be embodied in a formal resolution, and the minutes in recording it often, in fact, enter only the substance, e.g., ‘a contract with AB for the supply of ... was submitted and approved.’”
A similar passage appears in volume 2 of the current loose leaf service at 8.307.
In H L Bolton Engineering Co Ltd v T G Graham & Sons Ltd [1957] 1 QB 159, Lord
Denning stated -
“It is not necessary that any resolution by the board should have been expressed by a minute, although it ought to be so.”
And, as Rowland J said in Poliwka v Heven Holdings Pty Ltd [1992] ACSR 747 at 751 -
“It may be accepted that much latitude is given to directors of private companies in regard to the formalities that should attend their corporate activities.”
The conclusion I have reached also derives support from the observations of Young J in Galiprenzo v Solution 6 (1998) 28 ACSR 139 at 149 and from the approach taken by Anderson J in Atkins v St Barbara Mines (1996) 22 ACSR 187 at 194-5.
If the matters to which I have referred, contrary to my conclusion, cannot be regarded as a resolution or resolutions, I am of the opinion that they constituted a direction or directions. The board considered a serious matter and reached a consensus in relation to it. That consensus was recorded in the minutes. It is not reasonable to suppose that all present at the meeting did not regard the consensus as a policy determination of the board which directors and management were obliged to follow.
There would be no difficulty in treating what happened as the reaching of an agreement or the making of a determination by the board. See eg. Poliwka v Heven Holdings Pty Ltd (supra) at 785-786; Re Bonelli's Telegraph Co (1871) 12 LR Eq 246 at 258; Rurciman v Walter Rurciman plc (1992) BCLC 1084 and Swiss Screens (Australia) Pty Ltd v Burgess (1986) 11 ACLR 756. A determination or reaching of a consensus by the board does not necessarily constitute a “direction”. However, in this case it seems to me that the determination made by the board was intended by all directors to have an operative effect and thus amounted to a direction. Insofar as communication is necessary to constitute a direction it was achieved by the defendant's participation in discussion and by his receipt of a copy of the minute.
Matters not recorded in the minutes assist in reaching the same conclusion. I have found earlier that a consensus was reached to the effect that Promco not be allowed any credit beyond that contemplated by the repayment schedule.
Except in relation to agreeing to supply Promco petrol to the value of $300,000, the board never deviated from the substance of the stance arrived at in the course of this meeting. At the next meeting on 23 May 1990 the discussion centred around ways and means of reducing Promco's debt which, by then, had reached approximately $1,600,000. The defendant informed the board that the plaintiff had stopped supplying Promco prior to the meeting. Consideration to the supply of petroleum products to Promco was given at the meeting on 24 October. The agreement reached at the meeting was that $300,000 worth of petroleum products would be supplied to Promco in consideration of Promco's entering into lease arrangements then under discussion. No trading on credit outside that precise arrangement was endorsed or consented to by the board on that or on any subsequent occasion.
Alleged breach of Section 229(2) of the Companies (Qld) Code and of the defendant's general law duties
The plaintiff alleged that the defendant was in breach of his duty under section 229(2) of the Companies (Qld) Code and also his common law duties as managing director of the company. It was further alleged that it was an implied term of the service agreement that the defendant be obliged to exercise a reasonable degree of care and diligence in the exercise of his powers and discharge of his duties as managing director of the plaintiff.
Section 229(2) of the Companies (Qld) Code provided at relevant times -
“An officer of a corporation shall at all times exercise a reasonable degree of care and diligence in the exercise of his powers and the discharge of his duties.”
Subsection (10) provided -
“This section has effect in addition to, and not in derogation of, any rule of law relating to the duty or liability of a person by reason of his office or employment in relation to a corporation ...”
As s.229(10) made plain, the Companies Code did not purport to be an exclusive repository of director's duties. Consequently, one is also required to look to the general law to ascertain the nature and extent of such duties. The most authoritative judicial exposition of the general nature of a director's duty of care this century, at least until very recent times, is to be found in the judgment of Romer LJ, In re City Equitable Fire Insurance Co [1925] 1 Ch 407. Romer LJ relevantly said at 427-429 -
“In order, therefore, to ascertain the duties that a person appointed to the board of an established company undertakes to perform, it is necessary to consider not only the nature of the company's business, but also the manner in which the work of the company is in fact distributed between the directors and the other officials of the company, provided always that this distribution is a reasonable one in the circumstances, and is not inconsistent with any express provisions of the articles of association. In discharging the duties of his position thus ascertained a director must, of course, act honestly; but he must also exercise some degree of both skill and diligence. ...
The care that he is bound to take has been described by Neville J in the case referred to above [In re Brazilian Rubber Plantations & Estates, Ltd [1911] 1 Ch 425] as ‘reasonable care’ to be measured by the care an ordinary man might be expected to take in the circumstances on his own behalf. In saying this, Neville J was only following what was laid down in Overend and Gurney Co v Gibb LR 5HL 480 at 486 as being the proper test to apply, namely: ‘Whether or not the directors exceeded the powers entrusted to them, or whether if they did not so exceed their powers they were cognisant of circumstances of such a character, so plain, so manifest, and so simple of appreciation, that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into?’
There are, in addition, one or two other general propositions that seem to be warranted by the reported cases: (1.) A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. A director of a life insurance company, for instance, does not guarantee that he has the skill of an actuary or of a physician. In the words of Lindley MR: ‘If directors act within their powers, if they act with such care as is reasonably to be expected from them, having regard to their knowledge and experience, and if they act honestly for the benefit of the company they represent, they discharge both their equitable as well as their legal duty to the company’: see Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 at 435. It is perhaps only another way of stating the same proposition to say that directors are not liable for mere errors of judgment. (2.) A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so. (3.) In respect of all duties that, having regard to exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.”
The duty imposed on directors by the Act, to the extent that it differed from a director's general law duty would appear to be the narrower of the two. The general law duty includes a duty to exercise skill, the statutory duty imposed no such requirement, except to the extent that it may be imported into the obligation to exercise care.
Recent decisions such as Metal Manufacturers Pty Ltd v Willis (1988) 13 NSWLR 315, Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, Vrisakis v Australian Securities Commission (1993) 9 WAR 395, AWA Ltd v Daniels (1992) 7 ACSR 959 and Daniels v Anderson (1995) 37 NSWLR 438, disclose a tendency for courts to take a stricter view of directors' obligations than that taken by Romer LJ. For example, in Vrisakis, Malcolm CJ at 405 observed -
“Today, a director is expected to attend all meetings unless exceptional circumstances, such as illness or absence from the State prevent him or her from doing so: cf Harper and Brown, The Duties and Liabilities of a Director in 1973 (1973) 47 ALJ 447 at 451-452.”
In Daniels v Anderson Clarke JA and Sheller JA said at 501 -
“In our opinion the responsibilities of directors require that they take reasonable steps to place themselves in a position to guide and monitor the management of the company.”
Whatever changes may have taken place in the law since Romer LJ's decision in In re City Equitable Fire Insurance Co, there is no discernible change in the reluctance on the part of courts to find directors negligent as a result of business judgments and decisions, particularly where an entrepreneurial element is involved. See, for example, Daniels v Anderson per Clarke JA and Sheller JA at 501, Vrisakis per Ipp J at 449-450.
In this case it is not necessary to consider the extent, if at all, to which director's duties generally have increased beyond those expressed in In Re City Equitable Fire Insurance Co. The extent of a director's duty depends on “the particular function he is performing, the circumstances of the specific case and the terms on which he has undertaken to act as director”. Gould v Mt Oxide Mines Ltd (in liq) (1916) 22 CLR 490 at 531. The defendant was an executive director employed full time as managing director. The defendant had a duty to exercise that degree of skill required of a person in the position which he held. That is a matter calling for assessment on an objective basis. State of South Australia v Marcus Clark (1996) 19 ACSR 606 at 628-9; AWA Ltd v Daniels (1992) 7 ACSR 759 at 867 and Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555. Furthermore, the defendant had very extensive experience in that part of the petroleum industry in which the plaintiff was engaged. He was well aware of the risks of not maintaining tight credit control. Indeed, he had been instrumental in ensuring that that plaintiff had had very little in the way of bad debts since it commenced operations. He was also aware that Promco was trading in a high risk industry, that it had experienced difficulty in obtaining supplies of petroleum products and that failure on its part to obtain such supplies would result in its failure. I will put to one side, for the moment, the events prior to the meeting of 23 January 1990. They give rise to considerations of a different nature to those which arise after 23 January. At least by the end of that meeting -
the defendant had been acquainted with the fact that Promco had been a difficult trade debtor of Ampol;
the defendant was aware that a “take over” of Promco would not take place;
the defendant was aware that Promco was not in a position to meet its obligations to the plaintiff and had to resort to seeking an indulgence from the plaintiff to enable it to attempt to bring its trading account back within terms. He said of the understanding of its directors about the Promco debt at the time of the meeting “we were all concerned at that point ... we had serious problems.”
the defendant was aware that although Promco was well outside its credit limit, the security provided by the plaintiff was “risky”;
the defendant was under no illusions as to the financial solidity of Promco. That may be seen from his evidence that, were it not for the prospect of a takeover, he would not have commenced trading with Promco in the first place. He also conceded that he had started “to hear alarm bells ring” before the meeting;
in addition to the fact that the security offered had the inherent limitations of second mortgage security, it was additionally defective through non-registration. As Promco was in default, the plaintiff was entitled to register the mortgage but either no steps were taken by the defendant in that regard or he heeded Promco's requests not to proceed with registration;
the defendant was aware that Promco's bank had declined to honour one of its cheques;
Promco was anxious not to let its bank discover its indebtedness to the plaintiff.
Notwithstanding the above considerations, the defendant allowed Promco's indebtedness to increase from approximately $700,000 on 23 January 1990 to approximately $1,300,000 on 31 January 1990. In his oral evidence the defendant offered no explanation of why this increase in indebtedness was allowed to occur. Nor did the defendant explain the circumstances in which Promco had been permitted by him to depart from the requirements of the repayment schedule.
The defendant's conduct after January 1990 does not become any easier to understand. The defendant did not state expressly that he reposed some confidence in the directors of Promco and the assurances which they offered from time to time (supported by some evidence) that a re-financing was about to take place, but I am prepared to draw the inference that he did. The plaintiff though was aware that there was an appreciable risk that Promco would not be able to meet its obligations. Despite this, and despite the consensus reached at the January board meeting as to how Promco was to be treated, he permitted the debt to be increased from approximately $1.3 million to approximately $2.2 million. $300,000 of the increase of approximately $900,000 is attributable to the consideration payable to Promco by the plaintiff in return for the granting of head leases. That, of course, was approved by the board.
The defendant contended that the board gave approval at the 24 October 1990 meeting to continued trading of an unlimited nature with Promco with a view to keeping it afloat until the head lease stratagem could be put in place. I do not accept that this was so. The proposition was rejected by Mr Rapson. It gains peripheral support from the evidence of Mr Harrison QC who spoke of discussions he had had with Messrs Nagel and the defendant. But it does not appear to me to be the case that the question of the nature of future trading activities with Promco ever arose in any substantial way in that conference with Mr Harrison QC and there is no suggestion that Mr Harrison QC was ever informed in any considered way of the board's intentions in relation to future trading. By 24 October 1990 all directors were of the view that there was considerable risk that no moneys could be recovered from Promco. The new stratagems being put in place were not presented to the board and were not accepted by the board as a sure method of recovering the plaintiff's position. The prevailing attitude was that they may work and that they were better than nothing. If a decision had been taken to extend further credit to Promco it is improbable that there would not have been discussion at board level of matters such as the amount of further credit to be extended and the mechanisms of extending credit so as to minimise further exposure of the plaintiff to an increase in debt levels.
In the circumstances which I have outlined I conclude that the defendant, in permitting Promco's trading credit to be increased above the figure at which it stood on 23 January 1990, breached his duty of care to the plaintiff. He failed to exercise the degree of skill and care which could reasonably be expected from a person of his knowledge and experience. The defendant's conduct in relation to the Promco account involved a substantial departure from what even he regarded as normal industry practice and defied the express wishes of all members of the board of directors, including himself. It involved the taking of abnormally high risks without, it would seem, attempting to assess the benefit which might be obtaining in return for the risk. The defendant appeared to be gambling on the prospect that Promco's directors would solve that company's financial problems eventually. But the evidence does not suggest that he had a reasonable basis for concluding that Promco's financial difficulties would be resolved. I have reached the same conclusion in respect of the defendant's conduct after 31 January 1990. These conclusions do not apply to the extent to which credit was extended as a result of the supply of petrol to the value of approximately $300,000 agreed at the meeting on 24 October 1990. The defendant's conduct in that regard had the sanction of the board of directors and was part of a calculated stratagem under which the directors balanced the risk of losing $300,000 against the prospect of gaining some security in the event of Promco's feared collapse.
I return now to the question of the defendant's conduct leading up to the meeting on 23 January 1990.
Mr Bell QC, who appeared with Mr McQuade, for the plaintiff relied on the following passage from the judgment of Ipp J in Vrisakis -
“The mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. The management and direction of companies involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry. The legislature undoubtedly did not intend by s.229(2) to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity. According, the question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.”
Malcolm CJ agreed with Ipp J's reasons. In Permanent Building Society v Wheeler (1994) 14 ACSR 109 at 158-159, Ipp J (with whose reasons the other members of the Court agreed) referred to and relied upon the above passage.
Mr Bell contended that the likely benefit available to the plaintiff as a result of trading with and extending credit to Promco was as follows:
| Period | Benefit |
| 1. July 1989 - 26.09.89 30.09.89 (outside terms by $197,323) | (Before direct costs) on average 2.48% |
| 2. 27.09.89 - 23.01.89 (outside terms of $780,000) | Profit 2.48% |
| 3. 24.01.89 - 30.04.90 (outside terms by $1,153,374) | Recovery of debt |
| 4. 9 November 1990 - 31 January 1991 (outside terms by $1,796,593.70) | Recovery of debt |
The point made was that there was little to gain and much to lose by extending credit to Promco without adequate security. The balancing exercise to which Ipp J referred in Vrisakis and Wheeler is a practical and useful one but cannot be applied, and no doubt was not intended to be applied, as some inflexible formula. The merits of business decisions of an entrepreneurial nature are extremely difficult to assess with the benefits of hindsight. If they meet with failure the tendency is often to regard that result as a foregone conclusion. If they meet with success, on the other hand, the decision maker will often be regarded as having pursued a sound and reasonably obvious course. Also, such decisions cannot always be fully dealt with by means of objective analysis. The decision maker may owe some of his or her success in business to an ability to make an intuitive judgment, the basis of which is not able to be clearly articulated. Nor are the ramifications of the decision always necessarily apparent or able to be clearly demonstrated. For example, in this case the plaintiff contends that all that trading with Promco was likely to achieve was an increased volume of sales at a low profit margin. Initially though there was the prospect that trading with Promco would facilitate the acquisition of its assets. There was no suggestion by any of the Ampol directors that this would not have been a desirable course of action had it been possible to secure those assets at an acceptable price. There may also have been other benefits such as the denying of market share to competitors.
The plaintiff also relies on the opening of the Woombye and Eagle Farm accounts on 21 July 1989 with credit limits of $410,000 without the defendant first having obtained security from Promco. When that security was obtained it was defective. The plaintiff points out that, although Promco quickly defaulted and the plaintiff was in a position to register the mortgage it had taken from Promco, that was never done. Despite these matters however, I do not find that the defendant, at this stage, breached his duty of care to the plaintiff. The defendant was pursuing his policy of attempting to acquire the whole or a substantial part of the assets of Promco. The opening of an account and the extending of credit were done with a view to furthering that objective. In the way he went about commencing the trading activity and failed to give due consideration to the wording of the mortgage obtained from Promco or the necessity for proper legal advice in relation to it, his conduct, though hardly exemplary, in my view did not result in a breach of his duty of care. I do not accept that the defendant, in exposing the plaintiff to the risks which he did in the manner and for the reasons referred to above, acted in a way which “no men with any ordinary degree of prudence, acting on their own behalf” would have acted. Nor, in my view, did the defendant fail to exercise a “reasonable degree of care and diligence”. I note that the legal advice initially received by the defendant did not draw attention to the inherent limitations of second mortgage security.
Admissibility of evidence of discussion at board meetings
Mr Cooper submitted that minutes of board meetings were the sole admissible evidence of proceedings at such meetings. The substance of his submission was as follows -
(a)s.253 of the Companies (Queensland) Code provided at relevant times that a minute was prima facie evidence of proceeding to which it relates;
(b)the articles of the plaintiff were specifically drawn to regulate the operation of the plaintiff under the joint control and the defendant: see, for example, article 35;
(c)article 48 makes the minutes, when signed by the chairman, “sufficient evidence without further proof of the facts stated therein”;
(d)in article 48 “sufficient” means “conclusive” -
.Lewis v Leonard (1880) LR 5 Exch D 165
.The Board of Trade v the Sailing Ship “Glenpark” Ltd [1903] 2 KB 324
.. Kerr v John Mottram Limited [1940] 1 Ch 657
(e)furthermore, the minutes of each meeting were reconsidered in detail at the next meeting, corrected if necessary, and, by resolution, were “accepted as read” after such further consideration;
(f)the rationale underlying the parole evidence rule as expressed in Gordon v Macgregor (1909) 8 CLR 316 at 323-4 coupled with the provisions of article 48 and the course of conduct of the directors made the minutes conclusive evidence of what occurred at board meetings.
The defendant was unable to place reliance exclusively on article 48. Article 48.2 provides -
“The minutes of a meeting signed by the chairman thereof as provided in article 48.1 shall be sufficient evidence without proof of the facts therein stated.”
None of the minutes under consideration were signed by the chairman of the meeting. There is thus no factual foundation for defendant’s reliance on article 48. I doubt, that in the context of article 48, “sufficient” is synonymous with “conclusive” but it is not necessary for me to decide that point. I note that the article under consideration in Kerr v John Mottram (supra) expressly provided that minutes, if signed by the chairman of the next succeeding meeting, “shall be conclusive evidence without further proof of the facts therein stated”.
In Lewis v Leonard (supra) and The Board of Trade v The Sailing Ship “Glenpark” Limited (supra) the words “sufficient evidence”, where they appeared in the statutory provisions under consideration, were regarded as meaning “conclusive evidence”. I am unable to see that the considerations of construction which led to that conclusion in those cases applies to the construction of article 48. Even if the defendant's contention were to be accepted generally I doubt that the result would be that no evidence could be adduced to establish that matters discussed and agreed upon at a meeting were not recorded in the minutes. Article 48.2 is directed to making matters contained in the minutes sufficient proof of those matters. Nor am I able to accept that the parole evidence rule has any application to the minutes of directors' meetings of the plaintiff. Minutes of meetings are not to be equated with contracts. In many circumstances it is not to be expected that the former will embody a verbatim of proceedings or even that the language used will be carefully chosen and precisely expressed. Traditionally, in the absence of provision to the contrary in the Articles of Association, minutes have been regarded as prima facie evidence only of the matters recorded therein. See e.g. In re Pyle Works (No. 2) [1891] 1 Ch. 173 at 184.
Damages
I calculate the plaintiff's damages for breach of contract as follows:
Cost of sales to Promco (on products sold but not paid for) after 23 January 1990 excluding the sale of $300,000 worth of petroleum products sold with the express agreement of the board of the plaintiff.
plus direct selling costs in relation to such sales.
less profit made on sales to Promco during that period.
less dividends received from the bankrupt estates of Messrs Eustace and Butler.
less dividends likely to be received from those estates on the basis of no exercise of option by Shell.
It was submitted on behalf of the defendant that -
“Because ... the company was really an incorporated joint venture, the damages issues should be viewed as a claim by the other partner, albeit brought in the company's name, seeking to recover its loss flowing from Greenslade's conduct.
But that loss is not the lost revenue of $2.2 million. It is the last chance to receive a dividend from the profit which would have resulted from the receipt of that revenue: and Greenslade suffered the same loss.”
I am unable to accept those submissions. Irrespective of whether the relationship between Greenslade interests and the Ampol interests was akin to that of a joint venture, Greenslade and Ampol were shareholders and their rights fall to be determined by reference to the legal structure adopted by them. The trend of authority is against lifting the corporate veil in circumstances such as this. cf Hadoplane Pty Ltd v Edward Rushton Pty Ltd [1996] 1 Qd R 156.
I accept the correctness of the methodology used in the report of Vincents dated 3 June 1998 (Ex.17). That report deals with the whole of the trading activities between Promco and the plaintiff. Some adjustment will need to be made to the figures in schedule 1A of the supplementary report of 3 June 1998 to reflect the finding that the defendant is not liable for any debt incurred on the Promco accounts prior to 23 January 1990.
The plaintiff's damages in tort do not differ in this case from the contractual measure.
The object of damages in tort is to place the plaintiff in the position it would have been in had the tort not been committed: Gates v City Mutual Life Assurance Society Ltd (1985-1986)
160 CLR 1 at 12-13. If the defendant had not been negligent Promco's liability to the plaintiff would not have been permitted by the defendant to increase beyond that existing at the time of the meeting on 23 January 1990. On the evidence before me though I am unable to conclude that the plaintiff would not have resorted to some strategy such as that adopted at the meeting of directors of 24 October 1990 in relation to the transfer of the lease of Promco's Yamanto site for a consideration of $300,000. After all, Promco's liability to the plaintiff was already very extensive on 23 January 1990. Although the contractual measure of damages differs from the tortious one, I see no reason why the above reasoning is not equally applicable to the contractual claim. It was not demonstrated that the payment of this sum was a matter which ought “fairly and reasonably be considered either arising naturally ... or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.” Hadley v Baxendale (1854) 9 Ex 341. As the parties calculations of damages were made on a basis different to that required by my findings, I invite further submissions on the question of damages.
Section 535 of the Companies (Queensland) Code.
The defendant, in the event that he is found liable, seeks relief under the above provision. Section 535(1) of the Companies (Queensland) Code provided at relevant times -
“(1) [Discretion to relieve party from liability] If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity by virtue of which he is such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that he has acted honestly and that, having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused for the negligence, default or breach, the court may relieve him either wholly or partly from his liability on such terms as the court thinks fit.”
The defendant submits that -
“The purpose of the section is to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognizing that such officers are businessmen and women who act in an environment involving risk in commercial decision‑making.”: Daniels v Anderson (supra) at 525;
The defendant, being an equal owner of the plaintiff, has directly suffered half the loss;
if the defendant is liable to pay damages he will be punished twice for the same loss. His former co-owner will benefit from his wrongdoing even though its representatives could have removed the defendant from his position as managing director but elected not to do so;
as Ampol acquired all the issued shares, any tax loss resulting from the Promco transaction has been utilised for the benefit of Ampol;
it was accepted by both Rapson and O'Halloran that Ampol enjoyed very substantial benefits from its relationship with the defendant. The turnover of the company more than doubled in five years.
The plaintiff, in its submissions, recognised the wide discretion conferred on the court by s.535 (see Daniels v Anderson at 525) but submitted -
a court would be reluctant to relieve a director from liability to repay money in respect of which he had received a benefit: Re International Vending Machines Pty Ltd (1962) NSWR 1048;
the defendant received .03 cents per litre of petroleum products sold by the plaintiff to its customers;
in considering all the circumstances it is necessary to take into account whether a director has acted reasonably in the circumstances: Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946 at 1011;
the defendant did not act reasonably and his conduct in providing the credit was not merely due to inadvertence.
The submissions proceeded on the common assumption that s.535 encompassed claims by a company against an office for breach of contract. AWA at first instance and on appeal supports that approach.
It is a pre-condition to the giving of relief under the section that the person seeking relief acted honestly. I find this condition satisfied. It was not submitted on behalf of the plaintiff that the defendant had not acted honestly.
“All the circumstances of the case” obviously includes the way in which the default or breach has occurred: Advance Bank of Australia Ltd v FAI Insurances Australia Ltd (1987) 12 ACLR 118 at 143-4 and The Duke Group Ltd (in liquidation) v Pilmer & Ors (1998) 27 ACSR 1 at 327-9.
Although it is not a pre-requisite to the granting of relief that the defendant acted reasonably, whether the defendant's conduct was reasonable is a relevant consideration: Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (1989) 7 ACLC 1,232 at 1,252-3 and Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 196-7.
Having regard to the matters discussed earlier in some detail (and except for the considerations arising out of the nature of the plaintiff company) I do not consider that the defendant has made out a case for relief. In reaching this conclusion I have had particular regard to my findings that the defendant:
deliberately and persistently failed to observe a direction of the board of directors;
knowingly caused the plaintiff to assume a high degree of risk by, in effect, allowing Promco to incur an unusually large debt in circumstances in which the main hope of payment depended on Promco's ability to re-finance. The defendant, at no time, was in a position to make an informed assessment concerning that ability;
failed to provide the board of directors or the court with a satisfactory explanation of his conduct.
Nor do I regard the defendant's conduct as reasonable.
I now turn to the defendant's submission that relief should be given on the basis that the defendant, being an equal owner of the plaintiff, has directly suffered half the loss arising as a result of trading with Promco. If it was correct that, by being an equal shareholder with Ampol, Greenslade suffered half the loss caused by Promco's default, it would be reasonable, in my view, to afford the defendant some relief. Not to do so would result in a windfall to the other shareholder of the plaintiff. It would also cause the defendant's loss as a shareholder to be magnified. However, the facts are such that the extent, if at all, to which the defendant will be treated unjustly if some relief is not given having regard to the corporate structure is by no means clear. The accounts of the plaintiff for the year ended 30 June 1991 show that the Promco debt of $2,206,593.70 and other debts of $158,559.00 were written off as bad debts in that year. That contrasted with a figure of $11,065 written off for bad debts in the previous year. The profit and loss account of the plaintiff for the year ended 30 June 1991 showed an operating loss after income tax of $191,940 and accumulated losses at the end of the financial year of $1,527,668. The corresponding figures for the year ended 30 June 1990 were $970,019 and $1,335,728. The Promco bad debt written off amounted to approximately 78% of the net profit on trading for the year ended 30 June 1991 on a turnover of $84,803,109.00.
On 1 April 1987 Greenslade Nominees Pty Ltd (“Greenslade”) and Ampol Limited entered into a deed (referred to as “the shareholders' agreement”) under which they agreed to ensure that the company would declare annual dividends -
“... in respect of the ‘A’ and ‘B’ class shares at an amount calculated in accordance with the following formula:
D = _ (A-B)
where
A is the net profit after tax
B is the good will written off over ten (10) years.
D is the dividend to be declared.”
By another deed entered into between Ampol and Greenslade on 1 April 1987, Greenslade granted Ampol an option to acquire Greenslade's shares in the capital of the plaintiff for a purchase price of $1,400,000, exercisable by notice in writing at any time prior to 31 March 1992. The option was exercised and, in consequence, Greenslade sold its shares in the capital of the plaintiff to Ampol pursuant to a share sales agreement dated 31 March 1992. The balance sheet of the plaintiff as at 30 June 1991 showed total shareholders' equity of $4,522,534 and $4,714,474 as at 30 June 1990. The balance sheet as at 30 June 1989 showed total shareholders' equity of $5,684,493 and $5,734,691 as at 30 June 1988. The evidence of rapidly increasing sales tends to suggest that it would have seemed probable to the defendant and Ampol representatives at relevant times that Ampol would exercise the option in due course. However the evidence is not sufficient to permit me to make such a finding. I therefore propose to approach the matter merely on the basis that Ampol had an option which gave it the right to acquire Greenslade's shares upon exercise of the option at any time prior to 31 March 1992. Also, the financial impact on the shareholders of the writing off of the Promco bad debt was not developed in evidence, or addresses, beyond reference to existence of losses against which future profits could be offset for tax purposes.
In these circumstances, it seems to me to be appropriate that I give the parties an opportunity to make further submissions on this aspect of the case. Also relevant to the relief which ought be afforded the plaintiff is the profit, if any, which Ampol derived from selling to the plaintiff the petroleum products re-sold by the plaintiff to Promco.
Claim for relief under Article 66.1
The defendant argued that if found liable he was entitled to an indemnity under this provision. The article is quoted earlier in these reasons. The defendant cannot succeed on this basis because the article expressly provides that there is no entitlement to any indemnity under the article “in respect of (the defendant's) own negligence, default, breach of duty or breach of trust”. There is some authority, as noted earlier, for the proposition that breach of duty is sufficiently broad to accommodate breach of contract. In any event, the word “default” is a word of wide enough meaning to extend to breach of contract. See Woolworths Ltd v Crotty (1942) 66 CLR 603 at 620 and 623.
The defendant's claim for contribution or indemnity
The defendant contends that if the defendant is found liable then it will have been found also that the defendant “was out of control” and was seen in this light by his co-directors. In those circumstances, it is submitted, the Ampol directors had power under article 44 to replace the defendant and should have done so. Instead they merely “sat by, watched him ignore them, and plunged the company further and further into unsecured debt”.
I am unable to accept these submissions.
Mr Nagel was appointed under article 35.6. There were three votes to be exercised at any meeting of directors, that of the A directors, that of the B directors, and Mr Nagel's. Mr Greenslade however was a longstanding client of Mr Nagel and it could not be expected that Mr Nagel would be ready to act so as to remove the defendant as managing director of his client company. More importantly though, none of the Ampol directors were executive directors of the plaintiff. The defendant was its managing director with the carriage of the day to day running of its business. He was the effective founder of the plaintiff and had been instrumental in appointing its staff. He gave assurances to his co-directors from time to time as to his ability to get the matter under control. His co-directors expressed appropriate concern at relevant times but the defendant chose to ignore the clearly expressed wishes of his fellow directors in relation to relevant matters.
Allegations of failure to mitigate
The defendant alleged that the plaintiff had failed to mitigate its loss. He particularised these allegations as follows -
“The plaintiff failed to mitigate its loss and damage by the decision of the second and third defendant by a counter-claim taken at meeting of the board of directors of the plaintiff on 23 January 1990 to refuse to consider any offers made by Promco International Corporation for the acquisition of its business.”
This matter, although the subject of some evidence in chief and in cross-examination, was not developed by Mr Cooper in argument. No doubt, that was because there was no evidence to support it. The evidence did not support any conclusion that it was commercially unwise for the plaintiff not to have pursued the acquisition of Promco's business or that there was any offer made by Promco in relation to the acquisition of its business which merited acceptance by the plaintiff.
The alleged lack of standing on the part of the plaintiff
It was submitted on behalf of the plaintiff -
“The directors of the company at the time the action was commenced did not make the decision to sue and did not know who did. Given that the articles confer control of the company's affairs upon the directors, this is simply unbelievable.
Perhaps the action was commenced upon the instruction of an employee of Ampol or an employee of Pioneer. But there is simply no evidence that it was an authorised officer of the plaintiff.
An action brought in the name of a company by a person, not for the benefit of the company but for the benefit of that person or another, and without the company's authority, must be dismissed.”: Old Welshman's Reef Company v Bucirde (1881) 7 VLR (E) 115.
The matter was not raised by the defendant on the pleadings. If it had been, and if there was substance in the defendant's submissions, there would have been no obstacle to the plaintiff's ratifying the conduct of its agents. Any such ratification would have taken effect retrospectively. 1(2) Halsbury's Laws of England 4th ed. (Reissue) paragraphs 72 and 84. Accordingly, I find no substance in this contention.
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