Craddock v Sweeney

[2005] QSC 37

SUPREME COURT OF QUEENSLAND

CITATION:

Craddock v Sweeney [2005] QSC 037

PARTIES:

CHRISTOPHER JOHN CRADDOCK
(applicant)
v
PAUL DESMOND SWEENEY, LIQUIDATOR OF BLUEGUM INTERNATIONAL MARKETING PTY LTD ACN 107 543 877 (IN LIQUIDATION)
(respondent)

FILE NO:

BS5850 of 2004

DIVISION:

Trial

PROCEEDING:

Application

ORIGINATING COURT:

Supreme Court, Brisbane

DELIVERED ON:

2 March 2005

DELIVERED AT:

Brisbane

HEARING DATE:

4 November 2004

JUDGE:

Douglas J

ORDER:

Application dismissed.

CATCHWORDS:

CORPORATIONS – CONSTITUTION AND LEGAL CAPACITY – PARTICULAR ARTICLES – CONSTRUCTION – Where constitution indemnified directors, secretary and executive officers against any “Liability incurred by them by virtue of their holding office as, and acting in the capacity of, director, secretary or executive officer of the Company” – Where liability defined to include “cost or expense” – Whether legal costs incurred by a director were incurred in respect of a liability or a liability incurred by virtue of holding office and acting in the capacity as a director.

CORPORATIONS – CONSTITUTION AND LEGAL CAPACITY – INTERNAL DISPUTES – GENERAL – Deadlock among management and board leading to winding‑up – Where some legal expenses were incurred in exploring the possibility of an oppression action.

CORPORATIONS – MANAGEMENT AND ADMINISTRATION – DIRECTORS AND OTHER OFFICERS – AUTHORITY AND POWERS – Where legal fees claimed were incurred in a personal capacity.

CORPORATIONS – WINDING-UP – WINDING-UP BY COURT – GROUNDS FOR WINDING-UP – INSOLVENCY – Where dispute as to whether a sum was a loan or a capital contribution paid in advance pending completion of a share allotment caused deadlock of board but not contested at winding-up application.

CORPORATIONS – WINDING-UP – LIQUIDATORS – PROVISIONAL LIQUIDATORS – OTHER MATTERS – Where provisional liquidator advised director it did not approve claimed costs incurred – Where no estoppel.

Corporations Act 2002 (Cth) s471A(2)

Talbot v NRMA (2000) 34 ACSR 650, considered

COUNSEL:

P G Bickford for the applicant
M K Stunden for the respondent

SOLICITORS:

Clayton Utz for the applicant
McCullough Robertson for the respondent

1. DOUGLAS J:  The applicant, Mr Craddock, was a director of Bluegum International Marketing Pty Ltd (“BIM”), a company in liquidation.  The respondent, Mr Sweeney, is its liquidator.  On 25 August 2004 Mr Craddock lodged a proof of debt with the liquidator for $133,698.33, said to be legal costs he had incurred for “Performance of duties as director and secretary of company under article 24 of the constitution between dates of 1 June 2004 and 4 August 2004”. 

1. Article 24 of BIM’s Constitution reads, in part, as follows:

“24.2     Indemnity for legal costs

The company shall indemnify each director, secretary and executive officer to the maximum extent permitted by law, against any Liability for legal costs incurred by them in respect of a Liability incurred by them by virtue of their holding office as, and acting in the capacity of, director, secretary or executive officer of the Company ...”

1. It is additional to Article 24.1 which provides an indemnity to each director, secretary and executive officer against any “Liability incurred by them by virtue of their holding office as, and acting in the capacity of, director, secretary or executive officer of the Company ...”. Pelion is piled upon Ossa by the definition of “Liability” in Article 24.9, which includes “cost or expense”.  It seems to me, however, to remain a necessary prerequisite for the indemnity to operate that the costs be incurred by virtue of Mr Craddock holding office as, and acting in the capacity of, a director of BIM.

1. The proof of debt had several tax invoices attached from Mr Craddock’s solicitors for legal fees incurred by him during the period from 1 June 2004 to 4 August 2004.  They were addressed to Mr Craddock personally and deal with a variety of matters, including the winding up of BIM, possible oppression proceedings in respect of its operations, disputes with Mr Robinson, the other director of BIM, and an entity called SV Partners.  The solicitors’ retainer was said to be to act for Mr Craddock in relation to the affairs of BIM and another company, Robinson Craddock & Associates Pty Ltd, “which may include preparing and conducting Court applications to wind up one or both of the aforementioned companies”. 

1. The proof of debt was rejected by the liquidator for this reason:

“Article 24 of the Constitution of the company when read in its entirety contemplates the directors being indemnified in respect of actions being brought against them by external parties as a result of their conduct or actions as directors.  It does not contemplate a proceeding such as the one that was brought.  Further the Order of 4 August 2004 makes no provision for costs.”

1. That decision needs to be set in its context.  As well as being a director of BIM, Mr Craddock was also a director of its sole shareholder, Robinson Craddock.  He was also the sole shareholder of a 50% shareholder of Robinson Craddock, Stepha Investments Pty Ltd.  Mr Craddock’s co-director of BIM and Robinson Craddock was Mr Robinson.  He and his wife held the shares in the other 50% shareholder of Robinson Craddock.  There was a conflict between Mr Craddock on the one hand and Mr Robinson and another director or purported director in respect of the management of BIM.  This led to a deadlock and the appointment of a provisional liquidator on 7 July 2004.  The liquidation was instigated by a creditor and supported by the directors other than Mr Craddock because of the internal management deadlock of BIM and its alleged insolvency. 

1. There is evidence that at that time the company was insolvent.  Bluegum Beef (Qld) Pty Ltd (“BBQ”) was said to have advanced $251,713.39 to BIM which BIM was unable to repay, having only $145,000.00 in its bank account.  Its assets and liabilities were otherwise approximately equivalent to each other.  The issue whether the amount of $251,713.39 was a loan or a capital contribution paid in advance pending completion of a share allotment by BIM to BBQ was one of the matters in dispute between Mr Craddock, Mr Robinson and a representative of BBQ, who seems to have begun to act as a director of BIM.  Those disagreements led to Mr Craddock’s exclusion from the management of BIM and his inability to obtain access to its business and financial records.  It was in that context that he sought legal advice.  When the company was put into liquidation, however, Mr Craddock chose not to resist the application and not to argue that the debt claimed by BBQ was not properly payable. 

1. The liquidator argues that his decision to reject the proof of debt was correct because, as his counsel put it in his outline:

“●         in incurring over $130,000.00 in legal costs in the space of just nine weeks, the applicant was not acting as a director pursuing a corporate purpose or legitimately preventing any unfair oppression on a minority by the majority of directors and shareholders;
●           put shortly, the applicant incurred significant legal costs in his own self interest;
●           the manifest commercial intent of article 24 does not impose an obligation enforceable against the company in the present circumstances, and thus the indemnity is not triggered;
●           there is no authority of the board for the incurring of the legal costs nor any prior consent of the provisional liquidator after 7 July 2004;
●           the applicant concedes no entitlement to costs after 4 August 2004;
●           Justice Holmes’ order having determined that the applicant’s costs should not be recoverable in the winding up, operates the (sic) prohibit the costs incurred by the applicant as a debt owed by BIM in the winding up;
●           admitting the proof will unfairly prejudice creditors.”

1. The first issue is whether cl. 24 of BIM’s Constitution entitles Mr Craddock to an indemnity in these circumstances.  The answer to that question will depend upon whether the legal costs incurred by Mr Craddock were incurred by him in respect of a liability or were a liability incurred by him by virtue of his holding office as and acting in the capacity of a director.  There was no relevant liability incurred by Mr Craddock other than the legal costs.  He was not sued, for example, for any action by him as a director of the company.  

1. The picture is complicated slightly by the definition of “liability” in cl. 24.9 of the Constitution to include “any … cost or expense”. The question may thus be restated by asking whether the legal costs incurred by Mr Craddock were a cost or expense incurred by him by virtue of his “holding office as, and acting in the capacity of” a director of BIM.  It is necessary that both of those conditions be met. 

1. No doubt the costs were incurred partly because his responsibilities as a director led him to seek advice.  He was not authorised by the company, however, to act in that capacity when he sought advice.  The fact that the company’s management was deadlocked prevented it from authorising him to act for it as a director in seeking advice.  The other director or directors were seeking their own advice elsewhere. 

1. There were negotiations on foot during this period for the sale of Mr Craddock’s shares to another party and for him to resign as a director of BIM and Robinson Craddock.  There was no attempt to break out from the claim such expenses as were clearly personal. 

1. If anything, it seems to me that Mr Craddock was acting in the capacity of a shareholder of a company that itself held shares in BIM’s only shareholder and as a minority director of BIM.  Nor did BIM authorise him to incur these costs by any necessary implication, so he cannot be said to have incurred them while acting in his capacity as one of its directors.

1. In the end he consented to the appointment of a provisional liquidator and to the winding up of BIM.  He did not seek his costs in the winding up.  That was in a context where Holmes J had given the applicant its costs and Mr Robinson his costs but expressly ordered that there be no order as to the costs of Mr Craddock.  Mr Craddock had been represented before her and that order was not opposed.  I infer it was not opposed because Mr Craddock realised that if he were to obtain those costs he would have to argue for them which would have involved traversing the whole history of the matter; see T55 ll. 15-20 of the transcript of the application before me.  That evidence is relevant to the conclusion I have drawn that Mr Cradock was acting in his own interest in incurring his legal costs rather than by virtue of his holding office as and acting in the capacity of a director of BIM. 

1. It may have been open to him to argue then that he was entitled to his costs of resisting the winding up on the basis that he honestly and reasonably believed that his duties required the incurring of that expense in the interests of the company; cf. Talbot v NRMA (2000) 34 ACSR 650, 654-655 at [22]-[25] per Hodgson CJ. His failure to do so militates strongly against treating them as an expense incurred by him in his capacity as a director.

1. It is also relevant that $67,799.00 of the costs claimed were incurred after Mr Craddock consented to the appointment of a provisional liquidator on 7 July 2004.  The provisional liquidator did not consent to the company incurring these costs.  He advised Mr Craddock by letter to that effect on 8 July 2004.  It advised Mr Craddock that directors cannot “incur any liabilities on behalf of the company”.  In those circumstances he cannot recover those costs; see s. 471A(2) of the Corporations Act 2002 (Cth) which prevents a person from exercising a function or power as an officer of a company while a provisional liquidator is acting. 

1. Nor is he estopped from relying on that section because Mr Craddock continued to incur legal expenses on the assumption that he was entitled to continue to do so.  Generally speaking, an estoppel cannot affect the operation of the law and the submission to the contrary here presupposes that the liquidator accepted that Mr Craddock was incurring expense for the company rather than because of his duties as a director of the company or because of his own self interest.  This goes against the terms of the liquidator’s letter of 8 July 2004. 

Conclusion

1. Accordingly, in my view, these costs were not incurred by Mr Craddock in respect of a liability incurred by him by virtue of his holding office in BIM and acting in the capacity of its director or secretary.  Nor have the liabilities incurred been authorised by BIM’s board or the provisional liquidator, nor were they sought before Holmes J in circumstances where it was open to argue that they might be paid.  It seems to me, therefore, that the liquidator’s decision was correct. 

1. I dismiss the application and shall hear the parties as to costs.