Cummings, J.P. & Anor v Claremont Petroleum Nl Fuller, M.J. & Anor v Claremont Petroleum Nl

Re: JOSEPH PATRICK CUMMINGS; JURISPRUDENCE PTY. LTD.; MICHAEL JOHN FULLER and
M.J. FULLER SERVICES PTY. LTD.
And: CLAREMONT PETROLEUM NL
Nos. SA G65 and 66 of 1992
FED No. 989
Number of pages - 34
Corporations
(1992) 9 ACSR 583

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Burchett(1), French(1) and Lee(1) JJ.

CATCHWORDS

Corporations - directors - breach of duties imposed by Companies Code s.229 - whether loss suffered by corporation by reason of breach - payments to directors - whether payments constituted a prescribed benefit in connection with retirement of directors.

Companies (Queensland) Code ss.229, 233, 539; sub-ss.229(1), (2), (4) and (7), 233(7)

Journal of Banking and Finance Law and Practice vol.3 (1992) 151

Aberdeen Railway Company v. Blaikie Brothers (1 Macq 461)

Abalos v. Australian Postal Commission (1991) 171 CLR 167

Australian Growth Resources Corporation Pty. Ltd. v. van Reesema (1988) 13 ACLR 261

Hospital Products Limited v. United States Surgical Corporation (1984) 156 CLR 41

Paterson v. Paterson (1953) 89 CLR 212

Re North Eastern Insurance Company Limited (1919) 1 Ch 198

The People's Prudential Assurance Co. Ltd. v. The Australian Federal Life and General Assurance Co. Ltd. (1935) 35 SR (N.S.W.) 253

Powell v. Streatham Manor Nursing Home (1935) AC 243

Southern Resources Ltd. v. Residues Treatment and Trading Co. Ltd. (1990) 8 ACLC 1,151

S.S. Hontestroom v. S.S. Sagaporack (1927) AC 37

Watt or Thomas v. Thomas (1947) AC 484

HEARING

PERTH

#DATE 17:12:1992

Counsel for the Appellants: Mr D.J. Bleby, QC and Mr S.P. White

Solicitors for the Appellants: Baker O'Loughlin

Counsel for the Respondent: Mr T.A. Gray, QC and Mr R.J. Whittington

Solicitors for the Respondent: Piper Alderman

ORDER

THE COURT ORDERS THAT:

1. Both appeals be dismissed.

2. In each appeal the appellants pay the respondent's

costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

BURCHETT, FRENCH AND LEE JJ. These two appeals were heard together by consent. The appellants seek to set aside judgments entered after a trial before a Judge of this Court in which the appellants "Cummings" and "Jurisprudence" on the one part and "Fuller" and "Fuller Services" on the other were separately represented. The appellants were not separately represented on the hearing of the appeals.

The respondent ("Claremont") is a public company listed on the Australian Stock Exchange. Cummings and Fuller were former directors of Claremont. Fuller Services and Jurisprudence are proprietary companies controlled by Fuller and Cummings respectively.
Claremont was incorporated in Queensland. All material events occurred before the 31 December 1990 and it was not in dispute before the learned primary Judge that the law to be applied was the law as it stood under the Companies (Queensland) Code ("the Code") at the relevant time.
The learned primary Judge found that payments made by Claremont to Fuller Services and to Jurisprudence at about the time Fuller and Cummings ceased to act as directors of Claremont were paid in contravention of s.233 of the Code and, therefore, the payments were held in trust for Claremont by those companies. His Honour also found that by their acts as directors in respect of those payments or by the agreements out of which the payments arose Fuller and Cummings had breached the duties imposed upon them by s.229 of the Code and that they were liable to pay to Claremont the sums paid to Fuller Services and Jurisprudence.
Fuller was admitted as a solicitor in 1964 and practised until 1985. Cummings was admitted as a solicitor in 1982 and practised until 1988. In April 1988 Cummings joined Fuller in the management of Cambridge Mining Services Pty. Limited ("Cambridge Mining"), a company which provided management services to a number of companies controlled by Independent Resources Limited ("IRL").
Fuller had been appointed Chairman of Directors of IRL in 1979. The offices of IRL and of the companies it controlled were situated in Perth. Cambridge Mining was based in Adelaide where Fuller and Cummings resided.
In 1987 IRL acquired 23 per cent of the issued shares of Claremont. Fuller was appointed as a director of Claremont and of its subsidiary Beach Petroleum NL ("Beach") in September 1987. In late 1988 IRL acquired a further 25 per cent of the issued shares in Claremont. In December 1988 two of the directors of Claremont including the managing director and the managing director of Beach resigned. Cummings was appointed as a director of Claremont and of Beach from the 1 January 1989.
From 1 January 1989 the directors of Claremont and of Beach were Fuller, Cummings and Sir Cecil Burney ("Burney"). Burney was also a director of IRL and had been appointed to the boards of directors of Claremont and Beach with Fuller in September 1987. Burney resided in the United Kingdom. An alternate director for Burney for Claremont and Beach was appointed on 3 May 1989. The alternate director, Main, was also a resident of the United Kingdom. His Honour found that between the 1 January 1989 and the 3 May 1989 Fuller and Cummings, acting as joint managing directors without formal appointment to that position, exercised "unfettered control" over Claremont and Beach.
Fuller and Cummings did not provide full-time services to Claremont and Beach. The offices and the staff of Claremont and Beach were in Sydney. When the managing director of Claremont retired on the 31 December 1988 he had been receiving a salary of $200,000 per annum. From the beginning of 1989 Fuller and Cummings, or perhaps Fuller Services and Jurisprudence, received monthly payments equivalent to annual payments to each of $100,000 per annum paid for the services provided to Claremont by Fuller and Cummings. Claremont and Beach received substantial income from interests they held in oil and gas wells in production.
Between February and May 1989 Cummings, and perhaps Fuller, gave instructions to the solicitors retained by Claremont to prepare draft agreements under which Claremont would engage Jurisprudence and Fuller Services respectively to provide "consultancy services" to Claremont and under which Claremont would provide motor vehicles for the use of Cummings and Fuller in return for their services as directors.
After several drafts had been prepared and amended by Fuller and Cummings, four engrossed agreements were ready for execution in early April 1989.
Two of the agreements ("the consultancy agreements") provided for Fuller Services and Jurisprudence respectively to be engaged to provide services to Claremont for a period of five years from the 1 January 1989. The consultancy agreements did not provide for termination upon notice other than notice based on the liquidation of either party or the failure of a party to remedy a breach of the agreement when required to do so (Cll.7, 8). The two consultancy agreements were in identical terms. Fuller Services and Jurisprudence undertook a parallel obligation to provide services relating to administration, maintenance of financial records, provision of reports and the undertaking of projects or tasks as assigned by the directors.
Under the heading "Termination Penalty" Jurisprudence's consultancy agreement contained the following clause (an identical clause, mutatis mutandis, was contained in the consultancy agreement with Fuller Services):
"9.1 If the Engagement is terminated:

(a) by Claremont other than pursuant to

Clause 7; or

(b) by Jurisprudence pursuant to Clause 8;

then Claremont shall, as and by way of agreed and assessed damages for such termination pay to

Jurisprudence an amount equal to $10,750 for each whole month of what would have then been the

unexpired term of the Engagement.

9.2 The amount due in accordance with the previous Clause shall be paid within 14 days of such

termination and shall bear interest at the rate of 1.5% per month from the due date until payment in full has been effected."

The other agreements ("the motor vehicle agreements") also were in virtually identical terms providing for Claremont to make available to Fuller and Cummings respectively a "current model imported motor vehicle of such manufacture to be mutually agreed" between Claremont and Fuller and Cummings. The motor vehicle agreements further provided that in the event of either Fuller or Cummings ceasing to be a director of Claremont for any reason other than death Claremont would transfer to him an unencumbered title to the relevant vehicle without cost.
By a letter dated the 11 May 1989 on the letterhead of Jurisprudence and signed by Cummings three of the four agreements were returned to the solicitors for Claremont with a request that appropriate "Circular Resolutions" be prepared "having regard to the identity of the executing parties and the various conflicts involved". Apparently the agreements had been executed by Fuller Services, Jurisprudence, Cummings and Fuller and the attestation clause for affixation of the common seal of Claremont had been completed by Cummings and/or Fuller and by Main without the common seal of Claremont being affixed. The letter went on to request that "the Minutes" be circulated for execution but did not advise the date on which a meeting of the directors of Claremont had been held to approve execution of the motor vehicle agreements by the company nor did it advise the content of any resolutions passed by the directors at such a meeting.
On the 6 June 1989 Burney resigned as a director of Claremont and of Beach and Main was appointed in his stead.
On the 19 June 1989 by a facsimile transmitted memorandum Cummings reminded Claremont's solicitors that he had requested "draft minutes" to be prepared "reflecting the various conflicts". He requested that the draft minutes be forwarded to Claremont's secretary. On the 20 June 1989 Claremont's solicitors responded by forwarding draft minutes to Cummings asking Cummings to advise the date on which the meeting had taken place and to confirm that the directors present at the meeting and the events of the meeting were as recorded in the draft. In due course minutes were prepared in final form signed by Fuller as Chairman and included in Claremont's records. The minutes recorded that the meeting of directors had taken place on the 4 May 1989.
The common seal of Claremont was affixed to the agreements by the secretary on or about the 26 June 1989. The manner of affixation of the common seal did not appear to comply with the Articles of Association of Claremont which required the seal to be affixed in the presence of at least one director and the instrument to be countersigned by the secretary of Claremont or by another officer appointed by the Board.
Cummings and Fuller gave evidence at the trial before the learned primary Judge that a meeting of the directors had been held on the 4 May 1989 as shown in the minutes.
His Honour decided the case on an assumption that such a meeting had been held but added that he was not satisfied that a meeting of the Directors had been held on the 4 May 1989 as claimed. His Honour's assessment was not a conclusive finding of fact and his Honour did not find that the meeting had not been held. In effect his Honour stated that if he were required to make such a finding the evidence adduced would have been insufficient to persuade him to find as a fact that the meeting had been held on that day.
At the commencement of the appeal the appellant sought leave to adduce fresh evidence said to be directed to a material finding by his Honour that no meeting of the directors of Claremont had been held on the 4 May 1989. The evidence sought to be adduced consisted of documents and an extract of a transcript of the evidence of a witness in another proceeding all of which were said to tend to show that Main was present in Australia, and in particular in Sydney, on the 4 May 1989. It was said that such evidence supported an inference that a meeting of directors of Claremont had been held in Sydney on that day as recorded in the minutes.
In his reasons his Honour had said that in the absence of evidence from Main there was nothing to corroborate the claim that Main was still in Australia in May 1989 but noted that on the other hand there was no evidence that Main was not in Australia on the 4 May 1989.
It is immediately apparent from the foregoing that even if the purportedly fresh evidence were received it would not be directed to an issue to be resolved in the appeal. His Honour made no finding of fact that Main was not in Australia on the 4 May 1989 and based no part of his decision upon a finding that the minutes were false or that a meeting of directors had not been held on that day.
Two further grounds sought to be relied upon in support of the application to admit the fresh evidence were that it would counter findings said to have been made by his Honour that Fuller and Cummings procured the appointment of Main as an alternate director to Burney in order that Main would be available to approve the agreements without reference to Burney and that Fuller and Cummings intended to take advantage of Main's lack of familiarity with the affairs and operations of Claremont.
Nothing in the material sought to be adduced is capable of adding anything to the matters relevant to the first of those grounds, nor has the material more than peripheral relevance to the second.
Furthermore, the important findings of his Honour on this point were that Fuller and Cummings had ample opportunity before the 4 May 1989 to seek the views of Burney on the proposed agreements and failed to do so and failed to give Main, as alternate director to Burney, an adequate opportunity to seek Burney's instructions on the agreements. The additional evidence sought to be adduced did not address those findings.
The application for leave to adduce fresh evidence is misconceived and it is unnecessary to assess whether the proposed evidence is capable of meeting the stringent tests for the admission of such evidence set out in Wollongong Corporation v. Cowan (1955) 93 CLR 435 and Orr v. Holmes (1948) 76 CLR 632.
His Honour held that the resolution of the meeting of directors on the 4 May 1989 that the quorum for a meeting of directors be reduced from three to two was valid and rejected the argument that Fuller and Cummings each had an interest in such a resolution so as to disqualify them from voting upon it. But in respect of the resolutions of that meeting that the common seal of the company be affixed to agreements for the supply of consultancy services to Claremont by Fuller Services and Jurisprudence and to agreements for Claremont to provide motor vehicles for the use of Fuller and Cummings, his Honour held that each of those resolutions was invalid notwithstanding that Fuller and Cummings respectively did not form part of the quorum which voted on the particular resolution in which each held a direct interest. His Honour found that the agreements were presented to the meeting, and dealt with thereafter, as a package of arrangements and that the relationship between Fuller and Cummings was such that in respect of each separate resolution by the directors of Claremont a quorum of disinterested directors was absent. (See Re North Eastern Insurance Company Limited (1919) 1 Ch 198.) His Honour held that by virtue of the disability of Fuller and Cummings none of the agreements was binding on Claremont. (See The People's Prudential Assurance Co. Ltd. v. The Australian Federal Life and General Assurance Co. Ltd. (1935) 35 SR (N.S.W.) 253 at pp 266-267.) Those findings have not been challenged on this appeal and we agree with them.
A ground of appeal that his Honour should have found that any irregularity arising out of the absence of a quorum at the meeting of directors held on the 4 May 1989 was a procedural irregularity capable of being cured under s.539 of the Code was not pursued on the hearing of the appeal.
In February 1990 Western Rare Earth NL made a takeover offer for the issued shares in IRL. The bid did not succeed but did result in a director of Western Rare Earth NL, Towner, having discussions with Fuller about the appointment of new directors to the boards of some of the companies controlled by IRL. In March 1990 Main resigned from the board of directors of Claremont. Towner was appointed to that board as chairman and Hebbard, a resident of the United States of America with experience in the oil industry, was appointed as an additional director at Towner's request. The board of directors of Claremont then comprised Towner, Hebbard, Fuller and Cummings. The same persons were the directors of Beach. In April 1990, at the instigation of Towner, Atkins, a chartered accountant resident in Perth, was appointed "group manager" for Claremont and Beach.
Between June 1990 and November 1990 Towner and Atkins raised with Fuller the prospect of Fuller ceasing to act as a director of Claremont. Atkins had plans for the restructuring of Claremont. The object of the reconstruction was to remove the influence of IRL from the board of directors of Claremont. It was said by Cummings in evidence that he was aware by September 1990 that if Atkins' proposals for Claremont were carried through he also would cease to be a director of Claremont and Beach.
In October 1990 an extraordinary general meeting of Claremont was requisitioned by a group of shareholders. The resolutions proposed to be submitted to that meeting were for the removal of the existing directors and the appointment of three new directors. The requisition was the culmination of disquiet expressed by a group of shareholders in respect of the administration of Claremont by Fuller and Cummings. That group was known as the Shareholders Action Group. On the 24 October 1990 the directors resolved that an extraordinary general meeting of Claremont be held in Sydney on the 7 December 1990. They also resolved that the annual general meeting of Claremont be held in Sydney on the 29 November 1990.
In October 1990 Fuller was involved in conversations with Atkins, Towner and Claremont's banker in respect of the composition of the board of Claremont. In those conversations Fuller made it known that he would accept Cummings and himself being excluded from a reconstructed board of directors provided that the new board did not include any representatives of the Shareholders Action Group.
On the 21 November 1990 Atkins distributed to the directors a memorandum in which it was recorded that Claremont's banker, also a shareholder, and Atkins were of the view that the "management contracts" made between Claremont and Fuller Services and Jurisprudence should be "cancelled" and Fuller and Cummings retire from the board of directors "without causing any undue trauma to the company". One of the proposals Atkins put to the directors for consideration was an agreement under which Fuller and Cummings would relinquish their entitlements under the motor vehicle agreements and would accept $250,000 as consideration for the termination of the consultancy agreements made with Fuller Services and Jurisprudence.
On the 23 November 1990 Towner, Fuller and Cummings met at Claremont's offices in Sydney and minutes of that meeting recorded that, with Fuller and Cummings abstaining, resolutions were passed to "cancel" the motor vehicle contracts with Fuller and Cummings and to terminate the "consulting arrangements" with Jurisprudence and Fuller Services by payment of the sum of $370,000 to Jurisprudence and $397,500 to Fuller Services. It was also recorded that Cummings and Fuller would purchase the vehicles provided for their use under the motor vehicle agreements for a consideration of $95,000 and $150,000 respectively.

There was a conflict of evidence as to the discussions which took place at this meeting. Towner said he made it clear to Fuller and Cummings that the payments proposed to be made by Claremont would not be made unless Fuller and Cummings resigned as directors. On the other hand Fuller and Cummings said that nothing was discussed about their resignation as directors. His Honour found that Towner's evidence was to be preferred and that it had been made apparent to Fuller and Cummings on the 23 November 1990 that their resignations as directors were part of the package.
On the 26 November 1990 Towner, Hebbard, Fuller and Cummings met in Adelaide as directors of Claremont. Atkins was also present. Towner and Atkins gave evidence that part of the meeting involved discussion of arrangements for Fuller and Cummings to retire from the board of directors of Claremont. Fuller and Cummings denied that was so.
His Honour found that the agreements executed by Claremont, Jurisprudence, Fuller Services, Fuller and Cummings on the 26 November 1990 ("the Termination Deeds") gave effect to what had been agreed on the 23 November 1990 and were part of a comprehensive scheme for the termination of all associations between Fuller and Cummings and Claremont. His Honour found as follows:
"The payments were not made in direct consideration of their

retirement from their directorships. They were made in return for a bundle of undertakings, one of which was an undertaking by each man to relinquish office as a Claremont director within the near future. The payments were also made, and received, pursuant to a common expectation that, in any event and having regard to the balance of power amongst the shareholders, Messrs Fuller and Cummings would not long remain as directors. For both of these reasons, the payments had to do with their retirement as directors; they were 'connected with' those retirements within the meaning of s.233."

The moneys were paid and the vehicles disposed of in the terms of the Termination Deeds.
At the time of execution of the Termination Deeds in November 1990 the unexpired remainder of the term of the consultancy agreements was thirty-seven months. The amount then payable under cl.9 of those agreements, therefore, was $397,750. As stated earlier, the amounts negotiated to be paid under the Termination Deeds were $397,500 to Fuller Services and $370,000 to Jurisprudence.
If Fuller and Cummings intended to remain as directors there would have been no need to take any steps to terminate the motor vehicle agreements. In fact the motor vehicle agreements were not formally terminated. Apparently they were abandoned by Claremont, Fuller and Cummings. On the 26 November 1990 Claremont, Fuller Services and Jurisprudence executed agreements pursuant to which Fuller Services and Jurisprudence acquired Mercedes-Benz motor vehicles from Claremont in return for payment of the sums of $150,000 and $95,000 respectively. It appears the vehicles described were those that had been made available to Fuller and Cummings under the motor vehicle agreements.
At the annual general meeting of Claremont held on the 29 November 1990 Cummings retired as one of the two directors required to retire by rotation at that meeting. He had nominated for re-election on the day before the meeting of directors held on the 26 November 1990. Cummings did not withdraw his nomination at the annual general meeting. Candidates for election to the board were voted upon in separate motions sequentially and a candidate was declared elected as a director if the majority of the votes cast on the motion approved the appointment. Cummings exercised the votes attached to his own shareholding by voting for the election of Atkins and another. The two candidates for whom Cummings voted were duly elected and the two vacancies on the board filled before Cummings' nomination was put to the meeting.
Fuller resigned as a director of Claremont on the 6 December 1990, the day before the extraordinary general meeting. He was not one of the directors required to retire by rotation at the annual general meeting held on the 29 November 1990.
The principal grounds of appeal were, firstly, that his Honour erred in finding that the benefits paid to Fuller Services and Jurisprudence constituted a loss suffered by Claremont as a result of contraventions of s.229 of the Code by Fuller and Cummings. Secondly, it was said that his Honour erred in finding that the consultancy agreements and motor vehicle agreements conferred unreasonable benefits on the appellants or, alternatively, if the benefits were properly held to be unreasonable his Honour erred in holding that entry into the agreements by Claremont could constitute a breach of s.229 of the Code by Fuller and Cummings. Thirdly, it was argued that his Honour erred in finding that the benefits paid to Fuller Services and Jurisprudence constituted a prescribed benefit in connection with the retirement of Fuller and Cummings as directors of Claremont pursuant to s.233 of the Code.
In respect of the first of those grounds it was argued that no chain of causation existed to link the acts of Fuller and Cummings alleged to have caused Claremont to enter into invalid consultancy agreements in May 1989 and alleged to be acts in breach of s.229, and the loss said to have been suffered by Claremont. It was said that the acts of Fuller and Cummings did not cause Claremont any detriment and if any loss occurred it did so by reason of the acts of the directors of Claremont in November 1990 in negotiating for, and causing Claremont to execute, the Termination Deeds which provided for payments to be made for the termination of invalid agreements.
The submission in support of that ground was a direct alternative to the argument that s.233 of the Code did not apply in so far as the submission contended that it was the intent of the directors of Claremont in November 1990 to pay whatever sum was required to secure the retirement of Fuller and Cummings as directors of Claremont thereby demonstrating that there was no causal link between the actions of Fuller and Cummings in May 1989 in respect of the execution of the agreements by Claremont and the execution of the Termination Deeds and payment of moneys to Fuller Services and Jurisprudence in November 1990.
It was further submitted that it had not been shown that the contraventions of s.229 of the Code found by his Honour, namely the failure by Fuller and Cummings to act honestly and to exercise a reasonable degree of care and diligence in the exercise of their powers and duties as directors and the improper use of their position as directors to gain directly or indirectly an advantage for themselves or their companies, brought loss or damage to Claremont as a result of those contraventions. It was said that it had not been shown that had the directors of Claremont who dealt with Fuller and Cummings in November 1990 been aware of those contraventions they would not have caused Claremont to make the payments agreed to be made under the Termination Deeds. It was said that in the absence of that evidence it could not be contended that the loss suffered by Claremont was "as a result of" the contravention of s.229 by Fuller and Cummings.
It was also submitted that if a contravention of s.229 of the Code had occurred the payments were made and loss suffered not as a result of that contravention but as a result of a mutual or common mistake as to the legal effect of the agreements made involving that contravention.
The learned primary Judge found as a fact that Claremont became committed to the agreements dated the 4 May 1989 because of the conduct of Fuller and Cummings and that such commitment caused Towner and Atkins, and through them Claremont, to offer payments to Fuller Services and Jurisprudence in amounts determined by reference to the "Termination Penalties" set out in those agreements.
It was part of the appellants' case at trial that the parties were aware of the provisions of s.233 of the Code and, in the words of his Honour, they were "anxious to ensure that the payments were related to the termination of the consultancy agreements and nothing else".
On the hearing of the appeal it was submitted that the learned primary Judge erred in failing to find that Atkins and Towner had not relied upon, nor felt bound by, the Termination Penalty provisions in the agreements. It was further asserted in support of that submission that Towner and Atkins had sought to negotiate a lower payment than provided in the agreements and had succeeded in doing so.
We see no inconsistency between the desire of Towner and Atkins to have Claremont pay less than the payments of "Termination Penalties" provided for in the agreements and a finding by his Honour that the payments offered by Claremont were determined by reference to those provisions which Claremont perceived to be a binding obligation. There was ample evidence to support a finding of reliance by Towner and Atkins on the binding nature of the consultancy agreements. Towner had legal advice that the consultancy agreements may "stand up" in Court and he wanted to achieve a settlement which encompassed the claims being made on Claremont under those agreements. His Honour accepted Towner's account.
Neither the offer of a payment less than the entire sum provided for in the agreements nor the desire to secure more than the termination of the consultancy services in return for such payments suggested that the amounts finally paid were unrelated to obligations perceived as arising from those agreements.
If any part of the appellants' submissions was predicated upon a premise that Claremont could only recover loss or damage under sub-s.229(7) of the Code upon proof of damages appropriate for the tort of deceit (see Gates v The City Mutual Life Assurance Society Limited (1986) 160 CLR 1) it was misconceived. The nature of Claremont's claim was to recover what it had paid to discharge claims able to be made on the company by reason of the conduct of Fuller and Cummings in breach of s.229. This was not a case such as Gates where in the absence of evidence it could not be said that the plaintiff had failed to obtain value for its payment or had missed an opportunity to obtain better value for that payment. In the present matter it was Claremont's case that it had paid moneys on claims promoted by Fuller and Cummings based upon obligations purportedly made binding on Claremont by the conduct of Fuller and Cummings in breach of s.229 of the Code, the obligations being contained in agreements now shown to be invalid. Claremont sought to recover the moneys paid as an entire loss sustained by reason of that conduct.
The learned primary Judge treated the existence of the "Termination Penalties" as the outcome of acts by Fuller and Cummings that were contrary to the interests of Claremont. It was implicit in his Honour's finding that Fuller and Cummings compounded that conduct by causing Fuller Services and Jurisprudence to rely upon the clauses inserted in those agreements for their benefit and to seek payments under them when those agreements were made invalid by virtue of Fuller and Cummings purporting to commit Claremont to the agreements when they were disabled by a position of conflict from so acting. It was for those reasons that his Honour treated any payment based on the "Termination Penalties" as a loss suffered by Claremont. It was irrelevant to that finding that the parties may have entered a binding bargain in which they may have agreed upon the payment of a reasonable sum upon early termination of an agreement for the provision of consultancy services. No question arose of the loss to Claremont being assessed as the difference between the payments actually made and some reasonable sum that may have been payable under some hypothetical agreement. The whole of the payments made to Fuller Services and Jurisprudence represented a loss suffered by Claremont as a result of the contravention of s.229 by Fuller and Cummings.
The second ground of appeal relied upon was that the learned primary Judge had erred in finding that the consultancy agreements and motor vehicle agreements conferred unreasonable benefits on the appellants. It was Claremont's alternative case at trial that Fuller and Cummings had contravened the provisions of s.229 of the Code by taking unreasonable benefits under those agreements at Claremont's expense.
His Honour opined that the proposition that s.229 of the Code would be contravened if a director received unreasonable benefits at the company's expense was strongly arguable but that in the end it was unnecessary to make any finding on that contention. It may be interpolated that, where directors have procured agreements with themselves, or with companies representing them, by resolutions passed in breach of their fiduciary duty, the onus, if any question arises concerning the reasonableness of the agreements, must be upon the directors. As will appear, the question does not normally arise because such agreements cannot be justified. The basis on which his Honour found that Fuller and Cummings had contravened the provisions of sub-ss.229(1), (2) and (4) of the Code was that the benefits obtained in the form of payments made in termination of the consultancy agreements had been procured by conduct of Fuller and Cummings that breached the provisions of s.229. The nature of that conduct was that Fuller and Cummings had taken no steps to have an independent appraisal made of the terms of the agreements they caused Claremont to execute despite their awareness of the obvious conflict presented by the pursuit of their personal interests and performance of their duties to Claremont. Furthermore, his Honour found that Fuller and Cummings undertook a course of conduct designed to prevent an independent assessment of those benefits being made. In particular, between February and May 1989 they took no steps to allow their co-director, Burney, to be informed of, or express an opinion on, the proposed agreements.The receipt of an unreasonable level of benefit may help to show that directors have failed to act honestly or failed to exercise a reasonable degree of care and diligence in the exercise of their powers or have improperly used their position as directors to gain an advantage for themselves, but establishing that the benefits were reasonable would not preclude a finding that the directors had so acted in contravention of s.229 of the Code if the manner in which those benefits were obtained rested on the type of conduct his Honour found had occurred.
As Lord Cranworth said in Aberdeen Railway Company v. Blaikie Brothers (1 Macq 461, 471):
"A corporate body can act only by agents, and it is of course the

duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into."

It almost goes without saying that it was extraordinary conduct by Fuller and Cummings as executive directors of Claremont in a fiduciary relationship to fail to instruct Claremont's solicitors to include provisions under which Claremont could terminate contracts for a consultant's services upon reasonable notice and, at the same time, to act contrary to their obligations to Claremont by providing for Claremont to be subjected to a liability in pre-estimated damages in a substantial sum if Claremont shortly after executing the agreements decided that the services provided by Fuller Services and/or Jurisprudence lacked sufficient benefit or utility to Claremont to warrant continuing them. Such conduct demonstrated a lack of exercise of a reasonable degree of care and diligence in the exercise of powers and discharge of duties as directors and could be taken into account with other evidence in deciding whether as directors Fuller and Cummings had at all times acted honestly in the exercise of those powers or had made improper use of their position as directors to gain an advantage for themselves or each other. (See Australian Growth Resources Corporation Pty. Ltd. v. van Reesema (1988) 13 ACLR 261 per King C.J. at p 272.)
This was a case in which much turned upon the assessment the learned primary Judge made of the credit of the witnesses before him part of which may have been grounded upon an impression gained from observing the demeanour of witnesses. His Honour was obviously unimpressed by both Fuller and Cummings in many respects and unless it is shown that the trial Judge palpably misused the advantage he enjoyed in that regard it is not open to an appeal court to reverse findings he has made based upon such an assessment of witnesses and the evidence they have given. (See Abalos v. Australian Postal Commission (1991) 171 CLR 167; Paterson v. Paterson (1953) 89 CLR 212; Southern Resources Ltd. v. Residues Treatment and Trading Co. Ltd. (1990) 8 ACLC 1,151 at pp 1,163-1,164.) As Lord Sumner stated in S.S. Hontestroom v. S.S. Sagaporack (1927) AC 37 at p 47:
"If his estimate of the man forms any substantial part of his reasons

for his judgment the trial judge's conclusions of fact should, as I understand the decisions, be let alone."

and as Lord Atkin said in Powell v. Streatham Manor Nursing Home (1935) AC 243 at p 255 the appellate court "can never recapture the initial advantage of the judge who saw and believed".

The inferences drawn by his Honour were peculiarly a matter for him in so far as they depended upon assessments of the worth and credit of witnesses.
The appellants contended that the findings of the learned primary Judge on the credit of Fuller and Cummings were coloured by a belief that the benefits received by them under the agreements were excessive and that they had acted dishonestly in negotiating the execution of the agreements.
As to the former point it is clear that the provisions which were included in the agreements on the instructions of Fuller and Cummings described as "Termination Penalties" were unduly onerous on Claremont and potentially excessive as a purported pre-estimate of damages. As we have said already that was a matter the learned primary Judge was obliged to consider. Secondly, the matter of the honesty of the actions of Fuller and Cummings was part of the issue his Honour had to decide. It begs the question to say that his Honour's impression of Fuller and Cummings was coloured by the conclusion that they had not acted honestly.
In the course of the appeal the appellants submitted that the learned primary Judge had erred in finding that directors' reports signed by Fuller and Cummings as part of the 1989 and 1990 Annual Reports of Claremont were false where they indicated that benefits received by directors were disclosed elsewhere in the accounts. His Honour had to deal with the Annual Reports in deciding that the benefits paid to Fuller Services and Jurisprudence were not exempt benefits within the meaning of sub-s.233(7) of the Code. The appellants do not now argue that the benefits received were exempt benefits. Any finding of falsity in the Annual Reports, therefore, is not an issue in this appeal. In so far as it may be said that his Honour's finding may have affected the view his Honour took of the reliance he could place on the evidence of Fuller and Cummings, we are satisfied that the content of the directors' reports was not the foundation of the assessment his Honour made of Fuller and Cummings as witnesses but in any event, if anything turned on it, we would not be satisfied that it was shown that his Honour erred as a matter of substance in his treatment of the directors' representations in those Annual Reports.

With regard to the finding that Fuller and Cummings had breached sub-ss.229(1), (2) and (4) of the Code, it is to be remembered that the foundation of the statutory provision is the fiduciary relationship between a company and its directors. The object of s.229 of the Code is to provide a statutory re-statement of that duty with attached criminal responsibility and a statutory right for a company to recover compensation for loss or damage suffered as a result of a breach of that duty. It is unnecessary for the purpose of this appeal to consider the consequence for construction of the section of the merger of concepts of civil and criminal responsibility. (See Southern Resources Ltd. v. Residues Treatment and Trading Co. Ltd. (supra) at pp 1,166-1,168; Fisse, "The Criminal Liability of Directors: Honesty and Dishonesty in Law and Corporate Law Reform", Journal of Banking and Finance Law and Practice, vol.3 (1992) at p 151.)
One of the prime duties of a fiduciary is to avoid putting himself in a position of conflict of duty and interest, or at any rate to avoid advancing his personal interest by pursuing a gain in circumstances in which there is a conflict between his duty and his interest. (See Hospital Products Limited v. United States Surgical Corporation (1984) 156 CLR 41 per Mason J. at p 103.) In the present case not only was a gain pursued by Fuller and Cummings by means involving such a conflict, but it was open to the learned primary Judge to conclude that as directors they acted in defiance of knowledge that they were disabled from acting by reason of that conflict.
In addition to the clear conclusion that Fuller and Cummings failed to exercise a reasonable degree of care and diligence, there was ample material upon which his Honour could find that they had also failed to act honestly in the exercise of their powers and in the discharge of their duties of office and had made improper use of their position as directors to gain a direct or indirect benefit to themselves or each other.
The duties imposed on a director are stringent with good reason and having regard to the breadth of the right developed by the doctrines of equity to recover losses caused by and gains received by errant fiduciaries there is no reason to expect that the scope of s.229 was intended to be in any way narrow or limited. Fuller and Cummings were experienced commercial solicitors and Fuller, at least, an experienced director. These were matters to be taken into account when determining whether they had exercised a reasonable degree of care and diligence and had at all times acted honestly in the exercise of their powers as directors when they had put themselves in a situation where their personal interests conflicted plainly with the interests of the public company they served.
Finally it was submitted that there was no "justification" for a finding by the learned primary Judge that the termination payments constituted "prescribed benefits" given in connection with the retirement of Fuller and Cummings as directors of Claremont.
It was not in issue that the question whether there had been a breach of s.233 of the Code was an issue of fact to be determined upon the evidence and that if the evidence of Towner and Atkins were to be accepted it would follow that their evidence would describe the true character of the payments and that prescribed benefits had been paid to Fuller Services and Jurisprudence contrary to s.233 of the Code.
The submissions in respect of this ground really depended upon the other submissions already dealt with to the effect that the learned primary Judge had failed to assess appropriately the credibility of Fuller and Cummings as witnesses.
His Honour accepted the evidence of Towner unreservedly. That evidence was to the effect that the negotiation of the termination payments was directly linked to the retirement of Fuller and Cummings from the board of directors of Claremont.
His Honour was entirely unimpressed by the evidence of Fuller and Cummings in that regard. In a matter where the evidence of witnesses is in direct conflict and the primary Judge prefers the evidence of one or more of those witnesses and is satisfied that their evidence is able to be relied upon to the exclusion of evidence with which it conflicts, it would be a rare case where an appeal court would be able to disregard such an assessment of the worth of the witnesses. This is not one of those cases. The submissions advanced in support of this ground of appeal were a reiteration of submissions put to the trial Judge as to why he should accept the evidence of Fuller and Cummings. The submissions do not demonstrate that the trial Judge was obliged to reject the evidence of Towner and Atkins because of its inherent or blatant improbability or that the learned primary Judge misused the advantage of his position by accepting that evidence. (See Watt or Thomas v. Thomas (1947) AC 484 at p 488.)
The appealls will be dismissed with costs.

[1992] FCA 989

17 DECEMBER 1992