Diakyne Pty Limited v Ralph - [2009] FCA 721

FEDERAL COURT OF AUSTRALIA
Diakyne Pty Limited v Ralph [2009] FCA 721
CORPORATIONS – directors’ duties – whether first respondent in breach of his duties as a director of the applicant in authorising and directing the payment of a bonus to the second respondent – whether any reasonable person exercising the powers and discharging the duties as a director of the corporation would have authorised or directed the payment to be made
CONTRACTS – contract providing for the services of managing director for a corporation – provision in contract entitling second respondent to a bonus payment subject to certain conditions – principles of construction of contracts – proper construction of bonus provision – whether conditions satisfied – whether second respondent entitled to bonus
A New Tax System (Goods and Services Tax) Act 1999 (Cth)
Corporations Act 2001 (Cth)
Australian Securities and Investments Commission v Macdonald (No 11) (2009) 71 ACSR 368; [2009] NSWSC 287
Overend & Gurney Co v Gibb (1872) LR 5 HL 480
Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd (2004) 12 BPR 22,879; [2004] NSWCA 114
Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler and Others (2002) 41 ACSR 72; [2002] NSWSC 171
Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359
Vrisakis v Australian Securities Commission (1993) 11 ACSR 162
Walker v Wimborne (1975) 137 CLR 1
DIAKYNE PTY LIMITED (ACN 099 168 402) v PAUL RONALD RALPH and COLORADO INVESTMENTS PTY LIMITED (ACN 063 688 611)
NSD 465 of 2008
JAGOT J
7 JULY 2009
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 465 of 2008

BETWEEN:
DIAKYNE PTY LIMITED
(ACN 099 168 402)
Applicant

AND:
PAUL RONALD RALPH
First Respondent

COLORADO INVESTMENTS PTY LIMITED
(ACN 063 688 611)
Second Respondent

JUDGE:

JAGOT J

DATE OF ORDER:

7 JULY 2009

WHERE MADE:

SYDNEY

THE COURT DIRECTS THAT:
1.The parties prepare and file within seven days agreed draft orders reflecting these reasons for judgment for the applicant (including with respect to interest and costs).

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

The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 465 of 2008

BETWEEN:
DIAKYNE PTY LIMITED
(ACN 099 168 402)
Applicant

AND:
PAUL RONALD RALPH
First Respondent

COLORADO INVESTMENTS PTY LIMITED
(ACN 063 688 611)
Second Respondent

JUDGE:

JAGOT J

DATE:

7 JULY 2009

PLACE:

SYDNEY

REASONS FOR JUDGMENT

This proceeding involves a payment of $110,000 from the applicant, Diakyne Pty Limited (Diakyne), to the second respondent, Colorado Investments Pty Limited (Colorado), on 30 November 2007.
The first respondent, Paul Ralph, is the sole director of and holder of 99% of the shares in Colorado. Between 3 January 2002…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2009] FCA 721
Decision Date: 7 July 2009

CaseChat Overview and Summary

Diakyne Pty Limited, an Australian company, brought a case against Ralph, its former director and executive chairman, in relation to a bonus payment made to a company named Colorado, which was owned by Ralph. The dispute centred around the authorisation of the bonus payment and whether Ralph breached his duties under the Corporations Act 2001 (Cth). The Federal Court was tasked with deciding whether Ralph authorised the bonus payment and whether he breached sections 180, 181, and 182 of the Corporations Act by doing so.

The court had to determine if Ralph, in his capacity as a director of Diakyne, authorised and directed the payment of $110,000 to Colorado. Diakyne argued that Ralph was responsible for the payment, but the respondents contended that the payment was authorised by Ms Liu and the board of Diakyne. The court found that Ralph, as a director, signed the resolution authorising the payment and the instruction to UBS Warburg to make the payment, thus establishing his authorisation and direction of the payment. The court held that Ralph's actions constituted the authorisation of the payment, despite the involvement of Ms Liu and the board of Diakyne.

The court also considered whether Ralph breached his duties under sections 180, 181, and 182 of the Corporations Act. Diakyne claimed that Ralph breached these duties by authorising the bonus payment, as he had a material personal interest in the subject matter of the judgment. The court noted that the "business judgment rule" in section 180(2) of the Corporations Act did not apply to Ralph, as he had a material personal interest in the payment. Consequently, the court found that Ralph breached his duties under the Corporations Act by authorising the payment.

The Federal Court ordered that the parties prepare and file agreed draft orders within seven days, reflecting the reasons for judgment in favour of Diakyne. The orders would address interest and costs associated with the case. This decision reinforces the importance of directors adhering to their duties under the Corporations Act and the consequences of failing to do so.

Orders

Orders of the court

1. The parties prepare and file within seven days agreed draft orders reflecting these reasons for judgment for the applicant (including with respect to interest and costs).

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

Background

Background to the litigation

I deal with the subsidiary issues (such as the question of the GST of $10,000 on the bonus payment) as part of the principal issues. The question of damages (as claimed by Diakyne and Colorado) is dependent upon the resolution of the principal issues. PRIMARY FACTS Although the evidence ranged widely, the primary facts of relevance to the resolution of this dispute are within a narrower compass. Diakyne was developing a pathology analytical tool known as “TraceSmart” for use in the health care industry. Developing and marketing this technology required further investment. Mr Ralph, who was appointed Diakyne’s executive chairman on 16 January 2006, took action to secure further investment. By mid-March 2007 Mr Ralph was in discussions with Stephen Copulos. Mr Copulos was the managing director of a group of investment companies known as the Copulos Group. Mr Copulos subsequently invested in Diakyne through a company which Mr Copulos controlled. By mid April 2007 Mr Ralph was negotiating with Paul McPherson, a director and the chairman of the board of MediVac Limited (MediVac), a publicly listed company. MediVac’s business involved the development and supply of an apparatus for clinical waste management known as a “MetaMizer”. The negotiations concerned a deal by which MediVac would acquire all of the shares in Diakyne in exchange for freshly issued shares in MediVac. On 28 May 2007 MediVac and the shareholders of Diakyne executed heads of agreement by which MediVac was to acquire, and the Diakyne shareholders to sell, all of the shares in Diakyne in consideration for shares issued in MediVac. While these negotiations were taking place, Mr Ralph assisted MediVac to raise funds through the separate issue of shares and the placement of convertible loans. A company in the Copulos Group made one such loan on or about 27 May 2009. On 1 June 2007 Mr Copulos was appointed a director of MediVac. MediVac made an Australia Stock Exchange (ASX) announcement on 29 May 2007 about the proposed transaction with Diakyne and the separate revenue raising by the share issue and placement of convertible loans. While these matters were occurring, Mr Ralph was also negotiating the terms of the Colorado contract with the other directors of Diakyne. On 27 June 2007 MediVac and the Diakyne shareholders executed a share sale agreement (the share sale agreement). The share sale agreement was subject to conditions precedent (cl 3). The agreement provided for the issue of shares in MediVac in consideration for the sale of all shares in Diakyne (cl 4). By this means, Diakyne would become a wholly owned subsidiary of MediVac and the shareholders in Diakyne would become the majority shareholders in MediVac. Clause 4 operated by reference to “consideration shares” which cl 15 defined as involving a ratio of 8.75 shares in MediVac for each share in Diakyne. Clause 13(b) recorded the intention of Diakyne’s shareholders that the fair market value of the “consideration shares” be equal to the fair market value of the shareholder’s proportion of the Diakyne shares. Clause 15.1 specified the completion date as the latter of the satisfaction or waiver of all conditions precedent and the fifth business day, or such other business day as the parties may agree, from the date that the shareholders of MediVac approved all necessary resolutions in respect of the transaction as referred to in the conditions precedent.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

JAGOT J

As to GST, the terms of cl 6.1 of the Colorado contract support Diakyne’s construction. Clause 6.1(a) refers to the sum of $240,000 being exclusive of GST. There is no equivalent reference in cl 6.1(d) or Annexure B. The natural and ordinary meaning of the clause is that any bonus payment is inclusive of GST. It is not to the point that Diakyne may receive an input credit if its pays the GST on any bonus payment. The issue is Colorado’s entitlement. On the proper construction of cl 6.1, I am satisfied that the bonus payments are GST inclusive.Conclusion about Colorado’s entitlement From these reasons it follows that Colorado was not entitled to any bonus payment in accordance with cl 6.1(d) of the Colorado contract and paragraph 1 of Annexure B thereto.DID MR RALPH AUTHORISE OR DIRECT THE MAKING OF THE PAYMENT? The respondents submitted that Diakyne’s case was misconceived because the resolution to pay the bonus payment was authorised by Ms Liu and the board of Diakyne, not Mr Ralph. Further, Mr Ralph and Ms Brodie, in forwarding the instruction to pay the bonus to UBS Warburg, were acting as agents of Diakyne’s board in implementing the board’s resolutions. Mr Ralph also gave evidence denying that he had authorised any payment to Colorado and expressing the view that Ms Liu had authorised the payment. Although there were some conflicts in the evidence about exactly what Mr Ralph said to Ms Liu on 30 November 2007 and what Ms Liu said and did in response, the relevant facts are beyond argument. Acting in his capacity as a director of Diakyne, Mr Ralph personally prepared and signed the resolution authorising the payment of $100,000 to Colorado and personally signed the instruction to UBS Warburg to pay Colorado $110,000. The fact that Ms Liu also authorised the payment (I note, at Mr Ralph’s request) does not mean that Mr Ralph did not authorise and direct the making of the payment. The resolution required two signatures. One such signature was Mr Ralph’s. His signature, as well as Ms Liu’s, made the resolution operative. I infer that the instruction to UBS Warburg also required two signatures. Mr Ralph signed the instruction to pay the bonus and requested Ms Brodie to do so, thus making the instruction operative. In these circumstances the respondents’ submission that Ms Liu or the board of Diakyne authorised the payment and not Mr Ralph defies the reality of what occurred on 30 November 2007. The board of Diakyne authorised the payment because Mr Ralph exercised his powers as a director of Diakyne to sign the resolution having that effect. As noted, he also requested Ms Liu to sign the resolution and Ms Brodie to sign the instruction to pay. The involvement of Ms Liu and Ms Brodie in no way removes or alters the character of Mr Ralph’s own involvement. Mr Ralph, acting in his capacity as a director of Diakyne, thus authorised and directed the payment of $110,000 to Colorado on 30 November 2007.DID MR RALPH BREACH SS 180-182 OF THE CORPORATIONS ACT?Statutory provisions and principles concerning breach

Ratio Decidendi

Legal Principle Established

Established by: JAGOT J

In these circumstances the respondents’ submission that Ms Liu or the board of Diakyne authorised the payment and not Mr Ralph defies the reality of what occurred on 30 November 2007. The board of Diakyne authorised the payment because Mr Ralph exercised his powers as a director of Diakyne to sign the resolution having that effect. As noted, he also requested Ms Liu to sign the resolution and Ms Brodie to sign the instruction to pay. The involvement of Ms Liu and Ms Brodie in no way removes or alters the character of Mr Ralph’s own involvement. Mr Ralph, acting in his capacity as a director of Diakyne, thus authorised and directed the payment of $110,000 to Colorado on 30 November 2007.DID MR RALPH BREACH SS 180-182 OF THE CORPORATIONS ACT?Statutory provisions and principles concerning breach Diakyne claimed that Mr Ralph breached his duties as a director, being those duties specified in the following provisions of the Corporations Act:180(1)A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a)were a director or officer of a corporation in the corporation's circumstances; and (b)occupied the office held by, and had the same responsibilities within the corporation as, the director or officer. …181(1)A director or other officer of a corporation must exercise their powers and discharge their duties: (a)in good faith in the best interests of the corporation; and (b)for a proper purpose. …182(1)A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a)gain an advantage for themselves or someone else; or (b)cause detriment to the corporation. Diakyne claimed an entitlement to damages by way of compensation on the basis that ss 180(1), 181(1) and 182(1) are each civil penalty provisions (ss 1317DA and 1317E(1)(a)). Section 1317H of the Corporations Act is as follows:1317H(1)A Court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if: (a)the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and (b)the damage resulted from the contravention. The order must specify the amount of the compensation. There was no debate between the parties that the protection of the “business judgment rule” in s 180(2) of the Corporations Act was not available to Mr Ralph. This provision provides that a director is taken to have complied with s 180(1) if he or she makes a business judgment (that is, any decision to take or not take action in respect of a matter relevant to the business operations of the corporation) in certain circumstances. One of the required circumstances is that the director “not have a material personal interest in the subject matter of the judgment” (s 180(2)(b)). In the present case Mr Ralph had a material personal interest in the making of the payment of $110,000 from Diakyne to Colorado as he is the sole director (and effectively sole shareholder) of Colorado.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 465 of 2008

JUDGE:	JAGOT J
DATE OF ORDER:	7 JULY 2009
WHERE MADE:	SYDNEY

JUDGE:	JAGOT J
DATE:	7 JULY 2009
PLACE:	SYDNEY