Doyle v Australian Securities and Investments Commission
[2005] HCATrans 871
[2005] HCATrans 871
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Perth No P41 of 2005
B e t w e e n -
ALAN DAVID DOYLE
Appellant
and
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
First Respondent
DEREK WILLIAM SATTERTHWAITE
Second Respondent
GLEESON CJ
GUMMOW J
KIRBY J
HAYNE J
CALLINAN J
TRANSCRIPT OF PROCEEDINGS
AT PERTH ON MONDAY, 24 OCTOBER 2005, AT 10.11 AM
Copyright in the High Court of Australia
MR M.J. McCUSKER, QC: May it please the Court, I appear with my learned friend, MR K.L. CHRISTENSEN, for the appellant. (instructed by Christensen Vaughan)
MR K.J. MARTIN, QC: May it please your Honours, with my learned friend, MS C.H. THOMPSON, I appear on behalf of the first respondent. (instructed by Australian Securities and Investments Commission)
GLEESON CJ: I understand there is a submitting appearance for the second respondent.
MR McCUSKER: The second respondent is at the back at the Court but does not wish to attend.
GLEESON CJ: Yes, Mr McCusker.
MR McCUSKER: May it please your Honours, this is an appeal from the Full Court of the Supreme Court of Western Australia. The grounds of appeal are set out at pages 401 and 402 of the appeal book. There are few, if any, facts in dispute in terms of the narration of facts between the appellant and the respondent. If I could take your Honours to the chronology of events just to explain very briefly the background to all this. They occurred over a very narrow compass of time. The essential issue is whether the appellant in attending and, as it was found, voting in a sense at meetings ‑ ‑ ‑
KIRBY J: What do those words mean, “in a sense”? This is quite important to me.
MR McCUSKER: Certainly, your Honour. There was no formal vote taken – that was what was found – but it was held by the trial judge that the appellant by his attendance and participation at the directors’ meetings effectively voted at the meetings.
KIRBY J: There was a documentation as on a vote that followed and ‑ ‑ ‑
MR McCUSKER: There was, indeed, your Honour.
KIRBY J: ‑ ‑ ‑ it was endorsed by your client.
MR McCUSKER: That is so, your Honour, yes. We do not challenge the finding that there was a vote. That issue is no longer an issue before this Court.
GLEESON CJ: Whatever happened at the meeting, pursuant to whatever happened at the meeting, the $400,000 went back.
MR McCUSKER: It was, yes. The question is whether that participation by the appellant, Mr Doyle, at those meetings constituted a breach of the provision which prohibited a director from making improper use of his position to gain – that is said to be a purpose here – an advantage for a third party, in this case the allottees, and indeed his company, Doyle Capital Partners.
KIRBY J: There was no declaration of his interest. I think you say everyone knew it.
MR McCUSKER: We do not only say it, your Honour. The court below said it too. It was absolutely apparent because he had written the letter which appears at appeal book page 246 on behalf of the allottees, including Doyle Capital Partners, seeking the return of the funds by reason of the failure of the condition or representation. So Alan Doyle as director wrote it. There was no question of any misapprehension as to his position and his interest in the return of the funds.
GLEESON CJ: Did the primary judge make any finding as to when the company became insolvent?
MR McCUSKER: There was a finding, your Honour. I will see if I can get the relevant date.
GLEESON CJ: Thank you.
KIRBY J: Does the statute require some formalisation of declarations of interest?
MR McCUSKER: It does, indeed, your Honour.
KIRBY J: I think you drew my attention to that case of Kelly v Woolworths that I wrote so long ago, but I read it again this morning and they still represent my views.
MR McCUSKER: I had apprehended they would, your Honour.
KIRBY J: The problem with clubbish atmospheres is that people not doing things formally in this area is dangerous.
MR McCUSKER: Yes, I do understand that and we do not contend that there was an effective compliance with section 232A(3) but we do say that it is relevant for the purpose of determining whether an improper use was made of his position to know that there was no concealment of his interest. In fact, everyone knew what his interest was. So although we do not contend that he was entitled to vote and therefore it must follow that he was in breach because of the finding that he did vote he was in breach of section 232A(1) of the Act and not excused by any formal compliance with section 232A(3) of the Act, it really still comes down to this. A director at a meeting of directors, where his interest is clearly disclosed and is known but not ‑ ‑ ‑
KIRBY J: It was not disclosed in the sense at the meeting. That is the purpose of the statute to focus everyone’s attention at the meeting to the fact that there was a conflict.
MR McCUSKER: The letter was produced at the meeting, your Honour, and the letter signed by him makes it clear beyond any doubt and, indeed, Satterthwaite, the director who originally was found guilty but ultimately on appeal was found not to be guilty, so the trial judge and in turn the Court of Appeal said, was acutely conscious of the conflict of interest which Mr Doyle had.
It was for that reason that on 22 November, despite there having been a meeting of directors attended by Doyle and a further circular resolution, Satterthwaite managed to communicate with the other director, Mr Mountford, who was in South America, and they had a teleconference at which it was explained what the position was. The appellant was said to have participated in that also, and we do not challenge that finding. Mr Mountford, having had the position explained to him and the legal advice given, endorsed the decision to return the funds which had not at that stage been returned. Although a cheque had been drawn, the cheque had not been handed over to the appellant.
GLEESON CJ: I may have misunderstood something I read in the judgment of the primary judge, Mr McCusker, but there is a wider background to this, is there not? Is this not all going on in a context of a move by disgruntled minority shareholders to get rid of the board and of a circumstance in which Mr Mountford’s presence in Chile meant that he could not actually vote himself?
MR McCUSKER: That is right, because he could not be physically present.
GLEESON CJ: So if Doyle Capital Partners were going to get that $400,000 back, Mr Doyle had to do what he did, that is vote as a director.
MR McCUSKER: It is debatable, your Honour, whether he had to because it is a question of whether a director’s resolution as such was needed as distinct from a decision by directors to do something.
GLEESON CJ: That is why I was interested in the question of insolvency. Not only was this going on against a background of a move by disgruntled shareholders to get rid of the board, the company was, in fact, put under administration not long later because it was insolvent.
MR McCUSKER: Yes. The follow up to that, your Honour, is that the funds having been returned, that is the cheque was banked on I think it was 27 November, a dispute then followed and the company sought the return of the funds in a Supreme Court action and ultimately that dispute was resolved by the funds being returned, save for the $24,000 which was the agreed placement fee originally agreed to be paid to Doyle Capital Partners. The reason was that by that time it was not very long afterwards the share value had increased beyond the purchase price so that there was no point in the allottees resisting the claim for the return of the funds. They were happy to simply say, “All right, we will take our shares in exchange for these funds”. So that the purchase price paid for the shares ultimately was less than the market price of the shares.
But your Honour is quite right, there was this background where there were disgruntled shareholders seeking a spill of the board and a purpose – clearly it was of great importance to the allottees who were supportive of the proposal for what I might call the Chile venture. It was very important for those allottees to have shares that could be voted at the general meeting so as to ensure that (a) the directors that they favoured and who in turn favoured the Chile venture would remain on the board; and (b) that the Chile venture proposal would be approved.
Now, when the shares were allotted to them, as has been found by the court below and not in issue here, the shares were allotted to them on the basis that they could be voted and would rank pari passu, which meant voted and traded. When the ASX moved in and announced that that could not be done, it meant that both of those representations, or conditions if you like, on which the shares had been allotted had failed. It was our submission at the trial and before the Court of Appeal that the allotment was therefore voidable and by the letter that I have taken your Honours to, the letter from Mr Doyle on 21 November, he on behalf of all the allottees elected to avoid the allotment.
CALLINAN J: Mr McCusker, I wonder if I can just understand some of the facts a little better. What was the paid‑up capital of the company before the injection of the $400,000?
MR McCUSKER: I will get that for you in a moment, your Honour.
CALLINAN J: The price of the acquisition of the interest in the Chile venture, was that $140,000 or do I have a nought in the wrong place?
MR McCUSKER: I think it was greater than that but, again, your Honour, I will ‑ ‑ ‑
CALLINAN J: I am looking at page 364: 35,000,00 ordinary fully paid shares in the company at 4 cents each. What is 4 cents by ‑ ‑ ‑
MR McCUSKER: Sorry, 364 at 21?
CALLINAN J: At 21. In any event, perhaps you do not have to spend any time on it now but I would like to know what the arithmetic is. I would like to know what the paid‑up capital was at the time, what the price of the acquisition in the Chile interest was and I would also like to know what Mr Satterthwaite’s relationship was with the Chile venture and perhaps something about the state of the accounts after the injection of the $400,000. Do not worry now but at some stage I would like to know those matters.
MR McCUSKER: Yes, certainly, your Honour.
KIRBY J: Could you help me. The questions the Chief Justice asked about the two background factors, the looming insolvency and the disgruntled shareholders, do they help you or do they cause a problem from the point of view of the words “in proper use of his position”?
MR McCUSKER: We would submit, with respect, that they are neutral in that regard.
KIRBY J: Do they not suggest in each of them that compliance with the formalities quite strictly was required in such a circumstance, lest there subsequently be proceedings just of the kind that have occurred?
MR McCUSKER: Your Honour, without any doubt compliance with the formalities would have been highly desirable. It was highly imprudent for that not to have occurred and there is no question but that ‑ ‑ ‑
KIRBY J: Do you think company directors throughout the nation know of these requirements? I mean, that it could have been done in a particular way and you wonder, I suppose, the board just requires them to know it and comply with it.
MR McCUSKER: Well, there is no doubt, with respect, that it could have been complied with and would have been had the matter been raised. For example, if Mr Murphy or, indeed, Mr Nash who was there for a time had said to the directors ‑ ‑ ‑
KIRBY J: “You have to do it this way.”
MR McCUSKER: ‑ ‑ ‑ “This is the way you have to do it”, but as it was everyone knew that Mr Doyle had this interest in the outcome and everyone knew that he had a conflict of interest. Now, it was said that he did not actually vote but the facts go against us on that, the findings go against us. So we are left in this situation, that certainly if – can I come perhaps directly to that point because it is a matter which is of some interest.
If Mr Doyle had complied or the company had complied with 232A(3) by a formal declaration of his interest and a formal resolution of the directors agreeing that he should attend and vote, would that have meant that he was not in breach of section 232(6) of the Act? Now, on the reasoning of the Court of Appeal, the answer would be, yes, he would not be in breach because the Court of Appeal found that there was improper use of his position by reason of what the court called an independent impropriety, that is the mere fact or the fact of a breach of the requirements of section 232A(1) and a failure to deal with that by 232A(3) declaration meant that he had made improper use in terms of section 232(6).
KIRBY J: It is more than that because when Justice McLure turned to the question of penalty she said it was a very serious breach.
MR McCUSKER: Yes, and therefore ‑ ‑ ‑
KIRBY J: As it happened, she reduced the penalty but ‑ ‑ ‑
MR McCUSKER: From two years to six months, yes.
KIRBY J: Yes.
MR McCUSKER: But that goes to penalty and we are not appealing ‑ ‑ ‑
KIRBY J: I realise that, but she obviously thought that this was a very serious breach. She said so. What I am curious to get into an understanding of is if it is in a sense simply a failure to comply with formalities, then it is not really such a serious breach.
MR McCUSKER: That, of course, was our submission on behalf of the appellant before the Court of Appeal.
GLEESON CJ: But, Mr McCusker, did you have a disinterested quorum in the absence of Mr Doyle?
MR McCUSKER: No.
GLEESON CJ: Then how could the directors have complied with section 232A(3)? Mr Doyle would have had to be one of the directors ‑ ‑ ‑
MR McCUSKER: He would have, indeed.
GLEESON CJ: ‑ ‑ ‑ forming the judgment that his interests should not disqualify him.
MR McCUSKER: The only way they could have done that, I think, was to call back Mr Mountford. You are quite right, your Honour.
GLEESON CJ: Yes. So if you had no disinterested quorum of directors, at the moment I having difficulty understanding how you could have complied with section 232A(3) and, if that is right, I do not understand the talk about formalities.
MR McCUSKER: No, your Honour is quite right. I stand corrected. It goes deeper than that. Because of the difficulty that they faced where there were only two directors present in Perth. Doyle, your Honours will be aware, was a director for a very short period of time. He was appointed initially as an alternate director and subsequently he was appointed as a director for the purpose of the forthcoming annual general meeting and he remained as a director for a period of about eight days.
KIRBY J: And the annual general meeting was looming, was it not?
MR McCUSKER: It was. It was held on 22 November.
KIRBY J: I suppose that is the theory of what should have been done, go to the shareholders.
MR McCUSKER: Yes, but it should have – yes, that is right, your Honour, it should have gone to the shareholders but ‑ ‑ ‑
HAYNE J: Sorry, what should have gone to the shareholders?
MR McCUSKER: What was sought to be put to the shareholders were a number of things which ultimately were withdrawn because of the inability of – what was sought to be put to shareholders was the question of whether the shares were validly allotted. It was sought to validate those. But it could not be put to the shareholders, but the question of whether Mr Doyle could vote at the directors’ meeting was not put to shareholders and I am not sure that it could have been.
HAYNE J: Why would that have assisted the position had the shareholders resolved one way or the other?
MR McCUSKER: It would not have, your Honour, no. It could not have. The company was faced with a situation where it had one director on the ground effectively – that is Satterthwaite – and one director in Chile and Mr Doyle appointed initially as alternate and then as a director for a short period.
GLEESON CJ: As I understand it, because the man in Chile could not vote, you needed Mr Doyle’s vote to get an effective resolution of the directors on anything.
MR McCUSKER: Indeed, yes.
GLEESON CJ: That is why Mr Doyle had to do what he did to get the $400,000 back.
MR McCUSKER: Well, that may not be so, your Honour, because it is not necessarily the case that you need a resolution of directors to pay money that the company is obliged to pay. It could have been done but was not, in our submission, by Mr Satterthwaite speaking to the other director, Mr Mountford, and agreeing that in the circumstances the demand should be met, but not every ‑ ‑ ‑
HAYNE J: The demand is more than a demand for money, is it not? It is a demand, amongst other things, to rectify the register.
MR McCUSKER: It is.
HAYNE J: Now, how can that be done by the chief executive officer, assuming this company had one, on his/her own behalf? Did you not have to go to the board?
MR McCUSKER: It could be done in two steps though, your Honour. The money could be returned. The question of rectification of the register would still have to be dealt with by a resolution of directors, but certainly it was the case that for a resolution of directors to be passed there needed to be at least two directors physically present and we only had one without Mr Doyle.
GLEESON CJ: And you needed a disinterested quorum to get a resolution under section 232A(3)(b).
MR McCUSKER: That is so, and Mr Doyle could not vote for that purpose.
KIRBY J: That cannot be done under the law by video link or something of that kind?
MR McCUSKER: The provision said physically present.
KIRBY J: Why are you not physically present by telecommunications?
CALLINAN J: The articles expressly said you were not unless there was a quorum otherwise. That appears at page 261 of the trial judge’s reasons.
MR McCUSKER: So it could not be done and so the company was faced with this. There was a demand and a threat of action and a primary question which was litigated before the trial judge in the Court of Appeal was whether the allottees were entitled to avoid the allotment that was made on the grounds that were found to be valid grounds.
GUMMOW J: Was there any relief directed to 232A? There was a claim for it.
MR McCUSKER: It was abandoned, your Honour.
GUMMOW J: That was abandoned?
MR McCUSKER: Yes.
GUMMOW J: So it appears sideways, as it were?
MR McCUSKER: Yes. We accept that on the findings of the trial judge and Court of Appeal there was clearly a breach of section 232A(1) – no doubt about that – but before the trial judge and again on appeal the respondent did not press for any declaration under 232A(1). The approach that was taken was the breach of section 232A(1) of itself is the impropriety aimed at by section 232(6).
GUMMOW J: But 232A would attract the general penalty provision, would it not, 1311?
MR McCUSKER: Yes, it would. It would attract the general penalty provision. The question would be whether that of itself would give rise to the kind of penalties that were imposed by reason of a breach of section 232(6), which is generally viewed as a much more serious breach.
GUMMOW J: Yes, which was, what, 1317E(a)?
MR McCUSKER: Yes, 1317E(a).
GUMMOW J: Yes, I see.
MR McCUSKER: That general penalty applies to both 232A(1) and 232(6). There is no distinction between them. It is entirely discretionary as to what penalty then is imposed within those provisions.
GLEESON CJ: Is there a typographical error on page 396, line 26? No, it is “an authorised reduction of capital”.
MR McCUSKER: Yes, “an authorised”.
GLEESON CJ: So you succeeded in the Court of Appeal on the issue of whether, to put it around the other way, this was an unauthorised reduction of capital?
MR McCUSKER: We did, yes, your Honour. Our contention before the trial judge was that there was no unauthorised reduction of capital as contended for by the respondent in its pleading. In its statement of claim at page 27 one of the particulars given, (c) at line 15, was:
that no prior court approval had yet been obtained, as required by CL s195 ‑ ‑ ‑
GLEESON CJ: But the basis on which you succeeded on the issue of whether there was an unauthorised reduction of capital was that this was a compromise of a claim ‑ ‑ ‑
MR McCUSKER: That is so.
GLEESON CJ: ‑ ‑ ‑ the claim being Mr Doyle’s claim against the company.
MR McCUSKER: The claim being Doyle and the other allottees, yes.
GLEESON CJ: Yes. Well, it was the circumstance that this was a compromise of Mr Doyle’s claim against the company that brought you undone on the main issue, was it not? In other words, you were out of the frying pan into the fire.
MR McCUSKER: It was the circumstances, yes, I think, but the question is whether – well, take it a step further. The appellant argued that the argument was never dealt with by the Court of Appeal that not only was there a valid compromise – that was really a fallback position – but that the allottees were entitled to the return of their money because the allotment to them was voidable.
Now, we have noted in our reply that in a similar case dealing with the question of whether or not there had been an unauthorised reduction of capital – that is the case of Commonwealth Homes – two of the Justices in that case, Chief Justice Latham and Justice Dixon, as he then was, said that in the circumstances of that case, where the condition on which the allotment had been applied for and made had failed – or the representation which was made, whatever way one puts it, was not made out, the return of the allotment moneys was not an unauthorised reduction of capital, not only for the reason that there was a bona fide compromise of the claim for the return, but because the allotment was indeed voidable. Similarly here, the appellant’s contention was that the allotment was voidable or, in any event, if not voidable, there was a bona fide compromise of the claim.
The trial judge did not deal with the question, although it was in issue, as to whether the allotment was voidable. He did deal with the question of whether it was a bona fide compromise, but held it was not. The Court of Appeal held that it was a bona fide compromise but said that it was not going to deal with it because it found it unnecessary to do so, the question of whether the allotment was voidable.
GLEESON CJ: But it was its character as a compromise of a claim by Mr Doyle’s interests against the company that disqualified Mr Doyle from voting.
MR McCUSKER: Yes, it did, your Honour, but if the allotment was voidable as we contend, if it was voidable, then the question is whether what he did was using his position to gain an advantage for the allottees. The question then is, what is meant by “an advantage” in these circumstances if the allottees are entitled to the return of their money on the ground that the allotment was voidable.
KIRBY J: Yes, but cutting through the red tape and getting a big fat cheque in the mail sounds awfully like an advantage.
MR McCUSKER: It does the way that your Honour picturesquely describes it, but the question is, if you get your money back and you are entitled ‑ ‑ ‑
KIRBY J: You say you have to analyse it legally and it is not a legal advantage because it was his entitlement anyway.
MR McCUSKER: Yes, it was their entitlement to the return of their money.
KIRBY J: But the Act is addressed to – I mean, we have to look not just at this case but at how company boards and directors are supposed to operate in Australia.
MR McCUSKER: Certainly.
KIRBY J: Though it has to apply the law to this case, we have to solve this problem by reference to how the law of proper conduct by directors is supposed to operate and cutting the corners, though there is a conflict of interest, getting the cheque seems to be getting an advantage for yourself, especially because there is a lot of money involved and it saves any doubt and you get it in your pocket.
MR McCUSKER: There is that view of it, your Honour, but the other view is, if a person is entitled to be repaid money which was paid on a condition which has failed, then to have the money repaid, so far as that person is concerned, is no advantage. It is simply an entitlement.
GLEESON CJ: You may be right about that, but that issue was never, as it were, resolved in either of the courts below, was it?
MR McCUSKER: No, it was not, your Honour, and it was not – well, so far as the trial judge was concerned, he simply put it to one side and did not deal with it, although the point was raised fairly and squarely by the defence and was raised again by the notice of appeal, that it was a voidable transaction, void or voidable, and it was argued before both the trial judge and the Court of Appeal ‑ ‑ ‑
KIRBY J: It is just a matter of law, is it not ‑ ‑ ‑
MR McCUSKER: It just a matter of law.
KIRBY J: ‑ ‑ ‑ applying the Act to the facts which are not really in dispute.
MR McCUSKER: Indeed, yes.
KIRBY J: You make a lot of play, and I think with some force, that the premise of Justice Roberts‑Smith’s opinion was that there was an unauthorised reduction of capital and that that was very relevant to improper advantage. Once you knock that away, then you have removed one of the premises on which that was decided.
MR McCUSKER: Your Honour, with respect, yes, and it was a major premise. It was not the only premise but it was a major premise of the argument against the appellant.
KIRBY J: I think that is a very powerful argument myself at the moment and yet Justice McLure thought that it was an improper advantage, indeed, a serious improper advantage. So presumably her view was that the way this was gone about and the way you cut the corners and got the money back, though you were a director voting in a matter that affected your interests, is a serious breach of the standards that are expected of directors.
MR McCUSKER: I am not sure that that is so, your Honour. At page 373 where at paragraph 54 her Honour said:
It was part of the appellants’ pleaded case that the placement was void or voidable.
That puts it beyond any doubt.
The trial Judge found that the placement was not void, but made no finding on whether it was voidable. On these issues, the parties . . . relied on bare, undeveloped assertions of a conclusion.
In a sense that is true because we submit, and submitted there, that it was beyond debate that the allotment was voidable and had been avoided by reason of the failure of this condition which the trial judge and the Court of Appeal found was an important matter. It was important to the allottees that they be able to vote these shares. It was a major purpose in the allotment being made to them that they could vote those shares. Coming back to the point your Honour the Chief Justice made to me, the importance stemmed from the fact that there was this dispute between dissident shareholders. So there was a great importance attached to it and her Honour said, at page 374 at paragraph 55:
The trial Judge found that the Company had represented to Doyle that the shares would rank pari passu with existing shareholders and I infer that is a finding of a representation for which rescission is theoretically available. He also found that the representation meant that the share “could be traded and voted”.
There is no dispute about that representation having been made, but her Honour then went on to say:
As formulated, the proposition is on its face too wide. DCP was, to its knowledge, purchasing shares in a listed company. It is an implied term of the contract between a shareholder and a listed company that the company with ASX listing rules. The listing rules empower ASX to act in ways that result in different treatment of shareholders . . . Further, ASX has a discretion in relation to the quotation of securities after admission. If the reason for the ASX action in relation to the placement resulted only from the Company’s breach of LR 7.1 (and I am unclear on this), the representation may be read down in that light. If the trial Judge had gone beyond a consideration of whether the placement was arguably voidable, he would have had to turn his mind to these issues as well as the availability of rescission.
Now, this question of whether the voidability was qualified by the listing rules is a matter which was not in issue before her Honour; it was simply that her Honour concluded that she was:
not satisfied that this Court can or should make a finding on whether the placement was voidable.
So it was left up in the air. Now, the facts as found, in our submission, point without any doubt towards a legal conclusion that the allotment was voidable.
GLEESON CJ: This might bring us to the legal point. It sounds a bit like a claim of right.
MR McCUSKER: Yes.
GLEESON CJ: Suppose we were to come to the conclusion – and I am not suggesting it would necessarily be the right conclusion – that Mr Doyle’s company was entitled to rectification of the share register, cancellation of the allotment of shares and the return of the $400,000. What, if any, consequence would that have for a conclusion about whether his breach of section 232A(1) and his related conduct involved improper, et cetera, advantage?
MR McCUSKER: In our submission, it would follow that if they were entitled, that is under a claim of right, for example, to the return, then what he did was not to gain an advantage for them. If the conclusion were that it was an advantage, one would have to say that it is an advantage to people to have their money returned when they are entitled to have it returned, and that cannot be – and also it impinges on the question of whether it was an improper use, because, can I put it this way, what the Court of Appeal said was that it was an improper use independently because of the fact that he had breached section 232A(1).
GUMMOW J: Where do they actually say that? That is the heart of the case really.
HAYNE J: Is it 382 at paragraph 75, the first three lines of that paragraph?
MR McCUSKER: Exactly, your Honour, yes.
HAYNE J: The relevant improper conduct being presence and voting.
MR McCUSKER: Yes.
HAYNE J: Improper because of breach of 232A(1).
MR McCUSKER: Yes. One might test it this way. Suppose Doyle ‑ ‑ ‑
GUMMOW J: The question of construction is whether any contravention of any other provision of the law, at least one which attracts the general penalty provision, is ipso facto improper.
MR McCUSKER: Yes, that is the question. Now, that question of what is improper was, of course, considered in the case on our list of Byrnes.
HAYNE J: Just before you come to look at the cases, can I just stay a moment with that question that Justice Gummow has asked of you. Does it mean that improper when used in 232(6) means any breach of a provision of the law punishable under the general punishment provision, for if it does, what is that saying about the relationship between the different penalty regimes that may be engaged in respect of 232(6) and other penal provisions in the law?
GUMMOW J: One of the things that worries me about this case is there has been no consideration at any level of the complicated structure of penalty provisions ‑ ‑ ‑
MR McCUSKER: No, there has not, I accept that.
GUMMOW J: ‑ ‑ ‑ and the light they throw on this question of construction and interrelation between 232A and 232(6). There is a temptation to get into cases ‑ ‑ ‑
MR McCUSKER: I accept that, your Honour.
GUMMOW J: ‑ ‑ ‑ on which I will say no more on this occasion.
KIRBY J: Not at the moment anyway.
MR McCUSKER: Not at the moment, no.
KIRBY J: The last line is interesting there. Her Honour goes on to say:
[Mr] Doyle’s control when the allottees had no established lawful entitlement –
So it is not just the breach but she is looking at the practicalities that there is no established lawful entitlement to it.
MR McCUSKER: Yes.
KIRBY J: That is really the cutting of corners idea.
MR McCUSKER: Yes. Your Honour, the question of impropriety it has been said, and, with respect, properly said, is to be determined in this context of 232(6) by reference to what a reasonable person would expect or would regard as improper use in all of the circumstances. So that to say, as the Court of Appeal said, that the question of whether or not it was voidable, even if later determined, as the court put it, that it was a voidable transaction, does not bear on the question of impropriety is to ignore, with respect, the assumed knowledge of a reasonable person that this was an allotment which was made on certain conditions which had failed, or representations which were not made out, and a reasonable person must be presumed to know the law.
If the legal position of the allottees was that they were legally entitled to the return of their money, then it is clear that if that was the legal position, it does not matter that it was not yet established in the sense of litigation. If it was in truth the legal position, then the question of impropriety fell to be judged by reference to that as one of the relevant circumstances. That is Doyle used his position certainly in breach of section 232A(1), but he used his position to ensure the return of money to which persons were lawfully entitled.
GUMMOW J: What is wrong with saying at paragraph 75 are these two grounds or one ground? What is the force of the sentence, “Such conduct was itself improper”?
MR McCUSKER: Yes, that is coming back to what your Honour said a little earlier.
GUMMOW J: Could she then have said, “That is it”? Then she goes on. What is the purpose of going on?
MR McCUSKER: It is improper as it breached section 232 – well, her Honour must go on to determine whether it was an improper use for the prescribed purpose.
GUMMOW J: It is going to advantage, is it?
MR McCUSKER: Yes, it goes to advantage.
KIRBY J: I take it maybe she is saying, “But if I am wrong in that, as a matter of statutory construction of section 232A(1), then looking at all the circumstances, as I am required to do, the fact that there was no established lawful entitlement makes it clear that in this case that it was improper because he was using his power to secure that advantage that was not yet established”. We all know that in this area you can have private legal advice but it turns out to be wrong later.
MR McCUSKER: Yes. However, if one is examining the question of whether ‑ ‑ ‑
KIRBY J: Mr Nash said that they could do it this way.
MR McCUSKER: Nash said they could do it, but Nash qualified his advice by saying, “But I think I will get a counsel’s opinion”. In the meantime ‑ ‑ ‑
KIRBY J: There had been an earlier advice, had there not, that said it could not be done?
MR McCUSKER: A partner of Nash, I think, or a member of the same firm, Ayres, said that in his view it would be an unlawful reduction of capital. There is no evidence that that information was ever conveyed to Mr Doyle however. The information that was conveyed to Mr Doyle was the advice that Nash gave and that advice was, “Yes, it is okay to return the funds but I am going to get an independent counsel’s opinion, so I think the money should be held in a trust account”, which turned out to be Doyle’s trust account, and that is the way it went. Then when counsel’s opinion was obtained, with which Doyle disagreed, Doyle did not return the funds.
The Court of Appeal in the course of argument, I think it was, said there is no evidence that Doyle agreed that he hold the funds and pay it back if some independent counsel said it had to be paid back, that it was simply agreed that the money would be paid out. So the question of him not paying it back did not become an issue in the case.
Can I just, taking up this question of independent impropriety, refer your Honours also to paragraph 73 at page 382, where at line 25 her Honour referred to the conduct as being “independently improper”. She said:
Where, as in this case, the conduct is independently improper, it is a short step from there to the conclusion that a person made improper use of his position for a proscribed purpose –
relying upon the case of Donald and, again, referring to Donald in the context of advantage, said:
Receipt of a payment to which a third party is entitled at law can be an advantage for the purposes of the section.
Pausing there, as we have put in our outline of submissions, it is true that in Donald’s Case the payments that were made which were said to be payments properly payable to various contractors by the company were nevertheless held to be an advantage, but close scrutiny of the facts in that case and the reasons shows that it was not merely of a payment of moneys due, there were several factors. One was that the director concerned, Donald, had never declared his interests in these payments and, second, the payments had gone through without the kind of scrutiny that was applied to all other invoices that came to the company and it was not established that those accounts had been, in fact, due and payable in the normal process.
So, for those reasons, the Queensland Court of Appeal held that in those circumstances Mr Donald, who had not declared his interest or even revealed his interest, had made improper use to advantage these companies in which he had interests.
KIRBY J: That was Justice McPherson’s decision, was it not?
MR McCUSKER: I think it was, your Honour.
KIRBY J: Is it worth our while having a look at what their Honours said about improper use, because there are some analogies between that case and this?
MR McCUSKER: Yes.
KIRBY J: Do we have that in Court?
MR McCUSKER: It should be in the bundle, your Honour. It is No 1 in the book of authorities. At page 684 – her Honour referred to that page at the end of paragraph 73 of her reasons at page 382.
KIRBY J: There were secret arrangements in that case, so the facts are a bit different to ours.
MR McCUSKER: There were. There were secret arrangements and that, in our submission, clearly distinguishes the facts in that case from this. They were secret arrangements. They were payments made to companies without any disclosure of his interest in those companies and there were payments made circumventing the usual procedures of checking the invoices to ensure that they were correct.
GLEESON CJ: I cannot find anywhere in the reasoning of the primary judge or the Court of Appeal, but I may have overlooked it, a consideration of the significance of the insolvency that occurred shortly afterwards. Was it put to your client in cross‑examination that he was acting for the purpose of getting back the $400,000 in circumstances where there might have been some doubt about its recoverability if these procedures had taken more time?
MR McCUSKER: I do not think so, your Honour, but I cannot be certain that it was not put in cross‑examination. What I can say is that the only use of that, the subsequent insolvency, was made of it was in the penalties.
CALLINAN J: Mr McCusker, it is almost touched upon, I think, at 283 in the trial judge’s reasons and it does not seem to go any further than the end of paragraph 105:
Were there funds in the company to do other things without the 400,000?---No.
It does not suggest that the company was then ‑ ‑ ‑
MR McCUSKER: No, it was not insolvent.
CALLINAN J: It does not mean the company was then insolvent, but it was obviously close to the line if it did not have money to drill, I think. Was that not the question?
MR McCUSKER: That is right. The company needed these funds – well, the purpose of the funds being paid, apart from shares being issued of course, was to enable the company to embark upon this new venture. If that was not going to happen, the allottees were not going to put the funds in. But when it was found that they could not vote and carry the day against the dissident shareholders, they said, “We want our money back”.
CALLINAN J: Did the company have anything else at all, apart from the Chilean prospect?
MR McCUSKER: I cannot answer that directly. There was not much going on.
CALLINAN J: Do not tell me if it is not in the evidence.
MR McCUSKER: There is an annual report which may assist, I think, your Honour, but there was not very much, from my recollection of it, that was occurring.
GLEESON CJ: There would not have been any doubt about advantages if this had been a preference, but there does not seem to have been a case put against you on the basis that this was a preference.
MR McCUSKER: It was not put against us on that basis, no, your Honour. It was not contended that this was a preferential payment. The only basis on which it was put was that this was an unlawful reduction of capital and in breach of section 195 as far as infringing the law is concerned.
HAYNE J: Then can I come back to this relationship of penalty issues. What is the penal regime for breach of 232A?
MR McCUSKER: I think it is 1317. Your Honour, rather than do it on the run, can I come back to that and answer that question fully?
HAYNE J: Yes, of course. It seemed to me that it was perhaps 1311 but, relevantly, the point to which I was coming was, at least as I read it, breach of 232A did not engage Part 9.4B of the law for civil and criminal consequences of contravening civil penalty provisions. Now, is that right or wrong? Where you go from there is that what is said to be a contravention of one penal regime founds entry into another radically different penal regime. Now, that at least presents a question of construing the Act which thus far everybody seems resolutely anxious to avoid.
MR McCUSKER: Your Honour, I am not resolutely anxious to avoid it and I accept that it is a very important question.
HAYNE J: Well, it does not seem to have been at the forefront of argument in the courts below.
MR McCUSKER: No, it was not, because at the forefront of the argument in the court below was this was not an advantage because they were entitled to return, but the point that your Honour has raised, with respect, is a very important one because the way in which it was decided by the Court of Appeal was, if there was what was described as independent impropriety by reason of a breach of section 232A(1), then that is sufficient for the purpose of 232(6). I do accept, with great respect to your Honour’s point, that if there is a different regime of penalty applying to 232A(1), then it is not appropriate to treat any breach of any provision of the Act as constituting the impropriety dealt with by section 232(6).
HAYNE J: But what it tips you back into then is perhaps the different construction of what was done as being a director voting for resolution of a commercial dispute to his advantage. Now, regardless of whether 232A was there or no, does that mean that you are nonetheless within the realm of 232(6)? Those questions of construction are not going to be resolved by us wandering around the cases.
MR McCUSKER: No.
GUMMOW J: Where do we find the actual penalties that apply to 1311?
MR McCUSKER: It is in the schedule, your Honour, to the Act. I will just dig that out. I cannot answer that directly, your Honour.
HAYNE J: Is it 1311(5)? Is it not “a fine of 5 penalty units”? I may be wrong. It is a long time since I have had to wade around this law.
MR McCUSKER: Yes. Well, 1311(5) provides for a penalty of five penalty points.
HAYNE J: Five penalty units, which – I do not know, what is a unit, $1,000 or $100? I mean, we are talking comparatively minor penalty.
MR McCUSKER: It is $1,000.
HAYNE J: It is $1,000, so $5,000 maximum fine.
MR McCUSKER: As against I think it was $50,000 ‑ ‑ ‑
HAYNE J: And disqualification.
MR McCUSKER: Disqualification. So it is an enormous ‑ ‑ ‑
HAYNE J: Yes. That rather points up the need to read the Act and construe it.
MR McCUSKER: Yes. Coming back to your Honour Justice Hayne’s point, if it were to be found that a director has breached section 232A(1) and in so doing has done so to advantage some person or himself, the question is whether the conduct or the use of his position was improper and the impropriety is to be judged by reference to all of the surrounding circumstances, including the question of whether he had an honest or a reasonable belief that what was being done, that is in terms of the return of the money, was not that it was not improper but that it was a return of moneys to which they were lawfully entitled.
GUMMOW J: I think a penalty unit in my print is fine of $100. My print is in the Corporations Law as at 31 May 1996, which looks like the right sort of date.
HAYNE J: The point is getting a bit sharper, Mr McCusker.
MR McCUSKER: It is much sharper, your Honour. I think I have been looking at the update.
GUMMOW J: Exactly.
GLEESON CJ: Perhaps you could check and tell us what was the maximum penalty at the relevant time for contravention of section 232A(1).
MR McCUSKER: I will.
GLEESON CJ: Then you could tell us whether the outcome of the case would have been materially different if there had been no contravention of section 232A(1) but simply a director whose vote was decisive on the issue but who had a personal interest in the matter acting in this way.
MR McCUSKER: Acting in this way, that is to cause the repayment of moneys to which the allottees were lawfully entitled ‑ ‑ ‑
GLEESON CJ: What do the articles of association of the company say about disqualification of directors for interest?
MR McCUSKER: The same, your Honour.
GLEESON CJ: So if there had been no section 232A(1) and no penalty ‑ ‑ ‑
MR McCUSKER: There was still – it is about article 15 I think.
GLEESON CJ: Where do we find those articles by the way?
MR McCUSKER: At 135.
GLEESON CJ: Thank you.
MR McCUSKER: Starting at page 178, article 15.15. It provides that:
no Director shall be disqualified by his office from contracting with the Company ‑ ‑ ‑
HAYNE J: No, it does not. It starts by saying “Subject to the Listing Rules”, so you are off into the listing rules.
MR McCUSKER: I am sorry, yes.
GLEESON CJ: And the third-last line of that says he cannot vote.
MR McCUSKER: That is right.
GLEESON CJ: It is back to the problem of a disinterested quorum.
MR McCUSKER: No, there was not and there could not be a disinterested quorum without appointing a new director.
KIRBY J: What is the way that the law deals with this problem?
MR McCUSKER: The question still comes down to whether in acting in breach, as he did, by voting he is making improper use to gain an advantage. The fact that he has voted is certainly a breach of the articles of association and the statute itself but we still have the question of whether that breach of itself is improper use to gain the advantage.
GLEESON CJ: In the face of article 15.15, what was the consequence for the validity of the resolution of directors?
MR McCUSKER: It would be invalid. I think the decision would be an invalid decision and capable of being challenged.
GLEESON CJ: And of course circling, as it were, there were some disgruntled shareholders who I infer seem to have had a line into the ASX who had a motive to challenge this. What would be the consequence for impropriety of the fact that this contravened article 15.15 regardless of the provisions of section 232A(1)?
MR McCUSKER: No more, your Honour, than the contravention of the section because it is a contravention of both the section and the articles. The question is whether it is an improper use for the purpose of gaining an advantage.
GLEESON CJ: Has anyone ever put to your client in cross‑examination that the only reason he became a director of this company was to get $400,000 back?
MR McCUSKER: No, it was never put and on the facts that was not the case.
GLEESON CJ: Because he seems to have belonged to a camp.
MR McCUSKER: Yes, he did.
GLEESON CJ: The Chile camp, if I can use that expression.
MR McCUSKER: The Chile camp, yes. The starting point of this was he was not even a director or shareholder in early October and he was simply undertaking to obtain capital for the company for a purpose which he regarded as obviously to the company’s benefit. He became a director in substitution for Mountford because Mountford was in Chile and it was just a matter of convenience that he be there and obviously ready to represent the directors as against the dissident shareholders and then he became a director, as distinct from an alternate or substitute director, at the time of the annual general meeting for a short period so that they could have two directors present at the annual general meeting. It was never suggested that the purpose of his being appointed was so he could get the money back.
GLEESON CJ: Floating around in the background seems to have been a suggestion of a more red-blooded form of impropriety in relation to the whole Chile transaction.
MR McCUSKER: Yes, it was wafting, as it were, but there was never any finding, nor was it contended, that this was a larger impropriety. It must be borne in mind that when he was appointed as a director as an alternate for Mountford this demand had not yet been made. So it was not a case of appointing him so he would get the money back. That was never the issue.
GLEESON CJ: But if his conduct was unquestionably a contravention of section 232A(1) and unquestionably a contravention of the articles and unquestionably conduct that exposed the shareholders of the company to the consequences of delisting, then the finding of impropriety is not vulnerable, is it? The real issue must be as to the finding of the purpose linking impropriety and advantage.
MR McCUSKER: That is so, your Honour. Was the improper use to gain the advantage? The gaining of the advantage is said to consist of returning the money when the allottees had, as it was put at the foot of page 382, “no established lawful entitlement to it or when any such entitlement was in question.” Now, the fact that it was in question in terms of an advantage is, in our submission, not relevant. The question is, were they entitled to the return?
CALLINAN J: Mr McCusker, to avoid litigation and even having to pay the difference between party and party and solicitor and own client costs can be an advantage, I would have thought, so long as the defence is a legitimately arguable defence. You get an advantage if you do not have to go to court to establish it, if there is a real question whether you have the entitlement.
MR McCUSKER: There is in relation to advantage, though not in relation to the determination of improper use, the question of whether Doyle had a subjective purpose of gaining an advantage for them. The finding that he was acting bona fide which is there and that he believed that they were entitled to the return of their money, in our submission, negates any possibility that his purpose subjectively was to gain advantage for the shareholders, the allottees.
CALLINAN J: I am really questioning whether it is an advantage or not. I am not focusing on purpose at the moment.
MR McCUSKER: No.
CALLINAN J: It can be an advantage, can it not, to avoid litigation?
MR McCUSKER: It depends on how one categorises “advantage” of course. It is an advantage in one sense every time a creditor is paid by a company. The creditor gets an advantage. Could I just, by way of one illustration, which may not be helpful, suppose you have a director of a company who is also on a board of a charitable body and he goes to the company with a proposal that it make a donation to the charity and at the directors’ meeting he discloses his interest, the fact that he is on the board of the charity, and urges that the donation be made, but he does not comply with section 232A(3), there is no formal resolution that he can participate in a meeting and there is no formal declaration of his interest, although everyone knows it. The donation is made. Is that an improper use to gain an advantage for the charity?
CALLINAN J: I do not know whether that is a good example. I wonder whether some of these donations to charity are for the benefit or the purposes of the company anyway. It might make the directors feel very good about themselves, very happy, but I do not know whether it is in conformity with what they are suppose to do often.
MR McCUSKER: That may be so, your Honour, but then there is the question of whether a reasonable person, having regard to all of those circumstances, would conclude that there was impropriety in what he did.
KIRBY J: That is a large question and the issue of charitable donations is not analogous here. The charity here was your client. That is the complaint.
MR McCUSKER: Suppose in Mr Doyle’s case the circumstances were somewhat different in that he had declared his interest formally, there were sufficient directors but he did participate nevertheless, so there is no question of this being essential in order to make up the numbers. He declared his interest, there was a formal resolution that he could participate in the meeting under section 232A(3) and the decision was then made to make the payment. Has he made improper use to gain an advantage?
GLEESON CJ: Of course 232A(3) just shifts the impropriety to the other directors in certain circumstances.
MR McCUSKER: In some circumstances it may.
GLEESON CJ: Section 232A(3) is not some kind of general dispensing power.
MR McCUSKER: No.
GLEESON CJ: It requires the other directors to consider whether he should disqualify himself.
MR McCUSKER: Well, certainly. Also, if what is done, or what is agreed to be done, constitutes an unlawful reduction of capital, then compliance with 232A(3) does not help any of the directors.
GLEESON CJ: These were a group of directors in the Chile camp, to use an earlier expression, who were all under threat of being ousted. So making disclosure to them is not necessarily a solution to the problem.
MR McCUSKER: No, it is not, but of course they were the only directors who existed. Although they were in the Chile camp, that really does not matter, with respect, which camp they were in. They were the only directors and the disclosure that he made was of his interest, which puts this in a quite different category from the case of Donald where the interest of Donald was concealed from the company generally. This is a case where you have a director who discloses interest and who, on the facts as found, has a reasonable belief that the money should be repaid. Can it be said that that constitutes an improper use of his position to gain an advantage?
GLEESON CJ: Am I right in thinking that another part of the background to this, Mr McCusker, is that what the stock exchange was complaining about was that this allotment strengthened the voting power of the supporters of the Chile venture in circumstances where the allotment was in excess of the number of shares that could be allotted without the sanction of a general meeting.
MR McCUSKER: Correct, your Honour, yes. That is the reason why the ASX said that these shares could not be voted and, indeed, could not be traded.
GLEESON CJ: It just occurs to me the possibility that while, understandably, the courts below fastened on the unquestioned breach of section 232A(1) as the impropriety, there was a good deal more to it than that.
MR McCUSKER: That is all that was contended and all that was really involved in the decision, that is that the impropriety was an independent impropriety consisting of a breach of 232A(1), no more than that.
GLEESON CJ: It is just that when you take what is the critical step, as you rightly say, of going from the impropriety to the purpose of advantage, to confine your attention to the breach of section 232A(1) as though it is some kind of technicality may not disclose the whole picture.
CALLINAN J: Was the whole picture disclosed in evidence? That is why I was asking about the balance sheet and Mr Satterthwaite’s relationship with the Chilean venture. These facts do not seem to have found their way into the judgments ‑ ‑ ‑
MR McCUSKER: They do not, no.
CALLINAN J: ‑ ‑ ‑ if they were proved, and I do not know whether they were even proved.
MR McCUSKER: The starting point, your Honour, I suppose really is, since this was a civil action, the statement of claim itself where there is no plea directed to the kind of matters that your Honours have raised with me.
GUMMOW J: Well, the focus there was unauthorised reduction of capital. That was the bright idea that seemed to be driving the statement of claim.
MR McCUSKER: Quite so. That was it.
GUMMOW J: Then in the Full Court the bright idea was 232A.
MR McCUSKER: Yes.
GUMMOW J: Section 122(1) of the Bankruptcy Act talks about “preference, priority or advantage”. There are lots of cases on what “advantage” means there. Has anyone looked at them in relation to 232(6)?
MR McCUSKER: Yes, we have, your Honour. There are a number of cases. We have not referred to them because they seem to go no more than saying in some cases what the dictionary definition of “advantage” is ‑ ‑ ‑
GUMMOW J: Yes.
MR McCUSKER: ‑ ‑ ‑ and it is to put someone in a better position than they would otherwise have been.
GUMMOW J: Well, what is the answer then to Justice Callinan’s point?
MR McCUSKER: We say that it is not a better position than you would otherwise have been to be paid money that you are entitled to be paid.
GLEESON CJ: Well, that is it. That is the question.
MR McCUSKER: That is the question.
GLEESON CJ: The circumstances included, did they not, a threat of delisting by the stock exchange, a requisition for a general meeting to have a spill of directors? Getting this $400,000 back neatly and within a reasonable time was no sure thing, was it?
MR McCUSKER: Well, no sure thing in the sense that anyone who makes a claim against a company for payment of money due cannot be certain they will get it, but sure thing in the sense that they were legally entitled to it. The threat of delisting by the stock exchange did not impinge upon the question of entitlement, nor did it impinge on the question of whether they could get their money back. The threat of delisting was related at the time to the fact that this allotment of shares had been made.
GLEESON CJ: But if the Doyle Capital Partners had found themselves shareholders in a company that had been delisted by the stock exchange, whose principal venture was being challenged by a dissident group of directors and who had invested $400,000 in a company that was within a fairly short time to be put into administration because of insolvency, their position cannot fully and accurately be described as simply creditors who are owed $400,000, can it?
MR McCUSKER: Your Honour, if the company had gone into liquidation, if it had in fact become insolvent, which it was not at the relevant time – it later went into administration – they would still be ultimately entitled to get their money back if our central premise is right, that is that by reason of the findings as to the conditions on which the shares were allotted, the allotment was voidable.
There are two English cases – I could not find any Australian authority – which say that a right to rescind prevails even in insolvency or bankruptcy, so there would still be that right to recover the money. That is In re Eastgate [1905] 1 KB 465 and Tilley v Bowman [1910] 1 KB 745.
GUMMOW J: I think this is a fairly lively subject.
MR McCUSKER: Yes.
HAYNE J: I think there is a table occupying about five or six pages of Palmers Company Precedents volume 2 concerning rectification of the register and the like when the company has gone into liquidation and that table consists of about three line entries for each of the cases listed. There is just a tad of authority on it.
MR McCUSKER: Yes, there is, your Honour, but what we say is that although in every case where a payment is made by a company to a creditor it may be said that that is an advantage to the creditor because the creditor has got payment which previously it had not got, so in that sense it is in a better position. That cannot fulfil the test of advantage in this section because to do so would mean that whenever a director breached section 232A(1) and resolved to approve a payment to some person where he or she had an interest in the outcome, even though the payment was due and owing, that would constitute a breach of section 232(6) and that would be a very strange anomalous result.
HAYNE J: You keep speaking in terms of debtor/creditor relationships. That may be accurate, it may not be accurate, but at least it seems to obscure the fact that we have membership of a company in issue.
GUMMOW J: You have a plaintiff in a rescission action; that is what you have.
HAYNE J: In statutory terms, is what you are talking about an action under section 216H of the law for rectification of the register? Is that the process that you would have had to institute to get yourself off the register?
MR McCUSKER: It is one process that could have been used, your Honour, but the alternative process is to sue for the return of the money on the ground that the contract has been avoided.
HAYNE J: That would still leave the register unaffected, arguably.
GUMMOW J: The contract has been performed.
MR McCUSKER: Yes, but ‑ ‑ ‑
GUMMOW J: You have to get to the register. If it was land, you would have to get to the Torrens register. In this situation you have to get to the share register.
MR McCUSKER: True, the shares would have to be returned and, indeed, that is what occurred here. The shares were returned and they were cancelled – I am sorry, they were returned.
GUMMOW J: It has gone beyond contract ‑ ‑ ‑
MR McCUSKER: I stand corrected. They were voted later on because of the fact that the register was not rectified.
GLEESON CJ: That is why you had to have a resolution of directors. That is why it was not good enough to persuade Mr Murphy to sign a cheque.
MR McCUSKER: Yes, I accept that, your Honour.
HAYNE J: They were voted after return of the money, were they?
MR McCUSKER: So I am told.
HAYNE J: Well, perhaps you can come back to that.
MR McCUSKER: There was a dispute as to that, as I recall it, your Honour.
HAYNE J: There were lots of disputes, but were they voted after return of the money is the question.
MR McCUSKER: At 371 at paragraph 48 Justice McLure said:
The trial Judge found . . . that the allottees had purchased shares “which it had been represented would rank pari passu . . . There is no finding as to the reason for, or the likely extent of, the delay in the grant of official quotation, or the basis for or extent of the voting restriction. However, the unchallenged evidence is that on 21 January 1997 ASX granted official quotation for the placement shares and options. Further, by letter dated 15 January 1997 the Company’s solicitors, Fiocco Hopkins Nash, informed ASX that the holders of the 8,000,000 shares intended to exercise their right to vote at the EGM on 17 January 1997. I am unclear as to how this is to be reconciled with the purported cancellation of the allotment.
It does not go on to make a finding that the shares were in fact voted. It was just a letter saying that they intended. So that is why I say it is not clear that they were in fact voted.
I think the narrow point really that we make is this, your Honours, and that is that there cannot be an advantage in circumstances where, if it be the case – and there was no finding as to that – that the contract of allotment was voidable. The finding of the court below was that it was arguably voidable and, therefore, there was no unlawful reduction of capital, but the court did not make a finding on whether it was voidable because it took the view that it did not matter whether the allotment was voidable or not.
KIRBY J: It is a highly technical and legal view of what advantage is in a statute which addressed a whole range of directorial conduct and is designed to ensure good governance in the running of Australian corporations against a background of the terrible circumstances that led to a toughening up of this area of the law.
MR McCUSKER: In one sense that may be so, but care must be taken to draw the line at some point. If a director has a reasonable belief that what is being done is not an advantage in the sense that the persons are entitled to the money, then to find him or her guilty of a very serious contravention of the law, that is section 232(6), is something that, in my submission, it is unlikely that a reasonable person would regard what he did in these circumstances, if the persons, the allottees, were entitled to the return of their money, as constituting improper use to gain an advantage.
KIRBY J: Where does this reasonable person come to wander over our problem here? Is not the real answer, instead of using and inventing that fiction, to simply analyse the statute and see what its purpose is, what its object is, how it fits into good governance in Australian corporations, instead of sort of trying to avoid shouldering that burden ourselves and inventing this reasonable person fiction?
MR McCUSKER: Well, the term “reasonable person” I think appeared in Byrnes’ Case and was certainly ‑ ‑ ‑
KIRBY J: I know he is everywhere in the law, but essentially he is just people like us.
GLEESON CJ: Were you going to give us a reference to Byrne’s Case?
MR McCUSKER: Yes, I am, your Honour.
KIRBY J: We do not have Byrnes in the book of authorities.
MR McCUSKER: It is in the list of authorities, your Honour, No 2 in our list. Your Honour, the decision in Byrnes was referred to in the joint judgment of your Honours Justices Gummow and Hayne in Angas Law v Carabelas at page 127. Angas Law v Carabelas is No 4 on our list of authorities.
KIRBY J: If you would not mind giving the citations onto the record.
MR McCUSKER: Certainly, your Honour. It is (2005) 79 ALJR 993. It is No 2 in our book of authorities in fact.
GLEESON CJ: Do you have a paragraph number there?
MR McCUSKER: It is at page 1006 at paragraph [65]. The particular quotation from Byrnes’ Case, which was in the joint judgment of your Honours Justices Gummow and Hayne, was at the top of page 1007, the first column, and in particular the second sentence in that paragraph:
Impropriety consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position in the circumstances of the case.
GUMMOW J: Now, if you just stop there for a minute. If you go back to paragraph 75 of the judgment of Justice McLure at page 382, that seems to be the heart of it, and if one treats that sentence “Such conduct was itself improper as it breached s 232A(1)” as parenthetical or a gloss and then goes to the next sentence, what is wrong with her Honour’s conclusion, unless you are correct as to what you say are the limitations of the notion of advantage?
MR McCUSKER: Well, your Honour, the question is whether ‑ ‑ ‑
GUMMOW J: You are not saying to us that it was not open to her Honour to take that view of the notion of advantage by reason of the way the case has been run or anything of that sort, are you?
MR McCUSKER: No. The way the case was run was that it was an improper use by reason of the director being present at the meeting.
GUMMOW J: No, I am thinking of evidentiary matters. You are not complaining of any deficiency in evidence.
MR McCUSKER: No, we are not.
GUMMOW J: Well, does it not come down to whether her Honour is right or wrong about this notion of advantage?
MR McCUSKER: It does, indeed, yes, but the ‑ ‑ ‑
GUMMOW J: Bearing in mind her Honour seems to be right when she says you have to look at the surrounding circumstances, which the Chief Justice has been exploring with you.
MR McCUSKER: Yes.
KIRBY J: She seems to be taking a rather practical view of it, whereas yours is a bit ethereal.
MR McCUSKER: The problem is though, in terms of principle, whether a director could be held to be in breach of section 232(6) where what the director has approved, and in doing so has breached section 232A(1), was a payment to a person who was entitled to it.
GLEESON CJ: You have put in your submissions three slightly different possibilities, each of which at various times you have said is an answer to the claim against you. Possibility one is that Mr Doyle bona fide believed his interests were entitled to the money back; possibility two is that Mr Doyle reasonably believed he was entitled to the money back; and possibility three is that he was entitled to the money back.
MR McCUSKER: Yes.
GLEESON CJ: Which of those three alternatives is the one with which we are concerned?
MR McCUSKER: We say that all three are applicable, so this Court is concerned with all three of them.
GUMMOW J: Assume you are right about that, how do you then get over advantage?
MR McCUSKER: The question is whether his purpose was to advantage. Even if we said, well, by reason of the fact that the company was in difficulties, which was not one of the issues that was raised against us, and even if we said that the company was facing delisting by the stock exchange the question is whether his purpose was to advantage the allottees and the further question is if he believed that they were entitled to the return of their money, which we say was not only a reasonable belief but correct, then how can he be said to have a purpose or intention to advantage them.
KIRBY J: The answer Justice McLure gives is because at that time that was his belief that he had no established legal entitlement and there is many a slip twixt the cup and the lip in these things. He was jumping the gun and protecting his own pocket and getting in there early although he had the conflict of interest.
GUMMOW J: I think if I could just say this word “established” has some elements that are not fully teased out by her Honour, but which when teased out may not assist you.
MR McCUSKER: No, they may not. But I apprehend that what she is saying there is established ‑ ‑ ‑
GUMMOW J: Cash in hand. She is saying cash in hand without a law suit, delisting.
MR McCUSKER: Yes.
KIRBY J: And there is the insolvency hanging around, too.
MR McCUSKER: She does not actually say that.
KIRBY J: No, but that is part of the background facts. It is a factor. It is a very real – I would have thought a very – for practical business people it is a very real factor.
MR McCUSKER: But, your Honour, this was not the basis of her finding that it was an advantage. She simply said that the – nor was this the case put against us that it was an advantage because otherwise – or that the company might go into liquidation then they could not get the money back. That was never the argument that was run. The advantage was said to be, as her Honour put it at the foot of page 382, that the money was returned:
when the allottees had no established lawful entitlement to it or . . . was in question.
It was in question by – only in question in the sense that although Nash had said that it was all right to return the money, it was not an unlawful reduction of capital, he had said that he is going to get a second opinion on the matter and therefore the money should be held in Doyle’s trust account, but it was not said by her Honour, nor was it the case against us, well, the further advantage was that the company might have gone into liquidation, all kinds of terrible things could have happened to it. The only advantage said to have – according to his Honour – was the return of the money when the allottees had no established lawful entitlement to it.
GLEESON CJ: Was it the case that half of this $400,000 had been put up by the Rothschild interests?
MR McCUSKER: Some part of the half, yes.
GLEESON CJ: Did they give evidence?
MR McCUSKER: No.
KIRBY J: Why is it not one way to interpret it that when Mr Nash said, “Well, I think it is all right but I want to get counsel’s opinion” that propriety in those circumstances requires a director with a conflict to wait and your client did not wait, he jumped the gun which rather gives the flavour that he was really looking after number one.
MR McCUSKER: That was not the evidence of Nash – I am sorry, was not the finding in respect of Nash I should say. The finding was that Nash had advised that it was all right to return the money. That finding was based on the evidence of Murphy whose clear evidence was that Nash had advised that the money was - “it was okay” I think he said, to return the money, but he wanted it put in a trust account because he was going to get another opinion – counsel’s opinion.
KIRBY J: Was the evidence that he kept it in the trust account until he got the opinion?
MR McCUSKER: He did keep it in a trust account but there was no agreement that he would then use it for the purpose – whatever purpose the second opinion said it should be used for. So it was a strange kind of arrangement.
KIRBY J: Can I just understand that, no second opinion was then secured?
MR McCUSKER: A second opinion was obtained, and it was argued before the Court of Appeal that he should have abided by the second opinion and returned the money because the second opinion was it was an unlawful reduction of capital. That, of course, is contrary to the finding of the Full Court that it was not an unlawful reduction of capital in any event. That was the essence of the second opinion which was the initial view of Ayres, not conveyed to Mr Doyle and the appellant simply knew that Nash had said it would be all right to release the money but it should be kept in a separate trust account and he was going to get a second opinion.
GLEESON CJ: Is this concept of improper use of a possession for the purpose of gaining an advantage a composite idea?
MR McCUSKER: In our submission, yes. It cannot be looked at in two distinct parts.
GLEESON CJ: Does that mean that the advantage has to be an improper advantage?
MR McCUSKER: It used to be. I think the progenitor of this section in Victoria was it was a use to gain improper advantage. It was because that did not sufficiently cover all possible circumstances it was changed. The history of this is in fact set out in the joint judgment of Justices Gummow and Hayne in Angas Law Services.
GLEESON CJ: How do you widen its scope by transposing improper from immediately before advantage to before use?
MR McCUSKER: I could suggest this, your Honour. If it is not an improper advantage, if the advantage is simply anything that puts a person in a better position than he or she was before, even though that position is one to which that person was entitled, then it would be, in our submission, well beyond what is required in order to deal with the apprehended mischief. It is one thing to say that a director has breached section 232A(1) by attending and voting at a meeting where he should not – not entitled to – and the penalty for that entails. It is quite another to say that that of itself was an impropriety which then in turn infects the payment that has been approved in this case even thought the payment is to someone who is entitled to it.
The fact that the entitlement has not been established, as her Honour put it, established, as we apprehend it, in a sense that there had been no decision of the court that the parties are entitled simply ignores the fact that if the allottees were entitled to the return as a matter of law then it cannot be said to be an improper use to advantage them because the improper use is part and parcel of the advantage and you cannot simply say, well, independently of anything else there is a breach of the section 232A and because there is a breach of a section there is an improper use of the position to advantage.
Her Honour put it at paragraph 73 that once there is a breach of section 232A(1), as she found, then, as being an independently improper conduct it is a short step to the conclusion that a person made improper use for a prescribed purpose. In our submission, that is a very dangerous approach to the interpretation of the legislation. With great respect, this is a quite different and much more serious offence than section 232A(1).
HAYNE J: What then does the word “improper” add? Could there be a proper use of office to advantage?
MR McCUSKER: Yes.
HAYNE J: What?
MR McCUSKER: A proper use of office to advantage – well, can I put it this way, your Honour. If advantage is taken to be anything at all which can be said to be, however small, an improvement in a person’s position, then a proper use to advantage would be to vote to pay a debt that was owing by the company as one. A proper use in that narrow sense of advantage would occur in those circumstances but would it be an improper use for the same director who was prohibited from voting but nevertheless did vote to approve that same payment. Is it an improper use to confer an advantage in that limited sense?
So you cannot separate the two concepts, in my submission. The improper use to gain advantage must be adjudged by reference to what exactly is occurring here and in particular is it the case that the person to whom the advantage is said to accrue is someone who is entitled to it anyway.
HAYNE J: But does it mean that any and every occasion on which a director votes on a resolution relating to a contract or arrangement in which that director has direct or indirect material interest is inevitably a contravention of 232(6)?
MR McCUSKER: That would follow from the reasoning of the Court of Appeal, your Honour, because it would be said that that was independently improper conduct and it was to gain an advantage for someone by reason of the fact that whatever the transaction was it was an advantage, but to say that it is an advantage – coming back to your Honour Justice Callinan – because the person entitled to it, if that be the true situation on analysis, has not established in the sense of brought action to get the judgment, in my submission is taking a very narrow and technical view of the matter.
It is true that there are questions such as if you have to sue for money you will be possibly put to the expense of solicitor/client costs as distinct from party and party costs but that, in our submission, is not the kind of advantage that is being dealt with by section 232(6) because if it were it would mean that in almost every case, in fact in every case, where there was a decision to make a payment or to do something which the company was obliged to do and had not been yet established by litigation there would be an advantage in that sense and all that you would then need is for a director to have participated in a meeting when he should not have participated in that meeting for a breach of section 232(6) to have occurred.
That would seem to be a very anomalous surprising kind of result. I appreciate that there are background circumstances that have been agitated by your Honour the Chief Justice and others about the possible delisting and so forth but they did not form part of the reasoning in this case. It was not put by her Honour Justice McLure in the Court of Appeal that there were all these other aspects to it which led to a conclusion that there was an advantage. It was simply these allottees have not established their lawful entitlement. She may have meant by that had not litigated their entitlement or she may have meant simply that, where she goes on to say “any such entitlement was in question”, well, you had not yet got a second opinion, it is not clear.
GUMMOW J: Is not the reliance on 232A something beside the point? Is it not sufficient that there was an impropriety and a defiance of Article 15 that is including “such Director shall not vote”. It must be improper for directors to do what the articles specifically tell them not to do.
MR McCUSKER: It is an impropriety in that sense. The question is whether it is an impropriety for the purpose of section 232(6), an “improper use” for the purpose or to gain “an advantage”.
HAYNE J: At the very least it is a use of position, is it not?
MR McCUSKER: It certainly is, yes. I accept that.
HAYNE J: The use of position contrary to the explicit prohibition.
MR McCUSKER: Yes, it is.
CALLINAN J: You could have an impropriety without a breach of the law, could you not?
MR McCUSKER: It is difficult to imagine one, your Honour, but it is possible to have a breach of the articles which are not reflected in the law but then the law provides that ‑ ‑ ‑
GUMMOW J: It is possible to have unconscious breaches of articles.
MR McCUSKER: Of course, yes.
GUMMOW J: But this was not, as it were, an ingenuous occasion.
MR McCUSKER: No, this was not an unconscious breach. Everyone knew, including Doyle, that he had an interest.
GLEESON CJ: Disclosing an interest is no answer in a situation where you are disqualified and the people to whom you make the disclosure and you are participants in a joint activity, as it were. There was no hostility to Mr Doyle amongst Mr Mountford or Mr Satterthwaite or Mr Murphy.
MR McCUSKER: That is true.
GLEESON CJ: It was the people who had requisitioned the general meeting who were the threat.
MR McCUSKER: But, your Honour, to deal with that proposition, and I understand your Honour’s point, with respect – suppose there had been, there was not, but suppose there had been another director present who was not in any way interested in the transaction and those two directors resolved, as they could have, and they both were in the Chile camp, and those two directors resolve in terms of section 232A(3) there would be nothing then to stop – and Doyle has made a proper declaration and so 232A(3) had been properly complied it – it would not be any answer there to say he has only disclosed to people in the Chile camp. It would still have the same effect.
GLEESON CJ: I am not suggesting this would be an answer, but did the evidence show whether or not Mr Doyle or Mr Doyle’s advisers turned their mind to the problem of the lack of a disinterested forum physically present?
MR McCUSKER: There is in this way, your Honour. The case was fought for the appellant, as defendant, on the basis that there was no voting by him because he said, “I was aware and everyone else was aware that I had an interest and therefore couldn’t vote.” He said, “I was there simply as a person who had claimed on behalf of Doyle Capital Partners the return of the money”, but…..is no longer an issue. So it was in that sense raised and, indeed, it was put to Mr Murphy, the secretary, in cross‑examination that if Mr Doyle had voted at a meeting where everyone knew that Doyle had an
interest he, Murphy, would have remembered that because it would be contrary to the law as he understood it. Murphy agreed that he would have remembered that, or likely to have remembered that if Doyle had in fact voted. His evidence was that Doyle, so far as he could recall, did not vote.
KIRBY J: But there is the finding that he did and you do not now challenge that.
MR McCUSKER: We do not challenge it, your Honour. I am simply answering his Honour the Chief Justice.
GLEESON CJ: Yes. Actually, I had overlooked what you just mentioned. The case has gone off on appeal on a different tangent, as it were, but so obvious was your client’s disqualification that the case at trial was fought on the basis that he had not indeed voted because of his obvious disqualification.
MR McCUSKER: That is right. Everyone was aware of it. He was conscious of it. He said “I wouldn’t have voted because I’ve had long experience as a director and I know that I can’t vote” but the finding was against us that he had. The trial judge said that his participation in the discussion with Mountford, even though there was no formal vote taken, amounted to a voting at that meeting.
I will come back, if I may, to the question – try and clarify the question of penalties but I think, with respect, what your Honour Justice Hayne has put to me is correct and I will just verify that to be the case. The main issue that we seek to raise on this appeal is that where there is no established lawful entitlement in the sense put by Justice McLure, but legally the position is that there is an entitlement there cannot then be an advantage. That is the short point that we raise as our central point. Unless the Court would like to hear me further on that issue, they are our submissions.
GLEESON CJ: Thank you, Mr McCusker. Yes, Mr Martin.
MR MARTIN: May it please your Honours. First may I take your Honours to page 313 of the appeal book and paragraph 230 in the trial judge’s reasons for judgment in relation to the question concerning insolvency or potential insolvency. I think your Honours will find it dealt with there. There was actually a report by an accountant, Mr Halse, who concluded that on Friday, 22 November the company was not insolvent and it:
had a working capital surplus of $26,449 and so was then able to pay its debts as and when they fell due.
However, after the weekend on the following Tuesday, on 26 November, after certain amounts had been paid there was:
a deficiency of $9442.
KIRBY J: Which paragraph are you reading, now?
MR MARTIN: I am reading from paragraph 230, your Honour, towards the end between lines 25 and 30. Just to round that off, the $400,000 being lost from the capital, as it were, of the company at that time, albeit not causing the company to become insolvent at that time, the $400,000 was a significant cause to the company rapidly sliding into the red, as it were, and then in January when the barrister’s opinion had arrived which said that the money could not be returned without fulfilling the requirements of section 195 of the Corporations Law as to a special resolution and court approval and then the company asked for the money to be returned from Mr Doyle and it was not. At that point in time when he refused they called in the administrators immediately.
Your Honours, I start from the premise that in relation to the facts that there is an unchallenged factual edifice in regard to the appellant’s presence, act of participation and voting in respect of the board meetings on both 21 and 22 November 1996 and certainly there is no equivocation about the presence and the voting being a transgression of section 232A(1)(a) and (b). So put shortly, the appellant should not have even been in the room when the issue of the $400,000 was being debated. The only way that that could be escaped was to invoke the provisions of section 232A(3) by the non‑conflicting ‑ ‑ ‑
GUMMOW J: That would not have overcome the articles, would it?
MR MARTIN: No, it would not, your Honour. Practically, it could not have been done.
GUMMOW J: It might have meant there was no criminal offence. It would not have meant that there was not a contravention of the articles.
MR MARTIN: Indeed.
GLEESON CJ: Furthermore, you could only get a resolution under 232A(3) from a disinterested quorum, could you not?
MR MARTIN: Indeed, that is so, your Honour. Mountford, of course, the other director, was in Chile so he could not participate and the article that allowed for a telephonic conference, as it were, required as a minimum the physical presence of two non‑conflicted directors ‑ ‑ ‑
GUMMOW J: Where do we see that provision?
MR MARTIN: Your Honour, it is in Article 16 at page 179 of the appeal book. You will see at paragraph 16.1 it is made “subject to Article 15.3” and 15.3 back on 175 requires the presence for a quorum of:
two (2) Directors present in person who are entitled to vote at the meeting.
GLEESON CJ: That is right. It seems to me considerable error to think that 232A(3) is some general dispensing power to be applied to 232A(1). Section 232A(3) requires the directors who exercise that power themselves to be of the view that the person should not be disqualified. In other words, in a sense, it shifts the burden of propriety or impropriety on to the people who are going to exercise the relieving or dispensing power. They, to put it another way, take the responsibility.
MR MARTIN: Indeed, your Honour.
GLEESON CJ: And in a listed company they have the stock exchange, amongst others, looking over their shoulders.
MR MARTIN: At all events, your Honour, there was no suggestion that there was ever any attempt to rely upon 232A(3). It has simply never been put up as an antidote to the plain transgression of 232A(1)(a) and (b).
GLEESON CJ: But the consequence of the contravention of Article 15.15 was that there was no valid resolution anyway.
MR MARTIN: Your Honours, that needs to be read subject to section 1322 in regard to procedural irregularities. We certainly accept that Mr Doyle, as an alternate director on 21 November and then as a full director on 22 November, had a conflict on this point and, accordingly, could not contribute to being part of the quorum. However, what 1322(1) appears to do in subparagraph (b), and your Honours will find this in the assembled materials under tab 6, is to set up this notion of a procedural irregularity. In 1322(1)(b)(i), without conclusively defining what a procedural irregularity is, an instance of it is given as:
the absence of a quorum at a meeting of a corporation, at a meeting of directors or creditors of a corporation –
So, it would seem, then, that in the face of a procedural irregularity one is within the realm of section 1322(2).
GLEESON CJ: But an absence of a quorum can occur in different circumstances.
MR MARTIN: Certainly, your Honour.
GLEESON CJ: Here we are concerned with an absence of a disinterested quorum in a circumstance where there is a provision of the articles which positively disqualifies a person who is present and voting from being present and voting.
GUMMOW J: You would be hard pushed to get an order in your favour under 1322, I would have thought.
MR MARTIN: Yes. Your Honour, I should also draw your attention to one of the articles I think which attempts ‑ ‑ ‑
GUMMOW J: An order from the Court ‑ ‑ ‑
MR MARTIN: No, 1322(2) in regard to a “procedural irregularity” seems to envisage invalidation if there is a substantial injustice but I note that in the recent text on company directors which we refer to in our footnotes that that section is referred to as a prima facie validation of something that might otherwise be invalid until the court actually steps in and sets it aside. Your Honour, just in terms of rehabilitation there is also Article 15.11 on page 177 of the appeal book at about line 45. Your Honours, I do not wish to be ‑ ‑ ‑
GUMMOW J: These various aspects are the indoor management rule, are they not?
MR MARTIN: Indeed.
GUMMOW J: That does not mean that directors behave with propriety when they defy 15.15.
MR MARTIN: We certainly say, with respect, that that is so.
KIRBY J: You have shifted your ground though, have you not, because at trial you were relying on the unlawful, unauthorised reduction of capital and now that has been found against you so you are looking around for something else you can latch on to this unfortunate director.
GLEESON CJ: In circumstances where you may have an embarrassment of riches.
MR MARTIN: I certainly hope that is the case, your Honour, but I am not counting my chickens, as it were. In regard to the trial at first instance we, with respect, would say that certainly section 195 was a live issue in regard to a number of issues – one should remember that Mr Satterthwaite was in the equation at that point in time and the question was whether he had assisted the transgression as against section 232(6) but also whether he had acted, in effect, without due care and diligence in his own right in regard to preserving the capital of the company, as it were, and until of course the Full Court’s decision, the issue of whether there had been a transgression of section 195 was part of the matrix, not least in regard to the area of penalty.
Accepting that her Honour the trial judge found that the exception in MacKellar’s Case was reached on the basis of what was arguable then that has its consequences in regard to the existence of a bona fide compromise as between Chile Minera, the corporation, found to have been acting bona fide and the demanding company, Doyle Capital Partners. Our learned friends seek to capitalise on that finding to try and extract some benefit for Mr Doyle personally from that conclusion, but we would say, with respect, it does no more than say that Doyle, like Satterthwaite, believed at the time that the $400,000 demand letter was written on the basis that he thought that there was a legitimate claim to it back. That certainly does not intercept, in our respectful submission, with the separate question as to whether he has improperly used his position.
GLEESON CJ: It does a raise a problem of this idea of claim of right which in other areas of the law goes to some surprising lengths to protect people acting in a high‑handed fashion to get back what they believe belongs to them and maybe you just cannot transpose that into this area of the law which is concerned with process as well as substance. One of the arguments against you is that if we were to conclude, and that we ought to make up our minds about this issue, that Mr Doyle’s interests were entitled to a rectification of the share register and a repayment of the $400,000, that is a complete answer to the case.
MR MARTIN: Yes, that certainly seems to be the main arrow directed towards us in regard to the premise of entitlement. All I can say in respect of that is that the derivative basis for the argument as to entitlement comes from the fact that there is a representation said to have been made that the 8 million shares and options would rank pari passu with all the other shares and then from that premise of very limited evidence is the developed argument that when the ASX announces that the votes in regard to not only the 8 million shares but also another tranche of 1 million shares, so 9 million in total, cannot be counted or, in the words they used in their correspondence, “must be disregarded” on four of the seven motions that were before the annual general meeting, that somehow that translates into an ability to rescind.
GLEESON CJ: Justice McLure complained that she did not get enough assistance in argument on this question.
MR MARTIN: Yes.
GLEESON CJ: As I understand the facts, and my understanding may be imperfect, you had these two groups, one of whom supported and one of whom opposed development in Chile.
MR MARTIN: The Carrizal Alto Project, as it was called.
GLEESON CJ: Yes. The Doyle Capital Partners money, including some Rothschild money, was brought in to support and, to some extent, sustain the Chile development. As I understand it, if those shares that were allotted could not be voted at the general meeting that was going to decide the fate of the Chile development venture, the Doyle interests were going to find themselves locked into a company with the disappearance of the substratum of the commercial venture that they were brought in to support. Is that a reasonable understanding of what was going on?
MR MARTIN: I would seek, with respect, to qualify it in some respects, your Honour, by saying that one really needs to track it back to the extraordinary general meeting of 18 October 1996 at which the fifth of the five resolutions put at that point in time was essentially to adopt an acquisition of this project in Chile by acquiring a 75 per cent interest from the company, International Mining Holdings Limited on the basis of an allocation to International Mining Holdings Limited of 35 million shares in the corporation plus $US165,000 plus a commitment to spend, I think it was $3 million over a certain period of time.
That resolution was passed at the EGM on a show of hands by four votes to two, Mr Doyle being one of the four votes putting up his hand at the time. Part of the ASX’s inquiries after the event were in regard to whether, in putting up his hand, he was representing the 8 million shares and options that had already been allocated, I think, on 16 October by the company. That resolution 5 was very significant because 35 million shares passed on this resolution, which would fall outside the 10 per cent per annum rule that was the hurdle at which the 8 million shares had arguably infringed, or part of them anyway.
The consequence was that that big block of 35 million shares was going to pass about 27 per cent interest in the corporation to this new International Mining Holdings Limited, measured against the existing shareholder arrangements within Chile which showed that Metalsearch, Mr Clauson’s agreed faction, held about 14 per cent of the corporation so the 35 million resolution passed on 18 October at the EGM was very significant and that was what was under attack.
GLEESON CJ: But it was going to water down Metalsearch’s interests, was it not?
MR MARTIN: Absolutely. Once those 35 million shares were allocated to the holder of the Carrizal Alto, the entity said to be the holder of the Chilean tenements, Metalsearch was no longer going to be the number one on the top 20 shareholders at 14 per cent. It was going to be from that point in time subjected to an incoming interest and the concern about it that you will see in the stock exchange’s letter of 13 November, the long one, was that there were suspicions that Mr Satterthwaite had an interest in that International Mining Holdings company that had not been disclosed in the information that had been put out to shareholders before the extraordinary general meeting and that, in fact, the true owners of the shares were not the New Zealand company, International Mining Holdings, rather they were some Chilean families and some European interests that had not been disclosed.
That was in the wind and when the Australian Securities Commission, as it was, issued proceedings for injunctive relief to restrain essentially that fifth resolution being implemented that led to a suspension of all the shares in Chile by the corporation on 14 November 1996.
The AGM had been planned for some time and there were seven resolutions pending. Because of the correspondence that had been passed from the ASX about the 8 million shares and going over the 10 per cent per annum of your total shareholding limit the…..,through its solicitors, had initially proposed to put that as a resolution essentially for ratification before the AGM but the ASX had advised that that would not be satisfactory.
GLEESON CJ: And they were not going to allow these new shares to be voted on that resolution.
MR MARTIN: There was a concession in the terms of the notice of AGM that those shares, the 8 million shares and the 1 million shares respectively, 9 million in total, could not vote in regard to the ratification issue concerning them. What happened with the ASX correspondence is that in addition to obviously being barred on ratifying the infringing issue of those shares, there were four extra resolutions that were the subject of correspondence saying that if the shares were voted they must be disregarded.
GLEESON CJ: But what was going to happen to the future of the Chilean venture if these shares could not be voted at a general meeting?
MR MARTIN: The five resolutions that were before the annual general meeting did not really revisit the significance of resolution 5 back on 18 October at the EGM. Essentially, what one was concerned with – and I will try and take your Honour there to the actual resolutions themselves at page 127 – were the approval of the annual report. You will see the seven resolutions there, your Honour. The resolution in regard to the 8 million shares and options was resolution 3 and in the information that had gone out in the notes, the note to resolution 3, at page 129 point 5 at about line 23 made the observation:
Persons who have participated in this issue are excluded from voting, together with associates of those persons. However, the Company need not disregard a vote if:
and then ‑ ‑ ‑
GLEESON CJ: Actually, what I have in mind is what appears on pages 263 and 264 of the appeal book beginning with line 35 on page 263 and going to line 28 on page 264. Doyle Capital Partners were brought into this company to support the Chilean venture, were they not? They were consultants. They were engaged as consultants in relation to Chilean interests.
MR MARTIN: Their primary role was in regard to the raising of working capital for the Chilean venture which, from the annual report, was to be the main focus of this corporation’s affairs for the future. It had had unsuccessful ventures in the Philippines, it was writing them off and it was now going to change its name from InterChrome to Chile Minera reflecting this reorientation of goals towards a commitment to this project.
GLEESON CJ: The minority shareholders, Metalsearch, if I can use that expression, were complaining about the Chilean deal.
MR MARTIN: Indeed.
GLEESON CJ: One of the resolutions proposed for the EGM was this resolution 5. Was the effect of that under threat if these 8 million shares could not be voted?
MR MARTIN: No, because that was not on the table at the AGM. In fact, that was the subject of the Federal Court proceedings to seek that restraint. It was also the subject of the ASX’s correspondence because they wanted information to be forthcoming in regard to whether the New Zealand corporation, IMHL, was in fact covering for other interests that had not been disclosed. So, certainly, your Honour is correct in regard to that resolution 5 being under threat but it was not directly under threat in regard to what was on the table for the AGM on 22 November.
GLEESON CJ: What I am trying to understand, Mr Martin, is this: I am trying to understand the commercial significance of a possible conclusion that the shares allotted to the Doyle interests were going to be for a year or so non‑voting shares in a corporate situation where there was a challenge within the company to the very venture in support of which this capital was raised.
MR MARTIN: Yes, I think it we are putting it too high, with respect, to say that the ASX’s decision to say that these votes on the 8 million shares had to be disregarded at the AGM would of itself have undermined resolution 5 that had been passed back at the EGM in October. However, certainly given a looming motion to spill the board by Metalsearch which had been foreshadowed, not for the AGM but at a subsequent EGM, the position was that one would probably be looking for every vote that you could if you were seeking to marshal a block of votes against that attack from the disgruntled, soon to be, minority, Metalsearch.
GLEESON CJ: I think I can understand why, if they were not going to be able to vote these shares, the Doyle interests wanted out.
MR MARTIN: Your Honour, all you have, with respect, essentially is the letter of demand on 21 November which says there has been a breach and, as a result, we want to cancel. The letter itself is at 246, it is really the second paragraph:
The shareholders who took these shares believed they were ranked pari pasu . . . as the company has been instructed by the ASX that this is not the case and these shareholders have been disenfranchised in relation to voting these shares at the Annual General Meeting to be held on Friday 22nd November 1996.
That is it. One might supplement that with noting what Mr Doyle wrote on 27 November after the $400,000 had been banked into the account of Doyle Capital Partners back in Sydney.
GLEESON CJ: But the fact that they wanted out does not necessarily mean that the method that they chose of getting out was according to the Marquess of Queensbury Rules.
MR MARTIN: Your Honour, the question was, with all the grievance and legitimacy about a grievance in the world, if section 195 of the Corporations Law had to be complied with, which was ultimately the advice from the barrister, then the company might, in other circumstances, have been minded to simply return the money but this was an intersection of differing obligations. The only way that section 195 was able to be circumvented was on this proposal put up. Initially the solicitor Nash advised Chile that it could not be done, you had to comply with special resolution and court approval under section 195. Nash came up essentially with a hybrid proposal which was that a barrister’s opinion be obtained but in the interim the money be put in a trust account so it was hardly anything other really than an interim holding measure pending the assessment of somebody more knowledgeable.
Where there is the difference between the trial judge and Justice McLure is that the trial judge did not think that that was an agreement of compromise whereas Justice McLure rationalised it on the basis that you could, and the reason she did that is because she said that Doyle was acting in a dual capacity in the board meetings. So by his acting for Doyle Capital Partners in the meeting he was attending or meetings that he was attending on the 21st as an alternate director for Mountford and then on the 22nd as a director in his own right, he was able to perfect the agreement of compromise which was able, in her Honour’s rationalisation, to trigger the MacKellar exception.
GLEESON CJ: The argument against you, whether it is right or wrong, is that the Court of Appeal said the primary judge was wrong to find that this was an unauthorised reduction of capital. The Court of Appeal, according to the argument against you, was wrong in not making up its mind whether the Doyle interests’ claim for rescission and return of the money and rectification of the register was a valid claim as distinct from one bona fide believed to be valid.
MR MARTIN: Your Honours have already been taken to the passages where her Honour, I think at 54 and 55, said that it never got higher than arguable before the trial judge and that she herself felt that she was constrained by reason of the matters that she identified at paragraph 55 from being able to reach a conclusion about that.
The starting point for an argument of entitlement is always the bare assertion that Doyle Capital Partners and the other allottees, Doyle Capital Partners taking half of the 8 million allotment, would receive shares that would be pari passu. It is a question then of how one could convert that into an entitlement to rescission and that was an argument that she was obviously frustrated had not been properly developed to her.
GLEESON CJ: Pari passu means having the same right to vote as other people.
MR MARTIN: But what she said in 55 is that it is a part of the contract with every shareholder that shares in a public corporation are going to be held subject to the listing rules and the listing rules allow the stock exchange to essentially discriminate between classes of shareholders. So to the extent therefore that they decided to say that your vote on resolutions 1, 4, 6 and 7 must be disregarded at the AGM, that they were perfectly entitled to do that, and hence the line in paragraph 55 just above line 40 where she said that that was contemplated and then she said:
Further, ASX has a discretion in relation to the quotation of securities after admission. If the reason for the ASX action in relation to the placement resulted only from the Company’s breach of LR 7.1 ‑
that is the 10 per cent in 12 months ‑
the representation may be read down in that light.
GLEESON CJ: What is your submission? Were they entitled to rescission or does it not matter?
MR MARTIN: They were not entitled to rescission and it does not matter. I say they were not entitled to rescission because, looking at the bases upon which one might get rescission, the highest one could possibly put this would be an innocent misrepresentation. There was no suggestion as to fraud. Arguably, it also might be a representation about a future matter and, of course, the Trade Practices Act allows that to be taken further than the common law.
CALLINAN J: What about a total failure of consideration?
MR MARTIN: Your Honour, one of the things that the ASX was inquiring about was whether, when Mr Doyle put up his hand at the EGM on 18 October, he had actually been voting on behalf of these 8 million shares. If in fact he had – and this is a question never resolved – it would be hard to say that there had not been some element of consideration that had been accorded in respect of the shares.
CALLINAN J: Can you point to any other consideration?
MR MARTIN: Over and above that, the restraint essentially was that the vote in regard basically to five of the seven resolutions before the AGM was going to be disregarded but the shares had otherwise been allocated and that was essentially the only constraint. After that point in time, we know with the benefit of hindsight that in January the ASX decided that all restrictions would be lifted and that the shares were, in fact, allocated.
We also know that the ASX acts on the basis of complete discretion in regard to enforcement of the listing rules or in regard to whether it is going to waive compliance. Whilst one might identify a fetter in respect of five of the seven resolutions before the AGM in terms of the votes counting, it would be difficult, in my respectful submission, to rationalise that as a total failure of consideration.
GLEESON CJ: As I understand it, the argument put in the forefront of the defence case at trial was that it was perfectly obvious to everybody including Mr Doyle that Mr Doyle should not have been voting at this directors’ meeting and he was not voting.
MR MARTIN: That was his case, yes, your Honour.
GLEESON CJ: Once you find against him as a fact that he was voting, there does not seem to be a huge distance to travel from that premise to the conclusion but consistently with that approach that was taken at trial what, if anything, was said to be the foundation for the right to get the $400,000 back if there was no vote of Mr Doyle and therefore no quorum at the meeting?
MR MARTIN: The reality was that the money after the threat of legal proceedings had in fact been recovered by the corporation the focus was therefore not so much upon the basis that had been put up, although the argument was that there had been a transgression of section 195 in the process by not obtaining court approval, not getting a special resolution and there being no other statutory basis to justify the return of the capital. The focus was essentially upon the propriety of Mr Doyle’s conduct in contributing to the departure of the funds ‑ ‑ ‑
GLEESON CJ: Being conduct that he said he never engaged in because it would have been improper.
MR MARTIN: I do not know that he ever made that concession. Our respectful submission was that what there had been established, particularly if you take the step and say that he voted, was a textbook breach of fiduciary duty or, in the words of the learned trial judge put shortly, Doyle put the interests of DCP and the allottees ahead of the interests of his Corporation Chile.
GLEESON CJ: But the whole of the argument about the purpose for which he acted is counterfactual in the sense that he denied he ever acted for that purpose explaining that he knew he would not have been entitled to act for that purpose.
MR MARTIN: In regard to the question of purpose I do not think that he ever put it in ‑ ‑ ‑
GLEESON CJ: Perhaps you could tell us after lunch.
MR MARTIN: Yes, certainly.
GLEESON CJ: We do not have the benefit of Mr Doyle’s evidence. It is not reproduced in the appeal book. I am not inviting you to give us the transcript of Mr Doyle’s evidence, but what I would like to be a little clearer about is what the nature of the primary defence case was at trial.
MR MARTIN: Certainly, your Honour.
GLEESON CJ: We will adjourn until 2.15.
AT 12.38 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.10 PM:
GLEESON CJ: Yes, Mr Martin.
MR MARTIN: May it please your Honours. Your Honours, just dealing with the point that was put to me regarding purpose and the matter that might be found in the reasons of the trial judge. There are a couple of paragraphs that I would like to refer to. First, in the trial judge’s reasons at paragraph 120, which you will find between pages 285 and 286, you will see a passage that his Honour extracted from the cross-examination at trial. The point of that is really the concluding paragraph at the top of page 286 where, having acknowledged the conflict of interests, Mr Doyle confirmed that, notwithstanding that, he was still prepared to participate in a meeting of directors and he confirmed that that was the case.
Next, your Honours, there are the paragraphs at 179 on page 301 regarding the meeting of 21 November. Just below line 30 you will see the words in parentheses concerning the position that was being put:
(which I have no doubt was forcefully put) that the money be put into the DCP trust account.
GLEESON CJ: Just pausing there, there is a lot of reference in these judgments to the DCP trust account.
MR MARTIN: Yes.
GLEESON CJ: What exactly is that?
MR MARTIN: Doyle Capital Partners operates in Sydney an account that is classed as a trust account.
GUMMOW J: Classed by whom?
MR MARTIN: The bank that operates it.
GUMMOW J: I see.
MR MARTIN: But as to whether one would say that the money there is held on trust is obviously a different question, but I think her Honour Justice McLure did say on a number of occasions in her rationalisation of the MacKellar exception that she found the money, once it was there, to be held on trust and uses that a couple of times ‑ ‑ ‑
GLEESON CJ: Yes. Justice McLure actually found that this was a bona fide compromise, and I will ask you in a moment what she meant by bona fide, but the compromise that she found appears on pages 379 and 380 and, as I understand it, the compromise was that the shares were to be taken as cancelled, or the share allotment was to be taken as cancelled, and the money was to be retained, as it were, by DCP provided counsel, in counsel’s opinion, said that was lawful. If counsel said it was not lawful, the money was to go back from DCP to the company and in the meantime was to be kept in this trust account.
MR MARTIN: That is almost right, with respect, your Honour. The qualification that I would add to that is in regard to the money coming back, depending on counsel’s opinion, that was certainly the view held by Mr Satterthwaite and the view by Mr Murphy but was not Mr Doyle’s view.
GLEESON CJ: But you are not challenging Justice McLure’s findings, are you?
MR MARTIN: Certainly not.
GLEESON CJ: So I am interested at the moment in Justice McLure’s view.
MR MARTIN: Yes.
GLEESON CJ: Was it not Justice McLure’s view that the terms of the compromise were that that money was to go into the DCP trust account and was to go back to the company if counsel gave an opinion that this was not lawful?
MR MARTIN: I think the last part might be putting it too highly, with respect, and this is the differentiation between the trial judge and Justice McLure.
GLEESON CJ: Well, then we need to be precise, do we not, about what Justice McLure found were the terms of this payment to the DCP trust account?
MR MARTIN: Indeed. Your Honour, I think the answer is that the trial judge found that there was no agreement on the point simply because of the disconformity between the views taken by Mr Satterthwaite, which was that the agreement that had been reached was that the money would come back if that was counsel’s opinion.
GLEESON CJ: What did Justice McLure find?
MR MARTIN: Justice McLure said that there was a bona fide compromise notwithstanding that that was not Mr Doyle’s view. Mr Doyle’s view was that it was there pending resolution of the matter but that that was sufficient for there to be an agreement within the MacKellar exception. Notwithstanding that when it was put in cross-examination to Mr Doyle, “So was it the case that if the opinion was that you could not get around section 195, that the money would come back?”, his answer was, “Not entirely”, and then there is a passage of cross-examination. “So what actually was it pending?” “It was pending resolution.” “What does that mean?” “It means sorting the matter out.”
GLEESON CJ: Well, Justice McLure on page 380 at line 50 finds that there was a bona fide compromise.
MR MARTIN: Indeed.
GLEESON CJ: That is a reference to the good faith, amongst other things, of Mr Doyle, is it?
MR MARTIN: To the extent of characterising the belief that there is a respectable or legitimate claim to the recovery of the $400,000, yes, but no further.
GLEESON CJ: I am just wondering about the reconciliation between her finding of good faith and her finding of improper use to the advantage, et cetera.
MR MARTIN: Your Honour, it really starts when she comes to look discretely at the MacKellar compromise ‑ ‑ ‑
KIRBY J: There is a hierarchy, is there not? There is dishonest, there is mala fides, there is illegal and then you get down to improper. It is a sort of gradation of horrors coming in reverse order, so it is a question of where you slot it, but improper is at the bottom of that list.
MR MARTIN: Yes, there is no suggestion of dishonesty in this. Indeed, as a civil penalty provision, it was capable of bearing criminal charges provided dishonest intent was proved because of the requirements of that particular section of the Corporations Law. So this transgression of 232(6) with the addition of dishonest intent was capable of grounding a criminal charge but that was not the subject matter of what was pursued. It was purely a civil penalty transgression and, with respect, your Honour is quite right that “improper” does not have the connotation of a more serious characterisation of mala fide or dishonest.
KIRBY J: Now, I interrupted your answering the Chief Justice but I was just trying to express what it seems to me is a descending hierarchy from dishonest and mala fides down to improper, which is softer.
MR MARTIN: I suppose the bottom line position is that based upon the Whitehouse v Carlton category of case referred to by Justice Dawson in Chew, referred to by all members of the Court in Byrnes, by reference, I think, to the principle that a fiduciary can transgress, albeit acting honestly, albeit acting in good faith, that those sort of considerations really do not register in regard to the court’s characterisation of conduct in use of a director’s position as improper.
GLEESON CJ: But essential to your argument is that what was involved here was an advantage?
MR MARTIN: Indeed.
GLEESON CJ: Unless you make up your mind what was going to happen to that money if counsel’s opinion was that this was an unlawful transaction, what was the advantage? If the money was going to go back to the company, what was the advantage?
MR MARTIN: The advantage, with respect, was control. Can I just qualify my affirmative answer to your Honour the Chief Justice in the sense that it is of course the law after Chew and after Byrnes that the advantage does not have to materialise in the causative sense, so more correctly, it is the intention of conferring the advantage on the third party ‑ ‑ ‑
GLEESON CJ: How can you make up your mind whether there was an advantage involved in this transaction without making up your mind what was to happen to the money after counsel had given his or her opinion?
MR MARTIN: I think her Honour rationalising it departed from the views of the trial judge which was in fact there had been no compromise agreement because of the disconformity between Sattterthwaite and Doyle ‑ ‑ ‑
GLEESON CJ: We understand that Justice McLure reversed the trial judge on certain issues of fact and reversed the trial judge on an issue of law, but what was Justice McLure’s finding about what was to happen to this money after counsel had given his or her opinion, the money being in a trust account in the meantime?
MR MARTIN: Paragraph 65 on page 379 – perhaps I should start a little earlier at the last part of paragraph 64 on that page where her Honour said:
Having made the finding that the board minutes did not reflect what was actually resolved insofar as the terms of the trust were concerned, the trial Judge should have considered whether there was a reduction in capital and a compromise by reference to what had actually been resolved and agreed (if anything) with DCP. For it is the existence and terms of any agreement with DCP that is central to determining whether there was a MacKellar compromise.
Then she says in 65:
Thus, it was known to both parties that DCP had purported to avoid the placement, but there was a question as to the validity of any purported cancellation of the allotment by the Company. In light of that, the board resolved to cancel the allotment. However, the evidence –
and this beyond what is in the board minutes themselves –
establishes that Doyle on behalf of DCP agreed with the Company that DCP would hold the placement money on trust until the resolution of the uncertainty as to the legal position.
Now, that is not to be taken as a finding that he would abide by the barrister’s opinion if the barrister’s opinion was that section 195 applied.
GLEESON CJ: But it is relevant to the identification to the advantage, is it not, to understand the terms of the trust on which this money was to be held?
MR MARTIN: Indeed.
GLEESON CJ: What did Justice McLure find where the terms of the trust on which this money was to be held?
GUMMOW J: It is the top of page 380, is it not?
MR MARTIN: It is in the middle of paragraph 67.
CALLINAN J: Or is it at the top of page 380, “the compelling inference is”.
MR MARTIN: Yes.
CALLINAN J: That seems to accept that both sides agreed to that, that there was a clear understanding.
MR MARTIN: Certainly in regard to the bona fide compromise between the entity demanding the money, DCP, and the entity that had the money, Chile, there was enough predicated upon Mr Doyle’s presence at the meeting for her Honour to find, not only a bona fide compromise but an actual agreement, and that being the case was able to trigger the MacKellar exception simply because the articulated claim by DCP was an arguable one rather than one that had been characterised as one that was necessarily correct or had been established.
GLEESON CJ: But the compromise that her Honour found was bona fide was a compromise that involved paying the money into a trust account until they got a legal opinion on who was entitled to it.
MR MARTIN: Yes.
GLEESON CJ: Well, why is that an advantage?
MR MARTIN: In our respectful submission, it is not an advantage – I am sorry, I withdraw that. The question is when Mr Doyle, qua director, used his position to act in a dual capacity and bring that about, when he was acting qua his directorship of Chile, his intention was to advantage the DCP entities, and that is all that one needed to do in order to trigger satisfaction of 232(6). Whether it was actually an advantage or not in a causative sense does not matter, in my respectful submission, because Chew quite clearly establishes – and her Honour referred to the passage – that the advantage does not have to mature. It just has to be for the purpose of the third party, in this instance, obtaining the advantage.
CALLINAN J: But he intended it to occur ‑ ‑ ‑
MR MARTIN: He did.
CALLINAN J: ‑ ‑ ‑ and what he intended to occur occurred, and what occurred was a bona fide compromise. So how can that be improper?
MR MARTIN: As between the two companies, Chile and DCP, there was an agreement and a compromise of an arguable claim. However, in regard to the more material issue of transgression and improper use, Mr Doyle was acting, as the trial judge found, to advantage the interests of the other third party, namely the allottees including DCP. That was enough because, as the trial judge said, what he did was to put the interests of the third party ahead of the interests of the corporation Chile.
GUMMOW J: That is an internal management situation. Nothing wrong with it, but looking at that, that is what it is though, even though as a matter of externals everything looked okay.
MR MARTIN: Indeed, but ‑ ‑ ‑
HAYNE J: But is there not a tension in the argument, the tension being between whether there has been a compromise of the claim to cancel the allotment and the notion that the final decision about whether money will be returned is postponed? The compromise is not a compromise that resolves the issue of cancellation at all.
MR MARTIN: Your Honour, that was precisely our submission to the trial judge and I think, with respect, that is why he was not satisfied that there was actually agreement given the fact that there may not indeed be a resolution, as indeed subsequent events showed when the barrister’s opinion matured it was that section 195 could not be escaped from. Chile then demanded the money back from the trust account and Mr Doyle refused.
GLEESON CJ: Well, what actually happened in the end was they settled for half, about, did they not?
MR MARTIN: No, your Honour, more than half. There is a misleading passage in there that I think suggests that it was only half but I think the case has been run on the basis that almost all the money, save for the placement fee of $24,000 something, came back after the threat of legal proceedings.
GLEESON CJ: But if DCP has to pay the money back out of its trust account to the company, in the event that there is a ruling regarded by the parties as definitive as to who is entitled to the money, what is the nature of the advantage that is being obtained?
MR MARTIN: The advantage, in my respectful submission, is a rather crude and practical one and it is simply the advantage of control in the sense that the commercial context is $400,000 put into Chile in a scenario where, putting it mildly, the investment does not necessarily look like it is going to be a good one. The company’s shares are suspended. There are proceedings being taken against it by the ASC, as it then was. There is a faction that is very unhappy about the Carrizal Alto Project and essentially the $400,000 swings the position very closely between health and unhealth.
GLEESON CJ: Is the advantage in the fact that at least the result has been procured that the company has agreed to cancel this allotment and pay the money back to DCP if it can lawfully do so?
MR MARTIN: Yes, in the sense that the money moves pursuant to that resolution from being held by Chile to circumstances where it is now on the other side of the country. Now, whether it remains there remains to be seen but there must, in a practical sense, be a tangible advantage to having it under control in that environment.
HAYNE J: But if the company can lawfully return the money, it can do so only if it is bound to and it is a yes/no answer, is it not? Now, what is the advantage which is Mr McCusker’s point that you obtain in saying, “If you are bound to pay me money, you will pay me money”?
GUMMOW J: The answer is the imposition of the trustee, is it not?
MR MARTIN: In the sense that ‑ ‑ ‑
GUMMOW J: It is held on trust for A or B depending upon the outcome of this opinion and if the opinion goes one way, the trustee is obliged to hand it over and can be ordered.
MR MARTIN: Yes.
CALLINAN J: What is the difference between that and a determination by a court? A bit like an arbitration. The parties have agreed to be bound. No different from the situation in practical terms that would have been so had there been a determination by a court. They just substituted a barrister for the court.
GLEESON CJ: What exactly was the question that the barrister was going to be asked?
MR MARTIN: Whether section 195 of the Corporations Law was applicable, in which case the money could only be returned – he was not really going to the question of whether the demand itself had merit. It was a question of whether ‑ ‑ ‑
GLEESON CJ: Where do we find the question? In the papers where can we find the question?
MR MARTIN: There is not a lot about it. In paragraph 42 of her Honour’s reasons at page 370 she says, as you can see there:
the Company received counsel’s opinion that the payment of $400,000 was a reduction in share capital to which s 195 CL applied, thus requiring a special resolution of shareholders and confirmation by the Court. It was common cause that s 195 CL had not been complied with. However, counsel’s opinion is based in part on a misapprehension that proposed resolution 3 (to ratify the placement) was put and/or passed at the AGM on 22 November 1996.
GLEESON CJ: That is why I am so interested in what her Honour regarded as the terms of the trust upon which this money was paid into the trust account.
MR MARTIN: All of this component of her Honour’s reasoning regarding the MacKellar point is commencing at paragraph 56 on page 374. To that point, she has been considering the more absolute position of voidable or void. She rejects void as untenable. Voidable she says, as your Honours have been taken to a number of times now, “I really can’t deal with it because there is insufficient material”. It is at 56 she then focuses upon arguable in the context of an arguable position being enough to generate the exception in accordance with MacKellar’s Case.
As to the trust, it is between paragraphs 62 and 68, between 378 – and in paragraph 64 on page 379 she is dealing with the question of common intention as between Mr Doyle and Mr Satterthwaite from the perspective of finding the agreement that the trial judge did not find in order to generate the necessary meeting of minds between the two corporations, DCP and the company, and it is because of Mr Doyle acting in the dual capacity that she, unlike the trial judge, finds the agreement.
It is only then at paragraph 68 where she comes to consider the question of bona fides from the perspective of the corporation that she assesses Satterthwaite, says that “no finding . . . was made in respect of Doyle” but bearing in mind what has been said, the same characterisation made, that is of bona fide, should be made to him and, accordingly, the compromise that she has found on the common intention is said to be made bona fide.
GLEESON CJ: What I am suggesting for your comment is that the reasoning that her Honour pursued on the question of whether there was an unauthorised reduction of capital was also perhaps relevant to the question of whether there was an advantage. That is to say, that depending upon exactly what she thought was the bona fide compromise, there may or may not have been an advantage.
MR MARTIN: What she said about advantage seems to be tied very strongly to the question of intention. I say that because when she starts the analysis at paragraph 71 she starts by saying that there is a connection between purpose, not merely for the purposes of advantage but also it has utility for the purposes of impropriety.
GLEESON CJ: Take the example raised by Justice Callinan. Suppose the evidence showed that at this meeting of directors Mr Doyle said, “DCP claims to be entitled to have that allotment cancelled and to get the $400,000 back. What I want to happen is this. We are going to have an urgent arbitration next Monday, by a barrister, as to whether we are entitled to have that allotment cancelled and, if we are, whether we are entitled to the $400,000, and in the meantime the $400,000 will be paid into a solicitor’s trust account to abide the event, to abide the outcome of the arbitration.” Would that constitute an advantage or a purpose of obtaining an advantage?
MR MARTIN: If it was paid into a solicitor’s trust account to abide an event, in those circumstances it would be hard to draw a characterisation of advantage from such a scenario.
GLEESON CJ: So what is the difference between paying it into a solicitor’s trust account and paying it into a DCP trust account?
MR MARTIN: The position here was one of control in the sense that there was nothing to govern from the DCP perspective in a sufficiently tight enough way what would happen when the barrister’s opinion emerged.
GLEESON CJ: Was that the basis upon which Justice McLure decided this case?
MR MARTIN: No. In my respectful submission, she reached the views that she did in regard to the MacKellar exception. She then moved on to consider discretely the question of infraction against section 232(6). What, in my respectful submission, was the significant factor in that respect was the question of the unchallenged finding concerning the purpose of the appellant in acting as he did, which she sets out in paragraph 75. The long and the short of it was that the trial judge having found that he was acting in the interests of the allottees as third parties in the conduct which he had implemented, that the consequence of that enabled her to reach the conclusion, as she said in 73, that:
it is a short step from there to the conclusion that a person made improper use of his position for a proscribed purpose.
HAYNE J: The point can be put in this way. Go to page 382 of the reasons in the last two lines:
that advantage being the return of the money to DCP and Doyle’s control –
I emphasise “DCP and Doyle’s control”. Is that statement consistent with what appears in the first five lines of page 380, which is where her Honour finds:
the compelling inference is that in the event the cancellation of the allotment was accepted by both parties as valid or was established to be valid, the moneys would be paid to the allottees and if the cancellation was invalid, the money would be returned to the Company.
Is there not a tension between the two statements?
MR MARTIN: I think the passage that your Honour has taken me to at the top of 380 is the tension between the position of Chile through Satterthwaite thinking that the barrister’s opinion is going to be determinative.
GUMMOW J: What do we mean by “determinative”? Of what?
MR MARTIN: In the sense ‑ ‑ ‑
GUMMOW J: You keep talking about the money. That is inapt too. There is no bucket of ducats. There is going to be a constituted trust fund. I am surprised you say having a vested interest in a constituted trust fund is not an advantage, as distinct from an unliquidated claim, a common money claim.
MR MARTIN: I think her Honour from time to time – I am not sure if it is here – uses the phrase that the money could come back – yes, she is in 66. It is “a contingent interest in the trust fund”.
GUMMOW J: Whereabouts is that?
MR MARTIN: That is in line 4, paragraph 66 on page 380.
GUMMOW J: “Contingent”?
MR MARTIN: Yes:
The fact the Company had a contingent interest in the trust fund pending determination of the legal position and a right to the return of the moneys in the event the cancellation was invalid does not alter the position.
GLEESON CJ: She finds that the company – this is consistent with what she said in paragraph 65. She finds that the company had “a right to the return of the moneys in the event the cancellation was invalid”. What does that mean? In the event that a barrister said the cancellation was invalid?
MR MARTIN: There is another phrase where she uses “ultra vires” which ‑ ‑ ‑
KIRBY J: Maybe that is what she means when she says “no established lawful entitlement”. They were in a sense jumping the gun on the established lawful entitlement by getting it into their trust account, which is a whole lot better, as Justice Gummow said, than having a common money claim. But the problem still nags you that if in the end it would have gone back to the company, then what is the advantage that they have secured by this intermediate step?
GUMMOW J: One advantage is an intervening liquidation, is it not?
MR MARTIN: Yes.
HAYNE J: Could I amplify his Honour’s question by saying which would you rather have, a contingent interest in a trust fund or a claim in debt against XY No Liability having a record of some interest?
GLEESON CJ: Which is why the question of insolvency is not immaterial. Behind all commercial law stands the spectre of insolvency. That is what commercial law is about.
KIRBY J: But we are told that that was not a major card in the game. It does not loom very large in the reasoning.
MR MARTIN: It is mentioned by his Honour the trial judge. I think Justice McLure refers to it in passing, but I suspect the basis for the conclusion is more the purpose of intent, which is essentially unchallenged, predicated on her analysis of the law at 73, which is:
The accrual of an advantage or the suffering of a detriment is not an element of the prohibition.
So what she is looking for is the purpose of obtaining the advantage in the context of a finding that at all times Mr Doyle’s intention was to advantage the allottees in DCP.
GLEESON CJ: So Mr Doyle is saying, “To the extent to which I can – and I realise there is a question mark about it – I’m going to get my hands on this $400,000”.
MR MARTIN: Control, your Honour, yes.
GLEESON CJ: Was that put to Mr Doyle as his purpose?
MR MARTIN: I cannot say now that a question in cross‑examination in precisely those terms was put. What his Honour found though at I think 206 at page 307 – sorry, I should take you back to page 306 at the bottom, paragraph 205, where his Honour is considering whether the purpose was to inflict a detriment on the company, Chile, and rejects that in 204. What he says in 205 is:
he did not engage in the relevant conduct “in order to” cause detriment to the Company, rather he did so to obtain an advantage –
and the words that follow. He summed it up in 206:
shortly stated, he put the interest of the allottees ‑ ‑ ‑
GUMMOW J: Wait a minute, 205, line 8 is not correct either, is it?
That result was the payment of the money to DCP under his control.
That is not a complete statement, is it? It might be the situation that he could demand payment from DCP if certain things happened. Is that the idea that is trying to be conveyed there?
MR MARTIN: I think that reflects the difference between the trial judge and Justice McLure in the sense that she was prepared to find an agreement on certain terms, notwithstanding that Mr Doyle personally ‑ ‑ ‑
GUMMOW J: Justice Gaudron always used to say the intersection between criminal law, commercial law and trust law was never a happy one. The last passage in discussion indicates that.
MR MARTIN: Yes.
CALLINAN J: Mr Martin, I think you were asked by the Chief Justice what the question was that was submitted to counsel.
MR MARTIN: Yes, I was, your Honour.
CALLINAN J: Does that appear in paragraph 75 at page 277? It is not a complete indication but I think it suggests the substance of the question.
MR MARTIN: I am grateful for that, your Honour, yes.
CALLINAN J: The trial judge accepted Mr Murphy’s evidence, is that right?
MR MARTIN: He did on the point of what occurred at the meetings.
CALLINAN J: What did Mr Murphy say about the terms of the trust or what the trusts were?
MR MARTIN: He did not say a lot about the terms of the trust. I think he was, like Satterthwaite, of the view that the barrister’s opinion would determine whether the money would return or not, whereas Mr Doyle did not accept that. All he accepted was that the matter was held pending a resolution but that the barrister’s opinion was not going to necessarily be determinative of the resolution; it was just an ingredient, as it were.
GLEESON CJ: Was there a brief to counsel?
MR MARTIN: Yes, there was.
GLEESON CJ: And is that in evidence?
MR MARTIN: It is not before your Honours. Before the Full Court, certainly counsel’s opinion was before the Full Court.
GUMMOW J: It should be here. It was in evidence, was it?
MR MARTIN: It was in evidence before the Full Court. The opinion was, yes.
GLEESON CJ: It is just not reproduced in the appeal book.
MR MARTIN: It is not, no.
GLEESON CJ: Maybe it starts off with some questions.
KIRBY J: I thought I saw it somewhere. Is that a trick of the mind? It was not annexed to any submissions?
MR MARTIN: It may be referred to in passing in a document, but certainly counsel’s opinion is not part of what has been put before your Honours, although that is easily remediable.
GUMMOW J: What about item (lxii), as Justice Hayne reminds me, on page 9 of the index of the appeal book, “opinion”, et cetera.
MR MARTIN: Mr Stavrianou’s opinion?
GUMMOW J: Does that have anything to do with it?
MR MARTIN: He was the counsel who was briefed who provided his opinion in December, your Honour.
GUMMOW J: I see.
MR MARTIN: My recollection is that the brief to him was not included.
GUMMOW J: No, but what about the opinion?
MR MARTIN: The opinion was, yes. That was it.
GUMMOW J: Well, where is it?
GLEESON CJ: If we can have a look at that, we might find the question he was asked, which might have a bearing upon the terms of the trust on which this money was being held, that is all.
CALLINAN J: While that is being looked up, Mr Martin, I asked Mr McCusker about the state of the accounts. I now see that there are some findings. The company became insolvent. When did the administrators come in?
MR MARTIN: Your Honour, I believe it was about 17 January. I just need to check that.
CALLINAN J: According to the report that was made, there was a deficit of about 91,000, is that right? Is that the extent of the insolvency on the report? It would have been a report commissioned by the administrators, I would think.
MR MARTIN: I cannot offhand recall the figure.
CALLINAN J: The numbers are there somewhere. When you have a mining company and you obviously have questions of a proper evaluation of the tenements – you might remember I also asked a question about the paid‑up capital.
MR MARTIN: Yes.
CALLINAN J: $91,000 deficit does not seem necessarily a lot and solvency or otherwise might be a matter upon which minds might differ. It might depend upon valuations and opinions. It hardly suggests that the company was in danger of becoming insolvent in November when these events took place, which bears upon the question of advantage, if any. If nobody thought that there was a real question of solvency in November, then that may have a bearing upon Mr Doyle’s purpose or state of mind. You understand what I am putting to you?
MR MARTIN: Yes, your Honour. The annual report is in the papers. That is the annual report of what was then InterChrome NL.
CALLINAN J: What date is that? That would be for the previous financial year.
MR MARTIN: It is. The accounts are to 30 June 1996. At page 84 of the appeal book, it goes out with the notice of annual general meeting under cover of a letter of 25 October 1996. At page 88 you will see the chairman’s report, you will see Mr Mountford signs on 27 September 1996, and the consolidated results are there to be seen on page 89, more losses.
CALLINAN J: Where is the balance sheet?
MR MARTIN: The balance sheet is at page 99.
CALLINAN J: Shareholders’ funds.
MR MARTIN: There is net assets on the consolidated balance sheet to 30 June of about $1 million. Then at page 114 under the heading “SHARE CAPITAL” your Honours can see there again as at 30 June there was 59,919,160 issued and paid-up shares, making up the figure at the foot of the table just under line 46.
CALLINAN J: It seems to have been a pretty unlucky company. It had a lot of accumulated losses. It never seemed to strike any of the cobalt it was looking for.
MR MARTIN: Cobalt, nickel and gold. Your Honours will see if you look at the ‑ ‑ ‑
KIRBY J: Maybe that is the history of mineral companies. When they strike it rich, they are very famous and very popular. Then when they do not, they get pursued.
MR MARTIN: Yes. There does seem to be a certain search for El Dorado first in the Philippines and then ‑ ‑ ‑
CALLINAN J: It reads a bit like a law report out of the 19th century.
GUMMOW J: Yes, Peruvian Guano.
GLEESON CJ: Certainly nothing of a kind you would see in Western Australia.
MR MARTIN: Can I take the Fifth on that point, your Honour? We have now located the opinion of Mr Stavrianou. We will provide this to your Honours. I think it is an opinion of some 15 pages, but he recites the questions in respect of which he is asked. He says:
The case submitted for opinion is one in which Chile Minera NL (“the Company”) seeks advice in relation to the issue of 8 million ordinary fully paid 50 cent shares in the Company and 8 million attached options.
My opinion is now sought as to two questions:-
1. Whether or not the issue can be viewed as void ab initio.
2. The right of the Company to forward $400,000 to Doyle Capital Partners Trust account.
CALLINAN J: That is accurately summarised in paragraph 75 of the trial judge’s reasons.
MR MARTIN: Yes, I am obliged to your Honour for taking me to that. Would it be convenient if we have that photocopied and provided to your Honours forthwith?
GLEESON CJ: Yes, please.
MR MARTIN: That will be done. Your Honours, I wanted to try and get to Justice McLure’s observations between paragraphs 71 ‑ ‑ ‑
KIRBY J: Before you finish I would like you if you would, from the standpoint of your client, to say how your theory of the meaning of the Act is more in keeping with the imputed purpose of Parliament in the objects of the Act to ensure good governance of corporations better than the appellant’s theory. After all, you are appearing here for a corporation that has statutory obligations to uphold the Act and I would like to see why you are right and why Mr McCusker is wrong.
MR MARTIN: Your Honour, can I go to that directly and say that the legislative history of the section is set out, traced back to a section I think in the Companies Act 1958 (Vic) by their Honours Justices Gummow and Hayne in Angas v Carabelas, to which your Honour was also a party, and I think the conclusion was that when the Victorian provision was introduced, it was an attempt to embody the state of the existing law regarding directors’ obligations, notwithstanding that it might have consequences beyond the existing law.
So by reference to that, the analogy is a very strong one to the position of fiduciary duty and the duties which a corporate director owes in that sense to act in the best interests of the corporation. In my respectful submission, where you have a finding that a director has acted in the interests of a different corporation – indeed in these facts where he is the very author of a letter of demand threatening his other corporation with legal proceedings that afternoon unless the money is handed over – that you have the most textbook breach of fiduciary duty capable of being observed.
In that sense, the correlation between the statutory law now seen in 232(6) and the law governing fiduciary obligations is very strong and in harmony, in my respectful submission, with the conclusion that once you reach the view that someone has acted to advantage third party interests, that the conclusion of impropriety, recognising where it sits on the scale, as your Honour has rightly put to me, is inevitable. Couple that then to the question of whether an advantage is obtained or not in a causative sense as being irrelevant after the Court’s decision in Chew, the only question then is whether it was the purpose of the director in question to gain the advantage for the third party.
You have essentially the unchallenged finding of the trial judge on that point which was picked up and applied by her Honour. It is not correct, in my respectful submission, to say that her Honour simply took a transgression of section 232A by presence or voting and said without more that that automatically translates into a transgression against section 232(6) by reference to “improper use”.
GLEESON CJ: You may be right, but the interposition of this trust account is a slightly awkward circumstance, is it not?
MR MARTIN: It certainly appears that way, your Honour. Notwithstanding that ‑ ‑ ‑
KIRBY J: Do you mean by that that it appears that way in some of the questions that have been asked, or do you concede that it is that way?
MR MARTIN: It complicates to a degree what would otherwise be a fairly clear transgression of breach of fiduciary duty. It all hangs on the question of advantage but, in my respectful submission, the argument has to be that ‑ ‑ ‑
GUMMOW J: Part of your trouble is that, perhaps unnecessarily, you equate “advantage” with “control”. You keep using this word “control”. There may be more to it than that. The fact there is more to it may nevertheless not be fatal to you ‑ ‑ ‑
MR MARTIN: Your Honours, Justice McLure at paragraph 71 identified the connection between the discrete elements of the transgression, “the connection between improper use and gaining an advantage” by reference to an extract from Chew’s Case that she has set out there. She then in paragraph 72 identified five elements in regard to the transgression and separately identified impropriety as element (3) as distinct from purpose in regard to elements (4) and (5).
When she referred to the “short step” in paragraph 73 from the independent impropriety, she was picking up the same words that were used in Donald’s Case in the Queensland Court of Appeal, “short step”. But the short step in Donald’s Case was a short step from breach of fiduciary duty by Mr Donald seeking to advantage his other companies at the expense of the contractor company that was paying out those amounts of money. So,
read as a whole, the passages between paragraphs 71 and 75 indicate, in my respectful submission, that her Honour wove in accordance with the law as identified in Chew and in Byrnes the interrelationship between purpose and the finding of impropriety. In a sense basically, as the trial judge had done, she identified the breach of fiduciary duty as the impropriety.
Could I just say something about the argument as to entitlement predicated upon the allotment being voidable. In our respectful submission, in the absence of any argument about fraud, to get rescission based upon what at highest could be innocent misrepresentation, if that indeed was the misrepresentation, concerning an allotment of shares by a corporation to a shareholder, one would be in the realm of needing the intervention of equity in equity’s auxiliary jurisdiction to make an order rescinding that allotment.
It is not therefore one of those situations in the common law for fraud or for duress or something of that kind where the party who has been wronged can unilaterally avoid the assistance of the court as required. Then one would get into the arena of discretion and the question of whether the remedy of rescission was appropriate or whether terms were important as seen, for instance, in Maguire v Makaranis, where the rescission was made upon terms about repayment of the moneys that had been loaned. It raises a whole gamut of those sort of questions that were never examined.
GLEESON CJ: I think Justice McLure said that the information just was not there to enable her to reach a firm conclusion on the merits of this claim to have the allotment cancelled.
MR MARTIN: Yes, indeed. Certainly the discretions of the Australian Stock Exchange as to compliance and waiver were a large part of that. What should also be fatal, in my respectful submission, to an argument for rescission is the fact that we know that in January the 8,000,000 shares were actually given official quotation. Mr McCusker took you to paragraph 48 of her Honour’s reasons at page 371 where that happened. So the idea of a rescission seems to be totally out of harmony with what in due course transpired when the ASX abandons its objections and essentially allows official quotation to the shares. That is the passage.
Your Honours, I will make sure that the opinion of Mr Stavrianou is provided to you as soon as possible, perhaps first thing tomorrow morning. Subject to that, those are our submissions.
GLEESON CJ: Thank you, Mr Martin. Yes, Mr McCusker.
MR McCUSKER: Your Honours, may I go to the question that your Honours raised after the lunch adjournment, the question of advantage. There is a number of passages dealing with what the agreement was as found by Justice McLure from which there is no cross-appeal or contention.
HAYNE J: Can I put the point to you this way so that you may focus your submissions perhaps a little more closely. The advantage which the appellant used his position to gain was the segregation and creation of a fund which either his firm controlled or of which his firm was constituted trustee and in which his interests had a contingent interest.
MR McCUSKER: Your Honour, can I deal with that first by referring to the case that the appellant was called upon to meet. That appears in paragraph 26 of the statement of claim at page 28 of the appeal book where it is said in the particulars:
The advantage . . . was a return of $400,000 at a time when the Allottees had no established lawful entitlement to those funds, alternatively, when their entitlement to those funds was in question.
So that is what was put against us. It was contended for the appellant that that particular was not made out because the funds were in fact agreed to be placed and were placed in a trust account.
The reference to the agreement as found by her Honour Justice McLure – I will take you very quickly to the relevant references. It starts at appeal book page 375. Your Honours questioned my learned friend about whether the compromise was that there should be an agreement to abide by the decision of the legal adviser – that is the counsel. That was not quite as her Honour did find it. There was some debate before the Court of Appeal on this question and her Honour concluded – at page 375 she said at paragraph 57:
It is not clear to me that the trial Judge actually made a finding as to the terms of the arrangement . . . This finding –
that is, that there was a reduction of capital –
was made in response to the appellants’ contention that there was no capital reduction because the money was to be held in trust in accordance with the advice of the Company’s legal adviser –
At page 378 is the next relevant part. Having referred to what Satterthwaite said and what his Honour the trial judge said about that, she said towards the end of paragraph 62 at lines 45 to 50:
In my respectful opinion what the trial Judge failed to do but should have done is make a finding as to what the Company had actually resolved and agreed with DCP. However, it is open to this Court on the basis of the contemporaneous documents and the trial Judge’s unchallenged findings to determine these matters.
We go then to page 379 at line 30 where her Honour observes:
Where the participants differed –
that is, the participants at their meeting –
and on which there was no common intention, was whether counsel’s opinion would be accepted by DCP and the Company as determinative of their legal entitlement.
Could I just mention in that regard – I know it flips back a little, but at page 370 her Honour refers to counsel’s opinion at paragraph 42 and says:
On 17 December 1996 the Company received counsel’s opinion that the payment of $400,000 was a reduction in share capital . . . requiring a special resolution . . . It was common cause that s 195 CL had not been complied with. However, counsel’s opinion is based in part on a misapprehension that proposed resolution 3 (to ratify the placement) was put and/or passed at the AGM on 22 November 1996. On 19 December 1996 the Company requested DCP to return the subscription money.
There was some debate about this particular issue before the Court of Appeal as to whether there was an agreement to be bound by counsel’s opinion or an agreement simply that the moneys be held in trust pending determination of the correct legal position. Towards the foot of page 379 she says at lines 50 to 55:
the evidence establishes that Doyle on behalf of DCP agreed with the Company that DCP would hold the placement money on trust until the resolution of the uncertainty as to the legal position. Although the witnesses differed in their understanding as to whether or not counsel’s opinion would be accepted by the parties as determinative, the compelling inference is that in the event the cancellation of the allotment was accepted by both parties as valid or was established to be valid, the moneys would be paid to the allottees and if the cancellation was invalid, the money would be returned to the Company.
In 66 she refers to:
The fact the Company had a contingent interest in the trust fund pending determination of the legal position and a right to the return of the moneys in the event the cancellation was invalid does not alter the position.
At page 393 she returned to that question in dealing with the position of Mr Satterthwaite and said at the top of the page:
On any view, the moneys were to be held in trust pending the resolution of the legal issue. The Company at all times had a proprietary interest (albeit contingent) in, and remedy against, the trust fund until resolution of the legal issue.
GLEESON CJ: Was there a possibility at the time that the company was about to fall under the control of hostile hands?
MR McCUSKER: The answer to that is, yes, there was that possibility because there was a move on foot. There was a hostile group of shareholders.
GLEESON CJ: That is the attraction of getting the money into the trust account, is it not?
MR McCUSKER: That was not put against Mr Doyle as being the purpose. The purpose ‑ ‑ ‑
GUMMOW J: No, but it is an advantage.
MR McCUSKER: If it was an advantage it was not one that was perceived by him to be an advantage. So it really comes back to that…..the question of intention or purpose is relevant, as clearly it is.
CALLINAN J: It was not pleaded as an advantage.
MR McCUSKER: It was not pleaded. The only advantage that was pleaded was that the money was returned to the allottees, and it was not.
HAYNE J: Your answer to it was “No, it was held on trust”.
MR McCUSKER: That is so.
HAYNE J: That was the answer made under the cover of the general denial contained in your pleading. I am not saying it was not open to you, but that would leave it open, would it not, to the respondent to contend that holding on trust was a relevant advantage?
MR McCUSKER: In my submission, no, your Honour, because the case was run before the trial judge, not on the basis that that was a relevant advantage but on the basis that the money should ‑ ‑ ‑
GUMMOW J: I asked you about this earlier. You said you were not complaining of any evidentiary deficiency in the shape the case took before the Full Court.
MR McCUSKER: We are not complaining of any ‑ ‑ ‑
GUMMOW J: You are now complaining of that or ‑ ‑ ‑
MR McCUSKER: We are saying that the case we had to meet was not that the advantage was the placement of monies in a trust account.
GUMMOW J: I know. Are you are complaining then, of an evidentiary demand of opportunity, as it were? You see, Justice McLure ‑ ‑ ‑
MR McCUSKER: I see. I am sorry, your Honour. I had ‑ ‑ ‑
GUMMOW J: You see Justice McLure said she was alive to all this as one might expect and she said, “I will look at the documents and the undisputed evidence”. This is what I get out of it.
MR McCUSKER: Yes, and ‑ ‑ ‑
GUMMOW J: It is now put against you, I think, that one gets something to that effect with a little more wrinkle to it. Maybe it is an analysis of the trust and you complain about that, but how?
MR McCUSKER: We complain about that by saying we were faced at trial simply with an assertion not that we had put the money in trust, and that in some way conferred an advantage, but that the money had been paid by way of an unlawful reduction of capital back to, in effect, the allottees. Our contention was that it was (a) not an unlawful reduction of capital because it was either voidable or a valid compromise, and in any event was not paid to the allottees but was held in trust and as her Honour said at page 393 that I took you to a moment ago, line 10:
There is no finding (or evidence to support it) that DCP would or might abuse its position as trustee. Indeed, the evidence is that the placement money remained in the DCP trust account until the dispute was settled by agreement.
Now, nowhere in the case put against us or run against us at trial was it suggested that putting the money into the DCP trust account was an advantage in the sense that there was a danger that the company might go into liquidation or might fall into hostile hands. There was not that kind of argument run.
It was not put to Mr Doyle that that was behind his purpose or intention or underlying his purpose or intention. It was simply that the payment was an unlawful reduction of capital and the payment was therefore for the purpose of an advantage and the advantage was perceived to be simply the payment without specifying that it was related in some way to some collateral matter such as the possibility of the company going into liquidation. There was no suggestion that at that point it was going into liquidation or that it was about to. It was not put to him that he did it because the company was about to fall into hostile hands or he apprehended that to be so.
GLEESON CJ: Mr McCusker, is there not another possible aspect of this compromise that in circumstances where there was a potential dispute about whether the company was obliged to refund the $400,000 and cancel the shares at all, the directors got to the point of agreeing that if the company could lawfully do that it would do that?
MR McCUSKER: That is so.
GLEESON CJ: In other words they got to the point of agreeing that so long as this does not infringe the law about maintenance of share capital, we will give you your money back.
MR McCUSKER: That is what they effectively did, yes.
CALLINAN J: Well, is that right? I need to understand that, or is it “can” or “bound”, that they could give the money back or whether they were bound to give the money back, which really leads to another question. If this was not a reduction in capital then what basis at all was there for the retention of the money by the company? How could you say that it was voidable as opposed to void? I do not know. What is the answer to that? Were they in fact bound to hand the money back?
MR McCUSKER: Yes, they were bound to hand it back if it was not an unlawful reduction of capital.
CALLINAN J: It was not a question of exercising a discretion to hand the money back. They were either bound to hand it back or they were not.
GLEESON CJ: Your answer to Justice Callinan was that that was the terms of the compromise they made, but Justice McLure said, “I just do not have enough information to know or to make a decision about whether DCP was entitled to force a cancellation of the share allotment” and, as your opponent pointed out, that would have included, amongst other things, the way the ASX exercised some of its discretions.
MR McCUSKER: There again on the question - the argument that was raised as to voidability, the question of the ASX coming in and perhaps in some way being able to qualify the right to a void, it was not raised, it was not argued. It was just that Justice McLure said that she did not have sufficient information to reach a conclusion on that.
GLEESON CJ: But that is the point, is it not? If the judges in the Supreme Court of Western Australia were right to say that they simply could not conclude whether this was void or voidable or neither, your client was a step ahead of his earlier position as a result of this resolution by having got to the company to the stage where it said if counsel says that this is an unlawful reduction of capital we will pay the money back and cancel the allotment.
MR McCUSKER: I do not know that that is quite what the agreement was found to be.
GLEESON CJ: That is why we are having so much difficulty working out the terms of this trust.
MR McCUSKER: The terms, as her Honour put it at the top of page 380:
in the event the cancellation of the allotment was accepted by both parties as valid or was established to be valid, the moneys would be paid to the allottees and if the cancellation was invalid, the money would be returned to the Company.
Then in 66 she says:
pending determination of the legal position -
which probably relates to cancellation, the question ‑ ‑ ‑
GLEESON CJ: The problem of validity was a problem about reduction of capital.
MR McCUSKER: Yes, it was.
GLEESON CJ: So I would guess that when we look at counsel’s opinion we will find that what counsel is giving an opinion about is the lawfulness of this payment having regard to the law relating to the maintenance of share capital.
MR McCUSKER: My recollection is that is correct, your Honour, although her honour Justice McLure said that unfortunately counsel was not correctly briefed because of an incorrect statement in the brief, which I have taken your Honours to.
GLEESON CJ: This is why we have asked for the opinion, but was counsel asked to advise on whether the allotment was void or voidable?
MR McCUSKER: No.
CALLINAN J: Getting back to something that Justice Gummow asked you. He asked you about, in effect, evidentiary deficiencies.
MR McCUSKER: Yes.
CALLINAN J: Having regard to the fact that this Briginshaw test applies - no onus upon you in relation to anything here - why can you not take advantage of this?
MR McCUSKER: Quite so, your Honour. That is the reason I went back to what is the case put against us. There is the case put against us. It was not run against us that there was an advantage merely by virtue of the fact that the company no longer had control. It was now in the control of the trust account. As Justice McLure said there was no suggestion that Doyle would not observe the terms of the trust or the terms of the agreement or that there was any problem with the money being in the trust account or that he would not act in accordance with what the correct legal position was.
CALLINAN J: To use the language of the Chief Justice, the onus upon the respondent was to prove that you did get a step ahead.
MR McCUSKER: Yes, that is ‑ ‑ ‑
CALLINAN J: You did not have to prove anything in relation to that.
MR McCUSKER: Quite so, your Honour. What we did prove was that the money was paid into a trust account by agreement, but it was a trust account where there was no payment to be made to the allottees until there was a determination of the correct legal situation. Now, is that advantage?
CALLINAN J: Or if it was left in an equivocal position, why should it be inferred that it was an advantage?
MR McCUSKER: Yes. I think Rich’s Case has some bearing on that too, your Honour, makes that point in terms of ‑ ‑ ‑
CALLINAN J: I am not asserting that. I am just asking you to comment on it.
MR McCUSKER: With respect, we do adopt that approach because although it is a civil action it involves, in effect, penal provisions. Could I come back to that matter that was raised with me this morning, the question of penal provisions, very briefly? Section 1311 deals with the general penalty provisions. Section 1311(3) refers us to Schedule 3 penalties, but the Schedule 3 penalties do not apply to either of the statutory provisions that we are dealing with. It does not apply to section 232A(1), nor does it apply to section 232(6). Section 1311(5) refers to “5 penalty points”:
Except as provided in subsection (3) or (4) or in a provision of this Law –
The five penalty points by section 9 the penalty is $100. That is defined by section 9. Section 1317 provides for civil penalties and the civil penalty provisions appear in Part 9.4B and provides that each of the following provisions of the Corporations Law is a civil penalty provision. Section 232(6) is one of those. Section 1317EA(3) provides that:
The Court may also make against the person either or both of the following orders in relation to the contravention –
So, in that somewhat tortuous way, we reach the result that an infringement of 232(6) may be subject to a very large penalty, that is an order prohibiting a person from managing a corporation and an order that a person pay the Commonwealth pecuniary penalty not in excess of effectively $200,000. The pecuniary penalty cannot be ordered by section 1317EA(5) unless the court “is satisfied that the contravention is a serious one”. So it does highlight the difference between an infringement of the prohibition against participating in a directors’ meeting and voting where there is an interest where only five penalty points are applicable and the breach of section 232(6). The latter is a very serious breach indeed.
Your Honour Justice Callinan asked me several questions this morning. The paid‑up capital provisions, if I can just give you the references. Your Honour, I think you have been taken to at least ‑ ‑ ‑
CALLINAN J: I think we have seen them from the annual reports.
MR McCUSKER: It works out to a paid‑up capital of $12.9 million approximately and the Chile venture referred to in appeal book 197, the cost of that would have been $US165,000 plus 35 million shares to be allotted at four cents each. The state of accounts, again, I think your Honour now has that. Your Honour also asked whether there was any evidence as to a relationship between Mr Satterthwaite and the Chile vendors and the answer is there is no evidence about - there was an allegation made ‑ ‑ ‑
CALLINAN J: A suspicion.
MR McCUSKER: Suspicion, but no more. No finding and no evidence in support of it.
GLEESON CJ: I noticed, Mr McCusker, that the ultimate finding of Justice McLure as to purpose was precisely in terms of the particulars.
MR McCUSKER: Yes.
GLEESON CJ: If you look at page 382 at lines 54 and 55 she identifies in precise terms the advantage set out under the heading “Particulars” on page 28.
MR McCUSKER: That is so. The return “when the allottees had no established lawful entitlement”. That is so.
GLEESON CJ: Yes, she follows the words of the particulars in the pleading.
MR McCUSKER: Yes, not absolutely identical because she says the pleading as the advantage:
was a return of $400,000 at a time -
that is at page 28.
when the Allottees had no established lawful entitlement to those funds, alternatively -
whereas her finding was that it was the return of the money to DCP in Doyle’s control, which is slightly different.
GLEESON CJ: Very slightly different, because the particulars said a return of $400,000 without saying to whom.
MR McCUSKER: To whom, yes.
GLEESON CJ: And she says a return to DCP and therefore Doyle’s control.
MR McCUSKER: Yes, but the question is, is it Doyle’s control when there a trust account established, as she has found, which is, although it is a DCP trust account it is one which, at page – I took you to 393 - she says that:
There is no finding (or evidence to support it) that DCP would or might abuse –
the trust or ‑ ‑ ‑
GLEESON CJ: There is an ambiguity in the word “return”, also.
MR McCUSKER: Yes, there is.
GLEESON CJ: But she identified that as:
a serious departure from the standards of conduct required of corporate officers -
at page 397, top of the page.
MR McCUSKER: Yes, where she says that, your Honour, it is in general terms where she says:
For a director to misuse his or her position for a proscribed purpose is a serious departure from the standards -
She is not dealing with the particular so much as the abstract, that is a breach of section 232(6) is clearly a serious departure from the standards required and we would not cavil with that. It is made clear by the penalty provisions that I have taken your Honours to, but the question is whether the purpose, in circumstances where there is a finding that he was acting bona fide and in the belief that there was an entitlement to the return and where the funds were not paid to him but were still held in trust by agreement, whether that can be said to be an advantage within the terms of 232(6).
Your Honour the Chief Justice asked me, I think this morning, as to whether there was any evidence or was it put to Doyle that he became a director for the purpose of getting control of the money and the answer is that it was not put to Doyle. That was not the contention that that is the reason he was appointed, but I think I may have unwittingly misled your Honours in terms of the sequence of events. It was on 20 November that Doyle was made an alternate director for Mountford and a director on 21 November - that is in his own right for a short period about – 22 November I am told. There is a bit of debate about that, but 22 November, early in the morning before the AGM.
The placement was actually made on the 16 September and the ASX letter was on 17 October so the letter was received and Doyle was aware before he was made an alternate director to Mountford, not a director in his own right, of the receipt of the letter. But there is no suggestion that the reason that he was appointed was for that purpose, that is to somehow gain control of the funds.
My learned friend referred to Doyle having voted the shares, I think. I am not sure whether he was putting that, but his evidence was that he only voted one share at the extraordinary general meeting of 18 October 1996, and that was a share that he held in his own right because the previous day there had been this letter from the ASX. The letter that was referred to by my learned friend from the solicitors at 371 was the only – it was not evidence, but it was the only matter that he could point to as suggestive of voting those shares, but at line 15 all that was said by her Honour Justice McLure was:
by letter dated 15 January 1997 the Company’s solicitors, Fiocco Hopkins Nash, informed ASX that the holders of the 8,000,000 shares intended to exercise their right to vote at the EGM on 17 January 1997. I am unclear as to how this is to be reconciled with the purported cancellation of the allotment.
I think the answer to that question is that because the parties had reached an agreement the shares were taken up again, or perhaps the cancellation was cancelled. However one puts it, the money was paid, all except the $24,000 placement fee.
Coming back to the question of the improper use, it was not alleged against us that the participation of Doyle at the meeting was a breach of the articles of association. It was asserted. The statement of claim appears at paragraphs 24 to 28.
GUMMOW J: It was, was it not? What is the complaint? It is as plain as a pikestaff.
MR McCUSKER: It may be, your Honour, but the contravention that is alleged against us appears first at page 24. A contravention of section 232A, that is all that is pleaded and at page 25, line 35, again:
Doyle contravened s232A(1)(a) and (b) by reason of:
his personal interest and then it ‑ ‑ ‑
GUMMOW J: You said he did not because he did not vote.
MR McCUSKER: That is right. He did not vote.
GUMMOW J: All of this is irrelevant.
MR McCUSKER: Can I come back to a question that your Honour the Chief Justice raised with my learned friend. I think it was to this effect - I may have misapprehended - that if he did not vote - and that was certainly his defence - he said, “I was at the meeting. I was there, I admit, to make up the quorum”, which is extraordinary. He was there to make up the quorum ‑ ‑ ‑
GUMMOW J: But you do not dispute, as I now understand it, and I think you probably still do not dispute it, that he did vote.
MR McCUSKER: He was found to vote and we do not dispute it. But the case run at trial was that he had not voted ‑ ‑ ‑
GLEESON CJ: It went a little further than that, did it not? Did he not say at trial that, “The reason I did not vote was that I knew it would have been wrong for me to vote”?
MR McCUSKER: Acutely conscious of it, yes, he did. That was his evidence and we do not, of course, resile from that.
GUMMOW J: …..read the article.
MR McCUSKER: I understand that what your Honour the Chief Justice was saying, well if he did not vote how could he be referring to what his purpose or intention was, and they are in that regard two different things. If his case was, and it was, that he did not vote, nevertheless his evidence was that he believed that the allottees were entitled to the return of their funds, but found against us that he did vote, so that the intention does not change. His actions were for a purpose. What is the purpose? We say that on the evidence the purpose was not to advantage the allottees and I will not go through all that again, but it was not to advantage the allottees.
He could still have a purpose as found on the evidence to be a purpose on his own evidence a belief which seems to have been accepted that the allottees were entitled to the return of their funds, and even though he has made arguably improper use or he has contravened section 232A(1), whichever approach one takes, the question still is, for what purpose?
GLEESON CJ: Have we reached agreement on what the maximum penalty would have been for a contravention of section 232A(1)?
MR McCUSKER: Yes, $500.
GLEESON CJ: Five hundred dollars.
MR McCUSKER: Yes, which is perhaps one of the reasons that the respondent simply abandoned that as something in respect of which it was seeking a declaration. On the basis of the penalty provisions at least, it would appear to be a comparatively minor matter. So the purpose, we say, on all the evidence was clearly, whether right or wrong, a purpose which was not one to advantage if you believe that they were entitled to the funds and in any event was putting the funds in trust until final determination of that question.
There was an issue as to whether the counsel’s opinion, as I said, was going to be determinative of that question and in the course of argument before the Court of Appeal, as I recall, Justice McLure said, “Well, how could he possibly have agreed that he would be bound by counsel’s opinion unless he had some input into the case for opinion, which he did not?” Her finding was really that he was agreeing that the fund would stay there until the legal position was resolved or finally determined. So the narrow point put against him is the funds cease to be in the company’s control. They were put into a trust account to determine the legal entitlement.
I have not, I hope, sidestepped your Honour Justice Hayne’s proposition to me. Our submission is that putting the funds in trust account in those circumstances, particularly since it was not the pleaded case, cannot be held to have been the advantage that was alleged against us, or indeed an advantage in these circumstances. If it please your Honours.
GLEESON CJ: Thank you, Mr McCusker. We will reserve our decision in this matter and we will adjourn for five minutes to reconstitute.
AT 3.39 PM THE MATTER WAS ADJOURNED
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