DSHE Holdings Ltd (Receivers and Managers) (in liq) v Potts; HSBC Bank Ltd v Abboud; Potts v National Australia Bank Ltd

The case involved appeals from decisions in the Supreme Court of New South Wales concerning alleged breaches of directors' duties and misleading or deceptive conduct. The primary dispute centred on whether directors of DSHE Holdings Ltd (in liq) breached their duty of care and diligence under section 180 of the *Corporations Act 2001* (Cth) by approving dividend payments. This alleged contravention was linked to a purported breach of section 254T of the Act, which governs the payment of dividends. Additionally, the proceedings addressed claims of misleading or deceptive conduct in relation to a loan facility application, specifically concerning the non-disclosure of a practice of over-purchasing to obtain rebates and actions taken to address overstocking.

The court was required to determine several key legal issues. Firstly, it had to construe section 254T(1)(c) of the *Corporations Act*, specifically whether the term "prejudice" to a company's ability to pay its creditors encompassed prejudice to the company's ability to meet its obligations as they fall due, and whether this included the presence of trading stock that could be sold. Secondly, the court considered whether the payment of a dividend could constitute "damage" under section 1317H(1) of the Act in circumstances where a statutory norm had been breached. Thirdly, the court examined whether the non-disclosure of the over-purchasing practice and stock management actions constituted misleading or deceptive conduct, and how the significance of this undisclosed information should be assessed. Finally, the court considered the application of proportionate liability principles, particularly whether a vicariously liable principal could be considered a concurrent wrongdoer with its agent.

The Court of Appeal allowed the company's appeal in part, setting aside certain cost orders and entering judgment against two former directors, Mr Potts and Mr Abboud, for a significant sum. The court reasoned that the directors had breached their duty of care and diligence by voting for dividend payments when the company was not in a position to pay its debts as and when they fell due, thereby prejudicing its creditors. This interpretation of "prejudice" under section 254T(1)(c) was central to the decision. The court also dismissed the appeals by HSBC Bank Ltd and Mr Potts, upholding the original findings in those matters. The court directed further submissions on the costs of the trial and interest payable.