Edenham Pty Ltd v Meares
[2016] WASC 301
•22 SEPTEMBER 2016
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: EDENHAM PTY LTD -v- MEARES [2016] WASC 301
CORAM: LE MIERE J
HEARD: 16 DECEMBER 2015
DELIVERED : 22 SEPTEMBER 2016
FILE NO/S: CIV 2715 of 2013
BETWEEN: EDENHAM PTY LTD
Plaintiff
AND
ALEX GOLDSMITH MEARES
First DefendantKERRY ANNE MEARES
Second DefendantPREMIER HOLDINGS PTY LTD
Third Defendant(BY ORIGINAL ACTION)
PREMIER HOLDINGS PTY LTD
Plaintiff by CounterclaimAND
EDENHAM PTY LTD
First Defendant by CounterclaimPETER FRANK HARDING
Second Defendant by CounterclaimKRIS GOLDSMITH MEARES
Third Defendant by CounterclaimBSO DEVELOPMENT CONSULTANTS PTY LTD
Fourth Defendant by Counterclaim(BY COUNTERCLAIM)
Catchwords:
Procedure - Application for summary judgment - Whether high degree of certainty about outcome of proceeding - Where defendant provides answer to case - Application refused - Turn on own facts
Fiduciary duties and director's duties - Equity and Corporations Law - Circumstances in which duties arise - Serious question to be tried - Defences to plaintiff's claim - Whether consent - Whether conduct permitted by trust deed - Whether claim time barred or subject to laches - Whether s 1318 of Corporations Act operates - Whether equitable setoff can occur - Whether plaintiff came to court with unclean hands - Turns on own facts
Legislation:
Corporations Act 2001 (Cth), s 179, s 180, s 181, s 182, s 183, s 191, s 1317, s 1317A, s 1317K, s 1318
Limitation Act 2005 (WA), s 13
Rules of the Supreme Court 1971 (WA), O 14 r 1, o 14 r 3
Result:
Time to apply for summary judgment extended
Application for summary judgment refused
Category: B
Representation:
Original Action
Counsel:
Plaintiff: Mr P J Hannan
First Defendant : Mr M R B Hemery
Second Defendant : Mr M R B Hemery
Third Defendant : Mr M R B Hemery
Solicitors:
Plaintiff: McAuliffe Legal
First Defendant : Hotchkin Hanly Lawyers
Second Defendant : Hotchkin Hanly Lawyers
Third Defendant : Hotchkin Hanly Lawyers
Counterclaim
Counsel:
Plaintiff by Counterclaim : Mr M R B Hemery
First Defendant by Counterclaim : Mr P J Hannan
Second Defendant by Counterclaim : Mr P J Hannan
Third Defendant by Counterclaim : Mr P J Hannan
Fourth Defendant by Counterclaim : Mr P J Hannan
Solicitors:
Plaintiff by Counterclaim : Hotchkin Hanly Lawyers
First Defendant by Counterclaim : McAuliffe Legal
Second Defendant by Counterclaim : McAuliffe Legal
Third Defendant by Counterclaim : McAuliffe Legal
Fourth Defendant by Counterclaim : McAuliffe Legal
Case(s) referred to in judgment(s):
AAS v Benham [1891] 2 Ch 244
Agar v Hyde [2000] HCA 41; (2000) 201 CLR 552
Birtchnell v Equity Trustees Executors & Agency Co Ltd [1929] HCA 25; (1929) 42 CLR 384
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413; (1998) 28 ACSR 688
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672
Field Camp Services Pty Ltd v Site Accommodation Pty Ltd [No 2] [2012] WASCA 27
Gibson v Tyree (1900) 20 NZLR 278
Glassington v Thwaites (1822) 57 ER 50
Hausman v Abigroup Contractors Pty Ltd [2009] 29 VR 213
Howard v Commissioner of Taxation [2014] HCA 2; (2014) 253 CLR 83
James Point Pty Ltd v The Minister for Transport [2015] WASC 323
New Zealand Netherland Society 'Oranje' Inc v Kuys [1973] 1 WLR 1126
Our Lady's Mount Pty Ltd (as Trustee) v Magnificat Meal Movement International Inc [2000] QSC 319; (1999) 33 ACSR 163
Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd [2012] VSC 490
Streeter v Western Areas Exploration Pty Ltd [No 2] [2011] WASCA 17; (2011) 278 ALR 291
Western Areas Exploration Pty Ltd v Streeter [No 3] [2009] WASC 213; (2009) 234 FLR 265
Woolworths v Kelly (1991) 22 NSWLR 189
LE MIERE J:
Summary
The plaintiff company, Edenham, carries on business as surveyors, draftsmen and project managers. The first defendant, Alex Meares (Alex), and his wife Kerry Meares (Kerry), who is the second defendant, were directors of Edenham from 1989 to 2010 and 2009 respectively. Alex and Kerry are, and have been since 1988, directors of the third defendant company, Premier Holdings. The plaintiff says that from about 1997 Premier Holdings has carried on business as a project manager of property developments in competition with the plaintiff. The plaintiff says that Alex and Kerry thereby breached duties owed to Edenham in equity and under s 181, 182 and 191 of the Corporations Act 2001 (Cth). Edenham says that Premier Holdings was an accessory to those breaches.
Edenham now applies for summary judgment on all of its claims against the defendants. Edenham claims a declaration that Alex and Kerry are in breach of their fiduciary duties and a declaration that Premier Holdings is an accessory to the breach of fiduciary duty by Alex and Kerry. Edenham seeks that there be further orders as to the taking of accounts and assessment of damages.
The defendants deny the plaintiff's claims. First, they say there was never any conflict between the duties which Alex and Kerry owed to the plaintiff by virtue of their positions as directors of Edenham and their positions as directors of Premier Holdings because there was no competition between the business conducted by Edenham and the business conducted by Premier Holdings. Secondly, if there was a conflict the plaintiff consented to that conflict because at the establishment of its business the only directors of Edenham were Alex and Kerry and they consented to Premier Holdings undertaking the business conducted by it. Thirdly, in respect of breaches of fiduciary duty by Alex and Kerry the defendants say the claims are time barred in equity by analogy with s 1317 of the Corporations Act, by laches or by s 13 of the Limitation Act 2005 (WA). Fourthly, the defendants say that s 191 of the Corporations Act does not give rise to a duty owed by Alex and Kerry as directors of Edenham. Fifthly, the defendants say that any breaches of duty under the Corporations Act are time barred by s 1317K of the Corporations Act. Sixthly, the defendants say that any breaches of duty under the Corporations Act by Alex and Kerry as directors of Edenham should be excused under s 1318(1) of the Corporations Act. Sixthly, the defendants claim to be entitled to setoff in equity against any equitable compensation or account of profits awarded in favour of Edenham, the sum of $237,164.69 plus interest, which Edenham owes Premier Holdings under an agreement of 20 April 2010 entitled 'Commercial Loan Agreement'. Seventhly, the defendants say that the Court should decline to grant Edenham any equitable relief because of conduct which constitutes unclean hands. Eighthly, Edenham carries on its business as trustee of the Osprey Unit Trust and the defendants say that the Advisory Committee of the Trust passed a resolution which called on Edenham as trustee of the Osprey Unit Trust to discontinue this action and accordingly Edenham is not authorised to maintain the action.
For the reasons which follow the time for the plaintiff to apply for summary judgment should be extended but its application for summary judgment should be dismissed.
Outline of facts
The plaintiff is the trustee of the Osprey Unit Trust which was established on 1 July 1989. From that time the plaintiff carried on business as trustee of the Trust in Busselton and the surrounding area as a surveyor under the name Busselton Survey Office. Alex and Kerry were the only directors of the plaintiff and Premier Holdings was the only unitholder of the Trust. Alex and Kerry are, and have been since its incorporation, the only directors and shareholders of Premier Holdings.
The defendants say that between 1984 and 28 October 1988 Alex and Kerry carried on a business in partnership as property developers, property investors and project managers of developments in which they held equity. From 28 October 1988 Premier Holdings assumed the conduct of the partnership business and since then has carried on business as property developers, property investors, project managers of developments in which it holds equity and project managers of complex property developments.
Peter Harding, who is now the managing director of the plaintiff, started working for the plaintiff in 1989. He says that the plaintiff carried on business under the name Busselton Survey Office or BSO conducting survey work, property development, town planning and project management. The defendants deny that the plaintiff carried on project management work before 1998 but agree that it did so after that time. In 1994 Mr Jagoe‑Banks, Mr Cockman and Mr Reed became directors of Edenham and directly or through associated entities holders of units in the Trust. Mr Harding, Mr Smith and Mr Kris Meares (Kris) became directors of Edenham in 2002, 2009 and 2012 respectively and entities associated with them became unitholders in the Trust.
Edenham executed a loan agreement with Premier Holdings and a loan agreement with the Monterey Trust, a trust associated with Mr Jagoe‑Banks. Each loan agreement is dated 20 April 2010 and establishes a liability due by Edenham as trustee of the Osprey Unit Trust to each of Premier Holdings and Monterey in respect of the redemption of units held by Premier Holdings and Monterey in the Osprey Unit Trust.
Alex was the managing director of the plaintiff until July 2010. Alex says that up until 1 July 2005 he was employed for 40 hours a week by the plaintiff but at that time his situation changed and his employment was reduced to 20 hours a week. Alex says that subsequent to 1 July 2007 his employment was reduced to 10 hours a week. Kerry worked part time doing financial reporting within the Busselton Survey Office. In July 2010 Alex ceased being managing director and Mr Harding became managing director of Edenham.
In July 2011 Mr Harding and Kris commenced an audit of BSO costs. Mr Harding says that after they had completed their analysis it appeared that a disproportionate amount of the overheads of the business appeared to be consumed by some other business that appeared to be conducted by Alex. Mr Harding challenged Alex about the matter and about an invoice which Mr Harding subsequently came across which had been prepared by Kerry and charged back expenses to On‑Q Projects, which was the name under which Premier Holdings carried on business, from BSO in the sum of $400 per month. After that the relationship between Mr Harding and Kris on the one hand and Alex and Kerry on the other hand deteriorated.
In January 2012 the plaintiff obtained advice from Peter May, a commercial lawyer, concerning the status of the loan agreements between Edenham and Premier Holdings and Edenham and Monterey Trust. Mr May opined that there is a real possibility that Edenham would not be liable under the loan agreements. Mr May also said on the basis of the information provided to him there was a significant possibility that business opportunities which came to Alex as the result of being a director of Edenham and which had been redirected to his own competing business could result in Alex being liable at the suit of the company for lost profits as the result of having been deprived of those business opportunities. Mr May said that his letter was not intended to make final conclusions about the issues he had referred to and without a thorough investigation of the records of the company conclusions were not possible. There was subsequent correspondence between Edenham and Jonathan Meyer, a solicitor acting on behalf of Premier Holdings. Following the exchange of correspondence between Mr May, on behalf of Edenham, and Mr Meyer, on behalf of Premier Holdings, the relationship between Alex, Mr Harding and other directors of Edenham totally broke down. Alex was requested to leave the premises of BSO and on 11 May 2012 resigned as a director of Edenham.
Extension of time to apply for summary judgment
Order 14 r 1(1) of the Rules of the Supreme Court 1971 (WA) provides that an application by a plaintiff for summary judgment must be made within 21 days after appearance or at any later time by leave of the court. The defendants filed their memorandum of appearance on 23 December 2013. The plaintiff's chamber summons for summary judgment was filed on 6 March 2014 and is therefore out of time unless the court extends the time for the plaintiff to apply for summary judgment.
The plaintiff relies on a number of factors to justify the grant of an extension of time, including the following. First, having regard to the intervention of the Christmas and New Year period between the filing of the appearance on 23 December 2013 and the filing of the application for summary judgment on 6 March 2014 the delay in bringing the application is not great. Secondly, the plaintiff has a strong case for summary judgment. Thirdly, directions were given for the filing of evidence and affidavits were filed in support of the application before 9 July 2015 when the defendants first objected to the application having been filed out of time. Fourthly, there is no evidence of any prejudice to the defendants that will flow from a grant of an extension of time.
The defendants do not oppose an extension of time. For that reason, and for the reasons advanced by the plaintiff I will extend the time for the plaintiff to bring its application for summary judgment.
Summary judgment principles
Order 14 r 1(1) of the Rules of the Supreme Court provides that where a statement of claim has been served on a defendant and the defendant has entered an appearance, the plaintiff may, on the ground that the defendant has no defence to a claim included in the writ, or to a particular part of such claim, or has no defence to such a claim or part except as to the amount of any damages claimed, apply to the court for judgment against that defendant. Order 14 r 3(1) provides that on the hearing of a summary judgment application unless the court dismisses the application, or the defendant satisfies the court with respect to the claim, or the part of the claim to which the application relates, that there is an issue or question in dispute which ought to be tried, or that there ought for some other reason to be a trial of that claim or part, the court may give such judgment for the plaintiff against the defendant on that claim or part thereof as may be just, having regard to the nature of the remedy or relief claimed.
There is no dispute as to the relevant principles to be applied on a summary judgment application. The relevant legal test was expressed by a plurality in the High Court in Agar v Hyde [2000] HCA 41; (2000) 201 CLR 552:
Ordinarily, a party is not to be denied the opportunity to place his or her case before the Court in the ordinary way, and after taking advantage of the usual interlocutory processes. The test to be applied has been expressed in various ways, (citations omitted) but all of the verbal formulae which have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way [57].
In cases where the entitlement of a party to a judgment depends upon contested questions of fact, that high standard will not be discharged. The question is somewhat different where the central issue or issues depend upon questions of law. In such cases the court may, in an appropriate case, answer the legal questions.
The persuasive onus rests on the applicant for judgment but the respondent to the application bears an evidentiary onus. In general terms, a defendant does not have to establish a defence on the balance of probabilities, but must at least show cause why there is an arguable defence: Field Camp Services Pty Ltd v Site Accommodation Pty Ltd [No 2] [2012] WASCA 27 [4] (Martin CJ, Newnes & Murphy JJA).
Order 14 r 3(1) provides that the court may give summary judgment against the defendant unless the court dismisses the application or the defendant satisfies the court that there is an issue or question in dispute which ought to be tried or that there ought for some other reason to be a trial. In Hausman v Abigroup Contractors Pty Ltd [2009] 29 VR 213 the Court of Appeal of Victoria considered what a defendant must do to satisfy the court that there is a question to be tried. Weinberg and Bongiorno JJA and Williams AJA said:
The defendant must satisfy the court that, in respect of the claim to which the application for judgment relates, a question ought to be tried, or there ought for some other reason to be a trial of that claim. The court, if so satisfied, will give the defendant leave to defend and the proceeding will continue to trial in the ordinary way. The court will normally require an affidavit by, or on behalf of, the defendant before it will be satisfied that the defendant is entitled to leave to defend. The standard of diligence required of the defendant in preparing a case in opposition to the application, especially if under pressure of time, is perhaps not as high as that required in preparing for trial.
None the less, the defendant is required to use reasonable diligence to put before the court, albeit in a summary form, all the evidence relied on in the defence. In that regard, it would generally be regarded as an injustice to the plaintiff to allow the defendant to introduce for the first time, on appeal, evidence which was readily available for the hearing of the application, but was not produced. An affidavit filed by the defendant may contain a statement of fact based on information and belief.
The authorities suggest that an affidavit in opposition to an application for summary judgment must provide sufficient particulars to enable the defence case to be properly understood. A bald denial that the defendant is indebted to the plaintiff will not suffice. The affidavit should, so far as practicable, deal specifically with the plaintiff's claim and the facts set out in the supporting affidavit to establish that claim. It should state clearly and concisely what the defence is, and identify the facts relied upon in support of that defence [63] ‑ [65].
In Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd [2012] VSC 490 Pagone J after referring to those paragraphs in the judgment in Hausman said:
The rules do not require a defendant to show cause in response to a plaintiff's application for summary judgment by giving direct evidence upon affidavit. Nor would it be desirable to require such a course in all cases in which a defendant may need to resist a plaintiff's application for summary judgment. Such applications are not to be used as a substitute for trial or as the means by which the party moving for summary judgment obtains a collateral forensic advantage by forcing witnesses to give evidence before trial. In some cases a defendant may decide to defend an application for summary judgment by giving direct evidence on oath and, indeed, in some cases that may be either desirable or necessary.
Pagone J found that the defendants in that case were entitled to rely upon the facts asserted in particulars to their defence in showing cause why the matter should go to trial.
Counsel for the defendants, Mr Hemery, submitted that this is an unusual case because the application for summary judgment is made after pleadings are closed. Mr Hemery says that the defence has been fully pleaded and hence verification by affidavit of specified paragraphs of the defence is adequate to show cause why the matter should proceed to trial. Whether that is so depends on the nature of the plaintiff's allegations and the nature and content of the relevant paragraphs of the defence.
Director's duties
As directors of Edenham, Alex and Kerry were subject to fiduciary and statutory duties. The statutory duties imposed by the Corporations Act include the duty of care and diligence (s 180), the duty of good faith (s 181), the duty not to improperly use their position (s 182) and the duty not to misuse information (s 183). Section 179 of the Corporations Act provides that duties prescribed by s 180 to s 183 do not exclude the duties imposed by the general law. The duties imposed by the general law include the fiduciary duties of a director.
The core fiduciary duties are twofold. First, a director must not, in any matter falling within the scope of their service, have a personal interest or inconsistent engagement with a third party, except with the company's fully informed consent ‑ the conflict rule. Secondly, a director must not use their position for their own or a third party's possible advantage, except with the company's fully informed consent, and therefore they must account to the company for any gain which they make in connection with their fiduciary office - the profit rule. The general law concerning the conflict rule has been supplemented by s 191 of the Corporations Act. Section 191(1) provides that a director who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless s 191(2) says otherwise.
It is sufficient for the purposes of this summary judgment application to consider the plaintiff's claim that Alex and Kerry breached their fiduciary duties because counsel for the plaintiff, Mr Hannan, submitted that the plaintiff's claims are dressed up in different ways - common law, breach of fiduciary duty and statutory claims under the Corporations Act - but essentially they all come down to breach of fiduciary duty.
Director's fiduciary duties
The fiduciary duties of a director were summarised by French CJ and Keane J in Howard v Commissioner of Taxation [2014] HCA 2; (2014) 253 CLR 83:
The relationship of director and company is one of a class of accepted relationships which attract proscriptive fiduciary duties, including a duty 'not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict'. Those proscriptive duties attach to the powers and discretions exercised by company directors. As fiduciary agents, directors must exercise their powers 'honestly in furtherance of the purposes for which they are given' and not for their personal benefit or gain or for that of a third party.
…
Fiduciary duties apply beyond the exercise of powers and discretions flowing from the fiduciary relationship. A fiduciary cannot in his or her personal capacity be the subject of a conflict of interest. The general principle of equity, by reference to the liability to account, was stated by Deane J in Chan v Zacharia and was echoed in the unanimous judgment of the Court in Warman International Ltd v Dwyer:
'A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position.'
…
Despite their broad judicial formulations fiduciary duties are not infinitely extensible. That point was made in Chan v Zacharia which concerned the content of the fiduciary duties of members of a partnership inter se. The limits of those duties were to be determined by the character of the venture for which the partnership existed, the express agreement of the parties and the course of dealings actually pursued by the firm. The scope of the fiduciary duty generally in relation to conflicts of interest must accommodate itself to the particulars of the underlying relationship which give rise to the duty so that it is consistent with and conforms to the scope and limits of that relationship. It is to be 'moulded according to the nature of the relationship and the facts of the case'. By way of example, company directors are frequently shareholders. The decisions they take as directors may therefore affect their personal interests. They do not breach their fiduciary obligations merely because in promoting the interests of the company they are also promoting their own. On the other hand, a decision taken by directors to advantage themselves other than as members of the general body of shareholders would constitute an abuse of fiduciary powers.
…
If there is no possible conflict between personal interest and fiduciary duty, and if the gain or benefit is not obtained by use or by reason of the fiduciary position, the fiduciary is not liable to account for the gain or benefit [31] - [37].
The scope of a director's fiduciary duties depends on the circumstances. It will be necessary to look at the company's activities. The extent to which the potential of any conflict must be apparent has been the subject of different formulations. In Howard v Commissioner of Taxation at [116] Gageler J spoke of needing a substantial possibility of a conflict. In Streeter v Western Areas Exploration Pty Ltd [No 2] [2011] WASCA 17; (2011) 278 ALR 291 McLure P, with whom Buss JA agreed, observed that a fiduciary is under an obligation, without informed consent, not to promote his or her personal interest by making or pursuing a gain or benefit in circumstances in which there is a conflict or a real or substantial possibility of a conflict between the fiduciary's personal interest and those whom he or she is bound to protect.
A factor in determining the scope of the obligation is the degree of discretion and influence which the fiduciary has in the performance of his or her role. The chairperson of the board of directors may have wider obligations than an ordinary member of the board. In Woolworths v Kelly (1991) 22 NSWLR 189, 225 Mahoney JA said:
A director owes fiduciary duties to his company. The nature of those duties flows of course from his office as a director but the content of the duties will or may be affected by the powers and opportunities which, as a director, he has. Similarly, a person who is a chairman of the board of directors has additional rights and duties and additional opportunities. Ordinarily it is the function of a chairman to settle the agenda of the meetings of the board: at least he exercises a significant influence upon it. He is in a position, in the sense here relevant, to ensure that proposals are brought forward for consideration by the directors at their meetings. And this, in a particular case, may affect the content of fiduciary duties which he owes to his company (252).
The profit rule states that a fiduciary is accountable for profits made in connection with his or her fiduciary office. There is no absolute duty on a director to abstain from engaging for his or her own benefit in the same kind of business as that carried on by the company. Nevertheless directors are accountable to the company if they divert business opportunities away from the company and into their own business.
The principles concerning the diversion of business opportunities was considered by the Court of Appeal of Western Australia in Streeter v Western Areas Exploration Pty Ltd [No 2]. The case is summarised by the authors of Ford, Austin & Ramsay's Principles of Corporations Law (online ed), as follows. The plaintiff company, Western Areas Exploration NL (WAE) was a mining exploration company. The objective of those associated with WAE was to list the company on ASX and conduct an initial public offering to raise sufficient funds to undertake an exploration program primarily for nickel, but also for gold, upon mining tenements which the company had obtained or which it might obtain. The defendants included two directors of WAE. A group of geologists calling themselves the Australian Nickel Project Consultants (ANPC) contacted the chairman of WAE with the idea of raising capital to promote the formation or acquisition of a public company listed on ASX to undertake testing and, if appropriate, the development of mining tenements for gold and nickel which ANPC had assembled. The trial judge found that the chairman of WAE referred ANPC to one of the two defendant directors to explore this opportunity on behalf of WAE, and the knowledge of the ANPC proposal by the defendants and the opportunity to promote it was a result of the referral of the ANPC personnel to one of the defendants. However, the defendants then proceeded to participate in a new arrangement whereby a new company, Western Areas NL (WANL) was incorporated, the ANPC tenements were transferred to WANL, seed capital for WANL was provided by one of the defendants, the two defendants became directors and shareholders of WANL, and an IPO was undertaken to raise capital for an exploration and development program by WANL. This new arrangement was not disclosed to WAE or its chairman until the new arrangements were a fait accompli. WANL was a very successful company and went from being a small exploration company with a total capital of $7 million to a major producer of high grade nickel sulphide concentrate with a market capitalisation of more than $900 million. The trial judge held that the objective of ANPC was, for all practical purposes, the same objective which the directors and shareholders of WAE were seeking to pursue and therefore any proposal from ANPC along the lines of that being promoted would have been of interest to WAE. The trial judge held that both defendant directors were in breach of duty in that they 'took an opportunity which they knew was of the kind being sought by the plaintiff through WANL in a manner which secured for themselves major collateral benefits, and thereafter, abandoned any thought of pursuing the same or similar projects by the plaintiff': Western Areas Exploration Pty Ltd v Streeter [No 3] [2009] WASC 213; (2009) 234 FLR 265 [315]. The defendant directors were in a position of 'the clearest conflict': [316].
The Court of Appeal of Western Australia upheld the appeals of the defendant directors. The majority, McLure P and Buss JA, made a number of crucial findings. First, the evidence did not support the finding of the trial judge that the ANPC personnel approached the chairman of WAE because he was chairman of WAE. Instead, he was approached because he was a stockbroker and the ANPC personnel were seeking seed capital and a stockbroker to assist with the development of the ANPC proposal. Therefore, the chairman of WAE obtained information about the ANPC proposal not in his capacity as a director of WAE but in his capacity as a stockbroker. Secondly, the evidence did not support the finding of the trial judge that the chairman of WAE referred ANPC to one of the two defendant directors to explore this opportunity on behalf of WAE. The ANPC personnel did not approach this defendant director in his capacity as a director of WAE but as a potential provider of seed capital. Thirdly, WAE was not acceptable to ANPC as the corporate vehicle for the ANPC proposal and this was based on sound commercial reasons. Fourthly, the trial judge appeared to regard the corporate opportunity diverted by the two defendant directors as one for WAE to be the seed capitalist for WANL or for WAE shareholders to become foundation shareholders on equal terms with the two defendant directors. However, neither was a relevant opportunity for WAE. The first (the provision of seed capital by WAE to facilitate a capital raising by, and listing of, another company) was outside WAE’s actual or intended business and the second was an opportunity for the shareholders and not WAE. Fifthly, the defendant directors were not in a position of conflict by investing in, and becoming directors of, other mining companies in Western Australia, including a start-up mining company in the market for capital with the object of listing. Sixthly, because the defendant directors did not have a duty to acquire the ANPC proposal for WAE and there was no opportunity for WAE to be the corporate vehicle, there was no conflict between the interests of the defendants the interests of WAE.
All three Court of Appeal judges held that one of the two defendant directors had breached his duty in the following way. WAE had a 70% interest in a mining tenement. After the defendant director met with the ANPC personnel and he became aware of the ANPC proposal (which included the transfer of this mining tenement to WANL), the director became aware that the 30% interest in the mining tenement not held by WAE was for sale. The director arranged for a company he controlled to purchase the 30% interest and did not inform the chairman of WAE that the interest was for sale. WANL subsequently acquired 100% of the interest in the mining tenement ‑ 70% from WAE and 30% from the company controlled by the defendant director. All three judges held that the director was in a position of conflict, and he had diverted the opportunity to acquire the 30% interest away from WAE to a company he controlled. Although all three judges held this constituted a breach of duty the judges also held that WAE’s claim was barred by laches.
The decision of the Court of Appeal illustrates that cases involving breach of the conflict and profit rules, and in particular cases concerning diversion of corporate opportunities, are very fact dependent. First, whether a business opportunity is a relevant opportunity for the company depends on the scope of the company's actual or intended business and the nature of the business opportunity. Secondly, whether the directors are in a position of conflict by becoming directors of another company depends on the actual and intended business of the company and whether the directors have a positive duty to acquire or seek to acquire particular business opportunities for the company. McLure P observed:
When examining the case law, a distinction needs to be drawn between those cases in which the fiduciary was under a positive duty to acquire or seek to acquire a particular benefit or property for the company (Cook v Deeks [1916] 1 AC 554; Chan v Zacharia; Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443; Keech v Sandford (1726) 25 ER 223) and cases where there is no such positive duty [76].
Thirdly, whether a director has a duty to acquire a business opportunity for the company may depend on the capacity in which the opportunity came to the director which is a question of fact.
In this case Alex held a high degree of discretion and influence in the performance of his role as a director. Alex had a positive duty to acquire clients and work for the plaintiff within the scope of its business. Alex was the managing director from at least 1 July 1989 until July 2010, was a fulltime employee of Edenham from 1 July 1989 to June 2005 and a part-time employee from June 2005 to January 2012. There is uncontradicted evidence from Mr Harding that Alex's role as managing director was to provide direction for how the company operated. Mr Harding further said that Alex and Mr Jagoe‑Banks, another director, would often call him or others up to allocate new work and that some of this work had clearly been allocated by Alex to Mr Jagoe‑Banks who in turn allocated it down to others within BSO. Mr Harding further says that at directors' meetings Alex would normally present the issues for consideration by the board and these were normally presented as a fait accompli and were simply approved by the board of management. At the time Mr Harding viewed Alex as the captain of the ship and his observation of the other directors and members of the board of management was that they took a similar approach.
Kerry was a director of Edenham from 1 July 1989 to 1 March 2009 and as a director had a duty not to obtain any unauthorised benefit from her relationship with the company and not to be in a position of conflict. However, she had a lesser role than Alex within the company and less opportunity to ensure that business proposals were brought forward for consideration by the directors at their meetings.
Plaintiff's case: breach of fiduciary duty
The plaintiff's case is deceptively simple. From a date in or about 1997 to the present, Premier Holdings, by Alex and Kerry, carried on business as a project manager of property developments and did so in competition with the plaintiff. Alex and Kerry were directors of Edenham from 1989 to 2012 and 2009 respectively. Alex and Kerry by acting as directors of Premier Holdings breached fiduciary duties owed to Edenham and duties owed to Edenham under s 181, s 182 and s 191 of the Corporations Act. Premier Holdings was an accessory, knowingly assisting Alex and Kerry to commit a breach of their fiduciary duties.
Defendants say Alex and Kerry had no conflict
The defendants say that there was no conflict or significant possibility of conflict between Alex and Kerry's fiduciary duties owed to the plaintiff and their personal interest in the pursuit or possible receipt of a benefit or gain and they did not use any opportunity obtained by reason of their fiduciary position. The essence of the defendants' position is that Premier Holdings did not carry on business in competition with Edenham.
The question is not whether Premier Holdings was in competition with the plaintiff but whether in acting as directors of Premier Holdings Alex and Kerry breached the conflict rule or the profit rule. That depends on the plaintiff's actual or intended business, the role of each of Alex and Kerry within Edenham and the business activities of Premier Holdings. It is not necessarily the case that the whole of the activities undertaken by Premier Holdings does or does not give rise to a breach of fiduciary duty by Alex or Kerry. For example, it is possible that some of the business activities of Premier Holdings are within the scope of the actual or intended business of the plaintiff whilst others are not. It may be that the former activities entitle the plaintiff to an account of profits, equitable compensation or other relief whilst the latter do not. The plaintiff approached its application for summary judgment on the basis that it is unnecessary to give separate consideration to each of the contracts performed by Premier Holdings. Counsel for the plaintiffs submitted that it is just seeking summary judgment on liability and the plaintiff will have to make an election for an account of profits or equitable compensation later. In my opinion that is not a satisfactory approach. It may be that some of the business activities of Premier Holdings gives rise to a conflict of interest on the part of Alex or Kerry whilst others do not. In my opinion it is inappropriate to make a declaration of liability without determining whether all of the business activities of Premier Holdings gives rise to a relevant conflict or only part and if so which part.
In order to determine whether there is any breach of fiduciary duty by Alex and Kerry, a starting point is to consider the scope of Edenham's business and Premier Holdings' business.
Scope of business
The scope of business activities that a fiduciary is forbidden from conducting is limited by the business activities of the person to whom the duty is owed. A fiduciary is free to act outside the scope of the business of the person to whom the fiduciary duty is owed. As Dixon J said in Birtchnell v Equity Trustees Executors & Agency Co Ltd [1929] HCA 25; (1929) 42 CLR 384, 408, in relation to a partner's fiduciary obligations:
The subject matter over which the fiduciary obligations extend is determined by the character of the venture or undertaking for which the partnership exists, and this is to be ascertained, not merely from the express agreement of the parties, whether embodied in written instruments or not, but also from the course of dealing actually pursued by the firm (408).
If the business of the second company is not within the scope of the principal's business, the fiduciary will not need to account to the principal for any benefit obtained from the principal. In AAS v Benham [1891] 2 Ch 244, one of the questions was whether Mr Benham who was a partner in a firm of shipbrokers was entitled to retain for his own benefit benefits he gained from being a director of a company engaged in the business of shipbuilding. The Court of Appeal of England and Wales held that as the business of the new company was beyond the scope of, and did not compete with, the partnership business, Mr Benham was not bound to account for the benefit obtained by him in connection with the new company.
The question of whether the business carried on by the fiduciary on his own account or by another company, is the same as, or within the scope of, the business carried on by the principal has been explored in a number of cases including AAS v Benham where shipbroking and shipbuilding were held to be different businesses, Glassington v Thwaites (1822) 57 ER 50 where publishing a morning newspaper and an evening newspaper were held to be the same business and Gibson v Tyree (1900) 20 NZLR 278 where it was held that a purchase of boot leather, although in small lots, was in the same class as the business of wholesale leather merchants. In Birtchnell v Equity Trustees Executors & Agency Co Ltd (408) Dixon J held that the subject matter over which the fiduciary obligations extend is determined not just by the character of the undertaking actually conducted, but also from the course of dealing actually pursued by the firm.
Businesses carried on by Edenham and Premier Holdings
The defendants plead that at no time did Premier Holdings carry on business in competition with Edenham.
In essence Edenham says that its business does and has included project management which is, or is part of, the business carried on by Premier Holdings. The defendants agree that Premiere Holdings' business has and does include project management but says that the type of project management carried out by it is of a different nature than that carried on by Edenham. The defendants say that Premier Holdings' project management business has been confined to property development where equity was held or project management of complex property developments. The defendants define complex property developments as property developments that involve all of the following elements:
'Complex property development' are property developments that involve all of the following elements
(a)englobo land value in excess of $40,000,000;
(b)commercial development;
(c)industrial development;
(d)multiple englobo land ownership; and
(e)a combination of the majority of major service infrastructure, requiring specific catchment allocations and conversion of portions to trading stock on a stage by stage basis each financial year, with major service infrastructure including:
(i)highways and bridges;
(ii)sewer pump stations, pressure mains and pre‑fund gravity mains;
(iii)external water main extensions;
(iv)external gas main extensions;
(v)external high voltage electrical cable extensions;
(vi)external telecommunication cable extensions; and
The defendants define non‑complex property developments to mean property developments that do not involve all of the above elements. The defendants say that Edenham's business or business plan does not include project management in conjunction with property investment or property development or project management other than in conjunction with providing surveying and drafting services on non‑complex property developments.
Peter Harding has been an employee of the plaintiff since 1989 albeit he worked part‑time whilst he was studying at university between 1992 and 1996. He became a director of Edenham on 21 March 2002. He has been managing director of Edenham since 6 July 2010. He has sworn a number of affidavits in support of Edenham's application for summary judgment. His evidence includes the following.
1.Edenham worked on numerous projects as project managers through the various stages of the Vasse Newton development on which Alex was also working. Mr Harding undertook project management work as did Kris Meares, Ian Smith and Brendan Jagoe‑Banks.
2.He located in the archives of BSO records of Premier Holdings including hundreds of invoices rendered to clients and potential clients of BSO for work undertaken by Premier. That work is the same work that would normally be undertaken by BSO. Invoices span the period 1996 to 2006 and detail the work that was being charged for by Premier.
3.Mr Harding produces a copy of a project management journal file summarising invoices issued by Premier Holdings from 2 July 2004 to 26 September 2008 in a total of $1,988,215.
4.Mr Harding has produced copies of an agreement between Premier Holdings and Prombrad Pty Ltd of 8 February 1997 which details duties undertaken by Premier. These were duties that would normally be performed by BSO for the clients of BSO.
5.Mr Harding has produced an unexecuted copy of an agreement between Premier Holdings and Eastlane Pty Ltd which sets out the nature of duties being undertaken by Premier Holdings, which are duties that would normally be undertaken by BSO for clients of BSO.
6.In his affidavit sworn 20 May 2015 Mr Harding does not concede the distinction between complex and non‑complex projects defined by the defendants but says that Edenham and Premier Holdings both worked on projects that would meet the definition of complex property developments and non‑complex property developments.
Mr Harding refers to the Brookfield project in which it is asserted that Premier Holdings engaged in project management services on its own part and says the following:
1.Mr Jagoe‑Banks, Kris Meares, Mr Harding and Mr Smith undertook project management services on behalf of Edenham.
2.Alex also undertook project management services on behalf of Edenham. At all times Edenham believed such work was being undertaken on behalf of Edenham whereas documentation which Mr Harding has referred to indicates Alex was undertaking work on behalf of Premier Holdings.
3.Edenham at all times believed such project management was being undertaken of behalf of Edenham by Alex.
4.Mr Harding produces a bundle of correspondence from Edenham dealing with project management issues in respect of the Brookfield project. It appears from those documents that Alex purported to be acting on behalf of BSO in the delivery of those project management services.
5.Mr Harding produces a schedule of codes being codes used by Edenham in entering data for work completed into its time recording system, called Latitude. Codes beginning with the number 4 relate to project management. Mr Harding also produces reports from Latitude containing details of work undertaken on Brookfield stage 5 (A and B), Brookfield stage 6 (south and north A and north B) and Brookfield stage 7. Those reports are coded as project management. Reports identify persons working on project management on Brookfield including Kris, Mr Jagoe‑Banks, Mr Smith, Hamish Burton and a number of members of support staff.
6.The Brookfield project meets the defendants' definition of complex property development as it had a gross realisable value (defined by the defendants as englobo value) in excess of $40 million, including major service infrastructure requiring specific catchment allocations and conversion of portions to trading stock on a stage by stage basis with major infrastructure including external high voltage electric cable extensions and external telecommunication cable extensions.
In respect of the Vasse project Mr Harding says the following:
1.Extensive work was undertaken by Edenham on this project.
2.Mr Jagoe‑Banks, Kris Meares, Mr Harding and Mr Smith undertook project management services on behalf of Edenham.
3.Mr Harding produces copies of Latitude reports on the Vasse project which show project management work being undertaken by Kris Meares on behalf of Edenham.
4.Alex also undertook project management work on Vasse. At all times Edenham believed such work was being undertaken on behalf of Edenham whereas documentation referred to by Mr Harding indicates Alex was undertaking work on behalf of Premier Holdings.
5.The project meets the defendants' definition of complex property development as having a gross realisable value in excess of $40 million, involves commercial and industrial development, and includes major service infrastructure and stages including connection to sewer pump stations, pressure mains and pre‑fund gravity mains, external water main extensions and external high voltage electrical cable extensions.
Mr Harding says that Edenham and Alex worked on many other projects which meet the defendants' definition of complex property developments and include the projects at Cambridge Estate, Peppermint Park, Old Broadwater Farm, Dawson Beach Estate, Cape Naturaliste College, Kerrowa Heights, Carramar Country, Burnside Park and Cape Ridge. Mr Harding says that Edenham performed project management services in each of those projects without holding equity in any of those projects. Edenham was aware Premier Holdings held equity in the Brookfield project.
In summary, Mr Harding has provided substantial detailed evidence that both Edenham and Premier Holdings have provided project management services on complex property developments and on non‑complex property developments, as defined by the defendants.
The defendants have not responded to any of that evidence except by a denial at a high level of generality. The principal evidence advanced by the defendants is the supplementary affidavit of Alex sworn 25 September 2015 in which Alex refers to paragraphs in the amended defence of the defendants filed 10 September 2014, the second further amended defence and counterclaim of the defendants filed 4 May 2015 and the second further re‑amended defence and counterclaim of the defendants filed 24 September 2015 and says that he instructed the defendants' solicitors to file those defences and he verily believes to be true the relevant paragraphs of each defence. The paragraphs of the current defence which Alex swears he believes to be true include:
4A.Between 1 July 1989 and about 1998 the plaintiff's business was exclusively that of surveyors and draftsmen.
4A(b).From about 1998 onwards the plaintiff's business also included project management services on non‑complex property developments in conjunction with surveying and drafting services.
4A(c).At no time has the plaintiff's business or business plan included or could reasonably have been expected to include providing project management services in conjunction with property investment or property development or other than in conjunction with providing surveying and drafting services on non‑complex property developments.
7(b).From 28 October 1998 Premier Holdings has carried on business as property developers, property investors, project managers of developments where equity was held and project managers of complex property developments in the Busselton and surrounding regions.
7(g).At no time since 1 July 1989 has Premier Holdings business or business plan included providing surveying or drafting services for property development or providing project management services for property management in conjunction with surveying or drafting services.
7(h).At all times and from 1 July 1989 to about June 2012 Premier Holdings referred all surveying and drafting services on property development projects of which it was the project manager to Edenham.
7(j).At no time since 1 July 1989 has Premier Holdings provided project management services or made investments in any property development project that was introduced to Premier Holdings by Edenham.
7(k).At all times since 1998 Premier Holdings project management business has been confined to property development where equity was held or project management of complex property developments.
A serious question to be tried
All of the business activities undertaken by Premier Holdings do not fall within the scope of the business of the plaintiff. For example, the evidence does not establish that the plaintiff has carried on business as property developers or property investors or as property managers of developments where it has held equity in the development. On the other hand, there is evidence that Premier Holdings has carried on business as project managers which activities fall within the scope of the business carried on by the plaintiff. The plaintiff has adduced detailed evidence that the plaintiff and Premier Holdings have both engaged in project management on complex and on non‑complex property developments and invoices and records of Premier Holdings show that it has engaged in activities which the plaintiff can and does engage in.
The defendants have adduced evidence, albeit at a high level of generality, that there was no breach of the no conflict rule or the no profit rule because Premier Holdings has not engaged in activities within the scope of the actual or planned business of the plaintiff. The evidence of the defendants does not condescend to particulars. There are general statements in the defence, verified by Alex on affidavit, that Edenham and Premier Holdings are not engaged in the same business, are not in competition with each other and that Edenham did not and could not have carried on the business of project development with equity participation or project management in complex property developments.
On the evidence presently before the court I am not persuaded that project management on complex property developments, as defined by the defendants, is different in nature from project management of non‑complex property developments as defined by the defendants. The evidence does not establish that there is any qualitative difference. Furthermore, there is evidence before the court that the plaintiff was capable at the relevant times of undertaking project management on complex property developments and had done so. The plaintiff may have carried out project management on a smaller scale than Premier Holdings for some or all of the period between 1989 and 2012 but that does not mean that the plaintiff did not or could not have undertaken project management services on complex property developments on a larger scale.
The defendants' case is that the nature of the activities that Premier Holdings undertook were not within the scope of the business undertaken by the plaintiff. That is pleaded and the pleading is verified by affidavit. Although the defendant has not condescended to provide evidence in a form that would be admissible at trial, it has nevertheless set out an answer to the plaintiff's case in its pleading and verified that pleading by affidavit. I do not have a sufficiently high degree of certainty about the outcome of the proceeding to enter summary judgment for the plaintiff.
Breach of statutory duties
As I have said, counsel for the plaintiff invited the court to consider the matter on the basis that the plaintiff has made out a case of breach of fiduciary duty and, in effect, it was not necessary for the purposes of this application to consider separately the alleged breaches of duty pursuant to the Corporations Act.
Defendants' affirmative defences
The defendants say that even if, contrary to its contention, Alex and Kerry engaged in what would otherwise have been breaches of their fiduciary duties owed to the plaintiff, they did not breach those duties, or they are excused from those breaches, or the plaintiff is precluded from pursuing those breaches. It is strictly not necessary to consider these matters because, without considering them, I do not hold a sufficiently high degree of certainty that by acting as directors of Premier Holdings Alex and Kerry have thereby breached fiduciary duties they owe to the plaintiff and Premier Holdings is an accessory to the breach of fiduciary duty by Alex and Kerry. Nevertheless, the affirmative defences were argued and I will refer briefly to each of them.
Defence of consent - knowledge and implied consent
A fiduciary will not be liable to account for profits or gain acquired by virtue of their fiduciary position, nor any benefits applied in circumstances of conflict between duty and interest if it can be shown that the principal consented and the consent was given on the basis of a full and frank disclosure of all the material facts: New Zealand Netherland Society 'Oranje' Inc v Kuys [1973] 1 WLR 1126, 1131 ‑ 1132 (Wilberforce LJ). The onus of proving fully informed consent is on the fiduciary: Birtchnell (398) (Isaacs J). Consent need not be given expressly: Our Lady's Mount Pty Ltd (as Trustee) v Magnificat Meal Movement International Inc [2000] QSC 319; (1999) 33 ACSR 163 [128]. What is required for informed consent is a question of fact in all the circumstances of each case.
In [12(b)] of their defence the defendants say that if Alex and Kerry breached fiduciary duties to the plaintiff in respect of their conducting Premier Holdings business, by reason of the matter pleaded in [7(d)] the plaintiff had full knowledge and impliedly provided consent to Alex and Kerry. In [7(d)] the defendants say that as at the date of establishment of the Osprey Unit Trust on 1 July 1989 and thereafter Edenham, through Alex and Kerry as Edenham's directors, had full knowledge of and impliedly consented to Premier Holdings conducting its business and to Alex and Kerry conducting Premier Holdings business as its directors. In his affidavit sworn 25 September 2015 Alex says that those pleadings were drafted on his instructions as to facts from his own knowledge that he believes to be true.
The principal difficulty confronting the defendants is that Alex and Kerry ceased to be the only directors of Edenham in 1994. Mr Jagoe‑Banks, Mr Cockman and Mr Reed became directors in 1994. Mr Harding, Mr Smith and Kris became directors in 2002, 2009 and 2012 respectively. The plaintiff says that the defence fails as a matter of law at least from the time at which Alex and Kerry were no longer the only directors of Edenham.
The defendants submit that there is no decided authority regarding whether the informed consent of a company can continue notwithstanding that all subsequent members or directors of the company may not have had actual knowledge of previously given informed consent. The defendants say that the court should avoid stifling the development of the law by summarily disposing of actions in respect of which there was a reasonable possibility that a defence does lie. The defendants say there is a reasonably possibility that the defence of informed consent may succeed and therefore the action should be allowed to go to trial.
The defendants face significant difficulty in advancing the defence of informed consent to them acting as directors of Premier Holdings and Premier Holdings conducting a business in competition with the plaintiff after 1994. In the 6th Edition of Equity and Trusts in Australia Dal Pont at [4.115] discusses who represents the company when it comes to consenting to the director's personal exploitation of a corporate business opportunity. The author says that while in a large company a decision to abandon a small project may not require shareholder resolution, in a closely held smaller company that same decision would require it, and cites in support of that proposition Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413; (1998) 28 ACSR 688, 721 Young J, affirmed by Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672. The author then says:
In any case, shareholder consent cannot be used as a blanket indemnification or exemption on a prospective basis, only for specific absolution for properly disclosed conflicts or profits.
In his affidavit sworn on 6 March 2014 Alex swears to the following. First, it is incorrect that the business conducted by On‑Q Projects, that is by Premier Holdings, was not disclosed by Alex to the plaintiff. At all material times any work received by the business of On‑Q Projects was orally disclosed to both the plaintiff and all of the unitholders in the Trust and all of the unitholders knew that Alex was undertaking other work including project management independently of the business activities of the plaintiff. Secondly, On‑Q Projects was set up to participate in residential developments as an equity partner and to undertake the project management in relation to those developments. Premier Holdings has continued with those activities from that date to the present and has done so with the full knowledge of all the unitholders of the Trust. The plaintiff received large consulting contracts in relation to some of these projects and received hundreds of instructions from Premier Holdings in relation to certain minor matters relating to the same projects and numerous surveying and planning contracts were issued to the plaintiff in respect to those projects at Alex's instigation. Neither of those points are presently pleaded.
I do not underestimate the difficulty which confronts the defendants but I am not persuaded that a defence of informed consent is hopeless. In some circumstances a company's consent might possibly extend to the establishment and future conduct of a business in competition with the company. Furthermore, the defendants maintain, although they have not pleaded, that all of the unitholders in the Trust have known that Alex was undertaking project management work independently of the business activities of the plaintiff.
Defence - conduct permitted by trust deed
In [7(c)] of their defence, the defendants say that Alex and Kerry, being directors of Edenham, and Premier Holdings, as a unitholder of the Osprey Unit Trust, entered into contracts in transactions that were expressly permitted by cl 30 of the trust deed as pleaded in [2(v)].
Clause 30 of the trust deed provides that nothing in the deed shall prevent the trustees, that is Edenham, or any subsidiary of the trustees or the directors or officers of any of them from, amongst other things, contracting or acting in any capacity as insurer representative or agent or entering into any insurance financial banking agency or other transaction with any other of them or any unitholder or any companies whose shares form part of the trust fund or from being interested in any such contract or transaction or otherwise.
The defendants say that this defence gives rise to a construction question. They submit that on a construction question arising on a summary disposition application, the task of the court is to determine whether or not there is a 'high degree of certainty' that the construction contended for will not be accepted at trial: James Point Pty Ltd v The Minister for Transport [2015] WASC 323 [44] Martino J. The defendants submit that the construction contended for by the defendants is reasonably arguable and the court should not grant summary judgment as it cannot have the requisite high degree of certainty that the trust deed on its proper construction does not provide a good defence.
The natural and ordinary meaning of cl 30 provides, amongst other things, that nothing in the deed shall prevent the directors from entering into a transaction with a unit holder (which includes Premier Holdings) or from being interested in such a transaction. I am unable to read clause 30 as permitting a director or unit holder to enter into transactions with other parties which are of a sort which fall within the scope of the company's business and which otherwise would amount to a breach of a director's fiduciary or statutory duties.
Time bar and laches defences
In par 13A of their defence the defendants plead in relation to breaches of fiduciary duty by Alex and Kerry alleged to have been committed by them prior to 15 November 2005, the alleged cause of action did not arise within six years before the commencement of this proceeding and is barred in equity by analogy with s 1317 of the Corporations Act and further or alternatively barred in equity by laches before the commencement of this proceeding. In relation to breaches of fiduciary duty by Alex and Kerry alleged to have been committed by them between 15 November 2005 and 11 November 2007 the defendants say that the alleged causes of action did not arise within six years before the commencement of this action and are barred by s 13 of the Limitation Act 2005 (WA) and further or alternatively the alleged cause of action did not arise within six years before the commencement of this proceeding and are barred in equity by analogy with s 1317 of the Corporations Act and further or alternatively were barred in equity by laches before the commencement of this proceeding.
Counsel for the defendants, Mr Hemery submitted that the defendants' primary line of defence by way of statute of limitations to the fiduciary duty claim is based on s 13 of the Limitation Act 2005. Mr Hemery relied upon the following statements by Peter Handford at [5.10.310] Limitation of Actions, The Laws of Australia (2nd ed).
In the Australian Capital Territory and in Western Australia since 15 November 2005, all equitable claims are subject to statutory limitation periods. The limitation acts in these jurisdictions have a provision under which a six year limitation period applies to all claims not covered by any other provision of the act [Limitation Act 2005 (WA) s 13]. Since 'action' is defined to include any civil proceedings in a court [Limitation Act 2005 (WA) s 3(1)], it is clear that this applies to equitable claims.
In Western Australia, there is an additional provision under which an equitable action cannot be commenced after the only or later of:
(1)six years from the actual accrual of a cause of action; or
(2)three years since time started running, on equitable principles, for the commencement of the action [Limitation Act 2005 s 27(1)] - a reference to principles such as laches.
...
Where there is no contractual relationship between the parties, and a liability is based on breach of fiduciary duty, a court will apply the statute by analogy, and so again the claim for account will be barred [Paragon Finance PLC v DB Thakerar & Co (a firm) [1999] 1 All ER 400 (CA), 415 Millett LJ; Coulthard v Disco Mix Club Ltd [2000] 1 WLR 707.]
Mr Hemery submitted that if Limitation Act 2005 (WA) s 13 does not bar the plaintiff's claims then the defendants rely upon the alternative bases on which they say that the claim for breach of fiduciary duty is barred. Those are the same bases on which the defendants say the plaintiff's claim was barred prior to 15 November 2005. The defendants concede that prior to the Limitation Act 2005 coming into force on 15 November 2005 there was no direct statutory limitation defence. The defendants concede that actions for breach of fiduciary duty are not affected by the Limitation Act 1935 (WA). The defendants say that where the Limitation Act has no direct application to causes of action founded on equity, the act may be applied by analogy under doctrines developed by equity: see Handford [5.10.280]. The defendants say that the relevant analogue is s 1317K of the Corporations Act.
Section 1317K of the Corporations Act provides that proceedings for, amongst other things, a compensation order may be started no later than six years after the contravention. The plaintiff says, in effect, that time starts to run from the time that the defendant engages in competition with the plaintiff without making full and frank disclosure. The plaintiff says that the evidence shows that the plaintiff did not know of the competing activities of Premier Holdings until July 2010 at the earliest and hence the action was commenced within the six year period. The defendants submit that each act by Premier Holdings which constitutes acting in competition with the plaintiff constitutes a separate breach of duty and so the cause of action arises each time such a breach occurred. Therefore, any conduct by Alex and Kerry and Premier Holdings prior to 11 November 2007 (ie six years before the issue of the writ) is time barred.
The defendants' third line of the limitation defence is the equitable defence of laches. That involves a close review of the facts. It would be unusual for a court to find that the defence of laches was made out in relation to causes of action in respect of which a limitation period has not expired. However, in light of the other findings I have come to in relation to this application it is not necessary or appropriate to give further consideration to the defence of laches.
There is merit in all of the arguments mounted by the plaintiff. However, I am unable to reach the requisite high degree of certainty that all of the defendants claims that the plaintiff's claims are barred by the Limitation Act 2005, by analogy with the Corporations Act s 1317A or by laches cannot succeed.
Corporations Act s 191
Section 191 of the Corporations Act provides that a director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless s 191(2) says otherwise. In the course of his submissions counsel for the plaintiff said that he relied upon s 191 as part of the argument that there was not proper disclosure. In view of the conclusions I have come to in relation to breaches of fiduciary duty and the defendants' claim of informed consent it is not necessary to give further consideration to s 191 of the Corporations Act.
Power of court to grant relief to defendant
The defendants rely upon s 1318 of the Corporations Act which provides amongst other things, that if in any civil proceeding for breach of duty it appears to the court that the person is or may be liable in respect of the breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the breach, the court may relieve the person either wholly or partly from that liability on such terms as the court thinks fit. If the defendants are found to have breached their fiduciary or statutory duties, or to have been knowingly concerned in them, they will find considerable difficulty in persuading a court that they should be granted relief under s 1318 of the Corporations Act. However, in view of the conclusions I have otherwise come to it is not necessary to give consideration to that matter on this application.
Equitable set off
The defendants claim to be entitled to set off in equity against any equitable compensation or account of profits awarded in favour of the plaintiff the sum of $237,164.69 plus interest which Edenham owes Premier Holdings under the Commercial Loan Agreement.
The plaintiff says that Premier Holdings entitlement under the Commercial Loan Agreement does not give rise to an equitable set off. To give rise to an equitable set off a claim has got to impeach the demand, it has got to be so bound up with the plaintiff's claim as to impeach it.
The defendants submitted that the defence of laches will necessitate an inquiry by the court into the state of knowledge of the various participants in the business from time to time which is likely to be contentious and will require oral testimony. The defendants say that the affidavit material before the court gives rise to contentious factual issues going to this matter. The affidavit evidence referred to by counsel for the defendants is the statement by Alex in his affidavit of 6 March 2014 that Premier Holdings was set up in 1988 to participate in residential developments as an equity partner and to undertake the project management in relation to those developments and 'has continued with those activities from that date and does so to the present day and has done so with the full knowledge of all the unit holders of the trust'. Alex says that the plaintiff received large consulting contracts in relation to some of these projects and received hundreds of instructions from Premier Holdings in relation to certain minor matters relating to the same projects as well as that numerous surveying and planning contracts were issued to the plaintiff in respect of those projects at his instigation.
The existence of an equitable setoff can provide justification for the refusal to pay a debt that is otherwise due. The plaintiff says that the defendants' equitable claim must essentially be bound up with or impeach the title of the plaintiff. Equitable setoff is available where the party seeking it can show a recognised equitable ground for being, to the relevant extent, protected from its adversary's demand. An equitable setoff does not depend upon an unfettered discretionary assessment of what is fair. Rather, it is essential that there be such a connection between the claim and cross‑claim that the cross‑claim can be said to impeach the claim.
The plaintiff accepts for present purposes that Edenham is liable to pay Premier Holdings under the Commercial Loan Agreement and that Edenham has failed to pay. The plaintiff also accepts for present purposes that Edenham refused to pay that amount because of the alleged breach of director's duties by Alex and Kerry. However, the plaintiff says that is not a link such as to impeach the plaintiff's claim. There is merit in the plaintiff's claim but it is unnecessary to resolve it at this time.
Unclean hands
The defendants rely on the so‑called 'unclean hands' defence which is based on the notion that a court of equity will not aid a person to derive advantage from their own wrong. There are multiple limitations to the operation of the unclean hands defence. First, it applies only to an equitable claim and so does not apply to the plaintiff's claims of breach of statutory duty. Secondly, the alleged impropriety must be a depravity in a legal as well as in a moral sense: see, for example, Dal Pont G E, Equity and Trusts in Australia (6th ed) [30.175]. Thirdly, the defence is not triggered by any act of wrongful conduct. The impropriety must display an immediate and necessary relation to the equity sued for, that is the plaintiff's conduct must be directly related to the defendants' wrongful action. The defence does not apply to behaviour of a plaintiff that has no relevant connection with the equity they seek to invoke. Fourthly, the defence is not available to deny relief in circumstances where the conduct in question is simply taking advantage of a bad business decision or judgment. Fifthly, the court will take into account the consequences of refusing relief and will not debar relief if this conflicts with other policies of equity or statute: Dal Pont [30.175]. Sixthly, it cannot be assumed that a plaintiff who comes to equity lacking clean hands will necessarily be denied relief even if their misconduct relates directly to the subject matter of the relief. As an equitable defence, it remains discretionary, and impacted upon by the circumstances of each individual case.
It is unnecessary and undesirable to make any findings or observations about the specific allegations of unclean hands by the defendants and the impact, if any, on the discretion of the court to grant equitable relief.
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