Emanuel Management Pty Ltd (in liq) v Foster's Brewing Group Ltd
[2003] QSC 205
•17 July 2003
SUPREME COURT OF QUEENSLAND
CITATION:
Emanuel Management Pty Ltd & Ors v Foster’s Brewing Group Ltd & Ors [2003] QSC 205
PARTIES:
EMANUEL MANAGEMENT PTY LTD (IN LIQUIDATION) (ACN 007 840 913) AND OTHERS AS SET OUT IN SCHEDULE 1
(plaintiffs)
v
FOSTER’S BREWING GROUP LTD
(ACN 007 620 886)
(first defendant)
GLENMORE PARK ESTATE LTD
(ACN 007 533 888)
(second defendant)
ELFIC LTD (ACN 007 606 206)
(third defendant)
LENSWORTH PROPERTIES PTY LTD (IN LIQUIDATION)
(ACN 007 520 649)
(fourth defendant)
KINGLINGSTON PTY LTD
(ACN 068 499 874)
(fifth defendant)
CALOUNDRA DOWNS PTY LTD
(ACN 068 356 525)
(sixth defendant)
CABOOLTURE WATERS PTY LTD
(ACN 068 499 810)
(seventh defendant)
MANGO HILL DEVELOPMENT PTY LTD
(ACN 068 244 762)
(eighth defendant)
JOHN FRANCIS O’GRADY
(ninth defendant)
JOHN DANIEL CROSBY
(tenth defendant)
COOPERS & LYBRAND (A Firm)
(eleventh defendant)
MURRAY GOLDIE ANDERSON
(twelfth defendant)
AND
TIMOTHY JAMES CUMING
(thirteenth defendant)FILE NO:
s3723 of 1999
DIVISION:
Trial
PROCEEDING:
Trial
ORIGINATING COURT:
Supreme Court, Brisbane
DELIVERED ON:
17 July 2003
DELIVERED AT:
Brisbane
HEARING DATES:
19 August 2002 - 23 August 2003; 27 August 2002 – 29 August 2002; 2 September 2002 – 5 September 2002; 10 September 2002 – 13 September 2002; 17 September 2002 – 20 September 2002; 23 September 2002 – 24 September 2002; 30 September 2002 – 4 October 2002; 7 October 2002 – 10 October 2002; 14 October 2002; 17 October- 18 October 2002; 21 October 2002 – 24 October 2002; 28 October 2002 – 31 October 2002; 4 November 2002 – 8 November 2002; 12 November 2002 – 15 November 2002; 18 November 2002 – 20 November 2002; 26 November 2002 – 29 November 2002; 2 December 2002 – 5 December 2002; 16 December 2002 – 20 December 2002;
29 January 2003 –31 January 2003; 3 February 2003 – 7 February 2003; 10 February 1002 – 14 February 2003; 18 february 2003 – 20 February 2003; 24 February 2003 – 28 February 2003; 3 March 2003 – 6 March 2003; 10 March 2003 – 13 March 2003; 10 April 2003 – 11 April 2003; 14 April 2003 – 17 April 2003;
JUDGE:
Chesterman J
ORDER:
1. Action dismissed. Judgment for all defendants against the plaintiffs
2. Application by the 1st-10th defendants for leave to counterclaim against the plaintiffs dismissed
3. Claims by the 1st-10th defendants against the 11th-13th defendants and claims by the 11th -13th defendants against the 1st-10th defendants for contribution dismissed
CATCHWORDS:
CORPORATIONS – WINDING UP – INSOLVENCY – WHAT CONSTITUTES INSOLVENCY OR DEEMED INSOLVENCY - whether liability for ‘insolvent transactions’ incurred pursuant to the Bankruptcy Act 1966 (Cth), The Companies Code and the Corporations Law
CORPORATIONS– MANAGEMENT AND ADMINISTRATION – DIRECTORS AND OTHER OFFICERS – FIDUCIARY POSITION – DE FACTO DIRECTORS – whether the control exercised over company group by officers and employees of financier was to such a degree as to make those officers and employees de facto directors - extended definition of ‘director’ - s5 Companies Code and /s60 (1) & (2) Corporations Law
CORPORATIONS – COMPANIES – WINDING UP – CONDUCT AND INCIDENTS OF LIQUIDATION – EFFECT OF WINDING UP ON OTHER TRANSACTIONS – whether payment of dividends on preference shares contravened s565 Companies Code – where recovery on payment of dividends or redemption of shares is precluded by doctrines of res judicata or Anshun estoppel
CORPORATIONS – MANAGEMENT AND ADMINISTRATION – DIRECTORS – FIDUCIARY POSITION – DUTIES TO CREDITORS OF COMPANIES – Breach of fiduciary duty – whether payments made pursuant to deeds constituted bribes to directors and solicitors who acted for the plaintiff companies
CORPORATIONS – CORPORATIONS LAW - Whether profit fees constituted unfair loans pursuant to s588FD and s588FE(6) of the Corporations Law - Whether interest charged on loans was unfair for the purposes of s588FD and s588FE(6) of the Corporations Law – extortionate rates of interest – unfair loans - Whether transaction creating a further advance on an existing mortgage is vulnerable pursuant to s588FB; s588FC and s558FE(4) of the Corporations Law – related entity transactions – definition of related entity for the purposes of s5.7B
CORPORATIONS – WINDING UP – LIQUIDATORS – DUTIES AND LIABILITIES – REPORTS, BOOKS ACCOUNTS AND AUDIT – whether breach of liquidator’s fiduciary duty - s232 Corporations Law - whether liquidator failed to exercise the requisite degree of care and diligence in exercise of his powers - Whether breach of Auditor’s duties arising under Companies Code - Accessorial liability – negligence – breach of contract - Whether breach of duty causative of lossBANKRUPTCY - Bankruptcy Act 1966 ss.120 and 121 - Whether transaction was a fraudulent disposition of property voidable against the liquidator pursuant to s121 of the Bankruptcy Act 1966 - Whether transaction incurring an obligation to pay a fee for obtaining further advances of working capital was a settlement of property for the purposes of s120 of the Bankruptcy Act 1966 - Whether indenture was a settlement for the purposes of s120 or a fraudulent disposition of property for the purpose of s121 of the Bankruptcy Act 1966 - Whether profit fees constituted voidable transactions pursuant to s120 and s121 of the Bankruptcy Act 1966
PROCEDURE – JUDGMENTS AND ORDERS – AMENDING, VARYING AND SETTING ASIDE – setting aside judgment for fraud – whether Supreme Court judgment was obtained fraudulently and/or collusively - whether conspiracy to defeat creditors by fraud – s121 Bankruptcy Act
ESTOPPEL – GENERAL PRINCIPLES – FORMER ADJUDICATION – JUDGMENT INTER PARTES – Res Judicata - Anshun estoppel
BREACH OF STATUTORY DUTY – Corporations Law – Contract - Conspiracy – Duress – Unconscionability and Undue Influence – Whether an agreement can be set aside for conspiracy, unconscionability or undue influence
LIMITATION OF ACTIONS – Limitation of Actions Act 1936 (SA) – whether recovery of dividend payments on preference shares lost by effluxion of time - whether claims against auditor for breach of contract, negligence or assisting in a breach of fiduciary duty are barred by the Limitation Act
COUNSEL:
D Meagher QC, P Morrison QC, R Derrington, J Peden, M Livesey for the plaintiffs
PA Keane QC, J Sheahan SC, J Bond SC, J McKenna SC, A Pomerenke, P Fox for the 1st-10th of defendants
B Oslington QC, S Thompson SC, LF Kelly for the 11th – 13th defendants
SOLICITORS:
Bennett & Philp instructed as town agents for Hunt & Hunt, Adelaide for the plaintiffs
Clayton Utz for the first group of defendants
Mallesons Stephen Jaques for the second group of defendants
Cases Cited - The following cases are cited in the judgment:
| 3M Australia v. Kemish (1986) 10 ACLR 371 |
| Abigroup Ltd v. Abignano (1992) 112 ALR 497 |
| Addstead Pty Ltd (in liq) v. Liddan Pty Ltd [1997] 70 SASR 21 |
| Aequitas v. AEFC (2001) 19 ACLC 1006 |
| Aktieselkabet Dansk Skibsfinansiering v Wheelock Marden & Co (unreported) CA Hong Kong 17 November 1994 |
| Alati v. Kruger (1955) 94 CLR 216 |
| ANZ Executives and Trustee Company Ltd v. Quintex Australia Ltd [1991] 2 Qd R 360 |
| Associated Alloys Pty Ltd v. ACN 001 452 106 Pty Ltd (2000) 74 ALJR 862 |
| Attorney-General for Hong Kong v. Reid [1994] 1 AC 324 |
| Australasian Oil Exploration Ltd v Lachberg & Others (1958) 101 CLR 119 |
| Australia and New Zealand Banking Group Ltd v. Westpac Banking Corporation (1988) 164 CLR 662 |
| Australian Competition and Consumer Commission v. C G Berbatis Holdings Pty Ltd (2003) HCA 18 |
| Australian Securities Commission v. AS Nominees Ltd (1995) 18 ACSR 459 |
| Australiasian Oil Exploration Ltd v. Lachberg & Ors (1958) 101 CLR 119 |
| Avon Downs Pty Ltd v. Federal Commissioner of Taxation (1949) 78 CR 353 |
| Baker v. Palm Bay Island Resort Pty Ltd [1970] Qd R 210 |
| Bank Line Ltd v. Arthur Capel & Co [1919] AC 435 |
| Barclays Bank Ltd v. W J Simms Son & Cook (Southern) Ltd [1980] QB 677 |
| Barnes v. Addy (1874) 9 LR Ch App 244 |
| Barton v. Official Receiver (1984) 4 FCR 380 |
| Beach Patroleum NL v. Johnson (1993) 11 ACSR 103 |
| Beach Petroleum NL v. Johnson (1993) 43 FCR 1 |
| Bell v. Peter Browne & Co [1990] 2 QB 495 |
| Blue Corp Pty Ltd (in liq.) formerly Lloyds Ships Holdings Pty Ltd (in liq.) & Ors v ANZ Executors & Trustee Co Ltd (1994) 13 ASCR 386 |
| BP Refinery (Westernport) Pty Ltd v. Shire of Hastings (1977) 180 CLR 266 |
| Bridgewater v. Leahy (1998) 194 CLR 457 |
| Broad v. Commissioner of Stamp Duties (1980) 2 NSWLR 40 |
| Byrne v. Australian Airlines Ltd (1995) 185 CLR 410 |
| Cannane v. J Cannane Pty Ltd (1998) 192 CLR 557 |
| Carney v. Herbert & Ors [1985] 1 AC 301 |
| Charterbridge Corp Ltd v. Lloyds Bank Ltd [1970] Ch 62 |
| Chew v. The Queen (1991-1992) 173 CLR 626 |
| Christopolous v. Angelos (1996) 41 NSWLR 700 |
| Cinema Plus Ltd (Administators Appointed) v. Australia & New Zealand Banking Group Ltd (2000) 49 NSWLR 513 |
| Con-Stan Industries of Australia Pty Ltd v. Norwich Winterthur Insurance (Australia) Ltd 1985-1986 160 (CLR) 226 |
| Consul Development Pty Ltd v. D.P.C. Estates Pty Ltd (1974-1975) 132 CLR 372 |
| Coomera Resort Pty Ltd v. Kolback Securities Ltd (McKenzie J Supreme Court of Queensland 20 February 1998) at 37 |
| Corporate Affairs Commission v. Drysdale (1978) 141 CLR 236 |
| David Securities Pty Ltd v. Commonwealth Bank of Australia (1992) 175 CLR 373 |
| Demondrille Nominees Pty Ltd v. Shirlaw (1997) 25 ACSR 535 |
| Deputy Commissioner of Taxation v. Austin (1998) 28 ACSR 565 |
| Dimskal Shipping Co. SA v. International Transport Workers Federation [1992] 2 AC 152 |
| Economic Life Assurance Society v. Usborne [1902] AC 147 |
| Edison General Electric Co v. Westminster & Vancouver Tramway Co. [1897] AC 193 |
| Edwards v. The Queen (1991-1992) 173 CLR 653 |
| Equiticorp Financial Services Ltd (NSW) v. Equiticorp Financial Services (NZ) (1992) 29 NSWLR 260 |
| Ex parte Fewings, In re Sneyd (1883) 25 CH D 338 |
| Fatimi Pty Ltd v. Bryant [2002] Aust. Torts Reports 81-677 |
| Firmin v. Gray & Co Pty Ltd [1985] 1 Qd R 160 |
| Flower v. Lloyd (No. 1) [1877] 6 Ch D 297 |
| Forsythe v. Blundell (1973) 129 CLR 477 |
| Fryer v. Powell (2001)159 FLR 433 |
| Griffith Wilyas Liquidator or AUR NL (in liq) v. Rothschild Australia Ltd [1999] 47 |
| Hamilton v. BHP Steel (JLA) Pty Ltd (1995) 13 ACLC 1548 |
| Hamilton v. Kaljo 1989 17 (NSWLR) 381 |
| Hardie v. Hansen 105 CLR 451 |
| Harlows Nominees Pty Ltd v. Woodside (Lakes Entrance)Oil Co NL (1968) 121 CLR 483 |
| Harris v. S (1971-1976) ACLC 40-263 |
| Harvey v. Phillips (1956) 95 CLR 235 |
| Hawkins v. Clayton (1988) 164 CLR 539 |
| Hawkins v. Clayton and Others trading as Clayton Utz & Co (1986) |
| Heald v. O’Connor [1971] 1 WLR 497 |
| Henderson v. Henderson (1843) 3 Hare 100 |
| Horsburgh v. Strongman & Crouch [1998] 3 VR 896 |
| Hovenden & Sons v. Millhoff (1900) 83 LT 41 |
| Industrial Equity Ltd & Others v. Blackburn & Others (1976-1977) 137 CLR 567 |
| Industries & General Mortgage Co Ltd v. Lewis [1949] 2 All ER 573 |
| Iso Lildow' Aliphumeleli Pty Ltd (in liq.) v. Commissioner of Taxation |
| J E Hurdley & Son Ltd (in liq.) (1941) NZLR 686 |
| J N Taylor Holdings Ltd (in liq.) (1991) 6 ACSR 187 |
| Jackson v. Goldsmith (1950) 81 CLR 446 |
| Jeffery v. Associated National Insurance Co Ltd [1984] 1 Qd R 238 |
| Joseph Constantine Steamship Line Ltd v. Imperial Smelting Corporation Ltd [1942] AC 154 |
| Karak Rubber Co Ltd v. Burden (No. 2) [1972] 1 WLR 602 |
| Kostka v. Addison [1986] 1 Qd R 416 |
| Larking v. Great Western (Nepean) Gravel Ltd (1940) 64 CLR 221 |
| Logicrose Ltd v. Southend United Football Club Ltd (1988) 1 WLR 1257 |
| Maguire v. Makaronis (1996-1997) 188 CLR 449 |
| Marks v. Feldman (1870) LR 5 QB 275 |
| Marra Developments Ltd v. B.W. Rofe Pty Ltd [1977] 2 NSWLR 616 |
| McDonald v. Scobie [1980] Qd R 477 |
| McKernan v. Fraser (1931) 46 CLR 343 |
| McWilliam v. Crescendo Management Pty Ltd v. Westpac Banking Corporation (1988) |
| McWilliam v. Penthouse Publications Ltd [2001] NSWCA 237 |
| Melbase Corporation Pty Ltd v. Segenhoe Ltd (1995)17 ASCR 187 |
| Melbourne Banking Corporation Ltd v. Brougham (1881-82) 7 App Cas 307 at 315 |
| Moses v. Macferlan (1760) 2 Burr. 1005 |
| NA Kratzmann Pty Ltd v. Tucker (No. 2) (1968) 123 CLR 295 |
| National Australia Bank Ltd v. Freeman (2001) QCA 473 |
| Paragon Finance PLC v. DB Thakerar & Co [1999] 1 All ER 400 |
| Patch v. Ward (1867) LR 3 Ch App 203 |
| Pavey & Matthews Pty Ltd v. Paul (1986-1987) 162 CLR 221 |
| Peter Buchanan Ltd v. McVey [1955] AC 516 |
| Port of Melbourne Authority v. Anshun Pty Ltd (1981) 147 CLR 589 |
| Preston v. Wolverhampton Health Care NHS Trust & Others (No. 2) [2001] 2 AC 455 |
| QBE Insurance Group Ltd v. Australian Securities Commission (1992) 110 ALR 301 |
| Queensland Mines Ltd v. Hudson (1976) ACLC 40-266 |
| Re Bank of Credit & Commerce International S.A. [No. 8] [1998] AC 214 |
| Re Barnes, ex parte Stapleton [1962] Qd R 231 |
| Re Charge Broad v. Commissioner of Stamp Duties (1980) |
| Re Diplock [1948] 1 Ch 465 |
| Re Hampshire Land Company (1896) 2 Ch 743 |
| Re Hydrdam (Corby) Ltd [1994] 2 BCLC 180 |
| ReKastropil; Ex parte Official Trustee in Bankruptcy v. Kastropil (1991-1992) 33 FCR 135 |
| reLa Rosa and Ors; Ex parte Norgard v. Rocom Pty Ltd (1990) 21 FCR 270 |
| Re Newark Pty Ltd (in liq.) [1993] 1 Qd R 409 |
| Re PFTZM Ltd (in liquidation) [1995] 2 BCLC 354 |
| ReUnisoft Group (No. 3) [1994] 1 BCLC 609 |
| Reeve v. Lisle [1902] 1 Ch 53 |
| Reid Murray Holdings Ltd (in liq) v. David Murray Holdings Pty Ltd [1972] 5 SASR 386 |
| Rodway v. R (1990) 169 CLR 515 at 518 |
| Rogers v. The Queen (1994) 181 CLR 251 |
| Royal Brunei Airlines v. Phillip Tan Kok Ming [1995] 2 AC 378 |
| Salomon v. Salomon & Co Ltd [1897] AC 22 |
| Sandell v. Porter (1966) 115 CLR 666 |
| Saunders v. Vautier 49 ER 202; Queen Street Hotels Pty Ltd v. Byrne (1980) ACLC 40-611 |
| Scholefield Goodman & Sons Ltd v. Zyngier [1986] AC 562 |
| Secretary for the State for Trade and Industry v. Deverell [2001] Ch 340 |
| Selangor United Rubber Estates Ltd v. Cradock [(No. 3)] [1968] 1 WLR 1555 |
| Shipway v. Broadwood [1899] 1 QB 369 |
| Soar v. Ashwell [1893] 2 QB 390 |
| South Australia in Jackson v. Esanda Finance Corporation Ltd [1992] 59 SASR 416 |
| Southern Cross Interiors Pty Ltd v. Deputy Commissioner of Taxation (2001) 53 NSWLR 213 |
| Spedley Securities Ltd v. Western United Ltd (1992) 7 ACSR 722 |
| Spencer v. The Commonwealth of Australia (1907) 5 CLR 418 |
| Spies v. The Queen (2000) 201 CLR 603 |
| Standard Chartered Bank of Australia v. Antico (1995) 13 ACLC 1381 |
| Sycotex Pty Ltd v. Baseler & Ors (No 2) (1994) 51 FCR 425 |
| Taylor v. Australia and New Zealand Banking Group (1988) 13 ACLR 780 |
| Taylor v. Davies [1920] AC 636 |
| The Ampthill Peerage [1977] AC 547 |
| The Eugenia 1964 2 QB 226 |
| Tosich Construction Pty Ltd (in liq) v. Tosich (1997) 78 FCR 363 |
| Trawl Industries of Australia Pty Ltd v. Effem Foods Pty Ltd (1992) 36 FCR 406 |
| Walker v. Wimborne (1976) 137 CLR 1 |
| Wardley Australia Ltd v. State of Western Australia (1992) 175 CLR 514 |
| Westmex Operations Pty Ltd(in liq.) v.Westmex Ltd (in liq.) & Ors (1992) 8 (ACSR)146 |
| Westpac Banking Corporation v. Cockerill (1998) 152 ALR 267 |
| Westpoint Finance Pty Ltd v. Chocolate Factory Apartments Ltd [2002] |
| Williams v. Hursey (1959) 103 CLR 30 |
| Williams v. Lloyd (1933-1944) 50 CLR 341 |
| Wilyas Liquidator or AUR NL (in liq) v. Rothschild Australia Ltd [1999] 47 NSWLR 555 |
| Winkworth v. Edward Baron Development Co Ltd (1987) 1 All ER 114 |
| World Expo Park Pty Ltd v. EFG Australia Ltd (1995) 129 ALR 685 |
| Yat Tung Investment Co Ltd v. Dao Heng Bank Ltd [1975] AC 581 |
| Yorke v. Lucas (1983-1984) 158 CLR 661 |
| Youyang Pty Ltd v. Minter Ellison Morris Fletcher 2003 (HCA) 15 |
SCHEDULE 1
The Plaintiffs
1st Plaintiff Emanuel Management Pty Ltd (In Liquidation) (ACN 007 840 913)
2nd Plaintiff Segacious Pty Ltd (In Liquidation) (ACN 010 748 544)
3rd Plaintiff Meka Securities Pty Ltd (In Liquidation) (ACN 007 724 629)
4th Plaintiff Cofordo 251 Pty Ltd (In Liquidation) (ACN 010 683 584)
5th Plaintiff Grangeville Pty Ltd (In Liquidation) (ACN 008 104 854)
6th Plaintiff Emanuel (No. 14) Pty Ltd (In Liquidation) (ACN 008 080 206)
7th Plaintiff P.B.R.S. Pty Ltd (In Liquidation) (ACN 007 799 546)
8th Plaintiff Paterson & Co Pty Ltd (In Liquidation) (ACN 007 679 763)
9th Plaintiff Giuseppe Nominees Pty Ltd (In Liquidation) (ACN 007 771 486)
10th Plaintiff Lonsdale Stage 2 Pty Ltd (In Liquidation) (ACN 007 812 928)
11th Plaintiff Emanuel Properties Pty Ltd (In Liquidation) (ACN 007 740 123)
12th Plaintiff Emanuel (No. 4) Pty Ltd (In Liquidation) (ACN 008 036 995)
13th Plaintiff Emanuel (Rundle Mall) Pty Ltd (In Liquidation) (ACN 007 983 851)
14th Plaintiff Villa-Cairns Pty Ltd (In Liquidation) (ACN 010 633 459)
15th Plaintiff Addstone Pty Ltd (In Liquidation) (ACN 010 764 977)
16th Plaintiff Antlia Pty Ltd (In Liquidation) (ACN 010 688 776)
17th Plaintiff Centaurus Pty Ltd (In Liquidation) (ACN 010 688 767)
18th Plaintiff Cloudland Investments Pty Ltd (In Liquidation) (ACN 010 319 730)
19th Plaintiff Cofordo 260 Pty Ltd (In Liquidation) (ACN 010 685 775)
20th Plaintiff Derwent Water Pty Ltd (In Liquidation) (ACN 010 688 721)
21st Plaintiff Emanuel (No. 7) Pty Ltd (In Liquidation) (ACN 008 053 352)
22nd Plaintiff Lascivious Pty Ltd (In Liquidation) (ACN 010 749 032)
23rd Plaintiff Leominor Pty Ltd (In Liquidation) (ACN 010 688 758)
24th Plaintiff Livilla Pty Ltd (In Liquidation) (ACN 010 748 571)
25th Plaintiff Saroon Pty Ltd (in liquidation) (ACN 010 633 548)
26th Plaintiff Woodville Industrial Park Pty Ltd (In Liquidation) (ACN 008 037 018)
27th Plaintiff Airlie Beach Pty Ltd (In Liquidation) (ACN 008 203 218)
28th Plaintiff Navicio Pty Ltd (ACN 010 616 690)
29th Plaintiff Airlie Bay Developments Pty Ltd (In Liquidation) (ACN 010 177 232)
30th Plaintiff Elizabeth House Pty Ltd (In Liquidation) (ACN 007 548 487)
31st Plaintiff Addstead Pty Ltd (In Liquidation) (ACN 010 764 931)
32nd Plaintiff Bronstead Pty Ltd (In Liquidation) (ACN 010 906 475)
33rd Plaintiff Carmina Burana Pty Ltd (In Liquidation) (ACN 010 672 849)
34th Plaintiff Carsim Pty Ltd (In Liquidation) (ACN 007 760 116)
35th Plaintiff CC Lot 1 Pty Ltd (In Liquidation) (ACN 008 037 063)
36th Plaintiff CC Lot 4 Pty Ltd (In Liquidation) (ACN 008 037 036)
37th Plaintiff Dangier Pty Ltd (In Liquidation) (ACN 010 731 012)
38th Plaintiff Emanuel (No. 8) Pty Ltd (In Liquidation) (ACN 008 053 343)
39th Plaintiff Emanuel (No. 9) Pty Ltd (In Liquidation) (ACN 008 053 334)
40th Plaintiff Emanuel (No. 13) Pty Ltd (In Liquidation) (ACN 008 080 180)
41st Plaintiff Emanuel (No. 15) Pty Ltd (In Liquidation) (ACN 010 748 606)
42nd Plaintiff Emanuel (Malltown) Pty Ltd (In Liquidation) (ACN 007 885 403)
43rd Plaintiff Emanuel (Qld) Pty Ltd (In Liquidation) (ACN 008 100 810)
44th Plaintiff Emanuel (South Aust) Pty Ltd (In Liquidation) (ACN 007 963 466)
45th Plaintiff Emanuel Constructions Pty Ltd (In Liquidation) (ACN 007 639 438)
46th Plaintiff Emanuel Enterprises Pty Ltd (In Liquidation) (ACN 007 838 691)
47th Plaintiff Emanuel Holdings Pty Ltd (In Liquidation) (ACN 007 653 974)
48th Plaintiff Emanuel Investments Pty Ltd (In Liquidation) (ACN 007 743 400)
49th Plaintiff Emanuel Projects Pty Ltd (In Liquidation) (ACN 007 683 418)
50th Plaintiff Establishment Holdings Pty Ltd (In Liquidation) (ACN 007 736 218)
51st Plaintiff Etruscan Pty Ltd (In Liquidation) (ACN 010 731 058)
52nd Plaintiff Havana Pty Ltd (In Liquidation) (ACN 008 119 999)
53rd Plaintiff Hendon Industrial Park Pty Ltd (In Liquidation) (ACN 007 890 708)
54th Plaintiff Heriot Pty Ltd (In Liquidation) (ACN 010 731 021)
55th Plaintiff Hondel Pty Ltd (In Liquidation) (ACN 007 901 144)
56th Plaintiff Joe Emanuele Pty Ltd (In Liquidation) (ACN 007 623 690)
57th Plaintiff Libra Pty Ltd (In Liquidation) (ACN 007 588 490)
58th Plaintiff Marview Pty Ltd (In Liquidation) (ACN 008 272 615)
59th Plaintiff Molinara Pastoral Company Pty Ltd (In Liquidation) (ACN 007 705 062)
60th Plaintiff Roclin Enterprises Pty Ltd (In Liquidation) (ACN 007 841 161)
61st Plaintiff Sayer Properties Pty Ltd (In Liquidation) (ACN 007 714 927)
62nd Plaintiff South Australian Manufacturing Park Pty Ltd (In Liquidation)
(ACN 008 265 058)
63rd Plaintiff Surent Pty Ltd (In Liquidation) (ACN 008 178 434)
64th Plaintiff Trombone Pty Ltd (In Liquidation) (ACN 010 633 557)
65th Plaintiff Worando Trust Pty Ltd (In Liquidation) (ACN 007 511 739)
66th Plaintiff Peter Ivan Macks
INDEX:
INTRODUCTION…………………………………………………………………. 14
SECTION I: INSOLVENCY…………………………………………………….. 27
The Cases………………………………………………………………………. 28
Expert Evidence………………………………………………………………... 36
SECTION II: DE FACTO DIRECTORSHIP…………………………………... 75
De Facto Directors – The Facts………………………………………………… 86
The Meetings…………………………………………………………………… 88
Occupying Position of Director………………………………………………... 116
The Case Against Mr Crosby………………………………………………….. 118
Plaintiffs’ Written Submissions……………………………………………….. 118
SECTION III: THE 1988-1994 TRANSACTIONS…………………… ……… 123
Deed of Master Agreement…………………………………………………… 125
Deed of Variation – 2 September 1988………………………………………. 127
Indenture and Guarantee – 16 January 1990…………………………………. 131
Deed of Variation – 4 May 1990…………………………………………….. 134
Indenture – 4 September 1990……………………………………………….. 137
Profit Fees………………………………………………………… ………… 140
Interest……………………………………………………………………….. 143
Deed of Collateralisation – 5 March 1992…………………………………… 146
Debt Incentive Agreement…………………………………………………… 149
DOOR……………………………………………………………………….. 161
Deposit Account Agreement………………………………………………… 168
Deed – 16 August 1993……………………………………………………… 170
Deed of Variation – 9 September 1993……………………………………… 175
Deed – 23 September 1993………………………………………………….. 178
Deed of Variation – 16 November 1993…………………………………….. 179
SECTION IV: THE 1995 SCHEME…………………………………………… 182
Valuation of the APM Land………………………………………………….. 186
The Negotiations……………………………………………………………... 221
Review……………………………………………………………………….. 297
Setting Aside the Judgment………………………………………………….. 299
Undue Influence……………………………………………………………… 304
Effect of the Judgment of 27 February 1995………………………………… 304
The Purpose of the Trust…………………………………………………….. 316
DOFR and the Other Deeds…………………………………………………. 322
Bribery………………………………………………………………………. 322
The Cases……………………………………………………………………. 325
Facts…………………………………………………………………………. 327
Bribery of Thomsons………………………………………………………... 329
Bribe of Johnson Winter & Slattery……………………………………….… 331
Uncommercial Transaction………………………………………………….. 332
Breach of Fiduciary and Statutory Duties…………………………………… 340
Breach of Statutory Duties………………………………………………….. 344
Conspiracy………………………………………………………………….. 350
Duress, Unconscionability and Undue Influence…………………………. 353
Conclusion………………………………………………………………… 356
Confidentiality……………………………………………………………. 356
“EFG Always Wanted the Land”………………………………………… 361
Position of the Solicitors…………………………………………………. 367
Gift to Mr Emanuele……………………………………………………... 367
SECTION V: PREFERENCE SHARES – RECOVERY OF DIVIDENDS AND REDEMPTION PAYMENTS………………………………………………… 369
Release and Res Judicata…………………………………………………… 383
Limitation of Actions………………………………………………………. 384
Extension of Time …………………………………………………………. 388
Liquidator’s Claims under the Bankruptcy Act……………………………. 389
Were Elders’ Securities Invalid? ………………………………………….. 411
SECTION VI: MISCELLANEOUS MATTERS…………………………… 426
Loss by One Diminishes All………………………………………………. 426
Futility of Claims………………………………………………………….. 429
Claims by EFG……………………………………………………………. 431
Rulings on Evidence………………………………………………………. 432
SECTION VII: CLAIMS AGAINST COOPERS & LYBRAND…………… 434
Claims Against Mr Cuming…………………………………………………. 434
i. The Cuming Companies……………………………………………. 434
ii. Elizabeth House Deposit Account…………………………………. 444
Claims Against Coopers & Lybrand and Mr Anderson Arising out of Payment of Dividends and Redemption of Redemption of the Preference Shares. ……. 448
Limitation Act……………………………………………………………… 451
Claim by Elizabeth House Against the Auditors………………………….. 456
Redemption of the A and B Class Shares…………………………………. 456
Anderson…………………………………………………………………… 457
Allen……………………………………………………………………….. 458
Introduction
This action is brought at the instigation of the 66th (and last) plaintiff who is the liquidator of the other 65 plaintiffs. They were (with some presently irrelevant exceptions) all wound up in 1995 on the application of the Commissioner of Taxation. The first to eighth defendants are all related companies. The first, second, third, and fourth defendants have undergone a number of changes of name during the lengthy period in which occurred the events from which this action arises.
Foster’s Brewing Group Ltd, the conglomerate which resulted from the acquisition by Elders IXL Ltd of Carlton and United Breweries Ltd had a merchant banking division which has been known in these proceedings as Elders Finance Group or EFG. It consisted of a number of companies which included the second, third and fourth defendants, which are subsidiaries of the first defendant.
Except where it is necessary to identify particular plaintiffs I shall refer to them indistinguishably as “the plaintiffs” or “the plaintiff companies”.
Guiseppe Nominees Pty Ltd was the ultimate holding company. It was owned by
Mr & Mrs Giuseppe Emanuele. The plaintiffs were controlled by Mr Emanuele. When it is necessary to refer to a particular plaintiff or plaintiffs I shall abbreviate the name so that, for example, Emanuel Management Pty Ltd will become “Management”; Paterson Pty Ltd will become “Paterson” and Emanuel (No. 14) Pty Ltd will become “Emanuel 14”. It was the first 27 plaintiffs with whom the first to eighth defendants had most, if not all, of their dealings. I shall refer to them as the ‘Emanuel group’. It should be noted that a number of documents describe the ‘Emanuel group’ as the first 27 plaintiffs together with Mr Emanuele. I use the term to describe the companies only.
Similarly, unless it is necessary to identify one of the second to fourth defendants I shall refer to them indistinguishably as “Elders” or “EFG”, or “the first defendants”.
The ninth defendant, Mr O’Grady, has been the managing director of EFG (but not of its parent company, the first defendant) since 1991. Mr Crosby, the tenth defendant, was for a time a director of the second, third, and fourth defendants. He ceased to hold any directorship in those companies late in 1991. Many years ago, between 1961 and 1966 Mr Crosby was employed by Mr Giuseppe Emanuele.
The eleventh defendant is a well known firm of chartered accountants. The twelfth and thirteenth defendants were at various times members of the partnership who performed professional services for the plaintiffs. Mr Cuming was the liquidator of a small number of the plaintiff companies before the appointment of Mr Macks, the 66th plaintiff. I shall refer to these defendants collectively as ‘the second defendants’, ‘Coopers and Lybrand’ or ‘C & L’.
It will not be necessary to refer much to the fifth, sixth, seventh, or eighth defendants. They are joined because particular relief is sought against them. They were companies to which were transferred several parcels of land which had been mortgaged by the plaintiffs to Elders to secure substantial amounts of money borrowed by the plaintiffs. After default and in circumstances which it will be necessary to discuss in great detail, the lands were transferred to those companies as part of a compromise between the plaintiffs and Elders. The compromise is attacked by the plaintiffs on a very large number of grounds which all have as an objective the reconveyance of the lands to the plaintiffs. Some of them have become very valuable.
The directors of the plaintiff companies were Mr Giuseppe Emanuele, his son
Rocco Emanuele, his daughter Linda and his son Linton, as well as a nephew and a niece, Robert Simionato and Gelinda Simionato. These were called ‘the Emanuele Family Directors’ during the trial and again it is convenient to use that terminology. None of them was called as a witness. Mr Emanuele resigned as a director of the Emanuel group in March 1995 and the designation “Emanuel Family Directors” does not include him after that date.
The ultimate holding company for the plaintiffs was Giuseppe Nominees, the only shareholders of which were Mr and Mrs Emanuele. It held its property on trust for Mr Emanuele and members of his family. Giuseppe Nominees was the sole beneficial shareholder of Holdings which was the sole shareholder of Management which owned beneficially all the shares in Paterson. That company then owned, effectively, the shares in the other plaintiff companies which were its subsidiaries. This is an over-simplification but it is sufficient for present purposes. The number of companies is explained by the fact that for taxation purposes they were mostly single purpose companies, each company being acquired for the purpose of owning one property. As the property was sold the company would become dormant. Some companies which traded in properties would own more than the one property but there were only a few such companies. Management was, as its name suggests, the banker and administrator for the plaintiffs. When a company acquired a property Management would borrow for that purpose and on-lend the money. Security would be taken from Management as well as the owning company. When the property was sold, if sold for a profit, the proceeds would go to Management which would then owe the ‘profit’ as an inter-company loan to the company whose property had been sold. Conversely if the property sold for a loss, that company would owe money to Management.
Mr Emanuele came to South Australia from Italy in 1952. He commenced working as a real estate agent but soon began to develop residential, and then commercial properties. By 1986 he (or more accurately his companies) had become very substantial property owners in Adelaide. They had acquired a considerable part of the commercial centre of that city. Mr Emanuele was obviously a shrewd and astute investor as well as being determined in personality and confident in his ability to detect a good investment and to persuade a financier to lend the money for its acquisition. His group was always highly geared and his borrowings often came close in value to the worth of the properties. Nevertheless he was a self-made man who built his group from nothing to one which held properties worth more than $100,000,000.
In 1986 on a visit to Queensland Mr Emanuele impulsively agreed to buy about 64,000 acres of undeveloped land thickly planted with pine trees (“the APM land”). The vendor was Australian Paper Manufacturers Ltd (“APM”). The purchase price was $48,000,000 and the deposit was $5,000,000. The eventual purchaser was Emanuel 14 and Elders lent all the money to enable the purchase to proceed. At the time he made the agreement with the vendor the plaintiffs did not have available to them sufficient monies to pay the deposit. That amount, too, had to be borrowed. A delay in securing funds led to an additional amount of $811,587.63 being paid to APM by way of interest.
At the time of the purchase the Emanuel group’s financial position was far from sound. It had recently defaulted on payments due to mortgagees who had exerted some pressure on the plaintiffs to improve their performance. News that
Mr Emanuele had committed his companies to a substantial purchase of broad acres produced anger in some lenders and dismay in others.
Mr Emanuele was undeterred. He persuaded Elders, which up until then had not been the major financier to his group, to advance the money, as I have mentioned. The advance was for a term of four months with interest to be capitalised.
Mr Emanuele moved swiftly to find a partner with sufficient capital to allow the development of the land without the need for costly borrowing. He found a manifestation of a Chinese provincial government which indicated it would agree to acquire a half interest in the lands by purchasing shares in Emanuel 14 for about $2,000,000 and by financing the development of the land in return for a share of the profits. This would have allowed the plaintiffs to repay EFG and develop the land without cost. Elated by his success and the prospect of an immediate profit,
Mr Emanuele toured Queensland as far north as Cape Tribulation, buying whatever land took his fancy. In February 1988 his Chinese co-venturer withdrew the day before it was due to sign a binding agreement. The plaintiffs were obliged to sell their commercial properties in Adelaide, which produced substantial income, to reduce the level of debt. They were left with large tracts of land producing no income save for the proceeds of the sale of the pine plantations. They had no means of servicing their considerable debt to Elders. Thus began the plaintiffs’ troubles and their litigious effort to recover from them.
The loss of his joint venturer was a serious blow for Mr Emanuele and his companies. They were then in a parlous financial position. Indeed, for the purposes of the action, the plaintiffs date their insolvency from this event.
Mr Emanuele, however, remained optimistic and endeavoured to find buyers for the larger parcels of land. EFG was sympathetic and indicated that it would advance moneys by way of working capital to allow the plaintiffs to meet their financial obligations until sales could be effected and the proceeds applied to reduce debt and to meet the companies’ running costs. The plaintiffs argue that the amounts advanced were insufficient to allow them to pay their debts as they fell due. EFG’s motive was not altruism: its witnesses explained that they thought there was a better chance that the lands could be sold and for higher prices if Mr Emanuele was in charge of the selling program. Forced sales by a mortgagee would, it was apprehended, be less successful. This, too, became a subject of debate between the plaintiffs and the first defendants. The plaintiffs claimed that EFG involved itself in the plaintiffs’ affairs well beyond supervising the marketing of the properties charged with the payment of their debt. They argue EFG’s interest extended to all aspects of the plaintiffs’ undertaking so that EFG, by its officers, became de facto directors of the companies. When coupled with the allegation that those companies were insolvent from 1988 it is said that EFG incurred liability pursuant to the Bankruptcy Act (1966) (Cth) (‘Bankruptcy Act’), The Companies Code and
The Corporations Lawfor what may, for convenience, be compendiously described as ‘insolvent transactions’.
In 1990 it appeared as though Mr Emanuele had succeeded in extricating his group from its predicament. He negotiated the sale of part of the APM lands, about 1,800 hectares on Bribie Island, to a Japanese investor for a price of $105,000,000. The property the subject of the sale included some land at Kangaroo Point which may, for present purposes, be disregarded. The sale was subject to obtaining approval from the Foreign Investment Review Board (‘FIRB’). The plaintiffs, a little carpingly, tended to decry the contract as not being a genuine contract for sale. Certainly some of its terms were unusual but there is nothing in the evidence to show that the purchaser was not willing and able to complete, subject to FIRB approval. Unfortunately for Mr Emanuele the State Government had changed late in 1989 and the new administration placed more emphasis on protecting the natural environment than on development. In about January 1991 it determined to oppose the grant of FIRB approval and notified Mr Emanuele to that effect. Thereafter, though he remained optimistic that the setback could be overcome, the transaction was in reality doomed from the moment the State Government determined its position.
The first defendants took the same view. They decided to reduce the extent to which they would lend moneys to the plaintiffs to enable them to continue operating. In particular they told the plaintiffs of their decision not to advance moneys for the payment by the plaintiffs of interest due on loans from other financiers.
Mr Emanuele was told to come to whatever arrangements he could with those financiers. EFG itself ‘suspended’ the interest due to it from the plaintiffs. This meant that interest due from the plaintiffs was not regarded as income for the purposes of EFG’s profit and loss account though, as between plaintiffs and first defendants interest was still payable. The decision reflected the fact that the plaintiffs could not pay interest and that EFG’s accounts would be inaccurate if they included that interest as income.
The next two years were ones of particular difficulty for the plaintiffs. They attempted in vain to sell sufficient of their landholding to reduce their debt to manageable proportions. A number of contracts for substantial prices were signed but none proceeded to settlement. It would be remembered that 1990 and the years following were ones of economic hardship for the whole country which experienced a deep and prolonged recession. Property values declined and there was little enthusiasm for the large scale development which was necessary for the plaintiffs’ purposes. That is not to say that the plaintiffs made no sales. They did sell a number of parcels of land and successfully subdivided other land and sold off the subdivided lots. The overall proceeds, though substantial, were insufficient to make inroads into the debt owed to the first defendants (and other financiers) interest on which was capitalised so that it continued to increase.
Throughout these years the plaintiffs attempted to refinance their borrowings. Interest rates had declined markedly as the effects of the recession were felt but EFG did not reduce the rates agreed with the plaintiffs when the loans were advanced. These rates were quite high: of the order of 20 per cent when prevailing market interest rates in 1990 and 1991 fell to about 15 per cent. The maintenance of high rates is the subject of a particular complaint by the plaintiffs about which it will be necessary to say more later.
In 1992 the plaintiffs commissioned a report from Mr Bruce Wales, a chartered accountant, who had formerly been a partner of Coopers & Lybrand. The Wales Report, as it was called, was paid for by EFG and produced in November 1992. The essence of its conclusions was that if the APM lands were rezoned, or if development approvals could be obtained in respect of them, their saleability and value would increase very greatly. The process of obtaining such approvals would be relatively lengthy and expensive but the moneys expended to achieve that end would result in a hugely increased sale price.
The Wales Report was delivered to Mr O’Grady, the ninth defendant who spoke to Mr Wales about it. Mr O’Grady accepted the thrust of the report, that given time and some more money the plaintiffs could develop some or all of the APM lands to the point where a repayment of EFG’s debt was feasible.
In March 1993 the Emanuel group entered into a deed with the second, third and fourth defendants, the Deed of Orderly Realisation (‘DOOR’). This deed has already been the subject of litigation between the parties to it in the Federal Court. It is a focus of attack by the plaintiffs in these proceedings. It will be necessary later to consider the detail of its terms and the separate bases for the plaintiffs’ complaints about it. For the moment it is enough to explain that it provided for a moratorium of 40 months during which EFG was precluded from demanding repayment of any of its outstanding loans on the condition that the Emanuel group made sales of land within a timeframe and to a value set out in the deed. There were incentives for the plaintiffs to make the sales. Prices obtained in excess of designated amounts would result in additional receipts to the plaintiffs. A recital to DOOR acknowledged the amount of the debt which the Emanuel group owed EFG at the time of execution. It is this recital which is of particular importance to the plaintiffs. They allege that the debt was inflated and that EFG by its officers knew that the deed overstated the amount of the debt. It is also alleged that Mr Emanuele was overborne and coerced into executing the deed. EFG’s motives for its conduct are said to be sinister and to form part of an expansive plan implemented over years to obtain freehold title to the APM lands and thereby defraud the plaintiffs and their creditors, particularly their unsecured creditors.
As part of the security for the loan to it, Emanuel 14 gave a mortgage debenture to EFG which, relevantly, charged the trees growing on the APM lands and the proceeds from the sale of the timber. Emanuel 14 had, in fact, made an agreement with Softwoods Queensland Pty Ltd (‘Softwoods’), a subsidiary of Colonial Sugar Refineries Ltd (“CSR”) for the payment of royalties from the timber which Softwoods cut and removed from the land. The royalties exceeded $1,000,000 per year and were the plaintiffs’ only source of income apart from property sales which occurred sporadically. By the terms of the DOOR the receipt of the timber royalties by the Emanuel group was in the discretion of EFG.
In about August of 1993, only five months after the execution of DOOR,
Messrs O’Grady and Crosby became convinced that the scheme underlying DOOR would not succeed. There were two reasons for the reassessment. In March 1991 Emanuel 14 signed a contract to sell Parcel 64, the most saleable of the APM lands, to a company, Kartha Pty Ltd (‘Kartha”) for $30,000,000. Kartha could not perform and the contract was renegotiated in June 1992. Despite extensions of time the contract was not completed and was rescinded by agreement in August 1993.
Mr Crosby saw in the failure of the transaction, the third of its kind, an indication that Mr Emanuele was not capable of successfully completing a ‘big sale’ which was necessary if the moratorium was to achieve its desired end. To Mr O’Grady that was of secondary importance. To him of more significance was a report published by the Regional Planning Advisory Group (‘RPAG’) set up by the State Government to advise it on overall land use in South East Queensland. The work of this group was complemented by other population and land use studies which it is unnecessary to mention. The result of the report compiled by RPAG was that, with the exception of Parcel 64, also known as Mango Hill, the APM lands were all designated for preservation as open spaces. This meant that the thesis underlying the Wales Report had become invalid. Those lands would not, certainly for many years, be given approval for development. The prospect of their obtaining enhanced value by reason of such approvals had disappeared, and with it the purpose of the DOOR.
The position as Mr O’Grady saw it at the end of 1993 was that the plaintiffs owed EFG about $160,000,000. The debt was steadily growing. The plaintiffs had been unable, over the course of about five years, to effect any large scale sales of its lands to reduce the debt. The RPAG report cast serious doubts upon the saleability of three of the four large parcels of APM land. The plaintiffs did not have the financial resources to obtain development approval for Parcel 64. Mr O’Grady therefore proposed that the plaintiffs and EFG should sever their relationship. The plaintiffs should transfer to EFG the APM lands which were mortgaged to it so that EFG could develop them as best it could in an endeavour to recover its debt. The other lands should be sold and part of the proceeds paid to the Emanuel group. The size of its share would depend upon the prices obtained.
Mr Crosby, who by this stage was no longer employed by EFG but was a consultant to it and who had had a long and friendly relationship with Mr Emanuele, was commissioned to negotiate the proposal. He was unsuccessful. Mr Emanuele would not accept the loss of the APM lands and their potential. In March 1994 EFG determined to bring matters to a head and exercised its powers under DOOR to direct the payment of timber royalties from Emanuel 14 to itself. The plaintiffs were without an income. In August they commenced proceedings in the Federal Court in Adelaide to challenge EFG’s actions. The claim had two bases: first that on its true construction DOOR did not allow EFG to divert timber royalties. The second was that EFG had made representations during the course of negotiations for DOOR to the effect that timber royalties would flow to the plaintiffs. Those representations were said to have been a contravention of the Trade Practices Act 1974 (Cth) (‘TPA’) if DOOR by its terms did not secure the royalties to the plaintiffs. Relief was claimed giving effect to the alleged representations.
In November 1994 Branson J. gave judgment in favour of EFG which then proceeded to exercise its powers as mortgagee. It went into possession of the secured properties and commenced proceedings in this Court to obtain judgment for the outstanding debt. Simultaneously it negotiated with the plaintiffs for a resolution of their differences. An appeal against the judgment of Branson J had been instituted and Mr Emanuele had indicated that he would contest EFG’s attempts to realise the secured properties.
On 27 February 1995 summary judgment was entered on the application of the second, third and fourth defendants, in an amount of $186,880,302.71 against the first 27 plaintiffs and Mr Emanuele. On 17 March 1995 a compromise was reached between the Emanuel group, Mr Emanuele, and the second, third and fourth defendants. The compromise was affected by three separate deeds which were intended to be inter-dependant so that none would be effective unless all were executed. The deeds themselves do not contain this term: indeed they do not refer to each other at all. Each contained a clause obliging the respective parties to keep their existence, and their terms, confidential.
The first deed, styled Deed of Forbearance and Release (DOFR), was made between the first 29 plaintiffs and the second, third and fourth defendants. It will be necessary later to set out its terms in some detail but for the moment it is enough to record that the plaintiff parties agreed to discontinue their appeal to the full
Federal Court and agreed to transfer the various parcels of the APM lands to the fifth, sixth, seventh and eighth defendants for prices set out in a schedule the aggregate of which was to be applied to reduce the judgment debt. Further the plaintiff parties agreed not to resist or interfere with the exercise by EFG of its rights as mortgagee; released EFG its employees, agents and solicitors from all causes of action arising out of advances and securities made and taken between the plaintiffs and EFG and admitted indebtedness for the amount of the judgment debt together with interest accruing at 20.5 per cent per annum. For its part EFG agreed to pay $650,000 to the first 29 plaintiffs and to pay a further sum of $50,000 to their solicitors for services rendered and to pay a little over $320,000 to another creditor of the Emanuel group.
The second deed was made between Simionato Holdings Pty Ltd and the second, third and fourth defendants (‘the Simionato deed’). It provided for the payment by EFG to Simionato Holdings Pty Ltd (‘Simionato Holdings’) of $4,600,000. It further provided that the second, third and fourth defendants consented to Simionato Holdings paying Giuseppe Nominees $1,300,000 to allow that company to discharge mortgages it had granted in favour of those defendants over three house properties which were family and/or holiday homes of Mr Emanuele. The express reason for the payment, which was described as gratuitous, was the recognition of the valued commercial relationship between EFG and Mr Emanuele over three decades and the co-operation that Mr Emanuele would extend to the defendants when enforcing their securities.
The third deed was between Mr Emanuele himself and the second, third and fourth defendants. It admitted the enforceability of the judgment obtained against him in this court. It expressed his intention to use his best endeavours to compromise with his creditors other than EFG so as to avoid bankruptcy. Mr Emanuele also released EFG it employees, agents and solicitors in the same terms as the release found in DOFR.
The plaintiffs allege that the three deeds, the entry of judgment and the transfer of the APM lands pursuant to DOFR together constitute what they call ‘the 1995 Scheme’ which is the heart of their case. In the plaintiffs’ eyes it gives rise to a bewildering number of claims and causes of action which it is impossible to summarise. The salient features are that the judgment was obtained by collusion and that the 1995 Scheme was the result of a conspiracy between Mr Emanuele, his son Rocco, Mr Crosby, Mr O’Grady, Mr Elliott (a former partner of EFG’s solicitors), Mr Winter (a solicitor in Adelaide who acted for the Emanuel group) and Mr Ferrugia (who was the solicitor for Mr Emanuele personally) to defraud the plaintiff companies and therefore their creditors. The core of the conspiracy was to obtain for EFG the APM lands and in particular Parcel 64, at a gross undervalue. It is said that the judgment was for a deliberately inflated amount the purpose of which was to enable EFG to vote at meetings of creditors of the plaintiff companies which proposed compromises by means of deeds of company arrangement. The point is said to be that to ensure the conspiracy did not come to light the plaintiff companies had to be prevented from being put into liquidation. A liquidator, it was said, would investigate the affairs of the companies and discover the fraud. The remedy was to appoint an administrator to broker a compromise between the companies and their creditors but from whom would be concealed the existence and terms of the deeds and the transactions described in them. The amount of EFG’s judgment debt when voted at the meetings would ensure the passage of the compromise proposed by the plaintiffs.
An administrator was appointed to 40 of the plaintiff companies, including the Emanuel group, in March 1995. Deeds of company arrangement were proposed utilising part of the money paid by EFG pursuant to the DOFR. The proposal was for payment in full of the employees and trade creditors but of a tiny dividend to other creditors, mainly the Australian Tax Office and financiers. Resolutions supporting the proposal were passed at meetings held late in May 1995 but subsequent litigation in the Federal Court by the Australian Tax Office saw the deeds of company arrangement set aside and Mr Macks appointed as liquidator of the plaintiffs.
The payment of moneys to Simionato Holdings was said to constitute a bribe by EFG to Mr Emanuele. In return for it he was to have his companies transfer the APM lands to the fifth, sixth, seventh and eighth defendants and allow judgment to be entered for an excessive amount. He was to do this to further EFG’s ambitions to acquire the APM lands and to prevent detection of what it had done. In so doing he was to abrogate his responsibilities and duties to his companies.
Another event to which the plaintiffs attach great significance is that in 1988 the Australian Tax Office (‘ATO’) commenced an audit into the affairs of various of the plaintiff companies. The audit proceeded at a leisurely pace but in
November 1993 assessments were issued which required various companies to pay primary tax, penalties and interest aggregating about $44,000,000. The plaintiffs’ accountants believed the assessments to be based on errors of fact but the plaintiffs were unable through lack of resources to take matters beyond the lodging of objections which the ATO disallowed. The tax audit appears to have two aspects of significance for the plaintiffs. The first relates to the topic of insolvency. The plaintiffs argue that the assessments when issued related to the 1987 and 1988 financial years and that the amount of tax assessed should have been taken into account in the respective companies’ profit and loss accounts for those years as a liability. The effect of so doing would have been to reduce profits. The second significance is that the ATO was a creditor whose debt was to go almost entirely unpaid had the proposed compromises with creditors envisaged in the ‘1995 Scheme’ proceeded. Trade creditors were to be paid in full. To the plaintiffs this affords proof of bad faith against those who devised and/or implemented the ‘1995 Scheme’.
One other matter should be mentioned by way of background. Late in 1989 the first defendants suffered severely as the result of the miscalculations of a Melbourne adventurer. Its share price fell as did its credit rating. To overcome its financial difficulties it resolved to become a single purpose brewing company and changed its name to Fosters Brewing Group Ltd. A consequence was that its subsidiary companies engaged in activities other than brewing were to be sold or, if that proved impossible, were to sell their assets and wind themselves up. The banking and financial services division was amongst those which were to cease operation. They included more than the lending activities of EFG. As part of the process of sale and realisation a committee called Ramco, an acronym for Residual Assets Management Committee, was established in March 1990. It was a committee of the EFG Board responsible for realising the assets of EFG. It met monthly and was given extremely wide powers to dispose of assets to raise cash for EFG, and its parent, as quickly as possible. Its members came from the Board of EFG Australia Ltd, some members of the Board of the first defendants and some of its senior executives. Mr Crosby and Mr O’Grady attended meetings of Ramco from its inception.
Mr O’Grady explained (T.8164.40-8165.15):
‘In … the second half of 1989, Elders IXL Ltd … subsequently … Fosters Brewing Group Ltd … got itself into financial difficulties … effectively by a company called Harlin which … acquired 53% of Elders IXL and … was … highly leveraged … and … Elders IXL Ltd became a subsidiary of Harlin … so the rating agencies added the Harlin debt to the Elders IXL Fosters debt and the Elders Finance Group Ltd debt and, as a consequence … the Group was very highly leveraged. The … rating agencies downgraded Elders … and … Elders Finance Group Ltd … and as a consequence … Elders Finance Group paper became non-investment grade paper and we could not refinance the book (which) … had to be liquidated … as quickly as possible … In about March 1990 Elders IXL announced that it was going to become a single purpose brewing company … and all the non-brewing businesses were to be … sold or liquidated … The Ramco committee was established to … self-liquidate the Elders Finance Group Ltd which at that stage stood at over $6 billion with unfunded liabilities of about $1.2 billion. The Ramco committee … effectively became the driving force for the liquidation process …’
The principal relief claimed by the plaintiffs is an order that the judgment be set aside and that the APM lands be reconveyed to the plaintiffs. To the extent that that is impossible they seek an account of the profits made by the first defendants from the development and/or sale of the lands. In addition claims are made for damages at common law and equitable compensation.
As well, the plaintiffs complain about a number of separate transactions between 1988 and 1994, each of which is said to involve unlawful conduct by some or all of the Elders defendants with the result that they are voidable by reason of one or more of the provisions contained in Pt 5.7B of the Corporations Law and/or s 120 and
s 121 of the Bankruptcy Act. It will be necessary to analyse each of the transactions in question. A number of them is attacked on the basis that they occurred when the plaintiffs were insolvent so that the plaintiffs’ directors acted in breach of statutory and fiduciary duties with respect to the transactions. None of the Emanuel Family Directors has been made a party but the first four, and the eighth and ninth defendants are said to have become de facto directors of the plaintiffs and so liable for their misconduct as directors. The plaintiffs also seek to have the transactions set aside on grounds of duress, undue influence and unconscionability.
Before the acquisition of the APM lands by Emanuel 14, Elders had financed a number of the plaintiffs’ properties in Adelaide. It did so in part by subscribing for an issue of preference shares in Management. It was paid dividends on those shares over a number of years until their redemption in December 1990. The plaintiffs claim that when the dividends were paid and the redemption occurred Management was insolvent and, moreover, there were no profits out of which dividends could lawfully be paid or from which redemption monies could be found. Accordingly it seeks to recover from Elders the amount it received from dividends and the redemption.
Coopers & Lybrand were auditors and tax advisors to the plaintiffs in all relevant years. The late Mr Allen was the principal advisor to Mr Emanuele and auditor of his companies for many years. He died long before the trial commenced.
Mr Anderson, the twelfth defendant succeeded him as auditor in 1988.
Mr Patterson was a tax advisor in later years. Against them it is alleged that
Mr Anderson should have detected Management’s insolvency and lack of profits and that all of them should have advised Mr Emanuele of the impossibility of lawfully redeeming the shares.
This aspect of the case took on the utmost complexity. The parties had resort to the most detailed analyses of accounting standards and practice, and subjected the financial accounts of the plaintiff companies to painstaking scrutiny. The parties’ contentions do not lend themselves to simplification but, as best I can summarise them, the points are these.
There is no doubt that for most of the years in which dividends were paid on the preference shares there were insufficient trading profits to pay them. The defendants, however, contend that there were capital profits out of which the dividends either were paid or could have been paid. There is also no doubt that the plaintiffs created in their balance sheets an asset revaluation reserve (‘ARR’) resulting from an upward revaluation of a number of properties owned by companies which were subsidiaries of Paterson and of Management. The first defendants argue that dividends were paid from the capital profits represented by the ARR. The plaintiffs respond by pointing out that the accounts show no indication that the ARR was a source of dividends and that the accounts cannot now be ‘rewritten’ so as retrospectively to allocate moneys from the ARR to the profit and loss account and thence to dividends.
The eleventh and twelfth defendants who are accused of not advising the plaintiffs that there were no profits from which to pay dividends, argue that any such failure on their part was of no consequence. They argue that had they given such advice
Mr Emanuele would have asked how he could lawfully pay dividends, to which there was a simple answer. It was to pay them from the ARR. This would have been exhausted after some years but the eleventh and twelfth defendants point to evidence which would have allowed a further upward revaluation of properties and an augmentation of the ARR to an amount sufficient to pay all the dividends in question.
The plaintiffs seek to meet this argument by contending that the applicable accounting standards prevented the creation of an ARR by means of revaluation of the properties held by subsidiary companies and that a properly constituted ARR would have been in sums insufficient to pay the dividends.
Similar though not identical issues arise with respect to the redemption of the shares. They were issued with a par value of $1 but a premium of $99 each. The
Companies Codeallowed the redemption of the premium from a share premium account which Management appears to have maintained though this is contested by the plaintiffs. Again the defendants rely upon the existence of the ARR to provide sufficient profits from which to redeem the par value of the shares.
The EFG defendants have a further answer to the claim for the recovery of the dividends and redemption moneys. It is that as a condition of their subscription for the preference shares a number of the plaintiff companies agreed, by deed, to pay amounts equivalent to dividends payable and the value of the shares on redemption in the event that dividends were not or could not be paid or redemption did not or could not occur. Other of the plaintiff companies guaranteed these obligations which were secured by charges over moneys deposited by those companies with EFG. The first defendants therefore argue that if dividends could not have been paid lawfully and/or if redemption could not have occurred lawfully they would have acted under their securities to insist upon payment from the funds over which they had a charge. The result is, it is said, that Management suffered no loss.
The C & L defendants take the same point. Any negligence by them, they argue, had no consequence because had they advised Management that it could not pay dividends and/or redeem the shares EFG would have acted to take the money anyway.
Mr Cuming was a partner of C & L. He was appointed liquidator of eleven of the plaintiffs - Elizabeth House, Emanuel (South Australia), Emanuel Investments, Hondel, Jacost, Joron, Libra, Neromi, Sayer Properties, Emanuel 1, and
Worando Trust. All were wound up on 29 January 1991 by way of a members’ voluntary winding up. There were said to be solvent, having no liabilities and being owed substantial monies by Management. Seven of them (all but Emanuel 1, Jacost, Joron and Neromi) were issued with assessments following the ATO audit. These seven companies were designated ‘the Cuming companies’ in the trial and it is convenient to refer to them as such. The claims against Mr Cuming are that he did not recover monies for those companies at a time when they were available.
It is convenient to mention a number of defences which the defendants advance. The writ was issued on 24 December 1996. With one possible exception all of the claims against C & L arising from the payment of dividends are in respect of losses which occurred more than six years prior to that date. The same is true of a number of the claims (though not all) against Elders. Against them the plaintiffs seek to have the limitation period extended pursuant to s.48 of the Limitation of Actions Act 1936 (SA). There is no similar relief claimed against the C & L defendants.
Elders rely heavily upon the judgments in its favour in the Federal Court in November 1994 and in this court in February 1995 as raising, either by res judicata or by issue estoppel, bars to the claims the plaintiffs now advance. In particular it is said that the plaintiffs’ claims to set aside transactions or to recover moneys they say they were not obliged to pay EFG would nullify those judgments, particularly the second, which established as a matter of judicial record the fact of and amount of the indebtedness of those companies who were parties to it. In addition it is argued that to the extent that the plaintiffs had answers to the claim by EFG they were obliged to bring those defences forward in the Supreme Court proceedings and are now precluded from doing so.
The plaintiffs, of course, seek to have the judgment set aside on the ground that it was collusively obtained.
It will be observed that there are many more plaintiffs than comprise the Emanuel group. Those 27 plaintiffs were the ones with whom EFG had had dealings at the time of the events which have given rise to this litigation. They were companies which had borrowed money from EFG or given guarantees or provided security over their property for loans made to other of the plaintiff companies. They were the ones that presumably suffered loss as a result of the defendants’ alleged negligence, breach of contract or dishonesty. Nevertheless Mr Macks has chosen to join as plaintiffs all of the Emanuel companies. His purpose may well have been to circumvent the defences of res judicata and issue estoppel. The plaintiffs plead that all of the plaintiffs had an interest in the wealth of all of the other plaintiffs so that a loss suffered by one diminishes all. Any plaintiff may recover a loss suffered by another. This is said to be the result of deeds of indemnity given between the plaintiff companies over a number of years, the purpose of which was to allow the group to file consolidated financial statements rather than each company having to prepare and file its own. It was a condition of the regulatory authority’s consent to this process that deeds of indemnity be given. The first defendants contend that the deeds do not allow the plaintiffs as a group to sue for losses suffered by some of them.
A striking feature of the plaintiffs’ case is the lack of direct, testimonial evidence to support it. None of the principals to the transactions who would know of the alleged fraud and conspiracy were called despite their not being parties and no relief being sought against them. Mr Emanuele was not called as a witness, nor were his children or those closest to him in running his companies, Mr Hartley and
Mr Leonardis. The case entirely relies upon documents and the cross-examination of the Elders’ witnesses in an attempt to obtain concessions of wrongdoing. It is noteworthy that the documents, on their face, either do not support the plaintiffs’ case or are damaging to it. Likewise the cross-examination was of a most curious nature, if its purpose was (as it seems to me it had to be) to elicit admissions of circumstances which would give rise to inferences supporting the conspiracy and dishonesty alleged. No doubt to be effective the cross-examination had to be subtle but it had, at some stage, to approach the points in issue. As well, as a matter of fairness, the witnesses had to be given an opportunity to answer the very serious charges brought against them. As far as I could judge it, the cross-examination did not attempt the task. Indeed with a number of witnesses the cross-examiner appeared to avoid putting his case so as not to give the witness an opportunity to deny wrongdoing or to explain circumstances relied on to suggest it.
Oddly in a case containing allegations of dishonesty liberally strewed throughout the statement of claim there was no conflict of oral testimony to be resolved. The witnesses called by the plaintiffs all gave evidence peripheral to the main issues. With the exception of Mr Furniss whom I thought to be disreputable, I would accept all witnesses as honest and generally reliable. Mr Furniss’s evidence has an importance in one respect, which I accept, as will appear. It is corroborated by documents and is against the interests of the plaintiffs. Mr Sara may be another exception but I indicate what evidence of his I accept. I will, of course, make more detailed findings of fact where appropriate. Likewise, except for a reservation about one aspect of Mr Crosby’s evidence, I would accept as honest and reliable the evidence given by the witnesses for the defendants. Indeed, as I have mentioned, the first defendants’ witnesses were not pressed on the point that they had consciously committed any wrong. The cross-examination of some appeared deliberately to stop short of putting the occurrence of such misconduct so as to deny the witness a chance to refute the allegation.
There was an air of unreality about much of the plaintiffs’ case. At times it appeared as though the litigation were treated, not as a trial, but as a commission of inquiry into all aspects of the commercial dealings between the plaintiffs and EFG. There was little attempt to discard the irrelevant or the ambiguous, and to bring focus to such of the evidence as might support their pleaded case. Nor did the plaintiffs appear to realise that much of what they rely upon was inimical to their interests or is, at best, equivocal.
The plaintiffs presented their case chronologically so that, in sequence, ‘the 1995 Scheme’ with its allegations of conspiracy, fraud and bribery was considered last. If it should fail and the attack on the judgment should likewise fail, it may not be necessary to consider many of the plaintiffs’ claims because they will be answered by the pleas of res judicata and issue estoppel. This is particularly true of the claims in respect of the preference shares. To reduce the chance of confusion it is best to adhere substantially to a chronological discussion of the relevant events and the claims said to arise from them. Before dealing with these it is appropriate to consider the evidence and arguments relating to the claims about the plaintiffs’ insolvency and whether EFG and its officers became de facto directors of Management. Findings on these questions will colour the examination of the 1995 Scheme and be relevant, if not essential, to a determination whether some of the particular transactions should be set aside.
In their presentation of their cases and in their submissions the parties had recourse to a division of subject matter which it is convenient to adopt since the arguments have been organised pursuant to that classification. The judgment will therefore address the issues under the following headings:
Section I Insolvency
Section II De Facto Directors
Section III 1988-1994 Transactions
Section IV The 1995 SchemeSection VClaims Arising from the Issue of and Redemption of Preference Shares
Section VIMiscellaneous Matters
Section VIIClaims Against Coopers & Lybrand, Anderson & Cuming
References to the statement of claim are to the fourth amended consolidated statement of claim.
SECTION I:Insolvency
There are two reasons why proof that the plaintiffs, and in particular Management, were insolvent is important to their case. The first is that a finding that Management was insolvent in 1988 would greatly strengthen the claim that the payment of dividends and the redemption of the preference shares was unlawful. It is common ground and, I think, clear law, that dividends should not have been paid on the preference shares and the shares should not have been redeemed once Management was insolvent. The second reason is that the basis for attacking a number of the particular transactions is that they were ‘insolvent transactions’ for the purposes of the Corporations Law. It is therefore necessary to prove that the companies who entered into the transaction were insolvent at the time.
The plaintiffs contended that Management and its ‘active’ subsidiaries, (which may be taken to be the first 27 plaintiffs) were insolvent from 1 July 1988 to March 1995 when most of them were placed into liquidation. By a late amendment the plaintiffs sought to allege that there should be a finding of insolvency from 1 January 1988 but I think their pleading is better understood as fixing 1 July 1988 as the earliest date on which the court should find insolvency. Therefore I do not propose to consider whether Management or any of its subsidiaries were insolvent at any time prior to 1 July 1988.
It was common ground between the plaintiffs and the first defendants that the Emanuel group was insolvent in August 1994, the time of the trial between them in the Federal Court, and had been insolvent ‘for some years.’ Mr Emanuele, I was told, gave evidence to that effect and, on that point at least, the parties to that litigation accepted his testimony as accurate. The question, of course, is the precise extent of ‘some years’.
The second defendants were uninterested in the state of the plaintiffs’ solvency after 31 December 1990. They contended that Management was solvent until at least that date by which time the preference shares had been redeemed and all dividends paid (with the possible exception of the late payment of dividend early in 1991). The insolvency of the plaintiffs after 31 December 1990 would not affect any claim against the second defendants. Indeed a finding that Management was insolvent from January 1991 would assist their defence of the claims against Mr Cuming who was said to have been negligent in not obtaining loans due to the Cuming companies from Management. If that company were insolvent any criticism that he did not demand payment from it would become pointless.
The plaintiffs choose 1988 as the year in which insolvency should be found because it was at the beginning of that year that the proposed joint venture with the Chinese enterprise failed. That left Emanuel 14 and Management in particular with a debt of $43,000,000 which was then outstanding. The loan was for four months from
June 1987 and the term was not formally extended until September 1988. The loss of the joint venture which would have provided funds to repay the loan to the fourth defendant and money to develop the land was a severe blow to Management’s prospects. Contemporaneous memoranda by Mr Crosby showed that to be the fact.
The parties accept that the relevant test is the ‘cash flow test’, that is, whether the companies in question were able to pay their debts when they fell due. Despite changes to the statutory regimes over the time with which this action is concerned, the test has remained constant.
The plaintiffs do not always pay sufficient regard to the terms of the legislation on which their claims are based. There is, rather, an amorphous plea of insolvency which is said, by vague reference to legislation, to entitle them to recover vast sums of money paid away by the plaintiffs when they were insolvent and for which the defendants are sought to be made liable by reason of their involvement in the dissipation of the assets. Attention has to be focused on the particular terms of the legislation which found the plaintiffs’ claims. This, in turn, involves a consideration of the legislation into two distinct periods: prior to and subsequent to 23 June 1993. In the first period the only provision of relevance appears to be
s 556 of the Companies Code (s 592 of the Corporations Law). The plaintiffs make reference to s 451 of the Code (s 565 of the Law) but these references appear misconceived. Those sections deal with the recovery of property, the transfer of which is void as against the liquidator where, had the company been a natural person, the transactions would have been void as against a trustee in bankruptcy.
Subsequent to 23 June 1993 one must have regard to the provisions of Part 5.7B of the Corporations Law which are more elaborate and which require close attention.
Reverting to the earlier timeframe, s 556 of the Code imposes liability on directors of a company to repay a debt which is incurred by the company when there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they became due, or that it would not be so able if it incurred the debt in question.
The Cases
The principles are not in doubt. According to Barwick CJ in Sandell v Porter (1966) 115 CLR 666 (at 670)
‘Insolvency is … an inability to pay debts as they fall due … but the debtor’s own monies are not limited to his cash resources immediately available. They extend to monies which he can procure by realisation by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the court …’.
Subsequently the principle appears to have become a little clouded. Laxity on the part of creditors to insist upon prompt payment has been, in some cases, taken into account in deciding when debts were due, and that the ‘commercial reality’ of slow payment had to be recognized in determining whether a company was insolvent. The qualification appears first to have been introduced by
McGarvie J in Taylor v Australia and New Zealand Banking Group (1988)
13 ACLR 780. His Honour added to Barwick CJ’s statement that insolvency was a question of fact the words ‘to be decided as a matter of commercial reality in the light of all the circumstances.’
The defendants emphasise the qualification and say that the lack of action, and indeed of complaint, by the plaintiffs’ creditors was a commercial reality indicating that there had been substantial if not indefinite extensions of time afforded the plaintiffs for the payment of their debts. They submit that when so viewed the evidence does not show insolvency.
Judging by the number of authorities referred to by each of the parties and the discussion contained in those authorities, the question whether a company was insolvent at a particular time and the criteria to which regard must be had to answer the question, has become the subject of a considerable body of jurisprudence. I would have thought that whether a company was solvent or insolvent was a question of fact calling for the application of principle described in Sandell to the evidence in the particular case. That, it will be noted, said nothing about ‘commercial reality’.
The relevance of creditors’ response to apparently overdue debts as a fact in determining insolvency was discussed by Thomas J in reNewark Pty Ltd (in liq.) [1993] 1 Qd R 409 at 413-4. His Honour said
‘The question of whether a company is unable to pay its debts as they fall due from its own money is a question of fact to be decided as a matter of commercial reality in the light of all the circumstances, and not merely by looking at the accounts and making a mechanical comparison of assets and liabilities …
a debt does not necessarily become “due” … upon the date originally stipulated for its payment. It would be erroneous to adopt inability to pay a debt before it became payable as a criterion of the inability to which s 122 of the Bankruptcy Act refers. If there was a course of dealing whereunder a debt is not payable and the parties do not expect it to be payable until a future time, it should not be reckoned as “due” at an earlier time. … to take such a literal approach is in my view incorrect and contrary to the principles expressed in Sandell v. Porter.’
In relation to the claim in tort the Lord Justice held that the solicitor’s failure to have the plaintiff’s interest recorded in the land register or protected by caveat gave rise to a loss at the time of the transfer of his interest in the house to his wife:
‘At that point the plaintiff parted with the title to the house, and he became subject to the practical inconvenience which might flow from his not having his wife’s signature on a formal document … To the extent that this was less satisfactory than a formal document recording the deal, the plaintiff suffered prejudice. … In considering whether damage was suffered in 1978 one can test the matter by considering what would have happened if in, say, 1980 the plaintiff had learned of his solicitor’s default and brought an action for damages. Of course, he would have taken steps to remedy the default. But he would have been entitled at least to recover from the defendants the cost incurred in going to other solicitors for advice on what should be done and for their assistance in lodging the appropriate caution.’ (502-503)
Mustill LJ agreed and dismissed the notion that there might have been a continuing retainer that persisted for as long as the breach went unremedied. He said
(512-513):
‘The proposition entails that the defendants have two duties, one expressed and the other implied. The expressed duty would be to perform the task for which they were retained and paid, namely to put into effect in a legally appropriate manner the informal arrangement between the plaintiff and his wife. The second duty, implied and presumably gratuitous, and commencing immediately after the last moment when a careful solicitor would have taken the necessary steps to … protect his client’s interest in the future proceeds of sale, would be to exercise continuing vigilance to discover any mistake which they, themselves, might have made, and then to busy themselves in putting it right. Evidently this obligation can continue up to, but not beyond, the time when the mistake became irretrievable. I find it impossible to imply such a strange obligation … and equally improbable to suppose that if it did exist the obligation would be broken at any time other than the time when the mistake should have been discovered and put right: namely, straight away.’
Lord Justice Nicholl’s judgment that the contract provided for something to be done and that the failure occurred when performance was due under the contract was approved by Lord Slynn and Lord Hope in Preston v. Wolverhampton Health Care NHS Trust & Others (No. 2) [2001] 2 AC 455 at 472, 474.
Mr Anderson’s auditor’s report in respect of the year ended June 1989 was signed on 31 October 1989. This appears to be the only evidence as to the date when the audit process for that year concluded. If there was a duty to warn Management of its insolvency and/or of the lack of profits from which to pay dividends that duty ceased with the performance of the retainer on 31 October. Any breach of contract to give the warning occurred no later than that date. All causes of action for breach of contract arising out of a failure to warn during the 1989 audit were complete by 31 October 1989 and were more than six years old when the writ was issued.
Time began to run on the cause of action in negligence arising out of a failure to warn from the conduct of the 1989 audit when the first dividend was paid after
31 October 1989. Annexure 28 to Exhibit 1 shows that dividends were paid on both A and B Class shares in November 1989. Indeed the annexure shows that dividends were paid monthly until December 1990 in respect of the B Class shares and January 1991 for the A Class shares. It appears to be common ground that the last payment of dividend in January 1991 was in respect of dividends payable between
7 December 1990 and the date of redemption, 30 December. The amount paid, $222,178, was slightly less than the amounts paid in each of the preceding months, $225,264.
The position is the same for the 1990 audit. There is some uncertainty about the precise date when the audit report was signed but it seems to have been on
14 December 1990. (See Exhibit 484 and T.9422.10-9425.5) It appears that
Mr Anderson would have signed the audit report upon receiving Mr Allen’s intimation on 14 December that the terms in which he had proposed to qualify the accounts of Management were appropriate.
The dividend payment due in December on the A Class preference shares was paid on or about 18 December 1990 but before 24 December 1990. This appears from Exhibit 89 5/421 and Exhibit 218 (which has been inserted in Volume 5 following Document 421). Mr Macks conceded this to be so (T.2820.1-2823.10).
Any breach of duty by the auditor in failing to warn Management in the 1990 audit that it could not lawfully pay dividends came to an end when the contract was discharged by performance on 14 December. Any breach of duty in tort for failing to warn occurred in the period during which the audit was conducted. That period ended on 14 December. The December dividend was paid on or just after
18 December. When that payment was made Management suffered loss and its cause of action in negligence was then complete. Recovery of the December dividend had been lost by the effluxion of time.
On these findings of fact the payment of the dividend in January is also time-barred. In relation to the claim in contract the cause of action arose when the contract was breached no later than 14 December 1990. In relation to the claim in tort the cause of action is complete when any loss was suffered as a result of the breach of duty and loss was suffered on or about 18 December when the previous dividend was paid.
Whether or not the dividend payment in January 1991 is time-barred does not matter to the outcome. The evidence does not establish that the loss would not have occurred anyway because of the manner in which payment was effected. It is evident that Management suffered no loss by reason of that payment. On
10 January 1991 Mr Hosking wrote to the Emanuel group to set out interest payable on various accounts. One item, for $222,178.19 was said to be due by reason of ‘preference share dividends for December 1990 (preference share scheme settled 31.12.90 dividend due for 30 days)’. The letter went on:
‘Please arrange for this cheque to be exchanged at your convenience with ours totalling $249,480.33 i.e. and that payment … is required.’
The amount payable by Elders to the Emanuel group was in respect of interest due on the sums in the deposit accounts up until 31 December 1990 when the moneys were taken for the share redemption (Exhibit 89 5/422). A page from the Emanuel group’s general ledger journal seems to show that the January dividend was paid ‘by way of advance against APM facility on the 30th January 1991’. What appears to have happened is that, by book entry, Elders credited Management with the payment of dividend but debited its loan account secured on the APM land with the equivalent amount. There was no actual payment.
The plaintiffs led no evidence that a warning given by the auditor on or before
14 December 1990 would have been efficacious in preventing Elders doing what it did. Emanuel did not make a payment of dividends. Elders, by adjusting its own accounts, obtained ‘payment’ of the dividends. It is not shown that a warning would have come to Elders attention or that it would have acted differently if it had received the warning.
I have already mentioned that the claim arising out of an alleged failure to warn that the C Class preference shares should not be redeemed is out of time. The redemption occurred on 31 August 1988 (Exhibit 89 2/101, 102, 103). Any loss arising from a failure to warn during the 1987 audit occurred on 31 August 1988. Apart from that it appears Mr Anderson had no occasion to give a warning. The audit for the year ended June 1987 was completed on 31 December 1987. He did not commence the next year’s audit until October 1988. By the time work on that audit commenced the loss had been suffered.
I conclude that claims against Coopers & Lybrand and Mr Anderson arising out of the payment of dividends on the preference shares, and the redemption of the
C Class preference shares are barred by the Limitation Act.
Claim by Elizabeth House Against the Auditors
There is a claim by Elizabeth House that C & L and Mr Anderson should have warned it not to allow the credit balance in its deposit account to be applied in partial redemption of the preference shares. The claim is for the loss of the moneys in the Elizabeth House deposit account which were taken to redeem the preference shares. The claim fails because of my findings that the moneys were charged by Elizabeth House to pay the equivalent of the sum needed to redeem the shares in the event that Management did not or could not redeem the shares or in the event that one of the specified acts of default occurred. Whether or not the shares were redeemed Elizabeth House would have been obliged to part with the moneys in the deposit to Elders. Secondly I have found that as between Elizabeth House and Management the moneys represented by the balances in the account were the property of Management and Elizabeth House suffered no loss by being deprived of them.
Redemption of the A and B Class Shares
This claim arising out of an alleged failure to advise that the December 1990 redemption could not occur because of a lack of profits has two bases. It is said that Mr Anderson, who was the auditor at the time, should have given that advice.
There is a separate claim against Coopers & Lybrand arising out of advice given in December 1990 about the proposed redemption of the A and B Class shares.
Mr Allen was asked to give advice about the possible tax implications of the redemption and advised how the redemption might occur without Management losing its accumulated tax losses. It is alleged that he ought to have advised that there were no profits out of which the redemption could lawfully be made.
It is necessary to consider the claim against both accountants separately.
Anderson
The audit strategy for the 1990 audit compiled by the staff of Coopers & Lybrand for ‘the Emanuel group of companies’ is undated but would have been compiled after that financial year end and before the audit concluded. It contains a note:
‘7.Elders Finance wish to redeem their preference shares of $23,000,000. These are not due for redemption until 1992. If redeemed, Elders will simply take the money from deposits they hold on Emanuel’s behalf.’
Mr Anderson accepts he would have read the note during the 1990 audit but went on to say:
‘I had no information about the proposed redemption beyond what is recorded in para 7 of the audit strategy and I do not know the source of the information recorded … I made no inquiry about whether a firm agreement and date had been fixed for redemption. The note … did not convey … that an agreement about early redemption had been reached or was about to be reached.
If redemption had taken place before completion of the audit, or if an agreement had been made and date fixed for redemption before completion of the audit, I would have expected to have been told because it would be a reportable post-balance date event. I first learnt that redemption had taken place after I commenced work on the 1991 audit.
Beyond the information contained in para 7 … I was not told of any arrangement and date for redemption and, in particular, I did not know that a proposal and time to redeem at the end of December 1990 had been agreed upon.’ (Exhibit 481, Para 3.3)
This aspect of Mr Anderson’s evidence was not challenged in cross-examination. Indeed the cross-examination appeared to accept what he said. See T.9378.35-.40:
‘Now, let me ask you this, in 1991 when you did the accounts then, you found, did you not, that redemption had taken place? – In 1991, yes.
And that would have been when you did the accounts in the latter half of the calendar year 1991 …? – It would have, as I believe, yes.’
It is clear, then, that Mr Anderson did not know about the redemption and the preparations for it in December 1990. No case was advanced that he should have inquired and ascertained that a redemption was planned. There is no case of a negligent failure to ascertain the facts. The case against Mr Anderson is that he did not warn that redemption could not occur because there were no profits. The case necessarily falls when Mr Anderson did not know that there was an occasion for any such advice and it is not said that his ignorance was itself the result of any breach of duty.
For the same reason Mr Anderson cannot have been knowingly concerned in a breach of fiduciary duty by the directors of Management in effecting the redemption. He did not know about it.
Allen
The claim against Coopers & Lybrand arising from Mr Allen’s involvement is pleaded in paras 327-329 of the statement of claim. The allegations are:
‘327.On or about 1 December 1990 Management sought the advice of Coopers & Lybrand about the redemption of the preference shares … The advice was sought orally by Graeme Sara from Patterson and Peter Hill …
328.Coopers & Lybrand having the knowledge of the financial state of the Emanuel group including that of Management and of its insolvency … advised Management as to steps to be taken to effect the redemption.
Particulars of Advice
Letter dated 10 December 1990 from Coopers & Lybrand to Sara
Memorandum from Coopers & Lybrand to Sara dated 11 December 1990
329.Coopers & Lybrand … did not:
1.Advise Management that redemption … other than out of profits would breach articles … and … the Companies Code.
2.Advise Management … that it was insolvent …
3.Advise Management … that the proper course .. was not to redeem the shares.
…’
There is an issue between the plaintiffs and the second defendants as to the terms of the retainer pursuant to which the advice of 10 and 11 December was sought. The plaintiffs contend for a retainer the terms of which were that on any occasion when Coopers & Lybrand were requested to perform any service of an accounting nature they were obliged to give advice to the Emanuel group on all aspects of possible relevance connected with the topic the subject of the request. It was to give advice ‘more generally’ than to answer a specific inquiry (T.1656.5-1657.25). The second defendants argue that the scope of the retainer was determined by the specific request addressed to it on each occasion.
Rather than address the question in the abstract it is preferable to consider the evidence relating to the request for advice in December 1990.
Mr Sara made the approach on behalf of Management. He said (T.3781.25-.40) that he first learnt of the proposal to redeem the preference shares in October or November 1990 when Mr Hartley told him ‘they were to be redeemed’. He was asked what happened next and said (T.3871.41-3872.45):
‘I approached Gerry Allen in respect of the redemption of the shares. … In about November … I informed Gerry Allen that there would be a substantial change in ownership and that the Emanuel group would put at risk its accumulated losses. I approached Gerry Allen regarding the redemption … knowing that they were being redeemed early. There was a problem that if they’d redeemed all the preference shares as they proposed there would be a substantial change in ownership of the Emanuel group and under Australia income tax law there would be a substantial change of ownership and therefore put at risk the accumulated losses (of) the Emanuel group …
And what did he say? - … He agreed with me and that they would make further inquiries.’
In cross-examination Mr Sara said (T.3815.10-.32):
‘… And you said that Brian Hartley told you about the proposal? – Yes …
And you said that (you) weren’t given any instructions about the redemption at that time; is that correct? – As far as I can recall, no.
But you thought about the redemption and became concerned that redemption of the preference shares may put the tax losses at risk? – Yes.
And that’s something that crossed your mind in the general course of your duties? – Yes, it did.
And … Mr Gerry Allen was the person from Coopers & Lybrand you generally spoke to in relation to tax-related matters; is that correct? – Generally, yes.
And it was because of your concern about loss of tax losses on redemption that you approached Gerry Allen for advice on that issue? – Yes.
And that was the specific and only matter that you approached Gerry Allen about at that time in relation to the redemption; wasn’t it? – Yes that was the only matter I can recall.’
Mr Sara agreed that the letter of 10 December 1990 from Coopers & Lybrand was in response to his inquiry and that the advice he had sought was advice about retention of tax losses (T.3815.45). He accepted, explicitly, that he did not ask
Mr Allen ‘for general advice about redemption.’ (T.3815.51)
Mr Sara did not claim to have spoken to Mr Patterson, who was the tax partner at Coopers & Lybrand, or Mr Hill. His only contact was with Mr Allen. Mr Patterson confirmed that the approach to him was with respect to the tax implications arising from the redemption of shares (Exhibit 487, para 4.2).
The letter of 10 December 1990 (Exhibit 89 2/60) was written by Mr Patterson. Addressed to Mr Sara it read:
‘You have asked for our advice as to the most appropriate method of redeeming preference shares in … Management … currently held by Elders …
Executive Summary
4.For reasons explained in detail below it is critical to the taxation status of (Management) and its wholly-owned subsidiaries that (Elders) maintains some shareholding … for the short term future.
5.Given this criteria, it is our opinion that the most effective means of achieving the aims expressed in 2(b) (i.e. redemption of the shares) is either of the following:
(a)(Management) to redeem all but one of either the Class A or Class B shares; or
(b)(Management) to issue a small number of redeemable cumulative preference shares at no premium to (Elders) then redeem all the Class A and Class B shares.’
The letter then went on to give advice in more detail. Mr Hill’s memorandum of
11 December 1990 (Exhibit 89 2/61) was sent by facsimile transmission. It read:
‘Further to the letter which we faxed to you this morning I have had a discussion with Bruce Eliott [sic] of Elders …
2.Bruce wished me to clarify for you paragraph 2(k) of our letter … Bruce advised that Elders … is not willing to finance the redemption … Instead Elders will be offsetting the deposit that Emanuel has with Elders against the moneys that would be due to Elders as a result of the redemption …
3.After discussing our advice Bruce considered that the recommendation in paragraph 5(a) in our letter was the most viable option …’
The plaintiffs seize upon the phrase ‘you have asked for our advice as to the most appropriate method of redeeming preference shares …’ in the letter of 10 December as evidence of a retainer to give advice generally on the redemption. However, it is clear from the context in which advice was sought and given that the advice was limited to the preservation of the accumulated tax losses. Coopers & Lybrand’s retainer did not go beyond advising on that limited point.
It is not sensible to imply a term into the retainer that Coopers & Lybrand would give advice on all aspects of possible relevance to the redemption. The implication of such a term would not be reasonable. Indeed it would be most onerous. Not only would it require an investigation of what might be relevant to the redemption, and so involve considerable work, the term would impose an obligation to undertake the work whether or not Coopers & Lybrand wished to undertake it or believed they were capable of undertaking it. It may well involve them in doing the work gratuitously for Management could say ‘we undertook to pay you only for the work we expressly requested.’
The implication of such a term is not necessary to give business efficacy to the contract. Moreover the implication of such a term is, in my opinion, inconsistent with the express terms of the retainer which required Coopers & Lybrand to address a specific and limited point of taxation law. A contract to advise with respect to a particular specific topic is inconsistent with a contract to advise generally on all topics of possible relevance.
Nor is the implication of the term necessary for the reasonable or effective operation of the contract. See BP Refinery (Westernport) Pty Ltd v. Shire of Hastings (1977) 180 CLR 266 at 283; Byrne v. Australian Airlines Ltd (1995)
185 CLR 410 at 442.
The plaintiffs did not make out a case that a term should be implied into the retainer to give advice generally by custom or usage. I am not sure they tried. The evidence shows no more that on numerous occasions when requested to perform particular accounting services the second defendants did so. According to the High Court in Con-Stan Industries of Australia Pty Ltd v. Norwich Winterthur Insurance (Australia) Ltd 1985-1986 160 (CLR) 226 at 236-7:
‘(1)The existence of a custom or usage that would justify the implication of a term into a contract is a question of fact …
(2)There must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract … however, it is not necessary that the custom be universally accepted …
(3)A term will not be implied into a contract on the basis of custom where it is contrary to the express terms of the agreement …’
The evidence does not establish the fact that accountants, when asked to advise on a particular issue, are expected to advise on all possible areas of relevance to the advice sought or that those retaining accountants presume that to be a term of their contract. Moreover the implied term appears to be inconsistent with the express terms of the contract, as I have indicated.
Insofar as the claim is put in contract it fails because Coopers & Lybrand gave the only advice they were asked to give. It was not a breach of their contract not to advise that there were no profits out of which redemption could be made and that, for that reason, redemption should not occur.
In any event a breach of that contract occurred no later than 11 December 1990 and so is barred by the Limitation Act.
Any failure to advise as to a lack of profits had no consequence. Mr Dutney had passed on that information to Mr Sara when he advised about the necessary legal changes to the articles to allow the redemption to occur. I dealt with the terms of his conversation in Section V of the reasons. Mr Sara had the requisite knowledge whether or not Coopers & Lybrand told him.
Although not expressly articulated as such the claim arising out of the request for advice gives rise to a tortious duty, as well as a contractual one, to take reasonable care in the performance of the retainer. The ambit of the duty is, however, no greater. It is to take reasonable care with respect to what was required to be done pursuant to the retainer. The liability imposed by law does not impose a duty to take reasonable care with respect to a wider range of services than the retainer obliged the contractor to perform.
It follows that there was no negligence in advising with respect to the preservation of tax losses and not giving advice on the needs for profits to fund the redemption.
Although the statement of claim contains allegations against Coopers & Lybrand for ‘accessorial liability’ no such case appeared to be advanced in the evidence. I did not detect any cross-examination designed to elicit liability on the basis that any partner or employee of Coopers & Lybrand aided and abetted, or participated in, or was knowingly involved in a breach of fiduciary duty by the directors of Management (or its subsidiaries). I have mentioned why such a claim against
Mr Anderson must fail. Such a claim is out of time in respect of the payment of dividends and is beaten in relation to the redemption by Mr Anderson’s ignorance of its occurrence.
There does not seem to be a plea that the performance of Mr Allen’s retainer to give tax advice in December 1990 gives rise to ‘accessorial liability’. If there were such a claim it would fail because of the absence of evidence that Mr Allen or
Mr Patterson acted dishonestly. Mr Allen was dead and could not give evidence. Mr Patterson was a witness but was not taxed with the proposition that in giving advice of 10 December 1990 he was consciously participating in a breach of duties by the directors of Management. The basis for accessorial liability is dishonesty.
In Royal Brunei Airlines v. Phillip Tan Kok Ming [1995] 2 AC 378 Lord Nicholls said (389, 391, 392):
‘… In the context of the accessory liability principle acting dishonestly, or with a lack of probity … means simply not acting as an honest person would in the circumstances. This is an objective standard. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. … The standard of what constitutes honest conduct is not subjective … If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour. … To inquire … whether a person dishonestly persisted in what is later said to be a breach of trust is to ask a meaningful question, which is capable of being given a meaningful answer. This is not always so if the question is posed in terms of “knowingly” assisted. Framing the question in the latter form all too often leads one into tortuous convolutions about the “sort” of knowledge required, when the truth is that “knowingly” is inapt as a criterion when applied to the gradually darkening spectrum where the differences are of degree and not kind. … Drawing the threads together … dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation.’
I consider that I should accept this formulation of principle as authoritative. The decision of the High Court in Consul Development Pty Ltd v. D.P.C. Estates Pty Ltd (1974-1975) 132 CLR 372 does not contain a definitive exposition of the necessary ingredients to establish the liability of one who assists in a breach of fiduciary duty. That case followed Selangor United Rubber Estates Ltd v. Cradock (No. 3) [1968] 1 WLR 1555 and Karak Rubber Co Ltd v. Burden (No. 2) [1972] 1 WLR 602. Subsequent decisions have cast considerable doubt on those cases and, as
Lord Nicholls said in Royal Brunei Airlines at 388:
‘Since then the tide in England has flowed strongly in favour of the test being one of dishonesty …’
More important Gibbs J in Consul Development appeared to have reservations about the test applied in Selangor (398) and Stephen J (with whom Barwick CJ agreed) thought that Selangor went further than the prior authorities (412) and did not accept its authority.
One looks in vain to see evidence of Mr Patterson’s having acted with conscious impropriety or lack of honesty in giving his advice. Indeed, as I say, he was not taxed on the point. Moreover it is difficult to see how he assisted, in any real sense of the word, in the redemption of the shares. He gave advice about a means by which it might be performed without losing tax losses. The services he performed were not different in kind from those rendered by the solicitors in Barnes v. Addy (1874) LR 9 Ch App 244 who were held not to be liable for the breach of trust to their client.
The claim for assisting in breach of fiduciary duty has not been made out.
The last point to mention is that the plaintiffs’ case against Coopers & Lybrand and Mr Anderson would fail even if they established some breach of contract, or negligence, or accessorial liability, in not giving a warning that the redemption should not take place because of a want of profits, or insolvency, in Management. This is for the reason that had the advice been given, and had Management acted on it so as to refuse to redeem the shares, Elders would undoubtedly have taken action pursuant to the purchase agreements, guarantees and charges to appropriate the moneys in the deposit account. Any breach of duty by the second defendants would not have been causative of loss. The money would have gone inevitably to Elders regardless of their conduct.
The balances in the Elizabeth House deposit account were charged by it to Elders under the deed of 9 August 1983 as security for the performance of the obligations of the purchasers of the A Class preference shares under their purchase agreement of the same date. The moneys represented by the balances in both deposit accounts were charged by the Deed of Master Loan Agreement of 9 June 1988 with the obligations of Management and Elizabeth House to pay sums equivalent to the redemption amount. There is no point in repeating the recitation of the terms of the various agreements and charges which were dealt with in Section V. I am satisfied that they were valid and would have entitled Elders to the moneys in the deposit account in the event of Management’s insolvency (and I have found it was insolvent by December 1990) and upon a failure to redeem the shares on 31 December 1990.
The plaintiffs object that questions of causation of this kind are not relevant to their claims against the second defendants for dishonestly assisting in a breach of fiduciary duty by Management’s directors. They rely upon Youyang Pty Ltd v. Minter Ellison Morris Fletcher 2003 (HCA) 15 for the proposition that the court may not have regard to such considerations of causation in determining the losses for which a defaulting fiduciary is liable. It was submitted that if the second defendants were liable as accessories for a breach of fiduciary duty by the directors in paying out moneys to redeem the shares then those involved in the breach must restore all the moneys paid away regardless of whether the beneficiary of the duty, Management, would have suffered the loss in any event.
The submission involves a misunderstanding of Youyang in which the trustee paid away money in breach of trust which consisted of making the payment without first receiving a bearer deposit certificate from a prime bank which would have been both negotiable and a security for the money paid out. The recipient of the money misappropriated it. The argument for the trustee was that the moneys were paid to the authorised recipient who dishonestly misapplied them so that the loss would have occurred in any event. The argument was rejected, but not because questions of causation were irrelevant; rather because the facts showed that the loss of the trust estate was occasioned by the payment of the money pursuant to a certificate which did not provide the promised security for the investment made by Youyang. The court said (paras 43,44):
‘43.The essence of Youyang’s complaint is shortly identified. It is the misapplication of the moneys held on trust on terms that, in the events that happened, obliged Minters to hold the moneys absolutely for Youyang and at its direction. To adapt what was said by Fry LJ in Webb v. Stenton, Minters has made itself “personally liable to pay money to (Youyang) by reason of some breach of trust or default in the performance of [its] duties of trustee”. …
44.This appeal turns upon the significance for the facts of the causal requirement expressed by Fry LJ in the phrase “by reason of”. That serves to remind … that “there is no equitable bypass of the need to establish causation” and that “in questions of causation it is important to focus on the relevant equitable duty”.’
The discussion of the facts in paragraphs 62 and 63 show that the court was concerned to analyse whether Youyang’s loss was caused by the breach of trust. It pointed out that had the facts been different the trustee might have escaped liability. As it was the “dishonest and discreditable subsequent act by third parties which led to the loss of the funds” occurred after the trustee had parted with the money without obtaining the security which the terms of the trust required it to obtain before payment. Had the security been obtained the beneficiary would have been protected.
Accordingly I am satisfied that the plaintiffs have not established that any breach of fiduciary duty in which Coopers & Lybrand were involved caused any loss to Management.
It follows that the plaintiffs have not made out any of their causes of action against the second defendants. There must be judgment for the 11th, 12th and 13th defendants against the plaintiffs.
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