Friend v Brooker [2009] HCA 21 28 May 2009 S475/2008
ORDER
1. Appeal allowed.
2. First respondent to pay the costs of the appellant.
3.Set aside the orders of the Court of Appeal of the Supreme Court of New South Wales entered 25 June 2008 and, in lieu thereof, order that the appeal to that Court be dismissed with costs, including the costs of the application for recall of reasons.
On appeal from the Supreme Court of New South Wales
Representation
C R C Newlinds SC with H S Packer and B R Kremer for the appellant (instructed by Bull, Son & Schmidt)
B W Walker SC with M S White for the first respondent (instructed by Levitt Robinson Solicitors)
No appearance for the second respondent
Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.
CATCHWORDS
Friend v Brooker
Equity – Doctrine of contribution – "Co-ordinate liability" – Appellant and respondent company directors – Respondent personally borrowed money which was on-lent to the company – Company ceased trading – Respondent sought funds from appellant to repay personal loan – Whether fiduciary relationship existed between the two – Whether co-ordinate liability existed so as to require equitable contribution from appellant.
Words and phrases – "common design", "community of interest", "co-ordinate liability", "equitable contribution".
FRENCH CJ, GUMMOW, HAYNE AND BELL JJ. This appeal is brought by Mr Friend from the decision of the New South Wales Court of Appeal (Mason P and McColl JA; Basten JA dissenting[1]) which allowed an appeal by the first respondent (Mr Brooker) and set aside the orders of the primary judge (Nicholas J) dismissing a suit in the Equity Division of the Supreme Court of New South Wales[2]. The appeal should be allowed and the orders of the primary judge restored.
The appeal raises for consideration by this Court fundamental questions respecting the nature and scope of the equitable doctrine of contribution. These are precipitated by the decision of the Court of Appeal which proceeded from considerations first raised by the President in the course of argument and not advanced to the trial judge.
The matter is further complicated by the circumstance that in various respects findings of fact were made or assumed by the Court of Appeal and in this Court the appellant vigorously challenged the procedure adopted by the Court of Appeal, in going beyond the findings made by Nicholas J when disposing of the quite different case presented at trial. However, it will be possible to decide the appeal in favour of the appellant even assuming many of the factual findings and assumptions of which the appellant complains.
The equity suit
The suit was tried upon the fifth amended statement of claim. Mr Brooker sought a declaration respecting…
Grounds of appeal
[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.
[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.
[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.
Consideration
[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.
[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.
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AGLC
Friend v Brooker [2009] HCA 21
Case
[2009] HCA 21
Decision Date
CaseChat Overview and Summary
The appellant, Mr Friend, and the respondent, Mr Brooker, were co-directors of a company incorporated in 1977 to conduct an engineering and construction business, which later expanded to include land development. The company ceased trading in 1990 and was deregistered in 1996. The dispute arose when Mr Brooker sought funds from Mr Friend to repay a personal loan that had been on-lent to the company, which had become insolvent. The core of the disagreement concerned whether a fiduciary relationship or co-ordinate liability existed between the directors, necessitating an equitable contribution from Mr Friend towards Mr Brooker's personal loan repayment.
The High Court was required to determine whether the equitable doctrine of contribution applied between Mr Friend and Mr Brooker, given their roles as co-directors of a company. Specifically, the Court had to consider whether their dealings, including personal borrowings that were on-lent to the company, created a fiduciary relationship or established co-ordinate liability that would oblige Mr Friend to contribute to Mr Brooker's repayment of a personal loan. The Court also had to assess whether the respondent's attempt to invoke these equitable doctrines was an attempt to circumvent the established legal consequences of their decision to operate through a corporate structure.
The High Court allowed the appeal, holding that the equitable doctrine of contribution should not be extended to outflank the consequences of the parties' deliberate decision to adopt a corporate structure. The Court agreed with the submission that equity does not impose fiduciary duties between parties who have chosen to operate through a company, where their duties are owed to the corporation itself. The findings of the trial judge, which established that no partnership or joint venture existed between Mr Friend and Mr Brooker after the company's incorporation, were critical. The Court emphasised that the selection of the corporate structure brought with it the principles of corporate personality and limited personal liability, and that statutory provisions existed for resolving disputes in closely held companies.
The High Court ordered that the appeal be allowed, with the first respondent to pay the costs of the appellant. The orders of the Court of Appeal of the Supreme Court of New South Wales were set aside, and in their place, the appeal to that Court was dismissed with costs.
Orders
Orders of the court
1. Appeal allowed.
2. First respondent to pay the costs of the appellant.
3. Set aside the orders of the Court of Appeal of the Supreme Court of New South Wales entered 25 June 2008 and, in lieu thereof, order that the appeal to that Court be dismissed with costs, including the costs of the application for recall of reasons.
Background
Background to the litigation
The Company ceased to trade in about July 1990 and was deregistered on 26 July 1996. It played no active part in the litigation. The Company may be taken to have been insolvent at least since the time it ceased to trade. Mr Brooker's success in the Court of Appeal was based on the proposition that the dealings over some years between him and Mr Friend referable in particular to a certain loan transaction generated a right to contribution in his favour. The parties are in dispute in this Court, among other matters, as to whether the effect of the relief granted to Mr Brooker by the Court of Appeal is to disrupt what otherwise would be the established system for the insolvent administration of the Company, which the parties had jointly controlled. The facts As already noted, many matters of fact were still in dispute before this Court. Had Nicholas J ordered the account sought by Mr Brooker, various aspects of the dealings affecting the parties would have been for resolution on the taking of the full account. But, in the event, no such order was obtained from the trial judge. However, some basic facts were largely undisputed. In about May 1977, Mr Brooker and Mr Friend resigned from their employment as engineers with John Holland Constructions Pty Ltd, with the intention of establishing an engineering and construction business. The Company was incorporated on 18 July 1977. In 1979 the scope of the business of the Company was expanded to include the purchase and development of land. With respect to the incorporation of the Company, Nicholas J made an important finding respecting the subsistence thereafter of any partnership. He found:"What happened was that from the time of incorporation the partnership ceased, just as the parties intended. The effect of incorporation changed the basis upon which the business had been conducted since May 1977, not only with regard to third parties, but also as between themselves. Thereafter their relationship was as co‑directors of the company, and the assets and liabilities associated with the business were the company's." Mr Brooker and Mr Friend were the directors of the Company and the shareholding was controlled equally by a complex of their respective family companies and trusts. The trial judge recorded that to finance the activities of the Company funds were obtained by loans from third parties to the Company and from time to time by separate personal borrowings from family and friends by Mr Brooker and Mr Friend; these funds then were lent to the Company and reflected in the loan accounts of the directors as unsecured loans. In this Court, Mr Brooker accepted that the loan accounts were not matched between the two directors, but fluctuated from time to time depending upon which of them had been tapping available sources of funds. In January 1984 the Company entered into a contract with the Eurobodalla Shire Council ("the Council") for the construction of sewerage reticulation works at Narooma for a sum in excess of $2.5m. The contract reached practical completion in September 1985, but in April 1986 the Council rejected the Company's claim for payment of a sum of about $1m. This placed the Company in extreme financial difficulty and it was in these circumstances that further finance was obtained in circumstances disputed before the primary judge. It may be accepted for the purposes of these reasons that the indebtedness of the Company at this period comprised loans from Trade Credits Ltd, Mr and Mrs de Bakker, and Alcon Investments Pty Ltd; that the second and third loans were secured by mortgages over Brooker properties, and the first loan by mortgages over properties owned by Mr Friend and by Mr Brooker; and that the moneys advanced had been used for the purposes of the business of the Company.
Evidence
Evidence Before The Court
Full text does not contain this section.
Decision
Reasons for decision
FRENCH CJ, GUMMOW, HAYNE AND BELL JJ
(dissent)
HEYDON J
The appellant also submits that equity does not impose fiduciary duties between the parties to a deliberate commercial decision to adopt a corporate structure in which they would owe duties, but to the corporation and as directors. Why, it is asked, should equity intervene in such a fashion when the Company, by which Mr Brooker and Mr Friend carried on the business, failed and, in the result, their personal losses will not be in equal amounts? That submission is to be accepted.Conclusions The findings by the trial judge show that over many years Mr Friend and Mr Brooker each utilised their connections with family and friends to obtain loan funds then to be advanced to the Company. The moneys were advanced by these third parties to Mr Friend or Mr Brooker, as the case may be, then lent to the Company, and its indebtedness then appeared in the loan accounts of the directors. But Mr Friend, as appellant, submits that it was not an incident of this relationship that each of them bore in equity any personal responsibility to the other to carry half the burden of repayment of the loans to the other party. The appellant develops that submission by emphasising the significance of the selection by him and Mr Brooker of the corporate structure as the vehicle for their business enterprise. The appellant submits that the equitable doctrine of contribution should not be extended to outflank the consequences of the selection by the parties of the corporate structure. We agree. That selection brought with it the attendant legal doctrines of corporate personality and limited personal liability. Moreover, at the time of the incorporation of the Company, the Companies Act 1961 (NSW) was in force and this (and the successor legislation) provided for the breakdown of relations between the controllers of closely held companies by such provisions as those for winding up on the just and equitable ground under s 222(1)(h)[90] and for oppression suits under s 186[91]. [90]See Ebrahimi v Westbourne Galleries Ltd [1973] AC 360.[91]See In re Jermyn Street Turkish Baths Ltd [1970] 1 WLR 1195; [1970] 3 All ER 57. Further, the attempts by the respondent in this Court to enlist doctrines and remedies respecting contribution and fiduciary obligations seek to avoid the consequences of the undisturbed findings of fact and law by the trial judge. The appellant and the respondent were not, after the formation of the Company in 1977, in a relationship of partnership. Nor were their business dealings pursued pursuant to any agreement in the nature of a joint venture. To speak of a "common design" is to fix attention at a level of abstraction which is well above the endeavour of the parties to derive equal profit for their respective family shareholdings by the conduct of the business of the Company. On the case pleaded the trial judge held that there was no partnership between Mr Friend and Mr Brooker, no joint venture, and no other relationship which gave rise to an entitlement to an accounting between them[92]. Unless those findings were to be upset by the Court of Appeal that ought to have been the end of the litigation.[92][2005] NSWSC 395 at [79].Orders