G.W Glenn Road Transport Pty Ltd (In liq) v Glenn G.W & E

[1995] FCA 443

CATCHWORDS

CORPORATIONS - management and administration - fiduciary position of directors - whether breach of fiduciary duty of directors - liability of directors for breach.

Australian Growth Resources Corporation Pty Ltd v Van Reesema & Ors (1988) 6 ACLC 529
Kinsela v Russell Kinsela Pty Ltd (In Liq) (1986) 4 NSWLR 722

G W GLENN ROAD TRANSPORT PTY LTD (in liq) v GREGORY WARREN GLENN and ENA GLENN
NO NG 3400 OF 1993

R D NICHOLSON J
SYDNEY
2 JUNE 1995

IN THE FEDERAL COURT OF AUSTRALIA   )

NEW SOUTH WALES DISTRICT REGISTRY   )

GENERAL DIVISION                   )     NO NG 3400 OF 1993

B E T W E E N:              G W GLENN ROAD TRANSPORT PTY LTD (In Liq)

Applicant

and

G W GLENN

First Respondent

and

ENA GLENN

Second Respondent

MINUTE OF ORDER

JUDGE MAKING ORDER:     R D NICHOLSON J

DATE OF ORDER:         2 JUNE 1995

WHERE MADE:            SYDNEY

THE COURT ORDERS THAT:

1. The application against the first respondent be allowed.

1. The application against the second respondent be dismissed.

1. The first respondent pay the applicant

(a)the sum of $137,520

(b)interest thereon from 1 July 1991 at the rate fixed in annexure J to the Rules of the Supreme Court of New South Wales.

1. The first respondent pay the applicant's costs.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA   )

NEW SOUTH WALES DISTRICT REGISTRY   )

GENERAL DIVISION                   )     NO NG 3400 OF 1993

B E T W E E N               G W GLENN ROAD TRANSPORT PTY LTD (In Liq)

Applicant

and

G W GLENN

First Respondent

and

ENA GLENN

Second Respondent

CORAM:R D NICHOLSON J

DATE:2 JUNE 1995

PLACE:SYDNEY

REASONS FOR JUDGMENT

R D NICHOLSON J

The applicant seeks a declaration that the respondents in purporting to forgive a debt owed by the first respondent to the applicant in the sum of $117,935 on or about 30 June 1991 acted in breach of duties owed by them to the applicant pursuant to s232(6) of the Corporations Law and acted in breach of their fiduciary obligations to the applicant to act at all times in good faith and for the benefit of the applicant. Although that is the way in which the application was brought, it is now submitted, correctly, that it is not appropriate for a declaration to be sought pursuant to s232(6) inasmuch as at the relevant date there was not a law which would sustain an order for compensation if such a declaration was made. Accordingly, the application is pressed only in respect of its second limb.

In the application orders were sought in respect of the first respondent for payment of the sum of $137,250 and in respect of the second respondent for payment of the sum of $117,935.  However, as pressed, the claim is for orders against the first and second respondents in the sum of $117,935 and a further order against the first respondent in the sum of $19,585.  In each case interest is also sought.

It is apparent from a company search in respect of the applicant that the first and second respondents were directors of the company at the relevant time.  Furthermore, the petitioner's court action was first taken against the applicant on 13 April 1992.

The circumstances in which the debt the subject of the application arose are as follows:   On 30 June 1990, the first respondent was indebted to the applicant in the sum of $49,949.  By 30 June 1991 that indebtedness had increased to the sum of $137,250. That increase had taken place as a result of a variety of payments made by the applicant on the account of the first respondent.  It is not necessary to examine the detail of those payments.  It is sufficient to say that the total of those items by 30 June 1991 was $87,301 which, added to the indebtedness previously existing at 30 June 1990, resulted in the indebtedness of $137,250 to which reference has previously been made.

In the accounts of the applicant, as at 30 June 1991 there appears an item: Advance G.W. Glenn $19,585.  That figure is arrived at by subtracting $117,935 from the figure of $137,250 and augmented by a further $270 representing the balance of the beneficiaries' account.  The reduction of $117,935 is described in evidence by the accountant for the first respondent as being "balance forgiven by the trustee for full release from all claims for entitlements approved by Mr G.W. Glenn while an employee of G.W. Glenn Road Transport Pty Ltd in its capacity as trustee of the G.W.Glenn Family trust."

On 29 October 1992 the first respondent certified that answers which he had given to a certain questionnaire were true and complete to the best of his knowledge and belief.  In those answers he stated that the applicant, as trustee of the family trust, employed arms length employees and at the date of cessation of its business those were 9 in number.  He further stated that the business had been sold by the trustee on 3 September 1990.  He described himself as the managing director of the applicant.  He stated that as such he drew approximately $300 per week "against his entitlement as a beneficiary under the trust". 

In relation to the balance sheets and profit and loss accounts, in respect of the business of the applicant for the year ended 30 June 1990 and the year ended 30 June 1991, he said that he had taken steps to satisfy himself they were correct by having discussions with his accountant.  He further stated that he first realised that the applicant might have to go into liquidation in December 1990.  He said that what caused him to realise this was when major items of plant and vehicles belonging to the trust failed to sell at a clearing sale in December 1990.  Furthermore, he stated that creditors had begun pressing the applicant for payment in September to October 1990.  As a consequence, he attempted to collect outstanding amounts due from debtors and to dispose of remaining vehicles and plant.

Mr Chamberlain, the accountant having the care and conduct of the liquidation of the applicant, testified that upon careful review of the books and records of the applicant in his possession and control, there is no recording of any accruing entitlements owed by the applicant to the first respondent as an employee of the applicant.

From this evidence I find as a fact that the first respondent was not an employee of the applicant.  I also find that as at December 1990 the first respondent was aware that the applicant might have to go into liquidation and was being pressed by its creditors.

It therefore follows that the first respondent was not entitled to make claims as an employee of the applicant.  The fact that advances were made to him in the context of what was known to him at the time supports the case for the applicant that the first respondent has breached the obligations previously referred to.

The case for the applicant is supported by reference to what was said by King CJ, with Cox J concurring, in Australian Growth Resources Corporation Pty Ltd v Van Reesema & Ors (1988) 6 ACLC 529 at 538, as follows:

"But a fiduciary may be in breach of his fiduciary duties notwithstanding the subjective honesty of his motives. This is made clear by the following passage from the judgment of Viscount Haldane L.C. in Nocton v Lord Ashburton (1914) A.C. 932 at p.954:

"But when fraud is referred to in the wider sense in which the books are full of the expression, used in Chancery in describing cases which were within its exclusive jurisdiction, it is a mistake to suppose that an actual intention to cheat must always be proved.  A many may misconceive the extent of the obligation which a Court of Equity imposes on him.  His fault is that he has violated, however innocently because of his ignorance, an obligation which he must be taken by the Court to have known, and his conduct has in that sense always been called fraudulent, even in such a case as a technical fraud on a power.  It was thus that the expression "constructive fraud" came into existence.  The trustee who purchases the trust estate, the solicitor who makes a bargain with his client that cannot stand, have all for several centuries run the risk of the word fraudulent being applied to them.  What it really means in this connection is not moral fraud in the ordinary sense, but breach of the sort of obligation which is enforced by a Court that from the beginning regarded itself as a Court of conscience."

It is not to the point that a director genuinely considers his purposes to be honest if those purposes are not in the interests of the company.  The director must act in a way which he conceives to be for the benefit of the company as a whole, as
that concept is understood by the law.  It may be accepted, on the learned Judge's assessment of the first respondent as a witness, that the first respondent was genuine in his account of his purposes in entering into the transaction and that those purposes were shared by the co‑directors.  He may have genuinely believed those purposes to be proper.  In essence, however, those purposes are reducible to the single purpose of divesting the company of its business and assets without corresponding benefit to it, in order to enable the first respondent to take over and conduct the business.  Such a purpose is not within the scope of what the law regards as the interests of a company as a whole."

Reference has also been made to what was said in the reasons for judgment of Street CJ in Kinsela v Russell Kinsela Pty Ltd (In Liq) (1986) 4 NSWLR 722 at 732 as follows:

"The obligation by directors to consider, in appropriate cases, the interests of creditors has been recognised also in the High Court of Australia.  In Walker v Wimborne (1976) 137 CLR Mason J said (at 6-7):

"... it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors.  Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them."

Barwick CJ concurred in the judgment of Mason J.

It is, to my mind, legally and logically acceptable to recognise that, where directors are involved in a breach of their duty to the company affecting the interests of shareholders, then shareholders can either authorise that breach in prospect or ratify it in retrospect.  Where, however, the interests at risk are those of creditors I see no reason in law or in logic to recognise that the shareholders can authorise the breach.  Once it is accepted, as in my view it must be, that the directors' duty to a company as a whole extends in an insolvency context to not prejudicing the interests of creditors (Nicholson v Permakraft (NZ) Ltd and Walker v Wimborne) the shareholders do not have the power or authority to absolve the directors from that breach."

It is apparent that, even though each of the respondents were shareholders of the applicant, it was not open to them to ratify a payment such as that in issue here which had been made without regard to the interests of creditors.

In my view it is patent that, given the position the company was in in December 1990, the actions taken to make the advances to the first respondent constitute a breach of good faith, and I so find.  Reliance is also placed for the applicant on the fact that those actions constituted a breach of the duty by directors to avoid placing themselves in a position of conflict with the applicant.  It is clear in my view that this duty was also breached by the making of the advances.

It is, however, necessary to consider the position of the second respondent.  While it is the case that she was a director at the time, such evidence as is before me raises the prima facie position that she played no part in the management of the applicant.  That is not disputed on behalf of the applicant.  While there is evidence that she may have been the recipient of an advance of monies from the applicant, it is also accepted on behalf of the applicant that that does not have any relevance to the determination of her liability in relation to the breach of the duties to which I have referred.  In my opinion, it is not established that the second respondent participated in the breach of duties and I therefore conclude that it is not open for orders to be made against her.

I should add that this matter has been heard in the absence of any representation for the respondents or any attendance by either of them personally.  Each of them has acknowledged to the Court that they are aware this matter is being heard and they have elected not to appear.  In those circumstances the applicant has therefore carefully taken the Court to the relevant evidence and the Court has raised matters which might have been raised in the interests of the respondents had either of them been present or represented. 
I therefore consider that an order should be made in respect of the first respondent that he pay to the applicant the sum of $117,935. 

In respect of the further order sought, I am satisfied that demand for payment was made upon the first respondent namely, on 23 March 1993.  It is appropriate that there be a further order against him for payment of $19,585.  In the circumstances it may be convenient if one order for the total amount constituted in that way is made against the first respondent.

The applicant also seeks interest on the total sums owing by the first respondent pursuant to s51A of the Federal Court Act 1976 (Cth) and I will so order, also directing that the interest be in accordance with the annexure J to the Rules of the Supreme Court of New South Wales and at the rates there fixed from time to time.

When this matter last came on before Lockhart J on 21 March 1995 there was a question held over in relation to costs concerning the solicitors for the respondents.  The applicants have elected not to press that matter, and for that reason, those solicitors have not been represented today. Consequently no order is sought in that regard.

I certify that this and the preceding 6 pages are a true copy of the Reasons for Judgment of his Honour Justice R D Nicholson.

Associate:

Date:

APPEARANCES

Counsel for the Applicant:       Mr W Webb

Solicitors for the Applicant:      Walsh & Blair

There was no appearance by or on behalf of either the first or second respondents.

Date of Hearing:   2 JUNE 1995

Date of Judgment:  2 JUNE 1995