Grimaldi v Chameleon Mining NL & Anor [2012] HCATrans 187

[2012] HCATrans 187

[2012] HCATrans 187

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney   No S71 of 2012

B e t w e e n -

PHILLIP FELICE GRIMALDI

Applicant

and

CHAMELEON MINING NL

First Respondent

MURCHINSON METALS LIMITED

Second Respondent

Application for special leave to appeal

FRENCH CJ
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 17 AUGUST 2012, AT 10.57 AM

Copyright in the High Court of Australia

MR M.J. LEEMING, SC:   May it please the Court, I appear with my learned friend, MR M.J. WATTS, for the applicants.  (instructed by M.J. Woods & Co)

MR N.C. HUTLEY, SC:   If your Honour pleases, I appear with my learned friend, MR M.L. BENNETT, for the first respondent.  (instructed by Bennett + Co)

FRENCH CJ:   Yes, Mr Leeming.

MR LEEMING:   If it please the Court, the short reason why we say there should be a grant of special leave is that it is quite difficult in 2012 after this decision and a recent decision of the New South Wales Court of Appeal to advise when is someone what is known as a de facto director.  That is the question that squarely is raised by this, and we also say that your Honours should somewhat discount the submissions of my learned friends to the effect that for other reasons there are ultimately no or little prospects of success.

FRENCH CJ:   Are you proposing some simple test that is going to make it easy for everybody?

MR LEEMING:   Yes.

FRENCH CJ:   Let us hear it.

MR LEEMING:   Your Honour, it will take me more than a minute, so it is not quite as simple as I would like, but it will deal with the statute in a way that, so far as I can see, has not been addressed so far.  Can I first of all deal with the difficulties and then deal with the solution?  The difficulties, as your Honours know, are that the trial judge said that Mr Grimaldi was a de facto director.

FRENCH CJ:   But he looked at a constellation of activities and engagements and then made a kind of characterisation of an evaluative nature, did he not?

MR LEEMING:   I accept that completely, and I also accept that that is the right approach to take.  He also found that there were, without making a concluded view, that there was substantial force in the proposition that he was a de facto officer.  Now, the difficulties that arise at first instance in intermediate Court of Appeal level now arise directly from what the Full Court did, which was to confirm what the trial judge had done, but we say, with respect, on a fair reading reluctantly.  They used the language of “it truly was a distraction”; perhaps I should go there immediately.  At page 412 of the application book, paragraph 141 is the confirmation of the finding and the rejection of what was ground 1 of Mr Grimaldi’s appeal.

I will come back to paragraph 142 which is one of the reasons that gives rise to real problems, but it is paragraph 143 – that is where I say on a fair reading one sees the reluctance.  There is deference to the way the case had been determined at first instance and run on appeal, and then they use quite unusual language:

that the question whether he was a director was, in a sense, a distraction.

Now, when that is added to the different stance from another intermediate Court of Appeal decision in Buzzle the question arises, well, what is the status of the – I am not being critical to either the trial judge or the Full Court – but the less than fully half‑hearted support for the reasoning approach of the judge at first instance in concluding that he was a de facto director?

Now, that is a question that has not been engaged in by this Court since Drysdale’s Case which itself was a great step forward and the legislation has changed substantially since then.  Already in the six months or so that have gone past, and we have given your Honour reference to Professor Baxt’s article at the – if your Honour goes to the last page of the bundle of statutory materials – already in the Australian Business Law Review, Professor Baxt has said – I am taking your Honours to the concluding sentence on page 212, page 15 of the bundle, that:

This decision is a very important one highlighting the need for significant care to be taken by those who undertake active roles within an organisation and who do not properly arrange for their activities to be formally set out and described.  Failure to do so may leave to significant liability as well as the pain of litigation.

FRENCH CJ:   Well, there may be parameters of risk, I suppose.  That is not necessarily undesirable, is it?

MR LEEMING:   What is undesirable, we would say, is that if one is an accountant or a financial adviser or someone involved in raising capital or a merchant banker or maybe even a lawyer, and even if, as here, there was an express arrangement of consultancy, and even if, as here, some of the factors in the evaluative judgment that your Honour the Chief Justice referred to in terms involved express authorisation approval by the board – that is the point I want to make about paragraph 142 in a moment – nonetheless, there is risk that there is a finding that those people have acted as de factor directors and that, of course, has all sorts of consequences, not least of which is insolvent trading liability.

But the simple facts we say that full account was not had regard to in this case – I think none of them are controversial – one, Mr Grimaldi was never appointed, obviously.  Secondly, he was never regarded by the board of Chameleon as a director, and the documented minutes make it plain that when he turned up at board meetings he was there by invitation.  This is a world away from the classic case of a de facto officer whose appointment is defective in some way that is unperceived by everyone.  Thirdly, carefully, and in a way that could be seen quite conveniently at page 586 of the appeal book in an annexure to the Full Court’s reasons your Honours can see how Mr Grimaldi was a director.

Your Honour can see that he was not a director, obviously, of Chameleon Mining but was one of two directors of Chameleon Ventures, the company known as Venture which provided management consultancy services to Chameleon.  He was also a director of Murchison, which your Honours can see in the second last row on the page, and a director of, in the last row on page 587, Chameleon’s wholly owned subsidiary, Tembo.  Now, some effort had been gone to, as your Honours can see just from that, on the part of the company and Mr Grimaldi as to what offices he was holding, and we say that is something to which regard should be had.

Further, the context here is a world away from a case that my learned friends refer to in their submissions, a recent case of this Court, Shafron.  There one had someone who was a secretary and was general counsel of the company and was an employee of a large listed company with a long history.  In contrast, the sort of facts that arise in this case – one might think they are much more plentiful out there in the worlds of commerce whirling around – it is a start‑up company.  It started up between directors who have relationships, a friendship, a social close connection; in fact, Mr Grimaldi shared both office and residential accommodation with one of the two executive directors of Chameleon that is Mr Roberts.  Importantly, as this Court emphasised in Shafron’s Case, what was important in the evaluative judgment there was that Mr Shafron was a salaried employee of James Hardie.  That, of course, was not the case here.

Now, the same evaluative judgment that was adopted by the primary judge finds its way in the reasons of the Full Court, and as your Honours have seen, that is really dealt with in the paragraphs that precede paragraphs 141 to 143 that I have already taken your Honours to, and they deal fairly with the various matters deployed by my learned friends to create the factual basis for a conclusion of de facto director.  Can I return to paragraph 141, page 412?  The conclusion is that:

Mr Grimaldi was either given, or had arrogated to himself . . . functions in the affairs of Chameleon which would properly be expected to be performed by a director of that corporation given its circumstances.

Now that, of course, is a summary, but if may say so, with great respect, it is an unhelpful summary because one really needs to unpack what falls within “properly” by reference to the scale, or lack of it, in its junior mining start‑up, the social relations as opposed to the commercial relations, and the formalities which had been observed in the corporate structure in the office holdings of the subsidiary companies, the consultancy companies and the minutes of the board.

Can I then turn to the point which if one were an accountant or a lawyer or involved in capital raising for small start‑ups might cause greatest concern and that is paragraph 142?  The Full Court says:

While some of the acts done by Mr Grimaldi which evidenced his acting in the position of a director, were done at the request or with the authorisation of the board, others were not.

Their Honours go on to say that that is important when it comes to the virtual question of the scope of the fiduciary obligation.  But on a fair reading and on a natural reading we would say, that is the Full Court saying that there are two categories of things that Mr Grimaldi was doing.  One of them on any view was acting as a consultant pursuant to the instructions and with the authorisation of the board.  There is absolutely no doubt on the findings of fact that we are not here to challenge that Mr Grimaldi’s involvement in very substantial affairs of Chameleon went beyond that, and from time to time in important aspects he did things without the formal request and reporting back to the board; let that be given.

Both of those categories of conduct, on a fair reading of the first two sentences of paragraph 142, inform the evaluative judgment as to whether someone is a de facto director, and we would say, with great respect, that rather reveals the lack of having regard to the matters I have already referred to, the consultancy arrangement, the formal arrangements that were made between Mr Grimaldi’s company and the board.

FRENCH CJ:   Those sorts of arrangements, are they necessarily antithetical to the statutory test?

MR LEEMING:   Well, that is exactly what I need to come to now for two reasons.  One, to answer your Honour’s question and, two, to deal with what my learned friends will say and which I concede if I merely persuade your Honours that there is difficulty in construction of who is a de facto director I will fail and your Honours will not grant special leave because I need also to persuade your Honours that there is a difficulty with the definition and application of de facto officer.

Can I come to that immediately because there is a textual basis which has not been given attention in either the primary judge or the Full Court which directly responds to your Honour’s question to me?  If your Honours go to the materials, your Honours have the definition of director at the bottom of page 1, but the words that matter are at the top of page 2, and as your Honours know although a shadow director case was propounded the primary judge made no findings, expressly made no findings on that and there was no notice of contention on that, so the only limb that matters is (b)(i) “act in the position of a director”.

In answer to your Honour the Chief Justice’s question to me, there is a carve‑out expressly from what is called the shadow director provision of (b)(ii) in the words that immediately follow the section.  We say those words, subtracting from when you find shadow directorship, have a role to play in de facto directorship in (b)(i) ‑ I will come back to that in just a moment – because the same structure can be seen in a slightly more complicated way in the definition of officer which is on the following page.

Now, the things to note about that is that anyone who is a director, understandably enough, is an officer, and the expanded words on which the Full Court preferred to base their conclusion and affirmation of the orders of the primary judge were (b)(i) and (b)(ii).  We accept completely that this Court has helpfully described what:

participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation –

mean.  But notwithstanding the expansion of those words can we proffer three glosses which, in my respectful submission, ought be applied to those, on the face of it, expansive words?  The first is that below (iii) there are bracketed words which mirror the bracketed words carving up professional advisers that your Honours have seen in the definition of director.  I am here happily to concede that on the face of the section the carve‑out subtracts only from (iii) what might be called the shadow officer limb of the definition, but we say they too should be taken into account.

Secondly, what should be taken into account in the definition of officer is the fact that if you are already a director you are found to be an officer by means of the first limb of the definition rather than the second.  This is the case where the definitions overlap, where everyone who is a director is automatically an officer, and so the critical words “act in the position of a director” have to be read in a harmonised way with the broader words in officer; there does not seem to have been an attempt to do that.

Thirdly, as Justice Young said in the leading judgment of the Court of Appeal in Buzzle’s Case – and we have given your Honours just extracts of that in the bundle – at page 10 Justice Hodgson and Justice Whealy agreed with this, and I should say to be fair this is a case where what was at stake was both shadow director and de facto director and so much of what he says is directed to shadow director, obviously in paragraph [226] the application of these principles depends very much on questions of size and scale; obviously, we embrace that.

But [228] and [229] tend, in our respectful submission, to undercut the more literalistic reasoning of the Full Court.  We say, yes, it must be correct that not every person whose advice is in fact heeded as a general rule is to be classed as a de facto or shadow director.  There is more to it and there are unexpressed subtractions from these words, especially having regard to the serious consequences that apply if one is found to be a director, which you might be even though you do not know it ‑ that is the point of extending the definition to people who have not been appointed.

The example that is given by his Honour Justice Young at [229] “as a bank or mortgagee”, that must be right, with great respect.  In completeness, I should say, Justice Hodgson has a slightly more nuanced view on that very point.  But the simple point is that there there may be someone who has a very great role to play in the day‑to‑day activities at the highest level of the company that on no view falls within the terms of the definition.  Now, that judgment suggests a more nuanced approach ought be applied to the facts than was applied by the Full Federal Court in this case.

Those are the reasons that we put forward, in short, for a grant of special leave.  The question is important.  The same areas, with respect, that we say appear in relation to director apply to officer once one has regard to the textual considerations.  Professor Baxt is right, it is an important matter, and in a sense it complements what this Court has done already in relation to part of those provisions in relation to Shafron’s Case.  Can I say as quickly as I can, and in fairness to my learned friend, Mr Hutley, why you should not accede to his submissions that even if everything that I have said is right there will be no ultimate success because of the findings of fiduciary obligations?

HEYDON J:   Well, the facts, the findings of fact which you do not challenge which suggest fiduciary obligations of a general kind.

MR LEEMING:   Yes, that is so, and if your Honours were to accept what he says then that would be a good reason for refusing the grant of special leave.  In effect, it is an in terrorem, here is a notice of contention that is going to be filed if and when there is a grant of special leave, to which there is no answer.  I have no difficulty at all with – and there is nothing pejorative intended by in terrorem.  The two things that are said are, first of all, there is no answer to a Barnes v Addy claim for knowing assistance in the obvious breaches of fiduciary duty found by the judge by Mr Barnes, the director.

There is more to say, but the simple answer to that is that as we read the reasons there is no finding, expressly no finding, that Mr Grimaldi knew that Mr Barnes had not done what he ought to have done, namely, fully disclose the position to his board, and the documentary evidence tends to support that; after all, Mr Grimaldi ended up being armed in relation to the first of the two payments with a letter that was signed by Mr Dondas and signed by Mr Roberts whose evidence in this respect was rejected pretty much after the time it was given.  Your Honours can see that at [293].

HEYDON J:   How does this sit with Justice Jacobson’s finding at 675:

Neither Mr Grimaldi nor Mr Barnes went into the witness box to assert that he was acting honestly.  In my opinion, both acted dishonestly.

MR LEEMING:   Yes.

HEYDON J:   So that is just to be overturned by looking at these documents?

MR LEEMING:   That is a conclusionary finding and it presupposes that there was a fiduciary obligation that was breached, or by one of the two.

HEYDON J:   Mr Barnes owed a fiduciary obligation.

MR LEEMING:   Yes, he certainly did, and if your Honour goes to the very next page, paragraph 678 and 679, the problem that my learned friend, Mr Hutley, would have is that the primary judge very properly says that there is no breach of fiduciary obligation if Mr Barnes had obtained the fully informed consent of his company prior to transmitting the first or second payments to the company that became Murchison.  Now, the exception plainly is correct, it is properly made, and then expressly in 679 there is no finding.  That is the sort of debate that would be played out in the Full Court.

HEYDON J:   ….. misunderstanding something, it says neither Mr Barnes nor Mr Grimaldi made any “disclosure to the other directors”.

MR LEEMING:   That is so, but the essential factual matter that my learned friend would need on a Barnes v Addy claim was knowledge by Mr Grimaldi that Mr Barnes had not made full disclosure, and that is absent from the findings as we read them.  My learned friends have given a list of 50 or 60 paragraphs where the findings are made, and if there is something else that can be said no doubt my learned friends will point it out, but that seemed to be the most apposite aspect of it as we could see.  I see the time, your Honour.  May it please the Court.

FRENCH CJ:   Thank you, Mr Leeming.  The Court will adjourn briefly to consider what course it should take.

AT 11.20 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.22 AM:

FRENCH CJ:   I have asked Justice Heydon to give the Court’s disposition.

HEYDON J:   This is an application for special leave to appeal from the orders of the Full Federal Court of Australia (Justices Finn, Stone and Perram) dismissing an appeal from orders made by Justice Jacobson.  Those orders relevantly centred on ensuring that the applicant transfer to the first respondent certain shares and options acquired in breach of duty or the proceeds of their sale. 

The amended draft notice of appeal, on which the applicant would wish to rely if special leave were granted, makes two attacks on the reasoning of Justice Jacobson and the Full Court. First, it attacks their conclusion that the applicant was a director of the first respondent by reason of paragraph (b)(i) of the definition of “director” in section 9 of the Corporations Act 2001 (Cth) on the ground that he was a person who acted in the position of a director. Secondly, it attacks their view that he was an officer of the first respondent within the meaning of both limbs of paragraph (b) of the definition of “officer” in section 9 of that Act.

We would refuse special leave to appeal for the following reasons.

First, even if the applicant were not a director or officer, on his own case he acted as a third party consultant.  The first respondent has good prospects of demonstrating that in that role the applicant would have owed fiduciary duties and that the factors relied on by Justice Jacobson and the Full Court in concluding that he was a director support the view that even if he were not a director or officer he owed fiduciary duties.  In certain respects the trial judge specifically found, and the Full Court agreed, that that was so.  The first respondent also has good prospects of demonstrating that the applicant knowingly participated in a breach of duty by a director of the first respondent.  On that issue, the trial judge made findings in favour of the first respondent which were not disturbed in the Full Court.  The first respondent thus has good prospects of demonstrating that the relief ordered by Justice Jacobson is supportable, even if the applicant were not a director or officer.  The contemplated appeal would therefore be futile.

Secondly, even if the applicant were not a director he was an officer.  The reasoning of the Full Court is consistent with the later decision of this Court in Shafron v Australian Securities and Investments Commission (2012) 86 ALJR 584.

Thirdly, the applicant’s contention in writing that this Court should apply a decision of the United Kingdom Supreme Court Revenue and Customs Commissioners v Holland [2010] 1 WLR 2793 has insufficient prospects of success. The United Kingdom legislative scheme is different and the applicant did not demonstrate that even if what was said in that case is applicable here, the result would be different.

Fourthly, the applicant has insufficient prospects of demonstrating that the Full Court erred on the director issue.  He alleges in particular that the Full Court failed to consider the governance structure of the first respondent.  In fact, it did. 

Accordingly, the application should be dismissed with costs.

FRENCH CJ:   I agree.

Court will adjourn briefly to reconstitute.

AT 11.26 AM THE MATTER WAS CONCLUDED