Hakea Holdings Pty Ltd v McGrath (No 2)
[2022] FCA 995
•26 August 2022
FEDERAL COURT OF AUSTRALIA
Hakea Holdings Pty Ltd v McGrath (No 2) [2022] FCA 995
File number: NSD 278 of 2019 Judgment of: YATES J Date of judgment: 26 August 2022 Catchwords: CORPORATIONS — directors’ duties – duty under s 180(1) of the Corporations Act 2001 (Cth) – where the director of the company was also the sole director and shareholder of a building company engaged by the first-mentioned company to carry out construction of an aged care facility – whether the director breached his duty under s 180(1) by failing to inform the first-mentioned company that the building company was in severe financial distress and unable to complete the building work in a timely fashion – whether the alleged breach also involved the director breaching his duty to avoid conflicts of interest and conflicts of duty – where director deliberately failed to disclose facts to keep the building contract on foot
INSURANCE — Directors and Officers liability insurance – “claims made” policy – whether claim required to be made against the director or officer within the period of insurance – whether notification to the underwriters of the claim sufficient – whether a claim was, in fact, made on the insured director within the period of insurance – where demand made on the director by email notification – whether email notification received by the director within the period of insurance
INSURANCE — Directors and Officers liability insurance – exclusion clause – loss involving director or officer gaining personal profit or advantage – whether director gained a personal advantage within the meaning of the exclusion – where alleged personal advantage involved conduct of the director calculated to keep on foot a building contract – where the counterparty to the building contract was a building company which the director controlled – where the building company derived revenue from the building contract which supplemented funds to which the director had access for his personal use
INSURANCE — Directors and Officers liability insurance – exclusion clause – loss arising from circumstance known by director or officer prior to the period of insurance – whether knowledge of facts constituting the circumstance sufficient to trigger the exclusion – whether the exclusion also required the director or officer to know that the circumstance exposed him or her to a legal liability, actual or potential, to a third party
EVIDENCE — Evidence Act 1995 (Cth) – hearsay rule – whether previous representations made in affidavits filed in other proceedings admissible as admissions – whether previous representations admissible as an exception to the hearsay rule on the basis that they are representations of the maker’s state of mind at the time the representations were made
Legislation: Bankruptcy Act 1966 (Cth) s 58(3)
Corporations Act 2001 (Cth) ss 50, 180(1), 181(1), 182(1), 459E, 1315, 1317J
Evidence Act 1995 (Cth) ss 55, 60(1), 66A, 81, 83
Taxation Administration Act 1953 (Cth) Sch 1 s 260-5
Real Property Act 1900 (NSW) s 61(2)(d)
Cases cited: Alex Kay Pty Ltd v General Motors Acceptance Corporation [1963] VR 458
Bristow v R [2020] SASCFC 91
Commissioner of State Revenue v Can Barz Pty Ltd (No 2) [2017] 2 Qd R 537
Darlington Futures Limited v Delco Australia Proprietary Limited [1986] HCA 82; 161 CLR 500
DellaVedova v HIH Casualty & General Insurance Ltd (1997) 9 ANZ Insurance Cases ¶61-383
Drayton v Martin (1996) 67 FCR 1
FAI General Insurance Co Limited v Australian Hospital Care Pty Limited [2001] HCA 38; 204 CLR 641
Hakea Holdings Pty Ltd v McGrath [2021] FCA 660
HDI Global Specialty SE v Wonkana (No 3) Pty Ltd [2020] NSWCA 296; 104 NSWLR 634
Impact Funding Solutions Ltd v AIG Europe Insurance Ltd [2016] UKSC 57; [2017] AC 73
Laws v Australian Broadcasting Tribunal [1990] HCA 31; 170 CLR 70
Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390
Permanent Custodians Limited v ARMA Pty Limited [2006] FCA 640; 14 ANZ Insurance Cases ¶61-707
Quintano v BW Rose Pty Ltd [2008] NSWSC 793; (2009) 15 ANZ Insurance Cases ¶61-805
R v Adam (1999) 47 NSWLR 267
R v Blastland [1986] AC 41
Re Vassis; Ex parte Leung [1986] FCA 19; 9 FCR 518
Ritchie v Woodward [2016] NSWSC 1715
Selected Seeds Pty Ltd v QBEMM Pty Ltd [2010] HCA 37; 242 CLR 336
Shafron v Australian Securities and Investments Commission [2012] HCA 18; 247 CLR 465
Spencer v Bamber [2012] NSWCA 274
Triden Properties Ltd v Capita Financial Group Ltd (unreported, Court of Appeal, NSW, 15 November 1995)
Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100; 359 ALR 314
West Wake Price & Co v Ching [1957] 1 WLR 45
Woodlawn Capital Pty Ltd v Motor Vehicles Insurance Ltd [2016] NSWCA 28; 111 ACSR 377
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 321 Date of last submissions: 25 August 2021 Date of hearing: 19 – 22 April, 10 May, 4 June, 28 July and 29 September 2021 Counsel for the Plaintiff: Mr C Withers SC with Mr S Harford-Davis (19 – 22 April, 28 July and 29 September 2021)
Mr C Withers SC with Mr A D’Arville (4 June 2021)
Mr C Withers SC (10 May 2021)Solicitor for the Plaintiff: Holding Redlich Lawyers Counsel for the First Defendant: The First Defendant did not appear Counsel for the Second Defendant: Mr S Lawrance with Ms E Steer (19 – 20 April, 10 May, 4 June, 28 July and 29 September 2021)
Mr S Lawrance with Ms A Campbell (21 – 22 April 2021)Solicitor for the Second Defendant: Colin Biggers & Paisley Lawyers ORDERS
NSD 278 of 2019 BETWEEN: HAKEA HOLDINGS PTY LTD (ACN 116 147 436)
Plaintiff
AND: STEVEN JAMES MCGRATH
First Defendant
NEON UNDERWRITING LIMITED FOR AND ON BEHALF OF THE UNDERWRITING MEMBERS OF LLOYDS SYNDICATE
Second Defendant
ORDER MADE BY:
YATES J
DATE OF ORDER:
26 AUGUST 2022
THE COURT ORDERS THAT:
1.By 9 September 2022, the parties bring in agreed draft orders or, if not agreed, competing draft orders, giving effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
YATES J:
INTRODUCTION
This proceeding was commenced in the Supreme Court of New South Wales (the Supreme Court) on 24 April 2017 by the filing of a Commercial List Statement. The plaintiff, Hakea Holdings Pty Ltd (Hakea), alleges, amongst other things, that the first defendant, Steven James McGrath, who, at relevant times, was one of its directors, breached his duties to it. The alleged breaches are connected with the construction of a residential aged care facility on property owned by Hakea at 88 – 102 Louisiana Road, Hamlyn Terrace, New South Wales (the project). Hakea claims equitable compensation, or compensation pursuant to ss 1317J and 1325 of the Corporations Act 2001 (Cth) (the Corporations Act), from Mr McGrath in respect of those breaches. It also claims interest and costs.
On 15 September 2017, Mr McGrath filed a Commercial List Response. Since taking that step, he has played no active role in the proceeding. On 24 April 2018, he presented a debtor’s petition. The administration of his estate in bankruptcy under the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) commenced from that date. On 21 September 2018, the Federal Circuit Court of Australia made an order that, to the extent required, leave be granted to Hakea, pursuant to s 58(3) of the Bankruptcy Act, to continue with, and take fresh steps in, the proceeding.
For the period 23 January 2016 to 23 January 2017, Hakea held a Directors and Officers liability insurance policy (the policy). It was a “claims made” policy: see FAI General Insurance Co Limited v Australian Hospital Care Pty Limited [2001] HCA 38; 204 CLR 641 at [64] – [68]. The second defendant, Neon Underwriting Ltd (Neon), represents the underwriters of that policy (Lloyd’s Syndicate 2468). Hakea contends that the policy responds to its claim against Mr McGrath. Hakea seeks a declaration to that effect. Neon disputes liability under the policy on various grounds.
Hakea joined Neon to the proceeding and, on 29 January 2019, the proceeding was transferred to this Court by order of the Supreme Court. By then, Hakea had filed an Amended Commercial List Statement which pleaded its claim against Neon. The Amended Commercial List Statement was filed in this Court on 21 March 2019 as a non-prescribed summons. On 10 September 2019, Neon filed its defence. It amended its defence on 16 March 2021.
The hearing of the proceeding commenced on 19 April 2021. It was adjourned part-heard on 22 April 2021. Hakea subsequently sought leave to re-open its case to rely on further evidence. This evidence was directed to the issue of whether Hakea had made a claim against Mr McGrath during the period of insurance, in accordance with the policy—a question that remains in dispute.
On 18 June 2021, I concluded that leave should be granted to Hakea to re-open its case: Hakea Holdings Pty Ltd v McGrath [2021] FCA 660. On 22 July 2021, I made orders formally granting leave. On 28 July 2021, I made orders for the further conduct of the hearing of the proceeding on the question of liability. The hearing proceeded on 29 September 2021.
SUMMARY OF HAKEA’S CASE
In final submissions, Hakea advanced a case that Mr McGrath breached his duty to it under s 180(1) of the Corporations Act. However, in its Amended Commercial List Statement, Hakea alleged that Mr McGrath breached a number of other duties he owed to it, including fiduciary duties. This fact assumes importance because of a particular exclusion in the policy, on which Neon relies. I will return to Hakea’s pleaded case.
Mr McGrath’s alleged liability arises from the fact that, in addition to being a director of Hakea, he was also the sole director, shareholder, secretary, and general manager of Denham Constructions Pty Ltd (Denham). In short, he controlled Denham. On 12 October 2012, Denham entered into a contract with Hakea to design and construct the project (the building contract). However, on Hakea’s case, by 21 May 2015, Denham was either insolvent or in severe financial distress, such that it was not able to complete the project.
Hakea’s case against Mr McGrath is that a reasonable director in his position would or should have known that Denham’s financial difficulties prevented it from completing the project. As a director of Hakea, Mr McGrath should have informed Hakea of those difficulties and of its resulting contractual right to take the project out of Denham’s hands, without giving a notice to show cause under the building contract.
Hakea contends that, instead, Mr McGrath had his “head in the sand”, and made a series of representations reassuring Hakea that Denham could complete the project. Hakea says that, had it known the full circumstances, it would have: taken over the project by 22 May 2015; appointed a new builder by no later than June 2015; and completed the project by 22 December 2015.
Hakea says that, because of Mr McGrath’s misleading omissions and representations, it did not terminate the building contract until December 2015 and did not engage another contractor until 20 January 2016. As a consequence, the project was not finished until 30 June 2016—282 days after the original completion date. Hakea says that it suffered loss as a result of the delay and because certain rectification work was required to be undertaken.
FINDINGS OF FACT
The contractual arrangements
The contractual arrangements relevant to the case are to be found in four written agreements.
The first agreement is the building contract. As I have said, this contract was entered into on 12 October 2012. It was a lump sum contract for $17,700,000.00 (excluding GST) payable in separable portions ($400,000.00 and $17,300,000.00). The terms of the contract were those in Amended AS4902—2000 General conditions of contract for design and construct.
Under those terms, Denham was obliged to carry out and complete the Works (as defined): cl 2.1. Denham could claim payment progressively by progress claims: cl 37.1. Payments would be made on the basis of progress certificates issued by the Superintendent (as defined): cl 37.2. The work was to be carried out and completed in accordance with a program from which Denham could not depart without reasonable cause: cl 32.
Denham was to ensure that the work reached practical completion by the date for practical completion. In Part A to the building contract the period of time for practical completion was specified as 74 weeks. Under a written agreement dated 6 June 2014, this was subsequently varied to 11 June 2015. Other evidence indicates that this date was extended to 1 September 2015, and later. If the Works did not reach practical completion by the date for practical completion, Denham was liable to Hakea for liquidated damages at the rate of $2,500.00 per day commencing from the date six weeks after the date of practical completion. This rate was stipulated in a written agreement dated 20 January 2014 that was entered into by Hakea and Denham to amend the building contract.
Denham was obliged to rectify defects in accordance with written directions from the Superintendent. If failures were not made good, Hakea could have the work carried out by others, with the certified cost thereof standing as money due by Denham to Hakea: cl 29.3.
From June 2014, the Superintendent appointed for the purposes of the building contract was David Barry of Caverstock Group Pty Ltd (Caverstock). Mr Barry was also the project manager. In these roles, Mr Barry’s practice was to attend the building site on a weekly basis.
If Denham committed a substantial breach of the building contract (cl 39.2), Hakea could give Denham a notice to show cause why Hakea should not exercise its rights under cl 39.4 to either terminate the contract (cl 39.4(b)) or take out of Denham’s hands the whole or part of the work remaining to be completed (in which case, Hakea could also suspend payment under the contract) (cl 39.4(a)).
Clause 39.11 provided, relevantly:
39.11 Insolvency
If:
(a) a party informs the other in writing, or creditors generally, that the party is insolvent or is financially unable to proceed with the Contract;
(b)execution is levied against a party by a creditor;
…
then, where the other party is:
(A)the Principal, the Principal may, without giving a notice to show cause, exercise the right under subclause 39.4(a); …
These rights and remedies were expressed to be additional to any other rights and remedies. Further, they could be exercised notwithstanding that there had been no breach of contract.
As I have noted, on Hakea’s case, had Mr McGrath acted as a reasonable director, the rights and remedies given by cl 39.11 could have been exercised by it from on or around 22 May 2015.
The second agreement was a loan agreement, which was entered into by Hakea (as borrower) and Stevden Properties Pty Limited (Stevden) (as lender) on 16 April 2013. Denham was also a party to this agreement. Mr McGrath was Stevden’s sole director and secretary.
Under the loan agreement, Stevden agreed to advance $2,000,000.00 (the principal amount) to Hakea, which was payable on the date of practical completion referred to above: cl 1.3(a). Clauses 1.3(b) – (c) provided that, if Stevden failed to advance the principal amount, Hakea could set-off the principal amount from the separable portion of $17,3000,000.00 payable to Denham under the building contract.
The written agreement of 20 January 2014 referred to above also provided that Hakea was not required to pay progress claims to Denham where the remaining value of the contract sum was equivalent to the principal amount of the loan. This was expressed to be for the purpose of assuring payment of the principal amount by Stevden: cl 3.1.1.
The third agreement was a shareholders agreement, which was entered into by a number of parties, including Hakea and Stevden, on 7 May 2013. Under that agreement, Stevden agreed to advance $2,000,000.00 to Hakea as a shareholder loan, for which it would be issued 196 shares, representing 16.33% of all shares on issue. Stevden was also entitled to appoint a director. It appointed Mr McGrath. Clause 5.3 of the shareholders agreement provided that Stevden was not obliged to pay this loan until the date of practical completion under the building contract—reflecting the arrangements under the loan agreement to which I have referred.
The shareholders agreement contained a broadly expressed provision that forbade each shareholder from using Confidential Information in a way that damaged, or was reasonably likely to damage, Hakea and certain others: cl 4.1(c). The expression Confidential Information was defined in cl 1.1 of the shareholders agreement in very wide terms:
‘Confidential Information’ means the information, forms, specifications, processes, statements, formulae, trade secrets, drawings and data (and copies and extracts made of or from that information and data) concerning:
(a)the operations and dealings of the Company, the Operator or the Business and a Shareholder;
(b)the organisation, finance, customers, markets, suppliers, intellectual property and know-how of the Company, the Operator or the Business and a Shareholder and of a Related Body Corporate of the Company or the Operator or the Business and a Shareholder; and
(c)those operations and transactions of a Shareholder concerning Company, the Operator or the Business and that Shareholder’s shareholding in the Company, which is not in the public domain, except by the failure of a party to perform and observe its covenants and obligations under this document and which has been obtained through or by being a member of the Company about the Company or the operations or activities of the Company.
The expression Related Body Corporate was defined in cl 1.1 by reference to s 50 of the Corporations Act.
The shareholders agreement also contained a provision that required the Board to: use its best endeavours to procure that Hakea prepare and provide management information and reports to its directors; and make available to all directors all information concerning the Business (being, relevantly, the construction and conduct of the aged care facility at Hamlyn Terrace): cl 8.6.
As I discuss below, Hakea contends that the effect of these provisions was to place Stevden under a contractual obligation to provide information to Hakea and the directors concerning Denham’s financial affairs that were relevant to the construction of the project, as that information became available. It contends that, although Mr McGrath was not a party to the shareholders agreement, he was Stevden’s nominee and that this fact informs the content of the duties he owed to Hakea.
The fourth agreement was styled a Building Tripartite Deed, which was entered into by Denham (as the builder), Hakea (as the borrower), and National Australia Bank Limited (NAB) (as the lender) on 10 March 2014. Under this deed, Denham was not entitled to any payment under the building contract, and NAB was not obliged to make any payment to Hakea or Denham, for plant or materials onsite and unfixed until Denham demonstrated to the Quantity Surveyor’s satisfaction (being a quantity surveyor appointed or approved by NAB) that the plant or materials had not been unreasonably ordered and delivered in advance of the program under the building contract: cl 8.5(a).
The quantity surveyor appointed for the purposes of the Building Tripartite Deed was Slattery Quantity Surveying (Slattery). Slattery produced monthly progress reports in support of Denham’s payment claims. These reports are referred to below.
The progress of the project and Denham’s declining financial position
The evidence establishes the following facts concerning the progress of the project and Denham’s financial position.
In late 2013, Denham commenced construction work on the project. When Mr Barry commenced his role as Superintendent under the building contract and as project manager in June 2014, the project appeared to him to be a typical project in its inception and progress. Denham had subcontracted the whole or the majority of the works to Denham Constructions Project Company 890 Pty Ltd (Denham 890). Mr McGrath was the sole director of this company in the period 8 December 2014 to 14 June 2015.
Progress on the project began to slow in the latter part of 2014 at a time when Denham began to experience difficulty meeting its taxation obligations. I note that, according to Denham’s Running Balance Account with the Australian Taxation Office (ATO), its tax liability of $115,736.34 as at 23 June 2014 had substantially increased to $1,242,969.48 as at 7 August 2014.
On 24 October 2014, Slattery issued Progress Report No. 16. In that report, Slattery stated:
The works are not progressing as quickly as we would have anticipated, however, the Contractor is aware of this and is pushing for more resources from its subcontractors to ensure that progress is improved to meet the required milestones. The Contractor is to issue a revised program by the end of November 2014 to show how it plans on achieving the revised Contract Completion Date of 19 June, 2015.
This was the first time that Slattery had made such an observation about the project. Hakea’s Chairman, Mr Pardy, read this report. He did not consider this observation to be of concern at the time because there were no other reported difficulties on site and he noted Slattery’s reference to Denham’s efforts to overcome the apparent slowdown.
However, unbeknown to Hakea, on 30 October 2014 Denham defaulted on a payment arrangement it had with the ATO, which required it to pay $300,000.00 as a part payment to extinguish its tax debt. The ATO regarded this default to be a serious matter. On 17 November 2014, a Case Officer recorded that Mr McGrath was requested to provide, by close of business that day, a payment proposal which addressed Denham’s capacity to pay. The ATO’s case notes record that Mr McGrath was advised that recovery action would be commenced without further notice if the ATO did not receive this information.
On 25 November 2014, Mr McGrath made a payment proposal to the ATO. By that time, Denham owed a tax debt of $930,311.52. The proposal was that Denham would pay $250,000.00 plus $142,731.00 by no later than the end of November 2014; $250,000.00 by 31 December 2014 or early January 2015; and the balance by the end of January 2015.
On 27 November 2014, Slattery issued Progress Report No. 17. In that report, Slattery repeated the observation it had made in Progress Report No. 16. Mr Pardy read this report. Once again, he did not consider that this observation raised any significant matters of concern, especially absent any indication from Mr McGrath that there were problems with the project.
On 2 December 2014, the ATO wrote to Denham advising that it would accept instalment payments for Denham’s, then, owed tax debt of $939,199.56 as follows: $392,731.00 on 3 December 2014; $250,000.00 on 7 January 2015; and $296,468.56 on 7 February 2015. The letter stated that Denham’s failure to meet this arrangement (and other conditions which the ATO imposed) may result in the commencement of legal action without further notice. The evidence reveals that Denham only made the December 2014 payment. The failure to make the payment for January 2015 meant that, from that time onwards, Denham was at risk that the ATO would take legal action against it, without notice.
On 10 December 2014, Slattery issued Progress Report No. 18. In that report, Slattery stated:
As previously reported the works are not progressing as quickly as we would have anticipated. The Contractor is aware of this but has not yet provided the Superintendent and ourselves with a copy of its revised program which was due at the end of November 2014, to show how they plan on achieving the revised Contract Completion Date of 19 June, 2015. We will provide details of our assessment of the viability of this program when we receive it.
Progress did not improve. On 23 January 2015, Slattery issued Progress Report No. 19. In that report, Slattery repeated its observation that works were not progressing as quickly as it anticipated. Importantly, Slattery added that the works were “running significantly behind projected cash flow”, thereby indicating that not enough resources were being spent on site.
On 24 February 2015, Slattery issued Progress Report No. 20. By this time, Denham had provided its revised program to indicate how it planned on achieving the revised contract completion date of 31 July 2015. However, Slattery noted that the works were still running significantly behind projected cash flow.
In around March 2015, Denham began to fall significantly behind schedule. Mr Barry reported this fact to Mr Pardy in March 2015. He referred to it as “a concerning lack of construction activity on the site”. According to Mr Barry, this was reflected in the payment claims submitted by Denham in March and April 2015. Mr Barry’s evidence was that, for the size of the project, a competent contractor in Denham’s position would be expected to complete more than $1,500,000.00 worth of work per month in the middle of the project. However, the value of work completed by Denham in the March and April 2015 claim periods was assessed as $370,863.33 and $274,920.22, respectively.
Mr Barry said that, at this time, he not only observed a significant drop in the work activity on site, but also a significant drop in the attendance on site by subcontractor employees.
On 20 March 2015, the ATO gave a statutory notice to Australia and New Zealand Banking Group Limited (ANZ) under s 260-5 of Sch 1 of the Taxation Administration Act 1953 (Cth) (a statutory garnishee notice) requiring it to deduct money to the value of $890,114.61 from any account held by Denham with the bank and to pay that money to the Commissioner of Taxation. Hakea contended that the giving of this notice constituted execution being levied against Denham by a creditor, thereby triggering Hakea’s rights under cl 39.11(b) of the building contract, which included its right to take out of Denham’s hands the whole or part of the work remaining to be completed. Hakea contended that a reasonable director in Mr McGrath’s position would have been familiar with the importance of cl 39.11 of the building contract and would have told Hakea about these matters.
Mr McGrath knew about the garnishee notice shortly after it was given because, on 24 March 2015, he contacted the ATO and discussed it with a Case Officer. Also on 24 March 2015, a solicitor acting on behalf of Denham contacted the ATO and requested that the garnishee notice be lifted so that Denham could pay its employees. The ATO’s case notes record that, at that time, Denham had a taxation debt of $1,786,144.32. Importantly, when asked when Denham’s taxation debt could be paid in full, the solicitor advised that the debt could not be paid in full, although Denham could make an immediate payment of $100,000.00. The solicitor also advised that Denham wanted to set up a further payment plan. The request to lift the garnishee notice was refused.
On about 23 March 2015, Denham transferred all its employees to another company then called DCPC 760 Pty Ltd (Denham 760). Although internal correspondence within the Hakea Group (written by Mr McGrath) refers to this change as “restructuring the company for efficiencies and the future direction of the company with respect to development alliances”, the timing of this change is conspicuous as it coincides with the ATO’s issue of the garnishee notice on ANZ and Denham’s stated inability to pay its employees from that account because of that notice.
I also note that, on 23 March 2015, Denham raised an invoice (Invoice No 890-21) on Hakea for Progress Claim No. 21, requesting payment into Denham’s account with ANZ. However, on 20 April 2015, Denham raised an invoice (Invoice No 890-22) on Hakea for Progress Claim No. 22—this time requesting payment into Denham’s account with Commonwealth Bank of Australia (CBA). I infer that this request was made to avoid the consequences of the statutory garnishee notice given to ANZ.
On 26 March 2015, Slattery issued Progress Report No. 21. This report repeated the observations made in Progress Report No. 19 and Progress Report No. 20, noted above.
It appears that, following the approach to the ATO on 24 March 2015, Denham made a payment offer to the ATO which involved a lump sum payment being made in late June 2015 from funds sourced from an anticipated finance facility, with further (unspecified) instalment payments being made at some later time. The ATO’s case notes record that “no set amount” for the lump sum payment was provided, and the amounts for the instalments were “not stipulated”. The case notes also record that, by 21 April 2015, Denham’s tax debt would escalate to $1,891,498.80. The case notes further record that Denham had defaulted in payment arrangements on a number of previous occasions. The notes state:
The offer is not clear and definite and without the supporting financial information requested cannot be determined if the business is viable to enter into a payment plan and/or clear the debt within a timeframe acceptable to the ATO.
On 13 April 2015, the ATO sent a letter to Denham rejecting the offer. The letter stated:
…
We have fully considered your offer but we are unable to agree to it in its current form.
We are unable to assess the viability of entering into an arrangement as the following information has not been provided.
•a proposal to pay all amounts owed to us in the shortest possible timeframe, while allowing all future tax obligations to be met by the due date
•the most recent statement for each bank of financial institution account held
•the following documents for the year to date and the two preceding financial years
₋detailed profit and loss statement or statement of financial performance
₋detailed balance sheet or statement of financial position
•details of any overdraft or loan facilities, including term loans, hire purchase and leasing facilities (include the balances owing, the monthly repayment amount for each debt commitment and the limit for overdraft/s)
•aged creditors listing
•aged debtors listing
•any other relevant information which may assist us in assessing your proposal
Therefore, the position by this time was that Denham could not pay its considerable tax debt in full, and the ATO had rejected its offer to pay that debt by instalments. The ATO’s case notes show that, on 13 April 2015, the decision had been taken to issue a demand to Denham under s 459E of the Corporations Act.
On 14 April 2015, a creditor of Denham 890 obtained a garnishee order from the Local Court of New South Wales at Newcastle for the sum of $82,618.77. The order named Denham as the garnishee. Hakea contends that the issue of this order was a separate event triggering cl 39.11 of the building contract.
On 14 April 2015, the ATO issued a garnishee notice to Denham in respect of Mr McGrath’s personal tax debt of $1,013,349.00.
On 21 April 2015, Slattery issued Progress Report No. 22. In that report, Slattery stated:
As previously reported the works are not progressing as quickly as we would have anticipated with the cash flow running majorly behind schedule. The Contractor is aware of this and is now revising the recently released program of works. This will indicate how it plans on achieving the revised Contract Completion Date of 12 August, 2015.
We have not as yet seen this revised program and we have serious concerns regarding the Contractors (sic) ability to meet the current Contract Completion Date.
On 28 April 2015, the ATO wrote to Denham noting that it may not have met its superannuation guarantee obligations for the period 1 October to 31 December 2014.
On 4 May 2015, a Deputy Commissioner of Taxation issued a demand to Denham under s 459E of the Corporations Act for the amount of $1,812,615.05. The evidence shows that, in the period 6 May 2015 to 20 November 2015, 13 further statutory demands were issued on Denham by other creditors.
On 6 May 2015, Mr Barry received a Notice of Delay from Denham under cl 34.2 of the building contract for the period from 24 February to 29 May 2015 (94 days). The notice was sent by Neil Nguyen, Denham’s Project Director. The cause for the delay was attributed to:
Relocation of Existing Authority Services on Louisiana Road
Throughout May 2015, Mr Pardy was becoming concerned about the delay to the progress of the project. On 20 May 2015, he sent an email to Mr McGrath raising the question of a new revised date for practical completion, which Denham had proposed as 13 October 2015. In his email, Mr Pardy said:
…
Revised Date for Practical Completion
Neil has prepared a revised critical path (attached for clarity) which is looking at a revised date for practical completion on or about 13 October 2015.
I think where we are before the revised critical path was a practical completion date of about 3 September 2015.
From my perspective, the real issues taking us to 13 October 2015 is the Louisiana Road upgrade, contractor problems, and re-energising the project with tradies.
Neil has issued, and I don’t think you were across this when we spoke, five claims for principal delays totalling $1,964,000.00. I know this is a defensive strategy under the Construction Contract.
In the relationship, I know that neither of us want these issues addressed by reference to the technicalities of the Contract.
The Way Forward
I would like a revised date for practical completion agreed between us. I would like to bring the 13th October 2015 back to 30 September 2015 – but I am happy to discuss.
My concern here is that I want Hakea to get a three month run at getting residents in before Christmas. If we can’t do it by 30 September 2015 – then we can’t – but I want to discuss it with you.
…
It seems that Mr Pardy and Mr McGrath discussed this email that evening. On 21 May 2015, Mr McGrath sent an email to Mr Pardy in which he attributed the previous delays in the project to five matters, identified in the email as:
A. Nurse call and subsequent changes
B.FF&E
C.Ongoing changes to Design
D.Dementia location
E.Kitchen and Laundry changes
In his email, Mr McGrath also acknowledged a delay caused by a plastering contractor. He said, however, that:
… a new contractor has been appointed and the project has been flooded with staff and the delay has been nearly fully recovered.
Mr Pardy accepted Mr McGrath’s explanation for the delays in the project. Conspicuously, Mr McGrath’s email made no reference to Denham’s obvious financial difficulties at this time, including the fact that the ATO’s statutory demand had been made.
Hakea contends that this was the last point at which a reasonable director, in Mr McGrath’s position, should have known, and should have informed Hakea, that it (Hakea) had the power under cl 39.4(a) to take the Works out of Denham’s hands. Hakea contends that Mr McGrath should have known, and should have informed Hakea, that this power had been triggered as a result of execution being levied against Denham and because, by this time, Denham was insolvent or financially unable to proceed with the building contract: see cl 39.11(a).
Hakea contends, further, that, by his email of 21 May 2015, Mr McGrath represented that Denham could complete the works by 13 October 2015.
Mr Barry’s evidence was that there was an increase in activity on the site in June 2015 compared to previous months, but not to the level that he would have expected for that period of the project. Progress Report No. 24 issued by Slattery on 23 June 2015 noted:
The Superintendent has informed us recently that trade numbers on site has increased in the last two weeks, particularly in regards to the partitioner, indicating that the Contractor is beginning to make efforts to get back on track.
The report also stated:
We have been advised the current construction programme currently shows a completion date of 15 October, 2015. This is significantly beyond the current Practical Completion (PC) date of 1 September, 2015. The revised construction programme date is based on the estimated additional time that it will take to complete services relocation works associated with the road widening works. The Superintendent is currently reviewing the impact of this in terms of time and costs. Once the Superintendent has completed his review we will comment further on this.
Despite the increase in activity on site in June 2015, progress on the project soon slowed again.
Hakea relies on an expert report prepared by Tamara Lindsay, a Chartered Accountant and forensic accountant. Ms Lindsay was initially asked to opine on whether, and if so when, Denham was insolvent. She was also asked to opine on whether, and if so when, Denham first showed obvious signs of severe financial distress that would/could affect its operations.
Ms Lindsay was not able to ascertain whether, in fact, Denham was solvent or insolvent as at 30 June 2015, because she did not have all the necessary financial information to make that assessment and because the financial information she did have was, in her view, likely to be inaccurate. However, by reference to a table listing indicia of insolvency, and by reference to certain documents provided to her, Ms Lindsay did express the opinion that, by 30 June 2015, Denham was experiencing “severe financial distress”. This fact is not disputed.
On 23 July 2015, Mr McGrath sent an email to Mr Barry (with a copy to Mr Pardy and others including Mr Nguyen from Denham) seeking a meeting “to discuss [the] program and risks to the project”.
A meeting was held on 30 July 2015 at Caverstock’s office in Sydney. Mr Pardy and Mr Christopher Di Losa (one of Hakea’s directors) attended on behalf of Hakea. Mr McGrath and Mr Nguyen attended on behalf of Denham. Others were in attendance.
At the meeting, Mr Pardy asked:
Why have there been continuing delays on the project? What are the problems?
Mr McGrath responded:
There have been some disputes with trade subcontractors, however, these disputes have now been resolved. Subject to extensions of time that may be required in the future, we will meet the revised program that we have prepared.
A revised program from the project was tabled, with a date of practical completion of 17 November 2015. When asked whether the revised date of 17 November 2015 could be met, Mr McGrath said that it could. Mr Pardy expressed his preference for a completion date of 30 October 2015.
On 3 August 2015, Mr McGrath sent an email to Mr Pardy. In that email, Mr McGrath thanked Mr Pardy for the meeting, which Mr McGrath described as “a productive session identifying ALL project risks for both Hakea and Denham”. (Original emphasis.) Once again, conspicuously, Mr McGrath made no reference to Denham’s financial difficulties.
On 27 August 2015, at a meeting of Hakea’s directors, Mr McGrath said:
Denham will meet the current program. Hakea should be able to commence its fit out by 30 October 2015.
On 26 October 2015, Mr McGrath sent an email to Mr Pardy and Donald Ross (also one of Hakea’s directors) concerning delays to the project. Mr McGrath said:
I have spoken with Neil pash and Neil n
They are resolving site resources now and have it ramped up within the week or so
If the project is delayed its denham fault and the provisions of the contract should apply In terms of delay costs …
(As in original.)
On the evening of 27 October 2015, Mr Pardy had a telephone conversation with Mr McGrath. The conversation concerned Stevden’s loan of $2,000,000.00 that was to be made under the loan agreement. Mr McGrath informed Mr Pardy that he expected to make a “contribution” of $500,000.00 within the next 10 days, but that the balance of $1,500,000.00 would be funded by way of set off against the contract sum: see [23] above. In the course of that conversation, Mr Pardy asked Mr McGrath about unpaid trade creditors. Mr McGrath said that there was a dispute with two trade creditors. However, unpaid trade creditors would not operate to prevent the ramp up which, Mr McGrath had previously said, would occur within the week or so.
By October 2015, there was minimal activity on site and, by early November 2015, all substantive work on the project had ceased.
On 4 November 2015, Mr Pardy circulated an email to those who were to attend a meeting with representatives of Denham on 5 November 2015. In that email, Mr Pardy said (with respect to the revised program that Denham had submitted on 30 July 2015):
It is clear that the last 4 months has seen an inability in Denham’s (sic) to perform the project at the ramped up scale required of them under the Revised Program.
In cross-examination, Mr Ross confirmed that, prior to 5 November 2015, he and some of the other directors of Hakea had been discussing the fact that Denham was having liquidity problems. On 18 September 2015, an article appeared in The Canberra Times under the headline: Subcontractors seek assurances from Bupa for work on Canberra aged care facility. The article said:
A peak body that represents subcontractors says some Canberra businesses are collectively owed hundreds of thousands of dollars in certified claims by builders Denham Constructions.
The article continued:
Subcontractors’ Alliance spokesman Les Williams said Canberra businesses, in a variety of trades, that are owed money for work on the project had urged Bupa to take action against Denham Constructions in a bid to secure payment.
Correspondence with Bupa, shown to Fairfax Media, show the international healthcare group had been told that the builder had set up a shelf company, Denham Construction Project Company 940 Pty Ltd, to engage subcontractors.
Businesses feared this company could then be folded and they would be left out of pocket.
Subcontractors asked Bupa to not release further funds to the builder and the money instead be used to directly pay businesses that had been put under financial stress as a result of the disputes.
A link to the article was circulated by Mr Watson (one of Hakea’s directors) to Mr Pardy, Mr Ross, Mr Di Losa, Mr Pearse and Mr Yeo (who were also directors of Hakea) on 28 October 2015. Mr Pardy said in cross-examination that he discussed this article with them.
At the meeting on 5 November 2015, which involved representatives from Hakea, Denham, and Caverstock, the representatives from Denham (Neil Pash and Neil Nguyen) disclosed, for the first time, that Denham had liquidity problems. The minutes of that meeting record that:
1 The meeting had been requested by Hakea to understand the delays that are occurring with the completion of the project at Hamlyn Terrace.
2 Neil Pash advised that Denhams had been suffering from lack of liquidity and this had impacted on the project. He stated that he hadn’t been involved as he had been completing a project in ACT.
3 Neil Nguyen confirmed that the subcontractors would not return to the job because they had not been paid.
4 Neil Pash advised that Steve McGrath was in the process of fixing the liquidity problem and that he had been advised that funds would be available on 16 November 2015. On that basis the payment issue would be rectified and the site should start to ramp up by the following week.
5 Neil Pash was asked whether Denhams would be able to complete the project. Neil stated that they could based on the liquidity issue being rectified. Neil confirmed that Steve McGrath has agreed to compensate Hakea $85k for costs (bank finance issue) incurred with the delays which had been caused by Denham. Neil further stated that he and the executive could not comment any further as the funding issue was being addressed by Steve who owns and controls the business.
6 Based on funding occurring as in point 4 Neil Nguyen stated that the project would be completed by March 2016. Neil was asked if this could be fast tracked. He stated that it could by paying subcontractors on a fortnightly basis and working weekends. He stated that the subcontractors are long term contractors and they just wanted payment.
7 A program was tabled and the representatives from Caverstock viewed the program.
8 Neil Nguyen advised that he would issue the program to Caverstock by the next day.
9 The delay for the construction of the right hand turn lane into the property from Lousianna Rd was discussed. Neil Nguyen advised that NBN wanted $60,000 upfront to process the application and Denhams didn’t have the money and this was the reason that the relocation application for the fibre cable had not been proceeded.
10 It was suggested that if Hakea was aware of this issue then they could have funded the application fee to assist Denhams.
11 The representatives from Denhams made it clear that they could only make comment on the program on the basis that Steve McGrath would be providing the funding in the week of 16 November 2015.
12 The meeting closed at 12.10pm with Denhams confirming that the program would be supplied to Caverstock by the end of the week.
Mr Pardy said that this disclosure by Denham led him to be very concerned about its liquidity and capacity to finish the project in a timely manner. On 11 November 2015, he had a telephone conversation with Mr McGrath in which Mr McGrath said that he had “resolved the liquidity issues”; that Denham could complete the project with a $1,500,000.00 set off; and that Denham would reimburse Hakea for the interest that Hakea was incurring under its facility with NAB. However, Hakea’s attempts, in the period 12 to 20 November 2015, to document Denham’s offer to reimburse interest failed.
As it happens, on 11 November 2015, Denham submitted Progress Payment Claim No. 29 for works completed to 31 October 2015. The claim was for $409,869.78 excluding GST. Mr Barry’s evidence is that he was surprised by the amount of the claim given the negligible activity he had observed on site for the relevant period. The claim was disproportionately large compared to other claims in respect of which there had been more activity on site.
Mr Barry decided to conduct a thorough site inspection and assessment of the progress of the work. He attended the site on four occasions in December 2015 to review the amount of work performed against the amount claimed in Progress Payment Claim No. 29. He also took the opportunity to check on previous items paid to Denham against the percentage of the work assessed as having been completed at that time.
As matters transpired, Mr Barry revalued the work that, previously, had been certified. He formed the view that Denham had over-claimed the amount of work it had completed, and that Denham had been overpaid. As a result, he certified Progress Payment Claim No. 29 for a negative amount.
Having failed to document Denham’s offer to reimburse Hakea for the additional interest it was incurring under its facility with NAB, Mr Pardy began the process of terminating the building contract. He instructed Mr Barry to commence looking for a replacement builder.
On 1 December 2015, Hakea issued a notice to show cause under cll 39.2 and 39.3 of the building contract. The notice listed a significant number of matters which Hakea regarded as substantial breaches of the building contract by Denham, including its failure to proceed diligently with the work (which, amongst other things, involved its departure from the program without reasonable cause or the Superintendent’s approval); its failure to respond to correspondence and requests from Hakea and the Superintendent concerning the progress of the work; its misrepresentation as to the progress of the work; and its submission of a materially deficient program for the work. The notice stated that, based on these matters, Hakea had formed the view that Denham was no longer ready, willing, and able to perform the building contract.
On 2 December 2015, Denham issued a notice of dispute under cll 41.1 and 42.2. On 9 December 2015, it attempted to show cause in response to the notice that Hakea had served. Its attempt did not satisfy Hakea. On 10 December 2015, Hakea issued a letter of termination under cl 39.4 and terminated the contract.
Given the time of year, it was difficult for Hakea to contact builders to discuss working on the project. However, in the latter part of January 2016, Hakea engaged Insight Building Services Pty Ltd to complete the project under a Construction Management Agreement. The project reached practical completion on 30 June 2016.
On 1 September 2016, the Supreme Court made an order that Denham be wound up.
Mr Pardy gave evidence that had he been informed at any time after the building contract had been entered into that Denham was in severe financial difficulty, or was insolvent, he would have immediately commenced steps to terminate the building contract or, if the contract could not be terminated, to exercise such other rights as Hakea may have had to take the work out of Denham’s hands and procure another builder to complete the work. He said that he did not discover that Denham was in severe financial distress, or insolvent, until sometime after March 2016.
The other directors of Hakea gave similar evidence. Mr Ross (who was also Hakea’s Managing Director at all relevant times), Mr Di Losa, Mr Pearse, and Mr Watson each said that had he been informed at any time after the building contract had been entered into that Denham was in severe financial difficulty, or was insolvent, he would have immediately recommended that Hakea terminate the building contract and procure another builder to complete the work. Each said that he did not discover that Denham was in severe financial distress, or insolvent, until sometime after March 2016.
THE PLEADED CLAIMS AGAINST MR MCGRATH
In its Amended Commercial List Statement, Hakea alleges that, on 15 July 2013, Mr McGrath became one of its directors and the Deputy Chairman of its board. Hakea alleges that Mr McGrath owed it fiduciary duties to: act in its best interests; not to make improper use of his position as a director to gain an advantage for himself or Denham or to cause detriment to it; and to avoid a conflict between his personal interests and his duties to it. These duties included a duty to make full and complete disclosure to Hakea about all material information of which Mr McGrath was aware that could impact on Denham’s ability to perform its obligations under the building contract, including information about its true financial position (referred to as the Duty of Disclosure).
Hakea alleges that by misleading it, and failing to disclose Denham’s true financial state, Mr McGrath breached these fiduciary duties. It also alleges that Mr McGrath breached the statutory duties imposed on him by ss 180(1), 181(1), and 182(1) of the Corporations Act.
Section 180(1) of the Corporations Act provides:
(1)A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a)were a director or officer of a corporation in the corporation's circumstances; and
(b)occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Note:This subsection is a civil penalty provision (see section 1317E).
Section 181(1) provides:
(1)A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
Note 1: This subsection is a civil penalty provision (see section 1317E).
Note 2: Section 187 deals with the situation of directors of wholly-owned subsidiaries.
Section 182(1) provides:
(1)A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
Note: This subsection is a civil penalty provision (see section 1317E).
Hakea’s allegations are developed in other paragraphs of its Amended Commercial List Statement by reference to a series of pleaded representations and omissions.
First, Hakea alleges that, in his email of 21 May 2015 (see [61] – [65] above), Mr McGrath represented that Denham could complete the works by 13 October 2015 (referred to as the May Email Representation). Hakea alleges that, at the time of the May Email Representation, Denham was insolvent, or suffering severe financial distress, and that Mr McGrath had no reasonable basis for representing that Denham could complete the works by 13 October 2015.
Secondly, Hakea alleges that, at the July meeting referred to in [71] – [75] above (the Amended Commercial List Statement alleges that the meeting was held on 31 July 2015, but Mr Pardy’s evidence was that the meeting was held on 30 July 2015), Mr McGrath represented that the issues with the trade subcontractors that Denham had been experiencing on the project had been resolved and that, subject to extension of time claims that Denham had made, Hakea could expect practical completion of the project by 17 November 2015 (referred to as the July Meeting Representations). Hakea alleges that, at the time of this meeting, Denham’s issues with its trade subcontractors had not been resolved. It alleges, further, that Denham was insolvent or suffering from severe financial distress and that Mr McGrath had no reasonable basis for making a representation that Denham would complete the project by 17 November 2015.
Thirdly, Hakea alleges that, at the meeting of its directors on 27 August 2015 (see [77] above), Mr McGrath represented that Denham could complete the project by 17 November 2015 (referred to as the August Meeting Representation). Hakea alleges that, at the time of the August Meeting Representation, Denham was insolvent or suffering financial distress and that Mr McGrath had no reasonable basis for representing that Denham could complete the project by 17 November 2015.
Fourthly, Hakea alleges that, in his email of 26 October 2015 (see [78] above), Mr McGrath represented that the issues that had been experienced on the site would be resolved within a week and that Denham could complete the project within a reasonable time (referred to as the October Representations). Hakea alleges that, at the time of the October Representations, Denham was insolvent or in severe financial distress and Mr McGrath had no reasonable basis for making a representation that the issues that had been experienced on-site would be resolved within a week and that Denham could complete the project within a reasonable time.
Fifthly, Hakea alleges that, at the meeting on 5 November 2015 (see [85] above), Mr McGrath caused or procured Denham’s employees to represent that: Denham was suffering from a lack of liquidity which was impacting the project; Mr McGrath was in the process of fixing those liquidity issues; the liquidity issues would be fixed within two weeks; and if the liquidity issues were fixed, Denham could complete the project by March 2016 (referred to as the November Representations). Hakea alleges that, at the time of the November Representations, Denham was insolvent or in severe financial distress and that Mr McGrath had no reasonable basis for making the November Representations.
Sixthly, Hakea alleges that, between March and October 2015, it paid a total of $3,386,232.38 to Denham for the purposes of the project (referred to as the Project Moneys). It alleges that all or most of this money was not used for the purposes of the project, and was subsequently lost to the plaintiff.
Hakea then alleges that, at no time prior to the termination of the building contract in December 2015, did Mr McGrath inform it that: Denham was insolvent or suffering severe financial distress; Denham’s insolvency or financial distress would or was very likely to prevent it from delivering the project; the Project Moneys or some of them had not been used for the purposes of the project; or that the Project Moneys or some of them were unlikely to be used for the purposes of the project in the future (referred to as the Financial Distress Omissions).
Hakea alleges that, in reliance on: the May Email Representations; the July Meeting Representations; the August Meeting Representation; the October Representations; and the November Representations—all of which were misleading representations—and by reason of the Financial Distress Omissions, it did not terminate the building contract but, instead, paid the Project Moneys to Denham.
Hakea alleges that, at the time that Denham became financially distressed or insolvent, Mr McGrath’s personal interests in Denham, and his duties as a director of Denham, came into conflict with the duties he owed Hakea as a director, including in respect of his Duty of Disclosure (which required him to disclose Denham’s true financial position to Hakea, even though his duties to Denham required him not to make that disclosure).
Hakea alleges that, by making these representations, and through the Financial Distress Omissions, Mr McGrath breached his fiduciary duties. The particulars of this allegation are important. They include the particulars that Mr McGrath preferred his personal interests over his fiduciary duties and that he sought to obtain an improper advantage for himself (through his interest in Denham) and for Denham. This is clearly an allegation involving deliberate conduct by Mr McGrath to obtain a personal advantage. Conspicuously, this and other similar aspects of Hakea’s pleaded case, were not pressed when Hakea opened its case on the first day of the hearing.
As to Mr McGrath’s statutory duties, Hakea alleges that, by making the representations, and through the Financial Distress Omissions, Mr McGrath failed to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise if that person were a director and Deputy Chairman of Hakea, in breach of the duty imposed by s 180(1) of the Corporations Act.
Importantly, Hakea alleges that, by making the representations, and through the Financial Distress Omissions, Mr McGrath failed to exercise his powers and discharge his duties in good faith in the best interests of Hakea and for a proper purpose, in breach of the duty imposed by s 181(1) of the Corporations Act.
Equally importantly, and with reference to the matters summarised above concerning Mr McGrath’s alleged breaches of his fiduciary duties, Hakea alleges that Mr McGrath improperly used his position as a director of Hakea to gain an advantage for himself and to cause detriment to the plaintiff, in breach of the duty imposed by s 182(1) of the Corporations Act. The particulars of this allegation include the claim that, through his position as a director of and shareholder in Denham, Mr McGrath stood to benefit personally from Hakea not terminating the building contract because of Denham’s insolvency or financial distress, and that Mr McGrath thus stood to benefit from his own failure to disclose those matters to Hakea. This is also an allegation of deliberate conduct by Mr McGrath.
Hakea alleges that, because of these various breaches, it lost the opportunity to terminate the building contract and engage another builder to complete the work at an earlier time, and that it lost some or all of the Project Moneys.
Finally, at all relevant times, Mr McGrath remained as one of Hakea’s directors. There is nothing in the evidence to which I have been taken that would suggest that the other directors had any concern as to Mr McGrath’s conduct—either generally or in relation to his non-disclosure of Denham’s financial circumstances—that would warrant his removal as a director or other action being taken against him, or that they had expressed any such concern to Mr McGrath himself.
As I have noted, Neon contended that the second exclusion applies because of Mr McGrath’s knowledge of Denham’s severe financial distress and inability to complete the building contract in a timely fashion. In the course of argument, the question of Hakea’s knowledge of those matters arose as a possible reason for applying the exclusion. To the extent that there is any lingering question in that regard, I am not satisfied that Hakea, itself, had knowledge, before the inception of the policy, of the breach of duty I have found.
CONCLUSION
I have found that Hakea has established that Mr McGrath breached his duty to it under s 180(1) of the Corporations Act. However, the policy does not respond to the loss that Hakea claims because the first exclusion is engaged. It follows that Hakea’s claim against Neon must be dismissed.
The parties should confer with a view to agreeing on the orders that should now be made, including as to costs between Hakea and Neon. I will direct that agreed draft orders or, if there is no agreement, competing draft orders, be brought in by 9 September 2022.
I certify that the preceding three hundred and twenty-one (321) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Yates. Associate:
Dated: 26 August 2022
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