Hakea Holdings Pty Ltd v McGrath (No 2) - [2022] FCA 995

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…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2022] FCA 995
Decision Date: 26 August 2022

CaseChat Overview and Summary

The Federal Court heard a case between Hakea Holdings Pty Ltd and McGrath, the latter being the sole director and shareholder of a building company. Hakea, the plaintiff, alleged that McGrath breached his director's duties under section 180(1) of the Corporations Act 2001 (Cth) by not disclosing the severe financial distress and inability of the building company to complete an aged care facility construction project. Hakea further claimed that McGrath's failure to disclose constituted a breach of his duty to avoid conflicts of interest and duty. The case also involved issues surrounding directors and officers liability insurance, specifically the "claims made" policy and exclusion clauses related to personal profit or advantage and prior knowledge of circumstances leading to loss. Additionally, the admissibility of previous representations made in affidavits in other proceedings as evidence was a point of contention.

The court had to determine if McGrath breached his duties under section 180(1) by failing to disclose critical information about the building company's financial situation, and if so, whether this breach also involved a conflict of interest or duty. The court also needed to decide if the insurance policy's "claims made" requirement was met by McGrath, and whether the exclusion clauses related to personal profit or advantage and prior knowledge of circumstances leading to loss were applicable. Furthermore, the court had to consider the admissibility of previous representations made in affidavits as evidence, under the Evidence Act 1995 (Cth).

The court found that McGrath did breach his duties under section 180(1) by failing to disclose the building company's severe financial distress and inability to complete the project. However, the court held that the insurance policy did not respond to the loss claimed by Hakea because the first exclusion applied. The court concluded that Hakea's claim against Neon must be dismissed and directed the parties to confer and agree on the orders to be made, including the allocation of costs between Hakea and Neon. By 9 September 2022, the parties were required to bring in agreed draft orders or, if not agreed, competing draft orders, giving effect to these reasons.

Orders

Orders of the court

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.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

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.

Ratio Decidendi

Legal Principle Established

Full text does not contain this section.

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…