Hanel v O'Neill

Case [2003] SASC 409

HANEL v O’NEILL
[2003] SASC 409

Full Court:  Mullighan, Debelle and Gray JJ

  1. MULLIGHAN J                The factual circumstances of this matter are set out in the reasons for judgment of Debelle J.  I mention only those matters which are relevant to the conclusions which I have reached.

  2. Section 197 of the Corporations Act 2001 (Cth) provides for the circumstances in which directors of a corporate trustee are liable for debts and other obligations incurred by the corporation in that capacity. The first question on this appeal is whether s 197(1) provides the basis of personal liability of the appellant to the respondent.

  3. At all material times the appellant was the sole director of Daroko Pty Limited (“Daroko”), the trustee for the Daroko Unit Trust. Forcett Pty Limited (“Forcett”) was the trustee of the Kerry Hanel Investments Trust and is a beneficiary of the Daroko Unit Trust. No rent was paid by Daroko to the respondent after 22nd August 2001 when $1,000 was paid and was expressed to be the “final payment” under the lease. Before 30th June 2001, the Daroko Unit Trust made a profit of $512,617 and Daroko paid that amount to Forcett Pty Limited as trustee for the Kerry Hanel Investment Trust on or before 30th June 2001 with the consequence that Daroko and the Daroko Unit Trust are without assets. The appellant and members of his family are the directors of Forcett. As the sole director of Daroko, the appellant caused that payment to be made. At that time the lease of the premises was extant and Daroko had not been discharged from liabilities under the lease even though there were no arrears of rent. Daroko could not unilaterally bring the lease to an end before the term had expired as the respondent was not in breach of the lease.

  4. The respondent asserted that the purpose of the payment was to defeat his rights as a creditor of the Daroko Unit Trust. The learned Magistrate did not make any finding about that assertion as such a finding was not necessary for the purposes of her decision.

  5. On 24th January 2002 the appellant wrote to the respondent and informed him that Daroko had not traded for 18 to 20 months and had no funds and no assets. There was further correspondence between the parties. The appellant alleged that he and his family had lost a substantial sum when the Wendy’s franchise was lost which was the reason for purporting to terminate the lease.

  6. The respondent commenced legal proceedings in the Magistrates Court against Daroko on 26th June 2002 claiming $23,132.62 for the costs associated with obtaining a replacement tenant for the property which Daroko had leased from the respondent. The respondent obtained judgment in default, presumably of appearance, for that amount against Daroko on 30th July 2002. On 12th September 2002 the appellant informed the Magistrates Court that Daroko was unable to pay that judgment sum and the appellant commenced proceedings…

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Hanel v O'Neill [2003] SASC 409
Case
[2003] SASC 409
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CaseChat Overview and Summary

The appeal is from an order made on an application for summary judgment. The respondent, Mr John O’Neill, owns a shopping centre on Belair Road, Kingswood. Daroko Pty Ltd, a tenant in the shopping centre, was owned by the appellant, Mr Kerry Hanel. The lease held by Daroko was to expire on 30 September 2003. By letter dated 15 March 2001, Hanel gave notice on behalf of Daroko that Daroko intended to vacate the premises on 30 June 2001, two years and three months before the expiry of the lease. On 30 June 2001, Daroko vacated the premises. On 30 July 2002, O’Neill obtained judgment in the Adelaide Magistrates Court in the sum of $23,132.62, being the costs associated with obtaining a tenant to replace Daroko, which had acted in breach of the lease arrangement.

The appeal concerns the legal issues arising from the application for summary judgment and the interpretation of s 197 of the Corporations Act 2001. Specifically, the court needed to determine whether Mr Hanel, as the sole director of Daroko, was personally liable for the judgment debt incurred by Daroko when it failed to discharge its liability to Mr O’Neill. The primary issue was whether Daroko was entitled to be fully indemnified against the liability out of the assets of the Daroko Unit Trust, as provided in Clause 21 of the trust deed. The court had to consider whether the appellant was liable for the debt under s 197(1) of the Corporations Act 2001, given that the trust had no assets due to the appellant's actions.

The court found that the first three conditions for personal liability under s 197(1) were clearly established. The appellant was a director of Daroko when it incurred the liability and it did so while acting as trustee for the Daroko Unit Trust. The liability was not discharged, and the issue centred on whether Daroko was entitled to be fully indemnified against the liability out of the assets of the Daroko Unit Trust. Clause 21 of the trust deed provided a legal basis for the indemnity, but the undisputed facts showed that the trust was without funds due to the appellant's conduct. The court held that it would be a strange result if s 197(1)(b) was interpreted to allow a director to escape personal liability by ensuring that a provision, such as Clause 21, was contained in the trust deed and could operate as a shield against personal liability, even though the director caused the trust to be without funds to avoid paying the debt. Consequently, the court found that the appellant was personally liable for the debt under s 197(1) of the Corporations Act 2001.

The appeal was dismissed, and the order of the magistrate was affirmed.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

MULLIGHAN J DEBELLE J GRAY J
The appeal is from an order made on an application for summary judgment. The facts leading to the application for summary judgment are as follows.A Judgment for Damages The respondent, Mr John O’Neill (“O’Neill”), owns a shopping centre on Belair Road, Kingswood. Daroko Pty Ltd (“Daroko”) was a tenant in the shopping centre. The appellant, Mr Kerry Hanel (“Hanel”), is and was at all material times the sole director of Daroko. Daroko is the trustee of the Daroko Unit Trust. The lease held by Daroko was to expire on 30 September 2003. By letter dated 15 March 2001, Hanel gave notice on behalf of Daroko that Daroko intended to vacate the premises on 30 June 2001. That was some two years and three months before the expiry of the lease. On 30 June 2001 Daroko vacated the premises. On 30 July 2002, O’Neill obtained judgment in the Adelaide Magistrates Court in the sum of $23,132.62, being the costs associated with obtaining a tenant to replace Daroko which had acted in breach of the lease arrangement.The Damages Are Not Paid O’Neill sought to enforce his judgment. On 12 September 2002, in the Adelaide Magistrates Court, Hanel claimed(a)that Daroko had no assets in its own right or as trustee of the Daroko Unit Trust;(b)that Daroko Unit Trust had no assets and was unable to meet the judgment; and(c)that Daroko could not and cannot now pay the judgment.The parties have agreed the following additional facts. The financial accounts for the Daroko Unit Trust for the year ending 30 June 2001 show that the Daroko Unit Trust earned a total income of $607,642. After payment of expenses the Daroko Unit Trust earned a profit for the year ending 30 June 2001 of $512,617. This sum was distributed to the Kerry Hanel Investment Trust. The consequence of this agreed fact is that Daroko has no assets to which it can have recourse for the purpose of discharging its liability to the respondent. It is necessary to note one other agreed fact. Clause 21 of the trust deed of the Daroko Unit Trust provides an indemnity to Daroko in these terms:“The Trustee is entitled to be indemnified out of the assets for the time being comprising the Trust Fund against liabilities incurred by the Trustee in the execution or attempted execution of or as a consequence of the failure to exercise any of the trust, authorities, powers and discretions hereof or by virtue of being the Trustee.”An Action Seeking Order that Director is Liable As Daroko had failed to discharge its liability to him, O’Neill issued proceedings out of the Adelaide Magistrates Court on 28 November 2002 claiming an order pursuant to s 197 of the Corporations Act that Hanel pay the judgment debt of $23,132.62 and a further debt of $15,928.51, being a shortfall of rent. On 13 December 2002, Hanel applied for summary judgment in respect of the claim for $23,132.62. The application was heard on 31 January 2003. The magistrate ordered that O’Neill was entitled to summary judgment against Hanel in the sum of $23,132.62. Hanel has appealed to this Court from that judgment. He contends that the judgment should be set aside.

Ratio Decidendi

Legal Principle Established

Established by: MULLIGHAN J, DEBELLE J, GRAY J

I turn to s 197 of the Corporations Act 2001 which provides:“197 Directors liable for debts and other obligations incurred by corporation as trustee(1)A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation:(a)has not, and cannot, discharge the liability or that part of it; and(b)is not entitled to be fully indemnified against the liability out of trust assets.This is so even if the trust does not have enough assets to indemnify the trustee. The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection.(2)The person is not liable under subsection (1) if the person would be entitled to have been fully indemnified by 1 of the other directors against the liability had all the directors of the corporation been trustees when the liability was incurred.(3)[Not applicable](4)[Not applicable].”In the circumstances, s 197(2) has no application as the appellant is the sole director of Daroko. The appellant was a director of Daroko when it incurred the liability to the respondent and it did so while acting as trustee for the Daroko Unit Trust. The liability was not discharged. The issue is whether Daroko was entitled to be fully indemnified against the liability out of trust assets. Clause 21 of the trust deed of the Daroko Unit Trust provides:“The Trustee is entitled to be indemnified out of the assets for the time being comprising the Trust Fund against liabilities incurred by the Trustee in the execution or attempted execution of or as a consequence of the failure to exercise any of the trusts, authorities, powers and discretions hereof or by virtue of being the Trustee.” The respondent claims that this provision excludes the appellant from personal liability for the debt due to the respondent because Daroko was entitled to be fully indemnified against the liability out of the assets of the Daroko Unit Trust. The first three conditions for personal liability under s 197(1) were clearly established. In my view, whether Daroko was entitled to be indemnified out of the assets of Daroko Unit Trust is not merely a matter of law to be determined from the trust deed. It is a matter of mixed law and fact. Certainly, Clause 21 provides a legal basis for the indemnity. However, the undisputed facts establish that, at the relevant times, there were no such assets in the Daroko Unit Trust due to the conduct of the appellant. He had caused all of the assets to be paid to Forcett. It was the unilateral act of the appellant which resulted in the Daroko Unit Trust being without the funds to discharge the liability to the respondent. It would be a strange result if s 197(1)(b) was to be interpreted so that a director could escape personal liability by reason of that provision merely by ensuring that a provision, such as Clause 21, was contained in the trust deed and could thereby operate as a shield against personal liability, even though the director causes the trust to be without funds to avoid paying the debt.