FEDERAL COURT OF AUSTRALIA
Hui v Champion [2019] FCA 1111
File number: NSD 141 of 2019 Judge: JAGOT J Date of judgment: 23 July 2019 Catchwords: CORPORATIONS – whether a transfer of shares was carried out for an improper purpose – no improper purpose found – whether transfer of shares contravened the companies’ constitutions – if contraventions found, whether conduct can be validated and directors exonerated from beaches of duty – no validation and no exoneration available Legislation: Corporations Act 2001 (Cth) ss 140(1), 180(1), 180(1)(a), 236, 237, 1071B(2), 1071B(3), 1071B(4), 1317S(2), 1318, 1322(2), 1322(4), 1322(6), 1322(6)(a)(ii), 1322(6)(a)(iii), 1324, 1324(1)
Corporations Regulations 2001 (Cth) Sch 2A
Cases cited: Hall v Poolman [2007] NSWSC 1330
In the matter of Central Management (NSW) Pty Ltd (in liquidation) [2017] NSWSC 1258
Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109
Re Continental Pacific [2002] NSWSC 789
Dates of hearing: 11, 12 and 18 June 2019 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 114 Counsel for the Plaintiffs: Mr R Newlinds SC with Mr G Stapleton Solicitor for the Plaintiffs: HFW Australia Counsel for the First and Second Defendants: Mr D Sulan with Mr D Delany Solicitor for the First and Second Defendants: Arnold Bloch Leibler Counsel for the Third, Fourth, Fifth and Sixth Defendants: Mr JAC Potts SC with Mr AR Langshaw Solicitor for the Third, Fourth, Fifth and Sixth Defendants: Piper Alderman ORDERS
NSD 141 of 2019 BETWEEN: CAROL MEI MEI HUI
First Plaintiff
JIE ZHANG
Second Plaintiff
AND: DALE JAMES CHAMPION
First Defendant
JING YUAN XUE
Second Defendant
CONSOLIDATED AUSTRALIAN PASTORAL HOLDINGS NO.2 PTY LTD (and others named in the Schedule)
Third Defendant
AND BETWEEN: DALE JAMES CHAMPION (and another named in the Schedule)
First Cross-Claimant
AND: CAROL MEI MEI HUI (and others named in the Schedule)
First Cross-Respondent
JUDGE:
JAGOT J
DATE OF ORDER:
23 JULY 2019
THE COURT ORDERS THAT:
1.The parties confer and file agreed or competing short minutes of order:
(a)reflecting these reasons for judgment; and
(b)identifying directions or orders for the resolution of the undetermined balance of the statement of claim,
within 14 days.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
JAGOT J:
Background
These reasons for judgment concern a dispute between two groups of Chinese investors in large cattle stations in Western Australia.
One group is known as the Shimao interests. The other group is known as the Dechang interests.
The ultimate dispute is about who is in control of the entire venture between them but that dispute is being resolved in an arbitration in China.
Pursuant to orders for the separate determination of certain claims in the statement of claim, the presently relevant aspect of the dispute concerns only the validity of the actions of the respondents in January 2019 by which…
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- AGLC
- Hui v Champion [2019] FCA 1111
- Case
- [2019] FCA 1111
- Decision Date
CaseChat Overview and Summary
The case of Hui v Champion involved a dispute concerning the conduct of directors of HoldingCo, a company within the Shimao Aoya Holding Pty Ltd group in Australia. The dispute centred around the alleged improper purpose behind a transfer of shares and whether such transfer contravened the companies' constitutions. Furthermore, it was argued whether the contraventions could be validated and the directors exonerated from breaches of duty.
The central legal issues revolved around whether the directors of HoldingCo, Mr Xue and Mr Champion, acted for an improper purpose in transferring shares to Mr Champion. The applicants contended that the transfer was intended to preserve, protect, and extend the management rights of Argyle Cattle Company Pty Ltd (ACC). They argued that the transfer was a direct response to the termination of the Management Agreement and was for no other purpose. The respondents, on the other hand, argued that the applicants needed to prove that the transfer was solely due to the notice terminating the agreement, rather than just the substantial purpose. Additionally, the applicants alleged that the transfer contravened the companies' constitutions and sought validation of the conduct and exoneration of the directors from breaches of duty.
The court rejected the applicants' contention that the directors acted for an improper purpose. It found that the applicants had to prove that the actions were a direct response to and only because of the notice terminating the Management Agreement. The court held that the relevant legal principle is that the alleged improper purpose must be the substantial, not the sole, purpose of the directors. The court also dismissed the remaining allegations against Mr Xue and Mr Champion. The applicants' submissions ranged more widely than the statement of claim, but the court held that the applicants should be bound by their pleaded claims.
The court concluded that the contentions against Mr Champion in [62] and [63] of the statement of claim could not be sustained, and the remaining allegations were the same as against Mr Xue and Mr Champion. The first contention, that Mr Xue’s and Mr Champion’s conduct had the practical effect of making Mr Champion the only person supervising and monitoring ASA’s performance under the management agreement, was found to be unpersuasive.
The court ordered the parties to confer and file agreed or competing short minutes of order within 14 days, reflecting the reasons for judgment and identifying directions or orders for the resolution of the undetermined balance of the statement of claim. Entry of orders was to be dealt with in Rule 39.32 of the Federal Court Rules 2011.
The central legal issues revolved around whether the directors of HoldingCo, Mr Xue and Mr Champion, acted for an improper purpose in transferring shares to Mr Champion. The applicants contended that the transfer was intended to preserve, protect, and extend the management rights of Argyle Cattle Company Pty Ltd (ACC). They argued that the transfer was a direct response to the termination of the Management Agreement and was for no other purpose. The respondents, on the other hand, argued that the applicants needed to prove that the transfer was solely due to the notice terminating the agreement, rather than just the substantial purpose. Additionally, the applicants alleged that the transfer contravened the companies' constitutions and sought validation of the conduct and exoneration of the directors from breaches of duty.
The court rejected the applicants' contention that the directors acted for an improper purpose. It found that the applicants had to prove that the actions were a direct response to and only because of the notice terminating the Management Agreement. The court held that the relevant legal principle is that the alleged improper purpose must be the substantial, not the sole, purpose of the directors. The court also dismissed the remaining allegations against Mr Xue and Mr Champion. The applicants' submissions ranged more widely than the statement of claim, but the court held that the applicants should be bound by their pleaded claims.
The court concluded that the contentions against Mr Champion in [62] and [63] of the statement of claim could not be sustained, and the remaining allegations were the same as against Mr Xue and Mr Champion. The first contention, that Mr Xue’s and Mr Champion’s conduct had the practical effect of making Mr Champion the only person supervising and monitoring ASA’s performance under the management agreement, was found to be unpersuasive.
The court ordered the parties to confer and file agreed or competing short minutes of order within 14 days, reflecting the reasons for judgment and identifying directions or orders for the resolution of the undetermined balance of the statement of claim. Entry of orders was to be dealt with in Rule 39.32 of the Federal Court Rules 2011.
Orders
Orders of the court
1. The parties confer and file agreed or competing short minutes of order:
(a) reflecting these reasons for judgment; and
(b) identifying directions or orders for the resolution of the undetermined balance of the statement of claim,
within 14 days.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
On 14 January 2019, Mr Xue and Mr Champion as directors of HoldingCo then executed a resolution which said this:Background1.Argyle Cattle Company Pty Ltd, a subsidiary entity within the Shimao Aoya Holding Pty Ltd group in Australia, has not made general operational supplier payments since the first payment run in November 2018.2.Westpac Banking Corp had approved and presented to Argyle Cattle Company Pty Ltd a Business Loan facility of AU$5m that has been under consideration.3.It has reached a point whereby ongoing payment delays are materially and detrimentally impacting the value and brand of the Argyle Cattle Company Pty Ltd. It is also placing the welfare of staff and livestock at risk as suppliers cease trading with the company.4.It is resolved by the Directors that Argyle Cattle Company should be directed to proceed with accepting the Westpac Banking Corp Business Loan facility offer and instigate use of the facility to alleviate the mounting risks to the investment.Resolution(s)A.The Directors of the company confirm and direct Argyle Cattle Company Pty Ltd to proceed with the acceptance and implementation of the AU$5m Westpac Banking Corporation Business Loan facility as soon as practically possible.B.The Directors authorise Argyle Cattle Company Pty Ltd to instigate operation of the facility including the payment of all outstanding creditors of the company.C.The Directors of the company direct Argyle Cattle Company Pty Ltd to ensure an appropriate payment authorisation process is established between Australian Standard Agriculture Pty Ltd and a designated personnel appointed by the compnay [sic], as representative of the company and the Directors, for all payments thereafter ACC then entered into the Westpac facility which involved a loan of AUD$5 million for a term of 2 years, subject to ACC executing a general security agreement over all existing and future assets and undertakings, and executing a specific security agreement over all cattle at nominated stations.Issue 1: the alleged improper purpose The applicants’ contention, in [51] of the statement of claim, is that:On 10 January 2019 Mr Champion and Mr Xue, in direct response to and only because of the notice terminating [the Management Agreement] and for the purpose only of preserving, protecting and extending ASA’s management rights, as directors of HoldingCo, purported to resolve to direct Ms Hui and Mr Zhang to transfer the shares they held on trust for HoldingCo in CAPH2 and CAPH to Mr Champion on trust for HoldingCo. The circular resolution included a resolution that invalidly purported to allow Mr Champion to transfer the shares if the shareholders refused. The respondents submitted that the applicants should be held to the strict terms of the pleaded allegation. Thus, in order to succeed the applicants had to prove that the actions were a direct response to and only because of the notice terminating the ASA management agreement. The applicants submitted that the fact they had pleaded this did not mean they needed to prove it in order to succeed because the relevant legal principle is that the alleged improper purpose must be the substantial, not the sole, purpose of the directors in the sense that but for the improper purpose the conduct would not have been undertaken.
Evidence
Evidence Before The Court
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Decision
Reasons for decision
The specified provisions of the Act provide as follows:180(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.(2)A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they: (a)make the judgment in good faith for a proper purpose; and (b)do not have a material personal interest in the subject matter of the judgment; and (c)inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and (d)rationally believe that the judgment is in the best interests of the corporation. The director’s or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.(3)In this section: business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.181(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.182(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.184(1)A director or other officer of a corporation commits an offence if they: (a)are reckless; or (b)are dishonest; and fail to exercise their powers and discharge their duties: (a)in good faith in the best interests of the corporation; or (b)for a proper purpose. I have already rejected the applicants’ contention that Mr Xue and Mr Champion acted for the improper purpose of extending ASA’s management rights. It follows that the contentions against Mr Champion in [62] and [63] of the statement of claim cannot be sustained. The remaining allegations are the same as against Mr Xue and Mr Champion. Before considering those allegations I should note that the applicants’ submissions ranged more widely than the statement of claim. However, in the context of these claims of breach of director’s duties, the applicants should be held to their claims as pleaded and it is those claims to which I now turn. The first contention, that Mr Xue’s and Mr Champion’s conduct had the practical effect of making Mr Champion the only person supervising and monitoring ASA’s performance under the management agreement, is unpersuasive. It may be accepted that Mr Champion became the sole director of ACC, the company which entered into the (now expired) management agreement with ASA. However, Ms Hui remains a director of HoldingCo. If she and Mr Xue wished to act to ensure Mr Champion was not the sole director of ACC they could do so given that the shares in CAPH and CAPH2 are held solely for the benefit of HoldingCo. The respondents’ submissions to this effect should be accepted.
Ratio Decidendi
Legal Principle Established
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