Jeffcott Holding Ltd (in Liq) v Swiss Ptners & Ors No. Scgrg-95-535 Judgment No. S259

JEFFCOTT HOLDINGS LIMITED (IN LIQUIDATION) V SWISS PARTNERS PTY LTD & ORS AND BYRNES & ORS

[1999] SASC 259

JUDGE BURLEY. This is an application by the sixth third party (Mr Irving) whereby he seeks a determination pursuant to SCR 25.04 of an issue raised in the third party claim brought by the defendants against him and others.
The plaintiff claims damages from the defendant who prepared a report in relation to a proposed takeover of the plaintiff by Jeffcott Investments Limited. The defendants brought third party proceedings against the former directors of the plaintiff seeking contribution and indemnity. In broad terms it is alleged in the third party proceedings that the directors were in breach of their statutory, equitable and common law duties as directors in relation to the takeover. The directors have denied such assertions and Mr Irving has, in addition, invoked the provisions of Section 535 of the Companies (South Australia) Code. That section is as follows:-
“535(1)If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity by virtue of which he is such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that he has acted honestly and that, having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused for the negligence, default or breach, the court may relieve him either wholly or partly from his liability on such terms as the court thinks fit.”
It is common ground that the section applies to these proceedings and to Mr Irving.
At the hearing of the application, Mr Wilkinson appeared for Mr Irving, and Mr Lucarelli appeared for the defendants. I was informed that the plaintiff did not wish to be heard on the application although one of the plaintiff’s solicitors was in attendance during the course of the hearing. The file discloses that the plaintiff’s solicitors are also the solicitors for the third parties apart from Mr Irving.
Counsel directed my attention to a number of authorities relating to SCR 25.04. It was common ground that a third party could invoke against a defendant the provisions of that Rule in order to seek a summary determination of an issue or issues in the third party proceedings. The approach to be taken by the Court on an application for summary judgment has been summarised by Doyle CJ in Coombes & Barei Pty Ltd v Lincolne Scott Australia Pty Ltd & Anor, an unreported decision of the Full Court delivered on 28 February 1997, Judgment No S6045. At page 3 of the judgment the Chief Justice said:-
“However one expresses the obligation imposed by r25.04 upon a defendant or third party seeking to take advantage of it, it is a stringent one. The cases make it clear that the undoubted power of the Court must be exercised with great care. It is not sufficient that the Court might think it is likely that at the end of the day the party who invokes r25.04 will succeed, or even that the Court thinks success for that party is more than likely. The requirement of the Rule is more demanding than that. The Rule performs an important function, particularly these days where there is an emphasis upon efficiency in the conduct of litigation, in enabling the Court to dispose promptly and economically of claims entirely lacking in merit. But at the same time the Court must be careful not to dispose of claims in this way unless they really are lacking in merit. One can understand the concern of the [third party] about being drawn into protracted and costly litigation ... But the fact remains that the Court has to be satisfied that there is, at the least, no real question to be tried.”
In support of his application, Mr Irving filed an affidavit sworn on 16 March 1999. As I understand it, this affidavit set out Mr Irving’s factual response to allegations made against him in the third party statement of claim. It is therefore necessary to summarise those allegations.
In October 1998 the name of the plaintiff was Magnacrete Limited. At that time it was considering a takeover offer for Jeffcott Investments Limited. Magnacrete engaged the first defendant to prepare a report required under Listing Rule 3J(3) of the Main Board Listing Rules of the Australian Stock Exchange. At a Board meeting on 21 February 1989 the Magnacrete directors resolved to proceed with the proposed takeover. Two of the directors then present (one of whom was Mr Irving) voted in favour of the resolution and the other directors present abstained from voting. The directors’ decision was subsequently confirmed at an Extraordinary General Meeting of the plaintiff on 9 March 1989.
Paragraph 35 of the third party statement of claim sets out the allegations in relation to breaches of duty by the third parties Paior and Irving. That paragraph is as follows:-
“35... In casting their vote in favour of the 21Feb89 resolution, each of Irving and Paior breached each of the duties in that:
35.1.......... he had taken no step to ascertain whether the proposed take-over was in the interests of Magnacrete;
35.2.......... he had taken no step to ascertain the true worth of JIL;
35.3.......... he had taken no step to ascertain the true worth of the shares in the capital of JIL;
35.4.......... he had taken no step to ascertain whether the terms of the proposed take-over were fair and reasonable to non-associated shareholders of Magnacrete;
35.5.......... knowing that:
35.5.1....... Byrnes and Hopwood were directors and substantial shareholders of JIL;
35.5.2....... by reason of the matters in 35.5.1 above, Byrnes and Hopwood were in a position of conflict of interest in relation to the proposed take-over;
35.5.3....... Byrnes and Hopwood had, between October 1988 and 17 February 1989, provided information to Swiss Partners on behalf of both Magnacrete and JIL for the purposes of enabling Swiss Partners to prepare the 3J(3) report -
he had taken no step to ensure that the information so provided to Swiss Partners by Byrnes and Hopwood was accurate and/or independently verified by officers of Magnacrete and/or JIL who did not have a conflict of interest in relation to the proposed take-over.”
Further material allegations are made against the third parties Young, Paior and Irving in paragraphs 38 to 41 of the third party statement of claim. Those paragraphs are as follows:-
“38... Had Young, Paior and Irving or any of them taken any step to ascertain:
38.1.......... whether or not the proposed take-over was in the interests of Magnacrete;
38.2.......... the true worth of JIL;
38.3.......... the true worth of the shares in the capital of JIL -
they would have discovered the matters alleged in paragraphs 28 to 48 (inclusive) of the MASC.
39.... Had Young, Paior and Irving or either of them discovered the matters alleged in paragraphs 28 to 48 (inclusive) of the MASC, they would have informed:
39.1.......... the board of Magnacrete of those matters at or prior to its meeting of 21 February 1989; and/or
39.2.......... the shareholders of Magnacrete of those matters at or prior to the extraordinary general meeting of 9 March 1989.
40.Had Paior, Young and Irving or any of them taken any step to ensure that information provided to Swiss Partners by Hopwood and Byrnes was accurate and/or verified by officers of Magnacrete and JIL who did not have a conflict of interest, the matters alleged in paragraphs 28 to 48 (inclusive) of the MASC would have been made known to Swiss Partners and by reason thereof the 3J(3) report would not have valued JIL and the shares of JIL as it did.
41.Had any one or more of the matters alleged in paragraphs 38 to 40 above taken place:
41.1.......... Paior and Irving would not have cast their votes in favour of the 21Feb89 resolution;
41.2.......... the board of Magnacrete would not have carried the 21Feb89 resolution;
41.3.......... the shareholders of Magnacrete would not have carried the 9Mar89 resolution;
41.4.......... the Magnacrete directors would not have signed the Part A statement;
41.5.......... the proposed take-over would not have proceeded.”
In his affidavit Mr Irving said that he became a salaried partner of a firm of chartered accountants known as Allert Heard & Co. The fourth third party (Mr Young) was an equity partner and was the immediate superior of Mr Irving. He says further in his affidavit:-
“4..... At some time prior to February 1989, at a time and on a date, which I did not record and cannot now recall, I was informed that Young was a director of the plaintiff then called Magnacrete Limited (‘Magnacrete’). I was then aware that Magnacrete was in some manner associated with a company called Jeffcott Investments Limited.
5...... In the morning of Tuesday 21 February 1989 at the offices of Allert Heard & Co at 6th Floor, 12 Pirie Street, Adelaide, Young told me that a meeting of the directors of Magnacrete had been called for 12.00 noon that day (‘the Magnacrete meeting’), and that because of another commitment he could not attend. He said that he was appointing me as his alternate director and asked me to attend that meeting as his alternate director. He instruct me to vote on any resolution put to the meeting in the same way as the fifth third party (‘Paior’), voted. Young told me that Paior was another director of Magnacrete.
6...... Prior to 21 February 1989 I had no involvement with the affairs of Magnacrete.
7...... Young did not inform me of any facts pertaining to the business of the Magnacrete meeting.
8...... Now produced and shown to me and marked JI1 is a true copy of the page from my 1989 diary for the week commencing Monday 20 February 1989. I recollect from perusing the entries for Tuesday 21 February 1989 the Magnacrete meeting was held at 12.00 noon that day.
9...... I do not know how Young appointed me as his alternate director.
10.... I attended the Magnacrete meeting. I have no recollection of the whereabouts of the meeting. I can recollect that Paior and the first third party (‘Byrnes’) and the second third party (‘Hopwood’) and the third third party (‘Douglas Hill’) were present. I have no recollection of any others being present. I cannot recall the exact nature of the business of the meeting. I was not given any papers before or at the meeting. I was not asked by anyone to appreciate the business of the Magnacrete meeting. I can recall that I voted in favour of a resolution put to the meeting in the same way as Paior voted, following Young’s instructions. I cannot recall the details of the resolution, nor the way in which the others present voted. The only records which I kept other than my said diary concerning the Magnacrete meeting were a day book and a time entry book. Now produced and shown to me and marked with the letters JI2 and JI3 are true copies of the pages therein for 21 February 1989.
11.... If the resolution had appeared to me to be wrongful, unlawful or tortious then I would not have voted in favour of the resolution.
12.... After the Magnacrete meeting I did not have any further involvement with the affairs of Magnacrete.
13.... I have been shown, by my solicitors, a copy of a National Companies Securities Commission Form, a true copy of which is now produced and shown to me and marked with the letters JI4. I have no recollection of any circumstances surrounding my resignation as an alternate director of Magnacrete but I assume that my appointment as an alternative director for Young ceased by force of Young’s resignation.”
In response, the defendants filed and relied upon the affidavit of Mr Goulios, a Victorian solicitor, representing the defendants. Mr Goulios’ affidavit does no more than identify and exhibit various documents, including the Minutes of the meeting of the directors of Magnacrete Limited held on 21 February 1989 and a copy of a document purporting to be the consent of Mr Irving to the inclusion of a directors’ report in the terms specified in the consent in a Part A statement to be issued by Magnacrete Limited. Mr Irving acknowledged that his signature was placed on the consent.
The defendants contended that the question of whether or not Mr Irving should be exonerated pursuant to the provisions of Section 535 of the Code should not be determined summarily and that, in any event, the discretion to exonerate should not be exercised in favour of Mr Irving.
In AWA Ltd v Daniels (1992) 7 ACSR 759, Rogers CJ, Comm Div, dealt with Section 1318 of the Corporations Law, which is the successor to Section 535 of the Code. His Honour said (at 855):-
“The original provision in the English Act followed on the report of the Reid Committee in 1906. In para 24 of its Report the Committee warned that provisions of the Companies Acts should not be used as engines of oppression for honest and prudent men. The Report stated that while it would not be either safe, or wise, to diminish the obligations imposed by the Act ‘we do think that it would be both safe and wise to make some amendment in the law which shall prevent such penal provisions from operating unfairly’. The Committee therefore recommended that power be given to the court to relieve any director, or promoter, from liability for breach of any duty imposed on him by the Companies Acts ‘provided that the breach has been occasioned by honest oversight, inadvertence, or error of judgment on his part, and in an action for negligence or breach of trust against a director to relieve him from his liability on such terms as the court may consider proper if the court is satisfied that he has acted honestly and reasonably’.”
In Daniels v Anderson (1995) 16 ACSR 607 the New South Wales Court of Appeal said of Section 1318 of the Law at 685:-
“... The purpose of the section is to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are businessmen and women who act in an environment involving risk in commercial decision making; ... The courts have a wide discretion to relieve in whole or in part.”
Mr Irving seeks an exonerating order from the Court on the basis that he agreed, at the request of his superior, to be appointed as an alternate director so that he could attend a directors’ meeting of the plaintiff on 21 February 1989 and vote in accordance with the direction given to him by his superior, Mr Young. He attended that meeting and voted accordingly. He was not briefed by Mr Young in relation to the matters to be considered at the directors’ meeting nor did he, it appears, take the opportunity of looking at any of the material tabled during the course of the directors’ meeting. Even if he had done so, it is unlikely that he would have been able to absorb the detail of the documentation so as to make an informed decision. In those circumstances he has argued that his participation on the question of whether or not the takeover should go ahead was minimal. In addition, he at all times acted honestly. It was contended that in all of the circumstances he should be exonerated from any liability that might attach to him.
It is apparent from the cases just cited that in determining whether or not an exonerating order ought to be granted or withheld, the Court must consider the honesty of the applicant’s actions and also take into account in conjunction with that factor all other relevant considerations. In my view, it is not possible on the affidavit material before me to be satisfied that I can take a proper account of all other relevant circumstances.
It was submitted by Mr Lucarelli that there was insufficient evidence of all relevant circumstances put before the Court. I think that he is correct in that submission. The plaintiff has relied upon a relatively short affidavit presenting his response to the allegations made against him in the third party statement of claim. However, he has made no attempt to deal specifically with the detailed allegations made against him in the third party statement of claim and I think, without that detail, I cannot have an adequate appreciation of whether or not the discretion to exonerate should be exercised in favour of or against Mr Irving. It would be not only potentially unfair to the defendants to proceed to a decision, it would be equally unfair to Mr Irving to do so.
It was submitted by Mr Wilkinson that the lack of detailed evidential material before the Court arises from the paucity of the evidence adduced by the defendants on the application. Mr Lucarelli’s response was that the onus was upon Mr Irving to adduce sufficient evidence to enable a determination to be made. I think his response is correct, so that to the extent that the paucity of evidence precludes a determination, the responsibility for that must lie with Mr Irving.
In order to determine what the evidential requirements of an application such as this are it is necessary to have regard in particular to the following passage from Section 535(1):-
“... it appears to the court ... that the person is or may be liable ...”
Two alternatives are put forward by that passage: first, that the Court makes a finding that the applicant is liable; and, second, that the Court concludes that the applicant may be liable.
Neither party has suggested that it is open to me, on this summary application, to make a final determination as to whether or not Mr Irving is liable to the defendants as alleged. Apart from anything else, Mr Irving’s liability does not fall to be considered unless and until the plaintiff establishes a case against the defendants. If this matter were to proceed to trial, the trial Judge would decide whether or not the defendants were liable to the plaintiff and, in turn, whether or not the third parties were liable to the defendants on the third party proceedings. Therefore, at trial a final determination would be made as to whether or not Mr Irving was liable to the defendants as alleged. The trial Judge would not have to consider whether or not Mr Irving “may be liable” to the defendants.
On this application for immediate relief, I am not able to make a final determination of that question because Mr Irving has not advanced such a case. His application is based on the premise that he may be liable to the defendants and he has invoked Section 535(1) of the Code so that he might be exonerated from liability. He seeks a complete exoneration. In those circumstances I need carefully to examine the precise liability in respect of which he seeks his exoneration. A number of allegations have been made against him by the defendants as referred to in the pleadings set out above. Mr Irving maintains that he is not liable as alleged but he seeks an order for exoneration in case he is subsequently found to be liable. He has provided a factual response in his affidavits in support of the application to the allegations made in the pleadings against him. As I understand the submissions put by his counsel, his case is that, notwithstanding the allegations made against him in the third party statement of claim, he should be exonerated from liability. That must mean, in my view, that I am to proceed on the basis that the allegations made against him in the third party statement of claim are assumed to be correct for the purposes of this application.
In essence, the third party statement of claim asserts that Mr Irving as a director was subject to specified statutory, equitable and common law duties and that he breached those duties. The breaches are set out in paragraph 35 of the third party statement of claim. It is clear from Mr Irving’s affidavit that he failed to take the steps referred to in paragraphs 35.1 to 35.4 of the third party statement of claim.
In relation to paragraph 35.5 of the third party statement of claim, there is a possible conflict between what is asserted in that sub-paragraph and what was said by Mr Irving in his affidavits in support of the application. In essence, he said he was in ignorance of the matters to be dealt with at the meeting of 21 February 1989 and that all he did was vote in accordance with the way Mr Paior voted. He has not addressed specifically the allegations made against him in paragraph 35.5 of the third party statement of claim. It is probably implicit from his affidavit evidence that he was unaware that between October 1988 and 17 February 1989 Brynes and Hopwood provided information to the defendants on behalf of the plaintiff and JIL for the purposes of enabling the first defendant to prepare the 3J(3) report. However, even if Mr Irving were to have denied in his affidavit that he had such knowledge, there would be an immediate conflict of fact in the sense that Section 535(1) of the Code, for the reasons referred to above, requires me to assume the correctness of the allegations made against Mr Irving for the purposes of this application.

It also seems to me that if an applicant such as Mr Irving sought an exoneration order but denied that he was liable as alleged, he could only approach the Court for an exoneration order on the basis that the order sought to cover the eventuality that the Court may at trial find him to be liable despite his denial that he is liable. This process of reasoning constitutes another basis to support the proposition that I can only proceed with the application on the basis that it is assumed that the allegations made against Mr Irving are correct.
As I have said, in order to decide whether or not an exoneration order ought to be made, the Court must be in a position to make a proper assessment of the impugned conduct of Mr Irving and weigh that against the circumstances deposed to by Mr Irving giving rise to his attendance at the meeting of 21 February 1989. It was submitted by Mr Lucarelli that it would be unfair to the defendants to proceed with the application without giving the defendants the opportunity to cross-examine Mr Irving. However, in my view, such a submission is an inappropriate variation of the submission that there is insufficient evidence to make a fair determination. It is not a matter of proceeding to a decision without cross-examination. The reality is that Mr Irving has adduced insufficient evidence to enable a fair determination to be made.
It is also appropriate to mention that the Court has been asked to sanction a procedure which, according to Mr Irving’s affidavit, was adopted by Mr Young and Mr Irving. If an exoneration order were made, it would be a signal from the Court to the commercial community that such a procedure, in given circumstances, may be appropriate. The utmost care needs to be taken to ensure that the decision whether or not to exonerate is made in light of all the relevant facts.
In arriving at the conclusion that Mr Irving’s application should be dismissed, I have taken into account the fact that he has been brought in as a party to extensive litigation which, if it is not otherwise resolved, will lead to a lengthy and therefore expensive trial. I can well understand his desire not to be involved in such litigation given that he only attended the relevant directors’ meeting at the request of Mr Young. Unfortunately for him, I do not think that it is appropriate to embark upon an examination of whether or not an exoneration order ought to be made on this summary application.
For the above reasons Mr Irving’s application for orders pursuant to Section 535 of the Code must be refused. I will hear counsel as to costs.

[1999] SASC 259

25 June 1999