Lewis & Anor v Doran & Ors

[2006] HCATrans 41

[2006] HCATrans 041

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S430 of 2005

B e t w e e n -

ALAN EDWARD LEWIS (AS LIQUIDATOR OF DORAN CONSTRUCTIONS PTY LIMITED (IN LIQUIDATION))

First Applicant

DORAN CONSTRUCTIONS PTY LIMITED (IN LIQUIDATION)

Second Applicant

and

PAUL ADRIAN DORAN

First Respondent

PETER JOSEPH DORAN

Second Respondent

MICHAEL LEO DORAN

Third Respondent

JOHN CERRITI DORAN

Fourth Respondent

DORAN HOLDINGS PTY LIMITED

Fifth Respondent

DORAN CONSTRUCTIONS (AUSTRALIA) PTY LIMITED (IN LIQUIDATION)

Sixth Respondent

Application for special leave to appeal

GLEESON CJ
KIRBY J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 10 FEBRUARY 2006, AT 10.33 AM

Copyright in the High Court of Australia

__________________

MR D.F. JACKSON:   If the Court pleases, I appear with my learned friend, MR P.S. BRAHAM, for the applicants.  (instructed by Purcell Insolvency Lawyers)

MR A.S. MARTIN, SC:   May it please, I appear with my learned friend, MR S.A.S. WELLS, for the first to the fifth respondents.  (instructed by Christopher C. Freeman & Co)

GLEESON CJ:   Yes, Mr Jackson.

MR JACKSON:   Thank you, your Honours.  Your Honours, the question which is sought to agitate in these proceedings concerns the extent to which as a matter of directors’ duty or under the uncommercial transactions provisions of the Corporations Act directors of a then solvent company are required to consider the interests of possible creditors.

GLEESON CJ:   The essence of the argument against you, as I understand it, is that there are concurrent findings of fact in this matter that would be fatal to you.

MR JACKSON:   Your Honour, I accept that there are concurrent findings of fact.  The question is of their fatality to our case or the injury they might do to it depends on whether there is a question arising from those facts.  Your Honours, I use “possible” when I am speaking of possible creditors in the sense of persons who, by reason of events which have already occurred, may have a claim against the company but a claim which has yet to be established.

Your Honours, the case – if I can put it very shortly – was this, that Doran Constructions had as its principal asset a loan owed to it by Doran Holdings, a company itself owned by the same people but not otherwise related, and there was a loan payable on demand and by the transactions referred to by the Court of Appeal at page 64, paragraphs 1 and 2, and in accordance with resolutions of the directors in place of that loan for 4.1 million repayable on demand, there was a loan instead to its parent company which was repayable in six years time.  Your Honours will see there was a finding that Doran Holdings had been able to pay the 4.1 million, that is page 71, paragraph 23 ‑ ‑ ‑

GLEESON CJ:   Is that related to the finding on page 145, paragraph 16?

MR JACKSON:   That is our submission, your Honour.  Is your Honour referring to our submission?

GLEESON CJ:   Yes.

MR JACKSON:   Your Honour, in our submission, we accept and they accepted in the Court of Appeal that Constructions was solvent at the time, so it is not a case of insolvency in that sense, but the issue that arises particularly in relation to the uncommercial trading one was that there was a finding that the entry into the transaction was a cause of the later insolvency.

Your Honours, may I just say that the substituted debtor could not have paid the 4.1 million from its own resources.  There are two references, at page 100 and the paragraph the same number and also page 118, paragraph 152 in the Court of Appeal.  Your Honours, to put it shortly then, in order to repay the money the substituted debtor would have to rely on Doran Holdings, which was regarded as the banker for the various family companies, to continue making available finance.

As your Honours will see at page 64, paragraph 3, in December 1997, I think it was, Doran Holdings withdrew its support and very shortly afterwards the company, Doran Constructions, went into liquidation.  Your Honours, I said before and your Honours will see this at paragraph 140 in the Court of Appeal, that it was accepted that the situation of entry into the transaction and the inability of Doran, DCA, the other company, to repay was a cause of Constructions becoming insolvent when it did.

Now, your Honours, by section 232(4) of the then Corporations Law an officer of the corporation was required to exercise the degree of care and diligence that a reasonable person in a corporation would exercise in the corporation circumstances, and under the terms of the Corporations Law section 588FF which, your Honours, should be in the additional material, commencing at about page 173, your Honours will see it provides that:

Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders –

and the relevant passage at 588FE is 588FE(4) which says:

The transaction is voidable if:

(a)     it is an insolvent transaction of the company; and
(b)     a related entity of the company is a party to it; and
(c)     it was entered into . . . during the 4 years –

and then an insolvent transaction, your Honours, is defined by 588FC and it includes “an uncommercial transaction” and:

(b)      the company becomes insolvent because of, or because of matters including:

(i)     entering into the transaction –

and then your Honours will see an “uncommercial transaction” is defined by 588FB(1).  Your Honours, the basis for saying that the transaction was not an “uncommercial transaction” or that it was for the benefit of the company was that it would assist the company called Holdings in acting as banker to the group.

Your Honours will see that – I give two references – page 117, paragraphs 148 to 153 and page 120, paragraph 158.  Your Honours, there was no legal relationship between Holdings, which was the company said might act as banker, might make money available, and the company that went into liquidation, Constructions.  Constructions was not a subsidiary of Holdings.

GLEESON CJ:   What about paragraph 118 on page 106?

MR JACKSON:   Your Honour, we accept that fact.  That was the finding that the directors believed that Holdings would make available the money but, your Honours, if money were needed, and as is said there, apparently:

None of the directors was cross‑examined to the contrary –

but, your Honours, that simply left a situation where the directors’ belief was that some other company might make money available.  One had to look at the situation under both the causes of action from the point of view of the particular company and if what was done was to give away an asset which could be called on now for something that could be called on only at the end of six years, and anything else was dependent upon the grace of another company to provide it.

GLEESON CJ:   Another company which they controlled?

MR JACKSON:   Yes, your Honour, and controlled, your Honour, and had the potentiality as in fact happened, that it just decided to pull the plug one day leaving creditors owed a great deal of money.

KIRBY J:   There are some oddities in this case, and I have some sympathy for the way you present it, but the fact is you have these concurrent findings against you, the case was conducted in a particular way as far as cross‑examination is concerned, and you have an awful lot of hurdles to get over to get this Court looking into it.  Now, what is the important point of legal principle that is ‑ ‑ ‑

MR JACKSON:   Your Honour, if one goes simply, for example, to the uncommercial transaction provisions what appears ‑ ‑ ‑

KIRBY J:   That is a very fact specific question in every case, is it not?

MR JACKSON:   Of course, your Honour, but if I could say cases are always fact specific in that regard, but what one does see both in relation to that cause of action, the more broadly expressed one, what you have is a situation where directors are, in effect, resolved to substitute for an immediately recoverable sum something that was not recoverable for six years on the basis that if they needed money someone would probably make it available and in circumstances where there was notice of claims, no doubt a view that the claims might come to nothing, but there was notice of a very

significant claim, and I will give your Honour the reference in just a moment.

In those circumstances, our submission is that the directors could not just in respect to people who might become their largest creditors, simply say, we will change the position, that transactions would have to be uncommercial looking at it from the point of view of the company of which they were relevantly the directors.

I said, your Honours, there was some notice of the claims.  May I simply give the reference in that regard?  At page 14, paragraph 38 in respect of Beresfield Aluminium, and you will see, talking about a relevant restructuring in November 1994, you will see paragraph 38.  There was an amendment of the claim to $449,000.  You will see the primary judge’s view of that in paragraph 42.

GLEESON CJ:   Paragraph 43 is of some interest because it states the case that was being put against the directors and they denied that and their denial was accepted.

MR JACKSON:   Your Honour, I accept that, but the point we would seek to make is that they were not entitled just to have that view, to leave the interests of these two bodies aside, and the other reference I was going to give was paragraph 44 in relation to the University of Newcastle.  Your Honour, that is the issue that we seek to raise.

GLEESON CJ:   Thank you.  We do not need to hear you, Mr Martin.

On the concurrent findings of fact made by the primary judge and the Court of Appeal there are insufficient prospects of success of an appeal to warrant a grant of special leave and the application is dismissed with costs.

AT 10.46 AM THE MATTER WAS CONCLUDED