McCann & Anor v Bank of Western Australia Ltd

[2006] HCATrans 669

[2006] HCATrans 669

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B18 of 2006

B e t w e e n -

MICHAEL McCANN

First Applicant

UNITED (T & C) BRETTS WHARF PTY LTD (IN LIQUIDATION)

Second Applicant

and

BANK OF WESTERN AUSTRALIA LIMITED

Respondent

Application for special leave to appeal

KIRBY J
HAYNE J

TRANSCRIPT OF PROCEEDINGS

FROM BRISBANE BY VIDEO LINK TO CANBERRA

ON FRIDAY, 8 DECEMBER 2006, AT 12.05 PM

Copyright in the High Court of Australia

MR A.J.H. MORRIS, QC:   May it please your Honours, I appear for the applicants with MR I.K.A. ERSKINE.  (instructed by Stockley Furlong)

MR D.J.S. JACKSON, QC:   May it please the Court, I appear with MS S.E. BROWN for the respondent.  (instructed by Freehills)

KIRBY J:   Yes, Mr Morris.

MR MORRIS:   May I begin by taking your Honours to the leading judgment in the Court of Appeal, that of Justice Muir, which is in the record book, and the part with which I wish to begin ‑ ‑ ‑

KIRBY J:   What page is this?

MR MORRIS:   On page 77.  Your Honours will see the subheading “Conclusion on the uncommercial transaction question” which leads to the conclusion expressed in paragraph [109]:

For these reasons I conclude that the subject transaction or transactions constituted a transaction or transactions into which a reasonable person in UTC’s circumstances would not have entered.  It was, or they were, “uncommercial”.

KIRBY J:   Whose reasons are these?

MR MORRIS:   These are the reasons of Justice Muir.

KIRBY J:   Yes, I see.  This is the judge for the majority in the Court of Appeal.

MR MORRIS:   For the majority in the Court of Appeal.

KIRBY J:   Justice McMurdo essentially agreed with his reasons, did she not?

MR MORRIS:   That is so, yes.  That is why I took the liberty of referring to it as the leading judgment of the Court of Appeal.  At page 80 your Honours will see at the foot of the page the subheading “Conclusion on the insolvent transaction question”.  His Honour likewise found in favour of my client in a tentative way.  The conclusion expressed in paragraph [127] is:

In a broad sense it is accurate to say that UTC became insolvent because of matters including the entering into of the bank guarantee facility.  That facility gave rise to a debt which was substantial in proportion to UTC’s other liabilities.  When UTC was called on to pay it, it was unable to do so.  The requirements of s 588FC(b) appear to have been fulfilled but, in view of my conclusion in relation to the s 588FG defence, it is unnecessary for me to express a concluded view on the point.

So we reach the stage at paragraph [127] of a transaction which is both uncommercial and at least tentatively identified as being insolvent and it is on that footing that his Honour turns to the critical point for the purposes of this application as to whether or not the defence under section 588FC is sustainable, which depends ultimately on whether or not the transaction was one entered into in good faith.  In paragraph [130] his Honour notes that the matters discussed at an earlier point in the reasons:

sustain the finding that the respondent had no reasonable grounds for suspecting that UTC was insolvent in December 1997.

HAYNE J:   Why December 1997?

MR MORRIS:   December 1997 was the starting point of the series of transactions.  The series of transactions involved the granting of a guarantee to support borrowings by a director of the company – not the company itself, but borrowings in the name of a director.  The initial grant of such security was in December 1997.  There were rollovers and an eventual default which resulted in BankWest, the respondent to this application, discharging the director’s liability and then, in turn, relying on UTC’s security to discharge that liability which BankWest had discharged.

HAYNE J:   What was the transaction upon which those events occurred?

MR MORRIS:   The underlying transaction, if I can put it that way ‑ ‑ ‑

HAYNE J:   The moment you inject the notion “underlying”, you lose me, Mr Morris.

MR MORRIS:   I am sorry, your Honour.  The transaction which BankWest secured was a borrowing of $2 million in the name of Stephen Tam, one of the directors of UTC.  What UTC then did, through its directors, Stephen Tam and Jasper Tam, was to seek BankWest’s assistance to provide a bank guarantee to the lender in the transaction for the benefit of the director.  That guarantee was provided initially in December 1997, rolled over and subsequently, as I have said, default occurred and the debt was discharged by BankWest resulting in BankWest then calling on the liability of UTC.

HAYNE J:   It is the expression “rollover” that troubles me because their Honours below seem to proceed from the premise that there is a single transaction which is to be dated to the first giving of a guarantee and that the subsequent rollovers are but an aspect of the transaction entered in December 1997.  Is that accepted?

MR MORRIS:   Your Honours, for the purposes of this application we have to accept that that is a valid characterisation.  That, however, leads to the point, as we say, that the initial funding or the initial grant of the guarantee which was later rolled over was both uncommercial and an insolvent transaction and is therefore defensible only if it was entered into by BankWest in good faith.  That critical issue is the subject of the remaining six or seven paragraphs commencing at paragraph [128] on page 81.  

Justice Muir sets out the respondent’s summary of the trial judge’s findings, sets out the relevant section, of which the only applicable part is paragraph (b) providing a defence “in relation to each benefit that the person received because of the transaction” where two criteria are satisfied, firstly, that:

(i)       the person received the benefit in good faith; and

(ii)      at the time when the person received the benefit:

(A)the person had no reasonable grounds for suspecting that the company was insolvent –

Good faith is the critical issue here.

KIRBY J:   Given the evaluative and evidentially rich nature of such a conclusion, why would this be a High Court matter?  You have to really explain why this decision of the majority is a misreading of an important protective provision of the Act, I think, in order to get this into our concern.

MR MORRIS:   Yes.  That is summed up, if I may say so, in paragraph [133] in which Justice Muir, with the greatest respect to his Honour, disregards the actual words “good faith” and substitutes for them the form of words which has found favour in some earlier cases, namely, the words “acting improperly or dishonestly”.

HAYNE J:   Do you say negligence is enough to demonstrate absence of good faith?

MR MORRIS:   More than mere negligence, I would have to say is required, but negligence in circumstances where the transaction itself is uncommercial and where there are circumstances which would bring to the relevant party’s attention the fact that it is uncommercial and where that party itself has acted in a way which is inconsistent with appropriate and usual business practice, in those circumstances, are capable ‑ ‑ ‑

HAYNE J:   What is the content of that last proposition other than content, praying in aid, notions of carelessness or negligence?

MR MORRIS:   It is again something that Justice Muir accepted quite explicitly in paragraph [133] when his Honour characterised the respondent’s conduct as “remarkably casual and somewhat ingenuous” and conduct which “fell short of meeting the standards to be expected of a financier in its position exercising due skill and diligence”.

KIRBY J:   But does not the absence of good faith connote some consciousness of wrongdoing?

MR MORRIS:   If I may answer your Honour’s question this way, that depends on whether one is talking about a consciousness of wrongdoing in an absolute sense, whether the individuals acting for BankWest actually knew or believed that they were acting badly, or whether ‑ ‑ ‑

KIRBY J:   I suppose you are entitled to say that in this context – we are not in the context of the criminal law, we are in the context of a Corporations Act and proper conduct of corporations, here, relevantly, a large banking corporation, and therefore, in looking at whether this is merely incompetence or casualness or negligence or whether it crosses the line into want of good faith, you are entitled to look to what are the expectable standards of a corporation such as the Bank.

MR MORRIS:   We would say that, your Honours, and we would say that particularly on the facts of this case which, in our submission, offer a very useful vehicle for the Court to define what is the content of good faith in the relevant sections of the Corporations Act because this is a case of a most unusual transaction entered into in most unusual circumstances with the Bank, although one cannot say, because there are no findings in our favour to this effect, that the individual officers concerned were conscious of wrongdoing, nonetheless, the Bank’s knowledge, as a whole, was such that there was no objective good faith in allowing directors of a company to approve a transaction which saw one of those directors benefit to the extent of $2 million with the Bank taking no steps of any real nature whatsoever to ensure that the other creditors of the company were not disadvantaged by that transaction.

HAYNE J:   That brings us, does it not, to what is the underlying essence of your proposition, namely, that good faith is objective, not subjective?

MR MORRIS:   That is so.

HAYNE J:   Now, is that not contrary to the whole run of authority on the good faith provisions in insolvency legislation?  Can you point to any case which suggests that the test is objective rather than subjective, the relevant subjective test being identified as acting with propriety and honesty?

MR MORRIS:   The short, frank and candid answer to your Honour’s question is no.  The longer answer is that, in our submission, where one is dealing with an institution like a bank, one cannot say that the bank’s good faith is identified with the subjective state of mind of the particular officers who are involved with conducting the transaction when the bank, as a corporate entity, had the information which, if their minds were turned to it, would inevitably have led one to conclude that this transaction was, as Justice Muir explicitly found, both uncommercial and ultimately insolvent. 

We cannot though, in the same spirit of frankness and candour, put it higher than that, than to say that this case provides, in our submission, a useful vehicle for this Court to identify what are the appropriate criteria of good faith when one is dealing with an institution like a bank which has information from which an objective person would undoubtedly conclude that the transaction is an inappropriate one and which the relevant officers of the Bank themselves conceded that if they had turned their minds to the question they would have had serious concerns about it, but where ultimately the individuals who approved the transaction and signed off on it were found to have acted honestly and properly in the way it is expressed in the decision of the Court of Appeal.

HAYNE J:   Can I put to you what seems to me to be the main argument against you, taken from the legislative text itself.  If you go to 588FG(2), FG(2)(a) contains the reference to good faith and on its face has hitherto been understood as a subjective test, but FG(2)(b), with its reference to “no reasonable grounds for suspecting that the company was insolvent” is the objective element that balances the commercial card, as it were.  You have to be subjectively acting in good faith and objectively no reasonable grounds to suspect.  Now, that is the heart of the case against you, I would have thought, Mr Morris.

MR MORRIS:   I accept, if I may say so, that that is the strongest point against us.  I accept that if one applies cases decided particularly in the field of bankruptcy law rather than corporations law there has been a focus on the subjective state of mind of the acting parties.  What takes the issues in this case out of the ordinary is that we have – and I mean no disrespect to the individuals concerned – relatively low level bank officers who themselves were not conscious of acting dishonestly or improperly and yet we have an

institution which had the information from which a conclusion of impropriety could be drawn and the officers of which effectively conceded under cross‑examination that if they had been aware of the facts and directed their attention to it, they would have had concerns. 

As I say, I cannot put it higher than that but, in my submission, that is a novel issue in relation to the interpretation of the good faith point and this case presents a perfect vehicle for determining how the good faith test should be applied in the context of such a corporate entity.

KIRBY J:   Yes.  You have been your usual candid and helpful self, Mr Morris.

MR MORRIS:   Thank you, your Honours.

KIRBY J:   Thank you.  Mr Jackson, the Court does not need your assistance in this application.

The central issue in this application, as it has been argued, is whether the transaction impugned by the applicant was an uncommercial transaction within the meaning of section 588FB of the Corporations Act 2001 (Cth) on the ground that no reasonable person in the company’s circumstances would have entered into it having regard to the matters contained in section 588FB(a) to (d) and that the Bank did not act in good faith because it was a knowing participant in the breach of fiduciary duty by directors of the company in that the purpose of the bank guarantee in question was to secure a private debt of a director of the company, Mr Stephen Tam, and not for the benefit of the company itself.

The conclusion about the transaction and about good faith on the part of the Bank are ordinarily conclusions that depend very much on the assessments reached at trial concerning the dealings and motivations of the actors involved.  Whilst there are arguments both ways, as the dissenting reasons of Justice Jerrard in the Court of Appeal demonstrate, we are not ultimately persuaded that an appeal to this Court would result in disturbing the conclusions reached by the majority. 

A point that is highly persuasive in reaching that conclusion is the point raised by Justice Hayne during the very careful argument advanced to the Court by Mr Morris.  It relates to the juxtaposition in section 588FG(1)(b)(i) with its reference to “benefit and good faith” and the reference in subparagraph (ii) to lack of reasonable grounds for suspecting that a company is insolvent.  The juxtaposition seems to indicate that the benefit of good faith referred to in subparagraph (i) imports a subjective test, whereas the objective concerns are dealt with in subparagraph (ii).  This would conform to a long line of authority in insolvency legislation that a want of good faith in that context is ordinarily taken to require a subjective test. 

For these reasons we are not persuaded that the matter is one that should engage the attention of this Court or requires our intervention.  Accordingly, special leave is refused.  The applicants must pay the respondent’s costs. 

The Court will now adjourn to reconstitute for the following applications.

AT 12.27 PM THE MATTER WAS CONCLUDED