Pascoe Ltd (in Liq) v Lucas No. Scgrg-94-2029 Judgment No. S6660

[1998] SASC 6660

PASCOE LIMITED (IN LIQUIDATION) v LUCAS

Civil

Debelle J

The plaintiff Pascoe Limited (in liquidation) (“Pascoe”) is a company incorporated on 15 November 1988 under the provisions of the International Companies Act, 1981-1982 of the Cook Islands. At all material times its registered office was situated at the offices of Cook Islands Trust Corporation Ltd (later called European Pacific Trust Company (Cook Islands) Ltd) in Rarotonga in the Cook Islands. By order of this court made on 14 August 1991 Pascoe was wound up pursuant to Part 5.7 of the Corporations Law and Mr R A F England (“England”) was appointed liquidator. By order of the Registrar of International and Foreign Companies of the Cook Islands made on 4 March 1992 Pascoe was placed in voluntary liquidation in the Cook Islands and England was appointed liquidator. 

The defendant Mr Peter Lucas (“Lucas”) was at all material times a director of Pascoe.  Although there was a dispute on the pleadings as to when Lucas first became a director of Pascoe, it is now common ground that he held office as a director between 18 November 1988 and 11 December 1989.  In this action Pascoe claims that in 1988 and 1989 Lucas acted in breach of his statutory and fiduciary duties as a director of Pascoe and claims in excess of $50 million as damages.

The events which give rise to the claim involve a number of companies.  Most of those companies were part of the Bond Group of Companies.  I will describe those companies and their relationship to one another.  Appendix A to these reasons shows the relationship of the companies in diagrammatic form.

The Bond Group

Bond Corporation Holdings Limited was a company incorporated in Western Australia.  It was the holding company of an extensive group of companies known as the Bond Group.  Its chairman was Mr Alan Bond.  Other members of the board included Mr P Beckwith, Mr P A Mitchell, Mr A G Oates and Lucas.  In 1989 and 1990 Bond Corporation and its subsidiaries encountered serious financial difficulties.  In 1991 Bond Corporation entered into a scheme of arrangement with its creditors.  By order of this court made on 23 December 1993 the company was wound up and England was appointed liquidator.  Bond Corporation is now called Southern Equities Corporation Limited (in liquidation).  Despite the change of name, I will in these reasons call the company “Bond Corporation” and call its group of companies “the Bond Group”. 

A number of officers employed by the Bond Group were actively involved in the transactions the subject of these proceedings.  None of them were called to give evidence.  I list them with a brief description of the office they held. 

Graeme Baker  Group Company Secretary of the Bond Group

Chris Bennett  Group Chief Accountant of the Bond Group

Robyn Devries  Group Treasurer of the Bond Group

Maureen Noonan                Assistant Group Treasurer (Risk Management) of
  the Bond Group. She controlled the day to day
  treasury operations of the Group.

Alistair Nicholson              Group Treasury Manager of the Bond Group

Adrian Nizzola  A solicitor employed in the Bond Group Finance
  Department

Mary Tagliaferri                 A legal officer employed in the Bond Group Finance
  Department

Thomas Beregi  Treasury officer (money market dealer), Bond
  Corporation

Mike Issakov  Senior Accountant in the Accounting Department of
  Bond Corporation

Sam Randazzo  Tax adviser employed in the Bond Corporation Tax
  Department

Baker could fairly be described as one of the most senior employees in the Bond Group.  Ms Noonan also assumed a major role.  Both Baker and Noonan played major roles in the transactions the subject of this action.  There is no evidence as to which of the companies in the Bond Group employed those officers other than the last three, who were all employed by the Bond Corporation.  However, it was common ground that they were all officers employed by companies in the Bond Group and, as such, were subject to the direction and control of Bond Corporation.

J N Taylor Holdings Limited (in liquidation) (“J N Taylor Holdings”) is a company incorporated in South Australia.  In November 1988 J N Taylor Holdings was the holding company of a number of companies, including J N Taylor Finance Pty Ltd.  I will call this group “the J N Taylor Group”.  By order of this court dated 10 December 1990 a provisional liquidator was appointed to J N Taylor Holdings.  On 26 March 1991 this court made an order winding up the company and appointed  England as liquidator.

J N Taylor Holdings had been a company in the Bell group of companies of which Mr M R Holmes ÀCourt had been managing director. As from 26 August 1988 Bond Corporation held a controlling interest in J N Taylor Holdings by reason of the fact that it held or had a relevant interest in 46.6 percent of the issued ordinary shares in the company and 46.9 percent of the issued preference shares in the company.  It is unnecessary to trace the shareholding as it is common ground that Bond Corporation controlled the J N Taylor Group at all relevant times.  On 26 August 1988 Bond Corporation asked the directors of J N Taylor Holdings to resign.  They did.  A new board was appointed.  The new board comprised Messrs Alan Bond, Beckwith, Mitchell and Oates, who all were at that time also members of the board of Bond Corporation.  The directors of the subsidiary companies controlled by J N Taylor Holdings also resigned and were replaced by Messrs Bond, Beckwith, Mitchell and Oates. Bond Corporation gained complete control of J N Taylor Holdings in consequence of a takeover offer made on 12 December 1988 by Actraint No.85 Pty Ltd, a subsidiary of Bond Corporation.  On 12 June 1989 Bond Corporation held 98.75 percent of the issued ordinary shares in J N Taylor Holdings.   It is also common ground that, at all material times, Bond Corporation controlled all of the other companies in the Bond Group which are involved in these proceedings.

J N Taylor Finance Pty Ltd (in liquidation) (“J N Taylor Finance”) is a wholly owned subsidiary of J N Taylor Holdings.  On 15 February 1991 this court made an order winding up the company and appointed England as liquidator.   J N Taylor Finance acted as the treasury for the J N Taylor Group.  Companies within the Group invested funds with J N Taylor Finance which, in turn, made loans to other companies in the Group and invested its funds in various other ways.

Dolfinne Developments Pty Ltd (in liquidation) (“Dolfinne”) is another subsidiary of J N Taylor Holdings.  On 1 March 1991 this court made an order winding up the company and appointed England as liquidator.  Dolfinne is not directly controlled by J N Taylor Holdings.  J N Taylor Holdings controls Dolfinne in consequence of the following.  Dolfinne is a wholly owned subsidiary of Dolfinne Finance Pty Ltd which, in turn, is a wholly owned subsidiary of J N Taylor Developments Pty Ltd, which itself is a wholly owned subsidiary of J N Taylor Holdings.  Thus, Dolfinne also is a related company of J N Taylor Finance. 

Pascoe is a wholly owned subsidiary of Dolfinne.  Thus, Pascoe was also controlled by J N Taylor Holdings and was ultimately controlled by Bond Corporation.  I will shortly describe the events which led to the incorporation of Pascoe. 

Catton Finance Limited (“Catton”) is a company duly incorporated in the Cook Islands pursuant to the provisions of the International Companies Act, 1981-1982 of the Cook Islands.  Catton is a wholly owned subsidiary of Bond Corporation.  By order of the Registrar of International and Foreign Companies of the Cook Islands made on 7 September 1993 Catton was placed in voluntary liquidation in the Cook Islands and England was appointed liquidator.  Lucas was a director of Catton from 28 October 1988 to 11 December 1989.

Thus, at all relevant times, Lucas was a director of Bond Corporation, Pascoe and Catton.  He was also a director of Bond Corporation International Ltd in Hong Kong.

Bond Corporation International Ltd was a wholly owned subsidiary of Bond Corporation.  Its head office was in Hong Kong.  Lucas was appointed its managing director in about April 1987 and lived in Hong Kong from then until early 1990.  In October 1987 Mr R L Stevenson joined Lucas in Hong Kong.  Stevenson acted as the general manager of the company.  Stevenson was later appointed as a director of both Pascoe and Catton.

BCF (Bond Corporation Finance) Ltd (“Bond Corporation Finance”) was a company incorporated in Western Australia.  It was a wholly owned subsidiary of Bond Corporation. Its directors in November 1988 were Messrs Bond, Beckwith, Mitchell and Oates and other alternate directors. Bond Corporation Finance had no employees of its own. Its functions were performed by personnel employed by other companies in the Bond Group, notably Bond Corporation. It acted as the treasury for the companies in the Bond Group. It dealt with the cash requirements of the Group and redirected its funds through the Group.  It managed financial dealings such as money market transactions, foreign exchange transactions, raising of capital, and disbursement of moneys among the members of the Bond Group as required.

It is convenient to summarise the position in late November 1988 when the transactions, the subject of these proceedings, took place. 

1.Bond Corporation controlled J N Taylor Holdings and, through it, all of the companies in the J N Taylor Group.

2.Messrs Bond, Beckwith, Mitchell and Oates were directors of Bond Corporation, Bond Corporation Finance, J N Taylor Holdings and all of the companies in the J N Taylor Group other than Pascoe.  Thus, Bond, Beckwith, Mitchell and Oates were all directors of Dolfinne and of Dolfinne Finance.  Baker was also secretary of Dolfinne and Dolfinne Finance.

3.Lucas was a director of Pascoe, Catton, Bond Corporation and Bond Corporation International.

4.Pascoe was a wholly owned subsidiary of J N Taylor Holdings.

5.Bond Corporation Finance and Catton were both wholly owned subsidiaries of Bond Corporation.

6.The companies in the J N Taylor Group, including Pascoe, had no employees of their own.  Management services were provided pursuant to a management agreement with the Bell Group Limited, which was effectively controlled by Bond Corporation. 

Two Other Companies

I now mention two companies which were not at any time members of the Bond Group.  DFC Overseas Investments Limited (subject to statutory management) (“DOI”) is a company incorporated pursuant to the Companies Act, 1955 (NZ).  Its registered office is in Wellington, New Zealand.  In 1988 and 1989 DOI carried on business as a financier.  DFC New Zealand Limited (subject to statutory management) (“DFC”) is a company incorporated pursuant to the provisions of the Companies Act, 1955 (NZ).  Its registered office is in Wellington, New Zealand.  In 1988 and 1989 it, too, carried on business as a financier and banker in New Zealand and elsewhere.  DOI is a subsidiary of DFC.  On 3 October 1989 DOI and DFC were placed under statutory management pursuant to the provisions of the Reserve Bank of New Zealand Act, 1964 (NZ) and on 3 April 1990 the statutory management was subject to the Reserve Bank of New Zealand Act, 1989 (NZ).

Another company which was not a member of the Bond Group was European Pacific Banking Corporation (“EPBC”). It was a company incorporated in the Cook Islands and carried on business as a banker.  Its business was mainly conducted in the Cook Islands, Sydney and Singapore.  It was ultimately owned by the Bank of New Zealand Ltd (as to 40 per cent), Brierley Investments Ltd and Capital Markets Ltd.  EPBC had a subsidiary which in 1988 was called Cook Islands Trust Corporation Limited.  It later changed its named to European Pacific Trust Company (Cook Islands) Ltd.  For convenience I will call it “the Trust Company”.  The Trust Company was incorporated in the Cook Islands and it mainly carried on its business in the Cook Islands. Its business was the provision of banking and corporate administrative services. Those services included the incorporation and administration of companies, provision of nominee directors, company secretarial services, and facilitating on behalf of clients transactions through the Cook Islands.  As will be seen, both EPBC and the Trust Company, and officers of those companies paid an important role in the transactions the subject of this action.

Two former officers of EPBC and the Trust Company gave evidence for the plaintiff.  The first was Mr G W Couttie, who is now a solicitor practising in New Zealand.  He had been admitted as a barrister and solicitor in New Zealand.  In 1987 he took up employment with the Trust Company, then called Cook Islands Trust Corporation Limited.  He remained in that employ until April 1989.  He was succeeded by Mr C G McKie.  Mr McKie is a solicitor who now practises in Perth.  He was a solicitor when he went to the Cook Islands, having been admitted in 1985 in Western Australia.  Both Couttie and McKie were at different times directors of EPBC and of the Trust Company.  Both were at one time directors of Pascoe and Catton.  I will list in a moment the directors of Pascoe and Catton.  Both at different times took instructions from Graeme Baker.  As McKie said, he understood his duties as an officer of the Trust Company to act on the instructions of the client at all times, and it is clear that he acted in that way.

It is necessary to notice three  other officers employed in the Cook Islands by the Trust Company.   They were Mr M J Reynolds, Ms Deborah Strassnick and Mr T Clarke, all of whom were solicitors.  Reynolds was at all material times a director of both Pascoe and Catton but has not been joined as a defendant. 

The Directors of Pascoe and Catton

The original directors of Pascoe were Messrs Couttie and Reynolds.  They were appointed on 15 November 1988 when the company was incorporated. Couttie resigned on 26 May 1989 and Reynolds resigned on 13 June 1989.  On 18 November 1988 Lucas and Stevens were appointed.  Lucas remained a director until 11 December 1989.  On 13 June 1989 Mr C J McKie was appointed in place of Couttie, who had resigned.  At different times there were alternate directors.  They were Ms Deborah Strassnick (alternate to Couttie), Mr T C Clarke (alternate to Lucas), Mr D R McNair (alternate to Stevenson) and Hamilton Limited (another EPBC company which on 15 May 1989 was appointed as alternate for Reynolds, and on 13 June 1989 was appointed as alternate for McKie). 

Catton had been incorporated on 10 February 1988.  Its original director was Hamilton Limited.  On 28 October 1988 Lucas and Stevenson were appointed directors and McKie joined them as a director on 15 May 1989.  Alternate directors were Ms Deborah Strassnick (alternate to Stevenson), Mr T C Clarke (alternate to Lucas) and Hamilton Limited (alternate to McKie).  Hamilton had ceased to be a director on 15 May 1989 but became McKie’s alternate on the same date. 

The Plaintiff’s Witnesses

The plaintiff called both Couttie and McKie.  Evidence on behalf of the plaintiff was also given by two other witnesses, Mr R M Hay and Mr N J Wood.  Mr Hay was formerly employed by the group of which EPBC and the Trust Company were members.  His evidence proves some of the banking transactions made through EPBC.  Mr Wood is a former employee of the Bank of New Zealand in Australia.  In 1988 he was Manager, Banking Operations of that Bank.  His evidence proves the banking transactions which occurred in the course of the dealings the subject of these proceedings.  Both gave their evidence in affidavits tendered by consent.  Their evidence was uncontentious. 

England, as liquidator of Pascoe, had given both Couttie and McKie immunity from legal proceedings if they gave evidence in this action.  The letter to each recording the indemnity agreement was in similar terms.  Each letter referred to recent conversations with the solicitor for the liquidator and then stated that England, as liquidator of Pascoe, agreed to indemnify each “against all claims that may be made against you in consequence of you giving evidence in connection with the affairs of Pascoe”.  Thus, notwithstanding that they were at different times directors of Pascoe, neither Couttie nor McKie were defendants in this action. 

Couttie asserted that he had a good recollection of the events and transactions in which he had been involved some nine years ago.  He went so far as to assert that he was not reconstructing events but was able to recall them, given that documents existed which refreshed his memory. He had no contemporaneous notes which he could use to refresh his memory.  Although he has been required to give an account of these events on several occasions since, I believe that there is a significant element of reconstruction in his evidence and I do not accept his assurance to the contrary.  On one or two occasions it was demonstrated that his reconstruction was, in fact, incorrect. Observing him in the witness box, it was quite apparent that he was refreshing his memory from the documents.  It is relevant that Couttie occupied a position which required him to enter into hundreds of transactions of like nature to those the subject of this action.  It strains credulity to breaking point to accept that he is now able to recall each step in each of the transactions in this action.

As already mentioned, McKie had replaced Couttie as an employee of the Trust Company in about March 1989.  They worked together for about one month before Couttie left and returned to New Zealand.  Couttie handed over to McKie in about April 1989.  McKie also asserted that he had a good recollection of events independently of the documents.  He went so far as to say he recalled them clearly.  I do not accept that assertion.  Like Couttie, his duties required him to handle hundreds of transactions and I do not believe that he is now able to recall each step in the transactions involved in this action.  Furthermore, at an early stage, he was shown to be incorrect in his recollection, and thereafter it was quite apparent that he was, on many occasions, reconstructing events from the documents.  Like Couttie, he had not made notes or had any other contemporaneous record other than the proved documents to refresh his memory.  For example, there are quite a few occasions when, having been shown a document and asked if he acted on it, he answered saying “I expect I did”  or “I would have” or an expression similar to that.  On some occasions, he had to revise his evidence when confronted with a document inconsistent with earlier evidence.  In cross-examination, he often could not recall events.

McKie also asserted that, when instructions came from the Bond Group in Perth, he would first check with Lucas and Stevenson, the directors in Hong Kong, whether it was proper to proceed.  I do not accept that evidence.  Not only was that shown to be wrong on one occasion, it is apparent that he, like Couttie, acted on the bidding of officers of Bond Corporation, since that was the role they were paid to perform. 

No other witnesses were called by the plaintiff.  In particular, the plaintiff did not call either Baker or Noonan or any other person who had been formerly employed by Bond Corporation and who had been involved in the transactions the subject of these proceedings.

The Defendant’s Witnesses

Lucas gave evidence on his own behalf and called one other witness, Mr M H Bloom.

Lucas had practised as a solicitor in Albury, New South Wales from 1961 to 1968.  In 1968 he took up an appointment as a legal officer with Western Mining Corporation.  In 1971 he joined Bond Corporation as a legal officer.  He gradually became a director of several companies in the Bond Group.  In 1976 he left the Bond Group for a period, during which he was, among other things, managing director of Robe River Limited.  In about 1984 he rejoined the Bond Group as its state manager in New South Wales.  In 1985 he became a director of Bond Corporation. In 1987 he took up the position of managing director of Bond Corporation International Limited, which had its office in Hong Kong.  Lucas resided in Hong Kong from about April 1987 until early 1990.  In that time he returned to Perth from time to time to attend board meetings of Bond Corporation but he did not attend all of those meetings.  Lucas travelled extensively in the course of his duties.  In July 1987 he suffered a heart attack and was unable to attend fully to his duties until about October 1987. 

Lucas said that he had no recollection of the transactions the subject of this action.  He admitted signing documents which bore his signature but said that those documents did not refresh his memory.  He said that he could not recall any transaction in which either Pascoe or Catton was involved.  He could not offer any explanation for the transactions.  Making all due allowance for the fact that these events happened some nine years ago and the transactions were part of many in which he would have participated by virtue of the offices he held in the Bond Group, it is difficult to accept that Lucas has no recollection at all of these transactions or of the events surrounding them.  It is more likely that his memory would be prompted by the documents.  While he might not, for understandable reasons, remember all of the details, he would in all likelihood have a recollection of the broader facts.  For these reasons, I do not accept his evidence that he cannot recall anything about these transactions.

Mr Bloom is a chartered accountant who is a partner in the firm of Horwarth Sydney Partnership, a substantial firm of chartered accountants.  He was born in South Africa.  He holds the degree of Bachelor of Commerce from the University of Witwatersrand where he was a university medallist.  He was a chartered accountant in South Africa from 1964 to 1972, when he emigrated to Australia.  He has practised as an accountant in Australia and his main area of practice has been in audit work.  He has for the past five years been a member of the Professional Standards Committee of the Institute of Chartered Accountants in Australia and is a member of the Accounting Liaison Committee between major accounting firms and the Australian Securities Commission.  In my view he is an expert qualified to give evidence on accounting matters.  His evidence is limited to two narrow issues.  I accept his evidence.

Thus, the only witnesses called who had any direct involvement with the transactions the subject of this action were Couttie, McKie and Lucas.  However, as will appear later, all three were acting at the behest of officers in the Bond Group in Australia.  Neither Couttie, McKie or Lucas devised any of the transactions.  Instead, they simply carried out instructions given to them from time to time by one or more officers in the Bond Group.  None of the relevant officers in the Bond Group were called.  There was no explanation for their absence.  The court is, therefore, left with no evidence as to the reasons for these transactions from the persons who initiated and directed them.  As already mentioned, I do not accept that either Couttie or McKie has an independent recollection of the events.  Lucas said he could not remember them.  Thus, the plaintiff’s case is essentially one which depends on inferences to be drawn from a few objective facts and mainly from documents.  As will be seen, there are occasions when more than one interpretation of the documents is available.  On other occasions, it is simply not possible to draw from the documents the inferences for which the plaintiff contends.

Couttie’s Trip to Australia      

The transactions the subject of these proceedings were by no means the only transactions of this kind which the Trust Company carried out for companies in the Bond Group.  When Couttie took up employment with the Trust Company, Bond Corporation was already its client. Couttie gave evidence, which I accept, that there was a fairly significant volume of transactions and the workload for the Trust Company grew tremendously while he was employed in 1988 and 1989. 

One indication of the extent of the use of the Trust Company by the Bond Group was that Couttie made several trips to Perth.  He made the first in February 1988.  On that occasion he went to both Sydney and Perth.  In Sydney he met Robin Devries, Maureen Noonan and other senior executives in the Bond treasury.  In Perth he met four directors, Messrs Bond, Beckwith, Mitchell and Oates, as well as Baker, Nizzola and other senior executives, including Sam Randazzo, a tax expert.  The purpose of the trip was to market the services of the Trust Company and to explain the procedures of EPBC.  There were discussions as to the nature of transactions.  I find that those discussions included transactions in the nature of back to back loans.  That is demonstrated by the relatively extensive use of such transactions in 1988 and 1989.  It is reasonable to infer, as I do, that Messrs Bond, Beckwich, Mitchell and Oates, as directors of Bond Corporation and the companies in the J N Taylor Group were aware of the general nature of back to back loans and authorised their senior executives such as Noonan and Baker to engage in them.  I do not suggest that these transactions were always formally authorised by a resolution of the relevant company.  It is apparent from the documents that they were not all authorised.  But, such is the volume of the transactions, it would be unrealistic to reach any conclusion other than that they were carried out with the knowledge and consent of Messrs Bond, Beckwith, Mitchell and Oates.

Two Loans by J N Taylor Finance

As at 15 November 1988 J N Taylor Finance had lent $126.8 million indirectly to Bond Corporation Finance.  There may have been other loans.  It is sufficient for present purposes to note the loan of $126.8 million.  The loan had been effected by two separate sets of transactions.  In the first, J N Taylor Finance had lent or placed on deposit $101 million with Merchant Capital Limited which, in turn, had lent that sum to Bond Corporation Finance.  In the second, J N Taylor Finance had lent or placed on deposit $25.8 million with Winnington Securities Limited (“Winnington”) which, in turn, had lent that sum to Markland Investments Limited (“Markland”) which then, in turn, had lent that sum to Bond Corporation Finance. 

It is not entirely clear whether all of these loans were at arm’s length.  The evidence suggests that these and other companies to which I will shortly refer were prepared to enter into back to back loans on a limited recourse basis in payment for a fee, usually quite a substantial fee.  The nature of these limited recourse arrangements was that a loan was repayable only if the borrower has had repaid to it a loan which it, in turn, had earlier made to another.  Whether the loans were at arm’s length is not in the result a matter of consequence in relation to the above loans.

By a series of transactions between 22 and 24 November 1988 those loans and deposits were repaid.  The transactions which brought about that result include the transactions impugned in these proceedings.  It is necessary to describe the transactions in some detail.  The following are the facts as I find them to be.

Pascoe is Incorporated

On 15 November 1988 Couttie was asked by Ms Maureen Noonan to incorporate an international company in the Cook Islands.  The relevant legislation is the International Companies Act, 1981-1982 of the Cook Islands.  That Act authorises the incorporation of what it calls “international companies”.  Maureen Noonan instructed Couttie that the new company was to be part of the J N Taylor Group.  It was intended that Pascoe would be a wholly owned subsidiary of J N Taylor Finance.  As will be seen, these instructions were later confirmed in writing. 

In this transaction as well as in most of those which followed, Couttie received his instructions at different times from either Noonan or Baker.  Baker was in the Perth office of Bond Corporation and Noonan was in its Sydney office.  As Couttie explained in his evidence, it was “a Bond inspired transaction”.

In accordance with the instructions received from Maureen Noonan, Couttie together with Reynolds incorporated Pascoe on 15 November and prepared the usual initial resolutions of the company including resolutions to appoint directors.  The first directors were Couttie and Reynolds.  It was also resolved to transfer to J N Taylor Finance the only issued share from the Trust Company which had subscribed to this share.  On 15 November 1988 Reynolds reported that Pascoe had been incorporated and sent the share transfer to Ms Noonan for execution with a copy of the certificate of incorporation and some other documents.  It was later decided to transfer the share to Dolfinne.  It seems that decision was made on or about 22 or 23 November.  It is, however, quite clear that the original intention was that Pascoe should be the wholly owned subsidiary of J N Taylor Finance.  Couttie and Reynolds, as directors of Pascoe, also resolved to open a bank account.  Pascoe did in fact open an account with EPBC.  Ms Debra Strassnick was appointed an alternate director.

The First Proposal

The original reason for the incorporation of Pascoe was to enable a series of loans to be made from one company to another, what are frequently called “back to back loans”.  The loans were to be made on a limited recourse basis. According to Couttie, Ms Noonan told him that the intention was “to move money from J N Taylor through” to the Bank of Tokyo. At first he did not get any more detail.  On 16 November it was intended that a loan would be made first by J N Taylor Finance to Pascoe, then by Pascoe to DOI, and then by DOI to Bond Corporation Finance.   On 16 November Couttie and Reynolds, as directors of Pascoe, made a resolution that Pascoe would enter into these arrangements.  A copy of the minutes of the meeting was sent to Maureen Noonan.  She asked Couttie to amend the minutes.  She told him that the loan between Pascoe and DOI should be “isolated” from the loan by DOI to Bond Corporation Finance.  Couttie and Reynolds then carried a different resolution which referred only to a loan from Pascoe to DOI.  This is but one of several instances which illustrate how Couttie and other officers of the Trust Company simply acted at the bidding of Noonan, Baker, or other officers in the Bond Group. 

Later again, Noonan or Baker amended the instructions to Couttie.  Instead of a loan directly from Pascoe to DOI and then a loan from DOI to Bond Corporation Finance, it was proposed to introduce another step with a loan to Catton.  It was then intended to complete these transactions by 18 November. The sum then involved was $50 million.  Catton had already been incorporated. As mentioned earlier, it was a wholly owned subsidiary of Bond Corporation.  Lucas and Stevenson had been appointed directors of Catton on 28 October 1988.  Couttie and Debra Strassnick met as alternate directors of Catton on 16 November and resolved to borrow from DOI and, in turn, lend to Bond Corporation Finance.  Lucas was not a party to this resolution.  In addition, there is no evidence that the resolution came to his attention and I find that it was not.  At this stage Couttie was attending to the resolution and other documentation, at all times acting on the instructions of Noonan or Baker. 

On 17 November Couttie had not received the form transferring the single share in Pascoe to J N Taylor Finance.  On that day he sent a facsimile to Ms Noonan requesting the executed transfer.

On 18 November Baker confirmed in writing the instructions given by Maureen Noonan to incorporate Pascoe, saying “JN Taylor Finance Pty Ltd does require the incorporation of the above company”, referring to Pascoe.  The letter continued:

“I would suggest that you should appoint Peter Lucas and Rob Stevenson as the Directors with yourself and another person from your office as their respective alternates.”

Stevenson was then the general manager of Bond Corporation International Ltd in Hong Kong.  Like Lucas, he then resided in Hong Kong.  Thus, Noonan and Baker were directing not only the incorporation of Pascoe but also the appointment of directors. The resolution appointing Lucas and Stevenson was carried on 18 November by Couttie and Reynolds.  Later, on 21 November, Couttie received further confirmation in writing of the instructions to incorporate Pascoe in the form of a letter bearing the letterhead of J N Taylor Holdings not J N Taylor Finance.  The letter was signed by Macpherson as secretary of J N Taylor Holdings.

Pursuant to Baker’s direction, alternate directors were also appointed in addition to Debra Strassnick.  They were Mr T C Clarke and Mr D R McNair, both of whom were solicitors in the employ of the Trust Company.  In addition, Hamilton Ltd was appointed as a fourth alternate director. All of these alternates were at different times party to resolutions of Pascoe. 

As already mentioned, on 18 November 1988, Baker had instructed Couttie to appoint Lucas and Stevenson as directors for Pascoe.  Lucas said that he was not consulted about the appointment.  There is no suggestion in Baker’s letter that he was consulted.  According to Couttie, it was a policy of the Bond Group to appoint persons living outside Australia as directors of its subsidiaries outside Australia.  There is no other direct evidence on this topic.  The documents suggest that companies were incorporated and directors appointed as and when executives of Bond Corporation thought necessary.  Lucas would have been aware of the practice.  I find that he was not consulted on each occasion when he was appointed a director and was not consulted about becoming a director of Pascoe.  The issue is not of great significance because Lucas does not dispute his directorship.  What this does, however, illustrate, if not emphasise, is the fact that all of these events were being manipulated from Sydney and Perth by Noonan and Baker.  It is to be noted that the back to back loan proposal had been initiated before Lucas and Stevenson had been appointed directors of Pascoe.

Minutes of the resolution appointing Lucas and Stevenson were prepared and sent to Hong Kong where both Lucas and Stevenson resided.  The forms of consent to act as directors executed by Lucas and Stevenson were not received by the Trust Company until after 12 December 1988.  However, as mentioned above, Lucas does not dispute that he was a director of Pascoe from 18 November 1988. 

A Different Transaction is Proposed

Some time later, the transaction as originally proposed was amended.  A facsimile from Baker to Ms Noonan dated 23 November records the alterations.  It reads:

“RE:  PASCOE LIMITED

I have spoken to Andrew Parkinson of the Bell Group and Sam Randazzo and they have suggested that we should capitalise Pascoe as opposed to lending funds to that company.

This would involve the owner of the funds, which I understand is not J.N. Taylor Finance Pty Ltd, to lend those funds to J.N. Taylor Finance Pty Ltd at interest.  J.N. Taylor Finance Pty Ltd will in turn lend those funds to Dolfinne Finance Pty Ltd at interest.  Dolfinne Finance Pty Ltd will take up redeemable preference shares in Dolfinne Developments Pty Ltd which company will in turn take up A$100m of redeemable ordinary shares in Pascoe Limited.

I understand that A$100m will flow straight from J.N. Taylor Finance Pty Ltd to Pascoe Limited in accordance with a series of directions as between each of the abovementioned companies.

I will provide copies of these directions to the Accounts Department so that they can properly record the abovementioned flow of funds.”

Thus, instead of J N Taylor Finance lending money to Pascoe, it was resolved that Dolfinne should take up shares in Pascoe so that Pascoe would be capitalised with sufficient funds to enter into the separate loans.  By this time the amount of the loans had increased from $50 million to $100 million.  According to Couttie, Noonan told him that the decision to capitalise Pascoe was made for “tax reasons”.

Other alterations were proposed.  By about 22 November, there were four main changes to the transaction.

1.The documents recording the loan from Pascoe to DOI were amended to delete any reference in the loan agreement to the limited recourse agreement.  It was decided that the agreement would instead be recorded in a letter called “the side letter”.

2.Catton has been introduced into the series of back to back loans.

3.J N Taylor Finance was not going to lend money direct to Pascoe.  Instead, the funds to enable Pascoe to make the back to back loans were to be provided by J N Taylor Finance lending to Dolfinne sufficient funds to enable it to subscribe for shares in Pascoe.

4.The transactions would involve the amount of $100 million, $50 million to be lent via DOI to Catton and thence to Bond Corporation Finance and the other $50 million to be lent via EPBC to Catton and thence to Bond Corporation Finance.

Despite the intention that Dolfinne would take up shares in Pascoe and so capitalise it, the flow of funds was to be direct from J N Taylor Finance to Pascoe.

In other circumstances, one might not have described all the steps leading up to these variations but have started with the varied arrangements.  However, in this case, the circumstances surrounding the original transactions and the variations are very material to the issues in this action.  They provide an insight into the control of these transactions by officers of Bond Corporation and its subsidiaries in Australia.  Their direction and control of these transactions is an important issue in determining whether Lucas is liable for any breach of his duties as a director.

A Capitalisation and Subsequent Loans

On 22 November 1988, the directors of Pascoe gave effect to the instruction to Couttie to capitalise Pascoe by resolving to issue 100 million redeemable ordinary shares to Dolfinne at a price of one dollar each.  Dolfinne took up the subscription.  Thus, Pascoe was capitalised in the sum of $100 million in addition to the original share which had been transferred to Dolfinne. 

On the same day, Hamilton Ltd as well as Lucas and Stevenson, as directors of Catton, resolved that Catton would:

1      borrow $50 million from EPBC;

2      borrow $50 million from DOI; and

3on receipt of the funds from these two loans, lend $100 million to Bond Corporation Finance.

This resolution was carried before Pascoe had resolved to lend or had in fact lent the two sums of $50 million to DOI and EPBC.  This resolution was later altered in December 1988 by Couttie at the direction of officers of Bond Corporation.  The willingness of Couttie and of the directors of Catton (including Couttie) to alter the resolution is yet another instance of the frequent occasions when Couttie and the directors of Pascoe or Catton acted without question at the direction of Baker or Noonan.  The documentation to give effect to the loans was later executed.

On 23 November 1988 Couttie, Reynolds, Lucas and Stevenson, as directors of Pascoe, resolved by separate resolutions

1to deposit $50 million with EPBC on terms that there was limited recourse, namely, that EPBC was not required to repay the loan unless it had been repaid by Catton; and

2to lend up to $50 million to DOI on terms that there was limited recourse, namely, that DOI was not required to repay the loan unless it had been repaid by Catton.

The second resolution was altered later the same day at the direction of officers of Bond Corporation so that the agreement as to limited recourse was provided in a side letter.  The original resolution also stated that Pascoe would borrow $50 million from DOI but the word “borrow” was later amended to “lend”.  Lucas gave evidence that the terms of the original resolution were correct and that it was intended that Pascoe would borrow $50 million from DOI.  I do not accept his evidence.  It is wholly inconsistent with the events which followed.  I find that the word “borrow” was used wrongly and that it was in fact resolved that Pascoe would lend $50 million to DOI.  It was Couttie who amended the minute by substituting “lend” for “borrow”.  He says that he sent by facsimile an initialled amendment of the resolution to Lucas and Stevenson.  No copy of that document was produced by the plaintiff.  This is so notwithstanding the fact that in excess of 1300 exhibits were tendered by the plaintiff.  It is unnecessary to determine whether Couttie’s evidence should or should not be accepted on this point.  The fact that an alteration was required and was amended as directed from Australia is but one of the indications that little thought was being given to the terms of these resolutions by directors.  At the risk of repetition, both the officers of the Trust Company and the directors of the respective companies simply acted at the bidding of the officers of Bond Corporation in Australia without closely examining the implications of what was in fact occurring. The documentation to give effect to these loans was executed on 23 November.

On 23 November three directors of Bond Corporation Finance resolved that it should enter into an agreement to borrow $100 million from Catton.  The three directors were Mitchell and Oates (both directors of Bond Corporation) and a Mr Reed.  The directors also resolved to grant a power of attorney to Couttie, Reynolds and a third person called Stenson for the purposes of signing the loan agreement together with any other documents necessary to facilitate the transaction.

Summary of Proposed Loans

To summarise, Pascoe was to have an injection of capital from Dolfinne (ultimately from J N Taylor Finance) and, when capitalised, was to lend the whole of that sum by two different sets of back to back loans, each of $50 million.  The first set was a loan of $50 million to DOI which, in turn, would lend the same sum to Catton.  The second set was a deposit of $50 million with EPBC which, in turn, would lend that sum to Catton.  Catton would then, in turn, lend $100 million to Bond Corporation Finance.

It will have been noticed that the nature of the proposed transactions altered significantly between 15 November and 23 November.  As already mentioned, Couttie described it as “a Bond inspired transaction”.  He also described the instructions he received concerning the whole transaction as “evolutionary” and a “moving feast”.  The decision to capitalise Pascoe instead of lend it money was made at a very late stage, almost at the last moment.  But, as is apparent from the facts, the transaction was not only being designed in Australia by Noonan, Baker and other officers of Bond Corporation but they were also directing it, making such changes as and when they deemed necessary. 

It should be noted that, although some transactions were authorised by a resolution of the board of the appropriate company, that was by no means a universal practice.  I will later list some instances of important transactions which were not expressly authorised by a resolution of the board of directors of the relevant company. 

The Flow of Funds on 24 November

It is important to examine the flow of funds which occurred to enable these transactions to take place and the funds to be lent to Bond Corporation Finance.  That flow of funds is illustrated in diagrammatic form below. I find that the funds did in fact move in the way I shall describe.  All of the following transactions occurred on 24 November.  In these reasons, all references to monetary transactions are expressed in Australian dollars.

On 24 November 1988, J N Taylor Finance borrowed $71 million from Bell Resources Finance Pty Ltd, one of the companies in the Bell Group which had been acquired by the Bond Group.  The moneys were paid to Pascoe by means of a bank cheque in the sum of $71 million.  The payee named in the cheque was Pascoe.

On the same day, J N Taylor Finance recalled $29 million held on deposit and drew a cheque for $29 million payable to the ANZ Bank for a bank cheque to be drawn in favour of Pascoe.  That bank cheque has not been located.  However, it is clear that on 24 November 1988, $100 million was credited to Pascoe’s account, being two cheques which represented payment from J N Taylor Finance, one for $29 million directly from the resources of J N Taylor Finance and one for $71 million which J N Taylor Finance had borrowed from Bell Resources Finance. 

On the face of the cheques, J N Taylor Finance had lent $100 million to Pascoe. However, the books of J N Taylor Finance record a different transaction, namely, a loan of $100 million by J N Taylor Finance to Dolfinne Finance which, in turn, lent $100 million to Dolfinne.  The books of Dolfinne record a subscription for $100 million redeemable ordinary shares in Pascoe.  The accounts of Pascoe, in turn, show that it received the sum of $100 million as consideration for the issue of those shares.  I later examine whether that was the true nature of the transaction.  For the moment, it is sufficient to focus only on the flow of funds.

The two bank cheques payable to Pascoe were then delivered to the Bank of New Zealand (“BNZ”) at its Sydney office, together with a letter from J N Taylor Finance directing how that sum was to be disbursed.  In accordance with that direction, the whole of the sum of $100 million was electronically transferred to the BNZ at Singapore to be lodged in the account of EPBC “Reference Pascoe Limited”.  EPBC had established an account with the BNZ at Singapore as a bank into which EPBC would receive deposits of funds of clients of EPBC and would thereafter deal with those funds in accordance with its customer’s direction.  The account was similar in operation to a solicitor’s trust account, although it would not be correct to regard it as such.

EPBC had already instructed the BNZ in Singapore to transfer $50 million of that sum to DFC’s account at the BNZ in Sydney for the credit of DOI.  The BNZ at Singapore carried out that instruction.  Upon receipt by it of the sum of $50 million, DOI instructed the BNZ at Sydney to transfer that sum to the BNZ at Singapore to the account of EPBC “Reference Catton”.  On 24 November 1988, the BNZ at Sydney effected that transaction.  The loan to EPBC was effected by an internal transfer from Pascoe to EPBC.

Later that same day, EPBC lent $50 million to Catton by transferring that sum within its own account from its own name to that of Catton.  The instruction was signed by Couttie who was also an officer of EPBC.  Thus, by two separate routes $100 million originally in the hands of Pascoe was deposited in the account of Catton. 

EPBC had instructed the BNZ at Singapore that, upon receipt of the two sums of $50 million into the account of Catton at its Singapore office, it should transfer those two sums to the account of Bond Corporation Finance at the Hong Kong Bank Australia in Sydney.  The BNZ at Singapore carried out those instructions on 24 November 1988.  On that evening, Bond Corporation Finance deposited the sum of $100 million with Societe Generale on 24 hour call.  The money was to be repaid to Bond Corporation Finance at 11.00 am on 25 November.

Thus, in less than 24 hours, the sum of $100 million had been moved from J N Taylor Finance to Bond Corporation Finance.  There is little evidence showing why it was necessary to enter into this extraordinary series of transactions.  Nor is there any evidence why it was not possible simply for the money to be lent directly by J N Taylor Finance to Bond Corporation Finance.  All of the companies involved in these transactions, other than DOI and EPBC, were members of the Bond Corporation Group and DOI and EPBC were in truth mere conduits for the flow of funds, albeit for a substantial fee.  A number of possible explanations exist.  Mr Gray QC, for the plaintiff, sought to advance some in support of the case for the plaintiff.  I will later deal with his arguments and what little evidence exists as to the reasons for these transactions.  For the moment, it is sufficient to note that it was a transaction in which all but two of the companies involved were members of the Bond Group and the flow of funds was in accordance with directions initially given in Australia by officers of Bond Corporation.  The diagram below represents the physical movement of money on 24 November 1988.

BRFL

Other
JNTF
Funds

Dolfinne

$71m

$100 m

Société Génerale

$100m

$100m

$50m

$50m

$50m

$50m

$29m

EPBC

JNTF

BCF

Catton

DOI

Pascoe

In the above diagram, the book entries showing the loan to Dolfinne Finance and thence to Dolfinne to enable it to take up shares in Pascoe have not been shown, except by placing the box marked “Dolfinne” across the line showing the movement of $100 million direct from J N Taylor Finance to Pascoe.

The Flow of Funds on 25 November

On 24 November, officers of Bond Corporation had arranged a foreign exchange transaction with the Bank of Tokyo Australia (“Bank of Tokyo”).  The purpose of the transaction was to have cleared funds available at 9.30 am on 25 November.  The effect of the transaction was to put a little over $126.8 million in the hands of Bond Corporation Finance by means of a loan from the Bank of Tokyo. That transaction proceeded.  At 9.30am on 25 November 1988, Bond Corporation Finance borrowed the sum of $126.8 million from the Bank of Tokyo.  That sum was applied by Bond Corporation Finance to repay two loans.  The first was the loan to it by Markland of $25.8 million and the second was a loan by Merchant Capital Limited. 

Markland applied the sum of $25.8 million to repay a loan to it in the same amount by Winnington.  For its part, Winnington repaid that sum to J N Taylor Finance.  The funds were deposited in the account of J N Taylor Finance at the ANZ Bank in Perth on 25 November.  On the same day, Merchant Capital used the sum of $101 million paid to it to repay that sum to J N Taylor Finance. 

At about 11.00am on 25 November, Societe Generale repaid the deposit of $100 million to Bond Corporation Finance, which deposited that sum in its account at the National Australia Bank in Sydney. The sum of $100 million and other moneys available to Bond Corporation Finance (some $63 million), which had also been directed to the account at the National Australia Bank, were used to repay the loan from the Bank of Tokyo. 

The following diagram illustrates the total flow of funds of both 24 and 25 November 1988.

Other JNTF Funds

$29m

JNTF

$71m

$100m

$63m

$100m

$100m

$126.8m

$101m

$25.8m

$25.8m

$126.8m

$50m

$50m

$101m

$25.8m

$50m

$50m

Catton

EPBC

DOI

Pascoe

Dolfinne

BRL

$100m

$71m

Winnington

BCF

Markland

Bank of
Tokyo

NAB

HKBA

Merchant Capital

Other Funds

Société Génerale

Movement of Funds on 24 November                

Movement of Funds on 25 November                

It is apparent from the timing of these transactions that the intention of Bond Corporation Finance was that the loan from the Bank of Tokyo was wholly dependent on the fact that it was to be repaid almost immediately the loan had been made.  The loan was made at 9.30am on 25 November.  At 11.00am the funds on deposit in Societe Generale were recalled by Bond Corporation Finance and almost immediately added to other funds to repay the loan to the Bank of Tokyo.  This was not simply a coincidence of events.  It had obviously been planned to occur in that way since the deposit with Societe Generale had been made on terms that it would be for a period expiring at 11.00am on 25 November 1988.

Interest is Paid to J N Taylor Finance

Pursuant to its loan agreement, EPBC paid interest to Pascoe on 9 December 1988, 30 December 1988, 31 January 1989, 28 February 1989 and 29 March 1989.  At Pascoe’s direction, EPBC arranged for the interest to be paid to the account of J N Taylor Finance at the ANZ Bank in Perth.  For its part, DOI paid interest on 25 January 1989, 28 March 1989 and 24 May 1989.  Again, those payments of interest were made to the account of J N Taylor Finance at the ANZ Bank in Perth.  There is no evidence why the payments of interest were made to J N Taylor Finance.  Pascoe had its own bank account.  It could have retained the interest and applied it as it thought fit.  The fact that the interest was not used for the purposes of Pascoe but was paid to J N Taylor Finance raises the question whether, despite the fact that the books record a capitalisation by Dolfinne of Pascoe, the true nature of the transaction was a loan by J N Taylor Finance to Pascoe.  If that is so, the interest was being paid to the lender.  That question aside, even if Dolfinne had taken up 100 million shares in Pascoe, the repayment to J N Taylor Finance demonstrates yet again the manipulation of the whole transaction from Australia by officers of Bond Corporation. 

It is also apparent that EPBC was aware of all of these back to back loans as well as other financial arrangements between companies in the Bond Group.  That is clear, not only from its participation in the lending arrangements on 24 November, but also from correspondence in which it advises the amount of interest due on these loans.  A letter from EPBC dated 7 December 1988 is but one instance.  

An Absence of Resolutions

I have earlier mentioned that it was not the universal practice to arrange for resolutions to be carried by the directors of a relevant company authorising particular transactions.  It is convenient to interpolate a list of some quite significant transactions which did not receive express authority.  The list does not purport to be a complete list of all transactions for which there is no express authority from the board of the relevant company.  There are no resolutions relating to the following transactions:

1.The decision by J N Taylor Finance to borrow $71 million from Bell Resources Finance.

2.The decision by J N Taylor Finance to repay $71 million to Bell Resources Finance on 25 November 1988.

3.The decision by J N Taylor Finance to lend $100 million to Dolfinne Finance.

4.The decision of Dolfinne Finance to borrow $100 million from J N Taylor Finance.

5.The decision of Dolfinne Finance to make $100 million available by loan or otherwise to Dolfinne.

6.The decision of Dolfinne to borrow or otherwise obtain the sum of $100 million from Dolfinne Finance. 

7.The decision of Dolfinne to take up an allotment of 100 million redeemable ordinary shares in Pascoe.

In short, there is no relevant resolution at all in the minutes of either J N Taylor Holdings, J N Taylor Finance, Dolfinne or Dolfinne Finance. Yet it was J N Taylor Finance which the plaintiff alleges initiated these dealings and, in particular, the incorporation of Pascoe.  As will be noticed later, quite a number of transactions were entered into in August and September 1989 which were not the subject of resolutions of the directors of the relevant company.

A Stream Returning to its Source?

I pause here to examine what had occurred on 24 and 25 November 1988.  On one view, as the above diagram shows, the result of these transactions is that the sum of $100 million which had left J N Taylor Finance on 24 November has returned to it on 25 November together with a further sum of $26.8 million.  But that is a simplistic and incorrect view.  What in truth has occurred is that J N Taylor Finance has re-arranged some of its lending.  Thus, the loans by J N Taylor Finance to Bond Corporation Finance via Markland and Winnington in the sum of $25.8 million and via Merchant Capital Ltd in the sum of $101 million have been replaced by a loan from J N Taylor Finance to Bond Corporation Finance via the capitalisation of Pascoe and the two sets of loans which end up as a loan to Catton and thence from Catton to Bond Corporation Finance. 

Mr Gray QC, for the plaintiff, contended that it was wrong to reach that conclusion.  He submitted that the funds channelled through Catton to Bond Corporation Finance were on deposit with Societe Generale, while separate funds borrowed from the Bank of Tokyo were used by Bond Corporation Finance to repay the loans from Markland and Merchant Capital.  The effect of the submission is that there were two separate funds.  The submission has a distinct air of unreality and it is belied by the documents.  While there perhaps might be some contexts in which it is appropriate to segregate the funds in the way suggested by Mr Gray QC, it is commercially unrealistic in the context of these transactions. But, given that Bond Corporation Finance had access to more than $26.8 million from other sources and had $100 million on deposit with the Societe Generale, the reality is that it would have been as easy for Bond Corporation Finance to have repaid Markland and Merchant Capital Ltd without the necessity of borrowing from the Bank of Tokyo.

One can speculate why these transactions were arranged. The segregation might have been effected in an attempt to disguise the series of transactions or to disguise the true source of funding of the major part of the $126.8 million.  The side letters are plainly intended to conceal the limited recourse arrangements. A number of other explanations are available. Some were advanced in argument.  I do not think it profitable to engage in any such speculation.  Those who know the reasons for these transactions are Baker and Noonan and perhaps some other officers of Bond Corporation.  But neither Baker nor Noonan nor any other officer of the Bond Group (other than Lucas) was called and there is no explanation for their absence from the witness box.  It is clear that neither Couttie nor Lucas were fully aware of the reasons. They merely acted at the direction of the officers of Bond Corporation.  That does not necessarily mean that Lucas is not liable for a breach of his duties as a director.  Plainly, a director of a company should know why it is lending a sum as substantial as $100 million.  But, given that there are several explanations available, speculation as to the possible reasons for these transactions will not resolve the question whether Lucas is liable.

Couttie gave evidence that the purpose of the transaction was to enable Bond Corporation to “comply with the audit and NCSC requirements and their borrowing requirements”.  His evidence was that Maureen Noonan had given him that information on 16 November.  His evidence bore more than a remarkable similarity to the terms of a document he had prepared with another employee of EPBC on 9 December 1988.  That document (Exhibit P1209) was a memorandum reporting to the Executive Committee of EPBC concerning a transaction involving a company incorporated in Bermuda and called Weeks Investment Co Limited.  The memorandum described the purpose of the transaction in these terms:

“The purpose of the transaction was to isolate the advance from Bell Group from a loan to the Bond Group for Australian audit, and NCSC requirements, and to comply with the Bond Group’s obligations in terms of its borrowing arrangements.”

The memorandum then proceeded to describe how the transaction proceeded in these terms:

“The transaction proceeded as follows:

Weekes deposited AUD50 million into EPBC’s BNZ Singapore account on 14th September 1988 and EPBC lent AUD50 million to Bond Corporation Finance (“BCF”) Limited on 15th September 1988.”

Couttie admitted that he had refreshed his memory from this document before giving his evidence.  He denied that he had reconstructed his evidence of the conversation with Noonan from this document, adding that the transactions were similar and were not unlike others that had occurred earlier.  I do not accept his evidence.  It was the practice in EPBC for memoranda describing transactions to be prepared for the Executive Committee.  Couttie said that one had been prepared in relation to the Pascoe transaction.  Indeed, Exhibit P1209 refers to other similar memoranda.  But the memorandum for the Pascoe transaction has not been proved.  The transactions may have been similar but it does not follow that they were entered into for the same purpose.  However, even if the purpose of the transaction was as Couttie asserted it to be, it does not necessarily mean that Lucas is guilty of any breach of his duties as a director.

EPBC Repays $50 million

Between 25 November 1988 and March 1989, nothing particularly relevant occurred other than the payment of interest to J N Taylor Finance which has been already mentioned.

In March 1989, officers in the Bond Group decided to unwind the EPBC side of the transaction.  Lucas says that he was not asked for any comment, direction or authorisation.  It is, however, clear that he was party to the resolution to request repayment from EPBC which he signed.  I find that, as with the original loans made on 23 November 1988, he adopted a relatively passive role in that he was prepared to do whatever was being requested of him. In that respect his acts or omissions might render him open to criticism for a failure properly to discharge his duties as a director.  But, as will be seen, the question whether Lucas is liable turns on far more than the manner in which he discharged his duties as a director.  It is clear also that Couttie acted at the behest of officers of the Bond Group.

On 28 March 1989 Macpherson, secretary of J N Taylor Holdings, sent Couttie a letter by facsimile instructing him to require EPBC to repay on 29 March  the sum of $50 million which Pascoe had deposited with it.  The letter enclosed a draft resolution and letter to be signed by the directors of Pascoe seeking the repayment.  With the assistance of McKie, who had then joined the Trust Company, Couttie prepared the resolution.  Although it is clear that on 28 March Lucas and Stevenson signed the resolution,  the letter sent by facsimile transmission which enclosed the resolution shows, as McKie admitted, that it was first signed by Debra Strassnick and Reynolds and then sent to Lucas and Stevenson in Hong Kong for their subsequent signature.  This is one instance which gives the lie to what Couttie asserted to be the inviolate and invariable practice of the Trust Company that Lucas and Stevenson always signed resolutions in relation to substantial transactions before the nominee directors in the Cook Islands.  As will be seen, there are other instances where substantial transactions were not referred to Lucas.  Not only does this departure cast grave doubt over the evidence of Couttie and McKie generally and particularly over their assertion that they always consulted Lucas and Stevenson before making a major decision but it also lends further emphasis to the fact that this and other transactions were being manipulated from Australia by officers of Bond Corporation through the Trust Company in the Cook Islands.

The resolution of 28 March 1989 was not mirrored in any resolution by EPBC calling on Catton to repay the loan or by resolution of Catton calling on Bond Corporation Finance to repay it.  Instead, Reynolds signed a letter on behalf of Catton to EPBC confirming that Catton and EPBC had agreed that Catton would, on 29 March 1989, repay with interest the loan from EPBC. 

On 29 March Bond Corporation Finance repaid $50 million plus interest to that date to Catton and Catton, in turn, repaid EPBC.  On the same day,  EPBC repaid Pascoe the sum of $50 million together with interest due to that date.  The resolution of the directors of Pascoe had requested that the repayment of principal and interest be deposited in the account of J N Taylor Finance at the ANZ Bank at its branch at St George’s Terrace, Perth.  EPBC acted in accordance with that request.  Counsel for Pascoe submitted that the payment to J N Taylor Finance was by way of loan.  The resolution does not state that intention.  I do not accept the submission. Thus, the sum of $50 million plus interest was not retained by Pascoe but instead returned to J N Taylor Finance, just as the interest on all of the loans had earlier been paid to J N Taylor Finance at the direction of Pascoe.  This return of the sum of $50 million to J N Taylor Finance again raises the question as to the true nature of the transaction, that is to say, did J N Taylor Finance in fact lend $100 million to Pascoe which, in turn, lent that sum to others, or did J N Taylor lend the money so that Dolfinne could take up the issue of shares in Pascoe? .

By reason of the transaction on 29 March 1989, $50 million out of the total of $100 million advanced by J N Taylor Finance through Dolfinne had been repaid in full.  The plaintiff has not pleaded any loss in relation to this $50 million of the transaction.  I have set out the circumstances of this repayment for the purpose of demonstrating the continuing control and direction of the transaction by officers of Bond Corporation.

The DOI Loan is Extended

On 24 May 1989 McKie received instructions from Mary Tagliaferri at Bond Corporation in Perth to extend the loan to DOI in terms of drafts she sent with the instructions. In accordance with those instructions, he prepared resolutions of the directors of Pascoe and other documents in terms of drafts which she had sent.  The instructions required all of the documents to be prepared by 24 May (Cook Islands time).  The resolution was carried on 24 May.  The effect of the resolution was to extend the loan to DOI from 24 May to 24 November with an option to Pascoe to recall the deposit on one month’s notice to DOI and to keep in place the limited recourse arrangements in the side letter.  The directors present at the meeting on 24 May were Reynolds, Strassnick as alternate for Stevenson, and Clarke as alternate for Lucas. There is no evidence whether Strassnick or Clarke consulted either Stevenson or Lucas concerning the proposed resolution.  As Lucas has no recollection, he is unable to say whether he was consulted.  I place no reliance on the evidence of Lucas for the reasons already given.  However, that does not establish that he was consulted.  The plaintiff has the burden of proof.  Neither Strassnick nor Clarke were called.  I am not prepared to infer that either Lucas or Stevenson were consulted.  There is nothing which points to that conclusion.  Indeed, the fact that all of these transactions were being directed by officers of Bond Corporation in Australia suggests the contrary.  In addition, if Lucas or Stevenson had been consulted, it is likely that they would have signed the resolution.  Further, the fact that Clarke acted as an alternate for Lucas does not have the consequence that Lucas is imputed to know what was known to Clarke.  The knowledge of an alternate will not be imputed to the appointer nor is the appointer liable for the acts of his alternate: Re Associated Tool Industries Ltd (1963) 5 FLR 55 at 68.

The evidence shows that, after a copy of the resolution made on 24 May had been sent to her, Mary Tagliaferri asked that it be amended.  McKie effected the amendment in accordance with her instructions and arranged for the resolution to be signed again.  The resolution was amended on 29 May but back-dated by McKie to 24 May.  McKie’s explanation was that the action was justified as the substance of the minute was not altered.  His explanation might have some force. It is unnecessary to decide that.  But the issue is significant for other reasons.  First, it shows that McKie, like Couttie before him, was prepared to do whatever was requested by executives of Bond Corporation.  Secondly, it shows that, despite his assurances that he did not at any time back-date documents, this is one occasion when he did.  Thirdly, when added to other parts of his evidence, it casts doubt over the reliability of his evidence so that I do not accept that, on receipt of instructions from Perth, he checked them with Lucas and Stevenson in Hong Kong in order to be satisfied that they had turned their minds to the significance of the resolutions.  I find that McKie did not consult Lucas about the resolution of 24 May.  On that last matter there are other documents which reinforce that conclusion, in particular, another resolution made on 24 May 1989 relating to the loan to DOI which was not signed by either Lucas or Stevenson but only by McKie as chairman of the meeting at which Lucas and Stevenson were not present.

Corresponding Extensions of Loans

Between 24 May 1989 and 7 June 1989, corresponding arrangements were made as between DOI and Catton on the one hand, and Catton and Bond Corporation Finance on the other in the following way.

McKie prepared minutes of a meeting of the board of Catton held on 24 May 1989 which noted a letter from DOI extending the repayment date and resolving to agree to the new arrangement.  According to the minutes, those present were McKie, Strassnick for Stevenson and Clarke as alternate for Lucas.  The minute was signed by McKie.  There is no evidence that it was referred to either Lucas or Stevenson.  It is curious to note that the minute was confirmed as a correct copy by another company in the European Pacific Trust Corporation Group, namely, Corporate Secretaries Limited.  It was signed on behalf of Corporate Secretaries Limited by Reynolds.  Those facts reinforce the conclusion that Lucas was not consulted.  Again, if he had been, he would have been asked to sign the resolution.

On 7 June 1989 Catton wrote to Bond Corporate Finance confirming the extension of the repayment date.  This had been authorised at a meeting of the directors of Catton on 7 June 1989.  According to the minute, those present at that meeting were McKie and Strassnick as an alternate to Stevenson.  There is no evidence that the meeting was drawn to the attention of Lucas.  Here again, the minute was signed by McKie as chairman and certified as a true and correct copy by Reynolds on behalf of Corporate Secretaries Limited.  Indeed, all of the documents extending the loans were signed by McKie or other officers of the Trust Company.  I am not prepared to infer that Lucas had notice of the resolution for similar reasons to those already given in relation to the other resolutions of 24 May.  It is to be noted that the Trust Company sent its account for its services in relation to the extension of the date of payment to J N Taylor Holdings, not Pascoe.  This too raises doubts whether Dolfinne did in truth take up shares in Pascoe.

A Request for Earlier Repayment

On 9 August 1989, DOI sent a letter by facsimile to Catton recalling its loan.  On the same day, the directors of Catton met and, having recorded the demand from DOI, resolved to seek early repayment of its loan to Bond Corporation Finance.  Catton wrote to Bond Corporation Finance on the same day.  The new repayment date was to be 13 September 1989.  According to the minutes of Catton, the meeting of the directors on 9 August was attended by McKie and Reynolds as alternate to Stevenson.  The minute was signed by McKie as chairman.  McKie signed the letter dated 9 August requesting the earlier repayment.  Reynolds did not give evidence.  For reasons similar to those given earlier, I am not prepared to find that either Stevenson or Lucas were consulted about the proposed resolutions or knew of them. There is no evidence of any kind from which it can be inferred that Lucas knew of the resolution or was consulted about it. 

On 24 August 1989, acting on the direction of officers in the Bond Group, the directors of Pascoe resolved to require earlier repayment of the loan to DOI.  The amended date for repayment was 13 September 1989.  This resolution thus conformed with the requests for earlier repayment by the other companies involved in this series of back to back loans.  According to the minutes, the directors present at that meeting were McKie and Mr D R McNair as alternate to Stevenson.  McKie signed the minutes as chairman.  There is no evidence from which it can be inferred that the subject matter of this meeting was referred to either Lucas or Stevenson.  On the same day, McKie signed a letter on behalf of Pascoe to DOI requesting the earlier repayment.  Here again, McKie was acting at the direction of officers of Bond Corporation.  For the same reasons as with other resolutions relating to the DOI loan, I am not prepared to find that Lucas was consulted about or knew of these decisions.

DOI accepted the new repayment date by endorsing Pascoe’s letter on 25 August.

The Promissory Notes Are Issued

A major issue between the parties concerns two sets of promissory notes drawn by Bond Corporation Finance to repay the loan by Catton. It is convenient to note the documents first and then deal with the submissions.  According to the documents, the repayment of the series of loans between Pascoe, DOI, Catton and Bond Corporation Finance was effected in the following way. On 14 September 1989, Bond Corporation Finance drew two promissory notes totalling $52.8 million,  one was for the principal sum of $50 million and the second for the interest amounting to $2.8 million. The notes were drawn in favour of Catton.  Thereafter, the notes were endorsed by Catton in favour of DOI and then by DOI in favour of Pascoe.  Pascoe accepted the notes in full and final satisfaction of the amount payable by DOI as principal and interest to Pascoe.  That was evidenced in a letter from Pascoe to DOI dated 14 September 1989.  Later that same day, Pascoe asked that the two notes be replaced by two fresh promissory notes directly from Bond Corporation Finance to Pascoe.  Bond Corporation Finance agreed and the two promissory notes were issued in substitution for the earlier notes.

There is no resolution of either Bond Corporation Finance or Catton authorising the execution of the promissory notes, or their endorsement. Nor is there a resolution of Pascoe authorising the issue of the letter to DOI accepting the promissory notes in full settlement.  Nor is there a resolution of Pascoe requesting cancellation of the notes and the issue of fresh notes or corresponding resolution of Bond Corporation Finance to issue fresh notes. 

Baker had, on 13 September, instructed Parker & Parker, solicitors who then acted for Bond Corporation, to prepare a series of documents. They included the two promissory notes to Catton, the letter from Pascoe to Bond Corporation Finance requesting cancellation of the promissory notes, the drawing by Bond Corporation Finance of two replacement promissory notes in favour of Pascoe, and letters as between each of the companies in this series of back to back loans stating that the notes were to be accepted in full satisfaction of the debt.  In the meantime, by power of attorney, DOI had appointed two solicitors in Parker & Parker as its attorneys to execute the promissory notes and letters of satisfaction. The promissory notes were executed by one of those two solicitors.

Counsel for Pascoe submitted that it was never intended that Pascoe should receive the promissory notes and that there is no evidence that it did.  I do not accept this submission.  The documents indicate the contrary.  If Pascoe had attempted to recover the debt of $50 million from DOI, DOI would have relied on the endorsements on the promissory note and the letter accepting the promissory note in full settlement.  The promissory notes were not sent to McKie in the Cook Islands until early October 1989.  But that proves nothing.  It certainly does not establish that Pascoe did not receive them. 

It may well be that, as was submitted for the plaintiff, the scheme concerning the promissory notes had been contrived by Baker.  The submission does no more than emphasise yet again that this whole transaction was being effectively operated from Australia by Baker, Noonan and other officers in the Bond Group.  It also emphasises the lack of involvement by Lucas.

The plaintiff submits that Baker executed the promissory notes and other documents without authority.  Reliance is placed on the fact that there are no minutes of resolutions

.of Bond Corporation Finance authorising the execution by it of the promissory notes;

.of Catton authorising the entry into the promissory note transaction or conferring on Baker a power of attorney to execute promissory notes on Catton’s behalf;

.of Pascoe authorising entry into the promissory note transaction or conferring on Baker a power of attorney to execute the promissory notes on its behalf;

.of either Pascoe or Catton authorising the cancellation of the promissory notes;

.of Pascoe authorising the execution by Baker of the letters concerning the cancellation of the promissory notes.

But, as already pointed out, it was not unusual for these parties to act in the absence of a resolution of the board of directors of the relevant company.  I have already identified other significant transactions where there is no resolution of directors.  I am not, therefore, prepared to place any significance in the absence of a resolution authorising any of these steps.

I find, therefore, that Pascoe received the promissory notes; that it accepted them in satisfaction of the debt due by DOI; and that it then obtained two replacement promissory notes direct from Bond Corporation Finance. 

The Financial Position of Bond Corporation Finance

For the reasons which follow, I find that on 13 September 1989 the financial position of Bond Corporation and Bond Corporation Finance was precarious and that fact was known to both Lucas and Baker.

In September 1989 the auditors of Bond Corporation and Bond Corporation Finance had not published their reports.  They were not published until November 1989.  The reports contained severe qualifications on the financial stability of both companies.  I refer to those reports, not because they were before the directors and senior officers of the companies in August and September 1989, but because they identify facts which would have been known to the directors and senior officers of the companies from financial reports at board meetings.  Baker, as secretary, would have been aware of the financial situation at least as much as any other director.  The likelihood is that he would have had an even greater appreciation of the true position by reason of his continual involvement in the financial transactions of the Bond Group.  For his part, Lucas admitted, in an examination conducted by the liquidator, that in August and September 1989 the whole Bond Group looked “pretty sick”. 

The auditors of Bond Corporation on 13 November 1989 qualified their audit of the accounts for the year ending 30 June 1989 in a number of significant respects.  It is unnecessary to set out all of the qualifications.  It is sufficient to note that Bond Corporation and the Bond Corporation Group had incurred net losses of $123.3 million and $980.2 million respectively and that the auditors believed that the losses were continuing.  Given that, at 30 June 1989, Bond Corporation and the Bond Corporation Group had an excess of liabilities over assets totalling respectively $65.9 million and $1,362.8 million, the financial position of Bond Corporation and its Group was indeed bleak.  The auditors’ report noted that both Bond Corporation and the Bond Corporation Group had undertaken a reconstruction but, because of uncertainties associated with that reconstruction, the auditors were doubtful as to the success of the proposals.

The accounts of Bond Corporation Finance for the year ending 30 June 1988 disclosed an operating profit of $21,785,072 but a deficiency in shareholders’ funds of $15,205,535.  In the year ending 30 June 1989, it had a profit of $13,628,000 and shareholders’ funds stood at $16,628,000.  However, the auditors’ report noted that Bond Corporation Finance was a wholly owned subsidiary of Bond Corporation and referred to their qualifications of the accounts of that company and of the Bond Corporation Group;  that Bond Corporation Finance had $1,874.8 million owing to it by subsidiaries of Bond Corporation; and that it had doubtful recoveries of other major receivables.  Given the uncertainty whether Bond Corporation Finance could recover those sums, its financial position was indeed precarious in September 1989.

The directors of Dolfinne were also the directors of J N Taylor Finance, J N Taylor Holdings and members of the board of Bond Corporation.  It would be wholly unrealistic to view what occurred in any way other than that Pascoe was acting at the bidding of its only shareholder Dolfinne and its ultimate owners J N Taylor Holdings and Bond Corporation.  By reason of those facts, if in truth Dolfinne subscribed to 100 million shares in Pascoe, it is an inescapable inference that Dolfinne, as the sole shareholder in Pascoe,

(a)knew that Pascoe had been incorporated for the sole purpose of participating in the series of back to back loans to Bond Corporation Finance;

(b)knew that the sum of $50 million was to be lent on a limited recourse basis to DOI;

(c)knew that DOI was, in turn, going to lend those funds to Catton;

(d)knew that the sum of $50 million was to be deposited with EPBC and that EPBC would, in turn, lend that sum to Catton;

(e)knew that Catton was to lend the total sum of $100 million to Bond Corporation Finance;

(f)knew that Catton was a wholly owned subsidiary of Bond Corporation.

Dolfinne not only knew each of the above matters but intended that they should be carried into effect.  Thus, it is quite apparent that every step that was undertaken by Pascoe was being carried out at the behest of Dolfinne.  At the time it made the loans to DOI, Pascoe was solvent.  There is no suggestion that in making the loan it acted ultra vires.  Similarly, when Pascoe accepted the promissory notes in satisfaction of the debt due by DOI, it was solvent and again there is no suggestion that it then acted ultra vires.  Reference to the Articles of Association of Pascoe shows that the impugned transactions were not ultra vires.  See also Rolled Steel Product (Holdings) Ltd v British Steel Corporation [1986] Ch 246 per Slade LJ at 286-287. It might have been commercially unwise to accept the promissory notes from Bond Corporation Finance. But, as Lawson LJ pointed out in Multinational [1983] Ch 258 at 266, just as an individual can act like a fool provided he keeps within the law, so can shareholders of a company: see also Dillon LJ at 288.

I, therefore, find that everything which Pascoe did in relation to each step in these transactions was done at the behest of and with the knowledge and approval of Dolfinne.

Another feature of these transactions should also be noted.  If Pascoe succeeds in this action, the proceeds will be paid to Dolfinne, since Pascoe has a liability to creditors in a nominal amount only. Yet it was Dolfinne which authorised Pascoe to act.  Ultimately, the beneficiary of the award will be J N Taylor Finance if for no other reason than that the statement of affairs of Dolfinne Finance shows that its only creditors are J N Taylor Finance and, in the case of Dolfinne, J N Taylor Holdings and J N Taylor Finance.  Yet it was J N Taylor Holdings and J N Taylor Finance who initiated these transactions.  Had J N Taylor Finance not lent $100 million to Dolfinne, the transaction could not have proceeded.

Is Lucas Liable?

The answer to the question whether, in the circumstances as found, Lucas is liable will be assisted by consideration of several well-established principles. 

(1)Pascoe was, of course, a different legal person from its shareholder and was not the agent of its shareholder: Salomon v A Salomon & Co Limited [1897] AC 22.

(2)Where the articles of a company provide that the management of the company is vested in its directors, the directors exercise that power free from any directions by the shareholders in general meeting: see, for example, Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 at 837 and Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666. The articles of Pascoe vest the management of the company in its directors.

(3)However, the principle noted in the preceding paragraph is not absolute. The following is one qualification.  Provided that the company is solvent, and that the shareholders are acting intra vires and in good faith, a unanimous vote of the shareholders of a company may authorise or validate a transaction into which the company has entered in accordance with the resolution of its directors: Bamford v Bamford [1970] Ch 212 at 238-242; Winthrop Investments Ltd v Winns Ltd (supra) at 679, 680-289; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 at 729-733. In Kinsela’s Case it was also held that a resolution of an insolvent company in general meeting cannot authorise a decision to prejudice creditors.  But, as Pascoe was solvent at all relevant times, it is unnecessary to be concerned with the question whether creditors were prejudiced.  I will deal with that issue more fully a little later. 

As Street CJ observed at 730:

“In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise.  If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done.  But where a company is insolvent the interests of the creditors intrude.  They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets.  It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.”

Hope JA and McHugh JA both agreed with Street CJ, who then went on to cite with approval the following observations of Slade LJ in Rolled Steel Products (Holdings) Ltd v British Steel Corporation (supra) at 296-297:

“However, the clear general principle is that any act that falls within the corporate capacity of a company will bind it if it is done with the unanimous consents of all the shareholders or is subsequently ratified by such consents: see, for example, Salomon v A Salomon & Co Ltd [1871] AC 22, 57 per Lord Davey; In re Horsley & Weight Ltd [1982] Ch 442, 454 per Buckley LJ and Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258. This last-mentioned principle certainly is not an unqualified one. In particular, it will not enable the shareholders of a company to bind the company itself to a transaction which constitutes a fraud on its creditors: see, for example, In re Halt Garage(1964) Ltd [1982] 3 All ER 1016; per Oliver J.  But none of the authorities which have been cited to us have convinced me that a transaction which (i) falls within the letter of the express or implied powers of a company conferred by its memorandum, and (ii) does not involve a fraud on its creditors, and (iii) is assented to by all the shareholders, will not bind a fully solvent company merely because the intention of the directors, or the shareholders, is to effect a purpose not authorised by the memorandum.  The recent decision of this court in the Multinational case [1983] Ch 258 seems to me to point to a contrary conclusion: see also Attorney-General’s Reference (No 2 of 1982) [1984] QB 624, 640 per Kerr LJ.”

For decisions to like effect, see also Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 at 247-250, 254, 255-256; Brick and Pipe Industries v Occidental Life Nominees Pty Ltd (1990) 3 ACSR 649.

(4)Like reasoning leads to the conclusion that, where a company is solvent and the directors act at the direction and behest of the shareholders who are unanimous in their wishes and act intra vires and in good faith, the directors are not liable to the company: Multinational Gas & Petrochemical Co Limited v Multinational Gas & Petrochemical Services Ltd [1983] 1 Ch 258 per Lawton LJ at 269 and per Dillon LJ at 289-290. See also Attorney-General for Canada v Standard Trust Company of New York [1911] AC 498; Re ExpressEngineering Works Ltd [1920] 1 Ch 466; and Re Horsley & Weight Ltd [1982] Ch 442. The principle is in essence the same as that in the previous paragraphs, namely, that if the shareholders approve what the directors have done, there is no cause of action because at the time there is no damage. The shareholders adopt the acts of the directors and, as shareholders in agreement with each other, make those acts the acts of the company: see Multinational (supra) per Lawton LJ at 269.  See also Attorney-General for Canada v Standard Trust Company of New York (supra) at 504. There does not appear to be any reason why this principle should not also apply where the directors in furtherance of a scheme which has been propounded by officers of the company which is both its ultimate holding company as well as the ultimate holding company of the company which is its only shareholder. In truth it is the same proposition as proposition 4.

(5)The propositions expressed in paragraphs 3 and 4 apply even if the decision of the shareholders has been made informally and without any meeting:  Parker and Cooper Limited v Reading [1926] Ch 975; Re Duomatic Limited [1969] 2 Ch 365; Brick and Pipe Industries v Occidental Life Nominees Pty Ltd (supra) at 685-687.

(6)The consent of the shareholders to the conduct of the directors can be prospective as well as by way of ratification: Kinsela (supra) at 730, 732; ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd [1991] 2 Qd R 360 at 363; Brick & Pipe Industries Ltd v Occidental Life Nominees Ltd (supra); Thorby v Goldberg (1964) 112 CLR 597 at 616.

(7)If the company is bound by what was done when it was a going concern, the liquidator is in no better position:  Multinational per Lawson LJ at 267 and per Dillon LJ at 290 who observed:

......... “If the company is bound by what was done when it was a going concern, then the liquidator is in no better position.  He cannot sue the members because he owed no duty to the company as a separate entity and he cannot sue the directors because the decisions which he seeks to impugn were made by, and with the full assent of, the members.”

As the Judicial Committee of the Privy Council expressed the principle in Attorney-General of Canada v Standard Trust Company of New York (supra) at 504:

......... “In proceedings of the character of the present the title of a liquidator as representing creditors cannot be higher than the title of the company against whom the creditors claim.  In this case the interests of the company and of the syndicate were identical.  The only persons beneficially interested in the company were the four members of the syndicate.  The law gave them the complete control of its action.  Under that control the company gave effect to the policy of the only persons who had any beneficial interest in its capital.  The case is not one in which the apparent procedure can be said to have been unreal, or to have been a cloak under which a conspiracy to defraud was concealed.  Under these circumstances, their Lordships are of opinion that the company, notwithstanding that no general meeting, apart from the meeting of directors, appears to have been held for the purpose, was completely bound by the transactions sought to be impeached, and that the appellant, who has certainly no title higher than that of the company against the assets of which he claims, is bound likewise.”

(8)The principles in paragraphs 3 and 4 might not apply where directors have been reckless and their recklessness is conduct amounting to fraud: see Re Horsley v Weight Ltd (supra) per Cumming-Bruce LJ and Templeman LJ obiter and see the comments of Dillon LJ in Multinational (supra) at 291. There is no allegation in the pleadings that Lucas acted recklessly and that his recklessness amounted to fraud.

As mentioned above, it is unnecessary in this case to examine the extent to which the directors and shareholders of the company must have regard to the interests of creditors, since Pascoe was at all material times solvent.  It had no creditors in November 1988 and its liabilities to creditors in May 1989 and in September 1989 were in a nominal amount.  The proposition of Mason J in Walker v Wimborne (1976) 137 CLR 1 at 7 that directors of a company must, in the discharge of their duties, take account of its shareholders and creditors is widely expressed and requires a degree of qualification. Creditors are entitled to consideration if the company is insolvent, or near insolvent, or of doubtful solvency, or if a contemplated payment or other course of action would jeopardise the solvency of the company: Nicholson v Permakraft (NZ) Ltd (supra) at 249 per Cooke J. But, depending on circumstances, it may be difficult to make out a duty to new creditors at some time in the future. As Cooke J noted in Nicholson v Permakraft (NZ) Ltd (supra) at 250:

“On the other hand, to make out a duty to future new creditors would be much more difficult.  Those minded to commence trading and give credit to a limited liability company do so on the footing that its subscribed capital has not been returned to shareholders, but otherwise they must normally take the company as it is when they elect to do business with it.  Short of fraud, they must be the guardians of their own interests.”

In the same case, Richardson J was more positive, at 254:

“If a company is solvent in the sense of its assets exceeding its liabilities there can, I think, be no question of a separate duty to creditors:  they have their ordinary remedies if their accounts are not paid.  If it is insolvent, the creditors have an interest in the company and the directors might be said to have a duty to them for creditors’ money is then at stake.  It is in the intermediate situation of near insolvency or doubtful insolvency that greater difficulties of legal principle arise.”

See also Somers J at 255-256.  These observations were quoted without qualification by Street CJ in Kinsela.  Although His Honour expressly declined to formulate a general test of the degree of financial instability which would impose upon directors an obligation to consider the interests of creditors, he did observe:

“The plainer it is that it is the creditors’ money that is at risk, the lower may be the risk to which the directors, regardless of the unanimous support of all of the shareholders, can justifiably expose the company.”

But, as already mentioned, Pascoe did not at any relevant time have other than nominal liabilities to creditors so it is not necessary to consider these issues further. 

In this case, the directors of Pascoe acted in furtherance of a scheme in accordance with directions of its shareholder Dolfinne and by its ultimate shareholder J N Taylor Holdings.   Applying the principles expressed above, it is not necessary for a formal meeting to be held for the approval of the sole shareholder of a company to be obtained.  That approval can be expressed informally, particularly where the subsidiary acts at the behest of its sole shareholder.  There are many ways in which a sole shareholder can direct or control its subsidiaries.  The circumstances of this case provide but one example.  Lucas is not liable to Pascoe since he acted at the behest of its only shareholder, Dolfinne, at a time when the company was solvent.  The acts of both the directors and the shareholders were intra vires and there is nothing to show that they were made in bad faith.  The liquidator of Pascoe is in no better position than the shareholder.  The claim must, therefore, fail. 

In reaching this conclusion, I have not overlooked the remarks of Mason J in Walker v Wimborne (supra) at 6 to the effect that, even in the case of companies in a group with interlocking shareholdings, a director must determine whether a transaction in which a company proposes to engage must be judged according to the criterion of the interests of that company. But that principle does not apply where the shareholders of the company unanimously require it to act in a certain way.

The proposition has the greater force where, as here, it is the shareholder which incurs the loss.  I have already mentioned that almost all of the proceeds of this action will be paid to Dolfinne.  One extraordinary feature of this action is that, if Pascoe were to succeed, the damages to be awarded would be paid to the very person who has authorised the conduct giving rise to the loss. 

In his written submission, Mr Gray QC contended that Lucas had not pleaded that Noonan and Baker were directors or officers of Dolfinne or had authority to act on behalf of Dolfinne.  The submission must be rejected.  As already mentioned, the case for each party ultimately depended upon the inferences to be drawn from the documents.  There is little evidence as to facts outside the documents. In that sense, the plaintiff’s case, no less than the defendant’s, is built on speculation, to use the plaintiff’s words. More accurately, each case turns on the inferences to be drawn.  The documents clearly demonstrate that Dolfinne had no employees but relied on officers of Bond Corporation to manage its affairs.  I add that there was no unfairness to the plaintiff nor any injustice, particularly given that the case for both parties essentially turned on the documents.

Did Lucas Act Dishonestly?

The plaintiff alleges that Lucas acted dishonestly in a number of particularised ways.  Given that Lucas is not liable because he acted at the behest of Dolfinne, it is unnecessary to examine this issue.  But I am not in any event satisfied that Lucas acted dishonestly.  I set out my reasons in respect of each of the separate allegations.  The first is that Lucas had the improper purpose of avoiding breaches of the terms of the negative pledge arrangements.  The effect of this submission is that a director is in breach of a duty to a company if he seeks to avoid a breach of contract, a proposition which has only to be stated to be rejected.  If the effect of this allegation is that the purpose was to avoid some terms of the negative pledge arrangement, the allegation ignores the fact that the obligations under those arrangements were not obligations of Pascoe.  Thus, Lucas could not have been in breach of any duty to Pascoe.  Further, there is no evidence that Lucas was aware of those arrangements.  Indeed, the proposition was not even put to him in cross-examination. 

Next, it was alleged that the purpose of these transactions was to conceal from the auditors of Pascoe and Bond Corporation Finance the fact that moneys had been “upstreamed” from Pascoe to Bond Corporation Finance.  There is no evidence to show whether the auditors did or did not know of these transactions.  In any event, the transactions were completed well before the close of the audit year.  Nor is there any suggestion that the transactions would not have gone ahead if the auditors had known of them.

It was next alleged that the purpose was to conceal from the National Companies & Securities Commission (“NCSC”) the fact of these dealings.  But the evidence of Couttie is to the contrary effect, namely, that the transaction was entered into for the purpose of complying with the requirements of the NCSC not to avoid compliance with those requirements. Further, the submission is inconsistent with the fact that the effect of the transaction was to restructure the lending arrangements of J N Taylor Finance.  Finally, even if that were the true purpose, it does not follow that there is any breach of a duty owed to Pascoe nor is there any evidence as to how such a breach could cause any loss to Pascoe.  The duty, if any, was owed to the NCSC.

Next, it was alleged that the purpose was to avoid the operation of the listing rules of the Australian Stock Exchange (“ASX”).  The most obvious reason for rejecting the submission is that Pascoe was not listed on any Australian stock exchange and was, therefore, not subject to the ASX listing rules.  Further, there is no evidence that any other company involved in these transactions breached the listing rules. 

Next, it was alleged that the purpose was to avoid the operation of s230 of the Companies Code.  However, there is no evidence that the loans by Pascoe did breach the Code, and the plaintiff has not demonstrated that any breach did occur.

Finally, it was alleged that the purpose was dishonest in that it was to enter into a loan on uncommercial terms and the ordinary dictates of commercial prudence were not observed.  The submission is made in the face of the evidence of Mr Couttie, who was called by the plaintiff, who indicated that this transaction was typical of many engaged in by Australian companies at that time.  There is no evidence to suggest that the terms of the loan were unusual or contrary to prevailing practice.  Interest was charged and received by J N Taylor Finance.  There is nothing to suggest that, at November 1988, Bond Corporation Finance was not in a position to repay Catton which, in turn, would repay DOI and then repay Pascoe.  The initial loan was for a short term of six months.  The financial difficulties of Bond Corporation Finance did not become apparent until some time later.

It was also alleged that Lucas acted dishonestly and with a lack of commercial prudence in accepting the replacement promissory notes in full settlement of the loan to DOI.  In this respect it is to be noted that all of the resolutions and transactions concerning the loan to DOI which were made between 24 May 1989 and 13 September 1989 were made without consulting him in any way.  I find that he was not aware of them.  According to the documents, the first he knew of those transactions was on about 4 October 1989, at a time when it was too late to change them.

A director has, of course, a duty to monitor the affairs of the company and, in the ordinary case, cannot take refuge in the fact that he knew nothing.  But, as is apparent from these reasons, this was no ordinary case and, more significantly, as already found, everything was being done at the behest of Dolfinne.  I find, therefore, that the plaintiff has not proved that Lucas acted dishonestly in the discharge of his duties as a director and, even if he did, he is not liable because he acted at the behest of Dolfinne.

In this respect, the fact that the plaintiff’s case depends upon inferences drawn from documents has a particular significance. There is no positive evidence of dishonesty.  It might be possible to conclude from the documents that Lucas acted foolishly and even carelessly.  But I do not think that it can be reasonably inferred that he acted dishonestly or recklessly

Should the Breach be Excused?

Section 214(1) of the International Companies Act of the Cook Islands empowers the Court to grant relief to a director who has acted in breach of his duties if he has acted reasonably and honestly and ought fairly to be excused.  The section provides:

“(1)  In any proceedings for negligence, default, breach of duty or breach of trust against a person to whom this section applies, if it appears to the Court before which the proceedings are taken that he is or may be liable in respect thereof but that he has acted honestly and reasonably 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.”

The section is available to directors of a company: s214(3).  The provision is very similar in terms to s535 of the Companies Code and its successor, s138 of the Corporations Law, although, unlike them, it requires the director to show that he acted reasonably.

Given the decision that Lucas is not liable because he acted at the behest of Dolfinne, it is unnecessary to consider this issue.  There is, however, a nice question whether shareholders can relieve a director from a breach of his statutory duties.  But, as the statutory duties reflect the duties of a director at common law and in equity, I do not think there is any impediment to the shareholder excusing a breach of a statutory duty.  If it were necessary to do so, I would invoke s214(1) only for the purpose of enabling Lucas to have the benefit of the approval of Dolfinne to the acts he performed at its behest.

Did Dolfinne Subscribe to Shares?

I have so far proceeded on the footing that the financial statements accurately reflect the true nature of the transactions.  I have elsewhere in these reasons questioned whether Dolfinne in fact did subscribe for shares in Pascoe.  In my view, there is a serious question whether Dolfinne did in fact take up shares in Pascoe.  Neither the plaintiff nor Lucas asserted that the capitalisation by Dolfinne of Pascoe was a sham.  I have difficulty in sharing that view. The facts pointing to the conclusion that Pascoe was not capitalised are:

1.     The money was paid direct by J N Taylor Finance to Pascoe.

2.     Interest was paid direct to J N Taylor Finance.

3.     Repayments were made direct to J N Taylor Finance.

4.     The transaction was being directed by J N Taylor Finance.

5.     The one share in Pascoe initially held by J N Taylor Finance was not transferred to Dolfinne.

The only documents pointing to the conclusion that Dolfinne did take up shares in Pascoe are:

1.     The share certificate

2.     The resolution of Pascoe to issue shares

3.     The letter from Baker confirming the instruction.

The fact that Pascoe had $100 million in its bank account establishes nothing.  It is equally consistent with a series of back to back loans as with Dolfinne taking an issue of shares. So, too, are all the resolutions of the board of Pascoe after it had resolved to issue the shares to Dolfinne.  The plaintiff has the burden of proof that the issue of shares was made. 

The uncertainty whether Dolfinne did in fact take up shares in Pascoe casts significant doubt over the question of the liability of Lucas.  If, in truth, it did not, there is no reason why Lucas should be liable any more than any other director of any of the companies engaged in these back to back loans.  But it is unnecessary to pursue the issue given the decision that Lucas is not liable.

Did Pascoe Suffer Loss?

The plaintiff claims that Pascoe lost the sum of $50 million lent to DOI and the sum of $2.8 million interest thereon.  In addition, it is claimed that Pascoe has lost the use of those moneys. 

The claim for the loss of the use of the moneys is not pressed by the plaintiff.  In any event, it has no foundation.  Let it be assumed for present purposes that Pascoe lost the sum of $52.8 million.  Had it been repaid to Pascoe, there is a real probability that it would have been repaid to J N Taylor Finance just as the interest on this loan had been paid to J N Taylor Finance and the deposit with EPBC had been repaid with interest to J N Taylor Finance in March 1989.  The plaintiff has the burden of proof and it has not shown that, on the balance of probabilities, Pascoe would have retained that sum of $52.8 million for its own use.  Furthermore, the suggestion that Pascoe would have retained the money for its own use is inconsistent with the fact that Pascoe was incorporated for the purpose of these transactions and had no other trading commercial or financial operations.

The only question, therefore, is whether Pascoe incurred the loss of $52.8 million.  Counsel for Lucas advanced two reasons why it did not suffer loss:

1if regard is had to substance rather than form, when the transactions are viewed as a whole, no loss was suffered; and

2the loan to DOI was always a worthless loan because of the insolvency of Bond Corporation Finance.  Thus, the fact that it is now irrecoverable does not cause a loss to Pascoe. 

I deal first with the second of those grounds.

A Worthless Loan

At first blush, the submission that the loan was worthless does not appear to assist the cause of Lucas.  If, in fact, the loan was worthless, the directors of Pascoe should not have agreed to enter into the transaction.  But, it was submitted, the issue is deeper than that.  As already mentioned, Pascoe was incorporated for the purpose of participating in this transaction.  It was capitalised so that money advanced to Dolfinne could, in turn, be lent by Pascoe to DOI and EPBC.  It would be unrealistic to suggest that the directors of Pascoe had any choice what to do with the sum of $100 million in their hands.  Had they questioned the transaction, it was likely that other means would have been found to enable the loans of $50 million to be made respectively to DOI and EPBC.  In other words, Pascoe would not have been capitalised if there was any suggestion that it was not going to lend $50 million each to DOI and EPBC.  Thus, it was said, the funds with which Pascoe was capitalised were the subject of a constructive trust and the directors of Pascoe were bound to act in accordance with that trust. The submission was grounded on the decision in Barclays Bank v Quistclose Investments Limited [1970] AC 567. The submission does not identify the trustee, at what stage the funds became subject to the trust, or the purpose of the trust. Presumably the purpose of the trust was ultimately to enable the deposit with EPBC and the loan to DOI. In Barclays Bank v Quistclose Investments Limited it was held that money advanced to a company in financial difficulty for the sole and exclusive purpose of the payment of a dividend should not, on the company going into liquidation, become part of the general assets of the company available to all creditors but should be used exclusively for the purpose of a particular class of creditors, namely, those entitled to the dividend.  It was submitted that, applying the principle in that case, Pascoe suffered no loss because it was capitalised solely to enable the loans to be made. The argument is quite attractive but it depends on identifying the trustee and the terms of the trust.  The evidence is not sufficient to do either.  In addition, care must be taken not to create a new institution known as the “Quistclose Trust”: see Gummow J in Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491 at 503-504. Given the conclusions which have already been reached, it is unnecessary to decide the question. Notwithstanding the attractiveness of the argument I, therefore, prefer not to base my decision on this ground.

The True Nature of the Transaction

On 23 November 1988, Bond Corporation Finance owed J N Taylor Finance at least a total sum of $126.8 million.  That amount was represented by the loan of $101 million to Merchant Capital which, in turn had been lent to Bond Corporation Finance, and by the loans of $26.8 million to Winnington and the loan, in turn, to Markland and Bond Corporation Finance.  Two days later, on 29 November 1988, those loans had been repaid.  Bond Corporation Finance was able to repay those loans, largely by reason of the loan of $100 million made to it by Catton, and those funds had of course ultimately been derived from J N Taylor Finance when it advanced $100 million to Dolfinne to purchase the shares in Pascoe.  The sum of $100 million had been funded in the hands of J N Taylor Finance as to $29 million in deposits held by it and by a loan of $71 million to it by Bell Resources Finance. On 28 November J N Taylor Finance repaid the moneys borrowed from Bell Resources Finance.  Thus, J N Taylor Finance had itself restructured its lending arrangements with Bond Corporation Finance.  It had replaced a loan to Bond Corporation Finance of $126.8 million with a loan of $100 million.

There can be little doubt that J N Taylor Finance was the originator of these transactions.  Noonan gave the original instructions on behalf of J N Taylor Finance and those instructions were confirmed by Macpherson. (check - letterhead was J N Taylor Holdings, but see all relevant correspondence).  It was J N Taylor Finance which directed that Pascoe should be incorporated.  It was J N Taylor Finance which paid $100 million to Pascoe. Officers of J N Taylor Finance or Bond Corporation directed the rest of the transaction.

The fact that the sum of $50 million and interest repaid by EPBC was paid to J N Taylor Finance is confirmation of the fact that Pascoe was a mere conduit for the flow of the sum of $100 million through to Bond Corporation Finance. 

The accounting entries which were made after Pascoe had accepted the two promissory notes drawn by Bond Corporation Finance to replace the earlier set of promissory notes drawn by Bond Corporation Finance in favour of Catton, which had been ultimately endorsed to Pascoe, also confirm that all that occurred was a restructuring of the lending arrangements as between J N Taylor Finance and Bond Corporation Finance.  The issue of the two replacement promissory notes made Bond Corporation Finance directly liable to Pascoe so that  Pascoe avoided whatever difficulties might exist if it had to sue on the notes should either DOI or Catton have gone into liquidation.

After the two replacement promissory notes had been drawn, the Bond Corporation journal voucher No 54163 recorded a liability of $52.8 million on the part of Bond Corporation Finance to J N Taylor Finance, that is to say, the debt was recorded as a debt to J N Taylor Finance and not to Pascoe.  A journal entry in the general ledger of J N Taylor Finance records the transaction in a way which reflects the entry in the Bond Corporation journal.  The journal entry in the books of J N Taylor Finance records an asset of $50 million described as “Bond loan No 2 loan Pascoe - being transfer of $50 million 14 Sept ex DFC to Bond”.  At the same time, the general ledger recorded the corresponding liability to Pascoe.  The corresponding entry in the journal of Pascoe reads “Loan JNT Finance short term deposits - transfer DFC deposit to Bond 14 Sept Bond loan A/c No 2”.  Like entries are made in respect of the interest in the sum of $2.8 million.  The effect of these entries is that J N Taylor Finance has recorded that it is owed $52.8 million by Bond Corporation Finance at the same time as it records its indebtedness to Pascoe in the sum of $52.8 million.  For its part, Pascoe treats in its books J N Taylor Finance, and not Bond Corporation Finance, as its debtor.  Thus, the books of the various companies record that the original debt of $50 million due by DOI had been repaid and that Pascoe looked to J N Taylor Finance for repayment of the amount of $50 million plus the accrued interest of $2.8 million. Both J N Taylor Finance and Bond Corporation Finance accepted the change in the debtor and the creditor relationships resulting from this transaction as is evidenced by the entries in their respective books of account.  At any stage after 14 September 1989, J N Taylor Finance could have repaid its debt to Pascoe by simply paying it a cheque for the amount due.  J N Taylor Finance could avoid any cash flow difficulties occasioned by the repayment by the simple expedient of Pascoe redeeming its redeemable share capital, thus putting Dolfinne in funds to repay Dolfinne Finance, which then would have repaid J N Taylor Finance the loan initially advanced to it.  Thus, the cash position of J N Taylor Finance would substantially remain the same, the only outgoing being the sum of $2.8 million.  In these circumstances, Pascoe did not suffer a loss.

For all of these reasons, I find that Lucas is not liable to the plaintiff.  I dismiss the plaintiff’s claim.