Resource Equities v Carr Resource Equities v Garrett

[2009] NSWSC 1385

CITATION:	Resource Equities v Carr Resource Equities v Garrett [2009] NSWSC 1385
HEARING DATE(S):	2/11/09, 3/11/09, 4/11/09, 5/11/09 and 6/11/09
JUDGMENT DATE :	15 December 2009
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	McDougall J at 1
DECISION:	See paragraphs [386] to [392] of the judgment.
CATCHWORDS:	COMPANIES – directors and other officers – directors’ duties – whether multiple breaches of ss 180, 181 and 182 Corporations Act and common law duties – directors’ fees – whether directors had performed work which warranted additional fees – whether directors personally liable for overpayments – dividends - whether a payment to shareholders properly characterised as a dividend or return of capital – whether dividend payable when no profit demonstrable – whether payment otherwise justified – voluntary administration – whether administrator appointed for a proper purpose – whether directors personally liable for resultant costs – loans – whether loan made by company improper – whether directors personally liable – whether directors can be sued when debtor has not been pursued to bankruptcy – issue of shares – whether shares improperly issued to allow directors to maintain control of company – whether resultant litigation defended when no prospects of success – whether directors personally liable for consequent legal costs – defences – whether business judgment rule available – whether to exercise discretion under s1318 Corporations Act – remedies – damages - quantum - CONTRACTS – construction – whether cross claimant indemnified by settlement deed - DAMAGES – whether liability apportionable under the Civil Liability Act – whether available for breaches of the Corporations law - PRACTICE – pleadings – whether issue arguable when not pleaded
LEGISLATION CITED:	Civil Liability Act 2002 Corporations Act 2001 Pooled Development Funds Act 1992 (Cth) (the PDF Act) Uniform Civil Procedure Rules
CATEGORY:	Principal judgment
CASES CITED:	Australasian Oil Exploration Limited v Lachberg (1958) 101 CLR 119 Australian Securities and Investments Commission v Vines (2005) 65 NSWLR 281 Bluebottle UK Limited v Deputy Commissioner of Taxation (2007) 232 CLR 598 Brambles Australia Ltd v Tatale Pty Ltd [2006] NSWSC 204 Carr and Purves v Thomas [2009] NSWCA 208 Commissioner of Taxation of the Commonwealth of Australia v Sun Alliance Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 Dartberg Pty Ltd v Wealthcare Financial Planning Pty Limited (2007) 164 FCR 450 Ingot Capital Investment Pty Ltd v Macquarie Equity Capital Markets Ltd (No.6) (2007) 63 ACSR 1 Investments Pty Limited (in liquidation) (2005) 225 CLR 488 QBE Insurance Group Ltd v Australian Securities Commission (1992) 38 FCR 270 Re Spanish Prospecting Co Ltd [1911] 1 Ch 92 Rood Investments (Vic) Pty Limited v Abeyratne [2009] VSC 278 Segenhoe Ltd v Akins (1990) 29 NSWLR 569 Unity Insurance Brokers Pty Limited v Rocco Pezzano Pty Limited (1998) 192 CLR 603 Vines v Australian Securities and Investment Commission (2007) 62 ACSR 1 Western Ventures Pty Limited v Resource Equities Limited (2005) 53 ACSR 568
PARTIES:	50214/07 Resource Equities Limited (subject to deed of comapny Agreement) (Plaintiff) John Hiltion Garrett (First Defendant) Louise Mary Garrett (Second Defendant) Richard John Thomas (Third Defendant) Leon Phillip Carr (Fourth Defendant) Nigel Charles Purves (Fifth Defendant) 50205/07 Resource Equities Limited (Subject to deed of company arrangement) (Plaintiff) Leon Phillip Carr (First Defendant) Nigel Charles Purves (Second Defendant) Richad John Thomas (Third Defendant) John Hilton Garrett (Fourth Defendant)
FILE NUMBER(S):	SC 50214/07; 50205/07
COUNSEL:	CRC Newlinds SC / JC Giles (Plaintiff) VRW Gray (First and Second Defendants) Mr Carr and Mr Purves R J Thomas (Cross-Defendant) (In person)
SOLICITORS:	Lavan Legal (Plaintiff) NRG Legal (Mr Carr & Mr Purves) R J Thomas (In person)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

15 December 2009

50214/07 RESOURCE EQUITIES LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) v JOHN HILTON GARRETT & 4 ORS
50205/07 RESOURCE EQUITIES LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) v LEON PHILLIP CARR & 3 ORS

JUDGMENT

1 HIS HONOUR: In these proceedings, the plaintiff (REL) sues (among others) two former directors, the first and second defendants (respectively Mr Carr and Mr Purves), for alleged breaches of duty. Messrs Carr and Purves have brought a cross-claim against a fellow director, the cross-defendant (Mr Thomas), seeking contribution or indemnity. Mr Thomas too is a defendant in the proceedings. However, he reached a settlement with REL, the terms of which were embodied in a deed. In reliance on that deed, Mr Thomas claims indemnity from REL for any amount that he may be ordered to pay to Mr Carr or Mr Purves.

2 In addition, each of Messrs Carr, Purves and Thomas says that if he is found to be liable, he in entitled to be relieved from liability pursuant to s 1318(1) of the Corporations Act 2001.

Outline of the claims

3 REL advances six separate claims.

Excessive payments to directors

4 REL alleges that Messrs Carr, Purves and Thomas resolved to pay themselves remuneration in excess of the limit fixed pursuant to REL’s constitution. Alternatively, REL alleges, Messrs Carr, Purves and Thomas resolved that Messrs Carr and Purves should be paid amounts for “extra services or … special exertions” (such payments being expressly permitted by REL’s constitution) which were totally unjustified.

5 This claim involves, among other things, consideration of a resolution passed by an Extraordinary General Meeting (EGM) of REL held on 15 May 1995, in which directors’ fees were limited to a combined total of $200,000.00 per annum; and of a resolution of directors dated 26 February 2003 in which, among other things, it was agreed that the current directors should be paid $1,000.00 per month for their period of service as directors.

The Garrett loans

6 For a time, Mr John Garrett (who is also a defendant, but who did not participate in the hearing) was a director of REL. REL alleges that Messrs Carr and Purves caused it to make two unsecured loans to Mr Garrett. The first, in the amount of $100,000.00, relates to a payment undoubtedly made on 14 May 2004 (less than six weeks after Mr Garrett had been discharged from bankruptcy). The second (in an amount exceeding $258,000.00) was made on 18 June 2004. As the case was argued, the real issue was not as to the impropriety of these loans but as to whether REL could maintain its claim when (according to Messrs Carr and Purves) it had not exhausted its remedies against Mr Garrett and his wife. (I will discuss Mrs Garrett’s involvement when I deal with this claim.)

Fox Technology

7 Fox Technology Pty Limited (Fox) was a company controlled by Mr Mark Nagy and Ms Michelle Bryant. It specialised in the development of payment applications software (the Fox technology) for use in point of sale terminals. It is convenient to refer to these as EFTPOS terminals. EFTPOS terminals were used by those who sold goods or provided services to allow their customers to make payment by credit or debit card. In March 2003, Fox was seeking to develop software that would enable EFTPOS terminals to be used for a wider variety of transactions, including (to give two examples relevant to these proceedings) booking and paying for airline tickets and booking and paying for theatre tickets.

8 Cosmos Limited (Cosmos) had installed EFTPOS terminals in numerous pharmacies throughout Australia. According to Mr Carr, about 80% of pharmacies in Australia used Cosmos’ EFTPOS terminals. Cosmos derived revenue from the use of those terminals. Accordingly, it saw the Fox technology as something of potential value to it. The technology, if successful, would increase the use of Cosmos’ terminals and, accordingly, its revenues. Fox required substantial further funding to enable it to continue with the development of its technology. Mr Mike Kesterton, an employee of or consultant to Cosmos, spoke to Mr Carr to see if REL would be interested in investing in Fox. Mr Carr attended a meeting on 20 March 2003 known, from its venue, as the “Cargo Bar meeting”. At that meeting, Mr Carr agreed that REL would fund Fox’s further development of the Fox technology. It is convenient to refer to the Cargo Bar agreement and the suite of agreements relating to REL’s investment in Fox compendiously as the Fox transaction.

9 REL alleges that the Fox transaction was improvident, and that Mr Carr committed REL to it not for any proper purpose of REL but for his own benefit. REL alleges further that Mr Purves was in a position of conflict of interest, because he was a director of Cosmos, and had been appointed a director of REL by the time the various agreements (in their final form) were signed.

Distribution of proceeds of sale of Asia Iron Shares

10 REL had a substantial shareholding in a company known as Asia Iron Pty Limited (Asia Iron). In late 2004, it sold those shares for $1,400,000.00. It then caused in excess of $858,000.00 of the proceeds of sale to be distributed to shareholders. Those distributions were said to have been paid as dividends, although in argument Messrs Carr and Purves submitted that they were, alternatively, returns of capital. REL says that the payments were improper, because (among other things) the making of them left REL insolvent. Some of the payments were made, after REL had been placed into voluntary administration, by its administrator Mr Giovanni (John) Carrello.

Litigation expenses

11 The history of REL has been marked by strife between different groups of shareholders. There have been numerous court cases. One of those, proceeding COR 357 of 2004 (proceeding 357) was brought in the Supreme Court of Western Australia on 29 October 2004, preceding an EGM of REL to be held on 2 November 2004. That meeting followed closely on an annual general meeting (AGM) held on 29 October 2004. The plaintiff in proceeding 357 sought, unsuccessfully, to restrain REL from holding the EGM. By subsequent amendments, the plaintiff alleged that the EGM had been improperly conducted for a number of reasons; that a resolution purportedly passed for the removal of Mr Thomas as a director had not been passed; and that resolutions purportedly not passed for the removal of Messrs Carr, Purves and Garrett as directors and for the appointment of other individuals as directors had been passed.

12 Before the EGM in question, REL (at the behest of Messrs Carr and Purves) purported to issue some seven million shares to Cosmos E-C Commerce Pty Limited (Cosmos Commerce), a subsidiary of Cosmos. Cosmos Commerce voted those shares at the meeting, aligning its interest with the interests of Messrs Carr and Purves. REL says that the issue of the shares was a sham; alternatively, that it was undertaken for an ulterior and improper purpose.

13 Messrs Carr and Purves caused REL to defend proceeding 357. In so doing, REL alleges, they effectively used the resources of REL to defend their own positions as directors. Further, Messrs Carr and Purves caused REL to indemnify Cosmos Commerce, which was a party to the proceeding, for its costs.

14 REL alleges that Messrs Carr and Purves should not have caused REL to defend the proceeding, and should not have agreed to indemnify Cosmos Commerce for its costs.

Costs of administrations

15 On 14 March 2005, Messrs Carr, Purves and Garrett resolved to place REL into voluntary administration. Mr Nicholas Crouch was appointed as administrator. REL says that the resolution was invalid because, contrary to the terms of s 436A(1)(a) of the Corporations Act 2001, the directors did not resolve that REL was insolvent or was likely to become insolvent at some future time. REL alleges that the resolution was an attempt to stymie proceeding 357. If this were the intention, it failed. Le Miere J granted leave to proceed (s 440D(1)(b)) and the proceeding was heard by Commissioner Siopis SC. His Honour decided the proceeding in favour of the plaintiff. The effect of his Honour’s orders was to remove Messrs Carr, Purves and Garrett as directors with effect from the date of the EGM, to reinstate Mr Thomas as a director and to declare elected as directors at that meeting Messrs Robert Brown and Neal Macaulay.

16 After proceeding 357 was determined in favour of the plaintiff, the new board met. It was advised that the appointment of Mr Crouch was a nullity. However, since the new board considered that the company was, or was likely to become, insolvent, it passed a resolution in accordance with s 436A(1). By that resolution, Mr Carrello was appointed administrator.

17 REL alleges that the costs of administration were incurred unnecessarily, because:

(1) as to Mr Crouch – his appointment was invalid, and the amount ultimately paid to him by way of compromise ($25,000.00) was wholly wasted; and

(2) as to Mr Carrello – REL had only become insolvent, so as to justify his appointment, through the wrongful acts of Messrs Carr, Purves and Garrett (including the partial distribution of the proceeds of sale of the Asia Iron shares and the expenditure of costs on proceeding 357).

The issues

18 The parties agreed that the real issues for decision were as follows (and I adopt their formulation, including its grammatical and other infelicities):

DIRECTORS’ REMUNERATION
1. In authorising the plaintiff to pay, and causing the plaintiff to pay, the impugned payments to Carr, Purves and Thomas did Carr and Purves breach their duties to the plaintiff under ss 180, 181 or 182 of the Corporations Act 2001 (Cth) or in equity?
2. Does the resolution dated 26 February 2003 have any operative effect after 28 February 2003?
3. Was the work done by:
(a) Carr
(b) Purves and
(c) Thomas
after 28 February 2003 for which remuneration was paid to them (i) done at all and, if so, (ii) was that work “extra services” or “special exertions” on behalf of the company within Article 13.10?
4. In particular were any of the Defendants entitled to the said payments which were paid for work done as a direct consequence of the various breaches alleged?
5. What loss was caused to the plaintiff by the impugned payments of directors remuneration?
6. If:
(a) Carr and
(b) Purves
be otherwise liable, ought they to be excused in whole or in part under section 1318?
GARRETT LOANS
7. Has the Plaintiff proved any loss when it has not exhausted its remedies against Garrett?
8. Alternatively, should execution of any judgment given against Carr and Purves in respect of the Garrett loans be stayed until the Plaintiff has exhausted its remedies against Garrett?
FOX TECHNOLOGIES
9. In causing the plaintiff to enter into the Fox Transaction did Carr and Purves breach their duties to the plaintiff under ss 180, 181 or 182 of the Corporations Act or in equity and, in causing the plaintiff to continue to fund Fox Technology, did Carr, Purves and Garrett breach their duties to the plaintiff under ss 180, 181 or 182 of the Corporations Act or in equity?
10. Was the decision by:
(a) Carr and
(b) (after he became a director) Purves
that REL invest in Fox Technology a decision to which section 180(2) is applicable so that there was no beach of section 180(1)?
11. Was the loss sustained by the Plaintiff in respect of the investment in Fox Technology caused or materially contributed to by:
(a) the actions of Western Venturers and others
(b) the failure of the Plaintiff to take reasonable steps in its negotiations with Keycorp after 22 March 2005?
[The plaintiff contends that this issue is not available on the pleadings nor should the Defendant be allowed to run the said the defences]
12. If the loss was materially contributed to by extrinsic facts, is this relevant as a matter of law to the plaintiff’s claim.
13. What loss was caused to the plaintiff by the plaintiff entering into the Fox Transaction?
14. To what extent is:
(a) Carr
(b) Purves
liable for the loss suffered by the Plaintiff as a consequence of the Fox Technology transaction?
15. Insofar as:
(a) Carr
(b) Purves
be otherwise liable for the loss suffered by the plaintiff as consequence of the Fox Transaction, ought he to be excused in whole or in part under section 1318?
DISTRIBUTION TO SHAREHOLDERS OF ASIA IRON SHARE SALE PROCEEDS
16. In causing the plaintiff to enter into make the distribution to shareholders did Carr, Purves or Garrett breach their duties to the plaintiff under s 180, 181 or 182 or in equity?
17. Was the distribution a dividend or capital reduction which was permitted by the Corporations Act?
18. Did the distribution of the Asia Iron share sale proceeds cause the Plaintiff to become insolvent?
19. (a) Did the distribution to shareholders of the proceeds of sale of the Asia Iron shares cause the Plaintiff loss?
(b) If so, what is the amount of that loss?

20. Are Carr and Purves protected from liability by the principle in Re Duomatic Limited [1962] 2 Ch 365?

21. Are Carr and Purves liable for moneys distributed to shareholders by Carrello?
22. What loss was caused to the plaintiff by the distribution?
23. If:
(a) Carr
(b) Purves
be otherwise liable, ought he be excused in whole or in part under section 1318?
LITIGATION EXPENSES
24. In causing the Plaintiff to defend proceedings COR 357 of 2004 and to pay for its and Cosmos E-C Commerce Pty Limited’s defence of the proceedings did Carr, Purves or Garrett breach their duties to the plaintiff under s 180, 181 or 182 or in equity?
25. If so, what is the amount of the loss sustained by the Plaintiff by reason of such breach of duty?
ADMINSTRATION EXPENSES
26. Was the appointment of either or both administrators the result of a breach of duty owed to the plaintiff under ss 180, 181 or 182 of the Corporations Act or in equity by Carr, Purves or Garrett?
27. (a) Did the Plaintiff suffer loss by reason of the appointment of Crouch as an administrator?
(b) if so, what was the amount of that loss?
28. Were Carr, Purves and Garrett legally responsible for the appointment of Carrello as an administrator?
29. (a) Did the Plaintiff suffer loss by reason of Carrello as an administrator?
(b) If so, what was the amount of that loss?
30. If and so far as Carr and Purves be otherwise liable, ought they to be excused under section 1318?
PROPORTIONATE LIABILITY
31. Does the Civil Liability Act 2002 (NSW) apply to all or any of the claims made in these proceedings?
32. If so, what apportionment of liability should be made in respect of any such claim?
CONTRIBUTION
33. As between Carr, Purves and Thomas, what orders should be made for contribution in respect of those liabilities for which any two or more are jointly or concurrently liable?
THOMAS’ CROSS CLAIM
34. On the proper construction of the Settlement Deed entered into between, inter alia , the plaintiff, Mr Brown and Mr Johnson and Mr Thomas is Mr Thomas entitled to (in effect) an indemnity with respect to the cross claim brought against him?

Background

19 REL is a public company. At all times relevant to these proceedings, it was a registered pooled development fund (PDF) pursuant to the Pooled Development Funds Act 1992 (Cth) (the PDF Act).

20 Mr Carr was appointed a director of REL on 31 January 2001. He was removed from office at the EGM held on 2 November 2004. However, he held himself out as, and performed the functions of, a director of REL from 2 November 2004 until 22 March 2005 (the date when Commissioner Siopis gave judgment in proceeding 357).

21 Mr Carr was also a director of Fox from 9 March 2004 until 6 July 2004.

22 Mr Purves was appointed a director of REL on 19 May 2003. He, too, was removed from office on 2 November 2004, but continued to hold himself out as, and perform the functions of, a director from that date until 22 March 2005.

23 Mr Purves was a director of Cosmos from 19 November 2002 until 4 March 2005, and a director of Cosmos Commerce from 13 October to 5 November 2003 and 23 January 2004 to 31 March 2005.

24 Mr Thomas was appointed a director of REL on 29 August 2002. He was purportedly removed as a director at the EGM held on 2 November 2004, but the effect of the orders made in proceeding 357 was to reinstate him with effect from 2 November 2004. Mr Thomas ceased to be a director on 19 January 2006.

25 Mr Thomas was a director of Fox from 6 July to 27 September 2004.

26 Mr Garrett was appointed a director of REL on 31 August 2004. He too ceased to be a director on 2 November 2004, but held himself out as, and performed the functions of, a director from that date until 22 March 2005.

27 There was another director whose name appears from time to time: Mr Allen Lafferty. He was appointed a director of REL on 28 March 2002, was purportedly removed on 24 July 2003 and in any event resigned on 25 February 2004. Mr Lafferty appears to have been independent of the warring factions: a circumstance that may have led to his purported removal and his ultimate decision to resign.

Business experience of Messrs Carr, Purves and Garrett

28 Mr Carr described himself as a company director and investment adviser. He said in his principal affidavit that he had had “over 29 years experience in the securities industry [including] negotiating numerous securities related commercial transactions, including public share offerings and take - overs and advising in those types of transactions”.

29 Mr Purves described himself as a company director. He said in his principal affidavit that he has “a degree in financial administration… together with a post-graduate diploma in financial management… [and] a Masters Degree in Business Administration”. He is a fellow of the Australian Society of Accountants, a chartered accountant, a chartered company secretary and a registered company auditor. Mr Purves has had substantial business experience as a chief financial officer and managing director or chief executive officer of various substantial businesses. He was at first the chief executive officer of the “E-Commerce” business division of Cosmos Commerce, and eventually became its managing director.

30 Mr Garrett is or was a solicitor. He became bankrupt, and was discharged from bankruptcy on 7 April 2004. As at the date of the Cargo Bar meeting, Mr Garrett appears to have been the “Group Corporate Counsel” of Cosmos and its related or subsidiary entities.

The PDF Act

31 In very broad outline, a company that is a registered PDF is able to make investments on the basis that any profits are taxed at concessional rates, and to distribute the profits of those investments tax free to its shareholders. To be registered as a PDF, the company is required to have an investment plan approved by the Pooled Development Funds Registration Board (the Registration Board). Continued operation as a PDF required that the company comply with a number of provisions of the PDF Act, including that:

(1) loans made to a company in which investments are held should not exceed in total 20% of the PDF company’s shareholders’ funds (s 20B(2) the PDF Act ); and

(2) without approval of the Registration Board, no investment should exceed 30% of the PDF company’s shareholders’ funds (s 25).

32 One of the investments held by REL was its shareholding in Asia Iron. Asia Iron owned, or had interests in, a number of iron ore mining tenements at Mount Gibson in Western Australia. A company known as Mount Gibson Iron Limited (MGI) was formed to exploit those tenements. REL had a substantial direct shareholding in MGI, and a further, indirect, holding through Asia Iron. MGI is now a listed public company.

Western Ventures and Mr Johnson

33 One of the parties involved in the struggles for control of REL is Mr Bryan Johnson. He is a director of a company known as Western Ventures Pty Limited (Western Ventures). From time to time, Western Ventures provided staff to assist REL in carrying out its activities. One such person, who carried out work for REL from time to time, was Ms Angela Dent. She was a director of REL from 18 August 2001 to 18 October 2002. She was reappointed as a director on 28 November 2008.

34 Ms Dent was also the company secretary of REL from 6 June 2001 to 18 October 2002, and from 4 February until 6 May 2003.

35 Among the resolutions that purportedly were not passed at the EGM of REL on 2 November 2004 was one to appoint (or reappoint) Ms Dent as REL’s company secretary. The orders made by Commissioner Siopis included an order appointing Ms Dent as company secretary with effect from 23 March 2005.

36 By way of demonstration of the intertwined commercial arrangements that are a feature of this litigation: Ms Dent has been a director of MGI for two periods: 21 December 2001 to 31 December 2004, and 20 April 2005 to 21 August 2008.

Credibility

37 Before turning to the issues, I shall set out my views on the credibility of the witnesses who were called.

Ms Dent

38 Ms Dent gave evidence in chief and in reply by way of affidavits. She was cross-examined. No attack was made on her credibility, and no submission was made that I should not accept her evidence. I do accept it.

Mr Carr

39 Mr Carr too gave evidence in chief and in reply by way of affidavits. He was extensively cross-examined, and his credibility was repeatedly challenged. I have come to the view that the challenges to his credibility should be accepted, and that Mr Carr is a witness on whose evidence no reliance can be placed unless:

(1) it is corroborated by other, acceptable evidence; or

(2) it accords with the probabilities, objectively viewed; or

(3) it is against his interest.

40 I shall explain, as briefly as I can without doing injustice to Mr Carr, why I have reached that view.

41 At a level of generality, Mr Carr’s evidence was marked by persistent evasion and repeated failures to answer, directly (or in many cases at all) questions that were put to him. Indeed, these tendencies were so pronounced that at one stage I wondered whether there might be some underlying organic or mental incapacity which might explain them. However, although Mr Carr did refer briefly to “two heart attacks and eleven stents” (T136.16) neither he nor his counsel, Mr VRW Gray, suggested that there was any organic or mental impediment to Mr Carr’s powers of recollection.

42 Persistent evasion is to be seen in Mr Carr’s evidence as to the capacity in which he attended the Cargo Bar meeting. As I indicate below, in discussing the Fox transaction, the letter of 20 March 2003 was signed by Mr Carr, to agree to and accept its contents, on the basis that he was “duly authorised on behalf of” REL to do so. One of the propositions stated in the letter, which accordingly Mr Carr agreed to and accepted, was that he had represented that he had authority to bind REL to the transaction described in the letter. However, in para 68 of his first affidavit, Mr Carr had asserted that “[t]he opportunity to invest in Fox was not brought to my attention in my capacity as a director of REL”. He was cross-examined at some length about the capacity in which he did attend the meeting (T84.28-85.30) and was unable to give any satisfactory answer. In my view, Mr Carr’s evasion reflected his understanding that (as had been put to him at T82.8) he was in a position of intolerable conflict of duty and interest at the time of the Cargo Bar meeting.

43 Mr Carr’s evasions continued when the terms of the letter of 20 March 2003 were put to him, and he was asked to say what it was that he was doing when he indicated that he had REL’s consent (T89.5-90.44, 91.30 – 92.6):

Q. If anything of this is true, can you explain why it is you signed your name to this letter saying that you agreed and accepted what was in it?
A. There is nothing in here which is, in my view, binding. It is an indicative letter to say as a director of REL I would take it to my fellow directors and put a proposal.

Q. It doesn't say anything of that sort?
A. It doesn't say anything, to the best of my recollection that is what would have been in my mind at the time.

Q. In that is what was in your mind at the time can you explain why you were duly authorised on behalf of the Resource Equities Limited to agree and accept what was set out in the letter?
A. To my knowledge as a director I can have negotiations, discussions on many topics of which a director is duly authorised to have those discussions.

Q. Is that your answer to my question?

HIS HONOUR

Q. You also said you were authorised to bind REL on the basis of paragraph 11. Have a look at paragraph 12. ?
A. As a director, my understanding again is that a director can bind any company if are you a director but you have to act in the best interests of the company and shareholders.

NEWLINDS

Q. Didn't you say about two questions ago that you didn't think you had the authority to bind the board and you had to take this proposal back to the board, didn't you just say that
A. With respect, a director whether it is a director of public company or a director of a proprietary company can bind a company but in the best interests you always seek the counsel of your fellow directors.

Q. You are deliberately not answering questions now.
A. Ask your question again.

Q. Did you say three questions ago that you did not believe that you had the authority to bind REL and that you needed to take it back to your board for approval, didn't you say that?
A. To the best of my recollection, no, but if, obviously I have misunderstood the question, but a director can bind a company if he is a director.

Q. Thank you for that. Did you believe that you had authority to bind REL in relation to what I might call the Cargo Bar deal as at March 2003?
A. To the best of my recollection the words authority to bind REL on this basis, is a working relationship with what the understanding of this was, but with the potential to do further due diligence and agree some for some time of transaction.

Q. Would you do the Court the courtesy of answering the question, I'll ask it again. Did you believe as at March 2003 that you had authority to bind REL in relation to the proposal that is set out in this letter?
A. Yes, I do as a director.

Q. And when you read it, I appreciate you say you can't remember reading it, you undoubtedly read paragraph 12 and understood what it meant, correct?
A. That is correct.

Q. And when you signed it you undoubtedly understood that you were purporting to do so with the authority of REL's board withdrawn.

You were purporting to do it with the authority of the company, REL?


A. Purporting to sign it on behalf of Leon Carr, it is me, I agreed and accepted by Leon Carr, duly authorised on behalf of Resource Equities Limited so it was agreed and accepted by me as a director of REL.

Q. You can assume that we can all read. The proposition is, when you signed your name to this document you held yourself out as having the authority of REL to bind it in relation to the deal set out in the letter, didn't you?
A. No.

Q. Do you want to consider that answer?
A. No.

Q. What do you say the words, duly authorised on behalf of Resource Equities Limited, convey?
A. What was your previous question?

Q. Don't worry about the previous question, worry about this question. What do say the words duly authorised on behalf of Resource Equities Limited convey in the context of this letter?
A. That I as a director the Resource Equities Limited was present at the Cargo Bar meeting and that we discussed points 1 through to 13.

Q. That is what the words, duly authorised on behalf of Resource Equities Limited convey?
A. Agreed and accepted, on behalf of the, I have signed this letter as a director as what the meeting and the representations made at that meeting.

44 I will mention only two other aspects of Mr Carr’s evidence. The first relates to the payment of $100,000.00 made to Mr Garrett. The impropriety of that payment was conceded on behalf of Messrs Carr and Purves (see para 3 of Mr Gray’s outline submissions). Nonetheless, Mr Carr (and for that matter Mr Purves) sought to defend it by suggesting that it was a payment for legal work that Mr Garrett had done for REL. There was no evidence of any retainer, or of any memorandum of fees or tax invoice, rendered by or on behalf of Mr Garrett. There was no explanation as to why Mr Garrett – the Group Corporate Counsel for the Cosmos Group – should have done work for REL, in circumstances where (as the evidence showed) REL had independent legal advisers to whom, all too frequently, it resorted. In my view, the explanation was a sham, and the suggestion that Mr Garrett had any claim (let alone a justifiable one) for legal fees of the order of $100,000.00 was a fabrication.

45 The other aspect of Mr Carr’s evidence that I wish to mention at this point relates to the shares in REL issued to Cosmos Commerce. Those shares were voted at the EGM held on 2 November 2004. Mr Carr clearly appreciated that, to avoid any suggestion that the issue of the shares was a sham, it was necessary at least that Cosmos Commerce should have paid, or tendered payment, for them. Mr Carr and Mr Purves each asserted, in substance, that Cosmos Commerce had drawn a cheque in payment for the shares on 29 October 2004 and provided it to REL on that day.

46 Mr Carr was asked whether he understood that Cosmos Commerce had paid for the shares that were issued. His evidence was, as usual, evasive; but I think that the better view of it is that he did claim to have believed, until after the meeting, that the cheque had been banked (T143.19-145.10):

Q. I just go to a final topic still to do with this Court case. Do you say that Cosmos E Commerce paid for the shares that were issued to it?
A. A cheque was drawn by Cosmos E Commerce and Mr Purves had that cheque in his possession.

Q. That's why I couched the question the way I did. Do you say that that amounted to a payment by Cosmos E Commerce to REL for the shares?
A. Sorry?

Q. Do you say that that amounts to payment?
A. Is that amount?

Q. Does that mean that Cosmos E Commerce paid for the shares in your mind?
A. There was an obligation for Cosmos E Commerce because they had been issued shares to pay for those shares.

Q. You are deliberately not answering the question, aren't you?
A. No.

Q. The question was not did you think that Cosmos E Commerce had an obligation to pay for the shares, the question was did you think by the time of either meeting when you allowed Cosmos E Commerce to vote upon the basis that they owned 7 million shares did you think that they paid for them?
A. At that time Mr Purves was in charge of the accounting, he banked the cheques, paid the bills, he was in possession of the cheque at the time of that meeting. I was not aware whether that cheque had been banked or not banked.

Q. Let's just break that down. If you knew he was in possession of the cheque it must for the purpose that you knew he hadn't banked it, mustn’t?
A. No.

Q. The bank would have the cheque if he put it in the bank, wouldn't they?
A. This was several days, weeks before that he had been given the cheque.

Q. But Mr Purves is a Director of both companies so what's the good of him having the cheque if the idea is to get it into the hands of REL?
A. To the best of my recollection the Glammont shares were issued and that cheque was banked some time later as well because the Western Australians alleged that they were issued for an improper purpose.

HIS HONOUR

Q. Mr Carr, when Mr Purves held the Cosmos E Commerce cheque for $350,000 for payment of the shares did he do so to your understanding as a Director of Cosmos or as a Director of REL?
A. He was holding that as a Director of REL.

Q. Do you accept that as a Director of REL it was his obligation to bank the cheque?
A. Yes, it was.

Q. Into REL's account?
A. Yes, it was.

Q. Was that done to your knowledge?
A. At the time of the meeting I assumed it would have been banked. Subsequently to that meeting it became - I became aware that it had not been at that stage remitted to the company.

NEWLINDS

Q. The meeting was on 2 November. Do you recall that that's the second meeting, 2 November? Do you accept that from me?
A. Is that the day of the invalid - the ruling of the invalid votes?

Q. Yes. That's the meeting where the counting of the Cosmos E Commerce shares was declared to be invalid?
A. The counting of the E commerce shares--

Q. Don't worry, the meeting that we're talking about--
A. Yeah.

Q. --you just told his Honour I think, and tell me if I've got this wrong, that it was only after that meeting that you became aware that the cheque hadn't been banked, is that what you said?
A. Yes.

Q. Is that true?
A. Yes.

Q. Are you sure?
A. It was when the commencement of the litigation commenced.

Q. Are you sure of that? Are you confident, and I notice that you are not saying to the best of my recollection in relation to these answers, that you did not become aware that the cheque had not been banked until after the litigation was commenced?
A. Board meeting, allotment, to the best of my recollection there was a time where Mr Purves advised me that the cheque had been drawn and paid - drawn and he had - it was in his possession.

47 The butts for cheques numbered 1385 to 1408 (both numbers inclusive) were in evidence. The range of dates covered by those cheques, at least so far as the butts can be trusted, was 25 October 2004 to 16 November 2004. With one exception, the butts are in chronological order.

48 The particular cheque that was said to have been given in payment for the shares is cheque number 1394 (Mr Purves agreed with this, and, the evidence being against his interest, I accept it). Its butt is dated 29 October 2004. However, each of the five preceding cheque butts (1389 to 1393) is dated 5 November 2004, and each of the seven succeeding cheque butts (1395 to 1401) is dated 10 November 2004. In my view, it is clear from those facts alone that cheque number 1394 was not drawn before 5 November 2004 at the earliest, and was backdated.

49 There is powerful support for that inference. The immediately preceding cheque butt, number 1393, is dated (as I have said) 5 November 2004. The payee is stated as “Resource Equities Ltd”. The amount of the cheque is $350,000.00. That was the amount payable for the 7 million shares purportedly issued to Cosmos Commerce (the issue price was 5 cents per share). That cheque butt has been struck through with parallel transverse lines, and the word “VOID” has been written between the lines. It is in my view clear that, for whatever reason, Cosmos Commerce did not attempt or purport to pay for the shares until 5 November 2004. Thus, the cheque was cancelled and the replacement cheque, backdated to 29 October 2004, was drawn.

50 I have no doubt that Mr Purves was responsible for the series of events that I have just described. That is one of the reasons why I have formed the view of his credibility set out at [58] below.

51 However, Mr Carr is implicated. He asserted that he was aware of the existence of the cheque at the time of the meeting, and that it was not until after the meeting that he “became aware that it had not been at that stage remitted to the company” (T144.25-.28). He said further that he did recall seeing the cheque (T146.5) but could not recollect whether he had seen it before or after the meeting on 2 November 2004.

52 In an affidavit sworn in proceedings in Western Australia, Mr Carr asserted that the cheque had been tendered on 29 October 2004. The affidavit suggests that Mr Carr had possession of the cheque (he said, in para 5, that he did not bank it) on 29 October 2004, and that he retained it thereafter without presenting it for payment (para 8 of that affidavit).

53 I have no doubt that Mr Carr (and for that matter Mr Purves) appreciated that it was part of REL’s case that the issue of shares to Cosmos Commerce was a sham. In my view, the substance of this aspect of Mr Carr’s was fabricated, in an attempt to give some credibility to the purported issue of shares to Cosmos Commerce; and in my view, to the extent that Mr Carr sought to suggest (as plainly he did, at least in his affidavit in the proceedings in Western Australia) that the cheque had been issued, and he had seen it, on 29 October 2004, that evidence is knowingly false.

54 Both the behaviour in which, I find, Mr Carr engaged and the falsehoods that, I find, he fabricated in an attempt to disguise that behaviour are sufficient of themselves to justify the conclusion that I have reached as to his credibility.

55 In addition, I rely on various unsatisfactory aspects of Mr Carr’s evidence, to which I make specific reference in later sections of these reasons.

Mr Purves

56 The best that can be said for Mr Purves is that he did not engage in the barrage of evasive and non-responsive answers that marked Mr Carr’s evidence. However, he too sought to justify the payment of $100,000.00 to Mr Garrett on the basis that it was in return for legal services rendered; and he too was a party to what I find was the fabrication of evidence in relation to the purported payment by Cosmos Commerce to REL in exchange for the purported issue of shares. Of course, he was a principal actor in the sham itself.

57 As with Mr Carr, I rely also on other unsatisfactory aspects of Mr Purves’ evidence, to which I make reference in later sections of these reasons.

58 As with Mr Carr, I conclude that the evidence of Mr Purves should not be accepted unless:

(1) it is corroborated by other, acceptable evidence;

(2) it accords with the probabilities, objectively ascertained; or

(3) it is against his interest.

59 In case it is not clear from what I have said, I do not regard Mr Carr as providing any former satisfactory corroboration for the evidence of Mr Purves. Nor do I regard Mr Purves as providing any satisfactory corroboration for the evidence of Mr Carr.

Messrs Thomas and Nagy

60 Mr Thomas gave evidence, effectively both in chief and in reply, by affidavit. He was cross-examined. No attack was made on his credibility. I accept his evidence. Likewise, Mr Nagy gave evidence in chief by affidavit. He too was cross-examined. No attack was made on his credibility. I accept his evidence.

The duties said to have been breached

61 REL relied on ss 180, 181 and 182 of the Corporations Act and also on duties owed to it by Messrs Carr and Purves, as directors, under the general law.

62 Sections 180, 181 and 182 read as follows:

180 Care and diligence—civil obligation only

Care and diligence—directors and other officers

(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation’s circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Business judgment rule

(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

(3) In this section:
business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.


181 Good faith civil obligations

Good faith—directors and other officers
(1) A director or other officer of a corporation must exercise their powers and discharge their duties:

(a) in good faith in the best interests of the corporation; and

(b) for a proper purpose.

(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.

182 Use of position—civil obligations

Use of position—directors, other officers and employees

(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a) gain an advantage for themselves or someone else; or

(b) cause detriment to the corporation.

(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.

63 The content and scope of those statutory duties was not controversial. Nor was it controversial that Messrs Carr and Purves, as directors of REL, owed it fiduciary obligations proscribing, among other things, pursuit of their own interest at the expense of REL’s interest in circumstances where there was a conflict, or a real or substantial possibility of conflict, between those interests. In other words, their general law obligations as fiduciaries reflect, to some extent, ss 181 and 182.

64 It is not necessary to take up time analysing the statutory and general law duties. This is not a case where the factual considerations are finely balanced, so that careful attention to the precise wording of the statutory obligations, and detailed analysis of the general law obligations, is required in order to reach a conclusion on the facts.

Issues 1 to 6: payments to directors

Relevant provisions of REL’s constitution

65 Clause 14.1 of REL’s constitution vests in the directors, subject to the Corporations Act and any other provision of the constitution, the management of REL’s business. It reads as follows:

14.1 POWERS AND DUTIES OF DIRECTORS
14.1 Management of the Company
Subject to the Corporations Law and to any other provision of these Articles, the business of the Company shall be managed by the Directors, who may pay all expenses incurred in promoting and forming the Company, and may exercise all such powers of the Company as are not, by the Corporations Law or by these Articles, required to be exercised by the Company in general meeting.

66 Clauses 13.9 and 13.10 of the constitution deal with remuneration and expenses. They read as follows:

13.9 Remuneration
The Directors shall be paid out of the funds of the Company, by way of remuneration for their services as Directors, a sum not exceeding such fixed sum per annum as may be determined by the Directors. The remuneration of the Directors shall not be increased except pursuant to a resolution passed at a general meeting of the Company where notice of the suggested increase shall have been given to Shareholders in the notice convening the meeting. No non-executive Director shall be paid as part or whole of his remuneration a commission on or a percentage of profits or a commission or a percentage of operating revenue, and no executive Director shall be paid as whole or part of his remuneration a commission on or percentage of operating revenue. The remuneration of a Director shall be deemed to accrue from day to day.
13.10 Expenses
The Directors shall be entitled to be paid reasonable travelling, hotel and other expenses incurred by them respectively in or about the performance of their duties as Directors. If any of the Directors being willing shall be called upon to perform extra services or make any special exertions on behalf of the Company or the business thereof, the Directors may remunerate such Director in accordance with such services or exertions, and such remuneration may be either in addition to or in substitution for his share in the remuneration provided for by Article 13.9.

Relevant resolutions

67 On 15 May 1995, the company in EGM resolved as follows:

Directors Fees

“that in accordance with Article 13.9 directors fees to a combined limit of $200,000.00 per annum be paid to directors as determined by the board from time to time.”

68 On 26 February 2003, the board of REL (then, Messrs Carr, Lafferty and Thomas) held a telephone meeting. The resolutions that they passed included the following:

That the current Directors and Angela Dent be paid $1,000 per month for their period of service as Directors, a total of $56,000 for the period 31 January 2001 to 28 February 2003.

The payments claimed and received

69 According to Mr Carr (affidavit sworn 28 September 2009, para 6) he had a discussion with Mr Purves in about March 2004. Mr Purves said that he was preparing the accounts for REL, and that the three of them (i.e., Messrs Carr, Purves and Thomas) “should put in our tax invoices so the company can do its accounts”. Mr Carr said that he then telephoned Mr Thomas and asked him to “render invoices for the relevant periods for any work you have done…”.

70 Mr Purves did not deal with this topic in his affidavit; specifically, he did not deny that he had had a conversation with Mr Carr to the effect alleged. Mr Thomas did refer to the topic in his affidavit, but did not dispute that he had had a conversation with Mr Carr. He said that it was to somewhat different effect: Mr Carr said Mr Thomas was to be paid $66,000.00 for director’s fees for the two years to 30 June 2003 and 30 June 2004, and should submit a tax invoice for that amount to REL.

71 According to Mr Carr, after the conversations to which I have referred, he submitted tax invoices totalling $200,000.00; Mr Purves submitted tax invoices totalling $99,000.00; and Mr Thomas submitted a tax invoice for $66,000.00. Thereafter, Mr Carr said that “[t]o the best of [his] recollection”, there was a directors’ meeting by telephone to discuss the tax invoices. He said, of that meeting (affidavit sworn 28 September, 2009, para 11):

I believe that a minute of our meeting and the resolutions to approve payment of each Tax Invoice was prepared but I have not been able to locate a copy of it.

72 In cross-examination on this topic, Mr Carr’s evidence was very much less definite (T115.14-.34, 164.16-.27):

Q. … Just tell me if I've got this wrong, is it the position that you, Mr Purves and Mr Thomas had a discussion or a series of discussions amongst yourselves and then all turned up at a meeting in April 2004 with some invoices addressed to the company, is that right?
A. I think we became directors in 2003. At some point during the first year there was a discussion in relation to remuneration.

Q. It's inconceivable isn't it that you each independently turned up to the same meeting with your own invoices, there must have been some discussion and an agreement that you were going to each--
A. To the best of my recollection towards the end of the financial year, these ones being April, either Nigel or, before 30 June one was required or asked, it was decided that we would put in our director's fees.

Q. It was decided you would all be paid some remuneration?
A. I believe to the best of my recollection I think that was at a Board meeting.

Q. And at that Board meeting all three of you presented invoices, correct? Or are you saying it was decided at a Board meeting and the invoices came later?
A. I can't remember whether it was decided at the Board meeting, the invoices came later or they were put to that Board meeting.
…

Q. In relation to director's fees, I think it was established yesterday that there were no bills presented to the Board. Were the payments to yourself disclosed to me and agreed by me?
A. To the best of my recollection I received a telephone call from Nigel asking for me to lodge my up-to-date bills for all of the extra work that I did. I then telephoned you that afternoon and asked you to do the same, and to the best of my knowledge you provided your bills, I provided mine and the invoices were all handed to Mr Purves.

Q. But there was no disclosure as to what your bill was?
A. To the best of my recollection I think we probably discussed that at a Board meeting but I can't remember.

73 Mr Purves’ dealt with this subject very briefly in his affidavit (affidavit sworn 29 June 2009, para 20):

20. I further recall that in late March 2004 Leon Carr prepared a bill for all his time and expenses in attending to various matters on behalf of REL and he delivered it to REL Richard Thomas and I did the same in relation to the work we had undertaken for REL. When all the bills were completed we met as directors of REL and we resolved to approve payment of the bills.

74 Mr Purves’ less than detailed recollection was substantially qualified during cross-examination (T181.47-182.38):

Q. Do you recall in relation to Mr Carr's claims as to whether you actually saw any bills or invoices from him?
A. I can't recall but I would suspect that they would have been presented.

Q. Does it follow from that answer that you are not able to tell us whether he attached to his invoices what might be described as supporting documents?
A. I can't recall.

Q. Is the chronology of these events this, that there was a series of telephone calls where effectively the Directors all agreed that if they each sent in fee notes that they would be paid by the company?
A. I can't recall, sorry.

Q. They then each sent in some fee notes and all sat around in a meeting and duly approved each other's fees?
A. I can't recall that, sorry.

Q. Can you recall turning your mind at all as to whether the level of fees of any of the Directors that was being claimed was appropriate?
A. I - I can't recall that but they would have been appropriate, otherwise they wouldn't have been paid.

Q. Why does that follow?
A. Because of the level of work.

Q. See, they might have been paid if they weren't appropriate if no-one turned their mind to the question as to whether they were appropriate or not, that's right, isn't it?
A. It's possible.

Q. Well, are you able to say that that's not what happened?
A. I can't recall.

HIS HONOUR

Q. Mr Purves, are you saying that you cannot now recall whether or not there was a meeting of Directors at which the invoices from the three of you were considered and approved
A. No, your Honour, I'm sure there would have been a meeting. I can't specifically recall attending a meeting just approving the fees to be paid. No, I can't recall that but as a process there would have been either part of an existing meeting or a meeting would have been called.

75 Mr Thomas (who I should say represented himself during the hearing) said in his affidavit affirmed 14 October 2009 that:

(1) he was not given invoices (and, I infer, did not provide one) but was told that he would be paid $60,000.00, plus GST, for directors’ fees up until 30 June 2004. He thought “that this fell within the approval limits of what was available for Directors on a pro-rata basis…” (para 85); and

(2) He “was not aware of the amounts that Carr and Purves were to be paid”, “was not a bank signatory” and “these payments [to Messrs Carr and Purves] were not disclosed [to him]” (para 87).

I return to his evidence on this topic at [363] below.

76 Mr Thomas was not challenged on this evidence in cross-examination.

77 Although Mr Carr claimed to have submitted a tax invoice (together with supporting documentation) to REL, he was unable to produce any copy, and nothing has been produced from the records of REL.

78 Mr Purves submitted two memoranda of fees in April 2004, and a “Fees Notice” dated 11 October 2004.

79 The first memorandum of fees read as follows (omitting formal parts):

Fees for the periods [sic] ended March 2004 as requested including all, [sic] audit, tax and secretarial matters including preparation of extra ordinary [sic] shareholders [sic] meeting and attendance to litigation matters also including preparation of affidavits and meeting attendance as required.
Total Due $33,000.00

80 The second memorandum of fees read (again omitting formal parts):

Director’s fees for the periods ended May 2004 and May 2005 including all tax.
May 2004 33,000
May 2005 33,000
Total Due $66,000

81 The “Fees Notice” of 11 October 2004 was submitted on the letterhead of a company known as 560 Pty Limited. Mr Purves accepted in cross-examination that this was a company controlled by him. It read (again omitting formal parts:

To fees for the period to date as requested for Company Secretarial Services to Dec 31, 2004, [sic] registered office fees, including preparation for several General Meetings and Financial Statements, Constitution and general secretarial services.
$20,000
GST 2,000
Total Fees Due $22,000

82 Mr Thomas submitted a tax invoice for director’s fees for the financial years to 30 June 2003 and 30 June 2004. He claimed $30,000.00 per year plus GST.

83 Mr Carr received a further payment of $75,000.00 on about 29 December 2004. Mr Purves received a further payment of about $88,000.00 about two days later.

Issues 1, 3 and 4: breach of duty and related matters

84 There was no evidence of any tax invoice prepared by Mr Carr or by Mr Thomas. For the reasons that I have given, I do not accept Mr Carr’s evidence that there were any such tax invoices. Nor do I accept that there was a directors’ meeting – at least, one involving Mr Thomas – where the invoices supposedly submitted were approved.

85 In cross-examination, Mr Carr sought to embellish his evidence as to the tax invoices that he said he submitted. He claimed that they were “provided by me with back up” (T116.40): a proposition not advanced in either of his affidavits. I do not accept that evidence. In my view, and with apologies to Sir William Schwenk Gilbert (The Mikado, 1885) it was fabricated in an attempt to provide “merely corroborative detail, intended to give artistic verisimilitude to an otherwise bald and unconvincing narrative”. It failed entirely to achieve its purpose.

86 In his second affidavit, Mr Carr sought to justify the payment to him by reference to cl 13.10 of REL’s constitution. He said (para 6) that it related to “work… done for REL over the previous year over and above the normal work in being a director or REL and attending board meetings”. He gave what purported to be details of that “extra work… carried out for the benefit of REL” in para 12. I do not propose to set out that lengthy paragraph. Nor do I accept it: as I have said, in discussing the question of credibility, I am not prepared to accept any evidence given by Mr Carr unless it is corroborated by other, acceptable, evidence; or is consistent with the probabilities objectively ascertained; or is against his interest. Neither para 12 of his second affidavit nor the antecedent assertion of “extra work” in para 6 falls into any of those categories.

87 There are further problems with para 12. It is clear that many of the entries in the paragraph (specifically, in the table forming part of it) were adapted wholesale from memoranda of fees provided to REL by its solicitors Christensen Vaughan. To that extent, what is said in para 12 should not be taken as reflecting any actual recollection on Mr Carr’s part. The more significant difficulty is that, with very few exceptions, the justification given relates to matters such as the Fox transaction or litigation in which REL had become embroiled because of the disputes between those who controlled (or sought to control) it. Even if Mr Carr had undertaken the activities described – and I do not accept his evidence that he did – he was not entitled to charge REL for the time involved. For the reasons that I give in discussing the Fox transaction, that transaction was something undertaken not for the benefit of REL but for the benefit of Mr Carr and Cosmos. As to the litigation (and I am referring to proceeding 357): for the reasons that I give in discussing this aspect of REL’s claim, whatever time Mr Carr spent in relation to it was spent not on the proper affairs of REL but in an attempt to justify the control that he, together with Mr Purves and Mr Garrett, had exercised over the affairs of REL and the improper means taken by him in particular at the EGM of 2 November 2004 to maintain that control.

362 In those circumstances, there is considerable force in Mr Thomas’ submission that the amended list cross-claim statement does not allege any comprehensible claim for contribution against him. However, in case others may see it differently, I shall deal with the facts in so far as they relate to the two remaining heads of claim: overpayments to directors and the Fox investment.

Overpayments to directors

363 As to payments to directors, Mr Thomas’ evidence (to which I have referred at [75] above) may be summarised as follows:

(1) in early April 2004, he received a telephone call from Messrs Carr and Purves. Mr Carr said that Mr Thomas would be paid $60,000.00 plus GST for directors’ fees for the years to 30 June 2003 and 30 June 2004. He asked Mr Thomas to submit an invoice;

(2) Mr Thomas submitted an invoice for director’s fees on 4 April 2004;

(3) he believed, at the time, “that the payment of the $60,000 was allocated from an annual $200,000 pool which was previously approved for the payment of Directors at appropriate times” (affidavit affirmed 14 October 2009, para 36);

(5) he was not (contrary to Mr Carr’s allegation) informed of the amounts proposed to be paid, or paid, to Messrs Carr and Purves;

(6) he had no involvement in, or ability to be involved in, or knowledge of those payments; and

(7) he believed that whatever payments were made, were made within what he believed to be the applicable overall limit of $200,000.00.

364 Mr Carr said that he, Mr Purves and Mr Thomas “met as directors of REL and… resolved to approve payment of” the claims made by each of them (affidavit sworn 30 June 2009 para 97). Mr Purves said the same, in virtually identical words (no doubt, through the magic of word processing) (affidavit sworn 29 June 2009, para 20). Mr Thomas denied that there had been such a meeting, or that he had seen, let alone approved, the claims made by Messrs Carr and Purves. I do not accept the evidence of Mr Carr or Mr Purves on this point and I prefer the evidence of Mr Thomas. I find that Mr Thomas knew of the amount to be paid to him, and did not know of the amounts claimed by or paid to Messrs Carr and Purves; and that he did not participate in the approval or payment of the amounts claimed by Messrs Carr and Purves.

365 Thus, the only basis on which Mr Thomas could be said to be liable is that he accepted $66,000.00 (including GST) for two years’ director’s fees, at a time when (on REL’s case) the remuneration of each director was limited to $1,000.00 per month pursuant to the resolution made on 26 February 2003. I have concluded that the resolution does not have the construction for which REL contended. But even if it did, that construction is not so obvious that the alternative view could not be said to be open.

366 Apart from the resolution of 26 February 2003, there was no reason for Mr Thomas to think that the payment to him (and, as he might have thought, equivalent payments to each of Messrs Carr and Purves) would be in breach of duty. That is because, as he explained, those payments would have been within the $200,000.00 cap. If REL is right about the proper construction of the resolution, and the $200,000.00 cap is irrelevant, it does not follow that Mr Thomas acted in breach of his duties simply because he, understandably enough, took a different view of the resolution.

367 Alternatively, and even if (contrary to what I have just said) some breach of duty could be spelled out of the facts as I have found them, it would be appropriate for Mr Thomas to be relieved under s 1318. In my view, he acted honestly. In the circumstances that I have outlined, and taking into account the fact that Mr Thomas has effectively expressed contrition by reaching a settlement with REL, the circumstances require that he be excused from the consequences of this hypothetical breach of duty. Apart from anything else, not to excuse him would leave him exposed to liability, at the suit of Messrs Carr and Purves, in circumstances where Mr Thomas will gain no benefit from any payment that they might make to REL. He would gain no benefit from any such payment because (as a result of the settlement that he has reached) the payment will not go in reduction of, or in any way alleviate, his liability to REL.

The Fox transaction

368 I turn to the Fox transaction. Mr Thomas was not present at the Cargo Bar meeting. He did not become aware of the possibility of investment in Fox until, in early May 2003, Mr Carr spoke to him about it (see Mr Thomas’ affidavit affirmed 14 October 2009, para 17).

369 After that discussion, Mr Thomas visited the premises of Fox and spoke to Mr Nagy and others.

370 Thereafter, Mr Thomas said, the board (which by then included Mr Purves) discussed the Fox investment. Mr Thomas said that REL proposed to take up a 20% shareholding in Fox for $200,000.00, and lend Fox money by purchasing convertible notes. Mr Carr said that he had had discussions with the Registration Board, and had received preliminary advice from a firm of lawyers that there would be no breach of the PDF Act; any temporary excess of the 30% limit would be waived for a period of time.

371 After the board met, Mr Thomas said that:

(1) Mr Carr dealt with the Registration Board and, in general, compliance with the PDF Act ;

(2) Mr Purves was assigned, and undertook, responsibility for the financial due diligence (in conjunction with Armstrong Wily); and

(3) in effect, he left it to them to take the investment forward.

372 Further, Mr Thomas said, no one told him of Cosmos’ interest in the Fox technology, or of the arrangements, as between REL and Cosmos, recorded in the letter of 20 March 2003.

373 Indeed, Mr Thomas said, he was so convinced of the merits of the investment in Fox that he caused his family company Glamont to subscribe for a placement of 3 million shares in REL at $0.05 per share.

374 I accept Mr Thomas’ account of his knowledge and involvement. To the extent that Mr Carr (in particular) asserts that Mr Thomas had a more substantial involvement, I do not accept that evidence. In particular, as I have said, I regard Mr Carr’s evidence as to the valuation that he said Mr Thomas prepared as a fabrication.

375 In essence, the only breach of duty that could be found against Mr Thomas is that he was too trusting of Messrs Carr and Purves, and failed to apply his mind independently to the Fox transaction.

376 If some such breach of duty is to be spelled out then, again, Mr Thomas ought be excused under s 1318. Again, I find, he acted honestly. Again, when one takes into account all of the circumstances of the case, he ought fairly to be excused. In this context, again, I take into account not only the facts as I have found them in relation to the Fox transaction but also the fact that Mr Thomas has settled the claim made by REL against him.

377 It follows that there can be no joint or concurrent liability for any of the claims. As to some, that is so simply because Mr Thomas, having been excluded from involvement in the affairs of REL, was not involved in the relevant activities. As to the others, it is because even if some breach of duty could be made out against him, it is a breach for which he ought be excused under s 1318.

Issue 34: Mr Thomas’ cross-claim

378 This cross-claim must be dismissed. That is so for two reasons. The first is that Mr Thomas has no liability to Messrs Carr and Purves, and therefore no liability that could be passed on to those whom he has joined as cross-defendants.

379 The second reason is that, on its proper construction, the deed of settlement does not have the meaning for which Mr Thomas contends. Mr Thomas says that, on the proper construction of cl 3.4 of the deed of settlement, REL and Messrs Johnson and Brown (the other cross-defendants) have agreed to indemnify him for any liability that he may have under, relevantly, these proceedings brought by REL.

380 The deed of settlement was made in May 2007. It recites, among other things, what are now these proceedings (both the proceedings for breach of duty – 50205/07 – and the proceedings relating to the loans to Mr Garrett – 50214/07). It recites, among other things, that REL and Mr Thomas have agreed to resolve those proceedings, as between themselves, on the terms of the deed.

381 Clause 3 of the deed is headed “Release and Discharge”. By cl 3.4, REL and Messrs Brown and Johnson each agrees to release and discharge Mr Thomas from any claims relating, among other things, to the REL proceedings. It reads:

3.4 REL, Brown and Johnson and each of them agree to release and discharge RJ Thomas from any and all Claims arising directly or indirectly in relation to any circumstance or event pertaining to the REL Proceedings and proceedings COR 6 of 2004.

382 The “REL Proceedings” are of course the current two sets of proceedings. Proceedings COR 6/2004 can be disregarded. The word “claims” is defined, in cl 8.1.1, as follows:

8.1.1 Claims means any action, demand, suit, proceeding, debt, claim, loss or other liability whatsoever or howsoever arising directly or indirectly, whether present or further, contingent or otherwise.

383 Mr Thomas submitted, in essence, that the claim for contribution brought by Messrs Carr and Purves against him was a claim arising directly or indirectly in relation to any circumstance or event pertaining to the current proceedings. I do not accept that submission. The relevant promise is one by REL and Messrs Brown and Johnson to release and discharge Mr Thomas from any claim of the defined kind. In context, that must mean a claim that they have brought (or could have brought, or could in the future bring) against him arising out of or relating to the prescribed circumstances. It is not a promise to indemnify in respect of any similar claims, arising out of the same circumstances, brought against him by someone else. The natural and ordinary meaning of the words “release and discharge” does not extend to “indemnify”.

The Australian Securities and Investments Commission

384 I have found that Messrs Carr and Purves have committed numerous breaches of their statutory and general law obligations as directors of REL. Many adjectives could be used to describe most of those breaches: “gross”, “culpable” and “dishonest”, to give but three examples.

385 I do not think that it is appropriate for the matter to finish with the judgment inter partes of a civil court. In my view, there is a significant public interest in referring the breaches to the appropriate authority, for consideration of further action that might be taken.

Conclusions and orders

386 For the reason that I have given, Messrs Carr and Purves are liable to indemnify or compensate REL in the following amounts:

(1) in respect of overpayments to directors: $368,500.00;

(2) in respect of the loans to Mr Garrett: $242,035.65;

(3) in respect of the Fox transaction: $682,000.00;

(4) in respect of the payments out from the proceeds of sale of the Asia Iron shares: $810,702.58;

(5) in respect of litigation expenses: $191,004.00;

(6) in respect of the amount paid to Mr Crouch: $25,000.00; and

(7) in respect of the amounts paid to Mr Carrello: an amount to be determined in accordance with [323] and [324] above.

387 REL is entitled to interest on those amounts (and on the amount to be agreed or assessed in respect of the cost and expenses of Mr Carrello’s administration) in accordance with Schedule 5 to the Uniform Civil Procedure Rules. I note that the amount stated at [386(2)] above in relation to the loans to Mr Garrett includes interest to 7 July 2009, so that interest is to be calculated from then until the date of judgment. So far as I am aware, none of the other calculations of loss includes any allowance for interest; but to the extent that they may do so, all that is required is an updated calculation to the date of judgment.

388 I reserve consideration of the amount of indemnity or compensation in respect of the costs and expenses of Mr Carrello’s administration. Subject to that, I direct the parties to bring in short minutes of order to give effect to these reasons and my conclusions.

389 I direct the Prothonotary of the Court to forward a copy of these reasons to the proper officer of the Australian Securities and Investment Commission (ASIC) for consideration.

390 I direct further that ASIC is to be provided, on request, with access to or copies of the affidavits that were read, the transcript and the exhibits that were admitted into evidence.

391 Draft agreed orders, or competing drafts of orders, are to be submitted to my Associate by 2 February 2010.

392 I stand the proceedings over to 9:30am on 4 February 2010 for the making of orders. I will deal with any dispute, including as to costs, on that occasion.

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