Simpson v Tropical Hire Pty Ltd (in liq)

[2017] QCA 273

SUPREME COURT OF QUEENSLAND

CITATION:

Simpson v Tropical Hire Pty Ltd (in liq) & Ors [2017] QCA 273

PARTIES:

SANDE PALGRAVE SIMPSON
(appellant)
v
TROPICAL HIRE PTY LTD (in liquidation)
ACN 119 814 587
(first respondent)
DUANE PATRICK O’CONNOR
(second respondent)
OTAS INVESTMENT HOLDINGS PTY LTD
ACN 112 742 800
(third respondent)

FILE NO/S:

Appeal No 396 of 2017
DC No 216 of 2016

DIVISION:

Court of Appeal

PROCEEDING:

General Civil Appeal

ORIGINATING COURT:

District Court at Townsville – Unreported, 2 December 2016 (Baulch SC DCJ)

DELIVERED ON:

10 November 2017

DELIVERED AT:

Brisbane

HEARING DATE:

17 August 2017

JUDGES:

Sofronoff P and McMurdo JA and Boddice J

ORDER:

1.   The appeal against the judgment entered in favour of the first respondent be dismissed with costs.

2.   The appeal against the dismissal of the third party proceedings be dismissed with costs.

CATCHWORDS:

EQUITY – GENERAL PRINCIPLES – FIDUCIARY OBLIGATIONS – FIDUCIARY DUTY – DIRECTOR’S DUTIES – where the liquidators for the first respondent initiated proceedings in the District Court for recovery of equitable damages and/or compensation against the appellant for alleged breaches of director’s duties as a director of the respondent – where the liquidators for the first respondent were awarded judgment against the respondent in specified amounts, including interest, and costs on an indemnity basis – where the respondent counter-claimed against the second and third respondents – where the appellant was unsuccessful in his counter-claim – where the appellant appeals the judgment against him on the ground that the trial judge erred in finding breaches of director’s duties – where the appellant appeals the dismissal of the third party proceedings on the basis that the trial judge erred in finding any loss suffered arose due to the appellant’s actions or inaction as a director – whether the appeal should be allowed

Daniels v Anderson (1995) 37 NSWLR 438, considered
Re Railway and General Light Improvement Co; Marzetti’s case (1880) 28 WR 542; 42 LT 206, applied

COUNSEL:

L D Bowden for the appellant
K C Fleming QC for the first respondent
The second respondent appeared on his own behalf (via telephone), and as agent for the third respondent

SOLICITORS:

1Legal for the appellant
Connolly Suthers for the first respondent
The second respondent appeared on his own behalf (via telephone), and as agent for the third respondent

1. SOFRONOFF P:  I agree with the reasons of Boddice J and with the orders his Honour proposes.

2. McMURDO JA:  I agree with Boddice J.

3. BODDICE J:  By Notice of Claim filed 6 June 2014, the liquidators for the first respondent initiated proceedings claiming recovery of equitable damages and/or compensation against the appellant for alleged breaches of duties as a director of the respondent in distributing the proceeds of the sale of the first respondent’s business to himself.  The appellant was at the time the sole director and sole shareholder of the first respondent.

4. After the commencement of those proceedings, the appellant issued third party proceedings against the second respondent, his accountant, and the third respondent, the entity through which the second respondent provided accountancy services.  In those proceedings, it was alleged the second and third respondents had breached duties owed to the appellant and/or had engaged in misleading conduct as a consequence of which the appellant had suffered loss and damage.

5. On 2 December 2016, the primary Judge gave judgment for the first respondent against the appellant in specified amounts, including interest, and ordered the appellant pay the first respondent’s costs of those proceedings, to be assessed on an indemnity basis.  On the same date, the primary Judge ordered the appellant’s claim against the second and third respondents be dismissed with no order as to costs.

6. The appellant appeals both the judgment in favour of the first respondent and the order dismissing his claim against the second and third respondents.

7. At issue on the appeal against the judgment in favour of the first respondent is whether the primary Judge erred in finding the appellant had breached his common law duty or equitable obligation to the first respondent, in finding there was evidence to establish such breaches of duty and in finding the alleged breaches of duty caused the first respondent loss or damage.

8. At issue on the appeal against the dismissal of the third party proceedings is whether the primary Judge erred in any loss suffered by the appellant arose due to his independent actions or inaction as a director of the first respondent.

   Background

9. The first respondent was incorporated in 2006.  The sole director and sole shareholder was the appellant.  After incorporation, the first respondent operated a successful fuel infrastructure business.  On 6 May 2009, the first respondent sold that business.  It received sale proceeds, totalling $919,750, over three payments in 2009, 2010 and 2011.  Those sale proceeds were largely distributed by the appellant to himself and his wife by various payments in 2012 and 2013.

10. The second and third respondents were engaged as the accountants for the first respondent and the appellant personally since incorporation of the first respondent.  Their responsibilities included filing Business Activity Statements with the Australian Tax Office (“ATO”).  By 2012, numerous Business Activity Statements remained outstanding, for periods back to the commencement of the first respondent’s business.

11. In 2012, the ATO gave notice of those outstanding statements to the first respondent, through the second and third respondents.  The first respondent forwarded that notice to the appellant who expressed surprise at its contents and sought further information from the second respondent.  At one point, the appellant made payment to the ATO of $118,157.  The second respondent had advised that sum should be paid to the ATO.

12. At the time of that payment, penalties and interest were still outstanding to the ATO.  The second respondent advised the appellant not to pay them so further discussions could be had with the ATO in relation to the first respondent’s liability for those sums.  Ultimately, the ATO issued a statutory demand for the outstanding penalties and interest.  That demand was not met and as a consequence, the first respondent was wound up on 28 February 2014.

    Claim

13. The first respondent alleged the appellant, in his capacity as a director of the first respondent, had statutory duties and obligations to exercise his powers and discharge his duties with a degree of care and diligence that a reasonable person would exercise, to exercise those powers and discharge his duties in good faith, in the best interests of the first respondent, for a proper purpose and without a material personal interest, having informed himself in respect of the subject matter of the exercise of those powers and duties and having rationally believed his actions were in the best interests of the corporation, and not to improperly use his position to gain an advantage for himself or to cause detriment to the first respondent.

14. The first respondent alleged the appellant also owed common law duties to exercise his powers and discharge his duties as a director with a degree of care and diligence that a reasonable person would exercise, to exercise such powers and duties in good faith, for a proper purpose and not to improperly use his position to gain an advantage for himself or someone else, or cause detriment to the first respondent.  The first respondent further alleged the appellant owed a fiduciary duty to the first respondent as a result of holding the office of director of the first respondent.

15. The first respondent alleged that at the time of sale, the first respondent’s business was the sole significant asset of the first respondent.  Further, during the time the appellant was the sole director, secretary and sole shareholder of the first respondent, the first respondent had incurred liabilities including a taxation liability which remained outstanding as at the date of the winding up of the first respondent.

16. The first respondent alleged that notwithstanding those outstanding liabilities, the appellant distributed to himself the proceeds from the sale of the first respondent’s business in breach of his statutory, common law and fiduciary duties.  Those breaches entailed distributing the business sale proceeds not in good faith or for a proper purpose, in circumstances where the defendant had a material personal interest and without having properly informed himself as to the taxation and other liabilities and in circumstances where the appellant could not rationally have believed the distributions were in the best interests of the first respondent.

17. The first respondent alleged that but for those breaches, the first respondent would have been able to meet its taxation and other liabilities, would not have been wound up and would not have incurred costs or otherwise suffered loss and damage.  The first respondent sought equitable damages and/or compensation by reason of those breaches, together with interest and costs.

18. By way of defence, the appellant denied breaching any statutory, common law or fiduciary duty.  The appellant alleged the distributions were made in good faith and for a proper purpose, after the appellant had retained the second and third respondents to ensure the first respondent complied with its taxation and other obligations and in circumstances where the appellant prior to July 2013 understood the first respondent had met all outstanding obligations to creditors and had complied with its taxation obligations as advised by the second and third respondents.

    Third party claim

19. The appellant alleged if he was liable to pay damages and/or compensation to the first respondent, the third parties were liable to pay to indemnify the appellant for such loss and damage by reason of their negligence in failing to exercise reasonable care and judgment in the provision of advice to the appellant as to the taxation obligations of the first respondent and in the preparation of relevant documentation to meet those obligations.  Further, such loss and damage was occasioned by misleading and deceptive representations made by the second and third respondents that they would attend to all outstanding documentation and that all outstanding obligations to the ATO had been met by the first respondent.

20. In their defence, the second and third respondents alleged the appellant was at all material times aware the first respondent had outstanding tax documentation and obligations, that the appellant’s duties as a director could not be waived or reduced by the engagement of external consultants and that the appellant failed to undertake his own independent assessment to form his own judgment in relation to the financial affairs of the first respondent prior to undertaking the distributions.  The second and third respondents also alleged the second respondent was not liable as he was not personally retained by the appellant on behalf of the first respondent.

    Judgment

21. The primary Judge found that the appellant was at all material times aware that there were significant taxation issues in respect of the first respondent, including that no Business Activity Statement returns had been lodged for a significant period.  The primary Judge noted that in an email from the second respondent dated 16 March 2012, the appellant had been advised of the first respondent’s failure to lodge Business Activity Statements over a five year period and the appellant had acknowledged in a return email that he had understood the first respondent was behind “for three or four” Business Activity Statements.  That email revealed a much greater knowledge of the first respondent’s taxation situation than the appellant was prepared to acknowledge when giving evidence.

22. The primary Judge found the appellant, as director, had a duty to bring to the performance of his duties an involvement in the management of the first respondent, an ability to monitor its activities as a reasonable person would, and an understanding of the business of the first respondent.  The appellant also had an obligation to keep himself informed as to the nature of the first respondent’s activities, to keep himself familiar with the financial circumstances of the first respondent and to involve himself in an ability to understand its financial statements.

23. The primary Judge found that notwithstanding those obligations and the appellant’s knowledge of the existence of numerous outstanding Business Activity Statements the appellant authorised distributions from the first respondent to himself or to him and his wife between 30 July 2012 and 20 August 2013 in the sum of $484,850.78 which amount was significantly more than the total tax liability claimed by the ATO being $291,661.82.  At the time of those transfers, the appellant was well aware of the ongoing problem with the Business Activity Statements and the ATO.

24. The primary Judge found that in accordance with his duties as a director, the appellant had a duty to retain sufficient money to cover any likely liability to the ATO and to refrain from making distributions until he ascertained that amount.  The appellant had breached his duties as a director by making the distributions.  The primary Judge ordered that there be judgment for the first respondent against the appellant in the sum of $291,661.82.  The primary Judge also ordered the appellant pay interest, and costs on an indemnity basis.

25. In respect of the third party proceedings, the primary Judge found that whilst the second and third respondents displayed a total inattention to dealing with the affairs of the first respondent, the loss and damage sustained by the appellant was sustained because of his own conduct in breach of his duties as a director and were not suffered because of the conduct of either third party.  The primary Judge found that in any event, the first third party could not be liable as he was never retained by the appellant.  The primary Judge gave judgment for the third parties against the appellant, with no order as to costs.

    Appellant’s submissions

26. The appellant submits the primary Judge erred in finding the appellant breached his duties as a director.  The case as pleaded against the appellant was in negligence.  The primary Judge undertook no necessary analysis of the financial affairs of the first respondent sufficient to determine when and in what respect the appellant was negligent in the discharge of his duties as a director.

27. The appellant submits that whilst directors owe duties of care and skill, both at common law and in equity, an equitable duty to take care is different from a fiduciary duty and an equitable duty to take care was not pleaded or relied upon by the first respondent.  The breach of a common law duty was a tort, which could only be established by a consideration of the appellant’s actions at particular times in respect of particular transactions.  At the time the appellant made the distributions, the true state of the first respondent’s indebtedness to the ATO was unclear.  It was not negligent for the appellant, in those circumstances to make the distributions.

28. The appellant submits, in respect of the third party proceedings, that the primary Judge erred in finding that the appellant’s loss and damage was as a consequence of his own actions and not as a consequence of the negligence of the third parties.  The appellant relied upon the third parties to give proper advice as to the business, accounting and taxation affairs to the first respondent.  The third parties acted negligently in providing those services.  The loss and damage suffered by the appellant was as a consequence of that negligence as had the second and third respondents performed their services competently, there would have been no outstanding taxation liability.

    First respondent’s submissions

29. The first respondent submits the findings of the primary Judge were supported by the evidence.  The appellant had not established those findings were contrary to the evidence or so glaringly improbable such as to justify interference by an appellate Court.

30. The first respondent submits the claim before the primary Judge involved both breaches of common law and fiduciary duties.  The reference to negligence was in accordance with the duties imposed upon the appellant as a director of the first respondent.  The evidence supported the primary Judge’s conclusions that the appellant was aware of outstanding taxation liabilities owed by the first respondent and, in breach of those duties, made distributions to himself rendering the first respondent unable to meet those taxation liabilities.

31. The appellant had an obligation to make his own independent assessment of the financial position of the first respondent prior to making those distributions.  His failure to do so meant the first respondent was unable to meet its debts as and when they fell due.  The making of distributions in such circumstances were in breach of his duties as they were for his own personal benefit and to the detriment of the first respondent.

    Second and third respondents’ submissions

32. The second and third respondents submit the primary Judge did not err in dismissing the third party proceeding.  The appellant bore the legal and evidential onus of establishing that any loss and damage sustained by him was as a consequence of the conduct of the second and third respondents.  The primary Judge correctly found that the loss and damage sustained by the appellant was as a consequence of his own actions in breach of his duties as a director.  Those losses were not occasioned by any negligence on the part of the second and third respondent.

    Discussion

    Claim

33. Contrary to the appellant’s submissions, the first respondent’s claim was not pleaded in negligence.  Whilst the pleading referred to the appellant’s duties as exercising a degree of care and diligence that a reasonable person would exercise, the plea was framed as a claim for equitable compensation for breach of director’s duties.  As was observed in Daniels v Anderson[1] proceedings commenced against directors were traditionally commenced in equity and not at common law for damages for negligence.  When reference is made to negligence in relation to such duties, it is not to negligence in the common law sense but imprudence in an equitable sense.[2]

    [1](1995) 37 NSWLR 438 at 493.

    [2]Re Railway and General Light Improvement Co; Marzetti’s case (1880) 28 WR 541 at 543; 42 LT 206 at 208.

34. When regard is had to the nature of the claim, there was no error by the primary Judge in failing to undertake an analysis of the appellant’s actions at particular times in respect of particular transactions.  The primary Judge properly considered the evidence in the context of the appellant’s knowledge of the financial circumstances of the first respondent, particularly any indebtedness to the ATO, at the time the appellant made the distributions to himself and to himself and his wife.

35. On 12 March 2012, the appellant had been sent a copy of the ATO’s final notice, which stated Activity Statements had not been received from the first respondent since January 2007.  The notice referred to the need for lodgement and payment immediately as well as to a potential liability for penalties and interest.

36. On 16 March 2012, the appellant responded to the second respondent “guys … WTF I was under the understanding that we were only behind for the last 3 or 4 not since I started.  Michelle can you please set up an appointment with Duanne so I can resolve”.

37. At that time the appellant knew that the first respondent’s business was successful prior to its sale in 2009.

38. Notwithstanding that knowledge, the appellant, after the first respondent had received the final payment of the sale of the proceeds of the sale of its business, made various payments to himself and his wife on 30 July 2012, 12 October 2012, 26 February 2013, 4 March 2013, 17 May 2013 and 20 August 2013, totalling $484,850.78.

1. Having regard to that knowledge it was incumbent upon the appellant, in the proper exercise of his director’s duties, to not make distributions for his own personal gain in circumstances where such distributions were to the detriment of the first respondent by denuding it of available funds to meet any outstanding indebtedness to the ATO.

2. Nothing in the primary Judge’s findings in respect of the appellant’s breach of the duties was contrary to a fair assessment of the whole of the evidence.  Those findings were not so glaringly improbable as to justify appellate intervention.

3. The evidence led at the hearing amply supported the primary Judge’s conclusion that at the time of the distributions made from July 2012, the appellant was aware of a number of outstanding Business Activity Statements to the ATO, yet made the distributions for his own benefit to the detriment of the first respondent.

4. The appellant’s appeal against the judgment entered in the first respondent’s favour should be dismissed with costs.  In reaching this conclusion I note that at the hearing of the appeal the appellant expressly abandoned the grounds of appeal relevant to the primary Judge’s order that the appellant pay the first respondent’s costs of the claim, on an indemnity basis.

   Third party claim

5. The primary Judge’s findings in relation to a lack of causal connection between the appellant’s loss and damage, as a consequence of that judgment, and the conduct of the second and third respondents were also not contrary to a fair assessment of the whole of the evidence.

6. The primary Judge found that the appellant was liable to the first respondent due to a breach of his duties as a director.  Nothing in the second and third respondents’ conduct, in the provision of accounting services to the first respondent or the appellant, caused the appellant to breach his duties as a director of the first respondent.

7. Those duties and obligations were his responsibility.  His failure to comply with those duties and obligations resulted in a financial benefit to the appellant, to the detriment of the first respondent.

8. The appellant’s appeal against the dismissal of the third party proceedings should also be dismissed with costs.

   Orders

9. I would order:

   1.The appeal against the judgment entered in favour of the first respondent be dismissed with costs.

   2.The appeal against the dismissal of the third party proceedings be dismissed with costs.