Streeter v Western Areas Exploration Pty Ltd (No 2)
[2011] WASCA 17
•20 JANUARY 2011
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: STREETER -v- WESTERN AREAS EXPLORATION PTY LTD [No 2] [2011] WASCA 17
CORAM: McLURE P
BUSS JA
MURPHY JA
HEARD: 1-4 JUNE 2010
DELIVERED : 20 JANUARY 2011
FILE NO/S: CACV 109 of 2009
BETWEEN: TERRENCE ERNEST JAMES STREETER
First Appellant
DAVID CHARLES COOPER
Second AppellantJUNGLE CREEK GOLD MINES PTY LTD (ACN 008 795 033)
Third AppellantAND
WESTERN AREAS EXPLORATION PTY LTD (ACN 076 025 066)
Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram :EM HEENAN J
Citation :WESTERN AREAS EXPLORATION PTY LTD -v- STREETER [No 3] [2009] WASC 213
File No :CIV 2126 of 2006
Catchwords:
Fiduciary - Director - Director also an investor - Capacity in which director/investor acts - Executive/Non-executive directors - Conflict of interest - Account of profits - Corporate opportunity - Requirement to plead dishonesty - Laches
Legislation:
Nil
Result:
Appeal allowed
Category: A
Representation:
Counsel:
First Appellant : Mr C L Zelestis QC & Mr M D Cuerden
Second Appellant : Mr C L Zelestis QC & Mr M D Cuerden
Third Appellant : Mr C L Zelestis QC & Mr M D Cuerden
Respondent: Mr M L Bennett & Mr M A MacLennan
Solicitors:
First Appellant : Maxim Litigation Consultants
Second Appellant : Maxim Litigation Consultants
Third Appellant : Maxim Litigation Consultants
Respondent: Lavan Legal
Case(s) referred to in judgment(s):
Aas v Benham [1891] 2 Ch 244
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461
Allcard v Skinner (1887) 36 Ch D 145
Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23; (2005) 226 CLR 507
Armitage v Nurse [1998] Ch 241
Avins v Garvey [2001] WASCA 415
AWA Ltd v Daniels (1992) 7 ACSC 395
Baburin v Baburin [No 2] [1991] 2 Qd R 240
Bell v Lever Brothers Ltd [1932] AC 161
Birtchnell v Equity Trustees (1929) 42 CLR 384
Boardman v Phipps [1967] 2 AC 46
Boston Deep Sea Fishing & Ice Company v Ansell (1888) 39 Ch D 339
Boyns v Lackey (1958) SR (NSW) 395
Breen v Williams [1996] HCA 57; (1996) 186 CLR 71
Briginshaw v Briginshaw (1938) 60 CLR 336
Burg v Horn (1967) 380 F 2d 897
Canadian Aero Services Ltd v O'Malley [1974] SCR 592
Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178
Civil Service Co‑Operative Society Ltd v Blyth (1913) 17 CLR 601
Clegg v Edmondson (1857) 8 De GM & G 787
Connor v Blacktown District Hospital (1971) 1 NSWLR 713
Cook v Deeks [1916] 1 AC 554
Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260
Elliott v The Queen [2007] HCA 51; (2007) 234 CLR 38
Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 5 ACSR 424
Erlanger v The New Sombrero Phosphate Company (1878) 3 App Cas 1218
Ex parte James (1803) 8 Ves 337; (1803) 32 ER 385
Fox v Percy (2003) 214 CLR 118
Furs Ltd v Tomkies (1936) 54 CLR 583
Fysh v Page (1956) 96 CLR 233
Green & Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1
Hippisley v Knee Brothers [1905] 1 KB 1
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41
Hourigan v Trustees Executors & Agency Co Ltd (1934) 51 CLR 619
Howard Smith Ltd v Ampol Ltd [1974] AC 821
Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Keech v Sandford (1726) 25 ER 223
Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392
Lindsay Petroleum Company v Hurd (1874) LR 5 PC 221
London and Mashonaland Exporation Co Ltd v New Mashonaland Exploration Co Ltd [1981] WN 165
Lord Corporation Pty Ltd v Green (1991) 22 NSWLR 532
Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449
Mills v Mills (1938) 60 CLR 150
Mordecai v Mordecai (1988) 12 NSWLR 58
New Zealand Netherlands Society 'Oranje' Inc v Kuys [1973] 1 WLR 1126
Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1
Nullacourt Pty Ltd v Walker (Unreported, WASCA, Library No 950249, 19 May 1995)
Oldfield Knott Architects Pty Ltd v Ortiz Investments Pty Ltd [2000] WASCA 255
Orr v Ford (1989) 167 CLR 316
Pacifica Shipping Co Ltd v Andersen [1986] 2 NZLR 328
Parker v McKenna (1874) 10 Ch App 96
Payne v Parker (1976) 1 NSWLR 191
Permanent Building Society (in liq) v McGee (1993) 11 ACSR 260
Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1
Phipps v Boardman [1964] 1 WLR 993
Pilmer v The Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165
Queensland Mines Ltd v Hudson (1978) 52 ALJR 399
R v Byrnes (1995) 183 CLR 501
Re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
Rowe v Oades (1905) 3 CLR 73
S E A Food International Pty Ltd v Lam (1998) 16 ACLC 552
Sanders v Parry [1967] 1 WLR 753
Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359
Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 217 CLR 315
The Australian Metropolitan Life Assurance Company Ltd v Ure (1923) 33 CLR 199
The Bell Group Ltd (in Liq) v Westpac Banking Corporation [2008] WASC 239; 225 FLR 1
The Queen v Murphy (1985) 4 NSWLR 42
United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1
Vrisakis v Australian Securities Commission (1993) 9 WAR 390
Warman International Ltd v Dwyer (1995) 182 CLR 544
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285
Williamson v Hine [1891] 1 Ch 390
Woolworths Ltd v Kelly (1991) 22 NSWLR 189
McLURE P: The appellants, Mr T Streeter, Mr D Cooper and Jungle Creek Gold Mines Pty Ltd (a company controlled by Mr Streeter), appeal against orders made by EM Heenan J imposing in favour of the respondent, Western Areas Exploration Pty Ltd (WAE), a constructive trust over 11,075,000 shares held by the Streeter and Cooper interests in Western Areas NL (WANL) (the initial shares).
The initial shares were obtained by the appellants in connection with their contribution to a successful capital raising and listing of WANL on the ASX in July 2000. WANL shares traded for some considerable time under or around their list price of 20 cents. However, between the listing of WANL and the commencement of this litigation in 2006, WANL was spectacularly transformed from a junior mining exploration company to a highly successful mining company with a market capitalisation of more than $900 million. The WANL share price peaked at $11.65 prior to the start of the global financial crisis in 2008.
WANL was the corporate vehicle for a nickel project proposal put together and promoted by a group of geologists called the Australian Nickel Project Consultants (ANPC). The success of WANL was not attributable to the mining tenements which featured in the capital raising and float in 2000. Its success was attributable to the acquisition between April 2002 and May 2003, and subsequent development of, the Forrestania mining tenements. WANL's expenditure on the Forrestania project, which was financed by further share placements, rights issues and loans, exceeded $76 million in the period 30 June 2003 to 30 June 2006.
At all material times Mr Streeter and Mr Cooper were directors of WAE, which had been dormant since the end of 1998. Mr Streeter and Mr Cooper were directors of WANL from its incorporation in December 1999. The trial judge found that, by virtue of their involvement with ANPC and WANL between December 1999 and May 2000, Mr Streeter and Mr Cooper had breached their fiduciary duties as directors of WAE, with the consequence that the appellants were required to account to WAE for the entirety of the multi‑million dollar profit attributable to the increase in value of the initial shares.
I agree with Murphy JA for the reasons he gives that the trial judge erred in failing to find that WAE's claim for a constructive trust over the initial shares was barred by laches. However, I have a different view on issues relating to the nature and extent of the fiduciary duties owed by Mr Streeter and Mr Cooper. In order to understand my reasons, it is necessary to provide an outline of the factual background. The full details are set out in Murphy JA's reasons.
Background
Mr Streeter had a history of investing in junior exploration companies, in particular nickel mining companies. He was a director and shareholder of Jubilee Goldmines NL (Jubilee) prior to it discovering the rich nickel prospect known as Cosmos in August 1997 and its subsequent successful development. As a result of his investment in Jubilee, Mr Streeter acquired a reputation as a successful major investor in mining in Western Australia and was frequently contacted by persons offering him investment opportunities [149].
In early 1998, representatives of WAE approached Mr Streeter with a proposition that he provide seed capital of $250,000 for the purpose of enabling WAE to issue a prospectus in order to raise up to $2,500,000 in working capital and obtain admission to the official list of the ASX. At that time WAE had an interest in 12 mining tenements. If Mr Streeter agreed to subscribe $250,000 for shares in WAE, Mr Brailey and the other promoters of WAE would transfer to him approximately 600,000 additional shares for no further consideration [150]. The arrangement was that Mr Streeter would subscribe for 5 million WAE shares at 5 cents and Mr Streeter and Mr Cooper would be appointed to the board [143]. Messrs Streeter and Cooper were appointed to the WAE board on 15 March 1998. Mr Brailey continued as a director.
WAE had an unfortunate history of capital raising. It had an unsuccessful initial public offering (IPO) in May 1997 [135]; a proposed IPO in September 1997 was deferred and subsequently not pursued; and the proposed capital raising in April 1998 to be funded by the capital from Mr Streeter was abandoned [162].
From March 1998 Jungle Creek subscribed for capital in, and made loans to, WAE. Jungle Creek also paid and took an assignment of debts owing by WAE. The loans and debts were intended to be converted to equity in WAE [155]. The trial judge found that Mr Streeter continued to owe WAE approximately $118,000 pursuant to 'the March 1998 agreement', being a reference to the arrangement to subscribe $250,000 [176].
By 1999 WAE had a total share capital of 9,105,345 shares, of which approximately 18.6% were held by Jungle Creek [179]. Its only asset was an interest in the Cue tenements and its solvency was dependent on continuing financial support from Mr Streeter.
The trial judge appears to have accepted that by 1999 there was no hope of attracting investors to WAE unless there was a major reconstruction of its share capital by a reduction in the number of shares on issue. A reduction was required because new investors would suffer a major dilution of the capital invested, to the advantage of existing shareholders [28]. By March 1999 the Streeter interests were seeking a 1:20 reduction in WAE's share capital and shareholder approval to increase its shareholding above 20% without having to make a takeover offer for all WAE shares. This was discussed at a board meeting in March 1999 but no decisions had been taken by November 1999. Mr Brailey favoured a 1:10 reduction in capital.
By November 1999, Mr Streeter had since March 1998 been the sole source of WAE's funding. WAE had no capital, no employed staff, did not conduct any trade and had no income. Its only officers were its directors and secretary who were all unremunerated. It had been dormant since the end of 1998.
In November 1999 ANPC was seeking to promote a nickel project proposal. The ANPC included Mr Grammer, Mr Hanna and Mr Stuart, all of whom were experienced geologists who were under‑employed or unemployed at the time. Mr Grammer had been the geologist at Jubilee and knew Mr Streeter. In November 1999 the ANPC proposal was contained in a document entitled 'Nickel Company Proposal' dated November 1999 (the November proposal). The November proposal was accompanied by two 'Proposed Nickel Company Models'; the first dated 12 November 1999 and the second 18 November 1999.
The November proposal was to vend six nickel sulphide projects and one high grade gold project into a listed vehicle to raise $3 million to conduct a two‑year drilling programme. The proposed exploration programme was to be managed and carried out by ANPC on a contract basis. Both November models made provision for the allocation of vendor shares to the owners of the mining tenements to be vended into the listed vehicle. Other shares were to be issued by way of remuneration to ANPC, other service providers, a seed capitalist and a capital raising broker. By December 1999 a revised ANPC proposal and accompanying models identified the proposed corporate investment vehicle as a 'new NL co'.
In November 1999 Mr Brailey was working as a stockbroker at the broking firm Tolhurst. After a chance encounter with Mr Stuart, who told Mr Brailey that ANPC was looking for seed capital and had been wearing out shoe leather trying to interest stockbrokers in their proposal, Mr Brailey met with Mr Stuart and Mr Grammer on 30 November 1999 at Tolhurst's offices.
The trial judge accepted Mr Brailey's evidence concerning the meeting; in particular that Mr Brailey recognised the ANPC proposal as an attractive one suitable for WAE; that he mentioned this to the ANPC personnel and sent them to Mr Streeter expressly for the purpose of having the proposal considered on behalf of WAE. The evidence does not support a finding that Mr Brailey sent the ANPC personnel to Mr Streeter expressly for the purpose of having the proposal considered on behalf of WAE. This relates to what Mr Brailey expressly stated to the ANPC personnel. Separate but related issues (which I address below at [60] ‑ [62]) are what may be inferred as to the capacity in which Mr Brailey was acting, what he expected when he recommended to the ANPC personnel that they meet with Mr Streeter and Mr Streeter's knowledge of those matters.
Mr Hanna, Mr Stuart and Mr King (ANPC's corporate adviser) met again with Mr Brailey on 3 December 1999. The trial judge made no express findings as to what was said or resolved at that meeting [243]. It was Mr Brailey's evidence that he did not have any further communications with ANPC representatives about the ANPC proposal after 3 December 1999.
The trial judge made no findings as to the purpose of the ANPC representatives in meeting with Mr Brailey.
Mr Grammer, Mr Hanna, Mr King and probably Mr Stuart met with Mr Streeter at his business premises on 6 December 1999. The trial judge made no express findings as to what transpired at this meeting. There was a further meeting with Mr Streeter and Mr Cooper on 7 December 1999 attended by Messrs Hanna, Grammer, King and possibly Stuart. The November proposal was discussed at that meeting and Mr Streeter raised the prospect of WAE being brought into the ANPC proposal.
After the meeting on 7 December 1999, Mr Cooper prepared a document headed 'TE Streeter Group - Proposed Equity Holding - Nickel Project (using existing shareholding in Western Areas Exploration NL)' (the Streeter Group proposal). This proposal is referred to in the trial judge's reasons as an 'offer'. It is clearly not a contractual offer. The document incorporated the information in the ANPC model dated 12 November 1999 but with WAE as the corporate vehicle. The Streeter Group proposal contained information concerning WAE's issued capital, Jungle Creek's entitlement, subject to WAE shareholder approval, to partly paid shares and to a further 600,000 shares from other existing shareholders. Two options were included; the first assumed a WAE capital reduction of 1:20 and the second, no reduction of WAE capital.
The trial judge did not make any express finding as to the capacity in which Mr Streeter and Mr Cooper acted at the meetings on 6 and 7 December 1999. However, he found that the Streeter Group proposal was not made by Mr Streeter acting privately or independently of his role as a director of WAE [244].
There was a further meeting between Mr Streeter and ANPC representatives on 10 December 1999. The trial judge found that Mr King said on behalf of the ANPC personnel that they did not wish to use WAE as a vehicle but wanted a new company as a 'cleanskin' [258]. The trial judge also found that ANPC personnel made a 'counter offer' at that meeting. In fact, it was in the form of a further model dated 10 December 1999. That model shows Mr Streeter providing seed capital of $250,000 and taking a placement in the IPO of 1.25 million shares. It also shows an allocation of 600,000 vendor shares; 200,000 for WAE's shareholder base valued at $30,000 and 400,000 for 100% of the Cue gold project valued at $70,000. The content of the models altered from time to time. Generally, they incorporated a capital structure in which Mr Streeter's interests would hold around 20% of the shares in the new company.
The structure of the proposed new company was agreed at a meeting between Messrs Streeter, Hanna, Grammer, Cooper, King and Stuart on 20 December 1999. The company structure referred to at the meeting appears to be model 9 which provided that Mr Streeter inject $250,000 seed capital in return for 3.8 million shares and take a placement of 1.25 million shares at the issue price of 20 cents. Model 9 also provided for 1,100,000 vendor shares to WAE, 800,000 of which was for 100% of the Cue tenements and 300,000 for the shareholder base. WAE held a 70% interest in the Cue tenements and Golden Granite Pty Ltd held a 30% interest pursuant to a joint venture agreement.
In all ANPC models after 8 December 2000, the calculation of Mr Streeter's interest, direct and indirect, in the proposed new company is shown. In calculating that interest, 80% of the issued shares in WAE are attributed to Mr Streeter. The 80% holding assumes WAE shareholder approval to a 1:20 capital reduction, an increase in the Streeter Group shareholding above 20% without making a takeover offer and that Jungle Creek's entitlement to further shares was accurately reflected in the Streeter Group proposal. Model 9 shows Mr Streeter with 17.8% of the shares in the proposed new company.
WANL was incorporated on 29 December 1999 and Mr Streeter and Mr Cooper were appointed to its board.
Mr Cooper prepared a document dated 18 January 2000 concerning the proposed reconstruction of WAE. It identifies four options, the first of which was to call an extraordinary meeting of WAE shareholders to pass resolutions (1) permitting Mr Streeter to acquire additional shares in WAE without having to make a takeover offer; (2) approving a reduction in WAE's capital on the basis of one new share for every 20 existing shares; (3) approving the issue of sufficient new shares at a discount to convert Jungle Creek's debt to equity. The final proposed resolution was in terms that:
All shareholders agree to the transfer of their shares in [WAE] for 1,100,000 shares in the new Company ‑ Western Areas NL. The 1,100,000 shares is offered on the basis of 300,000 shares for the issued capital and 800,000 shares for 100% of the Cue Tenement.
Option 2 was that 100% of the Cue tenements be vended into the new company for 800,000 shares which would be subject to an escrow period.
Mr Brailey accepted that if he had seen the 18 January 2000 document before the WAE board meeting on 28 January 2000 he would have understood that the ANPC proposal was not proceeding through WAE.
The minutes of the WAE board meeting on 28 January 2000, attended by Messrs Brailey, Streeter and Cooper, record that Mr Brailey consented to a proposal that 800,000 vendor shares in a new company be accepted in exchange for the Cue tenements, with sufficient vendor shares going to Jungle Creek to satisfy WAE's debt to it and the balance becoming an unencumbered asset of WAE except for any escrow period. The trial judge found that Mr Cooper and Mr Streeter failed to disclose to Mr Brailey the name of the new company (WANL); that they were directors of the new company; or that the Streeter interests had acquired a 30% interest in the Cue tenements which Jungle Creek was vending into the new company in return for an allotment of vendor shares.
The trial judge accepted Mr Brailey's evidence that at the WAE board meeting around 14 February 2000, Mr Cooper handed him a copy of the 18 January 2000 document and it was only then he became aware that the ANPC proposal was no longer going into WAE. He also accepted Mr Brailey's evidence that after the February board meeting, Mr Cooper provided him with a draft chairman's notice of an extraordinary general meeting to consider an offer from WANL of 1,000,000 shares on the basis that WANL would take over WAE's interest in the Cue tenements and change its name. Mr Brailey refused to sign the document. Mr Brailey resigned as a director of WAE on 8 March 2000.
In February 2000 Mr Streeter became aware that Golden Granite's 30% interest in the Cue tenements was for sale for $5,000. A company controlled by Mr Streeter paid for that interest at the end of March 2000. At no time did Mr Streeter advise Mr Brailey that Golden Granite's 30% interest was for sale.
At a WAE board meeting on 28 March 2000 it was agreed that a value of $100,000 be placed on 100% of the Cue tenement and that WAE's 70% interest would equate to 350,000 fully paid shares in WANL. In fact, WAE, WANL and Jungle Creek had earlier on 28 March 2000 executed an option agreement for the sale of the Cue tenements. The trial judge found that $100,000 was very probably a significant overstatement of the value of the Cue tenements [197].
In May 2000 WANL issued its prospectus, a copy of which was sent to each shareholder of WAE. The independent valuation of the Cue tenements in the prospectus was between a low of $20,000 and a high of $70,000. WANL's capital raising was completed by July 2000. Mr Streeter ended up contributing $300,000 seed capital for which he received 4.5 million WANL shares at a two‑thirds discount to the issue price, 5.625 million options to acquire fully paid WANL shares at an exercise price of 20 cents on or before 31 March 2004 and 400,000 options at an exercise price of 40 cents on or before 31 March 2004. The options were exercised. The Streeter interests also received 150,000 fully paid WANL shares for its 30% interest in the Cue tenements. All of these shares are the subject of WAE's claim.
Mr Streeter also subscribed for 2.5 million shares in the IPO at the issue price of 20 cents pursuant to his agreement with ANPC. Mr Brailey and the other WAE shareholders who gave evidence at trial did not subscribe for any WANL shares in the IPO despite receiving the prospectus.
The WAE claim against the Cooper interests relates to the grant of 400,000 options at an exercise price of 40 cents, which options were exercised prior to their expiry date.
At an extraordinary general meeting of WAE on 15 August 2006, Mr Brailey and another shareholder, Mr Connell, took control of the WAE board and shortly thereafter WAE commenced these proceedings.
An analysis of the trial judge's reasons and findings
The trial judge found that Mr Streeter and Mr Cooper as directors of WAE acted in breach of their fiduciary duties in diverting and using to their own advantage 'the opportunity to avail of, or participate in', the ANPC proposal from WAE to the new company formed for the purpose, WANL [485]. He also found that Jungle Creek was knowingly involved in Mr Streeter's breach of duty [486].
It is necessary to go elsewhere in the lengthy reasons to attempt to tease out the facts and reasoning on which the findings of breach are based. The steps appear to be as follows. The trial judge was satisfied that there was no real distinction between the nature of the business or the aspirations of the directors of WAE 'and the company into which [Mr Streeter and Mr Cooper] placed the Nickel opportunity, namely WANL' [313]. The quoted words are consistent with an earlier finding that both WAE and WANL were substantially under the control or influence of Mr Streeter who 'chose to put the venture into WANL, rather than into [WAE]' [283].
The trial judge's view that Mr Streeter had a choice or the opportunity to elect between WAE and WANL as the vehicle for the ANPC proposal is also apparent in [314]:
It appears to be clearly the case that in December 1999 and January 2000 consideration was given to promoting these prospects via [WAE], then under the control of [Mr Streeter], but that, for various reasons, this was considered to be inexpedient, whereupon [Mr Streeter and Mr Cooper] took the decision to incorporate WANL, float it and place the nickel tenements with it.
The trial judge's explanation for the finding of breach of fiduciary duty continues:
There can be no doubt that Messrs Streeter and Cooper were aware that the ANPC proposal had come to them at the direction of Mr Brailey in his capacity as a director of WAE and in the expectation that it would be appraised and, if thought appropriate, developed by Mr Streeter in his capacity as a director of [WAE]. In addition, they used their roles as directors of [WAE] to permit or tolerate the use of the name of [WAE] by WANL and to facilitate the transfer of the Golden Granite 30% interest in the Cue tenements to WANL, taking the profit via Jungle Creek in the process. They realised that some form of remuneration or participation in the ANPC project by WAE was due and necessary, but, in discussions with the ANPC personnel during the evolution of the structure for the new project, they accepted the dilution of that participation while simultaneously negotiating for a controlling interest to be taken in the project by Mr Streeter. Effectively, they took an opportunity which they knew was of the kind being sought by [WAE] through WANL in a manner which secured for themselves major collateral benefits and, thereafter, abandoned any thought of pursuing the same or similar projects by [WAE] [315].
The observations in [315] have to be read with the conclusions in [284]:
[T]he promotion of the ANPC proposal by WANL did not and could not have progressed without the utilisation of advantages associated with [WAE]. These were … the provision of [WAE's] interests in the Cue tenements, and the use of [WAE's] name by the new company as occurred. The use of the Cue tenements … was not in any way essential or even desirable for the promotion of the ANPC project but it was necessary to secure the effective 20% shareholding, and ensuing control, by Mr Streeter in the flotation which was his price for his overall financial support. Accordingly, the use of [WAE's] assets, and the influence which Mr Streeter and Mr Cooper had over them as directors of [WAE] was an essential and actual part of the implementation of the ANPC proposal and the effective flotation of WANL on the terms which were later implemented.
The trial judge concluded that when Mr Streeter and Mr Cooper were considering what if any support would be given to the promotion of the ANPC proposal, they 'as directors of WAE, were in a position of the clearest conflict between WAE's interest, their self interests and then, shortly afterwards, their duties to … WANL' [316].
Further, the trial judge found that 'the strategy' of putting the nickel prospects into WANL, the formation of WANL and the role of Mr Streeter and Mr Cooper as its directors was deliberately kept from Mr Brailey until the WAE board meeting in mid‑February 2000 [318]. The appellants challenge (in ground 8) the trial judge's findings of intentional and wrongful concealment. I agree with Murphy JA for the reasons he gives that the trial judge erred in making those findings.
The appellants also challenge what they say is a finding that Mr Streeter breached his March 1998 agreement to subscribe $250,000 in WAE. It is difficult to determine whether the trial judge found a breach of a legally binding agreement or simply a breach of a moral obligation. There are strong moral fault overtones in the judgment: [166], [173], [176], [188]. Either way the conclusion is reached without any evaluation of all the relevant evidence, in particular the effect of the failure of the purpose for the subscription. The conclusion cannot stand. On my reading of the reasons, that conclusion was a contributing factor in the trial judge's conclusion that the appellants' breaches were intentional and dishonest.
Notwithstanding the repeated statements that Messrs Streeter and Cooper elected to use WANL rather than WAE as the corporate vehicle, the trial judge accepted that there were substantial commercial reasons for not using WAE as the vehicle for the ANPC proposal and in that context noting that WAE could have become a major shareholder in the new company, or its existing shareholders could have become foundation shareholders in the new company on equal terms with Messrs Streeter and Cooper [317].
The source of the trial judge's finding of choice or control of options is traceable to [262] in which he concluded:
Effectively, in all these negotiations Mr Streeter held the whip hand. That is not to say that his dealings with the ANPC personnel were other than harmonious but it was he and not they who had access to funds and they had little alternative but to accept his wishes. Had the situation arisen that instead of Mr Streeter himself being the source of the seed capital but Mr Streeter suggesting that seed capital could come from investment via [WAE], which in turn he and all the other shareholders might fund, I have no doubt that that arrangement would also have been acceptable to the ANPC personnel. It would have been treated, in effect, as a Streeter investment because of his assumed control, or capacity to achieve control, of WAE.
If [262], [283] and [313] ‑ [314] of the trial judge's reasons are looked at in isolation, it may be thought that he found that Mr Streeter and Mr Cooper had the option to elect between WAE or WANL as the corporate vehicle for the ANPC proposal. Such a finding is against the weight of the evidence. Indeed, the trial judge accepted Mr King's evidence that ANPC did not want to use WAE and found that there were substantial commercial and practical reasons which made it inadvisable for ANPC to use WAE which had a history of unsuccessful attempts at capital raising [458]. He accepted that ANPC would not have used WAE.
On a reading of the reasons as a whole, it appears the trial judge regarded the relevant opportunity diverted by Mr Streeter and Mr Cooper as one for WAE to be the seed capitalist for WANL or for WAE shareholders to become foundation shareholders on equal terms with Mr Streeter and Mr Cooper. Neither is a relevant opportunity (or interest) for WAE. The first is well and truly outside WAE's actual or intended business and the second was an opportunity for the shareholders not WAE. The case has to be approached on the basis that WAE was not acceptable to ANPC as the corporate vehicle for the ANPC proposal.
There are a number of other threads discernible in the trial judge's finding that Mr Streeter and Mr Cooper breached their fiduciary duties in diverting from WAE to WANL, and using to their own advantage, the opportunity to avail of or participate in the ANPC proposal. The conclusion appears to depend upon the trial judge's findings that (1) Mr Streeter and Mr Cooper were aware that the ANPC proposal had come to them at the direction of Mr Brailey in his capacity as a director of WAE and in the expectation that it would be appraised and, if thought appropriate, developed by Mr Streeter in his capacity as a director of WAE; and (2) that the use of WAE's name and the sale of the Cue tenements were essential parts of the implementation of the ANPC proposal and float of WANL. The appellants challenge these findings.
In particular, the appellants challenge (in grounds of appeal 9 ‑ 13) the trial judge's findings concerning the appellants' misuse of their powers in connection with causing or permitting WAE's name to be used by WANL. I agree with Murphy JA for the reasons he gives that the trial judge erred in making these findings and that grounds 9 ‑ 13 should be upheld.
The purchase by the Streeter interests of Golden Granite's 30% interest in the Cue tenements which was thereafter vended into WANL was pleaded as an independent breach of fiduciary duty, which claim was upheld by the trial judge. The finding is challenged by the appellants (grounds 14(a), 16, 17(d), 18(e) and 19). I agree those grounds of appeal should be dismissed for the reasons given by Murphy JA.
I turn now to the sale by WAE of its 70% interest in the Cue tenements to WANL. WAE affirmed the sale, which is understandable in light of the trial judge's finding that the purchase price of the Cue tenements was very probably a significant overstatement of their value. The sale of the 70% interest in the Cue tenements was not pleaded or litigated as an independent breach of fiduciary duty. The relevant breaches are pleaded in par 17 of the statement of claim which provides:
17.In or about the period December 1999 to May 2000, [Mr Streeter and Mr Cooper]:
17.1took steps to divert the Nickel Opportunity away from [WAE] to themselves, [Jungle Creek] and Western Areas NL (WANL) and, in doing so:
17.1.1used information acquired as directors of [WAE] to benefit themselves;
17.1.2took advantage of an opportunity or knowledge derived from their fiduciary position
17.2placed themselves in a position of conflict between their fiduciary obligations … and their personal interests in participating in the Nickel Opportunity other than through [WAE].
The expression 'Nickel Opportunity' is defined (par 8) as follows:
In or about December 1999 [WAE] was introduced … to a business opportunity (Nickel Opportunity) relating to a project identified by a group named Australian Nickel Project Consultants (Nickel Project).
Particulars of the Nickel Project
The Nickel Project was set out in a written document entitled 'Nickel Company Proposal' and dated November 1999 (Nickel Company Document). It included:
(a)a proposal to vend six nickel sulphide projects and one high grade gold project into a listed vehicle to raise $3.0 m to conduct a two year drilling program on existing, high quality targets and two additional high quality nickel sulphide projects to be included into the company, depending on the level of funds raised (Nickel Sulphide Projects);
(b)a $1.5 million per annum exploration programme to be managed and carried out by ANPC on a contract basis for the nickel company at reasonable market rates;
(c)the involvement services expertise and knowledge base of ANPC and the ANPC consultants, Grammer, Hanna and Stuart.
Particulars of Nickel Opportunity
The opportunity comprised of the chance for [WAE] to be the listed vehicle for the Nickel Sulphide Projects and to secure the other benefits of the Nickel Project … alternatively the chance to otherwise participate in the commercial exploitation of the Nickel Project.
The matters pleaded in pars 14A ‑ 14I of the statement of claim relate to the independent claim (in par 17A) that Mr Streeter diverted the opportunity to acquire the 30% beneficial interest from Golden Granite away from WAE to Jungle Creek.
Although the transfer of WAE's 70% interest in the Cue tenements was not pleaded or litigated as a breach of fiduciary duty, the circumstances surrounding the vending in of the Cue tenements became relevant to whether the appellants had acted dishonestly in diverting the ANPC proposal from WAE.
I turn now to the trial judge's finding at [284] that the utilisation of the assets of WAE was essential to the promotion of the ANPC proposal by WANL. One basis for that finding, the use of WAE's name, falls away. All that is left is the transfer of Golden Granite's 30% interest and WAE's 70% interest in the Cue tenements to WANL.
The trial judge draws a distinction in his reasons between the ANPC 'project' and the ANPC proposal. He recognised that the Cue tenements were not essential (or even desirable) for the ANPC project because of their limited value. On my reading of the reasons, what the trial judge intended to convey was that the inclusion of the Cue tenements in the ANPC proposal was necessary to secure to Mr Streeter a 20% shareholding in WANL and thus control; control was essential for Mr Streeter's participation; and Mr Streeter's participation was essential for the implementation of the ANPC proposal.
The clear weight of the evidence is against the finding that the vending in of the WAE assets (the Cue tenements or the WAE name) was necessary to secure to the Streeter interests a 20% shareholding in WANL. Mr Streeter, through Jungle Creek, acquired 4.5 million WANL shares in return for the $300,000 in seed capital and 2.5 million WANL shares in the float via subscription through the prospectus, a total of 7 million shares. The prospectus offered 25 million shares, 18,520,000 of which were taken up. Thus without reference to any interest connected with the Cue tenements or WAE, the Streeter interests acquired 28% of the shares offered by the prospectus and about 37.8% of the shares actually issued in the float.
Moreover, the calculation of the extent of the Streeter interests in the ANPC models assumed a holding of 80% of the shares in WAE, whereas in fact the Streeter interests never actually held more than 18.6% of the shares. The reconstruction and other steps necessary to achieve a figure of 80% was not pressed or pursued by Mr Streeter or WAE prior to or after the WANL float.
The remaining thread forming the foundation for the conclusion of a breach of fiduciary duty was that Mr Streeter and Mr Cooper were aware that the ANPC proposal had come to them at the direction of Mr Brailey in his capacity as a director of WAE and in the expectation that it would be appraised and, if thought appropriate, developed by Mr Streeter in his capacity as a director of WAE. This finding in [315] appears to be the drawing together of findings in [236], [240] and [241], culminating in the findings in [287] that:
I am satisfied Mr Streeter acquired his knowledge of the ANPC proposal and of the opportunity to promote it as a direct and intended result of Mr Brailey's referral of the ANPC personnel to him. I am further satisfied that Mr Brailey referred the ANPC personnel to Mr Streeter with a view to the opportunity being examined, and if thought attractive, being promoted by or on the behalf of [WAE]. I am satisfied that it was never the intention or within the contemplation of Mr Brailey in referring the ANPC personnel to Mr Streeter that the reference was not to Mr Streeter in his role as a director of [WAE] or that it was simply being passed on to Mr Streeter because he was known to be a wealthy investor with an inclination to invest in mining prospects.
However, the finding in [315] as to Mr Streeter and Mr Cooper's knowledge of Mr Brailey's actions and motivations is not supported by any earlier finding, or indeed the evidence. There is no evaluation of the evidence relating to the multiple relationships between Mr Streeter and WAE (director, shareholder, creditor, funder, investor). Having regard to the multiple relationships, the acceptance of Mr Brailey's evidence and rejection of Mr Streeter's evidence does not permit the positive finding of knowledge.
Moreover, the trial judge did not give reasoned consideration to the evidence relating to what the ANPC representatives were seeking, and why and in what capacity Mr Streeter was approached by them. However, he rejected a submission that the ANPC consultants were seeking seed capital, saying that how the necessary capital was raised was of secondary importance to them [226]. That conclusion is against the clear weight of the evidence which was that the ANPC representatives were seeking a seed capitalist and a stockbroker (to provide shareholder spread) for the ANPC proposal: [4], [174], [224], [226]. They approached Mr Brailey because he was a stockbroker. He was not approached in his capacity as a director of WAE. Whatever Mr Brailey said or intended, the only reasonable inference is that the ANPC representatives went to see Mr Streeter to further their object of obtaining seed capital.
As noted earlier, prior to the incorporation of WANL Mr Streeter had four relevant relationships with WAE; that of director, major shareholder, creditor and sole funder of its operations/investor of seed capital. Little attention was given to these distinct capacities in the trial judge's reasons. They should be centre stage in a case which raises frontier issues concerning the scope of the fiduciary obligations of Mr Streeter and Mr Cooper. After December 1999 Mr Streeter (and Mr Cooper) had the additional capacity of director of WANL.
Fiduciary obligations ‑ the conflict and profit rules
The legal principles are comprehensively canvassed in the reasons of Murphy JA and I do not propose to cover the same ground. I will confine my remarks to the legal principles that directly impact upon the determination of the issues in this case.
Two themes or rules are relevant. They are the conflict rule and the profit rule. The respondent did not rely on any 'business opportunity rule' that is wider in scope than the conflict and profit rules [50]. For useful background on the potential scope of a separate business opportunity rule, see Austin RP 'Fiduciary Accountability for Business Opportunities' in Finn PD (ed) Equity and Commercial Relationships.
First the conflict rule. A fiduciary is under an obligation, without informed consent, not to promote the personal interest of a fiduciary by making or pursuing a gain or benefit in circumstances in which there is a conflict or a real or substantial possibility of a conflict between the personal interest of the fiduciary and those whom he is bound to protect: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, 103; Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165 [78].
Mason J in Hospital Products stated the conflict rule in terms of a conflict between 'interest and interest'. I understand the analysis to be as follows. A fiduciary has (within the scope of his engagement or undertaking) a duty of undivided loyalty to the person to whom the duty is owed, in this case the company of which he is a director. Thus, ordinarily a director cannot have personal interests that conflict with the interests of the company. Although the conflict rule is usually formulated in terms of the need to avoid a conflict of duty and interest, the Mason J formulation assists in the understanding (and application) of the conflict rule.
If a director has a positive duty (even if non‑fiduciary) to pursue or acquire a particular benefit (which includes an opportunity) or property for the company and seeks that property for his private purposes, there will be a conflict of interest and interest. That is, the existence of a positive duty has the consequence that the company will have a relevant interest in the particular benefit or property for the purpose of the conflict rule. This does not involve the enforcement of a prescriptive fiduciary duty. This analysis may provide an answer to the conundrum about whether the 'duty' with which a fiduciary's interest must not conflict is confined to fiduciary duties and if so, what duties are encompassed within that rubric. The conflict rule also prohibits a conflict of duty and duty.
It has been observed that in the case of company directors, the conflict rule is not strictly applied: Ford's Principles of Corporations Law (13th ed) [9.060]. Thus a director can also be a shareholder and act with a personal interest even though the director cannot be shown to have freed his or her mind of that personal interest: Mills v Mills (1938) 60 CLR 150. It is also said that a director is permitted to occupy board positions in competing companies: London and Mashonaland Exporation Co Ltd v New Mashonaland Exploration Co Ltd [1981] WN 165; Bell v Lever Brothers Ltd [1932] AC 161, 195. There are similar examples in other types of fiduciary relationships. For example, real estate agents are entitled to act for multiple vendors of real estate even though the vendors are in competition for purchasers in the same geographic or other relevant market.
Of course, the scope of the rules can be narrowed or excluded by contract or other instrument which defines the duties and powers of the fiduciary. There is no suggestion in this case of any relevant provisions in WAE's constitution. However, that is not the only means by which the content of fiduciary duties can be affected. The High Court has said that the content of fiduciary duties are moulded to the character of the particular relationship so that even within an established fiduciary relationship, the content of the duties will not be uniform for all cases: United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1, 11. Further, the subject matter over which fiduciary obligations extend can be ascertained from the course of dealing between the parties or the circumstances of the appointment of the fiduciary: Chan v Zacharia (1984) 154 CLR 178, 196 and 204. In my view, these authorities provide the principled basis for any narrowing of the fiduciary rules applying to directors.
Having regard to the particular circumstances of this case, I am satisfied that Mr Streeter and Mr Cooper were not prohibited by the conflict rule from investing in, and being a director of, other mining companies in Western Australia, including a start‑up mining company in the market for capital with the object of listing. That is, the mere involvement of Mr Streeter and Mr Cooper in the implementation of the ANPC proposal as investors and directors in a company intending to tap into the market for public funding and with the intention of listing was not prohibited by the conflict rule. Thus, if the ANPC proposal had come directly to Mr Streeter and was implemented without any reference to WAE assets, there would be no breach of the conflict rule.
The circumstances relied on for that conclusion are as follows. Mr Streeter was known in relevant circles as an investor of seed (risk) capital in mining companies, including junior exploration companies. Mr Streeter was approached by WAE precisely because of his reputation and role as an astute investor of seed capital in the mining industry, the investment of capital being accompanied by board representation. An investment of seed capital in any start‑up exploration company is of a speculative nature. That was particularly true of WAE. When Mr Streeter and Mr Cooper joined the WAE board in March 1998 the company had a history of failed attempts to raise funds from the public, limited operations and no employees. It had a suite of mining tenements which were intended to be the platform for a hoped for capital raising in April 1998 which did not proceed. Shortly thereafter, WAE commenced a programme of divesting itself of its mining tenements and was dormant from the end of 1998. It is far‑fetched and fanciful to suggest that the parties intended that, from the commencement of Mr Streeter and Mr Cooper's involvement with WAE, all future investments by Mr Streeter (or Mr Cooper) in the mining industry in this State or elsewhere had to be with, or through, WAE.
I turn now to the profit rule. The conflict and profit rules overlap, but are not co‑extensive. The profit rule is usually formulated by reference to the remedy of an account of profits: Chan v Zacharia (199); Warman International Ltd v Dwyer (1995) 182 CLR 544, 557; Maguire v Makaronis (1997) 188 CLR 449, 468. The court in Warman International said:
A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position (557).
As the relief sought in this case was an account of profits as a proprietary remedy (a constructive trust), it can be taken that Mr Streeter and Mr Cooper were prohibited by the profit rule from obtaining a profit by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position. That is, the profit rule prohibits a fiduciary from misusing his position for his personal advantage: Chan v Zacharia (199).
Thus, where the relief sought is an account of profits, there must be a sufficient connection between the breach of the conflict or profit rule and the profit derived: Maguire vMakaronis (468). It is clear from the terms of the profit rule that there must be a causal connection between the profit and use of the fiduciary office. What is a sufficient connection between a profit and a breach of the conflict rule is not as clear. However, a mere temporal connection would seem to be inadequate.
When examining the case law, a distinction needs to be drawn between those cases in which the fiduciary was under a positive duty to acquire or seek to acquire a particular benefit or property for the company (Cook v Deeks [1916] 1 AC 554; Chan v Zacharia; Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443; Keech v Sandford (1726) 25 ER 223) and cases where there is no such positive duty. This case falls into the latter category. Whether there is a sufficient connection in those circumstances can give rise to difficult questions of fact. Indeed, where a complex course of dealing is in issue, as in this case, minds reasonably may differ as to the outcome of the application of the principles: Maguire v Makaronis (468). The principles in this area of the law are easier to state than to apply.
The High Court's formulation of the profit rule in Warman International Ltd v Dwyer and Chan v Zacharia focuses attention on the conduct of the fiduciary. There must be a causal connection between the fiduciary office and the receipt of the benefit. The 'opportunity' referred to in the profit rule is that taken by the fiduciary to obtain the profit. If the opportunity is derived by reason of his fiduciary position, it is irrelevant that the company to whom the duty is owed was unwilling, unlikely or unable to make the profits for which an account is taken or that the fiduciary acted honestly and reasonably: Warman International v Dwyer (588); Maguire v Makaronis (468); Boardman v Phipps [1967] 2 AC 46.
However, whether an opportunity was actually or likely to be available to the company can be a relevant consideration in determining whether a company has an 'interest' which conflicts with that of the fiduciary (save where there is a positive duty as discussed above). It would also be relevant if there is a business opportunity rule that is wider in scope than the existing conflict and profit rules due to the absence of any requirement for a relevant connection between the profit and the fiduciary position.
Whether a breach of the conflict or profit rule
I have concluded that Mr Streeter and Mr Cooper were authorised and entitled to pursue personal investment opportunities and involvement in the mining industry in Western Australia otherwise than through or with WAE. Something else is required to bring the conduct of Mr Streeter and Mr Cooper within the scope of the conflict and/or profit rules.
The salient facts are as follows. When the ANPC representatives approached Mr Streeter, he had four relationships with WAE. They were as director, major shareholder, creditor and sole funder of its operations from March 1998. Only the first of those relationships is fiduciary. Mr Streeter was also a potential investor of further seed capital in WAE and other mining ventures.
No one associated with WAE had any involvement in, or in connection with, the development of the ANPC proposal. It had been worked up by ANPC and had reached an advanced stage. ANPC required a seed capitalist and a capital raising broker to advance the proposal to fruition.
The ANPC proposal was in the public domain when its representatives approached Mr Brailey. Mr Brailey obtained information about the ANPC proposal in his capacity as a stockbroker not as a director of WAE.
The trial judge found that Mr Brailey referred the ANPC representatives to Mr Streeter in his capacity as a director to examine the proposal and, if thought attractive, to promote it by or on behalf of WAE. However, the trial judge's finding that Mr Streeter and Mr Cooper were aware of those matters is without any proper evidentiary foundation. In any event, nothing turns on this error.
The ANPC representatives met with Mr Streeter because they were seeking seed capital for the ANPC proposal. It is inconceivable (glaringly improbable) that Mr Streeter met with the ANPC representatives solely or even primarily in his capacity as a director of WAE.
If Mr Streeter was prepared to speculate on the success of the ANPC proposal, it was in his best financial interests that WAE be the corporate vehicle. Success would bring a return on his otherwise wasted expenditure in connection with WAE. WAE had no assets of any significant value; it was only solvent because of Mr Streeter's continuing financial support; the Streeter interests were WAE's major creditor but the debts were only convertible to equity in WAE; and Mr Streeter was a significant shareholder in WAE (and entitled to an 80% shareholding). As a significant shareholder in WAE and its only significant creditor, the Streeter interests in the ANPC proposal were identical to WAE's interests.
Mr Streeter sought to advance their common interests by proposing that WAE be the corporate vehicle for the ANPC proposal. The trial judge made the unchallenged finding that the Streeter Group proposal was not forwarded to ANPC independently of Mr Streeter's role as a director of WAE [244]. On any view, it was also forwarded in his capacity as a major shareholder in WAE. The document is headed 'Streeter Group proposal'. It was a proposal not an offer and it expressly contemplated the need for aspects of the proposal to be approved by WAE shareholders.
The Streeter Group proposal, using WAE as the corporate vehicle, was unacceptable to ANPC for sound commercial reasons. There being no positive duty on Mr Streeter to seek to acquire the ANPC proposal for WAE and there being no opportunity for WAE to be the corporate vehicle, there was no conflict between the Streeter Group's interests and the interests of WAE in WANL becoming the corporate vehicle. Thus, both before and after the rejection of the Streeter Group proposal there was no conflict between Mr Streeter's personal interests in the ANPC proposal and the interests of WAE. The provision of seed capital by WAE to facilitate a capital raising by, and listing of, another company was not a relevant opportunity for WAE, it being outside its actual or intended line of business.
Prior to the incorporation of WANL, the ANPC and Mr Streeter were negotiating at arm's length. ANPC's counter‑proposal provided a fall back position which contemplated the issue of vendor shares for the shareholders of WAE and 100% of the Cue tenements (overvaluing both). That was in consideration of Mr Streeter's proposed personal financial commitment to the ANPC proposal and was referable to his capacity as a shareholder in WAE. The WAE related aspects of the counter‑proposal, which also featured in subsequent models, clearly contemplated the need for WAE shareholder approval. In particular, it was dependent upon the WAE shareholders agreeing to the 1:20 reconstruction and the other matters which would have resulted in the Streeter interests holding 80% of the issued shares in WAE (without having to make a takeover offer).
The issue of vendor shares to WAE shareholders disappeared from the proposals following the WAE board meeting on 28 January 2000. However, the negotiations relating to the issue of vendor shares to the shareholders of WAE does not raise any fiduciary issues. In relation to the ANPC proposal, Mr Streeter and Mr Cooper were not in a fiduciary relationship with, and did not owe any fiduciary duties to, the shareholders of WAE. It was not suggested otherwise.
The arms length negotiations relating to the Cue tenements were conducted by and on behalf of Mr Streeter in his four capacities. From a practical commercial perspective, it is difficult to identify any relevant conflict of interest. However, it is unnecessary to determine whether a conflict arose prior to the incorporation of WANL. What is clear is that after Mr Streeter and Mr Cooper became directors of WANL there was a conflict of interest and duty (and duty and duty) relating to the proposed transfer of WAE's 70% interest in the Cue tenements. Mr Streeter and Mr Cooper were acting in their capacity as directors on both sides of a transaction which was yet to be the subject of final agreement.
The next question is whether that conflict itself entitles WAE to the profit the subject of the claim, being the initial shares issued to Mr Streeter and Mr Cooper on favourable terms (not available to those who participated in the IPO) in consideration of Mr Streeter's personal financial contribution.
The conflict is directly connected with the profit that flowed to WAE from the transfer of its 70% interest in the Cue tenements. However, for the reasons given earlier the transfer was not an essential part of the implementation of the ANPC proposal or the successful float of WANL. There was no finding that Mr Streeter's financial support for the ANPC proposal was conditional on the vending in of the Cue tenements. The vendor shares for the Cue tenements was an objectively undesirable add‑on given in consideration for Mr Streeter's personal financial commitment. The profit actually received by WAE on the transaction was attributable to Mr Streeter's significant personal investment in WANL; the profit on the initial shares resulting from the personal investment of Mr Streeter (and Mr Cooper) is not attributable to, or relevantly connected with, the vending in of the Cue tenements. Thus there is no sufficient connection between the conflict and the profit claimed by WAE.
Further and in any event, having affirmed the transaction and received the very considerable financial benefit flowing from it, WAE cannot approbate and reprobate to rely on the known conflict inherent in that transaction as the basis for taking the profit flowing to Mr Streeter and Mr Cooper from their personal financial support of the ANPC proposal.
Mr Streeter also breached his fiduciary duty in relation to Golden Granite's 30% interest in the Cue tenements. However, for the reasons already given in relation to the Cue tenements, that breach is only sufficiently connected with the profit from the 150,000 vendor shares attributable to that 30% interest.
The remaining issue is whether Mr Brailey's involvement in referring the ANPC representatives to Mr Streeter is itself a sufficient connection between the profit from the initial shares and the appellants' position as directors of WAE. I would answer that question in the negative. The ANPC proposal was in the public domain. It came to Mr Brailey's attention in his capacity as a stockbroker not in his capacity as a director of WAE. There is no finding that the ANPC proposal was disclosed to Mr Brailey to assist in finding a corporate vehicle. Mr Streeter had (to Mr Brailey's knowledge) a potential interest in the ANPC proposal in four capacities, three of which related solely to his personal interests. There is no finding that the ANPC representatives went to see Mr Streeter for any reason connected with WAE. The fiduciary relationship between the appellants and WAE did not prohibit them from pursuing their personal interests in the ANPC proposal. The connection between the information and the fiduciary office is so tenuous and insignificant (even by Boardman v Phipps standards) that there is no breach of the profit (or conflict) rule.
Apart from the 150,000 WANL shares attributable to Golden Granite's 30% interest in the Cue tenements, it cannot in my view be said that there is a sufficient connection between the profit from the initial shares and the role of Mr Streeter and Mr Cooper as a director of WAE. If the claim was not barred by laches, I would confine the constructive trust to the 150,000 shares for the 30% interest in the Cue tenements.
BUSS JA: I would allow the appeal. I agree with Murphy JA, for the reasons he gives, that the trial judge erred in failing to find that WAE's claim for a constructive trust over the initial shares was barred by laches. Otherwise, I agree with the reasons of McLure P.
MURPHY JA:
Introduction
This is an appeal by Mr Streeter, Mr Cooper and Jungle Creek Pty Ltd (Mr Streeter's company) in relation to a decision by the learned trial judge in which his Honour found that Mr Streeter and Mr Cooper had breached their fiduciary duties to the respondent (WAE) as directors of that company. The events concerned Mr Streeter and Mr Cooper and Jungle Creek obtaining certain shares and certain options in another company, Western Areas NL (WANL) which the judge found were obtained in breach of fiduciary duty to WAE. The learned judge declared that the appellants hold their interests in WANL resulting from the breach of duty on constructive trust for WAE.
The meaning of many of the judge's findings were contested on the appeal, both as to the underlying facts, and his Honour's ultimate findings of breach of duty. As to the latter, there was debate over the true nature of the judge's findings as to the particular obligations owed by Mr Streeter and Mr Cooper, and what particular acts or omissions the judge found as amounting to a failure to discharge those obligations (cf Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449, 464). As to the former, the judge's reasons do not disclose, in a chronological sequence, his findings as to the underlying events giving rise to the liability found. The events in question spanned nine years between 1997 and 2006, although most of the principal events occurred in 1999 and 2000.
Given the difficulties which arose in the appeal in ascertaining a chronological narrative of the findings of fact, and given that many findings, or alleged findings of fact, are under challenge in the appeal, it has been necessary to start these reasons with a detailed outline of the
events between 1997 and 2006 relevant to the disposition of the appeal. The outline attempts to draw together, in a chronological sequence, the facts which, it appears to me, were found by his Honour. There are references to the evidence where that appears to be necessary in order properly to understand his Honour's reasons. Certain events, which are relevant to an understanding of the allegations and issues in the appeal, but which were not expressly adverted to by his Honour, are also set out in the chronological conspectus.
After a recitation of the facts in this way, I record the judge's reasons in which his Honour formulated the issues of fiduciary duty and breach, and his Honour's reasons in which his findings in relation to those issues principally appear.
I next set out what I understand to be the relevant legal principles concerning fiduciary duties in this context, and the duties of directors.
Next, before seeking to deal with the detail of all the grounds of appeal, it is convenient to set out my observations and conclusions concerning breach of fiduciary duty based on the judge's findings of fact to the extent to which I find that they have not been successfully challenged in this appeal. In that section of these reasons, I explain why I consider that based on those findings of fact, it has not been shown that the judge erred in his finding of breach of duty.
After that, I address in detail the grounds of appeal on the issue of breach of fiduciary duty.
Finally, I deal with the grounds of appeal concerning relief and laches.
In summary, I find that the appellants do not succeed on the question of breach of duty, but succeed in the appeal on the basis that WAE's claims were barred by laches.
Chronological recitation of facts
History of WAE prior to 30 November 1999
WAE - incorporation 1996 to late 1997; shareholders (reasons [128] ‑ [149])
WAE was incorporated on 8 November 1996 as an unlisted no liability company called Bloodhound Gold NL. Its memorandum and articles disclose that the company was formed with a view to obtaining mining tenements, exploring for gold and other minerals, and undertaking associated activities typical of a junior exploration company.
Upon incorporation, it raised initial capital of $2,200, by the issue of 2.2 million 20 cent shares at a discount price of one‑tenth of 1 cent per share. The original shareholders and promoters were Mr Brailey, Mr Bernard Le Clezio, Mr Evans and two others. Mr Brailey, Mr Bernard Le Clezio and Mr Evans were stockbrokers. The intention was for Bloodhound to acquire mining tenements and to bring Bloodhound to a listing on the Australian Stock Exchange, and to carry out exploration of the tenements. At the time of incorporation, the focus was on goldmining tenements.
In January 1997, Bloodhound issued a further 2.6 million 20 cent shares at a discount price of 5 cents each, raising $130,000. It contracted to acquire certain goldmining tenements and a diamond tenement. In order to carry out exploration of the tenements, it issued an initial prospectus in March 1997, by which it issued a further 1.2 million 20 cent shares at a discount price of 10 cents per share, and thereby raised an additional $120,000.
In May 1997, Bloodhound lodged a second prospectus for the issue of 15 million 20 cent shares. The prospectus stated that the company's objectives and strategies were as follows [135]:
The principal and main objective with the Directors is to establish Bloodhound as a successful, profitable exploration and mining company with the aim of maximising returns to its shareholders. The strategies to achieve this objective are:
•explore mineral tenements using results from previous exploration, modern cost-effective geochemical, geophysical and geological search techniques and advice from geoscience specialists;
•concentrate activities in prime areas on targets which have a high probability of success.
In the Director's view, there remains considerable scope for further major mineral discoveries within Western Australia and it is the Board's current intention to focus and concentrate on the Company's exploration efforts in this particular State.
The share issue was not underwritten and the proposed float did not proceed. The directors withdrew the prospectus on 15 July 1997.
As at 30 June 1997, Bloodhound had cash of approximately $21,000. It had shareholder equity of approximately $13,000, although this figure was dependent on the company realising value from accumulated exploration expenditure of nearly $60,000, which had been carried forward as an asset in the balance sheet of the company.
On 23 October 1997, the directors changed the name of the company to WAE.
On 17 November 1997, WAE prepared another prospectus in which it sought to raise, in effect, seed capital of $250,000 to cover the costs associated with the issue of a contemplated subsequent prospectus. It was contemplated that if the $250,000 seed capital were raised, a subsequent prospectus would be issued to shareholders with a view to raising up to $2.5 million to explore the company's mineral tenements.
The directors of WAE decided to defer the issue of the prospectus prepared in November 1997 until the New Year of 1998.
In early 1998, the directors of WAE sought to interest Mr Streeter in investing in WAE. Mr Streeter had acquired a reputation as a successful major investor in base metal mining projects. It was of advantage to WAE to have Mr Streeter investing in WAE not merely because of the money, but also because of his reputation and connections.
Before agreeing to invest, Mr Streeter went to Kalgoorlie to view a number of WAE's tenements. He subsequently indicated that he would subscribe for 5 million shares at 5 cents per share, thereby contributing $250,000 to WAE. Mr Brailey told Mr Streeter that if Mr Streeter subscribed for the whole $250,000 seed capital that had been sought to be raised by the November 1997 prospectus, he (Mr Brailey) and the other promoters of WAE, would transfer to Mr Streeter 600,000 shares in WAE for no consideration. Mr Streeter sought a place on the board for himself as chairman, that his accountant, Mr Cooper, be appointed secretary, and proposed that Mr Brailey resign and a new managing director be appointed.
In view of Mr Streeter's proposed investment, WAE's then directors decided not to proceed with the prospectus of November 1997.
Mr Streeter and Mr Cooper were appointed as directors of WAE at a meeting on 15 March 1998, and a Mr Moeller was appointed the new managing director. On 16 March 1998, the minutes of the meeting of directors record that Mr Streeter would provide seed capital of $250,000 within three weeks.
Although not mentioned by his Honour, the shares in WAE were held, directly or indirectly, by about 25 shareholders. The evidence establishes that they were all friends, acquaintances, or in some way connected with one or more of Mr Brailey, Mr Evans and Mr Le Clezio (exhibit 155, ts 722 ‑ 726). Each of Mr Brailey, Mr Evans and Mr Le Clezio accepted that this was the case in cross‑examination (ts 896, 951, 988). This group has not changed since 1998 (Brailey ts 827).
Mr Streeter - background (reasons [147] - [148])
Mr Streeter had, for a number of years, known Mr Bernard Le Clezio and Mr Evans as stockbrokers, and had been a client of Mr Evans. Earlier in the 1990s, Mr Le Clezio and Mr Evans had advised Mr Streeter that a parcel of 6 million shares in Jubilee Goldmines NL was for sale. Mr Streeter, through one of his companies, purchased the shares in Jubilee and took a seat on the board of Jubilee. Jubilee made a significant nickel discovery known as Cosmos, and Mr Streeter's investment in Jubilee proved to be a great success. The success was recognised and, as noted above, Mr Streeter's investment in WAE was of advantage to WAE not merely for the money which he could bring to the company, but also because of his reputation and connections.
The nature and extent of Mr Streeter's investment in WAE, commencing in March 1998 (reasons [152] ‑ [156], [161], [176])
In relation to the proposed subscription of $250,000 seed capital, his Honour said [152]:
There is no issue in the present proceedings as to whether or not there was a legally enforceable contract between the plaintiff and Mr Streeter to subscribe $250,000 for shares to be issued in the plaintiff in March 1998, but I am satisfied that it was the unambiguous agreement between the plaintiff, through Mr Brailey, on the one hand, and Mr Streeter, on the other, that that would happen.
His Honour also said [156]:
It is unnecessary to determine whether or not Mr Streeter was legally obliged to convert the balance of his loan to equity or to make good his promise to subscribe a total of $250,000 for capital in the plaintiff, but I am satisfied that during 1998 and 1999, and during the first months of 2000, the plaintiff, through Mr Brailey, operated on the assumption and expectation that the whole of the $250,000 would be subscribed by Mr Streeter for shares in WAE.
It appears that his Honour did not make any finding that there was a binding contract for Mr Streeter to subscribe the $250,000 seed capital in WAE. Nor did his Honour go on to find that any assumption of Mr Brailey on behalf of WAE generated an estoppel. Insofar as his Honour suggested the possibility, without finding, that there was a binding contract to subscribe for $250,000 in seed capital, the reference to an agreement being one just between WAE and Mr Streeter would seem to be incomplete, as it would appear from the judge's earlier findings that Mr Brailey, separately from WAE, agreed, in effect, to transfer or procure the transfer to Mr Streeter of a further 600,000 shares in WAE from Mr Brailey and the other promoters of WAE in consideration for Mr Streeter's agreement to subscribe, or his subscription of, $250,000 for shares as seed capital in WAE.
As to the precise terms of the arrangement in relation to the subscription for $250,000 seed capital, the judge said [153]:
The progressive total of the moneys paid by Mr Streeter to the plaintiff [WAE] was recorded in the books of the plaintiff as a loan, convertible to equity, and the understanding appears to have been that at a suitable time, probably when there was a further major share issue or an IPO by the plaintiff [WAE], that loan would be converted to shares. There was no definition of when that would occur, but all indications were that it would take place as soon as reasonably possible having regard to market conditions for conducting a successful share issue.
It would appear from this that his Honour found, in substance, that the arrangement was for the money to be a loan, which would be convertible into shares when WAE embarked upon a major capital‑raising, which event would itself be dependent upon market conditions. Having regard to his Honour's earlier findings regarding the agreed transfer of 600,000 promoter shares, the arrangement was also presumably dependent upon Mr Brailey procuring the transfer of 600,000 promoter shares to Mr Streeter. Having regard to the judge's reasons in relation to the need for a restructure of share capital, his Honour also implicitly found that the arrangement was also dependent upon a capital reduction and the implementation of a mechanism which ensured that any further investment by Mr Streeter would not infringe the takeover provisions of the Corporations Law.
His Honour went on to make reference to Mr Brailey's subjective intentions regarding the proposed payment of $250,000 and to the fact that Mr Cooper, on behalf of Mr Streeter's company, had confirmed that the books and records of WAE, which recorded that the moneys received by WAE from Mr Streeter's company were convertible loans, were accurate. These additional matters do not, however, seem to change the substance of the finding referred to in the preceding paragraph.
His Honour found that of the proposed $250,000 subscription for seed capital, Mr Streeter, through his company, Jungle Creek Goldmines Pty Ltd (Jungle Creek), eventually contributed $155,000.
The first payment was a loan of $85,000, of which $70,000 was initially contributed on 16 March 1998. This loan was converted into equity by the issue of 1.7 million 20 cent shares to Jungle Creek at a discount price of 5 cents per share. The second loan was for $47,388. This was not converted into equity because the holding of 1.7 million shares gave Mr Streeter, via Jungle Creek, nearly 20% of the issued capital of the company, and any further increase in shareholding could trigger a requirement for a takeover, upon which Mr Streeter was not prepared to embark. There were, at the time, 9,105,345 issued shares in WAE.
Although his Honour made no findings concerning a binding obligation to provide $250,000 in seed capital, and as his Honour said, that was not an issue in the case, in other parts of his Honour's reasons, the judge refers to Mr Streeter as not 'having honoured his commitment' [155] or his 'promise' [166], [176], [177], [188], [227], [285]. His Honour, in such passages, is presumably referring to what his Honour considered to be a moral obligation to provide seed capital, rather than a legal obligation.
WAE's April 1998 prospectus - its withdrawal and the abandonment of the proposed capital‑raising (reasons [161] ‑ [162])
In April 1998, WAE proposed another initial public offering. It prepared another prospectus with a view to raising $2.5 million by the issue of 12.5 million fully paid 20 cent shares, each of which was to carry an option exercisable at 20 cents by 30 June 2001.
The market at this time was, however, flat. The appetite for resource stocks was very low. It was impossible to find underwriters to underwrite the proposed float of WAE. Accordingly, on 28 May 1998, the board of WAE abandoned the proposed capital‑raising.
WAE's assets, including the Cue tenements, its liabilities and its conditional solvency in the period to 30 June 1999 (reasons [14], [155], [165] ‑ [166], [172] ‑ [173], [176], [184] ‑ [185])
In relation to WAE's external creditors, Mr Streeter took steps to reach agreement with, and pay, various debts owed by WAE to its creditors, and took an assignment of those debts. He also deposited sufficient funds with WAE to enable it to pay other creditors.
There was, however, one creditor, Roberts, whose debt WAE disputed, in the sum of approximately $13,000. That dispute remained current in the Local Court for a number of years.
The various mining tenements which WAE had held in April 1998 were forfeited or lost as WAE did not commit the necessary expenditure to retain them. The judge said that this relinquishment of tenements [166]:
[W]as, in turn, due to the failure of Mr Streeter to honour his promise to subscribe the full $250,000 ... which he had promised in March 1998. Had that been done the company would have been in a position to meet those financial obligations.
As indicated above, the judge is presumably referring, in this context, to a moral commitment rather than a legally‑binding promise.
By 30 June 1999, WAE's only asset was its interest in relation to exploration tenements near Cue, known as the Cue tenements. WAE was in a joint venture with an entity called Golden Granite Pty Ltd in respect of applications for tenements in Cue. WAE's interest was 70%; Golden Granite's interest was 30%. There were three exploration licences in relation to the Cue tenements. Only one of these was subsequently granted - on 5 August 1999.
His Honour recorded the directors' declaration in the 30 June 1999 accounts to the effect that there was 'uncertainty regarding the going concern of the company and if funds are contributed by Mr T Streeter the company will be able to pay its debts as and when they fall due' [172].
Although not mentioned by the judge, the directors' report signed by Mr Brailey and Mr Streeter said (par 4, page 940):
Review of Operations: The Company, due to prolonged liquidity problems, was only able to maintain minimum operating requirements and its future ongoing operations are dependant upon the ongoing injections of capital by one of the directors, Mr T E Streeter, or the raising of further equity capital. If such future injections of capital are not forthcoming then the Company will have no option other than to cease operations and go into liquidation.
His Honour found that the conditional statement of WAE's solvency was 'the truth', but that 'all the indications were that Mr Streeter intended to continue his support for the company' [173]. His Honour did not seek to reconcile that finding with the earlier findings that Mr Streeter had failed to 'honour' his 'promise' to subscribe for the whole $250,000 in seed capital.
His Honour further found that despite WAE having few assets, namely, its interest in relation to the Cue tenements, and despite its dependency on further funds from Mr Streeter, WAE was still 'intent upon … acquiring interests in mineral tenements, raising further capital via public offers and becoming listed on the ASX'. The judge said that what WAE needed 'was a suitable opportunity which would prompt Mr Streeter and its other shareholders to contribute more capital after a necessary restructuring of the existing shareholding. Such a restructure was not regarded as being a contentious problem' [173].
The necessity to restructure WAE's share capital (reasons [179] ‑ [183], [187])
On 22 March 1999, the board of WAE met and discussed a corporate restructure of WAE to 'downsize' the company.
Although not referred to in the judge's reasons, Mr Brailey's evidence in cross‑examination (ts 828) was to the effect that because WAE had lost all its capital by that time, and WAE had no 'decent' assets, any further contribution of capital was unattractive because it would be diluted by the large number of shares then on issue and that, hence, it became necessary to 'collapse the capital'. In his evidence‑in‑chief (exhibit 170 par 102) Mr Brailey had said that Mr Streeter had wanted a 20:1 capital reduction and that he (Mr Brailey) had not agreed and had said that the existing shareholders might consider a 10:1 or 5:1 reduction. Mr Streeter also accepted that all the modelling undertaken for the purposes of negotiations concerning the acquisition of shares in WANL, proceeded upon an assumed 20:1 capital reduction in WAE (ts 1178 ‑ 1180). In cross‑examination (ts 829, 830), Mr Brailey said that his evidence in his witness statement was in error, and that what he 'really said was that [he] thought the shareholders would be more amenable to a 10:1 or a 5:1 reduction'.
Conclusion
For the above reasons, the appellants succeed on the ground of laches. It is unnecessary to rehearse the same arguments with reference to whether such matters would preclude the grant of relief on a more general basis of unconscionability as alleged by the appellants.
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: STREETER -v- WESTERN AREAS EXPLORATION PTY LTD [No 2] [2011] WASCA 17 (S)
CORAM: McLURE P
BUSS JA
MURPHY JA
HEARD: 9 SEPTEMBER 2014
DELIVERED : 9 FEBRUARY 2015
FILE NO/S: CACV 109 of 2009
BETWEEN: TERRENCE ERNEST JAMES STREETER
First Appellant
DAVID CHARLES COOPER
Second AppellantJUNGLE CREEK GOLD MINES PTY LTD (ACN 008 795 033)
Third AppellantAND
WESTERN AREAS EXPLORATION PTY LTD (ACN 076 025 066)
Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram :EM HEENAN J
Citation :WESTERN AREAS EXPLORATION PTY LTD -v- STREETER [No 3] [2009] WASC 213
File No :CIV 2126 of 2006
Catchwords:
Practice and procedure - Costs - Successful appellant awarded costs against respondent - Respondent unable to pay costs - Application for costs against nonparties - discretionary factors - Inordinate delay in applying for nonparty costs - Whether nonparties were 'the' real party or 'a' real party to the proceedings - Relevance of unsuccessful security for costs application by appellant in primary proceedings
Legislation:
Rules of the Supreme Court 1971 (WA), O 43
Supreme Court (Court of Appeal) Rules 2005 (WA), pt 5 r 63
Supreme Court Act 1935 (WA), s 37(1), s 58, s 58(1)
Result:
Application for costs against non-parties dismissed
Category: A
Representation:
Counsel:
First Appellant : Mr M D Cuerden
Second Appellant : Mr M D Cuerden
Third Appellant : Mr M D Cuerden
Respondent: No appearance
Non-parties : Mr M L Bennett
Solicitors:
First Appellant : Kings Park Corporate Lawyers
Second Appellant : Kings Park Corporate Lawyers
Third Appellant : Kings Park Corporate Lawyers
Respondent: No appearance
Non-parties : Bennett & Co
Case(s) referred to in judgment(s):
Amaca Pty Ltd v Hannell [No 2] [2011] WASCA 232; (2011) 42 WAR 224
Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation [2001] HCA 26; (2001) 179 ALR 406
Bailey v Marinoff [1971] HCA 49; (1971) 125 CLR 529
Burrell v The Queen [2008] HCA 32; (2008) 238 CLR 218
Caboolture Park Shopping Centre Pty Ltd v White Industries (Qld) Pty Ltd [1993] FCA 667; (1993) 45 FCR 224
DJL v Central Authority [2000] HCA 17; (2000) 201 CLR 226
Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807
Esther Investments Pty Ltd v Markalinga Pty Ltd (1992) 8 WAR 400
Gamser v Nominal Defendant [1977] HCA 7; (1977) 136 CLR 145
HPM Pty Ltd v Fear [2002] WASCA 249 (S)
Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178
Raja v Darul‑Iman (WA) Inc [No 2] [2011] WASCA 251 (S)
Stambulich v Ekamper [No 4] [2008] WASCA 189
UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd [1998] VSC 13; [1999] 1 VR 204
Vestris v Cashman (1998) 72 SASR 449
Western Areas Exploration Pty Ltd v Streeter [No 2] [2008] WASC 217
REASONS OF THE COURT:
Introduction
These supplementary reasons deal with a fresh application by the appellants in relation to the costs of the appeal and of the primary proceedings. The application was made over three years after the court had, on 20 January 2011, allowed the appeal and had made elaborate and detailed orders in the appeal, including orders as to costs.
On 20 January 2011, the court made the following orders with respect to the costs of the primary proceedings (referred to as the 'action' in the orders), and of the appeal:
[2.8]b.the respondent pay the appellants' costs of the action including all reserved costs, to be taxed if not agreed, and for the purpose of such taxation;-
i.pursuant to section 280(2)(c) of the Legal Profession Act 2008, any limits fixed by any applicable costs determination are removed; and
ii.the appellants be allowed costs in respect of
1.running transcript;
2.two counsel attending (including senior counsel);
3.solicitor attending trial.
3.The respondent pay the appellants' costs of the appeal, including all reserved costs, to be taxed if not agreed (upon the same basis as set out in paragraph 2 above in relation to the costs of the action).
The appellants' fresh application is in the following terms:
The applicants apply for orders that, further to the orders made on 20 January 2011 -
1.Gary Patrick Connell and Sherrifmuir Holdings Pty Ltd pay the appellants' (defendants') costs of the action from 18 November 2008, [or] alternatively from 30 January 2009 or from such other time as this court thinks fit, including all reserved costs, to be taxed if not agreed, and for the purpose of such taxation:
1.1pursuant to section 280(2)(c) of the Legal Profession Act 2008 any limits fixed by any applicable cost determination are removed; and
1.2the appellants be allowed costs in respect of:
1.2.1running transcript;
1.2.2two counsel attending (including senior counsel);
1.2.3solicitor attending trial.
2.Gary Patrick Connell and Sherrifmuir Holdings Pty Ltd pay the appellants' costs of the appeal, including all reserved costs, to be taxed if not agreed (upon the same basis as set out in paragraph 1 above in relation to the costs of the action).
3.Gary Patrick Connell and Sherrifmuir Holdings Pty Ltd pay the appellants' costs of this application to be taxed if not agreed.
The appellants' application, filed 18 March 2014, was supported by an affidavit of the first appellant, Mr Streeter, sworn on the same day as the application. Mr R White (an accountant) and Mr D Molony (a solicitor) also swore affidavits in support of the application. The appellants also prepared an application book (AB) containing the materials relevant to their current application. The material facts were not in dispute.
The non‑parties and the history of the litigation
In 2006, Western Areas Exploration Pty Ltd (WAE) commenced proceedings against the appellants. WAE alleged in effect that the appellants held some 11 million shares in a publicly listed company, Western Areas NL (WANL), on constructive trust for WAE. As more particularly described below, WAE obtained judgment against the appellants (the defendants to that action) in 2009. The appellants appealed, with WAE being the respondent to the appeal. The appeal was eventually allowed and the orders of the trial judge set aside.
The persons against whom the appellants now seek costs orders were not parties to the action or the appeal. Their connection with WAE, the plaintiff in the action and the respondent to the appeal, and the history of the litigation in more detail, are set out below.
In May 2000, Sherrifmuir Holdings Pty Ltd (Sherrifmuir) held 10% of the shares in WAE. Mr Connell and his wife were the only shareholders of Sherrifmuir, and Mr Connell was the sole director of Sherrifmuir.
On 15 August 2006, Mr Connell and another person (Mr Brailey) took control of the board of WAE and, on 18 October 2006 WAE commenced the primary proceedings against the appellants.
In late 2006, WAE's only assets, apart from its (alleged) causes of action against the appellants, were certain shares (in its own name) in WANL. By August 2007, the final parcel of WAE's shares in WANL had been sold for approximately $854,000.
In 2008, the appellants sought security for costs from WAE. The application came before Le Miere J. His Honour delivered reasons for judgment on 9 October 2008, and dismissed the application: Western Areas Exploration Pty Ltd v Streeter [No 2] [2008] WASC 217. Le Miere J observed that an earlier statement by WAE in October 2006, to the effect that WAE's costs of the action, including to trial, would be around $200,000 plus GST, may be understated. His Honour also estimated that the defendants' (appellants') costs up to and including the trial would be in the vicinity of $300,000 [30]. His Honour further observed that there was no evidence as to what had happened to the sale proceeds of the WANL shares [29]. His Honour also said that there was no evidence, and it could not be inferred 'precisely what money or assets [WAE] presently has' [46]. His Honour concluded that there was no credible testimony that there was reason to believe that WAE would be unable to pay the appellants' costs [47] ‑ [48]. His Honour also said that, in any event, he would have dismissed the application on discretionary grounds in that, on the evidence, the application had not been brought sufficiently promptly [59] ‑ [60]. In this regard, his Honour rejected the appellants' explanation that they could not have brought the application earlier because they did not have reason to believe that WAE would be unable to pay the appellants' costs until they had learned that the last parcel of shares in WANL had been sold in August 2007. As to this, his Honour said:
The defendants knew or ought to have known, at that time [October 2006] that that was the sole asset of [WAE] from which it would have to meet all of its expenses, including the legal costs of these proceedings. Selling the shares merely converted the company's assets from one form to another [59].
On 18 November 2008, WAE issued an Information Memorandum to raise funds for WAE's litigation against the appellants. The accompanying letter by the chairman of WAE, Mr Connell, stated that the company needed to raise additional funds to 'enable the Company to continue funding the litigation through to trial completion' (AB 97). The Information Memorandum stated that WAE's solicitors had estimated that the costs of the action from 11 November 2008 to the completion of trial would be $495,000 (including GST). The Information Memorandum also estimated that WAE had working capital requirements of $350,000.
On 5 December 2008, the appellants' solicitors referred to the Information Memorandum and put the non‑parties on notice that the appellants may seek costs against the non‑parties in relation to the action.
In January 2009, WAE raised $375,534.20 by issuing 3,755,342 fully paid 10 cent shares. A million (approximately) of these shares were issued to Sherrifmuir; 905,340 of the shares were issued to Mr Connell and his wife jointly; and 10 other shareholders took up 1,850,000 shares. Accordingly, in effect, Sherrifmuir and Mr Connell between them took up approximately 51% of the new shares in January 2009, and 10 other shareholders subscribed for the remaining 49% of the new capital raised in January 2009. In March 2009, WAE raised an additional $285,321 by the issue of a further 2,853,210 shares at 10 cents per share. These shares were issued to Sherrifmuir. As a result, Mr Connell and Sherrifmuir between them had contributed approximately 72% of the new capital raised by WAE in January/March 2009.
As at 17 March 2009, following the above capital raisings, Mr Connell's total shareholding in WAE was 11.5%, Sherrifmuir's total holding was 24.5%, and the remaining 66% of the capital of WAE was in the hands of other shareholders.
WAE's action came to trial in March/April 2009.
On 31 July 2009, EM Heenan J gave judgment for WAE. The appellants lodged a notice of appeal and, on 15 September 2009, filed an application for suspension orders in respect of the judgment at first instance. The appellants' evidence on this application included evidence to the effect that WAE had no assets other than the judgment under appeal. The application for suspension orders was granted.
On 30 November 2009, Mr Brailey ceased to be a director of WAE. Mr Connell remained as a director of WAE and was its sole director.
On 9 December 2009, Mr Connell wrote to shareholders advising of significant legal costs associated with completing the trial and funding the appeal. He indicated that WAE and Lavan Legal had entered into a confidential costs agreement and that in order to meet a capital gains tax and other ongoing expenses, WAE would need to raise an additional $250,000 by way of a rights issue.
On 23 February 2010, WAE issued a further 2,618,996 shares at 10 cents. Sherrifmuir took up 642,202 shares (24% of the new issue); Mr Connell (jointly with his wife) took up 643,457 shares (25% of the new issue); and 15 other members, including Mr Brailey, took up the remaining 1,333,337 shares (50.5% of the new issue).
As at 23 February 2010, Sherrifmuir held 24.5% of the shares in WAE; Mr Connell (jointly with his wife) held 13.4% of the shares in WAE; and the remaining (approximately) 62% of the issued shares in WAE was in the hands of other shareholders.
In June 2010, the appeal against EM Heenan J's decision was heard. On 20 January 2011, this court delivered judgment allowing the appeal. The appellants moved for, and were granted, the orders referred to earlier.
On 9 December 2011, the High Court dismissed an application by WAE for special leave to appeal.
On 29 March 2013, WAE was deregistered. The appellants have not sought to enforce the costs orders obtained against WAE on 20 January 2011.
The parties' submissions as to the court's power
It was not in dispute (subject to the matter referred to below) that this court has the power to order costs against a non‑party: Supreme Court Act 1935 (WA), s 37(1) and s 58; Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178; HPM Pty Ltd v Fear [2002] WASCA 249 (S) [3]; Raja v Darul‑Iman (WA) Inc [No 2] [2011] WASCA 251 (S) [18] ‑ [19].
However, the non‑parties raised what they described as a 'jurisdictional' issue in this matter. They contended that s 37 of the Supreme Court Act (and s 58(1) of that Act) are subject to the rules of court including, relevantly, pt 5 r 63 of the Supreme Court (Court of Appeal) Rules 2005 (WA) and O 43 of the Rules of the Supreme Court 1971 (WA). The non‑parties submitted that, in consequence, once the court had entered an order disposing of a proceeding (in this case the appeal), 'that proceeding apart from any specific and relevant statutory provision or necessary working out (such as in and for account) is at an end and is, in substance, beyond the recall by that court': non‑parties' written submissions par 11.5. In this regard, the non‑parties referred to Burrell v The Queen [2008] HCA 32; (2008) 238 CLR 218; Bailey v Marinoff [1971] HCA 49; (1971) 125 CLR 529; DJL v Central Authority [2000] HCA 17; (2000) 201 CLR 226, 245 ‑ 246; Gamser v Nominal Defendant [1977] HCA 7; (1977) 136 CLR 145, 154; Amaca Pty Ltd v Hannell [No 2] [2011] WASCA 232; (2011) 42 WAR 224 [1], [2], [29]; and Stambulich v Ekamper [No 4] [2008] WASCA 189.
The appellants, on the other hand, contended that this court had jurisdiction or power to make the orders sought because an order for costs against a non‑party does not vary, alter or set aside the final orders but is supplemental to it. Reference was made to Caboolture Park Shopping Centre Pty Ltd v White Industries (Qld) Pty Ltd [1993] FCA 667; (1993) 45 FCR 224, 234 ‑ 236; UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd [1998] VSC 13; [1999] 1 VR 204 [9] ‑ [16]; and Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807 [9] ‑ [17].
Legal principles - discretion
On the question of discretion (on the assumption that the court had the power to determine the application in this matter) the parties referred to a number of cases, including Knight; Vestris v Cashman (1998) 72 SASR 449; Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation [2001] HCA 26; (2001) 179 ALR 406; and Dymocks.
In Knight, Mason CJ and Deane J (Gaudron J agreeing) said that the court had power 'to order costs against a non‑party in cases in which, in the interests of justice, such orders should be made' (185). Their Honours also said:
[T]here are … a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non‑party.
…
For our part, we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non‑party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non‑party has played an active part in the conduct of the litigation and where the non‑party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non‑party if the interests of justice require that it be made (192 ‑ 193).
Earlier, their Honours had referred to cases in which the jurisdiction to order costs against non‑parties had been exercised 'against persons who were considered to be the "real parties" to the litigation' (188). In that regard, their Honours observed that instances in which the court had ordered costs against the 'real party' included actions of ejectment; cases concerning a relator in a relator action by an Attorney‑General; a solicitor who instituted proceedings without authority; a person interested in an estate who unnecessarily attended on the taking of an account and thereby occasioned additional costs; an unsuccessful claimant to a beneficial interest in an estate; a next friend who purported to institute an action on behalf of a person said to be of unsound mind when that person was of sound mind; and the directors of a company which unsuccessfully petitioned for the appointment of an administrator (187 ‑ 188).
In Vestris, Lander J (Doyle CJ agreeing) said:
The circumstances in which it is just to order costs against a person who was not a party to the litigation will be both rare and exceptional: see Aiden Shipping Ltd v Interbulk Ltd (at 980) per Lord Goff of Chieveley. If the order for costs which is sought against a non-party is in lieu of, in substitution for or complementary to an order for costs against a party, the circumstances for making such an order will not arise unless there is some connection or association between the party to the litigation and the non‑party against whom the order for costs is sought. The connection must be of a kind that makes it just to make an order for costs in that the connection must be material to the question of costs: see Bischof v Adams [1992] 2 VR 198 at 205.
Whilst the circumstances to make an order for costs against a non‑party will be both rare and exceptional such an order can be made without the moving party having to demonstrate any improper conduct of any kind on the part of the non‑party. An order for costs against a non‑party is not dependant upon any improper conduct on the part of any party. Of course in some cases improper conduct on the part of the non‑party will be a relevant factor in the exercise of the discretion.
Whether it is just to make such an order involves the exercise of a discretion on the part of the trial judge: see Symphony Group plc v Hodgson [1994] QB 179 at 193. The discretion to make an order for costs against non‑parties 'must be exercised judicially and in accordance with general legal principles pertaining to the law of costs': see Knight v FP Special Assets Ltd (at 192) per Mason CJ and Deane J.
It is not desirable to lay down any rules which would fetter the discretion of a trial judge to make such an order but some guidance as to the exercise of the discretion can be obtained from the decided cases.
In exercising the discretion regard would be had to whether the non‑party could have been joined as a party earlier in the proceedings and thereby obtained the protection of the rules of court; whether the non‑party has had any warning that an application for costs against that party would be made; whether, in those circumstances, the non‑party could have applied to be joined in the proceedings and thereby had the capacity to influence the proceedings or the non‑party could have protected itself by making an offer in accordance with the rules; whether if a warning had been given the non-party could have terminated the proceedings by discontinuance, negotiation, payment or otherwise; whether the party who would otherwise be usually liable for costs can meet an order for costs and if relevant the reason why that party cannot meet an order for costs; whether it was apparent at any earlier stage in the proceedings, and if so when, that the party could not meet costs; whether the moving party should have sought an order for security for costs; the relationship, if any, between the non-party and the party who would usually be liable for costs; whether the non‑party has caused the proceedings; whether the non‑party has funded the proceedings; whether the non‑party stood to benefit by the litigation and if so how; whether the non‑party had a direct or indirect financial interest in the litigation; and whether there has been any improper conduct on the part of the non‑party.
None of the matters will necessarily be decisive. Indeed the presence of one or more of those matters does not inexorably lead to the conclusion that an order for costs should be made against a non‑party. In Bischof v Adams the mere fact that a person may benefit from the litigation was not enough.
An order will be made against a non-party only if the justice of the case requires that an order be made (467 ‑ 468).
In Arundel, the Deputy Commissioner of Taxation had issued a statutory demand against a company in respect of unpaid tax. The company did not comply with the statutory demand and an application was made to set it aside. The company subsequently applied for the removal into the High Court of Australia of subsequent proceedings to wind up the company. The company's contention was, in effect, that the Deputy Commissioner of Taxation was unable to issue valid notices of assessment and levy income tax in Australia [15]. The company's application was made on the advice and encouragement of an organisation known as the Institute of Taxation Research Pty Ltd (ITR). An application was ultimately made by the Deputy Commissioner of Taxation for costs against ITR. In granting the application, Callinan J observed:
Mere encouragement of litigation would not suffice to attract liability for costs. But ITR has gone far beyond mere encouragement. It has been, in the clearest way, a promoter of this litigation. It is relevant that it had a direct financial interest in its promotion and its outcome. It acted as the de facto solicitor in the matter. It was either the author, or the major participant in the preparation of, the arguments to be advanced in this Court, and the tactics to be employed in the proceedings and activities leading up to the initiation of proceedings in this Court, these being the fusillade of letters to the respondent and the proceedings which came before Muir J in the Supreme Court of Queensland. ITR insisted upon persisting in these notwithstanding that various courts in this country had consistently held the claims made here and like claims to be utterly untenable. The impact upon the courts and upon the respondent as the responsible revenue‑collecting authority has been very considerable. ITR used the proceedings to pursue its own interests, of vindicating a totally misconceived and irresponsible opinion that it held and was determined to pursue, about the taxation laws of this country.
It seems to me, therefore, that this is a case par excellence for the making of an order for costs, even though Arundel [the company] is neither an insolvent company nor Dr Brown [its controller] a man of straw.
…
Although it may not be possible to say that ITR was the only real party in the relevant litigation, it was nonetheless in the nature of a party in the sense that it so heavily promoted, intermeddled in, had a continuing role in, and stood to benefit from it, and to benefit from it I might say, even if the litigation failed, because part of its charges was secured in any event. In Knight v FP Special Assets Ltd, Mason CJ and Deane J (Gaudron J agreeing) said this:
'The cases awarding costs against non‑parties are more readily explicable on the footing that there was no absence of jurisdiction to order costs against non‑parties in the strict sense and that the jurisdiction could be exercised against persons who were considered to be the 'real parties' to the litigation.'
As I say, although ITR was not 'the' real party to this litigation, it was nonetheless a real party in the very important and critical respects to which I have referred [36] ‑ [37].
In Dymocks there was litigation between Dymocks and a Mr and Mrs Todd and certain related entities, including a company (referred to as 'Bilgola') which was wholly owned by Mr and Mrs Todd. The non‑party against whom Dymocks ultimately obtained costs orders in the appeals was a company called Associated Industrial Finance Pty Ltd (Associated). Associated was a private company beneficially owned by Mrs Todd's family. Mrs Todd was a director of Associated together with her father and her brothers. When the Todds asked the family for further financial assistance because of the demands of the litigation involving Dymocks, Associated advanced the Todds $800,000, secured by a debenture over Bilgola. Following an adverse judgment against the Todds at first instance, Associated put Bilgola into receivership and advanced funds to the receivers to take the matter on appeal to the Court of Appeal. Having succeeded in the Court of Appeal, Associated then advanced funds to resist Dymocks' subsequent appeal to the Privy Council. Associated also negotiated, with the Todds' solicitors, the terms upon which the appeals were to be funded and how any sums by way of damages and costs would be distributed: Dymocks [1] ‑ [4]. In Dymocks, Associated had funded the appeals, it had pursued its own interests under an all monies debenture, and it was the party who principally, if not exclusively, stood to benefit from the success on the appeals [30], [34]. Associated was the party 'in whose interest the appeal to the Court of Appeal was brought and the further appeal to the Privy Council was defended' [30]. Their Lordships said that 'Associated can sensibly be characterised as "the real party" to these appeals - or at least "a real party" in very important and critical respects' [35].
Finally, it should be noted that the principle of finality of litigation may also be a significant factor in the exercise of the court's discretion. As Malcolm CJ observed in Esther Investments Pty Ltd v Markalinga Pty Ltd (1992) 8 WAR 400 (albeit in the context of a belated application for special costs orders), the making of further orders after an inordinate period of delay following the disposition of a proceeding may tend to bring the administration of justice into disrepute. There must be, in the interests of the administration of justice and finality in litigation, some limit to the exercise of discretion even where the delay has been the result of inadvertence (408 ‑ 409).
The parties' contentions on discretion
The appellants contended, in effect, that the non‑parties should pay the costs of the primary proceedings as from 18 November 2008 (the date of the Information Memorandum), or alternatively from 30 January 2009 (following the first of the capital raisings in which the non‑parties participated) for the following reasons:
(a)the non‑parties had been put on notice by the appellants in December 2008 that costs would be claimed against them, following the failed application for security for costs and in light of the information in the Information Memorandum;
(b)whilst WAE was not insolvent or a 'man of straw' when it commenced the action, the non‑parties knew, as from at least 18 November 2008, that WAE would be unable meet any adverse costs orders against it;
(c)the capital contributions of the non‑parties substantially funded the trial of the action;
(d)the value of the judgment at first instance was in the order of $66 million, and the non‑parties' combined shareholding of approximately 36% in WAE meant that their potential benefit from the action was substantial;
(e)Mr Connell (with Mr Brailey) effectively controlled the conduct of the action by WAE; and
(f)the costs of the action are substantial and WAE has no assets from which to pay the costs of the appellants.
The appellants also contended that the non‑parties should pay the costs of the appeal in light of the matters referred to above and because:
(a)WAE had no assets to meet any adverse costs orders against it if the appeal succeeded;
(b)Mr Connell played an active part, as sole director, in resisting the appeal;
(c)Mr Connell retained a substantial interest in the litigation; and
(d)WAE was in substance the initiating party to the entirety of the litigation.
The appellants also contended that there was no material or unexplained delay in bringing the application. They contended that it was not appropriate to seek non‑party costs orders prior to the disposition of the special leave application to the High Court, and they also referred to Mr Streeter's affidavit in support of the application, to the effect that:
•the appellants had corresponded with WAE and the non‑parties concerning the payment of costs in late 2011 and early 2012;
•whilst no application had been brought between early 2012 and March 2014, most of the delay in that period at least up to 9 December 2013, had arisen because of certain misunderstandings between the appellants and their solicitors, claims made for a lien over files in respect of allegedly unpaid costs, and the first appellant's attention to other business affairs.
The appellants did not contend that any term of the arrangements disclosed in the Information Memorandum, or any aspect of the capital raising, was uncommercial or unconventional.
The non‑parties submitted, in effect, that there should be no order as to costs against the non‑parties in that:
(a)the action by WAE was not to secure personal benefits for the non‑parties - it was an action by WAE for the benefit of the company as a whole;
(b)insofar as Mr Connell was responsible for the conduct of the litigation, he was acting purely as a director of WAE in accordance with the equitable and statutory duties attaching to that office;
(c)Mr Connell and Sherrifmuir were only two shareholders amongst a wide group of shareholders who, to varying degrees, had contributed capital to WAE;
(d)the appellants should have made a further application for security for costs;
(e)the factors on which the appellants rely in support of their application were known to them at least by 20 January 2011, and any application for costs orders against the non‑parties should have been made at the time that dispositive orders were made in the appeal; and
(f)the delay since 20 January 2011 was, in effect, unacceptable and inexcusable having regard to the principles of finality of litigation.
Disposition
It is unnecessary to decide the 'jurisdictional' issue raised by the non‑parties. Even if the court had power to make the orders now sought by the appellants, the orders, as a matter of discretion, should not be made for the following reasons.
First, there is no good reason why the appellants did not, as part of their suite of final orders on 20 January 2011, deal with the question of costs now sought to be raised. Whilst they had sought and obtained an order for liberty to apply on 20 January 2011, it was formulated so that its scope did not extend to the question of costs. Moreover, all of the matters upon which the appellants now seek to rely to obtain the orders sought, were known to them at that time. Further, it is not suggested that the failure to apply for such orders was as a result of oversight or accident. There is no merit in the contention that it was not appropriate to make the application pending disposition of WAE's application for special leave to the High Court, given that the special leave application occurred after the making of final orders on 20 January 2011. Also and in any event, ordinarily all appropriate costs orders should be sought following the disposition of an appeal to this court, irrespective of the potential for any application for special leave to the High Court by the losing party.
Secondly, the delay in any event between 9 December 2011 and 18 March 2014 (or even to 9 December 2013) is, in this context, inordinate. The appellants' reasons for the delay in this period, referred to earlier at [36], might explain the passage of time but they carry no, or no real, weight in the circumstances of this case and having regard to the importance the law attaches to the finality of litigation.
The above matters are sufficient to dispose of the application, although the following observations may be made about the merits, otherwise, of the application.
At the outset, it may be noted that throughout the litigation, most of the shares in WAE were in the hands of persons other than Mr Connell or Sherrifmuir.
In relation to the costs of the appeal, WAE had (prior to 20 January 2011) a judgment in its favour which gave it entitlements in equity to a valuable and substantial parcel of shares in WANL, a publicly listed company. WAE effectively had no choice but to resist the appeal if it wished to seek to preserve this asset. Whilst Mr Connell (including through Sherrifmuir) was a substantial shareholder of WAE, and its sole director for most of the period of the appeal, a range of other shareholders, including Mr Brailey, had contributed to the amount of capital raised after the judgment at first instance which, it may be inferred, was used to fund the resistance to the appeal.
In relation to the primary proceedings, the (alleged) cause of action vested solely in WAE. WAE was at all material times effectively under the governance of Mr Brailey and Mr Connell, as the directors of WAE. It may be inferred that decisions with respect to the litigation were taken by the board, and there is no suggestion that Mr Brailey was the 'puppet' of Mr Connell or otherwise did not bring an independent and informed mind to the prosecution of the action by WAE. Whilst Mr Connell (including through Sherrifmuir) ultimately contributed approximately 72% of the new capital raised by WAE in this period, the opportunity to subscribe for shares was one given to all shareholders of the company. As noted earlier, there was no suggestion that the capital raising was unconventional or uncommercial. Other shareholders also subscribed, in varying degrees, for shares in WAE in this period. At one end of the spectrum, some shareholders subscribed for as few as 50,000 shares (eg, AB 106, 109). At the other end, one shareholder and his company subscribed for a total of 1 million shares, taking their aggregate holding to 1.9 million shares in WAE (AB 116, 117).
This case is unlike that of Dymocks, upon which the appellants placed considerable reliance. Neither Mr Connell, nor Sherrifmuir, was in any relevant sense 'the' real party to WAE's action or the appeal. Nor could either be said to be 'a' real party. Further, there was no suggestion that Mr Connell (or Mr Brailey) had acted improperly in connection with the pursuit by WAE of the litigation.
In relation to the appellants' application for security against WAE, the judge found that there was no credible testimony that there was any reason to believe that WAE would be unable to pay the appellants' costs. Although it may be inferred that had the Information Memorandum been published prior to the application rather than subsequent to the determination of it, the appellants' evidentiary position would have been significantly improved, WAE was under no obligation to assist the appellants in establishing the matters necessary to succeed in their application for security. WAE, in resisting the application, was acting through its directors, Mr Brailey and Mr Connell. It was no doubt open to the appellants to make a further application for security following the publication of the Information Memorandum, although it may be accepted that ordinarily it is undesirable for time and resources to be expended in successive applications for security for costs: cf Knight (190 ‑ 191). For present purposes, it is sufficient to observe that the appellants' position that it is entitled to costs against Mr Connell and Sherrifmuir is not strengthened by the failure to make a further application for security following the publication of the Information Memorandum. Whilst Mr Connell and Sherrifmuir were on notice from 5 December 2008 that they may be held liable for costs if WAE continued with the action, the decision to proceed was not just in form, but was in substance, that of WAE.
For these reasons, we are not persuaded that the appellants would have succeeded in their application for costs against Mr Connell and Sherrifmuir even if there had not been the fatal delay referred to earlier.
Conclusion
The appellants' application for costs orders against the non‑parties should be dismissed, with costs.
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