United Petroleum Australia Pty Ltd v Hudson

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2018 0088
S APCI 2018 0147

UNITED PETROLEUM AUSTRALIA PTY LTD (ACN 164 398 832) (and others according to the attached schedule)	Applicants
V
MARTIN MOULE HUDSON	Respondent

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JUDGES:	WHELAN, McLEISH and NIALL JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	3, 4 September 2019
DATE OF JUDGMENT:	13 February 2020
MEDIUM NEUTRAL CITATION:	[2020] VSCA 14
JUDGMENT APPEALED FROM:	(2018) 128 ACSR 324; [2018] VSC 347 (Elliott J)

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COMPANY LAW – Directors’ duties – Whether Chairman breached duties as director by failing to alert executive directors as to concerns about documentation for public offer in advance of board meeting – Lack of information from company management – Corporations Act 2001 (Cth) ss 180, 181, 182, 183, 1317S and s 1318.

COSTS – Application for leave to appeal order that costs be on indemnity basis – Discretionary decision – No error demonstrated – Leave to appeal refused.

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APPEARANCES:	Counsel	Solicitors
For the Applicants	Mr M D Wyles QC with Mr C E Shaw SC and Mr J D Little	Norton Rose Fulbright
For the Respondent	Mr J P Slattery SC with Mr W Newland	Wotton + Kearney

WHELAN JA
McLEISH JA

NIALL JA:

Introduction

The respondent, Martin Hudson, was the chairman of United Petroleum Holdings Ltd (‘United Holdings’). United Holdings was incorporated in July 2016. It was intended that it would acquire the fuel distribution business conducted by corporate entities in the United Group[1] then owned and controlled by its founders Avi Silver and Eddie Hirsch (together the ‘founders’), and that up to 50 per cent of the shares in United Holdings would then be offered to the public by way of a public offering. The process of structuring and documenting the proposed public offering was complex and involved various professional advisers.
[1]The group comprised United Petroleum Australia Pty Ltd (‘United Australia’) and United Petroleum Pty Ltd (‘United Petroleum’) (together ‘United’).

In order to achieve an offering in 2016 it was necessary, or at least prudent, for a draft prospectus, known as a pathfinder, to be prepared and distributed to analysts, who would in substance review and price the offer in advance of submission to the Australian Securities and Investments Commission (‘ASIC’) and then to the investing public. A timetable was put in place to have the pathfinder approved by the board of United Holdings on 23 October 2016. Ultimately, the pathfinder was not in a suitable form for approval by that date and the public offering did not proceed in 2016.

The applicants place part of the responsibility for that failure on the shoulders of Hudson who, they say, breached his duties as a director and chairman by failing to advise the founders the day before the offering was aborted that he had serious concerns with the documentation and by failing to convene a board meeting to discuss those concerns. The judge rejected the applicants’ case, holding that there was no breach of duty. [2]
[2]United Petroleum Australia Pty Ltd v Herbert Smith Freehills (2018) 128 ACSR 324; [2018] VSC 347. (‘Reasons’).

Having dismissed the claim against Hudson, the judge ordered that the applicants pay Hudson’s costs on an indemnity basis on the ground that the proceeding was brought without reasonable cause.[3]
[3]United Petroleum Australia Ltd v Herbert Smith Freehills (No 2) [2018] VSC 501 (‘Costs Reasons’).

The proceeding against Hudson was not the only matter heard and determined by the judge. At the same time, and in the same set of reasons, the judge determined a proceeding to recover unpaid professional fees brought by Herbert Smith Freehills (‘Freehills’), a firm of solicitors, which acted for the various United entities being United Holdings, United and the founders in relation to the offering. In addition, the applicants had brought proceedings against Freehills alleging that the advice and legal services rendered by it was negligent. The judge upheld the Freehills claim to recover fees and dismissed the negligence proceeding. Orders made in the Freehills fee matters, including as to costs, are the subject of separate applications for leave to appeal brought by the applicants. There is no application for leave to appeal the order dismissing the negligence proceeding brought against Freehills but the consequential costs order is challenged. Those matters are not dealt with in these reasons.

In their first application for leave to appeal in the Hudson matter the applicants contend that the judge erred in failing to find a breach of duty on the part of Hudson. By a separate application for leave to appeal, they also contend that the judge erred in ordering indemnity costs.

Relevantly for present purposes, the applicants contended both below and on appeal that in the 24–hour period leading up to the decision on Sunday 23 October 2016 not to pursue the offering that year, Hudson should have voiced his concerns. The case against Hudson failed, in short, because the documentation was not ready within time, Hudson waited until the last minute to form his final assessment, a board meeting had been called for that Sunday, and Hudson believed that his concerns were shared and well understood by the advisers and the founders. There was no reason for him to think that by failing to speak up before the board meeting he was jeopardising the interests of the company, or that any different outcome for the offering could have been achieved had he expressed his concerns, in that narrow 24-hour window, directly to the founders.

The conclusions reached by the judge were correct. There is no merit in the proposed grounds of appeal and leave should be refused. In relation to costs, the special order was well open to the judge and leave to appeal the costs order should also be refused.

A. Summary of Facts

The judge’s reasons are detailed and extend to some 773 paragraphs. As required, the parties prepared an agreed summary in this Court which identifies the facts which they contend are relevant to the application for leave to appeal. The following recitation of the facts is drawn from that agreed summary, with supplementation by additional matters where necessary to explain our reasons. The parties are to be commended on the agreed summary which provides most of the detail necessary for the disposition of the application for leave to appeal. There is considerably more detail in the reasons of the judge. For present purposes it is not necessary to repeat it. For ease of reference the following is a list of the various entities and individuals involved:

(a)Silver and Hirsch:   the founders;
(b)United Petroleum Holdings Ltd :       United Holdings;
(c)United:   United Petroleum Australia Pty Ltd and
United Petroleum Pty Ltd;

(d)United entities: United Holdings; United; the founders;
(e)the United Group officers: Gary Brinkworth (CEO) from 10 October
2016; Peter Larsen (Company Secretary
and senior general counsel);

(f)the United Holdings Martin Hudson; Tim Antonie
non-executive directors: and John Slack-Smith;

(g)Herbert Smith Freehills (HSF):           Michael Ziegelaar and Alex Mackinnon;
(h)KPMG:   George Svinos and James Hindle;
(i)Morgan Stanley:   Mark Burmeister;
(j)Credit Suisse:   Adam Lennen and Stephanie Charles.

Silver and Hirsch established, and for over two decades developed, an independent fuel distribution business throughout Australia, which they continue to operate. The business acquires fuel from both domestic and international suppliers and transports it to its own terminals. The fuel is first deposited at nine fuel depots and then transferred to wholesale and retail outlets.

The business was conducted by United. Silver was more involved in financial matters than Hirsch. In late 2014, the founders decided to make an initial public offering by which they would offer shares in a company, which was yet to be incorporated and which was ultimately incorporated as United Holdings.

In order to proceed with the initial public offering, United engaged various consultants to act, including Freehills, which it engaged to act as the solicitors on the initial public offering. Michael Ziegelaar was the partner at Freehills responsible for the work to be performed for the public offering. In addition, Morgan Stanley and Credit Suisse were appointed joint lead managers for the public offering. Mark Burmeister and Adam Lennen were the managing directors of equity capital markets at Morgan Stanley and Credit Suisse respectively. Essentially their role was to manage the public offering process. KPMG acted as financial advisers to the founders in respect of the public offering as well as in preparing an investigating accountant’s report for inclusion in the proposed prospectus.

In early 2016, Hudson was appointed as prospective chairperson of the soon-to-be formed board of United Holdings. Upon its incorporation on 19 July 2016, he formally became chairman and non-executive director. He had substantial legal and corporate experience.

On the day of Hudson’s appointment as chairman and non-executive director of United Holdings, Tim Antonie and John Slack-Smith were also appointed as non-executive directors. Antonie had many years’ experience in investment banking and corporate advisory work and was a director of a number of listed companies. Slack-Smith was and remains the chief operating officer of a large retail company.

On 4 November 2015, a due diligence committee met. Ziegelaar was a member of that committee and it was noted that the target timetable for listing was to be around Easter 2016.

In May 2016 a document entitled ‘Project Diamond Discussion Materials’ was circulated by Peter Larsen, the senior general counsel and company secretary of United, to the non-executive directors: Hudson, Slack-Smith and Antonie. The document provided a ‘high level’ timetable for the public offering. That timetable had anticipated that the prospectus would be lodged by mid-November 2016 with the final price announced to the market by around 7 December 2016.

In mid-June 2016, the timetable was revised. The new timetable provided for the prospectus drafting to be completed by late September 2016, with the financial section to be completed by the end of August.

On 7 September 2016, Larsen sent an email to the United Holdings directors and Gary Brinkworth. At the time, it was proposed that Brinkworth would be the chief executive officer of United Holdings. Brinkworth was still employed elsewhere full time, but was being included in communications in anticipation of him starting in his position with United Holdings in October 2016. The email attached a list of proposed dates for the due diligence committee and board meetings for September to December 2016. The proposed date for the board to sign off on the financial section of the prospectus was 10 October 2016, and for the ‘Full final prospectus’ on 14 October 2016. The references to the prospectus in this context were not references to a prospectus in its final form (for lodgement with ASIC), but rather to a pathfinder for submission to market analysts.

Concerns arose about United’s ability to comply with the timetable given the progress of the work on the prospectus. On 23 September 2016, a meeting of the board of United Holdings was held. The meeting was attended by Hudson, Silver and Antonie. It was also attended by Brinkworth, Jim Mooney (the chief financial officer of United) and George Svinos (a partner of KPMG, who was acting as financial adviser to the founders in relation to the public offering, and who was responsible for co-ordinating many of the requests for information from external advisers of United). Larsen attended as secretary. The directors discussed key dates and the progress of the public offering, noting that it was critical to avoid ‘further slippage’ and that the ‘current aim’ was to have the completed draft of the prospectus (including financials and the management discussion and analysis section) completed for circulation to the due diligence committee and directors at meetings to be held on 3 October 2016.

At the end of September 2016, Ziegelaar and the lead managers, in substance, gave assurances to Silver that they would work very hard in an endeavour to meet the deadlines and informed Silver that they could still be met. However, no guarantees or commitments were given to Silver that the deadlines would be met ‘come what may’.

On 30 September 2016, a draft due diligence committee report was circulated by James Hindle of KPMG to a large number of persons, including each of the United Holdings directors. The covering email noted that the work was still in progress and that there were likely to be further changes to the financial model. The 159-page report essentially covered those matters that needed to be addressed by the due diligence committee.

8–20 October 2016: work on documentation progresses but remains incomplete

On the morning of 8 October 2016, Morgan Stanley circulated the current version of the draft prospectus, both in clean copy and mark up. Also attached was a draft analysts’ presentation which had ‘been through the verification process this week.’

On 14 October 2016 there was a due diligence committee meeting (there had also been meetings on 10 and 12 October). The minutes record that the lead managers provided an updated proposed transaction timetable which contemplated that a full prospectus, including the financial section, would need to be provided by 19 October 2016 if the public offering was to go ahead in 2016.

In the evening of 14 October, Stephanie Charles (managing director investment banking at Credit Suisse) circulated a high level timetable update which provided the following key dates: 19 October as the date for the completion of the prospectus, including the financial section, as a verified final draft; 21 October as the date for the board and due diligence committee to sign off on the financials and the draft prospectus; and 24 October as the date for the analysts’ briefing, with the financials and the draft prospectus to be provided. The timetable had 17 November 2016 as the date for lodging the prospectus with ASIC with a listing date of 16 December 2016.

On 15 October 2016, Larsen sent an email to the non-executive directors, Brinkworth, Silver and Hirsch’s personal assistant. The email recorded that, as discussed with Hudson, the arrangements for the board and due diligence committee meetings for the following week had changed to allow time for the finalisation of the prospectus and financials and to give adequate time for the board to review them prior to meeting to approve the full prospectus. The email noted that the due diligence committee meeting scheduled for 17 October was cancelled and that it was to be held on 19 October 2016. The board meeting to approve the prospectus would be scheduled on either the weekend of 22 to 23 October or on 24 October, as required, to give the directors a minimum of at least 2 clear days to review materials. The requirement of 2 days’ notice had been imposed by Hudson.

On 19 October 2016, KPMG circulated a due diligence report of 168 pages. It was stated to be a draft subject to detailed review by management and for discussion purposes only. The draft was not complete and included assumptions where further documents were required to be provided. The EBITDA forecast for the 2017 financial year had been increased from $113 million in the 14 October draft due diligence report to $115.1 million.

Late on the afternoon of 19 October 2016, Svinos sent an email to the founders stating that Hudson had requested that the proposed board meeting be rescheduled to Sunday, 23 October, to give the directors enough time to review the draft prospectus. Both the due diligence committee meeting and the board meeting were re-scheduled for 23 October 2016.

On the evening of 19 October 2016, Laura Dickie of Credit Suisse sent an email to a large number of persons, including the non-executive directors, attaching the then-current draft of the financial section of the prospectus. It contained a number of outstanding areas which needed to be worked through with management and included drafting notes where further information was required from either management or KPMG.

On 20 October 2016, Morgan Stanley circulated an updated version of the draft prospectus. The covering email noted that verification had been completed on section 2, had largely been completed on sections 3, 5 and 6, and that section 3.7 (dealing with growth initiatives and improvements) was with Svinos to review. The draft prospectus did not contain financial information, only a place holder. The financial section was being drafted separately by Credit Suisse.

Hudson reiterates deadline

On 20 October 2016 Silver and Hirsch met with Hudson and Antonie to discuss issues raised by Antonie in relation to the financial materials. That night Ziegelaar sent an email to Svinos, the non-executive directors and others saying that the due diligence committee meeting would start at 10:00 am on the upcoming Sunday, 23 October, followed by the board meeting.

Hudson responded almost immediately that the times were fine with him on the assumption that the non-executive directors would have the complete suite of documents and reports by the time that they rose on Saturday morning, with no ‘left-overs.’ Hudson’s reply was forwarded to, amongst others, Stockdale, Mooney and Larsen of United and to Svinos. Svinos drew the email to the attention of Silver who did not consider the position unreasonable.

On 20 October 2016, Antonie also conveyed extensive comments to Charles on the section of the prospectus containing financial information.

Friday 21 October 2016

On Friday 21 October 2016, Hindle distributed by email the draft independent accountant’s report, which Hindle said was in standard form and was not likely to be the subject of any material changes.

At around 9:30 am Larsen sent an email to Freehills identifying the list of 18 persons responsible for verifying the information contained in the prospectus. Also, on the same day, Freehills prepared and provided to Larsen a draft agenda and minutes for the proposed due diligence committee meeting and the board meeting both scheduled for Sunday 23 October.

At about 5:00 pm on Friday 21 October, a meeting was held at Freehills to discuss financial matters and information provided by KPMG, including the EBITDA forecast which was to be included in the prospectus. Those present at the meeting included Hindle, Svinos, Ziegelaar, Hayden Stockdale, the interim chief financial officer of United Holdings, Brinkworth, Charles, Lennen, Burmeister and Antonie. Hudson was present by telephone. After referring to contemporaneous notes taken by Ziegelaar and the various accounts of those who were present, the trial judge found that at the meeting Hindle said that KPMG would need around a further week to complete its work.

There was also discussion as to whether the EBITDA figure for the 2017 year would be $112 million (a figure which Hindle said he was comfortable with) or $115 million, being the amount that Svinos said the founders wanted as a forecast. In part, the difference turned on the extent to which recent trading results might have called for a lower forecast. The judge accepted that Hindle said words to the effect that if the actual results to date ’don’t make it up then you can drive a bus through the forecast’. Antonie said that he found the meeting unsatisfactory and it was unable to achieve its stated purpose of finalising the numbers. He said a number of issues were raised including land capital expenditure, project management fees and the EBITDA forecast.

Saturday 22 October 2016: the deadline is missed

At 1:10 am on 22 October 2016 (Saturday morning), Morgan Stanley emailed an updated version of the prospectus marked up from the version circulated on Wednesday evening to the external advisers and non-executive directors including Hudson. It did not include the financial section. The financial section was still being drafted by Credit Suisse under the direction of Charles. A number of matters remained outstanding in the draft.

At 4:28 am on the same Saturday morning, Credit Suisse emailed an updated draft of the financial section of the prospectus to United management but not to any of the other directors. The covering email noted that it remained a work in progress, but that Antonie’s comments had been accounted for and material had been updated. The email was not sent to the non-executive directors.

During the course of Saturday, Svinos worked through the draft financial section with Silver. At the end of that process, Svinos sent an email to various representatives of the lead managers, KPMG, Freehills, Stockdale and Mooney and said that he was happy with some minor changes noted.

On Saturday morning, Antonie emailed Hudson stating that he would like to meet prior to the meeting the following day to discuss his position going forward. Antonie said he had thought hard overnight and had reached a decision. Upon receipt of the email, Hudson rang Antonie. Antonie informed Hudson he was not going to act dishonestly, or be misleading, by signing his approval on the terms contemplated in the draft minutes and therefore he would have no option but to offer his resignation. However, he said he wanted to meet with Hudson ‘to give it the most chance to see if we could get there.’ Hudson said that he was in the exact same position.

The deadline of Saturday morning with ‘no leftovers’ had been missed and no one had telephoned Hudson to explain why that had happened. Hudson and Antonie then spoke to Ziegelaar and expressed their concerns. Hudson and Antonie decided to await the outcome of the further drafting by the lead managers before making any final decision.

Ziegelaar sent an email to Hudson and Antonie at 1:24 pm on Saturday 22 October setting out why he thought they were not in a position to proceed with the pathfinder and to see if his views were valid. Ziegelaar’s email provided a script as to what might be said to Silver explaining why, in Ziegelaar’s view, the initial public offering could not proceed in 2016 and should proceed in April 2017:

1. We have worked very hard since we last spoke to you about the timetable but still have serious concerns about giving the prospectus to analysts, and presenting to them, on Monday.

2. We think we are about a week behind where we should be.

3. This is due to a number of reasons — the main ones are:

— the financials have kept moving – we have not had time to get comfortable enough to give them to the analysts — we are concerned they will change after we do so when we have more time to analyse them in the next few days — the [non-executive directors] and the banks are not comfortable to sign off on them as you normally would before they go to analysts

— we are not sufficiently prepared for the analyst presentation and the questions they may ask — the [management discussion and analysis] is not settled, it did not have full company input until yesterday and we have not rehearsed — the [management discussion and analysis] normally takes at least a week to settle and we have not had the time to do that – nor have we rehearsed

— we have not had the time to ensure that the financials are consistent with the rest of prospectus

— the store roll out numbers are not clear.

4. If we give the prospectus to analysts in its current state, we are concerned that it will look incomplete or inconsistent to them, we may not be able to answer their questions and it may have to be changed after we give it to them — later changes, especially to the financials, reflect badly on the IPO.

5. These risks could result in:

— a material decrease to the analyst valuation or

— the analysts having a negative view of United, which affects your ability to IPO next year.

6. The analysts have to be independent and can’t have conflicts of interest. Because of licensing and regulatory reasons, the [lead managers] can’t influence the views of analysts. For example, the [lead managers] are not able to correspond with analysts in relation to these matters. So we can’t manage them or give them a draft prospectus which could later change.

7. Unfortunately, this means that we can’t IPO this year.

8. What we think you should do is list in April next year and change the year end to December to deal with the forecast issue.

Among the responses to this email was an email from Hudson in which he said the tone needed to focus on the numbers only being settled on Friday and Saturday and only being put into the draft for review on Sunday morning. Hudson did not immediately, or at all, pass this email on to Silver, Hirsch or Brinkworth.

Mid-afternoon on Saturday 22 October, Hudson contacted Larsen to speak about the order of proceedings the following day and who would present at the due diligence committee meeting and the board meeting.

At 4:55 pm KPMG circulated the first part of its comments on the financial section.

During the course of Saturday, Ziegelaar, Hudson and Antonie decided to meet at 5:00 pm to assess the situation. It was decided that it would be preferable to meet without any representative from United so that an independent assessment could be made. At 5:00 pm Ziegelaar, Hudson, Antonie, Slack-Smith, Lennen, Charles and Burmeister spoke on the telephone. The meeting concluded with either Lennen or Burmeister saying they would go to Svinos to discuss the issues raised on the call, but that they would do so the following day after seeing what progress was made overnight.

At 11:55 pm, Hindle emailed KPMG’s updated report for the due diligence committee meeting. The covering note stated that the work was incomplete. However, Hindle gave evidence that the further documentation required by him at that time related more to the provision of the investigating accountant’s report for the lodgement of the prospectus rather than to the pathfinder, and would not have impacted on the actual numbers. He also gave evidence that he was content with the forecast EBITDA numbers by that time. However, Hindle gave evidence that he was ‘well aware’ that the due diligence committee could not give a recommendation to release the pathfinder on 23 October 2016, and the evidence indicated that he would not have signed off on the pathfinder that day himself.

Sunday 23 October 2016

At 12:31 am on Sunday 23 October 2016, Morgan Stanley emailed an updated version of the analysts’ presentation, including to the non-executive directors. The financial section remained blank.

At 1:36 am, Charles, from Credit Suisse, emailed an updated ‘current draft’ of the financial section of the prospectus, including to the United Holdings directors. It contained more than 50 drafting notes, identifying gaps or questions in the document. The judge noted that at trial there was little attempt by the applicants to explain which of the notes were material and which were not.[4]
[4]Reasons [320].

Slack-Smith, who lived in Sydney, flew to Melbourne on the Sunday morning and arranged to meet Hudson and Antonie at the Grand Hyatt Hotel. They decided that they were not in a position to approve the pathfinder that day. Hudson then telephoned Silver. Silver said that he was leaving for the city and that he would call Hudson back. He never did. When the founders arrived at Freehills’ offices, Hudson approached them and asked if he could talk to them privately. They went into a room and Hudson told them that the non-executive directors had reached a decision that they would not approve the pathfinder for release to the analysts the following day. Hudson made reference to the possibility of the public offering proceeding in 2017.

They then went into a large conference room. There were differing accounts of what was said. It is not necessary to refer to them. It is clear the founders accepted the public offering could not proceed in 2016 and work on it was to stop. The due diligence committee meeting and the board meeting did not proceed and accordingly United Holdings did not resolve that the pathfinder be released to the analysts.

On 24 October 2016, Silver told Larsen to stand the board down and that he would not try for another public offering.

B. Summary of Proceedings and Issues

The pleaded case

Before referring to the pleadings that are relevant to the case against Hudson it is necessary to say something about the course of the trial.[5] As the judge recorded, the parties were reminded repeatedly throughout the trial that the case would be determined on the pleadings.[6] The judge indicated that he would entertain any application to amend the pleadings. The statement of claim was last amended, with leave, on the ninth day of trial.[7] The pleadings gave rise to an agreed list of issues which identified the relevant issues that the Court was required to determine. They cleave closely to the pleaded case.
[5]Ibid [440]–[451].
[6]Ibid [442], [763]–[773].
[7]There were a further 8 days of hearing.

With respect, the judge was right to hold the parties to the pleaded case. The allegations made against Hudson were serious; the process leading up to the public offering was heavily documented, enabling the parties to have a very good understanding of what happened well before the trial commenced; and the parties were represented by experienced counsel and solicitors. In those circumstances, the pleadings defined, and confined, the issues.

The plaintiffs pleaded that Hudson knew, or ought to have known, by reason of his position as chairman of United Holdings that:

(a) it was in the best interests of United Holdings to complete the public offering by Christmas 2016 and to do so to approve the release of the pathfinder prospectus at the board meeting scheduled for 23 October 2016;

(b) if the release of the pathfinder prospectus to analysts was not approved on 23 October 2016 the IPO could not proceed to completion before Christmas 2016;

(c) if the IPO did not proceed in 2016 it was likely that United Holdings would not achieve an IPO for a considerable time thereafter if at all; and

(d) there was no basis to rationally believe that it was in the interests of United Holdings to not approve the release of the pathfinder prospectus at the board meeting scheduled for 23 October 2016.

It was alleged that, in breach of the statutory duties in ss 180, 181, 182 and 183 of the Corporations Act 2001 (Cth), Hudson:

(e) failed to circulate the ‘script email’ which Ziegelaar sent to Hudson and Antonie on 22 October 2016 to the founders, Brinkworth and Slack-Smith;

(f) failed, by no later than the morning of 22 October 2016, to inform the founders, Brinkworth and Slack-Smith:

(i) that he had ‘serious concerns about giving the prospectus to analysts, and presenting to them on Monday’;

(ii) that he thought the IPO was about a week behind where it should be;

(iii) that he was not comfortable to sign off on the financials and considered that he had not had sufficient time to get comfortable enough to give the financials to the analysts;

(iv) that he was not comfortable to sign off on the financials and considered United Holdings could not complete the public offering in 2016 and not before Christmas 2016.

(g) failed to immediately convene a meeting of the board of United Holdings to discuss the matters in (b)(i) to (iv); and

(h) failed to proceed with the board meeting on 23 October 2016.

It was then alleged that had Hudson performed each of his obligations and duties, then the matters identified in the script email either could have been resolved on a rational and fully informed basis so as to remove obstacles to approval by the board on 23 October of the release of the pathfinder prospectus; or else his concerns were not rational or capable of being formed in good faith.

It is important to note that the counterfactual, premised on the performance by Hudson of his duties, involved the board approving the release of the pathfinder on 23 October 2016. Put another way, it was not pleaded that had Hudson duly performed his obligations and duties some other alternative, such as a delayed release of the pathfinder or proceeding with the float without the provision of the pathfinder to analysts, would have followed. We shall return to the significance of this later in these reasons.

Returning to the pleading, it was alleged that in consequence of the breaches of duty United Holdings suffered loss and damage in that it did not receive the proceeds of the public offering, was unable to use those proceeds to pay for the cost of the public offering and was prevented from acquiring the United business.

Judge’s reasons

The judge’s reasons are comprehensive. Before turning to the specific issues relevant to Hudson, the judge set out the statutory provisions and relevant legal principles to be applied.[8] No criticism was made of this articulation of the applicable principles.
[8]Reasons [606]–[659].

As already noted, the trial proceeded on the pleadings and by reference to an agreed set of issues. The issues that are relevant to the application for leave to appeal are:

G.2 Did Hudson know, by reason of his position as chairperson of United Holdings, or ought he to have known that, in the circumstances set out in the United statement of claim:
(1)It was in the best interests of United Holdings to complete the public offering by Christmas 2016 and to do so to approve the release of the Pathfinder at the board meeting scheduled for 23 October 2016?
(2) If the release of the Pathfinder to analysts was not approved at the board meeting scheduled for 23 October 2016, the public offering could not proceed to completion before Christmas 2016?
(3)If the public offering did not proceed in 2016, it was likely that United Holdings would not achieve a public offering for a considerable time thereafter, if at all?
(4) There was no basis to rationally believe that it was in the best interests of United Holdings to not approve the release of the Pathfinder at the board meeting scheduled for 23 October 2016.

G.3 Did Hudson breach each of his duties under ss 180, 181(1)(a), 181(1)(b), 182 and 183 of the Corporations Act owed to United Holdings by:
(1)Failing to circulate the script email to the founders, as executive directors of United Holdings, Brinkworth as chief executive officer of United Holdings, and Slack-Smith as a non-executive Director of United Holdings, upon receipt of that email from Ziegelaar?
(2)Failing to inform the founders, Brinkworth and Slack-Smith (in the same capacities) by no later than the morning of 22 October 2016 that he had serious concerns about giving the prospectus to analysts, and presenting to them on 24 October 2016?
(3) Failing to inform each of the founders, Brinkworth and Slack-Smith (in the same capacities) by no later than the morning of 22 October 2016 that Hudson thought the public offering was about a week behind where it should be?
(4)Failing to inform each of the founders, Brinkworth and Slack-Smith (in the same capacities) by no later than the morning of 22 October 2016 that Hudson was not comfortable to sign off on the financials and considered that he had not sufficient time to get comfortable enough to give the financials to the analysts?
(5) Failing to inform each of the founders, Brinkworth and Slack-Smith (in the same capacities) by no later than the morning of 22 October 2016 that Hudson was not comfortable to sign off on the financials and considered United Holdings could not complete the public offering in 2016 and not before Christmas 2016?

G.4 Did Hudson breach each of his duties under ss 180, 181(a) and 181(b) owed to United Holdings by:
(1)Failing to immediately convene a board meeting of United Holdings on 22 October 2016 to discuss each of the matters relied upon in the United statement of claim?
(2) Refusing or failing to proceed with the board meeting scheduled to occur immediately after the meeting of the due diligence committee to be held at or about 3.30 pm on 23 October 2016, and thereby denying the Board the opportunity to approve and adopt the draft minutes prepared by Freehills for that board meeting, including the adoption of the resolution to distribute the Pathfinder to the analysts?

G.5Did the conduct of Hudson as alleged fall within the business judgment rule contained in s 180(2) and (3) of the Corporations Act?

On the issues raised as G.2 (Hudson’s knowledge), the judge found that Hudson did not know, nor ought he to have known, that it was in the best interests of United Holdings to have the directors approve the release of the pathfinder at the scheduled board meeting on 23 October 2016. Hudson understood that the pathfinder had to be approved by the board on Sunday 23 October if the public offering was to occur in 2016.[9] Failure to meet that deadline did not necessarily entail a considerable delay to the public offering and Hudson himself was of the view that the first half of 2017 was possible.[10] As the judge found, there was no suggestion from the founders, or anyone else, that if things were not ready to enable the public offering to proceed in a commercially sensible and viable manner in October, the public offering would not proceed soon after, and, most likely, in the first half of 2017.
[9]Ibid [559], [560], [662], [665].
[10]Ibid [666].

None of these conclusions are the subject of the application for leave to appeal.

We note there is no attack on the judge’s conclusion that the failure to provide the script email to the founders involved no breach of duty on the part of Hudson (issue G.3(1)). In answer to issues G.3(2) to (5) (failure to inform) the judge found as follows.[11]
[11]Ibid [668]–[674].

The judge commenced this part of his reasons by noting that in light of his earlier discussion, each of the matters identified in G3 could be addressed briefly. He made the general observation that there was no proper basis on the evidence to suggest Hudson’s subjective intentions were ever other than to do what he genuinely believed to be in the best interests of United Holdings.

The judge found first, that the ‘serious concerns’ held by Hudson, among others, had been expressly stated to Brinkworth and Svinos on the evening of 21 October.[12] Secondly, there was no duty on Hudson to inform the founders, Brinkworth or Slack-Smith on the morning of 22 October that he thought the public offering was about a week behind where it should be, as this was stated by Hindle as being Hindle’s view at a meeting attended by both Brinkworth and Svinos on 21 October 2016 and neither Hudson nor anyone else had expressed disagreement with him.[13] Thirdly, on the morning of 22 October 2016 the financials had not been finalised and Hudson could not have been under a duty to state that he was not comfortable to sign off on something which he did not have.[14]
[12]Ibid [670].
[13]Ibid [671].
[14]Ibid [672].

The judge added that, late on 22 October 2016, Hudson, along with Antonie, decided the question of whether there would be sufficient time to approve the financials should be deferred until the financials were received overnight.[15] Importantly, the judge found that Hudson had not formed the view on the morning of 22 October 2016 that the company could not complete the public offering in 2016 and therefore he could have been under no duty to inform anyone of that view.
[15]Ibid.

In relation to G.4 (failure to hold board meeting) the applicants confine their challenge to the finding in relation to paragraph (1). They contend that the judge should have found that the failure to immediately convene a board meeting on 22 October constituted a breach of duty.

On that matter, the judge held that to convene a board meeting on 22 October 2016 would have made little, if any, sense. He found that it would have been highly disruptive for a board meeting to be convened in the circumstances and that the board meeting scheduled for 21 October had been deferred to 23 October 2016 with a view to completion of the documentation. The judge also held that it was difficult to perceive what would have been achieved by holding a board meeting in the absence of documents critical to determining whether or not the pathfinder could be released to analysts.

The judge also held that any director, acting rationally on 23 October 2016, would not have approved the release of the pathfinder, regardless of what was said by others at the board meeting, because there were material steps that needed to be taken by various persons including the non-executive directors themselves before any of the non-executive directors would have been in a proper position to responsibly consider approving the release of the pathfinder to the analysts.

As for issue G.5 (business judgment rule), the judge concluded that there was no need to consider this issue. However, for completeness, he was satisfied that the decision made by Hudson on 23 October was plainly a business judgment made by him which, on the facts, was informed and arrived at reasonably, in good faith, and for a proper purpose. He concluded that there was an overwhelming basis for each of the non-executive directors to rationally consider that a decision not to approve the release of the pathfinder to analysts that day was in the best interests of United Holdings. The fact that material information was not available to them so as to enable them to make an informed assessment was, in the judge’s view, particularly relevant.[16]
[16]Ibid [679].

The judge’s conclusions on issues G.3(2) to (5), G.4 and G.5 are specifically adverted to in the proposed grounds of appeal. The applicants’ written case is directed to these conclusions. However, it is plain that these paragraphs contain a summary of the judge’s conclusions that must be read with the factual foundation set out in the preceding parts of the judgment.

The findings in the impugned paragraphs are built upon the detailed narrative that the judge had set out in the earlier parts of his judgment. The application for leave to appeal failed to grapple with essential anterior findings of fact made by the judge that provided the platform for the conclusions on the identified issues.

Grounds 1, 2, 2A, 2B, 3 and 4

By proposed ground 1 the applicants contend that the judge erred in failing to find that Hudson breached each of his duties to United Holdings under Corporations Act ss 180, 181(a) and 181(b) by failing to inform the founders, Brinkworth and Slack-Smith by no later than the morning of 22 October 2016 of the matters set out in issues G.3(2) to (5).

Proposed grounds 2A and 2B assert that the judge erred in holding that the ‘serious concerns’ held by Hudson had been expressly stated to Svinos on the evening of 21 October, and that the judge erred in finding that the founders were aware, by no later than 22 October, that Hudson thought the offering was about a week behind where it should be.

Relatedly, by proposed ground 3 the applicants assert that the judge erred in not finding that Hudson also breached his duties by failing to immediately convene a board meeting of United Holdings on 22 October 2016 to discuss those concerns.

Proposed grounds 2 and 4 are the obverse of proposed grounds 1 and 3, and assert that the judge ought to have found the identified matters established.

Applicants’ submissions

The applicants’ essential case was that Hudson, as chairman, was duty bound to bring his concerns to the attention of the founders on the Saturday and that the judge’s finding that this was unnecessary because his concerns had been communicated to them through Svinos on the day before was factually wrong.

The applicants say that the critical finding of the judge as to why Hudson was not obliged to bring the identified matters to the attention of the founders and other non-executive directors was that the serious concerns held by Hudson had already been communicated by him on the evening of 21 October 2016 to a number of people including Svinos.[17] It was submitted that the finding that Hudson had communicated his concerns to Svinos on 21 October, and that this was the equivalent of telling Silver, was inconsistent with incontrovertible facts and uncontested testimony.[18]
[17]Reasons [670].
[18]Robinson Helicopter Co Inc v McDermott (2016) 90 ALJR 679; [2016] HCA 22.

The applicants submitted that the judge erroneously divided up the questions and ‘dealt with them piece by piece without considering the totality of the circumstances before the Court’. They submitted that as a consequence of ‘hiving off’ individual questions the judge failed to consider the totality of the events in context, including what were said to be concessions by Hudson that, as chairman, he was the leader in ensuring that the board worked to make decisions in the best interests of the company.

The applicants submitted that Hudson was obliged to make timely disclosure to all members of the board of his knowledge or reasonable perception of threats to the commercial objective of the company to complete the public offering by Christmas 2016. In describing the content of the duty owed to the company, the applicants emphasised that the content of the duty to take reasonable care and act diligently is affected by the particular factual arrangements operating within the company and how work is distributed across the various officeholders. It was said to be relevant that Hudson was the chairman, had extensive commercial and legal experience and had been appointed for the purpose of the public offering. The fact that the founders were not members of, and did not attend meetings of, the due diligence committee, increased the importance of Hudson’s obligation to assimilate and pass on information and updates to the other directors.

Hudson’s duty was said to be to ensure that all relevant information was brought to the board’s attention as a necessary aspect of each director’s obligation to inform themselves of matters that were relevant to the share issue. It was said that by the morning of 22 October the point had been reached that he could no longer remain silent.

Respondent’s submissions

The respondent referred in detail to the findings of fact made by the judge and identified what he submitted were 12 undisputed findings of fact. It is not necessary to set those findings out. In summary the respondent submitted that:

(i) the trial judge’s approach in reciting and making specific findings in relation to the entire chronology of facts surrounding the preparations for the public offering, before dealing with each of the specific allegations of breaches by Hudson, was entirely proper and answered the agreed statement of issues;

(j) it was clear to all those involved in the public offering that the documents were not in any state to be provided to the analysts, and the applicants had not demonstrated that even (at its highest) an extra 72 hours would have been sufficient for the documents to have been completed;

(k) all those involved were working towards completing the pathfinder by the 23 October deadline in any event; and

(l) Hudson gave evidence as to why he was uncomfortable with approving the documents, which the judge accepted.

More generally, the respondent argued that it was reasonable for Hudson, as a non-executive director, to assume that the various professional advisers engaged for the purpose of the public offering would be advising the founders on the progress of the pathfinder documents, and it was the responsibility of the joint lead managers, not Hudson, to manage the public offering on behalf of the board.

The trial judge’s finding that Silver relied upon Svinos and Stockdale to ’keep him up to date with respect to the public offering and to communicate any information they learned in relation to it’ remained unchallenged. Hudson was under no obligation to communicate his ’internal concerns’ to the executive directors. Regardless of whether and what Svinos had communicated to Silver regarding the meeting on the evening of 21 October, it was ’conspicuously obvious’ to everyone involved that by the morning of 22 October the non-executive directors, including Hudson, would have had serious concerns as to the progress of the timetable.

Consideration: applicable principles

The applicants alleged breach by Hudson of his duties under ss 180, 181, 182 and 183 of the Corporations Act. As the judge’s reasons make clear, those provisions provide different obligations. Nevertheless, the applicants’ submissions did not deal separately with the different provisions.

Section 180(1) provides that a director must exercise his or her powers and discharge his or her duties with the degree of care and diligence that a reasonable person would exercise in the corporation’s circumstances and having regard to the responsibilities of the officeholder.

Relevantly for the approval of financial statements, Middleton J said in Australian Securities and Investments Commission v Healey:[19]

What each director is expected to do is to take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an enquiring mind to the responsibilities placed upon him or her. … Because of their nature and importance, the directors must understand and focus upon the content of financial statements, and if necessary, make further enquiries if matters revealed in these financial statements call for such enquiries.
No less is required by the objective duty of skill, competence and diligence in the understanding of the financial statements that are to be disclosed to the public as adopted and approved by the directors.
No one suggests that a director should not personally read and consider the financial statements before that director approves or adopts such financial statements. … The reading of financial statements by a director is for a higher and more important purpose: to ensure, as far as possible and reasonable, that the information included therein is accurate. The scrutiny by the directors of the financial statements involves understanding their content. The director should then bring the information known or available to him or her in the normal discharge of the director’s responsibilities to the task of focussing upon the financial statements. These are the minimal steps a person in the position of any director would and should take before participating in the approval or adoption of the financial statements …

[19](2011) 196 FCR 291, 298–9 [20]–[22].

As the judge correctly recorded, whether a director has exercised a reasonable degree of care and diligence in a given scenario can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.[20]
[20]Reasons [612] citing Australian Securities and Investments Commission v MacDonald (2009) 256 ALR 199, 245–7 [236] (Gzell J); [2009] NSWSC 287; Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373, 398 [99]–[102] (Brereton J); [2006] NSWSC 1052; Vrisakis v Australian Securities Commission (1993) 3 WAR 395, 449-50 (Ipp J); [1993] WASC 438.

Section 181 provides that a director must exercise his or her powers and discharge his or her duties in good faith in the best interests of the company and for a proper purpose. The section provides two separate duties.[21]
[21]Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 39 WAR 1, 548 [4456] (Owen J); [2008] WASC 239.

The judge noted the divergent authority concerning the meaning of the phrase ‘in good faith’ and whether it imposes a subjective, objective or combined standard.[22] It is not necessary, for the purposes of this application, to identify or resolve that divergence.
[22]Reasons [630]–[638].

In order to establish a breach of the second duty it is necessary to establish the purpose for which the relevant power was exercised and that it was collateral to the proper purpose of the power or otherwise improper. Necessarily, the starting point is to identify the power in question. Having done that, it is necessary to determine the purpose for which the power was exercised and then assess whether that identified purpose was proper.

Section 182 provides that a director must not improperly use his or her position to gain advantage for themselves or cause detriment to the company. Section 183 provides that a director must not improperly use information they have gained as a result of their position to gain advantage for themselves or cause detriment to the company.

C. Application of the principles
Was Hudson under a duty to convey his concerns on 22 October?

Hudson was under a duty to exercise reasonable care and diligence and to take such steps as were open to him to avoid reasonably foreseeable harm to the company. It may be assumed for present purposes that the proposed share issue and restructure was in the best interests of the company,[23] although that could only be so if the process was done lawfully and prudently.
[23]As to which see Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483; [1968] HCA 37.

Obviously enough, as he acknowledged in his evidence, Hudson could have communicated directly to the directors on the Saturday or on the Sunday morning and gone through his concerns with them. In part the judge found it unnecessary for Hudson to do so because the issues of concern were known to the founders. Whether that was so is only significant if Hudson was obliged to bring the identified matters to the attention of the founders. That means the fundamental question is whether Hudson was under a duty to speak directly to the founders on the Saturday.

In order to answer this question it is relevant to refer to the findings made by the judge as to what Hudson knew or ought reasonably to have known on the Saturday morning.

First, and most importantly, he knew that the documentation was incomplete but remained a work in progress. By the Saturday morning those responsible for the preparation of the documents, which included Freehills, KPMG, and the lead managers, had been working extensively with United in order to prepare the documents.

Notwithstanding the deployment of those substantial resources Hudson, and the other non-executive directors, did not receive the full suite of documents and reports on the Saturday morning as requested. On Saturday morning they received an updated version of the prospectus with no financial section. The public offering documents were not received until late Saturday night. The updated draft of KPMG’s independent accountant’s report was sent at 11:55 pm. The updated financials section was sent through at 1:36 am on Sunday morning with more than 50 drafting notes still contained in it.[24]
[24]Reasons [254], [319], [320], [323], [541], [662].

Secondly, Hudson had unequivocally informed all those involved in the process, including Silver, that he and the other non-executive directors wanted at least two clear days to review the final and verified pathfinder before being asked at a board meeting to approve its release.[25]
[25]Ibid [149]–[153].

Late on 20 October 2016 Hudson sent an email addressing the timing of the upcoming due diligence committee and board meetings for the weekend which was at that time uncertain. He indicated his agreement for the due diligence committee meeting to commence at 10:00 am on the upcoming Sunday ‘but on the assumption that we have the complete suite of documents/reports by the time we rise on Saturday morning with no “left-overs”’.[26] That email was forwarded to, amongst others, Stockdale, Mooney, Larsen and Svinos. Svinos drew the email to the attention of Silver, who did not consider that position to be unreasonable. In this respect the judge noted that the board meeting was originally scheduled for Friday 21 October but was moved to Sunday to allow for the two-day review process.
[26]Ibid [197].

Silver must have been aware that the documentation was incomplete on the Saturday because he spent some time that day with Svinos working through the financials.

Thirdly, there was every reason for Hudson to believe that all that could reasonably be done to finalise the documents was being done. Conversely, there was no reason for him to think that by speaking up the documentation could have been completed any earlier. The directors were not responsible for drafting the documents or providing their content. That was the responsibility of management and had been largely delegated to the expert advisers, who were aware of the agreed timetable.

Fourthly, Hudson believed that the founders had retained expert external advisers to keep them informed of, and advise on, the progress of the public offering. That was significant in at least two respects. Firstly, it was reasonable to assume that the predicament facing the company, if it was to achieve approval on 23 October, would have been well known to all participants including the founders. Secondly, it was also reasonable to assume that he was not the primary source of the information being provided to the directors.

In this respect it was significant that Silver and Hirsch did not seek to be involved in the day-to-day matters required to be completed in preparation for the public offering. Svinos was the interface between the founders and the others involved in the process.[27] Svinos was described by Silver as his ‘right-hand man in the process’. Given his position at KPMG he was well placed to fulfil that role, at least insofar as it meant that he was across the factual detail.
[27]Ibid [205], [499], [500], [508].

Fifthly, the board meeting had been fixed for the Sunday. It was appropriate for Hudson to wait and speak with the founders on the Sunday. He had not formed a final view before then. As the judge found, Hudson decided not to approve the release of the pathfinder at the meeting with the other non-executive directors at 1:30 pm on Sunday and no decision had been made before that time.[28]
[28]Ibid [275], n 111, [362], [363], [513], [514], [528].

The combination of these matters entailed that it was reasonable for Hudson to wait for the Sunday and there was no reason for him to consider that it would be harmful to wait. The directors and the company’s external advisers, the lawyers, accountants and bankers, were under a duty to ensure that the documentation that would be released to the market was accurate, fair and defensible. That meant that the process of its production needed to be orderly, with appropriate input from the various experts both financial and legal. It also meant that the directors needed sufficient time to consider the pathfinder in order to satisfy themselves that it was in a form suitable for release. In this context it is notable that the judge found that the pathfinder was never in a state where it could responsibly be released to analysts, notwithstanding the continued efforts of those responsible for its production.[29]
[29]Ibid [667].

The applicants’ submissions inferred that these expectations were perhaps naïve and had to give way to the hectic realities of corporate life. As senior counsel put it, ‘this is in a pressure cooker. This is trying to get the deal done, this is what merchant bankers do.’ The commercial pressures to achieve an acceptable financial outcome are sometimes a necessary aspect of the context in which directors operate. However, they do not trump the obligations on directors to ensure that they have sufficient opportunity to consider and scrutinise information to be provided to potential investors. Nor do they require the dispensation of ordinary processes of corporate governance which provide for the conduct of board meetings and for the exchange and transaction of business within an orderly framework. Plainly directors are not expected to only communicate with each other in the confines of a formal board meeting and the exigencies of corporate activity will often require communication outside of the boardroom. However, directors are not necessarily obliged to share their views and concerns with each other as they are being formed and where they remain provisional or are liable to evolve as circumstances change.

The conclusion that Hudson was not obliged, as a director, before 1:30 pm on the Sunday to pass on to the other directors his concerns about the prospect of approving the pathfinder for release to analysts on the following Monday leads to the further conclusion that his position as chairman did not impose such an obligation either. Accepting, as the applicants’ submitted, that it is the role of the chairperson of a board of directors to oversee and ensure the effective running of the board, there was no basis for causing the board to convene at any earlier time, for the reasons already stated. Nor does the fact that Hudson was the chairman mean that his own personal concerns as a director compelled the communication of those concerns to the remainder of the board any earlier than this ultimately happened.

Was Hudson entitled to proceed on the basis the founders were aware of the problems?

Since there was no legal obligation that flowed from Hudson’s position of chairman to voice his concerns on the Saturday, the applicants’ case on breach of duty must fail. Whether the judge was right in holding that it was also unnecessary because the concerns had already been expressed does not matter. However, for the reasons that follow there was no factual error of the kind alleged.

The more specific attack under cover of proposed grounds 2A and 2B concerns the finding of the judge in [670], that the ‘serious concerns’ held by Hudson, amongst others, had been expressly stated to Brinkworth and Svinos on the evening of 21 October. That finding is based on an earlier part of the reasons, at [233]–[248], which deals with the meeting in some detail. We have set out a precis of those findings at [35] to [36] above.

Reading the reasons fairly, it is clear that the judge was saying that the substance of the concerns was conveyed at the meeting on 21 October. His Honour did not focus on who voiced those concerns. That is entirely understandable. Having regard to the state of the documentation, the suggestion that the timetable was in serious jeopardy was not a startling revelation, nor one which depended on any particular insight from Hudson. The tenor of the conversation that evening was that there were significant challenges to meeting the timetable. Hindle said KPMG would need a further week to complete their work.[30] Nobody including Hudson dissented from that suggestion.[31] It follows that the applicants’ characterisation of the judge’s finding about the meeting on the Friday evening is inaccurate.
[30]Ibid [233]–[248], [506], [508], [510].
[31]Ibid [671].

In oral argument, senior counsel for the applicants submitted that Hudson should have passed on the script email and also advised the founders that Antonie had told Hudson that he would have no option but to offer his resignation if he was asked to approve documents that were misleading or incomplete. Neither matter is reflected in the proposed grounds of appeal. In any event the matters in the email were broadly expressed and were discussed at the Friday meeting. The main point of concern, that the financials were incomplete and kept changing, was apparent from the drafts themselves. Antonie’s observation was qualified by his acceptance that he would wait and see how the documentation progressed and did not reflect a final position.

Whether Svinos actually passed on the concerns which were expressed at the meeting on the Friday to the founders is not the critical question. Rather, it is whether it was reasonable for Hudson to assume that Svinos, the other external advisers, and the obviously observable facts, would have brought home to the founders the risks that stood in the way of a sign-off on 23 October. In our view it was reasonable for him to proceed on that basis. The fact that Silver was himself working with Svinos on the Saturday to finalise various aspects of the documentation meant that he must have known that Hudson’s reasonable expectation as to time to review the material had not been realised. It would be remarkable if a person in Silver’s position had been oblivious to the risks that the delay might pose for meeting the timetable.

Did Hudson’s failure to speak to the founders on 22 October cause any harm to United Holdings or would the outcome have been different had he done so?

Further, even assuming that the founders were caught unawares, the applicants entirely failed to establish that the progress of the public offering would have been different had Hudson spoken of his concerns on the Saturday. This means that the applicants failed to establish that any omissions of Hudson, assuming that they constituted a breach of his duties, caused any harm to the company or even that harm was reasonably foreseeable.

Asked by the Bench what would have transpired had Hudson identified these matters on the morning of 22 October, senior counsel for the applicants answered that ‘nobody could say that because it was a hypothetical’, adding that the applicants did not know whether disclosure might have led to the pathfinder being approved on the Sunday or might have led to an alternative course. It was submitted that, with the involvement of the founders, ‘a way forward’ might have been found. One example given by counsel was that the time given to the analysts for examination of the pathfinder before the lodgement of the prospectus with ASIC on 17 November 2016 could have been compressed. This factual hypothesis does not arise on the pleaded case which was that the pathfinder would have been approved on 23 October. For that reason alone it can be put to one side.

In any event, as already observed, those charged with preparing the documentation continued working through the weekend. Hudson left open the possibility that the paperwork would be suitable for considered review and approval until the last moment. The judge found that late on 22 October 2016, Hudson, along with Antonie, decided the question whether or not there would be sufficient time to approve the financials should be deferred until they were received overnight.[32]
[32]Ibid [672].

The applicants’ submission that Hudson should have identified his concerns, as reflected in the script email, and that these matters could have been ‘targeted’, ignores a number of important features. First, Hudson did not have a specific concern about a particular item or forecast. Rather he was looking for a complete set of the financial documents so that he could satisfy himself that they were suitable for release. It was not a matter of addressing a specific variable or estimate. As already noted there remained a number of gaps in the documentation and these were ‘known unknowns’. However it would not be possible for Hudson to know whether or not these or other matters were of concern until he had seen them and had a reasonable opportunity to digest them.

Notwithstanding the work that continued to be undertaken on the Saturday and into the early hours of the Sunday morning, the pathfinder was not in a form which any responsible director could approve. By the time of the Sunday board meeting the pathfinder was significantly unverified. For example, there had been no verification at all of the financial section.[33] The judge found that there was not a real possibility as at 23 October that the pathfinder and related documents would have been in a satisfactory state in the next one to three days.[34]
[33]Ibid [352].
[34]Ibid [563], [564].

Moreover, there was a practical dimension. The evidence established that there was a financial imperative to provide analysts with a copy of the pathfinder in, or near to, final form in advance of filing with ASIC.[35] Any material variations between the documents considered by the analysts and those ultimately filed with ASIC risked a loss of confidence in the documentation on the part of those responsible for advising investors whether to subscribe, imperilling the return on the public offering. In other words, taking a cautious approach was both consistent with Hudson’s duties as a director and chairman and avoided the real possibility of harm had the pathfinder been approved in an incomplete or inaccurate state.
[35]Ibid [85], [139]–[140], [231]–[232], [662(5)], [754].

Importantly, the evidence did not establish that it was in the best interests of the company to complete the public offering in 2016 rather than at a later time, or that there would be any significant detriment, in terms of the price yield or the appetite of investors, if the offer was delayed until 2017.

Certainly, completion in 2016 was the target and the expectation of the founders. However, as part of resolving issue G.2 (Hudson’s knowledge) the judge found that Hudson was of the view that the first half of 2017 was an appropriate time for the public offering and this was consistent with advice that had been furnished up to and on 23 October 2016.[36] As at Sunday 23 October, Hudson was not aware of any reason why the public offering could not proceed in 2017.[37]
[36]Ibid [666].
[37]Ibid [582].

In short, there was no breach of duty, harm was not a reasonably foreseeable consequence of waiting, and the applicants failed to establish that the failure to speak up had any adverse consequences for the company. The judge’s conclusions were impeccable.

Was there a breach of the statutory duties in ss 180, 181, 182 and 183 of the Corporations Act?

Although the applicants did not attempt to bring the grounds back to the duties imposed in ss 180, 181, 182 and 183 of the Corporations Act it is desirable to return to them in the light of our conclusions.

First, Hudson’s conduct throughout the time he was chairman of the board revealed an assiduous attempt to act in the best interests of the company. More specifically, he exercised care and diligence in his approach to his duties on 22 and 23 October 2016. His obligations as a director included to carefully consider the documentation that had been, or was in the course of being, prepared for the public offering. He did so. As the judge observed he was never provided with a complete set of documentation, despite his exhortations, and the documentation was never in a state which could be reasonably signed off by him.

As chairman, he also had responsibility for overseeing the deliberations of the board and ensuring that his fellow directors had access to the material they needed, in a reasonable time, in order to discharge their duties to the company. Again, the evidence established that he discharged that duty. There was no want of care on his part.

In terms of his obligations under s 181 the judge noted there was no proper basis to suggest Hudson had subjective intentions other than to do what he genuinely believed to be the best interests of United.[38] That conclusion was undoubtedly sound.
[38]Ibid [668].

The allegation that Hudson acted for an improper purpose contrary to s 181 or s 182 in declining to inform the founders of his concerns or call a board meeting was based on a submission that his purpose in doing so was to avoid confrontation with Silver. It is clear from the judge’s findings that if Hudson was anxious about Silver’s response in the event that the float would not proceed in 2016, that anxiety did not motivate or actuate his decisions. He, together with Antonie, desired to proceed to the public offering in 2016. They delayed, as long as possible, before reaching their final conclusion that the documentation was simply inadequate to be provided to analysts and there was no way to render it satisfactory within the timeframe that had been set and understood by each of the participants.

Finally, in terms of s 183 there was simply no misuse of information to either gain advantage for Hudson or some other person or cause detriment to United Holdings or United.

We would refuse leave to appeal on proposed grounds 1, 2, 2A, 2B, 3 and 4.

Ground 5

By proposed ground five the applicants seek to challenge the judge’s finding that to convene a board meeting on 22 October 2016 would have made little, if any, sense.[39]
[39]Ibid [677].

In large measure this ground depends on success on the earlier grounds.

The findings of the judge demonstrated that the advisers were working to complete the pathfinder in accordance with the timetable. As the judge found, the non-executive directors, the lead managers, KPMG and Freehills were all working diligently and in some instances for extremely long hours in a genuine attempt to achieve a successful placement in 2016.[40]
[40]Ibid [752].

There is no factual foundation in the evidence or the findings made by the judge to suggest that calling a board meeting would have altered the progression of the documentation. The vague assertion in the amended application for leave to appeal that the board, had it convened on 22 October, would have been able to find ‘a way forward’ is entirely bereft of evidentiary support.

We would refuse leave to appeal on proposed ground 5.

Ground 6

By proposed ground 6 the applicants submit that had it not been for Hudson’s failure to perform his duties and had he convened a board meeting on 22 October to discuss the matters of concern ‘the position on 23 October 2016 would have been different and the board would have been able to find a way forward which would have allowed the initial public offering to proceed’.

What we have said above largely deals with this proposed ground. Apart from not forming part of the pleaded case, the suggestion that there was ‘a way forward’ that the founders could have discovered on Saturday amounts to no more than speculation without a footing in the evidence or the findings made by the judge. The reason the financial documentation was not complete was because of failure to complete the work in a timely manner.[41] It was not because the wrong work was being done or because the team had lost its focus.
[41]Ibid [534]–[549], [591].

The applicants did not establish at trial that the gaps in the financials that were sent on early Sunday morning were immaterial or easily addressed. They did not even attempt to make good that contention. Even if the documents were completed early on Sunday (and the judge found as a fact that this could not have been achieved) this would have left insufficient time for the directors to satisfy themselves that the pathfinder should be released.

The board meeting scheduled for the Sunday was to follow directly after a meeting of the due diligence committee at which the committee would be asked to give final sign-off on the documentation. Had the due diligence committee met as scheduled on the Sunday, the members of the due diligence committee would not have signed off and approved the release of the pathfinder.[42] The judge found that Lennen of Credit Suisse, Burmeister of Morgan Stanley, Larsen the company secretary and legal counsel for United, Hindle of KPMG and the CEO and CFO of United (Brinkworth and Mooney) all would not have signed off on the pathfinder on Sunday afternoon.
[42]Ibid [554].

The attempt to place the responsibility for the failure of the public offering to proceed in 2016 on the shoulders of Hudson and to contend that he could have done more on the Saturday is entirely unmeritorious. The caution and concerns exhibited by Hudson and the other non-executive directors throughout the process were consistent with the views of the expert advisers. They were well justified by the predicament facing them. As unpalatable as the delay may have been for the founders, there is no foundation for the allegations that Hudson breached his duty by not speaking to them on the Saturday.

We would refuse leave to appeal on proposed ground 6.

Grounds 8A and 8B

The applicants sought leave at the hearing to add proposed grounds 8A and 8B in these terms:

8A.The learned trial Judge erred in holding (at [679]) (if he did so hold) that the decision made by Hudson on 23 October 2016 not to approve the Pathfinder was a business judgment which on the facts was informed and arrived at reasonably, in good faith and for a proper purpose.
8B.The learned trial Judge erred in holding (at [679]) (if he did so hold) that there was a sufficient, indeed overwhelming, basis for each Non-executive Director to rationally consider that his decision not to approve the release of the Pathfinder to the analysts that day was in the best interests of United Holdings.

These proposed grounds are focused on a single paragraph in the judge’s reasons and it is convenient to set out in full:[43]

There is no need to consider this issue. But, for completeness, the facts demonstrate the decision made by Hudson on 23 October 2016, as well as by the other Non-executive Directors, not to approve the Pathfinder on that day was plainly a business judgment made by each of them which, on the facts, was informed and arrived at reasonably in good faith and for a proper purpose. There was a sufficient, indeed overwhelming, basis for each Non-executive Director to rationally consider that his decision not to approve the release of the Pathfinder to the analysts that day was in the best interests of United Holdings. It is particularly relevant in this context that material information was not reasonably available to Hudson (or the other Non-executive Directors) in the lead up to 23 October 2016, so as to enable him (or them) to make an informed assessment.

[43]Ibid [679] (citations omitted).

Given there was no error in the judge’s conclusion that Hudson did not breach s 180(1) of the Corporations Act it is not necessary to consider whether his conduct fell within the business judgment rule contained in s 180(2) and (3). However, the reasoning we have already set out shows these grounds to be entirely without merit.

Since the business judgment rule does not arise for consideration we would refuse leave to add proposed grounds 8A and 8B.

D. Costs Appeal

By order dated 26 June 2018 the judge dismissed the proceeding against Hudson. On 25 September 2018 the judge ordered that the plaintiffs pay Hudson’s costs of and incidental to the proceeding, including reserved costs, to be taxed on an indemnity basis. The judge gave separate reasons for ordering costs on an indemnity basis.

In so far as the costs reasons related to Hudson, the judge concluded that a special order for costs was warranted because the United entities ought to have known that the case against Hudson had no real prospect of success. In that respect the judge expressed his view that the case was so lacking in merit that that fact alone justified an award of costs on an indemnity basis.

In addition, the judge held that an offer of compromise, by which Hudson had offered to walk away from the proceeding with no order as to costs, which Hudson had served approximately three weeks before trial, was a reasonable offer and it was entirely unreasonable for the United entities to decline to accept it. The judge explained that if costs had not been awarded on an indemnity basis because the proceeding had no real prospect of success, he would have awarded costs on an indemnity basis because of the United entities’ unreasonable rejection of that offer. On that basis the indemnity costs order would have applied in respect of costs from 6 March 2018, being the second business day after the relevant offer had been made.

In addition to those reasons the judge made two further observations. First, he indicated there was ‘some substance to the allegation that it appears Hudson was being pursued by the United entities for an ulterior purpose or with some ulterior motive’.[44] His Honour explained:[45]

To explain, on 28 August 2017, a witness outline on behalf of Hudson was filed by Freehills in support of its defence to the United Proceeding. At that time, no witness outline had been filed on behalf of the other non-executive directors. Notwithstanding a key allegation against Hudson was that all the directors ought to have approved the Pathfinder for release to the analysts on 23 October 2016, neither of the other directors were joined as defendants. Moreover, the reaction of Silver to a former employee, Hayden Stockdale (’Stockdale’), agreeing to Freehills filing a witness outline in the United Proceeding on his behalf is instructive. Silver made serious and unwarranted threats against Stockdale in response to learning of the witness outline in question.

It was plain from this, and other evidence before the court, that Silver did not take kindly to, and was most unaccepting of, anyone who crossed him with respect to the issues relating to these proceedings.

[44]Costs Reasons [48].

[45]Ibid [49]–[50] (citations omitted).

The second matter noted by the judge was that as more and more evidence was led during the trial as to why there was no merit to the suggestion that the pathfinder ought to have been approved by the board on 23 October 2016, the United entities sought to pursue not only alternative inconsistent, but substantially unpleaded, avenues of attack that were also of little merit.

The applicants seek leave to appeal from the costs order on four proposed grounds. They are:

1. The learned Judge erred in holding (at [45]) that the applicant ought to have known that the case against the respondent had no real prospect of success.
2. The learned Judge erred in holding (at [45]) that the applicant’s case was so lacking in merit that that fact alone justified an award of costs in favour of the respondent on the ordinary indemnity basis, including reserved costs and the respondent’s costs of the application to join him to the proceeding.
3. The learned Judge erred in holding (at [46]) that it was entirely unreasonable for the applicants to decline to accept the First Hudson Offer.
4. The learned Judge erred in holding (at [48]–[50]) that there was some substance to the allegation that the respondent was being pursued by the applicants for an ulterior purpose or with some ulterior motive.

In support of proposed grounds one and two the applicants submit that the judge was wrong to conclude that the applicants ought always to have known that the pathfinder could not have been approved on 23 October 2016 or that the case was a hopeless one. In relation to proposed ground three the applicants submitted that an offer of compromise of zero dollars inclusive of costs is not a genuine offer to resolve the proceeding but rather an offer that requires the other side to capitulate.

The final proposed ground of appeal from the costs orders seeks to challenge the two additional observations made by the judge set out above.

Principles

The making of a costs order entails the exercise of a discretion. Accordingly, the principles in House v The King[46] apply to any application for leave to appeal. More specifically, this Court has observed that appeals from orders as to costs are rightly treated as exceptional and require this Court to exercise particular restraint.[47] The authorities explain that the main rationale for that caution is that the trial judge is almost always best placed to assess in whose favour and to what extent the discretion as to costs should be exercised.
[46](1936) 55 CLR 499.
[47]AJH Lawyers v Mathieson Nominees Pty Ltd [2015] VSCA 227 [89] (Hansen and McLeish JJA, Robson AJA agreeing at [92]); Transport Accident Commission v O’Reilly (1999) 2 VR 436, 457 [46] (Ormiston JA); PCCEF Pty Ltd v Geelong Football Club Ltd [No 2] [2019] VSCA 148 [38]–[41] (Whelan, McLeish and Emerton JJA).

We are not persuaded that there is any error in the exercise of the discretion to award costs on the indemnity basis in this case.

The judge’s assessment of the case against Hudson accords with our own; it was a very weak case. The judge did not underestimate the strength of the case. The documentary record and the oral evidence clearly showed that there was no realistic prospect that a director acting responsibly and conformably with his or her duties would have approved the pathfinder for release to analysts on 23 October 2016. The submission that a ‘way forward’ would have been found in the event that Hudson had given voice to his concerns on the Saturday and that this would have resulted in the completion of a pathfinder in an acceptable form for release had no support in the evidence.

The costs order was made on the basis of the judge’s assessment of the prospects of success and in our view it was entirely open to the judge to proceed on that basis. That being so it is not necessary to determine whether an alternative foundation for the order, at least from 6 March 2018, was also available by reason of a failure to accept a reasonable offer of settlement.

Finally, the two observations made by the judge did not form the basis, or part of the basis, for the costs order made by him. In those circumstances there is no need for this Court to consider them.

The application for leave to appeal the costs order should be refused.

– – –

SCHEDULE OF PARTIES

BETWEEN

United Petroleum Australia Pty Ltd (ACN 164 398 832)	First Applicant
United Petroleum Pty Ltd (ACN 085 779 255)	Second Applicant
United Petroleum Holdings Ltd (ACN 610 690 849)	Third Applicant
Avi Silver	Fourth Applicant
Eddie Hirsch	Fifth Applicant
Kinlee Pty Ltd (ACN 075 196 093) as trustee for the Kinlee Silver Trust	Sixth Applicant
Apson Pty Ltd (ACN 075 196 084) as trustee for the Apson Hirsch Trust	Seventh Applicant
and
Martin Moule Hudson	Respondent

Citations

United Petroleum Australia Pty Ltd (ACN 164 398 832) (and others according to the attached schedule) v Martin Moule Hudson [2020] VSCA 14

Most Recent Citation

Cases Citing This Decision

4

United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2020] VSCA 15

VicBeef Holdings Pty Ltd v Chen [2021] VSC 546

Director of Public Prosecutions v Baskerville [2022] VCC 776

Cases Cited

12

Statutory Material Cited

0

United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 347

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[2020] VSCA 14

13 February 2020