Walker v Wimborne

[1976] HCA 7

HIGH COURT OF AUSTRALIA

Barwick C.J., Mason and Jacobs JJ.

WALKER v. WIMBORNE

(1976) 137 CLR 1

3 March 1976

Companies

Companies—Liquidation—Directors—Negligence, default, breach of duty or breach of trust—Companies administered as a group by common directors—Payment by one company to another in group—No benefit or advantage to payer company—Payer company insolvent—General policy for movement of funds between companies—Payments to employees of other companies—Gratuitous payments to former director in recognition of past services—Whether payments made negligently or in breach of duty or breach of trust—Companies Act, 1961 (N.S.W.), s. 367B (1) (b).

Decisions

1976, March 3.
The following written judgments were delivered: -
BARWICK C.J. My brother Mason, in the reasons for judgment which he has prepared in this matter and which I have had the advantage of reading, sets out the relevant facts found by the Supreme Court of New South Wales. On those facts a finding against the respondents in respect of the sums of $10,000, of $40,523.82 and $17,960.93 was, in my opinion, inescapable. No interest of the company concerned could have justified those payments out of its funds. I agree with my brother Mason's reasons for concluding that in respect of those sums the appellant should succeed. (at p3)

2. After consideration I am prepared to agree with my brother Mason's reasons and his conclusion as to the sums which total $15,400. Upon the facts found by the Supreme Court, a contrary finding would be understandable. However, though not without some doubt, I agree that the appellant should fail in respect of this total sum. (at p3)

3. I therefore agree with the orders proposed by my brother Mason. (at p3)

MASON J. This is an appeal by the liquidator of Asiatic Electric Co. Pty. Ltd. ("Asiatic") against the dismissal by Street C.J. in Eq. (as he then was) of a misfeasance summons brought by the liquidator under s. 367B of the Companies Act, 1961 (N.S.W.), as amended, against Raymond Joseph Wimborne, Pearl Manson Wimborne, and David John Wimborne, former directors of Asiatic. The respondents were also the directors of certain other companies which, together with Asiatic, they administered as a group. Whether this policy was adopted because the companies had common shareholders we do not know - the evidence does not reveal how the share capital in the companies was held. (at p4)

2. The source of Asiatic's financial difficulties was a contract which the company had with Chevron Sydney Ltd. ("Chevron") which undertook the creation of an hotel at Kings Cross. Asiatic was owed substantially in excess of $100,000 by Chevron for work done in connexion with the hotel. Chevron was unable to pay a large part of the debt. The inability of Chevron to pay the debt led to a shortage of funds within the group of companies and the adoption of a practice whereby funds were moved between the companies within the group to meet exigencies as they arose. (at p4)

3. This practice was adopted with the approval or acquiescence of all the directors, so his Honour found. One of the difficulties is that the transactions which resulted in the movement of funds between the companies were not considered at meetings of directors or, alternatively, if they were so considered, they were not the subject of resolutions recorded in the companies' minute books. However, the oral evidence of R. J. Wimborne makes it clear that the particular transactions which took place were transactions which fell within the terms of the general policy formulated and approved by the directors. (at p4)

4. The liquidator's case comprised four separate claims. The first three claims are made against R. J. Wimborne (who was governing director of Asiatic) and his son D. J. Wimborne. In each instance the liquidator asserts that payments were made by Asiatic which were not made bona fide in the interests of the company and constituted a misapplication of its funds. The payments in question were: (a) a payment by cheque of $10,000 by Asiatic to Australian Sound and Communications Pty. Ltd. ("Australian Sound"), a company in the group, on 14th December 1967; (b) a payment by cheque of $40,523.82 by Asiatic to Starkstrom Control Gear (Australia) Pty. Ltd. ("Starkstrom") in March 1967; and (c) payments totalling $17,960.93 by Asiatic between 18th March 1967 and 2nd January 1968 allegedly by way of salaries and wages. The fourth claim, made against all the respondents, relates to payments totalling $15,400 made to A.B. Wimborne between 1961 and 1966 on account of wages or by way of pension. Again, it is said that the payments to A. B. Wimborne were not bona fide in the interests of the company and constituted a misapplication of its funds. (at p4)

5. The payment of $10,000 to Australian Sound on 14th December, was not authorized by a resolution of the board of directors. However, it was a payment which fell within the general policy to which I have referred. In his oral evidence R. J. Wimborne sought to justify the general practice of moving funds between companies within the group on the ground that it avoided or diminished the liability for interest on overdraft accounts, the banks being unwilling to set off a credit in one company account against another company account. Whatever may be said as to the wisdom of this policy, it had no relevance to the transaction under consideration for it is transparently clear that the payment of $10,000 to Australian Sound had nothing to do with reducing that company's liability for interest on its overdraft. R. J. Wimborne said that "the only reason for transferring" the $10,000 was that Australian Sound "needed the money". Evidently it needed the money to complete a business transaction in which it was then engaged. (at p5)

6. It was not suggested that Asiatic received any benefit or advantage from the making of the payment. The only consideration which it received was the implied promise to repay the money on demand. No security and no promise to pay interest was exacted from Australian Sound. No attention was given to these aspects of the matter, no doubt because the respondents failed to appreciate that each company was a separate legal entity and that entry into each transaction required to be examined in the light of the interests of each company participating in it. (at p5)

7. On the evidence the transaction was not merely a transaction which failed to present any opportunity of advantage to Asiatic, it was one which offered the probable prospect of loss. Australian Sound was, according to the finding of the primary judge, in financial difficulties at the time. R. J. Wimborne admitted that it did not then have the money to repay the loan. In fact Australian Sound was then unable to pay its debts as they fell due and the loan should not have been made for this reason alone. (at p5)

8. On the same day a sum of $10,000 was credited to Asiatic's bank account, this being an amount transferred by Estoril Pty. Ltd. ("Estoril"), another company in the group. The repayment of this amount to Estoril was secured by an equitable charge granted by Asiatic to Estoril. The consequence of the two transactions was that Asiatic paid $10,000 to Australian Sound, a company which was unable to repay that amount; in return it received, by way of loan, the sum of $10,000 from Estoril, but the repayment of this amount was secured by the equitable mortgage. (at p5)

9. The final aspect of the matter is that at the time of the transaction Asiatic was itself insolvent. According to the evidence of R. J. Wimborne it was unable to pay its debts as they fell due from 1961-1962 onwards. In February 1967 Esanda Ltd. obtained a judgment against Asiatic for $5,301, an amount which had been outstanding, despite pressing demands for payment, since 1963. Asiatic had, without success, endeavoured to effect a compromise of the debt owing to Esanda Ltd. whereby half the debt was to be paid immediately and payment of the balance was to be postponed. At the time of the making of the payment to Australian Sound, Asiatic had been served with a notice of demand. The petition on which the sequestration order was made was based on non-compliance with this notice of demand. According to its balance sheet as at 30th June 1967, Asiatic's solvency depended on the ability of Starkstrom to pay a debt of $146,852, the principal asset shown in the balance sheet. It was a debt which Starkstrom could not then repay. (at p6)

10. Despite these circumstances the primary judge concluded that the liquidator had not made out a prima facie case of misfeasance. Why his Honour came to this conclusion does not appear with any clarity. His Honour seems to have been influenced by two considerations: first, that Asiatic received $10,000 from Estoril on the same day; secondly, that as the transaction was undertaken for the benefit of the group, or another company in the group, this invested the transaction with an aura of legitimacy. (at p6)

11. To speak of the companies as being members of a group is something of a misnomer which may well have led his Honour into error. The word "group" is generally applied to a number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control. In such a case the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder in company B if that company is enabled to trade profitably or realize its assets to advantage. Even so, the transaction is one which must be viewed from the standpoint of company A and judged according to the criterion of the interests of that company. (at p6)

12. Here, however, the companies were not members of a group in the sense already described. There were no common or interlocking shareholdings. Asiatic did not hold shares in Australian Sound. Asiatic did not stand to lose if Australian Sound went into liquidation; nor did it derive any benefit if Australian Sound succeeded in staving off liquidation. The "group" argument therefore provides no justification for what occurred. (at p6)

13. Indeed, the emphasis given by the primary judge to the circumstance that the group derived a benefit from the transaction tended to obscure the fundamental principles that each of the companies was a separate and independent legal entity, and that it was the duty of the directors of Asiatic to consult its interests and its interests alone in deciding whether payments should be made to other companies. In this respect it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them. The creditor of a company, whether it be a member of a "group" of companies in the accepted sense of that term or not, must look to that company for payment. His interests may be prejudiced by the movement of funds between companies in the event that the companies become insolvent. (at p7)

14. The other factor relied upon by the primary judge, the receipt of $10,000 from Estoril, overlooks the prejudice to Asiatic's unsecured creditors worked by the transaction. As the repayment of the $10,000 to Estoril was fully secured, the transaction diminished by $10,000 the assets of the company to which the unsecured creditors of Asiatic could have resort. (at p7)

15. The transaction offered no prospect of advantage to Asiatic, it exposed Asiatic to the probable prospect of substantial loss, and thereby seriously prejudiced the unsecured creditors of Asiatic. It was more than an improvident transaction reflecting an error of judgment; it was undertaken in accordance with a policy adopted by the directors in total disregard of the interests of the company and its creditors. (at p7)

16. The payment to Australian Sound was in my view a "misfeasance" within the meaning of s. 367B (1) of the Companies Act, 1961, as amended. As Lord Evershed M.R. observed in In re B. Johnson &Co. (Builders) Ltd. (1955) Ch 634, at p 648 :

"There is no such distinct wrongful act known to the law as 'misfeasance' ... But it is clearly established that it is not every kind of wrongful act so done that is comprehended by the section."

However, it is well established that "misfeasance" in this context means "misfeasance in the nature of a breach of trust, that is to say, it refers to something which the officer ... has done wrongly by misapplying or retaining in his own hands any moneys of the company, or by which the company's property has been wasted, or the company's credit improperly pledged" (In re Canadian Land Reclaiming and Colonizing Co. (1880) LR 14 Ch D 660, at p 670 ; Couve v. J. Pierre Couve Ltd. (in liq.) (1933) 49 CLR 486, at p 495 ). (at p7)

17. To constitute a misfeasance it must appear that there has been something more than mere negligence; it must be shown that what occurred amounted to a breach of duty. The conclusion that a breach of duty was committed was to my mind not only open on the evidence, but it was irresistible. I am quite unable to agree with the primary judge's view that the evidence did not amount to a prima facie case against the respondents. (at p8)

18. The directors in adopting the general policy governing the movement of funds between the companies completely disregarded the interests of the individual companies. It is no answer to say that R. J. Wimborne did not participate in the decision to make the actual payment to Australian Sound and that he was therefore not responsible for it. The payment was made in accordance with the policy for which he was responsible together with D. J. Wimborne. (at p8)

19. It seems not to be in dispute that Asiatic sustained some loss in consequence of the wrongful payment. However, the amount of its loss was not investigated and its right to recover must be proportioned to the actual loss which it has sustained. (at p8)

20. The second payment subject of the claims made by the liquidator has antecedents which are, to say the least of them, somewhat obscure. The liquidator's case before the primary judge was that the payment of $40,523.80 to Starkstrom was not made in discharge of any pre-existing debt due to that company, the principal basis for this contention being that the work in question was not done by Starkstrom but by R. J. Wimborne Pty. Ltd. and others engaged by it. His Honour held that the materials available were insufficiently precise to enable him to make a finding in favour of the liquidator. (at p8)

21. From the evidence it seems that of the total amount of $40,523.82, $40,111.40 was referable to consultancy fees associated with electrical installations at the Chevron in the years 1959-1961. The balance related to an alleged consulting fee payable in connexion with work undertaken in or about March 1961. It is not in dispute that there was a contract between Asiatic and Chevron whereby Asiatic was to undertake, and did undertake, electrical installations in the hotel. It was under that contract that the primary judge found well over $100,000 was owing by Chevron to Asiatic on 4th April 1961. That amount included two items representing consulting fees (a) $23,638.90 being 3 1/2 percent on the total value of the contract - $775,397 to 17th February 1961; and (b) $16,471.80 being 2 1/2 per cent of the value of the completed work as at 30th November 1960 - $658,870. On 4th April 1961 Asiatic made written application to Chevron seeking payment in cash of part of the debt and the issue of registered first mortgage stock in Chevron to satisfy the balance of the debt. As I have already mentioned, the debt was not paid. What is significant for present purposes is that Asiatic was itself charging consultancy fees and no mention was made of any liability to pay such fees to Starkstrom. (at p9)

22. The respondents' case was that Starkstrom was appointed as consultant by Asiatic by way of subcontract. The subcontract was not evidenced by any writing or by resolution in the minute book of either of the companies. In fact Starkstrom was not incorporated until 3rd February 1960 at a time when, as his Honour found, "the consultancy work was well advanced". The consultancy work was actually carried out by R. J. Wimborne and others engaged by him. (at p9)

23. It is not easy to determine for whom they were working but there is no reason to suppose that they were working on behalf of a company not then incorporated when the principal contractor was in existence and attending to the work, its governing director being the principal actor in the enterprise. (at p9)

24. The respondents' case is that the subcontract came into existence because R. J. Wimborne as governing director of both companies decided in his own mind that this is how events should fall out. Although R. J. Wimborne's evidence of his state of mind cannot constitute evidence of a contract, the existence of a contract of the kind alleged could be established from the performance of consultancy work by Starkstrom at the request of Asiatic in circumstances in which it could be inferred that Starkstrom would be remunerated for its services. The problem is that R. J. Wimborne was regarded as un unreliable witness by the judge and that it is not clear from the evidence that consultancy work undertaken by individuals was undertaken on behalf of Starkstrom rather than Asiatic. (at p9)

25. Telling strongly against the suggestion that the work was done on behalf of Starkstrom or done in circumstances which would entitle Starkstrom to payment is, subject to entries relating to an amount of $35,769.97 to be mentioned later, the absence of any entry in the books of either company before July 1966, suggesting that Starkstrom was to receive any payment from Asiatic in connexion with the consultancy fees in question. Then, on the instructions of R. J. Wimborne an invoice dated 14th July 1966 was made out for the amount of $40,523.82 directed to Asiatic. It is an odd circumstance, to say the least of it, that if a subcontract was made, at least four years were allowed to elapse after completion of the work before any attempt was made to quantify Starkstrom's remuneration or to make an entry relating to it in the books of account. (at p10)

26. The aura of mystery which surrounds the respondents' case is not dispelled by the fact that according to the books of both companies Asiatic expended money in payment of wages on behalf of Starkstrom in the years ended 30th June 1960 and 1961 and that Starkstrom then debited to Asiatic fifty per cent of the total of the wages so paid. The total of the wages and the increment of fifty per cent amounted to $35,769. This amount was satisfied by payment of wages and by other credits set off against Starkstrom in the books of the companies. R. J. Wimborne in his evidence before the Master was unable to state whether the work covered by the invoice of 14th July, 1966, was part of the work to which the figure of $35,769.97 related. (at p10)

27. It is wrong to say, as his Honour did, that in these circumstances the liquidator made out a case of suspicion and no more. He presented evidence from which an inference could and should have been drawn that there was no foundation for the 1966 invoice and the payment which was made in satisfaction of it in March 1967 after Esanda Ltd. had obtained judgment against Asiatic and it was in serious financial difficulties. The circumstances in which an invoice was raised for the first time not less than four years after the work to which it related had been completed, work not otherwise the subject of entries in the companies' books, plainly required an explanation from those who were then managing the affairs of the companies. No persuasive explanation was offered by R. J. Wimborne or those with whom he was associated. The fact that his evidence was held to be unreliable was an additional difficulty which the respondents bore in rebutting the liquidator's case. (at p10)

28. The conclusion that the payment constituted a misfeasance is irresistible. It was a serious breach of duty to make the payment on a basis which has proved to be without foundation. That Asiatic sustained a loss in consequence of the payment is not in question, though the amount of the loss will need to be ascertained. (at p10)

29. The third claim for relief relates to amounts totalling $17,960.93 between 18th March 1967 and 2nd January 1968 paid by way of salaries and wages. The liquidator's case is that the payments were made to persons who were not employees of Asiatic but were employees of other companies within the group. Here again his Honour's suspicions were excited, but not to the extent of making a finding adverse to the respondents. (at p10)

30. It is apparent that the business of Asiatic had virtually ground to a halt by the first half of 1966. J. I. Kidd, who was the contracts clerk of the entire "group" of companies, stated in evidence that Asiatic entered into no contracts after 1964. According to its books it made no payment by way of wages or salaries from 1st July 1966 to March 1967. In response to the suggestion that Asiatic was at 1st July 1966 a dormant company, completely inoperative but for attempting to collect debts owing to it, R. J. Wimborne said in evidence: "Not completely inoperative. They were collecting debts and also tidying up contracts, to the best of my knowledge." No indication was given of what the reference to "tidying up contracts" entailed. Some suggestion was made by R. J. Wimborne that in 1966 Asiatic's payroll may have been "two or three hundred dollars a week". (at p11)

31. It is against this background that the payment to Starkstrom of $40,523 in March 1967 and the payment of wages and salaries now under consideration which commenced in March 1967 must be considered. It will be recalled that in the previous month Esanda Ltd. obtained its judgment against Asiatic. And it is clear that Asiatic did not enter into any new contracts which required the employment of new or additional staff at that time. (at p11)

32. It seems from the evidence that the employees in question were employees of other companies within the group before 18th March 1967. There is no evidence to the effect that new contractual arrangements were made in consequence of which their pre-existing employment was terminated at that date. All that appears to have occurred is that they were "transferred to the books" of Asiatic on 18th March 1967, to use his Honour's expression. His Honour said:

"The evidence establishes that the company derived minimal, if any, benefit from the services of these employees. It establishes, moreover, that the overwhelming proportion of the services rendered by them was rendered for the benefit of other companies within the group. In the result, the other companies would in due course have sent accounts to customers and received payments in return for work done by one or more of these employees." (at p11)

33. He said: " ... the recipients of these monies were bona fide employees and ... the wages were properly due to them." " ... the employees were genuine employees and ... the wages paid to them were genuine wages for work in fact done by them." (at p11)

34. In the light of what I have said it is not easy to discern how his Honour could come to the conclusion that the recipients of the moneys were bona fide or genuine employees of Asiatic. There was no evidence to support such a conclusion. Perhaps his Honour meant no more than that they were employees of companies within the group, but for reasons which I have already discussed this circumstance did not justify the expenditure of Asiatic's moneys in the payment of their wages and salaries unless Asiatic was deriving some significant benefit from their services, a fact negatived by the judge's findings. (at p12)

35. Once again the inference is irresistible that there was a misapplication of the company's funds, a misapplication which occurred because the directors disregarded, and were blind to, their duty to act in the best interests of Asiatic. Accordingly, there was a misfeasance and in this instance it may be safely concluded that the whole of the moneys paid away have been lost. (at p12)

36. There is the question whether all the directors were parties to the misfeasance. Although D. J. Wimborne made the decision to make the payments I see no reason for excluding R. J. Wimborne from responsibility for what occurred. It is scarcely conceivable that as governing director he was unaware that Asiatic was making these payments. And if he was unaware this in itself reflects a gross disregard for the company and its affairs. (at p12)

37. The final claim made by the liquidator relates to payments totalling $15,400 to A. B. Wimborne between 1964 and 1966. Of this claim his Honour said:

"The evidence indicates that, to a greater or less extent, Mr. A. B. Wimborne was living in retirement throughout this period. He is now dead. He came from time to time to the company's premises, and worked from time to time at various activities. On the whole of the evidence, however, I am satisfied that he did not in fact earn, nor was he regarded by the three respondents as earning, this amount by way of wages during the period in question. The assertion made in, for example, the company's income tax return for the year ended 30th June, 1966 that he had been employed in that year as a manager is untrue. It is abundantly clear that these payments were of a gratuitous nature, and that they were made to him by way of pension in respect of past services to, and past association with, the group." (at p12)

38. The judge accepted that A. B. Wimborne had played a significant part in the affairs of the company in the years gone by and concluded that the payments were justified as a gratuitous recognition of past services by way of regular pension. There are difficulties in reaching the conclusion arrived at by his Honour. First, the case initially presented by the respondents, in conformity with claims made in Asiatic's income tax returns, was that the payments were payments of salary to A. B. Wimborne as manager of the company. Secondly, to the extent to which the payments were made by way of recognition of past services, the past services so recognized were, it seems, services which he gave to the group generally, as distinct from Asiatic in particular. Finally, there was no resolution of the directors of Asiatic authorizing the payments on the footing that he should be remunerated for past services. (at p13)

39. However, I am not inclined to disagree with the conclusion reached by the judge on this issue. His Honour made two findings of fact which are relevant to the question. They were:

"The facts in this instance contained no element of unfair or unjust enrichment of Mr. A. B. Wimborne, nor, other than in an indirect sense, of any financial advantage to the directors who are charged with the misfeasance. The payments originated at a point of time long before the winding up became imminent, and at a point of time when it may be assumed that the company was regarded as having satisfactory prospects." (at p13)

40. The payment of a pension to a retired director may be reasonably incidental to the carrying on of the business of a company. It is implicit on his Honour's findings that the payments were made bona fide and with a view to advancing the interests of Asiatic. Although the payments were not authorized by a resolution of the directors, it is not disputed that the decision to make the payments fell within R. J. Wimborne's authority as governing director and that had the approval of the other directors. Moreover, there was evidence that A. B. Wimborne took some part in the company's business in the years in question and that he promoted its goodwill. Accordingly, I would dismiss the appeal in so far as it relates to these payments. (at p13)

41. In the result I would allow the appeal to the extent to which it relates to the payments made to Australian Sound, Starkstrom and the payments totalling $17,960 for wages and salaries. In relation to the first and second claims I would order the respondents to pay to the applicant such loss as Asiatic may have sustained in consequence of their misfeasance, the amount of that loss to be ascertained by the Supreme Court. In relation to the third claim, that which relates to the payments totalling $17,960, I would order the respondents to pay that sum to the liquidator. Otherwise I would dismiss the appeal. (at p13)

JACOBS J. In my opinion the conclusion of the judge at first instance except in relation to the sum of $17,960.93 should not be disturbed, I find nothing to suggest that he did not apply the correct principles although he did not find it necessary to set them out. It was a matter of applying established principles to the facts. The matter on appeal has become confused because the stricture passed by the judge on the method in which the company's business was carried on by its directors and the method of keeping its books have been confused by the appellant with the findings made by the judge on the questions in issue. I have no doubt that the judge kept the two questions distinct in his mind but in a case where such strictures do not either determine the issues or form part of the reasoning leading to their determination it may, with respect, be doubted whether the expression of such views, however useful they may be thought to be for directors and company managers generally, are apposite. They can confuse, as it seems to me they have in the present case. (at p14)

2. The basis of the appellant's submissions has been that these strictures expressed by the judge showed that a prima facie case of misfeasance existed and that his Honour erred in not drawing the correct inference from the facts so found by him. However, it seems to me that a prima facie case is just what his Honour did not find. The appellant was bound to establish in accordance with the allegations in the pleadings that the payments were not made bona fide in the interests of the company and were a misapplication of the company's funds. Section 367B (replacing s. 305) of the Companies Act, 1961 (N.S.W.) "does not create any new liability or new right; it only provides a summary mode of enforcing rights, including rights created by the winding up, which must otherwise have been enforced by the court's ordinary jurisdiction": Halsbury's Laws of England, 4th ed., vol. 7, par. 1196. The scope and effect of the section were stated by Maugham J. in In re Etic Ltd. (1928) Ch 861, at p 875 in words approved by Dixon J. in Couve v. J. Pierre Couve Ltd. (in liq.) (1933) 49 CLR 486, at p 495 :

"The conclusion at which I have arrived is that s. 215" (i.e. s. 162 of the New South Wales Act) "is not applicable to all cases in which the company has a right of action against an officer of the company. It is limited to cases where there has been something in the nature of a breach of duty by an officer of the company as such which has caused pecuniary loss to the company. Breach of duty of course would include a misfeasance or a breach of trust in the stricter sense, and the section will apply to a true case of misapplication of money or property of the company, or a case where there has been retention of money or property which the officer was bound to have paid or returned to the company." (at p14)

3. The Court must therefore be satisfied that the officer was in breach of a fiduciary duty or "something in the nature" thereof for which he is accountable in a court applying principles of Equity. That is what must be meant by "beach of duty" in the context of the passage which I have quoted. (at p15)

4. The misfeasances charged were as follows:
(1) That a payment of $10,000 made by the company to an associated company, Australian Sound and Communications Pty. Ltd., on 14th December 1967, was not made bona fide in the interests of the company, and was a misapplication of the company's funds.
(2) That a payment of $40,523.82 made by the company to another associated company, Starkstrom Control Gear (Australia) Pty. Ltd., in March 1967, was not made bona fide in the interests of the company and was a misapplication of the company's funds.
(3) That a payment of an amount totalling $17,960.93 between 18th March 1967, and 2nd January 1968, by the company allegedly by way of salaries and wages was not made bona fide in the interests of the company, and was a misapplication of the company's funds.
(4) That payments of $15,400 by the company purportedly by way of wages to A. B. Wimborne between 1961 and 1966 were not made bona fide in the interests of the company and were a misapplication of the company's funds. (at p15)

5. The evidence was lengthy. It consisted in part of oral evidence and in part of documentary evidence including the notes of the examination of the respondents under s. 250 of the Companies Act, 1961 (N.S.W.). These notes were admissible under s. 250 (7) (c) in any legal proceedings against the respondents. The paragraph makes them admissible for or against the respondents in such legal proceedings. If it did not, it would be an unnecessary provision. There is no substance in grounds A (2) and A (3) of the notice of appeal. (at p15)

(1) The payment of $10,000.

6. The payment was made to Australian Sound and Communications Pty. Ltd. This was a company which worked in conjunction with Asiatic Electric Co. Pty. Ltd., the company in liquidation. The exact relationship does not appear but it was so close that work was done by employees of the one company in performance of the contracts of the other company and adjustments to take account thereof would be regularly made in the books of both companies. In 1964, it was arranged that a third associated company, Estoril Pty. Ltd., would have an equitable charge over the assets of Asiatic and, it would appear, the other companies working in association, the purpose being that Estoril would hold security for all the inter-company debts. The association between the various companies was a business association and there was no evidence that its purpose was not one thought to be for the benefit of all the companies. This being so, for present purposes it is of no consequence that the various companies were not organized as subsidiaries of one of them or were not otherwise in a legally interlocking structure. (at p16)

7. The payment of $10,000 was made very shortly before the presentation of the petition for winding up. At the time Australian Sound and Communications Pty. Ltd. was not in a financially stable position but it was carrying on its business. The money to make the payment came from Estoril Pty. Ltd. with the result that the secured indebtedness of Estoril Pty. Ltd. was increased by that amount. It is not possible to isolate one aspect of the transaction. What D. J. Wimborne did was to pay to Australian Sound and Communications Pty. Ltd. the $10,000 which Asiatic Electric Co. Pty. Ltd. had received for the purpose, it can only be inferred from the evidence, of so doing. Street C.J. in Eq. was satisfied that Australian Sound and Communications Pty. Ltd. needed the money to complete a legitimate business transaction upon which it was then engaged. In these circumstances Street C.J. in Eq. said:

"I am not able to conclude from an evaluation of the whole of the evidence that the liquidator has made good his challenge that this payment was a misfeasance so as to require the director responsible for it, Mr. D. J. Wimborne, to make good to the company the amount involved."

In my opinion this conclusion was open and cannot be disturbed on appeal. Before a different conclusion could be reached it would be necessary to be satisfied that the purpose of the transaction was to increase the security of Estoril Pty. Ltd. over the assets of Asiatic Electric Co. Pty. Ltd. at the expense of unsecured creditors. In my opinion the judge was entitled on the evidence not to be so satisfied. (at p16)

(2) The $40,523.82 to Starkstrom Control Gear (Australia) Pty. Ltd.

8. Street C.J. in Eq. expressed his conclusion on this claim as follows:

"This transaction, also, went through the company's bank account and was associated with credits coming in from elsewhere, resulting in no significant change in the ultimate balance of the account. In fact on 10th March 1967 the bank account was in credit $368.29. At the close of business on 17th March 1967 after all the credits and debits had been entered, (that is to say, after the debit of $40,523.82), the account was in credit $848.36. Of the total sum of $40,523.82, $40,110.70 was referable to consultancy fees associated with the electrical installation at the Chevron Hotel for Chevron Sydney Ltd. in about the year 1960. It is not necessary to advert separately to the balance of $413.12. The evidence establishes that Chevron Sydney Ltd. acknowledged a liability for consultancy fees in the sum of $40,110.70. This acknowledgement was in fact made to the company. It is claimed, however, on behalf of the respondents, that the consultancy work was not performed by the company. The actual work was done by Mr. R. J. Wimborne and others engaged by him. There is no evidence which would establish that any of such other persons was acting as an employee of the company in carrying out any of the activities of the consultancy work. This also extends to Mr. R. J. Wimborne himself. It was the respondents' case that the consultancy work was in fact carried out by Starkstrom Control Gear (Australia) Pty. Ltd. This claim encountered difficulties by reason of the point of time at which Starkstrom Control Gear (Australia) Pty. Ltd. was incorporated. It appeared that this company was not incorporated until the consultancy work was already well advanced. The suspicion engendered by the foundering of this contention on the part of the respondents needs no elaboration. But suspicion will not take the place of evidence. I have grave misgivings regarding the precise form of the inter-company rights and liabilities in connexion with the consultancy work on the Chevron Hotel project, and it is at least possible that the whole matter was left in an amorphous state by reason, no doubt, of the uncertainties and difficulties created by the insolvency of Chevron Sydney Ltd. There may have been no clear arrangement whatever made back in 1960. On the other hand, there may at some stage have been such an arrangement as was claimed by Mr. R. J. Wimborne, namely that Starkstrom Control Gear (Australia) Pty. Ltd. would perform the consultancy work for the group, and it would not be inconsistent with such an arrangement for Starkstrom Control Gear (Australia) Pty. Ltd. to have succeeded to whatever contractual rights Mr. R. J. Wimborne personally might have had for consultancy services prior to the incorporation of Starkstrom Control Gear (Australia) Pty. Ltd. I find it impossible to determine judicially where the truth ultimately lies in connection with the consultancy work. The narrative is shrouded in the past, and obscured by what I again call the irresponsibility with which the internal dealings between the companies in this group were managed. I am, however, prepared to accept the assertion made on behalf of the respondents that the lateness of adjustment of the consultancy fees (1967) as against work done over five years previously is explicable by reason of the non-payment by Chevron Sydney Ltd. of the large debt owed by it in respect of the electrical installation work as well as the consultancy work. Without giving undue weight to elements of suspicion, I have weighed such evidence as the liquidator has been able to adduce, with due regard to what is called the scintilla doctrine. But, even after adding to the scales on the liquidator's side every item which could count against the respondents on this aspect of the claim, I find myself insufficiently satisfied to make a judicial finding that the transfers of these funds amounted to a misfeasance." (at p18)

9. I find myself unable to determine that this conclusion is wrong. There was evidence that all the moneys to make the payments came from Estoril Pty. Ltd., and that there was a "round robin" of cheques. There was, as the judge found, no significant change in the ultimate funds of Asiatic Electric Co. Pty. Ltd. Moneys which came in were paid out for the purpose for which they were received. This in itself cannot be a misapplication of funds. If thereby Estoril Pty. Ltd. obtained security for the amounts paid to Asiatic Electric Co. Pty. Ltd. (contrary to evidence that Estoril Pty. Ltd. received Chevron debentures in consideration for its payments) then it would have needed to be proved that the purpose of the transactions was to give that security. There was no such proof. Further, if there was no consideration for the crediting of Starkstrom Control Gear (Australia) Pty. Ltd. with the sum in question then the existing indebtedness of Starkstrom Control Gear (Australia) Pty. Ltd. to Asiatic Electric Co. Pty. Ltd. was not reduced. But it is not possible to segregate a part of the whole sequence of events and charge the respondents with a misapplication of funds in the sum claimed. (at p18)

(3) The payment of $17,960.93 between 18th March 1967 and 2nd January 19 68.

10. I agree that the appeal should be allowed in respect of this sum. Street C.J. in Eq. was not satisfied of the complicity of the respondents in the transfer of the employees to the payroll of Asiatic Electric Co. Pty. Ltd. and the subsequent payment of wages to them. I am of the opinion that there was evidence which ought so to have satisfied him for the reasons expressed by Mason J. (at p18)

(4) The payments of $15,400 to A. B. Wimborne between 1961 and 1966.

11. I agree that the appeal should be dismissed in respect of this sum for the reasons expressed by Mason J. (at p19)

Orders

1. Appeal allowed in part. Order of the Supreme Court of New South Wales varied by inserting:
(a) An order that the respondents Raymond Joseph Wimborne and David John Wimborne pay to the applicant the amount of the loss sustained by Asiatic Electric Co. Pty. Ltd. as a result of the payment on 14th December 1967 of $10,000 by Asiatic Electric Co. Pty. Ltd. to Australian Sound and Communications Pty. Ltd.
(b) An order that the respondents Raymond Joseph Wimborne and David John Wimborne pay to the applicant the amount of the loss sustained by Asiatic Electric Co. Pty. Ltd. as a result of the payment on 14th and 15th March 1967 of $40,523.82 by Asiatic Electric Co. Pty. Ltd. to Starkstrom Control Gear (Australia) Pty. Ltd.
(c) An order that the respondents Raymond Joseph Wimborne and David John Wimborne pay to the applicant the sum of $17,960.93 which was paid by Asiatic Electric Co. Pty. Ltd. by way of wages and salaries between 18th March 1967 and 2nd January 1968.

2. The matter to be remitted to the Supreme Court of New South Wales for assessment of the amount of the losses referred to in (a) and (b) above.

3. Appeal otherwise dismissed.

4. The respondents Raymond Joseph Wimborne and David John Wimborne to pay one half the costs of the applicant of the appeal.