Westpac Banking Corporation and Ors v The Bell Group Ltd and Ors

[2013] HCATrans 49

[2013] HCATrans 049

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth   No P29 of 2012

B e t w e e n -

WESTPAC BANKING CORPORATION ACN 007 457 141

First Applicant

SG AUSTRALIA LTD ACN 002 093 021

Second Applicant

NATIONAL AUSTRALIA BANK LTD ACN 004 044 937

Third Applicant

HSBC BANK AUSTRALIA LTD ACN 006 434 162

Fourth Applicant

STANDARD CHARTERED BANK ARBN 097 571 778

Fifth Applicant

COMMONWEALTH BANK OF AUSTRALIA ACN 123 123 124

Sixth Applicant

LLOYDS TSB BANK PLC

Seventh Applicant

BANCO ESPIRITO SANTO SA

Eighth Applicant

SEB AG

Ninth Applicant

BANK OF SCOTLAND PLC

Tenth Applicant

CREDIT AGRICOLE SA

Eleventh Applicant

UNICREDIT BANK AUSTRIA AG

Twelfth Applicant

CREDIT LYONNAIS

Thirteenth Applicant

COMMERZBANK AG

Fourteenth Applicant

KBC BANK VERZEKERINGS HOLDING NV

Fifteenth Applicant

SKOPBANK

Sixteenth Applicant

DZ BANK AG DEUTSCHE ZENTRAL-GENOSSENSCHAFTSBANK

Seventeenth Applicant

CALYON

Eighteenth Applicant

GENTRA LTD

Nineteenth Applicant

THE GULF BANK KSC

Twentieth Applicant

and

THE BELL GROUP LTD ACN 008 666 993 (IN LIQ)

First Respondent

THE BELL GROUP LTD ACN 008 666 993 (IN LIQ) AS TRUSTEE SEPARATELY FOR EACH OF: DOLFINNE PTY LTD ACN 009 134 516 (IN LIQ), INDUSTRIAL SECURITIES PTY LTD ACN 008 728 792 (IN LIQ), MARANOA TRANSPORT PTY LTD ACN 009 668 393 (IN LIQ), NEOMA INVESTMENTS PTY LTD ACN 009 234 842 (IN LIQ)

Second Respondent

BELL GROUP FINANCE PTY LTD ACN 009 165 182, (IN LIQ)
(RECEIVER AND MANAGER APPOINTED

Third Respondent

BELL GROUP (UK) HOLDINGS LTD (IN LIQ) (IN ADMINISTRATION RECEIVERSHIP)

Fourth Respondent

BELL PUBLISHING GROUP PTY LTD ACN 008 704 452 (IN LIQ)

Fifth Respondent

BELL GROUP NV

Sixth Respondent

AMBASSADOR NOMINEES PTY LTD ACN 009 105 800 (IN LIQ)

Seventh Respondent

BELCAP ENTERPRISES PTY LTD ACN 009 264 537 (IN LIQ)

Eighth Respondent

BELL BROS PTY LTD ACN 008 672 375 (IN LIQ)

Ninth Respondent

BELL EQUITY MANAGEMENT LTD ACN 009 210 208

Tenth Respondent

DOLFINNE PTY LTD ACN 009 134 516 (IN LIQ)

Eleventh Respondent

GREAT WESTERN TRANSPORT PTY LTD ACN 009 669 121 (IN LIQ)

Twelfth Respondent

HARLESDEN FINANCE PTY LTD ACN 009 227 561

Thirteenth Respondent

INDUSTRIAL SECURITIES PTY LTD ACN 008 728 792 (IN LIQ)

Fourteenth Respondent

MARADOLF LTD ACN 005 482 806 (IN LIQ)

Fifteenth Respondent

MARANOA TRANSPORT PTY LTD ACN 009 668 393 (IN LIQ)

Sixteenth Respondent

WANSTEAD TRANSPORT PTY LTD ACN 008 775 120 (IN LIQ)

Seventeenth Respondent

WESTERN TRANSPORT PTY LTD ACN 009 666 208 (IN LIQ)

Eighteenth Respondent

WIGMORES TRACTORS PTY LTD ACN 008 679 221 (IN LIQ)

Nineteenth Respondent

W & J INVESTEMENTS LTD ACN 000 068 888 (IN LIQ)

Twentieth Respondent

DOLFINNE SECURITIES PTY LTD ACN 009 218 142 (IN LIQ)

Twenty‑First Respondent

NEOMA INVESTMENTS PTY LTD ACN 009 234 842 (IN LIQ)

Twenty‑Second Respondent

TBGL ENTERPRISES LTD ACN 008 669 216 (IN LIQ)

Twenty‑Third Respondent

WANSTEAD SECURITIES PTY LTD ACN 009 218 160 (IN LIQ)

Twenty‑Fourth Respondent

WAON INVESTMENTS PTY LTD ACN 008 937 166 (IN LIQ)

Twenty‑Fifth Respondent

WESTERN INTERSTATE PTY LTD ACN 000 224 395 (PROVISIONAL LIQUIDATOR APPOINTED)

Twenty‑Sixth Respondent

GEOFFREY FRANK TOTTERDELL IN HIS CAPACITY AS LIQUIDATOR (WITH ALJ WOODINGS) OF EACH OF THE FIRST, SEVENTH, EIGHTH, NINTH, ELEVENTH, FIFTEENTH, SIXTEENTH, SEVENTEENTH, NINETEENTH, TWENTIETH, TWENTY‑SECOND, TWENTY‑THIRD AND TWENTY‑FIFTH RESPONDENTS

Twenty‑Seventh Respondent

ANTONY LESLIE JOHN WOODINGS IN HIS CAPACITY AS SOLE LIQUIDATOR OF THE THIRD, FIFTH, TENTH, TWELFTH, THIRTEENTH, FOURTEENTH, EIGHTEENTH, TWENTY‑FIRST AND TWENTY‑FOURTH RESPONDENTS AND AS LIQUIDATOR (WITH GF TOTTERDELL) OF EACH OF THE FIRST, SEVENTH, EIGHTH, NINTH, ELEVENTH, FIFTEENTH, SIXTEENTH, SEVENTEENTH, NINETEENTH, TWENTIETH, TWENTY‑SECOND, TWENTY‑THIRD AND TWENTY‑FIFTH RESPONDENTS

Twenty‑Eighth Respondent

GARY JOHN TREVOR IN HIS CAPACITY AS LIQUIDATOR OF THE SIXTH RESPONDENT

Twenty‑Ninth Respondent

THE LAW DEBENTURE TRUST CORPORATION PLC AS TRUSTEE OF THE BGNV TRUSTS AS DEFINED IN THE SCHEDULE TO THE WRIT OF SUMMONS IN CIV 1464 of 2000

Thirtieth Respondent

Application for special leave to appeal

FRENCH CJ
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 15 MARCH 2013, AT 9.39 AM

Copyright in the High Court of Australia

____________________

MR A.C. ARCHIBALD, QC:   May it please the Court, I appear with my learned friends, MR H.K. INSALL, SC, MR N.J. OWENS and MR D.F.C. THOMAS, for the applicants.  (instructed by Herbert Smith Freehills)

MR N.J. YOUNG, QC:   May it please the Court, I appear with my learned friends, MR C.G. COLVIN, SC, MR J.D.S. BARBER and MR D.J. JACKSON, for the respondents.  (instructed by Ashurst Australia)

FRENCH CJ:   Thank you.  There is no appearance for the sixth and the twenty‑ninth respondents.  Yes, Mr Archibald.

MR ARCHIBALD:   If the Court please, in logical sequence the first group of issues in this matter concerns directors’ duties.  In that respect, as the Court understands, the majority held that the duties in question, the duty to act in the best interest of the corporations and the duty to act for proper purposes were fiduciary.  We say that that conclusion runs headlong against and contradicts the principle that fiduciary duties in this country are confined to the twin but overlapping proscriptive duties of no profit and no conflict.  That that is the principle in this country is exemplified by decisions in this Court in Chan, particularly Sir William Deane; Breen; Pilmer and most recently, Friend v Brooker and the conclusions of the majority therefore may be seen to be in sharp conflict with those notions. 

Now, to exemplify what the majority did, Justice Lee - I will use the expression “Justice” rather than “Acting Justice of Appeal” for shortness – Justice Lee at paragraph 900 confined Breen to its special facts.  Justice Drummond at paragraphs 1960 to1961 concluded that fiduciary duties of directors are not limited to the Breen classification.  Indeed, one observes that Justice Lee even treated a substantial breach of a duty of care by a director of a company as a breach of fiduciary duty.  That is evident from paragraph 873.

In these circumstances, we say that the questions raised are, does the Breen principle not apply to company directors and, by way of corollary, do the fiduciary duties of company directors extend to prescriptive duties and, if so, which ones.  Those are questions which are fundamental both to the law and to commercial endeavours and the commercial community in Australia and, in our submission, warrant the attention of this Court.

The next issue that one encounters in relation to the position of directors is the basis upon which one is to assess directors’ conduct for the purposes of an allegation of breach of duty to act in the best interests of the company and for proper purposes.  The Court should, in this respect, ask whether the directors acted for what they regarded, rather than what the Court regarded as the benefit of the company in question.  That is established, in our submission, by Richard Brady Franks particularly at page 136 point 4 on the page in the reasons of the Chief Justice, Sir John Latham.  As Justice Carr observed in this case the facts of this case were nearly on all fours with Richard Brady Franks. 

The majority, however, departed plainly from those principles.  Justice Drummond, in particular, at paragraph 2031, page 3482 of the application book, held that:

courts will now intervene in an appropriate case, irrespective of the directors' beliefs and business judgments, to ensure that creditors are properly protected.

His Honour said that courts are more interventionist now, that Richard Brady Franks is an older case and the law has moved beyond deference to the judgment of company directors.  Justice Carr did apply Richard Brady Franks.  The result is stark.  Justice Carr found no breach.  The majority found breach. 

So the questions are, is Richard Brady Franks not only older law but now bad law; will the courts now intervene irrespective of directors’ beliefs and business judgments in any and what circumstances; and, underlying the approach of the majority is the theme that there is a necessity on the part of directors to ensure in the case of a company in near insolvency that any transaction ensures a pari passu outcome for all creditors so that ‑ ‑ ‑

FRENCH CJ:   Is it possible to consider these questions of principle that you raise without what is referred to euphemistically in the respondents’ submissions as a contextual inquiry?

MR ARCHIBALD:   Inevitably and palpably so in relation to the first question.  As to the second, yes, but we raise it as a point of principle rather than based upon facts.  We would need to cavil at the conclusions of the majority as to sole purpose and as to acting for an improper purpose in committing the Bell companies to the relevant transactions, but these are contests about inferences drawn from uncontroversial primary facts as found and as established in the reasons of the primary judge.

FRENCH CJ:   You say inferences or characterisations?

MR ARCHIBALD:   Perhaps characterisations, yes.  So there will be some need to look at the underlying facts but the driver, we say, the driver of error was the predicate in the majority that there was a need to ensure a pari passu outcome.  In substance, these particular conclusions of the majority involve the proposition that it is inevitable that unless there is a guaranteed pari passu outcome there must be a breach.  So the extent of the factual inquiry is very limited.

KIEFEL J:   When you say the driver was this requirement that there be a pari passu outcome for all creditors or unsecured creditors ‑ ‑ ‑

MR ARCHIBALD:   Well, yes, everybody.  In other words, there were unsecured creditors before.  The effect of this transaction was to gain time with the banks by transactions which did include the grant of securities and the prejudice that is said to have been suffered is that by reason of the grant of securities there was not a pari passu outcome assured.

KIEFEL J:   Did the majority state an authority for that proposition that there might be a duty on the part of directors when a company is facing insolvency to act in the interests of or for the protection of creditors?

MR ARCHIBALD:   Certainly the authorities about the need to have regard to the interest of all creditors were referred to and identified correctly but the step which we say is the impermissible one is to move from having regard to interests but exercising a business judgment as to the extent of protection of interests to the need to address the pari passu outcomes.  That, we think, is the ‑ ‑ ‑

KIEFEL J:   The protection – is this reminiscent of the approach taken, say, in Walker v Wimborne 137 CLR 1 towards the requirement of protection of creditors? There, I think, Justice Mason, with whom the Chief Justice Barwick agreed at page 8, floated the idea really that directors in adopting a general policy completely disregarded the interests of creditors.

MR ARCHIBALD:   Walker v Wimborne is well‑established, settled, orthodox authority one must have in the situation of a company in extremis - have regard to, but to say that one ‑ ‑ ‑

KIEFEL J:   You say this is an extension of that?

MR ARCHIBALD:   Saying that it goes beyond having regard to and regardless of the circumstances one must achieve an outcome such that no creditor in the eventuality is disadvantaged the one to the other.  That is a matter where we say the majority has gone beyond and unjustifiably sought to extend and elevate the Walker v Wimborne principle to the level of a right in creditors to such an outcome.  That is wrong.  Now, the second group of issues concerns Barnes v Addy, so one is now looking at the question whether the banks are liable in light of a breach of duties by directors.

FRENCH CJ:   So in terms of your draft notice of appeal, you have just dealt with two – ground 2(a) and (b)?

MR ARCHIBALD:   Yes.  In relation to Barnes v Addy the majority imposed limb one liability in circumstances in which there were persons, here the banks, dealing with what were characterised as non‑trustee fiduciaries.  It was said, therefore, limb one attached to the receipt of property that was not trust property stricto sensu.  We say that goes beyond established authority.  It is true, of course, that there are cases that have proceeded upon the assumption that limb one does extend so far, but in Farah in this Court at paragraph 113, the plurality observed that it had in recent times been assumed that limb one applies in such circumstances.  The Court did not find it necessary in that case to examine the correctness of the assumption.  Here, it is necessary and, in our submission, appropriate to examine the correctness of that assumption. 

There is a further point about limb one.  The Court held that there was receipt of trust property or its analogue.  Relevantly, we say, there was no receipt of property.  The property that was said by the majority to have been received were the choses in action that arose upon entry into the transactions with the banks.  Now, of course, choses in action arose.  There were choses owned by the banks, choses owned by the Bell companies but the banks did not receive the Bell companies’ choses in action.  So there is an error, in our submission, in relation to the notion of receipt and a point in itself which is worthy of attention by this ‑ ‑ ‑

FRENCH CJ:   So you are saying that the granting of the securities is elided with the concept of receipt?

MR ARCHIBALD:   The majority confined itself to the contractual rights and duties arising.  They did not look at the property interests which securities generated.  There were not securities across the board.  There were some securities but not across the board.  The majority did not look to the moneys received when the securities were realised, so that the question attaches to the contractual entitlements.  We say nothing was received, certainly nothing answering the description of trust property even in an extended sense. 

As to limb two, the need for a fraudulent and dishonest design, the classic formulation of Lord Selwyn in Barnes v Addy itself has been emphasised as a necessary integer by this Court, most recently in Farah at paragraph 179.  Here, the majority decided that limb two applied on the basis which, in our submission, reduces the notion of a fraudulent and dishonest design to vanishing point.  What the court said, particularly Justice Drummond at paragraphs 2125 to 2149, was that limb two is engaged if there is a non‑trivial breach of duty and the breach would not attract the excuse provisions of the statutes where a director or trustee may be excused if the director has acted honestly and reasonably and ought fairly to be excused.  Justice Drummond candidly said that limb two now sets quite a low threshold. 

The threshold established by the majority is, in our submission, inconsistent with the essential notion of a fraudulent and dishonest design.  It would remove, for example, the need for Briginshaw principles to be engaged, the necessity for which the Court in Farah emphasised at paragraph 183, and it would allow that a breach that was merely significant without more would attract limb two.  Again, Farah at 183 negates that notion.  So, there are limb one and limb two issues which are worthy, in our submission, of the grant of special leave. 

The third area that one comes to next in the sequence is the remedy.  Equitable compensation classically and properly looks to the loss to the plaintiff.  An account of profits looks to the gain to the defendant.  Interest, including compound interest, of course, may be awarded to effectuate both remedies but where interest is awarded to afford equitable compensation the loss criteria that are to be used in arriving at the appropriate rate are loss criteria only.  Profit disgorgement criteria are alien to that exercise.

FRENCH CJ:   All right, so your issue of principle is that it was an error in principle to apply a disgorgement approach and, therefore, put the plus one per cent on ‑ ‑ ‑

MR ARCHIBALD:   Indeed, Justice Lee referred to the cardinal principle of disgorgement.  His Honour and perhaps Justice Drummond as well, seemed to conclude that it was imperative to apply disgorgement criteria in awarding equitable compensation.

KIEFEL J:   You say that is contradictory given that an account of profits was regarded as not useful?

MR ARCHIBALD:   It was rejected by Justice Owen and the majority endorsed what Justice Owen did in that regard.  They endorsed ‑ ‑ ‑

KIEFEL J:   Did his Honour really regard that as simply impracticable, though?

MR ARCHIBALD:   There were a number of reasons.  One was the difficulty involved.  Another was the public interest in avoiding if one could the consumption of further scarce judicial resources.

FRENCH CJ:   I thought the crunch point was enough is enough and that instead of when they counted profits he was going to use the interest criterion to ‑ ‑ ‑

MR ARCHIBALD:   Yes, the Bell companies brought that matter before the Court of Appeal and they lost.  They lost on that point.  So the court endorsed the grant of equitable compensation by the primary judge but said the primary judge went about it in a wrong way.  The primary judge went about it by addressing the loss to the plaintiff.  We cavil, of course, with how we found the loss to the plaintiffs but the majority said do not look at the loss to the plaintiffs, look at disgorgement.  You have to look at disgorgement and so they went down that route and that is the error of principle. 

FRENCH CJ:   You complain about their use of Wallersteiner v Moir?

MR ARCHIBALD:   Yes.  They sought in applying the disgorgement criteria the disgorgement league of Wallersteiner and they said Wallersteiner says apply the official bank rate plus one per cent.  They then applied the Westpac business indicator rate, not the Reserve Bank rate.  They mistook the language “bank rate” and “official bank rate” for the retail rate charged by trading banks.  That was the argument of Bell, which was accepted.  Justice Carr at paragraph 3571 observes, correctly, in our submission, that bank rate has a well‑established meaning and it means the Bank of England rate, the rate at which the bank lends to trading banks, so it is the lowest borrowing rate of trading banks.  It is not their standard lending rate to retail consumers.

KIEFEL J:   Justice Owen applied the same rate, did he not, that took percentage points – did he discount for expenses relating to ‑ ‑ ‑

MR ARCHIBALD:   No, he did not.  He was not applying a profit disgorgement criterion at all.  He was looking for the likely loss to the Bell companies by being deprived of the use of their money.  He took the Westpac indicator rate at the top.  He took the statutory interest rate at the bottom and tried to find a figure in between and so he discounted the Westpac indicator rate by one per cent and I think his Honour said that is about midpoint.  That error - we say it is a plain error - by the majority produces a difference exceeding $1.2 billion. 

FRENCH CJ:   So it is a small visitation point with a large price tag?

MR ARCHIBALD:   Yes, we complained about the principal but we noticed the consequences.

FRENCH CJ:   I appreciate you are elevating its principles.

MR ARCHIBALD:   But, in our submission, it is quite unmistakable.  Indeed, I noticed last night, even in the Shorter Oxford Dictionary “bank rate” is defined in the way Justice Carr defines it.  So, in our submission, there are clear points of principle arising in that third area.

KIEFEL J:   Is there an evidentiary dispute, that is, about the use to which the evidence of the rate was to be put?

MR ARCHIBALD:   There is, but it is not critical to these points of principle.  There was some evidence about the Westpac business indicator rate.  We say that was admitted not in proof of the rate itself, but for arithmetical purposes.  We do have a point about the ability of a court to act

in circumstances where it is bereft of evidence.  If it is not looking at RBA rate plus one, that is straightforward enough.  So that is a component of the argument but there such evidentiary matters as are in issue are very limited.  The entirety of the evidence that bears upon that is in the exhibits to Mr Vaughan’s affidavit on this special leave application, so it is in narrow compass itself.  If the Court pleases.

FRENCH CJ:   Yes, thank you.  Yes, Mr Young.

MR YOUNG:   If the Court pleases.  The first set of points raised concern directors’ duties in Barnes v Addy.  In relation to the breach of directors’ duty, the position is clear and it has long been settled, that is to say a disposition of company property for improper purposes and for no value amounts to a breach of a prescriptive fiduciary duty, that has been settled for more than 100 years. 

That issue in any event cannot be visited by this Court without a complete reconsideration of the factual findings made by the trial judge in the Court of Appeal.  There is not some need to consider those findings.  It is absolutely crucial to the outcome of any appeal that that be done in extenso.  It is not a limited exercise.  The same facts were relied upon by us as founding a breach of a duty to avoid a conflict and we would seek to raise that by way of cross‑contention.  It depends entirely on the same facts.  Likewise, the equitable fraud aspect of the case relied entirely on the same facts and we would seek to raise that.

FRENCH CJ:   Now, when you speak of facts, you mean primary facts as found?

MR YOUNG:   Yes, your Honour, I mean the primary facts as found but they are facts covering a wide field and they relate not just to the activities of the Australian Bell Group but also the English group and the Lloyd’s syndicate.  So, there are factual findings about the improper purposes of two boards of directors. 

FRENCH CJ:   So the primary facts as – there are primary facts as found as to what people did or did not do and then there are questions of characterisation which are contested.

MR YOUNG:   No, the primary facts are essentially where the contest lies.  There is little about characterisation because the facts themselves either add up to a disposal of company property for improper purposes or they do not.

KIEFEL J:   But there cannot be much in the way of dispute about the commercial transactions, can there?

MR YOUNG:   Well, there is, your Honour, and let me indicate why.  My learned friends said that there was no disposal of the property.  The heart of the decision was that there was a disposal of company property for no value.  It was conceded at trial ‑ ‑ ‑

KIEFEL J:   But that is an inference.  I mean, the commercial transactions themselves would be recorded.

MR YOUNG:   They are and it was conceded at trial that the dispositions by the mortgage debentures and the share mortgages were dispositions of company property in exchange for absolutely no value.  That finding of no value is not challenged.  There is no challenge to the findings that the dispositions were for no value.  They were not made in good faith and they were made with the intention of defeating or defrauding creditors. 

Those findings are not challenged and in relation to there being dispositions of property, Justice Carr records at 3128 that the banks conceded at trial that the share mortgages and the mortgage debentures were dispositions of the company’s property.  It was through those securities that the banks seized the company’s property, sold the shares, sold the assets of Western Australia’s newspapers, realised close to $300 million and then kept that money and invested it in the Bank’s own business.  That is the heart of the findings of the trial judge and the Court of Appeal. 

This is not a case about executory contracts.  It is a case about actual dispositions of property and then the mortgages are realised to produce actual cash which the banks invest in their own businesses.  As to the findings of improper purpose, those findings have a number of elements.  It was found at trial and by the majority in the Court of Appeal that the purpose of the transaction was to provide the banks with security over all of the assets of an insolvent group, that no exchange of value come into the companies, so that the banks could control the realisation of the assets and apply the proceeds to the discharge of the banks’ debts. 

But further, the findings included these elements of improper purpose.  The directors acted for the improper purpose of advancing the interests of the banks in circumstances of insolvency.  There was no value obtained by the company for the transaction and that is unchallenged.  The transactions condemned every company in the Bell Group to immediate insolvency, including companies that were fully solvent such as the companies that operated Western Australian newspapers.

An object of the transaction was specifically to defeat the interests of the bondholders who otherwise might claim to rank equally with the banks in any liquidation.  The last element was that three of the directors were motivated by desire to protect the Bond Corporation Group from the consequences that would follow if this transaction was not done with the banks.  That would be that there would be repercussions from the banks.  They would take action against Bond Corporation and there would be cross‑defaults and the Bond Corporation would fall.

FRENCH CJ:   The transactions and the consequences that you are describing, are those in contest?

MR YOUNG:   Well, they are all the subject of the findings and that is the essence of the findings concerning improper purpose.  We take it to be that they are because of what my learned friend said, namely that there were no dispositions of property.  You only need – he wants to argue about the characterisation of the facts but this case is about dispositions of property for improper purposes with no receipt of value. 

The conduct of the directors in that respect was a fundamental failure to fulfil their obligations of loyalty to the company.  It is a strange proposition that directors can act for such purposes as found and the banks can escape liability on the grounds that fiduciary duties are confined to instances where the directors profit themselves.  Now, can I turn to one authority ‑ ‑ ‑

FRENCH CJ:   So underlying this seems to be a line of argument that says that on settled principle and on the primary findings of fact there are not sufficient prospects of success.

MR YOUNG:   Yes, and that the points that are sought to be agitated when examined in the context of a disposition of company property for no value are questions that have been long settled.

FRENCH CJ:   That is the first point I put to you.  You say it is settled principle.

MR YOUNG:   Yes, and the second aspect ‑ ‑ ‑

KIEFEL J:   But is the extension of the protection of creditors, unsecured creditors, is that an extension of settled principle?

MR YOUNG:   Well, the majority did not undertake that extension as characterised by Mr Archibald.

KIEFEL J:   You say that that is a mischaracterisation of their reasons?

MR YOUNG:   Yes, there is nowhere in the judgment where they say that the directors acted in breach because they pursued a pari passu distribution.

KIEFEL J:   But there are references to the protection of creditors rather than generally taking creditors into account. 

MR YOUNG:   No, the analysis of the court starts with the duty to have regard to the interests of the creditors and then two steps are taken by the majority.  First, the interests of creditors were completely disregarded in agreeing to undertake the transactions.  So there was no regard to creditors at all.  They were not even considered.  Secondly, the one creditor that was considered, there was a specific objective of defeating the rights of the bondholders, ensuring that they could not press their claims in circumstances where the banks wanted to take the securities.  They were the specific findings.  The case that helpfully captures the authorities about wrongful dispositions of company property is O’Halloran (1998) 45 NSWLR 262. Could I ask the Court to go to pages 273 to 274.

FRENCH CJ:   It is at tab 6, I think, is it not?

MR YOUNG:   Yes.

KIEFEL J:   I am sorry, what was the page, Mr Young?

MR YOUNG:   Page 274 between F and G, your Honour, and further over at 277F and that discussion runs across to 278D but the short point being discussed is right at F.  Since the Lands Allotment Case it has been clear that a fraudulent misapplication of the property of the company, in that respect:

the duties of a director are equivalent to that of a trustee.

This answers the Barnes v Addy point.  In this context, a fraudulent disposition of company property for no value does attract Barnes v Addy.  It is a prescriptive fiduciary duty and in respect of both the duty and the property it is to be treated in the same way as a trust breach and trust property.  That was the analysis undertaken by the majority judges. 

Our learned friends next raised a point about Richard Brady Franks.  Richard Brady Franks was decided at a time when this Court had not recognised a duty to have regard to the interests of creditors.  Secondly, it was decided at a time prior to those authorities that clearly spell out that improper purpose is to be judged by objective community standards, not by the subjective beliefs of directors.  That is what Justice Drummond was referring to when he referred to a law interventionist approach, that is to say, there is now a recognised a duty to have regard to creditors and there is now recognised the fact that improper purpose is to be judged by objective standards. 

Further, Richard Brady Franks is a very different case because the assets of the company were amply sufficient to satisfy the claims of all creditors.  Value was received by the company from the transaction, unlike here where there was no receipt of value.  I might add that all four judges found that these were transactions with no receipt of value by the company.  Now, we say that though that is the context within which the asserted points are to be assessed ‑ ‑ ‑

KIEFEL J:   In their reply at paragraph 16, the applicants refer to Justice Drummond’s conclusion at paragraph 2031 that the court will intervene:

irrespective of the directors’ beliefs and business judgments, to ensure that creditors are properly protected.

MR YOUNG:   Yes, that was directed at the facts I have indicated.  The case for the banks was even in the area of improper purpose the courts cannot intervene if the directors genuinely believed that the transactions were in the interests of the company no matter how irrational that might be.  That is what Justice Drummond is answering.  That was the context before this arose. 

Now, on those fiduciary duty in Barnes v Addy alleged breaches, it does come back to examining the alleged questions in the proper context of the facts that were at issue in the case.  They have not accurately been described by talking about executory transactions, a pari passu objective or arguments about the beliefs of directors.  They are all beside the point given the particular improper dispositions that took place. 

On the last point concerning fiduciary duty in Barnes v Addy, this is the content of a dishonest and fraudulent scheme.  Again, what was said by the judges needs to be examined in the context of the facts of the case.  Justice Owen only rejected the second limb “Barnes v Addy knowing assistance” claim because he considered that dishonest and fraudulent required the establishment of common law fraud, that is to say knowing dishonesty, which had not been alleged. 

The Court of Appeal took a different view because “dishonest and fraudulent” is to be assessed according to the principles of equity and that was the effect of the decision of this Court in Consul and assessed against the principles of equity the kind of scheme that the courts found to have been undertaken did satisfy that description. 

Now, can I move briefly to remedy and loss?  The argument that seems to be advanced is that in the context of a case like this with those findings where company property was taken in a way that was fraudulent in the eyes of equity and then used by the banks in their own business to generate profits, the remedy should be limited to compensation for loss.  That does not accord with principle.  It was not in dispute below that if it were an appropriate case and the factual findings made out that kind of case, disgorgement of profit was an available, equitable remedy.

FRENCH CJ:   You would be asserting if leave were granted your entitlement to an account of profit, would you not?

MR YOUNG:   We would, your Honour.  It was not rejected.

FRENCH CJ:   It was rejected as a matter of discretion.

MR YOUNG:   Yes, as a matter of discretion - Justice Owen considered it was legally available but as a matter of discretion it would be inappropriate to award it.

FRENCH CJ:   No, I understand that.

KIEFEL J:   Does the question of remedy in this case – the argument about the approach to remedy, is it dependent upon the findings of improper purpose?

MR YOUNG:   It is the findings of improper purpose that make it an appropriate case for disgorgement relief, your Honour - at the threshold, yes.

KIEFEL J:   So to deal with that question we would really have to have a look at the findings in relation to the directors’ duties.

MR YOUNG:   Yes, your Honour.  If it is – on the findings of the court a disgorgement remedy was appropriate because property was wrongfully taken and invested by the banks in their business and it is to be presumed they made a profit from.

KIEFEL J:   That is the disgorgement question.  There may yet be a discrete question of principle in relation to the remedy about the correct approach to interest rates which is still a very important issue.

MR YOUNG:   Can I deal with that, your Honour?  There was no dispute about compounding interest as such.  Of and by itself there was no dispute about compounding interest.  It has always been awarded in an appropriate case in equity, particularly where the wrongdoer has taken the money and invested it in its own business.  The issue was about the rate to be applied and the compounding of interest was to be on a disgorgement basis or a compensation for loss basis.

FRENCH CJ:   There was not a lot of discussion about the basis upon which the WBIR plus one per cent was selected, was there?

MR YOUNG:   There was not a lot of discussion.  Your Honour is correct.

FRENCH CJ:   A certain rough and readiness about it.

MR YOUNG:   There was a range of evidence put before the court.  The court had evidence that substantial profits were made by the banks but that was simply an approximate calculation.  There was evidence that Westpac advanced funds at the WBIR plus one per cent both in this transaction and elsewhere.  So it was a rate that was used by the banks.  It was at the lower end of the rates charged to Bell under the facility agreement.  There was evidence from which the court could see that the banks in addition charged fees, and very substantial fees.  Indeed, the trial judge made orders for the disgorgement of the fees that were paid and they were very large amounts.

KIEFEL J:   Does the WBIR plus one per cent take account of the banks’ expenses?

MR YOUNG:   Not explicitly, but it is a rate they charge on one aspect of their profit earning activities at the lower end of the range.  The banks opposed an account of profits on legal and discretionary grounds.

KIEFEL J:   Why did the majority disagree with the trial judge’s discounting?

MR YOUNG:   Because the trial judge said on his findings he would award compound interest and his conclusions led to the proposition that he was attempting to provide disgorgement, but then in that part of the judgment dealing with interest, his Honour reverted to a pure compensation for loss calculation.  So there was inconsistency between the findings and the principle his Honour said he was setting out to achieve, disgorgement, and then the implementation of it reverted to a compensation calculation.  That was the error identified by the Court of Appeal.  A range of other arguments are raised about ‑ ‑ ‑

KIEFEL J:   So just to be clear – I am sorry to interrupt you, to be clear, are you saying that if this Court considered the majority was wrong it would have to reconsider the remedy itself?

MR YOUNG:   It would need to reconsider the remedy of an account of profits, for instance, because interest was resorted to as a simpler alternative.

FRENCH CJ:   There was a proxy for account of profits.

MR YOUNG:   It was, your Honour, yes.  The banks now complain about no adjustments for risk, no adjustments for tax.  They complain about the number of risks.  None of those issues were agitated at trial and they led no evidence about those matters.

KIEFEL J:   I think you say they did not argue the question of monthly rests on appeal. 

MR YOUNG:   No, they did not.

FRENCH CJ:   Thank you, Mr Young.  Yes, Mr Archibald.

MR ARCHIBALD:   We did not submit that there was no disposition of property.  We accept there was for the purposes of the Bankruptcy Act and, as the Court knows, we do not challenge our liability under the Bankruptcy Act.  My friend submitted that the findings were there was a disposition of property without value.  The position was that the primary judge held that there was valuable consideration and that view was endorsed in paragraph 3201 by Justice Carr.  The consideration and finding by the primary judge of the giving of valuable consideration is recited by Justice Carr at 3200.

My friend indicated that his clients would seek to urge the conflict of interest issue were special leave to be granted.  Were they to do so, that issue would have to be considered against the background of arguments having been put at first instance and on intermediate appeal without success.  There was a finding by Justice Lee that in respect of one director of the United Kingdom company there was a conflict, but even that finding did not play any part in Justice Lee’s conclusions.

My friend also said that equitable fraud would be raised.  The Bell companies have agitated equitable fraud, both at first instance where they failed, and on intermediate appeal.  On intermediate appeal it was rejected by Justices Drummond and Carr, accepted by Justice Lee, but accepted, in our submission, on a basis which is erroneous, namely there was no common dealing between creditors which is critical to this principle if it survives the introduction of statutory remedies.

As to improper purpose, first we say that, as we indicated in‑chief, we do challenge various of the findings by way of characterisation on the part of the majority in the Court of Appeal.  The characterisation by Justice Carr was to the contrary.  There was a long run of paragraphs where his Honour considers that – 2743 to 2764 as to the Australian companies

and 2974 to 2977 as to the United Kingdom companies and a conclusion at 2920.

His Honour’s conclusions about purpose are at odds with the conclusions of the majority and it bears note that Justice Owen at first instance found that the directors exercised their powers in an honest belief that the transactions afforded a better prospect of the companies emerging from their difficulties as compared with the only alternative – immediate liquidation – and that would be consonant with a finding of proper purpose applying Richard Brady Franks rules.

My friend said Richard Brady Franks was decided in particular circumstances.  Be it so, we say that principle still survives but, at the very least, this Court should give attention to the question whether Richard Brady Franks is still good law.  My friend said in relation to principles concerning improper purpose that cases demonstrate that improper purpose constitutes, or may be said to constitute a breach of fiduciary duty. 

He referred to O’Halloran but in O’Halloran it is notable that the court on appeal was concerned only with the question of causation and it appears from page 267, letter E, that what was alleged was both a breach of director’s duty that was not of a fiduciary character and a breach of a duty which was of a fiduciary character constituted by the director gaining an advantage for himself or another person.  So in O’Halloran there was a classic fiduciary duty of self‑profit for advantage.  O’Halloran is not against the contentions that we advance.

In relation to the matters concerning loss, in our submission, the findings of the majority do show both a misunderstanding of Wallersteiner and a misunderstanding of the way in which equitable compensation should be ordered in the circumstances which attended their conclusion.  A critical matter, as we have submitted in‑chief, is that their Honours did not overturn, but rather endorsed, the conclusion of Justice Owen that there should be an award of that which constituted equitable compensation.  So despite the matters raised by our friend, that underlying error prevails in our submission.

FRENCH CJ:   Thank you.  The Court will retire briefly to consider what course it should take.

AT 10.25 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.34 AM:

FRENCH CJ:   There will be a grant of special leave in this matter.  However, rather than simply handing out the usual set of directions, I think it will need a specific directions hearing before me and it will be a matter for counsel to approach the Registrar and to arrange a time – it will probably be by video link from Canberra.  Can I just foreshadow that I will expect counsel to come forward with helpful and co‑operative suggestions as to the management of the appeal, given the size of the record.  The architecture of the presentation to the Court on the appeal, I think, might involve such notions as using the record in the Court of Appeal as the record for the purposes of the appeal in this Court and then a supplementary book which will bring in appropriate factual matters, relevant parts of the judgment and of course, the formal part of the record for the purposes of the appeal, including the notice of appeal.  Mr Archibald?

MR ARCHIBALD:   Yes, your Honour.  We will speak to our friends about that and seek to formulate a suggested regime that might commend itself to the Court and that could be made available shortly before the postulated directions hearing.

FRENCH CJ:   Yes.  There will obviously be only a finite amount of time allocated for oral argument, so it will be a matter of a combination of the submissions and oral argument, but we can debate that at the directions hearing.

MR ARCHIBALD:   If the Court pleases.

AT 10.36 AM THE MATTER WAS CONCLUDED