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Carr v Resource Equities Limited [2010] NSWCA 286

by Hilary Kincaid 18. January 2011 14:32

Facts

Spigelman CJ (with whom Macfarlan JA (at [127] and Sackville AJA (at [128]) agreed):

 

The appellants, Mr Carr and Mr Purves, had been directors of the first respondent, Resource Equities Limited (REL). REL commenced proceedings against Mr Carr and Mr Purves for breach of director's duties under ss 180, 181 and 182 of the Corporations Act and for breach of fiduciary duties. (REL had made similar claims against the second respondent, Mr Thomas, who had also been a director of REL, but those claims were settled before trial.)

 

McDougall J found that the appellants had breached their duties as claimed in relation to four transactions:

(i) overpayment of director's fees;

(ii) breach of statutory and fiduciary duties in investing in Fox Technologies Pty Ltd (the Fox transaction);

(iii) causing REL to sell shares held by it in Asia Iron Pty Ltd (Asia Iron) and make distributions; and

(iv) causing REL to pay certain legal costs in respect of proceedings in the Supreme Court of Western Australia.

In addition, McDougall J held that Mr Thomas was not liable to contribute with respect to the transactions in (i) and (ii) above.

 

The appellants appealed in respect of each of these aspects of McDougall J's decision.

 

Spigelman CJ noted that McDougall J had made strong credit findings in relation to each of the appellants: at [5]. His Honour held that any reliance placed by the appellants on the evidence given by either of them at trial could not ground submissions on appeal: at [6].

 

His Honour outlined the basis on which the finding outlined at (i) above had been made and held that the appellants, in their submissions, had not identified any error made by McDougall J. His Honour rejected the appeal in relation to the finding outlined at (i): at [11].

 

In relation to the Fox transaction, his Honour outlined the appellants' submissions and noted that McDougall J made his findings "on the basis of objective facts" (at [27]) which established that the appellants had breached the duties under ss 180, 181 and 182 of the Corporations Act and their fiduciary duties, and on the alternative basis that the appellants had "severe" conflicts of interest (at [27]). McDougall J further held that the defence under the business judgment rule pursuant to s 180(2) of the Corporations Act was not available to the appellants (at [28]) and rejected the application for exoneration under s 1318 of the Corporations Act.

 

Spigelman CJ held that "[n]o basis is advanced in the submissions for challenging these findings with respect to the impropriety of the motives of each appellant" (at [30]) and that the submissions did not challenge McDougall J's factual findings which were sufficient bases for the conclusion that the appellants had breached their duties (at [30]). His Honour rejected the appeal in relation to the Fox transaction.

 

In relation to the proceeds from the sale of the Asia Iron shares, Spigelman CJ noted that McDougall J held that the distribution of those proceeds was unlawful, and that there was no challenge to that finding: at [36]. Accordingly, his Honour rejected the appeal in relation to that conclusion, subject to a consideration of s 1318 of the Corporations Act. In relation to that point, Spigelman CJ noted that exoneration under s 1318 of the Corporations Act is only available if the court finds that the person has acted honestly: at [43]. McDougall J found that the appellants had not so acted (at [43]) and the appellants did not challenge that finding "in terms" (at [44]). In addition, McDougall J held that the case was not one of "accidental oversight" but of "gross or wholesale dereliction of duty": at [45]. No challenge was made to this finding: at [46].

 

In relation to the finding outlined at (iv) above, this relied on a finding that an issue of shares to Cosmos E-C Pty Ltd (Cosmos) was a sham: at [3(iv)] and [52]. The appellants challenged that finding. Spigelman CJ set out McDougall J's reasoning in relation to this point at [56], and noted that McDougall J had made the finding that the defence of the proceedings was wrong on two alternative bases: at [57]. The first basis was that REL had no interest in defending the proceedings (which concerned the question of who should control REL), a matter which Spigelman CJ held was "trite law" (at [58]), and this alone could dispose of the appeal on this point (at [59]), especially as the appellants had not challenged McDougall J's findings in this regard. The second basis related to the issue of the shares. Spigelman CJ held that McDougall J did not use the word "sham", when referring to the issue of the shares, in a technical sense: at [60].

 

In any case, McDougall J found the defence had had no reasonable prospects of success: at [61]. Again, the appellants did not challenge this finding.

 

In relation to the appeal made in respect of McDougall J's finding that Mr Thomas was not liable to contribute with respect to the overpayment made of directors' fees, that was based on findings that Mr Thomas had played no part in the overpayments (which were to Mr Carr and Mr Purves) and was in fact unaware of them, and that in any case, if he was liable, he should be exonerated under s 1318 of the Corporations Act on the basis that he had acted honestly: at [70]–[71]. There was no challenge to any of these findings: at [72]. Accordingly, there was no reason for the Court of Appeal to disturb McDougall J's findings: at [73].

 

In relation to the appeal made in respect of McDougall J's finding that Mr Thomas was not liable to contribute with respect to the Fox transaction, Spigelman CJ noted that Mr Thomas had been supportive of REL's investment in Fox: at [75]. However, McDougall J held that Mr Thomas' fault, if any, had been to be "too trusting of Messrs Carr and Purves, and [that he had] failed to apply his mind independently to the Fox transaction": at [78]. McDougall J held that if that amounted to a breach of duty, Mr Thomas had acted honestly and should be exonerated under s 1318 of the Corporations Act: at [78].

 

There was some "lack of clarity" in McDougall J's reasons (at [80]), and accordingly, Spigelman CJ considered this point in some detail. His Honour set out in detail the relevant findings that McDougall J had made in respect of the Fox transaction.

 

His Honour noted submissions made by the appellants as to conduct of Mr Thomas "long after the commitment [to invest in Fox] had been made", but held that such conduct was not relevant: at [93]–[94]. His Honour also rejected submissions made by the appellants that the findings made by McDougall J as to the breaches of duty by the appellants should also apply to Mr Thomas. His Honour held that there was no conceivable basis, given the findings made by McDougall J as to Mr Thomas' evidence, that Mr Thomas had breached the duties in ss 181 and 182 of the Corporations Act, although a breach of the duty under s 180 of the Corporations Act may at least be arguable: at [105]. However, the appellants' submissions suffered from a significant internal inconsistency: on one hand, they appealed from the findings that they had breached their duties; on the other, they argued that Mr Thomas had breached those same duties. Spigelman CJ held that this "stretche[d] credulity too far": at [106].

 

Outcome

In summary, his Honour held that the appellants' case for contribution failed for three alternative reasons: (1) the appellants did not establish that Mr Thomas breached his duties (at [115]); (2) the appellants did not establish that any such breach caused loss to REL (at [116]–[118]); and (3) in any case, it would be inequitable to make an order for contribution: at [107].

 

Further, in light of the way in which the trial had been run, it was not possible for the appellants to rely on findings that McDougall J had made about the appellants' duties and breach thereof to apply in terms to Mr Thomas: at [110].

 

In particular, Spigelman CJ held that the evidence about Mr Thomas' alleged failure to "require a detailed assessment of the [Fox] technology" was in "far too narrow a compass to discharge the appellants' onus of proof that a breach of duty [under s 180 of the Corporations Act] had occurred": at [115].

 

In relation to the equitable nature of the contribution sought, Spigelman CJ noted that even if Mr Thomas could be found to have breached his duties, the breaches committed by the appellants were far more significant, as was the fact that the appellants were in a position of conflict: at [124]. There was therefore a significant difference in the moral culpability that could be ascribed to Mr Thomas as compared to the appellants: at [125]. This would be sufficient to refuse to make an order for contribution, even if such an order should otherwise be made: at [125].

 

The appeal was dismissed with costs.

 

 Relevant paragraphs of Ford

[8.070], [8.080], [8.200], [8.210], [8.230], [8.280], [8.305], [8.310], [8.420]

Tags:

Ford's Principles of Corporations Law



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