Angas Law Services Pty Ltd (In liquidation) v Carabelas [2005] HCA 23
HIGH COURT OF AUSTRALIA
GLEESON CJ,
GUMMOW, KIRBY, HAYNE AND HEYDON JJ
ANGAS LAW SERVICES PTY LTD (In liquidation)
& ANOR APPELLANTS
AND
GEORGE CARABELAS & ANOR RESPONDENTS
Angas Law Services Pty Ltd (In liquidation) v Carabelas
[2005] HCA 23
27 April 2005
A49/2004
ORDER
1. Remit the matter to the Full Court of the Supreme Court of South
Australia to consider the amendment to the statement of claim
foreshadowed in this Court and to deal with any issue arising out of any
amendment that may be permitted.
2. Except as provided in order 1, appeal dismissed with costs.
On appeal from the Supreme Court of South Australia
Representation:
G Griffith QC with L G de Ferrari for the appellants (instructed by Cowell
Clarke Commercial Lawyers)
R J Whitington QC with M B Manetta for the respondents (instructed by von
Doussas)
Notice: This copy of the Court's Reasons for Judgment is subject to
formal revision prior to publication in the Commonwealth Law Reports.
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CATCHWORDS
Angas Law Services Pty Ltd (In liquidation) v Carabelas
Company law – Duties of directors – Claims against directors for contraventions
of Companies (South Australia) Code, s 229 – Respondents directors and sole
shareholders of company – Directors caused company to grant mortgage to
secure director's liability to bank – Bank exercised rights under mortgage –
Resulting debt of director to company – Alleged novation of the debt owed so as
to reduce director's liability to the company – Novation not shown to have
occurred – Whether directors exercised due care and diligence – Whether
directors improperly used position to gain personal advantage or cause detriment
to corporation – Consideration of circumstances in which shareholders may ratify
or excuse breaches of duties owed by directors – Relationship of offences under
the Code to common law duties of directors and officers.
Words and phrases – "improper", "impropriety".
Companies (South Australia) Code, ss 229, 588FA, 588FC, 588FF.
Corporations Act 2001 (Cth), ss 182, 183, 184.
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1 GLEESON CJ AND HEYDON J. The first respondent, George Carabelas, and
the second respondent, his wife, were at all material times the holders of the two
issued shares in the capital of Angas Law Services Pty Ltd ("ALS"). They were
also the only directors of ALS. Mr Carabelas is a legal practitioner. Apart from
signing some financial statements, Mrs Carabelas does not appear to have taken
an active part in the affairs of ALS, but the case was conducted on the
assumption that she acquiesced in decisions made by her husband. ALS was
incorporated in 1986. It was wound up, on the ground of insolvency, by order of
the Supreme Court of South Australia dated 26 April 1994. The petitioning
creditor was the Deputy Commissioner of Taxation, who was owed $25,408 for
capital gains tax incurred upon the sale, in October 1989, of a property in Angas
Street, Adelaide, which was the company's principal asset. The petition was
presented on 16 March 1994, which was agreed to be the date relevant for
considering preference issues. The second appellant is the liquidator of ALS.
2 ALS and the liquidator brought two claims against the respondents in the
Supreme Court of South Australia. The first was a claim by ALS for
compensation under s 229(7) of the Companies (South Australia) Code ("the
Code"), based upon alleged contraventions of s 229(2) and s 229(4). The second
was an application by the liquidator for orders under s 588FF(1) of the
Corporations Law, based upon a contention that, during the period specified in
the statute and before the commencement of the winding up of ALS, and at a
time when ALS was insolvent, ALS entered into transactions involving
preferences under ss 588FA and 588FC. The preference issue occupied only a
small part of the time taken in this Court, and it is convenient to put it aside until
the conclusion of these reasons.
The statute
3 Section 229 of the Code, so far as presently relevant, provided:
"(2) An officer of a corporation shall at all times exercise a reasonable
degree of care and diligence in the exercise of his powers and the
discharge of his duties.
Penalty: $5,000.
...
(4) An officer or employee of a corporation shall not make improper
use of his position as such an officer or employee, to gain, directly or
indirectly, an advantage for himself or for any other person or to cause
detriment to the corporation.
Penalty: $20,000 or imprisonment for 5 years, or both.
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Gleeson CJ
Heydon J
2.
...
(7) Where a person contravenes or fails to comply with a provision of
this section in relation to a corporation, the corporation may, whether or
not the person has been convicted of an offence under this section in
relation to that contravention or failure to comply, recover from the person
as a debt due to the corporation by action in any court of competent
jurisdiction –
(a) if that person or any other person made a profit as a result of
the contravention or failure – an amount equal to that profit;
and
(b) if the corporation has suffered loss or damage as a result of
the contravention or failure – an amount equal to that loss or
damage.
...
(10) This section has effect in addition to, and not in derogation of, any
rule of law relating to the duty or liability of a person by reason of his
office or employment in relation to a corporation and does not prevent the
institution of any civil proceedings in respect of a breach of such a duty or
in respect of such a liability."
4 The loss claimed to have been suffered by ALS in consequence of the
alleged contraventions of s 229 was $474,950. (In the pleadings, written
submissions, and reasons for judgment, the amount varied between $474,950 and
$474,960. The difference is immaterial.)
The allegations of contravention and loss
5 The loss of $474,950 was said to have resulted from what the primary
judge described as a course of conduct, involving two transactions. Although the
appellants argued that the first transaction itself contravened s 229, the loss
alleged resulted directly from the second transaction, if it took place. In the
events that occurred, the first transaction, if it stood alone, would not have
resulted in the loss of which the appellants complained.
6 In June 1988, Mr Carabelas approached the Adelaide branch of the
Commonwealth Bank seeking an advance of up to $2.5 million. An internal
bank memorandum shows that his approach was warmly received. The bank
manager recorded that Mr Carabelas was "very active in the property market",
that ALS owned the Angas Street premises from which he conducted his legal
practice, and that various other properties were owned either by Mr Carabelas or
by other companies of which he and his wife were the directors and shareholders.
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Heydon J
3.
Other evidence identified the companies as Barry Simpson Pty Ltd, Citizac Pty
Ltd, Wamville Pty Ltd, Tusport Pty Ltd and Blackcroft Pty Ltd. The bank
manager estimated the total value of properties owned by Mr Carabelas or by his
companies at about $3.6 million. The memorandum also recorded that the
property owning companies were incorporated solely for investment purposes,
each company owning separate properties. Rental income from the various
properties was $348,000 per annum. The manager recommended the advance.
At the time, the Angas Street property was subject to a mortgage to the
Hindmarsh Building Society ("HBS") to secure a debt of $435,040 owing by
ALS to HBS.
7 On or about 15 July 1988, the Commonwealth Bank advanced $1,750,000
to Mr Carabelas. The bank required, and obtained, as security, a first mortgage
over all the real estate owned by Mr Carabelas or by his companies, including
ALS. Mr Carabelas applied $435,040, part of the amount of $1,750,000, by
lending it to ALS to enable ALS to repay its debt to HBS and obtain a discharge
of mortgage. ALS then gave a mortgage over the Angas Street property to the
bank. The mortgage was expressed to be in consideration for accommodation
and advances to Mr Carabelas, and secured all moneys then owing, or which
might become owing, by Mr Carabelas to the bank. That is the first transaction.
It is common ground that, at the time, ALS and Mr Carabelas were solvent.
There was no clear evidence as to how Mr Carabelas applied the balance of the
sum of $1,750,000, apart from $435,040 lent to ALS, although certain
accounting entries suggested he may have made similar loans to other
companies, and procured the grant by them of similar mortgages. It was not
claimed that the mortgage transaction resulted in any direct or immediate loss or
damage to ALS.
8 It is convenient, at this stage, to mention a factual issue that was raised by
Mr Carabelas and resolved against him, both by the primary judge and by the
Full Court of the Supreme Court of South Australia. Mr Carabelas attempted to
establish that his various companies were engaged in a joint venture, and that, in
borrowing money from the bank, he was merely acting as an agent for each
company, and not as a principal. This was a major issue at trial, and in the Full
Court. The primary judge found that Mr Carabelas was "borrowing from the
bank and then supplementing these funds from other sources as necessary to
support a particular project." There was, he found, no joint venture, and
Mr Carabelas was not merely an agent. He was borrowing as a principal and
then lending to his companies. Those findings were upheld in the Full Court.
There is no reason for this Court to depart from those concurrent findings of fact.
However, the contention by Mr Carabelas, unsuccessful as it was, explains
certain accounting entries relevant to what was claimed to be a second breach of
s 229.
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Heydon J
4.
9 The accounts of ALS were kept, and its annual financial statements were
prepared, by Mr Vlassis. The accounts of ALS, following the mortgage
transaction, showed a loan by Mr Carabelas to ALS of $435,040, giving rise to a
debt owing by ALS to Mr Carabelas in the same amount. Although there was no
detailed examination of the topic in the evidence, it appears that, during the
second half of 1989, the fortunes of Mr Carabelas and his companies declined.
On 11 October 1989, the Angas Street property was sold for $910,000. The
whole of the proceeds of sale went to the mortgagee, the Commonwealth Bank,
and were applied in reduction of Mr Carabelas' indebtedness to the bank.
Mr Vlassis recorded the financial consequences of this by making a journal entry
(GJ2), dated 30 June 1990. The journal entry began with an amount of $474,960,
which was the difference between $910,000 (the gross proceeds of sale of the
Angas Street property) and $435,040 (the debt owed by ALS to Mr Carabelas).
The amount of $474,960 was adjusted for agent's costs and commission and
some other minor items, producing a net figure of $446,710.31. The correctness
of these adjustments, and of the net figure, is not in dispute. The amount of
$446,710.31 was debited to Mr Carabelas' loan account with ALS. Thus, one
consequence of the sale of the Angas Street property, and the payment of the
proceeds of sale to the bank in reduction of the indebtedness of Mr Carabelas to
the bank, was that, whereas before the sale ALS owed Mr Carabelas $435,040,
after the sale Mr Carabelas owed ALS either $474,960 or, if the adjustments
were to be taken into account, $446,710.31. According to the appellants, the
journal entry GJ2 accurately reflected the true state of accounts as between ALS
and Mr Carabelas immediately following the sale of the Angas Street property.
At that stage, assuming the solvency of Mr Carabelas (which was not in issue),
and disregarding any further contingent liability of ALS to the bank (a contingent
liability which, as will appear, never became an actual liability), the net assets of
ALS had not diminished. The value of the company's equity in the Angas Street
property was replaced by a debt of the same amount owed to it by Mr Carabelas.
10 The financial statements of ALS for the year ended 30 June 1990 were
prepared, belatedly, by Mr Vlassis. They were signed by both Mr and
Mrs Carabelas. Before they were prepared, Mr Vlassis made another journal
entry, GJ10, also dated 30 June 1990. In order to understand GJ10, it is
necessary to bear in mind the contention of Mr Carabelas that his borrowing from
the bank in July 1988 was as agent for various companies, including ALS, and
not as principal. That contention, although rejected by the primary judge, was
reflected in GJ10, and the financial statements of ALS. The journal entry GJ10
purported to correct GJ2. Journal entry GJ2 showed Mr Carabelas as owing
$446,710.31 to ALS. Journal entry GJ10 showed various amounts which,
together with an amount of $15,501.59 owed by Mr Carabelas, made up a total of
$446,710.31, as being owed to ALS by Barry Simpson Pty Ltd, Blackcroft Pty
Ltd, Wamville Pty Ltd, Tusport Pty Ltd and Citizac Pty Ltd respectively. If the
money originally borrowed by Mr Carabelas from the Commonwealth Bank, and
apparently later applied by him by way of loans to various companies, had been
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5.
borrowed by him merely as agent for the companies, this may have justified the
entries in GJ10. At least, those entries would have been consistent with
Mr Carabelas' case. That case was rejected both at trial and on appeal. The
appellants, however, sought to make a positive case of misfeasance, based, not
upon treating the accounting entries as erroneous, but upon treating them as
recording or reflecting a real and effective, but unlawful, transaction, described in
the pleadings as a "novation". By the time of the making of the journal entry of
GJ10 (which time was never clearly established) each of Barry Simpson Pty Ltd,
Blackcroft Pty Ltd, Wamville Pty Ltd, Tusport Pty Ltd and Citizac Pty Ltd was
insolvent. The debts said to have been owed by those companies to ALS were
later written off. The appellants argued that the second contravention of s 229
(or, as the primary judge saw it, the second aspect of a single course of conduct
in contravention of s 229) was the procuring of ALS to enter into a contract of
novation by which the debt owed to ALS by Mr Carabelas was discharged, and
in its place there was a series of debts owing to ALS by a number of insolvent
Carabelas companies. That allegation depended upon the shaky premise that in
truth there had been such a transaction, rather than a series of incorrect
accounting entries by Mr Vlassis. Apart from the journal entries, and the
financial statements in which they were reflected, there was no evidence of any
contract of novation. The signatures of Mr and Mrs Carabelas to the financial
statements were not admissions that there had been a novation. Rather, they
reflected the contention (ultimately found to be without foundation) that
Mr Carabelas had not been a principal borrower but had acted merely as agent for
various companies.
11 If there had been a transaction of novation, by which a debt owed by
Mr Carabelas to ALS was discharged and there was substituted for it a series of
debts owed by insolvent companies, it would be clear that the transaction
contravened s 229 and resulted in loss to ALS. The problem for the appellants
was to establish that there had been such a transaction.
12 Before turning to the way in which the primary judge, and the Full Court,
dealt with the s 229 claim, it is worth mentioning another feature of the litigation.
The evidence showed that, in June 1993, years before proceedings were
commenced, Mr Carabelas entered into a deed with the Commonwealth Bank
under which his outstanding liabilities to the bank were discharged. The
commercial circumstances of that arrangement were not the subject of any
findings by the primary judge. It was accepted by the parties that one
consequence of that deed was that ALS was under no further obligation to the
bank. That probably explains why no attempt was made to treat the amount of
the contingent liability incurred by ALS in June 1988 (or that amount less
$435,040) as a loss. ALS was insolvent as at 30 June 1992, but, apart from the
bank, its only significant creditor appears to have been the Federal Commissioner
of Taxation, who was owed $25,408. If it were not for legal and accounting
expenses incurred in relation to the liquidation, and this litigation, the only
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6.
people who would stand to gain from the present action would be Mr and
Mrs Carabelas, in their capacity as shareholders of ALS. The opening
qualification to that sentence, of course, is important. The proceedings at first
instance lasted 13 days. The only substantial debt originally owing to a third
party has been dwarfed long since by costs of the liquidation and the litigation.
Apart from the relatively modest amount owing to the revenue, and legal and
accounting costs, the ultimate fruits of the litigation, if there are any, will go to
the respondents. That in itself is curious. It is also curious that the attempt to
recover $474,950 from Mr Carabelas was based upon an allegation of
contraventions of s 229 rather than upon a straightforward claim (at least in the
alternative) that he owed ALS that amount, and that his debt was never
discharged.
The decision of the primary judge
13 The proceedings in the Supreme Court of South Australia were
commenced in 1997. The case for the appellants was ultimately expressed in a
Second Further Amended Statement of Claim dated 13 September 2000. The
matter came on for hearing before Williams J in February 2003. Williams J
found in favour of ALS and assessed the amount of compensation for which the
respondents were liable at $474,950. He also ordered the respondents to pay
interest of $731,423. He ordered the respondents to pay to ALS a total amount of
$1,206,373, together with costs1.
14 The primary issue of fact which Williams J had to resolve arose out of the
agency theory advanced by the respondents. If that theory had been accepted, it
may have provided an answer to the allegations of contravention of s 229. In
particular, it would have explained, and may have justified, the journal entry
GJ10. Williams J rejected the theory, and his reasoning in that respect was
upheld by the Full Court.
15 As to the financial position of ALS, which was relevant both to the claims
under s 229 and to the preference issues, Williams J noted that at the date of the
winding up order (26 April 1994) ALS owed the revenue authorities $25,408.41.
That amount became due and payable on 4 March 1991. In a letter to the
Australian Taxation Office of 23 September 1993, ALS acknowledged its
inability to pay that debt. Williams J accepted the evidence of an accountant that
ALS was insolvent on 30 June 1992, and on 30 June 1993.
16 There was no finding that ALS was insolvent on 15 July 1988. On the
contrary, assuming that the ultimate sale price of the Angas St property in 1989
1 Scott v Carabelas [2003] SASC 156.
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7.
was a reasonable reflection of its true value in July 1988, then in July 1988 the
assets of ALS substantially exceeded its liabilities, and it had no pressing
commitments it could not meet. The effect of the mortgage transaction of
15 July 1988 was to replace the debt of $435,040 owed by ALS to HBS with a
liability in the same amount to Mr Carabelas. At the same time, ALS incurred a
contingent liability to the Commonwealth Bank by reason of the security it gave
for Mr Carabelas' borrowings from the bank. Against that liability, presumably it
had rights of contribution from its co-sureties (the other Carabelas companies)
and rights against Mr Carabelas, but any rights against the other companies were
never investigated or pursued. No doubt this was because the arrangement
between Mr Carabelas and the bank in 1993, by which his liability to the bank
was discharged, was thought to render such questions of academic interest only.
When, in 1997, the appellants made their claim for compensation, they identified
as the loss suffered by ALS the amount of the debt owed by Mr Carabelas to
ALS after the sale of the property, which was lost by the supposed transaction of
novation.
17 Williams J recorded the contention of the appellants as being that "ALS
either has lost the sum of $446,710 by virtue of [the respondents causing it to
grant] a mortgage for the whole of its value (so that CBA could take the whole
sale price), or by virtue of the defendants 'novating the liability' from
[Mr Carabelas] to Barry Simpson, Blackcroft, Wamville, Tusport and Citizac so
that ALS could not recover the sum from [Mr Carabelas]." In his reasoning,
Williams J appears to have treated the agency theory as the only substantial
response to that contention. Having rejected that theory, he moved directly to the
conclusion that breaches of s 229(2) and s 229(4) had been demonstrated.
18 Williams J made no finding as to when or how a transaction of novation
occurred. He seems to have assumed that a finding that there had been such a
transaction followed from a rejection of the agency theory.
19 The rejection of the agency theory did not necessarily involve, or require,
a conclusion that, in fact and in law, there had been a novation which resulted in
a discharge of the liability of Mr Carabelas to ALS. On the findings of
Williams J, as a result of the sale of the Angas Street property, and the
application of the whole of the proceeds of sale in part payment of Mr Carabelas'
debt to the bank, Mr Carabelas became indebted to ALS. Although the judgment
did not examine the precise state of Mr Carabelas' loan account with ALS, there
was evidence that ALS also owed him money. Apart from what might have been
inferred from GJ10, there was no evidence of any resolution of directors or
shareholders, or of any agreement, or of any other transaction, between ALS,
Mr Carabelas, and the other Carabelas companies, that brought about any
discharge, by novation or otherwise, of Mr Carabelas' liability to ALS. The
journal entry, GJ10, and the financial statements prepared on the basis of that
journal entry, reflected the agency theory, found by Williams J to be spurious.
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8.
So far as appeared from the evidence, the novation theory was equally spurious.
It seems to have been an attempt to rationalise GJ10, and the financial
statements, in some alternative fashion. There was no evidence that a novation
had occurred. The evidence, and the findings of primary fact, showed that the
financial statements were wrong, and that the liability of Mr Carabelas to ALS
had never been discharged. The reasons of Williams J explain his rejection of
the agency theory, but not his acceptance of the novation theory. It was not
necessary to rationalise GJ10. On the evidence, it was simply wrong.
20 Similarly, perhaps because the agency theory was advanced as the
justification for the July 1988 mortgage, Williams J did not give any detailed
reasons for concluding that the mortgage transaction itself was part of a
contravening course of conduct. All he said on that topic was:
"The defendants contend that there is nothing unusual in an
arrangement under which a number of trading entities provide mutual
financial support to each other by guarantees of their collective
borrowings from a common account. As relevant to this case, that
proposition is an incomplete reflection of the pertinent facts. The various
entities were not trading in partnership, and upon the sale of property by
one company, the bank was entitled immediately to apply the proceeds of
sale in reduction of the account. Although the bank in the exercise of its
discretion might then be prepared to release funds for some other
approved investment, the arrangement seems to me to be difficult to
justify."
The decision of the Full Court
21 In the Full Court, counsel for the present respondents sought, for the first
time, to raise the matter of certain amounts owed by ALS to Mr Carabelas, and
complained of the failure of the trial judge to give credit for those amounts
which, it was said, would have reduced Mr Carabelas' liability to $257,512.
Counsel was refused leave to do so. The argument, however, serves to
emphasise the fact that, in the proceedings at first instance, neither side
approached the problem as one of attempting to work out the correct state of
Mr Carabelas' loan account with ALS, and to apply the conclusion directly by
way of a claim for debt.
22 One of the grounds of appeal to the Full Court was expressed as follows:
"The learned trial judge erred in law in failing to apply the principles
enunciated in Pascoe Ltd to defeat the [compensation] claim."
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9.
23 Pascoe Limited (In Liquidation) v Lucas2 was a decision of the Full Court
of the Supreme Court of South Australia. The somewhat circumspect reference
to that case was evidently intended to raise an argument based on the fact that Mr
and Mrs Carabelas were the owners of all the issued shares in the capital of ALS.
The precise legal significance attributed to that fact, which does not appear to
have featured in the arguments to the primary judge, was not stated in the notice
of appeal.
24 Pascoe was a case in which a company was incorporated for a special
purpose of participating in a series of transactions entered into for the benefit of a
group of which it was a member. All the shares in the company were owned by
another member of the group. The company was solvent. It entered into the
transactions at the behest of its sole shareholder. After the group encountered
financial difficulties, a liquidator sued one of the Pascoe directors claiming
breaches of s 229 of the Companies (Western Australian) Code, and of fiduciary
duty. The trial judge found that the director acted honestly, and rejected the
liquidator's allegation of impropriety. In the Full Court of the Supreme Court of
South Australia, reference was made to two related but distinct lines of authority,
both of which turn upon the significance of knowledge and unanimous approval
by shareholders of conduct of directors. The first line of authority, exemplified
by In re Duomatic Ltd3, concerns cases in which, by reason of some feature of a
company's internal structure, or some failure to comply with its Articles of
Association, there is a potential defect in a purported exercise of corporate
power. In such a case, the unanimous consent of the shareholders, even if there
has been no formal resolution of a general meeting, may be as binding as a
resolution in general meeting would have been4. This line of authority is often
invoked to meet a contention that a company is not bound by some decision or
conduct by reason of administrative irregularity, failure to comply with Articles
of Association, or want of authority on the part of some internal organ5. The
second group of cases concerns ratification by shareholders of breaches of duty
2 (1999) 75 SASR 246.
3 [1969] 2 Ch 365.
4 Generally, see Gower and Davies' Principles of Modern Company Law, 7th ed
(2003) at 305-306. No difficulty of the kind referred to by Bowen CJ in Eq in Re
Compaction Systems Pty Ltd and the Companies Act [1976] 2 NSWLR 477 at 484-
485 arises on the facts of the present case.
5 In Ho Tung v Man On Insurance Company [1902] AC 232 the acquiescence of
shareholders in a course of dealing validated conduct which otherwise would have
been without the sanction of articles of association.
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10.
by directors6. They are exemplified by Bamford v Bamford7. The principles
were considered and applied in Winthrop Investments Ltd v Winns Ltd8, and were
discussed in Miller v Miller9. Of particular relevance to the present case is one
well accepted qualification to the capacity of shareholders to ratify or excuse
directors' breaches of duty: shareholders cannot sanction improper expropriation
of a company's property by the directors10. The principle underlying that
qualification is the same as that recently applied in this Court in Macleod v The
Queen11.
25 The leading judgment in the Full Court was that of Doyle CJ, with whom
Prior and Vanstone JJ agreed12. Referring to Pascoe, Doyle CJ said:
"This line of authority suggests that the informal assent by the
shareholders of ALS to the grant of the mortgage to CBA is sufficient to
prevent ALS complaining that in granting the mortgage the directors acted
in breach of their duty to the company. The company was not insolvent at
the time. There were no other shareholders. There was no other person
with a claim to the property in question. There is no allegation that this
was a dishonest or fraudulent transaction, although it is to be noted that it
was alleged that there was no commercial advantage to ALS in the grant
of the mortgage, beyond securing the money required to repay HBS. It is
true that the grant of the mortgage contemplated the use of company assets
to discharge a liability of Mr Carabelas, and in that sense contemplated a
misappropriation of ALS' assets. But this was not a misappropriation
contrary to the interests of any other person: cf Macleod v R."
6 Generally, see Gower and Davies' Principles of Modern Company Law, 7th ed
(2003) at 437-44; Ford's Principles of Corporations Law, 11th ed (2003) at 374-
378.
7 [1970] Ch 212.
8 [1975] 2 NSWLR 666.
9 (1995) 16 ACSR 73.
10 Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246 at
296.
11 (2003) 214 CLR 230.
12 Carabelas v Scott (2003) 177 FLR 334; [2003] SASC 389.
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11.
26 Doyle CJ concluded that the mortgage transaction did not involve a breach
of s 229. Although he did not mention the matter specifically, it appears that he
dealt with the second aspect of the alleged contravention of s 229, that is to say,
the supposed discharge by novation of the debt to ALS by Mr Carabelas, on the
basis that there was no such discharge. He could not have treated that
transaction, had it occurred, as covered by the reasoning he applied to the entry
into the mortgage. In the Full Court, the present respondents pursued their
agency theory, which was again considered and rejected. The evidence,
Doyle CJ said, was vague and incomplete, and the accounting entries made by
Mr Vlassis appeared to reflect "surmise or assumption on his part" rather than an
accurate record of any dealings that were otherwise established by evidence. As
will appear, when Doyle CJ came to deal with the preference claims, which were
based upon book entries made by Mr Vlassis, he rejected those claims on the
ground that no transactions of the kind that the entries purported to record ever
occurred. At least by implication, he reached the same conclusion about the
alleged novation.
The s 229 claim
27 The Second Further Amended Statement of Claim pleaded the case under
s 229(7) of the Code as follows. In June 1988, ALS owed HBS $435,050. (The
Full Court treated the correct sum as $435,040.) In July 1988, the
Commonwealth Bank advanced $1.7 million to Mr Carabelas, of which $435,050
was used to pay off the debt owed by ALS to HBS. ALS became indebted to
Mr Carabelas in the sum of $435,050. ALS granted an "all moneys mortgage" to
the bank to secure Mr Carabelas' indebtedness to the bank. There was no
commercial advantage to ALS in granting the all moneys mortgage to the bank
except to the extent of the $435,050 used to repay the Company's debt to the
building society. In October 1989, the Angas Street property was sold for
$910,000, and the whole of the proceeds went to the bank. Mr Carabelas thereby
became indebted to ALS in the sum of $474,950 ($910,000 minus $435,050).
During the year ended 30 June 1990 "the defendants caused [ALS] and Barry
Simpson, Citizac, Wamville, Tusport and Blackcroft and George Carabelas to
novate the debt which George Carabelas owed to [ALS] by substituting for
himself, Barry Simpson, Citizac, Wamville, Tusport and Blackcroft as debtors of
the company." That allegation was followed by particulars. The particulars,
however, did not give any further detail of any act or agreement on the part of
any of the named parties which could have amounted in law to a novation.
Rather, they simply referred to the journal entry GJ10, and recited that the
financial statements of ALS for the year ended 30 June 1990 recorded Barry
Simpson, Citizac, Wamville, Tusport and Blackcroft as debtors of ALS and did
not record Mr Carabelas as a debtor of ALS. At the time of the novation, Barry
Simpson, Citizac, Wamville, Tusport and Blackcroft were insolvent. Their debts
to ALS were later written off. As a result of the foregoing Mr Carabelas
obtained a benefit in that he was relieved of his debt to ALS of $474,950. In
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12.
causing ALS to grant the all money mortgage to the bank and to "novate George
Carabelas' indebtedness", Mr and Mrs Carabelas contravened s 229(2) and s
229(4). "By reason of the foregoing the company has suffered loss and damage
in the said sum of $474,950."
28 The pleading explains why Williams J treated the alleged contravention of
s 229 as involving a course of conduct. The supposed novation, and consequent
discharge of Mr Carabelas' debt to ALS, was essential to the loss allegedly
suffered, which was the amount of that debt. There was no allegation that the
mortgage transaction of itself caused the loss sought to be recovered under
s 229(7). The loss was claimed to be the loss of the debt of $474,950 which
became owing to ALS by Mr Carabelas in October 1989. The mortgage
transaction of July 1988 explained how that debt came to be owing, but it was the
alleged discharge of Mr Carabelas' liability to ALS that was said to constitute the
loss. The significance of this is that, if purported ratification of directors'
breaches of duty had been raised as an answer to the claim under s 229(7), it
would have arisen in relation to the alleged novation, not the mortgage. No such
defence was pleaded.
29 Insofar as the pleading alleged that the mortgage transaction itself
involved a contravention by the respondents, in July 1988, of s 229, the
considerations mentioned by Doyle CJ were relevant, not to any question of
ratification, but to whether the provisions of sub-s (2) or sub-s (4) of s 229
applied. In particular, they were relevant to whether the respondents, as directors
of ALS, in July 1988 exercised a reasonable degree of care and diligence, and
whether they made improper use of their position. It may be that the reference to
"informal assent" should have been to informed assent. The mortgage was
executed under the seal of ALS, and bore the signatures of both respondents in
their capacity as officers of the company. There was no suggestion of any want
of formality, or of failure to comply with the Articles of Association. The
validity of the mortgage was never in question. In July 1988, ALS,
Mr Carabelas, and, so far as appears, the other companies controlled by
Mr Carabelas, were solvent. The mortgage transaction did not render ALS
insolvent. It had rights of contribution in respect of the contingent liability it
undertook. Following the mortgage transaction, ALS had no significant creditors
except Mr Carabelas and, contingently, the bank. Undoubtedly, by procuring the
mortgage to secure his own liabilities, Mr Carabelas gained an advantage for
himself, but the issue was whether the transaction was improper, or involved a
lack of reasonable care. The question whether corporate transactions of
guarantee or third party mortgages involve breaches of directors' duties, or the
particular kinds of breach referred to in s 229(2) or s 229(4), usually turn upon a
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13.
close examination of the commercial context in which they occur.13 Before
Williams J, probably because of the concentration by the parties on the agency
theory, and because of the way the loss was identified in the pleadings, there
appears to have been little investigation of that context insofar as it would have
been relevant to whether, in July 1988, the mortgage transaction considered alone
contravened s 229. In the Full Court, the opening sentence of the passage in the
reasons of Doyle CJ quoted above could be taken to suggest that, at that stage, he
was considering an issue of ratification. But there was no such issue on the
pleadings. His conclusion was that the mortgage transaction did not contravene
s 229. He said "there was in fact no breach of s 229". That is a different thing
from saying that there was a breach but ALS could not claim compensation under
s 229(7). The unanimous informed consent of the shareholders of ALS, the
solvency of ALS and Mr Carabelas, and the absence of any adverse effect on the
interests of third parties, were facts relevant to the propriety of the mortgage
transaction. As to the other aspects of the commercial context, the evidence was
thin, but the Full Court's conclusion that, in July 1988, there was no impropriety,
and no want of reasonable care, has not been shown to be in error.
30 This, however, was not the critical point. It was not that which occurred
in July 1988 that was the proximate cause of the relevant loss. The loss was said
to arise from the novation which allegedly occurred at some unspecified time
after the beginning of 1990, and which resulted in the discharge of Mr Carabelas'
liability to ALS, and the loss of a valuable asset in the form of that debt.
31 If such a novation, and consequent discharge of liability, had in fact
occurred, then it would have involved a contravention of s 229(4), although
whether Mrs Carabelas was a party to that contravention may be another matter.
However, there was not shown to have been any transaction of novation. To
discuss whether there was informed assent of, say, Mrs Carabelas to the novation
would require some hypothesis as to what exactly occurred. The appellants were
unable to give particulars of any transaction. All they could do was rely upon
book entries made by Mr Vlassis. Those entries, however, were made upon a
different basis. They purported to account for the dealings between
Mr Carabelas and his companies on the discredited agency theory. They did not
purport to record any transaction of novation. Journal entry GJ10 purported to
correct GJ2, not to show that a subsequent transaction altered the state of
Mr Carabelas' loan account.
13 See Walker v Wimborne (1976) 137 CLR 1; Charterbridge Corporations Ltd v
Lloyds Bank Ltd [1970] Ch 62; ANZ Executors & Trustee Company Limited v
Qintex Australia Limited (receivers and managers appointed) [1991] 2 Qd R 360.
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14.
32 If a novation of the kind alleged had occurred, then it would have involved
a contravention of s 229(4), at least by Mr Carabelas, assuming he had in some
way used his position as a director to effect the transaction. It would have
involved a discharge of his liability to ALS, and a substitution of the liability of a
number of insolvent companies. Clearly, that would have been improper. That
is not something that could have been ratified effectively by Mr and
Mrs Carabelas. If a novation had occurred as alleged, it would have involved
expropriation of the property of ALS by Mr Carabelas: a form of abuse of power
that could not have been ratified by the self-interested consent of Mr Carabelas
and the acquiescence of Mrs Carabelas.14 In any event, ratification was not
pleaded as a defence. The question whether, if the alleged novation had involved
a contravention of s 229, the involvement of Mr and Mrs Carabelas, by some
process of ratification, waiver, or otherwise, could have operated to prevent ALS
from enforcing its rights under s 229(7) did not arise on the pleadings, and was
not dealt with in the reasoning of Williams J or the Full Court. The wider issue
of the relationship between s 229(7) and the general principles of equity
concerning release of fiduciaries from their obligations or liabilities by
acquiescence, ratification, or waiver on the part of those to whom such
obligations or liabilities are owed did not arise. While, in some circumstances,
the informed assent of all the shareholders to a transaction might be a fact
relevant to a question of impropriety, the provisions of s 229 creating offences
operate according to their terms. Where ratification operates to protect a director
from civil liability to a company it does so upon the principle that "those to
whom [fiduciary] duties are owed may release those who owe the duties from
their legal obligations and may do so either prospectively or retrospectively,
provided that full disclosure of the relevant facts is made to them in advance of
the decision"15. The shareholders of a company cannot release directors from the
statutory duties imposed by sub-s (2) or sub-s (4) of s 229. In a particular case,
their acquiescence in a course of conduct might affect the practical content of
those duties. It might, for example, be relevant to a question of impropriety. A
company's right to recover under s 229(7) depends upon the existence of a
contravention. If such a contravention has occurred, the question whether a
company has lost its right of action under s 229(7) because of some binding
decision on the part of its shareholders to release the potential defendants is
another matter, and one that did not arise in this case.
33 The claim under s 229 fails for want of proof of the alleged novation,
which was critical to the alleged loss.
14 Macleod v The Queen (2003) 214 CLR 230.
15 Gower and Davies' Principles of Modern Company Law, 7th ed (2003) at 437.
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15.
The preference claims
34 This aspect of the appeal may be dealt with briefly. It was decided by the
Full Court on the facts, and the appellants have been unable to show error in the
Full Court's reasoning. As with the supposed novation, the preference claims
appear to have been founded upon an attempt to take at face value certain book
entries made by Mr Vlassis, in circumstances where the evidence provided no
justification for concluding that the entries reflected the true facts, and where
there was evidence to cast doubt on those entries.
35 Doyle CJ summarised the evidence as follows. When ALS was wound up
in April 1994 its books of account were not up to date. Mr Carabelas gave
Mr Vlassis general instructions to prepare accounts for the years ending 30 June
1992 and 30 June 1993, but left it to Mr Vlassis to decide how that should be
done. Mr Vlassis considered it to be desirable to prepare accounts for ALS and
the other companies in such a way as to show that the other companies had no
assets requiring administration, so that they could be de-registered rather than
wound up. To this end, Mr Vlassis took the following steps. Mr Carabelas was
shown in the books of ALS as a creditor, and in the books of the other companies
as a debtor. (The status of Mr Carabelas as a creditor of ALS assumed the
correctness of journal entry GJ10. The falsity of that assumption is presently
immaterial.) Mr Vlassis thereupon engaged in a process of "netting off" amounts
owed by Mr Carabelas to his companies and amounts owing to Mr Carabelas by
his companies. This was done by a series of journal entries that were not shown
to Mr Carabelas. According to the liquidator, these entries reflected, or resulted
in, transactions which he challenged as preferences. These "transactions" did not
involve any resolutions of directors or shareholders, or any cheques being drawn,
or money changing hands. Doyle CJ said they "involved nothing more than
entries in the records of the various companies."
36 The first "transaction" involved entries in the records of ALS and another
company according to which ALS reduced by $71,787.22 the amount of the debt
it owed to Mr and Mrs Carabelas by paying the debt they owed to another
company. This involved a like reduction in an amount owed by the other
company to ALS.
37 The second "transaction" involved a series of entries the effect of which
was that ALS reduced its debt to Mr and Mrs Carabelas by $67,826 by paying a
debt that they owed to another member of the group. An amount owed by the
other company to ALS was reduced by the same amount.
38 The third "transaction" involved entries which purported to record that
ALS reduced the debt it owed to Mr and Mrs Carabelas by paying a debt in the
sum of $93,763.75 that ALS owed to another group member.
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16.
39 Counsel for the present respondents argued in the Full Court that there
was no evidence that these entries recorded any actual transactions, that once the
order for winding-up was made the directors of ALS had no power to authorise
any such transactions, that the evidence did not show that they purported to
authorise such transactions, that if any such transactions had occurred they
occurred after the winding-up, that there were no transactions that amounted to
preferences, and that there were merely a number of incorrect book entries.
Doyle CJ agreed. The trial judge, he noted, was understandably reluctant to
allow the present respondents to impeach entries made in the records of ALS.
However, "the evidence indicates that there was no transaction before the
winding-up began, that these entries record or reflect". The trial judge had not
relied on estoppel or any other principle that would prevent Mr and
Mrs Carabelas from relying upon the facts disclosed by the evidence. The proper
conclusion, on the facts, was that the journal entries were not a true record of any
transaction and that there was no transaction that was binding on ALS or the
other companies.
40 The reasoning of the Full Court on this issue was correct.
A proposed amendment
41 In the course of argument in this Court, faced with the possibility that it
might be concluded, upon analysis of the facts, that there had never been any
legally effective discharge of the debt owed by Mr Carabelas to ALS following
the sale of the Angas Street property, counsel for the appellants sought leave to
amend the Statement of Claim by making a claim in debt against Mr Carabelas.
Perhaps because the state of Mr Carabelas' loan account with ALS was unclear,
the proposed amendment sought, in the alternative, a taking of accounts between
ALS and Mr Carabelas. It is not apparent why such a claim was not propounded
in the first place, at least as an alternative. It might raise questions of limitation
periods. Further, as has been noted, an attempt by the respondents in the Full
Court to amend their defence to raise certain liabilities of ALS to Mr Carabelas
failed. This Court does not have all the information that would enable it to do
justice to the amendment application. The matter should be remitted to the Full
Court of the Supreme Court of South Australia to enable that question to be
pursued.
Conclusion
42 The matter should be remitted to the Full Court of the Supreme Court of
South Australia to enable that Court to consider the proposed amendment to the
Statement of Claim foreshadowed in this Court and to deal with any issues
arising out of any amendment that may be permitted. Save to that extent, the
appeal should be dismissed with costs.
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17.
43 GUMMOW AND HAYNE JJ. We agree with the reasons given by the Chief
Justice and Heydon J and with the order proposed. This appeal is resolved by
recognising that the damage alleged to have been suffered by Angas Law
Services ("ALS") only arises upon an alleged novation which did not take place.
The result is that the debt owed by Mr Carabelas to ALS still exists.
44 However, detailed submissions were made to this Court respecting s 229
of the Companies (South Australia) Code ("the Code"). In these circumstances,
it is appropriate to consider the provenance and place of that provision in the
Code and, in particular, to say something further respecting the meaning of the
term "improper" in s 229(4) and its application to the grant of the mortgage by
ALS. The abbreviations follow those in the reasons of the Chief Justice and
Heydon J.
Sections 229 and 542 of the Code
45 Section 229 appeared in Div 2 (headed "Directors and Other Officers") of
Pt V (headed "Management and Administration") and with the sidenote "Duty
and liability of officers". It may be compared with s 542 which appeared in
Pt XIV (headed "Miscellaneous").
46 Section 542 provided for the making of orders for the payment of money
or transfer of property to a corporation, and for the recovery of loss and damage
suffered by a corporation, where "a person is guilty of fraud, negligence, default,
breach of trust or breach of duty in relation to a corporation" (s 542(2)(a)). This
provision was the then current incarnation of the misfeasance provisions first
introduced in England as s 165 in the winding-up provisions of the Companies
Act 1862 (UK)16. Section 165 had used the expression "Misfeasance or Breach
of Trust in relation to the Company".
47 The case law construing s 165 and its successors decided that (i) the
reference to breach of trust was better understood as being to breaches of
fiduciary duty, directors, for example, being fiduciaries but not trustees of the
assets of the company17; and (ii) the provision gave a summary remedy for
enforcing in a liquidation, not a new species of liability, but only such liabilities
16 25 & 26 Vict c 89.
17 In re City Equitable Fire Insurance Co [1925] Ch 407 at 426; Commissioner of
Taxation v Linter Textiles Australia Ltd (In Liq) [2005] HCA 20.
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18.
as might have been enforced by the company itself as by its liquidator by means
of an ordinary action18.
48 On the other hand, s 229 of the Code had a distinct source in measures of
corporate law reform first introduced in the State of Victoria. It provided for
both civil and penal remedies and its application, so far as relevant to this appeal,
turned upon notions of impropriety.
The text of s 229
49 At the time of the execution of the mortgage by ALS, s 229(4) of the Code
was in these terms:
"An officer or employee of a corporation shall not make improper
use of his position as such an officer or employee, to gain, directly or
indirectly, an advantage for himself or for any other person or to cause
detriment to the corporation.
Penalty: $20,000 or imprisonment for 5 years, or both."
Section 229(4) was accompanied by s 229(3), which was concerned with the
improper use of information. Section 229(3) stated:
"An officer or employee of a corporation, or a former officer or
employee of a corporation, shall not make improper use of information
acquired by virtue of his position as such an officer or employee to gain,
directly or indirectly, an advantage for himself or for any other person or
to cause detriment to the corporation.
Penalty: $20,000 or imprisonment for 5 years, or both."
50 Section 229(7) provided for the recovery of profits and damage suffered
by the company:
"Where a person contravenes or fails to comply with a provision of
this section in relation to a corporation, the corporation may, whether or
not the person has been convicted of an offence under this section in
relation to that contravention or failure to comply, recover from the person
as a debt due to the corporation by action in any court of competent
jurisdiction –
18 In re City Equitable Fire Insurance Co [1925] Ch 407 at 527; Walker v Wimborne
(1976) 137 CLR 1 at 7, 14-15; Spies v The Queen (2000) 201 CLR 603 at 635-636
[93].
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19.
(a) if that person or any other person made a profit as a result of
the contravention or failure – an amount equal to that profit;
and
(b) if the corporation has suffered loss or damage as a result of
the contravention or failure – an amount equal to that loss or
damage."
51 These provisions now appear in the Corporations Act 2001 (Cth) as s 182
(use of position – civil obligations), s 183 (use of information – civil obligations),
s 184(2) (use of position – criminal offence) and s 184(3) (use of information –
criminal offence). The criminal offence provisions in force now require
"dishonesty" rather than impropriety.
52 "Officer", for the purposes of s 229 of the Code, was widely defined in
s 229(5) to include, among other persons, a liquidator of the corporation and a
receiver of property of the corporation. Nothing turns on this definition. It was
not disputed that Mr and Mrs Carabelas were the sole directors and shareholders
of ALS. No question arises in this case respecting any other individual falling
within the broad definition of "Officer".
53 It was also not disputed that Mr Carabelas gained an advantage, the loan,
by the granting of the mortgage by ALS. Thus, the only element of s 229(4) that
was to be considered, assuming ALS suffered loss or damage (s 229(7)), was
whether the conduct was an improper use of position. Further, as explained in
the reasons of the Chief Justice and Heydon J, the issue was not one of
ratification (characterised as curing a breach), but of whether there was in fact
any breach of s 229(4) in the first place.
54 Contravention of s 229(4) is not established by merely showing that the
officer engaged in conduct that resulted in an advantage to himself, or a
detriment to the corporation. There must be the element of impropriety. What is
meant by "improper" should be considered by reference to the legislative history,
relevant authorities and matters of principle.
Legislative history of s 229
55 The progenitor of s 229(3) and (4) is s 107(2) of the Companies Act 1958
(Vic) ("the 1958 Act"). This dealt only with the use of information by an officer
of a company. Section 107 provided:
"(1) A director shall at all times act honestly and use reasonable
diligence in the discharge of the duties of his office.
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(2) Any officer of a company shall not make use of any
information acquired by virtue of his position as an officer to gain an
improper advantage for himself or to cause detriment to the company.
(3) Any officer who commits a breach of the foregoing
provisions of this section shall be guilty of an offence against this Act and
shall be liable to a penalty of not more than Five hundred pounds and shall
in addition be liable to the company for any profit made by him or for any
damage suffered by the company as a result of the breach of any of such
provisions.
(4) Nothing in this section shall prejudice the operation of any
other enactment or rule of law relating to the duty or liability of directors
or officers of a company."
Section 3(1) of the 1958 Act defined "Officer" as including a director and any
other officer whatsoever of a company.
56 It is apparent that, unlike in s 229(4), the word "improper" in s 107(2)
attached to the element of advantage for the officer. It is also apparent that, in
addition to serving the purpose of conferring on the company a cause of action
against the officer (sub-s (3)), s 107 also served the purpose of imposing both
criminal and civil liability.
57 The second reading speech introducing the Bill that became the 1958 Act
noted that s 107 was the first statutory provision of its kind in either Australia or
the United Kingdom19. It attempted to set standards of honesty (sub-s (1)) and
propriety (sub-s (2)), and give remedies (sub-s (3)) for any breach of those
standards.
58 The provision was introduced as a result of the report of the Statute Law
Revision Committee of Victoria, which examined the provisions of the
Companies Act 1938 (Vic) with respect to certain actions taken by the directors
of Freighters Limited20. The impugned actions arose from Freighters' acquisition
of Australian Machinery Co and the directors' formation of companies that would
re-sell products produced by Freighters. First, in order to raise the necessary
monies to fund the acquisition of Australian Machinery, Freighters issued shares.
However, rather than offering the shares pro rata to existing shareholders for the
19 Victoria, Legislative Assembly, Parliamentary Debates (Hansard), 9 September
1958 at 324.
20 Victoria, Statute Law Revision Committee, Report upon the provisions of the
Companies Acts (re Freighters Limited), 3 September 1957.
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21.
market price of 50s, the directors of Freighters, without informing the
shareholders, themselves took up the necessary shares at a reduced price of 40s.
Secondly, the board of directors took over personal responsibility for distributing
some of the products of Freighters by forming separate companies for this
purpose. This action was taken also without informing the shareholders. The net
result was that the directors fixed the prices at which Freighters' products were to
be sold to the newly formed companies for resale by them. Thus the directors
dealt with Freighters through the cloak of those companies21.
59 It also later transpired that the inspector appointed by the Attorney-
General of Victoria to investigate these activities faced difficulties ascertaining
the full facts because of his limited powers22. Thus, the Statute Law Revision
Committee's primary focus was on recommending provisions regarding
disclosure of interests and provisions regarding powers of investigation with
respect to preventing what is now called "insider trading".
60 Although the Minister's second reading speech attributed s 107 to the
report produced by the Statute Law Revision Committee, no recommendation of
this kind was in fact made. Rather, the report provided specific provisions
concerning share transactions and the like. An explanation of the clauses of the
Bill was incorporated in Hansard by resolution of the House. It stated, with
respect to s 107, that23:
"[i]t was decided to introduce this provision rather than the particular
provisions suggested by the Statute Law Revision Committee as it was
thought that a more general provision would be more effective."
The explanation went on to say:
"To a large extent the clause is declaratory of the existing law, but it is
believed that a restatement of the principles of honesty and good faith that
should govern directors' conduct, clearly set out in the Act, will be an
effective deterrent to misconduct and will free the courts from the
21 Victoria, Report of the Inspector Appointed to Investigate the Affairs of Freighters
Limited Pursuant to the Provisions of the Companies (Special Investigations) Act
1940, 4 October 1956 at 4-20.
22 Victoria, Report of the Inspector Appointed to Investigate the Affairs of Freighters
Limited Pursuant to the Provisions of the Companies (Special Investigations) Act
1940, 4 October 1956 at 25-26.
23 Victoria, Legislative Assembly, Parliamentary Debates (Hansard), 9 September
1958 at 331.
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22.
technicalities of the existing law in dealing with all forms of dishonesty
and impropriety by directors."
61 What those technicalities were was not explained. Some hint of what was
meant is gleaned from the evidence of Professor F P Donovan of the University
of Melbourne, given before the Statute Law Revision Committee. He suggested
that, without affecting any general law right which the company might have to
recover profits made by directors from dealings in the company's shares as a
direct result of their position, a specific remedy might be given to the company to
recover any profits made in respect of undisclosed shareholdings. Although not
couched in terms specific to the Freighters case (dealings in shares), s 107, in
addition to criminal liability, provided this remedy. Professor Donovan went on
to say that the purpose of the suggestion was to ensure that the company had
some real remedy against directors who had abused their position. His concern
was that the general law rules might not be adequate to cover that sort of case24.
62 These materials, together with s 107(4) which preserved "the operation of
any other enactment or rule of law relating to the duty or liability" of directors
and company officers, suggest that s 107 was designed to encourage good
corporate governance by provision of deterrents. It did so by imposing criminal
and civil liability with respect to actions that would be considered dishonest or
improper. The standards of dishonesty and impropriety were to be determined by
reference to the existing law. By "existing law" was meant the civil law; the
joinder of civil and criminal remedies meant that the section could not be
described simply as declaratory of the law as a whole.
63 The 1958 Act was repealed by the First Schedule to the Companies Act
1961 (Vic), which enacted the Uniform Companies Act ("the UCA"). The UCA
re-enacted s 107, without substantial amendment, as s 124.
64 Section 124(2) was amended in 1971 by s 8 of the Companies Act 1971
(Vic). The amendment was a result of the Fourth Interim Report of the Victorian
Company Law Advisory Committee25. The amended section provided:
"An officer of a corporation shall not make improper use of
information acquired by virtue of his position as such an officer to gain
24 Victoria, Statute Law Revision Committee, Minutes of Evidence accompanying the
Report upon the provisions of the Companies Acts (re Freighters Limited), 12 June
1957 at 26.
25 Victoria, Company Law Advisory Committee, Fourth Interim Report to the
Standing Committee of Attorneys-General, (1970) at 6 [24].
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23.
directly or indirectly an advantage for himself or for any other person or to
cause detriment to the corporation."
The amendment recognised that the word "improper" used in juxtaposition to the
word "advantage" (s 107 of the 1958 Act) incorrectly assumed that an authorised
use of information which resulted in a detriment to the corporation was within
the provision26. Thus the provision took its modern form.
Authorities
65 The defendants in R v Byrnes27 had been convicted of offences against
s 229(4) of the Code. The question in this Court was whether an element of
intention was necessary to establish improper use of position within the meaning
of s 229(4). The South Australian Court of Criminal Appeal had held that
s 229(4) required an element of criminal intent. In that case, the trial judge had
found that there was no such intent. Rather the defendants mistakenly believed
that their actions would be of benefit to the company. This Court allowed the
Crown appeal, holding that intention or purpose is only a necessary element of
the second limb of s 229(4), namely, that the officer acted in order to gain an
advantage for himself or another person, or cause a detriment to the company28.
The Court said that intention or purpose does not form part of the requirement of
improper use of position, yet it may be relevant in assessing impropriety29. An
officer who honestly believed his or her actions did not amount to improper use
could nevertheless be found to have improperly used his or her position. The
test, as noted in the joint judgment of Brennan, Deane, Toohey and Gaudron JJ,
for determining whether an action is improper is objective30:
"Impropriety does not depend on an alleged offender's consciousness of
impropriety. Impropriety consists in a breach of the standards of conduct
that would be expected of a person in the position of the alleged offender
by reasonable persons with knowledge of the duties, powers and authority
of the position and the circumstances of the case. When impropriety is
26 Victoria, Company Law Advisory Committee, Fourth Interim Report to the
Standing Committee of Attorneys-General, (1970) at 5 [15].
27 (1995) 183 CLR 501. See Austin, Ford and Ramsay, Company Directors:
Principles of Law and Corporate Governance, (2005) at §9.14-§9.18.
28 See Chew v The Queen (1992) 173 CLR 626 at 633.
29 (1995) 183 CLR 501 at 512, 513-515.
30 (1995) 183 CLR 501 at 514-515 (footnote omitted).
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24.
said to consist in an abuse of power, the state of mind of the alleged
offender is important: the alleged offender's knowledge or means of
knowledge of the circumstances in which the power is exercised and his
purpose or intention in exercising the power are important factors in
determining the question whether the power has been abused. But
impropriety is not restricted to abuse of power. It may consist in the doing
of an act which a director or officer knows or ought to know that he has no
authority to do." (emphasis added)
For present purposes, the second sentence is particularly important. The question
in each case is what content is to be given to the standards of conduct that would
be expected of the officer, having regard to the position occupied by the officer
in the company and the circumstances surrounding the impugned conduct (ie, the
commercial context31).
66 In oral submissions on the present appeal, the liquidator submitted that it
is "a basic principle of corporate law" that its assets be dealt with for the
purposes of the corporation and not for the purpose of "appropriation" by those
who control and own all the issued shares. The corporators necessarily acted
improperly if they so acted as to bring about the appropriation of the company's
assets as their own. The liquidator contended that any act of "appropriation"
caused by an officer of the corporation is a breach of the standard of propriety
required by s 229(4) of the Code. (The liquidator properly disavowed any
reliance on the doctrine of ultra vires; this had been drastically modified in 1985
by legislation giving to companies incorporated or deemed to be incorporated
under the Code "the legal capacity of a natural person"32.)
67 This proposition concerning "appropriation" is too broad. It insufficiently
allows for the significance from case to case of the commercial context, and
assumes a standard of conduct that is inflexible. The starting point must be the
general duty of a director to act in the best interests of the company33. The best
interests of the company will depend on various factors including solvency. In
Kinsela v Russell Kinsela Pty Ltd (In Liq), Street CJ said34:
31 This term was used in Grove v Flavel (1986) 43 SASR 410 at 420 and applied in
R v Byrnes (1995) 183 CLR 501 at 514.
32 See s 67 of the Code as substituted by the Companies and Securities Legislation
(Miscellaneous Amendments) Act 1985 (Cth), s 48.
33 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at 289, 300-301.
34 (1986) 4 NSWLR 722 at 730.
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Gummow J
Hayne J
25.
"In a solvent company the proprietary interests of the shareholders entitle
them as a general body to be regarded as the company when questions of
the duty of directors arise. If, as a general body, they authorise or ratify a
particular action of the directors, there can be no challenge to the validity
of what the directors have done. But where a company is insolvent the
interests of the creditors intrude. They become prospectively entitled,
through the mechanism of liquidation, to displace the power of the
shareholders and directors to deal with the company's assets. It is in a
practical sense their assets and not the shareholders' assets that, through
the medium of the company, are under the management of the directors
pending either liquidation, return to solvency, or the imposition of some
alternative administration."
68 Nothing said in Macleod v The Queen35 suggests the contrary. It was
decided in Macleod that the "consent" of a single shareholder company could not
cure what otherwise would be a breach of s 173 of the Crimes Act 1900 (NSW).
Section 173 created an offence where a director or officer of a body corporate
fraudulently took or applied any of the property of the body corporate for his
own use or benefit, or for any use or purpose other than that of the body
corporate. Gleeson CJ, Gummow and Hayne JJ said36:
"The self-interested 'consent' of the shareholder, given in furtherance of a
crime committed against the company, cannot be said to represent the
consent of the company."
69 In the present case, the mortgage was granted by ALS whilst it was
solvent and at a time when there appeared to be no real chance of insolvency. In
its internal memorandum concerning the loan application, the bank noted that
Mr Carabelas, by reference to the properties held by his companies including
ALS, was in "a very strong financial position". Further, the granting of the
mortgage was authorised by the shareholders of ALS. The combination of these
two factors, solvency and authorisation, indicates that the standards of propriety
expected of the directors was not breached.
35 (2003) 214 CLR 230.
36 (2003) 214 CLR 230 at 240 [30].
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Kirby J
26.
70 KIRBY J. I agree with the orders proposed by Gleeson CJ and Heydon J and
with their reasons.
71 As to the additional observations contained in the reasons of Gummow
and Hayne JJ, I prefer to reserve my opinion until a case arises where it is
essential to enter upon them.
72 Thus, whilst it is true to say that a contravention of s 229(4) of the
Companies (South Australia) Code is not established by merely showing that an
officer of a corporation engaged in conduct that resulted in an advantage to that
officer, or a detriment to the corporation37, the circumstances of the conduct by
such a person may not need to go much further in order to establish
"impropriety". That is a word, like "dishonesty", which always involves a
practical judgment based on all the facts and circumstances of the case. Amongst
them, the acquisition by an officer of a corporation of a personal advantage,
secured at the cost of the corporation, would often be powerful evidence of
wrongdoing, especially if full disclosure and formal consent were not duly
observed when that was the prudent and proper course.
73 The fundamental reason for the social and economic success of the
corporation is the separate existence and personality it derives from the law,
distinct from its shareholders, its officers and its employees. The present was a
relatively simple case where Mr Carabelas – even, it seems, to the exclusion of
his wife, the other shareholder – was the effective sole shareholder and moving
spirit of the company, Angas Law Services Pty Ltd . However, I would not wish
to say anything in this case that might be understood, in different circumstances,
to permit a shareholder to act without proper regard to the separate legal
existence of the corporation. Especially where doing so was open to be
construed as being exclusively for personal advantage, as, for example, to
redirect a tax debt of interest to the shareholder to insolvent companies.
74 Because they are sufficient to sustain the orders proposed within the
findings below that were unchallenged in this appeal, I agree with the reasons of
Gleeson CJ and Heydon J.
37 Reasons of Gummow and Hayne JJ at [54].
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