Dramatic developments in Centro – (a) PwC admissions and (b) warning on costs against their lawyers personally

Posted on April 17, 2012 by carrieromesievers

In case anyone has missed it, the past 24 hours have seen some dramatic developments in the Centro class action currently being heard in the Federal Court by Justice Gordon. (For a brief summary of what this case is about, see the first paragraphs of my previous post about the Centro class action here.)

It has been reported in the Age and the Australian that yesterday, counsel for PwC made some significant, limited admissions as to negligence, although not as to liability. The Australian reports that PwC, through counsel Richard McHugh SC, now concedes that it should have identified the $3.1billion in short-term debts that had been incorrectly classified as non-current in the company accounts for 2007. It is reported that Mr McHugh said –

“My client accepts for the purposes of the proceeding that audit staff were provided with information at a particular date which means more should have been done in relation to the classification….And that amounts to a breach of retainer and a breach of duty.”

However PwC has argued that the accounting errors did not cause the loss alleged to have been suffered by shareholders. Mr McHugh reportedly argued that the cause of the loss was, rather, the refinancing problems Centro was experiencing and not revealing, “and everything that went with it”, as well as shareholders investing based upon Centro’s history of paying considerable distributions. (I note in passing that the Full Federal Court recently handed down its decision on causation and shareholder losses claimed to be caused by misleading and deceptive conduct in De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liq) & Ors [2012] FCAFC 28.)

Somewhat curious is the argument advanced for PwC yesterday, as reported by the Age, that it was not PwC but rather its individual audit partner, Stephen Cougle, who made inaccurate representations about the quality of Centro’s flawed 2006/2007 audit. According to the Australian, PwC’s counsel Mr McHugh also argued that Mr Cougle was not directly responsible for the errors in the accounts, because when the first $1bn-plus error was discovered by PwC staff, Mr Cougle asked his staff if there were further issues in the accounts and was assured there were not.

Both papers report that Justice Gordon pressed Mr Hugh on these arguments, described by the Age as a “blistering exchange”, and that Justice Gordon warned PwC that if it persisted in holding a position that she ultimately found had no basis, the court could order costs against PwC’s counsel and lawyers personally. It appears that Mr Hugh took umbrage at this, remarking that her Honour’s reference to the issue of costs was “grossly inappropriate”.

It is not the first time Justice Gordon has warned parties in the expensive Centro class action that provisions of the Federal Court Act allow courts to award costs against lawyers personally if they have not acted to resolve disputes quickly, efficiently and inexpensively. Indeed her Honour has good cause to remind parties of this. Historically such orders have been unusual, but it may be that we can now expect to see more of them. Just a month ago, Gray J of the Federal Court ordered costs to be paid by a solicitor personally under s 43(3)(f) of the Federal Court Act, in Modra v State of Victoria [2012] FCA 240. In that case, there had been a history of deficient pleadings and several hearings concerning them, culiminating in an order for a further amended statement of claim to be filed and for the costs thrown away and of the last hearing to be borne by the applicant’s solicitor. In holding that the applicant’s solicitor should bear the costs personally, Gray J examined ss 37M and 37N of the Federal Court Act. His Honour held at [31] that since 1 January 2010, the duty of a legal practitioner in a proceeding in the Federal Court has been changed significantly: he or she must now conduct a proceeding in a way that is consistent with the overarching purpose referred to in s 37M, which has objectives that include efficiency, timeliness and economy, as well as justice. Whilst he accepted that the question of whether a lawyer should be ordered to pay costs personally should be determined by the principles found in the decided cases, his Honour observed that his so accepting was subject to the significant qualification of the changes to a legal practitioner’s duty effected by the introduction of ss 37M and 37N. (Note that the overarching purpose introduced in the Federal jurisdiction is of course broadly echoed in Victoria in the Civil Procedure Act 2010 (Vic) – see in particular Chapter 2 as to the overarching purpose and overarching obligations).

There have been further developments on this costs warning issued by the judge in Centro, this morning. The Age has reported that PwC’s counsel Mr McHugh informed her Honour in Court that her comments about possibly awarding costs against PwC’s counsel and lawyers personally had put them in a difficult position. Mr McHugh said that her Honour’s comments may give rise to a conflict of interest between the lawyers’ own concerns and those of their client PwC. He reportedly said the “making of the threat” may interfere with the proper conduct of the defence by PwC, although he said the members of the legal team needed to make it clear that the defence they were putting to the court was “not without foundation”. It is reported that twice Mr McHugh asked Justice Gordon to withdraw her comments about costs. On the first occasion, her Honour declined to withdraw them but agreed to stand the case down while PwC and its lawyers considered their position. Subsequently, another barrister representing PwC, Cameron Moore SC briefly returned to Court and asked for five more minutes. Mr Moore reportedly informed the Court that when he returned PwC would have “something to announce to the Court.”

When the hearing resumed at noon, counsel for PwC reportedly again asked Justice Gordon to withdraw the costs comments. Her Honour replied that she would consider the matter. Curiously, Mr McHugh reportedly then said that members of the legal team might have to withdraw, but immediately stopped himself, withdrew the comment, and said PwC’s defence would continue.

PwC’s auditing partner Stephen Cougle has since taken the stand.

De Facto Directors and Officers – Grimaldi v Chameleon Mining NL

Posted on March 27, 2012 by carrieromesievers

On 3 March 2012 I posted that the Full Federal Court had handed down its significant decision in Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6. I provided an overview of the facts of the case, and a cataglogue of the important legal issues upon which the Full Federal Court pronounced. My post can be read here and the judgment can be read here.

I now return to this case to post the first of a series of instalments of my closer review and analysis of the judgment of their Honours Finn, Stone and Perram JJ. Each instalment will address one sizeable legal issue from the judgment. Today’s addresses the first of these – de facto directors and officers. I do not propose to repeat my overview of the facts of the case here, so please check my earlier post to review the facts as found.

The judgment is long, and even its treatment of this one issue stretches to 116 paragraphs. I have drawn from it the two most helpful aspects of the judgment. Both are lists – one of law, one of fact. The first is their Honours’ useful distillation of principles from the authorities. The second list is of 11 factual matters, or activity by Mr Grimaldi, which were considered relevant to the finding that he was a de facto director of Chameleon. The latter can be useful to gain a pragmatic understanding of what conduct can be enough to amount to acting as a de facto director for a company, subject to the circumstances.

First, however, is an introductory overview.

De Facto Directors or Officers – The Law [28-76]

Section 9 of the Corporations Act 2001 (Cth) is the definitions provision of the Act. It defines the term “director” to include (a) someone who is appointed a director or alternate director, and (b) certain persons who are not. Those embraced by the definition of “director” under (b) are those people who are sometimes referred to as “de facto directors” and “shadow directors”, though those terms are not used in the provision. De facto directors under (b)(i) are those who, while not validly appointed as directors, act in the position of director. Shadow directors under (b)(ii) are also not validly appointed as directors, but the directors of the company are accustomed to acting in accordance with their instructions or wishes.

The trial judge Jacobson J had found that Mr Grimaldi was a de facto director of Chameleon for the purposes of s 9(b)(i) of the Corporations Act 2001 (Cth)’s definition of “director” (see [28]). His Honour did not therefore need to consider whether Grimaldi was a shadow director within the s 9(b)(ii) definition of a director, or was an “officer” within the s 9(b)(i) and (ii) definition of that term. On appeal, Chameleon argued that even if the Full Court found Grimaldi not to be a de facto director, then he was an “officer” and liable thereby.

The Full Federal Court gave close and detailed consideration to these issues, comparing the Corporations Act provisions with UK legislation, and tracing through the historical development of the law on this issue in Australia. They observed that the definitions of “director” and “officer” in the legislation has enlarged the class of persons concerned in the management and affairs of a corporation, who may be treated as a de facto director, with all the duties and potential liabilities that that entails [34] (but, I interpose to add, probably without the same D&O insurance coverage in place).

Their Honours also observed that in the UK there is not one single decisive test of when a person will be found to be a de facto director and judges have, for the most part, cautioned against attempting to formulate one. The UK cases equally demonstrate that generalisations in this area can often require subsequent qualification [60]. Their Honours appear to suggest at [59] that the same is true in Australia (the expression they use about this and another “lesson” derived from their review of the UK cases is that these “for the most part are confirmatory of what is immanent in our own jurisprudence”).

I suggest that the cases show that it is often a difficult line to draw, and whether a person is a de facto or a shadow director will, in each case, be a question of fact and degree largely to be determined by the circumstances and facts of the particular case, subject to the following.

Their Honours provide (from [63]) a most useful distillation of principles drawn from the authorities. They enumerate ten principles. The first eight are principles their Honours consider to have emerged from the wording of the definitions in context and from Australian case law, as to when a person will be a de facto director under s 9 “director” (b)(i) – that is, a person who is not validly appointed as such but “acts in the position of a director”. The ninth and tenth relate to the s 9 definition of “officer”. For the authorities their Honours cite in relation to each principle, I refer you to the judgment at the paragraph references I provide below.

Principles re De Facto Directors –

(i) A person may be a director even without any purported or previous appointment of that person to that position at any time. The definition applies as much to a person who is a true usurper of the functions of a director in a company, as to a person who takes “an active part in directing the affairs of [a] company” with the acquiescence of the appointed directors [64];

(ii) The formula “acts in the position of a director” contemplates that in some degree at least the person concerned, though not appointed a director, has been “doing the work of a director” in that company. Or, put another way, the person has been acting in a role (or roles) within the company and performing functions one would reasonably expect to have been performed by a director of that company given its circumstances [65];

(iii) The roles and functions so performed will vary with the commercial context, operations and governance structure (to the extent it is operative) of the company. Their performance by that person may well be at variance with what is permitted by the Act or by the company’s constitution. Nonethless, whether they suffice in the circumstances to constitute the person a “director” for the Act’s purposes will often be a question of degree having regard to “the nature of the functions or powers which are exercised and the extent of their exercise” [66];

(iv) There is no reason why the relationship of a person with a company may not evolve over time into that of a de facto director. It also may be the case that the person only performs the role and functions that constitute him or her a director for a limited period of time [67];

(v) Whether a person has acted in the position of a director is a question of substance and not simply of how that person has been denominated in, or by, the company. The fact that a person has been designated a “consultant” for the performance of functions for a company will not as of course mean that person cannot be found to be a director. It will turn on the nature and extent of the functions to be performed and the constraints imposed thereon. Their Honours did not need to determine the question, but said they considered that if a consultant is a corporation and what it does through its own directors or officers results in “acting in the position of a director” then, and consistently with the policy of s 201B (which requires a director to be a natural person), it will be a question of fact as to which director (or officer) in the consultant company is (or are) the de facto director/s of the corporation [68].

In this case, Chameleon entered into a range of consultancy arrangements. Grimaldi made submissions that he was a consultant himself, further or alternatively that Chameleon Ventures (CV) – the company of director Roberts of which Grimaldi also became a director – was hired as Chameleon’s consultant to perform a number of tasks, and CV in turn called on Grimaldi to do that work. None of which, so Grimaldi contended, makes him a de facto director. However, even if those submissions might have held good, the evidence did not bear them out. Grimaldi did not become a director of CV until after much of the key dealings took place. There were other problems with the evidentiary material for Grimaldi. Their Honours observed that even if the evidence established that everything Grimaldi did for Chameleon he did through CV (Chameleon Ventures) – which it did not – what he did was to act in the position of a director of Chameleon. As mentioned above, s 201B(1) of the Act does not permit Chameleon Ventures to be used as a screen to avoid that conclusion. In any case, while the trial judge did appear to accept that Grimaldi acted in his own right as a consultant for Chameleon for the limited purposes identified in Board minutes… he also conducted a wider range of activities for Chameleon. The Full Court approved of the trial judge’s observation that the description of Grimaldi as a consultant did not necessarily inform the conclusion as to whether he was a director [136-140];

(vi) Though the point seems not to have been authoritatively settled in Australia, their Honours agreed with the proposition that, with the extension of the de facto director concept to persons who have never purportedly been appointed director, a rigid distinction between a de facto and a shadow director cannot be maintained. Their Honours also considered that, like a shadow director whose wishes or instructions need not relate to all facets of the management of the company’s business, the functions assumed by a de facto director likewise may be limited in their scope. Nonetheless, there will commonly be the need to determine “how much a person must do before it can be held that such person is occupying or acting in the position of a director” [69];

(vii) This is a “substance over form” point. It can be misleading to say, as has commonly been said in both Australian and English cases, that to be a de facto director one must be shown to have assumed or performed functions which only a de jure director or board can properly perform. This is because when it comes to managing the business of the company – which in a typical “Table A” type company is entrusted to the directors (see Art 73) – a priori classification of what is or isn’t a proper function of a director has no general utility. In a range of cases a company’s business may be managed by the board, under the board, by directors individually, by delegates, by some combination of these, by senior managers, by executive committees, etc. In other corporate settings, the work of an appointed director may be simply selective and strategic action. In the end, what is being asked for is the making of a value judgment about the proper characterisation of what in its context the person in question had been doing [70];

(viii) Proof that a person exercises senior management functions, while ordinarily “a necessary condition of acting as a director” will not necessarily be a sufficient condition to qualifying as a de facto director (emphasis added). This is because the definition of “officer” includes a person (s 9(b)(i)) who, though not a director, “makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation” and (s 9(b)(ii)) “who has the capacity to affect significantly the corporation’s financial standing”. In many cases, of which this was one, the application of ss 180-183 to a “director or officer” can eliminate the need to differentiate between a de facto director and an officer (de facto or not) who is not a director, although this contrasts sharply with the situation in the UK [71];

Principles re Officers –

(ix) There was no need to decide whether the reach of ss 180-183 to “officers” had been altered by the repeal of the earlier definition of “executive officer”, although their Honours sounded doubtful as to whether it had been so altered. However they emphasised several points with regards to the s 9 definition of “officer”. First, that in their view, while the definition does not explicitly refer to someone acting in an “office”, that is implicit in it, and is made explicit in other provisions of the Act, eg s 180(1). That said, a person who otherwise satisfies either of the requirements in (b)(i) or (ii) of the definition is likely as a rule to be acting in an office (or position) of the corporation for the purposes of the Act irrespective of whether he or she has been formally appointed – “ie the person can be a de facto officer” – or engaged as a consultant. There is no reason in principle to differentiate between directors and s 9 officers in either of these regards. To do so would be contrary to the clearly manifest purpose of the legislation to extend the Act’s duties and liabilities to persons whose functions and/or capacities within a corporation extend to those described in (b)(i) and (ii) of the definition [72]; and

(x) The requirement in (b)(i) of the s 9 definition of “officer” – that a person makes, or participates in making decisions that affect the whole or a substantial part of the business of the corporation – does not mean that that person does so as one “in ultimate control”, or that the decision-makers are not subject to the direction and control of the board. Likewise, the requirement in (b)(ii) of the “officer” definition – that a person has the capacity to affect significantly the corporation’s financial standing – refers to the character properly to be attributed to that person’s capacity in the circumstances. It may arise from the extent of that person’s participation in investment decisions or financial commitments made, from the dimensions of a decision or decisions, from the nature of that person’s participation in the control and direction of the affairs of the corporation. The question again is one of fact [73].

Their Honours then added observations on “three additional matters”, for which I will continue the roman numerals as for the previous principles their Honours distilled.

Three Further Principles re de facto directors –

(xi) The fact that a company has active directors aside from the alleged de facto director, or has a properly constituted and apparently functioning board, does not preclude a finding that the person in question was a “director” [74].

Indeed in this case, the Full Court applied that principle here. They accepted that Chameleon had a properly constituted board, the board had minuted meetings from time to time at which decisions were taken, it had two executive directors who dealt with aspects of the company’s business. The board members seemed only to have allowed Grimaldi’s attendance at board meetings by invitation, and did not appear to regard him as a director as such. However, while they did not hold him out as a director eo nomine, they clearly authorised him on occasion to perform functions such as would lead a reasonable third party dealing with him to believe he was acting as a director of Chameleon (see the instances enumerated below). The significant deals he negotiated showed he stood on an equal footing with the directors in directing the affairs of the company. More generally, Grimaldi was allowed either to perform functions such as fund raising and share placements, or to arrogate to himself functions in which either or both executive directors at the least acquiesced with knowledge. Grimaldi was a resourceful and experienced person, and the extent of his participation and intrusion into Chameleon’s affairs could hardly have gone unnoticed, and indeed his skills and activities were known and utilised. One executive director even referred to Grimaldi in a letter as a “pseudo director” [132-135].

(xii) Whether the company itself has held the person out as a director will itself be a relevant, though not decisive, consideration. Similarly, in their Honours’ view, perceptions of those dealing with the company can be of some contextual evidentiary significance, especially where those perceptions were independently formed, reasonable in the circumstances, and support the appearance that the person was acting “under colour of office” [75].

Applying that here, their Honours observed that the trial judge properly used evidence of the perception of others as of contextual evidentiary significance in arriving at the characterisation of Grimaldi as a de facto director. One example was the trial judge’s observation that the most telling evidence that Grimaldi was reasonably perceived by outsiders to have acted as a director or officer of Chameleon was to be found in a letter from Chameleon’s auditors that Grimaldi was their main source of information and, although not a director, appeared to them to be “the manager of the company” [130-131].

(xiii) Their Honours made passing reference to the position of company secretaries: They have record-keeping responsibilities and a growing list of statutory duties, mainly to do with ensuring compliance with prescribed formalities. Traditionally the position was regarded as a humble one with little authority attached to it; however it has evolved over time to become that of the chief administrative officer of a corporation, and its “natural mouthpiece”. While it is now the case that a company secretary has authority to enter into contracts for the purposes of a corporation’s administration, it remains the case that, without the board’s authorisation, the secretary has no authority to participate in the management of the company’s affairs [76].

Application of the Law to This Case – The 11 “Matters” Relevant to the issue of De Facto Directors or Officers [77-144]

Their Honours reviewed each of the 11 “discrete matters” in almost all of which the trial judge had held the actions of Grimaldi were those of a director of Chameleon (from [90]). While it is clear that it will vary from case to case as to when a particular individual crosses the line and is held to be a de facto director, it is instructive to have regard to the facts of this case and what was regarded as relevant conduct here, to gain an understanding of what can be held to be sufficient. Here, the relevant conduct included –

(1) Negotiating for Chameleon to acquire some Fijian mining interests. The board gave Grimaldi unconstrained authority to negotiate a contract of high significance to Chameleon, including as to form and amount of consideration, and prepare the draft purchase agreements. Their Honours agreed with the trial judge that in the circumstances Grimaldi was being entrusted with the work of a director of Chameleon. That he could not formally bind the company did not detract from the significance of what he was authorised to do. In any event, his actions would be consistent with those of an “officer” under (b)(i) and probably (b)(ii) of the Act’s s 9 definition. [90-92]

(2) Preparing the Chameleon Prospectus. Chameleon engaged director Roberts’ company Chameleon Ventures to do it, and it in turn handed the task to Grimaldi. The trial judge held there was nothing to suggest Grimaldi’s functions were limited to the overall planning and verification process to be expected of a professional advisor. The accepted evidence was that Grimaldi decided the contents of the prospectus and dealt with external service providers including registries, sponsoring brokers, vendors and valuers. Their Honours held that it was open to the trial judge to find that Grimaldi’s function went beyond that of an “assistant” and involved performing a function to be expected of a director, vis a vis the prospectus. It was equally open to infer he was acting in reality for Chameleon, and had been doing director’s work for it in this matter. In any event, their Honours again concluded that his function was consistent with that of an “officer” of Chameleon for s 9(b)(i) purposes. [93-96]

(3) Raising capital for Chameleon. After listing, Grimaldi advised director Roberts that the next task was to find investors to raise capital and achieve the minimum spread of shareholders required by the ASX, and Grimaldi and Roberts set about doing that. In this regard, Grimaldi argued that his involvement was as a director of Murchison – which had assumed a contractual obligation to assist Chameleon with fundraising. Their Honours rejected this and his other arguments, and held that Grimaldi (and Roberts) conducted the capital raising for Chameleon as directors of Chameleon. [97-104]

(4) Appointing a representative of investor Zenith Development Co Ltd to the board of Chameleon, and (5) Corresponding with Prider. Grimaldi wrote to a law firm related to and representing Zenith, which said: “…we believe…it would be a good idea for Zenith to have a representative on the board of (Chameleon)…I will organise a directors resolution to approve your appointment.” The firm also wrote to Grimaldi, addressed to “Phillip Grimaldi, Chameleon Mining NL”. On appeal, Grimaldi argued that he had been appointed a director of Roberts’ company Chameleon Ventures (CV); CV had been appointed a consultant to Chameleon to provide “company secretarial duties”; hence Grimaldi was acting either for CV discharging its secretarial duties, or under the direction of the Chameleon board. The Full Federal Court rejected that. As to the first argument, Grimaldi was not appointed a director of CV until (just) after these events. As to the second, while the board was involved and passed resolutions about Grimaldi and Roberts meeting with Zenith officers regarding further funding, it was properly open to the trial judge to consider that Grimaldi’s participation in the process was such as to be expected of a person acting in the position of a director. His letter about the appointment to the board was not merely a company secretarial act. It evidenced Grimaldi’s role for Chameleon in this dealing with Zenith, as a director. [105-111]

A second matter emerged from a dealing between Tembo Gold Holdings Pty Ltd (a wholly owned subsidiary of Chameleon of which Grimaldi was a director), Zenith, and Chameleon. I will not review the detail of it here, but Zenith relied upon the dealing to refuse to pay $3million owed to Chameleon. Grimaldi was closely involved in meetings and correspondence to seek to resolve the problem. He also wrote an “internal memo” to Chameleon director Barnes, in which he gave advice and made strategic recommendations about the problem, about Chameleon’s position and liquidity, and about its relations with Murchison. It concluded with a remark by Grimaldi to the effect that if Zenith cannot be made to pay, Murchison could make a takeover bid for Chameleon, delist the company, and “we” could then sort out the Zenith problem. The Full Federal Court agreed with the trial judge that this with other actions he took, indicated Grimaldi “made high level management decisions on matters that affected Chameleon’s financial standing”. Their Honours held that the memo indicates the depth of Grimaldi’s participation in directing and influencing the affairs of Chameleon. They also agreed with the trial judge’s conclusion in relation to these dealings, that Grimaldi had the practical direction of those dealings on the balance of probabilities, and this was sufficient to make him a de facto director in those dealings, although their Honours disagreed that Grimaldi acted as a de facto director for all purposes or that he alone had the practical direction of them. This was partly because in the Tembo Gold-Zenith transaction, Grimaldi for some purposes at least acted on behalf of Tembo Gold. [112-116]

A third matter emerging from these dealings was that Grimaldi had written to Prider (of Zenith), cc’d to two Chameleon directors – saying he had spoken to them, “directors of Chameleon”, and then referred to their opinion, using the collective pronoun “we”. The trial judge found that this showed Grimaldi carrying out management tasks ordinarily performed by a director or senior officer of a company. The Full Court agreed. [117-18]

(6) Advising Mr Mclennan. McLennan’s company had sued Chameleon, and Grimaldi wrote to MrLennan about it. Grimaldi wrote indicating he had met with Barnes (a Chameleon director) and advised McLennan to withdraw his action and negotiate. Their Honours considered the letter revealed conduct appropriate to be taken by a director. [119-121]

(7) Contriving the March 2004 Share Placement. Grimaldi advised director Roberts about this, and identified the entities to whom shares would be issued and the number of shares each was to receive. Their Honours agreed with the trial judge that Grimaldi exercised functions which would ordinarily be exercised by a director. They also noted that the placement itself displayed a practice of preferential treatment. [122]

(8) Involvement in the Cadetta Transaction. Their Honours discuss this transaction in detail later in their judgment, but agreed with the trial judge that Grimaldi’s involvement in negotiating the transaction on behalf of Chameleon meant that he owed fiduciary duties to the company, whether or not he was a director or a fiduciary. [123]

(9) Involvement in the Cerro Negro Copper Mine Acquisition. The accepted evidence showed that Grimaldi negotiated the acquisition of this mine in Chile on behalf of Chameleon and made all the decisions on Chameleon’s strategy. Their Honours held that this was a good indicator that, in this company and in the circumstance under which it operated, Grimaldi was acting in the position of a director. They rejected Grimaldi’s argument that he was negotiating under the control of the board, even though the share issue agreed upon required board action and shareholder approval. [124-125]

(10) Involvement in the ASX Announcement of the July Share Placement; and (11) Involvement in the Proposed Further Share Placement. Grimaldi drafted the ASX announcement, procured its lodgment with the ASX, and received and banked the proceeds of the placement. As to the proposed further share placement, Grimaldi suggested it, indicated the number of shares that should be issued, to whom, and in what numbers. This involve the doing of acts which properly could be done by a person acting in the position of a director, so held the Full Court. In their setting, they supported the trial judge’s de facto director conclusion. [126-128]

Conclusions of the Full Federal Court re Grimaldi as a De Facto Director and Officer

1. Even though not authorised to be a director, Grimaldi was either given, or arrogated to himself with the acquiescence of at least the two executive directors, functions in the affairs of Chameleon which would properly be expected to be performed by a director of that company given its circumstances. Given the extent and significance of those functions, he so acted in the position of a director as to warrant the imposition on him of the liabilities, statutory and fiduciary, of a director. The trial judge committed no appellable error in his conclusion. [141]

2. Their Honours paused to note that while some of the these acts of Grimaldi were done at the request or with the authorisation of the board, others were not. Grimaldi took action at times without request and on his own initiative. This is important for later in the judgment, in determining the scope of the “subject matter over which his fiduciary obligations to Chameleon extend”. [142]

3. While their Honours focussed upon whether Grimaldi was a director, as that is how the case was run and as the trial judge had concluded, they remarked that that question was in a sense a distraction. They emphasised that the evidence also demonstrably brought him within the definition of “officer” for s 9(b)(i) and (ii) purposes. Their Honours pointed out that that finding, which is far less complex an enquiry than that of de facto director, was all that Chameleon needed for the purposes of this case [143].

Kassem and Secatore v COT – Third party preferences

Posted on March 6, 2012 by carrieromesievers

Last week the Federal Court handed down an interesting decision on third party preferences in Kassem and Secatore v Commissioner of Taxation [2012] FCA 152. The Commissioner was wholly unsuccessful, and may be concerned at what this case means for his ability to continue to resist liquidators’ demands that he disgorge payments made by failing corporate taxpayers, or rather, made to the Tax Office on their behalf by third parties.

Third party preferences are where an insolvent company’s debt is paid by a related entity, and the recipient creditor – here, the ATO – defends an unfair preference claim by the liquidator by pointing to the fact that the payment was made not by the company but by a third party, and arguing that the payment is not voidable as an unfair preference as it falls outside the reach of s 588FA (and 588FC) of the Corporations Act 2001 (Cth).

In this case, the tax debts of the insolvent company Mortlake Hire Pty Ltd were paid to the Tax Office by a related company Antqip Pty Ltd. The two companies shared the same sole director and shareholder, a Mr Russell, until at one point Mr Russell resigned as director of Antqip in favour of his daughter, although he continued to control Antqip’s business and bank accounts. The accounts of the companies were poorly kept, and indeed the computer in which the accounting records for the relevant financial years were stored had been disposed of. It appears that, as often happens, the liquidators had had to reconstruct the ledgers using what could be established by other records.

Mortlake’s liabilities to the Commissioner were recorded by the ATO in two separate accounts – the integrated client account (also known as the Running Balance Account) which recorded Mortlake’s primary tax liabilities to the Commissioner, and the Superannuation Guarantee Account which recorded its superannuation guarantee charge liabilities. The two payments in question were initially applied to reduce the balance of the Running Balance Account, but the Commissioner some months later reallocated the two payments to the Superannuation Guarantee Account in reduction of that liability. I will come back to this aspect of the case.

Mr Russell gave evidence that the two payments to the ATO were made by electronic funds transfer from Antqip’s bank account. Mr Russell’s evidence was that it was his intention that these payments were made by Antqip by way of a loan to Mortlake; indeed he said he instructed Mortlake’s bookkeeper to record the amount of those payments as a loan from Antqip to Mortlake.

The liquidators’ evidence was that there were not expected to be any distribution to any class of creditor of Mortlake, after allowing for costs of the voluntary administration and subsequent liquidation of Mortlake.

Section 588FA(1) of the Act provides –

“A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.”

It should be noted that previously the authorities have established that a “transaction” for the purposes of s 588FA(1), and as defined by s 9 is a word of wide connotation and can include a composite or multi-step dealing involving a third party. Where the third party payment is made with the authority of the company it can extinguish the company’s debt to the creditor, such that it can be treated as part of a multi-step transaction to which the company is party. This may amount to the giving of a preference by the company to the creditor. (See Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281; 24 ACSR 292; Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83; 64 ACSR 705 – note that special leave was granted in Capital Finance, and the High Court heard the appeal, but the parties settled prior to judgment.)

The ATO’s arguments were that the payments in question were not caught for these reasons –

The company (Mortlake) and the creditor (ATO) were not “parties to the transaction” as required by s 588FA, as the money came from a different entity (Antqip);
The company’s asset pool was not depleted by the making of the payments, as they came from the funds of another entity (Antqip). Thus, so the argument went, there was no preference over other creditors as the other creditors were not deprived of assets that would otherwise have been available on a disbtribution;
As the ATO applied the money to the Superannuation Guarantee Charge debt (a priority payment under s 556), there was no unfair preference to the ATO, as it would have received the same priority over other creditors in any event.

Nicholas J of the Federal Court in Kassem gave all three arguments short shrift –

His Honour was satisfied that the payments were made by or on behalf of Mortlake using moneys borrowed by Mortlake from Antqip and advanced to the Commissioner in accordance with Mortlake’s directions. Hence Mortlake and the Commissioner were “parties to the transaction”. [At 23-27, 36]
Mortlake borrowed from one creditor to pay another. The payments to the Commissioner made possible by that new borrowing were applied towards a pre-existing debt. Thus there was no enlargement or enhancement of the pool of assets available to satisfy the claims of Mortlake’s other unsecured creditors. It is clear the Commissioner would not have received $70,000 by way of dividend in respect of the superannuation charge debt if he had proved for it in the winding up instead of accepting the impugned payments as he did. It follows that he has received an unfair preference. [At 42-46]
The SCG argument failed also, on the basis that the priority the Commissioner claimed it would have would not obtain in the circumstances of this case. The Court must assess the unsecured creditor’s likelihood of recovery in the context of the actual winding up that eventuated, rather than a hypothetical winding up postulated to take place at the time of the impugned transaction. The evidence established that even as a priority creditor there was little prospect of the Commissioner receiving any dividend at all in the winding up of Mortlake. Therefore, contrary to the Commissioner’s argument on this too, he has received money which he would not receive if instead he was to prove for that amount in the winding up of Mortlake. It followed, so held Nicholas J, that he had received an unfair preference. [At 36-41, 45-47]

I refer to the last argument raised by the Commissioner. As noted above, the argument was that the money received was applied to the Superannuation Guarantee Charge debt (a priority payment under s 556 of the Act). As there were no other unsecured creditors of equal or higher priority, the Commissioner received no “unfair” preference, as he would have been accorded priority over the other unsecured creditors in any event. The Court rejected that argument on the basis given above, but at [47] his Honour noted that it was “unnecessary for [him] to consider whether or not the Commissioner would have been entitled to the priority he claimed to be entitled to under s 556(1)(e)”.

I query whether his Honour there was referring to the merit of the legal argument, or alluding to whether the Commissioner would have been entitled to the claimed priority, given the fact that the ATO had first credited the payments to the integrated client or Running Balance Account, and subsequently reversed that and reallocated the payment to the Superannuation Guarantee Account. I suggest it would seem extraordinary if the ATO could rely upon that reallocation, as it sought to do here, to escape the operation of Part 5.7B of the Act. It would mean that the ATO could simply reallocate payments it had previously received to pay off PAYG or GST liabilities to taxpayers’ SGC accounts, or allocate them to a different liability to that for which they were paid by or for the taxpayer, thereby circumventing any later claims for repayment by a liquidator.

This case does not involve a large amount of money, but it does involve arguments the Commissioner may want to test further. It will be interesting to see if the decision is appealed.

Grimaldi v Chameleon Mining NL (No 2) – FCAFC – Barnes v Addy, bribes and constructive trusts

Posted on March 3, 2012 by carrieromesievers

Last week a Full Federal Court bench of Finn, Stone and Perram JJ handed down a long and highly significant judgment in the latest Chameleon Mining decision, concerning dealings involving the Iron Jack Tenements in Western Australia. The full judgment – 783 paragraphs long – can be read here. The judgment includes a detailed table of contents, which can take you directly to a particular legal issue if desired.

This is essentially a case of those in a fiduciary position failing spectacularly to uphold the standards required of them by their duties and position, and misappropriating funds, diverting opportunities for themselves/their own companies, and taking secret commissions, according to the Court’s findings. The significance of this case is for its authoritative pronouncement by the plurality on a range of important issues of equity law in this country. It is notable, and fortunate, that one of the three members of the Full Court Bench was an equity jurist of the calibre of his Honour Justice Finn. This issues are listed below. First, for an overview of the facts, as found by the Court –

Chameleon claimed that several of its directors including a Mr Barnes and a Mr Roberts were guilty of breaches of their fiduciary duties to the company, and contraventions of ss 180, 181 and 182 of the Corporations Act 2001 (Cth). Phillip Grimaldi was also sued by Chameleon for breach of fiduciary duties and the same provisions of the Act, as an alleged de factor director of Chameleon or an “officer” of the company. Mr Grimaldi was a director and the controlling mind of Murchison Metals Ltd, which was also sued by Chameleon. Two transactions were at the centre of the controversy.

The first, the “Cadetta Transaction”, involved the acquisition by Chameleon negotiated for it by Mr Barnes and Mr Grimaldi of gold mining tenements in consideration for an issue of its shares. By way of what was held to have been a secret commission to Mr Grimaldi, Chameleon issued 5 million shares to Murchison. Murchison provided no consideration to Chameleon for the issue of those shares. Immediately after the allotment of shares to Murchison, Grimaldi had Murchison sell them and pay the proceeds of that sale to Winterfall (which later became Crosslands Resources Ltd).

The second transaction was really a series of dealings. Winterfall had contracted to buy the Iron Jack Tenements, but it ran out of money to pay the second instalment of the purchase price. Mr Barnes and Mr Grimaldi suggested Murchison acquire an interest in the project. Murchison and Winterfall signed Heads of Agreement under which Murchison would pay Winterfall $350,000 (which was needed to pay the Iron Jack vendors) plus Murchison would later effect a “reverse takeover” of Winterfall. Mr Grimaldi and Mr Barnes also negotiated a “spotter’s fee” for themselves in the form of shares in Winterfall (which they later exchanged for 10 million shares and 12 million options in Murchison).

Subsequently Grimaldi urged Chameleon, which had little cash, to raise capital ostensibly for exploration of a gold mine, by way of a share placement. With the knowledge of the principal Winterfall director Mr Zuks, 40% of Murchison’s payment obligation was made by Chameleon. This was held to be a missappropriation of Chameleon’s funds from the capital raising. At least some of the rest was paid by Murchison to Winterfall, using funds it had raised from the above-mentioned sale of it shares in Chameleon. In the end, Winterfall completed its purchase of the Iron Jack Tenements and Murchison completed its reverse takeover of Winterfall. The findings show that Mr Barnes and Mr Grimaldi did very well out of the deals. Chameleon, however, did not.

As noted above, the significance of this long judgment lies in the authoritative pronouncement by the Full Federal Court on a number of highly important issues of the law of equity. I recommend that anyone practising in these areas read this judgment carefully. Again, it can be read here. For now, I simply provide a heads up as to the issues upon which this judgment will undoubtedly become an oft-cited authority. They are listed in the order in which they appear, rather than in order of importance, and they are as follows –

De facto directors
Directors duties and misappropriation of funds – ss 181 and 182 of the Corporations Act
Compensation under s 1317H of the Corporations Act, and whether profits can be sought without proof of loss
Corporate knowledge – the imputation of director’s knowledge to a corporation – “fraud on the company” exception
Fiduciary duties – conflict of interest and misuse of position
Fiduciary duties – Secret commissions / bribes
Barnes v Addy – both limbs – knowing receipt and knowing assistance **important discussion at [242-270]
Constructive trusts and tracing corporate property – including whether a transaction must be avoided before proprietary relief can be awarded
Equitable remedies – flexibility – fashioned to fit the case and do what is “practically just”
Liability to account and Account of profits – including where breach of duty is only one of several sources of profit – the “just allowance” device
Account of profits – including when parties may be jointly and severally liable for profits
Interest awarded where misuse of trust moneys – including re compound interest and periodic rests
Remedies re Barnes v Addy – including whether joint and several as between fiduciary and third party participants in knowing receipt or knowing assistance
Remedies re bribes / secret commissions – including Lister & Co v Stubbs not followed
Constructive trust being an available remedy if appropriate in the circumstances.

It will be interesting to see if special leave is sought to appeal to the High Court from this judgment.

Phoenix companies targeted in suite of draft law reforms introduced

Posted on March 1, 2012 by carrieromesievers

Last year right before Christmas, the Gillard government released a set of two draft bills directed at cracking down on phoenix companies – the Corporations Amendment (Phoenixing and other measures) Bill 2012 (the Phoenixing Bill), and the Corporations Amendment (Similar Names) Bill 2012 (the Similar Names Bill). Yesterday was the deadline for submissions on the second of these Bills.

For the uninitiated, a “phoenix company” is a vehicle used by some directors of a failing company, to continue to trade on using a new entity, stepping away from and leaving the unpaid debts of the business in the shell of the old company. In other words, one day a company ceases trading and is left behind with just a pile of debts, and the next day the phoenix company, like the bird from Greek mythology, rises from the ashes, opens its doors and trades on with the same assets and customers. Often, the phoenix company bears a closely similar name to the old company, making it easier to assume the old company’s goodwill. However in some cases, the old company’s reputation is poor, so the phoenix company will trade under an entirely different banner, to avoid the taint of the old name. In either case it is a misuse of the company law concept of limited liability.

In Parliament yesterday, in debate on the second reading of the Phoenixing Bill, Joe Hockey said that Dun and Bradstreet research reveals that of companies that “became insolvent” in 2009-2010, 29% had one or more directors who had previously been involved with a failed, wound-up entity. This compares with 10% during the 2004-05 financial year. It would appear, then, that phoenix activity is on the rise. The ATO has been reported as stating that there are about 6000 phoenix companies in Australia and from 7500 to 9000 directors who will have personal liabilities under this legislation.

It was a curious move, for the government to release the two bills just 5 days before Christmas, and give interested parties tight time-frames to respond, largely running through the Summer break period – 24 January in the case of the Phoenixing Bill and 29 February for the Similar Names Bill. (Note that although the submissions received by Treasury have not been published, the Phoenixing Bill has already been introduced and read in the House of Representatives on 15 February 2012, the second reading debate has taken place yesterday and today.) This haste is especially surprising after last year’s false start as to other draft legislation designed to combat phoenix companies and rogue directors, in particular with regards to company’s taxation liabilities. On 24 November 2011 I posted the news that the government had withdrawn a bill then before Parliament, which was to increase the ATO’s powers to pursue directors personally for certain company tax liabilities – without first issuing a DPN, and broaden the range of taxes for which a director could be made personally liable – you can read my post here.

Earlier today, the Parliamentary Secretary to the Treasurer, the Hon David Bradbury MP, issued a press release to the effect that Tony Abbott and the Coalition have announced that they will “say no” to the Phoenixing Bill, which Mr Bradbury described as legislation that would ensure workers are able to access their entitlements where directors have abandoned a company. Unsurprisingly, Mr Bradbury used expressions such as “workers [should not be] dudded out of their entitlements…” and the punchline was “Tony Abbott and the Coalition should stop saying ‘no’ and back this legislation so that workers are not left out in the cold.” However the speeches I read in Hansard do not suggest a blocking of the proposed measures, rather an urge for a more careful and less hasty consideration of aspects of them.

In any event, that’s the political spin. Here is the substance of the proposed new laws.

Phoenixing Bill

This Bill proposes amendments to the Corporations Act 2001 (Cth) (the Act) which would give ASIC certain powers to address phoenixing activity. In particular, the Bill gives ASIC the administrative power to order the winding up of abandoned companies. The power would be triggered when, amongst other grounds, it appears to ASIC that a company is no longer carrying on its business.

The primary aim of this measure is the protection of workers’ entitlements, and indeed is part of the range of reforms included in the government’s Protecting Workers Entitlements Package, a 2010 federal election commitment confirmed by announcement in the 2011-12 Budget.

Already, workers employed by a failed company can seek to recover certain unpaid entitlements through the Government’s General Employee Entitlements and Redundancy Scheme (GEERS). However they can only do so if the company is placed into liquidation, which is of no assistance if the directors have simply walked away from the company without winding it up.

ASIC’s proposed new power to order the winding up of a company will enable employees more swiftly to access GEERS. It will have the additional benefit of enabling a liquidator to investigate the affairs of an abandoned company, including suspected phoenix activity or other misconduct.

A secondary set of measures in this bill are cost-saving measures aimed at facilitating the publication of corporate insolvency notices on a single publicly available website, rather than in the print media or the ASIC gazette.

Similar Names Bill

The Similar Names Bill proposes amendments to the Act which will impose personal joint and individual liability on a director for debts of a company that has a similar name to a pre-liquidation name of a failed company (or its business) of which that person was also director for at least 12 months prior to winding up. You might want to read that sentence again. The debts for which a director could become personally liable are debts incurred by the new (phoenix) company within five years of the commencement of the winding up of the failed company. Five years. You might want to read that again too.

The bill is not proposed to have retrospective effect. It will only apply to debts incurred after the legislation comes into force, and where the winding up of the old company commenced after the legislation comes into force. Directors would not be liable for the debts of the new company when the failed company has paid all of its debts in full. There is the incentive for directors not to try to walk away from a failed company leaving unpaid liabilities in its shell. However on one view, it is a surprising approach to take, which has already lead to some confusion (see below).

Innocent directors could avoid liability by obtaining an exemption from liability from the liquidator, or a similar Court-ordered exemption, if they can establish they have acted honestly and, in all the circumstances, ought fairly to be excused from liability. Some of these concepts will be already familiar to corporations lawyers.

The liquidator, or the Court, in considering whether to grant an exemption must take a number of matters into account, including whether there were reasonable grounds to suspect insolvency at the time debts were incurred by the failed company (more familiar concepts). Another matter the liquidator or the court must consider is, in broad terms, how brazen has been the extent of “phoenix activity” in the particular case. Specifically –

the extent to which the new company has assumed the assets, employees, premises and contact details of the failed company, and
whether any act or omission by the directors was likely to create the misleading impression that the new company was the same company as the failed company.

Of course one can see the clear potential for directors of multiple companies with related names in the same corporate group to get caught by these proposed new laws. The Bill does seek to address this. It provides an exemption for directors of a similarly-named company that was carrying on business in the 12 months before the commencement of the winding up of the failed company. A question will be whether this exemption goes far enough to avoid the imposition of liability on directors with no involvement in phoenix companies or activity , beyond the intended scope and focus of these reforms.

Commentary

I have to confess when I started reading the exposure draft of the Similar Names Bill and its explanatory document, I was expecting to see that the directors of the phoenix company were being made personally liable for the liabilities of the failed company that they had sought to shed, by leaving them behind in the shell of the failed company. However, clause 596AJ of the Bill imposes personal liability upon directors for the debts of the new company, referred to as the “debtor company”, not the debts of the failed company. Unfortunately, the drafters of the explanatory document accompanying the exposure draft of the bill were confused themselves. They explain clause 596AJ accurately as imposing liability for debts of the debtor company. However in the passages explaining Court-ordered exemptions from liability (under clause 596K(1)), they refer to exemptions for liability of “some or all of the debts of the failed company to which the person is otherwise liable under clause 596AJ”. I re-checked the exposure draft again, and this explanation is inaccurate. It is to be hoped that there will be no such confusion in the final version of the Bill and its explanatory memorandum, when those documents are finalised post-submissions.

Effectively, if a phoenix company is formed, directors will want to be confident as to its trading health and adequacy of its working capital, as they may be personally liable for the debts of the new company for the next five years. This is bound to raise concern in the business community, because there may be circumstances were some directors become personally liable for something they were not involved in and were not aware was going on, through no fault or carelessness of their own. Query whether the scope for obtaining exemptions appropriately protects them, when that process could easily turn out to be expensive and drawn out. Even if a director successfully obtains an exemption from the liquidator of the failed company, without having to go to Court, clause 596AL(7) provides that the liquidator is entitled to be paid “reasonable remuneration” for making an exemption determination. Paid, that is, by the director.

Another problem may be that some phoenix companies (with same assets, same employees, same premises, same contact details, same customers) use different names from that of the company whose business they assumed, because the old name is tainted and the new entity has not wish to be affected by it. It would appear that such phoenix companies will not be caught by the proposed new laws.

Another issue is that the Similar Names Bill only addresses situations where the new company uses a similar company name to the old company or business. If the new company uses a similar business name, this would not appear to be caught by the Bill as presently drawn.

Also, the Bill does not seek to define the where the line is drawn in terms of the degree of similarity required before a name is deemed to be so similar as to “suggest an association with the failed company”. It is unknown if this omission was deliberate or not, but it could be said to be asking for trouble to provide no better guidance to the business community, and to the Courts which will be required to apply these laws.

Conclusion

I suggest it may be better if Treasury takes a more measured approach to the finalisation of the Similar Names Bill, including better consultation with the public and interested bodies than it allowed with regards to the Phoenixing Bill, and a more careful consideration of the ramifications and potential gaps or shortcomings of the Bill as presently framed. We can await developments with interest.

On a final note, on 27 January 2012, Treasury also announced the release of an exposure draft of another bill: the Personal Liability for Corporate Fault Reform Bill 2012, for which the closing date for submissions is 30 March 2012. This is described as the first tranche of proposed amendments to Commonwealth directors’ liability legislation, and covers Treasury (non-taxation) legislation. The stated aim of these reforms is to harmonise the principled approach to the imposition of personal criminal liability for corporate fault already provided for across Australian jurisdictions. Treasury’s announcement may be read here.

Centro class action developments – (a) privilege and (b) a bombshell

Posted on February 27, 2012 by carrieromesievers

* An updated version of this article was republished with my permission in the December 2012 issue of the Australian Corporate Lawyer’s quarterly journal, the Australian Corporate Lawyer, volume 22, issue 4, pp 26-31.

There have been some interesting developments this month in the lead up to the big Centro class action trial, which is due to commence in the Federal Court in just a few weeks (early March) before her Honour Justice Gordon and is expected to run for at least 15 weeks.

By way of background, there are 5 class actions issued in 2008 and 2010 by different sets of Centro investors, variously represented by Maurice Blackburn and Slater & Gordon. Broadly – and I stress the use of that term – the investors are suing the old Centro Properties group over the events of 2007 shortly before the group’s collapse, when they failed to disclose approximately $3.1billion of short-term debt. Centro’s then auditors PricewaterhouseCoopers were joined as a co-defendant by Centro Properties and in turn, PwC has cross-claimed against Centro. The investors are also suing the auditors PwC directly, and in those proceedings too there are cross-claims by PwC against Centro. Indeed there are a multitude of cross-claims as between Centro and PwC.

To address the interesting developments occurring this month (February) in reverse order –

The bombshell – Centro Retail Australia’s “no liability” defence

In October 2011, Barrett J of the New South Wales Supreme Court approved a new corporate group structure for Centro. Subsequently, it appears that in or about December 2011, Centro Retail Australia Ltd took over as the responsible entity (RE) for the Centro group from Centro MCS Manager Ltd.

However, it is reported that submissions made in Court on Thursday suggest that this change in RE may not have been disclosed to the market and for some time remained unknown to the parties to the class action. Michael Lee SC, counsel for the Centro investors represented by Maurice Blackburn, reportedly said that the new RE was only discovered “by happenstance” by lawyers acting for PricewaterhouseCoopers, who ran repeated corporate searches of the new Centro Group structure after it was approved in October. PricewaterhouseCoopers has now successfully applied to join Centro Retail Australia to the class action.

On Thursday in Court, Centro Retail Australia revealed what its defence would be. It was something of a bombshell revelation. Certainly Centro Retail Australia was only newly joined to the action (on 14 February), however its predecessor as RE cannot claim the same. In Court, Counsel for PwC demanded to know if Centro Retail Australia would stand in the shoes of the old RE and assume its liabilities. Pressed by Gordon J, counsel for Centro Retail Australia Norman O’Bryan SC is reported as having said that it was “highly likely” the new entity would argue that it was excluded from certain liabilities of the old Centro. He reportedly indicated reliance would be placed upon Corporations Act provisions to argue these types of liabilities were not inherited by the new responsible entity in the restructuring.

Mr Lee is quoted as having described this new defence as “a matter of potentially extraordinary significance”. If successful, it could have the effect that the shell that is Centro MCS Manager Ltd retains the key liability, such that if the class action were successful, judgment might be made against an entity without assets. Concerns were also reportedly raised in Court by Mr Lee as to whether this proposed defence had been disclosed to the NSW Supreme Court on the restructure.

The orders made by Gordon J as shown on the Federal Court portal include that Centro Retail Australia must file its defence and any cross claim by 29 February and responding pleadings be filed by 2 March. For the full article discussing last week’s hearing see the Age article here.

Kirby v Centro Properties Limited (No 2) [2012] FCA 70 – Legal Professional Privilege

On 10 February, Bromberg J handed down his reasons on an application by PricewaterhouseCoopers that various Centro companies be compelled to produce specified documents for inspection. Centro had resisted inspection on the basis that the documents or part of them were subject to legal professional privilege. His Honour had heard and determined the application urgently in November 2011, dismissing PwC’s application and giving short reasons then; full reasons now. Bromberg J, not being the trial judge allocated the various proceedings, considered and determined these questions of privilege in order to avoid the trial judge (Gordon J) being exposed to documents the subject of privilege claims.

To explain the privilege claims it is useful to give a more detailed overview of the claims made in these proceedings. It is also useful, as his Honour did, to divide the related Centro corporations concerned in the litigation into two groups. The first is the Centro Properties Group (CNP) and the second the Centro Retail Group (CER).

The first principal claim made against CNP relates to what is referred to by the parties as the ‘classification issue’. The investors allege that in publishing its financial statements for the year ending 30 June 2007, CNP misclassified debt such that its current debt was understated and its non-current debt overstated. This is claimed to be in breach of the Corporations Act 2001 (Cth), the ASIC Act 2001 (Cth) and the Fair Trading Act 1999 (Vic). CNP admits the misclassification, and its failure to comply with accounting standard AASB101, however it denies liability on various grounds.

The second principal claim made against CNP relates to what has been termed the ‘refinancing risk issue’. The gist of this claim is that CNP should have, but failed to, disclose to the market that it had short-term debt about to become due which it either could not refinance or could only refinance at greater cost. This is said to be in breach of the continuous disclosure obligations of the Corporations Act.

CNP (and CER) have claimed against CNP’s auditors PricewaterhouseCoopers on a number of bases, including claims of misleading and deceptive conduct by making various representations to CNP concerning its 2007 financial statements. CNP alleges that PwC represented that the financial statements were appropriate for approval by the CNP Board in that they complied with the Corporations Act and relevant accounting standards, including AASB101, when in fact they did not. PwC denies liability to CNP on a number of grounds, including that any such misrepresentation was caused by CNP’s failure to disclose relevant material to PwC. CNP, in turn, denies that.

The investors also make claims directly against PwC in relation to the classification issue. They assert that PwC represented that CNP’s financial accounts gave a true and fair view of CNP’s financial position, when they did not, and complied with the Corporations Act and relevant accounting standards, when they did not. PwC admits that accounting standard AASB101 was not complied with, but denies liability on other grounds.

Bromberg J noted that PwC’s application for inspection of documents – opposed on grounds of privilege – fell to be determined under the common law rather than the Evidence Act 1995 (Cth) (at [10]). His Honour cited the “12 principles” distilled by Young J in AWB Ltd v Cole and Another (No 5) [2006] FCA 1234; (2006) 155 FCR 30 at [44]. They are, in summary –

(1) The party claiming privilege bears the onus of proving that the communication was undertaken, or the document was brought into existence, for the dominant purpose of giving or obtaining legal advice.

(2) The purpose for which a document is brought into existence is a question of fact that must be determined objectively. Evidence of the intention of the document’s maker, or of the person who authorised or procured it, is not necessarily conclusive.

(3) The existence of legal professional privilege is not established merely by the use of verbal formula. There will be cases in which a claim of privilege will not be sustainable in the absence of evidence identifying the circumstances in which the relevant communication took place and the topics to which the instructions or advice were directed.

(4) Where communications take place between a client and his or her independent legal advisers, or between a client’s in-house lawyers and those legal advisers, it may be appropriate to assume that legitimate legal advice was being sought, absent any contrary indications.

(5) A “dominant purpose” is one that predominates over other purposes; it is the prevailing or paramount purpose.

(6) An appropriate starting point when applying the dominant purpose test is to ask what was the intended use or uses of the document which accounted for it being brought into existence.

(7) The concept of legal advice is fairly wide. It extends to professional advice as to what a party should prudently or sensibly do in the relevant legal context; but it does not extend to advice that is purely commercial or of a public relations character.

(8) Legal professional privilege protects the disclosure of documents that record legal work carried out by the lawyer for the benefit of the client, such as research memoranda, collations and summaries of documents, chronologies and the like, whether or not they are actually provided to the client.

(9) Subject to meeting the dominant purpose test, legal professional privilege extends to notes, memoranda or other documents made by officers or employees of the client that relate to information sought by the client’s legal adviser to enable him or her to advise. The privilege extends to drafts, notes and other material brought into existence by the client for the purpose of communication to the lawyer, whether or not they are themsleves actually communicated to the lawyer.

(10) Legal professional privilege is capable of attaching to communications between a salaried legal adviser and his or her employer, provided that the legal adviser is consulted in a professional capacity in relation to a professional matter and the communications are made in confidence and arise from the relationship of lawyer and client. Some cases have added a requirement that the lawyer who provided the advice must be admitted to practice. However in other cases, the Court has not regarded the possession of a current practising certificate as an essential precondition.

(11) Legal professional privilege protects communications rather than documents, as the test for privilege is anchored to the purpose for which the document was brought into existence. Consequently, legal professional privilege can attach to copies of non-privileged documents if the purpose of bringing the copy into existence satisfies the dominant purpose test. In Propend at 512, Brennan CJ added a qualification: the otherwise privileged copy may lose its protection if the original unprivileged document cannot be found and no other evidence is made available to prove the contents of the original.

(12) The Court has power to examine documents over which legal professional privilege is claimed. Where there is a disputed claim, the High Court has said that the Court should not be hesitant to exercise such a power.

For greater detail of each principle and the authorities cited for each , see Bromberg J’s judgment where he sets out Young J’s 12 principles in full at [11].

Observing that a practical and cost efficient approach is to be encouraged when it comes to issues relating to the discovery of documents, Bromberg J then turned to consider each class of documents in question.

Retainers and Related Documents

PwC contended that a retainer was not a document generally protected by legal professional privilege. However his Honour noted that this proposition is not absolute and the specific content of a retainer must be examined. Some communications contained within a retainer may be protected from disclosure because they are “within the sphere of protection provided by the privilege”. Centro contended that insofar as the retainers identified the nature of the legal advice sought, they were privileged to that extent.

Bromberg J agreed with Centro. His Honour also rejected PwC’s contention that privilege had been waived by Centro (see below). He also rejected PwC’s contention that legal professional privilege did not extend to a retainer because a retainer pre-dates the formation of the solicitor-client relationship.

Documents Provided by Centro to ASIC

There were two categories of these – (1) the “subpoenaed documents” provided by Centro to ASIC in the course of ASIC’s proceedings agianst Centro, and produced by ASIC pursuant to subpoenas issued in these proceedings at the behest of PwC; (2) the “other ASIC documents” – those provided by Centro to ASIC but at a later time than the subpoenas to ASIC were issued and returned.

The Subpoenaed Documents – the Hourigan Records

The vast bulk of these comprised handwritten notes taken by Elizabeth Hourigan, the Company Secretary of CNP and CER and each of their controlled entities at the relevant time. They were notes taken at Board meetings or Board Audit and Risk Management Committee meetings of the various Centro companies.

The parts of Ms Hourigan’s notes that were in issue comprised what Ms Hourigan deposed to be records of either (i) confidential communications between Board members and Centro’s General Counsel at the meeting for the dominant purpose of the General Counsel giving and the Board receiving legal advice on behalf of Centro; (ii) confidential communications between Board members and Centro’s external lawyers at the meeting for the same dominant purpose; or (iii) confidential communications between Board members at the meeting which disclosed legal advice obtained by Centro from its external lawyers. Centro’s General Counsel Mr Hutchinson gave similar evidence, including that his communications were for the sole or dominant purpose of giving legal (and not commercial advice) and that the advice he gave was independent, objective advice given in his professional capacity.

PwC did not cross-examine either Ms Hourigan nor Mr Hutchinson, but argued Centro had adduced insufficient evidence to discharge its burden of demonstrating that the documents in question were privileged. PwC contended that Centro had adopted a formulaic approach which failed to provide evidence about any particular communication, identify any author or source of each communication and provide evidence from the author or source as to the purpose of their communication.

Bromberg J rejected PwC’s arguments. He was satisfied that Ms Hourigan’s approach was not “formulaic” in the sense that no more than a bare assertion of privilege being made. It was true that evidence was not provided by the multiple authors of each separate conversation made in the multiple conversations in question, however his Honour did not deem that necessary in the circumstances. His Honour pointed to Young J’s principles 4 and 10. His Honour observed that here the calling of direct evidence from each author of a part of the conversations in question would “unduly complicate, extend and render unacceptably expensive, the process of determining privilege issues…”, and was satisfied that the evidence established that the exchanges covered by all 3 of the categories listed above came into existence for the dominant purpose of a client seeking or obtaining legal advice from that client’s lawyer, or disclosed that legal advice.

The Subpoenaed Documents – the Hutchinson Records

These were the notes prepared by Mr Hutchinson of Board meetings he attended. Privilege was claimed in respect of extracts of these. Mr Huthinson deposed that the notes were prepared by him in his capacity as General Counsel of CNP and CER and other Centro companies, for the benefit of their use by Centro as a record of what occurred at those meetings. The redacted extracts comprised his notes of confidential communications between Board members and himself which occurred for the dominant purpose of him giving legal advice to Centro, and the Board receiving it on behalf of Centro. Mr Hutchinson also deposed that these communications were made for the sole or dominant purpose of him giving and Centro receiving legal and not commercial advice or assistance and that the advice provided by him was independent objective advice given in his professional capacity.

PwC argued this evidence was too general, and there was a failure to identify the nature of the communication or whether it was a communication to Mr Hutchinson or from him. PwC also contended generally that Mr Hutchinson was unable to speak to the dominant purpose of others, for instance those that communicated with him.

Bromberg J again upheld the claim for privilege. He considered that the evidence before the Court in relation to the Hutchinson Records demonstrated that the challenged communications occurred between Centro and its independent legal adviser in uncontroversial circumstances, and provided a sufficient basis upon which the Court could be satisfied that the communications in question came into existence for the dominant purpose of Centro seeking and obtaining legal advice from its lawyer.

The Subpoenaed Documents – the Reid/Stawell Documents

There were two emails from Ashley Reid of Centro to Peter Stawell, a partner of Freehills. Their attachments had been discovered (an earlier email and attachment sent from BNP Paribas to Mr Reid). Mr Stawell gave evidence that during 2007 he provided advice to CNP and CER in relation to banking facilities with BNP Paribas and that the emails in question were forwarded to him by Mr Reid for the sole purpose of Mr Stawell providing legal advice to Centro.

PwC contended this was just a bare assertion by a lawyer as to somebody else’s purpose. However Bromberg J was satisfied that Mr Stawell’s evidence was sufficient evidence of the circumstances in which the communications were brought into existence, and that the communications by Mr Reid came into existence for the relevant dominant purpose.

The Other ASIC Documents

His Honour was satisfied that for similar reasons as for categories of the subpoenaed documents, these documents too – revealing the content of legal advice provided to Centro variously by Freehills and Middletons – were protected from disclosure by legal professional privilege.

The Investigation Documents

These documents sought by PwC comprised “file notes of interviews, witness statements and any draft or final reports” relating to any investigations conducted in or about the period December 2007 to February 2008 by any of KPMG, Middletons and/or Freehills, into the classification of the interest bearing liabilities of CNP and/or CER and related matters.

A large number of lawyers involved as either the maker or receiver of a communication with Centro in relation to these investigations gave evidence, each of whom deposed that his or her sole or dominant purpose was to give, and for Centro to obtain, legal advice and assistance under the terms of their firm’s retainer.

Aside from communications passing between Centro and its external lawyers or Centro and its internal lawyers, the Investigation Documents also included –

notes taken by Freehills and Middleton solicitors of interviews and meetings,
internal communications between solicitors at Freehills,
internal communications between solicitors at Middletons,
communications between Freehills or Middletons and KPMG,
communications bewteen Middletons and Freehills, or Middletons and Gadens, or Middletons and Strongman & Crouch.

PwC called evidence directed to show that Centro had a multiplicity of purposes in reviewing the classification issue including, primarily, the conduct of an accounting disclosure exercise to determine for operational purposes the correct classification of the debt which may have been misclassified. Even if there was an additional, legal purpose, PwC argued that the Court ought not be satisfied on the evidence before it that this was Centro’s dominant purpose.

Essentially, PwC hinted darkly that the involvement by Centro of Freehills and Middletons was a sham, contrived to cloak their investigations into what had happened with the protection of legal professional privilege, although his Honour noted they stopped short of making that submission. PwC contented that CNP and CER had statutory accounting obligations which had required the inquiry to take place, and that the belated involvement of Freehills and Middletons did not of itself cloak the entirety of that process with legal professional privilege. Nor, so PwC argued, could a factual inquiry conducted so that CNP and CER could form a view as to an accounting position, be rendered privileged just because the factual inquiry was undertaken by external lawyers or an external accounting firm.

Bromberg J accepted PwC’s contention that Centro had an additional purpose rather than just to obtain legal advice, in retaining each of Freehills/KPMG and Middletons/KPMG – the conduct of an accounting enquiry or investigation independent of management to determine the correct classification of debt. However, his Honour stated this did not persuade him that the prima facie position as to Centro’s dominant purpose having been to obtain Freehills and Middleton’s legal advice should be displaced.

Bromberg J noted that the facts of this case are readily distinguishable from a case upon which PwC placed much reliance – Robson J’s decision in Perry v Powercor Australia Ltd [2011] VSC 308, upheld by the Court of Appeal of the Supreme Court of Victoria in Powercor Australia Ltd v Perry [2011] VSCA 239. Powercor concerned investigative reports prepared by technical experts into the course of a major bushfire, which were held in the circumstances of that case not to have been privileged. Bromberg J opined that Powercor is best understood as an example of the kind of non-privileged investigation carried out for the purpose of arming central management of a corporation with actual knowledge of what its agents had done. Here, Bromberg J considered, the evidence showed that the involvement of Freehills and Middletons in the investigation of the correct classification of debt was not artificial, contrived or objectively unjustified.

As to waiver, his Honour summarised the three key principles on the implied or imputed waiver of privilege drawn from the recent judgment of Keane CJ, Downes and Besanko JJ British American Tobacco Australia Limited v Secretary, Department of Health and Aging [2011] FCAFC 107; (2011) 195 FCR 123, by reference to the two High Court decisions of Mann v Carnell [1999] HCA 66; (1999) 201 CLR 1 and Osland v Secretary, Department of Justice [2008] HCA 37; (2008) 234 CLR 275 –

(1) Legal professional privilege will be waived, whatever the intention of the person whose conduct is in question, if the conduct of the person seeking to rely upon the privilege is inconsistent with the maintenance of the privilege,

(2) The focus is now upon inconsistency of conduct, but in determinnig whether there has been an inconsistency of conduct, considerations of fairness are still relevant, and

(3) It is now clear that disclosure of the gist of a privileged communication does not necessarily effect a waiver of legal professional privilege. Whether it does in a particular case will depend on whether, in the circumstances of the case, the requisite inconsistency exists, between a disclosure on the one hand and the maintenance of confidentiality on the other. There is no necessary inconsistency in stating the effect of advice and maintaining a claim of privilege. The purpose for which the privilege-holder made the disclosure is highly relevant including whether or not the disclosure was deployed for a forensic or other advantage.

In relation to the Freehills and Middletons Retainers – PwC pointed to the fact that in the affidavit material filed by Centro in support of its claim for privilege, the task for which the solicitors had been engaged was disclosed. However, His Honour took the view that the descriptions in the affidavits as to the tasks Centro gave its solicitors were general and unspecific, when compared to the terms of the retains themselves. Even if the gist of the advice sought by Centro was disclosed, partial disclosure is not necessarily inconsistent with maintaining a claim for privilege. Indeed the objective purpose of any partial disclosure here was to persuade the Court to protect the retainers from disclosure – entirely consistent with the maintenance of confidentiality. His Honour held there was no waiver in relation to the retainers.

As to the Subpeonaed Documents and Other ASIC Documents – These documents came into ASIC’s hands by virtue of notices issued under s 30 of the ASIC Act requiring their production by Centro. Section 30 provides for a coercive process requiring production under compulsion. However ASIC had sent the notices in each case with a covering letter recognising that Centro may have a valid claim of legal professional privilege with respect to some of the documents, and was not obliged to provide such documents, although it must provide detailed information in support of that claim. Centro provided documents to ASIC in response under covering letters expressing their provision to be on a confidential basis, with an express reservation of privilege and an express lack of intention to waive privilege.

Centro sought to claim privilege in these proceedings over redacted portions of some of those documents which had been provided to ASIC with no parts then redacted. Evidence was given that the documents had been provided to ASIC unredacted for reasons of the large volume of numbers, the shortness of time in which production had had to occur, and mistakes made by inexperienced lawyers or law graduates or Mr Hutchinson working in difficult conditions.

PwC argued that the provision of the disputed extracts to ASIC was a voluntary act of disclosure to a third party which is inconsistent with the maintenance of privilege in the documents. Bromberg J acknowledged that there might have been a limited waiver by Centro as against ASIC, but not necessarily as against another person like PwC. It is not the case that voluntary disclosure to a third party necessarily waives privilege. Disclosure to a third party for a limited and specific purpose did not lead to a loss of the privilege as against a person opposed in litigation in Mann or in any of the cases referred to in Mann at [32].

As to the Investigation Documents – PwC argued that Centro had waived privilege in respect of these because its directors had made submissions relating to the investigations by Freehills, Middletons and KPMG in the course of the penalty phase of the ASIC proceeding. However Bromberg J was not prepared to impute to Centro an understanding that its directors were about to be involved in making a disclosure of the Investigation Documents, and rejected PwC’s contention that the directors did disclose the substance of the legal advice contained in the Investigation Documents.

Thus PwC wholly failed in their application, privilege in all of the documents challenged was upheld, and PwC was ordered to pay costs. The judgment may be read in full here.

His Honour made an order allowing PwC 14 days to file a written application for leave to appeal, meaning a deadline of Friday 24 February. I stand to be corrected, but my search today of the Federal Court portal discloses no such application as having been filed in any of the five proceedings concerned.

With regards to the class actions and the fast-approaching trial, we can all await further developments with interest.

Re Willmott Forests Ltd – Disclaimer of onerous property by liquidators – does the disclaimer of a lease by the landlord company’s liquidator extinguish the tenant’s proprietary interest in the land?

Posted on February 12, 2012 by carrieromesievers

On Thursday (9 February), Davies J of the Victorian Supreme Court handed down her decision on a preliminary question which she was asked to decide on application by the liquidators of Willmott Forests Ltd (WFL), supported by the receivers and both Grower group intervenors.

The preliminary question was this:

Were the liquidators able to disclaim the Growers’ leases with the effect of extinguishing the Growers’ leasehold estate or interest in the subject land?

Her Honour Justice Davies concluded that the answer to the question was “No“.

As many of you will know, Willmott Forests is one of the more recent large agribusiness managed investment schemes to collapse, following in the steps of Great Southern, Timbercorp and Environinvest. Receivers and managers (Mark Korda, Mark Mentha and Bryan Webster of KordaMentha) were appointed by the Willmott Group’s banking syndicate on 6 September 2010, the same day the Willmott Group was placed into voluntary administration and Avitus Fernandez of Fernandez Partners was appointed administrator. Ian Carson and Craig Crosbie of PPB Advisory were appointed administrators of the Willmott Group by order of the Federal Court on 26 October 2010, replacing Mr Fernandez. Mr Carson and Mr Crosbie then became the liquidators of the Willmott Group when the companies were all placed into liquidation on 22 March 2011.

WFL was the responsible entity and/or manager of 8 registered MIS, 6 unregistered “professional investor” MIS, 11 unregistered contractual MIS, and 5 unregistered partnership MIS. These MIS were forestry operations conducted on land either owned by WFL or leased by WFL from third parties. The MIS members or “Growers” had rights to grow and harvest trees on that land under project documents that included lease and licence agreements with WFL for the use and occupation of the land.

After their appointment, WFL’s liquidators had entered into 6 sale contracts for the sale of part of the freehold land, unencumbered by Growers’ rights, including Growers’ rights under leases and licences. A transfer of clear title to the land could not be effected unless Growers’ rights were terminated or extinguished.

On 29 June 2011, the liquidators of WFL sought and obtained directions from Dodds-Streeton J of the Federal Court that they were justified in –

(a) amending the constitutions of the registered MIS and certain investment deeds to confer on WFL a power to terminate Growers’ rights, on condition that Court approval is obtained before doing so; and

(b) disclaiming the project documents of other MIS as onerous pursuant to s 568(1) of the Corporations Act 2001 (Cth), on condition that the Court’s consent is obtained before doing so.

The Federal Court had expressly left the above-described preliminary question open in making the orders and directions of 29 June 2011.

It was a condition precedent of the sale contracts that by 31 January 2012, the liquidators obtain that approval and consent from the Court. (That date was later extended to 15 February 2012.)

The liquidators applied to the Court to obtain those orders, directions under s 511, and approval of their entry into the sale contracts under s 477(2B). The receivers of WFL support the liquidators’ application for those orders, directions and approval, but the Willmott Growers Group Inc and the Willmott Action Group Inc – who both had leave to intervene as contradictors – oppose it. All parties did, however, support the hearing and determination of this preliminary question as to whether the liquidators can disclaim the Growers’ leases with the effect of extinguishing their leasehold estate or interest in the subject land.

Relevantly, s 568 of the Act gives liquidators power to disclaim certain “property of the company”, including land burdened with onerous covenants, shares, property that is difficult to sell, property where the costs of selling it would exceed the proceeds of sale, and contracts. S 568(1A) provides that a liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with leave of the Court. S 568(1B) provides for the Court’s power on such an application, and states that the Court may grant such leave subject to conditions, or may make orders about the contract as it considers to be just and equitable.

Section 568D(1) makes it clear that the effect of disclaimer is to terminate the company’s rights, interests, liabilities and property “for or in respect of” the disclaimed property, but that third party rights or liabilities are not affected by the disclaimer “except so far as is necessary in order to release the company or its property from liability”. Her Honour discussed the legislative intent and the authorities as to how the disclaimer provisions operate, including this remark by Lord Nicholls of Birkenhead in Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70 at 87 about the UK disclaimer provisions:.

“Disclaimer will, inevitably, have an adverse impact on others: those with whom the contracts were made, and those who have rights and liabilities in respect of the property. The rights and obligations of these other persons are to be affected as little as possible. They are to be affected only to the extent necessary to achieve the primary object: the release of the company from all liability. Those who are prejudiced by the loss of their rights are entitled to prove in the winding up of the company as though they were creditors.”

The liquidators submitted that as with the reverse position in Hindcastle Ltd v Barbara Attenborough Associates Ltd (disclaimer by the tenant) when a lease is disclaimed by the liquidator of the landlord, the leasehold estate also ceases to exist – the tenant’s rights are extinguished. Davies J disagreed.

Her Honour took the view that the tenant’s proprietary rights in the land will continue to subsist, even though the effect of the disclaimer is that the landlord’s interests and liabilities under the lease contract have been terminated [11]. She was supported in her conclusion by –

Re Bastable; Ex parte The Trustee [1901] 2 KB 518 – Romer LJ held that where a trustee in bankruptcy of the vendor of a contract of sale of land disclaims the contract, he does not put himself in the position of owner of the estate, freed altogether from the purchaser’s equitable interest in the land;

Dekala Pty Ltd (in liq) v Perth Land & Leisure Ltd (1987) 17 NSWLR 664 – Young J held that a disclaimer by a liquidator of an option agreement the company had entered into in respect of land it owned could not have the effect of divesting any equitable interest of the option holder, if held to exist (although the case was decided on the basis that the option holder did not hold any interest in the land).

Her Honour held that the statement of principle in Hindcastle Ltd v Barbara Attenborough Associates Ltd was expressly confined to disclaimer of a lease by the liquidator of the tenant, and the reasoning was inapposite to the disclaimer of a lease by the liquidator of the landlord, with respect to the impact on the tenant’s leasehold interest [13].

Davies J acknowledged that a disclaimer nonetheless will impact on the rights and liabilities of the tenant to the extent necessary to release the company or its property from liability. The liquidators pointed out that the Growers’ rights as lessees to occupy the land is interdependent with the rights and liabilities of the landlord to lease the land, such that a disclaimer of the lease by the landlord must mean the termination of the Growers’ leasehold estate in the leased property. Otherwise, so the liquidators argued, the disclaimer of the lease would be inutile. Her Honour said that this can be accepted, however it does not provide the answer.

Davies J returned attention to the language of the section (s 568D(1)): Is the termination of the Growers’ leasehold estates necessary to release WFL or its property from liability?

Her Honour held that it was not. Her Honour held that a tenant has different legal rights in the subject property than the rights attaching to the landlord’s reversionary interest. She noted that the property proposed to be disclaimed was the contract for lease, under which WFL had already leased the land to the Growers. Thus, so her Honour reasoned, it was unnecessary to interfere with the Growers’ property rights in order to release WFL from its liability to lease, because the leases had already been effected. The judgment can be read in full here.

An interesting conclusion. The Willmott Action Group have already reported the decision on their website and are understandably delighted. It would seem that the liquidators of Willmott Forests Ltd are in something of a pickle. A transfer of clear title to the freehold land cannot be effected unless the Growers’ rights are terminated or extinguished. For the 16 contractual and partnership MIS at least, disclaiming the project documents has not been effective to achieve this. The application for the rest of the orders and directions will return to Court for further hearing on 27 February 2012, however the conditions precedent for the sale contracts were to be fulfilled by 15 February 2012 – in just 3 days time. We will await the next development with interest.

Newsflash: ATO’s Director Penalty Notice Legislation – withdrawn

Posted on November 24, 2011 by carrieromesievers

Legislation had been before Parliament which the ATO had previously said included reforms designed to combat phoenix companies and rogue directors. The legislation was to operate with retrospective effect from 1 July 2011.

The legislation would have allowed the ATO to start issuing proceedings against directors personally for certain company tax liabilities – without first issuing a DPN (Directors Penalty Notice), once the liability had remained unpaid and unreported for more than 3 months after the due date. The tax liabilities for which a director could become personally liable was to be extended from only unpaid PAYG, as before, to now also include Superannuation Guarantee liabilities.

However, to the surprise of some, the Government announced yesterday that the legislation had been withdrawn. Opposition treasury spokesman Joe Hockey’s rather amusing comment, in response to this development, was this: “The government was using a sledgehammer to crack a nut and thankfully the nutters rebelled.”

There was to be further consultation with industry and stakeholders and possible modification to the DPN laws, to ensure the proposed changes would not affect company directors inappropriately in certain circumstances.

The legislation is expected to be reintroduced some time in 2012.

High Court hears James Hardie appeal

Posted on November 8, 2011 by carrieromesievers

Most people are aware from reports in the press and media about the large law suits that have been making their way through the NSW courts over the past few years, brought by ASIC against the former directors of James Hardie Industries Ltd. Broadly, ASIC have argued the directors contravened a number of provisions of the Corporations Law/Act (both were engaged) when they approved a draft ASX announcement at the now infamous board meeting held on 15 February 2001. The ASX announcement included a claim that under a proposed corporate restructuring, aimed at quarantining asbestos claims against members of the James Hardie group into one entity, the new entity would be “fully funded” to meet present or future asbestos claims.

Much of the contest centered around whether the minutes of that board meeting were accurate – was the draft ASX announcement in fact tabled and did the board in fact resolve to approve it.

At first instance in the NSW Supreme Court, in a 351 page judgment handed down in April 2009, Gzell J held for the most part in ASIC’s favour. You can read his Honour’s judgment here. At paragraph [1181] his Honour makes a remark which could be seen as largely summing up his view of the evidence lead by the defendants, when he says: “…I reject the chorus of non-recollection from the non-executive directors who gave evidence…”.

On appeal, in a judgment almost as long, Spigelman CJ, Beazley and Giles JJA of the NSW Court of Appeal in a unanimous judgment handed down in December 2010 largely overturned the judgment at first instance and found for the directors. You can read their Honours’ judgment here.

The High Court heard ASIC’s appeal two weeks ago, on 25, 26 and 27 October 2011 (you can read the transcript here (25 October), here (26 October) and here (27 October). There was interesting debate between the bench and counsel as to the evidentiary value to be accorded minutes kept as official records of meetings, even where they do not strictly qualify for the statutory presumption as to constituting prima facie evidence or conclusive evidence subject to proof to the contrary.

Their Honours were robust in their questioning of counsel particularly, so the transcript shows, of counsel for the directors. A betting man might place his money on a win for ASIC when the High Court hands down their judgment, which is unlikely to be until some time next year. Watch this space for further developments.

Carrie Rome-Sievers, Barrister

Developments in insolvency and commercial law

Category Archives: Corporations Law