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.