Boros v Pages Property Investments Pty Ltd

1. [1]

   BELL P: I agree with Basten JA.

2. [2]

   BASTEN JA: In 1957 Gregory Vincent Page started up an event equipment hire business known as “Pages Hire”. In the 1980s, the appellant, Attila Boros, and Mr Stephen Thatcher joined the business. The business was run through a number of corporate entities primarily for the benefit of the Page Family Trust of which the trustee was Pages Property Investments Pty Ltd (“PPI”).

3. [3]

   PPI was registered on 9 November 1998 by Mr Gregory Page. He remained the sole director until his death in July 2003. He was also the sole holder of the 12 issued shares in the company, which shareholding passed to his widow, Mary Therese Page, on his death. From 28 July 2003 until 3 March 2008 Mrs Page was the sole director of the company as well as the sole shareholder and a beneficiary of the trust.

4. [4]

   On 3 March 2008 she resigned as director and appointed Mr Boros in her place. It appears that Mr Boros and Mr Thatcher ran the business from then until September 2016. The business experienced financial difficulties in about 2014. On 12 September 2016 Mrs Page exercised her power as the shareholder of PPI to remove Mr Boros from his dual positions of director and secretary of PPI and appointed in his place Timothy Page, her son, as sole director and secretary. Under Mr Timothy Page’s control, PPI commenced proceedings against Mr Boros and six other defendants, of which four were other corporate entities within the Page group of companies. The two other individual defendants were Mr Boros’ wife and Mr Thatcher: however claims against them were settled before the hearing. The case went to hearing in the Corporations List, PPI alleging various breaches of duty by Mr Boros in contravention of his fiduciary obligations as a director of PPI and duties imposed under the Corporations Act 2001 (Cth).

5. [5]

   The proceedings were heard over eight days from late July until 12 August 2020 by Black J, attended, as the transcript revealed, by the difficult circumstances which were occurring with some remote hearings. With admirable expedition, a lengthy and comprehensive judgment was delivered on 17 September 2020. [1] The orders included the winding up on the just and equitable ground of each of the corporate defendants, together with a judgment in favour of PPI on some of its claims as against Mr Boros. Judgment was also given against the second defendant which was a corporate entity within the Page group, Pages Equipment Holdings Pty Ltd (“PEH”).

6. [6]

   PEH was also registered by Mr Gregory Page on 9 November 1998 with himself as the sole director. However, on 17 December 1999 both Mr Boros and Mr Thatcher were appointed as directors of PEH and remained in those positions at the date of the trial. The issued capital comprised 12 shares of which six were held by PPI and three by each of Hun Enterprises Pty Ltd (a company associated with Mr Boros) and Thatcher Group Pty Ltd (a company associated with Mr Thatcher).

7. [7]

   The event hire business involved the manufacture and supply of pavilions, stages, lighting and other infrastructure for events. PPI owned the land at Belmore Road, Punchbowl from which the business was conducted. PEH owned the equipment, vehicles and other assets used in the hire business. Before the increased borrowing by PPI referred to below, PEH’s non-current liabilities included hire purchase and other liabilities in respect of equipment and vehicles. From 2015, the retail hiring operations of the business were undertaken by Pages Sales Pty Ltd. Before then they had been conducted by Phire Pty Ltd, known as Pages Hire Centre (NSW) Pty Ltd from 1999 to 2015. PEH’s revenue was generated from the wholesale hire of equipment to Phire, and later Pages Sales. The Punchbowl property was the subject of a lease to PEH. However, the accounting records of PEH and Phire (and then Pages Sales) recorded that rental payments were made from funds of the latter.

8. [8]

   At the heart of PPI’s case was a claim that Mr Boros as director of PPI had a conflict of duty and interest in relation to dealings between PPI and PEH. That was found to have resulted in a breach of fiduciary duty in relation to an increased borrowing by PPI under a facility with the ANZ Bank, which funds were used to pay down debts of PEH. Separately, it was alleged that Mr Boros, as director of PPI, failed to take sufficient steps to ensure that PEH paid to PPI all of the rental due and payable under PEH’s lease of a property owned by PPI. This conduct was held to have involved a contravention of s 180(1) of the Corporations Act. Mr Boros was also found liable for contravening s 180 in failing to keep true and fair accounts of PPI, while he was both the director and secretary. He was ordered to pay compensation to PPI for amounts totalling $2,538,656, together with the costs incurred by PPI in engaging an accountant to reconstruct the financial records of PPI. Various other claims made by PPI failed, as a result of which Mr Boros and PEH were required to pay part only (60%) of the legal costs incurred by PPI.

9. [9]

   Final orders were made in a second judgment delivered on 23 October 2020. [2] Mr Boros appeals from those orders.

A Issues on appeal

1. [10]

   The orders made by the trial judge on 23 October 2020 were as follows:

2. [11]

   The amended notice of appeal challenged orders 1, 3 and 4, omitting order 2 as to the liability of PEH which was not an appellant. PEH (then in liquidation) was added as a second respondent, but took no part in the proceedings. The grounds of appeal were drafted on the basis that there was only one respondent, PPI, and were in the following terms:

3. [12]

   There was no ground expressly addressing costs, or more particularly order (4). The setting aside of those orders was treated as consequential on success on the substantive issues. For reasons discussed in Part D, that assumption needs to be examined.

4. [13]

   The major parts of the judgments against Mr Boros and PEH were in the form of compensation with respect to an increase in the borrowings of PPI from the ANZ Bank. The judgment against Mr Boros comprised an amount of $2,081,376 with respect to the increased debt owed to the ANZ Bank and a further amount of $457,280 on account of unpaid rental under a lease between PPI and PEH. (The judgment against PEH was for similar amounts, assessed for the same losses; it is clear that PPI could not recover two amounts in respect of one loss.)

5. [14]

   Two broad issues arise with respect to the order for payment of compensation. First, it is apparent that both amounts relate to intra-group arrangements which require that careful attention be given to the loss suffered from any apparent conflict of interest where two companies have a common directorship, although not necessarily a common shareholding. Secondly, if the borrowing is for the benefit of the group, careful attention must be paid to the inter-related obligations of companies within the group, which may be joint borrowers or may have provided guarantees for loans to particular members of the group. In other words, the fact that Mr Boros was a director of PPI, but had no interest in the company as shareholder or a beneficiary of the trust for which it was the trustee, may not mean that he will have a conflict in relation to any dealing between PPI and PEH of which he was also a director and in which he had a 25% indirect shareholding (through his own family company) and in which PPI held a 50% interest by way of shareholding.

6. [15]

   A separate issue in relation to the calculation of losses arose because the ultimate beneficiary of the business was a family trust, of which the sole (or principal) beneficiary was Mrs Page. The business being operated through the trustee, inadequate accounting arrangements may not give rise to an actual loss where some payments were made to the trust or its sole beneficiary, but not attributed to a particular obligation between the companies.

7. [16]

   Grounds 1 to 4 in the notice of appeal addressed the finding that Mr Boros had breached his duties to PPI in failing to ensure that PEH paid the full amount of the rent due under a lease. Grounds 1 and 2 denied the liability, but grounds 3 and 4 contended that account should be taken of payments made by PEH otherwise than pursuant to a legal obligation under the lease. Grounds 5 and 6 were concerned with the ANZ loan facility. Mr Boros’ case was that the group needed the additional funds, which were available to PPI because it owned a property against which the lending could be secured. The fact that the business was carried on in other entities, not PPI, did not mean that PPI suffered a loss from the increased borrowing in circumstances where it was the ultimate beneficiary of the business operations.

(1) Basis of claim

1. [17]

   There were two leases of PPI’s property to PEH. The first lease was executed in June 2004; a second lease commenced on 1 July 2016. In considering the claim which was upheld, in relation to the first lease, it is important to have regard to the circumstances in which it was executed, before Mr Boros was a director of the lessee.

2. [18]

   In 2001 PPI purchased the Punchbowl property for use in the event hire business. In June 2004, that is some four years before Mr Boros became a director of PPI, PPI executed a lease in favour of PEH for a period of five years, with two further options of five years renewal. The lease was not renewed, but continued for a further seven years with PEH holding over, until the execution of a second lease in June 2016.

3. [19]

   The allegation of underpayment was based on the proposition that although the first lease provided for monthly rental of $20,000, it contained a rent review clause which the judge found operated automatically and on an annual basis. The clause, the judge concluded, did not require the carrying out of a review, nor did he find that, if he were wrong in that respect, there would have been a breach of duty in not carrying out a review. The consequence of this approach was that not only was Mr Boros liable to compensate PPI for his failure to ensure that the full amount of rental was paid on a monthly basis, over a period of some six years, but PEH was also found liable in debt for the unpaid rental, although its landlord had never made a demand upon it for additional rental, nor quantified the rental at any point between the first anniversary of the entry into the lease (14 June 2005) and the date on which the second lease was entered 11 years later. That is a surprising result, but is not the subject of an appeal because PEH does not challenge the order against it.

4. [20]

   PPI’s claim against Mr Boros was for a contravention of ss 180, 181 and 182 respectively of the Corporations Act. The judge upheld the claim under s 180 (failure to exercise powers and discharge duties with a reasonable degree of care and diligence) but rejected the claims under s 181 (failure to act in good faith in the best interests of the corporation) and under s 182 (acting improperly to gain an advantage for himself or someone else).

5. [21]

   As to the appellant’s challenge to the findings of liability, four factors must be borne in mind. First, when the lease was entered into, the sole shareholder of PPI and its sole director was Mrs Page. The appellant took over a little short of four years after the lease commenced. If Mr Boros was in breach of duty to PPI, Mrs Page must also have been in breach of duty. Mr Boros merely continued a practice which he inherited.

6. [22]

   Secondly, although the operation of the companies involved the carrying on of a business, it is not uncommon for trustees of family trusts to lease premises to either a related company or to a member of the family. Rental may be fixed and payments arranged in a manner which satisfies the tax obligations of the parties, but is otherwise convenient to the ultimate beneficiary of the family trust.

7. [23]

   Thirdly, the finding that the rental increased on an annual basis without any steps being taken by the landlord or the tenant turned on the correct legal construction of the lease. The judge expressed his opinion that, “[o]n balance, it seems to me that ‘review’ took place without the need for further action of the parties to initiate it, since the new rent was determined by the formula specified in the first lease.” [3] It did not follow, however, that a director who had taken a different view of the construction of the lease had failed to discharge his duty under s 180 of the Corporations Act. The judge did not find that the breach arose from a failure to obtain legal advice: the breach arose because of the construction given to the lease by the judge.

8. [24]

   Fourthly, the judge concluded that the obligation continued from the date when Mr Boros became a director of PPI until the date he was removed in September 2016. Indeed, the amount appears to have been calculated for a period continuing until September 2016, although the lease terminated with the signing of a second lease which commenced on 1 July 2016. [4]

(2) Legal principles

1. [25]

   The trial judge upheld the respondent’s claim on the basis of a breach of s 180(1) of the Corporations Act. That section provides:

2. [26]

   Section 180(2) sets out the “business judgment rule”, which was invoked unsuccessfully at trial and need not be addressed. Section 180(1) has two characteristics. First, it broadly reflects general law principles requiring a person to exercise reasonable care, skill and diligence in the exercise of a power or function, or conduct generally. That may involve taking steps to avoid harm, or affirmative steps to achieve a particular outcome.

3. [27]

   Secondly, context is important. Context includes both the “corporation’s circumstances” and the functions exercised by the director within the corporate structure. Context is often critical in analysing the standard required. Statements as to the standard required made in other cases and other circumstances should be viewed with a degree of circumspection having regard to the fact-specific nature of the inquiry. The trial judge adopted principles which he had earlier articulated in another case, [5] which in turn extracted statements from earlier cases, including cases under the Corporations Law. However, judicial statements as to the scope of a provision based on principles of interpretation, not directed to the circumstances of the case, may provide limited assistance.

4. [28]

   Thirdly, as Spigelman CJ stated in Vines v Australian Securities and Investments Commission, [6] in relation to the equivalent provision in the Corporations Law:

5. [29]

   The structure of the Corporations Act is relevantly the same as that of the Corporations Law. Section 180(1) is a civil penalty provision under s 1317E(1); the court may order a person to compensate a corporation “for damage suffered by the corporation” resulting from a contravention of a civil penalty provision: s 1317H(1).

6. [30]

   After giving careful consideration to the operation of the civil penalty provisions, Spigelman CJ concluded that the inclusion of the compensation provisions demonstrated an intention to avoid multiplicity of proceedings and “would not have that effect if the standard of care applicable in proceedings in tort for negligence was different from the standard of care applicable in the case of compensation orders under the Act”. [7]

(3) Elements of claim by PPI

1. [31]

   The pleading with respect to payment of rent was found in the fifth further amended statement of claim in the following terms:

2. [32]

   The trial judge correctly found that the pleading of a duty to “ensure” that rental income was obtained did not reflect the obligation under s 180. Rather, the judge stated that he read the claim as an allegation that “Mr Boros did not act with sufficient care and diligence in taking steps to ensure that PPI, as lessor, received the benefit of the indexed rent payments”. [8] The dispositive findings were as follows:

3. [33]

   The reference in the last passage quoted above to the breach extending until 12 September 2016 was ambiguous. The first lease was replaced by a second lease which commenced on 1 July 2016. The calculation of unpaid rent must have ceased on that date.

4. [34]

   The judge dealt separately with the defences raised by Mr Boros. These were dealt with in the following passages:

5. [35]

   It may be noted that the judge rejected allegations of breaches of s 181 and s 182 of the Corporations Act and a claimed breach of fiduciary duty, in the following passage:

6. [36]

   Two points should be made in relation to this reasoning. First, a matter which will be significant in considering a breach of fiduciary duty discussed below, the recognition that two of the shareholders would obtain a benefit from the financial saving to PEH as a result of not paying an increased rental, omits reference to the fact that PPI was a 50% shareholder in PEH and thus itself obtained a benefit. If there were a breach of duty, the failure to take into account that indirect benefit to PPI would cast doubt upon an order for compensation simply calculated by reference to the unpaid rental. However, it is necessary next to have regard to the challenge to the finding as to liability. It should be borne in mind that, as appears in the last sentence set out above, the judge’s finding reflected “the failure to establish an adequate process for payment” of the additional rental. That failure the judge described as part of the “day-to-day inter-company transactions” or “day-to-day dealings between the two companies”. [9] The judge further explained:

(4) Challenge to judge’s findings – rental payments

1. [37]

   As appears from the passages set out above, the trial judge proceeded on the basis that the rent payable under the lease was an amount which increased annually in accordance with a formula in the lease. That conclusion was reached on the basis of the following provisions in the lease:

2. [38]

   Pursuant to item 6 in the reference schedule to the lease, the rent was “$218,181.82 pa plus GST payable monthly in advance on 15th of the month.” The commencing date was 15 June 2004.

3. [39]

   There could be two views about how cl 4.1 of the lease operated. The judge made a finding of law in that regard expressed in the following terms:

4. [40]

   As noted by the trial judge in the passage at [104] set out above, Mr Boros submitted that the rent payable under the lease was, in effect, the sum specified in the schedule, namely $20,000 per month. He did not understand that the rent automatically increased on each anniversary of the commencement date, or that it increased without any rent review being undertaken.

5. [41]

   There may well have been two views reasonably open as to how cl 4.1 operated. The judge’s finding, though not expressed in these terms, was that a reasonable person in the position of Mr Boros would understand that the lease operated in the way described in the judgment. However, a finding of law as to the proper construction of cl 4.1, fairly prefaced by “[o]n balance it seems to me”, is quite consistent with another view being reasonably open. That view is that the rent does not increase unless a review is undertaken and a new figure is identified. The fact that the exercise is one which can be undertaken arithmetically, once the appropriate CPI figures have been identified, does not render that view untenable. Further, the fact that cl 4 does not say that the rent does increase by a calculable amount each year, but rather that the rent will be “reviewed” on each anniversary is consistent with the view that one party, implicitly the landlord, will carry out a review and notify the tenant of the outcome.

6. [42]

   PPI did not plead and the trial judge did not find that Mr Boros was negligent in not carrying out such a review, nor that, to the extent that the proper construction of the clause was open to doubt, he was negligent in not obtaining legal advice as to its operation.

7. [43]

   Further, Mr Boros was appointed by and took over from the sole shareholder of PPI, Mrs Page. She had been the director of PPI when the lease was executed and continued to be the sole director of PPI through three anniversary dates, namely 15 June 2005, 15 June 2006 and 15 June 2007. (Mr Boros took over in March 2008.) In short, Mr Boros continued a practice which had been in operation for more than three years prior to his appointment as director.

8. [44]

   Mr Boros also submitted that the rent review provision did not continue to operate in the holding over period which commenced on 15 June 2009. By construing the contract, the judge held that the rent review clause continued to operate during the holding over period. Clause 2.2 of the lease provided that where the tenant continued to occupy the premises as a monthly tenant, it was required to pay to the landlord a monthly rent equal to one-twelfth of the rent payable immediately before the terminating date. Clause 2.2 gave the landlord the right to increase the monthly rent at any time and in any amount, on giving one month’s notice; it further provided that “[i]f the Landlord increases the monthly Rent then the provisions about review of Rent do not apply”: cl 2.2(6). The judge concluded that the provision for annual review on the anniversary of the commencement date continued to apply during the holding over period, because 2.2(6) assumed that to be the case, absent the landlord fixing a rent increase.

9. [45]

   There might be different views as to precisely how cl 2.2 operated in the holding over period where there had not been any rent increase required by the landlord. However, again, there was no finding that a director who took the view that the rent review provision did not continue during the holding over period, and failed to enforce payment by the lessee on that basis was failing to act with due care in the interests of PEH.

10. [46]

    Thirdly, the fact that PPI itself obtained a benefit as a shareholder of PEH, through its failure to insist upon the rent increases was itself relevant to the conclusion reached by a reasonable person acting as a director of PPI.

11. [47]

    Fourthly, there is the question of the so-called “top up” payments made by PEH to PPI over the relevant years. These will be dealt with further below, but they are relevant to the question whether a reasonable person acting as a director of PPI would insist on the rent increases. There is no doubt that payments well in excess of the unpaid rental calculated on the basis accepted by the trial judge were paid to PPI by PEH over the relevant years. Whether those payments were accounted for as part payments of rental, as loans or in some other way may have had tax consequences for either PPI or PEH or both, but the fact that such payments were made, with a degree of flexibility, could be taken into account by a person acting as director of PPI as a basis for not insisting on payments being made on account of increased rental obligations.

12. [48]

    It appears from the evidence, although there was no finding in this respect, that payments made to PPI by PEH were used to make payments to Mrs Page, presumably as a beneficiary of the family trust. PPI had two sources of income, which were not entirely independent. On the one hand, it obtained income from the lease of the property which it owned and leased to PEH. Secondly, it obtained income as a shareholder of the various companies which operated the event hire business. One of those companies was PEH. The fortunes of PPI (and the other shareholders of the operating companies) turned on the fortunes of the business. If the business became unprofitable, both sources of income might dry up. If the business got into difficulty, there might be little benefit in PPI insisting on a higher rental for the lease of the property, if PEH could not afford to pay both the rental and third party creditors. So long as the rental was adequate to satisfy the Tax Commissioner that it was fixed at a commercial rate, there may well have been benefits to PPI in allowing PEH the flexibility to provide money, when available, by way of payments not tied to the obligations under the lease.

(5) Conclusions – rental payments

1. [49]

   Once these factors are taken into account, the proper conclusion is that PPI did not demonstrate that Mr Boros acted without reasonable care and diligence in failing to ensure that increased rental payments were made to PPI by PEH. For these reasons, the finding of breach of s 180(1) in relation to the rental payments under the first lease should be set aside.

2. [50]

   There is, however, a second basis upon which this conclusion can be supported. As noted by the judge at [104], Mr Boros relied on the “top up payments” made to PPI as demonstrating that PPI did not suffer a loss. The judge found, at [109], that the arrangement to make such payments was “not established” and “the bare fact of payments by PEH to PPI does not support an implication of the particular arrangement alleged.” It appears that the judge required that to take the payments into account Mr Boros had to establish that the payments were made as “a set off against rental liabilities”.

3. [51]

   It may be accepted that there was no such “arrangement”, if only because neither Mrs Page (as the sole shareholder of PPI throughout the relevant period) nor Mr Boros (during the period when he was the director) believed that there was any obligation on PEH to pay an increased rental. The point is rather that the payments were apparently made to satisfy particular needs of PPI for cash. However, in the absence of any evidence to the contrary, it may reasonably be inferred that PPI’s needs for cash would have been lowered by whatever amount extra was paid by way of rental, so that the additional payments would have been lower and the rental higher. For the reasons explained above, this was largely an accounting exercise. The fact that PPI received additional payments from PEH of approximately $1.4 million during a period when the unpaid rental amounted to less than $500,000 demonstrates that there was in fact no loss suffered by attributing these payments to some other “arrangement” rather than to a rental obligation under the lease or by way of substitution for increasing the rent. It follows that, even if there was negligence on the part of Mr Boros in not ensuring that an increased rental was paid by PEH to PPI, PPI has failed to demonstrate that it suffered a loss.

4. [52]

   Although the judge referred to a schedule of payments as having been admitted only as a submission, the bank records which supported the making of the payments were in evidence and were in evidence before this Court.

5. [53]

   On either of the bases set out above, the conclusion that PPI demonstrated a breach of s 180(1) of the Corporations Act, entitling it to compensation did not establish a loss of $457,280 as found by the trial judge. Accordingly the judgment for PPI against Mr Boros must be reduced by that amount.

(1) Pleaded case

1. [54]

   The uncontroversial facts were that PPI’s purchase of the Punchbowl property in March 2001 was financed by a loan from the ANZ Bank in an amount of some $3.6 million. The Bank took a registered mortgage over the property. [10]

2. [55]

   PPI pleaded that Mr Boros caused the total amount secured by the mortgage to increase to approximately $8.5 million as at 22 November 2016 and caused PPI to secure loans and facilities for entities other than PPI. [11] Ironically, the particulars to that claim identified an amount in excess of $5.4 million being attributed to PPI’s own loan facility. However, facilities of PEH and Pages Sales Pty Ltd were also identified, although only $200,000 was then secured on account of a single PEH facility.

3. [56]

   No claim for breach of duty by securing the loan facilities of PEH and Pages Sales was pursued. Rather, a separate claim was raised by reference to an increase of $1,705,000 on 10 March 2016 in PPI’s indebtedness to the Bank. The indebtedness was said to have increased from $3.86 million to $5.565 million. Accordingly, to the extent that the property secured a debt of some $2.84 million owed by Pages Sales, no claim was pursued. The basis of the claim was that the bulk of the increase in PPI’s facility was used to repay the balance owing by PEH to the Bank under PEH’s asset finance facility. [12] The pleading as to the liability of Mr Boros was identified as follows:

4. [57]

   The primary elements of Mr Boros’ defence were as follows:

5. [58]

   There is no need to refer to par 82A referred to in the chapeau to par 116A. Mr Boros’ further responses in his affidavit were summarised by the trial judge in passages set out below.

(2) Reasoning of trial judge

1. [59]

   In March 2016 PPI increased the limit of its borrowing facility with the ANZ Bank by an amount of $1,705,000. The increase allowed PPI to pay out a separate facility involving PEH and the ANZ Bank by payment to the bank of an amount of $1,658,931.43. PPI claimed that Mr Boros, as director of PPI, breached his duty to PPI in authorising the payment on behalf of PEH. The judge’s conclusion was expressed in the following terms:

2. [60]

   With respect, there is an element of artificiality involved in this reasoning. As Mr Boros asserted in his evidence which was accepted by the trial judge, the operation of the group needed to be considered as a whole. Indeed, immediately before reaching the conclusion set out above, the judge expressly recognised that it was “not self-evident that the transaction was not in PPI’s interests, and that PPI did not obtain a commercial benefit from funding PEH in which it had a substantial interest.” [13]

3. [61]

   The judge also noted a separate matter which had originally constituted a claim by PPI of breach of duty, but which was not pursued. That matter provided important contextual material for considering the 2016 dealing. The judge explained:

4. [62]

   There was evidence of the package of cross-collateralised facilities. No doubt each company in the group had its own assets, but the land from which the business operated appears to have constituted the major fixed asset against which the bank obtained security. The land was owned by PPI. The evidence did not reveal that PPI had any source of funds by which to pay interest or pay down debt other than the income generated by the businesses operated by the companies in the group, including rental from PEH for the leased premises.

5. [63]

   As to the transactions in March 2016, the judge set out Mr Boros’ evidence and submissions in the following passages:

6. [64]

   The passage at [119] effectively denied Mr Boros the protection for which he had contended on the basis that the sole shareholder of PPI had approved or ratified the expenditure of the loan moneys to pay down PEH’s debt: neither prior approval nor subsequent ratification had been sought. The italicised passages in [118] will be addressed shortly.

(3) Legal principles

1. [65]

   The position of a director of one company in a group of companies has been considered in a number of cases addressing the duty to act in good faith and for a proper purpose (both at common law and pursuant to the Corporations Act, s 181) and not to use the position as director improperly to gain an advantage for the director or someone else, or cause detriment to the corporation (s 182). However, in the present case the judge did not identify a breach of those provisions, but rather relied on the general law fiduciary duty, stating:

2. [66]

   The breach of fiduciary duty, as found at [124] set out at [59] above, derives from an abstract identification based on Mr Boros’ shareholding in PEH. There was no finding that Mr Boros obtained an actual financial benefit from the loan made by PPI to PEH. Nor was there any finding that Mr Boros was motivated by self-interest in arranging the loan from PPI to PEH. It is necessary, therefore, to consider the manner in which the director of the principal shareholder in a group of associated companies should operate when making decisions affecting both its interests and interests of a subsidiary in which the director holds shares. As explained in Austin, Ford and Ramsey, Company Directors – Principles of Law and Corporate Governance: [14]

3. [67]

   In Walker v Wimborne, [15] Mason J stated:

4. [68]

   In Northside Developments Pty Ltd v Registrar-General [16] a question arose as to whether a creditor could rely upon a guarantee from a third party. Noting that the creditor would ordinarily be put on inquiry in such a case, Brennan J observed: [17]

5. [69]

   Acknowledging these principles, Clarke JA and Cripps JA in Equiticorp Finance Ltd (In liq) v Bank of New Zealand [18] observed:

6. [70]

   Clarke and Cripps JJA noted they had “reservations” about the test so proposed, stating: [20]

7. [71]

   In Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd [23] Bryson J noted that Charterbridge was not concerned with the liability of directors but the validity of the exercise of a corporate power. [24] Bryson J continued:

8. [72]

   In The Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 9), [25] Owen J observed:

9. [73]

   There is, as Owen J noted, overlap between general duties and the statutory obligations of directors:

10. [74]

    Further, as Deane J emphasised in Chan v Zacharia, [26] the equitable principle underlying the no conflict duty is:

(4) Application of principles

1. [75]

   The nature of Mr Boros’ interest in the transaction requires attention. It is of a kind identified by the Hon Paul Finn as “the indirect interest created through membership in a company.” [27] The trial judge was alert to the fact that the test “must be applied realistically to a state of affairs which discloses a real conflict of duty and interest and not to some theoretical or rhetorical conflict”. [28]

2. [76]

   The trial judge described the conflict as “real and sensible” and involving a “substantial economic interest in PEH”. [29] However, there are two aspects of this analysis which cast doubt on the conclusion. First, while Mr Boros held a 25% interest in PEH, PPI held a 50% shareholding. Secondly, there was no evidence, or no evidence relied upon by the trial judge, as to what benefit flowed to Mr Boros in practical terms from the 25% shareholding. If the group as a whole were found to be in financial trouble, the evidence did not reveal that the transaction (the loan to PEH) would not benefit the group and, therefore as Mr Boros asserted, PPI.

3. [77]

   There was, thus, an element of imprecision in identifying any immediate detriment to PPI in the arrangement. The amount of the further draw-down on PPI’s loan facility increased its liability as principal debtor to the Bank, but was not a “loss”. The funds were provided to PEH as a loan or investment in an asset of PPI, namely its 50% owned subsidiary. The funds were used to pay down PEH’s indebtedness to the Bank, which significantly reduced the monthly payments it had been making, with significant benefits to PPI in terms of the solvency of the business and likely improved returns as a shareholder of PEH. If it were proven to be a bad investment PPI would suffer a loss, but not because of a breach of a fiduciary duty owed by Mr Boros. On the other side of the record, there was no proof of a financial benefit to Mr Boros personally which he could be required to disgorge. There was a strong sense in which his interests and PPI’s were aligned.

4. [78]

   Groups of associated companies may operate in different ways. It is common practice for different subsidiaries to be created to operate discrete aspects of a business or, as in the construction industry, discrete projects. This was not so in relation to the Pages Hire business. There was a single integrated operation which was carried out by Phire (and later Pages Sales) using equipment, vehicles and other assets owned by PEH, held on a single set of premises owned by PPI and leased to PEH. There was a single financier of the group, ANZ Bank. Various financial facilities were established within the separate entities. Although there were changes in the facilities over time, they were “cross-collateralised”, meaning that there was an interlocking network of guarantees involving all the companies and Mr Thatcher and Mr Boros. The consequence was that the discharge of liabilities of PEH from moneys borrowed by PPI from the Bank would not have had any effect on the contingent liability of Mr Boros as guarantor.

5. [79]

   Mr Boros gave evidence (which was not contradicted so far as appears from submissions in this Court) to the effect that the group as a whole benefited from the change in the loan arrangements in March 2016 because the Bank accepted interest only payments on the loan to PPI, thereby reducing the group’s monthly recurring costs by $100,000. This was accepted by the trial judge at [117]. The judge noted that “the transaction did not increase PPI’s combined liabilities as principal and guarantor”. However, in the course of cross-examination suggesting that, contrary to his written evidence, there had been no pressure from the ANZ Bank to restructure the finances in March 2016, Mr Boros stated that the arrangements in fact reduced the overall indebtedness of the group by $500,000. Mr Boros stated in his affidavit that, “[a]s the plaintiff was a guarantor of PEH’s facilities including the asset finance facility (just as PEH was a guarantor of the plaintiff’s facilities including the cash advance facility) both the plaintiff’s and PEH’s combined liabilities as borrower and guarantor to ANZ remained the same”. Although the judge admitted this statement only as a submission, the fact was not in dispute.

6. [80]

   What was in dispute, as noted by the judge at [118] in the passages emphasised in the extract set out above, was the legitimacy of treating the loan facilities as a single liability. Legally it was entirely correct to say that there were important distinctions between a debt owed as a principal and a contingent liability as one of several co-guarantors, including as to the availability of a right of contribution in the latter case; however, in the circumstances of the Pages Hire business, as described above, it was the practical consequences which were of significance. If the retail operating business undertaken by Pages Sales and PEH failed, it was likely that all of the assets, including the Punchbowl property, would be liquidated and each of the companies, including PPI, wound up.

7. [81]

   In considering a breach of fiduciary duty, and to the extent that an objective test was to be applied to the conduct of Mr Boros, it was not demonstrated (and there was no finding) that treating the financial liabilities of the group as a consolidated liability was not commercially realistic. There was no finding that it was not undertaken in good faith. Mr Boros’ evidence demonstrated that he had regard to the interests of PPI and PEH. For a business with liabilities to the bank of less than $9 million, a monthly reduction of the repayments of $100,000 (being $1.2 million over a year) must have been a significant benefit to the group as a whole in terms of its trading position. At least it was not demonstrated by PPI that that was not so.

8. [82]

   The reasoning of the trial judge focused upon the structure of the group. Because Mr Boros was a director of two companies (PPI and PEH) but held shares indirectly in one (PEH), the reasoning suggested that any business relationship between the two companies which was not objectively more beneficial to PPI than to PEH would constitute a breach of fiduciary duty. Indeed, that appears to have been the underlying premise of PPI’s claims with respect to rental income, the ANZ loan in 2016 and other aspects of the business which do not arise on the appeal. However, no authority was relied upon to support such a stringent statement of duty. The establishment of the corporate structure, which occurred when Mr Page was in charge, was based on the assumption that there would be commercial transactions between the members of the group, undertaken by common directors. These were not to be assessed by some fine appreciation of where the net benefit lay within the corporate structure.

9. [83]

   Importantly, there was no finding by the trial judge that Mr Boros disregarded the interests of PPI. Such a finding would have required the rejection of his explanation for entering into the transaction: there was no such finding as to that.

(5) Conclusions as to breach of fiduciary duty

1. [84]

   For these reasons, PPI failed to establish a breach of fiduciary duty on the part of Mr Boros in arranging for PPI to obtain an increase in its facility with ANZ Bank, so as to reduce the liability of PEH to the bank. There was cogent evidence that both PPI and PEH benefited from the transaction; the fact that Mr Boros had an indirect interest in PEH, but not PPI, did not give rise to a breach of his general law fiduciary duty as a director of PPI in the circumstances of the case.

D Failure to ensure that PPI failed to keep proper financial records

1. [85]

   PPI alleged that Mr Boros had breached his obligations as a director under s 180 of the Corporations Act by failing to ensure that PPI’s financial records were properly kept in accordance with s 286 of the Act. The judge noted:

2. [86]

   The judge noted further difficulties with the claim, stating:

3. [87]

   Despite the fact that Mr Boros was self-represented, PPI was given leave at that late stage to particularise the complaints. That leave was availed of, but the results were still unsatisfactory and required further directions from the judge. The revised version of the schedule led to the judge to conclude:

4. [88]

   That finding made no reference to the records of the other companies for which a director of PPI could not have been responsible. Nor did it deal with the responsibility of a director for other officers maintaining proper records. The judge returned at [88] to the director’s responsibilities for ensuring compliance with s 286. This reasoning was not challenged on the appeal.

5. [89]

   After rejecting Mr Boros’ defences based on reliance on information supplied by others (s 189), the exercise of appropriate business judgment (s 180(2)), relief under ss 1317S or 1318, the judge turned to the question of PPI’s loss. The loss claimed was noted as $200,101. The judge did not accept that the whole of that amount was recoverable as it plainly involved “a substantial amount of work directed to companies other than PPI”. He noted that the evidence allowed no basis to allocate the amounts between those matters. The judge then concluded:

6. [90]

   In a second judgment, delivered on 23 October 2020, [30] the judge returned to the question of Ms Bateman’s fees. Mr Boros submitted that he should be required to pay 15% of Ms Bateman’s costs: second judgment at [20]. He also submitted that “a substantial amount of her work was directed to other companies”: second judgment at [21]. However, the judge accepted a submission by PPI identified in the following terms:

7. [91]

   It was clear from this reasoning that the judge accepted that the costs of obtaining Ms Bateman’s evidence were recoverable as costs of the proceedings and not on any other basis. However, the judge did not reject the proposition that time spent preparing accounts for other companies could not be charged against Mr Boros. Nor did he take into account the extent to which Ms Bateman’s work went to claims which had been rejected. (Had he done that, he would not have included order 4.)

8. [92]

   The intended operation of order 4 is not entirely clear. The order appears to assume that 60% of Ms Bateman’s fees, assessed on a party and party basis will be covered by order 3, leaving any excess within the concept of “reasonable costs” of her engagement as an expert witness (as opposed to other aspects of her engagement), which may be recovered under order 4. If the justification for the order was a breach of duty on the part of Mr Boros, in ensuring that PPI maintained proper accounts over the six years prior to the commencement of the proceedings, it is unclear why PEH should bear any portion of those expenses.

9. [93]

   As noted above, no ground in the amended notice of appeal was directed to this finding. Setting aside the costs orders should therefore be approached on the basis that such a step is sought as a consequence of success on the appeal. Accordingly, Mr Boros having been successful in challenging both elements of the claim which made up the substantive judgment against him, the costs order against him should be set aside. In so far as the judge intended the costs of Ms Bateman’s reports, or a proportion thereof, should be recoverable as costs of an expert witness, the favourable order made at trial must also be set aside.

10. [94]

    There being no notice of contention seeking to support the order on any different basis, and there being no claim for recoupment of any part of Ms Bateman’s costs other than as costs of the proceedings, order 4 should be set aside so far as it relates to Mr Boros. Mr Boros will not be liable for any part of the costs of obtaining her evidence in circumstances where he is not liable for the costs of the trial.

Orders

1. [95]

   The notice of appeal sought to set aside orders 1, 2, 3 and 4 made by the trial judge on 23 October 2020. Order 2 involved a judgment against PEH. As noted above, the amended notice of appeal removed the challenge to order 2 which concerned the liability of PEH. The substantive order in dispute was order 1 which gave judgment for PPI against Mr Boros. That order should be set aside.

2. [96]

   So far as appears from the pleadings and the conduct of the trial, Mr Boros has acted for himself throughout. Accordingly, a costs order in his favour will not impose any significant burden on PPI. In the circumstances, it is inappropriate to make special orders in respect of different aspects of the trial costs, other than to remove any liability upon Mr Boros for PPI’s costs and to award him his costs of the trial. Order 3 should be varied to remove reference to “the First Defendant” (Mr Boros). There should be an order in favour of Mr Boros against PPI with respect to his costs of the trial.

3. [97]

   So far as the appeal is concerned, Mr Boros has been successful other than in respect of the failure to keep adequate financial records. So little time was spent on that issue that there is no purpose in allocating costs of the appeal: his substantial success entitles him to an order in his favour. Such costs as he may be entitled to as an unrepresented litigant should be paid by PPI. PPI will bear its own costs of the appeal.

4. [98]

   The Court should make the following orders:

   1. (1)

      Allow the appeal in part and set aside orders 1 and 4 made by the trial judge on 23 October 2020.

   2. (2)

      Vary order 3 to delete reference to the first defendant.

   3. (3)

      Order that the plaintiff pay the costs of the first defendant at trial.

   4. (4)

      Order that the first respondent pay the appellant’s costs of the appeal.

5. [99]

   MEAGHER JA: I agree with Basten JA.