FEDERAL COURT OF AUSTRALIA

Ralph v Diakyne Pty Ltd (ACN 099 168 402) [2010] FCAFC 18

THE COURT ORDERS THAT:

1.         The appeal be dismissed.

2.         The first and second appellants pay the respondent’s costs of the appeal.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

INTRODUCTION AND OVERVIEW

1                          The proceedings under appeal arose out of a payment authorised by the first appellant, (“Mr Ralph”) in his capacity as a director of the respondent (“Diakyne”) in favour of the second appellant (“Colorado”).

2                          Mr Ralph had a material personal interest in the making of the payment because he was the sole director of Colorado and held 99% of the issued capital.

3                          The primary judge held that in authorising the payment, Mr Ralph breached his duties as a director of Diakyne under ss 180, 181 and 182 of the Corporations Act 2001 (Cth) (“the Act”).

4                          The payment consisted of a bonus of $100,000 plus $10,000 GST which Mr Ralph claimed to be due by Diakyne to Colorado under a service contract which provided for the services of Mr Ralph to be made available to Diakyne in return for an annual management fee of $240,000.

5                          The primary judge held that upon the proper construction of the service contract, the bonus was not due and owing by Diakyne to Colorado but that irrespective of whether it was, in authorising the payment in the circumstances which existed when the payment was made, Mr Ralph breached his duties under ss 180, 181 and 182 of the Act.

6                          Her Honour gave comprehensive reasons for these findings, dealing in great detail with the circumstances which in her opinion pointed inexorably toward Mr Ralph’s breaches of his duties as a director of Diakyne.

7                          We will refer to the circumstances more fully below but the gravamen of the primary judge’s finding was (a) that any reasonable person in Mr Ralph’s position would have appreciated that Colorado’s entitlement to payment was at least arguable, and (b) that Mr Ralph’s purpose in authorising the payment was to ensure that Colorado received the money without Diakyne having an opportunity to dispute the making of the payment.

THE ISSUES ON THE APPEAL

8                          The Notice of Appeal stated 15 grounds but in his written and oral submissions, Senior Counsel for the Appellants, Dr Birch SC, raised only two issues for determination.  The effect of his submissions was that if these issues are determined favourably to him, the appeal should be allowed.

9                          The first issue was whether the primary judge ought to have found that in authorising the payment Mr Ralph acted reasonably, that is to say, to the standard of reasonable care referred to by Santow J in Re HIH Insurance Limited (in prov liq) and Ors v Adler and Ors  (2002) 41 ACSR 72 at [372(4)] (“Re HIH”); see also Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1 at [7242].  Dr Birch contended that Mr Ralph acted reasonably, in accordance with that test.

10                        This was also said to be an answer to the findings made against Mr Ralph that he had breached his duties to Diakyne under ss 181 and 182 of the Act as stated in Re HIH at [735] and [738].

11                        The second issue was as to the proper construction of the bonus provision of the service contract.  This issue arises on the appeal because it goes to the question of quantum in the event that we affirm the primary judge’s findings that Mr Ralph breached his duties as a director of Diakyne.

12                        Dr Birch submitted that, upon the proper construction of the bonus clause, Mr Ralph was entitled to payment in full of the sum of $110,000.  The effect of Dr Birch’s submission was that her Honour was in error in her construction of the clause and that the only loss suffered by Diakyne was the loss of an opportunity to negotiate payment of a lesser sum.

“REASONABLENESS”

13                        In approaching the question of whether Mr Ralph breached his duties as a director, the primary judge accepted that Mr Ralph honestly believed that the bonus was payable by Diakyne to Colorado.

14                        It is true, as senior counsel for Diakyne, Mr Stevenson SC, conceded, that the primary judge did not make a finding in express terms that Mr Ralph had no reasonable basis for his belief.  However, we accept Mr Stevenson’s submission that this was plainly the effect of her Honour’s findings.

15                        In our view, the findings made by the primary judge provide a complete answer to Dr Birch’s submissions.  Most of the findings were not challenged on the appeal.  To the extent that they were, the challenge cannot be supported.

16                        There are four critical findings.  The first was that the bonus provision on which Mr Ralph relied was ambiguous.  Her Honour found at [111] that any person acting in Diakyne’s interests would have seen the ambiguities.

17                        In making this finding, her Honour gave, as an example, Mr Ralph’s acknowledgment that the first limb of the bonus provision which stated one of the essential pre-conditions for an entitlement “could have been better worded”.

18                        That concession, made by Mr Ralph under cross-examination, as well as other evidence given at AB1923, makes it plain that her Honour’s finding was correct.  Indeed, what it demonstrates is not merely an ambiguity in the clause but that the clause was, to Mr Ralph’s knowledge, not sufficiently certain to give rise to his claimed entitlement.

19                        Second, her Honour found that on the afternoon of 30 November 2007, when he authorised the payment, Mr Ralph knew it was likely that he would be removed as a director of Diakyne in the immediate future.

20                        Third, her Honour was satisfied that Mr Ralph was aware on 30 November, and for some months before that date, that the directors of Diakyne’s parent company, which owned all the shares in Diakyne, would take steps to dispute Colorado’s invoice for the bonus if and when it was presented to Diakyne.

21                        As her Honour went on to say at [116], the inescapable inference was that Mr Ralph was aware that if Colorado presented an invoice to Diakyne for the bonus, and the directors of the parent company controlled Diakyne’s decision-making, rather than Mr Ralph, those directors would be likely to “argue the toss” about Colorado’s entitlement.  This was because those directors, to Mr Ralph’s knowledge, were concerned about the validity and enforceability of the bonus provision, including the amount of the remuneration said to be payable to Colorado when the bonus was added to the $240,000 management fee.

22                        Her Honour was satisfied, in those circumstances, that Mr Ralph’s desire to ensure that Colorado was paid in full without any opportunity for dispute by Diakyne was Mr Ralph’s “actuating motive”: see Re HIH at [735(3)].

23                        Her Honour observed at [117] that any analogy to the payment by a company of an invoice in the ordinary course of business was immaterial to the circumstances that existed on 30 November 2007.  This was because Mr Ralph had a personal interest in the payment of the invoice and he took steps to authorise payment when he knew his control of Diakyne would be short-lived:

“ …and knowing that there was a real chance those likely to succeed him would debate or dispute the making of the payment.”

24                        Fourth, her Honour found at [119] that Mr Ralph intended to benefit Colorado by the making of the immediate payment, and to cause harm to Diakyne.

25                        In coming to that view, her Honour took into account the “ambiguities” or uncertainties as to Colorado’s entitlement to the bonus, and Diakyne’s parlous financial position at the time when the payment was made.

26                        The primary judge took into account each of these findings in setting out her ultimate conclusions which appear at [125] – [128].

27                        We do not need to set out those paragraphs in full.  It is sufficient to record that her Honour concluded that no reasonable person in Mr Ralph’s position would have authorised the payment even if he held the honest belief that payment was due.

28                        As her Honour concluded at [126], Mr Ralph intended to achieve the consequence that Colorado received payment without Diakyne having the opportunity to dispute the making of the payment.  This was a finding that Mr Ralph was aware of the full significance of the commercial circumstances relating to the presentation of the invoice, including doubts that had been expressed by the persons who were about to assume control of Diakyne, as to Colorado’s contractual entitlement.

29                        Her Honour said at [126] that this alone was sufficient to amount to a breach by Mr Ralph of s 180(1) of the Act.  She went on to say that the same findings resulted in contraventions of s 181(1) and s 182(1).  Her Honour made express findings at [127] that Mr Ralph did not act in good faith and in the best interests of Diakyne and that he improperly used his position to gain an advantage for Colorado, and thereby, for himself.

30                        There can be no doubt that these findings were sufficient to satisfy the tests for contravention of ss 180, 181 and 182 stated in Re HIH.

31                        Dr Birch sought to overcome the obvious effect of the findings by resort to analogy.  In his submission a director who honestly believes that the company owes a debt to a third party cannot be in breach of his or her duties to the company by causing the company to make immediate payment without seeking to delay the payment or without endeavouring to negotiate payment of an amount less than the sum he or she honestly believes to be due.

32                        That proposition was acknowledged by the primary judge at [117].  However, as her Honour observed, it fails to take into account the actual circumstances of the case which were the subject of the findings we have set out above.  At the risk of repetition, it is abundantly clear that those findings give rise to a breach of Mr Ralph’s duties under ss 180(1), 181(1) and 182(1).

CONSTRUCTION

33                        The bonus provision is set out at [17] of the primary judge’s reasons.  We will not set out the clause in full.  It is sufficient to say that the clause contained two limbs to which we will refer briefly.

34                        The first limb contained conditions precedent to be met before determining whether certain percentage requirements were satisfied.

35                        The conditions precedent were, relevantly, the completion of a listing of
Diakyne’s shares on a national stock exchange, inter alia, by way of a reverse takeover, or, alternatively, a trade sale of the Diakyne business or its assets.

36                        The percentage requirements to be satisfied in order to trigger the bonus were stated in the second limb.  It provided that the bonus was to be measured by the extent to which the “consideration” in cash or scrip exceeded the value of shareholder capital in Diakyne.

37                        It is plain that the first alternative pre-condition in the first limb required there to be a listing of Diakyne shares on a national stock exchange, either via an IPO or a reverse takeover.

38                        Whether or not there was a reverse takeover, it is clear that Diakyne’s shares were not listed on a stock exchange.  We agree with the primary judge’s reasons in this regard at [46] – [52].

39                        The primary judge considered that the second alternative pre-condition, namely a trade sale, was satisfied because Diakyne became a wholly owned subsidiary of MediVac and “MediVac became the owner of Diakyne’s business and assets”.

40                        However, we respectfully disagree with that conclusion because the ownership of Diakyne’s business and assets was not transferred to MediVac.  Diakyne owned the business and assets before the transaction took place and it continued to own them after the transaction was completed.

41                        All that happened was that the shareholders of Diakyne became owners of approximately 62% of the shares in MediVac.  Diakyne became a wholly owned subsidiary of MediVac but Diakyne’s business and assets remained in their former ownership.

42                        It follows that the pre-conditions for the entitlement to the bonus were not satisfied.

43                        Nor, in any event, were the percentage requirements fulfilled.  Mr Ralph’s contention that they were, depended upon his assertion that the consideration for the reverse takeover was to be measured by the list price of the MediVac shares that were allotted to the shareholders of Diakyne.

44                        As the primary judge observed at [34] – [35], Mr Ralph’s approach was untenable for a number of reasons.  First, the list price of the MediVac shares on a particular day bore no resemblance to their value.  Second, Mr Ralph conceded in his evidence that the shares were worth nothing like the price he relied upon to support the bonus.  Third, the listed price of the MediVac shares on the day of completion of the transaction was unknown.

45                        Finally, and most importantly, there was evidence in a written report of the value of the MediVac shares which made it clear that the percentage requirements of the second limb were not met.  That was the only contemporaneous independent evidence of value.

46                        The primary judge was apparently not referred to the principles of construction stated by a Full Court in Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd and Ors (2006) 156 FCR 1, and by the New South Wales Court of Appeal in Franklins Pty Ltd v Metcash Trading Ltd  [2009] NSWCA 407.

47                        Those cases are authority for the proposition that ambiguity in the terms of a written contract is not required before recourse may be had to the context.  Here, the context included knowledge by Diakyne and Colorado that the MediVac transaction had been concluded.  Once that fact is taken into account, the construction for which Mr Ralph contended was untenable.

ORDERS

48                                    The appeal must be dismissed with costs.

Associate:

Dated:         4 March 2010