FEDERAL COURT OF AUSTRALIA

Diakyne Pty Limited v Ralph [2009] FCA 721

CORPORATIONS – directors’ duties – whether first respondent in breach of his duties as a director of the applicant in authorising and directing the payment of a bonus to the second respondent – whether any reasonable person exercising the powers and discharging the duties as a director of the corporation would have authorised or directed the payment to be made

CONTRACTS – contract providing for the services of managing director for a corporation – provision in contract entitling second respondent to a bonus payment subject to certain conditions – principles of construction of contracts – proper construction of bonus provision – whether conditions satisfied – whether second respondent entitled to bonus

A New Tax System (Goods and Services Tax) Act 1999 (Cth)

Corporations Act 2001 (Cth)

Australian Securities and Investments Commission v Macdonald (No 11) (2009) 71 ACSR 368; [2009] NSWSC 287

Overend & Gurney Co v Gibb (1872) LR 5 HL 480

Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd (2004) 12 BPR 22,879; [2004] NSWCA 114

Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler and Others (2002) 41 ACSR 72; [2002] NSWSC 171

Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359

Vrisakis v Australian Securities Commission (1993) 11 ACSR 162

Walker v Wimborne (1975) 137 CLR 1

DIAKYNE PTY LIMITED (ACN 099 168 402) v PAUL RONALD RALPH and COLORADO INVESTMENTS PTY LIMITED (ACN 063 688 611)

NSD 465 of 2008

JAGOT J

7 JULY 2009

SYDNEY

THE COURT DIRECTS THAT:

1.                     The parties prepare and file within seven days agreed draft orders reflecting these reasons for judgment for the applicant (including with respect to interest and costs).

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

1                          This proceeding involves a payment of $110,000 from the applicant, Diakyne Pty Limited (Diakyne), to the second respondent, Colorado Investments Pty Limited (Colorado), on 30 November 2007. 

2                          The first respondent, Paul Ralph, is the sole director of and holder of 99% of the shares in Colorado.  Between 3 January 2002 and 4 December 2007 Mr Ralph was also a director of Diakyne.  From January 2006 Mr Ralph provided the services of managing director to Diakyne pursuant to a contract between Diakyne and Colorado executed on 12 July 2007 but expressed to be made on 1 July 2006 (the Colorado contract).  On 17 December 2007 Diakyne gave notice terminating the Colorado contract (assuming it had not already been terminated by the events of 4 December 2007 during which the shareholders of Diakyne resolved to remove Mr Ralph from his position as a director).

3                          Diakyne claims that Mr Ralph, in breach of his duties as a director of Diakyne under ss 180(1), 181(1) and 182(1) of the Corporations Act 2001 (Cth), authorised and directed the payment of $110,000 from Diakyne to Colorado on 30 November 2007 in purported satisfaction of a bonus provision in the Colorado contract. 

4                          The respondents claim that Diakyne’s board, not Mr Ralph, authorised the making of the payment.  Further, Colorado was entitled to payment of the bonus under the Colorado contract.  Alternatively, if not so entitled, the circumstances as at 30 November 2007 meant that it was reasonable for Mr Ralph to act as he did.  Either way, Diakyne was not entitled to terminate the Colorado contract without notice and was liable to Colorado in damages for breach of contract (claimed by a cross-claim in the sum of $277,830 plus leave entitlements accrued by Mr Ralph).   

5                          Having regard to these competing claims and submissions made by the parties, the principal issues requiring resolution in this proceeding are as follows:

(1)                    As at 30 November 2007 was Colorado entitled to the payment of $100,000 and $10,000 GST from Diakyne under the bonus provisions of the Colorado contract?

(2)                    Did Mr Ralph, as a director of Diakyne, authorise or direct the making of the payment of $110,000 from Diakyne to Colorado?

(3)                    If Colorado was or was not entitled to that payment then, in the circumstances as at 30 November 2007, is it the case that:

(a)           no reasonable person exercising the powers and discharging the duties as a director of Diakyne would have authorised or directed the payment to be made to Colorado, with the consequence that Mr Ralph’s conduct contravened s 180(1) of the Corporations Act? 

(b)           in authorising or directing the making of the payment to Colorado, Mr Ralph failed to exercise his powers as a director of Diakyne in good faith in the best interests of Diakyne and for a proper purpose, with the consequence that Mr Ralph’s conduct contravened s 181(1) of the Corporations Act?

(c)           in authorising or directing the making of the payment to Colorado, Mr Ralph exercised his powers as a director of Diakyne improperly to gain an advantage for Colorado or himself, with the consequence that Mr Ralph’s conduct contravened s 182(1) of the Corporations Act? 

(4)                    Was Diakyne entitled to terminate the Colorado contract without notice?

6                          I deal with the subsidiary issues (such as the question of the GST of $10,000 on the bonus payment) as part of the principal issues.  The question of damages (as claimed by Diakyne and Colorado) is dependent upon the resolution of the principal issues.

PRIMARY FACTS

7                          Although the evidence ranged widely, the primary facts of relevance to the resolution of this dispute are within a narrower compass.

8                          Diakyne was developing a pathology analytical tool known as “TraceSmart” for use in the health care industry.  Developing and marketing this technology required further investment.  Mr Ralph, who was appointed Diakyne’s executive chairman on 16 January 2006, took action to secure further investment.  By mid-March 2007 Mr Ralph was in discussions with Stephen Copulos.  Mr Copulos was the managing director of a group of investment companies known as the Copulos Group.  Mr Copulos subsequently invested in Diakyne through a company which Mr Copulos controlled.

9                          By mid April 2007 Mr Ralph was negotiating with Paul McPherson, a director and the chairman of the board of MediVac Limited (MediVac), a publicly listed company.  MediVac’s business involved the development and supply of an apparatus for clinical waste management known as a “MetaMizer”.  The negotiations concerned a deal by which MediVac would acquire all of the shares in Diakyne in exchange for freshly issued shares in MediVac. 

10                        On 28 May 2007 MediVac and the shareholders of Diakyne executed heads of agreement by which MediVac was to acquire, and the Diakyne shareholders to sell, all of the shares in Diakyne in consideration for shares issued in MediVac.

11                        While these negotiations were taking place, Mr Ralph assisted MediVac to raise funds through the separate issue of shares and the placement of convertible loans.  A company in the Copulos Group made one such loan on or about 27 May 2009.  On 1 June 2007 Mr Copulos was appointed a director of MediVac.

12                        MediVac made an Australia Stock Exchange (ASX) announcement on 29 May 2007 about the proposed transaction with Diakyne and the separate revenue raising by the share issue and placement of convertible loans.

13                        While these matters were occurring, Mr Ralph was also negotiating the terms of the Colorado contract with the other directors of Diakyne.

14                        On 27 June 2007 MediVac and the Diakyne shareholders executed a share sale agreement (the share sale agreement).  The share sale agreement was subject to conditions precedent (cl 3).  The agreement provided for the issue of shares in MediVac in consideration for the sale of all shares in Diakyne (cl 4).  By this means, Diakyne would become a wholly owned subsidiary of MediVac and the shareholders in Diakyne would become the majority shareholders in MediVac.  Clause 4 operated by reference to “consideration shares” which cl 15 defined as involving a ratio of 8.75 shares in MediVac for each share in Diakyne.  Clause 13(b) recorded the intention of Diakyne’s shareholders that the fair market value of the “consideration shares” be equal to the fair market value of the shareholder’s proportion of the Diakyne shares.  Clause 15.1 specified the completion date as the latter of the satisfaction or waiver of all conditions precedent and the fifth business day, or such other business day as the parties may agree, from the date that the shareholders of MediVac approved all necessary resolutions in respect of the transaction as referred to in the conditions precedent. 

15                        Also on 27 June 2007 RSM Bird Cameron Pty Ltd issued an independent expert’s report (the RSM Bird Cameron report) to accompany the notice of general meeting to MediVac shareholders scheduled for 2 August 2007.  At that meeting shareholder approval was to be sought for the issue of shares as required by the share sale agreement with Diakyne.  RSM Bird Cameron assessed whether the transaction was fair and reasonable for MediVac shareholders not associated with the transaction.  Their shareholding in MediVac would be reduced from 100% to approximately 37.35% by the transaction as the shares issued to Diakyne shareholders were to be 62.65% of the total MediVac shares on issue.  For that purpose RSM Bird Cameron concluded that MediVac had an underlying value of $nil and thus a value for each share of $nil.  RSM Bird Cameron concluded that Diakyne had an underlying value of $3.4 million.  From this RSM Bird Cameron opined that the Diakyne shareholders were paying a premium for their MediVac shares.  It followed that the transaction was fair and reasonable for MediVac shareholders not associated with the transaction. 

16                        On 12 July 2007 Diakyne and Colorado executed the Colorado contract by which Diakyne appointed Colorado to supply Mr Ralph as the managing director of Diakyne (cl 2).  Asnoted, the Colorado contract is expressed to be made on 1 July 2006 despite the fact that it was executed on 12 July 2007. 

17                        Under the Colorado contract Diakyne had to pay to Colorado the management fee of $240,000 per annum (exclusive of GST) for the provision of the services (cl 6.1(a)), that is, the provision of Mr Ralph as the managing director of Diakyne.  Diakyne also had to pay to Colorado “performance bonuses as per the schedule contained in Annexure B titled “Bonus Structure”” (cl 6.1(d)).  Annexure B appears in the Colorado contract as follows:

Annexure B

Bonus Structure (to Colorado Investments Pty Ltd or its nominee)

Bonuses to be paid within 5 days on the completion of each of the following milestones:

1.         Upon completing a listing of Diakyne shares on a national stock exchange either via an IPO or a reverse take-over, or a trade sale of the Diakyne business (or its assets), whereupon the consideration in cash or scrip paid in the Sale transaction is at least 120% of the value of shareholder capital¹ in Diakyne within the first year, or 130% in the second year or 150% in subsequent years post the most recent capital raising in Diakyne, a bonus of $50,000; and an additional bonus of $50,000 should the value exceed 200% of shareholder capital within years one and two and 300% in subsequent years after the most recent capital raising in Diakyne.

2.         Upon first sales of TraceSmart being achieved in FY08, a bonus of $25,000; and a bonus of 10% of sales up to a total of $25,000.

3.         Upon consolidated group revenues² exceeding $2 million per annum for a 12 month period, a bonus of $50,000 and a bonus of $25,000 for each extra $1.5 million of revenue achieved over a 12 month period.

4.         Subsequent to completion of milestone 1, $50,000 bonus for each 50% increment the market capitalization achieved in the first month following each anniversary of listing exceeds the market capitalisation³ at the time of listing.

…

1              means Diakyne shareholder (owners’) capital post the last equity raising.

2              means total (consolidated) revenues of the enterprise subject to this Services Agreement and for which Paul Ralph’s management services are provided or for which he is responsible for under this Agreement or replacement agreement with Diakyne.

3              means the IPO or RTO price of the total issued capital.

18                        The shareholders of MediVac approved the transaction with Diakyne at the annual general meeting on 2 August 2007.  On the following day MediVac made an ASX announcement about the approval.  The announcement also disclosed that Mr Ralph and Alex Radojev had been appointed to the MediVac board as “Diakyne’s nominated two representatives under the acquisition terms” replacing two existing directors of MediVac, one of whom was the MediVac chief executive officer.  The announcement stated further that the MediVac board had elected Mr Ralph as its executive chairman, with Mr Radojev, Mr McPherson and Mr Copulos being non-executive directors.  MediVac also welcomed Eva Liu (who had previously worked with Mr Ralph in other ventures) as the new company secretary replacing Mr McPherson.  Ms Liu had an additional role as MediVac’s chief financial officer.  She was also the chief financial officer of Diakyne.  Later, on 23 August 2007, Ms Liu became the other director of Diakyne with Mr Ralph.

19                        The new MediVac board was subject to conflict.  In particular, Mr Ralph (who had negotiated the deal for Diakyne) and Mr McPherson (who had negotiated the deal for MediVac) had a poor relationship from the outset.  Their relationship continued to deteriorate. 

20                        On 25 October 2007 John Walker was appointed to MediVac’s board and made its chairman, although Mr Ralph remained MediVac’s managing director.

21                        An annual general meeting of MediVac’s shareholders was scheduled for Friday, 30 November 2007.  Shortly before that meeting it became apparent that Mr Ralph would not be re-elected to the MediVac board.  On the morning of 30 November 2007 Mr Ralph, Mr Radojev and Mr Walker each tendered their resignation from the MediVac board.  Mr Ralph attended MediVac’s annual general meeting (as he remained a shareholder).  Mr Ralph returned to Diakyne’s office after the meeting and carried out the following steps during the afternoon of 30 November 2007:

(1)                    Mr Ralph prepared (or finalised) and signed a tax invoice on Colorado’s letterhead addressed to the directors of the Diakyne board (namely, Mr Ralph and Ms Liu) in these terms:

Bonus due and as per the Management contract with Colorado Investments Pty Ltd relating to the reverse take-over of MediVac Limited on 2 August 2007.

Subtotal:           $100,000

GST:                $10,000

Total:                $110,000

Amount due and payable: $110,000

(2)                    Mr Ralph prepared a draft resolution for Diakyne stating:

It was noted [Colorado] was to receive a bonus payment by 7 August 2007 of $100,000 relating to accomplishment of the MediVac RTO transaction on 2 August 2007.

Resolution 1

The Board hereby resolves to pay the prescribed bonus of $100,000 to Colorado Investments Pty Ltd as per the [Colorado contract].

(3)                    Mr Ralph presented the draft resolution to Ms Liu and asked her to deal with it.  Mr Ralph signed the resolution as “Chairman” and Ms Liu thereafter signed as “Director”.

(4)                    Mr Ralph prepared a letter of instruction from Diakyne to its bankers UBS Warburg Cash Management Ltd (UBS Warburg), to be sent by facsimile, instructing it to transfer $110,000 from Diakyne’s account to Colorado’s account.

(5)                    Mr Ralph signed this letter of instruction as “Chairman” and requested Lyndal Brodie (Diakyne’s marketing manager) to sign as co-signatory.  Ms Brodie did so.

(6)                    Mr Ralph caused this letter of instruction to be forwarded to UBS Warburg.

22                        In consequence, $110,000 was transferred from Diakyne’s account to Colorado’s account.

23                        The directors of MediVac met on Monday, 3 December 2007.  At that time the directors of MediVac did not know about the payment of $110,000 from Diakyne to Colorado.  They resolved to terminate the appointments of Mr Ralph and Ms Liu as directors of Diakyne and discussed Mr Ralph’s continuing position as managing director of Diakyne.  The minutes noted that the future role of Mr Ralph and the Colorado contract were “for urgent consideration” but that these issues “may be totally or partially resolved with the termination of Paul Ralph”. 

24                        On 4 December 2007 an extraordinary general meeting of Diakyne’s shareholders (that is, the directors of MediVac, as MediVac owned all shares in Diakyne) resolved to remove Mr Ralph and Ms Liu as directors of Diakyne and appoint new directors forthwith. 

25                        On 13 December 2007 a joint meeting of the boards of MediVac and Diakyne took place.  By this time the directors of MediVac and Diakyne knew about the bonus payment.  The minutes of this meeting record that:

The costs and the bonus payment of $100,000 to Paul Ralph were discussed and it was noted that the bonus payment was authorised by Paul Ralph for payment to himself despite his knowledge that the Board of the company does not agree that the payment should be made.

…

RESOLVED that …action will be taken to recover the $100,000 bonus paid to Paul Ralph.

26                        Mr Ralph continued as Diakyne’s chief executive officer until 17 December 2007.  On 18 December 2007 Mr McPherson (who had been appointed as chairman of Diakyne) asked Mr Ralph to leave Diakyne’s office immediately and handed him a letter dated 17 December 2007.  The letter referred to the contract between Diakyne and Colorado and made various claims about the validity and status of that contract.  The letter asserted that the Colorado contract was void or unenforceable on certain grounds.  It asserted that the Colorado contract had been frustrated by Mr Ralph having been removed as a director of Diakyne on 4 December 2007.  The letter said that, if the Colorado contract were valid and enforceable, then Diakyne was entitled to terminate the contract without notice pursuant to cl 4.3(b) on the basis of alleged grave misconduct by Mr Ralph.  The letter alleged that (amongst other things) Mr Ralph had caused the payment of $100,000 from Diakyne to Colorado being money to which Colorado was not entitled and in circumstances where Mr Ralph “knew that the whole question of bonus payments to him and or the validity of the [Colorado contract] was shortly thereafter to be discussed and determined by both the Nominations and Remunerations Committee and Board of [MediVac]”.  The letter demanded repayment of the $100,000.

27                        I deal with other findings of fact in the context of the resolution of the issues.

WAS COLORADO ENTITLED TO THE PAYMENT?

Diakyne’s submissions about entitlement

28                        As the respondents noted, Diakyne made no claim in the proceeding that the Colorado contract was invalid or unenforceable.  It was common ground that the only provision of the Colorado contract relevant to Colorado’s entitlement to the bonus is paragraph 1 of Annexure B read with cl 6.1(d) (the obligation of Diakyne to pay to Colorado a management fee per annum being, amongst other things, a performance bonus as per the schedule in Annexure B).

29                        Diakyne submitted that the pre-conditions in paragraph 1 of Annexure B had not been satisfied.  The provision required the listing of Diakyne’s shares on a national stock exchange (the first alternative) or a trade sale of the Diakyne business (the second alternative).  Neither had occurred.  There had been no listing of Diakyne’s shares on a national stock exchange.  MediVac acquired all of Diakyne’s shares but that event did not and could not satisfy the first alternative requirement in paragraph 1 of the bonus provision.  There had also been no trade sale of Diakyne’s business or assets.  Diakyne’s shares had been transferred but that was not a trade sale of Diakyne’s business or assets.  Once these facts were acknowledged, the provision could never be satisfied.

30                        In answer to the respondents’ position, Diakyne submitted that the words “either via an IPO or a reverse take-over” could not be construed as removing the requirement from the first alternative that Diakyne’s shares be listed on a national stock exchange.  As that listing had not occurred, the nominated methods by which the listing could occur were immaterial.  Alternatively, it was common ground that there had been no IPO (initial public offering) and according to Diakyne there had been no reverse take-over. 

31                        As to the reverse take-over, Diakyne observed that MediVac’s interim financial report for the six month period ending 31 December 2007 as lodged with the ASX did not treat the transaction as a reverse take-over but, rather, a traditional acquisition.  John Evans (a director of MediVac appointed on 3 December 2007 and a chartered accountant) said that in preparing this report he took into account the factors in Australian Accounting Standard Board 3 Business Combinations (AASB 3) and determined that the transaction should be considered a traditional acquisition.  According to Mr Evans many parts of the interim financial report would have been different if the transaction had been treated as a reverse take-over.  This report was reviewed by MediVac’s auditors and adopted by MediVac’s board before it was lodged with the ASX. 

32                        Diakyne also relied on the fact that MediVac’s auditors, William Buck, provided MediVac with a technical paper dated 24 January 2008 advising whether the transaction could be regarded as reverse take-over for the purpose of AASB 3.  The auditors concluded that the transaction did not involve a reverse take-over, as the legal form and substance of the acquisition involved MediVac as the acquirer.

33                        According to Diakyne, even if there had been a reverse take-over or trade sale, the consideration in scrip paid in the transaction was not 120% of the value of the shareholder capital in Diakyne in the first year (or any of the other required percentages thereafter as set out in paragraph 1 of the bonus provision).  It was not in dispute that the most recent equity raising in Diakyne occurred in April 2007 at which time Diakyne had a shareholder capital of $2,295,475.  But paragraph 1 of the bonus provision refers to the value of the shareholder capital, not merely the shareholder capital.  If, as the respondents claimed, the value of the shareholder capital means only the paid up capital of Diakyne then the provision would not have a sensible commercial operation (Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd (2004) 12 BPR 22,879; [2004] NSWCA 114).  Whatever may have been paid for Diakyne shares from time to time, those figures would not reflect Diakyne’s value.  The value could exceed the paid up capital by a significant margin.  If construed as the respondents contended, the provision would yield a bonus to Colorado for a sale of the Diakyne business at significantly less than its true market value.  Diakyne said that the reference to the “value” of shareholder capital must be given effect.  Value means actual or market value.  Construed in this way the provision required a bonus payment if Diakyne was listed or sold for more than its market value.  This makes commercial sense as Colorado would be entitled to a reward by way of bonus if it managed to achieve that outcome. 

34                        Diakyne contended that the transaction did not achieve the outcome of a listing or sale of Diakyne at more than market value.  The respondents’ approach (that is, treating the consideration paid in scrip as the amount of 4 cents for each MediVac share issued, being the list price for MediVac shares on 2 August 2007) is untenable.  The list price of shares on a particular day may bear no relationship to the value of those shares.  In this case, the RSM Bird Cameron report said that MediVac shares were worth $nil.  Mr Ralph agreed in evidence that MediVac shares were not worth anything like 4 cents a share when so listed.  In any event, the completion date of the transaction was not 2 August 2007 as the respondents assumed but 7 August 2007 (given the definition of completion date in cl 15.1 of the share sale agreement).  The list price of MediVac shares on 7 August 2007 is unknown.  Further, and contrary to the respondents’ submissions, “Note 2” to MediVac’s interim annual report for 2007 (headed “Subsequent Events”) (Note 2) is immaterial.  According to Mr Ralph, he did not rely on Note 2, which refers to the issue of 202,835,710 MediVac shares at a fair market value of 4 cents a share on 2 August 2007.  Moreover, none of the other MediVac directors were aware of the terms of Note 2 due to the circumstances in which the report had been prepared.

35                        As the RSM Bird Cameron report disclosed, the MediVac shares were worth nothing, which was considerably less than the assessed value of Diakyne ($3.4 million).  At best, the transaction resulted in an equal value as contemplated by cl 13(b) of the share sale agreement.  Either way the percentage requirements were not met.  Even if the most generous approach were to be adopted, the paid up capital of Diakyne following the April 2007 equity raising was $2,294,475.  $3.4 million, being the value of Diakyne and which the share sale agreement described as intended to be of equal value to the MediVac shares, is not 200% of that amount.  Thus, the additional $50,000 bonus could not have been payable. 

36                        Diakyne observed that the respondents’ submissions referred in passing to the assistance that could be obtained from the fact that the Colorado contract was being negotiated at the same time as the transaction with Diakyne, presumably to support an inference that the bonus provision was intended to apply to the transaction.  However, neither Mr Ralph nor any other person gave evidence to that effect.

37                        Finally, Diakyne said that irrespective of any other matter, there was no basis for the payment of $10,000 GST to Colorado.  Under cl 6.1(d) of the Colorado contract (in contrast to cl 6.1(a)) the performance bonus is not said to be “exclusive of GST”.  Accordingly, the performance bonus was to be inclusive of GST (see the definition of “price” in s 9.75 of A New Tax System (Goods and Services Tax) Act 1999 (Cth)).

Respondents’ submissions about entitlement

38                        According to the respondents, Diakyne’s approach to the bonus provision gave no work to the word “via” in paragraph 1.  The provision contemplated a listing of Diakyne’s shares on a national stock exchange via either an IPO (which did not occur) or a reverse take-over (which did occur).  By the transaction the subject of the share sale agreement, Diakyne’s shareholders gained exposure to the national stock exchange via the issue to them of shares in MediVac which was a listed company.  Hence, the respondents submitted that the first requirement of the provision for listing on a national stock exchange was satisfied.  The second requirement (the reverse take-over) was also satisfied. 

39                        A reverse take-over is defined in the Oxford English Dictionary as a take-over in which a small, usually private, company assumes control over a larger, public company.  The transaction in this case resulted in the shareholders of Diakyne (a small private company) acquiring 62.65% of the shares in MediVac (a listed public company).  Further, two out of the four directors of Medivac were Diakyne nominees (Mr Ralph and Mr Radojev), with one (Mr Ralph) appointed the chairman.  Ms Liu, Diakyne’s financial controller, became MediVac’s chief financial officer and company secretary.  Diakyne’s research and development manager, Ben Wright, also became MediVac’s general manager following the completion of the share sale agreement.  The advice of MediVac’s auditors, William Buck, that the acquisition was not a reverse take-over, was influenced by the information received from Mr Evans and thus Mr Evans’ desire to avoid having to write down the acquisition (as Diakyne was no longer operating) and his interest in this dispute. 

40                        Alternatively, the respondents submitted that a trade sale is simply a sale of a business.  On any construction of the share sale agreement, the transaction involved a sale of the Diakyne business to MediVac.  It is not the case that the shares in Diakyne “merely changed hands” as Diakyne submitted.  By acquiring all of the shares in Diakyne, MediVac acquired the Diakyne business including all of its assets and liabilities.

41                        The respondents said that the consideration in scrip paid satisfied the percentage requirements in paragraph 1 of the bonus provision.  The published price of MediVac shares was the best evidence of their value, consistent with the guidelines in paragraph 27 of AASB 3.  As Mr Ralph had calculated at the time the payment was made, the shareholder capital in Diakyne after the last equity raising in April 2007 was $2,295,475 (which was not in dispute).  As part of the transaction 202,835,710 MediVac shares were issued.  At the list price of 4 cents this equated to consideration of $8,113,428.  This is more than both 120% and 200% of the shareholder capital in Diakyne.  Even if the relevant date of completion was 7 August 2007 and not 2 August 2007, Mr McPherson and Mr Copulos both accepted that the share price for MediVac shares was 3.7 to 4 cents per share.  Accordingly, on completion of the share sale agreement, Colorado was entitled to a payment of $100,000 under paragraph 1 of the bonus provision in the Colorado contract. 

42                        This construction, submitted the respondents, followed from the terms of the bonus provision and the fact that the Colorado contract was being negotiated at the same as the transaction with MediVac was being negotiated.  What else, they asked, was the provision intended to refer to if not the transaction then in contemplation?  

43                        According to the respondents, the value of Diakyne as a company is irrelevant to the operation of the bonus provision.  Diakyne had not advanced any reason why the consideration recorded in Note 2 (forming part of a report which was audited and signed off by MediVac’s board) should not be used.  The RSM Bird Cameron report, in contrast, was prepared for the limited purpose of determining whether the transaction was fair and reasonable for MediVac shareholders.  The RSM Bird Cameron report noted that a range of valuation methods were available.  The report adopted a method of valuation based on the orderly realisation of assets, but acknowledged that the share price could have been used.  Accordingly, the respondents submitted that the RSM Bird Cameron report is irrelevant to Colorado’s entitlement to the bonus payment.  The respondents said that it followed there was no evidence from which it could be concluded that the value of the consideration paid in scrip was less than 200% of the paid up capital of Diakyne. 

44                        Finally, and contrary to Diakyne’s submissions, the respondents submitted that the better construction of cl 6.1(1)(d) of the Colorado contract is that the bonus payment was exclusive of GST.  This is because the bonus payment was part of the management fee and the management fee is itself expressed to be exclusive of GST (cl 6.1(1)(a)).

Discussion about Colorado’s entitlement

Principles

45                        The principles relevant to the construction of contracts are well-known.  McColl JA conveniently summarised them in Peppers Hotel Management at [66]-[73] as follows:

[66] Interpretation of a written contract involves “the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”: Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 at 188 [11] per Gleeson CJ, Gummow and Hayne JJ quoting Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912 ; [1998] 1 All ER 98 at 114.

[67] The words of the agreement will not be construed in a vacuum. In the case of a commercial contract where the words are ambiguous or susceptible of more than one meaning, the court should understand its commercial purpose and, to that end, may have regard to “the genesis of the transaction, the background, the context, [and] the market in which the parties are operating": see Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352 per Mason J (with whose judgment Stephens J and Wilson J agreed); Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436 at 439 [10] per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ.

[68] Commercial contracts should be construed so as to be given a sensible commercial operation: Upper Hunter District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437; Australian Broadcasting Commission v Australasian Performing Right Assn (1973) 129 CLR 99 at 109; Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-4; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 per Giles JA at [64].

[69] If the words used [in a written contract] are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, ‘even though the construction adopted is not the most obvious, or the most grammatically accurate’: Australian Broadcasting Commission v Australasian Performing Right Assn Ltd (1973) 129 CLR 99 at 109-110 per Gibbs J (as he then was). However, in construing written contracts it should be presumed that the parties did not intend their terms to operate unreasonably. The more unreasonable the result a party’s construction would produce, the more unlikely it is that the parties would have intended it. If the parties did intend an unreasonable result, it is essential that that intention be made “abundantly clear”: L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 251 per Lord Reid.

[70] Dealing with the circumstances where there are internal inconsistencies in a contract, Gibbs J said “it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument”: Australian Broadcasting Commission v Australasian Performing Right Assn Ltd (1973) 129 CLR 99 at 109.

[71] Gibbs J’s statement in Australian Broadcasting Commission v Australasian Performing Right Assn Ltd (1973) 129 CLR 99 at 109 that “the court should construe commercial contracts ‘fairly and broadly, without being too astute or subtle in finding defects’, finds reflection in the statement in International Fina Services AG v Katrina Shipping Ltd (“The Fina Samco”) [1995] 2 Lloyds Rep 344 at 350 per Neill LJ (with whom Roch and Auld LL.J agreed) that the primary focus is the agreement itself which “must speak for itself, but … must do so in situ and not be transported to a laboratory for microscopic analysis”.

[72] Consistently with this approach, it has been held that if detailed semantic and syntactical analysis of a written contract lead to a conclusion that flouts business commonsense the contract must be made to yield to business commonsense: Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 per Lord Diplock; applied by Gleeson CJ, Gummow and Hayne JJ in Maggbury Pty Ltd v Hafele Australia Pty Ltd, above, at 198 [43]. In Maggbury, after referring to Lord Diplock’s observations, Gleeson CJ, Gummow and Hayne JJ added: “what in respect of a particular contract comprises ‘business commonsense’, as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible”.

[73] Finally, it should be noted that no hard and fast rules can be set. The exercise of construction is neither uncompromisingly literal nor unswervingly purposive: The Fina Samco, above, at 350.

Reverse take-over?

46                        As Diakyne submitted, the first alternative pre-condition in the bonus provision (upon completing a listing of Diakyne shares on a national stock exchange either via an IPO or a reverse take-over) requires a listing of Diakyne’s shares on a national stock exchange.  That listing never occurred.  I do not accept the respondents’ submission that the words “either via an IPO or a reverse take-over” mean that an exposure of Diakyne shareholders to a national stock exchange through ownership of shares in another corporation is sufficient to satisfy the pre-condition of a listing of Diakyne shares on a national stock exchange. 

47                        First, the words “upon completing a listing of Diakyne shares on a national stock exchange” are clear and unambiguous.  No “detailed semantic and syntactical analysis” (Peppers Hotel Management at [72]) is required; the words mean what they say and the Court must give effect to that meaning. 

48                        Second, although I accept that the provision must be construed as a whole, the words “either via an IPO or a reverse take-over”, on which the respondents placed substantial weight, are insufficient to support the construction for which they contend.  The respondents’ submissions assumed that a reverse take-over of Diakyne could not have involved a listing of Diakyne’s shares on a national stock exchange because all of Diakyne’s shares would be bought by MediVac.  In other words, their submissions assumed that the expressly stated condition (a listing of Diakyne shares on a national stock exchange) could never be satisfied by a reverse take-over.  This fact of impossibility is the respondents’ justification for construing those words as meaning something different from what they say, namely, that exposure to a national stock exchange through the issue of shares in a public company to Diakyne shareholders as part of a reverse take-over will suffice. 

49                        I accept that the essence of a reverse take-over is one in which the shareholders of a company being acquired gain control over the acquiring company usually through the latter issuing shares.  Nevertheless, there are many ways in which a transaction capable of characterisation as a reverse take-over may be structured.  A reverse take-over (whatever particular meaning that term is given) does not necessarily exclude the event which paragraph 1 of the bonus provision expressly requires, namely, a listing of Diakyne shares on a national stock exchange.  Further, the words “a listing of Diakyne shares on a national stock exchange” are simply incapable of bearing the meaning for which the respondents contend.  Construing the opening part of paragraph 1 of the bonus provision in that way would not resolve ambiguity so as to avoid “consequences which appear to be capricious, unreasonable, inconvenient or unjust” (Peppers Hotel Management at [69]); it would effectively disregard the opening words of paragraph 1 of the bonus provision altogether.  In circumstances where the whole provision can be construed together, there is insufficient justification to depart from the ordinary meaning of the terms in which the parties chose to record their agreement.

50                        Third, the word “either” before the words “via an IPO or a reverse take-over” ensures that the reference to “reverse take-over” must be read with the words “upon completing a listing of Diakyne shares on a national stock exchange”.  It is not possible to read the reference to “reverse take-over” separately and the respondents, I note, did not submit to the contrary.

51                        Fourth, paragraph 4 of the bonus provision refers to circumstances “subsequent to the completion of milestone 1”.  From the context it appears that “milestone 1” must be a reference to paragraph 1 of the bonus provision.  Paragraph 4 refers to “listing”.  This tends to support a construction of the first pre-condition in paragraph 1 consistent with the ordinary meaning of the words used.

52                        Fifth, the context in which the bonus provision was negotiated does not indicate that departure from the ordinary meaning of the words is required.  A mere suspicion that one of the parties to the contract may have intended something different will not suffice.  The construction for which Diakyne contended does not lead to a result that flouts business common sense or is otherwise harsh or unreasonable to Colorado.  After all, Colorado was remunerated in accordance with the base entitlement of $240,000 per annum (cl 6.1(a)). 

53                        If I am incorrect in this construction then a question arises whether the transaction between Diakyne and MediVac involved a reverse take-over.  This question is not easy to resolve.  It is true that Diakyne shareholders obtained a majority shareholding in MediVac (62.65%), Diakyne representatives obtained positions on MediVac’s board (two out of four members initially), and Diakyne employees took over positions within MediVac.  Nevertheless, as the paper by William Buck dated 24 January 2008 states, the essence of a reverse take-over is that the acquired company obtains control over the acquiring company.  As that paper shows, MediVac’s revenue in 2007 materially exceeded the revenue of Diakyne (as at May 2007, MediVac’s revenue was $2,512,000, whereas Diakyne’s was $1,192,000).  Further, and as Mr Evans stressed, although Mr Ralph was governing the financial and other policies of MediVac after the transaction, subsequent events demonstrated that Mr Ralph (one of Diakyne’s initial appointees as a director on MediVac’s board) could not maintain his position. 

54                        The weighing of these factors indicates that the question as to whether or not the transaction involved a reverse takeover is by no means straightforward.  On balance, I prefer the conclusion that it did because of the majority shareholding achieved by Diakyne shareholders as a result of the transaction and board composition of MediVac at the time the transaction was completed.  I prefer this conclusion because it involves assessing the character of the transaction at the time of its completion rather than giving weight to subsequent events (as Mr Evans did).  This is consistent with paragraph 1 of the bonus provision which contemplates a capacity to determine satisfaction of the pre-conditions on completion of the events described.  This conclusion does not change the fact, however, that the first part of the pre-condition remains unsatisfied (completion of a listing of Diakyne shares on a national stock exchange).

55                        I should also note that the fact that MediVac’s solicitors on the transaction with Diakyne, Gadens Lawyers (Gadens), were apparently remunerated contingent upon a reverse take-over is immaterial to my conclusions.  The present case involves the construction of the bonus provision in the Colorado contract, not the terms of MediVac’s retainer of Gadens.

Trade sale?

56                        Given my conclusion that Diakyne shares were not listed on a national stock exchange with the consequence that the first alternative pre-condition in the bonus provision was not satisfied, Colorado must rely on the second alternative pre-condition - a trade sale of the Diakyne business or its assets. 

57                        Diakyne essentially argued that a trade sale can be achieved only by a sale of business agreement.  I do not accept that submission.  The phrase “trade sale of the Diakyne business (or its assets)” has to be construed as whole.  “Trade sale” is not a term of art.  It is not clear why the phrase is incapable of applying to any transaction by which ownership of the Diakyne business or assets was transferred.  The share sale agreement provided for the sale of each share in Diakyne to MediVac in exchange for the receipt by each Diakyne shareholder of shares issued by MediVac.  By this method Diakyne became a wholly owned subsidiary of MediVac and MediVac became the owner of Diakyne’s business and assets.  These facts are sufficient to satisfy the requirement of a trade sale of Diakyne’s business and assets.

Percentage requirements?

58                        As a result of my conclusion about satisfaction of the second alternative pre-condition (a trade sale of Diakyne’s business and assets), it is necessary to decide whether the consideration in scrip paid in the transaction was at least 120% of the value of the shareholder capital in Diakyne (meaning Diakyne shareholder (owners’) capital post the last equity raising) within the first year, in which event a bonus of $50,000 was payable to Colorado.  Further, “should the value exceed 200% of shareholder capital within years one and two” Colorado was entitled to a further bonus of $50,000. 

59                        As noted, the respondents maintained that, by the transaction, both the 120% and 200% requirements were simultaneously satisfied because the number of shares which MediVac issued (202,835,710) multiplied by their list price on or around the completion date (4 cents a share) equals about $8.1 million which is more than twice as much as Diakyne’s shareholder capital after the last listing in April 2007 of $2,295,475.  For its part, Diakyne rejected the relevance of these figures to the operation of paragraph 1 of the bonus provision when properly construed.

60                        The percentage requirements in paragraph 1 of the bonus provision are unclear. 

61                        First, although it may be accepted that the consideration in cash paid in the sale transaction simply means the sum or amount paid, the phrase “consideration in scrip paid” raises questions of construction.  Even if consideration simply means “price” (as the respondents contended) it does not necessarily follow that the price of scrip paid equals the listing price of shares in the same company. 

62                        Second, the bonus provision must be construed as a whole in order to ascertain its meaning.  In respect of the additional $50,000 the provision refers to a condition expressed as “should the value exceed 200% of shareholder capital”.  The “value” being referred to in this part of the provision cannot be the value of the shareholder capital as that would be meaningless.  The value here can only be a reference back to the “consideration” earlier in paragraph 1 of the bonus provision.  In other words, the provision appears to use “consideration” and “value” interchangeably.  This indicates that the parties intended the “consideration” to involve the concept of “value”. 

63                        Third, although the parties agreed that the shareholder capital in Diakyne post the last equity raising and before the transaction was $2,295,475 (being the total amount shareholders paid to the company in order to obtain their shares), they did not agree on the “value of” the shareholder capital in Diakyne.  According to Diakyne, the value of shareholder capital is not necessarily the same as the amount of shareholder capital.  The value of shareholder capital, on Diakyne’s construction, means the value of Diakyne.  

64                        I do not find these ambiguities easy to resolve.  Some assistance, however, is provided by the fact (relied on by Diakyne) that the provision in question involves a bonus; that is, a payment by Diakyne to Colorado over and above the standard management fee of $240,000 per annum referred to in cl 6.1(a) of the Colorado contract.  As Mr Ralph said in evidence a bonus provision involves a reward.  The provision should be construed recognising that its purpose is to provide Colorado with a reward for a particular service over and above Colorado’s standard entitlement to $240,000 per annum. 

65                        As Diakyne submitted, the equation of “consideration in scrip paid” with the list price of shares on a particular day or days may bear no resemblance to the actual value of the scrip.  This is particularly so in the context of a provision which contemplates that the consideration may be in the form of the issue of new scrip.  Further, and again as Diakyne submitted, the value of the scrip paid may be far less than the listing price of shares with the consequence that on the respondents’ construction Colorado would be rewarded for a sale of Diakyne at less than its true value.  Such an outcome would defy commercial logic.  This unlikely consequence can be avoided by not equating the consideration paid in scrip to the list price of shares on a particular day but, rather, treating the consideration paid in scrip as the value (that is, the market value) of the scrip paid.  The share price on a particular day or days is not necessarily the same as the market value of the scrip.  It is, as RSM Bird Cameron acknowledged, one potential measure of market value but by no means the only potential measure. 

66                        I do not accept that the list price of 4 cents for each MediVac share represents the consideration in scrip paid in the sale transaction.  The only independent valuation of the scrip paid in the transaction is that of RSM Bird Cameron.  The RSM Bird Cameron report noted that the placement of shares in MediVac in May 2007 took place at 4 cents a share but that this had been facilitated by Diakyne and was not a good indicator of MediVac’s value, particularly given the thinness of trading in MediVac shares.  RSM Bird Cameron concluded that the true value of MediVac and MediVac shares was effectively $nil.  For this reason RSM Bird Cameron considered the transaction fair and reasonable for MediVac shareholders. 

67                        The respondents’ reasons for discarding the RSM Bird Cameron report are unpersuasive.  RSM Bird Cameron’s engagement required an assessment whether the transaction was fair and reasonable for MediVac shareholders.  This required a valuation of MediVac and Diakyne as at 27 June 2007 having regard to the proposed transaction.  RSM Bird Cameron carried out the required valuation exercises and reached conclusions on the basis of its independent consideration.  The fact that RSM Bird Cameron did not have the Colorado contract in mind when preparing its report makes its opinions more, not less, reliable.  This ensures that its opinions are unaffected by any potential consequences for the bonus provision in the Colorado contract.  The same cannot be said of the entry in Note 2 to the MediVac report for the financial year ending 2007 on which the respondents (but, apparently, not Mr Ralph on 30 November 2007) relied.  As discussed, this note refers to the issue of 202,835,710 shares in MediVac at the fair value of 4 cents per share for a total value of $8,113,428.

68                        The fact that the MediVac report contains this note is insufficient to establish that the consideration paid in scrip for the sale of Diakyne was some $8.1 million.  The note was prepared by Mr Ralph in September 2007 when the conflict within the MediVac board (and about the Colorado contract, as to which see below) was apparent.  Paragraph 27 in AASB 3 (on which the respondents relied) excludes the use of the listed price as an indicator of fair value when that price is unreliable due to the thinness of the market (that is, lack of sales).  RSM Bird Cameron identified that the market in MediVac shares was thin with the consequence that the listed price was an unreliable indicator of value.  There is no justification for departing from this assessment.

69                        The respondents’ submissions also do not contend with the fact that the share sale agreement makes no reference to the consideration being 4 cents per MediVac share.  As Diakyne submitted, the agreement contemplated that the fair market value of the shares issued in MediVac equalled the fair market value of all of the shares in Diakyne (cl 13(b)).

70                        Section 1305(1) of the Corporations Act, to which the respondents referred, does not lead to a different conclusion.  The section provides that “a book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book”.  The respondents relied on the section as supporting the weight to be given to Note 2 in particular.  The section, however, refers to prima facie evidence only.  In this case, the evidence to which I have referred displaces any inference that the market value of the scrip paid by MediVac for the sale of Diakyne was 4 cents a share. 

71                        Further, and as Diakyne submitted, the relevance of the figure of 4 cents a share has to be subject to a common sense assessment.  MediVac could not have sold 202,835,710 shares for 4 cents a share in August 2007 or any other time.  Leaving aside the potential significance of the dilution of MediVac’s shareholding by the share issue, the figure of 4 cents a share was known by Mr Ralph (and others) not to reflect the true value of MediVac shares.  Mr Ralph agreed in evidence that he considered the MediVac shares were worth significantly less than 4 cents a share at the time he was negotiating with Mr McPherson.  Had 4 cents a share truly been the value of the scrip issued then it is difficult to know how RSM Bird Cameron, or anyone else, could have considered the transaction fair and reasonable from the point of view of the MediVac shareholders.  Those shareholders would have been giving away $8.1 million in value for a return of $3.4 million (the value of Diakyne) and the dilution of their shareholding in MediVac from 100% to about 37%. 

72                        Finally, and also as Diakyne submitted, the respondents confront an evidentiary problem.  Mr McPherson agreed that he had negotiated with Mr Ralph about the share sale agreement on the basis of a value of 4 cents for each MediVac share and that, on 2 and 3 August 2007, MediVac shares were listed at between 3.7 and 4 cents per share.  He did not give evidence about the share price on 7 August 2007 (being the completion date as defined in cl 15.1 of the share sale agreement).  Nor did Mr Copulos or Mr Ralph.  Mr Ralph appears to have assumed that paragraph 1 of the bonus provision was satisfied on the date of the approval by MediVac’s shareholders of the transaction.  Yet the paragraph refers to “completion of…the following milestones” and “upon completing” the nominated matters.  If the transaction embodied in the share sale agreement satisfied the pre-conditions in paragraph 1 of the bonus provision then that transaction was completed on the fifth business day after the shareholder’s approval (7 August 2007).  The listing price of MediVac shares on 7 August 2007 is unknown.

73                        The best evidence in this proceeding of the consideration in scrip paid for the sale of Diakyne is the RSM Bird Cameron report.  That report confirms that the consideration in scrip paid was $nil.  It follows that, even on the respondents’ case about the meaning of “value of shareholder capital”, none of the percentage requirements in paragraph 1 of the bonus provision were satisfied.

74                        If this conclusion is incorrect, it is necessary to consider the meaning of “value of shareholder capital”.  The difficulty for the respondents is that the reference is to the value of the shareholder capital not the shareholder capital per se or the amount of the shareholder capital.  Consistent with Diakyne’s submissions I consider that the “value of shareholder capital”, in the context of this bonus provision, does not mean the amount of the shareholder capital. 

75                        Construing paragraph 1 of the bonus provision as a whole, the focus is on the value (that is, the market value) of the things exchanged.  Hence, the consideration in cash is the amount of cash (which equals its value).  The consideration in scrip is the value of the scrip.  The reference to “value” in the part of the provision dealing with the additional bonus confirms this approach.  The reference to the value of the shareholder capital is also a reference to the value of the company which the shareholders’ own.  The best (indeed, the only) evidence of the value of Diakyne at the relevant time is the RSM Bird Cameron report valuing the undertaking in the amount of $3.4 million.  On this basis, the terms of the share sale agreement (particularly the reference in cl 13(b) to the fair market value of the MediVac shares issued being taken as the fair market value of the Diakyne shares sold) indicate that, at best, the MediVac shares had a value of $3.4 million.  This conclusion also leaves the percentage requirements in paragraph 1 of the bonus provision unsatisfied. 

GST

76                        As to GST, the terms of cl 6.1 of the Colorado contract support Diakyne’s construction.  Clause 6.1(a) refers to the sum of $240,000 being exclusive of GST.  There is no equivalent reference in cl 6.1(d) or Annexure B.  The natural and ordinary meaning of the clause is that any bonus payment is inclusive of GST.  It is not to the point that Diakyne may receive an input credit if its pays the GST on any bonus payment.  The issue is Colorado’s entitlement.  On the proper construction of cl 6.1, I am satisfied that the bonus payments are GST inclusive.

Conclusion about Colorado’s entitlement

77                        From these reasons it follows that Colorado was not entitled to any bonus payment in accordance with cl 6.1(d) of the Colorado contract and paragraph 1 of Annexure B thereto.

DID MR RALPH AUTHORISE OR DIRECT THE MAKING OF THE PAYMENT?

78                        The respondents submitted that Diakyne’s case was misconceived because the resolution to pay the bonus payment was authorised by Ms Liu and the board of Diakyne, not Mr Ralph.  Further, Mr Ralph and Ms Brodie, in forwarding the instruction to pay the bonus to UBS Warburg, were acting as agents of Diakyne’s board in implementing the board’s resolutions.  Mr Ralph also gave evidence denying that he had authorised any payment to Colorado and expressing the view that Ms Liu had authorised the payment.

79                        Although there were some conflicts in the evidence about exactly what Mr Ralph said to Ms Liu on 30 November 2007 and what Ms Liu said and did in response, the relevant facts are beyond argument.  Acting in his capacity as a director of Diakyne, Mr Ralph personally prepared and signed the resolution authorising the payment of $100,000 to Colorado and personally signed the instruction to UBS Warburg to pay Colorado $110,000.  The fact that Ms Liu also authorised the payment (I note, at Mr Ralph’s request) does not mean that Mr Ralph did not authorise and direct the making of the payment.  The resolution required two signatures.  One such signature was Mr Ralph’s.  His signature, as well as Ms Liu’s, made the resolution operative.  I infer that the instruction to UBS Warburg also required two signatures.  Mr Ralph signed the instruction to pay the bonus and requested Ms Brodie to do so, thus making the instruction operative.

80                        In these circumstances the respondents’ submission that Ms Liu or the board of Diakyne authorised the payment and not Mr Ralph defies the reality of what occurred on 30 November 2007.  The board of Diakyne authorised the payment because Mr Ralph exercised his powers as a director of Diakyne to sign the resolution having that effect.  As noted, he also requested Ms Liu to sign the resolution and Ms Brodie to sign the instruction to pay.  The involvement of Ms Liu and Ms Brodie in no way removes or alters the character of Mr Ralph’s own involvement.  Mr Ralph, acting in his capacity as a director of Diakyne, thus authorised and directed the payment of $110,000 to Colorado on 30 November 2007.

DID MR RALPH BREACH SS 180-182 OF THE CORPORATIONS ACT?

Statutory provisions and principles concerning breach

81                        Diakyne claimed that Mr Ralph breached his duties as a director, being those duties specified in the following provisions of the Corporations Act:

180

(1)        A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a)        were a director or officer of a corporation in the corporation's circumstances; and

(b)        occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

…

181

(1)        A director or other officer of a corporation must exercise their powers and discharge their duties:

(a)        in good faith in the best interests of the corporation; and

(b)        for a proper purpose.

…

182

(1)        A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a)        gain an advantage for themselves or someone else; or

(b)        cause detriment to the corporation.

82                        Diakyne claimed an entitlement to damages by way of compensation on the basis that ss 180(1), 181(1) and 182(1) are each civil penalty provisions (ss 1317DA and 1317E(1)(a)).  Section 1317H of the Corporations Act is as follows:

1317H

(1)        A Court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if:

(a)        the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and

(b)        the damage resulted from the contravention.

The order must specify the amount of the compensation.

83                        There was no debate between the parties that the protection of the “business judgment rule” in s 180(2) of the Corporations Act was not available to Mr Ralph.  This provision provides that a director is taken to have complied with s 180(1) if he or she makes a business judgment (that is, any decision to take or not take action in respect of a matter relevant to the business operations of the corporation) in certain circumstances.  One of the required circumstances is that the director “not have a material personal interest in the subject matter of the judgment” (s 180(2)(b)).  In the present case Mr Ralph had a material personal interest in the making of the payment of $110,000 from Diakyne to Colorado as he is the sole director (and effectively sole shareholder) of Colorado.

84                        The principles relating to the application of these statutory provisions were also largely agreed.  Those principles have been identified on numerous occasions.  The parties in the present case referred particularly to the observations in Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler and Others (2002) 41 ACSR 72; [2002] NSWSC 171 at [372], [458] and [735], Australian Securities and Investments Commission v Macdonald (No 11) (2009) 71 ACSR 368; [2009] NSWSC 287 at [236]-[257] and Vrisakis v Australian Securities Commission (1993) 11 ACSR 162.  Amongst other matters, those decisions identify that:

(1)        Sections 180, 181 and 182 involve duties owed to the corporation.

(2)        The requirement of reasonable care and diligence is objective in the sense that it involves asking what an ordinary person of ordinary prudence, with the knowledge and experience of the director, might be expected to have done in all of the circumstances at the relevant time of the conduct if he or she were acting on his or her own behalf.

(3)        Putting the test another way, was the director cognisant of circumstances of “such a character, so plain, so manifest, and so simple of appreciation, that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into” (Vrisakis at 212 citing Overend & Gurney Co v Gibb (1872) LR 5 HL 480 at 486-487).

(4)        The circumstances of the corporation at the time are thus relevant to the content of the duty to act with reasonable care and diligence.

(5)        Directors are not required to exhibit a greater degree of skill than may reasonably be expected from persons of commensurate knowledge and experience in the circumstances and are entitled to rely on others except where an exercise of ordinary care would deny reliance.

(6)        There can be no failure to exercise reasonable care and diligence unless at the relevant time harm to the interests of the corporation is reasonably foreseeable by reason of the conduct and, to determine breach, the foreseeable risk of harm must be balanced against the potential benefits which might be expected to accrue to the corporation.

(7)        Where the matter involves a potential conflict between the director’s duties to the corporation and a personal interest, “the duty of care and diligence falls to be exercised in a context requiring special vigilance…” (Adler at [372(14)]).

Respondents’ case concerning breach

85                        The respondents submitted that a finding should be made that Mr Ralph honestly believed that Colorado was entitled to the payment of $110,000 at all relevant times.

86                        Further, the respondents said that Mr Ralph’s honest belief was reasonable in all of the circumstances as:

(1)                   Mr Ralph had made a claim for the payment of the bonus on 23 August 2007 when the “Chief Executive’s Officer’s Report to Board of MediVac” on that day noted at item (viii) that “Colorado’s bonus as per its contract with Diakyne is overdue”.

(2)                   On 6 September 2007 Mr Copulos sent an email to Mr Ralph noting that he wanted to discuss the Colorado contract as the salary and bonus and escalation clauses were significant items that would need to be disclosed to the market.

(3)                   MediVac had received a copy of the Colorado contract by 19 September 2007 (a fact not in dispute).

(4)                   At a meeting on 20 September 2007 MediVac’s remuneration and nominations committee discussed the Colorado contract and decided that Mr Radojev (who was also a barrister) should obtain independent advice and report back to the committee.  Mr Ralph was aware the contract was on this committee’s agenda.

(5)                   On 1 October 2007 Mr Copulos sent an email to Mr Radojev and Mr McPherson attaching a chart setting out Colorado’s entitlements to a bonus (in fact, the chart set out Colorado’s total entitlements “under various scenarios”).

(6)                   MediVac’s remuneration and nominations committee discussed the Colorado contract at a meeting on 9 October 2007.  The minutes of the committee’s meeting record that the committee questioned the applicability of the contract to MediVac, considered the validity of the contract to be questionable, and decided to ask Mr Ralph to “renegotiate/defer the payment of the potential bonus payment in relation to the Diakyne/[MediVac] transaction”.

(7)                   Mr Ralph gave evidence that he raised the bonus payment at a meeting of MediVac’s board on 11 October 2007 and that Mr Copulos agreed the bonus was payable.  Mr Ralph ought to be believed.

(8)                   On 15 October 2007 Mr Copulos wrote an email to Mr Ralph which referred to Mr Copulos still having an issue with the Colorado contract and bonus structure.  According to the email Mr Copulos would not have invested in Diakyne if he had known about the bonus structure which was “not within the realm of normal employment practice”.  The email asked whether the other Diakyne shareholders were aware that “you may get $100,000 bonus on the float and the balance as it is written?”.

(9)                   On the same day, 15 October 2007, Mr Ralph replied that he would invoice for the bonus and was at a loss because MediVac seemed willing to pay others for their incompetence but not Mr Ralph for achieving the objectives.

(10)                 In a further email of 18 October 2007 Mr Copulos said he disagreed with all of Mr Ralph’s comments in his email of 15 October 2007 but, according to the respondents, did so generally and without specific reference to the bonus payments.

(11)                 Mr Copulos’ only concern, on the evidence, was the validity of the contract and not the bonus payments.  In other words, if the contract were valid Mr Copulos accepted that the bonus was payable.

(12)                 Ms Liu gave evidence to the same effect as Mr Ralph and also ought to be believed.

(13)                 Ms Liu believed that the bonus was payable and thus signed the resolution authorising the making of the payment.

(14)                 Mr McPherson and Gadens were both paid by MediVac for the transaction with Diakyne.  MediVac had only taken issue with the payment to Colorado after the event.

87                        According to the respondents a finding should be made that the only issue that the MediVac directors raised with Mr Ralph concerned the enforceability of the Colorado contract and not the bonus payment.  Mr Ralph believed the Colorado contract was enforceable.  He had been proved correct by the fact that Diakyne took no issue about the contract’s validity or enforceability in this proceeding.  It followed that there was never a legitimate reason raised by any person at the relevant time to the effect that the bonus was not payable.

88                        In any event, the respondents submitted that Mr Ralph was not under an obligation to search for ambiguity in every invoice issued to Diakyne.  That would render the duties in ss 180-182 of the Corporations Act unworkable. This is borne out by the terms of the termination letter of 17 December 2007 which allege that Mr Ralph knew the bonus was not payable, not that the bonus provision was ambiguous.  The ex post facto arguments now relied on by Diakyne about ambiguities in the bonus provision are immaterial.  No one identified to Mr Ralph at the relevant time any of the issues of construction or the ambiguities raised by Diakyne in this proceeding.

89                        Additionally, the respondents said that none of the evidence supported an inference that Mr Ralph had any special skill or knowledge that would justify him being subject to some higher standard than any other director of a corporation with the knowledge he had and in the circumstances prevailing at the time of the payment.

90                        Finally, according to the respondents, Diakyne had not proved that it suffered harm by reason of the payment.  Despite its parlous financial position, Diakyne could afford to make the payment.  It did not render Diakyne insolvent or near insolvent.

Discussion about breach

91                        I accept that Mr Ralph honestly believed that $110,000 was payable by Diakyne to Colorado.  Insofar as Diakyne’s statement of claim alleged to the contrary, the evidence does not establish that Mr Ralph knew that the bonus was not payable to Colorado but decided to take the steps he did to ensure its payment irrespective of the known lack of entitlement.  Indeed, any conclusion to that effect would be inconsistent with the way in which Diakyne presented its case at the hearing.  For example, Diakyne did not put to Mr Ralph that he knew that Colorado was not entitled to the bonus payment.  Rather, Diakyne’s primary case was to the effect that no reasonable person exercising the powers and discharging the duties as a director of Diakyne would have authorised or directed the payment to be made to Colorado in the circumstances as at 30 November 2007. 

92                        I do not accept the respondents’ submission that, by its statement of claim, Diakyne assumed the onus of proving that Mr Ralph knew that the bonus was not payable to Colorado and could not attempt to avoid that onus.  The way in which Diakyne put its case was clear from the opening submissions made on its behalf.  The assertion in the statement of claim of actual knowledge on Mr Ralph’s part of Colorado’s lack of entitlement to the payment formed part of a more general allegation that Mr Ralph, on reasonable enquiry, ought to have known that the Colorado was not entitled to the payment (paragraph 27) and an express allegation that that no reasonable person exercising the powers and discharging the duties as a director of Diakyne would have authorised or directed the payment to be made to Colorado (paragraph 29).  In these circumstances, Diakyne was entitled to press its case in the form it did.  No unfairness to the respondents has thereby arisen.

93                        Accordingly, the starting point for the discussion is that Mr Ralph honestly believed that Colorado was entitled to the payment of $110,000 under the Colorado contract.  The application of the statutory standards must be considered on the basis of the existence of that honest belief.

94                        With respect to s 180 of the Corporations Act, the relevant standard of conduct by which Mr Ralph is to be judged is objective in the sense that it involves asking what an ordinary director of ordinary prudence, with the knowledge and experience of Mr Ralph (and holding an honest belief that the bonus was payable), might be expected to have done with respect to Colorado’s claim for payment of the bonus in all of the circumstances as at 30 November 2007 if acting on their own behalf.  The following circumstances are of particular relevance to the application of that standard. 

95                        The evidence establishes that at all material times $110,000 was a substantial sum of money for Diakyne.  Although the payment of $110,000 would not make Diakyne insolvent, Diakyne’s financial situation was parlous and was known by Mr Ralph to be as such.  He thus knew that the payment of such a sum would be of significance to Diakyne’s finances. 

96                        Mr Ralph, in his own words, was “a bit miffed” by the fact that (as he saw it) people had reneged on the deal which they had with him, thus leading to the tender of his resignation from MediVac’s board on 30 November 2007.  He tendered his resignation on the basis that in the lead-up to the meeting of MediVac shareholders it was clear to all, including Mr Ralph, that Mr Ralph no longer controlled sufficient votes to remain on MediVac’s board.  For this reason also (namely, his “miffed” state), after leaving at the end of the meeting of MediVac shareholders in the afternoon of 30 November 2007 (a Friday), Mr Ralph did not speak to any of the other directors of MediVac. 

97                        Mr Ralph denied having arranged the payment of the bonus to Colorado because he was “a bit miffed” and denied having felt insecure about his continued position as a director and the managing director of Diakyne.  He noted that the Colorado contract was in place under which he was managing director of Diakyne but conceded that he did not feel “totally secure”.  Moreover, Mr Ralph agreed that, when taking the steps he did to secure the payment of $110,000 from Diakyne to Colorado, he considered that it would be difficult for him to deal with Mr Copulos and Mr McPherson as “they would just want to argue the toss about my contract per se and want it switched over to MediVac as Mr Copulos had done before”.  He also conceded that he “may have thought” that Mr Copulos and Mr McPherson would be concerned about a payment of $110,000 from Diakyne to Colorado. 

98                        This evidence, I note, is inconsistent with the respondents’ submission to the effect that no one at the relevant time, and until this proceeding, had communicated to Mr Ralph any problem with the payment of the bonus to Colorado. 

99                        Consistent with Mr Ralph’s awareness at the time that Mr Copulos and Mr McPherson would want to “argue the toss” about the Colorado contract, the evidence does not support an inference that the only issue of concern ever raised with Mr Ralph by the other board members of MediVac was the validity and enforceability of the contract.  Validity and enforceability were major issues but, equally, the evidence supports the inference that Mr Ralph knew that the other members of MediVac’s board had concerns about the whole question of Colorado’s total remuneration, including potential bonus payments.  Mr Copulos’s emails in particular disclose that he had a real issue with the potential bonus payments at all times.  I infer that Mr Copulos forwarded the chart of Colorado’s total entitlements under various scenarios to Mr McPherson and Mr Radojev on 1 October 2007 because Mr Copulos considered the total potential remuneration uncommercial.  So much is obvious from the terms of the email Mr Copulos sent on 15 October 2007.  Moreover, it is not possible to construe an email saying “I disagree with all of your comments” (which appears to be Mr Copulos’s final words to Mr Ralph on the subject on 18 October 2007) as meaning Mr Copulos disagreed with Mr Ralph’s comments except for the bonus which Mr Copulos accepted was payable (as the respondents attempted to submit).  It would have been equally clear to Mr Ralph that while Colorado’s contract was with Diakyne and not MediVac, MediVac owned all of the shares in Diakyne.

100                      I do not accept the evidence of Mr Ralph and Ms Liu that, at the meeting of MediVac’s board on 11 October 2007, Mr Copulos said words to the effect “there’s no dispute, you’re owed the money”.  Mr Copulos denied making this or any other statement to the same effect at any time.  Such a statement would have been inconsistent with everything Mr Copulos had written before that date, as summarised above.  Further, and in any event, by this time Mr Copulos was in possession of legal advice apparently to the effect that the Colorado contract was invalid and unenforceable.  It is implausible that Mr Copulos would have agreed that Colorado was owed the money when Mr Copulos had reason to believe the Colorado contract was invalid on the basis of legal advice to that effect.  The email Mr Copulos subsequently sent on 18 October 2007 disagreeing with everything Mr Ralph had said confirms the implausibility of Mr Copulos having made statement to the effect that Diakyne owed Mr Ralph (via Colorado) a bonus payment on 11 October 2007.  Moreover, as Diakyne submitted, had Mr Copulos made such a statement then Mr Ralph had a strong interest in ensuring its inclusion in the minutes of the meeting which he signed as true and correct.  Yet no statement to that effect appears in the minutes.

101                      Ms Liu’s evidence about this issue can be discounted.  Ms Liu was not in fact present at the meeting on 11 October 2007 (but confusion about dates and the sequence of events is unsurprising given the vagaries of human memory).  Ms Liu had been told by Mr Ralph on 30 November 2007 that the bonus to Colorado was due (in fact, overdue).  Further, Ms Liu acknowledged that when giving evidence she was doing her best to recall the terms of her affidavit and not the actual events in question.  Thus Ms Liu’s recollections of events from some time ago should not be accepted when weighed against the other available evidence, particularly evidence from contemporaneous documents and surrounding circumstances which are unaffected by the pressures of this litigation.  In these circumstances, whilst accepting Ms Liu as a witness of credit, her evidence of statements made by other MediVac board members about the bonus payment to Colorado should be given little weight.

102                      Mr Ralph’s evidence about these matters is subject to the same difficulties as that of Ms Liu.  In addition, it should not be overlooked that Mr Ralph’s acknowledgement that he was “miffed” about the events leading up to 30 November 2007 needs to be recognised as an understatement.  His belief that the bonus was and had been payable since 5 August 2007 but had not been paid while others, whom he perceived as far less competent than he was, had been paid, must also be factored in to the assessment of the weight to be given to his evidence.  It would be surprising if Mr Ralph’s recollections remained unaffected by his sense of grievance.  

103                      For these reasons, I do not accept Mr Ralph’s evidence about statements said to have been made by Mr Copulos on 11 October 2007 (or at any other time) to the effect that the bonus was payable.  I accept Mr Copulos’s evidence to the contrary.  Mr Copulos’s evidence, in contrast to that of Mr Ralph, generally accorded with the substance of contemporaneous documents and was inherently plausible.

104                      I am satisfied that from no later than September 2007 onwards Mr Ralph was aware that the other directors of MediVac (particularly Mr Copulos) were concerned about the not only the validity and enforceability of the Colorado contract, but also Colorado’s total potential remuneration having regard to the bonus payments.  Further, I am satisfied Mr Ralph was aware from no later than September 2007 that, if and when Colorado presented its invoice for the bonus payment to Diakyne, there was a real chance that the other directors of MediVac (noting that MediVac owned all shares in Diakyne) would take steps to dispute payment if possible. 

105                      Mr Ralph denied that this awareness prompted him to take the steps he did during the afternoon of 30 November 2007.  According to Mr Ralph, he considered the views of the MediVac directors to be irrelevant as Colorado’s contract was with Diakyne.  I do not accept that this evidence provides an accurate and complete picture of Mr Ralph’s state of mind at the time.  As Mr Ralph knew, MediVac owned all of the shares in Diakyne.  Mr Ralph also must have known that if his position on MediVac’s board was undermined, his continued role as a director of Diakyne and its managing director would be under direct threat.  It is not inconsistent with the decision in Walker v Wimborne (1975) 137 CLR 1 (referred to by the respondents as negating any concept of a group of companies in Australian law) to acknowledge the practical reality which confronted Mr Ralph and of which he must have been fully aware at the time.

106                      Examination of the circumstances as they existed at 30 November 2007 leads inevitably to the inference that, contrary to his denials, Mr Ralph’s awareness of these potential difficulties prompted his actions on 30 November 2007.  This conclusion is not inconsistent with my acceptance that Mr Ralph honestly believed that Colorado was entitled to the payment.  It merely recognises that the existence of such an honest belief, of itself alone, cannot and does not explain Mr Ralph’s actions on 30 November 2007. 

107                      In particular, the meeting of MediVac shareholders started at 2.30pm on 30 November 2007.  30 November 2007 was a Friday.  It is not clear how long the meeting lasted but it is known that Mr Ralph stayed for the whole meeting before returning to Diakyne’s office and meeting Ms Liu at about 4.30pm.  Mr Ralph knew that UBS Warburg did not accept any instructions to pay if received after midday.  Nevertheless, Mr Ralph took each of the steps identified in [21] above during the afternoon of 30 November 2007.

108                      Mr Ralph knew that Ms Liu was very busy in the late afternoon on 30 November 2007 as she was trying to finish the Diakyne board reports.  Yet he requested Mr Liu to consider the draft Diakyne resolution he had prepared authorising payment “now”.  Although Mr Ralph gave Ms Liu a copy of the Colorado services agreement, in his words to make sure the payment was “tickety-boo”, he was aware that she did not have time to check any of the calculations.  Thus, rather than Ms Liu doing so, Mr Ralph advised her to the effect that Diakyne’s shareholder capital was about $2.5 million and the Diakyne acquisition was at about $8.1 million, which was “easily three times”. 

109                      Whether or not, as he said, Mr Ralph thought Ms Liu was joking about not being able to do the calculations, Mr Ralph also knew at this time that the opening words of paragraph 1 of the bonus provision (referring to the requirement for a listing of Diakyne shares on a national stock exchange) “could have been better worded”.  Although he thought the intention was clear, he did not bring any issue with the wording to Ms Liu’s attention as he thought the trade sale requirement had also been satisfied. 

110                      Further, Mr Ralph had obtained no advice about Colorado’s entitlement to the payment (legal, accounting or otherwise).  He did not recommend or suggest to Ms Liu that she could obtain or should consider obtaining any advice about Colorado’s entitlement to the payment.  He did not himself consider or provide Ms Liu with the share sale agreement or the Bird Cameron report relating to the transaction between Diakyne and MediVac.  Insofar as Mr Ralph was aware, Ms Liu had not read any of the documents associated with the transaction between Diakyne and MediVac in the context of the request Mr Ralph made of Ms Liu on 30 November 2007.

111                      These circumstances must be considered together with the fact that this is not a case of searching for ambiguity in the Colorado contract.  The ambiguities in paragraph 1 of the bonus provision are patent.  Any person acting in Diakyne’s interests, confronted with an invoice for $110,000, would have seen those ambiguities.  For example, while Mr Ralph stressed the difference between consideration (price) and value, the fact is, as discussed above, paragraph 1 of the provision itself uses value interchangeably with consideration.  Mr Ralph himself considered that the reference to a listing of Diakyne’s shares on a national stock exchange could have been better worded.  As to GST, Mr Ralph assumed a common intention that GST would be payable by Diakyne on the bonus payment irrespective of the words actually used.  Nor did Mr Ralph turn his mind to the share sale agreement or the RTS Bird Cameron report or, indeed, any other transaction document to ascertain their potential relevance to Colorado’s entitlement to the bonus payment.  Again, he assumed that his view of the bonus provision, under which all such documents were irrelevant, must be correct. 

112                      While not conclusive, the evidence discloses the steps that Mr Ralph took about the payment of other invoices related to the same transaction as the Colorado invoice.  Hence, Mr Ralph obtained advice about and disputed Gadens’ bill to MediVac with a view to reducing the amount of the bill if possible.  Similarly, he disputed the amount of the bill from RTS Bird Cameron.  Both bills were for amounts substantially less than the $110,000 in the Colorado invoice ($66,000 and $27,500 respectively).  The contrast with Mr Ralph’s actions to secure the payment of $110,000 from Diakyne to Colorado on 30 November 2007 is obvious. 

113                      The respondents’ submission was that the relevant difference between the invoices of Gadens and RTS Bird Cameron and of Colorado is that Mr Ralph (via Colorado) was not a party to an agreement with either of the former.  This submission tends to support Diakyne’s case.  With respect to the bills of Gadens and RTS Bird Cameron, Mr Ralph had no conflict of interest and acted to protect the interests of the company of which he was a director (MediVac).  With respect to the Colorado bill, Mr Ralph had a conflict of interest and took no steps to protect the interests of the company of which he was a director (Diakyne). 

114                      Mr Ralph gave evidence of an (apparently total) reliance on Ms Liu on 30 November 2007 stating that she, and not he, had made the determination that the bonus was payable to Colorado.  The respondents submitted that Ms Liu’s conduct established that at least one other director considered the making of the payment reasonable, thereby undermining any suggestion that Mr Ralph acted as no reasonable director would have done.  I accept Diakyne’s submission to the contrary.  If (as he appears to have contended in parts of his evidence) Mr Ralph did not bring any of his own independent thought processes to bear upon Colorado’s entitlement to payment then that fact alone would be sufficient to establish a breach of s 180(1) of the Corporations Act in the circumstances of this case.  However, I do not accept that Mr Ralph brought no independent thought to bear.  Mr Ralph’s references to Ms Liu having made the determination appear to be a product of his view that, despite the steps he took on 30 November 2007, he was not responsible for authorising or directing the making of the payment to Colorado. 

115                      As discussed, Mr Ralph knew that Ms Liu was under time pressure yet asked her to deal with the Colorado invoice “now”.  He knew she had done no calculations to support the payment.  He knew that neither he nor she had obtained advice that Colorado was entitled to the payment.  Whatever Mr Ralph’s state of mind on 30 November 2007, Ms Liu’s actions on that day, in the circumstances to which I have referred, do not establish that Mr Ralph’s actions were reasonable.  It follows that Ms Liu’s decision to co-sign the resolution with Mr Ralph provides no support for the respondents’ case.

116                      Contrary to his denials, the inescapable inference is that Mr Ralph was aware that if Colorado presented an invoice to Diakyne for the bonus payment and the directors of MediVac controlled Diakyne’s decision-making (rather than Mr Ralph himself) those directors were likely to “argue the toss” about his contract and thus dispute Colorado’s entitlement to the payment.  Mr Ralph’s belief that the bonus was payable (indeed, overdue for payment) leads to the obvious inference that he wanted to ensure that Colorado was paid in full without any debate or dispute.  This explains why he took the steps he did and when he did on 30 November 2007.  Despite his evidence that it did not particularly matter when Colorado presented the invoice, I am satisfied that Mr Ralph’s desire to ensure that Colorado was paid in full without any opportunity for debate or dispute by Diakyne was his “actuating motive” (Adler at [735(3)]) for acting as he did on 30 November 2007. 

117                      The respondents said that it cannot be the case that every time a company pays an invoice it has to give consideration to whether or not that invoice is payable.  That proposition may be accepted.  It is, however, immaterial to the circumstances which confronted Mr Ralph on 30 November 2007.  Mr Ralph had a personal interest in the payment of the Colorado invoice.  He prepared the invoice after he knew that his position on MediVac’s board was at and end and his position on Diakyne’s board and as its managing director was insecure.  He took steps the effect of which was to ensure full and immediate payment of Colorado’s invoice while he was still on Diakyne’s board and was still its managing director.  He did so knowing that it was likely his control of Diakyne would be relatively short-lived and knowing that there was a real chance those likely to succeed him would debate or dispute the making of the payment. 

118                      The respondents said that the payment of an invoice which Mr Ralph reasonably believed was honouring a contractual obligation and which discharged an existing debt is something that has to be in the interests of Diakyne, unless it would cause an actual event of insolvency.  The making of the payment, according to the respondents, avoided the need for litigation.  The respondents thus asked “why does a director who honestly believes that he is owed – or a company associated with him is owed money, have to become a plaintiff?”  Insofar as this submission might have been intended to engage the notion of a balance between the potential harm and benefit to Diakyne by reason of the making of the payment, I adopt in answer the submission made by counsel for Diakyne that this is:

…not a proposition that sits well in the mouth of Mr Ralph in circumstances where what he’s in effect saying is, well, I decided I should pay myself – I should pay Colorado this money to spare Diakyne the trouble of me instructing or causing Colorado to sue Diakyne.

119                      In short, there was no benefit to Diakyne by the making of immediate and full payment of the Colorado invoice on its presentation by Mr Ralph.  The only benefit from so doing was to Colorado and the only harm was to Diakyne.  Mr Ralph must be taken to have intended this inevitable consequence of his actions and I am satisfied that he did so intend.  At the least, any reasonable person in his position at the time would have understood the inevitable consequence of his actions to be to advantage Colorado by securing immediate payment to it in full whilst disadvantaging Diakyne be removing any opportunity to debate or dispute the making of the payment.

120                      Contrary to the respondents’ submissions, this is not a case which can be reduced to the assertion that a director’s decision at the time should not be able to be second-guessed merely because later directors may wish to take issue with it.  For the reasons already given, this assertion does not accurately reflect the full circumstances known to Mr Ralph as at 30 November 2007.

121                      Similarly, the fact that Diakyne has not proved that Mr Ralph had any special knowledge or expertise over and above that of an ordinary director of a company such as Diakyne is no answer.  Diakyne accepted that the relevant test under s 180(1) of the Corporations Act was what an ordinary person of ordinary prudence, with the knowledge and experience of Mr Ralph, might be expected to have done with respect to Colorado’s claim for payment of the bonus in all of the circumstances as at 30 November 2007 if he or she was acting on their own behalf.

122                      The respondents’ submission about the lack of proof of harm or damage to Diakyne is also unsustainable.  It is not necessary that a payment render a corporation insolvent or nearly insolvent for the corporation to suffer harm.  The making of a payment to which Colorado was not entitled (whether as to the principal or GST) involved harm to Diakyne.  Further, and consistent with Diakyne’s case, even if the respondents’ construction of the Colorado contract were correct, the making of an immediate payment of the full amount caused harm to Diakyne.  As discussed, ambiguities were apparent on the face of the contract.  Mr Ralph had disputed the bills from others involved in the same transaction (and, apparently, had succeeded in having the amount of at least one of them reduced by a third).  Diakyne’s financial situation was poor and $110,000 was a substantial sum to it.  In these circumstances it is “so plain, so manifest, and so simple of appreciation” (Vrisakis at 212 citing Overend & Gurney Co v Gibb (1872) LR 5 HL 480 at 486-487) that any ordinary person of ordinary prudence would not have made an immediate payment to Colorado of the full amount claimed and thereby removing Diakyne’s opportunity to negotiate a commercial resolution more favourable to its interests, even if they honestly believed the claim was authorised by the contract.

123                      The respondents also sought to make something of the fact that, at the time of the meeting of Diakyne’s shareholder (MediVac) on 4 December 2007, at which a resolution was passed removing Mr Ralph and Ms Liu from their positions as directors of Diakyne, the MediVac board did not know about the payment of the $110,000 to Colorado.  As the respondents put it, the decision had been made to remove Mr Ralph irrespective of the payment of the $110,000.  As I understand the respondents’ submission, this should lead to an inference that the bonus provision in the Colorado contract was of no particular concern to those directors.  I do not accept that submission.  The fact that the directors decided to remove Mr Ralph from his position as director on 3 December 2007, when they did not know about the payment, merely confirms that Mr Ralph’s position as a director and managing director of Diakyne was untenable.  This supports, rather than undermines, the findings I have made above.  For the same reasons the terms of the letter dated 17 December 2007 do not undermine Diakyne’s case.

124                      Accordingly, and by way of conclusion, Mr Ralph, on 30 November 2007, exercised his power as a director of Diakyne to sign a resolution of Diakyne’s board which resolved “to pay the prescribed bonus of $100,000 to [Colorado] as per the Colorado [contract]”.  Mr Ralph also exercised his power as a director of Diakyne to sign an instruction to UBS Warburg authorising a payment of $110,000 from Diakyne to Colorado.  These actions of Mr Ralph contravened the duty imposed by s 180(1) of the Corporations Act to exercise powers with the degree of care and diligence that a reasonable person would exercise if they were a director of Diakyne in the circumstances. 

125                      No reasonable person in Mr Ralph’s position would have signed the documents on 30 November 2007 despite the existence of an honest belief on their part that the payment was due and owing to Colorado.  Mr Ralph knew that he had a material personal interest in the making of the payment.  Mr Ralph also knew that $110,000 was a significant sum of money given Diakyne’s perilous financial situation.  Any reasonable person in Mr Ralph’s position at that time would have appreciated that Colorado’s entitlement to the payment (as to the whole and as to the GST) was at least arguable because of the ambiguities within the Colorado contract and the bonus provision.  Further, and as discussed, any reasonable person in the circumstances also would have appreciated (as I consider Mr Ralph in fact did) that if the payment was not made immediately those likely to control Diakyne in the near future would be likely to debate or dispute the making of the payment. 

126                      In these circumstances, any reasonable person would have known that the consequence of authorising and directing the payment on 30 November 2007 would be to ensure Colorado received the money without Diakyne having any opportunity to debate or dispute the making of the payment.  Knowledge of this consequence alone would establish a breach of s 180(1) in the circumstances described.  In the present case, however, I am satisfied also that Mr Ralph in fact intended to achieve this consequence on 30 November 2007.  Accordingly, Mr Ralph contravened s 180(1) of the Corporations Act on 30 November 2007.  

127                      The same findings lead to my conclusion that Mr Ralph contravened ss 181(1) and 182(1) of the Corporations Act on 30 November 2007.  In exercising his power as a director of Diakyne to sign a resolution of Diakyne’s board which resolved “to pay the prescribed bonus of $100,000 to [Colorado] …as per the Colorado [contract]” and an instruction to UBS Warburg authorising a payment of $110,000 from Diakyne to Colorado, Mr Ralph did not act in good faith for the best interests of Diakyne and for a proper purpose and did improperly use his position to gain an advantage for Colorado (and, thereby, for himself).  Mr Ralph intended to and in fact gained an advantage for Colorado by ensuring Colorado received the money without Diakyne having any opportunity to debate or dispute the making of the payment.  The actions of Mr Ralph, assessed against the objective standard of impropriety, warrant that description

128                      As Diakyne submitted, these conclusions follow whether or not the construction of the Colorado contract which I have adopted is correct.  Even if that construction is incorrect, the same propositions apply, particularly given the conclusion that Diakyne suffered harm by reason of the fact that Mr Ralph’s actions deprived it of any opportunity to negotiate about the payment by reason of the ambiguities on the face of the Colorado contract.  In other words, the question of construction is of relevance to damages or compensation but, given my findings, not to contravention of ss 180(1), 181(1) and 182(1) of the Corporations Act.

WAS DIAKYNE ENTITLED TO TERMINATE WITHOUT NOTICE?

129                      Diakyne submitted that if Mr Ralph breached his duties as a director then it followed that he had breached cll 5.1 (“Colorado must provide the Services in accordance with this Agreement and with the diligence and care expected of a professional experienced in providing services of that type”) and 8.2 (Colorado must ensure that Ralph complies with any other legislation applicable to the services) of the Colorado contract.  Further, under cl 8.5, Colorado was liable to indemnify Diakyne for the loss it suffered by reason of Mr Ralph’s breach.  By reason of cl 4.3(d) it also followed that Diakyne was entitled to terminate the Colorado contract without notice.  Clause 4.3(d) permitted Diakyne to terminate without notice if “Ralph fails, refuses, ceases or neglects to provide the Services or to perform them with the standard of care, diligence and skill required under this Agreement”. 

130                      According to Diakyne, the respondents’ references to the lack of knowledge of the new directors to the payment when they decided to remove Mr Ralph from his directorship of Diakyne and terminate the Colorado contract are beside the point.  Any such submission was inconsistent with Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359 (in which Rich J at 371 described any reliance on an inability to rely on misdeeds to justify termination if they were not known at the time as “an ancient heresy to which I am surprised to find any surviving adherent”).

131                      The respondents submitted that the Colorado contract required 12 months’ notice before termination.  Given that Mr Ralph honestly believed that the payment to Colorado was due and owing, he was entitled by cl 4.2(d) to 28 days’ notice and an opportunity to remedy the breach even if Colorado was not entitled to the payment.  This period of 28 days would have given Diakyne and Colorado an opportunity to consider Colorado’s entitlement to the bonus payment.  An honest mistake by Mr Ralph as to the entitlement was insufficient to justify termination.

132                      I accept Diakyne’s submissions.  Under the Colorado contract Diakyne appointed Colorado to procure Mr Ralph to provide the services of managing director of Diakyne.  The steps which Mr Ralph took on 30 November 2007 to exercise his power as a director of Diakyne to sign a resolution of Diakyne’s board which resolved “to pay the prescribed bonus of $100,000 to [Colorado] …as per the Colorado [contract]” and an instruction to UBS Warburg authorising a payment of $110,000 from Diakyne to Colorado necessarily also involved him in the performance of the services of managing director of Diakyne.  He thus performed those services in breach of Colorado’s obligation to provide the services with “the diligence and care expected of a professional experienced in providing services of that type” (cl 5.1) and Colorado failed to ensure Mr Ralph complied with ss 181(1), 181(1) and 182(1) of the Corporations Act (cl 8.2(d)). 

133                      The respondents’ construction of the termination provisions of the Colorado contract is unsustainable.  The clause permitted termination without notice if Mr Ralph failed to perform the services with the standard of care, diligence and skill required under the Colorado contract (which, by cll 5.1 and 8.2(d), required a standard of care and diligence at least equal to that imposed by ss 180(1), 181(1) and 182(1) of the Corporations Act).  Clause 4.1 provided for an initial period of one year with a capacity for annual renewals thereafter.  Clause 4.2 provided for termination by notice in writing.  Clause 4.2(d) permitted such termination by either party if any breach remained unremedied after 28 days.  Clause 4.3 permitted termination without any notice only by Diakyne (and not by Colorado) if one of the nominated circumstances existed.  One of the nominated circumstances is a failure by Mr Ralph to perform the services with the standard of care and diligence required under the Colorado contract.  By reason of his breach of ss 180(1), 181(1) and 182(1) of the Corporations Act, Mr Ralph failed to provide the services with the standard of care and diligence required under the Colorado contract.  Diakyne was thus entitled to terminate the contract immediately irrespective of the fact that it became aware of the payment after having resolved to remove Mr Ralph as a director of Diakyne (and after it considered Mr Ralph’s position as managing director untenable despite Diakyne not having formally resolved to that effect). 

134                      Diakyne was entitled to terminate the Colorado contract without notice.  Colorado’s cross-claim against Diakyne based on Diakyne’s alleged repudiation of the Colorado contract therefore must be dismissed. 

135                      The only remaining issue is damages or compensation to Colorado.  Diakyne submitted that it was entitled to an order for the repayment of the $110,000 plus interest and costs.  I agree.  Section 1317H of the Corporations Act provides that a court may order a person to compensate a corporation for damage suffered by the corporation if the person has contravened a corporation civil penalty provision in relation to the corporation and damage resulted from the contravention.  Sections 180(1), 181(1) and 182(1) of the Corporations Act are civil penalty provisions (ss 1317DA and 1317E(1)(a)) and Diakyne suffered damage by reason of the contraventions. 

136                      On the construction of the Colorado contract which I have adopted, Diakyne paid Colorado $110,000 to which Colorado had no entitlement.  This is damage resulting from the contravention.  On the competing construction which I rejected, the contraventions deprived Diakyne of a capacity to debate or dispute the making of the payment which is itself a form of damage.  As neither party addressed the quantum of damage flowing from that latter circumstance I say no more about it.  Further, and as Diakyne submitted, Colorado is bound to indemnify Diakyne for any losses Diakyne suffered by reason of Colorado breaching the Colorado contract (cl 8.5). 

CONCLUSION AND DIRECTIONS

137                      For the reasons set out above I am satisfied that Mr Ralph, on 30 November 2007, contravened ss 180(1), 181(1) and 182(1) of the Corporations Act in exercising his power as a director of Diakyne to sign a resolution of Diakyne’s board which resolved “to pay the prescribed bonus of $100,000 to [Colorado]… as per the Colorado [contract]” and an instruction to UBS Warburg authorising a payment of $110,000 from Diakyne to Colorado. 

138                      Further, I am satisfied that, by reason of these contraventions, Colorado breached its obligations under the Colorado contract so as to vest in Diakyne a right to terminate that contract without notice.

139                      Finally, I am satisfied that Diakyne is entitled to orders requiring repayment by Colorado and Mr Ralph of the sum of $110,000 plus interest and costs. 

Associate:

Dated:         7 July 2009