FEDERAL COURT OF AUSTRALIA

Australian Motor Finance Limited (Receivers and Mangers appointed) v Angeleri (No 3) [2010] FCA 1431

THE COURT ORDERS THAT:

1.    Pursuant to s 31A of the Federal Court of Australia Act 1976 (Cth) judgment be entered for each of the plaintiffs against each of the first, second and third defendants in relation to that part of the plaintiffs’ claim which relates to contraventions, by the first, second and third defendants of ss 181 and 182 of the Corporations Act 2001 (Cth).

2.    Pursuant to s 1317E of the Corporations Act 2001 (Cth) it be declared that the first, second and third defendants each contravened ss 181 and 182 of the Corporations Act 2001 (Cth) by engaging in the conduct attributed to him in the reasons for judgment published on 20 December 2010 in this proceeding.

3.    The first, second and third defendants pay $4,837,314.94 to the second plaintiff for damage suffered by the second plaintiff by reason of the said defendants’ contraventions of ss 181 and 182 of the Corporations Act 2001 (Cth).

4.    The first, second and third defendants’ applications for leave to amend their defences be refused.

5.    The first, second and third defendants pay the first and second plaintiffs’ costs of the first and second plaintiffs’ application for summary judgment.

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    Between 1999 and 2008 the Plaintiffs (“AMFC” and “AMFL”) carried on a business of providing finance to the purchasers of second hand motor vehicles. Their business activities came to an abrupt end in January 2009 when accountants, appointed by the bankers who supplied the funds to support the loans, sought to obtain entry to the Plaintiffs’ business premises only to find them locked and deserted. After entry was eventually effected it was discovered that the business records of the Plaintiffs (including computer equipment) had been removed. Further enquiries disclosed what appeared to be serious irregularities in the financial affairs of the companies. Shortly afterwards Receivers and Managers were appointed to both AMFC and AMFL.

2    At relevant times the First Defendant, Mr Denis Angeleri, was the Managing Director of AMFL and a director of AMFC.

3    The Second Defendant, Mr Ian Brindley, was a director of both AMFL and AMFC. He was Deputy Managing Director and Chief Financial Officer of AMFL.

4    The Third Defendant, Mr Michael O’Brien, was a director of AMFL but not AMFC. He was also Company Secretary of AMFL. In this capacity he gave directions to employees of AMFL which caused AMFC to enter into loan transactions. Mr O’Brien denied that he was an officer of AMFC. It will be necessary, later in these reasons, to consider whether he was an “officer” of AMFC within the meaning of the Corporations Act 2001 (Cth) (“the Corporations Act”).

5    The Plaintiffs commenced proceedings against these three defendants and a number of other persons seeking to recover monies which, the Plaintiffs alleged, had fraudulently been obtained by AMFC and AMFL and then diverted by Messrs Angeleri, Brindley and O’Brien to other defendants, some of which one or more of them controlled.

6    The Plaintiffs’ statement of claim alleges that Messrs Angeleri, Brindley and O’Brien, each acted in breach of their duties as directors and officers of the Plaintiffs thereby causing loss and damage to the Plaintiffs. Their defences to the principal allegations were that they did not admit those allegations. In the course of examinations, conducted under s 596A of the Corporations Act, each of the first three Defendants made a series of admissions. The financial records of the Plaintiffs and other documentation supported the Plaintiffs’ claims.

7    The Plaintiffs have moved the Court, under s 31A of the Federal Court of Australia Act (1976) (Cth) (“the FCA Act”) for summary judgment against Messrs Angeleri, Brindley and O’Brien, in respect of part of the proceeding. The relevant part of the proceeding in respect of which judgment is sought relates to losses incurred through the making of 212 fictitious loans. It is alleged that these three Defendants were responsible for administering the scheme under which the fictitious loans were created and the proceeds of them were disbursed.

SUMMARY JUDGMENT

8    Relevantly, s 31A of the FCA Act provides:

“(1)    The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:

(a)    the first party is prosecuting the proceeding or that part of the proceeding; and

(b)    the Court is satisfied that the other party has no reasonable prospect of successfully defending the proceeding or that part of the proceeding.

(2)    …

(3)    For the purposes of this section, a defence or a proceeding or part of a proceeding need not be:

(a)    hopeless; or

(b)    bound to fail;

(4)    …

(5)    …”

9    In Deckers Outdoor Corporation Inc v Farley & Ors (No 2) (2009) 176 FCR 33 at 367 I observed that:

“11    Section 31A of the Federal Court Act was introduced to extend “the power of the court to deal with unmeritorious matters by broadening the grounds on which federal courts can summarily dispose of unsustainable cases”: see Jefferson Ford Pty Ltd v Ford Motor Company of Australia Ltd (2008) 167 FCR 372 at 406 [124] (per Gordon J) (quoting from the Second Reading Speech of the Minister on the Migration Litigation Reform Bill 2005 (Cth)). The section empowers the Court to give summary judgement in favour of an applicant if it is satisfied that the respondent “has no reasonable prospect of successfully defending the proceeding or [a] part of the proceeding”: see s 31A(1)(b). A defence may have no reasonable prospect of success notwithstanding that it is not “hopeless” and not “bound to fail”: see s 31A(3).

12    Plainly, s 31A was, as Lindgren J held in White Industries Aust Ltd v Federal Commissioner of Taxation (2007) 160 FCR 298 at [54], designed “to lower the bar for obtaining summary judgment” from the level that had been fixed by the High Court in Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91-2 and General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 128-130. Although the standard which must be met by an applicant who seeks summary judgment under the Federal Court Act has been expressed in a variety of different ways, where, as here, an application is made under s 31A, the Court is required to give close attention to the statutory language and to apply that test to the exclusion of all others. As Kenny J said in PZ Cussons (International) Ltd v Rosa Dora Imports Pty Ltd (2007) 74 IPR 372 at [13]:

‘The key is to address the statutory question. That is, under s 31A, in order to grant summary judgment, I must be satisfied that the respondents have no reasonable prospects of success in defending the infringement claim. As s 31A(3) makes clear, this does not mean that I must be satisfied that their defence is hopeless or bound to fail.’”

10    The power conferred by s 31A is to be exercised with caution and “is not to be exercised lightly”: Spencer v The Commonwealth (2010) 241 CLR 118 at 131 (per French CJ and Gummow J) and 141 (per Hayne, Crennan, Kiefel and Bell JJ). That need for caution is reflected in the approach to the application of s 31A adopted by judges of this Court. The principles which have emerged from their decisions were summarised by Sundberg J in Adnunat Pty Ltd (CAN 005 816 268) v ITW Construction Systems Australia Pty Ltd (CAN) 004 297 009) [2009] FCA 499 at [37]:

“.    In applying s 31A, the court does not conduct fact finding but must assess the strength of the allegations made by reference to the pleadings, affidavits and any other evidence adduced, in order to determine whether the claim is sufficiently strong to warrant a trial: see Jefferson Ford 167 FCR at [23] (Finkelstein J), [74], (Rares J) and [130] (Gordon J); see also Bradken Resources Pty Ltd v Lynx Engineering Consultants Pty Ltd [2008] FCA 1257 at [28] (Emmett J); Imobilari Pty Ltd v Opes Prime Stockbroking Ltd [2008] FCA 1920 at [6] (Finkelstein J). Ultimately, the court must consider whether there are any real, as opposed to fanciful, issues of fact or law that require proper determination at a trial.

    In assessing whether there are reasonable prospects of success, the court should draw all reasonable inferences (but only reasonable inferences) in favour of the non-moving party: see Jefferson Ford 167 FCR at [132] (Gordon J). Moreover, where the evidence on a summary judgment application is of an ambivalent character, there will be a real issue of fact and therefore reasonable prospects of success for the purposes of s 31A: see Boston 236 ALR at [45]; Jefferson Ford 167 FCR at [73] (Rares J) and [130] (Gordon J).

    The moving party bears the onus of persuading the court that its opponent has no reasonable prospects of success: see Jefferson Ford 167 FCR at [127] (Gordon J); Boston 236 ALR at [45]. However, where the moving party establishes a prima facie case for summary judgment, the opposing party must be able to point to “specific factual or evidentiary disputes that make a trial necessary”: see Jefferson Ford 167 FCR [127] (Gordon J).

    As s 31A requires in effect a prediction as to the outcome of a claim, the court should be more reluctant to summarily dismiss a claim where real questions of fact and credit arise. In those cases, the court will not have all material evidence before it until trial, the credit of important witnesses will not have been tested and it will as a consequence be very difficult if not impossible to fairly assess the prospects of the claim: see Jefferson Ford 167 FCR at [20] (Finkelstein J); Dandaven v Harbeth Holdings Pty Ltd [2008] FCA 955 at [6] (Gilmour J).”

11    Section 31A allows the Court to discriminate between causes of action which a defendant has no reasonable prospect of defending and those which give rise to real issues of fact or law which warrant the allegations being tested at trial. Summary judgment may be given in respect of the former “part of the proceeding”.

12    The Plaintiffs prosecute their summary judgment application on the basis of pleaded facts and evidence. Messrs Angeleri, Brindley and O’Brien have each sworn affidavits in response to those relied on by the Plaintiffs. In these circumstances the Court is required to form the necessary judgment, for the purposes of s 31A(1), on the basis of this material and to consider whether the evidence “reasonably excludes the possibility that facts essential to the success of the … defence will be able to be established”: see Fortron Automotive Treatments Pty Ltd v Jones (No 2) [2006] FCA 1401 at [20] (per French J).

THE SCHEME

13    In order to understand how the 212 fictitious loans were created between August and December 2008, it is necessary, first, to outline the commercial structures and arrangements which were utilised by those involved.

14    AMFC was the financier for the loans which were provided to the purchasers of motor vehicles. AMFC held the legal title to these loans as a trustee for ABL Nominees Pty Ltd (“ABL”) which is a wholly owned subsidiary of the Bendigo and Adelaide Bank Limited. AMFC had no employees, office infrastructure or assets (apart from title to the loans).

15    AMFL provided the infrastructure and personnel for AMFC’s loan business. Among the functions which AMFL performed were the accreditation of brokers and others who introduced prospective borrowers; the assessment of applications, the granting of credit approval; the documentation of loans; the settlement of loans including the process by which AMFC sold loans it had entered into to ABL; the collection of loan payments from customers of AMFC and on-forwarding those payments to ABL; the monitoring of loan arrears; and the provision of office and other facilities.

16    ABL was the trustee of a trust known as the AMF Warehouse Settlements Trust (“the trust”). The trust obtained funding through the issue of notes. The loans entered into by AMFC were sold to the trust pursuant to an arrangement under which the trust paid, subject to certain adjustments, the amount advanced to the purchaser of the motor vehicle. The loans sold by AMFC to the trust had to satisfy strict eligibility criteria including requirements that the credit worthiness of the borrower be carefully assessed and detailed documentation raised. Any loan purchased by the trust which was found not to meet the eligibility criteria had to be repurchased by AMFC. Repurchasing was required if, for example, the borrower defaulted in making repayments. AMFC granted a fixed and floating charge over its assets in favour of ABL to secure its obligation to ABL to repurchase loans which failed to meet the criteria. AMFL guaranteed AMFC’s obligations to ABL.

17    At relevant times, neither AMFC nor AMFL had the financial capacity to repurchase any of the 212 fictitious loans.

18    The starting point in creating the loans was the identification of a “borrower”. Most of the persons who were nominated as borrowers were unsuccessful applicants for loans. Mr O’Brien chose the names. These persons were “referred” to AMFC by a broker named First Scottish Limited. Messrs Angeleri and O’Brien were directors of this company. Although it was deregistered on 22 September 2008 it continued to make “referrals”.

19    Once a “borrower” was identified Mr O’Brien would enter the name and personal particulars of the borrower, the vehicle details (including false registration numbers and vehicle descriptions) and the amount involved in AMFC’s records. He would personally recommend and approve the granting of the loans, thereby wholly circumventing the prescribed approval process. The “approved” loans were referred by e-mail to the settlements officer employed by AMFL. The loans would be included by him in the list of loan transactions (some of them genuine) which were to settle on that day. That list would be emailed to Messrs Brindley, Angeleri and O’Brien by the settlements officer.

20    AMFC then provided a sale notice to ABL. The notice bore the electronic signature of Mr Brindley. Mr Brindley was authorised by AMFC to act as the signatory to these notices.

21    Upon receipt of the notices ABL would pay the aggregate amount of the loans for settlement on that day, less 10 per cent, into a bank account entitled the AMFC Settlements Account.

22    The fictitious loans could be distinguished from the legitimate transactions in AMFC’s records because the broker was, in each case, identified as “First Scottish” or “FS”. What happened to the funds paid into the AMFC Settlements Account by ABL in respect of the FS loans depended on the name of the dealer who was recorded as having made the sale. Depending on the name used the funds in the settlements account would be distributed automatically to one of four accounts. They were the:

    Angeleri Superannuation Fund Account controlled by Mr Angeleri;

    Euroquest Corporate Pty Ltd Account controlled by Mr Angeleri;

    Phantom Plate Pty Ltd (“Phantom Plate”) Westpac account controlled by Mr Angeleri; and

    Moneypac Investments Pty Ltd (“Moneypac”) account controlled by Mr O’Brien who was the sole director of that company. The company was and is the trustee of Mr O’Brien’s family trust.

23    Thus, for example, if the dealer was nominated as “Gleneira Cars”, the loan settlement sum would be paid into the Angeleri Superannuation Fund account.

24    It was Mr Brindley who nominated the dealers who were to be linked to each FS transaction.

25    Mr O’Brien caused the monies paid into the Moneypac account to be transferred to the Phantom Plate account.

26    In order to make it appear that the “borrowers” were meeting their obligations to make repayments of principal and interest, the necessary amounts would, from time to time, be transferred from the Phantom Plate account to the AMFC Collections Account. This was arranged by Mr Brindley who gave directions to AMFL employees to poll the Phantom Plate account for this purpose.

27    Each of the first three defendants was aware of the scheme and the manner in which it was implemented. Each knew that each of the 212 loans was fictitious.

28    The net amount of the disbursals from the AMFC settlements account in respect of fictitious loans (after allowing for notional repayments made on those loans from the Phantom Plate account) was $4,837,314.94. This is the principal amount owing and it has not been recovered. When accrued interest at default rates is added, the total sum claimed by the Plaintiffs, as at 16 July 2009, was $6,776,360.48 and, as at 18 November 2010, was $9,268,633.66. The first three Defendants do not challenge the Plaintiffs’ calculation of the principal sum.

THE PLAINTIFFS’ CAUSES OF ACTON

29    The Plaintiffs contend that, in engaging in the conduct just described, each of the first three Defendants breached their common law and statutory duties to the Plaintiffs, in their capacities as directors and officers.

30    In their amended statement of claim the Plaintiffs plead various causes of action against the first three Defendants.

31    It is sufficient, for present purposes, to concentrate attention on one of the pleaded causes, namely, breaches of duties as directors of AMFL and, in the cases of the Messrs Angeleri and Brindley, directors of AMFC and, in the case of Mr O’Brien, as an officer of AMFC.

32    The duties relied on by the Plaintiffs were those imposed by ss 180, 181 and 182 of the Corporations Act.

33    The Plaintiffs allege that the duties were breached by each of the first three Defendants because they acted dishonestly and other than in the best interests of the Plaintiffs. It was further alleged that they exercised their powers for an improper purpose and misappropriated the proceeds of the fictitious loans either for their personal benefit or for the benefit of others whom they knew were not entitled to those funds. These activities caused the Plaintiffs to become insolvent.

34    The Plaintiffs plead that they suffered loss and damage as a consequence of these breaches of statutory duty. The extent of the losses is set out above at [28].

35    As already noted the three Defendants each responded, in their defences, by not admitting the central allegations levelled against them.

36    Each did, however, admit to being directors and officers of AMFL at relevant times and that they owed duties at law to the company.

37    Mr Angeleri and Mr Brindley admitted that they were directors of AMFC and owed it duties at law.

38    Mr O’Brien denied that he was an officer of AMFC.

39    It will be convenient at this point to consider Mr O’Brien’s status in relation to AMFC.

40    Section 9 of the Corporations Act defines the term “officer of a corporation” to mean:

“(a)    a director or secretary of the corporation; or

(b)    a person:

(i)    who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or

(ii)    who has the capacity to affect significantly the corporation’s financial standing; or

(iii)    ...

…”

41    Reference has already been made to the role which Mr O’Brien played in creating the fictitious loans. In the course of his public examination he admitted to creating false loan applications which were to be entered into by AMFC with non-existent “borrowers”. It was Mr O’Brien who assigned names to the “borrowers”. Mr O’Brien entered the names and personal particulars of the borrowers, the vehicle details and the purchase price in AMFC’s records. Mr O’Brien “approved” the granting of the loans. He then advised the settlement officer at AMFL to include the fictitious loans among the transactions which were to settle on a particular day.

42    Had Mr O’Brien not engaged in this conduct AMFC would not have become a party to the 212 fictitious loans and ABL would not have made over $4 million available to support those loans. Mr O’Brien was, therefore, actively involved in the making of significant decisions relating to the business of AMFC and which had the potential significantly to affect AMFC’s financial standing.

43    Mr O’Brien was an “officer” of AMFC within the meaning of the Corporations Act.

44    On 15 November 2010 the first three Defendants each sought leave to amend their defences by pleading that the Plaintiffs had failed to mitigate their losses and had failed to act reasonably in not taking action to reduce their losses. They claim that ABL delayed in serving a repurchase notice in respect of the fictitious loans and that, as a result, interest, including default interest had accrued. As a result the amount claimed was higher than it would have been had the demand been served more promptly. They complained that the Plaintiffs should have challenged the repurchase notice which ABL served on AMFC and an associated demand under the guarantee which was served on AMFL with a view to having the amount claimed reduced because of ABL’s alleged delay. I will deal separately with this application later in these reasons. It may, however, be noted at this point that any such defence would not impinge on that part of the Plaintiffs’ claimed losses which is constituted by the net amount of the disbursals from the AMFC settlements account.

STATUTORY DUTIEs

45    Sections 180, 181 and 182 of the Corporations Act relevantly provide:

“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.

(2)    …

(3)    …

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.

(2)    A person who is involved in a contravention of sub section (1) contravenes this sub section.

182(1)    A director, secretary, or 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.

(2)    A person who is involved in a contravention of sub section (1) contravenes this sub section.”

46    A person is taken to be involved in a contravention if, inter alia, the person has, by act or omission, directly or indirectly, been knowingly concerned in, or party to, a contravention: see s 79 of the Corporations Act.

47    Each of these provisions is a civil penalty provision: see s 1317E(1). If the Court is satisfied that a person has contravened one or more of these provisions it must make a declaration of contravention: see s 1317E(1)(a). The Court may order a person who has contravened a civil penalty provision, thereby causing damage to a corporation, to compensate the corporation for that damage: see s 1317H(1).

BREACH OF STATUTORY DUTIES

48    The conduct of each of the first three Defendants in establishing and implementing the fictitious loan schemes is apt to attract the operation of ss 180, 181 and 182 of the Corporations Act. The most obvious contravention is, perhaps, that of s 181.

49    Section 181(1) is designed to prevent abuses of directors’ powers for their own or collateral purposes: see Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373 at [106] (per Brereton J). It is one of a number of provisions which give statutory effect to what would otherwise be fiduciary obligations imposed on directors by the general law.

50    In Chew v The Queen (1991) 4 WAR 21 at 49 Malcolm CJ, speaking of s 181(1), observed that:

“It follows that the duty of honesty or good faith has a number of aspects under the general law. First, the directors must exercise their powers in the interests of the company, they must not misuse or abuse their powers. Secondly, they must avoid conflict between their personal interests and those of the company. Thirdly, they should not take advantage of their position to make secret profits. Fourthly, they should not misappropriate the company’s assets for themselves.”

51    There is an unresolved debate as to whether it is necessary to establish subjective dishonesty on the part of a director before a contravention of s 181(1) can be proved: see, for example, Marchesi v Barnes [1970] VR 434 at 438 (per Gowans J); Australian Growth Resources Corp Pty Ltd v Van Reesema (1988) 13 ACLR 261 at 272 (per King CJ). The weight of authority favours the stricter view that it must be shown that a director engaged deliberately in conduct which he or she knows is not in the best interests of the company or for a proper purpose: see the authorities collected by McColl JA in Forge v Australian Securities and Investments Commission (2004) 213 ALR 574 at 632-3.

52    For the purpose of dealing with the present application I will adopt the stricter approach which is the one most favourable to directors.

53    In determining whether contravening conduct has caused loss to a company the Court is required to conduct “a common sense factual inquiry”: see Sheahan v Verco [2002] SASC 68 at [93] (per Lander J).

54    I have already outlined how the fictitious loans were created, and how funds were drawn down from ABL and then disbursed to the various accounts under the control of Messrs Angeleri and O’Brien. I have also explained the role played by each of the three Defendants in implementing the scheme and seeking to ensure that it would not be discovered. It is now necessary to refer in greater detail to the evidence relied on by the Plaintiffs in support of their summary judgment application.

55    Towards the end of 2008 ABL had concerns as to the manner in which AMFC and AMFL were conducting their businesses. It determined to carry out an examination of the accounting records maintained by these companies. It arranged for auditors to attend the companies’ premises in Port Melbourne. On 22 January 2009 it advised the companies that the auditors would attend at the companies’ premises the following day. When the auditors arrived they found the premises locked up and apparently abandoned. When, eventually, they managed to obtain access they found the premises in disarray. In particular, all computers, including hard drives in which the financial records were stored, had been removed.

56    When they were contacted, Messrs Angeleri, Brindley and O’Brien each denied knowing the whereabouts of the computers or the financial records.     

57    The Receivers and Managers set in train a process under which the records relating to the loans were reconstructed using a back-up facility in Pakistan.

58    The police subsequently became involved and executed a search warrant on premises at which a relative of Mr Angeleri carried on business and where Mr Angeleri then worked. The missing computer equipment was found at the premises and was seized by the police. The financial information which was found on the computers corresponded with that which had been reconstructed using the back-up facility.

59    In the meantime the Receivers and Managers had obtained bank statements and other documents relating to the operation of all the relevant banking accounts.

60    These contemporaneous business records made it possible to appreciate how each of the fictitious loans was created and to trace the subsequent movement of funds obtained to support them.

61    Messrs Angeleri, Brindley and O’Brien gave evidence in the course of public examinations.

62    Mr Angeleri gave evidence that:

    He knew that false loans were being entered into in the sense that false names and false details of vehicles and dealerships were used in relation to these loans. He denied that he was privy to the precise detail of each transaction.

    He was aware that Mr O’Brien was entering false information into the business records of the Plaintiffs, including information relating to the dealer who sold a particular car, the registration details and the description of cars.

    He was informed, from time to time, by Mr Brindley and Mr O’Brien as to the amount of the FS loans.

    Mr Brindley worked out on a monthly basis how much money was needed to keep the false loans to appear to be performing and how much money was needed for this purpose.

    He regularly received e-mails providing details of the FS loans.

    He and Mr Brindley had discussions, from time to time, about the number of fictitious loans which had been entered into.

    He recognised that the writing of false loans and the obtaining of money from ABL in relation to such loans constituted a dishonest breach of his duties as a director.

63    Mr Brindley gave evidence that:

    The FS transactions continued to be entered into and processed through the companies’ systems without compliance with the applicable credit policies and settlement procedures.

    It was the usual practice for Mr O’Brien to initiate the FS transactions by sending email communications to Settlements staff.

    The e-mails sent by Mr O’Brien gave credit approval and authorised AMFL personnel to proceed with settlement of the loans.

    He knew that numerous FS loans were being written, apparently with third party borrowers, which were not genuine loans. They were not arm’s length legitimate loans and some of the proceeds were used for the purpose of the polling process.

64    Mr O’Brien gave evidence that:

    He was involved in the creation of FS loans.

    The FS loans were fictitious.

    He would raise the e-mails which advised Settlement personnel about which FS loans were to be processed on a particular day.

    Where FS was nominated as the broker in the records of the plaintiffs the transactions were fictitious.

65    Each of the first three Defendants filed affidavits in opposition to the summary judgment application. In none of these affidavits did they seek to call into question the general accuracy of the financial and other records relating to the fictitious transactions or the evidence which they had given during their public examinations. They did, however, challenge the detail of the accounting treatment of some of the fictitious loans. I will return to this matter later in these reasons. For present purposes, it is sufficient to observe that, although they raised some issues relating to the calculation of the Plaintiffs’ losses which were caused by their activities, they did not deny that those activities had caused financial losses to AMFC and, potentially, AMFL.

66    I am satisfied, having regard to this evidence, that Messrs Angeleri, Brindley and O’Brien have no reasonable prospect of successfully defending the allegation that each of them has contravened s 181(1) of the Corporations Act. The unchallenged evidence strongly suggests that each acted dishonestly, in their capacities as directors and officers of the Plaintiffs, in a successful effort to obtain large sums of money which could be and were used for their personal benefit. Certainly, they failed to act in good faith and for a proper purpose. In doing so they rendered the Plaintiffs liable to claims made on them by ABL which they were well aware the Plaintiffs would be unable to meet. When the claims were made and not satisfied the Plaintiffs became insolvent. In so acting the Defendants were derelict in their duty to act in good faith in the best interests of the Plaintiffs and for proper purposes.

67    For the same reasons I consider that these Defendants have no reasonable prospect of defending the Plaintiffs’ claims that they each contravened both paragraphs s 182(1)(a) and (b).

68    A case could probably be made out that they also contravened s 180(1). In the circumstances, I do not consider it necessary to undertake an examination of this section and make findings in relation to it.

69    The strength of the Plaintiffs’ case, both as to matters of fact and law, insofar as it is founded on contraventions, by the first three Defendants, of their obligations under ss 181 and 182 of the Corporations Act, is overwhelming. The three Defendants have had ample opportunity to place exculpatory evidence before the Court. They have failed to do so. On the contrary, they have, in the course of their public examinations, either expressly or tacitly acknowledged that they acted in breach of their statutory duties to the Plaintiffs.

70    In my opinion the three Defendants have no reasonable prospects of successfully defending the claims made against them by the Plaintiffs under ss 181 and 182 of the Corporations Act.

DAMAGES

71    After Receivers and Managers were appointed to AMFL and AMFC in January 2009, it took many months to determine the details of what were discovered to be the 212 fictitious loans. On 16 July 2009, while enquiries were ongoing, ABL served a notice to repurchase the loans on AMFC. AMFC was liable to make such repayment because they were “ineligible loans”. This was because, among other things, they were not genuine transactions entered into in the ordinary course of AMFC’s business. AMFC did not repurchase the loans.

72    ABL also made a demand on AMFL as guarantor of AMFC’s obligations. AMFL did not satisfy this demand and has not since done so.

73    The demands made by ABL on AMFC and AMFL in July 2009 were for the sum of $6,776,360.48. This figure included the principal amount owing of $4,837,314.94 and also included interest on the principal sum.

74    In their evidence and submissions Messrs Angeleri, Brindley and O’Brien each sought to call into question the calculation of the amount specified in the repurchase notice which was served in July 2009. As has already been noted, that figure was $6,776,360.48. The defendants also complained that ABL had failed to mitigate its loss by delaying serving the repurchase notice and had failed to exercise its rights, under various transaction documents, to monitor the conduct of the bank accounts under the control of the Plaintiffs during the period in which the monies used to fund the fictitious loans were drawn down and disbursed.

75    The Defendants contended that the amount specified in the repurchase notice was overstated by $600,000 because this sum was held in a loss reserve fund to which ABL had access. The Plaintiffs, at an early stage in the proceeding, conceded that their claim should be reduced by this amount.

76    The three Defendants also challenged the accounting treatment of the fictitious loan accounts. These complaints were made following detailed inspections of the reconstructed records and the computer records relating to each of the 212 fictitious accounts.

77    One example of the alleged accounting errors was given by Mr O’Brien. He had examined the accounting treatment of one of the fictitious loans which was numbered 13143. The loan principal was $15,200. The loan was settled on 13 August 2008. The loan contract specified that monthly payments of principal and interest were to be paid on the ninth day of each month. This day was referred to as the “rest day” in each month. Mr O’Brien deposed that his examination of the records disclosed that fees and interest charges had been made on some days other than rest days thereby increasing the amount owing because of compounding of interest.

78    What is significant, for present purposes, is that this, and the other errors which the three Defendants allege are disclosed in the records, all relate to the accounting treatment of the fictitious loan accounts after the initial disbursement by ABL. They do not impinge on the net amount of the disbursals of $4,837,314.94. At best for the three Defendants the alleged errors might further reduce the difference between this net amount and the $6,776,360.48 which was claimed in the repurchase notice.

79    The three Defendants advanced no evidence or submissions which called into question the accuracy of the net amount of the disbursals from the AMFC settlements account arising from the fictitious loans.

80    Messers Angeleri, Brindley and O’Brien each complained that the Plaintiffs have failed to mitigate their loss because they have not challenged the repurchase notice which ABL served on AMFC and the related demand on AMFC under the guarantee. They  complained that ABL delayed in serving the demand and that, as a result, interest, including default interest, accrued on the liability and led to a higher figure being demanded than would have been the case had the demand been served earlier.

81    Assuming, in the Defendants’ favour, that the demand might have been served at some time prior to 16 July 2009, thereby reducing the amount then claimed, the amount of the demand would, nonetheless, have exceeded the net amount of the disbursals.

82    In any event, it may be doubted that the Plaintiffs would have had any proper basis for objecting to the sum demanded on the ground that ABL had been tardy in making its claim. The demand was served within four weeks of the conclusion of the last of the public examinations, that of Mr O’Brien. It is also to be borne in mind that, during the first half of 2009, the Receivers and Managers were struggling to reconstruct the relevant records. This difficult process was made necessary by the removal of the financial records from AMFL’s offices and the subsequent concealment of those records, conduct which, I infer, was knowingly engaged in by each of the three Defendants.

83    The three Defendants also contend that the Bendigo and Adelaide Bank was negligent in failing to inspect files and undertake audit activities in respect of the loan accounts maintained by AMFC and AMFL.

84    The subtext to this bold submission would seem to be that, had the Bank been more diligent, it might have discovered the fraudulent conduct being engaged in by the three Defendants at some point earlier than, in fact, occurred.

85    The Bank is not a party to the proceeding. No evidence is advanced to support any action in negligence against it.

86    The alleged negligence of the Bank does not provide a defence to the three Defendants to the charge that they breached their statutory duties to the Plaintiffs or served to undermine the Plaintiffs’ application for summary judgment for the sum of the net amount of the disbursals from the AMFC Settlements account which were procured by the defendants.

87    None of the three Defendants sought to suggest that their conduct did not cause losses to the Plaintiffs at least to the extent of $4,837,314.94.

AMENDMENT TO THE DEFENCE

88    By notice dated 15 November 2010 Messrs Angeleri, Brindley and O’Brien jointly proposed an amendment to their defences. The proposed amendment dealt with the issue of mitigation. The amendment was in the following terms:

“That the plaintiffs have failed to mitigate their losses and or have failed to act reasonably in not taking action to reduce their losses arising as a result of the issue of the notice to repurchase loans dated 16 July 2009 to the second plaintiff and the demand notices dated 17 July 2009 to the first plaintiff.

Particulars

1.    The plaintiffs have not challenged or defended the amount claimed in the said notices despite the unreasonable delay in these notices being issued which has had the effect of increasing the amount claimed;

2.    The plaintiffs have not challenged or defended the notices or liability thereunder notwithstanding evidence (which includes evidence which would be reasonably uncovered by due enquiry) that the party issuing the notices (which includes its related entities) is in breach of the transaction documents relating to the banking facility provided to the plaintiffs as a result (but not limited to) failures to undertake audit activity in the manner required by the transaction documents and in accordance with proper audit practice.”

89    The Plaintiffs opposed the granting of leave to amend in these terms on the ground that the proposed amendment was “manifestly untenable.”

90    The Plaintiffs’ objection may well be correct. There is, however, a more fundamental deficiency in the application to amend. It is that the amendment, in the terms in which it is proposed, could not be incorporated, in that form, in the defences as presently filed. Moreover the amended “defences” are not in a form to which the Plaintiffs could be expected to plead.

91    Leave to amend in the form proposed will, therefore, be refused.

CONCLUSION

92    Summary judgment should be entered against Messrs Angeleri, Brindley and O’Brien in respect of their contraventions of ss 181 and 182 of the Corporations Act. Declarations of contravention should be made pursuant to s 1317E of the Act. Each of these Defendants should be ordered, pursuant to s 1317H of the Act, to pay compensation for the damage suffered as a result of their contraventions in the sum of $4,837,314.94.

93    The order for compensation should only be made in favour of AMFC. If the compensation is paid and the demand made by ABL is, to that extent, satisfied, there will be no occasion to enforce the guarantee given to ABL by AMFL.

Associate:

Dated:    20 December 2010