Federal Court of Australia

Hakea Holdings Pty Ltd v McGrath (No 2) [2022] FCA 995

ORDERS

THE COURT ORDERS THAT:

1.    By 9 September 2022, the parties bring in agreed draft orders or, if not agreed, competing draft orders, giving effect to these reasons.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

YATES J:

Introduction

1    This proceeding was commenced in the Supreme Court of New South Wales (the Supreme Court) on 24 April 2017 by the filing of a Commercial List Statement. The plaintiff, Hakea Holdings Pty Ltd (Hakea), alleges, amongst other things, that the first defendant, Steven James McGrath, who, at relevant times, was one of its directors, breached his duties to it. The alleged breaches are connected with the construction of a residential aged care facility on property owned by Hakea at 88 – 102 Louisiana Road, Hamlyn Terrace, New South Wales (the project). Hakea claims equitable compensation, or compensation pursuant to ss 1317J and 1325 of the Corporations Act 2001 (Cth) (the Corporations Act), from Mr McGrath in respect of those breaches. It also claims interest and costs.

2    On 15 September 2017, Mr McGrath filed a Commercial List Response. Since taking that step, he has played no active role in the proceeding. On 24 April 2018, he presented a debtor’s petition. The administration of his estate in bankruptcy under the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) commenced from that date. On 21 September 2018, the Federal Circuit Court of Australia made an order that, to the extent required, leave be granted to Hakea, pursuant to s 58(3) of the Bankruptcy Act, to continue with, and take fresh steps in, the proceeding.

3    For the period 23 January 2016 to 23 January 2017, Hakea held a Directors and Officers liability insurance policy (the policy). It was a “claims made” policy: see FAI General Insurance Co Limited v Australian Hospital Care Pty Limited [2001] HCA 38; 204 CLR 641 at [64] – [68]. The second defendant, Neon Underwriting Ltd (Neon), represents the underwriters of that policy (Lloyd’s Syndicate 2468). Hakea contends that the policy responds to its claim against Mr McGrath. Hakea seeks a declaration to that effect. Neon disputes liability under the policy on various grounds.

4    Hakea joined Neon to the proceeding and, on 29 January 2019, the proceeding was transferred to this Court by order of the Supreme Court. By then, Hakea had filed an Amended Commercial List Statement which pleaded its claim against Neon. The Amended Commercial List Statement was filed in this Court on 21 March 2019 as a non-prescribed summons. On 10 September 2019, Neon filed its defence. It amended its defence on 16 March 2021.

5    The hearing of the proceeding commenced on 19 April 2021. It was adjourned part-heard on 22 April 2021. Hakea subsequently sought leave to re-open its case to rely on further evidence. This evidence was directed to the issue of whether Hakea had made a claim against Mr McGrath during the period of insurance, in accordance with the policy—a question that remains in dispute.

6    On 18 June 2021, I concluded that leave should be granted to Hakea to re-open its case: Hakea Holdings Pty Ltd v McGrath [2021] FCA 660. On 22 July 2021, I made orders formally granting leave. On 28 July 2021, I made orders for the further conduct of the hearing of the proceeding on the question of liability. The hearing proceeded on 29 September 2021.

Summary of Hakea’s case

7    In final submissions, Hakea advanced a case that Mr McGrath breached his duty to it under s 180(1) of the Corporations Act. However, in its Amended Commercial List Statement, Hakea alleged that Mr McGrath breached a number of other duties he owed to it, including fiduciary duties. This fact assumes importance because of a particular exclusion in the policy, on which Neon relies. I will return to Hakea’s pleaded case.

8    Mr McGrath’s alleged liability arises from the fact that, in addition to being a director of Hakea, he was also the sole director, shareholder, secretary, and general manager of Denham Constructions Pty Ltd (Denham). In short, he controlled Denham. On 12 October 2012, Denham entered into a contract with Hakea to design and construct the project (the building contract). However, on Hakea’s case, by 21 May 2015, Denham was either insolvent or in severe financial distress, such that it was not able to complete the project.

9    Hakea’s case against Mr McGrath is that a reasonable director in his position would or should have known that Denham’s financial difficulties prevented it from completing the project. As a director of Hakea, Mr McGrath should have informed Hakea of those difficulties and of its resulting contractual right to take the project out of Denham’s hands, without giving a notice to show cause under the building contract.

10    Hakea contends that, instead, Mr McGrath had his “head in the sand”, and made a series of representations reassuring Hakea that Denham could complete the project. Hakea says that, had it known the full circumstances, it would have: taken over the project by 22 May 2015; appointed a new builder by no later than June 2015; and completed the project by 22 December 2015.

11    Hakea says that, because of Mr McGrath’s misleading omissions and representations, it did not terminate the building contract until December 2015 and did not engage another contractor until 20 January 2016. As a consequence, the project was not finished until 30 June 2016—282 days after the original completion date. Hakea says that it suffered loss as a result of the delay and because certain rectification work was required to be undertaken.

Findings of fact

The contractual arrangements

12    The contractual arrangements relevant to the case are to be found in four written agreements.

13    The first agreement is the building contract. As I have said, this contract was entered into on 12 October 2012. It was a lump sum contract for $17,700,000.00 (excluding GST) payable in separable portions ($400,000.00 and $17,300,000.00). The terms of the contract were those in Amended AS4902—2000 General conditions of contract for design and construct.

14    Under those terms, Denham was obliged to carry out and complete the Works (as defined): cl 2.1. Denham could claim payment progressively by progress claims: cl 37.1. Payments would be made on the basis of progress certificates issued by the Superintendent (as defined): cl 37.2. The work was to be carried out and completed in accordance with a program from which Denham could not depart without reasonable cause: cl 32.

15    Denham was to ensure that the work reached practical completion by the date for practical completion. In Part A to the building contract the period of time for practical completion was specified as 74 weeks. Under a written agreement dated 6 June 2014, this was subsequently varied to 11 June 2015. Other evidence indicates that this date was extended to 1 September 2015, and later. If the Works did not reach practical completion by the date for practical completion, Denham was liable to Hakea for liquidated damages at the rate of $2,500.00 per day commencing from the date six weeks after the date of practical completion. This rate was stipulated in a written agreement dated 20 January 2014 that was entered into by Hakea and Denham to amend the building contract.

16    Denham was obliged to rectify defects in accordance with written directions from the Superintendent. If failures were not made good, Hakea could have the work carried out by others, with the certified cost thereof standing as money due by Denham to Hakea: cl 29.3.

17    From June 2014, the Superintendent appointed for the purposes of the building contract was David Barry of Caverstock Group Pty Ltd (Caverstock). Mr Barry was also the project manager. In these roles, Mr Barry’s practice was to attend the building site on a weekly basis.

18    If Denham committed a substantial breach of the building contract (cl 39.2), Hakea could give Denham a notice to show cause why Hakea should not exercise its rights under cl 39.4 to either terminate the contract (cl 39.4(b)) or take out of Denham’s hands the whole or part of the work remaining to be completed (in which case, Hakea could also suspend payment under the contract) (cl 39.4(a)).

19    Clause 39.11 provided, relevantly:

39.11     Insolvency

If:

(a)         a party informs the other in writing, or creditors generally, that the party is insolvent or is financially unable to proceed with the Contract;

(b)    execution is levied against a party by a creditor;

…

then, where the other party is:

(A)    the Principal, the Principal may, without giving a notice to show cause, exercise the right under subclause 39.4(a); …

20    These rights and remedies were expressed to be additional to any other rights and remedies. Further, they could be exercised notwithstanding that there had been no breach of contract.

21    As I have noted, on Hakea’s case, had Mr McGrath acted as a reasonable director, the rights and remedies given by cl 39.11 could have been exercised by it from on or around 22 May 2015.

22    The second agreement was a loan agreement, which was entered into by Hakea (as borrower) and Stevden Properties Pty Limited (Stevden) (as lender) on 16 April 2013. Denham was also a party to this agreement. Mr McGrath was Stevden’s sole director and secretary.

23    Under the loan agreement, Stevden agreed to advance $2,000,000.00 (the principal amount) to Hakea, which was payable on the date of practical completion referred to above: cl 1.3(a). Clauses 1.3(b) – (c) provided that, if Stevden failed to advance the principal amount, Hakea could set-off the principal amount from the separable portion of $17,3000,000.00 payable to Denham under the building contract.

24    The written agreement of 20 January 2014 referred to above also provided that Hakea was not required to pay progress claims to Denham where the remaining value of the contract sum was equivalent to the principal amount of the loan. This was expressed to be for the purpose of assuring payment of the principal amount by Stevden: cl 3.1.1.

25    The third agreement was a shareholders agreement, which was entered into by a number of parties, including Hakea and Stevden, on 7 May 2013. Under that agreement, Stevden agreed to advance $2,000,000.00 to Hakea as a shareholder loan, for which it would be issued 196 shares, representing 16.33% of all shares on issue. Stevden was also entitled to appoint a director. It appointed Mr McGrath. Clause 5.3 of the shareholders agreement provided that Stevden was not obliged to pay this loan until the date of practical completion under the building contract—reflecting the arrangements under the loan agreement to which I have referred.

26    The shareholders agreement contained a broadly expressed provision that forbade each shareholder from using Confidential Information in a way that damaged, or was reasonably likely to damage, Hakea and certain others: cl 4.1(c). The expression Confidential Information was defined in cl 1.1 of the shareholders agreement in very wide terms:

‘Confidential Information’ means the information, forms, specifications, processes, statements, formulae, trade secrets, drawings and data (and copies and extracts made of or from that information and data) concerning:

(a)    the operations and dealings of the Company, the Operator or the Business and a Shareholder;

(b)    the organisation, finance, customers, markets, suppliers, intellectual property and know-how of the Company, the Operator or the Business and a Shareholder and of a Related Body Corporate of the Company or the Operator or the Business and a Shareholder; and

(c)    those operations and transactions of a Shareholder concerning Company, the Operator or the Business and that Shareholder’s shareholding in the Company, which is not in the public domain, except by the failure of a party to perform and observe its covenants and obligations under this document and which has been obtained through or by being a member of the Company about the Company or the operations or activities of the Company.

27    The expression Related Body Corporate was defined in cl 1.1 by reference to s 50 of the Corporations Act.

28    The shareholders agreement also contained a provision that required the Board to: use its best endeavours to procure that Hakea prepare and provide management information and reports to its directors; and make available to all directors all information concerning the Business (being, relevantly, the construction and conduct of the aged care facility at Hamlyn Terrace): cl 8.6.

29    As I discuss below, Hakea contends that the effect of these provisions was to place Stevden under a contractual obligation to provide information to Hakea and the directors concerning Denham’s financial affairs that were relevant to the construction of the project, as that information became available. It contends that, although Mr McGrath was not a party to the shareholders agreement, he was Stevden’s nominee and that this fact informs the content of the duties he owed to Hakea.

30    The fourth agreement was styled a Building Tripartite Deed, which was entered into by Denham (as the builder), Hakea (as the borrower), and National Australia Bank Limited (NAB) (as the lender) on 10 March 2014. Under this deed, Denham was not entitled to any payment under the building contract, and NAB was not obliged to make any payment to Hakea or Denham, for plant or materials onsite and unfixed until Denham demonstrated to the Quantity Surveyor’s satisfaction (being a quantity surveyor appointed or approved by NAB) that the plant or materials had not been unreasonably ordered and delivered in advance of the program under the building contract: cl 8.5(a).

31    The quantity surveyor appointed for the purposes of the Building Tripartite Deed was Slattery Quantity Surveying (Slattery). Slattery produced monthly progress reports in support of Denham’s payment claims. These reports are referred to below.

The progress of the project and Denham’s declining financial position

32    The evidence establishes the following facts concerning the progress of the project and Denham’s financial position.

33    In late 2013, Denham commenced construction work on the project. When Mr Barry commenced his role as Superintendent under the building contract and as project manager in June 2014, the project appeared to him to be a typical project in its inception and progress. Denham had subcontracted the whole or the majority of the works to Denham Constructions Project Company 890 Pty Ltd (Denham 890). Mr McGrath was the sole director of this company in the period 8 December 2014 to 14 June 2015.

34    Progress on the project began to slow in the latter part of 2014 at a time when Denham began to experience difficulty meeting its taxation obligations. I note that, according to Denham’s Running Balance Account with the Australian Taxation Office (ATO), its tax liability of $115,736.34 as at 23 June 2014 had substantially increased to $1,242,969.48 as at 7 August 2014.

35    On 24 October 2014, Slattery issued Progress Report No. 16. In that report, Slattery stated:

The works are not progressing as quickly as we would have anticipated, however, the Contractor is aware of this and is pushing for more resources from its subcontractors to ensure that progress is improved to meet the required milestones. The Contractor is to issue a revised program by the end of November 2014 to show how it plans on achieving the revised Contract Completion Date of 19 June, 2015.

36    This was the first time that Slattery had made such an observation about the project. Hakea’s Chairman, Mr Pardy, read this report. He did not consider this observation to be of concern at the time because there were no other reported difficulties on site and he noted Slattery’s reference to Denham’s efforts to overcome the apparent slowdown.

37    However, unbeknown to Hakea, on 30 October 2014 Denham defaulted on a payment arrangement it had with the ATO, which required it to pay $300,000.00 as a part payment to extinguish its tax debt. The ATO regarded this default to be a serious matter. On 17 November 2014, a Case Officer recorded that Mr McGrath was requested to provide, by close of business that day, a payment proposal which addressed Denham’s capacity to pay. The ATO’s case notes record that Mr McGrath was advised that recovery action would be commenced without further notice if the ATO did not receive this information.

38    On 25 November 2014, Mr McGrath made a payment proposal to the ATO. By that time, Denham owed a tax debt of $930,311.52. The proposal was that Denham would pay $250,000.00 plus $142,731.00 by no later than the end of November 2014; $250,000.00 by 31 December 2014 or early January 2015; and the balance by the end of January 2015.

39    On 27 November 2014, Slattery issued Progress Report No. 17. In that report, Slattery repeated the observation it had made in Progress Report No. 16. Mr Pardy read this report. Once again, he did not consider that this observation raised any significant matters of concern, especially absent any indication from Mr McGrath that there were problems with the project.

40    On 2 December 2014, the ATO wrote to Denham advising that it would accept instalment payments for Denham’s, then, owed tax debt of $939,199.56 as follows: $392,731.00 on 3 December 2014; $250,000.00 on 7 January 2015; and $296,468.56 on 7 February 2015. The letter stated that Denham’s failure to meet this arrangement (and other conditions which the ATO imposed) may result in the commencement of legal action without further notice. The evidence reveals that Denham only made the December 2014 payment. The failure to make the payment for January 2015 meant that, from that time onwards, Denham was at risk that the ATO would take legal action against it, without notice.

41    On 10 December 2014, Slattery issued Progress Report No. 18. In that report, Slattery stated:

As previously reported the works are not progressing as quickly as we would have anticipated. The Contractor is aware of this but has not yet provided the Superintendent and ourselves with a copy of its revised program which was due at the end of November 2014, to show how they plan on achieving the revised Contract Completion Date of 19 June, 2015. We will provide details of our assessment of the viability of this program when we receive it.

42    Progress did not improve. On 23 January 2015, Slattery issued Progress Report No. 19. In that report, Slattery repeated its observation that works were not progressing as quickly as it anticipated. Importantly, Slattery added that the works were “running significantly behind projected cash flow”, thereby indicating that not enough resources were being spent on site.

43    On 24 February 2015, Slattery issued Progress Report No. 20. By this time, Denham had provided its revised program to indicate how it planned on achieving the revised contract completion date of 31 July 2015. However, Slattery noted that the works were still running significantly behind projected cash flow.

44    In around March 2015, Denham began to fall significantly behind schedule. Mr Barry reported this fact to Mr Pardy in March 2015. He referred to it as “a concerning lack of construction activity on the site”. According to Mr Barry, this was reflected in the payment claims submitted by Denham in March and April 2015. Mr Barry’s evidence was that, for the size of the project, a competent contractor in Denham’s position would be expected to complete more than $1,500,000.00 worth of work per month in the middle of the project. However, the value of work completed by Denham in the March and April 2015 claim periods was assessed as $370,863.33 and $274,920.22, respectively.

45    Mr Barry said that, at this time, he not only observed a significant drop in the work activity on site, but also a significant drop in the attendance on site by subcontractor employees.

46    On 20 March 2015, the ATO gave a statutory notice to Australia and New Zealand Banking Group Limited (ANZ) under s 260-5 of Sch 1 of the Taxation Administration Act 1953 (Cth) (a statutory garnishee notice) requiring it to deduct money to the value of $890,114.61 from any account held by Denham with the bank and to pay that money to the Commissioner of Taxation. Hakea contended that the giving of this notice constituted execution being levied against Denham by a creditor, thereby triggering Hakea’s rights under cl 39.11(b) of the building contract, which included its right to take out of Denham’s hands the whole or part of the work remaining to be completed. Hakea contended that a reasonable director in Mr McGrath’s position would have been familiar with the importance of cl 39.11 of the building contract and would have told Hakea about these matters.

47    Mr McGrath knew about the garnishee notice shortly after it was given because, on 24 March 2015, he contacted the ATO and discussed it with a Case Officer. Also on 24 March 2015, a solicitor acting on behalf of Denham contacted the ATO and requested that the garnishee notice be lifted so that Denham could pay its employees. The ATO’s case notes record that, at that time, Denham had a taxation debt of $1,786,144.32. Importantly, when asked when Denham’s taxation debt could be paid in full, the solicitor advised that the debt could not be paid in full, although Denham could make an immediate payment of $100,000.00. The solicitor also advised that Denham wanted to set up a further payment plan. The request to lift the garnishee notice was refused.

48    On about 23 March 2015, Denham transferred all its employees to another company then called DCPC 760 Pty Ltd (Denham 760). Although internal correspondence within the Hakea Group (written by Mr McGrath) refers to this change as “restructuring the company for efficiencies and the future direction of the company with respect to development alliances”, the timing of this change is conspicuous as it coincides with the ATO’s issue of the garnishee notice on ANZ and Denham’s stated inability to pay its employees from that account because of that notice.

49    I also note that, on 23 March 2015, Denham raised an invoice (Invoice No 890-21) on Hakea for Progress Claim No. 21, requesting payment into Denham’s account with ANZ. However, on 20 April 2015, Denham raised an invoice (Invoice No 890-22) on Hakea for Progress Claim No. 22—this time requesting payment into Denham’s account with Commonwealth Bank of Australia (CBA). I infer that this request was made to avoid the consequences of the statutory garnishee notice given to ANZ.

50    On 26 March 2015, Slattery issued Progress Report No. 21. This report repeated the observations made in Progress Report No. 19 and Progress Report No. 20, noted above.

51    It appears that, following the approach to the ATO on 24 March 2015, Denham made a payment offer to the ATO which involved a lump sum payment being made in late June 2015 from funds sourced from an anticipated finance facility, with further (unspecified) instalment payments being made at some later time. The ATO’s case notes record that “no set amount” for the lump sum payment was provided, and the amounts for the instalments were “not stipulated”. The case notes also record that, by 21 April 2015, Denham’s tax debt would escalate to $1,891,498.80. The case notes further record that Denham had defaulted in payment arrangements on a number of previous occasions. The notes state:

The offer is not clear and definite and without the supporting financial information requested cannot be determined if the business is viable to enter into a payment plan and/or clear the debt within a timeframe acceptable to the ATO.

52    On 13 April 2015, the ATO sent a letter to Denham rejecting the offer. The letter stated:

…

We have fully considered your offer but we are unable to agree to it in its current form.

We are unable to assess the viability of entering into an arrangement as the following information has not been provided.

•    a proposal to pay all amounts owed to us in the shortest possible timeframe, while allowing all future tax obligations to be met by the due date

•    the most recent statement for each bank of financial institution account held

•    the following documents for the year to date and the two preceding financial years

₋    detailed profit and loss statement or statement of financial performance

₋    detailed balance sheet or statement of financial position

•    details of any overdraft or loan facilities, including term loans, hire purchase and leasing facilities (include the balances owing, the monthly repayment amount for each debt commitment and the limit for overdraft/s)

•    aged creditors listing

•    aged debtors listing

•    any other relevant information which may assist us in assessing your proposal

53    Therefore, the position by this time was that Denham could not pay its considerable tax debt in full, and the ATO had rejected its offer to pay that debt by instalments. The ATO’s case notes show that, on 13 April 2015, the decision had been taken to issue a demand to Denham under s 459E of the Corporations Act.

54    On 14 April 2015, a creditor of Denham 890 obtained a garnishee order from the Local Court of New South Wales at Newcastle for the sum of $82,618.77. The order named Denham as the garnishee. Hakea contends that the issue of this order was a separate event triggering cl 39.11 of the building contract.

55    On 14 April 2015, the ATO issued a garnishee notice to Denham in respect of Mr McGrath’s personal tax debt of $1,013,349.00.

56    On 21 April 2015, Slattery issued Progress Report No. 22. In that report, Slattery stated:

As previously reported the works are not progressing as quickly as we would have anticipated with the cash flow running majorly behind schedule. The Contractor is aware of this and is now revising the recently released program of works. This will indicate how it plans on achieving the revised Contract Completion Date of 12 August, 2015.

We have not as yet seen this revised program and we have serious concerns regarding the Contractors (sic) ability to meet the current Contract Completion Date.

57    On 28 April 2015, the ATO wrote to Denham noting that it may not have met its superannuation guarantee obligations for the period 1 October to 31 December 2014.

58    On 4 May 2015, a Deputy Commissioner of Taxation issued a demand to Denham under s 459E of the Corporations Act for the amount of $1,812,615.05. The evidence shows that, in the period 6 May 2015 to 20 November 2015, 13 further statutory demands were issued on Denham by other creditors.

59    On 6 May 2015, Mr Barry received a Notice of Delay from Denham under cl 34.2 of the building contract for the period from 24 February to 29 May 2015 (94 days). The notice was sent by Neil Nguyen, Denham’s Project Director. The cause for the delay was attributed to:

Relocation of Existing Authority Services on Louisiana Road

60    Throughout May 2015, Mr Pardy was becoming concerned about the delay to the progress of the project. On 20 May 2015, he sent an email to Mr McGrath raising the question of a new revised date for practical completion, which Denham had proposed as 13 October 2015. In his email, Mr Pardy said:

…

Revised Date for Practical Completion

Neil has prepared a revised critical path (attached for clarity) which is looking at a revised date for practical completion on or about 13 October 2015.

I think where we are before the revised critical path was a practical completion date of about 3 September 2015.

From my perspective, the real issues taking us to 13 October 2015 is the Louisiana Road upgrade, contractor problems, and re-energising the project with tradies.

Neil has issued, and I don’t think you were across this when we spoke, five claims for principal delays totalling $1,964,000.00. I know this is a defensive strategy under the Construction Contract.

In the relationship, I know that neither of us want these issues addressed by reference to the technicalities of the Contract.

The Way Forward

I would like a revised date for practical completion agreed between us. I would like to bring the 13th October 2015 back to 30 September 2015 – but I am happy to discuss.

My concern here is that I want Hakea to get a three month run at getting residents in before Christmas. If we can’t do it by 30 September 2015 – then we can’t – but I want to discuss it with you.

…

61    It seems that Mr Pardy and Mr McGrath discussed this email that evening. On 21 May 2015, Mr McGrath sent an email to Mr Pardy in which he attributed the previous delays in the project to five matters, identified in the email as:

A.     Nurse call and subsequent changes

B.    FF&E

C.    Ongoing changes to Design

D.    Dementia location

E.    Kitchen and Laundry changes

62    In his email, Mr McGrath also acknowledged a delay caused by a plastering contractor. He said, however, that:

… a new contractor has been appointed and the project has been flooded with staff and the delay has been nearly fully recovered.

63    Mr Pardy accepted Mr McGrath’s explanation for the delays in the project. Conspicuously, Mr McGrath’s email made no reference to Denham’s obvious financial difficulties at this time, including the fact that the ATO’s statutory demand had been made.

64    Hakea contends that this was the last point at which a reasonable director, in Mr McGrath’s position, should have known, and should have informed Hakea, that it (Hakea) had the power under cl 39.4(a) to take the Works out of Denham’s hands. Hakea contends that Mr McGrath should have known, and should have informed Hakea, that this power had been triggered as a result of execution being levied against Denham and because, by this time, Denham was insolvent or financially unable to proceed with the building contract: see cl 39.11(a).

65    Hakea contends, further, that, by his email of 21 May 2015, Mr McGrath represented that Denham could complete the works by 13 October 2015.

66    Mr Barry’s evidence was that there was an increase in activity on the site in June 2015 compared to previous months, but not to the level that he would have expected for that period of the project. Progress Report No. 24 issued by Slattery on 23 June 2015 noted:

The Superintendent has informed us recently that trade numbers on site has increased in the last two weeks, particularly in regards to the partitioner, indicating that the Contractor is beginning to make efforts to get back on track.

67    The report also stated:

We have been advised the current construction programme currently shows a completion date of 15 October, 2015. This is significantly beyond the current Practical Completion (PC) date of 1 September, 2015. The revised construction programme date is based on the estimated additional time that it will take to complete services relocation works associated with the road widening works. The Superintendent is currently reviewing the impact of this in terms of time and costs. Once the Superintendent has completed his review we will comment further on this.

68    Despite the increase in activity on site in June 2015, progress on the project soon slowed again.

69    Hakea relies on an expert report prepared by Tamara Lindsay, a Chartered Accountant and forensic accountant. Ms Lindsay was initially asked to opine on whether, and if so when, Denham was insolvent. She was also asked to opine on whether, and if so when, Denham first showed obvious signs of severe financial distress that would/could affect its operations.

70    Ms Lindsay was not able to ascertain whether, in fact, Denham was solvent or insolvent as at 30 June 2015, because she did not have all the necessary financial information to make that assessment and because the financial information she did have was, in her view, likely to be inaccurate. However, by reference to a table listing indicia of insolvency, and by reference to certain documents provided to her, Ms Lindsay did express the opinion that, by 30 June 2015, Denham was experiencing “severe financial distress”. This fact is not disputed.

71    On 23 July 2015, Mr McGrath sent an email to Mr Barry (with a copy to Mr Pardy and others including Mr Nguyen from Denham) seeking a meeting “to discuss [the] program and risks to the project”.

72    A meeting was held on 30 July 2015 at Caverstock’s office in Sydney. Mr Pardy and Mr Christopher Di Losa (one of Hakea’s directors) attended on behalf of Hakea. Mr McGrath and Mr Nguyen attended on behalf of Denham. Others were in attendance.

73    At the meeting, Mr Pardy asked:

Why have there been continuing delays on the project? What are the problems?

74    Mr McGrath responded:

There have been some disputes with trade subcontractors, however, these disputes have now been resolved. Subject to extensions of time that may be required in the future, we will meet the revised program that we have prepared.

75    A revised program from the project was tabled, with a date of practical completion of 17 November 2015. When asked whether the revised date of 17 November 2015 could be met, Mr McGrath said that it could. Mr Pardy expressed his preference for a completion date of 30 October 2015.

76    On 3 August 2015, Mr McGrath sent an email to Mr Pardy. In that email, Mr McGrath thanked Mr Pardy for the meeting, which Mr McGrath described as “a productive session identifying ALL project risks for both Hakea and Denham”. (Original emphasis.) Once again, conspicuously, Mr McGrath made no reference to Denham’s financial difficulties.

77    On 27 August 2015, at a meeting of Hakea’s directors, Mr McGrath said:

Denham will meet the current program. Hakea should be able to commence its fit out by 30 October 2015.

78    On 26 October 2015, Mr McGrath sent an email to Mr Pardy and Donald Ross (also one of Hakea’s directors) concerning delays to the project. Mr McGrath said:

I have spoken with Neil pash and Neil n

They are resolving site resources now and have it ramped up within the week or so

If the project is delayed its denham fault and the provisions of the contract should apply In terms of delay costs …

(As in original.)

79    On the evening of 27 October 2015, Mr Pardy had a telephone conversation with Mr McGrath. The conversation concerned Stevden’s loan of $2,000,000.00 that was to be made under the loan agreement. Mr McGrath informed Mr Pardy that he expected to make a “contribution” of $500,000.00 within the next 10 days, but that the balance of $1,500,000.00 would be funded by way of set off against the contract sum: see [23] above. In the course of that conversation, Mr Pardy asked Mr McGrath about unpaid trade creditors. Mr McGrath said that there was a dispute with two trade creditors. However, unpaid trade creditors would not operate to prevent the ramp up which, Mr McGrath had previously said, would occur within the week or so.

80    By October 2015, there was minimal activity on site and, by early November 2015, all substantive work on the project had ceased.

81    On 4 November 2015, Mr Pardy circulated an email to those who were to attend a meeting with representatives of Denham on 5 November 2015. In that email, Mr Pardy said (with respect to the revised program that Denham had submitted on 30 July 2015):

It is clear that the last 4 months has seen an inability in Denham’s (sic) to perform the project at the ramped up scale required of them under the Revised Program.

82    In cross-examination, Mr Ross confirmed that, prior to 5 November 2015, he and some of the other directors of Hakea had been discussing the fact that Denham was having liquidity problems. On 18 September 2015, an article appeared in The Canberra Times under the headline: Subcontractors seek assurances from Bupa for work on Canberra aged care facility. The article said:

A peak body that represents subcontractors says some Canberra businesses are collectively owed hundreds of thousands of dollars in certified claims by builders Denham Constructions.

83    The article continued:

Subcontractors’ Alliance spokesman Les Williams said Canberra businesses, in a variety of trades, that are owed money for work on the project had urged Bupa to take action against Denham Constructions in a bid to secure payment.

Correspondence with Bupa, shown to Fairfax Media, show the international healthcare group had been told that the builder had set up a shelf company, Denham Construction Project Company 940 Pty Ltd, to engage subcontractors.

Businesses feared this company could then be folded and they would be left out of pocket.

Subcontractors asked Bupa to not release further funds to the builder and the money instead be used to directly pay businesses that had been put under financial stress as a result of the disputes.

84    A link to the article was circulated by Mr Watson (one of Hakea’s directors) to Mr Pardy, Mr Ross, Mr Di Losa, Mr Pearse and Mr Yeo (who were also directors of Hakea) on 28 October 2015. Mr Pardy said in cross-examination that he discussed this article with them.

85    At the meeting on 5 November 2015, which involved representatives from Hakea, Denham, and Caverstock, the representatives from Denham (Neil Pash and Neil Nguyen) disclosed, for the first time, that Denham had liquidity problems. The minutes of that meeting record that:

1    The meeting had been requested by Hakea to understand the delays that are occurring with the completion of the project at Hamlyn Terrace.

2    Neil Pash advised that Denhams had been suffering from lack of liquidity and this had impacted on the project. He stated that he hadn’t been involved as he had been completing a project in ACT.

3    Neil Nguyen confirmed that the subcontractors would not return to the job because they had not been paid.

4    Neil Pash advised that Steve McGrath was in the process of fixing the liquidity problem and that he had been advised that funds would be available on 16 November 2015. On that basis the payment issue would be rectified and the site should start to ramp up by the following week.

5    Neil Pash was asked whether Denhams would be able to complete the project. Neil stated that they could based on the liquidity issue being rectified. Neil confirmed that Steve McGrath has agreed to compensate Hakea $85k for costs (bank finance issue) incurred with the delays which had been caused by Denham. Neil further stated that he and the executive could not comment any further as the funding issue was being addressed by Steve who owns and controls the business.

6    Based on funding occurring as in point 4 Neil Nguyen stated that the project would be completed by March 2016. Neil was asked if this could be fast tracked. He stated that it could by paying subcontractors on a fortnightly basis and working weekends. He stated that the subcontractors are long term contractors and they just wanted payment.

7    A program was tabled and the representatives from Caverstock viewed the program.

8    Neil Nguyen advised that he would issue the program to Caverstock by the next day.

9    The delay for the construction of the right hand turn lane into the property from Lousianna Rd was discussed. Neil Nguyen advised that NBN wanted $60,000 upfront to process the application and Denhams didn’t have the money and this was the reason that the relocation application for the fibre cable had not been proceeded.

10    It was suggested that if Hakea was aware of this issue then they could have funded the application fee to assist Denhams.

11    The representatives from Denhams made it clear that they could only make comment on the program on the basis that Steve McGrath would be providing the funding in the week of 16 November 2015.

12    The meeting closed at 12.10pm with Denhams confirming that the program would be supplied to Caverstock by the end of the week.

86    Mr Pardy said that this disclosure by Denham led him to be very concerned about its liquidity and capacity to finish the project in a timely manner. On 11 November 2015, he had a telephone conversation with Mr McGrath in which Mr McGrath said that he had “resolved the liquidity issues”; that Denham could complete the project with a $1,500,000.00 set off; and that Denham would reimburse Hakea for the interest that Hakea was incurring under its facility with NAB. However, Hakea’s attempts, in the period 12 to 20 November 2015, to document Denham’s offer to reimburse interest failed.

87    As it happens, on 11 November 2015, Denham submitted Progress Payment Claim No. 29 for works completed to 31 October 2015. The claim was for $409,869.78 excluding GST. Mr Barry’s evidence is that he was surprised by the amount of the claim given the negligible activity he had observed on site for the relevant period. The claim was disproportionately large compared to other claims in respect of which there had been more activity on site.

88    Mr Barry decided to conduct a thorough site inspection and assessment of the progress of the work. He attended the site on four occasions in December 2015 to review the amount of work performed against the amount claimed in Progress Payment Claim No. 29. He also took the opportunity to check on previous items paid to Denham against the percentage of the work assessed as having been completed at that time.

89    As matters transpired, Mr Barry revalued the work that, previously, had been certified. He formed the view that Denham had over-claimed the amount of work it had completed, and that Denham had been overpaid. As a result, he certified Progress Payment Claim No. 29 for a negative amount.

90    Having failed to document Denham’s offer to reimburse Hakea for the additional interest it was incurring under its facility with NAB, Mr Pardy began the process of terminating the building contract. He instructed Mr Barry to commence looking for a replacement builder.

91    On 1 December 2015, Hakea issued a notice to show cause under cll 39.2 and 39.3 of the building contract. The notice listed a significant number of matters which Hakea regarded as substantial breaches of the building contract by Denham, including its failure to proceed diligently with the work (which, amongst other things, involved its departure from the program without reasonable cause or the Superintendent’s approval); its failure to respond to correspondence and requests from Hakea and the Superintendent concerning the progress of the work; its misrepresentation as to the progress of the work; and its submission of a materially deficient program for the work. The notice stated that, based on these matters, Hakea had formed the view that Denham was no longer ready, willing, and able to perform the building contract.

92    On 2 December 2015, Denham issued a notice of dispute under cll 41.1 and 42.2. On 9 December 2015, it attempted to show cause in response to the notice that Hakea had served. Its attempt did not satisfy Hakea. On 10 December 2015, Hakea issued a letter of termination under cl 39.4 and terminated the contract.

93    Given the time of year, it was difficult for Hakea to contact builders to discuss working on the project. However, in the latter part of January 2016, Hakea engaged Insight Building Services Pty Ltd to complete the project under a Construction Management Agreement. The project reached practical completion on 30 June 2016.

94    On 1 September 2016, the Supreme Court made an order that Denham be wound up.

95    Mr Pardy gave evidence that had he been informed at any time after the building contract had been entered into that Denham was in severe financial difficulty, or was insolvent, he would have immediately commenced steps to terminate the building contract or, if the contract could not be terminated, to exercise such other rights as Hakea may have had to take the work out of Denham’s hands and procure another builder to complete the work. He said that he did not discover that Denham was in severe financial distress, or insolvent, until sometime after March 2016.

96    The other directors of Hakea gave similar evidence. Mr Ross (who was also Hakea’s Managing Director at all relevant times), Mr Di Losa, Mr Pearse, and Mr Watson each said that had he been informed at any time after the building contract had been entered into that Denham was in severe financial difficulty, or was insolvent, he would have immediately recommended that Hakea terminate the building contract and procure another builder to complete the work. Each said that he did not discover that Denham was in severe financial distress, or insolvent, until sometime after March 2016.

The pleaded claims against Mr McGrath

97    In its Amended Commercial List Statement, Hakea alleges that, on 15 July 2013, Mr McGrath became one of its directors and the Deputy Chairman of its board. Hakea alleges that Mr McGrath owed it fiduciary duties to: act in its best interests; not to make improper use of his position as a director to gain an advantage for himself or Denham or to cause detriment to it; and to avoid a conflict between his personal interests and his duties to it. These duties included a duty to make full and complete disclosure to Hakea about all material information of which Mr McGrath was aware that could impact on Denham’s ability to perform its obligations under the building contract, including information about its true financial position (referred to as the Duty of Disclosure).

98    Hakea alleges that by misleading it, and failing to disclose Denham’s true financial state, Mr McGrath breached these fiduciary duties. It also alleges that Mr McGrath breached the statutory duties imposed on him by ss 180(1), 181(1), and 182(1) of the Corporations Act.

99    Section 180(1) of the Corporations Act provides:

(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.

Note:    This subsection is a civil penalty provision (see section 1317E).

100    Section 181(1) provides:

(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.

Note 1: This subsection is a civil penalty provision (see section 1317E).

Note 2: Section 187 deals with the situation of directors of wholly-owned subsidiaries.

101    Section 182(1) provides:

(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.

Note:     This subsection is a civil penalty provision (see section 1317E).

102    Hakea’s allegations are developed in other paragraphs of its Amended Commercial List Statement by reference to a series of pleaded representations and omissions.

103    First, Hakea alleges that, in his email of 21 May 2015 (see [61] – [65] above), Mr McGrath represented that Denham could complete the works by 13 October 2015 (referred to as the May Email Representation). Hakea alleges that, at the time of the May Email Representation, Denham was insolvent, or suffering severe financial distress, and that Mr McGrath had no reasonable basis for representing that Denham could complete the works by 13 October 2015.

104    Secondly, Hakea alleges that, at the July meeting referred to in [71] – [75] above (the Amended Commercial List Statement alleges that the meeting was held on 31 July 2015, but Mr Pardy’s evidence was that the meeting was held on 30 July 2015), Mr McGrath represented that the issues with the trade subcontractors that Denham had been experiencing on the project had been resolved and that, subject to extension of time claims that Denham had made, Hakea could expect practical completion of the project by 17 November 2015 (referred to as the July Meeting Representations). Hakea alleges that, at the time of this meeting, Denham’s issues with its trade subcontractors had not been resolved. It alleges, further, that Denham was insolvent or suffering from severe financial distress and that Mr McGrath had no reasonable basis for making a representation that Denham would complete the project by 17 November 2015.

105    Thirdly, Hakea alleges that, at the meeting of its directors on 27 August 2015 (see [77] above), Mr McGrath represented that Denham could complete the project by 17 November 2015 (referred to as the August Meeting Representation). Hakea alleges that, at the time of the August Meeting Representation, Denham was insolvent or suffering financial distress and that Mr McGrath had no reasonable basis for representing that Denham could complete the project by 17 November 2015.

106    Fourthly, Hakea alleges that, in his email of 26 October 2015 (see [78] above), Mr McGrath represented that the issues that had been experienced on the site would be resolved within a week and that Denham could complete the project within a reasonable time (referred to as the October Representations). Hakea alleges that, at the time of the October Representations, Denham was insolvent or in severe financial distress and Mr McGrath had no reasonable basis for making a representation that the issues that had been experienced on-site would be resolved within a week and that Denham could complete the project within a reasonable time.

107    Fifthly, Hakea alleges that, at the meeting on 5 November 2015 (see [85] above), Mr McGrath caused or procured Denham’s employees to represent that: Denham was suffering from a lack of liquidity which was impacting the project; Mr McGrath was in the process of fixing those liquidity issues; the liquidity issues would be fixed within two weeks; and if the liquidity issues were fixed, Denham could complete the project by March 2016 (referred to as the November Representations). Hakea alleges that, at the time of the November Representations, Denham was insolvent or in severe financial distress and that Mr McGrath had no reasonable basis for making the November Representations.

108    Sixthly, Hakea alleges that, between March and October 2015, it paid a total of $3,386,232.38 to Denham for the purposes of the project (referred to as the Project Moneys). It alleges that all or most of this money was not used for the purposes of the project, and was subsequently lost to the plaintiff.

109    Hakea then alleges that, at no time prior to the termination of the building contract in December 2015, did Mr McGrath inform it that: Denham was insolvent or suffering severe financial distress; Denham’s insolvency or financial distress would or was very likely to prevent it from delivering the project; the Project Moneys or some of them had not been used for the purposes of the project; or that the Project Moneys or some of them were unlikely to be used for the purposes of the project in the future (referred to as the Financial Distress Omissions).

110    Hakea alleges that, in reliance on: the May Email Representations; the July Meeting Representations; the August Meeting Representation; the October Representations; and the November Representations—all of which were misleading representations—and by reason of the Financial Distress Omissions, it did not terminate the building contract but, instead, paid the Project Moneys to Denham.

111    Hakea alleges that, at the time that Denham became financially distressed or insolvent, Mr McGrath’s personal interests in Denham, and his duties as a director of Denham, came into conflict with the duties he owed Hakea as a director, including in respect of his Duty of Disclosure (which required him to disclose Denham’s true financial position to Hakea, even though his duties to Denham required him not to make that disclosure).

112    Hakea alleges that, by making these representations, and through the Financial Distress Omissions, Mr McGrath breached his fiduciary duties. The particulars of this allegation are important. They include the particulars that Mr McGrath preferred his personal interests over his fiduciary duties and that he sought to obtain an improper advantage for himself (through his interest in Denham) and for Denham. This is clearly an allegation involving deliberate conduct by Mr McGrath to obtain a personal advantage. Conspicuously, this and other similar aspects of Hakea’s pleaded case, were not pressed when Hakea opened its case on the first day of the hearing.

113    As to Mr McGrath’s statutory duties, Hakea alleges that, by making the representations, and through the Financial Distress Omissions, Mr McGrath failed to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise if that person were a director and Deputy Chairman of Hakea, in breach of the duty imposed by s 180(1) of the Corporations Act.

114    Importantly, Hakea alleges that, by making the representations, and through the Financial Distress Omissions, Mr McGrath failed to exercise his powers and discharge his duties in good faith in the best interests of Hakea and for a proper purpose, in breach of the duty imposed by s 181(1) of the Corporations Act.

115    Equally importantly, and with reference to the matters summarised above concerning Mr McGrath’s alleged breaches of his fiduciary duties, Hakea alleges that Mr McGrath improperly used his position as a director of Hakea to gain an advantage for himself and to cause detriment to the plaintiff, in breach of the duty imposed by s 182(1) of the Corporations Act. The particulars of this allegation include the claim that, through his position as a director of and shareholder in Denham, Mr McGrath stood to benefit personally from Hakea not terminating the building contract because of Denham’s insolvency or financial distress, and that Mr McGrath thus stood to benefit from his own failure to disclose those matters to Hakea. This is also an allegation of deliberate conduct by Mr McGrath.

116    Hakea alleges that, because of these various breaches, it lost the opportunity to terminate the building contract and engage another builder to complete the work at an earlier time, and that it lost some or all of the Project Moneys.

117    Mr McGrath filed a response to Hakea’s Commercial List Statement. He did not file a response to Hakea’s Amended Commercial List Statement. However, Hakea’s allegations against Mr McGrath in its Amended Commercial List Statement are, in substance, the same allegations it made against him in its unamended pleading.

118    In respect of:

(a)    the May Email Representation – Mr McGrath admits that he made the representation, but says that the representation that Denham could complete the works by 13 October 2015 was conditional on responses being received from the Superintendent in respect of notices of delay submitted by Denham on 1 December 2014, 30 April 2015, and 6 May 2015.

(b)    the July Meeting Representations – Mr McGrath admits that he represented that, subject to extension of time claims made by Denham in accordance with the building contract, Hakea could expect practical completion of the project by 17 November 2015.

(c)    the August Meeting Representation – Mr McGrath admits that, on 27 August 2015, during a meeting attended by the board members of Hakea, he represented that Denham could complete the project by 17 November 2015, but this was conditional on responses being received from the Superintendent to the notices of delay.

(d)    the October Representations – Mr McGrath admits that he made the representations that the issues that had been experienced on the site would be resolved within a week, and that Denham could complete the project within a reasonable time, but this was conditional on responses being received from the Superintendent to the notices of delay.

(e)    the November Representations – Mr McGrath denies that he had caused or procured Denham’s employees to make these representations. I note, however, that he does not deny that the representations were made.

119    Mr McGrath denies that, at the time he made the May Email Representation, the July Meeting Representations, the August Meeting Representation, and the October Representations, Denham was insolvent or in severe financial distress and that he had no reasonable basis for making the representations. Similarly, in respect of the November Representations, Mr McGrath denies that, at the time those representations were made, Denham was insolvent or in severe financial distress and that he had no reasonable basis for making the representations.

120    Mr McGrath denies that all or most of the Project Moneys were not used for the purposes of the project, and were subsequently lost to the plaintiff.

121    In respect of the alleged Financial Distress Omissions, Mr McGrath does not dispute that he did not inform Hakea of the matters alleged. Mr McGrath does not plead to Hakea’s allegations that he breached his fiduciary and statutory duties as a director.

122    In its Amended Defence to the Amended Commercial List Statement, Neon denies that the May Email Representation and the October Representations were made, and does not admit that the July Meeting Representations, the August Meeting Representation, and the November Representations were made. Neon does not admit the allegations concerning Denham’s financial position at the time the alleged representations were made.

123    With respect to Hakea’s allegations concerning Mr McGrath’s fiduciary duties not to obtain any unauthorised benefit from his position as a director of Hakea, and not to be in a position of conflict, Neon pleads that Hakea was in a position to release Mr McGrath from his duties, and impliedly did so. Neon denies that Mr McGrath breached his fiduciary duties to Hakea. It does not admit that Mr McGrath breached his statutory duties as a director of Hakea.

The opening submissions on Mr McGrath’s liability

124    When opening their respective cases, Hakea and Neon refined their positions by departing significantly from their respective pleadings concerning Mr McGrath’s alleged breaches.

125    In oral opening submissions, Senior Counsel for Hakea, Mr Withers, said that Hakea’s main focus was Mr McGrath’s alleged breach of his duty under s 180(1) of the Corporations Act, which was “a very clear case”. As Mr Withers put it:

So what we say … is that this is a very clear case of breach of directors’ duties. Mr McGrath, as a director of Hakea, was under a duty to be sufficiently involved in its management to enable him to guide and monitor, effectively, management of the company. He was required to bring an informed and independent judgment to bear on the state of affairs of Hakea, and to take a diligent interest in information available to him, to understand that information and to apply an inquiring mind into the responsibilities placed upon him.

126    As developed in the course of opening, Hakea’s case was that Mr McGrath breached his duty under s 180(1) in two ways: firstly, he failed to inform Hakea that execution had been levied against Denham (see cl 39.11(b) of the building contract), which, under cl 39.4(a), would have entitled Hakea to take the work out of Denham’s hands; secondly, he failed to inform Hakea that Denham was insolvent or financially unable to proceed with the building contract (see cl 39.11(a), which, also, would have entitled Hakea to exercise its rights under cl 39.4(a). Hakea’s case was that these breaches occurred by 21 May 2015 at the latest, and were continuing breaches.

127    Hakea distinguished between what a person in Mr McGrath’s position as a director ought to have known, and what Mr McGrath in fact knew. Hakea contended that it was clear that Mr McGrath did not know that Hakea had the right to take the work out of Denham’s hands (by reason of execution having been levied against it or because it was insolvent or financially unable to proceed with the contract). Hakea contended that Mr McGrath did not believe that Denham was insolvent or financially unable to proceed with the contract. It contended that Mr McGrath had an “obvious belief” that Denham could still complete the project, even though this was not a view that a reasonable director could hold in the circumstances. Hakea contended that Mr McGrath had his “head in the sand”. According to Hakea, he was typical of a director who did not appreciate the magnitude of the financial difficulty that his company was in and had an unjustified sense of optimism about the company’s ability to trade its way out of its situation or to obtain a lifeline from third party financiers. Hakea contended that Mr McGrath was “oblivious to the … realities that were descending upon him”.

128    In its written opening submissions, Hakea also addressed Mr McGrath’s alleged breach of his fiduciary duties to Hakea. On its case, these duties included the duty to make disclosure of all material information of which Mr McGrath ought to have been aware, that could impact on Denham’s ability to perform the building contract, including Denham’s financial position. However, as I have noted above, when referring to Mr McGrath’s other alleged breaches, including in particular the alleged breach of his fiduciary duties, Mr Withers said that Hakea did not press any case that Mr McGrath sought to pursue his own interests to Hakea’s detriment or that Mr McGrath had acted for an improper purpose.

129    Mr Withers also said that Hakea was not contending that, when representing that Denham could complete the work by certain dates, Mr McGrath was actively and deliberately trying to mislead it.

130    Thus, in opening, and when dealing specifically with the question of breach, Hakea assimilated its case that Mr McGrath had breached his fiduciary duties with its case that Mr McGrath had breached the duty imposed on him by s 180(1) of the Corporations Act. Hakea submitted that the conduct by which it claimed that Mr McGrath had failed to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise if they were a director and the Deputy Chairman of Hakea, was the same conduct that would constitute a breach of Mr McGrath’s fiduciary duties to Hakea.

131    In its oral opening submissions, Neon accepted that Denham was in severe financial distress from 21 May 2015, and at all times thereafter. It contended that Mr McGrath knew this. It submitted that the idea that Mr McGrath was, as Hakea contended, oblivious to this reality was implausible—indeed, fanciful.

132    Neon accepted Hakea’s pleaded case that:

(a)    at no time prior to the termination of the building contract on 10 December 2015 did Mr McGrath inform Hakea that Denham was insolvent or suffering severe financial distress: para 43(a) of the Amended Commercial List Statement;

(b)    Mr McGrath’s fiduciary duties included a duty to make full and complete disclosure to Hakea about all material information of which he was aware that could impact Denham’s ability to perform its obligations under the building contract, including information about its true financial position (i.e., the pleaded Duty of Disclosure): para 46;

(c)    at the time that Denham became financially distressed or insolvent (which Neon accepted was from 21 May 2015), Mr McGrath’s personal interest in Denham came into conflict with his fiduciary duties, including his Duty of Disclosure: para 47;

(d)    Mr McGrath had a personal interest, as a director of and shareholder in Denham, in Denham continuing with the project, which interest conflicted with the duty he owed to Hakea to disclose Denham’s true financial position (with the likely consequence that Hakea would terminate the building contract): para 47, and particulars to para 47; and

(e)    Mr McGrath breached his fiduciary duties to Hakea in that he preferred his personal interests over his fiduciary duties and sought to obtain an improper advantage for himself (through his interest in Denham) and for Denham: para 49, and particulars 3 and 4 thereof.

133    I have said “accepted” because this is the way in which Neon put the matter. Neon submitted that, despite the fact that, in opening, Hakea had resiled from this aspect of its pleaded case, the underlying facts with respect to the claim made on the policy could not be ignored. As leading counsel for Neon, Mr Lawrance, put it, the claim made on the policy has to be considered as a matter of substance, and that:

… ingenuity of pleading or an exercise of judicious discretion as to which causes of action to press and not press doesn’t avoid the consequence that … this claim is a claim that involved, amongst other things, what’s set out in paragraph 49 of the list statement, that is, Mr McGrath seeking to obtain an improper advantage for himself …

134    It can be seen that, in opening, Hakea’s case moved from one of conscious and deliberate wrongdoing on the part of Mr McGrath to one of negligence. On the other hand, Neon’s case moved from one that denied or put in issue the fact that Mr McGrath owed any fiduciary duties or breached any statutory duties as a director of Hakea, to one that not only embraced the fact that Mr McGrath had breached his duties, but that, in doing so, Mr McGrath acted deliberately to prefer his personal interests and to obtain an improper advantage for himself (through his interest in Denham) and for Denham.

Admissibility of Mr McGrath’s affidavits

135    In an attempt to establish Mr McGrath’s state of mind on certain matters, Hakea tendered three affidavits (two affidavits made on 30 June 2016 and one affidavit made on 4 August 2016), which Mr McGrath had made and filed in another proceeding commenced in the Supreme Court (proceeding 2016/104627). Hakea also tendered Mr McGrath’s verified Commercial List Response.

136    As to the affidavits filed in proceeding 2016/104627, Hakea argued that it tendered each affidavit not as proof of the facts asserted in it but as proof of Mr McGrath’s state of mind at the time he made the affidavit. Hakea relied on the following statement in R v Blastland [1986] AC 41 at 54, quoted with approval in Bristow v R [2020] SASCFC 91 at [96]:

It is, of course, elementary that statements made to a witness by a third party are not excluded by the hearsay rule when they are put in evidence solely to prove the state of mind either of the maker of the statement or of the person to whom it was made. What a person said or heard may well be the best and most direct evidence of that person’s state of mind.

137    Hakea relied on one of the affidavits made by Mr McGrath on 30 June 2016 to establish that, at the time he made the affidavit, Mr McGrath believed that:

(a)    the most significant financial concern for Denham was Hakea’s refusal to pay adjudication sums; and

(b)    Hakea’s failure to pay adjudication sums had the effect of cutting off the cash flow necessary for Denham to pay its subcontractors, including on projects for Hakea.

138    Hakea relied on the other affidavit made by Mr McGrath on 30 June 2016 to establish that, at the time he made the affidavit, Mr McGrath believed that:

(a)    Hakea’s termination of the building contract was invalid: and

(b)    Denham did not claim for work not actually performed.

139    Hakea relied on the affidavit made by Mr McGrath on 4 August 2016 to establish that, at the time he made the affidavit, Mr McGrath believed that Denham’s cash flow difficulties were due to the recent non-receipt of amounts owing to it.

140    Hakea’s purpose in tendering these affidavits was to establish its case that, at all relevant times, Mr McGrath believed that Denham was solvent and was entitled to carry on work under the building contract, despite the objective facts as to Denham’s financial position and what those facts would have revealed to a reasonable director in Mr McGrath’s position.

141    Hakea relied on s 60(1) of the Evidence Act 1995 (Cth) (the Evidence Act) in seeking the reception of this evidence over Neon’s objection:

The hearsay rule does not apply to evidence of a previous representation that is admitted because it is relevant for a purpose other than proof of an asserted fact.

142    However, this provision is not directed to the admissibility of a previous representation as evidence, but to the use that can be made of the previous representation once it is admitted as evidence. This use is not determined by the subjective purpose of the party in tendering the previous representation. In this provision, the word “purpose” means the purpose to which, objectively, the evidence would be put, if admitted: R v Adam (1999) 47 NSWLR 267 at [116]. The effect of the provision is to declare that the hearsay rule does not apply to admitted evidence of a previous representation.

143    Hakea submitted that Mr McGrath’s Commercial List Response was admissible insofar as it contains admissions, regardless of whether the verifying affidavit is admitted as evidence. Hakea did not identify the representations in the Commercial List Response on which it relied although, obviously, the response does contain express admissions.

144    As I understand it, Hakea also seeks to rely on Mr McGrath’s denials in the Commercial List Response that, at the time that certain pleaded representations were made, or allegedly made, Denham was insolvent, or suffering severe financial distress, and that he had no reasonable basis for making, or allegedly making, the representations in question. As I also understand it, Hakea contends that these denials represented Mr McGrath’s state of mind—that is, his belief that Denham was not insolvent or suffering severe financial distress—at the time he verified the Commercial List Response.

145    Hakea also submitted that, as a verified pleading, the Commercial List Response is an exception to the general principle that assertions in pleadings do not amount to admissions: Laws v Australian Broadcasting Tribunal [1990] HCA 31; 170 CLR 70 at 85. As to the verifying affidavit itself, Hakea submitted that a statement in an affidavit can be tendered against a party as an admission: Re Vassis; Ex parte Leung [1986] FCA 19; 9 FCR 518 at 520.

146    Neon objected to each tender. At the hearing, the parties agreed that rulings on these tenders could await the publication of these reasons.

147    There are a number of reasons why the tender of the statements in the affidavits filed in proceeding 2016/104627 should be, and will be, rejected.

148    First, Hakea supports the tender by, in effect, contending that each previous representation made by Mr McGrath with respect to an asserted fact is, equally, an implied representation of his belief in the existence of that fact, and hence evidence of his state of mind. But, if that be so (which I doubt), the tender of the previous representation must be for a hearsay purpose—to prove the existence of a fact (Mr McGrath’s belief in the asserted fact) that, on Hakea’s argument, it can reasonably be supposed that Mr McGrath intended to assert by the representation. The previous representation of belief in an asserted fact is indistinguishable from the previous representation of the asserted fact about which the belief is said to have been expressed. Both offend the hearsay rule.

149    Secondly, I doubt that the particular previous representations on which Hakea relies can stand as evidence of Mr McGrath’s “state of mind” for the purposes of s 66A of the Evidence Act:

The hearsay rule does not apply to evidence of a previous representation made by a person if the representation was a contemporaneous representation about the person’s health, feelings, sensations, intention, knowledge or state of mind.

150    If it were otherwise, the application of the hearsay rule could be avoided readily and routinely by the expedient of simply characterising a person’s previous representation of an asserted fact as a reflection of his or her “state of mind”.

151    Thirdly, and in any event, Mr McGrath’s affidavits were made well after the events to which they refer. The question of whether, at the time he made his affidavits, he had a belief in what he said concerning those events, is not a fact in issue in this proceeding. Thus, the existence of Mr McGrath’s beliefs, at those times, is not relevant: s 55 of the Evidence Act. Further, the mere existence of a belief about a fact could not, without more, rationally affect the probability of the existence of that fact. This would stand as another bar to admitting, in this case, the previous representations as evidence.

152    Fourthly, none of the previous representations on which Hakea relies is an admission for the purposes of s 81 of the Evidence Act because they are not representations that are adverse to Mr McGrath’s interest in the outcome of this proceeding, particularly having regard to Hakea’s pleaded allegations.

153    The same reasoning applies to Mr McGrath’s Commercial List Response, other than in relation to the verified express admissions it makes. I will, therefore, admit the Commercial List Response as evidence to the extent that it makes those express admissions. However, as there is no privity between Mr McGrath and Neon, Mr McGrath’s admissions will stand as evidence against him only: see also s 83 of the Evidence Act.

Mr McGrath’s liability

Hakea’s submissions

154    In closing submissions, Hakea confined its case against Mr McGrath to breach of the duty imposed by s 180(1) of the Corporations Act. This was apparent not only from the terms in which Hakea couched its written closing submissions, but also from an express acknowledgement in oral closing submissions that Hakea did not “press any fiduciary claim” against Mr McGrath.

155    The degree of care and diligence required by s 180(1) of the Corporations Act is fixed as an objective standard by reference to the corporation’s circumstances and the office and responsibilities within the corporation that the officer in question occupies. As to the latter, the officer’s responsibilities are not simply that person’s statutory responsibilities. The responsibilities extend to all the responsibilities that the officer happens to have within the corporation: Shafron v Australian Securities and Investments Commission [2012] HCA 18; 247 CLR 465 at [18].

156    Hakea submitted that the scope and content of the duty that Mr McGrath owed it, by dint of s 180(1), was shaped by Stevden’s obligations under the shareholder agreement, even though Mr McGrath was not, himself, a party to that agreement. As I noted above, Hakea contended that the effect of cl 4.1 of the shareholders agreement—which forbade Stevden from using Confidential Information (as defined) in any way that damaged or was reasonably likely to damage Hakea and certain others—was to place Stevden under a contractual obligation to provide information to Hakea and the directors concerning the financial affairs of Denham to the extent that that information was relevant to the construction of the project, and became available. Hakea contended, further, that, although Mr McGrath was not a party to the shareholders agreement, he was Stevden’s nominee as a director of Hakea, and that Stevden’s contractual obligations under the shareholders agreement inform the content of the duties that Mr McGrath owed to Hakea.

157    I should make clear at the outset that I do not find this submission to be persuasive. It is based on fundamental propositions which I do not accept or which I consider to be dubious.

158    First, Hakea contended that information as to the organisation and financing of Denham was Confidential Information (as defined) within the meaning of para (b) of the definition. It contended that this is so because Denham was a Related Body Corporate (as defined) of Stevden.

159    This contention fails because the evidence does not establish that Denham was a related body corporate of Stevden within the meaning of s 50 of the Corporations Act.

160    Secondly, Hakea contended that Confidential Information (as defined in cl 1.1) included information concerning the operations and dealings of the Business: see para (a) of the definition. Business was defined in cl 1.1 of the shareholders agreement to mean, in substance, the business of constructing and operating the aged care facility at Hamlyn Terrace and the development of further aged care facilities as determined by Hakea’s board.

161    This contention fails because, plainly, the operations and dealings of the Business do not include the operation and dealings of Denham, still less its financial affairs.

162    Thirdly, Hakea contended that Confidential Information (as defined) included information concerning the suppliers of the Business.

163    Denham was a supplier to the Business. Also, its financial affairs were, arguably, within the broad sweep of para (b) of the definition of Confidential Information as information “concerning” a supplier. However, Hakea’s submission relies on the further contention that Stevden’s negative contractual obligation under cl 4.1(c) of the shareholders agreement not to “use” Confidential Information imported a positive obligation on Stevden to “disclose” information to Hakea concerning Denham’s financial circumstances. In my view, that construction of cl 4.1(c) is doubtful. Further, even if Stevden’s contractual obligations under the shareholders agreement did extend this far, they were Stevden’s contractual obligations, not Mr McGrath’s contractual obligations.

164    All in all, I do not see how Hakea’s reliance on Stevden’s contractual obligations as a shareholder under the shareholders agreement shapes, in any meaningful way, the scope and content of Mr McGrath’s duty to Hakea as a director under s 180(1) of the Corporations Act, or materially advances its case that Mr McGrath breached that duty. I would add that, apart from the fact that Mr McGrath was Hakea’s Deputy Chairman, the evidence does not disclose that Mr McGrath had any particular responsibilities entrusted to him as a director that would inform the nature of his duties in that capacity.

165    As I have also noted, in its written opening submissions Hakea addressed Mr McGrath’s alleged breach of his fiduciary duties to Hakea but, effectively, assimilated its case on breach, in that regard, with its case on breach based on the duty imposed by s 180(1) of the Corporations Act. Hakea submitted that both duties required Mr McGrath to make disclosure about all material information of which he ought to have been aware (including Denham’s financial position), that could impact on Denham’s ability to perform the building contract. Given the acknowledgement in oral closing submissions to which I have referred (at [154] above), any consideration of Mr McGrath’s possible breach of his fiduciary duties as a director of Hakea, as flagged in Hakea’s opening submissions, can be put to one side so far as Hakea’s case on breach of duty is concerned.

166    In its written closing submissions, Hakea submitted that Mr McGrath’s duty of care and diligence under s 180(1) of the Corporations Act not only obliged him to disclose to Hakea that Denham was in severe financial distress as at 21 May 2015, but also: that creditors (including the ATO) had levied execution against Denham; that, by reason of its financial position, Denham would be unable to complete the project by the agreed date of practical completion; and that, by reason of all these matters, Hakea had a right under the building contract to appoint a new contractor to take over the performance of the contract.

167    In developing these submissions, Hakea contended that a reasonable director, in Mr McGrath’s position, would have appreciated that the severe financial distress in which Denham found itself meant that it could not be assured that it would be able to pay contractors—an obligation which, Hakea submitted, was, perhaps, the most fundamental obligation of a builder under the building contract. On this basis, a reasonable director in Mr McGrath’s position would have known that Denham was unlikely to be able to procure contractors to complete the work on time, especially after 21 May 2015 when the project was already substantially behind schedule. Hakea submitted that a reasonable director would have known that this was information which it was essential for Hakea to know. It submitted that there cannot be any serious doubt that Mr McGrath was obliged to disclose the fact that Denham was in severe financial distress. Hakea submitted that, likewise, it is beyond argument that a reasonable director in Mr McGrath’s position would have informed Hakea that Denham could not complete the building contract by the date of practical completion.

168    As to whether a reasonable director in Mr McGraths’s position, and in that state of affairs, would have informed Hakea of its contractual rights under cl 39.4, including the fact that those rights had been “triggered” under cl 39.11, Hakea submitted that a reasonable director, in Mr McGrath’s position, would have known of those provisions in the building contract. As Mr McGrath was the only director of Hakea to know that Denham was in severe financial distress, he was the only director of Hakea who would have been caused to consider Hakea’s rights and remedies in those circumstances at that time.

169    In relation to cl 39.11, Hakea submitted that Mr McGrath knew that execution had been levied against Denham, within the meaning of cl 39.11(b), when the ATO gave the statutory garnishee notice to ANZ requiring it to deduct money to the value of $890,114.61 from any account held by Denham. Hakea submitted that execution had also been levied against Denham, within the meaning of cl 39.11(b), when a creditor of Denham 890 obtained a garnishee order from the Local Court of New South Wales at Newcastle for the sum of $82,618.77, in which Denham was named as the garnishee. According to Hakea, each act constituted a separate trigger under cl 39.11(b).

170    On the question of causation, Hakea submitted that the Court would have little difficulty in accepting the unchallenged evidence of its other directors that, had they become aware of Denham’s financial incapacity to complete the project, they would have taken steps to appoint a new contractor.

171    Hakea submitted, therefore, that had it become aware of Denham’s financial incapacity to complete the project, it would have replaced Denham as the builder. On the basis of Mr Barry’s evidence, Hakea submitted that a replacement builder would have been appointed within about one month—that is, by about 22 June 2015. Hakea submitted that, had a replacement builder been appointed at that time, the project would have been completed within approximately six months—that is, by about 22 December 2015. Hakea submitted that this counterfactual is consistent with the events that actually unfolded: Hakea signed a new building contract on 22 January 2016 and the works were completed on 30 June 2016 (on its calculation, a period five months and eight days).

Neon’s submissions

172    As I have noted, in opening submissions Neon accepted that Denham was in severe financial distress from 21 May 2015, and at all times thereafter. In closing submissions, it submitted that the Court should have no hesitation in finding that by May 2015, and for the balance of that year, Mr McGrath knew that Denham’s financial situation was one of severe distress, and that he had breached his duty, under s 180(1) of the Corporations Act, in failing to disclose that fact to Hakea.

173    Neon did not accept, however, that Mr McGrath’s duty under s 180(1) required him to notify Hakea of the fact that the ATO had issued the garnishee notice to ANZ or, relatedly, that his duty under s 180(1) required him to inform Hakea of its rights under cl 39.11 of the building contract to take out of Denham’s hands the whole or part of the work remaining to be completed under the building contract pursuant to cl 39.4(a). This is because, contrary to Hakea’s submission, the garnishee notice issued by the ATO is a creature of statute. It is not based on an underlying judgment debt.

174    I observe that the upshot of this argument appears to be that the statutory garnishee notice given by the ATO was not “execution … levied against a party by a creditor” within the meaning of cl 39.11(b) of the building contract, whereas a garnishee order, based on a judgment debt, is a form of execution that, arguably, would engage the clause: see Commissioner of State Revenue v Can Barz Pty Ltd (No 2) [2017] 2 Qd R 537 at [63] and [67]. Neon also submitted that, the juridical explanation of how a statutory garnishee notice operates is not something that a reasonable director would appreciate. Hakea adduced no evidence to suggest otherwise.

175    Further, Neon submitted that, as a director of Hakea and also as a director of Denham (Hakea’s contractual counterparty), Mr McGrath was in a position of conflict in two respects: (a) his duty as a director of Denham, and (b) his personal interest as the sole director, company secretary and shareholder of Denham, were, respectively, in conflict with his duty as a director of Hakea. I understand this submission to have been advanced to support Neon’s case that Mr McGrath resolved these conflicts in his favour and that, as a consequence, his breach of duty under s 180(1) of the Corporations Act was not unwitting, as Hakea had contended.

Conclusion

176    I am satisfied that Denham was in severe financial distress as at 21 May 2015 and that Mr McGrath knew that fact. The uncontradicted evidence is compelling: see [33] – [96] above.

177    Denham’s financial distress is illustrated by its significant tax debt and its inability to discharge that debt, including its repeated failures to comply with payment arrangements it had made with the ATO. Its inability to discharge that debt led to the ATO giving the statutory garnishee notice to ANZ on 20 March 2015 and, ultimately, a Deputy Commissioner of Taxation issuing the statutory demand on Denham under s 459E of the Corporations Act on 4 May 2015.

178    There are other indicia of Denham’s financial distress. For example:

(a)    Denham transferred its employees to Denham 760 at the time the ATO had given the statutory garnishee notice to ANZ, and requested Hakea to make payment of progress claims into Denham’s account with CBA;

(b)    on 14 April 2015, a creditor of Denham 890—Denham’s subcontractor who, it seems, was dependent on Denham for funds—obtained a garnishee order under which Denham was the garnishee; and

(c)    on 28 April 2015, the ATO wrote to Denham noting that it had not met its superannuation guarantee obligations for the last quarter of 2014.

179    The fact that Denham was experiencing severe financial distress at around this time is supported by Ms Lindsay’s opinion and analysis.

180    I am satisfied that this distress was the substantial reason why work on the project was not progressing as quickly as it should have been. I am satisfied that this was the substantial reason why it was necessary to extend the date for practical completion from time to time.

181    I am satisfied that, as at 21 May 2015, Denham was not in a financial position to complete the building work by 1 September 2015 (the then agreed date for practical completion) or in the reasonably foreseeable future, despite representations made by Mr McGrath to the contrary. In terms of cl 39.11(a) of the building contract, Denham was, at that time, financially unable to proceed with the contract. In March and April 2015—when, already, work was not progressing as quickly as anticipated—Mr Barry observed a significant drop in the work activity on the site, including a significant drop in attendance by subcontractors. Despite a modest increase in activity in June 2015, progress soon slowed again. By October 2015, there was minimal activity on the site and, by early November 2015, all substantive work on the project had ceased.

182    On 5 November 2015, when the representatives from Hakea, Denham, and Caverstock met, the reason for this was laid bare—Denham’s lack of liquidity had impacted on the project. Denham’s financial difficulties had been signalled by the article appearing in The Canberra Times on 18 September 2015, but the consequences of these difficulties had been in play for many months beforehand. At the meeting, it was disclosed that Denham could only complete the project if its liquidity problems were rectified. Whether its liquidity problems could be rectified was not known. What was known was that Denham’s subcontractors “would not return to the job because they had not been paid”. All that Denham’s representatives could hold out, at that time, was the nebulous prospect that Mr McGrath, who was not in attendance at the meeting, was “fixing the liquidity problem” and that he had said that funds would be available on 16 November 2015. Of course, that “fix” never came to pass.

183    I do not accept Hakea’s positive case that, as at 21 May 2015, and later, Mr McGrath was unaware of Denham’s true financial circumstances or that he was oblivious to the fact that, because of those circumstances—in particular, Denham’s liquidity problems—Denham was not in a position to complete the project in a timely fashion. I am satisfied, therefore, that Mr McGrath knew the true state of Denham’s severe financial distress as at 21 May 2015 and its inability, at that time, to complete the project in a timely fashion.

184    I am also satisfied that Mr McGrath deliberately did not disclose these facts to Hakea at that, or at any later, time. Of all the directors of Hakea, Mr McGrath was uniquely placed to know Denham’s financial position and its ability, from that perspective, to undertake and complete the work it was required to perform under the building contract. No other director had, or was in a position to have, that particular knowledge. The fact that, as at 21 May 2015, Denham was suffering severe financial distress and unable to complete the project in a timely fashion was fundamentally important information. As Hakea submitted, and which Neon does not dispute, it was information which it was essential for it to know.

185    I can think of no reason why Mr McGrath would not disclose this information to Hakea apart from, firstly, an awareness, on his part, that such disclosure would jeopardise the continuation of the building contract and, secondly, a desire to keep that contract on foot in the hope that, somehow, Denham’s financial circumstances would improve sufficiently to enable it, eventually, to complete the project. Mr McGrath was an experienced builder undertaking large projects of this kind. He must have appreciated the real possibility that, if this information was disclosed, Hakea would look to the building contract and take such steps as were available to it to either terminate the contract or replace Denham as the builder. This possibility—indeed, likelihood—is given form by the evidence of Mr Pardy, Mr Ross, Mr Di Losa, Mr Pearse, and Mr Watson to the effect that, had Denham’s severe financial circumstances been known, steps would have been taken to either terminate the contract or procure another builder to complete the work.

186    In all the circumstances, I am satisfied that, as a director of Hakea, Mr McGrath breached the duty imposed on him by s 180(1) of the Corporations Act by not disclosing, on or after 21 May 2015, that Denham was in severe financial distress and unable to complete the project in a timely fashion. Had Mr McGrath not been Denham’s sole director and shareholder but had come to know, by some means, of Denham’s financial position and circumstances as at 21 May 2015, and had failed, for whatever reason, to impart that knowledge to Hakea, I have no doubt that he would have failed to discharge his duties with the degree of care and diligence that a reasonable director, in his position, would exercise in Hakea’s circumstances. Section 180(1) of the Corporations Act does not countenance a lesser standard of care simply because Mr McGrath was also, at that time, a director of Denham.

187    My findings on the deliberateness of Mr McGrath’s failure to disclose are within the confines of Hakea’s pleaded case notwithstanding that, at the hearing, Hakea chose not to pursue its case to that extent. Whilst the finding of deliberateness is not essential to establishing Mr McGrath’s breach of duty under s 180(1) of the Corporations Act, it is relevant to Neon’s case that the policy does not respond to the losses arising from this breach.

188    Having reached my conclusion that Mr McGrath breached his duty under s 180(1) of the Corporations Act—a conclusion which Hakea urges and Neon accepts—it is not necessary for me to reach a final determination on whether Mr McGrath also breached that duty by not informing Hakea of its contractual rights under cl 39.11 of the building contract, or by not informing Hakea that execution had been levied against Denham within the meaning of cl 39.11(b). A final determination of these allegations will not affect the outcome of this case. I will, however, make the following observations.

189    As to the first proposition, I do not accept that a director of Hakea in Mr McGrath’s position, exercising the care and diligence required by s 180(1), was under a duty to provide what is, in effect, legal advice to Hakea as to its options under the building contract.

190    The same is true in respect of Hakea’s second proposition. In any event, Hakea’s second proposition is based on acceptance of its construction of cl 39.11(b)—namely that the giving of the statutory garnishee notice by the ATO was execution being levied against Denham. In my view, that construction of cl 39.11(b) is contestable. I am not persuaded, therefore, that a director of Hakea, in Mr McGrath’s position, exercising the care and diligence required by s 180(1), would be fixed with knowledge of the correct construction of cl 39.11(b) in this regard—a question of law which, at the present time, remains unresolved.

191    For completeness, I should record that I do not accept that service of the garnishee order on Denham, in respect of Denham 890, was execution being levied against Denham by a creditor, within the meaning of cl 39.11(b).

192    It is convenient at this point to also record that I am satisfied that, had Mr McGrath disclosed Denham’s severe financial distress as at 21 May 2015 and its inability, at that time, to complete the project in a timely fashion, Hakea’s directors, on taking legal advice on Hakea’s rights under the building contract, would have proceeded to take out of Denham’s hands the remaining work to be performed. I am satisfied that the directors would have acted promptly in this regard. I accept Hakea’s submission that, on the evidence, it is likely that a replacement builder would have been appointed within about one month (by about 22 June 2015) and that the project would have been completed within approximately six months thereafter (by about 22 December 2015).

193    As I understand it, Neon does not dispute that Hakea suffered loss as a result of Mr McGrath’s breach of duty. There remains, however, a question as to the extent of that loss and its quantum. The proceeding remains part-heard to enable those issues to be tried at a later time, subject to the determination of whether the policy responds to Hakea’s claim on Mr McGrath.

The policy

Introduction

194    As I have noted, the policy is a “claims made” policy. The period of insurance is 23 January 2016 to 23 January 2017. A number of issues arise in relation to the policy:

195    First, there is an issue between Hakea and Neon as to whether, as a matter of construction of the policy, Hakea was required to make a claim on Mr McGrath within the period of insurance or whether it was sufficient that Hakea had notified the underwriters of its claim within that period. Hakea’s case is that it was only required to notify the underwriters of its claim within the period of insurance.

196    Secondly, there is an issue as to whether, as a matter of fact, Hakea made a claim on Mr McGrath within the period of insurance in any event. Hakea says that it did. Hakea bears the onus of establishing that fact.

197    Thirdly, there is an issue between Hakea and Neon as to whether either or both of two exclusions in the policy bite so that the policy does not respond to Hakea’s claim.

Relevant clauses and other policy wording

198    The policy wording commences with the following statement appearing under the heading “Management Liability Insurance Policy”:

This is a “claims-made” insurance which covers only Claims notified to the Underwriters during the Period of Insurance …

199    The relevant insuring clause is:

In consideration of the payment of the premium … and in reliance on the statements made and information contained within the Proposal Form and subject to the terms and conditions of this Insurance and after the exhaustion of all other indemnification available to the Directors or Officers or the Employees or the Company from any other source including any other policy of insurance, the Underwriters will:

1)         Insuring Clauses

a)         Directors’ and Officers’ Liability

pay on behalf of any Director or Officer Loss (other than Loss payable under any other Insuring Clause) arising from any Claim first made against them during the Period of Insurance or, if applicable, during the Discovery Period as specified in 4) Extensions b), and notified to the Underwriters in accordance with Section 6), Claims Conditions a), for any Wrongful Act committed by them in the capacity as a Director or Officer;…

200    Relevantly, the word Claim is defined as follows:

b)     Claim means:

i)    a written notice received by a Director or Officer (or the Company in the case of Insuring Clauses c), d) or e) if applicable) for a demand for compensation or other relief from any party in respect of any actual or alleged Wrongful Act or Employment Wrongful Act or Fiduciary Wrongful Act; …

201    Relevantly, the word Loss is defined as follows:

k)    Loss means:

i)    such sums which the Directors or Officers (or the Company in the case of Insuring Clauses c) or d) or e)) are legally liable to pay as compensatory damages for any Wrongful Act, incurred by the Directors or Officers in connection with a Claim; …

202    Relevantly, the words Wrongful Act are defined as follows:

aa)    Wrongful Act means any actual or alleged error, misstatement, misleading statement, omission, neglect, libel, slander, breach of duty, breach of trust or breach of warranty of authority by the Directors or Officers in the discharge of their duties as Directors or Officers or any matter claimed against them solely by reason of their being Directors or Officers of the Company.

203    There are two exclusions that are relevant to the present case. They are contained in cll 5(a)(ii) and (iii) of the policy wording. Stripping out presently unnecessary language and punctuation, cll 5(a)(ii) and (iii) provide:

The Underwriters shall not be liable for Loss in connection with any Claim … based upon, consequent upon, by reason of, arising out of, arising from, directly or indirectly resulting from, attributable to, in any way involving, or in connection with any …

(ii) … Director or Officer gaining any personal profit or advantage or receiving any remuneration to which he or she was not or is not legally entitled … provided that this exclusion shall only apply if such profit or advantage or remuneration … is established … by a final and non-appealable adjudication in any proceedings or court or a tribunal;

(iii) circumstance notified or Claim made under any insurance which was in force prior to the Period of Insurance or circumstance or Claim which was known about by any of the Directors or Officers or the Company prior to the Period of Insurance.

204    For ease of reference, I will refer to the exclusion in cl 5(a)(ii) as the first exclusion and to the exclusion in cl 5(a)(iii) as the second exclusion.

205    In relation to the second exclusion, Neon drew attention to a later paragraph in cl 5 which provides, relevantly:

The … knowledge of any Director or Officer shall not be imputed to any other Director or Officer for the purpose of applying the exclusions.

206    Neon drew attention to this paragraph of cl 5 because, in its submission, when the exclusion in cl 5(a)(iii) is read with this paragraph, it is clear that the only “director’s” knowledge that is relevant for the purposes of this exclusion is Mr McGrath’s knowledge.

207    In relation to the second exclusion, Hakea drew attention to the following notice appearing on the certificate of insurance which, it contended, informed the proper construction of the exclusion:

The policy will not cover you for liability resulting from any claim, matter, occurrence or circumstance arising from any act, error or omission committed or alleged to have been committed;

i)     prior to the retroactive date, if any, specified in the Schedule.

ii)    of which you were aware before the commencement of the Insurance …

208    I note, for later reference, that the certificate of insurance also includes the following notice:

This is a Claims Made Policy which means that the policy will respond to:

i)    Claims first made against you and reported to the Insurer during the Period of Insurance.

ii)    …

Principles of construction

209    The principles governing the construction of contracts of insurance are clear. The present case does not call for any special consideration of them. Nevertheless, in its written closing submissions, Hakea drew attention to some of these principles, particularly as they relate to the construction of exclusion clauses. In deference to its submissions, and for completeness only, I note the following.

210    The insuring clause and any exclusion clause must be read together in an harmonious way so that due effect is given to both and the right conferred by the former is not negated or rendered nugatory by the construction adopted for the latter: Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100; 359 ALR 314 at [54]; Woodlawn Capital Pty Ltd v Motor Vehicles Insurance Ltd [2016] NSWCA 28; 111 ACSR 377 at [133]; Impact Funding Solutions Ltd v AIG Europe Insurance Ltd [2016] UKSC 57; [2017] AC 73 at [7].

211    In Alex Kay Pty Ltd v General Motors Acceptance Corporation [1963] VR 458 at 463, Sholl J quoted, with approval, the following statement in Welford On Accident Insurance, 2nd ed. (1932):

The words of the policy must, if possible, be construed liberally, so as to give effect to the intention of the parties. The object of the parties being to make a contract of insurance, any construction which defeats that object or renders the contract practically illusory is to be rejected. Hence, a literal construction leading to a result which is absurd, or otherwise manifestly contrary to the real intention of the parties, is not to be adopted, and the words used must be construed with qualifications. On the other hand, the words used must be construed with qualifications. On the other hand, the words of the policy are not to be extended beyond their ordinary meaning in order to comprehend a case which is within their object and which the parties would probably have desired to include, if it had occurred to them, for that would be to give effect to an intention which is not expressed. Thus, a death may be accidental in the sense that it is unforeseen and unexpected; but unless it is further caused by accidental means, it does not fall within the scope of a personal accident policy in the ordinary form.

212    This approach was approved by Cooper J in DellaVedova v HIH Casualty & General Insurance Ltd (1997) 9 ANZ Insurance Cases ¶61-383 (DellaVedova)—a case on which Hakea placed considerable reliance when dealing with the construction of the second exclusion.

213    In Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 at 393 – 394, Kirby P said:

There remains the construction of the policy. It should be given its ordinary meaning. However, the phrase which is the focus of our attention, is one repeated in many insurance policies. It is the subject of much case law in Australia and overseas. Ultimately, the language of the policy must determine the orders of the Court. However, in dealing with the construction of insurance policies three general rules at least are taken to guide courts in the meaning to be ascribed to the language used. The first is that, wherever possible, established constructions, laid down by courts of high authority, should be followed to ensure the uniform interpretation of terms in insurance policies, which are commonly repeated. This rule is founded on the obvious good sense of providing, in a worldwide market of common contracts, an objectively ascertainable and commonly known or knowable dictionary by which the respective rights and obligations of insurers and insured can readily be found.

Secondly, where there is doubt as to the meaning of a policy, particularly in respect of terms contained in standard printed forms proffered by the insurer to the insured, courts, if not otherwise able to resolve the ambiguity, will construe the policy contra proferentem. This principle is grounded in the substantially superior position enjoyed by the insurer to specify, and where necessary amend, the standard terms on which it offers indemnity to its insured.

Thirdly, insurance policies will be construed in their commercial and social setting and having regard to their purposes. If one construction strikes fundamentally at the purpose of the policy, which is to spread the risk insured against, whilst another construction that is reasonably available would effect that purpose, the latter will be preferred: see Albion Insurance Co Ltd v Body Corporate Strata Plan No 4303 [1983] 2 VR 339 and other cases cited below.

214    In Darlington Futures Limited v Delco Australia Proprietary Limited [1986] HCA 82; 161 CLR 500 at 510, when speaking of the construction of exclusion clauses in commercial contracts (which was accepted in Selected Seeds Pty Ltd v QBEMM Pty Ltd [2010] HCA 37; 242 CLR 336 at [29] as applicable to contracts of insurance), the High Court said:

… the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.

215    In Permanent Custodians Limited v ARMA Pty Limited [2006] FCA 640; 14 ANZ Insurance Cases ¶61-707 at [26], Conti J accepted that it is a well-known principle of insurance law that an exclusion clause in an insurance policy should be construed narrowly and otherwise against the interests of the insurer, relying on Derrington and Ashton, The Law of Liability Insurance (2nd ed, Lexis Nexis, 2005) at 10-2; see also Sutton, Insurance Law in Australia (3rd ed, 1990) at [9.97].

216    In HDI Global Specialty SE v Wonkana (No 3) Pty Ltd [2020] NSWCA 296; 104 NSWLR 634 Meagher JA and Ball J said (at [29] – [31]):

29    There is no special rule which applies to the construction of exclusion or limitation clauses in contracts of insurance (see, for example McClure P in Allianz Australia Insurance Ltd v Inglis [2016] WASCA 25 at [25]). As Lord Hodge (with whom Lords Mance, Sumption and Toulson agreed) uncontroversially observed in Impact Funding Solutions Ltd v AIG Europe Insurance Ltd [2017] AC 73; [2016] UKSC 57 at [7] :

An exclusion clause must be read in the context of the contract of insurance as a whole. It must be construed in a manner which is consistent with and not repugnant to the purpose of the insurance contract. There may be circumstances in which in order to achieve that end, the court may construe the exclusions in an insurance contract narrowly.

30    There remains the contra proferentem rule which provides that any ambiguity in a policy of insurance should be resolved by adopting the construction favourable to the insured: Halford v Price (1960) 105 CLR 23 at 30; [1960] HCA 38; Darlington Futures at 510; Johnson v American Home Assurance (1998) 192 CLR 266 at 275 (Kirby J, dissenting); [1998] HCA 14; McCann at [74]. The justification for the rule is that the party drafting the words is in the best position to look after its own interests, and has had the opportunity to do so by clear words. It ought only be applied for the purpose of removing a doubt, and not for the purpose of creating a doubt, or magnifying an ambiguity: Cornish v Accident Insurance Co Ltd (1889) 23 QBD 453 at 456 (Lindley LJ).

31    With acceptance of the principle that ambiguity can be resolved by reference to the surrounding circumstances, the contra proferentem rule is now generally regarded as a doctrine of last resort. However, it continues to have a role to play in insurance and other standard form contracts. That is so for two reasons. First, by their nature, standard form contracts are not negotiated between the parties, and the surrounding circumstances relevant to the entry into one contract or another are less likely to shed much light on the meaning of the written words. Secondly, the contra proferentem rule complements the principle that standard form contracts should be interpreted from the point of view of the offeree. The offeror has the opportunity to, and should, make its intentions plain. The point was made by Dixon CJ (at 30) in Halford v Price, citing with approval the following statement in Halsbury’s Laws of England (Butterworth & Co, 3rd ed, 1958) vol 22, p 214:

The printed parts of a non-marine insurance policy, and usually the written parts also, are framed by the insurers, and it is their language which is going to become binding on both parties. It is therefore their business to see that precision and clarity is attained and, if they fail in this, any ambiguity is resolved by adopting the construction favourable to the assured …

217    Although these precepts guide the construction of contracts of insurance, the cases nevertheless recognise that the words of the relevant policy are paramount.

Was a claim made?

Introduction

218    Hakea’s primary case was that, as a matter of fact, it had made a claim on Mr McGrath within the period of insurance. Its alternative case—which involves the construction of the policy—was that it was not necessary for it to have made its claim against Mr McGrath; it was only necessary for it to have notified the underwriters of its claim within the period of insurance.

219    I will commence by considering Hakea’s alternative case.

On whom must the claim be made?

Hakea’s submissions

220    Hakea submitted that the policy is ambiguous in respect of the timing requirements for the making and notification of claims.

221    The policy wording commences by stating that the cover provided is “claims-made” insurance only for “Claims notified to the Underwriters during the Period of Insurance”. Hakea pointed out that the only timing condition referred to in that statement is notification to the Underwriters.

222    The insuring clause refers to the twin requirements of the Claim being made against the Director or Officer and notification being given to the Underwriters. Hakea pointed out that the timing condition for each act is expressed differently: the Claim against the Director or Officer must be made within the Period of Insurance; the notification to the Underwriters must be given in accordance with cl 6(a), meaning, relevantly, “as soon as is reasonably practicable and in any event within 30 days after the end of the Period of Insurance …”.

223    The notice on the certificate of insurance states that the policy will respond to claims first made against the insured and reported to the insurer during the period of insurance. Hakea pointed out that this timing requirement is inconsistent with the timing requirement of the insuring clause.

224    Hakea submitted that, given this “significant ambiguity”, the policy must be interpreted contra proferentem against the underwriters and in accordance with the commencing words of the policy, so that the only requirement is that the underwriters be notified during the relevant period, although the claim must be brought to the insured’s attention at some point. Hakea submitted that, in the present case, the claim was brought to Mr McGrath’s attention by the commencement of Hakea’s proceeding against him for breach of duty.

225    Hakea submitted that this construction of the policy met “sound reasons of policy and construction”. The underwriters have been given notice of the claim. Hakea submitted that it would be a triumph of form over substance if the underwriters were given notice but the policy did not respond because of “a defect in the formalities of service of the Insured”. Further, this construction is the only one which does not bring about injustice, such as where the insured “goes to ground and cannot be located” but the underwriters have been notified within the period of insurance.

Neon’s submissions

226    Neon submitted that the insuring clause is clear. It is based on two conditions: the making of a demand on the insured within the period of insurance, and the notification of the underwriters in accordance with cl 6(a) of the policy. Neon submitted that Hakea’s submission simply ignores the first condition.

227    Neon submitted that Hakea’s construction is inconsistent with the notice on the certificate of insurance that, as a claims made policy, the policy will respond to claims made against the insured and reported to the insurer in the period of insurance. Neon submitted that Hakea’s construction treated this statement as expressing merely alternative requirements, when it is expressing cumulative requirements.

228    Neon submitted that the commencing words of the policy do not lead to a different construction because, there, the policy is not identifying the risk that is insured. Neon submitted that “while there may be some infelicity or inaccuracy in its wording”, this part of the policy does refer to cl 6(a), which makes plain the period in which the making of a Claim is to be notified to the underwriters.

Conclusion

229    Neon’s construction is correct.

230    First, there is no ambiguity in the insuring clause. The clause is perfectly clear. Relevantly, the indemnity is provided for “Loss … arising from any Claim first made against [the insured] during the Period of Insurance …”. The same condition is imposed by the notice in the certificate of insurance.

231    Secondly, this construction is not inconsistent with the commencing words of the policy. The commencing words of the policy simply refer to the requirement to notify the underwriters of Claims. They do not address the making of Claims against the insured.

232    Thirdly, the commencing words of the policy immediately under the heading “Management Liability Insurance Policy” are entirely prefatory in nature, referring, in turn, not only to the fact that the insurance is “claims-made” insurance, but also to aids to construction, such as italicised and coloured text, and headings. This part of the policy is obviously not intended to be a comprehensive statement of the cover that is to be provided. Indeed, this part of the policy makes no reference at all to the risk that is insured. The commencing words cannot be given precedence over the insuring clause itself.

233    Fourthly, Hakea’s submissions are really directed to ambiguity in the timing requirement for notifying claims to the underwriters. But there is no issue, in the present case, about whether the underwriters were notified in accordance with the policy.

234    Fifthly, and more importantly, any ambiguity in the requirement for notifying claims to the underwriters cannot be a proxy to attribute ambiguity in the insuring clause itself.

235    In order for the policy to respond in the present case, it is necessary for Hakea to prove that, as a matter of fact, it had made a Claim against Mr McGrath during the Period of Insurance.

Was a claim made on Mr McGrath?

Introduction

236    Hakea’s case that it had made a Claim against Mr McGrath during the Period of Insurance involved a number of twists and turns during the course of the hearing.

237    In its Amended Commercial List Statement, Hakea pleaded that it had made a claim against Mr McGrath by a letter from its solicitors dated 20 January 2017. Although the Amended Commercial List Statement does not plead the mode of delivery, the evidence shows that the letter was sent using two email addresses.

238    In opening its case, Hakea abandoned its allegation that it had made a claim against Mr McGrath on 20 January 2017. Instead, it submitted that it had made a claim against Mr McGrath on 4 January 2017, by sending a letter of demand to him at a postal address in Mittagong, New South Wales. It also submitted that it had made a claim against Mr McGrath on 18 January 2017 by sending a letter of demand to him by email (using a different email address to the addresses used for the 20 January 2017 letter of demand), and by post to a street address in Killara, New South Wales. The street address was the address provided by Mr McGrath in his Commercial List Response. It was a false address.

239    On 22 April 2021, I granted leave to Hakea to adduce further evidence in respect of its case that it had made a claim against Mr McGrath on 4 January 2017. However, at a case management hearing on 10 May 2021 to deal with the further conduct of the hearing (which had not concluded within the appointed time), Hakea abandoned its case that it had a claim against Mr McGrath on 4 January 2017 and 18 January 2017.

240    On 18 June 2021, after a contested hearing on 4 June 2021, I permitted Hakea to reopen its case on a limited basis, and to tender evidence to support its originally pleaded case that it had made a claim against Mr McGrath on 20 January 2017: Hakea Holdings Pty Ltd v McGrath [2021] FCA 660. Orders to that effect, and other programming orders, were made on 22 July 2021.

Hakea’s submissions

241    As defined, a Claim is a written notice received by the insured for a demand for compensation or other relief (my emphasis). Hakea accepted that, for the purposes of the policy, a claim made is a claim received. Hakea submitted that, on the evidence it has adduced, the Court should find, as a matter of fact, that Mr McGrath received, before the expiry of the period of insurance (23 January 2017), the email attaching its letter of demand dated 20 January 2017 that was sent using a particular email address (the asserted email address).

242    To this end, Hakea submitted that all that it was required to prove was that the email attaching the letter of demand was “received” in an email account of Mr McGrath that was “operative” at the time. Relying on statements made in Spencer v Bamber [2012] NSWCA 274 at [211] with respect to the service of documents under s 61(2)(d) of the Real Property Act 1900 (NSW), Hakea submitted that it is not necessary for it to prove that the email was opened or read by Mr McGrath. Hakea submitted that “(t)he question of whether a written notice is ‘received’ in this situation does not depend upon what may be [the] idiosyncratic email-reading practices of the recipient, but on the verifiable and certain act of sending an email to an address that is operative”.

243    Hakea also relied on ss 161(1)(d) and (e) of the Evidence Act (as then applying), which provided:

(1)     If a document purports to contain a record of an electronic communication other than one referred to in section 162, it is presumed (unless evidence sufficient to raise doubt about the presumption is adduced) that the communication:

…

(d) was received at the destination to which it appears from the document to have been sent; and

(e) if it appears from the document that the sending of the communication concluded at a particular time—was received at that destination at that time.

244    Hakea relied on the fact that no record of any “bounce back” or delivery failure notification was received when the email was sent on 20 January 2017. Hakea submitted that this supported a finding that the asserted email address was still operational.

245     Hakea also relied on evidence that, in its submission, showed that Mr McGrath was using the asserted email address “not infrequently at that time”. The evidence showed communications between Mr McGrath and Denham’s liquidators, using the asserted email address, in the period between 2 and 9 September 2016.

Neon’s submissions

246    Neon submitted that the email correspondence on which Hakea relied included a response from Mr McGrath to the liquidators stating (with respect to the asserted email address):

Sorry for the delay but I never check this email address as it’s rarely used.

247    Neon also pointed to the fact that, on 9 September 2016, Mr McGrath forwarded an email from Denham’s liquidators—which had been sent on 8 September 2016—to another email address used by Mr McGrath. For the eight months’ period up to 17 May 2017, the liquidators’ only email communications with Mr McGrath were those using the other email address.

248    Neon submitted that a “claim first made” requires the substance of the claim to be “brought home” to the insured: Triden Properties Ltd v Capita Financial Group Ltd (unreported, Court of Appeal, NSW, 15 November 1995) (Triden), cited with approval in Drayton v Martin (1996) 67 FCR 1 (Drayton) at 24. Neon submitted that it is not sufficient that a demand be sent to the insured at a “speculative email address”. Actual knowledge of the demand is required, and the insured director or officer will not be deemed to have knowledge of a claim merely because a demand has been sent.

Conclusion

249    I am satisfied that Hakea has established that it made a Claim against Mr McGrath during the Period of Insurance.

250    First, the evidence establishes that the asserted email address was one used by Mr McGrath. I would add that there is no evidence that any person other than Mr McGrath used that particular mailbox—although this is not a necessary requirement.

251    Secondly, I am satisfied that the asserted email address was “operative” as at 20 January 2017 in the sense that it remained a mailbox for email communications to Mr McGrath which had not been shut down and to which, I infer, he continued to have access (there being no evidence to the contrary). In this regard, I refer to the fact that, when the email of 20 January 2017 was sent by Hakea’s solicitors, there was no “bounce back” or other notification given that delivery of the email had failed. For this reason, I do not accept Neon’s characterisation of the asserted email address as a “speculative email address”.

252    Thirdly, I do not accept that the asserted email address was not operative simply because Mr McGrath had said, in a responding email from that mailbox in September 2016, that the address was “rarely used” and that he “never” checked his emails at that address (an obvious misstatement given that he must have checked his emails at that address in order to respond in the first place). The fact that Mr McGrath might have checked his emails in that mailbox infrequently and that, on occasion, he forwarded emails from that mailbox to another email address, does not gainsay the fact that emails were received in the mailbox.

253    Fourthly, the risk insured under the policy is the risk of claims made in the relevant period. The definition of Claim—which focuses on receipt of a written notice of demand for compensation or other relief—means that, in the present case, the underwriters were on risk as soon as the email of 20 January 2017 was received in the mailbox (subject, of course, to them being notified in accordance with the policy).

254    Fifthly, and relatedly, I do not accept that any act beyond receipt of the Claim—here, constituted by the 20 January 2017 email and its attachment—was necessary in order for the Claim to be made. Neon’s reference in submissions to Triden and Drayton suggests that, in its submission, the Claim was only made once Mr McGrath had read the 20 January 2017 email and its attachment, and understood that a claim was being made against him. If that was Neon’s submission, I do not accept it. Triden and Drayton do not stand for that proposition. Rather, those cases were concerned with the content of a communication and whether the communication would be understood as a “claim”. In the present case, the word Claim is defined in the policy itself. The only question is whether it was made (i.e., received) within the relevant period. Neon does not contend that the email of 20 January 2017 and its attachment would not be understood as a Claim.

255    Sixthly, I accept that the presumptions in ss 161(1)(d) and (e) of the Evidence Act apply, and that the evidence establishes that the 20 January 2017 email and its attachment arrived in the mailbox corresponding to the asserted email address on 20 January 2017 at 3.32 pm.

256    I am satisfied that, subject to one or both exclusions applying, the policy responds to Hakea’s claim.

Does the first exclusion apply?

Neon’s submissions

257    Neon submitted that, even though Hakea presented its case against Mr McGrath as one of unwitting breach of the duty imposed by s 180(1) of the Corporations Act, its pleaded case cast a much wider net, involving allegations of misleading representations and omissions, and breaches of fiduciary duties, as well as breaches of other statutory duties involving the exercise of good faith and the avoidance of personal advantage or conduct detrimental to the corporation (ss 181(1) and 182(1) of the Corporations Act). Neon submitted that while, at the hearing, Hakea framed its case as, essentially, one of statutory negligence, its choice to do so is not determinative of how the policy applies. Neon submitted that Hakea’s claim must be considered as a matter of substance, not simply by the form in which Hakea finally chose to propound that claim at the hearing. A claim under a contract of insurance should not be confused with the causes of action giving rise to that claim.

258    In West Wake Price & Co v Ching [1957] 1 WLR 45 (West Wake Price), Devlin J said (at 55):

I think that the primary meaning of the word “claim”—whether used in a popular sense or in a strict legal sense—is such as to attach it to the object that is claimed; and is not the same thing as the cause of action by which the claim may be supported or as the grounds on which it may be based.

259    At 57, Devlin J continued:

It follows, I think, that if there is only one object claimed by one person, then there is only one claim, however many may be the grounds or the causes of action which can be raised in support of it: likewise, where several claims are each dependent on the same cause of action (as, for example, where one cause of action leads to alternative claims for an injunction, damages or an account or other different forms of relief), there remains only one cause of action, however many claims it may give rise to. In my judgment there is in each of these actions against the assured only one claim and I have therefore to consider whether this “mixed” claim is a claim in respect of negligence within the meaning of the policy.

260    In Quintano v BW Rose Pty Ltd [2008] NSWSC 793; (2009) 15 ANZ Insurance Cases ¶61-805, Brereton J considered West Wake Price and other cases and said at [9]:

Those cases establish that, for the purposes of a professional indemnity policy, the manner in which a claimant formulates its case against the insured cannot be decisive of the rights and liabilities of the parties to the insurance policy, for which purpose the claim is characterised by its underlying facts, and not the form in which the claimant propounds it. Thus, if the facts underlying a claim amount in substance to fraud, the circumstances that the claimant eschews fraud and pleads its case in negligence does not allow the insured to evade a fraud exclusion ...

261    Neon submitted that, because he was the sole director and shareholder of Denham, Mr McGrath was personally advantaged by his breach of duty. Neon identified three advantages.

262    First, Neon submitted that, by keeping the building contract on foot, Denham was provided with a steady flow of revenue by Hakea’s payment of progress claims throughout 2015.

263    Secondly, Neon submitted that, by keeping the building contract on foot, and by continuing to receive payment of its progress claims, Denham was provided with the means to trade out of its insolvent or near insolvent position. Neon submitted that the Court should find that, in light of all the evidence, Denham was insolvent as at 30 June 2015.

264    Thirdly, Neon submitted that Denham’s revenue from Hakea was used to swell mixed funds that were used by Mr McGrath for, amongst other things, his personal expenses.

265    Neon provided a number of examples where funds paid by Hakea as progress payments under the building contract were deposited into Denham’s account with CBA, and then deposited into an account with ANZ held by Denham 760 or an account with ANZ held by another Denham company (Denham 1000). Sums were then transferred out of Denham 760’s ANZ account or Denham 1000’s ANZ account to make payments on Mr McGrath’s personal credit card and his home loan.

266    Neon provided another example where progress payments by Hakea were deposited into Denham’s CBA account, then deposited into Denham 760’s ANZ account, from which an amount of $50,000.00 was transferred into an ANZ account held by Denham. This sum was then used as part payment to a business called Campbell Floats. This payment was made on behalf of SM Stock Horses Pty Ltd (SM Stock Horses). SM Stock Horses is a company in which Mr McGrath was the sole shareholder.

267    The notion underlying these submissions is that Denham was a vehicle that Mr McGrath solely controlled and used for his purposes, and that, for this reason, Denham’s interests and Mr McGrath’s interests were aligned. Thus, an advantage to Denham was, correspondingly, an advantage to Mr McGrath. One aspect of this advantage was that Denham earned revenue which contributed to funds used by Mr McGrath to pay his personal expenses. It was an advantage to Denham and a personal advantage to Mr McGrath that Denham continued to earn revenue. Therefore, it was an advantage to Denham and a personal advantage to Mr McGrath that the building contract with Hakea remain on foot.

268    These submissions are grounded in Hakea’s pleading of the Amended Commercial List Statement. Hakea has pleaded that, as the sole director of and shareholder in Denham, Mr McGrath had a personal interest in Denham continuing with the project. Hakea pleaded that, when Mr McGrath’s personal interest in Denham came into conflict with his duty as a director of Hakea, Mr McGrath preferred his personal interest and sought to obtain an improper advantage for himself. Neon’s case is that, regardless of what cause of action Hakea ultimately chose to pursue at the hearing, Hakea’s claim against Mr McGrath was characterised by these underlying facts that give colour to his conduct. This is the context in which the applicability of the first exclusion falls to be considered.

Hakea’s submissions

269    Hakea submitted that Denham’s and Mr McGrath’s separate legal personalities must be maintained and that, for that reason, a benefit obtained (advantage gained) by Denham should not be equated with a benefit obtained (advantage gained) by Mr McGrath personally.

270    Hakea also submitted that, for the exclusion to apply, it is necessary for Neon to establish that any personal gain made by Mr McGrath was one to which he was not legally entitled. Hakea submitted that Neon has not adduced any evidence of Mr McGrath’s legal entitlement to the payments which it has exemplified as having been made for his benefit. Neon has not established, therefore, that, by directing the use of funds in payment of his personal expenses, Mr McGrath obtained a benefit to which he was not legally entitled. Hakea emphasised that, because he was Denham’s sole director and shareholder, Mr McGrath could decide on the payments that Denham could, legitimately, make, which would include payments to Mr McGrath himself.

271    In this connection, Hakea also submitted that the expert accounting evidence does not establish that the funds used to pay Mr McGrath’s personal expenses were “Hakea monies”. Indeed, Hakea submitted that “Hakea monies” is not even a valid concept. Once the progress payments that Hakea had made had been paid into a Denham company account, those funds became an asset of the entity into whose account the funds had been paid.

272    Further, Hakea submitted that the account balances of these entities were created by mixing funds originating from Hakea and other sources. It could not be said, therefore, that any of the exemplified payments said to have been made for Mr McGrath’s benefit came from progress payments made by Hakea under the building contract.

273    Further, Hakea had paid substantial sums to Denham well before the date on which Mr McGrath’s breach of duty occurred. These payments, which are not connected to or involve any breach of duty by Mr McGrath, also comprise part of the mixed funds from which payments were said to have been made for Mr McGrath’s benefit.

274    With respect to the submission that there was an advantage in providing Denham with the opportunity to trade out of insolvency, Hakea submitted that Neon has not established that Mr McGrath gained any personal advantage from that circumstance, even if that opportunity, in fact, existed.

275    Hakea submitted that, in any event, it could hardly be a personal advantage to Mr McGrath to allow Denham to trade out of insolvency when, in allowing Denham to do so, Mr McGrath would expose himself to liability as a director for insolvent trading. Causing Denham to trade while insolvent would have been a distinct disadvantage for Mr McGrath, not a personal advantage.

Conclusion

276    I am satisfied that the first exclusion is engaged and applies, so that the policy does not respond to Hakea’s claim against Mr McGrath.

277    Hakea’s case is that, had it been told of Denham’s severe financial distress as at 21 May 2015, and Denham’s inability, at that time, to complete the project in a timely fashion, it would have taken the remaining work to be performed under the building contract out of Denham’s hands and appointed another builder to complete that work. Mr McGrath’s breach of duty resulted in the building contract being kept on foot in circumstances where, on Hakea’s case and on my findings, it would not have been kept on foot in relation to the remaining work. Hakea’s case is that it suffered loss in the form of the loss of opportunity to take the work out of Denham’s hands in May 2015 and engage another builder from June 2015, resulting in (amongst other things) increased costs to complete the project and a loss of profit occasioned by the delay in completion.

278    I do not understand Hakea to dispute that keeping the contract on foot was, in those circumstances, an advantage gained by Denham connected with or involving Mr McGrath’s breach to which Denham was not legally entitled. If it be accepted that keeping the contract on foot was an advantage gained by Denham to which it was not legally entitled—which I think must be accepted—I do not see why this was not also a personal advantage gained by Mr McGrath himself, to which he was not legally entitled, for the following reasons.

279    Denham was Mr McGrath’s vehicle through which the benefit of the building contract was obtained and realised. As its sole director and shareholder, Mr McGrath had complete control over Denham. Hakea’s submissions concerning Mr McGrath’s capacity, as Denham’s sole director and shareholder, to control how Denham was able to use its funds implicitly recognise that Denham was, in fact, Mr McGrath’s creature.

280    As Mr McGrath’s creature, Denham’s interests and Mr McGrath’s interests were one and the same in seeing the building contract remain on foot. While the building contract remained on foot, Denham was able to generate revenue from it. Mr McGrath had complete control over that revenue because he had complete control over Denham. On Hakea’s own case, Mr McGrath could control how, and for what purpose, that revenue was used, including to supplement mixed funds which were also under Mr McGrath’s control and were directed, in part, to paying Mr McGrath’s personal expenses. The evidence satisfies me that, by virtue of the control he exercised, Mr McGrath used Denham’s funds, according to his wishes, as if they were funds for his personal use.

281    Mr McGrath’s and Denham’s community of interests in seeing the building contract remain on foot is not inconsistent with, and does not deny, the existence of their separate legal personalities.

282    Further, the terms in which the first exclusion is expressed in the policy do not require that the personal advantage gained by the director or officer be one that is gained to the exclusion of advantages gained, or potentially gained, by others. I do not understand the word “personal” in the collocation “personal profit or advantage”, as used in the first exclusion, to be a word of limitation, beyond requiring that the advantage that is gained be one that is actually enjoyed by the director or officer concerned. Thus, the fact that Denham can be seen to have gained an advantage does not mean that Mr McGrath did not also gain a personal advantage—that is, an advantage for himself—within the meaning of the first exclusion.

283    This realisation is supported by the very wide terms in which the first exclusion is expressed. The first exclusion refers to the director or officer gaining any personal profit or advantage or receiving any remuneration to which the director or officer was not or is not legally entitled (my emphasis). The word “advantage” is also a word of wide import. It encompasses and includes any non-pecuniary benefit or favourable outcome.

284    I accept, therefore, the tenor of Neon’s submissions. As I have noted, its case on the application of the first exclusion is grounded on Hakea’s pleaded case. I am satisfied that Mr McGrath’s breach of duty under s 180(1) of the Corporations Act involved, as a matter of fact, Mr McGrath preferring his personal interests over his duties to Hakea, and obtaining an improper advantage for himself and for Denham, as Hakea alleged in paragraph 49 of the Amended Commercial List Statement.

285    Neon’s case on the application of the first exclusion is also grounded on Hakea’s case that, had Hakea been told of Denham’s severe financial distress as at 21 May 2015, and Denham’s inability, at that time, to complete the project in a timely fashion, it would have taken the remaining work to be performed under the building contract out of Denham’s hands and appointed another builder to complete that work.

286    I do not, however, accept all of Neon’s submissions. Specifically, I do not accept that an advantage was gained by Denham or Mr McGrath in the form of Denham being afforded the opportunity to trade out of insolvency. I am not satisfied that, as at 21 May 2015, or as at 30 June 2015 (as Neon contended), Denham was insolvent. The evidence before me, including the expert accounting evidence, does not establish that fact. This does not gainsay the fact that, as at 21 May 2015, Denham was under severe financial distress, such that it was not in a position to complete the building contract in a timely fashion.

287    Finally, I should deal with Hakea’s submission to the effect that Neon has not established that the payment of Mr McGrath’s personal expenses represented an advantage to which Mr McGrath was not legally entitled. This submission does not engage with the gravamen of Neon’s case on the applicability of the first exclusion. Indeed, it misconceives Neon’s case.

288    Neon does not contend that these were payments to which Mr McGrath was not legally entitled. Its case, which I accept, is that, by his conduct giving rise to the claim on the policy, Mr McGrath gained a personal advantage to which he was not legally entitled, in the form of the building contract remaining on foot, which enabled Denham to earn a revenue stream that supplemented funds under Mr McGrath’s control that could be, and were, used by him to pay, amongst other things, his personal expenses. I would add that it is of no moment that these funds were mixed funds.

Does the second exclusion apply?

Neon’s submissions

289    Neon’s case in respect of the second exclusion directs attention to the following words of cl 5(a)(iii) of the policy:

The Underwriters shall not be liable for Loss in connection with any Claim … based upon, consequent upon, by reason of, arising out of, arising from, directly or indirectly resulting from, attributable to, in any way involving, or in connection with any …

(iii) … circumstance or Claim which was known about by any of the Directors or Officers or the Company prior to the Period of Insurance

(Underlining added.)

290    As I have noted, the period of insurance commenced on 23 January 2016. Neon submitted that it is Mr McGrath’s knowledge of circumstances connected with the claim, prior to 23 January 2016, that is relevant for the purposes of this exclusion. It also submitted, however, that Hakea’s directors, and hence Hakea itself, was fixed with knowledge of relevant circumstances prior to the policy’s inception.

291    In developing its case in this respect, Neon resorted, once again, to the breadth of Hakea’s pleading in the Amended Commercial List Statement. It repeated its submission, which I have now accepted, that, by 21 May 2015, Mr McGrath knew of Denham’s severe financial distress.

292    Neon supported this submission by reference to the facts that I have summarised at [33] – [96]. It also referred to evidence, which I have not found it necessary to discuss, in relation to Denham’s financial performance, Mr McGrath’s attempts to obtain finance to fund Denham’s indebtedness (particularly in relation to its large tax debt), and Denham’s non-payment of particular subcontractors.

293    Neon’s survey of the evidence in relation to the non-payment of particular subcontractors led it to contend that Mr McGrath knowingly falsified progress claims made by Denham. I am not prepared to make that finding. It is not an allegation that is made in Neon’s pleading of its amended defence.

294    However, it is clear from Mr Barry’s evidence that, as at 11 December 2015, Hakea had formed the view that, in the course of claiming payments under the building contract, Denham had claimed for work that it had not performed and had claimed an amount greater than the value of the work it had performed. As a consequence, Hakea believed that it had, in fact, paid Denham an amount greater than the value of the work that it had actually performed under the building contract.

295    Mr Barry also gave evidence that, after Hakea had terminated the building contract on 11 December 2015, Hakea took active steps to get subcontractors back on site in January 2016. Hakea’s instruction to Caverstock was that if retention of certain subcontractors was necessary due to reasons such as certification, or would result in efficiencies for the work, an agreement would be entered into with that subcontractor under which a portion of the monies owed by Denham to that subcontractor would, instead, be paid by Hakea. This would be done in order to procure the subcontractor to return to the site. Mr Barry’s evidence was that these amounts were essentially a “double payment” by Hakea for the work, in that Denham had already been paid for this work, but had not passed on the relevant payment to the subcontractor concerned.

296    An example is provided by Progress Payment Claim No. 27 for work completed to 31 August 2015. This claim included an amount of $46,200.00 plus GST which Hakea approved against provisional sums for work relating to the incoming power supply to the site. After the building contract had been terminated, Mr Barry was informed by Salem Power Engineering (Salem), who was constructing the incoming power supply, that Denham had not paid this amount to it. Salem was a critical trade subcontractor for the progress of the works in December 2015, and this amount was paid by Hakea directly to Salem on 23 December 2015 so that it would commit to completing the installation, thereby facilitating completion of the work as a whole.

297    What emerges from this evidence is that, before the inception of the policy on 23 January 2016, Hakea was on notice that amounts which Denham had certified as having been paid to subcontractors had not, in fact, been paid. Mr Pardy accepted in cross-examination that, after the disclosure by Denham’s representatives at the meeting on 5 November 2015 of Denham’s lack of liquidity, he considered that he had been misled by Mr McGrath. On the evening of 27 October 2015, Mr Pardy had asked Mr McGrath about unpaid trade creditors and had only been informed that there was a dispute with two creditors. Mr McGrath did not tell Mr Pardy that there were trade creditors who had not been paid because of Denham’s liquidity problem.

298    However, the evidence does not establish that, before 23 January 2016, Hakea’s other directors had the knowledge that Mr McGrath had in 2015 of Denham’s severe financial distress. Mr Pardy, Mr Ross, Mr Di Losa, Mr Pearse, and Mr Watson each said that he did not discover Denham’s severe financial distress until some time after March 2016.

299    I understand Neon’s submission in relation to the second exclusion to be this: As at 21 May 2015, Mr McGrath knew that Denham was in severe financial distress, such that it could not complete the building contract in a timely fashion. This was a “circumstance” that was “known about” by Mr McGrath as a director of Hakea, within the meaning of cl 5(a)(iii) of the policy. Therefore, in accordance with the second exclusion, the underwriters are not liable for Loss (as defined) in connection with any Claim (as defined) “based upon, consequent upon, by reason of, arising out of, arising from, directly or indirectly resulting from, attributable to, in any way involving, or in connection with” that “circumstance”.

Hakea’s submissions

300    Hakea submitted that the second exclusion in cl 5(a)(iii) must be read with the notice in the certificate of insurance quoted at [207] above. It is submitted that, when so read, two features are apparent. First, in order for the second exclusion to apply, the knowledge that is required for the exclusion to operate is actual knowledge. Secondly, that knowledge must be of a “claim, matter, occurrence or circumstance” that is causally related to the liability covered by the policy.

301    In developing its argument with respect to the second feature, and with apparent reference to the notice in the certificate of insurance, Hakea submitted that the insured (here, Mr McGrath) must be held to have actually known that the “act, error or omission committed or alleged to have been committed” had given rise to a “claim, matter, occurrence or circumstance” to which the liability—his liability—was causally related.

302    Hakea submitted that the reference to “circumstance or Claim” in cl 5(a)(iii) of the policy must be read, harmoniously, with the words “claim, matter or circumstance” in the notice and (what it submitted was) the additional requirement in the notice that the insured actually knew that a “claim, matter, occurrence or circumstance” had arisen from “any act, error or omission committed or alleged to have been committed”. It submitted that, reading cl 5(a)(iii) and the notice together, the insured must know about the “act, error or omission” and the “circumstance or Claim” which arises from the “act, error or omission”.

303    Relying on DellaVedova and Ritchie v Woodward [2016] NSWSC 1715, Hakea submitted that, in order for the second exclusion to apply, Neon must prove that, before the inception of the policy, Mr McGrath knew—in the sense of being actually conscious—that there was a “definite risk” or a “real possibility” or that it was “on the cards” that a claim would be made against him. It submitted that, in order to prove this, Neon needed to demonstrate that Mr McGrath knew that there had been a wrongful act, error or omission by him and that Hakea had, or could have, suffered loss as a result. It submitted that, without knowledge of those two matters, Mr McGrath could not have known that there was a “definite risk” or a “real possibility” or that it was “on the cards” that a claim would be made against him.

304    Hakea submitted that it was difficult to see how Mr McGrath knew that there had been a wrongful act, error or omission by him, without knowing that Denham was insolvent or in severe financial distress, and unable to complete the project on time.

305    Hakea submitted that Mr McGrath’s knowledge that Hakea could have suffered loss as a result of his wrongful act, error, or omission depended on Neon proving that Mr McGrath knew that: Hakea had a right to replace Denham; the right had been triggered; the right would have been exercised; and that, as a result, the project would have been completed earlier.

Conclusion

306    I accept Neon’s submission that it is Mr McGrath’s knowledge of circumstances connected with the claim, prior to 23 January 2016, that is relevant for the purposes of the second exclusion. I do not understand Hakea to contend otherwise, so far as “director’s” knowledge is concerned.

307    I am not persuaded, however, that the second exclusion is engaged, even though, prior to the inception of the policy, Mr McGrath knew that Denham was in severe financial distress, such that it could not complete the building contract in a timely fashion.

308    When cl 5(a)(iii) excludes the insurer’s liability for Loss with reference to any:

… circumstance or Claim which was known about by any of the Directors or Officers or the Company prior to the Period of Insurance;

the word “circumstance” cannot be referring to, simply, facts known to the director, prior to the inception of the policy, that might subsequently provide the factual substratum for a Claim. To read cl 5(a)(iii) in that way would drastically, and unrealistically, limit the availability of the indemnity that is to be provided under the policy, and thus fail to give the policy a commercial construction. In this regard, I agree with the tenor of Hakea’s submissions, but not every step or aspect of the argument it developed.

309    Neon’s submission focussed on that part of cl 5(a)(iii) I have quoted above. However, in order to understand the meaning of “circumstance” in that part of cl 5(a)(iii), it is necessary to have regard to all the wording of the second exclusion. When that is done, it is readily apparent that the clause juxtaposes a “circumstance notified or Claim made” under any insurance in force prior to the Period of Insurance and a “circumstance or Claim which was known about” prior to the Period of Insurance.

310    The reference to a “circumstance notified” under any insurance in force prior to the Period of Insurance does not simply capture the facts constituting the “circumstance”. It characterises the “circumstance” as one that is known by the insured director or officer to expose, or at least potentially expose, him or her to a legal liability to a third party—hence the reference to the “circumstance” being notified under any insurance in force before the inception of the present policy. The subsequent reference to a “circumstance … which was known about” in cl 5(a)(iii) must be understood accordingly. It does not make sense to give the word “circumstance” in that phrase a different meaning or character. The phrase “circumstance … which was known about” prior to the Period of Insurance connotes that the director or officer not only knows the facts constituting the “circumstance” but also that the director or officer knows that the “circumstance” is one by which he or she is exposed, or potentially exposed, to legal liability to a third party.

311    The juxtaposition of “circumstance” and “Claim” in each phrase is also relevant to this question of construction and supports the meaning of “circumstance” to which I have referred. Plainly, the word “Claim” bears its defined meaning in the policy as “a written notice received by a Director or Officer … for a demand for compensation or other relief from any party in respect of any actual or alleged Wrongful Act …”. The juxtaposition of “circumstance” with “Claim” indicates that a “circumstance” is of the same general character as a “Claim”; it is just that the “circumstance” has not matured into a written notice received by the director or officer for a demand for compensation or other relief in respect of a wrongful act.

312    This meaning of “circumstance” in cl 5(a)(iii) is consonant with the notice on the certificate of insurance to which Hakea has drawn attention. That notice declares that the policy does not cover liability resulting from any “claim, matter, occurrence or circumstance” (my emphasis) arising from “any act, error or omission committed or alleged to have been committed” by the insured of which the insured is aware before the commencement of the insurance. Here, the word “aware” conditions both the “claim, matter, occurrence or circumstance” and the “act, error or omission” from which the “claim, matter, occurrence or circumstance” arises. The words “act, error or omission” connote conduct of the insured that is, in some way, wrongful or blameworthy.

313    I have found that Mr McGrath knew that Denham was in severe financial distress, such that it could not complete the building contract in a timely fashion, and that he deliberately did not disclose these facts to Hakea. I have found that Mr McGrath’s conduct in this regard was born of his awareness that such disclosure would jeopardise the continuation of the building contract. I have also found that, in not disclosing these facts to Hakea, Mr McGrath preferred his own interests over his duty to Hakea as a director, and gained an improper advantage for himself.

314    However, Mr McGrath’s knowledge of these facts was not sufficient to constitute the knowledge required to engage the second exclusion. On the evidence, I am not persuaded that, before the inception of the policy, Mr McGrath was on notice, or otherwise knew, that his conduct, as summarised above, exposed him to any liability, or potential liability, to Hakea. Not only is there no direct evidence of such knowledge, but the circumstantial evidence is not such that I would infer the existence of such knowledge.

315    Although by 5 November 2015 Hakea’s other directors knew that Denham had liquidity problems, there is nothing in the evidence to suggest that they had formed the view that Mr McGrath had breached his duties as a director of Hakea by failing to inform Hakea of those problems, or that Hakea had any claim against him because of any other act, error or omission on his part.

316    The notice to show cause dated 27 November 2015 that was served on Denham under cl 39.2 of the building contract made no such claim. What it did claim was that Denham had breached the building contract in a multitude of ways. It did not claim, however, that Denham was insolvent or financially unable to proceed with the contract, and that this was a reason for terminating the contract.

317    Similarly, the notice of termination dated 10 December 2015 that was served on Denham under cl 39.4 of the building contract made no such claim concerning Mr McGrath, or claim that a reason for terminating the contract was that Denham was insolvent or financially unable to proceed with the contract.

318    Finally, at all relevant times, Mr McGrath remained as one of Hakea’s directors. There is nothing in the evidence to which I have been taken that would suggest that the other directors had any concern as to Mr McGrath’s conduct—either generally or in relation to his non-disclosure of Denham’s financial circumstances—that would warrant his removal as a director or other action being taken against him, or that they had expressed any such concern to Mr McGrath himself.

319    As I have noted, Neon contended that the second exclusion applies because of Mr McGrath’s knowledge of Denham’s severe financial distress and inability to complete the building contract in a timely fashion. In the course of argument, the question of Hakea’s knowledge of those matters arose as a possible reason for applying the exclusion. To the extent that there is any lingering question in that regard, I am not satisfied that Hakea, itself, had knowledge, before the inception of the policy, of the breach of duty I have found.

Conclusion

320    I have found that Hakea has established that Mr McGrath breached his duty to it under s 180(1) of the Corporations Act. However, the policy does not respond to the loss that Hakea claims because the first exclusion is engaged. It follows that Hakea’s claim against Neon must be dismissed.

321    The parties should confer with a view to agreeing on the orders that should now be made, including as to costs between Hakea and Neon. I will direct that agreed draft orders or, if there is no agreement, competing draft orders, be brought in by 9 September 2022.

Associate:

Dated:    26 August 2022