SUPREME COURT OF NORFOLK ISLAND

Prechelt v Douran [2022] NFSC 1

ORDERS

THE COURT ORDERS THAT:

1.    Judgment be entered for the plaintiff in the sum of $910,625 (inclusive of $323,125 in interest from 22 November 2012).

2.    The defendants pay the plaintiff’s costs on an indemnity basis.

REASONS FOR JUDGMENT

(Revised from the transcript)

RARES J:

1    In about 2002, Gregg Prechelt, the plaintiff, became a director and shareholder of Hillcrest Pty Ltd, together with its then-existing directors and shareholders, Kerry and Gordina Douran, the defendants, who are brother and sister. Hillcrest was incorporated under the Companies Act 1985 (NI). From 1996 until 21 November 2012, Hillcrest owned four parcels of land on Norfolk Island on which it conducted the business of a licensed hotel under the names “Hillcrest Hotel” or “Hillcrest Bed & Breakfast” using numerous buildings on the land. Hillcrest also acquired various items of plant and equipment for use in the business (the assets). Hillcrest had granted a mortgage to Westpac Banking Corporation over the land to secure a loan of $1.2 million.

2    During the six years from March 2002, Mr Prechelt managed the business as lessee from Hillcrest and caused the Westpac mortgage to be reduced by over $452,000. The significance of this was that on 9 April 2003, Mr Douran entered into an agreement (the share purchase agreement) with Mr Prechelt that acknowledged the earlier sale to Mr Prechelt for $300,000 of his initial holding of 300 shares and promised that Mr Douran would transfer to Mr Prechelt:

3    In October 2012, Mr Douran and Michael King, his business partner in among other ventures Worldwide Totalisators (NI) Pty Ltd, agreed to form a company to be incorporated and own its issued capital in equal shareholdings. Their plan was to buy land, business and assets (Hillcrest’s property) from Hillcrest without informing Mr Prechelt by Mr King funding payment of about $500,000 needed to discharge the mortgage to Westpac and Mr Douran funding the payment of Hillcrest’s unsecured trade creditors of about $130,000. At that time, Mr Douran held 2,199 of the 2,500 issued shares in Hillcrest. Mr Prechelt, who had resigned as a director in 2008, still held 300 shares and Ms Douran held 1 share.

4    On 29 October 2012, they caused Heritage Hill Investments Pty Ltd to be incorporated and became equal shareholders in it. In Heritage Hill’s application for finance to Commonwealth Bank of Australia (CBA), that he and Mr King signed, Mr Douran valued his own interest in Hillcrest at $700,000 (Ex E).

5    On 20 November 2012, Hillcrest entered into an agreement (the 2012 agreement) to sell the Hillcrest property to Heritage Hill for the price of $500,000, apportioned so that the purchaser paid $460,000 for the land, $20,000 for the plant and equipment and $20,000 for the licensed hotel business, being all of Hillcrest’s assets.

6    On 6 June 2013, Mr King obtained a valuation of Hillcrest’s property as at 22 November 2012 for stamp duty purposes (Vol 4, tab 3-4). The valuer assessed the value at $800,000.

7    Before the hearing, the expert valuers had conferred and arrived at a small difference between their two reports. Today, the parties agreed that the value of the assets transferred on 22 November 2012 from Hillcrest to Heritage Hill was $1,087,500. It followed that the transfer of the Hillcrest property for $500,000 resulted in Heritage Hill acquiring it at an undervalue of $587,500, being the difference between what was paid and its true value.

8    Mr Prechelt brought proceedings in 2016 seeking that Hillcrest be wound up, which Mr Douran opposed. On 2 June 2017, after a contested hearing, the Chief Justice ordered that Hillcrest be wound up and that Mark Pearce and Michael Dullaway be appointed its liquidators: Prechelt; in the matter of Hillcrest Pty Ltd v Hillcrest Pty Ltd (No 3) [2017] NFSC 6 at [13]. Besanko CJ ordered Mr and Ms Douran to pay Mr Prechelt’s costs of those proceedings on an indemnity basis. Earlier, his Honour had found that the facts before him revealed a prima facie case of breach of director’s duties against Mr Douran arising out of the 2012 agreement: Prechelt, in the matter of Hillcrest Pty Ltd v Hillcrest Pty Ltd (No 2) [2017] NFSC 3 at [29].

9    On 19 November 2018, Mr Prechelt entered into an assignment agreement with Hillcrest and its liquidators to purchase all claims belonging to Hillcrest against Mr King, Mr and Ms Douran and any other party arising out of, associated or connected with the 2012 agreement, its performance “and without limitation, a cause or causes of action for breach of duties of a director in equity and/or at common law and/or under statute”. Mr Prechelt agreed to pay the liquidators $5,500 and 25% of the net recovery in any such proceeding. It is common ground that the liquidators entered into the assignment in exercise of their power under s 481(2)(c) of the Act.

Issues

10    Mr Prechelt made various claims in the second amended statement of claim, many of which were defended. As a result of counsel sensibly narrowing the issues and making further refinements of them during the course of the hearing, two substantial issues remain to be determined, namely, first, whether Mr Prechelt has any standing to bring the proceeding as an assignee in respect of any rights under s 285(7) of the Act (the assignment issue), and, secondly, whether Mr Prechelt had proven that, but for Ms Douran’s breaches of her statutory or equitable duties or obligations, Hillcrest would not have suffered any loss or damage (the causation issue).

11    Mr Douran conceded that his conduct involved a breach his fiduciary duty not to act where his interest and duty conflicted or might possibly conflict: see Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 and s 285(4) of the Act. Ms Douran conceded that she had breached her duties under s 285(2) and (4) of the Act.

The legislative provisions

12    Relevantly, s 285 of the Act, which reproduced the analogous provisions of s 229 of the since repealed uniform Companies Codes of each State and Territory, provides as follows:

Duty and liability of officers

285.

(1)     An officer of a corporation shall at all times act honestly in the exercise of his powers and the discharge of the duties of his office.

Penalty:

(a)     in a case to which paragraph (b) does not apply - 50 penalty units; or

(b)     where the offence was committed with intent to deceive or defraud the company, members or creditors of the company or creditors of some other person or for some other fraudulent purpose - 200 penalty units or imprisonment or both.

(2)     An officer of a corporation shall at all times exercise reasonable care and diligence in the exercise of his powers and the discharge of his duties.

Penalty: 50 penalty units.

…

(4)     An officer or employee of a corporation shall not make improper use of his position as such an officer or employee to gain, directly or indirectly, an advantage for himself or for some other person or to cause detriment to the corporation.

Penalty: 20 penalty units or imprisonment or both.

…

(7)     Where a person contravenes or fails to comply with a provision of this section in relation to a corporation, the corporation may, whether or not the person has been convicted of an offence under this section in relation to that contravention or failure, recover from the person as a debt due to the corporation by action in a court of competent jurisdiction —

(a)     if that person or some other person made a profit as a result of the contravention or failure - an amount equal to the amount of that profit; and

(b)     if the corporation has suffered loss or damage as a result of the contravention or failure - an amount equal to the amount of that loss or damage.

(8)     This section has effect in addition to, and does not affect the operation of, any rule of law relating to the duty or liability of a person by reason of his office or employment in relation to a corporation and does not prevent the institution of a civil proceeding in respect of a breach of such a duty or in respect of such a liability.

(emphasis added)

13    Relevantly, s 481 conferred the following powers on a liquidator:

(2)     The liquidator may —

(a)     bring or defend a legal proceeding in the name and on behalf of the company;

…

(c)     sell or otherwise dispose of, in any manner, all or any part of the property of the company;

…

(j)     do such other things as are necessary for winding up the affairs of the company and distributing its property.

14    The Mercantile Law (Chose in Action) Act 1989 (NI) provided, analogously to Judicature Act provisions such as s 12 of the Conveyancing Act 1919 (NSW):

Legal assignments of debts and other choses in action

2.

(1)     A debt or other chose in action may be assigned by a written assignment signed by the assignor or by the assignor’s agent.

(2)     Subject to subsection (3), and to equities that have priority over the rights of the assignee, an assignment under subsection (1) is effective to pass to the assignee —

(a)     the legal right to the debt or chose in action;

(b)     all legal and other remedies in respect of the debt or chose in action; and

(c)     the power to give a good discharge for the debt or chose in action without the concurrence of the assignor.

Factual background

15    It is necessary to say something more about the factual background. During the period between March 2002 and March 2008, Mr Prechelt managed the hotel business under a lease from Hillcrest. He caused the mortgage to Westpac to be reduced by over $452,000. However, he appears to have ceased paying the monthly instalments of the option fee under the share purchase agreement in around June 2005. That led to a discussion, which it is not currently necessary to resolve, as to the proper construction of the share purchase agreement provision relating to the option fee for any tranche of shares, including as to when Mr Prechelt’s entitlement arose and what was due by him.

16    By March 2008, Mr Prechelt appears to have had enough and wished to conclude his management of the hotel business and the conduct of the lease. At the time he left, he had yet to complete some of the bookkeeping and records. He accepted, in his evidence, that he intended to return whatever relevant documents he had in that regard completed to the time that he finished in his management position, but he failed to do so, despite numerous promises. He has not now been able to recover the books. However, he gave unchallenged evidence that he left all of the ordinary accounting books and records, such as bank statements and documents recording the day-to-day transactions, in the hotel office when he left in 2008. For whatever reason, the books and records of the business after Mr Prechelt left do appear to have been sufficient to enable the preparation of statutory accounts for the 2007–2008 financial year. Moreover, no statutory accounts appear to have been created for some period by Mr Douran or whoever was responsible for that task. Although there was a deal of evidence on the topic, nothing turns on it.

17    At 31 July 2009, Hillcrest owed about $654,000 under the Westpac mortgage. Mr Douran contended that for a considerable period after Mr Prechelt’s departure he had to provide financial support to keep the business running and Hillcrest solvent. Mr Douran claimed that by 2012 he had arrived at the point where he was no longer prepared to continue to do so. That claim makes no sense to me because of what he did thereafter.

The events leading to the 2012 agreement

18    In mid-October 2012, Mr King and Mr Douran decided that they would cause their new company, Heritage Hill, to acquire Hillcrest’s property and then continue to run what, according to Mr Douran, had been an unprofitable business that he had had to keep afloat by his own contributions and was no longer prepared to do so. As I have said, that asserted rationale makes no commercial sense. Far less is it consistent with his and Mr King’s subsequent actions in stripping Hillcrest of its assets in secret from Mr Prechelt so that the latter would receive no benefit as a shareholder from the realisation of those assets. The result was that Mr Prechelt would receive nothing from his contributions to the reduction of the Westpac mortgage or earlier conduct of the hotel, in circumstances where the sale was, even from Mr Douran’s contemporaneous perspective, at an undervalue.

19    Mr Dullaway’s affidavit disclosed documents on the file of Willis & Bowring solicitors in Miranda, New South Wales, including the shareholders agreement made on 22 November 2012 in respect of Heritage Hill between Mr King and Mr Douran and the 2012 agreement. Don Wright of Willis & Bowring prepared those agreements. Mr Wright, properly, informed Mr King and Mr Douran that, without fully informed consent of each of them, he could not act for all parties in the transactions. After they gave their consent on behalf of Hillcrest, Heritage Hill and each individual personally, Mr Wright prepared a brief setting out his understanding of what was proposed and sent it to both Mr Douran and Mr King to consider.

20    In a meeting held on 15 October 2012, at which Mr King, Mr Douran and Mr Wright were present, Mr King and Mr Douran instructed Mr Wright that Mr Prechelt had a “share option agreement” in the latter’s favour (namely the share purchase agreement) but he was “broke”. They told Mr Wright that Mr Prechelt was not involved in any way in the current proposal. One of the concerns which Mr Wright recorded in his file note related to the distribution of the proceeds of sale. At that time and thereafter, the proposal was that Mr King would inject $600,000 into Heritage Hill, $500,000 of which would be used to pay out the Westpac mortgage with the balance to be used to pay any stamp duty and provide working capital. Mr Douran would pay out the existing trade creditors of Hillcrest so that there would be no external or other creditors, apart from whatever claim he had for his provision of his shareholder loans and a small sum owed to Mr Prechelt. The plan was that after two years or so, Mr King would forgive $500,000 of his capital injection. The equal shareholding both men were to have in Heritage Hill no doubt reflected, in effect, their then equal provision of about $100,000 each, in working capital and payment of Hillcrest’s external creditors, after taking in account the forgiveness of the $500,000 mortgage payment and Mr Douran’s having brought to his side of the Heritage Hill venture all of Hillcrest’s property that it sold at what is now an agreed undervalue.

21    On 5 November 2012, Mr Wright wrote to Mr Douran and Mr King referring to their discussion on 15 October 2012 and his email exchange with Mr King on 21 October 2012 as “the way to go. The principal reason for saying so is that it avoids the Prechelt complications which would arise if the company was sold, rather than its assets” (emphasis added). He then recited the essential elements of the arrangements which came to be reflected in the shareholders agreement between Mr King and Mr Douran. In cl 3.8 Mr King declared that his present intention was, at the expiration of two years from the date of the agreement, to forgive “so much of the advance as constitutes $500,000 and that thereupon so much of the advance as exceeds that sum shall continue to be subject to the terms and conditions” of the shareholders agreement.

22    Mr Wright continued to assist in the preparation of the documentation to effect the sale and shareholders agreement. He prepared a draft resolution of directors of Hillcrest for Mr and Ms Douran’s signature to record Hillcrest’s entry into the 2012 agreement for a consideration of $500,000. In his letter of 21 November 2012 to Mr Douran and Mr King, Mr Wright noted that Mr and Ms Douran were to sign and date the minute and keep the original with Hillcrest’s records, providing a copy to Heritage Hill. At least so far as the liquidators are concerned, no original of any signed minute was kept in Hillcrest’s records and none is in evidence.

23    Ms Douran, who is 92 years old, said in her evidence that she accepted that her memory was not good. She said that she signed the documents but did not recall having any discussions with Mr King or learning that he and her brother were the directors and shareholders of Heritage Hill, saying: “I don’t recall ever being there or ever concerned about that” and gave the following evidence:

Do you recall your brother Kerry Douran approaching you about selling Hillcrest to Mr King? --- Yes. He was trying to sell Hillcrest, but I knew after the sale that they had spoken and they had spoken about selling Hillcrest, but I wasn’t there, so I don’t know.

24    I asked her about what she had referred to in saying that she knew after the sale, and she said:

when I was asked to sign, I think, the land content or something, I signed the land content, and then I knew, and then the sale went through.

…

I knew nothing at all about the workings of Hillcrest or what happened at Hillcrest. I recall nothing about that, and I knew nothing about it. I had no part in the running of Hillcrest nor did I know how they ran Hillcrest.

…

but you do seem to recall Kerry Douran telling you something about selling the Hillcrest assets with respect to Mike King. You recall something about that, don’t you? --- Well, he was in trouble financially, and I was prepared for him to do what he had to do to get out of trouble, but I wasn’t part of any deals, and I don’t know what happened there.

…

I made no inquiries at all. … I didn’t want to know or be involved.

25    She repeated that she knew nothing about what was going on at Hillcrest, did not want to be involved, her brother had told her that he was in trouble financially and would be trying to sell Hillcrest.

Mr and Ms Douran’s admissions of contravening s 285(2) and (4)

26    In those circumstances, it is clear why Ms Douran accepted that she had breached her duties under s 285(2) of the Companies Act. That was because she did not take any action which a reasonable person in her position, acting as a director of Hillcrest, would have taken to find out what the transaction was, who the parties to it were, what the price was, what negotiations or steps had been taken to seek to achieve a proper price or whether her brother had any interest in the purchaser. Likewise there was a solid basis for her to concede that she had contravened s 285(4), given that she said that she had executed the documents because “I was prepared for him [Mr Douran] to do what he had to do to get out of trouble”. That conduct contravened her obligation not to use her position as an officer of Hillcrest in order to gain, directly or indirectly, an advantage for some other person, being her brother: see Chew v The Queen (1992) 173 CLR 626 at 632–633 per Mason CJ, Brennan, Gaudron and McHugh JJ, who held that the word “to”, in s 229(4) of the Companies (Western Australia) Code, the exact analogue of s 285(4), meant “in order to”.

27    The position with Mr Douran was more pellucid still. He knew that he was effecting the sale of Hillcrest’s property at a gross undervalue. Even on his own account, he valued his interest in Hillcrest at $700,000, in circumstances where he held almost 88% of the shares and Mr Prechelt the remaining 12%. Thus the value of Hillcrest’s assets being sold for $500,000, if one included Mr Prechelt’s interest, was in his mind even greater than the $700,000.

28    There was no explanation in any of Mr Douran’s evidence as to the commerciality behind why he and Mr King caused the transfer of the whole of Hillcrest’s property, including a business that Mr Douran claimed had been so loss-making, for the price they set, namely, the amount outstanding to Westpac under the mortgage, as opposed to setting a proper price for it. They then planned, through Heritage Hill, to run the same business, with exactly the same amount of debt of $500,000 albeit that it would be forgiven. The effect of the agreement and the transaction as a whole was that Mr Douran and Mr King, through Heritage Hill, would hold the whole of the transferred assets without having to account to Hillcrest for their true value. That was calculatedly dishonest. Mr Douran’s conduct reflected the dishonesty.

29    While the transaction was in its final stages Mr Prechelt appears to have got wind that something was going on, and he emailed Mr Douran on 15 November 2012, asking: “What is news on the Hillcrest, I hear that Mike King has bought it”.

30     On 17 November 2012, Mr Douran emailed back:

Hey Gregg, dont believe whatm [sic] you hear.

31    Subsequently, Mr Prechelt persisted in his attempts to discover what was going on in Hillcrest. Finally, Mr Douran arranged for accounts made up to 30 June 2013 to be presented to an annual general meeting of Hillcrest on 24 June 2014. On 24 June 2014, Mr and Ms Douran signed a directors report for the period 1 July 2010 to 30 June 2013 which stated under the heading “Directors Benefits”:

No directors have received a benefit by reason of a contract made with the company or related corporation.

32    That was not true to Mr Douran’s knowledge. He had made a contract to sell Hillcrest’s property, at an undervalue, to Heritage Hill, a company in which he knew he had a 50% shareholding. The minutes of the meeting held on 24 June 2014 recorded that Mr Douran, as chairman, moved in accordance with a motion on the agenda that steps be taken as soon as practicable to wind up Hillcrest’s affairs. That motion was passed unanimously. The transcript of Mr Douran’s tape recording of the meeting revealed that Mr Prechelt stated that he wanted to have a liquidator appointed to investigate what had happened in the company’s affairs, as Mr Douran understood.

33    On 19 January 2015, Mr Prechelt wrote a letter to the Chief Minister of Norfolk Island, the Registrar of Companies, Mr King, Mr and Ms Douran. He referred to the sale by Hillcrest to Heritage Hill that Hillcrest had recorded as being at the directors’ valuation, without them ever having obtained an independent valuation. He noted that the Land Titles Office had recorded that a valuation (for stamp duty purposes) had assessed the land and assets being sold as valued at $800,000, and that Mr Douran was interested on both sides of the transaction as a director of both Hillcrest and Heritage Hill and a 50% shareholder in the latter. Mr Prechelt suggested that what had occurred was unlawful and ought to be investigated.

34    In the meantime, Mr Douran had done nothing about progressing with the appointment of a liquidator. That was the last thing Mr Douran wished to occur. He decided to take another course and sought to have Hillcrest deregistered. On 18 February 2015, he made a statutory declaration seeking Hillcrest’s deregistration under the Companies Act, in which he certified that it had no assets and:

The members have lost all interest in [the affairs of the company] and would not attend a meeting for the purpose of winding up.

(emphasis added)

35    He admitted in cross-examination, when pressed, that this was not true. The obvious purpose of Mr Douran’s action in seeking deregistration, as also reflected in his opposition to Mr Prechelt’s 2016 proceeding, was to prevent a liquidator investigating what he and Mr King had done in causing Heritage Hill to acquire Hillcrest’s property at a gross undervalue. As the Chief Justice recorded in his reasons, based on the evidence then before him, there was a prima facie case of a breach of duty. That case has been established as fact in the evidence before me.

36    Importantly, Mr Douran admitted in cross-examination that there was no urgency in seeking to bring about the sale by Hillcrest to Heritage Hill in late 2012, creditors were not pressing and Westpac had not called up the mortgage. He made a desultory attempt to say that Hillcrest’s property was on the market listed with real estate agents and available for sale. But there was no independent evidence that this position existed at any time during 2012, and in particular, once he and Mr King had hatched the plan to use Mr Wright’s firm in mid-October 2012 to bring about the sale at the time it occurred, a little over a month later. It may well be that there had been earlier attempts, both by Mr Prechelt and Mr Douran, to interest others in a sale in 2008, and perhaps earlier, to Phillip Hooper, which came to nought.

37    The obvious commercial purpose of the structuring of the sale was to strip Hillcrest of its assets at an undervalue and to prevent Mr Prechelt receiving any benefit from those assets as a shareholder or member were the company to be wound up.

38    In his affidavit of 30 August 2016 in the previous proceeding, which was read in this proceeding, Mr Douran said that he was authorised on behalf of his sister to make that affidavit. The affidavit included a paragraph in which he stated:

I discussed the situation with Gordina, and we agreed to approach Michael William King to see if he could assist.

39    There is no other evidence that Ms Douran knew of or was involved in the plan between Mr King and Mr Douran other than what Mr Douran said purportedly on her behalf. It was not put to her that she had given him authority to say that. That affidavit gave no further description of any involvement of Ms Douran, and I do not need to make any further findings about her involvement.

Mr and Ms Douran’s submissions

40    Throughout these proceedings, Mr Douran and his sister have maintained a number of unmaintainable defences that have gradually fallen away.

41    Mr and Ms Douran argued that the cause of action in debt under s 285(7) was not assignable, in spite of the ordinary principle that a liquidator can assign a company’s causes of action under analogues of s 481(2)(c). They contended that, because of its nature, the cause of action under s 285(7) was not assignable. They submitted that the provision was in the nature of analogues of certain statutory compensation provisions, such as are found in s 236 of the Australian Consumer Law in Sch 2 of the Competition and Consumer Act 2010 (Cth) and its predecessor, s 82 of the Trade Practices Act 1974 (Cth). They noted that there is a debate in the authorities as to whether s 1317H(1) of the Corporations Act 2001 (Cth) allows for the assignment of a cause of action by a liquidator, given that some decisions have held it is assignable and others that it is not.

42    In favour of the ability to assign is the decision of North J in Cant; Re Novaline Pty Limited (in liq) (2011) 282 ALR 49 at 54 [21]–[22], while against that proposition are cases including Re Colorado Products Pty Limited (in prov liq) (2014) 101 ACSR 233 at 357–358 [392]–[395], where Black J did not follow North J and held that the cause of action in s 1317H(1) was not assignable: see also Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd (2018) 58 VR 1 at 36 [111]–[113] per Connock J, Chappell as Executor of the Estate of Hitchcock v Goldspan Investments Pty Ltd [2021] WASCA 205 and MG Corrosion Consultants Pty Ltd v Gilmour (2012) 202 FCR 354 at 359 [18] per Barker J, who was not referred to North J’s decision. In Chappell [2021] WASCA 205 at [65](b), Buss P and Mitchell JA applied what Connock J had said in Pentridge 58 VR at 36 [111]–[113], observing:

The weight of authority indicates that s 477(2)(c) of the Corporations Act does not empower a liquidator to sell or dispose of a cause of action under s 82(1) of the TPA in that s 477(2) does not make assignable statutory claims which are not otherwise assignable.

The assignment issue

43    Mr and Ms Douran accepted the validity of the assignment to Mr Prechelt of Hillcrest’s causes of action in equity and at common law for their breaches of fiduciary duty and of their equitable duty owed to Hillcrest to exercise reasonable skill and care when acting in a fiduciary capacity (see Nocton v Lord Ashburton [1914] AC 932 at 956–957 per Viscount Haldane LC; Maguire v Makaronis (1997) 188 CLR 449 at 468 per Brennan CJ, Gaudron, McHugh and Gummow JJ; Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 248 per Ipp J.

44    The following principles applied to the situation in which Mr and Ms Douran acted as Hillcrest’s directors in entering into and completing, on its behalf, the 2012 agreement and the transfer of Hillcrest’s property to Heritage Hill at an undervalue.

45    In Furs Ltd v Tomkies (1936) 54 CLR 583 at 592–593, Rich, Dixon and Evatt JJ identified the inflexible rule of equity that:

… except under the authority of a provision in the articles of association, no director shall obtain for himself a profit by means of a transaction to which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his doing so, or all shareholders acquiesce. An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company. It is no answer to the application of the rule that the profit is of a kind which the company could not itself have obtained, or that no loss is caused to the company by the gain of the director. It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company. If, when it is his duty to safeguard and further the interests of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self interest, beyond which it is neither wise nor practicable for the law to look for a criterion of liability. The consequences of such a conflict are not discoverable. Both justice and policy are against their investigation. With reference to a transaction arising out of another relation of confidence, Lord Eldon said: “The general interests of justice” require “it to be destroyed in every instance; as no Court is equal to the examination and ascertainment of the truth in much the greater number of cases” (Ex parte James ((1803) 8 Ves 337 at p 345; 32 ER 385 at p 388)). His language has been applied to, and illustrated by, the case of a fiduciary agent making undisclosed profits (Panama and South Pacific Telegraph Co v India Rubber Gutta Percha and Telegraph Works Co ((1875) LR 10 Ch 515, at pp 523, 527)).

(emphasis added)

46    Similar principles have applied, despite changes in corporate statute laws, to the need for a director or officiant to make a full and frank disclosure of, and receive fully informed consent for, any transaction that he or she makes with, or causes, to be made by a company where he or she has a real and sensible possibility of a conflict of interest and or duties: Pilmer 207 CLR at 199 [78] per McHugh, Gummow, Hayne and Callinan JJ, see also Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 and Phipps v Boardman [1967] 2 AC 46. Fiduciaries, such as directors, are bound by strict rules for good reason, because, as Mason CJ, Brennan, Deane, Dawson and Gaudron JJ said in Warman International Ltd v Dwyer (1995) 182 CLR 544 at 557, those rules ensure that “fiduciaries generally conduct themselves ‘at a level higher than that trodden by the crowd’”. They said (at 557–558):

The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage (Chan v Zacharia (1984), 154 CLR, at pp 198–199). Thus, it is no defence that the plaintiff was unwilling, unlikely or unable to make the profits for which an account is taken or that the fiduciary acted honestly and reasonably (Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929), 42 CLR 384, at p 409; Furs Ltd v Tomkies (1936), 54 CLR 583, at p 592; Consul Development (1975), 132 CLR, at p 394; Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443; [1972] 2 All ER 162; Canadian Aero Service Ltd v O’Malley, [1974] SCR 592; (1973) 40 DLR (3d) 371). So, in Regal (Hastings) Ltd v Gulliver ([1967] 2 AC 134n), although the directors acted in good faith and in the interests of the company of which they were directors in taking up shares in a subsidiary which the company could not afford to take up, they were held accountable for the profit made on the sale of the shares. And, in Phipps v Boardman ([1967] 2 AC 46), the solicitor was held accountable for the profit he made, notwithstanding that he acted bona fide and in the interests of the trust and that the opportunity would not have been availed of but for his skill and knowledge.

(emphasis added)

47    In R v Byrnes (1985) 183 CLR 501 at 515–516, Brennan, Deane, Toohey and Gaudron JJ said:

If, pursuant to the constitution of a corporation and the manner in which its business is conducted, a director has an authority to execute an instrument so as to bind the company but that authority is conditioned on the approval or concurrence of all or some other directors, it is improper to purport to exercise that authority without that approval or concurrence. Where prior authority is required for the execution of an instrument, the person executing the instrument may knowingly fail to obtain the authority for any of a number of reasons: that person may fail to seek the authority or the authority may be given by directors who, to the knowledge of the alleged offender, cannot effectively give the authority required (for example, where their powers are sterilised by a conflict of interests or duties), or where the authority, for some other reason known to the alleged offender, has not been effectively given by the person or persons empowered to give it. In any of these cases, the person executing the instrument, whether a director or officer, is guilty of impropriety. The test of impropriety is not whether the corporation would be bound by the instrument nor whether a third party would be entitled to rely on it (See Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146). It is the character of the conduct of the director or officer in relation to the internal management of the corporation that is in question.

(emphasis added)

Consideration

48    The issue here is whether, on its correct construction, a claim under s 285(7) is assignable. In Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) (2009) 239 CLR 27 at 46–47 [47], Hayne, Heydon, Crennan and Kiefel JJ said:

This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the text itself. Historical considerations and extrinsic materials cannot be relied on to displace the clear meaning of the text. The language which has actually been employed in the text of legislation is the surest guide to legislative intention. The meaning of the text may require consideration of the context, which includes the general purpose and policy of a provision, in particular the mischief it is seeking to remedy.

(footnotes omitted)

49    Critically, s 285(7) is expressed to operate where a person has contravened or failed to comply with an earlier provision in s 285 in relation to a corporation. The provision confers on the corporation, regardless of whether the person has been convicted of an offence under it in relation to the contravention or failure, the right to recover from the contravener an amount equal to the amount of loss or damage “as a debt due to the corporation by action in a court of competent jurisdiction” (emphasis added), relevantly, if the corporation has suffered loss or damage as a result of the contravention or failure.

50    Thus, s 285(7) creates a right to proceed on a statutory cause of action in debt. Such an action must have the character of the old common law causes of action of debt and indebitatus assumpsit. The common law allowed a plaintiff to sue on common money counts. In lecture V in F W Maitland, The Forms of Action at Common Law (A H Chaytor and W J Whittaker (eds), Cambridge University Press, 1981) p 52, Professor Maitland said that “the action of debt is not necessarily based on contract – it serves for the recovery of statutory penalties, of forfeiture under by-laws, of amercements, and of monies adjudged by a court to be due” (emphasis added). In lecture VI, Professor Maitland explained (pp 56–57) how the cause of action in indebitatus assumpsit developed. It was based on an implied promise in an executory contract that the defendant had agreed to pay money or deliver something.

51    By the mid-19th century, the common law permitted an assignee of a debt to sue, by a convoluted process, to recover the debt: see Bullen & Leake: Precedents of Pleadings in Personal Actions in the Superior Courts of Common Law (2nd ed, V & R Stevens, Sons, and Haynes, 1863) pp 60–65.

52    Since the enactment of s 25(6) of the Supreme Court of Judicature Act 1873 (UK) (and now s 2 of the Mercantile Law (Choses in Action) Act) there is a simple process to assign a debt or other chose in action under the statutory procedure. The statutory debt is in contrast to the rights under s 236 of the Australian Consumer Law and its analogues or s 1317H(1) of the Corporations Act, each of which creates a right to recover compensation, not a debt. Thus, s 1317H(1) creates a power for the court to order a person who has contravened particular provisions of that Act “to compensate a corporation, registered scheme or notified foreign passport fund for damage suffered by the corporation, scheme or fund” (emphasis added) that resulted from the contravention. Importantly, s 1317H(4) and (4A) require a responsible entity or operator found liable under s 1317H(1) to make payment of the compensation to the scheme or fund property respectively.

53    The legislature has chosen to create in s 285(7) the particular and long established statutory remedy of a cause of action in debt so that a corporation can recover the amount of loss or damage, being a sum certain, albeit it may be necessary sometimes to be fixed by action, from a person who had contravened a provision of s 285. Here, the amount of loss or damage is a sum certain, being the undervalue of $587,500.

54    In Re Movitor Pty Limited (receiver and manager appointed) (in liq); ex parte Sims (1996) 136 ALR 643, Drummond J held that a liquidator could assign a company’s cause of action to recover the statutory debts created by ss 588M(2) and 588W(1) of the then Corporations Law (Cth). The loss or damage was that resulting from insolvent trading. Relevantly, s 588M(2) provided:

The company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.

55    A similar right was created for a liquidator under s 558W where a holding company had caused a subsidiary to engage in the insolvent trading. Drummond J held (at 653–654):

The subject matter of the litigation the subject of the funding arrangement between the applicant and Lumley is the statutory causes of action created by ss 588M and 588W of the Corporations Law.

…

The right of the liquidator to recover damages created by each of these sections is described as a right to recover from the director and the holding company an amount equal to the loss or damage suffered as a result of the company's insolvent trading in which the director and the holding company were implicated “as a debt due to the company”. That “debt” arises once the conditions of liability have been fulfilled, something that must occur prior to commencement of any action for recovery under either section. Such a “debt” can properly be regarded as part of the property of the company which the liquidator is empowered to sell. Even if the rights to compensation created by ss 588M and 588W are not regarded as true debts but rights sui generis, Magor and St Mellons Rural District Council v Newport Corp [1950] 2 All ER 1226 at 1230–1 is authority for holding that they are still well capable of falling within the definition of “property of a company” in the relevant provisions of the Corporations Law.

(emphasis added)

56    In his classic judgment, with which Dixon CJ agreed in respect of his statement of the principles, in Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 at 26, Windeyer J said:

Assignment means the immediate transfer of an existing proprietary right, vested or contingent, from the assignor to the assignee. Anything that in the eye of the law can be regarded as an existing subject of ownership, whether it be a chose in possession or a chose in action, can today be assigned unless it be excepted from the general rule on some ground of public policy or by statute.

…

The common law doctrine that debts and other choses in action were not assignable never applied to Crown debts, and by the influence of the law merchant, bills of exchange and promissory notes were outside it. And it was never accepted in equity. “Courts of equity from the earliest times thought the doctrine too absurd for them to adopt” said Buller J in 1791 in the course of vigorous condemnation of it: Master v Miller ((1791) 4 TR 320 at p 340 [100 ER 1042 at p 1053]). Furthermore, he said that already at common law it had been “so explained away that it remains only an objection to the form of the action in any case”.

(emphasis added)

57    The statutory language in s 285(7) of the Companies Act creates a debt and s 2 of the Mercantile Law (Chose in Action) Act makes debts assignable in Norfolk Island. The natural and ordinary meaning of both provisions is that the cause of action in debt created in s 285(7) is assignable under s 2.

58    Mr and Ms Douran sought to eschew that consequence by arguing that the purpose of the statutory use in s 285(7) of the expression “as a debt due to the corporation by action in a court of competent jurisdiction” was intended to ensure that both courts of Norfolk Island, being this Court and the Court of Petty Sessions, could entertain actions for recovery within their jurisdictional limits. This is a court of unlimited jurisdiction and the Court of Petty Sessions is one of limited jurisdiction.

59    I reject that argument. The purpose of the legislation was to confer on the liquidator a statutory right to claim the amount of loss or damage as a debt, being a sum certain or as ascertained by judgment in the proceeding. No doubt, the legislature had in mind that liquidators often are in a position where, in order to raise funds to carry out their duties and to recover assets of the company as best they can for the benefit of its creditors and shareholders, they must assign some or all of the insolvent company’s assets in exercise of their powers under s 481(2).

60    The ordinary and natural meaning of s 285(7) is apt to create a statutory right to recover, as a debt, the amount of loss or damage suffered by the company. The provision is not intended to create jurisdiction in different courts. Rather the section creates a substantive chose in action to recover, as a debt, a particular class of loss or damage that a company has suffered, caused by a contravention of another part of s 285. In contrast, a right to statutory compensation may create a wide discretion in a court as to how the enactment’s compensatory purpose may be achieved: see, for example, the discussion by Emmett, Edmonds, and Rares JJ in V-Flow Pty Ltd v Holyoake Industries (Vic) Pty Ltd (2013) 296 ALR 418 at 429–431 [53]–[63], being a case dealing with compensation orders under s 1317H.

61    The purpose of the cause of action under s 285(7) is to create a debt, not a right to have compensation assessed, albeit that the amount of loss or damage must be proved so as to be recoverable. It is important to bear in mind that the purpose of provisions such as s 481(2)(c) and its analogues is to give the liquidator of a company statutory power to assign all of its property including that which would not otherwise be assignable under principles of the common law or equity. In UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1996) 21 ACSR 457 at 463–464, Hayne JA, with whom Brooking and Phillips JJA agreed, said of an analogue of s 481(2)(c):

In my view there is no warrant for reading down the general words of the law. The reference to sale or disposal “in any manner” makes plain that it is the intention of the legislature that the powers of the liquidator are to be ample. If a liquidator is to realise the assets of the company in liquidation to the best advantage, it would be surprising indeed if the liquidator were able to sell a particular form of the company’s assets (its rights of action) to only a limited class of persons – those who are already interested in the outcome of the action concerned. Especially is this so when it is to be assumed that the provisions about realisation of the company's assets are to be read in light of the long established rule in relation to bankruptcy which permits the trustee in bankruptcy to sell the bankrupt’s rights of action to a third party: see Seear v Lawson (1880) 15 Ch D 426; Guy v Churchill (1889) 40 Ch D 481; Ramsay v Hartley [1977] 2 All ER 673; 1 WLR 686; Stone v Angus [1994] 2 NZLR 202; Cotterill v Bank of Singapore (Australia) Ltd (1995) 37 NSWLR 238. In my view nothing turns on the different treatment of property of the bankrupt and a company in liquidation in the bankruptcy and companies legislation. In the former case, the property vests in the trustee but in the latter does not, without special order, vest in the liquidator.

(emphasis added)

62    Of course, there are limits to this power, as Sackville AJA, with whom Giles and Campbell JJA agreed, held in The Owners – Strata Plan No 5290 v CGS & Co Pty Ltd (2011) 81 NSWLR 285 at 300 [63]–[65]. There, Sackville AJA held that the effect of an analogue of s 481(2)(c), namely, s 477(2)(c) of the Corporations Act, could not override, for example, a contractual restriction on assignment of a cause of action. That was because the contract entered into by the company involved it agreeing not to assign the cause of action so that it never had a chose in action, as part of its property, that was capable of assignment. The power conferred under s 481(2)(c) is to assign the property of the company, not to change the nature of the property or to create a new right to assign when the company had contracted that the right could not be assigned. In contrast, as Hayne J held in UTSA 21 ACSR at 463–464, one purpose of the liquidator’s statutory powers to assign causes of action is to overcome what would otherwise be a breach of public policy reflected in the laws against maintenance and champerty or other common law or equitable restrictions on the capacity to assign property, including choses in action.

63    Cases that have construed whether or not statutory rights to compensation are assignable have focused on the true construction of the relevant statutory right that is sought to be assigned. It is not necessary, for the reasons I have given, for me to address the debate in authorities about the assignability of the statutory rights to compensation. It is important to bear in mind that there is an important public policy reflected in the right, that has existed for well over a century, of a liquidator or trustee in bankruptcy to assign the company’s or bankrupt’s property that would not otherwise be assignable because of a rule of common law or equity. Those rights include, for example, a personal cause of action of the bankrupt’s that has vested in the trustee. The legislation intended to overcome the old rules in the unwritten law against assignment in the same way that Windeyer J in Norman 109 CLR at 26 cited Buller J’s judgment in Master v Miller (1791) 4 TR 320 at 340.

64    In Stein v Blake [1996] AC 243 at 258A–B (and see also J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (5th ed, LexisNexis, 2015) at [6–470]), Lord Hoffman said:

In Ramsey v. Hartley [1977] 1 W.L.R. 686 the Court of Appeal, following authority which went back more than a century, held that even a bare right of action was property which the trustee was entitled to assign. His statutory duty to realise the estate excluded the doctrines of maintenance and champerty which would otherwise have struck down such an assignment. Likewise, there is no rule to prevent him from assigning such a right of action to the bankrupt himself. So why should a trustee not assign the right to the net balance?

(emphasis added)

65    Hillcrest has more than one cause of action against each of Mr and Ms Douran including for their breaches of their equitable and fiduciary duties as its directors for which they are liable to pay equitable compensation. In my opinion, the liquidators were entitled to assign to Mr Prechelt Hillcrest’s rights under s 285(7), because they were causes of action in debt: Movitor 136 ALR at 653–654; Stein [1996] AC at 258A–B; UTSA 21 ACSR at 463–464. The assignment was valid and enforceable in this proceeding.

The causation issue

66    The second basis on which Ms Douran, but not her brother, opposed the grant of relief to Mr Prechelt is that, so far as the causes of action against her are equitable, she contended that he did not prove that, but for each of her breaches of duty, Hillcrest would not have suffered loss. She argued that all that the evidence had established was that she had failed to do what Mr Prechelt had alleged in the statement of claim, namely, to obtain a valuation of Hillcrest’s property, to undertake any steps in respect of the proper marketing of the property and to prevent Hillcrest entering into the 2012 agreement and transactions giving it effect in circumstances where, first, she did not give any independent consideration to the interests of Hillcrest and, secondly, the 2012 agreement conferred a benefit on someone else, namely her brother and or Heritage Hill.

67    It may be accepted that Ms Douran did not act dishonestly and was not in a position of conflict. However, on her own evidence, she used her position in order to benefit her brother and or Heritage Hill regardless, in the sense of recklessness, of any interest that Hillcrest had in the transaction: cf Banditt v The Queen (2005) 224 CLR 262 at 265–266 [2]–[3], 275 [36] per Gummow, Hayne and Heydon JJ. Her object was to help her brother (and through him, Heritage Hill) and nothing else. She put to one side her duty and loyalty owed to protect Hillcrest’s interests and its assets so that they were, or might be, available to meet its debts and to be deployed in the best interests of its members as a whole, including Mr Prechelt: cf Ngurli Ltd v McCann (1953) 90 CLR 425 at 438–440 per Williams ACJ, Fullagar and Kitto JJ.

68    It is not open on the evidence to accept Ms Douran’s argument to find that Mr Prechelt failed to prove that Hillcrest would not have entered into the transactions but for her conduct. Her participation was an essential part of the transactions. That can be seen from what Mr Wright set out in his letter of 21 November 2012 in his instructions as to how to complete the disposition of Hillcrest’s property to Heritage Hill. Ms Douran had to sign each of the documents, being the 2012 agreement, which she did, and the transfers of the land, which she did under the common seal of Hillcrest, along with her brother. She also should have signed the minutes of the meeting of directors, although it does not appear whether she did so. Her signatures on the 2012 agreements and the transfer were necessary to ensure that the board of Hillcrest authorised and caused the transactions to proceed. Without her participation, they would not have. A different transaction may or may not have gone ahead, but that is not relevant because her acts caused, or were a real and effective cause for, Hillcrest to sell its property at an undervalue.

69    A fiduciary cannot be heard to say that no loss was caused from the use of his or her position to confer a benefit on another person in breach of his or her duty of care owed to, or fiduciary duty not to, confer a benefit on another person at the expense of, a cestui que trust, or, in this case, the company (Hillcrest). Equity does not permit such an enquiry: Furs 54 CLR at 592–593. She must compensate Hillcrest under the stringent rule applying to directors and fiduciaries for the consequences of the loss of its property at the undervalue. But, moreover, her contraventions of both ss 285(2) and (4) caused Hillcrest to suffer loss or damage in the amount of the undervalue of $587,500. That is a debt due to it by her under s 285(7), together with interest, that the liquidators assigned to Mr Prechelt and he can enforce.

Disposition

70    For these reasons, I am of opinion that Mr and Ms Douran must pay Mr Prechelt the sum of $587,500 plus interest of $323,135 at Court rates from 22 November 2012.

Costs

71    On 5 October 2022, Mr Prechelt’s solicitors made an offer of compromise to settle the proceeding for $600,000 inclusive of interest and costs. That offer was not accepted. Mr and Ms Douran accept that, as a consequence, they must pay costs on an indemnity basis from that time.

72    Mr Prechelt seeks indemnity costs from the commencement of the proceeding because there was no real defence and their defence was hopeless. In ordering indemnity costs against Mr Douran in Prechelt (No 3) [2017] NFSC 6 at [34], the Chief Justice said that Mr Douran’s explanation for opposing the order for Hillcrest’s winding up was implausible and that the more likely explanation was that he did not want the November 2012 transaction to be investigated by a liquidator. I agree on the fuller evidence before me.

73    Mr Douran’s resistance to these proceedings has been without merit or legal foundation. I have found his conduct to have been dishonest throughout his dealing with Mr Prechelt in 2012, in relation to Hillcrest and thereafter. He sought to disguise from Mr Prechelt the existence of the plan to effect the sale of Hillcrest’s property in November 2012 and made a false statutory declaration in 2015 to have it deregistered, again, to avoid having the light of day shone on his conduct. He made an affidavit claiming to speak on his sister’s behalf from the inception of the winding up proceeding to support his position.

74    It is clear from Ms Douran’s evidence that there was never any defence to the 2012 agreement being a breach of Mr and Ms Douran’s directors’ and fiduciary duties owed to Hillcrest. She believed and intended, as I have found, only that she needed to do what was necessary to help her brother regardless of any interest of Hillcrest.

75    In my opinion, the defence of both Mr and Ms Douran was foredoomed to fail and, therefore, was an abuse of process of the Court: Walton v Gardiner (1993) 177 CLR 378 at 393 per Mason CJ, Deane and Dawson JJ.

76    Mr and Ms Douran must pay the costs of the proceeding on an indemnity basis.

Associate:

Dated:    7 December 2022