Can directors give ‘preference’ to other companies in a group and not breach their duties?
The High Court of Australia in Walker v Wimborne ((1975) 137 CLR 1) suggested that where directors faced the rather difficult position of dealing with potential conflict of interests and duties involving different companies in a group that they would be in breach of their duty to the "primary" company (of which they were a director) if they looked at the group, as a whole, rather than providing their main attention to the affairs of the specific company in relation to which their primary duty arose. Where they occupy multiple directorships the agony (and there is no ecstasy in such a situation) in determining how to behave can be extraordinary. The courts, however, have tried to soften this general rule in circumstances where directors do need to give consideration to the affairs of a group of companies in dealing with financial and related matters. There are some cases which suggest that, depending on the nature of the relevant arrangements, directors would not be in breach of their duty if they deal with the situation on the basis that they are looking at a group scenario rather than an individual company. But this would depend very much on the facts. Now, in a wide-ranging decision of Bryson J in the New South Wales Supreme Court this particular question has been re-examined. Maronis Holdings Ltd & Anor v Nippon Credit Australia Pty Ltd & Ors ((2001) 38 ACSR 404) raised questions in addition to the duties of directors. The case also provides some useful discussion of when a person will be considered a director if that person is not acting formally as a director. Accordingly, this long note bears careful review by readers. The facts, as is our practice, are taken from the headnote of the relevant law report – this time the Butterworths Company Law Reports. Girvan Australia Ltd (Girvan) was a member of the Girvan group of companies that included Girvan Corp (NZ) Ltd (Girvan NZ). Girvan's directors included Petersen, Duncan and Ambler, the latter two being also the only directors of Girvan NZ. The directors all lived in Australia, although they visited New Zealand from time to time. Through a chain of subsidiaries, Girvan NZ indirectly controlled one of its subsidiaries, Maronis Holdings Ltd (Maronis). Girvan controlled 74 percent of the shares in Maronis, the remaining 26 percent of the shares being held by members of the New Zealand public. Maronis' principal asset was the Liverpool truckstop site in New South Wales, which the group intended to develop as a transport terminal.
In 1989 Duncan and Ambler caused Maronis to mortgage the site to Nippon Credit Australia Ltd (Nippon) to secure a loan of $15 million to Girvan. Maronis had no business or affairs other than ownership of the site, had no revenue and no capacity itself to service the borrowings. The directors did not consider giving security or protection to Maronis or Girvan NZ against the risk of Girvan defaulting. Girvan NZ additionally executed a deed of guarantee and indemnity. The guarantee document was incorrectly signed and imperfectly sealed, there was no quorum at the relevant meeting and no notice was given to the other directors. Duncan asserted that he had been appointed under a power of attorney allowing him to execute the guarantee. At the time of executing the securities the directors of Maronis were aware that Girvan was experiencing serious cash flow problems, and that there was a real possibility it might not be able to discharge the proposed loan. Clayton Utz, solicitors for Girvan, acted for Girvan in handling various related matters including the loan transaction. Clayton Utz did not have instructions from Maronis, but the firm did correspond with the Land Title Office as if it acted for Maronis.
In 1990 Maronis lodged a caveat (that is a document restraining registration of legal title) which would prevent the company dealing with the truckstop site. In the caveat document it claimed that it has certain title rights to the relevant land and that its rights were not in any way restricted by a mortgage. The same day Maronis issued a summons seeking a declaration that the mortgage was void or unenforceable. Nippon filed a cross-claim seeking an order for removal of the caveat. The court disposed of the proceedings by ordering that the summons be dismissed and the caveat removed. Subsequently, Maronis issued the present proceedings seeking equitable remedies against the directors, the relevant solicitors and Nippon. Bryson J ruled in favour of the plaintiff against the directors but otherwise ruled that the plaintiff failed against the other parties. The first issue that I wish to address is the duties of directors arising where there is a necessity to borrow funds for a group of companies which is pursuing a number of different projects.
Bryson J noted that normal commercial practice within a group of companies was to use mortgage funding to ensure that all development projects could be progressed appropriately. The group's aims would be to ensure that maximum borrowing facilities could be obtained. It was not unusual for payment to have to be made from time to time reflecting the nature of the loan and also the fact that the development of the projects would vary depending on the relevant circumstances. The mere fact that new financing arrangements had to be obtained from time to time, to pick up the "slack" that was occurring within the group's activities, was not indicative that a crisis was looming, that the directors were acting in a "panic" mode, or were trying to favour one company or another. In determining whether the directors were acting appropriately and were not breaching their duties one asks the question whether they were acting honestly in the discharge of their powers and in the best interests of the company. If it could be shown that the directors acted for any other reason than the interest of the company then this usually amounted to an abuse of power on the part of the directors; it would in, certain circumstances, also amount to a breach of the directors' duty to act with appropriate care. Bryson J, however, felt that where there was a breach of the relevant duty on the part of the directors it usually had no impact on the transaction if, the transaction, when viewed as a whole, could be seen to be in the best interests of the company. Generally speaking, notwithstanding the comments made in Walker v Wimborne, Bryson J took was of view that if the directors were trying to achieve the best result for the group of companies then, if the particular transaction or in this case the borrowings, could be viewed as in the best interests of the company as well then no breach of duty would be said to arise. But, this would depend on the facts of the particular case. If it could be shown that the behaviour of the directors was such that they did not give appropriate attention to the interests of the company (in this case the plaintiff) in evaluating the relevant transactions, this would amount to a breach of duty.
In his view the two directors, Duncan and Ambler, needed to differentiate between the interests of the Maronis company, on the one hand and Girvan NZ and Girvan on the other. After examining the facts in some detail, and referring to the fact that in his view the law did permit directors to take into account the interests of a group in appropriate circumstances, Justice Bryson noted (at para 311): "In my finding directors who were rational adults and who gave any consideration whatever to the interests of Maronis in entering into the transaction could not have decided to give the mortgage. The transaction was momentous for Maronis, and reasonable directors had to address the interest of Maronis in some way which involved reviewing the operation of the transaction on Maronis ... [addressing the relevant condition that had been put forward]. In the due exercise of their powers as directors of Maronis there is a very wide range of considerations which [Ambler and Duncan] could have had regard to and of judgments which they could have formed about what was appropriate; but in no actual address to how they should exercise their powers could they decide to do nothing."
In all the circumstances Bryson J held that Duncan and Ambler had acted in breach of their duties as directors and their decisions which committed Maronis to giving the mortgage were actionable. There was a further claim against a Mr Petersen. Whilst he was a leading figure in the affairs of Girvan (he was a director of Girvan and also Girvan NZ) he was never appointed a director of Maronis. The plaintiffs submitted that Petersen owed duties to Maronis because he was in an equivalent position to a director of that company. They argued that he fell within the definition of director in the New Zealand Companies Act 1955 which includes a provision similar to that under the Corporations Act. The provision states: "Director includes: (a) Any person occupying the position of director by whatever name called; and (b) A person in accordance with whose directions or instructions the persons occupying the position of directors of a company are accustomed to act." The court found that Petersen was in a position to exert influence over the affairs of Maronis and its directors. But it was more difficult to establish whether he was in a position of control. In fact, he found no substantial evidence that Petersen occupied any position of power or control in the affairs of Maronis. In the circumstances the claim against Petersen failed.
The final aspect of the case that I wish to comment on is whether the financial institutions lending the money had any fiduciary or other duties to the borrowers. The first claim – whether the financiers (lenders) owed any duty to Maronis – was dismissed. However, this was an ingenious argument which relied on dicta (statements that are unnecessary for the decision) in the High Court of Australia in Northside Developments Pty Ltd v Registrar-General ((1990) 170 CLR 146). In that case it had been suggested by the High Court that in certain circumstances a lender, who realised from the nature of the transaction that the monies that were being lent were not being used by the borrowing company for transactions related to the company's business, will be put on inquiry. That case, however, dealt with the forgery of the company's seal. Bryson J held that there was nothing in the current transaction which required the lenders to make the kind of inquiry that the High Court referred to in the Northside Developments case. It is important that the law is not extended in these ways by broad-based observations of judges which are not relevant to the case before the court.
The court also looked at whether the lenders had a duty of care (under the law of negligence) in relation to the loan. In arguing for such a conclusion the plaintiff relied on the High Court decision in Perre v Apand Pty Ltd ((1999) 198 CLR 180). In that particular case a number of the judges said that where a person was vulnerable to the acts of another, that other person could have a duty of care. In the Perre v Apand case (Law Reporter, December 1999) the element of vulnerability was very striking – the members of the class who claimed damages were persons who grew potatoes from potato seed. They relied heavily on the fact that the seed being supplied by the manufacturer would be of appropriate quality (which was not the case). In this case vulnerability was said to be supported by the fact that Nippon wanted to do business with the Girvan group. It is true that Nippon did want to provide funding to the Girvan group but the factors which allegedly showed vulnerability in this case were in no way analogous to Perre v Apand. Indeed Bryson J noted that "the operations of [Nippon and Maronis] were fully known to each other, the commercial motivations of [Nippon] were obvious and were the basis of its existence and activity, and the need of Maronis to consider and secure its own interests without any contribution of any kind from [Nippon] was also very obvious. I see nothing of any vulnerability in any sense ... [in this case]." (para 311) The judgment is a very long one, a very detailed one and a very learned one. However, in view of the importance of the issues raised, it would not surprise to see it being appealed to the New South Wales Court of Appeal and in due course, being pursued in the High Court of Australia. It does offer some very interesting and very important statements on this increasingly important are of the law.
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