Handcock ruling backs loan forgiveness

Some further good news for directors - the West Australian Full Supreme Court upholds the Hancock decision.

A strong West Australian Full Supreme Court consisting of Ipp, Owen and McKechnie JJ has, in an as yet unreported decision, Hancock Family Memorial Foundation Ltd & Anor v Porteous & Anor (judgment handed down 17 February 2000) provided some further good news for directors in evaluating liability in situations where loans are generated within company groups. The Hancock dispute is of course well known. The family was that of Lang Hancock who died in March 1992. The Perth mining entrepreneur controlled a number of companies which had made significant contributions to the Western Australian economy. Mr Hancock married for the second time and, following his death, a dispute arose between his daughter Georgina Rinehart and his widow Rosemarie Porteous. It is unnecessary to go into those matters of dispute other than to state that a number of court cases had been brought as a result of allegations made about the alleged inappropriate way in which the Hancock companies had been run during Hancock's last years and other matters.

The main issue surrounding the dispute was whether certain loans made by the Hancock group of companies to Mr Hancock, which had been forgiven or dealt with in ways that were regarded as inappropriate by his daughter, could be recovered from Mrs Porteous and the companies that she now controlled. It was alleged that there had been breaches of fiduciary duties by Hancock and other officers of the companies and that the moneys paid (or allowed to remain with Hancock and his family) had been impressed with a constructive trust and thus could be recovered. Anderson J at first instance had rejected those allegations on a number of grounds. In his view there had been no breach of duty of the part of Hancock and the constructive trust arguments had not succeeded. In the appeal case, the court again confirmed that there had been no breach of fiduciary duties. It also argued that even if there had been a breach of fiduciary duties no relief could be obtained because of the decision of the High Court in Daly v The Sydney Stock Exchange Ltd ((1986) 160 CLR 371). Under that decision for there to be recovery in such a situation (assuming there was a breach of trust which of course had not been found) it was necessary for the particular transactions to be rescinded (set aside) before the money could be repaid. Anderson J had found that all the loans made to Mr Hancock had been cleared by the company and that there had been no attempt of rescission and therefore the allegations failed.

On appeal a number of other arguments were raised and the Full Court rejected them. For example, it held that there was no cogent evidence impugning the genuineness of the entries in the companies books of account dealing with the loans and repayment. There was no cogent evidence to establish that the transactions described in the accounts were anything other than they appeared to be. The case that the accounts were a sham had not been made out. Further, Anderson J held that Mrs Porteous and others had received gifts and not loans and therefore did not have to repay them. In any event it was too late for the arguments to be raised at this time because it was contrary to the evidence heard by the judge. On the question of the duty of directors and the related factors the Full Court again did not depart from the findings of the trial judge. The court examined at some length the evidence and while it was prepared to countenance an argument that there may have been a breach of duty, it felt that the evidence before the court did not establish that such a breach had occurred. Indeed, the Full Court noted that even though Mr Hancock caused the company to pay him money that was due to him (he could have delayed it to pay other moneys that were owed) this did not amount to a breach of his duty. The court's words are worth noting:

"A director in control of the company who causes the company to pay its lawful debts at a time when those debts are due and the company is solvent cannot be said to be committing a breach of fiduciary duties, even when the debts are owed to the director. It would be contrary to principle to suggest that, in those circumstances, the director should be obliged to cause the company to delay payment of its lawful debts because they were owed to him or her." (See para 154.) As indicated earlier, the majority of the case turned on the applicability of the High Court decision in Daly v The Sydney Stock Exchange (Daly's case) and the operation of doctrines of constructive trust. In the view of the court the decision in Daly's was correctly applied by Anderson J. As there had been no rescission of the particular contract in this case the equitable doctrines argued for by Mrs Rinehart did not apply. The court concluded that Anderson J was correct in holding that Daly's case was conclusive on the issues. "The impugned payments were made pursuant to voidable contracts of loan. Not only had the contracts of loan not been rescinded, they have, in fact, been discharged. Adopting the approach ... in [Daly's case] there is no need to declare a constructive trust, as such a trust is entirely unnecessary to protect the legitimate rights of the lender." (See para 206 of the judgment.)

In all the circumstances Mrs Rinehart lost her appeal and the payments made to Hancock and to his family were allowed to stand. The case turns much on its facts but also on specific principles of company law that were regarded as relevant by the court. The case will merit closer study by persons who need to deal in greater detail with these sorts of issues.

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