Professor Bob Baxt explores a recent court case which highlights issues that can arise with a one director corporation.
Our corporations law permits the establishment of one person corporations, or corporations with only one director.
Where family corporations are established, and this is of course a very popular form of incorporation, a single person can sometimes become the directing mind, as well as the effective controller of the corporation.
The members of the family will usually rely on that person to ensure that the corporation conducts its affairs appropriately, complies with provisions of the law and ensures that the financial interests of those members of the family involved are adequately protected.
Sometimes, however, if there is a renegade person in charge of a company, there is a danger that the company will “go off the rails” and that the financial implications could be significant for all people involved in the company.
The Commissioner of Taxation, the Australian Securities and Investments Commission and liquidators will always examine the activities of people who are in “control” of the company, who may use the company as their so-called “plaything” or who may out of ignorance, desperation or sheer malice, use the funds of the corporation for their own use and advantage.
In those circumstances, will the members of the family who believe they are being “protected” and looked after by the one person director be able to recover money that should have been treated as separate from the money of the company – for example, where superannuation or similar arrangements have been made?
What remedies do they have or how can they be protected from the actions of receivers or managers?
Our courts have little difficulty in “lifting the corporate veil” in getting to the heart of what has gone wrong in the one person company and will make the one person director personally liable insofar as breaches of the legislation are concerned.
But will they adequately protect the members of the family, especially where funds such as superannuation are at risk, and be able to do so adequately when that person has gone one step too far.
This was a central question in the interesting Victorian Supreme Court decision in Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd  VSC 543.
The facts of this case are not particularly unusual. But one of the legal issues that arose, especially insofar as the members of the family are concerned, has thrown open an important question which has now been taken to the Victorian Court of Appeal.
The company involved, Australasian Annuities, had Steven Rowley as the sole director. His wife Barbara was the other shareholder in the company. The company was also appointed the trustee of the Rowley Family Trust (RFT). It was established as a discretionary trust in which Steven, Barbara and other family members of the company and certain corporate entities in the family “group” were the beneficiaries.
Steven transferred money from the company into a self-managed superannuation fund, RSF. This was either done directly through bank operations or through an account opened in the names of Barbara and Steven Rowley.
RSF had four directors: Steven and Barbara Rowley and their two sons, Adrian and Adam.
As a result of various activities, which allegedly included breaches of the Corporations Act 2001 and other duties by Steven, the company was placed into liquidation.
Receivers and managers were appointed to assess how they could recover the various funds that had been controlled by the company and especially Steven.
It is unnecessary for our purposes to discuss in any detail the aspects of the judgment which considered the breaches of duties.
Justice Almond of the Victorian Supreme Court quoted at length from a number of earlier cases, including the High Court decision of Ngurli Limited v McCann (1953) 90 CLR 425 and judgments in the Bell Group case and in particular, the Western Australian Court of Appeal in Westpac v Bell Group (in liq) (No. 3)  WASCA 157.
The extracts he quoted suggested it was inappropriate for directors to allow a conflict of duty or interest to occur. This was clearly the position here as Steven had allowed himself to treat the super money as he wished.
He noted: “In this case, I am not satisfied that Steven gave even token consideration to the interests of the company or that he gave any consideration to what was in the interests of the beneficiaries of the Rowley Family Trust… Where a company acts as a trustee, it must act in good faith and exercise its powers and perform its duties in accordance with the trust deed and for the benefit of the beneficiaries under the trust” (para 49).
Justice Almond also ruled that Steven paid very scant attention to those obligations when making payments by the company to himself and his wife in relation to various activities conducted on behalf of the super fund.
These actions were both inappropriate and illegal under the rules of the common law and the statute.
For members of a one person company that may be at loggerheads with the person who controls the company – and who may suffer as a result of the courts treating the activities of the sole director as the “directing mind and will of the company” – the critical issue is whether they can recover funds that may have been distributed by that person in breach of his or her duties.
Justice Almond had to consider the important question of whether the super fund trustee, RSF, had received the trust property paid to it by Steven, knowing that it was being paid in breach of the law.
The receivers and managers argued that the knowledge that Steven had about the way in which the property was distributed could be imputed to the other three directors of the superannuation fund – namely Barbara, Adrian and Adam.
In their view, as Steven had been the “directing mind and will” of the super fund, the fund itself was implied to have operated with this knowledge.
Justice Almond rejected this proposal. At para 128 of the judgment, he states: “There was no direct evidence of how the super fund’s investments were chosen, how they were managed or the process of determining asset allocations and such like. The passing reference by Adam to Adrian’s involvement in looking after the investment in the fund, although very general in nature, tends against the suggestion that Steven was the sole directing mind and will of RSF.”
In the judge’s view, there was other evidence to support the proposition that the trust fund should not be treated as simply another part of Steven’s affairs.
This question is one of the critical issues arising in the decision in Barnes v Addy (1874) LR 9 Ch App 244. This case was of central importance in the Bell Group case as one of the reasons why the banks, which were involved in restructuring the loan to the Bell Group, were ruled by the majority of the court as being in “illegal” receipt of funds. This was because they knew that there was a breach of duty on the part of the directors in not taking into account the interests of all creditors in the rescue package. The Bell case was settled so we do not know how the High Court would have dealt with this issue.
Justice Almond engages in a detailed discussion of the issues arising out of the decision in Barnes v Addy and the way in which it has been applied.
In his view, the super fund received the contributions made to it in good faith. He ruled that it had not knowingly received the trust property. Therefore, the receivers and managers could not succeed in their argument that the funds were being held on their behalf.
A detailed discussion of the facts and issues provide some comfort to those who may be caught in a similar situation, but the evidence will always be very critical in these matters.
The receivers and managers argued that the fund had received the property as a volunteer and did not provide any adequate consideration in return for the money.
But Justice Almond referred to provisions of the Trustee Act 1958 of Victoria, as well as the Commonwealth Bankruptcy Act 1966.
Although he was satisfied that perhaps money had not been paid by the trustee to the company, there was insufficient evidence to establish what he regarded as an underlying principle of law to be applied in cases of this kind – namely, that “the trustee of a superannuation fund (had not provided) valuable consideration by providing rights and benefits to a member in exchange for his or her contribution” (para 142).
While the super fund was a self-managed fund, it was bound by its terms of appointment. And there was a clear distinction between the obligations imposed on RSF and others.
Justice Almond ruled that valuable consideration did pass from the members of the family to the fund and the fund itself provided relevant consideration in the circumstances.
He also dismissed argument raised by the receivers and managers that the doctrine of clean hands operated to provide a reason for him to reach a different conclusion.
There was clear evidence that Steven acted in breach of his duty and did not properly reconcile his duties to those he owed to the company.
The receivers and managers “cannot succeed in this claim against RSF … as there was no knowing receipt of trust property by RSF and RSF gave valuable consideration for the contributions made to the super fund which it accepted in good faith and without notice of the breaches of fiduciary duty. Accordingly, RSF does not hold the funds or their traceable proceeds on trust for the [receivers and managers] nor is it liable [to it] for money had and received” (para 162).
As noted earlier, the case has been taken on appeal to the Victorian Court of Appeal.
It will be fascinating to see how it deals with these interesting factual and legal issues in a scenario that regrettably has become too common as financial and other difficulties besiege the Australian economy.
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