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Supreme Court 25 February 2004

White ACT (In Liquidation) v G B White & Ors

[2004] NSWSC 71

Fraud & dishonesty
CORPORATIONS DIRECTORS' DUTIES FRAUDULENT BREACH OF DUTY WHETHER ACTUAL KNOWLEDGE REQUIRED WHETHER ACTING AS DE FACTO DIRECTORS DIVESTITURE OF ASSETS

Citation: White ACT (In Liquidation) v G B White & Ors [2004] NSWSC 71; reported at 49 ACSR 220
Court: Supreme Court of New South Wales, Equity Division (Commercial List)
Date: 25 February 2004
Judge(s): McDougall J

Background

White Constructions (ACT) Pty Ltd ("White ACT") was a wholly owned subsidiary of White Constructions Ltd ("WCL") engaged in building work in the Australian Capital Territory, including a major contract for the Canberra National Convention Centre. As at 30 June 1988, White ACT was technically balance-sheet insolvent, with liabilities exceeding assets. Its asset base consisted largely of intercompany loans.

In October 1988, WCL sold White ACT to one of the individual defendants, who became a director of the company together with his son. Between 1988 and 1992, a series of transactions occurred, including management fees charged to White ACT, accounting journal entries, and the divestiture of assets and revenues. White ACT was wound up in February 1998 on the application of Australian Development Corporation ("ADC"), which held a judgment against White ACT for over $33 million. At that point, White ACT's only remaining asset was $328 in cash.

White ACT, through its liquidator, brought proceedings against the former directors and a range of related corporate entities. The claims alleged that the directors had breached their statutory and fiduciary duties by, among other things, stripping White ACT of assets with the purpose of ensuring no funds remained to meet ADC's anticipated judgment claim. The litigation ran for 28 hearing days.

  • Whether the director defendants (including those alleged to be de facto directors after the 1988 sale) breached their statutory duties and fiduciary obligations to White ACT
  • Whether the purpose of the divestiture transactions was to leave White ACT with no assets to meet a future claim by ADC
  • Whether White ACT was insolvent, or whether there were reasonable grounds to expect insolvency, at the relevant times
  • Whether unliquidated damages constituted a "debt due and payable" for the purposes of the insolvency analysis
  • Whether the directors had actual knowledge of the insolvency and of the likely claim arising from the Quadrant industrial dispute
  • Whether the pleaded case extended to non-intentional (as opposed to fraudulent) breaches of duty, and whether the plaintiff should be held to its pleaded case
  • Whether limitation defences under the Limitation Act 1969 barred the statutory duty and fiduciary duty claims
  • Whether fraudulent concealment could be established to defeat those limitation defences

Decision

McDougall J dismissed White ACT's claim against all defendants. His Honour worked through each pleaded allegation in detail, resolving the factual and legal issues in the defendants' favour across the board.

On the central question of the directors' state of mind, the court found that the director defendants did not have the knowledge or fraudulent intent that the pleaded case required. The allegation that transactions were carried out with the purpose of stripping White ACT of assets to defeat ADC's anticipated claim was not made out. The court made adverse credibility findings in respect of some witnesses but ultimately concluded that the plaintiff had not established the intentional wrongdoing its case depended upon.

On insolvency, the court considered the relevant circumstances and expert evidence, and examined the legal principles applicable to determining whether there were reasonable grounds to expect insolvency. The court also addressed the question of whether an unliquidated damages claim could constitute a debt due and payable. The court's conclusions on these issues were resolved as pleaded, but they did not ultimately assist the plaintiff given the findings on the directors' knowledge and intent.

A significant procedural issue arose because the plaintiff had opened the case on a broader basis than the pleadings supported, appearing to extend the case to non-intentional breaches of duty. The court considered whether the plaintiff should be confined to its pleaded case. McDougall J held that the plaintiff was bound by what it had pleaded. The court also observed, without detailed analysis, that the statutory duty claims were likely statute-barred under s 14(1)(d) of the Limitation Act 1969, and that the fiduciary duty claims would likely have been barred either under s 48 or by analogy with it. The court found no basis for a reply of fraudulent concealment, noting that such a reply requires proof of dishonesty or moral turpitude, which was not established.

Orders Made

  • The summons was dismissed.
  • The plaintiff was ordered to pay the defendants' costs.
  • Liberty was reserved for any party to move to vary the costs order, on application made no later than 19 March 2004.

Key Takeaways

  • A claim against directors for fraudulent breach of duty requires proof of the requisite dishonest intent. Where a liquidator's pleaded case is built on intentional wrongdoing, the plaintiff is confined to that case and cannot expand at hearing to rely on non-intentional breach.
  • The Supreme Court confirmed that a party who opens a case beyond the scope of its pleadings does not thereby enlarge the issues available for determination. The plaintiff is held to the pleaded case.
  • Statutory duty claims under the Companies Code and Corporations Law are subject to the six-year limitation period in s 14(1)(d) of the Limitation Act 1969. The court indicated, obiter, that such claims in this proceeding would likely have been statute-barred.
  • Fraudulent concealment will not defeat a limitation defence unless dishonesty or moral turpitude is affirmatively established. A finding that the defendants lacked the requisite fraudulent intent forecloses that reply.
  • De facto director status and the scope of the insolvency provisions, including whether unliquidated damages constitute a debt for the purposes of assessing a company's solvency, were examined, though those findings did not alter the ultimate outcome given the failure on the primary facts.

Legislation and Cases Referenced

Legislation:
- Corporations Act 2001 (Cth)
- Corporations Law
- Companies Code
- Limitation Act 1969 (NSW), ss 14(1)(d), 48

Cases:
- Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123
- Boardman v Phipps [1967] 2 AC 46
- Brunskill v Sovereign Marine & General Insurance Co Ltd (1985) 59 ALJR 842
- Constantinidis v JGL Trading Pte Ltd (1995) 17 ACSR 625
- Devries v Australian National Railways Commission (1993) 177 CLR 472
- Dunn v Shapowloff (1978) 2 NSWLR 235
- Emanuel Management Pty Ltd v Foster's Brewing Group Ltd [2003] QSC 205
- Geneva Finance Ltd v Resource & Industry Ltd (2002) 169 FLR 152
- Hamilton v Kaljo (1989) 17 NSWLR 381
- Iso Lilodw' Aliphumeleli Pty Ltd (in liq) v Commissioner of Taxation (2002) 42 ACSR 561
- Keech v Sandford (1726) 25 ER 223
- Nocton v Lord Ashburton [1914] AC 932
- Norberg v Wynrib [1992] 2 SCR 226
- Nuthall v Nuthall [2001] NSWSC 950
- Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165
- Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213
- Totterdell v Nicol-Burmeister (1995) 13 ACLC 1521
- Williams v Minister, Aboriginal Land Rights Act 1983 (1994) 35 NSWLR 497