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MATTHEW BERKAHN[*]
There has been debate since the mid 1970s as to the nature and extent of the directors’ duty to take account of the interests of a company’s creditors.
The debate on this issue stems from the 1976 decision of the High Court of Australia in Walker v Wimborne.[1] In that case the High Court held that the directors of a company had breached their duties in authorising a loan to a related company. The loan did not produce any benefit or advantage to the lending company, and in fact carried the risk of a substantial loss as the borrower was in financial difficulties and was unlikely to be able to repay the loan. Justice Mason noted that this transaction had seriously prejudiced the company’s unsecured creditors. In doing so, his Honour held that:
The directors of a company in discharging their duty to the company must take account of the interests of its shareholders and creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them.[2]
This statement raises the question of what ‘the company’, to which directors owe their duties,[3] actually consists of — the shareholders as a whole;[4] or the business entity itself, which would require consideration of the wider group of stakeholders including creditors?[5] Put another way, is the duty referred to by Mason J owed to, and enforceable by, the creditors themselves, or only by the company at the instigation of its directors or a majority of its shareholders? A related issue is whether the duty arises when a company is solvent or only when solvency is threatened.[6] The courts’ answers to these questions have been inconsistent.
The recent decision of the High Court of Australia in Spies v The Queen,[7] however, strongly suggests that the interests of ‘the company’ should be seen as quite distinct from those of its creditors, whatever the circumstances. The court, in the course of considering whether or not a company director had defrauded the company’s creditors, held that directors do not owe an enforceable duty to creditors.
This issue arose as the High Court considered whether the New South Wales Court of Criminal Appeal had correctly exercised its power to substitute one verdict for another under s 7(2) of the Criminal Appeal Act 1912 (NSW). The court had allowed an appeal against a conviction under s 176A of the Crimes Act 1900 (NSW), and substituted a verdict of guilty on a second charge under s 229(4) of the Companies (NSW) Code.
The case involved two companies in which Spies, the appellant, was a director and majority shareholder. The first company, Sterling Nicholas Duty Free Pty Ltd (‘Duty Free’), sold duty free items from a number of outlets to overseas travellers. Mr Spies held about two thirds of the company’s issued shares (33,750 out of 50,000). The other shareholders in Duty Free were a Mr Newton and his son. The only other director was an employee of the company, a Mr McPherson.
Mr McPherson and Mr Spies were also the only directors of a second company, Sterling Nicholas Holdings Pty Ltd (‘Holdings’). Mr Spies held all but one of the 10,000 issued shares, with Mr McPherson holding the remaining share. Holdings had minimal trading activities, its only significant asset being a lease over the premises used by Duty Free to conduct its business. This lease had been held by Duty Free and, under its agreement with the lessor, that company had an option to renew. When the lease expired in 1987 Mr Spies entered negotiations for its renewal, initially on behalf of Duty Free. It was, however, Holdings that was ultimately named as lessee, apparently as a means to give the shares in Holdings ‘the appearance of worth’ when they were, in fact, worthless since it was Duty Free that should by rights have had the lease.[9] The terms of the lease were very favourable to Holdings as the rent was well below the market rate; indeed, Mr Spies had obtained an opinion from a firm of real estate agents that a profit of some $700,000 could be achieved if the property was sublet.
Duty Free, on the other hand, was in financial trouble, and had been operating at a loss for some time. In the year to 30 June 1988, it suffered a trading loss of around $230,000 and its liabilities exceeded its assets by $360,000. By the following year the trading loss had increased to over $1 million, and liabilities exceeded assets by almost $1.8 million. Mr Spies attempted to sell Duty Free’s business, knowing that if he failed to do so the company would be forced into liquidation with substantial amounts owing to creditors. Liquidation of Duty Free would also have had a seriously adverse effect on Mr Spies personally, as he owed the company approximately $176,000 which would have been called up by a liquidator. He had also guaranteed the company’s bank overdraft and had given a mortgage over his home as security for that debt.
At a directors’ meeting of Duty Free in October 1989 it was resolved, at the instigation of Mr Spies, that Duty Free should purchase all of the issued shares of Holdings for $500,000. The transfer of shares from Mr Spies and Mr McPherson to Duty Free took place in March 1990. As Duty Free did not have the funds, however, to pay the required amount (or any amount), the board resolved that, rather than paying for the purchase, an equitable charge would be granted over all of the assets of Duty Free in favour of Mr Spies, and that his loan account with Duty Free would be credited with $500,000. Thus, in the words of the majority of the High Court, Mr Spies ‘went from being the owner of arguably worthless shares in Holdings and a substantial debtor of [Duty Free], to being a secured creditor of that company’, with around $324,000 owing to him.[10] In addition, the transaction resulted in Duty Free having much less funds available to repay its creditors, as it could no longer call upon Mr Spies’ loan account. The court concluded that Mr Spies was the only person to benefit from the transaction.[11] Duty Free resolved to go into voluntary liquidation in August 1990, with liabilities exceeding assets by over $2 million.
Mr Spies was charged on indictment under s 176A of the New South Wales Crimes Act, which provides that: ‘a director, officer or member of a body corporate who cheats or defrauds, or who does or omits to do any act with intent to cheat or defraud the body corporate or any person in his or her dealings with the body corporate is liable to imprisonment for ten years’. The basis of this charge was that Mr Spies, by entering into the transaction to sell his shares in Holdings to Duty Free, intended to defraud the creditors of Duty Free. The majority of the High Court noted that the indictment specifically alleged that the appellant had ‘defrauded persons, being the creditors of [Duty Free]’ in those creditors’ dealings with the company;[12] while Spigelman CJ in the Court of Criminal Appeal considered that it was significant that the Crown chose to lay a charge focusing on the position of the creditors of Duty Free, rather than the company itself.[13]
As an alternative, Mr Spies was also charged under s 229(4) of the Companies Code,[14] under which an officer or employee of a corporation is prohibited from making improper use of his or her position to gain, directly or indirectly, an advantage for him or herself or for any other person or to cause detriment to the corporation. This was also based on the transfer of shares and the crediting of $500,000 to Mr Spies’ loan account.[15]
At first instance Mr Spies was convicted of the s 176A charge. No verdict was taken in respect of the alternative charge under s 229(4).[16]
The Court of Criminal Appeal set aside the conviction under s 176A of the Crimes Act and, pursuant to its powers under s 7(2) of the Criminal Appeal Act 1912 (NSW), substituted a verdict of guilty in respect of the s 229(4) charge.[17] Chief Justice Spigelman, with Sully and Hidden JJ concurring, found that the trial judge had misdirected the jury as to the state of mind which the accused was required to have to be convicted of intentionally defrauding the company’s creditors under s 176A. His Honour held that the direction should have been:
... [T]hat the state of mind of the accused encompassed at least an understanding of the circumstances which made the value [of the shares in Holdings] fictitious ... The jury could have been left with the belief that, as long as they were satisfied as a fact that the shares were not worth anything, the charge could be made out, even if the accused believed that there was real value in the shares after the transaction.[18]
Chief Justice Spigelman then considered the alternative charge under s 229(4) of the Companies Code. He found that the mental element of this provision was quite different from that of s 176A, since s 229(4) required the accused to have an intention to benefit himself, rather than an intention to defraud anyone.[19] This was held to be satisfied in this case, as was the requirement under s 7(2) of the Criminal Appeal Act that, in convicting Mr Spies under s 176A, ‘the jury must have been satisfied of facts which proved the appellant guilty’ of the s 229(4) offence.[20]
Despite Spigelman CJ’s comments on the significance of the Crown’s case under s 176A being based around the creditors’, rather than the company’s, position, the issue of whether a director can be said to have prejudiced a company’s creditors by means only of that director’s dealings with the company was not addressed.
Mr Spies appealed against the Court of Criminal Appeal’s decision, on the grounds that it was not open to that court to hold that the jury must have been satisfied of facts which proved him guilty of the s 229(4) charge. The High Court agreed, ordering that a new trial under s 229(4) be held.
The greater part of the majority judgment of Gaudron, McHugh, Gummow and Hayne JJ, and the concurring judgment of Callinan J, dealt with the fundamental question of whether s 7(2) applied to this case. It was the court’s view that s 7(2) and its equivalents had in the past been subject to a ‘rather cavalier approach’, [21] under which its language had been stretched to convict persons whom the court thought were guilty of another offence, notwithstanding that the substituted verdict was not always one which could have been returned on the facts presented at trial. It was held that these past cases were wrongly decided and should not be followed. Instead, the court adopted the stricter view of the provision evident in more recent cases such as R v Maxwell, where it was held that s 7(2) ‘only applies when the jury’s verdict necessarily implies that they were satisfied of facts constituting another offence’.[22]
The case therefore depended upon ‘a comparison of the elements of the first charge under [s 176A of] the Crimes Act, and the elements of the alternative charge under s 229(4) of the Companies Code’,[23] to determine whether the latter offence was ‘wholly within’ the former, or at least that ‘the substituted verdict [was] one which the jury could have returned at the trial on the information which was in fact presented’.[24] This first required an assessment of whether the charge under s 176A should have resulted in a conviction in the first place.
The majority judgment noted that s 176A of the Crimes Act creates an offence in either of two situations, namely where a company director cheats or defrauds, or does or omits to do any act with the intention of cheating or defrauding (a) the company; or (b) any other person in his or her dealings with the company. The phrase ‘in his or her dealings with the company’ was interpreted as referring to the circumstances in which the allegedly fraudulent act occurs. [25] Thus, the court was of the opinion that a creditor does not, by reason only of being a creditor of the company, come within the scope of s 176A. In deciding this, the court referred to the few previous decisions on the section. Among these was R v Negline, where the Court of Criminal Appeal concluded that, in order to be ‘defrauded’ under s 176A, the alleged victim must have been ‘prejudiced in some aspect of his proprietary rights or the enforcement of those rights’.[26]
The court then considered whether Mr Spies had ‘defrauded’ the creditors of Duty Free. The indictment alleged that he had done so by causing the company to purchase his shares in Holdings with the aim of ‘hindering or delaying’[27] the creditors. The court noted that to defraud someone means ‘to deprive a person dishonestly [or at least by dishonest means] of something which is his or of something to which he is, or would, or might but for the perpetration of the fraud, be entitled’.[28] The court concluded that an intention to hinder or delay a creditor, as had occurred in this case, was not sufficient to constitute an intention to defraud, as required by s 176A. It was conceded that a director may be able to defraud creditors in their dealings with the company, but that would only be the case if the director has actually dealt with the creditors personally, rather than only with the company, or if he or she ‘obtained or used or prejudiced what belongs to the creditors by dishonest means’.[29] Since Mr Spies’ dealings were only with the company, the court concluded that he should not have been convicted of defrauding the company’s creditors under s 176A.
The court noted that statements like that of Mason J in Walker v Wimborne[30] might suggest that, because of the insolvency of Duty Free, Mr Spies owed a duty to that company to consider the interests of creditors when entering into transactions on behalf of the company. The court, drawing upon commentators on this issue, expressed doubt that Mason J intended to suggest that directors owe an independent and enforceable duty directly to creditors.[31] Such a duty would give some unsecured creditors remedies in an insolvency which are denied to others which, according to the court, would undermine the basic principle of pari passu participation by creditors.[32]
Although the court also noted the existence of other judgments which do suggest that directors have a duty which is owed to and enforceable by creditors,[33] it held that any such suggestions in these cases are ‘contrary to principle and later authority and do not correctly state the law’.[34] The court preferred the interpretation of Gummow J in Sycotex Pty Ltd v Baseler, where his Honour stated:
The duty to take into account the interests of creditors is merely a restriction on the rights of shareholders to ratify breaches of the duty owed to the company. ... This restriction does not, in the absence of any conferral of such a right by statute, confer upon creditors any general law right against former directors of the company to recover losses suffered by those creditors ... [T]he result is that there is a duty of imperfect obligation owed to creditors, one which the creditors cannot enforce save to the extent that the company acts on its own motion or through a liquidator.[35]
With the court holding that a conviction under s 176A should not have been returned, it was impossible to exercise the powers granted by s 7(2) of the Criminal Appeal Act and substitute a conviction under s 229(4) of the Companies Code. The appeal was therefore allowed.
The High Court’s decision in Spies confirms the traditional view of directors’ duties, namely that such duties are owed to the company, and that no independent duty is owed by directors to a company’s creditors or to individual shareholders.[36] This view was virtually unchallenged until Mason J ‘took the lead’ in Walker v Wimborne by advocating responsibility to creditors.[37] Since then, the judiciaries of New Zealand and the United Kingdom, as well as Australia, have wavered between supporting the status quo, and extending the law to include a duty to creditors. For example, in Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd, Dillon LJ said that:
The directors indeed stand in a fiduciary relationship to the company, as they are appointed to manage the affairs of the company, and they owe fiduciary duties to the company though not to the creditors, present or future, or to individual shareholders.[38]
In West Mercia Safetywear Ltd v Dodd the same judge, quoting from the decision of the New South Wales Court of Appeal in Kinsela v Russell Kinsela Pty Ltd,[39] held that where a company is insolvent the interests of the creditors intrude:
[T]hey become prospectively entitled, through the mechanism of liquidation, to displace the power of the directors and shareholders to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors ...[40]
This suggests that directors’ duties are owed to creditors when a company is insolvent, on the grounds that it is they who have the ultimate financial interest in the company once its capital has been lost.[41]
Other cases have gone further, stating that duties are owed to creditors not only in times of insolvency (by identifying their interests with those of the company in such situations),[42] but also when the company is solvent. In Walker v Wimborne itself, although the company in question was insolvent at the relevant time, this was not stated to be a prerequisite for a duty to creditors to exist. Rather, Mason J seems to have suggested that the theoretical possibility of insolvency is sufficient, since creditors’ interests ‘may be prejudiced by the movement of funds between companies in the event that the companies become insolvent’.[43] Similarly, in Equiticorp Industries Group Ltd v Attorney General, it was contended that the obligation to creditors is ‘especially important when the company is facing financial difficulty’,[44] suggesting that actual insolvency is not required; and in Australian Growth Resources Corp Pty Ltd v van Reesema, King CJ said that the interests of creditors may become the dominant factor in what constitutes the interests of the company ‘if a company’s financial position is precarious’. [45] In Ring v Sutton[46] the Court of Appeal of New South Wales applied Mason J’s statement in Walker v Wimborne to a company which, although in liquidation at the time the case was heard, was solvent when the impugned transactions (a series of loans from the company to the director at less than market interest rates) took place. The court allowed the liquidator, in the interests of the creditors, to challenge particular terms of the loan contracts.
From these examples it will be clear that few cases have actually characterised the “duty” to creditors as a directly enforceable duty, and none have done so unambiguously. Rather, they appear to generally refer to an obligation to have regard to creditors’ interests for the benefit of the company. The most that can be said is that certain cases suggest the existence of an independent directors’ duty to creditors. Wishart notes that some cases, including Nicholson v Permakraft (NZ) Ltd,[47] Winkworth v Edward Baron Development Co Ltd,[48] and Jeffree v National Companies and Securities Commission[49] ‘seem to support some sort of direct duty, but no case can be said to have decided the point’.[50]
The ambiguity present in such statements is evident from the judgment of Cooke J in Nicholson. His Honour stated:
The duties of directors are owed to the company. On the facts of particular cases this may require the directors to consider inter alia the interests of creditors. For instance creditors are entitled to consideration, in my opinion, if the company is insolvent, or near insolvent, or of doubtful solvency, or if a contemplated payment or other course of action would jeopardise its solvency ... To translate this into a legal obligation accords with the now pervasive concepts of duty to a neighbour and the linking of power with obligation.[51]
It is doubtful, however, that Cooke J intended that creditors should have an enforceable duty owed to them in situations like that in Spies. His Honour stated:
The foregoing principles relate to actions by the company against directors ... It does not exclude the possibility of an action by a particular creditor against the directors or the company for breach of a particular duty of care arising from ordinary negligence principles. For example, directors might obtain credit for the company when they ought to know that the creditor incorrectly understands a valuable asset to belong to the company.[52]
This suggests that the possibility of direct action by a creditor against a director is limited to situations where a ‘particular duty of care arising from ordinary negligence principles’ can be established. Such a duty will, of course, arise only in exceptional circumstances, for example when the director has assumed a personal or ‘special’ responsibility towards the creditor,[53] and is not a necessary consequence of a director’s position as such.
Justice Cooke’s statement does not, therefore, necessarily mean that directors have an enforceable duty to creditors to consider their interests. It could just as easily be seen as limiting a director’s liability to creditors to situations where the transaction in question actually involves the creditor (rather than just the director and the company) and where the creditor has been improperly deprived of something by the director’s actions. If so, it is not very far from the so-called “traditional” view upheld by the High Court in Spies.[54]
In any case, the decision in Spies confirms that suggestions of an enforceable duty to creditors, if that is what statements like that in Nicholson are, are wrong. In view of the ‘wealth of authority’ to the contrary, noted by both Wishart[55] and by the majority of the High Court,[56] it is likely that those few commentators who have detected judicial references to such a duty[57] have misinterpreted the courts’ intentions.
The source of the confusion may lie in the uncertainty surrounding the meaning of this phrase.[58] It has been suggested that the legal entity of the company should be the object of directors’ duties. McPherson states that: ‘[T]he underlying principle is that corporate assets must be applied for corporate purposes, and not for the benefit of other persons, whether they are shareholders or strangers, and whether many or few.[59]
McPherson admits, however, that such a formulation is ‘difficult ... to express with precision’, as it involves a balancing of all the various interests associated with the company, including employees, consumers, the public and even the environment.[60] Wishart believes that this argument puts directors in an impossible position, because:‘[E]ither they have to decide correctly on the balancing of interests, and their decisions are reviewable by the courts, or... the balancing is a mere pious hope’.[61] Dawson agrees, noting that even in Salomon, the case upon which the entity argument is usually based, it was held that the company was to be identified with the shareholders as a group for the purposes of determining whether a duty to the company had been breached.[62]
This is the more practical approach to the problem, and this is how the courts have traditionally dealt with the issue. Although, for the purpose of determining liability at least, a company and its shareholders are legally distinct entities,[63] and shareholders have no proprietary interest in assets owned by the company,[64] when it comes to identifying in whose interests directors must act, shareholders seem the obvious choice.[65] In both Greenhalgh v Arderne Cinemas Ltd[66] and Ngurli v McCann[67] it has been stated that ‘the phrase ‘the company as a whole’ does not ... mean the company as a commercial entity, distinct from the corporators: it means the corporators as a general body’. Ford summarises the reasons for this approach as follows:
The directors must consider the interests of existing members because they are the proprietors of the company who have risked their capital in the hope of gain ... Accordingly, the ‘interests of the company’ undoubtedly include the interests of existing members.[68]
In a similar vein, Dawson contends that:
It was the shareholders who, acting jointly, contributed their moneys to the directors to advance the purposes for which the company was established. And it was the shareholders who agreed to confer the various powers on the directors for the purpose of ... managing the business. By accepting the office of director, the directors undertook to exercise the powers conferred on them by the shareholders for the purposes set out in the company’s constitution. Correspondingly, the shareholders necessarily reposed trust and confidence in the directors.[69]
He concludes that, although there is a certain attraction in extending directors’ duties to other parties who may be affected by their decisions, such a scheme is unworkable in practice, and that protection for creditors and others should be left to specific statutory provisions rather than relying on such a vague understanding of what ‘the company’ is.[70]
The Spies case represents a confirmation of the fact that creditors are not owed an independent and enforceable duty by company directors. It also perhaps indicates, despite its result, that such a duty is not required. The High Court noted that it was not the lack of an enforceable duty to creditors which defeated the Crown’s case, but rather the ‘misconceived’ manner in which the charge against Mr Spies was formulated.[71] The Crown’s case would have been a strong one, had it proceeded on the basis of the alternative charge under s 229(4) of the Companies Code, or even if the charge under s 176A of the Crimes Act had been formulated slightly differently. Other cases which have been claimed to authorise direct action by creditors, but which in the light of Spies seem only to provide for an obligation to have regard to creditors’ interests for the company’s benefit, lead to a similar conclusion. In Ring v Sutton,[72] for example, an enforceable duty to creditors was not required, as the company was in liquidation and it was the liquidator who took action in the company’s name. The apparently expansive comments of Cooke J in Nicholson v Permakraft (NZ) Ltd[73] were made in the same context. His Honour’s reference to ‘a particular duty of care [to creditors] arising from ordinary negligence principles’ does not indicate the existence of a duty arising from the office of director itself. Rather it ‘arises by virtue of the general law and peculiar facts, and thus entails no greater contradiction than is already inherent in the law’.[74]
If the situation is such that a director’s actions directly affect a creditor’s interests, then both Nicholson and Spies support the possibility of action by the creditor against the director, not because he or she is a director and owes an enforceable duty to creditors, but because the creditor may properly claim to have been the subject of fraud or negligence by the director.[75] In other fact situations, such as that in Spies, remedies exist through the mechanism of liquidation, at which time action may be taken by the liquidator or a creditor.[76]
As noted by Dawson, ‘although the practical result in each of the two situations may be similar (the directors compensate the creditors), the two are conceptually very different’.[77] The existence of both allows for both the protection of creditors, and the necessary certainty for directors to know whose interests they are (at least principally) responsible for upholding.
[*] Lecturer in Business Law, Massey
University, New Zealand; SJD candidate, Deakin
University.
[1] [1976] HCA 7; (1976) 137 CLR
1.
[2] Ibid
7.
[3] Lord Greene in Re Smith &
Fawcett Ltd [1942] Ch 304, 306 stated that directors must act in ‘the
interests of the company’; and in Greenhalgh v Arderne Cinemas Ltd
[1951] Ch 286, 291 it was held that directors must act for the benefit of
‘the company as a whole’. David Wishart describes this as
‘one
of the most tenacious principles in company law’: ‘Models and
Theories of Directors’ Duties to Creditors’
(1991) 14 New Zealand
Universities Law Review 323, 326.
[4] See
John Farrar, Nigel Furey, Brenda Hannigan and Philip Wylie, Farrar’s
Company Law (3rd ed, 1991) 384.
[5] See
generally Reginald Barrett, ‘Directors’ Duties to Creditors’
(1977) 40 Modern Law Review 226; and Francis Dawson, ‘Acting in the
Best Interests of the Company — For Whom are Directors
“Trustees”?’
(1984) 11 New Zealand Universities Law
Review 68.
[6] See A J Black and P Wines,
‘Officers’ in Australian Corporation Law — Principles and
Practice (loose-leaf) (updated to July 2001) para.
3.2.0370.
[7] [2000] HCA 43; (2000) 201 CLR
603.
[8] See [2000] HCA 43; (2000) 201 CLR 603, 608-610; and
R v Spies (1998) 29 ACSR 217,
218-220.
[9] (1998) 29 ACSR 217,
221.
[10] [2000] HCA 43; (2000) 201 CLR 603,
626.
[11]
Ibid.
[12] Ibid 629 (emphasis in
original).
[13] (1998) 29 ACSR 217,
218.
[14] Since repealed. Now see s 182 of
the Corporations Act 2001 (Cth).
[15]
[2000] HCA 43; (2000) 201 CLR 603, 607; (1998) 29 ACSR 217,
218.
[16] (Unreported, District Court of New
South Wales, Armitage DCJ, 22 December
1997).
[17] Section 7(2) provides that:
‘where an appellant has been convicted of an offence, and the jury could
on the indictment have found the appellant
guilty of some other offence, and on
the finding of the jury it appears to the court that the jury must have been
satisfied of facts
which prove the appellant guilty of that other offence, the
court may, instead of allowing or dismissing the appeal, substitute for
the
verdict found by the jury a verdict of guilty of that other offence
...’.
[18] (1998) 29 ACSR 217,
222.
[19] Ibid 223, applying the
considerations of s 229(4) in Chew v The Queen [1992] HCA 18; (1992) 173 CLR 626; and
R v Byrnes (1995) 187 CLR 501.
[20]
(1998) 29 ACSR 217, 223.
[21] [2000] HCA 43; (2000) 201 CLR
603, 613-616. See R v Roberts [1942] 1 All ER 187, 193, where the English
Court of Appeal substituted a verdict even though it was ‘extremely
unlikely ... that the jury would
have returned’ such a verdict; and R v
Stones (1955) 56 SR (NSW) 25, 29, where the New South Wales Court of
Criminal Appeal rejected the jury’s findings and used its own findings of
fact to substitute
a verdict of manslaughter for
murder.
[22] (Unreported, Court of Criminal
Appeal of New South Wales; 23 December 1998) (emphasis added). See also R v
Deacon (1973) 57 Cr App R 689, 694: ‘What is necessary is that the
findings of the jury themselves must establish the appropriate facts to support
the alternative
offence’.
[23] [2000] HCA 43; (2000)
201 CLR 603, 642 (Callinan J).
[24] Ibid 611
and 612-613 (Gaudron, McHugh, Gummow and Hayne JJ), citing Calabria v The
Queen [1983] HCA 33; (1983) 151 CLR 670; R v Large (1939) 27 Cr App R 65; R v
Grasso [1949] VicLawRp 27; [1950] VLR 21; and Knight v The Queen [1992] HCA 56; (1992) 175 CLR
495.
[25] [2000] HCA 43; (2000) 201 CLR 603, 628 ‘It
suggests that the offence must be committed in respect of a person’s
actual dealings with the
company.’
[26] (Unreported, Court of
Criminal Appeal of New South Wales; 5 December
1990).
[27] [2000] HCA 43; (2000) 201 CLR 603,
629.
[28] Ibid 630, citing R v Scott
[1974] UKHL 4; [1975] AC 819, 839; and Peters v The Queen [1998] HCA 7; (1998) 192 CLR
493.
[29] [2000] HCA 43; (2000) 201 CLR 603,
635.
[30] [1976] HCA 7; (1976) 137 CLR 1,
6-7.
[31] See Len Sealy,
‘Directors’ Duties — An Unnecessary Gloss’ (1988) 47
Cambridge Law Journal 175; and John Heydon, ‘Directors Duties and
the Company’s Interests’ in Paul Finn (ed), Equity and Commercial
Relationships (1987) 126-7.
[32] [2000] HCA 43; (2000)
201 CLR 603, 636. See the comments, to similar effect, of Andrew Beck,
‘Headnote Digest: Fernyhough v Rankin Nominees Ltd’ [1998]
Companies and Securities Law Bulletin 106, 107; and Len Sealy,
‘Directors’ Wider Responsibilities — Problems Conceptual,
Practical and Procedural’
(1987) 13 Monash Law Review 164,
172.
[33] See, for example, Grove v
Flavel (1986) 43 SASR 410; and Nicholson v Permakraft (NZ) Ltd [1985] NZCA 15; [1985]
1 NZLR 242.
[34] [2000] HCA 43; (2000) 201 CLR 603,
637.
[35] [1994] FCA 1117; (1994) 13 ACSR 766, 785. See also
Kuwait Asia Bank v National Mutual Life Nominees Ltd [1990] 3 NZLR 513,
529; and ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd (1990)
2 ACSR 676, 682, where it was held that directors have no ‘duty in law
directly owing to and enforceable by creditors, and sounding in
debt or
damages’.
[36] See also Percival v
Wright [1902] UKLawRpCh 125; [1902] 2 Ch 421, 425-426.
[37]
Wishart, above n 3, 323. Wishart notes at 325 that ‘prior to Walker v
Wimborne ..., the cases uniformly rejected the idea that creditors interests
may be taken into account; see Re Wincham Shipbuilding Boiler and Salt Co
[1878] UKLawRpCh 195; (1878) 9 ChD 322; Re Dronfield Silkstone Coal Co [1850] EngR 712; (1881) 17 ChD 76.
Salomon v Salomon [1897] AC 22 is also in
point’.
[38] [1983] Ch 258,
288.
[39] (1986) 4 NSWLR 722,
730.
[40] [1988] BCLC 250,
253.
[41] Paul Davies, Gower’s
Principles of Modern Company Law (6th ed, 1997) 603. Davies describes the
West Mercia case as the ‘clearest recognition of [the argument that
directors owe duties to creditors] in the English
courts’.
[42] Smellie J in Mogal
Corp Ltd v Australasia Investment Ltd (1990) 3 NZBLC 101,783, 101,811
describes this as ‘perhaps the more orthodox approach’ to the
issue.
[43] [1976] HCA 7; (1976) 137 CLR 1, 7 (emphasis
added). See Barrett, above n 5, 229.
[44]
[1998] 2 NZLR 481, 549.
[45] (1988) 13 ACLR
261, 268-271. See also Nicholson v Permakraft (NZ) Ltd [1985] NZCA 15; [1985] 1 NZLR 242
(discussed below); Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722;
and Chew v The Queen (1991) 5 ACSR
473.
[46] (1980) 5 ACLR
546.
[47] [1985] NZCA 15; [1985] 1 NZLR 242,
249-250.
[48] [1987] BCLC 193,
197-198
[49] (1989) 15 ACLR 217,
221.
[50] Above n 3, 326-327. Wishart
concludes by noting that ‘there is a wealth of authority against a suit by
creditors’. See
also Ross Grantham, ‘The Judicial Extension of
Directors’ Duties to Creditors’ [1991] Journal of Business
Law 1, 11-13.
[51] [1985] NZCA 15; [1985] 1 NZLR 242,
249-250.
[52] Ibid
250.
[53] Such a duty would be of the sort
imposed in Coleman v Myers [1976] NZHC 5; [1977] 2 NZLR 225; and rejected by the House
of Lords in Williams v Natural Life Health Foods Ltd [1998] 1 BCLC 689.
See also Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517; Livingston v
Bonifant (1995) 7 NZCLC 260; and the discussion in Harold Ford, Robert
Austin and Ian Ramsay, Ford’s Principles of Corporations Law
(loose-leaf) (updated to July 2001) para 16.080 under the heading ‘Cases
in which a duty of care is an element raise a special
question’.
[54] See [2000] HCA 43; (2000) 201 CLR
603, 630 and 635, noted above.
[55] Above n
3, 327.
[56] [2000] HCA 43; (2000) 201 CLR 603,
636-637.
[57] See, for example, James
Corkery, Directors’ Powers and Duties (1987) 69; and Robert Baxt,
‘Do Directors Owe Duties to Creditors — Some Doubts Raised by the
Victorian Court of Appeal’
(1997) 15 Company and Securities Law
Journal 373, 374. Irene Trethowan notes that the view expressed by the High
Court in Spies is ‘supported by most commentators’:
‘Directors’ Personal Liability to Creditors for Company Debts’
(1992) 20 Australian Business Law Review 40,
44.
[58] See Dawson, above n 5,
77.
[59] B M McPherson, ‘Duties of
Directors to Shareholders and Creditors’, in B M McPherson (ed),
Company and Securities Law After the Market Crash (1989)
11.
[60] Ibid. See also Dawson, above n 5,
77.
[61] Above n 3,
338-339.
[62] Above n 5, 77. See Salomon
v Salomon and Co Ltd [1897] AC 22, 33 where Lord Halsbury said that
‘if every member of the company — every shareholder — knows
exactly
what is the true state of the facts, ... no case of fraud upon the
company could here be
established’.
[63] Salomon v
Salomon and Co Ltd [1897] AC 22; Lee v Lee’s Air Farming Ltd
[1961] NZLR 325.
[64] Segenhoe Ltd v
Akins (1990) 1 ACSR 691, 702.
[65]
Grantham makes the point that ‘only natural persons could be said to have
interests’: above n 50, 5.
[66] [1951]
Ch 286, 291.
[67] [1953] HCA 39; (1953) 90 CLR 425,
438.
[68] Ford, Austin and Ramsay, above n
53, para 8.095.
[69] Above n 5,
78.
[70] Ibid 79-81. In his article, Dawson
refers to a debate on this issue between Merrick Dodd and Adolph Berle in the
1930s. Dodd initially
favoured the broader approach, but eventually decided that
it was ‘unworkable and conceptually unsound’. Berle’s
opinion
was that to identify the company with its shareholders was the ‘only
effective way of ordering business affairs so
as to minimise managerial
over-reaching and self-seeking’, and that extending directors’
duties to other parties would
not work until ‘such time as one was
prepared to offer a clear and reasonably enforceable scheme of
responsibilities’
to those parties: see Merrick Dodd, ‘For Whom are
Corporate Managers Trustees?’ (1931) 44 Harvard Law Review 1145;
Adolph Berle, ‘For Whom Corporate Managers are Trustees’ (1932) 45
Harvard Law Review 1365; and Merrick Dodd, ‘Book Review’
(1942) 9 University of Chicago Law Review
538.
[71] [2000] HCA 43; (2000) 201 CLR 603, 629, 634,
637-638.
[72] (1980) 5 ACLR
546.
[73] [1985] NZCA 15; [1985] 1 NZLR
242.
[74] Grantham, above n 50,
7-8.
[75] See discussion at n 53
above.
[76] Corporations Act 2001
(Cth) s 588M and ss 588R-588U.
[77]
Dawson, above n 5, 80.
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