Pascoe Limited (In Liq) v Lucas A1/2000 [2000] HCATrans 227 (12 May 2000)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Adelaide No A1 of 2000

B e t w e e n -

PASCOE LIMITED (IN LIQUIDATION)

Applicant

and

PETER CHARLES LUCAS

Respondent

Application for special leave to appeal

GAUDRON J

KIRBY J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 12 MAY 2000, AT 11.03 AM

Copyright in the High Court of Australia

MR D.R. MEAGHER, QC: If the Court pleases, I appear with my learned friend, MR M.C.J. HOFFMANN, for the applicant. (instructed by Fisher Jeffries)

MR D.F. JACKSON, QC: If the Court pleases, I appear with my learned friend, MR I.C. ROBERTSON, for the respondent. (instructed by Piper Alderman)

GAUDRON J: Thank you, Mr Meagher.

MR MEAGHER: If the Court pleases, this application for special leave raises, in our submission, important issues of corporate governance. In particular, it raises the question of whether a director can be excused from his conduct where he is acting as a puppet - - -

GAUDRON J: What is the duty that was breached? The difficulty you have, is it not, that you have no finding of dishonesty? Your side bore the onus of proof, so where is the duty?

KIRBY J: And to whom?

GAUDRON J: And to whom?

MR MEAGHER: The duty, we say, is the duty owed to Pascoe by Mr Lucas and it is a duty to preserve the property of Pascoe.

GAUDRON J: What, just to put the money under the mattress?

MR MEAGHER: Well, not either send the money out in a way that it is going to be lost, either by not sending it out at all or if it is to be sent out, sending it out on proper terms as to security and the like so that there is some prospect of it being recovered. That is the essence of the matter as to what we say it was. When I say the duty is owed to Pascoe, it is owed to Pascoe but - - -

GAUDRON J: You do not identify a statutory duty in this regard.

MR MEAGHER: Yes, there is a duty to act honestly and diligently in respect - there are two duties; one to act honestly and the other to act diligently in the affairs - - -

GAUDRON J: Well, your "honestly" you cannot rely on.

MR MEAGHER: I am sorry, your Honour?

GAUDRON J: "Honestly" you cannot rely on because there is no finding of dishonesty.

MR MEAGHER: No, there is not, your Honour, but there is a finding that he abdicated his responsibilities as a director.

GAUDRON J: Right, so, the duty to act diligently.

MR MEAGHER: Yes. An abdication of - - -

GAUDRON J: And you say that that gives rise to a liability in damages to Pascoe.

MR MEAGHER: Yes, your Honour, to Pascoe.

GAUDRON J: Have you a finding that he did not act diligently?

MR MEAGHER: No, your Honour.

GAUDRON J: Well, then how can you - you are the onus-bearing party, how can you succeed?

MR MEAGHER: Because we have a finding as to what he did, your Honour, and it is a matter of characterisation of the acts of what he did that, in our submission, should have led to that finding being made. What they found was that he gave no independent consideration and that he simply acted at the behest of the recipient. If that finding is upheld, then that is a failure to act diligently in the affairs of Pascoe. I appreciate they then do not go on and say that, but consistently with making such a finding, the conclusion should have been reached that he was in breach of his statutory, and indeed his fiduciary, duties. I cannot have it both ways. I cannot - - -

GAUDRON J: I do not understand - - -

MR MEAGHER: If a director is found to have not given the transaction any independent consideration himself, but to have simply acted as a puppet at the behest of officers - - -

GAUDRON J: Of the shareholders, was it?

MR MEAGHER: Well, officers of Bond Corporation.

GAUDRON J: Yes, and of his shareholders?

MR MEAGHER: Well, that gets imputed to the other shareholder. I will come to that. But the people who are identified as devising the scheme and at whose behest he is said to be acting, are officers of Bond, the ultimate recipient of the benefit. So we have a director of Pascoe, being one of the companies in the JN Taylor Group, acting at the behest of the recipient of the moneys and not exercising any judgment himself. Indeed, the Court finds that Dolfinne, the shareholder of Pascoe next up the line, does likewise.

GAUDRON J: But you have an absence of factual findings in some respect. You have factual findings against you, both at first instance and in the Full Court. You have a big hurdle, have you not?

MR MEAGHER: The factual findings are in fact, in our submission, our way.

KIRBY J: Would you point me to the factual finding that you say is characterisable as acting as a puppet?

MR MEAGHER: Yes.

KIRBY J: You are saying that all of the respondent's contentions that there was no finding of actual dishonesty does not meet this proposition and that within the findings of fact that have been made you can contend in this Court as a matter of law that there ought to have been a finding of lack of diligence.

MR MEAGHER: Yes, indeed, your Honour.

KIRBY J: Well, I would like to have those factual findings and then I would like you to deal with that suggestion that the statute has changed and that that is relevant to this case, section 187.

MR MEAGHER: We have set them out.

KIRBY J: I realise that. I have read your reply but deal first of all with the factual findings.

MR MEAGHER: We have extracted the factual finding in each instance made at trial and on appeal and they are in our summary of argument. The extracts are there on page 160 of the application book at paragraph 13 and the Court will see at 13.1 the extract from "Both the Trial Judge and the Full Court":

"In short, all of the arrangements, the transactions and the dealings mentioned in these reasons were put in place by officers of Bond Corporation. They manipulated the strings and all of the directors of Pascoe, including Lucas, responded to their directions like puppets. So also with Dolfinne. Its decisions were made by these officers in the Bond Group."

And the second - - -

KIRBY J: Yes, I have read all those. Is this the essence of your special leave point?

MR MEAGHER: This is the essence of it, yes, your Honour.

KIRBY J: Then it is rather a short point.

MR MEAGHER: Yes, it is the fundamental point. If we did not have that finding that Mr Lucas was acting as a puppet and which is contrary to him exercising independent judgment on the transaction, then I would be in difficulty in identifying to your Honours a lack of judgment exercised - - -

GAUDRON J: Does that mean failure to act diligently?

MR MEAGHER: It does, your Honour. It means a failure to - - -

GAUDRON J: Well, how does that emerge? In one respect they acted very diligently.

KIRBY J: Do you say just being a puppet of somebody else external to the particular company is not acting diligently in the best interests of the shareholders of that particular company?

MR MEAGHER: No, your Honour, especially when the finding is made of those others as it is, that they were not having any concern for the interests of the companies.

GAUDRON J: Can you specify the precise duty and take us to the statute, please?

MR MEAGHER: I am sorry, I missed the last - - -

GAUDRON J: I said can you specify the precise statutory duty. Do not forget you also have the difficulty that in one way or another there seems to have been - the shareholders seem to at least have concurred in this course.

MR MEAGHER: We quarrel with that, your Honour. The basis on which the court below found that occurred was because it was said that those companies likewise acted as puppets. Now, on analysis, in our submission, that must mean that Mr Baker and Ms Noonan gave their scheme to the directors of Bond who in some instances were also directors of these companies and inferred, because there was no evidence, that therefore in their capacity as directors of those companies they directed those companies to participate in this scheme.

It is a little difficult because Baker and Noonan are said also by the court, both at first instance and on appeal, to be pulling the strings of all the companies fairly directly. The money, for example, does not go through the books of Dolfinne but there are book entries made, so the extent to which the directors did anything at all in Dolfinne we do not know. It is just an inference that has been drawn, but we say about that that if the finding that Baker and Noonan are not having regard to the interests of the companies is sustained, which is the finding the court has made, then one cannot attribute to those companies - - -

GAUDRON J: But you have to go further, do you not? You have to, in a sense, because you are asserting a duty and its breach.

MR MEAGHER: Yes, and it is being said there is no breach by the trial judge in the Full Court because Lucas acts in accordance or at the behest of Dolfinne.

GAUDRON J: Yes, but it is no use for you just to say that, in a sense, is it, Mr Meagher? You have to say that notwithstanding that, at least on the surface the shareholder was not objecting to this. You have to put that the court should have been satisfied that there was a breach.

MR MEAGHER: Yes, your Honour, but we have been frustrated in that by the court focusing upon the immediate shareholder and its conclusion that the immediate shareholder directed Lucas to do this and Lucas complied with that direction making what otherwise might be a questionable transaction a proper one. So that the court does not then look at and determine whether, independently of that, the transaction reflected misconduct on the part of Lucas or not. When one looks at the transaction itself, one finds $100 million going out on limited recourse, meaning if the Bermuda company or the Cook Island company did not get the money back, they could not do it.

GAUDRON J: Yes, we are familiar with the facts - - -

MR MEAGHER: Well, we just say that - - -

KIRBY J: Does your proposition involve any questioning of the authority of the court in Walker v Wimbourne or not?

MR MEAGHER: No, we say that assists us. I seem to go round in circles there, but we would say that Mr Lucas, in determining how he discharged his duties to Pascoe, had to have regard to the ultimate beneficial owner of the money. In other words, he could not just say because his immediate shareholder, even if it be true, wanted the money to go out, he still had to have regard to the fact that the money came from JN Taylor, the ultimate shareholder, it being part of the group, and being a wholly owned part of the group.

KIRBY J: Now, let me be absolutely clear. Your contention would be that on the hearing of an appeal, if special leave were granted, that you would simply pick up the findings of the trial judge confirmed by the Full Court at paragraph 13 and say within those findings - leave aside questions of dishonesty which you are not arguing and rearguing - there is sufficient for a finding of lack of due diligence and that it tenders an important question of whether, if a director of a company acts as a puppet for others external to the company and does not attend to the separate and special duties that he owes to the shareholders of the company, then that is a lack of due diligence.

MR MEAGHER: I agree with all of that, except, with respect, to where your Honour said his duty to the shareholders is. His duty is to the company, with respect, and that is to Pascoe. The moment one puts it in terms of saying a duty to shareholders, it can become a little confusing. I say that because part of the reasoning in the Full Court was that it did not matter as to what motives were, or plans or schemes, in respect of the money further back. But, of course, it does matter because if Mr Lucas allows Pascoe to join in an appropriation of money, that is, in breach of fiduciary duties owed further up the line, it would then become liable under Barnes v Addy, so the contingent creditor would arise. So, one cannot just ignore the antecedents of the transaction - - -

GAUDRON J: But is it not correct that to answer Justice Kirby's question, you have to accept that there may be other facts upon which the respondent could rely in answer to those matters?

MR MEAGHER: Well, we would say not. May I draw a distinction between findings - - -

GAUDRON J: You would have to say that all other facts are irrelevant.

MR MEAGHER: No. If I can draw a distinction between the findings as to overt facts, we do not challenge any of them. If we go to the - - -

GAUDRON J: This is not a question of overt facts. We are not trying a conspiracy charge.

MR MEAGHER: No. I meant by "overt facts" facts of what actually happened in respect of the money and where it went. I am trying to draw a distinction between that and the characterisation that arises from those facts. We certainly would take issue on appeal with how the facts have been characterised. We would not be challenging the findings as to the facts themselves.

KIRBY J: Would you help me with this: it is suggested in the respondent's written submissions that the supervening amendment of the Act makes it an inappropriate vehicle to bring this matter up now. You seek to answer that in your reply, but I do not quite understand it.

MR MEAGHER: That amendment is an exculpatory provision related to a company in a group. As to how that might exculpate a director, should he comply with those provisions, in our submission what we are concerned with here is whether the next company up in the group or the officers of Bond Corporation, whether the director could be exculpated simply by saying, "I acted in accordance with what they told me to do". That is a different issue.

GAUDRON J: "I acted in accordance with what the shareholder told me", is - - -

MR MEAGHER: Well, with what Baker and Noonan said. That is the fact.

GAUDRON J: Who may have been the agents of several corporations, but one of them was the shareholder corporation.

MR MEAGHER: They were not agents of Dolfinne. That is not the way you get to Dolfinne. The way they get to Dolfinne is to say, "Baker and Noonan at Bond devised this scheme. The directors of Bond must have approved of it. Some of those directors are also directors of Dolfinne, therefore Dolfinne must have approved it". That is the reasoning of the Court. That is drawing an inference. It is not suggesting, and nor is it suggested, nor was any fact found, that Baker and Noonan were officers of Dolfinne at all. So the puppet master that we are talking about are Baker and Noonan. And Dolfinne would be as much a victim of the puppetry as, indeed, was Pascoe.

So I get back to your Honour Justice Kirby's comment, of course the puppetry matter is vital. That is a finding of fact that has been made. We are not challenging that finding of fact. We are saying once that finding is made, once it is found that Baker and Noonan were not having any concern for the interests of companies, there were conflicts of interests, and once it is found Lucas simply complied with their directions, then Lucas is in breach of his statutory duties and is in breach of his fiduciary duties, simply because he has abdicated his responsibility as a director. When you then look at the transaction, you find that the money is advanced on terms that will almost certainly lead to its loss.

KIRBY J: I did not hear the last words.

MR MEAGHER: Almost certainly lead to its loss.

KIRBY J: And did, in fact.

MR MEAGHER: And did - well, as to half of it, yes. If the court had concentrated and focussed just on that in determining that, without having regard to this puppetry matter, then there would have been inevitably a finding in our favour. So the Court's characterisation of the transactions we challenged were not challenged in the transactions themselves. We are not challenging the fact that Baker and Noonan have devised it, we are not challenging the fact that the finding that they made that Baker and Noonan had no regard to the interests of the companies in doing so. That is patently evident.

GAUDRON J: Well, you rely on that.

MR MEAGHER: We rely on that. It is patently evident. The money was being taken from the cash box of JN Taylor and put into Bond.

GAUDRON J: But do you not have to go further, in this sense, and show that the respondent, Mr Lucas, either knew or ought to have known that these are the people, Messrs Baker and Lucas, were not acting in the best interests of the shareholder company?

MR MEAGHER: We rely on authority that we have cited there that if you act as a puppet, you are taken to have the knowledge of your puppet master.

GAUDRON J: I do not understand the legal concept of a puppet, I have to say. I do not think the law can be as simple as that. There must be something to impute knowledge to him, or it may well be that you can say "ought to have had". But you do accept that there is this need for knowledge for your case to succeed, yes.

MR MEAGHER: Your Honour, Mr Lucas was, of course, a director of Bond so the court has already imputed to the other directors of Bond what Baker and Noonan knew and did because that is the only way they get to Dolfinne. So, if you are going to be consistent about it, and the circumstances are no different between Mr Lucas and those other directors, then you would have to say on that account alone Mr Lucas knew it, but we would go the step further and say that if Mr Lucas in his capacity as a director of Pascoe is prepared to simply comply with the directions given by Baker and Noonan, then he had a duty on him to inquire as to the propriety of those directions and whether or not they were in Pascoe's interests and he cannot be exculpated by a finding that he was a mere cipher. If he did not inquire, he is in breach of his duty. If he did inquire, he knew that in the interests of Pascoe - - -

GAUDRON J: Now, that really is where the crux of your case must lie, is it not?

MR MEAGHER: Yes.

GAUDRON J: You must establish that part of a director's duty is to - - -

MR MEAGHER: Inquire.

KIRBY J: And that is diligence, in your submission.

MR MEAGHER: Yes.

GAUDRON J: Inquire with respect to what persons apparently acting on behalf of the shareholders tell him or her.

MR MEAGHER: No. Baker and Noonan, who are acting for Bond, as he would have known - - -

GAUDRON J: Well, yes, but they were also apparently acting for Dolfinne, were they not?

MR MEAGHER: Yes, but, your Honour, he is also the director of Catton, which is the Bond side of the equation, and that is where the money is going.

GAUDRON J: Yes, but this has to be put in a context - I realise your time has gone but, I am sorry, I need to explore this - - -

MR MEAGHER: Yes.

GAUDRON J: This does have to be put in a context, does it not, in which the company was set up for the very purpose of receiving this money from Dolfinne and thereafter using it in the way in which it was used?

MR MEAGHER: Yes.

GAUDRON J: And it is in that context that you have got to assert that diligence required the director of the company set up to do X, that before doing X he should inquire into the - - -

MR MEAGHER: Propriety of it.

GAUDRON J: - - - propriety, not of what he is doing, but the propriety of what the apparent agents of those who set up the company have set it up for.

MR MEAGHER: Yes, I would agree with most of that analysis.

GAUDRON J: Yes.

MR MEAGHER: I would add two things to it. First of all, he is a director of a company in the JN Taylor Group, being when is a director of Pascoe. So he has got to bring to account that he is acting as a subsidiary company, a wholly-owned subsidiary company, in the JN Taylor Group. I mean, he is receiving that money and he is going to pass it out. He is the point of departure of the money from that group to the Bond Group. So that is the first thing that you would have to add to it. Secondly, you would have to add to it that this scheme is being devised by the Bond Group.

GAUDRON J: But not by this man so far as we can - - -

MR MEAGHER: So far as we - no, no.

GAUDRON J: So far as we can tell it has been devised by Messrs Baker and - - -

MR MEAGHER: But if he is acting as their puppet or acting in accordance with their directions, he knows where Baker and Noonan are. He knows they are in Bond. So he knows the plan, who has devised that - - -

GAUDRON J: Yes, but, I mean, I do not think anything happens by saying "puppet, puppet, puppet". I mean, I think - - -

MR MEAGHER: I only do it because that is what the judges have done.

GAUDRON J: Well, I know.

MR MEAGHER: Yes.

GAUDRON J: And it may be something you can rely upon at the end of the day, if it goes that far, because ultimately what one has to focus on in this case, is it not, is what was known or what ought to have been known.

MR MEAGHER: Yes, your Honour, and that is what I am - - -

GAUDRON J: And that is why I say let us forget the "puppet" bit.

MR MEAGHER: I will leave "puppet" out - - -

GAUDRON J: Yes.

MR MEAGHER: - - - why I identify the source of the plan as being in the Bond empire and not in the JN Taylor empire. So he has to know that because he knows Baker and Noonan and he knows who they serve because he is a director of Bond and they are very senior officers in Bond, so there would be no dispute in that. So he knows this is a plan devised by the corporate group that is to gain the benefit. He knows that he is a director of a company that is in a group that has the money. So he knows enough at that point to know that he should be inquiring into the matter if he is to discharge his duties diligently.

GAUDRON J: But inquiring into what matter?

MR MEAGHER: Into the circumstances of this transaction.

GAUDRON J: No. I think you have to go further, do you not? You have to say, do you not, he had to inquire into Dolfinne?

MR MEAGHER: Well, JN Taylor, the corporate group.

GAUDRON J: It is not sufficient for you just to say, "He had to inquire into the security, or the wisdom, of what his company was doing, is it?

MR MEAGHER: With respect, we would say, yes, although the two are enmeshed. Because he is putting the money out on terms that obviously make its recovery precarious. He knows he is doing that, he signs the resolutions to that effect.

GAUDRON J: But he is doing that in circumstances where he knows that that was why the company was formed. It was formed precisely to do that.

MR MEAGHER: Formed by the Bond people who have gained control of JN Taylor. It is formed for a purpose of providing this money to Bond. It is formed, though, as part of the Taylor Group. If you were talking about his responsibilities as a director of Catton, then one would say he would be looking at the Bond interests and it might be difficult to say he has done anything particularly wrong. But if you talk of it in terms of being a subsidiary of the Taylor Group, then you have to bring - or he should have brought to account - the circumstances - - -

KIRBY J: It seems to be skirting on the edge of Walker v Wimborne.

MR MEAGHER: Yes.

KIRBY J: Well, that is a problem for you, is it not?

MR MEAGHER: We would actually have said Walker v Wimborne, to an extent, supports us, not that I am saying he owes a duty to the Taylor Group, he owes the duty to Pascoe. But as a director of Pascoe, knowing the money is coming from the Taylor Group, of which his company is a member, he has a responsibility to look into the basis on which it is coming. I have gone well over my time.

GAUDRON J: No, but I think that was in response to my probings. Have you said all you wish to say?

MR MEAGHER: There are some other grounds there, perhaps if I just draw your attention to them without saying a great deal more. We do say that, even if Dolfinne did give a direction, it could not be a direction that would abrogate statutory duties on the director, because that would mean that Dolfinne is taking on the position of a legislature, amending it. Further, we say that a director is not bound to do what the shareholder says, in any event. The shareholder might give the direction, but that does not mean that the director cannot refuse to comply with it because the management of the companies are set into the hands of the directors, not into the hands of the shareholders. Now, those issues, we say, are fundamental to corporate governments in this country and are deserving of special leave to have agitated. If the Court pleases.

GAUDRON J: Yes, thank you, Mr Meagher. Yes, Mr Jackson.

MR JACKSON: Your Honours, could I just say one thing before going to the matters that my learned friend has raised, and that is this, that there is, of course, an additional difficulty in the light of the application for special leave in this case, and that is that there has been the finding that the respondent should be excused pursuant to section 214 of the relevant Act - finding in both courts. Your Honours will see the relevant provision set out at page 141 of the application book at paragraph 287.

KIRBY J: Is that founded on the view that was taken about the absence of the lack of diligence?

MR JACKSON: No, your Honour, it was made on the assumption that their case was right.

KIRBY J: What page is it?

MR JACKSON: I said 287. It is paragraph 287 of page 141. Your Honours will see the provision set out at the bottom of the page, and I will not read it out, of course, but could I say in relation to it that both courts below have formed the view that, if necessary, relief should be granted under that provision. Your Honours, I will not trouble going to the primary judge, but if I could take your Honours to the Full Court on the next page. Your Honours will see, if - - -

KIRBY J: "Honestly" is not in question, so it is really a question of whether he acted reasonably and it is therefore reasonable to excuse him.

MR JACKSON: Could I say, your Honour, first of all, if one goes to paragraph 295 at page 142, your Honours will see the view taken by the Full Court in summary, and then if one looks at the approach taken by the Full Court in arriving at that conclusion - you will see it in the preceding paragraphs on page 142 - and, your Honours will see, for example, paragraph 289 and then 290, no suggestion they had used the "position to benefit himself", "no suggestion that he acted otherwise".

KIRBY J: But the suggestion Mr Meagher puts to us is: accept fully the finding of lack of honesty; accept then the findings of puppet and so on; that the courts below have failed to properly characterise this and that that is an important issue for corporate governance.

MR JACKSON: Well, your Honour, for the purposes of the terms of section 214, what I was going to say was, if your Honours look at page 142, what your Honours will see, first of all, is that the court took into account all the relevant matters. There is no error of principle in the approach they took to that provision, nor, in our submission, is there any error in the application of the principle to the facts which were assumed by the Full Court for the purposes of expressing the view that appears at page 295.

GAUDRON J: The key bit seems to be at paragraph 293, does it?

MR JACKSON: At 292 and 293, your Honour.

GAUDRON J: At 142.

MR JACKSON: Your Honours will see particularly that their Honours draw attention to the fact that the section itself says that one is entitled to have regard to all the circumstances of the case. They include, of course, the purpose of the incorporation of the provision - - -

KIRBY J: But what is said to us in relation to 293 is that it is true that Dolfinne was incorporated for the purpose of the transaction but that it existed in the Taylor Group and that, therefore, a director attending reasonably or diligently to his or her duties would not have acted as your client did.

MR JACKSON: What that means, your Honour, a concept of that kind is discussed in Walker v Wimborne. If I could take your Honours to that for just a moment, your Honours will see that the decision of the - it could be number 5 in the authorities which may be read by us. If I could take your Honours to three passages in the reasons of Justice Mason, first of all page 5, about point 4 on the page:

No attention was given to these aspects of the matter, no doubt because the respondents failed to appreciate that each company was a separate legal entity and that entry into each transaction required to be examined in the light of the interests of each company participating in it.

KIRBY J: As I understood Mr Meagher, he said, "I accept that, but it is of a company operating within the Taylor Group".

MR JACKSON: Your Honours, he said he accepted it. What I am saying is that if one looks at Walker v Wimborne, the approach taken in Walker v Wimborne is not consistent with the approach that is suggested by the applicant. Can I give your Honours two further references in this regard, The first is on page 6, halfway down the page, the paragraph commencing "To speak of the companies as being members of a group". I would invite your Honours to read the paragraph, but the last sentence is of some importance:

the transaction is one which must be viewed from the standpoint of company A and judged according to the criterion of the interests of that company.

What is meant by "the interests of that company" is then referred to at page 7, the fourth line on the page:

In this respect it should be emphasized that the directors of a company in discharging their duty to the company -

Now, your Honours, one hears the phrase "duty to the company", but what that means, in reality, can be seen by the concluding words:

must take account of the interest of its shareholders and its creditors.

Well, of course, this is a case where there were not any creditors. So, when speaking of the interest of its shareholders - and your Honours will see that is really what Walker v Wimborne says relevantly.

The point I would seek to make, if I could just go back to the discussion about section 214 for the moment, is this: that what one sees in our learned friend's argument in relation to getting over, as it were, section 214, because in our submission that is a significant difficulty with which they are faced, and the decision under that is ultimately discretionary, what they say about that is at page 187 of the application book, paragraph 19 in our reply. Your Honours will see paragraph 19 says, contrary to the suggestion that no issues of fact are involved:

The applicant challenges by grounds 2, 4 and 5 of its draft notice of appeal the underlying findings of the Trial Judge as affirmed by the Full Court that Dolfinne authorised and directed Mr Lucas to act as he did.

Then your Honours will see that in the remainder of that paragraph and in paragraph 20 they seek to rely upon a ground challenging the, I think, notional invocation of section 214. Could I say in relation to that that the appeal would necessarily involve the Court taking a different view about the exercise of a discretion. In that regard, in our submission, there is no basis in principle for doing so.

Could I go then to the matter that was relied on in the first place by our learned friend. The position which obtains, your Honours, if I could first to page 132 in the Full Court's findings - reasons, I should say. Could I say this, your Honours, because it sets a little background to what we wish to say. That is at paragraphs 218 and 219 it had been put to the judge that there was dishonesty because the loan was on uncommercial terms and also the side letters were on uncommercial terms. That was not the finding of the judge. Your Honours will see that referred to in paragraph 219, "typical of many engaged in by Australian companies at the time". Your Honours will also see - - -

KIRBY J: It may not necessarily be an accolade.

MR JACKSON: I did not suggest that for a moment. What I am suggesting is that in relation to the question of the dishonesty or propriety the transaction was not, for the time, unusual. That may or may not be a very good thing and it is a long time ago now. But, your Honour, all I am saying is that was the finding. Could I also say that in relation to the activity and the relationship of the companies, your Honours will see at page 135, paragraph 241, that after a discussion of the various allegations that were made about breach of duty, paragraph 241, the Full Court agreed with the trial judge and said that it had not been "established that the conduct of the respondent was dishonest or.....involved a breach by the respondent of any duties owed to the appellant." Now, your Honours, that is what Walker v Wimborne speaks about.

If I could go back then to page 17, the findings that are made - and there are three passages to which I wish to go - are findings that the conduct that was engaged in was conduct that was authorised by the companies in the chain, and in particular by the company Dolfinne, which was their sole shareholder. You will see, first of all at page 17, commencing at about line 31, where it is said the directors of Bond Corporation and the companies in the Taylor Group:

were aware of the general nature of back to back loans and authorised their senior executives such as Noonan and Baker to engage in them.

Baker, your Honours, was the secretary as well of Dolfinne - that appears at page 12. His Honour goes on to say:

I do not suggest that these transactions were always formally authorised....It is apparent from the documents that they were not all authorised. But, such is the volume of the transactions, it would be unrealistic to reach any conclusion other than that they were carried out with the knowledge and consent of Messrs Bond, Beckwith, Mitchell and Oates -

the directors of the shareholding company. Also, at page 48 - - -

KIRBY J: Mr Jackson, the thing that worries me, and it is a point in your favour, is the point you have raised under section 214. I recall Justice McHugh on a number of occasions drawing attention to a decision of Chief Justice Barwick which said that when you get to this Court, you do not really worry about what judges said they might have done in certain circumstances when they did not face it, because they really have not had to address themselves specifically to the point. You get the general drift of what the issue is. Is the fact that the judges below, the trial judge and the Full Court, did not actually have to consider section 214 a reason for, as it were, discounting that finding which they provisionally make on page 142 that you have called attention to?

MR JACKSON: Well, it is not, your Honour. Could I just say, it is some little time now since Chief Justice Barwick was here, and I must say I have heard other judges say the exact opposite.

KIRBY J: It is not a long time since Justice McHugh was sitting in this very seat.

MR JACKSON: But can I say this, one has to, if there is a case that is capable of being decided on two grounds and what one has is a situation where the court decides on one ground, but says it is strictly unnecessary to decide on the other, but if we had had to, we would have found it anyway, well now, your Honour - - -

GAUDRON J: But it does mean that this Court could not decide the matter finally, at least on the main ground which Mr Meagher - - -

KIRBY J: No, it would have to be reconsidered on section 214, either by this Court or by the court below.

MR JACKSON: Well, your Honour, could I also say, and it is right to say, of course - - -

GAUDRON J: Well, Mr Jackson, I think we do not actually need to trouble you further. Mr Meagher, anything in reply?

MR MEAGHER: So far as what my learned friend has said, one does have to bear in mind that the trial judge was excusing or finding no breach of duty, because he said they acted at the behest, or Lucas acted at the behest of Dolfinne. It did not - - -

KIRBY J: The section is very widely worded. It merely talks of honestly and reasonably; reasonably is a very large concept and the trial judge and the Court of Appeal have said, if necessary, they would have invoked it to excuse him. So you really have to attack that second limb of excuse, as well as mount your major attack that you have done. You were sailing very well until I reached that section.

MR MEAGHER: Well, the trial judge said that he would invoke section 214 only for the purpose of enabling Lucas to have the benefit of the approval of Dolfinne to the acts he performed on its behalf. We would say that does not get you relief under section 214, that circumstance, because - - -

KIRBY J: The Full Court, which is the place from which the appeal comes to us, says, for the purpose of relieving the respondent from any liability to the appellant, and even if you were to persuade us that the characterisation of the due diligence was incorrect, then this finding either stands fatally against you or at the least would have to be redetermined by the Full Court, in the face of their clear statement that they would have used it to give full relief to the respondent.

MR MEAGHER: Yes, but for exactly the same reason, the Full Court in its decision was saying - and you find this at page 142 - that the reason for that is at paragraph 294:

Because Dolfinne is the party which would benefit by the proceeds of this action it seems to me appropriate to allow the benefit of the section.

Now if Dolfinne - in other words, what is being said is, Dolfinne and the liquidator are to be equated. If the liquidator recovers here, the money will flow back to Dolfinne and since Dolfinne asked for it to be done in the first place, that seems inequitable and, on that basis, we excuse Mr Lucas. Now that, in our submission, is quite wrong, because if the money has been misapplied, the party that has lost the money is the JN Taylor Group. You would have to look up - - -

KIRBY J: There again you are on the cusp of Walker v Wimborne. It seems to me you are really asking us to - - -

MR MEAGHER: Not really, your Honour, because what we are looking at here is whether Mr Lucas' conduct should be excused under section 214. The reason that it is being put it should not be, is because Dolfinne asked for this to be done and it is inequitable that Dolfinne should get such a benefit.

KIRBY J: Yes, but it gets a leg into the section by not acting dishonestly, a matter that is found, and then all that is required is a finding that he acted reasonably in the circumstances.

MR MEAGHER: Yes.

KIRBY J: I agree that the issue is debatable. The point you raised in your primary submission, I think, is potentially an important point, but this finding, I think, makes this not a suitable vehicle.

MR MEAGHER: But that is not what the court is saying. It is not saying he acted reasonably. What it is saying is Dolfinne requested the transaction to be done; Dolfinne would get the benefit if Mr Lucas is found liable to it. That is not a finding that Lucas acted reasonably because that is not what they are saying. They are saying Lucas acted in accordance with Dolfinne's direction.

KIRBY J: Yes, but it must be inherent in their finding at 214 that it applies. You say that they are as misconceived on the application 214 as they are on their characterisation of due diligence.

MR MEAGHER: Yes, your Honour.

KIRBY J: I understand that but you have two hurdles, not one, to overcome.

MR MEAGHER: But it is the same hurdle, your Honour. It might be both together. If I get over one of them, I get over the other as well because - - -

KIRBY J: Not quite, because characterising findings as due diligence is one thing. Saying that the Full Court erred in finding "acted reasonably" is, it seems to me, a different thing. They are related but they are different.

MR MEAGHER: Well, as an objective matter, of course, they are, with respect to your Honour, but in the circumstances of this case that finding is tied inevitably to the finding that Dolfinne gave the direction to further the interests of Dolfinne. Now, that is quite contrary to the other findings they make about what Baker and Noonan are doing and, indeed, to the facts of what happened. It was not Dolfinne's money. It had flowed through from the J N Taylor Group. Dolfinne was no less a conduit pipe than was Pascoe and you could say that Dolfinne was the victim of the matter as much as Pascoe was because Dolfinne is handling Taylor's money as it passes through.

So to say, "Well, Dolfinne would get the money back," is really to say exactly what should happen: it should get the money back and it should then account on the money to Taylor. So, in our submission, that does not justify a section 214 relief at all. If the Court pleases.

GAUDRON J: Yes, thank you, Mr Meagher.

Whatever the other merits of this application for special leave, about which we say nothing, the finding by the trial judge and by the Full Court of the Supreme Court of South Australia that, had it been necessary, they would have invoked section 214(3) of the International Companies Code Act of the Cook Islands in favour of the respondent makes this an unsuitable vehicle to agitate the issues proffered by the application. Accordingly, special leave to appeal is refused and costs is the subject of written submissions already. It will be refused with costs.

MR JACKSON: Your Honour, in the application for costs we ask for costs as between solicitor and client.

GAUDRON J: Yes, and that was very ambitious, was it not?

MR JACKSON: Your Honour, I was going to say - - -

KIRBY J: Very, very ambitious.

MR JACKSON: - - - our ambitions have become somewhat muted and I just ask for an order for costs.

GAUDRON J: Yes. Well, you will get costs on the ordinary basis. Thank you, Mr Jackson.

The Court will adjourn briefly to reconstitute.

AT 11.53 AM THE MATTER WAS CONCLUDED