Angas Law Services Pty Ltd & Anor v Carabelas & Anor [2004] HCATrans 493 (8 December 2004)

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Angas Law Services Pty Ltd & Anor v Carabelas & Anor [2004] HCATrans 493 (8 December 2004)

Last Updated: 14 February 2005

[2004] HCATrans 493

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Adelaide No A49 of 2004

B e t w e e n -

ANGAS LAW SERVICES PTY LTD (IN LIQUIDATION)

First Appellant

ALAN SCOTT

Second Appellant

and

GEORGE CARABELAS

First Respondent

VIRGINIA CARABELAS

Second Respondent

GLEESON CJ
GUMMOW J
KIRBY J
HAYNE J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 8 DECEMBER 2004, AT 10.19 AM

Copyright in the High Court of Australia

__________________

MR G. GRIFFITH, QC: If the Court pleases, I appear with MS L.G. DE FERRARI for the appellants. (instructed by Cowell Clarke)

MR R.J. WHITINGTON, QC: May it please the Court, I appear with my learned friend, MR M.B. MANETTA, for the respondents. (instructed by Von Doussas)

GLEESON CJ: Yes, Dr Griffith.

MR GRIFFITH: Your Honours, in this matter there is a principal issue and a subsidiary issue. I do not intend to detain the Court with respect to the subsidiary issue but to stand on our submissions as essentially a factual issue dealing with the preference payments. With respect to the substantial issues, we assert that there were two breaches of duty by the directors, firstly, as to the granting of the mortgage in July 1998 as a guarantee mortgage securing a debt owed by the first respondent. Your Honours, conveniently I will call the first respondent Carabelas because he appears to have been the active party throughout. If I refer to the second respondent, I will refer to her as Mrs Carabelas.

Your Honours, we say that each of those breaches constituted a breach which caused ALS - - -

GLEESON CJ: You have not told us what the second one was.

MR GRIFFITH: Sorry, the second one, your Honour, was in June 1990 shielding Carabelas from liability by rendering his debt to the company with respect to the surplus on the sale of the property as a debt owed by what we have referred to in our submissions as the “Carabelas companies” not being, we would assert, a group of companies, your Honours – that term was used by Justice Mason – which companies each was insolvent at the time.

GLEESON CJ: I am sorry. The second breach, and you will come in a moment to tell us breach of what, but the second breach was in June 1990 shielding?

MR GRIFFITH: Transferring the debt owed by Carabelas, your Honour, being the surplus on the sale of the property which was appropriated by the CBA under the guarantee mortgage, by appropriating that debt and dividing it up between companies that Carabelas and his wife also controlled as the sole directors and shareholders, which companies at that time were each insolvent.

GLEESON CJ: That was a legally effective transaction?

MR GRIFFITH: It was, your Honour, and it was asserted down below that that was a transaction which Carabelas supported for the purpose of these proceedings.

GLEESON CJ: So the first step in that aspect of your argument will be to demonstrate that there was a legally effective transaction, and the second step will be to demonstrate that it constituted a breach of duty.

MR GRIFFITH: We will assert, your Honour, that that was common ground down below, and now in the appeal the appellant seems to be seeking to depart from that.

GLEESON CJ: Now, what are the relevant statutory provisions?

MR GRIFFITH: Your Honour, the relevant statutory provisions for our purpose may be confined to section 229 of the Companies Code; in particular, subsection (4) - - -

GLEESON CJ: Is that an accurate and complete designation of the legislation, the Companies Code?

MR GRIFFITH: Your Honour, the correct designation should be Companies (South Australia) Code.

GLEESON CJ: Thank you.

MR GRIFFITH: Your Honour will pick that up from the first part, page 1, of our outline and also in the judgments, of course. The judgment of Justice Williams as primary judge and on appeal, your Honour, set out these technical issues of the history of the Code.

GLEESON CJ: Just a minute. I have just got to get that – the Companies (South Australia) Code.

MR GRIFFITH: Your Honour, we have annexed that to our submissions. There is a print of it for the convenience of the Court. Our submissions seem rather thick, your Honour, because we have one bundle which commences with the extract of this Code from the CCH print, and other definitions from the relevant law, which should be complete references for any section that could arise for your Honours’ consideration. We attach also, your Honour – which we may not have to go to it - a bundle of correspondence dealing with what should go in the appeal book. Immediately under our written submissions there is annexure B, your Honour, a separately stapled document - what used to be, your Honour.

GLEESON CJ: Well, annexure B has a number of statutory provisions.

MR GRIFFITH: Yes, your Honour, but the first one is section 229.

GLEESON CJ: Yes.

MR GRIFFITH: So, your Honour, that is really our principal reference point for this appeal.

HEYDON J: It says, “as in force on 1 January 1989” - - -

MR GRIFFITH: Yes, your Honour.

HAYNE J: That was also in force on 4 July 1988? There are two key dates that you referred to at the start of your address. That provision is for both of those.

MR GRIFFITH: The answer to that would be, yes, your Honour. They were superseded, I think, in 1993 but we need not concern ourselves with that. Your Honours, may I make it clear that for the purposes of our argument on the substantive point, we need go no further forward than 30 June 1990. With respect to the preference issue, there is reference up to 1993 but I do not intend to detain your Honours with those issues. They are sufficiently dealt with in our brief written submissions.

GUMMOW J: You mentioned insolvency. There are two critical dates. What is the state of insolvency or solvency at each date?

MR GRIFFITH: Your Honour, at both dates each of the Carabelas’ companies were insolvent.

HAYNE J: At the date of the mortgage?

MR GRIFFITH: I am sorry, not at the date of the mortgage. I was taking 1990 and 1993, your Honours, 1998 that cannot be said.

GUMMOW J: No, 1998 is the mortgage date. That is the first critical date.

MR GRIFFITH: Yes.

GUMMOW J: And they were solvent then, I think.

MR GRIFFITH: Yes, your Honour, they each were acquiring properties and giving the guarantee mortgage for the entire personal debt of Carabelas.

GUMMOW J: Yes, I understand that.

GLEESON CJ: What were the precise dates of the two alleged breaches of duty?

MR GRIFFITH: The first date was July 1988 - - -

GLEESON CJ: No, what were the precise dates?

MR GRIFFITH: Your Honour, it is the date of the mortgage which is 4 July.

GLEESON CJ: Yes, 4 July 1988 and what was the date of the second breach of duty?

MR GRIFFITH: Your Honour, the date is 30 June 1990, when there were two entries made in the books. The first in order of time was the entry appearing at page 74 of the appeal book, that is exhibit GJ2, and the second exhibit GJ10 appearing at page 76 of the appeal book.

GLEESON CJ: Thank you.

MR GRIFFITH: Your Honour, the finding is that they were made successively in that order. Your Honour, that was also the date of the accounts signed off by Mr and Mrs Carabelas.

GLEESON CJ: But the transaction that constituted the breach of duty took place on 30 June 1990.

MR GRIFFITH: So far as the evidence exposes your Honour, yes, because that is when the - - -

GLEESON CJ: That is the allegation.

MR GRIFFITH: Yes.

GLEESON CJ: Your allegation is that the transaction that constituted the breach of duty took place on 30 June 1990.

MR GRIFFITH: Yes, your Honour.

GLEESON CJ: Thank you. Now, which are the subsections of section 229 that were contravened?

MR GRIFFITH: Your Honour, subsection (2), subsection (4) and subsection (7). Subsection (2) deals with the duty of reasonable degree of care and diligence. Perhaps more material was subsection (4), improper use of his position to gain an advantage or cause detriment, and subsection (7) deals with the recovery of compensation and the applicable provision for the measure is paragraph (b).

HAYNE J: What is the impropriety alleged for the purpose of (4)?

MR GRIFFITH: With respect to (4), your Honour, the impropriety is the same impropriety as alleged in paragraph (4), namely, procuring the company to enter a guarantee mortgage for a personal debt of Carabelas, with respect to the entry of the mortgage.

HAYNE J: I would have thought that the facts revealed a use of position as officer to gain directly, perhaps indirectly, advantage for himself. It seems that the requirement of impropriety is additional to those elements of 229(4). What is it that you say makes the use of position to gain advantage improper?

MR GRIFFITH: Your Honour, in this case, because the mortgage was with respect to a property which was already owned and mortgaged by the company, the arrangement made, which was procured by the mortgage and the Court now has the copy of the mortgage documents, was to substitute for that mortgage loan financing that property as an asset of the company. Instead, your Honour, a loan from Carabelas - - -

HAYNE J: Yes. Could the company lawfully have given the land in question to its corporator, namely, Mr Carabelas?

MR GRIFFITH: We say definitely not, your Honour.

HAYNE J: Why not? What would preclude it from making a gift of its property to a third party or to one of its corporators?

MR GRIFFITH: Your Honour, our position is that the assets of a company are to be used for the purposes of the company, and they are not capable of being disposed of by way of gift to those who own the shares in the company.

HAYNE J: Well, let us go back to basics, legal capacity powers and status, Division 3 of Part III of the Code.

MR GRIFFITHS: Yes, your Honour.

HAYNE J: Is it asserted that there was any lack of capacity to make a gift?

MR GRIFFITH: Your Honour, it is asserted that it was improper.

HAYNE J: Yes, I understand that. Forgive me, it is the end of the year; I am slow and I am slower than normal and tired - - -

MR GRIFFITH: I am slowing myself, your Honour.

HAYNE J: - - - but is there any lack of capacity?

MR GRIFFITH: Your Honour, this is not an ultra vires case to the extent that the company does not under the present Corporations Law have the power of a natural person. That is accepted.

HAYNE J: And that flows from section 67 of the Code, I think?

MR GRIFFITH: Yes, your Honour.

HAYNE J: So there is no ultra vires point?

MR GRIFFITH: We are not running this as an ultra vires point, your Honour.

HAYNE J: Well, there cannot be, can there?

MR GRIFFITH: Of course not, your Honour, that is why we do not mention it.

HAYNE J: No, but if all of the corporators and all of the directors join in saying that A Co will give its property to a director in circumstances where A Co is solvent, what is improper about that transaction?

MR GRIFFITH: Your Honour, we say that is to use the asset of the company for an improper purpose, namely, for the personal benefit of the sole or dual members of that company and, your Honour, what we say is at two levels. One it is a breach of the common law or equitable duties of directors, if one expresses in those terms. Secondly, your Honour, we say that there is now a statutory obligation imposed by the Corporations Law which has the effect of elevating that obligation to one of a requirement expressed by the Parliament and one which has a criminal sanction to it.

HAYNE J: Well, do you accept that A Co, in the example I give, might make a gift of its property if all the corporators and all the directors agree that it will make a gift?

MR GRIFFITH: A gift to whom, your Honour, may I inquire?

HAYNE J: Let us begin with a gift say to a charity, to a political party, to a third person unconnected with the company.

MR GRIFFITH: Your Honour, we would not cavil at that.

HAYNE J: Then what is it that makes it improper for A Co, when solvent, that is, when not to the prejudice of creditors, to give its property to one of its corporators?

MR GRIFFITH: Your Honour, our position with respect to that is that a company has its assets for the purposes of the company and does not have its assets for the purpose of enabling those who control that company to appropriate those assets as their own. We say that is fundamental to the operation of the corporation and, indeed, your Honour, it arises directly from Salomon, shorn of the issue of ultra vires which is now not an issue which arises, but nonetheless, your Honour, the basic principle of corporate law is that the assets of a corporation are those of the corporation and are to be dealt with for the purposes of the corporation, not for the purpose of appropriation by those who control, in fact own all the shares of the company. Our position is that is the basic principle of corporation law.

GLEESON CJ: Dr Griffith, at the risk of revealing decrepitude, can you just remind me when the doctrine of ultra vires went in relation to a transaction like this?

MR GRIFFITH: Your Honour, I wish I could give the year. I think it was 19 - - -

GUMMOW J: I think it is to do with section 67.

HAYNE J: Section 67, and I think it is 1983 or 1985. It is, I think, mid-1880s.

MR GRIFFITH: Yes.

GLEESON CJ: There is something else I would like you to do for me, please. You have conveniently annexed to your submissions some of the sections of the legislation.

MR GRIFFITH: Yes, your Honour.

GLEESON CJ: How can I go about getting hold of the Companies (SA) Code, the whole of it, in the form in which it stood on 4 July 1988?

MR GRIFFITH: Your Honour, the best method would be for us to undertake to deliver it to your Honour in a hard form - - -

GLEESON CJ: The reason is that I might like to look at some provisions other than the provisions that are directly in issue in this case.

MR GRIFFITH: Yes.

GLEESON CJ: Like section 67, just for a start.

MR GRIFFITH: One problem nowadays is finding hard copies of anything, your Honour.

GLEESON CJ: I know.

MR GRIFFITH: But your Honour is entitled to requisition for that, and we will ensure that the Court is supplied with a copy of the Code at the relevant time.

GLEESON CJ: Thank you very much.

MR GRIFFITH: Your Honours, I will take your Honours through the mortgage documents to indicate that the effect of the mortgage transaction was that for a property already owned by the company and mortgaged on what might be called an ordinary mortgage to a lender, there was substituted, your Honour, a guarantee mortgage to secure the personal debt of Mr Carabelas to the Commonwealth Bank in the extent of $2.75 million.

GUMMOW J: Now, there was obviously a conflict of interest.

MR GRIFFITH: Yes, your Honour. When one looks on the documents, your Honour, one sees on the mortgage itself that Mrs Carabelas signed as secretary. It is the only point that any activity by her appears on the documents, or, indeed, in the evidence. She has attested as secretary to the affixation of the seal, but on that same document Mr Carabelas has signed as the debtor. Could I take your Honours to that document? That is a supplementary - - -

GUMMOW J: If there was a conflict of interest, is it not cured by the involvement of all the corporate laws?

MR GRIFFITH: Your Honour, our position is that this action was not merely a matter of conflict of interest. It is a matter of, we say, direct contravention of subsection (4), the statutory imposition.

GUMMOW J: Yes, but what I am trying to get at is, does subsection (4) do any more than, in using the word “improper”, bring into the statute fiduciary notions or directors’ duties notions and extend them to these persons who are officers or employees? Do not forget there is an expanded definition of “officer” in subsection (5). It includes liquidators.

MR GRIFFITH: Yes, your Honour.

GUMMOW J: Receivers.

MR GRIFFITH: Your Honour, of course, work has to be given to “improper”.

GUMMOW J: Yes.

MR GRIFFITH: And we say, your Honour, that the capacity in limited circumstances of the corporators to sanction matters as the members of a company does not carry with it the capacity properly to appropriate the company’s assets as their own. They are the company’s assets. That is a basic principle of corporations law, your Honour. One has the position of this company – had a property which had a first mortgage, your Honour. The effect of this transaction was that that mortgage was discharged. It would substitute a mortgage for $2.75 million by way of a guarantee mortgage to the personal debt of Mr Carabelas.

HEYDON J: Do you say that there was a breach of subsection 1? I know you did not before, but do you say?

MR GRIFFITH: Your Honour, yes.

HEYDON J: Was that committed with intent to deceive or defraud the creditors, the members, or the company?

MR GRIFFITH: Your Honours, when one moves further to the transaction of June 1990, one could say that because, at that stage, there was the debt to the Deputy Commissioner of Taxation with respect to the profit arising from the sale of the property and the effect of that debt, which continued, and, indeed, was the debt on which the winding up was based, was one which could not be recovered because the effect of the transactions of 30 June 1990 was that the only assets of the company became the book debts of the Carabelas companies which admittedly were insolvent at the time.

HEYDON J: The guarantee mortgage of 4 July 1988, was that committed with intent to deceive or defraud the company, the members or the creditors?

MR GRIFFITH: Your Honours, that probably could not be said.

HEYDON J: So, if it was not to deceive the company, that was because the company knew the facts?

MR GRIFFITH: Your Honour, one is in an artificial area here because Mr Carabelas effectively acted for the company without apparent formalities.

HEYDON J: But if the company was not deceived or defrauded, presumably it consented, it gave informed consent.

MR GRIFFITH: Your Honours, the useful reference point, with respect, is the observation of various members of this Court in Macleod’s Case [2003] HCA 24; 214 CLR 230. Could I take your Honours to the three passages in that judgment. The first is on page 239, paragraph 26 in the joint judgment of your Honour the Chief Justice and Justices Gummow and Hayne dealing with the issue of consent:

The notion of “consent” was central to the appellant’s submissions. The reference to “fraudulently tak[ing], or appl[ying]” in s 173 was said to import a requirement that the accused took or applied the property with the intention of dealing with it in a manner not intended, contemplated or understood by the victim. The “victim” here was Trainex; it was submitted that the company, in which the appellant alone had a beneficial interest, had “consented” to the taking or application, and that that “consent” had not been obtained by deceit or dishonesty . . .

The reforms in England and New South Wales implemented legislative intention that criminal liability should extend to fraudulent dealings by agents, trustees, directors and others in property which had been entrusted to them for a particular purpose . . .

These reforms predated the emergence from the era of the joint stock company of a more fully developed understanding of the distinct legal identity of the corporation, as reflected in Salomon v Salomon & Co Ltd. The scope and operation of the provisions necessarily move with those developments; their construction is informed by the proposition that a company has rights, interests and duties which differ from those of its directors, officers and members.

And then in paragraph 29, your Honours refer to Lord Browne-Wilkinson after the citation:

His Lordship referred to Attorney-General’s Reference (No 2 of 1982). The Court of Appeal there answered in the affirmative a point of law, referred to it by the Attorney-General, whether a person in total control of a limited liability company (by reason of shareholding and directorship) is capable of stealing the property of the company within the terms of the statutory offence of theft.

The submission that the “consent” of a single shareholder company cures what otherwise would be a breach of s 173 should not be accepted. The self-interested “consent” of the shareholder, given in furtherance of a crime committed against the company, cannot be said to represent the consent of the company.

Your Honours, at page 250, Justice McHugh in paragraph 74 said:

The consent of a sole shareholder cannot cure what would otherwise be a fraudulent taking or application of the company’s property.

A corporation is an entity separate from other persons who are its shareholders or associated with it. In Salomon v Salomon & Co Ltd, the House of Lords unequivocally ruled that, even if a company is in essence a one-person business, no question of agency or trusteeship arises between the company and its controller. The company has the legal and beneficial title to its property. While legislative restriction on fraudulent dealing by agents, trustees, and directors in property entrusted to them for a particular purpose predates the emergence of the separate legal entity concept, the current provision must be read in the light of the dichotomy between the company and those who are its shareholders.

Even where the shares of a company are closely held, the purpose (or interests) of the body corporate are not synonymous with the intentions of the person or persons in control. Even if all the shareholders are officers of the company and consent to the taking of the company’s property, one or all of them can be guilty of an offence or offences against . . . the Act.

Similarly, your Honour, in paragraphs 127 to paragraph 128, Justice Callinan expresses similar views. In the middle of paragraph 127:

Taken to their logical conclusion the appellant’s submissions would, if correct, mean that no matter how the appellant chose to use Trainex’s money, the company (by him) could always validate the use by consenting to it. I cannot accept this submission. It ignores the vital distinction which the law draws between separate legal personalities . . . The funds or property of a company can only be used or applied as the result of some act or conduct on the part of a natural person. The fact that the natural person so acting is in effective control of the company does not mean what he does is the company, or that no distinction may be drawn between what he does and what the company may and should lawfully do.

A director or officer acting in breach of his obligations under statute law relating to companies . . . by using the money of the company for his own purpose is no more the voice or amanuensis of the company, as between himself and the company, than a thief . . . or a forger - - -

GLEESON CJ: Dr Griffith, how does this relate to the very common situation where you have a group of companies and one member of the company in the group gives a mortgage of its assets to secure borrowings that are made from the group member who acts as a kind of banker for the group? A sort of fact situation that used to give rise to questions of ultra vires.

MR GRIFFITH: Your Honours, Justice Mason dealt with this issue of the group approach in Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1. Our contention here, and it is stated in our submissions, is that this is not a group.

GLEESON CJ: Quite. I just wanted to relate your submission to that common problem.

MR GRIFFITH: Yes, what we say is, your Honour, if it were truly a group, there may be different issues that arise. We say here that it is not a group.

GLEESON CJ: Well, the way it used to be dealt with under the rubric of ultra vires was to ask whether there was some kind of business advantage, perhaps even a mere remote advantage, to the group member.

MR GRIFFITH: For that member of the group, yes.

GLEESON CJ: Yes, and it was often quite easy to identify a business advantage flowing from acting as a member of a group.

MR GRIFFITH: Although in that situation, your Honour, at the foot of page 6, over to page 7, Justice Mason makes it clear that the duties of the directors of that member are to have regard to the interests of that member alone in making the decision whether to participate.

GLEESON CJ: What page?

MR GRIFFITH: The top of page 7 and the bottom of page 6. Justice Mason did indicate even in that situation a high bar of obligation. What we say, your Honour – and one picks it up from the reasons in the second half of page 6 of this judgment – is that it cannot be contended this is a group. It is not a case of interlocking shareholdings or a subsidiary. It is a case of Mr Carabelas having what at both levels in the courts below has been held to be a personal loan from the CBA for his own purposes, choosing to spread the money through companies where he and his wife had the identity of ownership and controlling interest for his own purposes, not for the purposes of any group.

GLEESON CJ: I got the impression from the bank manager’s notes that Mr Carabelas’ method of operation was to use – if I can employ that expression – a separate company for each real estate investment.

MR GRIFFITH: One assumes for land tax purposes, your Honour. I think that is accepted in the evidence. So that you have a reduced assessment for each company, because it is not aggregated values.

GLEESON CJ: So there was no common business activity in which these various companies engaged?

MR GRIFFITH: No common business activity at all, your Honour. Mr Carabelas bought properties. The bank said, “We will lend you 2.75 million”, and the bank took a guarantee mortgage for the full amount. I will take your Honours through the documents quickly. The bank took a $2.75 million mortgage over each of the properties, each of the company’s assets, as a guarantee mortgage. By the terms, the guarantee inures after the sale of the property in this case by Angas and the discharge of the mortgage. The effect of the guarantee mortgage is that, without more, on sale of the property at a profit, the bank appropriated the entire net proceeds on settlement but they distributed that over the debt of Mr Carabelas partly on promissory notes, partly on his overdraft, and the company remained liable by the terms of the guarantee mortgage for the net balance owing by Mr Carabelas from time to time.

GLEESON CJ: If you look at it from the point of view of the bank, rather than from the point of view of Mr Carabelas for a moment, what the bank required before it would make this multi-option facility of 2.5 million available to Mr Carabelas – and I think he used the facility by drawing bills of exchange – was security over all the properties owned by all the companies controlled by Mr Carabelas.

MR GRIFFITH: Which were companies owned by Mr Carabelas and his wife.

GLEESON CJ: Then, having got that security, as far as the bank was concerned, Mr Carabelas could please himself how he drew down on or applied the 2.5 million.

MR GRIFFITH: Yes, your Honour.

GLEESON CJ: As far as the bank was concerned, he could have used the whole of the 2.5 million to buy another property altogether.

MR GRIFFITH: As long as security was there over the security held by the bank, yes, that is so, your Honour, but what we say it is for the reasons to be contrasted with Justice Mason’s reference to the meaning of a word “group” on page 6 of his judgment in 137 CLR that this is not a group. It is put against us it is. We say it is not a group, your Honour. It shows none of the characteristics. So far as Angas is concerned, it was a stand-alone company owned by two persons who also owned other companies who owned property. That the commonality was drawn into in the mortgage transaction is that it substituted for a first mortgage over a property which it owned with an equity instead a debt to Mr Carabelas, being the amount advanced by him to discharge the existing mortgage, and an obligation on the guarantee mortgage to pay to the bank, so that, in effect, your Honours, the entry of the mortgage stripped Angas of its assets.

GLEESON CJ: Angas seems to have owned the building from which he carried on his legal practice.

MR GRIFFITH: I do not know. It was apparently, yes, but - - -

GUMMOW J: The primary judge dealt with this point at paragraph 73 of his judgment on page 100. Do you support that as a sufficient statement of your position?

MR GRIFFITH: That is a correct statement as we understand how the defendant has put it, your Honour.

GUMMOW J: Yes, but his Honour then goes on.

MR GRIFFITH: Yes. Angas just owned the property, your Honour. It owned it before the transaction with just an ordinary first mortgage with - - -

GUMMOW J: The arrangement seems to me to be difficult to justify, and then he says:

In my opinion, the plaintiff has demonstrated breaches of section 229(2) and section 229(4) - - -

MR GRIFFITH: Yes. I should add, your Honour, for the purpose of the bank loan this property was noted as value $950, 000 at the time of the loan, so the effective of the transaction was that Mr Carabelas advanced merely enough to discharge the existing mortgage. The property was taken to be worth $950, 000. Apparently there was a substantial equity in the company, subject, your Honours, to the continuing obligation of the entire Carabelas debt.

GLEESON CJ: But there was no choice about that. The bank – again, look at it from the bank’s point of view - wanted a first mortgage over the properties owned by these various companies, including the property in which Mr Carabelas had his law practice.

MR GRIFFITH: That is so, your Honour.

GLEESON CJ: So he had to pay out the mortgage to the Hindmarsh Building Society, or whatever it was, in order to give the bank a first mortgage.

MR GRIFFITH: Yes, your Honour.

GLEESON CJ: That is how it came about, that he advanced $400,000-odd to Angas.

MR GRIFFITH: Yes. So he could give the bank the guarantee mortgage for the entire sum.

GLEESON CJ: Yes.

MR GRIFFITH: Over the equity in the property.

GLEESON CJ: So the bank had first priority.

MR GRIFFITH: For the entire process.

GLEESON CJ: Yes.

MR GRIFFITH: And still the bank was owed money, so as far as Angas was concerned, your Honours, from that transaction, it lost completely its equity in the property.

HAYNE J: It gave it away.

MR GRIFFITH: It gave it away.

HAYNE J: Just so.

MR GRIFFITH: We say, your Honour, that is something that contravenes a statutory obligation to give all your property away.

HEYDON J: But, according to you, you can give it away to a third party or a political party or a charity.

MR GRIFFITH: I am not saying you can give it all away, your Honour. You can make donations. Perhaps that is an issue for another day. Companies do not - - -

HAYNE J: What is the difference of principle? If you can make a gift of $100, half your property, three-quarters of your property, what is the informing principle that is dividing the cases?

MR GRIFFITH: Your Honours, companies are operated for the purposes of the company’s affairs. If you are able to give away all your assets to say, a charity, that is a denial of the function of the company itself.

HAYNE J: I am not being captious when I say the reference to purposes seems to have echoes of ultra vires. Now, we have to put ultra vires out of mind.

MR GRIFFITH: We do, your Honour.

HAYNE J: Therefore, what are you conveying by the expression “for the purposes of the company”?

MR GRIFFITH: Your Honour, perhaps better to put more positively, you cannot do it for your personal advantage, we say, as the controlling members and shareholders.

HEYDON J: Does not the company exist only for the personal advantage of the shareholders?

MR GRIFFITH: Yes, your Honour, for the point of view of the company carrying on its affairs and if the company makes a personal advantage by way of profit or capital gain, your Honour, that is distributed through the mechanisms of distribution of profits or capital return.

HAYNE J: The corporators could join in winding up. There is no question of solvency.

MR GRIFFITH: Of course they can.

HAYNE J: They could join in winding up, distribution in specie and achieve the result that way, so - - -

MR GRIFFITH: Once they granted the mortgage, your Honour, if they wound it up the bank would take the asset.

HAYNE J: Yes, but to give the bank the security they wanted, it would have been possible, it may have been commercially sensible or not sensible for them to say right, we will wind this company up, we will distribute the assets in specie to ourselves as tenants in common and then give a mortgage over that. Now, what takes this case apart from some others, at least, is the absence of creditors. Ordinarily speaking, to do that is to work to the detriment of creditors and it is that which is making it contrary to the purposes of the company.

MR GRIFFITH: Well, your Honours, that is why this is an interesting case because it is not, at this stage of the analysis, in an insolvency situation. On 30 June 1990, your Honours, there was an accrued tax liability which was never paid and the effect of the transaction in CJ10 was to have the effect that the company’s asset, being a debt owed by Carabelas, was converted into a debt owned by what were admittedly insolvent companies at the time. This case arises, your Honours, because the effect of that transaction is there is no money to pay the existing tax liability which remains unpaid with the Commissioner the petitioning creditor.

So, your Honours, at the moment, as I understand, we are concentrating on the mortgage transaction. We make it clear that there are two transactions and the second transaction, your Honours, as we have stated in our submissions, we say was entirely overlooked at the level of the Full Court of South Australia.

GUMMOW J: What happened to the first issue in the Full Court, the mortgage issue? What happened in the Full Court to that?

MR GRIFFITH: In the Full Court, your Honours, it was held by the Chief Justice in the judgment that there were the breaches as found down below, both of common law obligation and statutory - - -

GUMMOW J: Did he say - did he find that?

MR GRIFFITH: Yes, he did, your Honour, and we set out the paragraph references in our written submissions for that, but what he did in paragraph 59, having reviewed the authorities, and your Honour will pick that up at page 143 of the appeal book and, your Honour, those authorities include, of course, the authority of this Court in Macleod and also Justice Santow. His Honour said, “Doing the best I can,” he says that what otherwise is the breach of section 229 does not constitute a breach because the fact that these activities carried out by the shareholders – and his Honour was only referring to the mortgage, he did not refer to - - -

GLEESON CJ: Yes, but did he not say, in relation to the mortgage transaction, the company was solvent at the time, the transaction enjoyed the full and informed consent of 100 per cent of the shareholders and 100 per cent of the directors, and, for that reason, what would otherwise have constituted a contravention of the statute did not constitute contravention.

MR GRIFFITH: Yes.

GLEESON CJ: That may be right or wrong, but that was the reasoning.

MR GRIFFITH: Yes, your Honour. We say it is wrong. We say that if it is an act which - - -

GUMMOW J: The reasoning does not answer the first question.

MR GRIFFITH: No.

GUMMOW J: It assumes the answer to the first question.

MR GRIFFITH: Yes.

GUMMOW J: And says you get outside – escape the section because of the approval - - -

MR GRIFFITH: Yes. But his Honour made unequivocal findings, your Honours, in support of the learned primary judge on these issues, that there was - - -

GLEESON CJ: But was his process of reasoning that the consent of the shareholders removed the element of impropriety?

MR GRIFFITH: Yes.

GLEESON CJ: Or did he say it, as it were, exonerated them from contravention even though the words of the section were satisfied?

MR GRIFFITH: Your Honour, the expression he uses in paragraph 59 is that there was no breach. So all you can say is that the analysis was that what otherwise his Honour accepted must be a breach. There are no further facts, your Honour. It did not constitute a breach of the criminal law because it was conduct participated in by all members.

GLEESON CJ: I think what we are trying to find out is whether the consent relied upon operates by way of contradiction, as it were, of some element of section 229, or whether it operates in some other way to produce the result that what would otherwise be a contravention of section 229 is not.

MR GRIFFITH: Your Honour, with respect - - -

GLEESON CJ: It must be the former, must it not?

MR GRIFFITH: It must be, one would suppose, your Honour, but his Honour’s statement in paragraph 59 – which is, really, the crunch paragraph – and this is somewhat elusive.

GLEESON CJ: Well, let us take an easier example. Take section 229(2). Suppose you had careless conduct by a director, and then you had a resolution of all the shareholders saying, “We know all the facts in relation to what went on, and we resolve to exonerate the director from any of the consequences of the director’s carelessness”, and this perfectly solvent company, no interests of creditors involved at all. Would that be a defence to a charge of a breach of section 229(2)?

MR GRIFFITH: Your Honour, we would say certainly not. The legislature said you have to act with reasonable care and diligence. That is not a duty that can be lifted by personal consent.

MR GRIFFITH: Now, did the Full Court find there was a breach of subsection (2) in relation to the mortgage?

MR GRIFFITH: In essence, we would say yes, your Honour. Could I take you to the particular parts of his Honour’s judgment. We tracked this through, your Honour, in our submissions - - -

GUMMOW J: You have to start at paragraph 5, which does not mention (4). It just mentions 229(1) and (2).

MR GRIFFITH: Your Honour, it could be said that his Honour the Chief Justice focused on subsection (4). My learned friend says he thinks it is a slip in paragraph 5. My learned friend was not there and I was not there, your Honour.

GLEESON CJ: I am just wondering how this doctrine of informed consent works conceptually when you apply it to section 229.

MR GRIFFITH: So do we, your Honour. It has a lot of difficulties. Duomatic is simple enough because there we had an issue of dealing with required formalities and that was a matter where, for example, Justice.....said the Duomatic principle deals with issues of waiving requirements to comply with formalities rather than substantive issues. Duomatic is a quite ageing case but it has not advanced all that far as to where it goes. But this case, your Honour, we say is elite because there is nothing referred to whatsoever to constitute any action by Mr Carabelas or his wife to sanction any of this conduct other than the fact that it was his conduct apparently carried out with the acquiescence of his wife.

HAYNE J: But are we not to proceed on the assumption that both of them knew and agreed in what was done?

MR GRIFFITH: Yes.

HAYNE J: That is the basic assumption.

MR GRIFFITH: Yes.

GLEESON CJ: But if instead of a liquidator making a claim under section 229(7), you had a prosecuting authority suing for simply alleging a breach of subsection (2) or subsection (4) and seeking a pecuniary penalty or imprisonment, how would the notion of informed consent work? It would have to operate, would it not, at least in the case of subsection (4), at the level of denying impropriety? It could not operate as some kind of free-standing defence to a criminal charge.

MR GRIFFITH: Yes, and your Honour points out that there is no such concept in subsection (2) so one cannot see anything operating.

HAYNE J: But in the case posited of knowing acquiescence and consent to conduct, what is said to be the want of care or diligence? Let us take the case where a two-member company positively agrees at a regularly constituted meeting that it will enter the transaction of a guarantee mortgage to secure lending to a third party or to a director. Where lies the lack of care or diligence on the part of a director who, pursuant to that resolution, gives effect to it?

MR GRIFFITH: Your Honours can go back to the words of Justice Mason that I took your Honours to and the question you have to look at the interests of the particular company rather than persons, say, in a group or outside that.

HAYNE J: Let us assume that A Co owns land, has no creditor save the rating authority and other entities that are associated with the fact of landholding, and has a means of paying those debts. What is the want of care or diligence?

MR GRIFFITH: Your Honour, the question is answered by looking at all the circumstances. These are not isolated, abstract issues. We say one looks at the entire circumstances here. We make it clear that we do not stop our case at the mortgage, like the Full Court did.

HAYNE J: But you assert that looked at the day following the mortgage, there was then complete contravention of each of subsections (2) and (4), do you not?

MR GRIFFITH: That is the first way we put it, your Honour.

HAYNE J: Yes, I understand there is the second, but the first way has to be assessed at the day following on 5 July 1988.

MR GRIFFITH: Yes. Our position is that looking at the position of a company that went from having a property in which it had an equity asserted on the valuation as being the difference between the mortgage and the then value of $500,000 or so, on the next day it had no equity in the property and it had no prospect of paying off the mortgage which was some several times its otherwise net assets as it was the day before the mortgage, because it was left with the enduring mortgage debt even after the property was sold.

HAYNE J: But is that an assertion that the transaction brought about insolvency? It is not, I thought.

MR GRIFFITH: Not that it brought insolvency, your Honour.

HAYNE J: Just so.

MR GRIFFITH: We say that it was a case where the controlling persons entered that transaction for the purpose of an advantage for themselves and one which caused detriment to the corporation, because it changed from its position of having an unencumbered equity in the property to having liabilities of a continuing nature far in excess of its otherwise assets.

GLEESON CJ: In cases where there is an effective, fully informed consent, it must operate by way of denying or negating an ingredient of the section 229 offence, must it not?

MR GRIFFITH: Your Honour, that is an issue for the Court to determine.

GLEESON CJ: Let me take an example that I would hope would not be controversial, but maybe it is. Suppose you had a completely solvent company, with no creditors, that owned some livestock, horses, and the company had two shareholders who were the directors, and for some reason the shareholders and directors wanted the ownership of one of the horses to go to one of the shareholders. So, with every formality, holding meetings, signing minutes of meetings, doing whatever was necessary to satisfy the company’s accountants and auditors, the company for no consideration transferred ownership of the horse to one of the shareholders and there was absolutely nobody who would have any interest to complain about that.

Then a policeman comes up and taps them on the shoulder and says, “Just a minute. You have used your position as officers of the company to gain an advantage for one shareholder of the company and you’re liable to go to gaol. What do you say to that?” What they would say to that would be, would it not, “We didn’t do anything improper because what was done was done with the fully informed consent of all the shareholders and there aren’t any creditors who’ve got the slightest interest in this transaction”. That is the way it would work conceptually, would it not?

MR GRIFFITH: Your Honour, that is how it could be put, but one is still left with the statutory statement of obligation in section 229, to which one must have regard to its application in all the circumstances. Now, your Honours, the case was run down below on the basis that the mortgage itself constituted a breach of the sections because of the fact that the transaction could only be characterised as for the personal advantage of the directors.

GLEESON CJ: You may or may not be right about that, but if the Full Court was right – and you challenge it – in saying that there was effective, fully informed consent, then the relevance of that must be, must it not, that there was no impropriety within the meaning of subsection (4) and no want of care and diligence within the meaning of subsection (2)?

MR GRIFFITH: If your Honour is saying that is implicit in the reasoning of his Honour the Chief Justice - - -

GLEESON CJ: Yes.

MR GRIFFITH: - - - the answer is yes. The issue we seek to raise is whether it is right.

GLEESON CJ: Exactly.

MR GRIFFITH: And what we seek to do, your Honour, is say there are limits per se to the issue of whether or not persons can, consistently with the obligation in section 229(4), appropriate the company’s assets to themselves. So, in effect, the company has no assets after the transaction and only liabilities that it has no chance of ever meeting, having regard to the transactions that it has entered into by the corporator so acting, whether or not that is something which constitutes a non-sanctionable appropriation of the company’s assets. We make clear in our submissions that we tie it to the issue of characterisation of the transaction.

Your Honours, it may be better if I move on from having made that proposition and engage your Honours with respect to it, defining the line we say which exists between natural enough capacity to sanction procedural regularities – the Duomatic principle – there is no difficulty about that, a case such as your Honour postulates to me – to a case where one has a conversion of the entire assets of a company which in this case can be taken as roughly $500,000 equity in this property, to a situation of hopeless liability in a transaction entirely for the benefit of those two members who are the directors who have procured the transaction.

We say that is of a category that cannot be sanctioned, and here we do not rest on that. Can I take your Honours to the transaction of 30 June and demonstrate why that is so. I have given your Honours the references to pages 72, 74 and 76 of the appeal book, where one sees the two entries GJ2 and GJ10. The significance of this transaction that your Honours recollect from reading the judgments in our summary of facts is that the effect of these two book entries was to convert the entry made in the accounts as of 30 June with respect to transaction GJ2 from showing Mr Carabelas was the debtor to the company by reason of the net proceeds after the discharge of the amount owing on the mortgage.

GLEESON CJ: Yes, I am just not sure that a book entry of itself can have a legal effect, but that is a matter you will come to in due course.

MR GRIFFITH: I will come to it, your Honour.

GLEESON CJ: Could you just explain these entries to us?

MR GRIFFITH: I will, your Honours. We deal with that, your Honours, in paragraph D on page 4 of our submissions. I should indicate that our summary of facts is entirely accepted by the respondents. None of these facts is in issue.

The property was sold on 11 October 1989 in the year ending 30 June 1990. The mortgage was discharged and at that time, of course, there was an advance having been made by Mr Carabelas to discharge the earlier Hindmarsh mortgage, and that was shown as a loan from Mr Carabelas. This sale realised a profit and in the accounts for the year 30 June 1989 it is shown that there was $435,040 borrowed from Carabelas, which was used for the purpose of discharging the interior mortgage, and there had been $217,000 apparently borrowed from the shareholders to establish the initial holding of the property under the Hindmarsh mortgage.

Now, the accounts for the financial year ending 30 June 1990 reflected the entry GJ2, which your Honours have, which showed Carabelas as owing the sum of $446,710 debited to his loan account at the company - - -

GLEESON CJ: This is not a book of account of the company, is it?

MR GRIFFITH: This is not, your Honour, but it was reflected in the annual account.

GLEESON CJ: This is Mr Vlassis’s document.

MR GRIFFITH: Yes. It is agreed, and one sees that from E2, your Honour, that the financial accounts for each of these years were signed by the respondents and showed these loan accounts. They were signed.

GLEESON CJ: These entries that you are showing us now are entries made by Mr Vlassis in Mr Vlassis’s own books?

MR GRIFFITH: At this stage, yes, your Honour, but they were reflected in the annual accounts which were signed off by the directors. The one signed for 1990 did not have the GJ2 entry because that was superseded by the GJ10, but the GJ2 entry we say correctly showed the effect of this transaction, that Mr Carabelas, who previously was a creditor to the company when the property was sold for $910,000, was repaid the amount of that credit, $435,040, and appropriated the net proceeds, up to $910,000, which was $446,710. So we say that at both levels the agency argument having been rejected, these companies were companies acting in circumstances where Mr Carabelas was merely an agent for the purpose of the borrowing from the Commonwealth Bank of Australia.

One then had a position, your Honour, that correctly the effect of the appropriation of the entire proceeds was that that should be regarded as being for the benefit for Mr Carabelas to reduce his personal indebtedness to the bank. We say Mr Vlassis got it right in GJ - - -

GLEESON CJ: Yes. Your case is that GJ2 is an accurate record by Mr Vlassis in his own books of the transaction that had occurred?

MR GRIFFITH: Yes, and that is how it should have appeared in the annual accounts. Now, your Honours, the effect of GJ10, which your Honours have on page 76 of the appeal book, is an entry which was found to be of the same date but made after the entry of GJ2, that the sum of 446,710 is no longer a debt owed by Carabelas. We give in the footnotes the reference to - - -

GLEESON CJ: But what effect does Mr Vlassis writing something in his records have?

MR GRIFFITH: It then appeared in the annual accounts in this form, your Honours. At the end of the year accounts that appeared, they were signed by the Carabelases.

HEYDON J: Where are they in the book?

MR GRIFFITH: The answer is they are not in the book.

GLEESON CJ: Are they in the supplementary documents that you gave us?

MR GRIFFITH: They are not, your Honour.

HEYDON J: Were they in evidence?

MR GRIFFITH: We believe they were, your Honour.

GLEESON CJ: They were?

MR GRIFFITH: Yes, we believe they were.

GLEESON CJ: Is it really your case that both GJ2 and GJ10 occurred on 30 June 1990?

MR GRIFFITH: As far as one knows on the evidence yes, your Honour, and they appear in the annual accounts. GJ10, your Honour, is in the annual accounts. It might be a document which your Honour - - -

GLEESON CJ: But what is the transaction? Is it a resolution of the directors, a resolution of a meeting of shareholders, an agreement between the company and its shareholders?

MR GRIFFITH: Your Honours, the transaction is the conversion of what we say correctly is the debt owed by Carabelas with respect to the surplus on the sale as a personal debt for him arising from his personal financial affairs and his loans from the Commonwealth Bank, being converted into a debt owed by the other Carabelas companies, which are admittedly insolvent on that date.

GLEESON CJ: What effected the conversion? What produced the result that there was a legally effective conversion of that kind?

MR GRIFFITH: The result, your Honour, was that that was a transaction entered into the journals - your Honour has the journals – which were then entered into the annual accounts. Can I refer to the evidence of the annual account? It is paragraph 48 on page 93 of the appeal book. It was apparently exhibit P1 at the trial. It may be appropriate, your Honour, for the Court to be furnished with those exhibits.

GLEESON CJ: Yes.

MR GRIFFITH: But, it was not apprehended, your Honour, that there was any issue about that because that is a finding which, as we understand, the parties accept.

GLEESON CJ: What we have to identify is the conduct, the transaction that involved a breach of section 229.

MR GRIFFITH: Your Honour, we say the transaction is Mr Vlassis, the accountant, acting under the direction of Mr Carabelas, having two shots at doing the journal entries; the first, dated 30 June 1990, we say correctly reflecting the position, the second also dated that day, but, on the finding of the primary judge, your Honour, made afterwards, converting those debts into debts of the Carabelas companies, and that transaction being transmitted into the annual accounts signed off by Mr Carabelas.

GLEESON CJ: And Mrs Carabelas?

MR GRIFFITH: Yes.

GLEESON CJ: And were these adopted at a meeting?

MR GRIFFITH: Your Honour, the difficulties with this one man company is that one just has the signatures. These are the corporators acting together. They sign the annual - - -

GLEESON CJ: Two person company, actually. If your argument is right, Mrs Carabelas was engaged in conduct that could have exposed her to serious penalties.

MR GRIFFITH: Quite so, your Honour, and they both signed the accounts. That is accepted, your Honour. E2 is accepted.

GLEESON CJ: So your argument is that their act in signing the accounts was legally effective to achieve what I think has been described as a novation?

MR GRIFFITH: Yes, your Honour. Mr Carabelas has argued that down below – apparently up here he seeks not to, your Honour, but that was his argument down below. He said that GJ10 was correct, because he was arguing down below the agency argument, and his position was that that was appropriate, given that he said he was agent for all the companies for which he and his wife are shareholders. Therefore you should apportion what otherwise we say correctly is his personal debt for his personal loan from the Commonwealth trading bank.

GLEESON CJ: If this was a novation, other parties to the transaction of novation were these other companies. How did they become bound?

MR GRIFFITH: Your Honour, they also had annual accounts tied up, and your Honours remember from the judgment that when Justice Williams, the primary judge, was trying to deal with this argument and it was put that these companies each individually owed the amounts, he gave Mr Carabelas an opportunity to join those companies to the action, so their accounts could be put in order.

GLEESON CJ: But suppose a liquidator of Blackcroft Pty Ltd said, “I do not agree that there was any novation of this kind to which Blackcroft Pty Ltd was a party”. How would you go about challenging that?

MR GRIFFITH: Well, your Honours, we do not have to challenge it, because our position is that all those companies were insolvent at that date. What appears is that the asset is not an asset owned by Mr Carabelas as a person who is not a bankrupt, but a debt against an insolvent company.

GLEESON CJ: But Mr and Mrs Carabelas are not here defending an accusation that they signed a false set of accounts.

MR GRIFFITH: No.

GLEESON CJ: This part of your case against them involves, as one of its elements, that there was a legally effective transaction involving assignments of debts.

MR GRIFFITH: Yes, your Honour, and that is their assertion too, that it was effective. That is what they asserted down below, your Honours. They accepted these facts as true, that this represents - - -

GLEESON CJ: Well, can you both explain to us how that legal effect came about? It is unlikely to have come about by Mr Vlassis writing something in his own books.

MR GRIFFITH: Your Honour, this is the difficulty one gets into, informal sanction and assent by two persons who own the shares in one company and other companies. In effect, with the absence of formalities, one merely has the books and records of the companies reflecting the financial affairs which are proffered and signed off pursuant to a statutory obligation by the two directors as faithfully reflecting the circumstances of the company’s assets and liabilities.

GLEESON CJ: Do you rely on it as an admission? Do you rely on those accounts as an admission against the people who have signed them? Is that the way it works?

MR GRIFFITH: Your Honour, I hope we do not have to go to that extent down the possibilities of assertion but if needs be - - -

GLEESON CJ: We have to write a judgment explaining to curious readers how this happened and it is not an adequate explanation to say that the parties seem to be in agreement about it.

MR GRIFFITH: Your Honour, why I say we seem to be in agreement is because, at this level, it would seem that it is put by my learned friends for the first time that this transaction was not one that was affected. Down below, it was asserted at both levels that that was a transaction which was affected pursuant to the agency argument which has been rejected.

GLEESON CJ: What finding did the Full Court make about this transaction?

MR GRIFFITH: Your Honours, our complaint is it did not. It did not refer to it at all.

GLEESON CJ: Yes, that is why it is necessary for us to find out what are the steps by which we have reached the conclusion from this evidence - - -

MR GRIFFITH: Your Honours, one picks that up from the primary judgment which did deal with these issues and the steps are that the annual accounts were signed by the respondents, that it would seem that GJ2, which was in the year of the sale, the first annual accounts being 30 June 1990, after the sale of the property on 11 October 1989, were prepared with journal entries, we say, the first which correctly reflected the position, the second which, we say, incorrectly and improperly and in breach of the obligations of section 229(4), in particular, reflected a different financial position which was carried through into the annual accounts, the balance sheet of the company, signed off by the two directors. In our position, your Honours, that is sufficient, if one must put it that way, to constitute an admission – indeed, it is a promulgation and proffering by the directors, pursuant to their statutory duties, that these accounts are a true and fair reflection of the financial position of the company.

HAYNE J: It is possible for us to have the relevant accounts produced now, the ones that were in evidence? We are debating all this without the necessary bit of paper in front of us.

MR GRIFFITH: Your Honours, we apologise for that handicap. It had not been appreciated as an issue relevant to go in the appeal book.

HAYNE J: Have the exhibits not been transmitted to the Court? If these were in evidence, can we get on to it and get the papers now.

MR GRIFFITH: We will do our best. Your Honours, I have been making the assumption that those accounts will be available after lunch. I apologise for their not being here. On the assumption that the primary judge’s statement in paragraph 48 on page 93 of the appeal book is correct - - -

HAYNE J: But his Honour is there talking about journal entries, is he not?

MR GRIFFITH: I suppose the answer is that we will have to see the annual accounts, your Honours. It is the case that the accounts of 30 June 1990 were found by the primary judge to have reflected GJ10 and that - - -

GUMMOW J: Paragraph 53 of his Honour’s reasons:

The journal entries . . . form part of the financial statements . . . have been signed by the directors.

MR GRIFFITH: Yes, that is the reference we make, your Honour, at footnote 16 to our paragraph E2 as an agreed fact, because this is not disputed. We say that the substitution of a correctly designated debt in the accounts of the company as owing by Carabelas, being the difference between the money he lent to discharge the Hindmarsh mortgage and the net proceeds on sale – which we know he did not keep in his own hand but were applied by the bank to reduce his personal indebtedness, both on his bill line and on his overdraft – constitutes a transaction which, on any view, must be regarded as a contravention of section 229(4).

We say it cannot possibly be regarded as proper because it is, again, an agreed fact. One picks that up in the last sentence in our summary of facts, E1. There is a reference in paragraphs 15 to 54 of Justice Williams’ judgment that those companies at that stage who were then shown as being the debtors, as listed in paragraph 50 on the top of page 94 of the appeal book – did include George Carabelas as to $15,501.59 only – each of those companies was insolvent at that time.

GLEESON CJ: In paragraph 52 on page 94, the primary judge says:

Upon the plaintiff’s case, the making of the journal entry CJ10 (and the transaction which it records) constitutes the second act of misfeasance.

I understand why he would say on the plaintiff’s case, the transaction which the journal entry records, constitutes the second act of misfeasance. How can the making of a journal entry by Mr Vlassis in his own journal constitute a breach by Mr and Mrs Carabelas, of section 229?

MR GRIFFITH: Your Honours, if it has made it his direction on behalf of both of them to say, “I wish my personal debt to be taken out of the accounts of the company, the assets and liabilities”, that would be an asset of the company, “and to be converted into something else” - - -

GLEESON CJ: Then it is the transaction that constitutes the misfeasance and the journal entry might be an admission of the transaction.

MR GRIFFITH: Yes.

GLEESON CJ: But a journal entry is only a record of something, is it not?

MR GRIFFITH: Precisely, your Honour, but one must say that when the journal entry is made, we say at the direction of Mr Carabelas, one can - - -

GLEESON CJ: A journal entry is either right or wrong.

MR GRIFFITH: Yes, but - - -

GLEESON CJ: If it is wrong it does not amount to anything, and if it is right, then that which it records is the act of misfeasance, not the making of the journal entry, surely.

MR GRIFFITH: Yes, we would agree, your Honours.

GLEESON CJ: Or should we, when we read paragraph 52 omit references to the making of the journal entry as constituting the act of misfeasance and read it as though it is the transaction which is relied on?

MR GRIFFITH: Your Honour, the problem in a company of this sort, they did not seem to have separate meetings to say we decide to do this. This is the whole issue of the doctrine of unanimous consent. Just occasionally, one gets – for example, your Honour, dealing with the preference issue, there was the direction from Mr Carabelas to do what you have to do to ensure that there is no assets in any of the companies so they can be struck off the register. Then Mr Vlassis makes the entries, your Honour, but one cannot expect in this company, for the very reasons asserted one can assume unanimous consent of the two directors, the two members, that one has formal steps such as Mr and Mrs Carabelas sit down in his office or the dinner table and say, “We decide to convert this single debt I have, acting in our capacity as directors, by distributing a pro rata over the various Carabelas companies”.

One would not expect it, your Honour. There is no evidence or basis to assume there is such a thing. All one has, your Honour, is a position which we know from GJ2 which we say was making a journal entry which would have in the ordinary course been expected to be transmitted into the annual accounts and balance sheet, showing the correct position of debts, so that if that was in the balance sheets signed off by the directors, we say they would have complied with their statutory obligation to sign off annual accounts, verifying that they give a true and fair statement of the company’s affairs.

HAYNE J: Is the relevant aspect of the transaction upon which you fasten as the wrongdoing, the discharging of Mr Carabelas’ obligation to Angas Law Services?

MR GRIFFITH: Of course, your Honour, and the substitution - - -

HAYNE J: And a discharge in circumstances where that which was substituted was obligations by insolvent companies.

MR GRIFFITH: Admittedly insolvent, common ground, your Honours, and what we say is that that transaction, on any view, must be regarded as improper. It is a transaction which we know, your Honours, because we know that the Deputy Commissioner of Taxation had an outstanding assessment for that financial year arising from the capital gain on the sale of the property. The debt was - - -

GUMMOW J: Quite a large capital gain, was there not?

MR GRIFFITH: Well, your Honour, the debt is stated as $25,000. I cannot work out – perhaps it does not matter what the calculation is, but it was $25,000 debt owed to the Deputy Commissioner of Taxation with respect to the profit of that transaction, which was reflected in the accounts signed off on 30 June 1990. The effect of this transaction is that the only asset of the company thereafter has been the nominal book debts owed by companies which were, at that time and at all times since, insolvent, to the extent in 1993, Mr Vlassis - - -

GUMMOW J: But how do we know what Mr Carabelas is worth? There was a discharge, a substitution with a worthless - - -

MR GRIFFITH: Well, we will take pot luck on that, your Honour. He is here instructing in his own capacity as a practising solicitor, but one does not know, your Honour. He substituted something that was worthless and we say that that, on its face, is improper. He is not bankrupt. We know from the documents that he was forgiven $2.25 million of this personal debt by the bank in a settlement, and he is fighting this action with very able counsel. He is certainly not an insolvent person, apparently.

GLEESON CJ: I interpret what Chief Justice Doyle said in paragraph 40 of his judgment to mean that he thought that these journal entries made by the accountant had no legal consequences at all.

MR GRIFFITH: Your Honours, the issue is not so much the journal entries, but the translation of that into the annual accounts signed off by the directors.

GLEESON CJ: Well, I interpret Chief Justice Doyle’s judgment to mean that he thought that the evidence about those accounts and how they came to be prepared was so vague and unsatisfactory that he was not prepared to conclude that there was any transaction of the kind purportedly recorded in G10.

MR GRIFFITH: Your Honours, my learned junior suggests to me that this paragraph is going to his Honour’s discussion on this agency point.

GLEESON CJ: Yes, well, it is too. It is also, but the claimed correcting entry – that is G10, is it not?

MR GRIFFITH: Yes, your Honour.

GLEESON CJ: Had no special status. It also rested on surmise and assumption.

MR GRIFFITH: Your Honour, with respect, that entry was carried through to the annual accounts, which we will have to present to the Court.

GLEESON CJ: I am just trying to work out what was the reasoning of the Full Court, and it occurs to me that the Full Court disposed of your second alleged breach of section 229 by saying that they were not satisfied that there was any transaction of the kind alleged to constitute the breach. There were just a series of book entries.

MR GRIFFITH: If your Honours take that construction, our contention is that the fact that these would carry through into the annual accounts signed off by the Carabelases constitute an assertion, if one likes, an admission, by the directors that those debts have been converted from being a personal debt of Mr Carabelas to a nominal debt of then insolvent companies. That is what the annual accounts state and those accounts were signed off by Mr and Mrs Carabelas as being true, fair and accurate, as their statutory duty was to do so. In our submission, that overcomes any tentative views of the Full Court on that and we would say, your Honours, that the Full Court, if it is regarded as taking that view, is not in a position to in effect disregard the statements of facts dealt with in detail by Mr Justice Williams in his judgment, particularly on these issues at pages 92 and 93.

The statement in paragraph 48 on page 93 of the appeal book by Justice Williams is:

The financial statements for ALS for 1990 record that whereas previously ALS had owed $435,040 to George, ALS owed nothing to George –

compared with – and then he refers to the two exhibits, that I think we already know are the previous accounts -

The debt owed by ALS to George was paid by appropriating $435,040 of the money taken by the CBA to pay off this debt to George. This left a difference of $474,960 - - -

GLEESON CJ: Let me ask the question slightly differently. On your contention, is Mr Carabelas indebted to Angas Law Services Pty Ltd in the amount of $400,000-odd?

MR GRIFFITH: The answer is yes, he is, your Honour, under section 229(7).

GLEESON CJ: A more direct route to that conclusion, would you say, yes, he is because G2 was an accurate record of the effect of the transaction resulting from the sale of the mortgaged property?

MR GRIFFITH: Yes, your Honour, but the defence raised against us is that he is not indebted. We assert that he is.

GLEESON CJ: Has Angas Law Services ever sought to recover this as a debt from Mr Carabelas?

MR GRIFFITH: Your Honour, I should say that this issue was raised in discussion with members of the Bench on special leave. My learned friend, Mr Whitington, said, “Well, he still owes the debt but you’re out of time, and there’s been an Anshun estoppel”. Justice McHugh had doubts about those two defences, but that was the first we had heard of it.

GLEESON CJ: Why would you be out of time?

MR GRIFFITH: That is what Justice McHugh said, your Honour.

GLEESON CJ: In a sense, if Mr Carabelas remains indebted to Angas Law Services Pty Ltd $400,000, we are beating the air in this litigation, are we not?

MR GRIFFITH: Your Honour, we do not intend to beat the air. This action was intended to recover that sum on the basis of the accounts regularly published pursuant to - - -

GUMMOW J: I think Justice McHugh had in mind the consequences of the supervening liquidation.

HAYNE J: If it was an on demand debt, would not liquidation bring it on?

MR GRIFFITH: Yes, your Honour.

GUMMOW J: And the expiry of time.

MR GRIFFITH: Yes, your Honour.

GUMMOW J: Since then.

MR GRIFFITH: Yes. So, your Honours, what we say is that when one has the accounts, apparently regularly prepared, signed off by the directors, who were the two directors of the company, as stating a true and fair state of the accounts of their company, one has the position that they are to be taken as representing faithfully the transactions occurring to the point, in that year, your Honour, of appropriating the proceeds of the sale.

GLEESON CJ: Did it ever occur to the liquidator, I wonder, to make alternative claims against Mr Carabelas - claim number one being, “You owe the company $400,000-odd because of the legal effect of the transaction, culminating in the sale of the mortgaged property” or, alternatively, “If you don’t owe the company $400,000, because that debt’s been effectively written off or in some other way discharged, there was misfeasance involved in the writing off”?

MR GRIFFITH: Well, your Honour, the course adopted was the second. So one assumes that it did not occur, your Honour, to do it in the alternative. One took the accounts, verified by the directors, in obligation. We say, your Honours, they should be taken as bound by them. Down below, your Honour, it was asserted these accounts were accurate. Your Honour, that is common ground on this appeal that the accounts effect transactions, carried out by this company with respect to the proceeds of the sale.

HAYNE J: Is the relevant aspect of the pleading found at pages 4 and following? Paragraph 15 is the allegation of the original debt, what might be called the original indebtedness, but then paragraph 17, page 5, asserts the transaction which is impugned, namely novation.

MR GRIFFITH: That is right, your Honour.

HAYNE J: Then the breach is alternatively alleged on page 6, 22:

In causing the company . . .

22.2. to novate George Carabelas’ indebtedness –

or:

22A In causing the company to write off - - -

MR GRIFFITH: Yes, your Honour.

HAYNE J: But there is not the bare debt claim, “You are still indebted”.

MR GRIFFITH: That is accepted, your Honour.

GLEESON CJ: What would be the consideration from the novation?

MR GRIFFITH: On the issue of novation, what we say is the position was that Mr and Mrs Carabelas controlled the other companies as much as they controlled Angas. What these accounts of 30 June 1990 reflect is that acting in that capacity as the controllers of each of these companies, there were transactions implemented between those companies that had the effect of appropriating those moneys in that way. On the issue of consideration, really perhaps it is not for us to spell out the consideration. What we say is that - - -

HAYNE J: Why not? You assert there was a novation.

MR GRIFFITH: We say that all the participating entities having been controlled by Mr Carabelas in entering the transaction should be taken as intending to make an agreement which was carried into effect with respect to those companies as to the distribution of the indebtedness from Mr Carabelas across the companies. Quite plainly, your Honours, it would be a more direct route if we had the alternative claim your Honours referred to, but it is not there. What we say is we have a sound foundation for claiming in the single mechanism of relying upon the accounts proffered by the two directors as faithfully representing the accounts of that time and we say that on that basis it must follow that there has been a breach of section 229(4) which we can recover under 229(7).

GLEESON CJ: Does this matter that we have been talking about for the last minute or two have something to do with the primary judge’s refusal to amend the proceedings by adding further parties?

MR GRIFFITH: I do not think so, your Honour. That was an issue which was sought to be raised by Mr Carabelas, particularly dealing with the issues of the preference funds. He did not take the opportunity and the learned primary judge said, “I’m not going to alter the accounts with respect to the debt for Angas without having corresponding alterations made in the proper accounts which would show the indebtedness of Mr Carabelas being raised again to these companies”. It was a different issue, your Honour.

I think your Honours see with transparency how we put the issue and we say putting it in that way is not to be defeated by saying there is an alternative here whereby Mr Carabelas must lose on one or the other. We say it suffices if one says our case is made out without saying it would be absolutely certain if it had been pleaded in the alternative. Mr Carabelas has made it clear in this litigation that he does not accept any liability. Indeed, it is raised on their submissions in answer to our submissions a new concept that there is an obligation in equity in these Carabelas companies. We say there can be no content in that. It is seeking to raise agency in another name. These entities are entities at the time, it is common ground, that had no assets on - - -

GLEESON CJ: Just at the moment, I cannot understand why the liquidator’s attempt to get his hands on this $400,000-odd could not have been made effective by a knight’s fork move against Mr Carabelas.

MR GRIFFITH: The answer is, your Honour, with the sanction of your Honour having said that, one would say that even now that looks impossible. But the function of this action was to get his hands on it. We say the starting point was correct to say, subject to being produced to the Court, the annual account of the financial statement of assets and liabilities to 30 June 1990 reflected and was verified by the directors the transaction in exhibit CJ10 as entered in the journal. We say, ex facie, your Honours, that must be regarded as a breach of subsection (4), and that suffices. On that aspect, we say the Full Court has fallen into error in not accepting the financial accounts as signed off to Mr Carabelas as indicating that this conversion of the debt had occurred.

GUMMOW J: Can you just explain the orders the judge did make in your favour at 118?

MR GRIFFITH: Your Honours, paragraph 1 was the amount of $400,000-odd plus interest at the Supreme Court rate. Paragraph 2 was the payment with respect to the three preference transactions, together with interest.

GUMMOW J: Right. I am having difficulty squaring the orders at 118 with what was said in the conclusion of the judgment at 116. The 474,950 is the loan, the debt - - -

MR GRIFFITH: Yes, your Honour.

GUMMOW J: - - - then that plus the interest gives 1.2 million.

MR GRIFFITH: Yes.

GUMMOW J: I see.

MR GRIFFITH: So that the interest, your Honour, now wags the dog. It is a good investment, having interest at Supreme Court rates.

GUMMOW J: Yes, and 588F is the preference, is it not?

MR GRIFFITH: Yes, the three preference payments. Could I refer, on this aspect of the question of the transaction initiated or reflected in GJ10, to the respondent’s submissions, paragraph 5, on page 3 of the respondent’s submissions. It is put in paragraph 5.4 that:

There was no evidence that the respondents ever knew of, instructed, or ratified the entries in GJ10.

Now, your Honours, as to that, we refer firstly to our statement of facts on page 4, paragraph E1 and E2, which are agreed in paragraph 4 of the respondent’s submissions, bottom of page 2, as facts to which they agree. They agree to all our facts and then they add their preferences. So one has agreement to our E1 and E2.

Then, your Honours, could I refer to paragraph 17 on page 132 in the Chief Justice’s judgment. Do your Honours have that?

GLEESON CJ: Yes, thank you.

MR GRIFFITH: The last two sentences - this is dealing with the agency issue:

Mr Carabelas contended that he was never liable to ALS for the money borrowed -

He lost on that -

and that the entry that treated the balance of the sale proceeds as an advance to him was incorrect -

CJ2 -

and was rightly corrected -

CJ10 -

by the second journal entry. The judge rejected this submission.

GLEESON CJ: Pausing there, it follows, does it not, Mr Carabelas, on the findings of the primary judge, owed $446,710.31 to the company.

MR GRIFFITH: Your Honour, if we go to the finding of the primary judge, and that is at page 94, paragraph 52:

Upon the plaintiff’s case, the making of the journal entry CJ10 (and the transaction which it records) constitutes the second act of misfeasance. The CBA had taken monies - - -

Your Honours, I have already taken you to that. Paragraph 53, he makes a statement that I have already taken your Honours to as to that being included in the accounts.

Your Honours, it really comes back down to an issue of characterisation. Our submission is that we are permitted to take as our starting point the annual accounts to show what happened with respect to this abrogation of the debt by Carabelas and substitution of debts by insolvent companies to assert that that transaction, which one picks up as being a transaction supported by Mr Carabelas, is one that has not been taken into effect, and correctly, we say, on any view, must be analysed to constitute a breach of subsection (4).

GLEESON CJ: Have a look at paragraph 62 on page 96.

MR GRIFFITH: Yes, your Honour.

GLEESON CJ: The defendants denied that any such transaction, as alleged, was effected. The defendants sought to deny that Mr Carabelas ever owed $446,710.31 to ALS.

MR GRIFFITH: That is on the agency argument.

GLEESON CJ: But the judge rejected that and it was rejected again in the Full Court. The rejection of the answer of the defendants and the conclusion that there was no legally effective novation simply leads to the result, does it not, that Mr Carabelas owed Angas Law Services $446,710.31.

MR GRIFFITH: With respect, it does not reach a result, your Honours, of being no breach of subsection (4).

GLEESON CJ: Now, you are trying to recover the $446,710.31 either as damages for contravention of section 229, the contravention being the entering into the mortgage, or the same amount as damage for the misfeasance involved in effectively discharging the debt.

MR GRIFFITH: That is so, your Honour.

GLEESON CJ: Your argument assumes that there was an effective discharge of the debt.

MR GRIFFITH: Your Honour, not necessarily. What we say is that it is quite plain that Mr Carabelas’ assertion down below at both levels was that the transaction with respect to which the journal entry was made was a correct reflection of transactions that he supported and was carried through to the annual 1990 statement of assets and liabilities of showing the position of assets of the company.

GLEESON CJ: What were the findings in the Supreme Court of South Australia as to whether the debt of $446,710 was discharged?

MR GRIFFITH: Your Honour, there is not a finding. What the finding was was that the carrying into effect into the annual accounts of that position constituted an improper use of his position to gain, directly or indirectly, an advantage for himself or to cause detriment to the corporation. We say that finding is open and correct and unchallengeable. It is a finding that is forced by Mr Carabelas’ own arguments that it is correct. He says he - - -

GUMMOW J: What is the finding, again?

MR GRIFFITH: The finding is, your Honour, that the annual accounts signed off by Mr Carabelas showed as the asset of the company not, as was in the entry CJ2, the debt owed by Carabelas, in effect, the profit from the transaction and its surplus, but that it had been appropriated over the Carabelas companies, each of which was admittedly insolvent at the time, apart from 15,000 that was left pro rata to Carabelas.

GUMMOW J: I can understand that might have been improper because the accounts were false, but is there then not a problem as to the amount of the loss or damage under 229(7)?

MR GRIFFITH: Your Honour, at the first level, we say that there is a breach of section 229(4). We say the position is that the company has lost the benefit of that debt from Mr Carabelas.

GUMMOW J: Why has it lost it?

MR GRIFFITH: I suppose, your Honour, if it is the case that it needs a judgment of this Court to say that the debt is still owing, you are being wise after the event to say, well, you still have the debt. What we say is that we are entitled to seek recovery on the basis that the accounts are what they asserted by the relevant directors to be, a true, proper and fair statement of what is the position, and we say, if you assert that, our answer is that you have breached 229(4). The effect of this is, as a result, we were merely given a chose in action against insolvent companies that were, indeed, struck off before our appointment as liquidator. You are liable under 229(7) to pay that money that we – if you had not taken it that way, well, then, we would either have the money or we would have the cause of action against you.

GLEESON CJ: Did you tell us earlier that the evidence shows that on 30 June 1990, the company was insolvent?

MR GRIFFITH: Your Honour, it is accepted in the statement of fact.

GLEESON CJ: Thank you.

MR GRIFFITH: Not Angas, your Honour, but the other companies.

GLEESON CJ: No, Angas I am interested in.

MR GRIFFITH: Angas was not insolvent because it had the book debt.

GLEESON CJ: From Mr Carabelas.

MR GRIFFITH: From Mr Carabelas, but as soon as you convert it into the book debts of these insolvent companies the only asset left was 15,000 owing by Mr Carabelas, and there was the liability to the tax.

GLEESON CJ: Let me put it slightly different. Did the evidence show that if the debt owed by Mr Carabelas to the company was effectively discharged, the discharge rendered the company insolvent?

MR GRIFFITH: Your Honour, we would have to look at the balance sheet, but one knows about the tax liability of 25,000 arising from that same year. We will have to look at - your Honour.....saying it is right to say it should have been there.

GLEESON CJ: Was the theory on which, if it happened, these debts were, as it were, redistributed, that the amounts of the original borrowing that were applied for the benefit of particular Carabelas companies were treated in G10 as having been borrowed by those companies directly from the bank? This, I suppose, is consistent with the agency theory.

MR GRIFFITH: I suppose so, your Honour. As far as one can understand the evidence from Justice Williams’ judgment, after these transactions, as at 30 June 1990 in the accounts, each of the other companies were shown in their accounts as being liable to Angas - - -

GLEESON CJ: But that is how the numbers arose. There is where the numbers that went into GJ10 came from.

MR GRIFFITH: Yes. Your Honours, could I answer further your Honour’s question about solvency of ALS. The guarantee mortgage remained in force, which was guaranteeing the full indebtedness of Carabelas as an extra debt. So when one has regard to that, your Honour, undoubtedly the company could not meet that debt, and we know that as part of the transactions in closure in 1993 the bank took a haircut of $2.25 million, I think, on that.

HAYNE J: The debt had not been called at 1990.

MR GRIFFITH: It had not been – it was a contingent liability, your Honour.

HAYNE J: That raises issues about solvency that are not readily answerable.

MR GRIFFITH: Your Honour, can I step back and attempt to put what, from the point of view of my clients, is an air of reality in their situation, your Honour. They appointed a liquidator to an undoubtedly insolvent company that has no assets. It was wound up on the petition of the Commissioner of Taxation arising from a profit arising from this particular transaction, a liability that was never paid. They greeted your Honour with accounts signed off as regular and accurate accounts showing that the money from the proceeds – the profit, if one likes – from the sale of this property, is shown in the accounts as being owned by insolvent companies, who by then had already been taken off the register.

HAYNE J: Did the primary judge make a finding about insolvency? I assume he must have, given that there were preference claims about. What was the finding made?

MR GRIFFITH: The preference claims arise in 1993, so that they are of no assistance on this point. I should emphasise again, your Honour, I do not wish to detain your Honour on the preference claims. We make a short point that there was evidence, when the Chief Justice said there was not, and refer to it. We say there was evidence because Mr Carabelas gave instructions to Mr Vlassis to do what he had to do to ensure that each of the companies had no assets and could be struck off prior to the entries made with respect to the preference debts, which we say indicates there was a transaction beyond merely the entry by Mr Vlassis in the books. We just stand on our submissions on that.

Your Honours, on the principal issue, what we say is that it would be inappropriate for the Court to defeat that claim based on accounts presented by the Carabelases as being true and fair and reflecting truly the financial situation of the company by taking the view that one might obtain, say, at the level of this Court, an ultimate finding that all that was a nullity, as shown in the accounts, therefore they are of no effect, therefore you still owe the money. If that is to be the outcome, your Honour, we would suggest the Court give us leave to amend the statement of claim even at this level to put in a simple claim for the debt. Otherwise, your Honour, it is to make a mockery of the operation of the applicable principles with respect to the recovery of moneys we say appropriated.

GLEESON CJ: Apart from the transaction that effected the discharge of the debt, if any, what would be the defence to a claim for the debt now?

MR GRIFFITH: Your Honour, what was flagged at the special leave was, “You are out of time”, which we say on the face is not an amenable defence, and the other was an Anshun estoppel, which we would have thought was hopeless also. If this is the only thing that might defeat us on this claim, saying, Well, you could have got it more directly on the alternative claim”, albeit with the wisdom of hindsight, your Honour, we would apply at this level to just do a one paragraph addition and claim the moneys as a direct debt. We say my learned friends’ flagged defences are legless. There could be no answer.

We have taken your Honours to the findings and to the assertions that Mr Carabelas asserted that this transaction was correct. It was part of his agency defence, but, having lost on that, our submission is that he loses on the breach of subsection (4) issue.

GLEESON CJ: Once Mr Carabelas has lost his agency argument, then one way or another he must owe the company $441,000.

MR GRIFFITH: He must, your Honour. If that is plain, we should be permitted at this stage to do a one paragraph amendment and claim it directly. It is the same sum, same amount of interest.

GLEESON CJ: Am I right in thinking that that is the damages you seek in your misfeasance claim, $441,710.31?

MR GRIFFITH: Yes, with interest. It is the same sum, your Honour. So to say at special leave, “He does not owe the money this way because he owes it directly, but you cannot sue, you are too late”, with respect, is totally without merit. Although, your Honour, I pleaded Anshun many years ago and had to come to the level of this Court to vindicate the principle, it is not easily a refuge of a pleader in defence that works all that much. We say it cannot possibly work here. He got the benefit, once he lost his agency argument, and if it is the case that one can say with the wisdom of hindsight, because we are right on this argument about the nature of the transaction, it had no effect, it was a nullity, we say the Court may still find breach of subsection (4) because that is clearly, on his assertion, what Mr Carabelas both intended to do and did do and carried into the annual accounts.

Alternatively, your Honour, we say in the interests of the administration of justice, we should be permitted at this stage to add one paragraph to our statement of claim, claiming the money directly, the same sum. If the Court pleases.

HEYDON J: What is the relationship between that sum and the sum of $474,950 to which Justice Williams referred on page 116?

MR GRIFFITH: Your Honours, the 446,000 is the equity after adjustments, land agent’s commission and the like.

GLEESON CJ: It is the net proceeds?

MR GRIFFITH: It is the net, I am instructed.

GLEESON CJ: I think the biggest element in the deductions is the proceeds of the agent on sale, is it not?

MR GRIFFITH: I think so.

GLEESON CJ: It is the commission of the agent on sale.

MR GRIFFITH: Yes. We do not cavil at that, your Honours. It is the net sum we refer to.

HEYDON J: You claim the net sum?

MR GRIFFITH: We claim the net sum, yes.

HEYDON J: So that what you actually got was too much?

MR GRIFFITH: I said “Yes” once too often.

HEYDON J: It presumably actually lost the 474, not 446, because the money went out to the agent. It should have stayed with you, you say?

MR GRIFFITH: Can I say “Yes” to your Honour again?

HEYDON J: If it is the last “Yes”.

MR GRIFFITH: If the Court pleases.

GLEESON CJ: Thank you, Dr Griffith. Yes, Mr Whitington.

MR WHITINGTON: If the Court pleases, in our respectful submission, the proper starting point for an analysis of the issues on this appeal is a consideration of the charge, if I can put it that way, made against the defendants at trial in the case they had to meet. We say that is critical.

Can I take the Court briefly to the statement of claim. Justice Hayne has gone there briefly. I just wanted to highlight a couple more of the points. First of all, paragraph 7 which appears at page 3, that was the grant of mortgage. Then I should refer to paragraph 10, then paragraph 14, then critically paragraph 15, which is the point your Honour the Chief Justice has been agitating. So, in other words, the allegation is that because the surplus arising on sale after payment out of the debt to Mr Carabelas was applied in reduction of the bank debt, there arose an indebtedness of Mr Carabelas to ALS. It is actually said to be for “money had and received”. I presume it is really for money paid to the use of another.

GLEESON CJ: Just to pick up the point that Justice Heydon was making, should that amount of 474,950 be reduced to 446,710.31 because of the deduction of things like commission?

MR WHITINGTON: Your Honour, that is, with great respect, an interesting point that I want to develop because it depends upon how the cause of action is framed.

GLEESON CJ: It might depend on which is the misfeasance; the first head or the second.

MR WHITINGTON: Exactly, your Honour, and critically the trial judge finds for the former figure, the higher figure. We say that indicates and confirms that he did not ever find a novation. He found an operative misfeasance. Can I take a step back. There are two issues here. One is a breach of a norm in section 229 but the second issue is a cause of action for loss or damage which only arises when the loss or damage is proved under section 229.

Critically, the question here is which cause of action was found and on what basis, and your Honour the Chief Justice’s question about the amount is relevant to that. Then in paragraph 17, and this is a particularly important plea that Justice Hayne has highlighted, it is pleaded that the defendants caused ALS and other companies to novate the debt. Now, the response to that is, in effect, a denial, it is a broad denial, but that was denied in the defence, and it was repeatedly asserted in the defence that the borrowing was undertaken by Mr Carabelas and his agent for a joint venture of these companies. So we had to meet a case of novation.

Then at paragraph 18, it said that the companies who, in effect, who became obliged on the book debts had no ability to repay. There is a plea in paragraph 19 that the book debts owed by these companies were written off, but nothing turns on that, and then paragraph 20, it said that:

By virtue of the foregoing George Carabelas obtained a benefit, namely that he was relieved of his indebtedness to the CBA to the extent of $474,950 - - -

GUMMOW J: This agency of Mr Carabelas, who were the principals? Was there only one principal, Angas Law Services, or the other companies?

MR WHITINGTON: No, the principals were said to be all the companies.

GUMMOW J: That is what I thought.

MR WHITINGTON: Yes.

GUMMOW J: So this alleged novation you are saying was beside the point?

MR WHITINGTON: Beside the point, completely and, your Honour - - -

GUMMOW J: Because that was the situation anyway.

MR WHITINGTON: That was our case, your Honour, yes.

GUMMOW J: Yes.

MR WHITINGTON: The trial judge found against that, but you see, that explains why, to the extent that the financial statements to 30 June 1990 may have embodied this correcting entry GJ10, the directors were able to sign and, indeed, press those accounts at trial. My learned friend I think puts against us, that those accounts represents some admission against the directors. First of all, they may be prima facie evidence – normally it would be said they were prima facie evidence against the company, but for the extent that they could be said to represent admissions by the directors of a journal entry we would make two responses. First, an admission can be explained at trial, and secondly, the admission in any event was ambiguous in that the case that the directors were putting was that the accounts could be explained on one basis, and the plaintiff was saying that they could be explained on another basis.

GLEESON CJ: The accounts in fact reflect the agency theory which was rejected both at first instance and in the Court of Appeal and the Full Court.

MR WHITINGTON: Precisely.

GLEESON CJ: But they do not reflect a novation.

MR WHITINGTON: No.

GLEESON CJ: The novation theory is a reconstruction by the plaintiff of how you can explain the entries in the accounts if the agency theory is wrong.

MR WHITINGTON: Exactly, and the plaintiff at trial made no endeavour to prove a novation, strictly speaking, led no evidence to justify a novation – indeed, called Mr Vlassis but did not ask him any questions about this, put in a transcript of evidence of his examination under section 5 for one examination and, as I recall it, did not press him on novation, but asked for his explanation. It was generally to the effect that he thought that he was properly reflecting the agency arrangement.

Now, I will cut to the chase on this. We said on special leave that the case of agency having been dismissed in effect, not found in our favour, the so-called correcting entry, GJ10, could not stand. In other words, there is no finding anywhere of novation. The finding of the other basis for GJ10, agency, does not exist. That in effect means their accounts revert to the position that reflected GJ2 - - -

GLEESON CJ: Which means you owe $446,000 et cetera.

MR WHITINGTON: That was what we conceded on special leave was the implication of the combined judgments. Of course, we do not concede that that money is due and payable for a number of reasons.

GLEESON CJ: What would they be?

MR WHITINGTON: First of all, your Honour, one has to then look at the whole loan account, and there are other transactions in the loan account which must be brought to account. So if there is a debit to Mr Carabelas in the amount of $474,000 or $435,000, whichever it be, credits in his loan account must be brought to account.

For instance, a matter the trial judge did not bring to account anywhere in his consideration was the fact that Mr Carabelas gave evidence that he had provided to the company funds in excess of $230,000 for improvements to the property of ALS, which, of course, were realised in the sale. We would want to contend, if the matter goes any further, that not only does that have to be brought to account, but it has to be brought to account under an equitable interest. That is the first matter.

Secondly, there are other transactions in the loan accounts. Thirdly, it depends upon the effect of the judgment on the preference claims as to whether they are to be reversed. If the preference transactions are reversed, then, of course, there are further credits in the loan account of Mr Carabelas. So - - -

GLEESON CJ: But you succeeded on the preferences – on the finding that there were no transactions.

MR WHITINGTON: Yes, but I am not presuming that we will succeed in this Court on the preference claim. Then as I understand it, your Honour, there are other credits in the loan account. So it is not a simple matter of saying that judgment can be entered for the amount of that prima facie debt.

The other points that I did put on special leave, rightly or wrongly, were that, as I understood it, any debt in the loan account would be a demand debt and time would run ab initio, that is, from the date of the incurring of the liability. I referred to a case Re Action Waste, I remember, but I was wrong in that. I meant to refer to a case of Ogilvie v Adams [1981] VicRp 92; [1981] VR 1041, a decision of Justice Fullagar.

Also, we would want to take a defence of an Anshun estoppel, because we would want to say this matter has always been as plain as day to the liquidator. He was saying novation without any basis, we were saying agency, but he was denying agency, and the result of that, logically, is an indebtedness of Mr Carabelas in respect of this amount, to be brought to account on his loan account.

It may be that the liquidator deliberately and advisedly chose not to pursue the debt in that way because he knew of the state of the loan account and it may be he thought that he was better advantaged by pursuing recovery in this way. I am not sure.

GLEESON CJ: And it may also be that he puts up front his argument that the mortgage was the act of misfeasance because if he succeeds on that he gets a clean look at the $446,710, without the complications that you mention.

MR WHITINGTON: Yes, but that was the other point I was going to make about the statement of claim and about the way the case was run. The effect of the pleading is not to plead separate breaches but to plead a combined cause of action.

GUMMOW J: Yes, I was wondering about that. That seems to be so, does it not?

MR WHITINGTON: Yes, and that is exactly how my learned friend, with respect, put it on special leave.

HEYDON J: Are you talking about paragraph 22?

MR WHITINGTON: Yes, I am, if the Court pleases, and that is how the trial judge approached the matter as well. The trial judge approached the matter as a course of conduct. The Court sees that at reasons - - -

GUMMOW J: Clause 22A though, is distinct, is it not?

MR WHITINGTON: Clause 22A really is superfluous and can be excised because the evidence was nothing turned on that, that the money was gone before it was written off so the writing-off achieved nothing and nobody made anything of that at trial. But the trial judge says at paragraph 4 at page 780 - - -

GUMMOW J: What is that?

MR WHITINGTON: At page 80 in the appeal book, the fourth line, it is a sentence starting. “The liquidator claims”, and then, if one goes to paragraph 59 at page 96, one sees the same thing. The Chief Justice took the same approach, and I will simply give the Court the reference, in his reasons at paragraph 16, page 132. Finally, could I take the Court to the notice of appeal which is at page 146, ground 1. It seems to me that is also relying on a cause of conduct plea as well. On special leave, my learned friend, Mr Griffith, said at, I think it is a line number, line 102, “Your Honour, there is no - - -

HEYDON J: We do not have line numbers, at least my copy does not.

MR WHITINGTON: I think I might have another print.

HEYDON J: Actually I withdraw that. I have caught up with some line numbers. Yes, 102?

MR WHITINGTON: Yes.

HEYDON J: I am right now. “Your Honour, there is no concern about that”.

MR WHITINGTON: Yes:

when one has regard to the issue that the loss arose out of the second transaction.

Then at line 150 on the next page:

You take half a million dollars from the company because it gets a worthless chose in action of the five choses in action against defunct companies.

Then at 175:

But, your Honour, this is magic pudding stuff, with respect. What we say, your Honours, is that paragraph 59 –

that is in the Full Court reasons –

firstly suffers from the deficiency that his Honour is only referring to the original mortgage for the entire debt and failing to have any regard, your Honour – and one picks that up quite specifically when one goes to the judgment of the Chief Justice, particularly paragraph 59, that he is referring only to the first transaction. Once one looks at the second transaction, with respect, his Honour’s decision in the result must be wrong. With respect, your Honour, it must be as a matter of principle that if you owe a company, of which you are the owner, half a million dollars it is impermissible for you to make a book entry to transfer that to some other body –

The other – I should go back, I am sorry, to page 4 in my print, line 55:

His Honour does not deal with the issue of the effect of the transaction which itself caused the loss, namely the making of the book entry, the transfer which was a perfectly good book debt owed by Mr Carabelas, we say, as equivalent of the sole director, and transferred that at a time when the other five companies were defunct . . .

It was that second book entry, your Honour, which resulted in the loss to the company because instead of having a book debt owed by Mr Carabelas, whatever he is worth – we assume he is worth something, your Honour – it was transferred to five companies which admittedly - - -

GLEESON CJ: Just a minute. That seems to assume that if the granting of the mortgage was an act of misfeasance, there is a limit on the damage suffered by the company as a result of that act of misfeasance by reference to the value of the company’s property. If the granting of the mortgage was an act of misfeasance, the damage suffered by the company was $2.5 million, minus the amount of money that went to the company, was it not? Why do you treat the damage as being limited to the difference between the value of the company’s property and the amount of money that went for its benefit? Why is the damage not measured by reference to the liability it undertook, which had as its maximum $2.5 million?

MR WHITINGTON: Your Honour, what your Honour puts to me is a point well taken, but that was not the way the case was run. The case did not ever stop at a single act of misfeasance, the grant of a mortgage, and an assertion that loss and damage thereby arose pursuant to subsection (7). The case had the implicit assumption that the surplus paid over to the bank out of the asset was the limit on the damage, first of all. I take your Honour’s point - - -

GLEESON CJ: I have not checked the mortgage but this was an all-moneys mortgage, was it not?

MR WHITINGTON: It was an all-moneys mortgage, your Honour, yes.

GLEESON CJ: So as far as the bank was concerned, the amount owed to them by the company was $2.5 million, or whatever was the total of the amount of the moneys drawn down by Mr Carabelas under this facility.

MR WHITINGTON: As a collateral guarantee mortgage, that is so, your Honour.

GLEESON CJ: It was not limited to the value of the property over which the mortgage was given.

MR WHITINGTON: No, but what I am saying, your Honour, is that the case was put at trial on the basis that the limit of the company’s claim was the amount of the surplus proceeds applied to the bank’s debt on the sale. In other words, what your Honour puts to me might be right as a matter of principle but that was not the way the case was conducted. The further important implicit assumption which is borne out by the pleading and by the special leave submissions is that there was no loss or damage at the time Mr Carabelas was indebted to the company for the moneys paid on his behalf, being the surplus proceeds. The case was put on the basis that the loss and damage only arose when the so-called novation occurred.

GUMMOW J: What do you say about the primary judge’s finding at paragraph 72 on page 100 about the journal entry?

MR WHITINGTON: The important point there, your Honour, is that first of all - - -

GUMMOW J: He has found no agency. Where does he actually find no novation?

MR WHITINGTON: He does not, and that is one of our points, your Honour.

GUMMOW J: One way or the other.

MR WHITINGTON: He does not one way or the other, but we say first of all he makes no finding of novation. Your Honour has put your finger on it, with respect. It really should come in at 72, 73 and 74. He makes no finding of novation and, moreover - - -

GUMMOW J: What is this finding about shielding? What is the significance of that?

MR WHITINGTON: We would say no relevance in a sense. It is gratuitous. The point was that there was no evidence that Mr Carabelas knew anything about GJ10 or that he had authorised it, so his Honour in a kind of gratuitous remark or observation concluded that Mr Vlassis must have done it not, I suppose, bona fide to reflect the agency arrangement but in some way to shield Mr Carabelas. But there was no finding that Mr Carabelas knew anything about the entry or was party to it.

HEYDON J: How can you infer from the fact that no question was asked as to his reason for amending the accounts that the reason for amending the accounts was to shield George? How can you infer that as a matter of formal or informal logic?

MR WHITINGTON: I do not think you can, with respect. Indeed, that was not - - -

HEYDON J: Mr Vlassis was called by the plaintiff.

MR WHITINGTON: By the liquidator, yes, and he was - - -

HEYDON J: There was no evidence, you say, as to what the reason for amendment was. Therefore, there was no inference which could be strengthened by any failure to question in cross-examination.

MR WHITINGTON: Precisely. He was barely asked any questions by counsel for the liquidator and he was then cross-examined. His transcript of a company examination was tendered in the plaintiff’s case but my memory is no such suggestion was put to him in that examination, nor was there any such evidence, so this is a conclusion drawn by the trial judge.

The critical feature, from our point of view, is that there was simply no evidence that Mr Carabelas adopted this particular journal let alone was party to any underlying transaction which it reflected or recorded. From Mr Carabelas’s point of view to the extent that this journal was written up by Mr Vlassis intending to reflect an agency arrangement and was embodied in the accounts, it was Mr Carabelas’s view as well that he had borrowed the money as agent for the companies and although it did not ever come out in the evidence one can infer that what Mr Vlassis was trying to do was this, and when one sees the entry, I think it assists in this inference, the entry for instance in GJ10 at page 76 of the appeal book.

Mr Vlassis was reasoning in a kind of intuitive way which might be put in more formal legal terms along these lines. The company ALS has repaid the surplus being net $446,000 off the bank debt. The bank debt is in the name of Mr Carabelas but it is really a debt of these six companies as well as ALS, the six companies being those referred to in the entry. ALS has discharged, in effect, more than its fair share of the bank debt because it had only received $435,000 originally. It had paid that back and then it applied its surplus off the bank debt. That was to be treated in his intuitive way as a payment for the benefit of the other company borrowers, putative borrowers, in proportion, it appears, to the amounts that they had received from the bank facility. So he then divided up the amount of the surplus and debited it to them, that is charged it to them as a liability in their loan accounts with ALS.

Now, all of that is perfectly rationalised by his thinking that there was an agency arrangement, and that the real borrowers, in substance, from an accountant’s point of view, were the companies in the group. We accept that the courts below have found against us on the agency and joint venture arrangement, but that is no reason to find that Mr Vlassis, for instance, wanted to shield Mr Carabelas when that was not put to him, but, critically, nor is there any finding of a novation.

GLEESON CJ: Treating the accounts as an admission of a novation is a little difficult to do when you bear in mind that the case for Mr Carabelas all along has been that the accounts correctly reflected an agency arrangement.

MR WHITINGTON: Yes.

GLEESON CJ: It was an assertion by him, an assertion the correctness of which has since been rejected by the courts, but an assertion which does not involve any novation at all.

MR WHITINGTON: Precisely, your Honour, and if one were to put this in criminal terms under section 229(4) it might be said that he was raising, if you like, a defence of an honest and reasonable relief in a state of facts which would have justified this particular recording. He did not make out that defence, he was not upheld on that, but that does not create novation. A finding of no agency does not amount necessarily to a finding of novation, and there is no finding of novation.

We accepted on special leave that the consequence was that the accounts should stand as reflected in GJ10, subject, of course, to whatever else transpires in the loan account – GJ2, the accounts should stand as reflected in GJ2. Critically, we say that the plaintiff did not set out to prove a cause of action for the mortgage misfeasance, if I can put it that way, on its own. It was a necessary part of the plaintiff’s case as pleaded and presented at trial and as pursued on special leave that the cause of action was complete when, and only when, the so-called novation occurred. But since there is no novation, in our respectful submission, there can be no cause of action made out on the case as conducted below.

Can I then observe that our learned friends have criticised in their submissions and on special leave the absence of any reference to the so-called novation breach in the Full Court’s reasons. With great respect, we say that that is entirely understandable, since there was no finding of a novation, and so the Full Court did not deal with the matter. On one view, the Full Court could have said that that concluded the matter, but the Full Court went on in the alternative to deal with the case of breach, not so much the cause of action for mortgage misfeasance, but the case of mortgage misfeasance itself, and concluded there could be no misfeasance because of the unanimous shareholder assent rule.

HEYDON J: Could I just interrupt. There was a notice of alternative contentions in the Full Court. That was presumably filed by the present appellant.

MR WHITINGTON: Yes.

HEYDON J: That does not seem to contain any reference to novation. It should contain a complaint that the trial judge failed to find novation.

MR WHITINGTON: Precisely, your Honour.

HEYDON J: That explains why the Full Court did not mention novation.

MR WHITINGTON: Exactly, because, in effect, the respondent on that appeal, the present appellant, rested on the findings below, except in one narrow way. The notice of alternative contentions related entirely to the time bar points, which are not raised in this appeal. So, in effect, the appellant – the respondent below – accepted the finding, or the state of the findings, as to novation, that is, there is no finding of a novation.

Can I then come to the alternative misfeasance case, and can I come straight to the question your Honour the Chief Justice has agitated as to how one reconciles what we say is the unanimous shareholder assent rule with section 229. We have put it on alternative bases. We say, first of all, that unanimous shareholder assent, in effect, waives the duty. So that if - - -

GLEESON CJ: Hang on, the duty is statutory duty. You cannot waive a statute.

MR WHITINGTON: I understand that is a point that might be taken, but, with respect, we say this - - -

HAYNE J: The dispensing power was disposed of just a little long ago in history, I think, to start saying it is a point to be taken.

HEYDON J: Your point would be that if there is full consent of all relevant people, the use of the position is not improper.

MR WHITINGTON: That is our alternative position, yes.

HEYDON J: And what is the primary position?

MR WHITINGTON: The primary one is the one, I think, that does not meet favour with Justice Hayne, but it is the proposition that if there is consent, there has been, in effect, a waiver of the duty.

HEYDON J: Statutory, you cannot waive the criminal law.

MR WHITINGTON: We submit that - - -

GUMMOW J: You have a distributive notion, do you not?

MR WHITINGTON: We do, ultimately, yes, but we say, first of all, there are two things to be considered. The first distinction to draw is between a prospective assent and a retrospective assent. That is the first thing. This was a case of prospective assent, an assent before the act of the director. Secondly, dealing with prospective assent, we say that the norms or the duties embodied in section 229 are, if you like, a restatement of the general law duties and that they do not represent a course of - - -

GUMMOW J: Wait a minute. They are owed by an expanded class now, are they not?

MR WHITINGTON: Yes, they are, but to the extent that they are owed by directors, they are a restatement of either the common law or the equitable duties and we say that they do not amount in any sense to a codification of corporations law. They could not. They were only touching one particular aspect of corporations law. The unanimous shareholder assent rule is a rule of longstanding. We say that the norms of conduct established by section 229 and the unanimous shareholder assent rule can be harmonised, and that therefore the norms in section 229 must be read against the background of the unanimous shareholder assent rule. So our first submission is that if there is unanimous assent on the terms of the established rule, then the duty, even though it is a statutory norm, is waived.

It is a duty in this case owed by the directors to the company and the company waives it and therefore there is no breach. That is our first position. Our alternative position is that it could not be said to be improper conduct or unreasonable conduct if the shareholders have unanimously assented to the activity.

In relation to the criminal law, we say, first of all, that the same position would apply, that the duty could be waived and there would be no offence, at least prospectively. If that is wrong, we say, then the sections are to be construed in the same way as we have indicated, that is, that the conduct would not be improper or would not be unreasonable. Finally, we say there is no incongruity between a civil immunity and the superimposition of some criminal liability. The two can be harmonised.

Now, I had noted, since I prepared our written outline and our list of authorities, that there is an oblique reference to this issue in the decision of this Court in R v Byrnes [1995] HCA 1; (1995) 183 CLR 501 at 517. I wonder whether the Court would mind if I simply read a sentence or two from that? There is a passage at page 517 in the joint judgment, in which the Court is dealing, of course, with section 229(4). The Court said:

A director of a company who is also a director of another company may owe conflicting fiduciary duties. Being a fiduciary, the director of the first company must not exercise his or her powers for the benefit or gain of the second company without clearly disclosing the second company’s interests to the first company and obtaining the first company’s consent. Nor, of course, can the director exercise those powers for the director’s own benefit or gain without clearly disclosing his or her interest and obtaining the company’s consent.

I accept that that is a little oblique, but I simply make the point that that was said in the context of a criminal prosecution under section 229(4).

GUMMOW J: A construction was given to impropriety which is not necessarily the same as what you have been putting to us, I think, is it? In Byrnes?

MR WHITINGTON: In Byrnes and in the decision of this Court in Chew, the Court said that impropriety was an objective concept, in effect, what objectively a reasonable person would consider proper or improper. We say that if all the shareholders consent, then, viewed objectively, it could not be said that the conduct was improper.

GLEESON CJ: How would you get a disinterested quorum in this place for a resolution of directors?

MR WHITINGTON: You could not, your Honour. That is an issue which we say arises in the context of majority approval, so-called ratification by the majority of directors’ conduct.

GLEESON CJ: I have not really looked into this recently, but I have an impression that there are two different lines of reasoning at work here. There is a decision of the Privy Council called Ho Tung v Man On which exemplifies one line of authority, which is really dispensing with the need for compliance with internal company procedures in cases where there is unanimous assent of the shareholders - - -

MR WHITINGTON: Yes.

GLEESON CJ: - - - which is one thing, and then there is the Bamford v Bamford line of authority, concerning what the Court of Appeal described in Bamford v Bamford as seeking forgiveness.

MR WHITINGTON: Yes. There are a number of issues tangled up there, with respect, your Honour. The first proposition that your Honour is referring to, I think, is the Duomatic line of authority, where shareholders can, if you like, cure procedural irregularity by unanimous assent. That is a matter that is touched upon by the Court of Appeal in the case of Herrman v Simon which our learned friends - - -

GLEESON CJ: The theory being that if people who between them have the capacity to amend the articles of association, their assent to a particular course of conduct is effective on that basis.

MR WHITINGTON: Yes, or, alternatively, that if they have rights under the articles to procedural regularity, they can waive those rights as between themselves. That is a matter internal to the company. In relation to Bamford v Bamford, I think that was a question of absolving directors retrospectively from the consequences of a breach of duty, but it involved a consideration of when a majority of shareholders can do that, as opposed to all of the shareholders. When it is a case of majority assent or approval, issues arise as to the effect on the minority. That was one of the issues in the case of Winthrop v Winns.

The concern or reservation about the ability of the shareholders in those circumstances to in some way or other endorse the conduct of the directors is a concern which arises because of the effect on minority rights. When one is in the area of unanimous shareholder assent – and, of course, the other side of that requirement is that there be no oppression of a minority - - -

GLEESON CJ: Well, you qualify those principles by reference to expropriating the company’s property, and that is a qualification in the interest of creditors.

MR WHITINGTON: Quite so.

GLEESON CJ: Anyway, we will adjourn until 2.15.

AT 12.49 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.17 PM:

GLEESON CJ: Yes, Mr Whitington. Mr Griffith?

MR GRIFFITH: Your Honour, can I indicate that with the consent of my learned friend we have given to the Court the accounts, though the faxed forms are not as legible as we would like.

GLEESON CJ: Thank you.

MR GRIFFITH: There are two sets, your Honour. The first bears the date 30 June 1989, the second 30 June 1991. There are no accounts for the
1990 year, apparently, your Honour, because they could not be found, but the 1991 accounts indicate the state by reference to the comparative previous year in those accounts.

GLEESON CJ: Which is exhibit P1?

MR GRIFFITH: Apparently, all of them, both of them. They were tabs, I think, your Honour.

HAYNE J: There is an omnibus exhibit P1 in which the accounts form some of the tabs, I think.

MR GRIFFITH: Yes. Your Honours, I am afraid this is all we could do by this time of the day.

GLEESON CJ: Anyway, you can find the 1990 figures in the 1991 accounts just by looking over to the right hand column.

MR GRIFFITH: Exactly, your Honour, it is on page 9 one picks it up. One has there the appropriation of the debt over the various insolvent Carabelas companies at note 5 “Receivables”. One can pick up, your Honours, on the 1989 account, which is marked as if it is a court book 23, an unsecured loan from shareholders of $217,438.09.

GLEESON CJ: Thank you. Yes, Mr Whitington.

MR WHITINGTON: Might I just pick up on four matters briefly before moving back to the course of my argument. First, in relation to the last matter, my learned junior has checked and I understand the position to be this in respect of the accounts of the other companies said to be parties to the novation. There were no accounts in evidence, demonstrating that they, if you like, accepted the liabilities the subject of the asserted novation. All that was in evidence were annual returns filed on behalf of those companies, which had a statement to the effect that no accounts could be or had been prepared for those companies.

Secondly, can I deal with a matter that your Honour the Chief Justice raised with me before the adjournment. I put to your Honour the Chief Justice, in answer to your Honour’s proposition about the effect of the contingent liability, that the case was conducted at trial on the basis that, if you like, the loss or damage or detriment to ALS was capped at the amount of the surplus proceeds. I omitted to say, that was because on 23 June 1993 Mr Carabelas entered into a deed of settlement with the bank, under which his obligations as principal debtor were released and discharged. So there were no further obligations of the guarantors. Of course, that is well before trial and, indeed, well before the pleading. The misfeasance claim was only introduced into the proceedings in March 1999.

Can I revert briefly to another matter that was raised in answer to a question from your Honour the Chief Justice. I said that there was no necessary incongruity between a criminal liability and a civil immunity. We would test that this way. We would say, assume that one has a case of a breach of duty without any anterior or antecedent consent, assuming there is consideration or a deed, and then the company enters into a release with the offending director, that would absolve the director from liability, but it would not necessarily affect the criminal liability.

Finally, your Honour the Chief Justice, raised with me the issue of interests of creditors. Can I address that by saying this. As we understand the basic underlying principle behind the unanimous shareholder consent rule, it is that stated by Chief Justice Street in Kinsela with the agreement of Justice Hope and Justice McHugh, and that was to the effect that in a solvent company, the proprietary interests of the shareholders entitle them to be regarded as the company when questions of duty of directors arise.

This Court has held that a director does not have a duty to creditors, and certainly not future creditors, but, on the other hand, they have a duty to take into account the interests of creditors where the company is insolvent or nearing insolvency. We accept that, but that is allowed for in the orthodox statement of the unanimous shareholder assent rule - - -

GLEESON CJ: What if the transaction renders the company insolvent?

MR WHITINGTON: Then I would say that would fall within the qualification and the rule would not apply to protect the offending director. I think, with respect, that is the proposition that your Honour, Justice Gummow adverted to in the case – I think it is Sycotex v Baseler, where your Honour talked about the company being insolvent or nearing insolvency, and we would say, if the transaction rendered the company insolvent, that fits within that qualification.

HAYNE J: There may be different considerations that also obtain between companies, between a company which is nothing but the owner of realty and a company which has some other business activity, trades. Perhaps other considerations intrude, perhaps they do not.

MR WHITINGTON: Yes, I would agree with that, with respect, but we would say that that would come as a matter of fact, and not a consideration which would tend to adjusting the rule as we would state it, that is, that unanimous shareholder consent, particularly prospective consent, can, if you like, waive the duty, or provide a prospective release in circumstances where the company is solvent, there are no issues of insolvency, and there is no question of minority oppression or ultra vires. Can I stress that, as we understand the rule, it in that form emanates from the decision of Lord Davies in Salomon, the concept of intra vires there is the strict concept of intra vires, meaning the powers or capacity of the company itself, as opposed to the looser sense in which expression is sometimes used relating to the authority of directors.

GLEESON CJ: I understood you to say before lunch that the case was pleaded and conducted below, on the part of the liquidator, on the basis that the misfeasance was a continuing course of conduct, involving both cumulatively the mortgage and the novation.

MR WHITINGTON: I might have put that loosely, your Honour. What I intended to say was this, that there were two alleged acts of misfeasance or two alleged breaches, but the cause of action involved the combined effect of both breaches, resulting in one set of damage, that damage being the damage caused by the novation, so to speak, of the debt represented by the surplus proceeds to the worthless companies.

GLEESON CJ: If that is so, I understood you also to say that neither the trial judge nor the Full Court made a finding on whether there was a novation.

MR WHITINGTON: Correct.

GLEESON CJ: So they decided the issue of liability, in one case, adversely to your client and, in the other case, favourably to your client, without deciding the issue of damage.

MR WHITINGTON: Your Honour, in the case of the Full Court, correct, because the Full Court said, in effect, sub silentio, “There is no need to deal with the second breach because that does not arise. In respect of the first breach, assume it is capable of arising, it does not arise because of consent”.

GLEESON CJ: If the trial judge found or did not find any novation, how did he relate the breach to the damage, having regard to what you say was the way the case was conducted?

MR WHITINGTON: With the greatest respect, your Honour, that is a very good question, and the best we can do for an answer is paragraph 74. That is all one has, page 100.

GUMMOW J: And the preceding sentence.

MR WHITINGTON: Yes. Can I repeat what I stressed earlier, that the amount that the learned trial judge finds to be the loss and damage is the amount of the original surplus. That is the amount which – can I put it very loosely – would arise in respect of the first misfeasance but not in respect of the second misfeasance, because the amount of the alleged novated debt was somewhat less, $446,000. I can do no better than that, your Honours.

I was going to take the Court through the learned trial judge’s reasons to identify the structure for the Court on this point. Very briefly, his Honour starts at paragraph 42 and then at 45 he starts to recite or recapitulate the plaintiff’s case. We would say that he is recapitulating the plaintiff’s case right through to paragraph 54, so all he has done so far is recite the plaintiff’s case. Then he sets out the relevant sections and he has an interpolation at the bottom of paragraph 55. Then he proceeds again in paragraph 57 to recite the plaintiff’s case, then from paragraph 58 he commenced to recite the defence of the defendants. There is an interpolation at paragraph 59, where he says:

Although I would prefer to treat the alleged acts of misfeasance as constituting a course of conduct, the defendants have identified four separate points of criticism –

He then goes on and deals with them, calling them step 1 through to step 4.
Then at paragraph 64 there is what appears to be a finding, but it is really only a finding in relation to the financing transaction. At paragraph 65 and following he appears to be setting out evidence which may go to the question of agency. That continues until paragraph 70, where his Honour says:

the evidence does not sustain the defendants’ contention that George had merely some subsidiary role as agent for a joint venture between a number of companies. I find that there was not a joint venture.

That is in the last sentence. Then in paragraph 71 he refers to the deed of release, but only in the context to suggest that Mr Carabelas was not an agent.

GLEESON CJ: That does not provide a discharge to Angas Law Services, according to that.

MR WHITINGTON: No, not in terms, your Honour, and it did not. Mr Carabelas was a party, and I think it says here that Blackcroft was a party. I had not appreciated that, I thought it was only Mr Carabelas. But, your Honour, it discharged and released the principal debtor, and, as a result, the guarantees, as we understand it, were discharged accordingly.

GLEESON CJ: Nothing in the mortgage document makes the person liable as a principal?

HAYNE J: A very generous bank.

MR WHITINGTON: Well, certainly, that was the way the case was conducted at trial. The guarantors were no longer - - -

HAYNE J: There seems to have been a lot of things done at trial, Mr Whitington.

MR WHITINGTON: Yes. Yes, the mortgage is in the separate documents - - -

GLEESON CJ: This is what they call a third party mortgage.

MR WHITINGTON: A third party or collateral or guarantee mortgage, yes.

GLEESON CJ: I am not sure that I have ever seen one that did not make the third party liable as a principal.

MR WHITINGTON: I am just looking for an express reservation, if the Court pleases. I thought it might be clause 26, but I do not think it is.

GUMMOW J: Clause 27?

MR WHITINGTON: Yes, it may be 27.

GLEESON CJ: There is something put in by a stamp on page 219.

MR WHITINGTON: Yes, that is a conventional clause in South Australia, your Honour, for the purpose of the Stamp Duties Act. That is what is called a collateral mortgage clause, so as to avoid the stamping on more than one security. So that is a collateral mortgage stamping clause.

GLEESON CJ: Anyway, the case seems to have been conducted in the Supreme Court of South Australia and the claim seems to have been made upon the basis that the maximum exposure, if I can use that expression, perhaps by reason of what occurred in 1993, was the $400,000-odd figure, whatever exactly that figure was.

MR WHITINGTON: Correct, your Honour, yes.

GLEESON CJ: What happened to the other companies? Were mortgages taken from them?

MR WHITINGTON: Yes.

GLEESON CJ: And was property owned by them sold?

MR WHITINGTON: Yes, by the bank, leaving, as I understand it, a deficiency. I have seen different figures, but I think one can take it that it was a deficiency of more than $1 million and it might be considerably more than that. Mr Carabelas then made a payment to the bank on account of the deficiency and obtained a release under the deed. That is as I understand the position.

Now, I was making the point that the rule itself accommodates insolvency and therefore is a reflection of the underlying basis of the rule, that is, that if the company is insolvent or nearing insolvency, it is not appropriate any longer to treat the shareholders as the exclusive owners of the company or the only parties interested in the financial well-being of the company, and, from that point, the shareholders should no longer be treated as the unfettered owners. But before one gets to that point, the rule of unanimous assent reflects the underlying principle and permits the shareholders to be treated as the economic owners of the company and, indeed, the legal owners of the company.

I wanted to say one other thing, I think, on this area generally. It relates to Macleod’s Case that my learned friend has taken the Court to. We accept that there are some superficial similarities between the provision of section 173 of the Crimes Act in issue in Macleod’s Case and section 229(4). Section 173 made it an offence, amongst other things, if a director or member of a company:

fraudulently takes, or applies, for his own use or benefit, or any use or purpose other than the use or purpose of [the] company . . . any of the property –

of the company, and section 229(4) makes it an offence for a director of a company to “make improper use of his position” as director “to gain . . . an advantage for himself” or another “or to cause detriment to the corporation”. So, it might be said that at first blush each section is drawing a distinction between a director, on the one hand, and the company, on the other, and so is creating the possibility that the director may cause offence, so to speak, to the company and therefore that division should be preserved. Therefore it should not be possible for the director to exculpate himself by consent of the company.

There is this fundamental distinction, however, and we say it turns on the legislative and the historical context of section 173. The Court found in Macleod’s Case, and I think it is in paragraph 27, that because of its particular legislative history and context, the consent of the company was to be no answer. It is paragraph 27 I have in mind, at page 239 of the joint judgment. The point we would make, and it is allied to a point I made earlier, is that section 229 springs from a different context, and it does not in its context exclude the possibility of the consent of the company as an answer to a contravention of section 229(4) – either an answer, as we would say, by waiver of the duty, or an answer by way of assertion that what was done was not improper. So we say that this case can be distinguished from Macleod’s Case.

GLEESON CJ: Well, you would have the same problem if the relevant part of 229 was subsection (1), would you not? If the true theory of this is that where consent operates to defeat a claim under 229, it does so by negating an ingredient of the offence or contravention, then Macleod would tell you that there may be few, if any, cases in which it could operate in that way in relation to 229(1)(b).

MR WHITINGTON: Well, yes, what I am attempting to do is to reconcile the unanimous shareholder assent rule with these provisions. Of course, it is a further qualification to the unanimous assent rule that there must be no dishonesty, or bad faith in the sense of dishonesty, and so it would seem that it would not be possible ever to answer a claim under section 229(1) with unanimous shareholder assent obtained in circumstances of dishonesty. So there there does appear to be a direct clash, but it is a clash which is reconcilable within the terms of the unanimous shareholder assent rule. It does not operate to protect a director where he or she has been dishonest, and that is a well recognised qualification to the rule.

One sees that, for instance, in the statement of the rule from the authorities in the decision of the Full Court of the Supreme Court in Pascoe v Lucas, which is referred to in our outline. There, Justice Lander for the Full Court refers to the qualification that the conduct must be honest, and, indeed, that was one of the points in Pascoe v Lucas. Justice Debelle at first instance had applied the rule in favour of the defendant against the company, and the plaintiff was asserting that the entire transaction was a dishonest one, because it involved the moving of funds from a subsidiary of Bond Corporation holdings to Bond Corporation holdings by back to back transactions, in contravention of not only provisions of the Corporations Law – I think the Companies Code at the time – but also in contravention of restrictive covenants in agreements between Bond Corporation holdings and its banks.

So the point was taken that the conduct was dishonest, but Justice Debelle found that the conduct of the particular director was not dishonest, and so he did not fall foul of that qualification to the rule. I simply raise that to say that that is an example of an agitation of that exception to the rule.

GLEESON CJ: Did the Full Court, in the present case, find that the mortgage was not improper because of the informed consent of the shareholders, coupled with the solvency of the company, and the novation did not happen?

MR WHITINGTON: To answer that, your Honour, I think to deal with the second part, the Full Court simply accepted that there was no novation because there had been no finding of novation below and there was no notice of contention. In relation to the first part, the Court needs to go to paragraph 59, page 143. The best I can do is to say that the answer to your Honour’s question is a little opaque, because Chief Justice Doyle rolls up the propositions without making clear the basis. I think the sense of what he is driving at is that because of the prospective assent, the antecedent assent, there was a waiver of duty and therefore no breach. But his reasoning is also susceptible of the explanation that critical elements were not made out, namely, no impropriety and no unreasonable conduct. He does not spell out the basis for his ultimate conclusion, he simply rolls it up.

GUMMOW J: Paragraph 56 has to be looked at too, “is sufficient to prevent ALS complaining”, and at the last sentence, “Also, the consent of the shareholders is relied on to cure a breach”. That is the genesis of the difficulty of 59, I think.

MR WHITINGTON: Your Honour is right.

HAYNE J: Coupled with, also in 56, “the use of company assets . . . in that sense contemplated a misappropriation”. A value-laden term, “misappropriation”.

MR WHITINGTON: Precisely, your Honour, and we do, if you like, make a fairly quiet complaint about that. We think his Honour is, in a sense, being argumentative there and likewise in paragraph 41 and also I think it is paragraph 50. If the Court would go back to paragraph 50, that has echoes of that sentence in paragraph 56.

HEYDON J: He is postulating possible arguments without necessarily making it part of any process of decision or reasoning.

MR WHITINGTON: Yes, that is right, so we think there he is being argumentative, in a sense, or positing possibilities, but, of course, in doing it that way it makes it difficult to determine whether, in paragraphs 56 and 59, he has come at the ultimate conclusion by the route of saying, “Waiver of duty”, or whether he said, “No breach because there was no impropriety or no unreasonable conduct”.

GLEESON CJ: Suppose, to take a very simple example, what had happened in the present case was that Angas Law Services Pty Ltd had permitted Mr Carabelas to occupy Angas Chambers, or whatever they were called, rent free.

MR WHITINGTON: Yes.

GLEESON CJ: Full stop, with the knowledge and consent of Mrs Carabelas, and you had to apply section 229 to that.

MR WHITINGTON: We would give the same answer, with respect. We would say that one would first ask the question, I suppose – and this is in a sense the way in which the Chief Justice proceeds – is it capable of amounting to a breach? Is that conduct capable of amounting to a breach by the director? The consent then might have one of two effects. It might relieve the director of his duty in advance, be a waiver of duty, or, put another way, it might be equivalent to the informed consent of the beneficiary, in which case, in effect, the duty does not arise in those circumstances. Or one could come at it alternatively and say that there could be no impropriety under subsection (4) because, relevantly, the shareholders were the only persons with any interest in this, and they have agreed.

GLEESON CJ: Well, there must be countless examples throughout Australia of real property, either of a domestic character or a business character, that is owned by a corporation and occupied rent free by the corporators.

MR WHITINGTON: Yes, and no issue ever arises, except possibly unless and until the company goes into a liquidation and a liquidator is appointed, or perhaps there is a change in the shareholding and the company now takes on a different form, so to speak, and, for either reason, the company then chooses to allege a breach by the directors. There may be a difference between a case of prospective assent and retrospective assent, because in the latter case there may be arguments about consideration and effectiveness of releases, but we do not have to concern ourselves with that.

Otherwise, we would say there should be no breach. Now, whether one comes at it through the concept of waiver of duty or comes at it as a matter of statutory construction, either way, the ultimate result, we say with respect, is that there should be no breach. That really is, with respect, the common sense of it, and, as I discern the Court’s reasons in R v Byrnes, that is really the effect of the broad reasoning in that case. The informed consent can mean that there is no offence, and that, of course, was a case under section 229(4).

I suppose, to put oneself in the shoes of the Chief Justice, he might say about paragraph 59 that he did not have to state the basis for his ultimate conclusion, it did not really matter how he got there, and, either way, it was sufficient for his purposes to say that there was no breach of section 229. He did not need to identify the route that he took to get there.

GLEESON CJ: But he must have had to find there was no novation. If this novation occurred, it had to be improper, did it not? This was just a discharge of a debt owed by Mr Carabelas to the company, if it happened.

MR WHITINGTON: Yes. If there had been a novation to insolvent companies, if, in effect, an effective, valuable asset of the company that is receivable from Mr Carabelas had been passed over for worthless consideration to, in my learned friend’s words, defunct companies who did not have the means to pay, that would be a different scenario. What is more, on the face of the evidence, some loss or damage would have been suffered as a result – the irrecoverability of a previously recoverable debt.

GLEESON CJ: I think it was pointed out to us that at 30 June 1990 the company was insolvent.

MR WHITINGTON: Not ALS, your Honour. My learned friend corrected that.

GLEESON CJ: The other company was insolvent?

MR WHITINGTON: The five companies to whom the debt of $446,000 was novated - - -

GLEESON CJ: At that time the land had been sold by the bank, had it not?

MR WHITINGTON: Yes.

GLEESON CJ: So the debt to the Tax Commissioner for capital gains tax had been incurred?

MR WHITINGTON: Your Honour, the finding was that the debt became due and payable on, I think, 16 March 1991, so there was the potential there for the debt to crystallise, but it had not crystallised in any assessment.

GLEESON CJ: Well, we know that the company could not afford to pay the debt when it became due, because that is why the company was wound up.

MR WHITINGTON: That is as of March 1994.

GLEESON CJ: As at 30 June 1990 the company’s only asset had been sold, apart from the debt owed to it by Mr Carabelas, is that right?

MR WHITINGTON: Correct.

GLEESON CJ: It had paid its obligations to the bank to the extent to which the bank had at that stage chosen to enforce them.

MR WHITINGTON: Yes.

GLEESON CJ: It had an asset of 400,000-odd owing to it by Mr Carabelas.

MR WHITINGTON: Correct.

GLEESON CJ: And it had incurred a tax liability as a result of a sale of its asset.

MR WHITINGTON: I would want to qualify that, your Honour, by saying circumstances had occurred which might have given rise to a tax liability.

GLEESON CJ: And it had no other relevant assets or liabilities?

MR WHITINGTON: Correct.

GLEESON CJ: Why would not a discharge by the company of Mr Carabelas’s debt to it render the company insolvent?

MR WHITINGTON: In all probability, it would.

GLEESON CJ: Right. So there cannot be any argument, can there, about whether or not, if that novation were entered into, it was improper?

MR WHITINGTON: Well, we have never – certainly, I did not, on appeal in the Full Court, put the contrary. What I put in the Full Court and I believe the court has accepted, although without explicating it, is that on the evidence and the finding, there was no novation.

GLEESON CJ: Quite. That is why I said, at least by implication, Chief Justice Doyle must have found that there was no novation.

MR WHITINGTON: With great respect, I agree with that, your Honour, yes. Perhaps he did not see the need to say so because we were not contending for a novation in the Full Court and nor was ALS.

HAYNE J: Though the absence of explicit treatment of the novation claim may – it may not – owe something to the way in which the notice of appeal and notice of contention were framed.

MR WHITINGTON: Yes, that is certainly right, your Honour. I believe – I stand to be corrected, and my learned junior will correct me on this – I believe that we erroneously complained in our notice of appeal of a finding against us of novation, but, of course, on reflection, when I conducted the appeal, I appreciated there was no finding of novation, and so that matter was not agitated. I think that is how the matter stands.

HAYNE J: Well, I would be glad if you would be more precise about that, because I cannot for the moment identify a relevant ground, other than ground 6 at page 121. As I say, no doubt omitting that - - -

MR WHITINGTON: I think it is ground 6, your Honour, at 121, where I think we pleaded a ground of appeal in error. Does your Honour have ground 6?

HAYNE J: Yes.

MR WHITINGTON: Now, I did not press that on appeal, obviously. I put the contrary, that there was no need to make that complaint because it was misconceived. So that is how the matter stood in the Full Court.

If it is convenient, can I turn to the preference claim now. Could I start with page 112 of the appeal book, paragraph 108, and the reasons of the trial judge. Now, this is the only evidence of any involvement by Mr Carabelas, or, indeed, the directors, in the so-called transactions said to give rise to preference claims. This was evidence taken on examination of Mr Vlassis and tendered at the trial. It is really the first answer and the next question and the next answer. Then it is said that this:

would have occurred, from memory, around about the time when George and the Commonwealth Bank would have agreed upon a settlement.

And that was 23 June 1993.

GLEESON CJ: But did the trial judge in the Full Court deal with the preference claims and dispose of the preference claims simply by saying there were no transactions?

MR WHITINGTON: The Full Court disposed of them on the basis there were no transactions, yes. Both the trial judge and the Full Court found that the relevant journal entries creating a round robin in three sets of entries occurred after liquidation. My learned friend said it was not an issue, but it is a common finding that the journal entries were made by Mr Vlassis, he made them without any intervention of Mr Carabelas and that Mr Carabelas did not know of the journal entry or did not know anything about the journal entry or authorise it. Critically, the journal entries were made after liquidation.

GLEESON CJ: Presumably, the liquidator came upon these entries when the books were handed over to the liquidator and, taking them at face value, claimed that they represented transactions that had occurred and that those transactions involved preferences.

MR WHITINGTON: That may be so, your Honour, although the liquidator did know that accounts were not prepared as at the date of winding up, which was, I think, 26 April 1994. I think the evidence was that he requested that accounts be prepared, then there was a debate and argument between the liquidator and Mr Carabelas as to who would pay, and then ultimately Mr Vlassis was asked to prepare the accounts with Mr Carabelas paying. So there were no accounts until then and the finding, the adamant finding, of Chief Justice Doyle in the Full Court is that the journal entries were made after liquidation.

So the only question was whether those journal entries could be said to reflect a transaction as required by the Act which antedated the liquidation on 26 April 1994. As to that, this is the only evidence that one has, at 108, page 112, and it is our respectful submission that this could not come within a bull’s roar, to put it in the vernacular, of a transaction. The accountant said to Mr Vlassis, “In connection with deregistration, we will have to see there are no assets on the balance sheet”, and Mr Carabelas said, “Do what you have to do”.

That cannot be a transaction, in our respective submission. In any event, Mr Vlassis’s statement was in terms of assets, removing assets from the balance sheet. The preference claim is in respect of removing liabilities. Mr Carabelas was a creditor of ALS in at least the total amount of the preference claims, that is, an amount of $234,000. This was a liability of ALS, not an asset. Mr Vlassis removed other assets in the form of book debts or receivables it had from other companies by a round robin of entries, which involved offsetting against the liability to Mr Carabelas.

So we say a number of things about this affair. First, this exchange could not amount to a transaction for the purposes of the Corporations Law. Secondly, it could not amount to an instruction to Mr Vlassis to effect a transaction on behalf of the company; it is simply too broad and vague. But thirdly, to the extent it does convey an instruction, it is an instruction in terms of removing assets, not eliminating liabilities, and the preference claim turns and depends upon a claim of elimination of liabilities by a tripartite netting off. If I could put it simply, ALS owe Carabelas, Carabelas owed company B, and company B owed ALS. In effect, ALS said to company B, “We will assign to you what we owe to Carabelas”, and that was then offset by a liability of company B.

The consideration for that was offset by a liability of company B to ALS, and in the books of company B it now was indebted to Carabelas as ALS had been, but it in turn, in these cases, had a debt owed by Carabelas, and those two were netted off and extinguished. So it was a classic kind of round robin and, of course, in terms of net value, ALS was no better and no worse off, because it gave up – it gave up a book debt owed to it by company B, and in turn it was discharged of a liability it owed to Carabelas, so there was no change in the net value of its assets on the balance sheet.

The Chief Justice found that there was no transaction, and he does that at page 150 at paragraphs 102 and 103. The trial judge found that the entries evidenced an underlying transaction, and this is probably best seen in his reasons at paragraph 95, also at 99 and also at 110, but he appears to have done so not because there was any evidence of any underlying transaction, but because the effect of the netting off was embodied in the final accounts prepared for the liquidator. Those accounts I do not think were ever signed by the directors, but his Honour found at 110 that they had been authorised by the directors.

He also apparently decided that there had been a transaction because of the state of the accounts and because he had invited the defendants to join the other parties to the tripartite transactions – the parties I have compendiously called company B – and they were not joined. The Full Court held that that latter consideration was not relevant, and, with respect, we endorse what the Full Court said in that regard. So there was simply no evidence, in our respectful submission, of any transaction, and, on that basis, there could not be a finding of a preference, because it is fundamental under section 588FA that there must be a transaction. The Court will see that, for instance, in the appeal book at page 114 – section 588FA – and then on the preceding page his Honour sets out the definition of “transaction” as it appeared in the Corporations Law at the time.

Just to underscore the difficulty for the liquidator in this regard, these entries in two cases were said to be effective as at 30 June 1992 and in one case at 30 June 1993. In other words, they were said to be transactions operative at earlier dates. That presented a difficulty for the liquidator, in that if they were truly transactions operative at earlier dates, and particularly at dates that preceded 23 June 1993, as they did in two cases, they fell under the old preference regime, under the Corporations Law as it was prior to 23 June 1993 – and I think the provision was section 545 of the Law – not under the present regime. Under the old regime, they could only be preferences if the transactions were effected within six months of the relation back day, and the relation back day was 19 March 1994. So in relation to the transactions said to have been effective as at 30 June 1992, they could not amount to preferences.

I simply underscore that to the Court to illuminate the tangle in which the liquidator got himself by having to assert that mere book entries after liquidation were somehow transactions, when there was no other evidence to support the notion that they were transactions.

GLEESON CJ: How did the trial judge deal with this issue?

MR WHITINGTON: Again, somewhat elliptically, but perhaps it is best seen at paragraphs 109 and following, starting at page 112. First of all, his Honour says that:

the journal entries made by Mr Vlassis are evidence of transactions to which the defendants are parties.

Then he simply asserts in paragraph 110 in the first sentence:

The journal entries are evidence of transactions which occurred before the winding up of ALS commenced.

He does not say what the evidence of the transactions is. At its highest - - -

HAYNE J: Or does his Honour more particularly date them?

MR WHITINGTON: No, he does not. He simply finds that the entries themselves were made after 26 June - - -

HEYDON J: The 23^rd, I think.

MR WHITINGTON: I am sorry, 23 June 1993. That is the entries, but otherwise he does not date the transactions, no, and that is why I perhaps went into that somewhat overlong explanation of the difficulties for the liquidator in respect of the timing, because the liquidator himself did not ever identify really the substance of these transactions or when they took place. The evidence, in our submission, rises no higher in respect of a potential transaction than the evidence I have taken the Court to in paragraph 108. That is a discussion after 23 June 1993 and I have taken the Court to that. His Honour’s reasons continue at paragraph 110, as I have said, and then in paragraph 111 he simply says he finds that the allegations of preference are proved.

In effect, it seems his Honour’s reasoning was to deem there to be transactions because the accounts prepared for the liquidator and presented to the liquidator in the name of the directors embodied the effect of journal entries undertaken by Mr Vlassis on his own account. Since they were in those financial statements, his Honour said there must be transactions.

HAYNE J: The pleaded case against you was, as appears from page 10, paragraph 28, that the transaction was on or after 23 June 1993. See also page 14, paragraph 36, but contrast page 16, paragraph 45, which seems to specify the date only as “During the financial year”.

MR WHITINGTON: Yes, that is right, and can I explain the reason for that, your Honour. As we discern it, your Honours will notice that in paragraph 28 that your Honour Justice Hayne has directed me to and the other paragraph 36, but particularly paragraph 28, the Court will see that it was first pleaded that it happened during the financial year ending June 1992, and then it was pleaded that it happened at some time after 1 July 1991.

The difficulty for the liquidator in both those allegations was that if that was when the transaction occurred, it fell within the old preference regime under section 545 of the Corporation Law as it was, and for it to be a preference, it had to have been effected within 6 months before the relation back day, that is, within 6 months before, I think it is, 16 March 1994. Now, clearly, on the basis of the pleading as it originally stood there could not have been preferences. The liquidator discerned that and he then changed his case and said it took place on or after 23 June 1993. That date has two significances, but, critically, it is the date of the commencement of the new preference regime. Under the new preference regime, where the preference is between related parties, the relation back day is, I think, four years, and the Court will see that in the reasons of the learned trial judge at page 114, section 588FE, at about line 50.

Now, I do not say all of this has any greater significance than to demonstrate that the liquidator was in difficulty in identifying a transaction, and this exemplifies that. He was in difficulty because there was no transaction, there were only book entries and accounts made after liquidation. His Honour the trial judge seems to have proceeded on the basis that because there were accounts, they had been put in the name of the directors and they reflected Mr Vlassis’ netting off, therefore he would deem there to have been a transaction. That appears to be his reasoning. It is not entirely clear, but we think that is how he has gone about it.

As I have said, if I might just repeat it, to the extent that his Honour gets any comfort from the evidence, it is that exchange at 108, but to the extent there was any authority at all given to Mr Vlassis, it was to remove assets, and what was removed here was liabilities, not assets.

HEYDON J: I think you mean 112.

MR WHITINGTON: Yes, 112 of the appeal book, I am sorry, in paragraph 108. They are the only matters I wanted to deal with on the preference question. Can I deal with two incidental matters very briefly. First of all, I need to correct a couple of things in our outline. The first error is footnote 15, page 7. We refer to the Brick and Pipe Case in the Australian Companies and Securities Reports. I apologise, we should have referred to it in the authorised report. The reference is [1992] VicRp 68; [1992] 2 VR 279 at 314 to 318. Might I note that the Full Court dealt with that part of Justice Orminston’s reasons in one sense at page 369, saying they did not have to address the issue.

The second error, if I might correct it, is in paragraphs 31 and 34.2. This might be self-evident, but we refer to our own “paragraph 19 above”. That should be “paragraph 18 above”. That was a typographical error. I think they are the two matters I wanted to correct.

Finally, there is the somewhat vexed matter of our notice of contention, which is in the appeal book at page 161, which was filed out of time. There is an affidavit explaining that and a motion seeking an extension. In a sense, there is not a lot of issue in it. I would not want to press the matters in paragraph 2, 3 or 4.

GLEESON CJ: In relation to paragraph 1, you have concurrent findings against you, have you not?

MR WHITINGTON: It is really the matter referred to at point (a). That takes us back to paragraph 41 of the reasons of the Chief Justice. All I want to say about that is this. If the Court would go to paragraph 41 at page 137, the Chief Justice starts by saying this:

It was open to the Judge to find, as he did –

and can I interpolate, that is at paragraph 70 and 71 of the judge’s reasons –

that the suggest arrangement did not exist –

and I pause there. We have no complaint with that. That is what the trial judge found that is the concurrent finding of the Full Court. His Honour goes on:

and accordingly that in granting the mortgage to secure any advances made by CBA to Mr Carabelas, and in paying to CBA the full amount of the net proceeds of sale of the Angas St property, the directors permitted Mr Carabelas to make improper use of his position to gain an advantage for himself or for another company, this being to the detriment of ALS.

Now, I pause there. The passage starting “and accordingly”, we would submit, can only be his Honour the Chief Justice’s interpolation, because the trial judge does not make a finding in those terms. Our concern really is with the last clause in paragraph 41, “this being to the detriment of ALS”, because – and I have agitated this point before – there is no finding that up to the point of the grant of the mortgage, or, indeed, up to the point of the sale of the property and the application of the surplus proceeds, there is no finding that that by itself was of detriment to ALS.

This is the exchange we have had before about the value of Mr Carabelas’s obligation to the company. It was never suggested in these proceedings – and, indeed, the contrary was asserted on special leave – it was never asserted that up to the point where ALS had a debt due from Mr Carabelas, it suffered any detriment by virtue of that debt.

GLEESON CJ: Just a minute. As a result of entering into the mortgage transaction, ALS incurred a contingent liability of $2.5 million. Right?

MR WHITINGTON: Yes.

GLEESON CJ: At that stage, ALS had an asset worth about $900,000 and it had a debt to the Hindmarsh Building Society of $400,000-odd. Right?

MR WHITINGTON: Which was discharged, yes.

GLEESON CJ: At that stage, it had an asset worth $900,000 and a debt of about $400,000 to the Hindmarsh Building Society before it entered into the transaction, and all it did was replace a borrowing from the bank. Now, there is no evidence, as I understand it, of any business that was being carried on by ALS? No evidence of any rental income it was receiving from Mr Carabelas for his occupancy of the premises?

MR WHITINGTON: I think there is, your Honour, yes. There was evidence from Mr Carabelas that it was receiving rental income, and that appears in the revenue statement in the accounts.

GLEESON CJ: The question I wanted to ask you is this. What was the benefit, if any, that was received by ALS in return for undertaking a contingent liability of $2.5 million?

MR WHITINGTON: I will deflect it for a moment and say that is not entirely my complaint about that last clause, but to the extent there was any benefit, your Honour, I could only say, first, it was the securing of the alternative finance – and I appreciate it would be put against me that that was only in substitution for the - - -

GLEESON CJ: I am not asking this question in relation to the point you will ask on, because I am going to ask you a question about 229(2).

MR WHITINGTON: Yes.

GLEESON CJ: You have a transaction in which ALS incurs a contingent liability of $2.5 million and, so far as I can see at the moment, gets no benefit at all. My question to you is, how does that involve an exercise of a reasonable degree of care and diligence on the part of the directors who committed the company to that transaction?

MR WHITINGTON: One has to see, your Honour, the transaction in the overall context.

GLEESON CJ: That is what I was getting at when I asked about the relations with Mr Carabelas. What is the overall context once you get rid of this agency theory?

MR WHITINGTON: The overall context, your Honour, is that the bank provided a facility to permit advances to him which he was intending to use to advance to single purpose companies.

GLEESON CJ: But not to ALS?

MR WHITINGTON: Well, only to ALS to replace - - -

GLEESON CJ: Because the bank wanted a first mortgage over the property.

MR WHITINGTON: Yes.

GLEESON CJ: So he was going to do whatever was necessary to get rid of the Hindmarsh loan and replace it with a mortgage to the bank.

MR WHITINGTON: Yes, I accept all that, your Honour.

GLEESON CJ: But ALS gets no benefit out of that.

MR WHITINGTON: No, I was seeking to put something a little differently. I was simply seeking to put that that is not, of course, the same as saying it suffers a detriment. I appreciate your Honour is putting to me what is its benefit - - -

GLEESON CJ: But its detriment is a contingent liability of $2.5 million.

MR WHITINGTON: With respect, one cannot stop there, because there were a number of co-guarantors and there were rights of contribution, so, in effect, by virtue of the aggregation or the collection of collateral mortgages, in economic terms, one had a pooling of the resources of all the companies to meet the principal debt under the guarantees, and rights between the respective guarantors in equity to contribution equal to their share of the overall borrowing. When I say, “their share”, by that I mean the amount of the overall borrowing which had been passed on to them by on-lending from Mr Carabelas.

GLEESON CJ: We know, with the benefit of hindsight and the events that have happened, as a result of the transaction, ALS lost its equity in the building.

MR WHITINGTON: Yes.

GLEESON CJ: It had an equity in the building worth about $450,000.

MR WHITINGTON: Yes.

GLEESON CJ: And that went.

MR WHITINGTON: But, your Honour, judging it at the time of the transaction, and bearing in mind the existence of other guarantees then given and to be given and the pool of assets, and bearing in mind that the assessment of the bank and no doubt the directors was that the pool of assets in value well exceeded the liability, then ALS had a valuable right of contribution, or potential right of contribution, against the other companies and their assets in the event the guarantee was called in. So, you see, that is why we say you cannot look at it on a stand-alone basis. This is, in a sense, a group transaction, even if not a joint venture, because there were a number of companies, each with their own property, each giving a guarantee mortgage, with the money being funnelled down from the bank through Mr Carabelas and distributed to them.

Now, in practical economic terms, at the time of the borrowing from the bank, the aggregate worth of those companies exceeded the amount of the borrowing from the bank. That was the bank’s assessment. That was why they lent. As between the companies themselves, if any had to pay more than its rateable proportion under a guarantee, then things would equalise, if I can use that analogy. The guarantor who had to pay could draw on, so to speak, the equity of the other guarantors to meet the amount of its excess payment. In a sense, that is the way Mr Vlassis saw it and reflected it in this correcting entry, GJ10.

GLEESON CJ: Do we see any reasoning of the primary judge or the Full Court on that approach to the question?

MR WHITINGTON: No, we do not.

HAYNE J: And has the case hitherto been conducted solely by reference to principles of agency without regard to whatever consequence, perhaps no consequence, that would follow from the obligations as between guarantors, were they to be called on?

MR WHITINGTON: I am told by my learned junior that at trial he raised the concept of contribution, but I think it would seem fair to say from the trial judge’s reasons that he took the primary focus to be on a joint venture, an agency, and I would have to concede that must have been the emphasis of the case. That was the frontline defence and that is what appears in the written defence. I accept there is no assertion in the written defence of the concept of co-guarantors and contribution.

GLEESON CJ: You may have a combination of two circumstances contributed to by both sides. You have a defendant who is trying to defend the case on the basis of this agency theory, which is irrelevant to that, and you have a plaintiff who is attacking the transaction on the basis that the loss is the $450,000, with the result that nobody is looking at the transaction in the terms that I just put to you.

MR WHITINGTON: With respect, I think that is right. In fairness to my learned junior at trial, as I understand it, he did raise for the consideration of the learned trial judge the notion of contribution between guarantors, but, of course, only in reflex, so to speak, to the claim that the loss was the amount of the surplus distributed. It is another way of justifying Mr Vlassis’s correcting entry.

HAYNE J: Nobody, I suspect, at trial, looking at what would have been the balance sheet, if account had been taken on the one side of the contingent liability to the bank of the whole of the credit facility made available, two and a half, and on the other side perhaps, the value of rights as against co-guarantors.

MR WHITINGTON: That is right, your Honour. In other words, I do not believe anybody did the exercise of pooling the assets, pooling the liabilities and then making an adjustment between the companies of their pro rata share. Can I just say one other thing - - -

HAYNE J: But seeing it through only the spectacles of agency may unduly confine the field of view.

MR WHITINGTON: I have no doubt that is right, your Honour. Can I say this for consideration, and I think it might contradict something the Chief Justice has put to me, but I say this tentatively. I would have thought that the critical guarantee obligation was not the amount of the facility limit but the amount actually drawn down under it, which was somewhat less, I think, at least in the first instance, an amount of $1.75 million. The point may be academic, because I think it was an all-moneys mortgage, and with interest and so on the debt extended considerably beyond 2.2.

HAYNE J: Three weeks later it was up at limit and beyond.

MR WHITINGTON: I think so, yes. My learned friend says something about 3 million. I have seen that figure. It did, as I understand it.

GUMMOW J: What do you say about your opponent’s foreshadowed application to amend?

MR GRIFFITH: Your Honours, I do have one here.

MR WHITINGTON: Can I say immediately, in a sense, we are relaxed about it. We are not sure this is the appropriate forum for that.

GUMMOW J: Indeed.

MR WHITINGTON: That is a matter that ought to be remitted to the Supreme Court.

GUMMOW J: Yes, I would have thought so.

MR WHITINGTON: But we will meet that amendment when it comes. All we say is, it comes very late in the day. A huge amount of costs have been burnt. Bear in mind this case was all about $25,000 to the Tax Commissioner. My client suffered a judgment for well over $1 million, then there are costs on top. One might think that, ordinarily, all the money would come back to him and his wife because - - -

GLEESON CJ: I thought it would all go to the bank.

MR WHITINGTON: No, no, there is nothing to go to the bank.

GLEESON CJ: Because of the compromise?

MR WHITINGTON: It all goes to my clients as the shareholders. So this tiny molehill of $25,000 has grown into a massive mountain, but, of course, there is a huge leakage on the way because now - - -

GLEESON CJ: The liquidator.

MR WHITINGTON: The liquidator. What, as I say, was an irritation - - -

GLEESON CJ: And the legal profession.

MR WHITINGTON: And the legal profession.

GLEESON CJ: Which is money never wasted.

MR WHITINGTON: I do not think my client would – perhaps in this exceptional case, he might want to complain about that. Given that he is a legal practitioner, ordinarily, he would not. The irony of this case is that everything should come back to my clients except for $25,000, subject to what will be a massive leakage to the liquidator for fees and disbursements.

GLEESON CJ: It is not merely an irony, it is also an exemplification of part of the sense behind the informed consent of shareholders principle. It shows why the principle exists, to the extent to which it does apply.

MR WHITINGTON: Yes. So that was a long-winded way of saying that if and when an amendment is made, there are a number of things we will want to say about it, going to the lateness of it and going to the way in which the case has been conducted hitherto and issues of Anshun estoppel and so on and time bars.

GLEESON CJ: If a proper response to any amendment would be to remit it because, for example, as you say, there are other debits and credits in the loan account that we have not even looked at, such as the contribution to the cost of furnishings, then it may be the only reason Dr Griffith would need an amendment would be to protect himself again an Anshun argument.

MR WHITINGTON: If this Court is minded to entertain an application and to give leave, we would wish to submit it should be on terms that it is subject to any defence that we might wish to raise against it. I would have in mind, for instance, an Anshun defence and a time bar defence.

GLEESON CJ: An Anshun defence would not run if he got leave to amend, would it?

MR WHITINGTON: An Anshun defence is normally taken as a defence - - -

HEYDON J: But it cannot be taken in the very proceedings in which an amendment is allowed to the statement of claim. It is only in a second set of proceedings.

MR WHITINGTON: I am indebted to your Honour. In that event, I would ask that this matter be remitted to the Supreme Court so that if an application is to be made, we would have a fair opportunity to oppose the amendment on an Anshun ground - - -

HEYDON J: You could not do it if the amendment is made in these proceedings. There might be other grounds, but it would not be the doctrine enunciated by this Court in the Anshun Case.

MR WHITINGTON: No, but it may be that we could resist the amendment, could we not, on the ground of an Anshun estoppel?

HEYDON J: I do not think so. You could resist it on lots of grounds, which I leave to you to think up, but not that one.

MR WHITINGTON: Well, I am thinking on the run here somewhat. I would want it to fully protect our position, because there are a number of matters we would want to raise in opposition to any ultimate determination against us.

GLEESON CJ: I think we understand that.

MR WHITINGTON: If the Court pleases.

GLEESON CJ: I think you only have to give the example of what you said about the money said to be owing for the furnishing of the premises to make the point.

MR WHITINGTON: Yes, and also there is, of course, the preference matter. If the Court is against us on preferences, then those credits come back into our loan account. That is a further example.

GLEESON CJ: Anyway, we have the comfort of knowing that subject to what you describe as the leakages, which we think we understand, and subject to the $25,000 owing to the Tax Commissioner, Dr Griffith is fighting this case for the benefit of Mr Carabelas.

MR WHITINGTON: Mr Carabelas does not find that any comfort anymore, I am afraid. If the Court pleases.

GUMMOW J: But the result would be, on this hypothesis that we are thinking about, that we would be dismissing the appeal but reserving this possibility of amendment.

MR WHITINGTON: Yes.

GUMMOW J: And send it back for that possibility, if it was to be utilised.

MR WHITINGTON: Yes. If the Court pleases, they are our submissions.

GLEESON CJ: Thank you. Yes, Dr Griffith.

MR GRIFFITH: I am indebted to your Honour for the Chief Justice’s last remark to my learned friend, otherwise, I take your Honour as regarding my intervention in this case as a “leakage”.

HAYNE J: Do not lead with your chin, Dr Griffith.

MR GRIFFITH: Thank you, your Honour. Your Honours, with respect to the issue of “improper” in subsection (4), “improper use of his position”, we would regard the statement of four of their Honours in R v Byrnes, referred to by my learned friend, 183 CLR - - -

GUMMOW J: Yet another South Australian case.

MR GRIFFITH: It seems these sort of things happen in South Australia.

GUMMOW J: Yes.

MR GRIFFITH: Many things happen there. The Ring is produced three times, your Honour. Can I take your Honours, without reading, to parts, again, that have been referred to, under the heading “Improper use of position” at about point 7 on page 513, 183 CLR, over to page 515. We regard those statements as apt to support our propositions with respect to the issue of “improper”.

Your Honours, in addition to Walker v Wimborne which we have already taken your Honours to on this question of group activities, where we would say – well, not group activities, your Honour, with respect, to “improper” there, may we also give a citation to the decision of the Court of Appeal, which was not on our list, Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] 1 Ch 246. We put that citation forward to support the proposition that if there is no real commercial benefit for this particular company, then the directors should be regarded as in breach of their fiduciary duty, notwithstanding some benefits for the group.

There is a useful discussion of this issue, your Honours, in an article which we will deliver to the Court by Jeanne Ciliers, which is published in (2001) 13 AJCR 109. In particular, your Honour, the author makes reference to this issue on intra group transactions and commercial benefit on pages 113 to 114 - - -

GLEESON CJ: This really is an issue of large importance in commercial transactions, but the evidence bearing upon the way in which you would analyse this in that context in this case is about as sparse as it is possible to imagine.

MR GRIFFITH: Your Honour, we say my friend’s foothold was very sparse because this is not a case, we say, of a group or related companies in the sense that was enlarged upon by his Honour Justice Mason. We have a series of disparate companies, which are run for the benefit of the two persons who are the common directors and shareholders. It is not a group relationship as that have been expressed and has been endorsed by the description of that concept by his Honour Justice Mason. That is our first point. Our second point - - -

HAYNE J: It is not a group of holdings and subsidiaries as defined in the Code or later in the Law. That I understand, but is there not a grouping to be made because of the identity of corporator and ultimately the interests being united?

MR GRIFFITH: Your Honours, we say no ungrouping. We say there is a grouping of individual investments made by Mr Carabelas, arranged for his own purposes in the way that he did. Our second point with respect to this issue is that we say the basic principle is that the directors still have a duty to have regard to their particular company, and it is not an answer to say, “Well, this was a benefit to the grouping”, however that is expressed.

GLEESON CJ: But if they had regard to the particular company in this case, they would have to also have regard, would they not, to the rights of contribution that would exist between co-guarantors?

MR GRIFFITH: Yes, your Honour. In this case, it was not so much a matter of co-guarantor. Each mortgage was a guarantee mortgage, a separate mortgage. It stood on its own. It did not refer to the other mortgages.

GLEESON CJ: Did they have rights of contribution?

MR GRIFFITH: Only ones which would arise by reason of the equities, one would suppose, in the event that one could make a claim on it. The mortgages on the face do not cross-reference to the other mortgages.

GUMMOW J: No, but they have the same principal debtor, have they not?

MR GRIFFITH: They have the same principal debtor, yes. One would expect that rights of contribution would arise, not because there is any particular covenant between them. There was no relationship between these companies other than - - -

GUMMOW J: It does not matter.

MR GRIFFITH: It may well be, your Honour, if you paid on a guarantee you could issue proceedings, but, of course, in this case one has a good example of the consequence of such an ephemeral right. All the companies were insolvent from the time any exposure to liability arose.

GLEESON CJ: Is that right?

MR GRIFFITH: From 1990, your Honour.

GLEESON CJ: Yes, but at the time of the mortgage the bank made an assessment that the combined assets of these companies substantially exceeded the combined liability they were undertaking.

MR GRIFFITH: Including Mr Carabelas’s assets, his individual assets. Everything went in the pot.

GLEESON CJ: There would be rights of contribution against him, would there not?

MR GRIFFITH: Presumably, there would, your Honour, under ordinary principles, but not because of any particular covenant. It was a simple guarantee mortgage for the entire sum which, of course, your Honour, was as may be owing from time to time. I think it went to above $3.5 million at one stage.

GLEESON CJ: Was Mr Carabelas the only occupant of the building that was owned by Angas Law Services?

MR GRIFFITH: I do not think so, your Honour, but I am not sure of that.

HEYDON J: There is some evidence about this, I think, on pages 62 and 66. There were a number of other tenants.

MR GRIFFITH: I am indebted to your Honour. I think there was a restaurant there.

HEYDON J: Yes, there was at least a restaurant and I think there were some other places at some times. They became vacant later.

MR GRIFFITH: And there is evidence of the amount of rent that was being received in the bank documents at the time of the assessment of the loan.

GLEESON CJ: I have an impression – this will have to be checked – that having regard to the way the case was pleaded and conducted on both sides, nobody ever really analysed the problem in these terms.

MR GRIFFITH: Yes, your Honour, that could be said.

HAYNE J: The realty offered as security was, so far as these additional documents reveal, given a banker’s valuation of 3.67.

MR GRIFFITH: Yes, whatever that meant in the heady times of 1988, your Honour. I would wish, your Honour, a bank manager would write me up as a useful prospect the same way he wrote up the business he expected to get from this relationship with a practising lawyer.

Your Honours, we are indebted to Justice Hayne’s reference to paragraph 6 of the ground of appeal at page 121 of the appeal book. My learned friend made the point after your Honour’s reference to say, “Oh well, as I came in the case, then I abandoned it”, but, with respect, we would put forward the existence of that ground, challenging the finding of novation, as covering the point raised by your Honour Justice Heydon as to whether or not it was appropriate for the respondents to the appeal to put in a notice of cross-contention with respect to whether or not there should have been a finding of novation. We would submit that if the ground of appeal is the finding was wrong, that would suffice for the party to take the issue that that was an issue before the court.

Your Honours, my learned friend has sought to explain the position of Mr Carabelas in the courts below that the document GJ10 reflected correctly the position with respect to the accounts so far as any indebtedness of Mr Carabelas should be shown, or of his companies, on the basis that he was contending at both levels that there was not effective agency. That was an argument that was unsuccessful before the primary judge and unsuccessful on appeal.

In our submission, your Honour, the fact that one then has a finding that that argument was unsuccessful and was incorrect at law, that in itself would constitute a basis for asserting that in that situation, the position which was put forward in those accounts and promoted by Mr Carabelas in his argument at both levels is one which exposes an incorrect position to derive an advantage for him, we would say improperly, as much as would the case – which he denies, but we postulate, your Honour – that there was a novation.

In both cases, the effect of presenting the accounts in this way, which Mr Carabelas was asserting was correct on the basis of his unsuccessful agency argument, is to show that Mr Carabelas is not liable for the debt, but these insolvent companies – insolvent as at 30 June 1990 – are responsible. So, with respect, we would contend that one gets to exactly the same position with respect to the analysis of the situation of the accounts as at 30 June 1990, which your Honours have.

I should indicate, your Honour, in full explanation that the accounts for the year 30 June 1989 in fact are the accounts noted at tab 11 on page 3, not produced, and that the accounts for the year ending 30 June 1991, including 1990, are the accounts at tab 19, noted on page 3 of the appeal book, and not reproduced. One picks that up, your Honour, from page 93 of the appeal book, paragraph 48.

GLEESON CJ: Can I ask you about your application to amend. What is the amount of the debt you wish to claim?

MR GRIFFITH: Your Honour, can I hand your Honours a copy of it, typed quickly, but in the English language.

GLEESON CJ: Thank you.

MR GRIFFITH: Before taking your Honours to the text, I should indicate that in no court down below was the defence or argument made for Mr Carabelas that the answer to the contentions made with respect to the breach of duty constituting the making of the mortgage and the reconstitution of the accounts as at 30 June 1990 was that he remained personally liable, as distinct from his wife, for the sum of $446,710, being the net proceeds of the sale after taking into account the amount of the loan advanced by Mr Carabelas for the purpose of discharging the Hindmarsh mortgage.

GLEESON CJ: Against the possibility that it is thought relevant to your application to amend and a possible remittor, is your opponent right when he says that apart from legal and accounting expenses and the debt of $25,000 approximately owed to the Commissioner of Taxation, any other funds that the company has will be paid to Mr Carabelas?

MR GRIFFITH: In outline, I understand the position is yes, your Honour, to that question, but, of course, we have that leakage sum that your Honour referred to.

Your Honours, it is relevant, we submit, both to the question of whether the simple amendment should be allowed, dealt with by this Court, and also will be relevant on the question of costs, should that become an issue, that this position asserted that the defence put by Mr Carabelas to this claim based on section 229 and its breach, “I owe the same sum for another reason”, is one that should be censoriously dealt with, we submit, having been raised for the first time at the special leave level as an answer to the claim, and which has been observed in argument today would have been one which would have been of no consequence had there been just one further paragraph as an alternative pleading in the statement of claim, which could have been introduced at any time, firstly, if there had been perfect foresight by the pleader, secondly, if at any time, even up to the close of argument or the giving of judgment in the Full Court, it was contended that the answer is, if the agency argument is not successful, there can be no liability on the basis pleaded because Mr Carabelas remained directly liable for the debt.

One could have made the pleading, your Honour, on the principles enunciated by this Court, by application to amend at any time, at both the level, we would submit, of the primary judge and also on the appeal court. Now, it is our submission that it is appropriate for this Court to exercise the jurisdiction and not merely remit the matter for further consideration arising from my learned friend’s plain submissions to this Court that having abandoned agency, his position in answer to this claim for breach of section 229 in consequent measure of damages is that his client is, has been and always has been, at material times, liable for the sum of at least $446,710.31 to be debited to his loan account.

Your Honours, we would accept that on that debit being made, it would be appropriate to have a taking of accounts with respect to the state of that loan account. One can see from the two accounts presented to the Court that that loan account varied for reasons additional by entries to those of the fact that the indebtedness Mr Carabelas was taken out in the accounts pursuant to the journal entry, GJ12.

Our submission is, your Honour, with that concession from my learned friend, it remains appropriate in the interests of administration of justice for the Court to permit us now to make the amendment sought by asserting a new paragraph, 24AA, as at appeal book page 7 in the terms of the two lines we propose, to insert in the prayer for relief a new paragraph, B1, and in that circumstance, your Honour, we would say that if the orders of the Court are resolved on the basis assumed by the circumstances of that amendment, a definitive order, an appropriate order, can be made in the terms of those set out in inserting a new paragraph, page 6, in our notice of appeal.

So, your Honours, we would wish to press those amendments as appropriate to be made in the unusual circumstances of this appeal, that we have at the level of the High Court for the first time an admission of liability as to the quantum claimed, with the technical argument – technical upon technical – relying upon pleading points and close analysis and parsing of the judgment at first instance and the Chief Justice of Appeal, asserting that “Yes, but the particular aspect of novation on which you pleaded it is not something which is successful in the result. We owed it all the time for another reason”.

Now, one would expect that situation to have been exposed in a proper pleading of defence. It certainly should have been exposed, we would contend, at the level of the Full Court. So for that reason, your Honours, we say that it would not be appropriate, if that is what the case comes to, merely to remit the matter to a primary court or to the Full Court to deal with this issue. This Court is capable of disposing of that issue in a way which does justice between the parties.

Your Honours, with respect to the issue of what was decided at the courts down below, we contend that each of Justice Williams and the Chief Justice made specific findings, firstly, in detail by Justice Williams and, secondly, by acceptance by the Chief Justice of the findings of breach which otherwise were held at both levels of the court to exist, save for the possibility of the application of the doctrines relating to assumed unanimous consent of the two directors and shareholders.

One can pick that up from the judgment of Justice Williams at page 92, paragraph 48; page 94, paragraph 52; page 96, paragraph 59; and page 100 at paragraph 74. In that last reference, your Honour, one sees Justice Williams, certainly, we say implicitly, rejecting the “four steps” argument made in paragraph 60 to 63 on page 96, arising from the agency argument that is there set out in detail.

At page 144 at paragraph 64, his Honour the Chief Justice finds that they are separate breaches. We have set out in our written submissions, with reference and small citations, your Honour, because of the Chief Justice’s judgment, from paragraph 6 on page 7 of our contentions to paragraph 11 on the foot of page 8, which we say constitute explicit findings by the Chief Justice that there were breaches, and there would have been a consequence of liability for those breaches, save for the reasoning which is encapsulated in his Honour’s judgment at paragraph 59.

GUMMOW J: This case seems to have gone for 14 days, about.

GLEESON CJ: At first instance.

GUMMOW J: Yes.

MR GRIFFITH: The answer is yes, your Honour.

GLEESON CJ: Well, if Mr Carabelas had paid $25,000 to the Commissioner of Taxation, it would have been money well spent.

MR GRIFFITH: It would have been, yes, your Honour, without leakage. If it had been known that his answer was, “I owe them money, the principal sum, for different reasons”, one would suppose we would not be here either, but this is where we discover these things, your Honours. We know the cost of the consequences of being there.

Your Honours, my learned friend referred to Chief Justice Street in Kinsela as exposing the relevant principles. With respect to Sir Laurence, we would submit that his Honour’s view is somewhat more generous to the capacity of shareholders to deal with the assets of a company when they act together than is the applicable principle, particularly having regard to the statutory requirements as they now exist.

Our position is that for the reasons stated, there are two breaches, that there are cumulative breaches. We submit that on the issue of damages it is no consequence that one can refer, as my learned friend refers, to the fact that the damages are consistent with the higher amount that would have been ordered were just the first breach constituted. I think my learned friend was inviting your Honours to imply from that that his Honour the Chief Justice did not find the second breach. I have given your Honours citations as to where he explicitly did that.

Your Honours, the position is that if we were successful down below on both the first and second breaches, then the measure of damages would be the higher measure. So we say Justice Williams was quite right to take the higher measure. There was no need for him to say, “Well, on the second breach on which you were successful, you would have got a bit less”. With respect, we put that to your Honour Justice Heydon as answering the question your Honour made to me this morning as to which was the appropriate sum.

We say nothing can be implied from the fact that that was a sum at issue for my learned friend to mount an argument that it is plain that the Chief Justice was taking a particular view. We say it is plain from what the Chief Justice did that he stopped at the level of the first breach and did not consider the second breach. The issue of the damages themselves, we say, is a matter of no implication so far as the issues determined by the court were concerned.

If I could turn to the question of the preference payment, our notice of appeal makes clear that our complaint is that his Honour the Chief Justice said there was no evidence. We refer in the penultimate part of our contentions and also in our reply to the circumstances that prior to the making of these entries, on which it was common ground, your Honours, they were made after the commencement of the winding up, there was a business advantage in Mr Carabelas to establish that the position stated with respect to those preference payments was in place.

GLEESON CJ: Is the evidence that which appears on page 112?

MR GRIFFITH: Yes, your Honour. The matters we refer to are those which we refer to in our submissions on page 14. That is what we rely on to say it is not a “no evidence” case. We say for his Honour the Chief Justice to say “no evidence” is incorrect because there is sufficient evidence to show that it was to the advantage of Mr Carabelas in his dealings with the Commonwealth Bank to be in the position to swear an affidavit that these companies had no assets. One might question, your Honour, the legitimacy of instructions to an accountant to say, “We want you to clear the decks so these companies can be struck off as having no assets as defunct companies. Please do whatever book entries you have to do” – the expression in the evidence, I think, of Mr Carabelas said “Do what you have to do” – “to get that result”.

On the face of things, that does not seem to be a legitimate instruction to be made by a person who is a common director of all those companies and the controlling person with respect to them. It is a matter of saying, “Do whatever book entries you like to net off” – and the expression “net off” was that used by Mr Vlassis. Your Honours, the evidence is that that was an instruction which was given to enable Mr Vlassis to go to the bank to say the companies were all worthless. He swore a statutory declaration 26 March 1993 to say the companies were being deregistered. They could only be deregistered, rather than wound up, if they were defunct with no assets.

That was a matter of commercial advantage of Mr Carabelas at the time, because he was negotiating with the bank to obtain what might be regarded by an unsophisticated barrister as a spectacular result of having the banker forgive $2.25 million of a loan, given as a personal loan by way of overdraft and bills, on a security which has entirely failed, and in circumstances, your Honour, where, as a consequence of that release, Mr Carabelas has just submitted to the Court that apart from $25,000 any surplus is his. That is because the Commonwealth Bank took a haircut of $2.5 million. It otherwise would have been first in the queue.

So, your Honours, perhaps it is not a net $2.25 million. I think my learned friend said it might have been less than $1 million. Whatever it is, the bank suffered a significant loss in this matter. That is why Mr Carabelas can say, “I am entitled to any surplus”. We say that the matters of fact that we refer to in paragraphs 39 and 40, and refer to quickly in our submissions in reply, suffice to enable the Court to say the finding of Justice Williams is one which can be maintained and will survive an assault on a “no evidence” finding. The Chief Justice just said, “No evidence”. We say, your Honours, there is evidence, and, what is more, there are natural inferences that can lead to that evidence.

HEYDON J: The last two sentences of your submissions in reply say:

It is undisputed that the entries were made after winding-up. The finding, correctly made by the primary judge, was that they were entries reflecting transactions entered into at an earlier time.

Now, if there is nothing more than “Do what has to be done”, there are no transactions. There are just marks on pieces of paper called company books.

MR GRIFFITH: The difficulty is, your Honours, if one takes that view, there is nothing at all. One has a result that one has signed off accounts showing a position on the taking of an account which do not mean anything at all. This is the stuff of windings-up, your Honour. There is a statutory duty on the directors to keep accurate accounts when companies are not being wound up, and, when they are wound up, to produce and verify the accounts at the commencement of the winding up. That is their obligation to do that. With respect, we say that the result of that discharge of statutory obligation should be regarded as having forensic effect and should here be regarded as corroborated, because the matters shown in those accounts had a beneficial, financial effect for Mr Carabelas prior to the winding up, when he is negotiating the circumstances.

GLEESON CJ: That is one reason why people like to have companies struck off as distinct from wound up, because, like bankruptcy, winding up can produce all sorts of offences, including offences relating to keeping the books.

MR GRIFFITH: Yes, your Honour, with respect, we agree, and we say that it is quite clear from Mr Vlassis’ evidence that that course was taken. The instruction was, “Do whatever you have to do to get to that result”, and we say there is evidence that that was something implemented, so far as Mr Carabelas was concerned, prior to the winding up as part of his process of clearing the decks with the bank and obtaining the release which he obtained on that settlement, that very favourable release. It is not strong, we accept, but it is something, and we say, your Honour, on this ground, we merely have to show that there is something rather than nothing. His Honour said, “No evidence”, we say, doing his best, Justice Williams, having heard the case for 14 days, was justified in taking the view that something was done. For that reason, we maintain there was an error in the Full Court judgment with respect to the preference issue.

Your Honours, we do strongly maintain our submission that the amendment should be made in the simple form proposed at this Court, because of the circumstances that it is only at this level one has obtained the admission. Otherwise, your Honours, one might find the opening words of Bleak House are still alive within some jurisdictions within Australia. We are not saying in this Court, your Honours, but what a bleak result, with the years of litigation in this matter over issues of novation, close pleading, one would have thought would have been given up in common law and equity well before the federation of Australia, being greeted at this level, the answer to all this, “There is nothing in the novation argument, because nothing happened. I have been liable for the full amount of the entire time”. If the Court pleases.

GLEESON CJ: Thank you.

MR WHITINGTON: Would the Court hear me briefly on one matter? My learned friend said, no doubt innocently but in error, that the preference
entries were made as part of the process of clearing the decks with the bank and obtaining the release.

MR GRIFFITH: I did not intend to put it like that, your Honour. I was referring to evidence that that result that was reflected was one - - -

GLEESON CJ: I am still interested in what Mr Whitington has to say.

MR GRIFFITH: I am sorry.

MR WHITINGTON: Your Honour, there was no evidence that the preference netting off had anything to do with the bank. At the time that the release was obtained from the bank, the bank was told that there were these receivables as they stood before the netting off, but the bank was also told then correctly that the receivables were worthless, because they were owed by companies that could not pay them. The netting off took place a year later, after the winding up. So it had nothing to do with the bank or the bank release. If the Court pleases.

GLEESON CJ: Very well. We will reserve our decision in this matter, and we will adjourn until 10 o’clock tomorrow morning.

AT 4.11 PM THE MATTER WAS ADJOURNED