Playcorp Pty Ltd v Shaw and Others

(1993) 10 ACSR 212

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(Judgment by: Hedigan J)

Playcorp Pty Ltd
v.Shaw and Others

Court:

Judge:
Hedigan J

Case References:
Dey v Victorian Railways Commissioners - (1949) 78 CLR 62
Tampion v Anderson - [1973] VR 321
General Steel Industries Inc v Commissioner for Railways - (1964) 112 CLR 125
Murragong Nominees Pty Ltd v Permewan Wright Consolidated Pty Ltd - [1985] VR 293
Morley v Statewide Tobacco Services Ltd - (1992) 8 ACSR 305
Anaray Pty Ltd v Sydney Futures Exchange Ltd - (1988) 6 ACLC 271
Markwell Bros v CPN Diesels (Qld) Pty Ltd - (1982) 7 ACLR 425
Corporate Affairs Commission v Drysdale - (1978) 22 ALR 161; 3 ACLR 760

Hearing date: 19 March 1993
Judgment date: 25 March 1993

Melbourne

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Judgment by:
Hedigan J

The plaintiff has brought this proceeding in the Commercial List of this court against nine defendants. It has discontinued against the fourth defendant. The plaintiff claims that it sold goods to Venture Stores (Retailers) Pty Ltd (VSR) and was not paid for them. VSR had entered into a scheme of arrangement with its creditors pursuant to an order of this court made on 3 April 1992. Shortly afterwards, the ANZ Banking Group Ltd (ANZ) appointed a receiver and manager on 8 July 1992 pursuant to its powers under a registered debenture charge of 9 July 1991. It is now in liquidation.

The first eight defendants are alleged to have been directors of VSR between 1 May 1991 and 9 January 1992, the relevant period of the supply of goods. The ninth defendant was a director from 1 May 1992 to 29 November 1991.

The plaintiff's allegation is that at the time the debts were incurred there were reasonable grounds to expect VSR would not be able to pay all of its debts including these debts as and when they became due. It therefore contends that the defendants are jointly and severally liable to the plaintiff for payment of the debts pursuant to s 592 of the Corporations Law.

The seventh defendant Mr K Biggins has made application for summary judgment in his favour, asking that the plaintiff's claim be dismissed against him, either pursuant to r 23.03 or pursuant to the inherent jurisdiction of the court. The legal requirements to succeed on such an application are not in dispute. The seventh defendant must show that that plaintiff's claim against him cannot succeed, that it is ''absolutely hopeless'': cf Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 90, per Dixon J. See also Tampion v Anderson [1973] VR 321 and General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125 at 129-30. Great care must be exercised in using this power lest the plaintiff be improperly deprived of its opportunity to have its case tried.

Rule 23 formally expresses the inherent jurisdiction of the court to deal with claims that are frivolous and vexatious. Part of the policy underlying both sources of power is to spare defendants from the costs, strain and vexation of fundamentally futile proceedings.

This application is not an attack on the pleading, but is an application supported by evidence going to matters outside the pleading. This procedure is permitted in Victoria, both under r 23 and its predecessor O 14A. If the appropriate facts are established and the legal criteria met, the court may give summary judgment for the defendant. See Murragong Nominees Pty Ltd v Permewan Wright Consolidated Pty Ltd [1985] VR 293.

The seventh defendant's application is made by summons dated 15 February 1993 and relies on two affidavits, his own sworn on 24 November 1992 and the affidavit of his solicitor, Ms Whiting, sworn 16 February 1992.

Mr Biggins' affidavit states that during the relevant period he was a consultant to Foster's Brewing Group Ltd (FBG). He was a director of it until September of 1992. In his affidavit he states that ''at some time'' he was appointed as an alternate director for Kenneth Jarrett who was a director of VSR. He cannot recall either being appointed nor the date of that appointment. Jarrett was a consultant to Elders' Finance Group Ltd (Elders) which was a subsidiary of FBG.

Biggins states that he had never received any papers of any meeting of the board of VSR, was not called upon to act as an alternate director of VSR and has never attended any meeting of the board of VSR, nor any management meeting. He states that he has never had any involvement in the control, management or day-to-day activities of VSR.

He was a member, however, of an FBG committee which managed some FBG and Elders' assets and investments. Elders had an interest in either VSR or a VSR-related company. At some monthly committee meetings, Jarrett reported on the state of Elders' investment in VSR. Other than that, Biggins deposes that he had no involvement in the Venture Group. There was no answering material filed on behalf of the plaintiff, nor did the plaintiff seek to cross-examine either deponent.

Ms Whiting's affidavit is of little significance, primarily describing events which passed between solicitors. However one exhibit is sought to be relied on, a letter from the plaintiff's solicitors stating that the claim against the seventh defendant would be discontinued if each party bore its own costs. This proposal was presumably unacceptable.

The parties are agreed that the issue here is whether or not, on the facts which are described and which are the only facts, the plaintiff's case against the seventh defendant is unsustainable on the basis that there is no evidence from which it might be inferred that the seventh defendant impliedly authorised or consented to the incurring of the debts. It is common ground that there is no express authority or consent.

Indeed, there is no evidence that any debts were incurred at all as the plaintiff has not filed material verifying the facts alleged in the statement of claim. However, counsel for the seventh defendant did not found any part of his application on that basis and I treat the application as being made with that assumption made in the plaintiff's favour. The real point at issue is whether the cases concerning implied authority to incur debts extend to make an alternate director, absent because he was never called upon to perform any director's powers or functions, liable under s 592. Naturally, some attention was paid to the decision of the Full Court of this court in Morley v Statewide Tobacco Services Ltd (1992) 8 ACSR 305. The Full Court in Morley approved the conclusion of Ormiston J at first instance that the relevant authority for the purposes of s 556(a), the section there under consideration, may be acquired from a director or other person taking part in the management of the company who participates in the giving of authority to incur liability, whether that authority is given expressly or whether it is to be implied. In that case, it was beyond doubt that Mrs Morley had conferred the relevant authority. But Mrs Morley was a director, and was obliged to participate in the management of the company affairs. She did not do so, delegating her function to her son and authorising him, a fellow director, to incur debts. She also held the majority of the shares and thereby the power of control, including dismissal.

Here, however, the question really is a threshold one -- can Mr Biggins be liable because he is an alternate director even though he was never called upon to act?

Morley is the binding law in Victoria in this troubled area. There is little to be gained by traversing the Australia-wide authorities that litter the legal landscape fashioned by s 592 and its predecessors, and which have bedevilled judges at first instance and on appeal for some time past. Until such time as the High Court of Australia pronounces to the contrary, Morley is the applicable law in Victoria. However Morley provides no definite answer to this question, as it did not consider, either within the rubric of implied authority by an active director or authority deriving from the possession of the office of director, the possible liability of an alternate director.

There can be no doubt on the defendant Biggins' affidavit that the debts were not incurred with his actual authority. The strength of his case, as put by Mr J Peters who appeared for him, derives not only from his absence both from the board table and managerial function, but from his total detachment from the company's affairs as a consequence of never being called upon to act. The argument was that having no power or authority to insist upon a role of responsibility, why should he be responsible, absent the power to insist upon the right to exercise a director's function and/or its actual performance? It is, it was contended, impossible to conclude that in such circumstances he had reasonable cause to expect that the company was insolvent (s 592(2)(b)). This, it was contended, conferred on him a defence that was bound to succeed so that the proceeding therefore ought to be dismissed.

Mr M Wyles, for the plaintiff, submitted that the contention that the seventh defendant had no reasonable cause to expect that VSR was insolvent was not open at this stage because of Biggins' role in reviewing, through the FBG committee, the Venture performance. He also submitted that the point here, that is, concerning the passive alternate director, had not yet been decided. As a natural consequence, he said, the contention was not hopeless, was open to argument and might succeed as the evidence of and concerning Biggins' knowledge and role was not yet in.

It seems to me fundamental to appreciate that whatever the seventh defendant's knowledge, he had no power until he had assumed directorial authority. The policy behind the legislation as thought to apply through Morley and the cases it applied is to visit responsibility on those who fail to exercise within reasonable bounds the duties that the occupation of the office, or the assumption of powers and duties, commands.

Even if Biggins had knowledge, what authority did he have to exercise it, unless as an alternate director he was entitled to attend and ought to have attended board meetings? In those circumstances I turn then to what the articles of association provided in respect of alternate directors.

Article 93 of the VSR's articles of association, which applied from 19 September 1989 is in the following form.

ALTERNATES

93. Any Director may from time to time appoint any person approved for the purpose by the Director to act as his Alternate Director during his absence from the place where the meetings are held or inability for any other reason to act as such Director and all such appointments being made the Alternate Director shall (except as regards remuneration) be subject in all respects of the terms and conditions existing with reference to the other Directors and each Alternate Director while so acting shall exercise and discharge all the powers and duties of the director he represents and shall alone be responsible to the Company for his own acts and defaults. A director may at any time revoke the appointment of any Alternate Director appointed by him and if for any reason such a Director shall cease to be a Director then the person appointed by him shall thereupon cease to have any power or authority as Alternate Director. An Alternate Director shall look for his remuneration to the Director appointing him and not the company but shall be entitled to be paid such reasonable travelling hotel and other expenses as may be incurred by him in consequence of his attendance at meetings of the Directors or of the Company or while otherwise engaged on the authorised business of the Company. Any appointment or revocation under this article shall be effected by notice in writing given to the company. An Alternate Director shall not require any share qualification.

This article appears to me to justify the following observations:

(a)

any director may appoint an alternate director if the other directors approve;

(b)

that director is appointed to act as alternate director only during the appointing director's absence or inability to attend meetings;

(c)

on the appointment being made the alternate director is subject to the terms and conditions which apply to other directors, except remuneration;

(d)

each alternate director while so acting (my emphasis) shall exercise and discharge the powers and duty of the director he represents and he alone is responsible to the company for his acts and defaults;

(e)

the alternate looks to his appointor for remuneration for his work;

(f)

appointment or revocation of appointment of an alternate is effected by giving notice; and

(g)

the alternate does not have to hold shares in the company.

It may be that this article contemplates successive appointments of an alternate but in my judgment it is apt to effect an ongoing appointment which crystallises only when the described events occur, that is, the appointment does not empower the alternate to act unless the other director is absent or unable to act. The alternate does not exercise any power or have any duty to exercise power until he is called upon to fulfil the role empowered by the appointment in accordance with the article. Once he assumes the active function of the absent or incapacitated appointor, however brief the period, he is fully liable as a director in the period for acts and defaults during that period.

There is little helpful authority and textual commentary is sparse. Ford's Principles of Company Law, 5th ed, [1429] refers to the position of alternate director generally. The author states that any article deeming the alternate director to be the agent or the appointor could not save the alternate from liability for failing to perform duties imposed upon the director by legislation. The learned author suggests that an alternate director would have to exercise an active discretion in order to comply with the obligation imposed by s 229(1) of the Code, implying that an alternate would not be performing duties by following directions of the appointor. In Anaray Pty Ltd v Sydney Futures Exchange Ltd (1988) 6 ACLC 271 at 275 (SC(NSW)) Foster J expressed the view that an alternate director was obliged to act in every sense as a director of the company at the director's meeting he attended, (my emphasis), and not merely as his appointor's agent. In Markwell Bros v CPN Diesels (Qld) Pty Ltd (1982) 7 ACLR 425, Thomas J briefly considered the status of an alternate director saying that they were directors within the meanings of the Companies Act and are in the eyes of the law in the same position as any other director and as such were subject to the normal duties which a director owes to his company, referring to Corporate Affairs Commission v Drysdale (1978) 22 ALR 161 ; 3 ACLR 760. It is to be noted, however, that Thomas J stated that an alternate would have no legal status when his appointor was present. See too Palmer, 24th ed, para 60-40 and Gower, 5th ed, 143. I note that Ormiston J in Morley, in a passage approved by the Full Court, described the authority in s 556(a) as being an ''authority given as a matter of fact by a director either as an executive director or as a participating member (my emphasis) of the board of directors''.

In the circumstances of this case, it seems to me unnecessary to pursue the issue here further. Having regard to the evidence that Mr Biggins never received any papers, was never asked to attend and never did attend, and having regard to the inference which I draw that his appointor, Mr Jarrett, the third defendant, did attend the meetings and acted as a director, I conclude, by reason of the terms of art 93, that the seventh defendant was not entitled or empowered to act as a director and never did. Even if he had some knowledge of the insolvency of VSR (which I do not find as a fact) such knowledge was of no legal significance as he was not entitled to exercise directorial powers or assume directorial responsibilities. I should not be taken, however, as being thought to pronounce upon the powers and duties of alternates beyond the circumstances established by the uncontradicted material in this case.

Conscious of the burden that lies on the applicant, I have nevertheless, in the whole of the circumstances, reached the conclusion that the plaintiff could not succeed in its claim against the seventh defendant on the facts established. There is no evidence that he ever acted as a director of VSR. Accordingly I accede to the application and order that the proceeding by the plaintiff against the seventh defendant be dismissed.

I will hear counsel on the question of costs.