FEDERAL COURT OF AUSTRALIA Porteous v Donnelly (Trustee), in the matter of Hancock (Bankrupt) [2002] FCA 862 BANKRUPTCY – proof of debt admitted by Trustee in Bankruptcy – application to expunge proof of debt - debt resulting from bankrupt's breach of fiduciary duty – second respondent's purchase of share - alleged overvaluation – vendor of share was de facto director of second respondent at time of sale EQUITY – fiduciary duty of de facto director CORPORATIONS – whether overvalued share purchase ratified by company – exoneration CORPORATIONS LAW – s1318 Bankruptcy Act 1966 (Cth) s 82(1), s 82(2) Corporations Law s 1318 St Aubyn v Attorney-General [1952] AC 15, referred to Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, followed Castlemaine Tooheys v Carlton & United Breweries Ltd (1987) 10 NSWLR 468, considered Permanent Building Society v Wheeler (1994) 14 ACSR 109, referred to Abeles v PA Holdings Pty Ltd (2000) NSWSC 1008, (2000)18 ACLC 867, referred to Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666, referred to ROSEMARIE PORTEOUS v MAX CHRISTOPHER DONNELLY (AS TRUSTEE OF THE ESTATE OF THE LATE LANGLEY GEORGE HANCOCK, A BANKRUPT) & ANOR N 8328 of 1999 STONE J 8 JULY 2002 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 8328 OF 1999 BETWEEN: ROSEMARIE PORTEOUS APPLICANT AND: MAX CHRISTOPHER DONNELLY (as Trustee of the Estate of the late Langley George Hancock, a Bankrupt) FIRST RESPONDENT THE HANCOCK FAMILY MEMORIAL FOUNDATION LIMITED ACN 008 499 312 SECOND RESPONDENT JUDGE: STONE J DATE OF ORDER: 8 JULY 2002 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondents'costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 8328 OF 1999 BETWEEN: ROSEMARIE PORTEOUS APPLICANT AND: MAX CHRISTOPHER DONNELLY (as Trustee of the Estate of the late Langley George Hancock, a Bankrupt) FIRST RESPONDENT THE HANCOCK FAMILY MEMORIAL FOUNDATION LIMITED ACN 008 499 312 SECOND RESPONDENT JUDGE: STONE J DATE: 8 JULY 2002 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 Langley George Hancock ("Mr Hancock") died on 27 March 1992. On 8 April 1999, a judge of this Court ordered that the estate of Mr Hancock be administered under Part XI of the Bankruptcy Act 1966 (Cth) ("Act") and that the first respondent be appointed as trustee ("Trustee"). Mr Hancock's widow, the applicant in this proceeding, seeks to expunge a proof of debt lodged by the second respondent,The Hancock Family Memorial Foundation Limited ("HFMF") on 4 August 1999 and subsequently admitted by the Trustee. The alleged debt arose from a transaction in 1991 in which Mr Hancock sold his Life Governor's Share in Hancock Prospecting Pty Ltd ("HPPL") to HFMF for $20 million. The respondents allege that at the time of the sale the Life Governor's Share was worth, at the most, only $16,733.33. They allege that at the time of the sale the directors of HFMF were accustomed to act in accordance with Mr Hancock's instructions. They submit that, as Mr Hancock was in effective control of the company, he was a de facto director and consequently owed fiduciary duties to HFMF. It is alleged that, in breach of those duties, Mr Hancock caused HFMF to purchase the Life Governor's Share at a very substantial overvalue. Relying on s 82(1) and s 82(2) of the Act they claim that the consequential liability of Mr Hancock to compensate HFMF is a provable debt. 2 The applicant accepted that at the relevant time, Mr Hancock was in control of HFMF. She submits that there was no breach of fiduciary duty in him causing HFMF to purchase the Life Governor's Share and that the proof of debt should be expunged. She submits that $20 million was a fair and proper price for the share to be transferred to HFMF. It was, she contends, calculated in accordance with the advice of Mr Hancock's legal and accounting advisors and was commercially reasonable. The effect of the sale was to strip the Life Governor's Share of its extraordinary rights of control over HPPL and convert it to an ordinary share so from that time there ceased to be a shareholder exercising the Life Governor's control over HPPL. It is submitted that as HFMF was a major shareholder in HPPL, the extinguishment of those rights of control was a substantial benefit. 3 The applicant also submits that the sale of the Life Governor's Share was an alternative to Mr Hancock causing HFMF to make distributions directly in his favour as he could lawfully have done. On that basis it is submitted that HFMF did not suffer any loss or damage as a result of entering into the transaction. The applicant also submits that even if Mr Hancock was in breach of a duty owed to HFMF, the company assented to the purchase of the Life Governor's Share and this was ratified by the members of HFMF. Alternatively, it is submitted, Mr Hancock (and consequently his estate) should be exonerated of all liability under the provisions of the Corporations Law. background 4 In order to understand the circumstances surrounding the sale of the Life Governor's Share to HFMF it is necessary to understand some aspects of Mr Hancock's customary financial arrangements and, in particular the circumstances of an earlier sale to HFMF of shares that Mr Hancock held in HPPL. Mr Hancock was in the habit of drawing funds for personal expenses by way of loan from his companies. In 1988, Mr Hancock had accumulated substantial debts to HFMF. In order to enable Mr Hancock to draw more money from HFMF and to avoid the risk of the loans (present and past) being taxed as income, it was decided to sell some HPPL shares to HFMF. This decision was also alleged to be pursuant to an agreement made between Mr Hancock and his daughter, Mrs Rinehart. The plan was for the purchase price to be credited to Mr Hancock's loan account with HFMF and thus discharge his indebtedness in a tax effective way. It was also envisaged that Mr Hancock would be able to discharge his indebtedness to other companies in the Hancock group as a result of the sale. As a result, on 24 February 1989 Mr Hancock sold to HFMF for $23.2 million his one-third shareholding in HPPL, consisting of class A, C and Cumulative Special ("CS") shares but not including his Life Governor's Share. This sale is discussed in detail below at [26] 5 By 1991 Mr Hancock had accumulated further debts to HFMF and to Dinari Pty Ltd as trustee of the HPPL Pension Fund. It was decided to sell the Life Governor's Share to HFMF to enable Mr Hancock's indebtedness to be reduced in a tax effective manner. The sale would provide a book entry in the amount of $20 million and put Mr Hancock's loan account with HFMF in credit. Other avenues of reducing Mr Hancock's debt were considered but rejected as more likely to attract an obligation for Mr Hancock to pay tax. The Life Governor's Share was sold to HFMF on 7 August 1991. This sale is discussed in detail below at [35]. HANCOCK companies and their shareholding 6 It is also necessary to understand something of the structure of the Hancock group of companies, the extent to which they were controlled by Mr Hancock and the means by which he was able to exercise this control. The relevant companies are HPPL, HFMF and Zamoever Pty Ltd ("Zamoever"). HPPL 7 HPPL was incorporated in 1955. Its main source of income, which at the relevant time was very substantial, appears to have been the payment of royalties arising from the exploitation of iron ore deposits discovered by Mr Hancock in the Pilbara area of Western Australia. The initial issued capital was one Life Governor's Share issued to Mr Hancock and one A class share issued to Mrs Hope Hancock. The rights attached to the Life Governor's Share are described at [11] below. In May 1956, HPPL issued a number of A, B and C class shares, one-third to Mr Hancock, one-third to Mrs Hope Hancock and one-third to their daughter Gina Hancock, now Mrs Rinehart. In 1970 significant amendments were made to the articles of association including: · the insertion of article 3B which provided that if HPPL Share Number 2, originally an A class share held by Mrs Hope Hancock, were to be transferred to Mr Hancock, it should be known as Life Governor's Share Number 2 and, if Mr Hancock should dispose of the original Life Governor's Share, then Life Governor's Share Number 2 would have the same rights and privileges as the original Life Governor's Share. · the insertion of article 3C which provided that on transfer from Mr Hancock, the original Life Governor's Share was to be classified as an A class share. · the creation of a special class of shares, known as cumulative special shares, the incidents of which are described below at [12]. 8 HPPL Share Number 2 passed to Mr Hancock on the death of Mrs Hope Hancock in 1983. At the time of the sale of the Life Governor's Share to HFMF, Mr Hancock was the registered holder of Life Governor's Share Number 2. Under article 3B, once ownership of the first Life Governor's Share was transferred to HFMF, the second Life Governor's Share acquired the rights and privileges that previously attached to the original Life Governor's Share. 9 Article 124 of HPPL's articles of association deals with general dividend rights and provides that: "Subject to the rights of the holders of shares with special or preferential rights or conditions attached thereto any dividends hereunder may be declared: - (i) on one or more classes of shares to the exclusion of other classes; (ii) At different rates on different classes of shares; (iii) And for dividend purposes the Life Governor's Share shall be treated as a separate class of share." 10 Article 124 was subject to two provisos to the effect that the right to declare dividends in terms of (i) and (ii) above could only be exercised if approved by a resolution passed and approved by the holders of not less than 70% of the votes on all shares and that, in the absence of any such resolution all dividends were to be declared and paid on and according to the nominal amounts of the shares issued and held in the company. These provisos were removed by a special resolution passed at an extraordinary general meeting of HPPL held on 8 December 1988. The effect of their removal was that discriminating dividends could be declared by ordinary resolution. The Life Governor's Share 11 The rights attached to the Life Governor's Share are set out in Clause 53 of the memorandum of association of HPPL which states: "The "Life Governors Share" whilst the founder is the registered holder of or entitled to such share shall have attached to it and confer upon the holder (except during any period whilst the holder may be lunatic or of unsound mind or incapable of managing his affairs, or through illness is incapable of performing the functions of a director) the rights qualities and privileges following that is to say:- (a) the right for the holder at any time by notice in writing to the company to take office as a Director and to hold such office so long as he chooses and at any time by notice in writing to the company to resign and at any time to take office again as aforesaid and whilst holding such office to be chairman of the Board and to exercise all the powers authorities and discretions vested in the directors generally and all the other Directors if any, for the time being of the company, shall be under his control and shall be bound to conform to his directions in regard to the company's business. (b) the right for the holder from time to time and at any time by notice in writing to the company to appoint any other persons to be directors of the company and to define limit and restrict their powers and to fix and determine their remuneration and duties and by notice in writing to the company at any time to remove any director howsoever appointed. (c) the right whether the holder is or is not a director for the holder to attend and vote either in person or by proxy at all meetings of the directors of the company, and to have due notice of all such Meetings but any proxy must be appointed in writing under the hand of the appointor. (d) the right at any time to convene a general meeting (e) the right in respect of the life Governors Share at every general meeting and on every poll to 76 out of every 100 votes cast. (f) the right at any time to take up any unissued shares in the original capital of the company. (g) the right to have this article 53 so far as it relates to the Life Governors Share remain unaltered except with the previous consent in writing of the holder. (h) the right quality or privileges that it shall not be extinguished on a reduction of the Capital of the company without the consent in writing of the holder. The rights qualities and privileges attached to the Life Governors Share or conferred upon the holder shall be fundamental and shall not be altered varied abrogated or diminished except with the previous consent in writing of the holder. When the Life Governors Share has ceased to be held by the Founder such share shall thence-forth rank as and become an ordinary share." Cumulative special shares in HPPL 12 The class of shares known as shares was created by amendment to the articles of association in 1970. The CS shares comprised 999 shares numbered 2001 - 2333, 4001 - 4333 and 7001 - 7333. CS shares have special rights and privileges attached to them including special dividend rights that are triggered by the first transfer by way of sale. These shares rank for dividends and for a return of capital on winding up of the company in priority to all other shares. Article 3A(C)(4) provides that the CS shares: "entitle the holders to retain all or any of the rights and privileges attached to the said [CS] shares notwithstanding any voting or other rights granted to the Life Governor … and such rights and privileges shall be varied modified annulled abrogated or dealt with only – (1) with the consent in writing of the holders of at least three quarters of the said [CS] shares, or (2) by a resolution passed by a majority of not less than three quarters of the shareholders present in person or by proxy at a separate general meeting of the holders of the said shares…" HFMF 13 HFMF was incorporated in 1972 as a company limited by guarantee. As such it has members rather than shareholders. The company was originally established to receive dividends without incurring an obligation to pay tax. There were also advantages in relation to death duties and the remission of Australian currency overseas. Paragraph 5 of the HFMF memorandum of association states: "5. The company shall not be carried on for the purpose of profit or gain to its individual members and is prohibited from making any distribution whether in money property or otherwise to its members or to relatives of its members." 14 By about 1986, with the introduction of dividend imputation, the taxation advantages of diverting dividends to HFMF no longer applied. In 1986, the company amended its memorandum of association by adding mining and other commercial activities to the objects of the company. From that time HFMF also had several wholly owned subsidiaries. These subsidiaries had mining tenements that they exploited in various ways, particularly in trading with Eastern bloc countries. In 1991, a further amendment was made to the company's memorandum of association, allowing HFMF, subject to paragraph 5, to make gifts to any person, including "former members of the Company and their relatives" by means of money or other property or other assistances. 15 Articles 9, 10 and 11 of HFMF's articles of association are relevant. They provide: "9. The Company may in general meeting at any time and without assigning any reason therefor terminate the membership of any member of the Company and remove his name from the Register of Members. 10. Membership of the Company shall not be transferable and, if not previously terminated, shall terminate on death. 11. A person who from any cause whatsoever ceases to be a member of the Company shall not have any claim monetary or otherwise upon the Company, its funds or property." 16 Initially there were four classes of members, A, B, C and D, each member of which had voting rights as follows: Class A – 15 votes; Class B – 15 votes but only if there were no class A members; Class C – 15 votes but only if there were no class A or class B members; Class D – one vote. 17 Until he resigned his membership on 22 December 1989, Mr Hancock was the only A class member. Between that date and March 1992 there was no A class member and Zamoever Pty Ltd ("Zamoever") was the only B class member. There were no C class members and only five class D members, H.S. Winter, D.C. McKenna, D.V. Salt, H. Burolo and M. Dastlik. The applicant alleged that all the class D members were nominees of Mr Hancock and acted in accordance with his instructions. Nevertheless, as can be seen from the voting rights set out in [16] above Zamoever controlled HFMF and, indirectly, whoever controlled Zamoever could control HFMF. 18 The prohibition in paragraph 5 of HFMF's articles prohibiting gifts to members and "relatives" of those members was long seen as an obstacle to Mr Hancock taking funds out of HFMF. In 1990, Mr C.R. Fieldhouse, who at all relevant times was Mr Hancock's solicitor, briefed counsel (Mr Bennett QC and Mr Burton) to advise in relation to a specific proposal for the distribution of certain capital profits that HFMF expected to receive. The proposal was to establish a trust for "impoverished members of Mr Hancock's family". It is not necessary here to consider generally the nature of that proposal or the whole of counsels' advice on the matter. Some aspects, however of that advice are pertinent. Counsels' letter of advice dated 2 July 1990 states that: "We are also instructed that the essential matter for consideration is whether any proposed distribution offends the criminal law. Civil consequences are, we understand, less relevant as we are instructed that Mr Hancock is in fact the only person with control over [HFMF]." [emphasis added] 19 Consistent with that instruction, in their joint advice counsel considered some provisions of the Companies Act 1981 (Cth) breach of which might involve criminal sanctions and concluded that the proposal under consideration would not breach that legislation provided that the proposal fell within one of the stated objects of HFMF. They noted that, so long as Mr Hancock was a member of HFMF, the class of Mr Hancock's family could be seen as overlapping with the class of "relatives" of a member. They agreed, however, that a solution to this problem proposed by Mr Fieldhouse would be effective: "The solution which has been suggested to us is that Mr Hancock may resign, under Article 8, as a member of [HFMF], maintaining effective control though the membership of Zamoever Pty. Ltd, whose voting rights would then be activated and be preponderant (see Article 3). … Unless the corporate veil is to be totally wrenched asunder, Mr. Hancock's control of Zamoever Pty. Ltd. would not, in our view, make him a 'member' of [HFMF] for the purposes of the entrenched prohibition. Although the matter is not conclusively settled, the better view is that a member of a company limited by guarantee may resign his or her membership and cease to be liable on the guarantee on the anniversary of his or her resignation." [emphasis added] 20 It is clear from this advice that those advising Mr Hancock accepted that he would continue to control HFMF through his control of Zamoever. It is puzzling that this advice is premised on Mr Hancock being at that time (2 July 1990) a member of HFMF while the register of HFMF shows that he resigned as a member on 22 December 1989. The difficulty is compounded by a "Further advice concerning distributions" from the same counsel dated 23 May 1990 (that is prior to the advice of 2 July) which refers to the "earlier" joint advice and comments on a draft amendment to HFMF's memorandum of association. 21 On cross-examination Mr Fieldhouse agreed with the suggestion that one could be confident that on 23 May 1990, Mr Hancock was a member of HFMF but stated that he had no clear recollection of the events. In particular he was not able to explain why the letter to HFMF from Mr Hancock resigning his membership was dated 22 December 1989. Mr Fieldhouse strongly asserted that it was never his practice to backdate documents. In cross-examination Mr Fieldhouse denied that the twelve-month period referred to by Counsel had anything to do with the dating of Mr Hancock's resignation. Zamoever Pty Ltd 22 Zamoever was a shelf company acquired by Mr Hancock in 1989. During the relevant period there were only two issued shares in Zamoever, one of which was held by Mr Hancock. The second share was held was held in trust for him, initially by Mr Fieldhouse.. Subsequently it was held by Mr Harold Clough and then by Mr D.V. Salt, both acting as bare trustees for Mr Hancock. As a result during his lifetime, Mr Hancock had control of Zamoever. HFMF alleged that, pursuant to an agreement made in June 1988 (see [24] below), Zamoever's membership in HFMF was held for the benefit of Mrs Rinehart's children. 23 According to Mr Fieldhouse, Zamoever was acquired to become a B class member of HFMF so that, on the death of Mr Hancock as the only A class member, Zamoever would then be in control of HFMF. In fact, as indicated in [17] above, Mr Hancock resigned his membership of HFMF on 22 December 1989 and, as a result, Zamoever became the top-ranking member in HFMF. Mr Fieldhouse agreed that the reason Mr Hancock resigned his membership of HFMF was so that distributions from the company could be made to him personally. agreement of 22 June 1988 24 When Mrs Hope Hancock died in April 1983 her one-third shareholding in HPPL passed to Mr Hancock. Despite this there appears to have been some dispute between Mr Hancock Mrs Rinehart as to the proper disposition of these shares given longstanding family expectations. This dispute was resolved by an agreement made between them in June 1988 ("June 1988 agreement"). The June 1988 agreement was evidenced by a hand written document and signed by Mr Hancock and Mrs Rinehart. In early drafts of submissions in this matter, suggestions were made that the terms of the June 1988 agreement were partly written and partly oral. Prior to the hearing of this matter Counsel for HFMF unequivocally stated that he did not intend to rely on anything other than the terms of the agreement that are in writing and signed by Mr Hancock and Mrs Rinehart. He specifically said that his client was not advocating or contending that there were any terms to the agreement other than appear in the written document. 25 The first provision of the June 1988 agreement was that Mr Hancock was to retain his Life Governor's Share "to give him continued complete control over HPPL until his death". Mr Hancock was to establish two trusts, the Hope Hancock Trust ("HH Trust") and the Hope Margaret Hancock Trust ("HMH Trust"). The beneficiaries of the HH Trust were to be Mrs Rinehart's four children. The trustees were to be Mr Hancock during his lifetime and then Mrs Rinehart. Mr Hancock agreed that when probate of the will of Mrs Hope Hancock was granted and her one-third shareholding in HPPL was transferred to him, he would transfer those shares to the HMH Trust by way of gift. This transfer was effected on 27 December 1988. 26 Under the agreement Mr Hancock was to sell his one-third shareholding in HPPL to HFMF for "a price of about $12 - 16 million to be set by the auditors Coopers and Lybrand". Mr Hancock was to use part of the funds realised from the sale of these shares to discharge debts incurred by family members. The balance was to be available to Mr Hancock for private purposes but he was only to take out the balance of the funds after all the debt had been repaid. The agreement also provided that absolute control over HFMF would pass to Mrs Rinehart's children when the youngest reached the age of 25 years. 27 The agreement summarises the position of Mrs Rinehart and Mr Hancock as affected by its terms: "8. On the completion of these steps [Mrs Rinehart's] position will be as follows: Prior to the death of [Mr Hancock] [Mrs Rinehart] will hold one third of the special cumulative shares entitling her to dividends but no votes. She will also be entitled to such income from the Hope Margaret Hancock Trust as [Mr Hancock] determines. On the death of [Mr Hancock] Special CumulativeShares Present Special Cumulative Share entitlement 33.3% Entitlement to special cumulative shares from the HMH Trust 17.7% [Mrs Rinehart's] total special cumulative share entitlement on the death of [Mr Hancock] . 51.0% 9. As [Mr Hancock's] Life Governor's share loses its controlling rights on his death [Mrs Rinehart] will be in a position to control the company from that time onwards. 10. So far as [Mr Hancock] is concerned he will retain control over 33.3% of the ordinary voting shares and special cumulative shares held by [HFMF] because of his control over [HFMF]. He will also control the 331/3 % of the voting and 33.3% of the special cumulative shares held in the Hope Margaret Hancock Trust of which he is the sole Trustee. He will also hold his life governor's share with its overall control." 28 Clause 2 of the agreement states that Mr Hancock and Mrs Rinehart "will immediately enter into a legally binding agreement" on the terms of the hand written document. At the end of the document, immediately above the signatures of Mr Hancock and Mrs Rinehart, the following typed words appear: "we agree to the above entirely and intend to be so bound, and accordingly we instruct that the necessary legal steps now be taken to implement this plan of 22 June 1988 without further delay." It is not necessary for present purposes to determine if the June 1988 agreement created legally binding obligations. It is clear from the evidence of Mr Fieldhouse that following the agreement with Mrs Rinehart, Mr Hancock instructed Mr Fieldhouse to implement its provisions. The trusts referred to in the document were set up, the one-third shareholding in HPPL was sold to HFMF, Zamoever was acquired, Mr Hancock resigned his membership in HFMF and the articles of HPPL were amended. Once Zamoever was admitted as the B class member of HFMF, Mr Fieldhouse drafted a new will for Mr Hancock. Mr Fieldhouse testified that it was his understanding that those steps were ordered by Mr Hancock to be taken because Mr Hancock wanted to implement the 22 June 1988 plan. 29 In part the relevance of the June 1988 agreement is that it provides a context explaining the assumptions made in the Coopers & Lybrand valuation of 17 March 1989 (see [31] below). Whatever else the June 1988 agreement contemplated it certainly does not contemplate Mr Hancock fettering the rights and powers he had by virtue of his ownership of the Life Governor's Share. The agreement is also said to be relevant to the basis on which Zamoever shares were held and, in the submission of the respondents, to the range of interests that Mr Hancock was obliged to consider in selling the Life Governor's Share. In particular HFMF argued that the June 1988 agreement limited Mr Hancock's exercise of his powers as holder of the Life Governor's Share so as not to ignore the interests of his grandchildren. The sale of Mr Hancock's one-third shareholding in HPPL 30 As noted in [4] above, on 24 February 1989 Mr Hancock sold to HFMF his one-third shareholding in HPPL, consisting of class A, C and CS shares but not including his Life Governor's Share, to HFMF for $23.2 million. The relevance of this sale to the issues in this proceeding is as follows. HFMF's proof of debt that is under challenge in this proceeding depends in part on the claim that, on sale to HFMF, the Life Governor's Share was grossly overvalued (see [1] above). In support of this claim it is alleged that the terms governing Mr Hancock's sale of his one-third shareholding in HPPL obliged him not to exercise the special powers attached to the Life Governor's share, in particular the right to declare discriminatory dividends in favour of himself. It is also claimed that a similar obligation was imposed on Mr Hancock by an agreement that he made with Mrs Rinehart on 22 June 1988 and because he was obliged to consider the interests of his grandchildren (being the children of Mrs Rinehart). It is submitted that because of these restrictions, imposed prior to the sale of the Life Governor's Share, it could have no special value to HFMF. At most it could have only the value of one ordinary A class share. 31 The agreement for the sale of the one-third shareholding in HPPL was in writing but did not contain any term prohibiting Mr Hancock from exercising his powers as holder of the Life Governor's Share to cause discriminatory dividends to be declared. Despite this the respondents allege that Mr Hancock was obliged not to exercise these powers after the 1989 share sale because of circumstances, assumptions and implied undertakings prior to and at the time of the sale. There are a number of documents that shed light on the matter including several valuations of the shareholding provided by Coopers & Lybrand (Mr W. R. Lonergan). The last of these valuations, dated 17 March 1989, valued the shares at $23.2 million. Despite this valuation being dated after the sale of the HPPL shares, the earlier drafts and the fact that the actual sale was for the amount specified in this valuation suggest that this valuation was relied on for the purposes of the sale. Mr Fieldhouse's evidence supports this conclusion. The valuation, which is marked to the attention of Mr Fieldhouse, refers to certain "intentions" of the then shareholders of HPPL and certain amendments to HPPL's articles of association as affecting the "basis of our valuation". The details of these intentions as set out in paragraph 7 of the report include that: "(a) [Mr Hancock] has set up two irrevocable trusts, namely the Hope Hancock Trust and the Hope Margaret Hancock Trust. Hope Hancock Trust. The trustee of this trust will be [Mr Hancock] during his lifetime, and subsequently [Mrs Rinehart]. At the date of our valuation, this trust has no assets. Hope Margaret Hancock Trust This trust will receive the shareholding of the late Mrs Hope Hancock as a gift. The trustee will be [Mr Hancock] during his lifetime, and subsequently [Mrs Rinehart]. [Mr Hancock] will be entitled to all income from these shares during his lifetime, reduced by such income as is required to pay any difference which arises between the required annual dividend to [Mrs Rinehart] of $750,000 and the dividends that [Mrs Rinehart] receives on her "CS" shares. (b) Both during and after the lifetime of [Mr Hancock], and subject to the dividend payable as per sub-paragraph (a) above, any other dividends declared by the Directors on ordinary shareswill be declared at the same rate per share; (c) [Mr Hancock] will retain the Life Governor's Share; (d) …. (e) The "trigger mechanism" relating to dividends on the CS shares will apply … on the transfer of the Shares;" It is not difficult to see a link between these details and proposed amendments and the terms of the June 1988 agreement. 32 The Coopers & Lybrand report also refers to amendments made to HPPL's articles of association, including the deletion of the provisos to article 124 as described in [10] above. The report expressly bases its valuation on the assumption that the intentions in paragraph 7 would be put into effect and, "that the voting control exercisable by the Life Governor … is not able to be used to influence dividend policy in a manner contrary to the interests of other shareholders. Once the dividend flow on the CS Shares is triggered by the proposed transfer, we have assumed that during the lifetime of [Mr Hancock] only the required minimum dividend under Article 3A(B)[of HPPL's articles of association] is received by HFMF."[emphasis added] The words in bold are puzzling in the light of the following paragraphs of the report which appear to contemplate that Mr Hancock's voting control would not be fettered: "Shareholder Rights 12. The voting rights at an ordinary general meeting of the respective share classes may be summarised as follows:- (a) during the lifetime of [Mr Hancock] the voting of each class including the Life Governor's voting rights will be: Class Number of Shares Voting Rights % Life Governor 1 76.00 "A" 3,666 9.80 "B" 3,000 8.00 "C" 2,334 6.20 "CS" 999** - 10,000 100.00 (b) after the lifetime of Mr Hancock the voting of each class will be: Class Number of shares Voting Rights % "A" 3,667* 40.700 "B" 3,000 33.30 "C" 2,334 26.00 "CS" 999** - 10,000 100.00 * under Clause 53 and Article 3C once [Mr Hancock] ceases to hold, or transfers, the Life Governor's share, thereafter it is classified as "A" class share number 1. ** The CS shares are not entitled to any voting rights except where their dividends are in arrears or where HPPL is to be wound up. 13. We note, however, that dividend rights attaching to the various share classes are discretionary in the lifetime of [Mr Hancock] under Article 124. Whilst the Life Governor's share is held by [Mr Hancock] there is essentially 'total' control over the revenue and expenditure of HPPL and its dividend policy except in relation to dividends on the "CS" shares. 14. If the proposed intentions are followed then during the lifetime of [Mr Hancock] the holder of the Shares: (i) would, on transfer, have rights to at least the minimum CS dividend under Article 3A(B) equal to no less than one third of the dividends payable out of one third of the after tax royalty income. (ii) would have no rights to any ordinary dividends except those effectively granted by [Mr Hancock] through the exercise of his discretionary power. 33 Relevant to this issue is an earlier memorandum dated 6 October 1988 from Mr Keith Forrester to Mr Hancock which refers to a "Letter of Valuation" of Mr Hancock's A, C and CS shares in HPPL from Coopers & Lybrand. The memorandum states that the valuation relates specifically to the points agreed between Mr Hancock and Mrs Rinehart in the "June 22 Plan document" and that it assumed, among other things, that: "Both during and after your lifetime, and subject to annual dividends of $750,000 per annum being payable on the "B" class shares held by [Mrs Rinehart] during your lifetime, any other dividends will be declared at the same rate per share…" The memo continues, "If any or all of the above three (3) assumptions are not implemented through changes to [HPPL's] Memorandum and Articles of Association, then an amended Valuation will need to be undertaken by Coopers & Lybrand." 34 A letter dated 29 November 1989 from Mrs Rinehart to Mr Hancock and Mr Salt suggests that, at that time, she believed that following the sale of the HPPL Mr Hancock was not to use his Life Governor's Share to declare discriminatory dividends in his own favour. In that letter Mrs Rinehart complains that, although she is the largest shareholder in HPPL, she has not been given the information she requested in respect of the company and that Mr Hancock and Mr Salt have approved financial statements and their own reports over her voted objection. In particular she asks: "Was a dividend of around 5.18 million paid by HPPL to [Mr Hancock] during the year? Was it declared in respect of the Life Governor's single share even though Coopers & Lybrand's valuation was based on no such dividends?" 35 Mr Salt was a director of HPPL at the time of the sale of the one-third shareholding. Under cross-examination Mr Salt agreed that at the time of that sale he knew about the assumption that Mr Hancock would not exercise his Life Governor's Share to influence dividend policy and that at the time of the Life Governor's Share sale he was not aware of anything to suggest that Mr Hancock had departed from that position. 36 The assumption that Mr Hancock would not exercise his powers as holder of the Life Governor's Share is also referred to in a brief to advise dated 7 May 1991 addressed to Mr Bloom QC. The brief was prepared by Mr Fieldhouse in connection with the proposed sale of the Life Governor's Share. Having set out some background information about the Life Governor's Share the brief refers to the sale of Mr Hancock's HPPL shareholding to HFMF. Following a reference to valuations of that shareholding and of the shares formerly held by Mrs Hope Hancock, dated 20 March 1989, it states: "Counsel will note that under para. number 10 of the March 1989 Valuations, they were based on the assumption that my client would not exercise his rights as Life Governing Director "to influence dividend policy in a manner contrary to the interests of other shareholders". However, your instructing solicitor believes that there must be some doubt as to a possible future exercise of the above right. It is accordingly suggested that [HFMF] … and even my client's daughter [Mrs Rinehart] would place a substantial value on the removal of my client's rights – whether by acquiring the Share, or otherwise dealing with the disposal of those rights." 37 The brief then refers to the possible sale of the Life Governor's Share to HFMF and continues: "The purchase price for such a sale would be calculated presumably by way of a compromise to ensure to [HFMF] a right to a presumed level of income by removing my client's latent right to take out assets from HPPL by way of dividend. Such a compromise would be on the basis that there is arguably an implied term in the 24 February 1989 Agreement to the effect that my client cannot exercise that right to the detriment of [HFMF] and rather than litigate the issue, a compromise is reached." reason for sale of Life Governor's Share 38 It is clear from the evidence of Mr Salt and Mr Fieldhouse that the motivation for selling the Life Governor's Share was to clear Mr Hancock's indebtedness to HFMF. Although at that time the Hancock group was experiencing some liquidity problems, they were not unmanageable and the transaction was not prompted by demands for repayment. However, the state of Mr Hancock's loan account with HFMF was giving him concern. Mr Fieldhouse had advised Mr Hancock that if he withdrew any more money from HFMF he ran the risk of the payment being regarded, for tax purposes at least, not as a loan but as a distribution thus incurring a tax liability. Moreover there was also a risk that past payments would retrospectively be viewed in the same way and would also attract a tax liability. I accept that Mr Hancock required that any arrangement made to clear the loan account not attract a tax obligation, either in respect of that arrangement or in respect of past loans. Both Mr Salt and Mr Fieldhouse spoke of Mr Hancock's aversion to incurring tax liabilities. Mr Salt put it mildly saying that Mr Hancock was keen not to pay more tax than necessary. Mr Fieldhouse's response on being asked if Mr Hancock would consider it a practical impossibility to draw dividends from HPPL to meet his loan commitments with the consequent tax obligation, was, "Dead right!" 39 At the hearing Mr Fieldhouse explained that at the time, Mr Hancock could have obtained funds from HPPL by way of dividend. Alternately he could obtain the funds by direct distribution from HFMF. According to Mr Fieldhouse there was a serious prospect that either or those methods would be subject to tax and that was something that, in Mr Fieldhouse's opinion Mr Hancock "would not contemplate". Accordingly the problem of how to clear Mr Hancock's loan account with HFMF by transferring money from HPPL to HFMF in a tax effective way had been given to Mr Fieldhouse. As the Life Governor's Share was the only asset of any value that Mr Hancock owned at this time Mr Fieldhouse came up with the idea of sell it to HFMF in March 1991. In relation to this transaction Mr Fieldhouse was adamant that he "absolutely and only" advised Mr Hancock, and that he did not advise HFMF or HPPL. 40 I am satisfied that as far as the directors of HFMF were concerned the transaction was effected because that was what Mr Hancock wanted to happen. In cross-examination Mr Salt agreed that the purchase of the Life Governor's Share was not part of any forward planning by the directors of HFMF. The directors did not get any independent legal advice or any independent valuation of the share. Although as a director of HFMF Mr Salt (with Mr Dalby and Mr McKenna) formally approved HFMF's purchase of the Life Governor's Share for a price of $20 million and consented to registration of the share transfer, he did not devise and was not asked to approve the commercial terms of the transaction. By his own admission he made no independent consideration or assessment of the appropriate price for the share. He understood that Mr Fieldhouse had arrived at the price in conjunction with Mr Bloom QC. He relied entirely on Mr Bloom's and Mr Fieldhouse's advice. 41 Nevertheless Mr Salt did not disapprove of the transaction. He commented that he and the other directors thought that it would, "put a stop to the rot. … if you know what I mean by the moneys going out. We may not have liked it but we decided that that was the only way to go." It is clear that by "the rot" Mr Salt was referring to Mr Hancock's habit of taking money out of HPPL. He does not appear to have considered that there were other means open to Mr Hancock to take money out of HPPL for instance through exercise of his rights under the second Life Governor's Share. I accept that Mr Salt relied on Mr Fieldhouse not only in respect of the price but also in regard to the effectiveness and propriety of the transaction as a whole. 42 Despite this it appears that Mr Salt and Mr Dalby had some concerns about the transaction. Not long after the sale was completed they sought from Mr Fieldhouse the comfort of a formal assurance that the transaction was a proper one and a statement as to the fairness of the valuation. It is significant, however, that this request was after the date of the sale. Mr Fieldhouse replied to that request in a letter dated 6 September 1991 in which he described the process by which the value of the Life Governor's Share was determined (see [45] below). It would appear that Mr Salt and his co-directors were satisfied with this explanation. There is no evidence that they asked how the formula applied by Counsel was derived or that they commented on the unusual course of having a barrister provide a valuation. This is despite the fact that Mr Salt, at least, was aware that normally when a valuation was required, as in connection with the sale of the one-third shareholding in HPPL, the Hancock companies used Coopers & Lybrand. It was not their practice to consult a barrister for valuations or to rely on Mr Fieldhouse. 43 In the brief to Mr Bloom QC dated 7 May 1991, Mr Fieldhouse was quite clear as to the reason for the sale of the Life Governor's share, stating: "In order to raise sufficient funds to meet his needs for the rest of his life, my client proposes to sell or otherwise dispose of his rights under his Life Governor's Share in HPPL for a substantial sum of money. It is the purpose of this Brief to consider the most effective manner of putting my client's intentions into effect and thence to determine the maximum amount which could reasonably be paid as consideration therefor." 44 On the evidence before me this appears to be an accurate statement of how all parties approached the transaction. The notion that the companies and their assets belonged to Mr Hancock and were his to do with as he pleased was common to Mr Hancock's advisors and to Mr Hancock himself. Mr Fieldhouse described Mr Hancock's attitude to his companies: "He was not as well versed or … as concerned with the separate identity of his various companies. He treated everything in his group really very much as one under his control." The implications of this approach for the valuation of the Life Governor's Share and any separate consideration of the rights and interests of HFMF appear to have been entirely ignored. Valuation of Life Governor's Share 45 Unlike the sale of Mr Hancock's one-third shareholding in HPPL, the sale of his Life Governor's Share was not preceded by a formal valuation. The process by which the price of $20 million was arrived at was somewhat unusual. As Mr Fieldhouse stated in his letter of 6 September 1991 (see [42] above), he sought the assistance of Mr Bloom QC rather than a valuer for the purpose of determining "a reasonable consideration" for the life share. He stated that: "Counsel was of the view that a fair price for the Life Governor's Share would be 50% of the difference in the value of the "A" and "C" class shares in HPPL given to those shares in the 20 March 1989 valuation thereof compared to an up-to-date valuation." 46 The shares to which Mr Fieldhouse referred were those in the one-third shareholding in HPPL sold to HFMF in 1989. The letter referred to a valuation of those shares commissioned from the HPPL auditors. That valuation, dated 5 August 1991, estimated the A and C class shares to be worth between $38.3 million and $50.2 million. Application of the formula suggested by Mr Bloom QC would have suggested a sale price of $17 million. Mr Fieldhouse explained the uplift to $20 million as follows: "However, Counsel also notes that Mr Hancock was already indebted to [HFMF] and that it would be commercially reasonable for [HFMF] to pay up to $20 million for the Life Governor's Share if Mr Hancock repaid all amounts owing by him to [HFMF]." The letter also sets out seven factors that Mr Bloom is said to have taken into consideration in giving his advice: "1. Under Article 124 of the Articles of Association of HPPL, Mr Hancock has the right to declare dividends on one or more classes of shares to the exclusion of the other or others, and to this end the Life Governor's Share is treated as a separate class of share, and under Article 125 the directors have the power to resolve that any such dividend be paid wholly or in part by the distribution of specified assets of HPPL. 2. By virtue of the provisions of Clause 2(53) of the Memorandum of Association of HPPL, Mr Hancock while he is the registered holder of the Life Governor's Share effectively controls HPPL through his right at every general meeting and on every poll cast to 76 out of every 100 votes cast. 3. It would therefore be possible for Mr Hancock to utilise the above powers to take out most of the assets of the company by way of dividends. 4. On the other hand, under para. number 10 of the 20 March 1989 valuation, the "A" and "C" Class shares were valued on the assumption that Mr Hancock would not exercise his rights as Life Governing Director "to influence dividend policy in a manner contrary to the interests of the other shareholders". 5. Based on that valuation and the assumption made in para. 10, [HFMF] acquired certain of the shares the subject of the 20 March 1989 valuation for a purchase price of $23.2 million. 6. However and notwithstanding the assumption at para. 10 of the valuation, Mr Hancock could exercise his powers as holder of the Life Governor's Share to take out substantial assets from HPPL now or at any time in the future. 7. The best course available to [HFMF] to stop Mr Hancock exercising that power and thereby ensure its right to a presumed level of income on its "A" and "C" class shares", would be for [HFMF] to acquire the Life Governor's Share." 47 On cross-examination, Mr Fieldhouse agreed that the reason given for the sale in this letter was a pretext. He also agreed that he had no recollection of any conduct by Mr Hancock that in any shape or form constituted a threat to use his Life Governor's Share in a manner contemplated in the letter. Mr Fieldhouse also admitted that he was the only relevant source of instruction to counsel, the implication being that any suggestion that Mr Hancock might use his Life Governor's Share in a manner contemplated by the letter must have come from Mr Fieldhouse. Mr Fieldhouse also admitted that in the normal course of events he would have had the share valued independently. 48 Mr Fieldhouse was questioned about the possibility of a second Life Governor's Share resulting from the addition of articles 3B and 3C (see [7] above) to the articles of association of HPPL by special resolution of 5 November 1970. Mr Fieldhouse admitted that he knew about the second Life Governor's Share but said that he was not conscious of it at the time of the sale of Life Governor's Share No 1. He admitted that in view of Life Governor's Share No 2, the sale of Life Governor's Share No 1 had no value as the first Life Governor's Share was immediately replaced by the second. 49 Another relevant amendment to the articles of HPPL was the deletion of the provisos to article 124 (see [10] above). The effect of that amendment was that Mr Hancock retained the ability to declare discriminatory dividends in favour of himself even without holding a Life Governor's Share. He could cause HPPL to pass an ordinary resolution because of his control of HFMF and his position as trustee of the Hope Margaret Hancock Trust. 50 On cross-examination by Mr Hayes QC, Mr Fieldhouse agreed that, had he been conscious of the assumption in the Coopers & Lybrand valuation of the HPPL shares sold by Mr Hancock in 1989 concerning Mr Hancock's use of the Life Governor's Share, he would not have advised Mr Hancock to sell the Share to HFMF. He agreed that the sale transaction was inconsistent with the basis on which HFMF had paid $23.2 million for the one-third shareholding. It would also seem that Mr Fieldhouse did not advise Mr Bloom of this assumption. In fact the instructions given to Mr Bloom seem to be decidedly deficient. Mr Fieldhouse was not able to recollect if he drew Mr Bloom's attention to a number of relevant factors raised by Mr Hayes including relevant provisions of HPPL's articles of association and advices provided by Mr Bennet QC with Mr Burton. 51 In 2001 Mr Lonergan was briefed by the solicitors for HFMF to prepare a valuation of the Life Governor's Share. In his report dated 29 May 2001, Mr Lonergan stated that he had been instructed to prepare a report setting out his opinion on the following: "(a) the fair market value of Mr Hancock's Life Governor's Share in [HPPL] as at 7 August 1991 (b) the value of the Life Governor's Share in [HPPL] transferred to HFMF on or about 7 August." 52 In determining the fair market value of the share, Mr Lonergan made two assumptions. These were that, following the sale of the Life Governor's Share Number 1, there was no legal impediment to Mr Hancock paying all dividends (other than those required to be paid to the CS shares) to himself as the holder of the Life Governor's Share Number 2 or to Mr Hancock selling all the assets of HPPL and distributing all the proceeds (other than paid up capital) to the Life Governor's Share Number 2. On that basis Mr Lonergan concluded that the value of the Life Governor's Share Number 1 would be nominal only. He stated that: "This is because the economically rational action for Mr Hancock would be to sell the assets and distribute all the proceeds to the Life Governor's Share Number 2. This right could not be assigned to a new owner of the share as, upon transfer, the share would be reclassified in accordance with the articles." 53 Mr Lonergan also provided a valuation on the basis that there was a legal impediment to Mr Hancock stripping out the profits of HPPL. On that basis he valued the share (once reclassified as an A class share) on the basis of an entitlement to a 1/720,001 share of the profits of HPPL after payment of CS dividends. The fair market value on this basis was assessed to be $100. 54 Mr Lonergan also valued the Life Governor's Share on the basis of its special value to HFMF. The basis of the special value was said to be that because HFMF had a one third interest in the value of HPPL, it would have a special interest in eliminating the risk that the power of the Life Governor's Share would be exercised to the detriment of its interest. Mr Lonergan expressed the opinion that there would be no special interest for HFMF in acquiring Life Governor's Share Number 1 because it would need to acquire both the Life Governor's Share Number 1 and the Life Governor's Share Number 2 to be able to protect its interest. On that basis the value of Life Governor's Share Number 1 to HFMF was assessed as being no more than the fair market value of $100. 55 In addition to providing his own assessment of the value of the Life Governor's Share as outlined above, Mr Lonergan also made some comments on the way in which the actual sale price of $20 million was determined. He discussed the assumption that Mr Hancock could utilise the powers of the Life Governor's Share to declare discriminatory dividends in favour of himself and observed that this appeared to be inconsistent with the assumptions in the 1989 share valuation. He continued: "Notwithstanding this issue, Mr Fieldhouse's value appears to have been calculated based on previous values of the A and C class shares in [HPPL]. It appears that Mr Fieldhouse has adopted this approach on the assumption that Mr Hancock can influence the dividend policy and pay the value of the future dividend assumed to be paid to the A & C class shares in these valuations to himself. Given that the Life Governor's Share had dividend rights then this was indeed possible. However, Mr Fieldhouse implicitly assumes that dividends could be paid to the Life Governor's Share equal to the dividends in perpetuity on the A and C class shares. As the Life Governor's Share could only control the dividend policy while Mr Hancock was alive, this is an incorrect assumption. However, a substantially adverse impact on the value of HFMF's shareholding in [HPPL] would arise if the assets of [HPPL] were sold distributing a large proportion of the proceeds distributed [sic] to the holder of the Life Governor's Share … I note, however, that the methodology used by Mr Fieldhouse to arrive at the $20 million is not correct. Firstly, the value appears to have been derived by taking 50% of the difference in values of the A and C class shares at two different valuation dates. Why Mr Fieldhouse took 50% of the difference rather than the average values is not clear. Secondly, Mr Fieldhouse adjusts the $17 million value derived from the difference to reflect the fact that "Mr Hancock is already indebted to the Foundation". This indebtedness should have no bearing on the value of the Life Governor's Share. On this basis, it is clear that Mr Fieldhouse's valuation has not been based on the application of correct valuation methodology. However an assessment of the reasonableness of the price paid by HFMF depends upon whether it is a marked value or a special value which is being determined. I also note that Mr Fieldhouse's valuation appears to ignore the fact that the purchaser only had a one third interest in the A and C shares in [HPPL]. The trustee's report to creditors 56 The subject of these proceedings is the Trustee's decision to admit HFMF's proof of debt dated 14 July 1999. In his report to creditors dated 3 November 1999 the Trustee made the following comment about the proof of debt: "My investigations lead me to conclude that the primary motivation for the sale of the Life Governor's Share was to clear existing loan accounts and avoid any adverse income tax implications. I do not consider that the valuation methodology used by Mr Hancock's legal advisers has any merit, nor do I consider that the share had a value greater than $16,733.33 at the time it was sold. My investigations also led me to the conclusion that Mr Hancock was a de-facto director of HFMF, and that he directed the company enter into the transaction in the absence of any independent advice. As such I consider that Mr Hancock breached his fiduciary duty to the company in causing it to enter into the transaction. Accordingly I have admitted the proof in full." consideration Breach of fiduciary duty 57 It is not in contention between the parties that Mr Hancock, through his control of Zamoever, was in control of HFMF and was a de facto director. As such Mr Hancock owed a fiduciary duty to HFMF to act in that company's best interests and to put its interests ahead of his own. If he knowingly, recklessly or carelessly caused HFMF to purchase the Life Governor's Share at a fraction of its true value then he would have acted in breach of that duty. The applicant says that there was no breach because the price paid for the Life Governor's Share was a commercially realistic price determined with the assistance of Mr Hancock's legal and accounting advisors. 58 Clearly the value of the Life Governor's Share as at the date of sale to HFMF is critical. I do not, however, accept the basis on which Mr Fieldhouse arrived at a sale price of $20 million as an appropriate method of determining the value of the Life Governor's Share. It is in stark contrast with the approach adopted on the sale of Mr Hancock's one-third shareholding in HPPL in 1989. At that time the price was struck after a formal valuation process by Coopers & Lybrand. In the case of the Life Governor's Share Mr Fieldhouse, who was quite definite that he was advising only Mr Hancock and not HFMF, sought assistance, not from a qualified valuer but from Mr Bloom QC who specialised in taxation. Mr Bloom was told (in the brief of 7 May 1991 – see [42] above) that the purpose of the brief was to consider "the most effective manner" for Mr Hancock to raise a "substantial sum of money" by selling the Life Governor's Share. 59 The respondents have submitted that, because of the assumption in the Coopers & Lybrand valuation of 17 March 1989 on the basis of which the price of the one-third shareholding in HPPL was determined, Mr Hancock was under a binding obligation not to act inconsistently with that assumption. HFMF also submits that such an obligation arose out of the June 1988 agreement. In relation to the June 1988 agreement, there is no reference in the written document to any such obligation. In fact paragraph 10 of the written agreement specifically envisages that Mr Hancock will retain his controlling rights (arising from the Life Governor's Share) until his death when control will pass to Mrs Rinehart; see [27] above. 60 The second respondent submits that HFMF's purchase of the one-third shareholding in HPPL was on terms that Mr Hancock would not exercise the rights and powers conferred by the Life Governor's Share in any manner that would depreciate or take away the value of the share sold to HFMF. This proposition was supported in HFMF's written submissions on that basis that: "(a) The proposition is so obvious as to go without saying and therefore a term to that effect is to be implied into the [agreement]; (b) On the principle that a person may not derogate from his or her own grant or destroy or depreciate the thing that has been sold: see eg Trego v Hunt [1896] AC 7; Castlemaine Tooheys v CUB (1987) 10 NSWLR 468." 61 The first of these grounds brings to mind the comments of Lord Simonds in St Aubyn v Attorney-General [1952] AC 15 at 34; "On this question counsel on either side agreed in saying that there was no direct authority and they agreed too that the reason for that was that the answer was clear. But unfortunately here the harmony ended, for the clear answer given on the one side was the exact opposite of the clear answer given on the other." The proposition put forward by HFMF cannot be accepted. 62 In relation to the second proposition, both the cases cited deal with the implication of a term by law, that is as a legal incident of a particular class of contract as opposed to implication of a term where this is necessary to give business efficacy to a contract; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 345 per Mason J ("Codelfa"). In Castlemaine Tooheys v Carlton & United Breweries Ltd (1987) 10 NSWLR 468 ("Castlemaine") Hope JA, with whom Samuels and Priestly JJA agreed, referred to this class of term as a "Trego v Hunt" term. Hunt JA was prepared to assume for the purposes of the argument that a Trego v Hunt term could be implied into an agreement for the sale of shares: "because the contract is for the sale of shares in a company carrying on a business. Without dealing with what such a term might otherwise require, for the plaintiff's purposes it must be a term which precludes Tooth from exercising any of the powers which it has as owner and landlord of its hotel premises in a way that would depreciate the value of the brewery business of CUB(NSW) and thus of the value of the shares transferred to CUB." 63 There is no question of such issues arising here. The issue in relation to the 1989 sale, which is not challenged here, could only concern the price that was paid for the one-third shareholding and whether in the absence of the restriction for which the respondents contend, that sale was at an overvalue. There is no authority for the implication of a Trego v Hunt term to avoid the consequences of an improvident contract. 64 I accept that the price of the one-third shareholding in HPPL paid by HFMF was determined on the basis of the Coopers & Lybrand valuation of 17 March 1989 and on the express assumption in that report that Mr Hancock would not use his Life Governor's powers to declare discriminatory dividends. While there is considerable evidence to suggest that those close to Mr Hancock were aware of the assumption and had an expectation that he would be subject to such a restriction, the evidence does not show that Mr Hancock accepted the restriction or undertook in any way to be bound by the assumption. The interpretation of contractual terms and whether additional terms should be implied is not a matter of the subjective view of the parties; still less does it depend on those of their associates. It is not necessary for me to consider in detail the principles governing the implication of terms in contracts. The issue was dealt with comprehensively by the High Court in Codelfa. Suffice it to say the respondents have not submitted any basis on which I would be entitled to assume that such a restriction is an implied term of the 1989 share sale agreement. 65 There is no suggestion in the evidence before me that, at any time after the 1989 sale, Mr Hancock attempted in any way to use his Life Governor's powers. This may well be because he was aware of the assumption in the Coopers & Lybrand valuation and did not wish to act inconsistently with it. It may also be that he was not interested in drawing money from his companies because of the taxation implications. As Mr Fieldhouse himself admitted, the spectre, raised with Mr Bloom, of Mr Hancock using the Life Governor's Share to declare discriminatory dividends or to strip assets from HPPL was a pretext. The inescapable conclusion from the evidence is that that the prime motivation for the sale was to release more funds for Mr Hancock's personal use in a tax effective way and to protect the tax exempt status of the previous loans. 66 Even if one accepted that there was value to HFMF in removing the possibility of Mr Hancock exercising his Life Governor's powers to declare discriminatory dividends, the sale did not achieve this. The effect of article 3B of HPPL's articles of association is that the A class share number 2 that Mr Hancock received on the death of Mrs Hope Hancock, immediately acquired the rights and privileges of a Life Governor's Share. The existence of this second Life Governor's Share means that even if the reason for the sale expressed in the brief to Mr Bloom QC of 7 May 1991 are taken at face value, the sale was at a significant overvalue. The loans made to Mr Hancock were valuable assets of HFMF. The effect of the sale was to deprive HFMF of these assets in favour of a share that, in the hands of HFMF, was merely an ordinary A class share of very little value. In this sale Mr Hancock put his own interests ahead of those of HFMF and in doing so breached his fiduciary duty to HFMF; Permanent Building Society v Wheeler (1994) 14 ACSR 109, Abeles v PA Holdings Pty Ltd (2000) NSWSC 1008, (2000)18 ACLC 867. Ratification, authorisation and consent 67 While the applicant does not accept that Mr Hancock was in breach of his fiduciary duty ,she submits that that if there was a breach: (a) it was informally ratified and authorised by the members; or (b) if not so authorised and ratified, equity would treat is as such; or (c) in any event, HFMF suffered no loss. 68 The applicant submits that the directors of HFMF "knew that all the members of HFMF had or would consent" to the purchase of the Life Governor's Share for the price of $20 million. The principles as set out in the applicant's written submissions were that subject to there being no oppression or fraud on a minority and there being no contrary provision in the company's articles of association, a solvent company's members may consent to or ratify: (a) directors entering into transactions contrary to their fiduciary duties; (b) any voidable obligation that results from such a transaction; and (c) a director's profit or gain from any such transaction. 69 The difficulty for the applicant is that I am not satisfied on the evidence that all the directors did consent to the transaction or that all the members would have consented. The fact that members and directors were accustomed to act in accordance with Mr Hancock's wishes does not inexorably lead to the conclusion that they would have sanctioned this transaction. As Counsel for the Trustee, Mr Coles QC, pointed out, when HFMF was incorporated a non-proprietary company was required to have at least five members. In this case, at the relevant time, HFMF had five D class members and Zamoever as the only other (B class) member; see [17] above. For the transaction to be ratified the consent of all members was required. There is simply no evidence of the views of at least four of those members, Winter, McKenna, Burolo and Dastlik. Although Mr Salt gave evidence and was cross-examined at length he gave comparatively little information about his view of it other than to state that he relied on Mr Fieldhouse's advice and that he thought it would stop the financial drain on HPPL. 70 For the consent of either of these groups to be capable of authorising or ratifying a transaction in breach of Mr Hancock's duty it would need to be informed consent. By this I mean that there must be knowledge that the conduct that is being authorised or ratified involves a breach of fiduciary duty; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 per Samuels JA at 685. There is no evidence that any of the members were aware of this fact. At no time did the directors or the members obtain independent advice about the transaction. Mr Salt admitted that he gave no independent consideration to the matter but simply relied on the advice of Mr Fieldhouse. In particular it would seem that the members were not aware that: (a) on the sale of the original Life Governor's Share, Share number 2 that passed to Mr Hancock after the death of his wife would become a second Life Governor's Share with all the powers and privileges of the original; and (b) that after the removal of the provisos to article 124 of HPPL's articles (see [10] above), Mr Hancock could cause discriminatory dividends to be paid to him by procuring the passing of an ordinary resolution. 71 I am satisfied on the evidence that neither the directors nor the members of HFMF gave any independent consideration to the interests of HFMF in relation to the transaction. They were accustomed to act in accordance with Mr Hancock's wishes. I do not mean to suggest that Mr Salt or any of the directors or members of HFMF would have approved a patently illegal or improper transaction. They relied, however, on the advice of Mr Fieldhouse, who acted for Mr Hancock not HFMF, and the specious arguments that were put to them in support of the transaction. Underlying all of this appears to have been the prevailing view that these companies were Mr Hancock's and that the assets of the companies were also Mr Hancock's. There did not seem to be any appreciation that the creation of separate legal entities had deprived Mr Hancock of the same power over the assets of his companies as he would have had if those assets had vested in him personally and had given rise to interests that were not always identical with those of Mr Hancock. Ratification in equity 72 It was submitted by the applicant that subsequent to Mr Hancock's death the conduct of HFMF's members and directors is consistent with ratification of the transaction. Senior Counsel for the applicant, Mr Burnside QC relied on the fact that the transaction appears without comment in the accounts of HFMF over a period of years. I do not accept that this could per se, amount to ratification of the transaction. As Mr Coles submitted, this is an accounting matter. The company was not entitled to omit the transaction from its accounts. Whether or not a breach of fiduciary duty was involved, the transaction occurred and failing to record it in the accounts would not alter that. In my opinion this submission amounts to a claim that ratification can be assumed by mere knowledge coupled with lapse of time even if the period is within a relevant limitation period. Such a submission must be rejected. In my opinion there is no authority for the equitable position propounded by the applicant. Without clear and binding authority I would not accept that equity would adopt such an approach. Submission that Mr Hancock's breach of fiduciary duty did not cause a loss to HFMF 73 The applicant submitted that, even if the sale of the Life Governor's Share was in breach of Mr Hancock's fiduciary duty to HFMF, it did not lead to any loss. As Mr Burnside, expressed it, if the directors or members of HFMF had opposed rather than affirmed the transaction, Mr Hancock could have repaid the overpayment and funded his needs by way of a gift to himself. Mr Burnside pointed to the fact that a little over one month after the sale, HFMF's articles were amended to allow the company to make gifts to any person including former members of the company (see [14] above). He submitted that it was open to Mr Hancock at any time to cause such an amendment to the company's articles. While funding his needs in this way may have resulted in a tax liability that Mr Hancock otherwise avoided the approach was certainly possible. 74 I do not accept this argument. First it is clear that Mr Hancock's aversion to paying what he saw as legitimately avoidable tax was deep seated. Secondly the fact that such loss as HFMF suffered could have been remedied is irrelevant when the facts show that the loss was not remedied. With respect to Mr Burnside, the argument suffers from the flaw that seems to have permeated the whole transaction, namely the complete disregard for the fact that HFMF was a separate legal entity with its own rights and interests. Mr Hancock established HFMF for the purpose of reducing his tax obligations. He enjoyed the advantages (from a taxation perspective) that flowed from the separate legal identity of HFMF and he was subject to the disadvantage that interests of this separate legal identity were not always identical to his own. In particular the assets of HFMF could not be treated as if they were the same as the assets that Mr Hancock held in his own name. 75 At the hearing Counsel for HFMF suggested that HFMF may not have been able to make gifts to Mr Hancock because he might be regarded as a "relative" of a member (namely Zamoever) and thus fall within the prohibition in clause 5 of the company's articles; see [13] above. After the hearing, both the second respondent and the applicant provided further submissions on this point. While I doubt that I would be convinced by HFMF's submissions on this point, because of the view I have expressed in the preceding paragraphs it is not necessary for me to decide this point and I do not do so. Exoneration 76 Although the claim of exoneration was canvassed in the applicant's written submissions it was raised at a very late stage the hearing over the objections of counsel for the respondents who claimed that they had not been given fair notice of the submission. As I have formed the view that the claim cannot be maintained I see no injustice to the respondents in dealing briefly with it. 77 The applicant relied on s 1318 of the Corporations Law. This section applies in a civil proceeding involving various claims brought against a person to whom the section applies. The claims to which the section refers include breach of trust of breach of duty. The section continues that if it appears to the Court that the person is or may be liable but : "has acted honestly and that having regard to all the circumstances of the case … the person ought fairly to be excused … the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit." 78 The short answer to this claim is that this is not a civil proceeding brought against Mr Hancock. Even if Mr Hancock could have sought relief under this section in his lifetime the section is not relevant after his death and especially where his estate is now being administered under the provisions of the Bankruptcy Act 1966 (Cth). Even if that analysis is not correct I do not see any basis for allowing the issue of exoneration to be pleaded by a person who, if there were such a proceeding, would not be party to it. 79 For all of the above reasons the applicant has not established that the Trustee was in error in accepting HFMF's proof of debt. The application is dismissed with costs. I certify that the preceding seventy-nine (79) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone. Associate: Dated: 8 July 2002 Counsel for the Applicant: Mr J Burnside QC with Mr D Collins Solicitor for the Applicant: Slater & Gordon Counsel for the First Respondent: Mr B A Coles QC with Mr C R C Newlinds Solicitor for the First Respondent: Kemp Strang Counsel for the Second Respondent: Mr P Hayes QC with Mr I Martindale Solicitor for the Second Respondent: Freehills Date of Hearing: 25, 26, 27, 28 and 29 June 2001 Date of Judgment: 8 July 2002