New South Wales Supreme Court CITATION : Resource Equities v Carr Resource Equities v Garrett [2009] NSWSC 1385 HEARING DATE(S) : 2/11/09, 3/11/09, 4/11/09, 5/11/09 and 6/11/09 JUDGMENT DATE : 15 December 2009 JURISDICTION : Equity Division Commercial List JUDGMENT OF : McDougall J at 1 DECISION : See paragraphs [386] to [392] of the judgment. CATCHWORDS : COMPANIES – directors and other officers – directors' duties – whether multiple breaches of ss 180, 181 and 182 Corporations Act and common law duties – directors' fees – whether directors had performed work which warranted additional fees – whether directors personally liable for overpayments – dividends - whether a payment to shareholders properly characterised as a dividend or return of capital – whether dividend payable when no profit demonstrable – whether payment otherwise justified – voluntary administration – whether administrator appointed for a proper purpose – whether directors personally liable for resultant costs – loans – whether loan made by company improper – whether directors personally liable – whether directors can be sued when debtor has not been pursued to bankruptcy – issue of shares – whether shares improperly issued to allow directors to maintain control of company – whether resultant litigation defended when no prospects of success – whether directors personally liable for consequent legal costs – defences – whether business judgment rule available – whether to exercise discretion under s1318 Corporations Act – remedies – damages - quantum - CONTRACTS – construction – whether cross claimant indemnified by settlement deed - DAMAGES – whether liability apportionable under the Civil Liability Act – whether available for breaches of the Corporations law - PRACTICE – pleadings – whether issue arguable when not pleaded Civil Liability Act 2002 LEGISLATION CITED : Corporations Act 2001 Pooled Development Funds Act 1992 (Cth) (the PDF Act) Uniform Civil Procedure Rules CATEGORY : Principal judgment Australasian Oil Exploration Limited v Lachberg (1958) 101 CLR 119 Australian Securities and Investments Commission v Vines (2005) 65 NSWLR 281 Bluebottle UK Limited v Deputy Commissioner of Taxation (2007) 232 CLR 598 Brambles Australia Ltd v Tatale Pty Ltd [2006] NSWSC 204 Carr and Purves v Thomas [2009] NSWCA 208 Commissioner of Taxation of the Commonwealth of Australia v Sun Alliance Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 Dartberg Pty Ltd v Wealthcare Financial Planning Pty Limited (2007) 164 FCR 450 CASES CITED : Ingot Capital Investment Pty Ltd v Macquarie Equity Capital Markets Ltd (No.6) (2007) 63 ACSR 1 Investments Pty Limited (in liquidation) (2005) 225 CLR 488 QBE Insurance Group Ltd v Australian Securities Commission (1992) 38 FCR 270 Re Spanish Prospecting Co Ltd [1911] 1 Ch 92 Rood Investments (Vic) Pty Limited v Abeyratne [2009] VSC 278 Segenhoe Ltd v Akins (1990) 29 NSWLR 569 Unity Insurance Brokers Pty Limited v Rocco Pezzano Pty Limited (1998) 192 CLR 603 Vines v Australian Securities and Investment Commission (2007) 62 ACSR 1 Western Ventures Pty Limited v Resource Equities Limited (2005) 53 ACSR 568 50214/07 Resource Equities Limited (subject to deed of comapny Agreement) (Plaintiff) John Hiltion Garrett (First Defendant) Louise Mary Garrett (Second Defendant) Richard John Thomas (Third Defendant) Leon Phillip Carr (Fourth Defendant) PARTIES : Nigel Charles Purves (Fifth Defendant) 50205/07 Resource Equities Limited (Subject to deed of company arrangement) (Plaintiff) Leon Phillip Carr (First Defendant) Nigel Charles Purves (Second Defendant) Richad John Thomas (Third Defendant) John Hilton Garrett (Fourth Defendant) FILE NUMBER(S) : SC 50214/07; 50205/07 CRC Newlinds SC / JC Giles (Plaintiff) COUNSEL : VRW Gray (First and Second Defendants) Mr Carr and Mr Purves R J Thomas (Cross-Defendant) (In person) Lavan Legal (Plaintiff) SOLICITORS : NRG Legal (Mr Carr & Mr Purves) R J Thomas (In person) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST McDOUGALL J 15 December 2009 50214/07 RESOURCE EQUITIES LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) v JOHN HILTON GARRETT & 4 ORS 50205/07 RESOURCE EQUITIES LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) v LEON PHILLIP CARR & 3 ORS JUDGMENT 1 HIS HONOUR: In these proceedings, the plaintiff (REL) sues (among others) two former directors, the first and second defendants (respectively Mr Carr and Mr Purves), for alleged breaches of duty. Messrs Carr and Purves have brought a cross-claim against a fellow director, the cross-defendant (Mr Thomas), seeking contribution or indemnity. Mr Thomas too is a defendant in the proceedings. However, he reached a settlement with REL, the terms of which were embodied in a deed. In reliance on that deed, Mr Thomas claims indemnity from REL for any amount that he may be ordered to pay to Mr Carr or Mr Purves. 2 In addition, each of Messrs Carr, Purves and Thomas says that if he is found to be liable, he in entitled to be relieved from liability pursuant to s 1318(1) of the Corporations Act 2001. Outline of the claims 3 REL advances six separate claims. Excessive payments to directors 4 REL alleges that Messrs Carr, Purves and Thomas resolved to pay themselves remuneration in excess of the limit fixed pursuant to REL's constitution. Alternatively, REL alleges, Messrs Carr, Purves and Thomas resolved that Messrs Carr and Purves should be paid amounts for "extra services or … special exertions" (such payments being expressly permitted by REL's constitution) which were totally unjustified. 5 This claim involves, among other things, consideration of a resolution passed by an Extraordinary General Meeting (EGM) of REL held on 15 May 1995, in which directors' fees were limited to a combined total of $200,000.00 per annum; and of a resolution of directors dated 26 February 2003 in which, among other things, it was agreed that the current directors should be paid $1,000.00 per month for their period of service as directors. The Garrett loans 6 For a time, Mr John Garrett (who is also a defendant, but who did not participate in the hearing) was a director of REL. REL alleges that Messrs Carr and Purves caused it to make two unsecured loans to Mr Garrett. The first, in the amount of $100,000.00, relates to a payment undoubtedly made on 14 May 2004 (less than six weeks after Mr Garrett had been discharged from bankruptcy). The second (in an amount exceeding $258,000.00) was made on 18 June 2004. As the case was argued, the real issue was not as to the impropriety of these loans but as to whether REL could maintain its claim when (according to Messrs Carr and Purves) it had not exhausted its remedies against Mr Garrett and his wife. (I will discuss Mrs Garrett's involvement when I deal with this claim.) Fox Technology 7 Fox Technology Pty Limited (Fox) was a company controlled by Mr Mark Nagy and Ms Michelle Bryant. It specialised in the development of payment applications software (the Fox technology) for use in point of sale terminals. It is convenient to refer to these as EFTPOS terminals. EFTPOS terminals were used by those who sold goods or provided services to allow their customers to make payment by credit or debit card. In March 2003, Fox was seeking to develop software that would enable EFTPOS terminals to be used for a wider variety of transactions, including (to give two examples relevant to these proceedings) booking and paying for airline tickets and booking and paying for theatre tickets. 8 Cosmos Limited (Cosmos) had installed EFTPOS terminals in numerous pharmacies throughout Australia. According to Mr Carr, about 80% of pharmacies in Australia used Cosmos' EFTPOS terminals. Cosmos derived revenue from the use of those terminals. Accordingly, it saw the Fox technology as something of potential value to it. The technology, if successful, would increase the use of Cosmos' terminals and, accordingly, its revenues. Fox required substantial further funding to enable it to continue with the development of its technology. Mr Mike Kesterton, an employee of or consultant to Cosmos, spoke to Mr Carr to see if REL would be interested in investing in Fox. Mr Carr attended a meeting on 20 March 2003 known, from its venue, as the "Cargo Bar meeting". At that meeting, Mr Carr agreed that REL would fund Fox's further development of the Fox technology. It is convenient to refer to the Cargo Bar agreement and the suite of agreements relating to REL's investment in Fox compendiously as the Fox transaction. 9 REL alleges that the Fox transaction was improvident, and that Mr Carr committed REL to it not for any proper purpose of REL but for his own benefit. REL alleges further that Mr Purves was in a position of conflict of interest, because he was a director of Cosmos, and had been appointed a director of REL by the time the various agreements (in their final form) were signed. Distribution of proceeds of sale of Asia Iron Shares 10 REL had a substantial shareholding in a company known as Asia Iron Pty Limited (Asia Iron). In late 2004, it sold those shares for $1,400,000.00. It then caused in excess of $858,000.00 of the proceeds of sale to be distributed to shareholders. Those distributions were said to have been paid as dividends, although in argument Messrs Carr and Purves submitted that they were, alternatively, returns of capital. REL says that the payments were improper, because (among other things) the making of them left REL insolvent. Some of the payments were made, after REL had been placed into voluntary administration, by its administrator Mr Giovanni (John) Carrello. Litigation expenses 11 The history of REL has been marked by strife between different groups of shareholders. There have been numerous court cases. One of those, proceeding COR 357 of 2004 (proceeding 357) was brought in the Supreme Court of Western Australia on 29 October 2004, preceding an EGM of REL to be held on 2 November 2004. That meeting followed closely on an annual general meeting (AGM) held on 29 October 2004. The plaintiff in proceeding 357 sought, unsuccessfully, to restrain REL from holding the EGM. By subsequent amendments, the plaintiff alleged that the EGM had been improperly conducted for a number of reasons; that a resolution purportedly passed for the removal of Mr Thomas as a director had not been passed; and that resolutions purportedly not passed for the removal of Messrs Carr, Purves and Garrett as directors and for the appointment of other individuals as directors had been passed. 12 Before the EGM in question, REL (at the behest of Messrs Carr and Purves) purported to issue some seven million shares to Cosmos E-C Commerce Pty Limited (Cosmos Commerce), a subsidiary of Cosmos. Cosmos Commerce voted those shares at the meeting, aligning its interest with the interests of Messrs Carr and Purves. REL says that the issue of the shares was a sham; alternatively, that it was undertaken for an ulterior and improper purpose. 13 Messrs Carr and Purves caused REL to defend proceeding 357. In so doing, REL alleges, they effectively used the resources of REL to defend their own positions as directors. Further, Messrs Carr and Purves caused REL to indemnify Cosmos Commerce, which was a party to the proceeding, for its costs. 14 REL alleges that Messrs Carr and Purves should not have caused REL to defend the proceeding, and should not have agreed to indemnify Cosmos Commerce for its costs. Costs of administrations 15 On 14 March 2005, Messrs Carr, Purves and Garrett resolved to place REL into voluntary administration. Mr Nicholas Crouch was appointed as administrator. REL says that the resolution was invalid because, contrary to the terms of s 436A(1)(a) of the Corporations Act 2001, the directors did not resolve that REL was insolvent or was likely to become insolvent at some future time. REL alleges that the resolution was an attempt to stymie proceeding 357. If this were the intention, it failed. Le Miere J granted leave to proceed (s 440D(1)(b)) and the proceeding was heard by Commissioner Siopis SC. His Honour decided the proceeding in favour of the plaintiff. The effect of his Honour's orders was to remove Messrs Carr, Purves and Garrett as directors with effect from the date of the EGM, to reinstate Mr Thomas as a director and to declare elected as directors at that meeting Messrs Robert Brown and Neal Macaulay. 16 After proceeding 357 was determined in favour of the plaintiff, the new board met. It was advised that the appointment of Mr Crouch was a nullity. However, since the new board considered that the company was, or was likely to become, insolvent, it passed a resolution in accordance with s 436A(1). By that resolution, Mr Carrello was appointed administrator. 17 REL alleges that the costs of administration were incurred unnecessarily, because: (1) as to Mr Crouch – his appointment was invalid, and the amount ultimately paid to him by way of compromise ($25,000.00) was wholly wasted; and (2) as to Mr Carrello – REL had only become insolvent, so as to justify his appointment, through the wrongful acts of Messrs Carr, Purves and Garrett (including the partial distribution of the proceeds of sale of the Asia Iron shares and the expenditure of costs on proceeding 357). The issues 18 The parties agreed that the real issues for decision were as follows (and I adopt their formulation, including its grammatical and other infelicities): DIRECTORS' REMUNERATION 1. In authorising the plaintiff to pay, and causing the plaintiff to pay, the impugned payments to Carr, Purves and Thomas did Carr and Purves breach their duties to the plaintiff under ss 180, 181 or 182 of the Corporations Act 2001 (Cth) or in equity? 2. Does the resolution dated 26 February 2003 have any operative effect after 28 February 2003? 3. Was the work done by: (a) Carr (b) Purves and (c) Thomas after 28 February 2003 for which remuneration was paid to them (i) done at all and, if so, (ii) was that work "extra services" or "special exertions" on behalf of the company within Article 13.10? 4. In particular were any of the Defendants entitled to the said payments which were paid for work done as a direct consequence of the various breaches alleged? 5. What loss was caused to the plaintiff by the impugned payments of directors remuneration? 6. If: (a) Carr and (b) Purves be otherwise liable, ought they to be excused in whole or in part under section 1318? GARRETT LOANS 7. Has the Plaintiff proved any loss when it has not exhausted its remedies against Garrett? 8. Alternatively, should execution of any judgment given against Carr and Purves in respect of the Garrett loans be stayed until the Plaintiff has exhausted its remedies against Garrett? FOX TECHNOLOGIES 9. In causing the plaintiff to enter into the Fox Transaction did Carr and Purves breach their duties to the plaintiff under ss 180, 181 or 182 of the Corporations Act or in equity and, in causing the plaintiff to continue to fund Fox Technology, did Carr, Purves and Garrett breach their duties to the plaintiff under ss 180, 181 or 182 of the Corporations Act or in equity? 10. Was the decision by: (a) Carr and (b) (after he became a director) Purves that REL invest in Fox Technology a decision to which section 180(2) is applicable so that there was no beach of section 180(1)? 11. Was the loss sustained by the Plaintiff in respect of the investment in Fox Technology caused or materially contributed to by: (a) the actions of Western Venturers and others (b) the failure of the Plaintiff to take reasonable steps in its negotiations with Keycorp after 22 March 2005? [The plaintiff contends that this issue is not available on the pleadings nor should the Defendant be allowed to run the said the defences] 12. If the loss was materially contributed to by extrinsic facts, is this relevant as a matter of law to the plaintiff's claim. 13. What loss was caused to the plaintiff by the plaintiff entering into the Fox Transaction? 14. To what extent is: (a) Carr (b) Purves liable for the loss suffered by the Plaintiff as a consequence of the Fox Technology transaction? 15. Insofar as: (a) Carr (b) Purves be otherwise liable for the loss suffered by the plaintiff as consequence of the Fox Transaction, ought he to be excused in whole or in part under section 1318? DISTRIBUTION TO SHAREHOLDERS OF ASIA IRON SHARE SALE PROCEEDS 16. In causing the plaintiff to enter into make the distribution to shareholders did Carr, Purves or Garrett breach their duties to the plaintiff under s 180, 181 or 182 or in equity? 17. Was the distribution a dividend or capital reduction which was permitted by the Corporations Act? 18. Did the distribution of the Asia Iron share sale proceeds cause the Plaintiff to become insolvent? 19. (a) Did the distribution to shareholders of the proceeds of sale of the Asia Iron shares cause the Plaintiff loss? (b) If so, what is the amount of that loss? 20. Are Carr and Purves protected from liability by the principle in Re Duomatic Limited [1962] 2 Ch 365? 21. Are Carr and Purves liable for moneys distributed to shareholders by Carrello? 22. What loss was caused to the plaintiff by the distribution? 23. If: (a) Carr (b) Purves be otherwise liable, ought he be excused in whole or in part under section 1318? LITIGATION EXPENSES 24. In causing the Plaintiff to defend proceedings COR 357 of 2004 and to pay for its and Cosmos E-C Commerce Pty Limited's defence of the proceedings did Carr, Purves or Garrett breach their duties to the plaintiff under s 180, 181 or 182 or in equity? 25. If so, what is the amount of the loss sustained by the Plaintiff by reason of such breach of duty? ADMINSTRATION EXPENSES 26. Was the appointment of either or both administrators the result of a breach of duty owed to the plaintiff under ss 180, 181 or 182 of the Corporations Act or in equity by Carr, Purves or Garrett? 27. (a) Did the Plaintiff suffer loss by reason of the appointment of Crouch as an administrator? (b) if so, what was the amount of that loss? 28. Were Carr, Purves and Garrett legally responsible for the appointment of Carrello as an administrator? 29. (a) Did the Plaintiff suffer loss by reason of Carrello as an administrator? (b) If so, what was the amount of that loss? 30. If and so far as Carr and Purves be otherwise liable, ought they to be excused under section 1318? PROPORTIONATE LIABILITY 31. Does the Civil Liability Act 2002 (NSW) apply to all or any of the claims made in these proceedings? 32. If so, what apportionment of liability should be made in respect of any such claim? CONTRIBUTION 33. As between Carr, Purves and Thomas, what orders should be made for contribution in respect of those liabilities for which any two or more are jointly or concurrently liable? THOMAS' CROSS CLAIM 34. On the proper construction of the Settlement Deed entered into between, inter alia , the plaintiff, Mr Brown and Mr Johnson and Mr Thomas is Mr Thomas entitled to (in effect) an indemnity with respect to the cross claim brought against him? Background 19 REL is a public company. At all times relevant to these proceedings, it was a registered pooled development fund (PDF) pursuant to the Pooled Development Funds Act 1992 (Cth) (the PDF Act). 20 Mr Carr was appointed a director of REL on 31 January 2001. He was removed from office at the EGM held on 2 November 2004. However, he held himself out as, and performed the functions of, a director of REL from 2 November 2004 until 22 March 2005 (the date when Commissioner Siopis gave judgment in proceeding 357). 21 Mr Carr was also a director of Fox from 9 March 2004 until 6 July 2004. 22 Mr Purves was appointed a director of REL on 19 May 2003. He, too, was removed from office on 2 November 2004, but continued to hold himself out as, and perform the functions of, a director from that date until 22 March 2005. 23 Mr Purves was a director of Cosmos from 19 November 2002 until 4 March 2005, and a director of Cosmos Commerce from 13 October to 5 November 2003 and 23 January 2004 to 31 March 2005. 24 Mr Thomas was appointed a director of REL on 29 August 2002. He was purportedly removed as a director at the EGM held on 2 November 2004, but the effect of the orders made in proceeding 357 was to reinstate him with effect from 2 November 2004. Mr Thomas ceased to be a director on 19 January 2006. 25 Mr Thomas was a director of Fox from 6 July to 27 September 2004. 26 Mr Garrett was appointed a director of REL on 31 August 2004. He too ceased to be a director on 2 November 2004, but held himself out as, and performed the functions of, a director from that date until 22 March 2005. 27 There was another director whose name appears from time to time: Mr Allen Lafferty. He was appointed a director of REL on 28 March 2002, was purportedly removed on 24 July 2003 and in any event resigned on 25 February 2004. Mr Lafferty appears to have been independent of the warring factions: a circumstance that may have led to his purported removal and his ultimate decision to resign. Business experience of Messrs Carr, Purves and Garrett 28 Mr Carr described himself as a company director and investment adviser. He said in his principal affidavit that he had had "over 29 years experience in the securities industry [including] negotiating numerous securities related commercial transactions, including public share offerings and take - overs and advising in those types of transactions". 29 Mr Purves described himself as a company director. He said in his principal affidavit that he has "a degree in financial administration… together with a post-graduate diploma in financial management… [and] a Masters Degree in Business Administration". He is a fellow of the Australian Society of Accountants, a chartered accountant, a chartered company secretary and a registered company auditor. Mr Purves has had substantial business experience as a chief financial officer and managing director or chief executive officer of various substantial businesses. He was at first the chief executive officer of the "E-Commerce" business division of Cosmos Commerce, and eventually became its managing director. 30 Mr Garrett is or was a solicitor. He became bankrupt, and was discharged from bankruptcy on 7 April 2004. As at the date of the Cargo Bar meeting, Mr Garrett appears to have been the "Group Corporate Counsel" of Cosmos and its related or subsidiary entities. The PDF Act 31 In very broad outline, a company that is a registered PDF is able to make investments on the basis that any profits are taxed at concessional rates, and to distribute the profits of those investments tax free to its shareholders. To be registered as a PDF, the company is required to have an investment plan approved by the Pooled Development Funds Registration Board (the Registration Board). Continued operation as a PDF required that the company comply with a number of provisions of the PDF Act, including that: (1) loans made to a company in which investments are held should not exceed in total 20% of the PDF company's shareholders' funds (s 20B(2) the PDF Act ); and (2) without approval of the Registration Board, no investment should exceed 30% of the PDF company's shareholders' funds (s 25). 32 One of the investments held by REL was its shareholding in Asia Iron. Asia Iron owned, or had interests in, a number of iron ore mining tenements at Mount Gibson in Western Australia. A company known as Mount Gibson Iron Limited (MGI) was formed to exploit those tenements. REL had a substantial direct shareholding in MGI, and a further, indirect, holding through Asia Iron. MGI is now a listed public company. Western Ventures and Mr Johnson 33 One of the parties involved in the struggles for control of REL is Mr Bryan Johnson. He is a director of a company known as Western Ventures Pty Limited (Western Ventures). From time to time, Western Ventures provided staff to assist REL in carrying out its activities. One such person, who carried out work for REL from time to time, was Ms Angela Dent. She was a director of REL from 18 August 2001 to 18 October 2002. She was reappointed as a director on 28 November 2008. 34 Ms Dent was also the company secretary of REL from 6 June 2001 to 18 October 2002, and from 4 February until 6 May 2003. 35 Among the resolutions that purportedly were not passed at the EGM of REL on 2 November 2004 was one to appoint (or reappoint) Ms Dent as REL's company secretary. The orders made by Commissioner Siopis included an order appointing Ms Dent as company secretary with effect from 23 March 2005. 36 By way of demonstration of the intertwined commercial arrangements that are a feature of this litigation: Ms Dent has been a director of MGI for two periods: 21 December 2001 to 31 December 2004, and 20 April 2005 to 21 August 2008. Credibility 37 Before turning to the issues, I shall set out my views on the credibility of the witnesses who were called. Ms Dent 38 Ms Dent gave evidence in chief and in reply by way of affidavits. She was cross-examined. No attack was made on her credibility, and no submission was made that I should not accept her evidence. I do accept it. Mr Carr 39 Mr Carr too gave evidence in chief and in reply by way of affidavits. He was extensively cross-examined, and his credibility was repeatedly challenged. I have come to the view that the challenges to his credibility should be accepted, and that Mr Carr is a witness on whose evidence no reliance can be placed unless: (1) it is corroborated by other, acceptable evidence; or (2) it accords with the probabilities, objectively viewed; or (3) it is against his interest. 40 I shall explain, as briefly as I can without doing injustice to Mr Carr, why I have reached that view. 41 At a level of generality, Mr Carr's evidence was marked by persistent evasion and repeated failures to answer, directly (or in many cases at all) questions that were put to him. Indeed, these tendencies were so pronounced that at one stage I wondered whether there might be some underlying organic or mental incapacity which might explain them. However, although Mr Carr did refer briefly to "two heart attacks and eleven stents" (T136.16) neither he nor his counsel, Mr VRW Gray, suggested that there was any organic or mental impediment to Mr Carr's powers of recollection. 42 Persistent evasion is to be seen in Mr Carr's evidence as to the capacity in which he attended the Cargo Bar meeting. As I indicate below, in discussing the Fox transaction, the letter of 20 March 2003 was signed by Mr Carr, to agree to and accept its contents, on the basis that he was "duly authorised on behalf of" REL to do so. One of the propositions stated in the letter, which accordingly Mr Carr agreed to and accepted, was that he had represented that he had authority to bind REL to the transaction described in the letter. However, in para 68 of his first affidavit, Mr Carr had asserted that "[t]he opportunity to invest in Fox was not brought to my attention in my capacity as a director of REL". He was cross-examined at some length about the capacity in which he did attend the meeting (T84.28-85.30) and was unable to give any satisfactory answer. In my view, Mr Carr's evasion reflected his understanding that (as had been put to him at T82.8) he was in a position of intolerable conflict of duty and interest at the time of the Cargo Bar meeting. 43 Mr Carr's evasions continued when the terms of the letter of 20 March 2003 were put to him, and he was asked to say what it was that he was doing when he indicated that he had REL's consent (T89.5-90.44, 91.30 – 92.6): Q. If anything of this is true, can you explain why it is you signed your name to this letter saying that you agreed and accepted what was in it? A. There is nothing in here which is, in my view, binding. It is an indicative letter to say as a director of REL I would take it to my fellow directors and put a proposal. Q. It doesn't say anything of that sort? A. It doesn't say anything, to the best of my recollection that is what would have been in my mind at the time. Q. In that is what was in your mind at the time can you explain why you were duly authorised on behalf of the Resource Equities Limited to agree and accept what was set out in the letter? A. To my knowledge as a director I can have negotiations, discussions on many topics of which a director is duly authorised to have those discussions. Q. Is that your answer to my question? HIS HONOUR Q. You also said you were authorised to bind REL on the basis of paragraph 11. Have a look at paragraph 12. ? A. As a director, my understanding again is that a director can bind any company if are you a director but you have to act in the best interests of the company and shareholders. NEWLINDS Q. Didn't you say about two questions ago that you didn't think you had the authority to bind the board and you had to take this proposal back to the board, didn't you just say that A. With respect, a director whether it is a director of public company or a director of a proprietary company can bind a company but in the best interests you always seek the counsel of your fellow directors. Q. You are deliberately not answering questions now. A. Ask your question again. Q. Did you say three questions ago that you did not believe that you had the authority to bind REL and that you needed to take it back to your board for approval, didn't you say that? A. To the best of my recollection, no, but if, obviously I have misunderstood the question, but a director can bind a company if he is a director. Q. Thank you for that. Did you believe that you had authority to bind REL in relation to what I might call the Cargo Bar deal as at March 2003? A. To the best of my recollection the words authority to bind REL on this basis, is a working relationship with what the understanding of this was, but with the potential to do further due diligence and agree some for some time of transaction. Q. Would you do the Court the courtesy of answering the question, I'll ask it again. Did you believe as at March 2003 that you had authority to bind REL in relation to the proposal that is set out in this letter? A. Yes, I do as a director. Q. And when you read it, I appreciate you say you can't remember reading it, you undoubtedly read paragraph 12 and understood what it meant, correct? A. That is correct. Q. And when you signed it you undoubtedly understood that you were purporting to do so with the authority of REL's board withdrawn. You were purporting to do it with the authority of the company, REL? A. Purporting to sign it on behalf of Leon Carr, it is me, I agreed and accepted by Leon Carr, duly authorised on behalf of Resource Equities Limited so it was agreed and accepted by me as a director of REL. Q. You can assume that we can all read. The proposition is, when you signed your name to this document you held yourself out as having the authority of REL to bind it in relation to the deal set out in the letter, didn't you? A. No. Q. Do you want to consider that answer? A. No. Q. What do you say the words, duly authorised on behalf of Resource Equities Limited, convey? A. What was your previous question? Q. Don't worry about the previous question, worry about this question. What do say the words duly authorised on behalf of Resource Equities Limited convey in the context of this letter? A. That I as a director the Resource Equities Limited was present at the Cargo Bar meeting and that we discussed points 1 through to 13. Q. That is what the words, duly authorised on behalf of Resource Equities Limited convey? A. Agreed and accepted, on behalf of the, I have signed this letter as a director as what the meeting and the representations made at that meeting. 44 I will mention only two other aspects of Mr Carr's evidence. The first relates to the payment of $100,000.00 made to Mr Garrett. The impropriety of that payment was conceded on behalf of Messrs Carr and Purves (see para 3 of Mr Gray's outline submissions). Nonetheless, Mr Carr (and for that matter Mr Purves) sought to defend it by suggesting that it was a payment for legal work that Mr Garrett had done for REL. There was no evidence of any retainer, or of any memorandum of fees or tax invoice, rendered by or on behalf of Mr Garrett. There was no explanation as to why Mr Garrett – the Group Corporate Counsel for the Cosmos Group – should have done work for REL, in circumstances where (as the evidence showed) REL had independent legal advisers to whom, all too frequently, it resorted. In my view, the explanation was a sham, and the suggestion that Mr Garrett had any claim (let alone a justifiable one) for legal fees of the order of $100,000.00 was a fabrication. 45 The other aspect of Mr Carr's evidence that I wish to mention at this point relates to the shares in REL issued to Cosmos Commerce. Those shares were voted at the EGM held on 2 November 2004. Mr Carr clearly appreciated that, to avoid any suggestion that the issue of the shares was a sham, it was necessary at least that Cosmos Commerce should have paid, or tendered payment, for them. Mr Carr and Mr Purves each asserted, in substance, that Cosmos Commerce had drawn a cheque in payment for the shares on 29 October 2004 and provided it to REL on that day. 46 Mr Carr was asked whether he understood that Cosmos Commerce had paid for the shares that were issued. His evidence was, as usual, evasive; but I think that the better view of it is that he did claim to have believed, until after the meeting, that the cheque had been banked (T143.19-145.10): Q. I just go to a final topic still to do with this Court case. Do you say that Cosmos E Commerce paid for the shares that were issued to it? A. A cheque was drawn by Cosmos E Commerce and Mr Purves had that cheque in his possession. Q. That's why I couched the question the way I did. Do you say that that amounted to a payment by Cosmos E Commerce to REL for the shares? A. Sorry? Q. Do you say that that amounts to payment? A. Is that amount? Q. Does that mean that Cosmos E Commerce paid for the shares in your mind? A. There was an obligation for Cosmos E Commerce because they had been issued shares to pay for those shares. Q. You are deliberately not answering the question, aren't you? A. No. Q. The question was not did you think that Cosmos E Commerce had an obligation to pay for the shares, the question was did you think by the time of either meeting when you allowed Cosmos E Commerce to vote upon the basis that they owned 7 million shares did you think that they paid for them? A. At that time Mr Purves was in charge of the accounting, he banked the cheques, paid the bills, he was in possession of the cheque at the time of that meeting. I was not aware whether that cheque had been banked or not banked. Q. Let's just break that down. If you knew he was in possession of the cheque it must for the purpose that you knew he hadn't banked it, mustn't? A. No. Q. The bank would have the cheque if he put it in the bank, wouldn't they? A. This was several days, weeks before that he had been given the cheque. Q. But Mr Purves is a Director of both companies so what's the good of him having the cheque if the idea is to get it into the hands of REL? A. To the best of my recollection the Glammont shares were issued and that cheque was banked some time later as well because the Western Australians alleged that they were issued for an improper purpose. HIS HONOUR Q. Mr Carr, when Mr Purves held the Cosmos E Commerce cheque for $350,000 for payment of the shares did he do so to your understanding as a Director of Cosmos or as a Director of REL? A. He was holding that as a Director of REL. Q. Do you accept that as a Director of REL it was his obligation to bank the cheque? A. Yes, it was. Q. Into REL's account? A. Yes, it was. Q. Was that done to your knowledge? A. At the time of the meeting I assumed it would have been banked. Subsequently to that meeting it became - I became aware that it had not been at that stage remitted to the company. NEWLINDS Q. The meeting was on 2 November. Do you recall that that's the second meeting, 2 November? Do you accept that from me? A. Is that the day of the invalid - the ruling of the invalid votes? Q. Yes. That's the meeting where the counting of the Cosmos E Commerce shares was declared to be invalid? A. The counting of the E commerce shares-- Q. Don't worry, the meeting that we're talking about-- A. Yeah. Q. --you just told his Honour I think, and tell me if I've got this wrong, that it was only after that meeting that you became aware that the cheque hadn't been banked, is that what you said? A. Yes. Q. Is that true? A. Yes. Q. Are you sure? A. It was when the commencement of the litigation commenced. Q. Are you sure of that? Are you confident, and I notice that you are not saying to the best of my recollection in relation to these answers, that you did not become aware that the cheque had not been banked until after the litigation was commenced? A. Board meeting, allotment, to the best of my recollection there was a time where Mr Purves advised me that the cheque had been drawn and paid - drawn and he had - it was in his possession. 47 The butts for cheques numbered 1385 to 1408 (both numbers inclusive) were in evidence. The range of dates covered by those cheques, at least so far as the butts can be trusted, was 25 October 2004 to 16 November 2004. With one exception, the butts are in chronological order. 48 The particular cheque that was said to have been given in payment for the shares is cheque number 1394 (Mr Purves agreed with this, and, the evidence being against his interest, I accept it). Its butt is dated 29 October 2004. However, each of the five preceding cheque butts (1389 to 1393) is dated 5 November 2004, and each of the seven succeeding cheque butts (1395 to 1401) is dated 10 November 2004. In my view, it is clear from those facts alone that cheque number 1394 was not drawn before 5 November 2004 at the earliest, and was backdated. 49 There is powerful support for that inference. The immediately preceding cheque butt, number 1393, is dated (as I have said) 5 November 2004. The payee is stated as "Resource Equities Ltd". The amount of the cheque is $350,000.00. That was the amount payable for the 7 million shares purportedly issued to Cosmos Commerce (the issue price was 5 cents per share). That cheque butt has been struck through with parallel transverse lines, and the word "VOID" has been written between the lines. It is in my view clear that, for whatever reason, Cosmos Commerce did not attempt or purport to pay for the shares until 5 November 2004. Thus, the cheque was cancelled and the replacement cheque, backdated to 29 October 2004, was drawn. 50 I have no doubt that Mr Purves was responsible for the series of events that I have just described. That is one of the reasons why I have formed the view of his credibility set out at [58] below. 51 However, Mr Carr is implicated. He asserted that he was aware of the existence of the cheque at the time of the meeting, and that it was not until after the meeting that he "became aware that it had not been at that stage remitted to the company" (T144.25-.28). He said further that he did recall seeing the cheque (T146.5) but could not recollect whether he had seen it before or after the meeting on 2 November 2004. 52 In an affidavit sworn in proceedings in Western Australia, Mr Carr asserted that the cheque had been tendered on 29 October 2004. The affidavit suggests that Mr Carr had possession of the cheque (he said, in para 5, that he did not bank it) on 29 October 2004, and that he retained it thereafter without presenting it for payment (para 8 of that affidavit). 53 I have no doubt that Mr Carr (and for that matter Mr Purves) appreciated that it was part of REL's case that the issue of shares to Cosmos Commerce was a sham. In my view, the substance of this aspect of Mr Carr's was fabricated, in an attempt to give some credibility to the purported issue of shares to Cosmos Commerce; and in my view, to the extent that Mr Carr sought to suggest (as plainly he did, at least in his affidavit in the proceedings in Western Australia) that the cheque had been issued, and he had seen it, on 29 October 2004, that evidence is knowingly false. 54 Both the behaviour in which, I find, Mr Carr engaged and the falsehoods that, I find, he fabricated in an attempt to disguise that behaviour are sufficient of themselves to justify the conclusion that I have reached as to his credibility. 55 In addition, I rely on various unsatisfactory aspects of Mr Carr's evidence, to which I make specific reference in later sections of these reasons. Mr Purves 56 The best that can be said for Mr Purves is that he did not engage in the barrage of evasive and non-responsive answers that marked Mr Carr's evidence. However, he too sought to justify the payment of $100,000.00 to Mr Garrett on the basis that it was in return for legal services rendered; and he too was a party to what I find was the fabrication of evidence in relation to the purported payment by Cosmos Commerce to REL in exchange for the purported issue of shares. Of course, he was a principal actor in the sham itself. 57 As with Mr Carr, I rely also on other unsatisfactory aspects of Mr Purves' evidence, to which I make reference in later sections of these reasons. 58 As with Mr Carr, I conclude that the evidence of Mr Purves should not be accepted unless: (1) it is corroborated by other, acceptable evidence; (2) it accords with the probabilities, objectively ascertained; or (3) it is against his interest. 59 In case it is not clear from what I have said, I do not regard Mr Carr as providing any former satisfactory corroboration for the evidence of Mr Purves. Nor do I regard Mr Purves as providing any satisfactory corroboration for the evidence of Mr Carr. Messrs Thomas and Nagy 60 Mr Thomas gave evidence, effectively both in chief and in reply, by affidavit. He was cross-examined. No attack was made on his credibility. I accept his evidence. Likewise, Mr Nagy gave evidence in chief by affidavit. He too was cross-examined. No attack was made on his credibility. I accept his evidence. The duties said to have been breached 61 REL relied on ss 180, 181 and 182 of the Corporations Act and also on duties owed to it by Messrs Carr and Purves, as directors, under the general law. 62 Sections 180, 181 and 182 read as follows: 180 Care and diligence—civil obligation only Care and diligence—directors and other officers (1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation's circumstances; and (b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer. Business judgment rule (2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they: (a) make the judgment in good faith for a proper purpose; and (b) do not have a material personal interest in the subject matter of the judgment; and (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and (d) rationally believe that the judgment is in the best interests of the corporation. The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold. (3) In this section: business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation. 181 Good faith civil obligations Good faith—directors and other officers (1) A director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in the best interests of the corporation; and (b) for a proper purpose. (2) A person who is involved in a contravention of subsection (1) contravenes this subsection. 182 Use of position—civil obligations Use of position—directors, other officers and employees (1) A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. (2) A person who is involved in a contravention of subsection (1) contravenes this subsection. 63 The content and scope of those statutory duties was not controversial. Nor was it controversial that Messrs Carr and Purves, as directors of REL, owed it fiduciary obligations proscribing, among other things, pursuit of their own interest at the expense of REL's interest in circumstances where there was a conflict, or a real or substantial possibility of conflict, between those interests. In other words, their general law obligations as fiduciaries reflect, to some extent, ss 181 and 182. 64 It is not necessary to take up time analysing the statutory and general law duties. This is not a case where the factual considerations are finely balanced, so that careful attention to the precise wording of the statutory obligations, and detailed analysis of the general law obligations, is required in order to reach a conclusion on the facts. Issues 1 to 6: payments to directors Relevant provisions of REL's constitution 65 Clause 14.1 of REL's constitution vests in the directors, subject to the Corporations Act and any other provision of the constitution, the management of REL's business. It reads as follows: 14.1 POWERS AND DUTIES OF DIRECTORS 14.1 Management of the Company Subject to the Corporations Law and to any other provision of these Articles, the business of the Company shall be managed by the Directors, who may pay all expenses incurred in promoting and forming the Company, and may exercise all such powers of the Company as are not, by the Corporations Law or by these Articles, required to be exercised by the Company in general meeting. 66 Clauses 13.9 and 13.10 of the constitution deal with remuneration and expenses. They read as follows: 13.9 Remuneration The Directors shall be paid out of the funds of the Company, by way of remuneration for their services as Directors, a sum not exceeding such fixed sum per annum as may be determined by the Directors. The remuneration of the Directors shall not be increased except pursuant to a resolution passed at a general meeting of the Company where notice of the suggested increase shall have been given to Shareholders in the notice convening the meeting. No non-executive Director shall be paid as part or whole of his remuneration a commission on or a percentage of profits or a commission or a percentage of operating revenue, and no executive Director shall be paid as whole or part of his remuneration a commission on or percentage of operating revenue. The remuneration of a Director shall be deemed to accrue from day to day. 13.10 Expenses The Directors shall be entitled to be paid reasonable travelling, hotel and other expenses incurred by them respectively in or about the performance of their duties as Directors. If any of the Directors being willing shall be called upon to perform extra services or make any special exertions on behalf of the Company or the business thereof, the Directors may remunerate such Director in accordance with such services or exertions, and such remuneration may be either in addition to or in substitution for his share in the remuneration provided for by Article 13.9. Relevant resolutions 67 On 15 May 1995, the company in EGM resolved as follows: Directors Fees "that in accordance with Article 13.9 directors fees to a combined limit of $200,000.00 per annum be paid to directors as determined by the board from time to time." 68 On 26 February 2003, the board of REL (then, Messrs Carr, Lafferty and Thomas) held a telephone meeting. The resolutions that they passed included the following: That the current Directors and Angela Dent be paid $1,000 per month for their period of service as Directors, a total of $56,000 for the period 31 January 2001 to 28 February 2003. The payments claimed and received 69 According to Mr Carr (affidavit sworn 28 September 2009, para 6) he had a discussion with Mr Purves in about March 2004. Mr Purves said that he was preparing the accounts for REL, and that the three of them (i.e., Messrs Carr, Purves and Thomas) "should put in our tax invoices so the company can do its accounts". Mr Carr said that he then telephoned Mr Thomas and asked him to "render invoices for the relevant periods for any work you have done…". 70 Mr Purves did not deal with this topic in his affidavit; specifically, he did not deny that he had had a conversation with Mr Carr to the effect alleged. Mr Thomas did refer to the topic in his affidavit, but did not dispute that he had had a conversation with Mr Carr. He said that it was to somewhat different effect: Mr Carr said Mr Thomas was to be paid $66,000.00 for director's fees for the two years to 30 June 2003 and 30 June 2004, and should submit a tax invoice for that amount to REL. 71 According to Mr Carr, after the conversations to which I have referred, he submitted tax invoices totalling $200,000.00; Mr Purves submitted tax invoices totalling $99,000.00; and Mr Thomas submitted a tax invoice for $66,000.00. Thereafter, Mr Carr said that "[t]o the best of [his] recollection", there was a directors' meeting by telephone to discuss the tax invoices. He said, of that meeting (affidavit sworn 28 September, 2009, para 11): I believe that a minute of our meeting and the resolutions to approve payment of each Tax Invoice was prepared but I have not been able to locate a copy of it. 72 In cross-examination on this topic, Mr Carr's evidence was very much less definite (T115.14-.34, 164.16-.27): Q. … Just tell me if I've got this wrong, is it the position that you, Mr Purves and Mr Thomas had a discussion or a series of discussions amongst yourselves and then all turned up at a meeting in April 2004 with some invoices addressed to the company, is that right? A. I think we became directors in 2003. At some point during the first year there was a discussion in relation to remuneration. Q. It's inconceivable isn't it that you each independently turned up to the same meeting with your own invoices, there must have been some discussion and an agreement that you were going to each-- A. To the best of my recollection towards the end of the financial year, these ones being April, either Nigel or, before 30 June one was required or asked, it was decided that we would put in our director's fees. Q. It was decided you would all be paid some remuneration? A. I believe to the best of my recollection I think that was at a Board meeting. Q. And at that Board meeting all three of you presented invoices, correct? Or are you saying it was decided at a Board meeting and the invoices came later? A. I can't remember whether it was decided at the Board meeting, the invoices came later or they were put to that Board meeting. … Q. In relation to director's fees, I think it was established yesterday that there were no bills presented to the Board. Were the payments to yourself disclosed to me and agreed by me? A. To the best of my recollection I received a telephone call from Nigel asking for me to lodge my up-to-date bills for all of the extra work that I did. I then telephoned you that afternoon and asked you to do the same, and to the best of my knowledge you provided your bills, I provided mine and the invoices were all handed to Mr Purves. Q. But there was no disclosure as to what your bill was? A. To the best of my recollection I think we probably discussed that at a Board meeting but I can't remember. 73 Mr Purves' dealt with this subject very briefly in his affidavit (affidavit sworn 29 June 2009, para 20): 20. I further recall that in late March 2004 Leon Carr prepared a bill for all his time and expenses in attending to various matters on behalf of REL and he delivered it to REL Richard Thomas and I did the same in relation to the work we had undertaken for REL. When all the bills were completed we met as directors of REL and we resolved to approve payment of the bills. 74 Mr Purves' less than detailed recollection was substantially qualified during cross-examination (T181.47-182.38): Q. Do you recall in relation to Mr Carr's claims as to whether you actually saw any bills or invoices from him? A. I can't recall but I would suspect that they would have been presented. Q. Does it follow from that answer that you are not able to tell us whether he attached to his invoices what might be described as supporting documents? A. I can't recall. Q. Is the chronology of these events this, that there was a series of telephone calls where effectively the Directors all agreed that if they each sent in fee notes that they would be paid by the company? A. I can't recall, sorry. Q. They then each sent in some fee notes and all sat around in a meeting and duly approved each other's fees? A. I can't recall that, sorry. Q. Can you recall turning your mind at all as to whether the level of fees of any of the Directors that was being claimed was appropriate? A. I - I can't recall that but they would have been appropriate, otherwise they wouldn't have been paid. Q. Why does that follow? A. Because of the level of work. Q. See, they might have been paid if they weren't appropriate if no-one turned their mind to the question as to whether they were appropriate or not, that's right, isn't it? A. It's possible. Q. Well, are you able to say that that's not what happened? A. I can't recall. HIS HONOUR Q. Mr Purves, are you saying that you cannot now recall whether or not there was a meeting of Directors at which the invoices from the three of you were considered and approved A. No, your Honour, I'm sure there would have been a meeting. I can't specifically recall attending a meeting just approving the fees to be paid. No, I can't recall that but as a process there would have been either part of an existing meeting or a meeting would have been called. 75 Mr Thomas (who I should say represented himself during the hearing) said in his affidavit affirmed 14 October 2009 that: (1) he was not given invoices (and, I infer, did not provide one) but was told that he would be paid $60,000.00, plus GST, for directors' fees up until 30 June 2004. He thought "that this fell within the approval limits of what was available for Directors on a pro-rata basis…" (para 85); and (2) He "was not aware of the amounts that Carr and Purves were to be paid", "was not a bank signatory" and "these payments [to Messrs Carr and Purves] were not disclosed [to him]" (para 87). I return to his evidence on this topic at [363] below. 76 Mr Thomas was not challenged on this evidence in cross-examination. 77 Although Mr Carr claimed to have submitted a tax invoice (together with supporting documentation) to REL, he was unable to produce any copy, and nothing has been produced from the records of REL. 78 Mr Purves submitted two memoranda of fees in April 2004, and a "Fees Notice" dated 11 October 2004. 79 The first memorandum of fees read as follows (omitting formal parts): Fees for the periods [sic] ended March 2004 as requested including all, [sic] audit, tax and secretarial matters including preparation of extra ordinary [sic] shareholders [sic] meeting and attendance to litigation matters also including preparation of affidavits and meeting attendance as required. Total Due $33,000.00 80 The second memorandum of fees read (again omitting formal parts): Director's fees for the periods ended May 2004 and May 2005 including all tax. May 2004 33,000 May 2005 33,000 Total Due $66,000 81 The "Fees Notice" of 11 October 2004 was submitted on the letterhead of a company known as 560 Pty Limited. Mr Purves accepted in cross-examination that this was a company controlled by him. It read (again omitting formal parts: To fees for the period to date as requested for Company Secretarial Services to Dec 31, 2004, [sic] registered office fees, including preparation for several General Meetings and Financial Statements, Constitution and general secretarial services. $20,000 GST 2,000 Total Fees Due $22,000 82 Mr Thomas submitted a tax invoice for director's fees for the financial years to 30 June 2003 and 30 June 2004. He claimed $30,000.00 per year plus GST. 83 Mr Carr received a further payment of $75,000.00 on about 29 December 2004. Mr Purves received a further payment of about $88,000.00 about two days later. Issues 1, 3 and 4: breach of duty and related matters 84 There was no evidence of any tax invoice prepared by Mr Carr or by Mr Thomas. For the reasons that I have given, I do not accept Mr Carr's evidence that there were any such tax invoices. Nor do I accept that there was a directors' meeting – at least, one involving Mr Thomas – where the invoices supposedly submitted were approved. 85 In cross-examination, Mr Carr sought to embellish his evidence as to the tax invoices that he said he submitted. He claimed that they were "provided by me with back up" (T116.40): a proposition not advanced in either of his affidavits. I do not accept that evidence. In my view, and with apologies to Sir William Schwenk Gilbert (The Mikado, 1885) it was fabricated in an attempt to provide "merely corroborative detail, intended to give artistic verisimilitude to an otherwise bald and unconvincing narrative". It failed entirely to achieve its purpose. 86 In his second affidavit, Mr Carr sought to justify the payment to him by reference to cl 13.10 of REL's constitution. He said (para 6) that it related to "work… done for REL over the previous year over and above the normal work in being a director or REL and attending board meetings". He gave what purported to be details of that "extra work… carried out for the benefit of REL" in para 12. I do not propose to set out that lengthy paragraph. Nor do I accept it: as I have said, in discussing the question of credibility, I am not prepared to accept any evidence given by Mr Carr unless it is corroborated by other, acceptable, evidence; or is consistent with the probabilities objectively ascertained; or is against his interest. Neither para 12 of his second affidavit nor the antecedent assertion of "extra work" in para 6 falls into any of those categories. 87 There are further problems with para 12. It is clear that many of the entries in the paragraph (specifically, in the table forming part of it) were adapted wholesale from memoranda of fees provided to REL by its solicitors Christensen Vaughan. To that extent, what is said in para 12 should not be taken as reflecting any actual recollection on Mr Carr's part. The more significant difficulty is that, with very few exceptions, the justification given relates to matters such as the Fox transaction or litigation in which REL had become embroiled because of the disputes between those who controlled (or sought to control) it. Even if Mr Carr had undertaken the activities described – and I do not accept his evidence that he did – he was not entitled to charge REL for the time involved. For the reasons that I give in discussing the Fox transaction, that transaction was something undertaken not for the benefit of REL but for the benefit of Mr Carr and Cosmos. As to the litigation (and I am referring to proceeding 357): for the reasons that I give in discussing this aspect of REL's claim, whatever time Mr Carr spent in relation to it was spent not on the proper affairs of REL but in an attempt to justify the control that he, together with Mr Purves and Mr Garrett, had exercised over the affairs of REL and the improper means taken by him in particular at the EGM of 2 November 2004 to maintain that control. 88 Accordingly, to the extent that the amounts claimed by and paid to Mr Carr exceeded his entitlement to remuneration as a director, I find that they were not justified. 89 There are problems also with the claims made by and payments to Mr Purves. For example, he claimed director's fees not only for a period that was effectively in arrears ending May 2004, but also prospectively (for the period ending May 2005). He was unable to offer any acceptable justification for the prospective claim (T185.47-186.18): Q. Now can you tell his Honour why it was that you thought it was appropriate that you be paid Directors fees in advance? A. I was just - previously we hadn't been paid for some time. Q. But that's not what the invoice says? A. No, no, but before that this was the first time we'd been - been paid in accordance with what the fees were. Q. But if that's the explanation wouldn't the memorandum of fees simply state that this was a claim for the periods you haven't been paid for in the past? A. Oh, it's only an accounting period, I just issued it out. Q. But it is highly unusual, don't you agree, for people to claim money for work to claim and be paid money for work that they have yet to carry out? A. Not as Directors fees, it's not unusual. Q. So is your explanation that there's nothing unusual about being paid Directors' fees for the future? A. For the next 12 months, no. Q. So that's the explanation, is it? A. Sure. 90 What does seem to follow from Mr Purves' evidence (including his invoice for director's fees) is that he regarded $33,000.00 per annum as reasonable remuneration. Since there appear to have been three directors in office at the time, that appears to be within the cap fixed by the members of REL in the EGM held on 15 May 1995. If, as Messrs Carr and Purves say, they resolved to approve payment of the claims that they (and allegedly Mr Thomas) submitted, there is an available inference – to be drawn against their respective interests – that $33,000.00 per annum represents an appropriate amount for the fees to be paid to each director for the period of 12 months ending in May 2004. Mr Purves confirmed in cross-examination that, in his view, $33,000.00 was an appropriate annual amount for director's fees (T186.35). 91 I turn to Mr Purves' claim for extra services: his other memorandum of fees of April 2004, and the fees notice of his company dated 11 October 2004. Mr Purves did not say anything in his affidavit that might justify the claims made in those documents. 92 Nor did Mr Purves' evidence in cross-examination provide any acceptable justification for these claims. He gave no evidence of extra services or special exertions that would justify the claim for $33,000.00 for, in effect, secretarial services for the period ended March 2004. Nor did he produce any documentation in support of the claim. As to the fees notice of 11 October 2004, Mr Purves appeared to accept that part of it related to a period of time after he had ceased to be the company secretary of REL of 31 August 2004 (T187.5-.14). In doing so, he sought to justify this apparent anomaly by saying that "the balance is preparation of the balance [sic] of that invoice, so general meetings, financial statements, constitution". He added "general secretarial services" to this list of duties. When asked to enlarge on this, he gave the following evidence (T187.19-.41): Q. So what did you do in relation to the constitution? I take it that's the constitution of the company? A. Yeah, they were looking at amending it and bringing it up to a modern - modern level. Q. And did they? A. I can't recall whether they ever did or not. Q. And so you claim fees over and above your Director's fees for attending general meetings of the company, did you? A. Yes, I did. Q. That can't be justified, can it? A. It was preparation of those general meetings, not the specific attendance. Q. The preparation for the general meetings is something you were doing as a Director of the company to prepare for the meeting surely? A. Not when you have 13 in a short space of time. Q. And what precisely were you doing in relation to the financial statements? A. When we got the accounts from the other company officers the accounts were somewhat behind the audit so we had to bring them up-to-date so the auditors could then do their audit. 93 For the reasons that I have given, I do not accept that Mr Purves has justified any claim for remuneration over and above his director's fees. There is nothing to corroborate his claim, and for the reasons that I have given I do not accept his oral evidence in which he sought to justify his claim. 94 As to Mr Thomas: the amount paid to him can be justified (if at all) only as director's fees. I accept his evidence that he played no part in the approval of the payments, although no doubt he was happy to accept the payment. In any event, since Mr Thomas has settled with REL, the justification of the payment to him is relevant only to REL's claim for breach of duty against Messrs Carr and Purves. 95 I conclude, from Mr Purves' evidence and from the document to which I refer at [97] below, that an appropriate annual amount for director's fees was $33,000.00. Subject to what I say as to the directors' resolution of 26 February 2003, and leaving aside for the moment the further payments to Messrs Carr and Purves in December 2004, it follows that the payments in question can be justified to the extent of $33,000.00 for each of Messrs Carr, Purves, and to the extent of $66,000.00 for Mr Thomas, but not otherwise. With the same qualifications, it follows that there were unjustified overpayments as follows: To Mr Carr: $167,000.00; and To Mr Purves or his company: $88,000.00. 96 As I have said, I accept Mr Thomas' evidence that he was not involved in the approval of the payments. That was done by Messrs Carr and Purves. I do not accept that they had any justification for approving the payments. On the contrary, the purported approvals (if in fact they were given) were in breach of both statutory duties (ss 181 and 182 of the Corporations Act) and fiduciary duties as directors under the general law. 97 Mr Rodney Adler was a substantial investor in REL, through a company or companies controlled by him. It seems that, by earlier June 2004, Mr Adler was concerned with a number of aspects of REL's performance. Mr Carr wrote to Mr Adler on 16 June 2004, in answer to a fax from Mr Adler dated 7 June 2004 that is not (I think) in evidence. It would appear that one of the concerns raised by Mr Adler related to the level of directors' fees. In answer to some question on this topic, Mr Carr replied: Director's fees are currently $50,000.00 for Chairman, $33,000.00 for Directors. 98 Mr Carr did not see fit to mention to Mr Adler that, as at 16 June 2004: (1) Mr Purves had been paid a total of $99,000.00 (including what purported to be a year's director's fees in advance); and (2) he himself had been paid $200,000.00. 99 It is a fair inference from the terms of Mr Carr's statement to Mr Adler, and the actual levels of payments, that Mr Carr was: (1) concerned to suggest that the amounts paid were no more than as stated in his letter; and (2) concerned to conceal the actual amounts paid. 100 I return to the further payment to Mr Carr, of $75,000.00 in late December 2004, after REL received the proceeds of the sale of its shares in Asia Iron. He submitted no invoice for that payment. Even if one were to accept Mr Carr's attempt to justify the payment (and I do not) no proper purpose is revealed. The great bulk of the work said to have been done relates to proceeding 357: the litigation in which he and Mr Purves had caused REL to become embroiled in an attempt to protect their control of REL, and the interests of Cosmos Commerce. 101 As to the further payment to Mr Purves, of $88,000.00 in late December 2004: he submitted no invoice to justify the payment. Nor did he offer any in his affidavit. Mr Purves appeared to accept that, but could not explain why, he had not been able to produce any invoice relating to that payment (T189.2,.5,.9). 102 In its calculation of loss, REL gives credit for director's fees (at the rate of $1,000.00 per month) payable to each of Messrs Carr, Purves and Thomas from March until November 2004. In my view, it is appropriate to allow a credit, but on the basis of an entitlement to directors' fees of $33,000.00 each per annum. On the basis that there are seven full months (from the end of March to 2 November), the appropriate credit in respect of Messrs Carr and Purves is $38,500.00. Since Mr Thomas was paid up to 30 June 2004, the appropriate credit for him is for four months, or $11,000.00. The total credit is thus $49,500.00. 103 It follows that the total of the overpayments is $368,500.00, made up as follows: (1) the total of the payments referred to at [95] above - $255,000.00; and (2) the total of the payments referred to at [100] and [101] above - $163,000.00; less (3) a credit for seven months of directors' fees - $49,500.00. 104 It follows, from my conclusion that the overpayments referred to in the preceding paragraph were not justified, and from my rejection of the justifications offered, that Messrs Carr and Purves breached their statutory and general law duties. As I said at [64] above, this is not a case where close analysis of the content of the duties is required in order to reach that conclusion. On the contrary, it is a case involving total disregard of those duties, and a suppression of REL's interest in favour of the individual interests of Messrs Carr and Purves. Issue 2: the resolution of 26 February 2003 105 I turn to the resolution of 26 February 2003. For convenience, I repeat it: [t]hat the current Directors and Angela Dent be paid $1,000 per month for their period of service as Directors, a total of $56,000 for the period 31 January 2001 to 28 February 2003. 106 Mr CRC Newlinds of Senior Counsel, who appeared with Mr JC Giles of Counsel for REL, submitted that: (1) on the proper construction of REL's constitution, it was open to the directors of REL to fix annual remuneration at an amount less than any cap imposed by the members in general meeting; and (2) the amount of $1,000.00 per month fixed by the resolution of 26 February 2003 was effective not only for the period ended 28 February 2003 but, until varied, thereafter. 107 Mr Gray appeared to accept the first proposition. He did not accept the second. In case I am doing Mr Gray an injustice, I should make it plain that in my view the first part of Mr Newlinds' submission is correct. Clause 13.9 permits remuneration in a sum "not exceeding" whatever may be fixed by the directors, subject to any cap imposed by the company in a general meeting. There is no linguistic justification for the proposition that the directors may not pay themselves any amount less than that fixed by the company in general meeting. On the contrary, if the directors were to decide that there was no commercial justification for payment of the full amount of fees authorised by the cap, then performance of their duties under ss 181 and 182, and their fiduciary obligations, would require them to pay themselves less. A construction that would prevent them from doing so should not be adopted. 108 The second limb of Mr Newlinds' submission requires a little more thought. On its face, the resolution could be read as stating two propositions: (1) that those to whom it applied should be paid $1,000.00 per month so long as they should be directors; and (2) the total amount so payable, for the period 31 January 2001 to 28 February 2003, amounted to $56,000.00. 109 On balance, I think, that is not the proper construction to be given to the resolution. It refers both to "their period of service as directors" and to "the period 31 January 2001 to 28 February 2003". Clearly enough, the resolution (passed two days prior to the expiration of the second of those defined periods) was intended to prescribe the entitlement to remuneration of those to whom it applied. Equally, it was intended to state its effect as at the end of the second of the periods stated. But not all of those to whom it applied were directors for the whole of that period. Ms Dent was a director for part only (18 August 2001 to 18 October 2002). Mr Carr was a director for the whole of the period. Mr Lafferty was a director for part only: from 28 March 2002. Mr Thomas too was a director for part only: from 29 August 2002. Presumably, if those varying periods of service were taken into account, the total amount payable at the stated rate would equal $56,000.00. 110 Taking those matters into account, I think that the better reading of the resolution is that it authorises payment at the rate of $1,000.00 per month for those who were directors during the second period stated (31 January 2001 to 28 February 2003) but only for such time as they actually held the position of director up until 28 February 2003 (i.e., "for their period of service as Directors" – the first period stated). 111 Thus construed, the resolution has substantially retrospective effect (I do not regard the fact that it was passed two days before the end of the second period stated as necessitating a significant qualification to this proposition). No doubt, it reflected the view of those who participated in it that the services in question, for the period in question, would be appropriately remunerated at the rate of $1,000.00 per month. It does not follow that the same rate of remuneration should be regarded as appropriate for whatever services might be rendered in the future. 112 In other words, I think, the resolution should be construed as fixing particular remuneration, for a closed period, within the limit of the overall cap earlier set by the company in general meeting. 113 Further, on the construction that I should think should be given to cl 13.9 of REL's constitution, it was open to the directors from time to time to resolve to fix their remuneration at what they considered (acting honestly and reasonably) to be a reasonable rate, within the limits of any applicable cap. It seems to me that a commercial interpretation of cl 13.9 should recognise that the directors might from time to time review the work done by them in past periods, and (always subject to any applicable cap) fix an appropriate amount by way of remuneration. This approach enables the directors to take into account "known knowns": what has been done to date, and what, by way of time and effort, was involved in doing it. It does not require them to make some prognostication of either "known unknowns" or "unknown unknowns": as to what might be required to be done in the future, and the time and effort involved in it. At least where the amount of work required of directors fluctuated substantially from time to time, it could be said to be more consistent with their statutory and fiduciary obligations that they should fix their remuneration in arrears, taking into account what has occurred, rather than by hazarding a guess to what might be required in the future. That is, perhaps, particularly so in the case of a PDF company such as REL, where the work to be performed in the future depends necessarily on decisions made as to whether (for example) the company should be wound up, or should seek further capital and undertake further investment. 114 For those reasons, I do not regard the resolution of 26 February 2003 as imposing a prospective cap on the director's entitlement to remuneration. Issue 5 - loss 115 It follows from this that, subject to s 1318, REL has made good its claim for recovery of overpayments to its directors, to the extent indicated at [103] above, because those payments were made in breach of duty. Issue 6 – s 1318 116 Section 1318 of the Corporations Act applies to officers and employees of a corporation (see subs 4). In essence, the section operates where a person to whom it applies is or might be liable to the corporation for negligence, default, breach of trust or breach of duty. If the person is or may be liable, but has acted honestly, the court may relieve the person wholly or in part (and on terms) from liability if in all the circumstances of the case the person ought fairly to be excused. I set out s 1318(1): (1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit. 117 It will be noted that s 1318(1) does not in terms require that the person seeking to be excused should have acted reasonably. Statutory antecedents of s 1318 had included a requirement to act reasonably as well as honestly. But the word "reasonable" was dropped in 1982, and has not since reappeared. Austin J considered the consequences of this in Australian Securities and Investments Commission v Vines (2005) 65 NSWLR 281 at 288 [23] and following. His Honour concluded at 289 – 290 [33] that there was an "absolute requirement of honesty", which was to be contrasted with "reasonableness", no longer a requirement but "a mere factor". Thus, his Honour said, "reasonableness remains a relevant consideration under s 1318, in cases other than duty of care cases". 118 Although an appeal from the decision of Austin J succeeded in part (Vines v Australian Securities and Investment Commission (2007) 62 ACSR 1), the Court of Appeal upheld his Honour's decision on s 1318 and did not suggest that his Honour's analysis of the relevant principles was incorrect. 119 In terms, s 1318(1) involves the exercise of a discretion ("the court may relieve the person… from liability on… terms…"). As a matter of language, that discretion would appear to arise for exercise only if two conditions precedent are met: (1) the Court is affirmatively satisfied that the person acted honestly; and (2) the Court forms a value judgment (see Spigelman CJ in Vines v ASIC at 108 [558]) that in all the circumstances the person ought fairly to be excused. 120 It may be questioned whether this is what the legislature intended. If the two conditions precedent (as I have described them) are satisfied, it would be at least an unusual case where the discretion was not exercised in the person's favour. That is because, assuming a finding of honesty, the formation of the value judgment that the person ought fairly to be excused would seem to require the exercise of the discretion in the person's favour. It may be, on analysis, that once the value judgment is formed, any further element of discretion is concerned more with the extent of relief and with the conditions (if any) attaching to it. It is not necessary to pursue this fascinating topic, because in this case the discretion does not arise for exercise. 121 Whatever may be the content of the requirement that the person acted honestly, it involves at least that the person acted "without moral turpitude". Those words come from the judgment of Tadgell J in Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 196, cited by Austin J in ASIC v Vines at 292 [43]. In my view, the conduct of Messrs Carr and Purves cannot be described as involving no element of moral turpitude. Even confining analysis to the particular breach of duty with which I am concerned, I do not think that their conduct would be regarded by any reasonable person as honest. In essence, Messrs Carr and Purves concocted a scheme to justify payments to themselves well in excess of their entitlements. They did not seek to justify the entirety of the payments made to them as directors' fees. Nor could they have done so. That is why Mr Carr gave evidence (which I do not accept) seeking to justify the additional charges under cl 13.10 of REL's constitution, and Mr Purves did likewise. 122 Further to the extent that the charges by Mr Purves involved a claim for director's fees in advance, he was unable to justify it. See his evidence at T185-186 extracted at [89] above. 123 Nor do I think that either Mr Carr or Mr Purves ought fairly to be excused. The conduct in question amounted to an egregious preferment of their individual interests to the interest of the company to whom they owed statutory and general law fiduciary obligations. Further, each sought, in my view dishonestly, to justify his breaches of duty. 124 Accordingly, and considering only the circumstances relating to the particular breach, I conclude that the statutory discretion does not arise for exercise. 125 If it were appropriate to consider the totality of Messrs Carr's and Purves' conduct, that conclusion would be fortified. To take into account not only the circumstances of the particular breach but also the circumstances relating to the other breaches would require the conclusion that, when s 1318(1) talks of "all of the circumstances of the case", it requires attention to be given not to the individual breach and circumstances relevant to it but (where multiple breaches are alleged) the circumstances relating to each that is found. Since this question of construction was not argued, I express no view upon it. As I have said, the claim for relief under s 1318 can be dealt with in its own terms, and there is no need to reinforce the conclusion reached by reference to all the other circumstances emerging from the evidence. Issues 7 and 8: the Garrett loan 126 According to Mr Gray's written outline provided to the Court prior to the commencement of the hearing, the only issues, in relation to the payments to Mr Garrett, were as follows: Payments To Garrett 3. Carr and Purves concede the impropriety of the payment of $100,000 to Garrett. 4. The payment of $258,246 was applied toward the purchase by Louise Mary Garrett of the property at 6 Mabel Street, Willoughby, N.S.W. The money was received by Mrs Garrett with knowledge of its source. The Plaintiff can recover the entire debt by (at least) pursuing Mr Garrett to judgment and bankruptcy and having the trustee in bankruptcy pursue Mrs Garrett to judgment and bankruptcy. 127 That limited view of the issues is confirmed by the way in which issues 7 and 8 are stated. The first loan 128 As I have said, both Mr Carr and Mr Purves sought to justify the payment of $100,000.00 to Mr Garrett on the basis that it was not a loan but a payment for legal services rendered. For the reasons that I have given, I do not accept that evidence. There is thus no basis for regarding the payment other than as one made by way of unsecured loan. 129 There was no documentation relating to the first loan. There was no suggestion that any rate of interest had been agreed, or any terms as to repayment. 130 The payment was made by cheque dated 14 May 2004 – approximately six weeks after Mr Garrett was discharged from bankruptcy. Mr Carr accepted that he knew that Mr Garrett had been a bankrupt, but suggested that, to his understanding, that had been some time in the past. I do not accept that qualification. Mr Purves worked with Mr Garrett at Cosmos. He expressly acknowledged that he knew that Garrett had been recently been discharged from bankruptcy: T192.15-.17. However, the impropriety of the advance does not depend upon the fact that Mr Garrett was an undischarged bankrupt. 131 It was no part of the business of REL to make loans to its directors, although, no doubt, it had the power to do so. But if a loan were to be made to a director, the exercise of reasonable prudence would require that it should not be made unless those who were asked to authorise it were satisfied that it would be repaid, until there had been some agreement as to a reasonable rate of interest, and until it had been properly documented. On no view of things did Messrs Carr and Purves turn their minds to any of these considerations. Of course, on their view, they were not required to do so: because the money was not paid by way of loan, but for services rendered. However, the fact that they were prepared to fabricate this excuse for the payment supports an inference that they were well aware that, absent some such justification, the fact of payment by itself would demonstrate breach of duty on their part. 132 In the circumstances (and even putting aside that, as I have found, Mr Garrett was to the knowledge of Messrs Carr and Purves a recently discharged bankrupt when the payment was made) I conclude that the payment was made in breach of the duties owed by Messrs Carr and Purves pursuant to ss 180, 181 and 182 of the Corporations Act and in breach of their fiduciary duties. The second loan 133 I turn to the second advance: the amount of $258,346.53. That was made on 18 June 2004. The payment was made to Mr Garrett's wife, presumably at his direction, to enable her to complete the purchase of a residence. Mr Carr's evidence was in substance that he left all of the arrangements to Mr Purves. That loan, at least was documented in a written loan agreement, undated but stating a "Commencement Date" of 20 May 2004. (The amount of the loan was said to be $250,000; the amount in fact advanced was over $8,000.00 more.) The loan agreement did provide for a rate of interest, and for a "Final Repayment Date" (30 June 2005). It was unsecured. 134 There is no evidence that Messrs Carr and Purves ever turned their minds to the question of Mr Garrett's ability to repay. Mr Carr suggested that he left this to Mr Purves. Mr Purves suggested that he had thought that the loan was to be secured by a second mortgage over the residence. However, Mr Purves agreed, no security was given, and no step was taken to ensure that security was available before the money was handed over (T191.15-192.14). Indeed, so far as Mr Purves knew (he having taken no steps to check the value of any equity in the residence) a second mortgage, if given, might have been "entirely valueless" (T192.19-.25). 135 I do not accept Mr Carr's evidence that he left it to Mr Purves to arrange everything (including compliance with the law and provision of appropriate security) (T119.40-.50). It is clear from succeeding paragraphs of Mr Carr's evidence that he gave no thought at all to the proposed loan (T120.12-121.5, 121.21-122.14): Q. Wasn't it obvious if it was to be secured by a second mortgage that the first mortgagee was not prepared to advance this amount of money? OBJECTION HIS HONOUR: The question is whether it was obvious to the witness. I allow the question. WITNESS: Again I left that to Mr Purves to make sure that the full documentation was done. NEWLINDS Q. Did you think about the question why is it that this man needs to borrow money to secure by way of second mortgage? A. In most cases people who take a bridging mortgage out have got some other form of repayment coming through because it's a short term loan that had to be repaid within twelve weeks. Q. You accept don't you that the obvious place for a person who wants short term finance is to go to the financier who already has security over the relevant asset? A. That's not normally the case. Solicitors used to have trust accounts where they would always give short term bridging loans. Q. You know full well they did not give them by way of second mortgage? A. My understanding is that they did but anyway. Q. Did you turn your mind to how it was Mr Garrett was going to repay this money? A. My understanding from Richard was that he had some other monies that he was due and that it would be repaid. He had the capacity to repay it within twelve weeks. Q. And you knew Mr Garrett had only shortly been discharged from bankruptcy didn't you? A. To my knowledge that was many years earlier. Q. Did you inquire of Mr Thomas or Mr Purves as to where Mr Garret was going to receive the money in twelve weeks time? A. I inquired from Mr Purves whether he had contacted Mr Thomas and he assured me that he had spoken to him. Whether that is fact or not I don't know but he maintains that he did. … Q. What steps do you say you took other than leaving it up to Mr Purves and Mr Thomas so you could be satisfied that security had been taken? A. I didn't say that I left it up to Mr Thomas. I left it up to Mr Purves who is a fully qualified chartered accountant, company secretary, I said that as long as it complied with the PDF rules, complied with the Corporations Law and that Richard Thomas agreed to it, then the documentation had to be put in place. Q. I thought you also said so long as it was properly secured? A. And properly secured. Q. What steps did you take to satisfy yourself that it was properly secured? A. I left it to my fellow director. Q. Did you ask to see the written agreements or agreement? A. Again I left it to Nigel to make sure the documentation was done and complete. Q. Did you have any dealings with any solicitors who might have been acting for REL in relation to this transaction? A. Again I left all of that to Nigel Purves. Q. Did you have any understanding as to whether he had retained solicitors or not? A. Again I left it all to Nigel Purves. He gave me an undertaking that he would secure the second mortgage and handle the documentation. Q. But after the transaction went through-- A. To my knowledge the documentation was in place. Q. Presumably there was a directors' meeting at some point after the money had been advanced? A. I don't believe that it was actually put to a directors' meeting. I put it to Purves that he had to make sure that he contacted Richard Thomas to see whether he had an objection to a short term position. Q. I understand that but after the money went out presumably there was a directors' meeting at some point? A. To the best of my knowledge I can't remember. Q. Is the amount of a loan that you are talking about $250,000 or $350,000 or-- A. Two hundred and fifty eight thousand something or other. 136 Messrs Carr and Purves assert that Mr Thomas was aware of, and indeed in effect approved, the loan of $258,000.00 to Mr Garrett. I do not accept that evidence. Mr Thomas denied any involvement in that loan (and, for that matter, in the earlier payment of $100,000.00). I accept his denial. No board minute or other document has been produced to show that Mr Thomas had any knowledge, let alone involvement. 137 Essentially for the reasons that I have given in relation to the loan of $100,000.00, I find that the second loan, of approximately $258,000.00, was also made in breach of the duties that I listed at [132] above. The amount of the loss 138 Some amounts have been paid in reduction of Mr Garrett's indebtedness. The present position is set out in a schedule provided by REL, which shows that: (1) in respect of the first loan, for $100,000.00, there is outstanding, as at 7 July 2009, an amount of $155,140.68 (including interest); and (2) in respect of the second loan, for $258,346.53 there is outstanding, as at 7 July 2009, an amount of $86,894.97 (again including interest). Those figures are not disputed. The suggested defence: issues 7 and 8 139 The suggested defence, or issue, is that REL is not entitled to recover from Messrs Carr and Purves unless it has exhausted all of its rights against Mr Garrett and, Mr Gray suggested, against Mrs Garrett. The suggested claim against Mrs Garrett appears to be that REL is entitled to trace the proceeds of the loan, paid and received in breach of duty, into the asset. 140 The unchallenged evidence is that Mr Garrett has made no repayment of any part of the sum of $100,000.00; that he has made default in respect of the loan of about $258,000.00; that REL settled with him in relation to the latter loan; and that Mr Garrett has made default under that settlement. In addition, there is unchallenged evidence that the mortgagee of the residence has commenced proceedings against Mrs Garrett for possession: suggesting that she is in default of her obligations to that mortgagee. Documents produced by Mr Garrett demonstrate that he is insolvent. 141 It is clear that REL has suffered a loss. The only question is whether it is required to exhaust all its remedies against the Garretts before it can be said finally to have crystallised the amount of that loss. That seems to me to be at most, a question of mitigation. Having regard to the parlous financial position of Mr and Mrs Garrett (as is evident from the evidence that I have briefly summarised), it cannot be relevantly unreasonable for REL not to waste further time and money on legal actions: particularly when the claim against Mrs Garrett must be at best tenuous or speculative (because it is based on the proposition that she has some accessory liability for, or liability as a recipient of money flowing from, her husband's breach of duty). 142 In my view, the fact that REL has not pursued Mr and Mrs Garrett to bankruptcy is no bar to its recovery of the outstanding amounts from Messrs Carr and Purves. Issues 6 to 9: the Fox transaction Factual background 143 The basic facts in relation to the Fox transaction are simple. Fox was developing software that, if implemented, could enable consumers to use EFTPOS machines for a greater range of services than simply paying (by use of a credit or debit card) an amount due to a merchant. The development and implementation of that software would have provided a benefit to Cosmos, because it would have increased the revenue derived by use of Cosmos' EFTPOS machines in pharmacies. However, Fox had run out of money. 144 At the time, Fox had a loan facility from Utility Services Corporation Limited (USC) (a subsidiary of a company known as USX Limited which is mentioned from time to time in the evidence). Fox was in default and USC was threatening action: including against Mr Nagy and Ms Bryant personally, under the securities given by them. The Cargo Bar meeting 145 The only acceptable evidence of the genesis of the Fox transaction is to be found in Cosmos' letter to REL of 20 March 2003. That letter was written by Mr Garrett as group corporate counsel for Cosmos. It purports to record what was agreed at the Cargo Bar meeting. Omitting formal parts, it reads as follows: "It was extremely helpful to have had your input into the Fox dilemma regarding Compass. We need to wrap some formality around our discussions with the Nagys, particularly given your role as investment advisor to Cosmos. If we are able to get the "rules of engagement" right to the outset then it is likely to avoid uncertainty over our understanding at a later date. Perhaps, it would be useful to recapitulate upon our meeting at the post the Cargo Bar meeting with Mark, Nigel, Mike et al. I will call this the "Cargo Bar Meeting and Postscript". CARGO BAR MEETING AND POSTSCRIPT 1. On Thursday 20 March 2003 we met at the Cargo Bar to discuss Mark's difficulties with USC and their finding stall. Relevantly, were Cosmos to proceed with the Compass project this will pose considerable difficulty in terms of the promises and undertakings being given to our third party relationships. 2. Suggestions have been made by both Mike and Mark that we should consider taking over Fox or, at least funding it, thereby giving us exclusivity to the Fox products and, "taking out USC" by one means or another. 3. You, more than most appreciate that Cosmos does not have the cash to do this (without a cash raising, which is possible), although that appears to be Mark's preferred option. 4. Having read the Convertible Note agreement between USC and Fox there appears to have been both breaches by Fox but, more importantly, USC. As I advised at the meeting there is an appropriate method by which USC could be taken out of the equation, but this requires cash that we are not prepared to authorise. 5. I gave Mark certain advice that I considered appropriate for him to follow and to obtain independent review. He uses Stephen Blanks with whom I am familiar. He is a competent litigator with an understanding of I.T. I know him quite well. He could do a reasonable job advising the Nagy's. 6. After the meeting at the Cargo Bar occurred we regrouped to discuss the path forward. 7. It was clear to us that Fox played an important part in the over the counter bill payment plan for our pharmacies. The difficulty was how we could proceed down this track, without enough cash, but, nonetheless secure our relationship with Fox for the future. 8. You agreed as our agent to assist with the funding of the Fox obligations through REL and securing our relationship with Fox for the future. 9. REL is in a position to invest in a Fox styled venture, particularly, if downstream Cosmos was in a position to take it out when funds permitted. 10. In principle we agreed with this strategy. 11. Accordingly, REL will provide funding to Fox as required. Such shares that are acquired by REL are held by REL on trust for Cosmos subject, of course, to Cosmos repaying REL for funds expended together with a rate of return on capital to be agreed between REL and Cosmos failing agreement as determined by KPMG. 12. You represent and we rely in working with Fox upon your authority to bind REL on this basis. 13. In the event of a dispute about the subject matter of this agreement you agree to confer in your capacity as a director of REL with Nigel Purves. If you fail to agree on any subject of dispute then the nature and context of that dispute shall be referred to Roger Amos of KPMG who is hereby authorised on behalf of us both to determine the outcome of the dispute in any manner in which he in his absolute discretion so determines. Leon we view this as an exciting opportunity and certainly a way in which we may assist the Nagys. It would indeed be unfortunate if their homes were sold by USC under their securities. We are sure that is is [sic] the better way, however, we are totally reliant upon your trust and confidence in this deal proceeding. Thank you for your assistance, If this document accurately records our understanding pleas sign and return your copy to us. 146 The letter was signed by Mr Garrett. Beneath his signature there appeared the following words: Agreed and accepted by Leon Carr duly authorised on behalf of Resource Equities Limited Dated 20/3/2003 147 Mr Carr dated and signed the acknowledgment. 148 The "Compass" in the first paragraph of the letter is, I think, a reference to the software that was then under development: i.e., the Fox technology. The people specifically identified in the third paragraph of the letter – "Mark, Nigel, Mike" – were, respectively, Mr Nagy, Mr Purves and Mr Kesterton. Mr Nagy was a principal of Fox. Mr Purves was then a director of Cosmos. Mr Kesterton was an employee of, or consultant to, Cosmos. Issue 9: breach of duty 149 The points emerging from the letter of 20 March 2003 include the following: (1) Mr Carr had a "role as investment advisor to Cosmos": the proposition appears in the second paragraph of the letter, and must be taken to have been acknowledged by Mr Carr's acceptance. (2) Fox had run out of money, and Cosmos did not have the cash on hand to enable it to fund the continued development of the technology. (3) Fox was important to Cosmos, and Cosmos wanted to secure its relationship with Fox but without putting up money. (4) Mr Carr either was, or agreed to be, the "agent" of Cosmos "to assist with the funding of the Fox obligations through REL". (5) REL was to fund Fox "as required," apparently in exchange for the issue of shares; but such shares would be held "on trust for Cosmos subject… to Cosmos repaying REL for funds expended together with a rate of return on capital to be agreed… [or] determined…". 150 Although Mr Carr had a role as investment adviser to Cosmos, and either had or on acceptance of the terms of the letter undertook a role as its agent to assist with funding, he was also a director of REL. 151 Mr Carr warranted that he had authority to bind REL to the transaction described in the letter. There is, however, no evidence that he had discussed the proposals with his fellow directors. Mr Carr sought to justify this (again, in a passage of his cross-examination replete with evasion) by saying that he could bind REL by virtue of his office, or simply because he was a director. See the passages of his evidence from T89-92 extracted at [43] above. 152 I said at [149(1)] above that it appears from the terms of the letter that Mr Carr was then (as at 20 March 2003) an investment adviser to Cosmos. He was asked about this and gave the following evidence, completely inconsistent with what he had acknowledged through his agreement to and acceptance of the terms of the letter (T87.23-.35): Q. Is it the case as at March 2003 you considered yourself to be an investment advisor to Cosmos, that is right? A. No. Q. If you didn't consider yourself to be a business advisor to Cosmos you would not have signed a copy of this letter that you agreed and accepted what was in it, would you? A. To the best of my recollection, to my recollection I am assuming I was not on a retainer. I had been an investment advisor to Cosmos from time to time, we, with the Fox transactions we eventually were looking at a joint venture between REL Technology, Fox and Cosmos but Cosmos acted independently to me as a director of REL, Cosmos acted independently. 153 In my view, Mr Carr was acutely aware of his conflict of duties, and resorted to evasion and obfuscation in an attempt to obscure the extent of his conflict. 154 Mr Carr agreed that the proposal set out in the letter of 20 March 2003 was advantageous to Cosmos and to Fox. When asked to identify the benefit to REL, he referred to "an opportunity for REL to make a profit" (T88.1). When confronted with the proposition that, because any shares acquired by REL were to be held on trust for Cosmos, it would be Cosmos and not Fox that would derive any "upside", Mr Carr resorted to his customary tactic (T88.4-89.3): Q. But the opportunity that was being proposed on 20 March was not that REL invest, do you accept that? Mr Gray wants you to look at paragraph 9, if that helps. A. Yes. Q. Also look at paragraph 11 while you are at it? A. Yes. Q. The idea at that time was that REL was going to provide money which money was going to be used to purchase shares in Fox, which shares would be held in the name of REL but tut they would really be owned beneficially by Cosmos? A. It would appear by this. Q. You don't doubt that was the proposal? A. No, I don't doubt that. Q. On any view of it leaving aside the legal niceties that is not an investment by REL, is it? A. What was the question again? Q. On any view of what that arrangement is, that is using REL'S money to buy shares in REL's name for the purpose of REL holding them for Cosmos, that is not an investment by REL, is it? A. In what way? Q. Because Cosmos would be the entity that would benefit from any upside? A. This would have been an extremely preliminary discussion, this was the first meeting at the Cargo Bar. Q. You are deliberately not answering my question? A. Ask the question again. Q. In any view of the transaction described in paragraph 11 it could not sensibly be described as an investment by REL in Fox, could it? A. Yes, it could be. Q. The end result of that arrangement would be that if the investment was successful, Cosmos would reap the benefits, and if the investment was unsuccessful, REL would suffer the loss, do you accept that? OBJECTION(GRAY), ALLOWED A. This is a an extremely preliminary stage of which there is no legal documentation, there is no purchase or sale agreement. For REL to have entered into this, to be finally agreed it would have to have gone to the board of REL and if was deemed by the Board of REL to be a short term investment, buy for one dollar and sell to Cosmos for $2 that would be a good investment for REL. This is not articulated there because this is the very early stage of discussions. 155 On any rational analysis, the proposal outlined in the 20 March 2003 letter, and apparently accepted by Mr Carr on behalf of Fox, was one whereby REL would bear all the risk of investment and Cosmos would derive substantially the whole of any benefit. That is because, if Fox did not bring its technology to market or if the market did not take to the technology, REL would be left lamenting; but if the technology were brought to market successfully and profitably, Cosmos would be able to reap the benefit by paying to REL the amount of its investment (of course, with a "rate of return on capital to be agreed… [or] determined") and claiming the shares. 156 On that simple analysis, it seems to me, the transaction, regarded objectively, was not one for the benefit of REL. Nor was it one that a reasonable, competent and honest director in Mr Carr's position, and with his knowledge, would have regarded as being for the benefit of REL. 157 To the extent that Messrs Carr and Purves sought to justify the transaction, I do not accept their evidence. 158 However, there are complicating factors. The first is that Mr Carr found himself in a position of conflict of duties. His duty to REL, as a director, was clear: to exercise a reasonable standard of care and diligence (s 180) and to exercise his powers and discharge his duties in good faith, for the best interests of REL and for a proper purpose (s 181). It is unnecessary to set out his concurrent fiduciary duties under the general law. As an investment adviser to and an agent of Cosmos, Mr Carr owed it duties also, including (through his role as agent) fiduciary obligations. 159 In substance, the proper discharge of the duties that Mr Carr owed to REL required him to do the best he could for REL; and his duties to Cosmos required him to do the best he could for Cosmos. As the transaction was structured, it was REL that would bear the substantial burden and risk, and Cosmos that would reap any benefit. 160 So far as Mr Purves was concerned, he was then a director of Cosmos. He owed, to Cosmos, duties equivalent to those owed by Mr Carr to REL. Further, once Mr Purves became a director of REL (on 5 May 2003) he owed equivalent duties to it. Since the Fox transaction was not finalised until after 5 May 2003, from that date Mr Purves too was in a position of conflict of duties. 161 Mr Carr's conflicts appear to have gone further. Mr Nagy said (in an answer given to Mr Gray in cross-examination) that Mr Carr had discussed – "from day one" – an IPO for Fox (T226.10, .42). Spreadsheets were prepared which showed various ways in which the shareholding of Fox might be structured for the purposes of an IPO. One of those spreadsheets showed that Mr Carr would be allotted shares worth $5 million, apparently in consideration of his efforts in achieving public listing. It is open to infer from this material that Mr Carr was motivated by a desire to gain, for himself or a company controlled by him, a very substantial reward for arranging the listing of Fox. There is other evidence to support this inference. 162 Mr Carr accepted that if the capital structure shown in the spreadsheet (which indicated that he would have a substantial interest in a recapitalised Fox) were effected, one consequence would have been that REL's interest in Fox would be diluted from 30% to 23% (T163.31-.48). 163 On 28 July 2004, Mr Carr wrote (on the head of his company Lawson & Co Limited, described as "investment bankers") to Mr Thomas, in the latter's capacity as chairman of Fox. The letter referred to "our conversations in relation to the capital raising for Fox…" and noted that Fox "requires a pre-IPO injection of funds of approximately $1,500,000.00 to repay [REL] and provide further working capital…". Mr Carr proposed that Lawson, or a related company, "will be rendering a fee of 7% of the gross fund [sic] raised". Mr Thomas replied on 23 August 2004, agreeing to pay "a placing fee of 5% on any subscriptions accepted": limited to certain named investors. 164 The 5% fee was also raised in cross-examination of Mr Carr (by Mr Thomas). Mr Carr appears to have accepted that he would receive a fee of that magnitude for acting "in a capacity as an investment banker to assist in the, call it flotation and/or reverse listing by way of using a backdoor listing" (T162.24-163.2): Q. Did you seek at any stage to charge Fox a fee for corporate financial advice on behalf of yourself or your companies? A. During the course post the acquisition of Fox, July the 14th, there were several interested parties, one being Westpac interested in acquiring Fox, Keycorp were interested acquiring Fox, and Telstra, and hence that's why you and I and the Board agreed this would be a short term investment. During the course of looking at this the other partner within Fox being Mr Mark Nagy at a meeting with me sought to pursue whether a, whether this company should be listed on the Australian Stock Exchange. This discussion took place because Mr Nagy had had a bad relationship with USC as a partner. He saw that REL's tenure was of short term because REL was in the position of winding itself up and distributing and that he would be sold to another task master. Hence his discussion with me in relation to putting Fox into a public shell. During that period of discussion there were some financials produced by a consultant Mr Gregory West of what Fox would look like in a public entity. There was discussions with Mark Nagy if this was the route he preferred to go then would I act in a capacity as an investment banker to assist in the, call it flotation and/or reverse listing by way of using a back door listing, of which I described to Mr Nagy the way in which this would be done and what fees that he would expect to have to pay for (a) that advice and both legally accounting and for me to assist him. Q. Can you recall what the level of fees proposed for that advice was? A. To the best of my recollection it was about five percent the fees. Q. Five percent of? A. Whatever the deemed capital raising and/or market value may have been at that time. It was a very broad brush figure. 165 In my view it is quite clear that Mr Carr understood that if REL continued to fund the development of Fox's technology, to the point where it was ready to go to market or to be financed by another lender, he might benefit substantially by fees in respect of a further injection of funds, or fees (including in the form of shareholding) if Fox were listed. It was thus in Mr Carr's interest that REL should continue to fund Fox' activities, even if in the "short term". I am satisfied that, accordingly, Mr Carr was placed in a position where his duty to REL conflicted with his personal interest. 166 Mr Carr was asked how it was that he formed the view that the Fox transaction would be advantageous. He said, in substance, that he relied on Mr Nagy and Mr Kesterton. Neither of those gentlemen could be regarded as independent. It was in Mr Nagy's interest, as a director of and shareholder in Fox, for Fox to obtain funding to continue the development of its technology. It was in the interest of Mr Kesterton's employer or principal, Cosmos, for this to happen, but not to be at risk of losing money should the project fail. Whilst I do not mean to impute any dishonesty to either of those gentlemen, it is clear that no reasonable person could have regarded them as independent experts on whose judgment REL (or Mr Carr) would be entitled to rely, in deciding to proceed with the Fox transaction. 167 Of course, even though the letter of 20 March 2003 appeared to be framed in the language of present agreement, matters did not end there. The nature of the transaction changed somewhat between 20 March 2003 and 30 June 2003, as between REL and USC and others; and 14 July 2003, as between REL, Fox and others. 168 The agreements signed on 14 July 2003 did not reflect numbered paragraph 11 of the letter of 20 March 2003. Cosmos no longer had any right, as beneficiary of a trust, to call for the trust property – shares in Fox issued to REL. But it remained the position, nonetheless, that Cosmos would derive a substantial benefit from the development and implementation of the Fox technology. 169 It is notable that REL did not obtain, and Messrs Carr and Purves individually did not obtain, any independent analysis, verification or valuation of the Fox technology. The most that appears to have happened was that it was demonstrated on EFTPOS terminals to produce simulated transactions, or outcomes: the booking of theatre tickets and of airline seats. There was nothing in that demonstration to provide any assurance (at least, to someone professing no skills in the relevant discipline) that the technology would work in the real world. 170 Messrs Carr and Purves did cause REL to undertake some "due diligence". Mr Purves instructed a firm of chartered accountants, Armstrong Wily and Co, to undertake some form of financial due diligence. Each of Mr Carr and Mr Purves sought to minimise his involvement in this process, and to attribute primary responsibility to the other or to Mr Thomas. Mr Thomas denied that he was involved. I accept his denial, and do not accept the evidence of Messrs Carr and Purves to the contrary. I find that it was Mr Purves who was principally reasonable for the accounting due diligence (hardly surprising, given his qualifications and experience) but that Mr Carr, despite his denials, was well aware of the outcome of that process. 171 Armstrong Wily produced two reports: a "Preliminary Report" dated 30 June 2003, and a further report dated 10 July 2003. 172 The preliminary report stated the following matters: "1. The company's financial statements are not audited. 2. The last annual financial statements prepared by the directors were for the financial year ended 30 June 2001. 3. The last income tax return lodged with the Australian Taxation Office was for the year ended 30 June 2001. 4. We have not made contact with the company's external accountant at this stage. 5. The 2001 Financial Statements are not in statutory format and consists [sic] of a balance sheet and profit and loss account in MYOB format. 6. The latest management accounts available are for the year ended 30 June 2003. From our analysis of the assets and liabilities appearing in the balance sheet it is obvious that these management accounts are not accurate and would require some material fine tuning to produce a set of reliable financial statements as at 30 June 2003. 7. The company has a number of motor vehicles and we have been informed that the company has never lodged FBT returns. Accordingly, there could be substantial FBT liabilities including penalties relating to the non-lodgement and late payment of FBT returns covering a number of years. 8. The Directors were unable to provide any statutory records including the company's Register of Members; Register of Directors; Register of Secretaries; Register of Charges or a minute book. 9. A company search was carried out on 25 June 2002 a copy of which is attached. 10. The company currently employs six employees including the Directors. Personnel records were unable to be provided by the Directors. 11. We recommend that the company's legal advisors be contacted to obtain an independent confirmation in relation to any outstanding litigation on behalf of the company. 12. The latest income tax return available is for the year ended 30 June 2001. This tax return discloses carry forward losses available to the company as at the date of $433,726. 13. It is difficult to comment further on the company's Income tax position without access to accurate financial statements for the years ended 30 June 2002 and 2003. Even if this information were available it would be necessary to analyse the Profit and Loss Account for both reporting periods to produce a calculation of income tax payable or carry forward losses. 14. We have endeavoured to verify the assets and liabilities appearing in the 30 June 2003 balance sheet, however, as a result of the work we have carried out it is obvious that the balance sheet needs substantial work to be carried out on it to produce an accurate representation of the company's current position. As with many small proprietary companies the in-house bookkeeper processes the transaction on a day-to-day basis but requires the external account's input to produce accurate figures at any point in time. 15. Our recommendation would be to arrange for the company's independent accountant to carry out his normal year-end reconciliation exercise at 30 June 2003 to provide you with an accurate set of financial statements for your consideration. Alternatively, we could step into the breach and produce these financials for you if you so desired. To date our instructions have not been to take on this role and as such we are reluctant to commence any reconciliation work without your clear instructions. 16. From the information gathered to date it is clear the company is suffering from fairly severe cash flow pressures which has resulted in the non-payment of certain statutory obligations which in our view would be important to quantify and bed down before entering into any share purchase. 17. The following is a list of issues which may not be exhaustive for you to consider: 17.1 The company has received correspondence dated 27 May 2003 from the Office of State Revenue advising the company of an outstanding payroll tax liability including interest as at that date of $18.141.58. The correspondence states that unless payment is cleared by 10 June 2003 the Office of State Revenue will commence legal action for recovery. To date this has not occurred despite the fact that we have been informed that the liability has not been settled. 17.2 There is over $80,000 in unpaid employee contributions to superannuation under the Superannuation Guarantee Legislation relating to periods prior to 30 June 2002. In situations where superannuation has not been paid after the cut-off date it should be paid to the Australian Taxation Office and incurs penalty rates and no deduction is available to the company. 17.3 There is outstanding PAYG tax owing for periods outside the current financial year in the vicinity of $300,000 including interest. We have cited [sic] correspondence from the Australian Taxation Office dated 4 June 2003 referring to a repayment schedule to clear this outstanding liability. Based on the information we have examined however, the repayment schedule has not been adhered to which is likely to result in the commencement of legal action by the Australian Taxation Office against the company and potentially against the Directors personally. In view of the above we advise that we are not in a position to be able to report to you that we have any confidence in the figures that have been presented in the management accounts for the year ended 30 June 2003. … In view of the company's cash flow position it would also be our strong recommendation that we devote sufficient time to understanding what contingent liabilities the company may have over and above those currently recognised in the June management financial statements. 173 The report of 10 July 2003 did nothing to dispel the gloomy impression created by the preliminary report. It made, among others, the following points: 5. By reference to the unaudited financial statements at 30 June 2002 the company has positive shareholders funds of $8,107,496. It should be noted that the figure disclosed in the statement of financial position at 30 June 2002 includes intangibles consisting of core technologies of $9,350,000 and capitalised research and development expenditure of $490,268. 6. If these intangible assets are excluded from the statement of financial position the company would have deficiency of net assets of $1,733,772 at 30 June 2002. 7. The statement of financial performance discloses an operating loss for the year of $2,033,746. This compares to the operating loss before income tax for the 2001 financial [sic] of $137,492. 8. Included in expenses for the 2002 financial year is amortisation of core technologies and the amortisation of research and development expenditure of $850,000 and $35,689 respectively. 174 The report commented on the "Core Technology Valuation", recording an asset (after amortisation) of $6,233,000.00 in Fox's accounts. That amount is included in the "Core Technologies" referred to in para 5 of the report set out above. Of that valuation, the report said: At this stage we are not in a position to report on whether the initial raising of this intangible asset was capable of substantiation or indeed whether the rates of amortisation applied are appropriate. Note that Australian Accounting Standards preclude the raising of such intangible assets as they constitute internally generated goodwill: 175 The report noted that there were amounts outstanding to the Australian Tax Office, trade creditors and other creditors, and amounts payable for superannuation entitlements. 176 Other points made in the report include the following: 13. If one deducts the balance of intangible assets consisting of capitalised research and development expenditure and core technology assets amounting to $152,887 and $6,233,000 respectively from this net asset surplus the result is a deficiency of assets in $3,120,305. 14. The management accounts for the eleven month period ending 31 May 2003 disclose an operating loss before income tax of $3,567,069. We note that this includes amortisation of core technology of $3,117,000 which may be subject to review by the directors. In addition, there could be additional expenses and provisions to be booked as a result of our analysis of the balance sheet. 15. Without having the benefit of accurate financial statements for the eleven month period ended 31 May 2003 it is not possible to comment on whether the company may have an income tax liability. Although this appears unlikely in view of the company's carry forward losses disclosed in the tax return prepared for the year ended 30 June 2002. … 20. The directors have provided our office with a cashflow forecast for the year ending 30 June 2004 a copy of which is attached. We are unable to comment on the reliability of this spreadsheet. We note however that projected sales are materially higher than those achieved for the year ended 30 June 2002 (ie. $3.4 m v $1m). 177 No doubt appreciating that Armstrong Wily's reports did not provide any support for the investment in Fox, Messrs Carr and Purves sought to downplay the significance of those reports. 178 Mr Carr asserted that he had not been involved in the due diligence process carried out by Armstrong Wily, and that he relied on Mr Purves to inform him of any concerns that might arise out of the Armstrong Wily reports (see, for example, T102.25; 103.47). However, in another affidavit in other proceedings in Western Australia, Mr Carr had sworn that throughout June 2003 and in early July, he, with the assistance of Armstrong Wily, had undertaken a due diligence on Fox and its assets "to better determine whether it would be an appropriate investment" (T101.13). Notwithstanding this apparently uncomplicated statement, Mr Carr continued to deny that he was involved in the part of the due diligence that included Armstrong Wily, or that he reviewed its reports (T101.20-.31). Mr Carr sought to explain this apparent contradiction by saying that "as a board of three people I relied upon Nigel Purves who briefed Armstrong Wily" (T101.35). To be fair to Mr Carr, his earlier affidavit had said that Messrs Purves and Thomas also were involved in the Armstrong Wily due diligence process. 179 I have no doubt that Mr Carr sought consciously, and untruthfully, to minimise the extent of his involvement in and understanding of the due diligence process. I accept that Mr Purves may have had better qualifications. But it does not require a great deal by way of accounting qualifications or experience to understand that Armstrong Wily was not projecting a favourable view of Fox. 180 Mr Purves took a somewhat different view. He asserted, in substance, that the Armstrong Wily reports were irrelevant because REL "wasn't buying the previous business" but was "looking at the technology, taking it forward" (T177.23) and was "not buying a balance sheet" (T177.46). He said also that REL was buying "the technology" (T177.48). 181 Mr Purves accepted that Armstrong Wily was not retained to do any due diligence into the technology (T178.3); nor was anyone else, apart from Mr Kesterton (T178.5-.10). Mr Purves did not think that it might have been helpful that REL should obtain "some advice from a person with appropriate expertise in technology [who] was not connected to Cosmos or Fox" (T179.3-6). 182 When asked to justify the transaction, Mr Purves gave the following evidence (T180.4-.19): Q. What did you do to satisfy yourself from REL's perspective that this was an appropriate transaction for it to enter into? A. We took the - I took the view that we were looking at the technology so first off the due diligence report from the accounting firm was an historical view to see what had gone on previously and it had been run from a brother and sister business and obviously we knew there would be some issues there if you are looking at it from a public company perspective. We were told by the directors of Fox some of the issues so we were aware of some of those issues that came out to do with outstanding tax in there so there was no surprises really for us. So we were not buying the balance sheet. The technology we were looking at, I had faith in Kesterton and his ability in technology and I believe so the other board members of REL had the same faith. They had their expertise in various areas and so combined that plus the legal advice, we thought it was a good technology. We still believe it is a good technology. 183 There is much more that could be said, both as to Mr Carr and to Mr Purves; but I do not propose to do so. What I have set out is sufficient, in my view, to support the following propositions: (1) the investigations, or "due diligence," that Messrs Carr and Purves carried out, or caused to be carried out, were lamentably insufficient; and (2) on the basis of the information available to them, Messrs Carr and Purves had no reason whatsoever for believing that the Fox transaction, either as it was initially structured in the letter of 20 March 2003 or as it was finally documented in the agreements of 30 June and 14 July 2003, was in the best interests of REL. 184 There are two footnotes. The first is that Mr Carr sought to buttress his position by saying that he had relied on some valuation provided by Mr Thomas. Unfortunately, in another affidavit sworn in proceedings in Western Australia, Mr Carr claimed to have expressed the view in a discussion that Mr Thomas' "corporate career had been one of processing transactions, and… he was not sufficiently experienced to provide a valuation of Fox, nor did he have sufficient experience or understanding to engage in the sale of Fox". If Mr Carr had held that view of Mr Thomas, he could not have obtained any comfort from any valuation undertaken by Mr Thomas. Mr Carr was unable to give any acceptable explanation of this apparent dilemma (T95.20-98.28). Mr Purves did not assert that he had read or relied on any valuation prepared by Mr Thomas. 185 That footnote is to some extent academic, because Mr Thomas denied that he had prepared any valuation of Fox. I accept his denial, and I do not accept Mr Carr's evidence that such a valuation was prepared. 186 The second footnote is that, under the agreement signed on 14 July 2003 between REL and Fox, REL was committed to providing substantial amounts of cash to fund Fox's development of its technology. Mr Purves accepted that Fox was running at a cash loss of about $100,000.00 monthly, so that REL would be required to inject about $100,000.00 monthly (T176.32-.37). He appeared to accept further that REL had sufficient cash to fund the activities of Fox for about six months (T176.48). There was no reason to think that the technology would be developed, and marketable, in that time. Nor was there any assurance available to REL that it could obtain further funds, from other sources, to enable it to continue to fund the development of the technology. This is yet another demonstration of the proposition that the Fox transaction was, from REL's perspective, improvident. 187 The conclusions that I have reached are supported simply by an analysis of the Fox transaction, and the information available to Messrs Carr and Purves at the time they decided to commit REL to it. It is unnecessary to go further, and consider the implications of the conflicts of duty under which each laboured (Mr Carr, at all material times; and Mr Purves, from 5 May 2003). It is sufficient to say that the existence and substance of those conflicts, and the actions of Messrs Carr and Purves in continuing to drive forward REL's investment in Fox, provide an alternative basis for finding the breaches of duty to which I have referred. 188 Mr Gray emphasised, in his written and oral submissions, that REL had led no independent expert evidence to support the proposition that the decision to invest in Fox was not one made with the appropriate degree of care and diligence. I accept that there was no such evidence. I do not accept that it was necessary for REL to have led such evidence. The transaction was plainly improvident, as it was plainly motivated by self-interest. Messrs Carr and Purves were plainly afflicted by severe conflicts of duty, or of duty and of interest, at the times relevant to the actions of each of them in committing REL to the Fox transaction. Neither Mr Carr nor Mr Purves could give any acceptable explanation of the decision. In those circumstances, there was no point in REL's incurring the expense of expert evidence. Issue 10: the business judgment rule 189 Messrs Carr and Purves relied on "the business judgment rule" set out in s 180(2) of the Corporations Act. That rule reads as follows: ... Business judgment rule (2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they: (a) make the judgment in good faith for a proper purpose; and (b) do not have a material personal interest in the subject matter of the judgment; and (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and (d) rationally believe that the judgment is in the best interests of the corporation. The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold. 190 I accept, as Mr Newlinds submitted, that directors are entitled to exercise some degree of entrepreneurial flair. As I said in Ingot Capital Investment Pty Ltd v Macquarie Equity Capital Markets Ltd (No.6) (2007) 63 ACSR 1 at 292 [1436], after a review of relevant authorities: [1436] Thus, I think, the question for decision can be put in two ways: (1) Could someone with an ordinary degree of prudence have entered into such a transaction if acting on her or his own behalf; alternatively (2) Could an ordinary person with that degree of prudence and with the knowledge and experience of the directors have entered into the transaction in the circumstances if acting on her or his own behalf? 191 Someone with an ordinary degree of prudence could perhaps have seen fit to invest in Fox. In my view, however, no one of ordinary prudence would have done so without first taking steps to satisfy themselves that the technology had some merit, and some prospects of commercial realisation within a finite period of time. Those are inquiries that on any view Messrs Carr and Purves failed to pursue in a reasonable way. 192 There is of course an alternative answer to the business judgment rule. Para (a) requires that the judgment be made in good faith for a proper purpose, and para (b) requires the absence of material personal interest. It is apparent from what I have said that I do not regard the decision as having been made in good faith or for a proper purpose. It was made substantially for the benefit of Cosmos, and of Mr Carr, not for any proper purpose of REL. For the same reasons, Messrs Carr and Purves each had a material personal interest in the subject matter of the transaction. 193 For either reason, Messrs Carr and Purves have not brought themselves within the business judgment rule. Issue 11: causation 194 I turn to the eleventh issue, and deal first with the proposition that it is not available on the pleadings and that Messrs Carr and Purves should not be allowed to advance it. 195 The structure of the contentions in the amended commercial list statement is as follows: (1) it alleges what are called "background facts", as to the parties and other actors (paras 12 to 18); (2) it alleges the duties owed by Messrs Carr, Purves and Garrett to REL (para 19); (3) it alleges matters relating to REL's bank accounts (paras 20 and 21); (4) it alleges a number of matters relating to REL's incorporation and business (paras 22 to 32); (5) it deals with REL's financial position as at 31 December 2002, and attempts to wind it up thereafter (paras 33 to 40); (6) it alleges material facts relating to the alleged overpayments to directors, and the breaches of duty alleged to flow from those alleged overpayments (paras 41 to 54); (7) it alleges material facts relating to the Fox transaction, and the alleged breaches of duty in relation to that transaction (paras 55 to 91); (8) it alleges the loss incurred by REL on the sale of its interest in Fox (paras 92 to 95); (9) it then turns to proceeding 357, and related events (paras 96-121); and to the Asia Iron transaction (paras 122-132) and; (10) it then turns to the appointments of administrators (paras 133 to 142). 196 In relation to the Fox transaction, the relevant allegations, as to loss or damage, are paras 92 to 95: 92. Fox Technology failed to repay the Fox Loan and Interest to the plaintiff by the date required pursuant to the terms of the Fox Transaction Documents and Amended Loan Facility or at all. 93. By share sale agreement ( Keycorp Agreement ) dated on or about 20 May 2005 between the plaintiff, Keycorp Limited ACN 002 519 986, Fox Technology, the Fox Founders and Giovanni Maurizio Carrello (as administrator of the plaintiff) (Administrator): 93.1 Keycorp Limited agreed to purchase and the plaintiff agreed to sell the Fox Shares to Keycorp for the purchase price of $1,000,000 ( Keycorp Purchase Price) . 93.2 Keycorp Ltd agreed to provide Fox Technology with such funds as were required by Fox Technology to repay the Fox Loan and Interest; and 93.3 Fox Technology agreed to repay to the plaintiff the Fox Loan and Interest. 94 Pursuant to the terms of the Keycorp Agreement, between 20 May 2005 and June 2005; 94.1 Keycorp paid to the plaintiff the Keycorp Purchase Price; and 94.2 Fox Technology repaid to the plaintiff the amount of $865,000, being the total owing under the Fox Loan and Interest. together referred to as the Fox Sale Price . 95 By reason of the matters pleaded in paragraphs 55 to 93, the plaintiff has suffered loss and damage being the difference between the Fox Purchase Price and the Fox Sale Price. 197 As one would expect, the amended list response for Messrs Carr and Purves follows the order of the amended list statement. There is nothing in the answers to paras 55 to 91 of the list statement (the paragraphs in which the underlying material facts are alleged) to suggest that Messrs Carr and Purves are advancing any argument of the kind flagged in issue 11. Nor is there anything in the specific answers to paras 92 to 95. Those answers are contained in paras 29 and 30 of the list response: 29. The first and second defendants do not admit paragraphs C92-94. 30. The first and second defendants deny paragraph C95. 198 The list response returns to the topic of loss in para 61: 61. In further and alternative answer to the whole of the Amended Commercial List Statement, the first and second defendants say that if the plaintiff suffered any loss or damage as alleged (which is denied), such loss or damage was: (a) not the natural consequence of the alleged conduct of the first or second defendants; and (b) too remote. 199 Further, in relation to the Fox transaction, para 62E of the list response makes a number of complaints about the third and fourth defendants (Messrs Thomas and Garrett): complaints of breach of duty and the like. Para 62F then alleges: 62F. The acts or omissions of the third and fourth defendants pleaded in paragraph 62E caused, independently of the first and second defendants, the damage or loss claim in para C95 of ACLS. 200 The only specific reference to the administrators (Messrs Crouch and Carrello) in this section of the list response appears in para 62K; but that is referable not to the loss claimed in respect of the Fox transaction, but to the loss claimed by reason of the appointments of administrators. 201 From the specific to the general: REL's statement of the issues likely to arise (in part B of its list statement) enquires, by para 7.3, "[w]hether the first, second and fourth defendants caused the plaintiff loss in the Fox Investment". Messrs Carr and Purves state the issues likely to arise as their entitlement to receive directors' fees, and whether they breached their duties to REL as alleged. 202 Mr Gray submitted that damages, including causation, are always in issue; and that the onus to prove damage, including causation, always rests with a plaintiff. No doubt, that is correct as a matter of general principle. But it is no answer to the complaint, particularly in circumstances where the only issue of "causation" that is alleged (para 62F of the list response) is that it was Messrs Thomas and Garrett, rather than Messrs Carr and Purves, who caused any loss or damage arising from the Fox transaction, read in conjunction with the denial that Messrs Carr and Purves did cause any such loss (para 30 of the list response). 203 The "pleadings" are governed by Practice Notice SC Eq 3. Specifically, in relation to list responses, defendants are to comply with the following requirements: 10. A defendant shall file and serve a List Response, in the Commercial List a "Commercial List Response" or in the Technology and Construction List a "Technology and Construction List Response", setting out, in summary form in the form of Annexure 1: 10.1 the nature of the dispute 10.2 the issues which the defendant believes are likely to arise 10.3 the defendant's response to the plaintiff's contentions including the legal grounds for opposition to the relief claimed in the Summons 10.4 the questions (if any) the defendant considers are appropriate to be referred to a referee for inquiry and report and 10.5 a statement as to whether the parties have attempted to mediate and whether the defendant is willing to proceed to mediation at an appropriate time. 11. The defendant's contentions should: 11.1 avoid formality 11.2 admit or deny the allegations the plaintiff makes 11.3 in so far as they do not already appear state the allegations the defendant makes including adequate particulars of those allegations and 11.4 identify the legal grounds for opposition to the relief claimed in the Summons. 204 List statements and list responses are not pleadings in the strict sense. However, they serve the essential functions of pleadings. As Bergin J said in Brambles Australia Ltd v Tatale Pty Ltd [2006] NSWSC 204 at [9], the various requirements stated in the practice note were intended to ensure that each party knew the case to be made against it, to set the ambit of pre-trial procedures such as discovery, and "to define the limits within which the trial will be conducted". 205 I dealt with some considerations relevant to pleadings, and in my view equally relevant to list statements and list responses, in Ingot at 91 [278] and following. Having referred at [278] to what Bergin J had said in Brambles, I said: [279] A similar point, in respect of pleadings properly so called, was made by Lander J in Arthur Young v Tyco International (1995) 182 LSJS 367 at 370. His Honour said that the question of the adequacy of pleadings ought to be approached not by looking with a critical eye for some deficiency, but by reference to "the ultimate question; does the pleading give fair notice of the case to be made against the other party at trial, thereby minimising the risk of injustice arising from surprise". [280] This aspect of pleadings was emphasised by Mason CJ and Gaudron J in Banque Commerciale SA En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 at 286; 92 ALR 53 at 58. Their Honours said that pleadings were required to state with sufficient clarity the case to be met, and thus "to ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her and, incidentally, to define the issues for decision". This meant, their Honours said, "that, in general, relief is confined to that available on the pleadings". [281] Mason CJ and Gaudron J stated, at CLR 286–7; ALR 58-9, that "the circumstances in which a case may be decided on a basis different from that disclosed by the pleadings are limited to those in which the parties have deliberately chosen some different basis for the determination of their respective rights and liabilities". Their Honours said at CLR 287; ALR 59 that "[t]he question whether the parties have chosen some issue different from that disclosed in the pleadings as the basis for the determination of their respective rights and liabilities is to be answered by inference from the way in which the trial was conducted". [282] In the same case, Brennan J said at CLR 288; ALR 60 that, once the parties have been brought to an issue on their pleadings, "the court's function is to determine that issue and to grant relief founded on the pleadings unless the parties are allowed to alter the issues at the trial without amendment of the pleadings". [283] I do not think that the High Court intended to say anything different in cases such as Butcher . It is certainly correct to say that in the majority judgment at [39] their Honours referred to the need to view the agent's conduct "as a whole"; and that at [128] McHugh J said that the question, whether the relevant conduct was misleading or deceptive, or likely to mislead or deceive, had to be decided "having regard to all the circumstances of the case". But the conduct in respect of which the question, was it misleading or deceptive or likely to mislead or deceive, is asked and decided is that identified in the pleaded case. Likewise, the relevant circumstances that are alleged to make it misleading or deceptive, or likely to mislead or deceive, are those identified in the pleaded case. To the extent that evidence is admitted without objection that is capable of bearing on those questions, then that evidence may be taken into account: subject to the general "duty of a judge to reach his decision on evidence that is legally admissible, and to put evidence only to those uses which the law allows": Hughes v National Trustees, Executors & Agency Co of Australasia Ltd (1979) 143 CLR 134 at 153 ; 23 ALR 321 AT 337 (Gibbs J, with whom Mason and Aickin JJ agreed). [284] I do not think that the requirements of PN 100 or SC Eq 3 were intended to derogate from the fundamental entitlement to procedural fairness identified by Mason CJ and Gaudron J in Banque Commerciale . It should be emphasised, as their Honours did (at CLR 286; ALR 58), that the rule that relief is generally confined to that available on the pleadings "secures a party's right to this basic requirement of procedural fairness". Indeed, I think, to the extent that the court does dispense with requirements of formality or technicality, it should equally be zealous to ensure that the basic requirements of procedural fairness continue to be available to the parties. 206 There is nothing in the list response for Messrs Carr and Purves to suggest that whatever loss REL suffered by reason of the Fox transaction was caused or materially contributed to by the matters identified in issue 11. Nor was the hearing conducted on the basis that the matters canvassed by issue 11 were within the legitimate ambit of debate. On the contrary, as is clear from the agreed statement of issues, REL did not accept that issue 11 was available. 207 In this context, it may be noted that in his outline submissions provided prior to the hearing, Mr Gray stated the only issues, in relation to the Fox transaction, as being the business judgment rule and any common law equivalent to it. 208 It is not difficult to see that, if REL had been apprised that there were specific issues as to causation, or as to mitigation, of the sort agitated by issue 11, it would have taken specific steps to meet them. For example, it would have addressed the unparticularised "actions of Western Ventures and others", to the extent that they were properly articulated in the list response; and it would have addressed in detail the sequence of events. In relation to the negotiations with Keycorp Ltd, it is likely that REL would have sought to adduce evidence from Mr Carrello. 209 To permit Messrs Carr and Purves to raise the issue now, when they had done absolutely nothing prior to the start of the hearing to flag it, would risk real injustice to REL. There may well be questions of causation or mitigation in relation to the Fox transaction; and if there are, it may be that to exclude them from the litigious controversy might cause some injustice to Messrs Carr and Purves. But where they are the authors of that potential injustice (because they failed to raise the questions in an appropriate and timely way) it is they, and not the party against whom they seek to raise them, that should suffer any burden of injustice. 210 In my view, issue 11 is not available on a fair reading of the list response of Messrs Carr and Purves. 211 In essence, REL quantifies its loss on the Fox transaction by aggregating the total paid in respect of this (approximately $2,547,000.00) and giving credit for all receipts ($1,865,000.00). That calculation is not disputed. Of course, it was necessary for REL to show that the breaches of duty that it proved against Messrs Carr and Purves were a material cause of that loss. Prima facie, it would do so (as it has done) by showing that those breaches of duty caused REL to enter into the transaction. There is no apparent issue of remoteness with loss so calculated. 212 I do not propose to embark, in the alternative, upon a fact-finding exercise in relation to issue 11. That is because, the issue not having been properly raised and REL not having had a proper opportunity to address and meet it, it is likely that the relevant evidence is incomplete. In any event, to the extent that the issue depends on the evidence of Messrs Carr and Purves, then having regard to what I have said as to their lack of credibility, it could not succeed. Issue 12: other causes of loss 213 Issue 12 (to which no objection is taken) raises some other question of causation. It does not seem to me to be relevant. If there were extrinsic causes of the loss, they were at most concurrent and not exclusive. For example, assuming for the moment that Messrs Thomas and Garrett did breach their duties as alleged in para 62F of the list response, that could not supplant the causal effect of the breaches of duty that I have found against Messrs Carr and Purves. 214 The common law recognises that an event may have several effective causes. There is no reason to think that any different principle applies in connection with breaches of directors' duties. Thus, any breach on the part of Messrs Carr and Purves would go at most to contribution. (Mr Gray at one stage submitted that REL's claim was an apportionable claim, for the purposes of the Civil Liability Act 2002. As I indicate in discussing issues 31 and 32, at [330]-[332] below, he accepted that, on the basis of the authorities to which I there refer, I would resolve that issue against him.) 215 To the extent that issue 12 is in intended to raise some causal conduct on the part of REL (either in its own right or through Mr Carrello) then that should not be entertained, for the reasons that I have given in holding that issue 11 ought not be entertained. 216 Further, to the extent that issue 12 raises a question of mitigation, that is a matter for Messrs Carr and Purves to allege and prove. They have not done so. Issue 13: amount of loss 217 For the reasons given at [211] above, the amount of loss is (in round figures) $682,000. Issue 14: responsibility of Messrs Carr and Purves 218 It is correct to say (as Mr Gray submitted) that directors are not guarantors of every transaction into which they cause their company to enter. Nonetheless, in circumstances where I have found that the breaches of duties caused REL to enter into the Fox transaction, Messrs Carr and Purves are liable for the agreed calculation of that loss. Issue 15: s 1318 219 Finally, in the context of the Fox transaction, Messrs Carr and Purves rely on s 1318. That can be dealt with very quickly. I do not accept that Messrs Carr and Purves acted honestly in relation to the Fox transaction; on the contrary, I conclude, the actions of each of them were marked by conspicuous dishonesty, having regard in particular to their conflicts of duty (or duty and interest). Issues 16 to 23: the Asia Iron share sale proceeds Relevant facts 220 REL's audited annual financial report for the year ended 31 December 2003 disclosed, among other things, the following: (1) REL had derived a profit for the year a little in excess of $1,030,000.00; the profit was attributable to the increase of the value of its shareholding in MGI. (2) REL's principal assets, leaving aside its investment in Fox, were its shareholding in MGI (valued at a little under $3.25 million) and its shareholding in Asia Iron (carried at $1 million). (3) REL had accumulated losses of almost $12.5 million. (4) REL's total (net) equity was a little under $4.3 million. 221 The investment in Asia Iron represented 5 million fully paid ordinary shares. At some earlier time, the carrying value of those shares had been written down by about $12 million. That write-down was substantially responsible for the accumulated losses carried as at 31 December 2003. 222 As I have mentioned, Mr Adler, through a company or companies controlled by him, was a shareholder in REL. On 21 January 2004, Mr Adler sent a fax to Mr Carr. The fax appears to have been sent following a discussion between the two of them. In the fax, Mr Adler said, among other things: Dear Leon To say that I am unhappy with what has transpired must be considered an under-statement! The whole REL/Mt. Gibson scenario from start to now has been fraught with difficulty and unhappiness. Brian Johnson is not to be under-estimated, nor is he to be considered honest or reliable, he will do whatever he can to further his own interests at anyone's expenses. I have not had the opportunity to understand what this injunction is about but what it has done is potentially, materially damaged REL. All sorts of questions arise – when will my funds be returned, can you finalise Fox, can you borrow against those shares should you liquidate REL, etc. etc.? You have asked me to consider whether I could procure the $1 million to purchase a 51% stake in Fox. Leaving aside the legal issues that you and Fred Swabb need to understand and assure me there is no oppression of minority interests, insider trading, related party transaction, then I believe that I am in a position to organize and/or directly invest in Fox. However, I have gone from the position of expecting $1.5 million plus back, to having to put in $1 million! This wreaks havoc with one's cash flow! I need to have your loan funds repaid to me and we will also need to enter into an agreement regarding he shareholding of the 51% stake with appropriate guarantees and understandings. Please do not under-estimate my need and desire to have my loan funds back. I have been a patient lender. Please also bear in mind that you approached me well over a year ago for a 6 week loan and this loan will not be netted off against any other fee, whether real or imaginary. Yours sincerely 223 Thereafter, REL began to negotiate the sale of its shares in Asia Iron, to a company known as Jiangsu Investment Pty Limited (Jiangsu). 224 At a board meeting held on 20 July 2004 (attended by Messrs Carr, Purves and Thomas) Mr Carr advised, among other things, the following matters: 1) Asia Iron Sale Updated advised by Leon Carr that all conditions have been agreed and awaiting 10% subject to shareholder approval. … 5) Future of REL Leon Carr advised that a major shareholder wants a dividend and it was resolved that once Asia Iron is sold that the profits be distributed as a dividend. 225 On 5 August 2004, Mr Purves wrote (on REL's letterhead) to Mr Adler. That letter replied to a fax of 5 August 2004 from Mr Adler. Mr Adler's fax is not in evidence. However, it appears from the letter, Mr Adler had raised a number of questions relating (among other things) to the financial statements and a payment to Mr Carr. The second last paragraph of Mr Purves' letter appears to suggest that Mr Adler was concerned to have a distribution in specie of REL's shareholding in Fox, followed by the winding up of REL. The third paragraph of that letter stated: One of the issues that you may wish to consider before preparing such a motion is that the "Fox Loan" would need to be repaid to Resource Equities Limited before Resource Equities Limited relinquish [sic] its control of Fox Technologies Pty Ltd 51% shareholding. I think that upon the repayment of the "Fox Loan" then Resource Equities Limited would be in a position to distribute shares in Fox. Insofar as a motion to wind Resource Equities Limited up, I have no specific view and would also be happy to discuss this matter with you at your convenience. 226 It appears that Mr Adler also contemplated that Mr Carr's labours should receive some monetary recognition. The last paragraph of Mr Purves' letter stated: In regard to your second paragraph relating to Mr Carr's superb job, in principal I have no difficulties as to what you represent. The actual incremental increase in value of the Fox Technologies Pty Ltd shareholding has yet to be realised by Resource Equities Limited and perhaps at this time the monetary recognition should be given as a percentage. I would be pleased if Sue, your assistance calls me to organise a time suitable for you to discuss these matters. 227 By this time, REL held about $615,000.00 in cash. It was committed to lending at least $250,000.00 of that sum to Fox. 228 On 9 November 2004, REL entered into a contract to sell its shares in Asia Iron to Jiangsu for $1.4 million. The contract was subject to approval by REL's shareholders. That approval was given. 229 Jiangsu paid a deposit of $100,000.00. That was spent on legal fees. The balance of the proceeds of sale, $1.3 million, was received on 24 December 2004. As I have already noted, $75,000.00 was then paid to Mr Carr, and $88,000.00 to Mr Purves. Further amounts were paid for legal fees. 230 From late December 2004, REL, at the direction of Messrs Carr, Purves and Garrett, started to pay the "dividends". Mr Adler's company received about $235,000.00. Mr Carr's company received about $140,000.00. Dividends were paid to other shareholders although, notably, not to the purported shareholder Cosmos Commerce. (I say that Messrs Carr, Purves and Garrett "caused" REL so to act because, by then, they had secured de facto control of the company following the EGM of 2 November 2004, and were contesting proceeding 357 in which, among other things, the legitimacy of their control was under attack.) Issues 16-18: breach of duty 231 Issues 16, 17 and 18 should be considered together. The payments in question can only be justified if they were a dividend or a return of capital. If they were not one or the other then, in circumstances where no other justifications is, or on the evidence could be, advanced for them, they were made in breach of duty. 232 Mr Adler had called for the repayment of the money that he had leant. On no view could what happened be characterised as repayment of a loan. The directors' meeting of 20 July 2004 resolved to distribute the profits of the sale of the shares in Asia Iron "as a dividend". There is no evidence of any subsequent resolution characterising, or authorising, the payments that were made in some other guise. Of course, if the profits could be, and were to be, distributed as a dividend, the amount distributable would have been (leaving aside transaction costs) $400,000.00: the capital profit on the sale. (I should have said, when referring to the fact that the carrying value of the shares was $1 million, that no one suggested that the write-down in their carrying value was unjustified, or that the figure of $1 million was artificially low.) 233 It is necessary to pay some attention to REL's constitution. Clause 22 deals with "dividends and reserves". Of present relevance, cll 22.1, 22.2 and 22.3 read as follows: 22 DIVIDENDS AND RESERVES 22.1 Dividends The Directors may from time to time declare a dividend to be paid to the Shareholders entitled to the dividend. Subject to Article 5.5 and subject to the rights attaching to the Shares, the dividend as declared shall be payable on all Shares in proportion to the amount of capital for the time being paid up or credited as paid up in respect of such Shares, unless it was a term of issue of such Shares that they would carry full dividend rights, and such Shares were issued on a pro-rata basis to Shareholders. 22.2 Interim Dividend The Directions may from time to time pay to the Shareholders such interim dividends as they may determine. 22.3 Dividends only Payable from Profits No dividend shall be payable except out of profits. A determination by the Directors as to the profits of the Company shall be conclusive. 234 It is not necessary to set out cl 5.5. 235 Mr Newlinds submitted that there was no evidence of any resolution of the kind required by cll 22.1 or 22.2. I accept that submission. The only resolution in evidence is that of 20 July 2004. That resolution refers to the intention to distribute profits as a dividend, but does not in terms fix, or authorise, the dividends that were paid. 236 Clause 21.3 of the constitution reflects s 254T of the Corporations Act, which provides that a company may only pay a dividend "out of profits". 237 For the purposes of company law, the "profit" of a business, for a particular accounting period, is in essence the gain – the change in value of its assets – over that accounting period. The gain, or change in value, is measured by comparing its financial statements at the beginning of that period to its financial statements at the end. See Re Spanish Prospecting Co Ltd [1911] 1 Ch 92 at 98-99; QBE Insurance Group Ltd v Australian Securities Commission (1992) 38 FCR 270 at 285; Commissioner of Taxation of the Commonwealth of Australia v Sun Alliance Investments Pty Limited (in liquidation) (2005) 225 CLR 488 at 509-510 [61]. 238 It is clear that capital profits (that is to say, profits earned on the realisation of capital assets) may be available for dividend provided there has been an accretion to the paid up capital of the business: QBE at 288. 239 In the present case, it is impossible to say that REL made a profit for the year ended 31 December 2004 (or, indeed, for any accounting period up to that date). There are no financial statements for the period ended 31 December 2004. There is no basis on which its position at that date can be compared with its position at 31 December 2003. Thus, even though there may have been a "profit" on the sale of the Asia Iron shares, it does not follow that there was a profit for the financial period in which that sale was completed. 240 Mr Gray submitted that there was likely to have been a profit, because REL had engaged in no other trading activities. However, it was engaged vigorously in litigation, and paid substantial amounts to its legal advisers. I do not know if those amounts were characterised as expenses of REL's business. If they were, they would have eaten away at the profit realised on the sale of the Asia Iron shares. Again, presumably, the payments made to Messrs Carr, Purves and Thomas would have been recorded as expenses of the business. They, too, would have eaten away at the profit. In any event, the gross profit was $400,000.00; and the amounts paid out to shareholders exceeded $858,000.00 in total. 241 I said earlier that a company may pay a dividend out of capital profits, as long as those profits result in an increase to its paid up capital. That principle was firmly established by the decision of the High Court of Australia (Dixon CJ, McTiernan and Taylor JJ) in Australasian Oil Exploration Limited v Lachberg (1958) 101 CLR 119. Their Honours said at 133"that a company has no capital profits available for dividend purposes unless upon a balance of account it appears that there has been an accretion to the paid-up capital". 242 In this case, the financial report for 31 December 2003 shows that REL's contributed equity had been eroded by accumulated losses of almost $12.5 million for the year. (In the previous year, contributed equity and reserves totalling in excess of $25 million had been eroded by accumulated losses of $20.5 million.) On the Lachberg principle, no amount could have been paid by way of dividend out of the capital profit on the sale of the Asia Iron shares until REL's paid-up capital had been restored (subject of course to taking into account any reduction in capital authorised by statute). 243 Mr Newlinds submitted that in any event there was no capital profit, because the value of the Asia Iron shares had been written down by about $12 million. I do not accept that submission. The write-down (or write-downs) had occurred in prior years. Profit is to be assessed by comparing financial position at one reporting date with financial position at the immediately prior reporting date. In this case, the question of whether there was a profit on the sale of the Asia Iron shares during the financial year to 31 December 2004 requires a consideration of their value at the beginning of that period with the amount for which they were sold. 244 I conclude that the distribution was not justifiable as payment of a dividend. Was it justifiable as a return of capital? 245 Section 256B deals with the circumstances in which a company may reduce its share capital in a way that is not otherwise authorised by law. Subsection (1) is of present relevance. It reads: (1) A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction: (a) is fair and reasonable to the company's shareholders as a whole; and (b) does not materially prejudice the company's ability to pay its creditors; and (c) is approved by shareholders under section 256C. A cancellation of a share for no consideration is a reduction of share capital, but paragraph (b) does not apply to this kind of reduction. 246 Mr Gray's faint submission in reliance on s 256B must fail. There was no approval by shareholders, either under s 256C or at all. That is sufficient to dispose of the submission. 247 In any event, the distributions had the effect of making REL insolvent and thus materially prejudiced its ability to pay its creditors. Mr Carrello, in a report to creditors dated 23 June 2005, made the following observations: The issues surrounding the company's financial position have been resolved as a consequence of the sale of the company's investment in Fox. … Had the investment in Fox not been realised the company would still be insolvent until (at a minimum) until [sic] the loan due by Mr Garrett was repaid. These matters should be viewed in terms of the company's history and the relationships that exist between various parties involved with the company. The company distributed a significant amount of cash in December 2004. This created the company's cash crisis. The company's solvency would have been an issue on about January / February 2005; the company's solvency resting on the settlement of the Fox transaction which happened some 4 months later. Had the December distribution not taken place it is unlikely that Administrator [sic] would have needed to have been appointed. …. 248 Even if REL were not insolvent as a result of the distributions, its solvency, resting as it did on an uncertain event (the making and settlement of a binding contract for the sale of its interest in Fox – the prospect of Mr Garrett's repaying the balance of the loans should not have been seen as an event of greater certainty) must mean that the distributions at the very least materially prejudiced REL's ability to pay its creditors. In this context, there is ample evidence that REL's creditors – principally, its legal advisers – were owed money, and were not paid. 249 Further, once the payments were made, REL's only assets were its shareholding in and loans to Fox. The loans to Fox exceeded 20% of REL's paid-up capital, and its shareholding in Fox exceeded 30% of REL's up capital. There was thus a breach of s 20B of the PDF Act and of the requirements of REL's registered investment plan. Christensen Vaughan warned Mr Carr of those consequences, in a letter of 21 December 2004. Mr Carr does not appear to have been troubled by the warning, or indeed by the fact (which Christensen Vaughan also advised) that breach of the PDF Act was a criminal offence. 250 The letter of 21 December 2004 from Christensen Vaughan was not the only warning given to Mr Carr. The Registration Board wrote to him on the same date. That letter advised Mr Carr that the Registration Board was considering exercising its power to revoke the registration, as a PDF, of REL. The letter referred to an apparent contravention of s 43 of the PDF Act arising from REL's failure to provide required documents within a specified period of time. The letter also stated: The Board also believes the PDF's investment(s) in Fox Technology Limited may be in breach of division 1 of the PDF Act. 251 Mr Carr appears to have been no more concerned by this letter than he was by the Christensen Vaughan letter, even though the Christensen Vaughan letter must have brought home to him that the payment of the proposed dividend would turn the possible breach to which the Registration Board had referred into a certain breach. 252 That Messrs Carr, Purves and Garrett were prepared to risk the registration of REL as a PDF – which, after all, was its reason for existence – speaks volumes for their neglect of their duties as directors. It is impossible to understand how directors of a PDF company, acting in good faith and in the exercise of reasonable care and skill, could contemplate steps that would threaten the existence of the company as a PDF. 253 For those reasons, I conclude that Messrs Carr, Purves and Garrett did breach their duties to REL when they caused it to make the distributions in question. Issues 19 to 22: loss 254 The next significant group of issues is 19, 21 and 22 (I say this because Mr Gray did not pursue issue 20). In essence (leaving aside the payments said to have been made by Mr Carrello as administrator) the debate was whether REL suffered loss by making the payments in question. 255 Mr Newlinds relied on the decision of Giles J in Segenhoe Ltd v Akins (1990) 29 NSWLR 569. In that case, the defendants (auditors) were retained to audit the accounts of the plaintiff. The accounts contained an under-provision of about $517,000.00, and overstated retained profits accordingly. In reliance on the audited accounts, the plaintiff paid a series of dividends, of which (because of the overstatement of retained profits) about $494,000.00 was paid out of capital. The real issue was whether, thereby, the plaintiff suffered loss. 256 As Giles J stated at 574, there were two questions in relation to loss. The first was whether the amount of the dividend paid out of capital was recoverable as the measure of the plaintiff's loss. The second was whether any entitlement of the plaintiff to recover from the auditors was affected by any right of recovery from shareholders. 257 As to the first question, Giles J concluded at 580-581 that: (1) the plaintiff was out of pocket to the extent of the capital paid away purportedly by way of dividend; (2) it was irrelevant whether the plaintiff was solvent or insolvent at the time of the payment; and (3) it was irrelevant that the money was paid to shareholders rather than third parties. 258 As to the second question, his Honour concluded at 582-583 that: (1) the real question was one of mitigation of loss; (2) the plaintiff was obliged to act reasonably, and the standard of what was reasonable was to be assessed taking into consideration (among other things) that the auditors were wrongdoers; and (3) on the facts of the particular case, the plaintiff had not acted unreasonably in not seeking to recover the amount of the dividend paid to its shareholders. 259 In dealing with the first question, Giles J undertook a detailed review of the authorities (at 574-580). As his Honour explained, those authorities provide support for the proposition that a company suffers loss, when it pays a dividend out of non-existent profits, because it suffers a capital loss, or diminishes its capital in a way not authorised by statute. The authorities further support the proposition that it is irrelevant that the company is (or is not) insolvent when it makes the payment. 260 In my view, by reason of the payments in this case, whether considered as payments of dividends or as payments of capital, REL suffered a loss, because its capital was improperly reduced. It does not matter that the money was paid to shareholders, and that if it is recovered the shareholders may be paid again. (For that matter, it is not proved that the shareholders now are the same as those to whom the payments were made back in 2004 and 2005.) 261 The amount of the payments made is agreed to be $858,183.28. Subject to consideration of the impact of the payments made by Mr Carrello, that is the amount of REL's loss before interest. 262 Mr Carrello made some seven payments, totalling $47,480.70. Mr Newlinds submitted that if the payments were to be regarded as dividends, then they were debts due to shareholders. He relied on s 254V(2) of the Corporations Act, which provides that if a company has a constitution providing for declaration of dividends, the company incurs a debt when the dividend is declared. He relied also on the decision in Bluebottle UK Limited v Deputy Commissioner of Taxation (2007) 232 CLR 598 at 613-614 [37]. 263 Section 254V(2) is engaged if a dividend is declared. There is no evidence that REL declared a dividend in accordance with cl 22 . Indeed, as I have noted, one of Mr Newlinds' submissions on the validity of the payment was that the required resolution had not been passed (see at [235] above). 264 The passage in Bluebottle on which Mr Newlinds relied draws a distinction between an interim dividend and a final dividend. The Court said that the decision to pay an interim dividend is revocable until implemented by payment. On the contrary, their Honours said, when a final dividend is declared, the company incurs a debt either when the declaration is made or from the date when the dividend is declared to be payable. In the present case, the dividend could not have been a final dividend of the kind to which their Honours referred because there was no declaration. Thus, if it is to be regarded as a dividend, it could only have been an interim dividend. If it is to be so regarded then it was revocable. 265 Mr Newlinds submitted, in the alternative, that if the payments were to be regarded as a return of capital then, again, they should also be treated as a debt. The difficulty with that submission is that there was no resolution for reduction of capital, and thus nothing binding the company or creating an enforceable obligation in the hands of shareholders. 266 Finally, Mr Newlinds submitted, the payments made by Mr Carrello could be justified because he acted reasonably in treating them as debts due and in paying them. That submission does not seem to me to rise above its source, in the sense that if there were no obligation – or, at least, no arguable obligation – to make the payments, it could not have been reasonable to make them. 267 This aspect of the case is unilluminated by any evidence from Mr Carrello as to his reasons for making the payments, or even any evidence from which his reasons might be inferred. Accordingly, it is not possible to conclude, for example, that Mr Carrello received advice that he was obliged to make, or would be justified in making, the payments in question; or that he turned his mind to the question of obligation and concluded, on reasonable grounds, that the payments should be made. 268 What is in issue in relation to the "Asia Iron" payments is, in essence, the propriety of payments that Messrs Carr, Purves and Garrett, acting or purporting to act as directors, caused REL to make. So far as the evidence goes, there was no formal resolution after 20 July 2004. The resolution of that date approved a course of action. It was not in terms a resolution declaring a dividend, and thereby creating an enforceable obligation. Nor was there any resolution of the company in general meeting, approving the payments as returns of capital, so as to create an enforceable obligation. In essence, the payments were wrongful acts directed by Messrs Carr, Purves and Garrett. It is that wrongdoing for which they are liable. 269 On that analysis, there is no reason to make Messrs Carr, Purves and Garrett liable for payments that they did not cause REL to make. It might, be otherwise if they had used their position as directors to commit REL in such a way as to create an enforceable obligation to make the payments (for example, by declaring, or purporting to declare, a dividend). 270 It follows that the loss in respect of the payments in question should be quantified at $810,702.58. Issue 23: s 1318 271 Messrs Carr and Purves rely on s 1318 to excuse them, in whole or in part, for any liability that they may have. That issue can be dealt with briefly. Essentially for the reasons that I have given, I do not think that their conduct, in causing REL to make the payments, can be characterised as honest. On the contrary, I think, it was conduct engaged in for the benefit of, in particular, Mr Carr and Mr Adler through their respective companies. 272 Further, given that Messrs Carr, Purves and Garrett did not appear to turn their minds to the requirements of REL's constitution and of s 254T of the Corporations Act (in so far as the payments are to be characterised as payments of a dividend) or to the requirements of s 256B of the Corporations Act (in so far as the payments are to be characterised as a return of capital), I do not think that it is appropriate to conclude that Messrs Carr and Purves ought fairly to be excused. This is not a case of some accidental oversight, or failure to comprehend fully the requirements of some complex legislative regime. It is, instead, a case of gross or wholesale dereliction of duty. That characterisation can be supported not only by reference to the nature and circumstances of the breaches of duty but also by the following considerations: (1) the effect of the payments was to leave REL in a position where it was, or would soon become, insolvent; and (2) the effect of the payments was, as explained above, to leave REL in a position where it was at risk of losing its PDF registration. Issues 24 and 25: litigation expenses 273 As a result of infighting that it is not necessary to record, Messrs Carr, Purves and Thomas had effective control of the board of REL from about 24 July 2003, when, at a general meeting held on that day, Mr Lafferty was purportedly removed as a director. Mr Lafferty ultimately resigned on 25 February 2004, formalising the position that had existed de facto for the previous six months. 274 At an EGM held on 28 September 2004, resolutions to remove Messrs Carr, Purves and Thomas were lost, following a proxy battle. That meeting is significant only because the shareholding associated with Mr Thomas (three million shares formerly held by a company known as Glamont Pty Limited, were transferred partly to Mr Thomas' wife and partly to a company known as TFSF Pty Limited (TFSF)) had "switched sides". Mr Thomas, who held proxies from his wife and TFSF, had voted in favour of the resolutions to remove the incumbent directors. There were 42.3 million shares on issue. Eleven million, six hundred thousand were held by Mr Adler's company. Six million, nine hundred and fifty-four thousand were held by Mr Carr's company. Hitherto, the Adler, Carr and Thomas shares (as it is convenient to call them) had voted together, and thus commanded a slight but sufficient majority of the total issued shares. After the defection of Mr Thomas, that slight majority disappeared. 275 Messrs Carr, Purves and Garrett reacted swiftly to Mr Thomas' switch. They held a board meeting later on 28 September 2004, at which, among other things, they resolved to issue 6,351,000 shares to Cosmos. They were prevented from issuing those shares because of undertakings given by REL to the Supreme Court of Western Australia. However, if those shares had been issued, there would have been a new group – the Adler, Carr and Cosmos interests – which would have commanded a majority of the shares on issue. 276 REL held its AGM on 29 October 2004. At that meeting, Messrs Carr, Purves and Garrett retained control of the board partly through the voting of the Adler and Carr shares and partly because Mr Carr, as chairman, rejected (on dubious grounds – see at [281] below) sufficient proxies, from opposing interests, to retain control. However, Messrs Carr, Purves and Garrett must have realised that it was a close-run thing. 277 In the meantime, a further EGM had been called for 2 November 2004, to consider removing Messrs Carr, Purves and Garrett as directors of REL. Five days after the notice of meeting was received, Messrs Carr, Purves, Garrett and Thomas held another board meeting. The minutes of that meeting record, among other things, that there was discussion as to REL's need to raise further cash. The minutes record that Mr Thomas "raised the prospect of Cosmos assisting with the fund raising and Nigel Purves agreed to fund up to $350,000.00 at $0.05 per share." The following resolution is then recorded as having been moved by Mr Thomas, seconded by Mr Carr and passed with Messrs Garrett and Purves abstaining: IT WAS RESOLVED that Cosmos E-C Commerce Pty Ltd be allotted shares in REL at $0.05 per share ($350,000.00) and such funds be applied for the benefit of Fox. 278 Mr Carr signed the minutes as an accurate record. However, Mr Thomas disputes their accuracy. According to his contemporaneous handwritten notes at the meeting, what was discussed was: Placement of up to $350,000.00 to Cosmos subject to shareholders agreement i.e., via underwritten rights issue and subject to undertaking given. 279 In an affidavit sworn in proceeding 357 on 2 November 2004, and effectively incorporated by reference into his affidavit sworn in these proceedings, Mr Thomas amplified his notes of the meeting as follows (paras 4 to 6): 4. I attended every meeting held during 2004 of the directors of the Defendant of which I received notice in accordance with the Articles of Association of the Defendant. 5. I never at any of those meeting proposed the directors should consider increasing the capital of the Defendant by making a private placement of shares. 6. Any discussion I had with Mr Carr or any of the other directors of the Defendant only concerned the possibility of an underwritten rights issue of shares to existing shareholders consistent with undertakings given to the Court. 280 I prefer Mr Thomas' account of the meeting to what is recorded in the minutes. It may be noted that the apparent need for money evaporated shortly after the EGM on 2 November 2004: although REL apparently received a cheque (after the meeting), the cheque was never banked. To the extent that a need for money arose thereafter, it was caused by the improper payment out of the proceeds of sale of the Asia Iron shares. 281 Western Ventures commenced proceeding 357. It sought orders in relation to the conduct of the EGM. Proxies in a form that had been rejected (by Mr Carr as chairman) at the AGM on 29 October 2004 were accepted as valid (by Mr Carr as chairman) at the EGM on 2 November 2004. In relation to one of those proxies, the Supreme Court of Western Australia held that the rejection, on 29 October 2004, was a fraud on Mr Carr's power as chairman: Western Ventures Pty Limited v Resource Equities Limited (2005) 53 ACSR 568 at 574 [30]. On the assumption that the evidence before the Supreme Court of Western Australia included the evidence before me, there was ample evidence to support that finding, and I make it in these proceedings. It is relevant to the question of litigation expenses. 282 During the EGM on 2 November 2004, Mr Carr announced that 7 million shares had been issued to Cosmos Commerce. Those shares were voted with the Adler and Carr shares to defeat the motions for removal of Messrs Carr, Purves and Garrett as directors and for the appointment of Messrs Thomas, Brown and Macaulay as directors. Had the Cosmos Commerce shares not been voted, the resolutions would have passed. 283 In those circumstances, Western Ventures moved in proceeding 357 to set aside the issue of shares to Cosmos Commerce, for declarations that Messrs Carr, Purves and Garrett had been removed and for declarations that Mr Thomas and the other candidates had been appointed. Messrs Carr, Purves and Garrett caused REL to defend those proceedings, to pay for the defence and to indemnify Cosmos Commerce for its costs and for any liability that it might have arising from the issue of the shares to it. Messrs Carr, Purves and Garrett did so because they claimed that the share issue to Cosmos Commerce was valid. 284 In substance, the issue in proceeding 357 was whether Messrs Carr, Purves and Garrett, or Mr Thomas and his associates, should control REL. That was not an issue in which REL had any proper interest. It was not an issue that REL should have defended, for the benefit of Messrs Carr, Purves and Garrett. If Messrs Carr, Purves and Garrett wished to assert that they remained directors of REL, and that Mr Thomas and his associates had not been appointed, they should have applied to be joined to the proceedings and should have funded that claim themselves. 285 In any event, the defence of the proceeding depended on the validity of the share issue to Cosmos Commerce. For the reasons that I have already given, that share issue was a sham. Cosmos Commerce did not pay for the shares. For the reasons given at [47] to [49] above, I find that it had not even tendered a cheque in payment for the shares prior to the meeting. The better inference, from the fact that the cheque was retained and never banked, is that it was never intended that Cosmos Commerce should pay for the shares. That supports the inference that the issue was a sham. Further and powerful support for that inference is derived from the fact that Cosmos Commerce was not among the beneficiaries of the dividend, or reduction of capital, paid out of the proceeds of sale out of the Asia Iron shares. If it were a shareholder, it was entitled to participate. It did not participate, and did not protest. The purpose of the placement had been achieved, and there was no need (at least, so long as no further EGMs were called) for Cosmos Commerce to be regarded as a shareholder. 286 Thus, it was doubly wrong for Messrs Carr, Purves and Garrett to cause REL to defend proceeding 357. It was wrong, first, because it represented the use of REL's funds to defend their positions, and their private interests. It was wrong, secondly, because the whole basis of the defence – the majority achieved through the voting of the Cosmos Commerce shares – was a sham. They must have known this. For each of these reasons, the decision to cause REL to defend the proceeding, and to incur costs in so doing, was a breach of their several duties. 287 Equally, the decision to offer indemnity to Cosmos Commerce was a breach of their several duties. As to Mr Carr, it was a breach of duty because it represented the expense of REL's funds to attempt to uphold what he must have known was a sham transaction. For Messrs Purves and Garrett, it was a breach of duty for that reason, and also because of their conflict of interest as, respectively, a director and group corporate counsel of the Cosmos Group; and Mr Purves was then as well the sole director of Cosmos Commerce. 288 Mr Newlinds put, as a separate submission, that the defence had no reasonable prospects of success. That had been recognised, he submitted as early as 6 December 2004, by senior counsel then retained for REL. On that day, a number of interlocutory applications had been dealt with, and REL was in large part unsuccessful. Senior counsel reported to REL's solicitors Christensen Vaughan: [a]s a general comment, I can only continue to urge your client as I have in the past to endeavour to negotiate a suitable settlement in this matter because sooner or later some unattractive issues are going to be pressed, including the undertaking, improper purpose of the conduct and such like. If it is possible to negotiate a settlement that avoids the need for the court to reach conclusions on these serious matters, there would be much to be said for the matter being disposed of in this fashion. 289 In the same memorandum, and before the comments that I have quoted, senior counsel, having reported in some detail on the events of the day, said: "[t]he good news in any event is that his Honour [Pullin J], who had heard the applications] indicated that it would be most unlikely in any Court [sic] that the matter could be dealt with before Christmas." 290 The fact that delay was the only good news on which senior counsel could report is telling. 291 It should be noted that senior counsel had not been informed that the cheque purportedly given in payment for the shares issued to Cosmos Commerce had not been handed over until after the meeting. Nor had he been informed that the cheque had not been banked. It is unlikely that his views would have been any more sanguine had he been informed of those relevant matters. 292 Part of the truth – as to Cosmos Commerce – was apparently given to Christensen Vaughan in early March 2005. On 9 March 2005, they wrote to the directors of REL. The letter was written "to confirm our oral advice over the last few days as to [REL's] prospects of success…". It noted that one of the issues in the proceedings was "whether the issue of 7 million shares to [Cosmos Commerce] by REL… was made for the improper purpose of retaining control of REL". The other identified issue related to the rejection of proxies at the AGM on 29 October 2004. 293 The authors stated that they were "both of the opinion that REL has no realistic prospect of succeeding on either issue at trial. REL must be successful on both issues in order for the present board to remain in control of the company." That advice, which was reiterated in a way unnecessary to quote, identified accurately the real issue: control of REL. 294 The letter noted information that had come to the attention of the authors "in the last week". One of those matters was a draft report by an independent expert, valuing shares in REL at a little over $0.09 per share as at 29 October 2004. The expert had been asked "if there is any justification for discounting the issue price to 5 cents for a share." His advice was that "there is not". 295 Further, the letter noted: 3. inspection of the Cosmos E-C Commerce Pty Ltd cheque book strongly suggests that the $350,000 cheque tendered by that company was not written on 29 October 2004, but 5 November 2004; 4. the plaintiffs' solicitor has informed us that a major shareholder in Cosmos Limited (the holding company of Cosmos E-C Commerce Pty Ltd) has claimed that Nigel Purves was specifically instructed, in his capacity as an office of Cosmos, not to pay the $350,000 to REL. Although, if true, a direction from a shareholder would not bind Mr Purves, it does constitute some evidence to support the plaintiffs' argument that the share issue was a sham. 296 After considering the proxy issue, the authors turned their advice to the Cosmos Commerce shares. They referred to "evidence suggesting that the cheque may have been backdated; … the fact that the cheque was never presented…; [and] the failure to take legal advice about not presenting the cheque". In those circumstances, whilst the authors were not prepared to say that REL's defence was "manifestly untenable", they did say that its "prospects of success at trial are minimal". 297 Mr Gray submitted that, after the Christensen Vaughan advice on 9 March 2005 had been received, Messrs Carr and Purves acted properly by causing REL not to incur further costs in the defence of the proceedings. The facts are somewhat more extensive. Some further, but in the scheme of things insignificant and in any event probably explicable, payments were made to lawyers. But Messrs Carr and Purves did not take steps to cause REL to settle the litigation. Nor did they simply cause it to withdraw, and to leave the plaintiff to make good its case. Instead, on 15 March 2005, they resolved to appoint Mr Crouch as voluntary administrator of REL. They did not do so on the permissible ground – that REL was, or would in the future become, insolvent. They purported to do so (according to Mr Carr) "because there was an impasse between the directors and Brian Johnson and his group of shareholders… and if that impasse was not overcome REL would face the possibility of becoming insolvent". If that were a valid reason for appointment of an administrator, it reflected a situation entirely of their own making. 298 Presumably, it was thought that the appointment of Mr Crouch as administrator might head off the then imminent hearing (see s 440D of the Corporations Act). However, Western Ventures sought and obtained leave to continue the proceeding against REL. It was effectively undefended. The issues were decided in Western Ventures' favour. 299 In those circumstances, it was a breach of duty on the part of Messrs Carr, Purves and Garrett to cause REL to defend the proceedings, to incur legal costs in so doing, and to offer indemnity to Cosmos Commerce for its costs and potential liabilities. In summary (following from what I have said above) that is so because: (1) the proceeding had its origin in the wrongful conduct of Messrs Carr, Purves and Garrett: specifically, in relation to the sham issue of shares to Cosmos Commerce for the improper purpose of maintaining control; and in Mr Carr's case, because of his rejection of proxies in fraud of his powers; (2) further, the purpose of the defence of the proceeding was to maintain their control of REL. It was improper to cause REL to expend its funds in defence of their personal interests; and (3) they must have known that a key element of REL's defence of the proceeding – the issue of shares to Cosmos Commerce – was a sham. 300 There is no dispute as to quantification of the loss. It totals $191,004.00. Issues 26 to 30: administration expenses Issues 26 and 28: breach of duty; responsibility 301 Messrs Carr, Purves and Garrett appointed (or purported to appoint) Mr Crouch as voluntary administrator on 15 March 2005. Messrs Thomas, Brown and Macaulay appointed Mr Carrello as voluntary administrator of REL on 24 March 2005. Between those two dates, the Supreme Court of Western Australia had given its decision in proceeding 357. It held, among other things, that Messrs Carr, Purves and Garrett had been removed as directors on 2 November 2004, and that Messrs Thomas, Brown and Macaulay had been appointed directors in their place. Accordingly, on 15 March 2005, Messrs Carr, Purves and Garrett were directors in fact (because, although not validly appointed, they were acting in the position of directors – see para (b) of the definition of "director" in s 9 of the Corporations Act) but not directors in law. 302 Messrs Carr, Purves and Garrett appointed Mr Crouch in response to the advice from Christensen Vaughan that REL had little prospect of success in proceeding 357. The reason given by Mr Carr – deadlock (and, through deadlock, the possibility of insolvency) - was not a legitimate reason for appointment. There was no deadlock in the affairs of REL. Messrs Carr, Purves and Garrett were in control – illegitimately, but in control nonetheless. 303 The new board met on 24 March 2005, the day after it was confirmed in office by the Supreme Court of Western Australia. It was advised, among other things, that actions taken by Messrs Carr, Purves and Garrett after 2 November 2004 "were ineffective, inclusive of … the appointment of the Administrator Nick Crouch". The minutes of the meeting record that the board discussed REL's financial position and concluded "based on limited information available, that the Company appeared to have more liabilities than assets". Ms Dent's evidence confirmed that this conclusion was well founded. She said in cross-examination that the new board made inquiries as to the solvency of REL as soon as it had records available to it (T51.38-.49). She said, in addition, that she was aware that some cheques issued by REL had been dishonoured (T52.28). 304 In fact, as I have said, the cash payments and distributions made by REL out of the proceeds of sale of the Asia Iron shares left it in a position where it was unable to meet its obligations to Fox and where it was unable to meet some creditors' claims – principally, for legal and related fees. 305 At the meeting on 24 March 2005, the new board discussed the appointment of an administrator, and the advantages and disadvantages of that course of action (including, in relation to the sale of Fox, for which negotiations were then under way). The board resolved: that, the Company being, to the best of the Director's [sic] knowledge, unable to pay its debts, the company be placed into Voluntary Administration and that the company seal be affixed to the notice or that the notice be executed in accordance with section 127 of the Corporations Act. 306 The board resolved to appoint Mr Carrello as administrator. 307 In my view, it was open to the board to conclude, as it did, that REL was insolvent on 24 March 2005. REL was insolvent because of the actions taken by Messrs Carr, Purves and Garrett in stripping it of cash and leaving it unable to meet its obligations. 308 It may be, of course, that if Messrs Carr, Purves and Garrett had considered the solvency of REL, it would have been open to them too to conclude (on 15 March 2005) that REL was insolvent. But insolvency at that date would have been just as much a product of their actions as was insolvency as at 24 March 2005. 309 It follows, in my view, that there is a causal link between the wrongful actions of Messrs Carr, Purves and Garrett in paying away the proceeds of sale of the Asia Iron shares and the appointment of Mr Carrello as administrator. That causal link is to be found in the fact that the payments rendered REL incapable of meeting its obligations to Fox and its creditors. 310 I conclude that: (1) Messrs Carr, Purves and Garrett were directly responsible for the appointment of Mr Crouch as administrator; (2) that appointment was invalid, both because it did not comply with s 436A of the Corporations Act (there having been no resolution of the kind referred to in that section) and because Messrs Carr, Purves and Garrett had been removed as directors at the EGM held on 2 November 2004; (3) although the appointment of Mr Crouch (by directors lawfully appointed and competent to do so) could have been justified on the ground of insolvency, that insolvency was a product of the wrongful acts of Messrs Carr, Purves and Garrett in causing REL to pay away the proceeds of sale of the Asia Iron shares; (4) the appointment of Mr Carrello was justified on the ground that REL was, on 24 March 2005, insolvent; and (5) that insolvency was the direct result of the actions of Messrs Carr, Purves and Garrett in causing REL to pay away the proceeds of sale of the Asia Iron shares. 311 It follows, in principle that each of the appointments was the result, immediately or mediately, of the wrongful acts of Messrs Carr, Purves and Garrett. Thus, in principle, they should be held liable to compensate REL for the loss sustained as a result of those breaches of duties: namely, the expenses of administration. Issues 27 and 29: loss 312 The amount paid to Mr Crouch was $25,000.00. That payment was a negotiated compromise. Mr Crouch had asserted an entitlement to be paid more, and had asserted a lien over the property of the company (including in excess of $100,000.00 standing to the credit of its bank accounts) in his possession. 313 Mr Gray submitted that, if Mr Crouch had been invalidly appointed, there was nothing owing to him, and thus Messrs Carr and Purves could not be liable for the amount of $25,000.00 paid to Mr Crouch. I do not accept that submission. There was a dispute. Mr Crouch was in a position of some strength, because of his claimed lien. It was hardly in REL's interest to have the proper administration of its affairs sidetracked by a dispute with Mr Crouch, or to spend what could have been substantial amounts on yet more legal fees, unless there were no alternative. There was an alternative: negotiation. In the circumstances, and viewed objectively, the settlement reached with Mr Crouch was reasonable. See Unity Insurance Brokers Pty Limited v Rocco Pezzano Pty Limited (1998) 192 CLR 603. 314 In a related submission, Mr Gray relied upon the fact that it was Mr Thomas and his associates who caused the payments to be made to Mr Crouch; Messrs Carr and Purves had nothing to do with those payments. Mr Gray submitted, in effect, that in those circumstances Messrs Carr and Purves could not be liable for the amount of the payment. That submission should be rejected for the following reasons (which essentially summarise what I have said already): (1) it was Messrs Carr and Purves, together with Mr Garrett, who caused the appointment (or purported appointment) of Mr Crouch; (2) that appointment was made in breach of duty; and (3) even if the appointment of Mr Crouch were (as I have concluded it was) invalid, nonetheless it was open to REL, acting reasonably, to compromise his claim for fees. 315 It is not fatal, to this aspect of REL's claim, that the new board had been advised that the appointment of Mr Crouch was invalid. That is simply a factor to be taken into account in assessing whether the compromise reached with him was reasonable. 316 Mr Gray next submitted that Mr Crouch had done some work for the benefit of REL – specifically, negotiating the sale of its interest in Fox to Keycorp. In the absence of evidence as to the work done by Mr Crouch, Mr Gray submitted that the figure of $25,000.00 negotiated with him was a reasonable payment for work done by him for the benefit of REL. In those circumstances, Mr Gray submitted REL sustained no loss by the payment. 317 I do not accept that submission. Negotiations with Keycorp commenced before the appointment of Mr Crouch. They would have continued even if he had not been appointed. There is no evidence to suggest that it would have cost REL $25,000.00 to do whatever it was that Mr Crouch might have done, or to bring those negotiations to whatever was the point to which Mr Crouch had brought them. Even if it is to be assumed that Mr Crouch had done some work in negotiating with Keycorp, and that the work was of benefit to REL, it does not follow that REL did not suffer loss by being forced to pay $25,000.00 for it. Mr Gray led no evidence to show what (if any) work Mr Crouch had done, in negotiating with Keycorp; and, a fortiori, no evidence to show the value of that work. Mr Gray accepted that at least some of the work done by Mr Crouch was work inherent in his capacity (or purported capacity) as administrator: calling a meeting of creditors, preparing a report as to affairs, and the like. Work of that character would not have produced a benefit for REL, and Mr Gray did not submit otherwise. Thus, it cannot be said what if any proportion of the amount actually paid to Mr Crouch related to his negotiations with REL. Nor is there any evidence from which some conclusion might be drawn as to (for example) the proportion, in terms of hours or otherwise, devoted to the different kinds of work presumably undertaken by Mr Crouch. 318 As to Mr Carrello: Mr Gray submitted that Messrs Carr and Purves were not responsible for the decision taken on 24 March 2005 to appoint him as administrator. That is correct, as a matter of fact. It does not follow that the appointment was not a result of the breaches of duty that I have found; and for the reasons summarised at [310], above, I conclude that it was. 319 Mr Gray submitted that Mr Thomas and his fellow directors did not resolve that REL was insolvent, and had no evidence on which they could have based such a resolution. That submission cannot be accepted, at least according to its terms. First, as I have noted at [305] above, the directors did resolve, on 24 March 2005, that REL was, to the best of their knowledge, unable to pay its debts. It is not an enormous leap of faith to read this as a resolution that REL was, or would shortly become, insolvent. Secondly, as I have said at [303] above, there was in fact evidence on which the directors could properly have based that conclusion. 320 Mr Gray's next submission was that at least some of the work undertaken by Mr Carrello would have been required to be done whether or not an administrator was appointed: for example, finalising the sale of REL's interest in Fox to Keycorp, and identifying and paying creditors. In those circumstances, Mr Gray submitted, the Court could not be satisfied that any particular sum was attributable to costs incurred that would not have been incurred in any event. As he rightly pointed out, there was no evidence from Mr Carrello to show how his time (and that of any employees engaged in the administration) was spent, or how his costs were apportioned between the various activities undertaken by him. 321 Mr Newlinds submitted that, to the extent that Mr Carrello had undertaken work to put REL's affairs in order, that work was necessitated by the failure of Messrs Carr, Purves and Garrett to ensure that its affairs had been kept in order. To this extent, he submitted, Messrs Carr and Purves should not be permitted to take advantage of their own breach of duty. Second, he submitted, a substantial part of the work done by Mr Carrello related to matters inherent to the administration: investigation of the affairs of the company, preparation of the deed of company arrangement, meetings of creditors, report as to affairs and the like. He submitted, and I accept (as did Mr Gray) that costs referrable to those and like activities could not fall under the rubric of expenses incurred for the benefit of REL. 322 However, it is undoubtedly the case that Mr Carrello did spend time and effort in negotiating and completing the sale of REL's interests in Fox to Keycorp. No doubt, he incurred disbursements, including for fees paid to legal advisers, in connection with that transaction. It is possible to infer that the costs and disbursements relevant to this transaction were, at the least, not insubstantial. One of the reasons for appointing Mr Carrello as administrator was perceived to be facilitation of the Keycorp transaction. The minutes record the discussion as including, presumably as points in favour of the appointment, the following: Ability to sell Fox without a 28 day delay for shareholder meeting; … Positive obligation to act in relation to the offer from Keycorp for Fox. 323 In those circumstances, so much of Mr Carrello's costs and disbursements as are referable to this transaction should be regarded as costs and disbursements incurred for the direct benefit of REL, and should not be regarded as recoverable from Messrs Carr and Purves. 324 The parties did not attempt a dissection of Mr Carrello's invoices, or of the supporting invoices for disbursements. Presumably, if some analysis were undertaken (perhaps with the aid of underlying primary records) some estimate could be made of the extent of the deduction. It may be that the parties would prefer to avoid a lengthy and expensive accounting exercise, and to agree on some appropriation of Mr Carrello's costs and disbursements. In those circumstances, I think, the best way forward is to include, in the amount of compensation payable by Messrs Carr and Purves, an amount to be determined in respect of Mr Carrello's costs and disbursements, and to reserve further consideration of the amount to be allowed under that heading. If the parties cannot agree then, I think, the appropriate course would be to refer the question out. Issue 30: s 1318 325 Messrs Carr and Purves rely on s 1318, in relation to both any breach of duty as to the appointment of Mr Crouch and any breach of duty as to the appointment of Mr Carrello. They have not made out any ground on which they ought to be excused. 326 In my view, Mr Crouch was appointed in essence in an attempt to stymie the imminent hearing of proceeding 357. That was not a proper purpose. It is not consistent with honesty. 327 In any event, even if their behaviour in some way could be characterised as honest, I would not conclude that they ought fairly to be excused. On Mr Carr's own evidence, he did not (nor, on his evidence, did his colleagues) consider the legal requirement for appointment of an administrator: a resolution of the board that the company was, or would in the relatively near future would become, insolvent. 328 I have not overlooked that it was probably open to Messrs Carr and Purves to resolve, on 15 March 2005, that REL was or would shortly become insolvent. But for the reasons that I have given, that unhappy financial situation was the direct result of their wrongful actions in causing REL to pay away a substantial part of the proceeds of sale of the Asia Iron shares. That is an alternative basis for concluding that they ought not fairly be excused. 329 I have concluded that the appointment of Mr Carrello was justified on the ground relied upon – insolvency – and that REL's insolvency was a result of the actions of Messrs Carr and Purves in causing it to pay away the proceeds of sale of the Asia Iron shares. It follows that even if their conduct (in causing Asia Iron so to act) could be regarded as honest – and I do not think that it could – there is no basis on which they ought fairly to be excused for its consequences. Issues 31 and 32: proportionate liability 330 Mr Gray submitted that his clients were entitled to the benefit of s 35 of the Civil Liability Act 2002: an order limiting any liability to REL to an amount reflecting a just proportion of the overall loss having regard to the extent of their responsibility for that loss. 331 Mr Newlinds submitted that Pt 4 of the Civil Liability Act had no application to claims for breaches of duty under the Corporations Act. He relied on the decision of Middleton J in Dartberg Pty Ltd v Wealthcare Financial Planning Pty Limited (2007) 164 FCR 450, applied by Hansen J in Rood Investments (Vic) Pty Limited v Abeyratne [2009] VSC 278. 332 Mr Gray submitted that those decisions were, in so far as they dealt with this particular point, wrong. He did not, however, submit that they were plainly or obviously wrong. Thus, he accepted, I would follow them. I propose to do so. Issue 33: contribution 333 Mr Gray submitted that this issue related to the following claims: (1) the claim for recovery of payments made to directors (issues 1 to 6); (2) the claim in relation to the Fox transaction (issues 9 to 15); (3) the claim in relation to the distribution of the proceeds of sale of the Asia Iron shares (issues 16 to 23); and (4) the claim in relation to the amount paid to Mr Crouch (issues 26 (in part) and 27). Asia Iron; payment to Mr Crouch 334 The last two of those claims can be dealt with simply, at the level of fact. As to the distribution of the proceeds of sale of the Asia Iron shares, Mr Thomas' involvement was limited to the following matters: (1) he participated in the board meeting held on 20 July 2004, at which, among other things, "it was resolved that once Asia Iron is sold that the profits be distributed as a dividend"; and (2) presumably, he agreed with, or acquiesced in, the sale of the Asia Iron shares. 335 The second matter does not of itself give rise to any liability. There is no suggestion that the sale was at an undervalue, imprudent, or otherwise reflective or the product of any breach of duty. 336 Nor does the first. The decision made related to the distribution of profits. It did not fix the rate of distribution. Nor did it amount to the declaration of a dividend. At most, it authorised the board, once the profits were ascertained, to pay whatever dividend might be appropriate (and lawful) in the circumstances. 337 By the time the proceeds of sale of the Asia Iron shares were available, Messrs Carr, Purves and Garrett were (illegally) in control of REL, to the exclusion of Mr Thomas (and others). It was Messrs Carr, Purves and Garrett who caused and directed the distribution of the proceeds of sale. It is they, and not Mr Thomas, who should be held responsible for the consequences of that distribution. 338 As to the appointment of Mr Crouch: Mr Gray's submissions did not explain how Mr Thomas should have any responsibility for the consequences of a decision to which he was not (and, by virtue of his exclusion, could not have been) a party. The remaining claims: Mr Thomas' submissions 339 I have dealt with the claims for contribution, in relation to the distribution of the proceeds of sale of the Asia Iron shares and the amount paid to Mr Crouch, to show that there is no arguable factual basis for those claims. The position is not quite so simple in relation to the remaining claims. However, before turning to the facts, I note that Mr Thomas submitted that: (1) the case "pleaded" against him (through the amended commercial list cross-claim statement) disclosed no basis for contribution not only in respect of the two claims to which I have now turned but also in respect of the two with which I have dealt; (2) Messrs Carr and Purves should not be permitted to argue a claim for contribution that went beyond their pleadings; and (3) in any event, whatever liability might be established against him was not "coordinate" for the purposes of ordering contribution. 340 The third submission involved two limbs. The first limb was that the individual and differing natures of liability, as between different directors, meant that there could be no coordinate liability. The second limb was that there was no equality of burden, and hence no basis for equitable contribution, because he had settled with REL and obtained a release and discharge from it. The second limb of the argument can be put to one side. It is directly inconsistent with the decision of the Court of Appeal in Carr and Purves v Thomas [2009] NSWCA 208: in particular, to their Honours' conclusion that on its proper construction the relevant promise operated as a covenant not to sue, and not as a release: at [23], [38]. 341 The first limb of the argument was expressly left open by the Court of Appeal: at [30]. Deficiencies of the cross-claim 342 I turn to the first point: the pleaded case. 343 The amended list cross-claim statement alleges details of Mr Thomas' directorship of REL, and of Fox (from 6 July to 27 September 2004, in the latter case), and the duties (statutory and under the general law) that he owed REL in his capacity as a director. It then alleges that he breached those duties "in the same manner as alleged in paragraphs "50 to 54 and 88 to 91 of REL's amended commercial list statement. 344 Paragraph 50 of the amended commercial list statement alleges that, for their services as directors of REL, Messrs Carr, Purves and Thomas were entitled to be paid $20,000.00, $18,000.00 and $20,000.00 respectively for specified periods. 345 Paragraph 51 alleges that, in fact, they received substantially more (giving the amounts). 346 Paragraph 52 alleges that Messrs Carr and Purves breached the various duties that, it is said, they owed to REL by causing those overpayments to be made. Paragraph 53 makes the like allegations (of breach of duty) against Mr Garrett. 347 Paragraph 54 alleges that REL suffered loss in the amount of the overpayments. 348 Those paragraphs of the amended commercial list statement make no allegation of breach of duty (or, for that matter, of duty owed) against Mr Thomas. 349 Paragraph 88 of the amended commercial list statement alleges that the amounts that REL invested in and lent to Fox together constituted a breach of REL's constitution. 350 Paragraph 89 alleges that those amounts in context constituted a breach of the relevant provisions of the PDF Act. 351 Paragraph 90 alleges that Messrs Carr and Purves breached the duties that, it is said, they owed to REL by causing it to invest in and lend money to Fox. 352 Paragraph 91 makes the like allegations of breach of duty against Mr Garrett. 353 Again, those paragraphs contain no allegation of breach of duty against (or duty owed by) Mr Thomas. 354 The difficulty arising out of the amended list cross-claim statement to this point is that it does not allege against Mr Thomas any breach of duty that could be said to be coordinate with the breaches of duty alleged, in the amended list statement, against Messrs Carr and Purves. That is so because: (1) as to the breaches alleged against Messrs Carr and Purves in respect of overpayments to directors: the breach is said to arise from two things. One is receipt of overpayments. That of course is common to all (although the timing and amounts of the payments differ). But, in addition, REL alleges in its amended commercial list statement that if Messrs Carr and Purves caused all those payments to be made, and that in doing so they breached their duties. REL does not allege that Mr Thomas was involved in causing those payments to be made. (2) As to the Fox investment: again, REL alleges that it was Messrs Carr and Purves that caused REL to enter into the agreement with, and make payments, to Fox, and to do those things for the benefit of Fox. It is their actions in so doing that are said to give rise to their breaches of duty. REL does not allege that Mr Thomas was involved in those matters. 355 Thus, I conclude, the first, and extremely sketchy, way that Messrs Carr and Purves put their cross-claim (in respect of overpayments to directors and the Fox investment) does not allege, either by incorporation of paragraphs of the amended commercial list statement or otherwise, any case of breach of duty that could give rise to coordinate liability against Mr Thomas. 356 I turn to the alternative way in which Messrs Carr and Purves put their cross-claim, in paragraphs 2A to 2J. Those paragraphs repeat, for each of the six separate heads of REL's claim, the relevant allegations set out in the amended commercial list statement and assert, in relation to each such breach, that Mr Thomas (and Mr Garrett, the second cross-defendant) breached their duties in certain described ways. 357 This alternative way of putting the cross-claim is scarcely more informative than the first. For example, in relation to the overpayments: (1) it does allege that Mr Thomas (and Mr Garrett) approved the payments on which REL relies (on any view this is inaccurate as to the payments made in December 2004, because by then Messrs Carr, Purves and Garrett had effectively excluded Mr Thomas from any involvement in REL's affairs; but I put that to one side for the moment); but (2) apart from the bald assertion of involvement in approval of the payments, it does not identify, either by incorporation or otherwise, any facts that could demonstrate a breach of duty giving rise to coordinate liability. 358 The problem is even more acute in relation to the Fox investment. Messrs Carr and Purves sought to suggest in their evidence that Mr Thomas had taken a substantial role in driving that transaction forward, in particular by undertaking responsibility for due diligence. It became plain, when they were cross-examined on this, that in fact (as Mr Thomas said) it was Messrs Carr and Purves who had responsibility for the various aspects of the due diligence process. Of more importance, however, is the fact that Mr Carr in particular sought to assert that Mr Thomas had a leading role in the Fox transaction, and in causing REL to commit itself to it, because he produced some valuation of Fox. As I have said above, I regard that aspect of Mr Carr's evidence (among many others) as a fabrication. But even leaving that aside, the amended list cross-claim statement does not allege, either expressly or by incorporation, anything relating to the purported valuation. 359 On the other hand, the numerous particulars of alleged breach of duty refer to many matters that were not the subject of any evidence, and, indeed, were not even put to Mr Thomas in cross-examination. 360 I do not wish to spend too much time in commenting on the deficiencies in the pleading of the cross-claim. I will add only that even if one were to take the most liberal view possible, the pleading, in paragraphs 2I and 2J, of liability in respect of the appointments of Messrs Crouch and Carrello as consecutive administrators of REL is entirely incomprehensible. 361 Finally (and this is not so much a comment on the technical deficiencies in the pleading but, rather, a comment on the casual approach taken by Messrs Carr and Purves to the drafting of their cross-claim) it is alleged that Mr Thomas breached his duties to REL, and therefore has a liability to it coordinate with that of Messrs Carr and Purves, in respect of the costs of proceeding 357 and the distribution of the proceeds of sale of the Asia Iron shares. But on any view of the facts, those costs were incurred, and those proceeds were distributed, after Mr Thomas had been excluded from involvement in the affairs of REL following the EGM of 2 November 2004. 362 In those circumstances, there is considerable force in Mr Thomas' submission that the amended list cross-claim statement does not allege any comprehensible claim for contribution against him. However, in case others may see it differently, I shall deal with the facts in so far as they relate to the two remaining heads of claim: overpayments to directors and the Fox investment. Overpayments to directors 363 As to payments to directors, Mr Thomas' evidence (to which I have referred at [75] above) may be summarised as follows: (1) in early April 2004, he received a telephone call from Messrs Carr and Purves. Mr Carr said that Mr Thomas would be paid $60,000.00 plus GST for directors' fees for the years to 30 June 2003 and 30 June 2004. He asked Mr Thomas to submit an invoice; (2) Mr Thomas submitted an invoice for director's fees on 4 April 2004; (3) he believed, at the time, "that the payment of the $60,000 was allocated from an annual $200,000 pool which was previously approved for the payment of Directors at appropriate times" (affidavit affirmed 14 October 2009, para 36); (5) he was not (contrary to Mr Carr's allegation) informed of the amounts proposed to be paid, or paid, to Messrs Carr and Purves; (6) he had no involvement in, or ability to be involved in, or knowledge of those payments; and (7) he believed that whatever payments were made, were made within what he believed to be the applicable overall limit of $200,000.00. 364 Mr Carr said that he, Mr Purves and Mr Thomas "met as directors of REL and… resolved to approve payment of" the claims made by each of them (affidavit sworn 30 June 2009 para 97). Mr Purves said the same, in virtually identical words (no doubt, through the magic of word processing) (affidavit sworn 29 June 2009, para 20). Mr Thomas denied that there had been such a meeting, or that he had seen, let alone approved, the claims made by Messrs Carr and Purves. I do not accept the evidence of Mr Carr or Mr Purves on this point and I prefer the evidence of Mr Thomas. I find that Mr Thomas knew of the amount to be paid to him, and did not know of the amounts claimed by or paid to Messrs Carr and Purves; and that he did not participate in the approval or payment of the amounts claimed by Messrs Carr and Purves. 365 Thus, the only basis on which Mr Thomas could be said to be liable is that he accepted $66,000.00 (including GST) for two years' director's fees, at a time when (on REL's case) the remuneration of each director was limited to $1,000.00 per month pursuant to the resolution made on 26 February 2003. I have concluded that the resolution does not have the construction for which REL contended. But even if it did, that construction is not so obvious that the alternative view could not be said to be open. 366 Apart from the resolution of 26 February 2003, there was no reason for Mr Thomas to think that the payment to him (and, as he might have thought, equivalent payments to each of Messrs Carr and Purves) would be in breach of duty. That is because, as he explained, those payments would have been within the $200,000.00 cap. If REL is right about the proper construction of the resolution, and the $200,000.00 cap is irrelevant, it does not follow that Mr Thomas acted in breach of his duties simply because he, understandably enough, took a different view of the resolution. 367 Alternatively, and even if (contrary to what I have just said) some breach of duty could be spelled out of the facts as I have found them, it would be appropriate for Mr Thomas to be relieved under s 1318. In my view, he acted honestly. In the circumstances that I have outlined, and taking into account the fact that Mr Thomas has effectively expressed contrition by reaching a settlement with REL, the circumstances require that he be excused from the consequences of this hypothetical breach of duty. Apart from anything else, not to excuse him would leave him exposed to liability, at the suit of Messrs Carr and Purves, in circumstances where Mr Thomas will gain no benefit from any payment that they might make to REL. He would gain no benefit from any such payment because (as a result of the settlement that he has reached) the payment will not go in reduction of, or in any way alleviate, his liability to REL. The Fox transaction 368 I turn to the Fox transaction. Mr Thomas was not present at the Cargo Bar meeting. He did not become aware of the possibility of investment in Fox until, in early May 2003, Mr Carr spoke to him about it (see Mr Thomas' affidavit affirmed 14 October 2009, para 17). 369 After that discussion, Mr Thomas visited the premises of Fox and spoke to Mr Nagy and others. 370 Thereafter, Mr Thomas said, the board (which by then included Mr Purves) discussed the Fox investment. Mr Thomas said that REL proposed to take up a 20% shareholding in Fox for $200,000.00, and lend Fox money by purchasing convertible notes. Mr Carr said that he had had discussions with the Registration Board, and had received preliminary advice from a firm of lawyers that there would be no breach of the PDF Act; any temporary excess of the 30% limit would be waived for a period of time. 371 After the board met, Mr Thomas said that: (1) Mr Carr dealt with the Registration Board and, in general, compliance with the PDF Act ; (2) Mr Purves was assigned, and undertook, responsibility for the financial due diligence (in conjunction with Armstrong Wily); and (3) in effect, he left it to them to take the investment forward. 372 Further, Mr Thomas said, no one told him of Cosmos' interest in the Fox technology, or of the arrangements, as between REL and Cosmos, recorded in the letter of 20 March 2003. 373 Indeed, Mr Thomas said, he was so convinced of the merits of the investment in Fox that he caused his family company Glamont to subscribe for a placement of 3 million shares in REL at $0.05 per share. 374 I accept Mr Thomas' account of his knowledge and involvement. To the extent that Mr Carr (in particular) asserts that Mr Thomas had a more substantial involvement, I do not accept that evidence. In particular, as I have said, I regard Mr Carr's evidence as to the valuation that he said Mr Thomas prepared as a fabrication. 375 In essence, the only breach of duty that could be found against Mr Thomas is that he was too trusting of Messrs Carr and Purves, and failed to apply his mind independently to the Fox transaction. 376 If some such breach of duty is to be spelled out then, again, Mr Thomas ought be excused under s 1318. Again, I find, he acted honestly. Again, when one takes into account all of the circumstances of the case, he ought fairly to be excused. In this context, again, I take into account not only the facts as I have found them in relation to the Fox transaction but also the fact that Mr Thomas has settled the claim made by REL against him. 377 It follows that there can be no joint or concurrent liability for any of the claims. As to some, that is so simply because Mr Thomas, having been excluded from involvement in the affairs of REL, was not involved in the relevant activities. As to the others, it is because even if some breach of duty could be made out against him, it is a breach for which he ought be excused under s 1318. Issue 34: Mr Thomas' cross-claim 378 This cross-claim must be dismissed. That is so for two reasons. The first is that Mr Thomas has no liability to Messrs Carr and Purves, and therefore no liability that could be passed on to those whom he has joined as cross-defendants. 379 The second reason is that, on its proper construction, the deed of settlement does not have the meaning for which Mr Thomas contends. Mr Thomas says that, on the proper construction of cl 3.4 of the deed of settlement, REL and Messrs Johnson and Brown (the other cross-defendants) have agreed to indemnify him for any liability that he may have under, relevantly, these proceedings brought by REL. 380 The deed of settlement was made in May 2007. It recites, among other things, what are now these proceedings (both the proceedings for breach of duty – 50205/07 – and the proceedings relating to the loans to Mr Garrett – 50214/07). It recites, among other things, that REL and Mr Thomas have agreed to resolve those proceedings, as between themselves, on the terms of the deed. 381 Clause 3 of the deed is headed "Release and Discharge". By cl 3.4, REL and Messrs Brown and Johnson each agrees to release and discharge Mr Thomas from any claims relating, among other things, to the REL proceedings. It reads: 3.4 REL, Brown and Johnson and each of them agree to release and discharge RJ Thomas from any and all Claims arising directly or indirectly in relation to any circumstance or event pertaining to the REL Proceedings and proceedings COR 6 of 2004. 382 The "REL Proceedings" are of course the current two sets of proceedings. Proceedings COR 6/2004 can be disregarded. The word "claims" is defined, in cl 8.1.1, as follows: 8.1.1 Claims means any action, demand, suit, proceeding, debt, claim, loss or other liability whatsoever or howsoever arising directly or indirectly, whether present or further, contingent or otherwise. 383 Mr Thomas submitted, in essence, that the claim for contribution brought by Messrs Carr and Purves against him was a claim arising directly or indirectly in relation to any circumstance or event pertaining to the current proceedings. I do not accept that submission. The relevant promise is one by REL and Messrs Brown and Johnson to release and discharge Mr Thomas from any claim of the defined kind. In context, that must mean a claim that they have brought (or could have brought, or could in the future bring) against him arising out of or relating to the prescribed circumstances. It is not a promise to indemnify in respect of any similar claims, arising out of the same circumstances, brought against him by someone else. The natural and ordinary meaning of the words "release and discharge" does not extend to "indemnify". The Australian Securities and Investments Commission 384 I have found that Messrs Carr and Purves have committed numerous breaches of their statutory and general law obligations as directors of REL. Many adjectives could be used to describe most of those breaches: "gross", "culpable" and "dishonest", to give but three examples. 385 I do not think that it is appropriate for the matter to finish with the judgment inter partes of a civil court. In my view, there is a significant public interest in referring the breaches to the appropriate authority, for consideration of further action that might be taken. Conclusions and orders 386 For the reason that I have given, Messrs Carr and Purves are liable to indemnify or compensate REL in the following amounts: (1) in respect of overpayments to directors: $368,500.00; (2) in respect of the loans to Mr Garrett: $242,035.65; (3) in respect of the Fox transaction: $682,000.00; (4) in respect of the payments out from the proceeds of sale of the Asia Iron shares: $810,702.58; (5) in respect of litigation expenses: $191,004.00; (6) in respect of the amount paid to Mr Crouch: $25,000.00; and (7) in respect of the amounts paid to Mr Carrello: an amount to be determined in accordance with [323] and [324] above. 387 REL is entitled to interest on those amounts (and on the amount to be agreed or assessed in respect of the cost and expenses of Mr Carrello's administration) in accordance with Schedule 5 to the Uniform Civil Procedure Rules. I note that the amount stated at [386(2)] above in relation to the loans to Mr Garrett includes interest to 7 July 2009, so that interest is to be calculated from then until the date of judgment. So far as I am aware, none of the other calculations of loss includes any allowance for interest; but to the extent that they may do so, all that is required is an updated calculation to the date of judgment. 388 I reserve consideration of the amount of indemnity or compensation in respect of the costs and expenses of Mr Carrello's administration. Subject to that, I direct the parties to bring in short minutes of order to give effect to these reasons and my conclusions. 389 I direct the Prothonotary of the Court to forward a copy of these reasons to the proper officer of the Australian Securities and Investment Commission (ASIC) for consideration. 390 I direct further that ASIC is to be provided, on request, with access to or copies of the affidavits that were read, the transcript and the exhibits that were admitted into evidence. 391 Draft agreed orders, or competing drafts of orders, are to be submitted to my Associate by 2 February 2010. 392 I stand the proceedings over to 9:30am on 4 February 2010 for the making of orders. I will deal with any dispute, including as to costs, on that occasion. ********* DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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