Equiticorp Finance Ltd (in Liq) v Bank of New Zealand

32 NSWLR 50

(Judgment by: Clarke JA, Cripps JA)

Equiticorp Finance Ltd (in Liq)
v.Bank of New Zealand

Court:
Court of Appeal

Judges: Kirby P

Clarke JA

Cripps JA

Subject References:
Companies
Management and administration
Directors and other officers
Fiduciary position
Corporate group
Breach of fiduciary duty
Test for
Application of liquidity resources to discharge of subsidiary debt
As constructive trustee
Failure to consider creditors
Liability for breach
Discussion of
Equity
Duress
Economic duress
Apparent consent
Pressure enduring
When regarded as illegitimate
Commercial pressure not of itself sufficient
Application to corporate group
Decision to apply liquidity reserves to discharge of subsidiary debt

Case References:
Abalos v Australian Postal Commission - (1990) 171 CLR 167
Agip (Africa) Ltd v Jackson - [1990] Ch 265; [1991] Ch 547
Austotel Pty Ltd v Franklins Self Serve Pty Ltd - (1989) 16 NSWLR 582
Australian National Industries Ltd v Greater Pacific Investments Pty Ltd (In Liq) (No 3) - (1992) 7 ACSR 176
Australian National Industries Ltd v Greater Pacific Investments Pty Ltd (In Liq) - (Cole J, 14 December 1990, unreported)
Baden v Soci & eacutet & eacute G & eacuten & eacuterale pour Favoriser le D & eacuteveloppement du Commerce et de l'Industrie en France SA(1983) - [1992] 4 All ER 161; [1983] BCLC 325
Bank of New Zealand v Fiberi Pty Ltd - (Court of Appeal, 13 July 1993, unreported)
Bank of New South Wales v Vale Corporation (Management) Ltd (In Liq) - (Court of Appeal, 21 October 1981, unreported)
Barnes v Addy - (1874) LR 9 Ch App 244
Barton v Armstrong - [1973] 2 NSWLR 598; [1976] AC 104
Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2) - [1980] 1 All ER 393
Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd - (1990) 3 ACSR 649
Charterbridge Corporation Ltd v Lloyds Bank Ltd - [1970] Ch 62
Consul Development Pty Ltd v DPC Estates Pty Ltd - (1975) 132 CLR 373
Coulton v Holcombe - (1986) 162 CLR 1
Crescendo Management Pty Ltd v Westpac Banking Corporation - (1988) 19 NSWLR 40
Eagle Trust plc v SBC Securities Ltd - [1992] 4 All ER 488
Equiticorp Financial Services Ltd (NSW) v Equiticorp Financial Services Ltd (NZ) - (1992) 29 NSWLR 260
Freeman & Lockyer (a Firm) v Buckhurst Park Properties (Mangal) Ltd - [1964] 2 QB 480
Halt Garage - [1982] 3 All ER 1016
Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd - (1991) 22 NSWLR 298
Hely-Hutchinson v Brayhead Ltd - [1968] 1 QB 549
Hindle v John Cotton Ltd - (1919) 56 SC LR 625
Horsley & Weight Ltd, Re - [1982] Ch 442
Howard Smith Ltd v Ampol Petroleum Ltd - [1974] 1 NSWLR 68
Industrial Equity Ltd v Blackburn - (1977) 137 CLR 567
Jones v Dunkel - (1959) 101 CLR 298
Kinsela v Russell Kinsela Pty Ltd (In Liq) - (1986) 4 NSWLR 722
Lend Lease Development Pty Ltd v Zemlicka - (1985) 3 NSWLR 207
Mills v Mills - (1938) 60 CLR 150
Montagu's Settlement Trusts, Re - [1987] Ch 264; [1992] 4 All ER 308
Nelson v Larholt - [1948] 1 KB 339
New South Wales Rugby League Ltd v Wayde - (1985) 1 NSWLR 86
Nicholson v Permakraft (NZ) Ltd (In Liq) - (1985) 3 ACLC 453
Northside Developments Pty Ltd v Registrar-General - (1990) 170 CLR 146
Pau On v Lau Yiu Long - [1980] AC 614
Pavey & Matthews Pty Ltd v Paul - (1987) 162 CLR 221
Qintex Australia Finance Ltd v Schroders Australia Ltd - (1990) 3 ACSR 267
Reid Murray Holdings Ltd (In Liquidation) v David Murray Holdings Pty Ltd - (1972) 5 SASR 386
Selangor United Rubber Estates Ltd v Cradock (No 3) - [1968] 1 WLR 1555; [1968] 2 All ER 1073
Smith and Fawcett, Ltd, Re - [1942] Ch 304
Stephens Travel Service International Pty Ltd (Receivers and Managers Appointed v Qantas Airways Ltd - (1988) 13 NSWLR 331
Story v Advance Bank Australia Ltd - (1993) 31 NSWLR 722
Suttor v Gundowda Pty Ltd - (1950) 81 CLR 418
United States Surgical Corporation v Hospital Products International Pty Ltd - [1983] 2 NSWLR 157
Universe Tankships Inc of Monrovia v International Transport Workers Federation - [1983] 1 AC 366
Walker v Wimborne - (1976) 137 CLR 1
Warren v Coombes - (1979) 142 CLR 531
Williams v Bayley - (1866) LR 1 HL 200
ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd - (1990) 2 ACSR 57; 8 ACLC 788
Advance Bank Australia Ltd v Fleetwood Star Pty Ltd - (1992) 7 ACSR 387; 10 ACLC 703
Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation - (1988) 164 CLR 662
Australian Capital Television Pty Ltd v Minister for Transport & Communications (Cth) - (1989) 86 ALR 119
Carl Zeiss Stiftung v Herbert Smith & Co (No 2) - [1969] 2 Ch 276
Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd - (1975) 133 CLR 72
David Securities Pty Ltd v Commonwealth Bank of Australia - (1992) 175 CLR 353
Director of Public Prosecutions for Northern Ireland v Lynch - [1975] AC 653
Dovey v Cory - [1901] AC 477
Eaves v Hickson - (1861) 30 Beav 136; 54 ER 840
Elders Trustee & Executor Co Ltd v E G Reeves Pty Ltd - (1988) 78 ALR 193
Fyler v Fyler - (1841) 3 Beav 550; 49 ER 216
International Sales and Agencies Ltd v Marcus - [1982] 3 All ER 551
Lands Allotment Co, Re - [1894] 1 Ch 616
Lipkin Gorman v Karpnale Ltd - [1989] 1 WLR 1340
Midgley v Midgley - (1893) 3 Ch 282
Rolled Steel Products (Holdings) Ltd v British Steel Corporation - [1986] Ch 246
Royal British Bank v Turquand - (1855) 5 El & Bl 248; 119 ER 474; (1856) 6 El & Bl 327; 119 ER 886
Russell v Wakefield Waterworks Co - (1875) LR 20 Eq 474
Sandell v Porter - (1966) 115 CLR 666
3M Australia Pty Ltd v Kemish - (1986) 10 ACLR 371; 4 ACLC 185
Williams v Williams - (1881) 17 Ch D 437
Yorke v Lucas - (1983) 80 FLR 143; 49 ALR 672

Hearing date: 31 May, 1, 2, 3, 4 June 1993
Judgment date: 5 October 1993


Judgment by:
Clarke JA

Cripps JA

On 1 June 1987, Messrs McPherson and Culkin, both senior employees of the respondent, the Bank of New Zealand, wrote to the directors of Equiticorp Tasman Ltd and offered to lend to that company or a wholly owned subsidiary thereof a $200,000,000 loan facility. The purpose for which the facility was to be advanced was to finance, to an extent, the take-over by the Equiticorp Group (Equiticorp) of an Australian publicly listed group of companies operating in the building and construction industry known as Monier. In so doing they set in train a complicated series of transactions which resulted ultimately in this appeal, which concerns the facility's discharge.

The appellants, Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd, had between them funds on deposit with Bank of New Zealand in the amount of some $50,000,000 which were ultimately applied in the reduction of another Equiticorp Group company's indebtedness. Both appellants are now in liquidation and the liquidators claim that the application of the money in this way was procured without the authority of the companies, in breach of the directors' fiduciary duties to the companies, to the knowledge of Bank of New Zealand which is said thereby to have taken the funds as a constructive trustee; by economic duress; and finally in breach of s 229 of the Companies (New South Wales) Code . Giles J found for Bank of New Zealand on all matters and the liquidators thereupon appealed against the findings on each of those grounds and in addition challenged a number of the factual findings of the trial judge.

1. The Equiticorp Group:

In order to understand the appellants' complaint it is necessary first to understand the position of the various parts of Equiticorp involved in the transactions with respect to each other and with Bank of New Zealand. Although at one stage the group comprised over 140 companies, for present purposes we are only concerned with a small number of these. The structure of the group may be set out in, and most conveniently understood by referring to, the diagram below in which can be observed the broad division of the group into business and geographical lines represented by the Australian finance group; the New Zealand finance group and the Industrial group.

As is apparent, Equiticorp Tasman Ltd is a member of the Equiticorp Industrial Group -- a designation which refers to its "function" as a holding vehicle for a number of the Equiticorp group's industrial interests. Forty- eight per cent of Equiticorp Tasman Ltd's issued capital is owned by Equiticorp Industries Ltd a company which owned 56 per cent of Feltrax International Ltd. The remaining 44 per cent of Feltrax International Ltd was owned by the general public.

Equiticorp International Pty Ltd was a wholly owned subsidiary of Equiticorp Industries Group Ltd which in turn was wholly owned by the ultimate group holding company Equiticorp Holdings Ltd. Directly or indirectly Mr Allan Hawkins owned or controlled 45 per cent of the issued capital of Equiticorp Holdings Ltd.

Moving "downstream", two other members of the industrial group require immediate mention, both of which are wholly owned subsidiaries of Equiticorp Tasman Ltd. They are Vajudi Pty Ltd a company which was the take-over vehicle in respect of the Monier acquisition, and Uruz Pty Ltd. This latter company was the actual borrower of the $200,000,000 referred to earlier. It then lent that money to Vajudi Pty Ltd which used the funds to acquire shares in Monier.

The terms upon which the money was originally lent were such that it was to be available for a term of six months from the date of acceptance following expiry of which time it was to be "taken out" or refinanced by a syndicated three year facility to be arranged by Bank of New Zealand. The repayment of the loan was to be secured by an equitable mortgage, given by Vajudi Pty Ltd, over the shares acquired in Monier with the value of the security deposited amounting to 150 per cent of the value of the funds outstanding to Bank of New Zealand. In addition to this a guarantee was required from Equiticorp Tasman Ltd, the borrower's parent company. The offer was accepted and, on 21 July 1987, a loan agreement entitled "Syndicated A$200,000,000 cash Advance Facility" was executed. The parties thereto were Uruz Pty Ltd (the borrower), Equiticorp Tasman Ltd (the company), Vajudi Pty Ltd (the mortgagor) and the Bank of New Zealand (the sole "participant" and also agent). This was less than six months after the acceptance of the original offer and it appears that the terms of this loan agreement superseded the arrangement originally contemplated. Clause 1.1 of the loan agreement defined the "Repayment date" to mean "the first anniversary of the date of this agreement or such later date as the Participants may agree under cl 9". Clause 9 provided:

"The Participants shall review the continuation of this facility not later than 1 December 1987 with a view to extending the Repayment Date by two years. If all Participants agree to extend this facility, the Agent shall promptly notify the Borrower of the date to which the Participants have agreed to extend the Repayment Date."

As well as the reference in the recitals, cl 1.1 of the loan agreement defined the term "Participant" to mean "any of the banks or financial institutions named in the Schedule ...". Bank of New Zealand being the sole party named in the schedule the effect of cl 9 was to confer on Bank of New Zealand an option to extend the term of the loan.

By 21 December 1987, the full $200,000,000 had been advanced. However even before this date those in positions of responsibility in Bank of New Zealand were becoming nervous about the exposure of Bank of New Zealand to Equiticorp. As a memo from Mr Diack of Bank of New Zealand indicates, plans were underway for a review of the exposure of Bank of New Zealand to Equiticorp. On 27 November 1987, Mr Scott-Kemmis the Australian chief executive of Bank of New Zealand noted in a memo to Mr Travers the general manager of the Investment Banking Group of Bank of New Zealand that Bank of New Zealand was experiencing unforeseen difficulties in selling down exposure to the Equiticorp Group as contem plated under the loan agreement. These difficulties had no doubt been accentuated by the fall in the stock market on 20 October and the failure of the Equiticorp Group to gain control of Monier, slightly more than 50 per cent of which was owned by the Redlands group of companies.

The recipient of this memo responded on 1 December 1987 with another indicating his dissatisfaction with the overall exposure of Bank of New Zealand to Equiticorp. In addition to the grounds for concern raised by Scott-Kemmis there were other problems with respect to the Equiticorp Group exposures. Pressure was being applied by the Australian Rating Agency on Bank of New Zealand and in addition concern was raised that the terms of the facility were not in line with the terms under which the Bank of New Zealand approval board had approved its extension. On 4 December 1987, Culkin of Bank of New Zealand advised Travers that consistently with his earlier instructions Equiticorp Tasman Ltd had been advised of a limit reduction to $165,000,000 and that the limit would be reduced further to $80,000,000 within the short-term. Travers remained concerned and pointed to perceived difficulties which appeared likely to hinder the implementation of the reductions. He insisted that the Uruz Pty Ltd facility be immediately reduced to half its present terms. Murray Boyte of the Equiticorp Group was thereupon advised of this new requirement of Bank of New Zealand by Culkin.

A report prepared under the supervision of Mr McCredie of Bank of New Zealand (the McCredie Report) served to bring home the expectant fears concerning the Equiticorp Group of senior officers within the bank. Its preparation followed the completion of a review of the overall exposure of Bank of New Zealand to the Equiticorp Group focusing in particular upon the present and projected liquidity of the group. The conclusions drawn by the review team included the following: Group liquidity was already tight; there existed a present vulnerability to changes in business conditions; the ability of the group to complete the Monier acquisition was questioned; in addition, the basis for the previous practice of Bank of New Zealand treating certain Equiticorp Group companies, including Equiticorp Tasman Ltd, on a "stand alone basis" for credit evaluation purposes was questioned given the making of $140 million of intercompany advances by Equiticorp Tasman Ltd to other group companies since March 1987. Finally, general concern was expressed as to the extent of Bank of New Zealand's exposure to the group. Specifically the report noted that Equiticorp International Pty Ltd, the company holding the group's interests in Equiticorp Tasman Ltd and Feltrax International Ltd was in a budgeted cash deficit position.

The exposure of Equiticorp Tasman Ltd was deemed of sufficient importance, given its treatment on a "stand alone basis", for Bank of New Zealand to require Equiticorp Holdings Ltd and Equiticorp Tasman Ltd to enter into a deed on 18 December 1987 the essence of which was to ensure that all the dealings between Equiticorp Tasman Ltd (and companies in which it had a 25 per cent interest) with associated Equiticorp group companies were conducted upon an arm's length basis. Ultimately, however, notwithstanding the earlier advised limit reduction to $165,000,000, Bank of New Zealand agreed to advance a further $35,000,000 to Uruz Pty Ltd pursuant to the loan agreement in order that Vajudi Pty Ltd could acquire the remaining shareholding in Monier. By 21 December 1987, the full $200,000,000 originally contemplated under the loan agreement had thus been advanced. On this date a further agreement had been executed whereby Equiticorp Tasman Ltd was to acquire Redlands' shareholding in Monier for some $325,000,000. Redlands was then to re-purchase the Monier roofing operations for $314,000,000. It was contemplated that a reduction in the Uruz Pty Ltd facility was to be made out of the proceeds of this sale.

Bank of New Zealand continued to look for ways to reduce the exposure to the Equiticorp Group and Travers indicated to McCredie on 26 December 1987 that it was acceptable to him if the Uruz Pty Ltd exposure could be "sold down" via the syndication mechanism already in place rather than"demanding" repayment of the facility on 15 January 1988. To this end, on 29 December 1987, an information memorandum was issued. Nothing ultimately came of this. Total Bank of New Zealand exposures to the Equiticorp Group were in the vicinity of $504,000,000 by 6 January 1988. On 13 January 1988 Uruz Pty Ltd, Equiticorp Tasman Ltd, Vajudi Pty Ltd, Equiticorp Holdings Ltd and Bank of New Zealand entered into a supplementary agreement varying the terms of the Uruz Pty Ltd facility. The effect of the supplementary agreement was threefold. First, the Uruz Pty Ltd facility was to be reduced to $65,000,000 by 22 January 1988. This, of course, required a repayment of some $135,000,000 to be made by this date. The second matter was that the agreement effected an amendment to the previous loan agreement by re-defining the "repayment date" to mean 30 June 1988. Provision was, however, made for a possible extension of the facility. The third matter provided for was for a guarantee given by Equiticorp Holding Ltd to Bank of New Zealand in respect of the outstanding amounts. The Uruz Pty Ltd facility was accordingly not by this time, strictly speaking, a "stand alone" facility. The terms of the supplementary agreement obviously reflect a change in the initial position of Bank of New Zealand that it would require discharge of the facility by 15 January 1988 regardless of whether or not the Equiticorp Group was aware of this "requirement" of Bank of New Zealand.

On 15 January, Uruz Pty Ltd repaid $135,000,000 to Bank of New Zealand. Regular liaison concerning the Equiticorp Group's progress in controlling its liabilities and in attempting to reduce its asset book continued to occur at a high level. Obviously this allowed Bank of New Zealand to monitor closely the extent of its risk in what was by now a very large investment in the Equiticorp Group. The liaison did little to assuage the concern of senior employees of Bank of New Zealand as to their exposures but did allow the more effective monitoring of developments. Internal bank documents of this period reveal that Bank of New Zealand was aware that industrial group liquidity was tight and the Industrial group was vulnerable to declining asset prices because it would be required to "top up" its security to bankers who had loaned the group moneys and that the industrial group's cash deficits were presently being financed by the Equiticorp Finance Group. Although some positive steps had been taken to improve the liquidity position much more, in the view of Bank of New Zealand, needed to be done.

Matters came to something of a head on 14 March 1988 at a meeting between Diack, Milne, McCredie and Marlow of Bank of New Zealand and Hawkins, Stanes, Coney and Curtayne of the Equiticorp Group. At this meeting representatives of the Equiticorp Group were advised that Bank of New Zealand required that their exposures to the entire Equiticorp Group be reduced in accordance with the bank's prudential obligations to the Reserve Bank in New Zealand. The concern expressed by the Reserve Bank related to the fact that the total exposures of Bank of New Zealand to the Equiticorp Group were in excess of 25 per cent of the capital base of Bank of New Zealand -- a degree of exposure which obviously represented a concentration of risk inappropriate and contrary to proper banking practice. A formal proposal embodying the contemplated reductions was sent to Hawkins by Travers on 14 March 1988 enclosing a schedule of reductions in aggregate and individual exposures and the time thereof required to be met by Bank of New Zealand. In accordance with the variation agreement previously entered into the Uruz Pty Ltd facility was listed as due for repayment by June 1988. Hawkins accepted the schedule of reductions by letter of 16 March.

Bank of New Zealand was provided with cashflow forecasts and an internal bank memorandum reveals that the Industrial group's forecasted unfunded cash deficit for May, June and July was respectively $37.8 million, $50.8 million and $45.5 million and furthermore that the finance group was incapable of funding these deficits. Add to this the necessary implication that the Industries group would be unable to assist with a proposed acquisition of NZ Steel and the funding commitment generated thereby and the position became, as was recognised by Bank of New Zealand, one of great seriousness to the Equiticorp Group.

The Equiticorp Group attempted to meet these projected cash deficits by the issue of an information memorandum to potential lenders in an attempt to raise funds. Nothing came of this and it soon became apparent that unless a source of funds was found that the Uruz Pty Ltd facility could not be repaid by the date required.

Notwithstanding these uncertainties, Travers advised the board of directors of Bank of New Zealand on 19 May 1988 that the reductions in exposure to Bank of New Zealand planned for the end of June 1988 would be met.

(i) The finance group:

Matters began to accelerate very quickly from this point and it is necessary in order to understand the nature of the case properly to turn to the Equiticorp Finance Group. In formulating the general conclusions as to the state of Bank of New Zealand's exposure to the Equiticorp Group the McCredie Report paid special attention to "the finance group". This operational grouping of the Equiticorp Group of companies included both the Australian finance group and the New Zealand finance group. It is the former group which is of most relevance containing as it does both of the present appellants Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd. As appears from the group structure diagram depicted earlier, Equiticorp Financial Services Ltd (Aust) was a wholly owned subsidiary of Equiticorp Australia Ltd which was in turn wholly owned by a New Zealand company Equiticorp Finance Group Ltd. This latter company was wholly owned by the ultimate holding company Equiticorp Holdings Ltd. The McCredie Report noted that:

"EFG[L] is vulnerable, like any other financial institution, to market rumours which can precipitate a run on deposits ... The review team and the senior executives of EFG[L] are concerned about the general nervousness in the financial community. In this environment it is important to build up liquid assets ... EFG[L]'s liquid asset: Borrowings and deposit ratio is 18 per cent and this is considered by the review team and the company to be too low in today's environment. This is particularly so given the short maturity profile of EFG[L]'s liabilities (ie deposits and borrowings)."

Nonetheless, on balance it was said:

"In summary, we consider EFG[L] to be in a sound position under normal trading conditions. However given the state of the equities market... we consider it necessary that EFG[L] improves its liquidity position.
The company concurs with this view and is targeting to increase liquid assets by approximately $100 million."

Minutes of a board meeting of Equiticorp Finance Group Ltd on 25 January 1988 record that there was an identified lack of liquidity within the finance group and management were requested to pursue and implement the sale of receivables of $100,000,000 in order to correct this position. The term "receivables" as used by counsel in these proceedings refers simply to Equiticorp Finance Ltd/Equiticorp Financial Services Ltd (Aust)'s accounts receivable, that is, amounts repayable on loans made by those companies and the interest payable thereon. The receivables were eventually discounted to Beneficial Finance -- the funds for that acquisition being provided by Bank of New Zealand. Hawkins also pursued with Travers the possibility that other receivables could be discounted and cash thereby raised in order to improve the liquidity position of the finance group.

A diary note of McCredie's, recording a meeting between Hawkins and Curtayne of the Equiticorp Group and certain senior Bank of New Zealand employees, reveals that:

"... whilst liquidity remains tight the committed cashflow is manageable over March and April. Nevertheless, the company (EHL) remains vulnerable... The industrial group is presently being funded by the finance group. ..."

It is necessary also to draw attention in the context of the finance group to the contents of the information memorandum of 12 May 1988 wherein it was stated:"Group policy has been to maintain substantial unutilised committed standby facilities for potential periods of tight liquidity ...."

(ii) The Equiticorp Group position worsens:

On 7 June 1988, Fitzgerald, the newly appointed Equiticorp Group treasurer, transmitted a facsimile to Hawkins outlining the projected group cashflows for the coming months. He observed:

"We now think we are pretty right until 30/6/88. The big assumptions in the Equiticorp Investments cashflow are that we can get the $128 million net out of the Wardley/SBNSW facility and the $76 million net out of the Aurora facility. Both of these facilities are being worked on at present with Wardley looking good ...
The cashflows themselves are being used to sort out any intercompany balance problems at 30/6/88."

As Giles J found, at least from this point the refinancing arrangements contemplated above comprised a prominent feature of the Equiticorp

Group's proposal to deal with its liquidity crisis. Significantly, Giles J found that the funds expected to be derived from these facilities were seen as necessary to overcome a lack of liquidity within the group as a whole. Thus, the funds were to be directed to whichever entity within the group most needed them.

The next cashflow predictions transmitted by Fitzgerald to Hawkins on 16 June 1988 savoured of despair. They read:

"The current short term situation with regard to cash is very bad ... EFG(NZ) liquidity situation is extremely bad as you see with the debenture outflow over the next few weeks ...
EAL's situation, having to support EFG[L], is now about as bad ... Thus the banking group's liquidity is extremely dangerous. The industrial group is a drain at present and needs to raise money on its unencumbered assets ASAP. To this end CIBC, Boston, First Chicago, Westpac, ANZ and Sec Pac have been approached ...
If all of the above occur by 30/6/88 we will get through all right. But to be honest the likelihood of this occurring is getting less likely by day. As stated to you earlier in the week, we require a standby facility to cover for some of these things not occurring ...
The banks I can contact regarding the standby and have a chance of success in my view are only the BNZ and SBSA ...
As you can see ... so much is up in the air that the standby is a must ."

Concern about the liquidity position was echoed by Curtayne who faxed to Fitzgerald a number of schedules on 20 June 1988 relating to possible alternatives to overcome what was shaping up as a disaster for the group. Amongst the options being considered was the possibility of Bank of New Zealand agreeing to delay the repayment of the balance of the Uruz Pty Ltd debt. Without this delay or the acquisition of funding from some other source the projected cash deficit of Equiticorp International Pty Ltd for month end was estimated at $83,000,000.

(iii) The liquidity reserve:

Against this background Fitzgerald approached Bank of New Zealand to obtain a standby facility known in these proceedings as the "liquidity reserve" for a period of two months commencing on 27 June 1988. In addition to his role as group treasurer and the responsibility this entailed -- namely the establishment of a centralised Equiticorp group treasury function -- Fitzgerald was also the sole managing director of Equiticorp Australia Ltd.

Giles J found that the Australian finance group sought to establish a liquidity reserve of some $50,000,000 which was to comprise an element in the management of the entire group's cashflow. This finding is based upon the evidence of Hawkins who recollected the purpose of the facility to be along these lines. However, it conflicts with the evidence of Fitzgerald, the man whom Giles J found was solely responsible for the idea of a reserve and who had implemented his scheme in the absence of a formal resolution of directors approving its creation. The evidence of Fitzgerald was to the effect that the liquidity reserve was for the sole benefit of the Australian finance group. Although he did not say so in terms we consider that this is the only reasonable inference that may be drawn. If this was not in fact the case, why did he object to the application of the facility to the discharge of the Uruz Pty Ltd facility? This being so, it seems that Hawkins' evidence was accepted in preference to that of Fitzgerald. Giles J however did not treat the matter in this way because, as he viewed the evidence, Fitzgerald did not contemplate that the Uruz Pty Ltd facility would be on foot at the time the liquidity reserve became available.

In any event, Fitzgerald contacted Scott-Kemmis of Bank of New Zealand concerning such a liquidity reserve. The proposal was approved. In principle Bank of New Zealand was to purchase receivables from Equiticorp Group companies, those receivables being the subject of a put option in favour of Bank of New Zealand. Thus Bank of New Zealand could require at any time after the expiration of two months from the date of offer the re-purchase of the receivables by the vendor company. Fitzgerald gave evidence, accepted by Giles J, that he made known to Scott-Kemmis that the funds generated thereby could not be applied for "any purpose other than a liquidity reserve without my personal approval".

Three letters of offer to sell receivables dated 28 June 1988 were prepared and given to Bank of New Zealand. The total amount of proceeds from the receivables sold to Bank of New Zealand and the companies selling them were ultimately determined to be:

Equiticorp Australia Ltd --
Equiticorp Financial
Services Ltd (Aust)
$17,635,555.91
Equiticorp Finance Ltd $29,519,565.87
$47,155,121.78

As originally documented Equiticorp Australia Ltd sold to Bank of New Zealand some receivables for which Bank of New Zealand paid $20,910,578.85. Of this amount $10,625,040.24 represented the proceeds of the sale of receivables in fact owned by Equiticorp Financial Services Ltd (Aust) and $10,285,538.61 represented the proceeds of sale of receivables in fact owned by Equiticorp Finance Ltd. Although the $20,910,578.85 was originally deposited to the credit of Equiticorp Australia Ltd all parties accepted that the apportionment we have indicated earlier was the appropriate one.

The effect was of course to relieve the liquidity position of the Australian finance group by placing at their disposal some $47,000,000 of cash.

(iv) Default by Uruz Pty Ltd:

On 28 June 1988, it became apparent that the facility presently being negotiated with Wardley would not be in place by 30 June 1988. This, of course, meant that, absent an alternative source of funds, it would not be possible to repay the Uruz Pty Ltd facility by year-end, nor indeed other borrowings made to support the acquisition of Monier. A paper was presented to Bank of New Zealand that afternoon dealing with the entire Equiticorp Group and informing the Bank of New Zealand of a restructuring program about to be commenced. As regards the finance group the paper noted:

"Prompt service and well-managed treasury and credit areas have been the key notes of the Finance Group's success in the past and this has been borne out in the aftermath of the stock-market crash."

The self-assessment was one which was not borne out by the recent circumstances in which the finance group had found itself. On the next page the paper stated:

"The sale of GPG (Guinness Peat Group) will satisfy the longer term gearing and liquidity requirements for the industrial group. However in the interim a short term facility will be required which will convert to a standby arrangement on the sale of GPG."

There was then a summary of repayments scheduled to be made by Equiticorp Tasman Ltd in respect of Monier financing facilities followed by:

"These repayments represent a significant drain on liquidity and it is therefore proposed to approach the three banks concerned to negotiate a substitute reduced facility using alternative security."

Financial projections were then commented upon:

"The liquidity level of the Finance group is good ... Clarification of the group structure and the reduction in gearing through asset sales [in the Industrial group] will have a positive influence on the liquidity and profit position of the Finance group. Although these factors have no direct influence on the Finance group, their resolution will overcome the perception that liquidity for both groups inter-linked."

These were, however, empty words as the Finance group had for some time been funding the growing cash deficit of the Industrial group. It was then noted that "without the facility under review the group will be in a negative position at 1 July". The bottom line was not lost on Semple of Bank of New Zealand, the recipient of the paper. The following day he faxed it to McCredie in New Zealand with a covering note reading, in part:

"In essence Equiticorp are saying to BNZ 'We are unable to pay back the A$65 million related to the ET borrowings for Monier. Would you please accept A$30 million against Feltex shares ... until 30/9/88 ...'."

Bank of New Zealand strongly protested to the Equiticorp Group at the position in which they had been placed. On 29 June, Mr Grant Adams a director of Equiticorp Industries Group Ltd, Equiticorp International Pty Ltd, Equiticorp Finance Group Ltd and Equiticorp Financial Services Ltd (NZ) and a person whom Giles J found to be second to Hawkins in terms of overall authority in the group rang Diack to express their "extreme embarrassment at the current situation". Diack's file note of the conver sation recounts his response:

"I reflected our extreme concern that the first major reduction in our agreed program should be handled so badly by the Company and that the Company's credibility and the credibility of individuals within the company had been badly affected by the episode. I reflected major concern that Allan Hawkins had not spoken with either Mr Travers or Mr McCay and that although the Bank realised that there could always be glitches nevertheless they had been aware for six months that the facility be repaid on time.
I advised that some of their credibility could be restored if they could met [sic] the repayment prior to next Board [Meeting] on 28th [July]."

On the following day Fitzgerald spoke to Diack again expressing embarrassment and emphasising that they understood the sensitivity of the situation and the credibility issues involved. During this conversation Fitzgerald formally requested an extension of the Uruz Pty Ltd facility to 30 September. The extension sought was granted and the terms of the loan agreement were amended. The "repayment date" was redefined to mean "30 September 1988 or such other date as the participants may agree" ("the Participants" is a defined term which in this context means Bank of New Zealand). A repayment of $14,000,000 was required to be effected that day and thus the contemplated balance outstanding was to be reduced to $51,000,000. Bank of New Zealand charged a $150,000 fee for the extension of the facility and in lieu of the prior security arrangements accepted a lien over Feltrax International Ltd scrip and required a guarantee by Equiticorp International Pty Ltd of the debt to be executed. Allan Hawkins then called "to advise his personal embarrassment at the turn of events regarding repayment" and Diack used the call once again to emphasise strongly to Hawkins the need for the facility to be repaid prior to the July board meeting.

Giles J accepted that Hawkins conveyed to Diack that the Equiticorp Group"would do everything we possibly could to hit the deadline which I could see they had coming up". By this he meant the forthcoming Bank of New Zealand Board meeting.

It is not out of place to point out that the largesse of Bank of New Zealand had saved the Equiticorp Group, and in particular Uruz Pty Ltd (the principal debtor) and Equiticorp Tasman Ltd (the guarantor) from committing acts of default. Although it is also true to say that it was an expression of largesse for which Bank of New Zealand was to be handsomely remunerated there is, we believe, little doubt that Bank of New Zealand would have preferred repayment on the due date. It is also obvious that the strength of the ongoing relationship between Equiticorp and Bank of New Zealand made the extension possible.

In due course the contemplated security over Feltrax International Ltd shares was given, Equiticorp International Pty Ltd executed an all moneys guarantee in favour of Uruz Pty Ltd and an amount was paid reducing the outstanding balance of the Uruz Pty Ltd facility to $51,000,000. Although the amended Uruz Pty Ltd facility provided for an extended repayment date which contemplated the facility be repaid at the latest by 30 September it is clear that this was not entirely consistent with the intention of the parties. In a memorandum which McCredie sent to Travers in relation to the Equiticorp Group position he indicated that an alternate repayment mechanism had been arranged. This called for the repayment of $16,000,000 by 8 July 1988 from the Wardley's facility and the $35,000,000 balance by 31 July 1988 upon the approval of two other banks involved in the Wardleys deal. The memorandum then noted:

"Documentation [of the Uruz facility] provides for extension of the reduced facility of AUD41 million until 30.9.88 but we are advised that the above represents the intended repayment programme and that BNZ will exert pressure to ensure that this is adhered to."

A handwritten endorsement to the memorandum read:

"Equiticorp fully understands BNZ's requirement that this is repaid asp and have informed us (Curtayne/McCredie) that if at all possible this will be effected within next two weeks."

Briefing papers consistent with this arrangement had been prepared for use during an Equiticorp Holdings Ltd and Equiticorp International Pty Ltd board meeting. They indicate that:

"The Group liquidity position is now as bad as it has ever been. The Wardley/SBNSW facility for Equiticorp Industries was not put in place by 30 June 1988 as promised. Once again, we went to our main bankers BNZ and SBSA to fund the shortfall and thankfully once again they came to the party. Unfortunately, not having the facility in place by the due date has caused us to lose most of whatever credibility we had with these banks. However, we did make some ground back with these banks by supplying the updated cashflows ... which gave them a reasonable level of confidence that we could achieve total repayments of a number of facilities prior to 30 September. It is absolutely imperative that these repayments are achieved."

That same briefing paper notes in relation to ETL:

"Repayment of SBSA and BNZ facilities, as mentioned previously, must be made by 30/9/88 but preferably by 28/7/88. BNZ Board meets in NZ that day and we have given Ron Diack our word we will 'spill blood' to achieve full repayment on that due date."

On 18 July 1988, McCredie sent a memorandum to Travers concerning the results of his investigation of the Equiticorp Group's position. In it he expressed the opinion that the group's position had improved somewhat since his previous review. However, he expressed concern about the liquidity of the holding company and the overall high gearing levels of group companies. He commented as well that the liquidity of the Australian finance group was sound.

Those Equiticorp persons involved in the review conducted by Bank of New Zealand had been less than frank in their provision of information to Bank of New Zealand. Indeed in some respects the Equiticorp Group officers were positively deceptive. An Equiticorp memorandum relating to the investigation reveals:

"... The whole of [Fitzgerald's] emphasis, was to gloss over the Finance group and concentrate on Equiticorp Industries Limited. Obviously the main points of conversation related to the liquidity of the group and the likelihood of asset sales plus gearing levels but the sale of 'T' Company was not discussed.
BNZ seem fairly relaxed, although obviously concerned about the group's liquidity. [Fitzgerald] only gave a copy of the Finance Group Structure at 30/6/88 which did not reveal the Aylesford 'investment' of $264 million. This is still a problem in the cash flow as it will require repayment from the sale of [Guinness Peat Group/Guinness Mahon Holdings] while the EIL cashflow shows those proceeds going to repay ANZ, Boston etc. We will have to discuss 'T' Company situation, with the banks expecting their money out of the GPG/GMH settlement soon rather than later, BNZ by the time [Hawkins] visits, will probably have twigged to the 'double counting' in the absence of any information of the sale of 'T' Company."

T Company was Feltrax International Ltd, the company whose shares presently secured the Uruz Pty Ltd facility. McCredie sent Travers another memorandum on 18 July 1988 to supply the latter with up to date information concerning the Equiticorp Group. The first matter dealt with was the availability of the Wardley facility. Contrary to Bank of New Zealand's previous understanding this facility was to be for an aggregate NZ$330,000,000 rather than for AUD $330,000,000. Furthermore, the facility was available only upon NZSteel obtaining refinancing to the extent of NZ$170,000,000. It was now thought unlikely that this amount of refinancing would be effected in sufficient time for the Equiticorp Group to have the facility available prior to 28 July 1988. Once the facility was however committed, NZ$41,000,000 was to be made available to Bank of New Zealand in accordance with the previous understanding. This would reduce the Uruz Pty Ltd facility to NZ$17,000,000 (AUD$14.9 million), with this amount being cleared upon the availability of the remainder of the Wardley facility. Bank of New Zealand market intelligence in Australia did not engender confidence. It indicated that NZ$70,000,000 of the Wardley facility was unlikely to be available in less than two weeks (that is, by early August). A memorandum from McCredie of around this date records:

"I have discussed the Bank's position with Allan Hawkins and stressed the importance of clearance being effected no later than 28 July. I have pointed out that ultimate clearance (assuming the $260 million is forthcoming on time) can be effected from:

--
$50 million purchase of receivables facility -- Equiticorp Finance has $50 million on cash deposit
--
Cashflow. Cashflows given to us show share purchases totalling $16 million. $8 million of this is an error (a double-up) and the true figure of $8 million is not committed and, as we understand it, is for trading purposes and not therefore essential. Allan is to consider these matters and revert. It is pertinent that Brian Fitzgerald resisted these suggestions and no doubt will advise accordingly."

This was the first reference in the evidence to the application of the liquidity reserve in this manner.

Hawkins wrote to Travers on 20 July 1988 and informed him of the progress in asset sales and measures presently being taken to bring the Equiticorp Group's debt position under control. Significantly his letter made no mention of the application of the liquidity reserve to the Uruz Pty Ltd facility notwithstanding the previous raising of the issue with him by McCredie. On receipt of this letter Travers called Hawkins to discuss the position. The substance of the discussion is recounted in his memorandum to Diack and McCredie dated 21 July 1988:

"I conveyed to [Hawkins] that while the objective was great, he would have a number of major financial hurdles to get over during the ensuing months; that BNZ's continued support was imperative; and for this support, credibility of performance and adherence to reduction commitments for the Group's part was equally imperative. I explained this applied directly to extinguishing the ET exposure and I said it would be better for him to recognise the critical credibility issue at stage [sic] rather than our dictating this to be repaid as a matter of requirement or otherwise default. He understood the message clearly and will revert before end this week. I suggested he should look to the A$50 million deposit with BNZA, treating this as an intercompany loan to ET to extinguish our exposure; he had some difficulty with this but will consider, contact Brian Fitzgerald and revert.
I said we had a submission of ACBO relating to restructuring Feltrax facilities, encompassing placement lines etc to bring the level up to $80 million as we had earlier agreed in our letter of 14/3. However, I was not prepared to address this without taking a view of the Group exposure as a whole and then specifically clearance of the ET facility as already committed and now overdue. He understood the point."

Hawkins recounted the substance of the transaction in similar terms. His sworn statement in relation to this conversation reads as follows:

"On 21 or 22 July 1988, I had a telephone conversation with Travers which included words to the following effect:
Hawkins: 'Peter, we know that we need your support and you know
that we will do everything possible to perform.'
Travers: 'It is a question of Board credibility. I've got to report to my
Board. Up until now the Board has been happy with
Equiticorp because no wheels have dropped off. But it is a
credibility thing. You were due to repay the Monier facility
and you didn't.'"

Later, words to the following effect were said:

"Travers: 'I've got to report to my Board. I've got to tell them what's
going on. It is important for your credibility that I give them
something positive.'
Hawkins: I accept that. We will do what we can to give you something
positive to talk about.'"

Later still:

"Travers: 'I am aware that you've got moneys on deposit with the
Bank in Australia.'
Hawkins: 'Yes. That deposit was created from the sale of receivables
to create a liquidity reserve.'
Travers: 'You should use that deposit to repay the Monier facility.'
Hawkins: 'I am not comfortable with doing that for two reasons. First,
the moneys were raised by the Finance Group to create a
liquidity reserve. It is important that the deposit is in place
because of our short term book. Secondly, there are
technical difficulties with transferring money from the
Finance Group to the Industries Group because of Trust
Deed requirements.'
Travers: 'You have got to use that money. You have got to use that
money so as to maintain credibility with the Board.'
Hawkins: 'I will talk to my senior management and get back to you.'"

On 22 July 1988, Hawkins contacted Fitzgerald concerning the application of the deposit. According to Fitzgerald Hawkins advised him that Bank of New Zealand had "demanded" the application of the liquidity reserve in this manner and that he saw no alternative to so doing. Hawkins recollection of the substance of the discussions was somewhat milder. In his evidence they are recounted as follows:

"Hawkins: 'It looks like we've got to use that deposit. I know you are
not happy about it. However, the overall considerations of
the Group are important and I've got to weigh those
considerations up.'
Fitzgerald: 'I do not want the money to be used. It is wrong. You are
just bowing to pressure from BNZ. I think that the
liquidity reserve is important for the Group.'"

The reference by Hawkins to "the group" was found by Giles J to be a reference to the Equiticorp Group as a whole and not merely to the Australian finance group. Fitzgerald disagreed with the proposed application. In his view the funds were needed to maintain the liquidity of the Australian finance companies and the bank had more than adequate security for the loan. Hawkins then said that he would attempt to resolve the problem by other means. Much of Fitzgerald's objection to the discharge of the Uruz Pty Ltd facility out of the liquidity reserve appeared, however, to stem from his perception that Bank of New Zealand had no right to repayment of the Uruz Pty Ltd facility prior to 30 September. Hawkins also spoke with Curtayne concerning the matter. Curtayne recollects the substance of the discussion to be that Bank of New Zealand had demanded that the liquidity reserve be used to repay the Uruz Pty Ltd facility and that there was no alternative but to comply. Hawkins recollected the conversation in similar terms saying in evidence that: "Travers has got my arm up my back on this one. I think we have to do something about it. Brian [Fitzgerald] hates the idea of using the deposit, but I don't see any alternative at this stage." Curtayne gave evidence in similar terms recounting the conversation with Hawkins and the latter's concern with the situation in the following manner:

"... he's [Mr Travers] really wound up on this. He's talking lack of co- operation from Bank of New Zealand in the future and me having a credibility problem with the board if I don't agree to it. I'm afraid we have no real choice."

Giles J also found that Adams had been consulted concerning the application of the liquidity reserve. Although Adams had no independent recollection of this, the finding was based upon the fact that he was a signatory to the letter ultimately authorising its application by Bank of New Zealand. Fitzgerald gave evidence to the effect that he had contacted Morbey (Australian treasurer), Daley (group treasurer) and Curtayne -- none of whom were directors of either appellant company to protest, or voice his dissatisfaction with the proposal. None, however, had any recollection of this occurring and in the end Giles J found that these persons, regardless of whether or not they were in fact contacted, ultimately either concurred in, or at least accepted, the decision being taken to use the liquidity reserve in the reduction of the Uruz Pty Ltd debt. It was clearly apparent to those in control of the Equiticorp Group that the application of the liquidity reserve could not be validly accomplished without some compensation to the respective corporate owners of the reserve. Indeed apart from questions of fiduciary duty the debenture trust deeds binding the companies in the Australian finance group required this. To this end, Hawkins instructed Curtayne to examine the debenture trust deeds to which the Australian finance group companies were subject in order to ascertain the extent to which shares would comprise an adequate substitute for the cash about to be applied.

On 25 July, Fitzgerald telephoned Hawkins and was informed by the latter that"BNZ had insisted that the transaction go through and there was nothing he could do about it". Furthermore, Curtayne, Daley, David Morbey, Hutchinson and Adams had been instructed to work on the purchasing of New Zealand finance group receivables by the Australian finance group companies as consideration for the transaction. The decision to apply the liquidity reserve had apparently only been taken on that day, for there apparently had been no contact between Bank of New Zealand and the Equiticorp Group since 22 July.

On 26 July, there was a scheduled meeting between Hawkins and Curtayne of the Equiticorp Group and Travers, Diack, McCredie and Semple of Bank of New Zealand. The object was the discussion of the Equiticorp Group's liquidity and the "reduction program" to which Hawkins had committed the group. A Bank of New Zealand briefing paper prepared for the meeting placed a very stark choice before the Equiticorp Group. In the first place the Equiticorp Group's prior commitment to the program of debt reduction was noted, as was its failure to repay the Uruz Pty Ltd facility in terms of the previous agreement. The gearing of Equiticorp Holdings Ltd was then raised and Bank of New Zealand observed that:

"At present Equiticorp is vulnerable to uneven monthly cashflows, interest rate increases, vendors withdrawing facilities and/or subsidiaries being unable to pay the forecast level of dividends. These vulnerabilities appear now to have hit home. ..."

Then there is the liquidity position of the holding company Equiticorp Holdings Ltd:

"... the forecast cash balances over the period to 31 December 1988 ... generates negative cash balances. However, after the inclusion of the proposed Wardley facility and various asset sales the cashflow position becomes positive from September onwards."

As the above extract demonstrates the two critical features in the Equiticorp Group position were asset sales and the Wardley re-financing. This was not lost on Bank of New Zealand who regarded the availability and timing of the Wardley facility as an area of particular concern. They summarised the group's position, as they saw it, as follows:

"The impact of this facility not being available by the end of July is that both the receipt of the new funding and the repayment of the existing debt will be deferred until August.
However, Equiticorp will also suffer a loss of credibility if these repayments are not made, which may cause additional problems in the future if the ongoing support of the banks is to be retained."

There was then reference to the Australian finance group position whose level of liquid assets was acknowledged to be "dangerously low" with it having advanced $40,000,000 to fund the New Zealand finance group operation and with the contingent liability to repay the $55,000,000 deposit with the Bank of New Zealand upon exercise of the option to re-purchase receivables which could occur at any time subsequent to 28 August. Hawkins telephoned Travers on 27 July and confirmed that the liquidity reserve should be applied to satisfy the Uruz Pty Ltd facility. Travers was informed that this was to be done directly rather than as previously suggested by routing the funds through certain New Zealand entities as it was presumably simpler and more efficient. Hawkins also asked Travers for some assurance that liquidity support could be obtained from Bank of New Zealand pending completion of the Wardley re-financing and floated the idea of a future receivables financing transaction between the parties -- Bank of New Zealand would, however, offer no such assurance. Two letters came into existence on that day, the first confirming that Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd had between them some $44.4 million on deposit with Bank of New Zealand and wished this to be applied to the account of Uruz Pty Ltd with the bank. This letter was signed by David Morbey (treasurer of the Australian finance group and associate director of Equiticorp Australia Ltd) and Daley (treasurer of Equiticorp Finance Ltd and associate director of Equiticorp Australia Ltd). Both were authorised signatories. The second was a letter from Uruz Pty Ltd requesting the funds be credited towards the Uruz Pty Ltd facility balance and requesting the release of Feltrax International Ltd scrip held by Bank of New Zealand as security for this liability. This letter was signed by Adams (chairman of directors of Equiticorp Australia Ltd, director of each of Equiticorp Financial Services Ltd (Aust), Equiticorp Finance Ltd, Equiticorp Finance Group Ltd, Equiticorp Financial Services Ltd (NZ) and Uruz Pty Ltd) and Joanna Morbey (the secretary of Uruz Pty Ltd).

Curtayne had, presumably prior to the preparation of these letters, faxed David Morbey a letter instructing the latter on the steps to be implemented. As Giles J found, this is almost the only record of the steps as then determined to be undertaken within the Equiticorp Group companies involved. It provided:

"This is to confirm the transactions to be entered into today.

1.
EFSL [EFSA] to purchase $12.0 million worth of Feltrax International Ltd shares from Equiticorp Industries Limited. Payment to be way of cash with funds deposited into the account of Equiticorp Investments (Australia) Ltd [Uruz].
2.
EFSL [EFSA] and EFHL to purchase A$32.4 million worth of receivables from New Zealand finance companies. Details of the various receivables and from which companies in New Zealand these are coming will be sent to you by PJH [Hutchinson, a director of EFGL and EFSNZ] shortly. These receivables will need to be sold in the correct proportions to EFSL [EFSA] and EFHL in Australia depending on the amount of cash in each company and taking into the account the $12.0 million above.
3.
The New Zealand finance companies are to purchase sufficient Feltrax International Ltd shares from Equiticorp Industries Ltd to account for the $32.4 million cash. This cash can be deposited straight to the account of Equiticorp Investments (Australia) Ltd [Uruz] at the Bank of New Zealand in Australia and does not need to be remitted to New Zealand and back.
4.
We need to ensure that the Bank of New Zealand releases all Feltrax International Ltd shares other than those necessary to cover all A$6.6 million left under the facility. I think the current rate is 150 per cent.
5.
The Bank of New Zealand is to take a set-off agreement over the cash in the account of Equiticorp Investments (Australia) Ltd. I have spoken to Tony Marlow of Bank of New Zealand and he is confirming that this is okay with them. He mentioned Dave Carter as the person in Australia to contact who would need to have the necessary documen tation to effect the set-off. This needs to be done this afternoon. I will confirm to you that this is to be done shortly. [On a copy of this letter a handwritten note indicates that there is not to be a set-off but a repayment.]
6.
Please pass a copy of this to Joanna [Morbey] so that she can also be working on the transaction."

Cowell, the managing director of Equiticorp Financial Services Ltd (Aust) and of Equiticorp Finance Ltd and a director of Equiticorp Australia Ltd from 1 June 1988 was not consulted regarding the application of the liquidity reserve. As Giles J found, he was simply instructed that Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd were to purchase receivables and Feltrax International Ltd shares from Equiticorp Financial Services Ltd (NZ) and in return were to transfer some $17,460,000 to that company (the same moneys as were applied to the Uruz Pty Ltd facility). Cowell did not question the transaction but simply undertook the process of selecting and documenting the receivables which were to be transferred. Hutchinson provided these details.

Three instruments entitled "Loan Portfolio Purchase Agreements" came into existence concerning the receivables. They were dated 28 July. The relevant companies and the Australian and New Zealand dollar equivalent of the receivables were:

Vendor Purchaser Value
EFSNZ EFL A$8,172,349.60 or NZ$9,917,900
EFSNZ EFSA A$6,153,128.54 or NZ$7,467,389
EFGL EFL A$18 188 166.57 or NZ$22,072,957
A$32,513,594.71 or NZ$39,458,246

Equiticorp Financial Services Ltd (Aust) was also to receive some $12,000,000 worth of Feltrax International Ltd shares from Equiticorp International Pty Ltd.

The documentation of the receivables and share transfers all took place after the actual application of the liquidity reserve to reduce the balance of the Uruz Pty Ltd debt. Indeed Giles J found that the documents themselves did not come into existence before mid-August 1988.

Each of the Loan Portfolio Purchase Agreements was ostensibly signed on behalf of the vendor and purchaser by duly authorised attorneys. The powers under which these signatories acted were all dated 27 July 1988 and minutes of directors' meetings also dated 27 July 1988 authorised such signatories to execute the instruments and to affix the respective corporate seals thereto. Each minute also recited that a draft Loan Portfolio Purchase Agreement was before the board and the board resolved that the company concerned enter into the transaction in question. Giles J found that none of these minutes truly recorded a meeting of directors. It is of course to understate the position to say, as Cowell was found to have said, that authority to sign documents was "dealt with informally".

Perhaps most significantly the minutes purportedly reflecting the proceed ings of directors meetings of the purchasers Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd amended by Fitzgerald, Cowell and Chittenden recorded a resolution to enter into the transaction and an authorisation for Fitzgerald and Chittenden to do so as attorneys for the companies. These minutes were later signed by Fitzgerald as chairman of the companies. He was the person who can be described as the person most strongly opposed to the application of the liquidity reserve. He, still being overseas on the date of the purported directors' meetings, cut short his trip in an attempt to stop the application of the liquidity reserve. By the time he returned on 29 July the application had already been made.

On 28 July 1988, Bank of New Zealand released the 35,000,000 shares of Feltrax International Ltd scrip to Equiticorp International Pty Ltd. It retained one certificate comprising 5,000,000 shares as security for the balance of the Uruz Pty Ltd facility still outstanding. Internal to the Equiticorp Group the transactions designed to compensate Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd for the loss of funds representing their liquidity reserve were being documented more or less in terms of the letter from Morbey and as follows. First, there were the Loan Portfolio Purchase Agreements. These agreements have already been noted and were documented as sales for value. Thus, on their face they required that:

"2.1 Forthwith after the execution of this Agreement, the Vendors shall sell and the Purchasers shall purchase the Loans in the following manner:
(a) the purchaser shall pay to Equiticorp Australia Ltd, as agent for the vendor in New Zealand dollars, the purchase price therefore...."

Giles J noted that it was common ground between the parties that no such payments had been made although Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) submitted that the instruments were framed in error and the true compensation was the application of the liquidity reserve. Nonetheless contracts were entered into whereby: Equiticorp Finance Ltd purchased receivables of A$8,172,349.60 from Equiticorp Financial Services Ltd (NZ) and A$18,188,116.57 from Equiticorp Finance Group Ltd; and Equiticorp Financial Services Ltd (Aust) purchased the McClymont receivables of $A6,153,128.54 from Equiticorp Financial Services Ltd (NZ). As provided for in the Loan Portfolio Purchase Agreements, payment by Equiticorp Finance Ltd and Equiticorp Finance Group Ltd was to be made directly to Equiticorp Australia Ltd as agent for the vendors (Equiticorp Finance Group Ltd and Equiticorp Financial Services Ltd (NZ)). In the court below, Giles J observed (at 292):

"Journal entries were made in relation to the July receivables and the $12,000,000 in Feltrax International Ltd shares. As earlier noted, the latter entries reflected the acquisition by Equiticorp Financial Services Ltd (Aust) of shares of that value, but the entries were not fully analysed in the evidence and so far as they were analysed may not have been completely in accord with the arrangements I have described. They certainly included entries reflecting acquisition by Equiticorp Financial Services Ltd (Aust) of $6,150,000 in receivables and reduction of its deposit with Bank of New Zealand by $17,640,000, and also included entries reflecting associated transactions within the New Zealand finance group and with Equiticorp Industries Group Ltd. In the absence of more comprehensive attention in the evidence and further analysis the extent of the assistance to be gained from the entries is arguable, and it was not the subject of submissions."

Before this Court, however, the journal entries were the subject of extensive submissions from Bank of New Zealand and closer analysis of the evidence warranted in determining whether there was a breach of fiduciary duty in the decision to apply the liquidity reserve. The relevance of this evidence is that it bears on the intention fairly to compensate the Australian finance group companies for the application of the reserve. The general journal of Equiticorp Finance Group Ltd, a company which acted as banker for the New Zealand finance group and thus for Equiticorp Financial Services Ltd (NZ) shows the following entries posted in July 1988:

Debit Credit
(i) Intercompany Account
Equiticorp Financial Services
Ltd (Aust)
NZ 7,467,389
Intercompany Account
Equiticorp Financial Services Ltd (NZ)
NZ 7,467,389
(ii) Intercompany Account
Equiticorp Finance Ltd
NZ 22,072,966.34
Corporate I/O Loans NZ 12,109,248.34
Offshore Loans NZ 9,963,718.00
(iii) Intercompany Account
Equiticorp Finance Ltd
(banker for Equiticorp
Finance Ltd)
NZ 9,917,900
Intercompany Account
Equiticorp Financial Services
Ltd (NZ)
NZ 9,917,900

Entry (i) represents the sale of the McClymont receivable to Equiticorp Financial Services Ltd (Aust) as documented in the relevant Loan Portfolio Purchase Agreement. Although the vendor of this receivable is in fact Equiticorp Financial Services Ltd (NZ) payment is to be made to Equiticorp Finance Group Ltd in a manner consistent with its function as banker to the New Zealand finance group. The general journal of Equiticorp Financial Services Ltd (Aust) shows an entry posted on 31 July 1988 recognising a corresponding entry by debiting Equiticorp Finance Group Ltd's intercompany account to the extent of NZ$7,467,389 and crediting the receivable sold.

Entry (ii) represents the sale by Equiticorp Finance Group Ltd of specifically identified receivable to Equiticorp Finance Ltd under the Loan Portfolio Purchase Agreement. The split in the credit entries recognises the different sources from which those receivables derive. Entry (iii) represents the sale by Equiticorp Financial Services Ltd (NZ) of specifically identified receivables to Equiticorp Finance Ltd under the relevant Loan Portfolio Purchase Agreement. Equiticorp Finance Group Ltd thus recognises in its own books a liability to Equiticorp Finance Ltd to the extent of the receivables sold. For its part, in a manner akin to (i), Equiticorp Financial Services Ltd (NZ)'s general journal shows a debit to the Equiticorp Finance Group Ltd loan account -- thereby raising the amount payable to it by Equiticorp Finance Group Ltd -- and a corresponding credit reducing the balance of its receivables to the extent assigned. To the extent to which title to these receivables passed to Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) their respective positions before and after the application of the liquidity reserve may be illustrated as follows:

Before Application After Application
EFSA cash -- A$17,635,555.91 Receivables -- A$6,153,128.54
EFL cash -- A$29,519,565.87 Receivables -- A$29,360,466.17

Two factors must be borne in mind regarding this comparison. The first is that the "Before Application" cash is liable to be called upon to repurchase the receivables sold by the companies to Bank of New Zealand and the subject of a put-option. The second is that Equiticorp Financial Services Ltd (Aust), as will be detailed below, was to receive some A$12,000,000 worth of Feltrax International Ltd shares in addition to the receivables.

The title to these receivables, the subject of the Loan Portfolio Purchase Agreements, was at issue below. As recounted in the judgment of Giles J, the companies comprising the New Zealand finance group were involved in an action with the Australian finance group companies disputing ownership of the receivables, other than of the McClymont receivable. As matters eventuated, the claims were settled with an approximately equal division of the receivables and the proceeds derived therefrom between the parties to the Loan Portfolio Purchase Agreement. The settlement of the claims meant of course that Giles J was, as are we, deprived of the opportunity of resolving one way or other where title to the receivables actually lay. For the purposes of the claim against Bank of New Zealand this is obviously a matter of some relevance in determining the question of breach of fiduciary duty and the allowance to be made in respect of the award of damages if such a breach is found to exist.

The next step in the labyrinthine settlement of the "compensation" for the loss of the liquidity reserve was the "payment" by Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd to Equiticorp Australia Ltd (as agent for the vendors) for the receivables. The term repayment is used with little confidence for there was no physical movement of cash to Equiticorp Australia Ltd (such cash as there was being at all times with Bank of New Zealand). The only real consideration was the recognition, by way of an accounting entry, of changes in the balances owing to or payable by the relevant companies. The effect thereby generated is either to recognise a payment of consideration and subsequent loan back of funds by the vendor New Zealand finance group companies or a recognition that the consider ation envisaged for the sale of receivables had not yet been paid. The general journal of Equiticorp Industries Group Ltd records debits posted to the account of EIAL (a company with whom we have not previously been concerned to identify) of some A$44.4 million, the narrative records the entry as: "Being transfer of Feltrax shares to EAL re Uruz facility-- refer Rec file for details". For its part the general journal of Equiticorp International Pty Ltd records a debit to the intercompany account of Equiticorp Industries Group Ltd and corresponding credits to its investment in Feltrax International Ltd shares. These entries represent the first stages in the process of moving the "funds" from the finance to the industrial group, a process which was to be effected by the New Zealand finance group companies acquiring Feltrax International Ltd shares. The consideration for this acquisition was again indicated by journal entries and the acquisition of shares was designed to compensate Equiticorp Finance Group Ltd and as noted Equiticorp Financial Services Ltd (NZ) for cash ostensibly due to them but which they were never intended to actually receive.

In order to effect this acquisition Equiticorp International Pty Ltd debited its intercompany account with Equiticorp Industries Group Ltd its parent and credited its investment in Feltrax International Ltd shares. It thereby "sold"$54,000,000 of Feltrax International Ltd shares to Equiticorp Industries Group Ltd which took possession of the scrip. Equiticorp Industries Group Ltd then entered in its general journal debits to the intercompany loan account of EIAL totalling some $53,989,609.87. Corre sponding credits were then entered in the intercompany account of Equiticorp International Pty Ltd.

Finally Equiticorp International Pty Ltd "sold" by journal entry $54,000,000 of Feltrax International Ltd shares -- $10,300,000 to Equiticorp Finance Group Ltd, $29,100,100 to Equiticorp Financial Services Ltd (NZ) and $12,000,000 to Equiticorp Australia Ltd as banker for Equiticorp Financial Services Ltd (Aust).

The accounting circle was now complete:

1.
Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) had NZ finance group receivables;
2.
Equiticorp Financial Services Ltd (Aust) ostensibly had Feltrax International Ltd shares;
3.
Equiticorp Finance Group Ltd and Equiticorp Financial Services Ltd (NZ) had Feltrax International Ltd shares;
4.
Equiticorp International Pty Ltd obtained the liquidity reserve which it applied to reduce the Uruz Pty Ltd debt.

The entitlement, if it may be described as such, of Equiticorp Financial Services Ltd (Aust) to $12,000,000 of Feltrax International Ltd shares was not to survive long. Those shares were apparently never delivered into the company's possession nor were they ever specifically identified, other than in the journal as belonging to Equiticorp Financial Services Ltd (Aust). As was found by Giles J (at 270):

"... the shares went elsewhere. Some went as security to creditors ... By some means the share scrip then went to Equiticorp Industrial Group Ltd or Equiticorp Industries Ltd, and Equiticorp Industries Ltd mortgaged the shares to Wardley Australia Ltd on 31 August 1988 as part security for a NZ$300,000,000 facility."

The end result of this was another arrangement, designed now and again on an ex post facto basis to compensate Equiticorp Financial Services Ltd (Aust) for the shares it never received. Another Loan Portfolio Purchase Agreement was then executed around 17 October 1988 (though dated 4 October 1988) which made provision for the sale of receivables of Equiticorp Financial Services Ltd (NZ) to Equiticorp Financial Services Ltd (Aust) for NZ$14,468,628. The Loan Portfolio Purchase Agreement replicated the previous ones in form -- in so far as it made provision for the payment by the purchaser of the above amount for the receivables. No amount having been paid, the receivables formed the subject of a dispute as to ownership between Equiticorp Financial Services Ltd (Aust) and Equiticorp Financial Services Ltd (NZ) which was subsequently settled in a similar manner to the others.

2. Authority:

The issue which first arises in the present appeal is that of authority. Both appellants submit that no effective authorisation was given by the companies concerned to the application of the liquidity reserve by Bank of New Zealand towards the debt of Uruz Pty Ltd. At first instance the basic question placed before Giles J was whether Hawkins had, in relation to both Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd, actual authority to direct the use of the liquidity reserve in the manner in which he did. At the trial the issue was approached by the parties on the basis that the funds applied were, for the purposes of this question, the property of Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd. Furthermore, Bank of New Zealand accepted that the decision to apply the liquidity reserve was taken by Hawkins after discussions with Fitzgerald and Curtayne. It was his authority to act in the manner he did which was the central issue in this aspect of the litigation. Giles J found that Hawkins had actual authority to commit the liquidity reserve to discharge of the Uruz Pty Ltd debt and it is this finding which is challenged. An agent may have actual authority to bind a principal which is quite distinct from, but may overlap, ostensible authority. Actual authority may be express or implied. There is no evidence that Hawkins had express authority to commit the use of the liquidity reserve and the only question is whether implied actual authority or ostensible authority was established. Actual authority arises where a principal grants, and an agent accepts, authority for the agent to perform specific tasks on behalf of the principal -- in short there must be a consensual agreement between the principal and agent. Notwithstanding the absence of an express agreement, the parties, that is, the principal and agent, may conduct themselves in such a way that it is proper to infer that the relevant authority has been conferred on the agent. Accordingly, where the question is whether the agent has implied authority to act in a particular way the court directs its attention to the conduct of the parties in order to decide whether the inference of authority should be drawn. Ostensible authority is quite different. The question then is whether the principal has held out the agent as having authority to act on its behalf. Obviously a principal may expressly hold out a person as its agent to act on his or her behalf in a specific transaction but usually where this occurs there will have been a grant of actual authority. On the other hand there may be no evidence of a grant of actual authority and yet the principal may have so acted as to hold out the agent as having the requisite authority. In many instances the circumstances which give rise to ostensible authority may also provide a basis for inferring an actual grant of authority. The principles are clearly explained by Diplock LJ in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 502:

"It is necessary at the outset to distinguish between an 'actual' authority of an agent on the one hand, and an 'apparent' or 'ostensible' authority on the other. Actual authority and apparent authority are quite independent of one another. Generally they co-exist and coincide, but either may exist without the other and their respective scopes may be different. As I shall endeavour to show, it is upon the apparent authority of the agent that the contractor normally relies in the ordinary course of business when entering into contracts.
An 'actual' authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of the trade, or the course of business between the parties. To this agreement the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if the agent does enter into a contract pursuant to the 'actual' authority, it does create contractual rights and liabilities between the principal and the contractor ....
An 'apparent' or 'ostensible' authority, on the other hand, is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the 'apparent' authority, so as to render the principal liable to perform any obligations imposed upon him by such contract. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself. The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract."

We have already indicated that actual authority may be implied. It is, however, important to emphasise that the authority impliedly granted by the principal to the agent must be such as could be validly granted by express agreement. Put another way, in the specific context of company law, it must be an authority whose existence is contemplated by the company's memorandum and articles of association.

In the case of Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, the chairman of the board of directors of the defendant company was found to have implied actual authority to enter into transactions in the company's ordinary course of business as a consequence of a previous course of dealings in which he entered into a number of contracts on behalf of the company without the knowledge of the board and merely reported back to the board at the next convenient meeting after executing the contract. Lord Denning MR observed (at 584):

"... It is plain that Mr Richards had no express authority to enter into these two contracts on behalf of the company: nor had he any such authority implied from the nature of his office. He had been duly appointed chairman of the company but that office in itself did not carry with it authority to enter into these contracts without the sanction of the board. But I think he had authority implied from the conduct of the parties and the circumstances of the case ... The judge finds that Mr Richards acted as de facto managing director of Brayhead. He was the chief executive who made the final decision on any matter concerning finance. He often committed Brayhead to contracts without the knowledge of the board and reported the matter afterwards."

A recent example of the application of the principle in Australia is to be found in Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279, where (at 360-361) the Appeal Division of the Supreme Court of Victoria applied Hely-Hutchinson v Brayhead Ltd . In the joint judgment there was a finding of implied actual authority in relation to one Goldberg to manage the business and to hold out a person as secretary who was in fact not the secretary. The facts and circumstances there relied upon to justify such a finding included the following: Goldberg had actual control over the group of companies and invariably asserted control over each of the companies in the group; Goldberg was known as the alter ego of group companies; Goldberg made decisions for the group companies; there was no evidence that he found it necessary to refer to any board to seek approval for the course of action he proposed; the boards in question had never previously attempted to interfere with his action; Goldberg had obtained board approval of transactions to which he had already committed Brick and Pipe without first seeking authorisation from the board; and that individual directors in evidence confirmed the acquiescence of board members in the activity of Goldberg which culminated in completed transactions for which the board gave no prior approval. One final and, perhaps, decisive element in the scope of the authority the court was prepared to find vested in Goldberg, was that: "... in most, if not all, cases, the transactions committed assets of Brick and Pipe or its subsidiaries as security for borrowings by other Goldberg companies".

Whether authority is to be implied and, if so, the scope of the authority implied is, in our view, to be found in a close analysis of the evidence before the court which is relied upon to support the implication of actual authority.

(i) Did Hawkins have authority to apply the liquidity reserve of Equiticorp Financial Services Ltd (Aust)?

Article 123(a) of Equiticorp Financial Services Ltd (Aust)'s articles of association provide that "the business of the company shall be managed by the Directors who may exercise all the powers of the company". Article 118 relevantly provides that "the Directors may delegate any of their powers to committees consisting of such member or members of their body as they think fit". At the time of the application of the liquidity reserve, Giles J found that the directors of Equiticorp Financial Services Ltd (Aust) were Messrs Hawkins, Adams, Fitzgerald, Cowell, Crick, Chittenden and Teroxy. Furthermore his Honour found that each of the last three of these "was rather unsure of his status as a director, does not seem to have acted as a director in the sense of applying himself to directing the affairs of the companies beyond his particular executive functions and was probably appointed a director first to make up the number of persons available for formal execution of documents". Hawkins held the title "Chairman" or "Chief Executive of the Equiticorp Group" and was able to exercise a measure of control over its constituent parts by reason of his shareholding in Equiticorp Holdings Ltd.

His Honour said (at 294-295):

"Mr Hawkins had the major shareholding in the group to which I have already referred, and the description of chief executive of the group may be accepted as a broad indication of the control which he exercised. Outside the Australian finance group, he was a director of (relevantly) Equiticorp Industries Group Ltd, Equiticorp Tasman Ltd, Uruz Pty Ltd, Equiticorp Finance Group Ltd and Equiticorp Financial Services Ltd (NZ); whether he was a director of Equiticorp Industries Ltd was unstated but he probably was. In relation to the finance group, Mr Hawkins chaired the meetings of directors of Equiticorp Finance Group Ltd and in practice those meetings considered the affairs of the companies within both the New Zealand finance group and the Australian finance group. It seems that there were really no board meetings of Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust) at which the funding requirements of those companies was considered, that being dealt with at the Equiticorp Finance Group Ltd board meetings and otherwise in the communications with Messrs Fitzgerald and Curtayne concerning the group cash flow part of which was the funding requirements of those companies. The minutes of meetings of directors of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) in evidence were essentially confined to execution of instruments, approval of annual accounts, appointment and retirement of directors and matters of that kind. Even if reliable, they do not refer to matters of policy or to cash flow, treasury, funding or banking arrangements: policy was normally set by the Equiticorp Finance Group Ltd board and so far as not dealt with at Equiticorp Finance Group Ltd board meetings the affairs of the Australian financial group were dealt with at monthly executive meetings. In reality, the directors of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) carried out executive functions in their particular areas but were not involved as a board in decisions in relation to treasury matters.
This provides a generous foundation for acquiescence by the boards of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) in the exercise of the function of acquisition or disposal of funds -- the stock-in-trade in which the companies dealt -- otherwise than by board decision. The creation of the liquidity reserve was not the subject of board decision, but so far as appears was the act of Mr Fitzgerald, and it may be thought strange that Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) should deny the authority of the chief executive of the group to dispose of property acquired by authority of the chief executive of part of the group (not being their managing director).
Mr Fitzgerald acknowledged that he was 'ultimately answerable to Mr Hawkins' and, although he may have later qualified that by reference to his role as group treasurer, I am satisfied that the reality was that he and the other directors of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) regarded Mr Hawkins, and not themselves as a board, as the ultimate decision-maker. They acted accordingly in relation to the application of the liquidity reserve. Mr Fitzgerald protested, but gave effect to Mr Hawkins' decision. He did not call upon other members of the boards to participate in the decision, other than confirming with Mr David Adams that there had been discussion with Mr Hawkins. Rather, he spoke to Mr Morbey and Mr Daley, neither of whom was on either of the boards, not with a view to dissuading Mr Hawkins but with a view to getting Bank of New Zealand to change its mind. Mr Crick was not consulted at all. None of Messrs Cowell, Chittenden and Teroxy was consulted at the time, but each participated in the associated disposition of the July receivables in the manner I have described. They did so either without, so far as appears, inquiry into the reason for it, or if they did know of the use of the liquidity reserve (as did Mr Cowell even before it happened) without taking exception to its application towards discharge of the Uruz Pty Ltd debt. With partial knowledge, at least, that someone had decided that tens of millions of dollars of assets were being dealt with in a way affecting Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), and in the case of Mr Cowell knowing of the imminent transfer away from those companies of at least $17,640,000 held on deposit with Bank of New Zealand, they went along with whatever was occurring unquestioningly. Mr David Adams, of course, signed the letter of 27 July 1988.
All this is consistent with the conduct of the business of the group, including the business of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) as members of the group, under the general direction of Mr Hawkins (albeit by a procedure directed to consensus), and not by the boards of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) exercising authority in directing the conduct of the business of their companies. That is the way it was done generally as well as in relation to the application of the liquidity reserve towards discharge of the Uruz Pty Ltd debt. The description of Mr Hawkins as chief executive of the group reflected that he acted as such, with the concurrence of (relevantly) the boards of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), and he did so in the ordinary course of their businesses in relation to generation and allocation of funds."

It will be noted that his Honour found that there were really no board meetings of Equiticorp Financial Services Ltd (Aust) at which the funding requirements of that company were considered. The reason advanced in the evidence for this was that the treasury function, ostensibly within the domain of Fitzgerald and Curtayne, was a centralised one and was dealt with at Equiticorp Finance Group Ltd board meetings -- at which Hawkins presided. Consistently with this the minutes of the meetings of directors were found to be, for the most part, confined to the execution of instruments, approval of annual accounts and other administrative type matters. This finding was challenged by Equiticorp Financial Services Ltd (Aust) who drew to the Court's attention minutes of board meetings of the company and of Equiticorp Australia Ltd, the head company in the Australian finance group. The suggested evidentiary value of the material is said to lie in that it demonstrates that the boards of both Equiticorp Financial Services Ltd (Aust) and of Equiticorp Australia Ltd, its immediate parent company, met regularly and considered matters of importance to Equiticorp Financial Services Ltd (Aust). Whilst the evidence does indeed point to a discussion of the day to day operating issues by the respective boards it falls far short of upsetting the finding of Giles J as to the role of the Equiticorp Finance Group Ltd board and to the controller thereof -- Hawkins.

The Equiticorp Finance Group Ltd board, a body not within the scope of authorised delegates in the Equiticorp Financial Services Ltd (Aust) articles, took a number of decisions of strategic importance on behalf of Equiticorp Financial Services Ltd (Aust). These included: the establishment of certain discretionary loan limits for loans extended by Australian finance group companies over which the approval of the Equiticorp Finance Group Ltd board was required; and the establishment of a sub-committee to deal with issues arising in relation to the various trust deeds under which the Equiticorp Finance Group generally operated.

However, it would be wrong to over-emphasise the significance of these Equiticorp Finance Group Ltd board meetings and to attribute to them too great a degree of autonomous decision-making capacity separate from the influence of Hawkins. In this regard, it remains a fact that no single instance was cited in which an express direction of Hawkins was not complied with and although Fitzgerald gave general evidence to the contrary effect he did not identify any specific occasion on which such had occurred. The most compelling evidence before the Court as to the strength of the informal decision-making mechanisms within the finance group related to the creation and disposal of the liquidity reserve itself. Giles J found there was no board decision authorising its creation -- and this a transaction resulting in the liquidation of some $50,000,000 in Australian finance group receivables. The finding made was that the liquidity reserve was the creation of Fitzgerald who had sought the approval of Hawkins to proceed. Nothing relied upon by the appellant Equiticorp Financial Services Ltd (Aust) displaces this finding.

This informal decision-making process was replicated in the liquidity reserve's application, a decision of signal importance. As Giles J found (at 295):

"... the reality was that he [Fitzgerald] and the other directors of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) regarded Mr Hawkins, and not themselves as a board, as the ultimate decision-maker. They acted accordingly in relation to the application of the liquidity reserve. Mr Fitzgerald protested, but gave effect to Mr Hawkins' decision. He did not call upon other members of the boards to participate in the decision, other than confirming with Mr David Adams that there had been discussion with Mr Hawkins. Rather, he spoke to Mr Morbey and Mr Daley, neither of whom was on either of the boards, not with a view to dissuading Mr Hawkins but with a view to getting Bank of New Zealand to change its mind. Mr Crick was not consulted at all. None of Messrs Cowell, Chittenden and Teroxy was consulted at the time, but each participated in the associated disposition of the July receivables [the subject of the LPPAs] ... They did so either without, so far as appears, inquiry into the reason for it, or if they did know of the use of the liquidity reserve (as did Mr Cowell even before it happened) without taking exception to its application towards discharge of the Uruz Pty Ltd debt."

The evidence as to the decision-making mechanisms in place within Equiticorp Financial Services Ltd (Aust) is consistent with the findings of Giles J as to the conduct of the Equiticorp Group generally, namely that it was conducted under the general authority of Hawkins to whom was deferred, whether or not after consultation with the more senior members of management, decisions of significance. We agree with the finding of Giles J that the decision to apply the liquidity reserve of Equiticorp Financial Services Ltd (Aust) was one which Hawkins had implied actual authority to make.

(ii) Did Hawkins have authority to apply the liquidity reserve of Equiticorp Finance Ltd?

Giles J dealt with the question of the authority of Hawkins in respect of the application of the corporate assets of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) together. Equiticorp Finance Ltd was apparently happy with this for it allowed counsel for Equiticorp Financial Services Ltd (Aust) to address on this issue in respect of both appellants. As with Equiticorp Financial Services Ltd (Aust), we are of the view that circumstances under which the business of Equiticorp Finance Ltd was conducted leads inexorably to the conclusion that Hawkins had implied actual authority to apply the liquidity reserve of Equiticorp Finance Ltd in the manner in which he directed. Although the composition of the board of Equiticorp Finance Ltd differs from that of Equiticorp Financial Services Ltd (Aust), comprising, as Giles J found, Messrs Adams, Fitzgerald, Cowell, Crick, Chittenden and Teroxy (there was some doubt expressed as to the exact status of the last three mentioned) there is, in substance, no difference between the conduct of the boards of Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd in this respect.

The consequence of this view that Hawkins was in fact authorised to do as he did means that it is not necessary to consider submissions by Bank of New Zealand as to the application of the doctrines of ratification nor the potential application of s 68A of the Code.

3. Breach of fiduciary duty:

The submissions that were put to this Court by Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd during the hearing of the appeal on the issue of breach of fiduciary duty ranged very wide indeed. Counsel for Bank of New Zealand took objection to many of the submissions being raised in this Court. He said that Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd had not raised a number of the points upon which they now sought to rely during the hearing at first instance and that in accordance with well established principle ( Coulton v Holcombe (1986) 162 CLR 1) they ought not to be permitted to raise the points now. In these circumstances it is necessary first to determine whether the submissions being made now go beyond those which were put to the court below and, if they do, whether notwithstanding that fact the two appellants ought to be able to raise them. The judgment under appeal is a very careful and comprehensive one in which, fortunately, his Honour set out in detail the case made by the two appellants on this issue. It is worth repeating what his Honour said (at 301-302):

"The case put against Bank of New Zealand was that those responsible for the application of the liquidity reserve towards discharge of the Uruz Pty Ltd debt were in breach of fiduciary duty in so doing, and that Bank of New Zealand was liable as constructive trustee because it had received trust property or otherwise participated with actual or constructive knowledge of the breach. There was a contest over both whether there was any breach of fiduciary duty and whether Bank of New Zealand had the knowledge or notice necessary to make it liable.
For this purpose, those responsible were Mr Hawkins as the effective decision-maker and the other directors of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) so far as they permitted the decision to be made and implemented. The first question was whether there was any breach of fiduciary duty, and it will assist reference to the cases if I outline how Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) said there was such a breach.
They emphasised that the Uruz Pty Ltd debt was in substance a debt of Equiticorp Tasman Ltd (which wholly owned Uruz Pty Ltd) and that shareholders outside the Equiticorp Group had an interest in Equiticorp Tasman Ltd: as I have earlier said, Equiticorp Industries Group Ltd (via Equiticorp Industries Ltd) held 43 per cent of the shares in Equiticorp Tasman Ltd and indirectly had a further holding through its shareholding in Feltrax International Ltd (which may have gone to Equiticorp Holdings Ltd as from 30 June 1988), but Equiticorp did not hold all the shares in Equiticorp Tasman Ltd. Even if the liquidity reserve were regarded as Equiticorp funds generally rather than funds of the Australian financial group, its application towards discharge of the Uruz Pty Ltd debt was not solely for the benefit of the Equiticorp group but also for the benefit of the other shareholders in Equiticorp Tasman Ltd. But more than that, the use of the liquidity reserve was contrary to the interests of the companies in the Australian financial group and in the interests only of the companies in the industries group within which Equiticorp Tasman Ltd fell. The detriment to the Australian financial group was not redressed by making available to them Feltrax International Ltd shares and the July receivables, because neither the shares nor the receivables were a substitute for ready cash. At best they gave assets to the Australian financial group, of possibly fluctuating and in the case of the receivables possibly dubious value, when the whole point of the creation of the liquidity reserve had been to turn assets into cash and in any event there was no effective making available of the shares or the receivables. There was no more than what was described as a 'half-baked notion' that the Australian finance group should be compensated for the loss of the liquidity reserve.
In truth, it was said, in the application of the liquidity reserve towards discharge of the Uruz Pty Ltd debt no consideration was given to the interests of Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust) as such (or indeed of Equiticorp Australia Ltd), but rather those companies were deprived of their liquidity reserve for what was perceived to be the interests of the Equiticorp Group as a whole. That, in the submission of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), necessarily meant that there had been a breach of the fiduciary duty owed by their responsible officers to Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). In the words of Pennycuick J in Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62 at 74, an intelligent and honest man in the position of a director of Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust) could not in the circumstances have reasonably believed that the transaction was for the benefit of those companies."

The thrust of the submission was that no consideration had been given by those responsible to the interests of Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd and as a result both companies were deprived of their liquidity reserve for what were perceived to be the interests of the Equiticorp group as a whole. If that was the correct conclusion it necessarily followed that there had been a breach of the fiduciary duty owed by the responsible officers to Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd. It is also clear that the test his Honour was invited, by all parties, to apply, and did apply, was the test expressed by Pennycuick J inCharterbridge.

Later in the judgment, and after analysing the competing considerations, his Honour concluded that an intelligent and honest man in the position of a director of Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust) could, having in mind (at 307):

"(i)
the indirect shareholding in and substantial advances to other members of the group;
(ii)
the adverse effect of loss of Bank of New Zealand's support on the company's own funding;
(iii)
the adverse effect of loss of Bank of New Zealand's support on the funding of other members of the group;
(iv)
the adverse consequences of the effect on other members of the group;
(v)
the intention, albeit imperfectly executed, to provide compen sation for loss of the liquidity reserve; and
(vi)
the prospect (clearly enough not a certainty, but historically justified and in fact realised) that a liquidity reserve could be in place within a short time, believe that the application of the liquidity reserve towards repayment of the Uruz Pty Ltd debt was for the benefit of the company."

Both appellants challenge a number of the bases upon which his Honour made his ultimate finding but in addition assert that he was in error in failing to take account of factors to which the directors should have had regard in their decision. Those factors were:

"(a)
The effect of the loss of the liquidity reserve on Equiticorp Financial Services Ltd (Aust)'s liquidity and well being;
(b)
Breaches of Equiticorp Financial Services Ltd (Aust)'s trust deed;
(c)
The ability of Uruz Pty Ltd or its parent company to repay the debt;
(d)
Existing charges over the Feltrax International Ltd shares; and
(e)
Breach of s 230 of the Companies Code."

We will return later to the manner in which his Honour analysed the competing considerations put to him but at the outset it should be made plain that one of Bank of New Zealand's greatest objections concerns the submission that, at the time of the relevant transaction, Uruz Pty Ltd was unable to pay its debts as and when they fell due. Apart, however, from that objection Bank of New Zealand objected to the Court permitting the appellants to raise issues concerning breaches of Equiticorp Financial Services Ltd (Aust)'s trust deed, the existing charges over Feltrax International Ltd shares, the breach of s 230 of the Companies (New South Wales) Code , the failure of the directors to close down the business and the breach of duty in believing in and responding to Bank of New Zealand's statements concerning loss of credibility.

In order to determine whether Bank of New Zealand is correct in its assertion that the appellants are seeking to raise new points it is necessary to return to the judgment under appeal. Having set out the case made at the trial his Honour referred to a number of authorities including Charterbridge andWalker v Wimborne (1976) 137 CLR 1, and his Honour cited that part of the judgment of Mason J in Walker v Wimborne appearing (at 6-7) where his Honour said:

"To speak of the companies as being members of a group is something of a misnomer which may well have led his Honour into error. The word 'group' is generally applied to a number of companies which are associated by common or interlocking shareholdings, allied to unified control or capacity to control. In such a case the payment of money by company A to company B to enable company B to carry on its business may have derivative benefits for company A as a shareholder in company B if that company is enabled to trade profitably or realize its assets to advantage. Even so, the transaction is one which must be viewed from the standpoint of company A and judged according to the criterion of the interests of that company.
Here, however, the companies were not members of a group in the sense already described. There was no common or interlocking share holdings. Asiatic did not hold shares in Australian Sound. Asiatic did not stand to lose if Australian Sound went into liquidation; nor did it derive any benefit if Australian Sound succeeded in staving off liquidation. The 'group' argument therefore provides no justification for what occurred.
Indeed, the emphasis given by the primary judge to the circumstance that the group derived a benefit from the transaction tended to obscure the fundamental principles that each of the companies was a separate and independent legal entity, and that it was the duty of the directors of Asiatic to consult its interests and its interests alone in deciding whether payments should be made to other companies."

His Honour then pointed out that Mason J had recognised that when a parent assists its subsidiary there may be "derivative benefits" and said (at 304-305):

"... Consistently with Walker v Wimborne , a transaction undertaken for the benefit of the group, or some other member of the group, may be upheld if in the circumstances it is for the benefit of the particular company that the group or the other members of the group (even with outside shareholders) should be assisted by the transaction."

His Honour then posed for himself the question raised by Charterbridge and proceeded (at 305-307):

"Although it had originally been treated as a stand alone debt, by July 1988 the Uruz Pty Ltd debt had ramifications beyond Uruz Pty Ltd or Equiticorp Tasman Ltd or the industries group. From 13 January 1988 it was supported by the guarantee of Equiticorp Holdings Ltd, the ultimate parent company, and from 30 June 1988 it was supported by the guarantee of Equiticorp Industries Ltd and security over the Feltrax International Ltd shares. The Feltrax International Ltd shares were an important element in the Wardley facility, which (as Mr Fitzgerald's June cash flows showed) was itself important to the liquidity of the finance group. Release of the Feltrax International Ltd shares upon repayment of the Uruz Pty Ltd debt would make them available for wider purposes.
That of itself will not provide the requisite benefit to Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), although it demonstrates that the interests of Uruz Pty Ltd were not divorced from the interests of other companies in the group. Nor were the interests of the Australian finance group divorced from the fortunes of the industries group or the New Zealand finance group. Equiticorp Australia Ltd indirectly held an investment in companies in the industries group, and although the details were obscure the finance group had advanced substantial sums to the industries group and the Australian finance group had advanced substantial sums to the New Zealand finance group.
Against that background, the overwhelming consideration was the effect of loss of support of Bank of New Zealand if the Uruz Pty Ltd debt was not repaid by the board meeting of 28 July 1988 -- and both Bank of New Zealand and Mr Hawkins clearly enough saw it as group support and credibility rather than that of Uruz Pty Ltd. The support of Bank of New Zealand was seen as requiring the giving up of the liquidity reserve notwithstanding that it was thought (as Mr Hawkins told Mr Travers) important that it be in place because of the short-term book, and as requiring the arrangements in relation to the Feltrax International Ltd shares and the July receivables, and it is obvious that Mr Hawkins did not lightly make the decision that the liquidity reserve should be applied towards discharge of the Uruz Pty Ltd debt.
Loss of Bank of New Zealand's support would have been disastrous for the group. It would have eroded the confidence in the group of its other bankers and prospective bankers, since 'information gets around by one means or another', and eroded the market confidence vital both for raising of funds and avoidance of a run on deposits. In July 1988, there was still current an Equiticorp Australia Ltd prospectus for the raising of debenture funds, and the group restructuring to which I earlier referred was in train and would suffer from the loss of Bank of New Zealand's support. The maintenance of Bank of New Zealand's support was all the more important because of the poor liquidity of the group....
Specifically in relation to Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), they had a direct interest in the maintenance of Bank of New Zealand's support because erosion of confidence amongst bankers and depositors would immediately impact upon their raising of money and meeting their commitments: they were identified as part of the Equiticorp Group and would be tarred with the same brush as was applied to other members of the group. They had their own liquidity problems which made them vulnerable to such consequences. They had a less direct but nonetheless real interest in the maintenance of Bank of New Zealand's support for the purposes of the funding of the New Zealand finance group and the welfare of the industries group: a less direct interest by virtue of the indirect shareholdings in and substantial advances to other members of the group and by virtue of the impact upon the other members of the group of like consequences to their funding.
The substance of all these matters, and more, was drawn out in the evidence of Mr Hawkins. He said quite bluntly that in making his decision he had regard to what he believed to be the interests of the group as opposed to the interests of any particular company in the group, and that he saw the welfare of the group as the most important thing because of the effect the welfare of the group had on the individual companies within the group. He thought at the time that loss of Bank of New Zealand's support would be disastrous for some of the companies in the group. There was no real challenge to any of this, and the consequences of loss of Bank of New Zealand's support can readily be accepted even apart from Mr Hawkins' evidence. I accept that the loss of Bank of New Zealand's support would have been significantly against the interests of, and potentially disastrous for, Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust).
I further accept that it was intended that Equiticorp Finance Ltd and Equiticorp Financial Services Ltd be compensated for the loss of the liquidity reserve by Feltrax International Ltd shares and the July receivables. True it is that Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) no longer had immediately available cash to meet the demands of short-term depositors, but receivables had been fairly readily converted into cash in June 1988, a little earlier the New Zealand finance group had sold receivables of great value to a financier, and other receivables were sold in August, September and December at least. Experience shows that receivables were reasonably convertible into cash: indeed, the sale of the August receivables created a replacement liquidity reserve, approximately $10,000,000 of the July receivables were the subject of the sale, and the McClymont receivable was turned into cash. Differing views were expressed in relation to the holding of the Feltrax International Ltd shares by a member of the finance group. Be that as it may, there was the intention to compensate for the loss of the liquidity reserve, which intention may not have adequately been put into effect, the compensation being approximately comparable to the loss. I would infer that the compensation was by the only means readily open, and the case of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) was not one of breach of duty in failing to effectively provide the compensation but rather that regardless of the intention there was a breach of fiduciary duty."

It will be noticed that his Honour did not at any stage mention the interests of the creditors of Equiticorp Financial Services Ltd (Aust) or Equiticorp Finance Ltd. That is significant for the appellants have relied heavily on the asserted failure of the directors to consider the interests of the creditors in all, or nearly all, of the grounds which are said by Bank of New Zealand to be new ones. Indeed, one could have been forgiven for thinking, during the argument, that the submissions based on the failure to consider the interests of the creditors were at the forefront of the appellants' cases on the appeal. Despite this, as we have pointed out, there is not one word about those submissions in the judgment under appeal. This is powerful evidence in support of the objection raised by Bank of New Zealand but there is one further significant fact. The citation from the judgment of Mason J in Walker stops immediately before his Honour turned to deal with the obligation of directors to take account of the interest of creditors. What Mason J went on to say immediately following the passage we have set out was (at 7):

"... In this respect it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them."

This statement was, we hasten to add, made in the context of an insolvent company. The point of setting out this part of the judgment of Mason J at this stage is to highlight the absence of any reference in the judgment of Giles J to the particular submissions now sought to be advanced by Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). It is, we believe, unthinkable that his Honour would have omitted reference to this part of Mason J's judgment if the appellants had submitted to him that the directors had been in breach of their fiduciary duty in failing to consider the interests of creditors when the relevant company was in an insolvent, or near insolvent, condition.

Although one should not expect a trial judge to set out in his or her judgment every argument put to the court we simply cannot accept that Giles J would not have referred to the obligation to consider the interests of creditors and the near insolvent condition of the various companies if those matters had been raised before him. We conclude, therefore, that Bank of New Zealand is correct in its submission that the relevant contentions were not made before the trial court.

That leads to the next inquiry and that is whether, notwithstanding that fact, this Court should entertain the submissions. That in turn depends upon whether evidence could have been given below which could possibly have borne materially upon the issue: Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438.

It is not disputed that issues of insolvency were not investigated before Giles J and in particular that the solvency of Equiticorp Financial Services Ltd (Aust), Equiticorp Finance Ltd and Uruz Pty Ltd were not the subject of investigation. What was said by the appellants was that there was much concentration on the liquidity of companies in the Equiticorp Group and that there was no rational possibility that further material could have been led which would have borne materially upon the issues now sought to be raised. Indeed, during the hearing before Giles J, Equiticorp Finance Ltd sought to tender a print-out from its computerised ledger for the month ending July 1988 for two purposes, the second of which was to establish the insolvency of Equiticorp Finance Ltd in the context of whether or not there was a breach of fiduciary duty in the assignment of receivables from the New Zealand finance group to the Australian finance group. His Honour received the print out into evidence but upon the express basis that Equiticorp Finance Ltd could not rely on the document for the purpose we have set out. The reason for this decision is clear enough. The issue of insolvency had not previously been raised and his Honour took the view that it would be unfair to the parties to permit it to be raised at that stage. If his Honour was correct in his conclusion that unfairness was involved in permitting Equiticorp Finance Ltd to rely on insolvency at that stage of the trial it goes without saying that it would be even more unfair to allow Equiticorp Finance Ltd to rely upon it in the appeal.

We have already indicated that when Mason J spoke of the duty of the directors to consider the interests of creditors he did so in the context of a company which was at the time insolvent. For this reason we would not read his Honour's observations as applying to a company whose solvency was not in question.

The question of the obligation of directors to consider the interests of creditors was referred to by Cooke J in Nicholson v Permakraft (NZ) Ltd (In Liq ) (1985) 3 ACLC 453 at 459. There his Honour said:

"... The duties of directors are owed to the company. On the facts of particular cases this may require the directors to consider inter alia the interests of creditors. For instance, creditors are entitled to consider ation, in my opinion, if the company is insolvent, or near insolvent, or of doubtful solvency, or if a contemplated payment or other course of action would jeopardise its solvency."

In the same case Somers J (at 464) expressed the opinion that directors must have regard to the interests of creditors in the management of a company which is insolvent but reserved the question of the obligations to creditors when the solvency of the company was doubtful or marginal. Richardson J reserved the whole question of the obligations to directors for another day.

In Kinsela v Russell Kinsela Pty Ltd (In Liq ) (1986) 4 NSWLR 722, Street CJ (with whom the other judges agreed) said (at 730):

"... In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration."

These citations demonstrate that the question whether directors are required to consider the interests of creditors in determining whether particular action is or is not for the benefit of the company depends upon the state of solvency of the company at the time of the contemplated actions. Where it is clear that the company is solvent then, as Street CJ pointed out, there is no occasion to have regard to the interests of the creditors. Where the company is insolvent it may well be said that the welfare of the company is of greater concern to the creditors than to anyone. Whether, and to what extent, it is necessary to have regard to the interests of creditors when a company is of doubtful solvency has not authoritatively been determined. The point of the discussion is that the court would not be able to rule whether or not it was necessary for the directors to have regard to the interests of the creditors of the company in considering the benefit of a proposed transaction to the company without an examination of, and subsequent finding on, the solvency of the company at the relevant time. It seems to us that in the absence of such an examination and finding the court would be unable to determine whether, and to what extent, regard should be paid to the interests of the creditors.

In this case there was neither an examination of the solvency of the relevant companies at the critical time nor a finding. The reason for this is clear. The issue which the appellants now seek to ventilate was not raised below and, because evidence may have borne materially on that issue, should not be open to the appellants on the appeal. We would add, in this regard, the observation that no one would have been better placed to establish the solvency or insolvency of the two companies at the critical times than the liquidators who were, in fact, pressing the action.

It follows that the appeal should be confined to a consideration of the question whether his Honour erred in his resolution of the issues raised before him. Before proceeding to the detail of these matters it is appropriate that we say something about the principles which should be applied and, in particular, the Charterbridge test. It is trite law that directors must exercise their powers for the benefit of the company: Kinsela (at 729). If they exercise those powers for other, and improper, purposes they will breach their duty to the company. Where a case of breach of fiduciary duties on the part of the directors is raised upon the ground that they have acted otherwise than for the benefit of the company it will be necessary for the court to determine, as a factual issue, whether the directors did exercise their powers for the benefit of the company. This is a straightforward question of fact which can, in most cases, be answered in the affirmative or negative.

Problems may, however, arise when particular companies form part of a group of companies. Mason J referred to them in Walker v Wimborne and pointed out that each transaction must be viewed according to the criterion of the interests of the company in the group which is about to participate in the transaction. Nonetheless, his Honour recognised that a transaction involving two companies in a group may benefit one of the companies directly but as well have derivative benefits for the other company: see also Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 183, per Brennan J. It may be accepted, therefore, that actions carried out for the benefit of the group as a whole may, in particular circumstances, be regarded as benefiting as well one or more companies in the group. This may occur even where, for instance, a company is providing a guarantee for its holding company or another company in the group. Similarly a transaction carried out for the benefit of one of the companies in the group, company A, may be seen to be for the benefit of another company in the group, company B.

A particular difficulty arises when the directors of the particular company enter into the transaction on behalf of that company because they consider that the transaction is of benefit to the group as a whole and do not give separate consideration to the benefit of their company. It was this difficulty which faced Pennycuick J in Charterbridge . He referred (at 74-75) to the submission of counsel for the company saying:

"... Mr Goulding contended that in the absence of separate consideration, they must, ipso facto, be treated as not having acted with a view to the benefit of Castleford. That is, I think, an unduly stringent test and would lead to really absurd results, ie, unless the directors of a company addressed their minds specifically to the interest of the company in connection with each particular transaction, that transaction would be ultra vires and void, notwithstanding that the transaction might be beneficial to the company."

Having considered the competing contention his Lordship went on to say:

"... The proper test, I think, in the absence of actual separate consideration, must be whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company."

That was the test which was applied by Giles J and all parties have advised this Court that the same test should be applied on the appeal. Although we are content to deal with the issues in the case upon the basis put by counsel we should indicate that we have reservations about the test proposed by Pennycuick J. The directors are bound to exercise their powers, bona fide, in what they consider is in the interests of the company and not for any collateral purpose. Whether they did so or not is a question of fact. The traditional approach of the courts to this question is best explained by Viscount Finlay's statement in Hindle v John Cotton Ltd (1919) 56 Sc LR 625 at 630-631 which was cited in Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 NSWLR 68 at 77:

"Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon that question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye motive, possibly of personal advantage, or for any other reason."

(See also Re Halt Garage (1964) Ltd [1982] 3 All ER 1016 per Oliver J at 1032.)

Of course it should be borne in mind that the directors are involved in making a business decision and courts have traditionally not pronounced upon the commercial justification for such decisions. Specific reference was made to the reluctance of courts to interfere in business decisions in Howard Smith (at 74):

"There is no appeal on the merits from management decisions to courts of law; nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at."

(See also Gower, The Principles of Modern Company Law , 5th ed (1992) at 586; Re Smith and Fawcett, Ltd [1942] Ch 304 at 306 and Kinsela (at 733).)

Accordingly there seems to us to be difficulties in substituting an objective test (How would an intelligent and honest man have acted?) for the factual question raised in the proceedings. It may be that if a director bluntly states that he or she did not consider the interests of the particular company at all and solely had regard to the interests of the group then difficulties would arise in resolving that factual question. But the position will rarely be such a black and white one and it would usually be possible to discern whether in deciding to take certain action for the benefit of the group the directors perceived, and were justified in their perception, that in so doing they were acting for the benefit of the particular company. On the other hand it may be possible to discern that the directors embarked on a course to support the group unconcerned about the detrimental effect of the action on the particular company or were prepared to sacrifice that company for the good of the other companies in the group. A careful analysis of the factual situation will usually reveal the answer to the factual question posed although no doubt on some occasions the problem may very well be a difficult one.

We are mindful of the fact that Pennycuick J was not substituting the objective test for the subjective one which had traditionally been applied. In his view the occasion to apply the objective test only arose when it was clear that the directors had not considered the interests of the relevant company at all. In a sense he proposed a legal test to be applied only in limited cases to avoid what he regarded as an absurd situation.

Nonetheless we have reservations about this means of resolving those difficulties. A preferable view may be that where the directors have failed to consider the interests of the relevant company they should be found to have committed a breach of duty. If, however, the transaction was, objectively viewed, in the interests of the company, then no consequences would flow from the breach. Such an inquiry would not require the court to consider how the hypothetical honest and intelligent director would have acted. On the contrary it would accept that a finding of breach of duty flows from a failure to consider the interests of the company and would then direct attention at the consequences of the breach. However the approach adopted by the parties in this case both before Giles J and this Court requires that theCharterbridge test be applied and absolves the Court from further considering this tantalising question.

His Honour found that the loss of Bank of New Zealand support would have been significantly against the interests of, and potentially disastrous for, Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). That was a finding which was open to him and we see no reason to interfere with it. There is no doubt that Hawkins feared, and had reason to fear, that if the Uruz Pty Ltd debt was not repaid in part or in whole the group would lose that support. Hawkins said that he had regard to the interests of the group as a whole. He saw that as the most important thing because of the effect the welfare of the group had on each of the companies within it. Everyone may not agree with that approach but there is no suggestion that it was not a bona fide view and that encompassed within it was the view that the two appellant companies were better off if the transaction proceeded. One very important factor was that from 13 January 1988 the Uruz Pty Ltd debt was guaranteed by the holding company. If the guarantee had been called on and that had created a severe liquidity crisis for the holding company it is not difficult to visualise disaster, or at least a significantly worsened position, for the Australian financial group and the two appellant companies in particular.

At least that was a permissible view. Indeed it is almost inconceivable that, if the holding company had lost public confidence, the companies in the financial groups would not themselves have suffered the same fate and that would have been disastrous from the point of view of each company. For these reasons and the more detailed reasons of Giles J we agree, on the application of the objective test, with the answer given by the learned trial judge. If we posed the straightforward factual question, to which we earlier adverted, we would reach the same conclusion. Mr Hawkins considered, with some justification, that the welfare of the group was intimately tied up with the welfare of the individual companies. If one pays regard to that the scheme for Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) to be compensated for the loss of the liquidity reserve it is clear that consideration was given to the interests of the two companies. In a climate of substantial liquidity problems and having regard to the holding company's guarantee of the Uruz Pty Ltd debt we would conclude, despite Mr Fitzgerald's reservations, that those responsible for managing the two companies thought that the steps taken to protect the group as a whole, and in particular the holding company, coupled with the compensation scheme, were of definite benefit to the companies. The alternative was possible disaster for the whole group including the two companies.

The appellants argued that a number of his Honour's ultimate findings were factually erroneous or at least inaccurate. We have had regard to those submissions but nothing that was there said persuades us that his Honour was led into any factual error.

Economic duress:

We do not understand it to have been submitted that the learned trial judge misunderstood any of the principles he was required to apply under this ground. In Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 at 45-46, McHugh JA, in rejecting the overborne will theory of duress, said:

"... A person who is the subject of duress usually knows only too well what he is doing. But he chooses to submit to the demand or pressure rather than take an alternative course of action. The proper approach in my opinion is to ask whether any applied pressure induced the victim to enter into the contract and then ask whether that pressure went beyond what the law is prepared to countenance as legitimate? Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. But the categories are not closed. Even overwhelming pressure, not amounting to unconscionable or unlawful conduct, however, will not necessarily constitute economic duress."

The unconscionable conduct alleged was the insistence by Bank of New Zealand that the Uruz Pty Ltd debt be repaid by 28 July 1988 notwithstanding that it had agreed to extend the repayment date to 30 September 1988 at a time when withdrawal of its support would destroy the Equiticorp Group's credibility. However, on one view all that the variation of the loan agreement did was to give the borrower until 30 September 1988 to discharge the liability unless Bank of New Zealand required its discharge earlier. It was also said that Bank of New Zealand applied pressure by insisting on the use of the liquidity reserves to repay Uruz Pty Ltd's debt conscious that this would be a breach of fiduciary duty. As the learned trial judge observed, the alternative way the appellants put the case was really only another way of alleging breach of fiduciary duty. That finding has been criticised but, for the reasons given by Kirby P, we are of the opinion that no error was established.

Before the learned trial judge, it was submitted that there was an implied threat by Bank of New Zealand to start a rumour adverse to the Equiticorp Group to force early repayment. It was submitted that Bank of New Zealand threatened to let it be known that it would withdraw its support if the Equiticorp Group did not immediately repay the debt. For reasons given by the learned trial judge, that submission is rejected. Apart from anything else, it was not in the interests of Bank of New Zealand to have started such a rumour in the market place. Perhaps of more significance, however, is the denial by Mr Hawkins that the money was being paid under a threat. He said:

"I wouldn't put (it) in terms of a threat. The relationship between Mr Travers and Mr Diack and myself was not one of threat. It was one of knowing each other's position and discussing things out, and those two gentlemen were very, very human, so I knew what they meant when they talked to me. There wasn't a threat."

It must be steadily borne in mind that under the agreement dated 13 January 1988 Uruz Pty Ltd's debt was to be paid in full on or before 30 June 1988. As his Honour said (at 299):

"... Until close to that date it had thought that it would receive payment on or before the due time. When that was not possible, Equiticorp's credibility with Bank of New Zealand inevitably suffered, and Equiticorp plainly acknowledged that that was so both to Bank of New Zealand (in the various communications on 29 and 30 June 1988) and within itself: See in particular the board papers for the Equiticorp Holdings Ltd/Equiticorp Industries Ltd board meeting of 10 July 1988.
Then at the very time that Equiticorp obtained an extension of time for repayment it was told that the admitted extreme embarrassment could be assuaged -- and in terms that credibility would be largely restored -- if repayment were made prior to the board meeting at the end of July 1988. It said at the time, in effect, that it would do its utmost to make repayment prior to that board meeting: Mr Hawkins told Mr Diack that 'we would do everything we possibly could' and someone gave Mr Diack an assurance reflected in the words 'we have given ... our word we will "spill blood" to achieve full repayment on that due date'.
Thus in conjunction with the extension was a strong commitment to achieve repayment by 28 July 1988, a commitment which may have been suggested by Bank of New Zealand but was taken up with vigour by Equiticorp. There were sound reasons why Equiticorp should have done so, reasons not dependent on any particular conduct or attitude of Bank of New Zealand but inherent in Equiticorp's situation. Equiticorp was well aware, quite apart from anything said to it by Bank of New Zealand, of its vulnerability to the loss of support from its major banker and of the need to maintain its credibility with Bank of New Zealand, and credibility was in jeopardy when the Uruz Pty Ltd debt could not be repaid on 30 June 1988. The constant refrain of embarrassment and apologies in the conversations immediately before and on that day is eloquent of Equiticorp's own views. In those circumstances, it seems to me that the complaint that Bank of New Zealand was insisting on repayment of the Uruz Pty Ltd debt by the time of the board meeting on 28 July 1988 although it had agreed to extend the repayment date to 30 September 1988 is substantially undermined. The real position was that the debt was to be repaid by 28 July 1988 notwithstanding the strict date of 30 September 1988 unless, in commercial terms, Equiticorp could afford to delay until the strict date."

In our opinion, Giles J was correct in determining that the appellants had not established any illegitimate pressure of the kind to which McHugh JA referred in Crescendo Management . The defence having been rejected, it is unnecessary to consider what, if any, relief would follow had it been established. As Giles J observed, underlying the doctrine of restitution of money paid under duress is the "unifying legal concept of unjust enrichment": Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221. Bank of New Zealand was owed a greater sum than the amount in the liquidity reserve. On the worst view of the matter from the perspective of Bank of New Zealand, Uruz Pty Ltd's debt was paid two months before it was due. Furthermore, Bank of New Zealand released security worth much more than the debt.

The challenge to Giles J's finding that Bank of New Zealand was not liable to the appellants for breaches by the appellants' directors under s 229 of the Companies (New South Wales) Code was abandoned in the appeal.

In our opinion the appeals should be dismissed with costs.