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

32 NSWLR 50

(Judgment by: Kirby P)

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:
Kirby P

The Court has before it one of the consequences of the many corporate collapses of the late 1980's. Involved in the appeal are various corporations in the Equiticorp Group of companies which operated principally in New Zealand and Australia. The lead banker of those companies was Bank of New Zealand. When the collapse came, the liquidators of two of the Equiticorp Group companies sought to prosecute certain claims against Bank of New Zealand upon the basis that they were entitled to recoup from it certain funds paid to it before the collapse but when the companies were in a situation of economic jeopardy.

The claims, relevant to the appeal, were framed alternatively, asserting that the payments were made to Bank of New Zealand:

(a)
Without authority of the companies involved;
(b)
In breach of the fiduciary duties owed by the directors of the companies in circumstances which sufficiently fixed Bank of New Zealand with knowledge of such breaches, obliging it to account to the companies for the sums received; and
(c)
Following economic duress exerted by officers of Bank of New

Zealand upon officers of, and others connected with, the companies which was so illegitimate and unconscionable as to entitle the companies to redress. The redress claimed varied according to the several causes of action relied upon. It included claims for moneys had and received; for equitable compensation and account; and for common law damages.

Bank of New Zealand resisted all of the claims. It asserted:

1.
That authority was proved or at least that, so far as Bank of New Zealand was concerned, there was such authority;
2.
That there was no breach of fiduciary duty on the part of the officers of the companies or, at least, if there was, that Bank of New Zealand was not liable to recoup or account for funds received by it for breaches by the officers of their fiduciary duties;
3.
That there was no economic duress but, at most, commercial pressure of the kind which was perfectly legitimate, which in turn resulted from commercial pressure existing upon Bank of New Zealand at the same time and was such that no remedy to the companies was available or called for;
4.
That in any case, in answer to the alleged want of authority or economic duress, the companies had sufficiently ratified the decisions impugned; and
5.
That, finally and in any case, any remedies available to the companies were ultimately provided by the law to permit rectification of any unjust enrichment extracted by Bank of New Zealand from the predicament of the companies. As Bank of New Zealand had itself released valuable share scrip and taken certain other steps, pursuant to the transfer of the funds complained of it, which in aggregate had a greater value than those funds, no remedy was available to the companies. If, within the Equiticorp Group, the share scrip was not properly dealt with, that was not the concern of Bank of New Zealand; nor did it give rise to the legal entitlements claimed against it.

Necessarily, I have stated the issues in terms of generality with some consequent loss of accuracy. But this is an extremely complex case. Some simplification is essential if the Court is to perform its function.

In the Commercial Division, Giles J dismissed the companies' claims.

Relevantly, he held that:

(a)
It had been established that Mr Allan Hawkins, the chief executive of the Equiticorp Group had effective control of all the companies in the group. Although not a director of one of the litigating companies, he had actual implied authority on behalf of those companies to take the impugned decisions and he did take those decisions;
(b)
No breach of fiduciary duty on the part of the directors of the litigating companies was shown by the application of the test accepted by all parties, viz, what an intelligent and honest person in the position of a director would do having in mind all relevant facts. Having reached this conclusion, the consequential question of whether, had a breach of fiduciary duty been shown, Bank of New Zealand was liable for the consequences of it in respect of the funds it had received as a result of it, did not arise;
(c)
Although Bank of New Zealand exerted commercial pressure upon the Equiticorp Group for the release of the funds in question, such pressure was not illegitimate. It did not therefore constitute economic duress of the kind which would give rise to a legal remedy in those who were subject to it.

There was a fourth head of claim litigated at the trial. This was based upon an asserted breach by directors of the duties imposed upon them by the Companies (New South Wales) Code , s 229(2), then in force. It was asserted that, by way of the right of revocation conferred by s 229(7) against the directors and the role of Bank of New Zealand in aiding, abetting, counselling or procuring the offence, Bank of New Zealand was, by virtue of theCompanies and Securities (Interpretation and Miscellaneous Provisions ) Act 1980 (Cth), s 38(1), and the common law, liable both criminally and upon a civil claim for the recoupment of the moneys lost as a result of the breach of s 229(2) of the Code. Giles J rejected that claim. A challenge to that decision was included in the grounds of appeal filed. But it was abandoned during argument.

At the outset of the hearing in this Court, a question arose as to whether Mr Hawkins should have been a party to the proceedings. He was not a party, but a witness at the trial. The Court was informed that he had been convicted and imprisoned for criminal offences in New Zealand. He was engaged there in defending substantial civil and criminal litigation. He was therefore unavailable for proceedings in Sydney.

The decision of Giles J is reported: see Equiticorp Financial Services Ltd ( NSW) v Equiticorp Financial Services Ltd (NZ ) (1992) 29 NSWLR 260. A number of the Equiticorp Group of companies had, during the course of the long litigation before his Honour, settled various claims as between each other which arose on the pleadings. Bank of New Zealand had an outstanding claim against one of the companies, Equiticorp Finance Ltd. No set-off having been found, based upon the rejected claims of the companies, and no other defence being raised to Bank of New Zealand's claim in that regard, Bank of New Zealand was held to be entitled to judgment against Equiticorp Finance Ltd.

Necessarily, in the conclusions upon the principal claims, no question of ratification by the companies, or of resistance by Bank of New Zealand to the remedies sought, arose to be decided.

It is from the orders disposing of the proceedings in the foregoing way that the relevant Equiticorp companies, Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), have appealed to this Court. The appellants accepted that they bore the onus of showing want of authority, breach of fiduciary duty and economic duress.

The primary hearing and the appeal:

The facts from which the parties invited the Court to derive its conclusions were extremely voluminous and complex. In effect, the Court was taken into the detail of many months of the corporate dealings of inter-related companies and their banks, principally Bank of New Zealand. The trial, before Giles J, once it commenced, lasted twenty-three days. There were nineteen volumes of trial documents. There were three volumes of exhibits. There were three additional volumes containing pleadings, affidavits and the judgment. Thus, twenty-five volumes in all.

The hearing before this Court lasted five days, all of which were fully consumed. The written submissions, which elaborated nearly 250 pages of argument and transcript, comprise hundreds of pages. In addition, Bank of New Zealand and the two litigating companies prepared, at the direction of the Court, narrative statements of facts which followed the Court's Practice Direction. Together, these statements comprise nearly 140 pages.

I record these statistics not out of complaint but to indicate the complexity of the factual and legal issues presented. If courts, especially appellate courts, are to perform their functions effectively in relation to such complex litigation, new procedures are plainly called for. Continuous oral argument, even supplemented by written submissions, presents difficulties for effective decision-making which will be obvious to the informed.

It is appropriate to say at the outset how much I have been assisted by the judgment of Giles J. It is a model of synthesis and clarity. His Honour's reasons carry their own conviction. After a careful presentation of extremely complex facts, he reaches the four principal legal questions posed to him. He answers these with clarity. In the circumstances, he did so with commendable speed and in remarkable brevity.

It would be less than honest to deny that, faced with such a decision and a mountain of appeal papers, submissions and argument, there is the strongest possible temptation to endorse the primary conclusion and to pass to other tasks of life, at once simpler and more congenial. Such human feelings are reinforced by a proper reflection upon the advantages which Giles J had in deciding this case. He had a longer time with it. He therefore had more time to consider the complex factual evidence. He had a larger opportunity to reflect upon the interesting and important issues of law presented for decision. In a case like the present, I have always thought that these considerations amount to infinitely more important advantages of the primary judge than the supposed capacity to tell truthful from untruthful witnesses by reason of their appearance, something science denies: see Lend Lease Development Pty Ltd v Zemlicka (1985) 3 NSWLR 207 at 209f.

To a very large extent at least, this is not a case where the oft repeated advantages of the primary judge restrain the appellate court in the performance of its functions: see Abalos v Australian Postal Commission (1990) 171 CLR 167 at 178 and cases there cited. Whereas the documentary evidence of the trial was enormous, the oral evidence was not. Bank of New Zealand called no oral evidence. None of its officers entered the witness box. Senior counsel for Bank of New Zealand, who took responsibility for that decision, justified it upon the basis that Bank of New Zealand's position was fully chronicled by contemporaneous minutes and records, all of which went into evidence. Neither could the written evidence of the Equiticorp Group of companies be challenged by Bank of New Zealand's officers. Nor did the bank wish to challenge the oral evidence given by Equiticorp's witnesses, notably Mr Allan Hawkins and the group treasurer from 1988, Mr Brian Fitzgerald. Some of the oral evidence especially of those two witnesses, was clearly relevant to the evaluation of the issues of authority, breach of fiduciary duty and economic duress. But this is not a case where the ultimate decision depended upon Giles J's believing some witnesses and rejecting the credit of others.

Essentially, the answer to the legal problems presented is to be found in a full appreciation of the detailed facts. That detail is overwhelmingly contained in contemporaneous letters, minutes, memoranda and financial statements-- all of which have been presented to this Court. To that extent, this is a case less like Abalos and more like Warren v Coombes (1979) 142 CLR 531. This Court has before it an appeal by way of re-hearing. It is only such an appeal which could justify the deep involvement which the Court was obliged to accept in the explanation of the facts of the case. As in Warren (at 551), this is a case where the Court is, generally speaking, in as good a position as the trial judge to decide on the proper inferences to be drawn from the facts which are undisputed or which, having been disputed, are established by his findings. We must, of course, give respect and weight to the judge's conclusion. We must especially do so in this case because of the considerations which I have already mentioned. But, in the words of Gibbs ACJ and Jacobs J and Murphy J in Warren (loc cit):


"... once having reached its own conclusion [the appellate court] will not shrink from giving effect to it."

In a sense, it is the extremely clear way in which Giles J has tendered the issues to this Court, by the way in which his judgment is presented, that affords the Court the opportunity to play its full role as envisaged by the Supreme Court Act 1970. Amongst the massive detail of the facts of this case are found issues of considerable importance for Australian company law:

(a)
To what extent may the effective "leading light" of a group of companies, who is not himself a member of the board of directors of an individual company in the group, make decisions on behalf of those companies later to be defended -- not as the ostensible acts of the companies sustained by the ignorance of outsiders as to their internal management-- but as done with the actual authority of the company implied from the relationship of that person to all companies in the group?
(b)
To what extent does the basal rule that directors must act bona fide for the benefit of the company as a whole, as expressed in Mills v Mills (1938) 60 CLR 150, submit to qualification or variation where the practical reality of the company's life includes its membership of an inter-connected group of companies and its involvement in a "round robin" of financial transaction involving the shifting of funds within the group? see Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 NSWLR 68 at 73f. Does the law acknowledge, and accommodate, the group relationship to the extent of permitting directors of various companies within a group to take into account the implications for one company of significant actions of outsiders affecting other companies within the group?
(c)
Where the directors have been involved in breaches of their fiduciary duties to the company as a whole, what knowledge is required to fix the company's bank with notice of the breach, in such a way as to render the bank liable to the company (its members and creditors) for transactions in which the bank was involved which affected the company, its members and creditors? and
(d)
When does pressure, such as that exerted by a bank on a customer in difficult economic times and, itself the result of pressure upon the bank of rules of the central bank, cross the line which separates permissible commercial pressure from unlawful economic duress which is unconscionable or illegitimate and gives rise to a claim for damages?

Again, these questions have been expressed in terms of generality. But now the time has come to descend into the detail of this case. I can do so with more confidence because the parties accepted that the broad outlines of the facts contained in Giles J's reasons were accurate. From their opposing standpoints, they each urged relatively minor corrections. In the case of the appellant companies, they argued that his Honour had failed sufficiently to attend to additional facts, said to be relevant. What follows is taken from my own appreciation of the facts. This, in turn, is built upon his Honour's reasons, as elaborated by the narrative statements prepared by the parties, as described above.

The Equiticorp Group of companies:

Equiticorp Finance Ltd was incorporated in 1971. It was then known as Associated Securities Finance Ltd. In 1980 it became Associated Midland Corporation Ltd. Its shareholders were the commissioners of the State Bank of Victoria and Midland International Holdings Ltd, a merchant bank. In mid-1987, the company was taken over by Equiticorp Finance Holdings Ltd. It remained a wholly owned subsidiary of that company, which in turn, was a wholly owned subsidiary of Equiticorp Australia Ltd.

The Equiticorp Group originated in New Zealand. It is enough to say that in June 1984, Equiticorp Holdings Ltd was floated on the New Zealand Stock Exchange. Its chairman was Mr Allan Hawkins. About 40.9 per cent of the shares of Equiticorp Holdings Ltd were controlled by Mr Hawkins or by interests associated with him. The balance of the shares in the capital of Equiticorp Holdings Ltd were held by members of the public as a result of the float.

With the passing of time, the group of companies expanded. At its height there were over 140 companies associated with the group. They spread within New Zealand and then to Australia, Hong Kong, England and elsewhere. They did so through a series of subsidiary and related companies, all within the group. Both sides to the present contest agreed (and the evidence showed) that the group comprised basically two separate arms. These were the industrial and trading concerns (the "Industries Group") and those companies involved in the lending of money (the "Finance Group"). At the head of the

Industries Group was Equiticorp Industries Group Ltd. This was 100 per cent owned by Equiticorp Holdings Ltd. For the purposes of the proceedings, the relevant companies in the Industries Group were Equiticorp Industries Ltd; Equiticorp Tasman Ltd and Uruz Pty Ltd. Neither Equiticorp Tasman Ltd nor Uruz Pty Ltd were wholly owned members of the Equiticorp Group.

At the head of the Finance Group was Equiticorp Finance Group Ltd. This was 100 per cent owned by Equiticorp Holdings Ltd. The Finance Group was, in turn, divided. There was the Australian Finance Group and the New Zealand Finance Group. The Australian Finance Group comprised amongst others) Equiticorp Australia Ltd, Equiticorp Finance Ltd, Equiticorp Financial Services Ltd -- a company incorporated in New South Wales and Equiticorp Finance Holdings Ltd. The New Zealand Finance Group comprised Equiticorp Finance Group Ltd and Equiticorp Financial Services Ltd -- a company incorporated in New Zealand. The relationship between the corporations just mentioned, and their relationship with each other within the Equiticorp Group, is shown in the attached diagram (at 59): In May 1988, coinciding with some of the events which will later be described, it became known that a restructuring programme for the Equiticorp Group was planned for the second half of 1988. It was intended that the ultimate parent company should become Equiticorp International Plc as a non-resident company based in the United Kingdom with assets in Hong Kong. Bank of New Zealand was the principal banker to the various corporations in the Equiticorp Group, although other banks were occasion ally involved with various of the companies and their activities.

Diagram Equiticorp Group of Companies

The companies and their directors:

It is necessary to say something about the two appellant companies. When the Equiticorp Group finally collapsed, liquidators were appointed on 23 January 1989. They now control both of the appellant companies' affairs. A receiver was appointed to Equiticorp Finance Services Ltd (Aust) on the following day.

Equiticorp Finance Ltd was a finance company. It provided consumer and commercial finance on leasing, real estate, hire purchase and consumer credit transactions. As previously stated, Equiticorp Finance Ltd commenced under another name in 1971. It was acquired in June 1987 by a wholly owned subsidiary of Equiticorp Australia Ltd.

Equiticorp Finance Services Ltd (Aust) was a finance company which raised money from the public, mostly from small investors. From 29 July 1986, Equiticorp Financial Services Ltd (Aust) was subject to the terms of a trust deed. Under the deed, National Mutual Life Nominees Ltd was appointed trustee. Pursuant to this deed, Equiticorp Financial Services Ltd (Aust) charged its assets and undertaking to the trustee to secure its obligations to debenture holders. The trustee required (amongst other things) that the business of Equiticorp Financial Services Ltd (Aust) be conducted in a proper and efficient manner (cl 7.05(b)) and that certain liquidity ratios be maintained, suitable to a company involved in borrowing and lending money to the public (cl 8.01). The directors of Equiticorp Financial Services Ltd (Aust) were obliged to give regular certificates to the trustee concerning the maintenance of these ratios. Equiticorp Financial Services Ltd (Aust) was also subject to restrictions upon its transactions, including those as a member of Equiticorp Group. Thus, under cl 7.02(a) of the trust deed, it covenanted that it would not, without prior consent of the trustee in writing, dispose of its undertaking, or its assets, to any non- guaranteeing subsidiary or to its holding company or to any subsidiary of its holding company which was not a guarantor, otherwise than for full consideration and on the condition that such consideration was paid either wholly or partly on settlement, and any portion thereof not so paid be secured to the satisfaction of the trustee. By cl 9.01(q) of the trust deed, a breach of covenant on the part of Equiticorp Financial Services Ltd (Aust), if the default continued for more than fourteen days, rendered the security given by Equiticorp Financial Services Ltd (Aust) enforceable by the trustee.

This entitled the trustee to take possession of the assets of the company and to realise them for the benefit of secured creditors. These are not unfamiliar provisions governing the corporate arrangements of a company raising funds from the public and bound to a trustee as a guarantor for the financial probity of its transactions.

Two other corporations should be mentioned in this cast of corporate dramatis personae. Equiticorp Tasman Ltd, a member of the Industries Group was a public company listed on the Australian Stock Exchange. Thirty-one per cent of its issued capital was owned by Feltex International Ltd (later Feltrax International Ltd). Equiticorp International Pty Ltd owned 43 per cent of the capital. The balance was held by members of the public. As to Feltrax International Ltd, only 56 per cent of its issued capital was held by Equiticorp International Pty Ltd. The balance was held by members of the public.

Giles J recorded some doubt about the exact constitution of the relevant boards of directors of the two appellant companies, Equiticorp Finance Ltd and Equiticorp Finance Services Ltd (Aust). However, it appears that, at material times, there were some common directors. They comprised Mr David Adams, Mr Brian Fitzgerald, Mr Dennis Cowell, Mr David Crick, Mr Brian Chittenden and Mr Dennis Teroxy. At least, it was not seriously contested that they were directors. Mr Allan Hawkins was a director of Equiticorp Finance Services Ltd (Aust). He held no office (including director) of Equiticorp Finance Ltd. Mr Cowell was the managing director of Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd. Mr David Morbey held no office with either Equiticorp Financial Services Ltd (Aust) or Equiticorp Finance Ltd. He was the secretary of Uruz Pty Ltd. Mr Trevor Daley held no office with either appellant company. The significance of these facts will appear.

Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd held board meetings from time to time. Decisions affecting these companies were made also at board meetings of Equiticorp Australia Ltd where the common concerns of the Australian Finance Group were discussed. Such meetings were attended by the directors of Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd, together with senior management of both companies. The liquidity requirements of the companies were, as the minutes disclose, regularly discussed, as one would expect of directors and managers of companies involved in financial operations, one of which (Equiticorp Financial Services Ltd (Aust)) was bound, as described, to a trustee. The concerns of both the Australian Finance Group and the New Zealand Finance Group were also dealt with at the board meetings of Equiticorp Finance Group Ltd. No evidence was adduced before Giles J that any of the corporations mentioned (and in particular Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) had, by resolution of the directors or otherwise, conferred expressly on Mr Allan Hawkins actual authority to commit Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust) to transactions affecting the liquidity reserves of either company.

Origin of the Uruz Pty Ltd facility:

By a letter dated 1 June 1987, Bank of New Zealand offered to Equiticorp Tasman Ltd (a member of the Industrial Group) or to a wholly owned subsidiary of that company, a facility of $200 million to finance the purchase of up to 100 per cent of the ordinary shares in Monier Ltd. The facility was for a term of six months. It was to be "taken out" by a "syndicated three year facility" to be arranged by Bank of New Zealand. It was to be secured by lodgment of Monier shares and (if the borrower were a wholly owned subsidiary of Equiticorp Tasman Ltd and not Equiticorp Tasman Ltd itself) a guarantee from Equiticorp Tasman Ltd. Uruz Pty Ltd was chosen as the vehicle for this transaction. It was a wholly owned subsidiary of Equiticorp Tasman Ltd.

Bank of New Zealand acted as the lender and agent for this transaction. On 21 July 1987, the loan agreement between Uruz Pty Ltd as borrower and Equiticorp Tasman Ltd as guarantor was executed with Bank of New Zealand"as a participant and as agent for the participants". Another party to the agreement was Vajudi Pty Ltd, itself a wholly owned subsidiary of Uruz Pty Ltd and the purchase vehicle for the Monier shares. Although it was contemplated that another bank or financial institution might join Bank of New Zealand as a participant in the provision of the facility, none did. Bank of New Zealand alone stood exposed.

By 21 October 1987, Bank of New Zealand had advanced to Uruz Pty Ltd $165 million. The remaining $35 million was advanced on 21 December 1987.

Clause 9 of the loan agreement contained a provision which referred to the "repayment dates". This was defined to mean the first anniversary of the date of the loan agreement. By cl 9 the participants agreed to review the continuation of the facility:


"... not later than 1 December 1987 with a view to extending the Repayment Date by two years. If all the 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."

By cl 8 the borrower was bound to repay the principal outstanding "on the repayment date".

At the end of November 1987, doubtless in the aftermath of the stockmarket crash of October 1987, Bank of New Zealand commenced a review of its exposure to large corporations. Equiticorp Holdings Ltd and its subsidiaries, obviously fell within this category. Bank of New Zealand's management required a report, confirming that all exposures were in order, to be produced by 27 November 1987. The review was to include exposures treated"on a stand alone basis". The Uruz Pty Ltd debt was one of these. Pursuant to this requirement, on 27 November 1987, Mr Leigh Scott- Kemmis reported to Bank of New Zealand's general manager investment banking, Mr Peter Travers. The report included reference to the acquisition of the Monier shares by Equiticorp Tasman Ltd:


"Our intention was to sell our exposure down to other banks whilst Equiticorp went about reaching a joint venture agreement .... We have found it somewhat difficult to sell the loan down .... The fall in the world stock market has brought all these negotiations to a halt. The Bank's arrangement with Equiticorp were to maintain at all times 140% cover on market value. We informed Equiticorp ... that we were no longer prepared to accept the $4 per share value and would now value Monier at net asset backing of $2.75 per share; we therefore asked Equiticorp to top up their arrangements to maintain 140% cover at $2.75 per share. They accepted that position and topped up immediately... It is then the intention of the Equiticorp Group to purchase the Monier businesses from Equiticorp Tasman and to integrate them with other industrial activities of the Equiticorp/Feltex operations. They are not entirely sure at this point how they will accomplish this. ...

We are in the process of negotiating with Equiticorp Tasman the ongoing financing arrangements to see them through this restructuring. They are very aware of our urgent desire to halve our exposure. ... In conclusion not a bad transaction for Equiticorp. Hawkins negotiating skill won through again and the Bank's exposures and risks are manageable."

On 1 December 1987, Mr Travers wrote to Mr Scott-Kemmis indicating his dissatisfaction with the bank's exposure to Equiticorp. He had believed that the approval for the injection of Bank of New Zealand funds for the Monier operation was upon an assumption of an equal draw-down with other bank. The State Bank of South Australia was mentioned. He demanded to know the reason for the variance: "At a time when the Australian Rating Agency is giving us a hard time, this sort of situation is the last thing we need."

The result of this sharp memorandum was a note of 4 December 1987 from Mr Michael Culkin, senior manager of Bank of New Zealand in Australia to Mr Travers. This indicated that Equiticorp Tasman Ltd had been advised "of limit reduction to $A165 million". Furthermore, Equiticorp Tasman Ltd had been advised that Bank of New Zealand's exposure was to reduce to $A80 million "within the short term". Mr Culkin told Mr Murray Boyte, managing director of Equiticorp Tasman Ltd, that Bank of New Zealand wanted repayment in full of its $165 million facility with a reduction of the Equiticorp Group Tasman Ltd loan "by half immediately". Mr Travers was not impressed with any of these moves. He considered that Bank of New Zealand "shouldn't be anywhere near $165 million":


"We should be requiring application of the $165 million in specific reduction of our present position and I want BNZA to address and achieve this as a matter of real urgency."

Mr Hawkins of the Equiticorp Group must have got wind of this pressure. On 10 December 1987, he sent a soothing letter to Mr Travers claiming that Equiticorp Holdings Ltd's current "unused facilities" were $860 million. Nevertheless, under the pressure of Mr Travers' urgent memorandum, negotiations for the repayment of the Equiticorp Tasman Ltd indebtedness continued. This was despite the fact that the "repayment date" was taken to be 30 June 1988.

On 18 December 1987, within Bank of New Zealand, a decision was made that exposure of Bank of New Zealand to the Equiticorp Group was to be increased to permit it to go ahead with another bold initiative of the Equiticorp Industrial Group, viz, the purchase of New Zealand Steel Ltd. The price of this additional facility was that Equiticorp Tasman Ltd was to be required on 15 January 1988 to repay, in full, its indebtedness to Bank of New Zealand. A note to this effect was sent to Mr Culkin of Bank of New Zealand in Australia. But, as Giles J found, there was no evidence that this stern determination was conveyed to "anyone on the Equiticorp side". The appellants contended that Mr McCredie informed Equiticorp of Bank of New Zealand's requirement of full repayment by 15 January 1988. However, the reference given in proof of this is, as Giles J stated, entirely internal to Bank of New Zealand and Bank of New Zealand in Australia.

Nevertheless, on the same day, 18 December 1987, Equiticorp Holdings Ltd, Bank of New Zealand and Equiticorp Tasman Ltd entered into a deed by which Equiticorp Holdings Ltd and Equiticorp Tasman Ltd covenanted that they would not engage in transactions with related or associated companies and then only "on an arm's length" basis.

Bank of New Zealand and the financial position of the Industrial Group:

As stated above, the Uruz Pty Ltd facility was subject to review by Bank of New Zealand in December 1987. From 14-17 December 1987, a review of the entire Equiticorp Group was conducted by Bank of New Zealand. The review, as at 21 December 1987, relied on figures from September 1987, that is, before the stock market crash on 20-21 October 1987. These figures recorded total assets of the group of $467,799,000 with total liabilities of $164,136,000 and tangible nett assets worth $301,663,000. Bank of New Zealand concluded that the Equiticorp Group's liquidity, as a whole, was "tight". A number of variables were identified which might exacerbate the situation. With respect to the Industrial Group, specific concern was noted in respect of cash flows prepared for Equiticorp Industries Group Ltd; the fact that Equiticorp Industries Group Ltd was in a cash deficit position and was being funded by another company; that it had fully pledged a major shareholding; that it had very little unpledged scrip of other investments; that Equiticorp Industries Group Ltd was very vulnerable to further decline in share prices including of Feltex International Ltd (later Feltrax International Ltd); and that Equiticorp Tasman Ltd was owed $140 million by Equiticorp Holdings Ltd. Equiticorp Holdings Ltd's liquidity was described as "tight". There were a number of issues which had not been resolved. They could place Equiticorp Holdings Ltd into a cash deficit position. One of these was any change in Equiticorp Holdings Ltd's ability to raise additional borrowings.

One can only pause to imagine the impact of this extremely cautious memorandum on the insistent Mr Travers of Bank of New Zealand. However that may be, on 29 December 1987, Bank of New Zealand issued an"information memorandum" relating to the Uruz Pty Ltd facility. This was part of a redoubled effort to shift some of its exposure in that regard. The memorandum was unsuccessful.

The same December review of the Equiticorp Group position also looked at the Finance Group. Bank of New Zealand reported that there was a "comfortable level" of available funds within that arm of the group, provided normal trading conditions continued. It concluded that the Finance Group was in a "sound position under normal trading conditions" but that it should "increase liquid assets by approximately $100 million." Bank of New Zealand noted that, in the Industrial Group, there was a cash deficit, funded by Equiticorp Finance Group Ltd. This was permitted under Equiticorp Finance Group Ltd's negative pledge deed. Bank of New Zealand noted that it should support "Equiticorp" and that any sudden withdrawal of support by Bank of New Zealand might affect Equiticorp's reputation in the marketplace. Specifically, the report concluded:


"Rumours in the marketplace could ... start a run on the Finance Group which would have dire consequences. In order to forestall any potential short term liquidity problems Equiticorp has approached the Bank with a view to obtaining a standby line whereby the Bank would factor approved receivables assigned by Equiticorp...

Due to the size of the Bank's exposure to Equiticorp it is imperative that the Bank acts and is seen to be acting in a responsible and supportive role ...."

On 12 January 1988, Equiticorp Australia Ltd prepared an interim report for Bank of New Zealand on the state of the Equiticorp Group after the stockmarket crash. Equiticorp Australia Ltd's report was generally optimistic, including as to cash flow.

Meanwhile, Bank of New Zealand was calling for the reduction of the Uruz Pty Ltd facility. On 15 January 1988, the facility was reduced by $135 million to $65 million. Bank of New Zealand for its part agreed, on that day, to an extension of the time for repayment of the balance of the loan to 30 June 1988. The agreement was effected by a supplementary agreement dated 6 January 1988. This added Equiticorp Holdings Ltd as guarantor of the indebtedness to Bank of New Zealand. By this stage, the agreement was between Uruz Pty Ltd (as borrower), Equiticorp Tasman Ltd, Vajudi Pty Ltd (mortgagor) and Equiticorp Holdings Ltd (as guarantor). It amended the original loan agreement. Specifically, it amended the repayment date to read: "Repayment date means 30 June 1988 or such later date as the Participants may agree."

Despite this respite, further problems loomed for the Equiticorp Group. Most urgent amongst these was the provision of funds for the purchase of New Zealand Steel Ltd on 20 March 1988. It is unsurprising, therefore that, from about this time, Bank of New Zealand instituted regular monthly meetings attended by Mr Hawkins, Mr P J Stanes (managing director of Equiticorp Holdings Ltd) and other Equiticorp personnel. At some of these meetings the continuing exposure of Bank of New Zealand to Uruz Pty Ltd, and to the Industrial Group of which Uruz Pty Ltd was part, were discussed. Details of the cash flows to the Industrial Group were provided to Bank of New Zealand. The memoranda covering the meetings indicate that the cash flows continued to cause Bank of New Zealand concern. Specifically, in a memorandum of 10 March 1988, Mr McCredie, manager, Corporate Financial Services of Bank of New Zealand, analysed the Industrial Group's cash flow. He saw problems arising from the re-financing occasioned by the acquisition of New Zealand Steel Ltd and the loss of value of the share scrip assets held by Equiticorp Industries Group Ltd.

Mr McCredie's memorandum triggered a concern which was to take on increasing significance as explaining some of the subsequent actions of Bank of New Zealand. By 14 March 1988, officers of Bank of New Zealand were becoming anxious that Bank of New Zealand's exposure to the Equiticorp Group might be in breach of the prudential limits established by the Reserve Bank of New Zealand, that country's central bank. The result of this anxiety was a meeting, on 14 March 1988, to discuss Bank of New Zealand's exposure to the Equiticorp Group. Mr Hawkins and his cohorts were there. So were officers of Bank of New Zealand. The outcome was a conclusion that the Equiticorp Group's liquidity was "tight" but "manageable". A memorandum to this effect was sent to Mr Travers. A letter of the same date to Mr Hawkins proposed reduction of Bank of New Zealand's exposure to the Equiticorp Group. Specifically, it required that the Uruz Pty Ltd facility should be repaid by 30 June 1988. By letter of 16 March 1988 Mr Hawkins accepted this proposal. He asserted that Bank of New Zealand should consider a number of facilities, including the Uruz Pty Ltd facility, as "stand alone" because of the existence of trust deeds which placed restrictions upon inter-company transactions.

Mr Hawkins' agreement, in his letter of 16 March 1988, came against the background of discussions which had taken place between him and Mr Travers before 14 March 1988. Involved in those discussions was consideration of the funding levels of the Equiticorp Finance Group. In his oral evidence, Mr Hawkins spoke repeatedly of the "high level of communication" and "trust" between himself and officers of Bank of New Zealand. He said that his conversations with Mr Travers had:


"... led me to understand what his requirements were and the pressure which he was under from the Reserve Bank of New Zealand to get his exposures in line, not only with Equiticorp but with other companies."

The actual words used by Mr Hawkins in his letter were: "We look forward to the review of the $200 million limit which we understand will take place around 30 June 1988."

"Review" is somewhat different from "reduction", especially as understood in a banker's letter written in hard economic times, in conditions of tight liquidity, difficulties of raising funds from other sources and pressure coming on both Bank of New Zealand and the Equiticorp Group companies from differing directions. There is no evidence that Mr Hawkins went to these meetings with Mr Travers, or wrote the letter mentioned, with the express actual authority of any of the Equiticorp companies, least of all of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). He was just the moving spirit of the Equiticorp Group. He was treated as such by Mr Travers and Bank of New Zealand.

Through April 1988 the cash flow position of members of the Equiticorp Industrial Group remained tenuous. The cash balances of Equiticorp Finance Group Ltd were forecast in April to be in deficit for May, June and July. Concern was expressed within Bank of New Zealand that these deficits could not be funded by the Finance Group. By this time Mr Geoffrey Holland, of Corporate Financial Services Bank of New Zealand, considered that the Industrial Group was in a tenuous liquidity position. This was especially serious because of the programme of the Industrial Group to acquire New Zealand Steel Ltd. As May passed and June 1988 arrived, Bank of New Zealand was aware that its only prospect of securing repayment of the Uruz Pty Ltd facility by 30 June 1988, as proposed to Mr Hawkins by Mr Travers, would be if a re-financing of the facility were put in place. It was hoped by all participants that such re-financing would be accepted by two facilities, known respectively as "Wardley" and "Aurora". This hope was to be dashed. Yet without it, Uruz Pty Ltd and the Equiticorp Industrial Group, in their conditions of tenuous liquidity, had no other realistic source of short- term reduction of the exposure of Bank of New Zealand, as Mr Travers made it plain Bank of New Zealand required.

On 7 June 1988, Mr Fitzgerald sent Mr Hawkins, who was then in Europe, the grim news about the Industrial Group's expected cash deficits for June and July. In a further facsimile on 16 June 1988, Mr Fitzgerald described the Industrial Group's cash position as "very bad". Like messages at a grim moment in a war, the implications of the increasingly serious liquidity position of the companies in the Equiticorp Industrial Group came to Mr Fitzgerald's notice. He passed them on to Mr Hawkins. By 28 June 1988, it was clear that the Wardley/Aurora facilities would not be in place by 30 June 1988, the due date for the repayment of the Uruz Pty Ltd facility. The financial statements of Uruz Pty Ltd, as audited, contained the plaintive certificate of the directors that:


"There were reasonable grounds to believe that the company will be able to pay its debts, with the support of the holding company, as and when they fall due."

But Uruz Pty Ltd had its own working capital deficiency of approximately 13.4 million.

Through all of this, Mr Fitzgerald, in his messages to Mr Hawkins, was trying to keep a brave and optimistic face. The Wardley/Aurora facilities were presented as the potential Trafalgar that would turn the tide of the apparently approaching perils. Yet, in his cash flow to Mr Hawkins of 16 June 1988, even Mr Fitzgerald was forced to describe the short-term situation"with regard to cash as very bad". So far as the New Zealand Finance Group's liquidity was concerned, he described this as:


"... extremely bad with the debenture outflow over the next few weeks ... and EAL's situation, having to support EGF is now about as bad ... 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. ... the biggest impediment seems to be the cashflow of Equiticorp International. No matter how we look at it the day to day cash flow continues to be very negative."

All of this was stated at a time when Mr Fitzgerald still lived in hope that the Wardley/Aurora facilities would arrive by 30 June 1988:


"If all of the above occur by 30/6/88 we will get through alright. But to be honest the likelihood of this occurring is getting less likely by the day. ... 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 we are getting into every corner to enable us to get through this very difficult period -- but so much is up in the air -- the standby is a must ."

It is necessary to paint, in full, the dramatic picture as it was emerging in order to understand, in its context, the establishment of the liquidity reserve which was soon to follow. For the moment, it is enough to say that the Uruz Pty Ltd facility was not repaid. Mr Fitzgerald negotiated with Bank of New Zealand an extension for such repayment to 30 September 1988. Bank of New Zealand took, as additional security, a guarantee from Equiticorp International Pty Ltd and a deed of lien in respect of 40 million shares held by Equiticorp International Pty Ltd in the capital of Feltrax International Ltd. At the time this relief was afforded, it was still hoped that at least the Wardley facility would become available to relieve the liquidity concerns of the companies in the Equiticorp Industrial Group. However, those concerns did not diminish. The board of Equiticorp Holdings Ltd on 10 July 1988 heard a report that the group liquidity position was as bad as it had ever been. The Industrial Group was providing the main drain on the cash flow. The only way to resolve this, as Mr Fitzgerald kept emphasising, was to liquidate certain assets. By memorandum of 18 July 1988 Mr McCredie of Bank of New Zealand considered that Equiticorp Holdings Ltd's liquidity was tight but should be manageable over six months, provided the Wardley facility, expected to be $330 million, was secured to improve the liquidity position of the entire Equiticorp Group.

Financial position of the appellants before the liquidity reserve:

From the foregoing it will have emerged that, from the stockmarket crash in October 1987 until July 1988, the two appellant companies, Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) were, like all members of the Equiticorp Group, in a position of tight liquidity. As early as November 1987 the board of Equiticorp Australia Ltd, which wholly owned Equiticorp Financial Services Ltd (Aust) and wholly controlled Equiticorp Finance Ltd, noted the tight liquidity and that it would need to be monitored on a day to day basis. Similar views were repeated at Equiticorp Australia Ltd board meetings in January, February, March and June 1988. At the meeting on 21 June 1988, which was the last one prior to the transaction which is impugned by the appellants, the Equiticorp Australia Ltd board noted that the Australian Finance Group's liquidity was tight, with all committed facilities being fully drawn down and all uncommitted facilities being drawn down where possible.

This estimate of the financial position and liquidity of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) was shared by Bank of New Zealand. During the period in question its officers were concerned about the cash flow projections, the vulnerability of the Finance Group to market rumours, the inadequate borrowings and deposit ratio and the need to build up liquid assets. Bank of New Zealand memoranda generally showed an estimate that the Finance Group was in a sound position, under normal trading conditions. However, given the state of the equities market following the stockmarket crash, Bank of New Zealand was of the view that the Finance Group should urgently seek to improve its liquidity position. The strategy to be adopted to achieve this was to obtain standby arrangements by factoring receivables.

As a response to the shared concerns, the Australian Finance Group reported regularly to Bank of New Zealand. It did so both in writing and by telephone calls and visits by officers. The affairs of the Group were also discussed at regular meetings between representatives of Bank of New Zealand (notably Mr Travers) and of Equiticorp interests (notably Mr Hawkins). At one of these meetings it was agreed that the Finance Group would provide Bank of New Zealand with monthly updates on its financial position. It is reasonably clear from the memoranda of these meetings (such as that on 14 March 1988) that Bank of New Zealand considered the liquidity of the Finance Group as a point of particular vulnerability. By letter of 14 March 1988, Bank of New Zealand wrote to Mr Hawkins at Equiticorp Holdings Ltd:


"You have already and are continuing to reduce the business and funding levels of your Finance Group, also the matching of your receivables and deposit cost flows. You know our view that this is an area of particular vulnerability during these volatile and sensitive times and we would encourage you to view the strengthening of this area of your Group as being of the highest priority ". (Emphasis added.)

Bank of New Zealand's concern about the vulnerability of the Finance Group was also reflected in a letter of 7 April 1988 to Mr Curtayne (Equiticorp Industries Group Ltd). By that letter, Bank of New Zealand requested further information regarding the Finance Group and a maturity analysis of the Australian finance operation with details of the unused and uncommitted facilities which could be drawn down.

On 10 May 1988, a confidential background memorandum was provided for the information of the major lenders to the Equiticorp Finance Group. Bank of New Zealand was one recipient. By that memorandum, Bank of New Zealand was informed that:

1.
Equiticorp Financial Services Ltd (Aust) continued to raise funds through debenture markets and by lending in the commercial finance market;
2.
Equiticorp Financial Services Ltd (Aust) borrowings conformed to a debenture trust deed with small investors as the preferred source of funds;
3.
The selection of the group company in which assets were written was based on the requirements of the various borrowing covenants and on the availability of borrowing capacity suitable for the transaction in question;
4.
The three companies in the Equiticorp Australia Ltd group were separately funded by the two finance companies (Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Holdings Ltd) and were managed from three branches in Victoria, New South Wales and Queensland;
5.
The relatively short period of operations had resulted in the committed facility limits which were small in relation to total borrowings but that this broad borrowing base was a positive factor during a period of credit market contraction, such as followed the stockmarket crash of October 1987;
6.
Equiticorp Australia Ltd group policy had been to maintain substantial unutilised standby facilities for potential periods of demands on liquidity. The prudence of this policy had been borne out after the October crash. But this had resulted in utilisation of lines which had reduced the liquidity level available. Negotiations were therefore underway with a number of banks to restore standby lines to the desired conservative levels. In the interim, liquidity was adequate because of positive cash flows generated by the liquidation of the consumer portfolio. This had generated regular instalment cash flows, with commercial instalments, of approximately $15 million per month; and
7.
The group policy was to maintain a liquidity reserve in the form of unused committed funding loans, call advances and bank securities sufficient to cover 100 per cent of all call advances and three months projected lending commitments. Current unused facilities represented 10 per cent of total Equiticorp Australia Ltd group committed facilities. Negotiations were therefore underway to re-establish the conservative group position. Despite this apparently responsible and cautiously optimistic memor andum, the Australian Finance Group's liquidity position did not improve. That position was as described in Mr Fitzgerald's letter to Mr Hawkins of 7 June 1988 (above). The cash flow forecasts therefore came to be seen as "extremely dangerous".

It was to meet this predicament that Mr Fitzgerald approached Bank of New Zealand to provide a standby facility of $50 million to Equiticorp Australia Ltd as a liquidity reserve. Bank of New Zealand was informed that the purpose of the reserve was as a:


"... standby facility to EAL of up to A$50 million for a period of two calendar months commencing June 27, 1988. EAL have a number of uncommitted lines from merchant banks and there is a possibility that some of these merchants will call upon EAL to repay prior to June 30th ... In order to provide assistance it is proposed that the Bank sub- participate in the funding of loans made by EAL to its clients."

The liquidity reserve is created:

The need to create the reserve came to the fore in June 1988. On 24 June 1988, Mr Fitzgerald approached Mr Scott-Kemmis (Bank of New Zealand in Australia). It was agreed that Bank of New Zealand would provide funds by purchasing receivables to be sold by the Australian Finance Group. These were to be subject to an option in favour of Bank of New Zealand to call for re-purchase of the receivables. Mr Fitzgerald informed Mr Scott-Kemmis that the liquidity reserve could not be used without his personal approval. He explained that the funds were required to create a "liquidity buffer" for the Australian Finance Group because of the concern that the withdrawal of uncommitted lines would place Equiticorp Australia Ltd and its subsidiaries (including Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd) in a financially embarrassing position. As a consequence of Mr Fitzgerald's conversations with Mr Scott-Kemmis, Equiticorp Finance Ltd, Equiticorp Financial Services Ltd (Aust) and Equiticorp Australia Ltd sold receivables to Bank of New Zealand as follows:

Equiticorp Finance Ltd $ 4,720,952.96
Equiticorp Financial
Services Ltd (Aust)
$ 7,010,515.68
Equiticorp
Australia Ltd
$35,423,653.14
TOTAL $47,155,121.78

Board meetings of Equiticorp Finance Ltd, Equiticorp Financial Services Ltd (Aust) and Equiticorp Australia Ltd apparently approved these transactions. On 30 June 1988, the proceeds of the sales of the receivables were deposited into the accounts with Bank of New Zealand in Australia of Equiticorp Finance Ltd, Equiticorp Financial Services Ltd (Aust) and Equiticorp Australia Ltd as follows:

Equiticorp Finance Ltd $19,234.027.25
Equiticorp Financial
Services Ltd (Aust)
$ 7,010,515.68
Equiticorp
Australia Ltd
$20,910.578.85
TOTAL $47,155,121.78

The cheques drawn by Bank of New Zealand conformed to instructions contained in a letter from Mr Fitzgerald to Mr Semple of 30 June 1988. Giles J found that the creation of the liquidity reserve was really the act of Mr Fitzgerald rather than of the boards of the respective companies in the Australian Finance Group. He concluded that some of the persons, shown as being present at the board meetings bearing date 28 June 1988, were not consulted. One (Mr Vincent) was probably not a director either of Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust). These conclusion should be accepted. But so should his Honour's other conclusion:


"BNZ did not actively contest this beneficial ownership, and ultimately admitted that it had agreed to accept the validity of a later re-allocation as at and from 30 June 1988. ..."

The position reached by 30 June 1988, in respect of each of the appellant companies, was as follows. Equiticorp Financial Services Ltd (Aust)'s entitlement to the deposits held with Bank of New Zealand by the Equiticorp Australia Ltd group was $17,635,555.92. This sum comprised $10,625,040.24 of receivables sold by Equiticorp Australia Ltd to Bank of New Zealand and deposited in an account in the name of Equiticorp Australia Ltd but held on trust for Equiticorp Financial Services Ltd (Aust) together with the $7,010,515.68 of receivables sold by Equiticorp Financial Services Ltd (Aust) on 30 June 1988 and deposited into an account in the name of that company as above.

Equiticorp Finance Ltd's entitlement to the deposits held by Bank of New Zealand was $29,519,566.29. This comprised $10,285,538.61 of receivables sold by Equiticorp Australia Ltd to Equiticorp Finance Ltd and deposited in the name of Equiticorp Australia Ltd but held in trust for Equiticorp Finance Ltd together with the $19,234,027.68 as set out above deposited into Equiticorp Finance Ltd's account. The first of these figures corresponded with the receivables sold by Equiticorp Australia Ltd to Equiticorp Finance Ltd in January, February and June 1988.

On 22 July 1988, the deposited liquidity reserve had fallen (by reason of a debt paid by Equiticorp Finance Ltd) to $44,460,976.85. Certainly, at the end of July 1988, Bank of New Zealand was aware of the purpose of the liquidity reserve. Indeed, it had been partly Bank of New Zealand's repeated expressions of concern that had propelled Mr Fitzgerald into creating it. With the creation of the reserve, the Australian Finance Group's position improved considerably. This was reflected in meetings held between Bank of New Zealand and Equiticorp personnel on 13 and 14 July 1988. The Finance Group's position, so far as liquidity was concerned, was described as "sound". In the case of Equiticorp Financial Services Ltd (Aust), the sale of the"June receivables" had supplied that company with what was effectively its only liquid asset.

This rosy perspective of the Finance Group did not last. In a report prepared by Bank of New Zealand for a meeting in Wellington, New Zealand on 26 July 1988, the liquidity of the Finance Group, including that in Australia, was described as dangerously low. A factor in this consideration was seen to be the reaction of Bank of New Zealand in Australia in discounting NZ$50 million Australian receivables repayable in two months. Another report, also dated July 1988, recorded that the level of liquid assets in the Finance Group was too low: resulting in liquidity concerns about the Finance Group both in Australia and New Zealand.

These reports, and the information in them, were available to Bank of New Zealand at the time of its meeting on 26 July 1988 with Messrs Hawkins and Curtayne. It is essential to view the conduct of Bank of New Zealand at that time in the context of its own reports. These sounded warning alarms concerning (relevantly) the liquidity position of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust).

The failure to repay the Uruz Pty Ltd debt:

Pursuant to the supplementary agreement of January 1988, the repayment date for the Uruz Pty Ltd facility was to be 30 June 1988. That date loomed ominously close. In May and June 1988, Bank of New Zealand was being assured that the facility would be repaid from the proceeds of funds to be provided by Wardleys. However, by 28 June 1988, it became clear that the Equiticorp Group parties to the varied loan agreement would not be in a position to discharge the debt, the Wardley facility having not materialised. On 29 June 1988, in a memorandum by the Equiticorp Group to Bank of New Zealand in New Zealand, it was made plain that the Equiticorp Group would be unable to repay the $65 million borrowings for the Monier take- over by 30 June 1988, as promised. Instead, it offered A$30 million against certain Feltrax International Ltd share scrip controlled by Equiticorp Tasman Ltd until 30 September 1988. Various financial projections were provided to Bank of New Zealand.

Bank of New Zealand responded with a "strong protest" voiced on 29 June 1988 by Mr Ron Diack, chief manager, Corporate Financial Services, Wellington to Mr Fitzgerald. To Mr Grant Adams, who was effectively second in command to Mr Hawkins within the group, Mr Diack expressed the"extreme embarrassment of the current situation". The failure of the Wardley facility to materialise was blamed. Mr Diack condemned the bad handling of the "first major reduction" which had been agreed. He asserted that the:


"... company's credibility and the credibility of individuals within the company had been badly affected by the episode ... They had been aware for six months that the facility be repaid on time." [sic]

According to Mr Diack's memorandum:


"I advise that some of the credibility could be restored if they could meet the repayment prior to the next board on the 28th. This would enable us to advise the board that repayment had been effected in full."

On 30 June 1988, Mr Fitzgerald negotiated with Mr Diack an extension of time within which to pay the Uruz Pty Ltd debt. According to Mr Diack's records:


"Brian Fitzgerald has asked for extension until 30 September although Wardleys believe all finished by end of month ... Equiticorp extremely embarrassed but we were told up until late last week that everything okay. They understand sensitivity and credibility. I advised that this could largely be restored if they paid before our July Board meeting."

To add to the flurry, Mr Hawkins telephoned Mr Diack on 30 June 1988. He too expressed embarrassment. He was given the same message, viz, that to restore credibility the facility [Uruz Pty Ltd] needed to be repaid before Bank of New Zealand's July board meeting.

Ultimately, on 30 June 1988, Mr Semple of Bank of New Zealand agreed to an extension to 30 September 1988 for repayment of the Uruz Pty Ltd facility. The offer by Bank of New Zealand and the acceptance were in writing. Bank of New Zealand took as security for the extended facility a guarantee from Equiticorp International Pty Ltd, another company in the Industrial Group. It will be recalled that Equiticorp International Pty Ltd, owned 43 per cent of Equiticorp Tasman Ltd, whose fully owned subsidiary Uruz Pty Ltd was. A deed of lien was also taken by Bank of New Zealand over a million Feltrax International Ltd shares. The repayment dated was amended to mean "September 30, 1988, or such other date as the participants may agree". Uruz Pty Ltd agreed to pay Bank of New Zealand a consultancy and advisory fee of A$150,000. In accordance with the supplementary agreement, on 30 June 1988, the Uruz Pty Ltd debt was reduced to $51 million by the repayment of $14 million in compliance with the agreement of 30 June 1988. The share lien over 40 million Feltrax International Ltd shares was duly executed by Equiticorp International Pty Ltd. So was the guarantee agreement in favour of Bank of New Zealand. Bank of New Zealand also duly received four share certificates each relating to 10 million Feltrax International Ltd shares as security for this transaction.

Bank of New Zealand in Australia notified Bank of New Zealand in Wellington of the deposit of $14 million on 30 June 1988 and that a further reduction of $16 million was anticipated by 8 July 1988 when it was expected that the Wardley facility would be available. It seems fairly clear that Bank of New Zealand was counting on the reduction of the Uruz Pty Ltd facility to nil by the end of July 1988. Similarly, the Equiticorp Group interests were counting on the influx of substantial funds from the Wardley syndicate in July. Mr Curtayne, General Manager Equiticorp Industries Group Ltd, certainly informed Mr McCredie that, if at all possible, the repayment of the Uruz Pty Ltd facility would be effected within the following two weeks. The minutes of the Equiticorp Holdings Ltd board of 10 July 1988 recorded the following commitment:


"Repayment of SBSA and BNZ facilities ... 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."

Despite the promise to "spill blood", it is a fair inference that both Bank of New Zealand and the Equiticorp Group interests knew that the preferable course of discharge by 28 July 1988 depended upon the influx of the Wardley funds. This was confidently expected. But so it had been on earlier occasions. The formal agreements and the written documents accord with the legal obligation to repay by 30 September. There was a moral commitment to endeavour to do so before Bank of New Zealand's board meeting on 28 July 1988.

Mr Hawkins was well aware of the pressure on the Bank of New Zealand board coming from the New Zealand central bank. In the memo from Bank of New Zealand in Australia to Bank of New Zealand, Mr Travers wrote in his own hand his commentary:


"Keep the pressure on in both BNZ's and their own interests -- our future confidence and support is at stake in their performance of this first committed reduction."

It was in this environment that the plan was conceived to apply the Australian Finance Group's liquidity reserve to the discharge of the Uruz Pty Ltd facility. This was the way the blood was to be spilt.

The application of the liquidity reserve: By mid-July 1988 it was becoming increasingly apparent that the Wardley facility would not be in place, at least by the end of July, to permit the hoped for payment before Bank of New Zealand's board meeting on 28 July 1988. It was Mr McCredie at Bank of New Zealand Wellington, who suggested to Mr Fitzgerald that the deposits held by the Equiticorp Australia Ltd group might be used to reduce the Uruz Pty Ltd facility:


"I have discussed the Bank's position with Allan Hawkins and stressed the importance of clearance being effected not later than 28 July. I have pointed out that ultimate clearance ... can be effected from:--

--
$50 million purchase of receivables facility -- Equiticorp Finance has $50 million on cash deposit
--
Cashflow. Cash flows given us show share purchases totalling $16 million. $8 million of this is an error (a doubleup) 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 Allan accordingly."

At the start Mr Hawkins, like Mr Fitzgerald, resisted the suggestion. He had been aware of Mr Fitzgerald's efforts to secure the liquidity reserve. He had also been aware of the problems of the group's corporations generally but the special problems and needs of the Finance Group so far as liquidity was concerned. On 20 July 1988, Mr Hawkins wrote to Bank of New Zealand making it clear that his plan was still for the use of the Wardley facility to re-finance the shareholding in Feltrax International Ltd. He also hoped that Wardley would provide additional funds with which to repay Bank of New Zealand (and State Bank of South Australia) in respect of the short-term funds advanced by those banks to allow completion of the Monier take-over. The suggested use of the liquidity reserve was treated by him with deafening silence.

Doubtless under pressures of its own, Bank of New Zealand was not prepared to wait for the Wardley re-financing. This was so despite the fact that this was still then expected to be available by the end of August 1988 (which was within the extended formal repayment date of 30 September 1988). Upon receipt of Mr Hawkins' letter, Mr Travers was brought in. He telephoned Mr Hawkins. The latter recalled making it plain that "we will do everything possible to perform". Mr Travers' aide memoire of the conversation reiterated his advice to Mr Hawkins:


"... 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 stake rather than our dictating this 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 ETL to extinguish our exposure; he had some difficulty with this but will consider, contact Brian Fitzgerald and revert."

Mr Hawkins, for his part, explained the recorded "difficulty". According to his evidence, he told Mr Travers:


"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 the money from the Finance Group to the Industries Group because of trust deed requirements."

As will appear, this hesitation, on the part both of Mr Hawkins and Mr Fitzgerald, was entirely proper. It was founded upon a hesitation that ought also to have been clear to Mr Travers. But Mr Travers had his eyes fixed steadfastly upon the board meeting of Bank of New Zealand where, doubtless, he would have been obliged to report to Bank of New Zealand's directors on compliance by Bank of New Zealand with the central bank's prudential requirements. He thus extracted from Mr Hawkins the promise to talk to his senior management and return.

Mr Hawkins did indeed contact Mr Fitzgerald, still overseas. Mr Fitzgerald reiterated that he disagreed with the proposal. He told Mr Hawkins that the funds were needed to maintain the liquidity of the Australian Finance Group. He said that Bank of New Zealand had more than adequate security for the short-term loan to cover the Uruz Pty Ltd facility. According to Mr Hawkins, Mr Fitzgerald's protest was directed more towards the preservation of the liquidity reserve for the Equiticorp Group as a whole, not just the Australian Finance Group. But Mr Hawkins broke off the discussion with the statement: "... the overall considerations of the Group are important and I've got to weigh those considerations up." It seems abundantly clear from this d é nouement that Mr Hawkins, at least, had his eyes fixed upon a conceived duty so the "overall Group". He, who assumed the responsibility of the ultimate decision, did not hold steadfast to his initial concern for the separate duty owed to the companies in the Finance Group, to their separate needs and to the "technical difficulties" which he rightly discerned as arising from the trust deed requirements which certainly affected Equiticorp Financial Services Ltd (Aust). He was, after all, a director of Equiticorp Financial Services Ltd (Aust). He was not a director of Equiticorp Finance Ltd. His only connection with Equiticorp Finance Ltd was as a member of the Equiticorp Group.

That Mr Travers had been adamant that the liquidity reserve should be used to discharge the Uruz Pty Ltd facility emerges clearly enough from the foregoing evidence. But it is confirmed in a memorandum from Mr Bob Semple, senior manager, Corporate and Commercial Banking (NSW) of Bank of New Zealand dated 9 August 1988. This read:


"... the level of Equiticorp's overall exposure to the Bank has been discussed at recent Board meetings and we understand that assurances were given to the Board that the Equiticorp Tasman facility [Uruz] would be repaid on June 30th as scheduled. For this reason General Manager Investment Banking Group insisted that the liquidity buffer deposits be applied in reduction of the Equiticorp Tasman facility. As a result of these actions Equiticorp again has no liquidity."

If this result of Mr Travers' insistence was clear down the line to Mr Semple, it must have been equally clear to Mr Travers. In any case, it was clear to Bank of New Zealand.

Mr Hawkins informed Mr Curtayne of the substance of his conversation with Mr Travers and that "we" should make the repayment. On 22 July 1988, he consulted Mr Fitzgerald who was by then in New York. According to the latter's statement:


"He said that the Board of BNZ had just found out about the existence of a liquidity reserve in Sydney and Mr McCay, the Chief Executive had demanded of him that this be applied to the reduction of the debt of $51,000,000 owed by Uruz Pty Limited to BNZ. He said he had no alternative than to comply with the Bank's demand. I said I completely disagreed with this. I said that the funds were needed to maintain the liquidity of the Australian companies and that the Bank had more than an adequate security over the loan. At the conclusion of our conversation, Mr Hawkins undertook to see what he could do to avoid using the liquidity reserve in the way proposed and to telephone me back. I also asked Mr Hawkins whether he had discussed the demand with David Adams, my immediate superior and the Chairman of EAL. He said he had and I confirmed this with Mr Adams myself."

Mr Fitzgerald was sufficiently concerned to telephone Mr Hawkins from London, where he arrived on 25 July 1988. He was again told that Bank of New Zealand were insisting that the transaction go through and that there was nothing which he (Mr Hawkins) could do about it. Thereupon, Mr Fitzgerald cancelled his further meetings. He made immediate arrange ments to travel to Auckland:


"Upon arrival I immediately checked into my hotel and then went to the head office of the Equiticorp Group in Auckland and spoke to Mr Hawkins. He informed me that the transaction had already taken place. We had a heated argument about the matter. He said 'I needed to do it to make sure we kept BNZ's on-going support'."

Mr Fitzgerald obviously saw the Bank of New Zealand plan as an unnecessary, premature and unjustifiable raid on the Australian Finance Group's liquidity reserve. As a further sign of the seriousness with which he viewed developments, before he left London Mr Fitzgerald telephoned various officers of the Equiticorp Group of companies with the view to trying to get them to persuade Bank of New Zealand to change its mind. Specifically, he contacted Mr Morbey (Australian treasurer), Mr Daley (Group treasurer) and Mr Curtayne. None of those officers took any steps to alter either Bank of New Zealand's insistence or Mr Hawkins' intention to submit to it "for the interests of the group as a whole".

Mr Hawkins specifically requested that Mr Curtayne examine the trust deeds of the companies to see what assets they could hold and particularly whether the Australian companies could hold the promised Feltrax International Ltd shares. On 26 July 1988, Mr Morbey informed Mr Hawkins (and Mr Curtayne) that Equiticorp Financial Services Ltd (Aust) could take about $12 million of listed securities. The facsimile also informed Mr Hawkins that the deposits with Bank of New Zealand were held by Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd. This had come about by a letter, dated 28 July 1988, signed by Mr Morbey as treasurer of the Australian Finance Group and addressed to Bank of New Zealand. After Mr Hawkins' decision to apply the liquidity reserve for repayment of the Uruz Pty Ltd debt, that letter notified Bank of New Zealand that Bank of New Zealand should re-allocate the ownership of the June receivables as follows:

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

No inquiries were made either by Mr Hawkins or Mr Curtayne as to whether the Feltrax International Ltd shares were available to be transferred to Equiticorp Financial Services Ltd (Aust). Nor did either make inquiries about the receivables to be transferred.

Equiticorp International Pty Ltd, which owned 56 per cent of the capital of Feltrax International Ltd, had not, at this time, agreed to transfer any Feltrax International Ltd shares. Nor had Equiticorp Financial Services Ltd (NZ) or Equiticorp Finance Group Ltd agreed to transfer any receivables. Mr Hawkins and Mr Curtayne, without any recorded or apparent thought for the separate positions of the various corporations in the New Zealand Finance Group, or the Industrial Group, simply made their bold decisions. Mr Peter Saunders (a director of Equiticorp Financial Services Ltd (NZ) and Equiticorp Financial Group Ltd) and Mr William Wilson (a director of the same companies) made plain by their evidence that they would not have agreed, if they had been asked, to transfer receivables to Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd in exchange for Feltrax International Ltd shares.

As it happened, the Feltrax International Ltd shares were already subject to previous charges. Neither Mr Hawkins nor Mr Curtayne, nor any other officer under their direction, took any steps to identify which Feltrax International Ltd shares they planned to transfer to Equiticorp Financial Services Ltd (Aust). Had they done so, they might well have discovered the difficulty which their plan faced.

Upon receipt of the communication of 27 July 1988 from Mr Curtayne, Mr Morbey informed Mr David Carter, assistant manager, Loans (Bank of New Zealand in Australia) that the Equiticorp Australia Ltd group (relevantly the appellants, Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust)) had made arrangements to transfer the liquidity deposit to Uruz Pty Ltd and that Bank of New Zealand should act on instructions from Uruz Pty Ltd. Mr Carter requested Mr Morbey to send a confirming letter. The contents of the letter were, in effect, suggested by Mr Carter of Bank of New Zealand. The letter was duly signed by Messrs Daley and Morbey. Neither of them was a director or officer of Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust). In effect, the letter stated that Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd had on deposit with Bank of New Zealand a sum of $44.4 million. It requested Bank of New Zealand to apply those deposits to the credit of Uruz Pty Ltd. The letter is set out in Giles J's reasons (at 268). By another letter dated 27 July (ibid, at 268), signed by Mr David Adams and counter-signed by Ms Joanna Morbey, Uruz Pty Ltd requested Bank of New Zealand to apply the funds held on deposit (pursuant to the transfer from Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust)) to the facility secured by the Feltrax International Ltd share scrip. The letter instructed that the remaining $6.6 million would be fully secured utilising 5 million Feltrax International Ltd shares. The remainder of the scrip was to be returned.

On 28 July 1988, the deadline fixed by Mr Travers, Bank of New Zealand withdrew the deposits. It placed them in an account styled "Bank of New Zealand/Uruz Pty Limited". The funds were applied pursuant to the letter from Uruz Pty Ltd. Bank of New Zealand released 30 million of the Feltrax International Ltd shares. As found by Giles J, it later released 5 million shares after issue of separate share certificates. In accordance with the letter, it retained 5 million Feltrax International Ltd shares to secure the balance of $6.6 million owing to it. This debt was the last legacy of the Uruz Pty Ltd facility.

Bank of New Zealand sought to emphasise the responsibility of Mr Hawkins' decision. He was conforming to his "solemn obligation" to reduce the Uruz Pty Ltd facility. He was meeting, in a responsible way, the pressure which was upon Bank of New Zealand and specifically Mr Travers, with whom he enjoyed a relationship of trust. He was doing so by the deadline fixed by Mr Travers. He had tried (in a conversation with Mr Travers of 27 July 1988 recorded by letter) to secure an assurance from Bank of New Zealand that, pending the provision of the Wardley facility, Bank of New Zealand would protect the Equiticorp Group companies against"any sort of run on their funds". Mr Travers would give no such assurance. He promised only to look at the situation in the light of the circumstances prevailing and to abide by the decision of Bank of New Zealand's board. To the last moment, Mr Hawkins was expressing concern that Bank of New Zealand was "using their liquidity buffer for repayment of the [Uruz Pty Ltd] facility". He asked whether Bank of New Zealand would assist in a sale and buy back of a further parcel of receivables to a level of $20 million. Mr Hawkins agreed, in cross-examination for Bank of New Zealand, that he had a "concern" about information getting around between banks that could affect the reputation of the Equiticorp Group:


"Q. And I think that so far as the group was concerned, that is your group, as at the end of July one of our objectives was gaining the confidence of the banks?

A. Retaining the confidence of the banks ....

Q. Certainly so far as what I have, referred to as the Australian Finance Group is concerned, that's EAL, EFSL and EFL, the credibility and support of the bank was essential for its ongoing health?

A. Yes ....

Q. So that any loss of credibility and support of the Bank of New Zealand could have had the disastrous effect of a rejection of ongoing debenture subscriptions?

A. Yes.

Q. And the calling in of other existing debentures when they fell due?

A. Yes."

Under cross-examination by counsel for the New Zealand Finance Group companies, Mr Hawkins was asked:


"Q. Would it be fair to say that you regarded the welfare of what you perceived as the group as more important than the welfare of any individual company within the group of which you were a director? ...

A. Yes. There was no question about the fact that I regarded the welfare of the group of which I was chief executive, group chief executive, as the most important thing because of the effect that the welfare of the group had on the individual companies within the group."

Lack of inquiry by Bank of New Zealand:

Bank of New Zealand made no inquiry during the course of the pressure it was applying to have the Uruz Pty Ltd debt reduced, ultimately from the Australian Finance Group liquidity reserve, concerning the compensation which Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), the relevant companies ultimately left within the group, were to receive from the application of the use of the deposit to repay the Uruz Pty Ltd facility. By this stage, Bank of New Zealand was taking the same approach to the individual corporations in the Equiticorp Group as Mr Hawkins did. This can be seen by Mr Travers' suggestion, minuted on 21 July 1988, that Equiticorp should simply treat the payment as an "inter-company" advance to Equiticorp Tasman Ltd.

Bank of New Zealand was certainly aware that Equiticorp Financial Services Ltd (Aust) at least was subject to restrictions under its trust deed. These restrictions had been notified to it several times, including by Mr Hawkins himself. Apart from making inquiries about any obligations imposed by the deed or restrictions deriving from it, Bank of New Zealand simply kept up the pressure. Its awareness of the terms of the trust deed derived, if from nowhere else, from Bank of New Zealand's regular reviews of companies in the Equiticorp Group and by letters to Bank of New Zealand which were exhibited. One such letter was from Mr Fitzgerald to Mr Culkin (Bank of New Zealand in Australia) dated 13 January 1988. In that letter, Mr Fitzgerald had said that, in order further to separate the industrial from the finance streams, deeds had been completed which reduced inter-company activity between various parts of the Equiticorp Group. These were therefore nothing more than normal day to day business activities. In the confidential background memorandum of 10 May 1988, prepared for the information of major lenders to the Equiticorp Finance Group, Bank of New Zealand was certainly reminded of the existence of Equiticorp Financial Services Ltd (Aust)'s trust deed. Clearly, it was this (amongst other technical difficulties) that Mr Hawkins had in mind when, on 21 July 1988, Mr Travers told him that he should use the deposit to repay the Uruz Pty Ltd facility and he resisted.

Bank of New Zealand, although the principal banker to the companies in the Equiticorp Group, failed to make any inquiries concerning the compensation that might be received by these two companies in the Australian Finance Group, with their peculiar needs and obligations, when the proposed "inter-company advance" was made as Bank of New Zealand was urging. Bank of New Zealand can be taken to have been aware, from the long line of memoranda, made or received earlier in 1988, of the liquidity difficulties facing the Finance Group of Equiticorp. It was those difficulties which had prompted the establishment of the liquidity reserve in the first place. Despite the fact that Bank of New Zealand was aware of the source of the funds within the Equiticorp Group structure for the reduction of the Uruz Pty Ltd facility was Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), it simply released the Feltrax International Ltd shares to Equiticorp International Pty Ltd. As events were to show, this deprived Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) of protection in respect of the shares, that is, to the extent that they were not already the subject of charges and other claims.

The transfer of the funds, at least so far as Equiticorp Financial Services Ltd (Aust) was concerned, was a breach of the obligations imposed upon that company by its trust deed. It exposed Equiticorp Financial Services Ltd (Aust) to the risk that the trustee would be entitled to enforce the charge given by Equiticorp Financial Services Ltd (Aust) for the benefit of the debenture holders. Beyond this, both Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) lost vital, protective liquid asset. What they received in return was, to the knowledge of Bank of New Zealand, of paltry value. This troubled Bank of New Zealand not. Like Mr Hawkins, it regarded Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) not as separate companies with separate obligations (including particular ones deriving from their nature as public lenders and borrowers) but as simply units in the "Equiticorp Group" whose funds could be raided in the interests of the group, notably to restore the group's credit in the eyes of its principal banker, Bank of New Zealand. The question raised by this appeal is whether the law condones such an approach, both on the part of Mr Hawkins and on the part of Bank of New Zealand.

The later documentation of diversion of appellants' liquid funds: After the deposits earlier held by Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) as their respective liquidity reserves were applied to reduce the outstanding Uruz Pty Ltd facility, steps were taken to attempt ex post the documentation contemplated by the above procedure. The sale of receivables to Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) from Equiticorp Financial Services Ltd (NZ) and Equiticorp Finance Group Ltd took the following form. On 27 July 1988 Mr Cowell, a director of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) (as well as of Uruz Pty Ltd and Equiticorp Australia Ltd at the relevant times) requested Mr Paul Hutchinson, a director of Equiticorp Financial Services Ltd (NZ) and Equiticorp Finance Group Ltd to forward to him information in relation to the debts which they proposed to sell. The information was supplied on the same day by facsimile addressed to Mr Fitzgerald. On 28 July 1988, Mr Cowell advised Equiticorp Financial Services Ltd (NZ) that Equiticorp Financial Services Ltd (Aust) would purchase certain receivables (McClymont) for NZ$7,467,389. The balance of the receivables would be purchased by Equiticorp Finance Ltd. At the time these discussions took place, Mr Cowell was not aware that the Uruz Pty Ltd facility had been repaid from the deposits held with Bank of New Zealand by Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd.

After selecting the receivables, as above, Mr Cowell instructed Mr Teroxy, an associate director of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), to instruct solicitors to prepare the transaction documents. Mr Teroxy asked and received an assurance that the course proposed was proper. But he was not informed that the sale involved the application of the deposits held by Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd to repay the Uruz Pty Ltd facility with which those companies, individually, had nothing to do. This fact is reflected in the instructions which Mr Teroxy gave the solicitors and in their documentation of the sale agreements which required Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) to pay cash for the receivables. Their cash had, by that time, gone elsewhere.

After selecting the receivables to be "purchased" in this way, Mr Cowell informed Mr Morbey of the details. It was this information which caused Mr Morbey to send a note to Mr Gammel, manager-finance with Equiticorp Australia Ltd, Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), requesting journal entries for the purchase by Equiticorp Finance Ltd of $26.3 million of receivables and by Equiticorp Financial Services Ltd (Aust) of $6.1 million in receivables and $12 million in Feltrax International Ltd shares.

Needless to say, the documents recording the purchase of these receivables took a little time to prepare. The evidence suggests that they were not in existence until mid-August 1988. The consideration contem plated in the documents was the payment of cash to the New Zealand Finance Group by Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). Of course, this cash was never paid. The documentation was fictitious. The New Zealand Finance Group companies challenged the entitlement of Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd to the receivables. That challenge was an issue before Giles J. Some of the same grounds of challenge were raised in respect of those receivables as have been raised on the appeal. These included want of authority and breach of fiduciary duty by the directors of the companies in the New Zealand Finance Group, as known to the companies in the Australian Finance Group who took advantage of such breach. As early as September 1988, when things began to come apart, Mr Hutchinson, a director of the companies in the New Zealand group informed Mr Hawkins that the transfer of the receivables was "totally unacceptable" to the New Zealand group. He said that the receivables had only been transferred to the Australian Finance Group for about ten days.

On 23 August 1988, Equiticorp Financial Services Ltd (Aust) sold to Bank of New Zealand the McClymont receivable (purportedly sold to it by Equiticorp Financial Services Ltd (NZ)). Equiticorp Finance Ltd sold to Bank of New Zealand receivables to the value of $10,501,349.38 (purportedly sold to it by Equiticorp Financial Services Ltd (NZ) and Equiticorp Finance Group Ltd). Dollars 3,516,905.20 of the receivables sold by Equiticorp Finance Ltd to Bank of New Zealand were subsequently re-purchased by Equiticorp Finance Ltd for cash and transferred to the New Zealand Finance Group. The claim as between the companies in the New Zealand Finance Group and those in the Australian Finance Group was settled before Giles J. This Court has not been concerned in the claim or the settlement.

The diversion of the Feltrax International Ltd shares:

It will be recalled that Mr Curtayne had suggested to Mr Morbey that Equiticorp Financial Services Ltd (Aust) would purchase Feltrax Inter national Ltd shares to the value of $12 million from Equiticorp International Pty Ltd, presumably to justify, in part, the enforced transfer of cash from Equiticorp Financial Services Ltd (Aust) to Equiticorp International Pty Ltd to reduce the Uruz Pty Ltd facility. In the event, Equiticorp Financial Services Ltd (Aust) received no Feltrax International Ltd shares. As earlier stated, neither Mr Curtayne nor Mr Hawkins, nor any other officer engaged in the transactions, made inquiries concerning the status of the Feltrax International Ltd shares or their availability for sale. Nor was any express agreement given by Equiticorp International Pty Ltd to transfer such shares (unless it be through the personal authority of Mr Hawkins).

The evidence indicates that the Feltrax International Ltd shares held by Equiticorp International Pty Ltd were not available to be transferred to Equiticorp Financial Services Ltd (Aust) for the purpose proposed. They were already mortgaged to Wardleys as security for a facility which, at the time of the purported agreement to transfer them to Equiticorp Financial Services Ltd (Aust), was expected to be in place by the end of August 1988. They were also subject to charges held by Equiticorp Australia Ltd and other institutions. Equiticorp International Pty Ltd actually held the scrip. It therefore became necessary to effect an entry in Equiticorp International Pty Ltd's records. This occurred on 22 August 1988. Calculations were performed to line up the number of shares with the amount of the liquid funds to be attributed to them. It was found that the number of shares required was 6,004,695.4 shares. Without more, this imperfect number of shares reflects the fact that no real consideration was given to the identity or number of the shares intended to be transferred to Equiticorp Financial Services Ltd (Aust).

Officers of the Australian Finance Group made inquiries concerning the shares to be transferred to Equiticorp Financial Services Ltd (Aust). In a memorandum to Mr Daley of 1 September 1988, Australian Finance Group (Mr Morbey) requested details of the Feltrax International Ltd scrip purchased by Equiticorp Financial Services Ltd (Aust). A request was made for the nomination of precisely which scrip belonged to Equiticorp Financial Services Ltd (Aust). By a memorandum dated 13 September 1988, Mr Cowell requested confirmation that AUD$12 million worth of Feltrax International Ltd shares were held solely to the account of Equiticorp Financial Services Ltd (Aust). He requested that the scrip be forwarded to Equiticorp Financial Services Ltd (Aust) for safe-keeping. To add to the complications, shortly afterwards, Mr Cowell received confirmation that Equiticorp Industries Group Ltd held 6.5 million shares to the account not of Equiticorp Financial Services Ltd (Aust) but of Equiticorp Australia Ltd. Yet those shares had been mortgaged by Equiticorp International Pty Ltd on 31 August 1988. At no time were they owned by Equiticorp Industries Group Ltd.

By this time, the position of Equiticorp Financial Services Ltd (Aust), as a financial institution under the obligations of its trust deed, was becoming serious. An attempt was therefore made to substitute further New Zealand Finance Group companies' receivables as compensation to Equiticorp Financial Services Ltd (Aust) for the loss of its share of the liquidity reserve. This led to the purported assignment of the so-called October receivables. The Loan Portfolio Purchase Agreement contemplated that Equiticorp Financial Services Ltd (Aust) would pay a cash consideration to Equiticorp Financial Services Ltd (NZ) for the October receivables. This too was a sham. The cash had already moved. The validity of this transaction was challenged by the New Zealand Finance Group companies. This claim was one of those which was compromised between the companies in the respective Finance Groups of the Equiticorp Group after the proceedings before Giles J were part-heard.

It is enough for present purposes to note that the companies in the New Zealand Finance Group disputed the assignment of receivables in October. They did so upon the basis of lack of authority and breach of fiduciary duties by the directors of the companies in the New Zealand Finance Group involved in such assignments, to the knowledge of the Australian Finance Group companies. They also asserted that such assignments amounted, to the knowledge of such companies, to breaches of the trust deeds binding on the companies in the New Zealand Finance Group. They denied any basis for the "sham" written agreements which were put in place after the liquidity reserve belonging to the appellants was utilised as described. I have mentioned these complications because they illustrate the impediments which stood in the way of the expedients adopted, in a fairly brazen and patently ineffective attempt to give the colour of legal right to the transfer of the liquidity reserves of the appellants to the reduction of the Uruz Pty Ltd facility. Mr Travers may have said that the payment should be treated as an "inter-company loan". But as Mr Fitzgerald insisted, and dramatically flew from London to Auckland to reiterate, it was not so easy to dress the transaction up in such a way. The attempts to do so were not only a patent sham. They were bound to fail. There was a fundamental reason why that was so. It was the reason which Mr Hawkins himself hit upon. It was that there were technical, that is, legal, problems in shifting the assets needed to protect the liquidity of companies in the Australian branch of the Finance Group to a company in the Industrial Group which had a continuing take- over debt.

The former companies had separate interests and requirements because of their purposes, which included borrowings from the public. The latter were part of an entrepreneurial, and to some extent speculative, empire whose purpose was far from the conservative one of the Finance Group. It included risky operations of the take-over variety which, not even dampened by the October 1987 market crash, were continuing, with Bank of New Zealand involvement, during the course of the events just described.

The conduct of the directors of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust):

It is clear from the evidence (and was accepted by Giles J) that it was ultimately Mr Hawkins who directed the application of the liquidity reserves of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) to pay out the Uruz Pty Ltd facility. It was also undisputed that this occurred without board meetings either of Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust). The later attempts to document such meetings were just further evidence of the sham. Mr Hawkins' action was taken contrary to the advice, and over the strong protest, of Mr Fitzgerald who made his opinion clear throughout. Mr Fitzgerald was a director of both Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust).

Mr Hawkins had no formal position in Equiticorp Finance Ltd.

Mr Cowell, who was managing director of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), and Mr Teroxy, an associate director of both Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), participated in the selection of the receivables to be transferred to Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd. However, neither was aware that the transaction involved an unauthorised and ultimately ineffective partial trade-off for the transfer of the liquidity reserves of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) to Equiticorp International Pty Ltd to pay the Uruz Pty Ltd facility before the time which Mr Travers of Bank of New Zealand had nominated. Mr David Adams was a director of both Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) (and also of Equiticorp Australia Ltd). He signed the letter from Uruz Pty Ltd (of which he was also a director from 1 June 1988). This requested that Bank of New Zealand use the moneys held on deposit to repay the Uruz Pty Ltd facility. He gave evidence that he was not consulted about the decision to apply the deposit. Nor did he appreciate that the transaction involved the application of deposits held by Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust).

Messrs Crick and Chittenden, associate directors of Equiticorp Australia Ltd and directors at the relevant time of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) gave evidence that they were not consulted in the making of the decisions now under scrutiny. Against the background of the events which I have recounted, the problems earlier noted (including by Bank of New Zealand itself) the exhaustion of the liquidity deposit, earlier created by Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) from their funds or funds available to them, plainly exposed each of those companies to economic jeopardy. This was precisely what Mr Fitzgerald feared. It explained his opposition to the transfer adopted.

In Equiticorp Financial Services Ltd (Aust)'s case, the funds released amounted to the use of the only substantial fund of cash available to it. In the case of both companies, they were returned to the pre-existing position of chronic illiquidity. But with two significant disadvantages. First, they had lost the assets from which liquidity reserves had been created in the first place. Secondly, they were exposed to the risk of bad publicity which could cause still further runs on their deposits, always required to be healthy because of the banker-client nature of their activities. Mr Fitzgerald pointed this out in a memorandum to Mr Hawkins dated 4 August 1988. On 11 August 1988, Mr Hawkins returned to his theme that the group would need to sell something in order to get through the liquidity crisis of the ensuing two weeks. The cash flow projection attached to the latter memorandum predicted that the Equiticorp Australia Ltd group would have cash deficits in excess of its facilities in the coming weeks. Specifically it would have a deficit of $18.1 million by the end of December 1988. By this time, Mr Hawkins too was coming to the conclusion that Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) would not have sufficient assets to pay their liabilities. Their problems were compounded by the risk that Bank of New Zealand would exercise, after 31 August 1988, an option which it held to require them to repurchase the receivables sold to Bank of New Zealand on 30 June 1988 (the June receivables).

In the case of Equiticorp Financial Services Ltd (Aust), it was also exposed to the consequences of a breach of its trust deed. Even if Equiticorp Financial Services Ltd (Aust) had received unencumbered Feltrax Inter national Ltd shares, as the apparent plan envisaged, in exchange for its loss of its share of the liquidity reserve, it would not have been in a position, in the short term, to realise such shares. It would not have been in a position to generate the cash necessary to restore its liquidity position both for the conduct of its daily operations and as a buffer to provide the confidence in capacity to meet its liabilities, necessary for its survival.

Having achieved the goal of the substantial reduction (although not the elimination) of the Uruz Pty Ltd facility, Bank of New Zealand asserts that it had achieved nothing more than the compliance by the Equiticorp Group with the agreement and solemn understanding concerning the reduction of Bank of New Zealand's exposure, already twice delayed. Bank of New Zealand did not become involved in the internal arrangements between various members of the Equiticorp Group. In Bank of New Zealand's view, the group was complicated enough, and big enough, to look after itself. The fact that, within the group, receivables and Feltrax International Ltd shares were purportedly sold without authority, value and delivery was not Bank of New Zealand's concern. Bank of New Zealand was merely a banker, anxious about its own prudential ratios. Its aim was nothing more than to reduce an exposure which it had expected to share with other banks and which it did not wish to carry alone longer than the end of July 1988. To achieve this objective, it secured the co-operation of the man at the top of the Equiticorp Group. It was he who really "called the shots" down the line. Proof that this was so was to be found in what occurred. Despite hesitations and contrary advice from a senior manager, the orders went through. The liquidity reserve was indeed transferred. The Uruz Pty Ltd facility was substantially reduced. Honour was served. The "credibility of the group" with Bank of New Zealand was saved. That rebounded to the advantage of all members of the group, including the appellants. What was done was done with implicit authority by the "man at the helm". There was no breach of fiduciary duty because any of the directors, acting honestly and intelligently at the time under the pressure which was being applied on the appellants, through the group, would have realised that the course taken was in the best interests of the company as a whole, viewed objectively and at that time. In any case, if there was a breach of fiduciary duty, Bank of New Zealand was unaware of it and unconcerned in it. It could not be fixed with the consequences. Bank of New Zealand exerted pressure upon the Equiticorp Group (and thereby on the appellant companies). However, this was only legitimate commercial pressure. The simple objective was to have another company in the Equiticorp Group discharge a much delayed obligation to reduce Bank of New Zealand's exposure. There was nothing illegitimate or unconscionable in the pressure applied. If, in responding to the pressure, the Equiticorp Group, or members of it, acted in an improper or unconscionable way, that was their concern and not that of Bank of New Zealand. So went the relevant arguments for Bank of New Zealand. Substantially, they were the arguments which carried the day before Giles J.

For the appellant companies the position was quite different. Mr Hawkins had no authority express or implied to direct the use of the liquidity reserve protecting Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). Specifically, he had no authority to secure its use to repay the Uruz Pty Ltd facility derived by the take-over transactions of Equiticorp Tasman Ltd, a company in the separate Industrial Group of the Equiticorp Group structure. According to Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), Bank of New Zealand knew that Uruz Pty Ltd and the companies in the Industrial Group could not repay the Uruz Pty Ltd facility because of their own serious problems of liquidity. Knowing this, Bank of New Zealand nonetheless proposed, and ultimately induced, the action whereby Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust)'s liquidity reserve was devoted to repayment of the Uruz Pty Ltd facility. This was done notwithstanding the fact that, at the time, the facility had a revised repayment date for September 1988 and was fully secured to Bank of New Zealand.

In proposing the use of the liquidity reserve, Bank of New Zealand well knew the purpose of the reserve. It knew that the payment of the Uruz Pty Ltd facility had nothing to do with the purposes of Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust). Bank of New Zealand's action occurred when it had already exhibited substantial concerns about the viability of the liquidity of the group. It was those concerns which had affected Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) and had led to the very suggestion by Bank of New Zealand that those companies, being members of the Equiticorp Australia Ltd Finance Group, should set up liquidity reserves. The liquidity reserves were established on 30 June 1988. Bank of New Zealand knew that it could demand repayment after 30 August 1988. Instead of waiting for the Wardley facility to come through, the liquidity reserves to become available or the September deadline to be reached, Bank of New Zealand proposed, and effectively required, the immediate transfer to it of the liquidity reserves. It even suggested the device that this be documented by way of an "inter- company loan" to Equiticorp Tasman Ltd. Although Bank of New Zealand had good reason to hold serious concerns about the liquidity and viability of Equiticorp Tasman Ltd and other companies in the Industrial Group it made no inquiry about how this would be achieved, beyond suggesting a device and insisting upon the early discharge of the Uruz Pty Ltd facility. Bank of New Zealand was put on notice of the resistance of at least one senior officer of the relevant Equiticorp companies and of the concern which the Equiticorp Group's helmsman himself had concerning the suggested device ("an inter- company loan to Equiticorp Tasman Ltd") and the "technical difficulties" of transferring money from the Finance Group to the Industries Group "because of trust deed requirements".

Instead of fixing obdurately on 28 July 1988, and "pressuring" the Equiticorp Group into the action which was taken, Bank of New Zealand should, at the least, have ensured that there was provided to Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd securities available to it upon repayment of the Uruz Pty Ltd facility. Bank of New Zealand benefited by the repayment of the facility owed to it, not by Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) in the Finance Group but by Equiticorp Tasman Ltd in the Industrial Group. Bank of New Zealand knew the decision to apply the liquidity reserve was not made in a proper manner and at arm's length. Indeed, as the very originator of the idea and proponent of a device to effect it, it must be taken as being aware of the lack of authority of those who directed this use of the reserve; the breach of fiduciary duty of the directors who permitted, condoned or acquiesced in it; and the unconscionability of the conduct of those to whom pressure was applied to act in such a manifestly improper way.

The decision of the primary judge:

Giles J recounted the foregoing events. I have added to the tale in deference to the submissions of the parties (and particularly of the appellants) that his Honour's conclusions were affected less by error or mis- statement of facts than by a failure to perceive all of the facts in their fuller and proper perspective.

So far as the issue of authority was concerned, Giles J accepted that the actual decision was taken by Mr Hawkins and that he had implied actual authority as demonstrated by the subsequent acquiescence of those who had the legal authority. In coming to this conclusion he relied on Freeman & Lockyer (a Firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 502 and Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 at 584. Giles J was satisfied that all of the relevant directors of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) regarded Mr Hawkins, and not themselves as the board, as the ultimate decision-maker of the relevant Equiticorp companies. Even Mr Fitzgerald, who protested, ultimately gave effect to Mr Hawkins' decision. All of this was consistent with the operation of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) as members of the Equiticorp Group. In this way, Mr Hawkins derived actual authority to commit the liquidity reserve as he did. He did so although that authority was not express, was not contained in any board decision but was to be implied in the circumstances of the respective conduct both of Mr Hawkins and of the boards concerned.

So far as the breach of fiduciary duty was concerned, Giles J accepted the test stated in Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62 at 74. This was whether an intelligent and honest person 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. He referred to a number of cases concerning the conduct of directors in company groups. He distinguishedWalker v Wimborne (1976) 137 CLR 1 upon the basis that, factually, there were "derivative benefits" to Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) in this case by the assistance to the parent company (ultimately Equiticorp Holdings Ltd controlled by Mr Hawkins). In such circumstances, an intelligent and honest director of Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust) could reasonably have believed that the application of the liquidity reserve towards discharge of the Uruz Pty Ltd debt was for the benefit of those companies, as members of a group. They needed to preserve their credibility with their principal banker, Bank of New Zealand. This was the way to do so. Specifically, Giles J accepted (ibid, at 306) that 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). He listed six considerations which the honest and intelligent person in the position of a director of the appellate companies could, having in mind, lead that person to the belief that the application of the liquidity reserve towards payment of the Uruz Pty Ltd debt was for the benefit of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). The six considerations were (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."

Having concluded that an honest and intelligent director could have acted to take the steps which, he held, Mr Hawkins had the implied express authority of the boards of the appellants to take, Giles J did not have to consider the subsidiary question of whether (had it been otherwise) receipt by Bank of New Zealand of trust property, or participation in actual or constructive knowledge of the breach of fiduciary duty, would fix Bank of New Zealand with obligations to account for the use made by it of the liquidity reserve. So far as economic duress was concerned, Giles J accepted the tests stated inCrescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 at 46; Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 at 301 and Barton v Armstrong [1973] 2 NSWLR 598 at 634; [1976] AC 104 at 121. He accepted that Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) had proved that pressure had been applied by Bank of New Zealand in effectively insisting upon the use of the liquidity reserve to repay the Uruz Pty Ltd debt. But he concluded that, within the legal tests so stated, such pressure was not illegitimate. It did not amount to unconscionable conduct. It did not leave Mr Hawkins with "no choice but to act". It did not confront him with a situation where he had "no practical choice" but to go along with the Bank of New Zealand pressure.

When the question is asked why Mr Hawkins committed the Equiticorp Group as a whole to "spill blood" to meet Mr Travers' deadline the explanation offered by Bank of New Zealand was that a solemn commitment had been entered, was binding and should be complied with. Another plausible explanation was a fear that, if the deadline were not met, the bank's co-operation, upon which rested a large part of the assurance of Equiticorp's economic viability, might be lost. This would have consequential dangers for the solvency of the group and all of its members.

Having reached this conclusion, Giles J (at 300) noted other problems which might have been presented for the provision of relief on the ground of economic duress. Most important amongst these was the consideration that Bank of New Zealand merely received, by way of the liquidity reserve, an amount undoubtedly owed to it in respect of the Uruz Pty Ltd facility although owned by a company different from that which legally bound it to the repayment and some two months before the debt was strictly payable. In this appeal Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) challenged all of the conclusions of Giles J just stated.

The authority of the corporate group chairman:

Bank of New Zealand cautioned the Court about substituting its decision for that of the lawful officers of the relevant companies, including those who secured their lawful entitlement to act on behalf of the company not by appointment as an officer or resolution of a board but as a person whose control of the company was acquiesced in by those with the nominal legal entitlement to control the companies' affairs. There is, of course, much authority which lends weight to these words of caution. As one who has joined in such authority and accepts it, I readily re-endorse and apply these principles here: see New South Wales Rugby League Ltd v Wayde (1985) 1 NSWLR 86 at 102; see also Howard Smith Ltd v Ampol Petroleum Ltd at 74. It was suggested, for Bank of New Zealand, that all that Mr Hawkins did with Bank of New Zealand was to make business decisions which this Court should not, and would not, review. There is not the slightest chance that the Court would second-guess business decisions. Under this head of the argument, I am not concerned with the merits of what Mr Hawkins did. My sole concern is with its lawfulness.

In dealing with the authority of company officers (and those who pretend to be such) the law must tread a fine line between, on the one hand, upholding the rule of law in the constitution and operation of companies and discouraging delinquent directors, paper signers and others who abandon their responsibilities and, on the other, protecting outsiders who make commercial decisions in good faith upon the assumption that they are dealing with true company officers who have power to act on behalf of the company, as they appear or have purported to do.

The problem presented in such circumstances is expressed in the following passage of Mason CJ's reasons in Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 164:


"What is important is that the principle ... give[s] sufficient protection to innocent lenders and other persons dealing with companies, thereby promoting business convenience and leading to just outcomes. The precise formulation and application of [the indoor management] rule call[s] for a fine balance between competing interests. On the one hand, the rule has been developed to protect and promote business convenience which would be a hazard if persons dealing with companies were under the necessity of investigating their internal proceedings in order to satisfy themselves about the actual authority of officers and the validity of instruments. On the other hand, an overextensive application of the rule may facilitate the commission of fraud and unjustly favour those who deal with companies at the expense of innocent creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act on behalf of companies."

Agency principles aside, to hold that a person dealing with a company is put on notice when the company enters into a transaction which appears to be unrelated to the purposes of its business and from which it appears to gain no benefit is, in my opinion, to strike a fair balance between the competing interests identified above. Indeed, there is much to be said for the view that the adoption of such a principle will compel lending institutions to act prudently. By so doing they will enhance the integrity of commercial transactions and commercial morality.

Bank of New Zealand sought to uphold the authority of Mr Hawkins in three ways, namely by establishing that:

1.
he had implied actual authority from Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), as Giles J found;
2.
the respective companies had sufficiently ratified his exercise of authority; and
3.
he had ostensible authority and that Bank of New Zealand was entitled to act upon the assumptions contained in s 68A of the Companies (New South Wales) Code then in force.

So far as the implied or inferred actual authority is concerned, all parties before this Court accepted that the test to be applied was that stated in Freeman & Lockyer and in Hely-Hutchinson . Bank of New Zealand pointed out that, in the latter case (at 584) Lord Denning MR, whilst finding that the chief executive had no express authority to enter into arrangements for the two companies in question, nor even authority implied from the nature of his office; found that he had acquired that authority from the "conduct of the parties and the circumstances of the case". The executive had often committed the company to contacts without the knowledge of the board. They were merely reported afterwards. The contracts which he had negotiated were, in the words of Lord Pearson (at 592), "intended to assist in keeping the [company] alive".

Recent Australian cases in which the principle of implied actual authority has been held to cloak a "moving force" in a company with authority to act on its behalf include Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 3 ACSR 649 and on appeal [1992] 2 VR 279. Where, however, actual authority is held to be implied, it remains vital to ask the question: "authority for what"? It cannot be an authority at large to do anything at all. Relevantly, it must be authority to do something apparently in the best interests of the company. This requires keeping in mind the interests of the members of the company as a whole and also in times of economic danger at least its creditors.

How, then, can it be said that Mr Hawkins had the implied actual authority of Equiticorp Finance Ltd (of which he was neither director nor officer) to commit its liquidity reserve of that company to discharge the Uruz Pty Ltd debt owed by another entirely separate corporation? To find such an implication it goes without saying that Mr Hawkins had the actual authority. At least in the case of Equiticorp Financial Services Ltd (Aust) he was a director. But he did not trouble to secure a meeting of the board of Equiticorp Financial Services Ltd (Aust). In the case of Equiticorp Finance Ltd he could presumably have done so. He did not. The directors, save for Mr Fitzgerald, had no knowledge of the relevant circumstances. The one director who did (Mr Fitzgerald) protested vigorously, often and in a most emphatic way.

Giles J found that, despite these protests, Mr Fitzgerald later "gave effect" to Mr Hawkins' decision. Certainly, when Mr Fitzgerald returned from Europe he was faced with a fait accompli. The relevant act, viz, the transfer of the liquidity reserve, had already by then been effected. Mr Fitzgerald took no part in that act.

Giles J also found that Messrs Chittenden and Teroxy had participated in the disposition of the July receivables transferred from the New Zealand Finance Group companies. But his Honour appears to have overlooked the fact that the unchallenged evidence was that Mr Chittenden did not know of the use of the liquidity reserve when he participated. Nor did Mr Teroxy. Their conduct therefore hardly amounts to acquiescence at the time in the payment of Equiticorp Finance Ltd's liquidity reserve to reduce the Uruz Pty Ltd debt of Equiticorp Tasman Ltd. Giles J appears to find that Mr Cowell (a director of both of the appellants) knew of the use of the liquidity reserve before it was paid out yet did not take exception to its application towards the discharge of the Uruz Pty Ltd debt. In his oral evidence, Mr Cowell said unequivocally that, in mid-1988, he was unaware of the application of the liquidity reserve in this way. He did not discover it until after the proceedings had commenced.

In the absence of express authority, knowledge and acquiescence at the time by the directors of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) and given actual opposition by the one director of each company who was aware of what was planned, I cannot with respect to Giles J accept that the first suggested basis of authority in Mr Hawkins is made out. In particular, confining attention to the affairs of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), there were no comparable instances, proved by the evidence, where Mr Hawkins' say so had resulted in such a serious consequence for a company in the group. Notably it was not shown that there had been any like case of a serious deprivation of the liquidity of a company for a purpose extraneous to that company and having no apparent benefit for it: indeed being to the manifest disadvantage of the company concerned.

The principle behind such cases as Freeman & Lockyer, Hely-Hutchinson and the Brick and Pipe decisions is one protective of outsiders dealing with companies which operate over time in an irregular way and which are effectively controlled by powerful individuals. I accept fully that some of these features are in this case. But Bank of New Zealand was scarcely unaware of the corporate structure of the Equiticorp Group. Certainly it was aware of the distinction between the Finance Group and the Industrial Group. Clearly it knew of the special liquidity needs and obligations of the members of the Finance Group, including Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). It had abundant material to make it plain, to it that the Uruz Pty Ltd debt had nothing to do with Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). In these circumstances it is to debase the integrity of company law, and the obligations of companies to operate according to law, to extend the protective principle to cloak Mr Hawkins with implied actual authority when he certainly had no express actual authority and was clearly acting in a way, and for a purpose, that negatives the suggested implication. The law has not yet come to the point of ignoring the requirements of due formality. Such requirements are protective of shareholders, creditors, employees and the community. The suggested imperative of "realism" and the Realpolitik of corporate control does not authorise courts to ride roughshod over the due observance of company law.

But what of the suggestion which Bank of New Zealand makes that Mr Hawkins' authority to make the decision for the use of the liquidity reserve derived not just from the respective boards of directors of Equiticorp Financial Services Ltd (Aust) and Equiticorp Finance Ltd but from the ultimate parent of the Equiticorp Finance Group, viz, Equiticorp Finance Group Ltd and the parent of the Australian Finance Group, viz, Equiticorp Australia Ltd? Bank of New Zealand asserted that, in a chain of wholly owned subsidiaries, it was "artificial" to confine the doctrine of shareholder ratification to the direct parent. Thus, Bank of New Zealand argued that ratification in this case was implied. It was to be derived from the acquiescence, or inactivity, on the part of the parent companies Equiticorp Finance Group Ltd and Equiticorp Australia Ltd. Despite the lack of a formal meeting of shareholders either of the appellant companies or of their direct or ultimate parents, Bank of New Zealand argued that the Court should draw inferences of a "unanimous albeit informal agreement" of the companies' members in what Mr Hawkins decided: cf Re Horsley & Weight Ltd [1982] Ch 442 at 454.

This argument is also completely unacceptable. If accepted, it would set at nought the separate identity of corporations and the duties which are owed in each case severally to the company as a whole, even by directors who hold office in a number of corporations in a corporate group. The requirement conserving ratification of otherwise unauthorised conduct to the shareholders of a company is not a mere technicality. It is a rule which imposes on companies the beneficial discipline of the law for the protection of investors and creditors and, through them, of the community which is so dependent upon corporations for its economic well-being.

I acknowledge that Mr Hawkins had his own interest to protect the corporate"empire" which he had built up and in which he had a substantial personal stake. This was the interest which he expressed in words, to which it will be necessary to return, suggesting that what was good for the group was good for its members. Alas, it was not necessarily so. The members comprised corporations with quite distinct interests. In the Finance Group were separate companies (such as Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust)) raising from, and lending money to, the public. They were subject (as a consequence) to particular requirements of liquidity and special obligations of which Mr Hawkins himself was fully aware. In the Industrial Group were entrepreneurial corporations with quite different purposes; including corporate take-overs and share acquisitions with a high element of risk. To treat all such corporations in the situation of these as members of the "group", and to suggest that their group relationships conferred upon Mr Hawkins an authority which the corpor ations through their lawful organs had not bothered to express, is to depart unacceptably from the requirements of company law. It is to ignore, in the facts of this case, the differing nature and objectives of the appellants as companies in the Finance Group when compared to Equiticorp Tasman Ltd (the recipient of their liquidity reserve) which was in the Industrial Group. The third argument advanced to support the authority of Mr Hawkins to make the decision which he did on behalf of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) was that Bank of New Zealand was entitled to make an assumption of that authority in accordance with s 68A(3) of the Code. Bank of New Zealand relied, in particular, on par (a) and/or par (f) of that subsection.

To say the least, it was difficult for Bank of New Zealand to advance an argument of ostensible authority on the part of Mr Hawkins. No witness from Bank of New Zealand was called to say explicitly that Mr Hawkins had purported to act as a director of either of the appellants or to give such other evidence from which the inference, necessary to that conclusion, would be drawn. By s 68A(4) of the Code a person is not entitled to make the assumptions referred to in s 68A(3) if, relevantly: "(b) his connection or relationship with the company is such that he ought to know that the matter that, but for this sub-section, he would be entitled to assume is not correct."

As Priestley JA recently observed in Bank of New Zealand v Fiberi Pty Ltd (Court of Appeal, 13 July 1993, unreported) the meaning of the words "ought to know" in par (b) presents a matter of some difficulty. In his Honour's view, expressed with the concurrence of Clarke JA, the best meaning to be assigned to the expression is that a person would reasonably be expected, in the particular circumstances of that person in relation to the assumption being made, to know the true position about the matter assumed. In judging that question much depends on the person's "connection or relationship with the company". Priestley JA in Bank of New Zealand v Fiberi Pty Ltd went on:


"This seems to me to indicate that a judge considering whether s 64A(4)(b) applies to the facts of a case is required to look at the person in question, consider the full factual circumstances of that person's connection or relationship with the company in regard to the particular matter in question and then decide whether in those circumstances that person acting reasonably would know the true position about the matter assumed."

See also Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722. In the case of Bank of New Zealand v Fiberi Pty Ltd , where the relationships were much more confined than those between Bank of New Zealand, Mr Hawkins and companies in the Equiticorp Group, this Court unanimously found that a reasonably competent and prudent bank would either have known, or would have found out, about the authority (or lack of it) on the part of the company officer in question. Specifically, it would have known or discovered his authority to execute the guarantees upon which the bank's claim rested.

How much clearer is the present case? From a long, intense and eventually disputatious relationship between Bank of New Zealand and members of the Equiticorp Group, Bank of New Zealand certainly knew the separate status, liquidity needs and obligations of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). It knew that those companies had nothing to do with the Uruz Pty Ltd debt. Yet Bank of New Zealand itself had suggested a device which resulted in one company (Equiticorp Tasman Ltd) (and, through it, Bank of New Zealand itself) securing the benefit of a transaction at the cost of other companies in the group (Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust)) which, to use the words in Northside (at 165) appeared to gain no benefit for themselves as a result. In Mason CJ's words in Northside which deserve to be repeated, striking down such devices (at 165): "... will compel lending institutions to act prudently and by so doing enhance the integrity of commercial transactions and commercial morality."

In the light of the knowledge which Bank of New Zealand had, it was not open to Bank of New Zealand to initiate, carry through and take advantage from the transfer of, assets from Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) to Equiticorp Tasman Ltd. The idea was conceived by Bank of New Zealand. It was prosecuted by Bank of New Zealand. It was urged on by Bank of New Zealand, despite resistance even from Mr Hawkins himself. The letter to effect it was dictated by an officer of Bank of New Zealand. And all the while Bank of New Zealand knew enough about the companies in the Equiticorp Group (including the appellants) to raise a serious question as to how such a decision could possibly be in the best interests of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) in their circumstances. Such a question put Bank of New Zealand on notice of the need to be sure that the decision had the authority of the respective boards of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). Bank of New Zealand was not entitled, in the circumstances, to act upon suggested implications, or to rely upon ostensible authority. If that was the conclusion in Bank of New Zealand v Fiberi Pty Ltd , how much more clearly must it be so in this case.

With respect, therefore, I have come to a view on Mr Hawkins' authority different from that reached by Giles J. At the end of these reasons I shall return to the consequences.

Fiduciary duty: the problem of illiquidity/insolvency:

Before embarking on the general issue of the suggested breach of the fiduciary duty owed by the directors to Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), certain preliminary matters must be dealt with.

In argument before this Court, Bank of New Zealand resisted most vehemently the suggestion that its conduct was to be judged upon the basis that the solvency of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), or either of them, was in jeopardy at the relevant times. The reason for this anxiety was not hard to find. It arises from the expression, in a series of cases, that directors of a company owe a fiduciary duty which may, in particular circumstances, require them to consider, as well as the corporators, the interests of the creditors. So much was said by Mason J in Walker v Wimborne (at 5). To like effect are the remarks of Cooke J (as the President then was) in Nicholson v Permakraft (NZ) Ltd (In Liq ) (1985) 3 ACLC 453. This decision was, in turn, cited with approval by Street CJ in Kinsela v Russell Kinsela Pty Ltd (In Liq ) (1986) 4 NSWLR 722 at 731: see also J D Heydon, "Directors' Duties and Company's Interests" in P D Finn, (ed) Equity and Commercial Relationships , Law Book Co (1987) Sydney at 120, 126ff.

For Bank of New Zealand, it was put that there had not been the slightest suggestion at the trial of a jeopardy of insolvency either of Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust) or, indeed, of the Equiticorp Group as a whole or relevant parts of it (such as Australian Finance Group). Bank of New Zealand urged that the Court should not permit the appellants to recast their case on appeal. Evidence as to the risks of insolvency would normally be given by liquidators with the benefit of careful analysis of the companies' financial records, scrutinised over time. In such circumstances, as the liquidators of the appellant companies had not given such evidence, it would involve a procedural unfairness to Bank of New Zealand to permit such a consideration now to be advanced. Had such a case been urged at the trial, it could have been tested by cross-examination and met by evidence and argument. An appellate court should protect a party against the attempt of its opponent to recast its case on an appeal in such a way as to present a different case, where doing so would involve a risk of procedural unfairness: see Coulton v Holcombe (1986) 162 CLR 1 at 7 and cases there cited.

An examination of the record bears out Bank of New Zealand's contention that it was not asserted for Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust) at the trial that either of them was actually insolvent at the time the transaction took place involving the use of their liquidity reserve. In that sense, this case is to be distinguished from Walker v Wimborne where the company in question was actually insolvent. It is also probably fair to say that the case for Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) at trial was rather put in terms of the consequence for their liquidity ratios of denuding them of the liquidity reserves which they required, rather than (at least expressly) for the jeopardy of insolvency which this action produced. Nevertheless, it would be rather unrealistic, in the light of the pleadings, the evidence called, the conduct of the case and the interests of the respective parties, to ignore altogether the consequences of endangered liquidity for the solvency of the two companies concerned.

An examination of the transcript shows that this issue certainly arose during the trial. For example, during the evidence of Mr Keith Gammel, manager, finance for Equiticorp Finance Ltd, Equiticorp Financial Services Ltd (Aust) (and Equiticorp Australia Ltd) in Sydney, counsel for Equiticorp Finance Ltd tendered a printout from the computerised ledger of Equiticorp Finance Ltd for the month ending July 1988. The tender was objected to. Following argument, Giles J gave reasons for his ruling admitting the document. He noted that the tender was made for two purposes:


"... broadly, the material goes to solvency or otherwise of Equiticorp Finance Limited.

The first proposed use of the material is to counter BNZ's claim of ratification by arguing that there could not be ratification of a transaction which would thrust the company into insolvency. BNZ -- being the only party against whom the material was tendered -- does not object to the tender for that purpose, being content to fight that battle with whatever weight the material may cast in the scales against it.

The other proposed use, however, is to seek to support insolvency 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." (Emphasis added.)

In the ultimate, his Honour did not give leave to Equiticorp Finance Ltd to rely upon the material for the second purpose mentioned. Such was the position before us. But the foregoing extract from Giles J's ruling makes it plain enough that the issue of solvency was clearly in contest at the trial. The pleadings support Giles J's assumption. So does much of the evidence which was adduced going to the financial position, not only of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), but also of other members of the Equiticorp Group. Indeed, an important ingredient in Bank of New Zealand's case, in supporting the factors which weighed with Giles J in dismissing the suggested breach of fiduciary duty, was the very fact that the interests of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) included an interest to reduce the risk of insolvency of the whole Equiticorp Group which could derive from a failure by the group, through Mr Hawkins, to make appropriate arrangements to restore group credibility by discharging Equiticorp Tasman Ltd's Uruz Pty Ltd borrowing by the deadline which Mr Travers of Bank of New Zealand had nominated, viz, 28 July 1988.

To support, as an objectively rational and intelligent decision, the assignment of the liquidity reserve of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) to the benefit of Equiticorp Tasman Ltd in discharge of the Uruz Pty Ltd facility, it was, in a sense, important, in the Bank of New Zealand case, to lay emphasis upon the vulnerability of illiquidity to the entire Equiticorp Group. The more vulnerable and illiquid the group, the more important it was for Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) -- consequentially vulnerable and exposed to market rumours -- to take decisions (or have them taken on their behalves) which were in the interests of the group as a whole, viewed as an integrated and inter-related series of companies.

On this point, therefore, I am of the opinion that the only success which Bank of New Zealand is entitled to enjoy upon its preliminary objection, is that it must be accepted that it was not part of the case of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) that they were, or either of them was, actually insolvent when the relevant decision to utilise their liquidity reserves was made. But to say that the threat of insolvency was not hanging over the companies, and to suggest that this was not an issue at the trial, flies in the face of the expression of the ruling, which I have cited, and much of the controversy which has taken up the time of this Court as it did before Giles J.

This is not an unimportant determination. As counsel for Bank of New Zealand conceded (properly in my view), if there were actual insolvency on the part of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), the authority of Walker v Wimborne would clearly require that the separate obligations to the members and creditors of those two companies would be enlivened. With respect to Giles J, who took the contrary view, there is a fine line between actual insolvency and the kinds of concerns about liquidity of members of the Australian Finance Group, which were agitating Bank of New Zealand and Mr Fitzgerald during June 1988. Those concerns ultimately led to the establishment of the liquidity reserve, for a purpose far removed (as Bank of New Zealand would have known) from the discharge of a residual take-over debt, owing by a still more illiquid company in the Industrial Group, viz Equiticorp Tasman Ltd.

Financial illiquidity is sometimes a precursor to insolvency. Chronic liquidity problems in companies, vulnerable to market rumour, and dependent upon cash flow, can all too easily turn into the ugly reality of insolvency. The one may often herald the other. All the more reason to establish and preserve the liquidity reserves. And not to permit them to be raided for an extraneous purpose, still less to suggest that it should be effected by a device of an inter-company transaction, that would obviously be a sham.

The intelligent and honest director test:

The exclusion of Mr Hawkins from authority -- actual or implied -- to act on behalf of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), as I would hold, does not necessarily mean that the failure of the directors of either company to address their minds specifically to the interests of each company automatically rendered the transactions which followed ultra vires and void. The reason why this is not the law was explained by Pennycuick J in Charterbridge (at 74-75) cited by Giles J (ibid at 302). It is following that explanation that his Lordship offered the frequently repeated test which needs a little reworking in an age of greater awareness of gender-neutral language:


"... 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."

As Giles J pointed out, this test has been applied many times in Australia, notably by Mitchell J in Reid Murray Holdings Ltd (In Liq) v David Murray Holdings Pty Ltd (1972) 5 SASR 386 at 402; and in Australian National Industries Ltd v Greater Pacific Investments Pty Ltd (In Liq ) ( No 3 ) (1992) 7 ACSR 176.

Giles J, applying that test, concluded that there were the six reasons earlier identified which supported the conclusion that an intelligent and honest person in the position of a director of each of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) could reasonably have believed that the transaction, involving the deployment of those companies' liquidity reserves, was for the best interests of those companies and each of them. Running through the reasons offered by his Honour for this conclusion was his rejection of the argument that such a director should be confined, in the circumstances, to considering the separate position of each of the companies concerned. Instead, he concluded that, because the loss of Bank of New Zealand's support for the Equiticorp Group would have significantly and detrimentally affected the interests of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) (indeed would have been "potentially disastrous" for them) it was appropriate to take that consequential effect into account in evaluating their discharge of their duties to their companies. For the six reasons identified, Giles J accepted that the honest and intelligent director so postulated could believe that the application of the liquidity reserve of the two companies, towards repayment of the Uruz Pty Ltd debt, was for the benefit of those companies.

With respect, I cannot agree. The line of Australian authority, starting with Walker v Wimborne , commands, in my view, the contrary conclusion. Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) may not have been insolvent. But they certainly had serious and even chronic liquidity problems. Those problems necessarily required an intelligent and honest person in the position of a director to give consideration to their separate vulnerabilities. Such consideration is not confined to a case where the company in question is already insolvent. The reason for separate consideration is not specific to insolvency as such. It is related to the consequences that may flow to members, and ultimately creditors, from decisions which are taken affecting a company when it is in a vulnerable position so far as its liquidity is concerned.

In Charterbridge itself, it was emphasised that each company in a group "is a separate entity and the directors of a particular company are not entitled to sacrifice the interests of that company". In an English text, Groups of Companies , edited by C M Schmitthoff and F Woolridge (1991), London, Sweet& Maxwell, the authors state, accurately in my understanding of the applicable law (at 59-60):


"It is trite law that directors in exercising their powers must act bona fide in the interests of the company. In the context of groups, this requires the directors of each company in a group to consider whether a given transaction is in the interests of that company. Undoubtedly, it will often be the case that the interests of a company, which is a part of a group, will be so inextricably bound up with the welfare of the group, that what is in the interests of the group is in the interests of the company. This will almost invariably be the case with respect to a parent as regards its subsidiary. A subsidiary may not have the same compelling interest in preserving the other members of a group, but where a subsidiary is threatened by the failure of one of the members of a group then it will have an interest in preserving it. This for example would be the case where a member of a group supports another group member which markets the group's products."

See also R P Austin, "Problems for Directors within Corporate Groups" in M Gillooly, The Law Relating to Corporate Groups (1993), Federation Press, Leichhardt, at 133, 141ff.

An unbroken line of Australian authority since Walker v Wimborne has laid emphasis upon the duty of directors of companies within a group of companies, in circumstances analogous to the present, to consider the separate position of their company within a group. Following Walker v Wimborne , the High Court confirmed its approach in Industrial Equity Ltd v Blackburn (1977) 137 CLR 567. Rogers CJ Comm D followed it in Qintex Australia Finance Ltd v Schroders Australia Ltd (1990) 3 ACSR 267 at 269. So did Cole J in Australian National Industries Ltd v Greater Pacific Investments Pty Ltd (In Liq ) (Cole J, 14 December 1990, unreported) at 79- 80.

In Qintex (at 269), Rogers CJ Comm D suggested the possible need for legislative reform to cover the special problems presented by corporate groups. Although much company law reform has been enacted, the Walker v Wimborne principle is unaffected by a group exception. His Honour said:


"It may be desirable for parliament to consider whether this distinction between the law and commercial practice should be maintained. This is especially the case today when the many collapses of conglomerates occasion many disputes. Regularly, liquidators of subsidiaries, or of the holding company, come to court to argue as to which of their charges bears the liability. If an illustration were needed of the futility and inappropriateness of arguments of this kind, it may be found in the facts which ground my decision in Impact Datascape Pty Ltd v McIntosh (3 October 1990, unreported). As well, creditors of failed companies encounter difficulty when they have to select from among the moving targets the company with which they consider they concluded the contract. The result has been unproductive expenditure on legal costs, a reduction in the amount available to creditors, a windfall for some, and an unfair loss to others. Fairness or equity seems to have little role to play."

Of the six considerations in Giles J's list four related to features of group membership and the suggested inter-dependence of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) with the group. But these considerations cannot, as Mason J warned in Walker v Wimborne (at 6-7): "... obscure the fundamental principles that each of the companies was a separate and independent legal entity."

If I am right in considering that this principle -- which really derives from nothing less than the very nature of each corporation as a separate legal person-- is not confined (as Bank of New Zealand would have it) to a corporation unable to pay its debts as they fall due, but is equally applicable to corporations experiencing actual or real and potential problems of liquidity, the error of Giles J -- as I would respectfully see it -- is exposed. This is not to say that a consequential effect of the advantage to members of a group of companies could not be taken into account by an intelligent and honest director of a particular company in deciding what that company should do. But in the instant case there were a number of additional considerations which controlled the decision. In essence, they were the very considerations which caused Mr Fitzgerald to resist Bank of New Zealand's proposal, and Mr Hawkins to hesitate when the proposal was first put to him. The proposal was not only one which involved the use of the appellants' valuable liquid assets (Equiticorp Financial Services Ltd (Aust)'s only real source of available cash) for a purpose distant from their objects. It positively weakened their already vulnerable liquidity. It exposed them to still a greater risk of insolvency. It is precisely in such circumstances that Walker v Wimborne requires that group approaches give way to the duties severally owed by directors to the separate and independent legal entities to which they are appointed. That the principles in Walker v Wimborne and Kinsela do not apply only in circumstances of actual insolvency is made clear by authority: see, eg, Kinsela (at 732f).

In his fifth consideration, Giles J gave weight to Mr Hawkins' imputed intention to provide compensation to Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) by the sale of receivables from the New Zealand Finance Group. However, again with respect to his Honour, this consideration, which he conceded was "imperfectly executed", could not have had any weight at all with an intelligent and honest person in the position of a director of Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust). Why, one might ask, would it reasonably be supposed that the New Zealand Finance Companies would make a gift of their receivables in return for no real benefit, and simply on the instruction of Mr Hawkins? Why should this be done merely to achieve compliance with the 28 July 1988 deadline fixed by Mr Travers. Why, especially, should such be done when the legal obligation of repayment had already been extended to the end of September and Bank of New Zealand was fully covered until then? An intelligent and honest person in the position of a director of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) would doubtless weigh up the advantages of the goodwill of Bank of New Zealand both to their companies separately and as members of the group. But it was hardly likely that Bank of New Zealand, having agreed to an extension until September 1988, and being so committed to its involvement in Equiticorp funding, would have pulled the plug simply because the earlier deadline of 28 July 1988 was not observed.

It is not enough that Mr Hawkins might have had a benign intention. It is necessary to test that intention against the actions of a person both intelligent and honest. An honest person in the position of a director of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), asked to surrender the important liquidity reserve of his company so recently procured for good reason by that company, would have inquired as to the prospect of putting in place the equivalent liquid assets procured from sources having an obligation to provide them, and in a form free of relevant interests of other parties. None of this Mr Hawkins did. He did not consult the boards of any of the companies in the New Zealand Finance Group to ascertain their attitudes. Given the vulnerability of those companies, as well, such would have been the obligation of an intelligent and honest person. Far from being an ameliorating factor, as Giles J seemed to think, the fact that Mr Hawkins recognised, and so imperfectly sought to achieve, the provision of compensatory liquid assets to Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), indicates his recognition of his fiduciary obligation separately owed to those companies. It also demon strates his breach of the fulfilment of that obligation.

So far as the sixth consideration mentioned by Giles J, (the prospect that a liquidity reserve could be in place within a short time) any reliance by an intelligent and honest person in the position of a director of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), on the prospect that the bank would provide a replacement liquidity reserve, would need to have taken into account the enormous pressure which Bank of New Zealand was exerting to reduce its exposure to companies in the Equiticorp Group. It was doing so even to the point of itself suggesting the utilisation of a liquidity reserve so recently established after much insistence. By the end of July 1988, the senior officers of Bank of New Zealand were clearly operating on the fear of senior officers of the Equiticorp Group companies (especially Mr Hawkins) concerning a public loss of credibility with the consequences this might have upon the liquidity (and ultimately the solvency) of the group and its members. In such circumstances, an honest and intelligent person in the position of a director of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) would have had to entertain grave doubts, both that those companies would receive from other illiquid companies in the group truly compensatory liquid assets, to replace the liquidity reserves which were surrendered, and that Bank of New Zealand would extend an equivalent credit facility to those companies in the future, should the need arise. No intelligent and honest person in the position of a director of Equiticorp Finance Ltd or Equiticorp Financial Services Ltd (Aust) could, in the circumstances described, have considered that it was in the best interests of those companies to authorise the deployment of their liquidity reserves for the purpose for which they were used, viz, the reduction of the Uruz Pty Ltd facility of Equiticorp Tasman Ltd and the satisfaction of Bank of New Zealand's insistence on an early reduction of that facility before Bank of New Zealand's board meeting on 28 July 1988. Giles J erred in holding otherwise.

The bank was a constructive trustee for the breach:

In the conclusion which he reached concerning the suggested breach of fiduciary duty, Giles J was not obliged to determine whether Bank of New Zealand was liable as a constructive trustee for that breach. In my conclusion, I am so obliged.

Because no officer of Bank of New Zealand gave evidence, neither Equiticorp Finance Ltd nor Equiticorp Financial Services Ltd (Aust) could put questions to the bank to establish the bank's knowledge so as to render Bank of New Zealand liable for the breach of fiduciary duty found.

The absence of oral evidence from the bank does not prove any fact. But it does enable the Court to draw more readily the inferences which would otherwise be drawn and to come to the conclusion that no evidence was available to the bank which would have helped it. Otherwise it would have been called in this large and sharply contested case.

The failure of the bank to call any of its officers allows Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) to rely upon the well- known principles expressed in Jones v Dunkel (1959) 101 CLR 298 at 319. A central issue on the breach of fiduciary duty was the precise knowledge of the bank. It must be inferred, from the failure of the bank to call any witnesses, that it could not deny any fact contained in its files; could not deny any imputation on such facts reasonably available to the appellants; could not challenge any of the oral testimony given for the appellants; could not contradict evidence tendered by the appellants on any issue; and could not respond, better than the documents did, to the assertion that the use of the liquidity reserve exposed the appellants to the jeopardy of serious illiquidity with the potential that inevitably carried of the risk of insolvency.

As has by now become apparent, a great amount of the bank's records were admitted into evidence. They included painstaking memoranda which recorded the knowledge, and means of knowledge, of Bank of New Zealand, and the considerations which affected the conduct of its officers. It is clear from this material that Bank of New Zealand knew that Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) required their liquidity reserves. Indeed, Bank of New Zealand had advised the creation of such reserves. It is equally clear that the conception of using the reserves for the extraneous purpose of meeting Mr Travers' deadline and reducing the Uruz Pty Ltd exposure actually originated in Bank of New Zealand itself. Bank of New Zealand was aware that Mr Fitzgerald, executive director responsible for the Australian Finance Group, opposed the use of the reserves in this way. On the very day before the liquidity reserves were raided, Bank of New Zealand was made aware of the very low level of liquid assets available to the Australian Finance Group. The removal of the liquidity reserves would greatly exacerbate the Australian Finance Group's liquidity problems.

It is clear law that a bank does not have the responsibility of gratuitously supervising or checking the managerial activities of its customers: see Bank of New South Wales v Vale Corporation (Management) Limited (In Liq ) (Court of Appeal, 21 October 1981, unreported) per Street CJ. But this self- evident proposition does not relieve a bank of obligations imposed upon it by the particular circumstances of its relationship with a particular customer. Equiticorp Financial Services Ltd (Aust) relied upon s 230 of the Companies (New South Wales) Code . It agreed that it had not done so at trial. I do not believe that regard should be had to this argument: see Stephens Travel Service International Pty Ltd (Receivers and Managers Appointed) v Qantas Airways Ltd (1988) 13 NSWLR 331 at 360.

In so far as Bank of New Zealand turned its attention to how Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) would be compensated for the surrender and use of their liquidity reserves, it merely suggested a transparent device of treating the use as an "inter-company loan" to Equiticorp Tasman Ltd. It would have been known to Bank of New Zealand that this would have been an irresponsible step for directors of the finance companies to take, given their liquidity predicament. Equiticorp Tasman Ltd had its own acute liquidity problems. Indeed, in part, these explained Bank of New Zealand's urgent desire to discharge the Uruz Pty Ltd facility. When pressed by Mr Hawkins, Bank of New Zealand refused to give a clear commitment to the provision of a replacement liquidity reserve. Bank of New Zealand knew that Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) had no relationship with Equiticorp Tasman Ltd, either in terms of shareholding or in shared business interests. On the contrary, the prudent businesses of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) were entirely distinct from the entrepreneurial activities in which Equiticorp Tasman Ltd was engaged.

The only documentation which Bank of New Zealand obtained were the two letters dictated by its officer. It sought no board minutes nor other formal documentation of authority and decision. Bank of New Zealand discussed the use of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust)'s liquidity reserve with nobody in the Equiticorp Group except Mr Hawkins. He was not a director of Equiticorp Finance Ltd. The one person who was a director of each of the appellant companies, Mr Fitzgerald was known by Bank of New Zealand to be vehemently opposed to the use of the reserve as proposed by it. As Bank of New Zealand also knew, the funds of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) were being used not to discharge any liability of those companies but to discharge a liability of Equiticorp Tasman Ltd.

The only features which Equiticorp Tasman Ltd shared with Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) was membership of the Equiticorp Group, a common lack of liquid assets and a like problem with its cash flow. As Bank of New Zealand well knew (itself being a financial institution) liquid assets and cash flow were especially important for Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). Giles J found that Bank of New Zealand received Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust)'s funds and applied them towards discharge of the Uruz Pty Ltd debt. To this extent, Bank of New Zealand was certainly the recipient of the money so used. Was it therefore a constructive trustee for the breach of the duties owed by the directors of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) which I have already found?

It is true that this is not a case where Bank of New Zealand had knowledge of a relevant illegality or fraud. Such is the usual class of case giving rise to a claim of liability under Barnes v Addy (1874) LR 9 Ch App 244. Nor is this a case of blatant misfeasance of the kind found in the Australian National Industries litigation. Bank of New Zealand urged, following Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 398 that, in all the circumstances, it should not be inferred that it was aware that the transactions authorised by Mr Hawkins, as the head of the Equiticorp Group, involved a breach of the trust or of fiduciary duty owed by the directors of the relevant Equiticorp companies involved. Bank of New Zealand therefore argued that, even assuming breaches of duty within the Equiticorp Group, it was not liable for the consequences. Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust), on the other hand, urged that the Court should find that, within the two limbs of theBarnes v Addy principles, that Bank of New Zealand had:

(a)
received trust property with a requisite degree of knowledge of the breaches on the part of Mr Hawkins and the other directors of the two companies of the fiduciary duties owed to them; and/or
(b)
participated, with the requisite degree of knowledge, in the breaches of trust committed by Mr Hawkins and the other directors by inducing, procuring, advising, facilitating or taking advantage of the breaches for Bank of New Zealand's own benefit.

In a number of recent decisions both in Australia and in England, various principles have been elaborated to fix third parties with sufficient knowledge of a breach of trust to render them, although strangers, liable for the breach of trust of others.

The most detailed analysis of the knowledge necessary to enliven liability is found in the judgment of Peter Gibson J in Baden v Soci é t é G é n é rale pour Favoriser le D é veloppement du Commerce et de l'Industrie en France SA (1983) [1992] 4 All ER 161; [1983] BCLC 325. The states of knowledge identified by his Lordship as necessary for this purpose were:

(1)
actual knowledge;
(2)
wilfully shutting one's eyes to the obvious;
(3)
wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;
(4)
knowledge of the circumstances which would indicate the facts to an honest and reasonable man; and
(5)
knowledge of the circumstances which would put an honest and reasonable man on inquiry.

In Consul , Stephen J (at 412) concluded that knowledge of the kind mentioned in category (4) was sufficient. Gibbs J appeared to be of the same view (at 398).

A differential rule has been applied when the third party in question actually receives trust properties. In such a case, the stranger will become liable as a constructive trustee if any of the four first stated elements of knowledge identified by Peter Gibson J is established. The appellants submitted that knowledge of the fifth kind was sufficient, in such a case. They argued that, at the very least, Bank of New Zealand in this case had knowledge of circumstances which would have put it, if honest and reasonable in its approach, upon inquiry: cf Selangor United Rubber Estates Ltd v Cradock [1968] 1 WLR 1555 at 1590; [1968] 2 All ER 1073 at 1104; United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 at 258.

Having regard to the matters which the evidence discloses were known to Bank of New Zealand (both concerning the Equiticorp Group and the place of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) within it and of the circumstances and purposes of the use of the liquidity reserves) it sufficiently appears, in my view, that Bank of New Zealand, as the recipient of trust money both participated in the breach of fiduciary duty on the part of those who controlled Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) and assisted in such breach. Because it received the trust funds in circumstances where each of the five types of knowledge identified by Peter Gibson J in Baden applied, this was sufficient to render Bank of New Zealand, although a stranger to the trust, liable to account for the breach of trust which then ensued.

To the extent that Bank of New Zealand was not actually aware of the breach of trust, but left the transaction to be effected, on its suggestion and insistence, as best Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) could manage, the case is one where Bank of New Zealand must be taken to have acquired the knowledge which it would have done, but for shutting its eyes to the obvious, or wilfully or recklessly failing to make inquiries as a reasonable and honest person would have done in the circumstances: cf Re Montagu's Settlement Trusts [1987] Ch 264 at 285; [1992] 4 All ER 308 at 329.

A number of recent English authorities were cited to the Court as suggesting that a different standard applies to the second limb of Barnes v Addy . Thus, it was suggested that a stranger to a trust obligation will not be treated as accountable as a constructive trustee unless the stranger has knowingly participated in a dishonest design to misapply the fund. To be rendered liable, upon this view, the trustee must in some way be a party to the dishonesty of the trustees themselves: see, eg, Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2 ) [1980] 1 All ER 393 at 405; Agip (Africa) Ltd v Jackson [1990] Ch 265; [1991] Ch 547; Eagle Trust plc v SBC Securities Ltd [1992] 4 All ER 488 at 497. In Montagu's Settlement , Sir Robert Megarry VC suggested that the basic question in every case was whether the conscience of the recipient was sufficiently affected to justify the imposition of a constructive trust upon the recipient of the trust funds. Of course, such a formulation leaves the answer in each case dependent upon the facts and the impression they make on the decision-maker.

Both Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) conceded that, if the Belmont requirement applied in this jurisdiction, they could not establish dishonesty on the part of Bank of New Zealand or any of its officers.

In Australia, the only guidance of the High Court is to be found in Consul . It appears to be suggested that, in the case of participation in a breach of trust, a stranger to the trust will be liable at least if the "requisite degree of knowledge" in the categories 1 to 4, as stated in Baden , are made out. In such a case, the stranger will be liable to compensate the beneficiary.

Mason CJ, writing extra-curially, has observed that the law on this subject "suffers from over much classification at the expense of sound underlying principle": see P D Finn (ed), Essays in Equity , (1985) Law Book Co, Sydney, at 247. I see no reason why, to render a bank, the recipient of trust funds, liable to account, it should be shown that the breach occurred in furtherance of a "dishonest and fraudulent design" involving Bank of New Zealand. This appears to be the law in England and in New Zealand. However, such a rule inadequately protects beneficiaries. It fails to share risks equitably. And it provides inadequate stimulus to commercial morality of the kind referred to in Northside (at 165). Obtuseness is no excuse for or exemption from involvement in a breach of fiduciary duty, especially where it is rewarded with the receipt of the funds the subject of the breach. An interesting essay by Professor Paul Finn, "The Liability of Third Parties for Knowing Receipt or Assistance" (so far unpublished) was placed before the Court. The author points to the importance of the issue for the familiar problem of loss distribution (at 1):


"In the wake of the corporate and trust collapses of the 1980s this question ['Should not my loss be your loss?'] is being urged with no little insistence throughout the common law world. The dimensions of the losses suffered need no recounting here. Their symbols are the Savings and Loans associations in the United States, BCCI in Britain and elsewhere, Tricontinental and many others in Australia, and Equiticorp in New Zealand."

Professor Finn concludes (at 35) that what he terms participatory liability requires an affirmative answer to be given to three questions:

1.
Has a fiduciary committed a breach of fiduciary duty or breach of trust?
2.
Has the third party participated in the manner in which the breaches occurred? and
3.
In so doing, did the third party know, or have reason to know, that a wrong was being committed by the fiduciary on its beneficiaries?

If justice is to be done both to the third party and to beneficiaries, participation in the loss should be expected. No more but no less. Professor Finn's approach amounts, as he freely acknowledges, to an abandonment of "much of the jurisprudence of Barnes v Addy ". I am sympathetic to his approach. By the test of the three questions Bank of New Zealand would be liable for the breaches of fiduciary duty owed to the appellants in the manner in which such breaches occurred here. Bank of New Zealand would be liable both for what it knew and for what it had reason to know was a wrong being committed on the appellants. In this particular case, that wrong was actually conceived by Bank of New Zealand as the third party. It insistently pressed forward, and it did so despite resistance and proper hesitation at first on the part of the fiduciaries exhibiting (as Mr Hawkins ever so briefly did) a proper fiduciary's rejection of the proposal.

Whilst this conclusion can be reached by this new route it can also be reached quite readily, in the facts of this case by the more orthodox way whichBarnes v Addy allows. From the facts shown to have been known by it, Bank of New Zealand was aware of the fiduciaries' breaches of duties. It participated in them with the requisite degree of knowledge by taking advantage of them for its own benefit to secure the object which it had insisted upon. That was the reduction of the Uruz Pty Ltd facility by the date which Mr Travers fixed, of 28 July 1988. That date was, in turn, in advance of the legal obligation, which had been extended to September.

Economic duress:

In this already overlong opinion, I must deal with economic duress economically. The principles are accurately collected in Giles J's reasons (at 296ff). The test is one expressed by reference to somewhat unsatisfactory criteria. These ask: was the pressure exerted "illegitimate" or "unconscionable" in the circumstances? Or was it merely the kind of commercial pressure which operates in the economic marketplace and is said, by some, to be one of the most precious features of economic liberty? Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) criticised Giles J's conclusion that the attack on Bank of New Zealand's pressure, applied on Mr Hawkins, did not need to be considered because it would not bring greater success than the suggested breach by the directors of their fiduciary duties. It was urged that this approach had led Giles J to exclude from his consideration a number of facts relevant to the economic duress claimed. Specifically, it was argued that Giles J had erred in excluding commercial pressure and in finding that this could not, by definition, amount to economic duress.

I see no error in Giles J's approach. It is true that, in Crescendo (at 46), McHugh JA offered only enigmatic guidance:


"... The proper approach ... 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?"

What precisely the law is prepared to countenance as "legitimate" begs the question which needs to be answered in characterising particular conduct as impermissible economic duress (on the one hand) or the permissible (even necessary) operation of the market economy (on the other). There is no doubt that in some circumstances commercial pressure may constitute duress: see, eg, Pau On v Lau Yiu Long [1980] AC 614. The authors (Meagher, Gummow and Lehane) of Equity, Doctrines and Remedies , 3rd ed (1992) Butterworths, Sydney, after reviewing the cases, came to the not unsurprising conclusion that attempts to circumscribe the jurisdiction of economic duress by "attempts at exact verbal formulae" were bound to be unprofitable: see ibid par 1216 at 345-346.

Many (if not most) of the cases dealing with economic duress have concerned parties in seriously unequal economic bargaining positions. One of them effectively overbears the will of another in a way that strikes the decision-maker as unconscionable. Such a case was Williams v Bayley (1866) LR 1 HL 200. Relief in such cases involves an arguably legitimate, if somewhat paternalist, intervention of the law where the will of a party has been overborne or where what has occurred is so unconscionable as to call out for redress from the court. From one perspective, the relief offered can be seen as a defence of true freedom to contract and not an intervention by the courts to strike down contracts only achieved by duress: see Universe Tankships Inc of Monrovia v International Transport Workers Federation [1983] 1 AC 366 at 383f: cf R Halson, "Opportunism, Economic Duress and Contractual Modifications" (1991) 107 LQR 649 at 656; A Phang, "Economic Duress -- Uncertainty Confirmed" (1992) 5 J C L 147; A Phang, "Wither Economic Duress? Reflections on Two Recent Cases" (1990) 53 MLR 107.

There are various reasons why I approach this claim in the present case with reservation. These reasons include:

1.
The unsatisfactory and open-ended formulae which have been offered in the cases. These do not seem to have been improved much over the past hundred years;
2.
The dangers of courts' substituting their opinions about agreements for those reached by parties, at least in circumstances such as the present where the parties are substantial corporations and where millions of dollars are involved;
3.
The overlap, in this jurisdiction, of the concepts involved in economic duress and those invoked by the Contracts Review Act 1980 whose applications are more sensibly limited and whose provisions more detailed and structured;
4.
The doctrine of economic duress may be better seen as an aspect of the doctrines of undue influence and unconscionability respectively. If relief, beyond statute, is appropriate, courts would be better able to provide such relief in a consistent and principled fashion under the rubric of undue influence and unconscionability rather than by pretending to economic expertise and judgment which they will generally lack: cf Phang (1990) 53 MLR 107 at 113; and
5.
The doctrine renders the law uncertain and in an area where certainty is highly desirable. This is illustrated by the instant case. It invites judges (and lawyers advising clients) to substitute their opinions and decisions for those of commercial people who, almost always, will have a better grasp of detail of their relationships and a better appreciation of the economic forces which are at work.

For Bank of New Zealand, it was conceded that if Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) were to succeed in their claim of a breach of trust and of the liability of Bank of New Zealand as constructive trustee for that breach of trust, the claim in economic duress would not advance the matter. This was the case, so it was said, because the illegitimacy of the conduct giving rise to the constructive trust would be the same. It would invoke the same remedies in equity. On the other hand, if Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) failed to establish a constructive trust as against Bank of New Zealand, then they would fail, so it was applied in the claim of economic duress because the self-same considerations which underlined the constructive trust would deprive the suggested economic duress of the illegitimacy or offence to conscience required to attract relief.

In view of my conclusion that Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) have made out the breaches of fiduciary duties alleged and the constructive trusts necessary to render Bank of New Zealand liable as a constructive trustee, it is unnecessary for me to explore the submissions of the appellants which sought to distinguish the considerations relevant to proving a breach of fiduciary duty and liability for that breach in a stranger to the duty (on the one hand) and unconscionable conduct amounting to economic duress (on the other). I am prepared to accept Bank of New Zealand's concession that, the appellants having succeeded on their case of a constructive trust, economic duress would not in this case add any additional or different remedies.

But for the concession made for Bank of New Zealand I would myself have been inclined to question the application of relief for economic duress to a relationship such as existed here between Bank of New Zealand and the appellants. Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) withdrew the suggestion that part of the economic duress was the threat by Bank of New Zealand to spread rumours about the liquidity (or even insolvency) of the companies of the Equiticorp Group. Giles J hit this contention on the head. It would scarcely have been to Bank of New Zealand's advantage to mortally damage the credit of customers which owed it extremely large sums. Specifically, there was no attempt on the part of the appellants to prove that the diversion of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust)'s liquidity reserve caused or contributed to their ultimate insolvency.

I draw a distinction between the liability of Bank of New Zealand as constructive trustee for the breach of fiduciary duty on the part of those controlling Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) (on the one hand) and the suggested liability of Bank of New Zealand for having exerted illegitimate unconscionable and uncommercial economic pressure (on the other). The former looks to the whole conduct of Bank of New Zealand over an extended period in its relationship with Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). It does so in circumstances giving rise to the transfer of the liquidity reserves to the benefit of Equiticorp Tasman Ltd and then Bank of New Zealand (in discharge of the Uruz Pty Ltd facility). The latter's attention is concentrated upon the pressure which Bank of New Zealand exerted on Mr Hawkins to take the step he ultimately took, namely of authorising and instructing the use of the appellants' liquidity reserves. The former is not so narrowly confined. It is much more readily answered in favour of Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust). The latter is much more precisely focused.

Yet even if the theory of economic duress is no longer confined to overbearing the will of the party the subject of duress (on which, see Crescendo (at 45); and comment in Birks, "The Travails of Duress" [1990] LMCLQ 342) the question posed for a court must be answered by reference to a much narrower spectrum of facts. It would be conceivable that Mr Hawkins in the end was able to, and should have, resisted the commercial pressure of Bank of New Zealand. That conclusion could be reached without in any way doubting the earlier determination (based on a much wider range of facts) that Bank of New Zealand was a constructive trustee for the breach of fiduciary duties of the directors of the appellants in the use of their liquidity reserves. Bank of New Zealand, after all, conceived, proposed and pressed forward with this idea despite initial resistance and hesitation from within the Equiticorp Group.

I would have been inclined to dismiss the claim of economic duress. But in the light of the concession made -- and as no difference in remedies would seem to turn on the conclusion -- I will refrain from stating a final opinion.

Except that courts should be even more circumspect about extending the remedy of economic duress to cases of the contracts between substantial businesses than they would be in other cases of equal bargaining power, where different considerations obtain: cf Austotel Pty Ltd v Franklins Self Serve Pty Ltd (1989) 16 NSWLR 582 at 584. The parties in this case had available to them legal and managerial advice of a high order. Each was accustomed to making large decisions affecting millions of dollars and the lives of thousands of people.

Consequences:

In the conclusion which he reached, rejecting the attacks grounded upon the suggested want of authority, breach of fiduciary duty and economic duress, Giles J did not have to turn to the consequences for relief that would have flowed, including those which would attach to a determination that Bank of New Zealand was liable, as a constructive trustee for the breaches of fiduciary duties involved in the utilisation of Equiticorp Finance Ltd's and Equiticorp Financial Services Ltd (Aust)'s liquidity reserves. As I have come to a view different from his Honour's upon the issues of authority and breach of fiduciary duty, it becomes necessary to consider the consequences for the relief claimed by the appellants.

Bank of New Zealand made it plain that it did not argue that it could hold the orders under appeal if a breach of fiduciary duty was shown upon the basis either of ratification or estoppel against the appellants. Bank of New Zealand argued that the appellants had lost "not a cent"; that it had surrendered the valuable Feltrax International Ltd shares; that it had discharged the Uruz Pty Ltd debt which was undoubtedly owed to it by Equiticorp Tasman Ltd and otherwise acted in a proper and honourable way as banker. Equiticorp Finance Ltd and Equiticorp Financial Services Ltd (Aust) suggested that the proper remedy for want of authority, if established, was one for money had and received by Bank of New Zealand: cf Nelson v Larholt [1948] 1 KB 339 at 342. Alternatively, they sought restitution. These are questions which have not been tried, or at least not determined, at first instance.

Although the Court heard some oral (and received some written) submission on such relief, it made it clear, during argument, that it did not intend to embark upon the consideration of relief where, in the way the matter had proceeded at first instance, thus had not been decided by the primary judge. The facts are simply too complicated. The issues raised are too important. Upon one view, they are too novel to warrant this Court's endeavouring to sort out these matters, unaided by the decision on them of the primary judge. The amount at stake for the parties is sufficient to warrant returning the proceedings to the Commercial Division, even though that course involves still further delay in the ultimate resolution of the claims. Upon the return of the matter to trial the parties might wish to argue the defences of ratification and estoppel upon which Bank of New Zealand relied. In the nature of the determination of the primary issue, those defences did not have to be resolved by Giles J and no findings on them had to be made.

The alternative would be for this Court to take on even greater burdens than this case has already required. I hope it will be understood why, in this case, that is an invitation which I would decline. It is appropriate, in leaving the case, to record my appreciation for the extremely high quality of the submissions received by the Court both orally and in writing.

Orders:

The orders which I favour are:

1.
Appeals allowed;
2.
Set aside the orders of Giles J;
3.
In lieu thereof, order that the proceedings be returned to the Commercial Division for the determination of the relief, if any, to which the appellants are entitled by virtue of the conclusions of this Court;
4.
The respondent to pay the appellants' costs of the appeals and to have, if otherwise so qualified, in respect thereof, a certificate under the Suitors' Fund Act 1951; and
5.
The costs of the trial to abide the outcome of the proceedings returned to the Commercial Division, except for the costs associated with the trial of the claim based upon the suggested breach by the respondent of duties allegedly owed by it under s 229 of the Companies (New South Wales) Code which claim was determined against the respondent by Giles J and abandoned in the appeal.