Collier v. Electrum Acceptance Pty Ltd

69 ALR 355

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(Judgment by: Woodward)

Re: John Barry Collier; Paul England & Staff Pty Ltd; Fourth Turiki Pty Ltd; Hattingley Pty Ltd; Lindsay Quentin Hogg; K.A. Loyall Pty Ltd; Romani Pastoral Co Pty Ltd and James Bryan Foster
And: Electrum Acceptance Pty Ltd (Receivers and Managers Appointed), (Respondent/Cross-Claimant); Trevor Burton Huttley (First Cross-Respondent); Edward Christiaan Sent (Second Cross-Respondent); Brian Forshaw (Third Cross-Respondent) and Jon Dean Wilson (Fourth Cross-Respondent)

Court:

Judge:
Woodward

Judgment date: 17 October 1986

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Judgment by:
Woodward

In this matter I delivered a judgment on 6 May, which involved making a number of findings of fact. At the request of the parties, issues relating to the amount of damages which might be awarded, other relief sought, and the cross-claims of the respondent were left to be dealt with in the light of those findings of fact.

I have now heard argument, and received a little additional evidence, on these issues and it is appropriate that I should now make further findings of fact and rule on relevant questions of law.

My previous findings may be summarized for present purposes as follows: (I shall use the abbreviations explained at the outset of my earlier reasons for judgment)

(a)

At the end of June 1981 the respondent, Electrum, leased a new aircraft to the applicants, who were members of a syndicate seeking to obtain tax advantages. The aircraft was to be managed by another company, closely related to Electrum. A few weeks before the lease was entered into, on 23 May, the aircraft had made a forced landing and been damaged. The syndicate members were not told of this, but one of them, Romani, was fixed with the knowledge of its controlling director, Huttley, who through another company he controlled (Tarak) was responsible for putting the syndicate together.

(b)

Huttley learned of the damage to the aircraft from Wilson, a principal of the Schutt group of companies, who was to become a director of Electrum when it was formed. The other directors of Schutt companies who were also to become directors of Electrum were Sent and Forshaw. Sent became aware of the extent of the damage to the aircraft before Electrum came into existence on 25 June 1981 , but it is not clear that Forshaw knew any more than the bare fact that the aircraft had had a forced landing.

(c)

Because Wilson and Sent, at least, were well aware of the damage to the aircraft before the respective partners entered into a lease of it from Electrum in the last days of June, they were guilty of misleading and deceptive conduct in not informing the syndicate members generally that the situation had changed since negotiations were first entered into, in that the aircraft to be leased had been significantly damaged. Electrum was responsible for this inaction of its directors. The relevant effects of the damage from the point of view of the syndicate members were as follows:

(i)

The aircraft would not be able to earn income in the name of the syndicate partnership (Lazar) before the end of the financial year. The effect of this was not certain but it could have led to a disallowance of the partnership's claim for an investment allowance in the financial year 1980/81 - an important part of the tax advantages sought. In the event the claim for an investment allowance was disallowed on other grounds.

(ii)

The damage to the aircraft would mean that it was unable to earn income for several months at least. This was not a matter of serious concern to the partnership, because the scheme did not envisage any substantial profit on operations, and it provided for the Schutt company managing the aircraft to make minimum payments to Tarak, as agent for the partnership, each month - enough to keep the scheme working. (The costs of repairs were born by an insurance company.)

(iii)

Any significant damage caused by a forced landing would reduce the ultimate resale value of the aircraft. This resale was another important element of the scheme, representing as it did a tax-free capital gain. There was evidence to suggest that the resale value might be reduced by some 20% in the present case.

(d)

The partners gradually became aware of the damage to the aircraft during the financial year 1981/82. They learned of it at different times, in different ways and in differing degrees of detail. In most cases the information came to them in three stages - first, that there had been a forced landing; second, that the damaged sustained was quite substantial; and third, that the incident had occurred before they signed the lease.

It is rather surprising, in view of the way they had been left in the dark, and particularly having regard to the date of the accident, that they all seemed to take the news relatively calmly. There was no evidence of bitter recriminations. This may have been due to the fact that realization of the seriousness of the problem only dawned gradually and, by the time all was revealed, the scheme was already in great disarray because of the Deputy Commissioner of Taxation's refusal of the investment allowance. This was based on an unwillingness to accept Electrum as a "leasing company" for purposes of the relevant provisions of the Income Tax Assessment Act 1936 - a known risk for which Electrum could not be held responsible.

Before the Lazar partners learned finally about the date of the accident, they had ceased to receive their guaranteed monthly minimum payment from the Schutt group (which was in financial difficulties) and they had ceased to make their monthly lease payments to Electrum. Both these actions were taken in about May 1982, although precise dates are not now known. If the lease was not repudiated by conduct at this time, it was formally rescinded by an exchange of letters at the end of 1982.

It is against this background that I have to consider what remedies are available to the successful applicants - those other than Romani, who between them represent 95% of the lessees' stake in the aircraft.

However, before doing so, it is necessary to consider a motion by counsel for Electrum, supported by counsel for the cross-respondents, Huttley, Sent, Forshaw and Wilson, seeking that judgment be entered for the respondent.

The point relied on was a pleading point. It was said that the amended statement of claim disclosed only claims under s.87 of the Trade Practices Act 1974, together with common law claims relying on the Court's accrued jurisdiction. The recent decision of the High Court in Sent v Jet Corporation of Australia Pty Ltd ( 26 June 1986 unreported) established that claims cannot be brought in reliance upon s.87 of the Act alone; there was therefore no valid claim under the Act and nothing to attract the accrued jurisdiction of the Court. Therefore all the claims must fail.

However I am clearly of the view that the amended statement of claim did include a claim under s.82 of the Act to which other claims pursuant to s.87 could adhere. The Court therefore had both original and accrued jurisdiction to deal with all the matters raised.

The original statement of claim in the action, dated 30 March 1983 , set out, among other things, the misrepresentation which I have found to have been made. It alleged in paragraph 17 that this constituted "conduct that is misleading or deceptive within the meaning of s.52 of the Act". Paragraph 19 then stated

"by reason of the aforesaid matters the applicant's have and each of them has suffered loss and damage".

The statement of claim concluded

"21. This action is brought under the Trade Practices Act. The applicants claim the relief specified in the application."

Although the statement of claim laid the foundation for a common law claim of misrepresentation, no such claim was made expressly, and a fair reading of the whole document shows clearly, in my view, that only a Trade Practices Act claim was intended.

The application sought, in paragraph 1, "an order pursuant to s.87(2) of the Trade Practices Act 1974 declaring the lease .... to have been void ab initio ....". Para 2 sought an order for the refund of all moneys paid by the applicants under the lease. Para 3 sought damages.

I have no doubt that the claim for "Damages" in the application, when linked to the allegation of loss and damage in paragraph 19, constituted a claim under s.82 of the Trade Practices Act.

The statement of claim was later substantially amended pursuant to an order of 30 March 1984 . The main amendments relevant for present purposes were set out in paragraphs 28, 31, 40 and 42 of the renumbered document. Paragraph 26 repeated the earlier (para 17) allegation of misleading or deceptive conduct. Para 28 expanded the former para 19 to read:

"28. By reason of each of the aforesaid matters the applicants have and each of them has suffered, or is likely to suffer, loss or damage by the conduct of the respondent engaged in contravention of section 52 .... within the meaning of section 87 of the Act". (The amendments were underlined).

It was conceded by counsel for the applicants that this wording, and the parallel wording of paragraphs 31, 40 and 42, was designed to lay the foundation for claims for the varied forms of relief available under section 87 of the Act. However the amended statement of claim concluded,

"46. By reason of all the matters aforesaid the applicants have and each of them has suffered loss or damage. (Particulars of lease payments were referred to)

47. This action is brought under the Trade Practices Act. The applicants claim the relief specified in the application."

In my view it would be quite artificial to confine the operation of paragraph 46 to the common law claims in paragraphs 32 and 33 (breach of warranties) and 44 (fraud and negligence), as counsel for the respondent would have me do.

It is true that the paragraphs making claims under the Act (28, 31, 40, 42) all incorporate a reference to "loss or damage" in paraphrasing the relevant words of s.87 of the Act, while the common law claims make no such reference. However I am satisfied that the effect of paragraph 46, when read with the application, is to make a general claim for damages, relying on both s.82 of the Act and the common law. I think the reference in para 46 to "all the matters aforesaid" (emphasis supplied) was both deliberate and clear in its meaning.

Turning to the remedies sought by the successful applicants in draft minutes of orders, they are as follows

"1.

(a)

Order pursuant to Section 87(2) of the Trade Practices Act 1974 declaring the Lease and the consent of the Lessor each as referred to in the Statement of Claim to have been void ab initio as between the Applicants other than the Seventh Applicant and the Respondent.

(b)

Order pursuant to Section 87(2) of the Trade Practices Act 1974 varying the Guarantee as referred to in the Statement of Claim so as to release therefrom all of the Guarantors described in the Schedule thereto excepting TREVOR BURTON HUTTLEY and RUTH BERIS HUTTLEY and omitting paragraphs (a) to (h) inclusive and (k) of clause 11. thereof.

2. Order that the Respondent refund to the solicitors for the Applicants on behalf of the Applicants other than the seventh Applicant the sum of $245,356.66 being all of the monies paid to it under the lease by the Applicants other than the seventh Applicant.

3. Order that the Respondent pay the Applicants other than the seventh Applicant damages in an amount to be assessed by the Court.

4. Order that the Cross-Claim by the Respondent against the Applicants other than the seventh Applicant be dismissed.

5. Order that the Respondent pay the costs of the Applicants other than the seventh Applicant of the Application and the Cross-Claim (including any reserved costs) to be taxed."

Following the leading of some evidence as to the amount of refund sought by paragraph 2 of the applicants' draft minutes of order, it was agreed that the amount should be left to be determined hereafter, if it should ever become relevant. The respondent is in the hands of receivers appointed by Citicorp, and it seems unlikely that there will be any funds available for distribution to unsecured creditors. The proper amounts of refunds and damages are probably of academic interest only.

Having considered the complex situation which developed after the misleading and deceptive conduct of the respondent occurred, I am not persuaded that the declaration sought in paragraph 1(a) of the draft minutes would be appropriate.

I say this for several reasons. In the first place, I am not sure what the applicants would have done had they not been misled and deceived between 23 May and 30 June 1981 . If they had been told of the forced landing, and then kept informed of the developing problem concerning the extent of the damage, and the need to have the engines checked, I think it is quite possible they would have elected to go ahead with the lease - after negotiating more favourable terms for their lease payments to reflect the probable depreciation of the asset. The related Hogg/Collier/Loyall interests were to provide 80% of the finance required. Members of the Hogg family at least were very keen to obtain tax advantages for the year then ending. The Huttley/ England interests controlled 15% and Huttley was most anxious that the arrangement should proceed, because he had at least a moral obligation to take a large share in the aircraft if no syndicate was formed. Dr Foster was taking no close interest in proceedings and might well have gone along with the other partners. If not, his 5% interest could easily have been absorbed by others.

As stated earlier, the only strong arguments against the partners proceeding were the lack of a money-earning flight in 1980/81 and the depreciated resale value of the damaged aircraft. As to the first, I think it is likely that the partners would have agreed to support the device, which they later had no option of avoiding, of claiming the 22/23 May flight as a commercial flight for their tax purposes. As to the second, it called only for an adjustment of the leasing figures.

The ultimate calling off of the scheme by the partners may well have been contributed to by the deception practiced upon them; the evidence was inconclusive on this point. But I believe the major reasons for it were the financial demise of the company which was guaranteeing their monthly income payments, and the rejection of their investment allowances by the Deputy Commissioner of Taxation.

In these circumstances I think it would be inappropriate to declare the lease and other contractual elements of the scheme void from the beginning. A further reason for declining to make such a declaration is that I cannot know what the repercussions might be for other contracting parties who acted in the belief that the lease and guarantee were on foot. To declare that the lease is void from the beginning "as between" the lessor and parties representing 95% of the lessees' interests might create more problems than it solves for all concerned - including, for example, insurers and financiers.

It seems to me that the applicants other than Romani will be sufficiently protected, and proper weight will be given to the part played by the misrepresentations as to the aircraft's condition, if I order, pursuant to s.87(2)(b) of the Act, that those applicants be relieved from any further liability, whether accrued or yet to accrue, under the lease. This should also relieve them from liability under other related contracts.

For similar reasons to those just expressed, I do not think it is appropriate in this case to order refund of the amounts paid under the lease. I do not believe that a sufficient nexus has been established between the misrepresentations and the payments of those moneys to justify such an order.

Having protected the applicants from any further claim under the lease, I believe the most they are entitled to by way of compensation for the misrepresentations is the reduction in resale value of the aircraft. In accordance with the wishes of the parties I make no attempt to define any such damages accurately or to quantify them.

The applicants other than Romani are clearly entitled to the last two orders sought in the minutes.

I turn now to consider the orders sought against Romani, and the related question raised by paragraph 1(b) of the minutes set out above.

The respondent has moved for judgment against Romani, on the claim, with costs. Counsel for Romani has conceded that, in the light of my findings, it cannot ask for judgment against the respondent. Through Huttley, its controlling director, it was aware of the true situation at all relevant times, and so was not misled or deceived. Senior counsel for the respondent has not moved for judgment against Romani on the cross-claim. He has asked that that matter be reserved for further consideration after this judgment is delivered. Counsel for Romani has not opposed that course.

The situation I am faced with appears to be novel. Counsel have been unable to find any authority to guide me in deciding what to do when a party to a contract behaves in such a way that parties representing 95% of the interests on the other side of the contract have to be excused from performance of their part of the bargain, which they entered into jointly and severally with the party representing the other 5%.

Having given the matter anxious consideration I have reached the conclusion that the remaining contracting party with the 5% interest should be excused also, in spite of the facts that its counsel has conceded that it cannot move for judgment and that the successful applicants have not, in their minutes, sought orders which would protect it. The original application sought the same remedies for all applicants and, although counsel's concession seemed to me to be appropriate at the time it was made, I am not now persuaded that Romani cannot ask for orders in its favour. I think that, as the company left with sole responsibility for a contract in which it had only a 5% interest, it is "a person who ... is likely to suffer loss or damage" by the respondent's conduct, which was in breach of s.52 of the Act. It was therefore entitled to ask for protection under s.87 of the Act. It is clear, in my view, that these provisions of the Act can be called in aid by persons who have not themselves been misled or deceived, but who have suffered by reason of the conduct of a company which has been misleading or deceitful. Thus when customers are deceived, a business competitor may suffer. When a company is misled, its employees or sub-contractors may suffer. So, when most members of a partnership are misled, the remaining member of that partnership may suffer loss and damage as a result.

The complicity of its executive director in the respondent's misleading and deceptive conduct would be sufficient to debar Romani from any remedy in the nature of damages against the respondent but, equally, I cannot see why the respondent should be able to hold Romani to what has become an onerous contract from which all the other parties have been released by reason of the respondent's conduct. In my view the most appropriate outcome, as between Electrum and Romani, is that their respective losses should lie where they have fallen.

I think it would be unconscionable to allow the respondent, which has deceived most but not all of the parties contracting with it, to recover against the only party not deceived. Although the Lazar partners contracted jointly and severally, it must have been obvious to all concerned that if those constituting the great majority of the investors pulled out, it would not be possible for those remaining to keep the contract afoot. There could never have been any question of Romani "going it alone". The repudiation of the contract was on behalf of all the Lazar partners; it was accepted by the respondent, which resumed control of the aircraft and eventually disposed of it. Since the repudiation was justified so far as 95% of the investors (in money terms) were concerned, I do not believe that it would be equitable to allow the respondent to pursue Romani either for the whole of the moneys owing under the contract or even for its 5% share of those moneys.

It is convenient to mention here that my earlier reasons for judgment in this matter erroneously recorded the shareholding in Romani. I have now been informed by counsel for the company that, at about the relevant time, the shareholding was as follows:

In that judgment, I found that the company was fixed with Mr Huttley's knowledge, before the lease was entered into, of the true facts, but that Mr England was ignorant of those facts. There is no reason to think that Mrs England or the McCluskeys knew anything of the damage to the aircraft at the relevant time and there is no evidence either way as to Mrs Huttley's knowledge.

This piercing of the corporate veil tends to reinforce the view that it would be inequitable to leave the respondent in a position where it could recover large sums of money from Romani or from those who guaranteed its lease payments - Mr and Mrs England and Mrs Huttley as well as Mr Huttley.

In all the circumstances I think the appropriate order to make is that, pursuant to s.87(2) of the Trade Practices Act 1974, the lease agreement dated 29 June 1981 between the partners of Lazar Aviation and Electrum Acceptance Pty Ltd be varied so as to release the said partners of Lazar Aviation from any further liability under the said agreement, whether accrued or yet to accrue. I would make this order in satisfaction of Romani's claim; if I had thought that I had no power to do so, I would have made it as the appropriate order in satisfaction of the claims of the other applicants.

It must follow that, if none of the partners has any further liability under the lease, there can be no claim on the guarantors arising from any default of the partners.

I shall, however, reserve liberty to apply on the question of damages and generally, in case any unexpected difficulty should arise, touching the lease or any related agreement entered into at that time.

So much for the orders to be made on the claim. As I have already indicated, the respondent's cross-claim against the applicants, other than Romani, must be dismissed with costs. As at present advised, I would dismiss the cross-claim against Romani also, but make no order as to costs. But since counsel agreed that I should not finalise that matter I make no formal order other than to reserve liberty to apply.

This leaves the question of the respondent's cross-claim against Huttley, Sent, Forshaw and Wilson to be dealt with. In my view the claim against Huttley must fail. It was based on an allegation that he was the agent of Electrum and owed it fiduciary duties and duties of care.

I am satisfied that there was no relationship of principal and agent between Electrum and Huttley at the relevant times. Everything which Huttley did (or failed to do) in bringing the partnership together was done (or left undone) as the principal of Tarak. Tarak had a contractual relationship with the Schutt group of companies, including Electrum, which involved working together towards a common goal. The immediate aims of the companies were different and they sought different rewards, but they were all interested in reaching the ultimate goal - a syndicate of partners achieving tax advantages through the leasing and operation of an aircraft.

In my view there was nothing in the arrangements to suggest that Tarak was the agent of Electrum, let alone that Huttley himself was such an agent. The basis for a claim against him by Electrum is not established.

In looking at the possible liability of the other three cross-respondents, it is convenient to deal with Wilson first, because the case against him is strongest.

Wilson was fully informed about the state of the aircraft at all relevant times. He knew or assumed that the potential lessees of the aircraft (with the exception of Romani) were unaware that it had been involved in a damaging forced landing. As an executive director of Electrum, he had a duty to disclose the state of the aircraft to those who were about to contract with Electrum to lease it. His failure to do so amounted to misleading and deceptive conduct for which Electrum was liable. These findings were at the heart of the previous reasons for judgment.

The question which I now have to decide is whether the same facts constitute an actionable breach of any duty owed by Wilson to Electrum.

Counsel for Electrum asserted that this was a clear case of Wilson, Sent and Forshaw being in breach of s.124 of the Companies Act 1961 (Vic) which, at the relevant time, provided, "A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office".

None of the counsel concerned with this matter was able to refer me to any directly relevant authority. In fact, as senior counsel for Electrum said, no counsel has been able to find a case remotely similar; these waters are, it seems, uncharted.

It is surprising that there is no reported case of an action by a company in liquidation against its former directors to recover, by way of cross-claim, damages for negligence or fraud for which the company has been found liable in circumstances such as these; but that appears to be the case. It is not a situation which is likely to occur except when a company is in the hands of a receiver or liquidator.

It was argued by counsel for Wilson that, in order for him to be held liable in a civil action for breach of s.124 of the Companies Act 1961, he would have had to be guilty of something akin to gross negligence. In fact, it was said, his offence amounted to no more than an error of judgment.

Such concepts were dealt with by Romer J in his classic judgment on the topic of directors' liability In re City Equitable Fire Insurance co (1925) 1 Ch 407 at 426 -430. His Lordship said that something more than a mere error of judgment was necessary to found liability, but he doubted the value of any reference to gross negligence or any similar degree of negligence. His Lordship said, in effect, that liability depended upon the circumstances of the particular case, including the nature of the company and the precise role of the director concerned.

In the present case Wilson was, in effect, the executive director of the company. He was also, through a company which he controlled, the principal shareholder. He behaved, I believe, in the same way which he would have behaved if he had been operating in his own name. A difficult situation arose concerning a contract about to be entered into. It was one in which there were financial risks for Electrum as well as for other contracting parties - though their risks were more direct and immediate.

I think Wilson probably believed that all would come right in the end - the aircraft would be repaired and back in service in a few months; the objects of the scheme would be achieved; and if there was any difficulty about the resale price, that hurdle could be jumped when it was reached.

Given that Electrum only came into existence a few days before the conduct complained of occurred, and that it was brought into existence for the purposes of its directors and of related companies which they also controlled, there is an unreal quality about any detailed analysis of the duties owed to it by those directors.

Certainly it was very much in the interests of the related companies, Petres and Westwind, that the aircraft be taken off their hands and that the leasing arrangements proceed. It was also in the very nature of Electrum's role that risks were involved. It was going to borrow a large sum of money from a finance company to enable it to acquire the aircraft, and would be dependent on payments from others (the Lazar partners) to service that borrowing.

Having carefully considered all the surrounding circumstances, I do not believe that Wilson was in breach of any duty owed to Electrum when he caused or permitted the company to enter into the lease agreements with the Lazar partners. He took a calculated risk which, for a number of reasons, did not come off. That was not actionable at the suit of Electrum.

If Wilson was not in breach of his duty to Electrum, then Sent certainly was not. He is entitled to rely upon all the considerations applicable to Wilson and to add others to them. Those others are that Wilson was the director most closely involved with Electrum's activities, he was the principle shareholder (through his company) and negotiations were afoot, if not already concluded, for him to purchase all the interests of Sent and Forshaw in the Schutt group of companies, including Electrum. This in fact came to fruition in September 1981.

In all these circumstances I believe Sent was entitled to rely, to a considerable extent, on the judgment of Wilson in pressing on with the leasing arrangements. I do not mean to suggest that Sent would not have been liable if he had concurred in some activity which was clearly contrary to the company's interest. But given the difficult situation in which Wilson and Sent found themselves, I think it was entirely reasonable, in view of their respective positions, for Sent to go along with Wilson's chosen course. This may not have absolved him from liability to third parties, as a person in any way, directly or indirectly, knowingly concerned in, or party to" a contravention of the Trade Practices Act 1974 (see sec. 75B). It is, however, a further reason why he should not be liable at the suit of Electrum.

Counsel for Electrum were unable to advance any persuasive reason why Forshaw should be held liable on the facts as I have found them.

For the reasons I have given, the cross-claims by Electrum against Huttley, Sent, Forshaw and Wilson must be dismissed. I can see no good reason why costs should not follow the event.