Remedies in Commercial Disputes: Barnes v Addy (The mega-litigation in Bell v Westpac)

Introduction

In February 1874, the English Court of Appeal handed down its judgment in Barnes v Addy (1874) LR 9 Ch App 244.3 Little could Lord Selborne, who gave the leading judgment, anticipate the significance of his decision, or the controversies surrounding its implications, which still exist even today, well over 100 years later.

Barnes v Addy gave rise to the existence of two separate and distinct causes of action in equity.  The first is what is commonly known as a claim for knowing receipt.  It arises where a person knowingly receives property in breach of trust.  The second is a claim for knowing participation, also referred to as a claim for knowing assistance.  It arises where a person has knowingly assisted a trustee to carry out a “dishonest and fraudulent design”.  These have become known as the two limbs of Barnes v Addy. 

Although Barnes v Addy itself involved an alleged breach of trust, it is now generally considered that such claims also extend to breaches of fiduciary duty.  In relation to liability under the second limb of Barnes v Addy, so much has been clear since at least 1975 following the decision in Consul Development v DPC Estates Pty Ltd (1975) 132 CLR 373.4

In relation to first limb liability for knowing receipt, the High Court has not expressly stated that Barnes v Addy liability extends to breaches of fiduciary duty.  However, in Farah Constructions v Say-Dee (2007) 230 CLR 895, the High Court stated, at paragraph [113]:

In recent times it has been assumed, but rarely if at all decided, that the first limb applies not only to persons dealing with trustees, but also to persons dealing with at least some other types of fiduciary.

The extension of Barnes v Addy liability to breaches of fiduciary duty is perhaps of most significance, at least in a commercial context, in its application to breaches of fiduciary duties by directors.  That is, breach of duty by a director is a sufficient basis on which to ground Barnes v Addy liability, provided the other requirements for a claim are met.

Thus, establishing a breach of trust or breach of fiduciary duty is essential before a claim can be brought.  However, where that has happened, the key target of subsequent litigation is often not the trustee or errant director, but rather, third parties who have received assets or who have knowingly assisted in the breach.  Most significantly this occurs where the trustee or fiduciary is insolvent or of limited means.  In these circumstances, Barnes v Addy provides a potential claim against those third parties who may have “deeper pockets”.

Banks are frequently the targets of Barnes v Addy claims since they are regularly the facilitators or recipients of the movement of funds following a breach of fiduciary duty.6  As the High Court pointed out in Farah Constructions:7

Since the widening of the second limb of Barnes v Addy beyond breaches of express trust, attempts commonly are made in corporate insolvencies to render liable on this footing directors, advisers and bankers of the insolvent company.

This article discusses the deployment of Barnes v Addy by the liquidator of the Bell Group against twenty defendant banks in the recent Western Australian Court of Appeal decision in Bell.  Bell is no ordinary case.  The trial itself ran for 404 days and resulted in a 2,643 page judgment by Justice Owen.  The appeal was then heard over a two month period in 2011 and resulted in a judgment totalling 1,027 pages.  Without doubt this makes it one of the largest and longest running commercial trials held in Australia.

Before turning to the facts in Bell, the principles relating to Barnes v Addy, and its modern day interpretation by the High Court in commercial cases, are first re-visited.  Three controversies concerning the scope of Barnes v Addy liability are then discussed together with an analysis of how those controversies were addressed in Bell.  The article concludes with some practical considerations learnt from Bell when pursuing a Barnes v Addy claim.

Barnes v Addy

Barnes v Addy itself was a case that has little to do with modern day commercial life.  It has been described by Lord Walker as a “vignette of family life and family conflict in middle class mid-Victorian England”.8

Facts

The facts were as follows.  Two sisters were beneficiaries under their father’s will.  One of the sisters was married to Mr Barnes and the other to Mr Addy.  The two families did not get on.  Mr Addy was the sole trustee of the estate and he held half of the money on trust for his wife and children and the other half for Mr Barnes’ wife and children.  Mr Barnes was not happy with this arrangement and wanted to act as trustee for the money left for his wife and children.

Eventually, Mr Addy agreed that Mr Barnes would act as trustee for the money that was to go to Mr Barnes’ wife and children and that he would continue to act as trustee for his own wife and children.  Both Mr Barnes and Mr Addy engaged solicitors to bring this into effect.  However, shortly after this was achieved, Mr Barnes engaged in a breach of trust.  He used the money in his business and became bankrupt.

Mr Barnes’ children sued, amongst others, the two sets of solicitors that prepared the documents appointing their father as trustee.  No funds had passed into the solicitors’ hands.  The children did not have any contractual relationship with the solicitors.  Issues of negligence simply did not arise because Donoghue v Stevenson9  would not be decided for another 50 years.  So, what was the Court to do?  In the Court of Appeal in Chancery, Lord Selborne said this:10

Strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless:

(a) those agents receive and become chargeable with some part of the trust property, [knowing receipt]

(b) or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. [knowing assistance]

[words in brackets added]

Lord Selborne did not split out the two limbs into (a) and (b) above, but the words in (a) are now commonly referred to as a claim in knowing receipt, the first limb of Barnes v Addy, and the words in (b) are referred to as a claim in knowing assistance or knowing participation, the second limb of Barnes v Addy.  Under both limbs, the Courts use knowledge as the “gatekeeper” in controlling liability.  That is, knowledge of the breach is essential to ground liability.

Ultimately, the solicitors in Barnes v Addy were found not liable as they did not have knowledge of the breach of trust.

Modern commercial cases on Barnes v Addy

Most modern commercial cases are not concerned with breaches of express trusts, but rather, breaches of fiduciary duty by company directors or other persons standing in a fiduciary relationship.  The High Court has only had two opportunities to consider Barnes v Addy liability.  Both concerned breaches of fiduciary duty in commercial contexts.  The first was its 1975 decision in Consul Development and the second was its 2007 decision in Farah Constructions.

Consul Development

The facts in Consul Development are well known.  In essence, a solicitor, in addition to his legal practice, also carried on a property development business through his company, DPC Estates.  Mr Grey was a director and manager of DPC Estates.  An articled clerk who worked for the solicitor also engaged in a separate property development business through a family company, called Consul Development.  Mr Grey diverted opportunities from DPC Estates to Consul Development in return for a share of its profits.

Thus, Mr Grey was alleged to have breached the fiduciary duties he owed to DPC Estates by diverting business opportunities to Consul Development.  DPC Estates sued Mr Grey and Consul Development.  The cause of action against Consul Development is the relevant claim for current purposes.  It was a claim for knowing participation under the second limb of Barnes v Addy.  DPC Estates claimed that the properties purchased by Consul Development were held on constructive trust for it.

The critical issue before the High Court was whether constructive knowledge was sufficient to attract liability under the second limb of Barnes v Addy for knowing participation.  Ultimately, the High Court rejected the claim.  This was because Consul Development did not have the requisite knowledge of Mr Grey’s breach.  However, the Court did not speak with one voice on whether constructive knowledge was sufficient to establish liability.11 

Farah Constructions

It took over three decades for that controversy to be resolved when the High Court heard Farah Constructions, on appeal from the NSW Court of Appeal.

Facts 

The facts in Farah Constructions were complicated.  In essence, Farah and Say-Dee were involved in a joint venture to develop land in Sydney.  However, the local council refused development approval.  Farah’s director subsequently became aware that the Council was more likely to approve the development if the neighbouring properties were purchased. 

In light of this, the director purchased those properties in the name of a company he controlled and in the name of his wife and daughters.  The other joint venturer, Say-Dee, sued Farah and its related entities for the resulting gains, deploying causes of action for knowing receipt and knowing participation.  Say-Dee argued that the properties were held on constructive trust because the potential to develop the site was confidential information.  By not disclosing that information, Say-Dee alleged that Farah had breached its fiduciary duties.

Ultimately, the High Court, in a joint judgment of Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ, held that there was no breach of fiduciary duty.  This was because proper disclosure had been made to Say-Dee of the potential benefits of purchasing the neighbouring properties.  Given that there was no breach, that disposed of the case.  However, the Court went on to discuss the other aspects of Say-Dee’s claims.

In relation to the claim under the first limb of Barnes v Addy, the Court found that the knowing receipt claim would have failed in any event.  Their Honours said it was essential in a knowing receipt claim for the defendant to receive property.  All the defendant had received here was information.  Information is not property.  In any event, that information had not been transferred to the wife and daughters.  Thus, those defendants had not received any property belonging to the plaintiffs.  Therefore, they could not be liable for knowing receipt.

The High Court also considered the scope of liability for knowing participation under the second limb of Barnes v Addy.  The High Court resolved the controversy that had existed since Consul Development in relation to the necessary state of knowledge for second limb liability.  The Court found  that12 “Baden 4” knowledge is sufficient to attract liability.

By Baden 4 knowledge, the Court was referring to Mr Justice Peter Gibson’s decision in Baden v Societe Generale.13   In that case, his Honour set out 5 categories of knowledge:

(a) Actual knowledge;

(b) Wilfully shutting one’s eyes to the obvious;

(c) Wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make;

(d) Knowledge of circumstances which would indicate the facts to an honest and reasonable man; and

(e) Knowledge of circumstances which would put an honest and reasonable man on inquiry.

The categories of knowledge are set out in descending order, with the highest state of knowledge in the first category and the lowest state of knowledge in the last.  Thus, knowledge in any of the first 4 of those categories is sufficient in a claim under the second limb for knowing participation.  Their Honours put it like this:14

The result is that Consul supports the proposition that circumstances falling within any of the first four categories of Baden are sufficient to answer the requirement of knowledge in the second limb of Barnes v Addy, but does not travel fully into the field of constructive notice by accepting the fifth category.  In this way, there is accommodated, through acceptance of the fourth category, the proposition that the morally obtuse cannot escape by failure to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such persons.

However, while it is easy to state what each of the categories are, fitting a set of facts into one category rather than another can be very difficult.  Perhaps for this reason, the Baden scale of knowledge has its critics.  Writing extra-judicially, Justice Finn has described it as “technical to the point of the artificial and the arcane.”15   Nonetheless, it is important because it sets the boundaries of liability.

In Farah Constructions, the High Court did not resolve whether the same or a different level of knowledge applies in a claim under the first limb of Barnes v Addy for knowing receipt.  Ultimately, their Honours found that even if there had been a failure by Farah to disclose adequately the information to Say-Dee, this did not amount to a dishonest and fraudulent design for the purposes of second limb liability.  Further, the wife and daughters did not have notice of any breach so as to render them liable.  Thus, Farah was wholly successful in its appeal.

The Bell litigation

The above principles, providing for equitable relief against third parties following a breach of fiduciary duty by a director, were deployed “writ-large” in Bell.

The basic facts in Bell

The Bell Group Limited was a publicly listed company controlled by Robert Holmes a Court.  It was the ultimate holding company of a large corporate group (the Bell Group).

The Bell Group owned two principal assets.  The first was the “Western Australian” newspaper and the second was shares in Bell Resources Limited.

The financing entity within the Group, Bell Group Finance Pty Ltd (BGF), had borrowed approximately $260 million in total from 20 Banks.  This included separate facilities with 6 Australian banks, as well as a facility it had from a syndicate of 14 overseas banks (the Lloyds Syndicate Banks).  The Australian banks included Westpac, NAB and the Commonwealth Bank of Australia.

All of the bank lending was unsecured.  The facilities were entered into on a negative pledge basis, whereby the Banks received the benefit of a contractual covenant that no security would be granted without their consent.

In 1988, entities associated with Alan Bond’s Bond Corporations Holdings Limited took over control of The Bell Group Limited.  Later in 1988 and 1989 there was public speculation about the financial health of the Bell Group.  It was rumoured that the whole group may collapse.  As unsecured lenders, the Banks would have ranked pari passu with other creditors in a liquidation scenario.  Thus, the Banks entered into negotiations with the Bell Group to take security over all of the group’s assets.

Security documents were entered into in January 1990 in which security was taken over all of the assets in the Bell Group, including its 2 principal assets – Western Australian newspapers and the shares in Bell Resources Limited.  In return, the Australian Banks agreed to extend their facilities from being payable on demand to being payable fourteen months later in May 1991.  The Lloyds Syndicate Banks agreed to extend their facilities by 11 days.

The following year, in 1991, the Banks appointed receivers who sold all of the Bell Group’s assets to repay the Banks.  The Banks received the full amount of their loans, together with interest, a total of $283 million.  Subsequently, a liquidator was appointed to the Bell Group companies.  There was no money available to pay unsecured creditors.

How the liquidator mounted a claim against the Banks

It was in these circumstances that the liquidator instituted proceedings to set aside the Banks’ securities and “claw back” the money paid to them.16   The real problem for the liquidator was that the securities were granted about 18 months prior to the liquidation.  Thus, the liquidator was time barred from bringing an unfair preference claim.  A different cause of action had to be developed.

The primary causes of action deployed were claims in knowing receipt and knowing participation under the first and second limbs of Barnes v Addy.  In essence, the liquidator’s argument ran as follows:

(a) First, that the directors of the Bell Group breached their duties in granting the securities because they knew the companies were insolvent at the time.

(b) Three breaches were alleged: breach of the duty to act bona fide in the best interests of the company; breach of the duty to exercise powers for a proper purpose; and breach of the duty to avoid conflicts of interest.

(c) The critical point in establishing the directors’ breaches of duty was this.  The liquidator said that there was simply no benefit for any of the Bell Group companies in granting the securities.  They did not get the benefit of any new advances by the Banks, nor did they get the benefit of more favourable terms on their loans.

(d) The directors also knew that the effect of granting the securities was that all of the Bell Group’s assets were made available to the Banks for repayment of their debts in priority to the claims of other creditors. 

(e) Second, that the Banks knew that the directors were breaching their duties in granting the securities and actively participated in that breach.

(f) Third, when the Banks realised on their securities, they thereby received “tainted money”.  That is, the Banks received that money in circumstances where they knew that their securities had been granted pursuant to a breach of duty by the directors.    Therefore, that money should be disgorged.

By way of defence17, the Banks said the companies were not insolvent and even if they were, they had no knowledge of the insolvency.  The Banks also argued that the transactions gave the Bell Group “breathing space” and time to consider an orderly workout.  The Banks said that without the securities, they would have enforced on their debts immediately.  Thus, the granting of security was an essential “first step” in agreeing upon a workout and restoring the group’s financial health.

At first instance, the case came before Justice Owen in the Western Australia Supreme Court.  His Honour accepted the liquidator’s case and ordered that all of the Banks’ securities be overturned and that they pay almost $1.6 billion to the liquidator. 

The Banks then appealed to the WA Court of Appeal.  Interestingly, a specially constituted Court was convened for the appeal constituting solely of judges from outside the Western Australian Court of Appeal or Supreme Court.  Thus, the appeal Court consisted of three retired Federal Court Judges, Justices Drummond, Carr and Lee.  This was said by the WA Attorney-General to be necessary “so as to not affect the discharge of the normal work of the Supreme Court.”18

By a 2-1 majority (Justice Carr dissenting), their Honours upheld Justice Owen’s findings.  In short, the Court ordered the Banks to return the $283 million they received upon enforcement of their securities, together with compound interest, at monthly rests on that amount.  At first instance, Justice Owen had ordered compound interest on this amount from 1991 to 2009.  The effect was to increase the total award from $280 million to approximately $1.6 billion.

Justice Carr, in the minority, rejected the Barnes v Addy claims on the basis that none of the directors had breached their fiduciary duties.19 His Honour was also wary of extending equitable remedies into a field where the insolvency regime already provided protection:20

The insolvency regime to which I have just referred provides adequate protection for the unfavoured creditors.  There is no need, in my view, to stretch Barnes v Addy to provide them with a remedy.  …

Where, as in this case, the directors were not dishonest but, with the benefit of hindsight, are judged to have made a commercial mistake, in my opinion the insolvency laws should be deployed to do their work untroubled by 19th century equitable principles derived from the law of trustees.

Nonetheless, by a 2 to 1 majority, the liquidator succeeded in upholding his knowing receipt claim.

One of the issues in the appeal was the appropriate interest rate to use.  The liquidator contended that the interest rate should be increased by 2%.  Justices Drummond and Lee agreed.  The effect was to increase the total award from $1.6 billion to somewhere between $2 and $3 billion.

The liquidator also ran an alternative argument in the appeal seeking an account of profits.  That is, the liquidator argued that he should be awarded the profits that the Banks made with $283 million between 1991 and 2009.  Thus, if, for example, the Banks made a 10% return year on year, that rate of return would be applied to the $283 million over that period.

However, the Court of Appeal refused to award an account of profits.  Their Honours found that it would be an improper use of the Court’s resources for the parties to engage in another substantial hearing to determine the size of the profits earned by 20 banks over a period of almost two decades.

Three points of controversy

Bell is significant in that addresses a number of the “myriad of problems”21  concerning the scope of Barnes v Addy liability.  In particular, it addresses at least three controversies that still exist following the High Court’s decision in Farah Constructions.  Those controversies are:

(a) first, what state of knowledge is sufficient for a claim in knowing receipt under the first limb of Barnes v Addy?

(b) second, what is a “dishonest and fraudulent design” for the purposes of the second limb?

(c) third, what is a fiduciary duty (a question which is relevant to liability under both limbs)?

Each of these controversies is addressed in turn below.

First controversy: what state of knowledge is sufficient for a claim in knowing receipt?

The first controversy relates to the state of knowledge that is necessary to attract liability for knowing receipt under the first limb of Barnes v Addy.  In Bell, Justice Drummond referred to other authorities in which first limb liability had been extended to breaches of fiduciary duty and had no difficulty doing so himself.22

His Honour noted that the High Court in Farah Constructions did not settle the law with respect to the knowledge requirement under the first limb.23 The High Court simply said in that case that “persons who receive trust property become chargeable if it is established that they received it with notice of the trust”.24

It has been said that a less exacting degree of knowledge of the breach applies under the first limb.25   This perhaps stems from the different natures of the causes of action.  Under a claim for knowing receipt, the defendant must beneficially receive property.  Thus, in knowing receipt cases the defendant has received a benefit.  By comparison, under a claim for knowing participation, it is not necessary that property be received, but rather, the defendant must knowingly participate in a dishonest and fraudulent design.  Thus, in those cases, the defendant may not have received a benefit and may have to pay any equitable compensation out of its own resources.

Perhaps the best explanation of the different roles said to be performed by the two limbs was Millett J’s analysis (as he then was) in Agip (Africa) Ltd v Jackson [1990] Ch 26526. In that case, his Honour set out his view as to why a different test of knowledge should apply:27

The basis of liability in the two types of cases is quite different; there is no reason why the degree of knowledge required should be the same, and good reason why it should not.  Tracing claims and cases of “knowing receipt” are both concerned with rights of priority in relation to property taken by a legal owner for his own benefit; cases of “knowing assistance” are concerned with the furtherance of fraud.

In Bell, Justice Drummond relied upon the recent decision of the Full Federal Court in Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 29628   in which the Court did not follow Millett J’s reasoning and found that the same test of knowledge should apply under both the first and second limb of Barnes v Addy.  His Honour quoted from the Full Court’s decision as to why the knowledge requirement is the same:29

…  We do not consider that a property protection rationale for recipient liability … of itself provides a sufficient justification for imposing a personal liability to account.  That liability arises as a matter of conscience not of property.  As with assistance liability, recipient liability should be seen as fault based and as making the same knowledge / notice demands as in assistance cases.  We need not pursue this particular matter further because the weight of authority in this country appears now to draw no distinction between the two types of liability in this respect.

[emphasis in original]

Thus, following the Full Court in Grimaldi, Justice Drummond held that Baden level 4 knowledge will suffice for a knowing receipt claim.30 Justice Lee agreed with Justice Drummond in this regard.31

Second controversy: what is a dishonest and fraudulent design?

The second controversy addressed by the appeal Court in Bell relates what amounts to a “dishonest and fraudulent design” for the purposes of a knowing participation claim under the second limb of Barnes v Addy.  Establishing a dishonest and fraudulent design is essential in bringing such a claim.

Of course, the dishonest and fraudulent design is necessarily one carried out by the trustee or fiduciary.  It is not necessary that the defendant was dishonest.  The defendant has to have knowledge of, and participate in, the dishonest and fraudulent design.  But what is meant by this phrase?  On its face it sounds quite sinister.  However, it arises in the context of an equitable cause of action – equity traditionally taking a wider view of what amounts to fraud than the common law.  The nub of the issue seems to be this.  A breach of fiduciary duty can be sufficient to amount to a dishonest and fraudulent design.  But how serious must the breach be to amount to a “dishonest and fraudulent design”?

In Bell, the Banks argued a dishonest and fraudulent design required proof of “conscious dishonesty” by the directors.  That is, the Banks contended that they could only be found liable if the directors subjectively knew they were breaching their duties.  The Banks submitted that in the absence of such a finding, it was not possible to find them liable under the second limb of Barnes v Addy for knowing participation.

At first instance, Justice Owen accepted that submission.  His Honour considered that to establish a dishonest and fraudulent design, it was necessary to plead and prove subjective dishonesty.  That finding was challenged by the liquidator on appeal.

The High Court had addressed this issue in Farah Constructions, although only briefly.32   Drummond J stated that the discussion on this point in Farah was not entirely clear to him, but his Honour drew three principles from that case:33

(a) First, not every breach of trust or breach of fiduciary duty will amount to a “dishonest and fraudulent design”;

(b) Second, it is not necessary to show conscious dishonesty on the part of the fiduciary.  It is sufficient that the breach would be dishonest according to equitable principles (ie. objective dishonesty); and

(c) Third, the breach must be more than a trivial breach.  A breach of director’s duty will be more than trivial if it is one that would not be excused under the Corporations Act 2001 (Cth), s 1318 or the equivalent section of the Trusts Act in each of the States and Territories.34 Under s 1318, a Court can excuse a breach of director’s duty if the director acted honestly, reasonably and ought fairly to be excused.

Thus, if this reasoning takes hold, the test is an objective test.  There is no need to establish that the trustee or fiduciary subjectively knew he was breaching his duties.

Further, if Justice Drummond’s reasoning finds support elsewhere, the authorities on the Corporations Act 2001 (Cth), s 1318 may be relied upon in equity suits as guidance on whether a breach of director’s duty is sufficiently serious to amount to a dishonest and fraudulent design.35

In summary, although the phrase “dishonest and fraudulent design” may sound sinister, it seems that the “bar may be set pretty low”.36  

Third controversy: What is a fiduciary duty?

The third controversy addressed in Bell relates to which directors’ duties are fiduciary in nature.  Breach of a fiduciary duty is essential when bringing a Barnes v Addy claim.  Without such a breach, there simply is no cause of action.

In this context, it is trite law that directors stand in a fiduciary relationship with their company.  However, simply because directors are fiduciaries does not mean that every duty owed by a director is a fiduciary duty.  Thus, in the context of Barnes v Addy liability, a real question arises as to which of the duties owed by a director are fiduciary and which are not.

A basic list of directors’ duties may read as follows:

(a) Duty to act with reasonable care and diligence.

(b) Duty to act bona fide in the best interests of the company as a whole. 

(c) Duty to act for proper purposes. 

(d) Avoidance of conflicts of interest.

(e) Avoidance of unauthorised profits.

The first three of these duties are expressed in the positive – a positive duty to do something, whereas the last two are expressed in the negative – things that a fiduciary must avoid.

In Bell, the Banks argued that the only duties that are fiduciary are the proscriptive duties, namely, the duties governing what a director cannot do.  If that is correct, it would mean that the only fiduciary duties are the duty to avoid conflicts of interest and the duty to avoid making unauthorised profits.

Critical to the Banks’ argument was the following statement by Justices Gaudron and McHugh in Breen v Williams (1996) 186 CLR 71 at 113:

In this country, fiduciary obligations arise because a person has come under an obligation to act in another’s interests.  As a result, equity imposes on the fiduciary proscriptive obligations – not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict.  If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach.  But the law of this country does not otherwise impose any positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed.

That statement was approved in Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 at 198 by Justices McHugh, Gummow, Hayne and Callinan.

The two critical duties in question in Bell were:

(a) The duty to act bona fide in the best interests of the company as a whole; and 

(b) The duty to act for proper purposes.

Neither of these are proscriptive duties: both require a director to take positive acts.  Thus, the Court had to determine whether these duties are fiduciary in nature.  In resolving this question an element of policy may be involved.  As Justice Carr stated:37

If, as must be the case, some of a company director’s powers when exercised do not involve assuming a fiduciary duty but others do, how is the line drawn between the two types of powers?  It may be by exercising what might be described as judicial policy either to intervene with proprietary equitable relief (or other equitable relief) or not to do so.

Justice Drummond conducted an analysis of the authorities and found that the duties pleaded by the liquidator were fiduciary in nature.  His Honour concluded:38

Neither decision in Breen or Pilmer considered the position of directors who undoubtedly stand in a fiduciary relationship with their company and who have long been subject to duties to act bona fide in the interests of the company and to exercise their powers for proper purposes, both of which have long been described as fiduciary obligations.  If the fiduciary obligations of directors to their company are limited to the two proscriptive ones … an extensive revision of the law governing directors’ duties must have taken place without any examination of that particular issue at the intermediate or final appellate level.

Justice Lee agreed with Drummond J on this finding.39 Although Justice Carr was in the minority, his Honour came to the same conclusion.40

Some practical considerations

Bell also provides important learnings on the practical considerations of deploying a Barnes v Addy cause of action.  There are at least three worthy of mention.

The first relates to the proper parties to the proceedings.  In particular, it is not necessary to join the errant fiduciary or trustee as a party.  Thus, there is no need to join the director who is alleged to have breached his fiduciary duties.41 The directors were not parties at trial in the Bell litigation.

The second relates to proving dishonesty against the trustee or director. Bell is authority for the proposition that there is no need to establish conscious dishonesty (see above).  It is sufficient if a person in the director’s shoes should have known he was breaching his fiduciary duties.  Thus, establishing what facts were known by the director and asking the Court to draw inferences about the director’s state of knowledge from those facts will be critical.

The third practical consideration is a pleading point and relates to establishing that the trustee or director engaged in a “dishonest and fraudulent design”.  If Justice Drummond’s analysis (discussed above) finds support elsewhere, to prove this it may be necessary to establish whether or not the director was acting honestly, reasonably and should be excused.  A question then arises as to who bears the onus in establishing this allegation.  Is it an element of a cause of action under the second limb of Barnes v Addy?  If so, it seems that it would be for the plaintiff to plead and prove that the director was not acting honestly or reasonably and should not be excused.

Conclusion

Barnes v Addy remains a potential source of liability for directors, advisers and bankers.  In particular, where a breach of trust or fiduciary duty has occurred, it provides a means of pursuing such persons where they have received property or participated in the breach.  However, despite dating from 1874, with numerous decisions in the intervening years, the precise limits of liability remains uncertain.

In Bell, the WA Court of Appeal had to grapple with at least three of those uncertainties, first what state of knowledge is sufficient for a claim in knowing receipt; second, what amounts to a dishonest and fraudulent design; and third, which directors’ duties are fiduciary in nature.

The Banks have now been granted special leave to appeal to the High Court.42 Amongst the issues to be ventilated on appeal are whether the fiduciary duties of company directors extend to prescriptive duties and if so, which ones; whether the first limb of Barnes v Addy extends to breaches of fiduciary duty and whether the Court of Appeal correctly imposed the appropriate rate of interest when awarding compound interest.  Needless to say, it is hoped that the High Court’s decision on these points will clarify some of the difficulties posed in identifying the limits of Barnes v Addy liability.43  For now, the Court of Appeal’s decision in Bell provides helpful guidance on how to deal with some of these “myriad” difficulties.

Dan Butler

15 August 2013

Footnotes

1. A version of this paper was published in the August 2013 edition of the Company and Securities Law Journal: see Equitable Remedies for participation in a breach of directors’ fiduciary duties: the mega litigation in Bell v Westpac; Butler; (2013) 31 C&SLJ 307.  The paper is being re-published in Hearsay with the kind permission of Thomson Reuters, who hold the copyright.
2. Hereafter referred to as Bell.
3. Hereafter referred to as Barnes v Addy.
4. Hereafter referred to as Consul Development.
5. Hereafter referred to as Farah Constructions.
6. See, for example, Ninety Five Pty Ltd (in liq) v Banque Nationale de Paris [1988] WAR 132; Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50; 11 ACSR 642; Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16; Baden v Societe Generale Pour Favoriser le Development du Commerce et de l’Industrie en France SA [1992] 4 All ER 161; [1993] 1 WLR 509.
7. Farah Constructions, n 5, at [179].
8. R Walker, “Dishonesty and Unconscionable Conduct in Commercial Life – Some Reflections on Accessory Liability and Knowing Receipt,” (2005), Number 2, Sydney Law Review, 187 at 188.
9. Donoghue v Stevenson [1932] AC 562.  Indeed, difficult questions surrounding the existence and scope of a duty of care outside the context of injury to a person or a person’s property would only be confronted in the fullness of time.  See, for example, Hedley Byrne & Co Ltd v Hellar & Partners Ltd [1964] AC 465 and Hawkins v Clayton (1988) 164 CLR 539.  Of course, the appellate Courts still deal with difficult duty questions even today.
10. Barnes v Addy, n 3, at 251 – 252.
11. See the High Court’s analysis in Farah Constructions, n 5, at [176] of the earlier discussion of the knowledge requirement in Consul Development, n 4.
12. Farah Constructions, n 5, at [171] – [178].
13. Baden v Societe Generale [1993] 1 WLR 509 at 575 – 576.
14. Farah Constructions, n 5, at [177].
15. D Waters (ed), “Equity, Fiduciaries and Trusts” (1993) at 195 – 196.
16. One significant aspect of the case which need not be discussed here relates to $550 million of convertible subordinated bonds issued by entities within the Bell Group.  The Banks contended that monies on-lent within the Bell Group from the proceeds of these bonds were also subordinated.  Thus, as part of their defence, the Banks contended that granting the securities did not prefer them to other creditors because the only other debts were the on-loans from these bonds, which were subordinated.
17. Bell, n 2, at [2704].
18. D Guest, “Retired Federal Court Judges to Hear Bell Group Appeal”, (The Australian Newspaper), 6 December 2010.
19. Bell, n 2, at [2985], [3052] and [3062].
20. Bell, n 2, at [3062] – [3063].
21. T Boyle, ‘‘Never Say-Dee: The ongoing relevance of the ‘first limb’ of Barnes v Addy in modern Australian law,” (2011) 5 Journal of Equity 123 at 124.
22. Bell, n 2, at [2136].
23. Bell, n 2, at [2127].
24. Farah Constructions, n 5, at [112].
25. See, for example, Ninety Five Pty Ltd (in liq) v Banque Nationale de Paris [1988] WAR 132 at 176.
26. Hereafter referred to as Agip Africa.
27. Agip Africa, n 26, at 292 – 293.
28. Hereafter referred to as Grimaldi.
29. Bell, above, n 2, at [2129]; Grimaldi above, n 28, at [267].
30. Bell, n 2, at [2130].
31. Bell, n 2, at [1099].
32. Farah Constructions, n 5, at [179] – [184].
33. Bell, n 2, at [2112].
34. In Western Australia, the relevant provision is contained in the Trustees Act 1962 (WA), s 75.
35. Bell, n 2, at [2113].
36. Bell, n 2, at [2125].
37. Bell, n 2, at [2717].
38. Bell, n 2, at [1962].
39. Bell, n 2, at [1099].
40. Bell, n 2, at [2733].  In this context, Justice Finn’s judgment in Grimaldi, n 28, is also instructive.  See, for example, paragraphs [174] and [178].
41. Bell, n 2, at [2125].
42. Westpac Banking Corporation & Ors v The Bell Group Ltd & Ors [2013] HCA Trans 49 (15 March 2013).
43. After this paper was finalised, the Bell litigation was settled.  Thus, determination of these important points by the High Court will have to await another occasion.