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03/05/17

Corporate Advisory Update - Cases Update April 2017

Welcome to the latest update from Gilbert + Tobin's Corporate Advisory team.  The update on cases provides a summary of key recent legal developments, particularly relevant to in-house counsel.

In this issue, you will find:


When will an employee be a de-facto director? In the matter of ACN 092 745 330 [2017] NSWSC 241 

This case serves as a reminder for senior employees to be mindful, when performing their duties, of the fine line that often exists between a person acting as an employee and as a de-facto director under section 9(b)(i) of the Corporations Act 2001 (Cth) (Act).

ACN 092 745 330 Pty Ltd (Company) and its liquidator sued an employee (Mr Battaglia), his wife and their family company in connection with payments made to them by the Company (Payments).

The Company alleged that Mr Battaglia was a director of the Company (even though he had not been formally appointed until after the Payments were made) or an officer of the Company at the relevant time and had breached directors’ duties owed to the Company in directing, authorising or otherwise causing the Payments to be made.

Evidence brought by the Company and its liquidator in support of the contention that Mr Battaglia performed tasks that would typically be performed by a director included Mr Battaglia's LinkedIn profile (which described him as "founder and Director"), emails and letters sent by Mr Battaglia in which the words "Managing Director" appeared after his name and contracts signed by Mr Battaglia above a line for a director's signature.

However, Barrett J in the Supreme Court of New South Wales held that the evidence was insufficient to conclude that Mr Battaglia was a de-facto director within paragraph (b)(i) of section 9 of the Act at any time before his official appointment, and his activities and responsibilities did not extend beyond those of a senior manager. The following factors were relevant in Barrett J’s finding:

  • the LinkedIn profile was printed after the relevant time period and in any case was prepared by “marketing people” and not approved by Mr Battaglia;
  • in relation to several of the documents purportedly signed by him as director or managing director, Mr Battaglia may well have done so through carelessness or a misapprehension as to which company was involved (he was a director of other group companies);
  • Mr Battaglia appeared to operate under the superior authority of the two appointed directors of the Company;
  • Mr Battaglia’s access to the company's finances was through the intermediation of an accountant for the Company;
  • there was no holding out of Mr Battaglia as director by either himself or the Company; and
  • there was nothing to suggest that anyone believed him to occupy the position that the Act classifies as director.

Barrett J did however find that Mr Battaglia was an officer under section 9 of the Act on the basis of evidence which showed that he was, at all material times, a person who at least participated in making decisions affecting a substantial part of the business of the Company, including:

  • arranging the contracting for construction projects and retaining subcontractors; and
  • email statements by Mr Battaglia that he had always managed the affairs of the Company and would continue to do so.

Mr Battaglia was also found to owe fiduciary duties to the Company by virtue of his senior position in the Company.

However, Barrett J ultimately found that Mr Battaglia did not breach any statutory or fiduciary duties on the basis that there was no evidence that that he in fact “directed, authorised or otherwise caused” the Payments to be made.

Many thanks to Michael Tong, Graduate, for his assistance with this summary.


Another reminder of the importance of registering security interests:  NFT Specialized in Tower Cranes LLC -v- Machforce Pty Ltd (in liq) [2017] WASC 95

The Western Australian Supreme Court has further reinforced the importance of registering security interests under the Personal Property Securities Act 2009 (Cth) (PPSA).  Specifically the Court held that section 588FM of the Corporations Act 2001 (Cth) (Corporations Act) has no application to extend the date for registration of an unperfected security interest to prevent it from vesting under section 267(2) of the PPSA.

NFT Specialized in Tower Cranes LLC (NFT) and Machforce Pty Ltd (Machforce) entered into 6 separate rental agreements between 19 September 2014 and 9 July 2015 for rental by Machforce of tower cranes (and parts) for a minimum period of 12 months (Rental Agreements).   In July 2015, Machforce began to default on its rental payments under the Rental Agreements. 

NFT brought proceedings in the Western Australian Supreme Court against the liquidators of Machforce after the liquidators determined on 6 April 2016 (then in their capacity as administrators) that the 6 cranes had vested in Machforce immediately before their appointment as administrators on 29 March 2016 (Appointment Date).  One of the cranes was subsequently returned to NFT, but title to the other cranes remained contested.

In finding for Machforce, Acting Master Strk found that:

  • the Rental Agreements gave rise to security interests as “PPS leases” under section 13(1)(d) of the PPSA on the basis that firstly, they were for a period of up to one year (they were not on their terms expressed to be for a period of more than one year) and had not been effectively terminated on 16 January 2016 (as claimed by NFT); and secondly, Machforce had, with the consent of NFT, retained substantially uninterrupted possession of the cranes for a period of more than one year after the day it first acquired possession of them;
  • at all material times up to and including the Appointment Date, NFT was not in possession of the cranes and had not taken any active steps to retake possession (and as such had not perfected its security interests under section 21(a) or (b) of the PPSA).  Further, NFT had not registered a financing statement in respect of its security interests before the Appointment Date (in fact, financing statements were not registered until 11 May 2016).  As a result, immediately prior to and at the Appointment Date, NFT’s security interest in the cranes under the Rental Agreements remained unperfected; and
  • as NFT’s security interests in the cranes remained unperfected at the Appointment Date, those security interests vested in Machforce pursuant to section 267(2) of the PPSA on and from the Appointment Date.

Acting Master Strk also declined to make an order under section 588FM of the Corporations Act for an extension of the date for registration of NFT’s security interests on the PPSR to 11 May 2016 for the following reasons:

  • section 588FM has no application in circumstances where immediately prior to and at the Appointment Date, NFT’s security interests in the cranes under the Rental Agreements remained unperfected.  An order under section 588FM affects the date by which a financing statement must be registered to avoid the vesting of the security interest under section 588FL.  However the security interests in this case did not vest under section 588FL but instead vested under section 267 of the PPSA;
  • section 588FL applies only if the security interest was perfected by registration (and by no other means) ‘at the critical time’ under section 588FM(2)(a) (in this case, the date of appointment of an administrator).  The failure to register a financing statement immediately prior to the Appointment Date meant that no security interest was perfected under the PPSA by registration and the section 588FL(2)(a) requirements had not been met; and
  • even if it were accepted that an order under section 588FM could be made, in all of the circumstances, such order would not be justified on the basis of inadvertence.  On the evidence, NFT knew or ought to have made itself aware, of the requirements of registration and the implications of late registration.

Many thanks to Jack Coles, Lawyer, for his assistance with this summary.


The paramountcy of shareholder approval requirements for share buy-backs: In the matter of Wollongong Coal Limited [2017] NSWSC 201

The Supreme Court of NSW has held that section 259A(c) of the Corporations Act 2001 (Cth) (Act) does not confer freestanding jurisdiction on courts to make orders permitting a company to sidestep the requirement to obtain shareholder approval for a selective share buy-back where there is no other specific legislative basis for such an order (such as in a scheme of arrangement or oppression proceedings). 

In connection with settlement of an earlier dispute between the parties, Wollongong Coal Limited (WCL) (a listed company) and Bellpac Pty Ltd (recs and managers apptd)(in liq) (Bellpac) entered into a binding heads of agreement which required Bellpac, on receipt of $6.3 million from WCL, to return the 2,472,063,680 ordinary shares held by Bellpac in WCL (the WCL Shares) or to consent to the cancellation of the WCL Shares.  A condition precedent to the settlement was that WCL obtained all “necessary approvals” to buy-back or cancel the WCL Shares.

Section 259A of the Act prohibits a company from acquiring shares in itself except where shares are bought back under Part 2J.1 of the Act (which allows for a selective share buy-back with approval by a special resolution of shareholders).  However, section 259A(c) of the Act provides an exemption to the prohibition where the acquisition is “under a court order”.  As WCL did not wish to obtain shareholder approval, it sought an order under section 259A(c) of the Act.

In holding that a court did not have a freestanding discretionary jurisdiction to dispense with the buy-back procedures (and holding that the decision in Australian Kunquian International Energy Co Pty Ltd [2014] VSC 386 was incorrect), Black J in the Supreme Court of New South Wales reasoned that:

  • a narrower reading of section 259A(c) allows it a sensible application to permit an acquisition where it takes place under a court order made otherwise than under section 259A(c) (such as under a scheme of arrangement or in oppression proceedings); and
  • it seemed unlikely that the legislature would have intended to create a wide exemption to the detailed buy-back procedures in Pt 2J.1 of the Act which are directed to shareholder and creditor protection, particularly without identifying any criteria for the exercise of the court’s discretion in respect of Pt 2J.2 of the Act.

Many thanks to Edgar Myer, Graduate, for his assistance with this summary.


High Court split on how to construe a contract: Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12 

This decision of the High Court demonstrates the difficulty in construing contracts and that a court may give greater weight to the perceived commercial intent of the parties to a contract, rather the language of the bargain alone.  

Clause 4 of a standard form lease was amended by the parties to create a 99 year lease by changing various clauses and in particular by striking through the following words:

“pay all rates taxes assessments and outgoings whatsoever excepting land tax which during the said term shall be payable by the Landlord or tenant in respect of the said premises (but a proportionate part to be adjusted between Landlord and Tenant if the case so requires).”

The tenant contended that the clause should be construed as requiring the tenant to pay only rates, taxes, assessments and outgoings levied on it in its capacity as tenant, leaving the lessor liable to pay imposts levied on it in its capacity as owner.  On the other hand, the landlord contended that the clause should be construed as requiring the tenant to pay all rates, taxes, assessments and outgoings in respect of the land.  The majority of the Court of Appeal preferred the tenant’s construction of the clause, and found that the lessor was still liable for some payments (Kyrou JA dissented). 

The majority of the High Court recognised that both constructions were possible.  Because it was accepted by the parties that there was an ambiguity, there was no impediment to the Court considering surrounding circumstances and it focused on what a reasonable person in the position of the parties to the lease would have understood by its language, considered in light of the surrounding circumstances known to them at the time of execution.  This included the deleted words in clause 4.

The majority (Kiefel, Bell and Gordon JJ, and Gageler J, Nettle J dissenting) overturned the Court of Appeal’s decision and held that the proper construction was that the lessee bore the obligation to pay all rates, taxes and assessments during the term of the lease.  In arriving at that conclusion, the majority placed great emphasis on the perceived commercial purpose of the lease.  Of particular relevance to the majority was clause 13:

The parties acknowledge that it was the intention of the Lessor to sell and the Lessee to purchase the land and improvements hereby leased for the consideration of $70,000.00 and as a result thereof the parties have agreed to enter into this Lease for a term of ninety-nine years in respect of which the total rental thereof is the sum of $70,000.00 which sum is hereby acknowledged to have been paid in full.

The majority considered that clause 13 ought to be read as disclosing the circumstances and the intention of the parties leading to the lease, ie. that the parties were unable to convey a freehold estate and had instead decided to convey a very long term (99 year) leasehold estate.  As a result, the commercial purpose of the lease was “to recreate, as far as possible, in a lease, conditions which would have existed following a sale”.   This meant that the parties should be taken to have intended that the lessor was no longer liable for the liabilities set out in clause 4, because the lessor should be put as closely as possible in the position of a vendor who would not be liable for the payments (and the risks of increases in those payment sums) upon transfer of title.  In the majority’s view, even without clause 13, such a purpose could have been discerned from the surrounding facts and circumstances, known to a reasonable businessperson in the position of the parties. For example, the length of the lease term, prepayment of a sum equivalent to the land’s market value at the time of formation, and removing covenants restricting the lessee’s use of the land and the lessor’s right of inspection and termination for breach and re-entry.   

The majority agreed with the dissenting judgment of Kyrou JA in the Court of Appeal that even though the rights of the lessee were “not co-extensive with the rights of the owner of the land, they were not inconsistent with an intention to place the lessee in a position as close as possible to that of the purchaser of a freehold estate.”  Nettle J (in dissent) considered that primacy needed to be given to the words used by the parties, and the Court was not entitled to look for an assumed intention of ‘sale’. In Nettle J’s view, “the commercial approach to construction is not a licence to alter the meaning of a term “clearly and fairly susceptible of one meaning only”.

Many thanks to Denitsa Vasileva, Graduate, for her assistance with this summary.

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