Accessorial liability

Courts are getting tougher, says Professor Bob Baxt. He explains the growing importance of accessorial liability for directors.

Section 79 of the Corporations Act 2001(the Act) contains an interesting provision which has been relied on in a number of recent decisions, in conjunction with the increasing attention being paid to the common law rule in Barnes v Addey (1874) LR9Ch App244 (Barnes v Addey). While section 79 was not a critical feature in the recent decision of Justice Black in Waterfront Investments Group Pty Ltd (in liq) (2015) 105ACSR 280 (Waterfront), the decision contained interesting comments on potential accessorial liability claims against directors in the future.

This section, in effect, provides that a person may be convicted of accessorial liability if the person is shown to have aided, abetted, counselled or otherwise induced or assisted, directly or indirectly (including conspiring with relevant persons) in the commission of a relevant breach of the law.
For the Australian Securities and Investments Commission (ASIC) to establish a breach of section 79 it must prove more than a simple breach; something much more serious than that must be involved. This is in line with the way in which the courts have recently interpreted the two limbs of the decision in Barnes v Addey.
The High Court of Australia in Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) (Consul Developments) 132 CR373, and Farah Constructions Pty Ltd v Say-dee Pty Ltd (2007) (Farah Constructions) 230 CLR89 has provided some important guidance on the interpretation of the case , and recently the New South Wales Court of Appeal in Ramsay v Big Tin Can Pty Ltd (2014) ACSR 415 (Ramsay) also contributed to the evaluation of the common law rule.

The Waterfront case, involved a complex set of circumstances surrounding the development of  coastal real estate initiative north of Sydney. Justice Black faced a difficult task of determining, amongst other matters, whether accessorial liability should be imposed on certain parties who had been allegedly assisting a Mr Samir Jammal in this initiative. This major property development received funding from a bank and a number of other organisations and individuals. Some unusual financial transactions featured in the relevant arrangements.
The initiative failed and the responsible organisation went into liquidation. Various proceedings were brought against Jammal and other parties involved. The liquidator alleged that Jammal, the sole director of the relevant company, had breached a number of laws.  

The liquidator challenged a number of the transactions as uncommercial, unsupported by basic legal principles, which had, in the view of the liquidator, contributed to the failure of the development and the waterfront company.
In his judgment Justice Black had to consider a number of claims based on breaches of contract and related arguments, which undermined the legality and potential success of the relevant arrangements. Claims alleging uncommercial transactions under section 588FB(1) of the Act were brought. The liquidator argued that Jammal had breached various duties as a director of the company and as a de facto director of other organisations that were associated with the company in the relevant transactions.

Accessorial liability

In this column I only want to briefly consider questions surrounding the potential liability of Jammal and others as accessories. Justice Black in discussing these matters embraced the approach taken by the High Court of Australia in cases such as Consul Developments and Farah Constructions, referred to earlier.
Referring to Ramsay he noted that for a claim in accessorial liability to arise it was necessary to show that the relevant person was knowingly concerned in the transaction as an intentional participant. At paragraph 125 of the Waterfront case Justice Black notes that “the requisite intention [can be established] if the person has knowledge of the essential elements of the contravention.” Justice Black added that “it is not, however, necessary to prove that that person knew that the conduct amounted to a contravention of the  [Corporations] Act. That finding also at least requires that the person was in fact ‘concerned’ in the contravention in that he or she had a practical involvement in the acts or omissions constituting the contravention [at para 125].”
In stating his position, Justice Black referred not only to the corporate law cases but also to competition law cases arising from a consideration of section 75B(1)(c) of the then Trade Practices Act. In his discussion of Barnes v Addey he notes that to allow “a third party to be held liable as a constructive trustee [in essence an accessory] he or she [must] knowingly assist the director in a transaction which is a breach of duty to the company [at para 126].”

He added that in Farah Construction the High Court had established that to prove that there had been a breach of trust, or a breach of fiduciary duty, to establish a claim that a person was knowingly assisting in the relevant matter, there must “be dishonest and fraudulent [behaviour] so that the impugned conduct must involve circumstances attracting a degree of opprobrium beyond an innocent breach of trust or duty”. He then embraced the analysis in the Ramsay case referred to earlier.

In concluding his judgment, Justice Black made findings against a number of companies and persons who were involved in assisting Jammal in developing the arrangements to finance the property development. But, in each case, he found that there was insufficient evidence to establish what the actual loss or damage was as a result of the activity under which the claim of accessorial liability arose. While Mrs Jammal had certain rulings made against her with respect to transactions concerning the financial and other arrangements involved, Justice Black was not satisfied “that the matters to which the plaintiffs refer establish sufficient involvement in, or knowledge of the essential elements of, the specific contraventions that I have found against [Jammal] with respect to certain transactions”. He also noted that there was insufficient evidentiary material necessary to show what the damages (loss) claim would have been for the court to make an order.

While Justice Black made certain orders against both Jammal and one of the major parties involved in the relevant transactions and ordered the payment of a significant sum of damages, other claims, even though they attracted the elements of accessorial liability, failed because the amount of loss or damage had not been sufficiently established.

Recent decisions

So while the decision in Waterfront is not one in which the claims of accessorial liability had been established, it illustrates that potential liability can arise. In that context it is useful to note some recent cases where accessorial liability has been considered more favourably by the courts and where liability has been imposed. These include Agricultural Land Management Limited v Jackson and Others (No. 2) (2012) 98 ACSR 615 where the Western Australian Supreme Court ruled against an organisation associated with the relevant company ruling it was “knowingly concerned” pursuant to the terms of section 79 of the Act. Similarly, although there was no necessity for her to make a ruling in the particular case on the question of accessorial liability (because the director was being disqualified for a number of years) Justice Gordon (now elevated to the High Court) ruled in ASIC v Monarch FX Group Pty Ltd (2014) 103 ACSL 453 that accessorial liability could have been justifiably imposed.
Had the decision in the Bell Group case been heard by the High Court of Australia, it is likely that the High Court would have had to make a further ruling on claims alleging accessorial liability raised in that particular decision. We will need to await another case in the High Court to give the matter further consideration.

It is important that section 79 and the parallel provisions in other legislation are not ignored by directors and other officers. These sections can trigger liability for their  involvement in ways  beyond the intention of the relevant company involved, by virtue of the links between that activity and the activity of those who control the relevant company.