DSHE Holdings Ltd (Receivers and Managers) (in liq) v Potts; HSBC Bank v Abboud; Potts v National Australia Bank [2022] NSWCA 165
Article by Alicia Hill, Principle and Harriette Singh, Law Clerk
Introduction
On 26 August 2022, the New South Wales Supreme Court, Court of Appeal highlighted the importance of giving relevant evidence in proving misleading and deceptive conduct in the case of DSHE Holdings Ltd (Receivers and Managers) (in liq) v Potts and other related matters. The Court also found that following industry practices will not amount to a director exercising their duties with due care and diligence.
Background
In January 2016, Dick Smith Holdings Ltd (now known as DSHE Holdings Ltd (receivers and managers)) (DSH) went into voluntary administration and entered liquidation in July 2016.
A joint proceeding was brought by HSBC Bank Australia Ltd (HSBC) and National Australia Bank Ltd (NAB). They alleged that Mr Nicholas Abboud, the managing director and CEO, and Mr Michael Potts, the CFO and a director, engaged in misleading and deceptive conduct which induced them to enter into a contract with DSH.
HSBC argued that the misleading and deceptive conduct of Mr Abboud and Mr Potts induced them to enter into a Syndicated Facility Agreement with DSH in June 2015 and an Extension Agreement in November 2015. NAB argued that the misleading and deceptive conduct of Mr Potts on two separate occasions induced them to enter into the Syndicated Facility Agreement with HSBC.
The primary judge rejected HSBC’s claim against Mr Abboud and Mr Potts but held that NAB had been induced into the Syndicated Facility Agreement by Mr Potts.
In a separate proceeding, DSH commenced action against Mr Abboud and Mr Potts, alleging they breached a duty of care they owed under section 180 Corporations Act 2001 (Cth) (the Act). This section requires directors to discharge their duties with a degree of care and diligence that a reasonable person would exercise in those circumstances. Specifically, DSH alleged that Mr Potts and Mr Abboud failed to comply with section 254T of the Act when voting in favour to declare an interim dividend of $16.550 million in February 2015 and a final dividend of $11.826 million in August 2015.
The primary judge held that neither Mr Potts nor Mr Abboud had breached their duty under section 180 in respect of the interim dividend, but Mr Potts had breached section 180 in respect of the final dividend.
The appeals brought by HSBC against Mr Potts and Mr Abboud (HSBC Appeal), Mr Potts against NAB (Potts Appeal) and DSH against Mr Potts and Mr Abboud (DSH Appeal) form the subject of this case.
Issues
HSBC Appeal
On appeal, HSBC asked the Court to consider whether the primary judge erred in failing to find that Mr Pott’s and Mr Abboud’s misleading and deceptive conduct caused them loss.
Potts Appeal
On appeal, Mr Potts asked the Court to consider whether:
- the primary judge erred in finding that Mr Potts’ conduct constituted misleading and deceptive conduct and that it caused NAB to enter into the Syndicated Facility Agreement; and
- whether, if Mr Potts was liable for misleading and deceptive conduct, he could avail himself through the proportionate liability defence.
DSH Appeal
On appeal, DSH asked the Court to consider whether:
- the primary judge erred in finding that only Mr Potts contravened section 180 of the Act by voting to pay the final dividend, and that neither contravened the section in regards to the interim dividend; and
- to the extent that any contraventions of the Act are made out, did the primary judge err in finding that they did not result in DSH suffering any damage for the purposes of s 1317H of the Corporations Act.
Judgment and reasons
The New South Wales Court of Appeal delivered a joint judgment on the above issues.
HSBC Appeal
The Court dismissed this appeal.
The Court drew a distinction between a party being induced to enter into a contract because of misleading and deceptive conduct, and a party who is already in contractual relations with a part who engaged in misleading and deceptive conduct which caused an alteration to the contract. The Court acknowledged that when a party is in the latter position, it is often harder to prove the misleading and deceptive conduct is what caused loss or damage.
The Court upheld the primary judge’s decision that the evidence given by Mr Byrne, the decision-maker at HSBC, held no weight in showing the misleading and deceptive conduct caused loss. This is because the primary judge held that he was an unreliable and non-credible witness who would not give detailed evidence.
Potts Appeal
The Court dismissed this appeal.
The Court confirmed that Mr Potts engaged in misleading and deceptive conduct, and this was based on the evidence given at trial. Evidence contributing to this finding was that Mr Potts knew the financial issues posed by over and above rebates yet continued to use them, failed to raise issues of overstocking with NAB representatives, and did not provide sufficient explanations as to why steps had not been taken to address stocking problems when asked by NAB.
Again, the Court found that determining whether misleading and deceptive conduct causes a party to enter into a contract relies on the evidence produced. Because the evidence indicated that NAB would not have entered into the Syndicate Facility Agreement but for the misleading and deceptive conduct, the Court of Appeal upheld the primary judge’s findings.
The defence of proportionate liability is available where there is one or more legally actionable acts or omissions of two or more persons acting jointly, which causes loss or damage. Mr Potts attempted to attribute a portion of the loss he caused to DSH, as a joint wrongdoer. However, the Court of Appeal held that it is not possible for vicariously liable wrongdoers, as DSH was in this case, to be concurrent wrongdoers in the proportionate liability defence.
DSH Appeal
The Court upheld this appeal in part.
Relevantly, the Court addressed what may materially prejudice a company’s ability to pay its creditors and what can constitute damage to a corporation. The Court of Appeal acknowledged that material prejudice to a company’s ability to pay its creditors may be avoided where the company holds trading stock which can be sold. However, this will depend on the facts of each case. They also held that reliance on an industry practice paying creditors late was not an answer to a failure to consider whether paying dividends meant creditors could not be paid.
The above statements, when applied to the facts of the case, showed that both Mr Potts and Mr Abboud failed to exercise their duties with the due care and diligence needed under section 180, having regard to the final dividend payment. However, neither breached their duty in regards to the interim dividend as there was no evidence to establish that the payment would materially prejudice DSH’s ability to pay its creditors.
Finally, the Court held that payment of a dividend can constitute damage to a company, even though it benefits its shareholders. This meant that the primary judge did err in finding that DSH suffered no damage, and meant that Mr Potts and Mr Abboud liable to compensate the company for the damage.
Takeaways
This case reiterates principles relating to misleading and deceptive conduct. When alleging misleading and deceptive conduct against another party, it is important you have appropriate evidence to demonstrate how their actions caused the damage claimed. Evidence that may not be appropriate includes general statements lacking detail about events, and unreliable witnesses who give vague and conflicting accounts. Appropriate evidence includes that which shows what a party would have done had the misleading and deceptive conduct not occurred.
This case also highlights the importance of considerations that must be made by directors of a company when declaring dividends. Directors must ensure that any dividends declared will not materially prejudice their creditors. In doing this, they should take into account any trading stock which can be sold at the time and the cash flow of the company. Directors should not rely on industry practice to demonstrate they have exercised due care and diligence.
If you have any questions regarding this decision or any matters raised by it, please feel free to get in contact with Alicia Hill of the MST Dispute Resolution and Litigation team on (03) 8540 0200, or by email at alicia.hill@mst.com.au.
