Home > News > High burden when appealing findings of fact for breaches of directors duties: Bluemine Pty Ltd (in liq) v AKA (Civil) Pty Ltd and other related matters [2022] NSWCA 160.

High burden when appealing findings of fact for breaches of directors duties: Bluemine Pty Ltd (in liq) v AKA (Civil) Pty Ltd and other related matters [2022] NSWCA 160.

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By Alicia Hill, Principal and Harriette Singh, Law Clerk

Introduction

On 25 August 2022, the New South Wales Court of Appeal hear the case of Bluemine Pty Ltd (in liq) v AKA (Civil) Pty Ltd and other related matters [2022] NSWCA 160. The Court of Appeal held that the appellants face a high burden when appealing findings of fact, and acknowledged the difficulties for appeal Courts in addressing issues of witness credibility.

Background

In 2013 five companies, Earth Civil Australia Pty Ltd (Earth Civil), Bluemine Pty Ltd (Bluemine), RCG CBD Pty Ltd (RCG), Diamondwish Pty Ltd (Diamondwish) and Rackforce Pty Ltd (Rackforce), were voluntarily wound up by special resolution of their respective members.

Mr Mitchell Ball was appointed as liquidator for each company. Soon after his appointment, Mr Ball commenced proceedings against numerous defendants, including Mr Gino Cassaniti as director of Earth Civil, Bluemine and RCG and Mr Frank Criniti as director of Diamondwish and Rackforce.

Mr Bell alleged that the directors had breached sections 181 and 182 of the Corporations Act 2001 (Cth), by:

  • failing to exercise their power and discharge their duties in good faith in the best interests of their companies and for a proper purpose; and
  • improperly using their position to gain an advantage or to cause their companies detriment.

These breaches will be collectively referred to as the Breaches.

Mr Bell was successful at trial in proving the Breaches occurred, by showing that Mr Cassaniti and Mr Criniti had engaged in ‘carousel’ fraud. The carousel fraud scheme involved the above companies paying money to Banq Accountants and Advisors Pty Ltd (Banq) without legal obligation, receiving money to which they had no legal entitlement and ending up with no money to pay their only legitimate creditor.

The purpose of the carousel fraud was to obtain improper tax benefits.

Mr Bell, appealed against part of the orders made by Chief Justice Ward on 15 September 2020, which held that several parties were not liable for their involvement in the carousel fraud as they did not meet the threshold of knowingly assisting or participating in the dishonest and fraudulent Breaches.

The appeals in this case are against AKA (Civil) Pty Ltd (AKA Civil), Ms Ivana Cassaniti and Borg Family Pty Ltd (Borg Family).

Mr Bell alleged that Ms Cassaniti knowingly assisted Mr Criniti in his Breaches owed to Diamondwish and Rackforce, as she authorised the transfer of funds from her own company to other companies associated with Mr Criniti.

Mr Bell alleged that Borg Family knowingly participated in Mr Cassaniti’s Breaches owed to RCG through a single payment of $33,000 from Borg Civil to RCG. Mr Bell argued that although Borg Family acted upon the advice of Fred Khalil, they still had knowledge of Mr Cassaniti’s Breaches.

Mr Bell alleged that AKA Civil knowingly participated in Mr Cassaniti’s Breaches owed to Earth Civil and Bluemine, on the basis that its Director, Michael Abou-Antoun, had knowledge of the carousel fraud.

Issues on appeal

Multiple issues were raised on appeal. The issues and judgment are divided by the parties subject to the appeal.

Ivana Cassaniti:

  1. Whether Ivana had the requisite knowledge of Mr Criniti’s Breaches against Rackforce and Diamondwish.

Borg Family:

  1. Whether the primary judge failed to give sufficient reasons in dismissing the claims against Borg Family.
  2. Whether the primary judge erred in finding that Ms Tanya Borg, a director of Borg Family, received and relied upon advice from Mr Fred Khalil as to the restructuring of Borg Family, and that she did have the requisite knowledge of Mr Cassaniti’s Breaches in causing or approving RCG to enter into transactions with Borg Family.
  3. Whether Borg Family had the requisite knowledge of Mr Breaches, including whether an inference should be drawn against Borg Family from Mr Michael Borg’s failure to give evidence.

AKA Civil:

  1. Whether the primary judge misstated or misapplied the corporate attribution rule, and the fraud exception.
  2. If so, whether the activities of Mr Michael Abou-Antoun were in total fraud of AKA Civil, or whether there was evidence of any benefit received by AKA Civil in entering into transactions with Earth Civil and Bluemine.

Judgment and Reasons

Ivana Cassaniti: Issue 1

The Court of Appeal dismissed the appeal against Ms Cassaniti.

The Court considered the evidence given by Ms Cassaniti during the trial, and found that as the trial judge’s findings were based predominantly on Ms Cassaniti’s evidence given in the witness box and her credibility, they were unable to overturn the findings of the primary judge.

This dismissal highlights that the role of the Court of Appeal is limited by some disadvantages including being unable to evaluate a witness’ credibility. When a party appeals a decision of a demeanour-based finding, they must sufficiently address the context of the case, and adduce evidence to show why a witness was not credible.

Additionally, the Court confirmed that Mr Bell had to show that an honest and reasonable person in Ms Cassaniti’s position would have believed Mr Criniti was committing a dishonest breach of his fiduciary and statutory duties. As Mr Bell could not prove this, the appeal was dismissed.

Borg Family: Issues 2-4

The Court of Appeal dismissed the appeal against Borg Family.

Firstly, the Court held that the appropriate relief for Issue 2 would be a retrial, to allow the Court to make factual findings regarding the credibility of Ms Borg’s evidence. However, as a retrial was not sought, the Court dismissed this issue.

The Court dismissed Issue 3, stating that there is a high burden facing an appellant seeking to overturn findings of fact based on the credibility of a witness. The Court held that Mr Bell was not able to discharge this burden and could not show that Ms Borg acted in a way more than just receiving and acting upon advice given by Mr Khalil.

The Court dismissed Issue 4, stating that it was not correct to infer that, in the absence of Mr Borg’s evidence, that he knew the true basis of the transaction between RCG and Borg Family. The Court stated that this inference would go beyond well-known and accepted principles regarding the absence of evidence.

AKA Civil: Issues 5 and 6

The Court of Appeal allowed the appeal against AKA Civil.

The Court confirmed that the trial judge did not misstate the corporate attribution rule and the fraud exception. Her Honour relevantly found that the fraud exception rule states that the knowledge of an agent who is a director of the company should not be attributed to the company where the director was acting fraudulently, and the company receives no benefit. The Court of Appeal confirmed that this exception is not limited to cases of fraud, but also breaches of fiduciary duty.

However, contrary to the trial judge, the Court of Appeal held that Mr Abou-Antoun’s actions of entering into carousel transactions were partly for the benefit of AKA Civil, meaning the fraud exception could not apply. These benefits included taxation benefits gained from the transactions with Bluemine and Earth Civil.

Coupling this with Mr Abou-Antoun’s knowledge of the dishonest and fraudulent Breaches of Mr Cassaniti, AKA Civil were liable as accessories to these breaches.

Takeaways

This case highlights important points relating to appeals:

  1. When challenging findings of fact, parties appealing the decision face a high burden in showing that the findings of fact should be overturned, and must be able to bring clear evidence to the contrary.
  2. Courts of Appeal are generally unwilling to overturn findings based on witness character and credibility, as they are disadvantaged by the fact they have not viewed the witness under examination.

This case highlights that where a director of a company is liable for knowing assistance or knowing participation in breaches of fiduciary duties, their related company will also be liable where they gained a benefit from the transactions.

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.