One person released from a breach will not release everyone: Cassaniti v Ball as liquidator of RCG CBD Pty Limited (in liq) and related matters; Khalil v Ball as liquidator of Diamondwish Pty Ltd (in liq) and related matters [2022] NSWCA 161
By Alicia Hill, Principal and Harriette Singh, Law Clerk
Introduction
On 25 August 2022, the New South Wales Supreme Court, Court of Appeal, jointly heard fifteen appeals from two different companies and their liquidator.
In Cassaniti v Ball as liquidator of RCG CBD Pty Ltd (in liq) and other related matters, the Court of Appeal upheld that where one person has been excused of their fiduciary and statutory breaches, other persons who are jointly and severally liable are not released, through operation of section 95 of the Civil Procedure Act 2005 (NSW).
It was also held that where there are facts which indicate the existence of fiduciary and statutory breaches to an honest and reasonable person, a person in those circumstances will be liable for knowing assistance to a breach of fiduciary and statutory duties.
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 breaches of fiduciary and statutory duties.
Mr Bell was successful at trial in proving these breaches had 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.
In addition to commencing action against Mr Cassaniti and Mr Criniti as directors of their respective companies, Mr Bell also commenced action against other scheme participants such as Ms Ivana Cassaniti and Mr George Said.
At trial, it was held that Ms Cassaniti had knowingly assisted Mr Criniti in his breaches of fiduciary and statutory duties. However, Mr Criniti was released of his breaches of fiduciary and statutory duties by Mr Bell, in exchange for payments and the promise of assistance.
The trial judge upheld that through operation of section 95 of the Civil Procedure Act 2005 (NSW), Ms Cassaniti was still liable for knowing assistance, and was not released from her breach. This formed the basis of two issues in the appeal.
Additionally, it was held that Mr Said was liable in equity and under statute as an accessory for knowing assistance and knowing involvement in Mr Cassaniti’s breaches of fiduciary and statutory duties owing to Bluemine and RCG.
Mr Said was a director of the company Involved Recruitment Pty Ltd (Involved Recruitment) who were the firm who paid and received the monies to Bluemine and RCG in the carousel fraud scheme. During his time at Involved Recruitment, Mr Said was appointed and instructed by Mr Cassaniti.
Whether the trial judge correctly applied the test for knowing assistance to Mr Said formed the basis of the other main issues in the appeal.
Issues on appeal
Four main issues were discussed in the appeal.
In regards to Ms Cassaniti:
- Whether s 95 of the Civil Procedure Act abrogates the common law rule that a release of one joint and several wrongdoer releases all other joint and several wrongdoers; and
- Whether a similar rule in equity could apply.
In regards to Mr Said, the main issues raised were:
- Whether the trial judge erred in applying the test for knowing assistance; and
- Whether Mr Said had the requisite knowledge of Mr Cassaniti’s breaches of fiduciary and statutory duty to amount to accessorial liability.
Judgment
Issues 1 and 2
There is a common law rule that states the release of one joint and several wrongdoer releases all other joint and several wrongdoers. The Court firstly expressed that there is various case law expressing a dislike of this rule.
The Court then determined that section 95 of the Civil Procedure Act over-rides the common law rule. The section relevantly states:
(1) If two or more persons have a joint liability and, in any proceedings, judgment on the liability is given against one or more but not all of them—
(a) the liability of the other or others of them is not discharged by the judgment or by any step taken for the enforcement of the judgment…
The Court expressed that the ‘joint liability’ was not limited only to joint and several tortfeasors, but also applied to joint and several contractors and joint and several obligors, amongst others.
This means that in New South Wales the common law rule is overruled by operation of section 95 of the Civil Procedure Act which applies to all judgments, except those to which section 5(1)(a) of the Law Reform (Miscellaneous Provisions) Act 1946 applies. However, this section effectively has the same consequence as section 95 of the Civil Procedure Act.
The Court also determined that there is no such similar rule in equity, so Ms Cassaniti could not be released of her breaches in equity or statute.
Issues 3 and 4
The Court confirmed that the trial judge appropriately applied the test for knowing assistance, being that Mr Said had either:
- actual knowledge of Mr Cassaniti’s breaches; or
- to have wilfully shut his eyes to the obvious; or
- to have wilfully and recklessly failed to make such inquiries as an honest; and
a reasonable person would make or knew of the circumstances which would indicate the facts to an honest and reasonable person.[1]
The Court held that Mr Said had the requisite knowledge of Mr Cassaniti’s breaches of fiduciary and statutory duties, due to the following facts:
- Mr Said knew the amounts of cash which Mr Cassaniti instructed him to take for himself were arbitrary;
- He knew that he had no arrangement with Involved Recruitment for the payment of director’s fees, salary or wages;
- The cash payments he received to be paid to third parties were never systematic; and
- He withdrew large sums of cash and delivered them to Mr Cassaniti for no genuine commercial purpose.
The Court held that the above facts would have indicated to an honest and reasonable person the impropriety of Mr Cassaniti’s instructions, therefore making Mr Said liable as a knowing assistant for Mr Cassaniti’s breaches.
Takeaways
If you are jointly and severally liable with a person who has committed a breach, and they are excused from that breach, you will still be liable in New South Wales due to the operation of section 95 of the Civil Procedure Act. If in another State of Territory the equivalent legal provisions will also need to be considered to see if this interpretation will also be applied to that situation.
Additionally, due to the wide operation of section 95, the common law release rule will unlikely be able to apply in New South Wales/
This Court of Appeal decision also confirms that where there are facts indicating fiduciary and statutory breaches to an honest and reasonable person, an individual in those circumstances will be liable for knowing assistance to a breach of fiduciary and statutory duties.
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.
[1] Baden v Societe Generale pour Favorsier le Developpement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509, 575-576.
