“I know what you did last summer.”
One would be forgiven for thinking only of the 1997 slasher film of the same name – but as the recent case of Aidzan v K & A shows, the term is equally applicable as an (unsuccessful) defence by a director against claims brought by his own company for breach of fiduciary duty.
In Aidzan v K & A, the NSW Court of Appeal considered an argument, raised by a director of an insolvent company, that the company’s claims for breach of fiduciary duties were barred by the Limitation Act 1969 (NSW) (Act) because the claims lie outside the relevant limitation periods. Crucial to this argument was whether the knowledge of a director’s own breaches of duty could be attributed to the company – that is, whether the company could be taken to have been aware of the breaches from the time they occurred.
As a judgment of the Court of Appeal, the Court’s findings as to attribution of knowledge are likely to have lasting impacts in an area of law which is oft considered settled.
Facts and proceedings at first instance
The respondent, a company in liquidation, brought, among other things, claims against its sole director, Mr Laird, for breaches of fiduciary duty. These breaches were said to arise out of various transactions made by Mr Laird. Three remained relevant in the appeal proceedings:
- the purchase in 1990 of property by Aidzan Pty Ltd as trustee of the Peter Laird Trust (which Mr Laird caused to be entirely funded by the respondent) (First Transaction);
- causing the respondent to enter a lease for said property (in part, to repay the loan for the purchase by Aidzan) (Second Transaction); and
- causing the respondent to pay $1 million to the Aidzan Superannuation Fund (Third Transaction).
Proceedings were commenced by the respondent’s liquidator in 2020. Mr Laird argued that the proceedings were barred because they were initiated outside the limitation periods in the Act; specifically, the period of twelve years for actions in relation to trusts and trust property in s 47(1) of the Act for the First and Second Transactions, and six years in relation to the Third Transaction.
Central to this defence was when the respondent, as the plaintiff, ‘first discovered’ the facts giving rise to the cause of action, for the limitation periods begin at such a time. Mr Laird argued that, because the knowledge of a director is attributed to the company, the respondent ‘first discovered’ the facts at the time the alleged breaches occurred (the Attribution Defence). Relevantly, this would have the effect of barring completely the First and Third Transaction, and barring recovery for any rental payments forming the Section Transaction before 2008.
At first instance, although Mr Laird was partially successful in relation to the Second Transaction via the application of the Attribution Defence, he was unsuccessful in relation to the First and Third Transactions. He appealed to the NSW Court of Appeal. The respondent cross-appealed in relation to the findings on the Second Transaction.
Argument before the Court of Appeal
Central to almost all grounds of appeal was whether the Attribution Defence was legally correct. Mr Laird’s argument on this issue was summarized by Meagher JA at [31]:
The appellants submit that the general rule… is that a director’s knowledge is attributed to the company provided the director is acting within the scope of his or her authority. That rule is said to be subject to an exception described generally as the “fraud exception”, which only applies if the director acted “totally in fraud” of the company so that the company did not “by design or result” obtain a benefit from the director’s conduct.
Mr Laird’s argument was that K & A benefited from the transactions, notwithstanding his fraud or breach of duty, and that his knowledge would therefore be attributed to the company.
Findings
The Court did not accept the narrow formulation of the fraud exception as characterised by Mr Laird. Following extensive review of recent case law, including the UK case of Bilta (UK) Ltd (in liq) v Nazir (No 2) [2016] AC 1 and subsequent Australian decisions, Meagher JA concluded that the “fraud exception” extended not only to fraud, but to a director’s breach of duty.
Adopting an approach to the exception “which focuses on context and purpose” and the nature of the claim, Meagher JA determined that the exception could not be stated rigidly, nor turn only on whether the company had been benefitted by the director’s fraud or breach of duty. In the context of a claim by a company against its director for a breach of duty or fraud, it would be unjust for the director to attribute their knowledge to the company on the basis that the company obtained a benefit:
The… preferable approach is to recognise that the rules and principles of attribution applicable in a given case depend on the nature of the claim and purpose for which attribution is sought. In the present case, that the claims are for breaches of duty and that the attribution is sought to support a limitation defence leads inevitably to the conclusion that there should be no attribution.
Ultimately, the Court rejected any argument that Mr Laird’s knowledge of his breaches was attributable to the respondent. The necessary conclusion was that the respondent did not ‘first discover’ the facts giving rise to the breaches until the appointment of its liquidator at the earliest, and the claims in respect of each of the three Transactions was not outside the limitation period.
Takeaways
The judgment of Meagher JA makes it clear that it will not always be the case that the conduct of a fraudulent director will not be attributed to the company. In cases, for example, where a third party pursues claims against a company in respect of misconduct of that party’s director, or where the company pursues a claim against an unrelated third party, it may very well be sensible for the director’s knowledge to be attributed to the company. Liquidators considering pursuing third party companies for the conduct of their directors should take careful note of such.
As for fraudulent directors or those who face action for breach of duty, Aidzan v K & L makes one thing very clear: your company does not know what you did last summer.