Friend v Brooker & Anor [2009]: High Court on Directors’ Liability

Friend v Brooker & Anor [2009] HCA 21

• Court: High Court of Australia
• Date: 28 May 2009
• Citation: [2009] HCA 21
• The bench of judges: French CJ, Gummow, Hayne, Heydon and Bell JJ
• Equity; Doctrine of contribution

Background (Friend v Brooker)

In May 1977, Mr. Frederick Brooker and Mr. Nicholas Friend decided to start a construction business, initially as a partnership, which later became the company Friend & Brooker Pty Ltd in July 1977. Both were directors and shareholders in the company. Over the years, each director obtained personal loans from family and friends, which were then lent to the company to support its operations during financially difficult periods. These loans were recorded as debts owed to either Mr. Friend or Mr. Brooker.

In 1986, Mr. Brooker obtained a loan of $350,000 from SMK Investments Pty Ltd, which by 1995 had accrued interest, totalling $1.1 million. The company ceased trading in 1990 and was deregistered in 1996. Disputes arose between Mr. Brooker and Mr. Friend regarding the responsibility for repaying these loans.

Issue

Mr. Brooker claimed that, as Mr. Friend had refused to contribute equally to the repayment of the loan, he should be entitled to an equitable contribution from Mr. Friend. The issue revolved around whether there was a duty of equitable contribution between the two directors and whether Mr. Friend should contribute to the repayment of Mr. Brooker’s loan.

Judgment in Friend v Brooker

The High Court unanimously ruled that Mr. Brooker could not claim equitable contribution from Mr. Friend for the repayment of the SMK loan. The Court held that the remedy of equitable contribution did not apply because there was no co-ordinate liability or common obligation between the two directors. Importantly, the Court found that after the incorporation of the company, Mr. Brooker and Mr. Friend were not in a partnership or joint venture and that the debts owed by the company were governed by company law, not by partnership law.

Additionally, the Court held that there was no fiduciary duty or obligation for the directors to personally contribute to each other’s borrowings or losses. The High Court reinstated the decision of the primary judge, dismissing Mr. Brooker’s claim.

Key Points

1. The High Court emphasized that the creation of the company Friend & Brooker Pty Ltd meant that company law governed the obligations and debts of the company.

2. There was no partnership or joint venture between Mr. Brooker and Mr. Friend after the company’s incorporation.

3. The equitable doctrine of contribution could not be extended to require Mr. Friend to contribute to the repayment of the SMK loan.

4. No fiduciary duty existed between the directors regarding personal loans made for business purposes.

The appeal by Mr. Friend was successful, and the original decision was upheld.

References:

https://www.austlii.edu.au/cgi-bin/viewdoc/au/other/HCASum/2009/21.html

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