The meaning of ‘involving dishonesty’

Water v Diesel Holdings Pty Ltd [2024] VSCA 77

Executive Summary

The concept of dishonesty is something which insurers and insureds confront in the context of certain dishonesty and conduct exclusions. 

The Victorian Supreme Court has recently provided guidance on how courts will approach the concept of “involves dishonesty”. While this was considered in the context of a specific section of the Corporations Act 2001 (Cth) (Corporations Act), the approach to the interpretation of this phrase is nevertheless instructive for how courts will approach exclusions in insurance policies around dishonesty.   

The Victorian Supreme Court in the case of Water v Diesel Holdings Pty Ltd [2024] VSCA 77 ruled unanimously that section 206B(1)(b)(ii) of the Corporations Act, and by extension the phrase “involves dishonesty”, only applies to offences where dishonesty is at least inherent in, or a statutory element of, the offence in question. The Court clarified that this provision is limited to such offences and is not capable of being directed at conduct that provides broader indications around dishonesty, such as the breach of bail conditions or family violence intervention orders.

Ultimately, the appellate Court upheld the trial judge’s decision and decided against the proposed broader interpretation of the phrase.

Factual Background

In August 2018, Mr Baxter and Mr Waters established Rock Solid Structural Developments Pty Ltd (Rock Solid) to purchase and develop property together as business partners. The shares in Rock Solid were owned in equal shares by Diesel Holdings Pty Ltd (Diesel Holdings), controlled by Mr Baxter, and JRW Enterprises Pty Ltd (JRW Enterprises), controlled by Mr Waters.

During their venture, Rock Solid purchased a property at Cranbourne West, Victoria (Cranbourne Property).

However, in May 2021, Mr Baxter was convicted of various offences involving domestic and family violence, and in February 2022, Mr Baxter was also convicted of, amongst other things, breaching bail conditions and committing an indictable offence whilst on bail (Baxter Offences).

In March 2022, Mr Baxter was sentenced to a term of imprisonment for three years, one month and fourteen days. Shortly after, Mr Waters, in his capacity as director of Rock Solid caused a form 484 to be filed out with the Australian Securities and Investments Commission (ASIC) to notify it that Mr Baxter had ceased to be a director of Rock Solid on 19 May 2021.

In May 2022, whilst Mr Baxter was serving his sentence, Mr Waters caused Rock Solid to sell the Cranbourne Property. The proceeds of sale of the Cranbourne Property were paid out to JRW Enterprises (the entity controlled by Mr Waters) in their entirety.

Following those events, Diesel Holdings and Mr Baxter commenced an action claiming that the removal of Mr Baxter as a director of Rock Solid, the sale of the Cranbourne Property and the payment of the entirety of the sale proceeds to JRW Enterprises constituted oppression and a breach of various duties owed to them by Mr Waters and JRW Enterprises.

In response to the commencement of proceedings, on an interlocutory application, Mr Waters and JRW Enterprises argued that the proceedings should be stayed or dismissed because Mr Baxter had been automatically disqualified from his director roles at Rock Solid and Diesel Holdings under section 206B(1)(b) of the Corporations Act for offences “involving dishonesty”.

That application was dismissed by the trial judge. Mr Waters and JRW Enterprises then sought leave to appeal that decision.

Issue

The key issue on the application for leave to appeal, as it was before the trial judge, was whether Mr Baxter was convicted of any offence that “involves dishonesty” within the meaning of section 206B(1)(b)(ii) of the Corporations Act.

Decision

1. What do the words “involves dishonesty” mean under section 206B(1)(b)(ii) of the Corporations Act?

The Court turned to other authorities that considered the meaning of “involves dishonesty” (or similar). Consistent with those authorities, the Court’s inquiry as to the meaning of “involves dishonesty” was guided to the text, context and purpose of section 206B(1)(b)(ii) of the Corporations Act itself.

The Court had to grapple with two main proposed interpretations:

• a strict interpretation that restricts the application of the provision to only those offences where dishonesty is a statutory element; or
• a broader interpretation that involves an assessment of the specific circumstances of the offending behaviour on a case-by-case basis to determine if dishonesty was involved.

After careful consideration, the Court opted for a more balanced approach and held that, in the context of automatically disqualifying an individual from managing corporations under section 206B(1)(b)(ii) of the Corporations Act, “involves dishonesty” captures offences where:

(a) dishonesty is required as a statutory element of the offence according to the law; or

(b) at a minimum, dishonesty according to the standards of an ordinary person (as defined by the Corporations Act)[1] is inherent to the offence itself.

As such, the Court was not required to undertake a broader approach and examine the particular details of how Mr Baxter committed the Baxter Offences to determine whether they “involved dishonesty”.

This approach provided a clear framework that can be applied uniformly moving forward without mandating a broader interpretative approach that considers the details of the offending behaviour of each specific case.

2. Did the Baxter Offences “involve dishonesty” in the manner necessary to engage the operation of section 206B(1)(b)(ii) of the Corporations Act?

According to the law, the Baxter Offences do not include dishonesty as a statutory element. This was not in dispute. Therefore, the Court had to determine whether the Baxter Offences were instead inherently dishonest.

As detailed above, this required an assessment of the offences only, not the circumstances of the particular offending. The Court had to decide if “dishonesty” was an inherent element of the offences in question regardless of the details of Mr Baxter’s offending.

The Court assessed dishonesty according to the standards of an ordinary person (as defined by the Corporations Act)[2] and concluded that the Baxter Offences, whilst demonstrating a refusal to adhere to legal obligations/conditions, did not inherently involve dishonesty or deceit in the manner required by section 206B(1)(b)(ii) of the Corporations Act for Mr Baxter to be automatically disqualified. The Court held that acting contrary to the law, as Mr Baxter had done, is different to acting with deceit or a lack of honesty.

Key Takeaways

The decision of the appellate Court is relevant to the legislation affecting directors themselves and provides valuable insight into the Court’s approach regarding the meaning of dishonesty provisions under the Corporations Act. The Court confirmed that, in this context, “involves dishonesty” requires dishonesty to be an explicit element of the offence, or the dishonesty to be inherent to the offence itself.

From an insurance perspective, this ruling serves as a useful insight into how courts may approach the concept of dishonesty when interpreting exclusion clauses regarding dishonest conduct in (for example) Directors & Officers (D&O) insurance policies.

More broadly, this appellate decision aligns with the interpretative approach seen in previous rulings, such as Mead v Allianz Insurance Australia Ltd [2006] NSWSC 366, where the Court in that case similarly decided against a broader interpretive approach when considering the operation of an exclusion clause involving dishonesty.