This case demonstrates that dishonesty is determined according to the standards of ordinary people and that there is no definitive list of factors which will be relevant to determining whether a director has acted dishonestly.
Fincorp Investments Ltd (Fincorp) obtained investments from the public by offering secured and unsecured notes through prospectuses. The funds were then lent to other companies in the Fincorp Group including Bridgewater Developments Pty Ltd (Bridgewater) and were ultimately used for property development purposes.
Mr Eric Krecichwost was a director of Fincorp and a de facto director of Bridgewater. Mr Krecichwost signed cheques on behalf of Fincorp and Bridgewater for approximately $2.8 million in favour of himself and a company owned by his brother (from which Mr Krecichwost ultimately received the majority of the funds). The payments were recorded as being for “commission and management fees” for the identification of certain investment properties for the Fincorp Group in circumstances where Mr Krecichwost knew no such services had been provided. In fact, the payments were made to compensate Mr Krecichwost for start up costs and for work done for the Fincorp Group in its start up phase without compensation, and to distribute alleged (and unrealised) profits as a result of increases in value of the Fincorp Group’s properties.
At first instance, Mr Krecichwost was found guilty of dishonestly using his position as a director of Fincorp and Bridgewater with the intention of directly or indirectly gaining an advantage for himself. In dismissing Mr Krecichwost’s appeal, the Court held that factors that are relevant to a determination of dishonesty, and their degree of importance, vary with the circumstances of the case and there is no definitive list of the relevant factual matters that must be taken into account. The Court found that:
- dishonesty is tested by the standards of ordinary, decent people;
- the director’s state of mind at the time the cheques were signed was the relevant issue. Later conduct (such as preparation of a prospectus and company accounts) may be relevant to show the director’s state of mind at the time the cheques were signed;
- the fact that Mr Krecichwost believed, at the time of the payments, that the Fincorp Group companies were not entitled to declare dividends (as no profit had yet been realised on the purchased properties) helped establish his motive as dishonest;
- even if Mr Krecichwost was the sole beneficial shareholder (which was not the case), shareholder approval would not have avoided a potential breach;
- obtaining approval from others would not assist the director to avoid an allegation of dishonesty, if they were not people on whom the director was entitled to rely; and
- the fact that one of the payments was made in accordance with a previously agreed arrangement to distribute profits did not avoid the transaction being dishonest.