Angus Carnegie Gordon in his capacity as liquidator of Lyon Form Pty Ltd (in liq) & Anor v Leon Plant Hire Pty Ltd

Supreme Court of NSW|2015-02-25|Before: Black J

CLR 178 - Chew v R (1991) 4 WAR 21; 5 ACSR 473 - Cochrane v Cochrane (1985) 3 NSWLR 403 - Cook v Italiano Family Fruit Co Pty Ltd (in liq) [2010] FCA 1355; (2010) 80 ACSR 680 - Cummings v Claremont Petroleum NL [1996] HCA 19; (1996) 185 CLR 124 - Cussen v Sultan [2009] NSWSC 1114; (2009) 74 ACSR 496 - Dean-Willcocks v Air Transit International Pty Ltd [2002] NSWSC 525; (2002) 55 NSWLR 64 - Demondrille Nominees Pty Ltd v Shirlaw [1997] FCA 1220; (1997) 25 ACSR 535 - Falkner v Bourke (1990) 19 NSWLR 574 - Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 - Gertsch v Atsas [1999] NSWSC 898 - Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 - Great Southern Finance Pty Ltd (in liq) v Rhodes [2014] WASC 431 - Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 87 ACSR 260 - Heperu Pty Ltd v Belle [2009] NSWCA 252; (2009) 76 NSWLR 230 - Hewett v Court (1983) 149 CLR 639 - John Alexander's Clubs Pty Limited & Anor v White City Tennis Club Limited [2010] HCA 19; (2010) 241 CLR 1 - Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557 - Kenna & Brown Pty Ltd v Kenna [1999] NSWSC 533; (1999) 32 ACSR 430 - Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; 10 ACLR 395 - Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran [2005] NSWCA 243; (2005) 54 ACSR 410 - LHK Nominees Pty Ltd v Kenworthy [2002] WASCA 291; (2002) 26 WAR 517 - Mercedes Holdings Pty Ltd v Waters (No 3) [2011] FCA 236 - Mercedes Holdings Pty Ltd v Waters (No 5) [2011] FCA 1428 - Morley v Australian Securities and Investments Commission (No 2) [2011] NSWCA 110; (2011) 83 ACSR 620 - New Cap Reinsurance Corporation Ltd v AE Grant, Lloyd's Syndicate (No 991) [2009] NSWSC 662; (2009) 257 ALR 740 - Official Trustee in Bankruptcy v CS & GJ Handby Pty Ltd (1989) 21 FCR 19; (1989) 87 ALR 734 - Ogilvie v Ferry [2010] NSWSC 379 - Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 - Prentice v St George Bank Ltd (2002) 20 ACLC 923 - Raulfs v Fishy Bite Pty Ltd [2008] NSWSC 1195 - Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; (2014) 101 ACSR 233 - Re Dalma No 1 Pty Ltd (in liq) [2013] NSWSC 1335; (2013) 279 FLR 80 - Re Diplock; Diplock v Wintle [1948] Ch 465 - Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281; (1997) 24 ACSR 292 - Re Employ (No 96) Pty Limited (in liq) [2013] NSWSC 61 - Re Hallett's Estate; Knatchbull v Hallett (1879) 13 Ch D 696 - Re Sharp; Ex Parte Tietyens Investments Pty Ltd [1998] FCA 1367 - Ruby v Marsh (1975) 132 CLR 642 - Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in liq) [2005] NSWSC 1317; (2005) 65 NSWLR 603 - Skouloudis Group Pty Ltd (in liq) v Planet Enterprizes Pty Ltd [2002] NSWSC 239; (2002) 41 ACSR 369 - Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 39 ACSR 305 - Star v O'Brien (1996) 40 NSWLR 695 - Super Art Australia Pty Ltd v Foden [2014] FCA 1168 - Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14; (2014) 97 ACSR 627 - Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544 - Weaver v Harburn [2014] WASCA 227 - Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1 Category: Principal judgment Parties: Angus Carnegie Gordon in his capacity as liquidator of Lyon Form Pty Ltd (First Plaintiff) Lyon Form Pty Ltd (in liquidation) (Second Plaintiff) Leon Plant Hire Pty Ltd (First Defendant) Marcos German Leon (Second Defendant) Carol Paulina Dicsiascio (Third Defendant) Marco Antonio Leon (Fourth Defendant) Manuela Leon (Fifth Defendant) Representation: Counsel: S. Golledge (Plaintiffs) J T Johnson (Defendants)

Solicitors: Kells Lawyers (Plaintiffs) Hall Partners (Defendants) File Number(s): 2014/96930

Judgment

By Statement of Claim filed on 11 June 2014, Mr Angus Gordon in his capacity as liquidator of Lyon Form Pty Ltd (in liq) ("Lyon Form") and Lyon Form seek a range of relief against Leon Plant Hire Pty Ltd ("Leon Plant Hire"); Mr Marcos Leon (to whom I will refer, without any disrespect, as "Marcos"); his daughter, Ms Carol Dicsiascio (to whom I will refer, without any disrespect, as "Carol"); his son, Mr Marco Leon (to whom I will refer, without any disrespect, as "Marco"); and his wife, Ms Manuela Leon (to whom I will refer, without any disrespect, as "Manuela").
Leon Plant Hire is trustee of the Leon Family Trust, on the terms of a trust deed dated 27 October 1993 (CB 1, Tab 28) and members of the Leon family are beneficiaries or potential beneficiaries of the Trust (Gordon 9.7.2014 [13]). Marcos was appointed as a director of Lyon Form on or about 1 March 2012 and holds one third of the issued capital in Lyon Form (Statement of Claim [4], admitted in Marcos' Amended Defence [4]). Carol was a director of Lyon Form from 29 March 2011 to 1 March 2012, holds one third of the issued capital in Lyon Form and is the daughter of Marco and Manuela and the sister of Marco (Statement of Claim [5], admitted in Defence [5]). Marco holds 50% of the issued capital in Leon Plant Hire; is a director of Leon Plant Hire, having been appointed on 25 October 1993; is the son of Marcos and Manuela and the brother of Carol (Statement of Claim [6], admitted in Defence [6]). Manuela holds one third of the issued shares in Lyon Form; is a director of the Leon Plant Hire, having been appointed on 25 October 1993; holds 50% of the issued capital in Leon Plant Hire; and is the wife of Marcos and the mother of Carol and Marco (Statement of Claim [7], admitted in Defence [7]).
The Plaintiffs read an affidavit of the liquidator, Mr Angus Gordon, dated 2 April 2014, which was originally prepared in respect of an application for orders extending a caveat which Lyon Form had placed over a Merrylands property over which it now seeks to establish a constructive trust, and sets out background facts to the proceedings. The Plaintiffs also rely on a second affidavit of Mr Gordon dated 9 July 2014.
The Defendants read affidavits of Mr Jose Leon De La Barra sworn 2 April 2014, 17 September 2014 and 25 February 2015. Mr De La Barra was previously the accountant for Lyon Form. His evidence was that Lyon Form was one of a group of companies for the Leon family, and the Leon family had, through those companies, carried on a business of formwork concreting. His evidence is that the companies involved in that business included Lyon Form, Leon Plant Hire and Lyon Formwork Pty Ltd ("Lyon Formwork"). Significant parts of Mr De La Barra's affidavit evidence were inadmissible in form, being conclusory assertions as to matters such as the source of funds for particular payments and the purpose of making those payments. That evidence was rejected with leave to lead evidence in admissible form, by affidavit, but that leave was not exercised by the Defendants.

The background facts

There was a substantial degree of agreement between the parties as to the underlying facts. The narrative of facts which appears below is drawn from the matters pleaded in the Statement of Claim and admitted in the Defendants' Amended Defence, as expanded by the affidavit evidence led in the proceedings and documents tendered in the proceedings and a helpful chronology provided by the Plaintiffs.
Leon Plant Hire as trustee of the Leon Family Trust, Lyon Formwork, Marcos, Carol, Marco and Manuela and two other members of the Leon family borrowed $991,250 ("Advance") from MKM Capital Pty Ltd ("MKM Capital") on the terms of a loan agreement dated 22 January 2010 (CB 1, tab 29) and secured by registered mortgage over a property situated at Merrylands and a property situated at Wamberal, New South Wales. A direct debit request issued to MKM Capital, dated 28 January 2010, provided for Lyon Formwork to pay the regular repayments ("Mortgage Payments") due in respect of the Advance (Tender Bundle, tab 4).
On 7 February 2011, the Australian Taxation Office brought a winding-up application in respect of Leon Plant Hire. On 18 March 2011, a workers compensation insurer brought a winding-up application in respect of Lyon Formwork. Leon Plant Hire was placed in administration on 11 April 2011 and Mr Michael Jones was appointed as its administrator (De La Barra 2.4.12 [3]). On 11 May 2011, Lyon Formwork was wound up. Mr De La Barra's evidence was that that occurred after disputes with the head contractor on a project at Tempe and short payments and that Lyon Formwork had unpaid taxes and other creditors (De La Barra 2.4.12 [5]).
On 29 March 2011, Lyon Form was incorporated, with Carol as its sole director. Mr De La Barra accepted, in the course of cross-examination, that that entity was incorporated in anticipation of the potential winding-up of Leon Plant Hire or Lyon Formwork. On 28 April 2011, an initial deposit of $5,000 was made by Lyon Formwork into a bank account of Lyon Form which had been opened with National Australia Bank Limited. Lyon Form contracted with another entity, Ultimo Concrete, to undertake formwork in respect of a construction project at Cronulla and, from mid-May 2011, it received payments from Ultimo Concrete as work was done. A fixed price contract in the sum of $675,000 exclusive of GST between Lyon Form and Ultimo Concrete was signed on 9 June 2011 (Gordon 9.7.14 [19]; CB 2, tab 47).
After Lyon Formwork was wound up, the direct debit arrangement in respect of the Advance was amended, on 17 June 2011, to provide for Lyon Form to make the Mortgage Payments, and payments totalling $87,762 were made between 20 June 2011 and 4 January 2012 by Lyon Form to ABL Nominees Pty Ltd which received those payments on behalf of MKM Capital (Gordon 2.4.14 [13]). The Wamberal property was subsequently sold and the balance of the Advance, as reduced by the Mortgage Payments made by Lyon Form, was repaid (Statement of Claim [2]-[3], admitted in Defence [2]-[3], Marcos' Amended Defence [2]-[3]; Gordon 9.7.14 [14]-[15]; De La Barra 2.4.12 [15]-[16]).
A deed of company arrangement dated 21 July 2011 in respect of Leon Plant Hire (CB 1, tab 19) between Manuela, Marcos, the administrator of Leon Plant Hire and subordinated creditors provided for payments into a deed fund, including payments of $90,000 by 15 August 2011, $30,000 by 15 September 2011 and $1,020,000 by 31 October 2011, and for the return of the management, operation and control of Leon Plant Hire and its business and undertakings to the directors. On 8 September 2011, Lyon Form paid $40,035 into the deed fund in respect of Leon Plant Hire, in satisfaction of a requirement of that deed of company arrangement. On 7 October 2011, Lyon Form paid a further $40,000 into the deed fund in respect of Leon Plant Hire. The Workers Compensation Nominal Insurer brought proceedings against Lyon Form for payment of outstanding premiums in September 2011 (CB 2, tab 61).
On 1 March 2012, Carol resigned as a director of Lyon Form and Marcos was appointed as a director. On 20 April 2012, Lyon Form paid $103,000 into Marcos' bank account (recorded in Marcos' bank statement at CB 2, tab 58) and, on 26 April 2012, Lyon Form lodged outstanding business activity statements with the Australian Taxation Office which led to the recognition of a substantial tax liability. On 8 May 2012, Lyon Form paid a further amount of $4,450 to Marcos from its bank account (CB 2, tab 59).
Lyon Form was placed in creditors' voluntary liquidation under s 491 of the Corporations Act 2001 (Cth) on 15 May 2012 (Gordon 2.4.14 [3]).

Claim under s 588FB of the Corporations Act in respect of Mortgage Payments

The Plaintiffs plead an uncommercial transaction claim under s 588FB of the Corporations Act (Statement of Claim [11]-[19]) and seek declarations that the Mortgage Payments were uncommercial transactions within the meaning of that section; that each of Leon Plant Hire, Marcos, Marco and Manuela were parties to those uncommercial transactions; and a consequential order under s 588FF of the Corporations Act that they pay to Lyon Form the sum of $88,032 on account of those payments.

What was the relevant transaction and who were the parties to it?

Section 588FB of the Corporations Act provides that a transaction is an uncommercial transaction if it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to the benefit or detriment to the company in entering the transaction, the benefit to other parties to the transaction and any other relevant matter. The term "transaction" is relevantly defined, in relation to a body corporate, as a transaction to which the body is a party, including without limitation a payment made by the body or an obligation incurred by it. That definition gives several examples of transactions, which have the common characteristic that the conduct or dealing engaged in by debtor company has the consequence of affecting a change in its rights, liabilities or property: Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281; (1997) 24 ACSR 292 at 299; Re Employ (No 96) Pty Limited (in liq) [2013] NSWSC 61 at [15]. The identification of the relevant transaction must have reference to the totality of the relationship between the parties and a series of dealings may constitute a transaction if they are connected in being directed to bring about a change in the company's rights, liabilities or property: Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; (2007) 164 FCR 83; (2007) 64 ACSR 705 at [120].
The Plaintiffs plead that, on the dates described in the schedule to the Statement of Claim, Lyon Form made the Mortgage Payments in reduction of the Advance (Statement of Claim [13]) and the Defendants admit those matters. The Plaintiffs also plead that Lyon Form was under no obligation and had no liability to make payments in reduction of the Advance (Statement of Claim [15]). The Defendants admit that matter but plead the payments were made in a course of mutual dealings between Lyon Form and Leon Plant Hire which they particularise as involving, inter alia, making available the use of Leon Plant Hire's equipment and assets for the Cronulla project without receiving specific consideration or remuneration, the making of payments by Leon Plant Hire to Lyon Form, the provision of managerial overhead and employed staff by Leon Plant Hire to Lyon Form and the propositions that "[i]t was in the commercial interests of [Lyon Form] that [Leon Plant Hire's] debts be paid" and Lyon Form "received a commercial benefit from the making of the payments."
Mr Johnson, who appeared for the Defendants, submits that the concept of "transaction" is to be given a wide meaning for the purposes of s 588FB of the Corporations Act and that a number of separate dealings may together be regarded as constituting one transaction, and refers to the decision in Re Emanuel (No 14) Pty Ltd (in liq) above. Mr Johnson also referred to the decision in Prentice v St George Bank Ltd [2002] NSWSC 358; (2002) 20 ACLC 923, but it does not seem to me that the particular facts of that case, involving a loan by a sister to her brother for a particular purpose, are analogous with the present case, where substantial funds were applied by Lyon Form to payments on the loans over the relevant period. Mr Johnson submits that: "It is open to the Defendants to assert that the "transaction" to which they were a party is not the simple payment of monies as asserted in the Amended Statement of Claim but rather the composite of all the dealings that lead to that payment being made, including the payment." In oral submissions, Mr Johnson submitted that the totality of the dealings between the parties involved the provision of substantial monies by Leon Plant Hire into the bank account of Lyon Form and also contended that Leon Plant Hire made available the plant and equipment necessary to enable Lyon Form to conduct its trading activities (T124).
I should refer to the evidence as to the dealings between Lyon Form and Leon Plant Hire, which is relevant not only to the characterisation of the relevant transactions but also to the assessment whether they were uncommercial for the purposes of s 588FB of the Corporations Act. In his liquidator's examination, Marcos' evidence was that the Mortgage Payments were made out of Lyon Form's account with, he claimed, money owed to Leon Plant Hire for the relevant equipment (Ex P2, p 33). He also claimed to have made payment when Mr De La Barra told him to (Ex P2, p 33) but that evidence cannot relate to Mortgage Payments which were made pursuant to a direct debit authority out of Lyon Form's bank account.
Mr De La Barra's evidence, read without objection, was that it was necessary to use plant and equipment, materials, motor vehicles and fixed assets to carry on large formwork jobs and that equipment owned by Leon Plant Hire was made available so that work could be carried out by Lyon Form on the Cronulla project and there was no fixed agreement in terms of a lease of the plant and equipment or a written agreement (De La Barra 2.4.14 [17]). He also gave evidence, read without objection, that: "There are no payments as such going back to Leon Plant Hire for the use of its plant and equipment or the payment for Leon family members whilst involved with Leon Plant Hire in providing services to Lyon Form. There are no rental payments for the use of the plant and equipment." Mr De La Barra's later affidavits repeated that Leon Plant Hire provided plant and equipment, building fabrication materials and motor vehicles to Lyon Form that was used on the Cronulla job site undertaken for Ultimo Concrete, and there was no written agreement between Leon Plant and Lyon Form as to the use or hire of that equipment (De La Barra 17.9.14 [23]).
In cross-examination, Mr De La Barra's evidence was also that, after the control of Leon Plant Hire was handed back by the administrator to its directors, they chose not to open new bank accounts for Leon Plant Hire and funds were deposited into Lyon Form's accounts (T85). Mr De La Barra's evidence was that there was no contract or agreement between those companies supporting payments between them, but those payments were made at the discretion of the directors of Lyon Form and Leon Plant Hire (T86). There was also no set rate or set agreement for funds to be transferred between the companies in respect of the provision of equipment by Leon Plant Hire to Lyon Form (T86). Mr De La Barra's evidence was that, in conversations, there was an understanding that the plant and equipment supplied by Leon Plant Hire had a cost, but that cost was not stipulated (T86 - T87). Subsequent invoices recording charges by Leon Plant Hire to Lyon Form were created in December 2013, well after the winding up commenced (T87 - T88). Mr De La Barra did not believe that Leon Plant Hire had raised any invoice to Lyon Form seeking payment on account of the cost of provision of materials or the hire of plant and equipment before he left the company in March 2012 (T89).
It seems to me the making of the Mortgage Payments constituted the relevant transaction, which did not also incorporate the other matters for which the Defendants contend. I am not satisfied that there was any formal or informal linkage between the Mortgage Payments and the other matters to which the Defendants refer, or that the Mortgage Payments would not have been made if, at any particular time, Leon Plant Hire was not making equipment available for use by Lyon Form. However, little may turn on the characterisation of the transactions, since it seems to me that, whether or not they are characterised in the narrower way for which the Plaintiffs contend or the wider way for which the Defendants contend, their commerciality will still be assessed in the relevant circumstances, which include the provision of equipment by Leon Plant Hire to Lyon Form, and they will still be uncommercial for the reasons noted below.
The question then arises as to who were the parties to the relevant transaction. The Plaintiffs plead that the Mortgage Payments constituted a transaction, within the meaning of s 588FB of the Corporations Act, to which each of Lyon Form on the one hand and Leon Plant Hire, Marcos, Marco and Manuela were parties (Statement of Claim [18]) and that the effect of those payments was to discharge, pro tanto, liabilities of each of Lyon Form, Marcos, Marco and Manuela for the Advance (Statement of Claim [19]). The Defendants respond that the parties to the transactions were Lyon Form and Leon Plant Hire and plead that Marcos, Carol (against whom no claim is pleaded in this respect), Marco and Manuela would not have been called to pay any amount to MKM Capital having regard to the value of its security and the amount owed to it.
It is common ground that Lyon Form and Leon Plant Hire were party to the transaction. It seems to me that each of Marcos, Marco and Manuela must also be treated as party to the transaction, so far as they were also borrowers under the Advance and received the benefit of the reduction in liability on the Advance which resulted from the Mortgage Payments. I cannot accept the Defendants' submission that Marcos, Marco and Manuela would not have been called to pay any amount to MKM Capital having regard to the value of its security and the amount owed to it. There is no reason to think that MKM Capital would not have enforced its right to repayment against each of the borrowers if payments were not made when due to it, or would have treated Leon Plant Hire and other borrowers differently in that regard, or would necessarily have proceeded by enforcing its rights against the secured property to the exclusion of its personal rights against the borrowers.

Were the transactions uncommercial?

There was no substantial dispute between the parties as to the approach to be adopted in determining whether a transaction is uncommercial for the purposes of s 588FB of the Corporations Act. Whether a reasonable person in the company's circumstances would not have entered into the relevant transaction is determined by an objective inquiry, by reference to the factors specified in s 588FB(1), namely any benefits to the company of entering into the transaction, the detriment to the company of entering into the transaction, the respective benefits to other parties to the transaction of entering into it and any other relevant matter. In Demondrille Nominees Pty Ltd v Shirlaw [1997] FCA 1220; (1997) 25 ACSR 535 at 548, Foster, Lindgren and Madgwick JJ observed, by reference to the Explanatory Memorandum to the Corporate Law Reform Bill 1992, which introduced the section, that a transaction is uncommercial for the purposes of this section where there is a bargain "of such magnitude that it could not be explained by normal commercial practice". That formulation was also adopted in Skouloudis Group Pty Ltd (in liq) v Planet Enterprizes Pty Ltd [2002] NSWSC 239; (2002) 41 ACSR 369 at [14]-[15] and in Capital Finance Australia Ltd v Tolcher above at [129], where Gordon J also noted that the standard to be applied is an objective one, to be assessed by reference to the company's circumstances, including the knowledge of those who were directing the company, such as its controlling director; and that a transaction will be "uncommercial" where the consideration lacks a commercial quality.
In Cussen v Sultan [2009] NSWSC 1114; (2009) 74 ACSR 496, Nicholas J in turn observed (at [22]-[23]) that, in determining whether a transaction of a company is an uncommercial transaction: "The question to be asked is whether it was one which it may be expected that a reasonable person in the company's circumstances would not have entered into, having regard to the matters specified under this provision. The matter must be looked at from the point of view of the company (Tosich Construction Pty Ltd (in liq) v Tosich (1997) 23 ACSR 466 at 473). In Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd [2007] NSWCA 167 Hodgson JA (Spigelman CJ, Santow JA agreeing) held that the test was not so high as to require that the transaction be so unreasonable that no reasonable person would enter into it. He said: The statutory language is that "it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction". The word "may" is weaker than "must" or even "would"; and in my opinion one reason why something "may be expected" is that it is what normally happens. That is, it is not essential that it would always or necessarily happen. For that reason, what is normal commercial practice, while not decisive, is relevant to the question. Accordingly, the court will look at the totality of the business relationship between the parties, and to what the parties under their relationship intended to effect, and how their intention was effected, in part or in whole, by the impugned transaction …."
In Super Art Australia Pty Ltd v Foden [2014] FCA 1168 at [44], Davies J summarised the applicable principles as follows (omitting citations to authority): "The principles to be applied under s 588FB were not in controversy and may be summarised as follows: a It is an objective standard to determine whether a transaction is uncommercial for the purposes of s 588FB … b Four criteria are to be considered, being the four factors listed in s 588FB: (1) the benefits enjoyed by the company; (2) the detriment to the company; (3) the respective benefits others received; and (4) any other relevant matter; c The objective criteria are not considered in some vacuum but by reference to "the company's circumstances", which must include the state of knowledge of those who were the directing mind of the company, such as its controlling director or directors … d For a transaction to be "uncommercial" for the purposes of s 588FB, the transaction must result in "a bargain of such magnitude that it could not be explained by normal commercial practice" … e The fact that a transaction is entered into when a company is insolvent "is not of itself sufficient to make the transaction an uncommercial transaction within the meaning of s 588FB" …"
I turn now to whether the Mortgage Payments were uncommercial in character. I have referred above to the manner in which equipment was made available by Leon Plant Hire to Lyon Formwork. Mr Johnson cross-examined Mr Gordon to seek to establish that Lyon Form would need the relevant equipment in order to conduct a formwork business and, although Mr Gordon had no particular qualifications as to the erection of formwork, he fairly accepted that that seemed a reasonable proposition (T41). It is not, however, a proposition that supports an inference that it was reasonable for Lyon Form to pay the Mortgage Payments, so as to obtain the benefit of the supply of equipment by Leon Plant Hire. The obvious and fundamental difficulty with that proposition, which Mr Gordon noted in cross-examination, was that there is no basis to think that the amount of the Mortgage Payments was referrable to a fair charge for the supply of such equipment or comparable to the costs which would have been incurred by Lyon Form had it hired the equipment from a third party supplier. Mr Johnson put to Mr Gordon, in cross-examination, that without the relevant plant and equipment, Lyon Form would be unable to fulfil its obligations under the subcontract; Mr Gordon responded, sensibly, that that would be the case unless Lyon Form hired the equipment elsewhere (T50), but that qualification emphasises that there was no commercial necessity for Lyon Form to make the Mortgage Payments so as to secure equipment from Leon Plant Hire rather than, for example, hire that equipment from a third party.
Mr Golledge, who appears for the Plaintiffs, submits, and I accept, that the proposition that the Mortgage Payments permitted Lyon Form to be supplied with equipment by Leon Plant Hire does not provide commercial justification for them, where Lyon Form's activities were not funding its liabilities, including in respect of tax and superannuation on an ongoing basis, and any rental of that equipment continued that position (T119). It seems to me that the Mortgage Payments are such that a reasonable person in Lyon Form's circumstances would not have made them, at least without inquiry as to whether the benefits of obtaining equipment from Leon Plant Hire, as distinct from hiring it from third parties, outweighed the substantial cost of those payments. There is no suggestion that any such inquiries were made. Those transactions were therefore "uncommercial transactions" for the purposes of s 588FB of the Corporations Act.

Whether the transactions were insolvent transactions

I have held above that the Mortgage Payments were uncommercial transactions for the purposes of s 588FB of the Corporations Act. A transaction is an insolvent transaction of a company, as defined in s 588FC of the Corporations Act, if, relevantly, it is an uncommercial transaction of the company and the transaction is entered into at a time the company is insolvent or the company becomes insolvent because of matters including its entry into the transaction.
Section 95A(1) of the Corporations Act has effect that a company is solvent if, and only if, it is able to pay all its debts, as and when they became due and payable. Section 95A(2) has effect that a person who is not solvent is insolvent. That definition adopts a "cashflow test" of insolvency which turns upon the income sources available to the company and the expenditure obligations that it has to meet, although a balance sheet test can provide context for the application of the cashflow test: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 39 ACSR 305; Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; (2003) 46 ACSR 126 at [370]ff. Whether a company is able to pay its debts as and when they fall due and payable is a question of fact to be determined objectively and without hindsight in all the circumstances, including the nature of its assets and business, and the Court will have regard to commercial realities in that regard: Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation above at [54]; Lewis v Doran [2005] NSWCA 243; (2005) 54 ACSR 410 at [103]; Bentley Smythe Pty Ltd v Anton Fabrications (NSW) Pty Ltd [2011] NSWSC 186; (2011) 248 FLR 384 at [48]-[49].
The Plaintiffs plead that, at all times, Lyon Form was insolvent (Statement of Claim [11]) and, further or in the alternative, at all times between 29 March 2011 and 15 May 2012, Lyon Form should be presumed to be insolvent pursuant to s 588E of the Corporations Act by reason of its failure throughout that period to comply with the requirements of s 286 of the Corporations Act (Statement of Claim [12]). The Plaintiffs also plead that the Mortgage Payments were made when Lyon Form was insolvent (Statement of Claim [17]). The Defendants deny the allegation of insolvency (Defence [11] and Marcos' Amended Defence [11]) and particularise that denial by reference to matters including that, over the period to the date it was wound up, Lyon Form received payments from Ultimo Concrete and from or on account of Leon Plant Hire. It is not entirely clear whether the payments on which the Defendants rely to establish Lyon Form's solvency include amounts which they also contend Lyon Form had no entitlement to retain or hold (Defence [37]-[38], Marcos' Amended Defence [37]-[38]). If that proposition were (contrary to my findings below) established, it is difficult to see how such payments could support Lyon Form's solvency.
The Plaintiffs rely, first, on the inadequacy of Lyon Form's financial records in order to support a presumption of insolvency pursuant to s 588E of the Corporations Act. Section 588E(4) of the Corporations Act provides for a presumption of insolvency throughout a period in which a company has failed to keep financial records as required by s 286(1) of the Corporations Act, which requires a company to keep financial records that correctly record and explain the company's transactions and financial position and performance and which would enable true and fair financial statements to be prepared and audited. The effect of that section is that a company is presumed insolvent throughout the period in which a failure to comply with s 286 of the Corporations Act existed: Dean-Willcocks v Air Transit International Pty Ltd [2002] NSWSC 525; (2002) 55 NSWLR 64 at [13]. That presumption applies, inter alia, in an application under s 588FF of the Corporations Act brought by a liquidator and operates unless the contrary is proved in the proceedings: ss 588E(1)(a), 588E(9) of the Corporations Act.
Mr Gordon refers to correspondence with Marcos, as the then director of Lyon Form, requesting the provision of books and records relating to Lyon Form's business (Gordon 9.7.14 [16]-[17]) and gives evidence of the books and records received prior to December 2013, which included an Excel spreadsheet titled "Lyon Form Pty Ltd - Bank Account Transaction Analysis" received on 31 May 2012 (CB 1, tab 40) which recorded, inter alia, the Mortgage Payments. Mr Gordon also expresses the opinion, as to which it is not necessary to reach a conclusion for the purpose of these proceedings, that that Excel spreadsheet was created after the date of his appointment, and also observes that the spreadsheet merely reflects transactions which occurred within Lyon Form's bank account and does not take into account liabilities incurred by Lyon Form but not paid, such as workers compensation premium, taxation liabilities and superannuation liabilities (Gordon 9.7.14 [25]). Mr Golledge submits, and I accept, that that Excel spreadsheet would not, at least in itself, satisfy the requirements of s 286 of the Corporations Act, because, inter alia, it provides no assistance with identifying whether particular payments are, for example, in the nature of the discharge of an existing liability of Lyon Form, a loan to a third party, and if so to whom, or a transaction of some other character.
The financial records provided by Lyon Form also included a cheque book for Lyon Form's cheque account; limited bank statements and employee timesheets; MYOB files received by the liquidator in August and September 2012; and further duplicate bank statements received by the liquidator in November 2012 (Gordon 9.7.14 [18]). Mr Gordon observes that information contained on cheque butts held in Lyon Form's cheque book is inaccurate or insufficient to identify the purpose for which payments were made, with some payments being made to creditors not listed as creditors of Lyon Form and other payments not being reconcilable to specific invoices or accounts (Gordon 9.7.14 [26]). Mr Gordon also points out, inter alia, that the MYOB files which were provided to him stated, for example, that Lyon Form had trade debtors in excess of $1,102,800, as at May 2011, where it had only been incorporated on 29 March 2011, apparently reflecting the position of Lyon Formwork, including in respect of a loan from the Leon Family Trust of $703,000 (Gordon 9.7.14 [34]-[36]; CB 1, Tab 26, compare CB 2, tab 44). Mr Gordon also observes that the information contained in the MYOB file provided to him was inconsistent with that contained in the report as to affairs provided in May 2012 (Gordon 9.7.14 [36], CB 1, tab 13).
Mr Gordon's evidence, admitted as a submission, is also that Lyon Form had not complied with its obligation to submit business activity statements to the Australian Taxation Office quarterly or make payments to the Australian Taxation Office from its incorporation until 27 April 2012 and that, when outstanding business activity statements were lodged immediately prior to his appointment, the amount owing by Lyon Form to the Australian Taxation Office was in excess of $208,000, and that liability was not reflected in any of the books and records of Lyon Form. Those propositions were established by documentary evidence, including the financial records of Lyon Form led in evidence and the record of its running account balance with the Australian Taxation Office (CB 2, tab 55). The fact that the accrual of that liability was not reflected in Lyon Form's financial records seems to me to be sufficient, in itself, to establish that those records did not comply with s 286 of the Corporations Act.
Mr Gordon also gives evidence of the nature of the books and records which he would have expected in respect of a company of the size and nature of Lyon Form, which employed an in-house accountant (Mr De La Barra) and had a limited number of employees and was involved in one contract (with Ultimo Concrete), including bank statements from the date of incorporation to the date of appointment; source documentation for transactions; copies of employment agreements or forms of engagement; PAYG and superannuation statements for employees; sub-contractors statutory payment claims and statutory declarations supporting such claims; GST reconciliations; monthly management accounts including MYOB or similar and a full general ledger recording payments and detailing descriptions in the general ledger; and copies of hiring agreements, equipment leases, property leases and other contracts (Gordon 9.7.14 [20]). Mr Gordon expresses the opinion that the material provided to him was neither sufficient nor adequate to constitute proper books and records of a company of the size and nature of Lyon Form (Gordon 9.7.14 [21]).
Mr Gordon's evidence, admitted as an opinion, was also that the state of Lyon Form's books and records were such that it was not able to produce accurate financial information to display its trading performance and financial position to make reliable forecasts (Gordon 9.7.14 [72]). That proposition seems to me to be amply established by the deficiencies in the books and records of Lyon Form set out in this judgment. The same view was expressed in an expert report as to Lyon Form's solvency prepared by Mr Warwick Keneally, who is an insolvency practitioner with considerable experience, on which the Plaintiffs rely.
On the other hand, Mr De La Barra's evidence was that the MYOB accounting system for Lyon Form contained a number of modules and that the modules which were active for Lyon Form were invoicing and payroll and aspects of the contracts module for which employee details were loaded (De La Barra 17.9.14). That evidence had the difficulty, first, that the MYOB records for Lyon Form in fact contained other information, which was inaccurate, including balance sheet information which was substantially incorrect by reason of its inclusion of information relating to Lyon Formwork. Second, as will emerge below, the material contained in the MYOB records relating to invoicing were also substantially incorrect. Mr De La Barra acknowledged, in his affidavit dated 17 September 2014, that the MYOB data files for Lyon Form and Lyon Formwork: "were identical as to the starting information because when I established the Lyon Form MYOB data file I cloned the initial details from the other company Lyon Formwork Pty Ltd" (De La Barra [33]).
The necessary implication of that evidence is that the opening position information for Lyon Form contained in its MYPB records was incorrect, because it reflected the financial position of Lyon Formwork rather than Lyon Form. I do not accept Mr De La Barra's view that that matter was of "no consequence" because the MYOB data file was only used for invoicing and wages payments. As was amply demonstrated in Mr De La Barra's cross-examination, that incorrect information had the consequence that users of the MYOB records, including the liquidator of Lyon Form when he was appointed, would be significantly misled as to its financial position.
Much of Mr De La Barra's affidavit sworn 17 September 2014 was directed to providing information which would explain particular transactions which was not recorded in Lyon Form's financial records. That approach does not provide any assistance in establishing compliance with s 286 of the Corporations Act, which requires that the company's financial records meet the relevant requirement, and is not satisfied even if transactions recorded in them could be explained, with the aid of substantial additional information not recorded in them and later provided in Court proceedings.
Mr De La Barra, in his affidavit dated 17 September 2014, seeks to provide explanations for some of the cheques made out by Lyon Form, including, for example, explaining that a cheque made out to cash had a notation which was the name of Marcos' solicitor. He also refers to several cheques with notations that relate to credit cards which he describes as "small amounts", although they were hardly small in total. Mr De La Barra acknowledged in cross-examination that the purpose of his affidavit evidence in respect of the cheques was to provide information to identify particular payments, and that in some cases that information was not available because Lyon Form did not keep it (T108). Mr De La Barra also accepted that the effect of some of Lyon Form's records in relation to credit card payments was that a third party reviewing those records would make an incorrect allocation of the relevant items, unless further information was sought from Mr De La Barra (T113). It seems to me that Mr De La Barra's evidence in this regard emphasises, rather than displacing, the inadequacy of the initial records, since the transactions can only be explained if supplemented by the additional information which he now seeks to provide. Mr De La Barra's affidavit also sought to rely on the report as to affairs, provided after Lyon Form's liquidation, as allowing a true and fair view to be formed as to its financial affairs (De La Barra 17.9.14 [112]), although he retreated from that proposition in cross-examination. The fact that further information may be provided, after a company is placed in liquidation, by a report as to affairs does not, in my view, remedy any failure of the company's financial records to meet the requirements of s 286 of the Corporations Act that existed at a previous time
Mr De La Barra also gave evidence that the liquidator did not pay him an amount of $440 which he would have required to bring all of the accounts up to date for Lyon Form (De La Barra 17.9.14 [85]). This evidence appears to have been intended to establish that, had Mr Gordon paid that amount, Lyon Form's records would then have complied with the requirements of s 286 of the Corporations Act. I do not accept that proposition. First, the obligation of a company is to maintain financial records in accordance with s 286 of the Corporations Act on an ongoing basis, and that obligation is not satisfied by claiming that such records could be prepared if an additional payment were made by a liquidator to a third party, whether small or large. Second, given the fundamental difficulties with the accuracy of the existing financial records of Lyon Form that are in evidence, including, for example, the issues as to invoicing and the absence of records of taxation and superannuation liabilities, there is no realistic possibility that the payment of a relatively small amount to Mr De La Barra would have led to the preparation of adequate financial records.
It also became apparent, in the course of Mr De La Barra's cross-examination, that the information contained in the record of invoices contained in Lyon Form's MYOB records was substantially inaccurate. In particular, Lyon Form adopted a practice that, when it billed amounts to Ultimo Concrete that were disputed and not paid by Ultimo Concrete, it then included the unpaid amounts in the next invoice. However, it made no adjustment to the previous invoice to exclude the amount it had now billed again, and both invoices were included in the record of invoices, such that amounts unpaid by Ultimo Concrete for one item of disputed work were potentially recorded in multiple invoices, significantly overstating the value of the invoiced work. The liquidator was in fact misled by the form of the record of invoices, so far as he initially demanded payment by Ultimo Concrete of the full amount recorded as unpaid by it, without recognising - because Lyon Form's financial records did not disclose it - the manner in which that amount had been overstated (CB 2, Tab 52, p 562). Mr Gordon was cross-examined at some length whether he had spoken to Mr De La Barra about those matters before sending a letter of demand to Ultimo Concrete (T41). It did not seem to me that cross-examination assisted the Defendants, so far as its premise was that a liquidator could not rely on the form of a company's financial records, without making further inquiries of the company's accountant to obtain either explanations or corrections of them.
The aged receivables ledger retained by Lyon Form, so far as it recorded an amount owing by Ultimo Concrete Constructions to Lyon Form of $1,121,080 was also not accurate because, although it recorded invoices submitted to Ultimo Concrete, those invoices had in turn recharged disputed amounts in the manner to which I referred above. Mr De La Barra accepted in cross-examination that the amount recorded in the aged receivables ledger as due from Ultimo Concrete Constructions was not an amount that it owed Lyon Form (T93). Mr De La Barra also accepted that it was not possible to determine from the aged receivables record what part of an invoice was paid and, by extension, what amount was properly outstanding (T96). He also accepted that the aged receivables ledger appeared to include debts owing by entities with which Lyon Form in fact had no dealings (T97).
It was also apparent from Mr De La Barra's cross-examination (T69ff) that he did not have any precise understanding of the requirements of s 286 of the Corporations Act. Mr De La Barra did not accept, in cross-examination, that a small proprietary company was required to maintain its accounts on an accrual basis (T72). It is difficult to see, however, how a company could maintain financial records that would allow true and fair accounts to be prepared without maintaining some records that would allow it to track the accrual of tax and superannuation liabilities, particularly if they were not paid on a cash basis as and when they fell due. In the present case, Lyon Form neither paid those liabilities promptly, so that they would be recorded in cash transactions, nor maintained any record of their accrual. Mr De La Barra also appeared initially to consider that it would be sufficient to meet the requirements of s 286 of the Corporations Act if Lyon Form could provide information, when requested to do so, notwithstanding that that information was not recorded in its financial records (T74). It seems to me that that understanding did not properly reflect the requirements of the section.
Mr De La Barra at one point also appeared to consider that s 286 of the Corporations Act only applied when a company was required to prepare its financial statements, although he subsequently retreated from that proposition (T75). Again, that proposition does not seem to me to reflect the requirements of the section, as Mr De La Barra ultimately accepted in recognising that the obligations imposed by s 286 went well beyond the preparation of a company's annual financial statements (T76). Mr De La Barra appeared to contemplate that a company might adopt a practice by which, at the end of the year, its external accountant prepared the relevant records (T76). Again, it seems to me that such a practice would be inconsistent with s 286 of the Corporations Act, which contemplates that a company must maintain the underlying financial records on an ongoing basis, even if the accountant is retained to prepare financial statements based on those underlying records, and Mr De La Barra ultimately accepted that proposition in cross-examination (T76).
Mr Golledge submits (T115) and I accept that s 286 requires not only the completeness but also the reliability of a company's financial records: Kenna & Brown Pty Ltd v Kenna [1999] NSWSC 533; (1999) 32 ACSR 430 at [53]. Mr Golledge also submits, and I also accept, that the evidence to which I have referred has the consequence that at least the receivables ledger in Lyon Form's MYOB records, was inaccurate; and that Lyon Form's financial records would also not permit a profit and loss being prepared without substantial additional information, not included in them, as to the nature of the relevant expenditures (T116). The matters to which I have referred above seem to me to more than sufficient to establish non-compliance with s 286 of the Corporations Act so as to give rise to a presumption of insolvency of Lyon Form under s 588E(4) of the Corporations Act. That presumption was not rebutted, but confirmed, by evidence as to Lyon Form's position as a matter of fact.

Whether Lyon Form was insolvent in fact

The Plaintiffs also established that Lyon Form was, at relevant times, insolvent as a matter of fact. The Defendants at one point contended that the Plaintiffs' case of insolvency was limited to one relating to the presumption of insolvency under s 588E(4) of the Corporations Act and not one of actual insolvency, and also complained as to a lack of particulars of a claim of actual insolvency (T15). That contention cannot be sustained since the allegation of insolvency as a matter of fact is pleaded in paragraph 11 of the Plaintiffs' Statement of Claim. Although that allegation was not specifically particularised, it was open to the Defendants to seek particulars of that allegation, if they wished to do so, and they pleaded to that allegation in terms that recognised that it was an allegation as to insolvency in fact.
Mr Gordon's evidence, given by reference to the Australian Taxation Office's calculation of outstanding tax liabilities, was that Lyon Form did not have sufficient cashflow from July 2011 to meet its tax liabilities up to and including the date of his appointment (Gordon 9.7.14 [75]). It was common ground between the parties that a company's GST position in respect of each month or quarter must be reported to the Australian Taxation Office by the 21st day of the next month, unless the taxpayer had made an election that the relevant tax period was to be quarterly, and that the assessed net amount of GST must be paid no later than the date on which the return must be lodged. It was also common ground between the parties that a taxpayer must withhold relevant tax payments for amounts paid to employees on account of salary and wages, and must pay the Commissioner of Taxation the amount withheld no later than the 21st day of the next month, unless the taxpayer elected to lodge returns on a quarterly basis and that, having regard to Mr De La Barra's evidence, Lyon Form was obliged to remit that tax on a monthly basis, on either the 21st or 28th day of the following month.
Mr Keneally also expressed the opinion that Lyon Form was likely to have been insolvent from at least 18 July 2011, being the date on which cheques began to be dishonoured and from which it appeared that it was unable to meet ongoing GST and PAYG commitments. He acknowledged that that view was formed upon the limited books and records of Lyon From that had been made available to him, although that is the necessary consequence of the position where a company maintains limited books and records, and a matter which the presumption arising under s 588E(4) of the Corporations Act addresses. In order to make his assessment of solvency, Mr Keneally undertook the step of reconstructing Lyon Form's balance sheet by excluding opening balances, which cannot have reflected its activities and presumably reflected the information that, on Mr De La Barra's evidence, had been copied from Lyon Formwork's financial records. The necessity to undertake that task again emphasises the inadequacy of Lyon Form's financial records.
Mr Keneally noted several factors which led him to form the view, which seems to me have been amply justified, that Lyon Form was insolvent from at least 18 July 2011, including that its liquidity ratio was below 1 at each of the quarters ending on and after 30 June 2011; that it had a cash deficiency for the period from 28 April 2011, prior to unpaid GST and PAYG taxation liabilities and outstanding workers compensation premiums; that there were many dishonoured payments during the period July 2011 to March 2012; that Lyon Form had insufficient cash at bank to meet taxation liabilities due for payment from 21 July 2011 onwards, and no payments were made toward its taxation liabilities from incorporation; and that the Workers Compensation Nominal Insurer had commenced proceedings against Lyon Form on or around 16 September 2011 and Lyon Form did not rectify its failure to pay workers compensation premiums. He also noted that he was unable to determine whether Lyon Form had continuing losses or creditors paid outside their trading terms, which is a matter which again emphasises the inadequacy of the financial records maintained by Lyon Form.
Mr Keneally was briefly cross-examined. His evidence was that he had not been informed of difficulties with the accuracy of the MYOB records of Lyon Form at the time he was provided with them and had not been informed that they were at least in part copied from the MYOB records of Lyon Formwork. He had, however, checked the listing of bank transactions against the bank statements issued by National Australia Bank that had been provided to him (T58). It does not seem to me that that line of cross-examination assisted the Defendants since, to the extent that it sought to impugn Mr Keneally's report by the inaccuracy of Lyon Form's financial records, it would have emphasised the failure to maintain adequate financial records in compliance with s 286 of the Corporations Act and the application of the presumption of insolvency under s 588E(4) of the Corporations Act. Mr Keneally also accepted that he had not been advised of any arrangements under which plant and equipment might have been sourced from related entities (T59).

Whether the transactions were voidable transactions

It is common ground that the relation back day, for the purposes of s 9 of the Corporations Act, is 15 May 2012. There was no dispute that the Mortgage Payments occurred during the relation-back period under s 588FE of the Corporations Act, so that they were voidable transactions for the purposes of s 588FE of the Act, if, as I have held, they were uncommercial transactions and insolvent transactions.

Orders under s 588FF of the Corporations Act

Section 588FF of the Corporations Act allows the Court to make any one or more of the orders set out in the section on the application of a liquidator, where a transaction is voidable because of s 588FE of the Corporations Act. These include an order directing a person to pay to the relevant company an amount equal to some or all of the money that the company has paid under the transaction. Each of Leon Plant Hire, Marcos, Marco and Manuela received the benefit of the reduction in liability under the Advance by reason of the Mortgage Payments, which I have held to be uncommercial and insolvent transactions, and I am satisfied that an order should be made under s 588FF of the Corporations Act that each of them should pay to Lyon Form the sum of $88,032 on account of those payments. Although that order is made against several persons, Lyon Form cannot, of course, recover more than the amount due to it in that regard. I note, for completeness, that it is not necessary to address the effect of a personal insolvency agreement to which Carol was party at this point, although that issue arises in respect of the claim for compensation against her below, since no claim under s 588FF of the Corporations Act was brought against her.

Breach of duty claim against Carol in respect of Mortgage Payments

The Plaintiffs plead (Statement of Claim [24]-[25]) that Carol caused or alternatively allowed the Mortgage Payments to be made by Lyon Form and Carol admits that matter. They plead (Statement of Claim [26]-[27]) that the Mortgage Payments were not in the interest of or for the benefit of Lyon Form and, in causing or allowing Lyon Form to make the Mortgage Payments, Carol paid no regard to the interests of Lyon Form or alternatively preferred the interests of Leon Plant Hire, Marcos, Marco and Manuela. The Statement of Claim does not, however, plead a claim for equitable compensation or compensation under s 1317H of the Corporations Act arising from those matters, nor does the relief claimed in the Originating Process against Carol extend to that matter, as distinct from other payments made by Lyon Form to the deed fund in the administration of Leon Plant Hire. It seems to me that the breach of duty claim against Carol must therefore be treated as underpinning the Plaintiffs' claim for a constructive trust or other equitable relief rather than as directed to any claim for compensation against her. It is therefore also not necessary to address the issues as to the effect of a personal insolvency agreement to which Carol was party at this point, although that issue arises in respect of the claim for compensation against her in respect of contributions to Leon Plant Hire's deed fund below.
Although the Plaintiffs' pleading is not particularly clear, the allegations in paragraphs 26-27 of the Statement of Claim that Carol did not act in the interest of or for the benefit of Lyon Form and preferred the interests of Leon Plant Hire, Marcos, Marco and Manuela indicate that this claim is at least a claim for breach of the director's duty to act in the best interests of a company and not to prefer the interests of a third party over the company's interests. There is no substantive contest between the parties as to the content of directors' duties at general law or by statute. The Plaintiffs plead that, as a director of Lyon Form, Carol (and, later, Marcos) owed Lyon Form a fiduciary duty to act in good faith and in the best interest of Lyon Form; a fiduciary duty to exercise their powers as directors, only for proper purposes; a fiduciary duty not to act in a manner which would place him or her in a position where his or her personal interest did or might conflict with the interest of Lyon Form, or alternatively, a fiduciary duty to avoid taking advantage of any such conflict should one arise; and the statutory duties imposed on company directors pursuant to sections 180, 181, 182 and 183 of the Corporations Act (Statement of Claim [8]). Carol "[a]dmit[s] the duties as attach to the office of director and as pleaded" (Defence [8]).
It will be sufficient for present purposes to note that a director's duty to act in the best interests of a company, and the corresponding statutory duty under s 181 of the Corporation Act, requires that a director, inter alia, exercise his or her powers in the interests of the company and not misuse or abuse their power; avoid conflict between his or her personal interests and those of the company; and not misappropriate the company's assets for himself or herself: Chew v R (1991) 4 WAR 21; 5 ACSR 473 at 499. In Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1, the Court of Appeal of the Supreme Court of Western Australia unanimously held that the general law duty to act in good faith in a company's best interests is subjective and would be complied with if a director honestly believed that he or she acted in the company's best interests (at [923] per Lee AJA, at [1988], [2027], per Drummond AJA, at [2772], [2795] per Carr AJA). A company director is also a recognised category of fiduciary, and the no conflict rule prohibits conduct where the director has a personal interest or duty owed to a third party which gives rise to a real and sensible possibility of a conflict: Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 198-199; Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544 at 557-558. In Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 at 199, McHugh, Gummow, Hayne and Callinan JJ formulated the no conflict rule as follows: "… [t]he fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is 'a conflict or a real or substantial possibility of a conflict' between personal interests of the fiduciary and those to whom the duty is owed."
I accept that it may well have been consistent with Carol's duties to authorise payments, at least on an arm's length basis, by Lyon Form to Leon Plant Hire in respect of equipment made available and any other services properly provided by Leon Plant Hire to Lyon Form. However, I can see no basis on which it could be in Lyon Form's interests to authorise the payment of the Mortgage Payments, without any inquiry as to whether the amount of those payments was proportionate to the benefit which Lyon Form obtained from the use of the relevant equipment. I also do not accept that course is justified by any suggestion that Lyon Form's corporate interests required that it assist Leon Plant Hire to meet its obligations - or, more precisely, do so for it - where there is no evidence that Lyon Form could not have continued its business using equipment obtained or rented from third parties, had it needed to do so. There seems to me also to be a plain conflict of duty and interest in the relevant transactions, where they conferred the benefit on Leon Plant Hire, Marcos, Marco and Manuela of reducing their liability under the Advance, at the expense of Lyon Form and, ultimately, its creditors.
A finding of breach of duty involved in the Mortgage Payments also seems to me to be supported by evidence that Carol knew, at the time they were made, that Lyon Firm was accruing tax liabilities which had not been met. Mr De La Barra's evidence in cross-examination was that the directors of Lyon Form, initially Carol and subsequently Marcos, were aware of its tax accrued, but not paid, during the period in which Lyon Form traded (T77). Mr De La Barra's evidence was also that he explained to each of Carol and Marcos the taxation obligations of Lyon Form, including the obligations to record and remit PAYG tax and to record and remit GST payments to the Australian Tax Office, and it was his understanding that Lyon Form was required to report GST on a quarterly basis and PAYG on a monthly basis (T83). Mr De La Barra's evidence is that he had also brought to the directors' attention that Lyon Form had not been complying with its tax obligations and advised the directors of the quantum of its tax liabilities (T84).
This conduct was not capable of ratification by Lyon Form's shareholders given its then financial position. The breaches of duty pleaded against Carol in respect of the Mortgage Payments are therefore established.

Claim for constructive trust or equitable charge in respect of in respect of Mortgage Payments

The Plaintiffs plead a constructive trust claim against Leon Plant Hire (Statement of Claim [28]-[31]) and claim a declaration that Leon Plant Hire holds the Merrylands property subject to a constructive trust in favour of Lyon Form or alternatively that Lyon Form holds an equitable charge over the property as security for the payment to it of the amount of $88,032 and an order for judicial sale of that property. That claim is put on the basis that Leon Plant Hire knew that Lyon Form had no obligation or liability for the Advance and would receive no benefit or advantage from the Mortgage Payments (Statement of Claim [28]); the Mortgage Payments were made by Lyon Form at the request of Leon Plant Hire, Marcos, Marco and Manuela (Statement of Claim [20], [28]); Carol knew that she had caused Lyon Form to make the Mortgage Payments (Statement of Claim [31]) and Leon Plant Hire received a benefit, being the reduction of its liability under the Advance, with knowledge that benefit was derived from a breach of duty owed by Carol to Lyon Form (Statement of Claim [31]). In oral submissions, Mr Golledge confirmed that that claim is put as a knowing receipt claim (T121).
Mr Golledge refers to Boscawen v Bajwa [1996] 1 WLR 328 and Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269 to submit that a constructive trust will be imposed in respect of monies paid away in breach of duty (T121). There is, of course, a considerable body of authority as to the circumstances in which liability for knowing receipt, and a consequential equitable remedy including a constructive trust, may arise, and is not necessary to undertake a full review of that authority, particularly where it was not addressed by Counsel. Broadly, under the first limb of the rule in Barnes v Addy (1874) LR 9 Ch App 244, a person who receives company property from a director will hold it on trust for the company if he or she knows, or the circumstances are such that he or she ought to know, that the director is acting in breach of duty in respect of the relevant transaction. In Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557 at [152]-[159], the Court of Appeal examined the case law in which the first limb of Barnes v Addy above had been applied to breach of fiduciary duty by a company director and held that line of authority was to be followed until the High Court said otherwise. In order to succeed in a claim for knowing receipt, the Plaintiffs must establish the relevant breach of fiduciary duty by Carol; and that the third party, Leon Plant Hire, received the relevant property by reason of the breach of duty and, at the time of receiving that property, knew of the "trust" (or duty) and of the misapplication of the relevant property: Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89; Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) above; Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 87 ACSR 260.
I am satisfied that the elements of a claim for knowing receipt are established against Leon Plant Hire. I have held above that the relevant breach of fiduciary duty by Carol has been established, and there is no factual dispute that Leon Plant Hire received the benefit of that breach by payment of the relevant funds to MKM Capital in reduction of its liability on the advance. In my view, the requisite knowledge on its part is established where its directors at the relevant time were Marco and Manuela, and no submission was put to me by Mr Johnson that they were not aware of the payments or their circumstances, particularly where they as well as Leon Plant Hire were parties to the Advance.
However, several appellate decisions, to which Counsel did not refer, have emphasised that, before a constructive trust is imposed as a remedy, the Court should decide whether, having regard to the issues in the litigation, other means are available to quell the controversy, and the Court will only generally impose a constructive trust if no other appropriate remedy is available which is capable of doing full justice: Bathurst City Council v PwC Properties Pty Ltd [1998] HCA 59; 195 CLR 566 at [42]; Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 at [10]. In John Alexander's Clubs Pty Limited & Anor v White City Tennis Club Limited [2010] HCA 19; (2010) 241 CLR 1 at [128] - [129], in a case of alleged breach of fiduciary duty, the High Court observed that a constructive trust "ought not to be imposed if there are other orders capable of doing full justice" and that: "[I]t is not a complete answer to … reliance on Giumelli that remedies other than a constructive trust may lack practical utility because of the impecuniosity of those against whom they are sought. One point made in the Giumelli line of cases is that care must be taken to avoid granting equitable relief which goes beyond the necessities of the case. Another point in those cases is that third party interests must be borne in mind in deciding whether a constructive trust should be granted …"
In Grimaldi v Chameleon Mining NL (No 2) above at [567] the Full Court of the Federal Court observed that, although a Court would ordinarily award proprietary relief against a knowing recipient where the property received was still extant: "[W]e consider that, both as a matter of binding authority and of proper principle, the Court is not obliged to do so. The circumstances may be such as to make it appropriate to leave the company to its personal remedies of an account of profits or compensation in equity. As a practical matter, these are the remedies most commonly given in misuse of corporate property cases for the reason that the recipient no longer holds traceable proceeds of the property received."
In this case, the constructive trust which the Plaintiffs seek to have imposed would not attach to property acquired by the monies paid out by Lyon Form, but to the Merrylands property which was previously owned by Leon Plant Hire and which was security, with the Wamberal property which has now been sold, for the Advance. The constructive trust which is sought would also extend to that property as a whole, notwithstanding that the amount of the Mortgage Payments would be significantly less than its value. It does not seem to me that the imposition of a constructive trust is necessary to do justice between the parties and it should therefore not be imposed.
The Plaintiffs sought, but did not advance substantive submissions as to, an alternative remedy of an equitable lien or equitable charge. Courts have imposed an equitable lien or charge as a proprietary alternative to the constructive trust in circumstances where, for example, a trustee has mixed trust funds with its own funds or has subsequently acquired an asset: Re Hallett's Estate; Knatchbull v Hallett (1879) 13 Ch D 696; see also Hewett v Court (1983) 149 CLR 639 at 668. It seems to me that the imposition of relief in that nature is justified by the matters to which I have referred above and will sufficiently protect the Plaintiffs' interests, and I will hear the parties as to the form of order that should be made to give effect to that relief. Although relief was sought by way of an order for judicial sale, no submissions were put in that regard by Counsel and no basis has been established for making such an order at this point.

Claim by way of subrogation in respect of in respect of Mortgage Payments

The Plaintiffs also seek a declaration that Lyon Form is entitled, by way of subrogation to the rights of MKM Capital, to be paid the sum of $88,032 (being the amount of the Mortgage payments) by Leon Plant Hire, Marcos, Marco and Manuela. The relevant claim is pleaded as follows (Statement of Claim [20]-[23]): "20. The Mortgage Payments were made by [Lyon Form] at the request of each of [Leon Plant Hire, Marcos, Marco and Manuela]. 21. The Mortgage Payments discharged, pro tanto, liabilities of each of [Leon Plant Hire, Marcos, Marco and Manuela] for the Advance. 22. In the premises, [Lyon Form], upon making the Mortgage Payments, became entitled to be subrogated to the right of the lender, MKM Capital, to recover the Mortgage Payments from each of [Leon Plant Hire, Marcos, Marco and Manuela]. 23. Alternatively, [Lyon Form], upon making the Mortgage Payments, became entitled to be indemnified by each of [Leon Plant Hire, Marcos, Marco and Manuela] for each of those payments."
The effect of subrogation, if established, would be that Lyon Form would succeed to the rights against the borrowers formerly secured in favour of MKM Capital, imposing on MKM Capital the obligation to account to Lyon Form for any recovery under that mortgage in excess of the amount of the debt owed to it: Bofinger v Kingsway Group Ltd above. Subrogation is, in principle, available where a mortgage debt has been only partly discharged: Raulfs v Fishy Bite Pty Ltd [2008] NSWSC 1195 at [28]ff and the cases cited therein.
The Plaintiffs' submissions as to this aspect of the case may have extended beyond their pleaded case, but both parties addressed the case as the Plaintiffs advanced it in submissions, which turned on the consequences of a payment by Lyon Form as a result of a breach of director's duties rather than on any request for payment made by the Defendants to Lyon Form. The Plaintiffs submitted that, where monies of Lyon Form were paid away in breach of duty, a constructive trust attached to those monies, and Lyon Form could trace those payments into the property owned by Leon Plant Hire, which should be treated as a volunteer in respect of the receipt of those payments. They submitted that a remedy should be granted by way of subrogation against the Merrylands property of Leon Plant Hire, which had been relieved of liability under the mortgage to the extent of the Mortgage Payments by Lyon Form. Mr Golledge refers, in support of that submission, to the decision of Foster AJ in Gertsch v Atsas [1999] NSWSC 898, where his Honour allowed relief in subrogation in respect of monies paid out by an executor in breach of trust.
The case put in submissions by the Plaintiffs does not turn on the common application of principles of subrogation where, for example, a third party advances money to pay out a mortgage on the understanding that security would be kept alive for that advance: Cochrane v Cochrane (1985) 3 NSWLR 403 at 405. However, principles of subrogation have also been applied in circumstances where monies have been paid out in breach of duty and a third party, who knowingly receives those monies, applies them to pay down a loan or mortgage. In Re Diplock; Diplock v Wintle [1948] Ch 465, the Court of Appeal held that the discharge of a loan secured over property by wrongfully paid funds did not give the person entitled to those funds any interest in the property over which the security was discharged. However, in Boscawen v Bajwa above at 335, Millett J took a contrary view and observed that, where a plaintiff's money which was wrongfully paid out has been used to discharge a mortgage on a defendant's land, then the Court may treat the land as subject to a charge by way of subrogation in favour of the plaintiff. In Heperu Pty Ltd v Belle [2009] NSWCA 252; (2009) 76 NSWLR 230 at [135], Allsop P (with whom Campbell JA and Handley AJA agreed) observed that the views of Millett LJ in Boscawen v Bajwa were to be preferred to the reasoning in Re Diplock. In Cook v Italiano Family Fruit Company Pty Ltd [2010] FCA 1355; (2010) 80 ACSR 680 at [92], Finkelstein J also noted that several Australian and United Kingdom cases have treated subrogation as available as a remedy when funds have been misapplied and are traceable to a payment discharging a debt. His Honour noted that subrogation was available even if funds had been received by a creditor in good faith, for value and without notice and tracing was not available. His Honour there held that, where funds of a bank has been misapplied in breach of trust, and the bank had suffered loss, it should be subrogated to the rights of creditors who had been paid out with its funds since it would be unconscionable for the creditors to benefit from a windfall obtained by the breach of trust.
On the other hand, the Defendants refer to the decision of Windeyer J in Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in liq) [2005] NSWSC 1317 (2005) 65 NSWLR 603 at [14] as authority that principles of subrogation are not to be applied for the benefit of one who has, officiously and as a mere volunteer, paid the debt of another. In Ogilvie v Ferry [2010] NSWSC 379 at [79] - [80], Hamilton AJ similarly noted that the principle of subrogation was available to a party which had paid a debt under compulsion for which a second party was primarily answerable and which, in equity and good conscience, should have been discharged by the second party, and that formulation also emphasises that subrogation will not ordinarily be available in respect of a voluntary payment. In Re Dalma No 1 Pty Ltd (in liq) [2013] NSWSC 1335; (2013) 279 FLR 80, Brereton J similarly held that a right of subrogation did not arise in that case where payments had been made voluntarily, on the basis that equity did not allow A to assume the rights of B against C merely by voluntarily discharging B's obligation to C. That principle does not seem to me to answer the basis on which the Plaintiffs put their case in submissions, namely that the Mortgage Payments by Lyon Form were made in breach of duty by Carol and Leon Plant Hire and the other parties to the loan agreement with MKM Capital would act unconscionably in taking the benefit of those payments to reduce the mortgage debt owed to MKM Capital, without allowing Lyon Form the benefit of the security held by MKM Capital. The element of unconscionability in that case arises because the relevant payment by Lyon Form, although voluntary in one sense, was made in circumstances involving a breach of duty by its director and the voluntary character of the payment does not avoid that unconscionability.
However, the case law also recognises that "there is no occasion for equity to intervene by way of subrogation where there is available to the third party a remedy at law or in equity sufficient to avoid an unconscionable result": Cochrane v Cochrane above at 405; Break Fast Investments Pty Ltd v Giannopoulos (No 5) [2011] NSWSC 1508; and compare Challenger Managed Investments Ltd v Direct Money Corporation Pty Ltd [2003] NSWSC 1072; (2003) 59 NSWLR 452; 12 BPR 22,257 per Bryson J at [47] - [50]. It seems to me that an order for an equitable charge over the Merrylands property is sufficient to avoid an unconscionable result in the relevant circumstances. A remedy in subrogation also has the further difficulty that it would potentially affect the interests of MKM Capital as lender (at least to the extent that its security was now to be held in part for the benefit of Lyon Form, albeit it would hold the prior interest) and of two other parties to the loan agreement with MKM Capital, Veronica Leon and Brenda Leon who, as Mr Johnson points out, have not been joined as party to the proceedings. For these reasons, I am not satisfied that relief by way of subrogation should be ordered.
The Defendants also submit that no claim in subrogation is maintainable against Marcos, Marco or Manuela where they do not stand in a position of equality with Leon Plant Hire and submit that no claim would be maintainable by Leon Plant Hire against them upon the payment down of the loan and discharge of the mortgage. I would not have accepted this submission had I otherwise been satisfied that relief by way of subrogation was appropriate. There is no evidence that the benefit of the loan was only for the purpose of Leon Plant Hire, rather than also for the benefit of Marcos, Marco or Manuela, and it is also not apparent why Leon Plant Hire should be treated, as the Defendants contend, as "principal" borrower rather than Marcos, Marco or Manuela also being treated as principal borrowers, or all of them being treated as borrowers in the same interest, when all were parties to the relevant loan agreement.
Mr Johnson also draws attention to s 42 of the Real Property Act 1900 (NSW) and the decision of the High Court of Australia in Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2; (2015) 316 ALR 111. Mr Golledge distinguishes Cassegrain v Gerard Cassegrain & Co Pty Ltd on the basis that Lyon Form does not seek to establish an estate or interest which is not recorded in the register, but seeks to enforce that estate or interest reflecting MKM Capital's rights under the mortgage, which is registered, and does not seek to impeach Leon Plant Hire's title to the property. Mr Golledge also submits that, if the Plaintiffs' claim that the Mortgage Payments were received by Leon Plant Hire with knowledge of its director's breach of duty is made out, then the claim falls within the statutory exception to indefeasibility, at least so far as Leon Plant Hire is concerned: LHK Nominees Pty Ltd v Kenworthy [2002] WASCA 291; (2002) 26 WAR 517 at [214], [268], [273]. It is not necessary to address that question where I am not satisfied that relief in subrogation should be ordered in any event.

Claim for breach of statutory and fiduciary duties by Marcos as to $107,450

The Plaintiffs also seek a declaration that, in causing and allowing Lyon Form to make two payments to him, Marcos breached statutory and fiduciary duties owed to him by Lyon Form and an order that he pay equitable compensation, or alternatively damages to Lyon Form, in the amount of $107,450. The Plaintiffs plead claims for breach of general law and statutory duty against Marcos (Statement of Claim [32]-[39]) in relation to payments made by Lyon Form to Marcos on 20 April 2012 and 8 May 2012 in the amounts of $103,000 and $4,450 respectively. I have referred above to the pleading of the content of the relevant duties by the Plaintiffs, which was admitted by Marcos, and Marcos "[a]dmit[s] the duties as attach to the office of director and as pleaded" (Marcos' Amended Defence [8]). I have also briefly referred to the relevant case law in dealing with the claim for breach of duty against Carol.
Marcos admits the fact of those payments (Marcos' Amended Defence [32]-[33]) and also admits that he was the sole director of Lyon Form at the time of those payments and caused or allowed Lyon Form to make those payments (Marcos' Amended Defence [34]-[35]). The Defendants plead that the payments were made from deposits to the account of Lyon Form that it had no entitlement to retain or hold (Marcos' Amended Defence [37]-[38]).
In his liquidator's examination, Marcos' evidence was that he withdrew the amount of $103,000 to pay Leon Plant Hire for materials it had given to Lyon Form, but acknowledged that he had not transferred the money to Leon Plant Hire because its bank account had been "stopped" (Ex P2, p 28) and that the money had been spent (Ex P2, p 30). There is no evidence that Marcos either advised the deed administrator of Leon Plant Hire of the receipt of those monies or otherwise accounted to that company for them. His evidence was also that he could not recall the second payment of $4,450 to him (Ex P2, p 42).
In their written opening submissions, the Defendants seek to support the payment of these amounts to Marcos on the basis that Lyon Form received payments from Leon Plant Hire in the amount of $293,103.14 to the date on which it was wound up. The unsigned report as to affairs (CB 2, tab 48) records a claim that Leon Family Trust was a creditor of Lyon Form for $60,000. However, no admissible evidence was led to establish that claim. A claim for a debt in respect of Marcos for $4,000 is also recorded in that document and again no admissible evidence was led to establish that claim. Mr De La Barra also referred, in his first affidavit, to copies of bank statements on which he had made handwritten notes in relation to the source of particular payments. Mr Johnson did not seek to tender those handwritten notes. In oral closing submissions, the Defendants relied on a schedule which summarised the information contained in those handwritten notes. I give no weight to that schedule first, because the handwritten notes from which it was derived were not admitted in evidence and, second, because a conclusory statement of Mr De La Barra that the deposits recorded in that schedule were not funds that "belonged" to Lyon Form, although they were credits to its bank account, was rejected and evidence was not led in admissible form to seek to establish that proposition.
A series of deposits were also received into Lyon Form's bank account from Future Form Pty Ltd ("Future Form") commencing 27 March 2012 (CB 1, Tab 4, pp 28 - 30). The Defendants submit that those amounts should be treated as having been received, in effect, for Leon Plant Hire and those payments immediately precede the payment of $103,000 from Lyon Form to Marcos. Mr De La Barra's further affidavit sworn 25 February 2015 recorded the sales of equipment, on invoices issued by Lyon Form, to Future Form for amounts inclusive of GST of $50,400 and $21,740. That material does not support the proposition which the Defendants advanced, namely that the proceeds of the sale were not the property of Lyon Form, so far as the invoices were issued by Lyon Form and the amounts due were paid to it. That proposition is consistent with those monies being funds of Lyon Form, even if it had some obligation then to account to Leon Plant Hire, whether by loan or otherwise, in respect of the value of equipment which it had sold that had originally been property of Leon Plant Hire. Assuming that the monies received by Lyon Form from Future Form were proceeds of sales of Leon Plant Hire's plant and equipment, that does not establish the further proposition that Lyon Form had no beneficial entitlement in those funds when it received them or, to put it differently, that it held those funds on trust rather than, for example, under a loan arrangement. In those circumstances the proposition that the monies should be treated as belonging to Leon Plant Hire rather than Lyon Form, at the time they were paid out, is not established.
I have referred above to Mr De La Barra's evidence that he had informed the directors of Lyon Form, including Marcos, of Lyon Form's tax obligations, including the quantum of its accrued tax liabilities. The payments to Marcos were made by Lyon Form immediately prior to the lodgement of business activity statements with the Australian Taxation Office that would crystallise GST liabilities that Lyon Form plainly had no capacity to meet, and at a time that Lyon Form's directors had a duty to take into account the interests of its creditors: Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; 10 ACLR 395; Kalls Enterprises Pty Ltd (in liq) v Baloglow above at [162]; Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) above per Lee AJA at [1092]-[1093]), per Drummond AJA at [2042] - [2095]. It seems to me that the transfer of those funds to Marcos involved a conflict of interest that could not be ratified by shareholders at a time that Lyon Form was insolvent or likely to become insolvent, and Marcos also improperly used his position as a director of Lyon Form to obtain an advantage for himself, namely the amounts paid to him: Chew v R above; Pilmer v Duke Group Ltd (in liq) above at 199; Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; (2014) 101 ACSR 233 at [432]-[433]. Even if Leon Plant Hire had any claim to those funds, that could not support their payment to Marcos at a time that Lyon Form was insolvent or likely to become insolvent.
The claim for breach of directors' duty against Marcos in respect of these payments is therefore established, subject to the discretionary relief which he seeks under ss 1317S and 1318 of the Corporations Act.

Claim for relief under ss 1317S and 1318 of the Corporations Act

A further issue is raised by the Defendants in respect of the claim against Marcos as follows: "Further, and in answer to the entirety of the claim so far as it is directed to claims as against [Marcos], … [Marcos] says that to the extent that he may be found liable for compensation under the provisions of s 1317H of the Corporations Act 2001 or alternatively in respect of default, breach of trust or breach of duty otherwise pleaded against him (both of which claims are denied) having regard to all the circumstances of the case and the manner in which he relied upon advice and assistance from an appropriately qualified accountant in respect of the financial dealings of the company and his language difficulties he ought to excused from any such contravention or liability as might otherwise attach to his conduct" (Marcos' Amended Defence [49].
The application for relief by Marcos is presumably made under ss 1317S and 1318 of the Corporations Act. The court has power to grant relief from a contravention of a civil penalty provision under s 1317S if, in "eligible proceedings" brought against a person, it appears to the court that that person has or may have contravened a civil penalty provision, but that he or she had acted honestly and, having regard to all the circumstances of the case (including those connected with his or her appointment as an officer of a corporation), the person ought fairly to be excused for the contravention. Section 1318 in turn allows a court to relieve, relevantly, an officer of a corporation from liability in civil proceedings for negligence, default, breach of duty or breach of trust, if he or she establishes that he or she acted honestly, and that he or she ought fairly to be excused for the negligence, default, breach of duty or breach of trust having regard to all of the circumstances of the case including those connected with his appointment.
Whether relief from liability should be granted under these sections depend not only on subjective honesty but also on the degree to which the relevant conduct fell short of the required standard, the seriousness of the contravention and its actual or potential consequences, any element of impropriety such as deception and personal gain and any contrition of the applicant and the need for general deterrence is also relevant: Morley v Australian Securities and Investments Commission (No 2) [2011] NSWCA 110; (2011) 83 ACSR 620 at [44], [49]-[50]. In Great Southern Finance Pty Ltd (in liq) v Rhodes [2014] WASC 431 at [60], Beech J summarised the matters relevant to relief under these sections as whether the defendant acted honestly; a value judgment whether, having regard to all the circumstances of the case, the defendant ought fairly to be excused for the contravention; and whether, as a matter of discretion, the court should exercise its power to relieve the defendant from any liability.
Although an affidavit of Marcos had been prepared, it was not read in these proceedings, and Marcos did not give oral evidence. The Plaintiffs tendered a transcript of a liquidator's examination of Marcos which I held was admissible against him. That transcript included various self-serving statements as to his reliance upon Mr De La Barra. Marcos also claimed, in the course of that examination, to have language difficulties, and gave his evidence through an interpreter, although the transcript makes clear that the liquidator was sceptical of that claim and sought to have the examination proceed without the interpreter. The Registrar did not permit that course, without reaching any factual findings as to the extent of any language difficulties of Marcos. Mr De La Barra's evidence was that Marcos had limited ability to read English and generally conversed with Mr De La Barra in the Spanish language and that workers on the various jobs also generally spoke in the Spanish language. Mr De La Barra did not directly address Marcos' ability to speak English, notwithstanding that he may prefer to speak Spanish (De La Barra 17.9.14 [15]-[16]). I am not in a position to reach factual findings as to that matter, since Marcos has not given evidence before me.
I am not satisfied by the assertions made by Marcos during the liquidator's examination, which were not supported by any specific detail, that he in fact relied upon the accountant in respect of the specific transactions that are challenged in these proceedings. Mr De La Barra's evidence in cross-examination, including as to advice which he gave to Marcos and others that was apparently not implemented, does not support that proposition. Marcos accepted in his liquidator's examination that he was aware of his duties as a director (Ex P2, p 6) and, even if he had limited English skills and conducted Lyon Form's business in Spanish rather than English, that would not have prevented him complying with those obligations, including refraining from transferring substantially all of Lyon Form's remaining funds to himself immediately before Lyon Form lodged business activity statements that would crystallise tax liabilities that had accrued over a considerable period and that it had not met and could not meet. Given the nature of the impugned transactions and in the absence of evidence led by Marcos in these proceedings, the prerequisites to relief under ss 1317S and 1318 of the Corporations Act, including that he acted honestly, are not established.

Claim for unreasonable director-related transactions and uncommercial transactions as to $107,450

The Plaintiffs also seek a declaration that the two payments made by Lyon Form to Marcos on 20 April 2012 and 8 May 2012 in the amounts of $103,000 and $4,450 to Marcos were unreasonable director-related transactions within the meaning of s 588FDA of the Corporations Act and uncommercial transactions within the meaning of s 588FB of the Corporations Act and an order under s 588FF of the Corporations Act that Marcos pay Lyon Form the sum of $107,450. This claim was not clearly raised in the pleadings in the Statement of Claim but Marcos took no point as to that matter and the claim does not seem to raise any factual matters in addition to the claim for breach of directors' duties in respect of those payments.
A transaction between a company and a director or his or her close associate is treated as voidable on a winding up of the company if it occurs in circumstances where a reasonable person in the company's circumstances would not have entered into the transaction under s 588FDA of the Corporations Act. This section applies in respect of, inter alia, a payment made by the company: s 588FDA(1)(a). Whether a reasonable person in the company's circumstances would not have entered into the transaction is determined having regard to any benefits to the company of entering into it; the detriment to the company of entering into it; the respective benefits to other parties to the transaction of entering into it; and any other relevant matter: s 588FDA(1)(c). The test whether such a transaction is unreasonable is objective in character and the matters specified in s 588FDA(1)(c) must be taken into account in determining that: Weaver v Harburn [2014] WASCA 227 at [91]. In Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14; (2014) 97 ACSR 627, the Court of Appeal of the Supreme Court of Victoria held that a disposition may be "for the benefit of" a director where it "legally or financially advantages the director in question regardless of whether it is paid or directed to a close associate of the director" (at [26]) and that the purpose of the section is "to catch director-related transactions of kinds not otherwise liable to avoidance as unfair preferences, uncommercial transactions or unfair loans" (at [28]).
It seems to me that the findings which I have reached above in respect of Lyon Form's insolvency, and the fact that these payments were simply the transfer of its funds to a director, immediately prior to the lodgement of tax returns which would crystallise its unpaid tax liabilities and bring about its liquidation, are sufficient to establish that these payments were both unreasonable director-related transactions within the meaning of s 588FDA of the Corporations Act and uncommercial transactions within the meaning of s 588FB of the Corporations Act. An order should therefore be made under s 588FF of the Corporations Act that Marcos pay Lyon Form the sum of $107,450 in respect of these payments.

Claim for breach of statutory and fiduciary duties by Carol as to payments to Leon Plant Hire deed fund

As I have noted above, the Plaintiffs plead that, as a director of Lyon Form, Carol owed Lyon Form a fiduciary duty to act in good faith and in the best interest of Lyon Form; a fiduciary duty to exercise her powers as a director, only for proper purposes; a fiduciary duty not to act in a manner which would place her in a position where her personal interest did or might conflict with the interest of Lyon Form, or alternatively, a fiduciary duty to avoid taking advantage of any such conflict should one arise; and the statutory duties imposed on company directors pursuant to ss 180, 181, 182 and 183 of the Corporations Act (Statement of Claim [8]) and Carol "[a]dmit[s] the duties as attach to the office of director and as pleaded" (Defence [8]). I have addressed the content of that duty above. The Plaintiffs also plead claims for breach of general law and statutory duty against Carol (Statement of Claim [40]-[47]) and seek a declaration that in causing and allowing Lyon Form to make two payments to the administrator of a deed of company arrangement in respect of Leon Plant Hire, namely $40,035 on 8 September 2011 and $40,000 on 7 October 2011, she acted in breach of statutory and fiduciary duties owed by her to Lyon Form and an order that she pay equitable compensation or alternatively damages to Lyon Form in the amount of $80,035. Carol admits the fact of those payments and admits that Lyon Form had no liability to make the payments but pleads that the payments were made for a proper purpose.
The Defendants, in their opening written submissions, raised a defence to the claim against Carol in respect of payments of $80,035 to the deed fund on the basis that: "[Lyon Form] had an interest in ensuring at the time the payment was made, that it continued to enjoy the benefit of the ongoing use of [Leon Plant Hire's] plant and equipment, (together with the administrative overhead and support staff that was being provided to it at that time). There was a commercial basis for the making of the payment."
Mr Johnson put to Mr Gordon that it was in the interests of Lyon Form that Leon Plant Hire completed the deed of company arrangement according to its terms. Mr Gordon responded, sensibly, that he was not sure of that proposition (T52). It seems to me that those payments were not in the interests of Lyon Form at the relevant time. There is no reason to conclude, for the reasons that I have noted above, that any benefit obtained by Lyon Form from making the payments so as to secure the continued availability of equipment from Leon Plant Hire justified the size of the payments to the deed fund, which would in turn depend upon whether Lyon Form could have hired the equipment it required elsewhere for a lesser amount than the cost of the contributions it made to the deed fund of Leon Plant Hire, combined with the Mortgage Payments.
Carol raises an additional defence that the claim brought against her is not maintainable by reason that she entered into an arrangement under Part X of the Bankruptcy Act 1966 (Cth) (Defence [48], Ex D1). The Defendants submit that s 230 of the Bankruptcy Act releases a party to a Part X agreement from provable debts as if they were having their debts administered in bankruptcy, and that a provable debt means a debt that would have been provable in bankruptcy, if the debtor had become a bankrupt when the acceptance of the relevant debt agreement proposal for processing was recorded in the National Personal Insolvency Index. The Defendants submit that, by reason of Carol's entry into the Personal Insolvency Agreement, the claims against her are no longer capable of being maintained.
Clause 9 of Carol's Personal Insolvency Agreement of 23 July 2012 (Ex D1) provided that, upon Carol's performance of her obligations under the deed, she would be released and discharged from all the provable debts owed by her to the creditors and from all claims, actions, suits, demands and other proceedings by each of them on account of those debts. Clause 9.2 provided that, subject to any contrary provision of the Bankruptcy Act, the date of release and discharge of the provable debts would be the date of the trustee's certificate given under s 232 of the Bankruptcy Act and that release and discharge would be a complete defence to any claim, action, suit, demand or other proceeding in respect of or on account of any of those debts. The reference to a "provable debt" was defined as having the meaning in s 187(2) of the Bankruptcy Act, including a liability that would have been a provable debt in Carol's bankruptcy if she had become a bankrupt on the day on which she executed the Personal Insolvency Agreement.
The Personal Insolvency Agreement will therefore bar a claim for compensation for breach of director's duties against Carol if, as at 23 July 2012, that claim would have been a provable debt in a bankruptcy. That depends upon the terms of s 82 of the Bankruptcy Act which appears at the commencement of Part VI Div 1 of the Bankruptcy Act, headed "Proofs of Debt", and relevantly provides that: "(1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of bankruptcy, are provable in his or her bankruptcy. … (2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy."
A liability arising from the claim for breach of director's duties against Carol was a liability, albeit contingent, arising from an obligation incurred at the time of the relevant conduct, prior to the date of her entry into the Personal Insolvency Agreement, and would have been admissible in her bankruptcy if it was either a liquidated claim, or an unliquidated claim that arose by reason of a contract, promise or breach of trust. Conversely, the claim would not be provable in bankruptcy and would not be extinguished by the Personal Insolvency Agreement if it is properly characterised as a claim for unliquidated damages not arising by reason of a contract, promise or breach of trust.
Mr Johnson submits that a claim against Carol based upon a breach of the Corporations Act would be barred by her Personal Insolvency Agreement, provided the entitlement to that claim arose prior to the date of execution of that agreement. Mr Johnson relies on Official Trustee in Bankruptcy v CS & GJ Handby Pty Ltd (1989) 21 FCR 19; (1989) 87 ALR 734, where the Full Court of the Federal Court held that a claim for unpaid debts, under s 556 of the Companies (Tasmania) Code was a liability within the meaning of s 82 of the Bankruptcy Act and was capable of being admitted to proof, and that section was intended to extend to debts or liabilities arising under statute, and that such a claim was not a demand in the nature of unliquidated damages within s 82(2) of the Bankruptcy Act. That decision does not, of course, establish that a claim for breach of director's duties is similarly a liquidated claim. Mr Johnson also submits that the claims brought in this matter are in the nature of liquidated amounts and that a claim for breach of a director's duty is analogous to a breach of trust. Conversely, Mr Golledge submits that a claim for unliquidated damages that does not arise for breach of contract, promise or trust is not provable in Carol's bankruptcy and is not subject to the Personal Insolvency Agreement, and that a claim for breach of statutory or fiduciary duty is not a claim for unliquidated damages for breach of trust.
In Auto Group Ltd v England [2008] NSWSC 402, Bryson AJ considered whether claims brought by a company against its managing director for damages for monies misdirected in payment of false invoices were liquidated debts which were provable in the bankruptcy. His Honour described (at [3]) the difference between liquidated and unliquidated damages as follows: "Damages are liquidated where their assessment is substantially a matter of calculation as a result, usually, of some contractual provision which establishes the amount of damages to be paid in some event and does not leave damages for assessment. Damages are unliquidated in all cases except those where there is some contractual or statutory mechanism which provides means of calculating the damages without any process of assessment. Where damages are to be assessed on principles of the law of damages, however simple the process may be, they are unliquidated." His Honour also observed (at [4]) that a liability for breach of fiduciary duty in misdirecting payments of a company's funds was an equitable debt, where the claim was in substance a claim for restitution of the misappropriated money, and did not seek a wider inquiry into loss. I have not neglected the fact that a claim was also brought in these proceedings against Carol under s 1317H of the Corporations Act which provides for an order for compensation, but that claim was framed, in substance, as a claim for the two amounts paid out. With some hesitation, it seems to me that the claim was in substance one for liquidated damages, analogous to a claim for an equitable debt of the kind to which Bryson AJ referred. I therefore accept Mr Johnson's submission that the claim for breach of director's duties against Carol is a claim for liquidated damages so as to be provable in a bankruptcy and extinguished by the Personal Insolvency Agreement.
It is therefore not strictly necessary to determine the question whether, if (contrary to my view) the claim for breach of director's duties against Carol were properly characterised as a claim for unliquidated damages, it arose by reason of a breach of trust so as to be provable in a bankruptcy and extinguished by the Personal Insolvency Agreement. I should nonetheless indicate my views as to that issue against the contingency that an appellate Court takes a different view to mine as to whether the claim against Carol was a liquidated claim. The question whether a claim for breach of director's duties should be treated as a claim for breach of trust, for the purposes of s 82(2) of the Bankruptcy Act, is a difficult question, as both Counsel recognised. In Cummings v Claremont Petroleum NL [1996] HCA 19; (1996) 185 CLR 124, Brennan CJ, Gaudron & McHugh JJ observed (at [12]) that a claim arising from breach of fiduciary duty is classified as a claim arising by reason of contract or breach of trust for the purposes of s 82(2) of the Bankruptcy Act, the damages for which are a provable debt in a bankruptcy. That observation would, on its face, support the position for which Mr Johnson contends. In Re Sharp; Ex Parte Tietyens Investments Pty Ltd [1998] FCA 1367, Weinberg J similarly observed that an allegation of breach of fiduciary obligation fell within the concept of a breach of trust for the purposes of s 82(2) of the Bankruptcy Act.
On the other hand, in Auto Group Ltd v England above at [8], Bryson AJ observed that a claim for breach of fiduciary duty was not a claim for breach of trust within the language of s 82(2) of the Bankruptcy Act and distinguished the contrary observation of Weinberg J in Re Sharp; Ex Parte Tietyens Investments Pty Ltd above. His Honour also observed (at [22]) that: "[A] breach of fiduciary duty is not necessarily a breach of trust; there is no contextual or other reason for giving 'breach of trust' in s 82(2) a meaning other than its ordinary meaning, applicable only where there is an identifiable trust, trustee, equitable owner and trust property."
In Mercedes Holdings Pty Ltd v Waters (No 3) [2011] FCA 236 at [120], Perram J observed that the observation in Cummings v Claremont Petroleum above was not sufficient to establish that a claim for breach of fiduciary duty was a breach of trust, both because he considered the Court may there have been referring to the wider phrase "claim arising by reason of contract or breach of trust" and because that observation was not the ratio decidendi of the decision and because statutory claims against directors were held not to be provable debts in that case. His Honour expressed the same view in Mercedes Holdings Pty Ltd v Waters (No 5) [2011] FCA 1428 at [156]ff, where he had to consider whether a claim for relief under s 1325 of the Corporations Act and damages at general law could be characterised as a claim in the nature of unliquidated damages for breach of trust. His Honour noted the difference of view between Re Sharp; Ex Parte Tietyens Investments Pty Ltd above and Auto Group Ltd v England above and observed that he did not accept that a breach of trust under s 82(2) of the Bankruptcy Act was established by mere moral turpitude and preferred the views of Bryson AJ in Auto Group Ltd v England above.
It seems to me that the balance of authority now supports the view, which I would also take, that a claim for breach of director's duties is neither a liquidated claim nor an unliquidated claim arising by reason of a breach of trust, and the claim against Carol in respect of the payments to the deed funds would therefore not be admissible to proof under her Personal Insolvency Agreement or extinguished by that Agreement, by reason of being a claim for unliquidated damages as to breach of trust.
For the reasons set out above, I have held, however, that this claim was in substance a claim for liquidated damages that is not maintainable by reason of Carol's Personal Insolvency Agreement and this claim fails for that reason.

Claim as to interest

The Plaintiffs also claim interest under s 100 of the Civil Procedure Act 2005 (NSW) in accordance with a schedule of interest attached to the Statement of Claim. That section relevantly provides that: "In proceedings for the recovery of money (including any debt or damages or the value of any goods), the court may include interest in the amount for which judgment is given, the interest to be calculated at such rate as the court thinks fit: (a) on the whole or any part of the money, and (b) for the whole or any part of the period from the time the cause of action arose until the time the judgment takes effect."
That section has been treated as applicable in proceedings under s 588FF of the Corporations Act and its predecessors, and reflects the general principle that a successful plaintiff who obtains a money judgment will generally be entitled to an award of interest, by way of compensation, because it has been kept out of its money and the unsuccessful defendant has had the use of that money: Ruby v Marsh (1975) 132 CLR 642 at 644; Falkner v Bourke (1990) 19 NSWLR 574 at 576. Indeed, in Star v O'Brien (1996) 40 NSWLR 695, on which Mr Johnson relies, Clarke JA observed (at 701-702) that: "The general rule… is that interest should be awarded for the period between the accrual of the cause of action and the date of judgment… …where no more appears than that action was commenced within a reasonable time after the accrual of the cause of action and there is no evidence of any actual prejudice to an unsuccessful party the court would usually apply the general principle."
Mr Johnson submits that a claim for interest can only be made in respect of the uncommercial transaction claim or the breach of duty claim from the point at which a demand is made, and rely on the Court of Appeal's judgment in Star v O'Brien above in that regard. There are, I accept, several cases in which the date of a demand has been treated as the date from which interest would properly run, including Star v O'Brien above and Capital Finance Australia Ltd v Tolcher above. However, that approach reflects a view that, on the facts of those cases, until demand was made (and, in particular, before the advent of winding up), the recipient of the relevant payment would have had no reason to think that he or she would be required to disgorge the relevant payment: New Cap Reinsurance Corporation Ltd v AE Grant, Lloyd's Syndicate (No 991) [2009] NSWSC 662; (2009) 257 ALR 740. That may often be the case in respect of third parties which have received, for example, a payment that is later found to be a preference. It seems to me that principle has no application to a claim for breach of director's duties, at least in the circumstances of this case, where Carol and Marcos could have had no reasonable belief that they might not be held accountable for the relevant payments, or to a claim for recovery of the obviously uncommercial transactions at issue in this case. Accordingly, interest should run from the date of the relevant payments.

Summary, orders and costs

In summary, the liquidator has succeeded in his claim against Leon Plant Hire, Marcos, Marco and Manuela under s 588FF of the Corporations Act for $88,032 on account of the Mortgage Payments. Lyon Form has established an entitlement to relief by way of an equitable charge or lien over the Merrylands property of Leon Plant Hire in that amount, but not a claim to a constructive trust or by way of subrogation. The liquidator has also succeeded in his claim against Marcos for orders under s 588FF of the Corporations Act for $107,450 on account of the monies paid to him on 20 April and 8 May 2012, and Lyon Form has established a right to equitable compensation or damages for breach of director's duties in that amount against Marcos in respect of those payments. Lyon Form would have established a right to equitable compensation or damages for breach of director's duties in the amount of $80.035 against Carol in respect of payments made to the deed fund in respect of the administration of Lyon Formwork, but for her entry into a Personal Insolvency Agreement by reason of which that claim has been extinguished. The Plaintiffs should have interest on that amount and costs, other than in respect of their claim against Carol. I will hear the parties as to the costs of the claim against Carol if they cannot reach agreement as to that question.
I direct the parties to bring in short minutes of order to give effect to this judgment within 14 days.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 April 2015

Corporations Act 2001(Cth)ss 9, 95A(1), 95A(2), 286, 286(1), 491, 588E, 588E(1), 588E(4), 588E(9), 588FB, 588FB(1), 588FC, 588FDA, 588FDA(1), 588FE, 588FF, 1317H, 1317S, 1318, 1325

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