CORPORATIONS - winding up - unreasonable director-related transaction - where director allowed company's business to be taken over by new company for nil consideration - whether disposition "for the benefit of" director - Vasudevan v Becon Constructions - [2021] NSWSC 40 - NSWSC 2020 case summary

Supreme Court of NSW|2020-12-01|Before: Gleeson J

Background

The following background facts are not in dispute. The company was established under the name IW4U in July 2011, and as its name suggests, operated a labour hire business, supplying staff to work in clients' warehouses, including unpacking containers for clients. Mr David Ngaue was its sole director and shareholder. The company sourced casual labour force from two related subcontracting entities, Affordable Workforce Pty Limited (Affordable Workforce) and Dedicated Employment Pty Limited (Dedicated Employment). There was no written contract in respect of those arrangements. ASIC searches record that Mr Ngaue was a director of Affordable Workplace from 14 April 2014 to 1 May 2017 and the shareholders were his sons, Allan (strictly Alain) Ngaue and David Junior Ngaue. Mr David Ngaue was a director of Dedicated Employment from 7 April 2014 to 1 September 2014 and held 10 of the 20 issued shares in that company. His daughter, Sharon Ngaue, held the other 10 shares and was a director from 1 September 2014 to 16 August 2017.
The company supplied casual labour to a small number of customers, including Fantastic Furniture Pty Ltd (Fantastic Furniture) and Plush-Think Sofas Pty Ltd. These arrangements were on a handshake basis; Mr Ngaue had previously been an accountant for Fantastic Furniture from the 1990s until 2001. The company operated its business from a small office at West Ryde. Mr Astarci was the accountant and tax agent for the company. He was responsible for the preparation of BAS and IAS statements, tax returns and financial statements of the company.
The financial statements of the company record that: 1. the company had negative net assets in each year ending 30 June 2013 to 30 June 2016 (2013 - ($99,258.20); 2014 - ($98,000.99); 2015 - ($171,888.87); and in 2016 - ($191,448.53)); 2. the company received significant income from labour hire in the years ending 30 June 2013 to 2015 (2013 - $400,381.19; 2014 -$1,196,177.12; 2015 - $1,354,616.80); 3. with the exception of the year ended 30 June 2014 in which a small profit of $1,257.21 was recorded, the company suffered losses in all financial years from 30 June 2013 to 2016: 2013 - ($97,518.23); 2015 - ($73,887.88); 2016 - ($19,559.66); 4. during the 2015 financial year, the company was subject to a tax audit, which resulted in a significant unrecorded liability for employee entitlements of $137,083.66 being brought to account that year representing outstanding superannuation for employees.

R 56 Pereira v Director of Public Prosecutions [1988] HCA 57; (1988) 82 ALR 217 Permanent Building Society Pty Ltd (in liq) v Wheeler (1994) 11 WAR 187; (1994) 14 ACSR 109 Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; (2014) 101 ACSR 233 Re Great Wall Resources Pty Ltd (in liq) [2013] NSWSC 354 Spies v R (2000) 201 CLR 603; [2000] HCA 43; (2000) 35 ACSR 500 Sycotex Pty Ltd v Baseler (1994) 122 ALR 53; 13 ACSR 766 Termite Resources NL (in liq) v Meadows, in the matter of Termite Resources NL (in liq) (No 2) [2019] FCA 354; (2019) 370 ALR 191; (2019) 135 ACSR 45 Vasudevan v Becon Constructions (Aust) Pty Ltd (2014) 41 VR 445; [2014] VSCA 14 V-Flow Pty Ltd v Holyoake Industries (Vic) Pty Ltd [2013] FCAFC 16; (2013) 296 ALR 418; 93 ACSR 76 Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416 Yorke v Lucas (1985) 158 CLR 661; [1985] HCA 65 Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457; (2006) 57 ACSR 693 Category: Principal judgment Parties: IW4U Pty Limited (in liq) (First plaintiff) Frank Lopilato (Second plaintiff) Mitchell Herrett (Third plaintiff) Herman Astarci (First defendant) IW4U Employment Services Pty Limited (Second defendant) Representation: Counsel: Mr A Bailey (Plaintiffs) Mr H Astarci (Self-represented) (First defendant) No appearance (Second defendant)

Witnesses

Evidence was given by Mr Herrett, one of the liquidators. He was not cross-examined. The evidence was largely documentary and included the transcript of the liquidators' s 597 examinations of Mr David Ngaue and Mr Astarci.
The liquidators also adduced expert evidence from Mr Peter Haley, a chartered accountant and company director, as to the value of the business of IW4U. Mr Haley was briefly cross-examined.
Mr Astarci gave affidavit evidence and was cross-examined. No evidence was adduced by Employment Services.

Factual findings concerning the transfer of the business of IW4U to Employment Services

The transcript of Mr Ngaue's s 597 examination, which was tendered and admissible by reason of s 63 of the Evidence Act 1995 (NSW), as Mr Ngaue was not available, he having died in September 2019, contains statements by Mr Ngaue, which I accept, to the following effect: 1. the contractual arrangements between IW4U and its clients such as Fantastic Furniture were not in writing. The arrangements were oral and made on the basis of a handshake, given Mr Ngaue's connection with Fantastic Furniture, of which he was previously the financial controller; 2. the arrangements between IW4U and its subcontractors, Dedicated Employment and Affordable Workplace, were also oral arrangements. There were no written contracts; 3. the company was under financial stress in 2015 and money was owed to the ATO; 4. Mr Ngaue described what occurred in mid-2015 as a "restructure". He said he had a conversation with Mr Astarci in which he said to Mr Astarci, "This is what I want to do" and Mr Astarci replied, "If that's what you want to do, then that's what it is". Mr Ngaue accepted that he had some discussions with Mr Astarci concerning the restructure but it was "just my decision"; 5. the contracts with the company's clients, such as Fantastic Furniture, were not "sold" to Employment Services, rather Employment Services "just took over the work from IW4U". No consideration was paid by Employment Services to IW4U. Mr Ngaue said "There was no benefit, whatsoever" for IW4U; 6. Mr Ngaue instructed Mr Astarci to register the new company, Employment Services. Mr Ngaue called up the clients, such as Fantastic Furniture, and said "Don't pay IW4U Pty Ltd anymore, there's a new account" and he gave the clients the new identity of Employment Services and its ABN number and the new bank account for Employment Services.
Evidence was tendered of a business record of the ATO, being its internal notes relating to IW4U (Exhibit G), which contained representations made during a telephone conversation on 15 June 2015 between an ATO officer and Mr Astarci (a) by the ATO officer that the amount currently outstanding to the ATO was in the order of $212,302.20, and (b) by Mr Astarci that the taxpayer (IW4U) was having personal difficulties, could not afford to pay penalties, and in a response to a request by the ATO for a payment proposal, that Mr Astarci would speak with the taxpayer and "then call ATO back to advise of whether [the taxpayer] would request arrangement or consider insolvency". Mr Astarci agreed in cross-examination that there was a sum of around $220,000 owing to the ATO in June 2015 by IW4U. (T23 (18-20))
It is not in dispute that IW4U failed to pay the relevant superannuation guarantee charge in respect of its employees from at least 2014. Mr Astarci gave evidence, which I accept, that he was constantly reminding Mr Ngaue of the company's obligation to pay the superannuation guarantee charge which following the audit in 2015 was determined to be in the order of $137,000.
In cross-examination, Mr Astarci said that he formed the view that IW4U was in some difficulty with the ATO for "a long time", and that he sat down and discussed the matter with Mr Ngaue in 2012 and said, "'Look, we've got to do something, get' - I don't know what I advised him distinctly, but I said, 'You have to do something now, otherwise you are going to be insolvent'". (T19 (5-7), (28-31)) Mr Astarci said that he told Mr Ngaue that the hourly rate charged to clients was not enough to cover the overheads and that he should talk to the management of Fantastic Furniture to adjust the hourly rate a little bit, but they applied "a little bit industrial bullying and the request to cover the superannuation payment was never fulfilled" (T18 (32-49)).
Mr Astarci prepared a handwritten note in about mid-2015 of matters which he proposed to raise with Mr Ngaue, including: David, you are trading insolvent - that is an offence … I would like you to stop IW4U Pty Ltd for so many reasons.
In cross-examination, Mr Astarci was taken to his note and said: … That was a note for me to communicate to him but never happened. Maybe happened or it never happened, I don't know. It was in my folders that you found it. (T20 (4-6))
I infer that it is more likely than not that Mr Astarci informed Mr Ngaue in mid-2015 that IW4U was trading whilst insolvent, and that the company should stop trading.
Mr Astarci said in his s 597 examination that when he realised that IW4U was going to be audited, Mr Ngaue instructed him to set up the new company. With respect to his position as a director of the new company, Mr Astarci said: Look, I will be short (sic) while the director, and then the - strictly under my instructions, but didn't happen, so I resigned.
Mr Astarci's handwritten note also contains under the following words under the heading "12/6/15": For new IW4U - I would like the invoices to see and see a copy - payment straight CBA now bank account - after that I will know the [?] savings and the cost.
At his s 597 examination, Mr Astarci said of this part of his note that he wanted to chastise Mr Ngaue on the money matters and that the reference to seeing copies of the invoices of Employment Services was to see how much he was invoicing and how much he was putting into the bank account for the new company. In cross-examination, Mr Astarci said he became a director of Employment Services "stupidly thinking that I would be controlling the money, but unfortunately it didn't happen". (T21 (13-15))
Following the incorporation of Employment Services on 12 May 2015 on the application of Mr Astarci, Mr Alain Ngaue was appointed a director on 27 May 2016. Mr Astarci resigned as a director and secretary of Employment Services on 4 July 2016. Mr David Ngaue was appointed a director of Employment Services on 4 November 2016; and it seems that he became the sole shareholder around that time. The current director of Employment Services is Mr Alain Ngaue. He is also the current holder of the shares in Employment Services following the death of his father in September 2019.
The transcript of Mr Astarci's s 597 examination contains a statement by Mr Astarci that in his conversations with Mr Ngaue about closing down IW4U and starting or restructuring through Employment Services, Mr Ngaue told him that 50 people would have been unemployed if he closed down IW4U, that this would have been a big burden on unemployment benefits, in the order of $20,000 or $30,000 per fortnight, that "he couldn't do it" and he wanted to save the people employed. According to Mr Astarci, Mr Ngaue said: Look, if I started a new company, may be they would still be employed, because they all unskilled people and, basically, they don't have - got much qualifications.
The documentary evidence adduced by the liquidators establishes that IW4U ceased invoicing its clients at the end of July 2015 and thereafter Employment Services invoiced the same clients. Although a large number of invoices incorrectly used the name "IW4U Employment Pty Ltd", the ABN on the invoices was that of Employment Services. The amount of those invoices was banked into the account of Employment Services.
The financial statements of Employment Services record the following profit or loss before income tax for the years ended 30 June 2016 to 2019: 2016 - ($71,758.59); 2017 - $38,267.33; 2018 - ($71,375.60); 2019 - $22,822.96.

Whether Mr Nagaue breached his duties as a director?

In closing submissions, counsel for the liquidators put the accessorial liability claim against Mr Astarci on the basis that Mr Ngaue had breached his director's obligation of good faith and to act in the best interests and for a proper purpose contained in s 181(1) of the Corporations Act, by allowing the Employment Services company to "take over" the business of IW4U in mid-2015. No reliance was placed on the other pleaded allegations that Mr Ngaue had breached his director's duties under s 180(1) to exercise reasonable care and diligence, or under s 182(1) not to misuse the director's position.
The director's good faith obligation in s 181(1) is in the following terms: 181 Good faith - civil obligations Good faith - directors and other officers (1) A director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in the best interests of the corporation; and (b) for a proper purpose. (2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
Sections 181(1)(a) and (b) are the statutory expression of two separate duties owed at general law. Putting to one side the debate as to whether these duties are objective or subjective, the standards imposed are those that "would be expected of a person in that position by reasonable persons with knowledge of the duties, power and authority of the position": Downer EDI Ltd v Gillies [2012] NSWCA 333; (2012) 92 ACSR 373 at [76] (Allsop P). In Chew v R (1991) 4 WAR 21; (1991) 5 ACSR 473 at 499, Malcolm CJ said that the duty of honesty or good faith has a number of aspects under the general law, being that directors (1) must exercise their powers in the interests of the company; (2) must avoid conflict between their personal interests and those of the company; (3) should not take advantage of their position to make secret profits; and (4) should not misappropriate the company's assets for themselves.
In the context of insolvency or near insolvency, which includes a real and not remote risk that creditors will be prejudiced by the dealing in question (Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557 at [162]), the standard under s 181(1) entails an obligation on the directors to take into account the interests of creditors, which has been described by Gummow J, as an "imperfect obligation" because the creditors cannot enforce it "save to the extent that the company acts on its own motion or through a liquidator": Sycotex Pty Ltd v Baseler (1994) 122 ALR 53; 13 ACSR 766 at 785; see also Spies v R (2000) 201 CLR 603; [2000] HCA 43; (2000) 35 ACSR 500 at 525-526; Termite Resources NL (in liq) v Meadows, in the matter of Termite Resources NL (in liq) (No 2) [2019] FCA 354; 370 ALR 191; 135 ACSR 45 at [197]-[209].
No detailed submissions were addressed to the question of whether any part of the duty under s 181(1) is objective or subjective, or a combination of the two: see Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; (2014) 101 ACSR 233 at [421]; Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552; (2016) 340 ALR 75; 118 ACSR 184; 117 ACSR 408 at [494]; Hart Security Australia Pty Ltd v Boucousis [2016] NSWCA 307; (2016) 339 ALR 659; 117 ACSR 408 at [75]; Australian Securities and Investments Commission v Flugge [2016] VSC 779; (2016) 342 ALR 1 at [1976]-[1991]; Termite Resources (No 2) at [193]-[194].
Counsel for the liquidators referred to the remarks of Windeyer AJ in Australian Securities and Investments Commission v Somerville (2009) 77 NSWLR 110; [2009] NSWSC 934 at [36]-[37], where after referring to the conflicting authorities, his Honour observed at [37]: Whatever the position, I consider it clear first that unless the interests of the creditors are taken into account where objective circumstances require this, then if those interests are disregarded and only the interests of shareholders considered, the directors cannot be acting in good faith; and second, this really does not matter because it is clear the requirement to exercise powers for a proper purpose is an objective test: Chew v R (1992) 173 CLR 626; Linton v Telnet Pty Ltd (1999) 30 ACSR 465 at 471; Re HIH Insurance Ltd (in prov liq); ASIC v Adler (2002) 42 ACSR 80 at [738]-[740].
Those remarks are apposite here where the objective circumstances required the interests of creditors of IW4U to be taken into account. A director will be acting in breach of duty if he or she incorporates a new entity for the purpose of continuing to trade the business of the company without the new entity acquiring the business of the first company in an arm's length transaction for value: see, for example, the remarks of the Supreme Court of New Zealand in Madsen-Ries and Levin as Liquidators of Debut Homes Limited (in liquidation) v Cooper [2020] NZSC 100 at [174]-[188]. Honest or altruistic behaviour by directors will not prevent a finding of improper conduct on their part if that conduct was carried out for an improper or collateral purpose: Permanent Building Society Pty Ltd (in liq) v Wheeler (1994) 11 WAR 187 at 218; (1994) 14 ACSR 109 at 137 (Ipp J, Malcolm CJ and Seaman J agreeing).

Application of principles

I am satisfied that, notwithstanding Mr Ngaue's asserted subjective desire to protect the employment position of the persons working for IW4U, Mr Ngaue breached his duty under s 181(1) by allowing Employment Services to take over the business of IW4U for nil consideration in mid-2015. As Mr Ngaue acknowledged during his s 597 examination, the so-called "restructure" was of no benefit whatsoever for IW4U. Insofar as the "good faith" obligation in s 181(1)(a) involves a subjective component, I find that Mr Ngaue engaged deliberately in conduct in allowing Employment Services to take over the business of IW4U, knowing that it was not in the best interests of the company.
The standard of conduct expected of a person in Mr Ngaue's position by a reasonable person with knowledge of the duties, powers and authority of his position as director, and the circumstances of the case, including the commercial context of IW4U's financial position, would have been to carefully evaluate whether the company could continue to trade, given the absence of sufficient working capital to fund its continuing losses, in circumstances where its hourly rate for the supply of labour was insufficient to meet its overheads.
I infer from Mr Ngaue's decision to "restructure" the business of IW4U in the manner in which he did, following the audit in 2015 which identified the unpaid superannuation guarantee charge, that he was not prepared to fund the company's operations by way of contributing additional share capital. In those objective circumstances, the standard of conduct that would be expected of a person in Mr Ngaue's position is to have placed the company into external administration. Mr Ngaue did not do so. Instead, he preferred his personal interests to those of the company by allowing Employment Services to take over the business of IW4U, leaving behind the unpaid debts of IW4U. Mr Ngaue did not exercise his powers as a director for a proper purpose: s 181(1)(b).

Whether Mr Astarci was involved in Mr Ngaue's contravention?

The concept of being "involved" in a contravention is defined in s 79 of the Corporations Act which provides that a person is involved in a contravention if, and only if, the person, among other things, has aided, abetted, counselled or procured the contravention (subpar (a)), or has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention (subpar (c)).
The principal authorities dealing with accessorial liability of persons involved in a statutory contravention are Yorke v Lucas (1985) 158 CLR 661; [1985] HCA 65; Giorgianni v R (1985) 156 CLR 473; [1985] HCA 29; and Pereira v Director of Public Prosecutions [1988] HCA 57; (1988) 82 ALR 217. It is well-established that actual knowledge of the essential facts constituting the contravention is necessary: Yorke at 669-670, 676; Giorgianni at 506-507; and Pereira at 220. See also Lifeplan Australia Friendly Society Ltd (ACN 087 649 492) v Ancient Order of Foresters in Victoria Friendly Society Ltd (ACN 087 648 842) [2017] FCAFC 74; (2017) 120 ACSR 421 at [104].
Proof of actual knowledge may be inferred from the person's actual exposure to the obvious that they had knowledge of the essential elements of the contravention, however mere constructive knowledge is not sufficient: Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 41 ACSR 72 at [209].

Application of principles

In this case the essential elements of the contravention by Mr Ngaue of s 181(1) are that Mr Ngaue allowed the business of IW4U to be taken over by Employment Services for nil consideration at the beginning of August 2015. It is not in dispute that Mr Astarci had knowledge of those matters. But accessorial liability requires more than knowledge. It is necessary for the liquidators to prove that Mr Astarci relevantly "aided or abetted" or was "knowingly concerned in, or party" to the contravention by Mr Ngaue.
The liquidators put the "involvement" claim against Mr Astarci on two bases. First, that Mr Astarci had given advice to Mr Ngaue to "restructure" the business of IW4U by, in effect, allowing Employment Services to take over the business of IW4U. I reject this contention. The evidence does not establish that Mr Astarci gave any such advice to Mr Ngaue.
Second, that Mr Astarci was involved in Mr Ngaue's contravention by engaging in the following conduct with knowledge of the essential elements of the contravention by Mr Ngaue referred to at [41] above: 1. Mr Astarci registered the new company and the new ABN for Employment Services, on the instructions of Mr Ngaue; 2. Mr Astarci was the initial sole director, secretary and shareholder of Employment Services from May 2015 to July 2016; 3. Mr Astarci acted as "watch dog" of the new company controlling the overheads. Invoices from sub-contractors, such as Dedicated Employment, were sent to Mr Astarci's office address at Balgowlah; 4. Mr Astarci controlled the bank account of Employment Services for a period of time from the beginning of August 2015 up until at least March 2016.
Each of these matters is established by the evidence. The conduct in (1) to (4) constituted acts by Mr Astarci which are fairly characterised as both having "aided and abetted" and being directly or indirectly "knowingly concerned in or party to" the contravention by Mr Ngaue of s 181(1), because those acts facilitated and permitted Employment Services to take over the business of IW4U. I find that Mr Astarci was involved in Mr Ngaue's contravention of s 181(1).

Compensation order

Accepting that Mr Astarci is taken by s 181(2) to have also contravened s 181(1), which is a civil penalty provision (s 1317E(4)), the liquidators claimed compensation under s 1317H(1) which is in these terms: (1) A Court may order a person to compensate a corporation, registered scheme or notified foreign passport fund for damage suffered by the corporation, scheme or fund if: (a) the person has contravened a corporation/scheme civil penalty provision in relation to the corporation, scheme or fund; and (b) the damage resulted from the contravention. The order must specify the amount of the compensation.
In determining the damage suffered by the corporation for the purposes of making a compensation order, s 1317H(2) provides that a compensation order includes profits made by any person resulting from the contravention. This can even include instances where the corporation suffers no corresponding loss: V-Flow Pty Ltd v Holyoake Industries (Vic) Pty Ltd [2013] FCAFC 16; (2013) 296 ALR 418; 93 ACSR 76 at [54].
The words "resulted from" require a causal connection between the damage and the impugned conduct and do not import the more stringent test in equity for breach of fiduciary duty: Adler v ASIC [2003] NSWCA 131; (2003) 46 ACSR 504 at [707]-[710]. It has been said that the common sense test of causation from March v E and MH Stramare Pty Ltd (1991) 171 CLR 506, [1991] HCA 12 whether loss would have occurred had there been no breach of duty, is applicable to s 1317H: Hydrocool Pty Ltd v Hepburn [2011] FCA 495; (2011) 279 ALR 646; 83 ACSR 652 at [476]. Such an assessment may involve the positing of counterfactuals: see the remarks of Beach J in Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098 at [1778]-[1780], in the similar context of s 1317G.
The case advanced by the liquidators was that the damage suffered by IW4U was the value of the business of IW4U "transferred" to Employment Services. No claim was made by the liquidators to recover as compensation the amount of profits made by any person resulting from the contravention, such as Employment Services.

Mr Haley's report

In support of the claim for damages, the liquidators relied upon an expert report from Mr Haley who valued the business of IW4U on a realisation of future maintainable earnings method at $482,000.
I accept that Mr Haley is appropriately qualified as an expert, both as a chartered accountant and company director, to express the opinions which he gave in his report dated 13 August 2020.
Mr Haley was asked to provide his opinion on four matters relating to the property allegedly transferred from IW4U to Employment Services in or around August 2015 (the IW4U Property), namely: (a) The appropriate approaches or methodologies which could be used to determine the value of the IW4U Property as at the date it was transferred; (b) The value of the IW4U Property as at the date it was transferred as determined by each approach or methodology identified above; (c) If there is more than one, express my opinion as to which approach or methodology is preferable to determine the value of the IW4U Property as at the date it was transferred, and provide my reasons for forming that opinion; and (d) To any extent it has already not been addressed above, identify the impact on the value of the IW4U Property as at the date it was transferred if: (i) the IW4U Property was to be separated into its constituent components and those components valued, or offered for sale, individually; or (ii) the IW4U Property was to be valued, or offered for sale, collectively, with all components to be offered individually.
Mr Haley recorded that he had been instructed to conduct a limited scope valuation of the IW4U Property, but had not been requested to audit, verify or investigate the financial statements and other information provided unless otherwise stated in his report: par 1.5.
Mr Haley valued the IW4U Property adopting a "market value", which he described as "the price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm's length": par 1.6.
Mr Haley expressed the view that the capitalisation of future maintainable earnings method was the most appropriate method to determine the value of the IW4U Property as at the date it was allegedly transferred: par 2.2(a). Mr Haley considered and rejected as inappropriate alternative valuation methodologies, namely, net underlying assets, discounted cashflow, capitalisation of future dividends, comparable transactions, and industry "rule of thumb". He was not challenged on this approach.
In undertaking his limited scope valuation using the capitalisation of future maintainable earnings method, Mr Haley primarily relied upon the financial statements of IW4U for the year ended 30 June 2015, subject to certain adjustments he made to exclude wages paid to all related parties because he understood that some related parties received wages but did not work in the business, and to include estimated commercial wages (excluding superannuation) for those roles undertaken by related parties who worked in the business, being the late Mr David Ngaue, general manager, $80,000 per annum, Ms Sharon Ngaue, a part-time reception, $30,000 per annum, and Ms Angel Tisdale, full-time accounts clerk, $70,000 per annum.
As mentioned, the financial statements of IW4U for the year ended 30 June 2015 recorded a loss before tax of $73,888. As a consequence of adjustments made by Mr Haley, he calculated an underlying profit before tax of $144,668. As indicated, the primary adjustment related to wages. Mr Haley assumed that 50 per cent of the wage expense related to unrelated employees and accordingly, reduced the wages expense by this amount and then added the commercial wages referred to above for the positions of general manager, receptionist (part-time), and accounts clerk.
In arriving at a capitalisation rate of 30 per cent, Mr Haley said that this rate was derived from the discount rate applicable to the business and was the rate of return an investor would require for a particular investment having regard to the risk: par 6.15. Mr Haley recorded in par 6.18 that the selection of a capitalisation rate typically takes into account the following: (a) Future prospects of the business including growth and expansion opportunities; (b) History of the business, period it has been trading, its earnings and its growth; (c) Working capital requirements of the business; (d) Rates being achieved from virtually risk-free investments; (e) Nature of the business' operations including the barriers to entry, the level of competition, the industry in which it operates and any reliance on a small number of customers; (f) "Key person" issues; (g) Current and forecast economic climate; (h) The location of the business, the security of tenure and any specialist requirements of the Business premises; (i) The size of the business; and (j) The degree of management ability required;
Although Mr Haley identified in par 6.19 three matters specifically relating to the valuation of the IW4U business, namely: (a) The Business relied upon a small number of key customers; (b) These customer relationships were solely established, and were maintained by the late David Ngaue Senior; and (c) The Business utilised two (2) related entities, being the Subcontractors, from which to source casual labour hire under unwritten subcontract agreements. However, it is my expectation that the individuals employed by those Subcontractors were readily replaceable / interchangeable as and when required, Mr Haley did not explain in his report how he took those matters into account in arriving at his opinion, in particular the matters in (a) and (b). I return to this matter below.
In the summary of his opinion in par 2.2(b)(iii), Mr Haley expressed the view that the value of the IW4U Property determined by him ultimately represented the limited scope value of the: … intangible assets of the Business by virtue of there being no material tangible net assets, (eg, cash, stock, debtors, creditors, plant or equipment) required to operate the Business. [Emphasis added.]
It was put to Mr Haley in cross-examination by Mr Astarci that the valuation was a "little bit excessive" given that the company had continued to lose money one year after the other and there was a liability to the ATO for $500,000. (This figure seems to be a reference to the ATO's proof of debt for $509,960.35 dated 9 August 2017, comprising (a) running balance account deficit debt in respect of BAS amounts as at 9 June 2017 of $191,380.17 and (b) superannuation guarantee charge for the period 1 July 2012 to 30 June 2014 of $318,580.18.) Mr Haley responded that when valuing a business one looks at its true profitability and because there were a lot of family members on the payroll that were not actually working in the business, although it reported losses, the underlying business was actually profitable. (T13 (48-50)-14(1-7))
Mr Haley was also asked in cross-examination whether he thought there was any "re-sell value" in the business when the company owed the ATO an amount of $500,000. He responded: A. Well, I think that's - the liability to the tax office is a liability of the legal entity, being the company. As I said, the underlying business, in my opinion, is still profitable and therefore has value. If those family members hadn't been on the payroll who weren't actually employed and doing any work, the company would have presumably had profits in which to pay its tax office liabilities as they fell due. (T14 (15-20))

Whether Mr Haley addressed the appropriate counterfactual?

In closing submissions, the Court raised with counsel for the liquidators whether Mr Haley had addressed the appropriate counterfactual given the company's insolvency or near insolvency, and the likelihood that the context of the hypothetical sale of the business of IW4U, if it had not been taken over by Employment Services, would have been some form of external administration of IW4U. Counsel for the liquidators submitted orally that some sort of discounting of Mr Haley's valuation of $482,000 would be appropriate, but acknowledged there was no evidentiary basis to ground that submission.
The parties were given leave to provide supplementary submissions on this issue.
In supplementary submissions, the liquidators' submitted that "if the issue raised by the Court could be characterised as one of supervening loss (not caused by [Mr Astarci])", then the matter is not one that Mr Haley could be expected to opine given the issue raised on the pleadings between the liquidators and Mr Astarci and the nature of the case against Employment Services, about which no defence was filed. Reference was made to Termite Resources (No 2) at [747]-[751], for the proposition that a defendant must plead and prove that a supervening event would have caused the plaintiff's loss in any event.
The premise of the liquidators' submission is flawed. The issue raised by the Court was not one of "supervening loss". The issue is whether Mr Haley addressed the correct counterfactual with respect to the liquidators' accessorial liability claim, namely what damage had IW4U suffered as a result of Mr Ngaue's breach of his duty as director of IW4U: s 1317H(1). With respect to the unreasonable director-related transaction claim, the issue is what were the benefits that Employment Services received because of the transaction, assuming that provision was otherwise engaged: s 588FF(1)(c).
Addressing the accessorial liability claim, the question of whether the damage suffered by the company resulted from the contravention directs attention to whether the loss would have occurred had there been no breach of duty: see [47] above.
When considering the "no breach of duty" counterfactual, the relevant circumstances here were as follows: 1. IW4U was either insolvent or near insolvency in mid-2015, taking into account: 1. its substantial liability to the ATO in the order of $212,000 in June 2015 in respect of which it did not proffer any payment plan when invited by the ATO to do so; 2. its failure to pay the superannuation guarantee charge since at least 2014 culminating in a liability as at 30 June 2015 in the order of $137,000; 3. its inability to negotiate a higher hourly rate for the supply of labour hire services to its clients sufficient to cover its overheads; and 4. the inference that Mr Ngaue was not prepared to fund IW4U's loss-making operations by way of contributing additional share capital to maintain the company's solvency: see [37] above. 1. IW4U's contracts with its clients were informal, being based on a handshake; and 2. Mr Ngaue was not subject to any restraint of trade obligations in favour of IW4U preventing him from competing against the company if the company went into external administration, or indeed if the business of the company was sold to a third party.
If Mr Ngaue had not breached his director's duties, the most likely counterfactual, given the financial position of IW4U, is that either Mr Ngaue or a creditor, such as the ATO, would have taken steps to place the company in external administration. I infer that it is likely that had he not breached his duties, Mr Ngaue would have obtained advice as to his options and would have either appointed administrators pursuant to s 436A of the Corporations Act, or placed the company into liquidation by special resolution under s 491(1). In the latter event, the winding up would have proceeded as a creditors' voluntary winding-up, in the absence of a declaration of insolvency under s 494(1) of the Corporations Act.
Mr Astarci submitted that the absence of any binding contracts between IW4U and its clients such as Fantastic Furniture would have a negative impact on any resale value of (the business) of IW4U. There is force in that submission. As Mr Haley noted at par 6.19(a) and (b) of his report, the business of IW4U relied upon a small number of key customers, and these customer relationships were solely established, and were maintained by the late Mr Ngaue: see [58] above.
The hypothetical sale of the business of IW4U involved the sale of the benefit of informal "contracts" made on the basis of a handshake. There is no evidence as to the term of these "contracts". The inference from the issue by IW4U of weekly invoices to its clients, is that the informal arrangements were on a week-to-week basis, with no obligation to renew the arrangements in subsequent weeks. Nor is there any evidence of whether the "contracts" expressly permitted or prohibited an assignment. Even assuming that the benefit of such "contracts" was assignable, the burden of the contracts (IW4U's obligation to provide labour) was not assignable in the absence of a novation of the contracts: Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2006] FCAFC 40; (2006) 230 ALR 56 at [32]. There is no evidence of the likely attitude of the clients of IW4U to any hypothetical request by a purchaser of the business for a novation of the "contracts". Accepting that the client relationships were solely established and maintained by Mr Ngaue, it is pure speculation that the clients would have agreed to a novation of the contracts to a purchaser of the business if Mr Ngaue was no longer involved in the business.
Further, it is entirely unrealistic to suggest as the liquidators do relying on Mr Haley's report that a "knowledgeable, willing but not anxious buyer" of the business would have paid a substantial amount, if any, to acquire the benefit of IW4U's informal contracts which were based on handshake arrangements with no certainty of continued operation for any period of time. It was not submitted by the liquidators that Mr Ngaue himself would likely have been a purchaser of the business of IW4U. Obviously he did not need to do so. He personally had the relevant customer connections with the clients of the business and was not subject to any restraints against competition if IW4U sold its business to a third party.
Accepting Mr Haley's opinion that the underlying business of IW4U was profitable if adjustments were made for wage expenses unrelated to the business, the difficulty with the liquidators' reliance on Mr Haley's report as evidence of the damage suffered by IW4U that resulted from the relevant contravention of s 181(1) is that it does not squarely address what a "knowledgeable, willing but not anxious buyer" of the business would have paid for the business taking into account the circumstances referred to at [67] above and the matters referred to in [69]-[71] above, whether in the context of a sale of the business by IW4U itself or by an external administrator as referred to at [68] above. In my view, no weight can be given to Mr Haley's opinion as evidence of the damage suffered by IW4U. No alternative submission was advanced by the liquidators as to the damage suffered by IW4U.
The liquidators objected to Mr Astarci's "no value" submission arguing that they were prejudiced by this submission since it had not been pleaded in Mr Astarci's defence. I reject the pleading point.
The pleading rules require that a party must plead specifically in a defence any matter that if not pleaded specifically may take the opposite party by surprise: Uniform Civil Procedure Rules 2005 (NSW), (UCPR), r 14.14(2)(a). Mr Astarci joined issue in his defence filed 9 March 2020, by denying the liquidators' pleaded allegations that that he was involved in the alleged contraventions by Mr Ngaue of his director's duties and that he is taken to have contravened those statutory duties. Mr Astarci also denied the liquidators' allegations that he had knowingly assisted Mr Ngaue in a dishonest and fraudulent design and that IW4U was entitled to equitable compensation from Mr Astarci based on a second limb Barnes v Addy claim.
It was not necessary for Mr Astarci to specifically plead that he was not liable to pay compensation under s 1317H(1) giving as a reason, that there was no value in the business of IW4U; there was no pleading in the statement of claim that Mr Astarci was liable to pay compensation to the company pursuant to s 1317H of the Corporations Act. Nor was it necessary for Mr Astarci to plead to the relief claimed in the statement of claim, which included in the prayers for relief a claim for compensation under s 1317H(1) of the Corporations Act (par 3) and for equitable compensation (par 4). There is no requirement to plead specifically to a prayer for relief. On a fair reading of his defence, Mr Astarci put the liquidators on notice that he denied the liquidators' claim, including the claim for equitable compensation. It was a matter for evidence for the liquidators to prove the damage IW4U had suffered, had Mr Ngaue not breached his duty.
I am not persuaded that the liquidators have established that the damage suffered by IW4U as a result of the deemed contravention of s 181(1) by Mr Astarci on the basis that he was involved in Mr Ngaue's contravention, is the loss of its business having a value of $482,000. The liquidators' claim for compensation against Mr Astarci has not been made out.

B. Claim against Employment Services

The liquidators' claim against Employment Services alleges that the transfer of the business of IW4U to Employment Services was an unreasonable director-related transaction within the meaning of s 588FDA(1), which is in the following terms: 588FDA Unreasonable director‑related transactions (1) A transaction of a company is an unreasonable director‑related transaction of the company if, and only if: (a) the transaction is: (i) a payment made by the company; or (ii) a conveyance, transfer or other disposition by the company of property of the company; or (iii) the issue of securities by the company; or (iv) the incurring by the company of an obligation to make such a payment, disposition or issue; and (b) the payment, disposition or issue is, or is to be, made to: (i) a director of the company; or (ii) a close associate of a director of the company; or (iii) a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and (c) it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to: (i) the benefits (if any) to the company of entering into the transaction; and (ii) the detriment to the company of entering into the transaction; and (iii) the respective benefits to other parties to the transaction of entering into it; and (iv) any other relevant matter. The obligation referred to in subparagraph (a)(iv) may be a contingent obligation. Note: Subparagraph (a)(iv) - This would include, for example, granting options over shares in the company. …
The word "property" is broadly defined in s 9 of the Corporations Act to mean any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action.
As s 588FDA(2) makes clear, the test in s 588FDA is to be applied to the transaction taking into account the circumstances as they exist at the time when the transaction is entered into.
An unreasonable director-related transaction is voidable if entered into or an act was done for the purpose of giving effect to it during, relevantly, the four years ending on the relation-back day: s 588FE(6A). It is not necessary for the liquidator to prove that the company was insolvent at the time when the transaction was entered into. Here, the relation-back day is 9 May 2017 and the alleged transaction in August 2015 occurred within the relation-back period.
Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of s 588FE, the court may make one or more of the orders set out in s 588FF(1), including: (c) an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction.
The test of unreasonableness in s 588FDA(1) is an objective test requiring an answer to the question what a reasonable person in the company's circumstances may be expected not to do: Crowe-Maxwell v Frost (2016) 91 NSWLR 414; [2016] NSWCA 46 at [71]; Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416 at [91].
The requirement in s 588FDA that a transfer or disposition be made "on behalf of" the director requires something more than that it be effected on the instructions of the director: Vasudevan v Becon Constructions (Aust) Pty Ltd (2014) 41 VR 445; [2014] VSCA 14 at [16]. There is conflict in the authorities as to the meaning of "for the benefit of" in s 588FDA. There is first-instance authority that only a direct benefit will suffice and that a benefit to a company to which the director is a shareholder, even the sole shareholder, will not: Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457; (2006) 57 ACSR 693 at [86]-[87] (Gzell J); Re Great Wall Resources Pty Ltd (in liq) [2013] NSWSC 354 at [40], [43], [46] (Brereton J).
Against this narrow view of the words "for the benefit of" in s 588FDA, there is appellate authority, albeit strictly obiter, in Vasudevan v Becon Constructions (Aust) Pty Ltd that the word "benefit" includes both direct and indirect benefits and that, prima facie, that accords with the apparent objective of the section: at [19] (Nettle JA, Beach J and McMillan AJA agreeing). Nettle JA continued at [23]-[24]: [23] … the natural and ordinary meaning of a requirement that something be for 'for the benefit of' a person is that it be 'for the advantage, profit or good' of the person. So, in this context, just as moneys paid by A to B to discharge C's indebtedness to B would ordinarily be conceived of as paid to B for the benefit of C, so too the incurrence by A of obligations to B in order pro tanto to relieve C of his obligations to B would naturally and ordinarily be conceived of as being for the benefit of C. [24] … the natural and ordinary meaning of 'for the benefit of' accords to the objective of the section of preventing directors stripping benefits out of companies to their own advantage. Conversely, given the ease with which an errant director might channel benefits from a company under his charge to another company in which he is financially although not legally or equitably interested, there is every reason to suppose that Parliament intended not to confine the meaning of the expression to something in the nature of an equitable interest.
These remarks of Nettle JA in Vasudevan were cited with approval by the New South Wales Court of Appeal in Crowe-Maxwell v Frost at [72]. I proceed upon the basis that the wider view of "for the benefit of" in s 588FDAis correct. That is, the provision is calculated to catch a benefit which legally or financially advantages the director in question regardless of whether it is paid or directed to a close associate of the director: Vasudevan at [26].

Application of principles

Counsel for the liquidators submitted that the "transaction" by IW4U for the purposes of s 588FDA(1)(a) was the transfer or other disposition of property of IW4U to Employment Services, being the benefit of the contracts with its clients such as Fantastic Furniture. As indicated, there was no sale agreement between IW4U and Employment Services. Nevertheless, I accept that what occurred informally was that Mr Ngaue, on behalf of IW4U, transferred or disposed of the business of IW4U to Employment Services by allowing the latter company to take over the business of IW4U.
Although the ASIC search of Employment Services records that Mr Astarci was holding the ten shares in Employment Services beneficially, I find that the true position was that he was holding those shares for the benefit of Mr Ngaue. As indicated, Mr Astarci registered the new company on the instructions of Mr Ngaue in the context of the audit of IW4U's compliance with its obligations to pay the superannuation guarantee charge. He accepted the position as director with a view to acting as a "watch-dog" in relation to the banking of receipts and payment of debts. When he resigned as a director and secretary of Employment Services in July 2016, Mr Astarci transferred the ten shares to Mr Ngaue. It was not suggested by Mr Astarci that any consideration passed to him for that transfer, or that he was the beneficial owner of those shares.
Adopting the wider view of "for the benefit of" in s 588FDA as catching a benefit which legally or financially advantages the director in question (Vasudevan at [24], [26]), I find that the transfer or disposition by IW4U to Employment Services of the business of IW4U was made to a person (Employment Services) for the benefit of Mr Ngaue, who was a director of IW4U: s 588FDA(1)(b)(iii).
Turning to the requirement in s 588FDA(1)(c), I find that a reasonable person in IW4U's circumstances would not have entered into the transaction with Employment Services which allowed the latter to take over its business in mid- 2015 for nil consideration.
First, there was no benefit to IW4U entering into the transaction, as it received nil consideration. Second, the detriment to IW4U of entering into the transaction was that it was denied the opportunity to market and sell its business in an orderly manner (most likely by an external administrator). It is to be acknowledged, however, that the value of this lost opportunity was more ephemeral than real, for the reasons given at [70]-[71] above. Third, as to the respective benefits to other parties to the transaction of entering into it, plainly Employment Services obtained the benefit of being able to seamlessly continue providing labour hire services to the clients of IW4U without the interruption that may have occurred, at least for some short time, if Mr Ngaue had placed the company into administration or liquidation.
As to the question of relief, s 588FF(1)(c) directs attention to the benefits that Employment Services has received because of the transaction. The liquidators submitted that Employment Services received benefits of $482,000, relying on the report of Mr Haley. For the reasons given above, I reject the liquidators' submission that the business of IW4U had a value of $482,000 in mid-2015 and that this was the value of the benefits that Employment Services received because of the transaction.
Again, no alternative submission was made by the liquidators that the benefits received by Employment Services should be quantified by reference to the amount of profits, if any, earned by Employment Services since August 2015. Accordingly, it is not necessary to address this issue. The liquidators' claim for relief under s 588FF(1) has not been made out.

Conclusion and Orders

The liquidators' claims against Mr Astarci and Employment Services have failed. I reserve liberty to Mr Astarci to apply within 14 days if he has incurred costs which would be recoverable, although a self-represented litigant will not ordinarily be entitled to an order for costs. No costs order should be made in favour of Employment Services since it has not appeared.
Accordingly, the Court makes the following orders: 1. Statement of claim dismissed. 2. Reserve liberty to the first defendant to apply within 14 days for a costs order if he has incurred any costs which are recoverable.

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: 04 February 2021

CORPORATIONS - winding up - unreasonable director-related transaction - where director allowed company's business to be taken over by new company for nil consideration - whether disposition "for the benefit of" director - Vasudevan v Becon Constructions

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