Damberg v Damberg

Judgment (ex tempore) 1HIS HONOUR: Pursuant to a summons filed on 4 April 2012 and a statement of claim filed on 24 April 2012, the plaintiffs Great Wall Resources Pty Limited (in liquidation) and its liquidator David Gregory Young in that capacity, claim against the only remaining defendant, Comserve (No 1074) Pty Limited, relief under the (Cth) Corporations Act 2001, s 588FDA, in respect of payments made to Comserve in connection with the purchase of properties in its name at Greenwell Point and Alleena, which are said to be "unreasonable director-related transactions", and alternatively a monetary judgment for the recovery of the amount of those payments. 2Great Wall Resources was wound up by order of the Federal Court of Australia made on 7 December 2010, when the second plaintiff David Gregory Young was appointed its liquidator. The relation-back day was 15 September 2010. Accordingly, for the purpose of the voidable transaction provisions, four years before the relation-back date is 15 September 2006. 3At all relevant times, Francesco Severio Capocchiano was the sole director of and shareholder in Great Wall Resources. From its incorporation on or about 3 August 2006 Mr Capocchiano was also the sole director and shareholder of Comserve. Originally, Mr Capocchiano was joined to these proceedings as second defendant. Until about October last year, the defendants were represented in these proceedings by lawyers. On 15 October 2012, Lindsay J granted leave to discontinue the proceedings against Mr Capocchiano. Thereafter only Comserve was a defendant. At about the same time, Mr Capocchiano caused the lawyers who had previously acted for the defendants in the proceedings to cease to act. Since then he has, under not inconsiderable difficulties, himself purported to appear for Comserve. 4Under the rules of Court, a company cannot be represented in proceedings in this Court, except by a lawyer, except where a director is also separately a defendant. Though that exception once was applicable, it is no longer the case. Accordingly, the company was not entitled to be represented by Mr Capocchiano. However, Mr Capocchiano had, at an earlier stage, sworn an affidavit and was plainly a material witness in the company's case. 5In those circumstances having regard also to the fact that until the relatively recent discontinuance against him personally he was entitled to do so, I permitted him to continue to appear and conduct the company's case. He did so labouring under some difficulties, having recently undergone a tracheotomy and being unable to speak. He has conducted the proceedings with the assistance of his wife and an interpreter, communicating, where necessary, in writing. To the extent that I properly can, I have made all due allowances for the difficulties under which Mr Capocchiano has laboured, but it will be understood that this cannot extend to finding evidence where there is none. 6I turn then to the central facts in the proceedings. On 18 September 2006 Comserve completed the purchase in its name of Lot 2, Greenwell Point Road, Greenwell Point for a price of $850,000. It is not in dispute that the purchase price and costs of acquisition were funded to the extent of $833,374 by payments made by Great Wall Resources, of which $426,449.56 were made after 15 September 2006, and the balance of $406,925 before that date. 7On 12 January 2009 Comserve completed the purchase in its name of properties at 343 and 430 Lees Lane, Alleena for a price of $308,000, of which it is not in dispute that $260,533.05 were funded by payments made by Great Wall Resources, all of them after 15 September 2006. The liquidator abandoned a claim in respect of a further two payments amounting to $9,957.82 when it became apparent that the evidence did not establish sufficiently that those payments were attributable to the purchase of Lees Lane. 8The first issue in the proceedings involves the characterisation of the payments made by Great Wall Resources towards the purchase of Greenwell Point Road and Lees Lane and, in particular, whether they are to be characterised as a contribution of the purchase money, such as to give rise to a resulting trust, or as a loan to Comserve, or as a repayment of a loan previously made by Mr and Mrs Capocchiano to Great Wall Resources. It is not necessarily the case that the payments made in connection with Greenwell Point Road are of the same character as those in connection with Lees Lane. 9The financial statements of Great Wall Resources for the year ended 30 June 2006 record, as an asset, a loan to Comserve of $407,385, reflecting an increase by that amount from a balance on that loan account of zero as at 30 June 2005. That sum is very closely approximate to the payments made in connection with the Greenwell Point purchase in March and April 2006. The same financial statements record, as a liability, a loan from Mr and Mrs Capocchiano in the amount of $1,883,796, an increase from $1,070,003 as at 30 June 2005. 10The financial statements of Great Wall Resources for the year ended 30 June 2007 record, as an asset, a loan to Comserve of $835,785, which closely approximates the whole of the payments made by Great Wall Resources in connection with the Greenwell Point purchase. The same financial statements record as a liability a loan from Mr and Mrs Capocchiano of $1,383,452. 11The financial statements of Great Wall Resources for the year ended 30 June 2008 record, as an asset, a loan to Comserve of $838,169, a marginal increase on the amount for the previous year. The same accounts record, as a liability, a loan from Mr and Mrs Capocchiano of $799,463, a reduction on the previous year's amount. There were no relevant transactions in connection with the Greenwell Point or the Lees Lane properties during that financial year. 12A balance sheet of Great Wall Resources as at June 2009, in what appears to be MYOB form, records, as an asset, a loan to Comserve of $838,169 and, as a liability, a loan from Mr and Mrs Capocchiano of $801,011. 13The financial statements for the years ending 2006, 2007 and 2008 were each signed by Mr Capocchiano as true and accurate accounts. They reveal, at the least, that the payments made in connection with the Greenwell Point property, were treated in the company's accounts as a loan to Comserve. They do not reflect those payments being treated as debits to the Capocchiano loan account, or otherwise as repayments on that account, though it is clear that the company was indebted on loan account to Mr and Mrs Capocchiano. 14At least so far as concerns the payments in connection with Greenwell Point, the company's records plainly tell against the proposition that the payments were by way of contribution to the purchase price, such as to give rise to a resulting trust. But they also tell against the proposition that they were repayments on the Capocchiano loan account. They strongly favour the view that the payments were in the nature of loans to Comserve. 15So far as concerns Lees Lane, the position is less clear. The relevant transactions took place after the date of the 2008 accounts, but ought to have been reflected in the 2009 balance sheet. However, that balance sheet is, unlike those for the previous years, not from a set of finalised annual accounts but, as I have said, appears to be an MYOB printout. It seems that when that was done, the transactions in connection with Lees Lane had not yet been brought to account. Accordingly, it is not possible to tell from the financial records of the company how the Lees Lane payments were dealt with and applied by the company. 16The plaintiffs argued that, in those circumstances, there was no evidence to rebut the presumption that a resulting trust arose from contribution to the purchase price. For that purpose the plaintiffs submitted that proof of a "definite intention" to the contrary was required, citing Damberg v Damberg [2001] NSWCA 87 (at [44]). 17First, it needs to be recognised that what was there under discussion in Damberg was rebuttal of the presumption of advancement arising from purchase of a property in the name of another, as distinct from rebuttal of the presumption of a resulting trust. But, more importantly, the submission misconceives the role of the presumption in this context. The competing presumptions of resulting trust and advancement arise where property is purchased in the name of another using moneys contributed to the purchase price by the supposed beneficiary. It is concerned with identifying the intention of the person providing the purchase moneys, when it is established that that person is directly contributing purchase moneys. 18The alternative presumptions, as I have said, are resulting trust or advancement, trust or gift. This doctrine has nothing to do with identifying whether the provider of funds is in the first place directly contributing to the purchase moneys, so that the question arises at all, or is simply lending money to the person who purchases. That is an anterior question, which does not depend on, and is not affected by, the competing presumptions of resulting trust and advancement, but is to be determined on other evidence. 19One might easily presume in respect of Lees Lane, as it has not yet been brought to account in the company's records, that it would be accounted for in the manner most favourable or beneficial to the sole director and shareholder, Mr Capocchiano. On that basis, one might be inclined to accept his evidence that he intended that the payments be treated as repayments on his loan account. 20However, there are difficulties with that course. The first is that Mr Capocchiano says exactly the same thing in respect of the Greenwell Point payments, yet the company accounts demonstrate the contrary. The second is that after the company was wound up, he lodged a report as to affairs on 21 February 2011, which included an amount owing to him as a creditor of $1,010,275 and subsequently on 10 June 2011 he lodged a proof of debt claiming a total of $3,132,275. That total comprised $1,010,275 "moneys paid to company by director as per report as to affairs 2002 to 2010"; $272,000 "additional funds paid upon sale of 184 Shellharbour Road, Warilla (25 August 2011)"; $5,000 "moneys paid for purchase of Lot 2 Pacificana Drive, Sussex Inlet" (2003); and $1,350,000 (2003) and $1,350,000 "unpaid wages to director and wife" (2002-2010). 21In his affidavit sworn 17 May 2012, Mr Capocchiano set out and particularised the contributions made by him to the company that constituted all of the items in that claim. In paragraphs 64 to 66 he explained the basis of the claim for directors' fees and wages. That material was rejected when read in evidence as irrelevant, but its presence in the affidavit corresponds with the claim for $1,350,000 on that account, approximately. In paragraphs 22 to 27 he deals with the moneys paid for the purchase of Pacificana Drive. In paragraphs 56 to 63 he deals with the moneys contributed from the sale of Shellharbour. 22That leaves, as summarised in paragraph 69 of his affidavit, contributions in connection with the purchase of Yallah Road of $173,494; contributions from the sale of Port Kembla Ceramic Tiles of $501,509; direct contributions made during the period 2006 to 2008 of $196,500, and further direct contributions made during the period 2009 to 2010 of $150,000. Those amounts total approximately $1,023,000, which exceeds, albeit relatively slightly, the moneys claimed by way of payment to the company during the period 2002-2010 from sources other than those specifically mentioned. It is not possible that that amount can be reconciled with having deducted from the loan account, as repayments, the amounts paid in respect of Lees Lane, let alone those paid in connection with Greenwell Point. 23It follows that the amount of $1.010 million claimed in the proof of debt is only explicable on the basis that the payments in connection with the two relevant property purchases were not treated as repayments on the loan account. Much as I have endeavoured to make all possible allowances for the difficult position in which Mr Capocchiano finds himself, I cannot overlook that the combined effect of the financial statements of the company and his proof of debt of 10 June 2011, tells powerfully against any suggestion that the payments in connection with Lees Lane and Greenwell Point were treated as repayments on his loan account. 24However, while I cannot accept that they were repayments against his loan account, I also do not accept that the Lees Lane payments were contributions directly to the purchase price of Lees Lane, as distinct from a loan to Comserve. It is improbable that, when the final accounts came to be prepared, they would have treated those payments any differently from the payments made in connection with Greenwell Point. The much safer conclusion is that they would have been accounted for in the same way as the Greenwell Point payments, and that they too were loans to Comserve. 25It follows that unless the liquidator is entitled to some superior relief under s 588FF, the plaintiffs are entitled to judgment against Comserve for repayment of those loans. The corollary is that the Capocchiano loan account is undiminished by those payments when it comes to evaluation of his proof of debt. 26The next issue in the case is whether so much of the Greenwell Point payments as were made after 15 September 2006, and the Lees Lane payments, were "unreasonable director-related transactions" within s 588FDA. If so, the Court may craft a propriety remedy under s 588FF(1)(d). 27I accept that each payment, being "a payment made by the company" within s 588FDA(1)(a)(i) was a transaction of Great Wall Resources within s 588FDA(1)(a). 28The next question is whether those payments were made to Comserve for the benefit of Mr Capocchiano, a director of Great Wall Resources, within s 588FDA(1)(b)(iii). It is not in doubt that Mr Capocchiano was at all relevant times the sole director of Great Wall Resources, and that he was also the sole director and shareholder of Comserve. 29The issue, however, is not so straightforward. In Universal Financial Group v Mortgage Elimination Services (2006) 205 FLR 186 the company Mortgage Elimination Services had, as one of its directors, one Mr Warren Turner whose son, Mr Matthew Turner, held the shares in another company "Smarter". MES's clients were directed to pay commissions to Smarter, rather than to MES. When MES was wound up in insolvency, the liquidator sought to avoid those payments. Austin J found that the transactions were voidable on another basis, but addressed whether they were unreasonable director-related transactions as follows (at 212): Matthew Turner's directions to...are dispositions by the company of property of the company, made to a person (Smarter) for the benefit of a close associate of a director of the company (Matthew Turner) within s 588FDA(1)(a)(ii) and (b)(iii), (noting the definition of 'close associate' in section 9). 30That was the extent of the relevant reasoning, which was in any event obiter. 31In Ziade Investments Pty Limited v Welcome Homes Real Estate Pty Limited [2006] NSWSC 457 Gzell J reached a different conclusion. Again, the transactions were found to be voidable on another basis, so his Honour's conclusion as to whether they were unreasonable director-related transactions was obiter. But his Honour said: [83] The basis for this argument was that Jack and Jean Ziade were the sole shareholders of Welcome Homes and Ritz Cinema and they, together with Ziade Holdings Pty Ltd, were the only shareholders of Janlz Constructions. [84] ... [85] ... [86] So far as Welcome Homes and Ritz Cinema are concerned, I doubt that it could be said that their interests in the mortgages were created on behalf of, or for the benefit of, Mr and Mrs Ziade as the sole shareholders of those companies. In my view, the companies as separate legal entities gained the benefit of the grants of the mortgages in their own right and not for the benefit of their shareholders. [87] I would not have thought that it was the intention of the legislature to include derivative interests constituted by value increases in shares of a company or trust benefited by the transaction. Had that been the intended result of the provision, one would expect the definition of a "close associate of a director" to have been expanded. [88] ... [89] In my view, the benefit held by a third person that will bring a close associate of a director within the statutory provision must be a direct benefit and not a derivative benefit constituted by an increase in value of shares in a company or units in a trust. 32His Honour's decision was affirmed in the Court of Appeal, but without the Court of Appeal having to consider the s 588FDA issue (see Welcome Homes Real Estate Pty Limited v Ziade Investments Pty Limited [2007] NSWCA 167). 33The editors of Ford's Principles of Corporations Law contend for a wider concept of "benefit" than that adopted by Gzell J conformably with the outcome indicated by Austin J in Universal Financial Group. They say (at [27.335]): A payment, disposition or issue to a trustee holding property on a trust under which a director of a company or close associate could benefit as a beneficiary would be one for the benefit of the director or close associate. 34In Lawrence Waterhouse Pty Limited; Shaw v Minsden Pty Limited [2011] NSWSC 964, Ward J (as her Honour then was) considered the question, observing that while the relevant transferee was an associated company of a director of the primary company, and that that director was its only director and shareholder: It has been held that s 588DA does not extend to a dealing with a company or trust where a director or his or her 'close associate' is a shareholder or beneficiary of that entity. 35For that proposition, her Honour cited the judgment of Gzell J in Ziade. Her Honour concluded (at [281]) that, applying Gzell J's reasoning, the claim based on s 588DA in relation to transfer of certain land "would have failed in any event". Again, her Honour's conclusion was obiter. 36The issue was next dealt with by Master Sanderson in the Supreme Court of Western Australia in Verge v Stinson [2011] WASC 158. In that case, three arguments were advanced as to why the pledging of the company's land was not for the benefit of Mr Beetham, who was a director of the company and a shareholder in the pledgee. 37The first was that it was in substance that any benefit to him was indirect (see at [8]). The second argument invoked the second reading speech, in which the then Treasurer, Mr Costello said: The focus of the bill is transactions entered into by the company with its directors, and accordingly the recipients covered by it include directors of the company. The bill covers two further categories of person. It includes company transaction with close associates of a director. A 'close associate' is defined under the bill to mean a relative or de facto spouse of a director, as well as a relative of a director's spouse or de facto spouse. It will also apply to transactions entered into with third parties, where they are made on behalf of, or for the benefit of, either a director or close associate. This will prevent people avoiding the new provisions through restructuring or redirecting transactions. 38The third argument invoked Gzell J's decision in Ziade. In response, the plaintiff relied on the statement in Ford's Principles of Corporations Law, to which reference has been made above. The learned Master said (at [15]): No authority is quoted in support of that statement. Moreover, earlier in the same part reference is made to the Ziade, decision but without comment. Counsel for the defendant criticised the paragraph as being entirely speculative. On balance, I am satisfied the defendant's arguments should be accepted. In my view, to be caught by this section, a transaction must be for the direct benefit of a director or close associate of the director. Here the transaction was for the direct benefit of Mr Stinson. It may well be that there was an indirect benefit to Mr Beetham. However, the indirect benefit is not in my view sufficient to bring the transaction within the scope of section 588FDA. 39In that case, the decision was the ratio of the case. 40That review of the authorities, helpfully drawn to the Court's attention by Mr Koch of counsel who appeared for the plaintiff, indicates of itself that the balance of authority favours the proposition that only a direct benefit will suffice and that a benefit to a company of which the director is a shareholder, even the sole shareholder, will not. Austin J's decision, with great respect, did not in this case descend to any reasoning to support the proposition to which his Honour obiter inclined. On the other hand, the judgments of Gzell J and Master Sanderson elaborate the reasoning for the conclusions those judges reached, and were accepted by Ward J. 41Mr Koch drew attention to the definition of "benefit" in the Corporations Act to which reference was not made in any of the authorities to which I have referred. 42In s 9, "benefit" is defined as follows: Benefit: (a) means any benefit, whether by way of payment of cash or otherwise; and (b) when used in Division 2 of Part 2D.2 (sections 200-200J) - has the meaning given by section 200AB. 43The second part of the definition is not relevant for present purposes. The first part defines "benefit" in its sense of a thing or noun; in other words, it focuses on whether the benefit is in cash or in some other form. To define "benefit" in that way, to my mind, is not the same thing as defining the phrase "for the benefit of" in s 588FDA. The idea of something being "for the benefit of" someone is well established in law, and involves the notion of the separation of the legal and beneficial interest. A payment to a trustee upon trust is a payment for the benefit of the beneficiary. But a payment to a company is a payment to a separate legal entity - the company - not a payment for the benefit of its shareholders. 44A further reason that supports this conclusion is the use in s 588FDA of the concept of "a close associate". That term is defined in s 9 as meaning "a relative of the director or a relative of a spouse of the director". However, the term "associate" has the meaning given by s 10 through s 17 of the Act, and in particular paragraph 11, which provides that an "associate" reference, where the primary person is a body corporate, includes a director or secretary of the body, a related body corporate and a director or secretary of a related body corporate. Under s 15, an associate includes a person in concert with whom the primary person is acting; a person who, by the regulations, is an associate, and a person with whom the primary person is or proposes to become associated in any way. As Gzell J observed in Ziade, if it had been intended to capture in s 588FDA payments to companies of which the director of the payer was a shareholder, one would have expected a wider definition of "close associate". 45Further, the alternative view would raise very difficult questions of degree. A payment to a company of which the director of the payer was one of many shareholders, would in principle be as much a benefit in that case as in a case where the director was the sole shareholder. But it is difficult to envisage that Parliament intended to comprehend within the concept of "benefit to a director" a payment to a company in which that director was but one of many ultimate shareholders. 46In my view, the well established distinction in legal identity between a company and its shareholders means that a payment to a company is not a payment for the benefit of its shareholders. Accordingly, I do not accept that the payments to Comserve were payments for the benefit of Mr Capocchiano. 47Had I reached another conclusion on that issue, it would have been necessary to consider whether a reasonable person in Great Wall's circumstances would not have made the payments in question, having regard to the benefits, if any, to Great Wall of entering into the transaction, the detriment to Great Wall of entering into the transaction, the respective benefits to other parties of entering into it, and any other relevant matter: (see s 588FDA(i)(c)). 48It is important to appreciate the overall financial circumstances, such as the evidence discloses them to be at the time. As late as the balance sheet of June 2009, the company apparently had total assets of $13.8 million and while it is not entirely possible to ascertain its total liabilities, they appear to be in the order of about $3.7 million. It had no current liabilities of significance. A better overall picture is perhaps obtained from the 2008 accounts, which reveal total assets of $13.9 million; total liabilities of $4.8 million and net assets and total equity of $9.1 million. Of the liabilities there were no current liabilities, accounts payable being a double negative and therefore an actual positive figure. (That, as I understand it, represents a GST credit). 49The significance of all that is that the circumstances were not such that there was any cause to be concerned about the interests of creditors, or the company's ability to pay creditors, at the time of the transactions in question. 50Secondly, the company was the debtor in respect of a very substantial and interest free loan from Mr Capocchiano and his wife. Its amount varied over the years, but a figure of $1 million is a reasonable approximation of it over the term. If the company had not, at Mr Capocchiano's request, advanced the moneys as it did to Comserve, he could have achieved for himself exactly the same result by withdrawing the loan moneys from Great Wall and using them himself to advance the moneys to Comserve. That the advance to Comserve was interest free is offset by the circumstance that the Capocchiano's loan to Great Wall was also interest free. It is true that (on relevant assumptions, so far as the previous issue is concerned) there was a benefit to Mr Capocchiano in enabling Comserve to acquire the properties, but the same result could have been effected by repayment of Mr Capocchiano's loan account. The repayment of his interest free loan, which was presumably repayable on demand, is unlikely itself to have been a voidable transaction in circumstances where, on the evidence, there was no reason to doubt the solvency of the company at the time in question. 51For those reasons, in addition to the conclusion that the payments to Comserve were not "for the benefit of" Mr Capocchiano, I am not satisfied that the payments amount to unreasonable director-related transactions. 52It follows that the plaintiffs are entitled to judgment against Comserve for $833,374.56 in respect of the Greenwell Point payments, and $260,533.05 in respect of the Lees Lane payments. The loans were interest free, so that interest would be claimable only from the date of demand and if the evidence does not disclose an earlier date of demand, from the date of the filing of the initiating process. 53I direct the plaintiffs to bring in short minutes to give effect to this judgment.