On or about 5 May 2021, Prospa Advance Pty Ltd ('Prospa') agreed to lend money in the sum of approximately $100,000 to a company called Dullys Pty Ltd ('Dullys'). It was a short term loan.
Mr Abdul Sayed (the first defendant in this proceeding) was a guarantor and indemnifer of Dullys' obligations to Prospa. Mr Sayed was sole director and member of Dullys. Dullys operated a business called 'Barewolf Clinics' and did so from premises at Belfield.
Ms Georgina Makke was at relevant times an employee of Dullys and it is alleged that she too was an officer of Dullys. She is the second defendant in this proceeding.
In September 2021, an entity called Academy of Aesthetics Pty Ltd ('Academy Aesthetics') was registered. It is the third defendant in this proceeding. Its registered address was the same as the address as the address for Barewolf Clinics and Ms Makke was listed on the ASIC register as the sole director, secretary and member of Academy Aesthetics.
On 30 September 2021, it is alleged that Academy Aesthetics entered into an agreement with Dullys to acquire the latter's assets; and, on or from the same day, it operated the business of Barewolf Clinics. DebtCo referred, specifically, to some other evidence indicating Academy Aesthetics' acquisition of intellectual property of Dullys.
DebtCo Pty Ltd v Sayed & Ors [2024] NSWDC 18 | Case summary | Zoe
Dullys failed to repay the loan to Prospa. Dullys entered into liquidation in about October 2021 and became deregistered in May 2022.
On 5 November 2021, in advice to creditors, the liquidator to Dullys noted, amongst other things, that some of Dullys' assets were sold prior to his appointment and foreshadowed conducting a review of the sale to determine if it was conducted at fair value and at arm's length.
In May 2022, Prospa assigned its asset (Dullys' debt to it) to DebtCo Pty Ltd (DebtCo), the plaintiff in this proceeding. For present purposes, there is no issue about the validity of that assignment.
On 13 September 2023 Mr Sayed sent an email to Ms Makke to the solicitors for DebtCo in which he attributed to Ms Makke the idea of his selling the business to keep his dream going, but in a way that meant that it was not his business.
DebtCo commenced this proceeding on 27 September 2023.
Mr Sayed filed for bankruptcy in October 2023. Effectively that meant that his involvement in the proceeding ceased.
At the heart of the dispute, DebtCo contends that Academy Aesthetics prevented the liquidator to Dullys from realising the assets, at market value, for the benefit for all creditors of Dullys (including DebtCo). This is what DebtCo described as "Phoenixing" (paragraph 36(b) of the statement of claim)
From this, DebtCo goes on to allege (relevantly) that Ms Makke breached her and Academy Aesthetics its' respective, statutory obligations, under ss 180-184 of the Corporations Act 2001 (Cth) essentially, through their involvement in, participation or knowledge of the "Phoenixing" (reliance also being placed upon s 79 of the Corporations Act, in relation to Mr Sayed's conduct). There is an amalgam of allegations concerning the direct obligations that Makke had to Dullys and her accessorial involvement in Mr Sayed's breach of his asserted contraventions of his obligations and, in the case of Academy Aesthetics, assertions that it was also involved in Mr Sayed's breach of obligations to Dullys and its acquiring Dullys' assets (paragraphs 35-36 of the statement of claim).
DebtCo eschewed making any application for compensation against the second and third defendants under provisions in the Corporations Act 2001 (Cth). Instead, it claims an entitlement to liquidated sums calculated or attributable to the obligations that arose under the assigned loan agreement between Prospa and Dullys (paragraph 37).
Ms Makke and Academy Aesthetics each filed defences on 23 October 2023.
On 24 November 2023, Ms Makke and Academy Aesthetics jointly filed a notice of motion containing two main applications: first, an application for summary dismissal of the proceedings against them (or a strike out in the alternative); and, secondly, an application for security for costs for the sum of $50,000 or for some other amount (the latter application being premised upon the primary application being refused).
[2]
The applicants' arguments
Ms Makke and Academy Aesthetics' were commonly represented on the motion and their arguments were indistinguishable. Henceforth, I will refer to them as the applicants and DebtCo as the respondent.
The Applicants understand that the respondent was claiming against them personally, for their own breaches of obligations as director/officer to Dullys and, secondarily, for their involvement in Mr Sayed's obligations to Dullys.
Their fundamental point is that even if DebtCo is a creditor to Dullys DebtCo had no standing to sue them for any breaches by them of their obligations to Dullys.
They were not parties to Dully's loan agreement with Prospa. If they were in breach of their obligations under ss 180-184 of the Corporations Act, then the rule in Foss v Harbottle indicated that the party with the standing to bring suit about it was the corporation itself; although DebtCo might seek leave under s 237 of the Corporations Act 2001 (Cth) to bring an action. Thirdly, there was no causal link between any contravention by the applicants of their obligations and DebtCo's claim in debt against Dullys. Fourthly, if the claims of direct breaches of the Corporations Act against the applicants were arguable, this Court would have not jurisdiction to deal with them.
[3]
The respondent's arguments
The respondent says that its action is that the applicants (and the first plaintiff) acted in a way such as to 'asset-strip' Dullys; thus denuding it of its resources to honour its obligations; including its obligations under the loan agreement with Prospa (assigned to the respondent).
The respondent cites certain authorities for the propositions that:
where directors act in a way that a company's assets are transferred at an undervalue, this may found a breach of fiduciary duty (Gerard Cassegrain & Co Pty Ltd (in liq) v Cassegrain [2013] NSWCA 455 at [113]);
under the first limb of the rule in Barnes v Addy, Academy of Aesthetics may be liable for 'knowing receipt' of property misapplied by a trustee (The Bell Group Ltd (in liq) v Westpac Banking Corporation (No.9) [2008] WASC 239 at [4748]);
in a context of financial instability, including prospective insolvency, company officers must take into account the interests of its creditors (Walker v Wimborne (1976) 137 CLR 1 and Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 per Street CJ at 733);
if there be any novelty in the claim against the directors in relation to their contraventions of statutory obligations, then that does not automatically mean that the proceeding should be terminated; lest the development of the law be stultified (Bakewell v Anchorage Capital Master Offshore Ltd [2019] NSWCA 199 per Bell P (as the Chief Justice then was, Macfarlan and White JJA agreeing) at [37]-[43]).
In oral argument, in response to a point I raised, being that no statutory claim for compensation was brought against the applicants, and my query what equitable jurisdiction that the District Court had to entertain a claim of breaches of certain statutory provisions (ss 181-184 of the Corporations Act) which appeared equitable in nature, Counsel for the respondent cited this Court's jurisdiction under s 134(1)(h) of the District Court Act. He indicated that insofar as a claim was brought relying upon s 180 of the Corporations Act, the respondent had an analogous (although 'novel') claim in common law negligence against the applicants. Counsel also informally applied, in the alternative, and if it became necessary, for the Court to transfer the proceeding to the Supreme Court under s 144(2) of the Civil Procedure Act 2005 (NSW).
[4]
The applicants' submissions in reply
The applicants said that no claim in common law negligence had been advanced against them. They argued that it was incongruous that they could owe personal duties of care to the lender (and its assignee) based upon a factual background of a lender- borrower relationship.
They referred to the authorities, especially in the context of insolvency, and said that they only identified or delimited the scope of their duty to the company: it did not mean that they owed duties to the creditors themselves. They also said, with reference to Bell P's reference in Bakewell to Kirby P's earlier decision to refuse to strike out a 'novel' claim in negligence, that Kirby P did so in circumstances where two other actions were allowed to run to trial.
[5]
Consideration
I am not dealing, at this point, with criticisms of the pleading; for which, if the criticisms were accepted, the remedy would ordinarily be a strike out, with liberty to re-plead. I agree further, with the parties' common approach which requires me first to determine whether the claims are arguable in law, before considering whether this Court has jurisdiction to adjudicate upon them.
Mindful as I am of the high bar to such applications, partly attributable to a concern not to stultify the development of the law, in my opinion, the notion that directors or officers of a company owe enforceable duties to creditors, in addition to the corporation, is so unhistorical and so likely to give rise to incompatible or conflicting duties that the notion should be summarily rejected. It is plainly the case that, subject to a statutory entitlement to sue (such as under ss 236-237 of the Corporations Act), if the applicants were in breach of statutory obligations to the company (which might be accepted as involving consideration of the interests of creditors), it was the company's liquidator who had the exclusive standing to bring an action against them.
It is conspicuous that no policy considerations were advanced by the respondent to justify the notion. During the course of argument I asked the respondent's counsel whether his posited duty of company directors or officers to creditors might circumvent the separate entity rule from Salomon's case. Counsel's response was that there have already been statutory incursions into that rule; for example in the case of insolvent trading. However, that response only underscores the point that hallowed principles of company law are to be applied subject to statutory intervention. Of course, as the judgment of Mason J in Walker v Wimborne indicates, consideration of the interests of creditors by a company officer when contemplating action by a company may be needed in circumstances but as his Honour indicated, this is associated with the concern that damaging the interests of creditors is itself harmful to the company. The decision provides no support for a free-standing duty of care by owed by company officers to creditors.
As noted, DebtCo brings (or brought) no claim for statutory compensation against Mr Sayed. The arguable circumstance that Ms Makke and/or Academy Aesethetics were "involved" in his contraventions (under s 79 of the Corporations Act) was not relied upon as giving rise to a statutory compensation claim against either or both of them.
That is not to say, however, that it is inarguable that equity or the law of trusts, may not render either or both of the Applicants liable for equitable compensation for breach of fiduciary duty (in the case of Ms Makke) or as constructive trustees (in the cases of Ms Makke or Academic Aesthetics) for any breach of trust, or fiduciary duty by Mr Sayed, towards Dullys. But again, the equitable remedy or remedies lay with the liquidator to Dullys.
What is really left to DebtCo is a vaguely defined 'novel' claim against the applicants in negligence. It cannot be a claim against the applicants in contract; since unlike Mr Sayed, they were not parties to the loan agreement. That claim is manifested by the way that the loss is articulated in the statement of claim, being Dullys failure to repay a loan to Prospa under a conventional borrower-lender arrangement, so that the loss for a putative breach of duty by the applicants is assimilated to the balance of what is outstanding on the loan. But as Counsel for the applicants' correctly noted, if there was no duty of care owed by Dullys to Prospa, it is incongruous, if not incoherent, to posit that the officers or directors of Dullys owed personal duties of care to Prospa (and, by extension, any assignees).
It is unnecessary for me to consider the issue of this Court's jurisdiction and the application for security for costs.
[6]
Conclusion
The orders that I make are:
1. Pursuant to r 13.4 of the Uniform Civil Procedure Rules 2005 (NSW), the plaintiff's proceedings against the Second and Third Defendants are dismissed.
2. The Plaintiff is to pay the costs of the proceedings as against the Second and Third Defendants as agreed or assessed.
3. If there be any application to vary order 2, application is to be brought by further notice of motion, with supporting affidavit, within 14 days.
[7]
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Decision last updated: 14 February 2024