Dracoma Pty Ltd v Changela

Solicitors: William James (Plaintiff) Lodhia Lawyers (Defendants) File Number(s): 2023/298052

JUDGMENT

1. Mr Alex Wheeler has been a crop farmer in the Central West and Orana region of New South Wales for the last 50 years.
2. He is the sole director and shareholder of the plaintiff, Dracoma Pty Limited.
3. Dracoma grows "desi" and "kabuli" chickpeas on a number of farms in that region.
4. In that part of New South Wales, chickpeas are harvested annually in around November.
5. Until the events with which these proceedings are concerned, following harvest, Mr Wheeler caused Dracoma to sell its chickpeas to grain traders, or stored all or part of the crop for sale later, depending on market conditions and taxation planning considerations. Mr Wheeler had never presold a harvest of chickpeas.
6. These proceedings concern Dracoma's 2017 chickpea crop ("the 2017 Crop").
7. Dracoma agreed to sell the 2017 Crop to Changela Exports Pty Limited, now in liquidation, a company associated with the Changela family ("the Company"). The controversy concerns the agreement concerning the 2017 Crop ("the 2017 Agreement").
8. Mr Wheeler was introduced to members of the Changela family by his general practitioner, Dr Vijay Pandya. Dr Pandya has a medical practice in Dubbo and had been Mr Wheeler's general practitioner since around 1985.

The Changela family

1. Prashant and Rajan Changela are brothers.
2. Their wives are Sweta and Radhika Changela.
3. Their parents are Grishkumar and Jayana Changela.
4. Because each shares the same surname, I will adopt the convention used by counsel, and refer to them by their given names. I intend no disrespect or overfamiliarity.
5. Prashant and Sweta live in Forbes.
6. Rajan and Radhika live in Dubbo.

Changela Exports Pty Limited

1. The Company was incorporated on 12 December 2012.
2. It engaged in no trading activity until the events with which these proceedings are concerned.
3. Until 7 February 2019, the directors and shareholders of the Company were Sweta and Radhika. Sweta and Radhika were then replaced as directors and shareholders by Grishkumar and Jayana.
4. None of them played any role in the Company's affairs.
5. The Company was placed into voluntary liquidation on 23 December 2020. It was deregistered on 17 September 2021.
6. The Company's registration was reinstated on 27 May 2022 and, on 1 September 2022, Dracoma entered into a Deed of Assignment ("the Deed of Assignment") with the then liquidator ("the Liquidator") of the Company. Pursuant to the Deed of Assignment, in consideration of the payment by Dracoma to the Liquidator of $15,000, the Liquidator and the Company purported to assign to Dracoma, pursuant to s 477(2)(c) of the Corporations Act 2001 (Cth) ("the Act") all their rights, title and interest in any choses of action that the Company or the Liquidator had against, relevantly, any present or past director of the Company or against Dr Pandya ("the Assignment"). Following public examinations of Prashant, Sweta, Rajan, Radhika, and Dr Pandya the Liquidator executed letters addressed to him by Dracoma's solicitors which added Sweta, Radhika, the Company itself, Dr Pandya's company, Vijay Pandya Pty Limited and a company controlled by Prashant and Rajan, Changela Food Pty Limited to the entities the subject of the Assignment. The Deed of Assignment obliges Dracoma to pay the Liquidator 15% of any "Recovery Proceeds".
7. As assignee under the Deed of Assignment, Dracoma brings these proceedings against Prashant, Sweta, Rajan, Radhika, Dr Pandya, and Vijay Pandya Pty Limited and Changela Food Pty Limited.
8. There is a dispute as to the effectiveness of the Assignment, to which I will return.

The claims made by Dracoma as assignee from the Liquidator

1. Although Dracoma contends that it is owed some $1.2 million by the Company under the 2017 Agreement, it does not seek to recover that amount in these proceedings.
2. Rather, as assignee from the Liquidator and the Company, Dracoma seeks to recover from Prashant, Sweta, Rajan, Radhika, Dr Pandya, and their associated companies, amounts totalling $2,249,000 paid to them by the Company between September 2017 and January 2020.
3. Dracoma seeks to do this on the basis that at the relevant time: 1. each of the individuals was a director of the Company; 2. in the case of all but two payments, the Company was insolvent; and 3. the payments were: 1. unfair preferences for the purposes of s 588FA of the Act and thus a voidable transaction for the purposes of s 588FE of the Act; [1] 2. unreasonable director related transactions for the purposes of s 588FDA of the Act and thus voidable transactions for the purposes of s 588FE of the Act; 3. conduct amounting to a breach by Prashant, Rajan, and Dr Pandya of their statutory, general law and fiduciary duties to the Company; or 4. voidable alienations of property under s 37A of the Conveyancing Act 1919 (NSW) ("the Conveyancing Act"). [2]

The impugned payments

1. The impugned payments constituted repayment of funds earlier advanced to the Company.
2. Those earlier advances, totalling $1,702,000, were as follows: 1. 9 November 2016, $115,000 by Rajan/Radhika; 2. 10 November 2016, $300,000 by Dr Pandya/Vijay Pandya Pty Limited; 3. 14 November 2016, $184,630 by Prashant/Sweta; 4. 15 November 2016, $300,000 by Dr Pandya/Vijay Pandya Pty Limited; 5. 19 July 2017; 1. $250,000 by Prashant/Sweta; and 2. $250,000 by Dr Pandya/Vijay Pandya Pty Limited; 1. 7 November 2017: 1. $300,000 by Prashant/Sweta; and 2. $290,000 by Dr Pandya/Vijay Pandya Pty Limited; 1. 29 December 2017, $200,000 by Dr Pandya/Vijay Pandya Pty Limited; 2. 19 February 2018, $125,000 by Dr Pandya/Vijay Pandya Pty Limited; 3. 8 June 2018, $18,000 by Dr Pandya/Vijay Pandya Pty Limited; and 4. 11 June 2018, $19,000 by Dr Pandya/Vijay Pandya Pty Limited.
3. None of the advances was documented otherwise than by entry in the Company's general ledger and bank statements. There was no loan agreement or any other formal arrangement.
4. Dracoma alleges these advances to it were investments or share subscriptions by those parties. The defendants contend the advances were loans. The difference is probably immaterial, but I return to it below.
5. These advances were, in effect, the capitalisation of the Company and the only source of funds by which the Company could engage in trading; including by purchasing chickpeas from Dracoma.
6. The Company had no facility from any bank or other lender.
7. The business of the Company had no formal governance or financial systems. It had a paid-up capital of $200 and operated largely from the home then shared by Prashant and Rajan and their families. There is no evidence that the Company ever had formal shareholders or directors' meetings.
8. The Company's accounting records were maintained on a MYOB program, inputted on an ad hoc basis by Rajan as and when he had time to do so.
9. The impugned payments are: 1. 20 September 2017: 1. $250,000 to Prashant; and 2. $250,000 to Dr Pandya; 1. 9 January 2018, $200,000 to Dr Pandya; 2. 6 February 2018, $60,000 to Changela Food Pty Limited; 3. 7 February 2018, $315,000 to Prashant; 4. 28 February 2018, $162,000 to Prashant; 5. 7 March 2018, $100,000 to Prashant; 6. 12 June 2018, two payments each of $10,000 to Prashant; 7. 19 June 2018, payments of $10,000 and $7,000 to Prashant; 8. 19 February 2019, $90,000 to Vijay Pandya Pty Limited; and 9. 4 January 2020: 1. $193,382 to Rajan; 2. $485,000 to Vijay Pandya Pty Limited; and 3. $106,618 to Prashant.
10. The payments to Prashant referred to at [34(d)] to [34(h)], totalling $614,000, were used by Prashant to make payments to entities in India in the hope of securing payment to the Company of the chickpeas sold from the 2017 Crop. I return to this below.
11. Below is a schedule setting out these payments, as well as the four payments made by the Company to Dracoma on account of the amount due under the 2017 Agreement, and the running balance due to Dracoma. Defendant Recipient Date Transfer to Defendant Transfer to Dracoma Balance due to Dracoma Prashant 20 Sept 2017 $250,000.00 $0 Vijay Pandya Pty Limited 20 Sept 2017 $250,000.00 $0 Vijay Pandya Pty Limited 9 Jan 2018 $200,000.00 $1,826,297.55 Changela Food Pty Limited 6 Feb 2018 $60,000.00 $1,826,297.55 8 April 2018 $166,027.50 $1,660,629.95 Prashant 7 Feb-18 June 2018 $614,000.00 $1,660,629.95 Vijay Pandya Pty Limited 19 Feb 2019 $90,000.00 $1,660,629.95 11 June 2019 $140,000.00 24 Sep 2019 $200,000.00 Rajan 4 Jan 2020 $193,382.00 $1,320,269.95 Vijay Pandya Pty Limited 4 Jan 2020 $485,000.00 $1,320,269.95 Prashant 4 Jan 2020 $106,618.00 $1,320,269.95 21 Jan 2020 $100,000.00 $1,220,269.95 Total: $2,249,000.00

The directorship of the Company

1. There is no dispute that Sweta and Radhika were directors of the Company until 7 February 2019, nor that they at no time performed any functions as directors. They were nominees or proxies for their husbands, Prashant and Rajan.
2. Dracoma alleges that at all relevant times each of Prashant, Rajan, and Dr Pandya acted in the position of a director of the Company and were thus directors of the Company for the purposes of s 9 of the Act.
3. Prashant admits that he acted in the position of, and therefore was, a director of the Company.
4. Rajan disputes that he so acted, and claims that his involvement "was limited to doing some bookkeeping". I return to this below.
5. Dr Pandya initially denied he acted in the position of a director of the Company. Thus, in opening submissions, Dr Greinke, who appeared for the defendants, submitted that: "While in 2016 he had discussions with Prashant about he and his daughter Komal joining [the Company] as a shareholder and director, … that never eventuated. His involvement was limited to contacting local farms for buying crops. He never had access to the bank accounts of [the Company] and was not involved in export shipping or overseas sales".
6. However, after the cross examination of Dr Pandya by Mr Laughton SC, who appeared with Mr Hynes for Dracoma, had proceeded for over almost a day, Dr Greinke sought leave, with Mr Laughton's consent, to "have a conversation with Dr Pandya for the limited purpose of obtaining instructions for taking a step in the proceedings".
7. After a short adjournment, Dr Greinke told me that he had obtained instructions that the defendants admitted, for the purposes of the proceedings, that Dr Pandya was at all material times a director of the Company.
8. That admission was well made and, in view of the matters revealed in the cross examination, inevitable.
9. The cross examination and the documentary evidence revealed that, from the outset, Dr Pandya had an intimate involvement in the business of the Company. Dr Pandya's email exchanges with Prashant and Rajan showed that they, Prashant in particular, deferred to him and sought to involve him in all significant business decisions of the Company. In those emails Prashant frequently sought Dr Pandya's approval, thoughts and feedback on suggestions for the business of the Company, and its strategic direction: all of which Dr Pandya readily gave.
10. As Dr Greinke submitted, Dr Pandya said that he at one stage considered becoming a shareholder and formal director, but that following consultation with his accountant he decided against the idea. His evidence as to when he made the latter decision evolved, as he was confronted with documents showing his deep involvement in the Company's affairs, from saying this occurred in July or August 2016 to, ultimately, November 2016. I gained the impression that Dr Pandya was making up this evidence as he went along.
11. Further, as I set out below, by reason of being Mr Wheeler's general practitioner, Dr Pandya was instrumental in introducing Mr Wheeler and Dracoma to the Company, and thereafter liaising with Mr Wheeler on behalf of the Company.
12. Dr Pandya was seemingly oblivious to the fact that his conduct, revealed so clearly in the numerous emails he sent to Prashant, Rajan and Mr Wheeler, was that of a person acting in the position of a director of the Company.
13. I agree with the submission of Mr Laughton and Mr Hynes that it reflects badly on Dr Pandya's credit that it was not until he was confronted with an overwhelming body of evidence as to his involvement with the Company, that Dr Greinke obtained the instructions to which I have referred. I return below to the relevance of Dr Pandya's credit.

The Assignment

1. Before turning to the underlying events, I will deal with a number of matters that Dracoma must establish in order to succeed on its case arising from these events.
2. The first is the effectiveness of the Assignment.

Were the causes of action relied on by Dracoma assignable?

1. There is an issue as to whether the causes of action on which Dracoma relies are assignable. I will deal with each in turn.

Claims under Part 5.7B of the Act for unfair preferences and unreasonable director related transactions

1. Section 477(2)(c) of the Act empowers a liquidator of a company to: "… sell or otherwise dispose of, in any manner, all or any part of the property of the company."
2. Section 100-5 of the Insolvency Practice Schedule (Corporations) ("IPSC") [3] provides: "100‑5 External administrator may assign right to sue under this Act (1) Subject to subsections (2) and (3), an external administrator of a company may assign any right to sue that is conferred on the external administrator by this Act. (2) If the external administrator's action has already begun, the external administrator cannot assign the right to sue unless the external administrator has the approval of the Court. (3) Before assigning any right under subsection (1), the external administrator must give written notice to the creditors of the proposed assignment. (4) If a right is assigned under this section, a reference in this Act to the external administrator in relation to the action is taken to be a reference to the person to whom the right has been assigned."
3. Section 100-5 came into effect on 1 March 2017.
4. It has since then been held to enable an external administrator to assign "any right to sue that is conferred by the Act" and to enable a liquidator to assign statutory rights of action such that: "The sale and assignment of such rights of action stands to benefit creditors of a company by allowing the company to realise a negotiated value for such rights of action, which may otherwise go unexploited due to funding difficulties". [4]
5. Dr Greinke did not refer to s 100-5 in his closing written submissions.
6. In closing oral submissions, Dr Greinke accepted that s 100-5 had the effect that a liquidator could assign rights under Part 5.7B of the Act but submitted that although the effect of ss 100-5(4) was that, once there was such an assignment, references in the Act to "the liquidator" were to be taken as references to the assignee, ss 100-5(4) did not have the effect that references to "the company" were to be taken to be references to the assignee.
7. Section 588FF(1) of the Act provides that where, on the application of a company's liquidator, a transaction of a company is voidable because of s 588FE, the Court can make an order under ss 588FF(1)(a) "directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction…".
8. Thus, Dr Greinke submitted, while the effect of s 100-5 was that, assuming the Liquidator had assigned to Dracoma the Company's rights under ss 588FA and 588FDA, the reference in s 588FF to "the liquidator" was to be taken to be a reference to Dracoma as assignee from the Liquidator, and the reference in s 588FF(1)(a) to "the company" remained as a reference to the Company.
9. Dr Greinke pointed out that the relief sought by Dracoma was that the fruits of the assigned claims be paid to it, and not to Company, and that its claims as assignee of the Liquidator's claims under ss 588FA and 588FDA must, for that reason alone, fail.
10. Dr Greinke submitted that, for that reason, to the extent that the authority to which I referred at [56] suggested that an assignee under s 100-5 could seek orders requiring payment to it, rather than to the Company, [5] it was plainly wrong and that I should not follow it.
11. This contention had not hitherto been made on behalf of the defendants, whether in their List Response or in any earlier submission. Dr Greinke had not raised this matter in his opening or closing written submissions.
12. There was a debate in supplementary submissions as to whether Dr Greinke's new contention was a matter that the defendant should have raised in their List Response.
13. I do not find it necessary to resolve that dispute.
14. The answer to Dr Greinke's belated submission is that, although s 100-5(4) has the limited effect to which he pointed, it must be read in the context of s 477(2)(c) of the Act that, as I have set out, empowered the Liquidator to sell or dispose of any part of the "property of" the Company including, here, the Company's entitlement to the proceeds of any claim under ss 588FA and 588FDA of the Act. Such claims, and the money recovered from them, comprise property of the Company. [6]
15. I think Mr Laughton and Mr Hynes were correct to submit that, in the context of an assignment of the kind involved here, s 477(2)(c) of the Act works in tandem with s 100-5 of the IPSC such that: 1. a chose in action, being a personal right of a liquidator, is assigned by operation of s 100-5 of the IPSC; and 2. the entitlement to the proceeds of the chose in action, being the property of the Company, is assigned by operation of s 477(2)(c) of the Act.
16. The result is that to the extent that Dracoma's claims are brought in proceedings under Pt 5.7B of Act they are assignable by virtue of both s 477(2)(c) of the Act and s 100-5 of the IPSC such as to require payment, if the claims are made out, to the assignee of the right of action as opposed to the company directly. [7]
17. Mr Laughton and Mr Hynes submitted that, in any event, the issue raised by Dr Greinke could be overcome by: 1. a joinder of the Company to the proceedings as a defendant; and 2. an amendment to the relief sought in the Amended Summons such that it seeks, as an alternative, payment of the fruits of the assigned causes of action to the Company rather than to Dracoma.
18. The Company is a party to the Deed of Assignment and any funds that the Company might receive as part of a favourable judgment in these proceedings would be distributed by the Liquidator in accordance with the Deed of Assignment.
19. In supplementary submissions, Mr Laughton and Mr Hynes sought leave to file a Further Amended Summons and a Second Further Amended Commercial List Statement seeking relief to this effect. The Liquidator has indicated that he consents to the Company being joined to the proceedings and for leave being granted to Dracoma pursuant to s 500(2) of the Act for that purpose.
20. Had I not reached the conclusion set out above, I would have granted Dracoma leave to make those amendments.
21. Notice of Assignment, as required by s 100-5 of the IPSC, was provided to the Company's creditors in the Liquidator's statutory report of 26 August 2022.

Claims for breach of fiduciary duty

1. There is clear authority in this Court that a claim for a breach of fiduciary duty is assignable.
2. In In the matter of Colorado Products Pty Ltd (in prov liq) ("Colorado Products"), [8] Black J gave this question careful attention and, after a comprehensive review of authorities, concluded that such claims are assignable. [9]
3. In particular, Black J agreed with the conclusion of Beech J in EC Dawson Investments Pty Ltd v Crystal Finance Pty Ltd (No 3) [10] to this effect. [11]
4. Black J concluded: "Beech J's review of the authorities in EC Dawson Investments above, and the conclusions drawn from it, is thorough and I consider that the conclusions that his Honour draws are correct. So far as that decision concerns the construction of s 477(2)(c) of the [Act], the desirability of consistency of decision-making in respect of uniform national legislation indicates that I should take the same approach, especially where I do not doubt the correctness of his Honour's reasoning. Accordingly, I consider that the provisional liquidator's assignment of Colorado's claim for breach of fiduciary duty to HY International is effective to confer upon it the ability to bring that claim." [12]
5. These decisions have been followed on numerous occasions. [13]
6. Despite this weight of authority, Dr Greinke submitted that I should depart from that authority and, in effect, adopt the submissions, rejected by Black J, made by the defendants in Colorado Products.
7. I do not propose to follow that course.

Claims under s 37A of the Conveyancing Act

1. Section 37A of the Conveyancing Act provides that every alienation of property made with intent to defraud creditors is voidable at the instance of "any person thereby prejudiced".
2. In his closing written submissions, Dr Greinke submitted that a claim under s 37A "is inherently incapable of assignment".
3. But Dracoma does not seek to agitate its claim under s 37A as an assignee but rather as the person prejudiced by the posited alienation of property.
4. If Dracoma establishes a claim under s 37A the result will be that the relevant alienation of property, that is, the payments by the Company, will be avoided and thus returned to the Company.

Claims for breach of the duties in ss 180, 181 and 182 of the Act

1. In Colorado Products, Black J concluded that an assignee does not have standing to seek an order for compensation under s 1317H of the Act for contravention of civil penalty provisions, which include claims relating to breaches of statutory duties under ss 180, 181 and 183 of the Act. [14]
2. In closing written submissions, Mr Laughton and Mr Hynes responded to these submissions as follows: "The defendant's submissions raise arguments as to the assignability of statutory claims under ss 180, 181 and 182 of the Act. Dracoma recognises the uncertainty surrounding the assignability of such claims by reason of their treatment in decisions such as Colorado Products… and Re Novaline Pty Ltd (in liq)." [15]
3. In closing oral submissions Mr Laughton did not press this aspect of Dracoma's case with any enthusiasm. I take it to be abandoned.

Claims for breach of general law duties

1. As to the assignability of the Company's claims against the defendant directors for breach of their general law obligations to exercise reasonable care and diligence and to act in good faith in the interests of and for the benefit of the Company, [16] Dr Greinke submitted that in Colorado Products Black J treated "those claims as one and the same [as the claims for breach of the duties in ss 180, 181 and 182 of the Act] and not assignable". [17]
2. I do not read Black J's decision this way and, by parity of reasoning with his Honour's conclusions about the assignability of claims for breach of fiduciary duty, conclude that such general law claims are assignable.

The conditions precedent in the Deed of Assignment

1. There is also an issue as to whether conditions precedent in the Deed of Assignment have been satisfied.
2. Clause 2.1 of the Deed of Assignment provided: "The formation of a binding contract by this Deed … is subject to and conditional upon: (a) the Creditors of [the Company] granting approval to the [Liquidator] to enter into this Deed and effect the sale, transfer and/or assignment of the Choses in Action in accordance with this Deed under section 477(2B) of the Act ('the Creditor Approval'); or (b) the Court [defined as the Supreme Court of New South Wales or the Federal Court of Australia] giving the [Liquidator] a direction or order under section 90-15 of the IPSC that the [Liquidator] has power to effect the sale, transfer and/or assignment of the Choses in Action in accordance with this Deed under one or more of section 477(2)(c) of the Act, section 100-5 of the IPSC or otherwise ('the Direction'); and (c) the [Liquidator] obtaining any necessary approval from the Court to cause [the Company] to enter into and carry out its obligations under this Deed … pursuant to section 477(2B) of the Act ('the 477(2B) Approval')."
3. Thus, the Assignments in the Deed of Assignment were expressed to be subject to conditions precedent of either: 1. the approval of the creditors of the Company to enter the Deed of Assignment ("the Creditor Approval"); or both of 1. the Court giving a direction under s 90-15 of the IPSC ("the Direction"); and 2. the Court giving approval for the Company to enter the Deed of Assignment ("the Approval").
4. Neither Dracoma nor the Liquidator obtained the Creditor Approval.
5. No Court has given the Liquidator the Direction.
6. On 9 February 2023, the Federal Court of Australia, Markovic J, gave the Approval.
7. Clause 2.3 of the Deed of Assignment provided, relevantly: "If, in and after the hearing of the Application, the Court does not make orders giving the Direction or the 477(2B) Approval (if required) or the Creditor Approval is not obtained, this Deed will terminate forthwith and the parties are discharged from any further performance of their obligations under this Deed. This clause is for the benefit of Dracoma and the [Liquidator] and either of them may waive the requirement for the attainment of one or both of the Direction and the 477(2B) Approval within 3 Business Days of judgment in the Application being delivered. If one of Dracoma or the [Liquidator] waives the requirement but the other does not, then this clause still operates."
8. The operative part of cl 2.3 is in the first sentence, namely that appearing after the words "the hearing of the Application". Its effect is that if the Court did not give either the Direction or the Approval, the Deed of Assignment would forthwith terminate.
9. The "Application" was defined in the Deed of Assignment as "an application to the Court specified in clauses 2.1(b) and 2.1(c)". It is true, as Mr Laughton and Mr Hynes submitted, that cll 2.1(b) and 2.1(c) do not refer to an "application". But, read in the context of those clauses, the defined term "Application" must mean an application for the relief specified in the clause: that is, for the Direction and for the Approval. Contrary to Mr Laughton's and Mr Hynes's submission, I do not see how the definition of "Application" can be read to comprise an application for either the Direction or the Approval.
10. On 11 January 2023, the Liquidator of the Company applied for the Approval, but not for the Direction. That was the application determined by Markovic J on 9 February 2023. There has been no application for the Direction.
11. The operative part of clause 2.3, that is, the provision for termination of the Deed of Assignment, was only enlivened if, "after the hearing of the Application" the Court did not give the Direction or the Approval. There has been no such application. Thus, the operative part of cl 2.3 has not been enlivened, and the Deed of Assignment was not thereby terminated.
12. Clause 2.3 goes on to state that either Dracoma or the Liquidator may waive the requirement for either the Direction or the Approval. It is hard to see how either Dracoma or the Liquidator could waive the requirement for the Approval, but the point does not arise because the Approval was obtained.
13. Contrary to Dr Greinke's submission, I do not read cl 2.3 as having the effect that any waiver concerning the Direction was conditioned on there being a hearing of "the Application".
14. It is Dracoma's position that each of it and the Liquidator has waived the requirement for the Direction. Thus, the possible complication, referred to in the last sentence of cl 2.3, of one of them but not the other waiving the requirement for either the Approval or the Direction, does not arise.
15. The waiver for which Dracoma contends is said to arise from a Deed of Acknowledgement executed by Dracoma, the Liquidator, and the Company on 6 June 2024 ("the Deed of Acknowledgement").
16. The Deed of Acknowledgement recited the making of the Approval and then recited: "The Direction was not obtained at the hearing on 9 February 2023, the parties waived any requirement to obtain the Direction, and have at all times otherwise acted in a manner consistent with them being bound by the Deed of Assignment, including by performing its terms."
17. Clauses 2.1 and 2.2 of the Deed of Acknowledgement provided: "2.1 The Parties hereby acknowledge and agree that: (a) on 9 February 2023 they waived any requirement under the Deed of Assignment to obtain the Direction; (b) they are bound, and have been bound, by the Deed of Assignment since no later than the attainment of the 477(2B) Approval on 9 February 2023; (c) consistent with being bound by the Deed of Assignment, they have at all times since no later [than] 9 February 2023 continued to observe the terms of the Deed of Assignment. 2.2 The Parties further acknowledge and agree that the Deed of Assignment is, and has at all times since 9 February 2023, been enforceable against them and one another."
18. Dracoma and the Liquidator have performed their obligations under the Deed of Assignment. In particular, Dracoma has paid the $15,000 consideration referred to in the Deed of Assignment. [18]
19. In these circumstances, I find that each of Dracoma and the Liquidator has waived the requirement for the making of the Direction.
20. The "3 Business Days" requirement referred to in the second sentence of cl 2.3 was facultative in nature and, in any event, arose in the event of "judgment in the Application being delivered". For the reasons I have explained, there was no "Application".

The advances: investments/subscriptions or loans?

1. There is a dispute between the parties as to whether the advances made to the Company should be seen as loans, as the defendants contend, or something in the nature of "injections of cash/equity" as Dracoma contends.
2. Each of Prashant, Rajan, and Dr Pandya agreed that there was no express arrangement made between them and the Company in relation to the advances, including as to when they would be repaid and as to whether any interest would be payable.
3. Prashant said that the understanding between the individuals was that the monies would be repaid when the Company no longer needed the money. However, as I set out below, the monies were on occasions repaid even when the Company did need the money. In reality, the monies were repayable whenever Prashant, Rajan, and Dr Pandya so decided.
4. There are references in emails passing between Prashant and Dr Pandya to "my share" and to "our initial investment" and otherwise referring to the advances as "investments".
5. However, the transactions were recorded in the general ledger of the Company as "loans". Those entries were made by Rajan and appear to have been made contemporaneously with the making of the advances.
6. The entries in the Company's bank statements recording the repayment of the advances refer to "loan pay back". This must have been the characterisation then given by one of Prashant, Rajan, or Dr Pandya to the Company's bank at the time.
7. Those contemporaneous records are the best guide as to the true position. The advances were loans repayable whenever Prashant, Rajan and Dr Pandya so determined.

Was Rajan a director?

1. Rajan was never formally appointed as a director of the Company.
2. The question is whether, nonetheless, he was acting in the position of a director and is thus taken to be a director by reason of s 9 of the Act.
3. This will: "… often be a question of degree, and requires a consideration of the duties performed by that person in the context of the operations and circumstances of the particular company concerned." [19]
4. It is necessary to show that the relevant person "exercises what might be called the actual (and statutorily extended) top level of management functions". [20]
5. A fact that may be relevant is how the relevant person is reasonably perceived by outsiders who deal with the company. [21]
6. Rajan holds a Bachelor of Commerce from Saurashtra University in India and a Master of Accounting from Swinburne University in Melbourne.
7. Rajan deposed that: "My involvement in the … business was limited to doing some bookkeeping. This was not a regular day to day activity but something I [did] occasionally as needed. A few hours a month I would enter transactions into the accounts using MYOB. I did not prepare any BAS or income tax returns. The MYOB accounts were sent to the company's accountant, Kevin Rankmore, of Ryan and Rankmore Accounting, who prepared those returns for the company. I never controlled any of the bank accounts for [the Company] or had any authority to make payments for [the Company]. I was not involved in buying stock from farmers or arranging exports or sales overseas. So far as I knew, I did not have access to or authority to use the bank accounts."
8. As I have said, until 7 February 2019, the directors and shareholders of the Company were Prashant's wife, Sweta, and Rajan's wife, Radhika.
9. Radhika said that Rajan asked her to become a director and agreed that she then played no role in the Company. She said "I never asked any questions. I am always busy with my housekeeping."
10. There would have been no reason for Rajan to arrange for Radhika to play such role, unless as his proxy.
11. However, careful attention must be given to what it is shown Rajan actually did within the Company.
12. He posted all relevant entries to the Company's MYOB account. He was often copied in on emails dealing with the business activities of the Company. Many emails were sent to him "FYI".
13. Rajan was also the ATO contact for the Company and in that capacity on 16 February 2017 wrote to Prashant and Dr Pandya saying, "we can claim our refund".
14. Rajan was also perceived by the Company's external accountant, Mr Rankmore, as a director of the Company. Thus, Mr Rankmore prepared accounts which recorded Rajan, and Prashant, as directors, although there is no evidence that Rajan signed the accounts in that capacity.
15. Dr Greinke submitted that Dracoma "cannot identify any significant decision of [the Company] in which Rajan was involved". In closing submissions, Mr Laughton accepted that this was so, save for Rajan's evident involvement in the decision made by the Company on 4 January 2020 to make the impugned payment to him of $193,382 that I have referred to at [34(j)(i)] above.
16. As I have said, Prashant gave evidence that the understanding between him, Rajan and Dr Pandya was that monies advanced to the Company would be repaid when the Company no longer needed the funds. An inference is available that Rajan may have been a party to such a conclusion when the Company repaid the funds to him in January 2020. However, that decision could equally be characterised as a decision by Rajan, as a creditor of the Company, to call for his money.
17. Overall, I am not persuaded that Rajan can be said to have been acting in the role of a director of the Company.

Was the Company insolvent?

1. A critical issue is if and when the Company became insolvent.
2. Dracoma's position is that the Company was insolvent by at least December 2017.
3. Assessment of that proposition requires consideration of the events leading to that date.

The 2016 crop

1. Dr Pandya introduced Mr Wheeler to Prashant. As I have said, Dr Pandya knew Mr Wheeler as a patient.
2. Dr Pandya arranged for Prashant to meet Mr Wheeler at Mr Wheeler's farm in September 2016.
3. Thereafter, the Company purchased from Dracoma's 2016 chickpea crop.
4. These chickpeas were delivered and paid for. There is no dispute about these matters.

The 2017 Agreement

1. In late 2017, Dracoma and the Company entered into the 2017 Agreement.
2. There is a dispute about the terms of that Agreement.

Mr Wheeler's account

1. Mr Wheeler deposed that: "In or about October 2017, [Dr Pandya] called me in relation to my 2017 chickpea harvest. During this discussion, [Dr Pandya] said that he wanted to purchase approximately 1,300 to 1,350 tonnes of desi chickpeas and that he would pay me above market price by bypassing the middleman."
2. Mr Wheeler said that Dr Pandya said on this occasion: "I want a trainload of desi chickpeas from your 2017 chickpea harvest. I will pay you at least $45 to $50 above market price because we will bypass the middleman."
3. Mr Wheeler said he replied, "Okay agreed".
4. Mr Wheeler said that: "The reference to 'trainload' was a reference to approximately 1,300 to 1,350 tonnes of chickpeas. A trainload is approximately 50 flat top cars that each hold two 20-foot containers. One 20-foot container holds approximately 25 tonnes of desi chickpeas."
5. Mr Wheeler said that the market price of chickpeas in the Narrabri and Narromine region was then $675 per tonne, exclusive of GST, and that "this meant that I would be paid at least $720 per tonne (ex GST) under the sale".
6. Mr Wheeler also deposed: "At some point during the course of the harvest, I spoke with [Dr Pandya] where he said that he wanted to purchase another 1,300 to 1,350 tonnes of desi chickpeas at the same price (being $720 (ex GST) per tonne on delivery and weighing) and that he wanted the chickpeas delivered to [a packing facility in Narromine]."
7. Mr Wheeler said that during this conversation, Dr Pandya said: "I can take another trainload of desi chickpeas at the same price and terms as the first trainload."

Prashant's account

1. Prashant had no direct dealings with Mr Wheeler concerning the 2017 Agreement.
2. Prashant said that in about October 2017 Dr Pandya said to him: "Alex Wheeler is expecting a very big crop. He believes there is not much demand in the market for buying his crop from other traders. Hence he wants to know if anything can be done to get the best possible price for his expected big crop."
3. Prashant said that he replied to Dr Pandya: "I can offer solution [sic] that we can export his chickpeas whatever tonnes Mr Wheeler is willing to sell. However, due to an import tariff likely to be introduced by India government at any time we cannot guarantee him any price per tonne. In simple words, we were not buying his product, we will sell it on his behalf. The risk would be on Mr Wheeler and we would expect about $20 per tonne commission for doing this work."

Dr Pandya's account

1. Dr Pandya deposed that Mr Wheeler called him in October 2017 and said: "The demand for chickpeas in Australia is very poor. I am only getting a very low price. Can you ask Prashant what Changela Exports could offer?"
2. Dr Pandya said he then spoke to Prashant and that: "Prashant gave me an option to give to Mr Wheeler. While I cannot remember the precise words I said to Mr Wheeler, the effect was that [the Company] was able to export his chickpeas to India to obtain the best price available on the Indian market, which at that time was better than the local market. There was no fixed price agreed and the upside gain and downside risk would be on Dracoma. [The Company] would charge a small commission for exporting the chickpeas. I had more than one conversation with Mr Wheeler to the above effect, after which he agreed to proceed and I telephoned Prashant to tell him."
3. Mr Wheeler denied having any such conversation with Dr Pandya.
4. He deposed: "I would never have agreed to entrust tonnes of my product to [the Company] to be sold by them to someone else, without any idea as to how much I would be receiving as payment, or without any kind of security over the product."

The objective evidence

1. Thus, on Dr Pandya's and Prashant's account of it, the 2017 Agreement in effect involved the Company taking the 2017 Crop on consignment, undertaking without commitment to secure the best price possible and being rewarded with a commission if a sale could be effected.
2. It seems improbable to me that a person of Mr Wheeler's long experience would agree to such an uncertain and risky arrangement.
3. Mr Wheeler has been farming for half a century and has never entered into an arrangement of the kind for which the defendants contend.
4. And, leaving aside my poor view of Dr Pandya's credibility, the objective evidence points to the conclusion that the 2017 Agreement was a conventional sale.
5. There is in evidence what appears to be an invoice from "Alex Wheeler and Sons" to the Company in the following form: Alex Wheeler & Sons TAX INVOICE ABN 70 056 495 986 PO Box 496, COONAMBLE, NSW 2829 Ph: 0268243231 Fax: 0268243211 Mobile: NO. 1-000037 DATE 20-12-2017 PAGE 1 Changela Exports ORDER NO. ACCOUNT 841 ABN Qty Description $Each $GST $Total 2,459.99T 2459.66t Desi chickpeas 674.91 166,027.05 1,826,297.55 … Gov't levy … … -16,934.75

Total includes GST of $166,027.05 Amount due 1,806,362.80

1. There is no direct evidence as to the provenance of this document.
2. In his affidavit of 6 June 2024, Mr Wheeler deposed: "I became aware of this invoice when preparing this affidavit and I did not know about it before. The invoice was provided to my lawyers by Dracoma's accountant, Peacocke Accountants, on 14 May 2024. Notwithstanding that the invoice states the price per tonne to be $649.91 exclusive of GST, I adhere to my evidence in my affidavit that the price I agreed was, per tonne, $720 exclusive of GST."
3. There is also in evidence a further "Tax Invoice" in this form: TAX INVOICE Seller: Alec Wheeler & Son's P.O. BOX 435, Coonamble, NSW - 2829 ABN: 70056495986 Date: 20/12/2017 Buyer: Changela Exports Pty Ltd 180 Cobra Street, Dubbo, NSW - 2830 ABN: 68161627023 Qty. Tonnes Description Price Total 2,459.66 Desi Chickpeas $675 $1,660,270.50 Delivered to Packers GST $166,027.05 (Less Govt. Levy 1.02%) -$16,934.75 Total Due Including GST $1,809,362.80

BANK ACCOUNT DETAILS …

1. That document was prepared in February 2018 in the context of a request made by Dr Pandya to Mr Wheeler to pay to the Australian Taxation Office the GST amount referred to in that document.
2. On 13 February 2018, Dr Pandya sent an email to Mr Wheeler: "Prashant had to make this invoice as the port authorities in India demanded an invoice and you were on holidays. They were otherwise going to impose the 30 percent duty on 700 US dollars which would have resulted in huge losses. They also asked for the Australian GST return as evidence. The tax department is now causing problems. Could your accountant inform them that your book keeper issued the invoice. Otherwise Prashant is in trouble. The situation for you does not change. It was the only way we can release the products from the port at the actual price."
3. Dracoma paid the GST amount to the ATO at some time during February 2018. The Company repaid that amount to Dracoma on 8 April 2018.
4. The point for present purposes is, leaving aside whether these two invoices accurately recorded the agreed per tonne rate at which the Company would purchase chickpeas from Dracoma, that the invoices are consistent only with the 2017 Agreement being a conventional sale; and irreconcilable with Prashant's and Dr Pandya's accounts of the matter.
5. Further, the Company's General Ledger contains an entry dated 20 December 2017 in the amount of $1,809,362.55 described as being "Purchase; Alex Wheeler".
6. That entry was made in the Company's MYOB records by Rajan.
7. Finally, shortly before the commencement of the hearing, the defendants formally admitted that Dracoma has been a creditor of the Company since December 2017 and remains an unsecured creditor in the Company's winding up. That admission cannot be reconciled with Prashant's and Dr Pandya's evidence.
8. These matters point to the conclusion, and I find, that the 2017 Agreement was a simple contract for the sale of goods, namely the 2017 Crop.
9. There was no express agreement as to when the amount recorded in the Company's General Ledger would be paid. Payment was thus due on delivery. [22]

Events thereafter - the sale to Vijay Pulses Pvt Limited

1. The Company on sold most of the chickpeas purchased from Dracoma to an Indian Gujarat company, Vijay Pulses Pvt Limited ("Vijay Pulses").
2. The sale was recorded in the Company's general ledger on 1 and 2 January 2018 at a value of $2,002,948.90: again, an entry evidently made contemporaneously by Rajan.
3. The precise contractual arrangements between the Company and Vijay Pulses are not clear, but it appears that the sale occurred a short time earlier as 2,426 tonnes of the total 2,522.25 tonnes of chickpeas purchased by the Company from Dracoma from the 2017 Crop were shipped to India by late December 2017. The balance was retained at a packing facility.
4. By 3 January 2018 the Company had incurred expenses totalling some $370,000 for the packing and shipping of the chickpeas. This had the effect that the total cost of the chickpeas was some $2,179,000: some $176,000 more than the sale price to Vijay Pulses. The 2017 Agreement was thus, subject to whatever the Company could achieve from the sale of the remaining balance of chickpeas, and there is no evidence of any such sale, a loss making venture for the Company.
5. Following the sale to Vijay Pulses, the Company ceased to trade.
6. Prashant agreed that this took place in the first few days of January 2018.

The Indian Government tariff

1. On 23 December 2017, only two days after the sale from Dracoma to the Company, the Indian government imposed a 30% and then 40% tariff on all imported chickpeas.
2. From the Company's point of view, this was a disaster.
3. By 4 January 2018, import duties totalling $521,455.56 has been imposed.
4. The Company also incurred charges such as insurance fees, and shipping, unloading, and warehousing costs.
5. Moreover, the chickpea market in India collapsed. Prashant said it had gone "from bad to worse" and market conditions "were not going to improve".
6. In his public examination, Prashant said that as a result of the imposition of the tariff "the buyer withdrew his interest" with the result that "we had no other way apart from letting the containers reach the shore and bring them back…"
7. In the circumstances I describe in more detail below, Prashant used the $614,000 paid to him by the Company between February and June 2018, to which I referred at [34] above, together with further funds, to make payments into India which he hoped would help progress the sale to Vijay Pulses.
8. Between June and December 2019, Vijay Pulses paid the Company some $1.2 million on account of the $2 million due under the contract between it and the Company. It is not clear how this came about, nor what role, if any, the payments made by Prashant referred to in the preceding paragraph had in achieving this result. I return to this below.

Insolvency from December 2017?

1. What all this shows is that, almost immediately after the date of the 2017 Agreement, 21 December 2017, the Company was in a parlous financial position.
2. The amount payable under the 2017 Agreement was due and payable.
3. The Company's ability to make any payment to Dracoma was solely dependent on completion of the sale to Vijay Pulses.
4. But the Company had entered into a loss making contract with Vijay Pulses. It was never in a position where it could meet all of its obligations to Dracoma from the proceeds of its on sale to Vijay Pulses.
5. To make matters worse, the imposition by the Indian Government of the tariff had the effect that the directors of the Company were not in a position to know, as at the end of December 2017, if and when completion of the sale to Vijay Pulses would take place. The directors thus did not and could not know if or when the Company would receive any payment for the chickpeas which, by then, were at sea, on the way to India.
6. The only means available to the Company was to endeavour to retrieve the stock from India.
7. Payment by the Company to Dracoma under the 2017 Agreement was due on delivery. [23] Delivery took place between 14 and 19 December 2017. The amount due was the $1,809,362.55. As and from delivery by Dracoma of the 2017 Crop to the Company in December 2017, the Company was in no position to pay for the 2017 Crop.
8. It is true that Mr Wheeler did not for some time take steps formally to press for payment. Dr Pandya said that Mr Wheeler started pressing him concerning payment in mid-2019.
9. But Mr Wheeler said, and I accept: "When I saw Dr Vijay on different times over the 18 months, or whatever it was, every time I saw him, [I said] 'When am I going to get paid? When am I going to get paid?'"
10. This should be seen in the context of the circumstances in which Dr Pandya, as Mr Wheeler's general practitioner, had introduced the Changela family to Mr Wheeler and of Dr Pandya's and Mr Wheeler's ongoing relationship as patient and doctor.
11. In these circumstances, I find that the Company was insolvent from shortly after delivery by Dracoma of the 2017 Crop: no later than 31 December 2017.

Failure to keep financial records

1. Having come to that conclusion, it is not necessary for me to deal with Dracoma's alternative submission that the Company was insolvent from in or about 1 July 2018 by reason of its failure to keep financial records. However, I will do so, albeit briefly.
2. Section 588E(4) of the Act provides that, subject to irrelevant exceptions, if a company fails to keep or retain financial records in relation to a period as required by s 286 of the Act, it is presumed to have been insolvent throughout that period.
3. Dr Greinke submitted that this presumption was not available to Dracoma because, by s 588E(1)(a), that presumption is available only for "an application under section 588FF by the [C]ompany's liquidator".
4. However, as I have discussed, the effect of s 100-5(4) of the IPSC is that where a right has been assigned by a liquidator under s 100-5, references in the Act to a liquidator are taken to be references to the assignee.
5. Section 286 of the Act provides that a company must keep written financial records that correctly record and explain its transactions and financial position and performance, and would enable true and fair financial statements to be prepared and audited.
6. The definition of "financial records" in s 9 of the Act is as follows: "… financial records includes: (a) invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and (b) documents of prime entry; and (c) working papers and other documents needed to explain: (i) the methods by which financial statements are made up; and (ii) adjustments to be made in preparing financial statements."
7. The records required to be kept under s 286 include a balance sheet, profit and loss statement and a cash flow statement. [24]
8. In order to establish the presumption of insolvency for a particular period, it must be proved either that no documents within the description of "financial records" were kept in that period or that the documents which were kept were "deficient as to content", because they did not correctly record and explain the company's transactions and financial position and performance, for example, because they did not accurately record the matters purportedly recorded, or would not enable true and fair financial reports to be prepared and audited. [25]
9. As I have said, the financial records of the Company were kept using MYOB software which was updated, on an ad hoc basis, by Rajan.
10. The Company, by its external accountant, did produce financial statements for FY17 and FY18, which recorded the Company's financial position as follows: 2018 2019 Assets Cash and cash equivalents $74,351 $1,009,315 Trade and other receivables - $136,668 Inventories $2,443,000 $218,000 Total Assets $2,517,351 $1,363,983 Liabilities Trade and other payables $1,643,336 $1,364,437 Borrowings $874,630 ($370) Total Liabilities $2,517,966 $1,364,067 Net Assets (Liabilities) ($615) ($84) Equity Accumulated losses ($615) ($84) Total Equity ($615) ($84)

1. Those records did not correctly record the financial position and performance of the Company.

Trade and other receivables

1. The Company's financial statements for FY18 record nil trade and other receivables. However, in the Company's general ledger, the sale of the 2017 Crop to Vijay Pulses was recorded as at 1 and 2 January 2018 in the sum of $2,002,948.40, and that the sum had not been paid.

Inventories

1. The only material asset of the Company recorded in the financial statements as at FY18 was said to be stock in hand to the value of $2,443,000. This stock would only have been the 2017 Crop which had by then been sold to Vijay Pulses.
2. Further, as I discuss below, the amounts comprising the $614,000 to which I have referred were recorded in the Company's general ledger as assets of the Company, with descriptions such as "overseas investment", "overseas transfer", and "India investment". In fact, at best, they comprised expenses of the Company.
3. In those circumstances, I am satisfied that as at 1 July 2018 the Company failed to keep and maintain financial records as required by s 286 of the Act and that the Company must be presumed to have been insolvent from that date.

Mr Vouris

1. Dracoma adduced evidence from the current liquidator of the Company, Mr John Vouris.
2. The bulk of Dr Greinke's submissions on the question of insolvency comprised criticisms of the evidence that Mr Vouris gave in his report and in cross-examination.
3. It is true that, during his cross-examination, Mr Vouris accepted that a number of the assertions made in his report could not be sustained.
4. Perhaps for that reason, Mr Laughton and Mr Hynes hardly mentioned the evidence of Mr Vouris in their closing submissions.
5. In view of the conclusions to which I have come, it is not necessary for me to consider Dr Greinke's criticisms of Mr Vouris's evidence, save to say that although, as Dr Greinke submitted, Mr Vouris did not conduct a cashflow analysis in support of his opinions concerning the solvency of the Company, the fact is that from December 2017 the Company had no cashflow.

The impugned payments

1. I turn now to the impugned payments.
2. In closing submissions, Mr Laughton and Mr Hynes challenged the payments set out at [34] above on one or more, but not necessarily all, of the bases referred to at [25] above.
3. There is no dispute that all the impugned payments were made before the relevant "relation-back day" which, it is common ground, was 23 December 2020. [26]

The payments made on 20 September 2017

1. On 20 September 2017, the Company paid $250,000 to each of Prashant and Dr Pandya's company, Vijay Pandya Pty Limited.
2. These payments appear to be repayment of corresponding amounts advanced by Prashant and Vijay Pandya Pty Limited to the Company a short time earlier, on 19 July 2017.
3. However, neither Prashant, nor Dr Pandya, gave evidence of the circumstances in which these payments were made. These loans were repayable whenever Prashant, Rajan, and Dr Pandya so determined. [27] By what process Prashant and Dr Pandya so determined on this occasion was not revealed in the evidence, apart from Prashant's glib assertion that the money "was not required".
4. Dracoma does not submit that the Company was insolvent at the time of these payments.

Unreasonable director related transaction?

1. The principal claim made by Dracoma in respect of these payments is that they constituted unreasonable director-related transactions.
2. A payment is an unreasonable director-related transaction for the purpose of s 588FDA of the Act if, and only if, relevantly: 1. it is a payment made by the Company; [28] 2. it is a payment made to: 1. a director of the Company; [29] or 2. a person on behalf of, or for the benefit of, a director; [30] and 1. it may be expected that a reasonable person in the Company's circumstances would not have made the payment having regard to the benefits, if any, to the Company, [31] the detriment to the Company, [32] the respective benefits to other parties of the payment, [33] and any other relevant matter. [34]
3. As the language of the section makes clear, the test is objective and requires consideration of the "totality of the business relationship between the parties, and to what the parties under their relationship intended to effect, and how their intention was effected, in part or in whole, by the impugned transaction". [35]
4. Where payments are made by the Company to persons closely associated with the Company, careful scrutiny of the transactions is required. [36]
5. These payments were made almost a month before Dr Pandya first approached Mr Wheeler in relation to the 2017 Crop.
6. However, the defendants admit on the pleadings that by no later than 22 July 2017, the Company had the intention of purchasing chickpeas from Dracoma and that the purchase of chickpeas was then within the contemplation of Prashant and Dr Pandya.
7. From July 2017, Prashant was communicating with growers, including Mr Wheeler, about the possibility of purchasing chickpea stock. On 18 September 2017, two days before the impugned payments, Prashant and Dr Pandya exchanged emails concerning the relevant trade index and the price at which the Company could sell chickpeas into India.
8. According to the Company's balance sheet, as at FY17, it had total assets of $1,363,983, with total liabilities of $1,364,067: a slight deficiency.
9. The Company's assets included cash at bank in the sum of a little over $1 million.
10. The effect of the impugned transactions was that the Company had $500,000 less in liquid funds to devote to the purchase of the 2017 Crop.
11. There is no evidence that Prashant or Dr Pandya gave any consideration as to whether the payments would have a negative impact on creditors of the Company, nor that they considered the financial ramifications to the Company in making these payments. The effect of the payments was that the only means that would be available for the Company to pay for the likely cost of purchase of the 2017 Crop would be the proceeds of its on sale.
12. In that regard, Prashant gave this evidence: "Q. Did you make the payments in consultation with your brother and Dr Pandya? A. Not with my brother, but yes, I would have consulted Dr Pandya. Q. The payments should have been - the fact of the matter was that in September 2017, you were approaching the harvest season, were you not? A. Yes, we were. Q. For chickpeas. You knew that the chickpeas were to be harvested in late 2017, correct? A. That is correct. Q. You knew that there was going to be a cost to purchase more chickpeas in late 2017, correct? A. That is correct, but there was no plan for the purchase. As mentioned earlier, there was a likelihood of an import tariff getting, getting put on by Indian government, so there was no-- Q. But you were still in the business of buying and selling chickpeas, irrespective of whether it was into India or not, weren't you? A. Yes, we were but we-- Q. And you were in a position where the company needed to buy stock in late 2017 for the purposes of carrying out its business, correct? A. We never intended to sell it to any other country apart from India or we never, never have."
13. Although Prashant said in this passage that there was "no plan for the purchase" of the 2017 Crop, the defendants have made the admission to which I have referred. Further, Prashant's evidence reveals that he knew of the possibility of the Indian government imposing an import tariff and thus must have known of the potential for difficulty in selling chickpeas to India.
14. In those circumstances, I am persuaded that it might be expected that a reasonable person in the Company's circumstances, and in the circumstances in which Prashant and Dr Pandya found themselves, would not have caused these payments to be made but would, rather, have left those funds in the Company in preparation for its purchase of the 2017 Crop. Contrary to Prashant's evidence, the funds were "required" by the Company for that purpose.
15. I find that these payments were unreasonable director-related transactions.

Breach of fiduciary duty?

1. Mr Laughton and Mr Hynes submitted that, for the same reasons, the making of these payments constituted a breach by Prashant and Dr Pandya of their fiduciary duty to the Company.
2. There is no dispute that, as directors, Prashant and Dr Pandya owed to the Company a fiduciary duty. Such a duty is proscriptive and is "not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict". [37]
3. I do not see how the decision by Prashant and Dr Pandya to cause the 20 September 2017 payments to be made could be seen as being a breach of fiduciary duty.
4. As Dr Greinke submitted, Mr Laughton's and Mr Hynes's submission implies a fiduciary duty owed to creditors, or a fiduciary duty not to repay loans to directors and related parties until all unrelated creditors are repaid. As Dr Greinke has submitted, no such duty, which appears to be one of self-sacrificing of the interests of related party creditors to prioritising unrelated creditors, appears in the authorities.

Uncommercial transactions or breach of general law duty?

1. Mr Laughton and Mr Hynes also challenged these payments on the basis that they were uncommercial transactions for the purpose of s 588FB of the Act. Mr Laughton and Mr Hynes did not elaborate on that submission, and I do not see that it takes matters any further.
2. The payments may also have been a breach of Prashant's and Dr Pandya's general law duty to have regard to the interests of creditors when the Company was, although perhaps not insolvent, in a delicate financial position. As at FY17, its liabilities exceeded its assets by small margin, [38] and the payments had the effect of stripping almost half of its most substantial asset, cash at bank, at a time when the Company would need to retain a degree of liquidity if it was to proceed to purchase chickpeas, as was then contemplated. However, again, this takes Dracoma no further than my earlier conclusion.

The 2018 payments

1. The payments made in 2018 fall into two categories.
2. The first category comprises the payments made by the Company on 9 January 2018 and 6 February 2018 to Vijay Pandya Pty Limited and Changela Food Pty Limited.
3. The second category of payments comprises the seven payments totalling $614,000 to which I have referred, [39] and which Prashant used to make payments to entities in India.

Unreasonable director related transactions?

1. Turning first to the payments made by the Company on 9 January 2018 and 6 February 2018 to Vijay Pandya Pty Limited and Changela Food Pty Limited, these payments were made immediately after the Company had found itself in the disastrous position that I have described following the imposition by the Indian Government of the 40% tariff on chickpeas imported to India.
2. It must have been obvious to both Prashant and Dr Pandya that, at the time of these payments, there was significant doubt as to if or when the Company would recover any of the $2 million that Vijay Pulses had contracted to pay the Company for the on-sale by the Company of the chickpeas it had purchased from Dracoma.
3. Again, there is no direct evidence of by what process Prashant and Dr Pandya decided to cause these payments to be made. Apart from their decision to cause the repayment, the Company was not otherwise obliged to do so. [40]
4. If ever there was a time for the Company to retain its cash reserves, this was it. The payments the Company made to Vijay Pandya Pty Limited and Changela Food Pty Limited were clearly, in my opinion, payments that it might be expected that a reasonable person in the Company's position would not have made.
5. Different considerations apply to the remaining 2018 payments, being the seven payments made by the Company to Prashant between 7 February 2018 and 19 June 2018, totalling $614,000. Prashant intended to use these payments in an endeavour to retrieve the situation with which the Company was faced by reason of the imposition of the Indian Government's 40% tariff.
6. Prashant deposed that these funds were transferred, over a number of months: 1. into his account with the Kotak Mahindra Bank account in India; 2. then from that account to the Kotak Mahindra Bank accounts of his father and mother; 3. then from his father's and his mother's accounts to accounts of three directors of Vijay Pulses, being three members of the Vikani family; and 4. then from the accounts of those individuals to the account of Vijay Pulses itself.
7. Prashant's explanation for this elaborate structure was: "In order to send money to India to pay the import duties and other charges, I arranged for monies to be paid from [the Company] to my Indian bank account which was a 'non-residential ordinary account' and 'non-residential external account' (NRO) which are special category account type [sic] designed for all previous Indian citizens who are now citizens of different country [sic] but still would like to have account [sic] in Indian bank."
8. That evidence does not entirely explain the payment structure adopted. Indeed, the evidence generally is unclear as to the circumstances of the payments.
9. Prashant claimed that the payments were made to satisfy liabilities in connection with the shipped chickpeas, but accepted that the Company had no liability to make these payments.
10. Prashant exhibited to his affidavit numerous documents to evidence the charges in respect of which these payments were made. They primarily comprised invoices directed to Vijay Pulses, such as Indian transportation container unloading and warehousing costs.
11. Although Prashant claimed that these payments were expenses of the Company, the Company's general ledger recorded the payments as assets and included descriptions such as "India investment" and "overseas investment".
12. Prashant deposed that: "I believed that I had to act quickly to avoid significant container holding and storage charges for uncleared import goods, and to avoid the risk of the uncleared shipment being destroyed by the Indian port authority."
13. Prashant deposed that the money was to pay "import duties and other charges".
14. There is no evidence of what communications took place between Prashant and any representative of Vijay Pulses about these funds although, in an email Prashant sent to Dr Pandya and Rajan on 3 January 2020, and to which I will return, he said that: "After this we sold 351 tonnes to my friend Vijay Pulses which was sitting at his place. He did not charge us rent or fumigation hence we will work out fare [sic] price for him which does not disadvantage both parties."
15. In closing oral submissions, Mr Laughton submitted that even if, as appears to be the case, Prashant was motivated to use these funds to try to salvage the Company's position in relation to the chickpeas sent to India, the transfer of these funds was not an informed decision and in effect amounted to throwing good money after bad.
16. However, Prashant said in cross-examination that the only alternative was to endeavour to retrieve the chickpeas and have them shipped back to Australia which, Prashant said, was not a realistic possibility.
17. Further, as Dr Greinke emphasised, Vijay Pulses ultimately did make the following payments to the Company:

• 5 June 2019 - $137,589.75
• 17 September 2019 - $206,123.75
• 11 November 2019 - $177,490
• 11 November 2019 - $132,243.75 [41]
• 2 December 2019 - $579,000 Total: $1,232,447.25

1. There is no direct evidence of any connection between the making of those payments by Vijay Pulses and Prashant's payment of the $614,000 paid to him to the Company.
2. However, it does appear reasonable to infer that there is some connection between the payments and that but for Prashant's payment of the $614,000, all or some of the funds ultimately paid to the Company by Vijay Pulses would not have been made.
3. In those circumstances, I am not persuaded that the payments made by the Company to Prashant, and which he used as I have described, should be characterised as unreasonable director related payments.

Payments made in breach of fiduciary duty?

1. For the same reasons I have set out concerning the 2017 payments, these payments were not made in breach of fiduciary duty.

The payment made on 19 February 2019

1. On 19 February 2019 the Company paid $90,000 to Vijay Pandya Pty Limited.

Unfair preference?

1. A transaction is an unfair preference for the purpose of s 588FA of the Act if, and only if, relevantly, it results in an unsecured creditor receiving more from a company than it would receive if the transaction were set aside and the creditor were to prove for the debt in the winding up of the company. [42]
2. It is common ground that assuming, as I have found, that the Company was now insolvent, this payment constituted an unfair preference, and is voidable.

Payment made in breach of directors' duties?

1. Mr Laughton and Mr Hynes sought to challenge this payment also on the basis that it "constituted a breach of directors' duties".
2. As I have said, Mr Laughton and Mr Hynes did not press Dracoma's claim that there had been an assignment to Dracoma of the Company's rights of action under ss 180, 181 and 182 of the Act. [43]
3. As to Dracoma's claim, as assignee from the Company, against Dr Pandya for breach of Dr Pandya's general law duty as a director to act in good faith and in the interests of the Company, the difficulty for Dracoma is that, as the payment constitutes an unfair preference and is voidable, the Company has suffered no loss. Dracoma, as assignee from the Company, cannot be in a better or different position.
4. Although Mr Laughton and Mr Hynes did not, in terms, make a submission concerning a breach of fiduciary duty in connection with this payment, such claim must fail for the reasons I have set out in relation to the earlier payments.

The payments made on 4 January 2020

1. On 4 January 2020, the Company made the following three payments: 1. $193,382 to Rajan; 2. $485,000 to Vijay Pandya Pty Limited; and 3. $106,618 to Prashant.

Unfair preferences?

1. It is common ground that, assuming, as I have found, that the Company was by now insolvent, these payments constituted unfair preferences.

Breach of directors' duties

1. These payments were made the day after the Prashant, Dr Pandya and Rajan email of 3 January 2020 to which I have referred.
2. That email included (errors in original): "All money as per our Invoice has been received in AU$, current balance is $905,000. We can take our money invested from Australia back now, so you can use it settle u claim of your supermarket losses, and we can use if for forbes. And remaining we will pay Bhavesh brokerage, software charges from india in cash and then work out whats left we can pay Alec. I understand he has been very patient and best person in this world to trust us, but we did everything we could to get most out of it, and comped unnecessary losses like special one etc… All remaining money still to come will have to first go into my dad a/c then we have to get Form 51 from CA from India and then go into Prashant/Rajan NRI account and then come back to Australia all legal process but as we all know in India nothing is straightforward so it all take time… … After all it was great disappointment after we all working so hard wasting so much time, energy, money, interest on our investment, etc we would like to at lest break even at end. Other hand if we don't take risk we don't progress, learn etc… So once this is all over and settled lets concentrate on something safe like building, if other gujarati's wants to come on board we buy more blocks if not we can do trial with 1 dual occupancy block etc…"
3. I agree with Mr Laughton and Mr Hynes that this email reveals "an entirely self-interested approach to the matter on the part of the directors". The email explained that, with these funds, Dr Pandya could settle his "supermarket losses", being losses in relation to an unrelated business venture. The email also recorded that Prashant and Rajan could "use it for Forbes", that is, in relation to the KFC business conducted by Changela Food at Forbes. Prashant then proposed that he would "then work out what's left we can pay Alec".
4. The email is consistent with Prashant's evidence in the examination proceedings in relation to the matter: "Q. Did you give any thought at this point in time - 4 January - to whether or not creditors should be paid ahead of yourself, your brother and Dr Pandya? A. Privilege. We are also one of the creditors."
5. However, as I have said, [44] Dracoma has not established an entitlement to the assignment of the Company's rights under ss 180, 181 and 182 of the Act.
6. And, assuming that Prashant, Rajan and Dr Pandya were acting in breach of their general law duties as directors, as the payments are voidable, the Company has suffered no loss and Dracoma, as assignee from the Company, can be in no better position. [45]

The claims under s 37A of the Conveyancing Act

1. In relation to all the impugned claims, Dracoma advanced a "further alternative" claim under s 37A of the Conveyancing Act, which provides that "every alienation of property … with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced".
2. To establish that any of the impugned payments constituted an alienation of property of the kind referred to in s 37A, it would be necessary for Dracoma to prove that the relevant mind and will of the Company, that is, Prashant and Dr Pandya, had the requisite intention.
3. What must be shown is "an intention to hinder, delay or defeat creditors and in that sense show that accordingly the debtor acted dishonestly"; and not necessarily an intention or purpose to cause the creditor to suffer a loss. [46]
4. As I have found that the 2017 payments and the 2018 payments to Vijay Pandya Pty Limited and Changela Food Pty Limited were unreasonable director-related transactions, and are thus voidable, and as it is common ground that the 2019 and 2020 payments constituted unfair preferences, [47] and are thus voidable, it is not necessary for me to address s 37A in the context of those payments.
5. However, I am not persuaded that Prashant had the requisite intention in making the seven payments in 2018 totalling $614,000. Those payments appear to have been made with the intention of securing a benefit for the Company rather than defrauding its creditors in the sense described in the authorities.

Conclusion

1. The parties should confer and endeavour to agree on any matters that remain for disposition and in relation to the orders necessary to give effect to these reasons.

Endnotes

1. This is not alleged in respect of payments on two of the four dates.
2. Not every one of these allegations is made in respect of every payment to every recipient; I discuss the detail below.
3. Schedule 2 to the Act.
4. Lifestyle Holdings Australia & New Zealand Pty Ltd, in the matter of Re Venice Lane Pty Ltd (in liq) v Wu [2023] FCA 795 at [20] (Button J) ("Lifestyle Holdings").
5. Lifestyle Holdings at [21].
6. See, for example, Elfic Ltd v Macks [2003] 2 Qd R 125 at 166-168; [2001] QCA 219 at [199]-[206] (Davies JA, Cullinane J agreeing); Anderson v Canaccord Genuity Financial Ltd (2023) 113 NSWLR 151 at 208; [2023] NSWCA 294 at [229] (Gleeson, Leeming and White JJA); Re Italiano Family Fruit Company Pty Ltd (in liq) (2010) 190 FCR 474 at 483-486; [2010] FCA 1355 at [33]-[44] (Finkelstein J); H2 Migration & Education Pty Ltd v Gu [2023] WASC 199 at [74]-[80] (Seaward J).
7. As was held in Lifestyle Holdings at [21].
8. [2014] NSWSC 789 ("Colorado Products").
9. Ibid at [344]-[346].
10. [2013] WASC 183.
11. Ibid at [885]-[916].
12. Colorado Products at [346].
13. See, for example, Schlegel v Gourmania Holdings Pty Ltd [2019] WASC 277 at [235] (Allanson J); In the matter of ACN 091 518 302 Pty Ltd (In Liquidation) (formerly Pinnacle Investments Pty Ltd) [2019] VSC 699 at [193] (Connock J); Kitay v Frigger [2022] WASC 284 at [132] (Hill J); Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Ltd (2018) 339 FLR 35 at 386-7; (2018) 58 VR 1 at 31; [2018] VSC 633 at [92]-[93] (Connock J); Barre v Barre [2021] FamCA 101 at [193] (Harper J); Galati v Deans [2021] NSWSC 1094 at [642] (Ward CJ in Eq (as the President then was)); Anderson v Canaccord Genuity Financial Ltd [2022] NSWSC 58 at [1243] (Ward CJ in Eq (as the President then was)); Anderson v Canaccord Genuity Financial Ltd (supra) at [229] (Gleeson, Leeming and White JJA); Lottah Mining Pty Ltd (in liq) v Summers [2024] VSC 47 at [32] (Goulden AsJ).
14. Colorado Products at [390]-[404].
15. Cant, in the matter of Novaline Pty Ltd (in liq) [2011] FCA 898.
16. Although only the former was pleaded, see [99] of Dracoma's List Statement: a point not taken by Dr Greinke.
17. Referring to Colorado Products at [403]-[404].
18. See [20] above.
19. Deputy Commissioner of Taxation v Austin [1998] FCA 1034; (1998) 28 ACSR 565 at 570 (Madgwick J) ("Austin"); cited with approval by Black J in Alora Davies Developments 104 Pty Ltd (in liq) v Raphael [2024] NSWSC 547 at [84] ("Alora Davies").
20. Austin at 569; Alora Davies at [84].
21. Austin at 570; Natcomp Technology Australia Pty Ltd v Graiche [2001] NSWCA 120 at [13] (Stein JA, Spigelman CJ and Heydon JA agreeing).
22. Sale of Goods Act 1923 (NSW), s 31.
23. See [173] above.
24. See, for example, In the matter of Lawrence Waterhouse Pty Ltd (in liq) - Shaw v Minden Pty Ltd [2011] NSWSC 964 at [235] (Ward J, as the President then was), citing ASIC v ABC Fund Managers Ltd (No. 2) [2001] VSC 383 at [44].
25. See, for example, Woodgate v Fawcett [2008] NSWSC 868 (Hammerschlag J, as the Chief Judge in Equity then was); In the matter of SSET Construction Pty Ltd (in liq) - Sims v Khattar [2010] NSWSC 102 (Austin J); Fisher v Divine Homes Pty Ltd; Allen v Harb [2011] NSWSC 8 at [24] (Barrett J).
26. See ss 588FE(4) and (6A) of the Act.
27. See [116] above.
28. Section 588FDA(1)(a)(i) of the Act.
29. Section 588FDA(1)(b)(i) of the Act.
30. Section 588FDA(1)(b)(iv) of the Act.
31. Section 588FDA(1)(e)(i) of the Act.
32. Section 588FDA(1)(c)(ii) of the Act.
33. Section 588FDA(1)(c)(iii) of the Act.
34. Section 588FDA(1)(c)(iv) of the Act.
35. Featherstone v Ashala Model Agency Pty Ltd (in liq) [2018] 3 Qd R 147; [2017] QCA 260 at [125] (Morrison JA); citing Cussen v Sultan [2009] NSWSC 1114 at [23] (Nicholas J).
36. See, for example, Woodgate v Fawcett (supra) at [105], citing McDonald v Hanselmann (1998) 144 FLR 463 at 470 (Young J).
37. Breen v Williams (1996) 186 CLR 71 at 113 (Gaudron and McHugh JJ); [1996] HCA 57 at [41].
38. See [234] above.
39. At [35], [186] and [212] above.
40. There is no evidence of any prior payment by Changela Food Pty Limited to the Company, such that the payment to Changela Food Pty Limited on 6 February 2018 could be considered repayment of a loan.
41. Prashant deposed that this payment was on 11 November 2018, rather than 2019; it is agreed this was a typographical error.
42. Section 588FA(1) of the Act.
43. See [86]-[87] above.
44. See [86]-[87] above.
45. See [276] above.
46. Marcolongo v Chen (2011) 242 CLR 546 at 558; [2011] HCA 3 at [32] (French CJ, Gummow, Crennan and Bell JJ).
47. Assuming, as I have found, insolvency at the relevant times. 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: 21 February 2025