First Plaintiff v First Defendant

CORPORATIONS - Voidable transactions - Unfair preferences - Uncommercial transactions - Whether group of transactions made within short timespan can lead to conclusion that each single transaction is an insolvent transaction - Whether transactions were for a creditor-defeating purpose - Defences not made out - Corporations Act 2001 (Cth), ss 588FA, 588FB, 588FC, 588FE, 588FF, 588FG.

CORPORATIONS - Duties of directors - Duty of care and diligence breached - Duty to act in good faith in best interests of the company breached - No breach of duty to act for a proper purpose - Defences not made out - United Petroleum Pty Ltd v Herbert Smith Freehills [2018] VSC 347 - Corporations Act 2001 (Cth), ss 180, 181, 1318.

EQUITY - Resulting trust - Whether the contribution to purchase price of a property was made with the company's own funds - Constructive trust - Whether the contribution to improvement of property was made with the company's own funds - Alternative claim for money had and received.

1 This case concerns claims by the plaintiffs against:

(a) The first and second defendants, for insolvent trading and breach of directors' duties;

(b) The third, fourth and fifth defendants, for transactions which are alleged to be voidable; and

(c) The sixth defendant, for equitable relief in respect of approximately $1.7 million in contributions to a property owned by the sixth defendant.

2 The defendants deny all claims made against them.

3 The factual matters involved in this case are complex and many of the key facts are disputed.

4 This case concerns the company A.C.N. 602 135 446 Pty Ltd (ACN 602 135 446), formerly known as Minc Sallon (Laverton) Pty Ltd ('MSL'), which is now in liquidation.

5 Philip Newman ('Newman') is the liquidator of MSL, having been appointed by order of this Court on 30 January 2019. He is the first plaintiff in this proceeding.

6 MSL is the second plaintiff in the proceeding. From 27 April 2015 to around 5 June 2017, MSL was the registered proprietor of the property at 4 Leakes Road, Laverton ('Laverton Property'). The Laverton Property was sold at auction on 11 April 2017 for $2.7 million. At settlement on 5 June 2017, after satisfaction of MSL's debt as mortgagee to Westpac and selling costs, MSL received net sale proceeds in the sum of $1,347,854 ('Net Sale Proceeds').

7 Brett Douglas Hartwig ('Hartwig') was a director of MSL from 2 October 2014 until MSL was wound up on 30 January 2019. He is the first defendant in the proceeding. Hartwig is/was also a director of the following entities which are relevant to this proceeding:

(a) Berkeley Capital Partners Pty Ltd ('BCP') from 24 April 1997. BCP is the third defendant in the proceeding;

(b) Sallon Pty Ltd ('Sallon') as trustee for the Sallon Pension Fund from 7 June 1995. Sallon is the fourth defendant in the proceeding and is a shareholder of MSL as to 24 out of 120 shares. Hartwig, with his wife Christine Hartwig, is a shareholder of Sallon. Sallon holds 50% of the shares in BCP;

(c) East Brunswick Operations Pty Ltd ('East Brunswick Operations') from 24 February 2014;

(d) Kanyon Pty Ltd ('Kanyon'), from 28 February 2012 to 17 March 2017. Kanyon is not a party to the proceeding;

(e) Armidale Nominees Pty Ltd ('Armidale'); and

(f) Trimont Australia Pty Ltd ('Trimont Australia'), a company which subsequently changed its name to Cornonero Pty Ltd, from 15 September 2015 to 20 November 2016.

8 Richard Charles Minc ('Minc') was also a director of MSL from 2 October 2014 until MSL was wound up on 30 January 2019. He is the second defendant in the proceeding. Minc is also:

(a) a shareholder of MSL jointly with his wife, Susan Minc, as to 96 out of 120 shares;

(b) a director of Aida Nominees Pty Ltd ('Aida Nominees') from 29 June 1972 and a beneficial shareholder of Aida Nominees jointly with his wife, Susan Minc. Aida Nominees is the fifth defendant in the proceeding; and

(c) a director of Armidale.

9 Armidale is the trustee of the Armidale Unit Trust. Armidale, in its capacity as trustee of the Armidale Unit Trust, is the sixth defendant in the proceeding. It is also the registered proprietor of 124 Taylor Street, Armidale, in the state of New South Wales, more properly described in Certificate of Title folio identifier 2/524804 ('Armidale Property').

10 Cameron Bailey Hunter ('Hunter') is not a party to the proceeding. He is/was:

(a) a director of Kanyon from 28 February 2012 to 20 July 2013, and from 17 March 2017;

(b) together with his wife, Natalie Ann Hunter ('Natalie Hunter'), trustee of the CB and NA Hunter Family Trust ('Hunter FT'), which trust, inter alia, holds 50% of the shares in BCP and is a shareholder in Kanyon; and

(c) a director of BCP from 31 December 2010 to 14 February 2019.

11 Bailey Hunter ('Bailey Hunter') is Hunter's father and he is also not a party to the proceeding. He has been a director of Kanyon since 28 February 2012.

12 Silvio Ascenzo ('Ascenzo') is not a party to the proceeding. He is/was a director of the following entities which are relevant to this proceeding:

(a) Kanyon, from 22 February 2012 to 1 May 2016;

(b) Ascenzo Investments Pty Ltd ('Ascenzo Investments');

(c) Trimont Pty Ltd ('Trimont'). Trimont was a building company which, inter alia, worked on a number of building projects of which Kanyon was the developer;

(d) Trimont Australia, from 1 June 2015;[1] and

(e) Armidale, from 14 April 2016 to 13 May 2016.

13 Peter Breckenridge ('Breckenridge') is not a party to the proceeding. He is/was:

(a) a director of Kanyon, from February 2012 to 23 July 2012, and from 10 March 2016 to 17 March 2017;

(b) employed as the general manager of Trimont from around 2011 to about 2015;

(c) the CEO of Trimont Australia; and

(d) a director of Armidale.

14 As noted above, Kanyon is not a party to the proceeding. It was formed in 2012 for property investment and development purposes.

(a) At the relevant time, the shareholders of Kanyon were:

(i) Sallon as trustee of the Hartwig Family Trust, as to 2 out of 12 shares;

(ii) Hunter and his wife Natalie Hunter as trustees for the Hunter FT, as to 2 out of 12 shares;

(iii) Wickley Nominees Pty Ltd ('Wickley'), a company related to Bailey Hunter and to his brother, Warwick Hunter, as to 4 out of 12 shares; and

(iv) Ascenzo Investments, as to 4 out of 12 shares.

(i) Hartwig, from 28 February 2012 to 17 March 2017;

(ii) Bailey Hunter, from 28 February 2012;

(iii) Hunter, from 28 February 2012 to 20 July 2013, and from 17 March 2017;

(iv) Ascenzo, from 22 February 2012 to 1 May 2016; and

(v) Breckenridge, from 28 February 2012 to 23 July 2012, and from 10 March 2016 to 17 March 2017.

15 Minc Sallon (Dandenong) Pty Ltd ('MSD') is not a party to the proceeding. Its directors are Hartwig and Minc. Sallon owns 24 of the 120 shares in MSD, and Minc (with his wife Susan Minc) owns 96 of the 120 shares in MSD.

16 On 5 September 2013, Kanyon and Trimont entered into the following construction agreements:

(a) For a project at Murray Valley Highway, Barnawartha, also known as the Wodonga Logic Centre project ('Wodonga Project'); and

(b) For a project at 787 Hunter Street, Newcastle, NSW ('Newcastle Project').

17 On 11 August 2014, a certificate of compliance was issued for the Wodonga Project.

18 In August 2014, Ascenzo made a statutory declaration on behalf of Trimont, stating that all contractors for the Wodonga Project had been paid.

19 On 22 April 2015, the sum of $1,216,898.63 was transferred from MSL's bank account to the Carroll & O'Dea Lawyers trust account for the purchase of the Armidale Property ('Armidale Payment'). Carroll & O'Dea Lawyers were dealing with the conveyancing for the purchase.

20 On 24 April 2015, Armidale settled on the purchase of the Armidale Property and was registered as proprietor on 4 May 2015.

21 On 27 April 2015, MSL became registered proprietor of the Laverton Property.

22 Trimont Australia was registered on 1 June 2015.

23 In June 2015, Trimont sold its business, which included the projects it was then building for Kanyon, to Trimont Australia pursuant to a business sale agreement.

24 On 26 June 2015, Kanyon and Trimont Australia entered into a building contract.

25 In July and October 2015, Ascenzo and Breckenridge made statutory declarations stating that all contractors for the Newcastle Project had been paid.

26 On 1 December 2015, a loan of $600,000 from Hunter, alternatively Hunter and Natalie Hunter as trustees for the Hunter FT, was agreed to be made to MSL ('Hunter Loan').

27 On 3 December 2015, the Hunter Loan was paid into MSL's bank account.

28 On 18 March 2016, Hartwig and Hunter met at Giorgios in Malvern ('Giorgios Meeting'). The events of that meeting are in dispute.

29 On 10 April 2017, Horwood Nominees Pty Ltd ('Horwood Nominees') paid the sum of $400,000 by bank cheque to MSD which was deposited into MSD's bank account on the following day.

(a) Aida Nominees paid $200,000 to MSL; and

(b) $255,000 was paid by MSL to MSD.

(a) Aida Nominees paid $200,000 to MSL; and

(b) $200,000 was paid by MSL to MSD.

32 Also on 11 April 2017, the Laverton Property was sold by MSL at auction for $2,755,000. This sale settled on 5 June 2017.

33 From the Net Sale Proceeds, the following amounts were paid by MSL:

(a) $25,000 to Sallon on 6 June 2017 ('First Sallon Payment');

(b) $75,000 to East Brunswick Operations, at the direction of Sallon, on 6 June 2017 ('EBO Payment');

(c) $410,922.27 to Horwood Nominees on 6 June 2017 ('Horwood Payment');

(d) $400,000 to Aida Nominees on 6 June 2017 ('6 June Aida Payment');

(e) $1,100 to Sallon on 23 June 2017 ('23 June Sallon Payment');

(f) $20,541.98 to Sallon on 29 June 2017 ('29 June Sallon Payment'); and

(g) $240,000 to Aida Nominees on 30 June 2017 ('30 June Aida Payment').

34 On 22 August 2017, Hunter commenced proceeding CI-17-03879 in the County Court of Victoria against MSL for recovery of the Hunter Loan ('County Court Proceeding'). Hunter and Natalie Hunter in their capacity as trustees of the Hunter FT were subsequently added as plaintiffs.

35 The trial of the County Court Proceeding commenced on 16 May 2018 and was adjourned part heard after 4 days. Hartiwg was joined as second defendant on 21 May 2018.

36 In June 2018, the Newcastle Project was completed by ProCon Builders.

37 On 1 October 2018, the trial of the County Court Proceeding resumed.

38 On the following day, 2 October 2018, final orders were made by consent in the County Court Proceeding against MSL in favour of the Hunters for the sum of $600,000 ('Sum Order') plus interest of $168,986 ('Interest Order') and costs to be taxed on an indemnity basis in default of agreement ('Costs Order'), with the proceeding otherwise dismissed (together 'County Court Final Orders').

39 On 30 January 2019 ('Appointment Date'), this Court made orders in proceeding S ECI 2018 02680 that Newman be appointed as liquidator of MSL. The winding up of MSL pursuant to s 513A of the Corporations Act 2001 (Cth) ('Act') commenced on that date. The relation-back day in respect of MSL pursuant to the Act is 11 December 2018 ('Relation-Back Day').

40 The current pleadings in respect of the proceeding are:

(a) The plaintiffs' second amended statement of claim dated 28 September 2023 ('Statement of Claim');

(b) The second amended defence of Hartwig, BCP and Sallon dated 21 August 2023 ('Hartwig Parties Defence');

(c) The second amended defence of Minc and Aida Nominees dated 21 August 2023 ('Minc Parties Defence');

(d) The amended defence of Armidale dated 12 October 2020 ('Armidale Defence'); and

(e) The plaintiffs' reply dated 26 October 2020 ('Reply').

41 In many instances in the below discussion of the pleadings, I refer to the defendants collectively. This is done as a matter of convenience and so as not unnecessarily to lengthen the discussion, but it should be noted that in a number of instances, not all defendants actually make those pleadings as the allegations do not necessarily concern all of them all of the time.

42 What follows is a summary of key aspects of the pleadings. Where necessary, additional detail will be set out when each of the claims are discussed later in these reasons.

43 The plaintiffs allege that pursuant to s 588FE(4) of the Act, the relevant period for recovery of voidable transactions involving related parties is four years ending on the Relation-Back Day, being 12 December 2014 to 11 December 2018. The defendants admit this relevant period but otherwise do not admit this allegation.

44 The plaintiffs allege that pursuant to s 588FE(5) of the Act, the period for recovery of voidable transactions in respect of transfers to defeat creditors is 12 December 2008 to 11 December 2018. The defendants admit this relevant period but otherwise do not admit this allegation.

45 The plaintiffs allege, and the defendants admit (insofar as the allegation is made against them), that Hartwig, Minc, BCP, Sallon and Aida Nominees are related entities of MSL pursuant to s 9 of the Act.

46 The plaintiffs allege that the Net Sale Proceeds were used to pay, among other things:

(a) statutory obligations to the Australian Taxation Office in the sum of $78,634.20;

(b) a debt owed by MSL to BCP, satisfied by way of the Horwood Payment at the direction of BCP, in order to satisfy a debt owed by BCP to Horwood Nominees;

(c) loans provided to MSL by director-related entities to acquire the Laverton Property, satisfied in part or in full by payments totalling $711,507.36, comprising:[2]

(i) the First Sallon Payment;

(ii) the EBO Payment, at the direction of Sallon;

(iii) the 6 June Aida Payment and the 30 June Aida Payment, both in partial repayment of an outstanding loan account payable by MSL (together, the 'Aida Nominees Payments').

47 The plaintiffs allege that after accounting for the payments referred to in the preceding paragraph and other incidental payments made by MSL, the remaining surplus of the Net Sale Proceeds in the sum of $50,134.62 ('Surplus Payment') was distributed to or for the benefit of Sallon. The Surplus Payment is alleged to comprise:

(a) the 23 June Sallon Payment;

(b) the 29 June Sallon Payment; and

(c) the sum of $28,492.64, which is the difference between the EBO Payment of $75,000 and the amount which MSL's books and records stated at the time as being a debt owed by MSL to Sallon of $46,507.36. In circumstances where the EBO Payment exceeded the debt owed by MSL to Sallon, the balance of the payment comprising the EBO Payment was surplus funds belonging to MSL.

48 I interpose here to note that a total of $121,641.98 is alleged by the plaintiffs to have been paid from the Net Sale Proceeds to or for the benefit of Sallon ('Total Sallon Payment'). It is convenient to describe it in these terms for much of this judgment, however, it will need discussion and refinement later in these reasons.

49 In respect of the allegations referred to in paragraphs 46 and 47 above, the defendants admit (in paragraph 13 of their respective defences) that from the Net Sale Proceeds, MSL made the following payments totalling the sum of $1,248,564.25:

(a) the Horwood Payment;

(b) the First Sallon Payment;

(c) the EBO Payment;

(d) the 23 June Sallon Payment;

(e) the 29 June Sallon Payment;

(f) the sum of $76,000 to the Australian Taxation Office; and

(g) the Aida Nominees Payments.

50 In their particulars to paragraph 13 of their respective defences, the defendants say that:

(a) The payments from the Net Sale Proceeds were made in circumstances where MSL was not liable to repay, and Hartwig and Minc did not believe MSL was liable to repay, the Hunter Loan and where Hunter, alternatively the Hunter FT, was not a creditor of MSL. In their Reply, the plaintiffs deny these allegations.

(b) The purpose of the Horwood Payment was to discharge MSL's liability to repay a loan from Horwood Nominees in the sum of $400,000.

(c) The First Sallon Payment and the EBO Payment were in part for the purpose of discharging MSL's liability to repay a shareholder loan owing to Sallon, and in part a loan of monies from MSL which Sallon then loaned to East Brunswick Operations. In their Reply, the plaintiffs plead that MSL was not liable to repay a shareholder's loan to Sallon and that MSL did not loan the sum of $75,000 to Sallon who then loaned it to East Brunswick Operations.

(d) The Aida Nominees Payments were made in part for the purpose of discharging MSL's liability to repay a shareholder loan to Aida Nominees and in part a distribution of profit to shareholders. In their Reply, the plaintiffs plead that MSL was not liable to repay a shareholder's loan to Aida Nominees as Aida Nominees was not a shareholder, and MSL was not entitled to distribute profits to Aida Nominees as it was not a shareholder.

(e) The 23 June Sallon Payment was a management fee paid by MSL to Sallon for bookkeeping, invoicing and property management. In their Reply, the plaintiffs plead that Sallon was not entitled to any management fees from MSL.

(f) The 29 June Sallon Payment was a profit return to Sallon as a shareholder.

51 The plaintiffs allege that the Horwood Payment, the Total Sallon Payment and the Aida Nominees Payments were each unfair preferences and/or uncommercial transactions, and are voidable. In respect of the Total Sallon Payment and the Aida Nominees Payments, the plaintiffs also allege that they were transfers to defeat creditors and are voidable. The defendants deny these allegations.

B.2 MSL's alleged interest in the Armidale Property

52 The plaintiffs allege that the Armidale Payment was a contribution to the purchase of the Armidale Property such that a resulting trust in favour of MSL arises. They also allege that some $550,000[3] was contributed by MSL to Armidale for demolition works at the Armidale Property ('Demolition Payment'), giving rise to a constructive trust in favour of MSL.

53 The defendants deny these claims, saying, inter alia, that the Armidale Payment was not made from MSL's own money and that there was no Demolition Payment made by MSL.

B.3 Allegations against Hartwig and Minc for insolvent trading

54 The plaintiffs allege that between 1 December 2015 and the Appointment Date, MSL incurred debts to several creditors and which debts remained outstanding at the date of liquidation ('Debts'). The Debts are alleged to be owed to:

(a) Hunter, alternatively Hunter and Natalie Hunter in their capacity as trustees of the Hunter FT in the amount of $600,000 (that is, the Hunter Loan), incurred on 1 December 2015. Alternatively, the plaintiffs claim the same amount was a debt incurred on 2 October 2018 when the Sum Order was made;[4]

(b) Hunter, and Hunter and Natalie Hunter in their capacity as trustees of the Hunter FT in the amount of $168,986 incurred on 2 October 2018 (that is, the Interest Order); and

(c) Hunter, and Hunter and Natalie Hunter in their capacity as trustees of the Hunter FT for the legal costs of the County Court Proceeding (that is, the Costs Order), to be taxed but estimated to be approximately $200,000, incurred on 2 October 2018.

55 The plaintiffs allege that these Debts were incurred at a time when MSL was insolvent or, alternatively, MSL became insolvent because of matters including the incurring of each of these Debts, or incurring debts including each of these Debts.

56 Hartwig and Minc admit that on or about 1 December 2015, Hunter, alternatively Hunter and Natalie Hunter as trustees for the Hunter FT, entered into the Hunter Loan, being a short-term loan with MSL for $600,000, but say that MSL ceased to be liable to repay the Hunter Loan on or about March or April 2016 as a consequence of an agreement whereby it became a liability of Kanyon ('Replacement Agreement'). The alleged Replacement Agreement is disputed by the plaintiffs, and more will be said about this later.

57 Insofar as it is alleged MSL incurred the Hunter Loan on 1 December 2015, Hartwig and Minc plead that:

(a) It was not incurred at a time when MSL was insolvent and MSL did not become insolvent because it incurred the alleged debt.

(b) Hartwig and Minc had reasonable grounds to expect, and did expect, MSL was solvent and would remain solvent even if it incurred that debt or any other debts which it incurred at that time.

(c) Further and in the alternative, by reason of the Replacement Agreement, MSL was not liable to repay the Hunter Loan because it became a liability of Kanyon.

(d) Hartwig and Minc had reasonable grounds to expect, and did expect, Hunter, alternatively Hunter and Natalie Hunter as trustees for the Hunter FT, was/were not a creditor of MSL from March or April 2016 at the time when the transactions referred to in paragraphs 46 and 47 above were made.

58 Hartwig and Minc admit that the County Court Final Orders were made but plead that those orders included a stay on the payment of $600,000 and $168,986 for 30 days. In Reply, the plaintiffs acknowledge this stay on enforcement but plead that the Interest Order and the Costs Order were debts incurred by MSL on 2 October 2018.[5]

59 Hartwig and Minc deny that the County Court Final Orders were debts incurred by MSL on 2 October 2018 for the purposes of s 588G of the Act. They say that if the County Court Final Orders were debts incurred by MSL, then:

(a) they deny those debts were incurred at a time when MSL was insolvent; or

(b) alternatively, they say MSL did not become insolvent because of matters including each of the Sum Order, the Interest Order or the Costs Order.

60 The plaintiffs allege that from 10 December 2015 until the Appointment Date, MSL was unable to pay all its debts as and when they became due and payable, and was insolvent within the meaning of s 95A(2) of the Act.

62 The plaintiffs allege that at the time when each of the Debts were incurred:

(a) There were reasonable grounds for suspecting that MSL was insolvent or would become insolvent by incurring each of the Debts or incurring debts including each of the Debts.

(b) Hartwig and Minc were each aware that there were reasonable grounds for suspecting that MSL was insolvent or would become insolvent by incurring each of the Debts or incurring debts including each of the Debts.

(c) Further or alternatively, a reasonable person in a like position to that of Hartwig and Minc in a company in MSL's circumstances would have been aware that there were reasonable grounds for suspecting that MSL was insolvent or would become insolvent by incurring each of the Debts or incurring debts including each of the Debts.

63 Hartwig and Minc deny this allegation. They say that if the Interest Order and Costs Order are debts incurred by MSL, they had reasonable grounds to expect and did expect that MSL was solvent at the time those debts were incurred and would remain solvent even if it incurred them. They say the same in respect of the Hunter Loan. Further and alternatively, Hartwig and Minc say they had reasonable grounds to believe and did believe that a competent and reliable person was responsible for providing MSL with adequate information about whether it was solvent and that the person was fulfilling that responsibility. They say that they expected, on the basis of the information provided to MSL, that it was solvent at the relevant time and would remain solvent even if it incurred the Debts. The person said to be relied upon in this regard is HLB Mann Judd.

64 The plaintiffs allege that Hartwig and Minc have each contravened s 588G of the Act in respect of the incurring of each of the Debts. They also allege that the persons to whom each of the Debts are owed have suffered loss and damage in relation to each of the Debts because of MSL's insolvency and each of the Debts were wholly unsecured when the loss and damage was suffered.

66 The plaintiffs allege that pursuant to s 588M of the Act, Newman is entitled to recover compensation, as a debt due to MSL, from Hartwig and Minc in an amount equal to the loss and damage arising from the Debts being incurred and which compensation is in the sum of $968,986.

67 Hartwig and Minc deny these allegations, save that they admit that a liquidator is entitled to recover compensation under s 588M of the Act.

B.4 Alleged breaches of directors' duties by Hartwig and Minc

68 The plaintiffs allege that each of Hartwig and Minc, by causing MSL to enter into the Total Sallon Payment and the Aida Nominees Payments, and by causing MSL to make the contributions to the Armidale Property, contravened the duties owed by them as directors to MSL under ss 180 - 184 of the Act.

70 As against Hartwig and Minc, the plaintiffs seek:

(a) a declaration that Hartwig and Minc have contravened s 588G of the Act, and an order directing Hartwig and Minc to pay compensation in the sum of $968,986 to the plaintiffs pursuant to s 588M of the Act; or

(b) alternatively, a declaration that Hartwig and Minc have contravened ss 180(1), 181(1), 182, 183 and 184 of the Act, and a compensation order pursuant to s 1317H of the Act.

(a) an order pursuant to s 588FF(1)(a) of the Act directing BCP to pay MSL an amount of $410,922.27 (being the Horwood Payment); or

(b) alternatively, an order pursuant to s 588FF(1)(c) of the Act that BCP pay to MSL an amount that, in the Court's opinion, fairly represents the benefits BCP received because of the Horwood Payment.

(a) an order pursuant to s 588FF(1)(a) of the Act directing Sallon to pay MSL an amount of $121,641.98 (being the Total Sallon Payment); or

(b) alternatively, an order pursuant to s 588FF(1)(c) of the Act that Sallon pay to MSL an amount that, in the Court's opinion, fairly represents the benefits Sallon received because of the Total Sallon Payment.

(a) an order pursuant to s 588FF(1)(a) of the Act directing Aida Nominees to pay MSL an amount of $640,000 (being the Aida Nominees Payments); or

(b) alternatively, an order pursuant to s 588FF(1)(c) of the Act that Aida Nominees pay to MSL an amount that, in the Court's opinion, fairly represents the benefits Aida Nominees received because of the Aida Nominees Payments.

(a) a declaration that MSL has a resulting trust over the Armidale Property to the extent of its contribution to the purchase price of $1,216,898.63 (being the Armidale Payment); and

(b) a declaration that MSL has a constructive trust over the Armidale Property to the extent of its contributions to improvements to the Armidale Property in the sum of $550,000 (being the Demolition Payment); or

(c) alternatively, an order that Armidale pay MSL the sum of $1,774,898.63 within 30 days of the Court's order; and

(d) upon default of payment of the sum of $1,774,898.63 in accordance with that order, an order that the Armidale Property be sold forthwith and that sum be paid to MSL from the net proceeds of sale.

75 As against all of the defendants, the plaintiffs seek interest pursuant to statute from the date of the winding up, alternatively on some other basis, and costs.

76 The following persons were called as witnesses by the plaintiffs:

(a) Newman;

(b) Hunter; and

(c) Robyn Erskine ('Erskine'). Erskine is a registered liquidator and trustee in bankruptcy. She was retained by the plaintiffs to provide expert evidence.

77 Each of these witnesses made affidavits prior to the trial of the proceeding. At trial, the plaintiffs relied on the following affidavits of Newman and Hunter:

(a) affidavit of Newman affirmed 19 December 2019;

(b) affidavit of Newman affirmed 11 February 2022;

(c) affidavit of Hunter sworn 11 February 2022 ('First Hunter Affidavit');

(d) reply affidavit of Hunter sworn 11 March 2022 ('Second Hunter Affidavit');

(e) second reply affidavit of Hunter sworn 11 March 2022; and

(f) third reply affidavit of Hunter sworn 21 September 2023.

78 At trial, the plaintiffs relied on two reports of Erskine dated 22 October 2021 ('First Erskine Report') and 21 March 2023 ('Second Erskine Report').

79 The following persons were called as witnesses by the defendants:

(a) Hartwig;

(b) Minc;

(c) Ascenzo;

(d) Breckenridge;

(e) Brodie Ryan ('Ryan'). At the time, Ryan was an employee of BCP; and

(f) Michael Smith ('Smith'). Smith is a chartered accountant.

80 Each of these witnesses made affidavits prior to the trial of the proceeding. At trial, the defendants relied on the following affidavits of:

(a) Hartwig, affirmed 28 February 2022 ('First Hartwig Affidavit');

(b) Hartwig, affirmed 22 April 2022 ('Second Hartwig Affidavit');

(c) Minc, sworn 17 August 2023;

(d) Hartwig, affirmed 25 August 2023 ('Third Hartwig Affidavit');

(e) Breckenridge, sworn 25 August 2023;

(f) Ascenzo, affirmed 25 August 2023 ('Ascenzo Affidavit'); and

(g) Ryan, affirmed 25 August 2023.

81 At trial, the plaintiffs relied on two reports of Smith dated 22 June 2021 ('First Smith Report') and 11 August 2023 ('Second Smith Report').

82 Prior to each witness being called, objections to aspects of their affidavits were heard and determined. The court book, which contained all of the affidavits relied upon, was subsequently updated so as to contain the post-objection versions of the affidavits, which versions were subsequently adopted by the witnesses.

83 An expert valuation of the Laverton Property prepared by Joe Phegan of Savills Valuations Pty Ltd dated 22 June 2021 ('Savills Valuation') for the defendants was also in evidence, however, Mr Phegan was not required to attend the trial and give evidence.

84 On the ninth day of the trial, the defendants sought leave to rely on the affidavit of Frederick Leonard Horwood affirmed 6 October 2023 ('Horwood Affidavit'). The Horwood Affidavit concerned circumstances regarding the Horwood Payment and the making of the facility agency agreement between Horwood Nominees and BCP. I refused to grant such leave and gave short reasons, ex tempore, for that ruling. At that time, I indicated that I would include more fulsome reasons in this judgment, but having reviewed the transcript of my short oral ruling I do not consider it necessary to say anything further about it, other than to reiterate that my reasons for refusing the application were not based on the plaintiffs' contention that the defendants had breached their overarching obligations under the Civil Procedure Act 2010 (Vic).

85 Throughout the trial, the court book was supplemented with additional documents as agreed by the parties or as ruled upon by me. All documents in the court book to which I was taken in opening submissions or which were put to witnesses were treated as tendered unless an objection to them was successfully made. Following the close of evidence, the parties provided an updated court book.

86 The defendants submitted that the plaintiffs' failure to call Bailey Hunter should result in the Court making the usual Jones v Dunkel[6] inference. They say that Bailey Hunter took part in a number of relevant events and that apart from anything else, he would have been able to give evidence regarding Kanyon's accounts, in particular those he signed. The defendants submit that the plaintiffs' failure to call him as a witness is unexplained other than by Hunter's assertions regarding Bailey Hunter's medical condition. The defendants did not make any other submissions in respect of the Jones v Dunkel inference they invited me to make, being the inference that the uncalled evidence would not have assisted the plaintiffs.

87 I found Newman to be a truthful witness. He readily acknowledged that Hunter is funding this proceeding and that Hunter provided materials to him, but he did not appear to have been unduly influenced by Hunter in the way he has conducted the proceeding.

88 The defendants submit that Hunter has pursued Hartwig relentlessly, and that during his evidence Hunter expressed strong views about Hartwig, accusing him on multiple occasions of dishonesty and worse. The defendants' written closing submission contains an annexure listing instances of these alleged accusations. The defendants submit that Hunter's evidence needs to be considered carefully in light of the obvious animosity felt towards Hartwig.

89 It was clearly the case, as Hunter acknowledged, that he and Hartwig had once been close but they had now fallen out. The defendants attempted to portray him, and get him to concede, that he was out for retribution and that this was motivating him to pursue this case (through the liquidator). Hunter denied this. In doing so, I think he downplayed the animosity (or as he put it, disappointment) he had towards Hartwig, and I am in little doubt that he does bear animosity towards Hartwig. At the very least, there have been other legal proceedings between them both in this court and the County Court, and in his evidence Hunter accused Hartwig of placing his signature on certain documents without his authorisation.

90 The plaintiffs acknowledge that Hunter appeared at times to be advocating for his position, but say that this is understandable given Hunter's beliefs about Hartwig's management of Kanyon and the multiple court proceedings they have been involved in which have all settled in favour of Hunter or his entities. The plaintiffs submit that the defendants' attempts to discredit Hunter as a witness by portraying him as having a vendetta against Hartwig merely exposed the valid reasons Hunter has to hold his beliefs about Hartwig's conduct.

91 There are some instances where I did not find Hunter's evidence to be particularly convincing. For example, his evidence on when he first noticed Loan 9[7] (which is said to represent the Hunter Loan) in Kanyon's accounts was vague and inconsistent. This will be dealt with later, but I think it is likely that he noticed Loan 9 earlier than he said but did not want to concede that he had.

92 Hunter was not a dispassionate non-party in this proceeding. He has a direct interest in the outcome of the proceeding given that he (or the Hunter FT) is the only remaining creditor of MSL. He is also, as set out above, antagonistic to Hartwig.

93 For these reasons, I have approached his evidence cautiously, weighing it against the contemporaneous documents and the other oral evidence.

94 Notwithstanding this caution, on the key matters of the terms of the Hunter Loan, the existence of the Replacement Agreement, and the conversations he had with Hartwig on these matters, Hunter's evidence was consistently given and appeared truthful. On these matters, Hunter's evidence was more plausible than that of Hartwig.

95 Erskine made concessions where appropriate and sought to assist the Court.

96 At times, Erskine appeared to be trying to find a basis to adhere to the opinions expressed in her reports in the face of alternate propositions put to her. This was particularly evident in respect of matters such as whether to take account of the fact that no demand for payment of the Hunter Loan had been made when carrying out the solvency analysis. On this, Erskine kept retreating to the date when it was due to be paid. Nonetheless, I do not think this detracted from her evidence.

97 I would describe Hartwig as having given his oral evidence carefully, in that he appeared to have a narrative and to take care to give evidence that was consistent with that narrative. That is not to say that the narrative was necessarily false, just that Hartwig had one and he was doing his best to stick with it. So much so that when inconsistent statements made elsewhere or other materials suggesting something else were put to him, if he could not dispute these outright, he then wove them into his narrative, regardless of their plausibility. The content and circumstances of the Replacement Agreement, which I will discuss in detail later, are a prime example of this.

98 I did not find Hartwig to be a particularly convincing witness, as he left me with the impression of someone who was tailoring his evidence to suit his case.

99 I agree with the plaintiffs' submission that Hartwig was at times evasive and non-responsive by providing vague speeches as answers which did not really relate to the questions, and that he changed his evidence when confronted with conflicting material.

100 Minc did not appear to have a strong recollection of details. I accept that this was likely a product of a number of things, such as:

(a) his lack of involvement in the day-to-day activities of the companies of which he was a director, in particular, MSL;

(b) his reliance on Hartwig to manage MSL's affairs and to inform him of key matters, such that in a number of respects it was not so much not recalling details but never knowing them in the first place;

(c) the amount of time which has passed since the relevant events; and

(d) his current illness and treatment. While there was no medical evidence in respect of the latter, he was not challenged on it and I have no reason not to accept what he said about this.

101 Minc appeared to give his evidence honestly and to the best of his recollection.

102 Despite the problems with his memory, where he and Hartwig differ on particular matters and in the absence of contemporaneous documents to support Hartwig's position, I prefer Minc's evidence over Hartwig's. This is for the reasons set out above regarding Hartwig, and also because Minc's evidence came across as more genuine and less self-serving than that of Hartwig.

103 Ascenzo was a poor witness. He obfuscated quite a bit, had a poor recollection of detail, was unclear in many of his answers, and gave a number of conflicting answers over the course of his cross-examination.

104 Ascenzo appeared to be careful not to give answers that contradicted his claims and his evidence in a separate proceeding which Ascenzo Investments has brought against Kanyon, Hunter and others in this Court, bearing matter number S ECI 2022 02319 ('Ascenzo Proceeding').[8] I had the impression that he was tailoring his evidence in this proceeding to make sure it conformed with the Ascenzo Proceeding.

105 It is difficult to fully assess Breckenridge as a witness as he was not challenged a great deal on cross-examination. Rather, quite a bit of his cross-examination was taken up with putting his statements and evidence from previous proceedings in which he was a party to him and confirming that the statements and evidence were correct. I can only assume that the plaintiffs' counsel took this approach because this evidence supported (or was consistent with) aspects of the plaintiffs' case.

106 At times, Ryan appeared to be trying to protect Hartwig. For example, a number of times he was asked where he obtained instructions to make various journal entries in the accounts, and he said he could not recall, however, each time when pressed he had to concede that his instructions came from Hartwig. It is perhaps natural that he would want to protect his employer (and now co-director of BCP), however, it does detract a little from his credibility.

107 Apart from this, he appeared to give evidence truthfully. However, I accept the plaintiffs' submission that Ryan had no direct knowledge of the matters in dispute. Hence his evidence carries little weight.

108 Smith was appropriately careful in his answers, including by making sure he understood the questions and any assumptions he was to make correctly. He did appear, at times, to be trying to find a basis to adhere to the opinions expressed in his reports. Nonetheless, Smith made concessions where appropriate.

109 There are a number of key events or factual matters which were hotly disputed and that are necessary to make findings about, as they impact the analysis of the plaintiffs' claims in this proceeding.

110 It is convenient to deal with each of those factual matters in turn.

111 There are aspects of the Hunter Loan which are not disputed, but other aspects are.

112 It is not in dispute that there was a telephone call between Hunter and Hartwig on 1 December 2015 in which Hartwig requested that Hunter lend $600,000 to MSL. Hunter and Hartwig both say that Hartwig said it would be a short-term loan of five business days at an interest rate of 10%.

113 It is also not in dispute that after this telephone call, Hartwig sent an email to Hunter at 3:26pm on 1 December 2015 which stated as follows:

Just a short note to confirm the details of the following short term loan to Minc/Sallon which will support/offset the Funds as currently lent by that entity into Trimont Australia Pty Ltd.

Details remain:-

Amount: $600,000

Term: Should be no longer than 5 Business days.

Interest Rate: 10% (This is as per arrangements between being paid by Trimont to Minc Sallon) ...

114 It is common ground that on 3 December 2015, $600,000 was paid into MSL's bank account by way of two payments of $300,000 from two different Westpac accounts. Hunter says that these accounts were in the name of Hunter and Natalie Hunter. Hartwig says that the funds were from Hunter's entity Oscar Management Pty Ltd. In this regard, the documentary evidence supports Hunter's version regarding the accounts, but I do not think anything much turns on this. There is no dispute that the loan was with Hunter or one of his entities and that the money was advanced by him or one of his entities.

115 It appears to be common ground that the Hunter Loan was due to be repaid on 10 December 2015.

116 There are many aspects, particularly in respect of the content of the discussion between Hunter and Hartwig on 1 December 2015, which are in dispute.

117 Hunter's evidence is that Hartwig told him that MSL had paid a number of creditors on behalf of Trimont Australia, that Geoff Brady who was the majority owner of Trimont Australia had failed to put in place working capital facilities in order to fund that business and he knew Hartwig was a director of Trimont Australia. Hartwig told him that he was waiting for some bank guarantees to be put in place in order to provide that working capital facility and that he had made arrangements for MSL to pay creditors of Trimont Australia. Hartwig told him that once the bank guarantees were in place, Trimont Australia would be able to repay MSL and in return MSL would repay Hunter. Hartwig mentioned 10 per cent interest and that it would probably be in the order of five days for that facility to be put in place and therefore the loan would be short term. Hunter's evidence is that he agreed to these terms.

118 Hartwig's evidence is that he asked Hunter to assist by paying MSL $600,000 as MSL had advanced amounts in excess of $600,000 on behalf of Kanyon to Trimont, Trimont Australia and their creditors in relation to Kanyon's Newcastle Project. He told Hunter that this would be a loan via MSL. He told Hunter that the funds should be repaid within about 5 days because he believed that when Trimont Australia provided replacement security for Trimont's building contract retention sums, Trimont would receive back the retention monies of about $600,000. Once that occurred, the Trimont retention monies could be released by Kanyon and available to repay MSL, which would then repay Hunter. Hunter agreed to make the payment of $600,000. He asked Hunter to pay to MSL amounts that had been or were committed to be paid out of MSL's bank account in order to pay on behalf of Trimont and Trimont Australia and then be repaid once Trimont and Trimont Australia received funds due to them and repaid MSL.

119 Hartwig's evidence is that the first paragraph of his email to Hunter of 1 December 2015 (see paragraph 113 above) was expressed poorly - he says that the words "which will support/offset the Funds as currently lent by that entity into Trimont Australia Pty Ltd" referred to payments made to subcontractors of Trimont and Trimont Australia by MSL to keep the Kanyon projects moving, and that it was these loans which would be partly offset by the amount of $600,000.

120 From this, it can be seen that the key points of difference between Hartwig and Hunter as to the contents of their 1 December 2015 telephone conversation about the Hunter Loan are:

(a) whether Hartwig said that MSL had lent money to Trimont and Trimont Australia (Hartwig's version) or only to Trimont Australia (Hunter's version);

(b) whether Hartwig said that MSL had made these payments on behalf of Kanyon (Hartwig's version) or had not mentioned Kanyon at all (Hunter's version);

(c) whether retentions were mentioned as being the source of repayment (Hartwig's version) or retentions were not mentioned at all (Hunter's version).

121 Hunter's evidence is that he knew, because Hartwig had told him, that by December 2015, Trimont was in a poor financial position; Trimont had no capacity to earn income to be able to repay MSL, and its business had been sold to Trimont Australia. In his affidavit, he stated that if Hartwig had mentioned to him that MSL had advanced funds to Trimont, he would not have been comfortable that the loan would be repaid. In cross-examination, he was adamant about this, stating that he was comfortable with being repaid by Trimont Australia as he knew Geoff Brady was behind it and that it would soon have its working capital facility in place, but he would not have been comfortable that Trimont would be able to repay him. On the other hand, Hartwig's oral evidence was that he mentioned both Trimont and Trimont Australia to Hunter during the call. Hartwig also denied telling Hunter that Trimont was in a poor financial position, he says that it just had some cash flow issues.

122 I prefer Hunter's evidence to Hartwig's in relation to the content of the 1 December 2015 telephone call in respect of these three disputed aspects about the Hunter Loan, for the following reasons:

(a) Hunter's evidence that Trimont was not mentioned in that conversation was much more convincing than Hartwig's evidence to the contrary. It is also consistent with the content of Hartwig's subsequent email to Hunter. Hartwig's attempt under cross-examination to explain away his failure to mention Trimont (or Kanyon, for that matter) in that email was both unconvincing and self-serving. Hartwig's attempted deflection of having told Hunter that Trimont was in a poor financial position by referring only to cash flow problems was consistently made by him during cross-examination but is inconsistent with prior statements Hartwig had made about Trimont. For example, during cross-examination, Hartwig confirmed that in mid-2015 various subcontractors of Trimont were yet to be paid for works completed by them. When asked whether he believed at the time that Trimont was experiencing "financial difficulties", Hartwig instead insisted that Trimont was merely experiencing "cashflow problems". However, when shown contradictory statements in an affidavit affirmed by him in the County Court Proceeding, Hartwig admitted that he had previously deposed that he believed, in about 2015, that Trimont was experiencing financial difficulties. While Hartwig went on to clarify that Trimont's financial difficulties "were in relation to its cashflow", he also suggested that the reason Trimont sold its projects to Trimont Australia was because it "didn't have the working capital to be a builder and a developer". Hartwig's obfuscation and reluctance to describe what was clearly established on the facts, that Trimont was experiencing financing difficulties and in a poor financial position, renders his evidence on the topic unconvincing.

(b) Hunter's evidence that retentions were not mentioned in that conversation was also more convincing than Hartwig's evidence to the contrary. While I will deal with the issue of retentions in more detail later, I do not find it plausible that Hartwig linked the repayment by Kanyon to Trimont of the retentions with how MSL and then Hunter was to be repaid in that telephone call. It is significant that there is no mention of the issue in Hartwig's subsequent email to Hunter. The defendants sought to make much of the fact that when Hartwig sent that email to Hunter, it was as a forwarding of an email from the Commonwealth Bank of Australia ('CBA') to Hartwig, notifying him that the paperwork was prepared for the bank guarantees to be made by GB Autos Pty Ltd (one of Geoff Brady's entities) which would secure Trimont Australia's working capital facilities with Westpac. The defendants also sought to make much of the fact that the forwarded email from the CBA was not included by Hunter in his affidavit evidence. In cross-examination, it was put to Hunter that because of this email, he knew that the retentions were part of the arrangement due to the reference to a bank guarantee, which he denied. He stated that the email from the CBA demonstrated to him that arrangements were being made for Trimont Australia's working capital facilities. It is important here not to confuse or conflate two sets of bank guarantees which were under discussion at this time. The first set of bank guarantees were those referred to above from CBA to secure Trimont Australia's working capital facilities it was establishing with Westpac. The second set of bank guarantees were to be subsequently issued by Westpac as replacement security for the retention sums. I do not accept the interpretation sought to be given to the CBA email by the defendants - it says nothing about the bank guarantees for the retention sums. Hunter's interpretation was far more consistent with the email and the arrangements being put in place. The defendants are attempting to draw a long bow here and it is not a plausible contention.

(c) For the same reasons, I do not accept that Hartwig made the statements he says he did in this conversation about Kanyon. There simply would have been no need for Kanyon to have even been mentioned.

(d) Hunter was cross-examined about all of these aspects and his denial of Hartwig's version was convincing and consistently given.

123 There also appears to be some dispute, or possibly confusion, as to who actually lent the Hunter Loan. As noted above, in the First Hartwig Affidavit, Hartwig says that he asked Hunter for the loan and that Hunter agreed, but he does not specifically say who the lender was. In the same affidavit, he says that the funds were received from Hunter's entity Oscar Management Pty Ltd. He also says in that affidavit that after the Replacement Agreement was entered into (more about that later), the Hunter Loan was shown in Kanyon's financial statements and records as a loan owed by Kanyon to Hunter FT as loan number 9 from the Hunter FT ('Loan 9'). The defendants also sought to make something of the fact that in the County Court Proceeding, Hunter was initially the plaintiff claiming repayment of the Hunter Loan from MSL but he and Natalie Hunter in their capacity as trustees for the Hunter FT were later added as plaintiffs, with the alternative claim being that the Hunter Loan was to be repaid to the Hunter FT. On the other hand, Hunter consistently maintains, in his affidavit and oral evidence, that he personally was the lender of the Hunter Loan. Hunter was challenged in cross-examination about the fact that in the County Court Proceeding he had initially sworn an affidavit saying that the money he advanced to MSL had come from another account (not the two Westpac ones) in the name of Oscar Management Pty Ltd, one of his investment companies, which it now seems was incorrect. Hunter admitted it was incorrect and said he had assumed the money had come from that bank account because of a form he had found when preparing that affidavit, but now knows it was not correct. He remained adamant throughout his cross-examination that he personally had lent the money to MSL, not the Hunter FT. In cross-examination, he maintained that a number of the Hunter FT loans to Kanyon listed in Kanyon's financial statements and records were not necessarily made by the Hunter FT and that some were made by him or other of his entities. He said that this was just how it was recorded. It is unclear to me whether this issue has any particular significance, apart perhaps from questions to do with the Replacement Agreement (which I shall address later). It seems to me that the Hunter Loan was either made by Hunter personally or by him (and Natalie Hunter) for the Hunter FT, and that the plaintiffs' claims against the defendants in respect of the Hunter Loan do not require an answer on that, their claims having been put in the alternative anyway.

124 In terms of demands for repayment of the Hunter Loan, Hunter's evidence is that he discussed the loan with Hartwig on a number of occasions throughout 2016 but he did not make a formal demand for payment until around April and/or May 2017 and that he did not make a written demand until 9 June 2017. He says that when he discussed it with Hartwig in early 2016 he was reassured that Trimont Australia's working capital facilities were being put in place and so he was not too concerned about the repayment. Hunter said that Hartwig managed a number of loans for him prior to then, most of which typically would not be paid within the terms of the loan agreements, but he had not defaulted on any loans at that point in time. Hartwig says that Hunter never raised the Hunter Loan with him in 2016.

125 Hunter's evidence is that he found out that MSL had put or was putting the Laverton Property on the market in around April 2017 and that he telephoned Hartwig about it. He says he told Hartwig that he was concerned about being repaid the Hunter Loan by MSL if it no longer had the Laverton Property, as he believed the loan was secure while MSL had a property. Hunter says that in response Hartwig told him that it made no difference to Hunter's position as it would just mean that MSL would have the money in its bank account instead of in the property, so it would not change MSL's ability to repay the Hunter Loan. Hartwig says this conversation never occurred.

126 Hunter's evidence is that at some time in May 2017 after the Laverton Property had been sold, he spoke to Hartwig again and told him he wanted to be repaid the $600,000. Hartwig concedes that this conversation occurred.

127 It was not disputed that the building contracts between Kanyon and Trimont in respect of the Wodonga and Newcastle projects contained standard form provisions in respect of retention monies. If security in the form of bank guarantees was not provided, then Kanyon was entitled to withhold from each payment made on a progress claim an amount of 5% by way of a retention sum. When the project reached practical completion Kanyon would have to pay to Trimont half of the retention sum (ie, 2.5% of the building costs), followed by the other half of the retention sum once the defects liability period had expired.

128 It also seems to be common ground that under the business sale agreement between Trimont and Trimont Australia, Trimont Australia purchased the Newcastle retention. Therefore, Kanyon owed the Newcastle retention to Trimont Australia after that time, not Trimont.

129 Most other matters concerning the retentions appear to be in dispute.

130 A source of puzzlement for me during the trial was what I was expected to make of the issues regarding the retentions, including how it was said that they were relevant. On a number of occasions, I indicated that at some point the parties would need to make clear submissions about the retentions.

131 Despite the numerous references in the defences and in Hartwig's evidence to the retention sums for the Wodonga and Newcastle projects, the defendants have not presented a coherent explanation of these either from a factual perspective or in terms of their impact on the claims made against them. Both parties spent a great deal of time at trial cross-examining witnesses about the retention sums. It is telling that the defendants' written closing submission mentions the retentions only once, and then only in passing, and there were no mentions of retentions in the defendants' oral closing address.

132 The plaintiffs' submissions suggest that the defendants rely on the retentions for two matters, which are possibly related. The first is as an intended source of repayment of the Hunter Loan, and the second is as part of the rationale or justification for the Replacement Agreement.

133 In respect of the retentions, the plaintiffs submit as follows:

(a) Kanyon did not owe Trimont any retention for the Newcastle project in December 2015 or March 2016. The Newcastle retention was purchased by Trimont Australia under the business sale agreement and was owed to Trimont by Trimont Australia.

(b) In September/October 2015, Trimont received the benefit of the Newcastle retention by Trimont Australia paying Trimont's creditors, at the request of Ascenzo.

(c) Contrary to the affidavit evidence of Hartwig and Ascenzo, both knew by December 2015, and in any case, prior to March 2016, that the Newcastle retention had been paid by Trimont Australia to Trimont, by paying third party debts owed by Trimont.

(d) Contrary to his affidavit evidence, Hartwig knew by March 2016 that Kanyon owed the Newcastle retention to Trimont Australia, not Trimont.

(e) Any retention Kanyon owed Trimont for the Wodonga Project had been accounted for in the Ascenzo Investments/Kanyon loan ledger[9] before the alleged Replacement Agreement in March 2016.

(f) Contrary to the evidence of Hartwig and Ascenzo, both knew the Wodonga retention had been accounted for in the AI/Kanyon Ledger by 12 February 2016 at the latest.

(g) There was no reason to delay repayment of the Hunter Loan because, according to Hartwig, Trimont Australia's working capital became available in late December 2015 by way of the bank guarantees and Westpac facility in the amount of $4.7 million. The bank guarantees to replace the retentions were issued in early 2016, but Trimont Australia had funds to pay Trimont the retentions just before Christmas in 2015. By contrast, Hartwig's affidavit evidence was that during the March 2016 meeting with Hunter, Geoff Brady was yet to provide the bank guarantees. Hartwig's explanation of the inconsistency was unhelpful and vague, and did not explain why the proposed repayment had not occurred by the end of December 2015. This was not clarified in re-examination.

(h) Further, Hartwig and Ascenzo were directors of Kanyon at the end of 2015 and beginning of 2016. Hartwig gave evidence that neither caused Kanyon to make the Newcastle retention payment to Trimont Australia after the replacement bank guarantees were in place. However, Kanyon's bank statements show two payments to Trimont Australia in late December 2015, totalling $225,000 which Hartwig could not explain and which the plaintiffs submit may represent part payment of the retention to Trimont Australia.

134 I accept the plaintiffs' submissions in respect of the Wodonga and Newcastle retentions. In particular, I find it implausible that the Wodonga and Newcastle retentions were intended to be, or were factually able to be, a source of funds to repay the Hunter Loan. It is also implausible to suggest that there was to be a series of transactions which would result in MSL receiving the amount of the retentions and using it to repay the Hunter Loan.

135 Put another way, for the repayment of the cash retentions to be a source of MSL repaying the Hunter Loan, transactions in relation to the retentions would have to have resulted in a flow of cash that ended up with MSL. As at about 1 December 2015:

(a) if Kanyon had to pay Trimont Australia the Newcastle cash retentions (not Trimont) upon provision of the bank guarantees, then was that going to result in a flow of funds to MSL? This is unlikely, since if Trimont Australia had to pay the Newcastle retention to Trimont, then the September 2015 letters from Ascenzo to Trimont Australia directing which of his creditors Trimont Australia should pay instead of repaying amounts owed to Trimont, which included the Newcastle retention, then there would be no flow of funds to MSL;

(b) if Kanyon had to pay Trimont the Wodonga cash retention (upon provision of the bank guarantee by Trimont Australia or otherwise), then this would not result in a flow of funds to MSL to repay the Hunter Loan. As at the end of November 2015, the AI/Kanyon Ledger recorded AI as owing $595,184.84 to Kanyon. How can it seriously be suggested that Kanyon would have paid the Wodonga retention to Trimont in cash when AI owed Kanyon more than the amount of that retention? Rather, the relevant parties would have done what actually appears to have happened (on 1 February 2016), and enter the Wodonga retention as a credit to AI in the AI/Kanyon Ledger, thus reducing the overall amount owed to Kanyon.

136 The same can be said as at 18 March 2016, the date of the Giorgios Meeting.

137 As mentioned above, Hartwig and Minc allege that in or about March or April 2016, MSL ceased to be liable to repay the Hunter Loan because it became a liability of Kanyon, pursuant to what they refer to as the Replacement Agreement. The circumstances leading up to and of the Replacement Agreement are alleged as follows:

(a) between on or about 10 November 2015 and 2 December 2015, MSL made payments totalling $1,517,611.42 to creditors and sub-contractors of Trimont, to Trimont Australia, and to creditors and sub-contractors of Trimont Australia, in relation to building projects undertaken by Kanyon in Victoria and NSW (the Wodonga Project, the Newcastle Project, and the South Melbourne Project);

(b) during that time, Hunter was an officer of Kanyon and he and Natalie Hunter were shareholders of Kanyon, and were aware of these building projects;

(c) the payments were made by MSL because Trimont and Trimont Australia were unable to pay their creditors and sub-contractors in relation to Kanyon's building contracts;

(d) by a shareholders agreement dated 2012, it was agreed that the shareholders of Kanyon must ensure there was sufficient working capital to conduct Kanyon's building projects and that Hunter and Natalie Hunter must contribute to the conduct of Kanyon's building projects by providing capital as required;

(e) on or about 1 December 2015, MSL requested a short term loan of $600,000 from Hunter for the purpose of supporting or offsetting payments made by MSL to creditors and sub-contractors of Trimont and Trimont Australia;

(f) when requesting the loan, Hartwig told Hunter that Trimont Australia would soon be in a position to provide bank guarantees to Kanyon as replacement security for cash retention monies held by Kanyon as security for Trimont's obligations as builder for the Wodonga Project and outgoing builder for the Newcastle Project, and that once this occurred Trimont would be entitled to be paid those cash retention monies by Kanyon, which Trimont would then use to repay MSL, so that MSL could repay the $600,000 loan in 3 to 5 days;

(g) on 2 December 2015, MSL made payments on behalf of Kanyon to two creditors of Trimont and/or Trimont Australia;

(h) on or about 3 December 2015, Hunter, alternatively Hunter and Natalie Hunter, paid the amount of $600,000 to MSL;

(i) the payment of $600,000 was to be for a term of no longer than five business days at an interest rate of 10% per annum in accordance with arrangements between Trimont, Trimont Australia, Kanyon and MSL relating to the payment of interest. This is the Hunter Loan;

(j) by an agreement made in about March and April 2016 between Kanyon, Hunter, Hunter and Natalie Hunter and MSL, namely the Replacement Agreement, it was agreed that:

(i) the Hunter Loan would be repaid to Hunter and Natalie Hunter by Kanyon, who would replace MSL as borrower of the $600,000 from the date the amount was paid by the Hunters; and

(ii) in consideration of Kanyon agreeing to be liable for the Hunter Loan, Hartwig would procure Ascenzo's resignation as a director of Kanyon and the transfer of shares in Kanyon held by Ascenzo Investments to the other shareholders of Kanyon, and payments totalling $624,563.68 made by MSL to creditors of Trimont would be entered into the AI/Kanyon Ledger to the credit of Trimont; and

(k) pursuant to the Replacement Agreement, Ascenzo ceased to be a director of Kanyon on 1 May 2016 and a transfer of shares in Kanyon was obtained from Ascenzo Investments.

138 In the First Hartwig Affidavit, Hartwig says that at one of his and Hunter's regular breakfast catch up meetings at Giorgios restaurant in Malvern in March 2016 (ie., the Giorgios Meeting), Hunter asked for confirmation of how the $600,000 was to be repaid. Hartwig said he explained to Hunter that it would happen through the following steps:

(a) Geoff Brady would provide security to support a bank guarantee to replace the retentions held by Kanyon, on behalf of Trimont/Ascenzo and enable the release of those retentions, which were in excess of $600,000;

(b) Kanyon would repay Trimont the retentions it held for the Newcastle and Wodonga projects;

(c) Trimont would repay MSL for advances MSL had made to assist Trimont; and

(d) MSL would then repay Hunter.

139 Hartwig's affidavit evidence is that Hunter then asked him why they could not do this an easier way, by Kanyon repaying him directly. Hartwig said he had no problem with direct repayment by Kanyon. Hartwig says he then discussed it with Ascenzo and Breckenridge and they agreed. Hartwig says he instructed Ryan to account for it accordingly and told Minc of the proposed arrangement, and that Minc said he had no issue with that arrangement.

140 Hartwig's oral evidence is consistent with this affidavit evidence.

141 In his affidavits and oral evidence, Hartwig does not say that the concept of Ascenzo resigning as a director of Kanyon and transferring Ascenzo Investments' shares in Kanyon to its other shareholders was discussed at the Giorgios Meeting. In his oral evidence, he says that the prospect of this happening was first raised in May 2016.

142 In cross-examination, Hartwig said that Minc was aware of the Hunter Loan and the Replacement Agreement, and that when they got the written demand from Hunter's lawyers in June 2017, he told Minc it was not payable. He said that he did not tell Minc that the $600,000 had just passed through MSL's bank account.

143 Minc's evidence is that he knew nothing about the Hunter Loan or the Replacement Agreement until well after the fact, in mid-2017. In his affidavit, he said that Hartwig told him in mid-2017 that money had passed through MSL's bank account and that about $600,000 had been used to pay creditors associated with Hunter or one of his developments. Hartwig told him that it was something to do with helping one of Hartwig's and Hunter's projects. Minc said his understanding was that the money simply passed through MSL's bank account and did not concern MSL as MSL's account was merely used as a conduit. Minc's oral evidence was consistent with this account.

144 Ascenzo's affidavit evidence is that in about early April 2016, he met with Hartwig to discuss payment of the retention monies owed by Kanyon and repayment of MSL for the creditor payments it had made in late 2015. He says that Hartwig told him that:

(a) he had met with Hunter and Hunter had agreed that Kanyon could replace MSL as the company that had borrowed funds from Hunter in December 2015 to assist with the payments to subcontractors on Kanyon's Wodonga and Newcastle Projects;

(b) the payments by MSL to those creditors would be entered in the AI/Kanyon Ledger as advances made by Kanyon to Ascenzo's group; and

(c) the retention monies owed by Kanyon to Trimont would be offset against the running balance of that ledger.

145 Breckenridge's affidavit evidence is that around early 2016 he was present during a discussion between Hartwig and Ascenzo where they were discussing the retention monies owed to Trimont being used to pay money back to MSL for money that MSL had paid out in late 2015 relating to the emails Breckenridge had sent about paying Twisse and Straightline.[10] Breckenridge says that in about April 2016, he was a director of Kanyon, and he had a discussion with Hartwig, who told him that Hunter was on board with Kanyon replacing MSL as the company that had to repay him the $600,000 he had advanced in early December 2015. Breckenridge thought it was fine and that it seemed an easier way to manage the repayment so that the money did not need to be transferred multiple times.

146 In the First Hunter Affidavit, Hunter accepts that he met with Hartwig on 18 March 2016 at Giorgios restaurant in Malvern, but says that they did not discuss the Hunter Loan. Hunter says that he did not say that in his capacity as lender he would agree to Kanyon being substituted for MSL as the borrower or that he would do so on condition that Ascenzo sign over his shares and resign from his position as director of Kanyon. Hunter says that he never said any words to that effect to Hartwig, or at all. In the Second Hunter Affidavit, filed in response to the First Hartwig Affidavit, Hunter specifically denies Hartwig's account of the Giorgios Meeting. Hunter's evidence in his fourth affidavit is that after that meeting and on the same day, he received three emails from Hartwig: the first attaching monthly financials for the BCP entities; the second attaching some revisions to those documents; and the third attaching Trimont Australia's accounts and reporting package for the board meeting of the previous week.

147 Hunter's oral evidence was consistent with this. He also said that he would not have agreed to Kanyon replacing MSL as borrower because at the time Trimont owed Kanyon money, around $1.5 million, and it would not have made sense to agree to that given Trimont probably could not pay Kanyon what it owed. I accept Hunter's evidence that it made no commercial sense for him to have agreed to Kanyon replacing MSL as borrower under the Hunter Loan. His evidence in this regard was convincing.

148 As can be seen, the evidence relied upon by the defendants regarding the entry into and terms of the Replacement Agreement is both internally inconsistent and is also inconsistent with their pleaded defence. By way of example:

(a) Hartwig's evidence in this proceeding does not link the Replacement Agreement with Ascenzo's resignation/share transfer regarding Kanyon;

(b) Hartwig's evidence in the Ascenzo Proceeding tells quite a different story about the genesis of the Separation Agreement[11] as pleaded in that proceeding, which has nothing to do with Kanyon replacing MSL as borrower under the Hunter Loan;

(c) Ascenzo's evidence is also not fully consistent with Hartwig's (especially their evidence in the Ascenzo Proceeding as to the terms of the Separation Agreement - see below); and

(d) Hartwig says he told Minc about the Replacement Agreement at about the time it was entered into, whereas Minc says he knew nothing about it until May 2017 and even then, what he says he was told about the $600,000 just passing through MSL's bank account is inconsistent with Hartwig's version and the pleaded case.

149 As well as the above discussion, reaching a finding as to whether the Replacement Agreement was entered into also involves consideration of the following matters, which were relied upon by the parties:

(a) whether the payments made in December to Twisse and Straightline were 'on behalf of' Kanyon in the sense of them being payments in respect of Kanyon projects;

(b) whether retentions for the Newcastle Project and/or Wodonga Project were owed by Kanyon to Trimont as at March 2016;

(c) the circumstances of Ascenzo's resignation as a director of Kanyon and transfer of his shares to the other Kanyon shareholders;

(d) whether the existence of the Replacement Agreement is supported by Kanyon's financial statements; and

(e) the circumstances of the dispute over the existence of the Replacement Agreement.

D.3.3 December 2015 payments by MSL to Twisse and Straightline

151 Hartwig's evidence is that on 2 December 2015, Ascenzo as director of Kanyon and Trimont requested in writing (having verbally requested it some days earlier) that the following payments be made on behalf of Kanyon to two creditors of Trimont and/or Trimont Australia, which were paid by MSL from its bank account on that day:

(a) the sum of $413,798 to Colin Twisse ('Twisse'), a creditor of Trimont; and

(b) the sum of $166,122 to Straightline Excavations Pty Ltd ('Straightline'), a creditor of Trimont Australia.

152 It was these payments which Hartwig says were made by MSL in anticipation of the release of retention funds to Trimont by Kanyon on the provision of a bank guarantee by Trimont Australia, and which MSL needed a short-term loan from Hunter to cover in the meantime.

153 The money which MSL paid to Twisse was a repayment of a loan of $400,000 plus interest which Twisse had made to Trimont. By the end of Hartwig's evidence, he had acknowledged that Twisse was not a subcontractor or supplier on any of Kanyon's projects which Trimont was working on. Despite this, Hartwig maintained in cross-examination that the payment to Twisse was for Kanyon's benefit, since Trimont borrowed the money from Twisse so that it could pay some of its subcontractors or suppliers on Kanyon's projects. I do not accept Hartwig's evidence in this regard. It was implausible, as well as indicative of his approach of not paying particular attention to which entities were owed what amounts. In addition, Hartwig displayed what can only be a disingenuous approach to such matters - exemplified by his answers regarding a payment by Kanyon at his direction to Katia Ascenzo (Silvio's wife) for her home loan. Hartwig maintained that this was working capital for Trimont or the Ascenzo group, despite accepting that it was a payment for Ascenzo's personal benefit. When it was put to him that payments such as this did not fit into the arrangement for Kanyon to provide working capital to Trimont, his answer was "Oh, possibly not by definition, but by operation, it's how they were managed. ... The process was reasonably fluid ... on the basis that ... Silvio was owed funds at certain times, owed Trimont, owed Kanyon at certain times."

154 In cross-examination, Ascenzo acknowledged that Twisse was not a subcontractor on any Kanyon project and was a private lender to Trimont. While Ascenzo agreed that the arrangements between Twisse and Trimont were loan agreements that Trimont entered into of its own volition, when asked whether Kanyon had any obligation to pay Trimont's loan agreements Ascenzo simply said that Kanyon owed Trimont because Trimont was performing work for Kanyon. When pressed specifically as to whether there was a loan agreement in which Kanyon agreed to pay the money Trimont borrowed from Twisse, Ascenzo accepted that there was not. When asked whether he saw anything wrong with him, as a director of Kanyon, asking MSL to advance money to Twisse despite the fact that Kanyon had no obligation to pay such debts, Ascenzo said that he did not see anything wrong with doing this, as Kanyon owed Trimont retention monies.

155 The payment to Twisse therefore cannot be seen as being a payment made for Kanyon's benefit.

156 Hartwig's evidence is that Straightline performed work on Kanyon's projects. He says he knew that Straightline did demolition work and that such work had been performed at the South Melbourne Project, which was one of Kanyon's projects. Ascenzo's evidence is that Straightline performed all his excavation work and that it had done so on Kanyon's projects, although he was very vague and inconsistent about which particular Kanyon projects these were. Breckenridge's evidence was to similar effect.

157 However, there is evidence from the director of Straightline, Mr Tarkan Gulenc ('Gulenc'), that Straightline did not work on the Newcastle Project, the Wodonga Project or the South Melbourne Project for Trimont, but did do work for Trimont on the Brunswick Project and the Preston Project. The first three of these are Kanyon projects, whereas the Brunswick Project and the Preston Project were not Kanyon projects.

158 Gulenc's evidence was tendered after the plaintiffs made an application pursuant to ss 63 and 67 of the Evidence Act 2008 (Vic) ('Evidence Act'), seeking to rely on an email from their solicitor Catherine Pulverman to Gulenc and his reply, both dated 23 September 2023. On 25 September 2023 the plaintiffs obtained an order from me for short service of a subpoena addressed to Gulenc, however the next day the process server had been unable to serve the subpoena as he had been told that Gulenc was overseas for a few weeks. The defendants did not oppose the plaintiffs' application.

159 Notwithstanding that Gulenc was therefore unavailable for cross-examination, I prefer his evidence in respect of which projects Straightline worked on for Trimont. Unlike the other witnesses who gave evidence on this topic, Gulenc has no interest in this proceeding or in what can only be described as the labyrinth of litigation involving the various key players and their multi-faceted disputes.

160 The defendants do not address this issue in their closing submissions, written or oral. In circumstances where the alleged justification for the Replacement Agreement was that the amount of $624,563.68 paid by MSL for the alleged benefit of Trimont/Trimont Australia was for Kanyon's projects, the defendants' failure to address, let alone adequately answer, the case put against them on this point, is telling.

161 Accordingly, I find that the payments to Twisse and to Straightline were not made on behalf of Kanyon. I also find that Kanyon received no benefit from these payments having been made. This detracts significantly from the alleged justification for the Replacement Agreement.

162 I have addressed the issue of the Wodonga and Newcastle retentions in section D.2 above, and there is no need to repeat it here.

163 Given that the defendants have not established that retentions for the Newcastle Project and the Wodonga Project were owed by Kanyon to Trimont as at March 2016, it does not make sense that the retentions played a role in the justification or commercial explanation for the existence of the Replacement Agreement.

164 If return of the retentions were not a viable source of cash to pay MSL in December 2015, they were even less so in March 2016 when Hartwig allegedly said that this was how Hunter would be repaid the Hunter Loan. In this regard:

(a) the Wodonga retention had already been accounted for in the AI/Kanyon Ledger; and

(b) Geoff Brady had had the bank guarantees to replace the retentions since late December 2015/early January 2016 but this had not resulted in a flow of funds to MSL, and Hartwig was either wrong or untruthful when he allegedly told Hunter at the Giorgios Meeting that this is where the funds would be coming from.

D.3.5 Ascenzo's resignation as director of Kanyon and transfer of his shares

165 In the First Hartwig Affidavit, Hartwig says that over the next month or so after the Giorgios Meeting, Hunter and Bailey Hunter both asked if he would agree to facilitate Ascenzo resigning as a director of Kanyon. The AI/Kanyon Ledger and Ascenzo's position had been discussed at board level, and Bailey Hunter asked if the Trimont debt was not fully repaid to Kanyon could they treat Ascenzo's shares as pledged to compensate the other shareholders. Bailey Hunter also said he was concerned that Ascenzo remaining as a director might adversely affect Kanyon's creditworthiness with lenders. Hartwig put these matters to Ascenzo who said he was prepared to go along with what Bailey Hunter wanted. Hartwig says that Ascenzo ceased being a director of Kanyon on 1 May 2015[12] and that share transfer forms were prepared and signed for Ascenzo's shares to be transferred to the other Kanyon shareholders. Hartwig says that these signed share transfers were not to be acted upon as there were stamp duty implications in doing so, because Kanyon was a 'land rich' entity, and instead, the signed share transfers were to be held in escrow by BCP and actioned only if Kanyon had not been fully repaid everything it had advanced to Ascenzo's Trimont business.

166 Initially in cross-examination, Hartwig said that the events referred to in paragraph 21H(b)(i) of the Hartwig Parties Defence,[13] being him procuring Ascenzo's resignation as a director of Kanyon and the transfer of Ascenzo Investments' shares to the other Kanyon shareholders, occurred and were in exchange for Kanyon taking on the debt (being the Hunter Loan). He then said it was subsequently agreed that the transfers would be held in escrow because of stamp duty considerations. Later, he said that this developed to where the shares were to be held in escrow until the AI/Kanyon Ledger was balanced.

167 Nonetheless, in cross-examination Hartwig conceded that it is not pleaded by the defendants that the:

(a) shares were to be held in escrow due to stamp duty considerations;

(b) Replacement Agreement was subsequently amended;

(c) shares were to be held in escrow pending final accounting of the AI/Kanyon Ledger;

(d) Replacement Agreement was conditional upon that accounting; or

(e) the Replacement Agreement was conditional on anything.

168 Hartwig also conceded that if the Replacement Agreement was conditional upon the occurrence of an event and that event did not happen, there would be no basis to transfer liability for the Hunter Loan to Kanyon. Eventually, Hartwig conceded that what he in fact did was procure incomplete share transfer forms, and that he does not give evidence in this proceeding that he did procure transfer forms that could be acted upon by the Kanyon shareholders.

169 In his witness statement filed in the Ascenzo Proceeding (which was put to him during cross-examination in this proceeding) Hartwig says that in early May 2016 the board of directors of Kanyon (then being Hartwig, Bailey Hunter, Ascenzo and Breckenridge) had a meeting to discuss Kanyon's loan relationship with Trimont. At the time, Kanyon had sought an extension from Westpac on a loan for the Newcastle Project and was also seeking finance from Westpac for the South Melbourne Project. Westpac was also Trimont's financier and Hartwig was aware that Trimont had cash flow problems. Hartwig, Breckenridge and Bailey Hunter wanted to avoid a situation where Ascenzo's involvement in Kanyon could prejudice its ability to raise finance from Westpac. At the board meeting, Hartwig and Bailey Hunter asked Ascenzo if he would resign as a director of Kanyon for this reason. Ascenzo agreed.

170 In the same witness statement, Hartwig goes on to say that at that board meeting, they also discussed Ascenzo selling Ascenzo Investment's shares in Kanyon to the remaining three shareholders (Sallon, the Hunter FT, and Wickley). Bailey Hunter said he was concerned about Ascenzo taking profits from Kanyon if Trimont remained liable to Kanyon under the AI/Kanyon Ledger, and Bailey Hunter wanted to make sure Ascenzo did not receive funds from Kanyon before the loan account had been balanced. Hartwig then says in his statement:

The sale of Silvio's shares came about because I suggested that we could hold Silvio's shares as "security" for the loan, which could be achieved by Silvio signing share transfer forms but BCP keeping them in escrow until the loan account was balanced.

171 Hartwig's witness statement then states that it was agreed at the Kanyon board meeting that Ascenzo would immediately sign share transfer forms for the transfer of his shares to the remaining shareholders to hold as security and that the share transfer forms would be held in escrow by BCP until the AI/Kanyon Ledger was finalised. If the amount owed by Trimont to Kanyon was ultimately equivalent to the value of Ascenzo Investments' shares in Kanyon, then its shares would be transferred to the remaining shareholders proportionally to clear Trimont's loan. If Trimont ended up being owed money at the end of the balancing process, then Ascenzo would need to be paid for the value of Ascenzo Investments' shares so that he was not short-changed. The transfer forms were signed by Ascenzo, however, they were left undated and the quantities left blank, as they were to be completed once the loan ledger had been finalised. The signed forms were kept by Hartwig at BCP's office.

172 In Hartwig's witness statement in the Ascenzo Proceeding, he does not mention the Replacement Agreement or Ascenzo's resignation as a director of Kanyon being consideration for the Replacement Agreement. It was put to him in cross-examination that the rationale could not be both this and for the reason given in his statement (ie, to avoid issues with Kanyon getting finance from Westpac), but he disputed this, saying it was part of a process that began with the Giorgios Meeting. It was then put to him that he did not even give evidence in this proceeding that Ascenzo's resignation was part of the Replacement Agreement, taking him to paragraphs 68 and 70 of the First Hartwig Affidavit. Hartwig's answer was that it was a process that occurred.

173 Hunter's account of discussions about Ascenzo's directorship of, and shareholding in, Kanyon is different to Hartwig's. In the First Hunter Affidavit, he says that some time in around May 2016 Hartwig told him that Kanyon had lent money to Trimont, and that there was a practice where Kanyon would make a payment to Trimont before the money was due so as to assist Trimont with its cash flow, with the payments recorded as a loan. Hunter says he did not know about these loans. Hunter says Bailey Hunter was not there for this discussion, but shortly afterwards he and Bailey Hunter met with Hartwig in May 2016. Hunter says that Hartwig told him that Kanyon had lent approximately $1.5 million to Trimont and that the company would not be able to get it back from Trimont as it was an unsecured loan. Bailey Hunter said at the meeting that he did not know about these loans. Hartwig said that he wanted Kanyon to extinguish the debt owed by Trimont in return for the other three shareholders acquiring Ascenzo's shares in Kanyon, and that Kanyon was worth three times the amount of the debt.

174 Hunter says that he was copied into an email of 30 May 2016 from Hartwig to Neil Johnston (Bailey Hunter's accountant) attaching share transfer forms for Kanyon from Ascenzo Investments to the other shareholders and a letter from Ascenzo resigning from his position as a director of Kanyon. In that email, Hartwig wrote:

At a recent Board meeting it was agreed by all Shareholders that we should take over Silvio's position in the Company (Shareholder and Director) on the basis that the outstanding Loan position was forgiven.

175 In oral evidence, Hunter said that this email was incorrect, that Hartwig had proposed the arrangement set out in the email, but it was not accepted by those present at the meeting. He said that he had searched for board minutes in that regard but had not found any, and had not found any other documents suggesting that agreement was made at that time. Hunter says that after receiving this email he and Bailey Hunter had a further conversation with Hartwig in around May 2016, and that he told Hartwig he did not agree to taking over Ascenzo's shareholding in exchange for forgiving the debt, and that Bailey Hunter also said he did not agree.

176 Hunter's oral evidence was broadly consistent with his affidavit on this point, however there were some differences. He says that Hartwig told him around February 2016 that Kanyon had advanced funds to Trimont and that Trimont would not be able to repay Kanyon. His oral evidence was that in February 2016 Hartwig had proposed extinguishing Trimont's loan to Kanyon by Ascenzo selling his shares in Kanyon. He says that he was concerned about the Trimont loan and that he was not comfortable with the share sale proposal because he did not think there was sufficient equity in Kanyon for that to be a fair and appropriate way of extinguishing the debt, so he did not agree to it. He says that this all occurred over a number of conversations with Hartwig between February and May 2016.

177 In relation to his resignation as a director of Kanyon and the transfer of his shares, Ascenzo's evidence in this proceeding is as follows:

(a) In the Ascenzo Affidavit, he says that during his conversation with Hartwig in early April 2016 about Kanyon replacing MSL as the borrower under the Hunter Loan, he agreed to resign as a director of Kanyon and transfer his shares to the other Kanyon shareholders on the basis that once all Trimont business was concluded, those shares would be received by Kanyon's shareholders in payment of any amount Trimont might owe to Kanyon.

(b) In his oral evidence, Ascenzo's explanation for his resignation as a director and for transferring his shares in Kanyon was that Trimont's financial difficulties may cause an issue with Kanyon's financing. When pressed, Ascenzo conceded that what Kanyon and MSL did with any liabilities as between them had nothing to do with him. Considering that he was a director of Kanyon at this time, it is surprising that Ascenzo would think this had nothing to do with him.

178 The Ascenzo Affidavit is to be contrasted with his evidence in the Ascenzo Proceeding:

(a) In the statement of claim filed in that proceeding, he claims that in around May 2016 the shareholders of Kanyon entered into a conditional agreement whereby he would resign as a director and Ascenzo Investments would sell its shares in Kanyon to the remaining shareholders ('Separation Agreement'). The terms of this agreement were that he would resign as a director of Kanyon; he would sign share transfer forms; these would be held in escrow by BCP until the AI/Kanyon Ledger had been finalised; if at the conclusion of this balancing process Trimont owed Kanyon and was unable to repay it, then Ascenzo Investments' shares would be forfeited to the remaining shareholders; alternatively, if at the end of the balancing process Kanyon owed Trimont, the share transfer forms would not be lodged with ASIC and Ascenzo Industries would retain its shares in Kanyon. It is pleaded that these matters were a condition precedent to the transfer of Ascenzo Investments' shares to the remaining shareholders. He claims that the balancing process was never concluded and that Bailey Hunter wrongfully lodged with ASIC in March 2019 a form stating that Ascenzo Investments' shareholding had reduced to nil, and he claims that Ascenzo Investments remains a shareholder of Kanyon.

(b) Ascenzo's affidavit filed in the Ascenzo Proceeding is short and consistent with the statement of claim in that proceeding.

(c) Ascenzo's witness statement filed in the Ascenzo Proceeding is also consistent with the statement of claim in that proceeding. His evidence about the May 2016 Kanyon board meeting is consistent with Hartwig's, in terms of the reason for him resigning as a director was due to the Westpac relationship. He says he does not recall who first suggested that he sign the share transfer forms, but it was agreed that they would not be filed with ASIC until the loan ledger could be worked out, and that if Trimont still owed money to Kanyon then the share transfer forms could be lodged as a way to "repay" the amount owing.

179 The plaintiffs submit that the Replacement Agreement as pleaded is not made out on the evidence.

(a) The Replacement Agreement is pleaded as an agreement for consideration in March 2016 with the key obligations alleged to have been the procurement by Hartwig of the resignation of Ascenzo as director of Kanyon and the transfer of the shares of Ascenzo Investments in Kanyon to the other shareholders of Kanyon. Hartwig's evidence by way of affidavit was that the idea of some kind of agreement arose in March 2016, although not the agreement pleaded, and that it was later that the idea of Ascenzo resigning as a director and transferring his shares arose and became part of an agreement.

(b) The Replacement Agreement is pleaded as a completed agreement, including that Ascenzo's shares were transferred to the other Kanyon shareholders. By contrast, Hartwig's evidence was that the share transfers were to be held in escrow until some later time when the debts between Trimont and Kanyon could be reconciled, that the agreement was amended, but the amended agreement was not pleaded. Ascenzo's evidence as to the development of the agreement is to the same effect. The evidence of Breckenridge, who is alleged to have been party to the Replacement Agreement on behalf of Kanyon, does not support the alleged particulars at 21H of the pleading.

(c) Hartwig gave oral evidence that he did not have a conversation with Hunter in February, March, April or May 2016 during which Hartwig suggested Ascenzo's shares could be transferred to the other Kanyon shareholders to extinguish the debt. Hartwig gave evidence that he had a meeting with Bailey Hunter between February and June 2016 at which the idea of the share transfer was discussed but not agreed to at that time, but that subsequently there was an agreement in June 2016 that the shares would be held in escrow pending the loan reconciliation.

(d) This evidence is consistent with Hunter's affidavit evidence that at the Giorgios Meeting, the Hunter Loan was not discussed, and that he at no time suggested or agreed to the Replacement Agreement. Further, the correspondence Hartwig sent Hunter on 18 March 2016 after the meeting does not mention anything about the Hunter Loan or the alleged Replacement Agreement.

(e) Hartwig agreed that if the Replacement Agreement was conditional on the occurrence of an event that did not happen there would be no basis to transfer the $600,000 debt to Kanyon.

(f) Hartwig admitted that no shares were transferred pursuant to the Replacement Agreement.

(g) There are inconsistencies between the pleaded case, the evidence of Hartwig, and his witness statement in the Ascenzo Proceeding, and the allegations in the County Court Proceeding made by MSL and Hartwig that are material to the probability of the existence of the Replacement Agreement.

(h) There are inconsistencies between the pleaded case and Ascenzo's evidence in this proceeding and the allegations made by Ascenzo and his witness statement in the Ascenzo Proceeding that are material to the probability of the existence of the Replacement Agreement.

181 The plaintiffs further submit that the alleged amended agreement that developed in evidence is not established, for the following reasons:

(a) First, it relies on an agreement of all Kanyon shareholders to exchange the shares for the debt. Hartwig's oral evidence was that Bailey Hunter agreed but he denied ever suggesting the share transfer idea to Hunter between February and June 2016. This evidence is contradictory to the account given in Hartwig's affidavit. Further, Hunter denies ever entering into the agreement on behalf of the Hunter FT (the Kanyon shareholder).

(b) Second, the purported outstanding matters of the amended agreement that were said to be preconditions to the transfer of shares either did not exist or were not completed.

(c) Third, the AI/Kanyon Ledger was reconciled and there were no outstanding retentions, insurance payments or variations to be included. There was no mention of the alleged outstanding amounts in any of the contemporaneous correspondence relating to the debt owed by Trimont to Kanyon.

182 In their closing submissions, the defendants acknowledged that the evidence does not support the existence of a term of the Replacement Agreement as alleged in paragraph 21H(b)(i) of the defence. They submit that the arrangement for the removal of Ascenzo from Kanyon seems to have been on the cards for a considerable period and proceeded in parallel with, rather than specifically because of, the Replacement Agreement. The defendants submit that Hunter and Kanyon saw benefits in removing Ascenzo and Hartwig sought to achieve this outcome. The defendants also submit that the absence of a direct connection between the Replacement Agreement and Ascenzo's removal does not detract from the existence of the Replacement Agreement.

183 Even if I accepted Hartwig's version of the discussion at the Giorgios Meeting (which I do not), I do not accept that Ascenzo's resignation as a director of Kanyon and his agreement to transfer his shares to the other shareholders had anything to do with the Replacement Agreement.

184 There are so many different variations of Ascenzo's resignation as director and the share transfer that it is simply implausible to accept that it was part of the Replacement Agreement. In my view, at trial Hartwig and Ascenzo appeared to give evidence on this issue that conformed to whatever they each considered fitted best with the case or story they were each currently wanting to advance. Hartwig's own affidavit evidence in this proceeding does not suggest that there is a necessary link between Ascenzo's directorship and shareholding being part of the Replacement Agreement, and in cross-examination he seemed to treat it all as being developments over time that ended up resulting in an agreement. Hartwig's evidence on this topic appeared to be a re-casting of things so as to try and make them fit the case he was then trying to advance. I do not find this notion of the agreement involving a process that evolved and changed over time to be at all convincing.

185 It is inconsistent with the defendants' pleaded case, which involved a fully executed agreement in respect of Ascenzo's resignation and shares, for Hartwig to give evidence that the share transfers were to be held in escrow pending a final accounting of the AI/Kanyon Ledger, and only to be given effect if, in the final reckoning, Trimont owed Kanyon money. I find it telling that Hartwig's evidence at trial on this issue strayed so significantly from the defendants' pleaded case.

186 I do not accept the defendants' glib attempts to maintain their case based on the Replacement Agreement in circumstances where their own evidence does not support the pleaded case. It is disingenuous to contend that the fact that there is no direct connection between Ascenzo's removal as director of Kanyon and transfer of shares in that company and the Replacement Agreement does not detract from the existence of the Replacement Agreement. In circumstances where the Replacement Agreement is alleged by the defendants and they bear the onus of its proof, it defies common sense to think that the defendants' failure to prove a critical element of their case - the consideration for the Replacement Agreement - can have no bearing on whether the Court should find that the Replacement Agreement exists.

187 In circumstances where the party bearing the onus of proof - in this case, the defendants - has not met that burden, a Jones v Dunkel inference does not arise. As Croft J said in Tenth Vandy Pty Ltd v Natwest Markets Australia Pty Ltd:[14]

Applying the reasoning in Jones v Dunkel, I am of the opinion that no inference can be drawn in the present circumstances unless and until the party bearing the burden of proof of its case (the plaintiff) has by the evidence it relies upon established a case for the defendant to answer. If and when the plaintiff were to establish its case, then the defendant may, if it did not call evidence to rebut the case, be left in the position of arguing its case against the plaintiff's unchallenged or uncontradicted evidence. This may of itself, or with the aid of inferences according to the rule in Jones v Dunkel, establish the plaintiff's case. However, I am of the opinion that the rule in Jones v Dunkel may not be resorted to by a party, in effect, to fill in the facts of its case before the threshold for the operation of the rule is reached ...

188 In this instance, the defendants' own evidence does not support their case that Ascenzo's share transfer and resignation as director was consideration for the Replacement Agreement. The plaintiffs' failure to call Bailey Hunter to give evidence about conversations he is said to have had with Hartwig and others about the share transfer and resignation of Ascenzo is therefore not susceptible to a Jones v Dunkel inference.

189 In any event, and regardless of which account of Ascenzo's agreement to resign as a director of Kanyon and transfer his shares to the other shareholders is accepted, it is very difficult to see how it could be the consideration for Kanyon agreeing to replace MSL as the borrower under the Hunter Loan. Apart from Ascenzo's resignation as a director, what was Kanyon itself getting out of this? Whether Ascenzo kept his shares or transferred them to other Kanyon shareholders does not affect Kanyon's (or MSL's) position.

190 Accordingly, and for all these reasons, I do not accept the defendants' case that Ascenzo's resignation as a director of Kanyon and his agreement to transfer his shares to the other Kanyon shareholders was in consideration of Kanyon agreeing to replace MSL as borrower under the Hunter Loan.

D3.6 Whether the existence of the Replacement Agreement is supported by Kanyon's financial statements

191 The defendants plead that the Replacement Agreement is partly oral and partly to be implied, and that insofar as it is implied it is to be implied from the conversations pleaded between Hartwig and Hunter in March 2016 and between Hartwig, Ascenzo and Breckenridge and by a number of documents. Those documents are particularised as:

(a) Kanyon's balance sheet as at 30 June 2016 which records borrowings from Hunter and Natalie Hunter in the amount of $5,095,000, including Loan 9;

(b) the schedule of loans to Kanyon by Hunter and Natalie Hunter as trustees of the Hunter FT described as 'Kanyon Pty Ltd (Shareholder Loan 9)' of $600,000 made on 2 December 2015; and

(c) the recording of the Kanyon loan liability in the account of Hunter and Natalie Hunter and the recognition of the debt owed to them by Kanyon in Hunter's and Natalie Hunter's tax returns.

192 In the First Hunter Affidavit, Hunter refers to an email received from Dean Lear at BCP on 1 June 2016 attaching an updated schedule of loans made by the Hunter FT to Kanyon, on which Loan 9 is not included. He also refers to receiving an email the following day, also from Mr Lear, attaching various documents including an excel spreadsheet entitled 'CB & NA Hunter - Kanyon Loans Capitalised Interest Summary' which set out all loans made by the Hunter FT to Kanyon. Again, Loan 9 is not included on that interest schedule as a liability of Kanyon.

193 In the First Hunter Affidavit, Hunter says that in October 2016 he obtained documents from BCP to give to his accountant Aaron Burton for the purpose of Mr Burton preparing his tax returns, including in his capacity as trustee for the Hunter FT. He says that he received two emails on 18 October 2016 from Ryan. The first attached a Kanyon interest schedule and the second attached an updated Kanyon interest schedule. He says he did not notice that the schedules attached to those emails included Loan 9 with a drawdown of $600,000 on 2 December 2015, and that he did not examine the attachments to the emails in detail before passing them on to Mr Burton. He says that he received an email from Ryan on 21 October 2016 which attached a loan schedule, and that he did not notice Loan 9 being recorded on that schedule. He says his accountant used the schedules to prepare his 2016 tax returns and included Loan 9, which he did not realise at the time his tax return was lodged and did not realise this until about February 2017. Hunter's oral evidence was to the same effect.

194 This evidence was challenged during Hunter's cross-examination. It was put to him that he must have looked at the emails he received on 18 October 2016 because the second one said "Updated schedule attached - sorry for the confusion", it being suggested that Hunter had raised a query with Ryan after receiving the first email. Hunter denied this. It was also put to Hunter that one of his affidavits in the County Court Proceeding described receiving an email from Ryan on 18 October 2016 attaching a loan schedule which included Loan 9, and that he had not said in that affidavit that he did not notice the inclusion of Loan 9 when he received the email. Hunter denied that if he had not noticed it in October 2016 he would have said so in that affidavit.

195 In respect of the 21 October 2016 email from Ryan (referred to above), in cross-examination Hunter said he did not notice Loan 9 in the attached schedule as being the MSL loan, but acknowledged that it was there and said that it was incorrectly included as a Kanyon loan. He disagreed with the proposition that it was correct because it was what had been discussed at the Giorgios Meeting.

196 Hunter accepted the proposition that by the end of October 2016 he had received three emails which contained attachments with express references to Loan 9, being the $600,000 paid over in December 2015, but denied having read the attachments containing those references.

197 One of these emails was sent to Hunter by Ryan on 18 October 2016 at 11.42am. In his affidavit, Ryan deposes that after he sent that email, Hunter telephoned him, saying that he had identified various mistakes in the schedule attached to the email. Ryan deposes that he does not recall specifically which mistakes Hunter mentioned to him. Ryan also deposes that at 12.04pm on the same day he emailed Hunter with an updated schedule containing the corrections they had discussed on the phone call.

198 In the First Hunter Affidavit, Hunter refers to an email he received from Hartwig on 20 February 2017 attaching Kanyon's management accounts for June 2016 to December 2016, including a balance sheet dated June 2016. He acknowledges that this balance sheet records Loan 9 for $600,000. He then goes on to say that "Reading the Balance Sheet on 20 February 2017 was the first time, I became aware that the Hunter Loan was purportedly owed by Kanyon instead of MSL".

199 Hunter was challenged about this being the first time he became aware of Loan 9 being recorded in Kanyon's books, at first maintaining that he first became aware of it when he received the 20 February 2017 email, but later equivocating about whether he actually read it on that date or later, maintaining that it was later and that the First Hunter Affidavit was wrong when it said he read it on 20 February 2017. He says that he only started to look at the balance sheets after Hartwig had told him Kanyon was the borrower, and denied changing his evidence to suit his circumstances.

200 In cross-examination, Hunter was taken to two emails sent to him by Ryan on 28 February 2017. The first email attaches a number of schedules. The second email says "My apologies Cameron this was my mistake - that has now been updated to reflect the loans paid in (total $450k) on 15th July 2016." The attached schedule for the 'CB & NA Hunter - Kanyon Loans interest summary' lists Loan 9. Hunter said he had no recollection of what prompted Ryan to write the second email to him, and that he had no recollection of looking at the first set of material and identifying something that needed to be changed. These emails were not referred to in Hunter's affidavits but he accepted that it was another email and set of documents sent to him showing Loan 9 as payable by Kanyon. He accepted that he had asked questions of Ryan which prompted the second email. When asked whether he accepted that his query had nothing to do with Loan 9, he said he did not know what his query was in relation to but he had not noticed at that point that Loan 9 had been included in the schedule.

201 The plaintiffs' closing submissions, written or oral, do not attempt to address the evidence on this issue.

202 The defendants referred to the instances where Hunter had been sent information that included Loan 9 as a liability of Kanyon to the Hunter FT. They say that on at least two occasions the ledgers were corrected the same day and that the sensible inference is that this was due to queries raised by Hunter or discussions he had with Ryan or others in between the emails. At no time did Hunter raise anything to do with Loan 9.

203 The defendants submit that Hunter's failure to raise any issue or query regarding Loan 9 in the 28 February 2017 schedule is irreconcilable with his assertion that he first knew about it eight days earlier on 20 February 2017. On 28 February he corrected Loan 10, but said nothing about Loan 9.

204 The defendants submit that the only rational explanation is that Hunter was aware of the inclusion of Loan 9, and accepted that the $600,000 was repayable by Kanyon rather than by MSL. The fact that Loan 9 was recorded in the accounts of Kanyon and remains on its books shows that Kanyon accepted and continues to accept it as a liability.

205 My findings about this issue will be included in section D.3.10 below.

D.3.7 The circumstances of the dispute over the existence of the Replacement Agreement

206 Hunter's oral evidence was that he was not satisfied with Hartwig's explanation in April 2017 (see paragraph 125 above) that he would not be disadvantaged by the sale of the Laverton Property and he suggested to Hartwig that they meet, which they did a few days before 30 May 2017 at Hunter's office in Hawthorn. Hunter says that he told Hartwig that he wanted the Hunter Loan repaid and Hartwig told him that MSL was not liable to repay the loan, Kanyon was. Hartwig gave him an explanation that he did not understand. Hunter told him that he did not agree. The explanation was the same as set out in Hartwig's email of 30 May 2017. Hunter says that this meeting in late May 2017 was the first he had heard about Kanyon replacing MSL as borrower under the Hunter Loan.

207 As already noted, Hartwig denies that the April 2017 conversation occurred (see paragraph 125 above). During cross-examination, Hartwig confirmed that he met with Hunter towards the end of May 2017 where Hunter asked that MSL repay the Hunter Loan. Hartwig's evidence was that during this meeting, he explained to Hunter what had allegedly happened during the Giorgios Meeting - which Hunter disputed - and that the $600,000 loan was now recorded in Kanyon's accounts as Loan 9.

208 It was put to Hunter in cross-examination that he was bitter towards Hartwig and that his denial of the Replacement Agreement and pursuit of MSL for the repayment of the Hunter Loan was a way of getting back at him. Hunter denied that his pursuit of the loan was part of some vendetta or desire for retribution, maintaining that it was recovery of a debt owed to him.

D.3.8 Plaintiffs' additional submissions about the Replacement Agreement

209 The plaintiffs submit that the defendants are required to prove the existence of the alleged Replacement Agreement on the balance of probabilities. This is said to require that the Court feel an 'actual persuasion' of its existence.[15] That standard will not be reached if the existence and non-existence of the Replacement Agreement are merely 'conflicting inferences of equal degrees of probability so that the choice between them is [a] mere matter of conjecture'.[16] For the reasons set out above, the plaintiffs say that the defendants have not proved the existence of the Replacement Agreement. In addition, the plaintiffs say that the purported justifications for the Replacement Agreement, whether on the pleaded case or for the amended agreement which came out in evidence, are not made out. The plaintiffs further submit that as Hunter knew Trimont was struggling financially and as he refused to fund the Hunter Loan through Kanyon, it defies logic that Hunter would: (i) loan money to MSL on the basis it was to be used for Trimont; and (ii) later, when the Hunter Loan had not been repaid, enter into an agreement under which repayment of the Hunter Loan became subject to reconciliation of amounts owed between Kanyon and Trimont.

D.3.9 Defendants' additional submissions about the Replacement Agreement

210 The defendants acknowledge that there are conflicting accounts about the content of the discussion at the Giorgios Meeting, but say that subsequent events are consistent with the Replacement Agreement and confirm that there was an agreement in the terms relied on by the defendants. The subsequent events relied upon by the defendants are primarily the inclusion of Loan 9 in Kanyon's accounts and on spreadsheets provided to Hunter in 2016 and 2017, as described above.

211 The defendants submit that, viewed objectively, the evidence overwhelmingly demonstrates an agreement was in place for Kanyon to be responsible for repayment of the amount lent to MSL in December 2015. Despite the acknowledgment that the evidence does not support the pleaded case that a term of the Replacement Agreement was that Ascenzo would transfer his shares in Kanyon and resign as a director, the defendants say that this does not detract from the existence of the Replacement Agreement.

212 The defendants also submit that all parties by their conduct have acted on the basis that Kanyon became responsible for repayment until the breakdown in relations between Hunter and Hartwig in 2017. All of the accounts of Kanyon show this is so, despite Hunter's protestations that accounts he signed are false or subject to some kind of self-serving disclaimer created in the 2021 accounts after the commencement of this proceeding. Hunter said he knows that erroneous entries can be removed or reversed. They were not removed or reversed and remain in the accounts of Kanyon.

D.3.10 Conclusion regarding the existence of the Replacement Agreement

213 Insofar as the alleged conversation about the Replacement Agreement at the Giorgios Meeting, I prefer Hunter's evidence to that of Hartwig. Hunter's evidence on this has been consistent: he has been adamant that the conversation about the Replacement Agreement never took place. Hartwig's evidence, on the other hand, has been inconsistent in terms of what he says was actually discussed on that day and what it is he says was actually agreed. In particular, Hartwig's alleged statement about Trimont Australia having to provide a bank guarantee to free up the cash retention is contrary to the known facts, given that this guarantee had been given in December 2015/January 2016. Further, there are aspects of Hartwig's account about the Giorgios Meeting and the linking of the agreement said to have been reached then with the Ascenzo resignation/share transfer which are both inconsistent and implausible. I have already indicated that I do not accept that Ascenzo's resignation as a director of Kanyon and his agreement to transfer his shares to the other Kanyon shareholders was part of the Replacement Agreement. In short, the defendants' witnesses were incapable of telling a coherent and consistent story about the Replacement Agreement and its terms.

214 I accept that the burden of proof is not met where there are conflicting inferences of equal degrees of probability (see paragraph 209 above). It would therefore be open to me to reject the defendants' case based on the Replacement Agreement on that basis.

215 However, I do not think that there are conflicting inferences of equal degrees of probability: rather, I consider the inference that there was no Replacement Agreement is stronger than the inference that it did exist.

216 The only matters elicited in evidence which support the existence of the Replacement Agreement are the references to Loan 9 in the spreadsheets provided to Hunter in 2016 and 2017, and its inclusion in the Kanyon accounts at that time. However, this was all at a time when Hartwig or his employees at BCP were responsible for preparing the spreadsheets and financial information, and it can only be their provision to Hunter and his failure to query them that supports the inference the defendants would have me draw. While I did not find Hunter's evidence on this convincing, such that I think it is more likely than not that he knew Loan 9 was included earlier than he admits he knew it, that has to be balanced against the other evidence regarding the Replacement Agreement, all of which is unhelpful to the defendants.

217 Even if my conclusion that the evidence favours the inference that the Replacement Agreement does not exist is incorrect, then at best the conflicting inferences are of equal probability which leads to the conclusion that the defendants have not made out the existence of the Replacement Agreement.

218 Therefore, I find on the balance of probabilities, that the evidence supports the conclusion that there was no Replacement Agreement. My reasons for this are set out above but I have also summarised and added to them below:

(a) The payments made by MSL to Twisse and Straightline in December 2015 were not made on behalf of Kanyon, and so that does not provide a plausible basis for Kanyon agreeing to replace MSL as borrower.

(b) The Wodonga and Newcastle retentions are not a plausible commercial reason for the Replacement Agreement. As at March 2016, the retention for the Wodonga Project had already been accounted for in the AI/Kanyon Ledger, and so that was not going to be a source of cash for payment of the Hunter Loan. The bank guarantee had already been obtained by Trimont Australia, yet there is no evidence of any demand, either from Trimont or Trimont Australia, of payment of the cash retention for the Newcastle Project from Kanyon. It was hardly going to result in a payment by Trimont Australia to MSL when Trimont Australia had already been instructed by Breckenridge and Ascenzo to pay some of Trimont's debts in lieu of the retention.

(c) It is implausible that Hunter agreed (let alone suggested) to Kanyon replacing MSL as the borrower under the Hunter Loan, for the same reasons he gave for why he would have been concerned in December 2015 if the Hunter Loan was to be used for Trimont's debts.

(d) Hunter's version of the Giorgios Meeting is to be preferred over Hartwig's.

(e) The presence of the Hunter Loan in Kanyon's management accounts and financial statements from around October 2016, as Loan 9 due to Hunter and Natalie Hunter as trustees for the CB and NA Hunter FT is consistent with the defendants' case but is neither conclusive nor determinative. It is convenient for the case now advanced by the defendants for Hartwig to have recorded it in Kanyon's books in this way. That it continued to be so recorded after BCP ceased being responsible for Kanyon's accounts was satisfactorily explained by Hunter in cross-examination. When weighed against the other evidence in respect of the Replacement Agreement, the recording of the Hunter Loan in Kanyon's accounts is simply not enough to tip the scales in favour of the existence of the Replacement Agreement.

(f) This is despite the fact that Hunter's evidence that he did not notice the presence of the Hunter Loan in Kanyon's accounts when he was provided them was not entirely convincing. His evidence that he just received the information from BCP that he had requested and then passed it on to his tax accountant without reviewing it cannot be accepted, given that there is evidence of him having reviewed at least aspects of the documents and requesting clarification of some things. It was put to him in cross-examination that he had never queried Kanyon's accounts in that regard because he knew the Hunter Loan was appearing there due to the Replacement Agreement, which he consistently denied. I think it likely that Hunter did review the material when he received it, but that his focus was on his tax returns and not the Hunter Loan, and that the Hunter Loan being in Kanyon's accounts had no real significance to him at that time. I do not regard Hunter having received these accounts from time to time as being evidence that he accepted that Kanyon had replaced MSL as borrower under the Hunter Loan. I reject the defendants' submission, set out at paragraph 204 above, on this point.

(g) There is no consideration for Kanyon having agreed to replace MSL as borrower under the Hunter Loan. At no point did the defendants even try to explain why Ascenzo resigning as director of Kanyon or transferring his shares would be consideration for Kanyon replacing MSL as liable for the Hunter Loan. The notion that Ascenzo's resignation/share transfer was part of the Replacement Agreement was not proven and is not accepted, and the accounting treatment of the $624,563.68 paid by MSL is not consideration either since it has not been proven that these were for Kanyon's benefit.

(h) In this regard, it seems to me that the pleaded case in respect of the consideration for Kanyon agreeing to replace MSL as borrower under the Hunter Loan is nothing more than an attempt to find consideration so that the Replacement Agreement could be seen as binding and enforceable such as to extinguish MSL's liability for the Hunter Loan. The alleged consideration for the Replacement Agreement has not been made out. Further, this also undermines the defendants' case in respect of the Replacement Agreement itself.

(i) In my view, the plaintiffs tended to play down Hunter's negative feelings about Hartwig and the defendants tended to over-emphasise them. Even if the defendants are correct that Hunter wanted retribution against Hartwig, that does not lead to the conclusion urged upon me by the defendants that Hunter only disputed the Replacement Agreement and pursued MSL for the Hunter Loan once the relationship between he and Hartwig had soured. This is because Hunter's reasons as to why he never would have agreed to the Replacement Agreement were convincing.

219 For both the insolvent trading claims against Hartwig and Minc, and the voidable transaction claims against BCP, Sallon, and Aida Nominees, it is necessary for the plaintiffs to establish that MSL was insolvent or became insolvent at the relevant times.

220 It is convenient to deal with matters concerning MSL's solvency prior to considering the other elements of an insolvent trading or voidable transaction claim which the plaintiffs must establish or the elements of the defences relied upon by the relevant defendants.

221 There are three relevant timeframes for the consideration of solvency in this case:

(a) December 2015, being the time at which MSL became incurred the debt of the Hunter Loan. This is relevant to the first insolvent trading claim against Hartwig and Minc. The plaintiffs allege that MSL was insolvent or became insolvent when it entered into the Hunter Loan, whereas the defendants deny this;

(b) June 2017, being the time at which the Horwood Payment, the Total Sallon Payment and the Aida Nominees Payments were made. This is relevant to the voidable transaction claims made against BCP, Sallon, and Aida Nominees. The plaintiffs allege that MSL was insolvent or became insolvent by reason of those transactions, whereas the defendants deny this; and

(c) October 2018, being the time at which MSL agreed to the County Court Final Orders. This is relevant to the second insolvent trading claim against Hartwig and Minc. The plaintiffs allege that MSL was insolvent or became insolvent due to the making of the County Court Final Orders, and Hartwig and Minc accept this.

222 Section 95A of the Act defines solvency and insolvency in the following terms:

(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

223 The legal onus of proving that a company is insolvent is on the person alleging insolvency.[17]

224 In Queensland Phosphate Pty Ltd v Korda [No 2],[18] the Court of Appeal summarised the principles for determining whether a company is insolvent as follows:

The applicable test as to insolvency was stated by Barwick CJ (with whom McTiernan and Windeyer JJ agreed) in Sandell v Porter as follows:

Insolvency is ... an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realisation by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.

The above test has been applied by this Court. It has been said that s 95A of the [Act] adopts a cash flow test of insolvency which focusses on the liquidity and viability of the business. The test focusses upon whether a company is 'able' to pay its debts rather than whether it is 'willing and able' to do so.

Whether a company is insolvent for the purposes of s 95A of the [Act] is a 'question of fact to be ascertained from a consideration of the company's financial position taken as a whole'. In considering the company's financial position as a whole, the court must have regard to commercial realities, which will be relevant in considering the resources available to the company to meet its liabilities as and when they fall due. Commercial realities include the nature of the company's business, the character of the debt and all of the circumstances present at the relevant time.

...

The test of insolvency in s 95A of the [Act] is to be applied 'without intrusion of hindsight'.[19]

225 In Australian Securities and Investments Commission v Plymin, Mandie J referred to the following 14 general and non-exhaustive indicators of insolvency: [20]

1 Continuing losses.

2 Liquidity ratios below 1.

3 Overdue Commonwealth and State taxes.

1. Poor relationship with present bank, including inability to borrow further funds.

5 No access to alternative finance.

6 Inability to raise further equity capital.

1. Suppliers placing [company] on [cash on delivery], or otherwise demanding special payments before resuming supply.

8 Creditors unpaid outside trading terms.

9 Issuing of post-dated cheques.

10 Dishonoured cheques.

11 Special arrangements with selected creditors.

1. Solicitors' letters, summons[es], judgments or warrants issued against the company.
2. Payments to creditors of rounded sums which are not reconcilable to specific invoices.
3. Inability to produce timely and accurate financial information to display the company's trading performance and financial position, and make reliable forecasts.

226 Although s 95A of the Act adopts a cash flow test of insolvency rather than a balance sheet test, a deficiency of assets over liabilities in a company's balance sheet can be used as a non-conclusive indicator of insolvency.[21]

227 In Quin v Vlahos, the Court of Appeal surveyed a number of cases dealing with the issue of when funds held by a third party may be treated as funds available to pay a company's debts as and when they become due and payable.[22] It is sufficient at this point to cite the concluding paragraph of this survey by the Court of Appeal:[23]

Whilst the legal onus to prove insolvency rests with the party alleging insolvency, the party alleging that an inference that a company was insolvent should not be drawn because third‑party funds were available to it bears an evidentiary onus on this issue. It is not sufficient to merely assert that a third party was willing and able to provide sufficient funds to enable the company to discharge its debts. Rather, the third party's preparedness to fund the company is assessed by reference to the objective evidence.

E.2 Was MSL insolvent in December 2015 or did it become insolvent by incurring the Hunter Loan?

228 Both experts had access to the same financial information about MSL. The different opinions reached by them as to MSL's solvency as at December 2015 (and June 2017) mainly arise due to the assumptions they were each separately instructed to make, as well as their assessments of the material.

229 Erskine's opinion, as set out in the First Erskine Report, is that MSL became insolvent on or around 1 December 2015 when it agreed to the short-term loan from the Hunters for the sum of $600,000 as it did not have the readily realisable assets available to make the repayment that was due on 10 December 2015.

230 The key assumptions she was instructed to make which impact upon this opinion are that:

(a) the Replacement Agreement did not exist;

(b) as at 1 December 2015, there were no shareholder loans which were due and payable by MSL;

(c) Trimont's business was sold to Trimont Australia in May 2015 and completed in August 2015, and Trimont is now in liquidation;

(d) the payments by MSL to Twisse and Straightline Excavations were not on behalf of Kanyon;

(e) there was no account receivable in the sum of $629,920 (or such other amount) from Kanyon/Trimont to MSL as at 3 December 2015 or such other time;

(f) MSL received the sum of $160,000 on 24 February 2016 and the sum of $443,047.74 on 30 March 2016 in respect of amounts paid to it by Trimont Australia, being amounts which could have satisfied the Hunter Loan; and

(g) the accuracy of MSL's and Kanyon's financial statements is in question.

231 Erskine begins her solvency analysis by referring to the definition of solvency in s 95A of the Act and to her understanding of the effect of the Act and case law, saying that a working definition of insolvency is an inability to pay debts as and when they fall due. This is dependent on the ability of an entity to meet liabilities from its assets on hand; and/or the ability of an entity to generate sufficient cash flows to meet payment of these debts as and when they fall due. Non-trading cash flows can be considered for solvency purposes, provided they are generated in a sufficiently short time frame and may include cash flows from the sale of assets and/or raising debt finance, provided it can be used to pay debts.

232 In relation to non-trading cash flows, Erskine explains further. She says that 'relatively short time' needs to be sufficiently short such that the entity can continue to pay its debts as and when they fall due. She says that the court has held that "In assessing how long a director has to act, as a very broad rule, a period of 90 days would be a guideline for a director to be justified in expecting solvency if an asset could be realised to pay accrued and future creditors in full."[24] She also says that 'when debts fall due' does not necessarily mean when the debts are legally due, and it can include arrangements made by the entity with the creditor to extend the payment period.[25]

233 Erskine concludes that the definition of solvency requires an assessment of the cash flow test and an analysis of the balance sheet in the context of an entity's core ability to pay its debts in order to assess whether the entity was able to pay its debts as and when they fall due. In her analysis, she includes a balance sheet analysis, cash flow analysis, profit and loss analysis, an analysis of available financial resources, and a creditor analysis. She relies mainly on MSL's management accounts and has compared them with MSL's externally prepared financial statements, concluding that there do not appear to be any significant unexplained differences between them.

234 On a balance sheet analysis, Erskine says that:

(i) MSL's major assets were the Laverton Property at $1,934,963 and various related party loans totalling $3,132,813 - the property is recorded as a non-current asset and the other assets are a mix of current and non-current assets. She says that in relation to the other assets, she has not been provided with information indicating whether they are realisable and whether their allocation between current and non-current assets is reasonable. Using the allocation in the balance sheet, the current assets were $2,276,658.

(ii) MSL had current liabilities of $548,909.

(iii) MSL had a net asset deficiency of $10,921.

(iv) MSL's current ratio (calculated by dividing current assets by current liabilities) was 4.15. Erskine says that this ratio serves to measure a company's ability to pay its short-term obligations and indicates how a company can maximise its current assets on its balance sheet to satisfy its current debts and other payables. She says that MSL's current ratio of 4.15 means that it had the capacity to meet its current liabilities, subject to it being able to realise the related party loans.

(v) As she had limited information in relation to the ability of the various related parties to repay monies owed to MSL and MSL's ability to realise its current assets, she calculated a cash ratio for MSL as at 1 December 2015. This is calculated by dividing the sum of cash and marketable securities by current liabilities. She says that this ratio considers a company's most liquid assets that are most readily available to a company to pay its short-term obligations, and a cash ratio of less than 1 indicates a company has insufficient cash resources immediately available to pay its short-term debts. She says that in MSL's case, its most liquid asset appeared to solely be cash at bank. She says that MSL's cash ratio at 1 December 2015 was 0.03, such that it only had cash resources immediately available to pay 3% of its current liabilities.

(vi) MSL's debt-to-asset ratio (calculated by dividing total assets by total liabilities, to provide an insight on how much of a company's assets are funded by debt) was 1.00. She says this indicates that 100% of MSL's assets were funded by debt.

(i) MSL's net asset deficiency was $17,037.

(ii) MSL's current ratio was 2.35, which she says indicates that it had the capacity to meet all of its current liabilities subject to being able to realise the related party loans quickly.

(iii) MSL's cash ratio was zero, which she says means that it had no cash resources immediately available to pay its current liabilities.

(iv) MSL's debt-to-asset ratio was 1.00, meaning that 100% of its assets were funded by debt.

235 On a cash flow analysis, Erskine prepared an estimated cash flow forecast for the period 1 July 2015 to 30 June 2016. The closing balances for each month in that period ranged from a peak of $9,673 (for June 2016) and a low of negative $916 (for May 2016). Erskine also prepared a graph charting MSL's bank balance at the end of each month for 1 July 2015 to 31 October 2018. Apart from a balance of $1,534,407.29 at 31 August 2015, MSL's cash balance at the end of each month were all significantly less than $600,000 (and only once went over $150,000 for March 2016). Erskine says that the August 2015 balance followed a deposit of $1,628,694.36 on 25 August 2015 described in the bank statement as 'Deposit Online 2463286 Pymt Berkeley C Coonwarra Disb'. She says that subsequent to receiving this sum, there were payments between 26 August and 23 September 2015 totalling $1,772,290 which were described in the bank statements as payments to Kanyon, Coonwarra,[26] Minc and MSL, Trimont Australia and Trimont. Erskine states that on a standalone basis, MSL's business operations were relatively straightforward in that its principal business activity was collecting rent from the Laverton Property and paying expenses associated with it. She says that MSL's affairs were "inextricably intertwined" with those of its shareholders and related parties, together with other entities under the control of Hartwig and/or Minc, and that various deposits and payments flowed through MSL's bank accounts at various times involving those parties which do not appear to relate to its principal business activity.

236 Erskine has also tabulated MSL's profit and loss statements on a monthly basis from July 2015 to October 2018. She says that except for July and October 2015, MSL incurred trading losses in all other months during that period after the monthly management profit and loss statements are adjusted for interest payments on the Hunter Loan. Erskine says that based on these adjusted profit and loss statements, which show trading losses in all months from December 2015 to October 2018, MSL's revenue base was insufficient to sustain its ongoing expenses and obligations without realising assets.

237 In terms of an analysis of available financial resources, Erskine considered a sale of MSL's assets and funding from shareholders and/or related parties. In relation to:

(a) A sale of MSL's assets, the only asset it had was the Laverton Property. Erskine says that it appears MSL could rely on a sale of the Laverton Property to generate cash within a matter of months if a decision was made to sell, however the debt-to-asset ratio of 1.0 means that as at December 2015, 100% of its assets were funded by debt and the debt-to-asset ratios as at 1 June 2017 and 30 June 2017 were 1.00 as well.

(b) Funding from shareholders and/or related parties (or entities under the control of Hartwig and/or Minc), Erskine says that she does not have sufficient information available to her to assess the financial position of MSL's shareholders at any given point in time and their ability to provide support or further support. She says she did have some information regarding Kanyon and MSD, both of which had posted net losses before tax in FY15 and FY16 and had net asset deficiencies in FY15 and FY16.

238 In terms of a creditor analysis, Erskine says that MSL had minimal third-party creditors and that its liabilities (apart from the Westpac loan for the Laverton Property) were mainly loans owed to related parties and/or shareholders. She says that based on the information provided to her, MSL appears to have complied with its statutory obligations to the ATO and there is no evidence to indicate there was ever a default in the repayment of the Westpac loan or an accumulation of debt over and beyond the credit limit, noting that Westpac's debt (which was secured by a mortgage over the Laverton Property) was discharged in full at settlement.

239 Erskine then sets out her conclusion as to solvency as at 1 December 2015, in order to give her opinion on a question she was instructed to answer, being: whether MSL was insolvent at the time of or became insolvent by entering into the Hunter Loan on 1 December 2015. She states her opinion as being that by allowing MSL to enter into the Hunter Loan on 1 December 2015 the directors caused MSL to become insolvent as it did not have the liquidity to pay its debts as and when they fell due. The Hunter Loan was repayable on 10 December 2015 and it was not repaid. Erskine says that she formed this opinion based on the following considerations:

(a) The matters referred to above.

(b) The cash resources available to MSL as at 1 December 2015 were limited, such that MSL did not have the capacity to repay from its cash resources the Hunter Loan plus interest by the due date of 10 December 2015, and its income was insufficient to meet this payment.

(c) In order to repay the Hunter Loan, MSL would need to either quickly convert other assets to cash or receive immediate financial support from shareholders.

(d) The Laverton Property appears to be readily saleable however that would take some months for it to be converted to cash. As at 1 December 2015, the Laverton Property was recorded in MSL's management accounts as having a value of $1,934,963. Westpac was owed $1,350,000. Not only is it unlikely that the Laverton Property could have been realised to meet the repayment of the Hunter Loan by 10 December 2015, the estimated equity in the property at the time would not have been sufficient to meet the full amount owed under the Hunter Loan.

(e) Some assets (loans) listed on the balance sheet have been claimed by the directors to not be from company funds - for example, the Armidale Payment. If that is correct, then this asset should not have been included in the financial statements and so the current asset position is overstated. Further, MSL's directors were aware that Trimont Australia, listed as a debtor in the sum of $1,236,926, was in default of its obligations to MSL. Erskine says that the directors knew or ought to have known that some assets disclosed in MSL's records as assets were either overstated or not readily collectible.

(f) As at 1 December 2015, MSL had a net asset deficiency of $10,921 and a debt-to-asset ratio of 1.00, and would therefore have faced difficulties borrowing funds from mainstream financiers.

240 Erskine states that she was also asked to consider whether her answer to this question would change if MSL did not owe any amount to the shareholders/related parties as at 1 December 2015. She says that this does not change her opinion as MSL incurred the Hunter Loan on 1 December 2015 and did not have assets that could quickly be converted to cash to meet its current liabilities (excluding shareholders/related parties).

241 In the First Smith Report, Smith was asked to consider MSL's finances from its commencement in October 2014 and provide an opinion as to whether it was insolvent as at December 2015. Part of this question he was instructed to address stated "[t]he Defendants argue that the Liquidator was wrong to treat shareholders' loans as 'debts due and payable' and to continue to value the [Laverton Property] at its original costs of acquisition, despite its value steadily increasing."

242 Smith was instructed to address this question on two different scenarios:

(a) The Replacement Agreement did occur (and that consequently the books and records of MSL, inclusive of the balance sheets and financial statements were accurate as recorded) ('Scenario 1'); and in the alternative

(b) The Replacement Agreement did not occur ('Scenario 2').

243 Smith summarises his conclusion by saying that under both scenarios, for the period October 2014 to December 2015 MSL recorded profits, held cash at bank and was in a position to meet its debts as and when they fell due, such that it would be considered to be solvent on 3 December 2015. He notes that in the statement of claim, Newman has adjusted MSL's accounts for the Hunter Loan but has not adjusted for the loan receivable from Trimont of $624,564.

244 I will shortly summarise Smith's explanation for the above conclusion, but it is helpful first to note some of the assumptions he was instructed to make.[27] These included:

(a) the shareholder loans from Sallon and Aida Nominees were not liabilities that were immediately due and payable by MSL, they were repayable at call or on demand, and at no time did they make a call or demand on MSL for the repayment of shareholder loans;

(b) the Savills Valuation valued the Laverton Property as at 1 December 2015 to be $1,850,000; and

(c) at all material times shareholders of MSL were ready, willing and able to continue to provide funding to MSL.

245 Smith refers to the definition of solvency and insolvency in s 95A of the Act and recites the indicators of solvency from ASIC v Plymin which I have set out above. He also recites ASIC's guide 'RG 217: Duty to prevent insolvent trading: Guide for Directors' ('ASIC RG 217') released after that case, which included the following list of indicators of potential insolvency:

• The company has a history of continuing trading losses.
• The company is experiencing cash flow difficulties.
• The company is experiencing difficulties selling its stock, or collecting debts owed to it.
• Creditors are not being paid on agreed trading terms and/or are either placing the company on cash-on-delivery terms or requiring special payments on existing debts before they will supply further goods or services.
• The company is not paying its Commonwealth and state taxes when due.
• Legal action is being threatened or has commenced against the company, or judgments are entered against the company, in relation to outstanding debts.
• The company has reached the limits of its funding facilities and is unable to obtain appropriate further finance to fund operations.
• The company is unable to produce accurate financial information on a timely basis that shows the company's trading performance and financial position or that can be used to prepare reliable financial forecasts.
• The company auditor has qualified their audit opinion on the grounds there is uncertainty that the company can continue as a going concern.
• The company has defaulted or is likely to default on its agreements with its financier.
• Employees, or the company's bookkeeper, accountant or financial controller, have raised concerns about the company's ability to meet, and continue to meet, its financial obligations.
• It is not certain that there are assets that can be sold in a relatively short period of time to provide funds to help meet debts owed, without affecting the company's ongoing ability to continue to trade profitably.

246 In relation to his opinion as to MSL's solvency in December 2015, Smith:

(a) has assumed that the balance sheet at 30 November 2015 is reflective of MSL's financial position when the proceeds of the Hunter Loan were transferred to it on 3 December 2015;

(b) analysed the monthly profit and loss statements from October 2014 to 30 November 2015, from which he comments that:

(i) MSL earned revenue from renting the Laverton Property to Woolworths and at 30 November 2015 had recorded a cumulative profit of $2,702;

(ii) at 30 November 2015, MSL had net liabilities of $10,921 and cash at bank of $15,005;

(iii) there were loans receivable from related party entities;

(iv) there were loans payable to related party entities; and

(v) he used the Savills' valuation of the Laverton Property, and in respect of all remaining assets and liabilities listed, the carrying value in the balance sheet represents market value;

(c) opines that for the period October 2014 to November 2015, MSL recorded profits, held cash at bank and was in a position to meet its debts as and when they fell due;

(d) assumes, based on his instructions, that MSL's shareholder loans were interest free and repayable on demand, and no demand had been made for repayment; and

(e) states that he is not aware of MSL having any of the other indicators of insolvency listed in ASIC v Plymin or ASIC RG 217 at the time of the Hunter Loan.

247 Under Scenario 1, Smith notes that due to the existence of the Replacement Agreement, the Hunter Loan was not recorded in the financial records of MSL. I interpose here to note that I assume if it was recorded in the balance sheet it would be recorded as a liability. He also notes that a journal entry (being journal entry GJ000008) to adjust the MSL accounts to reflect the Trimont payments of $624,563.68 now being an asset of Kanyon rather than MSL was made.

248 He then concludes that on the basis of the above information, under Scenario 1, MSL was solvent on 3 December 2015.

249 Under Scenario 2, Smith states that under the principle of double-entry accounting, if the liability for the Hunter Loan is to be recognised in MSL's accounts, then it would also be necessary to reverse journal entry GJ000008 to reinstate the loan asset of $624,563.68 from Trimont. He then states that if the loan receivable from Trimont had been reinstated in MSL's accounts, this loan would have been repaid once the working capital had been arranged and retentions paid by Kanyon to Trimont. He says that the adjusted MSL balance sheet shows an adjusted net asset deficiency of $96,171.

250 He then concludes that MSL was solvent on 3 December 2015 under Scenario 2.

251 The above discussion is taken from the First Smith Report. In the Second Smith Report, he was instructed inter alia to set out any comments he had in response to the Erskine Reports. Below I have summarised those aspects of the Second Smith Report which are relevant to the question of whether MSL was insolvent in December 2015.

252 In the Second Smith Report, Smith says that he does not agree with Erskine's opinion, and that his opinion is that MSL was not insolvent in December 2015. His reasons for this opinion include:

(a) At the time the Hunter Loan was made, it was anticipated that the funds loaned by MSL to Trimont and Trimont Australia would be repaid when the latter's major shareholder arranged for working capital facilities.

(b) Hunter and Hartwig discussed repayment in March 2016 which led to the Replacement Agreement.

(c) It is not uncommon for loan terms to change after the initial terms are agreed.

(d) In relation to MSL's cash ratio and debt-to-asset ratio as at 1 December 2015, in private entities debt from shareholders is often quasi-equity and is not immediately due and payable.

(e) It is possible that MSL could have sought repayment of one of the related party receivables or the shareholders may have been in a position to contribute further funds had demand for repayment of the Hunter Loan been made on 10 December 2015. Accordingly, unless it is determined that a demand for repayment was made then and MSL was not able to meet it, then MSL would be considered not to be insolvent in December 2015.

(f) Erskine refers to losses in three of the five months from 1 July 2015 to 30 November 2015 but does not consider the profits earned from April to June 2015, such that MSL incurred losses in only three of the eight months reviewed. ASIC v Plymin refers to continuing losses and ASIC RG 217 refers to a history of continuing trading losses. Smith's opinion is that the losses in the three months referred to by Erskine are not an indicator of continuing trading losses and therefore are not an indicator of insolvency.

(g) MSL's balance sheet indicates that the $1,243,048 loan owed by Trimont Australia in February 2016 reduced to $800,000 in March 2016 and further reduced to nil by 30 June 2016. Smith appears to rely on this to criticise Erskine's opinion that the directors knew or ought to have known that some of MSL's assets were not readily collectable.

(h) Over the review period, MSL did not write off as an expense any unpaid loan amounts from related entities.

(i) Erskine has not indicated at what point the Hunter Loan became due and payable, noting that she indicated that loan terms can be renegotiated. Erskine has not referred to any information or details of when Hunter requested payment of the outstanding loan. She has not considered the collectability of the related party receivables, nor the ability of the shareholders to repay the debts, had a demand for repayment been made on the Hunter Loan in December 2015.

(j) He is not aware of any other debt of MSL that was not paid as and when it fell due.

253 The plaintiffs rely on Erskine's evidence to establish that MSL became insolvent by entering into the Hunter Loan (section 588G(1)(b) of the Act).

254 The plaintiffs submit that it is important that prior to entering into the Hunter Loan, MSL's liabilities exceeded its assets. The deficit is even worse if the Court accepts the defence that the Armidale Payment was not from MSL's funds, rather MSL was used as a pass through entity and it never made the Demolition Payment to or for the benefit of Armidale.

255 The plaintiffs submit that the Court can accept Erskine's opinion that MSL became insolvent by entering into the Hunter Loan, and should prefer the evidence of Erskine over that of Smith for the following reasons:

(a) Erskine's opinion relates to a precise date, being the date MSL incurred the debt on 1 December 2015 and is based on multiple, well analysed, relevant factors. Further, Erskine's opinion addressed the relevant test for the purpose of s 588G(1)(b) of the Act.

(b) By contrast, in the First Smith Report, Smith's opinion that MSL was solvent on 3 December 2015 does not address the relevant test and relies on limited historical matters in the period October 2014 to December 2015.

(c) Smith's opinion is his second report lacks coherent analysis and seems to rely on multiple assumptions that are not made out and the incorrect opinion that a debt with a due date is not payable unless a demand is made, and again does not address the relevant question for the purpose of s 588G(1)(b). Smith did not conduct any analyses of the type conducted by Erskine in reaching his opinion. Further, Smith conceded that he did not know whether MSL could or could not pay the Hunter Loan on the due date of 10 December 2015.

(d) The assumptions by Smith that the shareholders continued to provide financial support are not made out. The very fact that MSL sought finance from a non-shareholder in the form of the Hunter Loan indicates the shareholders were no longer willing to fund MSL to pay Trimont or Trimont Australia's debts.

(e) Smith was not instructed that the Armidale loan receivables ought to have been removed from the balance sheet. Smith said he was not aware that the defendants had claimed in this proceeding that the Armidale loan receivables were not MSL's funds. Smith agreed that removing the Armidale loan receivables would result in MSL having less assets.

(f) MSL had no intention to sell its only income earning asset, the Laverton Property, in December 2015. There was evidence that the source of repayment of the Hunter Loan was the working capital to be obtained by Trimont Australia.

(g) Smith admitted that solvency came down to MSL's ability to call in the loan receivables or get funding from shareholders. There are problems with this opinion. There was no evidence given about the ability of MSL to call in shareholder loans in December 2015. In re-examination, Hartwig said that Minc had a line of credit available to him, however, Minc's evidence was that he was not aware at the relevant time that MSL ever made the Hunter Loan. Hartwig also said funds were available through BCP and Sallon, however, no explanation was given as to why either of those companies did not provide funds to repay the Hunter Loan on the due date if funds were readily available. In those circumstances, the plaintiffs submit that the Court should be reluctant to accept bare, self-serving statements without any detail as to indicators of solvency.

256 The plaintiffs further submit that there is evidence that Trimont, who owed a debt to MSL at 1 December 2015, was financially struggling and could not pay its own debts, as Kanyon paid multiple debts for Trimont at the end of 2015 and start of 2016. There is evidence Kanyon funds were used to pay Trimont's legal fees on 3 December 2015, the very same day Hunter advanced the funds to MSL and again on 17 December 2015, and to pay Trimont's debts unrelated to Kanyon on 21 December 2015. This evidence brings into question the ability of MSL to recover the loan receivable from Trimont.

257 Defendants' counsel sought to impugn Erskine's analysis on the basis she had not had regard to a signed set of financial statements in respect of MSL's assets in December 2015. However, those financial statements were signed in June 2017. The plaintiffs submit that they are not reflective of the contemporaneous financial position of MSL in December 2015 and that it was reasonable for Erskine to rely on the management accounts in the way she did.

258 Defendants' counsel sought to make something of the fact that Erskine did not consider the absence of a demand for payment of the Hunter Loan on 10 December 2015 in her first report but did mention the absence of a demand for payment in relation to the MSD Loan in her second report. The plaintiffs submit that the distinction is immaterial because there was no due date for the MSD Loan, it being an assignment from MSD to MSL and there was no due date for the consideration MSL owed MSD under the assignment deed. By contrast, there was a clear due date of 10 December 2015 for the Hunter Loan, admitted by the defendants.

259 Defendants' counsel suggested to Erskine that MSL's accounts did not properly record the value of the Laverton Property at December 2015. However, the plaintiffs point out that the value attributed to the property in the management accounts that Erskine relied on is higher than the valuation at 1 December 2015, giving MSL a slightly higher asset value in Erskine's analysis.

260 Defendants' counsel sought to make something of Erskine not making any enquiries of the financial resources of Minc and Susan Minc or Hartwig and his companies. The plaintiffs say that kind of information is only within the possession of Minc and Hartwig and their accountants. They also say that the defendants did not adduce any evidence that would indicate Minc's or Hartwig's financial position or willingness to contribute to repayment of the Hunter Loan in December 2015. The plaintiffs submit that in any case, it is clear that Minc knew nothing about the Hunter Loan, therefore, his resources at the time are irrelevant. They submit that it is not possible to draw any inference that Minc would have contributed funds to repay the Hunter Loan. The plaintiffs further submit that the fact that Hartwig (on behalf of MSL) sought funds from Hunter indicates Sallon, of which Hartwig was a director, was no longer willing to provide funds to MSL.

261 Defendants' counsel sought to criticise Erskine's opinion as to the solvency of MSL on the basis that various assets could have been realised to pay the Hunter Loan. However, the plaintiffs submit that this criticism misses the point that it is a reasonable and undeniable inference that the sale of the Laverton Property or the obtaining of finance could not have been achieved by the due date of 10 December 2015.

262 In relation to Erskine's opinion that MSL was insolvent in December 2015 after entering into the Hunter Loan because it did not have the capacity to repay it by 10 December from its cash resources or income, the defendants submit that this is not, by itself, sufficient to establish insolvency.

263 The defendants submit that this is far too narrow an approach and ignores the kinds of factors identified in ASIC v Plymin. Even on the narrow, single-factor approach, they say that Erskine recognised that the question of when a debt falls due does not necessarily mean when the debt is legally due and can include arrangements with creditors to extend the payment period.

264 The defendants submit that this observation is consistent with authority. They say a court can enquire as to whether there was an arrangement for an extension of the time for payment, even an arrangement that is not contractually binding, and whether the debtor could expect that an extension would be granted.[28] They also refer to Quin v Vlahos, where the Court of Appeal said:[29]

... a loan which is technically repayable on demand will not be treated as immediately due and payable for the purpose of assessing solvency where there is evidence that the lender does not intend to demand repayment prior to a particular event occurring.

265 In cross-examination, the defendants refer to Erskine saying that:

(a) she did not consider the possibility that amounts repayable on 10 December 2015 might have been extended or the term re-negotiated, and she had no information to indicate an extension was provided;

(b) she was unaware of arrangements whereby funds were to be provided by the Hunter family or that Hartwig and Hunter were not dealing at arm's length;

(c) she had no information to ascertain the ability to raise money from related parties or that Minc had made a significant contribution to the initial deposit, assuming instead there was no ability to provide further funding;

(d) she did not recall seeing the email from the CBA regarding its approval of a guarantee;

(e) she assumed that the lender would insist on payment, but if the lender did not insist on payment, a matter for Hunter to decide, that would be taken into consideration; and

(f) she acknowledged that if the lender insisted on repayment then the directors could have sought to make arrangements.

266 The defendants submit that Hunter did not seek or insist on repayment of the $600,000 in December 2015 or January 2016. He said it made sense that the money would be repaid once funds were paid by Trimont Australia and he was comfortable with that. The defendants say that there is no evidence of a request for payment prior to 2017.

267 The defendants submit that the fact interest of 10% was to be paid on the Hunter Loan indicates that from the outset the parties contemplated the funds would not be repaid within the five business days. There were many occasions where Hunter could have asked for repayment, but did not.

268 The defendants submit that Hartwig says there would have been funds available from Minc if needed in December 2015 and that the fact that MSL's bank account went into overdraft on 2 December 2015 before the Hunter Loan proceeds were received is evidence that MSL would have been able to get a bank loan if needed. They say that if Hunter had sought payment on 10 December 2015 there is every reason to think that MSL's bank would have allowed it.

269 The defendants submit that Erskine's report is based on assumptions not established by the evidence, and that her conclusion regarding insolvency is not only contrary to common sense, it is unsupported by the facts of the case.

(a) I prefer Erskine's methodology to that of Smith. She explains clearly, and by reference to what facts or assumptions she makes, how she has reached each of her conclusions. On the other hand, after setting out his analysis as I've described it above, Smith moves straight to his conclusions without necessarily explaining how he got there. By way of example of this, he does not explain how his conclusion of solvency on 3 December 2015 under Scenario 2 is justified when he had just stated that under that scenario there was a net asset deficiency of $96,171; and

(b) I accept the plaintiffs' submissions in respect of MSL's solvency as at December 2015, as summarised above.

271 The key question to be answered is whether, at the time of entering into the Hunter Loan, MSL was able to pay its debts as and when they fell due. It was a term of the Hunter Loan that it be repaid on 10 December 2015 together with interest accrued as at that date based on an interest rate of 10% per annum.

272 Hence, the Court is required to determine whether, as at 1 December 2015 when it incurred the liability to repay the Hunter Loan of $600,000 plus interest on 10 December 2015, MSL had the ability to do so.

273 In my view, the Court must address this question based on the repayment date for the Hunter Loan, since that was the date when it was due and payable. I reject the defendants' attempts to deflect attention from, or minimise the importance of, this date, for the following reasons:

(a) Much of Smith's opinion that, in December 2015, MSL was able to pay its debts as and when they fell due and was therefore solvent is based on the premise that the Hunter Loan was not payable on 10 December 2015 because no demand was made for its payment on that date or shortly thereafter. He does not express it in this way, but it is obvious that this is his premise from the way he frames his opinion. In particular, he says that "unless it is determined that a demand for repayment of the Hunter Loan was made in December 2015 and MSL were not able to meet that demand, MSL would be considered not to be insolvent in December 2015."

(b) This cannot be accepted, because the Hunter Loan was not repayable on demand: it had a due date for repayment of 10 December 2015. Thus the defendants' reliance on Quin v Vlahos as cited at paragraph 264 above is misplaced, as that case relates to a loan that is repayable on demand, not one which has a due date for payment.

(c) Erskine's opinion based on a repayment date of 10 December 2015 must be accepted. The defendants' criticism of her evidence in this regard is not accepted. In particular, their submission that Erskine adopted a narrow, single-factor approach and ignored the factors identified in ASIC v Plymin[30] cannot be accepted. This is not what Erskine did: she clearly did consider the factors identified in ASIC v Plymin and did not base her opinion that MSL was insolvent in December 2015 after entering into the Hunter Loan solely on its capacity to repay from its cash resources or income.

(d) Smith's observations that the terms of a loan can be renegotiated are not to the point, since there is no evidence that, as at December 2015, there was any such renegotiation.

(e) The defendants' submissions that the Court can have regard to arrangements with creditors to extend the payment period are not to the point, since there is no evidence of this. In this regard, I am referring to the situation as at or around 10 December 2015. Their criticism of Erskine not considering the possibility that the amounts repayable on 10 December 2015 might have been able to be renegotiated or the term extended therefore has no substance. That it might have been renegotiated is of little import when there is no evidence that it was. In any event, given my findings in respect of the Replacement Agreement, there was no arrangement with Hunter to extend the payment period or to have someone else assume liability for the repayment.

(f) As noted above, the defendants submit that there being a term of the Hunter Loan requiring payment of interest at 10% pa indicates that from the outset the parties contemplated the funds would not be repaid within the five business days. There being interest payable on a loan, even a short-term loan, is hardly surprising (particularly in circumstances where Hunter borrowed funds himself or through one of his entities from a bank to make the loan). I do not think the inference posed by the defendants is the only inference available here and so I decline to draw it. Even if the defendants' submission is correct, that does not detract from the Hunter Loan being due and payable on 10 December 2015: it simply means that if it was not, more interest would accrue and be payable.

(g) In these circumstances, I do not accept that Hunter's failure to demand repayment on or shortly after 10 December 2015 affects the solvency analysis as at December 2015.

274 The cases are clear that the ability to pay debts as and when they fall due is to be assessed based on a number of factors, which I will address below.

275 It seems to me that it is abundantly clear that MSL did not have the cash resources to repay the Hunter Loan on 10 December 2015. Applying the cash flow test, MSL was not able to pay the Hunter Loan as and when it fell due. Its cash position, available cash or like resources, and its revenue from ordinary trading would not have produced the amount required to repay the Hunter Loan by the due date. That being the case, other factors must be considered.

276 Borrowing from mainstream financiers is recognised as a legitimate source of meeting short-term debts when considering solvency. However, in MSL's case as at December 2015, I do not accept that it is realistic to think that it would have been able to borrow funds, either from its own bank or another mainstream financier. This is because:

(a) I do not accept the defendants' submission that the fact that MSL's bank account went into overdraft for one day between 2 and 3 December 2015 is evidence that MSL would have been able to obtain a loan from its bank to repay the Hunter Loan or that its bank would have allowed the account to go into overdraft if the Hunter Loan was repaid from that account. I do not think it reasonable to infer that this is a potential resource when considering solvency; and

(b) I accept Erskine's analysis that MSL's debt-to-asset ratio as at 1 and 3 December 2015 means that MSL was unlikely to be able to obtain financing from its bank or other mainstream financier to repay the Hunter Loan on 10 December 2015.

277 Funding from a related party or further support from shareholders is also recognised as a legitimate resource for the consideration of solvency. In this regard:

(a) Insofar as a contribution from Minc or his entities is concerned:

(i) There was no evidence led from Minc that he or any of his entities would have provided financial support to MSL to meet the Hunter Loan in December 2015.

(ii) Hartwig gave evidence that Minc had the resources to do so, but this should be given little weight given that Hartwig did not provide any source material to support this, and Minc himself did not give evidence on this point.

(iii) I accept the plaintiffs' submission that in circumstances where Minc said he did not know about the Hunter Loan at the time, it cannot be inferred that he would have provided support for its repayment.

(b) Insofar as a contribution from Hartwig or his entities is concerned:

(i) Hartwig did not give evidence that he could or would have provided financial support to MSL to meet the Hunter Loan in December 2015.

(ii) That Hartwig sought a loan of $600,000 from a third party to MSL, being Hunter, so as to cover the monies MSL had paid or was about to pay to Twisse and Straightline, suggests that neither he nor his entities were willing and/or able to do so. After all, it is logical to think that the director would first consider his own resources when dealing with what he thought would be a short-term need. In this regard and despite Hartwig's oral evidence that funds were available through BCP and Sallon, I accept the plaintiffs' submission that this bare and self-serving statement should be rejected where Hartwig did not explain why neither of those companies provided funding to repay the Hunter Loan on the due date (or lend the money themselves to MSL in the first place instead of seeking funding from Hunter).

278 Accordingly, support from related parties or shareholders is not an indicator of MSL's solvency as at December 2015. Rather, it cannot be said in this instance that shareholder support was a resource available to MSL in December 2015 to meet its debts as and when they fell due, in particular the Hunter Loan on 10 December 2015.

279 It therefore falls to consider whether MSL had the ability to realise any of its assets in order to meet the Hunter Loan on 10 December 2015.

280 The only assets which MSL had as at December 2015 were the Laverton Property and the loan receivables from shareholders, related entities and others.

281 Insofar as the Laverton Property is concerned, I accept Erskine's opinion as to whether a sale of that property should be factored into the analysis. I accept her opinion that the property was readily saleable, but I also accept her opinion that it was not possible for it to be realised within a timeframe short enough to satisfy the repayment of the Hunter Loan. I reject the defendants' criticism of Erskine's reliance on the value attributed to the Laverton Property in MSL's management accounts, given that it is more than the valuation relied upon by their own expert, since Smith used the lower Savills' Valuation. Erskine's use of the valuation in MSL's accounts is reasonable, as is her conclusion that a realisation of the Laverton Property on that valuation would not have yielded an amount sufficient to discharge the mortgage on the property and repay the Hunter Loan plus interest.

282 Therefore, I do not consider realising the asset of the Laverton Property within the short time period of the Hunter Loan to be a realistic source for MSL repaying that loan by its due date.

283 It remains to consider whether realising MSL's loan receivables in December 2015 can be taken to be a resource for it meeting its obligations at that time. In this regard:

(a) MSL's ability to recover a debt owed to it by Trimont, either quickly or at all, for that matter, is seriously doubtful, for the reasons submitted by the plaintiffs.[31]

(b) Smith merely assumes that MSL could have sought repayment of one of the related party receivables, without conducting any real analysis (apart from the Trimont Australia receivable) of whether that was actually possible.[32]

(c) The inference Smith seeks to draw from the balance sheet changes in respect of monies owed by Trimont Australia[33] is not the only inference available. In any event, there is no evidence before the Court as to the reason for that reduction in Trimont Australia's liability to MSL in the latter's balance sheet.

(d) Nor do I attribute any significance to Smith's observation that MSL did not write off as an expense any unpaid loan amounts from related entities.[34] This was not the subject of any evidence at trial; in particular, there was no evidence as to MSL's usual practices in respect of such matters.

(e) The defendants could have led evidence as to the ability of related parties to repay their loans in December 2015, but did not do so. Such evidence was presumably available to them. In my view, this leads to a conclusion that limited weight should be given to this factor such that the related party loans cannot reliably be taken to be assets able to be readily and quickly realised so as to meet MSL's debts in December 2015. In this regard, in Roberts-Smith v Fairfax Media Publications Pty Limited (No 41),[35] Justice Besanko stated that:

In Ho v Powell, Hodgson JA (with whom Beazley JA agreed) made the following two points. First, Lord Mansfield's maxim in Blatch v Archer that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted, may affect the assessment of matters which are relevant to whether the limited material before the Court is an appropriate basis on which to reach a reasonable decision. ... [36]

284 Weighing up all of these factors, in my view MSL became insolvent on 1 December 2015 when it entered into the Hunter Loan, noting that this effectively crystallised once the funds were advanced to MSL on 3 December 2015. I accept Erskine's opinion in this regard and I reject the defendants' submission that her opinion is contrary to common sense and unsupported by the facts of the case.

E.3 Was MSL insolvent in June 2017 or did it become insolvent by reason of entering into the alleged voidable transactions at that time?

285 In summary, Erskine's opinion is that in June 2017, due to rising property values and the sale of the Laverton Property, MSL was in the position to pay all of its creditors, including the Hunter Loan in full. However, the payments which MSL made from the Net Sale Proceeds (including the Horwood Payment, Total Sallon Payment and Aida Nominees Payments) rendered MSL insolvent as it was left without resources to meet its liabilities and, after the sale of the Laverton Property, MSL had no source of income.

286 Erskine says that once the Laverton Property was sold,[37] MSL appears to have had no financial resources available to pay its debts as it no longer had any tangible assets readily available that could be sold to generate cash. She says that in its own right, it would have had limited access to borrowing from external or mainstream sources due to its lack of assets.

287 Erskine begins her detailed analysis of the question by saying that as the impugned payments were made over different days from 6 to 30 June 2017, she has elected to consider MSL's financial position as at 1 June 2017 and as at 30 June 2017, relying on MSL's management reports.

288 In order to carry out her analysis, Erskine used MSL's monthly management reports (which she subsequently reviewed against the financial statements) and adjusted them to reverse the journal entry that had been made by MSL to reflect the Replacement Agreement. This is consistent with the assumption she was instructed to make that the Replacement Agreement did not exist. A further adjustment was made to recognise the interest payable on the Hunter Loan, which was calculated to be $88,438 as at 1 June 2017.

289 Erskine then performed a similar exercise to that undertaken in respect of December 2015, noting that the assumptions she was instructed to make were the same or similar to those instructed for the earlier period.

290 The main differences in respect of the balance sheet for 1 June 2017 to December 2015 were:

(a) the interest amount of $88,438 for the Hunter Loan; and

(b) the Laverton Property being treated as a current asset with a value of $2.755 million, and the associated debt of $1.29 million to Westpac being treated as a current liability. In my view these were reasonable and necessary changes given that by 1 June 2017 the Laverton Property had been sold and settlement was imminent.

291 Erskine says that based on her balance sheet analysis, as at 1 June 2017, MSL had:

(a) a net asset surplus of $796,904;

(b) a current ratio of 1.67, indicating it had the capacity to meet all of its current liabilities (subject to being able to realise the related party loans quickly);

(c) a cash ratio of 0.01, which means it only had cash resources immediately available to pay 1% of its current liabilities, noting that this would have significantly improved upon settlement of the Laverton Property; and

(d) a debt-to-asset ratio of 0.80, which means that 80% of MSL's assets were funded by debt. I interpolate here to observe that I think this change from a debt-to-asset ratio of 1.0 as at December 2015 is primarily due to the combination of slightly less being owed to Westpac as at 1 June 2017 and the significant increase in value of the Laverton Property by then, although I do not think anything much turns on that observation.

292 Erskine says that in her opinion, MSL was not insolvent as at 1 June 2017 despite having limited cash and cash equivalents of $11,528, as:

(a) by 1 June 2017, MSL had sold the Laverton Property for $2.755 million with settlement due on or around 5 June 2017. After discharging the $1.29 million Westpac debt, MSL stood to receive $1.465 million (subject to costs of sale) into its bank account, noting that on 5 June 2017 a sum of $1,177,404.72 was deposited into its bank account which increased its cash at bank to $1,178,213.57;

(b) according to the adjusted balance sheet, MSL had current assets of $3,749,162 and current liabilities of $2,241,511 which included the Hunter Loan and interest. At that point MSL had the ability to pay all of its current liabilities in full. It had a surplus of assets over liabilities of an estimated $796,904 meaning it also had the capacity to pay all of its non-current liabilities included shareholder and related party loans, subject to collecting the remaining assets owed to it; and

(c) in answer to a supplementary question from her instructors as to whether her analysis would change if MSL did not owe any amount to shareholders and/or related parties at 1 June 2017, she says that would only improve MSL's financial situation.

293 Erskine then considers the situation as at 30 June 2017, making the adjustments necessary for the Replacement Agreement not existing, the Laverton Property having been sold, the Net Sale Proceeds having been distributed, and the interest on the Hunter Loan increasing to $93,370.

294 Erskine says that based on her balance sheet analysis, as at 30 June 2017, MSL had:

(a) a net asset deficiency of $91,028;

(b) a current ratio of 0.88, indicating it had the capacity to meet all of its current liabilities (subject to being able to realise the Trimont loan quickly);

(c) a cash ratio of 0.08, which means it only had cash resources immediately available to pay 8% of its current liabilities;

(d) a debt-to-asset ratio of 1.13, which means that 100% of MSL's assets were funded by debt.

295 Erskine also relies on the cash flow analysis she conducted and which I have described in the earlier section.

296 Erskine then concludes that by 30 June 2017, MSL was rendered insolvent due to the payments it had made to Horwood Nominees, Sallon and Aida Nominees, as:

(a) the balance sheet prepared by MSL's management as at 30 June 2017 had total assets of $61,664. Her adjusted balance sheet provided that MSL had total assets of $689,394, of which $624,564 related to the Trimont loan account which she says she is unable to determine if it would have been able to be converted to cash quickly. MSL only had $61,664 relating to cash and cash equivalents to meet its immediate liabilities. Including the Hunter Loan and interest, her analysis indicates MSL had unpaid liabilities of $780,422 and a net deficiency of $91,028;

(b) MSL had disposed of its only source of income, being the Laverton Property, and therefore had no future income from which to meet its liabilities;

(c) MSL therefore did not have the capacity to pay its liabilities as and when they fell due and was insolvent at this time; and

(d) In answer to a supplementary question from her instructors as to whether her analysis would change if MSL did not owe any amount to shareholders and / or related parties at 30 June 2017, she says that her opinion is unchanged.

297 Erskine says that by making the payments to Horwood Nominees, Sallon and Aida Nominees, MSL left itself without the capacity to meet its other liabilities and therefore once the payments were made, MSL was insolvent as it was unable to pay its debts as and when they fell due.

298 The First Smith Report does not address MSL's solvency or insolvency as at June 2017, as he does not appear to have been instructed to do so.

299 This issue is addressed in the Second Smith Report, along with his comments on both of the Erskine reports. In his second report, he relies on the same assumptions as for his first report plus certain statements made by Hartwig in the First Hartwig Affidavit that he told Hunter that the Hunter Loan would be repaid within about five days because of Trimont Australia providing replacement security for Trimont's retention sums, and that this did not happen as quickly as he had anticipated, which led to the discussion Hartwig said occurred at the Giorgios Meeting.

300 Smith's opinion is that MSL was not insolvent as at 30 June 2017.

301 He relies on MSL's balance sheet as at that date and assumes that it is reflective of MSL's financial position as at that time, along with a monthly profit and loss statement from 1 July 2016 to 30 June 2017. He says he completed an analysis of these documents and comments as follows regarding MSL's financial performance for FY17:[38]

(a) MSL earned revenue totalling $110,164 from renting the Laverton Property to Woolworths;

(b) MSL recognised a profit on the sale of the Laverton Property of $806,414;

(c) at 30 June 2017 MSL had net assets of $2,462 and cash at bank of $61,663;

(d) there was a loan payable to MSD (a related party entity);

(e) in respect of all remaining assets and liabilities, he assumes that the carrying value in the balance sheet are representative of fair value; and

(f) from this, Smith concludes that as at 30 June 2017 MSL recorded profits, held cash at bank and was in a position to meet its debts as and when they fell due.

302 Smith then goes on to address MSL's solvency in June 2017 on the same two scenarios as considered in the First Smith Report, being Scenario 1 (the Replacement Agreement did occur) and Scenario 2 (the Replacement Agreement did not occur).

303 Smith does not go into further detail regarding Scenario 1, as this is effectively what he had already done and which I have summarised in paragraph 301 above. According to Smith, under Scenario 1, MSL would be considered not to be insolvent on 30 June 2017.

304 Smith reaches the same conclusion for Scenario 2, as he states that reinstating the Hunter Loan into the books of MSL would also have resulted in reinstating the Trimont loan receivable of $624,563.68. Had that receivable been reinstated in MSL's books, Kanyon would have released the Wodonga and Newcastle retentions to Trimont, Trimont would have paid MSL, and MSL would have repaid the Hunter Loan.

305 The plaintiffs submit that MSL became insolvent by reason of making the June 2017 payments, and they rely on Erskine's evidence in this regard.

306 The plaintiffs submit Erskine's evidence as to the insolvency of MSL in June 2017 should be accepted. They say she was asked and answered the relevant question for the purpose of s 588FC of the Act, and that she carried out a detailed analysis of the financial position of MSL and each of the payments.

307 They say that by contrast, Smith was not asked the relevant question, he was merely asked to provide an opinion as to MSL's solvency in June 2017.

308 The Defendants' counsel criticised Erskine for not forming an opinion as to MSL's solvency at the date of each individual impugned payment. The plaintiffs say that this criticism misses the point. The plaintiffs' case is that while each payment is a separate transaction, under s 588FC(b) of the Act, a company can become insolvent by matters including entering into the transaction, which leaves open the potential for the insolvency to be caused by entering into the impugned transaction and other transactions.

309 The plaintiffs submit that for each of the impugned payments, the remaining impugned payments are other matters within the meaning of s 588FC(b) of the Act. On this analysis, the plaintiffs say that the appropriate dates to assess solvency were before and after all the impugned payments had been made.

310 Defendants' counsel suggested to Erskine that at the end of June 2017 there was no net effect on the adjustments to MSL's accounts, as the assessment of solvency at that time included an assumption that the Replacement Agreement did not exist. Erskine's evidence was that it was subject to the ability to collect in the assets, the asset being the loan receivable of $624,563.68 from Trimont. In re-examination, Erskine's evidence, in summary, was that the fact that an order was made for Trimont to be liquidated on 31 May 2017 confirmed that the liquidation would be relevant to collectability, as MSL would have to lodge a claim in the liquidation.

311 The plaintiffs submit that the basis on which Smith included the loan receivable of $624,563.68 as an asset of MSL in June 2017 was an assumption that the loan receivable of $624,563.68 was to be repaid to MSL by the release of the Newcastle and Wodonga retentions. By December 2015, Trimont already had the benefit of the Newcastle retention, therefore, there was no basis to include the entire loan receivable in MSL's assets. Smith agreed that if the Newcastle retention had already been accounted for, then the $624,563.68 from Trimont could not be repaid if that was the basis of the repayment. Smith also agreed that if Kanyon would not have released the retentions to Trimont and Trimont would not have repaid MSL (the opposite of the assumptions which Smith had made), that would impact MSL's solvency at June 2017 if it had no other source of funds.

312 The plaintiffs submit that the evidence is there was no other source of repayment of the Hunter Loan in June 2017. Hartwig and Minc (the individuals responsible for the shareholders) both gave evidence that they were not going to pay the Hunter Loan in June 2017. MSL had no funds left after distributing the entire Net Sale Proceeds of the Laverton Property. The plaintiffs submit that the Court can infer that there was no prospect of recovering the $624,563.68 loan receivable from Trimont, because Trimont was in liquidation and the retentions which were apparently meant to fund Trimont's payment to MSL had been accounted for elsewhere.

313 Smith agreed with Erskine's analysis that there was a net asset deficiency in June 2017 if the Replacement Agreement did not occur. Smith agreed that if MSL's shareholders would not fund repayment of the Hunter Loan, MSL's ability to pay the Hunter Loan and interest depended almost entirely on whether MSL could recover the loan receivable of $624,563.68 from Trimont. Smith said that the fact of Trimont being ordered into liquidation in May 2017 potentially impacted his opinion as to MSL's solvency in June 2017 and agreed that it potentially causes an issue in realising the asset in the short term.

314 The defendants submit that the issue of solvency arises separately in relation to each of the voidable transaction claims. With one exception,[39] the transactions took place on either 6 June 2017, or on 29 and 30 June 2017.

315 If the Court finds that MSL ceased to be liable to repay the Hunter Loan, the defendants submit that no question of insolvency arises. Accordingly, their submissions as summarised below are based on the continued existence of that debt despite that being contrary to the defendants' primary position.

316 Insofar as solvency on 6 June 2017 is concerned, the defendants submit that:

(a) Erskine's reports are based on the assumption that MSL remained at all times liable to repay the Hunter Loan. Even so, she expresses the view that MSL was "not insolvent" as at 1 June 2017 before expressing the view:

... I believe MSL was rendered insolvent following the payments to Horwood Nominees, Sallon and Aida Nominees.

Since the last of the identified payments occurred on 30 June 2017, the defendants contend that this opinion must relate to solvency at the end of June rather than any particular date during June. Having said MSL was solvent at the start of June, but insolvent at the end of the month, Erskine did not attempt to identify at what point, or as the result of which payment, MSL became insolvent.

(b) The timing is especially important because the first written demand for repayment of the Hunter Loan was by a letter and notice dated 9 June 2017, three days after the initial payments identified by Erskine.

(c) Erskine's evidence does not demonstrate that MSL was insolvent on 6 June 2017 or became insolvent because of payments made that day. In evidence, she agreed MSL might have been solvent at the time of the earlier payments but not solvent at the end of June. She said that just because MSL was in her view insolvent on 30 June does not mean it was insolvent on 6 June and that she looked at solvency on 1 June and 30 June.

317 Insofar as solvency on 30 June 2017 is concerned, the defendants submit that Smith deals with this in his second report, both on the basis the Replacement Agreement existed and on the basis it did not. On the second basis, he concludes MSL would be considered not to be insolvent due to the re-introduction of the Trimont loans as an asset. Although they do not specifically state it, I assume that the defendants submit that on this basis the Court should find that MSL was not insolvent at 30 June 2017.

318 The question under consideration is whether MSL was insolvent in June 2017 or became insolvent by reason of entering into the alleged voidable transactions at that time. The question arises because, for a transaction to be voidable as an unfair preference, uncommercial transaction, or as a transaction with a creditor-defeating purpose, it must also be an insolvent transaction.

319 In this regard, s 588FC of the Act defines the meaning of insolvent transaction as follows:

A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:

(a) any of the following happens at a time when the company is insolvent:

(i) the transaction is entered into; or

(ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

(b) the company becomes insolvent because of, or because of matters including:

(ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction.

320 One of the key issues in dispute in determining whether MSL was insolvent in June 2017 or became insolvent by reason of entering into the alleged voidable transactions at that time is whether solvency has to be assessed as at the date of each separate transaction or whether it can be assessed in aggregate.

321 In my view, it is plain that the plaintiffs' submission in this regard is correct: s 588FC(b) clearly contemplates the possibility that the company became insolvent because of matters including entering into the transaction. 'Matters' is not defined and would obviously include other transactions entered into around the same time. This is particularly the case here, where the evidence from both Hartwig and Minc was that with the Laverton Property having been sold, MSL no longer conducted any business and the intention, which they carried out over June 2017, was to pay MSL's debts and, depending on which way it was viewed, repay shareholder loans or return the surplus to shareholders.

322 I agree with the plaintiffs' criticism that the defendants' submission on this point addresses only s 588FC(a) and not sub-section (b), and that the plaintiffs' case is not limited to s 588FC(a) as the whole of s 588FC is pleaded. I agree that the plaintiff's case is that the situation at hand meets s 588FC(b)(i) and I accept that case.

323 Accordingly, for the reasons submitted by the plaintiffs, all of the impugned transactions, carried out over a 24 day period, can be considered alongside each separate impugned transaction.

324 It is undeniable that by 30 June 2017 when the Horwood Payment, the Total Sallon Payment and the Aida Nominees Payments had already been made by MSL, it was not in a position to repay the Hunter Loan together with accrued interest. Given my findings in respect of the Replacement Agreement, MSL was not in a position as at 30 June 2017 to pay its debts as and when they fell due - the Hunter Loan being well overdue by that time. This conclusion is justified given that by the time all of the impugned payments had been made:

(a) MSL had a net asset deficiency;

(b) MSL had insufficient cash resources to meet its remaining liabilities;

(c) the same difficulties regarding the ready realisation of other assets, being any remaining shareholder and related party loans, existed as set out in the analysis for December 2015;

(d) there is evidence that at that time neither Hartwig nor Minc would have contributed (either directly or through one or more of their entities) any funds to MSL so as to meet the Hunter Loan, since both said this under cross-examination; and

(e) without any substantial assets, MSL would not have been able to borrow the funds from its bank or any other mainstream financier.

325 I do not accept Smith's conclusion as summarised in paragraph 301 above, particularly at sub-paragraph (f). He does not specify the amount of the MSD debt referred to in sub-paragraph (d), such that it is not possible to confirm that there were sufficient assets to meet all liabilities. His conclusion that MSL was solvent under Scenario 1 as at 30 June 2017 suffers from the same gaps in analysis that I refer to at sub-paragraph 270(a) above. Even if that were not the case, given my findings about the Replacement Agreement, it is not necessary for me to consider whether MSL was solvent as at 30 June 2017 under Scenario 1.

326 I do not accept Smith's analysis of MSL's solvency under his Scenario 2 and the conclusion he reaches that MSL was not insolvent on 30 June 2017 under that scenario. He does not appear to have accounted for the interest which would be due on the Hunter Loan as at that date, which according to Erskine's calculation was some $93,370. Even on Smith's figures, this would have resulted in a net asset deficiency under Scenario 2. In cross-examination, Smith accepted that adding this interest amount would result in a deficiency of around $90,000. Further, Smith's reliance on the Trimont loan receivable of $624,563.68 cannot be accepted, given that Trimont was in liquidation by 31 May 2017 and the prospects of recovering that loan must have been very slim.

327 For all of these reasons, I find that MSL became insolvent by 30 June 2017 as a result of entering into each impugned transaction along with each other impugned transaction.

E.4 Was MSL insolvent in October 2018 or did it become insolvent by reason of the making of the County Court Final Orders?

328 In light of the concession now made by the defendants that MSL was insolvent or became insolvent in October 2018 by reason of the making of the County Court Final Orders, it is not necessary for me to address this in any detail. In light of the evidence, in particular that of both Erskine and Smith, this concession was appropriately made by the defendants.

329 This means that one of the essential elements for an insolvent trading claim, being insolvency at the relevant time, is made out in respect of the second insolvent trading claim made against Hartwig and Minc. However, there are other elements of the second insolvent trading claim and the defences thereto which will need to be considered later in these reasons.

F. The plaintiffs' insolvent trading claims against Hartwig and Minc

F.1 Statutory provisions and relevant applicable principles

330 Section 588G of the Act relevantly provides as follows:

588G Director's duty to prevent insolvent trading by company

(1) This section applies if:

(a) a person is a director of a company at the time when the company incurs a debt; and

(b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and

(d) that time is at or after the commencement of this Act.

....

(2) By failing to prevent the company from incurring the debt, the person contravenes this section if:

(a) the person is aware at that time that there are such grounds for so suspecting; or

(b) a reasonable person in a like position in a company in the company's circumstances would be so aware.

Note: This subsection is a civil penalty provision (see section 1317E).

331 The defences to an insolvent trading claim are set out in s 588H, which relevantly provides as follows:

588H Defences about reasonable grounds, illness or reasonable steps

Application

(1) This section has effect for the purposes of:

(a) proceedings for a contravention of subsection 588G(2) relating to the incurring of a debt at a time (the key time); and

(c) proceedings under section 588M relating to the incurring of the debt or the disposition of the property.

Expectations and belief about company's solvency

(2) It is a defence if it is proved that, at the key time, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent despite all its debts incurred, and dispositions of its property made, at that time.

(3) Without limiting the generality of subsection (2), it is a defence if it is proved that, at the key time, the person:

(a) had reasonable grounds to believe, and did believe:

(i) that a competent and reliable person (the other person) was responsible for providing to the first-mentioned person adequate information about whether the company was solvent; and

(ii) that the other person was fulfilling that responsibility; and

(b) expected, on the basis of information provided to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent despite all its debts incurred, and dispositions of its property made, at that time.

....

Director who did not take part in management

(4) If the person was a director of the company at the key time, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company.

332 Section 588M deals with recovery from directors compensation for loss resulting from insolvent trading, and relevantly provides as follows:

588M Recovery of compensation for loss resulting from insolvent trading

(1) This section applies where:

(a) a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and

(b) the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and

(c) the debt was wholly or partly unsecured when the loss or damage was suffered; and

(d) the company is being wound up;

whether or not:

(e) the director has been convicted of an offence in relation to the contravention; or

(f) a civil penalty order has been made against the director in relation to the contravention.

(2) The company's liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.

(4) Proceedings under this section may only be begun within 6 years after the beginning of the winding up.

333 In Quin v Vlahos, the Court of Appeal set out the relevant tests and explained the requirements of s 588G(1) and (2), and the interaction between those provisions, as follows:[40]

1. As is apparent, s 588G(1) of the Act sets out the circumstances when s 588G applies. Several aspects of s 588G(1) are straightforward and do not require elaboration. However, it is necessary to make three observations about the operation of s 588G(1)(c), which concerns whether there are reasonable grounds for suspecting that the company is insolvent at the time a debt is incurred.

(a) First, the requirement under sub-s (1)(c) is an objective one. The provision calls for an inquiry into the objectively formed state of mind of 'a director of reasonable competence and diligence, seeking properly to perform his or her duties as imposed by law ... and capable of reaching a reasonably informed opinion as to [the company's] financial capacity'. The provision is not concerned with the particular director whose conduct is under scrutiny.

(b) Secondly, the focus of the sub-section is on a specific state of mind, namely, 'suspicion'. This can be contrasted with earlier formulations of analogous provisions, such as that found in s 556 of the Companies (NSW) Code 1981, which required there to be reasonable grounds for expecting a company's insolvency. A suspicion is 'less developed and less well formulated than [an] expectation'. A suspicion that something exists is 'more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to "a slight opinion, but without sufficient evidence"'.

(c) Thirdly, where there is material before the court that is capable of proving actual insolvency, and where the material was available to the director at the time the debt was incurred, a court will generally find that a reasonable person in the position of the director would have concluded that the company was unable to pay its debts as they fell due. However, the court must always ultimately make its own findings, based on all of the facts and circumstances that existed at the time, and without the benefit of hindsight.

....

1. The first limb of s 588G(2) of the Act focuses on the subjective knowledge of the person concerned. However, it does not require proof of an actual suspicion by that person; rather, it requires proof that the person was aware of the facts and matters that can be objectively characterised as reasonable grounds for suspecting insolvency.
2. The second limb of s 588G(2) of the Act calls for an objective analysis. In relation to the second limb, we note the following.

(a) First, in one sense, s 588G(2)(b) provides an alternative to s 588G(2)(a). If it cannot be demonstrated that the relevant person was aware of the facts and matters that can be objectively characterised as reasonable grounds for suspecting insolvency, but a reasonable person in a like position would or ought to have ascertained those facts and matters, then s 588G(2)(b) may be relied upon. But that is not to say that in each case it is necessary to decide whether the relevant person has the subjective knowledge required for the purposes of s 588G(2)(a), before considering s 588G(2)(b). It is permissible for the court to proceed immediately to consider s 588G(2)(b).

(b) Secondly, what a reasonable person in a like position in a company would be aware of will depend on the particular person's duties as a director or officer of the company.

1. Section 588G(2) of the Act provides that a person contravenes s 588G by 'failing to prevent' the company incurring the debt. In ASIC v Plymin, Mandie J explained as follows:

[T]he essence of a failure by a director to prevent a company from incurring a debt is a failure by that director to take all reasonable steps within his power to prevent the company from incurring such debt. The effect of the provisions, shortly stated, is that if the requirements of s 588G(1) are proved in circumstances where either [para] (a) or [para] (b) of s 588G(2) is also proved, a director will be taken to have failed to prevent the company from incurring the debt unless it is proved that the director took all reasonable steps to prevent the company from incurring the debt.

1. Finally, we note that some authorities have proceeded on the basis that an insolvent trading claim must be established having regard to the standard recognised in the general law in Briginshaw v Briginshaw. We are content to proceed on that basis in this case without deciding whether that standard applies.

334 Noting that s 588M(1) imposes four threshold requirements that must be met before the right of recovery in sub-section (2) is enlivened,[41] the Court of Appeal in Quin v Vlahos stated, in respect of s 588M(1)(b), that:[42]

1. Section 588M(1)(b) of the Act requires that the creditor has suffered loss or damage in relation to the debt by reason of the Company's insolvency. The term 'loss or damage' does not necessarily mean the original amount of debt owed to the creditor. Although the amount of the debt will be the starting point, it is not necessarily the amount of the loss. As Barrett J observed in Edenden v Bignell:

[Section 588M] does not allow recovery of the amount of the creditor's debt as such. Rather, it is a provision allowing recovery of compensation measured by reference to loss or damage suffered by the creditor in relation to the debt because of the debtor's insolvency. In some cases - perhaps most cases - this will be the equivalent of the amount of the debt. In others - for example where a proof of debt is admitted and a substantial payment is made to all creditors rateably - the relevant loss or damage may be less than the amount of the debt. There may perhaps be circumstances in which the amount of the loss or damage exceeds the amount of the debt.

1. Similarly, the Western Australian Court of Appeal explained the approach to the quantification of the relevant loss in Perrine v Carrello as follows:

Section 588M refers to loss 'because of the company's insolvency'. That causal question directs attention to a comparison between the position of the creditors at the time of trial and the position if the company were not insolvent: how much worse off is the creditor? Often, that question is answered along the following lines: as at trial, the creditor of the insolvent company will get nothing; if the company were not insolvent, the creditor would be paid the amount of the debt; consequently, the loss is the amount of the debt.

That is why the cases state that, in ascertaining the creditor's loss or damage, the amount of the debt is the starting point and will often, if not normally, reflect the quantum of the loss. If the creditor has received or is receiving a dividend in the winding up, the loss suffered by the creditor is reduced accordingly.

335 In relation to s 588M(2), the Court of Appeal stated in Quin v Vlahos that:

In a claim under s 588M(2) of the Act, it is ultimately for the liquidator to show that the creditor has suffered loss or damage because of the company's insolvency and establish the quantum of that loss or damage.[43]

F.2 Insolvent trading claim regarding the Hunter Loan in December 2015

336 There is no dispute between the parties that the following matters required under s 588G(1) of the Act have been satisfied in respect of the incurring of the Hunter Loan in December 2015:

(a) each of Hartwig and Minc were directors of MSL in December 2015 (thus satisfying s 588G(1)(a)); and

(b) the debt was incurred at or after the commencement of the Act (thus satisfying s 588G(1)(d)).

337 Accordingly, there is no need for me to address these matters other than to note that they have been satisfied.

338 Insofar as s 588G(1)(b) is concerned, I have already concluded in section E.2 above that MSL became insolvent by entering into the Hunter Loan and thus incurring that debt, such that the requirements of s 588G(1)(b) have been satisfied.

339 It now falls to consider whether the requirements of ss 588G(1)(c) and (2) have been satisfied and, if so, whether Hartwig and Minc have established their defences under s 588H, and whether loss and damage has been suffered and is recoverable under s 588M of the Act.

340 The plaintiffs submit that the objective test is satisfied because the directors of a company, having knowledge that the company's liabilities exceeded its assets, would have reasonable grounds for suspecting that the company would become insolvent if it took on a debt of $600,000 that was repayable in the short term.

341 The plaintiffs submit the affidavit evidence of Hartwig, the delay by Trimont Australia both in repaying the $1.2 million it owed MSL and obtaining working capital leading up to early December 2015, as well as the lack of a loan agreement between Trimont Australia and MSL, establish the objective test. The plaintiffs also rely on the matters referred to in paragraph 256 above and Erskine's report as to MSL's insolvency as at December 2015 and her oral evidence. The plaintiffs further submit that Hartwig agreed that MSL's assets were reduced by about $1.77 million once the Armidale Payment and the Demolition Payment were excluded, MSL could not sell and settle the Laverton Property between 1 and 10 December 2015, that property was never intended to be the source for repayment of the Hunter Loan, and he did not see any need to take out finance.

342 The plaintiffs submit that what they describe as Minc's voluntary exile from the management of MSL does not prevent the objective test being satisfied in respect of him. They say that Minc had the information available to him if he chose to be involved. The plaintiffs also submit that Minc agreed he did meet with Hartwig from time to time and spoke about the accounts of MSL.

343 Insofar as loss and damage is concerned, there is no dispute as to whether the debt was unsecured when the loss or damage was suffered (s 588M(1)(c)), as the Hunter Loan has always been an unsecured loan. The other requirement under s 588M(1)(b), that the creditor suffered loss or damage in relation to the debt because of MSL's insolvency, is disputed. In this regard, the plaintiffs submit that the only impediment to recovery of loss and damage in respect of the Hunter Loan is the existence of the alleged Replacement Agreement, in that the defendants contend that Hunter suffered no loss or damage because Kanyon became liable to repay the Hunter Loan under the Replacement Agreement. The plaintiffs disagree with the defendants' contention in this regard.

344 The defendants did not expressly address s 588G(1)(c) and s 588G(2) of the Act in terms of reasons to suspect insolvency. At most, these matters were inferentially addressed (in part or in whole) in their submissions as to whether MSL was insolvent in December 2015. Nor did the defendants expressly address s 588H in their written or oral submissions, other than to note that Hartwig and Minc both rely on s 588H and that Minc's position is different to that of Hartwig because Minc was not directly involved in the relevant events.

345 The defendants submit that if the Court finds that the incurring of the Hunter Loan debt does fall within s 588G and the defences in s 588H do not apply, then the incurring of the debt in December 2015 caused no loss and damage of the kind referred to in s 588M. As I understand it, the basis for this submission is that even if Hartwig and/or Minc contravened the insolvent trading provisions and none of the defences apply, no loss or damage was caused to MSL or its creditors because of the Replacement Agreement. In other words, there was no loss or damage to Hunter because Kanyon became liable to repay the Hunter Loan plus interest in lieu of MSL.

346 The defendants also submit that there is no causal connection between the incurring of the debt and MSL's solvency in December 2015 and the loss and damage which the plaintiffs say has been suffered by Hunter (or the Hunter FT), since on any view MSL was solvent on 1 June 2017, noting that Erskine's evidence is that MSL was solvent as at that date.

347 As noted above, each of s 588FG(1)(a), (b) and (d) have been established.

348 In respect of s 588G(1)(c) of the Act, in the circumstances of this case the same matters which support the finding made earlier that MSL became insolvent when it entered into the Hunter Loan on 1 December 2015 mean that at that time there were reasonable grounds to suspect that MSL was insolvent or would become insolvent.[44] My reasons for reaching this view follow.

349 In particular, the reasonable grounds for suspecting insolvency at that time include the following:

(a) the net asset deficiency as at that time was an indicator of insolvency;

(b) MSL's cash flow position was such that it could not, from its ordinary trading, expect to have an inflow of funds within the time between 1 and 10 December 2015 to repay the $600,000 plus accrued interest;

(c) the Laverton Property could not be realised within that timeframe, and in any event Hartwig positively disavowed that this was to be a source of funds to repay the debt;

(d) there is insufficient evidence to suggest that MSL could have realised its other assets, being related party or shareholder loans within the timeframe;

(e) there is insufficient evidence to suggest that Minc would have advanced further funds to MSL in order to repay the debt. Hartwig's assertions to the contrary are insufficient in this regard;

(f) there was no reasonable prospect of MSL being able to borrow sufficient funds to repay the debt from mainstream financiers; and

(g) the Wodonga and/or Newcastle retention sums were not something that was going to lead to a flow of funds to MSL so as to enable it to repay the Hunter Loan. Even if Trimont Australia had been able to provide bank guarantees in respect of the retention sums by 10 December 2015, this would not have resulted in MSL receiving funds or sufficient funds to pay back the Hunter Loan, for the reasons already discussed earlier.

350 The requisite state of mind for the objective test in s 588G(1)(c) is that of 'suspicion'. It is clear from the authorities that the threshold for establishing suspicion is not an onerous one.[45] A director of reasonable competence and diligence with knowledge of the relevant facts would have suspected insolvency.

351 Given my findings in respect of MSL's insolvency by entering into the Hunter Loan, the observation of the Court of Appeal in Quin v Vlahos that where there is material before the Court capable of establishing actual insolvency, which was available to the director at the time of incurring the debt, a court will generally find that a reasonable person in the director's position would have concluded that the company was unable to pay its debts as they fell due, applies here.

352 Accordingly, the requirements of s 588G(1) have all been established.

353 The matters referred to in paragraph 349 above also support a finding that the requirements of s 588G(2) have been established in respect of Hartwig, since the evidence establishes that he was aware of all of those matters. It matters not that he did not draw the conclusion that MSL would become insolvent by entering into the Hunter Loan: it is sufficient if he was aware of the relevant matters or ought to have been so aware. I would add the following:

(a) Hartwig's insistence that the Wodonga and Newcastle retention sums were to be the source of funds for MSL to repay the Hunter Loan, together with his insistence that MSL did not need to borrow funds and did not intend to sell the Laverton Property in order to repay the Hunter Loan makes it very difficult for him to contend that there was no reason to suspect insolvency due to those two alleged sources of funds.

(b) Hartwig had sufficient information available to him at the time to show that it was not reasonable to regard the retentions as the source of funds for MSL to repay the Hunter Loan, as set out earlier.

(c) Even if it was reasonable to believe that Trimont Australia's working capital facilities would be put in place within a short time after 30 November 2015 when Hartwig received the CBA email (and I accept that it would have been reasonable for Hartwig to believe this at that time because of the CBA email), this does not mean that there were no reasonable grounds for suspecting insolvency. This is due to the matters referred to in the previous two sub-paragraphs as to the retention sum.

(d) Hartwig could have adduced evidence to justify his assertion that Minc had sufficient funds and would have advanced them if requested so as to repay the Hunter Loan, but did not. Accordingly, Minc as an alleged source of funds is not a reasonable basis for not suspecting insolvency.

354 Insofar as Hartwig is concerned, I therefore find that he was "aware of the facts and matters that can be objectively characterised as reasonable grounds for suspecting insolvency,"[46] such that s 588G(2)(a) is satisfied. However, even if that is not the case, then I find that "a reasonable person in a like position would or ought to have ascertained those facts and matters,"[47] thus satisfying s 588G(2)(b). Obviously, it is not necessary for both to be established; one of these will suffice. A reasonable person in a like position in a company, where that person had charge of the day-to-day running of the company and was intimately involved in all of its transactions, as Hartwig was, would or ought to have been aware of those matters. There is no suggestion in the material before me that Hartwig took any steps to prevent MSL from incurring the debt: to the contrary, it was Hartwig who caused MSL to enter into the Hunter Loan.

355 Insofar as Minc is concerned, it has not been established on the evidence that his knowledge or awareness satisfies the requirements of s 588G(2)(a) of the Act. There is no evidence that he knew of the Hunter Loan at the time, which is a significant barrier to establishing that he knew that MSL would become insolvent by incurring it. I have already found that Minc did not know about the Hunter Loan until much later. Further, there is no evidence that he knew about Trimont's financial position, or the aspects of the transactions concerning the retention sums leading to the conclusion that these were not a viable source of funds which would flow to MSL to repay the Hunter Loan. He was in a different position to Hartwig in that respect.

356 I now consider whether Minc's conduct falls within s 588G(2)(b). In other words, would a reasonable person in a like position who was not aware of the grounds for suspecting insolvency by MSL incurring the Hunter Loan in December 2015 have (or ought to have) ascertained those facts and matters giving rise to the reasonable grounds? While I have found that s 588G(2)(b) has been established in respect of Hartwig, this does not necessarily mean that it has been established for Minc. That is because their positions in respect of MSL differed.

357 As noted above, Hartwig had the day-to-day running of the company and was intimately involved in all of its transactions. Minc was not. There was evidence that Hartwig and Minc discussed MSL's financial position from time to time, however, the evidence as to the frequency of those discussions and the detail of the content of those discussions was inconsistent. Even if they met monthly or quarterly and reviewed MSL's management accounts at those times,[48] this does not mean that at the time of incurring the Hunter Loan a director with 'hands-off' involvement in MSL's financial and business affairs would or ought to have been aware of the facts and matters giving rise to the reasonable grounds for suspecting insolvency which were present in this case. This is due to the specific facts of this case: MSL entered into the Hunter Loan quickly and its intended duration was to be very short. There is no evidence that MSL's directors functioned in a way which required Hartwig to discuss such matters with Minc before causing MSL to enter into them. There is also no evidence that Minc's duties as a director of MSL required him to be involved in such matters. To say that Minc ought to have been aware of the facts and matters giving rise to reasonable grounds to suspect that MSL would become insolvent by entering into the Hunter Loan is effectively to say that MSL ought to have been run in such a way as to require all of its directors to be involved in decisions as to whether to incur a debt by taking out a loan. I do not accept the plaintiffs' submissions about Minc in this regard.

358 Accordingly, I am not satisfied that s 588G(2)(a) or (b) has been made out in respect of Minc. That being the case, it is not necessary to consider the statutory defence in s 588H in respect of Minc.

359 I refer to the contents of paragraph 344 above and observe that it is not particularly helpful to the Court for me to be left to speculate as to how Hartwig contends that the necessary elements of his s 588H defences are made out. Doing the best that I can and in order fairly to assess whether those elements have been established by him (obviously, he bears the onus in respect of s 588H), I will assume that some or all of the matters relied on by the defendants to say that MSL was not insolvent in December 2015 are also relied on by Hartwig to contend that there were reasonable grounds to expect solvency (s 588H(2)).

360 The state of mind required for s 588H(2) is that of expectation, not suspicion. Hartwig must establish that as at 1 December 2015 when MSL entered into the Hunter Loan, he had reasonable grounds to expect, and did expect, that MSL was solvent at that time and would remain solvent even if it incurred the Hunter Loan and any other debts it incurred at that time. This is both an objective and subjective test: were there reasonable grounds to expect (objective) and did the person expect (subjective) that the company was solvent and would remain so despite incurring the debt.

361 Hartwig's evidence, while not put squarely in these terms, was to the effect that he expected MSL was solvent in December 2015 and would remain so even after incurring the Hunter Loan. Thus the subjective aspect of s 588H(2) is satisfied.

362 However, Hartwig has not established the objective aspect of s 588H(2) of the Act. There were not reasonable grounds for expecting that MSL would remain solvent if it incurred the liability to repay $600,000 plus interest on the terms of the Hunter Loan. The reasons for this conclusion are the same as those set out when considering whether MSL became insolvent by incurring the Hunter Loan and when considering whether there were reasonable grounds to suspect insolvency.

(a) Hartwig knew the financial position of MSL (in particular, the net asset deficiency and its regular income not being sufficient to satisfy a short-term loan of $600,000);

(b) it was not reasonable to expect that the Wodonga and Newcastle retention sums would be a resource for repaying the Hunter Loan;

(c) it was not reasonable to expect that any of MSL's assets (be they the Laverton Property or the loans owing to MSL) could be realised within sufficient time to repay the Hunter Loan;

(d) it was not reasonable to expect that MSL could have borrowed funds from its bank (whether as a loan or allowing its account to go into deficit) to repay the Hunter Loan; and

(e) it was not reasonable to expect that Minc would have provided the funding.

364 Accordingly, Hartwig has not made out a defence under s 588H(2) of the Act.

365 In his defence, Hartwig also relies on s 588H(3) of the Act, pleading that he relied on a competent and reliable person for providing adequate information to him about whether MSL was solvent, that person being HLB Mann Judd. The particulars to sub-paragraph 23(d) of Hartwig's defence state that at all material times MSL received financial advice from HLB Mann Judd in relation to its financial affairs.

366 In order to rely on s 588H(3), Hartwig has to establish that:

(a) he had reasonable grounds to believe, and did believe, that HLB Mann Judd was responsible for providing adequate information to him about whether MSL was solvent;

(b) HLB Mann Judd was fulfilling that responsibility; and

(c) he expected, on the basis of the information provided to him by HLB Mann Judd, that MSL was solvent at the time of incurring the Hunter Loan and would remain solvent even if it incurred that debt.

367 The defendants' submissions did not address this defence.

368 The evidence is that HLB Mann Judd was responsible for preparing MSL's end of financial year accounts and statements. HLB Mann Judd was not responsible for MSL's bookkeeping or preparing MSL's management accounts or its monthly reports: those tasks were performed by BCP. The evidence establishes that an employee of BCP, Ryan, under Hartwig's direction or instruction, prepared those management accounts and reports. The evidence does not establish or support the breadth of the particulars to sub-paragraph 23(d) of Hartwig's defence.

369 I do not accept that the evidence supports Hartwig's s 588H(3) defence. It cannot be the case that an external accountant's responsibility for preparing annual financial statements after the end of the financial year equates to that accountant being responsible for providing adequate information about whether the company was solvent at any point in time during the course of that financial year. There was no evidence to establish that in or around December 2015 HLB Mann Judd was responsible for providing financial advice or information to MSL or its directors as to its solvency at that time.

370 To summarise, I have found that s 588G(1) is established; that Hartwig has contravened s 588G as s 588G(2) has been established; and that he does not have a defence under s 588H of the Act. On the other hand, I have found that Minc has not contravened s 588G of the Act.

371 It remains to consider whether Hunter (or the Hunter FT) have suffered loss and damage within the meaning of s 588M by reason of Hartwig's failure to prevent MSL from incurring the debt to them in December 2015.

372 Given my findings in respect of the Replacement Agreement, the defendants' submission that no loss or damage within the meaning of s 588M was suffered cannot be accepted. Kanyon did not become liable for the repayment of the Hunter Loan under the Replacement Agreement and therefore MSL remained liable for it. Since the defendants cannot rely on the Replacement Agreement in this regard, it follows that Hunter suffered loss or damage within the meaning of s 588M of the Act, as each element of s 588M has been made out.

373 I do not accept the defendants' causation argument as set out at paragraph 346 above. The defendants have not articulated how, if MSL became insolvent in December 2015 by incurring the debt, but was solvent at some points thereafter (such as at 1 June 2017), yet was subsequently wound up by the Court in insolvency and where the debt remained unpaid as at the date of winding up and thereafter, it can be said that the incurring of the debt did not cause the creditor's loss and damage. In circumstances such as this, I do not accept the proposition relied upon by the defendants.

374 In Quin v Vlahos, the Court of Appeal was satisfied that the creditors of the company in question had suffered loss or damage, by reason of the company's insolvency, in relation to the debts incurred by the company when it was insolvent. This was because the evidence there was that the company lacked funds to pay its creditors, and if the company was not insolvent then the creditors would be paid the amounts of their debts. The loss suffered by each creditor was the amount of its debt.[49]

375 In my view, the same is established here. It is clear that MSL incurring the debt in December 2015 caused it to become insolvent and the creditor (Hunter or the Hunter FT) suffered loss and damage as a consequence, since MSL was wound up in insolvency and is not able to repay the Hunter Loan. That loss and damage is equivalent to the amount of the debt, being $600,000.

376 Loss and damage under s 588M having been established, Hartwig's contravention of s 588G and his lack of a defence under s 588H means that he is liable to pay the Liquidator, as a debt due to MSL, the amount of $600,000.

F.3 Insolvent trading claim regarding the consent to the making of the Final County Court Orders in 2 October 2018

377 As set out in section E.4 above, it is now common ground between the parties that MSL was insolvent or became insolvent in October 2018 by reason of the making of the County Court Final Orders.

378 However, the parties remain in dispute as to whether Hartwig and Minc contravened s 588G of the Act by reason of them permitting MSL to consent to the making of those orders.

379 There was no dispute that MSL consented to the County Court Final Orders when the trial in the County Court Proceeding resumed in October 2018. Hartwig's evidence was that: he caused MSL to consent to the orders because it would have needed to borrow to pay the costs of an extended legal battle; he thought it neither appropriate nor responsible for MSL to borrow funds given that it had no assets; he could not fund the County Court Proceeding; and prolonging that litigation would have resulted in MSL incurring a debt it would be unable to meet. I assume that the debt Hartwig referred to in this regard was the legal costs MSL would have had to pay had it continued with the litigation.

380 Minc was aware of the County Court Proceeding, however, said he had little involvement. He said that he did not know the details of the claims and the final orders.

381 Hartwig's evidence regarding his motivation for causing MSL to consent to the County Court Final Orders, and Minc's evidence about his level of involvement or knowledge, was not challenged by the plaintiffs.

382 By the making of the County Court Final Orders, MSL was ordered to pay Hunter and the Hunter FT:

(a) $600,000;

(b) interest in the amount of $168,986; and

(c) legal costs (estimated by the plaintiffs as approximately $200,000).

383 The plaintiffs claim that each of these is a debt and that MSL incurred those debts by consenting to the making of the County Court Final Orders. The defendants deny that MSL incurred debts within the meaning of s 588G of the Act and that loss and damage within the meaning of s 588M has been suffered by the creditor.

384 The plaintiffs submit that s 588G(1) of the Act is satisfied in respect of MSL consenting to the County Court Final Orders. In this regard, they say that:

(a) it is not disputed that Hartwig and Minc were directors of MSL in October 2018;

(b) it does not appear to be disputed that MSL became insolvent by agreeing to the County Court Final Orders; and

(c) there were reasonable grounds for suspecting MSL would become insolvent by agreeing to the County Court Final Orders, as: MSL did not have assets it could realise in the short term to pay the debts; and the loan receivable from Kanyon (being the debt owed to MSD which MSD had assigned to MSL) did not exist. Even if it did exist, it would not have put MSL in a position to pay the debts it incurred on 2 October 2018, especially the $600,000 plus interest which was payable 30 days later.

385 The plaintiffs submit that the objective test in s 588G(2)(b) is satisfied because the directors of a company, having knowledge that the company's assets, if fully realised, were not sufficient to discharge a debt of $600,000, plus interest of $168,986, plus costs would have reasonable grounds for suspecting that the company would become insolvent if it incurred such debts.

386 The plaintiffs submit that the subjective test in s 588G(2)(a) is satisfied in respect of Hartwig. In this regard, the plaintiffs rely on Hartwig's evidence as set out at paragraph 379 above, and his evidence that he knew when agreeing to the County Court Final Orders that MSL would not be able to pay the $600,000 plus interest at the end of the 30 day stay.

387 The plaintiffs appeared to submit that the subjective test was satisfied in respect of Minc, but their submissions in this regard were really directed at the objective test. They say that despite Minc's lack of knowledge of the details of the claims in the County Court Proceeding and the County Court Final Orders, the objective test can be satisfied because there was no evidence Minc was prevented from participating in the proceeding or obtaining relevant material.

388 As to loss and damage under s 588M, the plaintiffs submit there can be no dispute that Hunter and the Hunter FT suffered loss or damage. The debts the subject of the County Court Final Orders do not depend on the existence of the Replacement Agreement. The plaintiffs submit that they were new debts, entered into by MSL in circumstances in which its directors disputed, and still dispute, liability for the Hunter Loan.

389 Insofar as the defendants' argument that consenting to judgment in the County Court Proceeding is not the incurring of a debt within s 588G, the plaintiffs refer to Quin v Vlahos, where the Court of Appeal stated:[50]

The term 'debt' is not defined in the Act. Rather, it falls to be construed in accordance with the ordinary principles of statutory construction, by reference to the context and purpose of the provision in which it appears. A useful starting point is the ordinary legal meaning of a debt, being 'a sum of money which is now payable or will become payable in future by reason of a present obligation'. In Hawkins v Bank of China, upon which the respondent relied, Gleeson CJ stated:

The words 'incurs' and 'debt' are not words of precise and inflexible denotation. Where they appear in s 556 [of the Companies (NSW) Code] they are to be applied in a practical and commonsense fashion, consistent with the context and with the statutory purposes.

'Debt' is capable of including a contingent liability. The word was used in that sense in s 291 of the Companies Act 1961, which referred to 'debts payable on a contingency'. That expression did not involve a contradiction in terms. Dictionaries define 'debt' as a liability or obligation to pay or render something. Such a liability may be conditional as well as present and absolute. ...

Similarly, the word 'incurs' takes its meaning from its context and is apt to describe, in an appropriate case, the undertaking of an engagement to pay a sum of money at a future time, even if the engagement is conditional and the amount involved uncertain. Once it is accepted that 'debt' may include a contingent debt then there is no obstacle to the conclusion that, in the present context, a debt may be taken to have been incurred when a company entered a contract by which it subjected itself to a conditional but unavoidable obligation to pay a sum of money at a future time.

Those observations are equally applicable to s 588G of the Act.

390 While acknowledging that they had not been able to find any analogous cases, the plaintiffs submit that:

(a) consenting to the County Court Final Orders fits within the ordinary meaning of 'debt' as set out in Quin v Vlahos; and

(b) there is nothing about consenting to the County Court Final Orders which prevents them from being debts.

391 The directors accept that MSL was insolvent following the making of the County Court Final Orders on 2 October 2018.

392 However, they submit that the debts created by the order were not debts incurred by MSL within the meaning of s 588G. In this regard, the defendants submit that:

(a) there is a distinction between a debt which a company incurs, and a debt created by an order of a court.[51] A debt created by a court order is different from a debt based on agreement and the term 'debt' has been interpreted as something recoverable by an action for debt;[52]

(b) it is not alleged that MSL entered an antecedent agreement to pay any amount to the plaintiffs, simply that it consented to an order being made. That is fundamentally different from an agreement to pay;

(c) the County Court Final Orders are as consistent with the misleading and deceptive conduct claims made in the County Court Proceeding as with a debt claim;

(d) a judgment debt is not covered by s 588G and it is not the incurring of a debt;

(e) it does not amount to a failure to prevent MSL from incurring a debt. All MSL could have done at that point if the proceeding was not settled was continue with its defence of the County Court Proceeding. If that proceeding had continued and had resulted in judgment for the plaintiffs in that case, it would not have been a debt within the meaning of s 588G; and

(f) as a matter of policy, companies should not be discouraged from agreeing to court orders for fear of contravening s 588G of the Act. MSL consented to the order rather than incur additional legal costs.

393 The defendants said that they have been unable to locate any authority to support the proposition that consenting to an order of a court amounts to the incurring of a debt within the meaning of the relevant sections of the Act.

394 The defendants also do not accept that the making of the County Court Final Orders caused loss or damage within the meaning of s 588M.

395 The comments of Gageler J (as his Honour then was) in Ramsay Health Care v Compton, as relied upon by the defendants (see paragraph 392(a) above), simply stand for the proposition that the antecedent obligation (ie, the debt sued upon) is not treated for the purposes of bankruptcy as merging in the judgment, where the creditor subsequently obtains judgment. It does not really assist in considering the question now before this Court.

396 I am not aware of any cases analogous to the one before me in respect of whether consenting to an order being made by a court to finalise a proceeding can constitute the incurring of a debt for the purposes of s 588G of the Act.

397 In the circumstances of this case, I agree with the defendants' submission that consenting to the making of the County Court Final Orders is not the incurring of a debt within the meaning of s 588G of the Act, for the reasons submitted by the defendants. In particular, all that the evidence establishes is that MSL consented to the making of those orders: there is no evidence of an antecedent agreement that MSL pay Hunter or the Hunter FT $600,000 plus interest plus costs. There is no evidence of a settlement deed or agreement, for example, let alone what its terms may be. Obviously, the incurring of the Hunter Loan itself was in December 2015 and not October 2018 and so is separate to the consideration of what occurred in October 2018.

398 True it is that the County Court Final Orders by their terms give rise to a judgment debt against MSL, but I do not consider that this amounts to the incurring of a debt in the relevant sense. I accept what the Court of Appeal said about the meaning of 'debt' in Quin v Vlahos, but do not consider that this assists the plaintiffs in this case. The focus of the plaintiffs' submission is on the meaning of 'debt', and the plaintiffs pay insufficient attention to the discussion about the meaning of 'incurs' in the passage they cite (see paragraph 389 above). In this instance, it cannot be said that by agreeing to the County Court Final Orders MSL "entered into a contract by which it subjected itself to a conditional but unavoidable obligation to pay a sum of money at a future t[53]e."53 The essence of an insolvent trading claim is, as set out in s 588G(2), the failure to prevent a company from incurring a debt at the time it was insolvent or would become insolvent by incurring that debt. As Gardiner AsJ observed in his comprehensive survey of the authorities concerning the meaning of incurring a debt in Re Overgold Pty Ltd, "when a debt is incurred for the purposes of s 588G will depend on the nature of the transaction invol[54]d".54 In ASIC v Plymin, Mandie J stated that:

Although it is necessary to consider the terms of the relevant contract, the question when the debt is incurred within the meaning of the section does not depend on strict legal analysis but turns on when, in substance and commercial reality, the company is exposed to the relevant liability.[55]

399 To regard consenting to the County Court Final Orders as the incurring of a debt is to disregard the substantive and commercial reality of when MSL became exposed to the relevant liability. In the County Court Proceeding Hunter sued on the debt, being the Hunter Loan, in the amount of the loan plus interest and costs. While he did also make a misleading or deceptive conduct claim, the essence of the claim was debt recovery. If Hunter's debt claim had gone to judgment and succeeded, then it would most likely have resulted in the same orders being made as were agreed to, which was the debt claim. To divorce the Sum Order from the Hunter Loan has an air of unreality about it. The same can be said for the balance of the County Court Final Orders. MSL became exposed to the relevant liability at the time it entered into the Hunter Loan.

400 I agree with the defendants' submission that as a matter of policy companies should not be discouraged from consenting to court orders by the prospect of their directors subsequently being rendered liable for insolvent trading in respect of such orders. That is consistent with the purpose of s 588G(2) of the Act.

401 It follows that s 588G(1) of the Act has not been satisfied in respect of the 'debts' of $600,000, $168,986 for interest and $200,000 for legal costs 'incurred' by MSL on 2 October 2018. That being the case, there is no need to consider whether ss 588G and 588M have been met, and whether Hartwig and Minc have defences under s 588H of the Act.

402 To re-cap, the plaintiffs claim that payments made to Horwood Nominees (at the direction of BCP), Sallon and Aida Nominees from the Net Sale Proceeds are voidable by the Liquidator as being one or more of an unfair preference, alternatively an uncommercial transaction, or a transaction to defeat creditors. These allegations are denied by the defendants. This section concerns those claims.

403 In respect of each of the impugned transactions, there is no dispute that each transaction was made, that each was a transaction within the meaning of s 9 of the Act, that each transaction was unsecured, and that the alleged recipient of the benefit of the transaction (being BCP, Sallon and Aida Nominees) was a related entity of MSL such that the 4 year timeframe applies and is met.

G.1 Statutory provisions and relevant applicable principles

404 Section 588FA(1) of the Act sets out when a transaction is an unfair preference, as follows:

A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

405 Section 588FB of the Act sets out when a transaction is an uncommercial transaction, as follows:

(1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:

(a) the benefits (if any) to the company of entering into the transaction; and

(b) the detriment to the company of entering into the transaction; and

(c) the respective benefits to other parties to the transaction of entering into it; and

(2) A transaction may be an uncommercial transaction of a company because of subsection (1):

(a) whether or not a creditor of the company is a party to the transaction; and

(b) even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

406 Section 588FC of the Act sets out when a transaction of a company is an insolvent transaction of the company, as follows:

A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:

(a) any of the following happens at a time when the company is insolvent:

(i) the transaction is entered into; or

(ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

(b) the company becomes insolvent because of, or because of matters including:

(ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction.

407 Section 588FE sets out where transactions may be voidable by the liquidator. Relevantly, if a company is being wound up then a transaction with a related entity of the company is voidable if it is an insolvent transaction of the company and it was entered into, or an act was done for the purpose of giving effect to it, during the four years ending on the relation-back day.[56]

408 A transaction is also voidable if it had a creditor defeating purpose. In this regard, s 588FE(5) provides as follows:

The transaction is voidable if:

(a) it is an insolvent transaction of the company; and

(b) the company became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up of the company; and

(c) the transaction was entered into, or an act done was for the purpose of giving effect to the transaction, during the 10 years ending on the relation-back day.

409 Section 588FF sets out what orders the court may make in respect of voidable transactions, relevantly providing as follows:

(1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:

(a) an order 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;

(c) an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction;

(g) an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company;

...

(3) An application under subsection (1) may only be made:

(a) during the period beginning on the relation-back day and ending:

(i) 3 years after the relation-back day; or

(ii) 12 months after the first appointment of a liquidator in relation to the winding up of the company;

(b) within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period.

410 Section 588FG of the Act sets out certain 'defences' to voidable transaction claims, by stipulating when transactions are not voidable as against certain persons. Relevantly, these concern two instances, as set out below:

588FG Transaction not voidable as against certain persons

If no benefit or benefit received in good faith without grounds for suspecting insolvency

(1) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person other than a party to the transaction if it is proved that:

(a) the person received no benefit because of the transaction; or

(b) in relation to each benefit that the person received because of the transaction:

(i) the person received the benefit in good faith; and

(ii) at the time when the person received the benefit:

(A) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and

(B) a reasonable person in the person's circumstances would have had no such grounds for so suspecting.

If transaction entered into for valuable consideration in good faith without grounds for suspecting insolvency

(2) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:

(a) the person became a party to the transaction in good faith; and

(b) at the time when the person became such a party:

(i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and

(ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and

(c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

411 In Queensland Phosphate, the Court of Appeal stated that:[57]

The principles applicable to determining whether a transaction is uncommercial according to the test in s 588FB of the Corporations Act may be summarised as follows:

(a) Under s 588FB, an objective standard is to be applied.

(b) The four criteria set out in s 588FB(1) are to be considered by reference to the company's circumstances, which must include the state of knowledge of those who were the directing mind of the company, such as its directors.

(c) For a transaction to be uncommercial it must result in 'the recipient receiving a gift or obtaining a bargain of such magnitude that it [cannot] be explained by normal commercial practice' or where 'the consideration ... lacks a "commercial quality"'.

(d) Courts have adopted a purposive approach in interpreting s 588FB by having regard to the objects and purpose of the provision. The purpose of s 588FB is to prevent a depletion of the assets of a company which is being wound up by voiding transactions at an undervalue entered into within a specified time period prior to the commencement of the winding up. Although s 588FB has been said to focus on transactions entered into at an 'undervalue', uncommercial transactions are not limited to such transactions.

(e) It must positively appear that a reasonable person in the position of the company would not have entered into the transaction.

(f) It has been recognised that the court must view the transaction prospectively 'according to the circumstances at the time, including proper perception of the future, but without the influence of hindsight'.

(g) Consideration of 'detriment' in s 588FB is not limited to monetary detriment, but encapsulates the broader concept of commercial detriment.

(h) The court will have regard to the totality of the business relationship of the parties. The court will also consider whether there is a relationship between the parties to the transaction that may require greater scrutiny. This may include consideration of any personal relationship between the individuals involved in the transaction.

G.2 Defendants' general submissions regarding the voidable transaction claims

412 In the defendants' written closing, they make a number of submissions generally regarding the voidable transaction claims and then later address specific aspects of each of those transactions. It is convenient to set their general submissions out here, before considering each transaction, given that these are relied upon by the defendants when making their submissions about specific transactions.

413 The defendants rightly submit that one of the critical elements of the definition of an unfair preference is that it must be given by the company to a creditor of the company in respect of an unsecured debt. They say that in the present case, the Liquidator must satisfy the court that BCP, Sallon or Aida Nominees was a "creditor".

414 The defendants rightly submit that the Liquidator must prove each element of the definition of an uncommercial transaction. They submit that one of the essential elements is whether or not "it may be expected" that a reasonable person in the company's circumstances would not have entered into the impugned transaction having regard to the specified matters, involving an objective assessment of what might be expected.

415 An objective consideration of what might be expected must consider the circumstances as they existed at the time of the impugned transaction. The defendants submit that the objective circumstances include the facts that the $600,000 payment made in December 2015 was not recorded as a liability of MSL, that there were no documents recording the sum as a liability of MSL, and there were numerous documents showing Kanyon as the debtor.[58] Loan schedules had been sent to Hunter on many occasions without any assertion by him that the $600,000 remained due from MSL.

416 The defendants acknowledge that after the breakdown in relations between Hunter and Hartwig, Hunter did raise the issue during conversations. They say that even so, nothing was done to pursue the matter until the notice to pay dated 9 June 2017 which was received on 13 June 2017. No further action was taken until the commencement of the County Court Proceeding.

417 The defendants contend that it is not necessary to consider separately the creditor defeating purposes provision under s 588FE(5), since if any of the impugned transactions is an insolvent transaction, s 588FF applies because of sub-section (4).

418 Insofar as the defences in s 588FG are concerned, the defendants submit that where sub-section (1) applies, it is sufficient to demonstrate that the person received no benefit because of the transaction. They go on to say that under sub-section (2), however, three limbs must be satisfied:

(a) good faith;

(b) no reasonable grounds for suspecting the company was or would become insolvent; and

(c) valuable consideration.

419 The defendants submit that in the context of avoidance provisions, good faith has been held to mean that the person must not intend to benefit at the expense of other creditors or to collude with the debtor in prejudicing creditors.[59] In Cussen v Sultan, Nicholas J stated that:[60]

What is required to satisfy the onus [of good faith] will vary with the circumstances of the case. There is no set criteria. However, in my opinion, usually a defendant would need to have an understanding of the substance of the transaction sufficient to show that he became a party to it with an honest and proper motive or purpose. Adopting the words of Mansfield J in Smith (p 322) the defendant must demonstrate that in becoming a party to the transaction he acted without an expectation that the transaction was uncommercial. In my opinion, for the defendant to benefit from s 588FG(2)(a) it is necessary to prove that the motive and intention in becoming a party to the transaction was founded on a genuine belief, or knowledge, that the transaction was of an ordinary business kind or was not uncommercial.

420 The defendants submit that there are two aspects of s 588FG(2)(b): one subjective, the other objective. They submit that both elements are directed to whether there were reasonable grounds for suspecting a certain state of affairs at the time the person became a party to the transaction. The defendants refer to the same principles and definitions for suspecting insolvency as I have canvassed above when considering the question of MSL's solvency. They submit that in the context of a suspicion of insolvency, a reason to suspect insolvency is frequently based on factors such as failing to pay debts within usual trading terms, non-payment of undisputed debts, and seeking indulgences from creditors. They say that none of these factors are present in this case.

421 The defendants note that it may be contended on behalf of the liquidator that there were grounds for a suspicion of insolvency once Hunter claimed that MSL still owed the Hunter Loan. However, they submit that on any view, liability to pay that amount was disputed by MSL. They also submit that the objective facts were that the sum was payable by Kanyon to the Hunters, as Hunter had received loan schedules showing that was so and Kanyon had prepared accounts recording the debt, and MSL's accounts did not record any such liability. The defendants submit that, viewed objectively, the debt was not a debt of MSL.

422 The defendants also submit that the service of a notice to pay in June 2017 does not change matters. Hunter made a claim for payment which was disputed. Proceedings were not commenced until later in 2017 and they were defended. There was an unsuccessful application for summary judgment and the case proceeded to trial.

423 Insofar as valuable consideration is concerned, to the extent that the impugned payments constitute an unfair preference, the defendants submit that the payments were made to discharge existing debts, and prior indebtedness is good consideration for a payment made in discharge of that indebtedness.[61]

424 There is no dispute that on 6 June 2017, from the Net Sale Proceeds, MSL made the Horwood Payment of $410,922.27 to Horwood Nominees.

425 The plaintiffs claim that the Horwood Payment was paid at the direction of BCP in satisfaction of a debt MSL owed to BCP ($400,000 plus interest), to satisfy in turn a debt BCP owed Horwood Nominees. The defendants say that MSL did not owe a debt to BCP and the purpose of the Horwood Payment was to discharge MSL's liability to repay a loan from Horwood Nominees in the sum of $400,000.

426 For the Horwood Payment to be an unfair preference, it must be established that the transaction was between MSL and a creditor (even if someone else was also a party) and that the transaction resulted in the creditor receiving more than it would have in respect of an unsecured debt if the transaction were set aside and the creditor was to prove for the debt in MSL's winding up.

427 Insofar as the unfair preference claim is concerned, while it is common ground that the Horwood Payment was a transaction within the meaning of s 9 of the Act and that it was unsecured, there is a dispute as to whether BCP was a creditor of MSL: the plaintiffs say it was; the defendants say that BCP merely acted as agent in a loan between MSL and the true creditor, Horwood Nominees.

428 The issues in dispute between the parties as to the Horwood Payment are:

(a) for the unfair preference claim, whether BCP was a creditor of MSL and the payment was in respect of an unsecured debt. As noted above, there is no dispute that it was unsecured, just whether there was a debtor-creditor relationship between BCP and MSL;

(b) whether it was an uncommercial transaction;

(c) whether it was an insolvent transaction; and

(d) whether BCP has a defence under s 588FG(1) or (2).

429 The following documents were in evidence and are relevant to the claims regarding the Horwood Payment:

(a) An executed loan agreement dated April 2017 between MSL and BCP ('Loan Agreement').

(b) An agreement dated April 2017 between BCP and Horwood Nominees entitled facility agent agreement ('Facility Agent Agreement') which is executed by BCP but not Horwood Nominees.

(c) Records regarding a bank cheque dated 10 April 2017 for $400,000 made out to MSD and paid from the bank account of Horwood Nominees.

(d) An account ledger for MSD showing a journal entry for the deposit on 12 April 2017 of the $400,000 from Horwood Nominees.

430 Hartwig deposed in the First Hartwig Affidavit that in April 2017, BCP as agent for Horwood Nominees entered into a loan agreement with MSL to loan it $400,000 on a short term basis. He said the loan was to repay a short term loan that MSD obtained from Westpac to assist Kanyon with its cashflow needs regarding the South Melbourne Project. He said that MSL took the loan from Horwood Nominees as it was shortly going to have the benefit of the Net Sale Proceeds which could be used to pay out the loan. Hartwig deposed that BCP was acting as the agent of Horwood Nominees and did not receive the funds borrowed from Horwood Nominees.

431 In his third affidavit, Hartwig describes BCP's practice as acting as agent in respect of loans in the following terms:

(a) BCP frequently facilitated loans between people seeking to borrow money for various projects and people who wanted to lend money privately at attractive interest rates. This was a common business function of BCP, and when BCP facilitated these loans it acted as agent for the lenders. It used a pro-forma facility agent agreement drawn by solicitors which it would complete by entering in the lender information and have the lenders sign.

(b) His understanding of these facility agent agreements was that it allowed BCP to enter into loan agreements on behalf of lenders without the lender needing to complete any further paperwork as BCP would do all of that for them. Once the facility agent agreement was executed, BCP would enter into a loan agreement with the relevant borrower in its own name, as agent for the lenders under the related facility agent agreement. BCP did not and does not lend its own funds.

(c) Whenever he signed a loan agreement on behalf of BCP, it was always BCP acting as agent for a principal. In the loan agreement, BCP staff would add names or a table of names in the schedule to the loan agreement at Item 2.

432 The Loan Agreement in this case uses a schedule to specify certain matters. The Lender is the parties named in Item 2 of the schedule, which is BCP "as Agent for the Principals"; the Borrower is the parties named in Item 3 of the schedule, which is MSL; and the Guarantor is the parties named in Item 4 of the Schedule, which is Hartwig and Minc. Clause 14 of the Loan Agreement provides that BCP enters into the agreement as agent for and on behalf of the "Principals". The definitions clause in the Loan Agreement, clause 1.1, defines "Principals" as BCP as set out in Item 2 of the schedule.

433 The plaintiffs begin by addressing the preliminary issue as to whether, under the arrangements for the Horwood Payment, BCP was a creditor of MSL or whether it merely acted as agent in a loan between MSL and Horwood Nominees.

434 The plaintiffs submit that on one view, the deposit by MSD in April 2017 of the bank cheque from Horwood Nominees and MSD's account ledger could support the defendants' claim that Horwood Nominees was the true creditor.

435 However, the plaintiffs point to the fact that in the Loan Agreement, BCP is defined as the Lender and Principal. They submit that because an entity cannot be agent for itself, clause 14, under which BCP purports to appoint itself as agent and limit its liability, is of no effect. Further, in guarantees provided by Minc and Hartwig the Lender is identified as BCP. Finally, the purported Facility Agent Agreement relied on by the defendants is not executed by Horwood Nominees and no Borrower is identified in that document, and no evidence was adduced from Horwood Nominees.

436 Having regard to these matters, the plaintiffs submit the only conclusion is that BCP was the true creditor and the issue is a legal issue for the Court to determine by construction of the documents.

437 The plaintiffs submit the Horwood Payment was an uncommercial transaction for the following reasons:

(a) The Loan Agreement demonstrates that MSL borrowed money from BCP. BCP sourced that money from Horwood Nominees. The funds were always intended to be for the benefit of MSD. Neither MSL's management accounts nor its financial accounts record the liability to BCP (or Horwood Nominees). MSD received the $400,000 from Horwood Nominees on 10 April 2017.

(b) MSD used the funds but it was MSL that incurred the liability and repaid it plus interest on MSD's behalf. The management accounts of MSD record a liability of $400,000 to Horwood Nominees as of 12 April 2017, however, it does not record repayment of that amount even though the ledger extends past the date of the Horwood Payment. MSL recorded the $410,922.27 to its credit in its ledger with MSD, however, the credit was written off by an accounting adjustment on 30 June 2017.

(c) A BCP schedule refers to MSD as the lender yet the Loan Agreement makes MSL liable for the funds and does not mention MSD.

(d) MSL and BCP were acting under the direction of one mind,[62] being Hartwig.

(e) At the time of the Horwood Payment, Hartwig knew or ought to have known that:

(i) MSL owed the Hunter Loan plus interest because the Replacement Agreement did not exist;

(ii) Hunter would not forgo the claim to the Hunter Loan and interest;

(iii) by the end of May 2017, Hunter was disputing Hartwig's assertions that MSL did not owe the Hunter Loan;

(iv) in meetings in May 2017, Hunter asked Hartwig to repay the Hunter Loan;

(v) by making the Horwood Payment and other payments made at the same time or contemplated at around the same time, being the Aida Nominees Payments and the Total Sallon Payment, that MSL would not have sufficient remaining assets to pay the Hunter Loan and interest;

(vi) if MSL paid the Hunter Loan and interest there would not be sufficient funds to make the Horwood Payment, Aida Nominees Payments and the Total Sallon Payment in full;[63]

(vii) MSL had no assets from which it could derive income to satisfy the Hunter Loan and interest and the shareholders were not going to provide money to satisfy the Hunter Loan; and

(viii) Hartwig's relationship with Hunter had broken down, and Hartwig had been removed from as a director of Kanyon.

(i) Hartwig's and Minc's intention was to distribute the Net Sale Proceeds within the Minc Sallon group and to tax authorities; and

(ii) Hartwig did not intend to set aside any amount in respect of a dispute about the Hunter Loan.

(g) Between 6 and 7 June 2017, Hartwig had correspondence with Hunter's solicitor, Mr Joyce, which did not resolve the dispute with Hunter about the Hunter Loan.

(h) On 9 June 2017, Hunter, via his solicitor, sent a letter of demand to MSL for payment of the Hunter Loan plus interest. After receiving this, Hartwig did not decide to withhold any funds in case a legal dispute arose.

(i) On the day of or within days of receiving the demand, Hartwig engaged lawyers in respect of the letter of demand.

(j) Hartwig engaged lawyers before he made the 23 June Sallon Payment, the 29 June Sallon Payment and the Second Aida Nominees Payment.

(k) In the circumstances of (a)-(j), Hartwig knew or ought to have known that there were legal risks in choosing to pay the Net Sale Proceeds to related entities and not pay any amount in satisfaction of, or withhold any amount as a provision for, the Hunter Loan and interest. Such risks included a claim from Hunter for payment of the Hunter Loan, which MSL would be unable to satisfy, and that Hartwig had obtained a benefit for himself or his related entity in breach of his director's duties.

438 The plaintiffs submit in the circumstances of (a)-(k) above and having regard to the statutory regime for insolvent transactions and directors' duties, BCP obtained a bargain of such magnitude that cannot be explained by normal commercial practice.[64]

439 The defendants submit that read together, the Loan Agreement and the Facility Agent Agreement contemplate a transaction whereby Horwood Nominees would lend $400,000 to "the Borrower". For that purpose, Horwood Nominees appointed BCP to act as its agent. The loan document describes BCP as "Agent for the Principals" without expressly identifying who is the principal. As a matter of construction of the documents, read as giving effect to one transaction, the principal could only be Horwood Nominees.

440 The defendants say that Hartwig was not cross-examined on the evidence summarised at paragraph 431 above.

441 The defendants refer to the payment by Horwood Nominees of $400,000 to MSD and submit that there is no evidence that Horwood Nominees paid any sum to BCP, or that BCP paid any sum to MSL.

442 The defendants submit that BCP was not a creditor of MSL and so the payment to Horwood Nominees of the Horwood Payment cannot be an unfair preference. They submit that the Horwood Payment was not an uncommercial transaction as it was the repayment of a debt owed by MSL to Horwood Nominees.

443 In addition, the defendants submit that the Horwood Payment was not an insolvent transaction because the plaintiffs have not demonstrated that MSL was insolvent on the date the payment was made (6 June 2017) or became insolvent because of that payment.

444 The defendants submit that since the Horwood Payment was not an unfair preference or an uncommercial transaction and since it was not an insolvent transaction, it is not voidable.

445 The defendants submit that BCP has a defence under s 588FG(1)(a) as it received no benefit from the Horwood Payment. They say that the Horwood Payment was a transaction from MSL to Horwood Nominees from which BCP received no benefit. Although there is evidence of an agreement, there is no evidence of any actual payment being made because of that agreement. Instead, the evidence of the payment of the $400,000 is that it was paid directly by Horwood Nominees to MSD.

446 The defendants also submit that s 588FG requires an examination of the circumstances of the imputed transaction - both subjectively, from the point of view of the person receiving the benefit, and objectively - which might provide grounds for suspecting insolvency. The defendants submit that the fact there was a dispute as to the existence or non-existence of the Replacement Agreement therefore needs to be considered. Under s 588FB, determining whether a transaction of a company is an uncommercial transaction requires an examination of what a reasonable person in the company's circumstance would do. The defendants submit that even if the court ultimately finds there was no legally binding Replacement Agreement, that there were contentions, supported by objective evidence, for its existence is a relevant factor to take into account when considering s 588FB and subsequently s 588FG.

447 By the Loan Agreement, MSL borrowed $400,000 and incurred a liability to repay it. That falls squarely within the definition of 'debt' as explored in Quin v Vlahos as set out at paragraph 389 above.

448 Who was the creditor in respect of that debt? The terms of the Loan Agreement are such that the creditor under that document can only be BCP. It is defined as the lender, albeit as agent for the principals, but then it is also defined as the principals. True it is that these definitions are circular, but under the Loan Agreement itself no other conclusion presents itself.

449 Even if I accepted the defendants' submission that the Loan Agreement should be read together with the Facility Agent Agreement, that does not advance the analysis much further since it does not identify the borrower. There is nothing on the face of either document to link it to the other: Horwood Nominees is not mentioned in the Loan Agreement and MSL is not mentioned in the Facility Agent Agreement. True it is that there is a reference in the recitals to the Facility Agent Agreement to the purpose of the loan being to "assist the debt restructure within the 'Minc Sallon' group", but that does not identify an entity which is the borrower. Even if there was evidence that Horwood Nominees had executed the Facility Agent Agreement, this would not assist the defendants since that would not address the shortfalls as identified in this paragraph.

450 The defendants also rely on the fact that the payment went from Horwood Nominees to MSD, and not from BCP to MSL, as a basis to say that BCP was not the creditor. This raises two issues for consideration:

(a) If the defendants are seeking to suggest that the debtor is not MSL but MSD, because MSL did not actually receive the advance, then I reject that argument. The Loan Agreement makes it clear that MSL is the borrower: it is reasonable for the Court to infer, and I do so infer, that there was an instruction from MSL to BCP for the advance to be paid directly to MSD. The instruction can only be from MSL to BCP rather than from MSL to Horwood Nominees, as there is no evidence of any direct relationship or communications between MSL and Horwood Nominees. In any event, the Facility Agent Agreement makes it clear that all communication with the borrower is carried out by BCP, so I do not see how BCP could now sensibly argue that it was not the party that received an instruction from MSL to pay the advance to MSD. In any event, such an argument is inconsistent with paragraph 46 of the Hartwig Parties' Defence, and so I assume this is not what the defendants are submitting.

(b) If the defendants are seeking to suggest that the creditor is Horwood Nominees, because it paid the advance to MSD by bank cheque, rather than the creditor being BCP, then this does not automatically follow. One possibility is that it does mean that Horwood Nominees is the creditor, but another possibility is that BCP procured the funds for the loan from Horwood Nominees and instructed it to pay the funds directly rather than through BCP. The first possibility is inconsistent with the plaintiffs' case, but the second is not. In this regard, clause 3 of the Facility Agent Agreement is not consistent with the defendants' case: it provides that "The Principals will advance the Loan to the Agent to advance to the Borrower in accordance with the Transaction Documents." On the balance of probabilities, I consider the second possibility to be the more plausible one.

451 Accordingly, I have concluded that BCP is a creditor of MSL in respect of the $400,000 borrowed by MSL under the Loan Agreement. Thus the threshold question in respect of the unfair preference claim, being whether the impugned payment was made in respect of a debt owed to a creditor, has been met.

452 MSL and BCP were parties to the transaction, even though the Horwood Payment was made to someone else, being Horwood Nominees, thus satisfying s 588FA(1)(a) of the Act. The Court can, and does, infer that the Horwood Payment was made by MSL on BCP's instruction, for the same reason as set out in paragraph 450(a) above. It is important here to note that Hartwig was a director and the guiding mind of both BCP and MSL.

453 The transaction resulted in BCP receiving from MSL more than it would receive if the transaction were set aside and BCP was to prove for the debt in MSL's winding up. This is because BCP received all that it was owed under the Loan Agreement by virtue of the Horwood Payment having been made, whereas it would not receive the full amount by proving for its debt in the winding up of MSL as MSL is insolvent and cannot pay all its debts in full.

454 All of the elements required for the Horwood Payment to be an unfair preference have been established:

(a) the Horwood Payment was a transaction within the meaning of s 9 of the Act;

(b) a related entity of MSL was a party to the transaction, being BCP;

(c) MSL and the relevant defendant, being BCP, were parties to the transaction;

(d) the payment was made within the requisite period, being within the 4 years prior to the Relation-Back Day;

(e) the payment was made in respect of an unsecured debt owed to BCP as creditor; and

(f) the payment resulted in BCP receiving more from MSL in respect of the debt than it would if the transaction was set aside and BCP proved for its debt in MSL's winding up.

455 The question is whether it may be expected that a reasonable person in MSL's circumstances would not have made the Horwood Payment, having regard to the following four matters:

(a) What benefits (if any) were there to MSL for it entering into the Horwood Payment?

(b) What was the detriment to MSL of it entering into the Horwood Payment?

(c) What are the respective benefits to other parties to the transaction of entering into it?

(d) Are there any other relevant matters to take into account?

456 Insofar as benefits to MSL are concerned, the benefit it obtained was a discharge of its liability to BCP under the Loan Agreement. In normal circumstances, one would think that this weighed heavily against the transaction being an uncommercial one: it had a liability to BCP for $400,000 plus interest and it made a payment at BCP's direction of the full amount so as to discharge that liability. However, all of the circumstances pertaining at the time must be taken into account. There has been no benefit to MSL whatsoever identified from it having taken out the loan: it was taken out for MSD's benefit and MSD received the advance. Of itself, that does not bring the Horwood Payment within the parameters of an uncommercial transaction, since the relevant transaction is the Horwood Payment and not the loan transaction. Nonetheless, it is relevant. In this case, MSL incurred the liability for the benefit of MSD and there is no evidence of any benefit to MSL as a result of that: while MSL's accounts recorded the Horwood Payment as a credit in its ledger with MSD, that credit was written off shortly after the Horwood Payment was made by MSL by way of an accounting adjustment, with there being no evidence that MSD had paid anything to MSL for the Horwood Payment. Hence MSL paid out the Horwood Payment and got nothing for it in return, as one would have expected MSD to continue to have a liability to MSL for the amount of that payment. Hartwig's own evidence was that MSL's purpose of the loan was so that MSD could discharge its own debt to Westpac and MSL pay the loan back from the Net Sale Proceeds. There is no benefit for MSL in this arrangement, which includes the Horwood Payment, in circumstances where MSD did not remain liable to repay MSL.

457 The detriment to MSL from the Horwood Payment is clear: it made the payment from its own funds without having obtained any benefit from the debt in the first place. In the circumstances of this case, discharge from the liability incurred by reason of the Loan Agreement is insufficient to make this a commercial transaction for MSL. The defendants' pleading that the Horwood Payment did not have any detrimental impact on MSL because MSL was able to discharge other existing creditors (which did not include Hunter or the Hunter FT) is therefore not accepted.

458 The respective benefits to BCP of entering into the transaction are that to the extent that it had any liability to Horwood Nominees (because the Facility Agent Agreement provides that Horwood Nominees advances the funds to BCP who then advances it to the borrower), that liability was discharged as Horwood Nominees received the Horwood Payment.

459 The other matters relevant to take into account have already been mentioned in paragraph 456 above, in particular, that MSL received no, or no sufficient, benefit from making the Horwood Payment. In addition, as set out in Queensland Phosphate, the Court will have regard to the totality of the business relationship between the parties. In this instance, the relationship between MSL and BCP is such as to require greater scrutiny, particularly given the common director and guiding mind (ie, Hartwig), who was crucial to the transaction.

460 I do not accept the defendants' submission that the Horwood Payment was not an uncommercial transaction because it was the repayment of a debt owed by MSL to Horwood Nominees - I have already found that the debt was owed by MSL to BCP, not Horwood Nominees.

461 In my view, a reasonable person in MSL's circumstances would not have made the Horwood Payment without securing or obtaining some tangible benefit for MSL in doing so. Further, a reasonable person in MSL's circumstances would not have made the Horwood Payment where to do so, along with the other impugned transactions, left MSL in a position where it could not pay all of its debts when due. The detriment to MSL of the Horwood Payment, in all the circumstances, far outweighed any benefit it might have obtained.

462 Due to the findings made in section E.3 above, particularly sub-section E.3.4, I have already found that MSL became insolvent because of matters including entering into the relevant transaction, being the Horwood Payment.

463 Accordingly, provided that the Horwood Payment is an unfair preference or an uncommercial transaction, then it is also an insolvent transaction within the meaning of s 588FC of the Act. Given my findings as set out in the preceding two sections, the Horwood Payment is an insolvent transaction.

464 Having established that the Horwood Payment is an unfair preference and an uncommercial transaction, and that it is an insolvent transaction, then it follows that it is a voidable transaction under s 588FE and the Court may make orders pursuant to s 588FF unless a defence under s 588FG is found to apply.

465 BCP relies on the defence in s 588FG(1)(a) because it says that it received no benefit from the Horwood Payment. I do not accept this, for the reasons set out in paragraph 458 above. It cannot be said that BCP received no benefit from the transaction.

466 BCP also relies on the defence in s 588FG(1)(b), that if it did receive a benefit then it did so in good faith without reasonable grounds for suspecting insolvency and a reasonable person in BCP's circumstances would have had no such grounds for so suspecting.

467 I do not accept this. In the circumstances existing as at June 2017, Hartwig (and therefore BCP) knew that Hunter had recently made verbal demands for payment of the Hunter Loan, that he contended that he should be paid from the Net Sale Proceeds, and that he had involved his solicitor. Hartwig also knew that if the Net Sale Proceeds were paid out to the ATO, Horwood Nominees, Sallon and Aida Nominees then MSL would not have any ability to pay the Hunter Loan.

468 I do not accept the defendants' submission that MSL's actions in making the Horwood Payment were reasonable because it was reasonable for Hartwig to believe that MSL did not owe the Hunter Loan due to the Replacement Agreement. First, I have found that the Replacement Agreement did not exist and that MSL remained liable for payment of the Hunter Loan. Second, I do not accept the defendants' alternative submission that even if the Replacement Agreement is found not to exist, it was reasonable for Hartwig to believe that it did. In the circumstances of this case, when Hartwig's evidence about key aspects of the Replacement Agreement, in particular the content of the discussion at the Giorgios Meeting, has not been accepted and the Court has made a finding that the Replacement Agreement did not exist, it is not reasonable that Hartwig believed that it did. As already noted, Hartwig was a director of MSL and BCP and was the guiding mind of both.

469 Accordingly, I do not accept that BCP received the benefit of the Horwood Payment in good faith. Therefore, s 588FG(1)(b)(i) has not been satisfied.

470 Further, I do not accept that s 588FG(1)(b)(ii) has been satisfied. BCP is imputed with Hartwig's knowledge and he had, despite his submission, reasonable grounds for suspecting that MSL would become insolvent by reason of matters including entering into the Horwood Loan (the other matters being the dissipation of all of the Net Sale Proceeds in particular the Total Sallon Payment and the Aida Nominees Payments). It therefore cannot be said that BCP had no reasonable grounds for suspecting insolvency. This negates s 588FG(1)(b)(ii)(A). Further, a reasonable person in BCP's circumstances, those circumstances including the common director in Hartwig, would have had grounds for so suspecting, such that s 588FG(1)(b)(ii)(B) has not been satisfied either, and it is necessary to satisfy both.

471 Accordingly, BCP has not made out its defence under s 588FG(1)(b) of the Act. For the same reason, it has not made out its defence under s 588FG(2) of the Act. In the circumstances of this case, the only effective difference between the two defences is whether BCP provided valuable consideration under the transaction or changed its position in reliance on the transaction. Since I have already found that BCP did not become a party to the Horwood Payment in good faith and that there were reasonable grounds for suspecting insolvency, sub-paragraphs (a) and (b) of s 588FG(2) are not satisfied and hence BCP has not been able to make out all elements of s 588FG(2).

472 Even if I am wrong about the good faith element of the s 588FG defence, the findings in respect of reasonable grounds to suspect insolvency mean that the defence is not available to BCP.

473 As I am satisfied that the Horwood Payment is a voidable transaction because of s 588FE of the Act, since it is an unfair preference and uncommercial transaction that is also an insolvent transaction, and as I am satisfied that no defence under s 588FG has been established, it follows that I may make orders under s 588FF of the Act.

474 In this instance, it is appropriate that BCP be ordered to pay MSL the amount of $410,922.27.

475 It is not disputed that the First Sallon Payment, the EBO Payment, the 23 June Sallon Payment and the 29 June Sallon Payment were made from the Net Sale Proceeds.

476 In the Statement of Claim, the plaintiffs calculate the Surplus Payment in the manner I have described in paragraph 47 above. That refers to MSL's books and records at the time as recording a debt owed by MSL to Sallon of $46,507.36. I have not been able to locate any evidence in respect of that particular figure. Rather, in opening, the plaintiffs referred to MSL's balance sheet as at 1 June 2017 which recorded a loan from Sallon as a non-current liability in the amount of $71,507. Therefore, I will use that figure as the amount of the loan from Sallon to MSL as at 1 June 2017.

477 This means that the plaintiffs' calculation of the amount of the Surplus Payment is wrong. It should be the difference between the total of the payments made in June 2017 from the Net Sale Proceeds for the benefit of Sallon, being $121,641.98 (ie, the Total Sallon Payment), less the loan amount of $71,507, which gives $50,134.98 as the correct amount for the Surplus Payment. I will refer to this sum as the 'Revised Surplus Payment'.[65] I will refer to the amount of $71,507 as the 'Revised Sallon Payment'.

478 The plaintiffs allege that the Revised Sallon Payment was both an unfair preference and an uncommercial transaction and that the Revised Surplus Payment was an uncommercial transaction. However, in their opening, they say that if the loan from Sallon to MSL is $71,507 then anything above that must be either a distribution of profit or return of capital. This has an impact on what can be considered as an unfair preference, which I will deal with later when considering the evidence and submissions.

479 In the First Hartwig Affidavit, Hartwig deposes as to the purpose of each of these payments as follows:

(a) the First Sallon Payment - "return of quasi-equity";

(b) the EBO Payment - "return of quasi-equity to Sallon redirected to East Brunswick Operatons Pty Ltd";

(c) the 23 June Sallon Payment - "Sallon agreed management fee for work done"; and

(d) the 29 June Sallon Payment - "balance of Sallon's quasi-equity contribution".

480 This is not entirely consistent with the pleaded defence in respect of the First Sallon Payment and the EBO Payment (see paragraph 50(c) above).

481 MSL's balance sheet does not record any liability to Sallon for management fees. Hartwig's evidence was that there was no written agreement between MSL and Sallon for this, just a verbal arrangement between he and Minc for 20 odd years.

482 Hartwig's evidence is that there was no written loan agreement between Sallon and MSL.

483 In cross-examination, Hartwig said that the $71,507 in MSL's balance sheet was treated as a loan, that the payments to Sallon in June 2017 were a repayment of that loan, and the rest was profit from the sale of the Laverton Property.

484 The plaintiffs claim that the Revised Sallon Payment was an unfair preference, or alternatively, that the Revised Sallon Payment and the Revised Surplus Payment were uncommercial transactions, or that the Revised Sallon Payment and Surplus Payment were transfers to defeat creditors.

485 The plaintiffs submit that Hartwig's affidavit evidence explaining the payments made to Sallon in June 2017 was meagre. Other than the management fee payment, the payments are described as quasi-equity, which they say is an unhelpful terminology.

(a) Hartwig admitted that the payments to Sallon exceeded MSL's liability to Sallon in its balance sheet of May 2017[66] but asserted that the difference was a profit distribution. Hartwig could not say whether a dividend had been declared and he did not know how the accounting was carried out.

(b) MSL's 2017 financial statements were produced by Hartwig through the Third Hartwig Affidavit. These record that dividends of $200,000 were paid or provided for, although the recipients are not identified. No dividend declarations were produced.

(c) Hartwig admitted there was no management agreement or loan agreement between MSL and Sallon.

487 The plaintiffs submit that these were insolvent transactions, for the reasons already submitted in respect of the Horwood Payment (see section G.3 above). There is no need for me to repeat them here.

488 The plaintiffs submit that the evidence as to the characterisation of the payments made to Sallon in June 2017 is equivocal.

489 They submit there is no such concept as quasi-equity, yet that is how Hartwig characterised the payments. The plaintiffs submits that on balance the Court can find Sallon was a creditor for the full amount of the payments for the purpose of the unfair preference claim.

490 The plaintiffs submit the Revised Sallon Payment and the Revised Surplus Payment were uncommercial transactions for the following reasons:

(a) MSL's accounts recorded a non-current liability of $71,507 to Sallon, however the total of the payments to Sallon in June 2017 was $121,641.98;

(b) there was no loan agreement with Sallon;

(c) Sallon was a shareholder of MSL, therefore its entitlement to be distributed profit ranked below unsecured creditors;

(d) the payments were made to an entity with the same director and same indirect ownership as MSL, ie, the payment benefited the individual Hartwig who ultimately controlled and owned MSL and Sallon;

(e) MSL and Sallon were acting under the direction of one mind, being Hartwig;

(f) Hartwig knew or ought to have known of the matters in referred to in paragraph 437(e) above;

(g) the matters in paragraph 437(f) to 437(j) above; and

(h) in the circumstances of (a)-(g), Hartwig knew or ought to have known that there were legal risks in choosing to pay the Net Sale Proceeds to related entities and not pay any amount in satisfaction of, or withhold any amount as a provision for the Hunter Loan and interest. Such risks included a claim from Hunter for payment of the Hunter Loan which MSL would be unable to satisfy, and that Hartwig had obtained a benefit for himself or his related entity in breach of his director's duties.

491 The plaintiffs submit that in the circumstances set out in the preceding paragraph and having regard to the statutory regime for insolvent transactions and directors' duties, Sallon received obtained a bargain of such magnitude that cannot be explained by normal commercial practice.

492 The plaintiffs submit that the following matters are relevant to the determination of whether the payment was made to defeat creditors:

(a) the matters in paragraph 490 above;

(b) Minc's evidence was that in mid-2017 Hartwig mentioned a problem with Hunter and that $600,000 had been used to pay creditors associated with Hunter or one of his developments;

(c) prior to 30 May 2017, Hartwig and Hunter had discussions about various loans, which included the Hunter Loan. On 30 May 2017, in an email to Hunter, Hartwig wrote that he had discussed Hunter's 'approach' with Minc and outlined his position as to various loans, including the Hunter Loan. On 31 May 2017, Hunter responded by email in which he wrote "I agree we need to achieve a quick resolution of the loan positions" and invited Hartwig and Minc to a meeting with himself and his solicitor Tony Joyce;

(d) the First Sallon Payment and the EBO Payment were made on 6 June 2017;

(e) on 9 June 2017, a letter of demand was served on MSL in respect of the Hunter Loan and interest.[67] That letter was addressed to the directors of MSL;

(f) after receiving the demand, Hartwig engaged Russell Kennedy Lawyers to act for MSL; and

(g) two further payments were made to Sallon on 23 and 29 June 2017, after MSL received the demand.

493 The defendants submit that each of the five payments constituting the Total Sallon Payment is a separate transaction.

(a) Hartwig's evidence is that the various payments were the return of quasi-equity and this was not challenged in cross-examination.

(b) MSL's externally prepared 2016 accounts show a debt owed to Sallon of $28,854.

495 Insofar as the unfair preference claim is concerned, the defendants submit that the payments alleged exceed the debt owed to Sallon. They submit that only that portion of the payments which represents the amount of the debt would have been received by Sallon in respect of its debt. Only the first of the payments made on 6 June 2017 is alleged to have been made to Sallon as a creditor.

496 Insofar as the uncommercial transaction claim is concerned, the defendants submit that payments above the amount of the debt represent the distribution of the proceeds of the sale of the Laverton Property to one of the shareholders of MSL. They submit that the single enterprise of MSL concluded with the sale of the Laverton Property and that there is no reason why it could be expected that the payments to shareholders as quasi-equity would not be made.

497 The defendants submit that there are three relevant dates to assess MSL's solvency in respect of the payments to Sallon, being 6, 23 and 29 June 2017, and that for the reasons I have already summarised in earlier sections, MSL was not insolvent at these dates.

498 The defendants' submission refuting the claim that the payments to Sallon were payments to defeat creditors are set out at paragraph 417 above.

499 The defendants submit that the payments to Sallon are not voidable transactions.

500 Insofar as a defence under s 588FG(2) is concerned, the defendants submit that Hartwig was the director and controlling mind of Sallon. They submit that given his belief regarding the substitution of Kanyon as debtor for Loan 9, he, and hence Sallon, did not suspect, and had no reason to suspect, that MSL was insolvent or might become insolvent. The defendants also submit that valuable consideration consists of the discharge of a debt.

501 I do not accept the plaintiffs' submission that the Court can find, for the purpose of the unfair preference claim, that Sallon was a creditor for the full amount of the payments made to or for the benefit of Sallon in June 2017 from the Net Sale Proceeds. It simply does not follow that Sallon could be a creditor for the full amount of $121,641.98 when the evidence is that at most Sallon was a creditor for $71,507 plus (possibly) $1,100. Since MSL's balance sheet does not record a separate amount of $1,100 for the alleged management fee, it is unclear to me whether that alleged debt is included in the $71,507 loan figure or not. I think it more likely that it is not, as the loan figure is recorded as a non-current liability and I would expect the management fee to be recorded as a current liability.

502 Accordingly, the amount of any unfair preference to Sallon would be, if the claim was accepted, $72,607.

503 If the 23 June Sallon Payment is a payment to Sallon for a management fee, then it is an unfair preference because:

(a) it is a payment by MSL to a creditor (Sallon) in respect of an unsecured debt; and

(b) it resulted in Sallon receiving more than it would receive in respect of that debt if the transaction was set aside and Sallon was to prove for the debt in MSL's winding up, since MSL does not have the capacity to pay all its debts in full.

504 If it is not a payment to Sallon for a management fee, then it should be regarded as an amount paid to Sallon over and above its loan amount of $71,507 and would be considered as part of the Revised Surplus Payment, which I will deal with shortly.

505 I accept the plaintiffs' submission that the defendants' characterisation of the payments to Sallon as a return of quasi-equity is unhelpful. There is no such thing as quasi-equity. In any event, I have taken the defendants to mean that it is either the repayment of a shareholder loan or a return of capital or a profit distribution. But that in itself is unhelpful since a shareholder loan has the character of a debt, whereas the other two possibilities do not.

506 To the extent that the payments to Sallon were a repayment of a debt, being the amount listed in its accounts as $71,507, then the payment of that amount is an unfair preference for the same reasons set out in paragraph 503 above. It matters not, for these purposes, whether it was a debt owed to Sallon as shareholder or in some other capacity. It is still a payment in respect of an unsecured debt, which is what is relevant for the purposes of s 588FA.

507 The Revised Surplus Payment cannot be an unfair preference, since it is not a payment in respect of an unsecured debt. However, it can be an uncommercial transaction. The Revised Surplus Payment is effectively a profit distribution made to Sallon following the sale of the Laverton Property. In my view, the Revised Surplus Payment is an uncommercial transaction for the following reasons:

(a) there is no benefit to MSL from entering into the transaction. It is not a discharge of any liability it had to Sallon;

(b) there is detriment to MSL from having entered into the transaction: it has the result, together with the other impugned payments made in June 2017, of having left MSL in a position where it could not discharge all of its existing debts;

(c) the payment occurred in circumstances where any profit distribution to Sallon ought not have been made until and unless all of MSL's creditors had been paid in full;

(d) Hartwig was the director and controlling mind of both Sallon and MSL and stood to benefit from the Revised Surplus Payment; and

(e) a reasonable person in MSL's circumstances would not have made the Revised Surplus Payment.

508 Despite my finding in paragraph 506 above, if the payment of the amount recorded in MSL's accounts as a loan from Sallon, being $71,507, is not viewed as an unfair preference because it is not properly characterised as a loan, then it is an uncommercial transaction. If it is not a debt, then it cannot be said that MSL received a benefit from the payment since there is no liability to discharge. The other factors referred to in (b) to (e) of the preceding paragraph are the same.

509 Each of the payments made to or for the benefit of Sallon in June 2017 were insolvent transactions as:

(a) they were unfair preferences and/or uncommercial transactions; and

(b) MSL became insolvent because of matters including entering into each of those payments, they were insolvent transactions, for the same reasons as I found the Horwood Payment to be an insolvent transaction.

510 Strictly speaking, in the circumstances of this case the defendants' submission that it is unnecessary to consider separately the creditor defeating purposes provision, because if any of the impugned transactions is an insolvent transaction, then s 588FE applies due to sub-section (4), is correct. A creditor defeating transaction under s 588FE(5) has to (first) be an insolvent transaction and (second) have the creditor defeating purpose referred to in s 588FE(5)(b). Once it is established that the impugned transaction is an insolvent transaction, the only reason why s 588FE(5) would need to come into play is if the transaction was outside the stipulated timeframe of any of the other bases in s 588FE for it to be voidable. Since the four year period specified in s 588FE(4) for related entity transactions has been met, there is no need to rely on s 588FE(5) to obtain a longer timeframe (being 10 years) by establishing a creditor defeating purpose.

511 However, I will consider the plaintiffs' claims in this regard for the purpose of completeness.

512 It is somewhat disingenuous for the defendants to contend that MSL only existed for the purpose of holding the Laverton Property, and now that it was sold MSL could pay its accepted debts and return the rest of the proceeds to its shareholders. Such a position ignores the reality that MSL did more than hold the Laverton Property, receive income from it, and pay debts in respect of it. Even on the defendants' own case, MSL borrowed funds from others for purposes unconnected with the Laverton Property,[68] and made loans to or payments for the benefit of others who were also unconnected with the Laverton Property.[69] However, this does not mean that MSL had the purpose of defeating Hunter's claim when it made the payments to Sallon in June 2017. There is no evidence that MSL set out to defeat Hunter's claims if MSL was ultimately liquidated. Rather, the evidence establishes that MSL was paying the debts it accepted and then distributing the profits: not rating Hunter's claim is not equivalent to trying to defeat it. Section 588FE(5) is concerned with the purpose of the transaction, not the effect of the transaction. Therefore, I do not accept that the Total Sallon Payment comprises creditor defeating transactions.

513 I do not accept the defendants' submission that Sallon has a valid defence under s 588FG(2) of the Act, for the following reasons:

(a) Sallon did not receive the payments made to it or for its benefit in June 2017 in good faith, Hartwig being the guiding mind of both MSL and Sallon, for the same reasons as set out at paragraphs 467 and [[70]](#_Ref157
(b) accordingly, the requirement in s 588FG(2)(a) that the payments be received in good faith has not been met;

(c) while that is sufficient to negate the s 588GF(2) defence, the requirement in s 588FG(2)(b) has not been satisfied for the same reasons as set out in paragraph [470
(d) the Revised Surplus Payment is not a payment in respect of a debt and hence the contention that there was valuable consideration for the discharge of a debt does not apply to this payment, such that s 588FG(2)(c) could not be satisfied for this payment.

514 It follows that I may make orders under s 588FF of the Act in respect of the payments made by MSL from the Net Sale Proceeds to or for the benefit of Sallon in June 2017. Sallon will be ordered to pay MSL the amount of $121,641.98.

515 It is not disputed that a total of $640,000 was paid by MSL from the Net Sale Proceeds to Aida Nominees in June 2017, being the Aida Nominees Payments.[72]

516 Aida Nominees is not a shareholder of MSL. It is a company of which Minc is a director. Aida Nominees is the trustee for the Minc Superannuation Fund. Minc together with his wife Susan Minc are joint shareholders of MSL, in their capacities as trustees for the Minc Family Trust.

517 MSL's balance sheet for 1 June 2017 records a loan from Aida Nominees in the amount of $1,010,000. It also records a non-current asset of a loan from "Minc Superfund" of $160,000.

518 In the First Hartwig Affidavit, Hartwig deposes that the 6 June Aida Nominees Payment was a "return of quasi-equity" and the 30 June Aida Nominees Payment was the "balance of Aida's quasi-equity contribution".

519 Relevantly in respect of the voidable transaction claims regarding the Aida Nominee Payments, in his affidavit Minc deposes that:

(a) he has been a client of BCP since the late 1990s;

(b) whenever he invested in opportunities Hartwig presented to him, he would usually invest using money from the Minc Family Trust or from the Minc Superannuation Fund. Minc did not concern himself with which of these entities the money would come from as he considered it all to be his money. He said he often left those details to Hartwig;

(c) when the Laverton Property was purchased by MSL, it was purchased using a bank loan for about $1.2 million which Hartwig arranged and the remainder came from the Minc Superannuation Fund or the Minc Family Trust;

(d) he does not recall which of those two paid the remainder of the purchase price, however he used $1 million from Aida Nominees towards the deposit and essentially saw that as his contribution as a shareholder;

(e) after the Laverton Property was sold, the surplus was distributed in accordance with the 80-20 split between he and Hartwig after the bank loan was repaid;

(f) he had put in money but expected to get that back when the Laverton Property was sold;

(g) he did not believe that MSL had debts which were not paid out of the Net Sale Proceeds; and

(h) he believed that MSL was solvent when it distributed the Net Sale Proceeds, including the Aida Nominees Payments, and he did not suspect and had no reason to suspect that MSL was or would become insolvent.

520 The plaintiffs claim that the Aida Nominees Payments were unfair preferences, further or alternatively, they were uncommercial transactions, and they were transfers to defeat creditors.

521 The plaintiffs submit that to the extent the Aida Nominees Payments were made to partially or fully discharge a debt owed by MSL to Aida Nominees, which is described in MSL's books as a loan, then they were payments of an unsecured debt and are unfair preferences.

522 The plaintiffs submit that the Aida Nominees Payments are unfair preferences because MSL became insolvent by reason of making the June 2017 payments from the Net Sale Proceeds, including the Aida Nominees Payments, and that this resulted in Aida Nominees receiving more than it would if the transactions were set aside and it had to prove in MSL's winding up for its debt.

523 The plaintiffs submit that the Aida Nominees Payments were uncommercial transactions for the following reasons:

(a) MSL's accounts recorded a non-current liability to Aida Nominees of $1,010,000 at the end of May 2017;

(b) MSL did not have a loan agreement with Aida Nominees for any amount;

(c) Minc deposed that he used $1 million from Aida Nominees towards the deposit of the Laverton property and he saw that as his contribution as shareholder. Aida Nominees was not a shareholder in MSL, however, its directors and shareholders were Minc and Susan Minc, who were shareholders in Minc Sallon in their capacities as trustees for the Minc Family Trust;

(d) if Aida Nominees did make a contribution on behalf of Minc and Susan Minc and it was in fact a shareholder contribution, then the liability to Aida Nominees in MSL's accounts is not a true liability. Rather, the contribution was shareholder equity and was only entitled to be returned to Aida Nominees/Minc and Susan Minc as a dividend or return of capital and upon a winding up of the company, it ranked below unsecured creditors;

(e) the Aida Nominees Payments were made to an entity with the same director and same indirect ownership as MSL, ie, the payment benefited the individual Minc who ultimately controlled and owned MSL and Aida Nominees;

(f) MSL and Aida Nominees were acting under the direction of one mind, being Minc;

(g) Minc knew or ought to have known of the matters in paragraph 437(e) above;

(h) the matters in paragraph 437(f) to 437(j) above; and

(i) in the circumstances of (a)-(h), Minc knew or ought to have known that there were legal risks in choosing to pay the Net Sale Proceeds to related entities and not pay any amount in satisfaction of, or withhold any amount as a provision for the Hunter Loan and interest. Such risks included a claim from Hunter for payment of the Hunter Loan which MSL would be unable to satisfy and that Hartwig had obtained a benefit for himself or his related entity in breach of his director's duties.[73]

524 The plaintiffs submit in the circumstances of (a)-(i) above and having regard to the statutory regime for insolvent transactions and directors' duties, Aida Nominees obtained a bargain of such magnitude that cannot be explained by normal commercial practice.

525 The plaintiffs submit that the Aida Nominees Payments were transactions with a creditor-defeating purpose and that the following matters are relevant to the determination of whether this is the case:

(a) the matters in paragraph 492(b), 492(c), 492(e) and 492(f) above;

(b) the matters in paragraph 523 above;

(c) the First Aida Nominees Payment of $400,000 was made on 6 June 2017; and

(d) the Second Aida Nominees Payment of $240,000 was made on 30 June 2017, after MSL received the written demand from Hunter.

526 The defendants submit that MSL's externally prepared 2016 accounts show a loan from the Minc Family Trust of $550,000. I note that those accounts do not show a loan from Aida Nominees or the Minc Superannuation Fund.

527 The defendants' submit that only the First Aida Nominees Payment and part of the Second Aida Nominees Payment could have been paid to Aida Nominees as a creditor, presumably because they have taken the figure of $550,000 as being owed to the Minc Family Trust.

528 The defendants' submit that the other part of the Second Aida Nominees Payment, which I take to be the sum of $90,000, represents payment of the profits of MSL's venture by way of quasi-equity. They submit that there is no reason why it could be expected that the payment would not be made and it is therefore not an uncommercial transaction.

529 The defendants submit that there are two relevant dates to assess MSL's solvency in respect of the payments to Aida Nominees, being 6 and 30 June 2017. The First Aida Nominees Payment, which the plaintiffs allege related to a debt, was made on 6 June 2017, and the plaintiffs have not established MSL was insolvent on that date.

530 The defendants submit that the Aida Nominees Payments are not voidable transactions.

531 Insofar as a defence under s 588FG(2) is concerned, the defendants submit that Minc is a director of Aida Nominees, that he did not suspect MSL was insolvent and that he had no reason to suspect that MSL was insolvent or might become insolvent. The defendants also submit that to the extent the plaintiffs' claim relies on an unfair preference, valuable consideration consists of the discharge of a debt.

532 The evidence regarding the characterisation of the purpose of the Aida Nominees Payments is contradictory and inconsistent:

(a) Hartwig describes the payments as return of "quasi-equity".

(b) MSL's balance sheet as at 1 June 2017 records a non-current liability to Aida Nominees for a loan of $1,010,000 and a non-current asset of $160,000 being a loan to "Minc Superfund".

(c) In the same balance sheet, there is no loan recorded to or from Minc and Susan Minc or the Minc Family Trust.

(d) MSL's externally prepared 2016 accounts record a loan of $550,000 from the Minc Family Trust as a current liability, and record that for 2015 a loan of $990,000 was owed to the Minc Family Trust and a loan of $1,025,000 was owed to the "Minc Family Superannuation Fund", with $0 owing to the "Minc Family Superannation Fund" in 2016.

(e) Minc does not describe his contribution towards MSL's purchase of the Laverton Property (whichever of his entities was used) as a loan, and in particular he describes the $1 million from Aida Nominees as his contribution as a shareholder.

533 For the Aida Nominees Payments (or a portion of them) to be an unfair preference, there must be a repayment of an unsecured debt. As set out earlier, there is no contest that if it is a debt then it is unsecured. The only evidence about there being a loan between MSL and Aida Nominees is the description of the liability in MSL's 1 June 2017 balance sheet. There is, as the plaintiffs submit, no evidence of a loan agreement between Aida Nominees and MSL.

534 The defendants do not nail their colours to the mast in respect of the Aida Nominees Payments, in that they do not unequivocally state whether the payments (or a portion of them) were in respect of a debt or not. Nonetheless, the burden of establishing it as a debt lies on the plaintiffs. I make the same comments here as I have in paragraph 505 above regarding "quasi-equity".

535 If it is a debt, how much is that debt? Similarly to when I considered the payments to Sallon, it is unclear why the defendants relied on the debt shown in the externally prepared 2016 accounts, being $550,000 to the Minc Family Trust, rather than referring to the balance sheet figure of $1,010,000 to Aida Nominees as at 1 June 2017. No submission was made in respect of this difference, which is a more significant difference than applied regarding Sallon. This is not just a bigger difference in terms of the amount (if the 2016 figure is used, then the defendants are correct that only part of the Aida Nominees Payments can be an unfair preference), but also in terms of the identity of the creditor. If the creditor is said to be the Minc Family Trust, as it is in the 2016 accounts, then the payee for the amount would be Minc and Susan Minc, as they are the trustees of that trust, not Aida Nominees. If the creditor is Aida Nominees, then unless Aida Nominees' activities involved more than being the trustee of the Minc Superannuation Fund (and there is no evidence that this was the case), it must have been the creditor as trustee for the Minc Superannuation Fund.

536 If it is a debt, then I consider it appropriate to use the figure of $1,010,000 as the claimed debt. I see no reason not to take this as the figure rather than use an outdated figure, even though that outdated figure was in externally prepared end of year accounts. This means that the division of the Second Aida Nominees Payment into an amount on account of the loan of $550,000 and the rest need not be made.

537 It is interesting that the externally prepared accounts for 2016 record three loans as current loans for 2016 (Sallon Pension Fund, Minc Family Trust, and Upper Hunter Developments (Scone) Unit Trust) and four loans as current loans for 2015 (the same three entities plus the Minc Family Superannuation Fund), and the only non-current loan for both years as the Westpac bank loan. In my experience, shareholder loans are usually recorded as non-current liabilities, as they are recorded in the 1 June 2017 MSL balance sheet. It appears that whether recorded as current or non-current liabilities, contributions from shareholders were recorded in MSL's books as loans, even if the way the "shareholder" was described was loosely given at times.

538 Hartwig, who had the day-to-day control of MSL, must have regarded the Aida Nominees Payments as being made to or for the benefit of a shareholder (that shareholder being Minc's entity rather than Hartwig's) for him to describe them as a return of "quasi-equity". To the extent that such a description exists, it is consistent with shareholder contributions being recorded as loans, particularly in circumstances where the company's accounts do not record shareholder contributions in other ways (as equity or capital, for example).

539 If the Aida Nominees Payments were made to satisfy a loan to MSL from Aida Nominees, then they are the repayment of a debt whether it was in respect of a shareholder contribution or not. If that is the case, then they can be regarded as an unfair preference, as they were paid by MSL to a creditor (Aida Nominees) in respect of an unsecured debt and resulted in Aida Nominees receiving more than it would receive in respect of that debt if the transactions were set aside and Aida Nominees was to prove for the debt in MSL's winding up, since MSL does not have the capacity to pay all its debts in full.

540 The evidence in respect of the Aida Nominees 'loan' recorded in MSL's accounts is different to that in respect of the Sallon loan. Hartwig described the $71,507 Sallon loan in MSL's balance sheet as a loan and said that the payments in June 2017 were a repayment of that loan and the balance was profit from the sale of the Laverton Property. On the other hand, Minc never described the Aida Nominees amount as a loan, despite what was recorded in MSL's accounts, and described this amount as his contribution.

541 In this instance and on balance, I do not accept that the Aida Nominees Payments were made for the purposes of repaying a debt, as I consider that the evidence and the inferences to be drawn from it weigh in favour of the finding that there was not a loan from Aida Nominees to MSL. Accordingly, the Aida Nominees Payments were not unfair preferences.

542 However, I am satisfied that the Aida Nominees Payments were uncommercial transactions. If they were not a repayment of debt, then they were effectively a profit distribution made to the benefit of one of its shareholders, being Minc and Susan Minc, following the sale of the Laverton Property. In my view, the Aida Nominees Payments were uncommercial transactions for the following reasons:

(a) there is no benefit to MSL from entering into the transactions, as they are not a discharge of any liability it had to Aida Nominees;

(b) there is detriment to MSL from having entered into the transactions: they have the result, together with the other impugned payments made in June 2017, of having left MSL in a position where it could not discharge all of its existing debts;

(c) this is in circumstances where any profit distribution to Minc and Susan Minc (even if via Aida Nominees) ought not have been made until and unless all of MSL's creditors had been paid in full;

(d) while I do not accept the plaintiffs' submission that Minc was the controlling mind of MSL, he was obviously a director of MSL and he knew that MSL was paying out the Net Sale Proceeds after the sale of the Laverton Property. Indeed, he expected that he would be paid at that point. He was also a director of Aida Nominees. There was no evidence that he was not the controlling mind of Aida Nominees, and he stood to benefit from the Aida Nominees Payments;[74]

(e) at the very least, no later than late May 2017 Minc knew that Hunter claimed that MSL owed him the Hunter Loan and accrued interest. While Minc did not recall precisely when Hartwig told him about the Hunter Loan or whether he had a meeting with Hartwig on around 30 May 2017 where this was discussed, in my view he likely did discuss it with Hartwig on or around that date given the email Hartwig subsequently sent to Hunter. Minc did not recall seeing Hunter's written demand for payment. Nonetheless, Minc must (or ought to) have known that if it was correct that MSL owed the Hunter Loan and accrued interest and that if all the payments that MSL intended to make at that time were made, there would not be sufficient assets for MSL to satisfy that loan and interest; and

(f) a reasonable person in MSL's circumstances would not have made the Aida Nominees Payments.

543 That the payee was Aida Nominees, which is not actually a shareholder of MSL and therefore not entitled to a profit distribution, is not an answer: the defendants cannot have it both ways. It is all very well for Minc to regard it as all his money, whether it came from the Minc Superannuation Fund, the Minc Family Trust, Aida Nominees, or another Minc entity, but this cannot be relied upon to characterise and re-characterise payments based on what suits the different claims made against him and his entities. In this instance, his loose characterisation of the beneficiary of the Aida Nominees Payments means that they can be regarded as having been made for the benefit of the actual shareholder. And if the Aida Nominees Payments were neither a repayment of debt or a profit distribution to a shareholder, then there was no reason for them to be made at all and so the detriment/benefit analysis is even worse than set out in the preceding paragraph. A payment made for no objective reason must be regarded as conferring a benefit of such magnitude that it cannot be explained by normal commercial practice.

544 Each of the Aida Nominees Payments were insolvent transactions as:

(a) they were uncommercial transactions;

(b) MSL became insolvent because of matters including entering into each of those payments; and

(c) for the same reasons as I found regarding the Horwood Payment, they were insolvent transactions.

545 The Aida Nominees Payments were not transactions entered into by MSL for purposes which included the purpose of defeating, delaying or interfering with the rights of a creditor, being Hunter (or the Hunter FT) on a winding up of MSL, within the meaning of s 588FE(5) of the Act. My reasons for so finding are the same as expressed when considering the creditor defeating purpose claim in respect of the Total Sallon Payment.

546 Insofar as a defence under s 588FG(2) is concerned:

(a) I do not think it has been proved that Aida Nominees became party to the transaction in good faith. It became a party to the transaction so as to receive a profit distribution (even if on behalf of the actual shareholder entitled to the profit distribution) when it was not entitled to receive that until and unless all other debts of MSL had been paid. I have already found that Minc knew by the time of the Aida Nominees Payments that Hunter claimed that MSL owed him the Hunter Loan, and so a payment to Aida Nominees was going to benefit it at the expense of other creditors;

(b) while Minc's evidence is that he had no grounds to suspect that MSL would become insolvent by reason of matters including the Aida Nominees Payments, such that I accept that s 588FG(2)(b)(i) is satisfied, I am not satisfied that s 588FG(2)(b)(ii) is satisfied. A reasonable person in Minc's circumstances, being one of two directors of MSL who stood to benefit substantially from the transactions and who knew that after the payments which were made in June 2017 would result in the end of the company's activities, would have ensured that he was properly informed by his co-director who effectively controlled the company and was its guiding mind that the company was not going to be left in a position where it could not meet all of its debts. Thus a reasonable person in Minc's circumstances, once he had that proper information which knowledge would be imputed to Aida Nominees given his role in that company, would have had reasonable grounds to suspect insolvency; and

(c) since the Aida Nominees Payments were not repayment of a debt and since there is no evidence of any other form of consideration being provided for the payments, the defendants have not established that valuable consideration was given. No evidence has been given that Aida Nominees changed its position in reliance on the transactions.

547 I note that even if my conclusions in paragraphs (a) and (b) above are wrong, s 588FG(2) requires all elements of sub-sections (a), (b) and (c) to be proven, and my conclusion in paragraph (c) above means that s 588FG(2) has not been satisfied.

548 The plaintiffs allege that on 15 April 2015 Armidale was registered with ASIC and on 21 April 2015 the Armidale Unit Trust was established with Armidale appointed as the trustee.

549 The defendants admit this allegation and further say that:

(a) Hartwig and Minc were the directors of Armidale; and

(b) the Armidale Unit Trust was established with the following initial unitholders:

(i) Minc as trustee for the Minc Superannuation Fund[75] as to 66 of 120 ordinary units;

(ii) AI & PB Property Pty Ltd as trustee for the AI & PB Property Trust as to 39 of 120 ordinary units; and

(iii) Sallon as trustee for the Sallon Pension Fund as to 15 of 120 ordinary units.

550 The plaintiffs allege that the Armidale Payment was paid by MSL to the Carroll & O'Dea Lawyers trust account on behalf of Armidale for the purchase of the Armidale Property and for demolition works undertaken by MSL in respect of the Armidale so that it could be prepared for development.

551 The defendants plead that as at the date the Armidale Payment was made, Armidale as trustee of the Armidale Unit Trust was liable to settle a contract to purchase the Armidale Property by paying the sum of $1,216,898.63. They plead that as at that date, Kanyon was indebted to the unitholders of the Armidale Unit Trust as to the following amounts:

(a) Sallon as trustee of the Sallon Pension Fund in the sum of $106,404.36;

(b) Minc as trustee of the Minc Superannuation Fund in the sum of $500,000; and

(c) Minc as trustee of the Minc Superannuation Fund in the sum of $250,000.

552 In their Reply, the plaintiffs plead that the Armidale Unit Trust was only established on 21 April 2015 and therefore, on 22 April 2015, Kanyon could not have been indebted to unitholders of the Armidale Unit Trust.

553 The defendants plead that on 22 April 2015, Kanyon transferred the sum of $1,210,000 to the MSL bank account in:

(a) repayment of Kanyon's liability to the unitholders of the Armidale Unit Trust referred to in paragraph 551 above in the sum of $856,404.36; and

(b) in part payment of works undertaken by Trimont for Kanyon as to $353,595.64, which was the balance of the monies required by the unitholders of the Armidale Unit Trust for settlement of the Armidale Property.

554 The defendants admit that the Armidale Payment was made for the purchase of the Armidale Property, which they say was comprised of the sum of:

(a) $1,210,000, being the amount transferred to the MSL bank account by Kanyon as referred to in the previous paragraph; and

(b) $6,893.63, being a refund of stamp duty to MSL held on behalf of Minc as trustee of the Minc Superannuation Fund and Sallon as trustee for the Sallon Pension Fund.

555 The defendants plead that the MSL bank account was used to facilitate the transfer of funds on 22 April 2015 because Armidale had been incorporated on 17 April 2015 and the Armidale Unit Trust established on 21 April 2015, and Armidale did not have a bank account.

556 The defendants plead that the Armidale Payment did not comprise MSL's funds.

557 The defendants also plead that the Armidale Payment was the amount required to settle the sale contract and did not include demolition works undertaken in respect of the Armidale Property, and that the plaintiffs' allegation in this respect is vague, embarrassing, unsupported by particulars and ought be set aside.

(a) (as set out above), Kanyon could not have been indebted to unit holders of the Armidale Unit Trust;

(b) those payments could have been made directly by Kanyon to the Carroll & O'Dea Lawyers trust account in satisfaction of the purported debts which were owed by it, and the fact that Armidale did not yet have a bank account is irrelevant; and

(c) certain amounts (including $603,488.03 and $6,893.63) were not being held in MSL's bank accounts for other parties including Minc as trustee for the Minc Superannuation Fund and Sallon as trustee for the Sallon Pension Fund.

559 The plaintiffs allege that based on MSL's contribution to:

(a) the purchase price of the Armidale Property in the amount of the Armidale Payment, MSL has a resulting trust over the Armidale Property to the extent of its contribution. The defendants deny this allegation and rely on the matters referred to in paragraphs 551 to 556 above; and

(b) improvements made to the Armidale Property, including but not limited to demolition costs, being the Demolition Payment in the sum of $558,000 (or such other amount as identified by the plaintiffs' investigations), MSL has a constructive trust over the Armidale Property to the extent of its contribution to improvements to the Armidale Property. The defendants deny that MSL paid any money on account of improvements to the Armidale Property and plead that the sum of $558,000 was transferred by Minc as trustee for the Minc Superannuation Fund from funds beneficially owned by him held in MSL's bank account to purchase 24% of the interest held by AI & PB Property in the Armidale Property.

560 Alternatively, the plaintiffs allege that MSL's contribution to the purchase price and improvements totalling $1,774,898.63 is money payable by Armidale to MSL for money had and received by Armidale for the use of MSL's funds. The defendants deny this allegation.

561 Hartwig's evidence as to the Armidale Property and the plaintiffs' claims concerning it is contained in the First Hartwig Affidavit. His evidence as to the structure of the Armidale Unit Trust, its unitholders, Armidale's directors, the purchase of the Armidale Property by Armidale and the amount required for settlement, and the payment of $1,216,893.63 from MSL's bank account to the Carroll & O'Dea Lawyers trust account on 22 April 2015 to settle the purchase is all consistent with Armidale's defence. Those elements are not controversial.

562 Hartwig deposes that the funds for settlement of the Armidale Property purchase were paid through MSL's bank account. He says that the reason for this is that Armidale had only been recently incorporated on 15 April 2015 and did not yet have its own bank account. He also says that "MSL's bank account had an internet banking facility which enabled its bank account being used as something of a 'treasury' for other interests" of himself and Minc.

563 Hartwig deposes as to the transfer by Kanyon of $1,210,000 to MSL's bank account on 22 April 2015 and says that this comprised:[76]

(a) repayment of the balance of Sallon's contribution then outstanding, of $106,404.46, to a loan to Kanyon by Sallon and the Minc Superannuation Fund ('Minc/Sallon Loan');

(b) repayment of the contribution in the amount of $500,000 by Minc Superannuation Fund to the Minc/Sallon Loan to Kanyon;

(c) reimbursement of Aida Nominees for it having earlier in April 2015 paid out $250,000 to Clairvaux Management Pty Ltd ('Clairvaux');[77] and

(d) the sum of $353,595.64, which was an advance by Kanyon for the purposes of the purchase of the Armidale Property by Armidale to be set off out of funds due to Trimont from Kanyon.

564 Hartwig deposes that the Armidale Payment was paid to the Carroll & O'Dea Lawyers trust account on 22 April 2015 for the purpose of settling the purchase of the Armidale Property by Armidale. He deposes that it comprised:

(a) $1,210,000 transferred from Kanyon to MSL, as set out in the preceding paragraph; and

(b) $6,893.63, being a stamp duty adjustment on the purchase of the Laverton Property.

565 Hartwig's explanation of the payment out of MSL's bank account of $558,000 on 18 May 2015, which I assume to be his explanation of what is alleged to be the Demolition Payment, is as follows:

(a) Shortly after settlement of the Armidale Property, Ascenzo told him he wanted to quit his interest in the Armidale development as he needed to direct all of his available funds to his Preston development and his commitment to the East Brunswick project. He, Minc, Ascenzo and Breckenridge agreed that Minc's entity would take an extra interest in the Armidale Property from AI & PB Property Development, which would leave AI & PB Property Development with a 10% interest which he and Minc considered was necessary to secure Breckenridge's ongoing involvement in the project.

(b) On 18 May 2015, $558,000 was transferred out of MSL's bank account to East Brunswick Operations, which represented the cost of planning and design work undertaken by AI & PB for the Armidale development, being effectively its contribution to equity in the project.

(c) East Brunswick Operations was the entity for the redevelopment of the East Brunswick hotel, ie, the East Brunswick project. That project involved him, Ascenzo (through Ascenzo Investments) and Breckenridge (through P & E Breckenridge Pty Ltd ("P & E Breckenridge")). The payment of $558,000 to East Brunswick Operations was a contribution from Ascenzo Investments and P & E Breckenridge to the East Brunswick project.

(d) That $558,000 was paid out of the sum of $625,000 which had been paid into MSL's bank account on 15 May 2015. The sum of $625,000 was a loan due to Minc, as trustee of the Minc Superannuation Fund, from Ballycotton Pty Ltd.

566 Hartwig deposes that none of the monies transferred out of MSL's bank account as described in the preceding two paragraphs (ie, the Armidale Payment and the Demolition Payment) were monies owed to or belonging to MSL. He says that "MSL simply had a convenient bank account through which the transfer of funds could take place conveniently." He also says that there "was never any intention that MSL would have any interest in the Armidale Property and MSL contributed no funds to the project".

567 Hartwig further deposes that MSL was a special purpose entity whose only business was holding the Laverton Property, which was leased to Woolworths and the annual rental was $115,000. He says that "MSL did not and could not have forwarded its own funds for the purpose of purchasing" the Armidale Property.

568 Financial records of MSL and Armidale show the following:

(a) MSL's monthly balance sheets for April to December 2015 record, as current assets, loan receivables of $1,217,887 for "Armidale - Settlement" and $583,000 for "Armidale - Demo & Env".[78]

(b) MSL's bank statement records a transfer of $558,000 on 18 May 2015, described as "Eb Ops Loan".

(c) MSL's unsigned financial statements for the year ended 30 June 2015 record a loan receivable from Armidale in the amount of $1,775,887.

(d) MSL's signed financial statements for the year ended 30 June 2016 do not record any loan receivable from Armidale.

(e) Armidale's unsigned financial statements for the year ended 30 June 2015 record a liability of $1,774,899 to MSL.

(f) Armidale's accounts as at December 2016 recorded liabilities of $1,217,886.63 under "Minc Sallon (Laverton)" and $608,740.01 under "Minc Sallon (Laverton) - Demo".

569 Hartwig conceded in cross-examination that if the $1,210,000 from Kanyon just passed through MSL's bank accounts and was not MSL's money, then the entries in MSL's balance sheets recording the payment for the Armidale settlement should not have been made. His evidence as to the $558,000 amount was to the same effect. He stated that these were just management accounts, were effectively working documents, and matters were recorded there until advice was taken or they had worked out where they should be recorded. He described it as like a bookkeeping function through MYOB, and that the management accounts were just bookkeeping.

570 Ryan gave evidence regarding these bookkeeping entries and the records in the financial accounts and statements.

571 Ryan deposes that in May 2016 he exchanged emails with Roya Najeem of HLP Mann Judd regarding transactions that had been reconciled for MSL and Armidale, amongst other things. Najeem asked about supporting documents such as loan agreements for the two loans to Armidale described as Settlement and Demo & Env. He told Najeem that there were no loan agreements. In his reply to Najeem, he wrote that the Armidale Loan - Demo & Env $558,000 was "Funds provided to Armidale to allow for Demolition and Environment", and that the Armidale Loan - Settlement $1,217,886.93 was "Funds provided to Armidale to allow for Property Settlement."

572 Ryan deposes that on 9 May 2017 he received an email from Rob Fuller of HLB Mann Judd regarding, amongst other things, accounts for MSL. Attached to that email was MSL's unsigned 2016 financial report, various MYOB movement journals and a group loan summary. He understood that the movement journal set out each transaction he would need to enter into MYOB as at 30 June 2016 which would have the effect of adjusting various transactions he had reconciled in MYOB previously, so that the MYOB accounts accurately reflected the unsigned financial report. The group loan summary from HLB Mann Judd set out adjustments which needed to be made to more accurately reflect the state of shareholder loans from Minc's companies.

573 In his oral evidence, Ryan stated that a document in the court book was a MYOB entry he had made showing the $1.21 million payment that was made from Kanyon to MSL. He said that he believed he entered it at the time or post the transaction going through, and that it is made up of a number of different amounts within the $1.21 million payment. He referred specifically to various amounts, including $500,000 which was a direct repayment of the Minc Super Fund loan provided with respect to the Groves loan, and approximately $106,000 which was in respect of a loan from Sallon to Kanyon.

574 The plaintiffs submit that Hartwig's explanations as to how the Armidale loans ended up in MSL's management accounts or stayed there for as long as they did were unsatisfactory when consideration is given to the qualifications of Ryan and the instructions Ryan gave HLB Mann Judd.

575 The plaintiffs say that Hartwig did not tell MSL's liquidator that funds advanced to Armidale Nominees were not MSL's funds.

576 The plaintiffs submit that there are a number of issues with the evidence, particularly the alleged prior loan agreements relied on by the defendants to support their contention that the $1.2 million transfer was Kanyon's repayment of amounts it owed other entities. According to the plaintiffs, these issues are:

(a) As to the loan agreement for the Groves/Minc Loan:

(i) the draw down dates are purported to be 2 and 25 June 2014;

(ii) there is no evidence that Kanyon drew down the loan funds on those dates or at all, or that the funds were applied to other parties on behalf of Kanyon before the purported due date of 24 December 2014; and

(iii) Hartwig did not provide any evidence about when or how Kanyon received or applied the funds despite being one of the directors of Kanyon (along with Ascenzo) who executed the agreement.

(b) As to the loan agreement for the Minc/Sallon Loan:

(i) the loan agreement is not signed by any of the parties;

(ii) the funds were to be advanced in one drawing on or around 7 April 2014, which conflicts with Mr Hartwig's evidence that the loan was entered into on 24 June 2014;

(iii) there is no evidence that Kanyon drew down the loan funds on 7 April 2014, or at all, or that the funds were applied to other parties on behalf of Kanyon before the purported due date 7 August 2014; and

(iv) Hartwig did not provide any evidence about when or how Kanyon received or applied the funds.

(c) Both of those loan agreements involve companies associated with Minc. As the lender, one would expect Minc to give evidence confirming the loan arrangements, especially in relation to the unsigned loan agreement. However, Minc said nothing about either loan agreement. Further, no evidence was adduced from Shane Groves or Annabel McCarthy, purported lenders under the Groves/Minc Loan. The plaintiffs seek a Jones v Dunkel inference in relation to the unexplained failure of the defendants to call either of those witnesses.

577 The plaintiffs submit that Ryan's evidence was seemingly adduced to show the amounts of $1,217,886.63 under 'Minc Sallon (Laverton)' and $608,740.01 under 'Minc Sallon (Laverton) - Demo' were not MSL's money via the production of financial statements prepared by HLB Mann Judd. The plaintiffs contend that this evidence works against the defendants for the following reasons:

(a) Ryan gave instructions to HLB Mann Judd that the amounts recorded in MSL's accounts regarding Armidale were funds MSL provided to Armidale. Ryan gave evidence that he likely would have received that information from Hartwig. Importantly, Ryan did not tell HLB Mann Judd that the funds merely passed through MSL's accounts and were really funds that Kanyon owed the Armidale unitholders.

(b) Further, defendants' counsel tried to make something of the purported reallocation of the Armidale amounts in the financial statements of Armidale and MSL. These adjustments in no way support a conclusion that the original $1.2 million was Kanyon funds or the loans to Kanyon existed. Further, nothing in the correspondence from HLB Mann Judd dated 9 May 2017 supports a conclusion that the original $1.2 million was Kanyon funds.

(c) Ryan's evidence about the Kanyon MYOB record showing allocation of the $1.2 million needs to be treated with caution given his statements to HLB Mann Judd in May 2016 that the $1,774,889 was funds provided by MSL. There is no way to tell when Ryan made the entries in the MYOB record. All he could say was that he believed he made the entries "at the time or post the transaction going through", which could be any time after 22 April 2015.

(d) Further, the amounts described by Ryan in relation to account 1-1250 do not match the explanation given by Hartwig or MSL's balance sheets for March to August 2015. Ryan recorded $603,595.64 in the loan ledger between Kanyon and MSL. Ryan connected this amount to an alleged repayment by MSL to the Groves Super Fund.

(e) However, Hartwig's evidence was that $250,000 of the $1.2 million was in effect a repayment to Aida Nominees for its repayment of a debt Kanyon owed the Groves Super Fund, even though the source of the funds was a drawdown on the Westpac facility MSL had secured by the Laverton Property. The loan ledger between Kanyon and MSL does have a journal entry for $250,000 on 8 April 2015 described as 'Minc Sallon Loan - Groves Loa'.

(f) Logically, had the $250,000 payment on 8 April 2015 been a payment on behalf of Kanyon using Aida Nominees funds, as Mr Hartwig deposed, it should not have been recorded in the loan ledger between Kanyon and MSL.

(g) Further, Hartwig's evidence is that $353,595.64 of the $1.2 million was funds paid by Kanyon to MSL for the purchase of the Armidale property to be set off out of funds due to Trimont from Kanyon. No further explanation was given of this convoluted arrangement. However, there is a varying liability in MSL's balance sheets from March 2015 to August 2015 even though the funds were allegedly loaned to the Armidale purchasers.

578 The plaintiffs submit the evidence about the purported loan arrangements is lacking, confusing, and conflicting and does not assist the Court to make a finding that the sum of $1.2 million was not funds of MSL.

579 The plaintiffs submit that Minc did not provide any corroborating evidence, which is surprising given entities in which he has an interest were the alleged lenders to Kanyon and the alleged ultimate beneficiaries of the $1.2 million deposit by Kanyon.

580 The plaintiffs submit that the Court can find the funds were MSL's funds based on the fact the funds were in MSL's bank account, the Armidale loans were recorded in MSL's accounts for a significant period of time, and Ryan's instructions to HLB Mann Judd that they were funds MSL provided to Armidale.

581 The defendants submit that the plaintiffs' claim to an interest in the Armidale Property is based solely on the fact that funds were transferred into MSL's bank account and immediately paid out to solicitors acting in respect of the purchase by Armidale of the property. On this event, MSL claims beneficial ownership of the Armidale Property.

582 The defendants accept that where a purchaser of land directs the land to be transferred into the name of a third party, a presumption may arise to the effect that the third party holds the property on trust for the purchaser.[79] The presumption is rebuttable by evidence of the payer that no trust was intended.[80]

583 The defendants submit that to establish a resulting trust MSL would first have to establish that the funds paid into its account became MSL's funds. Hartwig, who was a director of MSL at the relevant time, gave uncontradicted evidence that the account was used simply as a means to effect the transfer of funds to allow completion of the purchase in circumstances where Armidale did not yet have a bank account. In other words, the deposit was for the benefit of Armidale, not for the benefit of MSL. The Liquidator was unable to offer an explanation of how the funds became MSL's funds other than that they were deposited to its bank account. MSL does not say the payments represented amounts due to it or borrowed by it.

584 The defendants submit that if it is assumed the funds were deposited for the benefit of MSL (rather than Armidale), the plaintiffs have not demonstrated the payment out was not a loan to Armidale. Indeed, management accounts prepared at the time record the payment to Armidale as a loan. If it was a loan, MSL's claim would be for repayment of the loan rather than for an interest in the Armidale Property.

585 The defendants submit that the accounts for 2016, as prepared by HLB Mann Judd, were adopted by MSL as correct and the plaintiffs do not assert they are incorrect. The defendants concede that there is confusion arising from the way accounts were kept, but that even if the accounts are accepted, they do not support the existence of a resulting trust.

586 The defendants rely on Hartwig's affidavit evidence (as summarised above) and say that this shows the true nature of the transaction. They also submit that even if the funds did become funds of MSL when deposited and were not advanced to Armidale as loans when withdrawn, any presumption of resulting trust is rebutted.

587 There is no dispute that the Armidale Payment was made by MSL for the purpose of settling the purchase of the Armidale Property.

588 For this payment to give rise to a resulting trust, the Armidale Payment needs to be from MSL's own resources. Both parties recognised that this was a central element in dispute.

589 The plaintiffs rely on the fact that the money was in MSL's bank account and was paid out by MSL. The defendants' case is that the money was not MSL's funds, relying on the fact that $1,210,000 of the Armidale Payment was paid into MSL's bank account by Kanyon on the same day as the Armidale Payment was made. The defendants say that MSL's bank account was used as a convenient conduit because Armidale did not yet have its own bank account. They also say that part of the payment by Kanyon was for amounts it owed to Armidale's unitholders. The plaintiffs make a number of submissions which attempt to negate the defendants' position.

591 I do not find it at all implausible in the circumstances of this case that MSL's bank account was used as a conduit for the Armidale Payment to be made. It is abundantly clear that money was moved around between various bank accounts all the time, sometimes without an obvious purpose or a clear explanation as to why transactions were conducted in the way they were. For example, it is obviously plausible that Armidale did not yet have its own bank account, but why did the money from Kanyon need to go through MSL on its way to the Carroll & O'Dea Lawyers trust account? Why couldn't it have gone directly from Kanyon to that trust account? The answer to that probably does not matter, but it is indicative of the nature of a number of transactions involving these various parties.

592 I do not accept the plaintiffs' pleading (in their Reply) that because the Armidale Unit Trust was only established on 21 April 2015, Kanyon could not have been indebted a day later to unitholders of the Armidale Unit Trust. The defendants did not plead or give evidence that Kanyon's indebtedness to unitholders of the Armidale Unit Trust was in their capacity as unitholders of the Armidale Unit Trust. Given the multiple inter-relationships between Hartwig, Minc, Ascenzo, Beckenridge, Hunter, Kanyon, and their various related entities/parties, it is entirely plausible that Kanyon may have owed money to Armidale's unitholders (or their related entities/parties) as at that time.

593 The defendants' evidence as to the sources of Kanyon's indebtedness to unitholders of the Armidale Unit Trust was convoluted and confusing. I have done my best to understand it and set it out in an intelligible way. Despite its confusing nature, the plaintiffs' attacks on the defendants' explanation of that indebtedness have not landed, for the following reasons:

(a) the complaints about the lack of evidence about the drawdown of funds under the loan agreements are not dispositive;

(b) it is irrelevant that there is no evidence about how Kanyon applied the funds;

(c) the fact of the Minc/Sallon Loan being unsigned is not dispositive;

(d) the fact of the drawdown dates for the Minc/Sallon Loan being earlier than the date the loan was entered into is also not dispositive;

(e) Minc's failure to give evidence about these loans is not surprising, given his evidently poor memory for a lot of detailed matters; and

(f) I decline to draw a Jones v Dunkel inference in respect of the defendants' failure to call Shane Groves or Annabel McCarthy.

594 The evidence about the balance of the Kanyon payment, that is, the amount of $353,595.64, is also convoluted and confusing. It is described by Hartwig as part payment of works undertaken by Trimont for Kanyon. Why that would result in a payment to MSL is difficult to follow, other than MSL's bank account being used as a convenient conduit for the flow of funds in a variety of ways.

595 What is not in doubt, however, is that no evidence was presented to me as to any reason for the payment of $1,210,000 by Kanyon to MSL on 22 April 2015 other than that advanced by the defendants. This is an important factor.

596 On balance, I find that the $1,210,000 paid by Kanyon into MSL's bank account on 22 April 2015 was not money belonging to MSL.

597 The evidence about the payment by MSL of $558,000, which is said to be the Demolition Payment, is also very convoluted and confusing. There is no evidence that this amount was paid by MSL to Armidale. Rather, the evidence is that it was paid to East Brunswick Operations. Hartwig's explanation is not entirely unsatisfactory, mainly because it is confusing, but it is plausible. On balance, I find that the $558,000 payment by MSL, the purpose for which was ultimately attributed to AI & PB Property Development's planning and design work (and thereby its equity contribution to the Armidale project), was not from MSL's own funds.

598 I agree with many of the plaintiffs' criticisms about the state of the MSL and Armidale accounts and financial statements. A number of the accounts record the Armidale Loan - Settlement $1,217,886.63 and Armidale Loan - Demo & Env $558,000. The explanations for how those amounts ended up in the accounts, and then for how they were taken out, are not entirely satisfactory. However, those accounts do not support the existence of a resulting trust in favour of MSL or the factors required to establish a resulting trust. Nor do they support the existence of a constructive trust in favour of MSL or the factors required to establish a constructive trust. Rather, they are to the opposite effect, being described as loans. Payments made by way of loans are not consistent with it being intended that MSL have an interest in the Armidale Property.

599 Therefore, to the extent that the plaintiffs rely on those MSL and Armidale accounts and financial statements as evidence of MSL's interest in the Armidale Property, such reliance is misplaced and not accepted.

600 The description of the payments as loans, based on the description in some of the accounts and financial statements, does not assist the plaintiffs since they do not plead that the payments made by MSL for the Armidale Payment or the Demolition Payment were loans. In any event, for them to be regarded as loans, the funds would have to belong to MSL (even if it had borrowed them) and for the same reasons as set out above, that has not been established.

601 The same problem arises in respect of the money had and received claim. If the funds paid by MSL to or for the benefit of Armidale were not from MSL's funds but on behalf of someone else, then it is not MSL's money that has been had and received.

602 The above discussion deals with the claims in respect of the Demolition Payment and the claims in respect of the Armidale Payment save for one aspect.

603 As set out earlier, the evidence is that the Armidale Payment comprised the $1,210,000 paid by Kanyon into MSL's bank account plus the amount of $6,893.63. Hartwig's evidence is that the source of the latter amount is a stamp duty adjustment on the purchase of the Laverton Property. No further evidence was given about that amount. No submissions were specifically directed to this amount.

604 I do not see how this amount of $6,893.63 can be regarded as anything other than MSL's money. MSL was the owner of the Laverton Property and a stamp duty adjustment on its purchase of that property must belong to it. I do not accept that this portion of the Armidale Payment gives rise to a resulting trust in that amount, since I accept that it has been established that there was no intention to create a trust or for MSL to have an interest in the Armidale Property as a consequence of that portion of the payment. The payment of $6,893.63 is money had and received, and so that aspect of the plaintiffs' claim against Armidale succeeds.

605 For all of these reasons, the plaintiffs' claims against Armidale fail save for the money had and received claim in the amount of $6,893.63. Given the limited nature of the finding against Armidale and that I have rejected the plaintiffs' claim to an equitable interest in the Armidale Property, I do not consider it appropriate to make an order of the type sought by the plaintiffs as set out at paragraph 74(d) above.

I. Claims for breach of directors' duties against Hartwig and Minc

606 The plaintiffs allege that by causing MSL to enter into the Total Sallon Payment and the Aida Nominees Payments (together, the 'Alleged Breach of Duty Payments'), and the contributions to the Armidale Property, Hartwig and Minc each contravened the duties owed by them as directors to MSL. These allegations are all denied by Hartwig and Minc.

607 In the pleadings, the directors' duties which Hartwig and Minc are alleged to have contravened are:

(a) their duties of care and diligence, as set out in s 180 of the Act;

(b) their duties of good faith and to act for a proper purpose, as set out in s 181 of the Act;

(c) their duties not to use their positions as directors of MSL to gain an advantage for themselves and cause detriment to MSL, as set out in s 182 of the Act;

(d) their duties not to use MSL's information improperly, as set out in s 183 of the Act; and

(e) their obligations not to use their positions as directors of MSL or information of MSL recklessly or dishonestly and failing to discharge their duties to act in good faith in the best interests of MSL or for a proper purpose, as set out in s 184 of the Act.

608 During the course of the plaintiffs' closing submissions, counsel for the plaintiffs stated that they rely only on the alleged breaches of ss 180 and 181 of the Act. Accordingly, there is no need for me to address anything further in respect of alleged contraventions of duties set out in s 182 to s 184 of the Act.

609 Hartwig denies the plaintiffs' allegations, and pleads that:

(a) In respect of the alleged breach of s 180 of the Act:

(i) For the Aida Nominees Payments, he made the judgment in good faith and for a proper purpose, and did not have a material personal interest in the Aida Nominees Payments.

(ii) He informed himself about the subject matter to the extent he believed to be appropriate, and rationally believed the judgment to be in the best interests of MSL.

(iii) He believed the judgment to cause MSL to make each of the impugned payments was in the best interests of MSL and he is entitled to rely on the business judgment defence pursuant to s 180(2) of the Act.

(iv) Further and alternatively, he acted honestly and seeks to be relieved of liability pursuant to s 1318 of the Act.

(b) In respect of the alleged breach of s 181 of the Act:

(i) The Alleged Breach of Duty Payments were made in good faith in the best interests of MSL and for a proper purpose.

(ii) Further and alternatively, he acted honestly and seeks to be relieved of liability pursuant to s 1318 of the Act.

610 Minc denies the plaintiffs' allegations, and pleads that:

(a) In respect of the alleged breach of s 180 of the Act:

(i) For the Total Sallon Payment, he made the judgment in good faith and for a proper purpose, and did not have a material personal interest in the Total Sallon Payment.

(ii) He informed himself about the subject matter to the extent he believed to be appropriate, and rationally believed the judgment to be in the best interests of MSL.

(iii) He believed the judgment to cause MSL to make each of the payments relied upon was in the best interests of MSL and he is entitled to rely on the business judgment defence pursuant to s 180(2) of the Act.

(iv) Further and alternatively, he acted honestly and seeks to be relieved of liability pursuant to s 1318 of the Act.

(b) In respect of the alleged breach of s 181 of the Act:

(i) The Alleged Breach of Duty Payments were made in good faith in the best interests of MSL and for a proper purpose.

(ii) Further and alternatively, he acted honestly and seeks to be relieved of liability pursuant to s 1318 of the Act.

611 Section 180 of the Act concerns the duty of care and diligence and relevantly provides as follows:

(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation's circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

(a) make the judgment in good faith for a proper purpose; and

(b) do not have a material personal interest in the subject matter of the judgment; and

(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(d) rationally believe that the judgment is in the best interests of the corporation.

The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

(3) In this section:

business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.

612 Section 181 concerns the duty of good faith and relevantly provides as follows:

(1) A director or other officer of a corporation must exercise their powers and discharge their duties:

(a) in good faith in the best interests of the corporation; and

(b) for a proper purpose.

(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.

613 Section 1317H of the Act concerns compensation orders where there have been certain contraventions, and relevantly provides as follows:

(1) A Court may order a person to compensate a corporation, registered scheme or notified foreign passport fund for damage suffered by the corporation, scheme or fund if:

(a) the person has contravened a corporation/scheme civil penalty provision in relation to the corporation, scheme or fund; and

(b) the damage resulted from the contravention.

The order must specify the amount of the compensation.

....

614 Section 1318 of the Act concerns the powers of courts to grant relief in certain circumstances, including where there has been a breach of duty, and relevantly provides as follows:

(1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.

....

....

(4) This section applies to a person who is:

(a) an officer or employee of a corporation; or

....

I.3.1 General submissions regarding directors' duties in this case

615 In her closing address to the Court, the plaintiffs' counsel stated that the breach of directors' duties claims were pleaded as an alternative to the insolvent trading claims. Ms Nicholson acknowledged defence counsel's submission that the statement of claim does not plead or identify any damage said to have been suffered as a result of any contravention, but said that it is covered by the prayer for relief.

616 In this regard, the plaintiffs submit that paragraphs A and B of the prayer for relief seek declarations that Hartwig and Minc have contravened s 588G of the Act and orders that they pay compensation in the sum of $968,986 to the plaintiffs pursuant to s 588M of the Act. Paragraphs C and D of the prayer for relief seek, in the alternative to paragraphs A and B, declarations that Hartwig and Minc have contravened s 180 and s 181[81] and compensation orders pursuant to s 1317H of the Act.

617 This was explained by Ms Nicholson as an alternative if one or more of the insolvent trading claims are not successful. The compensation sought is limited to $968,986. The conduct relied upon for this alternative claim is the alleged breach of s 180 and s 181 in permitting the payments made out of the Net Sale Proceeds in 2017 (excepting the Horwood Payment), which are said to be a breach of duty because the directors failed to fulfil the obligation to consider creditors in discharging their duty.

618 In this regard, the plaintiffs rely on Australian Securities and Investments Commission v Maxwell & Ors.[82] The plaintiffs submit that where the impugned conduct occurs in a situation of impending insolvency, there is an obligation to consider creditors of the company. They say that here, Hartwig and Minc both knew that once the Net Sale Proceeds had been distributed, MSL had no income-earning asset. They submit that both Hartwig and Minc intended to distribute the entire Net Sale Proceeds and they both knew that MSL would not have sufficient funds to pay the Hunter Loan if it was a valid claim.

619 The plaintiffs describe the basis of their directors' duties claim in these terms: Hartwig and Minc permitted their personal and conflicting interests in their related entities to influence decisions they made about distribution of the Net Sale Proceeds and contribution to the Armidale Property in their roles as directors of MSL.

620 The plaintiffs submit that Hartwig and Minc permitted MSL to distribute the Net Sale Proceeds to their related entities when they were aware that Hunter disputed Hartwig's position that the Hunter Loan had been assigned to Kanyon and after receiving a demand for payment of the Hunter Loan.

621 They also submit that Hartwig and Minc permitted the interests of their related entities, some of whom were MSL's shareholders, to benefit, in circumstances in which there was a risk of negative legal consequences for MSL in doing so.

622 The plaintiffs submit that Hartwig and Minc permitted MSL to contribute over $1.7 million to Armidale without obtaining any security, which would have been available in the form of mortgage or caveat over the Armidale Property. They say that it was not in MSL's interest to make the Armidale loans, including as they were not interest bearing and not recorded in writing. The plaintiffs submit that Hartwig and Minc gave preference to their interests in Armidale, which conflict with their duties to MSL.

623 The plaintiffs submit that Minc understood the scope of his director duties, that he voluntarily accepted the role of director of MSL, and he did not keep minutes of board meetings, if any were held.

624 In respect of Minc's level of involvement in MSL, the plaintiffs submit that the evidence establishes that he:

(a) did not concern himself with the day-to-management of MSL;

(b) did not participate in the periodic reviews of MSL's management accounts; and

(c) was happy to be a director in name but did not want any involvement in the responsibilities of running MSL.

625 The plaintiffs contend that Minc's attitude to his director's duties was exposed when he gave evidence, in respect of contribution to the purchase of the Laverton Property that "as far as I'm concerned, it came from me, whatever the entities...were" and agreed that it did not matter which entity had put the money in in the first place, it was just split between Hartwig and himself.

626 The plaintiffs submit that Minc was happy to make the decision to distribute the proceeds of the sale of the Laverton Property to himself and Hartwig and with knowledge of Hunter's complaint that he was owed $600,000. He did not discuss withholding any money in case Hunter's complaint was valid, and did not make any enquiries into the validity of Mr Hunter's complaint. Further, Minc did not make any enquiries about the solvency of MSL and relied on what Hartwig told him.

627 In the defendants' written closing, it was submitted that:

(a) the obligations imposed on directors of companies by the provisions on which the plaintiffs rely, ss 180 to 184, are well known. The statement of claim alleges that both Hartwig and Minc breached all of them, including those concerned with intentional dishonesty;

(b) it is assumed that MSL will narrow down the nature of the breaches in its closing submissions. Depending on how MSL frames this aspect of the claim, the directors rely on s 180(2) and on s 1318 of the Act; and

(c) the statement of claim does not plead or identify any damage said to have been suffered as a result of any contravention.

628 These submissions were repeated in oral address, and the defendants also submitted that the plaintiffs have not established any damage which could be the subject of a compensation order.

I.5.1 Principles regarding s 180 of the Act

629 In United Petroleum Australia Pty Ld v Herbert Smith Freehills,[83] Elliott J relevantly summarised the principles in relation to s 180 of the Act as follows:[84]

By placing the "reasonable person" in "the office" and with the "same responsibilities" as the relevant director, s 180 creates an objective test. The applicable standard is what an ordinary person, with the knowledge and experience of the relevant director, would have done.

The duty mandates, at its core, that a director's involvement in the company's management requires ordinary competence or reasonable ability. Equivalently, the duty of diligence requires directors to take reasonable steps to place themselves in a position to guide and monitor the company's management.

....

Whether a director has exercised a reasonable degree of care and diligence in a given scenario can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.

The degree of departure from the acceptable standard required to constitute a breach of the director's statutory duty of care and diligence is the same as that which would support a claim of negligence at common law.

The statutory duty of care recognizes a distinction, which must be kept firmly in mind, between negligence and mere mistakes, with liability arising for the former and not for the latter. In relation to decisions made in expectation of events that might happen in the future, courts are conscious that forecasting is a difficult and uncertain process, with much room for mistakes and errors of judgment, and for differences of opinion.

In ASIC v Rich, Austin J stated that:

The statute requires the court to apply a standard defined in terms of the degree of care and diligence that a reasonable person would exercise, taking into account the corporation's circumstances, the offices occupied by the defendants and their responsibilities within the corporation. That requires the defendants' conduct to be assessed with close regard to the circumstances existing at the relevant time, without the benefit of hindsight, and with the distinction between negligence and mistakes or errors of judgment firmly in mind_. If the impugned conduct is found to be a mere error of judgment, then the statutory standard under s 180(1) is not contravened and it is unnecessary to advert to the special business judgment rule in s 180(2)_. In the view that I have taken of it ... s 180(2) provides a defence in a case where the impugned conduct goes beyond a mere error of judgment, and would contravene the statutory standard but for the defence.

(Emphasis added.)

Further, on the relationship between the duty contained in s 180(1) and the business judgment rule contained in s 180(2), Austin J stated:

[T]he statutory duty of care and diligence is essentially the same as the duty of care and diligence of a director or officer at general law. Since business judgment considerations are an integral part of the general law duty, it follows ... that those considerations are to be taken into account in applying the statutory standard of care and diligence. But it does not follow that the statutory defence in s 180(2) is therefore redundant. The business judgment considerations that figure in the articulation and application of the statutory standard of care and diligence are open-ended, whereas s 180(2) is a specific statutory rule having defined components and a defined outcome. It is at least theoretically possible that s 180(2) might protect defendants from liability for acts or omissions that would otherwise constitute a contravention of s 180(1) notwithstanding business judgment considerations at that level. Additionally, on a practical level s 180(2) articulates criteria that can be a reference point for directors and officers and their advisers, and can offer a direct solution to the issue of breach of duty in a straightforward case.

(Emphasis added.)

The reference in s 180(1)(a) to the "corporation's circumstances" requires the court to consider the type of company involved, the size and nature of its business or businesses, the provisions of its constitution, the composition of its board and the distribution of the work between the board and other officers.

....

The "responsibilities" referred to in s 180(1)(b) include the factual arrangements operating within the company and affecting the director in question and arrangements flowing from the experience and skills that the director brought to her or his office, and also any arrangements within the board or between the director and executive management affecting the work that the director would be expected to carry out. As such, it is not the case that "responsibilities" refer only to specific tasks delegated to the relevant director.

630 In ASIC v Maxwell, Brereton J stated that:[85]

... although the statutory duty of care and diligence would be contravened if a director had not exercised a reasonable degree of care and diligence in the exercise of his powers or the discharge of his duties, even if there was no actual damage, that could only be so if it was reasonably foreseeable that the relevant conduct might harm the interests of the company - which means the corporate entity itself, the shareholders, and, where the financial position of the company is precarious, the creditors of the company - and, moreover, that in determining whether the relevant duty had been breached, the foreseeable risk of harm must be balanced against the potential benefits which could reasonably be expected to accrue to the company from that conduct.

631 In respect of the business judgment rule, Elliott J in United Petroleum v HSF summarised the principles as follows:[86]

There must be a contravention of s 180(1) for consideration of the business judgment rule to have any application. Conduct that falls short of breaching s 180(1) will not require consideration of the business judgment rule, because it will not meet the threshold enlivening the rule.

For the business judgment rule to apply, the facts must show that the director has made an identifiable business judgment. Business judgment is defined to mean any decision to take or not take action in respect of a matter relevant to the business operations of the corporation. Business judgments include matters that are preparatory to the making of a business decision, including planning, budgeting and forecasting activities.

In relation to the requirement that a business judgment be made in good faith for a proper purpose, this requirement can be met where a decision is made to refrain from doing something.

In relation to the director informing her or himself to the extent she or he reasonably believes to be appropriate, the reasonableness of the belief should be assessed by reference to:

(1) The importance of the business judgment to be made.

(2) The time available for obtaining information.

(3) The costs related to obtaining information.

(4) The director or officer's confidence in those exploring the matter.

(5) The state of the company's business at that time and the nature of competing demands on the board's attention.

(6) Whether or not material information is reasonably available to the director.

The requirement that the director inform her or himself of the subject matter of the judgment to the extent she or he reasonably believes to be appropriate does not encompass an objective requirement that the director demonstrate that she or he was reasonably informed. It may be that the director was not aware of available information, but nonetheless took active steps to become informed about the subject matter of the decision and reasonably believed her or himself to be informed.

In relation to the requirement of a rational belief that the business judgment is in the best interests of the corporation, the director's belief will be rational if it was based on reason or reasoning (whether or not the reasoning was convincing and therefore "reasonable" in an objective sense), but it would not be a rational belief if there was no arguable reasoning process to support it.

I.5.2 Principles regarding s 181 of the Act

632 In relation to s 181 of the Act, the duty to exercise powers for a proper purpose and the obligation to act in good faith are separate duties.[87]

633 In United Petroleum v HSF, Elliott J also addressed the principles regarding s 181(1)(a) of the Act, as follows:[88]

The board, and not the shareholders, determine what is in the best interests of the company. As stated in ANZ Executors & Trustee Company Ltd v Quintex Australia Ltd (receivers and managers appointed):

[A] shareholder's freedom to exercise [her or his] vote as [she or he] pleases does not mean that in law [she or he] can accomplish everything that takes [her or his] fancy. The right to vote is, it is true, a species of property that can be exercised at will, and it may confer control over the affairs and property of the company; but it does not follow that the holder may always do whatever [she or he] pleases with the corporate assets. For they are the property of the company and not of the shareholder, who has no legal or equitable interest in them.

(Emphasis added.)

As Byrne J observed in Glover v Willert, the board manages the company. The directors are not obliged to act on the direction of all shareholders in general meeting.

In relation to determining the best interests of a company, the High Court has held that "[d]irectors in whom are vested the right and the duty of deciding where the company's interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts".

There is conflicting authority concerning the meaning of "in good faith" in s 181(1)(a).

There is a view that the requirement that there be an "absence of good faith" involves "much more than negligence". On this view, s 181(1)(a) "is contravened only where a director engaged deliberately in conduct, knowing that it was not in the interests of the company". This approach involves a subjective standard.

An alternative view is that the test is objective. On this view, breach of s 181(1) requires consciousness that what was being done was not in the best interests of the company, but "consciousness in this sense means knowledge of the facts that make the conduct not in the best interests of the company; it is not necessary to establish knowledge that the conduct constituted a breach of the law or was improper".

These divergent views were considered in ASIC v Macdonald (No 11). The objective test was rejected in favour of requiring subjective dishonesty.

In this jurisdiction, the issue was considered in Mernda Developments Pty Ltd (in liq) v Alamanda Property Investments No 2 Pty Ltd (in liq). In an uncontested appeal, the Court of Appeal stated that, although there had been some debate in the past, it was generally accepted that the objective test ought to be applied.

Following this decision of the Court of Appeal, the objective test was applied to the issue of whether directors were acting in good faith in at least 3 decisions of the trial division.

However, in the more recent decision of ASIC v Flugge, Robson J, after carefully considering the authorities, and acknowledging he was bound by the Court of Appeal's decision, applied both an objective and a subjective test to s 181(1)(a) "as held apposite by Owen J in Bell Group v Westpac and approved by the Court of Appeal in Mernda v Alamanda". It may be his Honour intended to refer to both paragraphs (a) and (b) of s 181(1) when making this observation.

Relevantly, Owen J held that the test of "whether directors are acting bona fide in the interests of the company as a whole is largely (though by no means entirely) subjective". His Honour continued:

The court can look objectively at the surrounding circumstances and at the impugned transaction or exercise a power. But it does so not for the purpose of deciding whether or not there was commercial justification for the decision. Rather, the objective inquiry is done to assist the court in deciding whether to accept or discount the assertions that the directors make about their subjective intentions and beliefs.

On appeal, Robson J's decision was upheld. Further, the Court of Appeal stated that Robson J dealt comprehensively and accurately with the legal principles governing s 181. However, like Mernda Developments Pty Ltd (in liq) v Alamanda Property Investments No 2 Pty Ltd (in liq), the Court of Appeal did not have the benefit of competing submissions on this issue.

In circumstances where this court also had no competing submissions on the proper construction of s 181(1)(a) or (b), and on either approach to the proper construction of the provision no liability has been found, it is unnecessary to distil the state of the authorities on this section beyond what has already been stated.

634 On the question of whether the test is objective or subjective, the Court of Appeal in ASIC v Geary[89] said that:

A director or officer of a company will be in breach of this section if they, or their involvement in certain actions, did not constitute acting in good faith, or for a proper purpose, and for the benefit of the company. Although the test is objective, based on what a reasonable person in a similar position would be expected to have done in the circumstances, the subjective beliefs and intentions of the director or officer may still be relevant.[90]