Fisher v Divine Homes Pty Ltd; Allen v Harb

Elements of the voidable transaction claim 8I address first the claim based on s 588FF(1), s 588FE(1) and s 588FE(4). 9Under s 588FF(1), the court may, on the application of a company's liquidator, make any of several orders (including an order that a person pay money to the company) where it is satisfied that "a transaction of the company is voidable because of section 588FE". Section 588FE(1), so far as relevant, provides: "(1) If a company is being wound up: (a) a transaction of the company may be voidable because of any one or more of subsections (2) to (6) if the transaction was entered into on or after 23 June 1993; . . . " 10Section 588FE(4) is in these terms: "(4) The transaction is voidable if: (a) it is an insolvent transaction of the company; and (b) a related entity of the company is a party to it; and (c) it was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation-back day." 11The expression "insolvent transaction" used in s 588FE(4)(a) takes its meaning from s 588FC: "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: (i) entering into the transaction; or (ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction."

The case of insolvency advanced by the liquidator 12Mr Allen contends that Divine Homes was insolvent when each of the payments by means of a cheque drawn in favour of Mr Harb or to "cash" was made and that that circumstance causes each payment to be an "insolvent transaction". That is one of the essential elements of the liquidator's claim based on s 588FE(4). There is accordingly a factual question as to whether Divine Homes was insolvent and, if so, when. 13Mr Allen seeks to rely, in that connection, on a presumption made available by s 588E(4): "Subject to subsections (5) to (7), if it is proved that the company: (a) has failed to keep financial records in relation to a period as required by subsection 286(1); or (b) has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2); the company is to be presumed to have been insolvent throughout the period." 14Sections 286(1) and 286(2), referred to in s 588E(4), are in the following terms: "(1) A company, registered scheme or disclosing entity must keep written financial records that: (a) correctly record and explain its transactions and financial position and performance; and (b) would enable true and fair financial statements to be prepared and audited. The obligation to keep financial records of transactions extends to transactions undertaken as trustee. (2) The financial records must be retained for 7 years after the transactions covered by the records are completed." 15It is pertinent to quote also s 588E(6): "Subsection (4) does not have effect, in so far as it would prejudice a right or interest of a person for the company to be presumed insolvent because of a contravention of subsection 286(2), if it is proved that: (a) the contravention was due solely to someone destroying, concealing or removing financial records of the company; and (b) none of those financial records was destroyed, concealed or removed by the first-mentioned person; and (c) the person was not in any way, by act or omission, directly or indirectly, knowingly or recklessly, concerned in, or party to, destroying, concealing or removing any of those financial records." 16Mr Allen's reliance on the s 588E(4) presumption makes it necessary to review the evidence about financial documents of Divine Homes. 17It is not disputed that Mr Harb, the sole director of Divine Homes, was prosecuted and, on 11 March 2008, convicted of offences against s 475 and s 530A of the Corporations Act . The convictions arose, in part, from Mr Harb's failure to deliver books and records of Divine Homes to the liquidator. A fine was imposed. In response to a summons under s 596A dated 4 March 2009 requiring production of Divine Homes' books to the court, Mr Harb produced no more than several documents generated after the making of the winding up order and apparently received by him. These were notices and other documents from the Valuer-General, Holroyd Council and National Australia Bank, all addressed to Divine Homes, and invoices from the Sutherland Local Court addressed to Mr Harb himself. 18It is clear, however, that other potentially relevant documents exist or have existed. Mr Harb gave evidence before me (and also when examined before the Registrar on 21 April 2009) of having delivered documents to an accountant named "Shafeel" of a firm called "Stamford Accountants", apparently with a view to Shafeel's performing certain services in relation thereto. Mr Harb says that this action was taken by him to facilitate his performing his obligation to co-operate with the liquidator. The documents were said by Mr Harb to have been so delivered some time after the making of the winding up order. Mr Harb says that Shafeel then simply disappeared, leaving his office unoccupied and that the papers Mr Harb had given him were then lost, in the sense that Mr Harb did not know where they were and could not retrieve them. 19Mr Harb did not say precisely which documents were delivered by him to Shafeel. He described them as "all my files, all my receipts, everything so I can finalise it for the liquidator"; and "everything like invoices that I've paid, all my documents for my properties, all my loan documents"; and later "cheque books" - which, I infer, includes cheque butts. The context makes it clear that the possessive "my" was used by Mr Harb to indicate that the documents referred to were documents of Divine Homes. 20Mr Harb conceded, however, that Divine Homes had not prepared income tax returns, business activity statements, balance sheets or profit and loss accounts for any period since its incorporation. Nor had it ever made any lodgments with ASIC. 21With the evidence in this state, I am compelled to find that there existed, in relation to one or more relevant periods of Divine Homes, at least "invoices", "receipts", "loan documents" and "cheque books" (including cheque butts). The definition of "financial records" in s 9 is as follows: " financial records includes: (a) invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and (b) documents of prime entry; and (c) working papers and other documents needed to explain (i) the methods by which financial statements are made up; and (ii) adjustments to be made in preparing financial statements." 22It has been held that invoices and loan agreements - documents within two of the categories expressly identified by Mr Harb as having been delivered to Shafeel - are within the "financial records" concept: see, respectively, Fox v Gadsden [2003] NSWSC 748; (2003) 46 ACSR 713 at [19] and Commonwealth Bank of Australia v Tabet [2008] VSC 161 at [7]. 23The fact that no income tax return, business activity statement, balance sheet or profit and loss account was prepared for a period does not mean that "financial records" for that period were not kept. 24For a presumption of insolvency to arise under s 588E(4)(a) and to be relied on in relation to a particular period, it must be proved either that no document whatsoever within the "financial records" description was kept in relation to that period or that such documents within the definition as were kept in relation to the period were deficient as to content, in the sense that they either did not correctly record and explain the company's transactions and financial position and performance (for example, because they did not accurately record the matters purportedly recorded: Woodgate v Fawcett [2008] NSWSC 868; (2008) 67 ACSR 611) or would not enable true and fair financial statements to be prepared and audited. Separate and distinct proof is necessary in relation to each relevant period: Sims (as liquidator of SSET Construction Pty Ltd) v Khattar [2010] NSWSC 102. 25It follows that where, as here, there is evidence that "invoices", "receipts", "loan documents" and "cheque books" (including cheque butts) did exist in relation to the company's activities, the presumption will not be available in relation to a given period unless the person seeking to rely on the presumption shows that those documents were, in respect of the period in question, deficient in the sense just mentioned. 26In the present case, the liquidator has proved nothing about the content of the "invoices", "receipts", "loan documents" and "cheque books" (including cheque butts). The fact that no income tax return, business activity statement, balance sheet or profit and loss account of Divine Homes was ever prepared says nothing about conformity of the documents that did exist with the criteria in s 286(1). In the case of a company carrying on a simple cash business it is quite conceivable that a collection of invoices and cheque butts in "raw form" (supplemented by bank statements) will satisfy those criteria. 27The only available finding, on the evidence, is that, before the winding up order was made, the company "kept" some documents within the "financial records" concept and that each such document that was "kept" related to some period or other, even though it is not possible to identify the period. That finding does not allow, in relation to any period, either a conclusion that no documents were "kept" or a conclusion that any relating to the period that were "kept" were deficient as to content in a way I have mentioned. Since the content of the totality of the documents that were kept in relation to a particular period is simply not known (beyond such content as is suggested by the description of a document - "invoice", "receipt", "loan document" etc), it is not possible to find that that totality did not correctly record and explain the company's transactions and financial position and performance or would not enable true and fair financial statements to be prepared and audited. 28I therefore cannot find, in relation to any period, that the liquidator has proved the matter in s 588E(4)(a), that is, that Divine Homes failed to "keep" financial records as required by s 286(1). It is important to emphasise that it is for the liquidator to prove that the records kept were deficient, not for Mr Harb to prove that they were not. 29That leaves the question whether it has been proved, as contemplated by s 588E(4)(b), that Divine Homes failed to "retain" financial records for seven years as required by s 286(2). 30It has been proved, in that connection, that the sole director does not have such documents as may exist and does not know where they are; also that the sole director did not deliver to the liquidator any relevant documents that existed at the commencement of the winding up. Mr Harb says that he delivered documents to the accountant Shafeel some time after the making of the winding up order in April 2007 and that both Shafeel and the documents thereafter disappeared or, at least, that Shafeel's office was vacant when Mr Harb went back there and that he was thereafter unable to discover the whereabouts of Shafeel and the documents. 31It is pertinent to note, in that connection, that, on 10 March 2009, the liquidator wrote to ASIC and said: (a) that he had, in the previous month, himself attempted to locate Shafeel, including by visiting the premises previously occupied by Stanford Accounting and speaking with the new tenants in an attempt to discover a forwarding address; also that he had made a business names search in an attempt to find the firm; and (b) "At this stage, I am satisfied that Mr Harb may be genuine in his statement that he supplied the Company's books and records to an accountant who is now uncontactable." 32Mr Harb was closely cross examined about his evidence concerning delivery of the documents to Shafeel. Although it was submitted that adverse findings should be made on the matter of Mr Harb's credibility, I did not understand there to be any direct submission that he had fabricated his evidence about delivery to Shafeel. This is not surprising in view of the second aspect of the liquidator's 10 March 2009 letter just quoted (item (b) above). 33On this evidence, I find that, as at the commencement of the winding up on 16 April 2007, Mr Harb, the sole director, had in his possession certain documents that were "financial records" of Divine Homes and that, at some point thereafter, he delivered those documents to an accountant. It follows that, up until the point of such delivery, "financial records" of Divine Homes were in the possession of its sole director; and, after 16 April 2007, this was in circumstances where the director was under an obligation to surrender them to the liquidator, which obligation he did not perform. That, of itself, was productive of adverse legal consequences for him. He was prosecuted, convicted and fined. For present purposes, however, the question is whether, by virtue of Mr Harb's delivery to the accountant, Divine Homes failed to "retain" the documents. 34After 16 April 2007, Mr Harb's powers as a director of Divine Homes were no longer exercisable except as the liquidator or the court might specifically allow: s 471A. The act of delivering the documents to the accountant was therefore not an act of Divine Homes. It was an act of a person neither qualified nor entitled to act for Divine Homes. It is therefore, strictly speaking, not possible to identify any "failure" of Divine Homes in relation to retention of the documents, by reason of Mr Harb's delivery to the accountant. 35Finally, in relation to s 588E(4), however, I am of the opinion that, if, contrary to the conclusion just stated, there was any contravention of s 286(2), it has been proved that the contravention was, in terms of s 588E(6), "due solely to" Shafeel's concealing or removing the documents delivered to him by Mr Harb and that Mr Harb did not destroy, conceal or remove any of them and did not, in relation to the concealing or removing by Shafeel, play a role of the kind described in s 588E(6)(c). Any presumption of insolvency that might arise under s 588E(4) therefore cannot operate to the prejudice of Mr Harb in the way the liquidator seeks to have it operate in these proceedings. This is the effect of s 588E(6).

Conclusion on the voidable transaction claim 36It follows from my conclusions on s 588FE(4) and the fact that the liquidator relied solely on that section to prove insolvency of Divine Homes that insolvency, as at any time, has not been proved, with the result that none of the payments effected by cheques drawn by Divine Homes in favour of Mr Harb or to "cash" was an "insolvent transaction" and an essential part of the foundation for an order under s 588FF(1) in relation to the payment is lacking. 37Mr Allen's claims in relation to the cheques drawn in favour of Mr Harb or to "cash" were based exclusively on s 588FF(1) and the related provisions. Those claims therefore fail.

The misfeasance claim 38I turn now to the claims based on s 598(2) noting, as I do so, that the allegations in relation to the cheques drawn in favour of Mr Harb or to "cash" are expressly excluded by the liquidator from this part of his case. Section 598(2) is in these terms: "Subject to subsection (3), where, on application by an eligible applicant, the Court is satisfied that: (a) a person is guilty of fraud, negligence, default, breach of trust or breach of duty in relation to a corporation; and (b) the corporation has suffered, or is likely to suffer, loss or damage as a result of the fraud, negligence, default, breach of trust or breach of duty; the Court may make such order or orders as it thinks appropriate against or in relation to the person (including either or both of the orders specified in subsection (4)) and may so make an order against or in relation to a person even though the person may have committed an offence in respect of the matter to which the order relates." 39A company's liquidator is, for these purposes, an "eligible applicant" (paragraph (b) of the definition of "eligible applicant" in s 9). Section 598(3), referred to at the start of s 598(2), requires that certain procedural safeguards be observed. They were obviously observed in this case, with the result that s 598(3) cannot stand in the way of the making of any order that may be warranted under s 598(2). 40The contention of Mr Allen in this part of the case is that Mr Harb, as the sole director of Divine Homes, caused the company to draw certain cheques in favour of (and thereby to make payments to) a number of entities to which funds of the company were not properly payable and that, because the payments were not for the benefit of the company or connected with its affairs and welfare, it was a breach of Mr Harb's duty as director to cause and permit the company to make the payments. Section 598 creates a summary procedure for dealing with cases of misfeasance in the nature of breach of trust or breach of duty resulting in loss to the company. It will be convenient to refer to these cheques as "third party cheques".

The payments to which the misfeasance claim relates 41The first group of third party cheques consists of seven cheques (numbers 435, 436, 352, 351, 305, 306 and 266) each drawn in favour of American Express which thereby received payments from Divine Homes. Mr Harb accepted that the payments were made to satisfy debts that had arisen through the use of his personal American Express card. 42The second group of third party cheques consists of six cheques (numbers 440, 382, 332, 265, 320 and 308) each of which was drawn in favour of ANZ Bank. Mr Harb accepted that these cheques were used to pay his debts arising from the use of his personal ANZ credit card. 43The third group of third party cheques consists of four cheques (numbers 336, 319, 273 and 345) each drawn in favour of "Fady Harb". Mr Harb gave evidence that the payee is his brother. 44The fourth group of third party cheques consists of four cheques (numbers 319, 279, 238 and 439) each payable to "F & M Harb", being Mr Harb's parents, Fayez and Masseheye Harb. 45The fifth group of third party cheques consists of three cheques payable to Government bodies, being the State Debt Recovery Office and the Firearms Registry. These are cheques numbered 367, 365 and 423.

The fifth group of payments 46The cheques in this fifth group may be dealt with shortly. Mr Harb accepts that the State Debt Recovery payment were for traffic fines that he had himself incurred and that the Firearms Registry payment related to two shotguns owned by him for personal sporting purposes. He concedes that these payments should not have been made by Divine Homes and that the liquidator's claim is validly and properly brought in relation to them.

The first and second groups of payments 47The cheques in the first and second groups may be dealt with together. Mr Harb accepts that the payments were made to meet his personal credit card bills. He says, in a general way, however, that he was in the habit of using his personal credit cards to pay company expenses (such as expenses incurred in purchasing materials needed for building work) and that the payments in question represented reimbursement to him by the company for such expenditures. 48The problem for Mr Harb is that he points to no evidence which would allow any such conclusion to be reached in relation to any of the credit card payments. He cannot show that, for example, a particular American Express or ANZ bill included charges for cement or timber or bricks acquired by Divine Homes and that one of the cheques in question satisfied the credit card debt thus incurred by him. All that the evidence shows is that Mr Harb was liable to American Express or ANZ for purchases made by use of the credit card and that Divine Homes satisfied Mr Harb's debt to the credit card provider. The only available finding, therefore, is that Mr Harb, by drawing and delivering the cheques in the first and second groups, caused funds of Divine Homes to be applied for his benefit and not for the benefit of Divine Homes. 49I deal at this point with a particular submission made on Mr Harb's behalf, that is, that, although he performed significant services for Divine Homes in the furtherance of its building activities, he was paid no salary or wages; and it was reasonable, therefore, that the company pay his personal bills; or, perhaps more explicitly, that payment by the company of his personal bills was proper and legitimate recompense for the services he provided. 50That submission cannot be accepted. If a company is to enter into a service contract with its director, it must do so in some clearly observable manner. The fact that a particular person is the sole director and shareholder and therefore the only human instrumentality by which the company may act does not change this. Corporate decisions and acts can only be achieved in explicit ways: Sheahan v Londish [2010] NSWCA 270; (2010) 80 ACSR 337. Coincidence of the identity of the sole director, the sole shareholder and the person by whom services are provided does not mean that the corporate decision to enter into a service contract and the actual formation of the contract can take place wholly within the individual's head and be revealed, if at all, only when it suits him or her to reveal it. 51Nor, in the present context, would it avail Mr Harb to say that he was entitled to some form of quantum meruit and was merely helping himself to what was due to him accordingly. A quantum meruit finding is simply not available on the evidence before me.

The third group of payments 52I consider next the four payments in the third group, being payments to Mr Harb's brother Fady. Mr Harb gave evidence that his brother, like himself, works in the building industry and that the brother sometimes provided services to Divine Homes. Furthermore, Mr Harb produced four documents purporting to be invoices or copies of invoices issued by the brother to Divine Homes each of which was for an amount corresponding with the amount of a cheque drawn in favour of the brother. Mr Harb explained that, shortly before the hearing, he had asked his brother for copies of invoices he had issued to Divine Homes at an earlier time and that the brother, having retained the documents on his computer, then printed out new copies. It is this group of copies that was produced to the court. Each copy invoice is addressed to Divine Homes by Fady Harb, bears a date in 2006 and is expressed to be for "Supply of labour at Seaforth" for a stated period. Divine Homes was, at that time, engaged in building work at Seaforth. 53On the basis of this evidence, my finding is that the four payments in the third group were made to Mr Fady Harb for work done by him for Divine Homes on the building project at Seaforth, with the result that the expenditure was for a proper corporate purpose.

The fourth group of payments 54Remaining for consideration are the cheques in the fourth group, being cheques drawn by Divine Homes in favour of Mr Harb's parents. 55Mr Harb maintains that his parents lent money to Divine Homes to assist it to purchase land to be turned to account through speculative building and that the several payments by the company to the parents were in reduction of the loan. In the report as to affairs he eventually completed, however, Mr Harb did not make any reference to a debt of Divine Homes to the parents. In addition, the proposition that the parents lent money to the company is quite at odds with Mr Harb's own evidence. He testified that the parents borrowed $420,000 on the security of their house and: "They lent it to me but I injected it into the townhouses I got." 56Mr Harb referred at a later point to "the loan that I took out on their house". 57According to each of these descriptions given by Mr Harb, it was Mr Harb who either borrowed money from the parents (who had, in turn, borrowed from someone else on the security of their house) or borrowed from some third party on the security of the parents' house. There is simply no evidence that the parents entered into any transaction with Divine Homes that would be a proper occasion and rationale for payments by it to them.

Conclusion on the misfeasance claim 58My overall conclusion on the second part of the liquidator's case is therefore that he has shown that the payments made by means of the third party cheques in the first, second, fourth and fifth groups were made otherwise than for the proper corporate purposes of Divine Homes and otherwise than for its benefit, with the result that it was a breach of duty on Mr Harb's part to cause and allow Divine Homes to make those payments. Furthermore, the lack of benefit to Divine Homes and the absence of proper corporate purpose mean that Mr Harb's breach of duty occasioned to Divine Homes loss or damage in the amount of the payment. All the elements necessary to justify an order against Mr Harb in relation to the payments represented by the cheques in the first, second, fourth and fifth groups are accordingly established. 59It was submitted on Mr Harb's behalf that, despite what has just been said, the court should relieve him from the consequent liability. That submission was made by reference to s 1318(1). For such relief to be extended to Mr Harb, it would be necessary to find, first, that he had "acted honestly" and, second, that "he ought fairly to be excused". There is nothing in the evidence which could ground a conclusion favourable to Mr Harb on either of these matters. 60In the result, therefore, there will be an order under s 598(2) as just outlined; but there will be no order under s 588FF(1) (or otherwise) in relation to any of the payments made by means of company cheques drawn in favour of Mr Harb or to "cash". 61It remains to consider the terms of the s 598(2) order. Where, as here, the elements in paragraphs (a) and (b) of s 598(2) exist, the court is empowered "to make such order or orders as it thinks appropriate against or in relation to the person" - here, Mr Harb. In this case, Divine Homes was, by Mr Harb's breach of duty, deprived of money that should have remained with it so as to be turned to account for its own benefit. There should therefore be an order that Mr Harb pay money to Divine Homes Pty Ltd (in liquidation). The amount to be paid should be the aggregate of the amounts of the cheques in the first, second, fourth and fifth groups, together with an interest component. Interest should be computed on the amount of each cheque from the date the cheque was honoured to the date of the order. Interest should be calculated according to the prescribed rate as set out in rule 36.7 of the Uniform Civil Procedure Rules 2005 as it has existed since 31 July 2010. The several individual interest amounts will then be added to the aggregate of the amounts of the cheques to produce a composite amount to be paid by Mr Harb. 62The question of costs will be reserved for future argument, assuming that there is no agreement. 63I direct that, within fourteen days, agreed short minutes be filed by delivery to my Associate and that, if short minutes are not agreed within that time, the short minutes for which the liquidator contends be so filed within a further seven days together with details of the calculations on which they are based. If the parties agree on an appropriate costs order, that order should be included in short minutes.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 14 March 2011