In the matter of Lawrence Waterhouse Pty Ltd (in liq) - Shaw v Minsden Pty Ltd [2011] NSWSC 964 | Case summary | Zoe

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In the matter of Lawrence Waterhouse Pty Ltd (in liq) - Shaw v Minsden Pty Ltd

[2011] NSWSC 964

Supreme Court of NSW|2011-05-20|Before: Ward J

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Source facts

Court

Supreme Court of NSW

Decision date

2011-05-20

Before

Ward J

Catchwords

16 ACSR 607
13 ACLC 614 Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535
15 ACLC 1716 Dowse v Gorton [1891] AC 190 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423
14 ACLC 1234 Jones v Dunkel (1959) 101 CLR 298 Kenna & Brown Pty Ltd v Kenna [1999] NSWSC 533

Source

Original judgment source is linked above.

Catchwords

16 ACSR 60713 ACLC 614 Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 53515 ACLC 1716 Dowse v Gorton [1891] AC 190 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 42314 ACLC 1234 Jones v Dunkel (1959) 101 CLR 298 Kenna & Brown Pty Ltd v Kenna [1999] NSWSC 533(2008) 74 NSWLR 550 Levi v Guerlini (1997) 24 ACSR 15915 ACLC 913 Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243(2005) 54 ACSR 410 Lewis v Doran [2004] NSWSC 608(2004) 50 ACSR 175 Lo v Nielsen [2008] NSWSC 407(2008) 26 ACLC 497 Longtom Pty Ltd v Oberon SC (1996) 7 BPR 14,799 Love v ASC [2000] WASCA 404(2000) 36 ACSR 363 Maguire v Makaronis (1997) 188 CLR 449 Manning v Cory [1974] WAR 60

Judgment (3 paragraphs)

[1]

Buckle (1998) 72 ALJR 243 Claremont Petroleum v Cummings & Anor (1992) 110 ALR 239 Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 Commonwealth of Australia v McLean (1996) 41 NSWLR 389 Daniels (formerly practising as Deloitte Haskins & Sells) v Anderson (1995) 37 NSWLR 438; 16 ACSR 607; 13 ACLC 614 Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535; 15 ACLC 1716 Dowse v Gorton [1891] AC 190 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; 19 ALR 223 Fitzgerald v Masters (1956) 95 CLR 420 Grossman v E Katz Manufacturing Jewellers (ACT) Pty Ltd [2004] NSWSC 1224 Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services Pty Ltd (1996) 19 ACSR 523; 14 ACLC 1234 Jones v Dunkel (1959) 101 CLR 298 Kenna & Brown Pty Ltd v Kenna [1999] NSWSC 533; (1999) 32 ACSR 430 Lam Soon Australia Pty Ltd v Molit (No 55) (1996) 70 FCR 34 Lawrence Waterhouse Pty Ltd v Port Stephens Council [2008] NSWCA 235 Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550 Levi v Guerlini (1997) 24 ACSR 159; 15 ACLC 913 Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243; (2005) 54 ACSR 410 Lewis v Doran [2004] NSWSC 608; (2004) 50 ACSR 175 Lo v Nielsen [2008] NSWSC 407; (2008) 26 ACLC 497 Longtom Pty Ltd v Oberon SC (1996) 7 BPR 14,799 Love v ASC [2000] WASCA 404; (2000) 36 ACSR 363 Maguire v Makaronis (1997) 188 CLR 449 Manning v Cory [1974] WAR 60; (1974) CLC 40-140 McDonald v Hanselmann (1998) 144 FLR 463 Mulkana Corporation Pty Limited (in liq) v Bank of New South Wales (1983) 8 ACLR 278 New World Alliance Pty Limited; Sycotex Pty Limited v Baseler (No 2) (1994) 51 FCR 425 Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Old Kiama Wharf Company Pty Ltd (in liq) v Betohuwisa Investments Pty Ltd [2011] NSWSC 823 Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 Re International Vending Machines Pty Limited and the Companies Act (1962) NSWR 1408 Re Kazar; Frontier Architects Pty Ltd (in liq) [2010] FCA 1381; (2010) 81 ACSR 158 Re Leisure Developments (Qld) Pty Ltd (in liq); Ell v Palmer (2002) 41 ACSR 276 Re Northumberland Insurance Co Ltd (No 2) (1975) 1 ACLR 142 Re Suco Gold Pty Ltd (1983) 33 SASR 99; 7 ACLR 873 Re World Expo Park Pty Ltd (1994) 12 ACSR 759 Repforce International v Master Lease Properties [2003] NSWSC 970 Sandhurst Trustees Ltd v Harvey (2004) 88 SASR 519 Skouloudis Group Pty Ltd (in liq) v Planet Enterprizes Pty Ltd [2002] NSWSC 239; (2002) 41 ACSR 369 Southern Wine Corp Pty Ltd (in liq) v Frankland River Olive Co Ltd [2005] WASCA 236; (2005) 31 WAR 162 Stott v Milne (1884) 25 Ch D 710 Stratti Ocean and Earthworks Pty Ltd v Deputy Commissioner of Taxation [2003] NSWSC 509 Summers v Commonwealth (1918) 25 CLR 144 Van Reesema v Flavel (1992) 7 ACSR 225; 10 ACLC 291 West v Mead (1984) 155 CLR 242; (1984) 56 ALR 483 White v Conroy (1921) 21 SR (NSW) 257; 38 WN (NSW) 63 Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457; (2006) 57 ACSR 693 Texts Cited: Carter on Contract Ford's Principles of Corporations Law Halsbury's Laws of Australia Heydon and Leeming, Jacobs' Law of Trusts in Australia (7th edn) Category: Principal judgment Parties: James Alexander Shaw (First Plaintiff) Lawrence Waterhouse Pty Ltd (in liq) (Second Plaintiff) Minsden Pty Ltd (First Defendant) Wayne Lawrence (Second Defendant) Representation: Counsel R Marshall (Plaintiffs) Solicitors Harris Wheeler (Plaintiffs) G Lancaster (Access Law Group) (Defendants) File Number(s): 09/287488

[2]

Judgment 1HER HONOUR : These are proceedings brought by James Alexander Shaw (the first plaintiff), in his capacity as the liquidator of the second plaintiff (Lawrence Waterhouse Pty Ltd (in liquidation)) and in the name of that company, seeking relief pursuant to ss 180, 588FF and 1317H of the Corporations Act 2001 (Cth), s 37A of the Conveyancing Act 1919 (NSW) and the general law, against Minsden Pty Ltd (the company to which land at Nelson Bay, formerly registered in the name of Lawrence Waterhouse, was transferred) and against Wayne Lawrence, formerly a director of Lawrence Waterhouse and a current director of Minsden. 2Broadly, what the liquidator seeks is to set aside both the transfer of the land in question and a fixed and floating charge granted over the assets of Lawrence Waterhouse in favour of Mr Lawrence, as well as orders that Mr Lawrence account for all moneys received and paid from the bank accounts of Lawrence Waterhouse and pay equitable compensation to the company for the alleged breach of his statutory and fiduciary duties as director in relation to the keeping of the books and records of the company. 3The claims made by the liquidator as at the time of the hearing are contained in a Second Further Amended Originating Process filed 13 December 2010 and Second Further Amended Points of Claim also filed on that date. The defendants have filed separate defences, the final iterations of which (pursuant to orders made during the course of the hearing on 19 May 2011) are the Amended Points of Defence to Second Further Amended Points of Claim filed by each of the defendants. 4The defendants deny the claims made against them. In the case of Mr Lawrence, he seeks relief (to the extent that he may be found liable for breach of any civil penalty provision under the Corporations Act ) pursuant to s 1317S on the following bases: that at all material times he acted honestly and ensured (either from his own resources or from the resources of related entities) that all creditors of Lawrence Waterhouse (with the exception only of the Port Stephens Council) were paid; by reference to certain conduct pleaded on the part of the Council (to which I will refer in due course); and that he suffered from medical conditions in 2006 that impacted on his ability to manage the day to day financial and other affairs of Lawrence Waterhouse. 5In further reply to the plaintiffs' claims, each of the defendants asserts various matters in criticism of the conduct of the liquidator (paras [26]-[27] of Minsden's defence and [50]-[51] of Mr Lawrence's defence, respectively). 6In particular, it is alleged that the liquidator has:

[3]

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: 25 August 2011

failed to act independently of the interests of the Council (by, inter alia, obtaining indemnity and payment for his remuneration as well as these proceedings from the Council and by engaging the solicitors for the Council to act for him in these proceedings rather than independent solicitors);
failed to review or update his expert report (though that has in any event not been read) in these proceedings, after new financial information was supplied by Mr Lawrence;
submitted to ASIC incorrect information when presenting his accounts (in that it did not include the Mr Lawrence as a creditor and did not record payments from a third party);
advanced the interests of the Council "without regard to the commerciality of such proceedings";
failed properly or fully to investigate the claims of Mr Lawrence to be a creditor of Lawrence Waterhouse;
created a schedule of payments which omitted payments to Lawrence Waterhouse by Mr Lawrence and related entities;
failed to correct the schedule of payments after the errors were drawn to his attention by Mr Lawrence;
acknowledged Mr Lawrence as a creditor in his report of 2 July 2009 but failed to treat or recognise Mr Lawrence as a creditor of Lawrence Waterhouse thereafter;
failed to pursue or realise, for the benefit of creditors as a whole, the sale of the Nelson Bay land which had been negotiated prior to his appointment by Mr Lawrence (a somewhat surprising assertion when it is said by the defendants that the Nelson Bay land has at all times been held on trust for Mr Lawrence and is the subject of a valid transfer to Minsden);
failed to realise by sale, leasing or otherwise the value in the real property at Old Bar for the benefit of creditors as a whole (a matter to which no submissions were directed and which seems to be inconsistent with Mr Lawrence's contention, accepted by the liquidator, that the Old Bar property is held on trust for the superannuation fund); and
failed to recognise that Lawrence Waterhouse had, apart from Mr Lawrence, only one external creditor, whose debt would be met by the sale of the Old Bar property (inconsistent with the submission now put that there are other creditors of the company to which the liquidator failed to have regard, being related companies with which Mr Lawrence is associated). 7When the hearing before me commenced, there was an application by the defendants for the proceedings to be dismissed pursuant to Rule 29.7 of the Uniform Civil Procedures Rules 2005 (NSW) on the ground that Mr Shaw was not physically present in the Court (though he was represented by his Counsel, Mr Marshall, and his solicitor). I dismissed that application for the reasons given orally at the time. 8One consequence of Mr Shaw's unavailability to attend was that his affidavit (and expert report) was not read in the proceedings (although his partner, Mr Newton, did adopt the views set out in a small portion of that report, relating to the adequacy of the books and records of the company). 9There was much complaint made by the solicitor appearing for the defendants (Mr Lancaster) as to the unavailability of Mr Shaw for cross-examination - I was reminded of this no less than three times in closing submissions. As I understand it, Mr Lancaster wished, no doubt on instructions, to cross-examine Mr Shaw as to his conduct of the liquidation in order to bolster the submissions made for Mr Lawrence as to a lack of independence on the liquidator's part. Issues 10The issues raised on the pleadings can broadly be grouped as follows: (i) as to the transfer of the Nelson Bay land to Minsden: (a) whether, as the plaintiffs contend, the transfer (or the steps there involved) is an insolvent transaction within the meaning of s 588FC of the Corporations Act or an unreasonable director related transaction within the meaning of s 588FDA of the Corporations Act (and, in either case, voidable pursuant to s 588FE of that Act) or an alienation of land with the intent to defraud the Council, as a creditor of Lawrence Waterhouse, voidable pursuant to s 37A of the Conveyancing Act ; (b) whether, again as the plaintiffs contend, Minsden holds the Nelson Bay land on constructive trust for Lawrence Waterhouse (it having been knowingly concerned in, and directly benefiting from, a breach by Mr Lawrence of his fiduciary duty to Lawrence Waterhouse in relation to the steps taken for the transfer of the Nelson Bay land to Minsden); or (c) whether, as the defendants contend, Lawrence Waterhouse from 2003 held the land as trustee for Mr Lawrence (following the execution of a Deed for the transfer of the land to him and execution of a transfer for that purpose) and later validly transferred to Minsden the Nelson Bay land in accordance with a direction by Mr Lawrence (which then gives rise to the further question as to whether, if so, Lawrence Waterhouse is entitled to be indemnified by Mr Lawrence out of the Nelson Bay land in respect of costs liabilities owed by the company to the Council in relation to the proposed development of the Nelson Bay land and is entitled to recoup that amount by tracing the land in the hands of Minsden); and (d) whether, if the transfer of the Nelson Bay land is declared void and/or set aside, the land is held on constructive trust or resulting trust for Mr Lawrence and/or a related company, Champerslife Pty Ltd, and is subject to an equitable charge (or equitable charges) in favour of Mr Lawrence and/or Champerslife to secure payments made towards the acquisition of the said land (as now asserted by Mr Lawrence); (ii) as to the charge granted to Mr Lawrence by Lawrence Waterhouse in or about December 2007: (a) whether, as the plaintiffs contend, it was an unreasonable director related transaction within the meaning of s 588FDA of the Corporations Act , and voidable pursuant to s 588FE of that Act, or an alienation of property with the intent to defraud the Council (as a creditor of Lawrence Waterhouse) and voidable pursuant to s 37A of the Conveyancing Act; and (b) whether, again as the plaintiffs contend, the charge is held on constructive trust for Lawrence Waterhouse (having been executed and procured in breach of Mr Lawrence's fiduciary duty to the company) or is void because it secures no debt or obligation of Lawrence Waterhouse to Mr Lawrence; (iii) as to the state of the books and records of Lawrence Waterhouse: (a) whether Mr Lawrence is obliged to account to Lawrence Waterhouse (by way of repayment of the balance of a loan account to be ascertained by the Court) or is liable for damages or equitable compensation in relation to alleged breaches of his duties, as a director of Lawrence Waterhouse, to keep written records correctly recording the company's transactions and its financial position that would enable true and fair financial statements to be prepared and audited; and (b) whether, if Mr Lawrence is liable for breach of any civil penalty provision in relation to the keeping of the company's books and records, exculpatory relief should be granted in his favour. Summary 11In summary, for the reasons set out below, I find that: (i) at the time of the transfer of the Nelson Bay land to Minsden, Lawrence Waterhouse held the land as trustee for Mr Lawrence (following the execution of the 2003 Deed and transfer, the rights and equitable interest arising under which I find had not been abandoned by Mr Lawrence); (ii) at the time of the transfer to Minsden (at Wayne Lawrence's direction), Lawrence Waterhouse was entitled, as trustee, to be indemnified by Mr Lawrence out of the Nelson Bay land in respect of any costs incurred in relation to the proposed development of the Nelson Bay land (including costs liabilities owed by the company to the Port Stephens Council) and is entitled to recoup that amount by tracing the land into the hands of Minsden; (iii) there was a failure by Lawrence Waterhouse (and a breach by Mr Lawrence of his duties under s 180 and s 334 of the Corporations Act ) to keep proper books and records as required by s 286 of the Corporations Act in order to permit the company (and now its liquidator) to ascertain its financial position vis a vis the entities to whom or by whom it is, or may be, owed money in its capacity as 'banker' to the Lawrence Waterhouse group of companies; therefore, a presumption of insolvency has arisen (which presumption, after some hesitation, I find has been rebutted for the period up to the withdrawal by Mr Lawrence, in or about late 2008, of financial support for Lawrence Waterhouse to be able to meet all of its debts as and when they fell due); (iv) had I found that the Nelson Bay land was not, at the time of transfer, held on trust in favour of Mr Lawrence, I would nevertheless not have found that it was an uncommercial and insolvent transaction within the meaning of s 588FC of the Corporations Act (by reason of the finding in (iii) above) nor would I have found it to be an unreasonable director-related transaction (by reason that it was not a transfer to a close associate as that term has been construed in this context). I would, however, have found that it was an alienation of land with the intent to defraud the Council as a creditor of Lawrence Waterhouse and that it should be declared to be void pursuant to s 37A of the Conveyancing Act ; (v) in light of the findings in (i) and (ii), I find that Minsden holds the Nelson Bay land impressed with a charge in favour of Lawrence Waterhouse in the amount necessary to discharge the costs judgment against the company (in the sum of $57,683.45 plus interest) plus the costs orders (as in due course to be assessed) made in relation to the Court of Appeal proceedings in favour of Lawrence Waterhouse and any interest payable thereon; (vi) had I made the finding indicated in (iv) and declared the transaction void pursuant to s 37A of the Conveyancing Act , it would not have been necessary to make any further finding in relation to the land held by Minsden (however, it seems to me on the probabilities that a case has been established that Minsden would otherwise have held the Nelson Bay land on constructive trust for Lawrence Waterhouse, having been knowingly concerned in, and directly benefiting, from a breach by Mr Lawrence of his fiduciary duty to Lawrence Waterhouse in relation to the transfer of the Nelson Bay land to Minsden for no value or at less than market value); (vii) had I not made the findings in (i) - (ii), I would have held that as at 2008 the Nelson Bay land was not held on constructive trust or resulting trust for Mr Lawrence and/or Champerslife (and was not subject to an equitable charge or equitable charges to Mr Lawrence and/or Champerslife to secure payments made towards the acquisition of the said land) in circumstances where the evidence of Mr Lawrence is that moneys paid to Lawrence Waterhouse by himself or companies associated with him were paid by way of loan by him and therefore any claim in relation to the moneys paid which were applied to the acquisition of the Nelson Bay land would be recoverable as an unsecured loan; (viii) the charge granted to Mr Lawrence by Lawrence Waterhouse in or about December 2007 was an unreasonable director related transaction within the meaning of s 588FDA of the Corporations Act and should be set aside pursuant to s 588FE of that Act and, further, is an alienation of property with the intent to defraud the Council as a creditor of Lawrence Waterhouse and should be declared void pursuant to s 37A of the Conveyancing Act; (ix) Mr Lawrence is obliged to account to Lawrence Waterhouse by way of repayment of any outstanding balance of his loan account; if that cannot be determined due to his failure to ensure that proper accounting records were kept by the company then he should account for any monies so unaccounted for (to be assessed by an associate justice or otherwise referred to a referee for determination) by way of damages for breach of s 180 and/or 334 of the Corporations Act ; similarly, he is liable for damages (to be assessed) suffered by the company to the extent that it is unable to recover outstanding loans from or moneys paid on behalf of related companies; (I also consider that Mr Lawrence would (had the land not been held on trust for him at the time of transfer) have been liable for breach of fiduciary duty in the transfer of the land to an associated company at less than market value or for no value but this issue does not arise given my earlier findings); (x) exculpatory relief should not be granted in Mr Lawrence's favour for breach of his statutory duties to the extent that this would absolve him from responsibility to account for the sums expended by the company on his behalf or on behalf of companies associated with him and for which the company (by reason of the inadequacy of financial records) is, or is likely to be, unable to recover (such relief does not arise in relation to the breach of fiduciary duty). 12As to the final form of orders and costs (and as to whether any order should be made granting priority to the Council as creditor of Lawrence Waterhouse for any recovery out of the Nelson Bay land under Lawrence Waterhouse's right of indemnity as trustee), I will hear further submissions. Background Facts
General 13Lawrence Waterhouse was incorporated on 23 September 1999. It is not disputed that at all material times since then (up to January 2009, when his wife, Valerie, who had previously been a director of the company was reappointed as director and Mr Lawrence resigned as director), Mr Lawrence was the company's director and that Mr Lawrence has at all material times been the company's controlling shareholder. 14Mr Lawrence has carried on business over the years, through various corporate entities, as a property developer - acquiring land for development and on-sale. Lawrence Waterhouse was described by Mr Lawrence as a management company (acting as the 'banker' for Mr Lawrence and the various companies associated or controlled by him) and not a 'developer' as such. In Mr Lawrence's own words (T 284.16): the company is the bank, the company that controls all the different identities works, so they manage it. I put all the money into Lawrence Waterhouse, I keep pumping it full of money so it can operate all the accounts for all the other people. In other words it is a management company so it is managing. It doesn't develop or anything it just manages. 15Lawrence Waterhouse was also, until shortly prior to its winding up, the trustee of a superannuation fund established on behalf of Mr Lawrence and of which he is a beneficiary. (The trustee of that fund is now the first defendant, Minsden.) 16Mr Lawrence has at all material times been a director of Minsden (a company that had been incorporated some years earlier, on 14 March 1979) and its only shareholder (and Mr Lawrence admits that he gave instructions to Minsden in regard to all its affairs). There are at least two other companies with which Mr Lawrence was associated and to which reference will be made in relation to the affairs of Lawrence Waterhouse (Bulevi Pty Ltd, incorporated on 6 June 1986, and Champerslife Pty Ltd, incorporated on 19 February 2002.) 17It is submitted by Mr Lancaster that Mr Lawrence was the main source of income for each of Minsden, Bulevi, Lawrence Waterhouse and Champerslife (and this was indeed Mr Lawrence's evidence), and that he used the companies as 'vehicles to make loans from himself'. Intercompany payments were said to be loans made by or on behalf of Mr Lawrence . 18The liquidator's complaint in this regard is that the company's books and records do not permit him to determine the status of the loan accounts as between Lawrence Waterhouse and the various other entities on whose behalf payments were made by the company and from whom payments were made into the company, so as to enable the liquidator to pursue any amounts that may be owing to Lawrence Waterhouse or to determine amounts that may be owing by the company to third parties related to Mr Lawrence. 19As at 2008, Lawrence Waterhouse did not appear to have any substantial income producing assets. It had earlier purchased land at Boorowa, in around 2001 or 2003, on which there was a house (according to Mr Lawrence in such a state that there were sheep running through it) that Mr Lawrence then renovated but, apart from a short period, it does not appear that Lawrence Waterhouse derived much by way of rental income for the property and it was sold in 2006. It was, however, the registered proprietor of 3 lots in a strata plan over a property in Nelson Bay (which had been acquired by the company in about 2001). I refer to these lots as the Nelson Bay land. (Lawrence Waterhouse had leased the land or part of it to the Owners Corporation for use as a carpark but rental income from the land was the subject of a set-off arrangement in respect of rates that would otherwise be payable in respect of the lots.) 20Other than its holding of the Nelson Bay land (the subject of the impugned transfer in 2008 to Minsden), it appears that by around 2008 Lawrence Waterhouse carried on no particular business in its own right, although payments were made in and out of its accounts (said to be as 'banker' for the various companies in which Mr Lawrence had an interest and through which Mr Lawrence carried out property developments from time to time). 21Mr Lawrence explained (at T 250.15) that he would pay for all the bills from his personal account in relation to Lawrence Waterhouse "because the company never had an income" adding that the "problem for 5 years or 6 years was that it wasn't a developer it was a banker all it did was lend money for the other companies and to be able to buy properties". 22Mr Lawrence gave evidence, in effect, that he had carried on the operations of the companies with which he was associated through the Lawrence Waterhouse accounts, and that this was on his (and his companies') accountant's advice. (I will refer to the various companies through which Mr Lawrence seems to have operated as a property developer generally as the Lawrence Waterhouse group of companies - those including but not limited to Minsden, Bulevi, Lawrence Waterhouse itself, and Champerslife.)
Acquisition of Nelson Bay land 23The circumstances in which the Nelson Bay land was acquired are of relevance having regard to the claims now made by Mr Lawrence as to the existence of one or more equitable charges over the land. 24On 14 August 2001, Lawrence Waterhouse completed the purchase of the Nelson Bay land for $72,000. The purchase price was paid in part by contributions from Lawrence Waterhouse (as to $9,182.75) and by Mr Lawrence (as to $20,817.25). The balance ($42,000) was advanced to Lawrence Waterhouse by Elliot Tuthill Mortgages Ltd (a finance company with whom Mr Lawrence had had a longstanding arrangement, as described by Mr Lawrence in the witness box, since 1975 whereby he would put up 35% of the money (and Elliot Tuthill would advance 65%) for properties he wished to acquire (T 211) because "the banks would not lend on development sites"). (Mr Lawrence said that he had to have a "bank" to deal with Elliot Tuthill - T 283.) 25It is relevant to note that Elliot Tuthill's loan seems to have been one made to Lawrence Waterhouse (not to Mr Lawrence personally) and was secured by a first registered mortgage over the property and by a personal guarantee from Mr Lawrence and his wife. (Mr Lawrence's personal financial contribution to the purchase price was thus $20,817.25, although he had provided a guarantee to secure Lawrence Waterhouse's borrowings for the balance or most of the balance of the purchase price.) 26Mr Lawrence says that during the period from the acquisition of the land until 9 August 2002 he advanced moneys to Lawrence Waterhouse to enable it to make interest repayments from time to time to Elliot Tuthill. 27On 8 August 2002, Mr Lawrence directed Champerslife to pay Elliot Tuthill the sum of $43,639.85 to discharge the amount then due and owing under the mortgage over the Nelson Bay land. As I understand it, Elliot Tuthill applied, towards the discharge of the mortgage, funds then held by Elliot Tuthill on behalf of Champerslife. Thereupon, Lawrence Waterhouse held the property unencumbered by any mortgage. 28Champerslife was not recorded as having any interest in the Nelson Bay land. Consistent with Mr Lawrence's own account of the intercompany dealings, it would seem that this should be treated as a loan from Champerslife to Mr Lawrence personally (which he then directed to be applied on his behalf to the discharge of the mortgage) (see T 273 - 274) or an intercompany loan from Champerslife to Lawrence Waterhouse on Mr Lawrence's behalf. (In either case, while Champerslife would be the ultimate creditor, the arrangement would seem to have been between it and Mr Lawrence). It does not appear to have been the intention for Champerslife itself to acquire any interest in the Nelson Bay land, nor has Champerslife asserted any such interest. (Mr Lawrence gave evidence that Champerslife obtained money from Elliot Tuthill and from Mr Lawrence himself and that Champerslife would lend the moneys to Lawrence Waterhouse (T 273) but this was "via my instructions as director" - T 274.29.)
2003 Deed and transfer 29Mr Lawrence says that in about early 2003 he started to think about retirement. At that stage he says that Lawrence Waterhouse was indebted to him for the total amount of approximately $300,000 in respect of loans he had made to the company (although it is not clear how that amount was quantified). 30A Deed was signed, dated 2 January 2003, between Lawrence Waterhouse and Mr Lawrence in which there was recorded the agreement of Lawrence Waterhouse to transfer the Nelson Bay land to Mr Lawrence in lieu of the repayment of the sum of $80,000 said to be due by Lawrence Waterhouse to Mr Lawrence (and in partial satisfaction of the total debt said to be due by Lawrence Waterhouse to Mr Lawrence). 31The sum of $80,000 does not seem to be referable to any particular loan(s) but may have been calculated by reference to the approximate value of the land, since there was reference in the Deed to the details of a ('desktop') valuation of the Nelson Bay land as at 18 November 2002 at $80,000, apparently obtained at the request of Elliot Tuthill "to ensure the valuation was independent", somewhat curiously after its mortgage had already been discharged.) (The Deed recorded an acknowledgement that there were no other creditors of the company at that date (at [6]) and that Lawrence Waterhouse would not be in a position to repay the amounts owing to Mr Lawrence (at [4].) 32Counsel for the plaintiffs, Mr Marshall, notes that the Deed is to some extent inconsistent with the facts as they were in early 2003. In particular, it is noted that clause 1 refers in the present tense to the Elliot Tuthill mortgage (though that had been discharged six months before the date of the deed) and that clause 2 does not take into account the fact that, of the original purchase price, $42,000 was provided by Lawrence Waterhouse by way of a loan from Elliot Tuthill (not provided by Mr Lawrence himself). Nevertheless, the document must have been created around that time as it was stamped for duty in 2003. 33The Deed, as headed, describes Mr Lawrence as the purchaser and provides in clause 5 that "The parties have agreed in lieu of loan accounts to the value of $80,000 to transfer the land to Wayne Lawrence". (There is no record of $72,000 being received by the company or deposited into Lawrence Waterhouse's bank account at around this time, which Mr Marshall accepts would be consistent with the Deed - under which the consideration was the partial discharge of the company's debt to Mr Lawrence.) 34A transfer document was prepared in registrable form (the consideration for the transfer being stated to be $72,000) and stamp duty was paid on both the Deed and the form of transfer on 3 February 2003. However, the transfer was not registered until 2008. At all material times from 2003 until early 2008 the Nelson Bay land remained in the name of Lawrence Waterhouse. (As will be seen, Mr Lawrence made no reference to the transfer or to the existence of an equitable interest on his part in the Nelson Bay land in the context of Land and Environment Court proceedings commenced in 2005/6 (as he conceded at T 242.6) or in the later Court of Appeal proceedings in 2007/2008.)
Proposed development of Nelson Bay land 35The foreshadowed retirement of Mr Lawrence is in itself somewhat curious since, within some two years or so after entry into the Deed, Mr Lawrence (through Lawrence Waterhouse) seems to have commenced taking steps to develop the Nelson Bay land. That, however, proved to be a source of various disputes - between Mr Lawrence and the Owners Corporation of the strata plan in question and between Mr Lawrence and the Port Stephens Council (being the local approval authority), ultimately leading to these proceedings. 36The overall site, of which the 3 lots owned by Lawrence Waterhouse formed part, had been the subject of an original development consent in the 1970's, pursuant to which a strata plan had been registered and 8 residential units or townhouses had been built (in two separate developments). Lawrence Waterhouse apparently acquired the remaining 3 lots from the initial developer (Cool Rush). The difficulty for the owners of the by then developed lots was that the 3 lots owned by Lawrence Waterhouse effectively 'landlock' the other lots, preventing access by vehicle to the other residents' car parking spaces. (The original development consent had apparently envisaged the building of a motel on the front lots, through which access to the other lots could be obtained.) 37Mr Lawrence explained in the witness box the difficulty that had thus arisen in relation to the proposed development of the 3 lots in question (9, 18 and 19) - first, that the Owners Corporation (whose consent was necessary for any fresh development application) insisted that the development be in the name of Lawrence Waterhouse (perhaps, though nothing turns on this, to ensure the provision of vehicular access to their lots as a condition of any development of the land held in Lawrence Waterhouse's name) (T 231.29) and, secondly, that he did not wish to prejudice the lease in existence between the company and the Owners Corporation in respect of the lots, and he was therefore "stuck with" the name Lawrence Waterhouse (T 232).
Land and Environment Court proceedings 38The upshot of this was that Mr Lawrence sought to proceed on the basis of the original development consent and commenced Class 1 proceedings in the name of Lawrence Waterhouse in September 2005 in the Land and Environment Court for that purpose. Port Stephens Council was joined as the respondent to those proceedings. Those proceedings were subsequently discontinued and then, on 17 November 2006, Lawrence Waterhouse effectively reconstituted the proceedings as Class 4 proceedings, seeking a declaration that the 1973 development consent had not lapsed (due to substantial commencement of the development). 39The capacity in which Lawrence Waterhouse commenced those proceedings becomes relevant when considering issue (i)(c). At T 228, Mr Lawrence denied that the reason that the Land and Environment Court case was brought by Lawrence Waterhouse was because it was the registered proprietor of land; rather, he said that it was because he could not file an application himself without the consent of the Owners Corporation. At T 227.33, Mr Lawrence said that the company was "technically" not the owner at that time because the land had been sold to him but accepted that it was the owner as per the rates notices (T 227.36). He also stressed that the development consent was over the whole of the land (not just the lots owned by Lawrence Waterhouse) (T 227). 40Mr Lawrence accepted that the company would have received a benefit (if it had obtained the declaration that had been sought as to the substantial commencement of the development in respect of the original approval over the whole of the site and not just lot 9) (T 231) but emphasised that such a benefit "could have been for any company". 41Mr Lawrence conceded that the Court was not told about the transfer (T 242), (though Mr Lancaster submits there was no need for it to be so informed). 42On 1 May 2007, Mr Lawrence swore an affidavit in the Land and Environment Court proceedings, expressly in his capacity as director and on behalf of Lawrence Waterhouse, in which he deposed that the "company purchased the site in or about 2001" (with no suggestion that, by reason of later events, the company had come to hold the legal title to the land on trust for him). By a further affidavit dated 11 April 2007, Mr Lawrence deposed to the existence of a 'continuous 12 months lease' granted by Lawrence Waterhouse to the proprietors of the strata plan which was then current for the 'motel carpark' (that presumably being a reference to the motel the subject of the initial development consent). Those affidavits form part of Exhibit O (the plaintiffs' cross-examination bundle). 43On 30 May 2007, Lloyd J dismissed the Class 4 proceedings. Lawrence Waterhouse was ordered to pay the Council's costs, as agreed or assessed. Those costs orders (which remain unsatisfied and in respect of which the Council ultimately based its winding up application) are what have, in substance, led to the present dispute. 44The irony of this is that Mr Lawrence was adamant in the witness box that he was happy to pay the Council's costs (at least once they had been properly assessed). At T 236.18, Mr Lawrence said "I was quite happy to pay their costs. I do not have a problem in paying costs if they are fair and reasonable"; at T 239.44, he maintained that "I had no intention not to pay Council their costs"; at T 239.48 that "I was going to pay their costs. I don't have a problem in paying their costs"; at T 244.15 that he was happy with the amount determined by the costs assessor (but adding that the costs assessor did not deal with his complaint as to the former solicitors' conduct of the matter); at T 244.19 that "I wanted to pay the amount. I had no problem with paying the amount"; at T 244.40 that "I didn't have a problem with paying them"; at T 252 "I didn't have a problem in paying council costs" and at T 252.49" I didn't have problem with them getting their costs". 45Had those costs orders been satisfied then it seems unlikely that matters would ever have reached the present stage and hence the adequacy of the accounting for intercompany arrangements may not have been called into review.
Costs Assessment/Appeal procedures 46The Council made application on 7 November 2007 under the costs assessment processes in this Court for the assessment of its costs of the Class 4 proceedings. Meanwhile, a holding appeal had been filed in respect of those proceedings on 25 June 2007 and, on 21 September 2007, a Notice of Appeal without Appointment and a Notice of Motion to extend the time for the filing of that Notice of Appeal were filed on behalf of Lawrence Waterhouse in the Court of Appeal. A Notice of Motion seeking a stay of the enforcement of judgment in the Land and Environment Court proceedings was also filed in early November 2007. (The former motion was successful, the latter not. Lawrence Waterhouse was ordered to pay the costs of both.) 47On 11 December 2007, the Council filed an application for security for costs in the Court of Appeal proceedings, that application being listed for hearing in February 2008. By affidavit sworn 11 December 2007 in relation to the Land and Environment Court proceedings, the solicitor then acting for the Council (Ms Dianna Grant) deposed (at [9]) to the receipt of two cheques from Champerslife in payment of the costs that had been ordered to be paid by Lawrence Waterhouse in relation to the post-judgment motions (i.e. not the principal costs order but costs relating to the unsuccessful application for a stay of Lloyd J's judgment and then for the successful motion for leave to extend time for an appeal from his Honour's judgment in relation to the question of substantial commencement of the development). 48Mr Lawrence responded to that affidavit (in an affidavit of 25 January 2008, on which he advised the Council he would rely in respect of the then forthcoming Court of Appeal security for costs application) in which (significantly) he deposed (at [30]) that the payment had been offered through Champerslife because "it [i.e. Champerslife not Lawrence Waterhouse] is the Development company that will be developing the site" and therefore that the payment had been made in that fashion to allow for a tax deduction in respect of the costs of the development application and approval ([30]). (This, I note, is inconsistent with the submission now made in the proceedings before me that Lawrence Waterhouse was not incurring costs in the Land and Environment Court proceedings as trustee for the beneficial owner, Mr Lawrence, but, rather, as a development company).
Deed of Charge 49Shortly after the security for costs application was filed (at least on Mr Lawrence's version of events) and in any event at some time between the filing of the application for security for costs and the day after that application was dismissed, a Deed of Charge was entered into under which Lawrence Waterhouse granted a fixed and floating charge (to a maximum of $1 million) to secure all present and future loans made to it by Mr Lawrence. (In his notes to the liquidator of February 2009 Mr Lawrence states that the charge was to secure funding for the appeal proceedings.) Lawrence Waterhouse agreed in the Deed that, in consideration of Mr Lawrence providing the sum of $102,000 and such other amounts as may be advanced from time to time by Mr Lawrence to Lawrence Waterhouse, the company charged its undertaking, assets and rights with the payment or repayment of such secured money. 50The Deed was dated (in handwriting) 27 December 2007. It was put to Mr Lawrence, in effect, that he had back-dated the document and that it was not brought into existence until after the security for costs application in 2008). The basis for the allegation that the charge had in fact been created in 2008 (and not in 2007) was that the copy document exhibited to Mr Lawrence's affidavit of 20 April 2010 had a typed date of 2004 date on its first page (explicable because it seems that it was prepared by reference to an earlier document in relation to a different transaction and that the number "4" in "2004" had been crossed out by hand and replaced with an "8" so that the date read "200[4]8"; but this was then crossed out and the handwritten date of "2007" was added. Mr Lawrence seemed at one stage to suggest that this was because he was dyslexic but in any event he denied that he had created the document in 2008 (T 229) and he was clearly concerned in the witness box as to why a 2008 date would be on the document. 51Mr Lawrence candidly said that the Deed was a document that was done at the time "because of an application by Port Stephens Council for security for costs" (T 229.49). He used the template of another company charge to prepare it (T 229). 52After his cross-examination had concluded, Mr Lawrence located and produced the original document (stamped at the higher rate) that showed no such reference to 2008. Having regard to that document, I do not accept the submission by Mr Marshall that I should infer that the charge was in fact created during 2008 (whether on 4 or on 5 February 2008, just after the motion for security had been dismissed) by reference to the handwritten annotation on the counterpart copy of the deed of charge. 53However, I do think that the evidence warrants an inference that the creation of the charge (and its registration only after the security for costs application was heard and dismissed) was in order to obtain priority for Mr Lawrence's personal position (over that of the Council) and an attempt to place assets of the company beyond the Council's grasp for the purposes of satisfaction by the Council of the outstanding costs orders in its favour. 54I reach that conclusion for two reasons. First, there seems to be no logic in Mr Lawrence taking a charge over land that, on his evidence, he already owned beneficially. Mr Lawrence accepted that the property that had been charged was his land ("that is my land" - T 235.49) but explained the grant of the charge on the basis that at the time the land was still in the company's name. (At T 241.4, Mr Lawrence denied that the charge was created or entered into for the reason that he did not think the transfer of the land to Minsden was valid.) Second, because of the timing of the charge. At T 235.34, Mr Lawrence agreed that he knew that if security was ordered to be provided then the company would be ordered to pay money into court (or to provide security in some other way) (though he went on to say (at T 235.40) that he did not have a problem with that). He accepted that he had resisted the motion for security because he did not want to pay the money (T 233.50 - 234.3). At T 235.12, Mr Lawrence said "I granted the charge because the security for costs application was made, when a security for costs application is made most of the time it is granted to the other side for security for costs. They were asking for $25,000. I believed they would continue asking ... so I granted the charge because I would then be pumping money into covering the security for costs each time". At T 241.2, Mr Lawrence said that the charge was "to protect the money I advanced to the company during the course of the appeal". 55As events transpired, far from Mr Lawrence pumping money into the company to enable it to meet demands for continual security for costs, Lawrence Waterhouse was either not put in funds to pay, or chose not to pay, even the first amount ordered by way of security, notwithstanding that there was then a charge registered in favour of Mr Lawrence (that he said had been registered for precisely that purpose).
Security for costs application 56There was no indication by Lawrence Waterhouse (or Mr Lawrence) at the time of the first security for costs application in early 2008 that the Nelson Bay land (registered in the company's name) was held by it other than as legal and beneficial owner. There was no mention of the 2003 Deed, by reference to which Mr Lawrence maintains that he was at that time the equitable owner of the land, nor was there any mention of the charge that Mr Lawrence said had been granted by then. Mr Lawrence agreed that at the time the Council's first security for costs application was heard on 4 February 2008, no company charge had been registered at ASIC (T 226.44 "no, I hadn't stamped the document") and that he had not told the solicitors or the Council or the Court of Appeal that he had been granted a charge by the company. Mr Lawrence (at T 235.15) agreed that nothing had been put before Court of Appeal by him (on the Council's application for security for costs) that would indicate that anyone other than the company had interest in the three lots but said that he did not think about anyone else's interest in the land in that context (T 235.26). Mr Lawrence's explanation for this was "No, because that was the security for costs application and Dianna Grant [the Council's then solicitor] in her affidavit in December made no mention of the real estate in Nelson Bay as at the time it was in the name of Lawrence Waterhouse." 57Mr Lawrence conceded in the witness box that a deliberate decision had been made not to register the charge until after the security for costs application had been determined. At T 242.15, Mr Lawrence quite candidly said "I was not doing anything in the course of the security for costs application between December and 2 March. It is not good business to do anything during the course of a security for costs application". 58Mr Lawrence was seemingly content to allow the Court of Appeal to proceed to determine (unfavourably to the Council) the initial security for costs application in the (mistaken) belief that the company owned beneficially an unencumbered asset available to meet any unfavourable costs judgment against it (something that did not take into account either the existence of the charge that Mr Lawrence says was granted to him on 27 December 2007 or the 2003 Deed). Mr Lawrence does not seem to have appreciated that, by not disclosing the existence of the charge (let alone the existence of the Deed entered into in 2003) he was, in effect, misleading the Court of Appeal as to the company's true financial position. 59On 5 February 2008 (the day after the Council's security for costs application had been heard and dismissed), stamp duty was paid on the charge. Mr Lawrence admitted that by 5 February 2008 he had decided that he would no longer pursue the transfer of the Nelson Bay land to him personally (T 250.25; 29) and instead he wished the land to be transferred to Minsden. (He said that this was done on his accountant's advice, following discussions in relation to his superannuation.) Mr Marshall submits that this would explain why Mr Lawrence thought it was appropriate to charge the land in his favour (there being no point in so doing if Mr Lawrence still wished to pursue the transfer of the land to himself), reliance being placed on this in support of the submission that Mr Lawrence had abandoned any rights in relation to the 2003 transfer in his favour. (It seems to me that there is force in the submission that if Mr Lawrence's entitlement to a beneficial interest in the property had not been abandoned, there would have been no point in charging the land as opposed to registering the transfer in his favour - particularly as the charge was to secure up to $1m of advances and Mr Lawrence, or his real estate agent(s), seems to have formed the view that the land was worth at least that much - having advertised it for sale in 2008 at $1.19m. However, I consider this in more detail later.) 60On 5 March 2008 the charge was registered with the Australian Securities and Investment Commission.
Costs assessment 61On 10 March 2008, the Costs Assessor wrote to each of the Council and Lawrence Waterhouse, advising that he had completed his assessment. A week later, on 17 March 2008, Mr Lawrence applied to have a transfer to Minsden in respect of the Nelson Bay land (for the stated consideration of $72,000) stamped at nominal duty and on 18 March 2008 the transfer to Minsden was executed and was stamped at nominal duty in accordance with s 18(3) of the Duties Act 1997 (NSW). 62On 6 May 2008, a certificate of determination of costs was issued in respect of the Council's costs as ordered to be paid in the Class 4 Proceedings. Those costs were assessed in the amount of $57,683.45. (The costs claimed had been nearly double that amount, a matter emphasised by Mr Lancaster in the context of the dispute which later arose as to the circumstances in which the Council had indicated it might be prepared to withdraw its winding up application against the company.) 63It is not disputed that on the formal assessment of the costs in May 2008, Lawrence Waterhouse became liable to pay the Council the sum of $57,683.45. This gave rise to what I have already referred to as the irony of the present situation. Mr Lawrence was only too keen to assure me that he (the controlling mind of Lawrence Waterhouse) was happy to meet the costs orders against the company. At T 237.12, he said that he had offered to pay the Council's costs, as assessed, but that the Council had broken off all communication (T 237.10). (However the only offer, as such, seemed to be put at the time of the winding up application itself.) At T 238.5, Mr Lawrence said that he did not pay the costs judgment obtained when the costs certificate was filed with the Local Court because he was considering whether he should apply to take the matter back to court. 64Mr Lawrence agreed (T 235) that at the time that the charge was granted he knew that the company had costs orders against it, the amount or quantum of which was in the process of assessment; that he considered the claim by the solicitors for costs to be excessive; and that he did not trust the costs assessment system to give him a fair outcome (although he then said that he considered the system to be good but to have a few flaws (T 236.1), a rather more charitable assessment than that expressed in a website set up under Minsden's copyright in 2009). (Mr Marshall adduced evidence - forming part of Exhibit O - of a website apparently set up by Mr Lawrence and copyrighted by Minsden in 2009 entitled PhoneLaw, in which assistance in advocacy against the costs assessment system, amongst other services, was offered - in particular, it was said that PhoneLaw would "strive to spot" abuses and unethical billing practices, referring to over 14 years having "continually highlighted the mental abuse within the system" and offering trained "interlectural [sic] counsel" - as supporting an inference that Mr Lawrence did not want to pay, or have his company pay, the Council's legal costs.) 65What was in fact done was that, on 30 May 2008, an application for review by the Costs Review Panel was lodged by Lawrence Waterhouse (as was its right) in respect of that costs certificate (this having the effect of suspending the operation of the certificate of determination pursuant to s 377 of the Legal Profession Act 2004 ( NSW)). That application was ultimately unsuccessful, in the sense that on 29 August 2008 the Costs Review Board confirmed the assessment of costs in the amount of $57,683.45. On 10 September 2008 the Council entered judgment for that sum against Lawrence Waterhouse in the Local Court based on the costs assessment certificate.
Further security for costs application 66Meanwhile, on 12 June 2008, the Council had filed a further Notice of Motion in the Court of Appeal seeking security for its costs of the appeal. (By that stage, the Council had become aware of the registration of the charge in favour of Mr Lawrence) and on 7 July 2008, Lawrence Waterhouse was ordered to pay $25,000 as security for costs of the appeal (by way of cash deposit or bank guarantee by 18 August 2008.) 67On the same date, Minsden registered the transfer to it of the Nelson Bay land. (As at 20 May 2009 there were no documents showing a receipt of $72,000 from Minsden (or anyone else) on the company's records between 1 March 2008 and 7 July 2008 (T 107).) For the defendants it is submitted that if, at the time, Mr Lawrence was the beneficial owner of the Nelson Bay land pursuant to the 2003 Deed, Minsden attained the transfer derivatively through Mr Lawrence and the transfer is valid. 68Lawrence Waterhouse failed to comply with the order for provision of security for costs and on 15 September 2008 the appeal proceedings were dismissed with an order that Lawrence Waterhouse pay the Council's costs. (Those further costs have not yet been assessed. The Council's legal officer, Ms Lisa Marshall, gave evidence that the solicitor/client costs of the appeal proceedings were in excess of $40,000.) 69McColl JA (in her judgment dismissing the appeal proceedings for failure to pay the security ordered - Lawrence Waterhouse Pty Ltd v Port Stephens Council [2008] NSWCA 235), referred to the circumstances in which the charge was created as follows: Mr Lawrence did not dispute that the effect of the charge registered on 5 February 2008 was to place an obstacle in the way of the respondent enforcing any costs orders of which it is currently, or may become, the beneficiary... I am concerned that the steps the appellant has taken either to burden its property and/or to dispose of it in circumstances where the respondent has been agitating to secure its costs of appeal appear to demonstrate that the appellant is doing all it can to expose the respondent to the risk of irrecoverable costs... The vague statements which Mr Lawrence made, after some pressure I should add from myself, to see whether the appellant could in any way meet the order for security for costs offers the Court no comfort that the order for security for costs will be complied with in a time which would accommodate an efficient hearing of the appeal, if at all
Statutory demand/winding up 70On 18 September 2008, the Council served a statutory demand on Lawrence Waterhouse pursuant to s 459E of the Corporations Act , in relation to the judgment debt comprising the costs as assessed of the Class 4 proceedings. Lawrence Waterhouse failed to comply with the statutory demand within the 21-day period allowed under the Act and on 17 November 2008 the Council filed an application for the winding up of Lawrence Waterhouse in insolvency relying upon the statutory presumption of insolvency arising by reason of non-compliance with the statutory demand. 71Prior to the hearing of that winding up application, there was correspondence between the parties in which a compromise was sought in relation to the winding up proceedings. By letter dated 9 December 2008 (on which reliance is placed by Mr Lancaster for a submission that the winding up proceedings or their continuation were an abuse of process), solicitors for the Council advised Mr Lawrence that the Council 'might' consider withdrawing the winding up application if it received a bank cheque in the judgment amount, plus a bank cheque for its costs of the winding up proceedings to that date (an amount of about $4,000) and (this being the contentious point) if Lawrence Waterhouse paid the sum of $40,000 into the solicitors' trust account to be held pending an assessment or agreement as to the amount of costs payable by Lawrence Waterhouse pursuant to the costs orders in the Court of Appeal proceedings. This was characterised by Mr Lancaster (incorrectly in my view) as a demand for moneys not then due and payable. 72The letter in question conveyed instructions from the Council that it "would consider seeking leave to withdraw from the winding up proceedings" in the following terms: We are instructed that Port Stephens Council would consider seeking leave to withdraw from the winding up proceedings against Lawrence Waterhouse Pty Ltd if the following amounts are paid by 4pm on 15 December 2008: 1.Bank cheque in favour of Port Stephens Council in the amount of $57,683.45 being the amount of assessed costs in the Land and Environment Court proceedings (excluding interest); and 2.Bank cheque in favour the Harris Wheeler Trust Account in the amount of $40,000 to be deposited into the Harris Wheeler Trust account against the costs incurred by the Council in the Court of Appeal, to be held until those costs have been agreed or assessed at first instance whereon the amount agreed or assessed at first instance will be immediately released to the Council, and any balance returned to you; and 3.Bank cheque for the amount of $4,323 being the Council's costs incurred in connection with these winding up proceedings to date (excluding counsel's fees). If the bank cheques for the amounts specified above are not received on or before 4pm on 15 December 2008 Council will proceed with its application to wind-up Lawrence Waterhouse Pty Ltd on 16 December 2008. 73Until the Court of Appeal costs had formally been assessed, there was no liquidated sum payable in respect of those costs. Nevertheless, in accordance with the Court of Appeal's orders there was a liability to pay those costs once agreed or assessed and what this letter seems to have been contemplating was a regime to secure moneys in respect of those costs until such time as the amount was determined. I do not read the letter in its terms as a demand. It puts Mr Lawrence on notice, in effect, that unless certain things happened the Council intended (as was its right) to proceed with the winding up application on the basis of the existing judgment debt. It was open to Lawrence Waterhouse to tender a cheque for the judgment debt or to pay that amount into Court (whereupon the Council might have been in a position to seek its costs of the proceedings and/or to seek the winding up on a different ground but would no longer have been in a position to rely on non-compliance with the statutory demand as a basis for moving on the winding up application). Lawrence Waterhouse, despite Mr Lawrence's many protestations to me of willingness to pay the costs judgment against the company, chose not to pay even the amount of the undisputed judgment debt. 74On 5 February 2009, on the Council's application, an order was made for the winding up in insolvency of Lawrence Waterhouse and the first plaintiff, Mr Shaw was appointed the company's Official Liquidator.
Present proceedings 75Mr Shaw (and this is the source of much of Mr Lawrence's complaints as to the conduct of the liquidator) then retained as his solicitors the same firm that had acted for the Council in the winding up application (and had acted from around February 2008 for the Council in the Court of Appeal proceedings), Harris Wheeler. (Another firm had acted for the Council in the Land and Environment Court proceedings and up to early 2008. The change of solicitors was apparently the outcome of a tender process for the provision of legal services to the Council conducted at that time.) The Council has been one of the (if not the) largest client of that firm. 76These proceedings were commenced by the liquidator and Lawrence Waterhouse shortly after the liquidator's appointment, orders being sought and obtained on an interlocutory basis to restrain Minsden from dealing with the Nelson Bay land. This was in the context that, at the time Mr Shaw was appointed as liquidator, Minsden was advertising the Nelson Bay land for sale for $1,190,000 through Ray White Port Stephens. Interestingly, the real estate agent's website had described the land as: Land Development Site DA approved for 3 unit development Close to shops and mariner [sic]. Offer placed and accepted awaiting in exchange. 77Mr Lawrence denied that he had instructed the agent to advertise the land in that way (although Mr Marshall pointed to Mr Lawrence's incorrect spelling of 'marina' in the witness box - T 267 - as suggesting that it was he who had given the relevant instructions). In particular, Mr Lawrence denied having instructed the agent to refer to a DA approval for a 3-unit development of the site (which he knew to be false) (T 268). There were in fact two website versions of the advertisement in question (one nominating as a contact within the real estate agency a Mr Dorrity, a copy of which was in Exhibit O, and one nominating Mr Mirosevich as the contact, that copy being Exhibit M), but both referred to a DA approval for 3-unit development and contained the words "Close to shops and mariner [sic]". Mr Lawrence said (at T 266) that Mr Dorrity had been retained in relation to the sale of other land at Salt Ash (held by the trustee of the superannuation fund) and denied that Mr Dorrity had been involved in the advertisement of the Nelson Bay land. (Nevertheless there was no challenge to the authenticity of the respective website publications.) 78Further, Mr Scott Newton (Mr Shaw's partner in the firm Shaw Gidley, who is also a registered liquidator and who had the day-to-day conduct of the present liquidation over the period up to November 2009) deposed (in his affidavit of 10 February 2009, Exhibit 22) to a conversation with Mr Mirosevich in which he says the latter confirmed in February 2009 that a "DA had been approved" (and that "it came through in the last couple of months"). Mr Newton was not challenged on that conversation. Mr Marshall submits that information as to the status of the development application could only have been obtained from Mr Lawrence, since the Council knew that that such an approval had not been given. (Mr Lawrence of course also knew that there was a problem with such an approval at that stage.) 79Reliance seemed to be placed on this evidence as indicating a willingness by Mr Lawrence to paint an inaccurate picture of events to suit his position (much as it was suggested he had later done in conveying to the liquidator the impression that the Nelson Bay land was land held on trust for his superannuation fund, in notes prepared in early 2009 to which I will refer shortly). 80It seems to me inherently implausible that real estate agents would have advertised the Nelson Bay land for sale by reference to an approved DA without some form of instructions or information from a director or other responsible officer of the vendor (Minsden). I consider the probability is that Mr Lawrence did give some such information to the agents in relation to the development of the land. However, it may be that there was a genuine miscommunication in that regard and ultimately I think little turns on this. 81After the filing of the Originating Process, Mr Lawrence was joined as a defendant to these proceedings and orders were sought in relation to a claimed debt owing by him to the company (first, in the sum of $88,228.46 as per the Amended Points of Claim filed on 8 February 2010 and later in the increased amount of $142,317.19 as per the Further Amended Points of Claim filed on 13 April 2010). 82By the time of the hearing (for reasons which I will explore below), the liquidator's position was that the amount owing by Mr Lawrence (or any other entity) to the company was unknown due to the state of the books and records of the company. In the Second Further Amended Originating Process and Second Further Amended Points of Claim filed on 13 December 2010, an account was sought of the amounts paid to and by the company over the period. (Although it was suggested that orders could be made for payment of particular amounts by reference to a revised schedule of payments proposed by the liquidator's office, ultimately what was urged by Mr Lawrence was that there now be a "full audit". 83From November 2009, the liquidator's employed manager, Mr David Irving, has undertaken the day-to-day conduct of the liquidation. Both Mr Newton and Mr Irving gave evidence at the hearing as to the obstacles they say they have encountered in the task of winding up the company (largely due to inadequacy of record-keeping).
Requests for documents 84Almost immediately following the appointment of the liquidator, pro forma (T 104.20) letters were issued (on 6 February 2009) to Mr and Mrs Lawrence, requiring the production of the company's books and records, and a report as to the affairs of the company was sought from Mr Lawrence as its director. On 27 February 2009 a similar letter was sent to the company's accountant (Mr Ronald Smith). That followed one day after a subpoena seeking similar documents was issued on 26 February 2009 to Mr Smith or his accounting practice. A notice to produce was issued on 25 February 2009 to Minsden. 85As to the liquidator's other queries, a subpoena was issued to Elliot Tuthill, and other enquiries had been made in due course at least of the Commonwealth Bank (T 107) and possibly (though there was no copy of any written enquiry) also of the ANZ Bank. On 25 May 2009 Mr Smith wrote (CB 390) saying he had no knowledge in relation to any other documents of the company. Mr Newton deposed to having made telephone calls to Mr Smith in relation to the documents sought by him. (Mr Smith, however, remained an elusive figure in these proceedings.) 86On 2 March 2009, Mr Lawrence responded to the requests made of him by the production of certain documents (those contained in CB 499-789, containing both ANZ and CBA company bank statements), copies of company tax returns going back to 2001, as well as unsigned financial statements apparently prepared by Mr Smith. (Insofar as complaint is made that Mrs Lawrence produced no documents, Mr Newton says that he assumed the material so produced was only by Mr Lawrence (hence his affidavit evidence that no documents were produced by Mrs Lawrence) (T 104). However, if Mrs Lawrence did not occupy an independent role from that of her husband in the company, then I accept that the production by Mr Lawrence may be expected to have encompassed any materials his wife also held.) 87Mr Lawrence also completed a pro forma document advising as to the records held by the company (a copy of which is Exhibit L). Mr Lawrence says that he completed this report with the assistance of, or in accordance with instructions given by, a member of the liquidator's staff (to whom he referred as Lucinda but who, having regard to the correspondence, is more likely to be a Ms Lucretia Sutherland). Mr Lawrence completed that report by noting the letters "N/A"s against a number of items. In the witness box he said at first that those letters meant "Not Available" but then conceded that in respect of some items the letters probably meant "Not Applicable" (T 237). 88Those items (either "not available" or "not applicable" as the case may be) included a large number of accounting records including item 11 (General Ledger posted and balanced to date of liquidation); item 12 (Journal with explicit narrations to all entries); item 13 (Cash Book Reconciled); item 14 (Purchase Journal and Supplier Invoices); item 15 (Sales Journal and Sales Invoices); item 16 (Petty Cash Book); item 17 (Wages Book, and Employee Records, including unused Group Certificates) and item 21 (Payment Vouchers). 89Items 18 and 19 (Debtors' and Creditors' Ledgers balanced and reconciled with General ledger) were initially marked "N/A" then the entries were crossed out and the items initialled (but it is not clear that any separate ledgers were in fact produced, Mr Lawrence's evidence as to how he completed this form being somewhat confusing). 90Also marked "N/A" was item 31 (Any other documents which relate to the Company and should be in the possession of the liquidator), relevant since Mr Lawrence seemingly did not produce personal records now said to be of relevance to the company's financial position (and to which he sought to refer when responding to questions in cross-examination - such as at T 280). Mr Lawrence expressed confidence that the records would be found in his MYOB entries and suggested that he would be able to identify exactly the entries from a "box of receipts" that he might have yet when he attempted to do so in response to particulars queries both that day and overnight he was unable to produce the relevant records. 91At the same time, on 2 March 2009 Minsden's lawyers wrote (in a letter marked without prejudice but tendered by Mr Lancaster as Exhibit 19) providing particulars in relation to the transfer of the Nelson Bay land. Curiously, that letter (which raised a conflict of interest issue) asserted that had the Court of Appeal been advised that the Nelson Bay land was in the name of Lawrence Waterhouse Pty Ltd then it would not have allowed the security for costs, yet went on to assert that Lawrence Waterhouse Pty Ltd had been unable to bring to the Court of Appeal's attention, on the security for costs application, that the company had contracted the sale of the property to Mr Lawrence. 92In the records initially produced, there were some documents described as 'MYOB style management accounting materials'. On 26 March 2009, Mr Shaw wrote to Mr Lawrence acknowledging the delivery of documents by Mr Lawrence and seeking the MYOB software for Lawrence Waterhouse. Mr Lawrence said that he spoke to 'Lucinda' of Mr Shaw's office, and then sent a letter to her [T 215]. (No such letter was able to be produced when a call was made for it during the hearing.) As far as the MYOB documents sought by the liquidator were concerned, (at T 215.48) Mr Lawrence claimed that he had offered to provide these "if I was given time to separate the companies, all the interlocutory companies and personal matters ... so that the liquidator would have just the Lawrence Waterhouse". He maintained that he had, in effect, already had a "full audit" comprised by the MYOB records since 2004 (T 281). 93Some MYOB records were eventually produced (only a few weeks before the hearing when Mr Lawrence served his most recent affidavit). Mr Newton accepted that he had received reconciliation reports apparently produced on MYOB (CB 695/700) (T 101) but said that he had no information as to how those reports had been prepared. 94(When he received no MYOB reports in respect to his request in 2009, Mr Newton reported the breach to ASIC but took no further action, noting in the witness box that it was the directors' duty to produce all the records of the company. Mr Lawrence at T 245.30 conceded that he knew he had a duty to produce all books and records to the liquidators and at T 245.37 agreed that the position as at the present time was that there was nothing else to produce (though he then sought to search for other documents in bags he had with him in the court when asked about particular invoices, which suggests that he may have other documents).) 95The report as to the company's affairs completed by Mr Lawrence recorded only one creditor (the Council) but noted Mr Lawrence as a secured creditor. (There was no notation of any debts owed to other companies in the Lawrence Waterhouse group.) 96Mr Lawrence also provided some notes (dated 12 February 2008) for the liquidator's assistance as to the company's affairs (T 210). Those notes (at para [18]) state that Lawrence Waterhouse provided the charge over the company in Mr Lawrence's favour to secure further funds for the Court of Appeal proceedings from the Land and Environment Court action and (at [19]), which Mr Lawrence agreed referred to the Nelson Bay land (T 211) state:

Initial report by liquidator 98Mr Shaw prepared an expert report dated July 2009 (ultimately not relied upon as such in these proceedings) as to the insolvency of Lawrence Waterhouse. (Mr Lawrence was referred to in that report as a creditor in the sum of $107,000.) 99Mr Newton (who had, as I understand it, been responsible within the liquidator's office for much of the preparation of that insolvency report) readily accepted in the witness box that the assumption made in the liquidator's report (para [10.3.13]) was that no additional income or funding was available from Mr Lawrence (T 122.11). (That assumption would seem to have been warranted at least in relation to any funding necessary to discharge the company's costs liabilities to the Council, since Mr Lawrence's own submissions in these proceedings make it clear that, unlike the position with other creditors, he was not prepared to ensure that Council's costs would be met). Nevertheless, Mr Lawrence's evidence (and the lack of any other pressing creditors in this period) supports the conclusion that as a general principle Mr Lawrence did provide funding for the company over the period up to at least 2008. 100Mr Newton accepts that no request was made of Mr Lawrence for details of his personal financial position (T 122.39) and none seems to have been proffered by Mr Lawrence. Mr Newton said that, as at 2008, for the purposes of the balance sheet test it was assumed that there were liabilities of the company not being met by Mr Lawrence (T 125). 101Mr Newton adopted only a small portion of the liquidator's initial report ([8.1] - [8.3], dealing with the adequacy of the books and records of the company) and accepted that, for the purposes of the present application, the only basis presently put forward as to the insolvency of Lawrence Waterhouse is the presumption arising from the alleged failure to keep proper books and records (though reserving the position as to whether, on a more complete review of the additional documents provided by Mr Lawrence since Mr Shaw's report, the company would be said to be insolvent - T 66.48).
Position as at 20 April 2010 102Preparation of a schedule of payments in and out of the company's bank account(s) was commenced by the liquidator's office towards the end of December 2009. Mr Newton accepted that as at December 2009, when the schedule of payments started to be prepared, he was (at least in part) looking to ascertain what Mr Lawrence's position was as a lender or borrower (T127.33). (Although some criticism seemed to be made of this by Mr Lancaster, criticism was also made to the effect that the liquidator did not enquire sufficiently as to Mr Lawrence's position as creditor of the company - which is at least partly the issue to which the task of preparing the schedule seemed to be addressed.) 103Mr Irving accepted that at a meeting with Mr Lawrence that took place after November 2009, a generally cooperative meeting (T 177), Mr Lawrence had brought with him some cheque books (relating to Champerslife) and had a highlighted schedule showing deposits by that company. Mr Irving said he had not considered at the time that these were necessary to review as he was not then aware of any dispute as to what money had gone into the account from the amounts he had already identified (T 197). 104On the basis of the material that had been provided by Mr Lawrence prior to 20 April 2010 (the matter then having been listed for final hearing before Palmer J on 22 April 2010), it seems that it was the understanding of the liquidator's office that the company had not engaged in any trading over the period leading up to the liquidator's appointment and that there had been few and infrequent transactions in which the company was involved (although in cross-examination it appeared to be conceded by Mr Newton there had been material available to the liquidator at that time that indicated deposits going into and payments going out of the company's bank account, which arguably should have cast doubt on the dormancy of the company at that time) (T 112). Mr Newton, nevertheless, said that he understood the company to have been dormant at that time (T 103.10) and prior to that to have been a landholder and developer (the only substantial activity of which in preceding period having been the Court of Appeal proceedings T 103). 105On 20 April 2010, Mr Lawrence produced 24 books of cheque butts (19 on a CBA account and 5 on an ANZ account) and 2 bank deposit books (one for each account), that disclosed the making of a large number of payments (in excess of 2,000) by Lawrence Waterhouse out of its bank accounts in an amount in excess of $1.2m since 7 January 2000. A list of those was prepared by Mr Irving but not until the course of the present hearing (that being Exhibit H). The cheque books and deposit books produced related to the 2001/2002 or earlier years (T 91.42); none were later than 2003 (T 91.46)). This led to the vacation of the April 2010 hearing. 106Orders were made, by consent, in late April 2010 as to the preparation of a schedule of all of the known banking transactions of the company - with Mr Lawrence to provide his comments on the items in question. This led to the preparation by Mr Irving of the schedule that, in one form or another, has been the subject of much criticism and argument before me. 107The first iteration of the Schedule was provided to Mr Lawrence for comment in late May 2010. Mr Lawrence (who during this time was representing himself), had a six hour meeting with Mr Irving on 11 August 2010 (conceded to be amicable) at Newcastle to discuss the contents of the schedule. (There were also some telephone conversations between Mr Irving and Mr Lawrence.) 108There nevertheless seems to have been disagreement between Mr Lawrence on the one hand and members of the liquidator's office (Mr Newton and Mr Irving) as to the manner in which the liquidator has sought to ascertain the financial position of the company. Mr Lawrence seems to be firmly of the belief that the liquidator should have approached this process by reference to the MYOB accounts prepared by his bookkeeper and then provided to the company's accountant for the purpose of preparing the company's financial accounts (and does not apparently accept there is a need for reference to supporting documents such as invoices or the like). Mr Lawrence emphasised that there was already a "full audit" in the MYOB records and it seems that he pressed to meet with the liquidator in order to explain his position in that regard. (However, the early request by the liquidator for a backup version of the MYOB accounting software used by the company was not met with a positive response by Mr Lawrence who seems to have wanted to extract material from the MYOB records before their production.) 109As to the MYOB accounts, Mr Irving's view was that what was provided with did not identify by whom or how they had been prepared and that there was no name or reference on those documents that could belong to anyone (T 199) and, at T 201.24, Mr Irving said that in all instances the particular MYOB accounting software entities appeared to be a "conglomeration of the various companies and Mr Lawrence personally" and that the bank reconciliation report did not assist as it just brought the accounting software up to date. 110In any event, what the liquidator's office was clearly seeking as at late 2010 was to verify the payments in or out of the company's bank accounts. Insofar as Mr Irving considered that the appropriate way to document the financial position of the company was by preparation of the schedule, Mr Lawrence seems to have taken issue with this. 111On 10 September 2010, Mr Lawrence's current solicitors (who had at that stage only recently been retained) forwarded to the liquidator's solicitors an annotated schedule containing Mr Lawrence's comments and corrections. At that stage, it would appear that the schedule represented the parties' respective positions in relation to the items in question based on that information then to hand. The result of that exercise seems to have been that, other than some broad brush responses by Mr Lawrence as to particular schedule items, and criticism by his solicitors of particular entries, the annotated schedule seems to have been left unamended from September 2010 until shortly before the hearing this year, when further documents were produced by Mr Lawrence.
Bank accounts maintained by Lawrence Waterhouse 112From the material produced by Mr Lawrence, it seems that Lawrence Waterhouse operated two bank accounts - an account with the Commonwealth Bank (that I will refer to as the 880 bank account) and an account with the ANZ Bank (the 565 bank account). (Mr Lawrence also had a personal bank account - the Commonwealth Bank 2071 account - and held various credit cards through which company and personal expenses were met.) Mr Lawrence said, in effect, that his living expenses were met over the relevant period through an overdraft held with the bank (T 271). 113The expenses paid by Lawrence Waterhouse for 8 or 9 years seem largely have been made on behalf of others (including for Mr Lawrence personally, Champerslife and Bulevi) mainly through the 880 bank account; the funds with which those payments were made seem to have come from Mr Lawrence or other companies in the group. The Lawrence Waterhouse 880 bank account thus seems to have been used to "wash through" all transactions. (The 565 bank account was used at least partly by Mr Lawrence's son as his personal bank account.) 114The thrust of Mr Lawrence's evidence seemed to be that the invoices or bills paid by Lawrence Waterhouse for others were not systematically kept or recorded by the company other than through the MYOB records (though he may have had some invoices in boxes or bags in cupboards in his house). He says that documents were provided to the company's bookkeeper (initially Booker Taylor) for the purpose of compilation of MYOB records, those then being delivered to his accountant, Mr Ronald Smith, in order to prepare the accounts. (It would seem, at least in relation to the accounts for the 2001-2005 years, that the financial statements were in some cases prepared some years after the event.) 115The liquidator maintains that Lawrence Waterhouse did not keep separate creditors' or debtors' ledgers, or a cashbook or other secondary accounting materials from which each loan account could be constructed at any particular point in time for the members of the Lawrence Waterhouse Group and Mr Lawrence personally with regard to Lawrence Waterhouse. Mr Lawrence's own report as to affairs concedes that there was no general ledger. September 2010 schedule 116Mr Marshall submits that this schedule (bearing Mr Lawrence's comments as at September 2010) recorded admissions by Mr Lawrence that Lawrence Waterhouse had made payments in respect both of his own personal expenses and expenses of Champerslife and Bulevi and that only $55,110.33 worth of payments were recorded in the schedule as having been made for Lawrence Waterhouse's benefit. 117When further documents were produced in April this year, this led to the preparation by the liquidator's office of a revised schedule (to the admission of which into evidence Mr Lancaster took objection, having regard to the lateness of its production, even though some of the revisions seem to have been to address criticisms that had been made on behalf of Mr Lawrence to entries in the previous version and, in particular, to entries relating to payments out of a bank account now conceded by the liquidator to be a personal bank account of Mr Lawrence - the 2071 account). I rejected the tender of the revised schedule but it was used as an aide memoire and Mr Lancaster cross-examined on its contents. 118Mr Marshall submits that the inclusion of the 2071 account entries in the schedule as payments made by the company (which the liquidator accepts was incorrect) is a red herring (noting that Mr Lawrence had not taken issue at an earlier time with these amounts and had given evidence of some of the transactions in that category as being on behalf of the company - in his response to items (c) - (g) of the 2071 payments in his 20 April 2010 affidavit.) 119At T 258, when it was put to Mr Lawrence that his initial response to the 2071 entries seemed to suggest that these payments had been made by the company (and not him personally) Mr Lawrence denied having made a mistake in saying that these were payments by the company but then (at T 259) accepted that he had been there saying in his affidavit was that these payments had been made by the company on his behalf (which now seems not to be the case). Mr Lawrence suggested that the confusion had arisen because in an earlier schedule this was described as an ANZ account. (What seems to me to be glaringly obvious from the to-ing and fro-ing in relation to the schedule entries in this regard is that without underlying records it is difficult, if not indeed impossible, for either the liquidator or Mr Lawrence himself to ascertain precisely what amounts are presently owing in relation to payments in and out of the company by Mr Lawrence or his related entities.) 120It was apparent that there had been errors both in the compilation of the schedule and the revised schedule (and that at least some of those were due to errors on the part of those in the liquidator's office, since it was accepted that as at the time of Mr Irving's original affidavit of 2 February 2010, he had been in possession of the 880 bank account cheque butts and bank statements for the period July 2006 to through to January 2007 (T 166) yet there were incorrect entries in respect of that period). 121In relation to the revised schedule, Mr Irving explained in the witness box that he had removed reference to entries on the cheque side of the personal bank account (2071) but by mistake had not removed the entries on the deposit side (T 158). He was adamant that nothing else in the schedule had changed (T 159/160) other than the updating of notations where a payment listed in the schedule could be matched in a subsequently received bank statement. However, it emerged in cross-examination that this was incorrect and that there were a number of differences in the revised schedule that had not been identified by him (T 164/165). Mr Lancaster highlighted those in detail in his submissions. 122Mr Irving said that he had prepared the schedule by reference to deposit slips (not cheque butts). He was unable to explain why cheques showing deposits into the company had not been recorded in the schedule (T 193). He accepted that it appeared that some $29,000 in cheques in the 2071 personal account had been paid into the company and were not in the schedule (in amounts of $8,000, $6,000, $5,000 and $10,000 respectively). After being taken to other records of deposits, it was put to Mr Irving that some $85,000 in payments to the company had been made that were not accounted for in the schedule balances. (Tellingly, perhaps, the question was put that these payments were in favour of Mr Lawrence or his related entities "or someone else" - T 197, therein highlighting the difficulty as I see it for the liquidator in determining to whom or by whom money might now be owed vis a vis the company.) Other entries included an $18,000 deposit by Champerslife and a $38,000 deposit on 11 November 2003 from a CBA bank account, to which reference had been drawn in correspondence from Mr Lawrence's solicitors prior to the hearing (when errors in the schedule had been pointed out). Mr Irving also accepted that AMP endowment payments for the benefit of Mr Lawrence appeared to have been paid into the company accounts. Mr Irving said (at T 199.23) that the liquidator accepted that there was a stamped deposit book indicating deposits made (though he said that expressed the opinion that some of the deposit slips appeared to be overwritten) but considered that there was doubt as to the basis of some of those deposits. 123Mr Lancaster had prepared a summary of the payments in and out of the account suggesting that there was an excess of payments into the company over those paid out for the relevant period of approximately $24,000, which Mr Newton was prepared to accept (assuming the mathematics of that calculation were correct) (T 176). 124Mr Newton accepted that Mr Lawrence had paid money from his own account or related entity into the company (T 124.39) but said he did not believe this was income of the company and that was why those amounts had not been so reflected (T 121.48). At T 200.39, Mr Irving agreed that it could very well be that there were more deposits into the company than payments out. 125The upshot of the evidence in relation to the schedule (both in its September 2010 form or in the form of the aide memoire) seems to be that little reliance ultimately can be placed on it for the purpose of proving what may be owed to or by whom among the various entities transactions relating to which flowed through the accounts. (The ANZ account is even more problematic since it emerged that this was an account that had been made available for the use of Mr Lawrence's son, whose earnings had been deposited into the account and who had made withdrawals from time to time for his own purposes out of moneys in that account.) 126Mr Marshall confirmed the liquidator's acceptance that there had been some inaccuracies in the schedule and that (by reference to the bank statements) there had been some additional deposits (including a deposit of $38,000 to the 880 bank account, although it was said that the identity of the depositor of that amount was said not to be known, there being no deposit book entry or other reliable information as to the source). Of the cheque butts produced in respect of the 2071 account, Mr Marshall noted that some refer to payments by cheque into Lawrence Waterhouse by Mr Lawrence. Mr Marshall submitted that all but one of those cheque payments were already in the schedule (that being a cheque for $8,000 dated 4 January 2005 said not to be matched by an entry in the bank statement for that amount). 127Mr Irving concedes (at T 175) that the schedule (revised or otherwise) cannot be relied on to determine how much money is owed by the company to Mr Lawrence or his related entities or vice versa. Mr Irving accepts that this was the original purpose of the preparation of the schedule but notes that the books and records produced did not allow for a starting point ( T175.9) and says that he cannot go back to the source documents to see how the accountant's information was compiled (as those source documents are not available). (The question as to whether there was a relevant starting point was somewhat confused. Mr Newton, having accepted that the loan accounts could vary from year to year and would not match directly the trust accounts (T 99) and that the loan accounts might balance at the start of the financial year, explained that in the initial year (which he assumed to be around 2001) there was no opening balance and said that it was zero. Mr Irving did not accept that there was a reliable starting point.) 128What I conclude from the evidence in this regard is that if one were to attempt to calculate as at today's date how much was owing by or to the company, it would be necessary to start with the first payment in or out of the company and then track through the debit/credit entries and that while it might be that at some point a line could be drawn (such as when accurate accounts were signed off that disclosed a balance on the relevant loan account) the liquidator is not satisfied that this is possible in the present case. 129Therefore, while it might not in some instances be necessary to go back to a zero balance, what would seem now to be necessary is that there be an agreed or verifiable starting point from which the calculation could be carried out. Hence, the proposition put by Mr Newton that bank records for the earlier period (whether or not statutorily required to be maintained beyond a 7 year period) would be of assistance in verifying the company's financial statements as at 2004 (T 92.20).
Valuation of Nelson Bay land 130There was conflicting evidence as to the value of the 3 lots comprising the Nelson Bay land. The liquidator obtained a valuation of the land from Mr Leigh Mather, a registered valuer with Herron Todd White, who provided a report dated 2 June 2009 valuing the land as at March 2008 and July 2008. Mr Mather's opinion, as tested in cross-examination was that the only, or the highest and best, use would be for the development of 2 duplexes on the land (though conceding it was possible that approval might be able to be obtained for a third, Mr Mather's view was that approval would be less likely the more units were sought to be approved for the land and that the additional time spent seeking to secure such approval would add to the holding costs of the land and he assumed that the planning process would take longer in such a case - see generally, T 73; T 83.76; T 85). Mr Mather did not see that there would be a market for the sale of individual car parks on the smaller two of the three lots if not attached to an individual unit (T 83) hence his valuation of the three lots collectively. 131Mr Mather was dismissive of the weight sought to be placed by Mr Lancaster on the location of the land (though conceding that it was on the waterfront side of the overall block of land, he did not consider it to be "waterfront" land as such - T 88; and had noted various negative aspects to the land in his valuation). 132As to the suggestion that there was an upward trend in the market for land of this kind, Mr Mather expressed the opinion that the market had been much stronger in 2005 than after the onset of the global financial crisis when there had been a falling property market in the area (T 81). He saw 2005 as very close to the peak of the market in the Nelson Bay area. He explained cogently the relative significance to be attributed to the evidence of sales frequency (which had decreased) as opposed to the median price of sales (which had shown an upward trend but which he said could be distorted by isolated sales) (T 88.15). 133Mr Mather accepted that his valuation had adopted the bottom end of the value range but said that this was because of the development constraints on the site (T 78). He had not valued the site on the assumption that a purchaser could acquire the remaining 8 units and develop the whole of the site (nor, I might add, was there any suggestion that this would be feasible in the short term) (T 83). 134Tellingly, Mr Mather noted that the block of land adjacent to the subject land (over which a development consent had been granted) had been on the market for some time - T 84; T 88.) He displayed familiarity with the area and I found his evidence balanced and cogent. He did not purport to have expertise in motel valuations (which he said was an area of specialist expertise in the industry) but nor does there presently appear to be a basis on which to conclude that the development of the 3 lots as a motel site is the most likely or highest and best use (since any purchaser would no doubt be faced with the history of the opposition to such a development in recent years). 135Mr Lawrence adduced evidence of a land tax valuation made in 2008 by another valuer, Mr Phillip Crane, in the context of an apparent dispute as to a land tax valuation in respect of the site. Mr Crane had valued the land as a single site at $2.420 million (Mr Lawrence having apparently objected on the basis of his opinion that the land was worth $100,000 only). The land tax valuation proceeds on the basis that the whole of the land is valued as a development site. It does not seem to me to be apposite to the exercise of valuing the 3 particular lots transferred to Minsden. 136In any event, the difficulty for Mr Lawrence in this regard seems to be that if I were to be persuaded that the land was worth significantly more than it has been valued at by Mr Mather, then its disposition for the notional sum of $72,000 (representing the benefit of the release by Mr Lawrence of any debts owed to him up to that amount as at the date of completion of the sale), would suggest that it had been disposed of at a serious undervalue (and therefore that if there was at the time no binding obligation on Lawrence Waterhouse to transfer the land to Mr Lawrence, then the fact that it acted at his direction to transfer the land to Minsden at that price would tend to support a conclusion that there had been a breach of directors' duties by Mr Lawrence and might sustain a claim under Part 5.7B that it was an uncommercial transaction, (assuming the company was insolvent at the relevant time) or an unreasonable director related transaction). 137The purpose of the evidence adduced by Mr Lawrence as to the worth of the land seemed to be to bolster his submission that the Council was improperly trying to acquire the land. As considered below, I do not accept that there is any evidence to support that submission. It is no more than speculation on Mr Lawrence's part. (The significance of his fervent belief as to the ulterior motives of Council is, however, that it makes it more likely that his conduct in causing the land to be transferred to Minsden in 2008 and in creating the charge over the land in 2007 was with a view to preventing the Council from obtaining the benefit of the costs order made in its favour in 2007.) 138Mr Mather appeared to adopt a standard and conservative valuation approach, valuing the land at $145,000 at the time of its transfer to Minsden. I accept his evidence. Minsden paid nothing for the land (the consideration stated in the transfer seemingly being referable to the discharge of the debts up to that amount said to have been owing to Mr Lawrence by Lawrence Waterhouse as at 2003). Therefore, unless Lawrence Waterhouse was bound to comply with the direction it received from Mr Lawrence, then even if it did obtain a benefit worth $72,000 by way of the partial release of debts owed to Mr Lawrence, it still disposed of the land for less than its then market value.
Criticism of Council/Liquidator 139Before turning to the issues for determination, I note that trenchant criticism has been made by Mr Lawrence, through his solicitor's submissions, both as to the motives of the Council in funding the liquidation (and these proceedings) and as to the conduct by the liquidator of his tasks in the winding up of the company (the latter reflected in the allegations now made in more detail in the amended pleadings). 140As to the position of the Council, Mr Lawrence is of the view that the Council is seeking to obtain possession of the Nelson Bay land (for itself or for a third party) (T 253) (perhaps in order to be able to carry out a development of the land that would address the access issues raised by the Owners Corporation) and seems to have harboured such suspicions since at least late 2007. In that regard Mr Lancaster drew my attention to the presence in court during the hearing of persons said to be representatives of the Council and of the Owners Corporation. Apart from Ms Marshall who gave evidence, the identity of the individuals in the court room was not a matter of which I had any knowledge other than by reference to Mr Lancaster's own submissions. In any event, ours is a system of justice in which public access to the court is an important feature. I cannot draw an inference, from the fact that the Council or the Owners Corporation members may be observing the conduct of the hearing in Court, that the Council has an ulterior purpose of seeking to obtain for itself or others the land that Mr Lawrence regards as his own. (Mr Lawrence's suspicion of Council's motivations and those of the liquidator was also seemingly reflected in the question raised as to whether Counsel appearing for the Council during the hearing was related to the Council's legal officer - a query that I note was answered in the negative.) 141It was submitted by Mr Lancaster that the cross examination by Mr Marshall "underscored, at times, that the Council wants the land" (though no reference was made to where in the transcript that was said to have occurred and it was not my perception of the cross-examination). 142Mr Newton was quite adamant that there had been no suggestion that the Council was seeking to offset its indemnity of the proceedings against the land in question (a question that I can only assume was put to Mr Newton on express instructions, involving as it did an allegation of improper conduct on the part of the liquidator) and that he would have regarded any such suggestion as improper (T 139). 143Nevertheless, despite the fact that Mr Lawrence mistrusts the motivation of the Council, it seems also to be the case (from the thrust of the cross-examination of the Council's legal officer) that during the time that there was a dispute as to the costs aspect of the matter there had also been ongoing discussion by Council officers with Mr Lawrence in the provision of pre-lodgement information in relation to his proposed development submission for a 3 unit development on the site (T 118), hardly consistent with some nefarious plan by the Council to get hold of the land for itself. 144At T 238.34, Mr Lawrence said that the "Council had a mindset that whatever I did they needed that land"; at T 238.37, that "the Council has since 2006 continually obstructed everything I've done"; at T 238.40 "The Council definitely wants the land 100%", at T 239, Mr Lawrence confirmed that he had believed in 2008 that the Council wanted the Nelson Bay land back and that that belief "could have developed towards end of 2007" and he agreed that by the time of the Court of Appeal security for costs application he had certainly held that belief (T 239.11); he said that he thought that the Council was trying "to get hold of the land or to knock me out in the Court of Appeal" (T 239.32). 145I do not accept that there is any evidence to support the conclusion that the Council (in funding the liquidator in these proceedings or in seeking to obtain security for costs in the Court of Appeal proceedings) was doing more than trying to recover payment for costs ordered against it and to obtain security for future costs that might be incurred. 146Mr Lancaster also criticised the conduct of the Council in continuing (if not in commencing) the winding up proceedings (after an exchange of correspondence in late 2008) for an amount greater than the assessed costs as being improper and an abuse of process. Mr Lancaster relies in that regard on the letter of 9 December 2008 from Harris Wheeler (acting for the Council), referred to earlier, as constituting a demand for payment not only of the assessed amount of costs but also for a further $44,323.00 in costs that were not then agreed upon or assessed and were therefore not due and payable. 147Reliance is placed on what was said in Repforce International v Master Lease Properties [2003] NSWSC 970 by Campbell J (at [16]-[18]), in circumstances where the creditor had available to it a bond on which the creditor could have had recourse in payment of the debt: 16 Here, the existence of the bond provides, in my view, a reason why the demand should be set aside. It is a commonplace that winding up proceedings are not to be used as a lever for gaining payment of a debt concerning which there is a bona fide dispute. Usually that principle is applied where the debt which is disputed is the debt which is the subject of a statutory demand. Here that familiar principle comes to be applied in a different context. As I have said, I assume for the purposes of this judgment that there is no dispute that, as to $9,500 or so, the debt which is the subject of the statutory demand is owing. Even so the statutory demand is being used as a lever for gaining payment of a different debt which is bona fide disputed . 17 What the landlord is seeking to do is to preserve the entirety of the $20,000 payable under the bond, as security for the debts concerning which there is a bona fide dispute, and which are currently the subject of a cross-claim in the Local Court. If the demand were not to be set aside, the landlord would be doing more than collecting, once the demand was complied with, a debt which is clearly due. It would be gaining an advantage, namely, the right to have an assured source of payment for $9,500 more of debt which is disputed, than it would have had if the winding up proceedings had not been brought. It is in this way that the present case involves the winding up proceedings being used as a lever for payment of a debt. 18 It is not an appropriate use of winding up proceedings to seek to gain that sort of commercial advantage. For that reason, I set aside the statutory demand. (my emphasis) 148Pausing there, the winding up proceeding was based on the non-payment of a judgment debt about which there could be, and was not asserted to be, any dispute. I am not persuaded that the letter from Harris Wheeler leads to an inference that the proceedings were for the purpose of obtaining a commercial advantage in relation to the entitlement that the Council also had at that time to pursue recovery of costs the subject of the further orders in its favour. (A different conclusion might have been drawn had Mr Lawrence in fact unconditionally tendered payment of the judgment debt but he chose not to do so.) 149Reference was also made to the admission by the Council's then solicitor (Mr Martin Ball) that the Council instructed him not to correspond with Mr Lawrence for a period in excess of 7 weeks (though I note that this was at a time before the appointment of the liquidator and could hardly be said to reflect on the latter's position) (T 149.28 -149.37). As to this latter point, I do not think it appropriate to express a view on this in the absence of a more complete picture of the discussions and positions adopted in the discussions at that time - it may be that the Council was, for example, genuinely of the view that there was no productive outcome to be gained from continuing discussions at that point. 150Mr Lancaster also referred to Intergraph Public Safety Pty Ltd v Tess Lawrence Media Services Pty Ltd (1996) 19 ACSR 523; 14 ACLC 1234, where Heerey J noted that: ... Winding-up proceedings are to be used for the winding up of companies, that is, paying off creditors and distributing whatever surplus remains amongst the shareholders. There is not the slightest indication in my mind that that was the true purpose for which this statutory demand was issued. Rather, I infer that it was issued for the improper purpose of exerting pressure on the applicant for the payment of what clearly was, and was known to be, a disputed debt. 151Here, I do not think that the evidence supports the inference that the statutory demand (or the subsequent winding up application) was for the purpose of improperly exerting pressure on Lawrence Waterhouse to meet costs liabilities or that there is evidence of a lack of clean hands on the part of the liquidator. It seems to me to have been a not surprising invocation of the statutory demand procedure in order to recover the judgment debt and the letter, in that context, offered a compromise in respect of proceedings properly on foot. 152The criticism made of the liquidator was broad ranging. Mr Lancaster submitted that this was a winding up "being conducted by a liquidator which has failed to understand that the company is part of a larger group of entities and who has failed to approach the director in anything other than an antagonistic manner whether justified legally or otherwise". 153Primarily, Mr Shaw was criticised on the basis of a lack of independence since he was being funded by the Council and represented by the same firm of solicitors as the Council (those solicitors being the ones for whom the Council was a major client) as well as the same barrister. Mr Newton, however, confirmed that the retainer of the Council's solicitors had not been a condition of the indemnity (T 139) and his explanation for the retention of the same firm of solicitors seemed to me to have commercial logic, in that they were familiar with the background to the matter (T 138.30). Mr Newton readily conceded that the Council had been provided with more information as to the progress of the matter than an ordinary creditor would be (but said that this was because it was funding the liquidator). 154Mr Lancaster submitted that there could be no real argument that the liquidator could be seen as independent on the basis that only one creditor had been recognised by the liquidator (the Council) and hence he was "arguably" was working only for that creditor's benefit. (A distinction was sought to be drawn between the situation where the creditor was also indemnifying the liquidator for his remuneration and expenses (as opposed to funding a specific set of proceedings). 155In some respects the argument as to independence based on funding by one creditor only seems somewhat disingenuous when Mr Lawrence does not appear to have been pressing for any recovery of amounts that might be owing by him or his related companies to Lawrence Waterhouse and does not appear to have been particularly helpful in assisting the liquidator to determine the relevant credit balances vis a vis those entities and the company. (Hence, this is not a situation where I think it could fairly be said that the liquidator had pursued claims against one creditor while ignoring potential claims against another.) 156The fact that these proceedings may be to the ultimate benefit of the funding creditor is not of itself something that leads to an inference of improper purpose. Doyle CJ, in the context of considering the discretion in relation to examinations by liquidators in Sandhurst Trustees Ltd v Harvey (2004) 88 SASR 519, noted at [51] that: The fact that a consequence of an examination order may be a forensic advantage to a particular class of creditors, or to a particular creditor, of the corporation, or to a particular person, does not of itself lead to the conclusion that the order was not made for a proper purpose. Nor does the fact that the order was made at the instance of that person or creditor. (my emphasis) 157Similarly, the fact that one creditor might seek to fund a liquidator to pursue, through causes of action available to the company, moneys owing to that creditor by a company in liquidation is not of itself indicative of improper purpose or a lack of independence on the part of the liquidator in receipt of such funding (as was implicitly recognised in Lo v Nielsen [2008] NSWSC 407; (2008) 26 ACLC 497 , where Barrett J was prepared to appoint a special purpose liquidator to be funded by a judgment creditor of the company there in liquidation in order to explore the recovery of assets for the benefit of the company - where the judgment creditor funding the special purpose liquidator would be likely to reap the most benefit from such a course if the recovery action were to be successful). 158That said, in Re Leisure Developments (Qld) Pty Ltd (in liq); Ell v Palmer (2002) 41 ACSR 276 Austin J expressly took into account (as relevant matters when assessing whether liquidator's examinations were an abuse of process) facts such as that the liquidator's investigations were being funded by the ATO; that the ATO had claimed an enormous amount of tax from the company in liquidation; and that one of the case officers of the ATO subsequently became the solicitor for the liquidator actively instructing counsel in the examination process and other proceeding (para [45]). 159It is recognised by the legislature that creditors may provide an indemnity for the cost of proceedings by the liquidator (since s 564 permits priority to be given over other creditors in distribution of the proceeds of successful proceedings. Ford's Principles of Corporations Law suggests (at [27.171]) that if a creditor or contributory wishes the liquidator to incur expense to investigate possible misfeasance or to recover assets for the company and there are not enough assets available to meet the expense, then the appropriate course is for the liquidator to require the creditor or contributory to provide an indemnity and, in some cases, provide security for the amount of the indemnity as a condition of the liquidator taking action (citing Re Northumberland Insurance Co Ltd (No 2) (1975) 1 ACLR 142.) 160Mr Lancaster referred to the test set out at paragraph 6.1 in the IPA Code of Conduct relating to independence (noting that a practitioner must be independent in fact and be seen or perceived to be independent.) Mr Newton agreed in the witness box that an indemnity of the kind that had been obtained from the Council in the present case (prior to the commencement of the winding up) was equivalent to an upfront payment of fees and that the latter is normally required to be disclosed (according to the IPA Code at 6.10). Mr Newton conceded that this fact was not disclosed to the Court upon the liquidator's appointment (T 139.9 - 139.26). He said that it was normally disclosed to creditors at a creditors' meeting (of which there has been none as yet). 161I take that into account but it does not persuade me that there has in fact been a lack of objectivity on the part of the liquidator's office in the conclusions reached as to the adequacy of books and records (particularly when the inadequacy of the records became apparent in Mr Lawrence's own inability to enlighten the Court as to various payments or transactions made by the company over the period). 162As to the liquidator's conduct in the course of the winding up, Mr Lancaster submits that despite the liquidator making an apparent concession in his expert insolvency report that Mr Lawrence may be a creditor in the amount of $107,000, the liquidator has never formally recognised Mr Lawrence as such (pointing to the Presentation of Statements and Accounts lodged with ASIC). Criticism was made of the fact that documents filed with ASIC had been erroneous (in that they failed to disclose the monies received by the liquidator) and it is said that, although amending documents were submitted in March 2011, no adequate explanation was given by Mr Newton as to why two such documents were submitted to ASIC incorrectly in the first place (T 130.1 -130.50 and T 131.1 - 131.13). 163Criticism was also made of the manner in which the liquidator or his office had prepared the schedule; had made errors in its compilation; had not amended it when issues were raised; and had made various assumptions in the initial insolvency report only to abandon that report. It was submitted by Mr Lancaster that the liquidator had not made any attempt to prepare financial statements other than those he attached to his insolvency report (which it was said "appear[ed] to be grossly and manifestly inaccurate", having regard to the documents available to the liquidator at the time of preparing the report). In this regard, I accept that criticisms may properly be made as to the inaccuracy of the schedules and as to the attention to detail given in that process. However, I do not see this as explicable by reference to a lack of independence on the part of the liquidator. It seems to me readily explicable by simple error on the part of those in the liquidator's office. 164Mr Irving explained that the account deficit identified in the first schedule ($88,228.46) of payments to and from Lawrence Waterhouse, then amended in the 12 April 2010 points of claim ($142,317.19), was simply the product of the differential between deposits and withdrawals (T 171) and accepted that between March 2010 (when the hearing was first vacated) and the 12 April amended pleading no further documents had been received (T 173) to explain the increased amount. (Although he explained the early figure as a 'draft', it must be noted that it formed the basis on which the liquidator had been prepared to verify the earlier pleadings - and this is the subject of criticism made by Mr Lancaster as to the basis on which the liquidator can have seen fit to do so.) I accept that criticism might well be made as to the basis on which it was alleged that the particular sums were due (at a time when investigations were hampered by the lack of records) but there is nothing to suggest that this was not the liquidator's belief (based on the state of those investigations) at the time. 165Mr Lancaster stressed, again no doubt on instructions, that it was the subjective view of the defendants (and particularly Mr Lawrence) that the appointment of the liquidator had not "changed" the entity with whom he was in dispute (his "opponent"). This was said to be so, particularly when coupled with the fact that Mr Lawrence had been negotiating with both the liquidator and the Council regarding the terms under which the winding up proceedings would be terminated and by reference to the fact (the subject of much complaint) that the solicitors he had previously been dealing with acted for both the liquidator and Council. 166Mr Lancaster submitted that it was 'remarkable' that the liquidator had not 'discovered' any other creditors (that itself being in contrast with the opening submissions in which it was said that there was only one external creditor whose debts had not been met by Mr Lawrence) and suggested that the present proceeding had been commenced only to recover the debt of the Council. (Even if it be the case that the proceedings would not have been instituted but for the Council's desire to recoup its costs, and hence its willingness to fund the proceedings, that does not indicate misconduct on the part of the liquidator.) The difficulty in the liquidator determining the loan balances as between the various companies in the group was reinforced by the inability of Mr Lawrence to explain various of the intercompany payments. 167It was further suggested by Mr Lancaster, as I understood his closing submissions, that the incurring of substantial costs, indemnified through public monies, was indicative of some improper purpose by the Council. It does not seem to me to be appropriate for me to opine as to the use of public funds in this fashion. The Council has had the benefit of legal advice and has chosen (as is its right) to fund the liquidator to recover what is an undisputed judgment debt and one that Mr Lawrence saw fit not to cause (or enable) the company to meet. 168The relevance of the allegations as to the lack of independence of the liquidator went, as explained by Mr Lancaster, largely to whether I could be confident in accepting the opinions proffered by the liquidator (or those from his office) as to matters such as the nature of the records that one would expect to be produced and as to the difficulty in obtaining an accurate view of the financial position of the company (but also as to the question of discretion). 169I do not accept that the evidence before me warrants any finding of improper conduct by the liquidator or those in his office. I consider it unfortunate that the matter seems to have escalated to the position that Mr Lawrence has come to regard the liquidator as his 'opponent' but there may be many reasons for that to have occurred. While there have been errors in the preparation of the schedule (and although the liquidator's office may be able to be criticised for not having earlier appreciated those errors or the need for further investigation of the relevant amounts in the schedule) there is nothing to suggest to me that these were the product of any intentional misstatement or concealment. I do not accept that the evidence shows that the liquidator's independence has been compromised by the making of errors in the compilation of the schedule(s). Issues for determination 170With the above in mind I turn to the issues for determination, grouped as I have outlined earlier. (i) Transfer of the Nelson Bay Land to Minsden
2003 Deed and Transfer 171It is submitted by Mr Lancaster that as at 2 January 2003, Lawrence Waterhouse had no equitable interest in the Nelson Bay land since, pursuant to the 2003 Deed, Lawrence Waterhouse had agreed to transfer the Nelson Bay land to Mr Lawrence for the forgiveness of $80,000 (being the then market value of the land) owed by Lawrence Waterhouse to Mr Lawrence; that the Deed conferred on Mr Lawrence an absolute interest in the land; and that Mr Lawrence was entitled to specific performance of the Deed and to direct Lawrence Waterhouse to transfer the land (on his behalf) to Minsden. Mr Lawrence had, in fact, been put in possession of all that was necessary in order to complete the transfer. 172Alternatively, Mr Lancaster submits that the Nelson Bay land was held by Lawrence Waterhouse on constructive or resulting trust for Mr Lawrence or for Mr Lawrence and Champerslife in interests proportionate to the parties' respective contributions towards the purchase of the land and the payment of amounts due under the Elliot Tuthill mortgage and that it was and remains subject to an equitable charge to Mr Lawrence or equitable charges to Mr Lawrence and Champerslife. 173Therefore, it is said, the transfer to Minsden was not an insolvent transaction within the meaning of section 588FC of the Corporations Act , was not an unreasonable director related transaction within the meaning of s 588FDA of the Corporations Act and was not an alienation of land within the meaning of section 37A of the Conveyancing Act. 174Logically, the first issue to be determined under this heading is whether, at the time of the transfer of the Nelson Bay land to Minsden, Lawrence Waterhouse held the land (as Mr Lancaster submits) as bare trustee. 175I accept that the documentary evidence supports Mr Lawrence's evidence that there was an agreement entered into between himself and the company (of which he was, of course the controlling mind, and so it is not perhaps surprising that there seems to have been no need for negotiation or discussion as to the agreement) whereby Lawrence Waterhouse would transfer to him the title to the Nelson Bay land in consideration for the discharge of any liability to repay up to $78,000 worth of loans said to have been made (and acknowledged by the Deed to have been made) by Mr Lawrence to the company. 176The fact that both the Deed and transfer were stamped suggests that they were intended to have legal effect. The fact that they were created and stamped before any dealings with the Council in relation to the Land and Environment Court proceedings or the development of the Nelson Bay land by the company occurred makes it difficult to see this as a part of a scheme to place the assets of the company beyond the call of existing creditors in relation to the land (and it would require somewhat of a crystal ball as to the events that later unfolded in relation to the costs orders to think that it was to put the land out of reach of future creditors such as the Council). There is no reason to believe that the transfer was not intended to be operative. 177There is an incongruity between the statement in the Deed of an intention to retire within the next two years (and hence the transfer of the land to Mr Lawrence) in circumstances where within that two year period it seems Mr Lawrence was taking steps, in the name of the transferor, to enable a development of the land to take place but it may be that this was to be his final development project and that it was for that reason that Mr Lawrence he wanted to acquire the equitable interest in the property. 178Nothing happened to put the outside world on notice that Mr Lawrence had acquired a beneficial interest in the property as the purchaser under an apparently enforceable Deed providing for the sale of the property to him. Of course, that is not of itself inconsistent with an intention on the part of both Mr Lawrence and the company that the land be transferred pursuant to the Deed. (It may well be that Mr Lawrence considered or was advised that there was no need to caveat his interest since he controlled the vendor company. That said, the fact that there was no caveat on the title disclosing Mr Lawrence's interest means that any entity dealing with the company would not have had the opportunity to ascertain the true extent of its interest in the property.) 179I find that as at the time the transfer was executed and stamped in 2003, Lawrence Waterhouse held the legal title to the Nelson Bay land on trust for Mr Lawrence.
Constructive or resulting trust in favour of Mr Lawrence or Champerslife 180Alternatively, it is submitted that the Nelson Bay land was held subject to a constructive or resulting trust for Mr Lawrence (or for Mr Lawrence and Champerslife) based on the principles analysed by Campbell J, as his Honour then was, in Black Uhlans v New South Wales Crimes Commission [2002] NSSC 1060; (2002) 12 BPR 22,421 and West v Mead (1984) 155 CLR 242; (1984) 56 ALR 483. In Calverley v Green (1984) 155 CLR 242 , Mason and Brennan JJ, at [263] said: If it is right to regard the payment of the mortgage instalments as having been made by the defendant out of his own funds and on his own account - that is, if he made those payments not intending the plaintiff ultimately to have the benefit of those payments - the defendant may be entitled to contribution from the plaintiff for her share of the payments and an equitable charge to secure the making of her contribution: see Ingram v Ingram (1941) VLR 95 at 102 at 102. 181As far as the interest now seemingly asserted (in the alternative) on behalf of Champerslife in the property (and not asserted in any documentation nor in any claim made by Champerslife, though it is also controlled by Mr Lawrence and presumably aware of the present proceedings), it is Mr Lawrence's evidence, in effect, that he provided all the money to fund not only Lawrence Waterhouse (which had little income yet paid the expenses for the other companies in the group and for Mr Lawrence himself) but also the other companies (such as Champerslife) in the group. Mr Lawrence said that all moneys to and from Lawrence Waterhouse came from him (though sometimes through other entities). 182Mr Lawrence's explanation of the role of Lawrence Waterhouse, as noted earlier, was that it was in effect the group banker and management company (but not developer) funded by him. If so, then the discharge of the Elliot Tuthill mortgage by Champerslife, on his instructions should be seen as another circumstance where Mr Lawrence (through loan or other funds provided to him or on his behalf to Lawrence Waterhouse) effected transactions that ultimately were on his behalf. It seems to me most likely, on the evidence of Mr Lawrence himself, that any moneys provided by Champerslife to discharge the Elliot Tuthill mortgage were by way of loan made to Mr Lawrence or to the company through him. There is no suggestion that the loan was intended to be secured or that the payment of funds was to give Champerslife an interest in the property. 183Any presumption of a resulting trust in favour of Champerslife arising out of its contribution to the discharge of the mortgage would therefore be rebutted in my view by Mr Lawrence's evidence. As to the position of Mr Lawrence himself, assuming (as is his evidence) that he funded the acquisition of the land by Lawrence Waterhouse (at least to the extent of his initial contribution and the later payout of the Elliot Tuthill mortgage), the difficulty I have with the submission that a resulting trust has arisen is (as was made clear by Gibbs CJ in Calverley v Green at [246]) that a presumption of resulting trust could only arise if the purchase money was provided by the purchaser "in his character as such", there distinguishing by way of example a contribution made by way of loan. Mr Lawrence's own evidence seems to contradict his claim that a resulting trust in respect of his monetary contributions to the purchase by Lawrence Waterhouse of the land (and it is inconsistent with the 2003 Deed transferring the beneficial interest in the land to Mr Lawrence). 184Thus Mr Lawrence's own evidence seems to me to displace any presumption of a resulting trust in favour of either Champerslife or himself and the subsequent acquisition of a full beneficial interest in his favour (by execution of the transfer) would seem to supersede any earlier resulting trust in his favour for a proportionate interest in the land whether from the payment of the moneys in relation to the initial purchase or the discharge of the mortgage. 185As to the suggestion that Mr Lawrence or Champerslife has an equitable charge over the Nelson Bay land for the discharge of a debt or other obligation, what must be established (for an equitable charge to have arisen) as noted in Halsbury's Laws of Australia at [295-2065] is that there be an intention to create a charge ( White v Conroy (1921) 21 SR (NSW) 257; 38 WN (NSW) 63; Southern Wine Corp Pty Ltd (in liq) v Frankland River Olive Co Ltd [2005] WASCA 236; (2005) 31 WAR 162 ). 186Here, there is nothing (at least prior to the creation of the charge in 2008) to record any intention to create a charge in respect of moneys lent to Lawrence Waterhouse in connection with the acquisition of the land or the discharge of the mortgage (assuming that the moneys provided for discharge of the mortgage were provided by way of a loan to that company) or to secure an interest by Mr Lawrence or Champerslife as purchaser of the land. 187I am not satisfied that any equitable charge arose in favour of Champerslife (and, as noted above, any interest in favour of Mr Lawrence arising from the contribution of moneys to the purchase price seems to have been overtaken has by the beneficial interest acquired by him by virtue of execution of the 2003 deed and transfer).
Abandonment of equitable interest? 188The next question is whether Mr Lawrence has since abandoned his contractual rights under the Deed and hence the equitable interest I have found he acquired in the property in 2003. 189At common law, the determination that a party has abandoned contractual rights (or an interest in property) is not one that is lightly made. It requires an unequivocal expression of an intention to abandon those rights or that interest (or conduct inconsistent with or repugnant to those rights). 190Insofar as a contract may be discharged by agreement between the parties as implied from the conduct of the parties (this commonly being referred to as 'abandonment' of contractual rights) the question is whether, by their conduct, the parties can be seen to have abandoned all the rights and obligations created by the terms of a contract between them. If so, the contract will be treated as having been discharged and the effect will be akin to a rescission of the contract ( DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; 19 ALR 223; Fitzgerald v Masters (1956) 95 CLR 420; Summers v Commonwealth (1918) 25 CLR 144). (By contrast, if, by their conduct, the parties can be seen to have abandoned only some of the contractual rights and obligations, the contract will be treated as partially discharged and the effect will be variation.) 191Where the parties have not expressly entered into an agreement to discharge an earlier contract, but a second agreement affecting the first is inferred from their conduct, the question whether the second (implied) agreement amounts to an implied agreement to abandon the first contract depends on whether the second agreement is substantially inconsistent with the first contract ( Carter on Contract at [32-080]). There must, however, be a clear intention of the parties to abandon the first contract. 192The question here is whether the conduct of Mr Lawrence and Lawrence Waterhouse in relation to the transfer of the Nelson Bay land is such as to evince a clear mutual intention to abandon the contract or an abandonment by Mr Lawrence of his equitable interest in the land. 193The passage of a long period of time, during which the parties have not taken any action in relation to a contract, can sometimes justify an inference that the contract has been abandoned. In Fitzgerald v Masters , Dixon CJ and Fullagar J (quoting Pearl Mill Co Ltd v Ivy Tannery Co Ltd [1919] 1 KB 78 per Rowlatt J at [82]) stated at [432]: There can be no doubt that, where what has been called an "inordinate" length of time has been allowed to elapse, during which neither party has attempted to perform, or called upon the other to perform, a contract made between them, it may be inferred that the contract has been abandoned ... What is really inferred in such a case is that the contract has been discharged by agreement, each party being entitled to assume from a long-continued ignoring of the contract on both sides that (in the words of Rowlatt J) "the matter is off altogether". 194However, it has been said that even inordinate delay will not be so significant as to amount to a basis for inferring abandonment in circumstances where one of the parties has acquired an equitable interest in property under the terms of the contract in question ( Fitzgerald v Masters) . Nor will delay be of great weight where one party has wholly or partly performed the contract ( Longtom Pty Ltd v Oberon SC (1996) 7 BPR 14,799 per Young J, as his Honour then was at [14,802]). 195There are four possible matters from which a conclusion of abandonment might potentially be drawn in the present case and I consider each in turn. 196First , there is the delay in registration of the transfer. The Deed and transfer were executed in 2003 but not registered in 2008. However, this delay in itself does not seem to me to be inordinate (reliance being placed by Mr Lancaster on cases where transfers were found to be registrable after a much longer delay) and it is difficult to see that the delay has been relied upon by the company so as to suggest that Mr Lawrence would have been estopped as at 2008 from asserting an entitlement to the equitable interest in the land. 197Second , there is the application to the Land and Environment Court that was made in the name of the company. In relation to those proceedings Mr Lawrence swore at least two affidavits (expressly as director and authorised to do so by the company) asserting the company's purchase of the land in or about 2011 and its subsisting lease to the strata owners of the land without any reference to his own beneficial ownership of the land. 198While potentially misleading by omission, it does not seem to me that this is conduct necessarily inconsistent with Mr Lawrence's position as beneficial owner. The equitable interest in the land was not of itself relevant to the substantial application then being made. (What it was clearly inconsistent with is Mr Lawrence's current assertion that Lawrence Waterhouse was bringing the application as "developer" - since in Mr Lawrence's own affidavit on behalf of the company in relation to the security for costs application, he says that the development company is Champerslife and that that is why Champerslife proffered cheques for payment of (some but by no means all) costs ordered against Lawrence Waterhouse in those proceedings). 199In this regard, the fact that the proceedings related to a development consent over the whole property and not just lot 9 (a point stressed by Mr Lancaster) seems to me to be of little relevance - Mr Lawrence was clearly aware that in the absence of consent from the Owners Corporation (who he described as aggressive and continually obstructive - T 243.6) he could not pursue a fresh application, hence the need to be able to proceed under the revived earlier development consent in the name of the company. 200Third , there is the entry into the Deed of Charge in 2008. This seems to me to be problematic. There seems no logical reason for the company to create a charge over land already beneficially held by the chargee. I accept that the charge extended beyond the land itself but the land was at that time the only tangible asset of the company. Nevertheless, it may be that there was perceived to be an advantage for Mr Lawrence then to be put in a position to could choose which way best to protect his interest in recovering amounts he said had been advanced to the company and that until enforcement of the charge or registration of the transfer he had not made an unequivocal election to proceed one way or the other. 201Mr Lancaster submits that the charge was a lesser interest in property and is not inimical to the operation of the transfer (though acknowledging that the maximum liability for which the charge was created was "ambitious") and says that it does not destroy the equitable interest Mr Lawrence held in the property. 202On balance, and not without some hesitation, I do not see this conduct as amounting to an abandonment of Mr Lawrence's rights under the Deed and transfer. 203Fourth , there is the evidence adduced (or more precisely not adduced) during the security for costs applications in the Court of Appeal as to any beneficial interest held by Mr Lawrence in the property. This is particularly troubling insofar as it suggests that the Court of Appeal was (unwittingly or otherwise) misled as to the asset position of the company (something which was highly relevant to the question as to whether security should be ordered). Mr Lawrence says that he did not think about his rights in this context. If so, then it seems only to have slipped his mind for a short time - since he promptly registered the transfer in March 2008, a month after the first security for costs application. The effect of this omission, was to present a picture (false on Mr Lawrence's current evidence) that the company had an unencumbered asset available to meet any adverse costs order in the Court of Appeal, so that there was no need for security for costs to be granted. The likelihood that Mr Lawrence concealed the fact that he maintained a claim to the beneficial ownership of the land, so as to bolster the resistance to an order for security for costs, is reinforced by his apparently deliberate decision some short time beforehand not to register the deed of charge during the course of the security for costs application as that would not be 'good business'. 204The omission of information as to Mr Lawrence's beneficial interest (in a context in which that material would have been of relevance to note) would arguably be consistent with an abandonment of any equitable interest in or right to acquire the land. It seems to me unlikely that Mr Lawrence had simply failed to recall the existence of a transfer that he promptly registered after the security for costs application had been determined. Further, while he may not have appreciated the significance of the transfer on that application, his conduct in relation to the charge shows that he was concerned not to portray the company as other than one holding the benefit of unencumbered land from which an adverse costs order could be met. 205However, to adopt a charitable view of events, it would also be consistent with a recognition that Lawrence Waterhouse had a right (as trustee, as it would be if there had been no abandonment of the contractual right to the land) to recoup out of the land the costs associated with the Land and Environment Court proceedings (such that the fact that the company held only the bare legal title would not preclude its ability to have recourse to the land to satisfy any adverse orders). 206Ultimately, it seems to me that if Mr Lawrence seeks to press his interest as equitable owner of the land, then the only manner in which he can do so consistent with him not having earlier presented a misleading picture to the Court of Appeal, is if it is assumed that he also accepted at the time the company's right to an indemnity for any costs liabilities incurred to the Council in the proceedings. I will give Mr Lawrence the benefit of the doubt in this regard and assume that had he turned his mind to the ability of the company to meet a costs order against it he would have accepted that the company could have recourse to the trust asset. 207I have concluded that the contractual rights in relation to the Nelson Bay land (and hence Mr Lawrence's beneficial interest in the property) were not abandoned.
Right of indemnification for costs incurred as trustee 208The question that follows from this is as to the company's right to indemnify itself for costs incurred in relation to the proceedings in the Court of Appeal at a time when it held the land on trust for Mr Lawrence. 209In Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at [367] the High Court said: ... It is common ground that a trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions: Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319. However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets ... it applies to the whole range of trust assets in the trustee's possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorised to use for the purposes of carrying on business: Dowse v Gorton [1891] AC 190. In such a case there are then two classes of persons having a beneficial interest in the trust assets: first, the cestuis que trust, those for whose benefit the businesses being carried on; and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the former, so that the cestuis que trust are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied: Vacuum Oil Co Pty Ltd v Wiltshire . The creditors of the trustee have limited rights with respect to the trust assets. The assets may not be taken in execution... but in the event of the trustee's bankruptcy the creditors will be subrogated to the beneficial interest enjoyed by the trustee: Vacuum Oil; Ex parte Garland ... These principles lend naturally to the conclusion that the beneficial interests which, by subrogation, the creditors whose claims arise from the carrying on of the business have in the assets held by a bankrupt trustee form part of the property of that bankrupt divisible amongst his creditors: Savage v Union Bank of Australia ... ; Jennings v Mathers ... ; Governor of St Thomas's Hospital v Richardson ... 210In Grossman v E Katz Manufacturing Jewellers (ACT) Pty Ltd [2004] NSWSC 1224, Barrett J, noting the entitlement of a creditor of the trustee to be subrogated to the rights of the trustee against the trust estate (and to stand in his shoes in respect of the right to be indemnified for the creditor's debt) emphasised that the trustee can establish no claim to indemnity - (and a creditor correspondingly can establish no claim to stand in the trustee's shoes) where the debt has been incurred otherwise than in the strict line of the trustee's duty and in proper exercise of his powers. There, his Honour noted that Re Suco Gold Pty Ltd (1983) 33 SASR 99; 7 ACLR 873 stands as authority for the proposition that the liquidator's costs, expenses and remuneration may, in a case where the company is trustee of a trading trust, be paid out of trust property, saying The reasoning was, in essence, that it is part of the duty of the corporate trustee to incur debts and to pay those debts; that once winding up commences, the trustee's duty to pay debts can only be performed through the liquidator; that the liquidator can function only if the liquidator's statutory right to be remunerated is accommodated; and that the resultant charges for remuneration must therefore be regarded as debts incurred in performing the duties of a trustee so that the trustee's right of indemnity is attracted. 211The indemnity relates to the whole of the assets of the trust, both corpus and income, including assets acquired by trading (Heydon and Leeming's Jacobs' Law of Trusts in Australia (7 th edn) at [2104] citing, among others, Stott v Milne (1884) 25 Ch D 710 at [715] and Dowse v Gorton [1891] AC 190). In Chief Commissioner of Stamp Duties v Buckle (1998) 72 ALJR 243, the High Court explained the rationale for the trustee's right of indemnity (at [49]): The entitlement to reimbursement and exoneration was identified by Lindley LJ as 'the price paid by cestuis que trust for the gratuitous and onerous services of trustees'. The right of the trustee has been described as a first charge upon the assets vested in the trustee, (Staniar v Evans (1886) 34 Ch D 470 at 477) as one upon the 'trust assets', (Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367. See also Re The Exhall Coal Co (Ltd) (1866) 35 Beav 449 at 452 - 453) and as conferring upon the trustee an 'interest in the trust property [which] amounts to a proprietary interest'. See Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 370. (my emphasis) 212For the purpose of enforcing the right of indemnity, the trustee "possesses a charge or right of lien over those assets" ( Octavo at [367]). The Court said (at [370]) that: The trustee's interest in the trust property amounts to a proprietary interest , and is sufficient to render the bald description of the property as "trust property" inadequate. (my emphasis) 213In Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550, Brereton J, considering the trustee's right of indemnity against trust assets, addressed the question whether each of the loans and securities in question was a transaction made by the trustee in his capacity as trustee , pointing out that in that case there was no evidence that the relevant transactions had been entered into in the company's own right rather than as trustee and that the fact that it did not disclose that it was acting as trustee, led to no inference that it was not, as that would have been an irrelevant matter to disclose and there was no obligation on the trustee to disclose that it was acting in that capacity. 214Mr Lancaster submits that because the Class 4 proceedings related to a development consent given in respect of the whole of the land contained in the Strata Plan, the application was not limited to the 3 lots owned by the company (reference being made to [3] and [4,] and further at [25] where the effect of the strata plan is explained). It is submitted that Lawrence Waterhouse had standing to apply as a representative (as did any of the proprietors) and that although the motel development would have primarily been over the largest of the 3 lots owned by the company, benefits (such as access) may have flowed to the lot owners generally. It is submitted that as the application did not deal solely with the lots held by the company, the application went beyond the scope of dealing with the company's land. 215Here, the only suggestion that Lawrence Waterhouse commenced the Land and Environment Court proceedings (and sought to preserve the ability to pursue a development of the Nelson Bay land) in its capacity as developer and not as registered proprietor of the land came in the course of this hearing. It is wholly inconsistent with Mr Lawrence's earlier sworn evidence. 216I consider that insofar as Lawrence Waterhouse was acting as registered proprietor of the land when it pursued the application in relation to the development of the Nelson Bay land, and the appeal from Lloyd J's decision, and held that land as trustee for Mr Lawrence, (and brought the proceedings on Mr Lawrence's instructions) then the company has a right to indemnify itself for the costs incurred in the Land and Environment court proceedings the subject of the appeal and the property was subject to a lien or charge in favour of the trustee for those costs when it was transferred (at Mr Lawrence's behest) to a company of which Mr Lawrence is the controlling mind and shareholder. Mr Lawrence's own evidence (in the earlier Court of Appeal proceedings) is inconsistent with there being a different capacity in which the company brought the Land and Environment proceedings and there is nothing to evidence any arrangement whereby (quite apart from its position as registered proprietor of the land) Lawrence Waterhouse (the much lauded banker for the group) was then to depart from its banking role in order to take on an independent development role. 217At the time of the transfer of the land to Minsden (at Mr Lawrence's direction), Lawrence Waterhouse was entitled, as trustee, to be indemnified by Mr Lawrence out of the Nelson Bay land in respect of any costs properly incurred in relation to the proposed development of the land (including any costs liabilities owed to the Port Stephens Council). Lawrence Waterhouse's right of indemnity is, according to Octavo and the many cases which have followed it, a proprietary beneficial interest in the land (the trust assets). As the land has been transferred to a third party, Minsden, and Minsden had actual knowledge (through Mr Lawrence) of the facts giving rise to the existence of the trust, the property is capable of being traced into its hands. Lawrence Waterhouse is therefore entitled to assert its right of indemnity and recoup the amount necessary to satisfy its costs liabilities by tracing the land into the hands of Minsden. 218Accordingly, it follows that the questions in (i)(a) and (b) should be answered in the negative but each of the questions in (i)(c) in the affirmative, namely that Lawrence Waterhouse held the Nelson Bay land on trust for Mr Lawrence and that at the time of its transfer to Minsden it was impressed by a lien or charge in favour of Lawrence Waterhouse for the costs orders for which it is liable in relation to the Land and Environment Court proceedings and the subsequent appeal proceedings.
Breach of fiduciary duty 219The remaining issue raised as to the transfer of land to Minsden is as to whether it acquired the land in the knowledge that it was transferred in breach of fiduciary duty by Mr Lawrence, and hence holds it on trust for Lawrence Waterhouse. 220The alleged breach of fiduciary duty is, as I understand it, the sale of the land for either no consideration or at an undervalue. Having regard to my finding on issue (i)(c), this question does not arise. Suffice it to note that had I found that the land was not (at the time of transfer to Minsden) held on trust for Mr Lawrence and hence required to be transferred to him or at his direction (subject only to the charge impressed on the land for payment of costs incurred in the Land and Environment and Appeal Court proceedings), I would have found that there had been a breach of fiduciary duty in the transfer of the land to Minsden (being a sale to a related entity at what I am satisfied was at best a consideration less than market value, even assuming that there was consideration in the form of a discharge of unidentified debt(s) owing to Mr Lawrence up to the stated amount of the consideration) and that Minsden took the land with notice of that breach.
Part 5.7B/s 37A claims 221Had I not been of the view that the Nelson Bay land was held on trust for Mr Lawrence at the time it was transferred at his behest to Minsden, then the questions as to whether the transfer of the land was a voidable transaction under Part 5.7B of the Corporations Act (or voidable under s 37A of the Conveyancing Act ) would then arise for consideration (posed as issues (i)(a) and (b) above). For completeness, I therefore consider what I would have concluded in that event. 222What is alleged first by the liquidator is that the transfer of the land to Minsden (and/or the steps taken to effect it) was a voidable transaction pursuant to s 588FE of the Corporations Act , on the basis that it was either an insolvent transaction within the meaning of s 588FC of the Corporations Act or an unreasonable director-related transaction within the meaning of s 588FDA of the Act. 223Pursuant to s 588FC, the transfer of land to Minsden will be an insolvent transaction if it is either an unfair preference (as defined in s 588FA) or an uncommercial transaction (as defined in s 588FB) of the company and either it was entered into (or an act or omission takes place for the purposes of giving effect to the transaction) at a time the company was insolvent or Lawrence Waterhouse became insolvent because of matters including entry into the transaction. 224If the transaction, or the act or omission that took place for the purpose of giving effect to it, is a cause of the company's insolvency, then this will suffice for the purposes of the last requirement ( Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243; (2005) 54 ACSR 410). As noted in Ford's at [27.230], to be an act giving effect to a transaction, the act does not have to give effect to the entirety of an earlier transaction and the phrase "for the purpose of" in s 588FC does not require that the purpose of giving effect to the earlier transaction must be the sole or dominant purpose ( Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535; 15 ACLC 1716). 225Pursuant to s 588FA(1), a transaction will be an unfair preference given by a company to a creditor if, and only if, the company and the creditor are parties to the transaction, even if someone else is also a party, and 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. 226Pursuant to s 588FB(1), a transaction will be 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 the benefits (if any) to the company entering into the transaction, and the detriment to the company of entering into the transaction, and the respective benefits to other parties to the transaction of entering into it, and any other relevant matter. 227As I understand it, the liquidator has focussed in this part of the claim on the transaction being uncommercial transaction not an unfair preference provision. In Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457; (2006) 57 ACSR 693, Gzell J noted that a purposive approach had been adopted (in Skouloudis Group Pty Ltd (in liq) v Planet Enterprizes Pty Ltd [2002] NSWSC 239; (2002) 41 ACSR 369 at [14]-[15] by Windeyer J) to s 588FB(1) of the Act. In Skouloudis , Windeyer J referred to the explanatory memorandum to the Corporate Law Reform Bill 1992 at [1034]-[1035], noting that the provision was specifically aimed at preventing companies disposing of their assets or other resources through transactions that resulted in the recipient receiving a gift or obtaining a bargain of such commercial magnitude that it could not be explained by normal commercial practice and endorsed what was said in McDonald v Hanselmann (1998) 144 FLR 463 at 470 per Young J, as his Honour then was, to the effect that where a purchaser was a related entity in the corporate sense, the court should look at the transaction far more closely and be less inclined to excuse a sale at an undervalue because of some commercial factor. (The fact that the transaction may not be at an undervalue would not of itself preclude a finding that the transaction was an uncommercial transaction, as noted by Pembroke J in Old Kiama Wharf Company Pty Ltd (in liq) v Betohuwisa Investments Pty Ltd [2011] NSWSC 823.) 228Here, the transfer of land to Minsden seems to me clearly to be uncommercial in that sense. No monetary consideration changed hands. The stated consideration was for an amount less than the market value of the land (and for less than what Mr Lawrence now asserts is the development potential of the land) and seems at best to be referable to a discharge of a debt owed to Mr Lawrence, the quantum of which was less than the then value of the land and the precise identification of which seems fraught with difficulty. 229As to the relevant time periods within which an insolvent transaction is voidable, as specified in s 588FE, an uncommercial transaction which is an insolvent transaction is voidable if entered into during the 2 years ending on the relation-back day (s 588FE(3)) or, if a related entity of the company was party to the transaction, it is voidable if it was entered into within 4 years ending on the relation-back day (s 588FE(4)). An insolvent transaction entered by a company with a purpose of defeating, delaying or interfering with the rights of any or all of its creditors on a winding up can be set aside within 10 years ending on the relation-back day (s 588FE(5)).
Insolvency at relevant time? 230What must first be determined, when considering the insolvent transaction claim, is whether the company is or is presumed to be insolvent at the relevant time. 231As Mr Lancaster notes, the presumption of insolvency arising under s 286 of the Corporations Act is the sole ground upon which the plaintiffs now rely to establish insolvency where that is necessary for the purposes of the voidable transaction claims.
Does the presumption of insolvency arise? 232Pursuant to s 286 of the Corporations Act Lawrence Waterhouse was obliged to keep written financial records that correctly record and explain its transactions and financial position and performance; and would enable true and fair financial statements to be prepared and audited and to retain those financial records for 7 years after the transactions covered by the records are completed. 233Austin & Black at [2M.286] note the purpose of this requirement is to prevent a company and its officers from "flying blind" as to the company's true financial position at any time (citing Manning v Cory [1974] WAR 60; (1974) CLC 40-140; Stratti Ocean and Earthworks Pty Ltd v Deputy Commissioner of Taxation [2003] NSWSC 509 at [8]) and that this section is predicated on the assumption that the records kept under it will be accurate (citing Kenna & Brown Pty Ltd v Kenna [1999] NSWSC 533; (1999) 32 ACSR 430 at [53]). 234"Financial records" are defined in s 9 to include: invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; documents of prime entry; and working papers and other documents needed to explain the methods by which financial statements are made up; and adjustments to be made in preparing financial statements. 235It has been held that the records required to be kept under s 286 include a balance sheet, profit and loss statement and a cash flow statement ( Australian Securities and Investments Commission v ABC Fund Managers Ltd [2001] VSC 383; (2001) 39 ACSR 443 at [44].) 236Austin & Black note that the keeping of a general ledger appears to be one of the "minimum requirements" of this section (referring to Van Reesema v Flavel (1992) 7 ACSR 225; 10 ACLC 291 at [295]; Love v ASC [2000] WASCA 404; (2000) 36 ACSR 363 at [59]) and that this requirement is not met by keeping the source material from which a set of books may be written up (again citing Van Reesema v Flavel and ABC Fund Managers Ltd) . They note: It appears that monthly management accounts of a company are not accounting records required to be kept under this section or its predecessors: Duke Group Pty Ltd (in liq) v Pilmer (1994) 63 SASR 364; 123 FLR 210; 15 ACSR 255; BC9400878 at 263. On the other hand, books, wage records and other documents prepared by an accountant were held to be accounting records required to be kept under a predecessor of this section in Caratti v R (2000) 22 WAR 527; 45 ATR 305; [2000] WASCA 279; BC200005748; see also Linfox Transport (Aust) Pty Ltd v Arthur Yates & Co Ltd (2003) 47 ACSR 261; [2003] NSWSC 876; BC200305676; Australian Securities and Investments Commission v Rich (2005) 216 ALR 320; 53 ACSR 752; [2005] NSWSC 417; BC200502844 at [284] ff. The concept of "financial records" does not extend to underlying contracts and transaction documentation, although the effect of those contracts and transactions should be reflected in company's financial records so that they are appropriately accounted for: Boulos v Carter, Re Tarbs World TV Australia Pty Ltd (2005) 220 ALR 572; 54 ACSR 827; [2005] NSWSC 891; BC200506576. 237In Van Reesema v Flavel, where the company in question did not keep any accounting records until after commencement of its winding up, the court rejected the argument that it was unnecessary to keep a general ledger or journal because of the limited number of transactions entered into by the company (and that it was sufficient to keep the source materials which evidenced the transactions) holding that "accounting records" include books of prime entry such as the cash book and journal, ledgers and also a range of source materials. 238Similarly, in Love v ASC failure to keep any adequate general journal was relevant to deciding whether a company has satisfied the relevant statutory requirement. There the court held that it was strongly arguable that failure to record loan transactions and to carry out proper account reconciliations provided, of themselves, sufficient evidence to establish contravention. 239Ford's notes that the common law supplements the statutory obligation to keep and maintain financial records by requiring directors, as part of their duty of care to the company, to establish and monitor appropriate internal financial control systems referring to Daniels (formerly practising as Deloitte Haskins & Sells) v Anderson (1995) 37 NSWLR 438; 16 ACSR 607; 13 ACLC 614. 240Mr Lancaster emphasises that there was no requirement that the company have audited accounts (as was conceded by Mr Irving) and that Mr Irving had indicated the financial statements prepared up to 2005 Mr Smith would be acceptable if signed by the director as to their accuracy (noting that there was no evidence that the liquidator had required Mr Lawrence to sign off on those accounts at any time in order to accept them - T 182.22 - 182.43). (In that regard, to be fair to Mr Irving, what I understood him to say was that if the accounts had been signed he would accept that the director(s) had agreed with them not that they had been properly verified.) 241The liquidator relies on the difficulties encountered in relation to the records of the company in two respects. First, it is said that Lawrence Waterhouse did not at any time since the 880 bank account was opened in 2000 have adequate books and records (and thus that at all times since the commencement of banking in 2000, Lawrence Waterhouse is presumed to be insolvent under s 588E(4)). (It is said that the difficulty in rebutting the presumption in this case is that there are no primary records in the nature of invoices paid by Lawrence Waterhouse to indicate on whose behalf expenses were paid.) Second, it is said that this evidence demonstrates that Mr Lawrence has contravened s 334 of the Corporations Act in failing to ensure that the company kept and maintained proper books and records, as required under s 286 of the Act and that the difficulty for the liquidator is that he does not know who the company is in position to collect outstanding loans from or to whom it owes money. 242As to the provision of documents, Mr Lancaster notes that Mr Lawrence provided a report as to affairs to Mr Shaw and also provided cheque books, deposit books, bank statements, financial statements for the years ended 2000-2004 and reconciliation reports for the financial years 2006 and 2005. (In relation to the provision of additional cheque books and deposit books prior to the hearing on 22 April 2010, Mr Lancaster notes that those cheque books and deposit books related to a period outside of the statutory period for the retention of records and have not been utilised by the liquidator except in the production of the revised schedule.) 243Mr Lancaster submits that the volume of documents retained by Mr Lawrence and produced to the liquidator, as well as the MYOB accounts, demonstrate that there were source documents that could be used to produce a set of accounts. 244Mr Newton and Mr Irving have both deposed to the view they formed, on the basis of the information then to hand, that the proper books and records had not been kept by the company and/or that Mr Lawrence had not delivered up all of the company's books and records in his possession, custody or control (since they had not been provided with documents of the kind that they considered would ordinarily have been kept by a company in compliance with the requirements of the Act). Mr Newton said in the witness box that missing were a number of documents he would expect to receive from both small and large businesses (naming the general ledger, cash book, purchases journal and wage book (T 134) as well as suppliers invoices (T 135)). 245At T 135.6, in response to a question as to whether he accepted that the company had acted as banker for Mr Lawrence and on his instructions, Mr Newton said: ... based on the financial statements it [Lawrence Waterhouse] acted as management, property management and development company and reflected expenses within that, that there are no invoices for, and you would expect based on those ongoing activities you would expect more post 2004. 246Mr Newton noted that payment of expenses relating to about eight properties were reflected in the profit and loss statements and said it would require more than cheque books, deposit books and bank statements to construct those secondary records (T 135.31), such as copies of invoices. It was put to Mr Newton, but he did not accept, that these were properties dealt with outside the company "and just recorded in the books of the company and reported" T 135.22 (though it is not clear whether by this it was suggested that this should obviate the need for proper record keeping). 247Mr Newton explained (at T 96.46 ff) that he did not believe the financial statements that had been prepared for the company were correct and that he had issues with the accounting for expenses on properties not owned by Lawrence Waterhouse (which expenses he considered should be reflected in loan accounts in favour of the company) including the property owned personally by Mr Lawrence at Davidson. 248Criticism was made of the liquidator (and his office) for not having exercised coercive powers available to liquidators to obtain missing company or other documents that may have shed light on the position. Mr Newton conceded that since May 2009 no further written requests had been made of Mr Lawrence for documents (T 100) (though I note that subpoenas had been issued to Minsden and Mr Lawrence; and requests made later of the bank) and that he had previously neither expressed his concern as to the balancing of the loan accounts to Mr Lawrence (T 100.5) nor carried out the exercise of analysing the financial statements as now explained in the hearing before me (T 100.2). 249Mr Newton's explanation was that though his concern as to the accounts arose in mid 2009 on the provision of financial statements (T 101.1), his understanding at that stage was that Mr Lawrence had provided all the company records he had in his possession (T 101.8) (since Mr Lawrence had not responded further when asked to confirm he had no other records (T 101.12)). 250Part of Exhibit O was a handwritten note prepared jointly by Mr and Mrs Lawrence explaining entries in the Lawrence Waterhouse deposit book. Mr Lawrence agreed that all of the entries in the document produced to the liquidator (CB 735) from 23 June 2001 to 9 February 2009 were written at the same sitting (T 211) and that says this was to "put the books in order" (T 214.15) not to record the amount of money he said he was owed (T 214.27) though he later accepted that this was part of the money he was owed. He says there was no need to write all of it on the document as the moneys were secured under the charge (T 214.47). 251At T 183.4, Mr Irving spoke with some evident frustration as to his inability to work out anything from the particular records provided "given they are a conglomeration of a number of entries going to one account". He said that he was unable to determine if Mr Lawrence is or is not a creditor and that the records do not permit a determination as to whether the parties owe or are owed money (T 183.3) referring to the large number of transactions "just washing through" the accounts (T 184). (In that regard his description of the movement of moneys through the accounts is not dissimilar to the account given by Mr Lawrence as to the use of the one bank account for the various entities - the difference being that Mr Lawrence seems to append an ex post facto characterisation of the payments as intercompany loans without any documentation to record that this is the case other than to the extent that there is a cheque butt annotation as to a payment.) 252The submission by Mr Lancaster seemed to be that the liquidator had sought to carry out an unnecessary financial audit (perhaps at the instance of the Council whose motivation has been put in issue in relation to the 'commerciality' of these proceedings) and unfairly to rely upon the non-retention of records beyond the minimum statutory 7 year period in which such records were required to be kept. 253It seems to me more likely on the evidence of Mr Newton and Mr Irving that the liquidator, faced with incomplete records, had tried to satisfy himself as to what exactly was the company's debtor/creditor position as at the time of the winding up and was not satisfied as to the reliability of the unsigned accounts for that purpose (hardly an unreasonable position in my view since Mr Lawrence was himself unable to explain himself how the later expense entries were to be allocated as between various companies in the group). It may well be that to some extent the liquidator's office at some point metaphorically threw up its hands and chose to rely on the presumption of insolvency rather than going to the expense of proving from inadequate records what the actual financial position of the company was. It seems to me that in effect what that does is to throw onto the very person who should have been responsible for the maintenance of adequate records the task of rebutting insolvency (but is not indicative of any improper purpose on the part of the liquidator). 254At T 221.21, Mr Lawrence confirmed that he was relying on accountant to look after group certificates, that his only wages came from Lawrence Waterhouse and that it was for the accountant to deal with the wages book (T 247). At T 221.34 Mr Lawrence confirmed that the other companies did not charge Lawrence Waterhouse for his services. At T 221.44 he explained that he was the 'developer' and that he would borrow against family home "or other properties that I owned. That money would then contribute to whatever company needed to carry its development out and I'd get remunerated at end of one to ten years". At T 282-283, Mr Lawrence explained his position as being that "I'm a development company. I buy raw land. The land doesn't have income. The only way I can fund is that accountant to do books and records and all by accounts keep track. Lawrence Waterhouse doesn't render invoices because it is a bank. I've got to have a bank where to deal with Elliot Tuthill". In other words, everything is run through the MYOB records in some amorphous fashion on Mr Lawrence's ultimate behalf and at some point Mr Lawrence left it to his accountant to decide what expenses or payments should be debited or credited to whom. 255So, for example, Mr Lawrence said that he did work for all his companies and that he received other benefits but that he left the question of disclosure of those benefits to his accountant (T 223). He relied on his accountant to prepare the tax returns (T 223.14); to manage his affairs (T 223.31); to allocate payments for the use of cars for business purposes (T 127.38) and he says that it was his accountant's advice to run the companies' affairs through the one company (T 242.20; T 250.29) (and that it was his accountant who had advised the Nelson Bay land to be put into Minsden's name and not him personally (in the context of advice as to how to sort out his superannuation). At T 268, Mr Lawrence said that he relied on his accountant to provide a summary of invoices; at T 270.41 that it was the accountant who had recorded the transactions "via Lawrence Waterhouse"; at T 279 that it was up to Ronald Smith to divide expenses up between the companies and that whatever invoices were rendered would be "up to his accountant" to work out; and at T 288.44 as to any shared expenses, it was the accountant's decision "where he puts it". 256What was missing, by way of explanation of the manner in which Lawrence Waterhouse had accounted for intercompany or group expenses, was anything from the accountant himself to explain what he had done or why it had been done in that fashion. 257That gives rise to the question whether a Jones v Dunkel (1959) 101 CLR 298 inference should be drawn against the defendants in relation to the unexplained failure to call evidence from Mr Smith in relation to the manner in which the accounts were prepared. Such an inference could only be drawn if there is a matter which calls for explanation by the defendants. The rule in such a case would permit evidence in relation to that matter to be given greater weight, and an inference or inferences to be more readily drawn, when the party who might have called evidence to the contrary has chosen not to do so. (In Commonwealth of Australia v McLean (1996) 41 NSWLR 389 Handley JA and Beazley JA said; "... The rule typically applies to strengthen or weaken an inference otherwise available on the evidence for the benefit of the party not in default." (my emphasis).) 258A Jones v Dunkel inference, if one does arise, would do no more than permit the inference that the uncalled evidence (or missing material) would not have assisted the defendants' case; it would not permit the inference that that the uncalled evidence was in fact damaging to their case. 259In Ziade, criticism was levelled at the liquidator for some mistakes in his report to creditors, for his lack of cash flow evidence, or the evidence of any expert expressing an opinion on solvency. Gzell J noted (at [49]: As Hodgson JA pointed out in Skouloudis v Planet Enterprizes Pty Ltd [2003] NSWCA 31 at [25] a liquidator is faced with difficulties if without funds, without cooperation from the liquidated company's directors, and with virtually no company records. His Honour stated that a liquidator could, in those circumstances, rely on Jones v Dunkel (1959) 101 CLR 298 ; [1959] ALR 367, but had to produce some evidence from which inferences could be drawn. 260Emphasis is placed by Mr Marshall on the fact that Lawrence Waterhouse did not keep a record of its loan accounts and that, in the absence of journals or ledgers recording the relevant payments, it is impossible to know at any point in time what amount the company owed to Mr Lawrence (or, for that matter, to Bulevi or Champerslife) or what amount was owed to the company by Mr Lawrence or other companies in the Lawrence Waterhouse group of companies. The liquidator's position is that, in the absence of such ledgers (and secondary documents to verify particular amounts) it is impossible to prepare an accurate balance sheet for the company. (That seems to be reinforced by the uncertainty on the part of Mr Lawrence even now as to how expenses borne by Lawrence Waterhouse for third parties were to be accounted for in the company books - an allocation he seems to have left entirely to his accountant who did not give evidence in these proceedings to shed any light on this process.) 261As I understand it, Mr Irving's difficulty with use of the schedule to determine an end balance was that it did not have a reliable starting date (since the position at day one was not known) (T 179) and that reliance could not be placed on the financial statements prepared by Mr Smith to assist in that regard because they were unsigned (T 180) and the source documentation did not establish as a starting point that the directors' loan accounts were as shown in those statements. Mr Irving accepted that the financial statements were not required to be audited. As to the significance of the statements being unsigned, he said that if signed he would accept that the director had accepted them as accurate but that for a liquidation of a company with unaudited accounts a liquidator would need to look for documents to support what was contained in the accounts (T 182.35). It is the lack of supporting documents in the present case that I understand has caused the difficulty for the liquidator. 262When asked what he would need to support the use of the unsigned unaudited financial statements at T 205.28, Mr Irving said: At least the working papers of the accountant. Given what I've described as the conglomeration of different entries within the accounting software. Any accountant would need to obviously separate those entires to try and draw up meaningful balance sheets and profit loss in relation to various entries...If you haven't got the source documents you would really need to have the working papers that would list... would split up ... [what] belongs to [what] 263I accept the evidence of Mr Newton and Mr Irving that the books and records produced are not themselves sufficient to explain the payments in and out of the company's accounts. Indeed, Mr Lawrence himself could not determine this (he resorted to the attribution to his accountant of the responsibility for allocation of expenses as between the relevant entities and there was deafening silence from the accountant in that regard). Mr Lawrence's response was at times an estimation as to the basis on which any expenses should be shared (in effect throwing up his hands and saying "whatever" - T 277). While it is said that Mr Lawrence has prepared accounts which explain such loans (and that it is simply that the liquidator does not wish to see them, reference being made to the 'guillotine' orders sought in relation to the adducing of further evidence), it must have been clear to Mr Lawrence from late 2009 that the liquidator was seeking the production of material to verify the accounting records he had provided and the explanation for the non-production seems to have been that Mr Lawrence disagreed with the manner by which the accounts were to be reviewed (he placing emphasis on the MYOB records). 264Insofar as Mr Lancaster submitted that the non-production of documents does not mean those documents were not kept or maintained, it seems to me that Mr Lawrence has had ample opportunity to produce whatever documents were maintained (or to adduce evidence from the company's bookkeeper or accountant as to what was kept or maintained but may no longer be available to be produced) and to the extent that he has not done so then he must bear the consequences of that decision. 265I consider there to have been a breach of s 286. A company setting itself up as the banker to a group of companies must keep records to disclose on whose behalf payments were made (and to what deposits into the company related) or it is at risk of not being in a position to determine what is owing to whom or by whom. The fact that these companies may be family or small related entities does not change that position. 266I find that the evidence establishes that Lawrence Waterhouse did fail to keep financial records as required by s 286 (and that Mr Lawrence was in breach of his obligations under s 180 and s 334 in that regard). Hence the rebuttable presumption of insolvency arises for the period in which Lawrence Waterhouse failed to do so. I accept that that period is at least the period for which the liquidator contends.
Is the presumption rebutted? 267Given the above finding, a presumption of insolvency arises at least for the period nominated by the liquidator. Is that presumption rebutted? Austin & Black [5.588E] note that rebuttal of that presumption is likely to require that the company's insolvency be affirmatively proved ( Levi v Guerlini (1997) 24 ACSR 159; 15 ACLC 913). 268It is submitted by Mr Lancaster that the schedule itself reveals that the director had a consistent pattern of obtaining funding for the company and his explanation was that such funds were usually secured against his personal real property. It is submitted that there was evidence of available credit. It is said that this pattern continued for almost 10 years according to the schedule. Mr Lancaster also pointed to the bank statements that show that at the relevant periods, the company had a bank balance that was generally in the positive (in addition to the credit facility available to Mr Lawrence through his Homeside account). 269Mr Lawrence says that he continually pumped money into the company and he seems to have done so by a mixture of funds from other companies (whether as loans or in advance of profit distributions out of developments carried out by them) or to some extent by payments from endowment policies or the like (he says that the overdraft was used for living expenses but some portion of it left available if needed it to contribute to an acquisition of property). There must, however, in the absence of even an informal arrangement between the various companies have been the risk that one or other would require funds and call for repayment on demand from Lawrence Waterhouse and there is no or little evidence as to Mr Lawrence's position to meet such a call. Moreover the fact that the arrangement was wholly at his whim seems to be borne out by the manner in which he responded to the Council's costs - determinedly adopting the position that he would pay all external creditors bar it (even while professing in the witness box on numerous occasions that he was happy to pay those costs). 270Mr Lancaster submits that the presumption in the present instance is rebutted by the fact that there is only one external creditor identified by the liquidator (namely the Council). (As I understand it this is tantamount to a submission that Lawrence Waterhouse was capable of paying its judgment debt to the Council but refused to do so.) (This submission is seemingly inconsistent with the submission also made that other related companies are or may be creditors of Lawrence Waterhouse.) 271In Lewis v Doran [2004] NSWSC 608; (2004) 50 ACSR 175 at [112]-[116], Palmer J held that a company could be considered to be solvent on the basis that it had available to it, as a resource from which debts could be paid, ongoing support from related entities or the directors and which had historically resulted in those creditors actually being paid. 272In Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61 it was said that the issue of insolvency is a question of fact to be decided as a matter of commercial reality in the light of all the circumstances. Gummow J, then in the Federal Court of Australia, in New World Alliance Pty Limited; Sycotex Pty Limited v Baseler (No 2) (1994) 51 FCR 425 observed that a situation must be viewed as it would be by someone operating in a 'practical business environment'. In Lam Soon Australia Pty Ltd v Molit (No 55) (1996) 70 FCR 34, where there was "financial support" from the parent company this was a relevant consideration in determining solvency. 273I accept that the evidence permits the conclusion that, for so long as Mr Lawrence (himself or through his companies) was providing support for Lawrence Waterhouse, then as a matter of commercial reality it was solvent.) (However, the corollary of that is that once Mr Lawrence withdrew his support the company could no longer be solvent unless it was in a position to liquidate its only asset (the Nelson Bay land) since it had no income. 274With some hesitation I would have held that the presumption of insolvency was rebutted for the period up to the withdrawal of support by Mr Lawrence (which I consider on the evidence to have occurred at least by late 2008 once the judgment debt was entered, noting that Mr Lawrence's own submissions make it clear that he was not prepared to act to ensure that the company was placed in funds to meet that judgment debt). 275The above finding does not affect the position in relation to the transfer of the land to Minsden (unless my conclusion that it was held on trust for Mr Lawrence is wrong and there was no obligation on the part of Lawrence Waterhouse to transfer the land, in which case the conclusion I have reached as to insolvency precludes a finding that the transfer of the land to Minsden (or the grant of the charge to Mr Lawrence) was an insolvent or uncommercial (and therefore voidable) transaction (although it would not preclude a finding that it was an unreasonable director-related transaction or otherwise voidable as a transaction with intent to defraud creditors).
Unreasonable director related transaction 276As to the claim based on section 588FDA of the Corporations Act, the transfer will be an unreasonable director-related transaction of the company if, and only if, the transaction is a disposition by the company of property of the company, and the disposition is made to a close associate of a director of the company, or a person on behalf of, or for the benefit of, a close associate of a director of the company, and it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction having regard to the benefits (if any) to the company entering into the transaction, and the detriment to the company of entering into the transaction, and the respective benefits to other parties to the transaction of entering into it, and any other relevant matter. 277When considering whether a reasonable person in the company's circumstances would not have entered into the transaction, regard is had to the matters referred to in s 588FDA(1)(c) (any benefits to the company of entering into it; the detriment to the company of entering into it; the respective benefits to other parties to the transaction of entering into it) and any other relevant matter. This is to be determined at the time of entry into the transaction (rather than by reference to the time at which the obligation to enter into the transaction may have been incurred) ( Austin & Black cite in this regard Re Kazar; Frontier Architects Pty Ltd (in liq) [2010] FCA 1381; (2010) 81 ACSR 158 at [23]). Thus, a transfer of the land to Minsden might be voidable under s 588FDA if it is unreasonable at the time it takes place, even if it was not unreasonable when the contractual obligation to transfer the land was incurred. 278An unreasonable director-related transaction is voidable if 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 or after that day but on or before the day on which the winding up began (s 588FE(6A)). Pursuant to s 588FF(4), a court may also make an order for the purpose of recovering, for creditors' benefit, the difference between the total value of benefits provided by the company under such a transaction and any value that it may be expected that a reasonable person in the company's circumstances would have provided. 279Here, however, the transfer in question is to Minsden. While it is an associated company of Mr Lawrence, (and Mr Lawrence is its director and shareholder), it has been held that s 588DA does not extend to a dealing with a company or trust where a director or his or her "close associate" is a shareholder or beneficiary of that entity ( Ziade ). 280In Ziade , Gzell J considered the position where mortgages had been given by the company to companies associated with a director of the mortgagor and held that these did not fall within the 'close associate' provisions saying (from [86]): So far as Welcome Homes and Ritz Cinema are concerned, I doubt that it could be said that their interests in the mortgages were created on behalf of, or for the benefit of, Mr and Mrs Ziade as the sole shareholders of those companies. In my view, the companies as separate legal entities gained the benefit of the grants of the mortgages in their own right and not for the benefit of their shareholders. I would not have thought that it was the intention of the legislature to include derivative interests constituted by value increases in shares of a company or trust benefited by the transaction. Had that been the intended result of the provision, one would expect the definition of a "close associate of a director" to have been expanded. The second reading speech to the Corporations Amendment (Repayment of Directors' Bonuses) Bill 2002 (Hansard, House of Representatives, Wednesday 16 October 2002, at 7677) does not support such a contention. What the treasurer said was: It will also apply to transactions entered into with third parties, where they are made on behalf of, or for the benefit of, either a director or close associate. This will prevent people avoiding the new provisions through restructuring or redirecting transactions. In my view, the benefit held by a third person that will bring a close associate of a director within the statutory provision must be a direct benefit and not a derivative benefit constituted by an increase in value of shares in a company or units in a trust. The same argument applies to the quarter interest of Janlz Constructions. True it is that the shareholders of Janlz Constructions were Mr and Mrs Ziade and Ziade Holdings and the apparent shareholders in Ziade Holdings were Mr and Mrs Ziade and their children. The children being a director of Ziade Investments and his siblings who were his close associates. But, again, I am of the view that the benefit of Janlz Constructions' quarter interest in the mortgages was for it, and it was the benefit to it that might have created some derivative benefit to the shareholders. For the reasons set out above, however, that is too remote to answer the description in the Corporations Act, s 588FDA(1)(b)(iii). (my emphasis) 281Applying the above reasoning, the claim based on s 588DA in relation to the transfer of the land would have failed in any event.
Intention to defraud creditors 282Section 37A of the Conveyancing Act provides that every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930 , with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced. 283As to the claim based on an intention to defraud creditors, the liquidator has the onus of proving a purpose to defraud any or all creditors. In Cannane (DM) v J Cannane Pty Ltd (in liq) (1998) 192 CLR 557; 153 ALR 163 (in the context of the bankruptcy legislation) the Court held that the phrase 'intent to defraud creditors' required proof of a real rather than a presumed intent to cheat creditors of their rights; a real intent 'by deceit to deprive creditors of something to which they are entitled' (though that proof could be by inference). As Ford's notes, an intent to defraud a contingent creditor, or even an anticipated creditor, is enough (citing Barton v DCT (1974) 131 CLR 370 at [374]; Re World Expo Park Pty Ltd (1994) 12 ACSR 759 at [771]; and the intent it need not be the sole intent.) 284Had I found that (as at 2008) the Nelson Bay land was not held on trust for Mr Lawrence, I would have found (for reasons similar to those I consider in relation to the charges granted in 2008) that the transfer was effected with the intent of preventing creditors (and in particular the Council) gaining access to the proceeds of sale of the land in order to discharge the debt(s) owing by the company. In particular, I consider that the timing of the transfer (so closely following the registration of the charge and in the context of the security for costs applications by the Council) seems to me to lead to such a conclusion. Mr Lawrence's explanation was that he was advised to transfer the land to resolve an issue as to his superannuation. That issue was not explained. There was no evidence from his accountant to say what it was or what advice had been given to Mr Lawrence. Mr Lawrence accepts that the land is not held by Minsden in its capacity as trustee of the superannuation fund. 285The manner in which Mr Lawrence has acted when faced with the prospect of the Council enforcing the adverse costs orders against the company (in circumstances where he has been distrustful of the Council and was clearly aware that the only recovery of those costs through the company would be by access to the land) is redolent of an attempt to put the assets of the company out of reach of the company's creditor. (ii) Charge 286Turning then to the claims made in relation to the 2008 charge granted in favour of Mr Lawrence, Mr Lancaster submits that, on its true and proper construction, the Charge secures an advance of $102,000 and any future advances made by Mr Lawrence to Lawrence Waterhouse. It is said that the company would be estopped from denying the acknowledgment contained in the deed of charge that there had been valuable consideration for the deed. 287I was taken in that regard to the judgment of Palmer J in Arena Management Pty Ltd (Admin App) (Rec and Mgrs App) and Anor v Campbell Street Theatre Pty Ltd [2010] NSWSC 957 where his Honour noted that the charge being created by deed further consideration was not required and that, in any event, Arena was estopped from denying the recitals in the deed as to the giving consideration. I accept that a similar conclusion would here be drawn. However, as I apprehend it, the submission that had been made by Mr Marshall was that the charge secured no debt (not that it was not supported by consideration). In that regard, there is uncertainty as to the final account balance as between Mr Lawrence and the company. However, the charge in its terms secured future advances and I would not have considered it void simply because the loan account as between Mr Lawrence and Lawrence Waterhouse as at that time may not have been in debit. 288The claim to set aside the charge under the provisions of Part 5.7B is a claim to set it aside as an unreasonable director-related transaction. Here, unlike the position in relation to the transfer of land, the security is given to Mr Lawrence personally (and hence the reasoning in Ziade does not apply to preclude such a claim). 289It seems to me that the grant of the charge is within s 588DA, given the uncertainty, as at the date of the charge, as to the then status of the loan accounts and the maximum liability permitted under the charge but in any event it is not necessary to determine this because I am of the view that it was in any event a charge granted for the purpose or with the intent of putting the company's land (on this hypothesis unencumbered by an equitable interest in favour of Mr Lawrence) beyond the reach of the creditor then pressing for payment of costs ordered against the company. 290The main aim of the charge was said to be to secure funding for the costs of the Court of Appeal proceedings and Mr Lawrence emphatically denied that it was to stop the Council 'getting its hands' on the land. However, Mr Lawrence had been of the belief since towards the end of 2007 (and was certainly of that belief by the time of the security for costs application) that this was the Council's intention. 291On Mr Lawrence's evidence, loans or payments had come in and out of the company for some years. The coincidence of the timing of registration of the charge and in particular the fact that Mr Lawrence concedes that he delayed registration of the charge until after the security for costs application (lest it prejudice his ability to resist the application, which can be the only conclusion drawn from his 'not good business' response in cross-examination) leads me firmly to the view that this was an attempt to put company assets beyond the reach of creditors. The fact that, once the charge was registered, the company then did not pay the amount subsequently ordered by way of security for costs reinforces the conclusion as it belies the suggestion that the charge was granted solely in order to secure advances for the provision of security in relation to the proceedings. 292I therefore draw the inference that the charge was granted with the intent to defraud the company's creditor(s) and accordingly I find that the deed of charge is voidable and should be set aside. (It is not necessary therefore to consider whether the charge is held by Minsden or constructive trust for Lawrence Waterhouse as was the alternative submission, although the reasoning explored above in relation to the transfer of land would lead to a similar conclusion on this issue.) (iii) Claim for damages/equitable compensation for breach of duty 293An important part of directors' responsibilities (and part of their duty of loyalty to the company) is the obligation to maintain proper financial records. This duty is embodied in the statutory scheme (s 344 of the Corporations Act ) and has been the subject of much judicial discussion. In Australian Securities and Investments Commission v Healey [2011] FCA 717, Middleton J stated, in relation to the obligation to keep proper financial records, (at [124]): In my view, the objective duty of competence requires that the directors have the ability to read and understand the financial statements, including the understanding that financial statements classify assets and liabilities as current and non-current, and what those concepts mean . This classification is relevant to the assessment of solvency and liquidity. Equally, a director should have an understanding of the need to disclose certain events post balance sheet date. It would not be possible for a director to form the opinion required by s 295(4)(d) without such an understanding. (my emphasis) 294A director who fails to take all reasonable steps (tested objectively by reference to the particular circumstances of each case, as explained in Healey at [150] and [179]) to secure compliance with Parts 2M.2 and 2M.3 of the Act contravenes s 344(1), which is a civil penalty provision. 295Ford's notes that, in its application to the duty to keep financial records, s 344(1) is similar in wording to the former s 591(1) and that it was a defence to s 591(1) if the person charged proved that he or she had reasonable grounds to believe, and did believe, that a competent and reliable person was charged with the duty of seeing to compliance with those provisions and was in a position to discharge that duty. 296In Australian Securities Commission v Fairlie (1993) 11 ACLC 669 Zeeman J held that the test in s 591(1) was an objective test which did not depend on the director's state of mind and was of the view that it was not sufficient for the managing director to employ a competent bookkeeper and to engage a consultant (no action having been initiated at board level). 297It is submitted by Mr Marshall, and it seems to me to be a matter of commonsense, that in order to be a responsible banker in a group of companies such as this, it would be necessary to characterise payments made for the benefit of others in the group and there might be a need to apportion the benefit of payments as between the recipients. To do so, it is said that a record of the primary documents (invoices or bills paid by cheque) would be necessary as well as a record of who had made payments into the company and the capacity in which such payments were made (or on whose account the payments were made). The scope for confusion becomes evident when it is noted that Mr Lawrence gave evidence that when Champerslife paid money into the company it did so as a lender to the company but in earlier evidence/submissions it had been suggested that a payment made by a related company, such as Champerslife, was a payment made on Mr Lawrence's own behalf and at his direction (and therefore Mr Lawrence not Champerslife was the creditor). 298Mr Lawrence says that he went to his accountant in about early 2005 and instructed him to prepare accounts of the previous period of (say) 5 years (T 216) and that Mr Smith did all the accounts and his bookkeeper all the cheque books (T 216.47). Mr Lawrence accepted that the company paid expenses on properties it did not own (T 219.44) (having been taken through a list of properties owned by him or other entities associated with him), but maintained that though the company did not own the properties it had an interest in them (though he couldn't explain what that interest was and said he "would have to go back to the books and find out what it is actually for" (T 220). When asked to identify what books and records, he said the "liquidator has got them"). 299Mr Lawrence's disbursement of funds without keeping records is said to amount to a breach of his statutory and fiduciary duties as a director of Lawrence Waterhouse. I am satisfied that such a conclusion should be drawn. The evidence does not satisfy me that there was in place a proper system for the keeping of books and records from which the intercompany dealings could be monitored and recorded. 300I note that Mr Lawrence's position seemed to shift from a submission that the company was solvent (because he had ensured that all creditors except the Council had been paid out) and had only one creditor or external creditor (the Council) apart from himself, and the position reflected in the submissions made as to what would be the case if Lawrence Waterhouse had a claim for reimbursement of expenses paid for his benefit as constructive trustee of the land (namely that any such amount would be shared pro rata with other creditors such as Champerslife and Bulevi, not hitherto suggested to be current creditors of the company). 301I was left with the impression that Mr Lawrence operated his various companies as little more than corporate emanations of himself and moved money through Lawrence Waterhouse's bank account for convenience or otherwise, but without a clear differentiation between the different entities as to what money belonged to which. 302As to Mr Lawrence's duties, I am satisfied that he is in breach of his duties by having failed to put in place a system whereby proper books and records were kept by the company so as to enable the company to rely upon and recover where applicable amounts owing to it by other companies within the group. The difficulty may be tested by asking how the liquidator could, for example, pursue Champerslife or Bulevi for moneys paid on behalf of those companies - or, conversely, whether he could be satisfied that amounts were properly owing to those or other related companies. 303The question then is what flows from that breach of duty. The liquidator's position is that Mr Lawrence, as the managing director and the controlling mind of the company, should account for all the payments made by the company (for which he cannot now account) and, in particular, that where the liquidator is unable from the records to determine how an allocation should be made between the companies then Mr Lawrence should be liable for those amounts. 304It is submitted by Mr Marshall that, for the purpose of evaluating equitable compensation in such a circumstance, a company director is treated as a trustee who is in breach of trust and that therefore a 'but for' test applies in respect of causation, and if causation is established the defendant is liable to restore the company to the position it would have in the absence of breach. Reference was made in this regard to O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 where the Court of Appeal concluded that the approach to causation which has been adopted for the trustee of a traditional trust should be applied to the exercise of fiduciary power by a company director. 305In Re International Vending Machines Pty Limited and the Companies Act (1962) NSWR 1408, Jacobs J said (at [1420]): The question still remains whether any of the duties of a director and of a trustee are alike and more particularly in this case it falls to be determined whether a director of a company, who disposes of property of the company in an ultra vires manner is liable in the same way as a trustee would be liable for disposing of trust property in a manner beyond the powers conferred on him by the trust instrument.... The act is wrongful; the director knows the wrongful circumstances and the director in this regard is in the same position as a trustee who disposes of trust property in breach of the law or of the terms of the trust instrument. 306In Mulkana Corporation Pty Limited (in liq) v Bank of New South Wales (1983) 8 ACLR 278 Powell J said: ... while directors are not, properly speaking trustees, but fiduciary agents, the range of duties and obligations to which they are subject or obligations which place them, in relation to moneys or property which are in their possession, or over which they have control, in a position analogous to, although not identical with, that of trustees ... (I)t is analogous since, just as, in such a case, trustees would be liable to recoup the trust for any loss, directors who misapply, or are parties to the misapplication of funds or other property of the company, are, subject to the court's powers to relieve them from so doing, liable to recoup the company for any loss thereby sustained. (279). 307Mr Marshall submits that Mr Lawrence's pattern of conduct was a misapplication of company property and a breach of the director's fiduciary duty analogous to the circumstances considered in O'Halloran , Mulkarna , and International Vending Machines . 308Insofar as it appeared that a distinction was sought to be drawn between companies of the kind here in question and larger public companies, I note that in Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, Tadgell J noted at [126], in relation to the statutory duty of care and diligence, that: As the complexity of commerce has gradually intensified (for better or for worse) the community has of necessity come to expect more than formerly from directors whose task it is to govern the affairs of companies to which large sums of money are committed by way of equity capital or loan. In response, the parliaments and the courts have found it necessary in legislation and litigation to refer to the demands made on directors in more exacting terms than formerly; and the standard of capability required of them has correspondingly increased. 309Having chosen to incorporate and to operate his business through a corporate structure, Mr Lawrence assumed the duties of a director that have been recognised as onerous duties. Mr Lawrence's mantra was that he left matters, such as allocation of expenses, to his accountant. That, however, does not address the question as to the proper performance of his duties as a director if he had no way of determining how much was lent to or owed by the company. 310As to quantum, it is submitted that Mr Lawrence is liable not only for the misapplied funds which can be identified, but also for those funds which were paid out of the company and cannot now be identified because of the failure to maintain adequate financial records, Mr Marshall citing Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211, where Street J (as his Honour then was) said (at [215]): Caffrey v Darby , supra, is consistent with the proposition that if a breach has been committed then the trustee is liable to place the trust estate in the same position as it would have been in if no breach had been committed. Considerations of causation, foreseeability and remoteness do not readily enter into the matter ... The principles embodied in this approach do not appear to involve any inquiry into whether the loss was caused by or flowed from the breach. Rather the inquiry in each instance would appear to be whether the loss would have happened if there had been no breach. 311In Maguire v Makaronis (1997) 188 CLR 449, where the High Court considered the question in the context of a solicitor's breach of fiduciary duty through non disclosure to the client, the High Court said that questions of foreseeability, remoteness and novus actus are irrelevant to the calculation of equitable compensation (See also Claremont Petroleum v Cummings & Anor (1992) 110 ALR 239 ) . 312Mr Marshall submitted (with some force having regard to Mr Lawrence's own evidence) that this was a case where Mr Lawrence treated his companies as one and where Lawrence Waterhouse paid the expenses for all (including personal expenses of Mr Lawrence and expenses of other companies) and that from time to time money was deposited by him to the company, such as payments from Mr Lawrence's AMP deposits. Criticism was not made as to the existence of an arrangement of that kind between the corporate entities and Mr Lawrence. Where criticism was levelled at the conduct was that it was said that, having treated the 880 bank account as an account for both Mr Lawrence and the group, and not having retained adequate underlying records to assist in determining what amounts were owing by whom, the difficulty is in now arriving at the correct position in relation to the loan accounts. 313For Mr Lawrence it is suggested that the starting balance from which to calculate loan accounts can be found in the unsigned financial accounts prepared by the company's accountant in April 2005. However, Mr Newton cogently explained why those accounts were unreliable and, insofar as they seem to be dependent on assertions by Mr Lawrence with no supporting documentation, I have some concern as to the ability to rely on them. Mr Smith was not called to give evidence to rebut any presumption of insolvency arising from the state of the records or to explain why the records were adequate for the statutory purposes. (Mr Irving criticised the MYOB as a "conglomeration" and said they were unhelpful when attempting to put together a balance sheet for the company.) 314It is asserted that Mr Lawrence did not comply with his obligations under s 483(1) of the Corporations Act in that he did not deliver up when required all the company's records. Such a conclusion would seem to follow from the piecemeal fashion in which those documents that were produced have seen the light of day. Mr Lawrence also maintains that there are other documents in his possession that are relevant to the payments made out of the company - yet did not see fit to produce them at an earlier time and was seemingly unable to produce them at the hearing before me. Mr Lawrence now says that he knows of no more documents of the company (although again he seems not to include personal statements in that, at least insofar as he said in cross-examination that he had a statement to match the entry for 'Buyers Edge' in the schedule at item 87 and seemed to think that this was something he could have produced had he known it was required - though the documents ultimately produced overnight were not relevant to the evidence that had been given). 315Mr Marshall submits that in circumstances where Mr Lawrence was given time by Palmer J to put on his evidence to support his comments in the schedule to explain the transactions; where a 'guillotine order' (criticised by Mr Lancaster as an attempt to preclude evidence from Mr Lawrence but more likely in my view to have been a concern to proceed expeditiously to a hearing) was ultimately made; where Mr Lawrence finally served an affidavit sworn in November 2010 and where, despite supplementing that evidence with his April 2011 affidavit, there are still no primary documents to explain numerous unexplained payments made by the company, Mr Lawrence (who bears the onus in regards to proving that the payments were made for the benefit of the company or that they can somehow be brought to account) has not satisfied that onus. 316The liquidator seeks an award of equitable compensation to the company for the director's fiduciary breach, such compensation to be assessed at the time of hearing and with the full benefit of hindsight and common sense. Mr Marshall submits that had there been proper accounts kept, then Mr Shaw could have gathered up any debts owing on the loan account and then made a distribution to the creditors, including the Council, who had (and pressed) valid claims against the company. As a creditor, Mr Lawrence would have had an expectation that his debts would be paid pro rata in the order of priorities under s 556. Mr Marshall submits that Mr Lawrence should fill all 'black holes' and that he then await the outcome of the distributions to creditors to see if there is a surplus that he would receive back as a shareholder of the company. 317Mr Marshall did hand up in closing submissions a schedule setting out the manner in which the liquidator suggested that certain items should be accounted for (which, needless to say, was not adopted by Mr Lancaster). However, while Mr Marshall submits that the 2010 schedule prepared by the liquidator (as annotated by Mr Lawrence and later revised) is the only reliable summary of Lawrence Waterhouse transactions (and says that the fact that it has no starting balance from which to calculate loan accounts is a problem caused by Mr Lawrence's failure to keep debtors and creditors ledgers at all, and his failure to keep primary records from which such ledgers could be derived), Mr Lancaster pointed to various errors in the schedule and the revised schedule which make me doubt that it is a suitable starting point. Mr Irving frankly conceded that the schedule is not in itself particularly reliable. 318Therefore, I do not consider it appropriate to make orders in relation to the payment of particular schedule items in respect of which either the party to whose account payments were made cannot be identified or that party is said to be Mr Lawrence personally. For completeness, however, I note that the suggested allocation was as follows:
A. Car Expense: $37,528.94 (BMW) - Items 1, 76, 115, 173, 216, 243, 875 (it is said that these should all be to Mr Lawrence's personal account since there was no evidence as to the arrangement in place between Mr Lawrence and group companies in relation to reimbursement of expenses incurred when using the leased BMW motor vehicle for company purposes)
AA. CBA 880 Bank Account - Unidentified Expenses: $85,659.36 (the liquidator submits that these expenses are unable to be identified and therefore should be to Mr Lawrence's account; Mr Lawrence's general response in relation to these items is that they are shared expenses of Lawrence Waterhouse, Bulevi and Champerslife. However, when pressed as to the basis on which it is said these should be treated as shared expenses, he had no real explanation and indeed his evidence was that he left it to his accountant to make the relevant allocation)
AB. Bateman's Bay property: $10,000 - Item no. 1732 (the liquidator accepts this is as accounted for as a company expense, it being a one-off transaction in relation to the payment of a deposit for a property transaction that did not proceed and was then refunded to the company)
AC. Booker Taylor: $3,262.50 - Items 1720, 1995, 1960, 1961, 2025, 2028 (Booker Taylor carried out bookkeeping services for the company. The question identified by the liquidator is whether the expense should be apportioned between the companies in the group or whether it should just be charged to the company as the banker. It is suggested that this should be treated as a company expense and apportioned pro rata as between the company and each of Mr Lawrence, Champerslife or Bulevi, who were also included in the conglomeration of accounts.)
B. Car Expense - Ute: $43,166.55 - Items 008, 0058, 099, 0895, 0898, 1336 (these expenses relate to the ute(s) driven by Mr Lawrence, for which expenses and lease repayments were made. The liquidator is prepared to accept Mr Lawrence's 80:20 assessment, i.e. that 20% of the use was private use by Mr Lawrence and therefore that he should account for 20% of these payments as being for his benefit.)
C. Darlington Drive, Hilltop Land when owned by Bulevi: $4,602.77 - Items 0079, 0123, 0135, 0199, 0204 (this is conceded to be an expense of Bulevi.)
D. Darlington Drive, Hilltop Land after transfer to Mr Lawrence on 20 May 2003: $2,965.42 - Items 0753, 0809 (these items relate to expenses incurred on an asset owned by Mr Lawrence and the liquidator says should be accounted for by him.)
E. Banksia Street, Hilltop Land: $135.05 - Items 0379, 0479 (the liquidator says that as the land was owned by Bulevi, the expenses are to its account.)
F. Elizabeth Way Hilltop Land: $88.04 - Items 0413, 0414,0477 (the liquidator says that as the land was owned by Bulevi, the expenses are to its account.)
G. Romney Avenue, St. Ives: $3,624.35 - Items 0014, 0036, 0382 (this is land owned by Mr Lawrence or Wayne Lawrence Pty Ltd (a company associated with Mr Lawrence) and the expenses are thus said to be for his personal benefit and ones for which he should account.)
H. Cambourne Road, St Ives: $3,479.87 - Items 0141, 0142, 0149, 0150 (these expenses were incurred in relation to a contract for sale in respect of land proposed to be purchased by Mr Lawrence personally and thus are said to be expenses for his personal benefit and for which he should account.)
I. Bindook Crescent, Terrey Hills: $11,006.12 - Items 0050, 0057, 0074, 0258, 0005 (this is land owned or exploited by Mr Lawrence, the expenses are said to be for his personal benefit and for which he should account.)
J . Gascoigne Street, Braemar: $6,276.40 - Items 0271, 0317, 0352, 0459 (this land is owned by Champerslife and the liquidator says the expenses should be treated as to its account.)
K. Biggera Street, Braemar: $6,113.03 - items: 0744, 0759, 0771 (this land was owned by Champerslife; was subdivided and Mr Lawrence became the owner of Lot 6. No submission is made in this regard but it is said that there needs to be some apportionment as between the expenses referable to each and if that cannot be identified then it would be treated as an unidentifiable expense for which Mr Lawrence should account).
L. Telstra Bills: $35,781.61 - Items 0749, 0956, 0975, 1001, 1162 (Mr Lawrence was the party with whom Telstra had its agreement for the provision of telephonic services but it is accepted that the Telstra invoices (not sighted by the liquidator) were paid by Lawrence Waterhouse. The liquidator proposes a pro rata allocation with these expenses treated in the accounts as being shared equally between each of Lawrence Waterhouse, Mr Lawrence, Champerslife and Bulevi).
M. AMP Expense: $42,581.57 - Items 1163, 1166, 1171, 1188,0031 (the liquidator accepts that Mr Lawrence had life or other policies with AMP and accounts with them and that deposits were made to Lawrence Waterhouse from AMP. It is submitted that these payments were for the benefit of Mr Lawrence and accountable for by him.)
N. Credit Card Payments: $274,559.29 - Items 0054, 0064, 0065, 0226, 02294, 0229 (the credit care payments were made for Mr Lawrence's Visa card, Gold Amex and Citibank. The liquidator submitd that there was no benefit to Lawrence Waterhouse in the reimbursement of these accounts and this should all be to Mr Lawrence's account.)
O. Elliot Tuthill Borrowings: $66,573.84 - Items 271, 281, 361, 424, 557 (the liquidator accepts that there were borrowings by Lawrence Waterhouse for the period 2001-2002 in relation to the Nelson Bay land. Any other borrowings from Elliot Tuthill are said to be those of Champerslife. As the payments appear to be loan repayments of borrowings by Champerslife either on instalments or as discharge, it is said that they should be to its account.)
P. Macquarie Bank Trust: $ 100.00 - item no. 278 (the liquidator says that there is no known information about this item other than it was to do with the Lawrence Superannuation Fund. It is submitted that it should be to Mr Lawrence's account.)
Q. Loan Repayment to Wayne Lawrence: $38,839.54 - Items 0640, 0685, 0755, 0776 (the liquidator submits that these expenses should be treated as payments to the direct benefit of Mr Lawrence and accountable for by him.)
R. Amex Tolls: $2,942.37 (the liquidator submits that this was a regular payment by Lawrence Waterhouse to an Amex card dedicated to payment of road tolls, that could have been of negligible benefit to the company and that the expense should be allocated one-third each to Mr Lawrence, Champerslife and Bulevi respectively.)
S. ASIC Charge over Champerslife: $405.00 Item 1156 (the liquidator says that the only charges granted by Champerslife were to Elliot Tuthill, processed on 22 August 2003, and to Mr Lawrence, processed on 23 February 2006. As the date of the transaction the subject of this item is 23 February 2006, and Mr Lawrence concedes it related to Champerslife, it seems to be suggested that this should be to the latter's account.)
T. ATO Super Return: $192.00 (the liquidator says that nothing is known about this transaction which is said to have occurred on 24 May 2006 and, as I understand it, would therefore submit that it be to Mr Lawrence's account).
U. Gunner Lawrence Exchange: $1,000.00 - item 2083 (the liquidator notes that this transaction was on 7 March 2007, after the appointment of the liquidator and he submits it should be paid by Mr Lawrence; Mrs Frances Gunner being Mr Lawrence's sister in law. Mr Marshall notes that Mr Lawrence is given credit in the schedule for Mrs Gunner's deposits into the account.)
V. Company Expense: $306.50 (this category is an expense that was previously thought not to be company expense, but is now conceded by the liquidator to be a company expense.)
W. VIP Personal Wages Expense & Wages Exchange: $131,919.96 (these expenses relate to the ANZ 565 bank account in respect of a business carried on by Mr Lawrence's son David. Mr Marshall submits that Lawrence Waterhouse was in effect also acting as banker for David Lawrence's business and points out that no primary documents have been seen. It is said that any deficiency should be to Mr Lawrence's account.)
X. Other Personal Wages Expense and Wages Exchange: Nil
Y. Shared Expense - Hilltop: $19,567.47 - Items 805, 807, 809, 849, 851, 853 (these expenses relate to different parcels of land at Hilltop owned respectively by Bulevi, by Mr Lawrence and by Bulevi and another company (Davhand) jointly. Mr Lawrence's explanation was that these items were shared expenses. Mr Marshall submits that as one piece of land is distinguishable from another the holding and development costs should therefore be able to be distinguished and that Mr Lawrence and Bulevi should be equally liable for these amounts.)
Z. 'No Pattern': $48,814.94 - Other items: 1034, 1096, 1102, 1129, 1201 (these are said to be random expenses which are unable to be identified and bear similarity to the expenses in category AA. It is submitted that Mr Lawrence should be liable for these expenses.) 319Mr Lancaster does not accept the above suggested allocations. He submits that the net effect of the identified errors in the schedules prepared by the liquidator is to turn the original deficit of $66,770.99 (calculated by the summary) into a surplus of payments in the amount of $108,539.81. He submits that as Lawrence Waterhouse had no source of funds other than through the defendants and their related entities (in addition to car parking licence fees of $300.00 per annum), the surplus must be attributable to the defendants or their related entities. Thus it is submitted that the schedule shows that moneys are payable to Mr Lawrence and his related entities and that reliance cannot be placed upon the document as being a useful forensic document. 320It is submitted by Mr Lancaster that the only real use to which the schedule can be put is to demonstrate the clear pattern that the company was used to pay for expenses, including personal expenses of Mr Lawrence and his related entities and that substantial payments were made into it on a regular basis with descriptions of the payments on the face of the cheque butts and deposit slips being 'loan'. 321Mr Lancaster submits that in circumstances where the liquidator now acknowledges that he is unable to calculate the loan accounts, a primary step should be to undertake that exercise. It is suggested that this would reveal that Mr Lawrence is a creditor of Lawrence Waterhouse in a sum that may exceed any obligation that Mr Lawrence may have to pay money back to Lawrence Waterhouse, particularly where some of the actions sought in the Points of Claim are actions of the liquidator only, whilst some of the actions are actions by Lawrence Waterhouse. 322For his part, by the close of his evidence, Mr Lawrence was calling for a full audit (although maintaining that there was already such an exercise contained in the MYOB accounts). It seems to me to be a remarkable situation that, in circumstances where it must have been apparent to Mr Lawrence that the liquidator was seeking to have an explanation as to the payments in and out of the company (and was not satisfied as to the explanation that these were all in the MYOB records), it is put at the end of a 5 day hearing that what should now be done is a full audit so that Mr Lawrence can prove his assertions (particularly when Mr Lawrence also tells the Court that he does not have any further documents to assist in that regard). 323Nevertheless (and leaving aside the question of who should bear the costs that would follow from the above course), I consider that the question of damages/equitable compensation should be referred to an associate justice (or referee) for the full audit that Mr Lawrence now suggests is necessary to determine how much is owed to the company (so that as assessment can be made as to the loss suffered if the company is unable now to recover it due to the state of the records). That determination cannot be made on the basis of the schedule (which Mr Irving concedes not to be reliable in the absence of a more complete analysis of the records made available). 324While I consider that the schedule prepared by Mr Marshall puts forward a sensible way of addressing the various categories of items, I do not consider that it can be adopted in that form given some of the discrepancies in the schedule and given that it is not known whether a demand for payment of some or all of the amounts would be met by the related companies on whose behalf the payments were made. (I am inclined to think, however, that an order could properly be made, in the abstract, on the basis of the schedule for reimbursement of payments apparently made on Mr Lawrence's personal behalf (subject to a set-off for moneys demonstrated to the satisfaction of the associate justice to have been lent by him to the company) but this is a matter on which I will hear further submissions.) (iv) Exculpatory relief 325As to the exculpatory relief sought, it is noted by Mr Marshall that this is not available for a claim for breach of fiduciary duty. Insofar as it is raised as a defence to the civil liability provisions Mr Marshall does not take issue with the evidence of Mr Lawrence as to his ill health but submits that this is as a case where there was an unskilled, unsuitable and unconscientious single director. It is submitted that Mr Lawrence should bear the responsibility for the problems that have arisen as a result of the manner in which the accounts of the company were kept in relation to its role as banker for the group. 326Reluctantly, I am forced to conclude that Mr Lawrence has been prepared to adopt whatever position seemed at the moment best suited to protecting his company or his assets from the need to meet the costs liabilities incurred by the company on his instructions and for his benefit. I see no reason to assist that endeavour and to the extent that there is a discretion to be exercised in that regard it seems to me that it lies in favour of the plaintiffs and not the defendants. Orders 327It seems to me that the appropriate orders would include a declaration that Minsden holds its interest in the Nelson Bay land subject to a charge in favour of Lawrence Waterhouse for all costs for which it is liable to the Port Stephens Council in relation to the Land and Environment Court proceedings and subsequent appeal (by the judgment debt, plus interest, and the costs still to be assessed ordered by the Court of Appeal in respect of the appeal proceedings). Further, there should be an order that the Deed of Charge be set aside. There should also be a declaration that Mr Lawrence was in breach of his statutory duties as director of the company in relation to the failure to keep proper books and records as required by s 286 or otherwise to explain and account for the loan transactions between the various entities. 328It was submitted by Mr Lancaster (in the context of the claim made pursuant to the trustee's right of indemnity), that even if the defendants have rights as creditors to be subrogated to the rights of Lawrence Waterhouse to indemnification out of the trust assets, other creditors would be entitled to compete on a pro rata basis. This does not sit happily with the numerous submissions that were made to the effect that there was only one external creditor (or that Mr Lawrence had ensured that all creditors other than the Council had been paid). It rather bespeaks of the shifting sands in Mr Lawrence's position throughout (and highlights the difficulty posed by the inadequacy of financial records from which a conclusion could be drawn as to the loan balances as between Lawrence Waterhouse and related companies). That said, the question whether priority should be granted to any amount recovered through the efforts of the Council's funding of the present application was raised and not fully argued. Therefore, it seems to me that it would be appropriate to invite any brief final submissions on that issue. 329I will hear further submissions on the orders to be made, having regard to the above findings, and on costs. (As to costs, it was noted by Mr Lancaster that there remains a reserved costs order in the respect of the last amended Points of Claim and Originating Process that should be granted in favour of the defendants in respect of costs thrown away by that late amendment.) 330Finally, in the interest of the just, quick and cheap resolution of the real issues in dispute between the parties, I question the need for a costly exercise of determining whatever amounts may be payable by Mr Lawrence by way of damages or equitable compensation if the only creditor with an interest in that exercise could be paid its debt out of funds otherwise available to the company. Mr Lawrence told me on his oath on numerous occasions in the witness box (as noted earlier) that he was happy to pay the Council's costs (qualified as it was on occasion by the requirement that they be fair and reasonable or the like). As I understood it, Mr Marshall for the liquidator acknowledged that if (as between the related companies) the group companies wished to enter into particular arrangements whereby the status of the loan accounts between them could not be precisely determined and did not press for a final accounting as between themselves, then that was a matter with which the liquidator would not have an issue provided that the debts of external creditors not privy to such an arrangement were satisfied). None of the related companies now identified as potential creditors seems to have made any claim for repayments of amounts that may have been owing to it and none may have an interest in the outcome of a costly exercise of determining the state of the intercompany accounts. 331I invited the parties to consider their position in that regard during closing submissions. I again invite them to do so, failing which I will make orders to reflect the findings above and I will consider submissions as to whether the recovery of the moneys referable to the trustee's indemnity in respect of costs of the proceedings before the Land and Environment Court and Court of Appeal should be the subject of an order for priority to be given to the Council over other creditors (those other creditors being Mr Lawrence and potentially other related companies, none of which has hitherto suggested it has a claim and for which Mr Lawrence has in submissions in effect already disclaimed the existence of a claim except when responding to the suggestion that the Council might recover its debt(s) through subrogation to the trustee's right of indemnity). 332I will list the proceedings at a convenient time for submissions as to the orders and costs.

In the matter of Lawrence Waterhouse Pty Ltd (in liq) - Shaw v Minsden Pty Ltd

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