[2003] HCA 15
Zaravinos v Houvardas [2004] NSWCA 421
Judgment (20 paragraphs)
[1]
These proceedings
On 9 August 2019, these proceedings commenced. In six affidavits filed over the course of the proceedings, Mr Hayes charted the results of his efforts to obtain the books and records of the Company and unravel the transactions in respect of which relief is sought. Mr Hayes considered that the Company's directors had failed to properly maintain financial records in accordance with their obligations under the Corporations Act since at least September 2009, been seven years prior to his appointment as liquidator.
Mr Hayes also gave evidence as to the Company's creditors. Mr Hayes has received a number of proofs of debt, on which he is yet to adjudicate. On 4 October 2016, the ATO lodged a proof of debt, being $5,670 for income tax and $3,084 for RBA deficit debts. Mr Hayes expects that the Company's liability for unpaid tax is greater than this based on actual deposits into the Company's bank accounts and the Company's failure to lodge tax returns and annual GST returns. Mr Hayes has requested the ATO to raise an estimated assessment based on the lodged tax returns and to provide a revised proof of debt but, by the time of the hearing, the ATO had yet to attend to this task.
The wife's financial statement of 13 October 2016 noted that the Company owed outstanding land tax for 2015 of $22,488.
In April 2017, QBE Insurance accepted liability, on behalf of the Home Building Compensation Fund, for two claims by the Epping owners against the Company for non-completion and defects in the amount of $339,750 each, with the owners' uninsured loss for each claim noted to be $88,955. On 9 January 2018, the Home Building Compensation Fund accepted a claim by the owners of the property in Guildford against the company, agreeing to contribute $204,821.88. On 23 October 2018, Mr Hayes received a proof of debt from NSW Self Insurance in the amount of $897,787.61 by way of subrogation in respect of claims by the Epping owners and Guildford owners against the Company for incomplete and defective works.
On 20 June 2019, Mr Hayes received a proof of debt from the Epping owners in the amount of $840,218. The owners claimed the uninsured loss in respect of defective and non-completed work ($177,910), loss of rent on the investment property ($250,380), accommodation costs ($127,881.40), legal costs ($222,422.34), other costs ($15,631) and interest ($46,064) plus GST. Accompanying the proof of debt was the owners' correspondence with NSW Self Insurance Corporation in respect of their claim. In support of the claim for loss of rental income, the owners submitted the managing agent's statements in respect of the present tenant of the property and the residential tenancy agreement. In respect of the owners' claim for alternate accommodation, the owners provided a tenant ledger in respect of the rent paid on that accommodation. The owners provided invoices in respect of the claim for legal fees of the District Court and Court of Appeal proceedings, including expert fees. As to other costs, invoices were provided in respect of an engineering report, surveying reports, fence hire, a development application fee, geotechnical and dilapidation reports. As to whether it was necessary to obtain legal advice as to the veracity of the proof of debt lodged by the Epping owners, Mr Hayes said:
No, because I was aware that their insurer paid that on them and it's my experience Mr Condon, yours may differ, but, insurers rarely payout on claims that aren't valid, so, and I was without funds, so I was relying on a judgment that I'd made that knowing the insurer's behaviour, that they're unlikely to payout on claims that aren't valid, so, I didn't seek advice and I didn't have any money to do so.
On 11 May 2017, Vero Insurance agreed to pay the Owners Corporation's claim in respect of the Bronte development in the sum of $2,999,500.
On 6 April 2021, the Owners Corporation of the Hughes Street development submitted a proof of debt claiming $2,372,104, being the subject of legal proceedings commenced by the Owners Corporation in this Court against the husband in respect of defective work.
Whilst the plaintiffs did not suggest that the proofs of debt were, of themselves, proof of the debts, other material was said to be in evidence that substantiated the claims: Bovis Lend Lease v Wily [2003] NSWSC 467 at [304]. It is certainly the case that the proofs of debt annexed documents, which I have endeavoured to summarise including at [141]-[143], which support the existence of these debts. Of course, the focus for the purposes of this application is on the creditors of the Company at the time of the transactions rather than today, which I have also described.
[2]
RELIEF SOUGHT
Mr Hayes claims that the 2014 Consent Orders, the transfer of the four properties and the apparent use of net equity to 'repay' the Shareholder's Loan Account and advance funds to the directors now recorded in "Trade and other Receivables" were each (and together) a transaction within the meaning of section 9 and Part 5.7B of the Corporations Act, an unfair preference within the meaning of section 588FA, an uncommercial transaction within the meaning of section 588FB, an insolvent transaction within the meaning of section 588FC, an unreasonable director-related transaction within the meaning of section 588FDA, a voidable transaction within the meaning of section 588FE and a transaction with a related entity of the Company within the meaning of section 588FE(4) and section 588FH.
Further, Mr Hayes claims that the husband and wife breached their director's duties and fiduciary duties. The plaintiffs seek damages or compensation, both equitable and under section 1317H of the Corporations Act and, further, a declaration that the husband and wife hold the four properties on constructive trust for the Company. In the alternative, the husband and wife are said to be liable to pay the Company the balance of their Shareholder's Loan Account in the sum of $991,961.42 as a debt due and payable. The relief sought by Mr Hayes was "complimentary" or "cumulative"; he accepted that, to the extent that the orders sought captured relief already granted, the plaintiffs were not entitled to double recovery: Kijurina v Taouk (2015) 105 ACSR 686 at [98]; [2015] FCA 424, referring to Baxter v Obacelo Pty Ltd (2001) 205 CLR 635; 184 ALR 616; [2001] HCA 66 at [39]; Grimaldi v Chameleon Mining NL (No 2) (2012) 87 ACSR 260; [2012] FCAFC 6 at [641].
[3]
SOLVENCY
It is convenient to first consider whether the Company was solvent at the time of these transactions as insolvency is jurisdictional for some, but not all, of the plaintiffs' claims and also informs the considerations relevant to the duties of the directors of the Company at the relevant time. The burden of proof in establishing insolvency falls squarely on the liquidator: M & R Jones Shopfitting Co Pty Ltd (in liq) v National Bank of Australasia Ltd (1983) 68 FLR 282.
[4]
Presumed insolvency
Mr Hayes contended that the Company could be presumed to be insolvent for failing to keep financial records under section 286 of the Corporations Act: section 588E(4). The liquidator relies upon the presumption of insolvency arising under section 588E(4), which provides:
… if it is proved that the company:
(a) has failed to keep financial records in relation to a period as required by subsection 286(1); or
(b) has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2);
the company is to be presumed to have been insolvent throughout the period.
Section 286 sets out a company's obligation to keep financial records:
(1) A company … must keep written financial records that:
(a) correctly record and explain its transactions and financial position and performance; and
(b) would enable true and fair financial statements to be prepared and audited. …
(2) The financial records must be retained for 7 years after the transactions covered by the records are completed.
"Financial records" includes (section 9):
(a) invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and
(b) documents of prime entry; and
(c) working papers and other documents needed to explain:
(i) the methods by which financial statements are made up; and
(ii) adjustments to be made in preparing financial statements.
That is, the obligation to keep financial records under section 286 is twofold: first, to keep records which record the company's transactions and financial performance sufficient to enable financial statements to be prepared; and, secondly, to retain those records for seven years. The records which must be retained are not simply the financial statements that were prepared from the financial records, but the underlying financial records from which the financial statements were prepared. The purpose of these provisions was explained by Siopis J in Trinick v Forgione (2015) 239 FCR 285; [2015] FCA 642 at [209]:
… to assist a liquidator in bringing recovery actions (including recovery actions against former directors for insolvent trading) when it is necessary to prove insolvency and the company's financial records are not available.
As Black J observed in In the matter of Swan Services Pty Limited (in liq) [2016] NSWSC 1724 at [127]:
In order to establish the presumption of insolvency for a particular period, the position must be separately and distinctly proved for that period; and it must be proved either that no documents within the description of "financial records" were kept in that period or that the documents which were kept were "deficient as to content", because they did not correctly record and explain the company's transactions and financial position and performance (for example, because they did not accurately record the matters purportedly recorded) or would not enable true and fair financial reports to be prepared and audited: Woodgate v Fawcett [2008] NSWSC 868; (2008) 67 ACSR 611 ; Re SSET Constructions Pty Ltd (in liq) - Sims v Khattar [2010] NSWSC 102 ; Fisher v Divine Homes Pty Ltd [2011] NSWSC 8; (2011) 85 ACSR 512 at [24].
See more recently Ward CJ in Eq in In the matter of Earth Civil Australia Pty Ltd [2021] NSWSC 966 at [2688]-[2689].
[5]
Insolvency
In any event, Mr Hayes contended that at the time of the 2014 Consent Orders and transfers, the Company was insolvent within the meaning of section 95A or, alternatively, became insolvent as a consequence of the transaction. As to solvency, the principles were not in dispute and were recently summarised in In the matter of MK Floors (NSW) Pty Ltd (in liq) [2020] NSWSC 1718 per Gleeson JA at [13]-[18]. By reason of the problems being experienced with the building projects, it was said to be apparent by May 2014 that the Company was in real financial difficulty and if not insolvent, was of doubtful solvency. Further, according to the husband and the draft financial statements, the Company's only assets were the four properties.
Given the absence of proper books and records, Mr Hayes was unable to fully assess the usual indicators of insolvency but pointed to non-compliance with the Company's revenue reporting obligations, rounded sum payments, dishonoured cheques and overdrawn balances, solicitors' letters and notices of claims, the absence of any other source of funds and the entry of judgments against the Company. In response to the criticism that Mr Hayes had not done a cash flow analysis:
With the greatest respect, Mr Condon, a cash flow analysis with the information before me, as a liquidator of this company, would be impossible. … the fundamentals required to do a cash flow analysis just do not exist in this business ‑ in this company's records. Building contracts, progress claims, project file jobs, tasks, responsibilities, costings, quantity surveyor reports, aged debtors, retentions, bank guarantees. Basic source documents. Not a bank reconciliation to be seen. No statements of practical completion. No aged creditors. Supplier invoices, creditor agreements, where are they? They don't exist. Tax portal, no reference to it. Loan agreements, funding arrangements, legal file defects ‑ they just don't exist. Whilst one or two may, it, you know, as you point out, at the beginning of one year, or at the end of the next year, they don't exist.
Further, the opening and closing balances of the financial statements, in many cases, bear no resemblance to each other. …
The reality is, me, you, the director, had no idea what was due, by whom, when ‑ so a cash flow analysis, with the greatest respect, be impossible to do on this company. There's no ‑ there's no means, there's no means by which I could determine an opening balance.
[6]
VOIDABLE TRANSACTIONS
Section 588FF(1) of the Act provides that where, on the application of company's liquidator, a court is satisfied that "a transaction of the company" is voidable because of section 588FE, the court may make orders including an order directing a person to pay money or transfer property to the company that fairly represents the money paid or property transferred by the company.
[7]
"transaction of the company"
For the purposes of Part 5.7B, "transaction" is broadly defined under section 9 as follows: (emphasis added)
transaction, in Part 5.7B, in relation to a body corporate or Part 5.7 body, means a transaction to which the body is a party, for example (but without limitation):
(a) a conveyance, transfer or other disposition by the body of property of the body; and
…
(d) a payment made by the body; and
…
and includes such a transaction that has been completed or given effect to, or that has terminated.
The wife submitted that the 2014 Consent Orders did not fall within the definition of a "transaction" as the Company was not a party to the orders, the orders were not enforceable against the Company, and the order did not constitute a disposition by the Company of anything. I agree; the 2014 Consent Orders were not a "transaction" as the Company was not a party to the orders. The question is whether the transfer of the four properties and repayment of the Shareholder's Loan Account fit this description.
As was explained in In the matter of Emanuel (No 14) Pty Ltd (in liq) (1997) 24 ACSR 292, the "transaction" referred to in section 588FA(1) is the totality of dealings through which a company effects a change in its rights, liabilities or property, irrespective of whether one or more of the dealings in the sequence involves a third party and not the company. "The transaction … is the totality of the dealings initiated by the debtor [company] so as to achieve the intended purpose of extinguishing the debt": at 300. A "transaction" can be made up a series of inter-related dealings and may involve third parties: Hosking v Extend N Build Pty Ltd [2018] NSWCA 149; (2018) 128 ACSR 555 at [92]. As Gordon J observed in Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83; [2007] FCAFC 185 at [120]:
… the term "transaction" is a word of wide connotation. It may include a series of events in a course of dealings initiated by a debtor intended to extinguish a debt: Kalls Enterprises Pty Ltd (in liq) v Baloglow (2007) 63 ACSR 557 at [103], [211]; Australian Kitchen Industries Pty Ltd v Albarran (2004) 51 ACSR 604 at [24], [30] and Re Emanuel (No 14) 147 ALR at 287-289. The events can occur at different times and in different forms: Mann v Sangria Pty Ltd (2001) 38 ACSR 307 at [31], [41]. The categories are not closed. It is not confined to transactions that are lawful or enforceable. The complexity of modern business relations necessarily requires the court to look objectively at the totality of the relationship between the parties in identifying and characterising the "transaction" for the purposes of the relevant provisions of Pt 5.7B of the Corporations Act: Mulherin v Bank of Western Australia Ltd [2006] QCA 175 at [126]; VR Dye & Company v Peninsula Hotels Pty Ltd (in liq) [1999] 3 VR 201 at [39] and Airservices Australia v Ferrier (1996) 185 CLR 483 at 502.
[8]
Unreasonable director-related transaction
Section 588FE(6A) of the Corporations Act provides:
(6A) The transaction is voidable if:
(a) it is an unreasonable director-related transaction of the company; and
(b) it was entered into, or an act was done for the purposes of giving effect to it:
(i) during the 4 years ending on the relation-back day; or
(ii) after that day but on or before the day when the winding up began.
The only issue before me is whether the transactions meet the description in section 588FE(6A)(a). As to this, section 588FDA(1) provides:
Unreasonable director-related transactions
(1) A transaction of a company is an unreasonable director-related transaction of the company if, and only if:
(a) the transaction is:
(i) payment made by the company;
(ii) a conveyance, transfer or other disposition by the company of property of the company …
(b) the payment, disposition or issue is, or is to be, made to:
(i) a director of the company …
(c) it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:
(i) the benefits (if any) to the company of entering into the transaction; and
(ii) the detriment to the company of entering into the transaction; and
(iii) the respective benefits to other parties to the transaction of entering into it; and
(iv) any other relevant matter.
Section 9 of the Act provides that "benefit" means "any benefit, whether by way of payment of cash or otherwise". The benefit to the directors may be indirect: Vasudevan v Becon Constructions (Australia) Pty Ltd (2014) 41 VR 445; [2014] VSCA 14.
Only section 588FDA(1)(c) is in issue here as the transfer of the four properties (and any repayment of the Shareholder's Loan Account) were made by the Company to the directors, thereby satisfying sub-sections (a) and (b). Section 588FDA(2) makes it plain that the test in section 588FDA is to be applied to the relevant transaction taking into account the circumstances which existed when the transaction was entered into: Kazar v Kargarian [2010] FCA 1381; (2010) 81 ACSR 158 at [23]; Smith v Starke (No 2) [2015] FCA 1119; (2015) 109 ACSR 145 per Gleeson J at [14].
The requirements of section 588FDA(1)(c) were comprehensively analysed by Gleeson J in Smith v Starke (No 2), whose analysis has been approved and summarised by the Court of Appeal in Crowe-Maxwell v Frost (2016) 91 NSWLR 414; [2016] NSWCA 46 per Beazley P at [70]:
… The following principles discernible in her Honour's judgment are of relevance to the present case:
(a) Impropriety or breach of director's duty is not necessary to establish an unreasonable director-related transaction (at [104]);
(b) The inquiry under s 588FDA(1)(c) is concerned with the reasonableness of the company's conduct, objectively assessed (at [104]-[105]);
(c) The inquiry under s 588FDA(1)(c) is conducted by reference to the company's circumstances, encompassing all relevant matters (at [107]);
(d) Normal commercial practice is a relevant but not determinative matter in conducting the s 588FDA(1)(c) inquiry (at [108]);
(e) A transaction of derivative benefit only can still be for the benefit of the company (at [110]).
See also McLure P in Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416 at [91]-[93] (where the President noted that the focus in section 588FDA is not the director's conduct but the reasonableness of the company's conduct, objectively assessed, in entering into the transaction) and Gleeson JA in In the matter of IW4U Pty Limited (in liq) [2021] NSWSC 40; (2021) 150 ACSR 146 at [78]-[85].
[9]
Uncommercial transaction
Section 588FB(1) of the Act provides as follows:
588FB Uncommercial transactions
A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:
(a) the benefits (if any) to the company of entering into the transaction; and
(b) the detriment to the company of entering into the transaction; and
(c) the respective benefits to other parties to the transaction of entering into it; and
(d) any other relevant matter.
In In the matter of DJG Equities Pty Ltd [2014] NSWSC 36, Black J summarised the applicable principles as follows at [16]:
The applicable legal principles are well-established … In Lewis v Doran [2005] NSWCA 243; (2005) 54 ACSR 410 at [136], Giles JA observed that the description of an "uncommercial transaction" in s 588FB(1) of the Corporations Act is directed primary attention to a balancing of benefit and detriment of a transaction of a company. Whether a reasonable person in the company's circumstances would not have entered into the transaction is determined by an objective inquiry by reference to the factors specified in s 588FB(1): Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363 at FCR 367; Old Kiama Wharf Company (in liq) v Betohuwisa Investments Pty Ltd [2011] NSWSC 823; (2011) 85 ACSR 87 at [35].
The plaintiffs submitted that the Company did not accrue any benefit from the transaction and instead suffered a severe detriment; namely, the transfer away of its only assets. The wife submitted that the value of the properties transferred was only part of the picture; the future viability and continued operation of the Company was said to be at stake such that transferring the properties to the couple at an undervalue was nonetheless something that a reasonable person would have agreed to in order to avoid the Company being wound up, frozen, or externally managed consequent to a family law property dispute involving the two directors and equal shareholders. It was said to be objectively reasonable for the Company to avoid being caught up in a family law dispute by giving effect to the Consent Orders and effecting the transfer of property.
Essentially for the same reasons as given in respect of the unreasonable director-related transactions, I consider that the transfers and any associated repayment of the Shareholder's Loan Account were uncommercial transactions. Any benefits attained by the Company by resolving the family law proceedings were not such as to transform an uncommercial transaction into a commercial transaction.
[10]
Unfair preference
Section 588FA(1) of the Act provides:
588FA Unfair preferences
(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency. ...
As Gordon J noted in Capital Finance Australia v Tolcher, there are differences in the concept of a "transaction" between the unfair preference provision and the uncommercial transaction provision. "For the transaction to be uncommercial under s 588FB of the Corporations Act, the company is required to be a party but no other person is specified. Any other person can be a party. However, for the unfair preference provision to apply, both the company and the creditor must be a party to the transaction even if someone else is also a party: s 588FA(1)(a). A debtor-creditor relationship must exist": at [117]. An unfair preference therefore involves a transaction to which the company and the creditor are both parties (s 588FA(1)(a)); whereby the creditor receives from the company more than it would receive if the transaction were set aside and the creditor proved for the debt in the winding up (s 588FA(1)(b)): In the matter of Evolvebuilt Pty Ltd [2017] NSWSC 901 per Brereton J at [19], on appeal Hosking v Extend N Build.
If, contrary to the plaintiffs' submissions, the defendants are found to have had a Shareholder's Loan Account of $1.238 million that was repaid in May 2014, the plaintiffs submitted that this transaction resulted in the defendants receiving an unfair preference in circumstances where the likely return to unsecured creditors of the Company in nil. The transactions took place within four years of the relation-back day. Under the Shareholder's Loan Account, the Company and its directors were in a debtor/creditor relationship. The husband and wife did not suggest otherwise.
[11]
Insolvent transaction
Section 588FC(1) of the Act provides as follows:
588FC Insolvent transactions
A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:
(a) any of the following happens at a time when the company is insolvent:
(i) the transaction is entered into; or
(ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or
(b) the company becomes insolvent because of, or because of matters including:
(i) entering into the transaction; or
(ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction".
As directors and members of the Company, the husband and wife were each a "related entity" to the Company: section 9. As such, an insolvent transaction of the Company is voidable for a period of four years prior to the relation-back day: section 588FE(4).
The plaintiffs submitted that the transactions took place within four years of the relation back day. The transactions were an unfair preference and an uncommercial transaction. The transactions took place when the Company was insolvent or it became insolvent as a result of it. The husband and wife did not suggest otherwise. I am satisfied that the transfer of the four properties and any repayment of the Shareholder's Loan Account were insolvent transactions.
[12]
REMEDIES
The plaintiffs seek to recover the four properties from the defendants. Three questions arise: first, is the Court precluded from making an order under section 588FF given the 2014 Consent Orders; second, what is the appropriate order to make in respect of the voidable transactions, in particular, to reflect the benefits which the Company received; and, third, should the Court exercise a discretion to decline such an order in the circumstances of this case.
[13]
Inconsistency with Family Court orders
The husband and wife submitted that this Court should not make orders under Part 5.7B of the Corporations Act as this would be inconsistent with orders already made by the Family Court. The transfers were required by orders made by the Local Court exercising federal jurisdiction conferred by the Family Law Act: Mateo. As Tamberlin J explained in Official Trustee in Bankruptcy v Higgins (2000) 109 FCR 1, section 79 of the Family Law Act requires the Court to exercise a discretion before making the orders, "Although the orders were consent orders they were not simply a matter of course or a mere administrative action but they involved the approval of the Court: subs 79(2). … The Court in making the orders was exercising a judicial discretion in the exercise of federal jurisdiction with respect to matrimonial causes": at [21]. Whilst the Federal Court had power under the Bankruptcy Act to set aside the order in that case, his Honour considered that, as a matter of discretion, it should not do so but leave it to the Family Court and thereby avoid the appearance of conflicting orders between the two courts: at [22].
I note also that the proceedings transferred by Tamberlin J were heard by Moore J, who took a different view and did not regard the orders sought by the Official Trustee as giving rise to any inconsistency with the earlier consent orders and readily set those orders aside: Official Trustee in Bankruptcy v Higgins (Family Court of Australia, Moore J, 2 September 2002, unrep), extracted in Mateo at [49]-[51]. Different judicial approaches to whether to transfer bankruptcy-related proceedings to the Family Court are summarised by Collier J in Combis v Jensen (No 2) (2009) 181 FCR 178; [2009] FCA 1383 at [58]. I note also, as Black J explained in In the matter of Glenvine Pty Ltd [2020] NSWSC 866, Mateo is not authority for any wider proposition that an order directed to A to cause B to transfer property to C, without more, divests B of an interest in property in equity or otherwise, and that was not the position addressed in Mateo: at [84].
There is no inconsistency here, for two reasons. First, as described at [175], the 2014 Consent Orders obliged the spouses to transfer "all their rights, title and interest" in the four properties, of which they had none as the properties were owned by the Company. As the spouses had no entitlement to the properties, they were not compelled to transfer anything. An order under section 588FF requiring the husband and wife to transfer back the properties which they did not, in fact, have any right to receive under the 2014 Consent Orders is not inconsistent.
[14]
Order under section 588FF
The plaintiffs seek orders under section 588FF(1)(b) that the properties (including the units at 87 Hughes Street that remain in the husband's name) be transferred to the Company. Alternatively, the plaintiffs seek orders under section 588FF(1)(c) that the defendants pay the Company $2.23 million, being the amount of benefit that they obtained on transfer of the properties in September 2014. Section 588FF provides:
Courts may make orders about voidable transactions
(1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
(a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;
(b) an order directing a person to transfer to the company property that the company has transferred under the transaction;
(c) an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction;
(d) an order requiring a person to transfer to the company property that, in the court's opinion, fairly represents the application of either or both of the following:
(i) money that the company has paid under the transaction;
(ii) proceeds of property that the company has transferred under the transaction;
…
(g) an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company;
…
As the transactions are voidable on several bases, the constraints in section 588FF(4) do not apply.
It is now eight years since the properties were transferred to the couple and the properties have significantly increased in value. The liquidator thus seeks an order transferring the properties. Whilst section 588FF(1)(b) clearly envisages that such an order may be made, I have found only one case where such an order has been made: Rivarolo Holdings Pty Ltd v Casa Tua (Sales) Pty Ltd (1997) 24 ACSR 105 per Windeyer J.
I consider it appropriate to make an order directing the defendants to transfer the four properties back to the Company, not least because the properties were, prior to the transactions, legally and beneficially owned by the Company. The fact that the properties have since increased in value "fairly represents" a benefit received by them "because of" the making of the transfers to them of the properties; that benefit should be re-allocated to the Company: New Cap Reinsurance Corp Ltd v AE Grant [2009] NSWSC 662; (2009) 72 ACSR 638 at [65]-[66], [72]-[73]. Of course, 87 Hughes Street has since been developed into apartments of which the husband retains four apartments subject to a mortgage in favour of the third defendant. As such, an order in respect of the apartments will be made under section 588FF(1)(d)(ii), where the apartments fairly represent the application of the proceeds of property that the Company transferred under the transactions.
[15]
Section 588FG and discretion
The husband and wife relied on section 588FG of the Corporations Act, which provides that the Court is not to make an order under section 588FF in particular circumstances. The husband and wife contended that they became a party to the transactions in good faith on the basis of legal advice, had no reasonable grounds for suspecting the Company was insolvent (nor would a reasonable person in the circumstances have so suspected), and provided valuable consideration and changed their position in reliance upon the transactions. The wife added that, in addition to discharging the mortgages over the Gladstone Street properties, she waived repayment of the Shareholder's Loan Account and avoided action being taken against the Company to wind it up or obtain orders against it to cease trading and distribute its assets pursuant to her family law property dispute with the husband.
Section 588FG(1) has no application here. The sub-section provides, "A court is not to make under section 588FF an order materially prejudicing a right or interest of a person other than a party to the transaction …". The husband and wife were a party to each transaction. Section 588FG(2) does not apply either; the sub-section does not apply to an unreasonable director-related transaction.
Further, the husband and wife submitted (and I accept) that section 588FF(1) confers a discretion, as opposed to merely identifying the source of the court's jurisdiction: D Pty Ltd at [68]; BP Australia Ltd v Brown (2003) 58 NSWLR 322; [2003] NSWCA 216 at [157] and [171]; Ansell Ltd v Davies [2008] SASC 203; (2008) 219 FLR 329 at [52]; Westgem Investments Pty Ltd v Commonwealth Bank of Australia Ltd (No 6) [2020] WASC 302 per Tottle J at [1172]; Bryant v Edenborn Pty Ltd [2020] FCA 715; (2020) 145 ACSR 20 per Davies J at [206]-[207]. See also Ward CJ in Eq in Earth Civil at [2594], following Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47; [2011] NSWCA 109 at [258]-[261] per Young CJ in Eq (Whealy JA agreeing and Hodgson JA substantially agreeing). The plaintiffs submitted that the Court ought not exercise any such discretion and decline to grant the relief sought, noting that the Company has substantial creditors.
Whilst accepting that the purpose of section 588FF was "to ensure that a creditor did not receive a benefit over and above that received by other creditors" (Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corporation [1999] NSWSC 671 at [570] and Bryant at [204]), the husband submitted that the liquidator had not adjudicated on any proofs of debt and there was said to be no admissible evidence that those who claimed to be creditors were, in fact, creditors. There were said to be no creditors of substance who would benefit from any recovery. Further, it was submitted that injustice would be occasioned to the husband as he had borrowed monies to discharge all of the mortgages encumbering the properties. Borrowing money and undertaking improvements to 87 Hughes Street constituted 'sweat equity' because he assumed risk on behalf of the Company.
[16]
DIRECTOR'S DUTIES AND COMPENSATION
It is not strictly necessary to deal with the remaining claims as I have found that the plaintiffs are entitled to the primary relief sought. I will do so briefly. The directors have a duty of care at general law and pursuant to section 180(1) of the Corporations Act:
(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation's circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
The directors have a duty to act in good faith and a proper purpose under section 181(1) of the Corporations Act:
Good faith-directors and other officers
(1) A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
Section 182(1) of the Corporations Act provides:
Use of position-directors, other officers and employees
(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
The directors must exercise their powers for the benefit of the company as a whole: Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 at 729. It has been said that when a company is insolvent or nearing insolvency that duty includes taking into account the interests of creditors: Walker v Wimborne (1976) 137 CLR 1 at 5-6; [1976] HCA 7; IW4U Pty Ltd at [30]-[34] per Gleeson JA. As Gleeson J observed in BCI Finances Pty Ltd v Binetter (No 4), "The extent to which directors are required to take into account the interests of creditors in their management of the company is contentious. As a general proposition, the best interests of the company will depend on various factors including solvency": at [277].
The husband submitted that, even if the Company was insolvent or if there was a real and not remote risk of its insolvency, all that a director had to do was to consider the position of the claimants. The directors were not obliged to preserve the status quo into the foreseeable future. They were entitled to take into account the husband's views about the possible claims, his suggested willingness to support the Company and the fact that some of the claimants had been quiescent for an extended period. The Court should not assume that a director acting reasonably, or in conformity with their equitable duties, would have quarantined the Company's properties on the contingency that a creditor might successfully prosecute proceedings.
[17]
EQUITABLE COMPENSATION
In the alternative to orders under section 588FF(1)(b), the plaintiffs sought equitable relief including a constructive trust and equitable compensation. The plaintiffs only sought a constructive trust should the Court not order that the properties be transferred to the Company under section 588FF(1)(b). The claim for equitable compensation was pressed, being assessed by reference to the value of the assets depleted by the defendant's wrongdoing as at the date of restoration rather than at the date of the defendant depriving the plaintiff of their use: Kijurina v Taouk at [88], referring to Re Dawson [1966] 2 NSWR 211 at 216; In the matter of Purcom No 34 Pty Ltd (In Liq) (No 2) [2010] FCA 624 at [23(3)], referring to Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 at [35]. Equitable compensation was sought in the current value of the properties (being $6.62 million as at 17 May 2021), also accounting for the benefits received by the Company (at least, the mortgage liability) but also by the directors (for example, rent received). Given the paucity of records, it was observed that calculating such an amount may be difficult.
As I am prepared to make an order under section 588FF(1)(b), I understand that the claim for a constructive trust is not pressed and I will not consider it further. As I understand it, the claim for equitable compensation was pressed as the plaintiffs appeared to proceed on the basis that an order under section 588FF can only be made to reflect the value of assets at the date of the "transaction". The text of the section does not suggest this and I note that, in New Cap Re, Barrett J made orders to capture the benefits at the time of the judgment, albeit in the context of an order under section 588FF(1)(c) rather than section 588FF(1)(b).
In any event, having found that the directors breached their fiduciary duties to the Company, it follows that equitable compensation would have been appropriate comprising the current value of the properties less the secured debt repaid by the directors (if, overall, the net equity in the four properties has not been eroded or destroyed by the mortgages now registered in favour of the third defendant) less the holding costs since September 2014 (being interest expense less rental income) borne by the husband and wife. As earlier mentioned, there is insufficient evidence to quantify such compensation and, were it necessary to do so, I would have permitted the parties a further opportunity to adduce further evidence on this score.
[18]
SHAREHOLDER'S LOAN ACCOUNT
In the event that the transfers were not set aside, the plaintiffs submitted that the defendants were jointly indebted to the Company for the sum of $991,961.42, being "Trade and other Receivables". Ironically, the husband submitted that there was no factual foundation for this. There was said to be no evidence that the husband or the wife agreed to enter into a loan with the Company whereby they assumed liability to it. The wife wanted a clean break from the Company; a loan requires consent and none came from her. In light of my reasons, it is not necessary to consider this alternate claim.
[19]
ORDERS
For these reasons, I make the following orders:
Transfer of properties
1. Order pursuant to section 588FF(1)(b) of the Corporations Act 2001 (Cth) that, within 30 days, the first defendant execute and deliver to the second plaintiff (the Company) a Transfer in respect of the land contained in folio identifier 59/8029, being 268 Cabramatta Road, Cabramatta NSW.
2. Order pursuant to section 588FF(1)(d)(ii) of the Corporations Act 2001 (Cth) that, within 30 days, the first defendant execute and deliver to the Company a Transfer in respect of each of:
1. the land contained in folio identifier Lot 1/SP93543, being Unit 1, 87 Hughes Street, Cabramatta NSW; and
2. the land contained in folio identifier Lot 10/SP93543, being Unit 10, 87 Hughes Street Cabramatta NSW; and
3. the land contained in folio identifier Lot 14/SP93543, being Unit 14, 87 Hughes Street, Cabramatta NSW; and
4. the land contained in folio identifier Lot 20/SP93543, being Unit 20, 87 Hughes Street, Cabramatta NSW.
1. NOTE that the transfer of properties in Order 1 and Order 2 does not affect the third defendant's interest in said properties as registered mortgagee.
2. Order pursuant to section 588FF(1)(b) of the Corporations Act 2001 (Cth) that, within 30 days of the date of these orders, the second defendant execute and deliver to the Company a Transfer in respect of each of:
1. the land contained in folio identifiers A/18608, being 110 Gladstone Street, Cabramatta NSW; and
2. the land contained in folio identifiers B/18608, being 112 Gladstone Street, Cabramatta NSW.
1. Order pursuant to section 94 of the Civil Procedure Act 2005 (NSW) that the Registrar in Equity is authorised, in default of compliance with Orders 1, 2 and 4, and on application of the plaintiffs, to execute the Transfers in favour of the Company.
2. NOTE that the transfer of properties to the Company pursuant to Order 1, Order 2 and Order 4, and the Company's interest in those properties, may be subject to further orders to account to the defendants for any benefits received by the Company because of the Company's transfer of properties to the defendants in 2014 (the Benefits), as described at [214]-[230] of the judgment given by Rees J on the date of these orders (the Judgment).
3. Defer the question of costs until determination of what further orders should be made in respect of the Benefits.
Shareholder's Loan Account
1. Order pursuant to section 588FF(1)(g) of the Corporations Act 2001 (Cth) that the debt which the Company owed the defendants, recorded in the Shareholder's Loan Account, may be proved by the defendants in the winding up of the Company.
Benefits conferred by defendants on the Company
1. Direct the defendants, by 1 March 2022, to file and serve any further evidence on which they seek to rely, in respect of the Benefits including:
1. the current level of indebtedness secured over the properties referred to in Order 1 and Order 2;
2. the interest paid on any loans secured over the properties referred to in Order 1 or Order 2, from May 2014 to date; and
3. the rental income earnt (either by the Company or the defendants) and associated expenses (such as management fees, repairs and maintenance) on the properties referred to in Order 1, Order 2 or Order 4 at any time.
1. Direct the plaintiffs, by 1 April 2022, to file and serve any evidence in reply.
2. Direct the defendants, by 15 April 2022, to file and serve any written submissions as to the Benefits and the appropriate orders which should be made, including under section 588FF(1)(g), and whether the defendants are content for this matter to be determined on the papers or require a further hearing.
3. Direct the plaintiffs, by 30 April 2022, to file and serve any written submissions in reply and also advise whether the plaintiffs are content for the matter to be determined on the papers or require a further hearing.
4. Parties to notify any errors or omissions with 14 days.
Amendment Notes: On 16 February 2022, the parties notified errors and omissions in accordance with Order 13. The principal amendment sought was to change various parts of the judgment and orders to reflect the fact that, as pleaded, the husband retained four apartments, rather than two apartments, in the Hughes Street development. The first defendant opposed these amendments. Her Honour referred the parties to the evidence of Mr Hayes, on which her Honour had relied in formulating the judgment and orders, and invited the plaintiffs to provide further evidentiary references in respect of the additional two apartments. This was done, following which the first defendant consented to the proposed amendments, which were made under the 'slip rule' on 25 February 2022.
[20]
Amendments
28 February 2022 - Amendment Notes: On 16 February 2022, the parties notified errors and omissions in accordance with Order 13. The principal amendment sought was to change various parts of the judgment and orders to reflect the fact that, as pleaded, the husband retained four apartments, rather than two apartments, in the Hughes Street development. The first defendant opposed these amendments. Her Honour referred the parties to the evidence of Mr Hayes, on which her Honour had relied in formulating the judgment and orders, and invited the plaintiffs to provide further evidentiary references in respect of the additional two apartments. This was done, following which the first defendant consented to the proposed amendments, which were made under the 'slip rule' on 25 February 2022.
01 March 2022 - 2nd Defendant's representation: Mr E Young and Ms F McNeil
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: 01 March 2022
D Pty Ltd (in liq) v Calas (Trustee) [2016] FCA 1409
DJG Equities Pty Ltd [2014] NSWSC 36
Edwards v Attorney-General (NSW) (2004) 60 NSWLR 667; [2004] NSWCA 272
Fisher v Divine Homes Pty Ltd [2011] NSWSC 8; (2011) 85 ACSR 512
Grimaldi v Chameleon Mining NL (No 2) (2012) 87 ACSR 260; [2012] FCAFC 6
Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123
Hosking v Extend N Build Pty Ltd [2018] NSWCA 149; (2018) 128 ACSR 555
In the marriage of Foda (1997) 21 Fam LR 653
In the matter of Earth Civil Australia Pty Ltd [2021] NSWSC 966
In the matter of Emanuel (No 14) Pty Ltd (in liq) (1997) 24 ACSR 292
In the matter of Evolvebuilt Pty Ltd [2017] NSWSC 901
In the matter of Purcom No 34 Pty Ltd (In Liq) (No 2) [2010] FCA 624
In the matter of Western Port Holdings Pty Ltd [2021] NSWSC 232; (2021) 150 ACSR 274
IW4U Pty Limited (in liq) [2021] NSWSC 40; (2021) 150 ACSR 146
Jones v Dunkel (1959) 101 CLR 298
Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557
Kazar v Kargarian [2010] FCA 1381; (2010) 81 ACSR 158
Kijurina v Taouk (2015) 105 ACSR 686; [2015] FCA 424
Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722
Lewis v Doran [2005] NSWCA 243; (2005) 54 ACSR 410
M & R Jones Shopfitting Co Pty Ltd (in liq) v National Bank of Australasia Ltd (1983) 68 FLR 282.
Matlic Pty Ltd (in liq) [2014] NSWSC 1342; (2014) 102 ACSR 602
Mingos v Federal Commissioner of Taxation (2019) 274 FCR 148; [2019] FCAFC 211
MK Floors (NSW) Pty Ltd (in liq) [2020] NSWSC 1718
New Cap Reinsurance Corp Ltd v AE Grant [2009] NSWSC 662; (2009) 72 ACSR 638
Ng v Van Der Velde [2011] FCAFC 35
Official Trustee in Bankruptcy v Higgins (Family Court of Australia, Moore J, 2 September 2002, unrep)
Official Trustee in Bankruptcy v Mateo (2003) 127 FCR 217; [2003] FCAFC 26
R v Byrnes (1995) 183 CLR 501; [1995] HCA 1
R v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 428; [1949] HCA 53
Re Dawson [1966] 2 NSWR 211
Rivarolo Holdings Pty Ltd v Casa Tua (Sales) Pty Ltd (1997) 24 ACSR 105
Roberts v Wayne Roberts Concrete Constructions Pty Ltd [2004] NSWSC 734; (2004) 50 ACSR 204
Ronchi v Portland Smelter Services Ltd [2005] VSCA 83
Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98
Slaven v Menegazzo [2009] ACTSC 94
Smith v Starke (No 2) [2015] FCA 1119; (2015) 109 ACSR 145
Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621
Super Vision Resources Ltd BVI Registered No 1810534 v AC Holdings Co Pty Ltd [2020] NSWCA 319
Swan Services Pty Limited (in liq) [2016] NSWSC 1724
Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd (1995) 56 FCR 236
Trajkovski v Simpson [2019] NSWCA 52
Trinick v Forgione (2015) 239 FCR 285; [2015] FCA 642
Universal Financial Group Pty Ltd v Mortgage Elimination Services Pty Ltd (in liq) [2006] NSWSC 1132; (2006) 205 FLR 186
Van Reesema v Flavel (1992) 7 ACSR 225
Vasudevan v Becon Constructions (Australia) Pty Ltd (2014) 41 VR 445
Walker v Wimborne (1976) 137 CLR 1; [1976] HCA 7
Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416
Westgem Investments Pty Ltd v Commonwealth Bank of Australia Ltd (No 6) [2020] WASC 302
Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; (2012) 89 ACSR 1
Westpac Banking Corporation v ZH International Pty Ltd [2015] NSWSC 607
White v Shortall (2006) 68 NSWLR 650; [2006] NSWSC 1379
Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15
Zaravinos v Houvardas [2004] NSWCA 421; (2004) 32 Fam LR 490
Zhang v ZH International Pty Ltd (District Court (NSW), Sorby DCJ, 28 May 2015, unrep)
Texts Cited: John Henry Wigmore, Wigmore on Evidence (3rd ed, 1940)
Category: Principal judgment
Parties: Alan Hayes (First Plaintiff)
ZH International Pty Ltd (in liquidation) (Second Plaintiff)
Hui Zhang (First Defendant)
Ngoc Hong Ly (Second Defendant)
V & T Vuong Pty Ltd (Third Defendant)
Representation: Counsel:
Mr RD Glasson (Plaintiffs)
Mr MK Condon SC / Mr PF Santucci (First Defendant)
Mr E Young / Ms F McNeil (Second Defendant)
SUMMARY
In 2001, the husband and wife established the Company, which acquired four properties with a view to property development. Whilst the couple made some contributions to the acquisition of the properties (albeit fairly minimal and imperfectly recorded in a Shareholder's Loan Account), the bulk of the funds were provided by bank loans to the Company, secured by registered mortgages over the properties. The couple also owned seven properties in their own names.
The Company obtained a builder's licence and embarked upon building projects. Two projects encountered significant difficulties, both in terms of being paid and by reason of legal proceedings brought against the Company for building defects. By 2014, the Company had been experiencing cashflow problems for some time: the Company's bank account was overdrawn, cheques were being dishonoured and bills paid by 'round sums' or, perhaps, using the couple's funds. The Company faced building defects claims exceeding $3 million.
The couple had separated three years' earlier but the husband had resisted his wife's entreaties for a property settlement. The husband now relented to agree on a partial property settlement, but only in respect of the four properties owned by the Company. The couple estimated that the Company's net equity in the four properties was $2.23 million. The husband considered that the Company owed him over $1 million for funds expended to complete the building projects. In May 2014, an Application for Consent Orders was filed, which contained no information on the financial position of the Company beyond the estimated value of the four properties and the amount owing on the associated loans. The couple did not disclose the significant claims made against the Company for building defects which, if successful, would eclipse the Company's net assets. Nor did the couple disclose that the Company was then insolvent or facing serious and well-defined claims: Official Trustee in Bankruptcy v Mateo (2003) 127 FCR 217; [2003] FCAFC 26 at [70]. The Company was not joined to the Family Court proceedings, nor executed the proposed orders.
The 2014 Consent Orders were made by a Registrar in the Local Court at Fairfield. The couple proceeded to pay out the four mortgages secured over the Company's properties. The Company then transferred two properties to the husband and two properties to the wife. The Shareholder's Loan Account was apparently 'repaid' (albeit no accounts were prepared at the time to record either the loan balance or its repayment). But for any protective effect conferred by the 2014 Consent Orders, the transfer of the Company's property and the repayment of the Shareholder's Loan Account were voidable transactions, with the primary focus being to defeat the Company's creditors.
RECORDS
Determining with exactitude precisely what happened with the Company and the four properties is not possible given the lack of documents. This is not for want of trying on Mr Hayes' part, who make requests for information to the husband, wife, daughter, Mr Marando, current and former accountants, banks and others (88 requests in total). As Mr Hayes observed, and is described more fully in what follows, the husband "had to be dragged kicking and screaming by ASIC and others to provide me with any information". Further, Mr Hayes said "the company records that exist … are plainly appalling: worst I've seen in probably 30 years of … practicing in this field of accounting." "[T]he records are just so inadequate in so many regards. … they're not even reconcilable". There were no building contracts "so it's really hard to determine in fact what the company did and what it didn't do. There's just no records of any significance."
Notwithstanding Mr Hayes' efforts to obtain all available documents, including by issuing notices to produce and subpoena in these proceedings, the husband continued to produce snippets of documentation shortly before and during the hearing, which put some 'meat on the bones' of what Mr Hayes had been able to divine until then.
An adverse inference may be drawn in respect of the absence of documentary evidence to support a party's case, where the party might be expected to be in possession of documents to corroborate their account: Jones v Dunkel (1959) 101 CLR 298 at 320; [1959] HCA 8 per Windeyer J, citing with approval John Henry Wigmore, Wigmore on Evidence (3rd ed, 1940), vol. 2, page 162: "The failure to bring before the tribunal some circumstance, document or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party …"; Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 at [134] (Callinan J); Ronchi v Portland Smelter Services Ltd [2005] VSCA 83 at [44] (Eames JA, with whom Buchanan JA agreed); Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445; [2011] VSC 184 at [131]-[132] (Croft J); Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98 at [112] (Henry J). The husband's senior counsel accepted that a Jones v Dunkel inference could be drawn in respect of the absence of documents which his client might be expected to have produced. I readily draw such an inference.
The implications of the lack of documentary evidence on the onus of proof should not be overlooked. As I noted in In the matter of Western Port Holdings Pty Ltd [2021] NSWSC 232; (2021) 150 ACSR 274 at [41]-[42], although the onus of proof is on the liquidator, it will commonly be the case that proof is not a straightforward exercise. The directors of the company may be unwilling to give evidence in support of the liquidator's claim. The books and records of the company may be sub-standard or incomplete. Transactions may have been entered into at a time of financial distress when proper documentation was overlooked. The company may have been poorly managed such that transactions were ill-considered or unconventional. These difficulties do not shift the onus of proof. But, where there is a paucity of evidence, the Court may draw inferences. As Gleeson J explained in BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351; (2016) 117 ACSR 18 at [125]:
All evidence "is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted": Coshott v Prentice (2014) 221 FCR 450; [2014] FCAFC 88 at [80], quoting Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970. This maxim also bears upon the appropriateness of deciding whether a fact has been proved when only limited evidence is available. In Ho v Powell (2001) 51 NSWLR 572; [2001] NSWCA 168 at [14], [15], Hodgson JA (with whom Beazley JA agreed) said:
[I]n deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision …
In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so …
Gleeson J's judgment was relevantly affirmed on appeal in BCI Finances Pty Ltd (In Liq) v Binetter [2018] FCAFC 189; (2018) 132 ACSR 1.
Resolution of building defect proceedings
In March 2015, the Epping proceedings were heard by Judge Sorby and judgment given in May 2015: Zhang v ZH International Pty Ltd (District Court (NSW), Sorby DCJ, 28 May 2015, unrep). In short, the Company successfully defended the claim. The Epping owners appealed. (The appeal was to be heard on 15 September 2016, but the proceedings were stayed when the Company went into liquidation).
In May 2015, the Bronte proceedings and Bank proceedings were heard together by Adamson J and judgment given on 22 May 2015: Westpac Banking Corporation v ZH International Pty Ltd [2015] NSWSC 607. Adamson J concluded that the bank was entitled to orders for possession; the Company and husband failed to establish an entitlement to specific performance of the contract to buy Unit 8. Ultimately, the police removed the husband from Unit 8. The husband said that he decided to appeal against the judgment in favour of Westpac; "I told my lawyer and then my lawyer turned around and [told] me they forgot to lodge the appeal for me … [I]t was about one day overdue." When it was suggested that the husband was making up this evidence, he strongly denied it, swearing that if he had made it up "I would have been hit by [a] car when I walk out of the door. Once the light was off, I would have died. I just die straightaway."
In July 2015, the Owners Corporation of the Bronte property entered into a building contract for the completion of rectification and completion works for a contract sum of $2,842,602.52 excluding GST.
The husband submitted that the statutory presumption was rebutted on the facts: section 588E(9). The wife submitted that the liquidator had failed to prove that the Company did not keep the required records as there were no public examinations which would have been an obvious means by which to obtain such information. Further, it was submitted that the liquidator had not inspected the Company's emails (which Mr Hayes said were not produced). It was said that the Court was left without an explanation for this lack of a usual forensic investigation. Accordingly, in the absence of such investigations having been done, there was said to be no reliable factual basis upon which a finding pursuant to section 588E of the Act could be made.
It is not clear why the liquidator is obliged to conduct examinations before seeking a finding that a company has not complied with its record keeping obligations. Apart from a handful of documents produced shortly before or during the hearing, neither the husband or wife produced any invoices, receipts, documents of "prime entry" such as the cash book and journal, ledgers, working papers or supporting source documents needed to "explain" the methods used to prepare the draft financial statements and any adjustments made in them: Van Reesema v Flavel (1992) 7 ACSR 225 at 229. The Company did not produce or appear to maintain any general ledgers (apart from three pages for 2016) or management accounts from 2003 to 2015. No income tax returns were produced or lodged by the Company after 2010. No GST returns were produced or lodged by the Company from 2004 (except for 2006 and 2009), although a failure to lodge such returns does not necessarily mean that financial records were not kept: Fisher v Divine Homes Pty Ltd [2011] NSWSC 8; (2011) 85 ACSR 512 at [23], [26]; Swan Services Pty Ltd at [127]. However, a large number of records that would ordinarily be kept by a company, or which the liquidator would ordinarily expect to have been produced to him, were not kept here.
In addition, the records prepared by the Company after liquidation were "deficient as to content" as they did not correctly record and explain the Company's transactions and financial position and performance or enable true and fair financial statements to be prepared and audited: In the matter of Swan Services Pty Ltd at [127]. All financial statements were drafts. For 2011, two draft versions of financial statements were produced which were materially inconsistent (the profit differed by $485,272, total assets by $1.33 million and total liabilities by $1.746 million), for which no explanation was provided. There were discrepancies and irregularities in the financial statements for other years which, overall, made them inherently unreliable: trading losses were not carried forward to the next year as between 2013 and 2014, nor were assets consistently carried forward. There were no financial statements for 2006.
The four properties did not even appear in the accounts until 2009, despite having been purchased in 2003 and 2004. The closing and opening profit/retained earnings balances as between years in 2011 to 2014 did not reconcile, the differences ranged from $102,893 up to ($614,632) and were unexplained. The failure of the closing and opening profit/retained earnings balances to reconcile in the years 2011 to 2014 meant that the financials did not accord with Australian Accounting Standards and increased the unreliability of the financial statements for 2011 to 2014.
Nor did the draft 2011 and 2012 financial statements record any debt owed by Bronte Properties. Nor did the 2012 financial statements include Unit 8 as an asset. None of the draft financial statements included any contingent liability or provision in respect of the litigation against the Company by Bronte Properties, Westpac or the Epping owners, where the litigation was well progressed by May 2014 and involved potentially large liabilities. Nor did the draft 2016 statements include any liability for the costs order made against the Company in favour of Westpac on 30 May 2016 ($374,558), the debt on which Westpac relied to wind the Company up in September 2016.
I am satisfied on the basis of Mr Hayes' evidence (including that at [22]), together with minimal accounting records prepared before the Company went into liquidation (see [47]-[48] and [62]), the history of requests for production of the books and records since the Company went into liquidation (see [126]-[136]) and the very poor quality of the financial statements produced since (all draft and unsigned) that the Company did not comply with its obligations under section 286 at the relevant time and thus insolvency is presumed.
Mr Hayes expected that the Company's accountant would have had concerns about the Company's position, "… the fact the company made losses for a number of years, the fact that the opening and closing balances to get from one year to the next were, on occasions, wrong, or didn't reconcile. The fact that there was no bank reconciliation, and … you couldn't assess that [the accounts] … presented a, you know, a fair view of the company's financial position or performance."
The husband submitted that Mr Hayes' evidence did not prove actual insolvency. The husband submitted that a review of the Bronte Account commencing in February 2011 recorded receipt of regular large payments which are then used to pay expenses. The statements record receipt of funds which kept the Company afloat for an extended period. No proof of debt has been lodged by a third-party supplier or contractor, or any other person providing goods of services to the Company. The Fair Entitlements Guarantee (FEG) scheme has not been invoked. There is nothing to indicate that the Company had a poor relationship with its financiers; rather, the mortgages were discharged at a time of the defendants' choosing. There was no evidence that post-dated cheques were used. No judgments were entered against the Company between 2011 and the impugned transactions. The Company continued to undertake building work. There was said to be nothing to indicate that, in the months preceding May 2014, the Company was incurring debts which it was not able to pay: In the matter of Matlic Pty Ltd (in liq) [2014] NSWSC 1342; (2014) 102 ACSR 602 at [59]. The husband was said to be willing and able to fund the Company. Any assessment of the Company's position must assume the husband's desire to keep the Company trading. The wife submitted that Mr Hayes had not proven that any specific debt had crystallised and was payable, and that the Company was unable to pay it.
As described at [71]-[99], the Company exhibited signs of insolvency from December 2012 on, when the Cheque Account became overdrawn and remained overdrawn. A number of cheques were dishonoured over this period, when 'round sum' payments were also made (as the husband's learned senior counsel acknowledged, "there's lots of rounded cheques for a long period of time"), being indicia of insolvency. The Company was without funds in the Cheque Account or Bronte Account and the loans in respect of the properties were in default (apart from the Hughes Street loan, which was interest only in arrears). The only source of funds for the Company was, for practical purposes, the net equity in the four properties. Whilst the husband asserted that he was willing to fund the Company, there was no evidence of his wherewithal to do so.
The Company was then owed more than $1 million for the Bronte development but was unlikely to be paid in a timely manner or at all. Not only was the Company being sued by the Bronte developer for building defects, but the developer had also purported to terminate the contract for sale in respect of Unit 8, being the Company's way of being paid 'in kind'. The developer was in receivership. The bank had also commenced proceedings against the Company and had put the Company 'on notice' of a building defects claim. The Company was also being sued by the Epping owners. It is true that there are no records, beyond what I have described, of creditors of the Company. That said, there are very few records at all.
Having regard to the Company's financial position at the time, I consider that the Company was insolvent in May 2014 to September 2014, not only having regard to its immediate lack of funds but looking forward to assess the Company's "reasonably immediate future": Lewis v Doran [2005] NSWCA 243; (2005) 54 ACSR 410; Coates Hire Operations Pty Ltd v D-Link Homes Pty Ltd [2011] NSWSC 1279 at [68] per White J. The Company owed existing obligations to Bronte Properties and the Epping owners under the building contracts, including the statutory warranties. Contingent and prospective liabilities are taken into account in assessing solvency: Edwards v Attorney-General (NSW) (2004) 60 NSWLR 667; [2004] NSWCA 272 at [59]-[60]. The Company could no longer expect to be paid for its building work on the Bronte and Epping projects in a timely manner, or at all, and was exposed to well-defined claims to pay substantial sums for building defects. Obviously, whether the Company would successfully defend the building defects claims remained to be seen but - as it turns out - the directors were not prepared to wait and see.
In Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557, Giles JA considered that the fact that the company is a party to a transaction does not necessarily make it a transaction "of" the company; "Being a party to a transaction requires a nature and extent of involvement, for which there is no simple test": at [101]-[102]. Ipp JA agreed, noting, "A composite transaction (that is, a series of transactions, or events, or acts, or a combination of such matters) can comprise a transaction for the purposes of Pt 5.7B …. Whether a company is so bound up in the transaction that it is a transaction 'of' the company is a question of judgment dependent on fact and degree": at [211]-[212]; see likewise Basten JA at [236]; followed by D Pty Ltd (in liq) v Calas (Trustee) [2016] FCA 1409 per Moshinsky J at [82].
The husband and wife submitted that the transfers of the four properties were made pursuant to the 2014 Consent Orders and, as such, were not a "transaction" under the Corporations Act, relying on Mateo, where a transfer of property under consent orders made under section 79 of the Family Law Act was considered not to be a "transfer of property by a person… to another person" within the meaning of section 121(1) of the Bankruptcy Act 1966 (Cth): per Wilcox J at [64]; Branson J at [100] and [104], [106]. As Merkel J reasoned in Mateo at [134]:
… The transfer of that estate and interest was brought about by the order of the Family Court, rather than by a transfer of the estate or interest by the bankrupt. For the purposes of ss 120 and 121 of the Act the transfer of the equitable estate and interest in the matrimonial home was "by the consent orders made on 22 June 2000" and not "by the bankrupt". Accordingly, there has not been a "transfer of property by a person who later becomes a bankrupt".
The plaintiffs submitted that Mateo was distinguishable as the terms of sections 120 and 121 of the Bankruptcy Act are materially different from section 588FF of the Corporations Act, which does not refer to "transfer of property by a person" but to a "transaction of the company". Further, there were no company assets involved in Mateo and thus the issue did not arise. (In Mateo, the husband transferred his interests in the matrimonial home to his wife in accordance with consent orders made by the Family Court. The husband subsequently became bankrupt and the trustee in bankruptcy sought to recover the husband's interest in the property from the wife.)
An order made under section 79 of the Family Law Act to transfer property has an immediate dispositive effect, even if the terms of the order require transfers at later dates. The order creates an equitable interest in the land in favour of the transferee: Trajkovski v Simpson [2019] NSWCA 52 at [146]-[153], and the authorities there analysed by Brereton JA. "However, much turns upon the form of the order and the nature of the property in question": Mingos v Federal Commissioner of Taxation (2019) 274 FCR 148; [2019] FCAFC 211 at [44] per Kerr and Steward JJ. (For example, in Mingos, the orders provided that the parties held their interest in the property "upon trust" pending completion of various obligations and, failing that, sale of the property. The Court held that the orders gave each of the husband and wife an equitable interest in the property to be held for the benefit of the other but did not give the husband an exclusive equitable interest in the property: at [46].)
Did the 2014 Consent Orders transfer an interest in the four properties such that the subsequent transfers were not a "transaction of the company" but the inevitable result of an order under section 79 of the Family Law Act? The 2014 Consent Order obliged the wife to transfer to the husband "all her rights, title and interest" in 268 Cabramatta Road and 87 Hughes Street. The wife, in fact, had no right, title and interest in those properties. Likewise, the husband was obliged to transfer "all his rights, title and interest" in 110 Gladstone Street and 112 Gladstone Street to the wife, of which he had none. Whilst a couple may be directors and shareholders in a family company, the couple do not own the company's assets. The company owns its assets. As shareholders, the couple are simply entitled to the rights attached to the shares as provided by the company's constitution, such as dividends while the company is trading or a distribution of assets upon winding up: R v Portus; ex parte Federated Clerks Union of Australia; White v Shortall at [193] per Campbell J citing Sydney Futures Exchange Ltd at 255-6 per Lockhart J. The basic rule nemo dat quod non habet applies (you cannot give what you do not have). The 2014 Consent Orders provided that the parties retained ownership of their respective shares in the Company: Order 3.
Thus, it is not necessary to consider whether Mateo applies to section 588FF of the Corporations Act as the 2014 Consent Orders were ineffective to transfer a beneficial interest in the four properties, being the Company's property and not property which either spouse could transfer in accordance with an order made under section 79 of the Family Law Act. Nor did the 2014 Consent Orders touch upon the Shareholder's Loan Account.
The Company was, however, a party to each of the transfers of the four properties in September 2014. The Company was not obliged by the 2014 Consent Orders to transfer the properties, but did so. The transfers were "transactions" of the Company, by which the Company divested itself of its principal assets. It is difficult to see how the transfer of the Company's assets was anything other than a transaction "of" the Company. Likewise, the Company was a party to any repayment of the Shareholder's Loan Account and any 'advance' of the excess net equity in the four properties to the Company's directors and shareholders.
As to when these "transactions" occurred, the husband submitted that the mortgages over the two Gladstone Street properties were discharged in May 2014. The Court could infer that discharge occurred concurrently with the settlement of the conveyances from the Company to the husband. The transfers were undated and the date the transfer forms were registered may bear no relationship to the settlement of the conveyances. Thus, the husband submitted that the plaintiffs cannot bring a case pursuant to section 588FE(3) in relation to 110 and 112 Gladstone Street (albeit an insolvent trading claim is still maintainable in respect of the Gladstone Street properties for four years prior to the relation-back date: section 588FE(4)).
While the loans were paid out on 28 May 2014 (for 110 Gladstone Street) and 16 June 2014 (for 112 Gladstone), and the financiers likely gave a discharge of mortgage at that time, that is the likely date when a benefit was conferred on the Company, which will need to be taken into account in formulating any relief. But it is not the date of the relevant "transaction", being "a conveyance, transfer or other disposition by the [Company] of property of the [Company]". That is the transaction in respect of which relief is sought. There is no reliable evidence that the transfers were executed by the Company on any particular date prior to registration of the transfers. As already noted at [107], I infer that the couple, or their solicitor, were waiting until all the loans had been paid out before the properties were transferred, otherwise one spouse may receive 'their' properties and fail to pay out the loans on the properties to be transferred to the other. There is no reason to infer that the transfers were executed by the Company until shortly before registration.
Thus, the "transactions" in respect of the transfer of the four properties occurred in September 2014 and all causes of action pursued by the liquidator are 'in time'. To the extent that the Company 'accepted' the repayment of the Shareholder's Loan Account and 'advanced' the excess net equity to the directors, this appears to have been an ex post facto accounting treatment undertaken after the Company was in liquidation and thus also occurred within the relation-back period.
As to the benefits to the Company of entering into the transaction, the husband and wife submitted that the amount due on the mortgages was $1,574,247.35 and was repaid. The Company was also discharged from the obligation to pay ongoing interest under the mortgages. The Company also undoubtedly owed money to its shareholders, albeit the precise amount is not known. Further, in the absence of these transactions, it was said that the Company would inevitably have been mired in contested litigation between the husband and the wife. The wife's nascent claim under the Family Law Act was said to put the Company's very existence in serious jeopardy with suggested catastrophic consequences of an existential kind.
Whilst the plaintiffs accepted that the Company obtained a benefit by reason of the discharge of liabilities it had secured against the properties and the ongoing obligation to pay interest, the plaintiffs maintained that the Company was deprived of the net equity in the properties, being $2.23 million on the figures used by the couple at the time and slightly less using Mr Rees' valuations. The plaintiffs accepted that the Company may also have received a benefit in the form of the repayment of the Shareholder's Loan Account, but maintained that there was no reliable evidence of the amount of the loan at the time.
Even assuming for the moment that the Shareholder's Loan Account was $1.238 million, the Company still received some $1 million less than the net equity in the four properties. This was at a time when the Company was in severe financial difficulties and the only apparent means of raising funds was by realising the net equity in the properties. The directors obtained a direct benefit from the transaction by acquiring the properties at an undervalue. A reasonable person in the company's circumstances would not have effected the transaction.
As to the suggested benefit to the Company by a resolution of family law proceedings, a company may benefit from the resolution of family disputes between company shareholders (Moshinksy J in D Pty Ltd at [11(c)], [80]). But there was no tangible benefit here and certainly not of the scale suggested by the defendants. After the marriage broke down, the parties continued to cooperate, including attending a meeting with the Bronte developer soon after the wife had gone to live with the daughter. The husband continued to work for the Company, the wife continued to be a director and the daughter continued to be administration manager. There was no suggestion of deadlock. The couple used the same solicitor and agreed upon consent orders with no apparent haste or divergent views on an appropriate division of assets. The wife was not litigious. The short time between filing and the agreement to the first and second consent orders did not support the submission that the property dispute was so acrimonious that it would have threatened the "continued existence" of the Company.
The detriment to the Company, and its creditors, by these transactions outweighed any benefits given that the four properties were its only assets at the time. The transaction was unreasonable given the Company's financial condition at the time, where the Company was "in uncertain financial and commercial circumstances in which questions as to its continuing solvency could arise in the short to medium term": Weaver v Harburn at [93], [103], [107]; Slaven v Menegazzo [2009] ACTSC 94 at [44]; Kijurina v Taouk at [48], [57]. Thus I am satisfied that the transfer of the four properties were voidable as unreasonable director-related transactions. Using the net equity to repay the Shareholder's Loan Account and advance the excess net equity to the directors - being an accounting treatment likely effected much later - falls into the same category. There were far more pressing needs which this net equity could reasonably have been used to satisfy than the manner in which it was used.
I am satisfied that any repayment of the Shareholder's Loan Account was an unfair preference. The husband and wife were unsecured creditors of the Company in respect of the Shareholder's Loan Account and have been paid in full whereas they will receive less as unsecured creditors in the liquidation.
Second, and more importantly, the 2014 Consent Orders did not compel the Company to transfer the properties. Section 90AE of the Family Law Act permits the Family Court to make orders "binding a third party", including, for example, an order "directed to a director of a company or to a company to register a transfer of shares from one party to the marriage to the other party". Such an order can, however, only be made if the requirements of section 90AE(3) are met, including that the third party has been accorded procedural fairness "in relation to the making of the order" and it is just and equitable to make the order. If such an order is made, then section 90AC of the Family Law Act provides:
This Part overrides other laws, trust deeds etc.
(1) This Part has effect despite anything to the contrary in any of the following (whether made before or after the commencement of this Part):
(a) any other law (whether written or unwritten) of the Commonwealth, a State or Territory;
(b) anything in a trust deed or other instrument.
(2) Without limiting subsection (1), nothing done in compliance with this Part by a third party in relation to a marriage is to be treated as resulting in a contravention of a law or instrument referred to in subsection (1).
In this case, the Company was not a party to the 2014 Consent Orders nor "directed" pursuant to section 90AE(2). The Company was not a party whose interests could be affected by the 2014 Consent Orders and the orders were in a form which did not affect its rights: Zaravinos v Houvardas [2004] NSWCA 421; (2004) 32 Fam LR 490 at [46]. As Black J noted in a similar situation in Glenvine, the fact that the Registrar who considered whether to make the orders did not require the Company to be joined undermines any inference that the orders were objectively intended to alter the Company's rights such as to require joinder: at [93].
Where the Company was not a party to the Family Court proceedings nor executed the 2014 Consent Orders, the orders were not made pursuant to section 90AE(2) of the Family Law Act and the provisions of section 90AC were not engaged, which may otherwise give such an order primacy over other Commonwealth legislation: Ng v Van Der Velde [2011] FCAFC 35 at [75], [83]. As observed in Ng v Van Der Velde, whilst reconciling section 90AC of the Family Law Act with the voidable transactions provisions may not be easy, nothing in the Family Law Act purports to protect settlement agreements effected by consent orders made under section 79 from the operation of other legislation: at [71]. As such, the relief sought by the liquidator does not conflict with the 2014 Consent Orders and thus it is not necessary for the liquidator to apply to vary the 2014 Consent Orders, unlike in Higgins or D Pty Ltd per Moshinsky J at [81].
I note also the indemnity given by the husband in the 2016 Consent Orders, which envisaged that an order may be made by this Court at the request of the liquidator in respect of the properties transferred by the husband and wife under the 2014 Consent Orders. Any such order now made will not thereby be inconsistent with the 2014 Consent Orders as varied by the 2016 Consent Orders.
As mentioned, the mortgages on the four properties were discharged when the properties were transferred to the husband and wife. As Barrett J explained in New Cap Reinsurance Corp Ltd, notwithstanding that Division 2 of Part 5.7B refers to "voidable transactions", its provisions do not operate to deprive concluded transactions of efficacy or effect. Rather, the existence of a transaction meeting the statutory description confers jurisdiction on the court to make one or more of the orders set out in section 588FF(1): at [19]. Thus, an order under section 588FF(1)(b) or 588FF(1)(d)(ii) requiring the properties to be transferred to the Company would not set aside the discharges of mortgages.
Mr Hayes acknowledged that it is necessary to account for the benefits conferred on the Company when the four properties were transferred, including the debt associated with the properties. Whilst the Company also saved the money it would have otherwise had to pay in mortgage repayments, Mr Hayes considered that it would have been "[c]ompletely offset by the enormous capital gain that would have been achieved in the interim."
Turning to the monies paid by the defendants to discharge the existing secured loans over the four properties:
1. The existing lender on 110 Gladstone Street was paid $229,109.27 on 28 May 2014. The property is unencumbered.
2. The existing lender on 112 Gladstone Street was paid $386,367.55 on 16 June 2014. The property is unencumbered.
3. The existing lender on 268 Cabramatta Road was paid $350,093.76 on 9 September 2014, replaced by a registered mortgage in favour of the third defendant, initially to secure a loan of $360,000 and later to also secure a loan to develop 87 Hughes Street. Whether there is any 'equity' in this property is unknown.
4. The existing lender on 87 Hughes Street was paid $608,676.77 on 19 September 2014. The property is subject to a registered mortgage in favour of the third defendant to secure a $3.5 million loan to develop 87 Hughes Street. Whether there is any 'equity' in the units which the husband retained from the development of this property is unknown.
Thus, while the Company received a benefit in the form of the discharge of a secured indebtedness over four properties, the Company will receive title to two properties (or, in the case of 87 Hughes Street, the four apartments which the husband retained from the development of that property) subject to registered mortgages in favour of the third defendant. Overall, the Company may receive less net equity in the properties than it had in September 2014. As there is no evidence of the amount owing to the third defendant, I can only speculate. As such, I cannot say whether the Company has received a benefit by the discharge of the mortgages, replaced by other mortgages, or not.
The result may differ if I consider the properties transferred to the wife separately from the properties transferred to the husband. However, I am minded to consider the four properties in aggregate as the Company transferred the four properties at the same time; the husband and wife were both then directors of the Company and acted together in effecting the "transactions". For practical purposes, the four properties were transferred in one "transaction" and the consequences for the Company should be viewed as a whole. As the two properties transferred to the wife are unencumbered, whilst those transferred to the husband are mortgaged and the net equity in unknown, the burden of meeting an order under section 588FF may fall on the wife in the first instance. However, the husband has given the wife an indemnity in respect of any liability arising from these proceedings; presumably this prospect was factored into the 2016 Consent Orders.
Assuming, for the moment, that the Company did receive a benefit by the discharge of the four existing mortgages, which benefit has not been destroyed by the registered mortgages in favour of the third defendant, how should the Court allow for this benefit? Considering the matter in the context of section 37A of the Conveyancing Act 1919 (NSW), the Court of Appeal observed (without deciding) that, where the recipient has paid consideration for the property that is ordered to be transferred, it may be that, in an appropriate case, the consideration may need to be returned or the recipient may be confined to prove in bankruptcy for the consideration: Super Vision Resources Ltd BVI Registered No 1810534 v AC Holdings Co Pty Ltd [2020] NSWCA 319 per Meagher JA at [133]-[134] (Basten JA agreeing); White JA at [162] and [166].
In this case, however, I note that the defendants discharged the Company's secured debt, with the consequence that a registered mortgage was discharged over each of the properties. Confining the defendants to lodging a proof of debt in the winding up would not fully reflect the benefit which they conferred on the Company. Section 588FF(1)(g) may assist, permitting the Court to make an order redefining the basis on which the defendants' right is to be taken into account by the liquidator for the purposes of allocation of benefits in the winding up of the company: New Cap Re at [18] per Barrett J. If it be the case that the defendants have, overall, conferred a benefit on the Company by discharging the existing mortgages then I consider that it would be appropriate to make an order under section 588FF(1)(g) providing that Mr Hayes should treat the defendants as secured creditors to that extent.
How one should calculate any such benefit, given that the secured loans were repaid on varying dates between May 2014 and September 2014 but the properties were re-encumbered on varying dates from September 2014 on, is also not straightforward. As the Company will, under the orders I will make, receive the four properties and thus at current value, it seems to me that any benefit conferred by discharging the mortgages in 2014 should also be calculated as at the present day in order to compare 'like' with 'like'. I note that, in New Cap Re, the Court assessed "benefits" (in that case received by a person) at the time of the judgment; Barrett J awarded interest up until judgment on payments found to be unfair preferences, on reliance on the power under section 588FF(1)(c): at [65]-[66], [72]-[73].
Whilst I will hear from the parties on this issue, my initial thought is that the amount paid-out on the mortgages in 2014 should be adjusted by the Reserve Bank of Australia's cash rate plus 2% per annum to reflect the time value of money. Of course, this computation need not be undertaken if, on any view, the net equity in the four properties is less today than in 2014 given the amount owed to the third defendant.
Turning then to the benefits which the directors may have conferred on the Company by relieving the Company of the obligation to service the mortgages after 2014, it may be appropriate to allow for money which the Company saved as a consequence of no longer holding the four properties (noting also that the Company may otherwise have earnt rental income which it forewent). In Universal Financial Group Pty Ltd v Mortgage Elimination Services Pty Ltd (in liq) [2006] NSWSC 1132; (2006) 205 FLR 186, the company's income stream (commissions) were paid to another entity, which was found to be insolvent, uncommercial transactions and unreasonable director-related transactions. Austin J made an order under section 588FF(1)(c) requiring the recipient to repay the monies less certain expenditure, at [142]-[143]: (emphasis added)
[142] The power of the court to make an order for payment of an amount of money in respect of a voidable transaction is a statutory power under s 588FF(1) and not a power that arises in the equitable jurisdiction. Nevertheless there is a broad analogy, in a case such as the present, between the kind of payment order the cross-claimants seeks and an order by way of account of profit for breach of fiduciary duty. In Warman International Ltd v Dwyer (1995) 182 CLR 544 the Full High Court observed (at 561) that in a case where a business is acquired in breach of fiduciary duty, it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit, and better to allow the fiduciary a proportion of the profit (especially when it appears that the profit has been generated by the skill, efforts, property and resources of the fiduciary). Their Honours warned that the stringent rule requiring a fiduciary to account for profit can be carried to extremes and that in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff.
[143] It seems to me that those considerations are transportable into the statutory context with which I am concerned, although the issue before me is not about the wrongful acquisition of a business, but rather the wrongful acquisition of commission income streams. If it appears from the evidence that the recipient of the income has used it to incur expenditure which relieves the entity entitled to it from an obligation to meet outgoings, it is likely to be just and appropriate to reduce any statutory payment order by the amount of such expenditure.
I note also that the legislative intent of section 588FF is to give the Court "very wide powers to make appropriate orders in respect of voidable transactions to fit the particular circumstances": Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth) at [1055].
Looking at each of the properties in turn, the bank statements for the loan for 110 Gladstone Street do not reveal the interest rate being charged when the loan was paid out. Earlier bank statements refer to an interest rate of 5.95% in 2003 and, in 2009, an interest rate of 4.98% and monthly interest payments of some $1,500 (or $375 a week). The husband said that the property was not leased when it was owned by the Company. It was leased when Mr Rees inspected the property (he noted the property was occupied by a tenant, who would not allow a full inspection). The current rental income is not known.
According to the bank statements for the loan for 112 Gladstone Street, the existing financier charged interest of 7.51% per annum, being $2,446.54 a month (or $611 a week) when the loan was paid out. The husband said that the property was rented for $350 to $400 a week. The property was vacant when inspected by Mr Rees.
According to the bank statements for the loan for 268 Cabramatta Road, the existing financier charged interest of 7.46% per annum, being $2,197.31 a month (or $550 a week) when the loan was paid out. The husband said that the property was not leased when it was owned by the Company but he has since rented it out at $300 a week (it was leased when Mr Rees inspected the property as he noted the property was occupied by a tenant, who would not allow a full inspection).
According to the bank statements for the loan for 87 Hughes Street, the existing financier charged interest of 5.38% per annum; interest for the 2014 financial year was $33,126.65 (or $637 a week). The liquidator found records that the Company received rental income on this property, although the liquidator's analysis (and presumably the available records) does not reveal the weekly rental. As best I can see, rent received in 2010 averaged $1,280 a month (or $320 a week). The husband said that he now receives rent of $350 to $400 per week on each apartment retained after development of the site.
Comparing the weekly interest payments and the weekly rental figures (where available), it does appear that the rental income on the four properties was less than the interest payments.
1. For 110 Gladstone Street (and using the mid-point rental income for 112 Gladstone Street, being a similar property), interest and rent were roughly the same, being $375 a week.
2. For 112 Gladstone Street, interest exceeded rent by $236 a week.
3. For 268 Cabramatta Road, interest exceeded rent by $250 a week.
4. For 87 Hughes Street, interest exceeded rent by $317 a week.
In total, interest payments on the four properties exceeded rent by $800 a week. I recognise that these figures are 'rough' as the available information is sparse indeed and requires acceptance of the husband's evidence as to rental income. The truth may differ widely. What this does indicate is that the capital gains enjoyed on the four properties far exceed the monies saved by the Company on having been relieved of the obligation to pay interest on the mortgages.
How, then, should the Court allow for these benefits where the evidence does not permit the Court to conclude with any degree of confidence or accuracy whether there was, in fact, a benefit and its quantum? I consider the appropriate course is to transfer the four properties to the plaintiffs and give the parties, in particular the defendants, an opportunity to put on further evidence in respect of the benefits conferred on the Company so that further orders can be made to allow for those benefits.
As to the Shareholder's Loan Account, Mr Hayes agreed that the Company obtained a financial benefit by repayment of the Shareholder's Loan Account "[t]o the extent that the original loan … was valid". However, the limited financial material produced by the husband, including during the hearing, was insufficient to enable the Shareholder's Loan Account to be supported or reconciled. Whilst a trust account ledger for Marando Solicitors in the name of the couple recorded transfers made to the Company totalling $336,860, Mr Hayes was unable to reconcile those payments with the movement in the Shareholder's Loan Account in the relevant period. In the absence of adequate books and records, specifically general ledgers, it was not possible to say more or sensibly compare or understand the draft financials. Further, the trust account ledgers of Marando Solicitors maintained on behalf of the Company show that $153,031 of the Company's money was transferred to the couple. The liquidator did not have cheque books to determine whether in any other period (2002 to July 2013 and 2016) further cheques were written by the Company to the couple. How these payments were treated in the draft financial statements was unknown. Additionally, based on the Cheque Account and Bronte Account, there were ATM cash withdrawals totalling $65,253.31, for purposes unknown. Given the general failure to keep and produce books and records of the Company, the precise position and amount of payments to the couple by the Company may never be known. The plaintiffs submitted that the defendants had not discharged their onus of proving the actual amount of the Shareholder's Loan Account as they had not demonstrated that the draft financials were accurate nor that they actually contributed $1.238 million to the Company nor that they did not receive substantial payments from the Company.
I am not satisfied that the balance of the Shareholder's Loan Account was $1.238 million in September 2014. Whilst the husband relied on the draft 2014 and 2015 financial statements as showing repayment of the Shareholder's Loan Account of $1.238 million, these statements were prepared after Mr Hayes was appointed and were only drafts and thus of limited probative value: Australian Securities and Investments Commission v Rich [2005] NSWSC 417; (2005) 53 ACSR 752 at [121], [131], [381] (where "reason to suspect that they may be drafts, there are obvious issues of probative value"); Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 75 ACSR 1 at [398]. In any event, I have found that any repayment of the Shareholder's Loan Account was inter alia an unfair preference. The directors are thus obliged to repay those funds to the Company and are entitled to lodge a proof of debt in respect of the monies which they claim to be owed by the Company. The Shareholder's Loan Account can be put to one side in determining what orders should be made under section 588FF in respect of the transfer of the properties and accounting for any benefits which the Company received.
The husband and wife submitted that no order should be made as they were assisted by Mr Marando and were entitled to assume that the settlement conformed to the law. The wife submitted that she was unaware of the financial circumstances facing the Company (although I have not accepted this). The wife was said to have acted honestly and in all of the circumstances ought fairly to be excused from any default found on her part. The wife was said to have provided valuable consideration for the transaction by not requiring the Company to repay her financial contributions to it, whether as recorded in the Shareholder's Loan Account or otherwise. Further, the wife was said to have changed her position in reliance upon the transactions by not seeking orders against the Company in the family law dispute to liquidate it and require the distribution of its realised assets in cash, and not seeking other or different property orders in settlement of the dispute with the husband about the division of the property of their marriage in relation to the Company (elsewhere, I have not accepted the wife's submission that, by transferring its properties to the wife, the Company 'dodged a bullet' by resolving the wife's potential remedies which may affect the Company). It is submitted that the wife acted in good faith and took all steps to assist in enabling the Company to continue in existence and in pursuit of its trade and operations, without her involvement.
I am not minded to refrain from making orders under section 588FF. As Lee AJA observed in Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; (2012) 89 ACSR 1, a "clear purpose" of Part 5.7B of the Corporations Act is "to assist liquidators to obtain orders to rectify the effect of transactions that prevent fair distribution of the assets of an insolvent company to creditors": at [737]. I am satisfied that there are creditors to whom the Company owes substantial monies: see [145]. I am satisfied that both the husband and wife were aware of significant claims for building defects, which had the potential to swallow the Company's assets. Both were keen to transfer the Company's assets to themselves in order to defeat the Company's creditors.
It is true that the husband provided funds to discharge the existing mortgages on the Gladstone Street properties, on his evidence, by selling other properties. He also incurred indebtedness in order to re-finance the loan on the Cabramatta Road property. But the point is that the husband and wife received more than what they paid for, by the transfer of the properties at an undervalue. Whilst the husband has since developed the Hughes Street property, he did so to benefit himself as the property was then in his name. The liquidator does not seek to recover the value of the land as developed - indeed, as 16 of the 20 apartments have been sold, that would not be possible - but only seeks to recover the land value of 87 Hughes Street by effectively 'tracing' the value of the whole site into the four remaining apartments. (Whilst the liquidator initially sought an account from the husband in respect of the development, that prayer for relief was not pressed.)
It is true that the couple do not appear to have had the benefit of detailed legal advice on the rights and wrongs of what they were doing, but I do not see why the creditors of the Company should suffer where the husband and wife will otherwise be permitted to retain the benefit of - for practical purposes - the Company's only assets to which they were not entitled at the time, and did not become entitled as a consequence of the 2014 Consent Orders. Even assuming the husband was over $1 million by the Company - as he told Mr Marando at the time - or even $1.238 million, the couple received far in excess of that amount in the form of the net equity of the properties. To the extent that the couple conferred a benefit on the Company by discharging the existing mortgages or relieving the Company of the need to fund any gap between interest expense and rental income, I will make orders to enable these benefits to be accurately quantified and appropriately recompensed.
I do not accept the husband's submission. This was a classic 'asset-stripping' exercise. The Company was, at the time when the husband and wife signed the 2014 Consent Orders, the object of two well-defined and substantive claims for building defects which potentially eclipsed the Company's assets. Contrary to her evidence, the wife was well aware of these claims and very concerned about the impact of the claims on the Company. Whilst the husband suggested that the Company would successfully defend the claims, he was a man of bluster whose views would unlikely have appeased the wife's concerns. The fact that the husband became - after three years of resistance - now amenable to a property settlement but only in respect of the Company's assets is telling. The claimants were prospective or contingent creditors of the Company; whilst the directors did consider the position of these claimants, it was only to the extent that they wished to defeat these creditors' claims by transferring the Company's only assets to themselves at an undervalue.
I consider that transferring the Company's assets at an undervalue was not something that a reasonable person appointed as a director of a company in the Company's circumstances would have done. This is especially where the Company was insolvent at the time and lacked funds to continue its business operations. The transfers were of no benefit to the Company and conferred a corresponding windfall gain on the directors. Accordingly, I find that the husband and wife breached their duty of care at general law to the Company and under section 180 of the Corporations Act.
I also find that the husband and wife each breached their fiduciary duties by causing the properties to be transferred to them. This is because they exercised their powers as directors for a purpose foreign to the purposes for which they were conferred, for the benefit of third parties: BCI Finances Pty Ltd v Binetter (No 4) at [298] per Gleeson J. I find that the husband and wife also breached section 181 of the Corporations Act for the same reasons.
The husband and wife also breached section 182 of the Corporations Act. The assessment of impropriety is objective: R v Byrnes (1995) 183 CLR 501; [1995] HCA 1. The use of their position as directors to transfer the properties at undervalue to themselves was improper as there was little corresponding benefit to the Company, and caused a detriment to the Company by denuding its valuable assets which could have been used to advance the Company.
The husband and wife contended that the Court should decline to make a compensation order under section 1317H of the Corporations Act and relieve them from liability pursuant to section 1317S and section 1318 of the Corporations Act because they acted honestly and in good faith, on the basis of legal advice and have taken further steps in accordance with the 2014 Consent Orders, in particular, the husband has discharged the mortgages over the four properties and incurred costs in developing 87 Hughes Street and, if judged liable in proceedings in the Commercial List of this Court, will have incurred a liability to the owners of the strata plan in relation to that development. Each waived the payment of the Shareholder's Loan Account and avoided the Company being embroiled in Family Court litigation.
The wife submitted that she agreed to terms of the 2014 Consent Orders, and gave effect to the orders when made, in accordance with Mr Marando's legal advice. Thus, it was said that there could be no suggestion that her actions were careless or imprudent to such a degree as to demonstrate that she made no genuine attempt to ensure that she was not in breach of her duties. As the 2014 Consent Orders were drafted by Mr Marando, who was also the Company's solicitor, it was said to follow that the orders were in the Company's interests (regrettably, that does not follow). There was said to be no proper basis to suggest that the wife, relying on Mr Marando, acted other than in accordance with her duties as a director. The wife submitted that there was no reason for her to believe that the Company was insolvent or approaching insolvency (I have not accepted this). The wife was said to have acted squarely within the scope of the description of Palmer J in Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123 at [325], without deceit or conscious impropriety, without intent to gain improper benefit or advantage for herself, and without sufficient carelessness or imprudence. The wife relied on Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621 at [134], where Palmer J observed that the law should recognised that a wife's failure to appreciate the reality of her responsibilities as a director due to deferral to her husband may be a 'good reason' for failing to participate in the management of the company, this being a question of fact and evidence in each case.
I would not relieve the husband or wife from liability pursuant to sections 1317S and 1318 of the Corporations Act. Even if they acted honestly, I am not satisfied that they should fairly be excused from liability where this would prejudice the Company and its creditors: In the matter of Cummings Engineering Holdings Pty Ltd [2014] NSWSC 250 at [88].
To the extent that the husband and wife relied on Mr Marando's advice, it is not entirely clear what advice he gave: see [91]. As best can be divined, Mr Marando suggested that the couple effect a property settlement in two stages, with the first stage to concern only the Company and for remaining marital assets to be dealt with when the husband had completed development of 87 Hughes Street. There is no suggestion that Mr Marando was retained to advise the couple on their obligations as directors or gave advice on that subject: Cummings Engineering at [86]. I do accept, however, that in the absence of Mr Marando informing - at least the wife - that the 2014 Consent Orders may amount to a breach of director's duties and fiduciary obligations, then the couple may well have thought that there was nothing wrong with transferring the Company's properties as they proceeded to do. Nonetheless, I would not have been prepared to excuse either the husband or wife on this account as I am not satisfied that they should retain the Company's net assets and thereby defeat the Company's creditors which was, at heart, their aim.
The husband continued to use the Company's building licence, although established new companies through which to conduct further property developments and building projects. In due course, as the legal proceedings against the Company were determined, a judgment creditor issued a statutory demand which went unanswered; the Company was wound up. Mr Hayes now seeks to retrieve the Company's assets from the couple, so that the Company's creditors may be paid.
The 2014 Consent Orders, as made by the Family Court, did not oblige the Company to do anything but were directed to the parties to the marriage. The 2014 Consent Orders did not create an equitable interest in the Company's properties in favour of the husband and wife as the orders did not create any obligation on the Company to transfer the properties. The orders simply obliged the spouses to transfer to the other 'all [their] rights, title and interest' in the Company's properties, where the spouse, in fact, had no right, title and interest in those properties. The 2014 Consent Orders did not touch upon the Shareholder's Loan Account which, according to the orders, remained the property of the spouses. It follows that orders under section 588FF of the Corporations Act requiring the husband and wife to transfer the properties back to the Company and 'undoing' any repayment of the Shareholder's Loan Account are not inconsistent with the 2014 Consent Orders.
In other words, the 2014 Consent Orders, properly construed, did not effect a "transaction" of the Company. The later transfers of the properties by the Company to the husband and wife were the relevant "transactions", as was the (much) later accounting treatment of repayment of the Shareholder's Loan Account and advancing the excess equity to the directors and shareholders as a "Trade and other Receivables" in the sum of $991,961.42.
Regrettably, this scenario is not unusual. Nor was the approach taken by the couple's solicitor - also the Company's solicitor - who said, "I treated it from a sort of a family law perspective … I pretty much … treated the ZH International properties as a matrimonial asset thrown into a pool." Further, "it wasn't perceived to be advantageous to the company in any shape or form. It was part of a process, a family law process …" Some obvious propositions bear re-statement.
First, whilst a couple may be directors and shareholders in a family company, the couple do not own the company's assets. The company owns its assets. As shareholders, the couple are simply entitled to the rights attached to the shares as provided by the company's constitution, such as dividends while the company is trading or a distribution of assets upon winding up: R v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 428 at 434; [1949] HCA 53; White v Shortall (2006) 68 NSWLR 650; [2006] NSWSC 1379 at [193] per Campbell J citing Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd (1995) 56 FCR 236 at 255-6 per Lockhart J. Nor are the spousal directors entitled to deal with the company's assets as if those assets are their own: Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416 at [103]. Rather, the directors must deal with the company's assets in accordance with their duties as directors (and as fiduciaries) and the constraints imposed by the Corporations Act. These constraints are imposed for good reason by parliament, to balance the interests of all stakeholders doing business in Australia.
Second, should the couple seek a property settlement under section 79 of the Family Law Act, including in relation to a company wholly owned by a party or the parties to the marriage, then it is customary to treat the net assets of the company as being the property of the couple, after deducting the moneys owing to the company's creditors and the costs of external administration: In the marriage of Foda (1997) 21 Fam LR 653 at 667; Roberts v Wayne Roberts Concrete Constructions Pty Ltd [2004] NSWSC 734; (2004) 50 ACSR 204 per Barrett J at [63]. In the oft-cited observation of Gibbs J in Ascot Investments Pty Ltd v Harper (1981) 148 CLR 337 at 354; [1981] HCA 1:
It can safely be assumed that the Parliament intended that the powers of the Family Court should be wide enough to prevent either of the parties to a marriage from evading his or her obligations to the other party, but it does not follow that the Parliament intended that the legitimate interests of third parties should be subordinated to the interests of a party to a marriage, or that the Family Court should be able to make orders that would operate to the detriment of third parties. There is nothing in the words of the sections that suggests that the Family Court is intended to have power to defeat or prejudice the rights, or nullify the powers, of third parties, or to require them to perform duties which they were not previously liable to perform.
As Wilcox J observed in Mateo, "The Family Court may be expected to be astute to prevent the claims of an unsecured creditor from being defeated by a s 79 order": at [93]. Likewise, Branson J noted, "it would be wrong to see s 79 of the Family Law Act as providing a means whereby the parties to a marriage … can defraud their creditors": at [99]. More recently, in Cantrell v North (2020) FLC 93-976; [2020] FamCAFC 175 the Full Family Court reiterated, "The Court should not readily be the vehicle by which the legitimate rights of third party creditors should be defeated or delayed": at [80]. Further at [81]:
It must be recalled that an applicant for property settlement consent orders must establish that the order is proper and satisfies s 79(2) of the Act. The obligation on parties to give accurate and full disclosure is of single importance in maintaining the integrity of the judicial process. Where the integrity of the judicial process is trammelled by giving false evidence which affects the rights of third parties, the Court must intervene.
Third, should the couple seek property orders from the Family Court which bind a third party, then the third party must be accorded procedural fairness in relation to the making of such orders: section 90AE(3)(c), Family Law Act. Where the third party is a company and the proposed orders involve transferring the company's assets, then the company "must be included as a party to the case": rule 6.02(1), Family Law Rules 2004 (Cth). "[T]he failure to disclose and notify the creditor …, of itself, justifies the setting aside of the orders" under section 79A(1)(a) of the Family Law Act: Cantrell v North at [83]. As the interests of the company are unlikely to align with that of the husband or wife, the company should ordinarily be separately represented.