In the matter of ZH International Pty Ltd (in liquidation) [2022] NSWSC 2

These proceedings

1. 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.
2. 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.
3. The wife's financial statement of 13 October 2016 noted that the Company owed outstanding land tax for 2015 of $22,488.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.

RELIEF SOUGHT

1. 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.
2. 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].

SOLVENCY

1. 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.

Presumed insolvency

1. 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.
2. 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.
3. "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.
4. 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.
5. 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].

Insolvency

1. 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.
2. 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.

VOIDABLE TRANSACTIONS

1. 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.

"transaction of the company"

1. 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.
2. 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.
3. 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.

Unreasonable director-related transaction

1. 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.
2. 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.
3. 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.
4. 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].
5. 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].

Uncommercial transaction

1. 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.
2. 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].
3. 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.
4. 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.

Unfair preference

1. 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. ...
2. 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.
3. 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.

Insolvent transaction

1. 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".
2. 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).
3. 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.

REMEDIES

1. 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.

Inconsistency with Family Court orders

1. 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].
2. 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].
3. 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.

Order under section 588FF

1. 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.
2. 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.
3. 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.

Section 588FG and discretion

1. 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.
2. 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.
3. 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.
4. 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.

DIRECTOR'S DUTIES AND COMPENSATION

1. 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.
2. 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.
3. 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.
4. 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].
5. 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.

EQUITABLE COMPENSATION

1. 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.
2. 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).
3. 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.

SHAREHOLDER'S LOAN ACCOUNT

1. 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.

ORDERS

1. 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.

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