Mualim v Dzelme

94 ALJR 715 Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1; [2011] FCAFC 24 Blatch v Archer (1774) 98 ER 969 Boardman v Phipps [1967] 2 AC 46 Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34 Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 Crawley v Short [2009] NSWCA 410; (2009) 262 ALR 654 Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260 ET-China.com International Holdings Ltd v Cheung [2021] NSWCA 24 Fox v Percy (2003) 214 CLR 118; [2003] HCA 22 Gerace v Auzhair Supplies Pty Ltd (in liq) (2014) 87 NSWLR 435; [2014] NSWCA 181 Gosford Christian School Ltd v Totonjian [2006] NSWSC 725; (2006) 201 FLR 424 Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609; [2014] NSWCA 266 House v The King (1936) 55 CLR 499; [1936] HCA 40 Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 NSWLR 68; [1974] AC 821 Johnson v Mackinnon [2021] NSWCA 152 Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 Law Society of New South Wales v Harvey [1976] 2 NSWLR 154 Lee v Lee (2019) 266 CLR 129; [2019] HCA 28 Life Association of Scotland v Siddal (1861) 3 De GF&J 58 Maaz v Fullerton Property Pty Ltd [2021] NSWCA 79 Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23 Micallef v ICI Australia Operations Pty Ltd [2001] NSWCA 274 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd [1992] HCA 66; (1992) 67 ALJR 170 O'Reilly v Law Society of New South Wales (1988) 24 NSWLR 204 Rahme v Benjamin & Khoury Pty Ltd (2019) 100 NSWLR 550; [2019] NSWCA 211 Robinson Helicopter Co Inc v McDermott [2016] HCA 22; (2016) 90 ALJR 679 Savage v Lunn [1998] NSWCA 204 Sze Tu v Lowe (2014) 89 NSWLR 317; [2014] NSWCA 462 Vetter v Lake Macquarie City Council (2001) 202 CLR 439; [2001] HCA 12 Warner Capital Pty Ltd v Shazbot Pty Ltd [2020] NSWCA 121 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285; [1987] HCA 11 Texts Cited: JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane's Equity Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths) Category: Principal judgment Parties: Gani Mualim (First appellant) Jorida Mualim (Second appellant) Ricards Dzelme (First respondent) Pacific Springs Pty Ltd (Second respondent) Representation: Counsel: D Grieve QC (Appellants) D R Pritchard SC / A Macauley (Respondents)

Solicitors: RBHM Commercial Lawyers (Appellants) Swaab Attorneys (Respondents) File Number(s): 2020/285001 Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity Division Citation: [2020] NSWSC 1240 Date of Decision: 11 September 2020 Before: Rees J File Number(s): 2019/55505

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

HEADNOTE [This headnote is not to be read as part of the judgment] In July 2000, Pacific Springs Pty Ltd (Pacific Springs) was incorporated for the purpose of acquiring an ice-cream manufacturing business in Paddington called "Nice Cream". The appellants, Gani and Jorida Mualim (Gani and Jorida), were the initial shareholders. Each held 100 shares of $1.00 in the company. They resided in Indonesia and appointed their son, Dean Mualim (Dean), who lived in Australia, as the sole director and secretary of the company. Gani and Jorida also provided $800,000 by way of loan to the company to assist in the purchase of the "Nice Cream" business which was completed in February 2001. In March 2004, Dean resolved to allot 1,800 ordinary shares to himself. The effect of the allotment was to defeat the voting power of Gani and Jorida by creating a new majority in favour of Dean, who then held 90 per cent of the shares in the company. In December 2009, Dean and Ricards Dzelme (Ricards), with whom Dean had been in a long-term relationship, incorporated Pacific Springs Investments Pty Ltd (Investments). Investments was appointed trustee of the Pacific Springs Trust of which Dean and Ricards were the beneficiaries. In February 2010, the equipment and trademarks of Pacific Springs were transferred to the Trust for a purchase price which was left blank in the sale agreement. In November 2010, Investments (not Pacific Springs) purchased a property at Wolli Creek with profits accrued from the "Nice Cream" business and moved the business to those premises. That property was sold in 2015 and an industrial unit was purchased at Marrickville. Dean died on 9 September 2018. Ricards purportedly appointed himself as a director and secretary of Pacific Springs. Ricards was also the sole executor and beneficiary of Dean's estate. Gani and Jorida brought proceedings against Ricards and Pacific Springs claiming that the 2004 allotment of shares was made for an improper purpose, namely, to dilute their interests in the capital of the company and to confer effective control of the company on Dean. They sought a declaration that the allotment was void and of no effect, an order for rectification of the register of members of the company, and a declaration that Ricards' appointment as director and secretary of the company was invalid. At trial, the respondents tendered invoices purportedly issued by an Indonesian entity called "CV Megah Chandra Insani" (CV Megah) to Pacific Springs for management services provided between 2002 and 2010 and contended that these invoices, totalling over $1 million, had been paid to the appellants, or at Gani's direction. The primary judge (Rees J) dismissed the proceedings, finding that the impugned allotment was made with Gani and Jorida's knowledge and consent, making adverse credit findings against the appellants. The primary judge found that there was an association between Gani and CV Megah and that the payment by Pacific Springs of invoices issued by CV Megah were in truth payments to the appellants, or at Gani's direction. As such, the primary judge found that almost half (some $356,000) of the $800,000 loan had been than repaid by March 2004 and the loan had been fully repaid by February 2010. On an alternative basis, the primary judge found that if Gani and Jorida had no actual knowledge of the impugned allotment then the respondents had established the defence of laches. On appeal, Gani and Jorida challenged the primary judge's conclusions that: (i) they were informed of and consented to the impugned allotment (including several factual findings underpinning the conclusion of informed consent); (ii) the defence of laches was established by Ricards and Pacific Springs; and (iii) a validation order should be made pursuant to s 1322(4) of the Corporations Act 2001 (Cth). Held, allowing the appeal (per Gleeson JA, Bathurst CJ and Brereton JA agreeing): As to issue 1

Judgment

1. BATHURST CJ: I agree with the orders proposed by Gleeson JA and with his Honour's reasons.
2. GLEESON JA: This appeal concerns the validity of an allotment of shares by the sole director of a family company.
3. Pacific Springs Pty Ltd (Pacific Springs) was incorporated in July 2000 for the purpose of acquiring an ice-cream manufacturing business in Paddington called "Nice Cream". The appellants, Gani Mualim and Jorida Mualim (Gani and Jorida), were the initial shareholders. Each held 100 shares of $1.00 in the company. They resided in Indonesia and appointed their son, Dean Zachary Mualim (Dean), as the sole director and secretary of the company. They provided $800,000 by way of loan to the company to assist in the purchase of the "Nice Cream" business for $910,000, which was completed in February 2001. Dean provided the balance of the purchase monies.
4. In March 2004, Dean resolved to allot 1,800 ordinary shares to himself. The effect of the allotment was to defeat the voting power of Gani and Jorida by creating a new majority in favour of Dean, who then held 90 per cent of the shares in the company. At some point prior to 2010, Dean suffered serious injuries as a result of being hit by a motor vehicle. His health later deteriorated, and he died on 9 September 2018. The first respondent, Ricards Dzelme (Ricards), purportedly appointed himself as a director and secretary of Pacific Springs on 14 September 2018. Ricards is the sole executor and beneficiary of Dean's estate; he obtained a grant of probate of Dean's will on 1 April 2019.
5. Gani and Jorida brought proceedings against Ricards and Pacific Springs (together the respondents) claiming that the 2004 allotment of shares was made for an improper purpose, namely, to dilute their interests in the capital of the company and to confer effective control of the company on Dean. They sought a declaration that the allotment was void and of no effect, an order for rectification of the register of members of the company, and a declaration that Ricards' appointment as director and secretary of the company was invalid.
6. The primary judge (Rees J) dismissed the proceedings, finding that the impugned allotment was made with Gani and Jorida's knowledge and consent, making adverse credit findings against the appellants and rejecting their denials to the contrary. The primary judge also found on an alternative basis that, if Gani and Jorida had no actual knowledge of the impugned allotment, then the respondents had established the defence of laches. Her Honour made orders validating the appointment of Ricards as a director and secretary of Pacific Springs in September 2018 and all acts performed by him in those roles pursuant to s 1322(4) of the Corporations Act 2001 (Cth): Re Pacific Springs Pty Ltd [2020] NSWSC 1240.

Factual circumstances

1. The power to allot shares in Pacific Springs was vested in the directors by Article 97 of Pacific Springs' constitution "to such persons on such terms and conditions and at such consideration and at such times as the Directors think fit". Dean exercised that power on 16 March 2004 when he resolved as the sole director of Pacific Springs to issue 1,800 ordinary shares to himself. Consequently, Dean became the majority shareholder of the company, holding 90 per cent of the issued shares. On Dean's instructions, a Form 484 Change to Company Details was lodged by the company's accountants with the Australian Securities and Investments Commission (ASIC) on 7 April 2004. The company's register of members as at that date recorded that Gani and Jorida each held 100 ordinary shares and Dean held 1,800 ordinary shares.
2. The appellants both gave evidence at trial through a Mandarin interpreter. The primary judge found that Gani does not speak or understand English at a relevant skill level to enable him to converse in English, and that Jorida spoke and understood English to a limited extent: J [5]. Their evidence was that it was not until after Dean's death in 2018 that they first became aware of the allotment of shares to Dean in 2004.
3. The respondents' case was that it was inherently likely that the appellants consented to the impugned allotment, given that Dean had overseen the acquisition of Nice Cream and had managed the business successfully since 2000, and that by 2004 Dean had repaid almost half (some $356,000) of the $800,000 advanced by the appellants to acquire the business. The respondents contended that the propriety of the impugned allotment was corroborated by evidence given by three witnesses of hearsay statements made by Dean about disclosures to the appellants. These statements were admissible under s 63 of the Evidence Act 1995 (NSW), given Dean's unavailability as a witness.
4. Ricards, with whom Dean had been in a long-term relationship, gave evidence that in about late 2003 Dean told him that he had sent "some paperwork" relating to Pacific Springs to his parents by facsimile which was to give effect to what he had agreed with his mother during a telephone call earlier that day. Ricards gave evidence that Dean told him (J [59]): My mother said she doesn't care about Pacific Springs and Nice Cream anymore. She said I can have my wings. (Emphasis added.)

CV Megah invoices

1. At trial, the respondents tendered invoices purportedly issued by "CV Megah Chandra Insani" (CV Megah) for management services allegedly provided to Pacific Springs between 2002 and 2010. Although the appellants denied any knowledge of, or connection with, CV Megah, the primary judge did not accept Gani's evidence and made the following findings: 1. there was an association or connection between Gani and CV Megah: J [55], [100]; 2. the payment by Pacific Springs of invoices issued by CV Megah to Dean were in truth payments to the appellants at their direction, such direction being given by Gani: J [101]; 3. by 2004, almost half of the $800,000 advanced by Gani and Jorida to Dean had been repaid by Pacific Springs: J [142]; and 4. by February 2010, the $800,000 loan had been repaid in full, and indeed, "more than repaid": J [102], [144].

2007: Issue of "C" class share

1. On 31 August 2007, Dean resolved to allot one single "C" class share to Gani. That share carried rights to dividends but no voting rights. Gani denied that his signature was on the share application form, however the primary judge rejected his evidence: J [83]. There is no challenge to this finding.
2. Although no dividends were ever paid to Gani as the holder of this "C" class share, the respondents submitted at trial that the issuing of the "C" class share only made sense in circumstances where the appellants were no longer the sole shareholders of Pacific Springs. This is because the "C" class share made it possible to declare a dividend (or return profits) to Gani to the exclusion of Dean as the holder of 1,800 ordinary shares in the company.

2009/2010: restructure of the business

1. In December 2009, Dean and Ricards caused Pacific Springs Investments Pty Ltd (Investments) to be incorporated, with each holding one share. Investments was appointed trustee of the Pacific Springs Trust; Dean and Ricards were the beneficiaries. Ricards gave evidence that the new company and the trust were established on the advice of Mr Salameh at a time when Pacific Springs was in dispute with the landlord of its Paddington premises, who claimed that the property had been damaged by water leaking from Pacific Springs' fridges. According to Ricards, Dean told him that he had spoken to Mr Salameh and was going to transfer the equipment and trademarks out of Pacific Springs and into the trust "just in case we get sued by the landlord": J [84].
2. In February 2010, three documents were executed in connection with the restructuring of the business of Pacific Springs: (a) an undated asset sale and purchase agreement between Pacific Springs and Investments (sale agreement); (b) a loan agreement between Pacific Springs, Gani and Jorida; and (c) a fixed and floating charge between Pacific Springs, Gani and Jorida. The appellants denied that their signatures appeared on the loan agreement and the charge, but the primary judge did not accept their evidence in this regard: at J [96]. Under the loan agreement, Gani and Jorida agreed to make available a cash advance facility of $1,000,000, and Pacific Springs acknowledged that $800,000 "has been provided and received by the [company]".
3. Pursuant to the sale agreement, Pacific Springs sold its equipment and intellectual property to Investments for a purchase price which was left blank in the agreement. Ricards gave evidence that Pacific Springs also entered into a trademark licence and an equipment lease agreement with Investments as trustee of the Pacific Springs Trust. Those agreements were unsigned and undated, and the royalty fee and rent per month was left blank in each agreement.

2010 and 2015: Purchase and sale of property by Investments

1. Gani gave unchallenged evidence that he discussed with Dean in 2005 the high cost of the rent on the Paddington property, specifically that he told Dean that "[w]e should minimise our cost and invest in a property rather than paying rent" and "[y]ou should keep the profits in the company so that we have money to buy our own property and relocate".
2. In 2009 or 2010, Gani told Dean the rent on the Paddington premises was too high and asked Dean if "we have enough money for the company to buy a property" to which Dean replied, "[w]e have more than $1,000,000". In September 2010, Dean told Gani that he had found a property and Gani said he and Jorida would come (to Sydney) and look at the property, which they did. They inspected a property at Wolli Creek together with Dean. Gani told Dean that the property would be a good investment for the company. In November 2010, Investments (not Pacific Springs) purchased the Wolli Creek property for $888,000 and moved the business of Nice Cream to those premises.
3. In April 2015, Investments sold the Wolli Creek property for $1,900,000. In June 2015, Investments completed the purchase of an industrial unit at Marrickville for $660,000 and moved the Nice Cream business to these premises in July 2015. Gani gave unchallenged evidence that he discussed and agreed with Dean in about April 2015 the sale of the Wolli Creek property for $1,900,000 and that during a visit to Sydney with Jorida, he also discussed with Dean purchasing a property at Marrickville.
4. Both Gani and Jorida gave unchallenged evidence, which was admitted as evidence of their states of mind only, and in the case of Gani, also subject to relevance, that they believed that the Wolli Creek and Marrickville properties were owned by Pacific Springs, that Dean did not inform them that he was incorporating another company to purchase those properties, and that they were shocked to discover after Dean's death that another company had purchased those properties.
5. Following Dean's death, the company's accountant, Mr Salameh, suggested to Ricards that he be appointed as director and secretary of Pacific Springs. This occurred on 14 September 2018, and documents recording the purported appointments were lodged by Mr Salameh with ASIC.

The primary judgment

1. The primary judge expressed adverse views as to the credibility of both Gani and Jorida. As such, the judge rejected Gani's denial that he signed the 31 August 2007 letter subscribing for a single "C" class share in Pacific Springs (J [83]); rejected both Gani and Jorida's denial that they signed the 6 February 2010 loan agreement and fixed and floating charge agreement (J [96]); rejected Gani's denial of any knowledge of or connection with an Indonesian entity CV Megah (J [100]); and found improbable Jorida's evidence that she had counselled Dean against expanding the Nice Cream business into China because she did not want to live in China (J [41]).
2. In addition, the primary judge did not accept both Gani and Jorida's evidence that they were unaware that Dean had been in a long-term homosexual relationship with Ricards. Her Honour observed that, even putting aside cultural, generational or religious factors, the appellants insistence on repeatedly denying the undeniable under oath was "troubling", and characterised their denials as lies: J [14]-[15].

Whether the appellants gave their fully informed consent to the 2004 allotment?

1. The primary judge referred to the applicable legal principles (at J [115]), including that directors cannot exercise a fiduciary power to allot shares for the purpose of defeating the voting power of existing shareholders by creating a new majority, or with the intention of solely diluting a shareholding of an existing shareholder: Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at 290; [1987] HCA 11; Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260 at 336 (Clarke JA); Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 at 491-492 (Kirby ACJ, Priestley and Handley JJA agreeing).
2. The primary judge proceeded upon the basis that there can be no complaint about the exercise of power to allot shares if what was done was with the consent of the existing shareholders of the company. Her Honour reasoned that in such circumstances there has not been a breach of fiduciary duty as what has transpired has occurred with the consent of the fiduciary's principal: J [124].
3. The primary judge concluded: [146] Given that Gani and Jorida's evidence was so unreliable, I place no weight on their evidence that they did not know or agree to the share issue. I find that they agreed at the time and have either since forgotten or have otherwise chosen to deny that they knew and agreed in order to advance their financial interests in this case. I find that the issue of 1,800 shares to Dean in 2004 was done with the knowledge and consent of the plaintiffs and thus refuse the declaratory relief sought.
4. In support of this conclusion, the primary judge reasoned: 1. the inherent unlikelihood that Dean would have committed such a brazen fraud against his parents, with his alleged conduct at odds with the appellants' historical interactions with him and their opinion of him as honest, reliable and of good character: J [137]; 2. it is likely that Dean wanted to be the majority shareholder, and given the fact that in 2004 almost half of the loan had been repaid, Gani and Jorida were content for Dean to be the effective owner of the business as they trusted him to run the business well and continue to repay the loan: J [142]. Her Honour found: [142] … I think it likely that his parents were content for Dean to have control as he had proved himself by running the business for four years and generating enough revenue to repay a sizeable amount of the loan. … 1. the evidence given by Ricards, Mr Summerfield and Mr Salameh as to what Dean told them about the ownership of Pacific Springs and the allotment of shares: J [143]; 2. the absence of documentary evidence from the appellants in circumstances where the evidence revealed they had not searched their records, notwithstanding being required to do so pursuant to a notice to produce issued by the respondents: J [143]; and 3. the absence of explanation or rationale for the issue of the "C" class share to Gani in August 2007, if the appellants truly believed at that time and up until Dean died in 2018 that they were the sole shareholders of Pacific Springs: J [144].

Laches

1. The primary judge stated the applicable legal principles by reference, principally, to decisions of this Court in Crawley v Short [2009] NSWCA 410; (2009) 262 ALR 654 and Gerace v Auzhair Supplies Pty Ltd (in liq) (2014) 87 NSWLR 435; [2014] NSWCA 181, and noted that in Crawley at [163] Young JA (Allsop P and Macfarlan JA agreeing) identified the three elements of the defence of laches as comprising: (i) knowledge of the wrong; (ii) delay; and (iii) unconscionable prejudice to the opponent by the delay. This summary was cited with approval in Sze Tu v Lowe (2014) 89 NSWLR 317; [2014] NSWCA 462 at [415] (Gleeson JA, Meagher and Barrett JJA agreeing).

Delay and prejudice

1. The primary judge found that the elements of delay and prejudice were clearly present, given that no issue was taken with the propriety of the allotment until 2018, being 14 years later, and, prejudice is obvious because Dean is no longer able to give evidence, his evidence would have been pivotal, and it is likely that some contemporaneous records would have been available if the claim had been brought sooner: J [192]. There is no challenge to these findings.

Knowledge

1. With respect to the element of knowledge, the primary judge (at J [188]) referred to authorities for two propositions: first, knowledge is a "question of fact and degree in each case to be taken together with all the other facts of the particular case" (Crawley at [169]), and second, the "availability of the means of knowledge is as good as knowledge": Savage v Lunn [1998] NSWCA 204 at [3] (Handley and Sheller JJA, and Shepherd AJA); and Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) and (No 10) (2008) 39 WAR 1; [2008] WASC 239; [2009] WASC 107 at [9306] (Owen J).
2. The primary judge continued at J [188]-[189]: [188] … As the learned authors of Meagher, Gummow & Lehane's Equity Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths) state (at [38-070]): …in the kind of laches which consists of a plaintiff's long delay leading to the defendant (or third persons) reasonably altering their position to their detriment in reliance thereon, there seems to be no reason why the fact that the plaintiff is ignorant of his or her rights should bar a defence of laches. [189] This accords with the authority confirming that it is not necessarily universally, but rather "ordinarily... necessary that there should be sufficient knowledge of the facts constituting the title to relief": Lindsay Petroleum Co v Hurd (1874) LR 5 PC 221 at 241 per Lord Selborne; Savage v Lunn [1998] NSWCA 203 (unreported) at 28 per the court. As Dr I. C. F. Spry states in his treatise, Principles of Equitable Remedies (9th ed, 2014), p 447: "It is ordinarily sufficient that the plaintiff has been put on suspicion, that is, that he is aware of sufficient matters to raise in his mind a doubt whether an infringement of his rights has taken place".
3. The primary judge's dispositive reasoning was as follows: [193] If, contrary to what I have found, Dean allotted the 1,800 ordinary shares to himself without his parents' knowledge and consent, the following matters are relevant to the element of knowledge: (a) Gani and Jorida are experienced businesspeople. They have been engaged in a manufacturing business and hotel business for some years. Jorida is the president of PT Gadjah Ruku. (b) At no time did the parents involve themselves in the operations or management of Pacific Springs, nor request any financial information from the director of the company. (c) Since 2004, a record of the share issue has been publicly available from a search of ASIC's records. (d) Although Pacific Springs made regular payments to the parents or at their direction for several years, no payments were made after February 2010. Notwithstanding this, eight more years passed before the parents suggested that they were sole shareholders of the company. [194] If, as the parents said: the purpose of the business was to make money for the Mualim family; Dean regularly told Gani that the business was making money for Gani; the moneys which were paid to them were profits, then the fact that they had not received any money since 2010 must have raised a doubt as to whether the company was profitable as Dean said, or whether their rights as shareholders had been infringed. If the plaintiffs did not know that Dean had allotted 1,800 ordinary shares to himself in 2004, then the plaintiffs had the means of knowledge by performing a simple and inexpensive search of public records. As experienced businesspeople, it would have been within their field of competence to arrange for such searches to be undertaken. Where the parents left the running of the business to the director without any involvement nor return for a protracted period, I consider that the parents were either on notice that the shareholding had changed or were no longer interested in the shareholding of the company. Taking all three elements together, I consider that the defence of laches is established. The plaintiffs acted as to make it unfair that their claim should now succeed. (Emphasis added.)

The issues on appeal

1. The issues on appeal were as follows: 1. whether the CV Megah invoices were fabricated by Dean and did not record or reflect legitimate transactions between Pacific Springs and CV Megah; 2. whether Gani was associated or connected with CV Megah; 3. whether Pacific Springs had paid almost half ($356,000) of the $800,000 advance by March 2004; 4. whether the primary judge erred in rejecting the tender of a letter to Gani from W Yogi Widido, the managing partner of Kantor Danoewiriono Widodo & Partners dated 13 July 2020, entitled "Search report on CV Megah" (the Widodo letter); 5. whether Gani and Jorida gave their fully informed consent to the 2004 allotment; 6. if Gani and Jorida did give their fully informed consent to the 2004 allotment, whether the respondents established the defence of laches; and 7. whether the validation order under s 1322(4) of the Corporations Act should have been made.

Factual challenges relating to CV Megah and payments to the appellants

1. Issues 1, 2 and 3 are related. The CV Megah invoices were relied upon by the respondents at trial to attack Gani's credit (who denied any knowledge of, or connection with, CV Megah), and as showing how the appellants were being repaid their $800,000 advance to the company. Before addressing the appellants' factual challenges, it is necessary to refer in more detail to the primary judge's reasons.

Primary judge's reasons

1. The primary judge found that 105 invoices for management services were rendered by CV Megah to Pacific Springs from July 2001 to February 2010 totalling $1,068,000. The invoices included an address and telephone number in Jakarta, a signature and two stamps stating "ENTERED" and "PAID". Although said to have been issued monthly, the primary judge found that the invoices appear to have been issued and paid in batches: J [48].
2. The primary judge accepted Ricards' evidence that he found the invoices in Dean's personal filing cabinet after his death in 2018, and although Ricards recognised Dean's handwriting on some of the invoices, he had never heard of CV Megah, Dean had not mentioned CV Megah, and no management services had been provided to Pacific Springs: J [49]. When it was put to Ricards in cross-examination that the invoices were "entirely [fictitious]" he responded "I can't answer that question", despite acknowledging earlier that he did not recall any person in or about the company's premises who purported to be a representative of CV Megah.
3. Gani gave affidavit evidence that he had no knowledge of CV Megah or any commercial dealings between Pacific Springs and that company, nor the reason for the rendering of the invoices. He was adamant in cross-examination that he did not know anything about CV Megah, however, the primary judge did not accept Gani's evidence: J [50]. Jorida also gave evidence in cross-examination that she had never heard of CV Megah: J [50]. No specific finding was made by the primary judge concerning this aspect of her evidence.
4. The primary judge rejected the appellants' submissions that Dean had fabricated the CV Megah invoices, and that this demonstrated "a disposition on the part of Mr Dean Mualim to create false or [fictitious] transactions of no commercial reality whatsoever, and it's entirely consistent with our contention that he effected this allotment in his own interests, with no disclosure whatsoever to his parents": J [99]. The primary judge concluded that Gani lied about having no knowledge of, or connection with, CV Megah, finding that several pieces of evidence strongly point to such a connection: J [100].
5. First, Gani told Dean to make transfers to Ms Thamrin, Gani and Jorida's daughter-in-law, totalling $368,000, which post-dated a payment direction letter from CV Megah dated 29 December 2003.

Approach of an appellate court to factual challenges

1. In an appeal such as the present involving challenges to findings of fact, and particularly those based in part on an assessment of the credibility or reliability of the evidence of the appellants, two matters need to be kept in mind. One is that an appellate court is to exercise its powers and duties on appeal, by way of rehearing under s 75A of the Supreme Court Act 1970 (NSW), in accordance with the approach stated in Fox v Percy at [28]-[29], Robinson Helicopters Co Inc v McDermott at [43], and Lee v Lee at [55]. As Brereton JA said in Johnson v Mackinnon [2021] NSWCA 152 at [115], "[t]he burden facing an appellant in seeking to overturn findings of fact based in substantial part on the evaluation of the credibility of witnesses is a heavy one". The other matter is the "natural limitations" on an appellate court proceeding wholly or substantially on the record below: ET-China.com International Holdings Ltd v Cheung [2021] NSWCA 24 at [181]-[188] (Bell P, Bathurst CJ and Leeming JA agreeing).
2. It also needs to be kept in mind that the appellants' allegation that Dean fabricated the CV Megah invoices attracts the considerations referred to in s 140(2) of the Evidence Act for the civil standard of proof, reflecting the principle in Briginshaw v Briginshaw (1938) 60 CLR 336 at 363 (Dixon J); [1938] HCA 34; see also Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd [1992] HCA 66; (1992) 67 ALJR 170 at 171; Berry v CCL Secure Pty Ltd [2020] HCA 27; (2020) 94 ALJR 715 at [39] (Bell, Keane and Nettle JJ).

Submissions

1. The principal submissions of the appellants were as follows: 1. the primary judge's finding that the appellants considered Dean to be "honest, reliable and of good character" (J [137]), distracted the judge from entertaining the probability that the invoices and payment direction letters were "bogus" and in fact all fabricated by Dean himself, perhaps with the misguided idea that he could use those documents "to convert" the money which his parents had lent to the company into tax-deductible management expenses; 2. CV Megah did not exist. Pacific Springs' supposed payment of the "bogus" invoices was not reflected in any entries in the company's accounting records (since if it were otherwise the respondents would have tendered those records), and no "management services" were ever provided by CV Megah to the company, as the invoices purportedly record, and as Ricards acknowledged in his evidence; 3. the finding that Gani was associated or connected with CV Megah should be set aside; 4. the finding that Pacific Springs had repaid almost half of the $800,000 advance by March 2004 should be set aside and a finding should be made that by March 2004 Pacific Springs had repaid only $240,000 of the $800,000 advance; and 5. the finding that by February 2010 Pacific Springs had repaid the advance in full was not supported by the evidence.
2. The respondents submitted that whether the CV Megah invoices were part of some "misguided" tax scam was not probative of the issues at hand. In oral argument, senior counsel for the respondents said that the invoices are "genuine in the sense that they are genuinely created at the time to record payments which were made at the time", and that "in the absence of anything else", the invoices were created by CV Megah, not the recipient.
3. No submission was made by the respondents at trial or on appeal that the conditions for admissibility under s 69 of the Evidence Act were satisfied for any previous representation contained in the CV Megah invoices, either as a business record of CV Megah (assuming it existed) or Pacific Springs: see Maaz v Fullerton Property Pty Ltd [2021] NSWCA 79 at [56]-[69] (Brereton JA), where the operation of s 69 is discussed.

The objective facts

1. The starting point is the objective facts, in accordance with the principles in Fox v Percy: 1. no management services were provided by CV Megah to Pacific Springs; 2. Dean never mentioned CV Megah to Ricards; 3. the CV Megah invoices were first found by Ricards in Dean's personal papers after his death; 4. there was no evidence that any entity by the name of "CV Megah Chandra Insani" existed; 5. there was no evidence of any accounting records of Pacific Springs recording the making of payments to CV Megah; 6. between 2001 and January 2007, Pacific Springs made payments at the direction of Gani to Mr Tjandra and Ms Thamrin totalling $528,000, and three of the five telegraphic transfer applications signed by Dean in favour of Ms Thamrin contained the message reference "C. V. Megah Chandra Insani"; 7. the CV Megah invoices dated between January 2007 and February 2010 contained bank details of an account with the NAB being account no. XX-XXX-8491. This was a FlexiCard account in Gani's name opened in March 1995; Dean was an additional cardholder, and Dean and Ricards were authorised signatories on this account. No bank statements were tendered in evidence for account 8491 covering the period of the CV Megah invoices. A bank statement in evidence for account 8491 for the 3 months ending December 2012 contained address details of a post office box at the Royal Exchange in Sydney; and 8. a bank statement for another NAB account in Gani's name being account no XX-XXX-0483, recorded transactions on 2 April 2008 including an internet deposit of $30,000 as made by "CV Megah Chandra", and an internet transfer of $30,000.12 as made to "Gani". The address details on the bank statement are the same as for account 8491.

Matters not in dispute on appeal

1. The appellants accepted on appeal that the evidence establishes that between 2003 and 2007 Pacific Springs remitted amounts totalling $528,000 to Mr Tjandra and Ms Thamrin at the direction of Gani as set out in the table below: Date Amount Payee 19 February 2003 $136,556.06 John Tjandra 19 February 2003 $ 23,443.94 John Tjandra 5 February 2004 $ 80,000.00 Ellis Thamrin 8 October 2004 $ 80,000.00 Ellis Thamrin 1 June 2005 $ 88,000.00 Ellis Thamrin 6 March 2006 $ 60,000.00 Ellis Thamrin 17 January 2007 $ 60,000.00 Ellis Thamrin Total: $528,000.00

1. At trial, Gani gave affidavit evidence that the five payments to Ms Thamrin totalling $368,000 were made at his direction, however, he was not aware of the two payments totalling $160,000 made to Mr Tjandra. According to Gani, the amounts paid by Pacific Springs pursuant to his direction were in respect of principal or interest on money lent by him to the company to enable it to purchase of the Nice Cream business.
2. When taken in cross-examination to [27] of his affidavit, which had not been read by the appellants following an objection by the respondents' counsel, Gani accepted that by 2006 he and Jorida had received money back from the company totalling "approximately" $500,000. Gani also accepted that from 2007 onwards he may have directed Dean to pay money from the company to other people, including family members, but could not remember either way.
3. In cross-examination, Gani adhered to his affidavit evidence that he did not know anything about the payments to Mr Tjandra, who he said was a relative. He said that he had not spoken to or questioned Mr Tjandra about these payments by the company in the weeks before the trial, and that the transfers were handled by Dean who was responsible for company money. The appellants submitted in this Court that when Gani swore his affidavit of 13 June 2020 (par [5]), he had simply forgotten the fact that he had authorised the payments to Mr Tjandra more than 17 years earlier.

ISSUE 1: Whether the CV Megah invoices were fabricated by Dean or genuine

1. The finding that the CV Megah invoices were issued to Dean involved an acceptance by the primary judge that the invoices were genuine and a rejection of the appellants' submission that the invoices were fabricated by Dean. Ground 10 challenges this finding.
2. Her Honour seems to have inferred that an Indonesian entity by the name of CV Megah existed, given that the invoices contained a Jakarta address and telephone number, a signature, and "ENTERED" and "PAID" stamps (J [48]). That inference could not be drawn in circumstances where the existence of such an entity was disputed by the appellants, there was no evidence as to whose signature appeared on the invoices (and their authority to sign on behalf of the entity), nor was there any evidence that an entity by the name of CV Megah in fact existed and carried on business at the Jakarta address with the telephone number contained on the invoices, or elsewhere.
3. Given the unchallenged evidence of Ricards that "CV Megah" did not provide any management services to Pacific Springs in the period of 2001 to 2010, as the invoices purportedly record, there was no proper basis to infer, as the primary judge did, that the invoices were issued to Dean. That finding involved the implausible proposition that an entity, for which there was no evidence of its existence or who its owners or principals were, would issue invoices to Pacific Springs for management services that were never provided.
4. In cross-examination, when asked if he knew who "CV Megah Chandra" was, Gani adhered to his affidavit evidence that he did not know "this company". The subject matter of the invoices was taken no further. When cross-examined in relation to the payment direction letters, Gani gave evidence that: (a) he did not recognise the signature on the payment direction letter dated 29 December 2003 relating to Ms Thamrin; (b) he never provided the (undated) typed document containing the bank account details of Mr Tjandra; and (c) he did not know anything about the payment direction letter dated 23 August 2001, relating to Mr Tjandra.
5. It was not put to either of the appellants that they had written or authorised any of the invoices. The respondents did not dispute the absence of cross-examination and submitted that no finding is necessary as to precisely who issued the invoices or the payment direction letters; it was enough, the respondents say, that the payments made, concerning as they did CV Megah, were done at the behest of Gani given his "involvement" in the payments. This submission conflated the supposed payments by Pacific Springs of the CV Megah invoices with the payments that Pacific Springs made at Gani's direction.

ISSUE 2: Whether Gani was associated or connected with CV Megah

1. The primary judge reasoned that the fact that the payment direction letter purportedly issued by CV Megah to Pacific Springs in December 2003 requested payment to Ms Thamrin suggests that CV Megah was associated with Gani: J [55].
2. Ground 9 contends that the primary judge erred in finding that Gani was associated or connected with CV Megah and in rejecting his evidence that he had no knowledge of CV Megah, no knowledge of any dealings between Pacific Springs and CV Megah, and no knowledge of the reason for the rendering of the invoices.
3. A major difficulty with the primary judge's reasoning is that the conclusion that Gani was associated with CV Megah does not follow as a matter of inference merely because Gani directed Dean to make payments to Ms Thamrin, and CV Megah purported to give the same direction in the letter of December 2003.
4. Gani gave evidence that he did not recognise the signature on the CV Megah payment direction of December 2003 relating to Ms Thamrin (see [69] above). It was not put to Gani that he gave or authorised this purported direction by "CV Megah", and the respondents did not adduce evidence of the identity of the person signing this direction. Accepting that the CV Megah invoices were not genuine and were most likely created by Dean, there is no reason to suppose that Gani gave, or was associated with, the payment direction of December 2003 purportedly given by CV Megah: see [71] above.
5. The respondents pointed to the handwritten notes on two of the CV Megah invoices which post-date the payment direction letter of December 2003. The amount of the second transfer to Ms Thamrin on 8 October 2004 is noted on the invoice dated 29 October 2004, and the amount of the fourth transfer to Ms Thamrin on 1 June 2005 is noted on the invoice dated 30 December 2005. Ricards' evidence was that he recognised Dean's handwriting on some of the invoices. That Dean may have treated or recorded in the company's records amounts remitted to Ms Thamrin as the payment of an expense for management services (which were never provided), says nothing of Gani's knowledge of, or connection with, CV Megah.
6. Although three of the telegraphic transfer applications signed by Dean relating to transfers to Ms Thamrin included the message "REF: C. V. MEGAH CHANDRA INSANI", Gani denied in cross-examination that he requested Dean to include this message on the remittances by Pacific Springs to Ms Thamrin, and there was no evidence that copies of these applications were provided to Gani or came to his attention. Again, accepting that the CV Megah invoices were not genuine, there would be no legitimate reason for Dean to include, or for Gani to request, this message be included on the transfer applications. It was not put to Gani in cross-examination, that he had any reason to make a request of Dean that some of the applications for transfer of monies to Ms Thamrin include the "CV Megah" message reference.

ISSUE 3: Whether Pacific Springs had paid almost half ($356,000) of the $800,000 advance by March 2004

Payments up to March 2004

1. The starting point is the objective documentary evidence which established that by March 2004 the appellants had received payment of $240,000 from Pacific Springs, comprising the payments to Mr Tjandra ($160,000) and Ms Thamrin ($80,000).
2. The respondents submitted that the stamps on the invoices between July 2001 and March 2004 recording "ENTERED" and PAID", and the handwriting "EFT 4/2/04" on the 31 January 2004 invoice, support an inference of regularity and, accordingly, her Honour was correct to find that all of the invoices up to March 2004, totalling $356,000, were paid by Pacific Springs to the appellants or at their direction. That submission should be rejected.
3. First, no inference of regularity of payment of the invoices is available given that the invoices were not genuine. Second, that the January 2004 invoice for $100,000 contains the handwriting "EFT 4/2/04" (likely to be that of Dean) and that the company remitted, at the direction of Gani, an amount of $80,000 to Ms Thamrin on 5 February 2004, does not establish that Gani had knowledge of, or was associated with, CV Megah. Third, the supposed payment by Pacific Springs of the amounts recorded in all the invoices up to March 2004 to the appellants, or at Gani's direction, is not corroborated by objective evidence such as telegraphic transfer applications by the company, bank statements or accounting records of Pacific Springs.
4. In my view, the primary judge erred in finding that the appellants had received payment of about half ($356,000) of their $800,000 advance by March 2004. The finding which should be made is that the appellants, at the direction of Gani, had received $240,000 from Pacific Springs by March 2004.

Payments after March 2004

1. It is not in dispute that after 16 March 2004, a further $288,000 was paid by Pacific Springs to Ms Thamrin at Gani's direction (see the table at [62] above). The total of the acknowledged payments in the table to January 2007 is $528,000. That amount closely accorded with Gani's evidence in cross-examination of having received approximately $500,000 up to 2006.
2. Accepting the possibility, as Gani acknowledged in cross-examination, that he may have - but could not recall - directing Dean to pay other people, including family members after the beginning of 2007, the evidence taken as a whole did not justify the finding by the primary judge that "it appears on the evidence - and in the absence of any reliable evidence from the appellants to the contrary - that the $800,000 which [the appellants] advanced to Dean to buy Nice Cream was more than repaid": J [102].
3. That view of the evidence overlooked that Pacific Springs acknowledged in the loan agreement in February 2010 that the $800,000 advance "has been provided and received by the [company]" (cl 1.2), that the company was obliged to pay interest on this advance at the rate agreed or, in the absence of agreement, at the NAB Business Overdraft Commercial Rate plus a margin of 2 per cent (cl 4.1), and that the company gave security by way of charge for both the $800,000 advance and the appellants' commitment to advance a further $200,000 to the company. The acknowledgment by Pacific Springs in cl 1.2 of the loan agreement that it had received $800,000 from the appellants, without any mention or qualification that this amount had been repaid, was inconsistent with the finding that the whole of the advance (including interest) had been repaid a month earlier.
4. Nonetheless, the respondents' submitted that the evidence established that the appellants received a total of $712,000 after March 2004 comprising: (a) $288,000, which the appellants acknowledged was paid to Ms Thamrin at Gani's direction after March 2004; and (b) $424,000, being the total amount of invoices after March 2004 of $712,000 less the $288,000 paid to Ms Thamrin.
5. As to payment of the amount of $424,000, the respondents relied upon an inference from the terms of the invoices after January 2007 and stamps thereon, relevantly, the invoices contained the bank details for account no 8491 in Gani's name, the stamps "ENTERED", "PAID" and the handwriting "EFT" and a date on the invoice. For the reasons given at [86]-[87] above, the suggested inference is not available.

ISSUE 4: Rejection of tender of MFI 1

1. On the first day of the trial the primary judge upheld the respondents' objection to the tender of the Widodo letter dated 13 July 2020 (MFI 1). The appellants had sought to tender this letter either as a business record or expert evidence or, alternatively, that the tender be permitted by waiver of the rules of evidence under s 190 of the Evidence Act. Section 190(3) provides that in a civil proceeding the Court may dispense with one or more of the provisions in, relevantly for present purposes, Pts 3.2 ("Hearsay") and 3.3 ("Opinion") of the Evidence Act if the matter to which the evidence relates is not genuinely in dispute, or the application of those provisions would cause unnecessary expense or delay.
2. Ground 8 contends that her Honour erred in rejecting the tender of this letter as expert evidence when it was not of that nature. Alternatively, it is contended that if the letter was expert evidence, the interests of justice warranted a waiver of the rules governing expert evidence. There is no challenge to the primary judge's finding that the letter did not fall within the business records exception by reason of s 69(3)(a) of the Evidence Act.
3. In her reasons given on 14 July 2020, the primary judge noted that the author of the letter appeared to be Gani's Indonesian lawyers. The letter referred to instructions received from Gani to conduct searches in respect of CV Megah and set out the results of the searches which the lawyers had conducted, including investigations undertaken at the purported address for CV Megah in Jakarta, a record of discussions between the lawyers and people who lived at that address, a record of what those residents had told the lawyers, and attaching various photographs taken at the address.
4. Her Honour described the letter as being in the nature of an investigative report and gave the following reasons for rejecting the tender of the letter as expert evidence: (1) no leave had been sought to adduce expert evidence as required by the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 31.19; (2) there had been non-compliance with UCPR, r 31.23(3) because the letter did not contain an acknowledgment by Mr Widodo that he had read the expert witness code of conduct and agreed to be bound by it; (3) the letter was not served more than 28 days prior to the final hearing as required by UCPR, r 31.28(1)(c); and (4) the letter failed to set out the full reasoning upon which the opinion was based contrary to UCPR, r 31.27(1) and s 79 of the Evidence Act.

Decision

1. The appellants cannot complain on appeal that her Honour rejected the tender of the Widodo letter on a basis advanced by them at trial, namely as expert evidence. In any event, the appellants' subsequent disavowal of the letter as expert evidence does not assist them. The letter included statements which implicitly contained or conveyed underlying legal contentions that "CV Megah" could not be, and could never have been, a legal entity under Indonesian law because "CV Megah" had not been located in the places searched by the author of the letter. Her Honour was correct to treat the letter as containing expert evidence.
2. To succeed on their alternative submission that the primary judge erred in not waiving the rules of evidence under s 190 of the Evidence Act or the requirements of the UCPR, the appellants must establish error in one of the ways described in House v The King (1936) 55 CLR 499 at 504-505; [1936] HCA 40 (see also Micallef v ICI Australia Operations Pty Ltd [2001] NSWCA 274 at [45]), namely, that the primary judge: (a) made an error of legal principle, (b) made a material error of fact, (c) took into account some irrelevant matter, (d) failed to take into account, or gave insufficient weight to, some relevant matter, or (e) arrived at a result so unreasonable or unjust as to suggest that one of the foregoing categories of error had occurred, even though the error in question did not explicitly appear on the face of the reasoning.
3. None of the first four categories of error in House v The King were relied upon by the appellants. As to the last category of error, the primary judge correctly considered the following matters in exercising her discretion not to permit the tender of the letter:

• the late service of the letter on the first day of the hearing;
• that the appellants had been on notice of the CV Megah invoices for more than seven months, given that they were exhibited to Ricards' affidavit of 27 November 2019 and served on that date;
• there was no explanation, let alone evidence, as to the reason for the late service of the letter; and
• the respondents would be prejudiced by the inclusion of the letter as they had not had the opportunity to test the assertions in the letter as Mr Widodo was not being called as a witness, nor would they have time to undertake their own investigations in Indonesia.

ISSUE 5: Whether the appellants gave their informed consent to the 2004 allotment?

1. Grounds 2-7 contend that the finding that the appellants were informed of, and consented to, the impugned allotment is inconsistent with incontrovertibly established facts and was glaringly improbable, in the sense referred to in Fox v Percy at [29]. Grounds 1 and 11 are general grounds challenging the ultimate finding of informed consent.

Legal principles

1. Before addressing these grounds of appeal, it is necessary to refer to some basic principles about "informed consent".
2. Informed consent is a defence. There is no duty on a fiduciary to obtain the informed consent of the principal, "[r]ather, the existence of an informed consent [will go] to negate what otherwise was a breach of duty": Maguire v Makaronis (1997) 188 CLR 449 at 466; [1997] HCA 23. Accordingly, it is for the fiduciary to make out the defence: Maguire at 466; Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1; [2011] FCAFC 24 at [108] (Besanko J, Finkelstein and Jacobson JJ agreeing); Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609; [2014] NSWCA 266 at [135] (Leeming JA, Barrett and Gleeson JJA agreeing).
3. The consent must be "fully informed". What is required is a question of fact which depends on all the circumstances of each case and there is no precise formula which will determine in all cases whether fully informed consent has been given: Maguire at 466; Boardman v Phipps [1967] 2 AC 46 at 109.
4. The question is whether the principal has been "fully informed of his rights 'and of all the material facts and circumstances of the case'": Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 393, citing Turner LJ in Life Association of Scotland v Siddal (1861) 3 De GF&J 58 at 73. See also Rahme v Benjamin & Khoury Pty Ltd (2019) 100 NSWLR 550; [2019] NSWCA 211 at [100] (Macfarlan JA, Bathurst CJ and McCallum JA agreeing).
5. In some cases, independent advice may be necessary for the principal to be fully informed; this will depend on the circumstances, including the capacity of the principal and the nature and significance of the circumstances that require disclosure: Law Society of New South Wales v Harvey [1976] 2 NSWLR 154 at 170-171 (Mahoney JA); O'Reilly v Law Society of New South Wales (1988) 24 NSWLR 204 at 209 (Kirby P). Where independent advice is required, it must be "meaningful" advice enabling the person seeking advice to make an independent, intelligent choice concerning the transaction: Rahme v Benjamin & Khoury at [106], citing Bester v Perpetual Trustee Co Ltd [1970] 3 NSWLR 30 at 36 (Street J).
6. The position is accurately summarised by the authors of Meagher, Gummow and Lehane's Equity Doctrines and Remedies (5th ed, 2015, LexisNexis Butterworths) at [5-130]: If a person occupying a fiduciary position wishes to enter into a transaction which would otherwise amount to a breach of duty, the fiduciary must, if liability is to be avoided, make full disclosure to the person to whom the duty is owed of all relevant facts known to the fiduciary, and that person must consent to the fiduciary's proposal. Consent need not be given expressly. What is required for a fully informed consent is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given. The circumstances of the case may call for independent and skilled advice from a third party. (Citations omitted.)

Decision

1. Again, the starting point is the objective facts: 1. the sole director resolution approving the allotment of 1,800 shares to Dean on 16 March 2004 makes no reference to Dean having provided any "paperwork" to his parents concerning the proposed allotment or having obtained their consent or agreement to the allotment; 2. Mr Salameh, the accountant who prepared the paperwork for the allotment on Dean's instructions, never spoke to the appellants or otherwise communicated with them regarding the company; 3. Dean never provided Mr Salameh with copies of any document informing his parents of the proposed allotment or containing their consent; 4. the records of the company in evidence at trial did not include any notification given by Dean to the appellants of the proposed allotment, nor any record of their consent; 5. the company's financial statements for the year ending 30 June 2004 and thereafter, which disclosed the alteration in the issued capital of the company in March 2004, were never provided to the appellants by Dean; 6. on 31 August 2007, the company issued one "C" class share to Gani. No dividends were ever declared on this share; 7. in February 2010, the appellants were prepared, according to the terms of the loan agreement, to advance a further $200,000 to the company; 8. Dean did not disclose to the appellants that Investments, not Pacific Springs, was the purchaser of the Wolli Creek and Marrickville properties in 2010 and 2015 respectively, or that Pacific Springs had sold its equipment and intellectual property to Investments in 2010 for an unstated amount; and 9. the appellants advanced $500,000 to Dean on 25 November 2016.

Absence of corroboration of the "paperwork" allegedly sent to the appellants

1. The matters in (1)-(4) above are related and it is convenient to deal with them together.
2. The primary judge reasoned that the absence of contemporaneous documents relating to disclosure of the allotment to the appellants was not significant because the appellants had not disclosed all documents within their possession relevant to the proceedings as they had not made a proper search of their records: J [25]. There are difficulties with this reasoning given that the respondents bore the onus of proof of establishing the defence of fully informed consent: see [111] above.
3. Little weight can be given to the hearsay statements made by Dean to others (Ricards, Mr Salameh and Mr Summerfield), which were admissible under s 63 of the Evidence Act, to support the likelihood that Dean had made the required disclosure to his parents about the proposed allotment.
4. One reason for doubting that Dean made full disclosure to his parents of the proposed allotment is the vague expressions recalled by Ricards, "some paperwork", and recalled by Mr Summerfield, "all of the paperwork". Another reason is that there was no evidence adduced by the respondents of the "paperwork" which Dean told others he had sent to his parents informing them of the proposed allotment. Nor was any record kept by the company of the appellants giving their consent to the proposed allotment to Dean.
5. The primary judge discounted these gaps in the respondents' evidence on the basis that it was conceivable that the appellants had in their possession documents relating to the allotment as they had not made a proper search in answer to a notice to produce dated 1 April 2020. That led her Honour to draw a Jones v Dunkel inference that the appellants might be in possession of documents that may not have assisted their case: J [139]. However, the assumption concerning the availability of records in the appellants' possession overlooked her Honour's earlier finding that Dean was "the record keeper for [the company] and, it appears a good record keeper": J [20]. The available inference is that if Dean had sent any "paperwork" to his parents concerning the proposed allotment he would most likely have kept a copy in the company records, given its importance.
6. That no copy of such paperwork or record of the appellants' consent existed in the company records supports the inference, contrary to his self-serving statements to others, that Dean did not send any paperwork to his parents in 2004 concerning the proposed allotment. That inference is strengthened by the fact that Dean did not mention or provide a copy of any "paperwork" to Mr Salameh when he told him in 2004 that his parents had (already) agreed to him being allotted most of the shares, or when he later instructed Mr Salameh to prepare paperwork for the allotment.

Whether the appellants attended AGMs before, but not after, March 2004

1. The respondents repeated a submission made at trial but not determined by her Honour (see J [183]), that the inference that the appellants were content for Dean to have control is strengthened by the fact that the appellants had been recorded as being in attendance at AGMs of Pacific Springs prior to March 2004, but not afterwards. Although the appellants gave unchallenged evidence that they did not attend any meetings of shareholders or receive notice of such meetings (noted at J [69]), her Honour did not make any finding in this regard.
2. The minutes of the 2002 and 2003 AGMs of Pacific Springs record the appellants as having attended those meetings, which were purportedly held at the same time and date on two consecutive years, being New Year's Eve at 5:00 pm, 31 December 2002 and 2003. Senior counsel for the appellants submitted that it is implausible that the appellants attended those AGMs. There is force in that submission.
3. First, the respondents did not adduce any evidence contradicting the appellants' evidence that they had not received notice or attended these two meetings.
4. Second, the appellants ordinarily resided in Indonesia. Attending AGMs of the company in two consecutive years at 5:00 pm on New Year's Eve in Sydney is highly unlikely.
5. Third, the reasonable inference is that these minutes were pro forma documents prepared on the instructions of Dean and inaccurately record the attendance of the appellants at those two meetings.
6. One further matter should be mentioned concerning these minutes. No attention was given by the parties to the evidentiary provisions in ss 251A and 1305(1) of the Corporations Act. Section 251A(1) relevantly provides that the company: … must keep minute books in which it records within 1 month: (a) proceedings and resolutions of meetings of the company's members; …
7. Section 251A(1) draws a distinction between a record of the proceedings and resolutions and a book in which the record is kept: Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287; (2009) 71 ACSR 368 at [57] (Gzell J). Section 251A(6) provides that a minute that is so recorded and signed is evidence of the proceeding, resolution or declaration to which it relates, unless the contrary is proved.

The appellants did not receive financial statements of Pacific Springs

1. As to the matter in (5) above, her Honour considered that the absence of financial statements in the appellants' possession was consistent with the appellants having no involvement in Pacific Springs, "such as they might have [had] if they regarded the company [as] owned by Dean": J [139]. There are difficulties with this reasoning.
2. First, Gani gave unchallenged evidence of his conversations with Dean concerning the business and his visits to Sydney with Jorida where they met with Dean and inspected the company's premises. Their evidence was inconsistent with the appellants not being interested in Pacific Springs.
3. Second, her Honour seems to have overlooked Gani's evidence explaining why he did not request copies of the financial statements; he was content to rely on his discussions with Dean as to the company's profit or loss each year. Importantly, there was no change after March 2004 in the way Gani obtained information from Dean regarding the company; he continued to rely on his discussions with Dean. Gani's manner of dealing with Dean reflected the trust he placed in his son.
4. Third, that the appellants allowed Dean the freedom to run the business in Sydney when they were shareholders and resided in Indonesia was not inconsistent with the appellants retaining their interest in the business, qua shareholders of the company.
5. Fourth, while her Honour accepted that Dean "may well have spoken to his parents" about the acquisition of the Wolli Creek and Marrickville properties (J [144]), the suggestion by her Honour that the fact that the appellants did not know that the properties were acquired by a different corporate entity "may simply be because it was not their concern", ignored the evidence that Dean had purchased these properties without disclosing to the appellants that he had set up a new company as the purchaser. Her Honour's view also overlooked Gani's unchallenged evidence of his conversations with Dean regarding these property transactions, which implicitly assumed that Pacific Springs was the purchaser. Her Honour's finding (at J [144]) that Dean had lived up to his "parents' trust" cannot be reconciled with Dean having kept secret from his parents the purchase of these properties by a different corporate entity to Pacific Springs or the sale of the company's equipment and intellectual property to Investments.

The "C" class share issued to Gani

1. As to the matter in (6) above, the finding by her Honour that after the 2004 allotment Dean continued to confer financial benefits on his parents, such as the issue of a "C" class share to Gani in 2007 (at J [144]), does not really bear on the anterior question of fully informed consent.
2. First, nothing ever eventuated from the issue of this share; no dividend was ever declared by the company to Gani as the holder of this share.
3. Second, there is no evidence that the reason for the issue of the "C" class share was ever communicated by Dean to Gani, as the respondents contended. In cross-examination, counsel for the respondents asked Gani whether Dean said to him in 2007, "[l]ook Dad, I need a way to get you and you alone a dividend declaration". The question was rejected following an objection on the ground of speculation. There is no challenge to that ruling.
4. Third, contrary to the respondents' submissions, there is an entirely rational reason for the issue of the "C" class share to Gani which does not involve the appellants having previously given their consent to the 2004 allotment. Any declaration of a dividend to ordinary shareholders after 2004 would have revealed the 2004 allotment, as Dean would have been entitled to 90 per cent and the appellants entitled to only 10 per cent of any dividend. Conversely, the "C" class share would have permitted Dean to distribute profits solely to Gani (if Dean wished to do so), without revealing to his parents the 2004 allotment.

Significance of 2010 loan agreement and charge

1. As to the matter in (7) above, although the primary judge did not accept the appellants' evidence that they did not sign the 2010 loan agreement and charge, there is a tension between her Honour's finding that the appellants agreed in 2004 to dilute their shareholding in the company to 10 per cent but subsequently allowed the company to remain indebted to them for a substantial sum, as acknowledged in the loan agreement, and also express their commitment to advance a further $200,000 to the company. The appellants' subsequent conduct is inconsistent with them having consented to the 2004 allotment.

The evidence of Dean's character

1. As to the matter in (8) above, her Honour's finding that the 2004 allotment would be at odds with Dean's character, as observed by his parents over a long period of time, is problematic because it ignored the appellants' unchallenged evidence that it was not until after Dean's death that they discovered matters which cast doubt on Dean's character.
2. There was objective evidence of Dean's conduct, which her Honour seems to have disregarded, where he was not frank in his dealings on behalf of the company. That conduct included: (1) the false minutes of the 2002 and 2003 AGMs signed by Dean recording, contrary to the facts, that the appellants attended those meetings; (2) Dean's use of the CV Megah invoices as the supposed payment of moneys at Gani's direction when the invoices were not genuine; (3) Dean did not disclose to the appellants the restructure of the company's business in 2010, including the establishment of Investments and the sale of the company's equipment and intellectual property to Investments and (4) Dean did not disclose to the appellants that it was Investments, not Pacific Springs, which acquired the property at Wolli Creek and later the Marrickville unit.
3. As to the last matter, the respondents submitted that Investments was established to insulate the company's business and its assets from exposure to external creditors or claims from external creditors, as well as for tax purposes. However, shielding assets from legitimate claims by creditors is hardly consistent with the proper discharge of Dean's duties as a director of Pacific Springs, especially in the context of the company anticipating a legal dispute with its landlord, and where there was no evidence that the company received appropriate consideration from Investments for the restructuring transactions. The respondents' suggested justification that the restructuring was for tax purposes is speculative and has no evidentiary foundation.
4. In my view, no weight should have been given by her Honour to the impugned allotment being at odds with Dean's good character, as observed by his parents, prior to his death.

Further advance of $500,000 in 2016

1. As to the matter in (9) above, the significance of the further advance of $500,000 by the appellants to Dean in November 2016 for what the appellants understood to be the cost of the move and fit-out of the Marrickville unit in 2015, is that this conduct is also inconsistent with the appellants having ceded control of the company to Dean in 2004.

Conclusions on fully informed consent

1. My conclusions can be summarised as follows.
2. Notwithstanding the other adverse credit findings made against Gani and Jorida concerning events after the impugned allotment in 2004, the objective evidence does not establish that it is more likely than not that Gani and Jorida gave their fully informed consent to the 2004 allotment to Dean. There is no evidence corroborating the self-serving hearsay statements made by Dean to others in 2003 and 2004 that he sent the "paperwork" for the proposed allotment to Gani and Jorida. Even if he had, there is no evidence of the contents of any such "paperwork" and thus no way of knowing whether it would have sufficed to constitute "fully informed consent".
3. Nor is it likely that the appellants gave their consent to the proposed allotment for the reasons given by the primary judge. Contrary to her Honour's findings, Gani was not associated or connected with CV Megah, the CV Megah invoices were not genuine and were most likely fabricated by Dean, and by March 2004 a substantial part of the $800,000 advance remained outstanding as only $240,000 had been repaid by Pacific Springs at the direction of Gani.
4. The adverse credit findings made against Gani on the basis that he applied for one "C" class share in Pacific Springs in 2007 and against both Gani and Jorida on the basis that they signed the loan and charge agreements in 2010 are of little significance on the critical issue of informed consent in 2004. This is because: (1) the issue of the "C" class share was explicable as a means by which Dean could return dividends to Gani without disclosing the 2004 allotment and, in any event, no dividends were ever paid to Gani in respect of the "C" class share; and (2) the loan agreement demonstrated, contrary to the primary judge's finding, that Gani and Jorida had a continuing interest in Pacific Springs and had agreed to advance the company a further $200,000.
5. The adverse credit finding made on the basis that Gani and Jorida had lied about their knowledge of their son's homosexual relationship with Ricards goes nowhere in terms of the objective facts on the issue of fully informed consent. The adverse credit finding made against Jorida on the basis that she counselled Dean against expanding the business into China was of very little, if any, significance to the matter in issue.

ISSUE 6: Defence of laches

1. Ground 12A contends that the primary judge erred in finding on the alternative basis that, if the appellants had no actual knowledge of the impugned allotment, then the defence of laches was established by the respondents as "the [appellants] had the means of knowledge by performing a simple and inexpensive search of public records": J [194].

Submissions

1. The appellants submitted that the finding as to "the means of knowledge" was not open to the primary judge given that no such defence had been pleaded, it was not part of the respondents' case run at trial, and it had not been put to the appellants in cross-examination.
2. The respondents did not directly respond to this submission. Their response was that "consent" is fatal to the appellants' challenge to the finding of laches and, even if the Court does not accept that there was fully informed consent in 2004, it is sufficient for the defence of laches that the appellants knew about the allotment in 2004 and did not do anything about it until Dean died.

Was the "means of knowledge" an issue at trial?

1. There is no dispute that the primary judge correctly stated the applicable legal principles with respect to the equitable defence of laches.
2. The appellants' contention that the finding was not open to the primary judge directs attention to the pleadings and the way in which the case was run at trial. An examination of the pleadings confirms that the defence of laches, as pleaded and particularised, did not include any allegation that the appellants had the means of knowledge concerning the 2004 allotment.
3. Turning to the way the case was run at trial, three observations can be made. First, the issue of means of knowledge was not mentioned in the respondents' opening written submissions.
4. Second, the point was not put to the appellants in cross-examination. Although a broad question was put to Gani: Q. Did you take any steps to satisfy yourself that you were still the sole shareholders with your wife? A. INTERPRETER: No. it was not directly put to him that he was aware of any matters that might cause him to doubt that he and Jorida remained the sole shareholders of Pacific Springs, let alone that he could and should have performed a "simple and inexpensive search of public records" to ascertain the true position of the shareholding of Pacific Springs after 2004.
5. Third, this is not a case where the parties expressly or by inference departed from the pleaded case. The first time the contention that the appellants had the "means of knowledge" was made was in the respondents' closing written submissions. According to the transcript, these submissions were only provided to the Court and senior counsel for the appellants at the commencement of the respondents' closing address.
6. In those closing submissions at trial, the respondents contended (in par [87]) that, even if the Court was not satisfied that the appellants consented or acquiesced to the disputed allotment, a finding should be made that the appellants, at the very least, were put on the requisite suspicion (and it was submitted "knew") about the disputed allotment many years ago. According to the submission, this was because, among other reasons: … (c) the plaintiffs refrained from taking any steps to monitor the company or their shareholding (including by consulting publicly available material or the records of Pacific Springs itself) to ensure it remained unaffected, notwithstanding what the foregoing indicated Dean had done with the company (i.e. decided to take it over as if it was his own); …

Significance of the absence of any return since 2010

1. The finding that the appellants had the means of knowledge of the 2004 allotment was premised on the absence of any return to the appellants since 2010, which her Honour found "must have raised a doubt" as to whether the company had continued to be profitable, as Dean said to Gani, or whether their rights as shareholders had been infringed (J [194]).
2. There are difficulties with this reasoning. It does not follow from the absence of any return since 2010 that the appellants should have considered that Dean might have unilaterally altered the shareholdings in the company six years earlier without their consent, as the primary judge seemed to have thought. A principal is not required to be astute to distrust their fiduciary and, in this case, the absence of any distribution of profits after 2010 was readily explicable.
3. On the unchallenged evidence of Gani, he discussed with Dean his preference that any profits of the company be invested in real property in Australia and that Dean agreed to this course. Gani understood this is what had occurred, first in 2010 with the purchase of the Wolli Creek property, and later in 2015 with the purchase the Marrickville unit. It is not in dispute that the appellants believed that these properties had been purchased by Pacific Springs and that they were unaware that Investments, not Pacific Springs, was the purchaser.

Whether the appellants were no longer interested in the company

1. In addition to finding that the appellants were on notice that the shareholding had changed, the primary judge found that the appellants were no longer interested in the company. That finding cannot stand. An inference that the appellants were not interested in the shareholding of the company does not follow from the fact that the appellants, as shareholders, were content to allow their son to conduct the business, and that Gani's involvement was limited to discussions with Dean, principally about the profitability of the company and major policy decisions, such as the purchase and sale of investment properties. The absence of any request by the appellants for financial statements reflected their trust in Dean. As Gani said in cross-examination, it was "good enough" that Dean would report to him every year about the profits or losses.
2. Finally, insofar as the appellants pointed to their ongoing financial assistance to Dean in November 2016 as being inconsistent with the finding that they were no longer interested in the shareholding of the company, it is no answer, as the respondents submitted, that the costs of the move and the fit-out of the Marrickville unit had already been incurred by Investments in 2015. What is significant is Gani's belief, based on Dean's request for financial assistance, that Pacific Springs required the money for that purpose and the provision of such financial assistance in 2016 is inconsistent with the finding that the appellants were no longer interested in the shareholding of the company.
3. In my view, ground 12A has been made out. The finding that the defence of laches was established should be set aside.

ISSUE 7: s 1322(4) validation orders

1. In making the validation order under s 1322(4) of the Corporations Act, the primary judge assumed the validity of the impugned allotment. Given the conclusion above that the allotment should be set aside, there is no longer a factual basis for granting relief under s 1322(4). The respondents did not argue to the contrary, if the appellants' challenges in the earlier grounds were upheld. Accordingly, the validation order should be set aside.

Conclusion and Orders

1. The appeal should be allowed, the orders of the primary judge be set aside, and, in lieu, a declaration be made that the impugned allotment was invalid: see the reasons and form of order made by Street CJ in Eq in Ampol Petroleum Ltd v R W Miller (Holdings) Ltd [1972] 2 NSWLR 850 at 882F-G and 885G-886A, approved by the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 NSWLR 68 at 76E; [1974] AC 821 at 834D-E. In addition, an order should be made that the impugned allotment be set aside, and an order made under s 175 of the Corporations Act to rectify the register of Pacific Springs. The orders made under s 1322(4) of the Corporations Act should also be set aside.
2. As to the costs of the appeal, there is no reason why costs should not follow the event: UCPR, r 42.1.
3. As to the costs below, in their written submissions the appellants sought indemnity costs on the ground that there was no proper basis on which the respondents could, or should, have challenged the veracity of the statements made by the appellants in their initial affidavits denying any knowledge of the impugned allotment. The submission continued that the respondents persisted in wilful disregard of known facts and clearly established law whilst making groundless allegations to the effect that Gani controlled CV Megah and caused it to issue "bogus" invoices.
4. I am not persuaded that this is an appropriate case to make a special costs order with respect to the proceedings below. A significant consideration against making such an order is that Dean had passed away and was not available to corroborate the hearsay statements he made to others which were relied upon by the respondents as indicative that it was likely that the appellants had given their informed consent to the 2004 allotment.
5. I propose the following orders: 1. Appeal allowed. 2. Set aside the orders of the primary judge made on 11 September 2020. 3. In lieu, make the following orders: 1. Declare that the allotment of 1,800 fully paid ordinary shares of $1.00 each in the capital of Pacific Springs Pty Ltd ACN 093 846 309 made on 16 March 2004 was invalid; 2. Order pursuant to s 175 of the Corporations Act 2001 (Cth) that the register of members of Pacific Springs Pty Ltd ACN 093 846 309 be rectified by the expungement of all entries made purportedly recording the allotment of shares referred to in Order (a) above; 3. Declare that the first respondent, Ricards Dzelme, is not a director or secretary of the second respondent; and 4. Defendants to pay the plaintiffs' costs. 1. Respondents to pay the appellants' costs in this Court. 2. Grant liberty to the appellants to apply on three days' notice for consequential relief in relation to monies paid into court by the appellants as security for costs of the proceedings below and the appeal, if the parties cannot agree on orders for payment out of court of such monies.

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: 03 September 2021