Plaintiffs v Defendants

Supreme Court of Victoria|2010-04-19|Before: PAGONE J

CORPORATIONS LAW - Shadow Directors - Breach of duty - Avoidance of contract.

1 The plaintiffs seek to avoid transactions entered into by the first plaintiff, Mernda Developments Pty Ltd (In Liq) ("Mernda"), on the basis that they were entered into or undertaken by its shadow director in breach of his duties as director. The second plaintiff is the liquidator of Mernda. The defendants did not appear at the hearing of the proceeding. The transactions complained about are the execution on 15 May 2003 of a facility agreement, the granting on 8 July 2003 of a fixed and floating charge securing amounts of up to $15,000,000 and the participation in what is described in the amended statement of claim as the "Alamanda acquisition".

2 Mernda was incorporated on 17 July 2002 in the context of a joint venture arrangement between the second defendant, Clestus Weerappah and Dale Howard Robertson. The arrangement between Mr Weerappah and Mr Robertson was of a kind frequently found in commercial affairs particularly those in relation to the development of property opportunities. The arrangement between Mr Weerappah and Mr Robertson may loosely be described as a joint venture and consisted of an understanding and agreement to develop business opportunities as they arose by the establishment of a special purpose vehicle through which each property opportunity would be undertaken. During the times in question there were about 25 such special purpose companies through which Mr Weerappah and Mr Robertson conducted their business affairs and dealings.

3 Mr Robertson had a background in property development and construction. His role was essentially to identify property development opportunities and to oversee the developments. Mr Weerappah was a director of a financial services business and provided or obtained the funding for the projects. There was some external funding procured by Mr Weerappah for the property developments but it was essentially Mr Weerappah's money that made the business activities possible for them and for each of the special purpose vehicle companies which otherwise had no other assets and no other activities.

4 It was agreed by Mr Weerappah and Mr Robertson that the latter would be the only director of each of the special purpose development companies although it is clear that Mr Weerappah was closely involved in the operations and decision making of each of the companies, particularly in relation to funding of the operations. Mr Robertson gave evidence that no significant decision of Mernda was ever made without Mr Weerappah's involvement or approval. Indeed, Mr Robertson described the only decisions he ever made without Mr Weerappah's approval as of a "trivial nature". It is not precisely clear what Mr Robertson meant by his characterisation of the decisions he made as "trivial", but he gave examples of minor decisions as generally in a "town planning or property development matter, an ongoing matter, not a financial decision". It is probable that the characterisation of Mr Robertson's decision making as "trivial" is inaccurate but I accept that he never made a financial decision without discussing it with Mr Weerappah and that Mr Weerappah's involvement in the active management of the company was, as one would expect, clear, substantial and fundamental to the operations of Mernda and to each of the other special purpose vehicle companies through which Mr Robertson and Mr Weerappah conducted their business. Mernda may have had its own cheque book but Mr Weerappah was a signatory to the cheque book through which all funding for the various projects relied. He directed which debts would be paid and which would not and, on at least one occasion, Mr Weerappah prevented Mernda from satisfying a liability which Mr Robertson wished to have paid.

5 By contract dated 5 August 2002 Mernda purchased a property at 1410 Plenty Road Mernda for $8,500,000. The funding for Mernda to make that acquisition came from Mr Weerappah through the first defendant, Alamanda Property Investments No 2 Pty Ltd (In Liq) ("Alamanda"). Each of Mr Weerappah and Mr Robertson controlled a 50% interest in Mernda. In Mr Weerappah's case his 50% interest was controlled through Alamanda which he owned and of which he was the sole director.

6 Mernda's contract for the purchase of its property provided for the payment of a purchase price of $8,500,000 plus GST. The deposit of $1,000,000 was payable by 14 October 2002 of which the contract acknowledged payment of $20,000. Under the terms of the contract $850,000 was payable on 1 September 2003 and $6,650,000 on 1 September 2004. It appears that $1,850,000 was paid by Mernda to the vendors by at least 19 December 2003 because credit for that amount was given by the vendor upon settlement of the purchase on 19 December 2003. It is clear that Mernda had no other source of funding for the purchase other than from Mr Weerappah through Alamanda and I accept, as the plaintiffs asked me to do, that the whole of the deposit monies paid by, or for, Mernda had come from Alamanda.

7 On 15 May 2003, Alamanda and 25 companies entered into the facility agreement under which Alamanda (then called Dollarforce Financial Services Pty Ltd) agreed at the request of the 25 companies (referred to as the borrowers) to provide a loan facility to the borrowers to an amount not to exceed $15,000,000. As at 15 May 2003 Mernda was recorded as owing Alamanda $1,030,516 in a schedule to the facility agreement. As at that date Mernda owed Alamanda $1,030,516 and had a contractual obligation with a third party to complete a purchase for which it would require some $6,500,000. The facility agreement was signed on behalf of Mernda by Mr Robertson at Mr Weerappah's request.

8 As at the date of entering into the facility agreement the total due by all of the borrowers to Alamanda was $10,141,125 and Mernda was the fourth largest creditor to Alamanda. A consequence of entering into the facility agreement was to expose each of the 25 borrowers to the obligations of each other. Each also had the indirect benefit of personal guarantees in favour of Alamanda given by Mr Robertson and a company called Rumasc Pty Ltd and by every other person who from time to time was or became a director or shareholder of any of the borrowers. They also had the indirect benefit of all fixed and floating charges in favour of Alamanda together with the registered mortgages in favour of Alamanda over a significant number of real estate. For its part Mernda became liable in return and was exposed to the extent of its equity (if any at that stage) in the property it had purchased but not yet then completed. On 8 July 2003 Mernda granted Alamanda a fixed and floating charge securing amounts of up to $15,000,000 which I accept, consistently with the evidence concerning the facility agreement, was given as a requirement imposed by Mr Weerappah.

9 On 31 October 2003 Mernda agreed to sell its property for the sum of $15,500,000 plus GST. Mernda's purchase of the property (on 5 August 2002) and its subsequent sale of the property (on 31 October 2003) both settled on 19 December 2003. The total payable to Mernda by the purchaser (with adjustments) was $17,051,817.90 including an amount of $1,550,165.26 as GST. The amount due to Mernda was in part applied to discharge its debt upon its purchase which, as at the date of settlement, with adjustments, totalled $6,648,533.49. Other amounts were paid or payable to third parties leaving a balance payable to Mernda's account on the transaction of $9,574,289.46. The whole of that sum was received by Alamanda's solicitors on behalf of Alamanda in discharge of Mernda's obligations under the facility agreement and the charge. It is that payment which the amended statement of claim describes as the Alamanda acquisition. The plaintiff's submissions describe the payment to Alamanda's solicitors as having been made upon a demand but nothing may turn on whether the word "demand" accurately reflects the nature of the correspondence between the parties at the time. On 18 December 2003 the solicitors for Alamanda wrote to Mernda's solicitors proposing a method of payment that would include performance by Mernda of its obligations under the facility agreement and the charge. The proposal was put to Mr Robertson and he agreed to it. No suggestion was made at that point by anyone that the steps proposed or the facility agreement or the charge might not be lawful or proper. No suggestion was made then or thereafter that Mr Robertson was personally in breach of his duties as director or that Mr Weerappah could not lawfully seek to require Mernda to direct the payment as proposed.

10 The claims by Mernda in this proceeding are not that the actual director (Mr Robertson) breached his duties, but, rather, that Mr Weerappah did so by the acts for which Mr Robertson was formally responsible. I accept that for these purposes Mr Weerappah is to be regarded as a director of Mernda. Section 9 of the Corporations Act 2001 (Cth) provides that a person is a director of a company if he or she is not validly appointed as a director but "the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes". It is common to talk of such people as "shadow directors".[1] It is plain that Mr Robertson, the nominated director of Mernda was accustomed to acting in accordance with Mr Weerappah's wishes in conducting Mernda's affairs. That was so not merely because Mr Weerappah controlled the purse strings. This is not a case of Mr Weerappah merely imposing conditions on dealings which Mr Robertson felt obliged to comply with as a matter of commercial imperative.[2] Mr Weerappah's role was more involved and integrated into Mernda's operations. Mr Robertson explained that a deliberate decision had been made that Mr Weerappah should not formally be a director so as to create a perception of independence because of his other activities in a financial services business. There was, it seems, a desire to give the appearance that Mr Weerappah was not involved in the projects through his joint venture with Mr Robertson. The evidence before me, however, is clearly that Mr Weerappah was involved in the day to day operations of Mernda and that Mr Robertson was accustomed to act in accordance with Mr Weerappah's instructions or wishes for a number of reasons. One reason was that it was Mr Weerappah who provided the funds. Another was that the business activities undertaken by Mernda were part of the broader arrangement which Mr Robertson and Mr Weerappah conducted together. They intended that Mr Weerappah be a decision maker and the evidence before me is that he was a decision maker for each of the companies including Mernda.

11 The more difficult question, however, is whether there was a breach of duty by Mr Weerappah by any of the three acts alleged in this proceeding. The plaintiffs contended that Mernda's activities in executing the facility agreement were "plainly against its best interests" but that it served the interests of Alamanda and Mr Weerappah. This is said to be the case because by entering the facility agreement Mernda (a) immediately became liable for debts of $10,141,125 owed by the other 24 borrowers in which Mernda had no interest at all, (b) agreed to charge all of its property to secure those liabilities and its existing liabilities of $1,030,516 and (c) notionally became able to borrow only a further $3,828,359.

12 Identifying the individual interests of a company in a group of companies raises potentially troubled and problematic questions.[3] It may be accepted that in a group context each company is a separate and independent legal entity and that it is the duty of directors in such a case to consult the interests of each company and of its interests alone in deciding whether payment should be made to other companies.[4] In doing so, however, it will often be necessary to have regard to the fact that the interest of the individual company in question will be so intertwined with the interests of other members of the group that those interests cannot be ignored as part of the interests of the individual company and may need to be taken into consideration.[5]

13 When Mernda entered into the facility agreement it had a contract of purchase to complete for which it needed a large amount of money that it did not have. It is misleading to say that by entering into the facility agreement it immediately became liable for debts of $10,141,125 because that amount was the total of the amount owing by all of the companies who entered into the facility agreement as borrowers and there is simply no foundation for the conclusion that the total liability would all be borne by Mernda in that amount at that time. Many of the companies had assets able to be realised at that time and the indirect benefits of a realisation of those assets may have exceeded the existing liability by an appreciable margin. The evidence before me makes it clear the other companies in the group all assumed the liabilities of each other and that others gave security for, in effect, the mutual benefit of the group through Alamanda. Indeed, the mechanism adopted by the facility agreement and charge may well have given greater security to the group through the advantage obtained by Alamanda as against third party creditors. Furthermore, the evidence of Mr Clements was that a calculation in December 2003 of the worst case scenario to Alamanda was of a shortfall of assets over liabilities of $3,750,000 and not $10,141,125. On any view it would be wrong to conclude that upon entering into the facility agreement Mernda was worse off by a net $10,141,125.

14 I am not able to conclude that entering into the facility agreement, or the giving of the charge in support of or in addition to the facility agreement, was a breach by Mr Weerappah of his duties as a director. I am not able to accept that Mernda received an illusory benefit (as was contended) or had no interest in supporting the other 24 borrowers (as was also contended). Mernda needed to secure funds to complete its purchase and it needed to do so in the context of an arrangement between Mr Weerappah and Mr Robertson through which they conducted serial projects for profit. The facility agreement permitted Mernda at least to borrow the difference between the then extent of overall borrowing and the $15,000,000 cap which was calculated to be $3,828,359. As at that date it still needed to secure some $3,000,000 to complete its purchase. As at that date it did not have a contract of sale sufficient to cover any part of the amount it needed for it to complete its purchase. The facility agreement and the charge had the effect of internally cross collateralising the internal borrowings within the group and of ensuring that the group (through Alamanda) had first call upon the funds within the group. These are substantial advantages which a prudent director could sensibly secure by entering into such transactions as the facility agreement and the charge.

15 The claim of breach of duty in relation to what was described as the Alamanda acquisition depends upon and follows from my conclusion about entering into the facility agreement and the giving of the charge. The Alamanda acquisition, namely, the receipt of the balance payable to Mernda upon settlement of its contract of sale of the property, was properly in discharge of Mernda's obligations under the facility agreement and the charge.

16 It follows that I do not consider the plaintiffs' claim to have been made out. I will, accordingly, dismiss the proceeding but, in the absence of any party seeking costs against the plaintiffs, with no order as to costs.

[1] Ho v Akai Pty Ltd (In Liq) (2006) 24 ACLC 1526, [21] (Finn, Weinberg, Rares JJ).

[2] Cf Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233 (Unreported, White J, 30 March 2010) [242].

[3] Robert Austin, Harold Ford and Ian Ramsay, Company Directors (Butterworths, 2005) 282-285.

[4] Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1, 7 (Mason J).

[5] See, for example, Ashwick (Qld) No 127 Pty Ltd v Commissioner of Taxation [2009] FCA 1388 (Unreported, Ryan J, 26 November 2009).

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