Plaintiffs v Defendants

Supreme Court of Victoria|2012-04-26|Before: FERGUSON J

PRACTICE AND PROCEDURE - Application to amend pleading - Allegations of breach of ss 180, 181, 182 Corporations Act 2001 (Cth) - Relief sought under Part 5.7B Corporations Act 2001 (Cth) - Evidence supporting claims - Need for proper basis certification - Civil Procedure Act 2010 (Vic) s 18, Corporations Act (Cth) , , , , , , , , .

For the Second, Third and Eighth Defendants in proceeding 4438

For the Tenth Defendant in proceeding 4438 (Third Defendant in proceeding 6004)

For the Eleventh Defendant in proceeding 4438 (Fourth Defendant in proceeding 6004)

1 Environinvest Limited was the responsible entity of a number of managed investment schemes. Its collapse has led to multiple pieces of litigation. These reasons concern two proceedings[1] that the liquidator of Environinvest has initiated. They concern claims against the former directors of Environinvest and members of the Pescott family and associated entities. The allegations are that the directors have breached their duties and are in contravention of ss180 - 182 of the Corporations Act 2001 (Cth) and that certain transactions are voidable under Part 5.7B of that Act.

2 In an earlier application, many of the defendants applied to strike out parts of the statements of claim in each proceeding. Those applications were successful. In his reasons for decision, Judd J expressed his opinion that the liquidator should not be permitted to replead a case against the directors unless and until he could satisfy the Court that there is a sound basis to support the claims.[2] The plaintiffs have now sought leave to file and serve an amended statement of claim in each proceeding. Those applications are opposed by some of the defendants.[3] In addition, there is an application for leave to join a director, Jason Bresnehan, as a further defendant to one of the proceedings and to proceed against a number of Pescott related companies that are in liquidation.

3 The amended claims in the proposed pleadings are significantly different from those which were the subject of the strike out application dealt with by Judd J. It is a different and more experienced pleader who has drawn them. In terms of pleading alone, the claims are properly formulated. They tell the reader what the material facts are that are relied upon by the plaintiffs, such that the defendants know the case that they have to meet, and they formulate what is an arguable claim, should the facts be established at trial. The plaintiffs have also established that there is a proper basis for the allegations pleaded. The plaintiffs' counsel has informed the Court that if leave is granted to file and serve the amended pleadings, he will sign the proper basis certification required under the Civil Procedure Act 2010 (Vic) if he continues to be retained as counsel.[4] For the more detailed reasons given below, leave should be granted to the plaintiffs to file and serve the amended statement of claim in each proceeding. Leave to proceed against the defendant companies that are in liquidation should also be granted. Leave should also be given to join Mr Bresnehan as a defendant.

4 A pleading must contain in summary form a statement of all the material facts on which the party relies.[5] There are two reasons why material facts must be pleaded. First, such a pleading enables a party's opponent and the Court to know what the case is that is to be met. Secondly, it discloses whether the party has a claim or defence (whichever may be the case) which is known to law.[6] Proper particulars of a pleading must be given, including particulars of damages.[7]

5 The Court has a discretion as to whether to allow a pleading to be amended. Where there is no prejudice, amendments are generally allowed.[8] The discretion to allow a proposed amendment is unlikely to be exercised if the proposed amended pleading would be liable to be struck out. A pleading will be struck out if it has no reasonable prospect of success.[9]

6 On a strike out application or where leave to amend is opposed, it is usually assumed that the matters pleaded can be proven.[10] If the case pleaded is arguable, commonly that is all that is required to permit the amended pleading to be filed. Its ultimate success or failure is a matter for determination at trial.[11] However, as noted above, in these proceedings, Judd J was of the opinion that leave to replead should only be granted if the Court is satisfied that there is a sound basis to support the claims.[12] Having regard to the history of the matter (there having been unsuccessful attempts at pleading claims previously) that seems to me to be the appropriate basis upon which the Court ought to proceed. Having said that, sight ought not be lost of the fact that this is a pleading application. Bearing that in mind, in my view it is sufficient if the plaintiffs have adequate documentary and other material to show that there is a proper basis for an arguable claim. They ought not to be required to produce evidence of the type that would be necessary to establish the claims at trial. In this regard, the plaintiffs relied on an affidavit of Mr James Downey, the liquidator of Environinvest, to which were exhibited, among other things, transcript from the public examinations of some of the Environinvest directors and affidavit material from other litigation arising out of the collapse of Environinvest. They also relied on a report prepared by Ferrier Hodgson (who were appointed by the Court for the purpose of assessing the solvency and viability of the managed investment schemes) and source documents such as board minutes, the relevant deeds, transfers and accounting records relating to the impugned transactions and other contemporaneous documents.

Care and diligence, good faith and use of position - ss180 - 182 Corporations Act

7 Some of the proposed claims concern allegations of contraventions of ss 180, 181 and 182 of the Corporations Act 2001 (Cth). Sections 180 and 181 impose positive duties on directors and s 182 prohibits certain conduct. If a director's conduct is in contravention of one of these provisions that conduct will frequently also constitute a contravention of the other sections. However, each section must be considered independently of the others to determine whether it has been established that the relevant section has been contravened on the facts.

8 Section 180(1) of the Corporations Act provides:

(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation's circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

9 In Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian and Securities and Investments Commission v Adler,[13] Santow J summarised the principles applicable to s 180. Most relevantly to this proceeding, his Honour noted the following:

[I]n determining whether a director has exercised reasonable care and diligence one must ask what an ordinary person, with the knowledge and experience of the defendant might be expected to have done in the circumstances if he or she was acting on their own behalf;...[14]

[W]here there is a transaction involving the potential for conflict between interest and duty... the duty of care and diligence falls to be exercised in a context requiring special vigilance, calling for scrupulous concern on the part of those officers who become aware of that transaction to ensure that any necessary corporate approvals are obtained and safeguards put in place. While the primary responsibility will fall on the director or officer proposing to enter into the transaction, this does not excuse other directors or officers who become aware of the transaction...[15]

[citations omitted]

10 Section 181(1) of the Corporations Act provides that:

A director or other officer of a corporation must exercise their powers and discharge their duties:

(a) in good faith in the best interests of the corporation; and

(b) for a proper purpose.

11 Section 182(1) of the Corporations Act is in the following terms:

A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a) gain an advantage for themselves or someone else; or

(b) cause detriment to the corporation.

12 In respect of these provisions, in Re HIH, Santow J summarised the applicable principles in the following way:

(1) a director (as a fiduciary) is under an obligation not to promote his personal interest by making or pursuing a gain in circumstances where there is a conflict or a real or substantial possibility of a conflict between his personal interests and those of the company. This is both at general law and by statute (s 181 and as applicable ss 182 and 183). Such promotion would not be to act in good faith in the best interests of the corporation, or for proper purposes (s 181). If the director has improperly used his position or information to gain such advantage ss 182 and 183 respectively are breached;

(2) in order to assess whether or not there is a real sensible possibility of conflict one must adopt the position of the reasonable person looking at the relevant facts and circumstances of the particular case;

(3) nonetheless, a director may act with a personal interest even though the director has not freed his or her mind of that personal interest when acting provided that this personal interest was not the actuating motive rather than some bona fide concern for the benefit of the company as a whole or for fairness as between members;

(4) in certain circumstances, such as a director in "a position of power and influence" over the board, mere disclosure of a conflict between interest and duty and abstaining from voting is insufficient to satisfy a director's fiduciary duty. The director may also be under a positive duty to take steps to protect the company's interest such as by using such power and influence as he had to prevent the transaction going ahead...;

(5) what action, beyond disclosure, the director must take will depend on matters such as the degree to which the director has been involved in the transaction, and the gravity of possible outcomes for the company... ;

(6) a director of a company ... who is also a director of another company ... must not exercise his or her powers for the benefit or the gain of the second company without clearly disclosing the second company's interests to the first company and obtaining the first company's consent. [16]

13 The solvency or otherwise of a company is one of the matters that will affect what is in the best interests of the company for the purposes of s 181(a) and, in some circumstances, directors will need to consider not only the interests of shareholders but also the interests of creditors.[17] Section 181(1)(a) calls for the application of an objective test.[18]

14 Under s 182(1), the test for determining whether use of position is improper is an objective one.[19] As the High Court has observed, "[w]hilst the presence of intention or purpose may be relevant in assessing impropriety, it is not an ingredient in the requirement of improper use of position."[20] In this regard, an "officer who honestly believed his or her actions did not amount to improper use could nevertheless be found to have improperly used his or her position."[21] Consequently, the relevant question is "what content is to be given to the standards of conduct that would be expected of the officer, having regard to the position occupied by the officer in the company and the circumstances surrounding the impugned conduct (ie, the commercial context)."[22] It is not necessary to establish that an advantage was actually achieved for a claim to succeed.[23]

15 In each proceeding the plaintiffs seek compensation under s 1317H of the Corporations Act in respect of the claims for breach by the directors of their duties. Section 1317H(1) provides:

(1) A Court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if:

(a) the person has contravened a corporation/scheme civil penalty provision[24] in relation to the corporation or scheme; and

(b) the damage resulted from the contravention.

The order must specify the amount of the compensation.

16 One of the proceedings includes claims that certain transactions are voidable under provisions in Part 5.7B of the Corporations Act.[25] The sections dealing with uncommercial transactions (s 588FB), insolvent transactions (s 588FC), unreasonable director-related transactions (s588FDA) and relief (s 588FF) are all relevant in this proceeding.

17 Section 588FB provides:

(1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:

(a) the benefits (if any) to the company of entering into the transaction; and

(b) the detriment to the company of entering into the transaction; and

(c) the respective benefits to other parties to the transaction of entering into it; and

(d) any other relevant matter.

18 Section 588FDA relevantly provides that a transaction of a company is an unreasonable director-related transaction if, among other things:

(ii) a conveyance, transfer or other disposition by the company of property of the company; or

(iv) the incurring by the company of an obligation to make such a payment, disposition or issue; and

(b) the payment, disposition or issue is, or is to be, made to:

(ii) a close associate of a director of the company; or

(iii) a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and

(c) it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:

(i) the benefits (if any) to the company of entering into the transaction; and

(ii) the detriment to the company of entering into the transaction; and

(iii) the respective benefits to other parties to the transaction of entering into it; and

(iv) any other relevant matter.

19 Section 588FC provides that a transaction is an insolvent transaction if, among other things, it is an uncommercial transaction of the company and:

(a) any of the following happens at a time when the company is insolvent:

(i) the transaction is entered into; or

(ii) an act is done, or an omission is made, for the purposes of giving effect to the transaction ...

Environinvest Ltd v Blackburne Pty Ltd & Ors (the Properties Proceeding)****[26]

20 In this proceeding, Environinvest is the plaintiff. The defendants were directors of Environinvest. They are Roger Pescott, his cousin, Clive Dossetor, Grant Robertson and (if leave to join him is granted) Jason Bresnehan. It is alleged that the directors breached their duties under ss 180, 181 and 182 of the Corporations Act. The breaches are alleged to arise out of separate transactions involving four properties - Eurambeen, Beenak, Lillirie and Modesty Park. I will refer to this proceeding as "the Properties Proceeding."

21 In broad terms, the proposed pleaded claim in relation to the Eurambeen land is that the directors breached their duties because that land (which it is alleged was beneficially owned by Environinvest) was transferred to a Pescott related company without Environinvest receiving any valuable consideration for the land.

22 The allegations in the proposed pleading are that:

(a) the registered proprietor of Eurambeen was Blackburne Pty Ltd, which is the trustee of a Pescott family trust;

(b) by a deed dated 30 October 2000 made between Environinvest and Blackburne, Blackburne agreed to sell Eurambeen to Environinvest for approximately $3.8 million;

(c) various provisions of the sale of assets deed pursuant to which it is alleged that Blackburne sold Eurambeen to Environinvest are pleaded, including terms that each of the parties would do or cause to be done all things necessary to give effect to the sale of assets deed, including the execution of all necessary documents;

(d) pursuant to the sale of assets deed, Environinvest issued Blackburne with 450,478 ordinary shares in Environinvest on 30 October 2000. Accordingly on and after that date, Blackburne held the fee simple of Eurambeen on trust for Environinvest as the purchaser of the Eurambeen land pursuant to an executory contract of sale in respect of which it had performed all of its obligations;

(e) the relevant knowledge of the three directors, Messrs Dossetor, Robertson and Pescott, is alleged with the particulars of that knowledge including inferences arising from other matters alleged in the statement of claim;

(f) at some point in 2007, the three directors resolved that Environinvest would transfer Eurambeen to a person or persons in the "Pescott Group". On 9 October 2007, Blackburne transferred Eurambeen to Arnac Pty Ltd, a company owned and controlled by Miffany Pescott (Mr Pescott's daughter) and James Blythe (husband of Miffany Pescott, and Mr Pescott's son-in-law). Arnac did not pay Environinvest anything for Eurambeen and nor did Environinvest receive any other valuable consideration for the land. The market value of Eurambeen at the time of its transfer to Arnak was between $10.8 million and $11.8 million. Consequently, the whole of the market value of Eurambeen was lost to Environinvest.

23 The claim in relation to the Beenak land is similar. In essence, it is alleged that Environinvest has been deprived of the value of the Beenak land due to an alleged breach by the directors of their duties. At a high level, the allegations are that Environinvest became beneficially entitled to Beenak, but the title to the property was never registered in its name. The property was subsequently mortgaged to St. George Bank Limited for an amount in excess of its value. In those circumstances, it is alleged that the directors breached their duties by failing to have the property registered in the name of Environinvest.

(a) Beenak was owned by a company called STY Holdings Pty Ltd ("STYH"), of which Messrs Dossetor and Pescott were directors;

(b) in or about December 2004, STYH agreed to sell Beenak (including certain trees growing on Beenak) to Environinvest for approximately $1.4 million. This amount was paid to STYH in December 2004, but STYH did not transfer the title to Beenak to Environinvest;

(c) accordingly in December 2004, or alternatively in June 2005 (depending upon which accounting entries in the books of Environinvest are the true entries in respect of the acquisition of Beenak) Environinvest became beneficially entitled to the fee simple in Beenak which was held on trust for it by STYH (based on the contention that the trust arose because it was the purchaser of the land and had paid the purchase price, but the contract remained unperformed by STYH because STYH had not transferred the title to Beenak to Environinvest);

(d) each of Messrs Dossetor, Robertson and Pescott knew those matters but none of them took any steps to ensure that Beenak was registered in the name of Environinvest;

(e) subsequently, STYH gave a first mortgage over Beenak to St. George Bank Ltd and when the bank as mortgagee appointed agents to take possession of Beenak, its value was less than 40% of the debt due to the bank.

25 It is alleged that in failing to take any steps to have Environinvest registered as the owner of Beenak and in authorising and permitting the transfer of Eurambeen to Arnak, each of Messrs Dossetor, Robertson and Pescott breached their duties under s 180 of the Corporations Act because a reasonable person who was a director of Environinvest in its circumstances:

(a) would have known the facts about Beenak and Eurambeen which are alleged;

(b) would have taken steps to ensure that Environinvest became registered as the owner of Beenak; and

26 It is alleged that, before they passed the directors' resolution to transfer Eurambeen to "Pescott Group" and caused or permitted Environinvest to transfer Eurambeen to Arnac, none of Messrs Pescott, Dossetor or Robertson took any steps to satisfy himself that the transaction was: (a) in the best interests of Environinvest (it is alleged it was not); (b) entered into in good faith by Environinvest (it is alleged it was not); (c) entered into for a proper purpose of Environinvest (it is alleged it was not); (d) not likely to gain an advantage for Miffany Pescott or other Pescott-related interests (it is alleged it was); and (e) not likely to cause detriment to Environinvest (it is alleged it was). The basis for the allegations that the resolution and the transfer of Eurambeen to Arnak were not in Environinvest's best interests, not entered into in good faith and for a proper purpose, were likely to cause detriment to the company and gain an advantage for others, is the allegation that it had the effect of transferring a valuable asset from Environinvest to Miffany Pescott or other Pescott family interests for no consideration.

27 It is alleged that by reason of these matters, the directors breached their duties under ss 180, 181 and 182 of the Corporations Act and that Environinvest has suffered loss and damage. Compensation of $13.3 million is sought based on the alleged values of each of Eurambeen and Beenak at the time of their transfer.

28 The allegations in relation to Lillirie are broadly that Environinvest transferred that property to a Pescott company for no consideration or consideration less than the value of the property and that, by permitting this to occur, the directors breached their duties.

(a) on 27 March 2004, Environinvest became the registered proprietor of the property known as Lillirie;

(b) on a date which is presently not known to the liquidator, but which was after 30 August 2007 and before 31 July 2008, Environinvest agreed to sell Lillirie to Trawalla Holdings Pty Ltd (a company of which Mr Pescott and his wife, Caroline Pescott, were directors) for $1.6 million;

(c) the Lillirie sale agreement provided that the purchase price for Lillirie was to be paid by a deposit of $1.12 million by 31 August 2007 and the residue ($480,000 plus interest at 8% per annum) by 31 August 2010;

(d) some time after 31 August 2007 and before 19 September 2008, book entries were made in Environinvest's accounts totalling $1.12 million, which entries constitute the payment of the Lillirie deposit and part payment of the Lillirie purchase price;

(e) despite the fact that on 31 July 2008 Trawalla had not paid the residue to Environinvest, by a transfer of land dated 31 July 2008, Environinvest transferred all of its estate and interest in fee simple in Lillirie to Trawalla;

(f) each of Messrs Dossetor, Robertson, Pescott and Bresnehan knew, or alternatively they ought to have known, these things;

(g) despite this, none of the directors took any steps whilst he was a director of Environinvest to ensure that Environinvest's right to receive the purchase price was enforced and that the title to Lillirie was not transferred to Trawalla without Environinvest receiving the purchase price in cash and in full.

30 It is alleged that the failure to ensure the payment of the purchase price was made before Lillirie was transferred to Trawalla constituted a breach by the directors of their duties under s 180 of the Corporations Act. Breaches of ss 181 and 182 of the Corporations Act are also pleaded.

31 The allegations in relation to Modesty Park are similar to the pleaded claim in respect of Lillirie, that is that the property was transferred by Environinvest for no consideration or consideration less than the value of the property. The allegations are that:

(a) Environinvest became the registered proprietor of Modesty Park on or about 19 April 2002;

(b) at some time between 30 August 2007 and 31 July 2008, Environinvest agreed to sell Modesty Park to Mr Pescott for $1.33 million;

(c) the sale agreement between Environinvest and Mr Pescott was that he would pay a deposit of $730,000 by 31 August 2007 and the residue of $600,000 plus interest at 8% per annum would be paid by 31 August 2010;

(d) similar accounting book entries as were made in respect of the Lillirie transaction were made in respect of the Modesty Park transaction, affecting various loan accounts of entities identified only as "Pescott Group" in the books and records of Environinvest. The ultimate effect of these entries in Environinvest's accounting books and records is alleged to be that the Modesty Park residue of $600,000 was recorded in Environinvest's trade debtors account and the Modesty Park deposit of $730,000 was paid by extinguishing part of Environinvest's liability to Mr Pescott or to entities with which he had a close association;

(e) despite the fact that on 31 July 2008 Mr Pescott had not paid the Modesty Park residue to Environinvest, by a transfer of land of that date, Environinvest transferred all of its estate and interest in Modesty Park to him;

(f) each of Messrs Dossetor, Robertson, Pescott and Bresnehan knew, or alternatively they ought to have known, all of those matters about the Modesty Park transaction;

(g) none of the directors took any steps to ensure that Environinvest's right to receive the Modesty Park purchase price was enforced, or that title to Modesty Park was not transferred to Pescott without Environinvest receiving the purchase price in cash and in full.

32 It is alleged that this was a breach of duty by each of the directors under s 180 of the Corporations Act because a reasonable person who was a director of Environinvest in its circumstances would have known the matters pleaded about the Modesty Park transaction and would have taken steps to ensure that Environinvest's right to receive the Modesty Park purchase price was enforced against Mr Pescott.

33 Breaches of ss 181 and 182 of the Corporations Act are pleaded for the same reasons as in respect of the Lillirie transaction. Loss and damage is pleaded (with particulars to be given before trial) and compensation is claimed under s 1317H.

Environinvest Ltd v Pescott & Ors (the Options Proceeding)****[27]

34 In this proceeding, the plaintiffs are the liquidator, Environinvest and a related company, S.T.Y. (Afforestation) Pty Ltd (in liquidation) ("STYA"). The defendants are Roger Pescott, his wife, Caroline Pescott, his brother, Euan Pescott, Mr Dosseter, six Pescott related companies and Mr Robertson.

35 Broadly the claims in the proposed amended statement of claim in this proceeding concern allegations arising out of certain transactions entered into by Environinvest that are alleged to have been favourable to Mr Pescott and his immediate family, close relatives or companies and trusts connected with him. Allegations of breach of duty under ss 180, 181 and 182 of the Corporations Act are made against Messrs Pescott, Dossetor and Robertson with voidable transaction claims under Part 5.7B made against the other defendants. I will refer to this proceeding as "the Options Proceeding."

36 The structure of the statement of claim is to identify the particular projects in respect of which it is alleged put and call options were entered into between Environinvest and Mr Pescott or interests associated with him. All of the transactions are pleaded as similar in nature and effect. An example is the BEP Bluegum Project. In respect of the transaction concerning that project, it is alleged that:

(a) Euan Pescott (brother of Mr Roger Pescott) entered into a deed with BEP Management Pty Ltd under which BEP was required to establish and manage a eucalyptus plantation on land provided to it by Euan Pescott. Between June 1999 and September 2007, Euan Pescott made payments to BEP totalling more than $1,076,253.46;

(b) on about 20 September 2007, Messrs Roger Pescott, Robertson and Dossetor resolved in their capacities as directors of Environinvest to cause Environinvest to enter into an arrangement with Euan Pescott pursuant to which Euan Pescott would have an option, exercisable at any time prior to the first clear felling of the BEP plantation, to require Environinvest to purchase from Euan Pescott all of his interest in the plantation for a sum equal to the total amount which he had paid to BEP between June 1999 and the date of exercise of the option;

(c) pursuant to the directors' resolution, a document was created which is alleged to bear the false date of 1 July 1999 (but which was probably created on about 20 September 2007) pursuant to which Environinvest agreed that Euan Pescott would have the option to require it to purchase from him his interest in the plantation. This deed was executed on about 20 September 2007;

(e) by a letter dated 20 September 2007, Mr Roger Pescott exercised the option on Euan Pescott's behalf. Following this, Euan Pescott transferred his interest in the plantation to STYA for a consideration of $1,076,253.46 and that amount was credited to a loan account in the books and records of Environinvest in discharge of a Pescott related party debt.

37 It is alleged that these transactions are breaches by the directors of ss 180, 181 and 182 of the Corporations Act because the directors did not satisfy themselves that the transactions were: (a) in the best interests of Environinvest (which it is alleged they were not); (b) entered into in good faith and for a proper purpose (which it is alleged they were not); (c) not likely to gain an advantage for Euan Pescott or other Pescott-related interests (which it is alleged they were) and (d) not likely to cause detriment to Environinvest (which it is alleged they were). The particulars supporting these allegations are that the steps taken to effect the transactions had the effect of forgiving a present debt owed to Environinvest by a Pescott associate, in exchange for rights in respect of a Pescott treegrowing venture that were "of uncertain, if any, value".

38 Loss and damage is pleaded (with particulars to be provided before trial) and compensation under s 1317H of the Corporations Act is sought.

39 The transaction is also alleged to be voidable under Part 5.7B of the Corporations Act as an uncommercial transaction within the meaning of s 588FB, as an insolvent transaction within the meaning of s 588FC of the Corporations Act, and as an unreasonable director-related transaction within the meaning of s 588FDA of the Corporations Act. Accordingly, it is alleged to be voidable pursuant to s 588FE of the Corporations Act.

40 There are other put option transactions allegedly favouring Pescott-related interests entered into in 2007 to 2008. They follow the same pattern in relation to a number of other agricultural project put options which are claimed to have favoured the interests of Mr Roger Pescott, other members of his family and related entities.

41 Very similar transactions are alleged in respect of:

(a) the BEP bluegum project involving Mr Roger Pescott;

(b) the company Blackburne Pty Ltd, which is a party to the proceeding;

(d) Mr Roger Pescott concerning the eucalyptus project;

(e) Mr Roger Pescott in respect of the Environinvest cropping project which was to an identical effect and is alleged to give rise to exactly the same liabilities in the directors;

(f) the Environinvest cropping project relating to Ms Pescott, also alleged to give rise to the same liabilities;

(g) Blackburne concerning the Environinvest cropping project;

(h) the Environinvest cropping project concerning Brabourne Pty Ltd, another company controlled by Mr Roger Pescott;

(i) Mount Ross Pty Ltd, a company controlled by Mr Roger Pescott;

(j) Eurambeen, again in relation to the Environinvest cropping project;

(k) Maridale Pty Ltd and the Environinvest cropping project;

(l) Carnac Pty Ltd and the Environinvest cropping project.

42 In respect of all of these matters, the relief sought is of the same type, namely, declarations that the transactions were insolvent transactions pursuant to s 588FC of the Corporations Act, and therefore are voidable pursuant to s 588FE and orders for relief pursuant to s 588FF of the Corporations Act. It is also alleged that some of the transactions were also unreasonable director-related transactions pursuant to s 588FDA of the Corporations Act and are voidable under s 588FE. Orders are sought for relief under those provisions of Part 5. 7B of the Corporations Act.

Should the plaintiffs in each proceeding be granted leave to file and serve the proposed amended statements of claim?

43 The pleaded claims are very different to those that Judd J considered. In my opinion, they are so different that there is little to be gained by an analysis of the current and proposed pleadings to see whether the defects that his Honour identified have been rectified. Rather, subject to one rider, it seems to me preferable that the task be approached on the basis of considering the new pleadings absent the pleadings that preceded them and simply to apply the pleading rules as they would be applied in other pleading applications. For the reasons I have given in [6] above, the rider is that the plaintiffs ought to satisfy the Court by reference to documents and other material that there is a proper basis for an arguable claim. I should add that the allegations that are made are serious if made out and I have had regard to this in considering the proposed pleadings.

44 Mr Robertson, who is a defendant in each proceeding, raised a number of preliminary issues. He contended that any evidence from the liquidator's public examination of him which the plaintiffs wish to rely upon is inadmissible as he claimed privilege against self incrimination in respect of each answer that he gave during the examination. In this regard, s 597(12A) of the Corporations Act relevantly provides that answers given where the privilege has been claimed cannot be used in a proceeding for the imposition of a penalty. As counsel for the plaintiffs submitted, these proceedings are not penalty proceedings. Rather, they are proceedings in which compensation is sought pursuant to s 1317H of the Corporations Act.

45 Mr Robertson submitted that affidavit evidence given by Mr Dossetor and another witness (Anthony Medland) in separate proceedings are hearsay and no leave has been sought to use them in this proceeding. He noted that no notice of intention to adduce hearsay evidence had been given pursuant to s 67 of the Evidence Act 2008 (Vic). As counsel for the plaintiffs noted, this application is interlocutory and the hearsay rule does not apply.[28] Those affidavits go to show that there is a reasonable basis on which the plaintiffs may plead an arguable case.

46 Mr Robertson also submitted that the plaintiffs have failed to provide proper basis certifications with the proposed amended statements of claim in breach of s 42 of the Civil Procedure Act.[29] The time for provision of the proper basis certifications would be when leave was granted to file the amended pleading and the point as to any failure to comply with s 42 has been taken prematurely. Counsel for Mr Robertson also submitted that if the transactions which are the subject of the Options Proceeding are set aside as being voidable transactions the effect will be that they will be reversed and there would be no cause of action against the directors. No authority was cited for that proposition. It seems to me to be a far fetched allegation. If the Court sets aside the transaction, that does not mean that the directors did not breach their duties. The breach of duty allegations require consideration of what the directors did or did not do at the relevant time, which is not after the Court has set the transaction aside if the grounds for doing so are made out. There was also some suggestion by counsel for Mr Robertson that there was no allegation that the transactions were shams. However, that is not the plaintiffs' case. Rather, the plaintiffs contend that the transactions did occur and that the directors breached their duties in respect of them.

47 The defendants submitted that the claim as originally formulated in the Options Proceeding was founded on an allegation that the directors knew, or ought to have known, that the value of the relevant trees was "substantially less" than the purchase price paid by Environinvest. Judd J struck these allegations out because there were no particulars or apparent foundation for the allegation of knowledge or particulars of what was alleged to be the true value of the trees.[30]

48 The defendants submitted that in the proposed pleading, the value of the rights in respect of the relevant treegrowing venture remains a key plank in the allegation of contravention. They contended that replacing the formulation that the value of the trees "was substantially less than the price paid" with a formulation that the relevant rights "were of uncertain, if any, value" cannot hide that the value of the rights remains unknown to the plaintiffs. Indeed, they contended that it may be a more unsatisfactory formulation because "uncertain" value might end up being to the benefit of the company. They suggested that the proposed formulation appeared to be no more than an attempt to shift the onus of proving what steps might have been taken to them.

49 It seems to me that this is the folly with the approach of considering whether a defect identified by Judd J has been rectified. As counsel for the plaintiffs submitted, the proper question is whether the transaction as pleaded is one which is in contravention of the three statutory provisions judged objectively taking into account the circumstances of the company. Using the BEP Bluegum project as an example, one of the questions for determination might be put, "Should a director have permitted the company to enter into the option deed when the value of Euan Pescott's interest in the plantation was uncertain?" Counsel for the plaintiffs noted that the pleading did not refer to value where the plaintiffs did not have evidence of value. Where there is evidence, then counsel stated that they have relied on that evidence for the purpose of pleading the claim. In this regard, for the purposes of this application, the plaintiffs relied on a report that had been prepared by Ferrier Hodgson to establish that there is a proper basis for pleading that the rights are of uncertain if any value. That report is dated 24 November 2008. Ferrier Hodgson were appointed by the Court for the purpose of assessing the solvency and viability of each of the relevant Environinvest managed investments schemes. In their report, they observed that the net present value of the BEP Bluegum project was a negative figure of $402,088. Although that report is prepared at a date after the relevant option deed is alleged to have been entered into (about 20 September 2007), I am satisfied for the purposes of this application that it provides a proper basis for the pleading that the interest in the plantation was of uncertain, if any, value.

The criticisms of Mr Robertson and Mr Dossetor ("the director defendants")

50 Another criticism of the proposed pleading stems from the submission of the director defendants that it is the manner in which the powers are exercised that is important in respect of s 181(1). They contended that the plaintiffs' pleading is not directed to this but rather to whether or not the transactions were in fact in the best interests of Environinvest, entered into in good faith and for a proper purpose. Counsel for the plaintiffs submitted that the suggestion that s 181 is directed to the manner of exercise of the power misstates the provision. He contended that the proper question is whether the power has been exercised in good faith and for proper purposes and this goes directly to the circumstances of the exercise of the power and the reasons why it is exercised. It seems to me that that is at least an arguable contention and there is no reason why the pleading ought not to go forward on this basis.

51 The next criticism by the director defendants related to the pleading in respect of s 182 (improper use of position). They submitted that the plaintiffs simply allege that the transactions in question were "likely to gain an advantage" for the other party to the transaction and "likely to cause a detriment" to Environinvest. They contended that there is no allegation of impropriety, and no identification of any conduct which the plaintiffs say constituted impropriety on the part of Mr Dossetor and Mr Robertson. They suggested that although that circumstance merely renders the proposed pleading to be embarrassing, the pleading proposed does not even hint at what such impropriety might be. As the authorities make clear (see [14] above), whether use of position is improper is to be assessed objectively. The plaintiffs' case is that objectively viewed, in the commercial context of the various transactions, the use by the directors of their position was improper. The pleading raises an arguable claim in this regard and the material relied on by the plaintiffs in this application, including the excerpts from the examinations of the directors, provides a sufficient basis for the pleading.

The criticisms of Caroline and Euan Pescott and Maridale ("the Maridale parties")

52 As noted above, Caroline Pescott, Euan Pescott and Maridale ("the Maridale defendants") are defendants to the Options Proceeding. The claims against them concern allegations under the voidable transaction provisions in Part 5.7B of the Corporations Act. They contended that the uncommercial transaction claim can only succeed if the value of the constituents of the transaction are established. No authority was cited for this proposition. Using the BEP Bluebum Project as the example, the Maridale defendants noted that the plaintiffs plead that a reasonable person in Environinvest's circumstances would not have entered into the transaction. A transaction is only an uncommercial transaction having regard to the benefits and detriment to the company, the benefits to the other parties and any other relevant matter.[31] They criticised the proposed pleading on the basis that they say it does not address any of these matters. They contended that the mere fact that Euan Pescott and Environinvest agreed to a transfer of Euan Pescott's shares to Environinvest for $1,076,253.46 does not of itself give rise to an uncommercial transaction. They say that under the transaction Environinvest acquired Euan Pescott's interest in the trees. The Maridale parties contended that to determine the benefit or detriment arising from the transaction, the value of the trees at the time the option was entered into has to be established. They submitted that if the trees were, for example, of the same or greater value than the amount paid by Environinvest for them it cannot be said that the transaction was uncommercial. They submitted that it follows that, without any evidence of the value of the trees there is no proper basis upon which to make the claim that the transaction is an uncommercial transaction within the meaning of s 588FB.

53 As counsel for the plaintiffs submitted, proof of value is not a necessary element to establish that there is an uncommercial transaction. It is the benefits and detriments of the transaction to the various parties that is important. That may, and often will, necessitate consideration of the value of the transaction to each party but that will not always be so. Counsel also noted that what Environinvest received was a transfer of interests in certain managed investment schemes (rather than trees). Counsel noted that it is not a question of what trees Environinvest received, and what the trees were valued at; the question is what was the value to Environinvest of the interests in the managed investment schemes and in this regard, as I have said above, I am satisfied that there is material that is adequate for the purposes of this application to show that there is a proper basis for pleading that those interests were of uncertain, if any, value.

54 The Maridale defendants also contended that the debt owed to Environinvest by Blackburne may not have been collectible and therefore it could not be certain that anything of value was relinquished by Environinvest in the transaction. However, it seems to me that that is something that the defendants may choose to plead but it is not necessary for the liquidator to plead that Blackburne was solvent or that the debt was recoverable.

55 The director defendants made many of the same complaints that I have dealt with in respect of the Options proceeding. A number of additional submissions were made in respect of the Properties proceeding pleading.

56 The defendants submitted that in relation to the Eurambeen claim, the conduct complained of is the resolution of the Environinvest directors that the property be transferred to a Pescott entity, but the loss arises from a transfer from Blackburne to Arnac and there are no material facts pleaded that sensibly link the transfer to the directors. However, as counsel for the plaintiffs noted, that submission does not take into account the plea that the property was held by Blackburne on trust for Environinvest and that there were things that could have been done to protect Environinvest's interests in respect of that ownership. Further, in respect of Mr Robertson, the transcript of his public examination suggests that it is at least arguable that he was aware that Eurambeen was to be transferred by Blackburne to Arnac.

57 The proposed pleading states that the directors of Environinvest authorised the transfer of Eurambeen from Blackburne to Arnac. There are no particulars of authorisation provided. In this regard, it seems to me that particulars ought to be given. That can be done either separately or incorporated in the form of amended pleading to be served. It does not give rise to a reason to refuse to grant leave to file the proposed amended statement of claim.

58 In respect of the Beenak property, counsel for Mr Dossetor contended that the case the liquidator wants to pursue at a trial is that a director of a company with perfect knowledge of the balance sheet of that company, and in particular perfect knowledge of the fixed assets contained in the balance sheet, is required to take a step positively to ensure that where there is a real property in the books of the company, the company has all of the incidents of title in respect of that property. Counsel contended that it was not clear that that was the case that the liquidator wanted to pursue and that from a pleading perspective, that ought to be made clear. The plaintiff's counsel submitted that that analysis was not the point of this litigation. Rather, counsel contended, the question in this case is whether, in the circumstances, having regard to what is recorded in the balance sheet, it is or is not reasonable to demand that the directors take steps to ensure that land of significant value to Environinvest was registered in its name. Counsel for the plaintiffs contended that the failure to register the title to Beenak in the name of Environinvest could be laid at the feet of the directors. It is alleged that Mr Dossetor and Mr Pescott were the directors of STYH which was the registered proprietor of the land and it is for that reason that it is alleged that they knew that the property had been sold to Environinvest in 2004 and, despite that, they took no steps to ensure that the title was registered in Environinvest's name. It seems to me that those allegations as pleaded are maintainable as an allegation of contravention of the relevant statutory provisions in circumstances like the present case.

59 Mr Robertson submitted that despite an allegation that Beenak was worth no more than $1,380,000 as at 30 November 2010, the pleader goes on to claim loss of $1.5 million in respect of that property. However, that the property is given a value at one date (being the date that the bank appointed agents to take possession of the property) does not mean that the amount of the loss is to be assessed as at that date. In my view, the submission by Mr Robertson of inconsistency is misconceived on this point.

60 In respect of Lillirie, counsel for Mr Dossetor submitted that there was no breach until the transfer of the property was executed (31 July 2008) and that occurred at a time when Mr Dossetor was not a director (having ceased to be a director on 29 May 2008). The same point was made in respect of Modesty Park. However, counsel for the plaintiffs submitted that there is a cause of action in respect of the resolutions in connection with those proposed transactions as Mr Dossetor allegedly failed to do anything before his departure as a director to prevent the transactions from being consummated. Again, in my view, that claim as pleaded is maintainable.

61 Mr Robertson submitted that the claim against him in respect of Lillirie must fail because the whole purchase price was paid to Environinvest. In this regard, counsel relied on a statement of adjustments and settlement statement. No doubt that is material that, at trial, may be sought to be relied upon by Mr Robertson, but it is also not in doubt that the plaintiffs will wish to test the evidence in respect of that document at trial. That is the appropriate time for the matter to be determined, not now on an interlocutory pleadings application. A similar submission was made in respect of Modesty Park and for the same reasons previously given, I do not accept that the claim ought not to be permitted to proceed at this stage based on the proposed amended pleading.

62 The defendants also submitted that for the loss and damage claim, the Court will be required to determine whether the value of what Environinvest received is less than or equal to the value of what it gave up. This would require, at trial, the trees to be valued on an unknown date and the debt given up to be valued on a reasonable assumption that the book debt is not its written down value.

63 Counsel for the plaintiffs accepted that the loss will need to be valued for the purposes of obtaining compensation orders under s 1317H. As foreshadowed in the particulars, counsel stated that this will be done before trial. It has not been done so far, in part, because the plaintiffs want to have the benefit of the interlocutory steps prior to the exchange of expert reports, so that they can reliably confine the relevant dates for valuation rather than having the experts opine on valuation at many different dates, some of which may turn out to be irrelevant. The cost of expert reports can be expensive and, if the scope of what the expert is asked to opine on is too wide, this can lead to delay. Counsel observed that once the plaintiffs know with as much confidence as they think they are going to have prior to trial which dates are the probable dates on which the events occurred and the documents were signed and the transactions occurred, then they will be in a position to limit the number of dates at which the independent expert will be asked to provide the relevant valuations.

64 In my view, the course proposed by the plaintiffs has merit, provided that the Court can be satisfied that there is an arguable case for loss that is more than a nominal loss, rather than a case that has no real prospects of success on the issue of loss. This process accords with giving effect to the overarching purpose of the Civil Procedure Act to facilitate the just, efficient, timely and cost effective resolution of the real issues in dispute.[32] Counsel for the plaintiffs submitted that there is prima facie evidence of loss. He pointed to material going to the forgiveness of significant debts owed by Pescott entities; the transfer of valuable assets, including Eurambeen which was worth in the vicinity of $11m, in exchange for which it is alleged nothing was received. Counsel made similar submissions in relation to the tree schemes and the cropping schemes, pointing to material that suggests that it is at least arguable that they were worthless at or about the time that they were received. Consequently, counsel contended that unless the Court was absolutely confident that the debts that were given in exchange were also absolutely worthless, that is, there was no point making any claim on any of the Pescott related entities, there is then very strong prima facie evidence that there was an exchange of value to the detriment of Environinvest. On the basis of the material that was referred to by counsel, I am satisfied that there is an arguable claim for loss of more than a nominal amount. In those circumstances, it is appropriate for particulars of loss to be given at a later stage, before trial.

Mr Pescott and the defendant companies in liquidation

65 At the time the application was heard, Mr Pescott was an undischarged bankrupt. In those circumstances, the Court was informed that an application had been made in the Federal Magistrates' Court for leave to proceed against him. I do not know the outcome of that application. Subject to that leave having been granted, I will grant leave to file and serve the proposed amended statement of claim in each proceeding on him.

66 In addition, some of the defendant companies are in liquidation and the plaintiffs sought leave to proceed against them. That application was not opposed and leave should be granted.

67 The plaintiffs in each proceeding ought be granted leave to file and serve amended statements of claim in the form provided to the Court on 1 December 2011. In the Properties proceeding, particulars of the allegation in paragraph 28 that the directors authorised the transfer of Eurambeen to Arnac, should also be provided (either separately or by incorporation into the amended statement of claim to be filed).

68 I will hear the parties as to costs and further directions that ought to be made.

Parties in the Properties Proceeding (6004 of 2010)

Environinvest Ltd (receivers & managers appointed) (in liquidation)

Blackburne Pty Ltd (in liquidation) (ACN 071 416 870)

STY (Holdings) Pty Ltd (in liquidation) ACN 409 734 057

Parties in the Options Proceeding (4438 of 2010)

Environinvest Ltd (receivers & managers appointed) (in liquidation)

James Patrick Downey (in his capacity as liquidator of Environinvest Ltd) (receivers and managers appointed)(in liquidation)

Extracts from proposed statement of claim in the Properties Proceeding (6004 of 2010)

Between 15 August 2002 and 1 March 2008 Blackburne Pty Ltd (ACN 071 416 870, the trustee of the Pescott Family Trust B) (Blackburne) was the registered proprietor of the fee simple in all that land known as "Eurambeen", Western Highway, Ercildoune in the State of Victoria (Eurambeen).

"Eurambeen" is comprised of the land described in the following certificates of title: volume 9526 folio 583, volume 6685 folio 974, volume 6885 folio 975, volume 6888 folio 528, volume 8255 folio 227, volume 8617 folio 026, volume 9153 folio 389, volume 9507 folio 419, volume 10668 folio 117, volume 10668 folio 118, volume 10668 folio 119, volume 10668 folio 120, volume 10668 folio 121, volume 10668 folio 122, volume 10668 folio 123, volume 10668 folio 124, volume 10668 folio 125, volume 10668 folio 126, volume 10668 folio 127, volume 10668 folio 128, volume 10668 folio 129, volume 10668 folio 130, volume 10668 folio 131, volume 10668 folio 132, volume 10668 folio 133, volume 10668 folio 134, volume 10668 folio 135, volume 10668 folio 136, volume 10668 folio 137, volume 10668 folio 138, volume 9225 folio 900.

By a deed dated 30 October 2000 made between EL and Blackburne (Sale of Assets Deed), Blackburne agreed to sell its interest in Eurambeen to EL, for a price of $3,783,961.

The Sale of Assets Deed was in writing. A copy of the Sale of Assets Deed is in the possession of the solicitors for EL and is available for inspection by appointment.

There were terms of the Sale of Assets Deed, among others, to the following effect:
- (a) the assets to be sold by Blackburne to EL were described in Schedule 1 to the Sale of Assets Deed, and included Eurambeen;
- (b) EL agreed to assume certain liabilities of Blackburne described in Schedule 2 to the Sale of Assets Deed;
- (c) EL and Blackburne agreed to execute a standard land sale contract in respect of Eurambeen, which contract would be subject to the terms and conditions of the Sale of Assets Deed: clause 1.2, Schedule 1;
- (d) EL agreed to issue to Blackburne ordinary shares in EL with a value equal to the net value of the assets received from Blackburne (after deducting the liabilities assumed as specified in Schedule 2 to the Sale of Assets Deed), namely 450,478 shares, worth $225,240 at the time of issue: clause 2.1, Schedules 1 and 2;
- (e) EL and Blackburne agreed that they would do, or cause to be done, all things necessary to give effect to the Sale of Assets Deed, including the execution of all documents as may be necessary, desirable or reasonably required to give full effect to the provisions of the Sale of Assets Deed and the transactions contemplated by it: clause 5.1.
Pursuant to the Sale of Assets Deed, on or about 30 October 2000, EL issued to Blackburne 450,478 non-redeemable ordinary shares in EL (Share Issue).
By reason of the matters alleged in paragraphs 11, 12 and 13 above, on and after 30 October 2000, Blackburne held the fee simple of Eurambeen on trust for EL (the Trust).
At all material times on and after 30 October 2000, Dossetor, Robertson and Pescott knew that Blackburne held Eurambeen on trust for EL pursuant to the Trust and that Eurambeen was owned beneficially by EL.

Dossetor was a director of both EL and Blackburne and attended meetings of the directors of those companies on 30 October 2000 at which the Sale of Assets Deed and the Share Issue were approved and the Sale of Assets Deed was executed by him.
Dossetor signed EL's Share Certificate No. 42 on 30 October 2000 recording that Blackburne, as trustee for the Pescott Family Trust B, held 450,478 ordinary shares in EL.
Dossetor is Pescott's cousin and served as an officer of numerous public and private Pescott companies, including Blackburne, STYH and EL, from 1996 until 2008.
At all material times between 30 October 2000 and 30 June 2006, EL recorded Eurambeen in its books of account as an asset owned by it.
Robertson was a foundation director of Environinvest from the commencement of its incorporation on 14 November 1997 and later became chairman of the board. He was at all material times a qualified and experienced lawyer, accountant and public company director. He regularly signed Environinvest's annual accounts. In 2000, Pescott arranged for the transfer to Robertson of 460,000 shares in Environinvest from Pescott's wife, Caroline Pescott. Robertson gave evidence in Robertson v Robertson [2010] VSC 54 (see at [196]) that these shares were transferred to him pursuant to a "moral obligation" owed to him by Pescott because he (Robertson) had been assisting Pescott by attending board meetings, doing unpaid work as a director and giving Pescott "ideas as to how things [with Environinvest] should proceed".
It is reasonable to infer Dossetor's, Robertson's and Pescott's knowledge of the fact that Blackburne held Eurambeen on trust for EL from the particulars in items 1-4 above and from the circumstances in which they authorised the transfer of Eurambeen to Arnac, as alleged in paragraph 25 below.

In December 2004 STY Holdings Pty Ltd (ACN 091 734 057, a company of which Dossetor and Pescott were directors) (STYH) was the registered proprietor of the fee simple in all that land described in Victorian Certificates of Title Vol. 2712 Fol. 382, Vol. 2522 Fol. 332, Vol. 2543 Fol. 591 and Vol. 1300 Fol. 831, being the properties together known as "Beenak" or "Three Bridges" (Beenak).
In or about December 2004, STYH agreed to sell Beenak (including any trees growing on Beenak which were not owned by other persons) to EL for the sum of $1,380,000 (the Beenak Purchase Price).

The agreement was partly in writing and partly to be implied. In so far as it was in writing, it was contained in a contract of sale of real estate dated 24 December 2004 between STYH and EL, an unexecuted copy of which is in the possession of the solicitors for EL and may be inspected by appointment.

In so far as it was to be implied, it was to be implied as a result of the matters particularised in paragraphs 18 and 20 below.

In December 2004, alternatively in June 2005, EL paid the Beenak Purchase Price to STYH, but the title to Beenak was not transferred by STYH to EL.

The Purchase Price was paid by way of the making of adjustments to the loan account between companies associated with Pescott (the "Pescott Group") and EL in EL's books and records, copies of which are in the possession of the solicitors for EL and may be inspected by appointment.

The EL books and records disclose a credit to the Pescott Group in the sum of $1,380,000 on 24 December 2004, in 3 entries of $460,000, $490,000 and $430,000, respectively, together with a reversal and reinstatement of those same entries recorded on 30 June 2005.

In the premises above, in December 2004, alternatively in June 2005, EL became beneficially entitled to the fee simple in Beenak, which was held on trust for EL by STYH.
By reason of their positions as directors of EL, each of Dossetor, Robertson or Pescott knew, alternatively they ought to have known, the matters alleged in paragraphs 16, 17, 18 and 19 above.

As from 30 June 2005, Beenak was recorded in EL's books and records as an asset of EL with a book value of $1,380,000.

As directors of EL between 30 June 2005 and 2008, each of Dossetor, Robertson and Pescott was, or alternatively each of them ought to have been, aware of the fact that Beenak was recorded as an asset of EL.

Despite the matters alleged in paragraphs 16 - 19 inclusive above, none of Dossetor, Robertson or Pescott took any steps whilst he was a director of EL to ensure that the title to Beenak was registered in the name of EL.
By a mortgage dated 28 June 2007 and registered on title on 11 July 2007, STYH mortgaged Beenak to St George Bank Ltd (Beenak Mortgage).
On or about 30 November 2010 being the date on which St George Bank Ltd (St George) appointed Nicholas Martin and Stephen Longley of PPB Advisory as agents of the mortgagee in possession of STYH as the registered proprietor of Beenak, the value of Beenak was less than the debt due to St George and secured by the Beenak Mortgage.

On or about 30 November 2010 the value of Beenak was no greater than $1,380,000 and the debt due to St George secured by the Beenak Mortgage was approximately $3,685,000.

On a date in 2007 which is presently not known to the plaintiff, but which was on or before 9 October 2007, Robertson, Dossetor and Pescott, acting in their capacities as the directors of EL, resolved that EL would transfer Eurambeen to "Pescott Group".

Unsigned EL Board minute dated 22 June 2007, which is to the effect alleged. A copy of the minute is in the possession of the solicitors for EL and may be inspected by appointment.

The fact that the board of EL resolved to transfer Eurambeen to Pescott Family interests in 2007 is to be inferred from the facts alleged in paragraph 25 below.

On 9 October 2007 Blackburne transferred Eurambeen to Arnac Pty Ltd (ACN 107 421 330), a company owned and controlled by Miffany Nicola Pescott (Pescott's daughter) and James Brian Blythe (her husband, and Pescott's son-in-law) (Arnac).
Arnac did not pay EL anything for Eurambeen and nor did EL receive any other valuable consideration therefor.
On 9 October 2007 the market value of Eurambeen was between $10,800,000 and $11,800,000.

In failing to take any steps to have EL registered as the owner of Beenak and in authorising the transfer of Eurambeen to Arnac, each of Dossetor, Robertson and Pescott breached their duties under s.180 of the Act in that a reasonable person who was a director of EL in EL's circumstances:
- (a) would have known each of the matters alleged in paragraphs 10 - 27 inclusive above;
- (b) would have taken steps to have EL registered as the owner of Beenak; and
- (c) would not have authorised the transfer of Eurambeen to Arnac for no consideration.
Before they:
- (a) passed the resolution referred to in paragraph 24; and
- (b) caused or permitted EL to transfer Eurambeen to Arnac;

none of Pescott, Dossetor or Robertson took any steps to satisfy himself that that transaction was:

(c) in the best interests of EL;

(d) entered into in good faith by EL;

(e) entered into for a proper purpose of EL;

(f) not likely to gain an advantage for Miffany Pescott or for other Pescott-related interests;

(g) not likely to cause detriment to EL.

Each of:
- (a) the resolution referred to in paragraph 24; and
- (b) causing or permitting EL to transfer Eurambeen to Arnac

(c) not in the best interests of EL;

(d) not entered into in good faith by EL;

(e) not entered into for a proper purpose of EL;

(f) likely to gain an advantage for Miffany Pescott or for other Pescott-related interests;

(g) likely to cause detriment to EL.

The acts and matters referred to in paragraphs (a) and (b) above had the effect of transferring a valuable asset of EL (worth between $10.8 - $11.8 million) to Miffany Pescott or other Pescott family interests for no consideration.

By acting (and failing to act) as alleged in paragraphs 28 and 29 above, having regard to the matters alleged in paragraph 30 above, Pescott breached each of the duties alleged in paragraph 6 above.
By acting (and failing to act) as alleged in paragraphs 28 and 29 above, having regard to the matters alleged in paragraph 30 above, Dossetor breached each of the duties alleged in paragraph 7 above.
By acting (and failing to act) as alleged in paragraphs 28 and 29 above, having regard to the matters alleged in paragraph 30 above, Robertson breached each of the duties alleged in paragraph 8 above.
EL has suffered loss and damage by reason of the breaches by Dossetor, Robertson and Pescott of their duties, as alleged in paragraphs 31, 32 and 33 respectively above.

In the premises above, each of Pescott, Robertson and Dossetor is required to compensate EL for its loss and damage, pursuant to section 1317H of the Act.

On or about 27 March 2004 EL became the registered proprietor of the fee simple in all that land described in Victorian Certificates of Title Vol. 10799 Fol. 335, Vol. 10799 Fol. 341, Vol. 10799 Fol. 322 and Vol. 7407 Fol 249, being the properties together known as "Lillirie", "Fisher" or "Meena Park - Fisher" (Lillirie).
On a date which is presently not known to the plaintiff, but which was after 30 August 2007 and before 31 July 2008, EL agreed (Lillirie Sale Agreement) to sell Lillirie to Trawalla Holdings Pty Ltd (ACN 098 685 664), a company of which Pescott and his wife, Caroline Margaret Pescott, were directors, (Trawalla) for the sum of $1,600,000 (the Lillirie Purchase Price).

The agreement was partly in writing and partly to be implied. In so far as it was in writing, it was contained in an undated contract of sale of real estate between EL and Trawalla, a copy of which is in the possession of the solicitors for EL and may be inspected by appointment.

In so far as it was to be implied, it was to be implied as a result of the matters particularised in paragraphs 38, 39 and 40 below.

There were terms of the Lillirie Sale Agreement, among others, to the effect that the Lillirie Purchase Price was to be paid as follows:
- (a) by a deposit of $1,120,000 (Lillirie Deposit) payable by 31 August 2007; and
- (b) the residue of $480,000 plus interest calculated at the rate of 8% per annum (Lillirie Residue) payable by 31 August 2010, being the third anniversary of the settlement date (31 August 2007), or such other date as may be agreed between EL and Trawalla.
On a date which is presently unknown to the liquidator, but which was on or after 31 August 2007 and before 19 September 2008, a debit of $1,120,000 was made to account ENV-321500 named "Related Party Loan - Pescott Group" in EL's books and records (the Lillirie accounting adjustments), which accounting entry constituted the payment of the Lillirie Deposit in part payment of the Lillirie Purchase Price.

The Lillirie accounting adjustments were recorded as follows in EL's books and records, copies of which are in the possession of the solicitors for EL and may be inspected by appointment:

Prior to 31 August 2007, Lillirie was recorded as an asset on EL's balance sheet with a value of $1,680,000. In an accounting entry dated 31 August 2007, a credit was recorded against the Lillirie asset account reducing the asset value recorded on EL's books to nil. Two corresponding debit entries were made in EL's books. A debit of $1,600,000 was made to the "Trade Debtors" account, and a debit of $80,000 with narration "Account for Profit/Loss on Sale of Lillirie" was made to an expense account to record the accounting loss on the sale of Lillirie.

A subsequent adjustment, also dated 31 August 2007, was made to the "Trade Debtors" account. Under the adjustment, the deposit of $1,120,000 was debited to the account ENV-321500 named "Related Party Loan - Pescott Group". The "Trade Debtors" account was credited with $1,120,000.

As at 30 August 2007, the account ENV-321500 named "Related Party Loan - Pescott Group" in EL's books had a credit balance of $1,946,720.93. At that time the account reflected a loan to EL from the Pescott Group of $1,946,720.93. The holder of the corresponding right to receive payment is not apparent from the account's name "Pescott Group", however, the entries giving rise to the $1,946,720.93 liability have narrations of "Blacburne Pty Ltd", "Eurambeen Pty Ltd", "Far East China Trading", "Blackburne Pty Ltd", "Pescott Group - R Pescott", "Blackburne Pty Ltd - R Pescott" and "Reallocate Settlement Monies to Loan Account". All of EL's liabilities recorded in the "Related Party Loan - Pescott Group" account are referable to obligations of EL to Roger Pescott or to entities with which he had a close association.

Only two entries were made to the account ENV-321500 named "Related Party Loan - Pescott Group" on 31 August 2007. The debit of $1,120,000 referred to in these particulars, and the further debit of $730,000 referred to at paragraph Error! Reference source not found., had the effect of partially extinguishing EL's liability recorded in the "Related Party Loan - Pescott Group" account. As at 31 August 2007, the balance of the account as recorded in EL's books was a liability of $96,720.93.

The ultimate net effect of these transactions was that the Lillirie Residue of $480,000 was recorded in EL's "Trade Debtors" account and the Lillirie Deposit of $1,120,000 was paid by partially extinguishing EL's liability to Roger Pescott or entities with which he had a close association.

Despite the fact that on 31 July 2008 Trawalla had not paid the Lillirie Residue to EL, by a Transfer of Land dated 31 July 2008, EL transferred all its estate and interest in fee simple in Lillirie to Trawalla.
By reason of their positions as directors of EL, each of Dossetor, Robertson, Pescott and Bresnehan knew, alternatively they ought to have known, the matters alleged in paragraphs 36 to 40 above.

As from 30 June 2000, Lillirie was recorded in EL's books and records as an asset of EL.

As directors of EL (between 30 June 2000 and 31 July 2008), each of Dossetor, Robertson, Pescott, and Bresnehan (between 17 July 2008 and 31 July 2008) was, or alternatively each of them ought to have been aware of the fact that Lillirie was recorded as an asset of EL.

On 31 July 2008, Pescott and Bresnehan signed a Transfer of Land transferring Lillirie to Trawalla in their capacity as directors of EL.

Between January 2008 and 31 August 2008, Robertson, Pescott and Bresnehan were included in email correspondence regarding the accounting treatment of the Lillirie Sale Agreement.

Despite the matters alleged in paragraphs 36 to 40 inclusive above, none of Robertson, Pescott, Dossetor (prior to his resignation as a director on 29 May 2008), or Bresnehan (after 17 July 2008) took any steps whilst he was a director of EL to ensure that:
- (a) EL's right to receive the Lillirie Purchase Price was enforced;
- (b) the title to Lillirie was not transferred to Trawalla without EL receiving the Lillirie Purchase Price in cash and in full.
In failing to take the steps described in paragraph 42 above, each of Dossetor, Robertson Pescott and Bresnehan breached their duties under s.180 of the Act in that a reasonable person who was a director of EL in EL's circumstances:
- (a) would have known each of the matters alleged in paragraphs 36 to 40 inclusive above;
- (b) would have taken steps to ensure that EL's right to receive the Lillirie Purchase Price was enforced;
- (c) would not have authorised the transfer of Lillirie to Trawalla without EL receiving the Lillirie Purchase Price in cash and in full.
Before they caused or permitted EL to transfer Lillirie to Trawalla none of Pescott, Dossetor, Robertson or Bresnehan took any steps to satisfy himself that that transaction was:
- (a) in the best interests of EL;
- (b) entered into in good faith by EL;
- (c) entered into for a proper purpose of EL;
- (d) not likely to gain an advantage for other Pescott-related interests;
- (e) not likely to cause detriment to EL.
Causing or permitting EL to transfer Lillirie to Trawalla was:
- (a) not in the best interests of EL;
- (b) not entered into in good faith by EL;
- (c) not entered into for a proper purpose of EL;
- (d) likely to gain an advantage for Pescott-related interests;
- (e) likely to cause detriment to EL.

At the time of the transfer of Lillirie to Trawalla, EL was:

(a) according to its accounts, indebted to Trawalla and/or other entities associated with and/or controlled by Pescott; and

(a) enabled Trawalla and/or other entities associated with Pescott to recover, in respect of an unsecured debt owed by EL, more than it and/or they would have recovered if they proved in the winding up or EL;

(b) had the effect of diminishing the assets available to EL to be applied rateably between EL's then creditors;

(d) had the effect of transferring a valuable asset of EL, which could have been sold for cash, to Pescott family interests for no consideration or, alternatively, for a consideration less than the value of the asset.

By acting (and failing to act) as alleged in paragraph 42 above, having regard to the matters alleged in paragraph 43 above, Pescott breached each of the duties alleged in paragraph 6 above.
By acting (and failing to act) as alleged in paragraph 42 above, having regard to the matters alleged in paragraph 43 above, Dossetor breached each of the duties alleged in paragraph 7 above.
By acting (and failing to act) as alleged in paragraph 42 above, having regard to the matters alleged in paragraph 43 above, Robertson breached each of the duties alleged in paragraph 8 above.
By acting (and failing to act) as alleged in paragraph 42 above, having regard to the matters alleged in paragraph 43 above, Bresnehan breached each of the duties alleged in paragraph 9 above.
EL has suffered loss and damage by reason of the breaches by Dossetor, Robertson, Pescott and Bresnehan of their duties, as alleged in paragraphs 46, 47, 48 and 49 respectively above.

Particulars of EL's loss and damage will be given prior to trial.

In the premises above, each of Pescott, Robertson, Dossetor and Bresnehan is required to compensate EL for its loss and damage, pursuant to section 1317H of the Act.

Extracts from proposed statement of claim in the Options Proceeding (4438 of 2010)

Part 5.7B claims - formal elements

On 19 September 2008, the Liquidator was appointed as administrator of EL pursuant to section 436A of the Act.
On 24 October 2008, the creditors of EL resolved that it be wound up and the Liquidator be appointed as its liquidator, pursuant to section 439C of the Act.
By reason of the matters set out in paragraphs 19 and 20 above and sections 9, 513B and 513C of the Act, the relation-back day in relation to the winding up of EL is 19 September 2008 (Relation-Back Day) and the winding up of EL is taken to have commenced on 19 September 2008.
The Liquidator sues in his capacity as liquidator of EL.
At all times after January 2007, EL was insolvent.

At a glance

Court

Decision date

Before

Source

Judgment (267 paragraphs)

Parties

Legislation Cited (5)

Cases Cited (7)