These are my reasons for judgment in the matter of Primes and Wethmar v Kumar. Proceedings were commenced by statement of claim.
In January 2022, and the pleadings have been amended on a number of occasions. The matter was fixed for hearing by Judicial Registrar Howard on 20 March 2023 for hearing commencing yesterday with an estimate of four days. I was informed by the parties yesterday morning that prior to attending my court, they had appeared before Her Honour Judge Gibson who had heard the defendant's application to vacate the hearing date and refused the application.
In those circumstances, the matter came before me for hearing yesterday morning, and at that time, Mr Bateman of counsel appeared for the plaintiffs and Mr Kumar, the defendant, appeared in person. He explained to me that he was not legally qualified and had not prepared himself to argue the case, and did not feel he was in a position to do that. He asked me for leave, as in permission, to leave the Court. I informed him that, as I understood it, he did not require my leave or permission to leave, but I told him that he was free to go, but if he did go, the hearing may well proceed in his absence depending upon what course the plaintiff wished to take.
As events transpired Mr Kumar, the defendant, did leave the courtroom yesterday morning and has not returned. The matter proceeded yesterday in the usual way by the calling of evidence and was adjourned until 2pm today for submissions. The matter was called again outside court today at 2pm. There was no appearance for the defendant either in person or by someone else. The matter has proceeded to submissions this afternoon, and in that regard, I have been provided with written submissions prepared by Mr Bateman which became exhibit 3 in the proceedings.
The evidence was led yesterday in the form of two affidavits, one by each plaintiff and an affidavit together with the exhibits to that affidavit. The affidavits and the exhibit form part of the evidence before me, together with an affidavit of Philip Noel Parker sworn 31 July 2023 in relation to service. Documents were tendered and became exhibits that were included in the court book behind tabs 14, 15 and 16. Yesterday after the defendant had left the court, the plaintiffs sought leave to further amend their statement of claim. I dealt with that yesterday by making orders and allowing the amendment.
Primes v Kumar [2023] NSWDC 576 | Case summary | Zoe
I might record the reason again why I granted leave to make that application without the filing of a notice of motion was on the basis that the defendant had been notified in July 2023 at a time when he had solicitors acting for him about the intention to make an application at the hearing to amend the statement of claim in the manner set out in a letter of 31 July 2023 to the defendant's then solicitor and by reference to an attached proposed second amended statement of claim.
That amendment having been made, the plaintiffs filed in court, with my leave, a second amended statement of claim, filed in court yesterday 27 November 2023, and it is that claim which I am being asked to rule upon. By that claim, the plaintiff's claim judgment against the defendant in the sum of $682,290 plus interest and costs. The plaintiffs' claim can be broken into two parts. Firstly, there is a claim for outstanding rent. That is based on a residential tenancy agreement between the plaintiffs and the defendant. Under that agreement the defendant was the tenant of a property owned by the plaintiffs and I will come to the evidence about that shortly.
The second claim made by the plaintiffs against the defendant, and by far the one of greater value, is a claim that is based on claims which a company that the first plaintiff and the defendant were directors of, and shareholders as well. They were directors of which company has gone into liquidation. That company is called Bads Developments Pty Ltd (in liquidation) and I will refer to it as the parties have done as "the company". The plaintiffs have taken by assignment from the liquidator of the company claims of the company against the defendant in respect of money that the evidence shows the defendant was paid by the company from the company's bank accounts into the defendant's personal bank accounts.
By way of further background, I should record that the defendant had been legally represented in the proceedings between at least 10 March 2022, when he filed a defence and cross-claim, and until 21 November 2023. Further, despite orders for the parties' evidence to be filed and served being made as long ago as 5 September 2022, that is last year, the defendant failed to file any evidence in response to the plaintiff's claim, nor in support of his own cross-claim.
I will move on to dealing with the claim for outstanding rent. On the evidence before me, I am satisfied that the plaintiffs have a claim for outstanding rent, pursuant to a residential tenancy agreement between the plaintiffs and the defendant. I am satisfied on the evidence that the defendant occupied the premises the subject of the residential tenancy agreement between 1 July 2018 and 25 May 2021, at which time he vacated the premises.
When the lease was first entered into in writing, the residential tenancy agreement provided for a weekly rent of $650. The plaintiffs have calculated the amount that they say is due under the lease on the basis that by agreement, notwithstanding what was in the written agreement, they agreed with the defendant to accept $600 per week in the period 1 July 2018 to 11 February 2021 and I am satisfied on the evidence before me that that was the rent payable for that period.
I am also satisfied on the evidence before me that after giving notice required under the Residential Tenancies Act the rent was increased to $850 from 12 February 2021 until 25 May 2021, which is when the defendant vacated the premises. I am satisfied on the evidence before me, which includes reconciliation of payments into the bank account of the plaintiffs for the payment of rent, that the defendant has failed to pay the sum of $27,500 in respect of rent and that the plaintiffs are entitled to judgment against him in that amount for outstanding rent.
That takes me to the claims against the defendant which were claims of the company that have been assigned to the plaintiffs. I am satisfied on the evidence that the claims that the company had against the defendant have been assigned by the liquidator to the plaintiffs. The various deeds of assignment and formal notices are in evidence before me. The position in relation to those assignments is accurately summarised in the written submissions of Mr Bateman at paragraphs 22-27.
By way of background for these claims, it is important to understand that the company was incorporated on 12 July 2018 with the first plaintiff and the defendant appointed as its directors. According to the affidavit of the first plaintiff at para 13, and I paraphrase: "The company was formed to buy a property development in Blakehurst and the money the first plaintiff injected into the company was to be used for the purchase of the Blakehurst development property. The first plaintiff says in his affidavit, 'Mr Kumar was never authorised to withdraw funds for any other purpose.'"
According to the liquidator's report to creditors dated 22 February 2022 at p 107 of the court book, the company's only activity appears to have been in relation to the proposed purchase of the Blakehurst development property.The purchase did not proceed and has resulted in a dispute between the directors in relation to the disbursements of funds from the company's bank account.
According to the evidence of the first plaintiff in his affidavit, he reviewed the company's bank account statements being statements of its account with the Commonwealth Bank of Australia, which revealed to him that during the period 21 December 2018 to 24 March 2020 there were a number of large transactions debited from the account to bank accounts that he was not aware of.
Subsequent investigations have revealed that the money identified by the first plaintiff at that time was transferred during that period into bank accounts operated in the name of the defendant. These revelations occurred to the first plaintiff before he ceased being a director on 1 June 2021 and before the company was placed into liquidation on his application. The evidence before me shows that the company was wound up and a liquidator appointed on 29 November 2021 on the application of the first plaintiff as the company's only creditor.
A statutory report to creditors by the company's liquidator was prepared, as I have already mentioned, and has revealed that upon analysis of the bank statements provided to the liquidator by the plaintiffs that both the first plaintiff and the defendant loaned moneys to the company. However, payments had been made to the defendant in excess of the moneys loaned by him to the company in the sum of $654,790.
Further, an analysis of the company's bank accounts or bank statements revealed that the sum of $1,071,800 had been transferred from the company's bank account to the three unknown bank accounts initially identified by the first plaintiff which I have mentioned, and that a further tracing exercise upon receipt of information from the banks concerned and in evidence before me, some of which documents were produced on subpoena show, as I have already mentioned, that each of those three bank accounts were held in the personal name of the defendant.
On that basis, the plaintiffs seek to step into the shoes of the company and claim money from the defendant that they say was the company's money which was wrongfully paid to the defendant. The plaintiffs say that they are entitled to have a judgment in a money sum against the defendant on three separate and alternative bases.
The first is in relation to unreasonable director-related transactions, giving a statutory remedy under the Corporations Act. The second is a cause of action for compensation for breach of fiduciary duty under general equitable principles. The third is a claim said to be based on moneys had and received or unjust enrichment. I will deal with each of those in turn.
In relation to the unreasonable director-related transactions, the plaintiffs seek an order under s 588FF(1)(a) of the Corporations Act 2001. By that section: "Where, on the application of a company's liquidator, a court" - and I highlight the fact that in the legislation "court" in the section appears with a lowercase - is satisfied that a transaction of the company is voidable because of s 588FE, the court may make one or more of the following orders:
1. an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction."
The significance of the reference in the section to "court" with a lowercase C is that the Corporations Act draws a distinction between courts generally and specific courts, which are identified as the Supreme Court and the Federal Court. Section 9 of the Act provides that "court" with the lowercase C has the meaning given in s 58AA and "Court" with a capital C has the meaning also given in 58AA. Section 58AA provides that "court" with a lowercase C "means any court", whilst "Court" with a capital C means a number of specified Courts, including in which are the Federal Court and the Supreme Court of New South Wales.
I am satisfied that the District Court of New South Wales falls within the definition of "court" with the lowercase C in s 588FF and this court has jurisdiction to make an order under that section of the Corporations Act if it is otherwise permissible to do so.
Under those provisions, one starts with s 588FDA which defines and refers to "unreasonable director-related transactions":
"A transaction of a company is an unreasonable director-related transaction of the company if, and only if:
(a) the transaction is:
(i) payment made by the company - … and
(b) the payment is made - … to:
(i) "a director of the company."
I am satisfied that on the evidence before me that the payments the plaintiffs have identified were payments made by the company from its bank account to the defendant who was, at the time, a director of the company. Section 588FDA also requires that a transaction of a company is an unreasonable director-related transaction if, and only if:
"(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 enter into the transaction; and
(iii) the respective benefits to other parties to the transaction of entering into it; and
(iv) any other relevant matter."
These provisions were the subject of detailed consideration by the Court of Appeal in the decision of Crowe-Maxwell v Frost [2016] NSWCA 46, (2016) 91 NSWLR 414. The judgment of the Court was given by Beazley P with whom Macfarlan and Gleeson JJA agreed. Her Honour's analysis of the relevant legislative provisions about the unreasonable director-related provisions of the Act commences at para 59 of the judgment and continues for quite a number of pages by reference to the legislation itself and by reference to case law. I do not propose to quote or repeat anything that her Honour set out there.
Returning to the facts before me, it is significant to understand how the plaintiffs come to bring the action when the legislation refers to the right of a liquidator to bring the claim. The plaintiffs' right to bring the claim occurs as a result of the application of s 600K of the Act and sch 2 to the Act. Clause 5-20 of sch 2, provides that "A person is an external administrator of a company if the person" - amongst other things - "is the liquidator of the company." Clause 100-5 of sch 2 provides that:
"Subject to subs (2) and (3), an external administrator of a company may assign any right to sue that is conferred on the external administrator by this Act."
Subclause (2) refers to an action that has already begun and subclause (3) provides that:
"Before assigning any right under subs (1), the external administrator must give written notice to the creditors of the proposed assignment."
I am satisfied on the evidence before me that that notice was given and that there has been an effective assignment by the liquidator of the company of the company's right to sue conferred on the liquidator by the Act.
Under the Corporations Act provisions, an unreasonable director-related transaction is voidable if it was entered into during the four years ending on the relation back day, which in relation to the company was 29 November 2021. The evidence before me shows that all the transactions occurred within that period, the transactions having occurred between 21 December 2018 and 24 March 2020.
I will return to the requirement of s 588FDA(1)(c), being the requirement I set out earlier. The evidence in that regard includes the context that the payments were made at a time when both the first plaintiff and defendant were directors of the company. They were made at a time when, on the evidence of the first plaintiff, the money he had provided to the company and I infer the money provided by the defendant to the company, was to be used for the specific purpose of buying a property development in Blakehurst and for no other purpose.
The evidence before me demonstrates that the money that originated in the bank account of the company was transferred directly to the accounts operated in the name of the defendant. On that basis, the plaintiffs submit that it may be expected that a reasonable person in the company's circumstances would not have entered into the transactions, that is made these payments, in circumstances that the company was formed and loaned money for the limited purpose which did not eventuate of purchasing the Blakehurst property for property development.
They also submit that the payments that were made to the defendant have caused detriment to the company in the amount of $654,790, which is confirmed by the analysis of the liquidator, in the liquidator's report to creditors that I have referred to. I accept both of those submissions. The plaintiffs also submit that the payments have conferred no discernible benefit to the company, having not been made on commercial terms, such as with interest or a secured basis.
There is no evidence before me of the terms upon which any payment was made by the company to the defendant. The evidence before me consists of the evidence of the first plaintiff and the liquidator in relation to this topic that I have referred to already, together with the bank records and reconciliations of those records demonstrating the fact of payment made to the company by each director from their personal funds and the fact of payments out by the company to the defendant personally.
In the absence of any evidence or explanation from the defendant, as to which there is none, I am more comfortably satisfied that I can infer that there was no discernible benefit to the company by making these payments to the defendant and I make that finding.
It is also submitted that in causing the payments to be made the defendant, as a director of the company, has acted to the detriment of the company to whom he owed fiduciary, statutory and common law obligations and preferred his own interests to that of the company. As I understand it, that submission is to make good the second cause of action in relation to breach of fiduciary duty and I will return to that in a moment.
Having regard to that evidence, I am satisfied that it may be expected that a reasonable person in the company's circumstances would not have entered into these transactions. Having regard to the benefits to the company of which there appear to have been none, the detriment to the company of entering into the transaction, which is obviously the payment away of the company's money in circumstances where there was no obligation to repay the money and the respective benefits to other parties to the transaction of entering into it, which on the evidence appears to me to be not applicable and having regard to any other relevant matters which have not been identified.
In any event, I find that it may be expected that a reasonable person in the company's circumstances would not have entered into those transactions. In those circumstances I am satisfied that each payment represented a transaction of the company as an unreasonable director-related transaction within the meaning of s 588FDA of the Corporations Act.
In those circumstances, having regard to the fact that the net result of those payments having been made to the defendant and the defendant having made some payments to the company, that the net result is that the plaintiffs are entitled to an order under s 588FF directing the defendant to pay to the company the net amount of the payments which were made to him as against the payments which he made to the company, which is the amount claimed in the statement of claim being the second amended statement of claim filed in court on 27 November 2023 in the sum of $682,290.
That brings me to the fiduciary duty claim which, strictly speaking, it is unnecessary for me to deal with, having determined that the plaintiffs are entitled to the relief they seek on the basis of the Corporations Act claim, so I will be brief in dealing with this. The plaintiffs bring this claim, as I have mentioned, on the basis that as a director of the company the defendant owed fiduciary duties to the company which, in the circumstances, give rise to a claim for an entitlement of the company to claim equitable compensation from the defendant for breach of fiduciary duty.
The equitable jurisdiction of the court is limited and was considered and thoroughly explained by Leeming JA in Great Northern Developments Pty Ltd v Lane [2021] NSWCA 150. I will not repeat the explanation that his Honour gave, but I am satisfied, having regard to his Honour's explanation of how s 134 of the District Court Act should be understood and applied, that an equitable claim for compensation for breach of fiduciary duty would not fall within any of the subparas (a) to (g) in s 134(1) of the District Court Act, but would fall within subs (1)(h) which provides that:
"The Court shall have the same jurisdiction as the Supreme Court, and may exercise all the powers and authority of the Supreme Court, in proceedings for...any equitable claim or demand for recovery of money or damages, whether liquidated or unliquidated (not being a claim or demand of a kind to which any other paragraph of this subsection applies), in an amount not exceeding the Court's jurisdictional limit."
This Court's jurisdictional limit is now $1,250,000. The plaintiffs' claim for fiduciary duty is put, in similar terms to the duty of a director stated in s182 of the Corporations Act. I make it clear that the plaintiffs are not relying upon s182 of the Corporations Act but I mention that section because it is submitted, and I accept, that the statutory obligation is very closely aligned with the equitable obligation and the statutory obligation for a director not to improperly use their position to gain an advantage for themselves as stated in s 182, aligns very closely, if not identically, with the position in equity.
In my opinion, the evidence and reasoning that I have set out in relation to the statutory claim for unreasonable director-related transactions, also fall within the compass of a breach of fiduciary duty by the defendant, giving the company the right to compensation for those payments which were made improperly to the defendant by gaining an advantage from his position as a director. In those circumstances, in my opinion, the plaintiffs are also entitled to the same relief. That is, in respect of the payment on the same amount of money by way of compensation as they are entitled for the breach of the Corporations Act provisions about unreasonable director-related transactions.
The third basis or cause of action upon which the plaintiffs put their claim was moneys had and received based on unjust enrichment. Having regard to the findings I have already made and my acceptance that the plaintiffs are entitled to the relief they seek, firstly under the Corporations Act, or alternatively, under general fiduciary obligations and equitable principles, it is not necessary for me to consider the claim for moneys had and received in any detail or at all.
Having regard to the fact that I am giving these reasons ex tempore and in an attempt to meet the requirements of delivering quick, just and cheap justice to the parties, particularly the plaintiffs when the hearing before me has been unopposed and in an attempt to avoid the need for a reserved judgment. I suggested to Mr Bateman, for the plaintiffs, that it was unnecessary for me to consider and rule upon the third basis of the claim, based on moneys had and received and the plaintiffs have acceded to that course. I, therefore, do not propose to consider that claim any further.
For those reasons, the plaintiffs are entitled to $27,500 for unpaid rent in addition to the sum of $654,790 for the unreasonable director-related transactions or compensation for breach of fiduciary duty. The plaintiffs also claim pre-judgment interest, the calculations for which have been set out in Mr Bateman's written submissions. Pre-judgment interest totals $122,407.
On that basis, the plaintiffs are entitled to the sum total of $804,697. I give a verdict and judgment for the plaintiffs against the defendant in the sum of $804,697 and I order the defendant to pay the plaintiffs' costs of the proceedings.
Anything else?
BATEMAN: One other matter. The defendant had a cross-claim and that ought to be dismissed.
[2]
HIS HONOUR: All right, thank you.
As counsel for the plaintiffs draws to my attention, the defendant also brought a cross-claim against the plaintiffs. Having not presented any evidence on that cross-claim, nor made any submissions in regard to it, I dismiss the cross-claim and the plaintiffs' costs in the proceedings are to include the plaintiffs' costs in the cross-claim.
The order I make in relation to the cross-claim is that the cross-claim is dismissed with costs.
[3]
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Decision last updated: 19 December 2023