Shot One Pty Ltd (in liq.) & Anor v Day & Anor [2017] VSC 741

1 The central issue in dispute between the parties to this proceeding is whether a Deed of Settlement entered into between Shot One Pty Ltd ('Shot One') and others, at or following a judicial mediation held on 23 May 2012, relevantly constituted an 'uncommercial' transaction and should be set aside and declared void by this Court at the suit of the liquidator of Shot One.

2 By way of background, relevantly, on 9 November 2012, following the issue of a statutory demand by the Australian Taxation Office as principal creditor,[1] the Federal Court of Australia ordered that Shot One be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth) (the 'Corporations Act'), and that the second plaintiff, Mr Andrew Reginald Yeo, be appointed as liquidator.

Deed of Settlement entered into on 23 May 2012 to settle the 2010 proceeding

3 On 23 May 2012, some five months prior to the winding up order being made, Shot One had entered into a Deed of Settlement by which it settled a proceeding it had commenced in this Court in November 2010 seeking relief against Rising Rocket Pty Ltd ('Rising Rocket') and Richard Day ('the 2010 proceeding').[2] The Deed of Settlement was entered into following a judicial mediation conducted before Randall AsJ. The parties to the Deed of Settlement were not only Shot One, Rising Rocket and Richard Day, but also included Nicholas Day (a brother of Richard, who had replaced him as the sole director and shareholder of Shot One on 11 February 2009) and Cooniemoon Pty Ltd ('Cooniemoon'), neither of whom were parties to the 2010 proceeding.

4 The dispute between the parties to the Deed of Settlement had its origin in the purchase by Rising Rocket, a company controlled by Richard Day, in its capacity as trustee of the Rising Rocket Trust,[3] of a property known as 5/2 Rockley Road, South Yarra (the 'Rockley Road property') in December 2004.[4] Nicholas Day had been the architect for that development, and when the Rockley Road property was purchased, he was bankrupt and was employed by Shot One as its lead architect. Under Nicholas Day's employment contract, Shot One was obliged to provide him with suitable accommodation, and when Rising Rocket purchased the Rockley Road property, Richard Day (then the sole director and shareholder of Shot One) envisaged that it would be suitable for use as a residence for Nicholas and his family. Nicholas acquiesced in that course, and lived there for several years. Indeed, on 23 May 2012, when the Deed of Settlement was entered into, Nicholas was still residing at the Rockley Road property.

5 When the Deed of Settlement was entered into, Cooniemoon, which is now de-registered, was a company associated with Richard Day via his son, Simon.[5] The evidence was that, from April 2003 until March 2009 Richard Day, through Cooniemoon, had invoiced Shot One for management services rendered by him to Shot One during the period of Nicholas's bankruptcy. Not all of those invoices had been paid and Cooniemoon claimed that Shot One and/or Nicholas Day owed it some $72,000, a matter which each of Shot One and Nicholas Day disputed.[6] Under the Deed of Settlement, that dispute, amongst others, was compromised and the mutual releases given by each of the parties included 'without limitation any claims by Nicholas or Shot One as against Cooniemoon'.[7]

6 Relevantly for present purposes, the Deed of Settlement also purported to compromise a (prospective) claim against each of Rising Rocket and Richard Day in relation to loan accounts recorded in the financial records of Shot One, which to that point had not been pleaded in the 2010 proceeding but had been foreshadowed just prior to the judicial mediation. The Deed of Settlement recited, by way of 'Introduction', that:

1. The financial records of Shot One for the financial year ending 30 June 2011 also disclose that Rising Rocket and Richard owe Shot One loans in a total which as at the date of this deed remain outstanding (the Loans), which Rising Rocket and Richard dispute.

1. The parties agree that the matters recited under the heading 'Introduction' are correct. The parties adopt all the introductory remarks as representations made to each other and as part of this document.

7 As part of the settlement reached, mutual releases were given. The mutual releases contained in clause 12 of the Deed were expressed to cover:

1. . . . all future and existing actions, causes of action, potential causes of action, suits, rights, claims, expenses, losses proceedings and demands of whatsoever nature . . . wherever and however arising, known or unknown, which relate to, directly or indirectly, or are in anyway connected with the Proceeding or the matters raised in the Introduction above, and further includes without limitation . . . any claims as against Richard in relation to Richard's role and tenure as a director of Shot One . . .

Proceeding commenced by the liquidator of Shot One on 31 January 2014 seeking to set aside the Deed of Settlement

8 On 31 January 2014, Shot One and Mr Yeo (as liquidator of Shot One) commenced the present proceeding against Richard Day and Rising Rocket (the '2014 proceeding'), seeking to have the Deed of Settlement declared an 'uncommercial transaction' and an 'unreasonable director related transaction' under Division 2 of Part 5.7B of the Corporations Act. There have been several iterations of the pleadings, but when the trial commenced the plaintiffs were pursuing the allegations made in their Second Further Amended Statement of Claim, which were directed to obtaining the following relief in this proceeding:

• A declaration that the Deed of Settlement is an 'uncommercial transaction' pursuant to section 588FB of the Corporations Act, and void as against the liquidator pursuant to section 588FE(3) of the Act;
• A declaration that the Deed of Settlement is an 'unreasonable director related transaction' pursuant to section 588FDA of the Corporations Act, and void as against the liquidator pursuant to section 588FE(6A) of the Act; and
• An order pursuant to section 588FF of the Corporations Act declaring the Deed of Settlement to be void at the time when it was made, or alternatively declaring the Deed of Settlement to be unenforceable.

• Payment of the total sum of $1,082,446.94 (the 'SO-RD Amount') being the monies that Shot One transferred to Richard Day between April 2004 and June 2007;
• Interest on that sum pursuant to statute;
• Damages arising as a result of certain alleged breaches of director's duties.

• A declaration that Rising Rocket holds the Rockley Road property (and the proceeds of sale of the Rockley Road property) subject to an equitable trust, charge or lien in proportion to Shot One's contributions to the property;
• An order that Rising Rocket execute such deeds, instructions or other documents reasonably necessary to give effect the declaration (immediately above), or that a registrar of the Court be ordered to execute those deeds, instruments or other documents if Rising Rocket fails or refuses to execute them;
• Further and in the alternative to the declaration (immediately above), payment of the 'SO-RR Amount' (being the sum of $1,172,018.39 set out in Schedule B as the 'Net contributions to the Rockley Road property');
• Interest on the 'SO-RR Amount' pursuant to statute; and
• Damages arising as a result of the alleged knowing involvement and alleged knowing receipt.

9 From the commencement of the 2014 proceeding, both Richard Day and Rising Rocket disputed the plaintiffs' case in its entirety, and so the matter proceeded to trial.

During the course of the trial the issues in dispute were narrowed significantly

10 The trial commenced on 2 February 2017. After Senior Counsel for the respective parties opened their cases, the matter was referred for judicial mediation before Efthim AsJ. Following the conclusion of the mediation, Senior Counsel for the plaintiffs informed the Court that they proposed to re-formulate their case by re-pleading so as to rely solely on the forgiveness of the loan accounts of Richard Day and Rising Rocket as demonstrating that the Deed of Settlement was an 'uncommercial transaction' within the meaning of s 588FB of the Corporations Act or an 'unreasonable director-related transaction' within the meaning of s 588FDA of the Corporations Act. There being no opposition to that course, the matter was stood down to permit the pleadings to be amended.

11 The plaintiffs then filed their Third Further Amended Statement of Claim, in which they continued to claim the same declaratory relief as before as against both Richard Day and Rising Rocket, but the scope of the relief sought against Richard Day and Rising Rocket severally was narrowed significantly, as follows:

• Payment of the total sum of at least $730,610 (the 'SO-RD Loan Amount')[8] being the monies that Shot One alleges it advanced to Richard Day by way of loan between November 2001 and 23 May 2012;
• Interest on that sum pursuant to statute.

• Payment of the total sum of at least $721,500 (the 'SO-RR Loan Amount')[9] being the monies that Shot One alleges it advanced to Rising Rocket by way of loan between November 2001 and 23 May 2012;
• Interest on that sum pursuant to statute.

12 The trial resumed (or perhaps more correctly, re-commenced) on 9 February 2017, with fresh opening addresses from Senior Counsel for the respective parties, based on the revised pleadings and the parties' Second Agreed List of Principal Issues. The plaintiffs then called their witnesses, being Mr Yeo, the liquidator, and Mr Terrence John Jasper, the accountant who performed work for each of the relevant corporate entities and for Richard Day personally. Evidence was then given on behalf of the defendants by Richard Day, Mr Samuel Marash, the solicitor who acted for Shot One at the mediation in May 2012 when the Deed of Settlement was executed, and Mr Michael Grano, the external bookkeeper who prepared the management accounts for Shot One. Nicholas Day was not called to give evidence and he did not take part in the trial.[10]

13 During the trial, the respective parties tendered a host of documents including (redacted) witness statements and documents from the court book that were referred to therein, along with a vast array of accounting documents extracted from the files of Terrence Jasper & Associates that were subpoenaed at trial. An agreed final joint tender list was prepared and submitted by the parties at the commencement of closing submissions, to which certain additional documents were later added by agreement.

14 By the time closing written submissions were filed, the issues in dispute between the parties had narrowed somewhat. In their written submissions, the plaintiffs informed the Court (for the first time) that they were no longer pursuing their claim that the Deed of Settlement was an 'unreasonable director-related transaction' of Shot One. Accordingly, it is not necessary for the Court to determine whether the Deed of Settlement was a 'conveyance, transfer or other disposition' of property to Richard Day for the purposes of s 588FDA of the Corporations Act (Issue 6) or whether the entry into the Deed of Settlement was an unreasonable director-related transaction of Shot One (Issue 7).

15 During the course of oral closing submissions, the issues in dispute were narrowed even further. At the conclusion of the defendants' oral closing submissions, Senior Counsel for the plaintiffs informed the Court that they were no longer pursuing the claim made against Richard Day personally. Accordingly, it is no longer necessary for the Court to decide Issues 1 or 2.[11] But, as explained below, the plaintiffs' claims against Richard Day inevitably form part of the circumstances giving rise to Shot One's entry into the Deed of Settlement, and therefore have some contextual relevance to the issues that remain in dispute between the parties.

The final form of the case pursued by the plaintiffs

16 Against that background, it will be apparent that the final form of the case now pursued by the plaintiffs is one that relates solely to alleged indebtedness of Rising Rocket to Shot One. The plaintiffs contend that when the Deed of Settlement was executed on 23 May 2012, Shot One's claim in debt against Rising Rocket had a 'value' of at least $433,961,[12] and that by entering into the Deed of Settlement, Shot One released Rising Rocket from that debt claim, and in so doing, abandoned a potentially valuable cause of action but obtained no, or merely negligible, benefits for itself. In those circumstances, and with Shot One having now been placed in liquidation, the plaintiffs submit that the Court should find that the Deed of Settlement was an 'uncommercial transaction' of Shot One, and order that the Deed of Settlement be set aside pursuant to s 588FB of the Corporations Act.

17 If the Deed of Settlement is set aside, the plaintiffs then seek to have the Court determine the quantum of the indebtedness of Rising Rocket to Shot One that is recoverable in the 2014 proceeding. The plaintiffs acknowledge that 'there may be a legitimate challenge to the quantum of the debt'[13], because the quantum of the loan account between Shot One and Rising Rocket was adjusted from time to time, but they assert that there nevertheless remained throughout 'a core irreducible debt' reflected by the Rising Rocket loan account and submit that, at the very least, judgment may be entered for the lowest proven amount, the plaintiffs having satisfied their burden of proof. The plaintiffs contend they have established the minimum amount of the relevant 'irreducible' indebtedness of Rising Rocket for the period from 1 February 2008 (i.e., six years prior to the date of issue of the 2014 proceeding) as being $201,961.[14] The plaintiffs also raise issues as to the correct accounting treatment for certain journal entry adjustments made in Shot One's books and records concerning the Rising Rocket loan account, and their impact on limitations issues raised between the parties.

18 The defendants dispute the debt claim brought against Rising Rocket, contending that the evidence the plaintiffs rely upon in support of that claim is weak, and that there is strong evidence to the contrary from which the Court might infer that no loan amount was in fact owed by Rising Rocket as at 23 May 2012 when the Deed of Settlement. Further, the defendants submit that a substantial portion of the payments made by Shot One to Rising Rocket between February 2009 (when Richard Day resigned as a director) and May 2012 were demonstrably for rent, effectively in exchange for the continued occupation by Nicholas Day of the Rockley Road property owned by Rising Rocket, and made in circumstances where Shot One had agreed to provide suitable accommodation for him. The defendants also assert that any claim brought by Shot One will face limitations issues because when the Deed of Settlement was entered into on 23 May 2012, no claims based on the existence of the alleged loan to Rising Rocket had been pleaded by Shot One in the 2010 proceeding. Therefore, the defendants say Shot One was statute-barred from making any loan account claim that arose prior to at least 22 November 2004 (i.e., six years before the 2010 proceeding was commenced), but alternatively 23 May 2006 (i.e., six years before the Deed of Settlement was entered into). The defendants submit that when the Court has regard to all relevant matters, it cannot be said that a reasonable person standing in Shot One's position on 23 May 2012 would not have entered into the Deed of Settlement. Further, they submit that even if the Court does set aside the Deed of Settlement the plaintiffs may not recover in respect of any loan claim which accrued to Shot One prior to 1 February 2008 (which is six years prior to commencement of the 2014 proceeding).

19 At the request of the Court, the parties prepared a flow chart titled 'Analysis of the Plaintiffs' Debt Claims', which they provided jointly to the Court on 10 February 2017. The flow chart shows in a helpful way the logic to be applied to the anterior evaluation of the commercial merits of the Deed of Settlement (referred to by the parties as 'the evaluative phase') and, if that transaction be set aside, to the subsequent determination of the plaintiffs' debt claims (referred to by the parties as 'the determinative phase'). That document remains useful notwithstanding that several limbs of the plaintiffs' claim are no longer being pursued.

20 Following the conclusion of the oral submissions, on 9 March 2017 the parties also provided an amended version of the Second Agreed List of Principal Issues, redacted to show which of the 12 issues listed remain alive for determination by the Court.

21 Nicholas Day is an established and storied architect. From the late 1970s or thereabouts he conducted an architecture business, under the business name Nicholas Day Architects, catering for clients in the high-end property markets, particularly in South Yarra and Toorak.[15]

22 In early 2001, Richard Day, Nicholas's older brother, approached him to discuss setting up a company to develop properties, the idea being that Nicholas would design the dwellings and Richard would manage the company and project manage the developments, with the profits being shared equally. Nicholas expressed interest in the idea, and so Richard pursued it, and on 5 March 2001, Shot One Pty Ltd was incorporated. However, only six months later, Nicholas Day was declared bankrupt and Mr Peter Goodin of Brooke Bird was appointed as his trustee in bankruptcy.[16] Once he was made bankrupt, Nicholas Day resigned as a director and shareholder of Shot One.

23 Between 5 March 2001 and 5 September 2001 (when Nicholas became bankrupt), Shot One did not purchase any properties or carry on any business. Richard Day first learned that Nicholas was in financial trouble in August or September 2001, when Nicholas told him he was going to be made bankrupt. Hitherto, Richard was unaware that Nicholas was under any financial stress.

24 At or around the time when he became bankrupt, Nicholas asked Richard to purchase Nicholas Day Architects from his trustee in bankruptcy. Richard Day thought it was an attractive option. He said:

By purchasing Nicholas Day Architects, Shot One would acquire a successful business. As director and shareholder of Shot One, I would benefit from that business, and would be able to derive an income stream. I saw the opportunity to purchase Nicholas Day Architects, and to ensure that it was run properly, as a good business opportunity. I thought it was a good idea for Nicholas too, because he would be able to continue to work within the business which carried his name with it, during his bankruptcy.[17]

25 Shortly after Nicholas was made bankrupt, Richard Day made arrangements with Nicholas's trustee in bankruptcy for Shot One to purchase the business name Nicholas Day Architects, which he succeeded in doing for the price of $16,000, fixed by the trustee.[18] Thereafter, during the period of his bankruptcy, Shot One employed Nicholas Day as its lead architect, along with others from the architectural practice, and Shot One effectively continued the architectural practice, with Richard Day providing management services. Richard said he ensured that Shot One maintained the business name 'Nicholas Day Architects' because the success of the architectural practice 'depended on the continued goodwill created by Nicholas' name.'[19] Shot One also engaged the services of Mr Michael Grano, a bookkeeper, to attend to its bookkeeping and prepare its general ledger. Mr Grano was introduced to Richard Day by Mr Terrence Jasper, his tax accountant, but Richard said that Mr Grano contracted directly with Shot One.

26 One of the steps undertaken by Richard Day early in Shot One's ownership of the architectural practice was to draft an employment agreement between Nicholas and Shot One. Richard said that his goal was to ensure that Nicholas was satisfied with its terms so that he would stay and work with Nicholas Day Architects. Richard explained that this 'was crucial to ensure the success of the business' because without Nicholas there was probably no business.[20] However, given Nicholas's 'expensive lifestyle', Richard said that he also 'did not want Shot One to pay Nicholas too much' and because 'Nicholas was used to living an expensive lifestyle' it made sense to him 'to agree to pay Nicholas' rental expenses, and other expenses such as school fees directly, rather than pay him income in cash.'[21] Accordingly, under this employment arrangement, Shot One agreed to pay Nicholas Day a relatively modest salary of $5,000 per month, and pay his business expenditure and certain living and other expenses, as well as providing him with suitable accommodation and a motor vehicle. Richard gave evidence that the employment agreement was signed by Nicholas, but no signed version of the agreement was available for production at the trial. An earlier draft was produced and Richard was cross-examined about the differences between that version and the executed agreement. That draft provided that the agreement was to be effective from October 2001. I am satisfied that at all relevant times an employment arrangement was in place between Shot One and Nicholas Day, along the lines of the evidence given by Richard Day, and to the effect alleged by the defendants.

27 When Nicholas first became an employee of Shot One, he was living in rented accommodation at 123 Domain Road, South Yarra. From about December 2001 until about April 2003, Shot One paid the rent for 123 Domain Road which was about $4,117 per month. In about July 2003, Richard negotiated a decrease in the rent and so from July 2003 the rent was $3,467 per month. In about August 2004, Nicholas moved to one of the townhouses he had designed, at 5/2 Rockley Road, South Yarra, which Richard Day had arranged for Rising Rocket to purchase, in its capacity as trustee of the Rising Rocket Trust. Richard Day said that his purpose in doing so was for Rising Rocket to acquire a rental property which it could offer to Nicholas as rental accommodation, and thereafter he could carry on the property development business that he had originally wanted Shot One to run. Nicholas agreed that the townhouse would be suitable for him and so in about July 2004, Rising Rocket procured and arranged mortgage finance from the Commonwealth Bank and then executed a contract to purchase the Rockley Road property.

28 In advance of the completion of the purchase of the Rockley Road property, Rising Rocket entered into a licence agreement with the vendor so that Nicholas could move in and occupy the property prior to settlement at a rental of $1,100 per week. On 1 August 2004 or thereabouts, Rising Rocket entered into a residential tenancy agreement with Nicholas Day. Under that arrangement, Rising Rocket agreed to lease the Rockley Road property to Nicholas for a rental of $3,683.33 per month. Richard Day said the rental sum was calculated in an amount sufficient to meet the mortgage repayments that Rising Rocket was required to pay to the Commonwealth Bank. Notwithstanding the entry into the residential tenancy agreement, it remained the case that Shot One was required to pay the rent, as it had when Nicholas occupied 123 Domain Road, but Richard Day said that he did not think about causing the rent to be paid regularly because he controlled both the landlord (Rising Rocket) and the entity required to pay the rent (Shot One).

29 Richard Day gave evidence that when Michael Grano commenced providing bookkeeping services to Shot One there was already a loan account in Shot One's MYOB[22] ledgers with the description 'Ric Day Loan Account'. He said:

[131] ... In about early 2002, Michael Grano and I discussed how to record payments that Shot One made for Nicholas' benefit. There was a lot of miscellaneous purchases that Shot One and Nicholas using the Shot One credit cards made for Nicholas' benefit, other than the amounts that were invoiced through Cooniemoon. Michael Grano told me that one way of recording non-business expenses was a director's loan account. I told Michael Grano to record Nicholas' miscellaneous expenses in the Ric Day Loan Account and I believe that Michael Grano did so until about early 2009.[23]

30 On 27 July 2004, a loan account for Rising Rocket was created in Shot One's MYOB ledgers. Richard Day said this loan account was established after discussion with Michael Grano and at his (Mr Grano's) suggestion 'to record the payments made to Rising Rocket or on Rising Rocket's behalf.'[24] But, Richard Day added:

... in doing so [he] did not intend the making of payments by Shot One related to Rockley Road, and in payment of the costs of acquisition or paying down the CBA mortgage loan to be a loan to Rising Rocket. The Rising Rocket Loan Account was just a method, at a bookkeeping level, to record payments that were made by Shot One to Rising Rocket.[25]

31 From July 2004, a number of payments were made by Shot One to, or for the benefit of, Rising Rocket. The evidence given on behalf of the plaintiffs at trial suggested that not all payments so made to or for Rising Rocket were recorded in the loan account. Mr Yeo said he had identified a number of additional payments made between Shot One and Rising Rocket that he contended were made by way of loan, albeit they were not recorded in the loan account, but it was not put to Mr Grano, the bookkeeper, that he had wrongly characterised payments and should have recorded these additional sums as loans. And Mr Jasper gave evidence to the effect that he believed all relevant payments had been captured in the accounts of Shot One.

32 Richard Day gave evidence that the payments made by Shot One to Rising Rocket for or in relation to the purchase of the Rockley Road property were not provided by way of a loan. In his witness statement, he said:

[115] ... At the time that I authorised Shot One to make those payments, I had no intention that Rising Rocket would be required to pay them back. As at July 2004, I had owned and operated Shot One for nearly three years without payment to me of director's fees or a wage. The Nicholas Day Architects business was obviously profitable, as the MYOB records prepared by Michael Grano showed me. As sole director and shareholder of Shot One, I was comfortable with the idea that Shot One could make these payments to Rising Rocket without ever needing the money back. I intended to tell Terry Jasper these matters when Terry prepared Shot One's tax returns for the 2005 financial year.

[116] From time to time after June 2005, I caused Shot One to make payments to Rising Rocket's loan account with the Commonwealth Bank. I did this to reduce Rising Rocket's loan account from the Commonwealth Bank, and to reduce the amount of interest Rising Rocket incurred on that loan. As the sole director and sole shareholder of Shot One I authorised Shot One to make these payments. At the time that I authorised Shot One to make these payments, as with the payments from Shot One which were used to pay for the acquisition of Rockley Road, I had no intention that Rising Rocket would be required to pay them back to Shot One. I considered that the Nicholas Day Architects business and Shot One continued to be easily profitable throughout 2005 to February 2009, when I transferred my shares to Nicholas and resigned as a director, even taking into account the payments made to Rising Rocket as being non-recoverable by Shot One. Again, I intended to tell Terry Jasper these matters when Terry prepared Shot One's tax returns for the 2005 financial year.[26]

33 Throughout the period when he was a director of Shot One, Richard Day performed a management role with respect to the architectural business. In that role he kept the practice functioning as a business and attended to making payments on behalf of Shot One for staff wages and associated expenses such as motor vehicles and the like, including payments made by Shot One for Nicholas's family.

34 Richard Day also noted that between August 2008 and 13 February 2009, he caused Rising Rocket to make a number of transfers of money back to Shot One. He does not now recall the reason why each of those transfers were made but he observed that, as Shot One did not have an overdraft facility with the Commonwealth Bank, transfers were often necessary to ensure that sufficient funds were available to pay the staff wages and Mastercard bills on time. Richard Day said that from late 2001 until March 2009, he paid the school fees for Nicholas's two sons, and their dental fees. Initially Richard Day did not charge Shot One for his management services but from April 2003 until March 2009 he rendered invoices for his management services via Cooniemoon. Until February 2006, he calculated his management services in an amount that was effectively equal to the monies that Shot One and he were paying for the benefit of Nicholas and his two sons, by way of school and dental fees, and rent and body corporate fees. In his view, as he was actively managing the business, he was entitled to charge a fee for his services, calculated on a basis he saw fit. He had built the business and it was running profitably.

35 Richard Day said that from the time when Shot One bought the Nicholas Day Architects business, until 2009 when he resigned as the sole director, 'Nicholas had no involvement at all with the financial side of the Shot One business' save for fee negotiations with clients.[27] It was not until late 2008, when Nicholas told Richard that he would like to take over the business, that they had any discussion about such financial matters.

36 Nicholas Day was discharged from bankruptcy on 21 December 2006. As a condition of discharge, the trustee in bankruptcy required that Nicholas, as bankrupt, and Richard, as guarantor, sign a deed of settlement settling the debt owed for missed income contribution payments at $155,000. It appears that this sum was paid (or substantially paid) to the trustee in bankruptcy by sums withdrawn from Shot One's bank account.

37 Richard Day gave evidence that from 2006, he was conscious that Shot One had not completed its income tax returns for the year ended 30 June 2004, even though it had paid and was continuing to pay on time its obligations to the Australian Tax Office in respect of PAYG withholding tax and GST, as disclosed in the Business Activity Statements lodged by Shot One. He said that he 'raised this from time to time with Terry Jasper', his tax accountant, but Mr Jasper did not express concern at the fact that Shot One's income tax returns had not been lodged.[28]

38 On 11 February 2009, Richard Day resigned as the sole director and shareholder of Shot One and Nicholas Day became the sole director and shareholder of Shot One with effect from that day. These steps were taken consensually, with the share being transferred for only nominal consideration. Richard Day said that he considered that 'the natural progression of Shot One and Nicholas Day Architects was for the company to pass into Nicholas' control and ownership' - after all, he was the face of Nicholas Day Architects and without him neither the business nor the company would be financially viable.[29] Richard Day ceased providing 'management services' to Shot One from that point. Thereafter, over a period of time, the brothers fell out with one another and their relationship deteriorated.

39 After Richard Day resigned, Nicholas Day continued to occupy the Rockley Road property and Shot One made rental payments to Rising Rocket, although Richard said that he (on behalf of Rising Rocket) had to chase Nicholas for these payments. On 28 August 2009, Nicholas Day lodged a caveat over the Rockley Road property, claiming an estate in fee simple pursuant to a constructive or resulting trust in his favour.

40 On or about 28 May 2010, Richard Day sent an email to Mr Jasper asking whether Shot One had any outstanding tax liability for the period up to his resignation as a director. He followed up that email with a telephone call, but was informed by Mr Jasper to the effect that he could not speak to him about Shot One's tax affairs because Richard was no longer a director of Shot One.

41 On 10 June 2010, Shot One lodged a caveat over the Rockley Road property claiming an interest pursuant to a constructive trust or a resulting trust. Shortly after Richard Day became aware of this, he served Nicholas with a notice to vacate the Rockley Road property. Nicholas responded by lodging an application with the Victorian Civil and Administrative Tribunal ('VCAT') to set aside the notice to vacate.

Shot One commenced the 2010 proceeding against Richard Day and Rising Rocket

42 In the 2010 proceeding, Shot One claimed that in circumstances where the Rockley Road property had been purchased in the name of Rising Rocket, but all purchase monies and related expenses and outgoings such as land tax and council rates had been paid by Shot One, Richard Day had breached his fiduciary duty to Shot One and improperly used his position as a director to gain an advantage for himself or third parties to the detriment of Shot One. Shot One claimed that Rising Rocket effectively held the Rockley Road property on trust for Shot One and sought, amongst other things, a declaration that the Rockley Road property (registered in the name of Rising Rocket) was held on trust for Shot One by virtue of payments made by it to and for the benefit of Rising Rocket which were traceable to the Rockley Road property.

43 It appears that at some point early in 2012, prior to the judicial mediation taking place before Randall AsJ, Shot One was also asserting (but had not pleaded) that its books and records showed loans had been made to each of Richard Day and Rising Rocket that remained outstanding, a matter which each of them disputed. In addition, Richard Day and Rising Rocket also asserted that they had good grounds for bringing counterclaims against Shot One and/or Nicholas Day in the 2010 proceeding. Similarly, Cooniemoon claimed that Shot One and/or Nicholas Day owed it some $72,000, a matter which each of them disputed. At or about the same time, Rising Rocket had also instructed its solicitor to make an application to VCAT seeking possession of the Rockley Road property pursuant to a Notice to Vacate served on Nicholas Day dated 27 February 2012.

44 A directions hearing in the 2010 proceeding was scheduled for 27 February 2012. In advance of the directions hearing, Shot One's solicitor, Mr Samuel Marash of Kenna Teasdale, wrote and informed Nicholas Day (as director) that they had not received any response from the solicitors acting for Rising Rocket and Richard Day in relation to arranging a mediation of the matter, and would need to inform the Court and seek directions accordingly. In his letter, Mr Marash noted that 'we cannot force Rising Rocket or Richard Day to participate in a mediation' and that if one cannot be conducted, 'the only recourse for Shot One ... is to pursue this matter at trial.'[30] Mr Marash continued, by reiterating that Kenna Teasdale 'have advised Shot One that there are significant problems with its case against Rising Rocket and Richard Day' and he then canvassed the 'Options available to Shot One' and gave an estimate of the likely quantum of the legal costs that would be incurred from that point up to and including a trial as being $80,000. He added:

You could expect the defendant's costs to be roughly equal to that of Shot One. Accordingly, if Shot One is completely unsuccessful in its claim it may be out of pocket up to $200,000.[31]

45 Against this background, at the directions hearing held on 27 February 2012, Randall AsJ ordered that a judicial mediation of the 2010 proceeding take place.

Judicial mediation of the 2010 proceeding and entry into the Deed of Settlement

46 The mediation took place on 23 May 2012 before Randall AsJ. At the mediation, Shot One was present by its sole director and shareholder, Nicholas Day, along with its legal representatives, Mr Justin Tomlinson, barrister, instructed by Mr Marash of Kenna Teasdale Lawyers. Richard Day was present at the mediation both in his own right and also on behalf of Rising Rocket and Cooniemoon (which at that time was a company associated with his son, but is now de-registered) along with Mr Michael Lhuede of Piper Alderman as their legal representative.

47 In advance of the mediation, Nicholas Day had consulted with Mr Jasper and Shot One's legal representatives in relation to the outstanding loan accounts recorded in Shot One's books in the name of Rising Rocket and Richard Day respectively. Mr Marash gave evidence[32] to the effect that prior to the mediation, he and Nicholas Day had discussions with Mr Tomlinson about the possibility of making an amendment to Shot One's statement of claim, and consideration was being given to pleading the issue of the outstanding loan accounts if the matter did not resolve at mediation. He said some documents that had only recently been provided by way of discovery showed that the financial records of Shot One recorded loan accounts in the name of each of Rising Rocket and Richard Day, and possibly also Cooniemoon. Mr Marash said that having only recently discovered the existence of these loan accounts, Shot One's objective or 'mediation strategy' for trying to resolve the whole matter was 'that there would be effectively an exchange or trade-off of the loan accounts in the name of Rising Rocket, Ric Day and perhaps even Cooniemoon for the [Rockley Road] property that was sought to be recovered'.[33] He explained that the 'trade-off' would not involve a 'payment moving from the company to Rising Rocket' but rather the loan accounts would effectively be deleted, '[a]lmost like a purchase, effectively' as 'consideration for the transfer' of the Rockley Road property to Shot One.[34] But as noted earlier, these 'loan account' claims were not articulated in any pleading or correspondence passing between the parties.

48 On the evening of 22 May 2012, following a conference with Mr Tomlinson and Nicholas Day in preparation for the mediation, Mr Marash sent an email to Nicholas Day setting out what he understood to be the basis on which Shot One was prepared to resolve the dispute, as discussed between them earlier that day. Relevantly the email stated:

Further to our conference with Justin Tomlinson earlier today, I confirm that the following was discussed to achieve a resolution of the dispute:

1. That Shot One would "purchase" the Rockley Road property from Rising Rocket for the sum of $1,800,000;
2. That you would do so by refinancing the mortgage over the Rockley Road property in the sum of approximately $1,000,000;
3. That the remaining sum of approximately $800,000 would be paid to Rising Rocket by forgiving the loan accounts owing by Rising Rocket and Richard Day (you would therefore not actually have to pay the $800,000 as it has already been paid and is represented in the loan accounts);
4. That you will pay any CGT that Rising Rocket is assessed to pay arising from the sale of the property to Shot One.
5. That you would pay Cooniemoon the sum of $57,755 ($77,755, less $20,000 already paid as set out in the agreement drawn by Mr Pointer). We have received documents from Terry Jasper that indicate Shot One owes Cooniemoon the sum of $71,071. This is approximately $6,000 less than what the agreement states you would pay and does not seem to take into account the $20,000 that you say has already been paid to Cooniemoon at, or around the time the agreement was prepared. Can you clarify with Mr Jasper the sum Shot One owes Cooniemoon and confirm with this office what you are prepared to pay to Cooniemoon to settle the debt.

Would you please provide written instructions confirming that you would be prepared to settle the dispute on the abovementioned basis prior to the mediation tomorrow. Also, we confirm that we have asked you to bring the Shot One bank account statements that evidence Shot One's continued payment of the Rising Rocket mortgage and should show the $20,000 payment.[35]

49 On 23 May 2012, the mediation commenced with the legal representatives making an opening statement on behalf of the respective parties. Mr Tomlinson went first, making an opening statement on behalf of Shot One. Richard Day gave evidence that in Mr Tomlinson's opening statement on behalf of Shot One he said words to the effect that 'Shot One had paid for Rockley Road, and therefore, it owned Rockley Road.'[36]

50 Mr Lhuede then made an opening statement on behalf of Richard Day and Rising Rocket. Mr Marash gave evidence that Mr Lhuede said words to the effect that:[37]

• Richard Day and Rising Rocket disputed that they had any loan accounts with Shot One. They were aware that the financial statements of Shot One had been reconstructed since Richard Day had left the company in 2009, and contended that the reconstructed financial statements were not a true representation of the loans that were made. Further, Mr Lhuede noted that there were no written loan agreements in existence.
• The asserted balance of the loan accounts is disputed by Richard Day and Rising Rocket. Mr Lhuede noted that the balance of the loan accounts seems to change depending on which version of the financial documents is used and he observed that this would present significant problems if this matter proceeded to a Court hearing.
• The constructive trust argument being put forward by Shot One, namely that the Rockley Road property was being held by Rising Rocket on trust for Shot One, could not be maintained. But if the constructive trust argument were pursued, potential legal ramifications may flow for Nicholas Day. Mr Lhuede added that at the time the agreement that is said to give rise to the constructive trust was made, the sole director of Shot One and the sole director of Rising Rocket was Richard Day, and as such he is the only person who could give relevant evidence about any agreement that was made. Nicholas Day could not give any evidence in relation to the creation of a constructive trust.

51 At the conclusion of the opening addresses, the mediating parties separated into their respective 'break-out' rooms. Mr Marash said that when they came into their room, 'Nicholas Day basically said he doesn't want to proceed with his claim'[38] but Mr Marash acknowledged that Nicholas Day did not tell him why he did not wish to proceed. Mr Marash said that in the break-out room they then went on to discuss the loan accounts, as follows:

... Following that, the loan accounts were discussed and as part of the offers that were made the effect of that was going to be that Shot One would release the loan accounts and for that reason we had only recently received information on those loan accounts the night before the mediation and I wanted Nicholas to talk with his accountant about it and I asked Nicholas to do that on a few occasions and he indicated that he didn't want to do so. In fact, he refused.

[MR EVANS:] There was a discussion with Mr Jasper between yourself, Mr Tomlinson, Nicholas Day and Mr Jasper, wasn't there, at the mediation?

---Yes, there was.[39]

52 Mr Marash said that the observation made by Mr Lhuede during the opening session, to the effect that if the constructive trust argument was pursued potential legal ramifications may flow for Nicholas Day, was a matter that he believes he had discussed with Nicholas Day before the mediation took place. It appears that this reference to 'potential legal ramifications' was a reference to the fact that if Shot One was successful in obtaining relief by way of a constructive trust over the Rockley Road property, Nicholas's trustee in bankruptcy would likely re-assess his position in relation to the settlement reached to discharge Nicholas from bankruptcy in 2006 and then seek to claw-back the Rockley Road property from Shot One. It might also give rise to the question of whether, despite the evidence given by Nicholas Day during his bankruptcy examination in the Federal Court of Australia, there was an undisclosed 'warehousing arrangement' on foot.

53 Mr Marash was aware that the amounts recorded in the loan accounts differed depending on which version of the accounts was consulted, and that the balance of each of the loan accounts was disputed by the defendants. He said that he strongly encouraged Nicholas Day to speak with Mr Jasper, but Mr Marash said he was unsuccessful in getting him to do so. In his evidence in chief Mr Marash explained the matter as follows:

[MR EVANS:] Do you recall whether or not you had a discussion with Nicholas Day and Mr Tomlinson regarding those matters prior to the deed of settlement being executed?---I don't recall specifically discussing the matter, but I do recall saying to him, because of the matters raised by Mr Lhuede during the opening session, that I wanted him to discuss these matters and the effect of releasing the loan accounts with his accountant and his legal advisers.[40]

54 Following the break-out session, an offer was made by the defendants which was essentially that mutual releases be provided in respect of all loan accounts said to be owing, that Nicholas Day be permitted to continue to reside in the Rockley Road property for 12 months, and that each party walk away and bear their own costs. Shot One responded to that offer by suggesting some relatively minor modifications, and the parties then finalised their agreement in a Deed of Settlement dated 23 May 2012. Prior to Nicholas Day signing the Deed of Settlement, Mr Marash again told him he should speak to Mr Jasper 'to discuss certain issues such as any tax implications arising on the release of loan accounts by [Shot One].'[41] But Nicholas said that 'he doesn't need to' and that he was prepared to sign without speaking to Mr Jasper.

55 Following the mediation and execution of the Deed of Settlement, Mr Marash sent a letter to Shot One on or about 28 May 2012 reporting on what had taken place at the mediation, including the sequence of offers and counter-offers that were made by the respective parties, and summarising the agreement that was reached to settle the matter as follows:

1. A Residential Tenancy Lease will be entered into between Rising Rocket and Nicholas Day for a fixed term of fifteen months; $7,500 to be paid as rent per calendar month;
2. That two months bond be paid by 1 June 2012;
3. That Shot One Pty Ltd forthwith remove the caveat encumbering the Rockley Road property;
4. That Richard Day agreed he shall not issue any notice under Section 257, 258, 259 of the Residential Tenancy Act in respect of obtaining possession of the Rockley Road property prior to the expiry of the lease;
5. That all parties provide mutual releases in relation to the loan accounts, including Cooniemoon Pty Ltd and Richard Day who are not parties to the proceedings;
6. That the matter be otherwise dismissed and each party bear their own costs of and in respect of the proceeding;
7. That Rising Rocket Pty Ltd remain as the registered proprietor of the Rockley Road property; and
8. Shot One agreed to release Richard Day for any breach of Directors duties whilst he was acting as Director of Shot One Pty Ltd.[42]

56 In his letter, Mr Marash also set out what he understood to be the reasons Shot One made its counter-offer to settle the matter, stating:

Shot One made the offer as set out above for the following reasons:

1. No evidence of any certainty had been provided which could support the value asserted by Shot One in respect of the loan accounts owing by Rising Rocket Pty Ltd and Richard Day;
2. The instructions in respect of the loan accounts seemed to change regularly and no written loan agreements are in existence.
3. The financial statements of Shot One appear to have been reconstructed since Richard Day signed off on those financial statements in or around 2009;[43]
4. The balance of the loan accounts is disputed by the Defendants and the balance of the loan accounts seems to change depending on which version of the financial documents are used. This would present significant problems if this matter proceeded to a Court hearing.

Furthermore, even if Shot One was successful in obtaining any judgment in its favour, the Trustee in Bankruptcy of Nicholas Day would almost certainly re-assess its position in relation to the settlement reached to discharge Nicholas Day from bankruptcy in 2006. It is likely the Trustee would seek to claw back the Rockley Road property from Shot One.

During the mediation Mr Tomlinson and Mr Marash suggested that you call Shot One's accountant, Terry Jasper, to further discuss the effect of settling on the basis proposed by Shot One. However, Mr [Nicholas] Day declined to make that call as he did not consider it necessary.[44]

57 Mr Marash acknowledged that of the four matters he had listed in his letter, the first matter concerning the loan accounts was really the only one that was discussed at the mediation, it having been expressly mentioned by Mr Lhuede. The second, third and fourth listed matters were not ones that he recalled having been specifically discussed at the mediation, but he said the substance of them were matters that were mentioned by Mr Lhuede in making the defendants' opening statement. Under cross-examination, Mr Marash was taken back to these four reasons, and it was put to him that the four points were simply surmise on his behalf, as follows:

[MR GLICK:] You believe, you surmise, if you like, that those four points each having been made by Mr Lhuede were the reason for Mr Day not wanting to go ahead?---Well, yes, in hindsight it probably should have said it was a reason because Nicholas didn't specifically say why he wasn't proceeding. It was probably trying to find or give some understanding as to why he might have given up his claim.

Completely understandable. So what you are really doing in point number 1, 2, 3 and 4 is saying to your client, Shot One, "We went to the mediation and I would understand that these are the four reasons," but they were not put by Mr [Nicholas] Day, but you understand from the context of what occurred that they are the four reasons?---Yes.[45]

58 In the final passages of his post-mediation letter to Shot One, Mr Marash also commented upon the outcome reached under the Deed of Settlement, describing it as being a 'sensible one'. He stated:

Whilst the settlement of this matter did not provide the outcome that Shot One was initially hoping to achieve, we consider that the settlement reached is a sensible one given the problems with Shot One's case and the potential consequences that may have flowed in the event the matter proceeded past Mediation. The costs involved in pursuing Shot One's case would be significant and, as Mr Day noted, the proceedings distract him from the business of Shot One. In addition, it was highly unlikely that Shot One would have been successful in obtaining judgment against the Defendants due to the documents that were produced by the Defendants in the course of discovery, those documents being the Lease Agreement and the Employment Agreement. We confirm the proceedings were initially instituted in order to allow Shot One to negotiate a settlement with Rising Rocket and Richard Day, and to delay the removal of the caveat over the Rockley Road property such that Nicholas Day was not left without time to arrange his affairs and seek alternative accommodation for his family.[46]

59 Once again, under cross-examination, Mr Marash accepted that the reference to the settlement being 'a sensible one' was his personal view, but he explained his position by saying:

There were problems with his case at the time. There were difficulties with the evidence that we had at the time and other difficulties. So, yes, following the settlement, looking back, it was something that could be perhaps justified.

[MR GLICK:] This is the perhaps rationalisation after the event?

---Yes.[47]

60 When it came to the loan accounts, Mr Marash also accepted that at the mediation he was not really in a position to express any view about them or how much was owing under them, adding that this was one of the reasons why he had encouraged Nicholas Day to speak further with Mr Jasper about them.

61 Following the execution of the Deed of Settlement, Nicholas Day continued to reside at the Rockley Road property until about August 2013, when he vacated it. Richard Day then set about preparing the property for sale and engaging real estate agents. The Rockley Road property was sold in the first week of December 2013 for the sum of $2.32 million, with settlement to occur two weeks later.

62 On 17 December 2013, Mr Yeo as liquidator of Shot One lodged a caveat over the Rockley Road property. The settlement went ahead and was completed notwithstanding the caveat. The proceeds of sale, after paying out Rising Rocket's mortgage to the Commonwealth Bank, were about $1.07 million, which sum was paid into the trust account of the defendants' solicitors. Since then, orders have been made by the Court, from time to time, permitting the payment out of the trust account of specified sums in payment of the defendants' legal costs and expenses.

Evidence given concerning the Rising Rocket loan account

63 At the trial, a substantial body of evidence was led from Mr Jasper, Shot One's accountant, Mr Grano, its bookkeeper, and Richard Day about Shot One's books of account and financial records. Mr Yeo also gave evidence about his investigation of Shot One's financial records and the views he reached about what was the true or correct amount of the indebtedness of Richard Day and Rising Rocket to Shot One. At the point in the trial when the witnesses gave their evidence, the plaintiffs were pursuing claims made by Shot One in respect of both the Richard Day loan account and the Rising Rocket loan account, and there was a significant overlap between the evidence given concerning each of those claims. However, by the time the plaintiffs' closing oral submissions were made, they had narrowed their case and they were pursuing only the claim made in respect of the Rising Rocket loan account, and it is the forgiveness of that claim that they rely upon as evidencing the alleged 'uncommerciality' of the Deed of Settlement transaction.

64 Mr Michael Grano was called by the defendants to give evidence at the trial. Mr Grano has been practising as a bookkeeper for some 14 years. He holds a Certificate IV in Bookkeeping from Australian College and is certified as a consultant in the use of an accounting software package called 'MYOB'.[48] In 2003 or thereabouts, Mr Grano was engaged as a subcontractor to Qualified Professional Group, a bookkeeping business affiliated with Mr Jasper's accounting practice, for the purpose of preparing Shot One's books and to 'bookkeep to trial balance' stage. Generally, this task involved 'maintaining the general ledger of Shot One', which is effectively a collection, or helicopter view, of sub-ledgers or journals, and attending to 'the day to day processing of transactions, overseeing accounts payable and reconciling bank and credit card statements.'[49] Further, Mr Grano explained, maintaining the general ledger means:

... transacting in the ledger, making sure that the purchases ledger, the sales ledger, the cash disbursements, cash receipts and wages all balance to the general ledger and also balance to the bank or the credit card, and making sure that the transactions were done according to the GST legislation as well.[50]

Mr Grano was also responsible for maintaining and lodging the Group Payroll ('PAYG') and Business Activity Statements ('BAS') records and statements.

65 Mr Grano said that to perform the bookkeeping work, ordinarily he would attend at Shot One's office once a fortnight for about five hours. He set up an 'in-tray' in which Richard Day would place hard copies of paid and unpaid invoices, credit card statements, and bank statements and Mr Grano would work from the purchase documents, whether they be a tax invoice or receipt, and enter them in the ledger. In the case of Rising Rocket, Mr Grano said there were no purchases to record but if there was a transfer of funds that would be visible in the bank statements for the main cheque account or trading account, or he would receive a 'direction' from Richard Day, who would tell him that that particular transaction was 'a Rising Rocket' one.[51] On a day to day basis, if he had any queries about how a matter should be entered in the general ledger, Mr Grano said that he would speak to Mr Jasper, or one of his assistants, Mr Kirk Webster, or take instructions from Richard Day. Mr Grano said that for the entire period between about 2003 and the end of 2008 while he was engaged as Shot One's bookkeeper, he did not have a single discussion with Nicholas Day about financial matters.

66 When Mr Grano commenced as Shot One's bookkeeper, the accounting structure forming Shot One's general ledger had already been set up, but he found 'the MYOB records were not in very good shape.'[52] Mr Grano said he proceeded to 'clean up' the MYOB 'to ensure that legitimate business expenses were reflected correctly in the MYOB records' and that 'non-business expenses were not recorded in the same manner as legitimate business expenses.'[53]

67 Mr Grano said he was aware that it is common for non-business expenses, whatever they may be, to be allocated to a director's loan account in the financial records. In the case of Shot One, there was a loan account labelled 'Ric Day Loan Account' in existence when he started. Mr Grano said that he was told by Richard Day 'that any expenses which could not be justified as a legitimate business expense were to be allocated to the Ric Day Loan Account'[54] and that Richard had informed him on several occasions that these expenses 'had been incurred by Nicholas.'[55] He explained that from these discussions he 'understood that the Ric Day Loan Account did not record that a loan was being made by Shot One to Richard' but rather that 'it was a method of allocating Nicholas's non-business spending at a bookkeeping level, and that this would probably be reallocated by Terrence Jasper & Associates when it prepared Shot One's financial statements and tax returns.'[56]

68 Mr Grano said that he also maintained a suspense account in the MYOB records for transactions which were not obviously business expenses. He made sure that all expenses in the suspense account were allocated by the end of each financial year, and said that '[a]nything that could not be allocated as a business expense at the end of the financial year would be allocated to the Ric Day Loan Account.'[57]

69 Mr Grano created a loan account for Rising Rocket in Shot One's books on 27 July 2004. He does not recall the circumstances of the creation of the loan account, but does recall that 'money would be paid out of the Shot One bank account and would be recorded in the Rising Rocket loan account in Shot One's MYOB records.'[58] He said that the first transaction recorded was for the sum of $85,000.

70 Under cross-examination, Mr Grano was asked how he would record moneys going from Shot One to Rising Rocket, and the following exchange ensued:

[MR GLICK:] If you found a bank statement which recorded moneys going from Shot One to Rising Rocket, that would be on the bank statement, wouldn't it?---Correct, yes.

But that would not give you an indication of what it was for?---No.

How did you work out to put it into loan account?---Because the loan account had been set up or I had been told to set it up for Rising Rocket and there will be funds moving in and out of that over the next future period, whatever that was.

So Mr Richard Day told you that a loan account had been set up for Rising Rocket?---Yes, I think I set it up, from memory. I think I did.

Or Mr Richard Day told you to set it up, from memory?---Yes.

And he told you that moneys would be going in and out of that loan account from time to time?---Correct.

So when you saw items in the bank statements - I read a line item in the bank statement saying "debit" against the Shot One, "cash" going over to Rising Rocket, you would have asked Mr Day, "Is this the loan account," or whatever?---Initially it would have been, but then once you see it, it becomes automatic because you set it up as a reoccurring transfer in MYOB and you set it up and when you see that transaction you hit "reoccurring". I think I set up a Rising Rocket, I can't remember. But that's how you'd do it.[59]

71 Mr Grano also made clear that while he had conversations with Richard Day from time to time, he did not know what the transfers of funds to Rising Rocket were for. He maintained only the Shot One ledger, with the one trading account and the one credit card, and he did not know how Rising Rocket dealt with any particular payments. In essence, he said the position was that if a transfer was annotated on the Shot One bank statement as a Rising Rocket transfer, 'it was a Rising Rocket transfer, and it went to the Rising Rocket loan [account]'[60] and he accepted that between 2005 and 2008 Richard Day was aware that money was going in and out of a Rising Rocket loan account with Shot One 'because that instruction came from Ric, Mr Day.'[61]

72 In re-examination, Mr Grano was asked whether he could recall what were the initial instructions Richard Day gave him in respect of that loan account, but he said he was unable to do so. The following exchange then ensued:

[MR EVANS:] Are you able to recall in respect of any specific payment that was recorded in that loan account what the instructions you were given were?---Well, probably initially it was along the lines of, "There's this new thing happening, Rising Rocket." Once I saw "Rising Rocket" annotated in bank statements, then it would become automatic because then I wouldn't have to ask the same question many times.

Are you able to say approximately on how many occasions during the period from 2004, and the loan account was set up in July 2004, from July 2004 until Mr Day resigned you discussed the entries to be made in the Rising Rocket loan account with Mr Day?---No.

Would you be able to put an estimate upon it?---Well, I didn't know anything about what Rising Rocket was all about and initially - and I will say it again - once I see the transaction, any transaction, that's repeated on a repeated basis, it then becomes once the direction has been given you don't have to keep going backwards and forwards all the time to ask for instructions.

So it becomes an automatic entry?---It becomes a - entry, because if it is annotated "Rising Rocket" - - -

Is that done with or without discussing the matter further with Mr Day?---Well, it's usually done without further discussion because once the knowledge is obtained by me and it has the name Rising Rocket on it, then I know what it is, and it sits in that loan account, whatever the number is.[62]

73 Mr Grano ceased providing bookkeeping services to Shot One in late January 2009. The background to this was, he said, that by January 2009, 'things very getting very tense between Richard and Nicholas',[63] and for the very first time Nicholas had asked him about the financials of Shot One. He provided Nicholas with a copy of Shot One's transaction history from MYOB so that he could review the company's spending. Nicholas Day did not say anything further to Mr Grano about the transaction history but he did receive a call from Mr Jasper at around that time informing him that Nicholas was taking over Shot One. He said that Mr Jasper told him words to the effect that 'Nicholas feels that you are too close to Richard and it would be better if you did not come back to the NDA [Nicholas Day Architects/Shot One] office.'[64] Mr Grano did not return to the office, and as a result he did not do a handover. In February 2009, Nicholas Day replaced Richard Day as the sole director and shareholder of Shot One. Thereafter, Richard Day had virtually no involvement in Shot One.

74 Richard Day was the first of the witnesses called to give evidence on behalf of the defendants. He was present in court when each of Mr Yeo and Mr Jasper gave evidence on behalf of the plaintiffs and was cross-examined, and was also aware of the evidence they had given. Notwithstanding that he was an interested party, he gave his evidence frankly, and acknowledged errors on his part, but he remained firmly of the view that the payments made by Shot One to Rising Rocket for or in relation to the purchase of the Rockley Road property were not moneys provided by way of a loan. Richard Day said that at the time he authorised Shot One to make those payments, he 'had no intention that Rising Rocket would be required to pay them back.'[65] Relevantly, he was the sole director and shareholder of Shot One at that time, and as the Nicholas Day Architects business conducted by Shot One was profitable, he was 'comfortable with the idea that Shot One could make these payments to Rising Rocket without ever needing the money back.'[66] Further, he said he considered that 'the Nicholas Day Architects business and Shot One continued to be easily profitable throughout 2005 to February 2009', when he resigned as a director and transferred his shares to Nicholas, 'even taking into account the payments made to Rising Rocket as being non-recoverable by Shot One', and he intended to tell Mr Jasper about these matters when he was preparing Shot One's tax returns for the 2005 financial year.[67]

75 Richard Day was taken to a number of documents such as financial statements and tax returns of Shot One for the financial years 2005 through to 2008, and accompanying correspondence that wasprepared by Terrence Jasper & Associates in the period following his resignation as a director and shareholder. But it soon became clear that the only financial records of Shot One that he had ever seen were effectively the MYOB management accounts as prepared by Mr Grano. The evidence given by Mr Jasper, discussed below, with which Richard Day agreed, was to the effect that after Richard resigned as the sole director of Shot One in February 2009, he did not have any involvement in the preparation of the financial statements of Shot One. Importantly, however, in that regard it is clear that no final financial statements for Shot One for any year after financial year 2004 were prepared until after February 2009, and no financial statements at all for financial years 2006 and following were prepared until after February 2009.

76 Richard Day gave evidence that he never saw any version of these financial statements that were prepared for Shot One following his retirement. He acknowledged that his signature did appear on four pages of documents headed 'Minutes of Directors' Meeting' of Shot One said to have been held on 30 November 2005, 30 November 2006, 30 November 2007 and 30 November 2008 respectively, but he did not recall signing them. In each case, the minutes stated in respect of Shot One's 'Accounts' as follows:[68]

The Chairman tabled the financial accounts of the Company in respect of the year ended 30th June [2005, 2006, 2007 or 2008 respectively as the case may be]. It was noted that the accounts had been prepared as a special purpose financial report in accordance with the accounting policies outlined in Note 1 to the accounts.

It was resolved the accounts be and are hereby adopted as tabled.

Richard Day confirmed that no directors meetings of Shot One were convened or held on any of those dates in respect of any of the matters described in those minutes.

77 Under cross-examination, Richard Day readily accepted that part of his role as managing director of Shot One was to ensure that 'proper records were kept.'[69] He said that in hindsight, he would have to say he was not careful, but he had engaged a bookkeeper, and trusted him to do the job he was employed to do. He was aware that Mr Grano was preparing the MYOB accounts for Shot One, but initially he said that he was not aware that these accounts listed a loan account in the name of Rising Rocket as an asset of Shot One. He later corrected that answer, and agreed that he was aware that in July 2004, a loan account for Rising Rocket was created in Shot One's MYOB ledgers and that throughout the period when he was the sole director of Shot One, the MYOB accounts for Shot One recorded a loan account in the name of Rising Rocket, with Rising Rocket as the debtor and Shot One as the creditor.

78 Richard Day did not recall ever telling Mr Jasper that the MYOB accounts for Shot One were 'incorrect'. Richard Day understood that Mr Jasper's staff would be preparing the statutory accounts and returns for Shot One by reference to the MYOB accounts, but he said he was not aware that he had to tell Mr Jasper's office if the information so provided was incorrect. The following exchange illustrates the tenor of the evidence Richard Day gave whilst under cross-examination:

[MR GLICK:] ...You accept proposition number 1 that the MYOB accounts, whilst you were the sole director, maintained a loan account between Shot One creditor and Rising Rocket debtor?---Correct.

You accept that that loan account, the integrity of that loan account, that is to say that they represented loans, was by you never corrected?---That's correct.

They were never written off?---That's correct.

They were never shifted to some other entry such as gifts or donations or expenses?---Not to my knowledge.

And to your knowledge nobody ever told Mr Jasper that they were not true and correct; that is, the MYOB accounts were not true and correct?---I don't know.

To your knowledge no one told him that?---That's correct.

Certainly you didn't tell him that?---That's right.

And you knew, did you not, that Mr Jasper's knowledge in preparing financial accounts was only as good as the information he received?---Yes, I did.

And you never corrected that information?---That's right. [70]

79 When the topic was re-visited a little later, Richard Day continued in the same vein:

[MR GLICK:] . . . You also accept, do you not, and you knew, did you not, that Mr Jasper would prepare such statutory accounts as he was required to prepare using primarily the Shot One MYOB accounts?---Yes, I did.

Assuming for the moment that the 2005, 6, 7 and 8 Shot One financial statements were prepared after you left?---Yes.

When you left in February 2009, you did not take a single step to correct any of the existing MYOB accounts of Shot One, did you?---That's absolutely correct.

You never told your brother Nicholas, for example, that "Nicholas, if you look at the MYOB accounts, they record loans, assets in favour of Shot One, but disregard them because they're not expected to be repaid and I don't want them repaid and they're not real loans"?---I seem to remember a conversation in the first mediation that I had with Nicholas where a similar conversation occurred.

I don't want to go to the mediation yet. I just want to be precise about my question?---In 2009, no.

Nor to Mr Jasper, obviously?---No.

I want to suggest to you that if, as you assert, in your mind you never intended the Rising Rocket loan to be repaid, it only ever remained a private thought of yours and it never was elevated beyond a private thought?---I'm not sure.

Let's test it. First, it was a thought of yours that it would not be repaid; correct? That is, the Rising Rocket loan to Shot One?---That's right.

And it was a thought that was never communicated to anyone other than - well, to anyone?---I don't recall.

You can't, sitting there and having prepared your witness statement and gone to all the detail and thought about this case and knowing how important the loan accounts are, you are unable to tell Her Honour of a single relevant person that you told this to?---Since this case started, certainly. Before this case started, no, I have not. I don't recall, I should say.

Do you understand the way that accounts would be drawn up, both at the MYOB level and the statutory account level, if an asset in the balance sheet being a loan was never intended to be a loan but was something else, a gift or whatever?---No, I do not understand that.

But you understand, don't you, that if you look at a MYOB account which records in the balance sheet item an asset being a recoverable loan - a loan that is an asset, the assumption is that it is going to be repaid?---No, I did not understand that.

What did you think a loan was?---I thought it was a place in the management accounts to record certain transactions that would then subsequently be handled by my tax accountant.

How would your tax accountant handle it if you never told him the truth?---I didn't have the conversation with him.

Why didn't you?---We never got to it.[71]

80 Senior Counsel for the plaintiffs submitted that the Court should reject the evidence given by Richard Day (emphasised in bold above) about his understanding of the purpose of the loan accounts, but I do not propose to do so. Having seen him give evidence, and explain the way in which Shot One and Rising Rocket operated, I regard his account as credible. In my view, the notion that discussions were intended to take place between Richard Day, as director of Shot One, and Mr Jasper, its accountant, before Shot One's accounts and returns were finalised is confirmed by both Mr Grano's and Mr Jasper's evidence. As noted above, Mr Grano was simply recording in Shot One's MYOB, in the Rising Rocket loan account, the payments that were made by Shot One to Rising Rocket. That recording exercize did not require him to form a view that the payment transaction was one by way of loan. Rather, the allocation of such payments to the Rising Rocket loan account was something that happened automatically, because Mr Grano had set it up in MYOB as a 'reocurring' transaction. The impression Mr Grano conveyed when giving his evidence was that the Rising Rocket loan account was handled in much the same way as the Richard Day loan account, in the sense that at a bookkeeping level it was simply a method of allocating payments made to or for the benefit of Rising Rocket, and that it would probably be reallocated by Terrence Jasper & Associates when the firm prepared Shot One's financial statements and income tax returns.

81 In his witness statement, Mr Jasper described the iterative process by which Shot One's statutory accounts would be prepared. He said that following the incorporation of Shot One, from the financial year ended 30 June 2002 onwards, in the normal course of events, he would prepare draft statutory accounts for Shot One, based on the bookkeeping entries made. Mr Jasper said:

[16] It was my practice to send Ric draft accounts by email, deal with any queries he had by telephone until those queries had been resolved and then send or hand deliver final accounts to him for his signature. Before Ric signed the accounts each year, he and I went through them page by page.

...

[18] I prepared the annual statutory accounts and income tax returns of Shot One and prepared the income tax returns using the information in the management accounts of Shot One. [72]

82 Mr Jasper's evidence makes clear that while the information recorded in the MYOB management accounts was used in preparing the statutory accounts and income tax returns of Shot One, Mr Jasper also consulted with Richard Day in the process of finalizing them - preparing draft accounts, dealing with queries and then resolving those queries in discussion with him - before the final accounts were delivered to Richard Day for signature. What that means is that, in the ordinary course, Richard Day would have had an opportunity to discuss the draft accounts with Mr Jasper before they were finalized. Following Richard Day's resignation from Shot One in February 2009, however, Mr Jasper informed Richard Day that he could no longer consult with him about the statutory accounts and returns, with the result that the usual consultative process did not take place, and Richard Day was effectively denied the opportunity to discuss with Mr Jasper the basis on which the payments made to Rising Rocket had been recorded by Mr Grano in the Rising Rocket loan account.

1. The rental payments to be made by Shot One to Rising Rocket (discussed further below in the context of the evidence given by Mr Jasper) are another example of the Rising Rocket loan account being used as a method of allocating payments and recording them in Shot One's MYOB, but on the basis that they would likely need to be re-visited and possibly adjusted when the final accounts were being prepared by Mr Jasper.

84 When Richard Day initially informed Mr Jasper that Nicholas Day would be residing at the Rockley Road property, Mr Jasper told him words to the effect that 'a commercially reasonable amount of rent would need to be paid by Nick', in order for Rising Rocket to be able to deduct in full the interest and other property-related costs.[73] In the case of the Rising Rocket loan account, Mr Jasper said that:

[34] ... The money paid from Shot One to Rising Rocket was recorded in a loan account for Rising Rocket in Shot One's accounts with an adjustment to be done when the accounts were being prepared for the commercial amount of rent that needed to be shown as paid.[74]

85 In other words, from the outset it was envisaged by Mr Jasper that the rental payments made by Shot One to Rising Rocket would be recorded in the MYOB management accounts, even though they were rental payments and not payments made by way of loan. Further, that when the final accounts were being prepared, some adjustment would be required to be made to the information recorded in the MYOB so as to ensure that it reflected a 'commercial amount' of rent.

86 Richard Day said he did not know why the statutory accounts for Shot One for 2004 and 2005, and the income tax returns for those years, were not lodged until 2011 or thereabouts. He said the 2006 accounts were not completed on time but he had assumed that Mr Grano would have given the MYOB accounts to Mr Jasper's office. Richard Day said that he had a meeting with Mr Jasper in April 2009, shortly after he had resigned from Shot One, because he was 'anxious to get the taxation up to date.'[75] However, he does not recall what was discussed at that meeting. Richard Day said that he thought that Shot One's income tax return for the year ended 30 June 2004 had been lodged, but knew that the returns for 2005, 2006, 2007 and 2008 had not been lodged. He was also aware that once they were lodged, a 'substantial' tax liability would be payable to the Australian Taxation Office and under cross-examination, he agreed that he had a real concern about the unpaid tax. However, when he resigned from Shot One, there was a substantial amount of money available to pay it. Indeed, as at 11 February 2009, Shot One was trading profitably, and had net assets of over $500,000, even allowing for removal of any alleged debt owed by Richard or Rising Rocket to Shot One, and while Shot One had an unpaid tax liability in the order of $500,000, it was, as Senior Counsel for the defendant noted, fully provisioned in the accounts.[76]

87 Richard Day also gave evidence that when the mediation took place in May 2012, he was not aware that the records of Shot One recorded the existence of a loan account indebtedness by Rising Rocket to Shot One. He said that after 2004 he did not understand there was a loan to Rising Rocket recorded in the MYOB management accounts for Shot One. He said he 'didn't look' at the MYOB accounts after 2004 but suspected that the original amount that was recorded in 2004, which was in the region of $85,000, 'might have been in there'.[77] When he went to the mediation in May 2012, he believed he was aware that Shot One was alleging the existence of a Rising Rocket loan account in the MYOB accounts, but his view was that it was '[f]ictitious in amount' and under cross-examination he explained why he thought it should not have been there, as follows:

[MR GLICK:] Do you say there was not one dollar owing by Rising Rocket to Shot One?---I don't think there should have been; that's right.

Because?---Because it had been forgiven or something else done with it. But I didn't know about it. I wasn't aware of it. I thought it had been dealt with.[78]

88 In the case of the account labelled 'Ric Day loan account' in the MYOB management accounts for Shot One, Richard Day said that he thought the existence of any loan account in his name 'was wrong' because 'it didn't exist' and added that 'the Ric Day loan account in the management accounts of Shot One was not [his] expenditure'.[79] He said that when he attended the mediation, he understood there were loan accounts in his name shown in the management accounts of Shot One, but he had not seen the figures, and he rejected the claim being made by the other side. Under cross-examination, when asked to explain why he rejected that claim, the following exchange ensued:

[MR GLICK:] Because?---Because Michael Grano and I - when we were doing MYOB management accounts or the transactions within the company anything that we couldn't explain as what it should be, where it should go, was put into a Ric Day loan account. Most of that was not my expenditure at all. It was simply an area to put it which subsequently then would go to Terrence Jasper, my tax adviser, who would then handle it and probably ask me and maybe Michael Grano what it was all about. I wasn't involved in that second step.

You said most of it wasn't yours, but what about what was yours? Was that a loan account truly recorded?---The Ric Day loan account, if I'm not wrong, would be - none of it was mine.

None of it?---None of it.[80]

89 The evidence given at trial shows clearly that Mr Jasper did not take any instructions from Richard Day regarding the contents of Shot One's financial statements after 11 February 2009, and Richard Day gave evidence that before the commencement of this proceeding he had not seen the second version of the financial statements for the financial year ended 30 June 2005, or any of the versions of the financial statements for the financial years ended 30 June 2006, 2007 and 2008. Further, the evidence shows that in preparing the financial statements and income tax returns for Shot One for those years, Mr Jasper did so without consulting Richard Day and without any input from him, or indeed Mr Grano, as to their contents.

90 The plaintiffs subpoenaed Mr Terrence Jasper to give evidence, and two written statements were prepared by him in advance of being called, each of which was tendered.[81]

91 Mr Jasper is a Chartered Accountant, Certified Tax Accountant, Registered Tax Agent and a member of the Institute of Certified Bookkeepers and practises as the principal of the firm named 'Terrence Jasper & Associates Pty Ltd' in East Melbourne. Richard Day was a client of the firm and Mr Jasper prepared accounts and income tax returns for Richard Day personally and gave ad hoc advice as required from time to time. Mr Jasper also incorporated both Shot One and Rising Rocket and established the Rising Rocket Trust at Richard's request.

92 Following Shot One's acquisition of the business of Nicholas Day Architects in about 2001, Terrence Jasper & Associates prepared financial and other documents on behalf of Shot One, and from 2002 for Rising Rocket, as required.

93 Mr Jasper gave evidence about the incorporation of Rising Rocket. He said that in around 2002, Richard Day had called him and said that he wanted to buy a property in Rockley Road and that Nicholas Day would live in the property. Mr Jasper could not specifically recall advising Richard Day to establish the Rising Rocket Trust to facilitate that acquisition but he said it would have been consistent with his usual practice to do so. Mr Jasper was not involved in any of the formalities relating to the purchase of the Rockley Road property. He did not recall seeing any licence agreement between Rising Rocket and Nicholas Day, nor did he recall ever discussing such an agreement with either Richard or Nicholas Day.

94 Mr Jasper said that after Richard Day told him that Nicholas would be living at the Rockley Road property, he informed Richard to the effect that 'in order for Rising Rocket to be able to claim in full a deduction for interest and other property-related costs, a commercially reasonable amount of rent would need to be paid by Nick.'[82] He then discussed with Richard Day the method he proposed for recording the payments in the accounts, namely that 'the amount that was attributable to rent should be recorded via Shot One's loan account, with an adjustment to Ric's personal loan account in Shot One' and Richard Day replied to the effect that he (Mr Jasper) should prepare the accounts of Shot One and Rising Rocket on that basis.[83] Under cross-examination Mr Jasper explained what he meant by the 'adjustment' that was to be done when the accounts were being prepared, saying:

... in order for Rising Rocket to claim as an expense all of the interest and all of the costs relating to that property, because it was being rented to a non-arm's length party, the amount of rent needed to be commercially realistic and what was agreed when we were preparing the accounts of Rising Rocket, I would be advised at that point what the commercial amount of rent was to include and we'd put that adjustment through the loan account between Shot One and Rising Rocket.[84]

95 When he was asked to explain what he meant by his earlier reference to making 'an adjustment to Ric's personal loan account in Shot One' Mr Jasper said:

---So the rent that would be shown as paid or received by Rising Rocket would need to be recorded in the loan account with Shot One, and the other side of the entry in Shot One would be a personal loan account.[85]

96 Mr Jasper was then asked a series of questions about why the rent paid to Shot One would be recorded in a loan account. He said he told Richard Day that, in his view, payments made by Shot One on account of Nicholas's personal expenses were required to either be reconciled as a Division 7A-compliant loan to Nicholas Day or shown as income of Nicholas. He recalled Richard Day telling him words to the effect that he did not want to record those payments as income of Nicholas because of his bankruptcy, given his obligation to make mandatory income contributions to his trustee in bankruptcy. Richard then said to Mr Jasper that, on the basis of the advice he had given, the amounts should be recorded in a loan account in his name. During cross-examination Mr Jasper agreed that from his discussions with Richard Day he understood that '[a]ny of Nic's personal expenses were recorded in Ric's loan account'.[86] Mr Jasper was aware that at that time in order to be compliant, a Division 7A loan was required to be for no more than seven years, with interest at a statutory rate, and the loan was to be repaid by monthly instalments of principal and interest, but he accepted that he never prepared any Division 7A loan documentation in respect of Richard Day.

97 Mr Jasper said he did not have any direct involvement in the preparation of Shot One's internal (or MYOB) management accounts, which were prepared by Mr Grano, the external bookkeeper. He was involved, however, in the preparation of Shot One's statutory accounts or financial statements by Terrence Jasper & Associates. A staff member, Mr Kirk Webster, was the principal person delegated to attend to the preparation of the accounts of Shot One, Rising Rocket and the Rising Rocket Trust, and the returns for Richard Day personally.[87] Mr Jasper said that typically in the process of preparing the accounts they would 'engage with the director of the company, seek his approval to prepare them, and then we would engage with the bookkeeper to provide us with the source information' which in this case meant the MYOB management accounts.[88] For each of the financial years for which the firm prepared statutory accounts for Shot One, Mr Jasper said that they would treat an item recorded in the MYOB management accounts consistently with how it was treated in the management accounts. For example, in the case of an item described in the MYOB management accounts as a loan, Mr Jasper said that if an item 'had been recorded as a loan and I felt it wasn't, then I could query why it was recorded that way.'[89]

98 In the case of the statutory accounts (or financial statements) his firm prepared for Shot One, Mr Jasper said that typically they would have discussed any contentious issues or queries in the accounts with Richard Day; however, he said that process took place in respect of the accounts for the first three financial years only, being 2002, 2003 and 2004. He explained that because they were not provided with all of the information they needed to prepare them, '[t]he later accounts weren't completed until after Mr Richard Day had ceased to be a director of Shot One', which took place in February 2009, but 'once Mr Nicholas Day was a director, we then resolved all the final queries.' [90]

99 Mr Jasper said that as at February 2009, when Richard Day ceased to be a director of Shot One, the position was that while income tax returns of Shot One in respect of the financial years 2002, 2003 and 2004 had been prepared, only the 2002 and 2003 returns had actually been lodged. The tax return for 2004, which he thought had been prepared in November 2004, was not lodged because he 'was advised by the director at the time [i.e., Richard Day] that the company didn't have enough money to pay the tax.'[91] He said that the tax returns for the 2005, 2006, 2007, and 2008 years were prepared some time later by one of his assistants, Mr Webster, and he prepared them in sequence, but essentially in one run, on the basis of information provided by the bookkeeper, Mr Grano, and the then director, Nicholas Day.

100 Initially Mr Jasper said that the tax returns for the 2005 to 2008 years were lodged in 2009, along with the 2004 return, but he later corrected this and confirmed that each return was lodged on 9 March 2011.[92] Mr Jasper explained that in the case of companies, the obligation to pay tax arises upon lodging the return, but he said no tax was paid by Shot One for any of the 2005, 2006, 2007, and 2008 years.[93]

101 Under cross-examination, Mr Jasper accepted that the financial statements of Shot One for each of the financial years from 2005 through to 2011 must have been signed by Nicholas Day, and not Richard Day although he later noted that the firm's records show that Richard Day signed the minute that would accompany the financial statements. He said that these things are 'often ... backdated to effect a date',[94] so 'it is entirely possible Mr Richard Day also signed the financial statements, but he would keep those.'[95] Mr Jasper confirmed, however, that he did not recall by whom, and where, the financial statements of Shot One for the 2005 financial year and onwards were signed. And he accepts that there were no accounts for Rising Rocket that were signed by Richard Day.

102 Mr Jasper was then taken to the financial statements of Shot One for the relevant financial years commencing with those for the financial year ended 30 June 2003.[96] The copy of the financial statements that were produced by the firm were unsigned, by Richard Day or anyone else, but Mr Jasper had earlier given evidence to the effect that the income tax return would only be signed once the financial statements had been signed[97] and the tax return for the financial year ended 30 June 2003 had been filed. Relevantly, in the financial statements of Shot One for the financial year ended 30 June 2003, the balance sheet set out the 'Assets' of Shot One. Under the heading 'Current assets', receivables of $203,042 were listed, annotated with a note '2', which stated:[98]

103 As will be noted, at this point there is no loan to Rising Rocket that is recorded in the balance sheet as a receivable. However, it will be recalled that the purchase of the Rockley Road property was not settled until December 2004.

104 Senior Counsel for the plaintiffs showed Mr Jasper a bundle of documents relating to the 2004 financial accounts of Shot One, but he was not questioned about them and none of them was tendered.

105 Mr Jasper was then taken to a set of financial statements of Shot One for the financial year ended 30 June 2005. He had given evidence earlier that the financial statements for the 2005 financial year were not finalised until 2009 at the earliest. During the course of his cross-examination, he accepted that this version was not the final one the firm had prepared.[99] He said that while Richard Day had signed the 2004 income tax return for Shot One he presumed that Nicholas Day had signed the tax returns for each of the years 2005 to 2011 and he accepted that the final signed financial statements for 2005 through to 2011 must have been signed by Nicholas Day and not by Richard Day, essentially because the income tax return would only be signed once the financial statements had been signed.

106 Mr Jasper said that the firm does not usually receive a signed copy of the financial statements but under cross-examination he explained the process by which the signed income tax return was produced to him, as follows:

[MR EVANS:] I should say that in my review of your subpoenaed files, which were some eight folders, I didn't find any signed financial statements in the sense that the director's declaration was signed at all?---No, that's correct, because we don't get a copy of that.

What you do get, I take it, is you do get a copy of the signed income tax return?---That is correct, yes.

And from that do you then infer that the financial statements were also signed?---In this case the financial statements were signed in front of me when the income tax returns were lodged, the director holds on to the signed financial statements and I get the signed income tax return.

So the existence of a signed income tax return you would say shows that there's a signed financial statement because you have direct recollection of having seen it being signed?---In this case they were signed in front of me, yes.

But just coming back to your earlier answers in terms of the financial years 2005 to 2011, you said Nicholas Day signed the income tax returns?---Yes. No, I said I presumed that's the case. I don't have the copies here.

No, the income tax returns?---Yes.

You have said - - -?---For Shot One.

No, you have said - let me just step you through it. You have said that you would never lodge an income tax return unless there was a signed financial - unless there was a signed income tax return by the director?---That is correct.

You have lodged income tax returns for Shot One for each year up to and including 2011?---Yes.

You have said in your table, exhibit P4.8, that the income tax returns for Shot One for 2004 to 2009 were lodged on 9 March 2011?---That is correct.

You have said that you had a signed income tax return from Richard Day for 2004?---Yes.

I asked you and I believed your answer was that, as far as you could recall, Nicholas Day had signed the income tax returns for the years 2005 to 2011?---That is correct, yes.

HER HONOUR: He said he presumed?---Presumed, yes.

MR EVANS: So you don't have a direct recollection of it?---I don't remember him signing it, but as you have correctly said, we wouldn't have lodged them unless they were signed and Nicholas was the director at the time they were produced.

Therefore the logical inference is that he signed them?---Yes.

And the logical inference is also that he signed the financial statements on which those income tax returns were based?---That is entirely possible, yes.

Well, you say they're signed at the same time, so that must be the logical conclusion?---Yes.

Which means that the final signed financial statements for 2005 through to 2011 must have been signed by Nicholas Day and not by Richard Day?---I accept that assumption, yes.[100]

107 A little later in his cross-examination Mr Jasper said that he did recall sitting down with Richard Day in the offices of Shot One and him signing the financial statements for 2002, 2003 and 2004 but he does not recall who signed the subsequent ones or where they were signed.[101]

108 Under cover of a letter dated 29 April 2009, addressed to Richard Day as Director of Shot One but sent to Nicholas Day's postal address, Mr Webster of Terrence Jasper & Associates provided a package of documentation pertaining to Shot One's 2005 Accounts. The letter enclosed financial statements for Shot One for the year ended 30 June 2005, statutory minutes and notices and the company's income tax return.[102] Mr Jasper confirmed that this set of financial statements for Shot One was the version that he used when preparing his summary of Shot One's income and tax position (which was attached to his witness statement[103]) but he was unsure whether these accounts were in fact the final set of financial statements for Shot One. Under cross-examination, Mr Jasper explained the matter but he ended up agreeing that it was 'quite likely' that they were the final ones, as follows:

MR EVANS: Do you have exhibit P4.8 and then can you turn to page 3006?---Yes.

These financial statements, if we go through them, we can see that the trading profit, there's a figure of trading profit on page 3007 of 717,167; do you have that first entry?---Yes, sorry. Correct, yes.

If you look at exhibit P4.8 you can see that that corresponds to your entry for gross income for the year ended 2005?---Yes.

If we look at the next entry on P4.8 it's total expenses 426,568?---Yes.

And we can see that on this document at page 3008 the figure is 428,436?---Yes.

But nonetheless we can see that the net profit figure on page 3008 corresponds exactly to the figure on exhibit P4.8?---That's correct, yes.

If we go to the balance sheet we can see that there's a net asset figure on page 3012 of 523,748?---Yes.

And that corresponds exactly to the net asset figure on exhibit P4.8?---That is correct.

And if we look at the figure which you have put in for taxable income of $222,526 and we turn to the tax return, which is at page 3018, we can see that that figure corresponds again exactly?---That's correct, yes.

Does that give you confidence that the financial statements which appear at page 3006 through to 3014 and the tax return which appears at 3017 through 3024 were those that were ultimately - sorry, the tax return was that which was ultimately lodged on 9 March 2011 and the financial statements are the financial statements which relate to that tax return?---Yes, it does.

So then if I can just return to some earlier questions. Does that lead you to consider that the earlier version of the financial statements which I took you to at page 307 of volume 1 of the court book which I took you to where the numbers didn't correspond were not in fact the final financial statements of the company?---Except there was a subsequent adjustment done to the accounts several years or some time later.

Some time after when? What are you talking about?---These tax returns were lodged and then subsequent to this period there was an adjustment done requested by the director.

Mr Nicholas Day?---Mr Nicholas Day, and we lodged amended tax returns.

For 2005?---Yes.

Through to 2009?---Yes.

On his instructions?---On his instructions, yes, and the financial statements were updated at the same time.

I appreciate that?---So I'm not sure whether the ones before were that set of accounts or not, but that may explain the difference.

Can I ask you just to look back to volume 1 at page 307?---Yes.

I took you to these earlier. Can I just perhaps take you back to page 315 and 316, which bear dates of 10 November 2004 I asked you about earlier?---Yes.

So they are plainly wrong dates, aren't they?---Yes, they are.

It is unlikely that that error would have crept back in in a subsequent version of the financial statements?---That's correct.

So do you now accept that it's certainly likely that these draft financial reports at page 307 or the unsigned ones are in fact some earlier iteration of them?---Yes, I think that's quite likely.[104]

109 Mr Jasper confirmed that for the financial year ended 30 June 2005, three sets of accounts were prepared for Shot One which ultimately resulted in the financial statements being prepared by Terrence Jasper & Associates.[105] The first set was the MYOB management accounts prepared by Mr Grano.[106] The second set, comprising an Annual Trial Balance and an Annual General Ledger, was created by the firm using the 'Solution 6' software package[107]. Each of the journal entries there set out represents an entry which is made into the accounts by the accountants to effect a 're-characterisation' or an adjustment made to the accounts by them. The third set was a Trial Balance as at 30 June 2005 and a Ledger Entries report as at 30 June 2005,[108] which was also prepared by the firm but after they had moved to a new software system called 'HandiLedger'.

110 In the case of Rising Rocket, the MYOB management accounts of Shot One prepared by Mr Grano for the year ended 30 June 2005 recorded entries in its loan account totalling $260,500.00.[109] Of this total, an amount of $92,500.00 was disclosed as owing by Rising Rocket to Shot One as at 22 November 2004 (i.e., six years prior to the commencement of the 2010 proceeding).

111 The second set of accounts for the year ended 30 June 2005, prepared by the firm in 2009, recorded the following:[110]

Ledger Entries Report for the year ended 30 June, 2005

Movement in balance sheet accounts as per mgmt accounts

112 Mr Jasper was taken to this ledger entry for Rising Rocket and he confirmed that it simply recorded the transfer to these accounts of what is recorded in the MYOB management accounts (at page C10).[111] He explained that this entry was then recorded in the third set of accounts, being the financial statements for Shot One for the year ended 30 June 2005, where it will be seen that under the heading 'Non-Current Assets', and sub-heading 'Receivables' a 'Loan to Rising Rocket Pty Ltd' of $260,500 is shown.[112]

113 During his examination in chief, Richard Day was also taken to the second witness statement of Mr Jasper[113] and was asked questions about some of the documents that were exhibited to it. When taken to Exhibit P4.2, which was the letter from Terrence Jasper & Associates dated 29 April 2009, addressed to 'Mr Richard Day, Director, Shot One Pty Ltd, PO Box 311, Toorak, Vic, 3142,' re '2005 Accounts',[114] Richard Day said that he did not receive this letter. He had resigned as a director of Shot One on 11 February 2009 and thereafter he did not have any access to the post office box of Shot One.[115] Further he confirmed that prior to the commencement of this proceeding he had not seen and did not receive the 'enclosed' draft financial statements, the unsigned minutes of meeting of directors of Shot One nor the unsigned tax return for Shot One for the year ended 30 June 2005. He also had not seen or received the 'Annual Trial Balance' as at 30 June 2005 or the 'Annual General Ledger' or the 'Ledger entries report for the year ended 30 June 2005'.

114 Under cover of a letter dated 5 May 2009,[116] addressed to Richard Day as Director of Shot One but sent to Nicholas Day's postal address, Mr Webster of Terrence Jasper & Associates sent a package of documentation pertaining to Shot One's 2006 Accounts, including financial statements for Shot One for the year ended 30 June 2006,[117] and the detailed general ledger,[118] statutory minutes and notices[119] and the company's income tax return.[120] Under cross-examination Mr Jasper agreed that the ledger entries in the financial statements for the financial year ended 30 June 2006 were made at some point after February 2008, which was when the firm stopped using the Solution 6 software.

115 In the case of Rising Rocket, the Ledger Entries Report prepared by the firm recorded the following information:[121]

Ledger Entries Report for the year ended 30 June, 2006

Account number 2540 - Loan to Rising Rocket Pty Ltd

116 The description 'D10' (above) is a reference to page one of the MYOB management accounts where the entry pertaining to the Rising Rocket loan account for the financial year ended 30 June 2006 is summarised.[122] Under cross-examination, Mr Jasper confirmed that that journal entry simply represents the loan account change as summarised in the management accounts, which was then transposed into the accounts prepared by the firm. He said he did not recall having had any discussions with an officer of Shot One about this entry at that time. Mr Jasper also confirmed, by reference to his summary of Shot One's income tax and position (Exhibit P4.8), that this version of the accounts was not the final version of the financial statements which were used to support the tax return. He explained that the financial statements were subsequently adjusted and that no income tax return was lodged prior to the making of that adjustment.

117 Mr Jasper was then taken to another version of the financial statements of Shot One for the year ended 30 June 2006,[123] which he confirmed corresponded with the information set out in his summary of Shot One's income tax and position (Exhibit P4.8). The latter set of financial statements included at least three changes which Mr Jasper had previously identified, being first, an adjustment of the amount of the management fees recorded as an expense (from $114,955 to $247,702);[124] secondly, the receivable being the 'Loan - Ric Day'[125] is recorded in the later amended financial statements as 'Loan - Nic Day'[126] and for the same amount,[127] and thirdly, the director's declaration provides for Nicholas Day (rather than Richard Day) to make the declaration.[128] Mr Jasper confirmed that these changes were made between May 2009 and December 2009 at the direction of Nicholas Day. He also said that following the making of these changes, an amended tax return for Shot One was lodged.

118 During his examination in chief, Richard Day was taken to Exhibit P4.3 which comprises a letter from Terrence Jasper & Associates dated 5 May 2009 re '2006 Accounts', addressed to 'Mr Richard Day, Director, Shot One Pty Ltd, PO Box 311, Toorak, Vic, 3142'.[129] Richard Day confirmed that he never received this letter from Terrence Jasper & Associates, nor prior to this proceeding had he ever seen the 'enclosed' draft financial statements, the unsigned minutes of meeting of directors of Shot One or the unsigned tax return for Shot One for the year ended 30 June 2006. He also had not seen or received the 'Comparative trial balance' as at 30 June 2006 or the 'Ledger entries report for the year ended 30 June 2006'.

119 Mr Jasper gave evidence that the income tax return of Shot One for the financial year ended 30 June 2006 was filed on 9 March 2011.[130] There is no evidence to suggest that prior to this proceeding Richard Day had ever seen the final version of the financial statements for the financial year ended 30 June 2006 that supported the income tax return of Shot One that was filed on 9 March 2011.

120 A pro forma letter dated 7 May 2009 was sent by Mr Webster of Terrence Jasper & Associates, addressed to Richard Day as Director of Shot One but sent to Nicholas Day's postal address, enclosing a package of documentation pertaining to Shot One's 2007 Accounts, including financial statements for Shot One for the year ended 30 June 2007,[131] and the detailed general ledger,[132] statutory minutes and notices[133] and the company's income tax return.[134]

121 In the case of Rising Rocket, the Ledger Entries Report prepared by the firm recorded the following information:[135]

Ledger Entries Report for the year ending 30 June, 2007

Account number 2540 - Loan to Rising Rocket Pty Ltd

122 The description 'D10' (above) is a reference to page one of the MYOB management accounts where the net activity on the Rising Rocket loan account for the financial year ended 30 June 2007 is summarised.[136]

123 Under cross-examination, Senior Counsel for the defendants asked Mr Jasper about what conclusion could validly be drawn from the fact that no other journal entries were made in respect of the Rising Rocket loan account, as follows:

[MR EVANS] I should perhaps ask you this question, which I should probably have asked you about the Rising Rocket loan account before. The fact that there are no other journal entries in respect of the Rising Rocket loan account, does that lead to a valid conclusion that you and your staff did not identify any other amounts which should be recharacterised and attached to the loan account of Rising Rocket Pty Ltd in your review of the accounts?---Not at the time we were preparing these financial statements.

So we are talking here in this case 2009?---Yes.

And in the case of the 2006 accounts, 2007 to 2009, and in the case of the 2005 accounts, anywhere between 2005 and May 2009?---That is correct.

Can I ask you then to turn - well, I will ask you this question rather than just always doing it through the documents. The 2007 accounts were amended after May 2009, weren't they?---Yes, that's correct.

They were amended in about December 2009 or January 2010?---That's correct, yes.

And that was largely to deal with an issue of management fees and an adjustment in the draft accounts to take that up?---Yes, that's correct.

And no tax return was lodged in reliance upon the financial statements provided in May 2009 prior to that adjustment being made?---That's correct, yes.[137]

124 As with earlier years, a further (amended) version of the financial statements of Shot One for the financial year ended 30 June 2007[138] was prepared by Terrence Jasper & Associates. Mr Jasper confirmed that this version was the final version of the financial statements that supported the tax return that was lodged on 9 March 2011. Relevantly, between the penultimate and final versions the same changes were made, being first, an adjustment of the amount of the management fees recorded as an expense (from $129,094 to $184,420),[139] and secondly, the receivable 'Loan - Ric Day' is recorded in the later amended financial statements as 'Loan - Nic Day' and for the same amount.[140] Thirdly, while the director's declaration provides for Richard Day to make the declaration,[141] Mr Jasper accepted that this was an error and that this later set of financial statements '[m]ust have been' signed on behalf of Shot One by Nicholas Day (rather than Richard Day), and that he thereby acknowledged that those accounts were true and correct.[142]

125 In the final version of the financial statements for the financial year ended 30 June 2007, a loan to Rising Rocket in the sum of $456,000 continued to be shown as a non-current receivable.[143]

126 During his examination in chief, Richard Day was taken to Exhibit P4.4 which comprises a letter from Terrence Jasper & Associates addressed to 'Mr Richard Day, Director, Shot One Pty Ltd, PO Box 311, Toorak, Vic, 3142,' dated 5 May 2009, re '2007 Accounts'.[144] Richard Day confirmed that he never received this letter, nor prior to this proceeding had he ever seen the 'enclosed' draft financial statements, the unsigned minutes of meeting of directors of Shot One or the unsigned tax return for Shot One for the year ended 30 June 2007.[145] He also had not seen or received the 'Comparative trial balance' as at 30 June 2007 or the 'Ledger entries report for the year ended 30 June 2007'.[146]

127 Here again, there is no evidence to suggest that prior to this proceeding Richard Day had ever seen the final version of the financial statements for the financial year ended 30 June 2007 that supported the income tax return of Shot One that was filed on 9 March 2011.

128 For the financial year ended 30 June 2008, a pro forma letter addressed to Richard Day as Director of Shot One dated 12 May 2009 was sent by Mr Webster of Terrence Jasper & Associates, to Nicholas Day's postal address. The letter enclosed a package of documentation pertaining to Shot One's 2008 Accounts, including financial statements for Shot One for the year ended 30 June 2008,[147] a minute of director's meeting[148] and the company's income tax return[149] as well as a 'Ledger Entries Report'[150] and 'Comparative Trial Balance'.[151]

129 In the financial statements, under 'Current Assets', a receivable in the sum of $730,610 was described as 'Loan - Ric Day'.[152] Mr Jasper agreed that this was an adjustment from the previous year, which was recorded against Account number 2117 - Loan - Ric Day.[153] The relevant journal entries recording the adjustments are set out in the Ledger Entries Report.[154] After the opening balance of $616,469.31, the first journal entry (000000002) records a debit of $95,469.31 with a description 'Management accounts D10', and there follow five more entries for reasonably small amounts referable to matters such as the private use of motor vehicles by Nicholas Day or his family, the re-allocation of an amount to eliminate GST, the re-allocation of a non-deductible expense etc. Mr Jasper acknowledged that save for the first journal entry, which effected the transposition of $95,469.31[155] from the management accounts, none of those adjustments reflect an actual advance of funds by Shot One to Richard Day. Mr Jasper also accepted that each of the journal entries was made after February 2009, when Richard Day was no longer a director of Shot One.

130 In the financial statements, under 'Non-Current Assets', a receivable in the sum of $721,500.00 was described as 'Loan to Rising Rocket Pty Ltd'.[156] The first journal entry set out in the Ledger Entries Report[157] records the opening balance of $456,000.00, and then the next journal entry (000000002) records the transposition of the information contained in the MYOB management accounts, namely a debit of $265,500.00, across to the ledger entries (producing a total of $721,500.00).[158] Mr Jasper confirmed that no current discussions were had in respect of that activity and also that the firm did not itself identify any matters that would necessitate any change to those amounts.

131 Mr Jasper also confirmed that this version of the financial statements (made in or around May 2009) is not the final version of the accounts of Shot One for the financial year ended 30 June 2008, and that as with earlier years, a subsequent adjustment was made to them in or about December 2009.[159]

132 In the adjusted version of the financial statements of Shot One for the financial year ended 30 June 2008, under 'Current Assets', a receivable in the sum of $293,635 was described as 'Loan - Ric Day' (and for the preceding financial year an amount of zero was recorded, consistently with the revised financial statements for that year) and a receivable in the sum of $606,666 was described as 'Loan - Nic Day' (and for the preceding financial year an amount of $616,543 was recorded, consistently with the revised financial statements for that year).[160] The Comparative Trial Balance reflected the same position.[161]

133 The Ledger Entries Report for the financial year ending 30 June 2008 records the two additional journal entries in Account number 2117 referable to these adjustments, as follows:[162]

Ledger Entries Report for the year ending 30 June, 2008

134 Worksheet 'X19' shows that the sum of $293,635.18 was re-allocated to the Richard Day loan account.[163] In or around December 2009, a new loan account was established in the books of Shot One in the name of 'Ric Day' as follows:[164]

Ledger Entries Report for the year ending 30 June, 2008

135 The worksheet which is described as 'X19' is located at TB 3:3794 and the accompanying sheet described as 'X20' is located at TB 3:3795. Under cross-examination, Mr Jasper was taken to these worksheet documents and the following exchange ensued:

[MR EVANS:] Can I ask you to turn to page 3794, which is X19?---Yes.

You can see there where the figure of 293,000 comes from?---Yes, I can.

If you look on the next page, 3795, there appears to be a method by which that figure of $293,635.21 was calculated?---Yes.

It appears to have been calculated by someone, we don't know who, running a highlighter across some of the transactions and seeming to allocate some or all of those to Nic and others to Ric?---That is correct.

I just want to suggest to you that that reallocation or recharacterisation occurred in or about December 2009?---Yes, that is correct.

I assume, but if you recall, that it was done on the instructions of Nicholas Day?---That is correct.

Did you have any communications with Richard Day about those reallocations within the loan account?---No, sir, I didn't.[165]

136 In the adjusted financial statements, no adjustment was made to the 'Loan to Rising Rocket Pty Ltd' - it continued to be recorded under 'Non-Current Assets' as a receivable in the sum of $721,500.[166]

137 Mr Jasper was then taken to the tax return for Shot One for the financial year ended 30 June 2008.[167] Mr Jasper agreed that the figures he had recorded in his summary of Shot One's income and tax position (Exhibit P4.8) corresponded with those recorded in the adjusted version of the financial statements of Shot One for the financial year ended 30 June 2008, and that it must be the case that those financial statements and the tax return were signed by Nicholas Day (rather than Richard Day) prior to the tax return being lodged on 9 March 2011.

138 In relation to the '2008 Accounts', Richard Day gave similar evidence to that given for the earlier years. During his examination in chief, he was taken to Exhibit P4.5, being a letter from Terrence Jasper & Associates addressed to 'Mr Richard Day, Director, Shot One Pty Ltd, PO Box 311, Toorak, Vic, 3142,' dated 5 May 2009 and enclosing the financial statements, statutory minutes and income tax return for Shot One for the year ended 30 June 2008. This version of the documents appears to correspond with the pre-adjusted set of documents for financial year 2008 as described by Mr Jasper above. Richard Day confirmed that he never received this letter, nor prior to this proceeding had he ever seen the 'enclosed' draft financial statements, the unsigned minutes of meeting of directors of Shot One or the unsigned tax return for Shot One for the year ended 30 June 2008.[168] He also had not seen or received the 'Comparative trial balance' as at 30 June 2008 or the 'Ledger entries report for the year ended 30 June 2008'.[169]

139 Here again, it is not suggested that prior to this proceeding Richard Day had ever seen the final version of the financial statements for the financial year ended 30 June 2008 that supported the income tax return of Shot One that was filed on 9 March 2011.

140 The financial statements, statutory minutes and income tax return for Shot One for the financial year ended 30 June 2009 were prepared by Terrence Jasper & Associates and sent to Nicholas Day as the director of Shot One under cover of a letter from Mr Webster dated 22 February 2010. This letter was the first such letter that was correctly addressed, and in addition to the usual (pro forma) content three paragraphs were added, as follows:

As explained, when preparing your personal income tax return, we have paid you sufficient Director's fees to take your personal taxable income up to $80,000, which is the maximum amount that you can earn whilst being subject to a marginal income tax rate of 30%. All remaining taxable income has been left in your company to be subject to the same value of tax of 30%. In this way, your overall income tax impost is minimised, whilst optimising the amount that can be allocated to you on a tax effective basis.

The financial statements also incorporate the fully reconciled management fee and loan position with Cooniemoon Pty Ltd, incorporating the withdrawals by Cooniemoon Pty Ltd from Rising Rocket Pty Ltd. As previously discussed, the additional management fees payable to Cooniemoon Pty Ltd are to cover the income tax impost that Cooniemoon is required to pay on these management fees. This translates to a direct income tax saving to your company. In addition to the income tax payable by your company, the management fees will need to be paid as soon as payable to allow that company to also pay its income tax impost.

Another issue to be addressed is the rise of your debit loan account with the company. This loan has arisen due to the company paying certain personal expenses on your behalf. We have reduced this loan account to the extent of any credit loan account that was present in Rising Rocket Pty Ltd. This loan account should be repaid prior to the submission of the enclosed income tax return, to avoid any adverse deemed dividend implications.[170]

141 Attached to this letter were the financial statements of Shot One for the financial year ended 30 June 2009,[171] the income tax return,[172] and a Comparative Trial Balance and Ledger Entries Report.[173] In the financial statements, the detailed balance sheet records under 'Current Assets' two receivables by way of loan being 'Loan - Ric Day' in the sum of $357,155 and 'Loan - Nic Day' in the sum of $926,525. In each case these entries correspond with the information recorded in the final version of the financial statements for the previous year. In the Ledger Entries Report for the financial year ended 30 June 2009, the journal entries pertaining to Account number 2116 'Loan- Ric Day' record a debit entry as follows:[174]

Ledger Entries Report for the year ending 30 June, 2009

142 Under cross-examination, Mr Jasper was taken to worksheet 'C70' which was a print out of the MYOB management accounts pages pertaining to the Richard Day loan account. The 'Net Activity' on the account was recorded as $112,310.56, and Mr Jasper agreed that the handwritten markings and annotations showed that someone had gone through the listed amounts and divided them between 'Ric' (as to $63,520.10) and 'Nic' (as to $48,790.46) and then sought to attribute those amounts in accordance with the Ledger Entries Report, and that this must have been done in or about February 2010.[175]

143 In the case of Rising Rocket, the Ledger Entries Report prepared by the firm recorded the following information:[176]

Ledger Entries Report for the year ending 30 June, 2009

Account number 2540 - Loan to Rising Rocket Pty Ltd

144 In the case of the credit adjustment of $332,031.33, a counterpart debit entry was made to 'Account number 2117 - Loan - Nic Day', as follows:[177]

145 Under cross-examination, Mr Jasper was taken to worksheet 'D40',[178] which was a print out of the balance sheet (last year analysis) contained in the June 2009 MYOB management accounts pages. There the Rising Rocket loan account is shown as being $839,784.43 (for 30/06/2009) and $721,500.00 (for 30/06/2008) resulting in a difference of $118,284.43, which Mr Jasper agreed was simply transposed across from the MYOB management accounts and into the ledger entry. Mr Jasper agreed that two re-allocations were performed by the transaction recorded in journal entry number 35, being first, the recording of the credit against the Rising Rocket loan account of $332,031.33, and then the recording of the debit of $332,031.33 against the Nicholas Day loan account.

146 In the case of the credit adjustment of $332,031.33, Mr Jasper agreed that any such adjustment must have been done either at the instruction of Nicholas Day or because in his professional opinion he considered it was an appropriate characterisation. Mr Jasper confirmed that, so far as he was aware, the credit adjustment was not the subject of any discussions with Richard Day. (During closing submissions, Senior Counsel for the defendants informed the Court that there is nothing in the evidence before the Court which explains how that figure of $332,031.33 was calculated or adopted, and Mr Jasper was not asked and did not give any evidence about it.)

147 Mr Jasper also confirmed that the version of the 2009 financial statements and the income tax return enclosed with the letter[179] correspond with information he extracted for the financial year ended 30 June 2009 and set out in his summary of income tax and position (Exhibit P4.8). Mr Jasper believed that it was Nicholas Day (rather than Richard Day) that signed the 2009 financial statements and the income tax return.

148 Against that background, it is, as the defendants submitted, clear that that credit adjustment of $332,031.33 made to the Rising Rocket loan account for the financial year ended 30 June 2009, and effectively assumed by the Nicholas Day loan account, was signed off by Nicholas Day on behalf of Shot One in or about February 2010, and adopted by Shot One because it lodged a tax return based upon those accounts in which that write-off occurred.

Preparation of Shot One's financial statements and tax returns for the financial years 2010 and 2011

149 On or about 9 May 2012, in advance of the judicial mediation, Shot One's solicitor Mr Marash contacted Mr Jasper and asked him to provide Shot One's financial statements for the financial years ending 30 June 2010 and 30 June 2011. Mr Jasper said that by then the firm had done a fair bit of work on preparing them and had taken instructions from Nicholas Day about them, but they had not been completed and delivered to him. At about that time he also attended a meeting with Mr Marash and Nicholas Day. He said he did not recall the specific details of what was discussed, but he made some handwritten notes dated 9 May 2012 recording some matters discussed and a listing of 'information required' to be provided by him, as follows:

NICHOLAS DAY

Long meeting with Nicholas and lawyer

What they are presenting:

1. Ric held shares (directorships) of Shot One on behalf of Nic until his bankruptcy was terminated. Shareholding/directorship was then transferred to Nicholas.
2. Ric was holding shares (directorships) in Rising Rocket on behalf of Shot One Pty Ltd.

↓

Shot One has provided all of funding for property purchase and loan payments as well as any outgoings provided to it.

Information required

1. Details of movements in the loan accounts of Shot One Pty Ltd in each financial year with each of the following entities:
   • - Nic Day
   • - Ric Day
   • - Cooniemoon Pty Ltd
   • - Rising Rocket Pty Ltd.
2. Support for the amount of each 'management fee' levied by Cooniemoon Pty Ltd to Shot One Pty Ltd.
3. Ric has been withdrawing substantial moneys from Rising Rocket loan (highlighted on attached schedules).

Consider the implication of this on the loan account balances of Shot One Pty Ltd.

4. 2010 and 2011 financial statements.

TJ to meet with Nicholas at 9 am on Friday 18 May with all of the above information, which can then be provided to Sam once Nicholas approves it. Sam would prefer to receive the information earlier.

(signed) T Jasper

9/5/12

Can we see how much Ric paid for business of company initially?[180]

150 Under cross-examination, Mr Jasper read this note and, having refreshed his memory, agreed that at the meeting with Mr Marash and Nicholas Day he was specifically asked to provide information in respect of the loan accounts of, amongst others, Richard Day and Rising Rocket.

151 Shortly after the meeting on 9 May 2012, Mr Jasper prepared a written response setting out the information that Mr Marash and Mr Tomlinson had requested, which he sent to Mr Marash by email at 5:18 pm on 22 May 2012.[181] In his response, Mr Jasper stated that his firm had 'also revised the management accounts of Shot One Pty Ltd in respect of each financial year since it was established' and so '[t]he statutory accounts of Shot One Pty Ltd as at 30 June 2011' now show the loan account balance due from Rising Rocket as being '$565,808'.[182] However, the version of the financial statement of Shot One for the 30 June 2011 financial year that accompanied his response actually recorded the Rising Rocket loan as being $694,727.[183] For the financial year ending 30 June 2010, the Rising Rocket loan account is shown in the accompanying financial statement of Shot One as being $583,442.[184]

152 At or about the same time as Mr Jasper was working with Mr Marash and Mr Tomlinson in preparation for the mediation, Terrence Jasper & Associates was preparing the financial statements, statutory minutes and income tax returns for Shot One for the 2010 and 2011 financial years.

153 Under cover of a letter from the firm dated 10 May 2012, Mr Webster sent to Nicholas Day, as the director of Shot One, the financial statements, statutory minutes, income tax return and related documents prepared for Shot One for the year ending 30 June 2010.[185] In his letter, under the heading 'financial statements', Mr Webster adverted to the Nicholas Day loan account, and explained the position as follows:

Another issue to be addressed is your debit loan account with the company. These loans have arisen due to the company paying certain personal expenses on your behalf, and including the deposit paid and settlement monies relating to the property you acquired during the financial year.[186] We have reduced this loan account by the payment of fully franked dividends as explained above. Rather than have the total amounts of these loans, amounting to $2,086,848.68, treated entirely as assessable income to you (on which an estimated $970,384 of income tax would be payable), we have instead treated the net amounts as loans to you. This allows the loans to be repaid by you over the next few financial years, thereby deferring the payment of these income taxes, and potentially reducing the rate of tax that this income will be subject to.

In order to assist to ensure that this loan is not taxed as an unfranked dividend to you under Division 7A of the Income Tax Assessment Act, we have created three complying loans, two relating to your property and the other for the balance of the loan, as at the end of the financial year. The criteria for these loans is as follows:

• must not exceed seven years;
• the applicable interest rate must not be lower than the statutory rate; and
• must be repaid in equal monthly instalments
• must be subject to a written loan agreement

To this end, therefore, we have prepared and herewith enclose the following documentation in respect of each loan:

• amortisation schedule showing the required monthly repayments of each loan
• loan agreement
• minutes of a meeting of Director approving the loan

Please review the contents of each of these documents. ...[187]

154 The letter enclosed the final set of Shot One's financial statements prepared for the year ending 30 June 2010.[188] The detailed balance sheet (enclosed with the letter) records, under Current Assets, the extinguishment of the previous loans to 'Ric Day' and 'Nic Day', and under Non-Current Assets, a 'Receivable' in respect of Division 7A loans and a 'Loan to Rising Rocket' as follows:[189]

155 The letter from Terrence Jasper & Associates also enclosed loan agreements and minutes of meeting which were drafted so as to record the acceptance by Nicholas Day of his obligation to make repayment to Shot One of that amount of $2,087,000.[190] Mr Jasper confirmed that he provided those documents to Nicholas Day, in accordance with his instructions.

156 In the Ledger Entries Report for the financial year ended 30 June 2010 (printed on 10 May 2012), the journal entries pertaining to Account number 2116 'Loan - Ric Day' record that on 30 June 2010 journal entry number 30 effected a credit entry of $357,155.28, which reduced the loan account balance to zero, as follows:[191]

Ledger Entries Report for the year ending 30 June, 2010

Once again, Mr Jasper confirmed that those entries were made in accordance with the instructions he had received.

157 Mr Jasper gave evidence that the notes he prepared when reviewing the client file, which are then given to his staff to update the client file, were probably prepared on 9 May 2012, being the day before the accounts were printed.[192] Relevantly, his worksheet 'C50' records the following comments:

At worksheet C50:

A/C 2116 reallocate to a/c 2117

Dr 2117

Cr 2116.[193]

158 Shot One's Ledger Entries Report for the year ending 30 June 2010 (print-out also dated 10 May 2012) records the Rising Rocket/Nicholas Day transaction by the following entries. In the case of the Rising Rocket loan account no. 2540, entries were made as follows:[194]

Account number 2540 - Loan to Rising Rocket Pty Ltd

159 Relevantly, journal entry number 30 records a credit entry of $583,441.60 which reduces the Rising Rocket loan to zero, referencing worksheet 'C50'. However, as there does not appear to be any entry recorded on worksheet 'C50 in respect of that transaction', during cross-examination Mr Jasper was shown worksheet 'C53' where the following pertinent comment is recorded, apparently by Mr Webster:

At worksheet C53:[196]

Rising Rocket P/L / Rising Rocket Trust

...

The Trust info required

• Bank statements (if any) original was closed 27/5/09
• Loan statements CBA number 20 (a/c 374760709)
• Rental expenses
• Rental income

↓

TJ advised that this info will never be received ∴ put all related loan balances of RR to Nic's loan account.

160 Mr Jasper was unable to say precisely when that note was made by Mr Webster but he 'could only guess it was made at the time [they] were putting the accounts together.'[197] He confirmed that the transaction recorded under journal entry number 30 would have been done in discussion with the client.

161 Five journal entries later, by journal entry number 35 ('Reinstate loan balance C40') the loan balance of $583,441.60 was reinstated to the Rising Rocket loan account (number 2540). Mr Jasper's worksheet 'C40' records the following comments:

At worksheet C40:[198]

A/C 2540 suggest leaving debit balance of loan with Rising Rocket instead of transferring it to Nicholas's loan a/c balance

Reinstated a/c 2540 583,441.60

a/c 2117 (583,441.60)

162 Mr Jasper agreed that worksheet C40 was made after worksheet C50, because another comment made further down the same page refers to it. He was unsure precisely when the note was prepared, but he observed that the General Ledger was dated May 2012 and recalled that they were only given the accounts at that time and had very little time to prepare the financial statements, so he thought that the notes pertaining to the journal entries were made '[w]ithin days'.[199]

163 As noted in worksheet C40 above, counterpart entries concerning the loan balance of $583,441.60 were also required to be made to the Nicholas Day loan account number 2117[200] and these were recorded in Shot One's Ledger Entries Report as follows:[201]

164 As is apparent from the foregoing, a number of adjustments took place concerning the loan accounts, which were recorded by a series of journal entries made with effect on 30 June 2010. Journal entry number 30 records the following transactions:

(a) what was formerly the loan to 'Ric Day' of $357,155.28 was reallocated and debited to the loan account of 'Nic Day (C50)';

(b) what was formerly the loan to Rising Rocket of $583,441.60 was reallocated and debited to the loan account of 'Nic Day (C50)'.

In this way, both the 'Ric Day' loan account and the Rising Rocket loan account were effectively written off, and those sums were then re-allocated to the loan account of Nicholas Day.

165 Then, journal entry number 35 in turn records the following transactions:

(a) the sum of $583,441.60 was then credited to the loan account of 'Nic Day' (by way of 'Reinstate loan balance C40'); and

(b) the sum of $583,441.60 was then debited to the Rising Rocket loan account (by way of 'Reinstate loan balance C40') such that the loan balance for Rising Rocket was resurrected.

Mr Jasper confirmed that it is this resurrected loan balance that appears in the name of Rising Rocket in Shot One's financial statements for the financial year ended 30 June 2010.

166 As will be apparent, in this way, in the lead-up to the judicial mediation, the sum of $583,441.60 recorded in the Nicholas Day loan account was re-allocated to Rising Rocket, and the Rising Rocket loan account was effectively reinstated. Accordingly, as noted above, it was this final amount of $583,441.60 that was taken into the financial statements of Shot One for the financial year ended 30 June 2010 as a Non-Current Asset, Receivable, denoted as 'Loan to Rising Rocket Pty Ltd'. During re-examination of Mr Jasper, Senior Counsel for the plaintiffs re-visited the issue of the adjustments made to the Rising Rocket loan account and the Richard Day loan account in financial year 2010, and the following exchange ensued:

[MR GLICK:] Are these types of adjustments in discussion with management unusual?---Yes, it's unusual to write off a loan of that nature, yes.

The net of these adjustments in this case was just to bring it back to what it was before?---That's exactly right, yes.

So in that sense no harm was done?---In that sense that's correct.

My friend took you through a number of transactions whereby the Ric Day loan account with Shot One was written down to zero?---Yes.

It was allocated to Mr Nicholas Day?---Yes.

Why was that done that way?---I don't believe Nicholas Day thought it was recoverable, and I think a lot of it as well related to his transactions that were recorded in Ric's loan account; not all, but some.

When you say "his transactions" do you mean for his benefit?---For his benefit, yes.

Did you express any view as to whether it was or wasn't recoverable?---I didn't, no.[202]

167 The adjustment of the general ledger entries pertaining to the Rising Rocket loan account for the year ending 30 June 2010 (and the financial statements for the year ending 30 June 2011) took place without any consultation with Richard Day.

168 The defendants submit that the documentation produced by Terrence Jasper & Associates confirms that the adjustments to the loan accounts were undertaken by Mr Jasper, and that one might reasonably infer he did so either on the basis of instructions given by Nicholas Day or because it was Mr Jasper's professional opinion that it was necessary to do so. Thus the defendants challenge the reliability of the general ledger/MYOB management accounts, and thereby also the financial statements of Shot One, on the basis that they were effectively being manipulated by Mr Jasper. Further, they say that in circumstances where a director assumes the liability of a third party and takes it on for himself, as one might infer Nicholas Day did in respect of the Rising Rocket loan account, that conduct gives rise to a binding contract and discharges any liability that Rising Rocket might have had, and it is not a matter that is capable of being reversed by Nicholas Day unilaterally. Secondly, they say it should not pass unnoticed that the subsequent reversal appears to have occurred in the lead-up to the mediation, on the day after the meeting between Mr Jasper, Sam Marash and Nicholas Day at which the loan accounts were discussed with a view to Shot One re-pleading so as to allow it to pursue a claim against Richard Day and Rising Rocket based on the loan accounts. In those circumstances, the defendants submit that one might reasonably infer that the reversal was done for the purposes of promoting such a claim at the mediation.

169 The plaintiffs contend that the reversal of the transfer of the Rising Rocket loan account to Nicholas Day is in quite a different position to that which applied in the case of the transfer and re-allocation of the Richard Day loan account. It will be recalled that in closing oral submissions the plaintiffs informed the Court that because the Richard Day loan had been written off in its entirety, and was in any event statute-barred, they were no longer pursuing it. In the course of those submissions, Senior Counsel for the plaintiffs stated:

... My friend Mr Evans makes a valid submission when he says that the creditor, Shot One, of any loan account, if it existed insofar as Mr Richard Day is concerned, wrote that down to zero. I accept that you cannot willy-nilly then just resurrect it without the permission of the debtor. But, in any event, I cannot sustain an argument that it has been acknowledged after the limitation period. [203]

170 Later in closing submissions Senior Counsel for the plaintiffs sought to articulate or clarify the difference between the positions taken with respect to the two sets of loan accounts, stating:

... The difference that we draw between the Rising Rocket treatment in the journals and the Ric Day treatment is that one is reflected in the final accounts and one is not. That, we think, provides, in our respectful submission, a very simple answer to what our friend asserts. When Mr Jasper and Mr Nicholas Day are looking at the accounts and getting instructions, they do a number of entries into the accounts. You often find that. You find them in suspense journals; they go here, they go there, they go all over the place. What is important is they put it in, they took it out, they did this, they did that, but at the end of the day Ric Day's loan account was written off in the final accounts, but Rising Rocket's was not. So it is the case that they were tinkering with the accounts up and down but that's not a final determination. That is just preparing journals, seeing what the end result. The end result are the accounts that Mr Jasper sent across as the final accounts for Shot One showing the debt. ...[204]

171 The submission then made on behalf of the plaintiffs was to the effect that the process of making adjustments was deliberative but not determinative, such that in the case of Rising Rocket the allocation and re-allocation (or reinstatement) of the loan account was tentative, because '[n]o determination is made, no decision is made until you file your final accounts.'[205] In the case of the Richard Day loan account, however, the plaintiffs submitted that 'the final accounts eradicated the debt', whereas in the case of Rising Rocket, '[t]he final published accounts of Shot One sustain, effect the liability'.[206] In other words, Senior Counsel for the plaintiffs said the fundamental point is that, in the case of Rising Rocket, 'these journal entries are just that; they're not the final accounts, unlike Mr Richard Day.'[207]

Shot One's financial statements for 2010 record the financial liability of Shot One to Cooniemoon

172 For the purposes of considering the commerciality of the Deed of Settlement, it is also relevant to note that in the financial statements of Shot One for the financial year ended 30 June 2010, the balance sheet prepared as at 30 June 2010 records a financial liability of Shot One to Cooniemoon in the sum of $91,071.[208] Under cross-examination, Mr Jasper confirmed that in preparing the balance sheet, based on his instructions, he had concluded that Shot One had such a liability to Cooniemoon.[209]

173 By a further letter dated 10 May 2012, Mr Webster of Terrence Jasper & Associates wrote to Nicholas Day as Director and enclosed documents relating to Shot One for the financial year ending 30 June 2011, being the financial statements,[210] statutory minutes and income tax return.[211] Documents enclosed within that package indicate that the letter was not actually dispatched until at least 17 May 2012. In the covering letter, in reference to the financial statements, Mr Webster stated:

In preparing the enclosed accounts, we have recorded the payment to you of a fully franked dividend, to the extent of the remaining amount in the company's franking account, as well as Directors fees, to the extent required to cover the net amount withdrawn by or paid on your behalf by the company during the financial year, together with the required payments under each loan made to you by the company in the previous financial year. This ensures that there is no Division 7A loan problem in respect of the financial year.[212]

174 During cross-examination, when Mr Jasper was taken to the financial statements of Shot One for the financial year ending 30 June 2011, he confirmed that under 'Non-Current Assets' there is no debt which is owed by Richard Day to Shot One that is recorded as a 'Receivable'.[213] Mr Jasper was then taken to the Ledger Entries Report for Shot One for the financial year ending 30 June 2011, which was printed on 17 May 2012 (i.e., after the date of the covering letter), and to the journal entries for the loan to Rising Rocket in particular, which recorded the following transactions:[214]

Account number 2540 - Loan to Rising Rocket Pty Ltd

Reallocate to Nic's a/c (C53 10[216])

Reinstate loan balance C70[217]

175 Mr Jasper accepted that the Ledger Entries report shows there was a reallocation and extinction of Rising Rocket's debt in the books of Shot One, that must have occurred before the print date of the document of 17 May 2012 which was later reinstated. The net balance of $694,727.02[218] corresponds with the receivable 'Loan to Rising Rocket' recorded in the Detailed Balance Sheet for Shot One as at 30 June 2011.[219] The financial liabilities of Shot One shown in that balance sheet include 'Loan - Cooniemoon Pty Ltd' in the sum of $71,071.[220] Mr Jasper confirmed that that accorded with the instructions he had been given by Nicholas Day. The income tax return of Shot One for the financial year ending 30 June 2011 reports the sum of 'All current liabilities' of Shot One as being $1,262,510, which includes the 'Loan - Cooniemoon Pty Ltd' in the sum of $71,071.[221]

176 There is in evidence another version of the financial statements for Shot One for the year ending 30 June 2011.[222] These adjusted financial statements (which are endorsed with the handwritten note 'as per TJ adjustments (see A50)' and bear a 'Post-It Fax Note' stating that these financial statements were the 'Correct Financial Statement') were faxed through to Mr Marash by Mr Jasper at 12.42 pm on 23 May 2012, apparently whilst the mediation was underway. Senior Counsel for the defendants observed that this correspondence shows that 'they were still tinkering around with the financial statements during the mediation itself.'[223] Relevantly the amended detailed balance sheet contained in the adjusted financial statements recorded an increase in the non-current assets of Shot One (from $2,558,846 to $2,683,872) by the insertion of a new receivable being 'Loan to Ric Day' of $162,944 and by the reduction of the quantum of the loan to Rising Rocket to $656,809 (from $694,727), as follows:[224]

Shot One's financial statements for 2011 record the financial liability of Shot One to Cooniemoon

177 In that detailed balance sheet, the financial liabilities of Shot One continue to include an item denoted as 'Loan - Cooniemoon Pty Ltd' in the sum of $71,071.[225] Senior Counsel for the defendant referred to this version of the financial statements, as evidencing that 'there is a clear debt identified to Cooniemoon of $71,071 in those accounts'.[226]

Evidence given concerning Rising Rocket's accounts and records

178 Mr Jasper gave evidence that the accounts of Rising Rocket show that all of the funding that Rising Rocket received from Shot One was recorded as a loan.[227] It seems clear, however, that Mr Jasper was mistaken in this regard because the evidence before the Court showed that no accounts of Rising Rocket were prepared for any year other than the financial year ended 30 June 2009.[228] Mr Jasper also prepared a tax return for the Rising Rocket Trust for those 2009 accounts, but this tax return was signed off by Nicholas Day,[229] despite him having no authority to do so. In the circumstances, the defendants submit that the Court should disregard that evidence as being patently incorrect, and I propose to do so.

179 During cross-examination, Mr Jasper was also shown copies of the income tax returns prepared by the firm for the Rising Rocket Trust for each of the financial years ended 30 June 2005,[230] 2006,[231] 2007[232] and 2008.[233] In each case, the return recorded 'gross rent' received and interest and other rental deductions, producing a net loss for the year in respect of rent.[234] Under the 'Key financial information' section of each return, no key financial information was recorded in the listing of 'All current assets', 'Total assets', 'All current liabilities' or 'Total liabilities' or under 'Proprietors' funds'.[235] In other words, there was no loan account with Shot One that was recorded as a liability of Rising Rocket, but nor was the Rockley Road property shown as an asset. Mr Jasper accepted that, in the case of the 2005, 2006, 2007 and 2008 financial years, his firm only provided the relevant income tax return for the Rising Rocket Trust to Richard Day in or after April 2009.

180 Mr Yeo gave evidence both by witness statement and viva voce, and then he was cross-examined.[236]

181 Once appointed as the liquidator of Shot One on 9 November 2012, Mr Yeo and his staff attended at Shot One's premises and collected physical records such as bank statements, financial accounts, and architectural contracts etc. He said they also took a 'mirror image' of the central computer used in the business. A few days later they obtained additional financial records from Mr Jasper, which included the MYOB records used for preparing the statutory accounts for the company.

182 In preparation for the trial, Mr Yeo and his staff had reviewed the source documentation recording the relevant financial interactions between Shot One, Richard Day and Rising Rocket and prepared a 'Master Schedule' (Exhibit P1) in which he traced transactions through bank accounts and credit cards etc and then grouped them by denoting the relevant transactions in coloured blocks and referencing relevant pages of the Court Book. But, as Mr Yeo explained, the 'Master Schedule' was prepared in readiness for a trial where the real issue was to be 'a property debate' concerning ownership of the Rockley Road property,[237] rather than for the trial that actually took place concerning the loan accounts.

183 Working from his 'Master Schedule' of relevant transactions relating to the financial interactions between Shot One, Richard Day and Rising Rocket, Mr Yeo caused to be created a colour-coded schedule of all transactions relating to Shot One and Rising Rocket in relation to the Rockley Road property ('Property Schedule', Exhibit P1.2). The Property Schedule contained two columns which were of particular relevance to Shot One's claims against Rising Rocket:

(a) The third column from the left of the Property Schedule spreadsheet, titled 'Schedule B', identified transactions that Mr Yeo and his team had identified as "mak[ing] up the [Rising Rocket] loan account".[238] As at the date of Mr Yeo's appointment as Shot One's liquidator on 9 November 2012, the transactions identified by Mr Yeo's analysis totalled the sum of $1,189,590.39.[239]

(b) The second column from the left of the Property Schedule spreadsheet, titled 'Property Contribution' identified a further subset of those transactions that Mr Yeo and his team asserted could be "traced into the Rockley Road Property".[240] Mr Yeo indicated that, according to his analysis, as at the date of his appointment as Shot One's liquidator on 9 November 2012, that the value of the transactions that could be traced into the Rockley Road Property was $1,077,792.05.[241]

184 In his reply witness statement, Mr Yeo allocated each of the transactions forming part of the $1,189,590.39 identified in the column titled "Schedule B" into ten separate categories as follows:[242]

Category A [SO to RRHL (RLD)]: funds transferred directly from the Shot One account to Rising Rocket's Investment Home Loan account (secured by the Rockley Road property) ('RRHL') (while Richard Day was sole director)

Category B [SO to RRHL (ND)]: funds transferred directly from the Shot One account to the RRHL (while Nicholas Day was sole director)

Category F [SO to Property Expense]: payment made on 31 May 2006 from the Shot One account to pay a Rockley Road property expense (to State Revenue Office for land tax)

Category J [SO to RRCB]: funds transferred directly from the Shot One account to Rising Rocket's cheque account ('RRCB')

Category K [SO to RLD/RLDMC to RRCB] : funds transferred from the Shot One account to either Richard Day's cash management account ('RLD') or his Mastercard ('RLDMC') which were then transferred to the RRCB

Category L [SO to CM to RRCB]: payments made from the Shot One account to Cooniemoon pursuant to invoice, and subsequently paid into RRCB (with a description of being received from Cooniemoon)

Category M [SO to Licence Fee]: payment made on 20 July 2004 from the Shot One account receipted to an unknown account, in payment of a licence fee for the Rockley Road property

Category N [Redraws from RRHL to SO]: funds received into the Shot One account as re-draws from the RRHL

Category O [Redraws from RRHL to RR to SO] : payment received on 13 February 2009 into the Shot One account from the RRCB, after its receipt of those funds as a re-draw from the RRHL

Category P [RRCB to SO] : payment received on 7 September 2007 into the Shot One account from the RRCB

185 Similarly, in his reply witness statement, Mr Yeo allocated each of the transactions forming part of the $1,077,792.05 identified in the column titled "Property Contribution" into eleven separate categories of transaction:[243]

Category A [SO to RRHL (RLD)]: funds transferred directly from the Shot One account to the RRHL (while Richard Day was sole director)

Category B [SO to RRHL (ND)]: funds transferred directly from the Shot One account to the RRHL (while Nicholas Day was sole director)

Category C [SO to RRCB to RRHL]: funds received into the RRHL indirectly from the Shot One account by payment first into the RRCB and then transferred to the RRHL (also listed at Category J)

Category D [SO to CM to RRCB to RRHL] : funds received into the RRHL indirectly from the Shot One account by payment first to Cooniemoon of Cooniemoon invoices; Cooniemoon then invoiced Shot One, which made payment from the Shot One account. Payments are then receipted into the RRCB with a narration indicating payments were received from Cooniemoon

Category E [SO to RLD to RRCB to RRHL]: payment of $8,000 received on 8 August 2007 and $7,400.00 received on 6 February 2008 into the RRHL indirectly from Shot One payments to Richard Day. Shot One transferred funds from the Shot One account to the RLD account, which then funded the transfers to the RRCB (also listed at Category K) which then funded further payments into the RRHL

Category F [SO to Property Expense]: payment made on 31 May 2006 from the Shot One account to pay a Rockley Road property expense (to State Revenue Office for land tax)

Category G [SO to RRCB to Property Expense]: funds that were transferred from the Shot One account to the RRCB account, which then funded payments of the Rockley Road property expenses (such as settlement fees, body corporate fees, land tax and stamp duty)

Category H [SO to CM to RRCB to Property Expense]: payment of $559.25 funded from the Shot One account to Cooniemoon as invoiced, which was subsequently transferred to the RRCB. Rising Rocket then made a payment to a Rockley Road property expenses (body corporate fee)

Category I [SO to RLD to RRCB to Property Expense]: payment of $511.00 funded from the Shot One account indirectly to the payment of Rockley Road property expenses. The funds were paid from the Shot One account to the RLD account, then to the RRCB and then paid to a Rockley Road property expense (council rates)

Category N [Redraws from RRHL to SO]: funds received into the Shot One account as re-draws from the RRHL

Category O [Redraws from RRHL to RRCB to SO]: payment received on 13 February 2009 into the Shot One account from the RRCB, after its receipt of those funds as a re-draw from the RRHL

186 Mr Yeo, with assistance from his staff and in consultation with the legal representatives, also prepared a summary of the alleged rental income of Rising Rocket against the transactions in 'Schedule B' allocated to financial year periods, as follows:[244]

Gross Rent Amount ($) (as per Rental Agreement)

Running Balance of Schedule B Payments in excess of Declared Rental Income ($)

187 Mr Yeo gave evidence that in the rental income table:

(a) the 'Gross Rent Amount' column figures were calculated from the original Rental Agreement which commenced on 1 December 2004 of $3,683.33 per month for a period of 24 months,[245] and in the absence of any more recent rental agreement the same monthly rental figure has been applied, without change, through to October 2012;

(b) the 'Declared Rental Income' column has been calculated from the information declared in Rising Rocket's income tax returns for the financial years ending 30 June 2005 through to 2011, and as no returns have been provided for the period thereafter, he has estimated the rental amounts based on the previous year's rental;[246] and

(c) the 'Schedule B payments' column allocates the annual net amount of payments disclosed in Schedule B of the Second Further Amended Statement of Claim for each financial year matching each period of the alleged rental liability.[247]

188 As will be apparent, with the significant refinement of the plaintiffs' pleaded case during the course of the trial, from what was essentially a 'money had and received claim' concerning the Rockley Road property to one where the plaintiffs, in closing submissions, relied solely upon the forgiveness of the loan account claims against Rising Rocket as evidencing the alleged uncommercial nature of the Deed of Settlement transaction, much of the evidence that Mr Yeo gave about his review of the source documentation for the purposes of their money had and received claim was no longer relevant. In the case of the rental payments, his evidence was largely an exercise in estimation and re-construction, based upon a 'hindsight' examination of documentation but without having consulted Mr Grano, who prepared Shot One's MYOB records until February 2009. Further, in undertaking that exercise, Mr Yeo relied upon information contained in the Rising Rocket Trust's income tax returns as confirming views he formed, but those returns were later shown at trial to have been prepared by Mr Jasper in or after April 2009 and, in the case of the trust's tax return of the 2009 financial year, was signed off by Nicholas Day in circumstances where he lacked any authority to do so.

189 One of the documents that Mr Yeo had prepared for the assistance of the Court, using the information contained in Shot One's records and that provided by Rising Rocket and Richard Day on discovery, was a summary of the payments made by Shot One which were allocated to a loan account in the name of either Rising Rocket or Richard Day as the debtor. Mr Yeo said there was no deed of loan or any kind of loan agreement available for either loan account, but he added that in the 25 years he has been doing insolvency work, it is 'very unusual to come across a situation where there is a loan agreement to make life easy for you'.[248] He explained that, in preparing the summary, the starting point was to look at how Shot One recorded and treated those payments, which in each case was as a loan. He said:

---The starting point, Your Honour, very simply is how the company has treated those payments. The company being Shot One has recorded those payments as loans. . . . The starting point is we have gone off the Shot One books and records, both MYOB and financial accounts which disclose the loan. Not at the time I did the schedule, but since that time more recently we have also had the benefit of the financial accounts of Rising Rocket which equally show the other side of the loan, if that makes sense. . . . [249]

He added that in some cases he had also had the benefit of other third party or external documents, such as an invoice for land tax or the like that vouches for the payment made.

190 In calculating the quantum of the loan accounts at relevant times, Mr Yeo also had occasion to make adjustments to the books and records of Shot One. He explained that where the accounting records of Shot One disclosed an amount as a loan, his team did not necessarily accept the calculations and numbers within those amounts; rather they interrogated the transaction by looking at the records for both sides, and checked whether they had been entered correctly in calculating the quantum of the loan accounts. He said their analysis revealed that a number of payments had been missed or 'misallocated' in the compilation of the loan accounts, thereby demonstrating some 'very clear' errors:

[MR YEO:] Those errors, if I can put them that way, run both ways, so there are amounts which are included in the Shot One to Rising Rocket loan account in the MYOB accounts which shouldn't be there, there's about four transactions that shouldn't be there, and there's quite a number of transactions that have been, I will just say, missed. I don't know whether they were missed or misallocated or whatever the case may be, but they are not included. We have prepared a schedule for Your Honour to assist you with all of the MYOB transactions and analysing the difference between MYOB and our detailed reconciliations based on those source documents.[250]

191 One of the documents Mr Yeo prepared as part of the liquidator's analysis of the alleged loan account transactions was headed 'Nicholas Day Architects, Shot One, General Ledger [Detail] 1/07/2004 to 3/02/2017'. He said that this document, which was tendered as Exhibit P2.1, seeks to explain the differences between what the MYOB accounts of Shot One record and what the liquidator's full reconciliation back to the source documents picked up, and it assists to explain why the liquidator has arrived at a different figure for the loan accounts, as against the figures recorded in the MYOB accounts. Exhibit P2.1 shades each transaction with a particular colour, depending on whether the amount in question has been picked up in both the MYOB accounts and in the liquidator's reconciliation (in which case it is shaded in green), or where the amount has been picked up in the liquidator's reconciliation but was not picked up in the MYOB accounts, it is shaded in yellow. Mr Yeo said that red shading has been used to indicate cases where the MYOB records include the payment in the Rising Rocket loan account but the liquidator has, after analysing the source documents, formed the view that the payment should not have been included.

192 He also prepared another (black and white) version of the document, headed 'General Ledger [Detail] 1/07/2004 to 23/05/2012', which shows the MYOB accounts of Shot One as they stood before the yellow shaded transactions were added in and the red shaded transactions were removed. This was tendered as Exhibit P2.2.

193 A further document prepared by Mr Yeo, headed 'Schedule C SO-RD Amount' was tendered as Exhibit P2.3. Mr Yeo explained that a similar process was undertaken by his staff in examining Shot One's banking records, MYOB records and in some instances Richard Day's Mastercard statements to identify payments made between Shot One and Richard Day with the dates, amounts and method of transfer etc. noted in chronological order to arrive at a running balance of $1,082,446.94. He said that Exhibit P2.3 incorporates any payments that were shaded in red and noted as Richard Day transactions on Exhibit P2.1 pertaining to the Rising Rocket loan account.

194 Mr Yeo accepted, under cross-examination, that he had never spoken with Mr Grano, the bookkeeper who made the entries in Shot One's MYOB records up to 31 January 2009.[251] The cross-examination then continued:

[MR EVANS:] I will ask you this question based on your knowledge. The entries from 9 July 2009 until 5 November 2012, I think your evidence just then was that those were made by Mr Jasper or presumably his employees?---Yes, again I don't know. Mr Jasper will no doubt answer the question, Your Honour, as to who actually performed them. But I think that's the period in which Mr Jasper was - I wouldn't use the word "in control" - but providing the accounting function.

In preparing the general ledger which is exhibit P2.1, you have relied essentially entirely on documentary analysis; is that right?---Yes, it was based on the MYOB accounts and then the bank statements of Shot One and of Rising Rocket and some other - - -

I should say it doesn't make any allowance for journal adjustments of the kind that might be made when financial statements are prepared for Shot One Pty Ltd?---2.1, you mean?

Yes?---No, I don't believe - I believe this is going to be simply the payments, the actual transactions.

Of course, you would accept that the management accounts, which is what MYOB documents form part of, the management accounts of a company may be the subject of journal adjustments made by the accountant who is engaged to prepare financial statements based upon the management accounts?---Yes, they are from time to time.

And P2.1 doesn't take into account any such adjustments?---I don't believe so. I think they are all actual transactions.

And because it is documentary, it doesn't take into account any instructions that might be given by any person in respect to at the time the transactions occurred as to the appropriate characterisation of the transactions which are recorded in exhibit P2.1?---It would if there was something in the records of Shot One to indicate that. But if there was a verbal discussion that doesn't find its way into the records, then, no, I wouldn't obviously know that.

But of course in some cases - and I will come to this in a bit more detail - in some cases in preparing this general ledger you have already indicated that, particularly I think in respect of the red and yellow entries, you have undertaken the task of re-characterising entries that actually appear in the MYOB?---There are some clear errors, correct, yes.

Sorry, just answer my question, please?---Yes, I have re-characterised - - -

You have re-characterised those?---Correct.

And you have perhaps then inferred in the process of characterisation that there are errors in the MYOB?---Yes.

Have you sought to clarify the existence of those errors with any person involved in the preparation of that MYOB?---Not that I'm aware of. I could find out the answer to that as to whether one of my staff had discussions with Mr Jasper regarding that schedule, but certainly not that I've had and I could find out the answer to the second part, if you like.[252]

195 Senior Counsel for the defendants then referred Mr Yeo to the first entry made on the Shot One General Ledger Exhibit P2.1, being a payment of $30,000 made on 20 July 2004, which he had shaded in yellow thereby denoting it as an entry that should be allocated to the Rising Rocket loan account, instead of the Richard Day loan account as per Shot One's MYOB records. Mr Yeo agreed that he had sought to re-characterise the entry made in the MYOB records as incorrect on the basis that it ought to have been recorded in the Rising Rocket loan account.[253] However, when taken to Exhibit P2.3, which is the Richard Day loan account schedule, Mr Yeo agreed that there was also an entry made there for 20 July 2004 recording that the sum of $30,000 had also been claimed against the Richard Day loan account.[254]

196 The evidence was that the sum of $30,000 related to a licence agreement made between the vendor of the Rockley Road property, N Kenos & Sons Pty Ltd, and Rising Rocket, permitting occupancy of the Rockley Road property in advance of completion of the sale to Rising Rocket. Mr Yeo said that they had 'allocated it based on the licence agreement' and they had 'gone to the actual document that we had in our possession and allocated it based on that actual written document.'[255] He then went on to clarify that he believed the correct characterisation was that the $30,000 should be allocated as a loan to Rising Rocket. Mr Yeo was taken to a number of other instances in his documentation where it appeared that errors were made in the process of re-characterisation, and resulting in what appeared to be a 'doubling-up' of amounts claimed. He confirmed that where errors were made, the plaintiffs were not seeking to recover the same sum twice, that is from both Richard Day and Rising Rocket.

197 During cross-examination, Mr Yeo also explained the way in which he had re-characterised transactions where the flow of funds was from say, Shot One to Richard Day and then from Richard Day to Rising Rocket - which represented the payments recorded under his Category K. In Mr Yeo's professional opinion, such payments were best treated in the books of Shot One as a loan by Shot One to Rising Rocket, rather than a payment made to Richard Day. When asked why that was so, the following exchange ensued, in which Mr Yeo acknowledged the difficulty of the task he was undertaking:

[MR EVANS:] . . . Why is it that you say that, rather than that they should be characterised as payments, either as loans or payments or other payments to Richard Day who was the recipient of the fund?---That's a fair question. I can perceive - look, in all honesty I can perceive an argument either way as to those payments. It just doesn't sit well with me - I mean, the narration to start with is a Cooniemoon invoice. I should go back a step. Your Honour, what I'm trying to do here is reconstruct accounts that someone else has prepared. So there is a lot of potentially loose language, narrations. So, for instance, on that one payment, that $15,000 payment at line 151, for instance, it says "Cooniemoon invoice $15,815", but the payment is into Ric Day's account. There is then a payment out of the Ric Day account to Rising Rocket, and Rising Rocket pays the mortgage. All I can say to Your Honour is I've treated it as if that is a way of getting the money from Shot One to the Rising Rocket home loan. I hear what Mr Evans says. I've treated it as a loan between the two parties. I understand between categories K and L there is that uncertainty. I can't, particularly when I'm trying to extrapolate someone else's records, I think that is the appropriate treatment, but I accept for categories K and L it does bounce through a separate account and I've specifically identified that in my witness statement. To answer Mr Evans' question, I think having regard to the way in which it moved and often the very close proximity of the ongoing payment that then goes into the Rising Rocket account and mortgage, I think that's been persuasive in my determination.[256]

198 Having reviewed the source documentation pertaining to the transactions between Shot One and Rising Rocket, Mr Yeo and his staff also sought to identify the net payments made directly between Shot One and Rising Rocket and other net expenses paid directly by Shot One on behalf of Rising Rocket for the period 1 July 2004 to the date of liquidation on 9 November 2012.[257] The plaintiffs contend that the significance of the source documentation is that 'they enable the identification of net direct payments in the sum of $759,606.04 during the six year period prior to the Deed of Settlement.'[258] And if those direct net payments are then adjusted by the amounts recorded in Shot One's Ledger Entries Report for the year ending 30 June 2009 of $325,508.43[259], it produces the figure of $434,097.61, which the plaintiffs submit 'reconciles very closely to the loan amount of $433,961 recorded in the MYOB accounts'.[260] As noted earlier, the plaintiffs contend that the figure of $433,961 (arrived at by subtracting from the balance of the Rising Rocket loan on 23 May 2012 of $751,961, the balance of the loan as at 23 May 2006 of $318,000) is the minimum value of the Rising Rocket loan released by Shot One pursuant to the Deed of Settlement.

199 In the final outcome, for the reasons noted above, I have difficulty in attaching any probative weight to Mr Yeo's evidence, and have not found it to be of any real assistance in resolving the issues that remain for the Court to decide.

200 Against that factual background, and taking into account the several matters that the plaintiffs no longer contest, the parties are agreed that there are two broad issues that the Court must determine when assessing the claims made by the plaintiffs in this proceeding. The first broad issue involves an 'evaluative phase', where the Court must evaluate the merits of Shot One's loan account claims against Rising Rocket as they stood at 23 May 2012, for the purposes of determining whether the Deed of Settlement constitutes a 'voidable transaction'. In the evaluative phase, Issues 3 and 4 (as set out in the parties' Second Agreed List of Principal Issues (amended on 9 March 2017)) relate to the value of Shot One's claims against Rising Rocket as at 23 May 2012 and Issues 5 and 8 relate to the application of that evaluation to the legal requirements of s 588FB. If the transaction is found to be one that is 'uncommercial', Issue 9 concerns the defence available under s 588FG(2), and Issue 10 addresses the remedies available under s 588FF of the Corporations Act.

201 The second broad issue, which arises if and only if the Court finds that the Deed of Settlement does constitute a 'voidable transaction' that should be set aside, involves a 'determinative phase' and requires the Court to determine the extent to which Shot One has established its loan account claims against Rising Rocket in the 2014 proceeding. Issues 11 and 12 concern the 'determinative phase'.

The 'evaluative phase': whether the Deed of Settlement constituted an 'uncommercial transaction' (Issues 3, 4, 5, and 8)

202 Under the scheme established by Division 2 of Part 5.7B of the Corporations Act, 'transactions' which a company became a party to in a specified period preceding the commencement of its winding up, or the 'relation-back day' in relation to its winding up, are classified and delineated into particular types or classes - such as 'uncommercial transactions' (s 588FB), 'insolvent transactions' (s 588FC) and 'unreasonable director-related transactions' (s 588FDA)[261] - in order to decide whether the transaction is one that is 'voidable' within the meaning of s 588FE. A transaction of one or other of these types will be treated as a 'voidable transaction' pursuant to s 588FE if it has 'in addition to the characteristics bringing it within the particular class, characteristics described in s 588FE itself.'[262]

203 The expression 'voidable transaction' is not defined in the Act. As Barrett J explained in Edenden v Bignell, 'voidable transaction' is merely a statutory label relevant to the working of the voidable transactions provisions and does not give rise to contractual remedies under the general law.[263] Rather, the position is that where a company's liquidator makes application for relief under s 588FF, if the court is satisfied that a transaction is a 'voidable transaction' because the criteria specified in s 588FE are met, the court is empowered to make a wide range of orders including an order declaring an agreement constituting or forming part of the transaction to have been void (s 588FF(1)(h)) or declaring an agreement or a provision of an agreement to be unenforceable (s 588FF(1)(j)).

204 In the present case, the plaintiffs focus on the Deed of Settlement that was entered into on 23 May 2012, contending that it was an 'uncommercial transaction' of Shot One, and thus relevantly a 'voidable transaction'.

205 Before turning to consider the 'evaluative phase' issues identified by the parties, it is convenient to say a little more about the statutory framework and outline the approach the courts have adopted when assessing whether a transaction is an 'uncommercial transaction'.

Legislative background to the introduction of the 'voidable transactions' provisions

206 Division 2 of Part 5.7B of the Corporations Act empowers liquidators to challenge transactions involving insolvent companies, by applying to a court to set them aside. The provisions set out in Division 2 were introduced into the Corporations Act as a result of recommendations made by the Australian Law Reform Commission following its review of the law of insolvency conducted in 1988.[264] In its report,[265] the Commission identified a number of deficiencies in the scope of s 120(1) of the Bankruptcy Act 1966 (Cth), which operate to render void as against a trustee in bankruptcy a 'settlement of property' made in the period of two years prior to the commencement of the settlor's bankruptcy. Among other things, the Commission noted that s 120(1) was interpreted as relating only to transactions where the transfer of property was 'coupled with the intention that the transferee retain or preserve the property subject to the transfer', meaning that some transactions with the effect of diminishing the pool of available assets of an insolvent company could not be reviewed by liquidators. In light of these limitations, the Commission proposed that s 120(1) be replaced with a new provision that allowed for 'transactions that occurred at an undervalue' to be avoided by the liquidator. If approached in this way, the Commission noted that the 'emphasis should be on the element of undervalue - not the method by which the property has been disposed of' and that 'the depletion in value of the property of the insolvent' should be the focus of the provision.[266]

207 The Commission's recommendations ultimately provided the impetus for the Corporate Law Reform Act 1992 (Cth) (the 'CLRA') which introduced the voidable transactions regime into the Corporations Act and expanded the scope of liquidators' power to avoid transactions entered into by insolvent companies. Under the new CLRA regime, liquidators could apply for a variety of remedial orders in respect of certain types of dealings involving insolvent companies, including transactions that could be 'characterised as unfair preferences, uncommercial transactions (transactions at an under-value) and unfair loans (where the rate of interest or credit charge is extortionate)'.[267] But as Sofronoff P observed in Featherstone v Ashala Model Agency Pty Ltd (in liq)[268] while the provisions as they were enacted in the CLRA were directed at the types of transaction that the Commission's report had recommended, 'the legislation differed materially from the recommended draft.'[269] In the case of the provisions concerning 'uncommercial transactions', his Honour said:

[62] However, rather than providing for "transactions at an undervalue" as recommended by the Harman Report, the Act provided in s 588FB for a new species of voidable transaction termed "uncommercial transactions". Transactions of this kind were not defined by reference to the presence or absence of valuable consideration but by reference to whether a 'reasonable person in the company's circumstances would not have entered into the transaction" having regard to four matters. These factors were the benefits to the company, the detriments to the company, the benefits to other parties to the transaction and "any other relevant matter". The 'reasonable person' test and its accompanying relevant matters widened the scope of operation beyond that which would be encompassed by a provision based merely upon the concept of undervalue.

[63] Neither of these two sets of provisions required proof of moral turpitude upon anyone's part. They merely required a liquidator to prove facts that satisfied objective criteria, one of which involved the familiar legal yardstick of the reasonable person.[270]

208 Section 588FE(3) of the Corporations Act provides that:[271]

The transaction is voidable if:

(a) it is an insolvent transaction, and also an uncommercial transaction, of the company; and

(b) it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation-back day.[272]

209 Section 588FB defines what is an 'uncommercial transaction' as follows:

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:

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

the detriment to the company of entering into the transaction; and

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

A transaction may be an uncommercial transaction of a company because of subsection (1):

whether or not a creditor of the company is a party to the transaction; and

even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

210 The meanings of some of the terms used in s 588FB are addressed in the dictionary contained in s 9 of the Corporations Act, relevantly as follows:

means any benefit, whether by way of payment of cash or otherwise; and

when used in Division 2 of Part 2D.2 (sections 200 to 200J) - has the meaning given by section 200AB.

transaction, in Part 5.7B, in relation to a body corporate or Part 5.7 body, means a transaction to which the body is a party, for example (but without limitation):

a conveyance, transfer or other disposition by the body of property of the body; and

a security interest granted by the body in its property (including a security interest in the body's PPSA retention of title property); and

and includes such a transaction that has been completed or given effect to, or that has terminated.

211 No meaning of the term 'detriment' is provided in s 9. However, it is generally accepted that, for the purposes of Part 5.7B, the word refers to 'commercial detriment' but is not limited to a detriment that can necessarily be measured in money terms.[273]

212 It will be noted that, in line with the Commission's recommendations, s 588FB focuses on substantive aspects of the relevant 'transaction', and in particular its commerciality. In explaining what renders a transaction 'uncommercial', the Explanatory Memorandum accompanying the Corporate Law Reform Bill 1992 (Cth) emphasised that:

The tests under proposed section 588FB for whether a transaction is uncommercial relies on the phrase 'if... it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction'. The provision is specifically aimed at preventing companies disposing of assets or other resources through transactions which resulted in the recipient receiving a gift or obtaining a bargain of such magnitude that it could not be explained by normal commercial practice. Where consideration is given by the other party to the transaction but the consideration is nominal or trivial or lacks 'a commercial quality' then, provided it occurs within the time period set out in proposed section 588FE, the liquidator may apply to a court to have the transaction set aside or another order made under proposed section 588FF so that the body of unsecured creditors is not prejudiced by this transaction.[274]

213 Despite that statement of purpose, the legislation itself provides little in the way of guidance as to what makes a particular transaction 'uncommercial' in the relevant sense. Sub-sections 588FB(1)(a)-(c) require the court to have regard to the 'benefits' and 'detriments' associated with the transaction, and the parties involved in the transaction, implying that assessing the commerciality of the transaction involves examining the balance of benefits and detriments accruing to different parties as a result of the transaction. However, as s 588FB(1)(d) then goes on to require that the court must also consider 'any other relevant matter', the scope of the inquiry to be undertaken is expanded, such that the court is required to consider any 'other matters' pertaining to the transaction that could relevantly affect its commerciality.

Case law concerning setting aside 'uncommercial transactions'

214 Since the introduction of Division 2 of Part 5.7B in 1992, there have been a large number of cases concerning applications to set aside 'uncommercial transactions' involving insolvent companies. In the leading case of Capital Finance Australia Ltd and v Tolcher, Gordon J summarised the applicable principles as follows:

(1) as the express words of s 588FB make clear, it is an objective standard to determine if a transaction is uncommercial: see also Lewis (as liquidator of Doran Constructions Pty Ltd (in liq)) v Doran (2005) 219 ALR 555; 54 ACSR 410; [2005] NSWCA 243 at [156] and Tosich Construction Pty Ltd (in liq) v Tosich [1997] FCA 979; (1997) 78 FCR 363 at 366-7;

(2) four criteria are to be considered - the benefits enjoyed by the company (s 588FB(1)(a)), the detriment to the company (s 588FB(1)(b)), the respective benefits others received (s 588FB(1)(c)) and any other relevant matters (s 588FB(1)(d));

(3) the objective criteria are not considered in some vacuum but by reference to "the company's circumstances" which must include the state of knowledge of those who were the directing mind of the company, such as its controlling director or directors: (Tosich Construction at 367); and

(4) for a transaction to be "uncommercial" it must result in "the recipient receiving a gift or obtaining a bargain of such magnitude that it [cannot] be explained by normal commercial practice" or where "the consideration ... lacks a 'commercial quality'": see Peter Pan Management Pty Ltd v Capital Finance Corp (Aust) Pty Ltd (2001) 19 ACLC 1392 ; [2001] VSC 227 at [43]; Lewis v Cook (2000) 18 ACLC 490; [2000] NSWSC 191 at [45]-[46] and Demondrille Nominees Pty Ltd v Shirlaw [1997] FCA 1220; (1997) 25 ACSR 535 at 548 and the explanatory memorandum, Corporate Law Reform Bill 1992, para [1044].[275]

215 In addition to these principles, courts have recognised that:

(1) Section 588FB must be construed in a manner that would promote the purpose of the underlying law.[276] The purpose or object of s 588FB is to prevent a depletion of the assets of a company which is being wound up by, relevantly, avoiding 'transactions at an under-value' entered into within a specified time period prior to the commencement of winding up.[277]

(2) The court must view the transaction prospectively 'according to the circumstances at the time, including proper perception of the future, but without the influence of hindsight'.[278]

(3) The matter must be looked at from the point of view of the company,[279] and it must 'positively appear' that the reasonable person in the position of the company would not have entered into the transaction.[280] Accordingly, the liquidator bears the onus of demonstrating that a transaction is uncommercial.[281]

216 Although, as noted above, the legislation does not refer to the 'value' of the transaction, courts have nevertheless emphasised that the purpose of s 588FB is to avoid transactions at an 'undervalue' where assets are effectively disposed of at below market value. For example, in Demondrille Nominees v Shirlaw,[282] the Full Court of the Federal Court considered whether a contract to sell a property for $180,000, but to forego receipt of $120,000 of the purchase price, was an uncommercial transaction for the purposes of s 588FB. In finding that the transaction was relevantly an 'uncommercial transaction', the Full Court noted that:

The purpose or object of the provisions with which we are concerned is to prevent a depletion of the assets of a company which is being wound up by, relevantly, "transactions at an under-value" entered into within a specified limited time prior to the commencement of the winding up (see Explanatory Memorandum, par 1014). To construe the expression "uncommercial transaction" to catch the Agreement in the way in which we have done promotes the purpose or objects of the provisions to which we have referred.[283]

217 Although the Full Court's comments in Demondrille have been cited with approval on many occasions, some intermediate courts have moved away from assessing transactions by reference to their 'value'. In Lewis (as liquidator of Doran Constructions Pty Ltd (in Liq)) v Doran[284], for example, the New South Wales Court of Appeal considered an application by a liquidator to set aside a series of resolutions that operated to restructure debt obligations between related companies. After considering the comments of the Full Court in Demondrille, Giles JA observed that the statutory test under s 588FB was not solely targeted towards undervalued transactions, with other considerations shaping the commercial context for the transaction. His Honour said:

Transactions at an undervalue were no doubt the primary target of the provisions, but the description of an uncommercial transaction in s 588FB(1) was not limited to such transactions. The description directed primary attention to a balance of benefit and detriment, only in the broadest sense involving undervalue. A transaction could conceivably be one that a reasonable person would not have entered into although for full value; or it could be one that a reasonable party would have entered into although at an undervalue, for example, a forced sale to overcome temporary illiquidity.[285]

218 The recent observations of Sofronoff P in Featherstone v Ashala Model Agency Pty Ltd (in liq)[286] reinforce the notion that the legislation does not define uncommercial transaction by reference to the presence or absence of valuable consideration.

219 Apart from the value of the transaction in question, other factors that the courts have had regard to include whether there is a relationship between the parties to the transaction that might require it to be subjected to greater scrutiny. For example, in McDonald v Hanselmann,[287] the Supreme Court of New South Wales considered an application by a liquidator to set aside an agreement purporting to sell, to the son of a director of the company, the company's equipment, the ability to deal with existing clients, and the goodwill of the business. Young J noted that the equipment in question was specialised equipment which was used in a specialised business, and that the company had to vacate the site where it was located and did not appear to have the wherewithal to lease a suitable alternative site. The purchaser was the son of the controller of the company at the relevant time, and he did have a business in which most of the equipment could be used, and he was familiar with it having worked in his father's business. The controller of company 'knew that his son was interested and that his son was willing to take virtually the whole of the plant and equipment for his new business.'[288] Young J referred to the fact that the transaction involved related parties and observed that s 588FB(1):

...indicates that I am to take into account not only the position of the company, but also the significant matter of the relationship of the purchaser to the people who control the company. Where, it would seem to me, the purchaser is a related entity in the corporate sense, or a relation by blood or by law in the individual sense, then the court should be inclined to look at the transaction far more closely and be less inclined to excuse a sale at an undervalue because of some commercial factor.[289]

220 Young J held that the transaction was uncommercial and liable to be set aside under s 588FB of the Corporations Act. His Honour said he could not see 'any sufficient reason why the company would sell the property to a relative of the controller for an undervalue of 21 per cent rather than sell it by auction or in some other way', noting that no other avenues appeared to have been explored.[290] But in reaching the conclusion that the transaction was uncommercial, his Honour also gave consideration to the issue of whether the discrepancy could be accounted for by reason of a 'special value [of the transaction] to the company which would affect its worth to the company'.[291] He said that 'it was clear that the company needed to clear the equipment and the company needed ready money' and observed that '[t]hese would be factors which could induce a reasonable person in the position of the company to let the property go for less than its proper value.'[292]

221 Against this background, it seems clear that while the 'value' of a transaction will often be an important consideration in assessing whether it is 'uncommercial' for the purposes of s 588FB, it is not decisive. Rather, in determining whether a transaction is 'uncommercial' for the purposes of s 588FB, the court must consider all of the benefits and detriments bearing on a party's decision to enter into a transaction, including benefits and detriments that cannot be measured in monetary terms. The commerciality or otherwise of the transaction is to be assessed upon an objective view, having regard to the company's circumstances and not just the subject matter of the transaction. Furthermore, a transaction will be an uncommercial one only where a reasonable person in the company's circumstances would not have entered into it.

222 I turn now to consider the 'evaluative phase' issues.

Issues 3 and 4: What was the value of Shot One's loan claims against Rising Rocket as at 23 May 2012 (when the Deed of Settlement was entered into)?

223 Issues 3 and 4 relate to the value of Shot One's loan claims against Rising Rocket as at 23 May 2012, as a precursor to determining whether the Deed of Settlement entered into that day constituted an 'uncommercial transaction'.

Issue 3: In respect of the claim of Shot One against Rising Rocket that it was indebted to Shot One as at 23 May 2012 by reason of having had loans made to it by Shot One prior to 23 May 2012, what was the value of that claim to Shot One as at 23 May 2012, taking into account:

(1) legal and procedural hurdles which existed in respect of that claim;

(2) the defences available to Rising Rocket in respect of that claim;

(3) the likely legal costs to Shot One of pursuing that claim.

Issue 4: In particular regarding the claim of Shot One against Rising Rocket:

(1) What was (is) the evidentiary value of the financial statements of Shot One, the general ledger of Shot One, and the ledger entry reports in respect of Shot One, in establishing the existence of a loan account between Shot One and Rising Rocket as at 23 May 2012?;

(2) Was Shot One statute-barred in pursuing part of its claim against Rising Rocket?

225 It will be recalled that as at 23 May 2012, Shot One had not pleaded any claim in respect of the Rising Rocket loan account, but it had foreshadowed amending its statement of claim to do so. In those circumstances, and leaving limitations issues to one side, Shot One's unpleaded claim in respect of the Rising Rocket loan account was, at that point, no more than a cause of action that was capable of being asserted by Shot One against Rising Rocket, and one that had value as a contingent asset of Shot One, the contingency being the prospect of the alleged debt recorded in the Rising Rocket loan account being successfully converted by Shot One into a judgment debt.

226 The plaintiffs submit that the 'commercial merits' of the Deed of Settlement are a function of the value to Shot One of the loan account claim. They contend that this was the approach adopted by Merkel J in Victorian Producers' Co-operative Co Ltd v Kenneth,[293] a case involving an application made under s 139ZS of the Bankruptcy Act 1966 (Cth) to set aside a notice given by the Official Receiver requiring payment to the trustee of an amount equal to the money or the value of the property received in circumstances where a person, the Co-operative, was said to have received money or property as a result of a transaction that is void against a trustee in bankruptcy.

227 In Victorian Producers' Co-op, the assessment that was being undertaken by the court was for the purposes of s 120 of the Bankruptcy Act. The background to the competing claims was that the debtors had agreed to a request from the Co-operative that they enter into a mortgage to secure their indebtedness, from time to time. The consideration for the mortgage was stated to be the Co-operative's agreement, at the request of the debtors, to forbear from immediately suing for the amount of their indebtedness to the Co-operative. At the point when the mortgage was given, namely 14 November 1995, the unsecured assets of the debtors approximated $100,000 and their unsecured liabilities approximated $700,000. It was estimated that if the Co-operative had sued the debtors at that time, after taking into account legal and potential insolvency costs, it would have recovered an amount 'within the range of approximately $0-$8,000'. But instead the Co-operative, relying upon its power of sale under the mortgage, ultimately realised a net sum of $45,163.87.

228 In seeking to have the mortgage declared void as against the trustee under s 120, the court was required to assess whether the value of the consideration given by the Co-operative for the transfer was less than the market value of the livestock transferred by the debtors. Importantly, there was no dispute as to the existence of a debt or as to the amount of the debt. What was in dispute was the question of whether, at the time the mortgage was given to the Co-operative as creditor, it would be able to recover that debt and if so, the value of what it could recover were it to enforce the mortgage. The Official Receiver and the trustee claimed that the transfer of livestock to the Co-operative under the mortgage was void as against the trustee pursuant to s 120(1)(b) of the Bankruptcy Act because the value of the Co-operative's forbearance to sue was less than the market value of the property transferred under the mortgage. The Co-operative disputed that that was the case.

229 Merkel J upheld the trustee's claim and found that the trustee was entitled to a declaration that the transfer of property under the mortgage was void as against the trustee. In reaching that conclusion, his Honour said:

[20] The value of an agreement to forebear from recovering a debtor's indebtedness will be closely linked to the "value" of the chose in action. In the present case the chose in action of the Co-operative, in respect of the existing indebtedness of the debtors on 14 November 1995 of $78,878, plainly had a value that was significantly less than that amount as a result of the insolvency of the debtors at the time. Even if the debtors were somehow able to pay that amount to the Co-operative, the significant risk that the payment would be void under the [Bankruptcy] Act by reason of the debtors' insolvency would inevitably result in the value of the chose in action being significantly less than the amount due. As no further loans were made on 14 November 1995 the agreement, presumably terminable on reasonable notice, to provide credit in the future was of little value at that date. In so far as the loans subsequently made were part of the consideration given by the Co-operative I am satisfied that at all material times the value of the consideration given by the Co-operative remained significantly less than the market value of the live stock transferred to it from time to time under the mortgage.

[21] In the circumstances, I am satisfied that the value of the consideration given by the Co-operative for the transfer of property under the mortgage on 14 November 1995, and thereafter, was significantly less than the market value of the property transferred under that mortgage.[294]

230 In the present case, however, where there is no loan documentation (and never has been), and the existence of the alleged Richard Day loan and the alleged Rising Rocket loan is said to be inferred from the fact that there is, in each case, a loan account recorded within the MYOB management accounts of Shot One, any assessment of value must take account of those factors.

231 For this reason, the defendants submit that the 'value' for the purposes of conducting the evaluative exercise is relevantly the value of the claim Shot One makes against Rising Rocket based on the loan accounts as a cause of action rather than as a subsequent judgment. They contend that the assessment of the value of the unpleaded claim against Rising Rocket involves a consideration of at least three matters. First, the claim that there is a loan must be evaluated by reference to all of the evidence that was available as at 23 May 2012. Secondly, one must estimate what costs would be involved in converting the cause of action into a judgment. Thirdly, any legal impediments to the entry of a judgment or matters which would render the debt not recoverable, such as a limitations defence, would also have to be taken into account.[295] Thus, in the present case, they submit that the 'value' is effectively the amount of each alleged 'loan' constituting the Rising Rocket loan account, multiplied by the probability of its being successfully converted into a judgment debt, less the non-recoverable costs and expenses of achieving this. In my view, in circumstances such as the present where the alleged indebtedness is not acknowledged and must be proved as a judgment before it could be enforced, the defendants' approach to the assessment of value in the present case reflects the process the court would likely adopt.

232 As the plaintiffs' case is, in large part, a documentary one that relies heavily on the financial records of Shot One, including its general ledgers and year-end financial accounts, as constituting reliable evidence of the value of Shot One's claim against Rising Rocket, it is convenient to address Issue 4 first.

233 The plaintiffs accept that there is no loan agreement documentation but they say that the existence of the Rising Rocket loan is to be inferred from the fact that there is a loan account in the name of Rising Rocket recorded within the MYOB management accounts (or general ledgers) of Shot One. As noted above, until 2009, the MYOB files for Shot One were prepared and maintained by a contracted bookkeeper, Mr Grano, under the general direction of Richard Day. The MYOB files were then used by the accountants, Terrence Jasper & Associates, in the preparation of Shot One's financial statements and income tax returns.

234 In this regard, the plaintiffs rely upon s 1305(1) of the Corporations Act, which provides that a book kept by a body corporate under a requirement of the Act 'is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.' The meaning of the expression 'books' is addressed in the dictionary set out in s 9 of the Corporations Act, as follows:

books includes:

(a) a register; and

(b) any other record of information; and

(c) financial reports or financial records, however compiled, recorded or stored; and

(d) a document;

but does not include an index or recording made under Subdivision D of Division 5 of Part 6.5.

235 The plaintiffs contend that when the mediation took place on 23 May 2012, the following books and records of Shot One were available:

236 In addition to those books and records, each of Richard Day, Mr Grano, Mr Jasper and Nicholas Day was available in May 2012 to give evidence as to the value of the alleged Rising Rocket loan.

What was (is) the evidentiary value of the financial statements of Shot One, the general ledger of Shot One, and the ledger entry reports in respect of Shot One, in establishing the existence of a loan account between Shot One and Rising Rocket as at 23 May 2012?

237 The plaintiffs contend that the financial statements and general ledger files of Shot One listed above are clearly 'books' within the meaning of s 1305(1) and thus provide (and would have provided at the time the Deed of Settlement was entered into) prima facie evidence of the loans made by Shot One to Rising Rocket.

238 The defendants, on the other hand, accept that a company's general ledger and financial accounts are books for the purposes of s 1305(1), but they do not accept that the loan account entries recorded in the books of Shot One can be relied upon as prima facie evidence of their contents. Relying upon observations made by their Honours in Whitton v Regis Towers Real Estate Pty Ltd[296] and Livingspring Pty Ltd v Kliger Partners,[297] the defendants submit that the mere existence of entries in a company's general ledger and financial accounts does not establish a presumption that the matters stated therein are prima facie true and correct and accurate. Rather, they submit, the true or correct position is, as Austin J explained in ASIC v Rich[298], that while the books are treated as prima facie evidence of the matters stated in them, the weight to be attached to that evidence is a matter which is to be measured in accordance with the common sense of the tribunal.

239 In Whitton v Regis Towers Real Estate Pty Ltd, Buchanan J, with whom Marshall and Tracey JJ agreed, said:

Section 1305 of the Corporations Act does not elevate the entry to prima facie evidence that any such transaction (or series of transactions) exists. It can be no more than prima facie evidence that an unknown person formed an opinion on an undisclosed basis that, in the absence of any directly recordable transaction nevertheless, as a balancing entry, such a figure should appear in the accounts. Mr Harris took the matter no further and, indeed, eroded any weight the entry may have had. [299]

240 Similarly, in Livingspring Pty Ltd v Kliger Partners, Maxwell P and Buchanan JA stated:

LS [the applicant] called in aid on the appeal s 1305(1) of the Corporations Act, which, it was said, established "a presumption that company accounts are prima facie true and correct and accurate". The provision does no such thing. All that s 1305(1) provides is that a company's books (relevantly, its financial reports and records) are admissible and are "prima facie evidence of any matter stated or recorded" in them. As the Full Federal Court said in Whitton v Regis Towers Real Estate Pty Ltd, s 1305 does not elevate an entry in a book of account to the status of prima facie evidence of the transaction(s) which the entry purports to record. The same must be true of an entry purporting to record the existence, and value, of an asset.[300]

241 More recently, in ASIC v Rich, Austin J said:

[397] Section 1305(1) does not make the company's books conclusive evidence of the matters they contain, in the sense of requiring the tribunal of fact to make a finding in terms of the content of the books in the absence of proof to the contrary by the opposing party. The books are prima facie evidence of the matters stated in them, but the weight of that evidence is to be measured in accordance with the common sense of the tribunal of fact...

[398] In my view it would be open to the tribunal of fact to find that the prima facie evidence constituted by the company's books is outweighed by other evidence (including evidence adduced by the proponent of the books, even if the opponent does not give evidence about them); or by some quality or characteristic of the books themselves, even if there is no other evidence. In particular, if a book has the appearance of a draft or (being electronic) has a file title indicating that it is a draft, that alone may be sufficient (all other things being equal) for the tribunal of fact to reject the book as evidence of the matter stated in it, notwithstanding that the book is prima facie evidence of that matter; a fortiori if, in addition to having the appearance of a draft, the book contains inconsistencies or ambiguities or the matter otherwise demands explanation.[301]

242 Austin J then referred to the purpose of s 1305(1) as outlined in the explanatory memorandum to the Companies Bill 1981, which introduced the provision, and said:

[400] Therefore s 1305(1) allows a company's books to be introduced in evidence as they are, without any "authenticating" evidence by any witness, and allows the books to be relied upon to prove transactions recorded in them. But it does not elevate the matters contained in the books to a plane of probative value that requires the court to disregard the context in which the matters relied on appear in the tendered document. If, for example, there is some doubt as to whether a particular transaction is "recorded' in a book because of some uncertainty about the status of the document or ambiguity about what it contains, s 1305(1) does not overcome the problem.[302]

243 Against this background, the defendants contend that when regard is had to the body of evidence that was available to the parties in the present case as at 23 May 2012, and in particular the fact that the evidence shows there are multiple versions of the financial statements for the relevant financial years, with each presenting a different and inconsistent treatment of the loan accounts, it will be concluded that Shot One's financial statements are so lacking in reliability that they do not raise a prima facie presumption of the existence of the Rising Rocket loan alleged by the plaintiffs. Alternatively, they say that if the books and financial records of Shot One that record loans owing by Rising Rocket do raise a prima facie presumption under s 1305, that presumption is rebutted for the reasons advanced by them - in essence, because of the unreliability of Shot One's general ledger (MYOB management accounts) and the effective reconstruction of the financial records by Terrence Jasper &Associates in 2009 and 2010 without any involvement by Richard Day, and the evidence given by Richard Day to the effect that he never intended the payments made by Shot One to Rising Rocket to constitute loans and never intended that Rising Rocket would be required to repay those amounts - and should therefore be treated as having no ultimate probative value.

244 In my view, while Shot One's general ledger and financial accounts are books for the purposes of s 1305(1), and are generally to be treated as prima facie evidence of the matters stated in them, I am not satisfied that the loan account entries recorded in the books of Shot One over the relevant period can be relied upon as 'proving' either the loan transaction(s) which the respective entries purport to record, or the quantum of the alleged indebtedness. When the loan account entries are viewed in the context of the body of evidence before the Court, that was available as at 23 May 2012, regarding the preparation of the MYOB accounts and the financial statements of Shot One one cannot be satisfied that the loan account entries in the company's books are probative evidence that could be relied upon to prove indebtedness on the part of Rising Rocket. In particular, the manner in which the loan account entries made by Mr Grano were later adjusted down or written off and re-allocated, and then reinstated unilaterally, by journal entries made by Terrence Jasper & Associates on instructions from Nicholas Day, and without reference to the parties to the underlying transaction, undermines their reliability. Accordingly, the prima facie evidence constituted by the company's books is rebutted or 'outweighed' (to adopt Austin J's language) by that other evidence.

245 In Tosich Construction Pty Ltd (in liq) v Tosich,[303] Lehane J observed:

Accounting entries, after all, reflect and may provide evidence of the nature of, the underlying transaction. The character of the underlying transaction depends, principally at least, on the intention of those who entered into it.[304]

246 In the present case, with respect to the alleged Rising Rocket 'loan', Richard Day, the sole director of both Shot One and Rising Rocket at the relevant time, was the only person capable of giving evidence of the intention of Rising Rocket and of Shot One when they entered into the relevant transactions. The evidence given by Richard Day was that he did not intend the making of payments by Shot One related to the Rockley Road property, in payment of the costs of acquisition or paying down the mortgage, to be a loan to Rising Rocket, and when he authorised those payments to be made, he had no intention that Rising Rocket would be required to pay them back. And his explanation for the Rising Rocket loan account that was created in Shot One's MYOB management accounts was that it was 'just a method, at a bookkeeping level, to record payments that were made by Shot One to Rising Rocket.'[305]

247 In the face of that evidence before the Court, the plaintiffs sought to make out an inferential case that there was an agreement between Shot One and Rising Rocket, to the effect that between 2004 and 2008, certain payments that were being recorded in the MYOB management accounts of Shot One in the name of Rising Rocket were moneys advanced by way of loan that were required to be repaid by Rising Rocket to Shot One. This 'agreement' and its terms were not documented. It is said to have arisen when Richard Day gave a direction to Mr Grano to create the Richard Day and Rising Rocket loan accounts in Shot One's MYOB records, but the plaintiffs accept that the accounts do not themselves create a debt but are merely evidence of it.[306] Indeed, the only evidence of the existence of the Rising Rocket loan are the account entries recorded in Shot One's MYOB management accounts between 2004 and 11 February 2009 (when Richard Day resigned as a director), and then to the extent that those entries were taken up in Shot One's financial statements that were prepared by Mr Jasper and his firm in 2009 and following, on the instructions of Nicholas Day.

248 Generally speaking, management accounts are records that are kept for internal analysis and management purposes, usually pursuant to the obligation imposed by s 286(1) of the Corporations Act to keep financial records.[307] In Manning v Cory[308] Burt J explained the policy of the provisions which impose the record-keeping obligations on companies and their officers, stating:

The evident policy ... is that the accounts should disclose or exhibit the financial position of the company at all times and at any time. They must be such as to enable one to say at any point of time where, in a financial sense, the company is, and it is not enough that they be such as to enable a competent accountant by producing a set of accounts long after the happening of the events to which they, i.e. the cheque butts, receipts and so on relate, to say where it has been and to establish the fact that it is then insolvent and unable to carry on. The whole policy of the section is to prevent this from happening, that is to say to prevent its officers from flying the company blind and upon its crash, and without having any information capable of sustaining the opinion, from then saying that he thought that he had more altitude.[309]

249 As Austin J explained in ASIC v Rich, however, there is a real difference between management accounts kept by a corporation and statutory accounts or financial statements that are filed by the corporation as part of its annual returns. His Honour said that management accounts 'are used by business managers (sometimes, but not necessarily always, including boards of directors) to assist them to monitor business performance on a regular basis, usually monthly' and 'they are used and circulated internally in the business, and are not externally reported.'[310] Importantly, his Honour said management accounts:

are not prepared for the purpose of providing a statement of the financial position of the company to external users of financial information (such as shareholders, lenders, investment analysts and trade unions), but instead they are prepared in order to satisfy the needs of internal users (including the need of managers to assess current financial performance) . . . That being so, one would not expect management accounts to be as reliable as statutory financial reports in stating the company's position at a past date. . . . [311]

250 Further, his Honour observed, '[i]n contrast with financial accounting reports, which are based on past information, management accounts are forward-looking and often pragmatically computed.'[312] His Honour noted that such case law as there is serves to confirm this view, and cited, by way of example, Consolidated Constructions Pty Ltd v Satellite Group Ltd.[313] That was a case where Santow J had to determine the solvency of a company, and his Honour remarked that he would have expected to see reasonably up-to-date management accounts but that management accounts, if they existed, would be 'no great assurance as to reliable financial information.'[314]

251 In the present case, the evidence shows that while Shot One's MYOB management accounts were kept by Mr Grano, it was always intended that Shot One's financial statements for statutory reporting purposes[315] would be prepared by Terrence Jasper & Associates. Mr Grano gave evidence that after some discussion with Richard Day, he created a loan account in the name of each of Rising Rocket and Richard Day in the MYOB management accounts. In the case of the Rising Rocket loan account, Mr Grano created the loan account in Shot One's books on 27 July 2004, and thereafter it was used to record 'payments' that were made by Shot One to Rising Rocket or for its benefit. Mr Grano said he recorded amounts in the Rising Rocket loan account where there was clear evidence of the payment having been made to Rising Rocket. His evidence was that he did not know what the transfers to Rising Rocket were for, but whenever he saw Rising Rocket annotated on Shot One's bank statement, he would automatically record that sum in the Rising Rocket loan account in Shot One's MYOB records. Thus it is clear that when Mr Grano was recording in the Rising Rocket loan account the payments Shot One had made to Rising Rocket, he did so not because he had formed the view that they were moneys advanced by way of 'loan' that were repayable by Rising Rocket, but rather because that account was where he had been directed to record payments made to Rising Rocket, and he had set up a 'reoccurring transfer in MYOB' to do so.[316]

252 In the case of the Richard Day loan account, Richard Day said it was used as a convenient method for recording the payments made by Shot One of business expenses which had been incurred for the benefit of Nicholas Day, such as payments made for motor vehicles used by him or his fiancée. Mr Grano recorded those amounts in Shot One's MYOB management accounts under the Richard Day loan account.

253 Mr Grano maintained the MYOB management accounts until sometime in early February 2009. It is unclear precisely who prepared the management accounts from that point forward, and on what basis. In his witness statement, Mr Grano said that once he was told his services were no longer required, he ceased work and 'did not do a handover.'[317] In those circumstances, it is unclear whether the 'direction' that Richard Day gave Mr Grano in 2004 regarding the recording of payments made by Shot One to Rising Rocket in the Rising Rocket loan account was ever communicated to the new bookkeeper and continued to be followed, or whether some other arrangement applied.

[50] I always ensured that on each occasion before I left the NDA [Nicholas Day Architects] office the Shot One MYOB data files on the main computer were backed up and up-to-date.

[51] The last Shot One MYOB reconciliation on my laptop is for the month ended 31 January 2009. I never updated the MYOB records or worked on them in any way unless I was at the NDA office. On my last visit to NDA in or around February 2009 this reconciliation was backed up to the main computer. After my services were terminated no one contacted me regarding NDA or Shot One and I was not asked about the Shot One MYOB data files, or asked for a copy of it.

[52] By early 2009, Terrence and Sonja were no longer in business together. However I continued to provide bookkeeping services to other clients of Terrence's. I also attended one or two of Terrence's Christmas parties after I ceased providing bookkeeping services to Shot One.

[53] If Terry, Nicholas or anyone else with a legitimate reason to ask had asked me at any time about the MYOB records of Shot One, I would have told them where I saved them at the NDA office and would have provided them with a copy of the record from my laptop.[318]

255 Mr Grano went on to explain that the MYOB records of Shot One which he retained 'balance to the cent' but because he was not provided with the adjustment journals he could not close out the financial years 2005, 2006, 2007 or 2008.[319] Accordingly, he said 'the MYOB records retained by [him] record that the "current" financial year is 2005 and the data is accessible from 2003 to 2009, when [he] ceased providing services to Shot One.'[320]

256 Richard Day said the MYOB management accounts were simply internal working documents and, in accordance with normal company practice, they were always intended to be the subject of journal adjustments when Shot One's financial statements were prepared. The plaintiffs challenged this evidence, submitting that it should not be believed.[321] But the subsequent conduct of Mr Jasper, in creating a series of journal adjustments in the ledger entries reports before taking them up in the financial accounts, tends to confirm that it was not unusual for such adjustments to be made. Further, as noted earlier, I accept Richard Day's evidence that he considered the management accounts were working records that would be finalised in consultation with Mr Jasper in due course, but that the opportunity to do so did not eventuate and so '[w]e never got to it'.[322]

257 Against that background, the defendants challenge the very existence of the loan. They submit that for the Court to determine whether there was a loan made by Shot One to Rising Rocket 'involves a consideration of what evidence there is which supports the existence of an agreement between the borrower and the lender.'[323] Further, they say, in circumstances where there is not sufficient evidence available for the Court to make direct findings of a loan agreement, and the Court is effectively being asked to embark upon a process of inferential reasoning in order to reach the requisite state of satisfaction to do so, it must be vigilant not to allow conjecture, guesswork or surmise to fill the void. As Gordon J explained in Re Day,[324] when conducting the process of fact finding, a court or tribunal, after careful weighing of testimony and close examination of the facts:

. . . must feel an actual persuasion of the occurrence or existence of a fact before it can be found[325]. Where direct proof is not available and satisfaction of the civil standard depends on inference, "there must be something more than mere conjecture, guesswork or surmise"[326] - there must be more than "conflicting inferences of equal degrees of probability so that the choice between them is [a] mere matter of conjecture"[327]. An inference will be no more than conjecture unless some fact is found which positively suggests, or provides a reason in the circumstances particular to the case, that a specific event happened or a specific state of affairs existed.[328] [329]

258 As noted above, the plaintiffs accept that there is no loan agreement documentation but say that the existence of the Rising Rocket loan is to be inferred from the fact that there is a loan account in the name of Rising Rocket recorded within the MYOB management accounts (or general ledgers) of Shot One.

259 In closing submissions, in answer to a question from the Court about how one would approach the issue of whether the recorded amounts should be characterised as loans, Senior Counsel for the plaintiffs responded:

[MR GLICK QC]: When Your Honour comes to determine the first level of enquiry which is benefit and disadvantage, Your Honour has asked me how do I know it's a loan and not something else. We submit that the way you know that is by conduct, and the way it was entered in the accounts is prima facie evidence.

If that was the whole of the evidence, the MYOB accounts was the whole of the evidence, it's sufficient for us to succeed. But, contrary to us, they've got that statement the subjective intention it would never be repaid. That might mean it's a gift or it might mean it will only be repaid when demanded. I don't know what that means.

...

And the same answer that my friend gave, which is you look at all the evidence and what are the indicia. Is there a loan agreement? No. No loan agreement, I accept that. Would you expect a loan agreement between related corporations? No, in my respectful submission, because I'm the director of both companies.

Secondly, what is it that Mr Ric Day himself said about these transactions? We submit that's found in the evidence of Mr Grano. He tells us what his direction was, and that's the strongest evidence from the horse's mouth. "I'm going to be making a series of payments. You are to record them as loans." It got to the position, Mr Grano says, "That's the default position. I read the bank statements." He doesn't enter the bank statements. The bank statements are prepared in-house by Shot One. Rising Rocket loan. We know it exists. We know the amount. We know he is following a direction.

Why would there be a challenge to that, in our respectful submission we put rhetorically. We can't go beyond that as a liquidator. Then we are confronted with Mr Ric Day who says, "Oh, I privately thought no need to repay it." Really? You had an opportunity but you never expressed that once. We ask Your Honour to reject it.[330]

260 The plaintiffs acknowledge that the quantum of the relevant loan account between Shot One and Rising Rocket (and also the relevant loan account between Shot One and Richard Day) was adjusted from time to time. They also accept that 'there may be a legitimate challenge to the quantum of the debt'[331], but they submit that there nevertheless remained throughout 'a core irreducible debt' reflected by the Rising Rocket loan account. In essence, they say the minimum amount of the 'irreducible' indebtedness owing by Rising Rocket from 1 February 2008 (i.e., six years prior to the commencement of this proceeding) is $201,961 calculated as follows:

• The MYOB accounts (as maintained by Mr Grano prior to Richard Day's departure) disclose an amount owing by Rising Rocket to Shot One as at 1 February 2008 of $550,000;
• At 30 June 2008, the balance of the Rising Rocket loan in the MYOB accounts had increased to $721,500.[332] (This same figure was disclosed as the Rising Rocket loan balance in the financial statements prepared by Mr Jasper during 2009[333] and was reflected in Shot One's income tax returns for the year ended 30 June 2008 lodged by Mr Jasper on 9 March 2011[334]).
• As at 23 May 2012, when the Deed of Settlement was entered into, the balance of the Rising Rocket loan in the MYOB accounts was $751,961.[335]
• Accordingly, the value of the Rising Rocket loan claimable by the plaintiffs pursuant to the MYOB accounts was the balance of the loan at 23 May 2012 of $751,961, less the balance of the loan at 1 February 2008 of $550,000, being $201,961.

261 This total of $201,961 includes the 'Journal Entries' adjustment of $325,508.43 made by Terrence Jasper & Associates in Shot One's accounts for the year ended 30 June 2009,[336] whereby the Rising Rocket loan account was reduced by the sum of $332,031.22 which was then re-allocated to the loan account of Nicholas Day. (In this proceeding, however, the plaintiffs seek judgment in a higher amount, contending that the Court should ignore or reverse the Rising Rocket credit[337] because the journal entries have a distorting effect given the operation of the limitation period - this argument is dealt with in greater depth below under the heading "the Journal Entries re-adjustment below).

262 In those circumstances, the plaintiffs submit that, at the very least, judgment may be entered for the lowest proven amount of indebtedness, namely $201,961, the plaintiffs having satisfied their burden of proof.[338]

263 The evidence was that when Richard Day resigned as the sole director of Shot One in February 2009, and Nicholas Day became the sole director in his place, Mr Jasper worked with Nicholas Day and took instructions from him in relation to the preparation of the financial statements and income tax returns of Shot One. Hitherto, however, Nicholas Day had not been involved in the financial matters of Shot One. Neither Richard Day nor Mr Grano had ever discussed any of Shot One's corporate financial matters with him.

264 In February 2009, the position was that the financial statements of Shot One for the financial years ended 2004, 2005, 2006, 2007 and 2008 had not been lodged. Relevantly, for present purposes, the evidence adduced before the Court shows that the financial statements and income tax returns of Shot One for the years ended 30 June 2005 and following were prepared by Terrence Jasper & Associates and provided sequentially to Nicholas Day from about April 2009.[339] The MYOB management accounts prepared by Mr Grano between 2004 and February 2009 were used by Mr Jasper and his firm in the preparation of Shot One's financial statements and income tax returns, but neither Mr Jasper nor his staff consulted with Mr Grano, or Richard Day, in the preparation of those documents.

265 As noted above, while Richard Day was the sole director of Shot One, he intended that the MYOB management accounts would be discussed with Mr Jasper before Shot One's financial statements were prepared and finalised. What is clear, however, is that after Richard Day resigned as a director of Shot One no discussion took place between him and Mr Jasper about the contents of Shot One's accounts or the finalisation of them. The evidence shows that Mr Jasper did create a series of journal adjustments in the ledger entries reports before taking them up in the financial accounts of Shot One, and that he did so on the basis of his instructions from Nicholas Day or on the basis of his professional opinion. In making some of these journal adjustments on the instructions of Nicholas Day, Mr Jasper moved 'indebtedness' recorded in the Richard Day and Rising Rocket loan accounts across to Division 7A loan accounts established in the name of Nicholas Day, apparently so as to render them more tax-effective.[340] In the course of this process, the 'indebtedness' recorded in the Richard Day loan account in the MYOB management accounts was effectively eliminated in the financial statements for the year ended 30 June 2007, then reinstated unilaterally (and maintained) in the financial statements for the years ended 30 June 2008, and 30 June 2009, and then reduced to zero in the financial statements for the year ended 30 June 2010, which were prepared and provided to Shot One on 10 May 2012, just prior to the judicial mediation.

266 The plaintiffs submitted that Richard Day had adopted the accounts of Shot One for the financial years ended 30 June 2005 to 30 June 2008 because he had signed the minutes of the meetings of directors of Shot One containing the resolutions to adopt the accounts. Richard Day's evidence was that he could not recall signing the minutes, and that no meetings were actually held. Mr Jasper accepted that no meetings of Shot One ever took place as described in the minutes. Mr Jasper gave evidence that he believed Richard Day signed the minutes sometime after he had resigned as director of Shot One, and probably in about May 2009. The relevant minutes of meetings of directors refer to financial accounts of Shot One for financial years ended 30 June 2005, 2006, 2007 and 2008 respectively and state in each case that the identified accounts 'be and are hereby adopted as tabled.' However, none of the minutes attach any financial accounts, and there is no evidence as to which financial accounts each set of minutes purported to adopt. In this regard, it is significant that the minutes (as tendered) were located in Mr Jasper's file as a bundle, either at the back of the documents pertaining to 2007 or at the start of 2006, and were not filed away with any specific version(s) of the financial statements. The fact that there are multiple versions of Shot One's financial statements for financial years 2005, 2006, 2007 and 2008 in evidence before the Court exacerbates the difficulty of identifying which version of the financial statements was purportedly adopted by each of the respective minutes.

267 In the case of the Rising Rocket loan account, the position is similar, in the sense that the quantum of the 'indebtedness' recorded in the MYOB management accounts was later adjusted by journal entries. When Mr Jasper was making those journal entry adjustments in the period after February 2009, he did not discuss them with Richard Day. Nor did Mr Jasper make any enquiries of Mr Grano about the MYOB management accounts. Rather, in preparing Shot One's financial statements, Mr Jasper effectively adopted what was stated in the MYOB management accounts, and then on the basis of instructions given by Nicholas Day, or on the basis of his professional opinion, or both, he made journal entries effecting adjustments.

268 Relevantly, in the case of Rising Rocket, in early May 2012 when Terrence Jasper & Associates were putting together Shot One's accounts for the year ended 30 June 2010, journal entries were made whereby the Rising Rocket loan account was reduced to zero and re-allocated to Nicholas Day. As Nicholas Day did not give evidence at the trial the matter is not the subject of direct evidence, but the accounting documents and records of Shot One suggest that at some time prior to the judicial mediation, Nicholas Day in his capacity as a director of Shot One gave a direction to Mr Jasper to the effect that he would assume the liability for the Rising Rocket loan to the extent that it existed, and thereafter the loan was taken up in the Nicholas Day loan account. Sometime later, however, but before the financial statements were finalised, Nicholas Day in his capacity as the director of Shot One apparently directed Mr Jasper to re-establish a loan account in the name of Rising Rocket and transfer that sum from the Nicholas Day loan account to the Rising Rocket loan account. Under cross-examination Mr Jasper confirmed that the transaction recorded in the relevant journal entry[341] whereby all of the Rising Rocket loan balances were put to Nicholas Day's loan account would have been done in discussion with the client.[342] However, Richard Day, the sole director of Rising Rocket, which was the counterparty to the re-established 'loan', was not consulted or informed about that transaction.

269 In that regard, Mr Jasper accepted that in circumstances where he presumed that Nicholas Day had signed the income tax returns for Shot One for the 2005 to 2011 financial years,[343] the signed financial statements for 2005 to 2011 must also have been signed by Nicholas Day and not by Richard Day, essentially because the income tax return for each year would only be signed once the financial statements were signed. The defendants submit that, in those circumstances, it is clear that Richard Day had no opportunity to have any input into the manner in which the Rising Rocket loan account that was recorded in the MYOB management accounts was taken up into the financial statements of Shot One, with the result that the financial statements do not constitute any admission against Rising Rocket.

270 As will be apparent, what is lacking in the present case is any cogent evidence which supports the existence of an agreement between Rising Rocket as borrower and Shot One as lender, indicating that the payments made by Shot One to Rising Rocket and recorded by Mr Grano in the Rising Rocket loan account were payments made by Shot One by way of loan that were intended to be repayable by Rising Rocket. The plaintiffs bear the burden of proving that each advance of money was by way of loan, rather than by way of gift: see Heydon v Perpetual Executors, Trustees & Agency Co (WA) Ltd.[344] That onus is not discharged by mere proof of the payment itself.[345] Further, the styling of an account as a 'loan account' in the MYOB management accounts does not evidence the making of a loan and an agreement to repay, nor does it supply the terms and conditions on which the 'loan' was alleged to have been made. But even if that were sufficient to evidence indebtedness, in my view, the subsequent adjustments that Mr Jasper made to the loan accounts by journal entries on the instructions of Nicholas Day, in the course of the preparation of Shot One's financial statements call into question the accuracy or reliability of the MYOB management accounts, and render them an unsatisfactory basis for the making of inferential findings by the Court.

271 The plaintiffs also submitted that in circumstances where Richard Day was aware that the MYOB records of Shot One between 2004 and February 2009 recorded a loan account in the name of Rising Rocket, yet he took no steps to correct the characterisation of that sum, '[t]he Court should be disinclined, by accepting Richard Day's evidence in this case, to sanction a situation in which any company director who simply chooses to disregard the state of a company's loan accounts ... may disavow the existence of loan accounts and displace the evidentiary presumption which exists by virtue of sub-s 1305(1) of the Corporations Act 2001 (Cth).'[346] In this regard the plaintiffs rely upon the reasons of Vickery J in Ambridge Investments Pty Ltd (in liq) (rec apptd)[347] as supporting the following legal and evidentiary propositions, which the defendants also accepted as correct statements of law, differing only in their application to the present matter:[348]

• By signing accounts as director of a company, a person adopts those accounts as fairly presenting the company's financial position.[349]
• Where a company's financial accounts are brought to a director's attention, and that director does not take the opportunity to correct what may or may not be an error in those accounts, then in view of the director's obligation under s 286 of the Corporations Act to keep proper financial records of the company, the Court can infer that those accounts did in fact correctly record and explain the transactions of the company, and that the director's reliance on these accounts constitutes an admission against interest.[350]

272 Against that background, the plaintiffs rely upon Richard Day's failure to take steps to correct the characterisation of the advances made by Shot One to Rising Rocket as a loan, '[f]or the purposes of an admission against interest' in relying on the financial statements of Shot One to prove that there was no loan to Rising Rocket. '[T]he Ambridge point' submitted by the plaintiffs is therefore an evidentiary point, 'that the books and records of Shot One as produced by Mr Richard Day or his officers ... [represent] prima facie evidence of a loan' within the meaning of s 1305(1).

273 In Ambridge, a dispute arose as to the terms of a joint venture that was entered into to effect the purchase of a property on Wellington Parade, East Melbourne. The main point of contention was whether the terms of the joint venture entitled the plaintiff company to a 12.5 per cent share or a 25 per cent share of the venture. If the former, then only 12.5 per cent went to Ambridge Investments Pty Ltd ('Ambridge'), and the other 12.5 per cent to its former director and sole shareholder, Mr Stanley. If the latter, then 25 per cent went to Ambridge, to which its creditor, The H2O Company Pty Ltd ('H2O'), had appointed a receiver before proceedings were commenced.

274 For present purposes, it is relevant to note that among the evidence available to the Court for ascertaining the terms of the joint venture, his Honour examined balance sheets which had been signed off as true and accurate by the directors of the relevant company. In the present case, however, there is a material difference with the position that applied in Ambridge, in that the evidence before the Court demonstrates that Richard Day did not sign the financial statements of Shot One for any of the financial years after 2004, and the minutes of meetings of directors of Shot One for the financial years ended 30 June 2005 to 30 June 2008 (constituting Exhibit P4.6) were signed by Richard Day after he had resigned as director of Shot One and without any demonstrated knowledge of what was contained in the financial statements. Hence they were not, to use Vickery J's words in Ambridge, 'made within the scope of the authority of the person to make them.'[351]

275 As Richard Day did not sign the financial statements of Shot One for the relevant years, strictly speaking the Ambridge point does not apply, and they cannot be used as evidence against him. Hence the plaintiffs' submission really amounts to a policy argument about sanctioning delay on the part of a director in correcting false information in financial accounts, rather than a technical point leading to any evidentiary conclusions.[352] While it is the case that during his term as a director of Shot One Richard Day did not actively review the MYOB management accounts prepared by Mr Grano to make them conform with what he contends is the true position, I have found nevertheless that he was effectively denied an opportunity to discuss those management accounts with Mr Jasper before the financial statements were prepared and finalised. As the defendants observed in their written closing submissions, the tenor of Austin J's decision in Australian Securities and Investments Commission v Rich[353] is that management accounts are often -

the subject of reconsideration and adjustment in the process of being used for the purposes of preparing statutory financial statements, and only then would the directors be expected to ensure that the transactions (being documents 'published' by the company to external persons) were correctly recorded and explained.[354]

276 If, as appears to be the case, Richard Day did fail to correct an error for several years, that error was contained in management accounts which were only used in preparing statutory accounts at a point in time after Nicholas had replaced Richard as director in February 2009.[355] And the evidence shows that Richard was not consulted by Nicholas Day or by Mr Jasper in the process of finalising those accounts. Ambridge, on the other hand, involved directors formally adopting financial statements recording evidence of the terms of a joint venture which they subsequently contested in litigation, and is distinguishable on that basis.

277 Furthermore, unlike Ambridge, this is not a case in which 'the conduct of the parties', occurring either at the moment of formation or subsequent to the alleged agreement, is 'capable of proving all the essential elements of an express contract'; or where the critical terms of a contract, in this case a loan, can be identified with enough clarity to infer an agreement even lacking the classical strictures of offer, acceptance, intention and consideration. This is not a case in which it could be said that the parties contemplated the drawing up and execution of a formal contract. The evidence given by Richard Day on behalf of each of the respective parties to the transaction was that the payments made by Shot One to Rising Rocket were not intended to be repayable and so the position that beyond the recording of a purported loan to Rising Rocket in the management accounts of Shot One, there is no evidence of any intended contract. Hence Ambridge does not assist the plaintiffs in proving either a loan to Rising Rocket or the terms of that loan.

278 When considering the evidence available to support the existence of a loan between Shot One and Rising Rocket, it is also relevant to advert to the available evidence concerning the counter-party to the transaction. Although Richard Day had resigned as a director of Shot One in February 2009, he nevertheless remained the sole director of Rising Rocket throughout. If it were the case that Rising Rocket was indebted to Shot One, in the sums contended for by the plaintiffs, one might expect to find that indebtedness recorded in the books and records of Rising Rocket, particularly in circumstances where Terrence Jasper & Associates was engaged to prepare taxation returns for Rising Rocket (in its capacity as trustee of the Rising Rocket trust). However, there is no cogent evidence before the Court as to how Rising Rocket's 'indebtedness' to Shot One was recorded in Rising Rocket's books of account.

279 Mr Jasper gave evidence in chief that the accounts of Rising Rocket show that all of the funding that Rising Rocket received from Shot One was recorded as a loan. But, as noted above, it seems clear that Mr Jasper was mistaken in this regard because no accounts of Rising Rocket were prepared for any year other than the financial year ended 30 June 2009.[356] In the financial statements of the Rising Rocket Trust that he prepared for the year ended 30 June 2009, the Comparative Trial Balance as at 30 June 2009[357] does record under 'Non-Current Liabilities' a 'Loan-Shot One Pty Ltd' of $(Cr) 514,276.60, but those 2009 accounts (and the Rising Rocket Trust tax return[358]) were presented to Nicholas Day (instead of Richard Day) and signed off by him despite him having no authority to do so.[359] In those circumstances, I have found that those financial statements cannot be viewed as an admission against Rising Rocket's interest.

280 Neither side pursued the matter of Rising Rocket's accounting for the alleged loan transaction with Mr Jasper when he was giving evidence. When the matter was raised by the Court during closing submissions, Senior Counsel for the plaintiffs informed the Court that '[t]here is no evidence one way or the other whether there were MYOB accounts for Rising Rocket.'[360] Senior Counsel for the defendants likewise confirmed that the only financial statements that were ever prepared for Rising Rocket were those prepared for the financial year ended 30 June 2009, which Richard Day never saw.[361] He added that Mr Jasper was engaged to prepare tax returns for Rising Rocket (in its capacity as trustee of the Rising Rocket Trust), and while that task necessarily involved the recording of assessable income and deductible expenditure, those tax returns never included 'any statement of assets and liabilities of the Rising Rocket trust.'[362]

281 Finally, by way of further support for their contention that there was no loan to Rising Rocket in existence, the defendants point to the fact that when Richard Day resigned as a director of Shot One he also effectively handed over his shares in Shot One to Nicholas for no consideration or for the sum of $2.00. They submit that it would be nonsensical for Richard to have done so but nevertheless to have intended to leave behind a substantial liability that Shot One could enforce by way of judgment against him. In those circumstances, the defendants submit that there is a strong basis for the Court to infer that Richard Day had never reached any agreement to repay the sum recorded in the Rising Rocket loan account, and that the Court could accept the evidence he gave that there was no such intention.

282 In the absence of any direct evidence of a loan agreement between Rising Rocket and Shot One, the Court must feel an actual persuasion of the occurrence or existence of the loan before it can be found as a fact. For the reasons discussed above, and notwithstanding the prima facie presumption arising under s 1305(1), when regard is had to the totality of the evidence available to the Court during the evaluative phase, there is real doubt about whether any alleged indebtedness on the part of Rising Rocket to Shot One could ever be made out. In the circumstances, I am not satisfied that the Court could proceed to find the existence of the Rising Rocket loan as a fact, or indeed the quantum of any such alleged indebtedness.

283 As will be readily appreciated, such a view is fatal to the plaintiffs' case, even during the evaluative phase. Nevertheless, I shall proceed to address the other issues raised in the evaluative phase lest a different view later be taken.

In respect of the claim of Shot One against Rising Rocket that it was indebted to Shot One as at 23 May 2012 by reason of having had loans made to it by Shot One prior to 23 May 2012, what was the value of that claim to Shot One as at 23 May 2012, taking into account the legal and procedural hurdles which existed in respect of that claim, the defences available to Rising Rocket and the likely legal costs to Shot One of pursuing that claim?

284 As the plaintiffs' claim in respect of the Rising Rocket loan account is effectively a contractual claim seeking repayment of the moneys advanced or paid by Shot One, the relevant limitation period is that prescribed by s 5(1)(a) of the Limitation of Actions Act 1958, being a period of six years from the date on which the cause of action accrued. The parties agree that there are two relevant limitation dates for the assessment of the value of the alleged Rising Rocket loan as at 23 May 2012. The first is 22 November 2004, being the date which is six years prior to the commencement of the 2010 proceeding. The second is 23 May 2006, being six years prior to the date of the judicial mediation. When the judicial mediation took place, the plaintiffs had not pleaded any claim in respect of the Rising Rocket loan account. If Shot One was not successful in obtaining leave to amend its statement of claim in the 2010 proceeding, so as to include a claim for recovery of the alleged indebtedness in respect of the Rising Rocket loan account, another option available to it may have been to commence a fresh proceeding, in which it could make a claim in respect of any debt incurred from 23 May 2006.

The plaintiffs' assessment of the value of the Shot One's alleged claim against Rising Rocket for amounts loaned since 22 November 2004

285 The plaintiffs submit that there is no apparent reason why Shot One would have been shut out from amending its statement of claim in the 2010 proceeding against Rising Rocket and Richard Day to include a debt claim against Rising Rocket based on the loan account. They submit that had the 2010 proceeding progressed beyond the mediation, it was likely they would have been given leave to amend because the proceeding was not sufficiently advanced that irremediable prejudice would have been occasioned to the defendants by reason of that amendment, and the defendants' solicitors had previously complained about the pleading of the statement of claim. Thus the plaintiffs claim that Shot One could have recovered amounts loaned to Rising Rocket since 22 November 2004, and that the value of the Rising Rocket loan claim that was released by Shot One pursuant to the Deed of Settlement was $659,461, being the balance of the loan on 23 May 2012 of $751,961, less the balance of the loan six years earlier at 22 November 2004 of $92,500.[363]

286 The plaintiffs submit that the source documents examined by Mr Yeo serve to confirm this level of indebtedness. They say Mr Yeo's investigations reveal that direct payments were made by Shot One to Rising Rocket in the sum of $994,106.04 for the period from 22 November 2004 to 23 May 2012. Further, they say, once payments identified by them as not appearing in the MYOB files are subtracted from that total, 'the remaining total of net direct payments that are also recorded as loans against the Rising Rocket account in Shot One's MYOB files total $984,969.43.'[364]

287 The plaintiffs submit that once the direct payments made by Shot One to Rising Rocket (in the sum of $994,106.04) are adjusted by the amounts recorded in Shot One's Ledger Entries Report for the year end 30 June 2009 of $325,508.43[365], the remaining balance is $668,597.61, which 'only slightly exceeds the value of the MYOB accounts loan figure of $659,461 for loans since 22 November 2004.'[366]

The plaintiffs' assessment of the value of Shot One's alleged claim against Rising Rocket for amounts loaned since 23 May 2006

288 The plaintiffs acknowledge that the Court might find it is appropriate to exclude from consideration any amounts alleged to have been loaned to Rising Rocket prior to 23 May 2006, on the basis that any recovery of those prior amounts may have been statute-barred. In that event, the plaintiffs contend that on 23 May 2012, the 'minimum value' of the Rising Rocket loan that was released by Shot One entering into the Deed of Settlement was $433,961. That figure is said to be the balance of the Rising Rocket loan account on 23 May 2012 of $751,961, less the balance of the Rising Rocket loan account loan six years prior to that date of $318,000.

289 The relevant calculations relied upon by the plaintiffs are described as follows in their written closing submissions:[367]

[63] The MYOB files disclose an amount owing by Rising Rocket to Shot One of $318,000 as at 23 May 2006.[368] This is the figure disclosed as owing by Rising Rocket in the MYOB accounts maintained by Mr Grano prior to the replacement of Richard Day by Nicholas Day as sole director and shareholder of Shot One on 11 February 2009.

[64] At 30 June 2006, the balance of the Rising Rocket loan in the MYOB files had increased to $427,000,[369] and this figure was also recorded as the Rising Rocket loan balance in the financial statements prepared by Terry Jasper during 2009 and supporting the income tax returns for the year ended 30 June 2006 (which were lodged on 9 March 2011).[370]

[65] For each financial year between 30 June 2006 and 30 June 2009, the balance of the Rising Rocket loan account disclosed in Shot One's MYOB files matches the balance disclosed in the financial statements and income tax returns, as follows:

[66] In respect of the 30 June 2010 and 2011 financial years, these financial statements and tax returns were not finalised and lodged until after the date of the Deed of Settlement. Nevertheless, the MYOB files continued to record transactions between Shot One and Rising Rocket to the Rising Rocket loan account from 1 July 2009 until the date of the Deed of Settlement. The MYOB files thus disclosed the value of the Rising Rocket loan, as follows:

[67] The MYOB accounts disclose that between 1 July 2011 and the date of the Deed of Settlement further amounts were loaned to Rising Rocket in the sum of $81,719, increasing the balance of the MYOB Rising Rocket loan to $751,961[381].

290 As the plaintiffs noted in their written closing submissions, because the financial statements and tax returns of Shot One for the financial years ended 30 June 2010 and 2011 were not finalised and lodged until after the date the Deed of Settlement was entered into,[382] for the purposes of the 'evaluative phase' they rely upon the quantification of the Rising Rocket loan as shown in the MYOB management accounts. It is clear that the MYOB management accounts for those later years were not prepared by Mr Grano, as he ceased providing bookkeeping services to Shot One in late January 2009. Further, the sums recorded in those MYOB management accounts ($582,066 for the 30 June 2010 financial year[383] and $670,242 for the 30 June 2011 financial year[384]) differ from the quantification of the Rising Rocket loan as reported by Mr Jasper to Shot One's legal advisors prior to, and during the judicial mediation.

291 The evidence before the Court was that on 22 May 2012, the evening before the mediation, Mr Jasper had sent through to Mr Marash a formal response to the information request he and Mr Tomlinson had made at their meeting with Nicholas Day on 9 May 2012. In Mr Jasper's written response to Mr Marash, sent by email at 5:18 pm on 22 May 2012,[385] he stated that they '[had] also revised the management accounts of Shot One Pty Ltd in respect of each financial year since it was established' and so '[t]he statutory accounts of Shot One Pty Ltd as at 30 June 2011' now show the loan account balance due from Rising Rocket as being '$565,808'.[386] However, the version of the financial statements of Shot One for the 30 June 2011 financial year that accompanied his response actually recorded the Rising Rocket loan as being $694,727.[387] For the previous financial year ending 30 June 2010, the Rising Rocket loan account is shown in the accompanying financial statements of Shot One as being $583,442.[388]

292 The evidence shows that the revised figures were still being adjusted by Mr Jasper during the mediation, when he faxed through to Mr Marash an adjusted financial statement of Shot One for the financial year ended 30 June 2011 (endorsed with the handwritten note 'as per TJ adjustments (see A50)') and with a 'Post-It Fax Note' stating that this financial statement was the 'Correct Financial Statement'.[389]

293 The detailed summary of the accounting records evidence set out earlier in these reasons shows that it is unclear precisely what was the quantum of the Rising Rocket loan account as at the date of the mediation. The MYOB management accounts of Shot One reported one set of figures ($582,066 for the 30 June 2010 financial year and $670,242 for the 30 June 2011 financial year), but Mr Jasper said those MYOB management accounts had been revised. Further, from 1 July 2011 until 23 May 2012, the MYOB management accounts record Shot One as having made 11 monthly payments of $7,429 to Rising Rocket, totalling $81,719, which were added to the Rising Rocket loan account (shown as being $670,242 as at 30 June 2011[390]), such that the total indebtedness of Rising Rocket to Shot One as at the date of the mediation is recorded as being $751,961.

294 It is against that background that the plaintiffs contend the 'minimum value' to be ascribed to the Rising Rocket loan account as released by the Deed of Settlement was $433,961, being the (asserted) balance of the Rising Rocket loan account on 23 May 2012 of $751,961, less the balance of the loan account six years prior, at 23 May 2006, of $318,000.

The defendants contend that the value of the alleged Rising Rocket loan as at 23 May 2012 was negligible

295 The defendants, on the other hand, contend that in light of the matters advanced by them, and discussed above, the (real) value of the alleged Rising Rocket loan as at 23 May 2012 was negligible. They submit that such a conclusion is 'reflected in the advice Shot One received from Sam Marash during, and following the mediation, as stated in the letter from Sam Marash to Shot One dated 28 May 2012.'[391] It will be recalled that in his letter, Mr Marash expressed the view that the plaintiffs would likely encounter significant problems if the matter proceeded to a trial, in particular because:

(a) of the lack of evidence of any certainty which could support the value of the loan accounts asserted by Shot One;

(b) there are no written loan agreements in existence;

(c) the financial statements of Shot One appear to have been reconstructed after Richard Day signed off on them;

(d) the instructions regarding the loan accounts seemed to change regularly, as do the balances depending on which version of the financial documents is used; and

(e) the balances relied upon are disputed by the defendants.

They also rely upon the fact that in the weeks leading up to 17 May 2012, Mr Jasper, acting on instructions from Nicholas Day as the sole director of Shot One, reduced the Rising Rocket loan account in Shot One's financial statements for the year ending 30 June 2010 from $583,441.60 to zero (thereby eliminating the Rising Rocket loan account),[392] and then on 17 May 2012, as part of Shot One's preparation for the upcoming mediation of the 2010 proceeding, unilaterally reversed out this entry (thereby re-establishing the Rising Rocket loan account).

296 In addition to their primary case that the amounts recorded in the Rising Rocket loan account are not loans, the defendants submit that all of the amounts added to the $514,276 (that was recorded in the MYOB management accounts of Shot One as at 30 June 2009) to arrive at a total of $751,000 should never have been recorded in Shot One's books as a loan to Rising Rocket, because there is no evidence that any of those payments (totalling $237,000) was ever the subject of agreement as a loan. They say the plaintiffs have not sought to explain why these (later) payments should be treated as a loan. Further, they point to the fact that (a) from February 2009 Mr Grano was no longer preparing the MYOB management accounts, (b) there is no evidence that Richard Day ever gave any 'direction' to any bookkeeper at Mr Jasper's firm that payments made to Rising Rocket were to be recorded in a loan account, and (c) there is no evidence suggesting that there was ever any agreement by Rising Rocket as the recipient of those payments for them be treated as loans.

297 The defendants also contend that the total sum of $237,000 referred to above, that was paid by Shot One to Rising Rocket by regular monthly payments made between 11 February 2009 and 23 May 2012, was not paid by way of loan.[393] Rather, they submit, these payments, which are summarised in Exhibit P1.4 (prepared by Mr Yeo, Shot One's liquidator), were payments made by Shot One which were in the nature of rent, being payments made by Shot One to Rising Rocket in exchange for the continued occupation by Nicholas of the Rockley Road Property.[394] As noted above, by way of example, the additional sum of $81,719 that the plaintiffs claim was added to the Rising Rocket loan account from 1 July 2011 until 23 May 2012 represents 11 monthly payments of $7,429 (being the notified monthly rental sum for the Rockley Road property) that were made by Shot One to Rising Rocket. As the defendants point out, in circumstances where Nicholas Day and his family were residing in the Rockley Road property throughout that period, the notion that these regular monthly payments were loans and not payments of rent is simply not a credible one because it 'involves the counterfactual proposition that Rising Rocket (which was under Richard's control) was willing to allow Nicholas to occupy the Rockley Road Property for no consideration, including while Nicholas was causing Shot One to sue Richard and Rising Rocket in the 2010 proceeding.'[395]

298 In these circumstances, the defendants submit that if the sum attributable to rental is taken out (i.e subtracted from the $433,961 'minimum value' claimed), a balance of $196,000 remains, which they contend was never a loan, and in any event it was later written off, on instructions from Nicholas Day.

299 The defendants contend that any application brought by Shot One at or around the time of the mediation for leave to amend its statement of claim in the 2010 proceeding to include a claim based on the alleged Rising Rocket loan would have had significant risks of failing. They note that while both s 34 of the Limitation of Actions Act 1958 and r 36.01(6) of the Supreme Court (General Civil Procedure) Rules 2015 permit a court to give leave to a plaintiff to add an otherwise statute-barred cause of action after the date of commencement of a civil proceeding in Victoria, it is by no means inevitable that leave would be granted. In this regard, they rely upon Agtrack (NT) Pty Ltd v Hatfield,[396] where Ormiston JA made clear that the primary test as to whether leave would be granted was one of fairness, and that an amendment which sought to raise new facts, as opposed to an amendment re-characterising a claim, would generally not be permitted if it would have the effect of unfairly prejudicing a defendant, including by depriving the defendant of the benefit of a limitations defence conferred by statute.[397] In those circumstances, the defendants submit that unless Shot One can establish that Rising Rocket had acknowledged the existence of a loan owed to Shot One during the relevant six year period, it was statute-barred as at 23 May 2012 in respect of a portion of the alleged debt.

300 It is not clear why Shot One's claim based on the Rising Rocket loan account was not brought when the 2010 proceeding was issued. In the terms in which the Rising Rocket loan account claim was foreshadowed just prior to the mediation, it was a fresh claim that would add a totally new cause of action to the 2010 proceeding, even though it may have had some common factual substratum with the existing claims. It is difficult to identify and assess precisely what scope there was for Richard Day to suffer significant prejudice if the Rising Rocket loan account claim was permitted to be added in to the 2010 proceeding and pursued without regard to any limitation issue, save that the claim was a totally new cause of action and Rising Rocket would face a greater financial exposure as a result of the earlier date being applicable (i.e., 22 November 2004 rather than 23 May 2006). It is likely that much of the relevant documentation that has been adduced in this proceeding would have been available, and similarly with the witnesses who have given evidence. Whether the Court would exercise its discretion to permit the loan account claim to be added to the proceeding is not clear, but given that it is a claim of a different character to those advanced in the 2010 proceeding, I share the defendants' view that any application brought by Shot One for leave to amend its statement of claim in the 2010 proceeding so as to include a claim based on the alleged Rising Rocket loan had significant risks of failing.

301 As to 'acknowledgment', s 24(3) of the Limitation of Actions Act 1958 relevantly provides that where any right of action has accrued to recover any debt, and the person liable acknowledges the claim, the right 'shall be deemed to have accrued on and not before the date of acknowledgement'. Section 25 deals with what constitutes an 'acknowledgment'. In essence, an acknowledgment for this purpose must: be in writing;[398] be signed by the person making the acknowledgment;[399] and be made to the person whose claim is being acknowledged.[400] An acknowledgement may be made by an agent of the person making the acknowledgment.[401] Further, the cases make clear that corporate documentation, such as a company's balance sheet, may constitute an acknowledgment of the company's indebtedness to the creditors shown in the balance sheet.[402]

302 In VL Finance Pty Ltd v Legudi, Nettle J confirmed that in order for a document to constitute an acknowledgement, it must express the debtor's intention to admit the debt:

[I]t remains the position in Australia as it is in England that a document does not constitute an acknowledgement unless it is in substance expressive of the debtor's intention to admit the debt and to have the document produced and used for that purpose.[403]

303 In VL Finance Pty Ltd, the relevant acknowledgement was submitted to be contained in an annual tax return of a company that was signed by the director. The relevant debt was a debt owed by the director to the company, which was referred to in the return. His Honour found that the company's annual tax return did not constitute, and was not capable of constituting, an acknowledgement by the directors of the company of debts which they owe to the company. He said:

In my opinion an annual return is not capable of constituting an acknowledgement by the directors of the company of debts which they owe to the company. It may perhaps be an acknowledgement by the company (in the same way that a balance sheet may be an acknowledgment by the company), because it may be supposed that the return is intended for use by the company's creditors. But I do not consider that it is an acknowledgement by the directors, because in my view it cannot be supposed that the return is made out to be used by the directors' creditors. The return is not made to the company. It is made by the company.[404]

304 The plaintiff foreshadowed that it would rely upon minutes of meetings of directors of Shot One signed by Richard Day, and income tax returns and financial statements of Rising Rocket prepared by Mr Jasper, as constituting admissions or acknowledgments of debt by Rising Rocket to Shot One. However, as the trial progressed, it became clear that any minutes of Shot One that Richard Day might have signed were of little or no evidentiary value, in the sense that Richard's evidence was that the meetings did not occur and he did not recall signing the minutes, and Mr Jasper accepted that no meetings of Shot One ever took place as described in the minutes.

305 The relevant minutes of meetings of directors refer to financial accounts of Shot One for financial years ended 30 June 2005, 2006, 2007 and 2008 respectively and state in each case that the identified accounts 'be and are hereby adopted as tabled.'[405] However, as noted earlier, none of the minutes attach any financial accounts, and there is no evidence as to which version of the financial accounts each set of minutes purported to adopt. The fact that there are in evidence before the Court multiple versions of Shot One's financial statements for financial years 2005, 2006, 2007 and 2008 exacerbates the difficulty of identifying which version of the financial statements was purportedly adopted by the respective minutes. Furthermore, Mr Jasper gave evidence that he believed Richard Day signed the minutes sometime after he had resigned as director of Shot One, and probably in about May 2009. Mr Jasper also accepted, under cross-examination, that the final signed financial statements of Shot One for each of the financial years 2005 through to 2011 must have been signed by Nicholas Day and not by Richard Day, essentially because the income tax return would only be signed once the financial statements had been signed, and he presumed that Nicholas Day had signed Shot One's tax returns for each of the years 2005 to 2011.

306 To the extent that there are financial statements or income tax returns of Rising Rocket in evidence before the Court, they also suffer from similar deficiencies that render them of little or no probative value. During cross-examination, Mr Jasper was shown copies of the income tax returns prepared by the firm for the Rising Rocket Trust for each of the financial years ended 30 June 2005,[406] 2006,[407] 2007[408] and 2008.[409] Mr Jasper accepted that, in each case, his firm only provided the relevant income tax return to Richard Day in or after April 2009.[410] In each case, the return recorded rental income received and interest and other rental deductions, producing a net loss for the year in respect of rent.[411] Under the 'Key financial information' section of each return, no key financial information was recorded in the listing of 'All current assets', 'Total assets', 'All current liabilities' or 'Total liabilities' or under 'Proprietors' funds'.[412] In other words, there was no loan account with Shot One recorded as a liability of Rising Rocket. Further, as was noted earlier, the financial statements of Rising Rocket for the financial year ended 30 June 2009 were prepared by Mr Jasper, without consulting Richard Day, and were signed off by Nicholas Day, despite him having no authority to do so.

307 In the circumstances, I am not satisfied that any one or more of the minutes of meeting of directors of Shot One, or the income tax returns of Rising Rocket (as trustee of the Rising Rocket Trust) or the financial statements for the financial year ended 30 June 2009 could relevantly constitute an 'acknowledgement' made by or on behalf of Rising Rocket of any indebtedness to Shot One.

308 In my view, the fresh cause of action based on the loan account which Shot One sought to assert against Rising Rocket at the mediation faced some real and significant hurdles before it could be brought to fruition. First, the lack of evidence supporting the very existence of transaction by way of loan was problematic. Secondly, if a loan were made out, then Mr Jasper had effectively written it off on the basis of instructions given by Nicholas Day, albeit that he later sought to re-instate it prior to the mediation on instructions from Nicholas Day. Thirdly if the reinstatement was effective, the sum attributable to post 11 February 2009 rent should be deducted from the $433,961 minimum value claimed, leaving a balance of $196,000.

309 Accordingly, essentially for the reasons advanced by the defendants, I share the view Mr Marash expressed when he reported to Shot One by letter, immediately following the mediation, to the effect that the plaintiffs would likely encounter significant problems if the matter proceeded to a trial, in particular because there was a lack of evidence of any certainty which could support the value of the Rising Rocket loan account asserted by Shot One. Furthermore, Shot One could only pursue recovery action against Rising Rocket once it had dealt successfully with the limitations and pleading issues, and having done so it would then encounter real difficulties in converting its claim into a judgment debt. But even if it were successful in doing so, Shot One would likely incur non-recoverable costs and expenses in the course of achieving this.

310 When these matters are taken into account, in the process of assessing the value of Shot One's claim as a cause of action, it is likely that a reasonable person in the position of Shot One would form the view that Shot One's loan account claim against Rising Rocket was 'not worth the powder and shot'. Accordingly, for the purposes of the evaluative phase, I would place a low, tantamount to 'negligible', value on Shot One's loan account claim against Rising Rocket.

311 As noted above, Issues 5, 8, 9 and 10 relate to the application of the conclusions reached during the evaluative phase to the legal requirements of s 588FB, the defence under s 588FG(2), and the remedies under s 588FF of the Corporations Act. I turn to consider them, even though it is not strictly necessary to do so, given the conclusions I have reached above.

Issue 5: Benefits to Shot One from entry into the Deed of Settlement

Issue 5: What benefits (if any) did Shot One obtain from entering into the Deed of Settlement?

313 As has been noted, the Deed of Settlement effected a compromise not only of the claims pleaded by Shot One in the 2010 proceeding but also the foreshadowed (unpleaded) claims against Richard Day and Rising Rocket in respect of their alleged loan accounts with Shot One, as well as Cooniemoon's claims against Shot One[413] and the claim brought by Rising Rocket against Nicholas Day in the VCAT proceeding seeking possession of the Rockley Road property.[414]

314 The plaintiffs submitted that 'Shot One obtained no or merely negligible benefits from entering into the Deed of Settlement.'[415] Rather, they said, by doing so Shot One 'abandoned potentially valuable causes of action in debt against Richard Day and Rising Rocket' and '[i]n return, it avoided certain inchoate inconveniences (such as the risk of a costs order and the stress of litigation).'[416] The plaintiffs also maintained that there was 'no insuperable or even major obstacle to Shot One's pursuit of or recovery on its claims in debt against Rising Rocket and Richard Day'.[417] Whilst resort to hindsight is not permissible, the plaintiffs' submissions now fall for consideration in a context where they acknowledge that only the claim against Rising Rocket is now being pursued.

315 The defendants, in their closing submissions, contended that the plaintiffs had effectively conceded that none of the (pleaded) claims made by Shot One in the 2010 proceeding had any prospects of success, given that they called no evidence to support them, and in their statement of claim filed in this proceeding they had abandoned any reliance upon them. Accordingly, the defendants submitted it is likely that in the absence of Shot One's statement of claim in the 2010 proceeding being amended (or a fresh proceeding being commenced) to include the foreshadowed claims in respect of the alleged loan accounts, none of the pleaded claims in the 2010 proceeding would have had any real prospects of success, in which event the Court would likely have required Shot One to pay the costs of Richard Day and Rising Rocket.

316 It is unclear precisely what costs had been incurred by the defendants to that point, but it would not have been a trifling amount, and by settling as it did, Shot One avoided paying those costs and the risk of it being required to pay the costs of Richard Day and Rising Rocket in the event that the matter proceeded to a trial in which Shot One was ultimately unsuccessful. The settlement also put an end to Shot One itself incurring any further legal costs in the 2010 proceeding (and the costs of any fresh proceeding it might otherwise have commenced as a vehicle for pleading the fresh causes of action it had foreshadowed). That is, while the compromise achieved might be viewed simplistically as one where Shot One effectively abandoned its claims and walked away bearing its own costs, by entering into the Deed of Settlement, Shot One nevertheless:

(a) put an end to any liability it might have for the costs incurred by the other parties;

(b) avoided incurring further non-recoverable costs on its own account;

(c) expunged its liability (of at least $71,000) to Cooniemoon;[418] and

(d) by settling both the 2010 proceeding and the VCAT proceeding, Shot One ensured that its lead architect, Nicholas Day, could continue to reside in the Rockley Road property for a period of 15 months, and perform his role in Shot One's architectural practice free from the stress and distraction of the litigation.

317 In my view, essentially for the reasons advanced by the defendant, it is clear that Shot One obtained real benefits from entering into the Deed of Settlement.

Issue 8: Was the entry into the Deed of Settlement an uncommercial transaction of Shot One?

Issue 8: Was the entry into the Deed of Settlement an uncommercial transaction of Shot One?

319 In determining whether the transaction in question in the present case, namely the entry into the Deed of Settlement, is relevantly an 'uncommercial transaction', the Court must consider each of the criteria set out in s 588FB by reference to Shot One's circumstances as at 23 May 2012, but including the state of knowledge of Nicholas Day as the sole director and directing mind of the company, and then, without the influence of hindsight, reach a conclusion as to whether a reasonable person in Shot One's circumstances would not have entered into the transaction.

320 The defendants submit that the following facts are relevant to a consideration of Nicholas Day's state of knowledge, in agreeing to cause Shot One to enter into the Deed of Settlement on 23 May 2012:

(a) Mr Jasper had advised Nicholas Day on 22 May 2012 and 23 May 2012 that Shot One owed Cooniemoon the sum of $71,071;[420]

(b) Mr Marash had informed Nicholas Day from at least 17 February 2012 that there 'were significant problems with [Shot One's] case against Rising Rocket and Richard Day'.[421] Closer to the mediation, when Shot One was also pursuing the unpleaded loan account claims against Rising Rocket and Richard Day, Nicholas was aware that there were problems with the reliability of Shot One's financial records and accounts, and at the mediation he was informed that the financial records of Shot One did not present coherent and convincing proof for its claims that loans were owed by Rising Rocket and Richard Day to Shot One;[422]

(c) Mr Marash had given Nicholas Day an estimate of the costs Shot One would likely incur from the date of the mediation up to and including trial (about $80,000) and informed him that 'if Shot One is completely unsuccessful in its claim it may be out of pocket up to $200,000',[423] such that Nicholas Day was aware as at 23 May 2012 that the costs of a trial of the 2010 proceeding were likely to be significant.

321 The plaintiffs, on the other hand, in their written submissions contended that the balancing exercise directed by s 588FB is to be undertaken in the context of the following facts:

(a) Shot One had sued Rising Rocket for valuable real estate in Rockley Road for which it paid most if not all of the purchase moneys;

(b) Shot One decided to negotiate a trade-off of the loans owed to it by Rising Rocket and Richard Day and the Rockley Road property;

(c) the consideration Shot One received for the abandonment of its claim was no consideration or at best negligible, amounting to the avoidance of a potential liability for a costs order against it in the event that it lost its case for a trust over the property.[424]

322 By the time oral closing submissions were made, however, the plaintiffs had effectively determined not to pursue any claim other than that in respect of the Rising Rocket loan account. They submitted that the consideration Shot One received for the abandonment of its claim was 'merely notional', being no more than a mutual release and the avoidance of further expenditure of time and money on the 2010 proceeding and a potential costs order in the event that its debt claims or any part of them were unsuccessful. Nevertheless, they point to the difference between the value of the loan from Shot One to Rising Rocket alone, and the value of the consideration it received for its forbearance under the Deed of Settlement, as being 'substantial' and submit that it is the true measure of the (un)commerciality of the Deed of Settlement for Shot One. In those circumstances, they submit that the transaction giving effect to the surrender of that asset for minimal value was 'uncommercial' within the meaning of s 588FB of the Act.

Evaluation of benefits and detriments - sections 588FB(1)(a) and (b)

323 As will be apparent from the foregoing, in my view, Shot One's claim against Rising Rocket based on the loan account faced considerable problems. First, it was an unpleaded claim. If it were to be pursued along with the pleaded claims in the 2010 proceeding, leave was required and it was by no means inevitable that leave would be granted. If pursued in a fresh proceeding, then Shot One would be limited to recovering for amounts 'loaned' to Rising Rocket on or after 23 May 2006.

324 Secondly, there was no written loan agreement made between Rising Rocket and Shot One, and Richard Day denied that there was ever any transaction by way of loan entered into between them. Apart from the fact that the 'books' of Shot One record entries made in the Rising Rocket loan account as a 'Non-Current' 'receivable', it is unclear what the terms of the alleged loan agreement were, and when it was repayable. Further, having regard to the evidence adduced at trial concerning the unreliability of the books and records of Shot One, the prima facie presumption under s 1305 is rebutted, with the result that no real weight can be attached to what is recorded in the books and financial statements of Shot One and ultimately they are of no probative value. It seems clear that from February 2009, following the appointment of Nicholas Day as the sole director and shareholder of Shot One, discussions did take place between him and Mr Jasper concerning the accounts of Shot One. The financial statements and income tax returns of Shot One for the financial years ended 30 June 2005 and following were prepared by Terrence Jasper & Associates and then signed off by Nicholas Day, apparently in consultation with Mr Jasper, after journal entries were made adjusting and re-adjusting many of the loan account entries. The process by which the loan account entries were recorded in the various sets of financial statements and tax returns has been described in some detail above. If, as appears to be the case, the MYOB management accounts simply record 'payments' made by Shot One to Rising Rocket, rather than loans, it is difficult to accept that the MYOB management accounts are capable of constituting direct and reliable evidence of any 'loan' transactions.

325 As the MYOB management accounts were used as the starting point for the preparation of the financial statements and income tax returns of Shot One, it is likewise difficult to accept that the financial statements and income tax returns could constitute any better or more reliable record of any 'loan' transaction. Nicholas Day gave the instructions to Mr Jasper for the preparation of those accounts, including the journal entry adjustments to be made, but (for the most part) they relate to a period of time when he was not a director of Shot One, and Nicholas had not been involved in the preparation of the MYOB management accounts. In giving those instructions to Mr Jasper when he was preparing those documents or performing the journal entry adjustments, there was no consultation with, or enquiry made of, Richard Day or Mr Grano. That is, the journal adjustments were made by or on behalf of Shot One unilaterally. I am not satisfied that the financial statements in their final form for each of the years from 2004 to 2009 enable the Court to infer that the accounts of Shot One as presented correctly record and explain the transactions of the company, and in particular, any indebtedness of Rising Rocket to Shot One.

326 Accordingly, any evaluation of the benefits and detriments to Shot One in entering into the transaction must take place against that background.

327 By entering into the Deed of Settlement on 23 May 2012, Shot One effectively abandoned its claims, both pleaded and unpleaded against Richard Day and Rising Rocket. But of those claims, the only one which the plaintiffs now seriously contend had value as an enforceable claim is the loan account claim against Rising Rocket. In my view, from the outset, that claim faced significant difficulties. The plaintiffs assert that its value as at 23 May 2012 was 'at least' $433,961. But if one accepts, as I do, the defendants' submission that a substantial component of that alleged indebtedness arising after February 2009 reflected what were demonstrably payments made by Shot One to Rising Rocket by way of rental for Nicholas Day's occupation of the Rockley Road property, then the real 'value' was considerably less, and closer to $196,000. And Shot One would only succeed in recovering that sum if it could prove, first, that the component sums were advanced to Rising Rocket by way of loan and, secondly, that the journal entries re-allocating the loan account balances to Nicholas Day and then later reinstating them to Rising Rocket did not render the 'loan' sum non-recoverable. In my view, the prospect of Shot One proving each of those matters is doubtful. Accordingly, the 'detriment' to Shot One of entering into the transaction recorded in the Deed of Settlement is effectively the abandonment of its loan account claim against Rising Rocket, but recognising and acknowledging its attendant difficulties of proof and (poor) prospects of success.

328 The benefits to Shot One of entering into the transaction have been discussed above under Issue 5. Suffice it to say that, in my view, Shot One obtained real benefits from entering into the Deed of Settlement.

The respective benefits to other parties to the transaction - section 588FB(1)(c)

329 Neither the plaintiffs nor the defendants devoted any real attention in their submissions to this aspect, so I propose to address it only briefly.

330 The parties to the Deed of Settlement were not only the parties to the 2010 proceeding, namely Shot One, Rising Rocket and Richard Day, but also included Nicholas Day and Cooniemoon.

331 When the Deed of Settlement was entered into on 23 May 2012, Nicholas Day was the sole director and shareholder of Shot One, and he was employed in its architectural practice as the lead architect. He was living in the Rockley Road property owned by Rising Rocket, but had been served with a notice to vacate, which he was seeking to set aside in proceedings he commenced at VCAT.[425] At the mediation it was made clear that Nicholas Day wanted to continue residing there.[426] By entering into the Deed of Settlement, and thereby settling the VCAT proceeding, Shot One ensured that Nicholas Day could continue to reside in the Rockley Road property for a period of 15 months. No doubt that was of benefit to him, but it was also of real benefit to Shot One in the sense that it maintained the status quo and permitted Nicholas Day to devote his time and attention to the work of the architectural practice, without any disruption being caused by the need to relocate his family to a similarly suitable residence.

332 In the case of Nicholas Day, recitals J and K to the Deed of Settlement recorded that Cooniemoon's claims that Shot One and Nicholas owe sums under loans by way of damages, which claims are disputed by Shot One and Nicholas Day and that the solicitors acting for Rising Rocket and Richard Day have asserted that Rising Rocket and Richard have counter-claims available against Shot One and or Nicholas Day's in the 2010 proceeding. As each of those claims was compromised, notionally some benefit was derived by or accrued to Nicholas Day as a result of entry into the transaction.

333 In the case of Richard Day, Shot One compromised its claim in respect of his loan account. As with Shot One's claim against Rising Rocket, it is clear from the outset that the pursuit of this unpleaded cause of action faced significant difficulties. While it is likely that there was some notional benefit to Richard Day in putting an end to both this unpleaded claim and the other pleaded claims, nevertheless he gave up the ability to recover from Shot One any of the costs incurred to date in defending the pleaded claims. I note also that the mutual releases contained in cl 12 of the Deed of Settlement were expressed to cover:

1. . . . all future and existing actions, causes of action, potential causes of action, suits, rights, claims, expenses, losses proceedings and demands of whatsoever nature . . . wherever and however arising, known or unknown, which relate to, directly or indirectly, or are in anyway connected with the [2010] Proceeding or the matters raised in the Introduction above, and further includes without limitation . . . any claims as against Richard in relation to Richard's role and tenure as a director of Shot One . . . [427]

334 It is unclear whether there was any other benefit derived by Richard Day as a result of the extended terms in which the release was expressed, but as the plaintiffs did not address any submissions to it, I shall proceed on the basis that any such benefit was nominal.

335 The position of Rising Rocket has already been canvassed at some length earlier in these reasons. By entering into the Deed of Settlement, Shot One compromised both its pleaded claims against Rising Rocket in respect of the Rockley Road property and its unpleaded claim concerning the Rising Rocket loan account. The plaintiffs contend that the 'difference between the value of the loan from Shot One to Rising Rocket alone, and the value of the consideration that [it received for its forbearance to sue], is substantial and it is the true measure of the commerciality of the Deed of Settlement for Shot One.'[428] For the reasons set out above, Shot One's claim in relation to the Rising Rocket loan account faced significant problems and, in my view, its prospects of establishing that there was any substantial indebtedness by way of loan that was recoverable at the suit of Shot One were low. Nevertheless there would have been some notional benefit to Rising Rocket in the same way as for Richard Day in that it gave up the ability to recover costs incurred to that point.

336 By entering into the Deed of Settlement, Shot One expunged its liability (of at least $71,000) to Cooniemoon, which was an indebtedness that Mr Jasper had substantiated as being correct in the days leading up to the mediation. As noted earlier, this resulted in a demonstrable benefit to Shot One.

Any other relevant matters - section 588FB(1)(d)

Transaction between 'blood relatives' - but no benefit intended to be conferred

337 It is also relevant to note that unlike some of the other cases where a transaction that took place between 'blood relatives' is sought to be set aside under s 588FB, in the present case it is clear that when the Deed of Settlement was entered into there was no 'brotherly love' left between Nicholas Day and Richard Day. The evidence shows that while Richard Day actively sought to assist Nicholas Day during the period when he was bankrupt, by arranging for Shot One to purchase the NDA architectural practice from his trustee and keep it going and employ Nicholas Day as the lead architect on a bespoke remuneration package, Nicholas Day's response shortly after he took over control of Shot One was for Shot One to sue Richard Day and Rising Rocket. In the 2010 proceeding, Shot One contended that Richard Day had breached his duties as a director of Shot One and that Rising Rocket held the Rockley Road property on a resulting trust or a constructive trust for Shot One. There is nothing in the evidence before the Court to suggest that in reaching a compromise of that proceeding and the foreshadowed loan account claims, Nicholas Day was motivated by a desire to confer a benefit on his brother or any corporate entity involving him.

Advice given to Shot One by its lawyers at or about time transaction entered into

338 The defendants submit that the most significant 'other relevant matter' in considering whether or not a reasonable person in Shot One's circumstances would not have entered into the Deed of Settlement is the fact that Shot One was being advised by competent lawyers throughout, both in respect of the 2010 proceeding generally and at the judicial mediation which led to the Deed of Settlement being entered into, and in circumstances where they were fully informed of all matters relevant to Shot One, including Nicholas Day.[429]

339 The case that was pleaded in the 2010 proceeding, as it was when it was instituted, and as it stood at the mediation in May 2012, was founded on the notion that Rising Rocket had received the benefit of payments made by Shot One, with knowledge that they had been effected by Richard Day in breach of duty. Shot One contended that the payments made to Rising Rocket or the traceable proceeds were subject to a constructive trust in favour of Shot One, with the result that the Rockley Road property was effectively held by Rising Rocket on a constructive trust for the benefit of Shot One. By 23 May 2012, Shot One was aware that the constructive trust claim had little or no prospects of success, and had foreshadowed amending its pleading to bring the loan account claims against Richard Day and Rising Rocket.

340 Shot One's solicitor, Mr Marash, gave evidence that in terms of the mediation, the approach Shot One was adopting, or its objective in terms of trying to resolve the matter was that, having discovered the loan accounts, 'there would be effectively an exchange or trade-off of the loan accounts in the name of Rising Rocket, Ric Day and perhaps even Cooniemoon for the property that was sought to be recovered, Rockley Road'.[430] He then explained the 'trade-off' by saying that there 'wouldn't be a payment moving from the company to Rising Rocket'; rather 'effectively the loan accounts would be deleted' and traded-off as consideration for the transfer of the Rockley Road property.[431]

341 At the mediation, one of the points Mr Lhuede, the solicitor for Richard Day and Rising Rocket, made in his opening address was to the effect that the constructive trust argument could not be maintained. But, he said, if it was pursued by Shot One at trial, then potential ramifications may flow for Nicholas Day, in the sense that if Shot One was successful, his trustee in bankruptcy might re-assess his position in relation to the settlement reached to discharge Nicholas Day from bankruptcy, and seek to claw back the Rockley Road property.

342 The notes taken by Mr Marash record that at several stages during the mediation reference was made to the topic of a 'warehousing arrangement'. The first mention was by Mr Lhuede during the opening session, when he touched on the issue of whether there was any warehousing arrangement and said that Richard Day denies there was, and noted that it 'would create criminal issues'.[432] That was followed a little later by Mr Lhuede stating words to the effect that Richard Day and Rising Rocket want to know whether Shot One is saying there was a warehouse agreement, to which Randall AsJ responded by querying whether Shot One 'can maintain a claim if warehouse agreement'.[433] Mr Marash gave evidence that the matter raised by Mr Lhuede in opening, concerning the potential for ramifications to arise for Nicholas Day if the constructive trust argument was pursued by Shot One, was one that he believed he had discussed with Nicholas before the mediation.[434]

343 After the opening addresses were made, the parties separated and retired to their private break-out rooms.[435] Mr Marash's notes record the following matters raised and comments made during this 'break-out session':

Shot One tax debt

E$400,000

-pay $50,000 a month until satisfied

-Tacit agreement w ATO

→underlying agreement is illegal.

Justin [Tomlinson][436] → maybe best to walk away'[437]

344 Mr Marash said that when the Shot One team retired to their private room, Nicholas Day gave him new instructions, to the effect that he did not wish to proceed with the litigation. Under cross-examination, Mr Marash outlined the gist of the new instructions, as follows:

[MR GLICK:] What were your new instructions?---That he didn't want to proceed with the litigation, with the claim.

Did Mr Nicholas Day tell you why he didn't want to proceed?---No.

Should Her Honour understand it's a client saying to you, "Mr Marash, thank you, but I just don't want to go ahead"?---Yes.

Was it in that context - you spoke about recommending or advising Mr Day to call Mr Jasper?---Yes.

And the reason you gave to Her Honour was you wanted him to call Mr Jasper in relation to the loan account and other related matters?---Yes.

And you said Mr Day refused?---Yes.

What did he say to you?---He doesn't want to and he doesn't need to call Mr Jasper.[438]

345 After the break, the negotiations continued, and the defendants made an offer. Mr Marash's notes of the mediation record that the Shot One team then made a telephone call to Mr Jasper, following which Nicholas Day gave instructions for Shot One to make a counter-offer, to which the defendants responded. Perusal of Mr Marash's notes of the mediation make clear that he and Mr Tomlinson were giving 'advice' to Shot One during the course of the mediation at least in the sense of canvassing the available options - for example, after Shot One's counter-offer was put, and negotiations were underway in respect of the defendants' responding offer, Mr Marash's notes record the following:

Justin Options

1. Can accept his offer; or

2. Counter offer 18 months but accept 2 months bond

3. Don't accept offer.

→Walk away

- proceeding continues

→costs issue

→further costs of going ahead

→criminal issues

4. Discontinue proceedings

releases

-current situation for 3 months

1. Will not act on current notice to vacate & will not issue any fresh notice to vacate

346 Nicholas Day then gave instructions to put a further offer, which was accepted by the defendants, following which the agreed terms were recorded in the Deed of Settlement.

347 As noted in the Introduction to these reasons, a few days after the Deed of Settlement was entered into, Mr Marash wrote to Shot One, reiterating what had taken place at the mediation and recording the matters that had been raised. In the closing paragraphs of his letter, Mr Marash commented upon the outcome reached under the Deed of Settlement, observing that 'whilst the settlement of the matter did not provide the outcome that Shot One was initially hoping to achieve, we consider the settlement reached is a sensible one, given the problems with Shot One's case and the potential consequences that may have flowed in the event the matter proceeded past Mediation.' He also went on to set out the substance of the reasons why he was of that view.

348 When giving evidence in chief, Mr Marash was asked by Senior Counsel for the defendants about his recollection of the matters that were discussed by the legal representatives with Nicholas Day at or prior to the mediation and before the Deed of Settlement was signed. His evidence was that some of the matters set out in the penultimate paragraph of his letter 'would have been discussed' and he was then asked what his recollection of those discussions was. He responded by saying:

---Certainly during the discussions with Mr Tomlinson and Nicholas there were concerns about the case that was currently being pled and run, and some of those concerns were a result of documents that had been produced recently and also during the course of the proceeding which were initially said to have been not in existence, but then did turn up.[440]

349 Under cross-examination, he clarified that the reference to the documents that were produced recently was the loan account documentation. He said:

---Fairly late into the proceeding documents were discovered which showed loan accounts in the names of Rising Rocket, from memory, and I can't recall off the top of my head, but possibly Ric Day and maybe even another company as well, Cooniemoon. As part of that, the pleading as drafted at that time didn't include an application to recover those funds, any funds in the loan account and it was raised that this was something that needed to be addressed if the matter went past the mediation.[441]

350 At the trial, during oral closing submissions, Senior Counsel for the plaintiffs submitted that at the mediation, by entering into the Deed of Settlement, Shot One's interests were being 'sacrificed' for Nicholas Day's interests.[442] In effect, Mr Glick QC said, that once allegations of warehousing and the prospect of criminal charges were raised by Mr Lhuede in his opening address at the mediation, 'there was an about face'[443] in the sense that Nicholas Day gave instructions on behalf of Shot One that he did not wish to proceed, but Mr Marash 'didn't know the reason for it'.[444] Mr Glick QC added that 'that inexplicable change is not the object or the result of any legal advice from either counsel or solicitor'[445] noting that Nicholas Day did not follow Mr Marash's advice that he should contact Mr Jasper to discuss the loan accounts. Rather, he said Nicholas Day 'dropped everything' and '[t]he sacrificial lamb was Shot One' in the sense that it 'gave up everything, and that was to Mr Marash a change which was unexpected and unexplained.'[446] To the extent that Mr Marash, in his letter, sought to explain what had taken place, Mr Glick QC submitted that Mr Marash had agreed it was 'a rationalisation after the event'[447] and thus he cautioned the Court 'not to give too much weight to the letter which talks about possible rationalisations for what happened written after the event.'[448]

351 The submission that 'Shot One was sacrificed' harks back to the original 'money had and received' case brought by the (liquidator) plaintiffs in this proceeding, in which it was proposed that Nicholas Day would give evidence. But following the mediation conducted before Efthim AsJ in February 2017, the plaintiffs repleaded their case (as one relying solely on the loan account claims) once it became clear that Nicholas Day would not be giving evidence, and when the trial recommenced they informed the Court that they no longer proposed calling Mr Marash. The defendants responded by indicating that they would be calling Mr Marash in responding to the repleaded case, and he was examined briefly in chief and a redacted version of his original statement was tendered before he was cross-examined.

352 Mr Marash was a non-partisan witness, and he gave his evidence frankly. In my view, Mr Marash's post-mediation letter fairly and accurately represents the views he held at or about the time when he wrote it. The views Mr Marash recorded in his letter reflected the advice given to Shot One at or about the time of the mediation - in substance, that there was a lack of reliable evidence available to support the loan account claims to be made against Richard Day and Rising Rocket, and that if the matter were to proceed to trial there would be difficulties in proving the alleged indebtedness. The 2010 proceeding and the loan account claims were settled by Shot One against the background of that advice. Importantly, Mr Marash's letter does not convey the impression that he was of the view that the settlement reached was anything other than a reasonable and sensible one for Shot One to enter into, and there is nothing to suggest that it was a different view to that which he held at the mediation on 23 May 2012. Indeed, as Senior Counsel for the defendants observed, 'Mr Marash never disavowed the substance of his advice' nor did he ever express 'any disquiet to Nicholas Day about the fact that Shot One was going to be entering into that transaction, being the Deed of Settlement.'[449]

353 Further, it is clear that the reasonableness of Shot One's actions in entering into the transaction must be assessed at the time of the transaction and without the benefit of hindsight. Given the observed difficulties about proving each of the loan account claims in circumstances where the lack of reliability in Shot One's financial records would hamper its ability to prove the alleged indebtedness of Richard Day and Rising Rocket, the quantum of costs likely to be incurred in adding those loan account claims to the 2010 proceeding and pursuing them, and the advice that the settlement reached was a sensible one for Shot One, it is difficult to see why a reasonable person in the company's circumstances would not have entered into the Deed of Settlement transaction. This is not a case where it could be said that Richard Day and Rising Rocket were receiving a bargain of such a magnitude that it could not be explained by normal commercial practice. In my view, given the risks and contingencies that attend all commercial litigation, and the associated costs (both recoverable and not recoverable), it is not at all surprising that the parties, and in particular Shot One, agreed to compromise the 2010 proceeding and all of the related claims by entry into the Deed of Settlement.

354 In the circumstances, having had regard to each of the matters to which reference is made in s 588FB(1), I am not satisfied that a reasonable person in Shot One's circumstances would not have entered into the Deed of Settlement transaction. It follows that the entry into the Deed of Settlement was not an uncommercial transaction of Shot One.

Issue 9: If the Deed of Settlement is found to have been an uncommercial transaction of Shot One, has Rising Rocket established the defence under section 588FG(2) of the Act?

355 Having found that the transaction is not an 'uncommercial transaction', it is not strictly necessary for me to proceed to deal with Issues 9 and 10, but it is useful to record the gist of the evidence led and the arguments raised lest a different view later be taken of the transaction.

356 Under s 588FG(2) of the Act, where a defendant can establish that it entered into the transaction in good faith and had no reasonable grounds to suspect insolvency, it is a defence to an insolvent transaction claim based on an uncommercial transaction. Section 588FG(2) provides:

A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:

the person became a party to the transaction in good faith; and

at the time when the person became such a party:

(i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in section 588FC(b); and

(ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and

the person has provided valuable consideration[450] under the transaction or has changed his, her or its position in reliance on the transaction.

The defendants became a party to the transaction in good faith (s 588FG(2)(a))

357 Section 588FG(2)(a) requires that the 'person', here the defendants, establish that they became a party to the transaction in 'good faith'. As Nicholas J explained in Cussen v Sultan, this component of the defence imposes a subjective test and the defendants bear the onus of proof.[451] There is no presumption in the defendants' favour, and the plaintiffs are not required to prove the absence of good faith. Further, the term 'good faith' is to be given its natural meaning, namely to act with propriety and honesty. Relevantly, his Honour said:

[34] The concept of "good faith" encompasses notions of honesty of purpose, motive, or intention which actuated the defendant to become a party to the impugned transaction. The concepts are interchangeable. To show that a person became a party to the transaction subjectively in good faith it is necessary to prove that the motive which actuated the person to do so was honest and proper. The inquiry, accordingly, is directed to the party's state of mind, with regard to his knowledge and belief about the nature of the transaction at the relevant time.[452]

. . .

[36] . . . in cases concerning an uncommercial transaction, "good faith" should be understood to relate to the uncommercial nature, or possible uncommercial nature, of the transaction, and knowledge thereof. . . .

[37] What is required to satisfy the onus will vary with the circumstances of the case. There is no set criteria. However, in my opinion, usually a defendant would need to have an understanding of the substance of the transaction sufficient to show that he became a party to it with an honest and proper motive or purpose. Adopting the words of Mansfield J in Smith (p 322) the defendant must demonstrate that in becoming a party to the transaction he acted without an expectation that the transaction was uncommercial. In my opinion, for the defendant to benefit from s 588FG(2)(a) it is necessary to prove that the motive and intention in becoming a party to the transaction was founded on a genuine belief, or knowledge, that the transaction was of an ordinary business kind or was not uncommercial.[453]

358 In the present case, the evidence establishes that Richard Day, on his own behalf and on behalf of Rising Rocket, was motivated to, and did, enter into the Deed of Settlement on the basis of a genuine belief that the transaction was an honest and proper one. He denied that Rising Rocket was indebted to Shot One and regarded Shot One's claims based on the MYOB books and records as '[f]ictitious in amount'. Viewed objectively, from his perspective, entry into the Deed of Settlement would put an end to the pursuit of such claims and also to him incurring further legal costs in defendant them. Relevantly, the settlement transaction arrived at was the product of negotiations between the parties that took place at a judicial mediation, conducted before Randall AsJ, in circumstances where each party was bound by the suite of overarching obligations imposed by the Civil Procedure Act 2010.[454] There is nothing to suggest that either of the defendants breached their overarching obligations, or acted otherwise than in good faith, in entering into the Deed of Settlement.

The defendants had no reasonable grounds for suspecting Shot One was insolvent or would become insolvent (s 588FG(2)(b)(i))

359 The plaintiffs submitted that there was evidence showing that Richard Day had reasonable grounds for suspecting that Shot One was insolvent, or at risk of becoming so, when he entered into the Deed of Settlement on his own behalf and on behalf of Rising Rocket. They pointed to an email exchange that took place between Richard Day and Nicholas Day on 8 February 2010,[455] in which Richard requested that Shot One make payment of its tax and the outstanding monies due to Cooniemoon, as demonstrating that since at least late 2008, Richard Day understood that Shot One had significant actual and contingent tax liabilities.

360 In the course of the email exchange, Nicholas Day stated:

1. I absolutely understand the pressure of taxation liabilities - There are large liabilities we have as a result of tax not being paid for the past 5 years.[456]

I would add, in response to your comment about tax owing, you may recall early in 2009, prior to you asking me to sign SHOTone over, I advised you not to buy a property as the company had substantial tax commitments. The two major issues I flagged were tax obligations and collections had blown out in both amount and duration. Your priority should be meeting your obligations and avoid any other expenditure until they are settled. It seems you are once again avoiding these responsibilities. Second time around I believe the ATO will not be so lenient.[457]

362 The reference to Richard Day's advice 'not to buy a property' is a reference to advice he gave to Nicholas Day that he should not purchase the Dunraven Avenue property, but Nicholas ignored the advice and purchased it in March 2010 for use as a residence for his family. The deposit for the purchase of the property was funded largely by way of Division 7A loans from Shot One to Nicholas Day.[458] The Dunraven Avenue property was later sold for $2.9 million, and ultimately the proceeds of sale were recovered for the company.

363 The defendants submitted that Richard Day, and therefore Rising Rocket also, had no reasonable grounds for suspecting that Shot One was insolvent as at 23 May 2012. They relied on the following matters and circumstances:

(1) As at 11 February 2009, when Richard Day resigned as a director, Shot One was trading profitably, and had net assets of over $500,000, even allowing for removal of any alleged debt owed by Richard or Rising Rocket to Shot One, and provision for unpaid income tax of Shot One.[459]

(2) From 11 February 2009 onwards, Richard Day no longer played any role in the management of Shot One and ceased to have access to Shot One's bank accounts.[460] He essentially became an 'outsider' in respect of Shot One and its business.

(3) As at 11 February 2009, Richard Day expected and believed that Nicholas Day and Mr Jasper would bring Shot One's tax affairs up to date.[461]

(4) On 28 May 2010, Richard Day sent an email to Mr Jasper[462] asking whether Shot One had any outstanding tax liability for the period leading up to 13 February 2009. At that time, Mr Jasper told Richard Day that he could not speak to him about Shot One's tax affairs because Richard was no longer a director of Shot One.[463]

(5) Shot One commenced the 2010 proceeding on 22 November 2010 and instructed solicitors and a barrister. This provided a reasonable ground to assume that Shot One had sufficient assets to pay legal fees.

(6) From 11 February 2009 onwards, Shot One did not owe any money to Richard Day or Rising Rocket, and neither Richard nor Rising Rocket took any steps to recover any amount of money from Shot One.

364 The defendants acknowledge that when Richard Day severed his links with Shot One it had an unpaid tax liability in the order of $500,000, but they contend it was fully provisioned in the management accounts at that time and in the financial statements that were later prepared, and there remained a significant surplus after reckoning for the (unpaid) tax. Furthermore, the management accounts and financial statements of Shot One show that, when Richard resigned as a director in February 2009, it was a profitable enterprise, in the sense that its architectural practice was generating significant revenue and it had low overheads. Indeed, when Nicholas Day purchased the Dunraven Avenue property, he used cash from the business to do so, and borrowed in excess of $700,000 by way of Division 7A[464] loans at a time when the company's accounts disclosed that it had an unpaid tax liability in the order of $500,000.

365 In my view, essentially for the reasons advanced by the defendants, Richard Day, and therefore Rising Rocket also, had no reasonable grounds for suspecting that as at 23 May 2012 Shot One was insolvent or would become insolvent. By that point, the 2010 proceeding had been on foot for about 18 months and there was no indication that Shot One was having any difficulty in meeting its legal costs and expenses. Nicholas Day was still conducting his architectural practice through Shot One, and there was no reason to believe it was not prospering. Richard Day was not consulted or informed about the tax affairs of Shot One after he departed the scene on 11 February 2009, but when he left the unpaid tax was fully provisioned.

A reasonable person in the defendants' circumstances would have had no reasonable grounds for suspecting Shot One was insolvent (s 588FG(2)(b)(ii))

366 Given the views I have formed above in relation to s 588FG(2)(b)(i), in my view, it is also the case that a reasonable person in Richard Day's and Rising Rocket's respective circumstances would have had no reasonable grounds for suspecting that Shot One was insolvent as at 23 May 2012, or would become insolvent.

The defendants have provided valuable consideration under the transaction or changed their position (s 588FG(2)(c))

367 For the reasons set out earlier, I am satisfied that each of Richard Day and Rising Rocket provided valuable consideration under the Deed of Settlement, in that they released Shot One from the claims they would otherwise have pursued for costs arising from Shot One's 2010 proceeding - that is, the near certainty of an adverse costs order being made against Shot One in respect of the whole of the 2010 proceeding to date, and the risk of an adverse costs order in relation to it bringing any fresh claims based on the alleged existence of loans by Shot One to Richard Day and Rising Rocket. Shot One avoided the risk of incurring liability to pay the costs of Richard Day and Rising Rocket in respect of the loan account claims in the event that the matter proceeded to trial and Shot One was unsuccessful. Furthermore, Rising Rocket agreed to allow Shot One's director and lead architect, Nicholas Day, to continue to reside in the Rockley Road property for a period of 15 months.

Issue 10: If the Court has power under section 588FF of the Act in respect of the Deed of Settlement, what orders should it make?

368 Once again, given the conclusion I have reached that the Deed of Settlement is not an 'uncommercial transaction', it is not necessary to deal with this issue. Nevertheless, it is convenient to record that if, contrary to the view I have formed, the Court were to find that the Deed of Settlement constituted an uncommercial transaction of Shot One, then the defendants accept that the Deed of Settlement should be set aside.

The 'determinative phase': the extent to which Shot One has established its loan account claims against Rising Rocket' (Issues 11 and 12)

369 The second broad issue, which involves a 'determinative phase' and requires the Court to determine the extent to which Shot One has established its loan account claims against Rising Rocket, arises if and only if the Court finds that the Deed of Settlement does constitute a 'voidable transaction' that should be set aside. Having found that the transaction is not an 'uncommercial transaction', it is not strictly necessary for me to proceed to deal with Issues 11 and 12, but it is convenient to record the gist of the evidence lead and the arguments raised lest a different view later be taken of the transaction.

Issue 11: If the Deed of Settlement is set aside, has Shot One made out its claim in debt against Rising Rocket?

370 If the Deed of Settlement were set aside, it would be necessary for the Court to determine, as a discrete matter, whether Shot One has made out its loan account claim against Rising Rocket, and if so, then proceed to quantify the current indebtedness of Rising Rocket to Shot One and any amounts that are statute-barred. As this aspect of the plaintiffs' case was the subject of evidence from Mr Yeo, concerning the quantification of the alleged current indebtedness of Rising Rocket (and also the alleged current indebtedness of Richard Day, which is no longer pursued by the plaintiffs), it is useful to summarise the gist of his evidence and the submissions made.

The plaintiffs submit that Shot One's MYOB accounts are prima facie evidence of loans made by Shot One to Rising Rocket since 1 February 2008

371 Shot One submits that the Court should accept the prima facie evidence recorded in Shot One's MYOB accounts of the existence of the loan accounts owing by Rising Rocket to Shot One as at 23 May 2012. That is, they say the prima facie evidence arising by virtue of sub-s 1305(1) of the Corporations Act has not been outweighed or rebutted having regard to the state of Shot One's financial records in existence on 23 May 2012.

372 For the purposes of this 'determinative phase' of the case, the plaintiffs submit that as at 1 February 2008 (being six years prior to the commencement of this proceeding by the (liquidator) plaintiffs), Rising Rocket owed to Shot One an amount of $550,000.[465] The figure of $550,000 is recorded in the MYOB accounts of Shot One that were prepared and maintained by Mr Grano immediately prior to the departure of Richard Day on 11 February 2009. As at 30 June 2008, the balance of the Rising Rocket loan as shown in Shot One's MYOB accounts had increased to $721,500.[466] This same figure was recorded as the Rising Rocket loan balance in the financial statements prepared by Mr Jasper during 2009[467] and was reflected in the income tax returns for the year ended 30 June 2008 lodged by Mr Jasper on 9 March 2011.[468]

373 The balance of the Rising Rocket loan account as shown in Shot One's MYOB accounts as at 23 May 2012, when the Deed of Settlement was entered into, was $751,961.[469] Accordingly, the plaintiffs submit that the value of the Rising Rocket loan that may be claimed by them pursuant to the MYOB accounts was the balance of the loan account at 23 May 2012 of $751,961, less the balance of the loan account at 1 February 2008 of $550,000, being the sum of $201,961. This sum includes the Journal Entries adjustment made by Shot One for the year ended 30 June 2009, which is discussed further below.

The plaintiffs also rely upon work undertaken by Mr Yeo to verify payments made by Shot One to Rising Rocket

374 In addition, the plaintiffs refer to evidence given by Mr Yeo to the effect that he has identified, from source documentation, net direct payments of $163,960.61 made by Shot One to Rising Rocket since 1 February 2008. The plaintiffs submit that this sum, which is calculated as set out below, 'is comparable to the Rising Rocket loan':[470]

375 The plaintiffs submit that in circumstances where Mr Yeo has verified loans made since 1 February 2008 recorded in Shot One's MYOB account, this supports Shot One's claim to the amount of at least $163,960.61 according to the MYOB accounts and the source documents alone. Further, they say, the actual sum recoverable by Shot One should be higher, as the Journal Entries re-adjustment has a 'skewing effect'.

376 The 'Journal Entries' refer to the amounts recorded in the Ledger Entries Report of Shot One for the year ended 30 June 2009 of $325,508.[476] The figure of $325,508 is said to be the net result of the debits at journal entries 27 ($4,548.50 accounting fees) and 33 ($1,975.00 land tax) and the credit at journal entry 35 ($332,031.33, which may be an adjustment for rent payable by Shot One on behalf of Nicholas Day).[477]

377 While the plaintiffs do not accept that Shot One was contractually liable to pay any amount by way of rental pursuant to Nicholas Day's employment contract, they submit that if (as is the case) the Court is satisfied that Shot One was obliged to provide him with satisfactory accommodation, then the amount of $332,031 that was credited in favour of Rising Rocket is greater than the amount of rental that was payable from 1 February 2008.[478] Accordingly, the plaintiffs contend that it would be appropriate for the Court to ignore or reverse the Rising Rocket credit amount of $332,031, and instead deduct, from the balance of the Rising Rocket loan shown in Shot One's MYOB accounts, a rental sum equivalent to the amount that would have accrued between 1 February 2008 until 23 May 2012 (when the new tenancy agreement was entered into), which they calculate as being $190,612.32 (for 51.75 months) pursuant to the rental contract, noting that $52,000 has already been paid through the Cooniemoon rental payments.[479] On this scenario, they submit that Rising Rocket would be liable to Shot One for the sum of $395,380, calculated as follows:

378 Alternatively, the plaintiffs submit the Court could instead deduct a rental value equivalent to the rental income declared by Rising Rocket in its income tax returns for the period from 1 February 2008 to 23 May 2012, being $267,617.[480] On this scenario, Rising Rocket would be liable to Shot One for the sum of $318,375,[481] calculated as follows:

The defendants contend that the Court should not accept Mr Yeo's evidence, including as to the quantification of Rising Rocket's indebtedness

379 The defendants note that in quantifying Rising Rocket's alleged indebtedness to Shot One, the plaintiffs seek to rely upon the evidence given by Mr Yeo, based upon his examination of the books and records of Shot One and other documents provided by Richard Day and Rising Rocket on discovery. But they submit that the evidence given by Mr Yeo, to the effect that Rising Rocket's indebtedness to Shot One by way of loans should be quantified at $1,189,590.39,[482] is in contradiction to the most recent of Shot One's financial records existing as at 23 May 2012, which quantify the Rising Rocket loan account at $656,809, and is inconsistent with the figures contained in every financial statement or MYOB ledger produced by Terrence Jasper & Associates for Shot One between 2003 and 2012.[483]

380 In their closing written submissions, the defendants set out at least eight reasons why the Court should not accept Mr Yeo's evidence. In particular, they point to the fact that much of the material prepared by Mr Yeo and his staff to assist the Court was prepared at a time when the plaintiffs' claims against Rising Rocket and Richard Day were framed as claims for money had and received, and for equitable remedies pursuant to a constructive trust, whereas the claim pursued by the plaintiffs in closing submissions was directed at recovering the alleged indebtedness recorded in the Rising Rocket loan account. Further, they submitted, Mr Yeo's quantification of the alleged Rising Rocket loan is based on his opinion (unsupported by any evidence) that each of the transactions appearing in his Exhibit P2.1 was subject to loan agreements. But whether there was relevantly a loan that is recoverable is a legal question, to be determined by the Court having regard to the evidence adduced at trial. Mr Yeo's opinion is based upon an examination of the MYOB accounts and the bank statements of Shot One and Rising Rocket, but he ignored the journal adjustments made by Mr Jasper (that were made based on Mr Jasper's professional opinion or on instructions from Nicholas Day as the sole director of Shot One), and did not consult Mr Grano to verify whether his recharacterisation of transactions as loans was correct.

381 Another reason advanced by the defendants for not accepting Mr Yeo's evidence is that he is a party to the proceeding and thus must be regarded as interested in its outcome. In this regard, the defendants referred to Hussain v CSR Building Products Limited, where Edelman J considered expert opinion given by a liquidator plaintiff in regard to insolvency, and said:

Although there was significant cross-examination about Mr Ross' independence and impartiality, I am satisfied that he approached his evidence honestly. But Mr Ross was not independent. Nor was he impartial. He properly accepted that he was not merely a plaintiff in these proceedings, in his capacity as liquidator, but also that he had done considerable work which would not be remunerated if the liquidators were unsuccessful in the proceedings. Although Mr Ross was honest, and although he was aware of his obligations as an expert, the conflict which he faced as both expert and party was apparent at times in his evidence.[484]

382 In the present case, Mr Yeo was clearly a party and he was not put forward as having given 'expert evidence', nor was his evidence received by the Court as 'expert evidence'. His evidence was directed towards achieving success for Shot One in the proceeding. He gave his evidence frankly and honestly, and acknowledged errors (such as the double-counting) when they were pointed out. But as indicated earlier, and for the reasons given, I did not find his evidence, in particular his characterisation or recharacterisation of the transactions set out in Exhibit P2.1 as loans to Rising Rocket, of any real assistance.

The defendants submit that Shot One's MYOB ledger as at February 2009 is the appropriate starting point for any quantification of Rising Rocket's indebtedness

383 If, contrary to the views I have reached, the Court were to find that the sum recorded in the Rising Rocket loan account was a loan that was intended to be repayable, and that the indebtedness was never discharged or reallocated to another person (such as Nicholas Day), then the defendants submit that the starting point for any determination of the quantum payable is the Shot One MYOB ledger as at February 2009, because that MYOB ledger was maintained by Mr Grano in accordance with Richard Day's instructions until that time. But in circumstances where Richard Day ceased to be involved with Shot One from that date, and the plaintiffs do not allege there was any agreement with Richard Day (whether in his own right or on behalf of Rising Rocket) after that date, the defendants submit that any subsequent adjustments made to the figures in the MYOB ledger should only be taken into account to the extent that they can properly be seen as admissions by Shot One against Shot One's interest - i.e. to the extent that they have the effect of reducing the loan account liability of Rising Rocket to Shot One.[485]

384 The defendants contend that such a quantification exercise would disclose a 'best possible' outcome for Shot One as being one where the Rising Rocket loan balance is $474,277, which sum is arrived at by taking the balance recorded in the final (signed) 2009 financial statements of Shot One (being $514,277),[486] less an adjustment for amounts paid by Rising Rocket to Shot One (totalling $40,000) but not credited to the loan account. They maintain that there are no other relevant transactions after this date by which it can properly be said that this loan account balance could have increased (all subsequent payments being in the nature of rent).[487] The sum of $474,277 is calculated as follows:

Rising Rocket loan account pursuant to most recent signed financial statements of Shot One (FY2009)

Issue 12: If so, to what extent, if any, are Shot One's claims statute-barred?

385 As Shot One's claim against Rising Rocket in the 2014 proceeding is a contractual one, the relevant limitation period is six years, and so Shot One may not recover in respect of any alleged loan claim which accrued to it prior to 31 January 2008.

The defendants contend that the limitations period affects the amount of the Rising Rocket loan that Shot One may seek to recover

386 The defendants submit that once adjustments are made for transactions that are not within the limitation period, the amount of the alleged Rising Rocket loan that is susceptible to being claimed by Shot One is reduced to $232,009.43, calculated as follows:

Transactions before 31 January 2008 are statute barred

The amount debited to the Rising Rocket loan account for FY2008 in Shot One's MYOB management accounts, during the period after 31 January 2008 is $171,500.[488]

The amount debited to the Rising Rocket loan account for FY2009 in Shot One's MYOB management accounts is $285,907.43. The amount credited to the Rising Rocket Loan Account for FY2009 is $167,623.[489] The net amount debited to the Rising Rocket Loan Account for FY2009 is therefore the difference between those two sums: $118,284.43. This amount should be adjusted to:

(1) exclude three payments that were in the nature of rent of $5,925 each (totalling $17,775);

(2) credit the three amounts that were paid by Rising Rocket to Shot One but not credited to the loan account (referred to above), totalling $40,000.

Therefore, the net Rising Rocket loan account for FY2009, adjusted for rent and payments made by Rising Rocket to Shot One is $60,509.43.

Not statute barred, but all payments made by Shot One to Rising Rocket were in the nature of rent, not loans.

Not statute barred, but all payments made by Shot One to Rising Rocket were in the nature of rent, not loans.

Not statute barred, but all payments made by Shot One to Rising Rocket were in the nature of rent, not loans.

Not statute barred, but all payments made by Shot One to Rising Rocket were in the nature of rent, not loans.[490]

387 Following the conclusion of the hearing, the plaintiffs filed a supplementary outline of submissions, without objection from the defendants. Therein, the plaintiffs set out their analysis of the alleged distorting effect of the rental journal entry processed in the books and records of Shot One that reduces the balance owing by Rising Rocket by $332,031 on 30 June 2009, and its effect on the statutory limited claim amount.

The plaintiffs contend that because the rental journal entry includes an adjustment for rent that accrued prior to the limitation date, some adjustment of that entry is required

388 The plaintiffs contend that in circumstances where Rising Rocket has pleaded that the claim currently being pursued by the liquidator of Shot One is subject to a statutory limitations period commencing on 1 February 2008 (i.e., that transactions that took place before 31 January 2008 are statute barred), which is 15 months prior to the date of the rental journal entry, the rental journal entry operates to produce a 'distorting effect'. The alleged 'distortion' is said to be derived from the proposition (founded solely on the evidence of Mr Jasper) that the rental journal entry records a rental amount charged for the use of the Rockley Road property (an asset of Rising Rocket) for a period commencing 1 December 2004 and ending on 30 June 2009 and, therefore, predominantly represents an expense incurred prior to the statutory limitations date of 1 February 2008. Accordingly, so the plaintiffs argue, the rental journal entry ought to be amended to take into account the effect of the fact that the rental journal entry includes an adjustment for rent that accrued prior to the limitation date.

389 The plaintiffs seek to demonstrate the alleged distorting effect of the rental journal entry by looking first at how the rent should have been charged to the Rising Rocket loan account using (what they submit is) the correct accounting treatment, and then by calculating what they contend is Shot One's potentially statutory limited claim based on the corrected loan balances.

Step 1 - apply the correct accounting treatment

The current treatment of the rental journal entry on Shot One's financial statements

390 The following table prepared by the plaintiffs summarises how the rent for the use of the Rockley Road property was charged to the Rising Rocket loan account in the MYOB accounts of Shot One. The Rising Rocket loan balances in the MYOB accounts match the amounts disclosed in the financial statements of Shot One on each relevant date.

391 The plaintiffs submit that the table shows that approximately 4½ years' rent (from 1 December 2004 to 30 June 2009) was charged through the rental journal entry adjustment all at once on 30 June 2009, and that this was the predominant reason that the Rising Rocket loan balance decreased from $721,500 as at 30 June 2008 to $514,276 as at 30 June 2009.

How rent should have been charged with the correct accounting treatment

392 The plaintiffs submit that if Mr Jasper had been engaged by Shot One to prepare its financial statements and income tax returns in each year, rather than all at once in 2009, then the rent would have been recorded more frequently. That is, they say the rent should have been recorded more frequently (most appropriately monthly in line with the rental contract, or at least in each year's final accounts). Rising Rocket's tax returns were declaring rental income for each financial year during this period. If the value of the rental journal were apportioned across the 4½ year period, the Rising Rocket loan balance at the end of each financial year would be reduced accordingly, except for the year ended 30 June 2009, as follows:

393 As will be noted, while the balance of the Rising Rocket loan account as at 30 June 2009 is unchanged (because the total rent charged is still $332,031), the ending balance for each of the preceding years is reduced once the rent is apportioned for each year it was incurred. Just one year earlier, as at 30 June 2008, the correct loan balance has reduced from $721,500 to $461,912 because rent has been charged continuously for each year prior to 30 June 2008 instead of it all being charged in one hit at 30 June 2009. The variance between the two methods of treatment is demonstrated more clearly when the two tables are placed side-by-side and an additional column is added to track the variance, as follows:

394 The plaintiffs observe that under (what they contend is) the 'correct treatment' column it will be seen that the variance accumulates in each year until the final year (2009). The value of the distortion is therefore at its greatest at the end of the financial year prior to 2009 when the full value of the rental journal entry takes effect. After the rental journal entry is entered, the same balance of the loan account ($514,276) results under each of the treatment scenarios.

Step 2 - calculate claim using loan balances with correctly apportioned rent

Effect of incorrect treatment on the value of a statutory limited claim

395 The plaintiffs submit that in order to quantify Shot One's statutory limited loan claims against Rising Rocket (both now and as at 23 May 2012) it is necessary to deduct the balance of the loan account as at 1 February 2008 and 23 May 2006 from the balance of the loan as at 23 May 2012 in order to quantify the movement in the loan. To illustrate this, the above comparison table has been reproduced below with these dates included:

* Rent charged for the balance of the financial year due to the splitting of the year into two rows

396 Deducting each of the Rising Rocket loan balances highlighted (by shading) above from the closing balance at 23 May 2012 produces the following results using the different accounting treatments:

397 In summary, the plaintiffs contend that the rental journal entry adjustment distorts the ascertainment of what is the correct balance owing from time to time across the relevant period because of the incorrect treatment of rent. As the period of distortion includes the beginning of the plaintiffs' statutory limited claim period (1 February 2008), the incorrect treatment flows into the calculation of that claim, if not corrected. This is because:

• Apportioning rent on a yearly basis across the relevant period decreases the balance of the Rising Rocket loan at any given date until 30 June 2009 (Step 1).
• This in turn increases the movement in the loan between the opening and closing (23 May 2012) balances (Step 2).

398 If the Court accepts that the rental journal entry should be reversed because of its distorting effect, and rent is payable by Shot One, then the plaintiffs submit that the calculations contended for by them apply (see under Issue 11 above) - namely, $395,380, alternatively $318,375.

399 The defendants submit that it is not open to the plaintiffs to simply make a series of retrospective adjustments to the accounts of Shot One and thereby reverse the rental journal entry. Rather, they say, the position is that the rental journal entry was processed in the books and records of Shot One for the financial year ended 30 June 2009, and Shot One lodged its 2009 income tax return based on those accounts (in which the balance owing by Rising Rocket was reduced by $332,031 on 30 June 2009). Having done so, it follows that Shot One has accepted that Nicholas Day assumed liability for the $332,031 that was reallocated to him, because Mr Jasper's evidence was that the Shot One's tax returns would not have been lodged unless the financial statements were signed off. Further, the defendants submit, there is no evidence before the Court that the sum of $332,031 was actually a rental payment. The annotation made in the ledger entries report is 'Reconcile loan with Rising Rocket KW Adj', but there is no reference to a worksheet to the accounts that might explain how that figure was calculated or adopted, and Mr Jasper was not asked about it or the underlying basis on which the adjustment occurred. In closing oral submissions, Senior Counsel for the defendants acknowledged that Mr Jasper had given evidence about an adjustment that might be made in the future regarding an adjustment for a commercial amount of rent, but he said Mr Jasper was not aware about the sum of $332,031. He said:

[MR EVANS:] That was speaking of an adjustment that was to be done when the accounts were being prepared for the commercial amount of the rent that needed to be shown as paid. Then I asked Mr Jasper a further question regarding that, and he spoke of what would be intended to occur. But Mr Jasper was not asked about that entry of the 332,000, and he didn't give any evidence regarding it. What the defendants say is that, . . . it is impermissible conjecture for the court to seek to determine how that figure of 32,000 [sic] was calculated; we really do not have any evidence in respect of it at all. And the underlying basis upon which the adjustment occurred.

It really is effectively a whole degree of retrospective attack upon the accounts without ever having sought to establish the basis upon which the entry was made in the first place, and of course I hesitate to repeat myself, and of course seeking, as it were, to rewrite Shot One's accounts from the figures that were accepted by Shot One as being including that adjustment downwards.[491]

400 The evidence shows that the rental journal entries were made by Mr Jasper (or his firm) on the basis of instructions given by Nicholas Day. The substance of the rental journal adjustment was not explored with Mr Jasper when giving evidence, and the correct treatment of the journal entries was not the subject of any impartial expert evidence at trial. Were it necessary for the Court to decide this issue, for the reasons advanced by the defendants, I would not be inclined to accede to the plaintiffs' submission that the Court should effectively 'rewrite' the accounts and reverse the journal entries.

401 For the reasons set out above, I am not satisfied that, as at 23 May 2012 when the Deed of Settlement was entered into, a reasonable person in Shot One's position would not have entered into that transaction. Shot One faced real difficulties in seeking to prove its (unpleaded) loan account claims against Rising Rocket. This was because the very existence of the alleged loan was disputed by Richard Day, who was the sole director and shareholder of each of the parties to the underlying transaction, and there was no written agreement recording the loan and its terms. Further, the books and records that Shot One relied upon to support the existence and quantum of the loan account claim had been the subject of journal entries adjustments (and re-adjustments) made on the instructions of Nicholas Day that included the writing off of the Rising Rocket loan and its reinstatement shortly prior to the judicial mediation. When these observed difficulties are viewed in conjunction with the attendant statute of limitations issues and the quantum of costs and legal expenses likely to be incurred by Shot One in adding the loan account claim into the 2010 proceeding and pursuing it through to judgment, and weighed against the benefits that accrued to Shot One as a result of entering into the Deed of Settlement, it will be seen that the settlement reached was a sensible one for Shot One. To that point, none of Shot One's pleaded claims in the 2010 proceeding had any real prospects of success and if leave were not granted to include the foreshadowed loan account claims, Shot One would likely have been required to pay the costs of Richard Day and Rising Rocket. By settling, Shot One also put an end to it incurring any further non-recoverable legal costs and expenses on its own account, expunged its liability (of at least $71,000) to Cooniemoon, and by settling the VCAT proceeding it ensured that Nicholas Day, its lead architect, could continue to reside at the Rockley Road property for a period of 15 months and run the architectural practice free from the stress and distraction of the litigation.

402 In my view, this is not a case where it could be said that under the Deed of Settlement Rising Rocket was receiving a bargain of such a magnitude that it could not be explained by normal commercial practice.

403 In the circumstances, having regard to each of the matters to which reference is made in section 588FB(1), I am not satisfied that a reasonable person in Shot One's circumstances would not have entered into the Deed of Settlement transaction.

404 I will hear the parties on the precise form of the appropriate orders, including on the question of costs.

[1] The Australian Taxation Office lodged a proof of debt with the liquidator for approximately $1.497 million: Transcript 09/02/17, Yeo XIC, at 218.

[3] Rising Rocket was incorporated by Richard Day's accountant, Terrence Jasper, on 1 October 2002. At the same time, he established the 'Rising Rocket Trust': Exhibit D6, at [79]-[80].

[4] The whole of the land in Certificate of Title volume 10813 folio 025.

[5] The Deed of Settlement records that it was executed by Richard Day 'for and on behalf of [Cooniemoon] under authority and agency approved by Simon Day.' See TB 1:1066.

[6] See recital J to the Deed of Settlement (TB 1:1060-1068 at 1061).

[7] Deed of Settlement: TB 1:1060-1068 at 1064 [12].

[8] In their Third Further Amended Statement of Claim (7 February 2017), at [26], the 'SO-RD Loan Amount' is pleaded as being 'at least $730,610'.

[9] In their Third Further Amended Statement of Claim (7 February 2017), at [23], the 'SO-RR Loan Amount' is pleaded as being 'at least $721,500'.

[10] The position was that the plaintiffs had, at an earlier point, foreshadowed amending the present proceeding to add Nicholas Day as a party and claim relief against him. However, they settled with Nicholas Day without the need for any formal amendment, and proposed to call him to give evidence at the trial in support of their case against Rising Rocket and Richard Day. Prior to the trial commencing, a witness outline of Nicholas Day was filed on behalf of the plaintiffs and a subpoena directed to him to give evidence was issued at their request. At the conclusion of opening submissions, and prior to the commencement of the judicial mediation before Efthim AsJ, the Court noted that the plaintiffs' case as outlined and the documents proposed to be tendered would likely expose Nicholas Day to the risk of self-incrimination. Arrangements were then made for him to receive independent legal advice. When the trial resumed following the mediation, Senior Counsel for the plaintiffs informed the Court that Nicholas Day had received independent legal advice, and they would not be calling him to give evidence.

[11] Issues 1 and 2 were framed as follows:

Issue 1: In respect of the claim of Shot One against Ric that he was indebted to Shot One as at 23 May 2012 by reason of having had a loan debt of $730,610 as at 30 June 2008, what was the value of that claim to Shot One as at 23 May 2012, taking into account:

(1) legal and procedural hurdles which existed in respect of that claim;

(2) the defences available to Ric in respect of that claim;

(3) the likely legal costs of Shot One of pursuing that claim;

(4) the likelihood of successful recovery or money or property in respect of that claim, if judgment was obtained against Ric.

Issue 2: In particular regarding the claim of Shot One against Ric:

(1) What was (is) the evidentiary value of the financial accounts of Shot One for the financial year ended 30 June 2008, the general ledger of Shot One for the financial year ended 30 June 2008, and the ledger entry report in respect of Shot One for the financial year ended 30 June 2008, in establishing the existence of a loan account between Shot One and Ric as at 23 May 2012;

(2) Was Shot One statute-barred in pursuing its claim against Ric?

[12] See plaintiffs' closing submissions, at [6]. This figure of $433,961 is arrived at by taking the sum of $751,961 (being the balance of the loan on 23 May 2012 when the Deed of Settlement was entered into) as set out in the final MYOB accounts (see plaintiffs' closing submissions at [68]) and subtracting the sum of $318,000 being the balance as shown in the MYOB accounts on 23 May 2006 (i.e. 6 years prior).

[13] See plaintiffs' closing submissions, at [16] (emphasis in original).

[14] This claim takes, as a starting point, essentially the same approach as that adopted for the evaluative phase in that it takes the balance of the Rising Rocket loan as set out in the MYOB accounts as at 23 May 2012 of $751,961 (see plaintiffs' closing submissions at [103]-[106]) and subtracting the balance as shown in the MYOB accounts as at 1 February 2008 (i.e. 6 years prior) of $550,000, to arrive at a base value of $201,961 (which includes the adjustments made by the amounts recorded in the Ledger Entries Report for the year ended 30 June 2009 of $325,508.43 (see TB 3:3841) (referred to as 'the Journal Entries')). However, the plaintiffs then seek to re-adjust the Journal Entries by reference to putative rental income to arrive at a sum of $395,380, alternatively a sum of $318,375 (see plaintiffs' closing submissions at [110]-[118] and Transcript 06/03/17, at 728-729 (Mr Glick QC).

[15] Richard Day was unsure what name Nicholas Day used for his architecture practice throughout the whole of that time: Transcript 13/02/17, R Day XIC, at 468-469.

[16] The bankruptcy of Nicholas Day was terminated on 21 December 2006. See TB 1:578-579.

[18] Richard Day said he made payment of the $16,000 from his own funds: Exhibit D6, at [65].

[22] Mr Yeo explained that the expression 'MYOB', or MYOB records or accounts, refers to the computer program through which the initial transactions are entered, and then it is used later for the creation of the company's financial statements.

[25] Exhibit D6, at [114] (emphasis added).

[26] Exhibit D6, at [115]-[116] (emphasis added).

[30] TB 1:919-922, at 919, Letter from Kenna Teasdale to Shot One dated 17 February 2012.

[32] Mr Marash prepared a witness statement on behalf of the plaintiffs, but with the narrowing of the plaintiffs' case he was not called by them. The defendants called Mr Marash as part of their case, however, and a redacted version of his witness statement was tendered (Exhibit D8). He gave some additional evidence viva voce and was then cross-examined by Mr Glick QC.

[33] Transcript 13/02/17, Marash XXN, at 550.

[34] Transcript 13/02/17, Marash XXN, at 550-551.

[37] See TB 1:1073-1076; Transcript 13/02/17, Marash XIC, at 544-547.

[38] Transcript 13/02/17, Marash XIC, at 545.

[39] Transcript 13/02/17, Marash XIC, at 545.

[40] Transcript 13/02/17, Marash XIC, at 546.

[43] The defendants disputed that Richard Day had relevantly 'signed off' on those financial statements in the relevant sense. In closing oral submissions, the plaintiffs accepted that Richard Day was not given the financial statements of Shot One and so could not have 'signed off' on them: see Transcript 06/03/17, at 715-716 (Mr Glick QC)

[45] Transcript 13/02/17, Marash XXN, at 555-556.

[47] Transcript 13/02/17, Marash XXN, at 556.

[48] MYOB (an acronym for 'Mind Your Own Business') is an off-the-shelf accounting software programme used for recording cash flow, payments and transactions etc.

[50] Transcript 13/02/17, Grano XXN, at 560.

[51] Transcript 13/02/17, Grano XXN, at 562.

[59] Transcript 13/02/17, Grano XXN, at 563.

[60] Transcript 13/02/17, Grano XXN, at 564.

[61] Transcript 13/02/17, Grano XXN, at 564, 565.

[62] Transcript 13/02/17, Grano RE-XN, at 569-570.

[69] Transcript 13/02/17, R Day XXN, at 480.

[70] Transcript 13/02/17, R Day XXN, at 486.

[71] Transcript 13/02/17, R Day XXN, at 490-492 (emphasis added).

[74] Exhibit P3, at [34] (emphasis added).

[75] Transcript 13/02/17, R Day XXN, at 496.

[76] Transcript 6/3/2017, at 664 (Mr Evans QC). See also the defendants' written closing submissions at footnote 71, where they noted:

The final version of Shot One's financial statements for the year ended 30 June 2009 (TB 1:704.4) disclosed a value of the shares (being the value of the company) of over $1.55 million as at 30 June 2008 and 30 June 2009. This valuation included a liability for unpaid tax of $712,413 - that is, it provided for Shot One's liability to pay this tax as part of the valuation. The value of the disputed Richard Day Loan and Rising Rocket Loan in these statements was less than $900,000 in total as at 30 June 2009 - so that even if these are treated as valueless, the value of the shares in Shot One as at 30 June 2009 was still in excess of $600,000.

[77] Transcript 13/02/17, R Day XXN, at 534-535.

[78] Transcript 13/02/17, R Day XXN, at 534.

[79] Transcript 13/02/17, R Day XXN, at 533.

[80] Transcript 13/02/17, R Day XXN, at 533.

[81] A witness statement of Mr Jasper (together with relevant exhibits) was tendered as Exhibit P3 (dated 8 December 2016) and a second witness statement (together with relevant exhibits) was tendered as Exhibit P4 (dated 1 February 2017).

[83] Exhibit P3 at [34] (emphasis added).

[84] Transcript 09/02/17, Jasper XXN, at 344.

[85] Transcript 09/02/17, Jasper XXN, at 345.

[86] Transcript 09/02/17, Jasper XXN, at 346.

[87] Mr Webster was not called to give evidence at the trial.

[88] Transcript 09/02/17, Jasper XIC, at 313.

[89] Transcript 09/02/17, Jasper XIC, at 314.

[90] Transcript 09/02/17, Jasper XIC, at 316.

[91] Transcript 09/02/17, Jasper XIC, at 318.

[92] See Ex P4.8 ('TJJ-15') and Transcript 10/02/17, Jasper XXN, at 369.

[93] Transcript 09/02/17, Jasper XIC, at 318. As was noted in the Introduction, Shot One went into liquidation in 2012 at the suit of the Australian Taxation Office when it failed to pay a statutory demand.

[94] Transcript 10/02/17, Jasper XXN, at 381.

[95] Transcript 10/02/17, Jasper XXN, at 379.

[97] See, e.g., Transcript 10/02/17, Jasper XXN, at 369. See also Transcript 09/02/17, Jasper XIC, at 316-318.

[99] It became clear, and Mr Jasper accepted, that this set of financial statements of Shot One, which were unsigned and bore a date of 10 November 2004, could not be the final version: Transcript 10/02/17, Jasper XXN, at 367. See also Transcript 10/02/17, Jasper XXN, at 405-406.

[100] Transcript 10/02/17, Jasper XXN, at 372-373.

[101] Transcript 10/02/17, Jasper XXN, at 381. The signed returns are no longer available. Given the absence of any signed documents, the plaintiffs do not assert in their pleaded reply that Richard Day signed the director's declaration in the financial statements of Shot One for the years 2005 to 2008.

[102] TB 3:3004-3005. This letter and the package of documents enclosed appears to be the same as that which was referred to by Mr Jasper in his second witness statement as "TJJ-6" and subsequently tendered as Exhibit P4.2.

[103] This summary was tendered as Exhibit P4.8.

[104] Transcript 10/02/17, Jasper XXN, at 404-406.

[105] Transcript 10/02/17, Jasper XXN, at 387-388.

[111] Transcript 10/02/17, Jasper XXN, at 393.

[114] Exhibit P4.2, TB 4:5051. This letter and the package of documents enclosed appears to be the same as that which appears at TB 3:3004-3005ff to which Mr Jasper was referred in cross-examination.

[115] Transcript 13/02/17, R Day XIC, at 472.

[124] See TB 3:3231 and 3392. The Ledger Entries Report (at TB 3:3380 dated 18/12/2009) shows that a new journal entry was added being 'Additional management fees paid B40' with an adjustment of $132,747.

[127] The Ledger Entries Report (at TB 3:3384-3385 dated 18/12/2009) sets out the journal entries pertaining to 'Account number 2117 - Loan - Nic Day'. Save for the change in the identity of the debtor from 'Ric Day' to 'Nic Day', these entries correspond precisely with the entries set out in the Ledger Entries Report contained in the preceding version of the accounts (see TB 3:3252-3253 dated 04/05/2009).

[128] TB 3:3398. In the earlier version, the declaration (set out at TB 3:3237) does not identify the relevant director by name.

[129] Exhibit P4.3, TB 4:5187-5308. The letter enclosed financial statements, statutory minutes and an income tax return for Shot One for the year ended 30 June 2006, and this version of the documents appears to correspond with the pre-adjusted set of documents described by Mr Jasper above.

[130] See Exhibit P 4.8 (Mr Jasper's Summary of Shot One's income and tax position).

[136] TB 3:3445. The detailed entries pertaining to the Rising Rocket loan account are set out at TB 3:3465-3466.

[137] Transcript 10/02/17, Jasper XXN, at 429-430.

[140] See TB 3:3419 and 3590. The Trial Balance and the Ledger Entries Report for the 'Loan - Ric Day' in the penultimate set of accounts are located at TB 3:3428 and 3438 respectively. For the final set of accounts, the Detailed Balance Sheet is located at TB 3:3590 and it appears that the Comparative Trial Balance and the Ledger Entries Report for the 'Loan - Nic Day' are located at TB 3:3571 and 3581-3582 respectively.

[142] Transcript 10/02/17, Jasper XXN, at 432-433.

[144] Exhibit P4.4, TB 4:5309-5438. The letter enclosed financial statements, statutory minutes and income tax return for Shot One for the year ended 30 June 2007.

[145] Transcript 13/02/17, R Day XIC, at 475-476.

[146] Transcript 13/02/17, R Day XIC, at 476.

[153] Transcript 10/02/17, Jasper XXN, at 434.

[155] This figure reflects the 'Net Activity' in respect of the 'Ric Day Loan Account' as recorded in the MYOB management accounts at TB 3:3661-3662.

[158] Ibid. The detail underlying that 'Net Activity' figure is set out in the MYOB management accounts at TB 3:3662-3663.

[159] Transcript 10/02/17, Jasper XXN, at 437. The adjusted or final version of the accounts is located at TB 3:3751, with the financial statements at TB 3:3751-3759, and the Ledger Entries Report and Comparative Trial Balance at TB 3: 3769-3784.

[165] Transcript 10/02/17, Jasper XXN, at 439.

[168] Transcript 13/02/17, R Day XIC, at 476-477.

[169] Transcript 13/02/17, R Day XIC, at 477.

[170] TB 3:3804-3806, at 3805 (emphasis added).

[175] Transcript 10/02/17, Jasper XXN, at 441.

[182] See Exhibit D7, TB 4:5623, at 5626.

[183] See Exhibit D7, TB 4:5623, at 5643.

[184] See Exhibit D7, TB 4:5623, at 5631. It continues to be recorded as that same amount in the 2010 column in the financial statement of Shot One for the 30 June 2011 financial year: see Exhibit D7, at 5643.

[186] A reference to the Dunraven Avenue property that Nicholas Day purchased on 10 March 2010.

[188] Mr Evans QC confirmed that there were no revised accounts for the 2010 financial year (see Transcript 07/03/17, at 738).

[192] The print-out was dated 10 May 2012.

[193] TB 3:4032 at 4047. Other documentation contained on the Terrence Jasper & Associates' file (at TB 3:4047 (which was added to the tender list during closing oral submissions: Transcript 07/03/17, at 742) provides support for the proposition that the entry in C50 was originally made by one of Mr Jasper's staff in March 2012 and approved by him on 7 May 2012.

[194] TB 3:4032 at 4038 (emphasis added).