Arthur Hughes Pty Limited (1st Defendant)
Speakman Hughes Pty Limited (2nd Defendant)
Telfer Hughes Pty Limited (3rd Defendant)
Melvie Hughes Pty limited (4th Defendant)
Gypson Hughes Pty Limited (5th Defendant)
Bathurst Hughes Pty Limited (6th Defendant)
Pamela Lewis (7th Defendant)
David Lewis (8th Defendant)
Daniel Lewis (9th Defendant)
Representation: Counsel:
S Loughnan (Plaintiffs)
1st - 6th, and 9th Defendants - unrepresented
G Waugh (7th Defendant)
In person (8th Defendant)
[2]
Solicitors:
Hennessy & Co (Plaintiff)
L J Rickard, Solicitor (7th Defendant)
File Number(s): 2014/116046
[3]
Judgment
HIS HONOUR: The first plaintiff, Mr Hugh Thomas, commenced proceedings in his capacity as liquidator of Anne Lewis Pty Ltd (in liq) ("the Company" or "Anne Lewis") against nine defendants. He sought to enforce causes of action on behalf of the Company against one of its directors, the seventh defendant, Mrs Pamela Lewis, against one of her sons, the eighth defendant, David Lewis, and various companies to whom assets of the Company had been transferred, the second to sixth defendants. The first defendant is the shareholder of those companies and the trustee of various trusts established by Mr David Lewis. Belatedly the Company itself was joined as the second plaintiff.
The Company was incorporated on 29 March 1961. At all material times the two shareholders of the Company were Mr Geoffrey Lewis ("Mr Lewis") and his wife Mrs Lewis. Mr Lewis had practised as an accountant. Over many years he caused the Company to acquire a valuable portfolio of listed company shares as well as cash investments.
Mr Lewis was born in 1922. Mrs Lewis was born in 1924. In 2011 they were both in their late 80s. Mr Lewis had been admitted to a nursing home in 2010.
Mr and Mrs Lewis had four sons, Peter, David, Roger and Hugh. Their sons had been directors of the Company, but they all ceased to be directors on 28 November 1995. Mr Lewis and Mrs Lewis remained the sole directors as well as the sole shareholders of the Company. On 25 January 2012 Mr Bryan Bird, was appointed as a director. He was a partner in the firm of accountants of which Mr Lewis had formerly been a partner. At the dates relevant to these transactions the directors of the company were Mr and Mrs Lewis, and Mr Bird (from 25 January 2012). But Mr Lewis took no part in the affairs of the Company. He did not play any part in the transactions with which these proceedings are concerned and was not consulted on them.
Mr Lewis died on 20 June 2012. He made his last will on 15 January 2007. He appointed his son Peter Lewis and Mr Bird as the executors and trustees of his will. In substance, he provided that Mrs Pamela Lewis would have the right to reside in his principal place of residence until her death and that she be entitled to the net annual income of his estate for her life. He provided that after his wife's death his residuary estate would be held for his sons Peter, David, Roger and Hugh in equal shares. Mr Lewis' principal assets were the family home in Turramurra and his shares in the Company, which were valued for probate purposes at $1 million and $4,450,000 respectively.
Mrs Lewis' will was not in evidence, but it was common ground that prior to the transactions which gave rise to these proceedings, Mrs Lewis' will provided for her estate to be divided five ways with a one-fifth share to pass to each of her four sons. David Lewis gave evidence that in respect of the shares passing to each of her sons there were different provisions concerning who should inherit each son's share if her son predeceased her. Those provisions are not of present relevance. The remaining fifth share was to be divided equally between Mrs Lewis' seven grandchildren. I understand that Mrs Lewis might have changed her will since the events giving rise to the litigation, but that is not of present relevance.
These proceedings concern dispositions of the Company's assets in January and February 2012. Peter Lewis and David Lewis were both accountants. They were concerned to minimise the income tax liabilities that might arise on the liquidation of the Company when their parents died. They were also concerned that their parents' assets were tied up in the Company and that this could create complications for their parents having access to sufficient funds. Between July and November 2011 David and Peter Lewis briefed a barrister, a Mr Bryan Pape, to provide advice on the ways and means of winding up the Company for the benefit of the children and grandchildren of Mr and Mrs Lewis. He provided two drafts of an opinion that were subject to further questions by both Peter and David Lewis.
On 22 November 2011 Mr Pape provided a supplementary draft opinion following a conference with David and Peter Lewis in relation to matters arising out of his earlier draft opinions. He noted that at a conference on 11 November 2011 it had been suggested that he consider a particular plan for the reorganisation of the affairs of the Company with the aim of providing Mrs Lewis with sufficient funds to make some gifts of cash to her seven grandchildren and to preserve the share portfolio of the Company for the benefit of the Lewis children and grandchildren. The plan involved the following steps:
"AL to make a loan to Mrs Pamela Lewis which satisfies the provisions of Div. 7A of Part III of the 1936 Act.
AL to cause to be incorporated five new companies for the purpose of buying at market value five parcels of the shares presently owned by AL.
The purchase prices would be wholly financed by AL making unsecured loans, repayable on demand, interest free loans.
AL would sell the shares in five identical parcels to the five new companies, owned and controlled [by] each of the children, namely David, Hugh, Peter, Roger and to a Trustee for the shares in the Grandchildren's company. For convenience I have called them DPL, HPL, PPL, RPL and TPL.
AL would then be wound up. This could involve the distribution of debts in specie and presumably their subsequent release or forgiveness. The preferable course would be for the shareholders of AL to arrange for their bankers to provide a facility to allow the loans made by AL to the new companies to be repaid with the shareholders discharging the bank loans on receipt of the liquidator's distribution. Effectively, Geoffrey and Pamela Lewis would be making a gift to the five companies by paying their respective debts to the bank. Each company would then record a non-assessable capital gain due to a liability being discharged by way of gift."
The effect of Mr Pape's opinion seems to have been that such a proposal would be a tax effective way of distributing the Company's assets. Although the Company would incur a capital gains tax liability of $460,778 on the assumed market value of the Company's assets, the use of franking credits would reduce the tax on a liquidator's distribution and would mean that effectively the liquidator's distribution would be about 84 per cent free of tax. Mr Pape raised the question "How does this seem?".
On 29 November 2011 Peter Lewis wrote to David Lewis stating that based on the current draft advices it appeared as though any action in transferring assets to ancillary companies and a proposal to liquidate the company would create a massive capital gains tax liability. He said that the impost of the liability should not at present be borne by the Company. He referred to a different, and in his view, more pressing, taxation issue, namely the putting in place of an agreement for the making of loans to shareholders that would comply with the requirements of Div 7A of the Income Tax Assessment Act 1997 (Cth). He said that if David Lewis could put their mother's mind at rest concerning the accessibility of funds from the Company, then he believed her concerns regarding the Company would be appeased. He also proposed that a meeting be held between both Peter and David Lewis and their mother and their two brothers.
David Lewis did not wait. He considered that the proposal summarised by Mr Pape, as quoted at [8] above, was an appropriate "succession plan" to give effect in due course to his parents' wishes as expressed in their then wills in a way most advantageous to the family. Without waiting for the assent of his siblings, or the approval of his father (if his father were capable of giving or withholding such approval) David Lewis arranged for the incorporation of the first to sixth defendants. The companies were incorporated on 12 January 2012. Typically of accountants, David Lewis' proposal involved the creation of discretionary trusts.
The first defendant, Arthur Hughes Pty Ltd ("Arthur Hughes"), had one shareholder, namely Mrs Lewis. She and Mr Bird were its directors.
The second defendant, Speakman Hughes Pty Ltd ("Speakman Hughes") was incorporated on the same day. All of the shares in Speakman Hughes are owned by Arthur Hughes, but according to the ASIC return, Arthur Hughes is not the beneficial owner of those shares. On the same day a trust deed was entered into for the establishment of a discretionary trust named as the Howarth Family Trust. The trustee is Arthur Hughes. Mrs Lewis and Mr Bird executed the trust deed on behalf of Arthur Hughes as trustee. The trust deed provides that the trustee has an absolute discretion to distribute any part of the trust fund prior to the vesting day to a "named beneficiary" or "a member of a class of eligible beneficiaries". Income can be distributed at the discretion of the trustee to a named beneficiary or to any one or more persons who are members of any of the classes of eligible beneficiaries. If the trustee fails to exercise a discretion to appoint income by the end of any given financial year, then the named beneficiaries are entitled to that income in equal shares. The named beneficiaries are Peter Lewis, his wife Rosemary Lewis, Mrs Lewis, Mr Lewis, and Speakman Hughes. The classes of eligible beneficiaries include the spouse of a named beneficiary, the parents of a named beneficiary, the children of a named beneficiary, the brothers and sisters of a named beneficiary, their remoter relations, the spouses of any such relations, and a vast range of other potential objects including schools, universities, colleges and other educational bodies, and any companies in which any of the beneficiaries otherwise mentioned is a shareholder or a director, and any charity or other legal entity that the trustee might nominate. Mrs Lewis as appointor has power to appoint an additional or replacement trustee. The trustee has power to nominate one or more persons as an additional class of eligible beneficiaries if the power is exercised with the consent of the appointor, and has the power, with the consent of the appointor, to delete a class of eligible beneficiaries.
The third defendant ("Telfer Hughes"), the fourth defendant ("Melvie Hughes"), and the fifth defendant ("Gypson Hughes") were also incorporated on 12 January 2012 and trust deeds establishing discretionary trusts in the same form were established on the same day.
David Lewis caused the companies to be incorporated and the trusts to be established. His intention was that Peter Lewis and his wife and Speakman Hughes would be the principal beneficiaries of the Howarth Family Trust which was the beneficial owner of the issued shares in Speakman Hughes. David Lewis, together with his two sons and Telfer Hughes, were to be the intended principal beneficiaries of the trust established for them called the Grant Family Trust. Roger Lewis, together with his wife and two children, and Melvie Hughes were to be the intended beneficiaries of the trust established for them, called the Geoffrey Family Trust. Hugh Lewis, together with his wife and children, and Gypson Hughes were named as beneficiaries of the trust established for them called the Barnby Family Trust.
It was common ground that the trust deeds of the four discretionary trust were all in substantially the same form. Hence the trustee, Arthur Hughes, that was controlled by Mrs Lewis or, after her death, by whoever might be entitled to her personal estate, could control each of the four discretionary trusts. The width of the class of eligible beneficiaries was such that the income or capital of any of the trusts could be distributed to any family members or to a wide range of other persons at the discretion of the trustee.
Arthur Hughes as well as being the trustee of each discretionary trust is the legal holder of all of the shares in Speakman Hughes, Telfer Hughes, Melvie Hughes and Gypson Hughes.
The fifth trust deed is styled a unit trust deed, rather than a discretionary trust deed. It established the "Grand Family Unit Trust". It was also entered into on 12 January 2012. The trustee is Arthur Hughes. The initial unitholders are described as Arthur Hughes as trustee for the Grant Family Trust, Arthur Hughes as trustee for the Geoffrey Family Trust, and Arthur Hughes as trustee for the Barnby Family Trust. Arthur Hughes as trustee for the Grant Family Trust has 40 units, (David Lewis has two children). Arthur Hughes as trustee for the Geoffrey Family Trust has 40 units (Roger Lewis has two children). Arthur Hughes as trustee for the Barnby Family Trust has 60 units (Hugh has three children). The Grand Family Unit Trust deed provides in substance that the trustee (Arthur Hughes) holds the assets of the trust as a separate fund on trust for the unitholders and that each unit entitles a holder to an equal share with each other unitholder of a unit in a beneficial interest in the trust assets as a whole, and that each unitholder is entitled to a proportionate share in the income of the trust and the trust assets.
On 12 January 2012 David Lewis also caused another company to be incorporated called Bathurst Hughes Pty Limited ("Bathurst Hughes"), the sixth defendant. The shares in Bathurst Hughes are owned by Arthur Hughes. According to David Lewis' instructions to his solicitor, Arthur Hughes holds the 140 shares in Bathurst Hughes on trust for the Grand Family Unit Trust. Mrs Lewis and Mr Bird were the initial directors of the company.
These trusts were established without reference to the potential beneficiaries of the trusts. Neither Mrs Lewis nor David Lewis consulted the other children in relation to what was proposed.
On 17 January 2012 Mrs Lewis signed three cheques drawn on the bank account of the Company in favour of Bathurst Hughes. Two cheques were drawn for $590,188 each and the third for $2 million. The cheques were prepared for Mrs Lewis' signature by David Lewis. On 5 March 2012 Mrs Lewis signed a further cheque drawn on the Company's bank account in favour of Bathurst Hughes in the sum of $370,000. On 23 May 2012 she transferred the balance of the Company's bank account, $66,251.76, to Bathurst Hughes. All these transactions were done at the instigation of David Lewis.
On 10 February 2012 the shares and stapled securities held by the Company were transferred to Speakman Hughes, Telfer Hughes, Gypson Hughes and Melvie Hughes. The shares were transferred at then market value. The share transfers were signed by Mrs Lewis and Mr Bird as directors of the Company as transferor and as directors of each of Speakman Hughes, Telfer Hughes, Gypson Hughes and Melvie Hughes as transferees. Gypson Hughes received a few additional shares where the Company's shareholding could not be divided by four.
Mrs Lewis acted on David Lewis' recommendations. Mr Bird considered that it was his role as a director of the Company to carry out the wishes of the owners, namely Mr and Mrs Lewis. He discussed the proposed transactions with Mrs Lewis and David Lewis. He considered that the "restructure plan" that was put in place involving the transfer of the assets of the Company to other companies was in accordance with the wishes of Mr and Mrs Lewis, as expressed in their wills at the time. That is to say, Mr Bird acquiesced in the plan for the "restructure" as propounded by David Lewis.
A minute of a meeting of directors of the Company dated 13 February 2012 signed by Mr Bird and Mrs Lewis recorded a resolution of the directors to authorise the transfer of shares from the Company to Speakman Hughes, Telfer Hughes, Melvie Hughes and Gypson Hughes. The minute stated that:
"The directors also acknowledged that the value of the shares transferred to each of the above entities are to be recorded as loans between the Company and the relevant entities as at 10 February 2012 in the Company's accounting records. The parties have agreed that the loan is to be repaid on a mutually agreed basis but not to exceed 7 years from the date of the loan. Interest is to be charged on a mutually agreed basis."
On 20 June 2012 Mrs Lewis and Mr Bird signed a letter, both as directors of the Company, and as directors of Bathurst Hughes, setting out an acknowledgment that the moneys paid by the Company to Bathurst Hughes were paid by way of loan. The letter stated:
"The purpose of this letter is to set out the understanding between the two companies below:
The directors of Anne Lewis Pty Limited (Anne Lewis) and Bathurst Hughes Pty Limited (Bathurst Hughes) acknowledged that Anne Lewis has made loans to Bathurst Hughes in several tranches.
The directors of Anne Lewis and Bathurst Hughes acknowledged that the parties have agreed that the loans are to be repaid on a mutually agreed basis but not to exceed 7 years from the date of the loans. Interest is to be charged on a mutually agreed basis.
The directors of Anne Lewis and Bathurst Hughes acknowledged that the value of the loans are to be recorded as loans between Anne Lewis and Bathurst Hughes in their respective company accounting records."
In earlier proceedings (referred to at para [45] below) a solicitor, Ms Jane Maconachie, then acting for the Company on the instructions of David Lewis, swore an affidavit based on information given to her by David Lewis in relation to these transactions. She deposed:
"40. Between about January 2012 and May 2012, all the cash assets of Anne Lewis Pty. Limited were loaned to Bathurst Hughes Pty Limited (the issued shares of which are held by the Grand Family Unit Trust). The total cash that was loaned by Anne Lewis Pty. Limited to Bathurst Hughes Pty. Limited was approximately $3.6 million. The intention was that Bathurst Hughes Pty. Limited would invest the cash in bank deposits and would operate as a form of treasury for the family group to cover bills relating to income tax and operating expenses. The intention was also that the income from the cash investments could be distributed to the grandchildren through the Grand Family Unit Trust. A loan acknowledgment dated 20 June 2012 between the directors of Anne Lewis Pty. Limited and Bathurst Hughes Pty. Limited in relation to the loan of the cash is at page 51 of exhibit 'PHL 1' to the affidavit of Peter Lewis sworn 3 December 2013 in these proceedings.
…
Current Status of Assets of Hughes Companies and Anne Lewis Pty. Limited
43. The shares and stapled securities that were transferred into the four Hughes companies referred to above remain in those entities. They have not been sold or otherwise dealt with since they were transferred into those Hughes companies.
44. The current value of the assets in the four Hughes companies will match the value of the shares and stapled securities on the Australian Securities Exchange. David Lewis carried out a valuation as at the end of December 2013 of the total shares and stapled securities held in each of the four Hughes companies that acquired shares and stapled securities from Anne Lewis Pty. Limited. As at that date, the value of the shares and stapled securities which each of those companies had acquired from Anne Lewis Pty. Limited was approximately $1.9 million (totalling approximately $7.6 million).
…
46. Of the $3.6 million cash assets that were lent to Bathurst Hughes Pty Limited in the first half of 2012, Bathurst Hughes Pty. Limited still holds cash of approximately $3.050 million. They are held in two term deposits with the National Australia Bank. The reduction in the cash assets of Bathurst Hughes Pty. Limited is primarily due to payment of the following:
(a) Income tax arising from the net taxable capital gain from the sale of shares and stapled securities from Anne Lewis Pty. Limited to the four Hughes companies - approximately $411,000.
(b) A distribution by the Barnby Family Trust to Hugh Lewis and his wife Rhonda Lewis in the amount of $60,000. To effect that distribution, Bathurst Hughes Pty. Limited loaned the sum of $60,000 to Gypson Hughes Pty. Limited, Gypson Hughes Pty. Limited declared a dividend of $60,000 in favour of Arthur Hughes Pty. Limited as Trustee of the Barnby Family Trust, which then distributed the sums of $30,000 to Hugh Lewis and $30,000 to Rhonda Lewis.
(c) A division 7A loan by Bathurst Hughes Pty Limited to Pamela Lewis in the sum of $200,000. Drawn down 18 July 2012.
(d) A payment of 50% of an interim fully franked dividend of $120,000 to Pamela Lewis as a shareholder in Anne Lewis Pty. Limited, which dividend was declared in August 2013. The payment of $60,000 was made to Pamela Lewis on 22 August 2013. This payment was made by Bathurst Hughes Pty. Limited on behalf of Anne Lewis Pty. Limited. The balance of the $120,000 declared dividend is yet to be distributed.
(e) Another division 7A loan by Bathurst Hughes Pty Limited was made to Pamela Lewis in August 2012 in the sum of $350,000. That sum was distributed equally to Pamela Lewis's grandchildren shortly thereafter. Pamela Lewis repaid that loan to Bathurst Hughes Pty. Limited in January 2013.
…"
David Lewis gave evidence that he and Peter Lewis attended on Mr Pape on 11 November 2011 where on earlier advice from Mr Pape was discussed. He deposed that:
"14. At that meeting, Peter Lewis discussed with Bryan Pape the concept of Division 7A loans and the assessability to income tax of capital profits made from the sale of shares acquired prior to 20 September 1985 when received by the shareholders of a proprietary limited company. Bryan Pape orally advised Peter Lewis that income tax would not be payable by shareholders of a proprietary company in that event.
15. At that meeting, I discussed the concept, and then impact, of Capital Gains Tax Event K6 with Bryan Pape.
16. Later at that meeting, a general discussion took place between us where the concept of transferring the assets of Anne Lewis Pty Ltd to five separate companies was considered. After that discussion, Bryan Pape undertook to further consider this issue and to provide advice in relation to it.
17. On the Saturday after the meeting with Bryan Pape, Peter Lewis advised me that he had read my father's Power of Attorney granted to my mother and further advised me that my father's Power of Attorney gave my mother the authority to act on behalf of my father.
18. After he returned home, Peter Lewis and I further discussed this issue. Again, Peter Lewis advised me that he would research this subject further by examining the following subjects:
Scrip for scrip rollover
Demergers
Exchange of shares or units
Exchange of shares between two companies
Asset transfers between certain group companies
Value shifting
19. Peter Lewis then advised me that value shifting was available to be used to form the basis of the succession plan and he then sent me an Australian Taxation Office publication about value shifting. This publication indicated that the value shifting regime did not apply to the shares of my mother and my father in Anne Lewis Pty Ltd as these were acquired prior to 20 September 1985. If shares were acquired after that date, then the value shifting regime would apply and result in a significant income tax liability on the value shifted from the shares of my mother and my father in Anne Lewis Pty Ltd to any other entity.
20. I then prepared a draft paper for discussion between myself and Peter Lewis which was not to be forwarded to Bryan Pape until after both Peter Lewis and I had approved the final draft of that paper. …
21. In early January 2012, I advised Bryan Bird that Peter Lewis had retained the services of Bryan Pape to provide advice about a succession plan for my mother and my father. That advice basically involved the creation of 5 new proprietary companies to hold all of the assets of Anne Lewis Pty Ltd. I also advised him that Peter Lewis had provided me with information concerning value shifting. Bryan Bird and I then discussed how a succession plan could be based on value shifting by using trusts and proprietary companies. …
22. On 12 January 2012, Isabella Wong, a solicitor with Lewis & Coble, then advised me that a separate company (the First Defendant) must be incorporated to act as Trustee of the five trusts. …
23. … 4 proprietary companies (the Second to Fifth Defendants) were incorporated on 12 January 2012 to represent the shares that each of the 4 sons would take in accordance with the succession plan.
24. The Sixth Defendant was also incorporated on that date to represent the interests of the 4 sons and the 7 grandchildren.
25. The First Defendant was also formed on that date to act as the trustee of the 4 discretionary trusts (each one relating to the 4 sons) and the unit trust (relating to the 7 grandchildren) whereby those trusts would own the issued shares in the Second to Sixth Defendants.
26. The ultimate purpose of this succession plan was to allow my mother and my father to access their beneficial interest in Anne Lewis Pty Ltd without incurring a substantial income tax liability. My mother and my father were the only shareholders of Anne Lewis Pty Ltd and the common named beneficiaries of the 4 discretionary trusts (each one of which also named the particular son and his wife, and their respective children, as potential beneficiaries).
27. At no time did anyone involved in the matter of this succession plan, including Peter Lewis, mention that it may involve contravention of any law.
…
30. The succession plan included the eventual voluntary liquidation of Anne Lewis Pty Ltd once the succession plan had been completed. This meant that my mother and my father would gain access to the following amounts (all amounts are as at 30 June 2013):
$1,180,376.00, being the paid up capital of Anne Lewis Pty Ltd, and
$3,506,608.84, being the net capital profits from the sale of shares acquired prior to 20 September 1985.
31. The balance of the net assets of Anne Lewis Pty Ltd of $4,389,744.16 (being the value of shares acquired after 20 September 1985 and subject to Capital Gains Tax when sold), together with the franking account of Anne Lewis Pty Ltd of $1,891,377.05, were to be distributed to Speakman Hughes Pty Ltd, Telfer Hughes Pty Ltd, Melvie Hughes Pty Ltd, Gypson Hughes Pty Ltd and Bathurst Hughes Pty Ltd, in accordance with the wills of my mother and of my father. This ensured that my mother and my father did not have to sell their shares and stapled securities, and the income tax liability payable on the amount of $4,389,744.16 was payable by Speakman Hughes Pty Ltd, Telfer Hughes Pty Ltd, Melvie Hughes Pty Ltd, Gypson Hughes Pty Ltd and Bathurst Hughes Pty Ltd and not by my mother and my father.
…"
Mr Lewis remained a director of the company but did not participate in its management after being admitted to a nursing home. He was not consulted in relation to the "succession plan". It was suggested by counsel for the liquidator in cross-examination of Mrs Lewis that at that time Mr Lewis suffered from severe dementia, a claim she denied. It appeared from the cross-examination of David Lewis that in January 2010 Mr Geoffrey Lewis was described on a medical discharge form as suffering from dementia, a diagnosis that David Lewis rejected. It does appear however that although Mr Lewis remained as a director, he was not consulted about the Company's affairs or its investments.
In oral evidence David Lewis said that the purpose of incorporating the investment companies to which assets were transferred was for the assets to be held for the benefit of his parents and then, after their death, for the benefit of the beneficiaries under their wills.
In oral evidence David Lewis said that all the cash that his mother intended to go to the grandchildren had been transferred to Bathurst Hughes, but not all the cash that was in Bathurst Hughes was destined for the grandchildren because they were only entitled to one-fifth of Mrs Lewis' estate. He said:
"The adjustment was going to take place through the loan accounts before, so that the intention was that the final allocation of the money between the five - between the second to sixth defendants was going to be based upon a calculation which would take the original cost value as at 30 June 2012, and allocate that as to 50 per cent to, prospectively Speakman, Telfer, Melvie and Gypson and the other 50 per cent would then be allocated a fifth across the five companies, which would then leave Bathurst Hughes with only the grandchildren's cash in it. Then the intention then was to liquidate Bathurst Hughes and distribute that money to the companies, which they were then beneficiaries of the trusts that owned those companies, your Honour. So, in the case of Gypson Hughes, that would mean that Gypson Hughes would get that money and then that would then be distributed, by virtue of the trustee[']s discretion, to the grandchildren."
David Lewis said that the liabilities owed by each of the five companies to Anne Lewis arising from the transfer of cash and shares would have been satisfied and the property distributed to shareholders in one of two ways. One alternative, that Mr Pape had recommended, involved a round robin of cheques. As I understood it, Mr Lewis and Mrs Lewis would have lent moneys to the five companies that would have been applied by the companies in discharging their debts to Anne Lewis. Mr and Mrs Lewis would have forgiven the debt owed by the five companies to them. Presumably the money repaid to Anne Lewis would then be distributed to them as shareholders on the winding-up of the Company. David Lewis described the alternative as follows:
"…the alternative was to do what's called a value shifting regime which actually involved - this is based on research that Peter did - was the issue of additional shares by Anne Lewis to the second to sixth defendants in proportion as it represented the beneficiaries['] interest in Anne Lewis's assets as at that date, which was going to be 30 June 2012. The effect of that then, your Honour, was it would then lead to the liquidation of Anne Lewis and the distribution of those funds to the second to sixth defendants."
David Lewis said that the plan, if it had proceeded, would have had taxation advantages. The plan was for the Company to be liquidated and the loans repaid before Mr Lewis died. He said that the plan would have had taxation advantages for all parties. He acknowledged that the trust deeds conferred power on the trustee to distribute income or capital across a wide range of people, not just Mr and Mrs Lewis, their sons and grandchildren, and that the trustee had a discretion to appoint additional beneficiaries. He said that it was never his intention that anything would be done other than following a process that accurately reflected his father's testamentary wishes and his mother's testamentary wishes. He said that the original intention was that the companies would be passed on to his brothers once all the debts between the companies had been liquidated and they would be put in a situation where they controlled the trusts. He said that his mother had signed a codicil to the effect that on her death her powers as appointor in respect of each of the trusts went to the son for whose benefit the trust was established. David Lewis said that the codicil had subsequently been rescinded because of the later disruption in the family's relationships and because of the intercompany relationships which had not been resolved. Nonetheless, his intention in implementing these arrangements was to give effect, in what he considered to be a tax effective way, to his parents' testamentary wishes.
Mr Pape provided a further draft opinion on 6 March 2012, that is, after David Lewis had instigated the transfers of the shares and stapled securities of the company and most of its cash.
On 19 March 2012 Peter Lewis wrote to his brother David complaining that he had been advised that without reference either to himself or to Roger or Hugh Lewis, David Lewis had arranged for the transfer of a number of securities held in the name of the Company to four private companies. He said that David Lewis had no authority to act on matters relating to their father's financial affairs. Mr Lewis had given a power of attorney to his wife. It was not an enduring power. Peter Lewis said that the power of attorney was no longer effective as Mr Lewis was no longer competent.
A meeting was held on 25 March 2012 attended by Peter, David, Roger and Hugh Lewis. Peter Lewis wrote to David Lewis on 31 March 2012 confirming oral advice given by David Lewis that he had transferred the share portfolio into four new companies. Peter Lewis noted that the directors of those companies were Bryan Bird and Pamela Lewis and the shareholding was in the name of Arthur Hughes. He confirmed advice that had been given by David Lewis as to the establishment of trusts and that the cash investments were now controlled by Mrs Lewis and the dividend income from the share portfolio would be available to both parents, as would the interest income. He noted David Lewis' advice that he had undertaken the transactions because David Lewis believed the matter had been dragging on too long. Peter Lewis made various complaints and demands, including a complaint that the transfer of assets had crystallised a capital gains tax liability that he estimated would be approximately $460,000.
Mr Lewis died on 22 June 2012. Probate of his will of 15 January 2007 was granted to Peter Lewis and Bryan Bird on 21 September 2012.
Meanwhile, on 1 August 2012 Mr Bird resigned as a director of Speakman Hughes, Melvie Hughes, Gypson Hughes, Bathurst Hughes and Arthur Hughes. On 3 August 2012 David Lewis was appointed as a director of Arthur Hughes, Bathurst Hughes and Telfer Hughes.
The Company incurred a liability for capital gains tax of $376,696.92. For the 2012 tax year it incurred an overall tax liability of $454,234.80 calculated after taking into account tax offsets of $75,186 on a taxable income of $1,764,736. Of that taxable income $298,356 represented the net amount received by the Company from interest and dividends after deduction of expenses. The remaining taxable income of $1,401,194 was the capital gain incurred by the Company on the transfer of its assets. The Company's tax liability was paid by Bathurst Hughes. A journal entry credited Bathurst Hughes' liability to the Company by a corresponding amount.
On 18 July 2012 Bathurst Hughes lent Mrs Lewis $200,000. It made a further loan to her of $350,000 on 1 August 2012. At her direction that sum was distributed equally to her seven grandchildren. She repaid the loan of $350,000 on 4 January 2013. On the same day she paid Bathurst Hughes $19,068.49 and on 13 June 2014 she paid Bathurst Hughes $48,482, apparently either as partial repayment of the $200,000 loan or in payment of interest.
Mrs Lewis as sole director of Bathurst Hughes, Speakman Hughes, Telfer Hughes, Melvie Hughes and Gypson Hughes signed a loan acknowledgment on 2 August 2012 for each company. She acknowledged receipt of two advances of $200,000 on 18 July 2012 and $350,000 on 1 August 2012 from Bathurst Hughes. She also acknowledged that Bathurst Hughes had received the loans from Anne Lewis and that "The parties have agreed that the loans are to be repaid on a mutually agreed basis but not to exceed 7 years from the date of the loan. Interest to be charged on a mutually agreed basis." Repayment and interest terms of the drawdowns made by Mrs Lewis from Bathurst Hughes were said to be "subject to the Loan Agreement between Pamela Lewis and the Company mentioned above [sic]".
On 2 August 2012, as the sole director of Speakman Hughes, Mrs Lewis resolved to pay a fully franked dividend of $30,000 to Arthur Hughes as trustee for the Howarth Family Trust. Mrs Lewis acknowledged that Speakman Hughes had received a loan from Anne Lewis on 12 February 2012 for the amount of $1,484,458.06 and that the loan was to be repaid on a "mutually agreed basis but not to exceed 7 years from the date of the loan. Interest is to be charged on a mutually agreed basis."
As the sole director of Telfer Hughes, Melvie Hughes and Gypson Hughes, Mrs Lewis resolved to pay a fully franked dividend from each of those companies to Arthur Hughes as trustee for the Grant Family Trust, the Geoffrey Family Trust and the Barnby Family Trust respectively. The companies acknowledged loans from Anne Lewis on 10 February 2012 in the same amount of $1,484,458.06, save for Gypson Hughes which acknowledged a loan of $1,484,882.61.
On 12 April 2013 Mrs Lewis, acting through her solicitor, gave notice to Mr Bird for the holding of a meeting of directors on 16 April 2013 with a view to passing resolutions for the distribution of net capital profits of $3,506,608.84 to the shareholders of the Company arising from the sale of assets acquired prior to 20 September 1985 and the payment of that sum by Bathurst Hughes in partial repayment of its loan from the Company. That proposal did not proceed. Mr Bird wrote to Mrs Lewis on 7 May 2013 advising that he had told David Lewis on 15 April that in his view the plan was seriously flawed and would result in incurring a substantial tax liability. David Lewis then agreed that the proposed meeting on 16 April should be cancelled.
On 9 August 2013 Mrs Lewis as director of the Company purportedly declared a dividend of $120,000. Bathurst Hughes paid $60,000, purportedly on behalf of the Company, to Mrs Lewis. Sixty thousand dollars was not distributed to the executors of Mr Lewis' estate.
On 5 December 2013 Peter Lewis filed an originating process seeking an order that the Company be wound up on the just and equitable ground. On 9 April 2014 Brereton J ordered that the Company be wound up and that Mr Hugh Thomas be appointed its liquidator.
By summons filed on 16 April 2014 Mr Thomas sought a declaration that the first to sixth defendants held their respective assets on trust for the company, an order that those defendants do all things necessary to transfer their respective assets to the Company, or alternatively, judgment for a debt of $9,136,451.27 and interest, and certain other relief. It was not until closing submissions that leave was sought for the joinder of the Company as a plaintiff. That leave was granted. The causes of action that the liquidator pursues are the Company's causes of action. They are not causes of action vested in the liquidator.
Mrs Lewis swore an affidavit in which she deposed that:
"11. My late husband and I held shares in the company. The restructure of the company in early 2012 before my husband died, was for my benefit, my husband's benefit and the benefit of all of our beneficiaries, including Peter.
12. In respect of the restructure of the company pursuant to an estate plan, I acted on professional advice from my son David Grant Lewis ('David') who is a qualified accountant with a degree in accounting from Macquarie University. I believe that David received advice for the estate plan from Mr Bryan Pape, a barrister at law and Mr Bryan Bird who at that time was a director of Anne Lewis Pty Limited and of the Hughes companies and the company accountant. Mr Bryan Bird worked at my late husband's old firm Lewis & Coble. He assisted and advised over a period spanning about 25 years managing tax matters for Anne Lewis Pty Limited. He was on good professional and personal terms with my husband.
(a) Peter was involved in the estate planning exercise involving my late husband's and my estate, up until the end of December 2011;
(b) all transactions between the companies of which I am a director were legitimate, transparent and not designed to defeat my late husband's intentions under his will; and
(c) were agreed to and executed for the purposes of:
protecting my husband and I, my grandchildren and my husband and my other beneficiaries being our four sons; and
to adequately restructure the company to reduce any future tax liability that could not have otherwise been properly and honestly minimised by applying current taxation rules and regulations."
As the plaintiffs allege, the transfer of all of the cash investments and all of the shares and stapled securities that belonged to the Company to the second to sixth defendants was of no corporate benefit to the Company. The sixth defendant, Bathurst Hughes, acknowledged that it was indebted to the Company for the moneys transferred. The second to fifth defendants, through Mrs Lewis, acknowledged that they were indebted to the Company for the amount of the purchase price payable on the transfer of the shares and stapled securities that were described as having been advanced by way of vendor loan. But the loans were to be repaid only after seven years, unless the parties mutually agreed on an earlier repayment, and did not carry interest, unless the parties agreed on the rate of interest to be charged. The documentation of these arrangements may have been prepared with the view to satisfying the criteria whereby loans made by a private company are not to be treated as dividends if they provide for a rate of interest which equals or exceeds the benchmark interest rate for the year of income and the loan does not exceed the maximum term provided for by s 109N of the Income Tax Assessment Act 1936 (Cth). However, it is admitted on the pleadings that no interest was negotiated or agreed in relation to the loans made by the Company and they have not been bearing interest. No submissions were made by any party as to what, if any, taxation liability might arise as a result.
As a director of the Company Mrs Lewis owed a fiduciary duty to act in the best interests of the Company and to avoid a conflict between her duty to the Company and her personal interests. She owed a statutory duty to act in good faith in the best interests of the Company and for a proper purpose (Corporations Act 2001 (Cth), s 181(1)).
The Company was solvent. The interests of the Company were the interests of its shareholders, that is, Mr and Mrs Lewis. Mr Lewis did not participate in the "restructure". The defendants did not plead that he gave his informed consent to the transactions, either personally or by his attorney Mrs Lewis. Had such an issue been raised there would have been a question as to whether or not Mrs Lewis could have exercised her husband's power of attorney to consent to the transactions on his behalf, or whether her authority so to act was lost because he had lost capacity. No issue of the shareholders giving their informed consent to what would otherwise be a breach of a director's fiduciary duty was raised.
Mr Bird had not been appointed to the board when the initial cash withdrawals were made from the Company's bank account totalling $3,180,376. He was appointed a director on 25 January 2012 and signed the share transfers. He was approached to become a director by David Lewis on Mrs Lewis' behalf. He understood it was his role as a director of the Company to carry out the wishes of the owners, being Geoffrey Lewis and Pamela Lewis. He said that the restructure plan in which he participated was based on the wishes of Mr and Mrs Lewis as expressed in their wills, that under Mr Lewis' will the sons got a quarter of the estate each and from Mrs Lewis' side the sons got one-fifth each and the grandchildren as a whole got one-fifth. He said that the companies were set up in that exact proportion and that control would pass on the death of Mrs Lewis as he understood it. He had had no discussions with Mr Lewis about those matters. He believed on the basis of what was said in Mr Lewis' will that the restructure would be in accordance with his wishes.
However, the transactions did not implement Mr Lewis' wishes as expressed in his will. Mrs Lewis had effective control of Bathurst Hughes and of Arthur Hughes, which was the trustee of all of the discretionary trusts. Whereas under Mr Lewis' will his executors were responsible for the investment of his estate having regard to the interests of Mrs Lewis as life tenant and the four sons as remaindermen, under the so-called succession plan Mrs Lewis controlled the trustee and could appoint either capital or income unconstrained by the terms of her husband's will.
The transfer of assets to the five companies was not for the benefit of Anne Lewis. From its perspective the transaction was most disadvantageous. The loans were interest-free and were given without security. The Company was deprived of its income stream from interest and dividends and was deprived of the prospect of future capital growth of the shares and stapled securities. The transaction was disadvantageous to Mr Lewis as shareholder for the same reasons it was disadvantageous to the Company. It did not implement his testamentary wishes, even if that were a legitimate consideration.
I accept the evidence of Mr Bird, Mrs Lewis and David Lewis referred to above as to their motives and intentions in implementing these transactions. I accept that it was David Lewis' intention, and his expectation, that the affairs of the trusts would be so managed in the future that effect would be given ultimately to the substance of his father's testamentary wishes as to who should inherit his father's estate, albeit that this depended upon the future exercise of discretions of the trustee of the four discretionary trusts and the distribution of capital from Bathurst Hughes. Likewise I accept that Mrs Lewis acted on the advice of her son David and considered that the transactions were not designed to defeat her husband's intentions under his will, but were for the purposes of protecting her husband and her and restructuring the Company's affairs with the aim of reducing future tax liabilities. I accept that Mr Bird simply considered that he was implementing the wishes of David Lewis and Mrs Lewis and thought that the transactions were of a kind of which Mr Lewis would approve. Mrs Lewis, Mr Bird, and David Lewis did not act dishonestly.
Nonetheless, Mrs Lewis breached her fiduciary and statutory duties as a director. She entered into transactions that were not for the benefit of the Company and where she had a conflict between her duty to the Company and her personal interest. The transactions were not for the benefit of her husband. The effect of the transactions was to transfer all of the Company's assets to five other companies which she controlled. She obtained for herself the power to appoint both capital and income, including to herself to the exclusion of any of her children. Unless she had the informed consent of her husband, which was not alleged, Mrs Lewis breached her fiduciary duty by arranging for the transfers.
Mrs Lewis also breached her duty under s 181(1) of the Corporations Act. That section provides:
"181 Good faith-civil obligations
Good faith-directors and other officers
(1) A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
Note 1: This subsection is a civil penalty provision (see section 1317E).
Note 2: Section 187 deals with the situation of directors of wholly-owned subsidiaries."
In Re Ledir Enterprises Pty Ltd [2013] NSWSC 1332; (2013) 96 ACSR 1 Black J summarised the authorities on that provision as follows:
"[78] In Westpac (No 3), the Court of Appeal of the Supreme Court of Western Australia unanimously held that the first element of that duty, the duty to act in good faith in the company's best interests, was subjective and would be complied with if directors honestly believed they acted in the company's best interests: per Lee AJA at [1923], per Drummond AJA at [1988] and [2027], per Carr AJA at [2772] and [2795]. The authors of R P Austin, H A J Ford and I M Ramsey, Company Directors: Principles of Law and Corporate Governance, LexisNexis Butterworths, New South Wales, 2005 observe at [7.4] that a failure to comply with that duty can tend to arise, relevantly, 'when circumstances induce directors to believe that the company's interests correspond with their own interests' and '[m]aking that unreflective assumption, they then act in the company's affairs without considering its interests as a separate entity with its own shareholders and creditors'.
[79] The second limb of s 181(1) requires that directors' powers may be exercised only for the purpose for which they were conferred and not for any improper purpose: Mills at 185, where Dixon J noted that a power conferred upon directors 'cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power'; Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 218; 14 ACSR 109 at 137. There is authority that whether a director acted for a proper purpose within s 181 is to be determined objectively: Re HIH Insurance Ltd and HIH Casualty and General Insurance Ltd; Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; 168 FLR 253; [2002] NSWSC 171 at [738]-[739]. In Westpac (No 3), the majority held that whether a director acts for an improper purpose is determined objectively involving an assessment by the court of what was reasonable in the circumstances: per Lee AJA at [933], per Drummond AJA at [1988], [2027], and [2073]. By contrast, Carr AJA held that the test whether directors had acted for an improper purpose was primarily subjective, although a decision would be voidable if directors acted in good faith for a purpose that was beyond their powers or for a collateral purpose: at [2903]. The application of a company's funds, without regard to its separate identity and without considering whether it was in the interests of the company and its members, was held to constitute a breach of that section in Vigliaroni v CPS Investment Holdings Pty Ltd (2009) 74 ACSR 282; [2009] VSC 428 at [42], where Davies J noted that, even where a director had authority to make the relevant payments, the exercise of that authority required the director to turn his mind to whether the relevant transfer of funds was in the interests of the company."
It is not clear to me that Mrs Lewis subjectively considered that the transactions were in the best interests of Anne Lewis. In any event, for the reasons given, the transactions were not for a proper purpose.
Mr Bird participated in the transfers of the shares and stapled securities. He was not joined as a defendant. It is not necessary to make any finding as to whether he was in breach of his equitable or statutory duties as a director in acquiescing in and facilitating the transactions.
David Lewis was the instigator of the transactions and of Mrs Lewis' breaches of fiduciary and statutory duties. He did not merely assist those breaches. Because David Lewis instigated or procured his mother's breach of fiduciary duty, he is liable to pay equitable compensation to the Company for whatever loss the Company might suffer as a result of his breach. That is so even though I have found that neither he nor Mrs Lewis was guilty of dishonesty (Hasler v Singtel Optus Pty Ltd [2014] NSWCA 266; (2014) 87 NSWLR 609 at [77]; William Gummow, "Knowing Assistance" (2013) 87 ALJ 311 at 315-317).
Both Mrs Lewis and David Lewis are liable to compensate the Company for the loss suffered by it as a result of the transactions whereby the shares and stapled securities and cash investments of the Company were transferred to the second to sixth defendants.
The second to sixth defendants received the Company's property with actual knowledge through Mrs Lewis of all relevant circumstances, and those companies had the same want of probity as did Mrs Lewis personally and David Lewis. The companies have a personal liability to account for profits or pay compensation for loss suffered by the Company under the first limb of Barnes v Addy (1874) LR 9 Ch App 244 at 251-252 (Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 at [266]-[269]). That is so notwithstanding that the property received by the second to sixth defendants was not trust property, but the Company's property that was misapplied by at least Mrs Lewis' acting in breach of her fiduciary duty (Grimaldi v Chameleon Mining NL (No 2) at [510], [563]-[567]).
The extent of the second to eighth defendants' personal liability to pay equitable compensation (or to account for profits) will depend upon whether the Company is entitled to a proprietary remedy so as to require the defendants to retransfer to the Company the shares that were transferred to the second to fifth defendants, whether the sixth defendant is liable to transfer so much of the cash investments it received, and whether the defendants are also required to transfer the fruits of the property received, in the form of interest and dividends.
Prima facie, the second to sixth defendants having received the Company's property with knowledge of Mrs Lewis' breach of fiduciary duty would hold the funds on a constructive trust for the Company (Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 at 405; Grimaldi v Chameleon Mining NL (No 2) at [562]-[564], [567]).
On 17 and 28 April 2014 orders were made restraining the defendants from dealing with the moneys and other assets that had been transferred to them.
A difficulty with the plaintiffs' claim to a proprietary remedy was that it was not until counsel's attention was drawn to Daly v Sydney Stock Exchange Limited (1986) 160 CLR 371 that the Company sought to rescind the contracts of loan and of sale and purchase of the shares and stapled securities. The plaintiffs pleaded and submitted that the purported loans were merely a disguise to hide the bare transfer of the Company's assets in breach of fiduciary duty without there being any intention that the assets would be paid for or the loans repaid. A similar argument was successfully advanced in Grimaldi v Chameleon Mining NL (No 2). In this case, however, I am satisfied that David Lewis, who was the true mind behind the transactions, intended the transactions to take effect in accordance with the tenor of the minutes that he prepared, namely, that the transfer of cash investments to Bathurst Hughes be by way of loan and that the transfer of the shares and stapled securities be by way of sale and purchase with the purchase price being provided by vendor finance. It is unnecessary to say whether this was a vendor loan or merely a deferred obligation on the part of the second to fifth defendants to pay the purchase price.
As the Full Federal Court held in Grimaldi v Chameleon Mining NL (No 2), before proprietary remedies could be granted, current authority requires rescission of the contracts of loan and contracts of sale and purchase, because those transactions are only voidable for breach of fiduciary duty or analogous statutory duty (Daly v Sydney Stock Exchange Limited per Brennan J at 387-390, 390; Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143 at 153; Hancock Family Memorial Foundation Ltd v Porteous [2000] WASCA 29; (2000) 22 WAR 198 at [173]-[206]; Robins v Incentive Dynamics Pty Ltd (in liq) [2003] NSWCA 71; (2003) 175 FLR 286 at [73]-[74], [82]; Grimaldi v Chameleon Mining NL (No 2) at [273]-[281]).
Belatedly, the liquidator sought and was granted leave to join the Company as a second plaintiff and to amend the statement of claim to seek an order for rescission of the agreement by which the Company's moneys were transferred by loan to Bathurst Hughes and of the agreements by which the listed shares and stapled securities owned by the Company were transferred to the second to fifth defendants. By its statement of claim the plaintiffs as well as seeking an order for rescission elected to rescind those transactions. Leave to amend was granted.
The effect of rescission was described by McLelland AJA in Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd as follows (at 153):
"In general, where there is a contract for the sale of property by A to B made
in breach of a fiduciary duty owed to A by … C in whose breach B knowingly participated … pursuant to which the legal title to the property has been transferred from A to B, the transaction is in equity voidable at the instance of A, who may (if necessary) obtain an order for rescission setting it aside. Unless and until A effectively avoids the transaction and (if necessary) obtains an order for rescission, B's property rights as a result of the transaction remain unaffected. However if A does effectively avoid the transaction and (if necessary) obtain an order for rescission, the parties will be treated in equity as if the transaction had never been effected; in other words equity will treat B as if he had held the property in trust for A, that is, as a constructive trustee, ab initio. A constructive trust arises in such circumstances as a consequence of the effective avoidance or rescission of the transaction."
That principle applies to the present case. No question of the Company's making restitution arises.
No submissions were made as to whether an order for rescission was necessary or whether the appropriate remedy was a declaration that by their proposed amended statement of claim the plaintiffs had rescinded the transactions.
It could not be suggested that the agreements were voidable at law. They were voidable only in the exercise of equity's exclusive jurisdiction. The better view is that such rescission is effected by order of the court (J D Heydon, M J Leeming & P G Turner, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies, 5th ed 2015 at [25-095]-[25-110] and cases there cited).
No submission was made that the plaintiffs were not entitled to rescind the transactions if it were found that the transactions were entered into as a result of Mrs Lewis' breach of her fiduciary duty. I am satisfied that the plaintiffs are entitled to declarations that the second to fifth defendants hold the listed shares and stapled securities transferred to them on constructive trust for the Company, and that the sixth defendant held the Company's money transferred to it on constructive trust for the Company. The Company is entitled to an order for the return of that property to the extent it is still held by those defendants. I think the constructive trust applies also to the fruits of the property that were wrongly transferred, namely the dividends received by the second to fifth defendants and the interest earned by the sixth defendant for the moneys transferred to it. This question is probably academic as there is no suggestion that there are external creditors of the second to sixth defendants, and they would in any event be liable personally to account for profits derived by them.
Whether any of the defendants are liable to pay equitable compensation will depend upon whether or not the Company is restored to its position by the proprietary remedies outlined above. The extent of the liability of the second to eighth defendants to pay equitable compensation will also be affected by whether or not the Company is entitled to a refund of the capital gains tax paid on its behalf by Bathurst Hughes. Accordingly, I will grant liberty to the plaintiffs to apply for the assessment of equitable compensation.
Counsel for Mrs Lewis submitted that if the transactions were rescinded, the liquidator would be bound to proceed with the winding-up of the Company and at the conclusion of the winding-up Mrs Lewis would be entitled to receive 50 per cent of the surplus on the winding-up. Counsel submitted that she should not be left to suffer any pecuniary anxiety in the meantime and hardship should be avoided by allowing her to retain a "sizeable six-figure sum" from any money Bathurst Hughes was ordered to repay with that sum to be accounted for as part of her share on the final distribution by the liquidator.
The liquidator through his counsel accepted that on the winding-up of the Company Mrs Lewis will be entitled to a substantial distribution in the millions of dollars. The liquidator has power to make an interim distribution and did not oppose its being a condition of the relief that an interim distribution be made to Mrs Lewis.
I do not think it necessary to impose such a condition as a condition of the grant of equitable relief. Although it appears that the Company does not have external creditors of any substance other than, possibly, the Commissioner of Income Tax, the question of what sum could be appropriately paid to Mrs Lewis as an interim distribution pending the completion of the winding-up is essentially a matter for the judgment of the liquidator. There is no reason to apprehend that the liquidator would not give prompt and careful consideration to making an interim distribution once the Company's assets have been returned to it so as to avoid hardship to Mrs Lewis.
The first defendant, Arthur Hughes, did not receive a transfer of the Company's property. It is not liable for personal remedies as a constructive trustee under the first limb of Barnes v Addy. Nor did it assist with knowledge in an fraudulent and dishonest design so as to be liable under the second limb of Barnes v Addy. Arthur Hughes, as distinct from David Lewis, was not the instigator or procurer of the breach of fiduciary duty. I do not consider that it is liable to any equitable remedy.
The ninth defendant is David Lewis' son, Daniel Lewis. He was appointed a director of Anne Lewis, Arthur Hughes, and the second to sixth defendants, on 15 March 2014. He did not participate in any of the transactions. The claim against him should be dismissed.
Although complaint was made about the declaration by Anne Lewis of the $120,000 dividend on 9 August 2013, the complaint appeared to be that half of the dividend was paid (via Bathurst Hughes) to Mrs Lewis, but the other half was not paid to the executors of Mrs Lewis' estate. The plaintiffs' claims for relief did not include any orders challenging the validity of the declaration of the dividend. It is clear that sufficient profits were available from which the dividend could be declared. The executors of Mr Lewis' estate are not plaintiffs. Presumably they are entitled to be paid their share of the dividend by Anne Lewis. But the defendants are not liable to Anne Lewis or the liquidator in respect of that matter.
[4]
Conclusion and orders
For these reasons subject to any submissions the parties may have as to the form of the declarations and orders to be made I propose to make orders and declarations to the following effect:
Order that the agreement by which moneys of the second plaintiff were transferred by way of loan to the sixth defendant be rescinded.
Order that the agreements by which the listed shares and stapled securities owned by the second plaintiff were transferred to the second, third, fourth and fifth defendants be rescinded.
Declare that the second, third, fourth and fifth defendants have at all material times held the listed shares and stapled securities transferred to them by the second plaintiff on constructive trust for the second plaintiff.
Declare that the sixth defendant held the moneys transferred to it by the second plaintiff on constructive trust for the second plaintiff.
Order that the second to fifth defendants forthwith take all steps required on their part to transfer to the second plaintiff the listed shares and stapled securities that were transferred to them by the second plaintiff.
Declare that the sixth defendant is liable to pay to the second plaintiff, so far as its assets so extend, a sum equal to the amount of all moneys transferred to it by the second plaintiff, the interest earned on such moneys, less the liabilities of the second plaintiff that were discharged by the sixth defendant.
Order that within 14 days the sixth defendant pay to the plaintiff the sum owing in accordance with the preceding declaration.
Order that the second to fifth defendants account to the second plaintiff for all dividends or other income received by them from the listed shares and stapled securities transferred to them by the second plaintiff.
Order that the second to fifth defendants pay interest at the rates prescribed pursuant to s 100 of the Civil Procedure Act 2005 (NSW) on the amount of the dividends to be accounted for to the second plaintiff.
Reserve for further consideration the question of liability of the second to eighth defendants to pay equitable compensation to the second plaintiff.
Give liberty to the second plaintiff to apply for the assessment of equitable contribution that might be payable to it by the second to eighth defendants.
Order that the claims for relief against the first and ninth defendants be dismissed.
I will stand the proceedings over to a convenient time. I direct the parties to bring in short minutes of order in accordance with these reasons. Prima facie the second to eighth defendants should pay the plaintiffs' costs. I will deal with any submissions concerning costs at that time.
[5]
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Decision last updated: 29 July 2015