4084/05 UNIVERSAL FINANCIAL GROUP PTY LTD & 2 ORS V MORTGAGE ELIMINATION SERVICES PTY LTD (IN LIQ) & 5 ORS
JUDGMENT
1 HIS HONOUR: This judgment relates to the hearing of a cross-claim brought by a company in liquidation, the first defendant ("MES"). The cross-claim was filed after the court had made an order for the winding up of the company, and is being prosecuted in the company's name by its liquidator, Mr Alan Lewis.
2 The essential allegations in the cross-claim are that
· the first cross-defendant, Warren Turner, together with his son Matthew Turner and Lorraine Hilton, by uncommercial and insolvent transactions as defined in ss 588FB and 588FC and unreasonable director-related transactions within s 588FDA of the Corporations Act, caused each of the third, fourth and fifth cross-defendants ("CBA", "AFG" and "Lawfund") to pay commissions that were truly owing to MES to another entity, the second cross-defendant ("Smarter"), owned by Matthew Turner; and
· by another uncommercial, insolvent and unreasonable director-related transaction, Mr Turner caused MES to assign to him all its interest in proceeding No 2893 of 2003, for no or minimal consideration
· Warren Turner as a director of MES breached his fiduciary duty by causing Smarter to enter into an agreement with Lawfund.
3 The contest at the hearing of the cross-claim was between the cross-claimant, MES (represented by its liquidator), and the first two cross-defendants, Warren Turner and Smarter. I was informed from the bar table that the other three cross-defendants (CBA, AFG and Lawfund) filed submitting appearances in the sense that they abide by any order of the court.
Evidentiary problems
4 I must remark at the outset that the hearing and preparation of my judgment have been made difficult by some deficiencies in the documentary evidence. I received evidence at the hearing that was designed to establish the provenance of the documentary evidence that was placed before me, and to identify shortcomings in the evidence from the liquidator's point of view. I also received evidence about the liquidator's attempts to gain access to information, and difficulties encountered by the first and second cross-defendants because of a dispute between them and their former solicitors, who were asserting a lien over documents for unpaid costs the principal significance of this evidence is to explain why the liquidator has not tendered some evidence (such as journals and ledgers) that would normally be expected in this kind of case.
5 I have reviewed this evidence but in my view, it is unnecessary to make any particular findings about it. At this stage, the principal significance of the difficulties of both the liquidator and the solicitor for the first and second cross-defendants in putting together their documentary cases is that the court will be less willing than it might otherwise be to draw inferences adverse to a party from the absence of documentation of a kind that would normally be put into evidence.
The companies
6 MES was registered in 1992. Currently its sole director is Graham Smith, who was appointed on 23 July 2005, shortly before he decided to appoint voluntary administrators to the company. Warren Turner was a director in the period from 1992 until 23 July 2005. Lorraine Hilton was a director from 14 February 2000 until 23 July 2005. As well as being a director for a time, Ms Hilton worked as the internal accountant/bookkeeper of MES, although she is not professionally qualified as an accountant. Matthew Turner was appointed to the board in November 1995 but ceased to be a director in October 1999. At an earlier time (September 1998 to November 1998) Laurence Turner, Warren Turner's brother, was a director. The shareholders of MES are Matthew and Warren Turner, each holding one ordinary share.
7 Smarter was registered in 1999. It was initially called "Mortgage Elimination Home Loans Pty Ltd" but it changed its name to ME Smarter Mortgage Services Pty Ltd in June 2002, and to its present name in January 2003 (apparently after Members' Equity objected to its use of the initials "ME"). The sole director is Lorraine Hilton, who was appointed on 14 February 2000. She is also Smarter's internal accountant/bookkeeper, though (as already mentioned) not professionally qualified as an accountant. Matthew Turner was appointed to the board in April 1999 and ceased to be a director in May 2001. Warren Turner was appointed a director in May 2001 but ceased to hold office in November 2002. Matthew Turner holds both of the issued ordinary shares, as sole shareholder.
8 There is a business name, "MES Loans", registered under the Business Names Act 1962 (NSW) in the name of Warren Turner as proprietor. It appears that the business name was used by Mr Turner as trustee for a trust which owns the business premises to which I shall refer.
9 Life Long Planners was registered in 1981. It was originally called "Turner Life Sales Pty Ltd". Its directors are Warren Turner and Bronwyn Turner, who are the sole shareholders in equal shares. It received commission payments arising out of the business activities of MES, as I shall explain.
10 Superior Tax Services Pty Ltd was registered in December 1999. Its directors are Lorraine Hilton and Michael Unicomb. Mr Unicomb and Warren Turner are the shareholders. Ms Hilton gave evidence that the company holds the franchise of "ITP - The Income Tax Professionals" in the Newcastle and Hunter Valley region, and that she has the day-to-day conduct of the business.
11 Seahome Pty Ltd was registered in 1994. Its director is Warren Turner, appointed on 30 November 2005 when Lorraine Hilton ceased to be a director. The shareholders are Warren Turner, Lorraine Hilton, Geoffrey Vaughan, Matthew Turner and Sarah Turner. The company is subject to a deed of company arrangement. According to the evidence of Ms Hilton, Seahome was the trustee of the ITP Discretionary Trust, and it advanced funds from time to time to MES and Smarter for working capital during the period from 1 January 2004 to 30 June 2005, which were repaid.
12 Universal Financial Group Pty Ltd was registered in October 1999. It is one of the companies associated with Jay McNabb, against whom Warren Turner and MES have fought several legal proceedings. Its directors are Andrew Daines, Jay McNabb and Justin Daines. They each hold one of the three issued shares. Other companies associated with Mr McNabb are Universal Home Loans Pty Ltd (in which Warren Turner was also interested), are the other two plaintiffs in the present proceeding, Total Vision Financial Strategies Pty Ltd and Daines Financial Solutions Pty Ltd.
The business of MES
13 MES began trading in October 1995, conducting business which it described as the business of a "mortgage manager", by advising its clients on strategies for reducing their residential mortgage debts and in connection with that advice, obtaining refinancing for mortgage loans. It developed software to assist it, at a cost (according to Ms Hilton) well in excess of $100,000.
14 MES operated through a network of consultants, who operated through their own companies. Typically a consultant, who had a commission arrangement with MES, interviewed clients and filled out a client questionnaire, referred to in the evidence as a Client Data Questionnaire or "CDQ", for which the clients paid a fee. One of these documents is in evidence. It gives details of the clients, their present income and assets and their liabilities. The consultant then supplied the CDQ to MES's staff, who prepared a "Personal Master Plan" for the clients based upon the information contained in the CDQ. A sample is in evidence. The master plan purported to demonstrate how the clients could reduce and eventually eliminate mortgage debt, by taking various steps which would involve refinancing their principal and interest loan into a more flexible line of credit. The clients would pay another fee called a "program establishment fee" after they accepted the plan and a loan had been arranged and settled.
15 If the clients accepted the master plan, then an application for finance would be made to one of the mortgage facilitators with whom MES had a contractual relationship, such as AFG. Some details of those contractual relationships, which were non-exclusive, are given below. The mortgage facilitator would arrange finance with a funder such as Residential Mortgage Acceptance Corporation Ltd ("RESIMAC") or through its own resources. The funder (if different from the facilitator) would pay upfront and trail commissions to the facilitator, who would share these with MES in agreed proportions, and MES would then share its part of the commissions with its consultants. MES would arrange for a reviewer (usually the consultant who dealt with the clients) to meet with the clients at regular intervals in the first year of the loan, to review income and expenditure patterns and make sure the clients were staying within their budget.
16 According to the evidence of Ms Hilton, the clients paid MES a fee of $440 (inclusive of GST) upon completion of the CDQ and the commission agent received $286 (inclusive of GST) out of that sum. On completion of the master plan and loan the clients paid another fee, which was eventually set at $3465, and the consultant received a portion, apparently $2035 (though not necessarily in a single payment). The consultant received 75% of the upfront commission paid to MES by the facilitator. Trail commissions were to be paid each month on the outstanding balance of the referred loan, and the consultant was to receive 75% of trail commissions paid by the facilitator to MES.
17 A software program for the CDQ database was developed by Mike Harris, whose company, Mike & Renae Harris Pty Ltd, was retained by MES to do so in about 1999 or 2000. The CDQ program produced financial plans, automatically calculated how much of the commissions received by MES fell to be disbursed to its consultants, and generated commission statements.
18 Mr Harris gave evidence that he was instructed by Laurence Turner, the brother of Warren Turner. He said that Laurence Turner asked him to incorporate into the program a system that would direct certain payments to Life Long Planners Pty Ltd, one of Warren's companies. Mr Harris said he did so.
19 As previously mentioned, MES entered into non-exclusive arrangements with mortgage facilitators to whom loan applications were referred. There is evidence of contractual relationships with State Bank of New South Wales (later Colonial State Bank and then Commonwealth Bank of Australia), Australian Finance Group Pty Ltd ("AFG"), and Lawfund Australia Ltd ("Lawfund"). In the first two cases the facilitators contracted with MES, while it appears on the face of the documents that the contract with Lawfund was made by Smarter. I shall describe the contractual relationships here, and later in this judgment I shall to deal with the evidence about the circumstances in which the agreements were made.
The agreement with CBA
20 There is in evidence an incomplete copy of an undated document entitled "Accredited Agent Agreement" between State Bank of New South Wales Ltd (whose successor is the Commonwealth Bank of Australia, "CBA") (in the agreement called "the Bank") and "the party specified in Schedule A" (called and "the Agent"). The copy is incomplete because only the odd pages are there. The place for specifying the identity of the Agent in Schedule A has been left blank but the name Mortgage Elimination Services Pty Ltd has been written by someone on the cover sheet of the document. Schedule E to the agreement is in evidence but the clause of the agreement to which that schedule relates is not. In Schedule E, Mr Turner made a statutory declaration, on 11 November 1996, that he is a director of MES, which was a party to an Accredited Agent Agreement with State Bank which was to be signed in connection with the statutory declaration.
21 Mr Nolan, the employed solicitor of the cross-claimant who has the carriage of the matter, gave sworn evidence that the agreement (as opposed to Schedule E) was signed by Mr Turner on 11 November 1996. Although that evidence is not directly supported by the copy document itself, I have decided that there are adequate grounds for me to infer that there was an agreement between State Bank and MES for loan facilitation made on about 11 November 1996.
22 There is also in evidence an undated agreement between the State Bank and "the party specified in Schedule A" (called the "User"), relating to the Bank's agreement to allow that party to use certain Bank software in relation to credit assessment. The place for specifying the identity of the User in Schedule A has been left blank, but the document has been signed by Warren and Laurence Turner under the seal of MES. Mr Nolan's evidence is that the software agreement was signed by Warren and Laurence Turner on 11 November 1996. Again, that evidence is not directly supported by the copy document itself but I shall accept it on the basis of inference from the document that is in evidence.
The agreement with AFG
23 A written agreement entitled "Commission and Software User Agreement", dated 1 June 2001, was entered into between MES (described as the "Introducer") and AFG (described as engaged in the business of finance, and residential mortgage broking/facilitation). It was signed on behalf of MES by Warren Turner as director and Lorraine Hilton as secretary.
24 The agreement dealt with two matters. First, it was an agreement under which MES would assist borrowers to prepare mortgage finance applications and refer the borrowers to AFG, which would find lenders. AFG agreed to pay MES upfront and trail commissions of various kinds for the referred business. Commissions were payable only if, in a given month or on an average basis, MES achieved certain benchmarks (essentially, finance applications settled for at least $500,000, or five or more residential mortgage finance applications settled). Second, it was an agreement by which AFG would allow MES to use its "residential mortgage comparison/qualification software" known as "Electronic Finance Broker" ("EFB Software"). MES entered into a supplementary agreement authorising AFG to generate Recipient Created Tax Invoices for the purposes of GST.
25 MES lodged documents called "Commission Claim Form/Lodgment Advice" with AFG at various times between 1 June 2001 and 5 August 2005, sample copies of which are in evidence. They identify the loan writer and the "Master Agent" (MES, in each of the samples tendered), also specifying the borrower and the type of loan. Also in evidence are some copies of Recipient Created Tax Invoices in respect of commission paid to MES by AFG.
26 The evidence includes a copy of a statement issued by AFG setting out the amounts paid to MES or on its behalf for upfront and trail commission from 1 July 2001 to 20 September 2005. According to the statement, in the period from 1 July 2001 to January 2003 upfront and trail commissions totalling $301,892.47 were paid. In the period from February 2003 to 21 September 2005 the total amount of commission was $317,209.32.
27 As explained below, a direction was purportedly given to AFG in February 2004 to pay commissions into the account of Smarter rather than the account of MES. It appears that subsequently, a new agreement was entered into with AFG, the contracting party this time being Smarter. In November 2005 AFG produced some documents in answer to a notice to produce. The documents included a "Member Agreement" between AFG and Smarter executed by Ms Hilton on behalf of Smarter on 24 June 2005. The agreement provided for Smarter to refer loan applications to AFG and for AFG to pay Smarter (or as it might direct) upfront and trail commissions calculated as agreed percentages of the corresponding commissions received by AFG from funders, provided that Smarter achieved a performance benchmark. The performance benchmark was that the average monthly amount of funds borrowed on referral from Smarter was to be at least $1 million. There was a special condition, stating: "Existing commission structure for CBA/Colonial settlements to remain as is ie commission split 90/10 all other lender commission splits to be 80/20."
28 If there was an effective new agreement between Smarter and AFG, it appears to have generated only relatively small amounts of commission. During the period from 22 September to 17 November 2005 AFG paid Smarter upfront and trail commissions totalling $4342.53 (including GST).
The agreement with Lawfund
29 Lawfund carries on the business of finance provision, mortgage origination and finance broking, together with certain other commercial activities and businesses in Australia, by providing services to a network of professional persons and organisations.
30 The documentation in respect of Lawfund includes "Membership Rules for Loan Writers", dated February 2002. The intention of the drafter of the rules seems to be that if an application for membership is accepted, there is an agreement between the member and Lawfund in accordance with the provisions of the rules, but those provisions may be amended. Under the rules, the member pays an annual membership fee, and Lawfund provides services (finance, mortgage origination, finance broking and certain other commercial activities) to the member and endeavours to obtain approval of loans for borrowers introduced by the member. Lawfund specifies introduction fees and trailer fees applicable to each of its "products" (loan facilities, financial products and other services), payable after the loan has been settled and Lawfund has received a fee from the lender.
31 The evidence includes an application for membership by Smarter, signed on behalf of Lawfund and dated 1 November 2002, and an agreement for Recipient Created Tax Invoices for GST purposes, signed (evidently by Warren Turner) for Smarter as member, and dated 31 October 2002. There is an undated document entitled "Quickline Electronic Payment Service" directed to Lawfund and evidently a Lawfund document. Adjacent to the printed words "Company Name" the name of MES has been written by hand, and adjacent to the words "Division Name" the following appears in handwriting: "T/as ME Smarter Mortgage Services Pty Ltd". The form nominates the CBA bank account of MES, No 2800-1494.
32 There is in evidence a schedule of payments made by Lawfund to Smarter for the period 21 January 2003 to 9 September 2005, showing total payments of $239,899.63 plus GST. But it appears that between 1 November 2002 and 1 March 2004 Lawfund paid commissions to the MES bank account, according to the MES bank statements.
Trading history
33 MES commenced its mortgage reduction business in 1995, with four consultants working for it. It had trading losses for the years ended June 1997, 1998 and 1999. It had about 20 consultants working for it in mid-1997, about 30 in mid-1998 and about 100 in mid-1999. As noted above, MES established a business relationship with State Bank of NSW (later Colonial State Bank, and then CBA) from 1996 onwards. CBA upfront and trail commissions were paid into MES's account No 2800-1494 up to 8 August 2005.
34 In February 1998 MES moved into new premises at 14 Garnett Rd, Green Hills (East Maitland) owned by a Turner entity, constructed (according to Mr Turner's evidence) at a cost in the order of $1.3 million. MES occupied the first floor and provision was made for offices for some of the consultants, allowing them to access client information through computer outlets.
35 Mr Turner and MES developed a significant business relationship with Jay McNabb and his companies (including Universal Financial Group Pty Ltd and Total Vision Financial Strategies Pty Ltd). Universal Financial Group Pty Ltd ("UFG") operated as an MES consultant in part of the MES building premises. By mid-2000 it was the largest consultant entity, having approximately 20 individual consultants who submitted business through UFG to MES (there being, at that time, approximately another 25 consultants who submitted business to MES directly). It submitted loan applications to Universal Home Loans Pty Ltd ("UHL"), a company of which Warren Turner and Jay McNabb were directors and in which they, directly or indirectly, held the shares. UHL arranged loan finance with RESIMAC. MES earned a profit for the year ended June 2000.
36 The relationship between Mr Turner and Mr McNabb and their respective companies broke down in late 2000. UHL came under the control of Mr McNabb. By the end of January 2001 MES had approximately 10 consultants working for it. As a result of the collapse of the HIH Insurance Group it had no professional indemnity insurance, and it would have been very expensive to arrange insurance because the company had made a claim on HIH in 1999. It suffered a trading loss for the year ended June 2001.
Ms Hilton's evidence about the transfer of business from MES to Smarter
37 In September/October 2001 Ms Hilton received complaints from clients who had not received reviews for which they had paid. She checked MES's records and established that the majority of the clients who were complaining had been introduced by UFG, and that MES had paid UFG to perform the reviews.
38 She gave evidence that in November 2001 she had a conversation with Warren Turner in which they discussed ceasing to operate under the name of MES because the name had been tarnished and had a negative image. They discussed changing the CDQ program so that the name of MES would no longer appear on the documentation, and also developing a "user-friendly" website that would allow clients to obtain information about their loans.
39 Ms Hilton gave evidence that in about November 2001 she contacted Mike Harris, who had designed the CDQ program. She said Mr Harris advised her that the CDQ program was not internet-friendly and so the website she had in mind could not be developed in conjunction with that program. Ms Hilton said she also asked Mr Harris to remove the MES name from the CDQ program and he said he could do so, but as he was very busy he would make the changes when he could get around to it. She said she repeated this request in November or early December 2003. Ms Hilton said that Mr Harris did not make the requested changes.
40 Ms Hilton also gave evidence that in November 2001 she and Mr Turner contacted Damien Tarnawsky, a computer programmer, and asked him to write a new CDQ program for Smarter. She said Mr Tarnawsky attended the premises of MES for quite some time but despite his work, the CDQ system continued to produce printed documents in the name of MES.
41 Ms Hilton said that by November 2001, UHL had not paid any trail commissions to MES, although (she claimed) it was receiving monthly commissions of about $20,000 from RESIMAC, and it had become necessary for MES to procure a new source of funds. MES therefore entered into the agreement with AFG.
42 Ms Hilton gave evidence that, as the internal accountant of MES, she formed the view, after MES had recorded a trading loss for the year to June 2001, that it would have a reasonable prospect of trading out of its financial difficulties if it could increase its number of consultants. She contacted a personnel agency for that purpose, but the personnel agency was only able to find about six consultants and only two of them stayed. By about the end of June 2002 she formed the view that MES was unable to trade out of its difficulties.
43 Smarter adopted the name "ME Smarter Mortgage Services" in June 2002. According to Ms Hilton, it began using standard form documentation in that name. The name was used on forms submitted by the client, samples of which are in evidence. The forms bear the name "ME Smarter Mortgage Services" and some but not all of them show that the name belongs to a company with an ABN. Ms Hilton said that from about June 2002 all applications for finance submitted to and dealt with by AFG were in documents bearing the name ME Smarter Mortgage Services. Upon settlement of the loan, AFG sent out a commission statement, two samples of which (dated 9 September 2004 and 26 May 2005) are exhibited to Ms Hilton's affidavit of 7 October 2005. In each case the statement is a Recipient Created Tax Invoice addressed to MES (marked to the attention of Warren Turner), stating that a specified amount has been credited to Smarter's CBA bank account No 2800-4345. Ms Hilton said that the data from the statements was entered into the CDQ program.
44 Ms Hilton claimed that as from June 2002 Smarter took over the servicing of the MES clients who were on a mortgage reduction program. The service consisted of performing reviews. But she said that "for reasons of administration" the MES account was still used. Smarter's method of processing loan applications was that the consultant sent the application direct to AFG and sent a "Commission Claim Form/Lodgment Advice" to AFG after settlement. Some samples of these forms are in evidence, for settlements in May, June and July 2002. They identify MES rather than Smarter as the "Master Agent/AFG Member". On the other hand, two sample letters written to clients upon settlement of loans, dated 18 November 2002 and 26 February 2003 respectively, used the Smarter letterhead.
Assessment of Ms Hilton's evidence on these matters
45 I have decided not to accept Ms Hilton's evidence to the effect that MES did not trade after June 2002 and that thereafter Smarter was conducting the business of a mortgage broker. While it has not been established that Ms Hilton falsified her evidence, in my view it is highly probable that her account of the transfer of business operations from MES to Smarter is an ex post facto reconstruction of arrangements which did not, at the time, adequately distinguish between the two entities and therefore did not establish or mark a transition from one to the other. Further, her evidence was unsatisfactory in ways that have caused me to accept the submission made on behalf of MES that her evidence was generally unreliable.
46 Ms Hilton was extensively cross-examined on her assertions. I agree with counsel for MES that she conceded that various documents to which she was taken did not support her contentions. The documents included:
· the business activity statements that had been signed by her;
· a lease agreement entered into by MES with Premier Financial Services on 19 February 2004;
· bank statements for account No 2800-4345, which showed little activity prior to the directions given to AFG and Lawfund in February 2004;
· commission statements and payments made to consultants, which seem to have been issued and paid for by MES.
47 Additionally, Ms Hilton was not able to explain, if Smarter was conducting a substantial business from about June 2002, some matters revealed in answer to notices to produce, such as the absence of wage records to identify employees of Smarter, the absence of BAS statements or income tax returns for Smarter, the absence of commission statements or records of payment of commission to consultants by Smarter prior to August 2005, the absence of written consultancy agreements to which Smarter was a party, and the absence of evidence of business expenditure.
48 MES tendered Warren Turner's Report as to Affairs in respect of MES dated 23 October 2005. The document identifies employees and the amounts of their claims, and lists substantial and apparently current creditors. The statement does not indicate that the company ceased to trade in mid-2002.
49 Ms Hilton said that commissions paid by AFG and Lawfund after June 2002 were paid into MES's bank account for "reasons of administration", though in my opinion, her evidence did not adequately identify the administrative issues or explain why payment into one bank account rather than another addressed them. Her evidence as to the use of documents bearing Smarter's name was not strong, because the sample documents that she provided were, as I have pointed out, limited as to time and in some cases quite recent, and it appears that concurrently documents were being used bearing the MES name. Her statement that if MES had not gone into administration and liquidation, all entries would have been "journalised" back to Smarter (Transcript page 183) does not establish that there was any change of business practice some three years earlier.
50 Ms Hilton's evidence seeking to explain why documents continued to be issued in the name of MES rather than Smarter after June 2002, namely that Mr Harris had failed to carry out her instructions to amend the CDQ database, is inconsistent with Mr Harris's denial that he ever received such a request. I prefer his evidence to the evidence of Ms Hilton.
51 Counsel for MES was particularly critical of the following passages of evidence given by Ms Hilton in cross-examination (Transcript page 174 and page 176):
Question: "Don't you see a problem in declaring to the Tax Department [in a Business Activity Statement] that MES has an income of $36,274 on page 5 when you are now telling the court that it didn't have that income at all?"
Answer: "What I am saying to you is that those expenses relate directly to that income and as long as somebody is declaring it to the Tax Office, normally they are more than happy."
And later:
Question: "As a director of the company and operator of an ITP franchise, how can you issue statements, business activity statements in this form if you know they are not correct?"
Answer: "Well, the correct amount of income and expenses were shown."
Question: "But not if you take into account that the income is not the income of MES but the income of Smarter."
Answer: "And if that is the income of Smarter then those are the expenses of Smarter. So it has the same net outcome."
Question: "As long as it is the same net income it didn't concern you as to which entity was going to declare the income and expenses?"
Answer: "Well, indeed, but that's why I haven't put any BAS statements in after the one in May."
52 I do not accept the submission by counsel for MES that this demonstrates that Ms Hilton was prepared to say whatever was required to obtain the result that was sought. But it does support, graphically, my view that she conducted the affairs of the companies without, at the time, paying attention to the separate corporate entities, making it likely that her firm evidence that there was a transition from MES to Smarter after June 2002 was reconstruction.
53 Ms Hilton's evidence about an agreement dated 9 July 2003 demands some attention. This is a single page document on the letterhead of MES, which purports to be an agreement by MES to sell the CDQ program to Life Long Planners as trustee for the Turner Family Trust. The document asserts that, as at 30 June 2003, MES owed Life Long Planners as trustee for the Turner Property Trust approximately $135,000 in unpaid commissions, and purports to record an agreement between the parties that the purchase price for the CDQ program is the total of all outstanding commissions. It is signed by Bronwyn and Warren Turner as directors of Life Long Planners and by Warren Turner and Lorraine Hilton as directors of MES. Attached to the document is a 30 page printout headed "Life Long Planners - Commission Entitlement to 30/06/2003" listing amounts of commission totalling $135,504.27.
54 Ms Hilton said in cross-examination that the schedule attached to the agreement was prepared by Mr Michael Harris in July 2003, contemporaneously with the document. When she was taken to a balance sheet as at 30 June 2003 which did not show a debt of over $135,000 to Life Long Planners, she claimed that the debt had been "offset by the asset of the program" (Transcript page 24), even though the agreement to sell the CDQ program was dated after the balance date. She said "it had been discussed and agreed prior to 30 June that that is what was going to happen and we were just waiting for Mr Harris to come and run the report". Although Ms Hilton did not have professional training as an accountant, it is hard to believe that a person of her experience would have thought it appropriate that a balance sheet be prepared in this fashion.
55 Mr Harris gave evidence to different effect. He said that in the week commencing 21 November 2005 he attended the premises of MES in the East Maitland to correct a malfunctioning telephone system. He said Ms Hilton approached him and asked him to print out a report showing the amounts paid to Life Long Planners up to 30 June 2003. He said he did so, and was able to identify the report in his evidence. He identified the report attached to the document dated 9 July 2003. The solicitor for the first and second cross-defendants criticised his evidence, saying that it was vague and that he was unable to recall very much at all. I reject that criticism. Although Mr Harris's evidence was in some respects not precise, I regarded him as a reliable witness who was doing his best to recollect the circumstances. Mr Harris has no interest in the outcome of this case. The general gist of his evidence, that he did not create the attachment to the sale document of 9 July 2003 in that year but only in 2005 (though he cannot be sure whether it was early November or late October) survived cross-examination. I accept that evidence.
56 The evidence of Mr Harris implies that the purported agreement for sale, though dated 9 July 2003, was not entered into earlier than October or November 2005, by which time MES was in liquidation. There is no application to set aside the purported sale of the CDQ program, but the implication of Mr Harris's evidence, that Ms Hilton caused the annexure to the document to be created years after the purported date of the transaction, raises a question about the overall reliability of her evidence.
57 Similarly, Ms Hilton's evidence about Smarter's proof of debt is troubling. The documentary evidence includes two forms of proof of debt signed by Ms Hilton as a director of Smarter, dated 30 August and 7 September 2005. Both documents claim that MES was, as at the commencement of the administration on 5 August 2005, and continued to be, indebted to Smarter in the sum of $401,213.79. Particulars were as follows:
1/1/03-30/6/04 Contract Labour $198,000
1/7/03-30/6/05 Loans for Working Capital $203,213.79
58 The differences between the two proofs of debt are, first that, while the earlier document describes the creditor as simply Smarter, the later document describes the creditor as Smarter, as trustee for the Mortgage Elimination Home Loans Discretionary Trust; and second, the first proof of debt contained an incorrect and invalid ABN.
59 In each case the proof of debt attached invoices to support the claim for "Contract Labour" and copies of bank statements to support the claim for "Loans for Working Capital". Three invoices were attached, each seeking payment of $66,000 "to provide staff to present Mortgage Elimination Services Mortgage reduction plans to Mortgage Elimination Services clients and to perform reviews for those clients" for an identified period of 6 months (the periods being, respectively, 1 January to 30 June 2003, 1 July to 31 December 2003 and 1January to 30 June 2004). The invoices were dated, respectively, 1 July 2003, 1 January 2004 and 30 June 2004, and they all purported to be issued to MES by Smarter. The copies of bank statements attached to the proof of debt were those used by the cross-claimant's lawyers to prepare the schedules of payments to which I shall refer.
60 There were also proofs of debt lodged on behalf of
· Life Long Planners for $511,422.53, comprising loans for working capital of $14,422.53 and consultancy fees for the period from 1 October 1999 to 31 July 2003 in the sum of $497,000, for which invoices were attached bearing dates 1 July 2003 and 31 July 2003;
· Warren Turner trading as MES Loans as trustee for the Turner Property Trust in the sum of $480,441.13, partly for rent extending over a period well beyond the time at which, according to Ms Hilton, MES had ceased to trade;
· Warren and Bronwyn Turner for $79,715.
61 Ms Hilton gave evidence (Transcript page 205) that she caused the invoices to be prepared on or about the dates that they bear. But she said the invoices were not incorporated into the records of MES at that time because she believed MES had stopped trading and its accounts had only been prepared up until 30 June 2003. She said that the three invoices for Smarter were not brought into the records of MES until July 2005, but she insisted that they were recorded in Smarter's books on about the dates that they bear.
62 A printout was tendered from the MYOB records of MES for "All Journals 01/07/2003 to 14/10/2005", showing session dates indicating the date of entry of information into the system (Exhibit P15). According to the evidence, the printout was produced by Ms Hilton to the liquidator. It clearly demonstrates that the invoices attached to the proof of debt were not brought to account in the financial records of MES at any time prior to 17 August 2005. In cross-examination Ms Hilton was unable to explain why the invoices did not appear in the MYOB printout (Transcript page 217). She denied having prepared the invoices for the first time in August 2005 but it seems to me implausible that if the invoices had existed from 2003, they would not have been reflected in MES's accounts, even when the accounts were massively updated in July 2005.
The making of the agreement with Lawfund
63 Smarter entered into its agreement with Lawfund in October 2002. According to Ms Hilton, the standard form documentation used to process loan applications to Lawfund was in the name of Smarter, also bearing the name of Lawfund. Blank samples were exhibited to her affidavit of 7 October 2005. Lawfund issued Recipient Created Tax Invoices to Smarter, samples of which have been provided by Ms Hilton, bearing dates in 2003 and 2004. Ms Hilton said that she arranged for commission payments from Lawfund to be deposited to the account of MES, and she continued to pay commissions to consultants through the old CDQ program "for reasons of administration". In about April 2003 she began, on a trial basis, paying upfront commissions to consultants before receiving payment from AFG or Lawfund. She provided some samples of a document called "Authorisation to Pay Upfront" in the name of Smarter, bearing dates in April and May 2003.
64 Smarter became a member of the Mortgage Industry Association of Australia in June 2003, and in that month of obtained professional indemnity insurance for a much lower premium than had been available to MES. After the appointment of Mr Lewis as liquidator to MES, Smarter continued to occupy the premises at East Maitland, paying rent to Turner Property Trust of $1200 per month. The Trust has a mortgage in excess of $1 million and must meet monthly repayments of $6,200.
The Equity and District Court Proceedings
The Equity Proceeding
65 The breakdown of the relationship between Mr Turner and Mr McNabb in their respective companies has led to a great deal of litigation, including:
· proceeding No 2895 of 2003 in the Equity Division of this court;
· proceeding No 15 of 2002 in the District Court, Maitland (referred to in the "Plaintiffs' Chronology", presumably by mistake, as No 52 of 2002), heard by Blanch CJDC;
· proceeding No 74 of 2003 in the District Court, Maitland; and
· proceeding No 1071 of 2004 in the District Court, Sydney, heard by Charteris DCJ who delivered his judgment on 14 June 2005.
66 In proceeding No 2895 of 2003 in the Equity Division of this court, Warren Turner and MES sue UHL, Jay McNabb and Cherie McNabb. MES make certain claims in its own name, and Mr Turner makes claims either in his own name or through the entities Seahome and Life Long Planner. The amended statement of claim alleges that a business venture was entered into between Mr Turner and Mr McNabb, MES and UHL, under which UHL established a mortgage originator business with assistance from Mr Turner and MES. Disputes arose between Mr McNabb and Mr Turner and they agreed to sever their relationship, and entered into heads of agreement for a dissolution agreement. Mr Turner alleges that he entered into the heads of agreement on his own behalf and on behalf of MES and other entities associated with and controlled by him. Mr Turner and MES claim that UHL and Mr McNabb have breached the heads of agreement by failing to make payments as required by the agreement, and that Mr McNabb has made a voidable transfer of his half share in his family home to his wife. They seek payment of $300,000 plus interest, together with relief in respect of the voidable transfer under s 37A of the Conveyancing Act 1919 (NSW).
67 There is a schedule to the amended statement of claim, which shows that the principal component of the claim in the proceeding is a claim by MES for upfront and trail commissions.
68 In the present proceeding Mr Nolan gave evidence that his firm, and he personally as employed solicitor, act for the defendants in the equity proceeding. He agreed with the proposition that his clients have filed a defence, in which they assert that UFG did not refer clients to MES, but rather it referred them to UHL in a direct relationship with UHL. Mr Nolan accepted that Mr McNabb had sworn an affidavit in the equity proceeding in which he asserted that, of 210 clients who were referred to UHL, only 35 were introduced by MES and that UFG was not an agent for MES in respect of the bulk of the loans for those clients. Mr Nolan agreed that in the District Court proceedings before Judge Charteris QC (that is, I infer, proceeding No 1071 of 2004), UHL and its co-plaintiffs alleged, in seeking to recover commissions from MES, that there was a direct relationship between UFG and MES. Under cross-examination in the District Court proceeding, Mr McNabb resiled from his Supreme Court affidavit evidence and informed Judge Charteris QC that the way had been opened up for UHL and UFG to say that all loans were placed through MES. In cross-examination in the present proceeding, Mr Nolan acknowledged that Mr McNabb "had some difficulty in cross-examination" in the District Court. Mr McNabb's evidence in the District Court seems to be relevant to the prospects of success of MES and Mr Turner in the equity proceeding.
69 The court made Mareva orders in May 2003, on the application of Mr Turner and MES, and those orders were extended from time to time thereafter. But on 8 October 2004 Palmer J decided that the Mareva orders should be discharged. Mr Turner and MES have appealed from Palmer J's decision to the Court of Appeal (No 40963 of 2004). On 16 August 2005 Campbell J ordered the plaintiffs in the equity proceeding to provide security for costs in the sum of $50,000. Up to the hearing before me, the appeal to the Court of Appeal had not been heard and the order for security had not been complied with (although Ms Hilton gave evidence that she had made an application for mortgage finance secured over her home and investment property with RAMS Home Loans and intended to use part of the proceeds to satisfy the security order, and that she had received "conditional approval" for a loan from Bluestone Mortgages).
70 There are two outstanding orders for costs in the equity proceeding. There is an order in favour of Mr Turner and MES, which has been the subject of assessment and then review by the Costs Review Panel, whose certificate is dated 19 August 2005. The amount certified as the fair and reasonable amount of costs to be paid by the defendants is $74,297.72. There is an order against Mr Turner and MES, which has been assessed at $10,014, by a certificate dated 7 April 2004.
71 Mr Nolan gave evidence in cross-examination that his firm, while acting for Mr Lewis as liquidator of MES, has continued to act for the defendants in the equity proceeding. On behalf of the defendants, the firm filed a notice of motion on about 17 November 2005 to seek to have the equity proceeding dismissed for want of prosecution. Mr Turner complained to Mr Lewis, in the letter dated 11 October 2005, that Mr Lewis was in a position of a conflict of interest, but there is no application before the court for relief based upon any alleged conflict of interest of Mr Lewis or his solicitors.
72 I was informed from the bar table during final oral submissions that the equity proceeding has recently been summarily dismissed for want of prosecution. It is not clear whether MES would be able to assert its rights in another proceeding.
District Court proceeding No 15 of 2002
73 There is very little evidence about proceeding No 15 of 2002 in the District Court, Maitland, except that the plaintiff was MES and the defendants were UHL and Mr McNabb, and the case was heard in late February and early March 2004 by Blanch CJDC. The "Plaintiffs' Chronology" asserts that the proceeding was settled as against Mr McNabb on 24 February 2004, and was settled against UHL on 23 March 2004, and that on 30 March 2004 UHL paid MES $75,000 in satisfaction of terms of settlement. I can find no evidence to support these assertions in the cross-claimant's evidence in chief but there is some evidence to that effect in the cross-examination of Ms Hilton, although the settlement amount was not given.
District Court proceeding No 74 of 2003
74 In proceeding No 74 of 2003 in the District Court, Maitland, UFG sued MES and UHL claiming damages for breach of contract. It claimed from UHL $122,182.69 for damages for failure to pay upfront commissions and trailer income in respect of loans introduced by it and approved and settled by RESIMAC, and in the alternative, it claimed $97,825.27 from MES. By its defence, MES said that UFG forfeited its entitlement to trail commissions when its directors severed all dealings with MES in about January 2001. As regards upfront fees, MES said it was currently suing UHL and if it recovered fees then it would pay an agreed percentage of them to UFG.
District Court proceeding No 1071 of 2004
75 In proceeding No 1071 of 2004 in the District Court of New South Wales, UHL, Total Vision Financial Strategies Pty Ltd and Daines Financial Solutions Pty Ltd as plaintiffs sued MES as defendant, for damages for breach of contract. In the document entitled "Plaintiffs' Chronology" it is asserted that this proceeding (wrongly identified as No 1074 of 2004) commenced on 22 December 2003. I have not been able to find any evidence as to the time of its commencement in the cross-claimant's evidence in chief, but Ms Hilton acknowledged in cross-examination that UFG had served a District Court statement of claim on MES in December 2003 (Transcript page 166) and that she knew MES was facing a substantial claim. The "Plaintiffs' Chronology" also asserts that the hearing of this proceeding commenced on 21 March 2005 and concluded on 22 April 2005. Again, there is some support of this in evidence in cross-examination.
76 At least the evidence shows that, on 17 June 2005, as a result of the decision of Charteris DCJ in the proceeding, UFG obtained judgment against MES for $222,257, Total Vision Financial Strategies obtained judgment against MES for $9,244, and Daines Financial Solutions obtained judgment against MES for $14,086. MES was ordered to pay the costs of the plaintiffs. These orders were stayed on the condition that the defendant satisfy 50% of each plaintiff's verdict within 28 days and file the holding appeal within that time. The "Plaintiffs' Chronology" asserts that on 15 July 2005 MES failed to comply with the terms of the stay. While I can find no direct evidence of this, I am prepared to accept this assertion as a matter of inference from the evidence of the financial position of MES at that time.
The winding up proceeding
77 On 22 July 2005 the three District Court plaintiffs commenced the present proceeding, No 4084 of 2005, for winding up of MES, on grounds of insolvency and other grounds. MES was served with the originating process on 25 July 2005.
Directions to pay Smarter rather than MES
78 By February 2004 MES had contractual relationships with CBA and AFG, and Smarter had a contractual relationship with Lawfund, but the CDQ program bearing the name of the identifier which belonged to MES (subject to the purported assignment dated 9 July 2003) was used for all of this work, although some standard form documents used for AFG and Lawfund businesses identified Smarter as the originator. Commission income was paid into the MES bank account. It appears that in the case of Lawfund, payments were made to the bank account of MES on the basis that the company name for payment transfers was "Mortgage Elimination Services Pty Ltd T/As ME Smarter Mortgage Services Pty Ltd".
79 It also appears that commission statements were being issued to consultants in the name of MES. The evidence includes some commission statements issued by MES to Daines Turner & Associates Pty Ltd, for the periods from 1 June to 30 June 2003, 1 June to 15 June 2004, 16 June to 30 June 2004, 1 July to 31 July 2004, and 1 June to 30 June 2005. The evidence also includes some incomplete copies of bank statements for Daines Turner & Associates. On the face of it, there are some linkages between these bank statements and bank statements on MES's bank account. For example, a receipt recorded in the Daines Turner bank account on 3 July 2002 for $5,067.85 appears to match a payment of the same amount on the same day in the MES account.
80 According to submissions made on behalf of Mr Lewis, by that time Warren Turner and Ms Hilton knew that there was a substantial claim being made by UFG and its co-plaintiffs in the District Court, which, if successful, would lead to a large judgment against MES. That submission is supported by Ms Hilton's evidence that she was aware of the District Court claim as from December 2003. It seems to me very likely that Mr Turner was aware of it as well. In February 2004 steps were taken by Matthew Turner to cause AFG and Lawfund to pay commissions in future into the account of Smarter rather than the account of MES.
81 By e-mail dated 26 February 2004 to Stephen Barnes, Business Development Manager at AFG, Matthew Turner requested that all commissions be paid to Smarter at account No 2800-4345, as MES would cease to trade. On 16 March 2004 Mr Barnes instructed someone else at AFG to complete a change of details form.
82 Then on 27 February 2004 Matthew Turner sent an e-mail to Marilyn Carrero, evidently (according to Mr Nolan's evidence) of Lawfund, saying he wanted all commissions to be paid to Smarter in CBA account No 2800-4345. Ms Carrero responded saying she would forward the request to Marisa Dixon.
83 Ms Hilton gave evidence that she instructed Matthew Turner to issue the directions both to AFG and to Lawfund. She was a director of MES at the time. It emerges from her evidence of involvement in financial matters at MES generally that she had a measure of executive responsibility within MES which would permit her to give such instruction on the company's behalf. The fact that she was also a director of Smarter and was probably also acting on its behalf does not, in my opinion, derogate from the conclusion that her instruction meant that the directions given to AFG and Lawfund were given on behalf of MES. I therefore infer that Matthew Turner was acting with the authority of MES in issuing the directions.
84 A similar instruction was given with respect to commission payments by CBA, but it was given after voluntary administrators had been appointed to MES. The instruction was later revoked, in the circumstances set out below, and does not appear to have been acted upon. No claim is made by the liquidator in respect of CBA payments, except for a declaratory order.
Payments to Smarter
85 There is evidence, which I accept, that the directions given to AFG and Lawfund led to commission payments being made to Smarter. The evidence includes copies of statements of account in respect of CBA account No 2800-4345 in the name of Smarter for the period from 2 January 2004 to 29 August 2005. Relying on those statements, the cross-claimant's solicitors have prepared a schedule listing amounts received by Smarter as commission income and amounts paid out by it as loans to MES, in the period from 1 March 2004 to 26 August 2005. The schedule identifies AFG and Lawfund as paying the commissions, which are described as upfront commissions or trailer commissions, with GST shown separately. The total commission received is $313,349.92, and the total amount lent to MES is $194,931.50. There is a separate schedule which divides the commissions paid by AFG from the commissions paid by Lawfund, showing that AFG paid $178,214.18 and Lawfund paid $135,135.74. In my opinion these calculations are correct and are based on the evidence.
86 The schedules were prepared before Smarter's solicitors produced documents on 17 October 2005 in response to a notice to produce. The documents produced included "Statement Reports" for account No 2800-4345, Smarter's CBA account. One of these documents is a seven-page report dated 30 August 2005, for a period beginning on 2 January 2004 and ending on 29 August 2005. The opening balance is $1934 and the closing balance is $13,328. There is another, much shorter Statement Report for the period from 30 August to 30 September 2005, dated 5 October 2005. The opening balance is $13,328 and the closing balance is $11,372.72. Also produced were bank statements for Smarter's CBA account No 2800-4345 for periods from 2 June 2001 to 27 February 2004. The bank statements show minimal transactions for very small amounts during that period. These documents do not materially affect the overall analysis.
The deed of assignment
87 Warren Turner gave evidence that, after judgment was entered against MES in District Court proceeding No 1071 of 2004, he formed the view that there was a strong likelihood that the District Court plaintiffs would move to wind up MES and that this would, in practical terms, result in the "killing off" of MES's action in equity proceeding No 2895 of 2003. He said that MES did not have the funds to finance legal proceedings, and he decided the only possibility of the equity claim being litigated to final hearing would be if he took an assignment of the rights of MES, on such terms as to fees as he could agree with the solicitors who were acting in the matter. He accordingly negotiated a fee agreement with the solicitors.