BETWEEN : DARREN GORDON WEAVER & MARTIN BRUCE JONES as the Joint and Several Liquidators of HARBURN GROUP AUSTRALIA PTY LTD (in liq)

HARBURN GROUP AUSTRALIA LTD (in liq) (ACN 105 116 283)

Corporations Act 2001 (Cth) - Director making payment from company for purchase of boat - Whether improper payment - Turns on own facts

1 MASTER SANDERSON: This is an application brought by the liquidators of the Harburn Group Australia Pty Ltd to recover certain funds they say were improperly paid from the company to the defendants. Four affidavits have been lodged by the parties. On behalf of the plaintiffs two affidavits of Darren Gordon Weaver the first sworn 27 May 2013, the second sworn 21 August 2013 were relied upon. Each of the defendants filed an affidavit. Each of these affidavits was sworn 31 July 2013. The first defendant was crossexamined on his affidavit. This summary of the facts is drawn from the evidence of the parties and what was said by the first defendant in crossexamination. The relevant facts are not in dispute.

2 The first and second defendants are husband and wife. At all material times the first defendant was the sole director of Harburn Group Australia Pty Ltd. Harburn Investments Pty Ltd was the sole shareholder of the Harburn Group. Harburn Investments is now deregistered. At all material times the first defendant was the sole director and secretary of Harburn Investments. Harburn Investments was the trustee of the first defendant's family trust. The first defendant is the sole named beneficiary of that trust.

3 The Harburn Group provided various financial services including managing selfmanaged superannuation funds. It also provided share broking and mortgage broking services. The first defendant carried out financial services on behalf of the Harburn Group as an authorised representative licence holder under Sagecorp Securities Pty Ltd Australian Financial Services Licence. Harburn Group provided mortgage broking services through a licence held by the Australian Finance Group. In October 2006 Harburn Group incorporated a subsidiary called HGA IT & IT Solutions Pty Ltd. The sole director of that company was the first defendant. The company provided information technology services to Harburn Group and third parties.

4 In 2007 the first defendant decided to reduce his workload. He resolved to sell the Harburn Group's client base. The sale price was $765,000. The agreement for sale was signed around 25 June 2007. The sale settled on 12 July 2007. These dates have some significance in the context of this application.

5 In or about July 2007 the first defendant decided to purchase a boat for the second defendant. The price of the boat was $385,219.35. Payment was made for the purchase from the funds held by Harburn Group. The boat was registered in the name of the second defendant. It is this payment of the purchase price for the boat which is central to these proceedings.

6 The plaintiffs put their case on two alternative but interrelated grounds. First they say it is an unreasonable directorrelated transaction and therefore the money paid out from the company can be recovered either from the first defendant or the second defendant. Second they say the transaction breaches the first defendant's obligations under s 181 and/or s 182 of the Corporations Act 2001 (Cth). Once again as a consequence of these breaches the plaintiffs say they are entitled to recover the purchase price of the boat.

7 Section 588FE of the Corporations Act deals with 'Voidable transactions'. Relevantly the section reads as follows:

(a) a transaction of the company may be voidable because of any one or more of subsections (2) to (6) if the transaction was entered into on or after 23 June 1993; and

(b) a transaction of the company may be voidable because of subsection (6A) if the transaction was entered into on or after the commencement of the Corporations Amendment (Repayment of Directors' Bonuses) Act 2003.

(a) it is an unreasonable director-related transaction of the company; and

(b) it was entered into, or an act was done for the purposes of giving effect to it:

(i) during the 4 years ending on the relationback day; or

(ii) after that day but on or before the day when the winding up began.

8 It was common ground between the parties s 588FE(6A) allows the plaintiffs to make this application. The application was made within time. The question was whether the purchase of the boat was an unreasonable directorrelated transaction.

9 Section 588FDA deals with 'Unreasonable directorrelated transactions' as follows:

(1) A transaction of a company is an unreasonable director-related transaction of the company if, and only if:

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

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

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

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

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

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

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

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

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

The obligation referred to in subparagraph (a)(iv) may be a contingent obligation.

Note: Subparagraph (a)(iv)--This would include, for example, granting options over shares in the company.

(2) To avoid doubt, if:

(a) the transaction is a payment, disposition or issue; and

(b) the transaction is entered into for the purpose of meeting an obligation the company has incurred;

the test in paragraph (1)(c) applies to the transaction taking into account the circumstances as they exist at the time when the transaction is entered into (rather than as they existed at the time when the obligation was incurred).

(3) A transaction may be an unreasonable director-related transaction because of subsection (1):

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

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

10 The first issue was whether or not by paying for the boat the company actually made a 'payment' or a 'disposition by the company of property'. The first defendant maintained the money paid for the purchase of the boat was actually a dividend paid to him and used by him to purchase the boat.

Because I was the sole director of both the Company and its sole shareholder (Harburn Investments), I always treated the purchase of the boat as done with shareholder consent and as a distribution of funds to the shareholder by way of dividend or return of capital (par 21).

12 In my view there is nothing in the evidence which would support that statement. There were no company minutes evidencing a resolution on the part of the company to pay a dividend. No money was actually paid to Harburn Investments - that company was the sole shareholder of the Harburn Group and it is that company which would have been entitled to receive a dividend. In turn Harburn Investments would have passed on the money to the first defendant's family trust. Then the money may have passed to the first defendant. Instead there was a direct transfer of funds from the company to the vendors of the boat.

13 The company did not lodge a tax return for the year ending 30 June 2008. Accordingly there is nothing in the books of the company to suggest the payment out for the purchase of the boat was a dividend. The first defendant's tax return for the year ending 30 June 2008 does not disclose any payment to him by way of distribution from the family trust. Furthermore the plaintiffs wrote to the first defendant on a number of occasions demanding repayment of the money paid to purchase the boat. Generally the first defendant was unresponsive. However on 15 November 2011 he did write back to the plaintiffs. He denied the company had purchased a boat. He makes no mention of purchase of the boat being paid for out of dividends from the Harburn Group. If in truth there had been a dividend declared that letter was the ideal time to mention it. The fact the first defendant did not do so is telling.

14 In my view there is no doubt the money transferred from the company to purchase the boat falls either within s 588FDA(1)(a)(i) or (ii). There is no doubt the second defendant is 'a close associate of a director of the company'. That was not in dispute between the parties. The remaining question is whether 'a reasonable person in the company's circumstance would not have entered into the transaction'. It is to be borne in mind this question is to be answered 'taking into account the circumstances as they exist at the time when the transaction is entered into'. In other words the relevant date is July 2007.

15 It is clear there was no benefit to the Harburn Group in this transaction. In fact it might well be said there was detriment to the company. After all when this transaction was concluded it was less financially sound than it had been. So when those two factors are taken into account they weigh in favour of the transaction being categorised as an unreasonable directorrelated transaction. The only party to benefit from the transaction was the second defendant. It is difficult to see how the benefit to her could have in any way countered against the transaction being regarded as unreasonable. Doubtless the relationship between husband and wife was improved by the transaction but that is hardly relevant to the position of the company.

16 But that is not the end of the matter. Other 'relevant' matters are to be taken into account. In this case what is highly relevant is as at the date of the transaction the Harburn Group was not only solvent but was comfortably solvent. At par 37 of his closing written submissions counsel for the defendants analysed the Harburn Group balance sheet as at 30 June 2007. In doing so he took into account capital gains tax payable on the sale of the company's client base. During the course of crossexamination the first defendant maintained capital gains tax would not have been payable on the sale of the client base until the 2008 tax year. Counsel for the defendants acknowledged the first defendant had a misunderstanding of the relevant legislation. Capital gain tax accrues when the sale is concluded not when the sale is settled. So a liability for capital gains tax arose in the 2007 tax year, albeit until an assessment issued, no tax was actually payable.

17 If current assets and liabilities are taken into account the Harburn Group had net assets of $445,840. If noncurrent assets and liabilities were taken into account it had a surplus of $535,136. It is to be borne in mind the surplus was in cash. So it is clear the Harburn Group was in a healthy financial situation.

18 On behalf of the plaintiffs an attempt was made to show that as at the date the Harburn Group paid over money for the purchase of the boat the first defendant knew that substantial debts would be payable in the year ending 30 June 2008. Counsel went so far as to suggest a reasonable man in the position of the first defendant would have had doubts about the solvency of the Harburn Group.

19 The particular focus of counsel's submissions were the obligations the Harburn Group had to the landlord for space rented to conduct the company's business. At pars 11 13 of his affidavit the first defendant details the lease arrangements for the premises occupied by the Harburn Group. Importantly he notes the company was paying rent of approximately $185 per square metre per year. He estimates the market rent at the time would have been between $300 and $350 per year. So even allowing for the prospect the Harburn Group would, after having sold its client base, wind down its activities as at July 2007 there is no reason why the first defendant should have thought the company would not be able to meet its liability for rent. It is certainly the case the first defendant's claim made in par 27 of his affidavit that the company had alternative and ongoing sources of income is difficult to accept. But even if all of that is put to one side there is no evidentiary basis for saying as at July 2007 there was any reason to believe the company would not be able to meet its obligations. In fact during the calendar year 2007 it did just that. It is also to be borne in mind the company was not wound up until March 2011. In my view it cannot be said taking all the surrounding circumstances into consideration the company paying for the boat was 'unreasonable'. It was in a sound financial position. The first defendant was winding down his business and at that stage it was by no means clear what future role there would be for the Harburn Group. It would certainly not conduct business to the same extent as it had in the past. The first defendant was in complete control of the company - he did not have to consult anyone else about where the funds were to go and how they were to be used. In disposing of the company's funds as he did in my view the first defendant did not act unreasonably.

20 The remaining question is whether the first defendant failed to act in good faith in breach of s 181 of the Corporations Act or whether he used his position to cause detriment to the company in breach of s 182. These sections read as follows:

(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

Note 1: This subsection is a civil penalty provision (see section 1317E).

Note 2: Section 187 deals with the situation of directors of whollyowned subsidiaries.

(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1: Section 79 defines involved.

Note 2: This subsection is a civil penalty provision (see section 1317E).

Use of position--directors, other officers and employees

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

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

Note: This subsection is a civil penalty provision (see section 1317E).

(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1: Section 79 defines involved.

Note 2: This subsection is a civil penalty provision (see section 1317E).

21 Both sections are by their terms very broad. For instance on one view of the matter to declare a dividend thus removing cash from a corporation could be seen to cause detriment to the corporation and be impermissible under s 182(1)(b). Of course the payment of dividends is authorised elsewhere in the Corporations Act but this example serves to illustrate the point. Both sections must be given context.

22 Some assistance as to the proper approach to both sections is to be obtained from the decision of the High Court in Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23; (2005) 226 CLR 507. The High Court was there dealing with the old s 229 of the Companies (South Australia) Code. While s 229(2) and (4) are not identical to s 181 and s 182 they are very similar. The facts of the case are not presently relevant. It is the High Court's approach to the two subsections which is important. In their joint judgment Gleeson CJ and Heydon J say:

The question whether corporate transactions ... involve breaches of directors' duties, or the particular kinds of breach referred to in s 229(2) or s 229(4), usually turn upon a close examination of the commercial context in which they occur [29].

In their joint judgment Gummow and Hayne JJ say much the same thing:

The question in each case is what content is to be given to the standards of conduct that would be expected of the officer, having regard to the position occupied by the officer in the company and the circumstances surrounding the impugned conduct (ie, the commercial context) [65].

23 Their Honours also note during the course of oral submissions it was submitted on behalf of the liquidator that it was 'a basic principle of corporate law' that the company's assets be dealt with for the purposes of the corporation and not for the purposes of 'appropriation' by those who control and own all the issued shares. Their Honours dealt with this submission as follows:

This proposition concerning 'appropriation' is too broad. It insufficiently allows for the significance from case to case of the commercial context, and assumes a standard of conduct that is inflexible. The starting point must be the general duty of a director to act in the best interests of the company. The best interests of the company will depend on various factors including solvency [67].

24 Kirby J agreed in essence with the judgment of Gleeson CJ and Heydon J. However his Honour did make some comments which are worth quoting. He said:

Thus, whilst it is true to say that a contravention of s 229(4) of the Companies (South Australia) Code is not established by merely showing that an officer of a corporation engaged in conduct that resulted in an advantage to that officer, or a detriment to the corporation, the circumstances of the conduct by such a person may not need to go much further in order to establish 'impropriety'. That is a word, like 'dishonesty', which always involves a practical judgment based on all the facts and circumstances of the case. Amongst them, the acquisition by an officer of a corporation of a personal advantage, secured at the cost of the corporation, would often be powerful evidence of wrongdoing, especially if full disclosure and formal consent were not duly observed when that was the prudent and proper course.

The fundamental reason for the social and economic success of the corporation is the separate existence and personality it derives from the law, distinct from its shareholders, its officers and its employees. The present was a relatively simple case where Mr Carabelas - even, it seems, to the exclusion of his wife, the other shareholder - was the effective sole shareholder and moving spirit of the company, Angas Law Services Pty Ltd. However, I would not wish to say anything in this case that might be understood, in different circumstances, to permit a shareholder to act without proper regard to the separate legal existence of the corporation. Especially where doing so was open to be construed as being exclusively for personal advantage, as, for example, to redirect a tax debt of interest to the shareholder to insolvent companies [72] [73].

25 It is necessary then to look to the commercial context in which the Harburn Group paid for the boat. The first defendant was the only director of the company and ultimately the only person who could benefit from the company. At the time the payment was made the Harburn Group was solvent and there was no reason to suspect that it would become insolvent into the future. Really what is left is an analysis of the payment which is very similar to the analysis to be undertaken in determining whether the payment made is an unreasonable directorrelated transaction. As I have already concluded that was not the case. It would seem to me there is not here any reason to conclude the first defendant breached either his duty of good faith or that he used his position as a director improperly.

26 Accordingly I would dismiss the plaintiffs' application. I will hear the parties as to costs.