Court of Appeal (WA)|2014-12-11|Before: Mr J, Lure P, Buss JA, Murphy JA

WEAVER -v- HARBURN [2014] WASCA 227 (11 December 2014)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : WEAVER -v- HARBURN [2014] WASCA 227

BETWEEN : DARREN GORDON WEAVER as liquidator of HARBURN GROUP AUSTRALIA PTY LTD

MARTIN BRUCE JONES as liquidator of HARBURN GROUP AUSTRALIA PTY LTD

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : WEAVER & JONES -v- HARBURN [2013] WASC 441

Corporations law - Director used company funds to purchase boat for a close associate - Company in uncertain financial and commercial circumstances - Whether an unreasonable director-related transaction - Scope of orders under s 588FF, Corporations Act 2001 (Cth) - Scope of defence in s 588FG, Corporations Act 2001 (Cth) - Director's duties

First-named First Appellant : Mr M D Howard SC & Mr M Sims

Second-named First Appellant : Mr M D Howard SC & Mr M Sims

Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23; (2005) 226 CLR 507

Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 277 ALR 189

Ferrier and Knight v Civil Aviation Authority [1994] FCA 1571; (1994) 55 FCR 28

Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; (2007) 25 ACLC 1094

New Cap Reinsurance Corp Ltd (in liq) v Renaissance Reinsurance Ltd [2002] NSWSC 856; (2002) 192 ALR 601

Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651

Re Employ (No 96) Pty Ltd (in liq) (2013) 93 ACSR 48

Slaven v Menegazzo [2009] ACTSC 94

The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239; (2008) 39 WAR 1

Wardley Australia Ltd v The State of Western Australia [1992] HCA 55; (1992) 175 CLR 514

1 McLURE P: This is an appeal from the decision of Master Sanderson dismissing the liquidators' claim for relief under s 588FF, alternatively s 1317H, of the Corporations Act 2001 (Cth) (the Act), arising out of the payment of company funds totalling $385,219.35 for a boat for the second respondent. The first respondent was the sole director of the company and the husband of the second respondent.

2 The liquidators claimed that the payments by the company constituted unreasonable director-related transactions under s 588FDA of the Act. The liquidators also claimed against the first respondent for compensation for breach of the director's duties in s 181 and s 182 of the Act.

- the first respondent was the sole director of Harburn Group Australia Pty Ltd (the company);

- Harburn Investments Pty Ltd (Harburn Investments) was the sole shareholder of the company;

- Harburn Investments was the trustee of the Harburn family trust;

- the first respondent was the only named beneficiary of the Harburn family trust;

- HGA IT Solutions Pty Ltd (HGAIT) was a wholly owned subsidiary of the company;

- the first respondent was the sole director of HGAIT;

- the company leased office premises in the Septimus Roe building in Perth (the company premises). The lessor was Aspen (Septimus Roe) Pty Ltd (the lessor).

4 The company provided financial, share broking and mortgage broking services. HGAIT provided information technology services to the company and third parties.

5 In 2007 the first respondent decided to reduce his workload. By an agreement dated 25 June 2007 the company sold its financial services business client list (with some exceptions) for $765,000 (client list sale). The client list sale settled on or about 12 July 2007.

6 In about July 2007 the first respondent decided to purchase a boat for the second respondent. On 19 July 2007 the second respondent entered into a contract to buy the boat 'Stardust' (the boat contract) for a purchase price of $385,219.35 (the purchase price). The appellants do not seek a finding in the appeal that both respondents were parties to the boat contract.

7 In July and August 2007, the company paid the purchase price to the vendors of the boat by four instalments ($5,000 on 19 July 2007; $15,000 on 23 July 2007; $219.35 on 1 August 2007; and $365,000 on 2 August 2007). The second respondent became the sole registered owner of the boat on 5 August 2007.

8 In about November 2007 the first respondent received from Aspen Group Ltd (Aspen Group) an offer to sublease the company premises and an offer of permanent employment.

9 In February 2008 the first respondent commenced permanent employment with Aspen Group and Aspen Group commenced subleasing the company premises.

10 On 15 October 2010, in District Court proceedings 2043/2010, the lessor obtained default judgment against the company for $162,421.85, being the amount owed under the lease of the company premises.

11 By an order of the Supreme Court on 31 March 2011, the first appellants were appointed the joint and several liquidators of the company.

12 From 5 December 2011, the liquidators or their solicitors made demands in writing of the respondents for repayment of the purchase price.

13 Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable, the court has very wide powers to grant relief, including an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction: s 588FF(1). Section 588FE lists the voidable transactions to which s 588FF applies. A requirement common to all the voidable transactions is that the company is being wound up: s 588FE(1).

14 The provisions relating to unreasonable director-related transactions were inserted by the Corporations Amendment (Repayment of Directors' Bonuses) Act 2003 (Cth) (the 2003 Amendment Act). Although the impetus for the amendment was the payment of unreasonable remuneration to directors, the text is not so confined.

15 Section 588FE(6A) relates to unreasonable director-related transactions and relevantly provides:

The transaction is voidable if:

(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 relation-back day[.]

16 In this case, the 'relation-back day' (a term defined in s 9) is the date of filing of the application to wind up the company.

17 The expression 'unreasonable director-related transaction' is defined in s 588FDA, which relevantly provides:

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

(i) a payment made by the company; or

(ii) a ... transfer or other disposition by the company of property of the company; [and]

...

(b) the payment [or] disposition ... is ... made to:

(i) a director of the company; or

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

(iv) any other relevant matter.

(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.

18 The expression 'close associate' is defined in s 9 of the Act to include a relative of the director and the term 'relative' is defined in s 9 to include a spouse.

19 The effect of s 588FDA(2) is that the reasonableness of entering into the transaction is determined at the time the company actually enters into the transaction, regardless of its reasonableness at the time the company incurred the obligation to enter the transaction.

(1) A director ... 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.

(1) A director ... of a corporation must not improperly use their position to:

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

(b) cause detriment to the corporation.

22 The master focused attention on whether the company payments for the boat were an unreasonable director-related transaction under s 588FDA of the Act. He regarded his findings in that context as, in effect, compelling the outcome on the claims of breach of s 181 or s 182 of the Act.

23 The master dismissed the first respondent's claim that the money paid for the purchase of the boat was actually a dividend paid to him and used by him to purchase the boat. The first respondent said in his affidavit:

Because I was the sole director of both the Company and its sole shareholder ... 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 [21].

24 As noted by the master, there were no company minutes evidencing a resolution to pay a dividend; no money was actually paid to Harburn Investments which would then have to make a distribution under the Harburn family trust; the company did not lodge a tax return for the year ending 30 June 2008; there was nothing in the books of the company to suggest the payment for the purchase of the boat was a dividend; and the first respondent's tax return for the year ending 30 June 2008 did not disclose any payment to him by way of distribution from the family trust.

25 The master held that the money paid by the company to purchase the boat fell within par (a)(i) or (ii) of s 588FDA(1). He also found that the second respondent was a close associate of a director of the company, a matter not in dispute between the parties.

26 Turning to the matters in s 588FDA(1)(c) the master held that there was no benefit to the company; there was detriment to the company because it was less financially sound than it had been; and the only person to benefit from the transaction was the second respondent.

27 When considering 'any other relevant matter' under par (c)(iv) of s 588FDA(1), the master said it was highly relevant that at the date of the transaction the company was not only solvent but was comfortably solvent [16]. He also described the company as 'in a healthy financial situation' [17]. He reached that conclusion by reference to the company's 2007 balance sheet, adjusted to take into account the proceeds of the client list sale in July 2007 (the 2007 balance sheet). The 2007 balance sheet showed a surplus of current assets and liabilities of $445,840. The surplus was in cash. Taking into account non-current assets and liabilities, the surplus was $535,136.

It is certainly the case the first defendant's claim ... 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 [19].

29 In the course of addressing the claims under s 181 and s 182 of the Act, the master held that, at the time the payments were made, the company was solvent and there was no reason to suspect that it would become insolvent into the future [25].

30 The appellants rely on eight grounds of appeal, four of which relate to the unreasonable director-related transaction claim.

31 Ground 1 is to the effect that the master erred in failing to make findings as to all relevant aspects of the company's financial and commercial circumstances at the time the payments were made. Those facts (identified in 'Annexure A' to the grounds) are relevantly as follows:

(1) The company's 2007 financial year tax return had not been lodged.

(2) The company had a significant capital gains tax (CGT) liability on the sale of its client base which was not determined.

(3) the income of the company in the 2008 financial year was uncertain, but would be substantially less than in the 2007 financial year.

(4) Further to (3), in the 2007 financial year the company had received the following income:

.1 $436,800 from a one-off capital gain from the sale of shares which would not be repeated in the 2008 financial year;

.2 $491,370 by way of commissions on securities activities, which would be significantly less in the 2008 financial year as the company's client base had been sold;

.3 $23,922 by way of commissions from finance broking activities, which would be significantly less in the 2008 financial year as the company's client base had been sold;

.4 $54,662 from share trading activities, and it was uncertain whether there would be any profit/income from share trading activities in the 2008 financial year;

.5 $52,487 by way of income from HGAIT, and it was uncertain whether there would be any income from HGAIT in the 2008 financial year.

(5) Whereas in the first quarter of the 2007 financial year the company had received significant annual fees from clients, that would not be the case in the first quarter of the 2008 financial year because of the sale of the company's client base.

(6) The company had ongoing obligations in respect of:

.1 rent and outgoings in the order of $15,000 per month;

.2 the first respondent's salary in the order of $8,500 per month;

.3 the salary of an employee of the company of $1,589.65 (net of tax) per month;

.4 motor vehicle expenses in the order of $1,000 per month; and

.5 insurance expenses, which in the 2007 financial year had been $4,506 or an average of $375.50 per month.

(7) It was not known whether the company would be profitable in the 2008 financial year.

(8) Allowing for an estimated CGT liability of about $124,500, after the payments made for the boat the company would be able to meet its liabilities for less than three months from its surplus of current assets over current liabilities without further income.

32 Ground 2 challenges the positive findings made by the master as to the rosy financial health of the company at the time the payments were made and the finding that there was no reason to suspect the company would become insolvent in the future. The appellants claim the master erred in fact 'as each was not a complete, and so not accurate, statement as to the company's position; and they were not findings as to all relevant aspects of the company's commercial and financial circumstances at the time the payments were made', repeating that the master should have found the matters in Annexure A.

33 In ground 3, the appellants claim the master erred in finding that the first respondent was ultimately the only person who could benefit from the company.

34 As the case was run at the hearing, ground 5 is to the effect that, with or without regard to the matters in Annexure A, the master erred in finding that a reasonable person in the position of the company may have made the payments.

35 Ground 4 relates to the alleged breach of s 181(1)(a) of the Act. The appellants contend the master erred in failing to consider and make findings about what the first respondent knew at the time of the payments, including his knowledge of the matters in Annexure A.

36 Grounds 6, 7 and 8 follow the same format. In relation to the alleged breaches of s 181(1)(a), s 181(1)(b) and s 182 of the Act, the appellants contend the master failed to consider the material elements of the statutory duties and to the extent he considered them, erred in concluding there was no breach.

37 The evidence established the following. First, the company's 2007 financial year tax return had not been lodged by 9 May 2011 (exhibit 1) or indeed by the time of the hearing in September 2013 (ts 23, 40).

38 Second, the company had a significant CGT liability on the client list sale, the extent of which had not been finally determined. At the hearing below, that CGT liability was estimated at $124,500, based on the first respondent's 'guestimate' as to the relevant cost base (ts 55).

39 Third, the income of the company in the 2008 financial year was uncertain, but would be substantially less than in the 2007 financial year. It was not in dispute that in the 2007 financial year the company had received income of (i) $436,800, which was a one-off capital gain from the sale of shares; (ii) $491,370 by way of commissions on securities, which would be significantly less in the 2008 financial year as 90 - 95% of the company's client base had been sold; (iii) $23,922 by way of commissions from finance broking activities, which would be significantly less in the 2008 financial year because of the client list sale; (iv) $54,662 from share trading activities; and (v) $52,487 from HGAIT. However, the intention was to put that business on the market.

40 Fourth, in the first quarter of the 2007 financial year the company had received significant annual fees from clients and that would not be so in the first quarter of the 2008 financial year because of the client list sale.

41 It was not in dispute that at the time of the payments, the company had ongoing obligations in respect of rent and outgoings for the company premises in the order of $15,000 per month. However, the unchallenged evidence of the first respondent was that in 2007 the company was paying significantly under the market rental and thus the lease was a potentially realisable asset (at least until global events in late 2008).

42 The evidence does not establish that the company had ongoing obligations to pay the first respondent a salary of $8,500 per month. It was within the first respondent's power to reduce or eliminate any future payments to himself. The same is true of the claim as to the company's ongoing obligation to pay the salary of an employee, who in fact ceased employment with the company at the end of 2007 when the first respondent was employed by the Aspen Group.

43 It was accepted that the company had ongoing obligations in respect of motor vehicle expenses in the order of $1,000 per month and ongoing obligations in respect of insurance expenses, which in the 2007 financial year had been $4,506.

44 Allowing for an estimated CGT liability of $124,500 from the client list sale and after the boat payments, the company would be unable to meet its then existing outgoings ($26,465/month) for more than three months from current assets without further income. However, the company had not divested itself of all sources of future income. The evidence was that in the 2008 financial year the company received income of approximately $83,180 and HGAIT received income of approximately $26,245.

45 The evidence established that the first respondent was aware of all the relevant facts. The appellants contend that based on these facts the company was in questionable, alternatively uncertain, financial and commercial circumstances at the time the boat payments were made in July and August 2007.

46 It was also submitted that the evidence established that there were reasons to suspect, alternatively questions arose as to whether, the company could become insolvent in the future.

47 I accept that at the time the boat payments were made the company was, to the first respondent's knowledge, in uncertain financial and commercial circumstances in which questions as to its continuing solvency could arise in the short to medium term.

48 At the heart of this appeal is the relevance, alternatively weight, to be given to the financial health of the company at the time of the transactions. That issue requires an understanding of the wider statutory context of pt 5.7B div 2 of the Act.

49 At the heart of a number of voidable transactions in s 588FE is the 'insolvent transaction', defined in s 588FC as an unfair preference (defined in s 588FA) or an uncommercial transaction (defined in s 588FB), entered into when the company was insolvent or which became insolvent because of entering into the transaction.

50 An unreasonable director-related transaction is one of, relevantly, six different types of voidable transaction under s 588FE. They are as follows.

51 First, an insolvent transaction is voidable if it occurred within a six-month relation-back period: s 588FE(2).

52 Second, a transaction is voidable if it is both an insolvent transaction and an uncommercial transaction of the company and the transaction occurred within a two-year relation-back period: s 588FE(3).

53 Third, a transaction is voidable if it is an insolvent transaction of the company, a related entity of the company is a party to the transaction and the transaction occurred within a four-year relation-back period: s 588FE(4). A related entity is defined in s 9 of the Act to include a director and a relative of a director of the company.

54 Fourth, a transaction is voidable if it is an insolvent transaction of the company, the company became a party to it for the purpose of defeating creditors and the transaction occurred within a 10-year relation-back period: s 588FE(5).

55 Fifth, a transaction is voidable if it is an unfair loan to the company made at any time on or before the day when the winding up began: s 588FE(6). Under s 588FD, a loan to a company is unfair if the interest on the loan or the charges in relation to the loan were extortionate.

56 Sixth, unreasonable director-related transactions: s 588FE(6A).

57 Thus, of the six types of voidable transactions in s 588FE, four are voidable only if the company was insolvent at the time of the transaction or became insolvent as a result of the transaction.

58 Insolvency at the time, or because, of entering into the transaction is not an element of a voidable unfair loan or a voidable unreasonable director-related transaction under s 588FE. As a result, the defence in s 588FG(2) has no application to these types of voidable transactions.

59 Under s 588FG(2), it is a defence to a claim for relief under s 588FF if the person became a party to the transaction in good faith; at the time they became a party, the person had no reasonable grounds for suspecting that the company was insolvent or would become insolvent because of the transaction; a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and the person provided valuable consideration or changed his or her position in reliance on the transaction.

60 The 2003 Amendment Act amended s 588FG(2) to remove unreasonable director-related transactions from the scope of the defence. In that context, the explanatory memorandum notes that '[t]he insolvency of the company at the time of an unreasonable director-related transaction is a not a relevant consideration under the proposed amendments'.

61 It is instructive to contrast the statutory regime relating to unreasonable director-related transactions and that relating to 'uncommercial transactions', defined in s 588FB as follows:

(1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to:

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

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

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

(d) any other relevant matter. (emphasis added)

62 The italicised words are identical to those in par (c) of the definition of unreasonable director-related transaction in s 588FDA(1). Further, s 588FB(2) mirrors s 588FDA(3).

63 However, in the definition of 'uncommercial transactions', the word 'transaction' has the wider meaning given in s 9 of the Act and there is no equivalent to s 588FDA(1)(b) which limits the other party to the transaction to directors and close associates of directors.

64 On the other hand, an uncommercial transaction is only voidable if the company was insolvent at the time of entry into, or became insolvent as a result of, the transaction. Thus, 'any other relevant matter' under s 588FB(1)(d) would not include matters relating to the financial health of the company. The explanatory memorandum to the Corporate Law Reform Act 1992 (Cth), which inserted the provisions relating to uncommercial transactions, said the provision aims to prevent companies:

[D]isposing of assets ... through transactions which resulted in the recipient receiving a gift or obtaining a bargain of such magnitude that it could not be explained by normal commercial practice [1,044].

65 It is clear that, as with an unfair loan, the financial condition of the company at the time of the transaction is not an element (ie necessary condition) of an unreasonable director-related transaction. However, that does not answer the question whether it may be a relevant circumstance or consideration under s 588FDA(1)(c) and if so, in what circumstances.

66 An issue in the appeal is whether the circumstances in this case are analogous to a situation where the company is the alter ego of its director(s) and shareholder(s) and if so, whether the approach of the High Court in Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23; (2005) 226 CLR 507 informs the assessment of what is objectively reasonable under s 588FDA of the Act.

67 The appellants rely on the decision of Mansfield J in Slaven v Menegazzo [2009] ACTSC 94, a case in which the financial health of the company at the time of the transaction was not determinative.

68 In Angas, a husband (C) and wife were the sole directors and shareholders of a company. C's wife acquiesced in his management and control of the company. The company was indebted to a building society, which indebtedness was secured by a mortgage over land owned by the company. In July 1988, C borrowed $1.75 million from a bank, part of which (around $435,000) he on-lent to the company for the purpose of repaying its loan to the building society and discharging the related mortgage. The company then provided a mortgage of its land to the bank to secure C's indebtedness. When the company sold the land in October 1989, all the sale proceeds went to the bank in reduction of C's indebtedness. Following that transaction, the company's books of account showed that C owed the company $446,710. A subsequent journal entry in the company's accounts purported to correct this position by showing that the same total amount was owed by other companies controlled by C. By this stage the other companies were insolvent.

69 In April 1994 the company went into liquidation. The liquidator claimed that the journal entry reflected a contractual novation by which C's indebtedness to the company was discharged and replaced by debts owed by the insolvent companies. The liquidator alleged that, in procuring the contractual novation, the directors were in breach of s 229(2) of the Companies (South Australia) Code (the Code) (which required a director at all times to exercise a reasonable degree of care and diligence in the exercise of his powers and the discharge of his duties) and s 229(4) (which prohibited a director from making improper use of his position to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to the corporation).

70 The High Court held that there had been no novation of C's indebtedness to the company and that the liquidator's claims thereby failed. However, the High Court also considered whether the grant of the mortgage to the bank to secure all of C's indebtedness involved a breach of s 229(4) of the Code in circumstances where all the directors and all the shareholders gave informed consent to that transaction. The High Court was unanimous in the view that the shareholders of a company cannot, by consent or ratification, release directors from the duties imposed by s 229(2) and s 229(4). However, informed consent was relevant to the anterior question of whether there had been any breach at all.

71 Gleeson CJ and Heydon J said that whether there was a breach usually turned upon a close examination of the commercial context in which the transaction occurred [29]. They continued:

The unanimous informed consent of the shareholders of [the company], the solvency of [the company] and [C], and the absence of any adverse effect on the interests of third parties, were facts relevant to the propriety of the mortgage transaction [29].

72 Gummow and Hayne JJ said that a contravention of s 229(4) is not established by merely showing that the officer engaged in conduct that resulted in an advantage to himself or a detriment to the corporation. There must be the element of impropriety [54].

73 In response to the liquidator's submission that the directors acted so as to bring about the appropriation of the company's assets as their own, Gummow and Hayne JJ said:

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. In Kinsela v Russell Kinsela Pty Ltd (In Liq), Street CJ said:

'In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise ... a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets' [67].

74 They concluded that the solvency of the company and authorisation of the conduct indicated that the standards of propriety expected of directors were not breached [69].

75 Kirby J agreed in the result. However, mindful of the separate existence and personality of the company, he said the acquisition by an officer of a company of a personal advantage secured at the cost of the corporation would be powerful evidence of wrongdoing, especially in the absence of full disclosure and formal consent [72]. The task of determining propriety involved a practical judgment based on all the facts and circumstances of the case [72].

76 Unlike s 229(2) and (4) of the Code, which created criminal offences, s 181 and s 182 are civil liability provisions. However, I am not persuaded anything turns on that distinction.

77 The focus in Angas on the presence or absence of insolvency of the company (and C) is not an exhaustive statement of the scope of the duties of a director of a company. That issue was canvassed by Owen J in The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] (2008) 39 WAR 1 [4384]- [4450]. Owen J had the task of identifying the time at which directors of a company come under obligation to consider the interests of creditors. Owen J rejected the proposition that the duty to take into account the interests of creditors was merely a restriction on the right of shareholders to ratify breaches of duty owed to the company. He also rejected the proposition that the obligation to take into account the interests of creditors arises only if the company is insolvent. He cites with approval the statement in Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; (2007) 25 ACLC 1094 [162] that the interests of creditors must be considered where to the knowledge of the directors there is a real and not remote risk of insolvency and that the risk includes the effect of the transaction in question.

78 There is little doubt that a transaction which, from the company's perspective, produces unsatisfactory answers to the mandatory considerations in par (c)(i) - (iii) of s 588FDA(1) and also constitutes a breach of a statutory or other duty of a director would ordinarily be a transaction that, it may be expected, a reasonable person in the company's position would not have entered into.

79 However, impropriety or other breach of a director's duty is not an element of an unreasonable director-related transaction. That is reinforced by s 588FDA(3) which recognises that the transaction may otherwise be valid and enforceable. The focus in s 588FDA is not the director's conduct but the reasonableness of the company's conduct, objectively assessed, in entering into the transaction.

80 In Slaven the company in question was, in practical terms, an incorporated partnership. It was wound up because of a breakdown in the relationship of its directors, not for insolvency. The company was the trustee of a unit trust.

81 The liquidator applied under s 588FF to have declared void a contract dated 4 August 2006 between the company, as vendor, and Clinton Menegazzo (Clinton), as purchaser, of a unit (the Unit) in a 10-unit land development being carried out by the company (the contract). The contract was set aside as an unreasonable director-related transaction.

82 At the material times, the shareholders and directors of the company were Clinton's father, John Menegazzo, and Raymond Schofield. The development was well advanced at the time of entry into the contract. After entry into the contract but before settlement, the company's accountant prepared a document setting out the projected net profit position of the development based on actual costs to 30 June 2006 and estimates thereafter. Based on projected gross revenue on the sales of the 10 units and the actual and estimated costs of the development, the estimated net funds available for distribution to the unitholders of the trust was $971,903. The accountant's document anticipated that there would be a direct distribution of that amount to the unitholders of the trust, described as the 'Schofield Interests' and the 'Menegazzo Interests', with the distribution to the latter being reduced by the purchase price of the Unit.

83 The Unit was sold on the understanding between the directors, not formally recorded, that the price of the Unit would be deducted from the Menegazzo interests' share of the profit from the development. Mr Schofield understood that Mr and Mrs Menegazzo had promised Clinton one unit in the development in repayment of a loan he had made to Mr and Mrs Menegazzo. At the time of entry into the contract, the company expected to have sufficient profit to accommodate that arrangement so the price of the Unit would ultimately come out of the Menegazzo family share of profits and not from company funds. However, that was not how the transaction was structured.

84 In essence the contract relevantly provided for the sale of the Unit to Clinton for $425,000 which purchase price was to be satisfied by the payment of $40,000 to Mr Menegazzo on entry into the contract and by the release of Mr and Mrs Menegazzo's indebtedness to Clinton in the sum of $130,000. Neither payment was to or for the company or its purposes.

85 The contract provided for settlement 21 days after notice of registration of the strata plan, which occurred on 17 July 2007. Before settlement of the sale of the Unit, the relationship between Mr Menegazzo and Mr Schofield had broken down, as had the relationship between Mr and Mrs Menegazzo. The sales of the other units in the development were greatly delayed and, when sold, realised nowhere near the anticipated revenue. On 25 July 2008 the company was wound up.

86 It was accepted by the parties that the relevant 'transaction' was the contract and that Clinton was a close associate of a director of the company. The trial judge found that at the time of entry into the contract: there was no benefit to the company; the detriment to the company was that it gave away a valuable asset for no real consideration to itself; and the benefits to the purchaser were identified.

87 As to 'other relevant matters' the trial judge concluded that at the time of entry into the contract: the expectation of the company, through its directors, was that the assets of the company would be progressively and reasonably promptly realised, and that there would be a significant surplus of around $459,000 available to each group of unitholders of the trust which would be distributed to them; there was no reason to expect that these estimates would not come to pass in the relatively near future; and there was no evidence to suggest the company was insolvent or was not paying its secured and unsecured creditors in a timely manner.

88 Notwithstanding these other relevant matters, the trial judge concluded that it may be expected a reasonable person in the company's circumstances would not have entered into the transaction. At the relevant time the development had not been completed; although sufficient revenues were reasonably anticipated it was not assured; there were very substantial outstanding liabilities of the company; and there are a number of contingencies involved in any property development, not least the price to be obtained for the assets and the timing of their realisation. The trial judge concluded:

The company is a separate legal entity from its shareholders, and in the present circumstances as a trustee, it has obligations apart from those to the unitholders of the trust.

Notwithstanding that, at the time of the transaction, there was no particular reason to anticipate difficulty in realising the assets of the company in a timely manner, or that its assets would not produce a generous surplus available for distribution upon realisation to its unitholders, in my view a reasonable person in the company's circumstances would not have entered into the transaction. It amounted to giving away a valuable asset of the company to the son of one of the directors, because it was anticipated that in due course the company would realise its assets and have a sufficient surplus ... available for distribution to the unitholders of the trust ... and that those unitholders would somehow be able to procure a distribution in kind of the property to [Clinton] [44] - [45].

89 The claims of unsecured creditors significantly exceeded the company's assets. The trial judge declared the contract void.

90 In Slaven, the financial position of the company was strong both at the time of, and immediately after, entry into the contract. What weighed heavily in the value judgment as to its unreasonableness was the transaction itself which involved, in effect, an immediate gift of a company asset to a director and his son. The fact that the directors and shareholders consented to the transaction and that it was a down payment on an intended distribution to the unitholders of the trust of the reasonably anticipated profit did not prevent that conclusion. There can be no doubt that the outcome in Slaven is correct.

91 The test of unreasonableness in s 588FDA of the Act is objective; it is what a reasonable person in the company's circumstances may be expected not to do. The 'company's circumstances' encompass all relevant matters, starting with its status as a company and what flows from that; its controllers, shareholders, business and other activities; and the facts and circumstances of, and surrounding, the transaction.

92 The matters in par (c)(i), (ii) and (iii) of s 588FDA(1) are mandatory relevant matters in the evaluative assessment of what is objectively unreasonable. The 'any other relevant matter' requirement in par (c)(iv) recognises that relevance depends on the facts and circumstances of the particular case.

93 The only insolvency related elements (ie necessary conditions) of a voidable unreasonable director-related transaction are that the company is being wound up and the transaction was entered into within four years of the relation-back day. Otherwise, the relevance and/or weight to be given to the fact, or risk, of insolvency depends on the facts. Indeed, a director-related transaction entered into when the company was insolvent would, without more, be caught by s 588FE(4). Further, a transaction may, like an unfair loan, be so objectively unreasonable that the financial position of the company at the time of entry into the transaction is not relevant. In other circumstances, the transaction may be unreasonable solely or primarily because of the financial condition of the company at the time of the transaction.

94 I turn now to the application of the law to the facts of this case. In this case the company made the payments directly to the owners of the boat in discharge of the second respondent's contractual liability to pay them the purchase price. A payment or disposition of property 'to' a person for the purpose of s 588FDA(1)(b) includes a payment for or on behalf of that person. There was no payment or disposition of property to the first respondent.

95 As the payments are the transactions, their reasonableness is to be determined at the time the company made the payments, which was in July and August 2007.

96 There were no benefits to the company in making any of the payments. The detriment to the company was the full extent of the payments, they being a gift with no arguable benefit, financial or otherwise, to the company.

97 The second respondent benefited because the payments discharged her personal liability under the boat contract to pay the purchase price. She was a party to the transactions, and received a benefit commensurate with the extent of the detriment to the company. The second respondent had no connection with the company whether as director, officer, shareholder or creditor.

98 Prima facie, a reasonable person in the company's circumstances would not have made the payments, regardless of the financial health of the company. The respondents resist that conclusion on the basis that (1) because of its financial position, the first respondent and the company were not obliged to have regard to the interests of creditors; (2) thus the best interests of the company was on all fours with the first respondent's best interests, he being the sole named beneficiary of the family trust and sole director and shareholder of the corporate trustee (Harburn Investments) which was the sole shareholder of the company.

99 There was no evidence that Harburn Investments had consented to the company making the payments to the second respondent. To have done so would, prima facie, be in breach of its fiduciary duty as trustee. Consent of the corporate trustee shareholder cannot be implied from the first respondent's knowledge of and involvement in the transactions.

100 The transactions were not in fact or law a dividend to Harburn Investments. At the hearing of the appeal, the focus was on whether it was open to the company to declare a final or interim dividend to Harburn Investments prior to making the payments. It was then to be assumed that Harburn Investments would have made a distribution of $385,219.35 to the first respondent. It is incorrect to say that the first respondent was ultimately the only person who could benefit from the company. The potential beneficiaries were as wide as the Harburn family trust deed permitted. However, the first respondent controlled the entity responsible for trust distributions.

101 Under s 254T of the Act as it was at the time of the transactions, dividends can be paid only out of profits of the company. The relaxation of the requirement effected by the Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth), s 7, has no application to the transactions. There was no evidence as to what, if anything, the company's constitution says about the declaration of dividends or payment of interim dividends or whether the replaceable rule in s 254U of the Act applies.

102 Having regard to the limited information before this court, the one-off nature of most of the income of the company in the 2007 financial year, the company's uncertain financial and commercial circumstances going forward and the continuing reliance on an estimate of the CGT liability for the client list sale, I would decline to find that it was open to the company to declare a dividend equivalent to the payments.

103 In any event, the fact that it may have been open to reach the same outcome (the gift of a boat to the second respondent) by a route that was in conformity with the company's obligations, statutory and otherwise, does not prevent a finding that the payments are unreasonable director-related transactions. The commercial and financial advantages of conducting a business through companies (and trusts) have the consequence that those responsible for the administration of the company are prevented from using corporate (and trust) property as if it was their own. That is what happened in this case, with the consequence that it may be expected that a reasonable person in the company's circumstances would not have made the payments. That conclusion does not depend on, but is fortified by, the conclusion that at the time of the payments the company was in uncertain financial and commercial circumstances in which questions as to its continuing solvency could arise in the short to medium term. I would uphold grounds 1, 2, 3 and 5 of the appeal insofar as they relate to the second respondent.

104 There are important factual differences which distinguish Angas from this case. First, the Angas company provided the third party mortgage with the prior informed consent of all shareholders. Second, the Angas company had rights of contribution in respect of the contingent liability it undertook in granting the mortgage. Third, C and all the companies in his group were solvent at the time of the grant of the mortgage and the Angas company had no significant creditors. Fourth, the mortgage transaction did not cause the loss sought to be recovered under s 229. In summary, the mortgage was granted in the ordinary course of the business of the group as a whole and resulted in the company becoming contingently liable at a time when C and all the companies in the group were solvent.

105 In this case the payments constituted a gift of a very significant magnitude (both absolutely and relative to the company's financial position) for which there was no arguable commercial justification. Moreover, the sole shareholder of the company had not consented to the transactions.

106 The objective circumstances in this case require the conclusion that the first respondent did not exercise his powers or discharge his duties as a director of the company for a proper purpose, in breach of s 181(1)(b) of the Act, and improperly used his position to gain an advantage for the second respondent to the obvious detriment to the company, in breach of s 182 of the Act.

107 Further, in view of the finding that at the time of the payments, and to the first respondent's knowledge, the company was in uncertain financial and commercial circumstances in which questions as to its continuing solvency could arise in the short to medium term, the first respondent did not act in good faith in the best interests of the company, in breach of s 181(1)(a) of the Act. I would uphold grounds 4, 6, 7 and 8.

108 At trial, the first respondent relied on the defence in s 588FG(1)(a) of the Act to the unreasonable director-related transaction claim. The master did not deal with the defence. Somewhat oddly, the question whether the first respondent could be the subject of an order under s 588FF was only squarely raised in this context.

A court is not to make under section 588FF an order materially prejudicing a right or interest of a person other than a party to the transaction if it is proved that:

(a) the person received no benefit because of the transaction[.]

110 It is apparent from the opening line that s 588FG limits the exercise of powers that would otherwise fall within the scope of s 588FF(1). The logical first question is whether the court has power under s 588FF(1) to make an order against the first respondent.

111 Under s 565 of the former legislative scheme, a transaction of a type which was void against a trustee in bankruptcy under the Bankruptcy Act 1966 (Cth), s 120 - s 122, was, without the intervention of the court, void against a liquidator.

112 By contrast, s 588FF(1) gives the court very wide powers to make orders in respect of voidable transactions which fit the particular circumstances of the case. The section relevantly provides that where a court is satisfied that a transaction is voidable under s 588FE, the court may make an order:

- directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;

- directing a person to transfer to the company property that the company has transferred;

- requiring a person to pay to the company an amount that fairly represents some or all of the benefits that the person has received because of the transaction;

- for the release or discharge of a debt incurred or security given by the company;

- declaring an agreement to be void at and after the time the agreement was made;

- declaring an agreement or the provisions of an agreement to be unenforceable.

113 The court's powers in s 588FF(1) are not confined to a person who is a party to the transaction. The power extends to a non-party who, for example, receives (directly or indirectly) property of the company the subject of the voidable transaction.

114 It is clear from the text and purpose of s 588FF(1) that the relief is intended to be restitutionary in nature, in the sense that its purpose is to recover company property, or the value thereof, that is or has been in the hands of the defendant. It is not concerned with compensation for loss or damage suffered by the company.

115 There is authority, based on the text of s 588FG(1)(a), that the powers in s 588FF(1) extend to making an order against a non-party who received no benefit because of the voidable transaction: New Cap Reinsurance Corp Ltd (in liq) v Renaissance Reinsurance Ltd [2002] NSWSC 856; (2002) 192 ALR 601 [22]. However for the reasons discussed below, I remain to be persuaded of the correctness of that proposition.

116 Against that background, I turn to the matters in contest in the appeal. The appellants submit that the first respondent is a party to the transactions and that the defence in s 588FG(1)(a) is confined to a person who is not involved in the wrongdoing captured by s 588FDA and remedied by s 588FF.

117 The first respondent contends he is not a party to the transactions. He says party means 'a person immediately concerned in some transaction' and that a natural person does not become a party to a transaction merely because he or she causes a corporate entity to enter into and perform the transaction.

118 The definition of 'party' in s 9 of the Act adds nothing to the ordinary meaning of the term. The first respondent's construction is consistent with the text, context and purpose of s 588FG(1). Part 5.7B div 2 relates to voidable transactions which can be avoided by the company's liquidator(s). The avoidance of the transaction points to the persons between whom the relevant transaction occurred.

119 The starting point must be to identify the type of voidable transaction in issue. For an unreasonable director-related transaction, the transaction and the parties thereto are identified in s 588FDA(1)(a) and (b) of the Act. Under par (a), the company must be a party. Under par (b), the other party is the person(s) to whom the payment, disposition or issue is, or is to be, made. That construction is consistent with authority: Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109; (2011) 277 ALR 189 [140] - [143]; Re Employ (No 96) Pty Ltd (in liq) (2013) 93 ACSR 48 [82].

120 Accordingly, the fact that the first respondent was the directing mind of the company in relation to the payments does not make him a party to the transactions. Such an outcome would also be at odds with the restitutionary nature of the relief in s 588FF(1).

121 If both respondents had entered into the boat contract, the company payments (transactions) would be to both respondents as parties. If the boat contract was entered into by the second respondent only, the first respondent would not be a party to the transaction.

122 The first respondent's evidence was that he purchased the boat. The second respondent's evidence was that the first respondent purchased the boat for her. Although the boat contract named both respondents as purchasers, only the second respondent signed it. The balance of the evidence is that only the second respondent entered into the boat contract, the intention being that it be solely owned by the second respondent. The effect of the payments made by the company was to discharge the second respondent's liability under the boat contract to pay the purchase price. Thus, the first respondent was not a party to the transactions.

WEAVER -v- HARBURN [2014] WASCA 227 (11 December 2014)

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WEAVER -v- HARBURN [2014] WASCA 227 (11 December 2014)

Legislation Cited (4)

Cases Cited (7)