In the matter of ZH International Pty Ltd (in liquidation)

1. [1]

   HER HONOUR: This case involves the intersection between the voidable transaction provisions of Part 5.7B of the Corporations Act 2001 (Cth) – which prevent depletion of the assets of a company by certain transactions (generally, at an undervalue) in a specified timeframe before a winding up – and orders made under section 79 of the Family Law Act 1975 (Cth), which alter the property interests of the parties to a marriage on its demise.

2. [2]

   Alan Hayes, liquidator of ZH International Pty Ltd (the Company), seeks to recover four properties transferred by the Company to its directors and shareholders, Hui (John) Zhang (the husband) and Ngoc Hon Ly (the wife). The Company’s net equity in the properties was then some $2.16 million. The properties were transferred as part of a property settlement under the Family Law Act, effected by consent orders made by a Registrar in the Local Court at Fairfield exercising jurisdiction under section 39(2) of that Act (2014 Consent Orders). The liquidator is entitled to the relief sought.

SUMMARY

1. [3]

   In 2001, the husband and wife established the Company, which acquired four properties with a view to property development. Whilst the couple made some contributions to the acquisition of the properties (albeit fairly minimal and imperfectly recorded in a Shareholder’s Loan Account), the bulk of the funds were provided by bank loans to the Company, secured by registered mortgages over the properties. The couple also owned seven properties in their own names.

2. [4]

   The Company obtained a builder’s licence and embarked upon building projects. Two projects encountered significant difficulties, both in terms of being paid and by reason of legal proceedings brought against the Company for building defects. By 2014, the Company had been experiencing cashflow problems for some time: the Company’s bank account was overdrawn, cheques were being dishonoured and bills paid by ‘round sums’ or, perhaps, using the couple’s funds. The Company faced building defects claims exceeding $3 million.

3. [5]

   The couple had separated three years’ earlier but the husband had resisted his wife’s entreaties for a property settlement. The husband now relented to agree on a partial property settlement, but only in respect of the four properties owned by the Company. The couple estimated that the Company’s net equity in the four properties was $2.23 million. The husband considered that the Company owed him over $1 million for funds expended to complete the building projects. In May 2014, an Application for Consent Orders was filed, which contained no information on the financial position of the Company beyond the estimated value of the four properties and the amount owing on the associated loans. The couple did not disclose the significant claims made against the Company for building defects which, if successful, would eclipse the Company’s net assets. Nor did the couple disclose that the Company was then insolvent or facing serious and well-defined claims: Official Trustee in Bankruptcy v Mateo (2003) 127 FCR 217; [2003] FCAFC 26 at [70]. The Company was not joined to the Family Court proceedings, nor executed the proposed orders.

4. [6]

   The 2014 Consent Orders were made by a Registrar in the Local Court at Fairfield. The couple proceeded to pay out the four mortgages secured over the Company’s properties. The Company then transferred two properties to the husband and two properties to the wife. The Shareholder’s Loan Account was apparently ‘repaid’ (albeit no accounts were prepared at the time to record either the loan balance or its repayment). But for any protective effect conferred by the 2014 Consent Orders, the transfer of the Company’s property and the repayment of the Shareholder’s Loan Account were voidable transactions, with the primary focus being to defeat the Company’s creditors.

5. [7]

   The husband continued to use the Company’s building licence, although established new companies through which to conduct further property developments and building projects. In due course, as the legal proceedings against the Company were determined, a judgment creditor issued a statutory demand which went unanswered; the Company was wound up. Mr Hayes now seeks to retrieve the Company’s assets from the couple, so that the Company’s creditors may be paid.

6. [8]

   The 2014 Consent Orders, as made by the Family Court, did not oblige the Company to do anything but were directed to the parties to the marriage. The 2014 Consent Orders did not create an equitable interest in the Company’s properties in favour of the husband and wife as the orders did not create any obligation on the Company to transfer the properties. The orders simply obliged the spouses to transfer to the other ‘all [their] rights, title and interest’ in the Company’s properties, where the spouse, in fact, had no right, title and interest in those properties. The 2014 Consent Orders did not touch upon the Shareholder’s Loan Account which, according to the orders, remained the property of the spouses. It follows that orders under section 588FF of the Corporations Act requiring the husband and wife to transfer the properties back to the Company and ‘undoing’ any repayment of the Shareholder’s Loan Account are not inconsistent with the 2014 Consent Orders.

7. [9]

   In other words, the 2014 Consent Orders, properly construed, did not effect a “transaction” of the Company. The later transfers of the properties by the Company to the husband and wife were the relevant “transactions”, as was the (much) later accounting treatment of repayment of the Shareholder’s Loan Account and advancing the excess equity to the directors and shareholders as a “Trade and other Receivables” in the sum of $991,961.42.

8. [10]

   Regrettably, this scenario is not unusual. Nor was the approach taken by the couple’s solicitor – also the Company’s solicitor – who said, “I treated it from a sort of a family law perspective … I pretty much … treated the ZH International properties as a matrimonial asset thrown into a pool.” Further, “it wasn't perceived to be advantageous to the company in any shape or form. It was part of a process, a family law process …” Some obvious propositions bear re-statement.

9. [11]

   First, whilst a couple may be directors and shareholders in a family company, the couple do not own the company’s assets. The company owns its assets. As shareholders, the couple are simply entitled to the rights attached to the shares as provided by the company’s constitution, such as dividends while the company is trading or a distribution of assets upon winding up: R v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 428 at 434; [1949] HCA 53; White v Shortall (2006) 68 NSWLR 650; [2006] NSWSC 1379 at [193] per Campbell J citing Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd (1995) 56 FCR 236 at 255-6 per Lockhart J. Nor are the spousal directors entitled to deal with the company’s assets as if those assets are their own: Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416 at [103]. Rather, the directors must deal with the company’s assets in accordance with their duties as directors (and as fiduciaries) and the constraints imposed by the Corporations Act. These constraints are imposed for good reason by parliament, to balance the interests of all stakeholders doing business in Australia.

10. [12]

    Second, should the couple seek a property settlement under section 79 of the Family Law Act, including in relation to a company wholly owned by a party or the parties to the marriage, then it is customary to treat the net assets of the company as being the property of the couple, after deducting the moneys owing to the company’s creditors and the costs of external administration: In the marriage of Foda (1997) 21 Fam LR 653 at 667; Roberts v Wayne Roberts Concrete Constructions Pty Ltd [2004] NSWSC 734; (2004) 50 ACSR 204 per Barrett J at [63]. In the oft-cited observation of Gibbs J in Ascot Investments Pty Ltd v Harper (1981) 148 CLR 337 at 354; [1981] HCA 1:

11. [13]

    As Wilcox J observed in Mateo, “The Family Court may be expected to be astute to prevent the claims of an unsecured creditor from being defeated by a s 79 order”: at [93]. Likewise, Branson J noted, “it would be wrong to see s 79 of the Family Law Act as providing a means whereby the parties to a marriage … can defraud their creditors”: at [99]. More recently, in Cantrell v North (2020) FLC 93-976; [2020] FamCAFC 175 the Full Family Court reiterated, “The Court should not readily be the vehicle by which the legitimate rights of third party creditors should be defeated or delayed”: at [80]. Further at [81]:

12. [14]

    Third, should the couple seek property orders from the Family Court which bind a third party, then the third party must be accorded procedural fairness in relation to the making of such orders: section 90AE(3)(c), Family Law Act. Where the third party is a company and the proposed orders involve transferring the company’s assets, then the company “must be included as a party to the case”: rule 6.02(1), Family Law Rules 2004 (Cth). “[T]he failure to disclose and notify the creditor …, of itself, justifies the setting aside of the orders” under section 79A(1)(a) of the Family Law Act: Cantrell v North at [83]. As the interests of the company are unlikely to align with that of the husband or wife, the company should ordinarily be separately represented.

WITNESSES

1. [15]

   For the plaintiffs, evidence was given by Mr Hayes and valuer William Rees (no relation). Both were cross examined. No issues of credit arose. Mr Hayes was an experienced and knowledgeable witness who made reasonable concessions. Whilst clearly exasperated with the directors, Mr Hayes was nonetheless compassionate to the wife's situation and language difficulties. Mr Rees was an experienced valuer and impressive witness.

2. [16]

   The husband gave evidence together with his solicitor, Mark Marando. Both were cross examined. The husband was an unsatisfactory witness; his learned senior counsel wisely conceded that the husband’s evidence should be approached with caution. Whilst the husband gave evidence through a translator, it was clear that he understood English, including because he answered several questions in English. After enduring two days of cross-examination via a translator over a video link, it was annoying to learn from Mr Marando that Mr Zhang was “quite fluent with his speaking of English. Written English, most documents I do read to him." Having now reviewed the contemporaneous documents, I note that Mr Marando and his staff routinely sent the husband written communications in the English language.

3. [17]

   The husband was asked a series of Dorothy Dixers by the wife’s counsel, during which time he gave evidence with his head down, making no eye contact. His demeanour changed when cross-examined by counsel for the liquidator, when he became engaged. The husband was evasive. Some of the husband's evidence seemed unlikely (see [116]) or was inconsistent with his affidavit in this or previous proceedings. Within moments, he gave answers which were inconsistent with previous answers: see [110]. He was, on occasion, non-responsive; even the translator became frustrated with the husband’s reluctance to give a straight answer. At other times, the husband gave angry speeches. The husband had no hesitation blaming others, including by making serious and inherently improbable accusations. Ultimately, I did not accept the husband’s evidence, except where it was inherently likely, corroborated by a contemporaneous document, the evidence of another reliable witness or where the evidence he gave was against his own interests.

4. [18]

   The husband’s interactions with the liquidator, the Australian Securities & Investments Commission (ASIC) and others, more fully described in this judgment, indicate that the husband conducted himself in a cavalier manner. Mr Hayes description of their first meeting is apposite: “The first time he was so offensive in his use of language and tone of voice that it was not possible really to ask him any questions. … He was so rude and so loud that a senior member of my staff that was sitting with me was frightened of him and I had to ask [the husband] to get out of my office … he was abusive.” The husband was “much better behaved” at subsequent meetings as he wanted to get the Company’s builder’s licence back, but “was not really keen to answer questions about historical matters”.

5. [19]

   Mr Marando is a local Cabramatta solicitor who acted for the couple for twenty years. According to Mr Marando, he and the husband were “good friends” (although the husband would not be drawn on the subject) and co-investors in a land-holding company, Beauty 398 Pty Ltd. (Mr Marando is not to be confused with his brother, Roy, of Marando Real Estate, with whom the couple also had a very good relationship.) Mr Marando was also fairly agreeable to the Dorothy Dixers posed by the wife's counsel. Whilst I have generally accepted his evidence, Mr Marando was an imperfect historian. His evidence did not accord with the contemporaneous documents in several respects and I have preferred the documents where available.

6. [20]

   The wife gave evidence (also through a translator, although necessarily so) together with her daughter, Joanna Tong (the daughter). Both were cross examined. The wife seemed like a nice lady who became upset talking about her divorce. The wife did not appear to have been particularly involved in the Company’s business or knowledgeable about corporate matters. That said, the wife had given a contrary description of her role in the Family Court proceedings: see [31]. The wife had also successfully operated her own business for some years, worked in another business with her daughter, been a director of several family companies and owned a significant number of properties before these events. To suggest that the wife “just essentially did sewing” was to understate her experience and acuity. I accepted her evidence on some matters but preferred the evidence of Mr Marando on other matters: see [33] and [87].

7. [21]

   The daughter was a very nervous witness who appeared unsophisticated and commercially naïve. The daughter appears to have acted throughout in a dutiful manner to both her mother and stepfather, acting as a translator for her mother where necessary when attending meetings with Mr Marando and generally trying to assist her mother to progress her efforts to finalise her divorce. The daughter also assisted her stepfather with the administrative aspects of the Company’s business and, as she said, “I did … what I was asked to do.” The daughter was keen to support her mother in these proceedings. I have accepted her evidence on some matters, but not others (see [87]), in particular, where the financial records indicate otherwise.

RECORDS

1. [22]

   Determining with exactitude precisely what happened with the Company and the four properties is not possible given the lack of documents. This is not for want of trying on Mr Hayes’ part, who make requests for information to the husband, wife, daughter, Mr Marando, current and former accountants, banks and others (88 requests in total). As Mr Hayes observed, and is described more fully in what follows, the husband “had to be dragged kicking and screaming by ASIC and others to provide me with any information”. Further, Mr Hayes said “the company records that exist … are plainly appalling: worst I've seen in probably 30 years of … practicing in this field of accounting.” “[T]he records are just so inadequate in so many regards. … they’re not even reconcilable”. There were no building contracts “so it’s really hard to determine in fact what the company did and what it didn’t do. There’s just no records of any significance.”

2. [23]

   Notwithstanding Mr Hayes’ efforts to obtain all available documents, including by issuing notices to produce and subpoena in these proceedings, the husband continued to produce snippets of documentation shortly before and during the hearing, which put some ‘meat on the bones’ of what Mr Hayes had been able to divine until then.

3. [24]

   An adverse inference may be drawn in respect of the absence of documentary evidence to support a party’s case, where the party might be expected to be in possession of documents to corroborate their account: Jones v Dunkel (1959) 101 CLR 298 at 320; [1959] HCA 8 per Windeyer J, citing with approval John Henry Wigmore, Wigmore on Evidence (3rd ed, 1940), vol. 2, page 162: “The failure to bring before the tribunal some circumstance, document or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party …”; Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 at [134] (Callinan J); Ronchi v Portland Smelter Services Ltd [2005] VSCA 83 at [44] (Eames JA, with whom Buchanan JA agreed); Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445; [2011] VSC 184 at [131]–[132] (Croft J); Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98 at [112] (Henry J). The husband’s senior counsel accepted that a Jones v Dunkel inference could be drawn in respect of the absence of documents which his client might be expected to have produced. I readily draw such an inference.

4. [25]

   The implications of the lack of documentary evidence on the onus of proof should not be overlooked. As I noted in In the matter of Western Port Holdings Pty Ltd [2021] NSWSC 232; (2021) 150 ACSR 274 at [41]-[42], although the onus of proof is on the liquidator, it will commonly be the case that proof is not a straightforward exercise. The directors of the company may be unwilling to give evidence in support of the liquidator’s claim. The books and records of the company may be sub-standard or incomplete. Transactions may have been entered into at a time of financial distress when proper documentation was overlooked. The company may have been poorly managed such that transactions were ill-considered or unconventional. These difficulties do not shift the onus of proof. But, where there is a paucity of evidence, the Court may draw inferences. As Gleeson J explained in BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351; (2016) 117 ACSR 18 at [125]:

FACTS

1. [26]

   The wife hails from Vietnam and the husband from China. Both immigrated to Australia, where they met and married in 1991. The wife had a daughter from a previous relationship, Ms Tong. The couple started a textile business called “Zhang Hong Trading" and made clothing from rented premises in Fairfield. In 1995, the couple incorporated Zhang Hong Trading Pty Ltd, of which the husband and wife were directors and equal shareholders. The business was successful. (Later, the daughter also ran her own business, Armone Corporation, selling garments that were manufactured overseas, coat hangers and other textile items. The wife worked in her daughter’s business. The wife was also a director of another company, ZH Trading Pty Ltd, in 1999 and, in January 2005, became a director of ZH (Holdings) Pty Ltd, of which she was a director until February 2014.)

2. [27]

   From 2000 to 2002, the couple purchased six properties together, including the Fairfield business premises and properties in Cabramatta, Canley Vale and Fairfield. Mr Marando acted as the solicitor on the conveyances. The properties were mostly for development. Some of the properties were developed into apartments and the apartments either sold or retained as rental properties.

The Company

1. [28]

   The husband wanted to do property development through a company. In September 2001, the Company was incorporated. Presumably, the name of the Company was a combination of the couple’s initials. The husband and wife became directors and equal shareholders. The Company opened a cheque account with St George Bank, ending 0474 (the Cheque Account).

2. [29]

   The daughter was the administration manager for the Company, assisting the husband in the preparation of accounts and claims, general bookkeeping, preparing correspondence and translating correspondence. “I collated the information, … I sent emails, I did the invoices of what he's instructed, like how much to claim, how much to ask the clients to claim. I did errands. I put the information, and I sent that to the accountant on his instructions.” “I did the filing, I did the emails, I did … what I was asked to do.” The daughter also maintained financial records which she sent to the company's accountants, Nelson Liu & Co, which drafted financial statements and tax returns. The daughter said she gave these to the husband, “He did not give them back to me."

3. [30]

   As to the wife’s involvement in the Company, the husband said that the wife had no role although he did discuss major matters with her, for example, if he wanted to buy a property. Against this, the husband said, “me and my wife had been actually working for this company, sometime me and my wife we've been working for 24 hours a day. We had been working very hard. Very hard."

4. [31]

   The wife said she was not involved in any part of the business of the Company, had no knowledge or experience in the work that her husband did, and did not know the details of the Company’s financial affairs. This was at odds with an affidavit filed by the wife in the Family Court where the wife deposed, “I assisted to manage the property development business and attended to the administrative tasks in respect of the property development business”; while her husband was on-site managing the builders and contractors, the wife and daughter “organised the administration side of the business".

5. [32]

   In these proceedings, the wife said that the description in the Family Court affidavits “was not what I meant”. Rather, “I know that my husband was involved in building construction, and whenever he went home, if he needs any help, I would do … I collected all of the documents, papers that he scattered around the house." The wife insisted that she was not involved in the operation and administration of the Company, “I didn't know anything about what he did." The daughter also said that her mother did not take any part in the Company's operations, “She may have opened some letters or she may have [bought] folders, things like that.”

6. [33]

   I accept that the wife’s involvement in the day-to-day operations of the Company was minimal and her primary interest was in her own textiles business and the business later conducted with her daughter. But I do not accept that the wife knew nothing about the Company. Living in the same house as the husband, it is inherently likely that she was generally aware of what the Company was doing and was consulted on property purchases, including because her signature was needed on the documents associated with the purchase and related finance. Mr Marando also said that, when the wife came into his office, matters relating to the business of the Company were discussed.

The Company buys four properties

1. [34]

   In 2003 and 2004, the Company purchased the four properties which are the subject of these proceedings. The husband and wife accept that the properties were legally and beneficially owned by the Company.

2. [35]

   On 7 February 2003, the husband paid a deposit of $830 on 110 Gladstone Street, Cabramatta. On 9 February 2003, contracts were exchanged to purchase the property for $332,000. The Cheque Account then had a balance of some $1,300 and had largely been unused since it was opened.

3. [36]

   On 14 February 2003, Marando Solicitors, sent a facsimile to the husband, “Johnny, Please make cheque of $32,370.00 to Makinson and D’Apice Solicitors.” Presumably, this was a 10% deposit less the amount already paid by the husband. On 14 February 2003, the husband obtained a bank cheque in that amount (or $32,376.50 with charges). The funds were not drawn from the Cheque Account, although $347,563.85 was deposited to the account that day, bringing the balance to $348,846.98. On 21 February 2003, Maranda Solicitors sent a letter to the couple, requesting a cheque for $10,434 for stamp duty.

4. [37]

   On 26 February 2003, contracts were exchanged to buy 268 Cabramatta Road, Cabramatta for $300,000. A deposit of $30,000 is recorded on the contract as having been paid, although a later settlement statement indicates that only $15,000 may have been paid. A cheque for $15,000 was drawn on the Cheque Account on 27 February 2003.

5. [38]

   On 27 February 2003, the couple re-financed a property they owned in Canley Vale mortgage with the Bank of Western Australia. After discharging the existing financier and paying associated fees, $279,235.16 was paid to the couple. These funds were deposited to the Cheque Account on 14 March 2003.

6. [39]

   On 5 March 2003, Mr Marando requested a cheque for stamp duty from the Company for $8,994 for 268 Cabramatta Road. A cheque in that amount was presented on the Cheque Account on 22 April 2003, when the transfer for 268 Cabramatta Road was stamped for duty.

7. [40]

   On 16 April 2003, the vendors’ solicitors for 110 Gladstone Street sent cheque directions to Mr Marando in advance of settlement on 17 April 2003. Mr Marando asked the husband to draw bank cheques for the real estate agent ($10,260.80) and the vendors ($110,000 and $178,477.95). On 17 April 2003, a bank cheque was drawn from the Cheque Account for the real estate agent ($10,267.30 with bank fees) while the cheques for the vendors were drawn from an account of “ZH Trading Pty Ltd & Zha[ng]” ending 9044, being presumably a bank account operated by the couple’s other company.

8. [41]

   On 23 April 2003, the parties agreed to extend the completion date to 28 May 2003, with the deposit to be released to the vendor forthwith. On 24 April 2003, a cheque for $10,434 was drawn on the Cheque Account, presumably for stamp duty. On 29 April 2003, the purchase of 110 Gladstone Road was completed.

9. [42]

   On 11 June 2003, the Company executed a mortgage over 110 Gladstone Road in favour of IMB Ltd, to secure an advance of $265,600. The mortgage was stamped for duty on 12 June 2003, with duty payable of $1,005. Various payments were also made from the Cheque Account on 12 June 2003, including a payment of $1,018.97, which was presumably the expenses associated with completing the loan transaction, including duty. On 13 June 2003, $262,127.90 was deposited to the Cheque Account, presumably the net advance. I note also that $300,000 was transferred out of the Cheque Account the same day for “Cheque Number 39”. It is reasonable to think that the funds obtained from the financier were used to reimburse those who had provided funds to the Company to purchase the property in the first instance, although obviously the absence of accounting records makes it difficult to say for sure.

10. [43]

    By my calculations, the deposit was paid by the husband ($33,206.50), stamp duty, mortgage duty and the agent were paid from the Cheque Account ($21,720.27 in total) and the balance paid by “ZH Trading Pty Ltd & Zha[ng]” ($288,477.95 in total). Finance was then raised from IMB Ltd, with the nett proceeds of the loan paid into the Cheque Account. That is, of the $343,4070.74 outlaid to acquire the property, only 6% came from the Cheque Account, with the balance paid by the husband or ZH Trading Pty Ltd. However, having acquired the property, finance was obtained from IMB – secured over the property – which was likely used to reimburse those who had provided the initial funds to acquire the property as $300,000 was transferred from the Cheque Account on the same day that the loan funds were received into that account. By my calculations, if the $300,000 was used for that purpose, then $21,684.45 was not reimbursed. In the ordinary course, this remaining sum could be expected to be recorded in the accounts of the Company as a shareholder’s loan.

11. [44]

    The Company had a mortgage loan account with IMB ending 0745. Loan repayments to IMB began to be made from the Cheque Account.

12. [45]

    Completion of the purchase was delayed. In June 2003, IMB Ltd approved finance of $240,000 to the Company, secured over the property. On 17 June 2003, the vendors’ solicitors for 268 Cabramatta Road sent cheque directions to Mr Marando in advance of settlement, including $284,806.02 payable to the vendors. Mr Marando forwarded cheque directions to IMB Ltd. IMB provided a bank cheque of $236,835.44 whilst the Company provided the balance of $47,048.58 from the Cheque Account on 18 June 2003, including $1,512.06 to cover Mr Marando’s fees. A mortgage was registered on title, noting that $901 had been paid in duties.

13. [46]

    The purchase was completed on 20 June 2003. The Company had a mortgage loan account with IMB Limited ending 2366. Loan repayments to IMB began to be made from the Cheque Account. By my calculations, the acquisition of this property was funded by $71,042.55 paid from the Cheque Account and the balance by IMB Ltd. There were no payments made by the couple for 268 Cabramatta Road, although it does appear that the Cheque Account included funds which came from the couple, albeit not related to the acquisition of this property.

14. [47]

    Financial statements prepared for the Company for the 30 June 2003 financial year, dated 31 July 2003, record that the Company was then trading as ZH Import and was not profitable. The husband is recorded as having made an unsecured loan to the Company of $624,139.16 (Shareholder’s Loan Account).

15. [48]

    On 15 June 2004, the Company lodged a nil income tax return for the 2002 and 2003 financial years. The company did not lodge any further tax returns for another six years. Nor did the Company lodged an annual GST return from the 2004 financial year onwards, save for 2006 and 2009.

16. [49]

    The Company agreed to purchase 87 Hughes Street Cabramatta for $982,000. On 5 September 2003, the Company opened a cheque account ending 8741 with the National Australia Bank (NAB Cheque Account). The couple may well have paid the deposit (it was not obviously paid from the Cheque Account or the NAB Cheque Account).

17. [50]

    On 24 September 2003, the Company executed a mortgage over 87 Hughes Street Cabramatta in favour of the National Australia Bank, to secure an advance of $786,000. Duty was paid in the amount of $3,085, which was paid by the bank as part of the drawdown. From Mr Hayes’ review of the transfer and mortgage, he has calculated that stamp duty of $39,680 was payable. A similar sum, being $40,454.64 was drawn by bank cheque from the Cheque Account on 27 October 2003. On 28 October 2003, the transfer was stamped for duty. The loan was drawn down on 3 November 2003, being National Australia Bank home loan account ending 5710. On 22 November 2003, the purchase was completed.

18. [51]

    Given the difference between the purchase price and the amount lent by the National Australia Bank, the deposit was likely 20% or $196,400. Of the total acquisition cost of $1,022,854.60, it may be that the couple provided 19.2%, the Company provided 4% and the balance was financed.

19. [52]

    On 11 March 2004, the Company exchanged contracts to buy 112 Gladstone Street, Cabramatta for $550,000. Although the husband said that the couple paid the deposit, on 19 March 2004, the Company paid a deposit of $26,100.

20. [53]

    On 25 March 2004, Mr Marando requested $20,244 for duty payable on the contract. On 8 June 2004, Mr Marando requested bank cheques be drawn for settlement, including four bank cheques each for some $130,000 payable to each of the vendors. On 8 June 2004, the bank cheques were drawn, including a cheque for $120,000 drawn from the Cheque Account. Other cheques were drawn by the husband ($130,395.51), the husband and wife ($10,538.65) and $20,538.65 (likely stamp duty), $80,000 and $120,000 from persons unknown. The purchase was completed on 11 June 2004. No mortgage was registered on title.

21. [54]

    On 15 October 2004, the Company executed a mortgage over 112 Gladstone Road in favour of Adelaide Bank Limited, to secure an advance of $418,000. Mortgage duty of $1,613 was paid, although not obviously from the Cheque Account and perhaps formed part of the loan advance. The loan account was an Adelaide Bank account ending 1835, but the bank statements are not available until 2009. Overall, it appears that, once the loan was finalised, the couple may have contributed some $46,615 to the acquisition of this property.

22. [55]

    In December 2004, the Company refinanced the IMB loan over 268 Cabramatta Road with Adelaide Bank which advanced $365,000 (mortgage duty paid of $1,401). The Company then had an Adelaide Bank loan account ending 8038 in respect of this loan but, again, the bank statements are not available until July 2009.

23. [56]

    The husband said that the deposits on the four properties were paid from the couple’s savings. The wife said the deposit and costs of the purchase were paid from the couple's joint savings, using “my own money", while the balance of the purchase price was borrowed in the name of the Company by a mortgage secured against the couple’s other properties. Whilst it does appear that, for some of the properties at least, some of the monies to acquire the properties came from the couple, none of the mortgages registered on the properties suggest that the finance was also secured over the couple’s other properties.

24. [57]

    The wife also said that the income earned from Armone Corporation was paid towards “mortgage repayments on our various properties", although did not specify whether these “various properties" included properties in the name of the Company. Nor is there any documentary evidence which supported such payments.

25. [58]

    Overall, Mr Hayes estimated that the amounts paid by the couple represented some 3% of payments made by the Company in respect of the properties. Based on Mr Hayes’ analysis of the available documents, the Company paid a total of $1,426,139.68 in respect of the four properties, comprising 428 transactions. Whilst Mr Hayes accepted – by dint of documents produced by the husband shortly before or during the hearing – that the couple had used some funds belonging to them personally to pay the deposit or acquisition costs for the purchase of the four properties, Mr Hayes remained unsure where the initial equity for the property purchases came from, “it could have come from company money, it could have come from other loan funds, it could have come from Mr and Mrs Zhang ‑ I ‑ I don't know.”

26. [59]

    Thus, the couple did contribute some funds to the acquisition of the four properties, although less than asserted and probably largely reimbursed by bank finance raised against the properties. To the extent that the couple was not so reimbursed, one would expect to see – in the ordinary course – their contributions recorded in the Shareholder’s Loan Account. However, no financial statements appear to have been prepared for the Company after the 2003 financial year until seven years later: see [62].

The Company becomes a builder

1. [60]

   In 2010, the Company obtained a building and contracting licence and began doing building work. In February 2010, the Company entered into a building contract with Bronte Properties Pty Ltd to construct ten apartments and car spaces in Waverley for $3.26 million (the Bronte development). St George provided construction finance, secured by a tripartite agreement between the bank, the Company and Bronte Properties executed on 7 April 2010. Also on 7 April 2010, the Company opened a St George business account in respect of the Bronte project ending 4158 (the Bronte Account).

2. [61]

   In 2010, the Company also began work on a project in Guildford, owned by Mr and Mrs Abi-Daher, but stopped work when the client stopped paying. The Company also worked on another project in Guildford owned by Ms Naboulsi but, again, stopped work after invoices stopped being paid. In June 2010, the Company entered into building contracts with the owners of two duplexes at Fenwick Street and Marion Street, Bankstown.

3. [62]

   In November 2010, the ATO issued penalties for the Company's failure to lodge tax returns and, in January 2011, the Company lodged nil tax returns for the financial years 2004 to 2006. In June 2011, some efforts appear to have been made to get the Company's financial records in order. Draft financial statements were prepared for the 2004 to 2009 financial years by Nelson Liu & Co. The financial statements are sparse: the Company made a loss in 2004 and 2005; there is no profit and loss statement for 2006; the Company made a profit in 2007 and 2008 and a loss in 2009. The Company had negative equity every year. As at 30 June 2009, the Shareholder’s Loan Account stood at $835,592.72. From June to November 2011, the Company lodged nil tax returns for 2007, 2008 and 2009 and has not lodged a tax return since.

Problems with the Bronte development

1. [63]

   The Company experienced problems being paid for its work on the Bronte development. The husband said he told the wife about these problems. It was proposed that the Company would be paid by the developer transferring Unit 8 in the development at a price to reflect what was then owing, and expected to be owed, in order to complete the development. The wife agreed that she heard from the husband that he wanted to use Unit 8 to pay money owed to the Company.

2. [64]

   On 5 July 2011, the husband met with the developer. Mr Marando attended, as did the wife and daughter. The husband said that the wife and daughter attended as the decision to purchase Unit 8 was a major decision for the Company; the daughter was there to translate for the wife. The daughter said she sat outside with her mother until the negotiations were complete. The husband said he discussed with the wife whether or not the Company should do a deal to get Unit 8 as this was the only way to be paid “because all these people are crooks" and the wife agreed that the Company should enter into the transaction.

3. [65]

   On 11 July 2011, the Company exchanged contracts to buy Unit 8 in the Bronte development for $1.3 million, although the Company was only required to pay the purchase price less the balance then due by Bronte Developments to the Company on account of unpaid building work, then agreed to be $750,000: special condition 51. The contract was to be completed on the later of 42 days after the contract, 28 days after registration of the strata plan or 90 days after the final occupation certificate: special condition 43.1.

4. [66]

   The husband said that he and his wife funded completion of the Bronte development and obtaining the necessary certificates. “We used our money to pay for everything." Whether this is true is unclear. A trust account maintained by Mr Marando for the couple shows that monies were transferred to the Company from August 2011 to October 2011 totalling $498,720. A trust account maintained by Mr Marando for the Company also shows that $153,031 was transferred to the couple. Mr Hayes has not been able to reconcile these payments with the Shareholder’s Loan Account or the Company’s accounting records generally.

End of marriage

1. [67]

   Also at this time, the couple separated; the wife went to live with the daughter. The wife’s medical notes record that, since June 2011, she was experiencing marital problems, “in process of divorcing”. According to the wife’s later application to the Family Court of Australia, the couple finally separated on 31 July 2011. In August 2011, it would appear that Mr Marando had received instructions from the wife to obtain a divorce and, as a first step, applied for a marriage certificate. In November 2011, the daughter accompanied the wife to Mr Marando’s offices, where the wife signed an application for divorce and paid the filing fee for it to be lodged with the court. For reasons unclear, the application was not filed (and, indeed, there is no evidence that an application was ever filed).

2. [68]

   Notwithstanding the marital breakdown, the husband continued to carry on the business of the Company and the daughter continued to work in the business as administration manager. The daughter says that the husband and the wife were not speaking to each other at this time other than in respect of their separation and divorce, and she no longer spoke to her mother about the ongoing operation of the Company. The wife tried to speak to her husband about a property settlement on numerous occasions but was rebuffed, sometimes in angry terms.

Completion of Bronte development

1. [69]

   As the Bronte development neared completion, Bronte Properties agreed to further reduce the purchase price of Unit 8 to effectively fund completion of the development and procure issue of an occupation certificate. According to an affidavit later affirmed by the husband in proceedings brought by Bronte Properties against the Company (the Bronte proceedings), on 9 March 2012, the husband met with Bronte Properties’ solicitor and director, together with the wife, the daughter and Mr Marando, at which meeting the husband said Bronte Properties owed over $1 million which was needed to pay tradesmen. It was agreed that, in consideration of the Company taking steps within seven days to complete the building works and obtain an occupation certificate, the sum then owing by Bronte Developments to the Company under the building contract was agreed to be $1,032,202. Further, Bronte Properties agreed to pay $100,000 within one month of the issue of the occupation certificate in reduction of that amount.

2. [70]

   The Company lodged a caveat on the title of the Bronte property. In June 2012, an occupation certificate issued. In November 2012, Bronte Properties instructed Tyrrells Property Inspections to carry out a final inspection of the building work and report any incomplete or defective work. Whilst Tyrrells reported that the majority of the building work was of satisfactory quality, a number of issues were reported which, in Tyrrells’ opinion, a court or tribunal would require the contractor to rectify or complete.

Solvency issues

1. [71]

   From 5 December 2012 on, the Cheque Account remained overdrawn. On 17 December 2012, Bronte Properties commenced the Bronte proceedings, seeking withdrawal of the Company’s caveat over the property. The husband moved into Unit 8.

2. [72]

   As already mentioned, the Company had not been paid over $1 million owed by the Bronte developer. On 12 January 2013, cheques began to be dishonoured on the Cheque Account. From January to September 2013, Mr Hayes observed eight dishonoured cheques in respect of the Cheque Account and, from August 2013 to February 2014, ten dishonoured cheques for the Bronte Account. In Mr Hayes’ experience, multiple dishonoured cheques indicate insufficient funds available when the cheque is presented for payment, being an indication of cash flow difficulties.

3. [73]

   From June 2013 to January 2014, Mr Hayes observed 17 ‘round-sum’ payments from the Bronte Account. In his experience, the use of multiple rounded sum payments on a recurring basis is an indicator that the Company was experiencing cash flow difficulties. In his experience, when a company insolvent, it tends to discharge its debts in full by a single payment to each of its creditors at or by the due date. If a company is not solvent or facing cash flow difficulties, it often attempts to satisfy its creditors by making multiple smaller round sum payments over a period that exceeds the agreed terms of trade. A single one-off payment is a more efficient and cost-effective method of paying debts and hence is the preferred method. There was no utility in making multiple rounded payments and generally a company will only do so if it is experiencing cash flow pressure.

4. [74]

   Meanwhile, on 16 January 2013, the daughter sent an email to Mr Marando advising that she would send a list of properties which the wife wished to either refinance or keep, in negotiations with the husband. Notwithstanding that the husband and wife were in the process of getting divorced, both appeared content for Mr Marando to act for both of them in the matter.

5. [75]

   On 11 February 2013, Bronte Properties’ solicitors provided a copy of Tyrrells’ report to Mr Marando and advised that the Company had failed to complete the building contract in accordance with its terms as the work was defective and not completed in a proper and workmanlike manner. Bronte Properties was said to have incurred substantial costs in finalising the building works and rectifying the defective work in order to obtain an occupation certificate; a substantial amount of defective work still required rectification. Bronte Properties claimed to have suffered damage in that it was unable to repay its mortgage with St George Bank and proceeded to terminate the building contract. In addition, Bronte Properties noted that the Company had yet to pay the deposit on Unit 8 and purported to terminate the contract for sale as well. Further cheques were dishonoured on the Cheque Account on 12 February 2013, 12 March 2013 and 12 April 2013.

Building work in Epping

1. [76]

   On 20 March 2013, the Company entered into a building contract for a project in Epping for $500,000 plus GST. The project involved building a detached duplex; the couple intended to live in one house and rent out the other once the work was complete. The contract term was 12 months and the owners expected to move in and rent out duplex in April 2014.

2. [77]

   The project did not get off to a good start. On 8 April 2013, the building certifier issued a notice of proposed order to the Company in respect of the work, given concerns raised with the manner in which the building work was being undertaken. On 23 May 2013, Parramatta City Council issued a stop work order. A further stop work order was issued on 18 June 2013 as the retaining walls were said to have been constructed contrary to the construction certificate and to encroach on the adjoining land. On 11 July 2013, the solicitors for the owners sent a letter of demand to the Company, noting that there had been no attendance on site to comply with the Council's orders and, if the listed breaches was not remedied within ten working days, they considered themselves entitled to end the building contract.

3. [78]

   Meanwhile, the husband wanted to develop the 87 Hughes Street property which, it will be recalled, was owned by the Company. On 6 May 2013, Mr Marando met with the couple to discuss this. Mr Marando’s file note records that the wife “doesn't want to be involved + has advised JOHN already." Of this meeting, Mr Marando said “what we were trying to work out is what Hughes Street would crystallise ultimately, and which would obviously assist in further discussions in relation to the property settlement”.

4. [79]

   On 16 May 2013, Bronte Properties filed a statement of claim against the Company in the Bronte proceedings, seeking a declaration that the contract in respect of Unit 8 had been terminated. In addition, Bronte Properties sought damages for incomplete building work, alleging that the Company had abandoned the building work in late March 2012. The husband was also said to be refusing to vacate Unit 8.

The Bank proceedings

1. [80]

   On 23 May 2013, Westpac appointed receivers and managers to Bronte Properties. The bank commenced possession proceedings against the Company and the husband (the Bank proceedings). On 31 May 2013, Kunc J made orders permitting the receiver to access Unit 8 and, on 3 June 2013, the bank's solicitors wrote to Mr Marando seeking access to the property. On 12 June 2013, the Company began to ‘round-sum’ payments from the Bronte Account, which Mr Hayes said is indicative of insolvency. The Company continued to have cheques dishonoured on the Cheque Account.

2. [81]

   On 9 August 2013, the bank's solicitors sent a letter of demand to the Company noting that, following an inspection of the Bronte property and a review of Tyrrell’s report, the bank had come to the conclusion that the works had not been carried out in a proper and workmanlike manner. It was not then known whether the bank would incur a loss following the sale of the units but the bank's rights were reserved under the tripartite agreement. The Company was requested to notify its professional indemnity insurer. Mr Marando discussed the contents of the letter with the husband and provided him with a copy of Tyrrells’ report. The frequency of dishonoured cheques and ‘round-sum’ payments increased in August 2013, with eight such payments.

Epping proceedings

1. [82]

   In November 2013, the Epping clients issued a notice of breach to the Company, asserting that the Company had failed to diligently proceed with the work and had last carried out work on site on 22 May 2013. The work carried out was said to be defective and incomplete, having regard to a building report and the council’s stop work order. In January 2014, the Epping clients commenced proceedings against the Company in the District Court of New South Wales, seeking damages for breach of statutory warranties and breach of contract (the Epping proceedings).

2. [83]

   In February 2014, the bank's solicitors wrote to Mr Marando, requesting that the Company vacate the Bronte site as rectification building work was to commence in April 2014, with four months required to complete the works. The bank lodged a home owner warranty insurance claim in respect of the Company. Attached to the claim were 18 building reports in support of the claim that items of work were defective or incomplete.

3. [84]

   In March 2014, the Epping clients served a notice of termination on the Company in respect of the building contract. Westpac's solicitors continued to request access to Unit 8.

4. [85]

   Mr Marando said he told the wife about the building defects claims made by Bronte Properties and the Epping clients; the wife was concerned about her liability as a director of the Company. According to Mr Marando, the wife said she did not want to be involved in the Company anymore and wanted her name out of it; the wife was “very concerned … about her personal liability" regarding the Company. The husband, on the other hand, was “quite confident he’d meet the claim”.

5. [86]

   The wife said she “did not hear" about the defects claim made by the Epping clients and could not recall whether she was aware in May 2014 of the building defects claim in respect of the Bronte, “I couldn't remember that, because during that time I was in a mental breakdown." The wife said she did not know that the Company's assets were at risk because of claims being made against the Company for defective building work.

6. [87]

   Whilst I accept that the wife was likely experiencing some mental anguish in the course of her efforts to reach a property settlement with her husband, I do not accept that she was unaware of the building defects claims or did not appreciate the implications of those claims. I also expect that the wife’s interest in the Company and its financial position at the time of these events was greater than she acknowledged, if for no other reason than she wanted to divide up the marital assets with the husband. The wife was a 50% shareholder in the Company and was keen to extract her interest. The wife also wished to protect herself from looming director’s liabilities given the building defects claims which the Company then faced. In this regard, I have not accepted the wife’s evidence that she was unaware of these matters but have preferred the evidence of Mr Marando.

7. [88]

   Likewise, although the daughter said that she did not tell her mother anything about the Company after the marriage ended, I expect that the daughter kept her mother informed of significant matters for the same reasons as I expect the mother was interested to know what was happening with her interest in the Company.

2014 Consent Orders

1. [89]

   The daughter recalled attending a mediation with the husband and the wife at Mr Marando's offices, where the couple discussed what they would do with the Company. The wife wanted the company to be “closed" while the husband wanted to keep the Company because he could use its building and contracting licence.

2. [90]

   Mr Marando said he was shown the relevant balance sheets and financials of the Company. (As the Company did not have any financials prepared at the time, it is unclear what Mr Marando was shown.) He was told that the husband had paid over $1 million on behalf of the Company to suppliers and contractors to assist with the development that he was doing at the time, presumably the Bronte development. As the husband make the same statement in these proceedings numerous times, I do not doubt that the husband told Mr Marando the same thing.

3. [91]

   Mr Marando said his advice at the time was to start the division of assets by separating the Company's assets and worrying about the properties held in their personal names at a later stage. Whilst Mr Marando deposed, “I did not provide express oral or written advice to … John or Hong", in cross-examination he said, “I think the word ‘oral’ might be a typographical mistake. Obviously I provided them with oral advice …”

4. [92]

   Mr Marando obtained appraisals for the four properties from his real estate agent brother. He was satisfied at the time that the values were accurate. As to the amount owing on the properties, the daughter showed Mr Marando the bank statements that identified how much was outstanding on each property. The estimated value of the properties and the amounts owing were recorded in a document which was annexed to proposed 2014 Consent Orders to be made in the Family Court: 110 Gladstone Street was valued at $650,000 with $233,000 then owing to IMB; 112 Gladstone Street was valued at $650,000 with $390,000 then owing to the Bank of Adelaide; 268 Cabramatta Road was valued at $680,000 with $332,770 then owing to the Bank of Adelaide; 87 Hughes Street Cabramatta was valued at $1.8 million with $594,000 then owing to the National Australia Bank. In total, the net equity in the four properties was said to be $2.23 million.

5. [93]

   According to Mr Rees, at that time 110 Gladstone Street Cabramatta had a current market value of $750,000, 112 Gladstone Street Cabramatta had a market value of $735,000, 87 Hughes Street had a market value of $1,575,000 and 268 Cabramatta Road had a market value of $650,000. Overall, the annexure to the 2014 Consent Orders was not dissimilar to Mr Rees' valuations: the properties transferred to the wife were worth slightly more than the value ascribed in the annexure whilst the properties to be transferred to the husband were worth slightly less.

6. [94]

   On 5 May 2014, being a few days after the bank was to start rectification work on the Bronte development, the wife signed an Application for Consent Orders in the Family Court of Australia. Her solicitor was noted as Mr Marando. The husband was said to be self-represented, although it appears that Mr Marando was acting for both. The wife and husband signed the 2014 Consent Orders which proposed the following orders: (emphasis added)

7. [95]

   Mr Marando said he framed the orders this way, “primarily [due to] Ms Ly's concern about any liability that the company, and her mainly, would incur in continuing on with these developments in Z H International. … the reason why we did what we did – why I advised what I did – was obviously a timing perspective to be able to protect Ms Ly from any future liability of Z H. … the main reason was to give Ms Ly some comfort. … we wanted to ensure she was comfortable. Also to enable Mr Zhang to complete his project to get some moneys to be able to refinance those other loans that were the individual loans in due course. I think there was a 12‑month plan … The plan was for Mr Zhang or Z H International to complete the project – off memory, Bronte and a project in Hughes Street, Cabramatta, which we sort of anticipated that would all crystallise in about 12 months …” Mr Marando also said, “I didn't perceive advantages to the company at that time. … it wasn't perceived to be advantageous to the company in any shape or form. It was part of a process, a family law process …”

8. [96]

   In drafting the consent orders, Mr Marando said he intended to achieve a “fresh start" for the couple so that the Company would not owe any money to the husband or the wife after the refinancing and the husband could carry on the Company's business. He anticipated that further orders would be needed to divide up the rest of the properties held in their personal names once the couple could agree. However, I note that no mention was made of the Shareholder’s Loan Account in the 2014 Consent Orders, according to which the loan remained an asset of the husband and wife.

9. [97]

   The wife said that she did not understand that properties owned by the Company were not owned by the couple, “Because I think that I put my own money in to buy the properties, so the properties would be mine." The wife said she understood that, as a director of the company, she was free to deal with the property of the Company as if it was her own. The wife may well have thought that; Mr Marando appeared to hold similar views, “I treated it from a sort of a family law perspective … I pretty much … treated the ZH International properties as a matrimonial asset thrown into a pool.” However, it appears to me that the wife’s primary focus was to get her ‘share’ of the Company’s assets before the assets might be required to meet the building defect claims.

10. [98]

    The husband agreed that he did not want the Company to lose the four properties registered in its name as a result of the building defect claims, “Of course I do [not] want to lose it, as a Chinese, we all have a face." Having resisted the wife’s efforts to reach agreement on a property settlement for almost two years, the husband was now amenable to doing so but only in respect of the properties owned by the Company. Putting to one side considerations of ‘face’, I expect that the husband preferred to give the Company’s assets to the wife (and himself) rather than the Company’s prospective creditors.

11. [99]

    On 7 May 2014, an Application for Consent Orders was filed with the Court. The application contained no information on the financial position of the Company beyond the estimated value of the four properties and the amount owing on the associated loans. The couple did not disclose the significant claims made against the Company for building defects which, if successful, would eclipse the Company’s net assets. Nor did the couple disclose that the Company was then insolvent or facing serious and well-defined claims: Mateo at [70]. The Company was not joined to the Family Court proceedings, nor executed the proposed orders.

12. [100]

    The matter was listed on 9 May 2014, when the 2014 Consent Orders were made by the registrar of the Local Court in Fairfield. The Company then had $16 in the Bronte Account. The Cheque Account remained overdrawn. The loans for 110 Gladstone Street, 112 Gladstone Street and 268 Cabramatta Road were in default (the Hughes Street loan was interest only in arrears.)

13. [101]

    On 23 May 2014, Bronte Properties’ claim against the Company in respect of Unit 8 was dismissed by Rein J for want of prosecution (presumably by reason of the appointment of receivers). The Company’s cross claim, seeking an order for specific performance of the contract of sale for Unit 8, remained on foot. The Bank proceedings continued.

14. [102]

    On 5 June 2014, the Epping clients filed an amended statement of claim in the District Court of New South Wales, containing further particulars of their alleged damages. The Epping clients claimed rent paid on alternate accommodation from the date for practical completion under the building contract until the date when the works were completed, together with loss of rental income on the duplex which was to have been constructed on the site. The Epping clients sought defect rectification costs of some $260,000 together with the increased cost of completing the work given an increase in building costs since the contract and also sought repayment of monies paid to the Company of some $219,000.

Transfer of Company properties

1. [103]

   On 28 May 2014, the existing financier on 110 Gladstone Street, IMB Ltd, was paid out on receipt of a cheque from Suncorp, presumably a bank cheque, for $229,109.27. The husband said that he paid out the mortgage by selling other property which he owned. IMB gave a discharge of mortgage. On 19 September 2014, the discharge of mortgage was registered, together with a transfer of the property from the Company to the wife.

2. [104]

   On 16 June 2014, the Adelaide Bank loan account in respect of 112 Gladstone Road received a “transfer credit" of $386,367.55, which paid out the loan. The husband said that he paid out the mortgage by selling other property which he owned. Adelaide Bank gave a discharge of mortgage. On 19 September 2014, the discharge was registered together with a transfer of the property from the Company to the wife.

3. [105]

   In September 2014, the Adelaide Bank account for 268 Cabramatta Road received a “transfer credit" of $350,093.76, paying out the loan. On 5 September 2014, Adelaide Bank's mortgage was discharged and 268 Cabramatta Road was transferred from the Company to the husband. The husband granted a mortgage over the property to the third defendant to secure a loan of $360,000.

4. [106]

   Finally, on 19 September 2014, the National Australia bank loan account in respect of 87 Hughes Street was paid out, with the receipt of $608,676.77. On 23 September 2014, the existing mortgage was discharged and the Company transferred the property to the husband.

5. [107]

   All the transfers were signed by the husband and wife on behalf of the Company. There was no evidence as to why there was a delay between the pay-out of the loans for the Gladstone Street properties in May 2014 and the transfer of those properties in September 2014. I infer that the couple, or their solicitor, were waiting until all the loans had been paid out before the properties were transferred, otherwise one spouse may receive ‘their’ properties and fail to pay out the loans on the loans on the properties to be transferred to the other.

6. [108]

   Mr Rees opined that, having reviewed sales transactions between May and September 2014 of comparable land in Cabramatta, the market remained relatively stable with no material change in the value of the properties. Based on his investigations and review of the Company's books and records, Mr Hayes believed that the Company did not have any source of funds available to it at the time the four properties were transferred other than could be realised from the realisation of the properties.

New companies

1. [109]

   Amidst the solvency and marital problems, the husband moved his business interests to new corporate entities. On 8 July 2013, Crown Home (NSW) Pty Ltd was incorporated. The husband’s new partner, Xu Ying, was a director. In November 2013, Benfold Investments Pty Ltd was incorporated; the husband was appointed a director. Benfold Investments owned a development property at Bonnyrigg, on which it was proposed to build 135 apartments. Mr Marando said that Crown Home took over from the Company on the Bonnyrigg project.

2. [110]

   A month after the 2014 Consent Orders were made, on 13 June 2014, 398 Investment Pty Ltd was incorporated. The husband was appointed director and was the sole shareholder. In evidence is an unsigned joint venture agreement between Benfold Investments and 398 Investment, dated 2016, by which it was proposed that Benfold would develop the Bonnyrigg land with the assistance of 398 Investment. 398 Investments was entitled to all the profits after Benfold had been repaid its $15 million contribution: clause 1.17.

3. [111]

   The husband reluctantly agreed (“Do I really have to say that?”) that the Company had an interest in the property development in Bonnyrigg, which was worth about $40 million. The Company had obtained insurance cover for the project, from which the husband expected to make about $20 million in profit. When asked how the Bonnyrigg project had progressed, the husband initially said “we just started to clean the site" but then immediately agreed that, in fact, 141 apartments had already been constructed. The husband denied that he pursued the Bonnyrigg project through a new company, 398 Investments, so that the profits would not be at risk in the liquidation; “That was really a crook's saying.” The plaintiffs submitted that, while the couple were struggling to reach a property settlement, the husband was setting up an alternative structure through which the Bonnyrigg project would be developed, despite originally having considered it to be a project of the Company. That does appear to be the case.

4. [112]

   In December 2014, the husband granted a further mortgage over 87 Hughes Street and 268 Cabramatta Road to the third defendant to secure a loan of $3.5 million, to fund the development of 87 Hughes Street by constructing 20 apartments. The husband continued to use the Company’s builder’s licence, sending a letter to the building certifiers in respect of the Bonnyrigg development on 19 August 2016 in support of an application for a construction certificate.

5. [113]

   The Company also rendered invoices to LJ Hooker Cabramatta for repair works at various properties. The husband relied on these invoices – produced at hearing – as indicating that the Company continued to trade after divesting itself of the four properties. Mr Hayes did not agree, “It was doing some work, yes. I wouldn’t say it was trading …” Further, “one [swallow] doesn’t make a summer … three of these payments are actually cash. And if you look at the materials, it's cash there as well, so ‑ look, it's ‑ it's ‑ a lot of it's just cash. Look, I don't know where this money comes from. … there aren't sufficient records for any … satisfactory conclusion about solvency to be made. They're just not there.” It appears that the husband continued to use the Company’s builder’s licence, presumably as it was convenient to do so, but largely conducted building activities through new corporate entities.

Resolution of building defect proceedings

1. [114]

   In March 2015, the Epping proceedings were heard by Judge Sorby and judgment given in May 2015: Zhang v ZH International Pty Ltd (District Court (NSW), Sorby DCJ, 28 May 2015, unrep). In short, the Company successfully defended the claim. The Epping owners appealed. (The appeal was to be heard on 15 September 2016, but the proceedings were stayed when the Company went into liquidation).

2. [115]

   In May 2015, the Bronte proceedings and Bank proceedings were heard together by Adamson J and judgment given on 22 May 2015: Westpac Banking Corporation v ZH International Pty Ltd [2015] NSWSC 607. Adamson J concluded that the bank was entitled to orders for possession; the Company and husband failed to establish an entitlement to specific performance of the contract to buy Unit 8. Ultimately, the police removed the husband from Unit 8. The husband said that he decided to appeal against the judgment in favour of Westpac; “I told my lawyer and then my lawyer turned around and [told] me they forgot to lodge the appeal for me … [I]t was about one day overdue." When it was suggested that the husband was making up this evidence, he strongly denied it, swearing that if he had made it up “I would have been hit by [a] car when I walk out of the door. Once the light was off, I would have died. I just die straightaway."

3. [116]

   In July 2015, the Owners Corporation of the Bronte property entered into a building contract for the completion of rectification and completion works for a contract sum of $2,842,602.52 excluding GST.

Further Family Court orders

1. [117]

   Notwithstanding the apparently final form of the 2014 Consent Orders, on 4 February 2015, the wife signed another application for consent orders, again represented by Mr Marando. The daughter said the further consent orders were sent to the husband to sign, but he did not reply. The wife retained Harris Friedman solicitors who, on 10 August 2015, wrote to Mr Marando as the husband's solicitor, noting that the consent orders “effected a part property settlement. Our client would now like to finalise the outstanding property matters …" The wife’s solicitors set out the current pool of marital assets, being some $8.6 million, and requested financial disclosure. No response was received.

2. [118]

   On 14 September 2015, the wife's solicitors wrote to the husband directly and received an email from Mr Marando confirming that he was instructed to act on behalf of the husband and would respond to their correspondence within 14 days. No response was received from either Mr Marando or the husband and, on 28 September 2015, the wife's solicitors wrote again. There was no reply. On 28 September 2015, the wife resigned as a director of the Company. On 1 December 2015, the wife's solicitor wrote to the husband again, proposing a property division in respect of the seven properties in the name of the wife and the husband.

3. [119]

   Meanwhile, the husband had been developing the land at 87 Hughes Street. In June 2015, contracts began to be exchanged for units constructed at the site. On 16 June 2016, a strata plan was registered for 87 Hughes Street, comprising 20 lots. In July 2016, sale of the apartments in the Hughes Street development began to be completed. (The husband still owns Lots 1, 10, 14 and 20, subject to a mortgage to the third defendant.)

Company wound up

1. [120]

   On 30 May 2016, Westpac's costs of the Bank proceedings were assessed, with judgment entered in the District Court of New South Wales in the amount of $374,558.65. On 24 June 2016, the Official Receiver issued a bankruptcy notice to the husband in respect of the judgment debt, presumably on application by Westpac.

2. [121]

   The couple now moved speedily to distance themselves from the Company. On 30 June 2016, the wife and husband signed letters resigning as directors of the Company (albeit the wife had already resigned). Mr Marando lodged a Form 484 Change to Company Details form with ASIC, noting the resignations together with the appointment of Diego Pica as director. Of this person, the husband said, “It's just a person I know".

3. [122]

   On 12 August 2016, Westpac filed an application to wind up the Company. The parties agreed that this was the “relation back day": sections 9 and 91, Corporations Act. On 13 September 2016, the Company was wound up by the Court and Mr Hayes was appointed as liquidator. Undeterred, on 28 October 2016, Mr Marando wrote to NSW Fair Trading requesting a reinstatement of the Company's builder licence as it was said to be causing significant hardship to the husband.

2016 Consent Orders

1. [123]

   The couple now also moved to finalise their property settlement. On 13 October 2016, the wife filed an initiating application with the Family Court of Australia, seeking orders for the adjustment of property. On 20 December 2016, the wife's solicitors wrote to the Registrar of the Family Court of Australia, enclosing further proposed consent orders signed by the wife and husband on 2 December 2016. The wife's solicitors also advised the Court that the liquidator had been appointed to the Company, "The liquidator is investigating the recovery of monies owed by the company, and its directors. The husband is in the process of negotiating with the liquidator to resolve those claims. Pursuant to the proposed consent orders, the husband will be solely liable for and indemnify the wife for any payment/s required to be made to the liquidator to resolve his claims. The wife is not currently aware of such amount as may be required to be paid by the husband, but she acknowledges that it represents a financial liability to him, and a financial benefit to her in circumstances where it is conceded that the husband will be required to pay money to the liquidator to resolve his claim."

2. [124]

   On 22 December 2016, consent orders were made by a registrar (2016 Consent Orders), pursuant to which the wife agreed to transfer her shares in the Company and any interest in Shareholder’s Loan Account to the husband. Further, the Orders provided:

3. [125]

   Again, the Company was not joined to the Family Court proceedings, nor signed the 2016 Consent Orders, nor was directed by the orders to do anything. Unlike the position with the 2014 Consent Orders, however, the wife’s solicitors informed the Court of the claims expected to be made by the liquidator in respect of the Company.

Getting the books and records

1. [126]

   On his appointment, Mr Hayes immediately wrote to Mr Marando, the husband and the wife requesting the books and records of the Company. Having received no reply, on 20 October 2016, Mr Hayes wrote again. On 23 November 2016, Mr Hayes wrote to the company's accountant, Nelson Liu & Co, seeking the production of the Company’s books and records. This appears to have prompted action. On 15 December 2016, Nelson Liu & Co lodged a notification with ASIC that the wife had resigned as a director of the Company on 13 November 2015 (this being, now, her third resignation). On 18 December 2016, Nelson Liu & Co became the Company's authorised agents on the ATO portal.

2. [127]

   On 16 January 2017, Mr Hayes received draft 2014 financial statements from Nelson Liu & Co. According to these financial statements, the Company had made a loss that year and had negative assets of some -$503,000. The balance of the Shareholder’s Loan Account stood at $1,238,268.58. This was the first set of accounts prepared since the 2009 financial year, when the balance of the Shareholder’s Loan Account was $835,592.72: see [62]. The accounts now provided by Nelson Liu & Co were most likely prepared after the Company went into liquidation and in circumstances where the couple were anticipating that the liquidator may make a claim in respect of the 2014 Consent Orders.

3. [128]

   On 20 January 2017, Mr Hayes followed up his request for documents with Nelson Liu & Co and, again, on 3 February 2017. On 24 February 2017, Mr Hayes wrote to the daughter, requesting the books and records of the Company. On 5 June 2017, Mr Hayes wrote to ASIC requesting its assistance to compel the husband to provide the books and records of the Company. ASIC obliged and followed up its request with Mr Marando on 4 August 2017: unless the husband completed a Report as to Affairs, ASIC would commence legal action. On 9 August 2017, the husband completed a Report as to Affairs, albeit largely bereft of information. On 29 August 2017, Mr Hayes met with Mr Marando and the husband and requested the Company's books and records. On 11 September 2017, Mr Hayes requested the wife to also complete a Report as to Affairs and to deliver up the books and records of the company. Mr Hayes also followed up his earlier request to the daughter for the books and records.

4. [129]

   On 27 September 2017, Mr Marando provided Mr Hayes with draft financials for the Company for 2010, 2011, 2012 and 2013. According to these documents:

5. [130]

   On 16 October 2017, Mr Hayes wrote to Mr Marando, noting that neither the husband nor Mr Marando had supplied the Company's books and records. Mr Hayes requested supporting documentation substantiating the draft financial statements for the 2010 to 2014 years.

6. [131]

   On 22 March 2018, Nelson Liu & Co produced draft financial statements for 2015 and 2016. Unlike previous financial years, the financial statements represented that, in both financial years, the company traded profitably and had positive net assets of some $900,000. No shareholder’s loan was recorded.

7. [132]

   From Mr Hayes’ analysis of the Company's draft financial statements between 2014 and 2015, it appears that the disappearance of the Shareholder’s Loan Account and the appearance of an asset, “Trade and other Receivables", in the sum of $991,961.42 is explained by the equity in the four properties being transferred to the husband and wife in accordance with the 2014 Consent Orders, based on the figures in the annexure to those orders. On 18 April 2018, Mr Hayes asked Mr Marando to provide a copy of the Family Court documents supporting the transfer of the four properties, together with the books and records of the Company held by the husband, the wife, the daughter, Nelson Liu and any other person or entity in the control or influence of the husband. Mr Hayes also wrote to Nelson Liu & Co, again requesting the Company's records on which he presumed the financial statements recently prepared had been based. Mr Hayes also advised, “If you fail to provide all documents to which I am entitled I shall report your negligence to all regulatory bodies.”

8. [133]

   On 20 April 2018, Mr Marando advised Mr Hayes, “I am instructed by Mr Zhang that Mr Liu has returned all the books and records to Mr Zhang and that Mr Liu does not hold any documents on behalf of the company.” Mr Hayes begged to differ and, on 22 April 2018, Mr Liu sent Mr Hayes the draft 2014 financial statements, invoices for building work, bank statements and the annexure to the 2014 consent orders and, on 24 April 2018, further documents of a similar type. The list of documents received indicates that the documents were few in number and, in respect of the bank statements, incomplete. If the draft financial statements were prepared on the basis of these documents, it must have been difficult to compile financial statements at all.

9. [134]

   On 16 October 2018, Mr Hayes renewed his request for books and records from the wife and daughter. On 13 November 2018, Mr Hayes sought ASIC’s assistance again to compel compliance by the wife and daughter with his request for books and records. ASIC obliged. On 23 November 2018, the daughter provided ASIC with the wife's response, advising that she did not hold any books or records of the company but the books and records may be held by the husband. An ASIC officer also spoke to the daughter and reported to the liquidator that the daughter “advised that she does not have any books or records in her possession. She maintains that everything was handed back to her father and that he is refusing to hand them over to you. She has also advised that she assisted with administration duties post her cessation, primarily data entry…" On 19 December 2018, the wife completed a Report as to Affairs, which was, again, uninformative.

10. [135]

    On 24 June 2020, the liquidator's solicitors served a notice pursuant to section 530B of the Corporations Act on Mr Marando, requiring delivery up of the Company's books and records. Mr Marando did not respond. On 14 August 2020, Mr Hayes wrote to Nelson Liu & Co, requesting a copy of the general ledgers maintained in order to prepare the draft financial statements of the company from 2010 to 2016. On 3 September 2020, Mr Liu advised that, since 2010, he had moved to a new office and changed all computer systems, including his server. “Due to those reasons, the enclosed is all I have." The attached ledger listing comprised three pages of journal entries in the 2016 financial year.

11. [136]

    Mr Hayes said that the hard copy records received in relation to the Company fill less than half an archive box and the electronic records are not voluminous. Mr Hayes has not seen any evidence that the Company maintained management accounts, cash flows or construction/project accounting. Nor has the Company prepared income tax returns from 2010 to 2017 nor annual GST returns from 2004 (save for 2006 and 2009). “The records received to date are grossly inadequate in quantity and quality for a company the size, type and the period throughout the Company operated." All of the Company's financial statements were in draft and unsigned. No general ledgers, management accounts or supporting documents have been produced to enable Mr Hayes to substantiate the draft financial statements from 2003 to 2015.

12. [137]

    Further, in each of the financial years from 2011 to 2014, the financial statements recorded a difference between the closing retained profits or losses from the prior year and the opening retained profits or losses for the current year. The differences were not explained and were as high as $614,632. The fact that there is a difference did not accord with Generally Accepted Accounting Principles and rendered the financial accounts incapable of correctly recording or explaining the Company's transactions, financial position and performance. In Mr Hayes’ experience, the recording of opening and closing balances of retained earnings over four years in this manner was uncommon and wrong; all major accounting software automatically carries forward closing balances to the next year. The unexplained differences increased the unreliability of the draft financial statements for 2011 to 2014 and suggested that the draft financial statements were “a confection".

These proceedings

1. [138]

   On 9 August 2019, these proceedings commenced. In six affidavits filed over the course of the proceedings, Mr Hayes charted the results of his efforts to obtain the books and records of the Company and unravel the transactions in respect of which relief is sought. Mr Hayes considered that the Company's directors had failed to properly maintain financial records in accordance with their obligations under the Corporations Act since at least September 2009, been seven years prior to his appointment as liquidator.

2. [139]

   Mr Hayes also gave evidence as to the Company’s creditors. Mr Hayes has received a number of proofs of debt, on which he is yet to adjudicate. On 4 October 2016, the ATO lodged a proof of debt, being $5,670 for income tax and $3,084 for RBA deficit debts. Mr Hayes expects that the Company's liability for unpaid tax is greater than this based on actual deposits into the Company’s bank accounts and the Company's failure to lodge tax returns and annual GST returns. Mr Hayes has requested the ATO to raise an estimated assessment based on the lodged tax returns and to provide a revised proof of debt but, by the time of the hearing, the ATO had yet to attend to this task.

3. [140]

   The wife’s financial statement of 13 October 2016 noted that the Company owed outstanding land tax for 2015 of $22,488.

4. [141]

   In April 2017, QBE Insurance accepted liability, on behalf of the Home Building Compensation Fund, for two claims by the Epping owners against the Company for non-completion and defects in the amount of $339,750 each, with the owners’ uninsured loss for each claim noted to be $88,955. On 9 January 2018, the Home Building Compensation Fund accepted a claim by the owners of the property in Guildford against the company, agreeing to contribute $204,821.88. On 23 October 2018, Mr Hayes received a proof of debt from NSW Self Insurance in the amount of $897,787.61 by way of subrogation in respect of claims by the Epping owners and Guildford owners against the Company for incomplete and defective works.

5. [142]

   On 20 June 2019, Mr Hayes received a proof of debt from the Epping owners in the amount of $840,218. The owners claimed the uninsured loss in respect of defective and non-completed work ($177,910), loss of rent on the investment property ($250,380), accommodation costs ($127,881.40), legal costs ($222,422.34), other costs ($15,631) and interest ($46,064) plus GST. Accompanying the proof of debt was the owners’ correspondence with NSW Self Insurance Corporation in respect of their claim. In support of the claim for loss of rental income, the owners submitted the managing agent's statements in respect of the present tenant of the property and the residential tenancy agreement. In respect of the owners’ claim for alternate accommodation, the owners provided a tenant ledger in respect of the rent paid on that accommodation. The owners provided invoices in respect of the claim for legal fees of the District Court and Court of Appeal proceedings, including expert fees. As to other costs, invoices were provided in respect of an engineering report, surveying reports, fence hire, a development application fee, geotechnical and dilapidation reports. As to whether it was necessary to obtain legal advice as to the veracity of the proof of debt lodged by the Epping owners, Mr Hayes said:

6. [143]

   On 11 May 2017, Vero Insurance agreed to pay the Owners Corporation’s claim in respect of the Bronte development in the sum of $2,999,500.

7. [144]

   On 6 April 2021, the Owners Corporation of the Hughes Street development submitted a proof of debt claiming $2,372,104, being the subject of legal proceedings commenced by the Owners Corporation in this Court against the husband in respect of defective work.

8. [145]

   Whilst the plaintiffs did not suggest that the proofs of debt were, of themselves, proof of the debts, other material was said to be in evidence that substantiated the claims: Bovis Lend Lease v Wily [2003] NSWSC 467 at [304]. It is certainly the case that the proofs of debt annexed documents, which I have endeavoured to summarise including at [141]-[143], which support the existence of these debts. Of course, the focus for the purposes of this application is on the creditors of the Company at the time of the transactions rather than today, which I have also described.

RELIEF SOUGHT

1. [146]

   Mr Hayes claims that the 2014 Consent Orders, the transfer of the four properties and the apparent use of net equity to ‘repay’ the Shareholder’s Loan Account and advance funds to the directors now recorded in “Trade and other Receivables” were each (and together) a transaction within the meaning of section 9 and Part 5.7B of the Corporations Act, an unfair preference within the meaning of section 588FA, an uncommercial transaction within the meaning of section 588FB, an insolvent transaction within the meaning of section 588FC, an unreasonable director-related transaction within the meaning of section 588FDA, a voidable transaction within the meaning of section 588FE and a transaction with a related entity of the Company within the meaning of section 588FE(4) and section 588FH.

2. [147]

   Further, Mr Hayes claims that the husband and wife breached their director’s duties and fiduciary duties. The plaintiffs seek damages or compensation, both equitable and under section 1317H of the Corporations Act and, further, a declaration that the husband and wife hold the four properties on constructive trust for the Company. In the alternative, the husband and wife are said to be liable to pay the Company the balance of their Shareholder’s Loan Account in the sum of $991,961.42 as a debt due and payable. The relief sought by Mr Hayes was “complimentary” or “cumulative”; he accepted that, to the extent that the orders sought captured relief already granted, the plaintiffs were not entitled to double recovery: Kijurina v Taouk (2015) 105 ACSR 686 at [98]; [2015] FCA 424, referring to Baxter v Obacelo Pty Ltd (2001) 205 CLR 635; 184 ALR 616; [2001] HCA 66 at [39]; Grimaldi v Chameleon Mining NL (No 2) (2012) 87 ACSR 260; [2012] FCAFC 6 at [641].

SOLVENCY

1. [148]

   It is convenient to first consider whether the Company was solvent at the time of these transactions as insolvency is jurisdictional for some, but not all, of the plaintiffs’ claims and also informs the considerations relevant to the duties of the directors of the Company at the relevant time. The burden of proof in establishing insolvency falls squarely on the liquidator: M & R Jones Shopfitting Co Pty Ltd (in liq) v National Bank of Australasia Ltd (1983) 68 FLR 282.

Presumed insolvency

1. [149]

   Mr Hayes contended that the Company could be presumed to be insolvent for failing to keep financial records under section 286 of the Corporations Act: section 588E(4). The liquidator relies upon the presumption of insolvency arising under section 588E(4), which provides:

2. [150]

   Section 286 sets out a company's obligation to keep financial records:

3. [151]

   "Financial records" includes (section 9):

4. [152]

   That is, the obligation to keep financial records under section 286 is twofold: first, to keep records which record the company's transactions and financial performance sufficient to enable financial statements to be prepared; and, secondly, to retain those records for seven years. The records which must be retained are not simply the financial statements that were prepared from the financial records, but the underlying financial records from which the financial statements were prepared. The purpose of these provisions was explained by Siopis J in Trinick v Forgione (2015) 239 FCR 285; [2015] FCA 642 at [209]:

5. [153]

   As Black J observed in In the matter of Swan Services Pty Limited (in liq) [2016] NSWSC 1724 at [127]:

6. [154]

   The husband submitted that the statutory presumption was rebutted on the facts: section 588E(9). The wife submitted that the liquidator had failed to prove that the Company did not keep the required records as there were no public examinations which would have been an obvious means by which to obtain such information. Further, it was submitted that the liquidator had not inspected the Company’s emails (which Mr Hayes said were not produced). It was said that the Court was left without an explanation for this lack of a usual forensic investigation. Accordingly, in the absence of such investigations having been done, there was said to be no reliable factual basis upon which a finding pursuant to section 588E of the Act could be made.

7. [155]

   It is not clear why the liquidator is obliged to conduct examinations before seeking a finding that a company has not complied with its record keeping obligations. Apart from a handful of documents produced shortly before or during the hearing, neither the husband or wife produced any invoices, receipts, documents of "prime entry" such as the cash book and journal, ledgers, working papers or supporting source documents needed to "explain" the methods used to prepare the draft financial statements and any adjustments made in them: Van Reesema v Flavel (1992) 7 ACSR 225 at 229. The Company did not produce or appear to maintain any general ledgers (apart from three pages for 2016) or management accounts from 2003 to 2015. No income tax returns were produced or lodged by the Company after 2010. No GST returns were produced or lodged by the Company from 2004 (except for 2006 and 2009), although a failure to lodge such returns does not necessarily mean that financial records were not kept: Fisher v Divine Homes Pty Ltd [2011] NSWSC 8; (2011) 85 ACSR 512 at [23], [26]; Swan Services Pty Ltd at [127]. However, a large number of records that would ordinarily be kept by a company, or which the liquidator would ordinarily expect to have been produced to him, were not kept here.

8. [156]

   In addition, the records prepared by the Company after liquidation were "deficient as to content" as they did not correctly record and explain the Company's transactions and financial position and performance or enable true and fair financial statements to be prepared and audited: In the matter of Swan Services Pty Ltd at [127]. All financial statements were drafts. For 2011, two draft versions of financial statements were produced which were materially inconsistent (the profit differed by $485,272, total assets by $1.33 million and total liabilities by $1.746 million), for which no explanation was provided. There were discrepancies and irregularities in the financial statements for other years which, overall, made them inherently unreliable: trading losses were not carried forward to the next year as between 2013 and 2014, nor were assets consistently carried forward. There were no financial statements for 2006.

9. [157]

   The four properties did not even appear in the accounts until 2009, despite having been purchased in 2003 and 2004. The closing and opening profit/retained earnings balances as between years in 2011 to 2014 did not reconcile, the differences ranged from $102,893 up to ($614,632) and were unexplained. The failure of the closing and opening profit/retained earnings balances to reconcile in the years 2011 to 2014 meant that the financials did not accord with Australian Accounting Standards and increased the unreliability of the financial statements for 2011 to 2014.

10. [158]

    Nor did the draft 2011 and 2012 financial statements record any debt owed by Bronte Properties. Nor did the 2012 financial statements include Unit 8 as an asset. None of the draft financial statements included any contingent liability or provision in respect of the litigation against the Company by Bronte Properties, Westpac or the Epping owners, where the litigation was well progressed by May 2014 and involved potentially large liabilities. Nor did the draft 2016 statements include any liability for the costs order made against the Company in favour of Westpac on 30 May 2016 ($374,558), the debt on which Westpac relied to wind the Company up in September 2016.

11. [159]

    I am satisfied on the basis of Mr Hayes’ evidence (including that at [22]), together with minimal accounting records prepared before the Company went into liquidation (see [47]-[48] and [62]), the history of requests for production of the books and records since the Company went into liquidation (see [126]-[136]) and the very poor quality of the financial statements produced since (all draft and unsigned) that the Company did not comply with its obligations under section 286 at the relevant time and thus insolvency is presumed.

Insolvency

1. [160]

   In any event, Mr Hayes contended that at the time of the 2014 Consent Orders and transfers, the Company was insolvent within the meaning of section 95A or, alternatively, became insolvent as a consequence of the transaction. As to solvency, the principles were not in dispute and were recently summarised in In the matter of MK Floors (NSW) Pty Ltd (in liq) [2020] NSWSC 1718 per Gleeson JA at [13]-[18]. By reason of the problems being experienced with the building projects, it was said to be apparent by May 2014 that the Company was in real financial difficulty and if not insolvent, was of doubtful solvency. Further, according to the husband and the draft financial statements, the Company's only assets were the four properties.

2. [161]

   Given the absence of proper books and records, Mr Hayes was unable to fully assess the usual indicators of insolvency but pointed to non-compliance with the Company’s revenue reporting obligations, rounded sum payments, dishonoured cheques and overdrawn balances, solicitors’ letters and notices of claims, the absence of any other source of funds and the entry of judgments against the Company. In response to the criticism that Mr Hayes had not done a cash flow analysis:

3. [162]

   Mr Hayes expected that the Company’s accountant would have had concerns about the Company’s position, “… the fact the company made losses for a number of years, the fact that the opening and closing balances to get from one year to the next were, on occasions, wrong, or didn't reconcile. The fact that there was no bank reconciliation, and … you couldn't assess that [the accounts] … presented a, you know, a fair view of the company's financial position or performance.”

4. [163]

   The husband submitted that Mr Hayes' evidence did not prove actual insolvency. The husband submitted that a review of the Bronte Account commencing in February 2011 recorded receipt of regular large payments which are then used to pay expenses. The statements record receipt of funds which kept the Company afloat for an extended period. No proof of debt has been lodged by a third-party supplier or contractor, or any other person providing goods of services to the Company. The Fair Entitlements Guarantee (FEG) scheme has not been invoked. There is nothing to indicate that the Company had a poor relationship with its financiers; rather, the mortgages were discharged at a time of the defendants' choosing. There was no evidence that post-dated cheques were used. No judgments were entered against the Company between 2011 and the impugned transactions. The Company continued to undertake building work. There was said to be nothing to indicate that, in the months preceding May 2014, the Company was incurring debts which it was not able to pay: In the matter of Matlic Pty Ltd (in liq) [2014] NSWSC 1342; (2014) 102 ACSR 602 at [59]. The husband was said to be willing and able to fund the Company. Any assessment of the Company's position must assume the husband's desire to keep the Company trading. The wife submitted that Mr Hayes had not proven that any specific debt had crystallised and was payable, and that the Company was unable to pay it.

5. [164]

   As described at [71]-[99], the Company exhibited signs of insolvency from December 2012 on, when the Cheque Account became overdrawn and remained overdrawn. A number of cheques were dishonoured over this period, when ‘round sum’ payments were also made (as the husband’s learned senior counsel acknowledged, “there’s lots of rounded cheques for a long period of time”), being indicia of insolvency. The Company was without funds in the Cheque Account or Bronte Account and the loans in respect of the properties were in default (apart from the Hughes Street loan, which was interest only in arrears). The only source of funds for the Company was, for practical purposes, the net equity in the four properties. Whilst the husband asserted that he was willing to fund the Company, there was no evidence of his wherewithal to do so.

6. [165]

   The Company was then owed more than $1 million for the Bronte development but was unlikely to be paid in a timely manner or at all. Not only was the Company being sued by the Bronte developer for building defects, but the developer had also purported to terminate the contract for sale in respect of Unit 8, being the Company’s way of being paid ‘in kind’. The developer was in receivership. The bank had also commenced proceedings against the Company and had put the Company ‘on notice’ of a building defects claim. The Company was also being sued by the Epping owners. It is true that there are no records, beyond what I have described, of creditors of the Company. That said, there are very few records at all.

7. [166]

   Having regard to the Company’s financial position at the time, I consider that the Company was insolvent in May 2014 to September 2014, not only having regard to its immediate lack of funds but looking forward to assess the Company’s “reasonably immediate future”: Lewis v Doran [2005] NSWCA 243; (2005) 54 ACSR 410; Coates Hire Operations Pty Ltd v D-Link Homes Pty Ltd [2011] NSWSC 1279 at [68] per White J. The Company owed existing obligations to Bronte Properties and the Epping owners under the building contracts, including the statutory warranties. Contingent and prospective liabilities are taken into account in assessing solvency: Edwards v Attorney-General (NSW) (2004) 60 NSWLR 667; [2004] NSWCA 272 at [59]-[60]. The Company could no longer expect to be paid for its building work on the Bronte and Epping projects in a timely manner, or at all, and was exposed to well-defined claims to pay substantial sums for building defects. Obviously, whether the Company would successfully defend the building defects claims remained to be seen but – as it turns out – the directors were not prepared to wait and see.

VOIDABLE TRANSACTIONS

1. [167]

   Section 588FF(1) of the Act provides that where, on the application of company’s liquidator, a court is satisfied that “a transaction of the company” is voidable because of section 588FE, the court may make orders including an order directing a person to pay money or transfer property to the company that fairly represents the money paid or property transferred by the company.

“transaction of the company”

1. [168]

   For the purposes of Part 5.7B, “transaction” is broadly defined under section 9 as follows: (emphasis added)

2. [169]

   The wife submitted that the 2014 Consent Orders did not fall within the definition of a "transaction" as the Company was not a party to the orders, the orders were not enforceable against the Company, and the order did not constitute a disposition by the Company of anything. I agree; the 2014 Consent Orders were not a “transaction” as the Company was not a party to the orders. The question is whether the transfer of the four properties and repayment of the Shareholder’s Loan Account fit this description.

3. [170]

   As was explained in In the matter of Emanuel (No 14) Pty Ltd (in liq) (1997) 24 ACSR 292, the “transaction” referred to in section 588FA(1) is the totality of dealings through which a company effects a change in its rights, liabilities or property, irrespective of whether one or more of the dealings in the sequence involves a third party and not the company. “The transaction … is the totality of the dealings initiated by the debtor [company] so as to achieve the intended purpose of extinguishing the debt”: at 300. A “transaction” can be made up a series of inter-related dealings and may involve third parties: Hosking v Extend N Build Pty Ltd [2018] NSWCA 149; (2018) 128 ACSR 555 at [92]. As Gordon J observed in Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83; [2007] FCAFC 185 at [120]:

4. [171]

   In Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557, Giles JA considered that the fact that the company is a party to a transaction does not necessarily make it a transaction “of” the company; “Being a party to a transaction requires a nature and extent of involvement, for which there is no simple test”: at [101]-[102]. Ipp JA agreed, noting, “A composite transaction (that is, a series of transactions, or events, or acts, or a combination of such matters) can comprise a transaction for the purposes of Pt 5.7B …. Whether a company is so bound up in the transaction that it is a transaction ‘of’ the company is a question of judgment dependent on fact and degree”: at [211]-[212]; see likewise Basten JA at [236]; followed by D Pty Ltd (in liq) v Calas (Trustee) [2016] FCA 1409 per Moshinsky J at [82].

5. [172]

   The husband and wife submitted that the transfers of the four properties were made pursuant to the 2014 Consent Orders and, as such, were not a “transaction” under the Corporations Act, relying on Mateo, where a transfer of property under consent orders made under section 79 of the Family Law Act was considered not to be a “transfer of property by a person… to another person” within the meaning of section 121(1) of the Bankruptcy Act 1966 (Cth): per Wilcox J at [64]; Branson J at [100] and [104], [106]. As Merkel J reasoned in Mateo at [134]:

6. [173]

   The plaintiffs submitted that Mateo was distinguishable as the terms of sections 120 and 121 of the Bankruptcy Act are materially different from section 588FF of the Corporations Act, which does not refer to "transfer of property by a person" but to a "transaction of the company". Further, there were no company assets involved in Mateo and thus the issue did not arise. (In Mateo, the husband transferred his interests in the matrimonial home to his wife in accordance with consent orders made by the Family Court. The husband subsequently became bankrupt and the trustee in bankruptcy sought to recover the husband’s interest in the property from the wife.)

7. [174]

   An order made under section 79 of the Family Law Act to transfer property has an immediate dispositive effect, even if the terms of the order require transfers at later dates. The order creates an equitable interest in the land in favour of the transferee: Trajkovski v Simpson [2019] NSWCA 52 at [146]-[153], and the authorities there analysed by Brereton JA. “However, much turns upon the form of the order and the nature of the property in question”: Mingos v Federal Commissioner of Taxation (2019) 274 FCR 148; [2019] FCAFC 211 at [44] per Kerr and Steward JJ. (For example, in Mingos, the orders provided that the parties held their interest in the property “upon trust” pending completion of various obligations and, failing that, sale of the property. The Court held that the orders gave each of the husband and wife an equitable interest in the property to be held for the benefit of the other but did not give the husband an exclusive equitable interest in the property: at [46].)

8. [175]

   Did the 2014 Consent Orders transfer an interest in the four properties such that the subsequent transfers were not a “transaction of the company” but the inevitable result of an order under section 79 of the Family Law Act? The 2014 Consent Order obliged the wife to transfer to the husband “all her rights, title and interest” in 268 Cabramatta Road and 87 Hughes Street. The wife, in fact, had no right, title and interest in those properties. Likewise, the husband was obliged to transfer “all his rights, title and interest" in 110 Gladstone Street and 112 Gladstone Street to the wife, of which he had none. Whilst a couple may be directors and shareholders in a family company, the couple do not own the company’s assets. The company owns its assets. As shareholders, the couple are simply entitled to the rights attached to the shares as provided by the company’s constitution, such as dividends while the company is trading or a distribution of assets upon winding up: R v Portus; ex parte Federated Clerks Union of Australia; White v Shortall at [193] per Campbell J citing Sydney Futures Exchange Ltd at 255-6 per Lockhart J. The basic rule nemo dat quod non habet applies (you cannot give what you do not have). The 2014 Consent Orders provided that the parties retained ownership of their respective shares in the Company: Order 3.

9. [176]

   Thus, it is not necessary to consider whether Mateo applies to section 588FF of the Corporations Act as the 2014 Consent Orders were ineffective to transfer a beneficial interest in the four properties, being the Company’s property and not property which either spouse could transfer in accordance with an order made under section 79 of the Family Law Act. Nor did the 2014 Consent Orders touch upon the Shareholder’s Loan Account.

10. [177]

    The Company was, however, a party to each of the transfers of the four properties in September 2014. The Company was not obliged by the 2014 Consent Orders to transfer the properties, but did so. The transfers were “transactions” of the Company, by which the Company divested itself of its principal assets. It is difficult to see how the transfer of the Company’s assets was anything other than a transaction “of” the Company. Likewise, the Company was a party to any repayment of the Shareholder’s Loan Account and any ‘advance’ of the excess net equity in the four properties to the Company’s directors and shareholders.

11. [178]

    As to when these “transactions” occurred, the husband submitted that the mortgages over the two Gladstone Street properties were discharged in May 2014. The Court could infer that discharge occurred concurrently with the settlement of the conveyances from the Company to the husband. The transfers were undated and the date the transfer forms were registered may bear no relationship to the settlement of the conveyances. Thus, the husband submitted that the plaintiffs cannot bring a case pursuant to section 588FE(3) in relation to 110 and 112 Gladstone Street (albeit an insolvent trading claim is still maintainable in respect of the Gladstone Street properties for four years prior to the relation-back date: section 588FE(4)).

12. [179]

    While the loans were paid out on 28 May 2014 (for 110 Gladstone Street) and 16 June 2014 (for 112 Gladstone), and the financiers likely gave a discharge of mortgage at that time, that is the likely date when a benefit was conferred on the Company, which will need to be taken into account in formulating any relief. But it is not the date of the relevant “transaction”, being “a conveyance, transfer or other disposition by the [Company] of property of the [Company]”. That is the transaction in respect of which relief is sought. There is no reliable evidence that the transfers were executed by the Company on any particular date prior to registration of the transfers. As already noted at [107], I infer that the couple, or their solicitor, were waiting until all the loans had been paid out before the properties were transferred, otherwise one spouse may receive ‘their’ properties and fail to pay out the loans on the properties to be transferred to the other. There is no reason to infer that the transfers were executed by the Company until shortly before registration.

13. [180]

    Thus, the “transactions” in respect of the transfer of the four properties occurred in September 2014 and all causes of action pursued by the liquidator are ‘in time’. To the extent that the Company ‘accepted’ the repayment of the Shareholder’s Loan Account and ‘advanced’ the excess net equity to the directors, this appears to have been an ex post facto accounting treatment undertaken after the Company was in liquidation and thus also occurred within the relation-back period.

Unreasonable director-related transaction

1. [181]

   Section 588FE(6A) of the Corporations Act provides:

2. [182]

   The only issue before me is whether the transactions meet the description in section 588FE(6A)(a). As to this, section 588FDA(1) provides:

3. [183]

   Section 9 of the Act provides that "benefit" means “any benefit, whether by way of payment of cash or otherwise”. The benefit to the directors may be indirect: Vasudevan v Becon Constructions (Australia) Pty Ltd (2014) 41 VR 445; [2014] VSCA 14.

4. [184]

   Only section 588FDA(1)(c) is in issue here as the transfer of the four properties (and any repayment of the Shareholder’s Loan Account) were made by the Company to the directors, thereby satisfying sub-sections (a) and (b). Section 588FDA(2) makes it plain that the test in section 588FDA is to be applied to the relevant transaction taking into account the circumstances which existed when the transaction was entered into: Kazar v Kargarian [2010] FCA 1381; (2010) 81 ACSR 158 at [23]; Smith v Starke (No 2) [2015] FCA 1119; (2015) 109 ACSR 145 per Gleeson J at [14].

5. [185]

   The requirements of section 588FDA(1)(c) were comprehensively analysed by Gleeson J in Smith v Starke (No 2), whose analysis has been approved and summarised by the Court of Appeal in Crowe-Maxwell v Frost (2016) 91 NSWLR 414; [2016] NSWCA 46 per Beazley P at [70]:

6. [186]

   As to the benefits to the Company of entering into the transaction, the husband and wife submitted that the amount due on the mortgages was $1,574,247.35 and was repaid. The Company was also discharged from the obligation to pay ongoing interest under the mortgages. The Company also undoubtedly owed money to its shareholders, albeit the precise amount is not known. Further, in the absence of these transactions, it was said that the Company would inevitably have been mired in contested litigation between the husband and the wife. The wife's nascent claim under the Family Law Act was said to put the Company's very existence in serious jeopardy with suggested catastrophic consequences of an existential kind.

7. [187]

   Whilst the plaintiffs accepted that the Company obtained a benefit by reason of the discharge of liabilities it had secured against the properties and the ongoing obligation to pay interest, the plaintiffs maintained that the Company was deprived of the net equity in the properties, being $2.23 million on the figures used by the couple at the time and slightly less using Mr Rees' valuations. The plaintiffs accepted that the Company may also have received a benefit in the form of the repayment of the Shareholder’s Loan Account, but maintained that there was no reliable evidence of the amount of the loan at the time.

8. [188]

   Even assuming for the moment that the Shareholder’s Loan Account was $1.238 million, the Company still received some $1 million less than the net equity in the four properties. This was at a time when the Company was in severe financial difficulties and the only apparent means of raising funds was by realising the net equity in the properties. The directors obtained a direct benefit from the transaction by acquiring the properties at an undervalue. A reasonable person in the company's circumstances would not have effected the transaction.

9. [189]

   As to the suggested benefit to the Company by a resolution of family law proceedings, a company may benefit from the resolution of family disputes between company shareholders (Moshinksy J in D Pty Ltd at [11(c)], [80]). But there was no tangible benefit here and certainly not of the scale suggested by the defendants. After the marriage broke down, the parties continued to cooperate, including attending a meeting with the Bronte developer soon after the wife had gone to live with the daughter. The husband continued to work for the Company, the wife continued to be a director and the daughter continued to be administration manager. There was no suggestion of deadlock. The couple used the same solicitor and agreed upon consent orders with no apparent haste or divergent views on an appropriate division of assets. The wife was not litigious. The short time between filing and the agreement to the first and second consent orders did not support the submission that the property dispute was so acrimonious that it would have threatened the "continued existence" of the Company.

10. [190]

    The detriment to the Company, and its creditors, by these transactions outweighed any benefits given that the four properties were its only assets at the time. The transaction was unreasonable given the Company’s financial condition at the time, where 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": Weaver v Harburn at [93], [103], [107]; Slaven v Menegazzo [2009] ACTSC 94 at [44]; Kijurina v Taouk at [48], [57]. Thus I am satisfied that the transfer of the four properties were voidable as unreasonable director-related transactions. Using the net equity to repay the Shareholder’s Loan Account and advance the excess net equity to the directors – being an accounting treatment likely effected much later – falls into the same category. There were far more pressing needs which this net equity could reasonably have been used to satisfy than the manner in which it was used.

Uncommercial transaction

1. [191]

   Section 588FB(1) of the Act provides as follows:

2. [192]

   In In the matter of DJG Equities Pty Ltd [2014] NSWSC 36, Black J summarised the applicable principles as follows at [16]:

3. [193]

   The plaintiffs submitted that the Company did not accrue any benefit from the transaction and instead suffered a severe detriment; namely, the transfer away of its only assets. The wife submitted that the value of the properties transferred was only part of the picture; the future viability and continued operation of the Company was said to be at stake such that transferring the properties to the couple at an undervalue was nonetheless something that a reasonable person would have agreed to in order to avoid the Company being wound up, frozen, or externally managed consequent to a family law property dispute involving the two directors and equal shareholders. It was said to be objectively reasonable for the Company to avoid being caught up in a family law dispute by giving effect to the Consent Orders and effecting the transfer of property.

4. [194]

   Essentially for the same reasons as given in respect of the unreasonable director-related transactions, I consider that the transfers and any associated repayment of the Shareholder’s Loan Account were uncommercial transactions. Any benefits attained by the Company by resolving the family law proceedings were not such as to transform an uncommercial transaction into a commercial transaction.

Unfair preference

1. [195]

   Section 588FA(1) of the Act provides:

2. [196]

   As Gordon J noted in Capital Finance Australia v Tolcher, there are differences in the concept of a “transaction” between the unfair preference provision and the uncommercial transaction provision. “For the transaction to be uncommercial under s 588FB of the Corporations Act, the company is required to be a party but no other person is specified. Any other person can be a party. However, for the unfair preference provision to apply, both the company and the creditor must be a party to the transaction even if someone else is also a party: s 588FA(1)(a). A debtor-creditor relationship must exist”: at [117]. An unfair preference therefore involves a transaction to which the company and the creditor are both parties (s 588FA(1)(a)); whereby the creditor receives from the company more than it would receive if the transaction were set aside and the creditor proved for the debt in the winding up (s 588FA(1)(b)): In the matter of Evolvebuilt Pty Ltd [2017] NSWSC 901 per Brereton J at [19], on appeal Hosking v Extend N Build.

3. [197]

   If, contrary to the plaintiffs’ submissions, the defendants are found to have had a Shareholder’s Loan Account of $1.238 million that was repaid in May 2014, the plaintiffs submitted that this transaction resulted in the defendants receiving an unfair preference in circumstances where the likely return to unsecured creditors of the Company in nil. The transactions took place within four years of the relation-back day. Under the Shareholder’s Loan Account, the Company and its directors were in a debtor/creditor relationship. The husband and wife did not suggest otherwise.

4. [198]

   I am satisfied that any repayment of the Shareholder’s Loan Account was an unfair preference. The husband and wife were unsecured creditors of the Company in respect of the Shareholder’s Loan Account and have been paid in full whereas they will receive less as unsecured creditors in the liquidation.

Insolvent transaction

1. [199]

   Section 588FC(1) of the Act provides as follows:

2. [200]

   As directors and members of the Company, the husband and wife were each a “related entity” to the Company: section 9. As such, an insolvent transaction of the Company is voidable for a period of four years prior to the relation-back day: section 588FE(4).

3. [201]

   The plaintiffs submitted that the transactions took place within four years of the relation back day. The transactions were an unfair preference and an uncommercial transaction. The transactions took place when the Company was insolvent or it became insolvent as a result of it. The husband and wife did not suggest otherwise. I am satisfied that the transfer of the four properties and any repayment of the Shareholder’s Loan Account were insolvent transactions.

REMEDIES

1. [202]

   The plaintiffs seek to recover the four properties from the defendants. Three questions arise: first, is the Court precluded from making an order under section 588FF given the 2014 Consent Orders; second, what is the appropriate order to make in respect of the voidable transactions, in particular, to reflect the benefits which the Company received; and, third, should the Court exercise a discretion to decline such an order in the circumstances of this case.

Inconsistency with Family Court orders

1. [203]

   The husband and wife submitted that this Court should not make orders under Part 5.7B of the Corporations Act as this would be inconsistent with orders already made by the Family Court. The transfers were required by orders made by the Local Court exercising federal jurisdiction conferred by the Family Law Act: Mateo. As Tamberlin J explained in Official Trustee in Bankruptcy v Higgins (2000) 109 FCR 1, section 79 of the Family Law Act requires the Court to exercise a discretion before making the orders, “Although the orders were consent orders they were not simply a matter of course or a mere administrative action but they involved the approval of the Court: subs 79(2). … The Court in making the orders was exercising a judicial discretion in the exercise of federal jurisdiction with respect to matrimonial causes”: at [21]. Whilst the Federal Court had power under the Bankruptcy Act to set aside the order in that case, his Honour considered that, as a matter of discretion, it should not do so but leave it to the Family Court and thereby avoid the appearance of conflicting orders between the two courts: at [22].

2. [204]

   I note also that the proceedings transferred by Tamberlin J were heard by Moore J, who took a different view and did not regard the orders sought by the Official Trustee as giving rise to any inconsistency with the earlier consent orders and readily set those orders aside: Official Trustee in Bankruptcy v Higgins (Family Court of Australia, Moore J, 2 September 2002, unrep), extracted in Mateo at [49]-[51]. Different judicial approaches to whether to transfer bankruptcy-related proceedings to the Family Court are summarised by Collier J in Combis v Jensen (No 2) (2009) 181 FCR 178; [2009] FCA 1383 at [58]. I note also, as Black J explained in In the matter of Glenvine Pty Ltd [2020] NSWSC 866, Mateo is not authority for any wider proposition that an order directed to A to cause B to transfer property to C, without more, divests B of an interest in property in equity or otherwise, and that was not the position addressed in Mateo: at [84].

3. [205]

   There is no inconsistency here, for two reasons. First, as described at [175], the 2014 Consent Orders obliged the spouses to transfer “all their rights, title and interest" in the four properties, of which they had none as the properties were owned by the Company. As the spouses had no entitlement to the properties, they were not compelled to transfer anything. An order under section 588FF requiring the husband and wife to transfer back the properties which they did not, in fact, have any right to receive under the 2014 Consent Orders is not inconsistent.

4. [206]

   Second, and more importantly, the 2014 Consent Orders did not compel the Company to transfer the properties. Section 90AE of the Family Law Act permits the Family Court to make orders "binding a third party", including, for example, an order “directed to a director of a company or to a company to register a transfer of shares from one party to the marriage to the other party”. Such an order can, however, only be made if the requirements of section 90AE(3) are met, including that the third party has been accorded procedural fairness "in relation to the making of the order" and it is just and equitable to make the order. If such an order is made, then section 90AC of the Family Law Act provides:

5. [207]

   In this case, the Company was not a party to the 2014 Consent Orders nor “directed” pursuant to section 90AE(2). The Company was not a party whose interests could be affected by the 2014 Consent Orders and the orders were in a form which did not affect its rights: Zaravinos v Houvardas [2004] NSWCA 421; (2004) 32 Fam LR 490 at [46]. As Black J noted in a similar situation in Glenvine, the fact that the Registrar who considered whether to make the orders did not require the Company to be joined undermines any inference that the orders were objectively intended to alter the Company’s rights such as to require joinder: at [93].

6. [208]

   Where the Company was not a party to the Family Court proceedings nor executed the 2014 Consent Orders, the orders were not made pursuant to section 90AE(2) of the Family Law Act and the provisions of section 90AC were not engaged, which may otherwise give such an order primacy over other Commonwealth legislation: Ng v Van Der Velde [2011] FCAFC 35 at [75], [83]. As observed in Ng v Van Der Velde, whilst reconciling section 90AC of the Family Law Act with the voidable transactions provisions may not be easy, nothing in the Family Law Act purports to protect settlement agreements effected by consent orders made under section 79 from the operation of other legislation: at [71]. As such, the relief sought by the liquidator does not conflict with the 2014 Consent Orders and thus it is not necessary for the liquidator to apply to vary the 2014 Consent Orders, unlike in Higgins or D Pty Ltd per Moshinsky J at [81].

7. [209]

   I note also the indemnity given by the husband in the 2016 Consent Orders, which envisaged that an order may be made by this Court at the request of the liquidator in respect of the properties transferred by the husband and wife under the 2014 Consent Orders. Any such order now made will not thereby be inconsistent with the 2014 Consent Orders as varied by the 2016 Consent Orders.

Order under section 588FF

1. [210]

   The plaintiffs seek orders under section 588FF(1)(b) that the properties (including the units at 87 Hughes Street that remain in the husband's name) be transferred to the Company. Alternatively, the plaintiffs seek orders under section 588FF(1)(c) that the defendants pay the Company $2.23 million, being the amount of benefit that they obtained on transfer of the properties in September 2014. Section 588FF provides:

2. [211]

   It is now eight years since the properties were transferred to the couple and the properties have significantly increased in value. The liquidator thus seeks an order transferring the properties. Whilst section 588FF(1)(b) clearly envisages that such an order may be made, I have found only one case where such an order has been made: Rivarolo Holdings Pty Ltd v Casa Tua (Sales) Pty Ltd (1997) 24 ACSR 105 per Windeyer J.

3. [212]

   I consider it appropriate to make an order directing the defendants to transfer the four properties back to the Company, not least because the properties were, prior to the transactions, legally and beneficially owned by the Company. The fact that the properties have since increased in value “fairly represents” a benefit received by them “because of” the making of the transfers to them of the properties; that benefit should be re-allocated to the Company: New Cap Reinsurance Corp Ltd v AE Grant [2009] NSWSC 662; (2009) 72 ACSR 638 at [65]-[66], [72]-[73]. Of course, 87 Hughes Street has since been developed into apartments of which the husband retains four apartments subject to a mortgage in favour of the third defendant. As such, an order in respect of the apartments will be made under section 588FF(1)(d)(ii), where the apartments fairly represent the application of the proceeds of property that the Company transferred under the transactions.

4. [213]

   As mentioned, the mortgages on the four properties were discharged when the properties were transferred to the husband and wife. As Barrett J explained in New Cap Reinsurance Corp Ltd, notwithstanding that Division 2 of Part 5.7B refers to “voidable transactions”, its provisions do not operate to deprive concluded transactions of efficacy or effect. Rather, the existence of a transaction meeting the statutory description confers jurisdiction on the court to make one or more of the orders set out in section 588FF(1): at [19]. Thus, an order under section 588FF(1)(b) or 588FF(1)(d)(ii) requiring the properties to be transferred to the Company would not set aside the discharges of mortgages.

5. [214]

   Mr Hayes acknowledged that it is necessary to account for the benefits conferred on the Company when the four properties were transferred, including the debt associated with the properties. Whilst the Company also saved the money it would have otherwise had to pay in mortgage repayments, Mr Hayes considered that it would have been “[c]ompletely offset by the enormous capital gain that would have been achieved in the interim.”

6. [215]

   Turning to the monies paid by the defendants to discharge the existing secured loans over the four properties:

7. [216]

   Thus, while the Company received a benefit in the form of the discharge of a secured indebtedness over four properties, the Company will receive title to two properties (or, in the case of 87 Hughes Street, the four apartments which the husband retained from the development of that property) subject to registered mortgages in favour of the third defendant. Overall, the Company may receive less net equity in the properties than it had in September 2014. As there is no evidence of the amount owing to the third defendant, I can only speculate. As such, I cannot say whether the Company has received a benefit by the discharge of the mortgages, replaced by other mortgages, or not.

8. [217]

   The result may differ if I consider the properties transferred to the wife separately from the properties transferred to the husband. However, I am minded to consider the four properties in aggregate as the Company transferred the four properties at the same time; the husband and wife were both then directors of the Company and acted together in effecting the “transactions”. For practical purposes, the four properties were transferred in one “transaction” and the consequences for the Company should be viewed as a whole. As the two properties transferred to the wife are unencumbered, whilst those transferred to the husband are mortgaged and the net equity in unknown, the burden of meeting an order under section 588FF may fall on the wife in the first instance. However, the husband has given the wife an indemnity in respect of any liability arising from these proceedings; presumably this prospect was factored into the 2016 Consent Orders.

9. [218]

   Assuming, for the moment, that the Company did receive a benefit by the discharge of the four existing mortgages, which benefit has not been destroyed by the registered mortgages in favour of the third defendant, how should the Court allow for this benefit? Considering the matter in the context of section 37A of the Conveyancing Act 1919 (NSW), the Court of Appeal observed (without deciding) that, where the recipient has paid consideration for the property that is ordered to be transferred, it may be that, in an appropriate case, the consideration may need to be returned or the recipient may be confined to prove in bankruptcy for the consideration: Super Vision Resources Ltd BVI Registered No 1810534 v AC Holdings Co Pty Ltd [2020] NSWCA 319 per Meagher JA at [133]-[134] (Basten JA agreeing); White JA at [162] and [166].

10. [219]

    In this case, however, I note that the defendants discharged the Company’s secured debt, with the consequence that a registered mortgage was discharged over each of the properties. Confining the defendants to lodging a proof of debt in the winding up would not fully reflect the benefit which they conferred on the Company. Section 588FF(1)(g) may assist, permitting the Court to make an order redefining the basis on which the defendants’ right is to be taken into account by the liquidator for the purposes of allocation of benefits in the winding up of the company: New Cap Re at [18] per Barrett J. If it be the case that the defendants have, overall, conferred a benefit on the Company by discharging the existing mortgages then I consider that it would be appropriate to make an order under section 588FF(1)(g) providing that Mr Hayes should treat the defendants as secured creditors to that extent.

11. [220]

    How one should calculate any such benefit, given that the secured loans were repaid on varying dates between May 2014 and September 2014 but the properties were re-encumbered on varying dates from September 2014 on, is also not straightforward. As the Company will, under the orders I will make, receive the four properties and thus at current value, it seems to me that any benefit conferred by discharging the mortgages in 2014 should also be calculated as at the present day in order to compare ‘like’ with ‘like’. I note that, in New Cap Re, the Court assessed “benefits” (in that case received by a person) at the time of the judgment; Barrett J awarded interest up until judgment on payments found to be unfair preferences, on reliance on the power under section 588FF(1)(c): at [65]-[66], [72]-[73].

12. [221]

    Whilst I will hear from the parties on this issue, my initial thought is that the amount paid-out on the mortgages in 2014 should be adjusted by the Reserve Bank of Australia’s cash rate plus 2% per annum to reflect the time value of money. Of course, this computation need not be undertaken if, on any view, the net equity in the four properties is less today than in 2014 given the amount owed to the third defendant.

13. [222]

    Turning then to the benefits which the directors may have conferred on the Company by relieving the Company of the obligation to service the mortgages after 2014, it may be appropriate to allow for money which the Company saved as a consequence of no longer holding the four properties (noting also that the Company may otherwise have earnt rental income which it forewent). In Universal Financial Group Pty Ltd v Mortgage Elimination Services Pty Ltd (in liq) [2006] NSWSC 1132; (2006) 205 FLR 186, the company’s income stream (commissions) were paid to another entity, which was found to be insolvent, uncommercial transactions and unreasonable director-related transactions. Austin J made an order under section 588FF(1)(c) requiring the recipient to repay the monies less certain expenditure, at [142]-[143]: (emphasis added)

14. [223]

    I note also that the legislative intent of section 588FF is to give the Court “very wide powers to make appropriate orders in respect of voidable transactions to fit the particular circumstances”: Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth) at [1055].

15. [224]

    Looking at each of the properties in turn, the bank statements for the loan for 110 Gladstone Street do not reveal the interest rate being charged when the loan was paid out. Earlier bank statements refer to an interest rate of 5.95% in 2003 and, in 2009, an interest rate of 4.98% and monthly interest payments of some $1,500 (or $375 a week). The husband said that the property was not leased when it was owned by the Company. It was leased when Mr Rees inspected the property (he noted the property was occupied by a tenant, who would not allow a full inspection). The current rental income is not known.

16. [225]

    According to the bank statements for the loan for 112 Gladstone Street, the existing financier charged interest of 7.51% per annum, being $2,446.54 a month (or $611 a week) when the loan was paid out. The husband said that the property was rented for $350 to $400 a week. The property was vacant when inspected by Mr Rees.

17. [226]

    According to the bank statements for the loan for 268 Cabramatta Road, the existing financier charged interest of 7.46% per annum, being $2,197.31 a month (or $550 a week) when the loan was paid out. The husband said that the property was not leased when it was owned by the Company but he has since rented it out at $300 a week (it was leased when Mr Rees inspected the property as he noted the property was occupied by a tenant, who would not allow a full inspection).

18. [227]

    According to the bank statements for the loan for 87 Hughes Street, the existing financier charged interest of 5.38% per annum; interest for the 2014 financial year was $33,126.65 (or $637 a week). The liquidator found records that the Company received rental income on this property, although the liquidator’s analysis (and presumably the available records) does not reveal the weekly rental. As best I can see, rent received in 2010 averaged $1,280 a month (or $320 a week). The husband said that he now receives rent of $350 to $400 per week on each apartment retained after development of the site.

19. [228]

    Comparing the weekly interest payments and the weekly rental figures (where available), it does appear that the rental income on the four properties was less than the interest payments.

20. [229]

    In total, interest payments on the four properties exceeded rent by $800 a week. I recognise that these figures are ‘rough’ as the available information is sparse indeed and requires acceptance of the husband’s evidence as to rental income. The truth may differ widely. What this does indicate is that the capital gains enjoyed on the four properties far exceed the monies saved by the Company on having been relieved of the obligation to pay interest on the mortgages.

21. [230]

    How, then, should the Court allow for these benefits where the evidence does not permit the Court to conclude with any degree of confidence or accuracy whether there was, in fact, a benefit and its quantum? I consider the appropriate course is to transfer the four properties to the plaintiffs and give the parties, in particular the defendants, an opportunity to put on further evidence in respect of the benefits conferred on the Company so that further orders can be made to allow for those benefits.

22. [231]

    As to the Shareholder’s Loan Account, Mr Hayes agreed that the Company obtained a financial benefit by repayment of the Shareholder’s Loan Account “[t]o the extent that the original loan … was valid”. However, the limited financial material produced by the husband, including during the hearing, was insufficient to enable the Shareholder’s Loan Account to be supported or reconciled. Whilst a trust account ledger for Marando Solicitors in the name of the couple recorded transfers made to the Company totalling $336,860, Mr Hayes was unable to reconcile those payments with the movement in the Shareholder’s Loan Account in the relevant period. In the absence of adequate books and records, specifically general ledgers, it was not possible to say more or sensibly compare or understand the draft financials. Further, the trust account ledgers of Marando Solicitors maintained on behalf of the Company show that $153,031 of the Company's money was transferred to the couple. The liquidator did not have cheque books to determine whether in any other period (2002 to July 2013 and 2016) further cheques were written by the Company to the couple. How these payments were treated in the draft financial statements was unknown. Additionally, based on the Cheque Account and Bronte Account, there were ATM cash withdrawals totalling $65,253.31, for purposes unknown. Given the general failure to keep and produce books and records of the Company, the precise position and amount of payments to the couple by the Company may never be known. The plaintiffs submitted that the defendants had not discharged their onus of proving the actual amount of the Shareholder’s Loan Account as they had not demonstrated that the draft financials were accurate nor that they actually contributed $1.238 million to the Company nor that they did not receive substantial payments from the Company.

23. [232]

    I am not satisfied that the balance of the Shareholder’s Loan Account was $1.238 million in September 2014. Whilst the husband relied on the draft 2014 and 2015 financial statements as showing repayment of the Shareholder’s Loan Account of $1.238 million, these statements were prepared after Mr Hayes was appointed and were only drafts and thus of limited probative value: Australian Securities and Investments Commission v Rich [2005] NSWSC 417; (2005) 53 ACSR 752 at [121], [131], [381] (where "reason to suspect that they may be drafts, there are obvious issues of probative value"); Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 75 ACSR 1 at [398]. In any event, I have found that any repayment of the Shareholder’s Loan Account was inter alia an unfair preference. The directors are thus obliged to repay those funds to the Company and are entitled to lodge a proof of debt in respect of the monies which they claim to be owed by the Company. The Shareholder’s Loan Account can be put to one side in determining what orders should be made under section 588FF in respect of the transfer of the properties and accounting for any benefits which the Company received.

Section 588FG and discretion

1. [233]

   The husband and wife relied on section 588FG of the Corporations Act, which provides that the Court is not to make an order under section 588FF in particular circumstances. The husband and wife contended that they became a party to the transactions in good faith on the basis of legal advice, had no reasonable grounds for suspecting the Company was insolvent (nor would a reasonable person in the circumstances have so suspected), and provided valuable consideration and changed their position in reliance upon the transactions. The wife added that, in addition to discharging the mortgages over the Gladstone Street properties, she waived repayment of the Shareholder’s Loan Account and avoided action being taken against the Company to wind it up or obtain orders against it to cease trading and distribute its assets pursuant to her family law property dispute with the husband.

2. [234]

   Section 588FG(1) has no application here. The sub-section provides, “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 …”. The husband and wife were a party to each transaction. Section 588FG(2) does not apply either; the sub-section does not apply to an unreasonable director-related transaction.

3. [235]

   Further, the husband and wife submitted (and I accept) that section 588FF(1) confers a discretion, as opposed to merely identifying the source of the court’s jurisdiction: D Pty Ltd at [68]; BP Australia Ltd v Brown (2003) 58 NSWLR 322; [2003] NSWCA 216 at [157] and [171]; Ansell Ltd v Davies [2008] SASC 203; (2008) 219 FLR 329 at [52]; Westgem Investments Pty Ltd v Commonwealth Bank of Australia Ltd (No 6) [2020] WASC 302 per Tottle J at [1172]; Bryant v Edenborn Pty Ltd [2020] FCA 715; (2020) 145 ACSR 20 per Davies J at [206]-[207]. See also Ward CJ in Eq in Earth Civil at [2594], following Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47; [2011] NSWCA 109 at [258]-[261] per Young CJ in Eq (Whealy JA agreeing and Hodgson JA substantially agreeing). The plaintiffs submitted that the Court ought not exercise any such discretion and decline to grant the relief sought, noting that the Company has substantial creditors.

4. [236]

   Whilst accepting that the purpose of section 588FF was “to ensure that a creditor did not receive a benefit over and above that received by other creditors” (Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corporation [1999] NSWSC 671 at [570] and Bryant at [204]), the husband submitted that the liquidator had not adjudicated on any proofs of debt and there was said to be no admissible evidence that those who claimed to be creditors were, in fact, creditors. There were said to be no creditors of substance who would benefit from any recovery. Further, it was submitted that injustice would be occasioned to the husband as he had borrowed monies to discharge all of the mortgages encumbering the properties. Borrowing money and undertaking improvements to 87 Hughes Street constituted ‘sweat equity’ because he assumed risk on behalf of the Company.

5. [237]

   The husband and wife submitted that no order should be made as they were assisted by Mr Marando and were entitled to assume that the settlement conformed to the law. The wife submitted that she was unaware of the financial circumstances facing the Company (although I have not accepted this). The wife was said to have acted honestly and in all of the circumstances ought fairly to be excused from any default found on her part. The wife was said to have provided valuable consideration for the transaction by not requiring the Company to repay her financial contributions to it, whether as recorded in the Shareholder’s Loan Account or otherwise. Further, the wife was said to have changed her position in reliance upon the transactions by not seeking orders against the Company in the family law dispute to liquidate it and require the distribution of its realised assets in cash, and not seeking other or different property orders in settlement of the dispute with the husband about the division of the property of their marriage in relation to the Company (elsewhere, I have not accepted the wife’s submission that, by transferring its properties to the wife, the Company ‘dodged a bullet’ by resolving the wife’s potential remedies which may affect the Company). It is submitted that the wife acted in good faith and took all steps to assist in enabling the Company to continue in existence and in pursuit of its trade and operations, without her involvement.

6. [238]

   I am not minded to refrain from making orders under section 588FF. As Lee AJA observed in Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; (2012) 89 ACSR 1, a “clear purpose” of Part 5.7B of the Corporations Act is “to assist liquidators to obtain orders to rectify the effect of transactions that prevent fair distribution of the assets of an insolvent company to creditors”: at [737]. I am satisfied that there are creditors to whom the Company owes substantial monies: see [145]. I am satisfied that both the husband and wife were aware of significant claims for building defects, which had the potential to swallow the Company’s assets. Both were keen to transfer the Company’s assets to themselves in order to defeat the Company’s creditors.

7. [239]

   It is true that the husband provided funds to discharge the existing mortgages on the Gladstone Street properties, on his evidence, by selling other properties. He also incurred indebtedness in order to re-finance the loan on the Cabramatta Road property. But the point is that the husband and wife received more than what they paid for, by the transfer of the properties at an undervalue. Whilst the husband has since developed the Hughes Street property, he did so to benefit himself as the property was then in his name. The liquidator does not seek to recover the value of the land as developed – indeed, as 16 of the 20 apartments have been sold, that would not be possible – but only seeks to recover the land value of 87 Hughes Street by effectively ‘tracing’ the value of the whole site into the four remaining apartments. (Whilst the liquidator initially sought an account from the husband in respect of the development, that prayer for relief was not pressed.)

8. [240]

   It is true that the couple do not appear to have had the benefit of detailed legal advice on the rights and wrongs of what they were doing, but I do not see why the creditors of the Company should suffer where the husband and wife will otherwise be permitted to retain the benefit of – for practical purposes – the Company’s only assets to which they were not entitled at the time, and did not become entitled as a consequence of the 2014 Consent Orders. Even assuming the husband was over $1 million by the Company – as he told Mr Marando at the time – or even $1.238 million, the couple received far in excess of that amount in the form of the net equity of the properties. To the extent that the couple conferred a benefit on the Company by discharging the existing mortgages or relieving the Company of the need to fund any gap between interest expense and rental income, I will make orders to enable these benefits to be accurately quantified and appropriately recompensed.

DIRECTOR’S DUTIES AND COMPENSATION

1. [241]

   It is not strictly necessary to deal with the remaining claims as I have found that the plaintiffs are entitled to the primary relief sought. I will do so briefly. The directors have a duty of care at general law and pursuant to section 180(1) of the Corporations Act:

2. [242]

   The directors have a duty to act in good faith and a proper purpose under section 181(1) of the Corporations Act:

3. [243]

   Section 182(1) of the Corporations Act provides:

4. [244]

   The directors must exercise their powers for the benefit of the company as a whole: Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 at 729. It has been said that when a company is insolvent or nearing insolvency that duty includes taking into account the interests of creditors: Walker v Wimborne (1976) 137 CLR 1 at 5-6; [1976] HCA 7; IW4U Pty Ltd at [30]-[34] per Gleeson JA. As Gleeson J observed in BCI Finances Pty Ltd v Binetter (No 4), “The extent to which directors are required to take into account the interests of creditors in their management of the company is contentious. As a general proposition, the best interests of the company will depend on various factors including solvency”: at [277].

5. [245]

   The husband submitted that, even if the Company was insolvent or if there was a real and not remote risk of its insolvency, all that a director had to do was to consider the position of the claimants. The directors were not obliged to preserve the status quo into the foreseeable future. They were entitled to take into account the husband’s views about the possible claims, his suggested willingness to support the Company and the fact that some of the claimants had been quiescent for an extended period. The Court should not assume that a director acting reasonably, or in conformity with their equitable duties, would have quarantined the Company’s properties on the contingency that a creditor might successfully prosecute proceedings.

6. [246]

   I do not accept the husband’s submission. This was a classic ‘asset-stripping’ exercise. The Company was, at the time when the husband and wife signed the 2014 Consent Orders, the object of two well-defined and substantive claims for building defects which potentially eclipsed the Company’s assets. Contrary to her evidence, the wife was well aware of these claims and very concerned about the impact of the claims on the Company. Whilst the husband suggested that the Company would successfully defend the claims, he was a man of bluster whose views would unlikely have appeased the wife’s concerns. The fact that the husband became – after three years of resistance – now amenable to a property settlement but only in respect of the Company’s assets is telling. The claimants were prospective or contingent creditors of the Company; whilst the directors did consider the position of these claimants, it was only to the extent that they wished to defeat these creditors’ claims by transferring the Company’s only assets to themselves at an undervalue.

7. [247]

   I consider that transferring the Company’s assets at an undervalue was not something that a reasonable person appointed as a director of a company in the Company’s circumstances would have done. This is especially where the Company was insolvent at the time and lacked funds to continue its business operations. The transfers were of no benefit to the Company and conferred a corresponding windfall gain on the directors. Accordingly, I find that the husband and wife breached their duty of care at general law to the Company and under section 180 of the Corporations Act.

8. [248]

   I also find that the husband and wife each breached their fiduciary duties by causing the properties to be transferred to them. This is because they exercised their powers as directors for a purpose foreign to the purposes for which they were conferred, for the benefit of third parties: BCI Finances Pty Ltd v Binetter (No 4) at [298] per Gleeson J. I find that the husband and wife also breached section 181 of the Corporations Act for the same reasons.

9. [249]

   The husband and wife also breached section 182 of the Corporations Act. The assessment of impropriety is objective: R v Byrnes (1995) 183 CLR 501; [1995] HCA 1. The use of their position as directors to transfer the properties at undervalue to themselves was improper as there was little corresponding benefit to the Company, and caused a detriment to the Company by denuding its valuable assets which could have been used to advance the Company.

10. [250]

    The husband and wife contended that the Court should decline to make a compensation order under section 1317H of the Corporations Act and relieve them from liability pursuant to section 1317S and section 1318 of the Corporations Act because they acted honestly and in good faith, on the basis of legal advice and have taken further steps in accordance with the 2014 Consent Orders, in particular, the husband has discharged the mortgages over the four properties and incurred costs in developing 87 Hughes Street and, if judged liable in proceedings in the Commercial List of this Court, will have incurred a liability to the owners of the strata plan in relation to that development. Each waived the payment of the Shareholder’s Loan Account and avoided the Company being embroiled in Family Court litigation.

11. [251]

    The wife submitted that she agreed to terms of the 2014 Consent Orders, and gave effect to the orders when made, in accordance with Mr Marando's legal advice. Thus, it was said that there could be no suggestion that her actions were careless or imprudent to such a degree as to demonstrate that she made no genuine attempt to ensure that she was not in breach of her duties. As the 2014 Consent Orders were drafted by Mr Marando, who was also the Company's solicitor, it was said to follow that the orders were in the Company's interests (regrettably, that does not follow). There was said to be no proper basis to suggest that the wife, relying on Mr Marando, acted other than in accordance with her duties as a director. The wife submitted that there was no reason for her to believe that the Company was insolvent or approaching insolvency (I have not accepted this). The wife was said to have acted squarely within the scope of the description of Palmer J in Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123 at [325], without deceit or conscious impropriety, without intent to gain improper benefit or advantage for herself, and without sufficient carelessness or imprudence. The wife relied on Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621 at [134], where Palmer J observed that the law should recognised that a wife’s failure to appreciate the reality of her responsibilities as a director due to deferral to her husband may be a ‘good reason’ for failing to participate in the management of the company, this being a question of fact and evidence in each case.

12. [252]

    I would not relieve the husband or wife from liability pursuant to sections 1317S and 1318 of the Corporations Act. Even if they acted honestly, I am not satisfied that they should fairly be excused from liability where this would prejudice the Company and its creditors: In the matter of Cummings Engineering Holdings Pty Ltd [2014] NSWSC 250 at [88].

13. [253]

    To the extent that the husband and wife relied on Mr Marando’s advice, it is not entirely clear what advice he gave: see [91]. As best can be divined, Mr Marando suggested that the couple effect a property settlement in two stages, with the first stage to concern only the Company and for remaining marital assets to be dealt with when the husband had completed development of 87 Hughes Street. There is no suggestion that Mr Marando was retained to advise the couple on their obligations as directors or gave advice on that subject: Cummings Engineering at [86]. I do accept, however, that in the absence of Mr Marando informing – at least the wife – that the 2014 Consent Orders may amount to a breach of director’s duties and fiduciary obligations, then the couple may well have thought that there was nothing wrong with transferring the Company’s properties as they proceeded to do. Nonetheless, I would not have been prepared to excuse either the husband or wife on this account as I am not satisfied that they should retain the Company’s net assets and thereby defeat the Company’s creditors which was, at heart, their aim.

EQUITABLE COMPENSATION

1. [254]

   In the alternative to orders under section 588FF(1)(b), the plaintiffs sought equitable relief including a constructive trust and equitable compensation. The plaintiffs only sought a constructive trust should the Court not order that the properties be transferred to the Company under section 588FF(1)(b). The claim for equitable compensation was pressed, being assessed by reference to the value of the assets depleted by the defendant's wrongdoing as at the date of restoration rather than at the date of the defendant depriving the plaintiff of their use: Kijurina v Taouk at [88], referring to Re Dawson [1966] 2 NSWR 211 at 216; In the matter of Purcom No 34 Pty Ltd (In Liq) (No 2) [2010] FCA 624 at [23(3)], referring to Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 at [35]. Equitable compensation was sought in the current value of the properties (being $6.62 million as at 17 May 2021), also accounting for the benefits received by the Company (at least, the mortgage liability) but also by the directors (for example, rent received). Given the paucity of records, it was observed that calculating such an amount may be difficult.

2. [255]

   As I am prepared to make an order under section 588FF(1)(b), I understand that the claim for a constructive trust is not pressed and I will not consider it further. As I understand it, the claim for equitable compensation was pressed as the plaintiffs appeared to proceed on the basis that an order under section 588FF can only be made to reflect the value of assets at the date of the “transaction”. The text of the section does not suggest this and I note that, in New Cap Re, Barrett J made orders to capture the benefits at the time of the judgment, albeit in the context of an order under section 588FF(1)(c) rather than section 588FF(1)(b).

3. [256]

   In any event, having found that the directors breached their fiduciary duties to the Company, it follows that equitable compensation would have been appropriate comprising the current value of the properties less the secured debt repaid by the directors (if, overall, the net equity in the four properties has not been eroded or destroyed by the mortgages now registered in favour of the third defendant) less the holding costs since September 2014 (being interest expense less rental income) borne by the husband and wife. As earlier mentioned, there is insufficient evidence to quantify such compensation and, were it necessary to do so, I would have permitted the parties a further opportunity to adduce further evidence on this score.

SHAREHOLDER’S LOAN ACCOUNT

1. [257]

   In the event that the transfers were not set aside, the plaintiffs submitted that the defendants were jointly indebted to the Company for the sum of $991,961.42, being “Trade and other Receivables”. Ironically, the husband submitted that there was no factual foundation for this. There was said to be no evidence that the husband or the wife agreed to enter into a loan with the Company whereby they assumed liability to it. The wife wanted a clean break from the Company; a loan requires consent and none came from her. In light of my reasons, it is not necessary to consider this alternate claim.

ORDERS

1. [258]

   For these reasons, I make the following orders:

   1. (1)

      Order pursuant to section 588FF(1)(b) of the Corporations Act 2001 (Cth) that, within 30 days, the first defendant execute and deliver to the second plaintiff (the Company) a Transfer in respect of the land contained in folio identifier 59/8029, being 268 Cabramatta Road, Cabramatta NSW.

   2. (2)

      Order pursuant to section 588FF(1)(d)(ii) of the Corporations Act 2001 (Cth) that, within 30 days, the first defendant execute and deliver to the Company a Transfer in respect of each of:

   3. (3)

      NOTE that the transfer of properties in Order 1 and Order 2 does not affect the third defendant’s interest in said properties as registered mortgagee.

   4. (4)

      Order pursuant to section 588FF(1)(b) of the Corporations Act 2001 (Cth) that, within 30 days of the date of these orders, the second defendant execute and deliver to the Company a Transfer in respect of each of:

   5. (5)

      Order pursuant to section 94 of the Civil Procedure Act 2005 (NSW) that the Registrar in Equity is authorised, in default of compliance with Orders 1, 2 and 4, and on application of the plaintiffs, to execute the Transfers in favour of the Company.

   6. (6)

      NOTE that the transfer of properties to the Company pursuant to Order 1, Order 2 and Order 4, and the Company’s interest in those properties, may be subject to further orders to account to the defendants for any benefits received by the Company because of the Company’s transfer of properties to the defendants in 2014 (the Benefits), as described at [214]-[230] of the judgment given by Rees J on the date of these orders (the Judgment).

   7. (7)

      Defer the question of costs until determination of what further orders should be made in respect of the Benefits.

   8. (8)

      Order pursuant to section 588FF(1)(g) of the Corporations Act 2001 (Cth) that the debt which the Company owed the defendants, recorded in the Shareholder’s Loan Account, may be proved by the defendants in the winding up of the Company.

   9. (9)

      Direct the defendants, by 1 March 2022, to file and serve any further evidence on which they seek to rely, in respect of the Benefits including:

   10. (10)

       Direct the plaintiffs, by 1 April 2022, to file and serve any evidence in reply.

   11. (11)

       Direct the defendants, by 15 April 2022, to file and serve any written submissions as to the Benefits and the appropriate orders which should be made, including under section 588FF(1)(g), and whether the defendants are content for this matter to be determined on the papers or require a further hearing.

   12. (12)

       Direct the plaintiffs, by 30 April 2022, to file and serve any written submissions in reply and also advise whether the plaintiffs are content for the matter to be determined on the papers or require a further hearing.

   13. (13)

       Parties to notify any errors or omissions with 14 days.