Sorak Thai Pty Ltd v Sopharak

1. [1]

   The plaintiff, Sorak Thai Pty Ltd (the Company) seeks various relief against the first defendant, Ms Ratcharin Sopharak (Ms Sopharak) and the second defendant, Sorak & Co Pty Ltd (Sorak & Co) in relation to the sale by the Company to Sorak & Co of the restaurant business operated by the Company under the name ‘Benjamas Thai by Chin’ (Business) from leased premises located at 100 Darby Street, Newcastle, New South Wales (Premises).

2. [2]

   The sale of the Business occurred pursuant to a contract dated 6 July 2022 by which the Company agreed to sell the Business to Sorak & Co for $2, apportioned as to $1 for goodwill and $1 for equipment (Sale Contract). Ms Sopharak, who was the sole director of both the Company and Sorak & Co on that date, signed the Sale Contract on behalf of both of them. The completion date was stated to be the date of the contract. As part of the transfer of the Business, the lease of the Premises was also transferred to Sorak & Co.

3. [3]

   The plaintiff contends that the transfer of the Business by Ms Sopharak was in breach of the fiduciary, equitable and statutory duties she owed to the Company, and that further, Sorak & Co is liable as being involved in those breaches or as the recipient of property in breach of her fiduciary duties.

4. [4]

   The plaintiff was represented at the hearing by A Rizk of counsel and the first defendant was self-represented.

Evidence

1. [5]

   The evidence for the plaintiff comprised two affidavits affirmed by its sole director Xuming Du (Mr Du), two affidavits affirmed by Siwei Wang, the Company’s taxation accountant since March 2023, and one affidavit affirmed by Sheng Yang Ho the Company’s solicitor. None of the plaintiff’s witnesses were cross-examined. The principal witness for the plaintiff is Mr Du who is a businessman with interests in a number of hospitality related businesses in regional New South Wales. He graduated with a Master of International Business from the University of Newcastle in 2007.

2. [6]

   The evidence for the defendants comprised two affidavits affirmed by Ms Sopharak, and she was cross-examined. Ms Sopharak migrated to Australia from Thailand when she was 16 years of age. She completed a bachelor’s degree in Architecture and Design at the University of Newcastle in 2015. In 2017, after working for a year as an intern in an architecture practice in Sydney, she met Mr Du and began working for him in the Business which was then operating at the Premises under the name ‘Benjamas Thai’.

Background

1. [7]

   On 25 May 2011, Mr Du and a business associate, Mr Xiaohui Yuan incorporated Darbythai Pty Ltd (Darbythai), for the purpose of purchasing the Business, which was already operating from the Premises. The purchase price for the Business was $200,000. The funds for the purchase were provided by loans of $140,000 by Mr Du and $60,000 by Mr Yuan, reflecting their proportionate shareholdings in the company.

2. [8]

   On or about 4 March 2014, Mr Du bought out Mr Yuan’s interest in Darbythai (which by this point had increased to a 50% shareholding) for the sum of $175,000 and Mr Du became the sole shareholder and director of the Company.

3. [9]

   On 1 November 2015, Darbythai entered into a new lease with the lessor of the Premises for a term of 5 years (with an option to renew for a further 5 years) and Mr Du gave a guarantee of the obligations of Darbythai under the lease.

4. [10]

   In March 2017, Darbythai hired Ms Sopharak as a restaurant manager for the Business and from early 2018 she was also a chef in the restaurant.

5. [11]

   On 24 September 2019, Mr Du and Ms Sopharak entered into a handwritten agreement described as ‘Darbythai Pty Ltd trading as Benjamas Thai Restaurant sublease agreement’ (Handwritten Agreement). The Handwritten Agreement, which refers to Mr Du as ‘Party A’ and Ms Sopharak as ‘Party B’, provided relevantly:

6. [12]

   Mr Du deposed that the genesis of the Handwritten Agreement was that he was spending increasingly lengthy periods overseas and wanted Ms Sopharak to manage the Business and also to incentivise her to grow the profitability of the Business. The evidence is unclear as to whether Ms Sopharak did become a director of Darbythai, but it is not in dispute that Mr Du did not transfer to her a 20% shareholding in Darbythai as contemplated by para 1. While para 8 contemplated that the agreement would be superseded by a formal agreement, this did not occur. Although not expressly stated, Mr Du and Ms Sopharak proceeded on the basis that the arrangement embodied in their agreement was that subject to the payment of the ‘sublease fees’ of $2,000 per week and the expenses of the Business in accordance with paras 2 and 3, Ms Sopharak was entitled to retain all the profits of the Business for the ‘sublease period’ of 1 October 2019 to 30 September 2021.

7. [13]

   Mr Du deposed that between 6 October 2019 and 18 March 2020 Ms Sopharak paid him the amounts of $2,000 per week in accordance with the Handwritten Agreement. However, with the onset of the Covid-19 pandemic, the weekly turnover of the Business reduced and Ms Sopharak asked Mr Du in WeChat messages to reduce or defer the weekly payments. Ultimately, in June 2020, Mr Du and Ms Sopharak agreed in WeChat messages to incorporate a new company to take over the Business, with Mr Du holding 75% of the shares and Ms Sopharak the remaining 25% and Ms Sopharak being appointed as the sole director of the new company. Mr Du also deposed that around this time he and Ms Sopharak agreed in the WeChat messages that the arrangement in the Handwritten Agreement would continue despite the incorporation of the new company, but on the basis that he would waive 8 weeks of payments (amounting to $16,000). This appears not to be in dispute.

8. [14]

   In accordance with that agreement, on 1 July 2020, the Company was incorporated, with Ms Sopharak as sole director and the shareholders being Mr Du with 75 shares with a paid-up value of $10 per share and Ms Sopharak with 25 shares with a paid-up value of $10 per share.

9. [15]

   On 1 November 2020, the Company entered into a new lease with the lessor of the Premises for a term of 5 years commencing on 1 November 2020 with an option to renew for a further 5 year term. The copy of the lease in evidence shows that both Mr Du and Ms Sopharak signed the lease as guarantors of the lessee’s obligations. From around that time, the Company took over operating the Business and Darbythai ceased trading. There was no formal agreement for the transfer of the Business and it is apparent from the accounts of the Company for the year ended 30 June 2021 that no consideration was paid to Darbythai for the acquisition of the Business. Darbythai was deregistered on 1 April 2022.

10. [16]

    It is also apparent from the accounts of the Company for the year ended 30 June 2021 that the Handwritten Agreement was no longer being followed after the transfer of the Business to the Company because for that financial year Ms Sopharak received a salary and no amounts were paid to Mr Du by way of ‘sub lease fees’.

11. [17]

    In September 2021, Mr Du and Ms Sopharak began negotiating a potential buyout of Mr Du’s shares in the Company by Ms Sopharak in WeChat messages. Mr Du said he wanted $200,000 for his shares and he wanted Ms Sopharak to pay the balance of the outstanding weekly payments of $2,000 per week under the Handwritten Agreement, and Ms Sopharak responded that the shares were only worth $120,000-$160,000. Mr Du deposes that during this meeting Ms Sopharak said that she wanted to buy his shares for $50,000 and he said that this was not enough and they could discuss the matter further once she had ‘fixed up the outstanding payments’ (which was a reference to the outstanding weekly payments). Ms Sopharak does not dispute Mr Du’s evidence about the meeting. I accept Mr Du’s evidence that the meeting ended without a resolution of the impasse as to as to the price for the sale of Mr Du’s shares.

12. [18]

    On 26 January 2022, Ms Sopharak incorporated the second defendant, Sorak & Co, of which she was the sole director and shareholder. On 21 February 2022, Sorak & Co registered the business name ‘Benjamas Thai’.

13. [19]

    On 4 March 2022, Ms Sopharak’s solicitor, Keith Spencer of Arch Law (Mr Spencer), sent a letter to Mr Du which stated relevantly:

14. [20]

    The ‘agreement’ referred to in para 1 is the Handwritten Agreement. However, it does not include a term to the effect stated. There is nothing in the WeChat messages in evidence to support the assertion of an agreement of the kind alleged in paras 1 to 4 of the letter and those messages are inconsistent with there being such an agreement. Mr Du responded by email to Mr Spencer, denying any agreement was reached in the terms stated in the letter, and asked him to provide evidence of it. No response was forthcoming. I find that there was no agreement on the terms alleged in paras 1 to 4 of the letter.

15. [21]

    On 8 March 2022, Mr Du sent a letter to Ms Sopharak giving notice of a meeting of shareholders of the Company for 15 March 2022 to pass resolutions to appoint a director and secretary. Mr Spencer responded by letter on 14 March 2022 that the notice was defective and Ms Sopharak would not attend the proposed meeting,

16. [22]

    On 2 May 2022, Mr Spencer sent an email to Mr Du attaching a notice of meeting signed by Ms Sopharak, in her capacity as sole director and secretary of the Company, calling a general meeting of the Company on 10 June 2022 at 3pm at the Premises. One of the items of business was that she be removed as sole director and secretary of the company and Mr Du be appointed to those positions in her place. There appears to be no dispute that this was a valid notice of meeting. Mr Du’s proxy attended the Premises at the appointed time but Ms Sopharak did not and due to the absence of a quorum the meeting did not take place. Ms Sopharak accepted in cross-examination that she knew that the purpose of the meeting was to remove her as a director.

17. [23]

    On 1 July 2022, Sorak & Co registered the business name ‘Benjamas Thai by Chin’. Ms Sopharak accepted in cross-examination that ‘Chin’ is her nickname. The Minutes referred to in the next paragraph record that this was the trading name of the restaurant conducted by the Company at the Premises at that time.

18. [24]

    On 4 July 2022, Ms Sopharak signed a document entitled ‘Minutes of a Director Meeting’ of the Company (Minutes) as the sole director and resolved to sell the Business under the Sale Contract, including the benefit of the lease of the premises, to Sorak & Co (ie. her company), for $2, comprised of $1 for equipment and $1 for goodwill.

19. [25]

    The Minutes record that the Sale Contract was before her at the time she signed the Minutes. The Sale Contract annexed financial statements for the Company for the year ended 30 June 2021 and for the period from July 2021 to 26 May 2022. The former showed that the Company suffered a small loss of $7,274 for the 2021 year and had a deficiency in net assets of $6,274 as at 30 June 2021. The latter recorded that the Company made a loss of $42,988 for the year to 26 May 2022 and had a deficiency in net assets of $49,262 as at 26 May 2022. The assets of the Company at that date were stated to be cash of $33,834 and fixed assets (comprising plant and equipment and furniture and fixtures) of $10,174, and the Company’s only liability was an amount owing to the Australian Taxation Office (ATO) totalling $93,270 in respect of GST, PAYG withholding and superannuation payments due to the ATO.

20. [26]

    The Minutes recorded that Ms Sopharak’s relationship with Mr Du had broken down irretrievably and that she wished to sever all ties with him due to his failure to perform his obligations under the agreement she had entered into with him in September 2019; noted the Company’s losses and negative net asset figures disclosed in the accounts referred to in the previous paragraph; stated that the Company’s negative net asset position was unlikely to improve in the near future, given the lack of profit being generated and that she saw no basis to assume that the Company would become profitable in its current form; noted the risk the Company would become insolvent and her potential liability should she permit the Company to trade while insolvent; stated that Mr Du had demanded as much as $300,000 for his shareholding which she considered to be ‘entirely unrealistic’; that she saw no realistic basis to be able to raise finance for the Company to help pay expenses; that under the draft business sale agreement produced at the meeting, ‘all assets and liabilities of the Business’ were to be sold for a sale price of $2 which represented ‘a premium to the value of the Business’ and would mean that the Company ‘would no longer be exposed to the ongoing expenses of running the Business and likely adding to the accumulated losses to date’.

21. [27]

    It may be noted here that the Minutes neglected to mention that (a) the Sale Contract did not involve the transfer of the Company’s liability to the ATO for GST, PAYG withholding and superannuation which were clearly liabilities incurred in carrying on the Business, and these were to be left behind with the Company; and (b) the value of the Company’s assets to be sold under the Sale Contract considerably exceeded $2. There is no suggestion that the rent payable by the Company under the lease of the Premises was other than a market rent, and hence the lease was not a burdensome asset for the Company.

22. [28]

    The Minutes then conclude (under the heading ‘Consideration of the business sale arrangements’):

23. [29]

    On 6 July 2022, Ms Sopharak signed the Sale Contract for the sale of the Business to Sorak & Co, as sole director of both the vendor and the purchaser, and pursuant to the terms of the contract, completion occurred on the same day. Various debits were made to the Company’s bank account on 6 July including a transfer of $7,800 to another account with the same bank which Ms Sopharak could not explain in her evidence, which reduced the balance to a credit of only $9.05. Since then, Ms Sopharak has been operating the Business through Sorak & Co. The transfer of the lease of the Premises to Sorak & Co was registered on 28 July 2022.

24. [30]

    Ms Sopharak said in cross-examination that she prepared both the Minutes and the Sale Contract. She then changed her evidence, when it was pointed out to her that the Sale Contract stated that the purchaser’s solicitor was Mr Spencer, and accepted that the Sale Contract was prepared by him. However, she continued to maintain that the Minutes were prepared by her using ChatGPT. When it was pointed out to her that ChatGPT was not released until 30 November 2022, she said that the Minutes were prepared by her and she had ‘checked it all with the Internet’ (T55). Her evidence on this aspect was entirely unsatisfactory and I do not accept it. It is highly likely that the Minutes were also prepared by Mr Spencer given their content, that he prepared the Sale Contract and the earlier letter of 4 March 2022 on her behalf and my observation of Ms Sopharak’s relatively poor proficiency with the English language. I infer that she continued to maintain that she was the author of the Minutes because they state that the Company did not receive legal advice in relation to the sale.

25. [31]

    Ms Sopharak accepted in cross-examination that she sold the Business for $2 without obtaining a valuation of the Business from the Company’s accountant or an independent valuer, or making any attempt to see if a third party was prepared to pay more than $2 for the Business, or telling Mr Du beforehand about the sale. In particular, no attempt was made by her to discuss the Company’s financial position with Mr Du and alternative ways in which it might be addressed.

26. [32]

    Ms Sopharak stated in her first affidavit that despite her relationship with Mr Du deteriorating, she was passionate about the restaurant and believed that, if she ran it ‘without Mr Du’s involvement’, she could make it profitable. She also said in cross-examination that she believed the restaurant could be profitable ‘under my management alone’. She did not explain in her evidence in what way Mr Du’s ‘involvement’ in the Business affected its profitability. To the contrary, the evidence suggests clearly that Mr Du had no involvement in the operation of the Business and certainly not one that affected its profitability. This evidence does not support the position she adopted, as sole director of the Company, that the value of the Business was only $2 or that she genuinely thought at the time of the sale that this was the value of the Business.

27. [33]

    In August 2022, Ms Sopharak appointed Mr Du as a director of the Company and resigned from her position as a director. In late August 2022 she sent a letter to Mr Du enclosing various business records for the Company, including the Sale Contract. It was only at this point that Mr Du became aware of the sale.

28. [34]

    The financial statements for the Company for the year ended 30 June 2022, which are dated 21 October 2022, show that the company made a loss of $76,847 for that year and that the Company had as at 30 June 2022 a deficiency in net assets of $83,121. Cash on hand is shown to be $21,647 and the liability to the ATO at that date was $114,943 which had increased to $127,046 as at 6 May 2025. The Company currently has a payment plan with the ATO to discharge this liability.

29. [35]

    The accounts of Sorak & Co in evidence show that it made a loss of $12,738 for the year ended 30 June 2023.

Company’s constitution

1. [36]

   The constitution of the Company provides that it replaces the replaceable rules under the Corporations Act. Relevantly, articles 24 to 27 provide:

Claim and relief sought

1. [37]

   The plaintiff pleads that the Sale Contract involved a breach by Ms Sopharak of her fiduciary duties as a director of the Company and her statutory duties under ss 180, 181 and 182 of the Corporations Act. The principal relief sought by the plaintiff is:

   1. (1)

      declarations that Ms Sopharak breached her fiduciary duty to the plaintiff; the second defendant knowingly received property transferred in breach of her fiduciary duty; Ms Sopharak breached ss 180, 181 and 182 to the Corporations Act and the second defendant was involved in those contraventions;

   2. (2)

      rescission of the Sale Contract;

   3. (3)

      an injunction ordering defendants to do all things necessary to return the Business to the plaintiff, including to have the lease of the Premises reassigned to the plaintiff;

   4. (4)

      an account of profits as against the defendants for the period from 1 July 2022 to the date of judgment.

2. [38]

   In the defence, the defendants deny that Ms Sopharak breached her fiduciary duties or statutory duties to the plaintiff, pleading that at the time the sale transaction occurred, the Business was making a loss and had negative assets, the plaintiff had no source of income other than the Business and the plaintiff’s constitution did not require the consent of the shareholders prior to sale of the Business. The defendants also rely on articles 24-27 of the plaintiff’s constitution. In reply to the allegations of negligence, default, and breach of duty made against the first defendant in her capacity as a director of the plaintiff, Ms Sopharak says that if any findings are made against her as to any negligence, default or breach then she ought fairly to be excused from liability under s 1318 of the Corporations Act.

Principles

1. [39]

   A director is in a fiduciary relationship with the company of which he or she is a director and this attracts the proscriptive duties known as the ‘conflict rule’ and the ‘profit rule’. Black J summarised the relevant principles in Re Colorado Products Pty Ltd [2014] NSWSC 789 at [351]-[357]:

2. [40]

   In Australian Careers Institute Pty Ltd v Australian Institute of Fitness Pty Ltd [2016] NSWCA 347; (2016) 340 ALR 580 Sackville AJA (Bathurst CJ and Meagher JA agreeing) said at [136] (footnotes omitted):

3. [41]

   Sections 180, 181 and 182 of the Corporations Act provide relevantly:

4. [42]

   Sections 180, 181 and 182 are civil penalty provisions for which the relief in s 1317H of the Corporations Act is available to the company.

5. [43]

   In summary, under these provisions of the Corporations Act a director of a company: (a) is required to exercise his or her powers and discharge his or her duties (i) with the care and diligence which a reasonable person in their position would exercise (s 180), and (ii) in good faith in the best interests of the company and for a proper purpose (s 181); and (b) is prohibited from improperly using his or her position to gain an advantage for themselves or someone else or cause detriment to the company (s 182).

6. [44]

   In relation to s 181, in Sunnya Pty Ltd v He [2025] NSWCA 79 Basten AJA (Bell CJ and Leeming JA agreeing) said at [24] (footnote omitted):

7. [45]

   Later at [34] Basten AJA noted that at ‘a director may act in the firm belief that particular conduct is in the best interests of the company, but be pursuing a purpose for which the power was not intended’ and then quoted with approval from observations of Gleeson J (sitting in the Equity Division) in Re IW4U Pty Ltd (in liq) [2021] NSWSC 40 at [30]-[34] which are set out in full below because of their relevance to the circumstances of the present case:

8. [46]

   A person who is ‘involved’ in a contravention of s 181(1) or s 182(1) contravenes s 181(2) or s 182(2) respectively. The term ‘involved’ is defined in s 79 of the Corporations Act. In Re IW4U Pty Ltd Gleeson J made the following observations about the meaning of this expression:

9. [47]

   Ms Sopharak relies in her defence on s 1318(1) of the Corporations Act which provides:

10. [48]

    Under subsection (4), the section applies to a person who is an officer or employee of a corporation and therefore applies to Ms Sopharak. A person seeking relief under the section bears the onus of proving the existence of facts to justify the granting of relief.

11. [49]

    In K & A Laird (NSW) Pty Ltd (In Liq) v Aidzan Pty Ltd [2023] NSWSC 603, Black J summarised the principles relevant to the application by a director for relief from liability under s 1318 at [209]-[214] (which observations were not disturbed on appeal: [2024] NSWCA 185):

Consideration

1. [50]

   I am satisfied that Ms Sopharak breached her fiduciary duty to the Company when, as a director, she authorised and implemented the Sale Contract. As the sole director her functions and responsibilities were to manage the business of the Company for the benefit of the Company. As the sole shareholder and director of the purchaser, there was a real or substantial possibility of conflict between her personal interest (that of sole shareholder and director of the purchaser) and the interests of the Company. She had a personal interest in securing the Business for the purchaser at the cheapest price because she would thereby through her shareholdings in the two companies effectively acquiring 100% interest in the Business rather than her existing 25% interest. She also had a personal interest in ensuring that the Business continued to be operated by her rather than another purchaser (or by the Company with a different restaurant manager), particularly as she was aware that Mr Du was seeking to remove her as a director and potentially deny her operational control over the Business.

2. [51]

   In authorising and implementing the Sale Contract Ms Sopharak allowed her personal interest to take precedence over the interests of the Company. This is because it was not appropriate on 4 July 2022 to sell the Business to Sorak & Co for $2 absent at the very least a valuation or other independent financial advice that this reflected the market value of the Business, in circumstances where (a) the book value of its assets recorded in its accounts attached to the sale agreement was $44,008, including cash on hand of $33,834; (b) the bank statement for the Company shows a credit to its bank account on 4 July 2022 of $7,813; (c) there was no attempt to explore whether an independent third party would be prepared to purchase the Business for an amount greater than $2, and (d) the sale transaction deprived the company the ability to generate further revenue which would assist it to meet its outstanding liabilities to the ATO shown in the accounts at $93,270.

3. [52]

   The question arises whether this conclusion is affected by articles 24 to 27 of the Company’s constitution set out earlier in these reasons. The extent of a director’s fiduciary duties to the company can be ameliorated by the provisions of its constitution: Short v Crawley (No 30) [2007] NSWSC 1322 at [1004]. Articles 24 to 27 are similar to the typical provisions found in the constitution of a company to achieve this outcome: RP Austin and I Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (LexisNexis, 17th Edition, 2018), [9.120]. I note the following regarding these articles:

   1. (1)

      The effect of article 24, read with article 27, is that a contract or arrangement entered into by the company which is one in which a director has an interest is not liable to be avoided, and the director has no obligation to account for any profit made under it, ‘merely because of’ that directorship or his fiduciary duty to the company.

   2. (2)

      Article 25 requires the director to disclose an interest in any contract or arrangement with the company as required by the Corporations Act.

   3. (3)

      Article 26 permits the director to give a general notice to the Company at its registered office of the nature and extent of the director’s interest in a matter involving the Company. (I note there is no evidence that such a notice was given by Ms Sopharak in the present case.)

   4. (4)

      Article 27 permits a director to vote in respect of any contract or arrangement in which he or she has an interest and permits the contract or arrangement to be entered into subject to the qualification in the chapeau which is that the director ‘complies with the law and this Constitution in relation to disclosing the interest’.

4. [53]

   That qualification was not satisfied in the present case. Under s 191(1) of the Corporations Act a director of a company who has a material personal interest in a matter that relates to the affairs of the company must give to the other directors notice of the interest, subject to the exceptions in subs (2). However, s 191(5) states that s 191 does not apply to a proprietary company that has only one director. That is explicable on the basis that the provision would have no sensible operation in the case of a single director company. The Company had only one director at all relevant times. In the circumstances, the relevant ‘law’ referred to in the chapeau to article 27 is the requirement under the general law that a director must disclose his or her interest in the contract to the shareholders and obtain their fully informed consent.

5. [54]

   In Woolworths Ltd v Kelly (1991) 22 NSWLR 189, Samuels JA summarised the position as follows (at 207):

6. [55]

   Hence, while as noted by Samuels JA in the above passage the constitution of a company can ameliorate the requirement of the general law for notice to the shareholders and the obtaining of their approval, the Constitution in the present case has not done so due to the qualification in the chapeau to article 27. That outcome makes sense in the context of a single director company, because it serves to protect the interests of the shareholders where there is no independent board of directors.

7. [56]

   Accordingly, as notice of the sale transaction was not given to all the shareholders, article 27 does not apply. Nor does article 24 apply because the mischief in the entry into and implementation of the sale transaction was not merely that Ms Sopharak was a director and had a fiduciary duty to the company; it was her exercise of her powers as sole director, including the power to vote, in a manner which was not in the best interests of the company, and without the fully informed consent of all shareholders.

8. [57]

   In relation to the claim for breach by Ms Sopharak of her statutory duties, it is sufficient to address s 181. I am satisfied that, for the same reasons given above, in entering into and implementing the sale transaction Ms Sopharak did not exercise her powers as a director in the best interests of the Company and for a proper purpose. The sale transaction was not in the best interests of the Company because it was not an arm’s length transaction for value and the Company was left without any assets from which to meet its significant liabilities to the ATO. It was not for a proper purpose because it was a transaction in which the purchaser was an entity in which she had a 100% shareholding interest and did not make an adequate disclosure of her interest to Company: R v Byrnes (1995) 183 CLR 501 at 517. Further, the objective circumstances required that the interests of the creditors of the Company, relevantly the ATO, should be taken into account and she clearly failed to do so: see Re IW4U Pty Ltd at [33]-[34].

Defence under s 1318

1. [58]

   I do not accept that Ms Sopharak acted honestly in relation to the sale of the Business to the second defendant. The explanation for the sale transaction was that she believed if she ran the restaurant without Mr Du’s involvement she could make it profitable. However, the evidence establishes that he had little or no involvement in the running of the Business. She made no attempt to establish whether the Business was worth more than $2 and it seems highly likely that it was given that the transfer occurred without the burden of the liabilities of the Business which were left behind with the Company. I infer that she knew that she was likely to benefit personally from the sale, as the sole director and shareholder of the second defendant. She also acted in a manner which was designed to effect the sale behind Mr Du’s back and to his detriment because, as the majority shareholder, he would be left with the major burden of the Company’s significant liabilities to the ATO without the benefit of any assets from which to derive income to meet those liabilities.

2. [59]

   I am also not satisfied in all the circumstances that Ms Sopharak ought fairly to be excused. She states in her affidavit the explanation for why the price was only $2 is that the business was not making any profit and had negative net assets. In relation to lack of profitability, she fails to acknowledge the impact of external factors on the Business, in particular the Covid-19 pandemic, in the relevant period, and her evidence is that she thought at the time of the sale that the Business could be made profitable. While the Company had negative net assets recorded in its balance sheet, this does not assist because the Business was sold without the burden of the liabilities, and those assets clearly had a value in excess of $2.

Position of Sorak & Co

1. [60]

   I accept the plaintiff’s submission that, at all relevant times, the second defendant was the alter ego of Ms Sopharak as she was the sole shareholder and director of the company and has at all material times been the controlling mind of the company.

2. [61]

   In light of those circumstances, the second defendant has participated in Ms Sopharak’s breach of fiduciary duty and is accountable in equity as a constructive trustee under the first limb of Barnes v Addy (1874) LR 9 Ch App 244. The relevant principle is stated in Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [243] (where the Full Federal Court addresses the first of four circumstances in which third party’s participation in another’s breach of fiduciary duty will render that person accountable in equity as a constructive trustee):

3. [62]

   Accordingly, the plaintiff is entitled to equitable relief against the second defendant by way of a declaration of a constructive trust over the Business acquired by the second defendant from the plaintiff and ancillary orders for the transfer of the Business back to the plaintiff. In light of the evidence as to the financial performance of the Business, an account of profits or equitable compensation would be unlikely to do justice between the parties. However, I will give the plaintiff the opportunity to make further submissions on the appropriate form of the relief.

4. [63]

   I also accept that the second defendant was involved in Ms Sopharak’s breach of s 181 of the Corporations Act, because it had actual knowledge of the essential facts constituting the contravention, through her knowledge which is to be attributed to it because she was acting in her capacity as its sole director. Hence, I accept the plaintiff’s submission that it is open to the court to grant relief against the second defendant pursuant to s 1317H and s 1324 of the Corporations Act, to the extent that the necessary relief is not available or granted in equity.

Conclusion

1. [64]

   For the above reasons, the plaintiff has succeeded in its claim that Ms Sopharak breached her fiduciary duty to the plaintiff in entering into and implementing the Sale Contract, and that the second defendant holds the Business on constructive trust for the plaintiff. The plaintiff has also succeeded in its alternative claim that Ms Sopharak breached s 181 of the Corporations Act, and that the second defendant has accessorial liability in respect of that breach under s 181(2). Ms Sopharak has failed in her defence under s 1318 of the Corporations Act. The plaintiff is entitled to its costs of the proceedings.

2. [65]

   I direct the parties to bring in agreed short minutes to give effect to this judgment and as to costs within 14 days or, if there is no agreement, their respective short minutes of order and short submissions in support not exceeding 5 pages.