Thomas & Anor v Arthur Hughes Pty Limited & Ors

1. [1]

   HIS HONOUR: The first plaintiff, Mr Hugh Thomas, commenced proceedings in his capacity as liquidator of Anne Lewis Pty Ltd (in liq) (“the Company” or “Anne Lewis”) against nine defendants. He sought to enforce causes of action on behalf of the Company against one of its directors, the seventh defendant, Mrs Pamela Lewis, against one of her sons, the eighth defendant, David Lewis, and various companies to whom assets of the Company had been transferred, the second to sixth defendants. The first defendant is the shareholder of those companies and the trustee of various trusts established by Mr David Lewis. Belatedly the Company itself was joined as the second plaintiff.

2. [2]

   The Company was incorporated on 29 March 1961. At all material times the two shareholders of the Company were Mr Geoffrey Lewis (“Mr Lewis”) and his wife Mrs Lewis. Mr Lewis had practised as an accountant. Over many years he caused the Company to acquire a valuable portfolio of listed company shares as well as cash investments.

3. [3]

   Mr Lewis was born in 1922. Mrs Lewis was born in 1924. In 2011 they were both in their late 80s. Mr Lewis had been admitted to a nursing home in 2010.

4. [4]

   Mr and Mrs Lewis had four sons, Peter, David, Roger and Hugh. Their sons had been directors of the Company, but they all ceased to be directors on 28 November 1995. Mr Lewis and Mrs Lewis remained the sole directors as well as the sole shareholders of the Company. On 25 January 2012 Mr Bryan Bird, was appointed as a director. He was a partner in the firm of accountants of which Mr Lewis had formerly been a partner. At the dates relevant to these transactions the directors of the company were Mr and Mrs Lewis, and Mr Bird (from 25 January 2012). But Mr Lewis took no part in the affairs of the Company. He did not play any part in the transactions with which these proceedings are concerned and was not consulted on them.

5. [5]

   Mr Lewis died on 20 June 2012. He made his last will on 15 January 2007. He appointed his son Peter Lewis and Mr Bird as the executors and trustees of his will. In substance, he provided that Mrs Pamela Lewis would have the right to reside in his principal place of residence until her death and that she be entitled to the net annual income of his estate for her life. He provided that after his wife’s death his residuary estate would be held for his sons Peter, David, Roger and Hugh in equal shares. Mr Lewis’ principal assets were the family home in Turramurra and his shares in the Company, which were valued for probate purposes at $1 million and $4,450,000 respectively.

6. [6]

   Mrs Lewis’ will was not in evidence, but it was common ground that prior to the transactions which gave rise to these proceedings, Mrs Lewis’ will provided for her estate to be divided five ways with a one-fifth share to pass to each of her four sons. David Lewis gave evidence that in respect of the shares passing to each of her sons there were different provisions concerning who should inherit each son’s share if her son predeceased her. Those provisions are not of present relevance. The remaining fifth share was to be divided equally between Mrs Lewis’ seven grandchildren. I understand that Mrs Lewis might have changed her will since the events giving rise to the litigation, but that is not of present relevance.

7. [7]

   These proceedings concern dispositions of the Company’s assets in January and February 2012. Peter Lewis and David Lewis were both accountants. They were concerned to minimise the income tax liabilities that might arise on the liquidation of the Company when their parents died. They were also concerned that their parents’ assets were tied up in the Company and that this could create complications for their parents having access to sufficient funds. Between July and November 2011 David and Peter Lewis briefed a barrister, a Mr Bryan Pape, to provide advice on the ways and means of winding up the Company for the benefit of the children and grandchildren of Mr and Mrs Lewis. He provided two drafts of an opinion that were subject to further questions by both Peter and David Lewis.

8. [8]

   On 22 November 2011 Mr Pape provided a supplementary draft opinion following a conference with David and Peter Lewis in relation to matters arising out of his earlier draft opinions. He noted that at a conference on 11 November 2011 it had been suggested that he consider a particular plan for the reorganisation of the affairs of the Company with the aim of providing Mrs Lewis with sufficient funds to make some gifts of cash to her seven grandchildren and to preserve the share portfolio of the Company for the benefit of the Lewis children and grandchildren. The plan involved the following steps:

9. [9]

   The effect of Mr Pape’s opinion seems to have been that such a proposal would be a tax effective way of distributing the Company’s assets. Although the Company would incur a capital gains tax liability of $460,778 on the assumed market value of the Company’s assets, the use of franking credits would reduce the tax on a liquidator’s distribution and would mean that effectively the liquidator’s distribution would be about 84 per cent free of tax. Mr Pape raised the question “How does this seem?”.

10. [10]

    On 29 November 2011 Peter Lewis wrote to David Lewis stating that based on the current draft advices it appeared as though any action in transferring assets to ancillary companies and a proposal to liquidate the company would create a massive capital gains tax liability. He said that the impost of the liability should not at present be borne by the Company. He referred to a different, and in his view, more pressing, taxation issue, namely the putting in place of an agreement for the making of loans to shareholders that would comply with the requirements of Div 7A of the Income Tax Assessment Act 1997 (Cth). He said that if David Lewis could put their mother’s mind at rest concerning the accessibility of funds from the Company, then he believed her concerns regarding the Company would be appeased. He also proposed that a meeting be held between both Peter and David Lewis and their mother and their two brothers.

11. [11]

    David Lewis did not wait. He considered that the proposal summarised by Mr Pape, as quoted at [8] above, was an appropriate “succession plan” to give effect in due course to his parents’ wishes as expressed in their then wills in a way most advantageous to the family. Without waiting for the assent of his siblings, or the approval of his father (if his father were capable of giving or withholding such approval) David Lewis arranged for the incorporation of the first to sixth defendants. The companies were incorporated on 12 January 2012. Typically of accountants, David Lewis’ proposal involved the creation of discretionary trusts.

12. [12]

    The first defendant, Arthur Hughes Pty Ltd (“Arthur Hughes”), had one shareholder, namely Mrs Lewis. She and Mr Bird were its directors.

13. [13]

    The second defendant, Speakman Hughes Pty Ltd (“Speakman Hughes”) was incorporated on the same day. All of the shares in Speakman Hughes are owned by Arthur Hughes, but according to the ASIC return, Arthur Hughes is not the beneficial owner of those shares. On the same day a trust deed was entered into for the establishment of a discretionary trust named as the Howarth Family Trust. The trustee is Arthur Hughes. Mrs Lewis and Mr Bird executed the trust deed on behalf of Arthur Hughes as trustee. The trust deed provides that the trustee has an absolute discretion to distribute any part of the trust fund prior to the vesting day to a “named beneficiary” or “a member of a class of eligible beneficiaries”. Income can be distributed at the discretion of the trustee to a named beneficiary or to any one or more persons who are members of any of the classes of eligible beneficiaries. If the trustee fails to exercise a discretion to appoint income by the end of any given financial year, then the named beneficiaries are entitled to that income in equal shares. The named beneficiaries are Peter Lewis, his wife Rosemary Lewis, Mrs Lewis, Mr Lewis, and Speakman Hughes. The classes of eligible beneficiaries include the spouse of a named beneficiary, the parents of a named beneficiary, the children of a named beneficiary, the brothers and sisters of a named beneficiary, their remoter relations, the spouses of any such relations, and a vast range of other potential objects including schools, universities, colleges and other educational bodies, and any companies in which any of the beneficiaries otherwise mentioned is a shareholder or a director, and any charity or other legal entity that the trustee might nominate. Mrs Lewis as appointor has power to appoint an additional or replacement trustee. The trustee has power to nominate one or more persons as an additional class of eligible beneficiaries if the power is exercised with the consent of the appointor, and has the power, with the consent of the appointor, to delete a class of eligible beneficiaries.

14. [14]

    The third defendant (“Telfer Hughes”), the fourth defendant (“Melvie Hughes”), and the fifth defendant (“Gypson Hughes”) were also incorporated on 12 January 2012 and trust deeds establishing discretionary trusts in the same form were established on the same day.

15. [15]

    David Lewis caused the companies to be incorporated and the trusts to be established. His intention was that Peter Lewis and his wife and Speakman Hughes would be the principal beneficiaries of the Howarth Family Trust which was the beneficial owner of the issued shares in Speakman Hughes. David Lewis, together with his two sons and Telfer Hughes, were to be the intended principal beneficiaries of the trust established for them called the Grant Family Trust. Roger Lewis, together with his wife and two children, and Melvie Hughes were to be the intended beneficiaries of the trust established for them, called the Geoffrey Family Trust. Hugh Lewis, together with his wife and children, and Gypson Hughes were named as beneficiaries of the trust established for them called the Barnby Family Trust.

16. [16]

    It was common ground that the trust deeds of the four discretionary trust were all in substantially the same form. Hence the trustee, Arthur Hughes, that was controlled by Mrs Lewis or, after her death, by whoever might be entitled to her personal estate, could control each of the four discretionary trusts. The width of the class of eligible beneficiaries was such that the income or capital of any of the trusts could be distributed to any family members or to a wide range of other persons at the discretion of the trustee.

17. [17]

    Arthur Hughes as well as being the trustee of each discretionary trust is the legal holder of all of the shares in Speakman Hughes, Telfer Hughes, Melvie Hughes and Gypson Hughes.

18. [18]

    The fifth trust deed is styled a unit trust deed, rather than a discretionary trust deed. It established the “Grand Family Unit Trust”. It was also entered into on 12 January 2012. The trustee is Arthur Hughes. The initial unitholders are described as Arthur Hughes as trustee for the Grant Family Trust, Arthur Hughes as trustee for the Geoffrey Family Trust, and Arthur Hughes as trustee for the Barnby Family Trust. Arthur Hughes as trustee for the Grant Family Trust has 40 units, (David Lewis has two children). Arthur Hughes as trustee for the Geoffrey Family Trust has 40 units (Roger Lewis has two children). Arthur Hughes as trustee for the Barnby Family Trust has 60 units (Hugh has three children). The Grand Family Unit Trust deed provides in substance that the trustee (Arthur Hughes) holds the assets of the trust as a separate fund on trust for the unitholders and that each unit entitles a holder to an equal share with each other unitholder of a unit in a beneficial interest in the trust assets as a whole, and that each unitholder is entitled to a proportionate share in the income of the trust and the trust assets.

19. [19]

    On 12 January 2012 David Lewis also caused another company to be incorporated called Bathurst Hughes Pty Limited (“Bathurst Hughes”), the sixth defendant. The shares in Bathurst Hughes are owned by Arthur Hughes. According to David Lewis’ instructions to his solicitor, Arthur Hughes holds the 140 shares in Bathurst Hughes on trust for the Grand Family Unit Trust. Mrs Lewis and Mr Bird were the initial directors of the company.

20. [20]

    These trusts were established without reference to the potential beneficiaries of the trusts. Neither Mrs Lewis nor David Lewis consulted the other children in relation to what was proposed.

21. [21]

    On 17 January 2012 Mrs Lewis signed three cheques drawn on the bank account of the Company in favour of Bathurst Hughes. Two cheques were drawn for $590,188 each and the third for $2 million. The cheques were prepared for Mrs Lewis’ signature by David Lewis. On 5 March 2012 Mrs Lewis signed a further cheque drawn on the Company’s bank account in favour of Bathurst Hughes in the sum of $370,000. On 23 May 2012 she transferred the balance of the Company’s bank account, $66,251.76, to Bathurst Hughes. All these transactions were done at the instigation of David Lewis.

22. [22]

    On 10 February 2012 the shares and stapled securities held by the Company were transferred to Speakman Hughes, Telfer Hughes, Gypson Hughes and Melvie Hughes. The shares were transferred at then market value. The share transfers were signed by Mrs Lewis and Mr Bird as directors of the Company as transferor and as directors of each of Speakman Hughes, Telfer Hughes, Gypson Hughes and Melvie Hughes as transferees. Gypson Hughes received a few additional shares where the Company’s shareholding could not be divided by four.

23. [23]

    Mrs Lewis acted on David Lewis’ recommendations. Mr Bird considered that it was his role as a director of the Company to carry out the wishes of the owners, namely Mr and Mrs Lewis. He discussed the proposed transactions with Mrs Lewis and David Lewis. He considered that the “restructure plan” that was put in place involving the transfer of the assets of the Company to other companies was in accordance with the wishes of Mr and Mrs Lewis, as expressed in their wills at the time. That is to say, Mr Bird acquiesced in the plan for the “restructure” as propounded by David Lewis.

24. [24]

    A minute of a meeting of directors of the Company dated 13 February 2012 signed by Mr Bird and Mrs Lewis recorded a resolution of the directors to authorise the transfer of shares from the Company to Speakman Hughes, Telfer Hughes, Melvie Hughes and Gypson Hughes. The minute stated that:

25. [25]

    On 20 June 2012 Mrs Lewis and Mr Bird signed a letter, both as directors of the Company, and as directors of Bathurst Hughes, setting out an acknowledgment that the moneys paid by the Company to Bathurst Hughes were paid by way of loan. The letter stated:

26. [26]

    In earlier proceedings (referred to at para [45] below) a solicitor, Ms Jane Maconachie, then acting for the Company on the instructions of David Lewis, swore an affidavit based on information given to her by David Lewis in relation to these transactions. She deposed:

27. [27]

    David Lewis gave evidence that he and Peter Lewis attended on Mr Pape on 11 November 2011 where on earlier advice from Mr Pape was discussed. He deposed that:

28. [28]

    Mr Lewis remained a director of the company but did not participate in its management after being admitted to a nursing home. He was not consulted in relation to the “succession plan”. It was suggested by counsel for the liquidator in cross-examination of Mrs Lewis that at that time Mr Lewis suffered from severe dementia, a claim she denied. It appeared from the cross-examination of David Lewis that in January 2010 Mr Geoffrey Lewis was described on a medical discharge form as suffering from dementia, a diagnosis that David Lewis rejected. It does appear however that although Mr Lewis remained as a director, he was not consulted about the Company’s affairs or its investments.

29. [29]

    In oral evidence David Lewis said that the purpose of incorporating the investment companies to which assets were transferred was for the assets to be held for the benefit of his parents and then, after their death, for the benefit of the beneficiaries under their wills.

30. [30]

    In oral evidence David Lewis said that all the cash that his mother intended to go to the grandchildren had been transferred to Bathurst Hughes, but not all the cash that was in Bathurst Hughes was destined for the grandchildren because they were only entitled to one-fifth of Mrs Lewis’ estate. He said:

31. [31]

    David Lewis said that the liabilities owed by each of the five companies to Anne Lewis arising from the transfer of cash and shares would have been satisfied and the property distributed to shareholders in one of two ways. One alternative, that Mr Pape had recommended, involved a round robin of cheques. As I understood it, Mr Lewis and Mrs Lewis would have lent moneys to the five companies that would have been applied by the companies in discharging their debts to Anne Lewis. Mr and Mrs Lewis would have forgiven the debt owed by the five companies to them. Presumably the money repaid to Anne Lewis would then be distributed to them as shareholders on the winding-up of the Company. David Lewis described the alternative as follows:

32. [32]

    David Lewis said that the plan, if it had proceeded, would have had taxation advantages. The plan was for the Company to be liquidated and the loans repaid before Mr Lewis died. He said that the plan would have had taxation advantages for all parties. He acknowledged that the trust deeds conferred power on the trustee to distribute income or capital across a wide range of people, not just Mr and Mrs Lewis, their sons and grandchildren, and that the trustee had a discretion to appoint additional beneficiaries. He said that it was never his intention that anything would be done other than following a process that accurately reflected his father’s testamentary wishes and his mother’s testamentary wishes. He said that the original intention was that the companies would be passed on to his brothers once all the debts between the companies had been liquidated and they would be put in a situation where they controlled the trusts. He said that his mother had signed a codicil to the effect that on her death her powers as appointor in respect of each of the trusts went to the son for whose benefit the trust was established. David Lewis said that the codicil had subsequently been rescinded because of the later disruption in the family’s relationships and because of the intercompany relationships which had not been resolved. Nonetheless, his intention in implementing these arrangements was to give effect, in what he considered to be a tax effective way, to his parents’ testamentary wishes.

33. [33]

    Mr Pape provided a further draft opinion on 6 March 2012, that is, after David Lewis had instigated the transfers of the shares and stapled securities of the company and most of its cash.

34. [34]

    On 19 March 2012 Peter Lewis wrote to his brother David complaining that he had been advised that without reference either to himself or to Roger or Hugh Lewis, David Lewis had arranged for the transfer of a number of securities held in the name of the Company to four private companies. He said that David Lewis had no authority to act on matters relating to their father’s financial affairs. Mr Lewis had given a power of attorney to his wife. It was not an enduring power. Peter Lewis said that the power of attorney was no longer effective as Mr Lewis was no longer competent.

35. [35]

    A meeting was held on 25 March 2012 attended by Peter, David, Roger and Hugh Lewis. Peter Lewis wrote to David Lewis on 31 March 2012 confirming oral advice given by David Lewis that he had transferred the share portfolio into four new companies. Peter Lewis noted that the directors of those companies were Bryan Bird and Pamela Lewis and the shareholding was in the name of Arthur Hughes. He confirmed advice that had been given by David Lewis as to the establishment of trusts and that the cash investments were now controlled by Mrs Lewis and the dividend income from the share portfolio would be available to both parents, as would the interest income. He noted David Lewis’ advice that he had undertaken the transactions because David Lewis believed the matter had been dragging on too long. Peter Lewis made various complaints and demands, including a complaint that the transfer of assets had crystallised a capital gains tax liability that he estimated would be approximately $460,000.

36. [36]

    Mr Lewis died on 22 June 2012. Probate of his will of 15 January 2007 was granted to Peter Lewis and Bryan Bird on 21 September 2012.

37. [37]

    Meanwhile, on 1 August 2012 Mr Bird resigned as a director of Speakman Hughes, Melvie Hughes, Gypson Hughes, Bathurst Hughes and Arthur Hughes. On 3 August 2012 David Lewis was appointed as a director of Arthur Hughes, Bathurst Hughes and Telfer Hughes.

38. [38]

    The Company incurred a liability for capital gains tax of $376,696.92. For the 2012 tax year it incurred an overall tax liability of $454,234.80 calculated after taking into account tax offsets of $75,186 on a taxable income of $1,764,736. Of that taxable income $298,356 represented the net amount received by the Company from interest and dividends after deduction of expenses. The remaining taxable income of $1,401,194 was the capital gain incurred by the Company on the transfer of its assets. The Company’s tax liability was paid by Bathurst Hughes. A journal entry credited Bathurst Hughes’ liability to the Company by a corresponding amount.

39. [39]

    On 18 July 2012 Bathurst Hughes lent Mrs Lewis $200,000. It made a further loan to her of $350,000 on 1 August 2012. At her direction that sum was distributed equally to her seven grandchildren. She repaid the loan of $350,000 on 4 January 2013. On the same day she paid Bathurst Hughes $19,068.49 and on 13 June 2014 she paid Bathurst Hughes $48,482, apparently either as partial repayment of the $200,000 loan or in payment of interest.

40. [40]

    Mrs Lewis as sole director of Bathurst Hughes, Speakman Hughes, Telfer Hughes, Melvie Hughes and Gypson Hughes signed a loan acknowledgment on 2 August 2012 for each company. She acknowledged receipt of two advances of $200,000 on 18 July 2012 and $350,000 on 1 August 2012 from Bathurst Hughes. She also acknowledged that Bathurst Hughes had received the loans from Anne Lewis and that “The parties have agreed that the loans are to be repaid on a mutually agreed basis but not to exceed 7 years from the date of the loan. Interest to be charged on a mutually agreed basis.” Repayment and interest terms of the drawdowns made by Mrs Lewis from Bathurst Hughes were said to be “subject to the Loan Agreement between Pamela Lewis and the Company mentioned above [sic]”.

41. [41]

    On 2 August 2012, as the sole director of Speakman Hughes, Mrs Lewis resolved to pay a fully franked dividend of $30,000 to Arthur Hughes as trustee for the Howarth Family Trust. Mrs Lewis acknowledged that Speakman Hughes had received a loan from Anne Lewis on 12 February 2012 for the amount of $1,484,458.06 and that the loan was to be repaid on a “mutually agreed basis but not to exceed 7 years from the date of the loan. Interest is to be charged on a mutually agreed basis.”

42. [42]

    As the sole director of Telfer Hughes, Melvie Hughes and Gypson Hughes, Mrs Lewis resolved to pay a fully franked dividend from each of those companies to Arthur Hughes as trustee for the Grant Family Trust, the Geoffrey Family Trust and the Barnby Family Trust respectively. The companies acknowledged loans from Anne Lewis on 10 February 2012 in the same amount of $1,484,458.06, save for Gypson Hughes which acknowledged a loan of $1,484,882.61.

43. [43]

    On 12 April 2013 Mrs Lewis, acting through her solicitor, gave notice to Mr Bird for the holding of a meeting of directors on 16 April 2013 with a view to passing resolutions for the distribution of net capital profits of $3,506,608.84 to the shareholders of the Company arising from the sale of assets acquired prior to 20 September 1985 and the payment of that sum by Bathurst Hughes in partial repayment of its loan from the Company. That proposal did not proceed. Mr Bird wrote to Mrs Lewis on 7 May 2013 advising that he had told David Lewis on 15 April that in his view the plan was seriously flawed and would result in incurring a substantial tax liability. David Lewis then agreed that the proposed meeting on 16 April should be cancelled.

44. [44]

    On 9 August 2013 Mrs Lewis as director of the Company purportedly declared a dividend of $120,000. Bathurst Hughes paid $60,000, purportedly on behalf of the Company, to Mrs Lewis. Sixty thousand dollars was not distributed to the executors of Mr Lewis’ estate.

45. [45]

    On 5 December 2013 Peter Lewis filed an originating process seeking an order that the Company be wound up on the just and equitable ground. On 9 April 2014 Brereton J ordered that the Company be wound up and that Mr Hugh Thomas be appointed its liquidator.

46. [46]

    By summons filed on 16 April 2014 Mr Thomas sought a declaration that the first to sixth defendants held their respective assets on trust for the company, an order that those defendants do all things necessary to transfer their respective assets to the Company, or alternatively, judgment for a debt of $9,136,451.27 and interest, and certain other relief. It was not until closing submissions that leave was sought for the joinder of the Company as a plaintiff. That leave was granted. The causes of action that the liquidator pursues are the Company’s causes of action. They are not causes of action vested in the liquidator.

47. [47]

    Mrs Lewis swore an affidavit in which she deposed that:

48. [48]

    As the plaintiffs allege, the transfer of all of the cash investments and all of the shares and stapled securities that belonged to the Company to the second to sixth defendants was of no corporate benefit to the Company. The sixth defendant, Bathurst Hughes, acknowledged that it was indebted to the Company for the moneys transferred. The second to fifth defendants, through Mrs Lewis, acknowledged that they were indebted to the Company for the amount of the purchase price payable on the transfer of the shares and stapled securities that were described as having been advanced by way of vendor loan. But the loans were to be repaid only after seven years, unless the parties mutually agreed on an earlier repayment, and did not carry interest, unless the parties agreed on the rate of interest to be charged. The documentation of these arrangements may have been prepared with the view to satisfying the criteria whereby loans made by a private company are not to be treated as dividends if they provide for a rate of interest which equals or exceeds the benchmark interest rate for the year of income and the loan does not exceed the maximum term provided for by s 109N of the Income Tax Assessment Act 1936 (Cth). However, it is admitted on the pleadings that no interest was negotiated or agreed in relation to the loans made by the Company and they have not been bearing interest. No submissions were made by any party as to what, if any, taxation liability might arise as a result.

49. [49]

    As a director of the Company Mrs Lewis owed a fiduciary duty to act in the best interests of the Company and to avoid a conflict between her duty to the Company and her personal interests. She owed a statutory duty to act in good faith in the best interests of the Company and for a proper purpose (Corporations Act 2001 (Cth), s 181(1)).

50. [50]

    The Company was solvent. The interests of the Company were the interests of its shareholders, that is, Mr and Mrs Lewis. Mr Lewis did not participate in the “restructure”. The defendants did not plead that he gave his informed consent to the transactions, either personally or by his attorney Mrs Lewis. Had such an issue been raised there would have been a question as to whether or not Mrs Lewis could have exercised her husband’s power of attorney to consent to the transactions on his behalf, or whether her authority so to act was lost because he had lost capacity. No issue of the shareholders giving their informed consent to what would otherwise be a breach of a director’s fiduciary duty was raised.

51. [51]

    Mr Bird had not been appointed to the board when the initial cash withdrawals were made from the Company’s bank account totalling $3,180,376. He was appointed a director on 25 January 2012 and signed the share transfers. He was approached to become a director by David Lewis on Mrs Lewis’ behalf. He understood it was his role as a director of the Company to carry out the wishes of the owners, being Geoffrey Lewis and Pamela Lewis. He said that the restructure plan in which he participated was based on the wishes of Mr and Mrs Lewis as expressed in their wills, that under Mr Lewis’ will the sons got a quarter of the estate each and from Mrs Lewis’ side the sons got one-fifth each and the grandchildren as a whole got one-fifth. He said that the companies were set up in that exact proportion and that control would pass on the death of Mrs Lewis as he understood it. He had had no discussions with Mr Lewis about those matters. He believed on the basis of what was said in Mr Lewis’ will that the restructure would be in accordance with his wishes.

52. [52]

    However, the transactions did not implement Mr Lewis’ wishes as expressed in his will. Mrs Lewis had effective control of Bathurst Hughes and of Arthur Hughes, which was the trustee of all of the discretionary trusts. Whereas under Mr Lewis’ will his executors were responsible for the investment of his estate having regard to the interests of Mrs Lewis as life tenant and the four sons as remaindermen, under the so-called succession plan Mrs Lewis controlled the trustee and could appoint either capital or income unconstrained by the terms of her husband’s will.

53. [53]

    The transfer of assets to the five companies was not for the benefit of Anne Lewis. From its perspective the transaction was most disadvantageous. The loans were interest-free and were given without security. The Company was deprived of its income stream from interest and dividends and was deprived of the prospect of future capital growth of the shares and stapled securities. The transaction was disadvantageous to Mr Lewis as shareholder for the same reasons it was disadvantageous to the Company. It did not implement his testamentary wishes, even if that were a legitimate consideration.

54. [54]

    I accept the evidence of Mr Bird, Mrs Lewis and David Lewis referred to above as to their motives and intentions in implementing these transactions. I accept that it was David Lewis’ intention, and his expectation, that the affairs of the trusts would be so managed in the future that effect would be given ultimately to the substance of his father’s testamentary wishes as to who should inherit his father’s estate, albeit that this depended upon the future exercise of discretions of the trustee of the four discretionary trusts and the distribution of capital from Bathurst Hughes. Likewise I accept that Mrs Lewis acted on the advice of her son David and considered that the transactions were not designed to defeat her husband’s intentions under his will, but were for the purposes of protecting her husband and her and restructuring the Company’s affairs with the aim of reducing future tax liabilities. I accept that Mr Bird simply considered that he was implementing the wishes of David Lewis and Mrs Lewis and thought that the transactions were of a kind of which Mr Lewis would approve. Mrs Lewis, Mr Bird, and David Lewis did not act dishonestly.

55. [55]

    Nonetheless, Mrs Lewis breached her fiduciary and statutory duties as a director. She entered into transactions that were not for the benefit of the Company and where she had a conflict between her duty to the Company and her personal interest. The transactions were not for the benefit of her husband. The effect of the transactions was to transfer all of the Company’s assets to five other companies which she controlled. She obtained for herself the power to appoint both capital and income, including to herself to the exclusion of any of her children. Unless she had the informed consent of her husband, which was not alleged, Mrs Lewis breached her fiduciary duty by arranging for the transfers.

56. [56]

    Mrs Lewis also breached her duty under s 181(1) of the Corporations Act. That section provides:

57. [57]

    In Re Ledir Enterprises Pty Ltd [2013] NSWSC 1332; (2013) 96 ACSR 1 Black J summarised the authorities on that provision as follows:

58. [58]

    It is not clear to me that Mrs Lewis subjectively considered that the transactions were in the best interests of Anne Lewis. In any event, for the reasons given, the transactions were not for a proper purpose.

59. [59]

    Mr Bird participated in the transfers of the shares and stapled securities. He was not joined as a defendant. It is not necessary to make any finding as to whether he was in breach of his equitable or statutory duties as a director in acquiescing in and facilitating the transactions.

60. [60]

    David Lewis was the instigator of the transactions and of Mrs Lewis’ breaches of fiduciary and statutory duties. He did not merely assist those breaches. Because David Lewis instigated or procured his mother’s breach of fiduciary duty, he is liable to pay equitable compensation to the Company for whatever loss the Company might suffer as a result of his breach. That is so even though I have found that neither he nor Mrs Lewis was guilty of dishonesty (Hasler v Singtel Optus Pty Ltd [2014] NSWCA 266; (2014) 87 NSWLR 609 at [77]; William Gummow, “Knowing Assistance” (2013) 87 ALJ 311 at 315-317).

61. [61]

    Both Mrs Lewis and David Lewis are liable to compensate the Company for the loss suffered by it as a result of the transactions whereby the shares and stapled securities and cash investments of the Company were transferred to the second to sixth defendants.

62. [62]

    The second to sixth defendants received the Company’s property with actual knowledge through Mrs Lewis of all relevant circumstances, and those companies had the same want of probity as did Mrs Lewis personally and David Lewis. The companies have a personal liability to account for profits or pay compensation for loss suffered by the Company under the first limb of Barnes v Addy (1874) LR 9 Ch App 244 at 251-252 (Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 at [266]-[269]). That is so notwithstanding that the property received by the second to sixth defendants was not trust property, but the Company’s property that was misapplied by at least Mrs Lewis’ acting in breach of her fiduciary duty (Grimaldi v Chameleon Mining NL (No 2) at [510], [563]-[567]).

63. [63]

    The extent of the second to eighth defendants’ personal liability to pay equitable compensation (or to account for profits) will depend upon whether the Company is entitled to a proprietary remedy so as to require the defendants to retransfer to the Company the shares that were transferred to the second to fifth defendants, whether the sixth defendant is liable to transfer so much of the cash investments it received, and whether the defendants are also required to transfer the fruits of the property received, in the form of interest and dividends.

64. [64]

    Prima facie, the second to sixth defendants having received the Company’s property with knowledge of Mrs Lewis’ breach of fiduciary duty would hold the funds on a constructive trust for the Company (Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 at 405; Grimaldi v Chameleon Mining NL (No 2) at [562]-[564], [567]).

65. [65]

    On 17 and 28 April 2014 orders were made restraining the defendants from dealing with the moneys and other assets that had been transferred to them.

66. [66]

    A difficulty with the plaintiffs’ claim to a proprietary remedy was that it was not until counsel’s attention was drawn to Daly v Sydney Stock Exchange Limited (1986) 160 CLR 371 that the Company sought to rescind the contracts of loan and of sale and purchase of the shares and stapled securities. The plaintiffs pleaded and submitted that the purported loans were merely a disguise to hide the bare transfer of the Company’s assets in breach of fiduciary duty without there being any intention that the assets would be paid for or the loans repaid. A similar argument was successfully advanced in Grimaldi v Chameleon Mining NL (No 2). In this case, however, I am satisfied that David Lewis, who was the true mind behind the transactions, intended the transactions to take effect in accordance with the tenor of the minutes that he prepared, namely, that the transfer of cash investments to Bathurst Hughes be by way of loan and that the transfer of the shares and stapled securities be by way of sale and purchase with the purchase price being provided by vendor finance. It is unnecessary to say whether this was a vendor loan or merely a deferred obligation on the part of the second to fifth defendants to pay the purchase price.

67. [67]

    As the Full Federal Court held in Grimaldi v Chameleon Mining NL (No 2), before proprietary remedies could be granted, current authority requires rescission of the contracts of loan and contracts of sale and purchase, because those transactions are only voidable for breach of fiduciary duty or analogous statutory duty (Daly v Sydney Stock Exchange Limited per Brennan J at 387-390, 390; Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143 at 153; Hancock Family Memorial Foundation Ltd v Porteous [2000] WASCA 29; (2000) 22 WAR 198 at [173]-[206]; Robins v Incentive Dynamics Pty Ltd (in liq) [2003] NSWCA 71; (2003) 175 FLR 286 at [73]-[74], [82]; Grimaldi v Chameleon Mining NL (No 2) at [273]-[281]).

68. [68]

    Belatedly, the liquidator sought and was granted leave to join the Company as a second plaintiff and to amend the statement of claim to seek an order for rescission of the agreement by which the Company’s moneys were transferred by loan to Bathurst Hughes and of the agreements by which the listed shares and stapled securities owned by the Company were transferred to the second to fifth defendants. By its statement of claim the plaintiffs as well as seeking an order for rescission elected to rescind those transactions. Leave to amend was granted.

69. [69]

    The effect of rescission was described by McLelland AJA in Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd as follows (at 153):

70. [70]

    That principle applies to the present case. No question of the Company’s making restitution arises.

71. [71]

    No submissions were made as to whether an order for rescission was necessary or whether the appropriate remedy was a declaration that by their proposed amended statement of claim the plaintiffs had rescinded the transactions.

72. [72]

    It could not be suggested that the agreements were voidable at law. They were voidable only in the exercise of equity’s exclusive jurisdiction. The better view is that such rescission is effected by order of the court (J D Heydon, M J Leeming & P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies, 5th ed 2015 at [25-095]-[25-110] and cases there cited).

73. [73]

    No submission was made that the plaintiffs were not entitled to rescind the transactions if it were found that the transactions were entered into as a result of Mrs Lewis’ breach of her fiduciary duty. I am satisfied that the plaintiffs are entitled to declarations that the second to fifth defendants hold the listed shares and stapled securities transferred to them on constructive trust for the Company, and that the sixth defendant held the Company’s money transferred to it on constructive trust for the Company. The Company is entitled to an order for the return of that property to the extent it is still held by those defendants. I think the constructive trust applies also to the fruits of the property that were wrongly transferred, namely the dividends received by the second to fifth defendants and the interest earned by the sixth defendant for the moneys transferred to it. This question is probably academic as there is no suggestion that there are external creditors of the second to sixth defendants, and they would in any event be liable personally to account for profits derived by them.

74. [74]

    Whether any of the defendants are liable to pay equitable compensation will depend upon whether or not the Company is restored to its position by the proprietary remedies outlined above. The extent of the liability of the second to eighth defendants to pay equitable compensation will also be affected by whether or not the Company is entitled to a refund of the capital gains tax paid on its behalf by Bathurst Hughes. Accordingly, I will grant liberty to the plaintiffs to apply for the assessment of equitable compensation.

75. [75]

    Counsel for Mrs Lewis submitted that if the transactions were rescinded, the liquidator would be bound to proceed with the winding-up of the Company and at the conclusion of the winding-up Mrs Lewis would be entitled to receive 50 per cent of the surplus on the winding-up. Counsel submitted that she should not be left to suffer any pecuniary anxiety in the meantime and hardship should be avoided by allowing her to retain a “sizeable six-figure sum” from any money Bathurst Hughes was ordered to repay with that sum to be accounted for as part of her share on the final distribution by the liquidator.

76. [76]

    The liquidator through his counsel accepted that on the winding-up of the Company Mrs Lewis will be entitled to a substantial distribution in the millions of dollars. The liquidator has power to make an interim distribution and did not oppose its being a condition of the relief that an interim distribution be made to Mrs Lewis.

77. [77]

    I do not think it necessary to impose such a condition as a condition of the grant of equitable relief. Although it appears that the Company does not have external creditors of any substance other than, possibly, the Commissioner of Income Tax, the question of what sum could be appropriately paid to Mrs Lewis as an interim distribution pending the completion of the winding-up is essentially a matter for the judgment of the liquidator. There is no reason to apprehend that the liquidator would not give prompt and careful consideration to making an interim distribution once the Company’s assets have been returned to it so as to avoid hardship to Mrs Lewis.

78. [78]

    The first defendant, Arthur Hughes, did not receive a transfer of the Company’s property. It is not liable for personal remedies as a constructive trustee under the first limb of Barnes v Addy. Nor did it assist with knowledge in an fraudulent and dishonest design so as to be liable under the second limb of Barnes v Addy. Arthur Hughes, as distinct from David Lewis, was not the instigator or procurer of the breach of fiduciary duty. I do not consider that it is liable to any equitable remedy.

79. [79]

    The ninth defendant is David Lewis’ son, Daniel Lewis. He was appointed a director of Anne Lewis, Arthur Hughes, and the second to sixth defendants, on 15 March 2014. He did not participate in any of the transactions. The claim against him should be dismissed.

80. [80]

    Although complaint was made about the declaration by Anne Lewis of the $120,000 dividend on 9 August 2013, the complaint appeared to be that half of the dividend was paid (via Bathurst Hughes) to Mrs Lewis, but the other half was not paid to the executors of Mrs Lewis’ estate. The plaintiffs’ claims for relief did not include any orders challenging the validity of the declaration of the dividend. It is clear that sufficient profits were available from which the dividend could be declared. The executors of Mr Lewis’ estate are not plaintiffs. Presumably they are entitled to be paid their share of the dividend by Anne Lewis. But the defendants are not liable to Anne Lewis or the liquidator in respect of that matter.

Conclusion and orders

1. [81]

   For these reasons subject to any submissions the parties may have as to the form of the declarations and orders to be made I propose to make orders and declarations to the following effect:

2. [82]

   I will stand the proceedings over to a convenient time. I direct the parties to bring in short minutes of order in accordance with these reasons. Prima facie the second to eighth defendants should pay the plaintiffs’ costs. I will deal with any submissions concerning costs at that time.