Crowe-Maxwell v Frost

BEAZLEY P: The appellants appeal from orders made by P Taylor SC DCJ dismissing their claim against Ian and Kathrine Frost, the sole shareholders and directors (the directors) of the second appellant. The first appellant is the liquidator of the second appellant, I & K Frost Pty Ltd (in liq) (the Company). In the proceedings before P Taylor SC DCJ, the appellants sought to recover monies alleged to have been paid by the Company for the directors’ benefit, primarily on the basis that the payments were unreasonable director-related transactions within the meaning of the Corporations Act 2001 (Cth), s 588FDA and thus were voidable transactions.

The directors have been self-represented throughout the litigation. Mr Frost appeared at first instance, although only for part of the second day of the hearing. Neither director appeared on the appeal, although the Court received an email from Mr Frost and there was a telephone communication between him and a Court staff member. The import of each communication was that the directors were unable to afford legal representation and would not be appearing. The directors conveyed nonetheless that they resisted the relief sought by the appellants on the appeal. As the Court was satisfied that the directors had been served with all relevant documents on the appeal and that they were aware that the appeal was listed for hearing on 17 September 2015, it was considered appropriate to proceed with the hearing notwithstanding the directors’ absence and without any submissions being advanced by them or on their behalf.

The Company conducted a childcare business at the directors’ residential premises. That property was subject to a mortgage to the National Australia Bank in respect of which repayments totalling $51,500 were made by the Company.

Mr Frost operated the business and Mrs Frost worked elsewhere full-time, although she assisted in the business when she was not working, such as during her holidays from her usual employment. In the running of the Company, at least in the latter years of its operation, the directors failed to keep the Company’s expenses and their personal finances separate and, in general, the books of account were not properly kept. There was no record in the Company’s books of account of the payment of wages to either Mr or Mrs Frost for the services they provided to the Company. However, the evidence revealed that the Company paid various personal expenses they had incurred.

The childcare business began to suffer falling enrolments from about 2005, which impacted upon its financial viability. As a result, Mr Frost contended that he used personal savings, as well as borrowings from his family, to continue to operate the business. Those borrowings included a loan or loans from Mr Frost’s father, in respect of which he contended that a payment to his father in the sum of $8,900 was by way of repayment of monies lent.

On 19 November 2008, an application was made by the Workers Compensation Nominal Insurer to wind up the Company and an order for its liquidation was made on 12 March 2009. The first appellant was appointed as liquidator. The relation-back period, derived from the date of the filing of the summons for winding up, commenced on 19 November 2008.

The monies expended from Company accounts of which the appellants sought recovery and which remained in issue on the appeal were as follows:

The appellants accepted that an amount of $69,531 was to be deducted from the total of the sums particularised in [7](i)-(iv) above, to account for the payment into the Company bank account of Mrs Frost’s wages from her employment other than with the Company. The balance claimed was $136,508.97, although it should be pointed out his Honour’s finding at [60] was that the $69,531 was deductible specifically from the amount of personal expenditure as claimed in [7](i) above.

The appellants also claimed interest on the sum claimed calculated at pre-judgment rates from 12 March 2009 until 12 August 2014 and at post-judgment rates from 12 August 2014 until payment.

It is convenient at the outset to deal with the issue, properly raised by the appellants, that the appeal was not commenced within the time limits prescribed by the Uniform Civil Procedure Rules 2005 (NSW) (UCPR).

Judgment was given in the court below on 13 August 2014. A notice of intention to appeal was filed on 11 September 2014, and posted to the directors on 15 September 2014, such that service was deemed to have occurred on 19 September 2014: the Evidence Act 1995 (NSW), s 160. Thus the notice of intention to appeal was filed 29 days and served 37 days after the relevant material date. UCPR, r 51.8 provides that a notice of intention to appeal is to be filed and served within 28 days of the material date. The notice of intention was therefore filed and served out of time.

The appellants submitted that by filing the notice of intention to appeal, the jurisdiction of the Court was engaged, notwithstanding that the notice was out of time: Jingalong Pty Ltd v Todd [2014] NSWCA 330 at [45]. This, strictly, is not a correct characterisation of what occurs when a notice of intention to appeal is filed. Pursuant to UCPR, r 51.6 a notice that a party intends to file a notice of appeal or a summons seeking leave to appeal is a notice of that intention. The notice does not engage the jurisdiction of the Court as such. The filing of a notice of intention to appeal or summons seeking leave to appeal has the practical effect of extending the time in which a notice of appeal or summons seeking leave to appeal is to be filed, from 28 days to 3 months: UCPR, r 51.9.

Although the jurisdiction of the Court is not formally engaged, a notice of intention to appeal, filed out of time, is nonetheless governed by the UCPR, such that an extension of time for its filing may be granted in an appropriate case: UCPR, r 1.12. In this case, there being no complaint by the respondents as to its late filing and service, an extension of time should be granted.

The notice of appeal was filed on 13 November 2014 and served on 20 November 2014, 7 days out of time for service: UCPR, r 51.9.

The directors, having been served with notice of the intention to appeal approximately 5 weeks after judgment was delivered, were aware of the possibility that the appellants would appeal. They have not advanced any submission that they have been prejudiced by the delay. In the circumstances, I consider that the time for the filing and service of the notice of appeal should be extended to 20 November 2014 pursuant to UCPR, r 51.16

The first and primary basis upon which the appellants brought the claim was pursuant to the Corporations Act, s 588FF, which provides that, on the application of a company’s liquidator, the court may make orders, including an order that monies be paid to the company, if it is satisfied that a transaction of the company is voidable because of s 588FE. Section 588FE provides, relevantly, that an “unreasonable director-related transaction of the company” may be a voidable transaction. An “unreasonable director-related transaction” is defined in s 588FDA(1).

The essential question on the appeal, therefore, was whether the monies claimed were unreasonable director-related transactions within the meaning of s 588FDA. One aspect of the appellants’ arguments was that there was no evidential basis for his Honour’s findings that the relevant payments did not constitute unreasonable director-related transactions. An issue also arose as to whether the appellants had discharged the onus of proving the relevant transactions were “unreasonable director-related transactions”, and the extent to which the directors bore an onus to adduce evidence in relation to the impugned transactions.

The alternative basis upon which the appellants brought their claim was by way of equitable compensation for breach of directors’ duties, including duties to act bona fide in the interests of the company as a whole; not to use their positions as directors to gain personal advantage or cause detriment to the company; to exercise reasonable care in the discharge of their duties as directors; and to exercise their powers for a proper purpose. On the appeal, the appellants initially submitted that the two claims were linked such that:

During the course of argument on the appeal, the appellants’ counsel accepted that the benefits and detriments of the impugned transactions were not so disproportionate that a reasonable person in the Company’s circumstances might not have made the payments, but added:

The appellants did not expand upon this submission.

The appellants also made a submission that, at best, the trial judge found in favour of the directors on the basis of quantum meruit, but that his Honour failed to make the findings necessary to do so: see Progressive Pod Properties Pty Ltd v A & M Green Investments Pty Ltd [2012] NSWCA 225; Laidlaw v Hillier Hewitt Elsley Pty Ltd [2009] NSWCA 44; Lumbers v W Cook Builders Pty Ltd (in liquidation) [2008] HCA 27; 232 CLR 635.

It is convenient first to deal with the appellants’ challenges to the evidential basis of the trial judge’s reasoning. There were four sources of ‘information’ before the trial judge, each of which requires consideration in this regard:

The trial judge, over the appellants’ objection, “read” into evidence the filed defence, which was in the form of a letter written by Mr Frost annexed and marked ‘A’ to the prescribed form of defence (annexure A). Mr Frost had sworn the affidavit verifying the defence. The defence was the entirety of the documentary evidence tendered by the directors, although an email written by Mr Frost to the trial judge’s associate was also in evidence, as I explain below.

In their amended notice of appeal, the appellants did not challenge his Honour’s decision to admit the defence as evidence, except in respect of the claim relating to the sum of $8,900: see ground 5(b). However, they contended that there was no evidence:

However, in their written submissions the appellants asserted that “a defence is not evidence”: see Bhagat v Global Custodians Ltd [2002] FCA 223; ICM Agriculture Pty Ltd v Young [2009] FCA 109; Campbell v Illawarra Golf Club Pty Limited (In Liquidation) (No 3) [2014] NSWSC 341. In the course of oral argument, senior counsel submitted that it was impermissible for his Honour to have taken into account the defence as evidence as “pleadings could not be evidence”.

Bhagat v Global Custodians concerned, relevantly, an application to set aside a bankruptcy notice founded on a judgment debt. The judgment debtor, who was self-represented, produced an affidavit, annexed to which was a statement of claim in separate proceedings, containing allegations that the judgment had been procured by fraud. At [53], the Court (O’Loughlin, Whitlam and Marshall JJ), in considering the circumstances in which a bankruptcy notice founded on a judgment debt should be set aside on the basis of a separate claim attacking the underlying judgment, stated:

In ICM Agriculture Pty Ltd v Young a litigant annexed to an “affidavit verifying” a statement of claim from a different proceeding which purported to quantify the amount sought in his cross-claim in the subject proceedings. The documents were admitted before the primary judge as a single exhibit but the affidavit was not read into evidence. At [76], Lindgren J held:

Campbell v Illawarra Golf Club concerned, relevantly, whether the institution of proceedings by the registered proprietor of a property subject to a writ of possession was a factor that should have caused the trial judge, in the exercise of his discretion, to stay the writ. At [47], Bellew J held:

Bhagat v Global Custodians and Campbell v Illawarra Golf Club were concerned, relevantly, with the use to which pleadings filed in one proceeding may be put in another and in particular, with the interaction between the proceedings in question and a second set of proceedings or the claim underlying those proceedings. The present matter, by contrast, raises the question as to the use that can be made of verified averments in a pleading filed in the proceedings.

As to that question, ICM Agriculture Pty Ltd v Young is authority that, in a given case, depending upon the terms of the pleading, verified pleadings may constitute evidence of a person’s belief in the matters asserted. In ICM Agriculture Pty Ltd v Young the averments in the pleadings were conclusory only. That was not the position in respect of all paragraphs of the defence in the present case, as is apparent from his Honour’s rulings and I do not consider that the conclusion in ICM Agriculture Pty Ltd v Young is authority for the proposition that a verified pleading can only ever be evidence of the person’s opinion. It is thus necessary to consider each of the paragraphs of the defence to determine whether they constituted evidence of the fact of the matters asserted.

Paragraph (1) of the defence stated that monies used for personal expenditure were short term loans and had been repaid. As I understand the appellants’ case, they now accept that there were payments into the Company from Mrs Frost’s salary. They also accept that a credit of $69,531 was to be allowed in respect of such payments. Accordingly, nothing further needs to be said about the admissibility of par (1) of the defence in terms of its admissibility.

No objection was taken to par (2) of the defence, as it responded to a claim that the appellants had abandoned. Paragraph (8) may also be put to one side as it related to a sum which is not the subject of challenge on appeal.

Paragraph (3) of the defence itemised nine expenses, of which eight totalling $34,715.08 were pressed by the appellants. A brief explanation of the purpose of each was set out in the defence. His Honour admitted par (3) as evidence of the fact, save for a qualification in respect of one matter that was admitted as evidence of Mr Frost’s opinion.

There was no error in his Honour’s ruling that par (3) of the defence was admissible. An explanation was given for each item of expenditure that would have been admissible if given by way of formal affidavit or oral evidence. Further, the appellants cross-examined Mr Frost on those items. Whether his Honour accepted the evidence, including that given in cross-examination, was a matter for him. The matter admitted by way of opinion evidence was, in the result, not relevant to the admissibility of the evidence of the expenditure as a business related expense.

Objection was taken to par (4) of the defence, which dealt with cash withdrawals from ATMs and by way of EFTPOS withdrawals, totalling $60,030.16 and $99,286.15 respectively. The defence stated that these figures were cash payments to staff and could be cross-referenced with the wage books held by the first appellant. Paragraph (5) related to payments of approximately $35,000 by way of cash cheques and withdrawals, also said to be payment of staff wages that could be verified by the wage books held by the first appellant. As wages for staff was not an issue on the appeal, it is not necessary to make further reference to these paragraphs.

Paragraph (6) of the defence related to payments made by the company on the NAB mortgage over the directors’ property. It described that mortgage and the property, including those parts of it which were used for the childcare business. The paragraph stated that the company benefitted from the loan repayments as they allowed the business to operate on the property. Only the sentence that “[a] reasonable business expense of 50% of interest payments would be expected” was subject to objection, on the basis that it was an expression of opinion without basis.

There was no error in his Honour allowing the evidence on the basis that the directors, as owners of the residence, were in a position to say what a reasonable cost of accommodating the child care centre was having regard to the extent of that use and had purported to do so by attributing half the monthly mortgage payments as the cost of that accommodation. Whether that made such a transaction an unreasonable director-related transaction is a different question from the question of admissibility.

Paragraph (7) was a statement to the effect that the $8,900 paid to Mr A Frost was in repayment of a loan made by him. It was objected to on the same basis as par (4) and allowed, again with a comment by his Honour that there might be queries as to its weight. It was admissible evidence, just as a statement on a cheque butt or in a book of account describing the payment would be admissible evidence of the purpose of a payment.

It follows that the statements made in the defence were admissible evidence in the directors’ case and accordingly, there was no error in the trial judge admitting the verified statements in the defence as evidence. The question of what those statements proved and in particular whether they proved the matters stated was a question for his Honour’s determination.

The appellants raised two further contentions regarding the pleadings.

First, they contended that only Mr Frost had filed a defence, such that judgment should have been entered in the appellants’ favour against Mrs Frost. I do not agree with this assertion. Nor do I consider the appellants should be allowed to raise it on the appeal. Whilst it is correct that the cover page of the defence stated that it was filed for Mr Frost and it was verified only by Mr Frost, Annexure A, which contained the defence stated:

The document also pleaded that “the defendants” denied the plaintiff’s allegations. It was therefore apparent that the directors intended the document to be a defence of the claim by both respondents. The appellants did not, at any time, seek default judgment against Mrs Frost, which is, at the least, an indication they treated the claim as being defended by both directors. In addition, on the second day of the hearing, when Mr Frost first appeared, he announced his appearance on behalf of “the defence”, without any objection being taken that Mrs Frost had not pleaded to the statement of claim.

Finally, it is not apparent that the appellants raised this issue at trial. Had they done so, then presumably, on the argument now raised, they would have sought the entry of judgment against Mrs Frost. In the absence of being satisfied that the appellants contended at trial that they were entitled to judgment against Mrs Frost, I do not consider that they should be entitled to seek on appeal, what in effect is a default judgment against her.

The appellants’ other general pleadings point was a complaint that his Honour’s findings in respect of the amounts in issue were not the subject of a pleaded defence. However, that point was not taken at trial and in any event, the question of the directors’ entitlement to remuneration for the services they performed was very much in issue at the hearing at first instance.

The email of 10 July 2014, forwarded to the trial judge’s associate on the morning of the hearing, tendered by the appellants and marked as Exhibit A, is of importance in determining what was before his Honour by way of evidence. It appears from the transcript that the purpose of its tender was to demonstrate that Mr Frost was on notice of the proceedings. However, it was admitted without any limitation being placed on the use to which the evidence could be put and no such limitation was sought: see the Evidence Act, s 136. Accordingly, the evidence was admitted for all purposes: the Evidence Act, s 60.

The email was in the following terms:

The appellants also adduced evidence by way of an affidavit sworn by the first appellant dated 21 October 2013, in which he identified the payments made by the Company subject of the claim.

A further complaint made by the appellants was that his Honour, contrary to a ruling he made in the course of the trial, relied upon statements made by Mr Frost from the bar table as evidence of the matters stated.

As noted above, Mr Frost appeared in the court below for part of the hearing. He gave evidence, although he did not adduce any evidence in chief. He was cross-examined by counsel for the appellants. The trial judge assessed his evidence, at [18], as follows:

Mr Frost also made statements from the bar table. His Honour had foreshadowed at the hearing that he would not treat these statements, many of which had an evidentiary flavour, as evidence, stating:

In the course of his judgment, his Honour, at [19], said in respect of Mr Frost’s statements from the bar table:

Subject to some statutory provision dispensing with the rules of evidence, a court, in determining a dispute between parties, is required to act only on evidence given on oath by witnesses, any documentary evidence tendered in the case; such facts as are agreed by the parties for the purpose of the proceedings; and any concessions made by a party in the course of the proceedings. Subject to any acquiescence by the opposing party, a submission does not have the status of evidence: Randwick City Council v Fuller [1996] NSWCA 444; 90 LGERA 380 at 382.

The statements from the bar table that the appellants contended appeared to, but ought not to, have been the basis for any fact finding by his Honour related to Mr Frost’s statements about wages. In answer to a question put to him by the trial judge, Mr Frost accepted that some of the cash withdrawals in issue were for personal use. He went on to say:

Later, Mr Frost stated:

Mr Frost also stated that he had no outside employment. He referred to his stated income of $7,500 per annum in his income tax returns and said he had no other employment as he worked from 7 am to 6 pm in the childcare business.

His Honour challenged Mr Frost as to where he had said that in his evidence or in his defence. Mr Frost responded:

The appellants are correct in contending that these statements could not be taken into account as evidence. However, it was apparent that the explanations Mr Frost gave in his statements from the bar table, particularly his reference to his wage base, were consistent with the evidence. In particular, Mr Frost said in his email of 10 July 2014 that “this business was my life from 1995 and the last thing I wanted to do was lose my job”. He also stated in the email that he was concerned with the “daily operations” of the business. Further, there was no dispute that business and personal expenses had been intermingled.

It is apparent that Mr Frost, in his statements from the bar table, was proffering an explanation that he used funds from the Company for personal expenditure as a form of wages or remuneration or by way of compensating himself for an entitlement he considered he had to be paid for his services. As I have already stated, there was evidence in the email that running the child care centre was his “job”. It is neither impermissible nor unusual for an explanation or characterisation of events or circumstances of the evidence to be given in submissions before the court. I consider that is how Mr Frost’s statements referred to above should be treated and it is probable that that is how his Honour treated this material, having regard to his comment that he was prepared to consider the material without giving it the status of evidence given on oath. Otherwise, his Honour’s comment would not have made sense.

The unreasonable director-related transaction provisions were inserted into the Corporations Act by the Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003 (Cth). The policy behind these provisions is evident from the Explanatory Memorandum to the amending Act:

Section 588FF provides that, on the application of a company’s liquidator, the court may make orders, including an order that monies be paid to the company, if satisfied that a transaction of the company is voidable because of s 588FE. Section 588FE then provides that an “unreasonable director-related transaction of the company” may be a voidable transaction.

Section 588FDA is the operative provision in relation to unreasonable director-related transactions:

Section 9 of the Corporations Act provides a definition of “transaction” for the purposes of Pt 5.7B, in which s 588FDA is found. That definition is in the following terms:

The interrelation of s 9 which, in any event, is a non-exhaustive definition, and s 588FDA is that a transaction will only be an unreasonable director-related transaction if it satisfies the elements of s 588FDA(1)(a)-(c).

As the trial judge noted, s 588FDA(1)(c) substantially adopts the language used to identify an “uncommercial transaction” under s 588FB. That provision is in the following terms:

In relation to s 588FB, the authors of Ford, Austin & Ramsay’s Principles of Corporations Law make the following observation, at [27.220]:

The same observations may be made with respect to s 588FDA.

Before examining the impugned transactions, and the appellants’ submissions, it is appropriate to consider the principles governing the voidable transactions provisions of the Corporations Act.

The requirements under s 588FDA(1) are twofold. First, there are certain threshold requirements imposed by s 588FDA(1)(a) and (b). Second, there is the inquiry mandated by s 588FDA(1)(c), viz, whether it may be expected that a reasonable person in the circumstances would not have entered into the transactions.

As it was not disputed that s 588FDA(1)(a) and 1(b) were made out in this case, the appellants’ entitlement to relief turns on s 588FDA(1)(c).

Gleeson J recently conducted an extensive review of the authorities on s 588FDA in Smith (in his capacity as liquidator of Action Paintball Games Pty Ltd) v Starke (No 2) [2015] FCA 1119; 109 ACSR 145. The following principles discernible in her Honour’s judgment are of relevance to the present case:

McLure P made the following useful observations in Weaver v Harburn [2014] WASCA 227; 103 ACSR 416 as to what is required to satisfy s 588FDA(1)(c):

Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14; 41 VR 445 was concerned with the question whether there was an unreasonable director-related transaction where a company agreed to assume joint liability for obligations owed by a director to a third party, and to grant a mortgage securing performance of that liability. Nettle JA made the following observations:

Re Lesvos Pty Ltd [2012] NSWSC 1288 demonstrates that payments made into the home loan account of a director may, in some circumstances, constitute an unreasonable director-related transaction. As Brereton J’s judgment demonstrates, much will turn on the circumstances of the payment, and whether there was relevant benefit or detriment to the company. In relation to the facts there in question, Brereton J reached the following conclusion at [31]:

The authorities referred to above involved the application of s 588FDA(1)(c) to specific factual circumstances. Given the similarities between s 588FDA(1)(c) and s 588FB, authorities concerning “uncommercial transactions” are also of assistance in identifying circumstances that may constitute “unreasonable director-related transactions”.

In Mulherin v Bank of Western Australia Ltd; McCann v Bank of Western Australia Ltd [2006] QCA 175 it was alleged that transactions by which a company, UTC, obtained a bank guarantee facility were uncommercial. There was no evidence led as to what happened to $2 million apparently lent to a director of UTC as part of these transactions, but a possibility was raised that it was used in the acquisition of land in Hong Kong by UTC.

Muir J, with whom McMurdo P agreed, held that the transactions were uncommercial. His Honour pointed to three factors that led to that conclusion. First, at [106], his Honour noted that, in the result, UTC derived little or no benefit from the transactions but did suffer detriment. Secondly, his Honour noted that it was relevant that a director appeared to have been the beneficiary of the arrangement and that “on the face of things” he had procured such benefit in breach of his director’s duties: at [107]. At [108], his Honour noted that a reasonable person in the company’s circumstances would have been aware of legal risks that might arise as a result of the director gaining a benefit from the transaction and the potential that the transaction would be found to be unlawful. His Honour concluded that “[i]n short, there [was] little about the subject transaction which accord[ed] with normal commercial practice”.

Jerrard JA dissented, essentially on the basis that the liquidator had failed to discharge the onus of proving that the impugned transaction in that case was uncommercial: see at [27].

In Gibbons v Deputy Commissioner of Taxation [2003] NSWSC 936, the liquidator claimed that certain payments made by the company, Deemah Marble & Granite Pty Ltd (Deemah), in reduction of unsecured debts owed to the Deputy Commissioner by two related companies were uncommercial. At [68]-[70], Nicholas J stated:

McDonald v Hanselmann [1998] NSWSC 171; 144 FLR 463 concerned transactions by which certain property was sold at undervalue. Young J held, at 470, that:

There was much discussion in the court below, and on the appeal, as to the formal legal basis of the Directors’ entitlement to the relevant payments. For example, in relation to the personal expenditures identified in [7](i) above, the appellants submitted that the evidence was equivocal, such that it could not be found that there was a contract or implied obligation as between the Company and Mr Frost that he be remunerated for his services.

In Laidlaw, Macfarlan JA reviewed the authorities commencing with Brogden v Metropolitan Railways Co (1876-77) 2 App Cas 666 that establish that when a party asserts that a contract has arisen from the conduct of the parties, “the character and circumstances of the conduct must indicate unambiguously that the parties intended to contract”: see at [5]. I agreed with Macfarlan JA at [1]. Handley JA, although dissenting on the result, agreed with his Honour’s analysis of authority: at [93].

In Fisher v Divine Homes Pty Ltd [2011] NSWSC 8; 85 ACSR 512, upon which the appellants particularly relied, the liquidator brought a claim against Mr Harb, the sole director and shareholder of a company which, relevantly, made payments to third parties in respect of his personal bills. Mr Harb submitted that as he had performed significant services for the company and had not been paid wages, the payments were a proper and legitimate recompense.

Barrett J, at [50]-[51], rejected that submission, as follows:

Sheahan v Londish to which Barrett J referred, related to a decision of a company that required the making and minuting of a resolution of the company. A decision made by a company as to whether to pay a person for services provided does not fall within that category. Whilst Barrett J’s opinion that entry into a contract must be apparent in some concrete way may be accepted, there can be no question that, as McHugh JA (Hope and Mahoney JJA agreeing) held in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR [97326] at 11,117:

These statements of principle are uncontroversial where the question is whether a contract exists between the parties. However, the relevant inquiry here is whether the requirements of s 588FDA(1) are made out. The appellants’ reliance on Fisher, and any narrow focus on the establishment of contractual relations or a legal obligation distracts attention from the question whether the relevant transactions were unreasonable director-related transactions.

That does not deny that the existence of a contractual relationship, or the fulfilment of some antecedent payment obligation, may be relevant to the evaluative inquiry under s 588FDA(1)(c). Indeed, evidence of quid pro quo may serve to illustrate the respective benefits and detriments envisaged by s 588FDA(1)(c)(i)-(iii). The legal relationship between the parties, and any extant obligations, may be a further relevant matter as envisaged by s 588FDA(1)(iv). However, to focus on whether there was a contract or antecedent obligation asks the wrong question and potentially casts the onus in the wrong direction. The question at all times is whether there was an unreasonable director-related transaction.

This accords with the observations of Daubney J in Fielding v Dushas [2013] QCA 55; 2 Qd R 416 at [40], quoting with approval the statement of the trial judge in that case, to which P Taylor SC DCJ referred at [24]:

No specific complaint was raised in respect of the trial judge’s reliance on Fielding. However, it must be recognised that what is normal commercial practice is relevant to, but not decisive of, the question of what it “may be expected” that a reasonable person in the company’s circumstances would do: Welcome Holmes Real Estate Pty Ltd v Ziade Investments Pty Ltd [2007] NSWCA 167 at [54] (Hodgson JA, Spigelman CJ and Santow JA agreeing).

A common thread in the uncommercial transaction cases is that, where there is limited evidence of the nature or purpose of a transaction, but the surrounding circumstances show it to be a departure from normal commercial practice and to raise inferences as to a lack of benefit to the company, detriment caused to the company, or benefit accruing to other parties, absent some commercial explanation, courts may infer the transaction was uncommercial, without requiring the liquidator to prove its precise uncommercial nature. The same may be said with respect to the identification of unreasonable director-related transactions.

In those limited circumstances, for practical purposes, a defendant may be said to bear an ‘onus’, sometimes referred to as an evidentiary onus, of raising some commercial explanation for the transaction. Thus, in Hawksford v Hawksford [2005] NSWSC 463; 191 FLR 173 Campbell J explained, at [54]:

Hawksford concerned a challenge to a solicitor’s retainer with two corporate entities in which the plaintiffs had interests. Campbell J, at [55], considered that while the legal onus of proving the absence of a retainer lay on the plaintiffs, once they had raised an inference of the negative proposition, the defendants carried an evidential burden “to advance in evidence any particular matters with which (if relevant) the plaintiffs would have to deal in the discharge of their overall burden of proof”: Apollo Shower Screens Pty Ltd & Anor v Building and Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561 at 565 per Hunt J. Campbell J’s statement is an application, in the context of proof of a negative proposition, of the principle in Blatch v Archer (1774) 1 Cowp 63; 98 ER 969 at 970 that:

As the nature of and evidence relating to each of the impugned transactions were different it is convenient to consider each of the claimed categories separately.

The trial judge, at [10], set out in table form the items of personal expenditure that were claimed by the appellants. The total of the claimed expenses was $181,064.34 and included expenses such as alcohol ($4,612.45), department store purchases ($5,069.01) and fashion ($6,865.99). His Honour observed, at [34] ff, that in his evidence, Mr Frost had admitted that some of the itemised expenses would probably be regarded as personal expenses that had been paid by the Company.

His Honour found, at [43], that the amount of payments made for personal expenses was $143,439.97. That calculation was not in dispute on the appeal. The question in issue was whether the underlying transactions were unreasonable director-related transactions.

His Honour observed, at [64], that whilst Mr Frost had worked full-time in the business and Mrs Frost had done so “occasionally or casually”, there was “no record of them ever receiving any wages from the Company”. His Honour considered that that was due to the directors failing to distinguish between the Company’s funds and their own. However, his Honour observed that:

His Honour further observed, at [65], that payment by the Company of personal expenses of approximately $15,000 per annum ($76,312.67 over five years) was “a very reasonable amount for their services and an amount that [was] favourable to the Company”. In his Honour’s view, it was “not to the point”, as the appellants had submitted, that it had not been established that there was any formal agreement between the Company and the directors to use the Company’s money for personal expenditure in lieu of remuneration.

In essence, the trial judge considered that the directors were entitled to payment for services provided to the Company. The payments did not, on his Honour’s view, provide a benefit to the directors beyond their entitlement to be paid for their services, nor did the monies expended by way of personal expenditure appear to be a detriment to the company. His Honour concluded, at [67], that the monies paid by the Company to the benefit of the directors “were not uncommercial”.

His Honour considered, at [68], that the failure by the directors to provide relevant documentation in respect of the transactions particularised as personalised expenditure did not relieve the appellants from the onus they bore to prove that the directors had received unreasonable amounts.

His Honour concluded, at [69], that he did not think that the amounts the directors had received from the Company “exceeded a reasonable remuneration for their work for the Company”. At [70], he rejected the appellants’ submission that there was a breach by the directors of their directors’ duties, including by failing to keep proper records, such as would enliven an entitlement in the liquidator to recover the monies paid.

The appellants accepted that they bore the onus of proving that the impugned transactions were unreasonable director-related transactions. They contended that it was sufficient to discharge that onus to point to the fact of the payments for personal expenditure having been made and the absence of any Company resolutions or accounting records relating to the payments. The appellants submitted that having discharged that onus, the directors bore an evidentiary onus to prove that those payments provided some benefit to the Company.

The appellants accepted that it could reasonably be inferred from the circumstances that there was an implied request by the Company for Mr Frost to provide his services to the Company and that Mr Frost worked in the business with the consent and agreement of the Company. However, in a subsequent submission the appellants’ senior counsel, although not disowning his previous submission, restricted his concession to accepting that Mr Frost worked in the business with the consent of the Company. Whatever be the extent of the appellants’ concession, the central contention was that his Honour erred in finding that the directors were entitled to payment for the work they performed. Their first submission in support of that argument was directed to the absence of evidence of Company records to support any such entitlement, in contrast to the care with which staff wage records had been kept.

The appellants further submitted that no finding that wages were owed could be made in the absence of any claim relating to the payment of wages in the defence and in the absence of any evidence as to whether any such payments had been made or that the wages to which the respondents were entitled exceeded the amounts they had caused the Company to pay on account of the personal expenditure, the loan money, the monies paid to Mr Frost’s father and the mortgage payment.

The appellants also submitted that any such entitlement assumed a legal relationship that gave rise to an implied contractual obligation, about which the evidence was, at best, equivocal, particularly in the absence of any evidence of a contract of employment or of any arrangement by which wages would be paid: see Laidlaw v Hillier Hewitt Elsley at [5]; Progressive Pod Properties v A & M Green Investments. On the appellants’ submission, the directors’ conduct was as consistent with an intention as proprietors to maximise their investment in the business by investing time without pay as it was with any expectation of payment: see Fisher at [50]-[51]. Nor, on the appellants’ argument, had the pre-requisites for the payment of monies by way of a quantum meruit been determined by the trial judge.

I do not agree that there was an absence of evidence upon which a finding of an entitlement to remuneration could be made. On the contrary, there were a number of indications in the evidence that the Company and Mr Frost proceeded on the basis that he was entitled to be remunerated for his services.

In the email of 10 April 2014, Mr Frost referred to his work in the business in terms of it being “my job”. Mr Frost also gave evidence that he lodged income tax returns in which he disclosed a nominal income of $7,500, both being indications that he worked in the Company with the expectation that he would be remunerated. In cross-examination, Mr Frost gave extensive evidence of the work that he did in the business, including that he was required to be present at all times during operating hours. He also gave evidence that Mrs Frost worked in the business five afternoons a week and in school holidays. There was a statement in the email of 10 July 2015 to similar effect. The evidence that personal and business expenditures were intermixed is also indicative that the directors considered that they were entitled to be remunerated for their services.

The appellants submitted that this evidence was equivocal, such that it could not be found that there was a contract between the Company and Mr Frost that he be remunerated for his services. As explained above, this approach distracts attention from the relevant inquiry under s 588FDA(1) – the only question is whether the transactions were unreasonable director-related transactions. As the text of s 588FDA(1)(c) and the authorities referred to above make clear, this question is to be determined by reference to all of the relevant circumstances.

There was evidence before his Honour that the directors worked in the business and that Mr Frost did so for long hours so as to keep the business going. Mrs Frost worked in the business in addition to her own full time employment. It was not suggested that the Company was insolvent: cf Gibbons. It was not suggested, and there was no evidence, that the Company received no benefit from the services provided. Indeed, the inference from the evidence was that the business only continued to operate because of Mr Frost’s services.

The appellants also contended that there was no evidence that the sum concerned, of approximately $15,000, was a reasonable amount for the services provided. However, the Court is entitled to use its common knowledge that a payment of that amount would not be unreasonable. Nor did the appellants lead evidence to suggest payments of the order of $15,000 per year were unreasonable.

In all the circumstances, it could not be said that the directors received a gift or a bargain of such magnitude that the payments were unreasonable: see Fielding v Dushas, nor could it be said that the Company received no benefit or that it suffered a detriment by paying for personal expenditure of the directors who were otherwise not drawing a wage from the business: Mulherin v Bank of Western Australia. In short, I consider that his Honour did not err in finding at [67] that the payments were not unreasonable director-related transactions.

Something should be said about the appellants’ contention that the available evidence was consistent with an intention on the part of the directors to maximise their investment in the business. For the reasons already given, I consider that that submission diverts attention from the onus borne by the appellants to prove that the transaction was an unreasonable director-related transaction. In any event, and this may be another way of stating that the appellants’ have not discharged their onus, there was no evidence upon which to base that inference.

Finally, a comment should be made as to the appellants’ submission that there was no claim in the defence contending that the personal expenditure was in lieu of wages. However, that was a live issue raised by the trial judge on the first day of the hearing and by Mr Frost in his statements from the bar table: see above at [48]-[58].

In those circumstances, and given that the directors were unrepresented, I do not consider that the failure to raise in the defence the question of wages or payment for work done precluded the trial judge from deciding the case as he did.

It follows that I would dismiss so much of the appeal as relates to the personal expenses claim and the I & K Frost payment.

His Honour dealt with the sum of $2,200, having been a sum paid directly to the directors, on the basis that it was part of the payments made for personal expenditure: at [58]. His Honour found, in effect, that the total amount of personal expenditure, including this additional sum, did not exceed reasonable remuneration and did not result in a transaction that a reasonable person would not have entered into. For the reasons given above, there was no error in that finding.

His Honour, at [44]-[46], dealt with the loan payments made by the Company in the sum of $51,500 and, at [47], rejected the liquidator’s claim for that amount.

The loan payments of $51,500 represented payments made by the Company over a five-year period in respect of the mortgage on the directors’ residential property. In the defence, Mr Frost stated:

His Honour, at [45], considered that when a portion of the property was used by the childcare centre, it was reasonable that the Company should pay an amount for that use, although, he observed, it was difficult to assess what that amount might be. His Honour considered that on the evidence, about half of the residence was used by the business. His Honour assessed that an occupation fee of about $10,000 per year which represented a return on investment of about 3.7 per cent was reasonable (that sum was calculated on $270,000, half of the value of the property of $545,000, being its sale price in 2009).

In his Honour’s view, although there was some generality in that approach, an occupation fee of about $200 per week did not seem to be excessive. His Honour concluded, therefore, at [46], that the payments made by the Company in respect of the mortgage payments did not exceed what was reasonably payable for the use of the property. Accordingly, His Honour concluded that the payments were not for the personal benefit of the directors but rather that the Company’s use of a portion of the property.

Again, the appellants’ submissions on this point focussed on the lack of any evidence, either of the existence of an agreement for the payment of an occupation fee or for the means by which it was calculated. They contended that there was no basis upon which a term of occupation requiring payment should be implied.

For the reasons given above, I do not consider that any such term needs to be implied. By paying part of the mortgage on the property in which the directors’ lived and from which the Company was run, the transactions were accruing to the Company the benefit of the continued availability of the premises for the business. That point was raised in the defence and there was no error in his Honour accepting it, particularly as no countervailing evidence was adduced. This is not a case like Re Lesvos Pty Ltd where there was detriment to the company without any corresponding benefit.

Further, the amounts of the payments were not, on their face, such as to render the transactions unreasonable. To the extent that the appellants wished to dispute that issue, the onus was on them to adduce evidence of, for instance, the likely cost of alternative arrangements. They did not do so. I therefore consider that the appeal as it related to the loan payment should also be dismissed.

His Honour, at [59], accepted Mr Frost’s submission that the sum of $8,900 paid to Mr A Frost, Mr Frost’s father, was in repayment of some of the short-term loans that Mr A Frost had made to assist the business.

The paragraph of the defence to which his Honour referred was in the following terms:

No evidence by way of deposit book pages was adduced by the directors and the appellants contended that there was no evidence upon which the Court could conclude that the sum of $8,900 constituted repayments of loans from Mr A Frost. I do not agree. It is true that there was no direct evidence of the asserted loan beyond the defence. However, his Honour admitted the verified averment as evidence. The statement in the defence was supported by the email of 10 July 2015, the import of which was relevantly that the Company was receiving loans from the directors’ friends and family and that it required them to continue to operate. It was open for the trial judge to accept that evidence.

Further, it is objectively improbable given the financial difficulties of the Company that gratuitous payments were being made to Mr Frost’s father. In those circumstances, I consider that there was no error in the trial judge’s finding, on the balance of probabilities, that the $8,900 constituted repayments of loans made to the Company. Accordingly, it cannot be said that the payment constituted an unreasonable director-related transaction.

The appellants did not advance any separate argument in support of their claim for equitable compensation for breach of directors’ duties. Although there was some shifting of position as to whether the determination of the s 588FF claim would determine the breach of duty claim, in circumstances where no separate argument was advanced, no reason has been advanced or is apparent as to why the same result as I have reached in respect of the s 588FDA issues ought not ensue in relation to the equitable compensation claim.

Finally, something should be said about the appellants’ argument that, if any thing, the trial judge found in favour of the appellants on the basis of a quantum meruit. The appellants submitted that this case was distinguishable from a “traditional” case such as Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; 162 CLR 221, where the Court found a quantum meruit, the distinction being that in Pavey there was an implied request for the work to be done. Again, this approach places undue emphasis on identifying formal legal entitlements instead of the explicit requirements of the statutory text of s 588FDA. In any case, I do not consider that the question of quantum meruit is relevant to this appeal.

It follows from the above that I consider that the appeal should be dismissed. As the directors were unrepresented and took no step in the proceedings that involved the incurring of costs, there should be no order as to costs. I propose the following orders:

MACFARLAN JA: I agree with Beazley P.

GLEESON JA: I agree with Beazley P.