Aaron J Homes Pty Ltd v Damjanovic
[2017] VSC 541
•13 September 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S CI 2016 00472
| AARON J HOMES PTY LTD | Plaintiff |
| v | |
| SIMONE JOY DAMJANOVIC | First Defendant |
| - and - | |
| NEBOJSA PAUL DAMJANOVIC | Second Defendant |
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JUDGE: | RIORDAN J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 1, 2 August 2017 |
DATE OF JUDGMENT: | 13 September 2017 |
CASE MAY BE CITED AS: | Aaron J Homes Pty Ltd v Damjanovic |
MEDIUM NEUTRAL CITATION: | [2017] VSC 541 |
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CORPORATIONS – Statutory derivative action – Director selling corporation’s assets to a related corporation – Consideration for sale limited to indemnity for corporation’s liabilities – Leave granted on conditions.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr S J Maiden | Maddocks |
| For the Defendants | Mr J A Ribbands | Melbourne Legal Chambers |
HIS HONOUR:
By a summons filed 8 August 2016, the first defendant (‘Mrs Damjanovic’), as a former director, and the second defendant (‘Mr Damjanovic’), as a shareholder, (together ‘the Damjanovics’) seek an order pursuant to s 237 of the Corporations Act 2001 (Cth) (‘the Act’) that they have leave to issue proceedings against the following persons:
(a) Stephen Short;
(b) Rachel Short;
(c) Short Family Investments Pty Ltd as trustee for the Short Family Trust;
(d) SShorty Superfund Pty Ltd
(e) Fordhams Business Advisers Pty Ltd; and
(f) Michael Sutherland.
However, the proposed statement of claim amends the leave sought to issuing proceedings against Stephen John Short (‘Mr Short’) and Elara Homes Pty Ltd.
Background
Aaron J Homes Pty Ltd was incorporated on 8 September 2005 and initially the directors and shareholders were Mr Damjanovic and Mr Short.
Aaron J Homes Pty Ltd traded as the trustee of Aaron J Homes Unit Trust and owned all of its assets in that capacity.
The 20 units in the Aaron J Homes Unit Trust are held equally between the Short Family Investments Pty Ltd as trustee for the Short Family Trust and the Café TCL Pty Ltd as trustee for the Tychlo Trust, which is Damjanovics’ Family Trust.
Aaron J Homes Pty Ltd was a residential home builder. Damshor Property Holdings Pty Ltd was an associated company, which was established to purchase and own display homes constructed by Aaron J Homes Pty Ltd. Mr Short and Mr Damjanovic were the sole directors and shareholders of Damshor Property Holdings Pty Ltd.
Mr Short and his wife, Mrs Short, (together ‘the Shorts’) were employed as the managers of Aaron J Homes Pty Ltd.
On 25 October 2012, Mr Damjanovic resigned as a director of Aaron J Homes and Mrs Damjanovic was appointed as a director in his place.
By May 2013, issues had arisen between the Shorts and the Damjanovics; and Mr Short offered approximately $700,000 for the Tychlo Trust’s interest in Aaron J Homes Pty Ltd. Mr Damjanovic refused the offer.
Relations continued to deteriorate and, after further discussions in December 2015, Mr Short made an offer on 1 February 2016 of $350,000 to buy Tychlo Trust’s interest in Aaron J Homes Pty Ltd. Mr Damjanovic also refused that offer.
On 10 February 2016, the sum of $304,250 was misappropriated to the Tychlo Trust from Aaron J Homes Pty Ltd’s bank account, without authority. On 10 February 2015, Zammitt J made an ex parte freezing order over the assets of the Damjanovics.
The amount of $22,000 of the misappropriated funds has been returned, but the balance of $282,250 was paid to the Damjanovics’ creditors and remains outstanding to Aaron J Homes Pty Ltd.
On 17 March 2016, it was ordered that the Damjanovics have access to the books and records of Aaron J Homes Pty Ltd pursuant to s 247A of the Act. The arrangements for access to the books and records were the subject of an ongoing dispute between the Shorts and the Damjanovics and there were a number of applications to this Court, before inspection was undertaken in about late 2016.
On 9 August 2016, the Damjanovics appointed a controlling trustee under Part X of the Bankruptcy Act 1966 (Cth) and on 9 November 2016 they executed personal insolvency agreements under that part.
On 20 March 2017, Munday Wilkinson, Chartered and Forensic Accountants, provided a valuation of the business of Aaron J Homes Pty Ltd as at 31 December 2016. The valuation valued the business as nil based on both an assessment of the deficiency of net assets and on a capitalisation of a future maintainable earnings basis.
By Business Sale Agreement dated 23 March 2017, Aaron J Homes Pty Ltd sold its business to Elara Homes Pty Ltd for the sum of the Assumed Liabilities plus one dollar. Under the Business Sale Agreement:
(a)The purchased business was described as the ‘business of residential housing construction known as Aaron J Homes, which included the following assets of the business:
(i)Business Contracts and Arrangements;
(ii)Customer Lists;
(iii) Goodwill;
(iv) Material Contracts;
(v) Work in Progress;[1]
[1]Defined in the Business Sale Agreement to mean ‘the work in progress of the Business as at the Completion Date’.
(vi) Building Contracts;
(vii) Plans and Designs;
(viii) Plant and Equipment;
(ix) Intellectual Property Rights;
(x) Premises Lease;
(xi) Records;
(xii) Statutory Licences;
(xiii) Stock;
(xiv) Stationery; and
(xv) Telephone Numbers.
(b)The Assumed Liabilities was defined to mean the liabilities owed by Aaron J Homes as at the completion date, being 24 March 2017, namely:
(i) the Employee Entitlements;
(ii) the Trade Creditors; and
(iii) the Hire Purchase Agreement Liabilities.
Mr Short is the sole director and shareholder of Elara Homes Pty Ltd and the Sale of Business Agreement was executed by him as the sole director and sole company secretary of Aaron J Homes Pty Ltd and also on behalf of Elara Homes Pty Ltd as its sole director and sole company secretary.
Legislative framework
Section 236 of the Act provides that:
(1)A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if:
(a) the person is:
(i)a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or
(ii) an officer or former officer of the company; and
(b) the person is acting with leave granted under section 237.
(2)Proceedings brought on behalf of a company must be brought in the company’s name.
(3)The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.
Section 237 of the Act sets out the criteria for a grant of leave under s 236. It provides (relevantly):
(1)A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.
(2) The Court must grant the application if it is satisfied that:
(a)it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b) the applicant is acting in good faith; and
(c)it is in the best interests of the company that the applicant be granted leave; and
(d)if the applicant is applying for leave to bring proceedings—there is a serious question to be tried; and
(e) either:
(i)at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii)it is appropriate to grant leave even though subparagraph (i) is not satisfied.
…
Section 241 provides the Court with ancillary powers to make any orders that it considers appropriate in relation to an application for leave made under s 236.
Section 242 provides that the Court may make any orders that it considers appropriate about the costs of persons (including the costs of the applicant and the company), including orders requiring the indemnification of costs.
It is common ground that the power under s 236 is not discretionary and the Court must grant leave if, but only if, the five criteria set out in s 237(2) are satisfied.[2] The burden of establishing the five criteria is on the applicant; and those are the only relevant criteria to be considered on the application.[3]
[2]Huang v Wang (2016) 114 ASCR 586, 597 [57] (Bathurst CJ, with whom McColl JA and Barrett AJA agreed).
[3]Re Poly Pacific Pty Ltd [2013] VSC 670 [64] (Robson J).
Of the five criteria set out in s 237(2) it is common ground that I should be satisfied of sub-paras (a) and (e). Accordingly, the questions that I am required to resolve on the application are as follows:
(a) Are the Damjanovics acting in good faith in bringing the application?
(b) Is it in the best interests of Aaron J Homes Pty Ltd that leave be granted?
(c) Is there a serious question to be tried?
Are the Damjanovics acting in good faith?
The Damjanovics’ submissions
On behalf of the Damjanovics, it was submitted that the Court should be satisfied that they are bringing the application in good faith for the following reasons:
(a) The facts disclose a serious question to be tried.
(b)The complaint raises serious issues including whether a fraud has been perpetrated by Mr Short on the company.
(c)The family interests of the Damjanovics had a keen interest in the outcome because they will benefit from any award of damages in favour of the company.
(d)The Damjanovics are prepared to bear responsibility for all costs incurred by the company and undertook to post a bond of $50,000 as security for costs of the company in the event that an order was to be made against it.
(e)Mr Damjanovic holds 50% of the shares in Aaron J Homes Pty Ltd and the Tychlo Trust holds 50% of the units in the Aaron J Homes Trust.
(f)The Damjanovics acknowledge that the amount misappropriated by the Tychlo Family Trust should be brought into account prior to effecting a distribution of any funds received by Aaron J Homes Pty Ltd as a result of the successful prosecution of the derivative action, even though the Part X arrangement precluded such an adjustment.
Short’s submissions
On behalf of Mr Short, it was submitted that the application by the Damjanovics was not brought in good faith for the following reasons:
(a)The Damjanovics are only general beneficiaries of the Tychlo Trust and therefore they have at best an expectation of a benefit under the Tychlo Trust, if a distribution was to be made following the successful prosecution of a derivative action.
(b)Before the Damjanovic could obtain any of the benefit from the proposed litigation —
(i) the litigation would have to generate proceeds net of costs;
(ii) Aaron J Homes Trust’s creditors would have to be satisfied in full;
(iii)from anything remaining, half would have to be paid to the Short Family Trust as the holder of half of the units in the Aaron J Homes Trust;
(iv)the other half would be applied in satisfaction of the Tychlo Trust’s outstanding unitholder’s loan and its obligation to repay the misappropriated funds under Cherry v Boultbee;[4]
(v)if there were any remaining proceeds, they would be made distributed to the trustee of the Tychlo Trust; and
(vi)the Tychlo Trust would then have to exercise its discretion in favour of making a distribution to the Damjanovics.
(c)Several of the matters about which the Damjanovics complain are matters from which they derived benefits including:
(i) received cash payments from Aaron J Homes;
(ii) obtained payment of building expenses for himself and a friend; and
(iii) obtained access to company assets to secure personal borrowings.
[4](1839) 4 My & Cr 442; 41 ER 171; Gray v Gray (2004) 12 BPR 22,755.
Is it in the best interests of Aaron J Homes Pty Ltd that leave be granted?
Damjanovic’s submissions
It was submitted on behalf of the Damjanovics that it was in the best interests of the company that leave be granted for the following reasons:
(a)On their case, the company has been defrauded of a substantial sum of money and at present has no assets.
(b)If the action is successful, Aaron J Homes Pty Ltd will receive the benefit of a substantial award of damages.
Short’s submissions
It was submitted on behalf of Mr Short that it was not in the best interests of the company that leave be granted for the following reasons:
(a)Because all the assets of Aaron J Homes Pty Ltd have been sold, the Court should consider the interests of its creditors rather than the interests of members or the unitholders of the Aaron J Homes Trust.
(b)It would not be in the interests of the company for its resources to be consumed in litigation against its principal operators.
(c)As the beneficial owner of half the units in the trust, Tychlo Pty Ltd could seek leave to bring a claim against the prospective defendants itself.[5]
[5]Pearson v Commissioner of Taxation (2001) 116 FCR 357.
(d)There was no evidence of the Damjanovics’ ability to meet any judgment for costs.
(e)There were little prospects of success.
(f)The costs of the litigation are likely to be substantial.
(g)Its lack of funds means that:
(i)if the litigation is not successful, Aaron J Homes Pty Ltd would be unable to meet any costs orders against it; and
(ii)if it incurred debts to fund the litigation, it would be trading while insolvent.
(h)The Damjanovics have a demonstrated history of financial difficulties and are incapable of funding the litigation or protecting the company against the potential adverse consequences of the action.
(i)There is no evidence of willingness in the applicants to fund the action or secure the company against adverse costs; and the evidence demonstrates that the applicants entirely lack the capacity to do so.
Is there a serious question to be tried?
With respect to the question of whether there was a serious question to be tried, I summarise the parties’ respective submissions as follows.
Loans payable to Tychlo Trust
The Damjanovics allege that the financial statements disclose the following discrepancies with respect to the unit holders’ loan accounts:
(a)For financial year ending 30 June 2011, the credit and loan account of the Tychlo Trust should have been $888,286.64 but was recorded as $883,911.67 representing a discrepancy of $4,374.97. At the same time the credit to the loan account of the Short Family Trust should have been $948,397.62 but was recorded as $937,267.66 representing a discrepancy of $11,029.96.
(b)For financial year ending 30 June 2012, the credit and loan account of the Tychlo Trust should have been $844,561 but was recorded as $700,188.51 representing a discrepancy of $144,372.49. At the same time the credit to the loan account of the Short Family Trust should have been $886,191.66 but was recorded as $895,943.51 representing a discrepancy of $9,751.85.
(c)For financial year ending 30 June 2013, the credit and loan account of the Tychlo Trust should have been $551,818.72 but was recorded as $287,389.15 representing a discrepancy of $264,429.57. At the same time the credit to the loan account of the Short Family Trust should have been $770,966.68 but was recorded as $524,904.55 representing a discrepancy of $246,062.13.
(d)For financial year ending 30 June 2014, the credit and loan account of the Tychlo Trust should have been $139,389 but was recorded as $149,741 representing a discrepancy of $10,352. At the same time the credit to the loan account of the Short Family Trust should have been $448,251 but was recorded as $460,861 representing a discrepancy of $12,610.
(e)For financial year ending 30 June 2015, the credit and loan account of the Tychlo Trust should have been $66,679 but was recorded as $42,532 representing a discrepancy of $24,147. At the same time the credit to the loan account of the Short Family Trust should have been $357,799 but was recorded as $356,057 representing a discrepancy of $1,742.
The respondent submits that the applicants’ conclusions are not supported by the evidence of Mr Sutherland, who is a qualified accountant, and who has deposed that:
(a)the discrepancy in the two accounts for the financial year ending 30 June 2012 were discussed at a meeting on 2 May 2013, where it was agreed that there were errors that had to be rectified;
(b)the applicants had not taken into account amounts which were credited to each of the trusts other than amounts paid as distributions.
Overpayment of superannuation
Mr Damjanovic deposes that the applicants have reviewed bank statements of Aaron J Homes Pty Ltd and assert that ‘between 2011 and 2015 the Shorts have paid to their superannuation fund amounts totalling $116,302.71 in excess of their statutory entitlements’.
Mr Sutherland deposes that the Shorts were underpaid superannuation during the period and provides a reconciliation and explanation in support of that contention.
Houses not paid for by Shorts
The Damjanovics contend that the Shorts constructed the following houses for themselves without payment to Aaron J Homes Pty Ltd:
(a)Lot 216 Mills Road, Warragul was constructed and the only record of a payment to Aaron J Homes Pty Ltd was $17,530 on 9 October 2015.
(b)Lot 255 Kensington Drive, Warragul was constructed and the only recorded payment to Aaron J Homes Pty Ltd is $17,934 on 12 October 2015.
(c)Lot 23, 7 Palm Square, Drouin was constructed for Short Family Investments Pty Ltd at a contract price of $218,313 and was completed in February 2010 and sold on 1 April 2010. The audit trail shows a payment of $141,903.45 on 29 June 2010 but there is no record of a payment. In fact, on 30 June 2012, a credit in the sum of $76,409 was applied to create a nil balance.
The respondent submits that it was agreed between Mr Short and Mr Damjanovic that each could have homes built by Aaron J Homes Pty Ltd at a ‘manager’s discount’ rate of cost plus 10%. Mr Short deposes that although contracts AJ126, AJ206 and AJ365 were underpaid by his family trust, nine other contracts were overpaid resulting in an overpayment of $62,211.55.
Rebates
Mr Damjanovic deposes that documentation relating to houses constructed for the Shorts refer to ‘variations’. In particular, an example is quoted where a credit is given for evaporative cooling and a Jetmaster fireplace not installed but, it is asserted, advertisements for the sale of the property state that the items are included. He further deposes that the Short Family Trust took the benefit of rebates and discounts on various materials totalling $73,968.87 with respect to a house at a 97 Twin Ranges Drive, Warragul.
Mr Short deposes that he was entitled to these rebates as a consequence of the agreement that Aaron J Homes Pty Ltd would construct houses for the Short interests at cost plus 10% margin.
Incorrectly stated income
Mr Damjanovic deposes that the following discrepancies between deposits showing bank statements and income disclosed in management financial statements:
Year Total deposit Management financial statements Discrepancy 2012 $12,004,121.76 $10,504,631.76 $1,499,490.00 2013 $10,597,779.85 $ 8,907,917.60 $1,689,862.25 2014 $ 7,051,596.40 $ 6,441,845.00 $ 609,751.40 2015 $10,221,200.49 $ 9,320,999.00 $ 900,201.49
Mr Sutherland deposes that there are a variety of reasons why receipts do not correlate with income in the company’s account including transfers made from other accounts and proceeds from the sale of fixed assets.
Non-sequential Audit Trail entries
Mr Damjanovic deposes that in the audit trail documentation, transaction numbers are out of sequence which indicates alteration with the financial information of Aaron J Homes Pty Ltd.
Mr Sutherland deposes that ‘an audit trail is produced … according to a description which is entered into Data build and the system then generates a trail of entries that contain that reference … The entries are then organised by date, however, the transaction will not be sequential’.
Cessation of distribution payments to Tychlo Trust
Mr Damjanovic deposes that the Tychlo Trust and the Short Family Trust receive drawing/distribution of at least $2,000 per week; but after queries by the Damjanovics, payments to the Tychlo Trust ceased but the Short Family Trust continued to receive drawings.
The respondent relies upon the evidence of Mr Sutherland that distributions for financial use in 2015 and 2016 were equal and production of the distributions statement for year ended 30 June 2016.
Business name
The Shorts are registered as the owners of the business name ‘Aaron J Homes’, which is asserted should be transferred to Aaron J Homes Pty Ltd.
Mr Short deposes that the business name was in honour of his late son and was registered prior to the incorporation of Aaron J Homes Pty Ltd — all of which was disclosed to Mr Damjanovic. Further, it is said that the business name is not being used.
Altered financial statements
Mr Damjanovic refers to three sets of financial statements for the financial year 2012 provided by Sutherland on 2 May 2013, 21 April 2016 and 27 September 2016. These statements would indicate an entitlement of the Tychlo Trust for as little as $458,284.97 or as much as $700,188.51.
Mr Sutherland deposes as follows:
(a)The financials provided on 2 May 2013 were prepared for the purpose of being reviewed prior to the meeting on the same day.
(b)At the meeting of 2 May 2013, it was identified that, as a result of a duplicated invoice, the debtors balance was too high. As a result, the financial statements provided on 12 June 2013 were prepared.
(c)The financials provided on 21 April 2016, in the second column, reflect the calculations as were considered at a meeting with Mr Short and Mr Damjanovic on 12 June 2013.
(d)Mr Sutherland sets out the differences between the 2012 financials of 2 May 2013 and the final financial statements for financial year 2012 and states that the differences relate to:
(i) a reduction in sales in 2012 for overstated revenue;
(ii)additional expenses as a result of recording reversals of duplicated sales.
Motor vehicle payment
In February 2009, Mr Short purchased a Holden utility which was financed through Esanda and monthly payments of $676.54 and charged Aaron J Homes Pty Ltd — allocated as ‘advertising’. Mr Short was driving another company vehicle at this time.
Mr Short deposes that he ‘required the Ute to drive to the various Aaron J Homes Pty Ltd construction sites to supervise, to move furniture or collect and drop off building materials at the site’. Aaron J Homes Pty Ltd did have another vehicle, a Mitsubishi Pajero, which was used for other Aaron J Homes Pty Ltd purposes, and was not well suited to the work for which the Ute was used. He deposed that he classified the payments as ‘advertising’ because he ‘used the Ute primarily for the Aaron J Homes Pty Ltd business and the vehicle was also used as a marketing tool’.
Use of company assets to secure personal borrowings
Mr Damjanovic produces a letter from the ANZ Bank dated 15 August 2012 approving the facilities to the Short Family Trust subject to Aaron J Homes Pty Ltd providing security. He states that he did not authorise the provision of this security.
Mr Short deposes that it is a common practice for ‘closely-held groups of companies’ to secure each other’s liabilities for mutual benefit. He contends that Mr Damjanovic signed one facility in his capacity as a director of Damshor Property Holdings Pty Ltd and he obtained a reciprocal benefit from at least one guarantee.
Forging of signature
Mr Damjanovic produces copies of documents in which Damshor Property Holdings Pty Ltd has purchased or sold properties in which he asserts that his signature, as a director, has been forged.
Mr Short denies forging Mr Damjanovic’s signature and deposes that he saw Mr Damjanovic sign some of the documents in question.
Cash payments
Mr Damjanovic deposes that Mr Short has received cash payments and failed to deposit such payments into the company’s bank account.
Mr Damjanovic alleges that Mr Short has retained cash received from customers of Aaron J Homes Pty Ltd on the following occasions:
(a)According to a Post-it note, $9,200 was paid in cash with respect to construction of a house at Lot 1377, 10 Little Gem Way, Berwick.[6]
(b)Two amounts of $3,850 and $3,200 cash based on a opinion of Mr Damjanovic after inspecting the documentation with respect to job No AJ325 – Lot 4, 5 Thomas Western Court, Yarragon.[7]
(c)A reduction variation of $12,990, that Mr Damjanovic believes was an amount paid in cash by the customer, with respect to job No AJA471 – Lot 391, 16 Sun Orchid Drive, Pakenham.[8]
(d)The sum of $18,800 being the balance in respect of which there is no record of payment for job No AJ373 – Lot 1081, 83 Banjo Patterson Drive, Pakenham.[9] It is asserted that the customer confirms that cash payments were made with respect to the construction of a house.
(e)Reduction variations of $13,090 for job No AJ299 – Lot 15, Namel Court, Drouin,[10] which after inspecting the paid up company accounts, Mr Damjanovic believes were cash payments.
[6]Construction completed at the end of February 2011.
[7]Construction completed December 2010.
[8]Construction completed end of July 2013.
[9]Construction completed early June 2012.
[10]Construction completed April 2011.
Mr Short accepts that he accepted cash payments on behalf of the business but deposes that he divided cash equally with the Damjanovics.
Commission payments
Mr Damjanovic deposes that between 14 December 2007 and 8 July 2016, the Short Family Trust was paid 67 invoices for commission payments totalling $240,200. Of those invoices, 32, which totalled $112,000, were created on 16 December 2015 shortly prior to negotiations for the sale of the Tychlo Family Trust interest in Aaron J Homes Unit Trust to the Short Family Trust.
Mr Short does not dispute the payment of these commissions but says that there was an oral agreement between him and Mr Damjanovic that he would be paid commissions for homes sold by Mr Short outside of his contracted working hours.
Display home furnishings
Mr Damjanovic notes that according to the Aaron J Homes Pty Ltd balance sheet, as at 30 June 2015, the total value of ‘Assets Furniture’ was $127,230.46. In December 2015, Mrs Short posted an advertisement for the sale of Aaron J Homes Pty Ltd’s ex-display home furnishings on her Facebook page and stated that the sale commenced on 25 January 2016. The Aaron J Homes Pty Ltd accounts do not disclose any income from the sale of display home furniture.
Mr Short has deposed that the proceeds of the sale were retained in an envelope in the safe at Aaron J Homes Pty Ltd business premises. The cash has now been banked and will be brought into account.
Use of company credit cards
Mr Damjanovic asserts that credit card statements for the period from 17 December 2009 to 18 April 2012 reveals, what he alleges to be, personal expenses paid by Aaron J Homes Pty Ltd, which he allocates to 23 categories of expenses.
Mr Short explains 22 of those categories and says he cannot recall the purpose of the 23rd category.
Personal expenses paid by the company
Mr Damjanovic identified five categories of expenses, in the Aaron J Homes Pty Ltd books of account, which he alleges are personal expenses.
Mr Short deposes that each of the expenses is justified, except for lawn mowing, which was due to an oversight.
Purchase of factory
Mr Damjanovic deposes that, in July 2010, the trustee of the Shorts’ superannuation fund purchased the factory in which Aaron J Homes Pty Ltd operated its business. Shortly prior to the purchase, Aaron J Homes Pty Ltd expended $66,458.35 on the fitout, repair and maintenance of the factory. After the purchase of the factory, the rent was increased from $1,760 per month to $1,850 per month. The applicants contend that by purchasing the factory the Short superannuation company obtained the benefit of the money expended on the fitout and maintenance of the factory and the increased rent.
Mr Short submitted that the terms of the Aaron J Homes Unit Trust permitted him to cause the superannuation fund to purchase the factory, the rent was set at an arm’s length valuation and the Damjanovics made no objection to the purchase when given the opportunity by Mr Short.
Maintenance expenses
Mr Damjanovic deposes that the records of Aaron J Homes Pty Ltd show total maintenance costs incurred by the company from 2009 at $1,040,019.45.
Mr Short deposes that the business has built almost 600 homes and asserts that the maintenance costs are reasonable.
WIP figures, negative claim entries and journal entries
Mr Damjanovic asserts that a review of the work in progress (‘WIP’) for the years 2009 to 2016 reveals that the WIP figures for the years 2012 to 2015 were not consistent with the level of work being undertaken by Aaron J Homes Pty Ltd. He alleges that the WIP figures were deliberately understated.
Mr Sutherland deposes to how the WIP entries are calculated for accounting purposes and states that the ‘WIP is an accounting entry that reflects the degree to which the total cost of a build at any given date (multiplied by the relevant margin) exceeded the total amount invoiced to the customer for that build at that date’.
Payments to accountants and lawyers
Mr Damjanovic notes that Aaron J Homes Pty Ltd accounts show that between 1 July 2006 and 30 June 2016 the accountants were paid $390,265 and between 15 November 2010 and 31 August 2016 the lawyers were paid $419,806.60.
Mr Short submits that apart from the assertion that the payments were ‘grossly excessive’, there is no evidence of any fraud or incompetence with respect to the engagement of the professional advisers of Aaron J Homes Pty Ltd.
Sale of the business to Elara
By a contract of sale of 23 March 2017, Aaron J Homes Pty Ltd sold all of the goodwill, business and assets to Elara Homes Pty Ltd in consideration of Elara indemnifying it for all trade creditors, employee entitlements and hire purchase liabilities.
On behalf of Mr Short it was submitted as follows:
(a)Aaron J Homes Pty Ltd was severely impacted by the Damjanovics’ misappropriation of $304,500.
(b)The financial year 2016 accounts showed a loss of $145,160.
(c)Aaron J Homes Pty Ltd had current liabilities of almost $1,000,000 and cash of only $304,000.
(d)The Shorts were unwilling to continue in business with the Damjanovics and were unwilling to commit their own time and resources to Aaron J Homes Pty Ltd following misappropriation of funds.
Accordingly, after an independent valuation that valued the business at nil, it arranged for its new entity Elara Homes Pty Ltd to enter into the contract to purchase the Aaron J Homes Pty Ltd business in consideration of which it indemnified Aaron J Homes Pty Ltd for liabilities totalling $1,215,000.
Decision
With respect to the question of whether there is a serious question to be tried (with the exception of the claim based on the sale of the company), the proposed claims appear to have varying degrees of substance and prospects of success. It is not appropriate for the Court ‘to enter into the merits of the proposed derivative action to any great degree’.[11]
[11]Swansson v R A Pratt Properties Pty Ltd (2002) 42 ACSR 313, 318–9 [25].
However, the sale of the assets of Aaron J Homes Pty Ltd to Elara Homes Pty Ltd was effected by Mr Short on behalf of both parties to the Business Sale Agreement. At the time of the sale he was a director of both companies; and consequently had a conflict of interests. Specifically, his duty as a director of Aaron J Homes Pty Ltd conflicted with both his duty as a director of Elara Homes Pty Ltd and his own interests as a shareholder of Elara Homes Pty Ltd.
As noted above, it is not appropriate in this application to deal in detail with the merits of the proposed proceeding. It is sufficient to say the following with respect to the question of the potential liability of Mr Short and Elara Homes Pty Ltd in equity and under the Act:
Equity
(a)Except in limited circumstances, not here relevant, it is a breach of a director’s fiduciary duty for the director to obtain for himself or herself a profit from a transaction, in which he or she is concerned on behalf of the corporation.[12]
(b)In equity, the profit made by a director in execution of his fiduciary duties or property received by a third party with knowledge of the breach of fiduciary duty,[13] belongs to the company; and it is not necessary for the corporation to prove that it made a loss as a result of the transaction.[14]
[12] Furs Ltd v Tomkies (1936) 54 CLR 583.
[13] Barnes v Addy (1874) LR 9 Ch App 244.
[14]Furs Ltd v Tomkies (1936) 54 CLR 583, 591–2 (Latham CJ).
The Act
(c)Section 182 of the Act provides as follows:
(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
(2)A person who is involved in a contravention of subsection (1) contravenes this subsection.
(d)In my opinion, on the uncontested facts there is a strong case that Mr Short’s conduct in authorising the transfer of assets to another corporation was in contravention of the above section;[15] and Elara Homes Pty Ltd, through its director Mr Short, was involved[16] in the contravention.
(e)Section 1317H provides that the Court may make compensation orders against persons who have contravened a civil penalty provision (which incudes s 182[17]) for damages resulting from such a contravention to compensate a corporation; and damages include profits made by any person resulting from the contravention or the offence.
[15]See Jeffree v National Companies and Securities Commission [1990] WAR 183 (Wallace, Brinsden and Pidgeon JJ).
[16]For the definition of ‘involved’ see s 79 of the Act.
[17]See s 1317E of the Act.
Accordingly, I consider that there is a real question to be tried about whether Aaron J Homes Pty Ltd has suffered damage, including a right to claim an account of profits or a constructive trust, as a result of Mr Short effecting the sale of its assets to his related company, Elara Homes Pty Ltd.
With respect to the question of whether the Damjanovics are acting in good faith, I note the following:
(a)The Damjanovics are prepared to accept that the amount misappropriated by them should be brought into account before any distributions are made to the Tychlo Trust.
(b)The Damjanovics are prepared to lodge a bond of $50,000 to secure the potential costs liability of Aaron J Homes Pty Ltd.
(c)The Damjanovics are prepared to pay the costs of the proposed proceeding and indemnify Aaron J Homes Pty Ltd with respect to such costs. Further, I will impose a condition that they not pledge the credit of Aaron J Homes Pty Ltd.
(d)The Court will supervise the proceeding to ensure that the Damjanovics will not be permitted to include insubstantial claims that inappropriately vex the proposed defendants.
With respect to the question of whether it is in the best interests of Aaron J Homes Pty Ltd that leave be granted, in Blakeney v Blakeney,[18] Buss and Murphy JJA and Beech J said:
It has been said that generally it is reasonable to expect that the pursuit of an action by or on behalf of a company against an officer for recovery of compensation for damage done to the company by the officer’s breach of duty is in the best interests of the company.[19] That will ordinarily be so at least as long as there are reasonable prospects of success, appropriate arrangements have been made in relation to costs and it is expected that a judgment can be successfully executed in whole or in substantial part.[20]
[18](2016) 113 ACSR 398
[19]MG Corrosion Consultants Pty Ltd v Vinciguerra (2011) 82 ACSR 367, 379 [60].
[20] Blakeney v Blakeney (2016) 113 ACSR 398, 410 [57] (citation in original).
On the basis of the strength of the case against the proposed defendants and the matters referred to above at [79], I have concluded that:
(a) the Damjanovics are acting in good faith;
(b)the proposed proceeding is in the best interests of Aaron J Homes Pty Ltd; and
(c)there is a serious question to be tried.
Accordingly, on first and second defendants undertaking to the Court:
(a)to pay all the costs and disbursements of bringing the proposed proceeding against the proposed defendants and not to pledge the credit of Aaron J Homes Pty Ltd with respect to such costs and disbursements;
(b)to indemnify Aaron J Homes Pty Ltd against any liability for costs to the proposed defendants arising from the conduct of the proposed proceedings; and
(c)to provide security for that indemnity by way of bank guarantee in a form satisfactory to the Prothonotary in the amount of $50,000.00;
I propose to order that the first and second defendants have leave to bring a proceeding against the proposed defendants on behalf of Aaron J Homes Pty Ltd, pursuant to s 236 of the Act.
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