Aviation 3030 Pty Ltd (in liq) v Lao, in the matter of Aviation 3030 Pty Ltd (in liq)

[2022] FCA 458

FEDERAL COURT OF AUSTRALIA

Aviation 3030 Pty Ltd (in liq) v Lao, in the matter of Aviation 3030 Pty Ltd (in liq) [2022] FCA 458

File number:

VID 174 of 2020

Judgment of:

ANASTASSIOU J

Date of judgment:

29 April 2022

Catchwords:

CORPORATIONS – application brought by Plaintiffs as liquidators – where liquidators of the company were appointed pursuant to winding up orders made – where company is solvent – where the company purchased land and subsequently sold it for a substantial profit – where Defendants are founding shareholders – where Defendants exercised rights under an “option agreement” to issue founder shares – where Defendants failed to give adequate disclosure in relation to founder shares – where exercise of options and subsequent share issue significantly diluted interests of existing shareholders – where First Defendant was also a director at the time of share issue – whether transaction in issue was an unreasonable director-related transaction pursuant to s 588FDA of the Corporations Act 2001 (Cth) – whether relief under s 588FF(4) of the Corporations Act was available for a solvent company – whether term creditor includes shareholder for the purposes of s 588FF(4) – scope of orders and remedies available under s 588FF(4) – whether First Defendant breached directors’ duties pursuant to ss 180(1), 181(1) and 182(1) – whether First Defendant breached fiduciary duties – accessorial liability of other Defendants pursuant to s 79 of Corporations Act – claim for knowing assistance and knowing receipt – remedy fashioned according to specific circumstances of case

PRACTICE AND PROCEDURE – application by Plaintiffs pursuant to r 30.21 of the Federal Court Rules2011 (Cth) that the trial proceed in respect of all Defendants, notwithstanding First Defendant’s failure to appear – application granted

Legislation:

Corporations Act 2001 (Cth), ss 9, 79, 588FDA, s 588FF

Evidence Act 1995 (Cth), ss 55, 91, 93, 135, 136, 190

Federal Court of Australia Act 1976 (Cth), Pt IVA

Federal Court Rules2011 (Cth), r 30.21

Cases cited:

A-G (NSW) v Martin [2015] NSWSC 1372

A-G (NSW) v Mohareb [2016] NSWSC 1823

Ainsworth v Burden [2005] NSWCA 174

ASIC v Aviation 3030 Pty Ltd [2019] FCA 377

Blatch v Archer (1774) 1 Cowp 63; 98 ER 969

Capital Finance Australia Ltd v Tolcher [2007] FCAFC 185; 164 FCR 83

Crowe-Maxwell v Frost [2016] NSWCA 46; 91 NSWLR 414

D Pty Ltd (in liq) v Calas (Trustee), in the matter of D Pty Ltd (in liq) [2016] FCA 1409

Fielding v Dushas [2013] 2 Qd R 416

Fisher v Divine Homes Pty Ltd [2011] NSWSC 8; 85 ACSR 512

Golden Heritage Golf Pty Ltd (in liq) (recs and mgrs apptd) v Sun [2016] VSC 167; 113 ACSR 550

Gould v Vaggelas [1984] HCA 68; 157 CLR 215

Hall v Ledge Finance Ltd [2005] NSWSC 645

Hawksford v Hawksford [2005] NSWSC 463; 191 FLR 173

Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd [1978] HCA 11; 140 CLR 216

Hundy v Kashan [2020] FCA 1101

Jackson v Goldsmith [1950] HCA 22; 81 CLR 446

Jones v Dunkel [1959] HCA 8; 101 CLR 298

Kijurina (as liquidator of ET Family Pty Limited) v Taouk [2015] FCA 424; 105 ACSR 686

Lindholm (liquidator), in the matter of Aviation 3030 Pty Ltd (in liq) [2021] FCA 1244

Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651

Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; 147 CLR 589

Project Blue Sky Inc v Australian Broadcasting Authority [19998] HCA 28; 194 CLR 355

Queensland Phosphate Pty Ltd v Korda [2019] VSCA 215

Randall v Chief of the Defence Force [2020] FCA 1327

Re BM2008 Pty Ltd (in liq) [2010] VSC 337; 244 FLR 17

Re Gondon Five Pty Ltd (in liq) [2020] NSWSC 1769

Re IW4U Pty Ltd (in liq) [2021] NSWSC 40; 150 ACSR 146

Re Lawrence Waterhouse Pty Ltd (in liq) [2011] NSWSC 964

Shot One Pty Ltd (in liq) v Day [2017] VSC 741

Silk Bros Pty Ltd v State Electricity Commission (Vic) [1943] HCA 2; 67 CLR 1

Slaven v Menegazzo [2009] ACTSC 94

Smith v Starke (No 2) [2015] FCA 1119; 109 ACSR 145

Vasudevan v Becon Constructions (Aust) Pty Ltd [2014] VSCA 14; 41 VR 445

Weaver v Harburn [2014] WASCA 227; 103 ACSR 416

Western Areas Exploration v Streeter [2009] WASC 213; 234 FLR 265

Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd [2006] NSWSC 457; 57 ACSR 693

Division:

General Division

Registry:

Victoria

National Practice Area:

Commercial and Corporations

Sub-area:

Corporations and Corporate Insolvency

Number of paragraphs:

467

Date of hearing:

19 April 2021 – 31 May 2021
28 February 2022
21 March 2022 – 23 March 2022

Counsel for the Plaintiffs:

Mr C. Caleo QC with Ms K. Brazenor

Solicitor for the Plaintiffs:

Ashurst

Counsel for the Defendants:

Mr C. Northrop

Solicitor for the Defendants:

Scammell Black Mileo

ORDERS

VID 174 of 2020

 IN THE MATTER OF AVIATION 3030 PTY LTD (IN LIQUIDATION) (ACN 150 720 317)

BETWEEN:

AVIATION 3030 PTY LTD (IN LIQUIDATION) (ACN 150 720 317)

First Plaintiff

GEORGE GEORGES AND JOHN LINDHOLM IN THEIR CAPACITY AS LIQUIDATORS OF AVIATION 3030 PTY LTD (IN LIQUIDATION) (ACN 150 720 317)

Second and Third Plaintiffs

AND:

HAKLY LAO

First Defendant

LAO HOLDINGS PTY LTD (ACN 160 597 142)

Third Defendant

HENG KIM OU

Seventh Defendant

ORDER MADE BY:	ANASTASSIOU J
DATE OF ORDER:	29 APRIL 2022

THE COURT ORDERS THAT:

1.The Court declares that the March 2016 Share Issue is an unreasonable director-related transaction within the meaning of s 588FDA of the Corporations Act 2001 (Cth).

2.Under and pursuant to s 588FF(4) of the Corporations Act, Lao Holdings Pty Ltd pay the sum of $9,044,000 in respect of the 76 million shares issued to it pursuant to the March 2016 Share Issue.

3.The payment of the sum of $9,044,000 referred to in paragraph (2) of these orders is stayed pending the final distribution of the net assets of Aviation 3030 Pty Ltd (in liquidation). I direct the Plaintiff liquidators of Aviation 3030 to set off that sum against the distribution of the net assets of Aviation 3030 to which Lao Holdings is entitled, in accordance with paragraph [450] of these reasons.

4.The Plaintiffs’ costs of and incidental to this proceeding be assessed on an indemnity basis and paid as to 50% thereof by Lao Holdings. The payment of those costs in the sum assessed be stayed pending the final distribution of the net assets of Aviation 3030. I direct the Plaintiff liquidators of Aviation 3030 to set off those costs from the final distribution of the net assets of Aviation 3030 to which Lao Holdings is entitled, in accordance with paragraph [462] of these reasons.

5.The proceeding against the Seventh Defendant be dismissed with no orders as to costs.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

ANASTASSIOU J:

INTRODUCTION

1. This proceeding was commenced in March 2020 by Aviation 3030 Pty Ltd (in liquidation) (the First Plaintiff) and its liquidators, Mr George Georges and Mr John Lindholm (the Second and Third Plaintiffs), collectively, the Plaintiffs.  The case arose against the background of Aviation 3030 having entered into a contract to purchase a parcel of land near Point Cook, on the outer western fringe of Melbourne, in May 2011 for $7.8 million.  Approximately 7 years later, in October 2018, Aviation 3030 contracted to sell the land for $135 million, settlement of which is to occur in April 2023 (being 54 months after the date of entry into the Contract of Sale).  The difference represents a profit of approximately $127 million. 

2. More specifically, the case concerns whether the issue of 152 million shares in Aviation 3030, at a price of $0.001 per share, to interests associated with its Founding Shareholders, being Mr Hakly Lao and Mr Khay Suong Taing, and members of the Lao and Taing families respectively, or corporate entitles associated with either of those families, constitutes an unreasonable director-related transaction contrary to s 588FDA of the Corporations Act 2001 (Cth), and, if so, the consequences that flow from that. The Plaintiffs’ claim also includes alleged breaches of the statutory and fiduciary duties that Mr Lao owed to Aviation 3030 as a registered director of that company, and related claims for accessorial liability founded on knowing involvement, knowing assistance and knowing receipt of benefits in connection with those alleged breaches of duty.

3. The liquidators of Aviation 3030 were appointed pursuant to winding up orders made by the Court on 20 March 2019 by O’Callaghan J on the application of the Australian Securities and Investments Commission (ASIC).  ASIC applied for the winding up orders on the grounds that the orders were necessary for the public interest, to ensure investor protection and to enforce compliance with the law: see ASIC v Aviation 3030 Pty Ltd [2019] FCA 377 (the ASIC Proceeding).  There is a question concerning the admissibility of O’Callaghan J’s Reasons in this proceeding.  I shall return to that question below.

4. It is important to note that Aviation 3030 was not wound up on the grounds of insolvency.  To the contrary, at the time of its winding up, Aviation 3030 had the benefit of a contract for the sale of the land, which as I have said above, will produce a substantial commercial profit.  The present proceeding is thus unusual in that it concerns claims brought by the liquidators of a solvent company by which they challenge the issue of the 152 million shares referred to above.

5. If successful, the effect of the Plaintiffs’ challenge will alter the economic outcome of Aviation 3030’s investment in the land for the Founding Shareholders, or interests associated with them, relative to the economic interests of the Early Investors, being shareholders who invested in Aviation 3030 at an early stage to assist it in acquiring the land.

6. The principal legal question in this case is whether the remedies available, where there is found to be an unreasonable director-related transaction, apply to a solvent company.  I have referred above to the relative interests of the Founding Shareholders.  I have used the expression ‘Founding Shareholders’ for convenience, not because of any formal distinction between shareholders, as there is only one class.  I have similarly referred to the other shareholders as the ‘Early Investors’, where it is convenient and sufficient to refer to them by that description.  The Early Investors are all of the shareholders who are not the Founding Shareholders, most of whom made an investment in Aviation 3030 in or around 2011.

7. The parties to this proceeding as originally commenced were:

   (1)Mr Hakly Lao (the First Defendant);

   (2)Mr Chong Huy Taing (the Second Defendant);

   (3)Lao Holdings Pty Ltd (the Third Defendant);

   (4)Khay Suong Taing Aviation3030 Pty Ltd (KST Aviation3030) (the Fourth Defendant);

   (5)Mr Khay Suong Taing (the Fifth Defendant);

   (6)Ms Say Kim Taing (the Sixth Defendant);

   (7)Ms Heng Kim Ou (the Seventh Defendant); and

   (8)ASIC (the Eight Defendant). ASIC was removed as a defendant pursuant to orders made by consent on 18 March 2020.

8. Mr Hakly Lao did not file a notice of address for service in this proceeding, appear at the hearing or file any documents in connection with the proceeding. He was not represented during the hearing and did not participate in it. Accordingly, on the first day of trial, the Plaintiffs made an application pursuant to r 30.21 of the Federal Court Rules2011 (Cth) that the trial proceed in respect of all Defendants, notwithstanding Mr Lao’s failure to appear. The Plaintiffs relied on the Affidavit of Michael Gordon Sloan sworn 31 March 2021, the Affidavit of Michael Gordon Sloan sworn 11 April 2021 and the Affidavit of Michael Gordon Sloan sworn 15 April 2021 in support of this application. On the first day of the trial I made an order to the effect sought and reserved the Plaintiffs’ costs in respect of that application.

9. The hearing of the proceeding commenced on 19 April 2021, and ran initially for 11 days.  During the course of 2021, while the hearing was adjourned, the proceeding was settled as between the Plaintiffs and the Second, Fourth, Fifth and Sixth Defendants, being the Taing Defendants. The settlement was subject to approval by the Court pursuant to s 477(2B) of the Corporations Act. To that end, Anderson J made orders on 11 October 2021 approving the settlement deed between the relevant parties: see Lindholm (liquidator), in the matter of Aviation 3030 Pty Ltd (in liq) [2021] FCA 1244. Shortly thereafter, on 22 October 2021, I made orders by consent discontinuing the proceeding against those same Defendants.

10. The remaining defendants are therefore the First Defendant, Mr Hakly Lao and the parties associated with him; namely, the Third Defendant, Lao Holdings and the Seventh Defendant, Ms Heng Kim Ou, who is Mr Lao’s mother (the Lao Defendants).  Lao Holdings was registered on 2 October 2012 with Mr Lao as the sole shareholder and director.  At all relevant times, Lao Holdings was owned and controlled by Mr Lao and his mother, Ms Ou. 

11. Returning to the background facts, the acquisition of the land that is the subject of this proceeding was pursued as a joint venture, or enterprise, between the Founding Shareholders.  In the course of that enterprise, and in order to raise capital for the acquisition of the land, potential shareholders were canvassed, principally among persons known to the Founding Shareholders, many of whom are members of the Cambodian community in Melbourne.  The Lao and Taing families are also members of the Cambodian community in Melbourne.

12. The circumstances relating to this capital raising are relevant to whether there was adequate disclosure to Early Investors concerning the proposed issue of 152 million shares to the Founding Shareholders or their associates.  Whether there was adequate disclosure is, in turn, relevant to whether the impugned transaction was an unreasonable director-related transaction.  The impugned transaction is referred to as the “March 2016 Share Issue”.  As I shall explain in detail below, it was a transaction which involved members of the Lao and Taing families.  Those families, or their associates, controlled Aviation 3030 during the relevant time. 

13. If, as the Plaintiffs allege, the March 2016 Share Issue is an unreasonable director-related transaction, and assuming that a remedy is available in the context of a solvent company, whether the transaction was adequately disclosed, or forecast, is also relevant to what remedy should flow under s 588FDA of the Corporations Act. In this respect, the Third and Seventh Defendants say that there was no unreasonable director-related transaction, and even if there was, no remedy is available for a contravention of s 588FDA of the Corporations Act where the company is solvent.

14. I shall turn to address some preliminary matters before setting out the factual matrix and competing claims in greater detail.

    PRELIMINARY MATTERS

    Lay witnesses

15. The Plaintiffs called seven lay witnesses to give evidence at trial:

    (1)Mr Terence Grundy, the independent director of Aviation 3030;

    (2)Mr Michael Bishop, a solicitor at Pointon Partners (being the former solicitors for Aviation 3030);

    (3)Mr Philip Webb, the former external accountant to Aviation 3030;

    (4)Ms Eve Gothe, an early investor in Aviation 3030;

    (5)Mr David Olsen, an early investor in Aviation 3030;

    (6)Mr John Ribbands, of Counsel; and

    (7)Ms Say Kim Taing, who was, prior to 22 October 2021, the Sixth Defendant to this proceeding (and is the wife of Mr Khay Suong Taing, and mother of Mr Chong Huy Taing).

16. This is a case in which the Plaintiffs submit that certain inferences ought to be drawn in respect of the Lao Defendants’ failures to either: (a) give evidence themselves, or (b) call particular witnesses to give evidence, for the following reasons.

17. First, and as stated above, Mr Lao did not give evidence at trial (either on his own behalf as the First Defendant, or in his capacity as sole director and shareholder of Lao Holdings at the time of the relevant events in March 2016).  The Plaintiffs submit that the Court ought to infer that Mr Lao’s evidence would not have assisted his case, such that it is appropriate for a Jones v Dunkel [1959] HCA 8; 101 CLR 298 inference to be drawn against him. This is particularly so given the apparent centrality of Mr Lao in all of the events that are the subject of this proceeding. The Plaintiffs refer in this context to the statement in Blatch v Archer (1774) 1 Cowp 63; 98 ER 969; namely, that “all evidence is to be weighed according to the proof which [it] was in the power of one side to have produced, and in the power of the other to have contradicted”.

18. Second, the Plaintiffs submit that an inference ought to also be drawn against the Third and Seventh Defendants in respect of their failure to call Mr Lao to give evidence at trial.  Indeed, the only witness called on behalf of the Third and Seventh Defendants to give evidence at trial was Jenny You (who was Mr Lao’s personal assistant and sometime-partner during the relevant period).  I note for completeness that an outline of evidence for Vuong Do was filed and served by the Third and Seventh Defendants.  However, Mr Do was ultimately not called to give evidence at trial, a failure about which the Plaintiffs make no submission. 

19. It is unnecessary to express a view as to whether a Jones v Dunkel inference should be drawn at large, to the effect that Mr Lao’s evidence would not have assisted any of the Lao Defendants, as was urged by the Plaintiffs.  Where, and to the extent, that such an inference arises and assists in resolving a controversy in the evidence, I have dealt with it at that point of my reasons.

    Expert witnesses

20. The Plaintiffs relied upon the evidence of two expert witnesses in this proceeding: Mr Bruce Kerr of Savills (in respect of the valuation of the Property), and Mr Andrew Fressl of McGrathNicol (in respect of the valuation of Aviation 3030 shares and Aviation Unit Trust units). 

21. Mr Kerr prepared one report, which was filed on 16 November 2020.  That report was admitted into evidence without objection, and no party sought to cross-examine Mr Kerr.  Further, the Third and Seventh Defendants’ expert witness on share valuation, Mr Richard Norris, expressly relies upon Mr Kerr’s valuation of the Property as an integer in his analysis.

22. Mr Fressl prepared two reports, dated 20 November 2020 and 26 March 2021, respectively.  Both reports were admitted into evidence without objection.  Mr Fressl also prepared a joint report dated 11 April 2021 in conjunction with the expert engaged by the Third and Seventh Defendants, Mr Norris.  

23. There was cross-examination of both Mr Fressl and Mr Norris during an expert conclave held on 31 May 2021, at which time the two experts gave evidence concurrently. 

    Admissibility of affidavit of Mr David Leggatt

24. Late in the course of the trial, the Third and Seventh Defendants sought to adduce evidence by affidavit from David Leggatt, a solicitor who has previously acted for both Mr Lao and Aviation 3030, as a means for explaining why they did not call Mr Lao.  The Plaintiffs object to the admission of this affidavit into evidence.  They submit as follows.

25. First, the Plaintiffs say the entirety of the affidavit is irrelevant and therefore inadmissible.  The Lao Defendants seek to adduce the evidence from Mr Leggatt in order to explain the absence of Mr Lao from the witness box.  No evidence has been adduced, however, that could support a finding that the Lao Defendants ever intended, or attempted, to call Mr Lao to give evidence in the proceeding.  On 28 August 2020, the Court made orders requiring the Defendants to file and serve “outlines of evidence for each lay witness whom they propose to call at trial”.  No outline of evidence for Mr Lao was filed or served.  No evidence has been given of requests made to Mr Lao to give evidence, provide instructions or to otherwise assist in the defence of the proceeding by the Lao Defendants. 

1. In the circumstances, the Plaintiffs submit that the Court ought infer that the Lao Defendants never intended to call evidence from Mr Lao, and that such a decision was strategic.  Belatedly, the Lao Defendants have sought to call evidence from Mr Leggatt – who has never acted for either Mr Lao or the Lao Defendants in this proceeding – in an attempt to avoid the inevitable consequence of that strategic decision.  Further, none of the evidence sought to be adduced via Mr Leggatt’s affidavit addresses the period between 28 August 2020 (when the Court made its procedural orders for the filing and service of outlines of evidence) and 15 February 2021 (when the outlines of evidence were to be filed and served).

2. In the alternative, if the Court were to rule against the Plaintiffs’ general objection on the ground of relevance, the Plaintiffs submit that, in any event, the Court ought reject the evidence in:

   (1)the fourth sentence of paragraph 19 of the affidavit, together with exhibit DTL-03; and

   (2)the second sentence in paragraph 25.

3. As to the fourth sentence in paragraph 19 and exhibit DTL-03, the Lao Defendants accept that this part of the evidence cannot be admissible as proof of its contents, but submit that it is admissible to prove that the exhibited document was sent to Mr Leggatt.  The Plaintiffs submit that the mere fact that the document was provided to Mr Leggatt is itself irrelevant; after all, the fact that it was sent to him does not form the basis for the expression of some admissible expert opinion by him.  To this end, and as to the second sentence in paragraph 25, Mr Leggatt’s evidence of his opinion of Mr Lao’s mental health is expert medical evidence that Mr Leggatt is plainly not qualified to give.

4. Finally, to the extent (if any) that parts of Mr Leggatt’s affidavit are admitted into evidence, the Lao Defendants have consented to a direction being made pursuant to s 136 of the Evidence Act 1995 (Cth) to the effect that the use of those parts of Mr Leggatt’s affidavit that are deemed admissible be limited to rebutting any Jones v Dunkel inference that might otherwise be drawn against them for their failure to call Mr Lao to give evidence in the proceeding. 

5. In all of the circumstances, the Plaintiffs submit that an adverse inference ought to be drawn against the Third and Seventh Defendants for their failure to call Mr Lao to give evidence in the proceeding.  They have not explained their failure do so, and it ought be inferred that Mr Lao’s evidence would not have assisted their case.

6. Finally, the Plaintiffs submit that an adverse inference ought to also be drawn against the Seventh Defendant, Ms Ou, for her failure to give evidence at trial about the matters that are the subject of this proceeding.  In this regard, it is notable that Ms Ou filed no witness outline, and gave no evidence at trial, in circumstances where no suggestion was ever made that she was unavailable or otherwise unable to do so.  As with Mr Lao, the Plaintiffs submit that the Court ought to infer that any evidence given by Ms Ou would not have assisted her case.

7. The Third and Seventh Defendants submit that they only sought to tender the affidavit following evidence given by Mr Webb.  More specifically, that issue arose during examination-in-chief, when Mr Webb was taken through multiple transactions involving payments made to various companies in which Mr Lao was a director or held shares.  The Third and Seventh Defendants contend that the evidence seemed to have been elicited to demonstrate that Mr Lao had received significant benefits from payments to other companies and was not included in Mr Webb’s outline of evidence.

8. During Mr Webb’s examination-in-chief, Counsel for the Third and Seventh Defendants raised this issue and I allowed Counsel for the Third and Seventh Defendants to seek instructions as to this matter.  The Third and Seventh Defendants submit that Mr Leggatt’s affidavit is admissible for the purpose for which it is tendered; that is, to show the impracticability of obtaining instructions from Mr Lao to call him as a witness, in particular that Mr Leggatt himself, who was acting for Mr Lao in a Magistrates’ Court criminal matter, found it difficult to get instructions.

9. In response to the Plaintiffs’ specific objections, the Third and Seventh Defendants submit that:

   (1)Exhibit DTL-03 is a document that was made available to Mr Leggatt acting as Mr Lao’s lawyer.  It is relevant to whether or not Mr Lao was in a position to give proper instructions or to appear at court.  It is precisely the kind of information legal representatives would consider to assess the utility of seeking instructions from or calling Mr Lao.  It is not led to prove Mr Lao’s actual medical condition but to show what was known by his legal representative.

   (2)The second sentence of paragraph 25 does not contain an opinion of Mr Lao’s mental health.  It expresses a concern, Mr Leggatt, as a lawyer, had about compelling Mr Lao to leave his apartment.  The basis of that concern is set out in preceding paragraphs.

10. I accept the Plaintiffs’ submission that the entirety of Mr Leggatt’s affidavit is irrelevant.  In short, although Mr Leggatt has acted for Mr Lao in other matters, I am not satisfied that his affidavit demonstrates any attempt by the Third or Seventh Defendants to contact Mr Lao or call Mr Lao to give evidence, or any reason why they could not have at least attempted to call Mr Lao, particularly considering the fact that Ms Ou is Mr Lao’s mother.  Accordingly, I have not had regard to the affidavit in considering the evidence in this proceeding.  

    Admissibility of O’Callaghan J Reasons

11. The Plaintiffs seek to tender in evidence in this proceeding: (a) O’Callaghan J’s orders dated 20 March 2019, and (b) his Honour’s reasons for judgment dated 19 March 2019.  The Plaintiffs submit that this tender is sought for the limited purpose of establishing particular findings and orders that were made in that proceeding in respect of Aviation 3030 (and by which, it is submitted, that company is now bound as a matter of res judicata and issue estoppel: see, eg, Jackson v Goldsmith [1950] HCA 22; 81 CLR 446 at 466 (Fullagar J); Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; 147 CLR 589 at 597 (Gibbs CJ, Mason and Aickin JJ)).

12. In this regard, the Plaintiffs seek to rely upon the following specific matters arising from or recorded in those documents:

    (1)on 25 September 2018, ASIC commenced proceeding VID1223/2018 (being the proceeding before O’Callaghan J) in this Court, seeking the winding up of Aviation 3030 on grounds including the impropriety of the March 2016 Share Issue; 

    (2)in that proceeding, ASIC submitted to O’Callaghan J that the winding up of the Aviation Group was justified on the basis that “the conduct of the directors of the defendants [was] such that winding up orders [were] necessary for the public interest, to ensure investor protection and to enforce compliance with the law”;  

    (3)Aviation 3030 was ultimately found by O’Callaghan J to have been operating an unregistered managed investment scheme, contrary to the requirements of the Corporations Act; and

    (4)on 20 March 2019, O’Callaghan J made winding up orders in respect of Aviation 3030 (and the Aviation Group more broadly), on grounds including the impropriety of the March 2016 Share Issue.

13. In seeking to rely upon O’Callaghan J’s reasons in this limited way, the Plaintiffs submit that they do not seek to rely on any findings of fact made by O’Callaghan J about any of the Defendants to the present proceeding (including but not limited to the Lao Defendants). Further, they say that s 91 of the Evidence Act1995 (Cth) does not preclude the course proposed by the Plaintiffs. That section relevantly provides as follows:

    (1)Evidence of the decision, or of a finding of fact, in an Australian or overseas proceeding is not admissible to prove the existence of a fact that was in issue in that proceeding.

    (2)Evidence that, under this Part, is not admissible to prove the existence of a fact may not be used to prove that fact even if it is relevant for another purpose.

14. Further, s 93 of the Evidence Act relevantly states that:

    This Part does not affect the operation of:

    (a)a law that relates to the admissibility or effect of evidence of a conviction tendered in a proceeding (including a criminal proceeding) for defamation; or

    (b)a judgment in rem; or

    (c)the law relating to res judicata or issue estoppel.

15. The Plaintiffs submit that s 91 of the Evidence Act “does not prevent the tender of judgments which contain findings as to the existence of facts relevant to the issues in the trial in which they are tendered. It merely prevents the judgments from being tendered for the purpose of proving the existence of those facts”: Ainsworth v Burden [2005] NSWCA 174 at [109] (Hunt AJA, Handley and McColl JJA agreeing), cited with approval in Randall v Chief of the Defence Force [2020] FCA 1327 at [36] (Collier J).

16. The Plaintiffs also contend that whether s 91 operates to exclude the use of a decision or judgment “will depend upon an analysis of three things — (i) what facts were in issue in those proceedings; (ii) what facts were found in the decisions; and (iii) the use to which the [party in question] seeks to put those judgments — that is, what facts [they seek] to prove by their use”: A-G (NSW) v Martin [2015] NSWSC 1372 at [13] (Simpson J), also cited with approval in Randall v Chief of the Defence Force at [36] (Collier J).

17. The Plaintiffs submit that a “finding of fact”, in the sense that phrase is used in s 91, is not defined in the Evidence Act. In this regard, Schmidt J in A-G (NSW)v Mohareb[2016] NSWSC 1823 observed at [26] that:

    While issues which arise for resolution in particular proceedings will very frequently depend on findings of fact made on the evidence, not every finding made, or conclusion reached on matters in issue involves a finding of fact. In some cases they involve the resolution of questions of law and often, the resolution of questions of mixed fact and law.

18. In that case, Schmidt J held (at [32]) that s 91 of the Evidence Act does not prevent the tendering of judgments:

    unless the judgment is sought to be tendered to prove the existence of a fact that was in issue in the earlier proceeding. If tendered to establish the existence of the proceedings, who the parties were and how a question of law, or a question of mixed fact and law, was resolved in those proceedings, s 91 does not render the judgment inadmissible.

19. In the circumstances, the Plaintiffs submit that the tender of O’Callaghan J’s orders and reasons in this proceeding in the specific manner proposed is not precluded by s 91 of the Evidence Act, and ought to be permitted. Alternatively, if the Court were to conclude that s 91 of the Evidence Act prohibits the tendering of his Honour’s reasons and orders in this proceeding (even in the limited manner proposed), then the Plaintiffs submit that the Court should dispense with compliance with this provision pursuant to s 190(3) of the Evidence Act.

20. Relevantly, s 190(3) provides that the Court may order that s 91 (which, relevantly, is located in Part 3.5 of the Evidence Act) does not apply in relation to evidence if the matter to which the evidence relates is not genuinely in dispute, or if the application of s 91 would cause or involve unnecessary expense or delay.

21. In this regard, the Plaintiffs submit that the matters for which they seek to tender O’Callaghan J’s Reasons identified above cannot be said to be genuinely in dispute.  They comprise:

    (1)the fact of commencement of the proceeding before O’Callaghan J and statements of what was submitted by ASIC in that proceeding (insofar as the matters referred to at [37](1) and (2) above are concerned); and

    (2)statements of the ultimate outcome (and resolution of questions of law) in that proceeding (insofar as the matters referred to at [37](3) and (4) above are concerned). 

22. In these circumstances, the Plaintiffs submit that the limited use of O’Callaghan J’s Reasons and orders in this proceeding as proposed by the Plaintiffs will cause no injustice to the Lao Defendants. The Plaintiffs add that insistence on strict compliance with s 91 of the Evidence Act would only be productive of unnecessary delay and expense.

23. In response, the Third and Seventh Defendants submit that the Plaintiffs must demonstrate that, given the express restrictions on the use of O’Callaghan J’s Reasons, they contain evidence that could rationally affect the assessment of the probability of the existence of a fact in issue in this proceeding: s 55 of the Evidence Act.

24. As to the four matters the Plaintiffs seek to rely on, the Third and Seventh Defendants submit as follows.

    (1)The commencement of the proceeding is admitted by [44] of the Defence and the originating motion is in evidence.

    (2)The making of the ASIC submissions to O’Callaghan J is irrelevant to the existence or otherwise of a fact in issue in this proceeding.

    (3)The unregistered managed investment scheme was a fact in issue in the ASIC Proceeding, and s 91 of the Evidence Act expressly states that an earlier decision is not admissible to prove the existence of a fact that was in issue in the earlier proceeding (even if it were otherwise a relevant fact in the later proceeding).

    (4)The Third and Seventh Defendants do not dispute the making of the winding up orders and the orders have already been tendered.

25. The Third and Seventh Defendants submit that the reasons should therefore not be admitted, particularly as they are critical of the conduct of Mr Lao and Mr Huy Taing.  The Third and Seventh Defendants contend that if the reasons are admitted, I should disregard any comments made by a different judge in a different proceeding that was based on different evidence and issues.  The Third and Seventh Defendants further submit that the Court should not be influenced by anything said in O’Callaghan J’s Reasons, particularly in circumstances where each of the Second to Seventh Defendants made an application for his Honour to recuse himself from hearing this proceeding.

26. The Third and Seventh Defendants also made a number of other observations regarding O’Callaghan Reasons including, among others, that the March 2016 Share Issue was just one of a number of matters ASIC relied on in support of its application. The Third and Seventh Defendants submit that even if I were persuaded that O’Callaghan J’s Reasons were relevant, they should be excluded from evidence in the exercise of the Court’s discretion under s 135 of the Evidence Act as any probative value to demonstrate the matters the Plaintiffs seek to rely on is outweighed by the potential prejudice it would cause if it were admitted into evidence.

27. Considering the limited matters for which the Plaintiffs seek to rely on O’Callaghan J’s Reasons, and that those matters are facts about the commencement of a proceeding, statements of what was submitted in that proceeding and statements relating to the resolution of questions of law in that proceeding, I am satisfied that s 91 of the Evidence Act does not preclude those reasons from being admitted as evidence: A-G (NSW) v Mohareb at [32]. For the avoidance of doubt, I have not had regard to any other finding or matter in those reasons, save for those specific matters for which the Plaintiffs propose to rely on.

    BACKGROUND FACTS

28. Most of the relevant facts in this case are not in dispute.  Rather, the dispute concerns the characterisation of the relevant facts in context and the legal principles to be applied to those facts.  However, to understand how the issues in this case arise, it is necessary to describe in some detail the relevant background facts.  In so doing, I acknowledge the substantial assistance I have received from the Plaintiffs’ and the Third and Seventh Defendants’ written and oral submissions.  Having regard to the narrow scope of any factual differences, as opposed to differences concerning the legal analysis of those matters, much of the following account of the relevant background facts is taken from the summary provided in the Plaintiffs’ closing written submissions dated 4 March 2022. 

29. Where factual matters are not controversial, it has been convenient to essentially paraphrase, and at times plagiarise, those submissions. That has only been possible through the industry of Counsel and those assisting them, who have carefully and thoroughly summarised such matters on behalf of the Plaintiffs. In this regard it is of significance that the proceeding is brought by liquidators, who are also officers of the Court. The fact that the proceeding is one brought by the liquidators, and insofar as s 588FF(1) is concerned, can only be brought by a liquidator, has further substantive significance to which I shall refer below. However, for the time being, I shall focus on the relevant background narrative.

30. Aviation 3030 was incorporated by Mr Lao and Mr Khay Suong Taing on 4 May 201l.  Mr Lao and Mr Khay Suong Taing had previously been business associates in connection with a company called “VKK”.  Mr Lao first identified the property as a business opportunity.  Initially, Mr Lao asked Mr Khay Suong Taing’s opinion about the investment, and later, for his participation. 

31. Mr Lao has been a director of Aviation 3030 since its incorporation, and remains so as at the time of the trial of this proceeding.  Mr Khay Suong Taing was replaced as a registered director of Aviation 3030 by his son, Mr Huy Taing, on 20 October 2011 (although Mr Khay Suong Taing became a registered alternate director for Mr Huy Taing in March 2012).  In April 2013, Ms Ou became a registered alternate director for her son, Mr Lao.

32. At all relevant times, Aviation 3030 was advised by both external accountants and external legal advisors.  Its external accountant was Mr Philip Webb (initially of Prime Charter and subsequently of Lindon Advisory).  Its external solicitor was Mr Michael Bishop of Pointon Partners.  Further, in 2016, John Ribbands of Counsel was engaged to provide legal advice to the company.

33. Information memoranda prepared by Aviation 3030 (addressed to potential ‘shareholders’ and ‘unitholders’) (collectively, Information Memoranda) relevantly stated that the company was incorporated for the “sole purpose” of acquiring and developing 240 acres of land located in Point Cook, Victoria.  Those memoranda further stated that Aviation 3030 would conduct a capital raising in order to raise the funds required for this project, whereby shares in Aviation 3030, or units in one or more of the Aviation Unit Trusts, would be issued to investors.  There was no dispute at the hearing that these statements were an accurate summary of the company’s business model in respect of the Property at the relevant times (and this business model is addressed further below).

34. As I have mentioned, in May 2011, Aviation 3030 entered into a contract to purchase the Property for a total price of $7.8 million (Purchase Contract).  At that time, the Property was zoned as “green wedge zone”, being a zoning type with particularly restrictive permitted uses (insofar as general use and development are concerned).

35. However, in October 2012, the Property was rezoned as “farming zone”.  This rezoning caused the value of the Property to significantly increase in value.  In this regard, the unchallenged evidence of the Plaintiffs’ property valuation expert, Mr Kerr, was that by 17 March 2016, the value of the Property was $75.2 million, ex GST.

36. The Purchase Contract settled in December 2015, at which time Aviation 3030 became the registered proprietor of the Property.  

37. In October 2018, Aviation 3030 entered into a contract to sell the Property to a third-party purchaser for $135 million (Sale Contract).  A deposit has been paid to Aviation 3030 by that purchaser (and the sale is due to complete in April 2023).

1. Between 2011 and late 2015, Aviation 3030 sought to raise capital from investors for the purpose of funding the acquisition and development of the Property (Capital Raising).  As indicated by the Information Memoranda referred to above, the Capital Raising took one of two forms: some investors were offered the opportunity to purchase shares directly in Aviation 3030, whereas others were offered the opportunity to purchase units in one or more of the Aviation Unit Trusts.  

2. During the course of the Capital Raising, Aviation 3030 provided at least some investors with one or more of these Information Memoranda.  It appears that various versions of the Information Memoranda were produced over time, and for different types of investor (shareholders or unitholders).  There are some differences in content as between the versions of these documents.  In particular:

   (1)One key difference in content between versions of the Information Memoranda concerned the amount/s intended to be raised by Aviation 3030 via the Capital Raising.  The different versions of the Information Memoranda variously record this amount as ranging from $19,795,748.52 to $21,194,676.09.  Regardless of the precise figure used in this regard, it was not suggested by any party or witness that any of these Capital Raising targets were ever met – in fact, all of the evidence was to the contrary.

   (2)A further key difference in content as between versions of the Information Memoranda addressed to shareholders (Shareholder IM) and those addressed to unitholders (Unitholder IM) concerned paragraphs 21 and 22 of the Shareholder IM.  Those particular paragraphs did not appear in the Unitholder IM.

   Those paragraphs read as follows:

   21.If, within three years from settlement or prior to the date of rezoning of the Land (whichever is earlier), further funding is required for any costs associated with the Property (including, without limitation, rezoning costs), the Company intends to issue further Shares in the Company provided that the number of Shares on issue at any given time does not exceed 240 million Shares. The Company may also elect to retain, and not issue, Shares if further funding is not required.

   22.Upon the full funds being raised as set out in the 'Disbursement of Funds' section of this IM, any remaining Shares not allocated shall be retained by the founders or their nominated entities.

3. It is against this background that the particular events giving rise to the March 2016 Share Issue took place. 

4. First, on 18 September 2012, Mr Grundy, the independent director of Aviation 3030, resolved (as the sole director who voted on that resolution) that Aviation 3030 would enter into a so-called “Option Agreement”.  This document is referred to in the Further Amended Statement of Claim as the “Purported Option Agreement”, because the Plaintiffs submit that, on the evidence before the Court, there are real doubts about whether it is bona fide and/or enforceable.  I shall refer to this agreement as the “Option Agreement”, noting that one of the principal questions before the Court is whether the options issued under and pursuant to that agreement are valid and enforceable.

5. The Option Agreement purported to grant options to purchase up to 160 million shares in Aviation 3030 to “the Founders (or their respective nominees)”.  ‘The Founders’ were stated in the Option Agreement to be, in the first instance, Mr Lao and Mr Khay Suong Taing.  I have used the expression above of ‘Founding Shareholders’ in a more general sense to include associates of Mr Lao and Mr Khay Suong Taing.  That phrase is not to be confused with “the Founders” as defined in the Option Agreement.  The price at which these options were capable of being exercised pursuant to the Option Agreement was $1,000 per one million shares.  In this regard, the Option Agreement relevantly states that:

   (1)“[t]he Options consist of a right for the Founders (or their respective nominees) to collectively purchase up to one hundred and sixty million (160,000,000) shares (‘Total Options’) in equal proportions” at the stipulated subscription price; 

   (2)the options referred to could be exercised “at any time within five (5) years of the Effective Date (‘Option Exercise Period’) or as otherwise agreed in writing between the Company and the Founders”;  and

   (3)the options were to be exercised by the ‘Founders’ “delivering to the Company a notice in writing signed by both of the Founders within the Option Exercise Period, and specifying the number of Shares to be subscribed for pursuant to the exercise of the Options”.

6. At Recital A of the Option Agreement Mr Lao and Mr Khay Suong Taing are referred to as the “founders of the Company”.  Recital C, however, defines Ms Ou and Mr Khay Suong Taing as “the Founders” (as a defined term).  In this context, Recital B states that Mr Lao “has assigned all of his rights and interest under the Former Option Agreement to his mother, Ou, so that she becomes a founder in place of Lao in accordance with Lao’s letter to the company dated #”.  The term “Former Option Agreement” is not defined in the Option Agreement.  It may be inferred that this is intended to be a reference to the so-called “Grant of Options Letter” annexed to the Option Agreement.

7. Sometime after 25 August 2015, Ms Ou (Mr Lao’s mother) and Mr Khay Suong Taing (Mr Huy Taing’s father) each purported to execute an “Option Exercise Notice”.  These documents are referred to in the Further Amended Statement of Claim as the “Purported Option Exercise Notices” because they were executed in apparent reliance on the Option Agreement, which the Plaintiffs allege suffers from the deficiencies referred to below. 

8. There were two versions of the document entitled “Option Exercise Notice” in evidence.  Both versions appear to be signed by Ms Ou and Mr Khay Suong Taing, and both are dated 25 August 2015 (although it appears that neither of the versions of this document was in fact executed on this date).  Both versions signed by Ms Ou nominate herself to receive the shares in question, and both versions signed by Mr Khay Suong Taing nominate his wife, Ms Say Kim Taing) to receive the relevant shares.  However, one version of the notices provides for the issue of 76.5 million shares (at an exercise price of $76,500), whereas the other version provides for the issue of 76 million shares (at an exercise price of $76,000).  As is set out further below, it was the latter version that was ultimately acted upon by Aviation 3030 in making the March 2016 Share Issue.

9. At a meeting held on 10 March 2016, the Board of Aviation 3030 (comprising Mr Lao, attending by telephone, and Mr Huy Taing, as Mr Grundy was not in attendance) resolved as follows:

   The Board resolved to accept the exercise notice from both founders and made note that each founder is required to make a payment to the company in accordance to [sic] the share price as stipulated.  The Board is to issue the shares within 7 days of the notice provided.  Huy Taing motioned this arrangement and Hakly Lao seconded it. The board resolved for Hakly Lao to instruct Michael Bishop from Pointon Partners to start the process to issue the shares.

10. These resolutions are referred to in the Further Amended Statement of Claim as the “10 March 2016 Resolutions”.  It is unclear from the evidence which of the two versions of the Option Exercise Notice was before the Board at this time.  For instance, Mr Huy Taing’s evidence was that he could not recall which version of the Option Exercise Notice was tabled at the 10 March 2016 Board meeting.  

11. On about 16 March 2016, each of Ms Ou and Mrs Taing executed a “Share Nomination Form”.  There is a question about the accuracy of the date on these forms, as a copy of the unexecuted form was sent by Pointon Partners to Mr Lao on 16 March 2016 at 2:31 pm, with the request that Mr Lao “please review this form carefully and if satisfactory, arrange for it to be signed by the appropriate persons”.  An equivalent email was sent by Pointon Partners to Mr Huy Taing on 16 March 2016 at 2:32 pm.  The above documents are referred to in the Further Amended Statement of Claim as the “Purported Share Nomination Forms”, because they were executed in apparent reliance on what the Plaintiff describe as the “Purported Option Agreement”.

12. The Share Nomination Form executed by Ms Ou refers to “the option agreement executed between myself […] and the Company on 18 September 2012”.  It also states that she nominated Lao Holdings Pty Ltd (as trustee for the Lao Holdings Trust) as the party in whom would vest “all the rights in respect of the securities in the Company to be issued pursuant to the option exercise notice served on the Company on or about 10 March 2016”.  That form was signed by Ms Ou, and also by Mr Lao (which was stated to be in his capacity as “the authorised representatives [sic] of LAO HOLDINGS PTY LTD […] as trustee for The Lao Holdings Trust”).

13. The Share Nomination Form executed by Mrs Taing was in broadly similar terms, albeit that it nominated “KHAY SUONG TAING AVIATION3030 PTY LTD […] as trustee for The Khay Suong Taing Aviation3030 No1 Trust” as the recipient of “all the rights in respect of the securities in the Company to be issued pursuant to the option exercise notice served on the Company on or about 10 March 2016”.

14. On 17 March 2016, the Board of Aviation 3030 (comprising only Mr Lao and Mr Huy Taing, as Mr Grundy abstained from voting)  resolved to:

    (1)approve the issue of 76 million fully-paid ordinary shares to each of Lao Holdings and KST Aviation3030; and

    (2)complete share certificates in respect of those share allocations.

15. These resolutions are referred to in the Further Amended Statement of Claim as the “17 March 2016 Resolutions”.

16. On about 17 March 2016, Aviation 3030 received two payments of $76,000: one that bore the payment description “AVIATION 3030 LAO FOUNDERS SHARES”, and one that bore the payment description “AVIATION 3030 TAING FOUNDERS SHARES”.  The Third and Seventh Defendants admit in this regard that Lao Holdings, as trustee for the Lao Holdings Trust, paid $76,000 for 76 million shares in Aviation 3030.

17. On or shortly after 17 March 2016, 76 million shares in Aviation 3030 were issued to each of Lao Holdings and KST Aviation3030 (this share issue comprising the “March 2016 Share Issue”, as defined in the Further Amended Statement of Claim).

18. Also in March 2016, the Lao Holdings Trust was settled.  The trustee of this trust was Lao Holdings, and the beneficiaries were Mr Lao and Ms Ou. 

    Plaintiffs’ submissions concerning factual findings and conclusions.

19. I turn to the Plaintiffs’ submissions concerning the factual findings they contend support their case against the Lao Defendants, being Mr Lao, Lao Holdings and Mr Lao’s mother, Ms Ou.

20. The Plaintiffs submit that it cannot be doubted that the March 2016 Share Issue, issued at $1000 per one million shares, which equates to $0.001 per share, was below market value for those shares at the time of issue.  That conclusion is not disputed by the Third and Seventh Defendants.  They admit that the price paid for the shares acquired by Lao Holdings was less than the value of those shares in 2016 measured by reference to the assets and liabilities of Aviation 3030. 

21. The price at which the shares were issued pursuant to the March 2016 Share Issue was significantly less than the prices paid by third party investors, which I have referred to as the Early Investors.  An expert accountant, Mr Fressl, whose report was tendered by the Plaintiffs without challenge, noted that there were 22 different share prices for shares issued in Aviation 3030 during the Capital Raising.  The prices ranged between $10 per one million shares to $350,000 per one million shares.  However, Mr Fressl’s evidence was that during the Capital Raising, shares in Aviation 3030 were most commonly issued at a price per million shares of either $98,000, being $0.098 (observed 6 times), $120,000, being $0.12 (observed 8 times) and $140,000, being $0.14 (observed 3 times).

22. Some shares were issued at a price of $10 per million shares.  Insofar as the price of $10 per one million shares is concerned, Mr Fressl gave evidence that this price was only paid by persons expressed to be Mr Lao’s “nominees”, in two transactions: one in July 2011, and one in December 2012.  Mr Fressl concluded that these transactions, which involved issue prices that were “considerably lower than other transactions”, were not conducted on a commercially arms-length basis, and could thus be put to one side for the purpose of his analysis of the market price for Aviation 3030 shares. 

23. This evidence concerning the prices at which the Early Investors acquired shares in Aviation 3030 is of significance to the question of whether, and if so how, a remedy may be fashioned in this case which balances the economic interests of the Founding Shareholders, now relevantly, Lao Holdings and indirectly via the Lao Holdings Trust, Mr Lao and Ms Ou, with the economic interests and reasonable expectations of the Early Investors.  Also relevant to this question, in particular as to the reasonable expectation of the Early Investors, is the extent to which the issue of shares to the Founding Shareholders was foreshadowed to them at the time of their investments.  I shall refer below to the evidence and submissions of the parties concerning disclosure to the Early Investors.

24. As stated above, the shares that were the subject of the March 2016 Share Issue were issued to (a) Lao Holdings as trustee for the Lao Holdings Trust, and (b) KST Aviation3030 as trustee for the Khay Suong Taing Aviation3030 No 1 Trust.  In both cases, the beneficiaries of these share issues were Aviation 3030 directors Mr Lao and Mr Huy Taing, and their family members.

25. Insofar as the Lao Defendants are concerned, as at the dates of each of the 10 March 2016 Resolutions, the 17 March 2016 Resolutions and the March 2016 Share Issue (collectively, the impugned transactions), the sole shareholder and director of Lao Holdings was Mr Lao.  At all relevant times, the beneficiaries of the Lao Holdings Trust were Mr Lao and his mother, Ms Ou.  

26. Insofar as the Lao Defendants are concerned, Aviation 3030 received only $76,000 for the 76 million shares issued to Lao Holdings pursuant to the March 2016 Share Issue (being a price of $0.001 per share).  The same sum was paid on behalf of KST Aviation3030.  The Plaintiffs submit that as a result of the March 2016 Share Issue, Aviation 3030 was deprived of the ability to sell those 76 million shares for commercial consideration.  It is relevant to observe in this context that according to the Shareholder IM, Aviation 3030 was not able to issue unlimited numbers of shares.  That document states that the company could issue “a maximum” of 240 million shares which were issued in million share ‘lots’ (240 of which notionally corresponded to the 240 acres of the Property).  Relevantly, prior to the March 2016 Share Issue, there were 87,000,010 Aviation 3030 shares on issue.  The March 2016 Share Issue had the effect of increasing the number of shares on issue to 239,000,010 (being almost the “maximum” limit that the company had set for itself).  If the March 2016 Share Issue was set aside (leaving to one side the shares issued by KST Aviation3030) Mr Lao would not hold any shares.

    Valuation of Shares as a result of the March 2016 Share Issue

27. For the purpose of assessing the value received by the Lao Defendants as a result of the March 2016 Share Issue, and the quantum of the loss and damage suffered by Aviation 3030 in this matter, both the Plaintiffs’ expert (Mr Fressl) and the Third and Seventh Defendants’ expert (Mr Norris) were asked to value the 152 million shares that were the subject of the March 2016 Share Issue as at the time of issue in 2016.  Whilst the experts were instructed to use slightly different dates for their valuation (29 February 2016 for Mr Norris, and 17 March 2016 (being the date of the March 2016 Share Issue) for Mr Fressl), the experts agreed that this difference would not have a material impact on their valuations.

28. As is recorded in the Joint Expert Report dated 11 April 2021, the experts agreed upon both:

    (1)the appropriate standard of value to use (market value); and

    (2)the appropriate method of valuation to use (the orderly realisation of net assets approach). 

29. In this regard, both Mr Fressl and Mr Norris agreed that if it were assumed that the Option Agreement was binding and enforceable, then the value of the 152 million shares in 2016 was $0.21 per share (giving those 152 million shares a total value of $32,196,775).

30. This was also Mr Norris’ valuation of those shares if it were assumed that the Option Agreement was not binding and enforceable.  However, Mr Fressl’s opinion was that if it were assumed that the Option Agreement was not binding and enforceable, then the value of the 152 million shares in 2016 was in fact $0.58 per share (giving those 152 million shares a total value of $88,183,041).   

31. The scope of the experts’ disagreement in this regard was confined, and principally turned on the following matters:

    (1)how they interpreted the assumption that the Option Agreement was not binding and enforceable;  and

    (2)to the extent that this question was to be answered by reference to the value of the 87 million shares already on issue prior to the March 2016 Share Issue, what, if any, discounts ought to be applied when valuing those shares.

32. The Plaintiffs submit that in both respects, the evidence of Mr Fressl ought to be preferred, for the following reasons.

33. In respect of the first matter, the Plaintiffs submit that it was both necessary and appropriate for the experts in this case to conduct their valuation task on the basis of two counterfactuals: one where the Option Agreement was not binding and enforceable, and one where the Option Agreement was binding and enforceable.  

34. Whilst the Plaintiffs do not seek orders in this proceeding that formally impugn the entry into the Option Agreement (to which I shall refer to further below), the issues concerning the bona fides and enforceability of the Option Agreement make it appropriate for the experts to have conducted their valuations pursuant to both counterfactuals.

35. Insofar as the ‘no Option Agreement’ counterfactual is concerned, the Plaintiffs submit that Mr Norris failed to properly apply its underpinning assumptions.  Mr Norris conceded that when valuing the 152 million shares that were the subject of the March 2016 Share Issue, he assumed that they existed, “because the company was bound to issue them”.  The Plaintiffs submit that his reasoning in this regard was somewhat circular, referring to when he specifically said: “I was just assuming they existed because I’m instructed to value them.  So I assumed they exist”.  Critically, in doing so, he expressly assumed that those 152 million shares were issued for the price stated in the Option Agreement (being $152,000).  

36. The Plaintiffs submitted that it was erroneous for Mr Norris to have done so.  To assume that the 152 million shares were issued in accordance with the Option Agreement (and at the price provided for by that agreement) is directly inconsistent with the fundamental premise of this counterfactual.  I agree with the Plaintiffs’ submissions in this respect.  However, once the premise of the counterfactual is accepted, as the Plaintiffs suggest, the question remains as to the value of the 152 million shares issued pursuant to the Option Agreement.

37. By contrast, when performing his valuation in the context of this counterfactual, Mr Fressl did not assume any binding obligation by Aviation 3030 to issue the 152 million shares that were the subject of the March 2016 Share Issue.  Rather, he identified the value of those shares by reference to the value of the 87 million shares already on issue in early 2016.  In this regard, Mr Fressl assumed that, in the absence of a valid and enforceable option agreement, Aviation 3030 directors would not issue 152 million shares at a value that was lower than the value of the existing shares on issue at the time, and which would dilute those shareholdings.  This is a key difference between the two experts’ approaches to the question of valuation of the March 2016 shares at the time of issue.

1. The Plaintiffs submit that Mr Fressl’s approach ought to be preferred by the Court, as it appropriately reflects the assumptions of the ‘no Option Agreement’ counterfactual.  It also assumes – the Plaintiffs submit, appropriately – that directors acting in the best interests of the company would not ordinarily effect a share issue to the detriment of existing shareholders.

2. As to the question of discounts, Mr Fressl’s opinion was that no discounts are applicable when valuing the 87 million Aviation 3030 shares on issue, regardless of whether the Option Agreement is assumed to have been binding and enforceable.  By contrast, Mr Norris applied minority interest discounts for lack of control (20%) and lack of marketability (25%) in both scenarios.   

3. The Plaintiffs unsurprisingly contend that Mr Fressl’s evidence ought to be preferred on this point.  They say Mr Fressl’s evidence was that an orderly realisation of assets methodology involves a realisation of assets, a deduction of realisation costs and a settlement of liabilities, followed by distribution of proceeds to shareholders on a pro rata basis (namely, reflecting their proportional shareholdings in the company).  As Mr Fressl said, pursuant to this methodology, “you end up with a cashbox”, the contents of which is distributed accordingly (to shareholders and others).  No discount for control is required, because there is no ongoing business in respect of which one might pay a premium for control (or, by contrast, in respect of which one might suffer a discount for not having control).

4. By contrast, Mr Norris’ approach involved making assumptions which are fundamentally inconsistent with the application of the orderly realisation of assets methodology (which, as observed above, Mr Norris agreed was the appropriate methodology to adopt in this case).  As Mr Fressl stated in the joint expert report:

   As the experts agree on the method of value, which is an orderly realisation and that there is a distribution of net proceeds to shareholders, the ability of a minority shareholder to “force a realisation” is not relevant. 

   The shareholders would choose to make a distribution of those proceeds in the absence of another project.  There is no information as to another project and Aviation 3030 was a single purpose entity to take ownership and affect a rezoning of the Point Cook Land.

5. Given that the assumptions underpinning Mr Norris’ evidence appear to conflict with the tenets of the valuation methodology agreed upon by both experts and with the undisputed nature of the project being pursued by the company, the Plaintiffs submit that Mr Fressl’s evidence ought to be preferred in all of the circumstances.

6. As a matter of principle, in the sense of resolving the competing views of the experts, it is convenient at this point to state my reasons for preferring the evidence of Mr Fressl to Mr Norris.  As I have said above, I agree with the Plaintiffs’ submission that Mr Norris appears to have misunderstood the premise of the counterfactual assumption that there was ‘no Option Agreement’.  For the reasons advanced by the Plaintiffs, I also agree that in the present circumstances there is no warrant to discount the value of the 87 million shares on issue.  In particular, I accept the force of the logic in Mr Fressl’s opinion that when applying an orderly realisation of assets methodology (which both experts agree is the appropriate methodology in the present circumstances), ‘you end up with a cashbox’.  Accordingly, as there is no evidence that Aviation 3030 is to conduct any ongoing business, a premium for control, or discount for the lack thereof, is inapposite.

7. It is also convenient at this point to note the significance of the valuation of the 152million shares as at the time of the March 2016 Share Issue.  It is worth repeating the alternative assumptions the experts were asked to make and to restate the essential differences between them.  On the assumption that the Option Agreement was binding and enforceable, Mr Fressl and Mr Norris agreed that the value of the 152million shares in March 2016 was $0.21 per share, giving an aggregate value of $32,196,775.  If, however, the Option Agreement was not binding, then Mr Norris values the shares at $0.21 per share (the same value he accords to the shares also on the assumption that the Option Agreement was binding), but Mr Fressl values the shares on the hypothesis that the Option Agreement was not binding at $0.58 per share, giving those 152 million shares a total value of $88,183,041.

8. For the reasons I have given above, I prefer the evidence of Mr Fressl, more specifically his analysis, to Mr Norris’ on the contending hypothesis, namely where the Option Agreement is assumed not to be binding.  As stated above there is no difference between the experts in relation to the alternative assumption that the Option Agreement is binding. 

9. Applying Mr Fressl’s and Mr Norris’ conclusions as to value on the assumption that the Option Agreement was binding and enforceable, the value of the shares issued pursuant to the March 2016 Share Issue was $32,196,775.  Applying Mr Fressl’s conclusion as to value on the hypothesis that the Option Agreement was not binding and enforceable, the aggregate value of the shares purportedly issued pursuant to the March 2016 Share Issue (at $0.58 per share) was $88,183,041.

10. However, in my view, the valuation of the shares on the assumption that the Option Agreement was valid and enforceable is somewhat academic.  If it was, and is, valid and enforceable according to its terms, and the 152 million shares were validly issued at the exercise price of $0.001 per share, the value of the shares, assuming an orderly realisation of assets methodology, is of little assistance in relation to the question of what, if any remedy, should be available in this case.  That is because on the hypothesis that the Option Agreement is enforceable, it begs the question that is in issue in this case; namely, whether the shares issued under and pursuant to that Option Agreement should be upheld or set aside.

11. If the March 2016 Share Issue should be set aside, the valuation of the shares on the counterfactual assumption that the share issue was, and is, valid and enforceable, reveals the gain that will be enjoyed by the Early Investors; that is to say, the owners of the 87 million shares on issue at the time of the March 2016 Share Issue.  They will be better off collectively by at least $32,196,775.  However, that is on the assumption that the value of their shareholding at that time was effectively diluted by the issue of the 152 million shares issued at a price of $0.001 per share.  If the alternative assumption is made; namely, that the Option Agreement is not valid and enforceable, or as the Plaintiffs put their case, that the March 2016 Share Issue is impugned, the gross collective benefit to the Early Investors would, on Mr Fressl’s analysis, be $88,183,041. 

12. It seems to me that in relation to the question of loss or benefit, depending on whether the position is considered from the perspective of the Founding Shareholders or the Early Investors, the assumption that the Option Agreement is and was valid and enforceable, or that the March 2016 Share Issue was valid and enforceable, is relevant to an assessment of the substantive gain to the Early Investors and concomitant loss to the Founding Shareholders.  From the perspective of the Early Investors, if this valuation assumption were adopted, they would have the benefit of a distribution of assets on an orderly realisation without having their notionally fractional interest in the underlying assets of Aviation 3030 diluted by the issue of shares at the strike price of $0.001 per share.  Thus, the Early Investors would notionally have the benefit of the difference between the value of the shares assuming the Option Agreement was valid and enforceable as well as the difference in value between the strike price and the value of the shares, assuming that there was no Option Agreement. 

13. The result on Mr Fressl’s analysis is that the Early Investors would be $88,183,041 better off, and the Founding Shareholders would, ipso facto, be worse off in the same sum.  In other words, it does not matter for the purposes of assessing benefit, from the perspective of the Early Investors, or loss, from the perspective of the Founding Shareholders, whether the assumption is made that the Option Agreement is or is not enforceable.

14. The point of this distinction is that it exposes the corresponding loss and benefit if the Option Agreement, or the March 2016 Share Issue thereunder, is impugned.  To put it another way, the loss of the Founding Shareholders directly equates to the benefit of the Early Investors.  As I have said in the introduction to these reasons, in practical terms this proceeding involves a contest between the interests of the Founding Shareholders and those of the Early Investors.  If the assumption that the Option Agreement is not ‘purported’ but is the actuality rather than the ‘counterfactual’, the valuation of the shares issued under the March 2016 Share Issue is then academic, as the Founding Shareholders, now relevantly only Lao Holdings, and indirectly Mr Lao and Ms Ou, would simply be entitled to the shares at the strike price for its 76 million shares of $76,000, irrespective of the value of those shares. 

15. A valuation of the shares issued under the March 2016 Share Issue, on the assumption that the share issue was valid and enforceable, is however a proxy for the position the Early Investors would have been in, so far as the aggregate value of their shares in Aviation 3030 is concerned.  If the March 2016 Share Issue was valid and enforceable, the effect would be to dilute the value of their shares by approximately $32 million, assuming an issue price of $0.001 per share.  But in reality, there would be a dilution of their proportionate notional share of the underlying assets of Aviation 3030 by approximately $88 million, given the shares issued under the March 2016 Share Issue were issued without regard to the issue price under the Option Agreement, and were issued at the value reflective of the net assets of Aviation 3030 at that time.

16. The question of what, if any, dilution of the Early Investors is justified in the present circumstances is at the core of the contest of economic interests as between the Early Investors and the Founding Shareholders.  It is a subject that I shall discuss further below in the context of what remedies may be appropriate.

    Distribution of existing shareholders

17. The March 2016 Share Issue increased the number of Aviation 3030’s shares on issue from approximately 87 million to approximately 239 million.  As a result of the March 2016 Share Issue, Lao Holdings and KST Aviation3030 went from holding zero shares in Aviation 3030 to collectively holding 63.6% of the total issued share capital of Aviation 3030.  

18. The Plaintiffs submit that the March 2016 Share Issue had a significant dilution effect on the existing shareholdings of Aviation 3030.  Specifically, existing shareholdings were reduced in value by 63.49% by the March 2016 Share Issue, which, in total dollar terms, represents a reduction in value of approximately $32 million.  

19. The dilution in value of existing interests caused by the March 2016 Share Issue was the subject of express admissions by Aviation 3030 in a letter sent to its investors on about 5 September 2016, at the direction of ASIC.  That letter was sent on the company’s behalf by its solicitors (Pointon Partners), and its content was expressly approved by each of the three registered directors of Aviation 3030 at the time (Mr Grundy, Mr Lao and Mr Huy Taing).  

20. That letter reads as follows:

    We confirm that we act for Aviation 3030 Pty Ltd (ACN 150 720 317) ('the Company').

    You are receiving this letter as an investor in the Company ('Investor', and collectively 'the Investors'), that has made an investment in the Company either as a shareholder of the Company or as a unitholder of the Aviation3030 Investment Unit Trust, the Aviation3030 Holdings Unit Trust, the Aviation 3030 Heng Ly Unit Trust, the Point Cook Aviatation3030 Unit Trust and/or the Aviation3030 HL Unit Trust.

    The purpose of this letter is to provide you with:

    (a)details of a proposed sale of the Company's primary asset; and

    (b)corrective disclosure in relation to matters concerning your investment,= of which you may be unaware.

    This letter is being sent to you as part of an agreement between the Company and the Australian Securities and Investments Commission.

    Sale of the Company's primary asset

    (a) As you would be aware, the Company's primary asset is the property at Lot 1, Aviation Road, Point Cook in the State of Victoria ('the Aviation Road Property'). The Company has entered into negotiations with a prospective purchaser of the Aviation Road Property. A contract of sale has not been signed but negotiations are at an advanced stage. The key terms of the proposed sale ('the Sale') are as follows:

    a.the Aviation Road Property is proposed to be sold for $145,000,000 ('the Purchase Price');

    b.ten percent (10%) of the Purchase Price is payable on the day of the Sale;

    c .twenty percent (20%) of the Purchase Price is payable six (6) months after the day of the Sale;

    d.seventy percent (70%) of the Purchase Price is payable twelve (12) months after the day of the Sale;

    e.the Sale will be subject to leases existing on the Aviation Road Property as at the day of the Sale; and

    f .the Sale will be subject to the approval of the Company's shareholders. For that reason, and assuming that the Sale proceeds, you will be sent a Notice of Meeting and, at that meeting, the contract of sale will be presented to Aviation Investors for their approval.

    Corrective disclosure

    (b)On 17 March 2016, the Company issued 76 million shares to Lao Holdings Pty Ltd and Khay Suong Taing Aviation3030 Pty Ltd ('the 17 March 2016 Share Issue').

    (c)Lao Holdings Pty Ltd is a company controlled by Hakly Lao, a director of the Company.

    (d)Khay Suong Taing Aviation3030 Pty Ltd is a company controlled by Khay Suong Taing, a former director of the Company and father of current director of the Company, Chong Huy Taing.

    (e)Prior to the 17 March 2016 Share Issue, the Company had a total of approximately 88 million shares on issue.

    (f)Following the 17 March 2016 Share Issue, the Company has a total of approximately 240 million shares on issue.

    (g)The 17 March 2016 Share Issue resulted in 63.33% of the Company's shares now being held by Lao Holdings Pty Ltd and Khay Suong Taing Aviation3030 Pty Ltd, both of which previously held no shares.

    (h)Each of Hakly Lao and Khay Suong Taing paid $76,000 for their 76 million shares, representing a price of 0.1 cents per share of the Company.

    (i)Other shareholders of the Company who ,purchased their shares prior to the 17 March 2016 Share Issue paid prices which ranged between 0.001 and 20 cents per share of the Company.

    (j)The 17 March 2016 Share Issue was made pursuant to a document termed 'Option Agreement' between the Company, Khay Suong Taing and Heng Kim Ou (mother of Hakly Lao) dated 18 September 2012, which in turn annexed a letter dated 4 May 2011 from Aviation to both of Hakly Lao and Khay Suong Taing. Copies of these documents are attached for your reference.

    (k)The 4 May 2011 letter purports to record a grant by the Company to Hakly Lao and Khay Suong Taing (in their capacity as 'Founders' of the Company) of options to collectively purchase up to 160 million shares in the Company at a price of $1,000 per million shares.

    (I)The 18 September 2012 'Option Agreement' purports to record a grant by the Company to Heng Kim Ou (Hakly Lao's mother) and Khay Suong Taing of options to collectively purchase up to 160 million shares in the Company at a price of $1,000 per million shares.

    (m)The Information Memorandum that may have been provided to Investors did not refer to the 4 May 2011 letter or, after 18 September 2012, to the 18 September 2012 'Option Agreement'. Paragraph 22 of the Information Memorandum states:

    Upon the full funds being raised as set out in the 'Disbursement of Funds' section of this IM, any remaining Shares not allocated shall be retained by the founders or their nominated entities

    (n)The 'Disbursement of Funds' section of the Information Memorandum anticipated approximately $19.8 million being raised by the Company from Investors.

    (o)At the time of the 17 March 2016 Share Issue, the Company had not raised $19.8 million from investors.

    (p)As a result of the 17 March 2016 Share Issue:

    a.The proportion of the Company's shares held by each Investor has substantially decreased; and

    b.the amount of any profits distributed by the Company to an Investor will be substantially lower than was the case prior to the 17 March 2016 Share Issue.

    For your information, please refer to the 'table below for a comparison of effect of the 17 March 2016 Share Issue on the entitlement of typical Investors to any profits distributed by the Company. Please note that the table below is based on the Company earning a net profit of approximately $100,000,000 following the Sale, after accounting for the transactions costs associated with the Sale and taxation ('Net Profit') (that is, assuming the Sale in fact takes place and settlement of the purchase is completed).

    Please note that nothing contained in this letter shall be deemed or construed as a guarantee, or assurance that the Sale will proceed on the terms specified in paragraph (a), if at all. Accordingly, and as noted above, the table below only provides a hypothetical comparison of the entitlement of typical Investors to any profits distributed by the Company.

Shares held by typical investor	Entitlement to net profit prior to the 17 March 2016 Share Issue	Entitlement to net profit prior to the 17 March 2016 Share Issue	Net Change to Net entitlement profit
1,000,000	$1,136,363.64	$416,666.67	($719,696.97)
2,000,000	$2,272,727.27	$833,333.33	($1,439,393.94)
3,000,000	$3,409,090.91	$1,250,000.00	($2,159,090.91)
4,000,000	$4,545,454.55	$1,666,666.67	($2,878,787.88)
5,000,000	$5,681,818.18	$2,083,333.33	($3,598,484.85)

Upon consideration of the above, you may wish to seek independent legal advice as to your rights as an Investor in relation to the amount you may expect to receive based on your investment.

1. It is relevant to note that the dilution complained of in this case is not merely the dilution of existing shareholdings in percentage terms.  What is specifically complained of in this case is the dilution in the value of those shareholdings.  Mr Fressl observed during the concurrent expert evidence session that, whilst the issue of shares by a company will ordinarily cause a dilution of existing shareholdings in percentage terms, the dilution does not also need to occur in “valuation terms – in dollar terms”.  Accordingly, the price at which Lao Holdings acquired its 31.8% of the total issued share capital in Aviation 3030 is highly significant.  The fact that Lao Holdings did not pay a commercial price for its 76 million shares means that existing shareholdings were diluted both in percentage, and also in value (as there was no commensurate increase in the company’s share capital as a result of the March 2016 Share Issue, as one would ordinarily expect in a commercially arms-length transaction where a market price is paid for shares).

2. I agree with the Plaintiffs’ submission that the March 2016 Share Issue diluted the existing shareholding in both percentage terms and as to the value of existing shares.  As a matter of simple mathematics, the share issue at the strike price, or option exercise price, could not but have a diluting effect as described.

   The bona fides and/or enforceability of the Option Agreement

1. It is instructive, when considering whether Mr Lao’s involvement in the March 2016 Share Issue was a breach of his directors’ duties, to ask: what would have happened if that transaction had not occurred so far as litigation against Aviation 3030 and regulatory investigations are concerned, given that, as the Plaintiffs put it, such consequences could have been avoided if Mr Lao had not been involved in causing an unreasonable director-related transaction to occur and by reason of the same foreseeable consequences so far as such litigation is concerned,  breached his directors’ duties? 

2. At a superficial level, it may appear incongruous that a transaction may satisfy the definition of an unreasonable director-related transaction on the one hand, but the director who effectively procured it, on the other hand, is not necessarily taken to have therefore breached one or more of his or her duties as a director of the company. However, as I have said now repeatedly, s 588FDA of the Corporations Act is an “anti-avoidance provision”: Vasudevan at [19]. It is intended to operate where other specific statutory proscriptions do not capture a transaction that nevertheless meets the definition in s 588FDA of the Corporations Act. While it may be expected that the broad duties of directors in s 180 of the Corporations Act (among the others) might usually also have been contravened when there has been an unreasonable director-related transaction, that is not necessarily always the case.

3. However, ultimately I find it is unnecessary to decide if Mr Lao’s conduct in voting in favour of the March 2016 Share Issue constitutes a breach of his duties as a director as it is immaterial in relation to the remedy I consider appropriate in the circumstances.  This is because I would not, in any case, have awarded additional compensation for any such breach.  The reasons for this are that: (1) I am not persuaded that the proceedings of which the Plaintiffs complain are sufficiently connected to this proceeding, such that compensation should be awarded; and, (2) in any event, Aviation 3030, and through it, the Early Investors, are adequately compensated by the remedy I have referred to above (and expand upon below).  Although, as I have said, I would not make any further order for compensation even if I had determined the question and found that there had been a breach of directors’ duty, it may be said that I should nevertheless determine the question of breach.  This is because if I had done so and found there to be a breach of duty, I would be required by s 1317E to make a declaration to that effect.  That, in turn, might have led to other claims against Mr Lao for breach of duty.  However, without deciding the question of breach in terms, for the reasons I have given above I am not persuaded that the conduct constitutes a breach and because I am also not persuaded of the alleged causal connection between the alleged breaches and the consequences said to ensue from them, in my view I am not required in this case to determine this question.

4. In this respect, I note that the damages claim by the Plaintiffs is for the recovery of costs from Mr Lao and the Third and Seventh Defendants.  These expenses relate to the Guildford Proceeding in respect of which apparently $992,470 in costs have been incurred to date and to the two earlier proceedings brought by ASIC, being proceeding VID 998 of 2016, described as the “receivership proceeding”, and proceeding VID 1223 of 2018, described as the “winding up proceeding”.  The costs of those proceedings include cost orders in those proceedings in favour of ASIC, including some costs associated with ASIC’s investigation.  The total sum incurred by Aviation 3030 in respect of those proceedings was $1,090,160.46.  These are substantial sums.  However, in my view, the payment of $9,044,000 by Lao Holdings (being a price of 0.12 per share for 76 million shares) will nevertheless be sufficient in the circumstances to compensate Aviation 3030, and through it the Early Investors, bearing in mind that indirectly approximately 31.7% of those costs will in any event be borne by the Lao interests. 

5. It follows, for the above reasons, that it is also unnecessary to consider the claims of accessorial liability arising under the statute and the equitable principles concerning a third party’s knowing assistance or knowing receipt in a breach of fiduciary duty.

   THE APPROPRIATE REMEDY

6. I have set out at length the parties’ contending submissions.  The case put by the Plaintiffs was entirely binary.  The case put by the Third and Seventh Defendants was also entirely binary.  Neither of the parties suggested any other principled basis upon which to resolve this proceeding, nor in particular how I might fashion a remedy which might accommodate the economic interests of the Founding Shareholders, on the one hand, and the Early Investors, on the other; and do so equitably, having regard to their respective contributions to the spoils of success.  On the basis of the parties’ submissions as to remedy, the outcome would be either black or red.  The remedies afforded by the law and in equity do not operate in this fashion, and whatever the wrongdoing, perhaps save in the most egregious case, the legal outcome, viewed from the perspective of the competing economic interests should not be black or red, as in roulette.  I have chosen the metaphor of the roulette wheel because it evokes both the binary position of the contending parties, the all or nothing outcome for one or the other, and because if the Plaintiffs’ analysis as to the appropriate remedy were accepted, the Founding Shareholders, now relevantly the Lao Defendants, shall have (in substance) lost their investment entirely on the black, whereas the Early Investors shall have won a massive windfall on the red, so to speak.

7. It should be acknowledged that the adjustment I propose to mediate the economic interests of the Founding Shareholders on the one hand, and the Early Investors on the other, also involves notionally treating Mr Lao’s contribution to the success of the enterprise conducted by Aviation 3030 as capable of being attributed to Lao Holdings, though it is a separate legal entity and though it did not, as the Plaintiffs stress, contribute to the success of the venture.  In my view, for present purposes, it is permissible to attribute the benefit of Mr Lao’s contribution to Lao Holdings, as that entity became the shareholder as a result of Ms Ou’s nomination when she exercised her rights under the Option Agreement and because Lao Holdings holds the shares as trustee, I would infer bare trustee, on behalf of discretionary objects among whom include Mr Lao.  Accordingly, I infer that the beneficial owner of the shares in Aviation 3030, subject to Lao Holdings nominating Mr Lao as the beneficial owner of the shares, or more accurately, as the beneficial owner of the proceeds from the sale of the land upon distribution of those proceeds by the Plaintiffs in their capacity as liquidators of Aviation 3030.  As I have said above, I infer that the nomination of Lao Holdings as the beneficiary of the options was likely due to a decision by Mr Lao to structure his interests.  Thus, I would attribute the equity, for the purposes of adjusting the equities as I have described, to Lao Holdings, in effect, as Mr Lao’s nominee.

8. On balance, it appears to me that the market value of the shares at the time the options were exercised is not the economic value, nor the point in time to choose, for the purposes of fashioning a remedy that is capable of having the effect of compensating the Early Investors for the effects of inadequate disclosure without unduly punishing the Lao Defendants.  If the market value of the shares at the time the options were exercised was selected as the key integer for the purposes of the analysis, it would inevitably result in the Early Investors receiving the benefit of the substantial increase in the value of the land (and therefore the shares) in the period between the issue of the shares to them and the exercise of the options.  Plainly, the increase in the value of the shares over this time period effectively tracks the increase in the value of the land as events occurred, in particular the rezoning of the land and necessary town planning approvals.

9. In my view, the better proxy for the purposes of fashioning a remedy which cures the essential reason that ‘colours’ the March 2016 Share Issue as an unreasonable director-related transaction; namely, the dilution of the value of the shares held by the Early Investors, is to notionally impute an option exercise price equivalent to the median price at which the shares were acquired by the Early Investors.  The median price at which the shares were sold to the Early Investors was $0.12 per share.  By imputing a notional price of $0.12 per share to the shares issued to Lao Holdings, there will be no material dilution to the value of the shares issued to the Early Investors.  For those who paid a lower price, for example Ms Gothe, who paid $0.098 per share, they will undoubtedly be better off.  For those investors who paid more than $0.12 per share, such as Mr Olsen, in terms of the gross price paid, there is a small dilution, but that is substantively compensated by the $9,044,000 that will be notionally paid by Lao Holdings.  On this basis, it seems to me that the Early Investors will not be worse off than they would have been had the events that bear upon disclosure to the Early Investors been different, in particular, as if the Founding Shareholders had issued to themselves 152 million shares upfront.  The difference from the perspective of the Founding Shareholders is that not having taken that course, as they could have, they are now worse off by $9,044,000, that detriment being the price they must pay to cure the twin vices of not adequately disclosing the proposed Option Agreement and therefore unjustifiably diluting the value of the shares held by the Early Investors when the options were exercised.  I consider a remedy fashioned in this way to be as elegant a solution as may now be devised to cure the wrongdoing, without conferring a windfall on the Early Investors at the expense of the Founding Shareholders.

10. The ‘mechanics’ to achieve the remedy I have suggested are, I believe, quite simple.  I shall direct that the Lao Holdings nominally pay the additional sum of $9,044,000 to Aviation 3030. That sum reflects the net ‘market value’ of 76,000,000 shares at a cost of $0.12 per share, deducting the $76,000 already paid for those shares.  The Plaintiffs, as liquidators, are to in turn distribute the aggregate sum, once Aviation 3030 has been wound up, pari passu between all shareholders (including Lao Holdings) who have separately reached a resolution with the Plaintiffs concerning the matters that arise in this proceeding.  A high level worked example provided by the Third and Seventh Defendants of the ‘mechanics’ necessary to give effect to this remedy is reproduced at Annexure I.  In addition, as I shall explain below, prior to making the pari passu distribution the Plaintiffs will need to account for the orders I have made as to costs (see [461] and ff.).

    Scope to fashion relief under s 588FF(4) of the Corporations Act

11. I shall commence my consideration of the Court’s power to fashion a remedy as I have proposed with a consideration of the relevant section of the Corporations Act, which both informs and constrains the remedies available in the present circumstances; namely, where the impugned transaction has been found to be an unreasonable director-related transaction, but is not also found to fall within any other category of voidable transaction in Part 5.7 B of the Corporations Act. In these circumstances, the remedy a court may grant must meet the criteria in s 588FF(4), set out above.

12. The Third and Seventh Defendants submit that s 588FF(4) is not satisfied in this case, because the power to grant a remedy in the circumstances where s 588FF(4) is engaged, is limited to recovering any sum calculated as directed in ss 588FF(4)(a) and (b), only ‘for the benefit of creditors of the company.’ The Third and Seventh Defendants submit that as Aviation 3030 is solvent, indeed abundantly solvent, there is no creditor who might conceivably benefit from the recovery of any sum. This contention turns upon the meaning of ‘creditors’ in s 588FF(4) of the Corporations Act. The Third and Seventh Defendants submit that the distinction made variously throughout the Corporations Act between ‘creditors’ and ‘shareholders’ is applicable to the expression ‘creditors’ in this subsection and, accordingly, the Court is bereft of power to grant any remedy in the context of a unreasonable director-related transaction to which a solvent company is a party. I disagree with that submission for the following reasons.

13. The natural meaning of ‘creditors’ includes all persons to whom any specie of obligation may be owed.  The creditor may be a person entitled to payment of a debt, or to the recovery of damages awarded by a judgment of a court of competent jurisdiction.  It may be a person entitled to payment for goods sold and delivered to the company and so the list goes on.  A shareholder is one class of creditor of the company, entitled to payment of a sum in accordance with the terms which govern the obligation.  The relevant terms in the case of a shareholder are the articles of association of the company.  For certain purposes, shareholders are to be treated differently to other creditors of the company, including, importantly, so far as priorities are concerned upon a winding up, external creditors are to be paid before any shareholder.  If, however, the company is solvent, shareholders are entitled to the return of their paid up share capital and to a distribution of any surplus.  Even if the company is wound up in insolvency, the shareholders remain entitled to a pari passu distribution of any surplus after payment of external creditors, though the surplus may not be sufficient to fully discharge the obligations to the shareholders in full.

14. There are various contexts in which it is relevant to distinguish between a shareholder and an external creditor, and the example of priorities as between external creditor and shareholder is perhaps the most well-known and significant. The distinction between creditor and shareholder only matters when there is a reason to make the distinction. In my view, there is no reason to distinguish between creditors generally and one class of creditor, a shareholder, for the purpose of the recovery of the difference in value described in s 588FF(4). The reason there is no difference is that shareholders are just as likely to be harmed by an unreasonable director-related transaction as external creditors. Indeed, if the company is insolvent, it is more likely that the shareholders will suffer a loss precisely because of priorities as to payment, noted above. The fact that a claim pursuant to s 588FDA is not conditioned by any requirement that the company be insolvent is an implicit recognition that such transactions may arise irrespective of the solvency of the company. It would be therefore incongruous, to say the least, that there be a remedy under and pursuant to s 588FDA for external creditors, but not for shareholders. Equally, an unreasonable director-related transaction may arise in the context of an insolvent company, or be the cause of its insolvency. In those circumstances it would be no less incongruous that a remedy would be available to external creditors, but not for the benefit of shareholders, whose interests are just as likely to be harmed by the transaction. For these reasons, in my view, the power under s 588FF(4) is enlivened.

15. I now turn to the question of whether the remedy I propose meets the mandate specified in s 588FF(4) of the Corporations Act. In my view, the remedy is entirely congruent with that provision. I note Nettle JA’s comments in Vasudevan in relation to the Court’s discretion in granting relief pursuant to s 588FF(4) at [30]:

    …[that subsection] confers a broad degree of discretion on the court to do what is just and equitable in the particular circumstances of each case and so thereby to avoid the possibility of capricious and unfair consequences for innocent third parties.

16. Having set out the reasons why s 588FF(4) applies in the present circumstances, I consider the question of how each subsection is to be interpreted. In this regard, I do not accept the Plaintiffs’ contention that the value in subsection (a) “must be” the market value of the 76,000,000 shares at the time of the share issue. To the contrary, in my view, the value of the benefit provided by the company under the transaction is the price paid for the shares by the options holders at the time the options were exercised, being $76,000. That is, in the circumstances of this case, the total amount of the payments made under the impugned transaction: see, eg, Fielding at [7] (McMurdo P).  I also do not accept the Plaintiffs’ contention that the value to be attributed to subsection (b) should be nil, as no reasonable person in the company’s position would have entered into the transaction.  The value (if any) referred to in sub paragraph (b) is the price at which the options should have been exercised in March 2016.  In my view, for the various reasons I have expressed, that was the price at which the options could be exercised without diluting the value of the shares issued to Early Investors; namely, $0.12 per share, the aggregate sum being $9,120,000.  The difference between those two values is therefore $9,044,000.  Using those two values in the equation gives effect to the purpose of the provision; namely, to do what is required to undo the unreasonableness of the transaction.  In the circumstances of this case, that is to pay the difference between what was paid and what should have been paid.

17. That price would have been sufficient to satisfy the “reasonable person”, acting in good conscience, as equity requires, to avert diluting the value of the shares issued to the Early Investors.  As I have explained, that price, notionally imputed as the price at which the options might have been exercised at the time they were eventually exercised, has the effect of holding harmless the Early Investors against the dilution that was caused by issuing the shares at the price of $0.001 specified in the Option Agreement at the time the options were exercised.  Arguably, the option exercise price under the Option Agreement may not have been unreasonable if the options had been exercised before third party investors became involved.  However, in the absence of full and proper disclosure of the Option Agreement to the Early Investors before they purchased shares, the contract price became unreasonable as time passed between the making of the Option Agreement and the time it was exercised.

    Discretion as to appropriate remedy

18. During the hearing I raised with the parties whether the Court has a discretion to fashion a remedy rather than being compelled to rescind the impugned transactions if they were found to be unreasonable director-related transactions.  The Plaintiffs submit that the authorities are divided on this question: see, eg, D Pty Ltd at [68], citing a number of authorities in support of each position; see also Great Investments Ltd v Warner [2016] FCAFC 85; 243 FCR 516 at [141] (Jagot, Edelman and Moshinsky JJ).

19. As I have found that s 588FF(4) provides the power, indeed it requires the Court in this case to, in effect, adjust the equities between the contending parties to achieve the objectives stated in that section, it is unnecessary for me to determine the question of discretion. In cases where the impugned transaction also satisfies the definition of other transactions proscribed by Part 5.7B of the Corporations Act, the need to fashion a remedy, and thus exercise a discretion as to the remedy or suite of remedies, will often arise. Where that is necessary, in my view the Court plainly has a discretion to fashion a remedy that remediates the wrong. The Court is not, in my view, constrained to apply an ‘all or nothing’ remedy as I have discussed above where such remedy, for example the setting aside of the impugned transaction without more, would have the effect of punishing the wrongdoer disproportionately to the harm caused by the wrong.

1. Where the legitimate expectations of persons adversely affected by the wrong to be made whole may be achieved by a remedy, or suite of remedies, that are less blunt in their effect upon the wrongdoer, or where, as here, the blunt tool of an order in the nature of rescission would confer an unearned windfall on persons affected by such an order, the Court may use the range of powers in s 588FF(1)(c) to ameliorate such consequences and thus adjust the equities between the persons affected by the impugned transaction. That discretion is inherent in, and implied by, the range of powers conferred on the Court by s 588FF(1). For example, the power conferred by s 588FF(1)(c) would have provided the discretionary latitude necessary to fashion an appropriate remedy in this case, but for the specific application of s 588FF(4) of the Corporations Act.

   COSTS

2. In my view, this proceeding has been of utility in resolving the competing interests of the Founding Shareholders and the Early Investors.  It has averted the likelihood, as a practical matter, that further proceedings such as the Guildford Proceeding would have been brought by Early Investors, though it is theoretically possible such further claims may still be made.  In other words, in the circumstances of this case, this proceeding brought by the Plaintiffs has proved to be an efficient vehicle for the quelling of controversy between the two groups of shareholders.  In this sense, the proceeding has been beneficial to the Early Investors, though they are not parties to it.  Further, an order for costs against Aviation 3030 would, in a practical sense, be reflected in a diminished return to the Lao Defendants in a proportion equivalent to their shareholding, being approximately 31.7%. 

3. Taking into account: (a) the sum of $9,044,000 to be paid by Lao Holdings, which as I have indicated should be set off against its entitlement to a pari passu distribution, and (b) the broader utility of the proceeding and indirect benefit of it to the Early Investors, in my view the appropriate order as to the costs of this proceeding is as follows.  The costs of and incidental to this proceeding be assessed on an indemnity basis and paid in the first instance by Aviation 3030.  Following settlement of the Contract of Sale, which is expected to occur in April 2023, and upon the distribution of the net assets of Aviation 3030 in the finalisation of the winding up, a sum equal to half of the costs of the proceeding, be deducted by the Plaintiffs, in their capacity as liquidators of Aviation 3030, from the distribution to which Lao Holdings would otherwise have been entitled.  For the avoidance of doubt, in determining the Early Investors’ entitlement to a distribution, the costs which are to be borne by the Lao Defendants ought not be deducted from the broader pool for distribution.  In other words, in addition to the sum of $9,044,000 to be deducted from the distribution to Lao Holdings, a further sum equal to half of the costs of this proceeding, assessed on an indemnity basis, also be deducted from the distribution.

4. There is a rough analogy relevant to my discretion as to costs so far as the Early Investors are concerned.  That is, the ‘free ride’ factor considered in the context of representative group proceedings: see, eg, BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall [2019] HCA 45; 269 CLR 574 at [168]-[169] (Gordon J). Indeed, in my view, there are policy considerations embedded in the legislation concerning representative group proceedings, such as Part IVA of the Federal Court of Australia Act 1976 (Cth), and the Practice Notes that have been developed through experience, to ensure that the interests of non-parties are protected when orders are to be made that affect their interests, which might be adapted to the present context involving claims made pursuant to s 588FDA. It may be that over time a practice is established for proceedings, like the present, to be brought by liquidators, as an arguably more efficient vehicle for quelling the controversy between a variety of competing interests who may otherwise, individually, or in some representative capacity, proliferate several, or even many, separate claims. Those claims might be capable of more global and efficient resolution by a claim of the present kind, provided, as I have said, that particular attention is given to the possible impact of the remedies sought on the rights of non-parties. An obvious advantage of a proceeding brought by a liquidator is that he or she is an Officer of the Court. Thus, the liquidator may be directed by the Court, and, equally importantly, may seek directions from the Court.

5. Needless to say, a claim pursuant to s 588FDA can only be a competitor to a representative group proceeding if the company concerned is wound up. Again, the facts of this case provide a practical example of how and why this vehicle might be appropriate, as Aviation 3030 was wound up by orders made by O’Callaghan J on the application of ASIC in the public interest pursuant to s 461(1)(k) of the Corporations Act. In my view, the winding up of Aviation 3030 was prescient.

6. These matters are relevant to the reasons I have determined costs be assessed on an indemnity basis.  That is to say, in the present context, there is a special feature which justifies awarding costs on an indemnity basis having regard to the global resolution of the proceeding.  Indeed, the orders I propose to make in relation to costs will have the effect of indirectly attributing a proportion of the costs to the Early Investors, who have also benefited from this proceeding.  The cost order I propose cuts the καρπούζι (meaning watermelon) in half.

   DISPOSITION

7. For the reasons above, I have determined that the orders should be as follows.

   (a)The Court declares that the March 2016 Share Issue is an unreasonable director-related transaction within the meaning of s 588FDA of the Corporations Act.

   (b)Lao Holdings pay the sum of $9,044,000 under and pursuant to s 588FF(4) of the Corporations Act.

   (c)The payment of the sum of $9,044,000 is stayed pending the final distribution of the net assets of Aviation 3030.  I direct the Plaintiffs, in their capacity as liquidators of Aviation 3030, set off that sum against the distribution of the net assets of Aviation 3030 to which Lao Holdings is entitled, in accordance with [450] of these reasons.

   (d)The Plaintiffs’ costs of and incidental to this proceeding be assessed on an indemnity basis and paid as to 50% thereof by Lao Holdings.  The payment of those costs in the sum assessed be stayed pending the final distribution of the net assets of Aviation 3030.  I direct the Plaintiffs, in their capacity as liquidators of Aviation 3030, set off those costs from the final distribution of the net assets of Aviation 3030 to which Lao Holdings is entitled, in accordance with [462] of these reasons.

   (e)The balance of the Plaintiffs’ costs of and incidental to this proceeding be assessed on an indemnity basis and paid by Aviation 3030.

   (f)The proceeding against the Seventh Defendant be dismissed with no orders as to costs.

8. I shall hear from the parties as to any other order that may be necessary or appropriate to give effect to the orders I have proposed above, or otherwise to give effect to these reasons.  I invite the parties to correspond with my chambers by 5:00pm today in this regard.

I certify that the preceding four-hundred and sixty-seven (467) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Anastassiou.

Associate:

Dated:       29 April 2022

ANNEXURE I – TABLE OF WORKED EXAMPLES