Brentwood Village Limited (in liq) v Terrigal Grosvenor Lodge Pty Limited (No 4)
[2016] FCA 1359
•18 November 2016
FEDERAL COURT OF AUSTRALIA
Brentwood Village Limited (in liq) v Terrigal Grosvenor Lodge Pty Limited (No 4) [2016] FCA 1359
File number: NSD 1123 of 2014 Judge: MARKOVIC J Date of judgment: 18 November 2016 Catchwords: CORPORATIONS – alleged breach of directors’ duties under ss 181 and 182 of the Corporations Act 2001 (Cth) – where the impugned transactions involved the transfer of an asset with no evidence of payment of any consideration and the sale of a second asset for less than market value – where the impugned transactions entered into for the benefit of entities related to the respondent Legislation: Civil Procedure Act 2005 (NSW) s 100
Corporations Act 2001 (Cth) ss 181, 181(1), 182, 182(1), 1317DA, 1317E, 1317H, 1317H(2)
Federal Court of Australia Act 1976 (Cth) s 51A
Uniform Civil Procedure Rules 2005 (NSW) r 6.12(8)
Cases cited: Blatch v Archer (1774) 98 ER 969
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64
Doyle v Australian Securities & Investments Commission (2005) 227 CLR 18
GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 201 ALR 55
Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296
Ho v Akai Pty Ltd (in liq) (2006) 24 ACLC 1,526
Permanent Building Society v Wheeler (1994) 14 ACSR 109
The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2009) 70 ACSR 1
Date of hearing: 18-22 July 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 68 Counsel for the Plaintiffs: Mr R Newlinds SC with Mr J Hynes Solicitor for the Plaintiffs: Corrs Chambers Westgarth Counsel for the Defendants: Did not appear ORDERS
NSD 1123 of 2014 BETWEEN: BRENTWOOD VILLAGE LIMITED (IN LIQUIDATION) ACN 002 570 087
First Plaintiff
SCOTT DARREN PASCOE AS LIQUIDATOR OF BRENTWOOD VILLAGE LIMITED (IN LIQUIDATION)
Second Plaintiff
AND: TERRIGAL GROSVENOR LODGE PTY LTD ACN 000 868 057
First Defendant
ACN 153 892 436 PTY LIMITED ACN 153 892 436
Second Defendant
JOHN GERARD KLUMPER (and others named in the Schedule)
Third Defendant
JUDGE:
MARKOVIC J
DATE OF ORDER:
18 NOVEMBER 2016
THE COURT DECLARES THAT:
1.The third defendant contravened s 181(1) and s 182(1) of the Corporations Act 2001 (Cth) by causing the first plaintiff between 2012 and 2013 to transfer to Terrigal Grosvenor Lodge Pty Limited for no consideration:
(a)all of the first plaintiff’s interest in the land compromised in certificate of title folio identifier 203/1034204, being the land situated at and known as 2/1 Scaysbrook Drive, Kincumber in the State of New South Wales (Land); and
(b)all of the first plaintiff’s interest in the Veronica Nursing Home business operated from the Land.
2.
The third defendant contravened s 181(1) and s 182(1) of the Corporations Act 2001 (Cth) by causing the first plaintiff between 2012 and 2013 to transfer to ACN 153 892 436 Pty Limited for $2.5 million, knowing that at the time its true market value was $2.75 million, all of the first plaintiff’s interest in the land comprised in certificate of title folio identifier 100/1039621, being the land situated at and known as 86 John Whiteway Drive, East Gosford in the State of New South Wales.
THE COURT ORDERS THAT:
3.In relation to the declaration in 1 above, pursuant to s 1317H(1) of the Corporations Act 2001 (Cth), the third defendant compensate the first plaintiff in the amount of $14.66 million.
4.The third defendant pay the sum of $3,479,239.73 in respect of pre-judgment interest pursuant to s 51A(1) of the Federal Court of Australia Act 1976 (Cth) on the amount referred to in Order 3 for the period 1 February 2013 to the date of judgment.
5.In relation to the declaration in 2 above, pursuant to s 1317H(1) of the Corporations Act 2001 (Cth), the third defendant compensate the first plaintiff in the amount of $250,000.
6.The third defendant pay the sum of $59,332.19 in respect of pre-judgment interest pursuant to s 51A(1) of the Federal Court of Australia Act 1976 (Cth) on the amount referred to in Order 5 for the period 1 February 2013 to the date of judgment.
7.The third defendant pay the plaintiffs’ costs of the proceedings against him.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
MARKOVIC J:
INTRODUCTION
On 31 October 2014, the plaintiffs, Brentwood Village Limited (in Liquidation) (Brentwood) and Scott Darren Pascoe, the liquidator appointed to Brentwood (the Liquidator), commenced proceedings on an urgent basis against Terrigal Grosvenor Lodge Pty Limited (TGL) and A.C.N. 153 892 436 Pty Limited (ACN). Orders were subsequently made to join three further defendants to the proceeding: John Gerard Klumper (Mr Klumper), Paul-Alexander John Klumper (Paul Klumper) and Veronica Klumper-Peters as third, fourth and fifth defendants respectively.
Paul Klumper and Ms Klumper-Peters are the son and daughter of John Klumper. Relevantly:
·Mr Klumper is a director of Brentwood;
·Paul is a director and the secretary of TGL and the sole director, secretary and shareholder of ACN; and
·Ms Klumper-Peters is a director of TGL.
The proceeding was listed for hearing commencing on 18 July 2016. As between the plaintiffs and the first, second, fourth and fifth defendants the proceeding settled and on 22 July 2016 the Court made orders by consent including an order dismissing the proceeding as against those defendants.
The only matter before me for determination is the claim against the third defendant, Mr Klumper. In summary in their further amended statement of claim Brentwood and the Liquidator allege as against Mr Klumper that:
(1)in his capacity as a director of Brentwood he owed duties to Brentwood pursuant to ss 181(1) and 182(1) of the Corporations Act 2001 (Cth) (Corporations Act) to exercise his powers and discharge his duties in good faith in the best interests of Brentwood and for a proper purpose and not to improperly use his position to gain an advantage for himself or someone else or to cause detriment to Brentwood and that in addition he owed fiduciary duties to act in the best interests of Brentwood; and
(2)in transferring a nursing home known as the Veronica Nursing Home from Brentwood to TGL (the Veronica Nursing Home Transaction) and in transferring a parcel of land at 79-87 Henry Parry Drive and 86 John Whiteway Drive, Gosford NSW (the HPD Property) from Brentwood to ACN (the HPD Property Transaction) Mr Klumper breached his duties owed to Brentwood pursuant to ss 181(1) and 182(1) of the Corporations Act and failed to act in the bests interests of Brentwood.
Brentwood and the Liquidator seek declarations that Mr Klumper contravened ss 181(1) and 182(1) in causing each of the Nursing Home Transaction and HPD Property Transaction to occur and orders pursuant to s 1317H of the Corporations Act that, in relation to each transaction, Mr Klumper compensate Brentwood and that he pay equitable compensation or damages.
On 3 August 2015 the Court made orders that personal service on Mr Klumper of the originating process and statement of claim filed in the proceeding be dispensed with and made an order for substituted service on Mr Klumper by delivering the originating process, statement of claim and a copy of the Court’s orders made on 3 August 2015 to Peter Hodges at McLachlan Thorpe Partners. Copies of the originating process, statement of claim and the orders of the Court made on 3 August 2015 were sent to Mr Hodges on 7 August 2015. Accordingly, pursuant to the Orders made on 3 August 2015, Mr Klumper was deemed to be served five days after, namely on 12 August 2015.
Mr Klumper has not filed a defence in the proceeding and there is evidence, as at 5 July 2016, that neither he nor anyone representing him had contacted the plaintiffs’ solicitors in relation to the proceeding. Nor was there any appearance by or on Mr Klumper’s behalf when the matter was listed for hearing before me. Thus the hearing for relief against Mr Klumper proceeded in his absence.
RELEVANT FACTS
The sale and purchase of the Veronica Nursing Home by Brentwood
Pursuant to a contract for sale of land dated 1 May 2007, John Klumper caused Brentwood to sell the business known as the Brentwood Retirement Village to Australian Property Custodian Holdings Ltd (Prime) for $39m. It appears that pursuant to a contract for sale of land dated 13 March 2007, the Veronica Nursing Home was also sold to Prime. The sale of the Brentwood Retirement Village settled on about 31 August 2007. According to a settlement adjustment sheet prepared as at 31 August 2007, of the sale proceeds payable to Brentwood, a cheque was to be made payable to Industry Funds Management (Nominees 2) Pty Limited for $30,081,322.15 “as part of the loan facility to” TGL.
Approximately two years later, by contract for sale of land and agreement for sale both dated 12 June 2009 between Prime and Glendale RV Syndication Pty Ltd in its own right and in its capacity as trustee for the Veronica Nursing Home Unit Trust (Glendale) as vendors of their respective interests and TGL as purchaser, Prime and Glendale were to sell the Veronica Nursing Home to TGL. The sale price was $8.5m comprising of $4.5m for the land and $4m for the business.
On 10 August 2009 Warwick La Hood, a solicitor who appears to have acted for TGL and Brentwood at the time, sent an email to Ms Klumper-Peters which recorded, among other things:
Veronica
Following our conversation today, I received a further telephone call from John. John informs me that:-
1.the NAB have no problem advancing the finance of $10.5m to Terrigal Grosvenor Lodge Pty Limited and Terrigal Grosvenor Lodge Pty Limited advancing that money to Brentwood to allow the acquisition to take place, and
2.the monies advanced from the Terrigal Grosvenor Lodge Pty Limited to Brentwood would be accounted for as a reduction in the monies owed to Brentwood, and
3.the current application to the Commonwealth Department is not effected as Terrigal Grosvenor Lodge Pty Limited will still hold the aged care licences to operate the VNH
I ask for your specific instructions confirming that I am to approach Prime’s lawyers and request that Brentwood takes over the acquisition of the VNH.
If Prime agrees and Brentwood takes over the acquisition generally as contemplated above, then this means that on the completion
A.Brentwood becomes the owner of the land and business
B.Terrigal Grosvenor Lodge Pty Limited remains as the approved provider for the VNH
C.documentation will need to be available on and from completion and reflecting that Terrigal Grosvenor Lodge Pty Limited leases the land from Brentwood and operates the business for and on behalf of Brentwood. I envisage that a Lease agreement coupled with a services agreement needs to be prepared
D.Appropriate rental will need to be agreed upon as will other terms and conditions.
An email dated 11 August 2009 from Madgwicks to Phillip Powell, the managing director of Prime, copied to Sue Harris with subject “Veronica” includes the following:
I had a call from Warwick La Hood this afternoon. He told me that TGL having to claim back the GST gives them a huge tax problem. He didn’t elaborate but said, for that reason, they are wanting to rescind the contract with TGL and enter into a new contract with Brentwood Village Limited being the purchaser.
On 8 September 2009 Hones La Hood, solicitors, wrote to Brentwood confirming that:
(1)the National Australia Bank had no problem advancing $10.5m to TGL and TGL advancing $4.5m to Brentwood for the purchase of the Veronica Nursing Home;
(2)the monies advanced from TGL to Brentwood would be accounted for as a capital purchase and that the “$4.5m advanced to Brentwood Village Limited by Terrigal Grosvenor Lodge Limited will represent the amount to be paid for the contract of sale of the Veronica Nursing home land and transfer from Brentwood Village Limited to Terrigal Grosvenor Lodge Pty Limited at a future date”;
(3)the monies advanced by the National Australia Bank to TGL for the purpose of renovating Veronica Nursing Home would also go towards a further capital payment towards the purchase of the nursing home land – Brentwood would carry out the renovations and TGL would use the monies advanced by the bank to cover the costs of those works;
(4)at the time of exchange a lease to TGL would be produced for registration for the sole purpose of providing TGL with security. No rent was to be payable; and
(5)the current approved application to the “Commonwealth Department is not effected” as TGL will still hold the aged care licences to operate the Veronica Nursing Home business.
The letter continued:
I confirm your specific instructions confirming that I have approached Primes lawyers and request that Brentwood takes over the acquisition of the Veronica Nursing home land.
A.Brentwood becomes the owner of the land
B.Terrigal Grosvenor lodge becomes the owner of the business
C.Terrigal Grosvenor Lodge Pty Limited remains the Approved Provider for the Veronica Nursing home.
D.No rental will be required to be paid by Terrigal Grosvenor Lodge to Brentwood Village Ltd as well as other terms and conditions.
Also on 8 September 2009, the vendors of the Veronica Nursing Home, Prime and Glendale, entered into a deed of rescission, the effect of which was to rescind the contract for sale of land and agreement for sale dated 12 June 2009 for the sale of the land and business comprising the Veronica Nursing Home to TGL. On the same day Prime and Glendale entered into a new contract for sale of land and an agreement for the sale of the Veronica Nursing Home to sell their respective interests in the Veronica Nursing Home to Brentwood. The sale price remained $8.5m for both the land and the business.
On 8 September 2009 Prime issued a tax invoice to Brentwood for the sale of the property and business of the Veronica Nursing Home in the amount of $8.5m plus GST making a total of $9.35m.
By lease dated 6 September 2009 Brentwood leased the land on which the Veronica Nursing Home is situated to TGL for a period of five years commencing on 9 September 2009.
A letter dated 10 September 2009 from Brentwood to TGL titled “Confirmation agreement” and signed by Mr Klumper stated (as written):
The amount of 4.5 million dollars will be paid by Terrigal Grosvenor Lodge Pty Limited at settlement for the purchase of Veronica Nursing Property from prime to Brentwood.
This capital purchase represents the amount paid for the contract of sale and transfer for the acquisition of the Veronica Nursing Home from Brentwood Village Ltd to Terrigal Grosvenor Lodge Pty Limited at a future date, after settlement of Veronica Nursinghome Property from prime to Brentwood Village.
4,500,000
Loan by NAB to Terrigal Grosvenor Lodge Ply Limited for 1.5 million dollars for renovation and extensions to be completed ’09-’10 for Brentwood Village Ltd is a capital payment towards the purchase of Veronica Nursing Home Property from Brentwood Village Ltd to Terrigal Gronsvenor Lodge P/L Limited.
1,500,000
_________
Total of 6,000,000 dollars
A valuation to be obtained from Robertson&Robertson will be the purchase price of contract of sale – transfer when transaction takes place from Brentwood to TerrigaL Grosvenor Lodge Pty Limited.
This amount to be applied and debited from the 6 million dollars already paid.
The monies for the purchase were advanced by the National Australia Bank to TGL. The records of TGL, in particular the “Annual General Ledger” for the period 1 July 2009 to 30 June 2010, show an entry as at 31 March 2010 narrated as “reallocate nursing home to brentwood as per g.i” for a gross amount of $8,133,203.50 and a corresponding reduction in the loan from Brentwood to TGL from $35,554,599.22 to $27,421,395.72. That is the monies that were advanced by the National Australia Bank and which were provided by TGL to Brentwood to acquire the Veronica Nursing Home were treated, as between TGL and Brentwood, as a reduction in the loan from Brentwood to TGL as contemplated by the email dated 10 August 2009 from Mr La Hood to Ms Klumper-Peters.
An email dated 8 October 2009 from Warwick La Hood to, among others, Ms Klumper-Peters attached a “BAS statement for APCH” (also known as Prime) which Mr La Hood said was in relation to the purchase of the Veronica Nursing Home. Mr La Hood said that “Prime through their lawyers want to know when you lodged the BAS statement”. The attached business activity statement was in the name of Brentwood for the quarter 1 July 2009 to 30 September 2009. It showed the amount of $9.35m, being the total purchase price inclusive of GST for the Veronica Nursing Home, as a capital purchase for which Brentwood claimed a GST tax credit.
The 2009 comprehensive risk review by the Australian Tax Office and subsequent events
On 5 May 2009 the Australian Taxation Office (ATO) commenced a comprehensive risk review of Mr Klumper and his associated entities.
Finalisation of the ATO’s risk review was notified to Mr Klumper by letter dated 14 October 2011. In that letter the ATO informed Mr Klumper that on the information that he had provided in relation to the risks identified it considered that there were material tax risks which were appropriate to address through audit action.
The evidence discloses that from about 2011 Mr Klumper was seeking to make plans in light of the issues that arose with the ATO:
·a PKF internal memorandum dated 13 October 2011 with subject “Minutes of meeting 13 October 2011, 11am Re: ATO review of John Klumper’s affairs” noted that Brentwood was the subject of ATO review and that of particular risk was the loan form Brentwood to Mr Klumper with a balance of approximately $20m which may be the subject of Div 7A. The aim of the meeting was said to be to review the assets and liabilities of Brentwood to ensure the distributable surplus was correctly reflected in the accounts and consequently the amount of deemed dividend correctly calculated. The memorandum set out Brentwood’s assets and proposed courses of action that were considered;
·a file note prepared by Tim Elliott, senior manager – tax consulting at PKF, records that Mr Elliott had four telephone conversations with Mr Klumper on 17 October 2011 in which he discussed, among other things, whether the ATO’s rights of recovery against Mr Klumper “ranked above rights of village residents should JK ultimately be held liable to payout RPS refunds” and the ongoing execution of “strategies that were discussed at the meeting with PKF held on Thursday 13 October 2011”;
·a PKF internal memorandum dated 28 October 2011 with subject “Minutes of meeting 13 October 2011, 11am Re: ATO review of John Klumper’s affairs” between Mr Klumper and, among others, representatives of PKF concerning the ATO review of Mr Klumper’s affairs records, among other things, that the ATO was “becoming increasingly agitated and require lodgement of amended income tax returns and information in relation to potential Division 7A loans ASAP” and that agreed actions for “BVL 2012” were that “JK to sell Henry Parry Drive to a special purpose related vehicle … for valuation – expected to be $2.5m” and “JK to see Barrister re bankruptcy and voluntary administration of” Brentwood.
According to records obtained from the Department of Immigration and Border Protection Mr Klumper spent 149 days abroad in the period from 11 December 2011 to 23 January 2013 and 400 days abroad in the period 20 February 2013 to 27 March 2014.
Amended assessments were subsequently issued by the ATO to Brentwood in April 2012 for the years ended 30 June 2000, 30 June 2001, 30 June 2002 and 30 June 2003 and in April 2013 for the year ended 30 June 2007. As at 30 June 2013 an income tax account statement of account for Brentwood showed that a total of $34,554,859.84 was owing to the ATO including for penalties and interest.
By letter dated 26 September 2013 the ATO notified Brentwood that the Commissioner of Taxation (Commissioner) would impose penalties for the capital gains tax and expenditure claims disallowed in the amended Brentwood income tax return for the year ended 30 June 2007 which issued on 18 April 2013. The Commissioner notified Brentwood that it made findings against it for making a false and misleading statement by omitting a capital gain that led to a shortfall amount in 2007.
The Veronica Nursing Home Transaction – sale to TGL
An internal PKF email dated 24 May 2012 from Michael Grant, the Chief Executive Officer of the PKF East Coast Practice, to others at PKF, subject “Brentwood – future planning” records, among other things, that:
Jonathan and John have confirmed that the only assets currently owned by BVL are as follows:
1.Loan to John Klumper (circa $20m);
2.Loan to TGL (circa $17m); and
3.Prime life bank guarantee in BVL’s favour (circa $5m).
There is a significant liability due to residents of the Brentwood Retirement Village which essentially equals the value of the above assets. Hence BVL has been valued at $10k (nominal).
Other BVL property assets (Gosford land) has been transferred to Paul Klumper together with attendantbank liabilities. This transfer is supported by an independent valuation. The Veronica Nursing Home was also transferred to TGL, the value of which was also supported by independent valuation.
Notwithstanding the terms of the email set out in the preceding paragraph, Brentwood entered into a contract for the sale of land dated 28 June 2012 for sale of the land on which the Veronica Nursing Home was situated to TGL for $3m. No moneys were paid by TGL to Brentwood for the purchase of the property. It seems that stamp duty was not paid on the contract until at least January 2013 and the transfer of the property was not lodged until 24 September 2013. The National Australia Bank’s discharge of mortgage over the property is dated 2 September 2013 and a notice of sale of transfer of land for the property signed by Paul Klumper is dated 18 September 2013.
Over this period the following also occurred:
(1)on 6 November 2012 Paul Klumper sent an email to Charles Cupit and Paul Bedford saying “[n]eed to sell vnh to lend lease or other NOW for 15m”;
(2)from December 2012 there was correspondence passing between PKF and Mr Klumpers about the debt owing to the Commissioner arising from the amended assessments for the years ended 30 June 2000 to 2003 and the Tax Office’s ongoing audit in relation to the year ended 30 June 2007;
(3)on 13 February 2013 Andrew Skyring, TGL’s accountant, sent an email to David Dejong in which he recorded that he spoke to Ms Klumper-Peters and that he told her of the need to address Brentwood and the need to discuss “with Giles tomorrow his possible appointment to Brentwood as liquidator”;
(4)on 22 April 2013 Ms Klumper-Peters received a copy of a statement of claim filed in the Supreme Court of New South Wales by the Deputy Commissioner of Taxation against Brentwood as defendant and seeking recovery of $29,763,635.19 for unpaid tax liability;
(5)on 10 September 2013 Employers Mutual NSW Limited filed an application to wind up Brentwood in the Supreme Court of New South Wales;
(6)on 30 October 2013 Mr Skyring recommended to Paul Klumpers that “new entities be established to hold any property assets”; and
(7)on 19 December 2013 the Supreme Court of New South Wales ordered that Brentwood be wound up and that Mr Pascoe be appointed as liquidator.
The HPD Property Transaction
Again despite the terms of the PKF internal email dated 24 May 2012, by contract for sale of land dated 28 June 2012 between Brentwood as vendor and ACN as purchaser Brentwood agreed to sell the HPD Property for $2.5m. A valuation of the HPD Property prepared by Robertson & Robertson, on instruction of Mr Klumper and ACN, assigned a value of $2.75m including GST to the property as at 8 June 2012.
The transfer for the HPD Property is dated 28 June 2012 but it was presented for stamping on 31 January 2013 and not lodged for registration until 12 June 2013.
No proceeds were received by Brentwood for the sale of the HPD Property as at June 2012 but a letter of offer from the ANZ to ACN dated 19 September 2012 makes a facility of $2.275m available to ACN for the “sale and transfer of land plus stamp duty with regards to the property situated at 86 John Whiteway Dr, Gosford NSW”. In evidence before me is a bank statement for ACN dated 15 October 2012 for account type “fully drawn advance” which records two payments made on 3 and 15 October 2012 for $1m and $1.125m respectively, totalling $2.125m, and a bank statement for Brentwood to 31 October 2012 showing the receipt of two payments of $1m and $1.125m on 3 and 15 October 2012, respectively.
On 30 May 2014 Paul Klumper sent an email to Mr Skyring attaching the claim by the liquidator, the valuation of the HPD Property, the transfer and the notice of valuation after sale. In that email he wrote:
The difference between sale and valuation was $250,000. This was due to stressed sale by BVL.
I am in the process of acquiring the bank statements to verify funds transferred to BVL.
The land was only recently registered in the name of ACN due to the NAB not releasing correct documents to ANZ for lodgement.
Mr Skyring responded to Paul Klumper by email dated 2 June 2014 in which he wrote:
Please confirm that you are agreeable to us noting to the BVL liquidator (on a without prejudice basis) the following:-
- the property was transferred to A.C.N for $2,500,000 A.c.n paid $2,125,000 via a new ANZ loan
The balance of $375,000 was not paid to BVL
Following the sale of the property and the payout of the secured creditor, the balance of any funds after selling costs would be available to the BVL liquidator
On 25 November 2014 D.C. Balog & Associates wrote to K & L Gates, the solicitors for the plaintiffs, enclosing a cheque for $375,000 “in satisfaction of the balance of the purchase price for” the HPD Property.
Transfer of the Veronica Nursing Home in 2014
By report dated 16 September 2013 addressed to TGL, Nelson Partners Australia provided a valuation of $11.5m for the Veronica Nursing Home as a going concern.
Pursuant to an agreement between TGL and others as Seller and Aurrum Pty Limited (Aurrum) as Buyer, Aurrum acquired the business of the Veronica Nursing Home and the land on which it was situated as well as another asset for $53m, of which $14.66m was attributed to the sale of the Veronica Nursing Home, broken up as $9.66m for the business and $5m for the land.
STATUTORY FRAMEWORK AND LEGAL PRINCIPLES
The claim against Mr Klumper is for breach of ss 181(1) and 182(1) of the Corporations Act. Those sections provide:
181Good faith—civil obligations
Good faith—directors and other officers
(1)A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
182 Use of position—civil obligations
Use of position—directors, other officers and employees
(1)A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
Sections 181(1) and 182(1) are civil penalty provisions: ss 1317DA and 1317E(1), column 1, item 1.
As a result of the alleged breaches Brentwood and the Liquidator seek an order pursuant to s 1317H of the Corporations Act which relevantly provides:
1317H Compensation orders—corporation/scheme civil penalty provisions
Compensation for damage suffered
(1)A Court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if:
(a)the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and
(b) the damage resulted from the contravention.
The order must specify the amount of the compensation.
Damage includes profits
(2)In determining the damage suffered by the corporation or scheme for the purposes of making a compensation order, include profits made by any person resulting from the contravention or the offence.
The test to be applied for the purposes of considering whether there has been a contravention of s 181 of the Corporations Act is based on what a comparable person, having the same knowledge and skills of the director, would reasonably have done in the circumstances. In The Bell Group Ltd (in liq) v Westpac Banking Corporation (No. 9) (2009) 70 ACSR 1 at Chapter 20, Owen J set out the general legal principles relating to breach of directors’ duties. At [4619] his Honour summarised what he saw as the relevant legal principles including relevantly that “directors must give real and actual consideration to the interests of the company. The degree of consideration that must be given will depend on the individual circumstances. But the consideration must be more than a mere token: it must actually occur”.
In Permanent Building Society v Wheeler (1994) 14 ACSR 109 at 137 Ipp J, with whom Malcolm CJ and Seaman J agreed, observed that fiduciary powers and duties of directors may be exercised “only for the purpose for which they were conferred and not for any collateral or improper purpose”; that the issue for the court was not whether a management decision was good or bad but “whether the directors acted in breach of their fiduciary duties”; that “honest or altruistic behaviour by directors will not prevent a finding of improper conduct on their part if that conduct was carried out for an improper or collateral purpose”; and “whether acts were performed in good faith and in the interest of the company is to be objectively determined” but statements by directors about their subjective intentions or beliefs will be relevant to that inquiry.
In relation to s 182 of the Corporations Act the High Court in Doyle v Australian Securities andInvestments Commission (2005) 227 CLR 18 at [35] held that impropriety would be found on the part of a director or officer when there was:
a breach of the standards of conduct that would be expected of a person in his position by reasonable persons with knowledge of the duties, powers and authority of his position as director, and the circumstances of the case, including the commercial context. Such standards, expressed according to objective criteria, are ultimately stated, as necessary, by the courts.
(footnotes omitted)
In Australian Securities and Investments Commission v Adler (2002) 168 FLR 253 at [458], Santow J considered the principles applicable to s 182 of the Corporations Act in the context of the facts before him. Relevantly, his Honour said:
I should commence by a brief statement of the effect of the case law on the application of s182 in the present context.
(1)Causing a company to enter into an agreement which confers unreasonable personal benefits on a director is a breach of ss 180, 181 and 182.
…
(4)Moreover it is sufficient to establish that the conduct of a company was carried out in order to gain an advantage for that director or someone else without also having to establish that an advantage was actually achieved: Chew v The Queen (1992) 173 CLR 626 per Mason CJ, Brennan, Gaudron and McHugh JJ at 633.
…
(6)Finally, impropriety for the purposes of s 182(1) is to be determined objectively and does not depend upon the director’s consciousness of impropriety. It consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case: R v Byrnes (at 514-515) per Brennan, Deane, Toohey and Gaudron JJ.
CONSIDERATION
Brentwood and the Liquidator allege that Mr Klumper contravened his duties pursuant to ss 181(1) and 182(1) of the Corporations Act in putting into effect and causing to occur the Veronica Nursing Home Transaction and the HPD Property Transaction.
The Veronica Nursing Home Transaction
The established facts in relation to the Veronica Nursing Home Transaction are that:
(1)Mr Klumper has been a director of Brentwood since 1983 and was a director at all relevant times;
(2)in 2009 Brentwood acquired the Veronica Nursing Home. Despite the suggestion that the Veronica Nursing Home was acquired by TGL at that time, in my opinion the documentary trail demonstrates that it was Brentwood that acquired the Veronica Nursing Home and that, although the monies used for the acquisition were provided by TGL, via a loan to it from the National Australia Bank, to Brentwood those monies were then applied in reduction of the loan from Brentwood to TGL and Brentwood claimed a GST tax credit. The transaction was effected in the way contemplated in the 10 August 2009 email from Mr La Hood to Ms Klumper-Peters;
(3)thus prior to 2012 Brentwood was the owner of the Veronica Nursing Home;
(4)in about October 2011 the ATO finalised its comprehensive risk review of Mr Klumper and his associated entities. In April 2012 the ATO issued amended assessments to Brentwood for the financial years ended 30 June 2000, 2001, 2002 and 2003 and in April 2013 it issued an amended assessment for the financial year ended 30 June 2007;
(5)in 2011 Mr Klumper had discussions with his accountants, PKF, in which the issue of whether Brentwood should be placed into external administration was raised; and
(6)in June 2012 Brentwood entered into a contract for sale of land of the property on which the Veronica Nursing Home was situated for $3m to TGL, a company controlled by Mr Klumper’s children. The transfer for the sale of the property was not lodged until September 2013. There is no evidence before me that any money changed hands for the sale.
In my opinion, in effecting the Veronica Nursing Home Transaction Mr Klumper contravened ss 181(1) and 182(1) of the Corporations Act.
First it cannot be said that a director acts in good faith if he or she transfers a significant asset of a company for no consideration let alone to effect that transfer to a company in the control of other family members. Further, even if consideration had passed to Brentwood, which it has not, there is evidence that the contract price was significantly under market value. A valuation obtained by TGL dated 16 September 2013 valued the Veronica Nursing Home as a going concern at $11.5m.
There is no evidence that Mr Klumper gave any consideration to the interests of Brentwood in effecting the Veronica Nursing Home Transaction. To the contrary there is evidence that supports the conclusion that he acted for a collateral purpose. Namely, in the face of imminent or actual recovery action by the ATO of tax liabilities of tens of millions of dollars, he divested a significant asset of the company for no consideration.
The same circumstances give rise to a finding that Mr Klumper used his position improperly when putting in train and completing the Veronica Nursing Home Transaction. He clearly breached the standards of conduct that would be expected of a person in his position by reasonable persons with knowledge of the duties, powers and authority of his position as director, and the circumstances of the case, including the commercial context. Further in doing so he acted so that TGL, a company in the control of his family, would and did gain an advantage and Brentwood suffered detriment by loss of a substantial asset for no consideration.
That then leaves the determination of the quantum of the loss suffered by Brentwood as a result of the contravening conduct. The Court has before it the following evidence of value:
·the valuation prepared by Nelson Partners dated 16 September 2013 which valued the Veronica Nursing Home as a going concern at $11.5m; and
·the actual sale of the Veronica Nursing Home by TGL in 2014 for $14.66m.
Senior counsel for Brentwood and the Liquidator submitted that a sensible approach to quantum would be to assess compensation at the value of the actual net proceeds arising from the sale to Aurrum, $14.66m, and that s 1317H(2) of the Corporations Act would permit that approach.
In Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 83, Mason CJ and Dawson J said:
The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can. Indeed, in Jones v Schiffmann Menzies J. went so far as to say that the “assessment of damages … does sometimes, of necessity involve what is guess work rather than estimation”. Where precise evidence is not available the court must do the best it can. And uncertainty as to the profits to be derived from a business by reason of contingencies is not a reason for a court refusing to assess damages.
(footnotes omitted)
In my opinion there is a difficulty in assessing the true quantum of damage suffered by Brentwood as a result of the contravening conduct. There is no contemporaneous valuation of the Veronica Nursing Home at the date of the contravening conduct that is, the date of its transfer to TGL. However, s 1317H(2) specifies that in determining the damage suffered by a corporation for the purpose of making a compensation order profits made by any person resulting from the contravention can be included.
In Ho v AkaiPty Ltd (in liq) (2006) 24 ACLC 1,526 at [55], a Full Court of this Court (Finn, Weinberg and Rares JJ) in considering the difference between damages under s 588J and s 1317H of the Corporations Act said:
Under s 1317H, in contrast the award of “compensation” to the company is for damage suffered by it resulting from the contravention, but the damage suffered under this provision includes “profits made by any person resulting from the contravention”.
In Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296, a Full Court of this Court (Finn, Stone and Perram JJ) preferred a construction of s 1317H(2) that did not make mandatory the inclusion of profits in a compensation order under s 1317H(1). Their Honours favoured the following construction set out at [630]:
the “include profits” formula is simply definitional in the sense that it brings with the compensatory scheme of the section a type of claim (ie for profits made) which would not otherwise necessarily fall within the formula “damage suffered by the corporation” as, for example, where the contravenor or a third person made profits as a result of the contravention, but without loss to the corporation. Put shortly, it empowers the Court to compensate for profits made from a contravention without proof of a corresponding loss.
Having considered the evidence that is available, in my opinion, an order for compensation in the amount of $14.66m should be made pursuant to s 1317H(1). This amount represents the loss to Brentwood including the profit made by TGL which sold the Veronica Nursing Home, having not paid any consideration for it, approximately two years after the contract for sale was entered into with Brentwood and in the year after the transfer of land on which the Veronica Nursing Home was situated was lodged for registration.
The HPD Property Transaction
The established facts in relation to the HPD transactions are that:
(1)Mr Klumper has been a director of Brentwood since 1983 and was a director at all relevant times;
(2)on 28 June 2012, Brentwood entered into a contract for sale with ACN, a company controlled by his son, Paul Klumper, to sell the HPD Property for $2.5m;
(3)this was at a time when, as recorded at [44] above, Mr Klumper was aware of his increasing liability to the ATO, was having ongoing discussions with his accountants about the ATO’s investigation and its consequences, including strategies for managing those matters, and had had discussions which canvassed the possibility of placing Brentwood into external administration;
(4)there was a contemporaneous valuation of the HPD property dated 8 June 2012 which valued it at $2.75m including GST;
(5)in June 2014, Paul Klumper tried to justify the sale price recorded in the contract as a “distressed sale” by Brentwood;
(6)the sum of $2.125m was transferred by ACN to Brentwood on 3 and 15 October 2012. I infer that those amounts were paid for the acquisition of the HPD Property. ACN tendered the balance of the purchase price to the liquidator on 25 November 2014.
Senior Counsel for Brentwood and the Liquidator submitted that, in the absence of evidence from Mr Klumper and Paul Klumper, I would not infer that the payment of $2.125m was for the HPD Property. He did so based on the principle in Blatch v Archer (1774) 98 ER 969 where Lord Mansfield said 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”. That is, Brentwood and the Liquidator’s submission is that it was in the power of Mr Klumper to adduce positive evidence of the purpose of those payments and that, in the absence of doing so, there is insufficient evidence to establish, and for the Court to infer, that the payments were made for the purpose of acquiring the HPD Property.
But I have not drawn the inference of the purpose of the payments from the bank statements alone. There is in addition the ANZ’s letter of offer of finance and the email exchange in late May and early June 2014 between Paul Klumper and Mr Skyring which refers to acquiring bank statements to verify funds transferred to Brentwood and to ACN paying $2.125m via a “new ANZ loan”. Despite the failure on Mr Klumper’s part to give positive evidence about the purpose of the payments there is, in my view, sufficient evidence to draw the necessary inference as to purpose of payment.
In my opinion in effecting the HPD Property Transaction Mr Klumper contravened ss 181(1) and 182(1).
At a time when Mr Klumper was aware of Brentwood’s difficult situation and the exposure it faced to tax liabilities he arranged the HPD Property Transaction, selling the HPD Property to a party related to and owned by his son. The contemporaneous valuation of the HPD Property was $2.75m. ACN paid $2.5m. While at first blush that may not seem to be a difference of such significance that it could be said Mr Klumper did not act in the best interests of Brentwood or that he used his position such as to cause detriment to it, as Senior Counsel for Brentwood and the Liquidator submitted, absent an explanation for the purchase price struck, an issue in relation to Mr Klumper’s conduct arises. That is, there is no evidence before me of attempts to sell the property, any offers received for it and whether, in light of those offers, it was reasonable to sell at a discount to the valuation that had been obtained.
In my opinion, Mr Klumper gave no consideration to the interests of Brentwood at the time of the HPD Transaction. That is evident from the matters referred to at [60] above, the existence of the valuation and the circumstances in which Brentwood found itself. Mr Klumper cannot be said to have acted in Brentwood’s best interests but rather acted for a collateral purpose in divesting Brentwood of its asset. Further, he improperly used his position to the detriment of Brentwood in a way that breached the standards of conduct that would be expected of a person in his position by a reasonable person with knowledge of the duties, powers and authority of his position as director.
Brentwood and the Liquidator seek compensation in the amount of $250,000 in the event of a finding that the October 2012 payments can be attributed to the HPD Property Transaction, as I have found. That amount is the difference between the valuation and the sale price, which I have found has been paid in full, and is the amount for which compensation should be ordered.
Interest
Brentwood and the Liquidator seek interest pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth) on the amounts awarded as compensation up to the date of the judgment. In my opinion, they are entitled to interest as sought. But two issues arise: the date from which interest would be calculated and the applicable rate.
In relation to the dates, for each transaction the contract of sale was entered into on 28 June 2012 and the transfer registering the change in ownership lodged on a much later date. Brentwood and the Liquidator submit that, doing the best it can, the Court would pick the middle of the period as the date from which to calculate pre-judgment interest. There is no evidence before me, nor would Brentwood and the Liquidator call such evidence, of when Mr Klumper would say the transactions took effect although there is an argument that they did not take effect until the transfers were lodged and registered. However, given the period over which the transactions were implemented I would accept the submission of Brentwood and the Liquidator that, in the circumstances, it would be appropriate and just to select the mid point between the date of contract and the date of lodgement of the transfers and to calculate interest from that date, being 1 February 2013.
There is no rate of interest fixed or prescribed by s 51A. In GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 201 ALR 55 at 58, [7] Finn J said:
Through the matter is, and remains, one of judicial discretion, the usual practice that has been followed in applying s 51 has been to adopt the rates of interest applied by the Supreme Court of the State or Territory in which this Court is dealing with the matter … unless there is evidence that those rates are penal or not commercial.
(citations omitted)
Adopting that practice, the rates prescribed by the Supreme Court of New South Wales are those to be applied. Section 100 of the Civil Procedure Act 2005 (NSW) provides that the court can include interest up to judgment in proceedings for recovery of money “at such rate as the court sees fit”. Brentwood and the Liquidator have assisted the Court by informing it that, based on the Uniform Civil Procedure Rules 2005 (NSW), the rate of interest appears to be a rate of 4% above the relevant cash rate published by the Reserve Bank of Australia: Uniform Civil Procedure Rules 2005 (NSW) r 6.12(8).
Brentwood and the Liquidator have also has informed the Court that the cash rate in the period from 30 June 2012 has decreased steadily from 3.5% to 1.50% and for the sake of simplicity has submitted that an average cash rate should be applied for the period. I accept that submission but, as the date from which interest is to be calculated is the mid point date, 1 February 2013, the average should be calculated using the cash rate published immediately prior to 1 January 2013, which was 3% decreasing to 1.50% as at 8 November 2016. That renders an average rate of 2.25%. Adding the 4% margin gives a rate of 6.25% which is the rate that should be applied and which I will apply.
DISPOSITION
I will make orders giving effect to my findings set out above and will order that Mr Klumper pay Brentwood’s and the Liquidator’s costs of the proceedings against him.
I certify that the preceding sixty-eight (68) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic. Associate:
Dated: 18 November 2016
SCHEDULE OF PARTIES
NSD 1123 of 2014 Defendants
Fourth Defendant:
PAUL-ALEXANDER JOHN KLUMPER
Fifth Defendant:
VERONICA KLUMPER-PETERS
0
10
4