Emerald Emperor Investments Pty Ltd (in Liq) v Kumali Pty Ltd - [2019] SADC 181

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
EMERALD EMPEROR INVESTMENTS PTY LTD (IN LIQ) & ANOR v KUMALI PTY LTD & ANOR
[2019] SADC 181
Judgment of His Honour Judge Chivell
5 December 2019
CORPORATIONS - MANAGEMENT AND ADMINISTRATION - OFFICERS OF CORPORATION - DIRECTOR - WHO IS A DIRECTOR
CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION - FIDUCIARY AND RELATED STATUTORY DUTIES - REMEDIES AND PENALTIES FOR BREACH OF DUTY
CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - EFFECT OF WINDING UP ON OTHER TRANSACTIONS - PREFERENCES AND VOIDABLE TRANSACTIONS - UNCOMMERCIAL TRANSACTIONS
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - PLEADINGS - DEPARTURE
Liquidator’s action to recover money alleged to have been lost by first plaintiff, Emerald Emperor, in sale of real estate property in 2012 to first defendant, Kumali. Second defendant, Mr Bouhamdan, sole director and shareholder of first defendant. Plaintiffs say property sold for 50% of its value. Defendants say additional consideration in the form of forgiveness of a debt owed by Emerald Emperor to another company, Tyger Lilly Pty Ltd, of which the second defendant also sole director and shareholder.
Issues: whether Mr Bouhamdan a shadow director of Kumali within meaning of s 9 Corporations Act during entire relevant period; identity of director of Emerald Emperor at time of sale; whether that director in breach of statutory and fiduciary duties to Emerald Emperor; whether Mr Bouhamdan knowingly assisted that director to breach duties; whether Kumali received benefit of transaction knowing it resulted from breach of duties; whether transaction an uncommercial transaction within meaning of s 588FB Corporations Act; whether transaction an insolvent transaction within meaning of s 588FC Corporations Act; whether transaction voidable pursuant to s 588FE(3) Corporations Act; whether Kumali should compensate Emerald Emperor pursuant to s 588FF(1)(c) Corporations Act.
Held: Mr Bouhamdan a shadow director of Kumali at all relevant times; director of Emerald Emperor at time of transaction was Mr Michael Macpherson – plaintiffs’ pleaded case was that director of Emerald Emperor at that time was Mr Ian Hillard – plaintiffs’ claim against Mr Bouhamdan based in breach of director’s duties by Mr Hillard dismissed; sale of property was an uncommercial transaction, an insolvent transaction, a voidable transaction – Kumali liable to compensate Emerald Emperor in sum of $150,000.
Judgment for plaintiffs against Kumali in sum of $150,000. Plaintiffs’ claim against Mr Bouhamdan dismissed.
Acts Interpretation Act 1901 (Cth) s 2C, s 15AA; Corporations Act 2001 (Cth) s 9, s 91, s 95A, s 180, s 181, s 182, s 191, s 513A, s 588E, s 588FB, s 588FC, s 588FE, s 588FF, s 1274B, s 1317H; District Court Civil Rules 2006 (SA) r 22, r 27, r 67, r 90, referred to.
Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; Channel Seven Adelaide Pty Ltd v Manock [2010] SASCFC 59; Buzzle Operations Pty Ltd (in liq) & Anor v Apple Computer Australia Pty Ltd & Anor (2010) 238 FLR 384; Emanuel Management Pty Ltd (in liq) v Fosters Brewing Group Ltd (2003) 178 FLR 1; Macks v Viscariello (2017) 130 SASR 1; Southern Waste Resource Co Pty Ltd v Adelaide Hills Region Waste Management Authority (No 3) [2019] SASC 192; Demondrille Nominees Pty Ltd v Shirlaw & Anor (1997) 25 ACSR 535; Lewis v Cook [2000] NSWSC 191; Lewis v Doran (2004) 50 ACSR 175; Brooks v Heritage Hotel Adelaide Pty Ltd (1996) 20 ACSR 61; Powell v Fryer (2000) 18 ACLC 480, considered.

EMERALD EMPEROR INVESTMENTS PTY LTD (IN LIQ) & ANOR v KUMALI PTY LTD & ANOR
[2019] SADC 181

On 11 June 2012, a contract was entered into between the first plaintiff, Emerald Emperor Investments Pty Ltd, as vendor, and the first defendant, Kumali Pty Ltd, as purchaser, for the sale of certain real estate situated at 11 Thomas Street, Cavan in South Australia.
The purchase price for the property was stated in the contract[1] and in the Memorandum of Transfer[2] as $150,000. No other consideration was mentioned in either document. The defendants admit that the value of the property was $300,000.
[1] Exhibit P1, pp 7-16.
[2] Exhibit P1, pp 19-20.
On 16 October 2013, an order was made in the Federal Court[3] that Emerald Emperor be wound up in insolvency on the application of the Deputy Commissioner of Taxation. Mr Nicholas Cooper, the second plaintiff, was appointed liquidator of the company.
[3] Exhibit P1, p 43.
It is Mr Cooper’s position that Emerald Emperor sold the property to Kumali for about half its value. That being the case, the plaintiffs say that both Kumali and Mr Bouhamdan, the second defendant, are liable to pay to the liquidator, Mr Cooper, the difference between the actual value of the property and the amount paid, being $150,000 plus interest and costs.
Issues
Rule 90 of the District Court Civil Rules 2006 (SA) states:
90—Definition of issues in action
(1)The issues to be resolved in an action are defined by the pleadings.
(2)A pleading is a formal statement of the basis of a party's case filed in the Court.
(3)The principal pleadings are—
(a)the statement of claim; and
(b)the defence; and
(c)the reply.
(4)…
The four functions of pleadings are:[4]
(1)to define the matters in dispute;
(2)to show the parties what facts they will have to prove at the trial;
(3)to enable the nature of the trial to be determined;
(4)to provide a record of the matters which have been before the court for determination in the action.
[4] Civil Procedure South Australia vol 1 (Service 178) LexisNexis Butterworths, [R 90.5] – see notes and cases cited therein.
The following further principles arise from the cases cited:[5]
(1)prima facie, a party is confined at the trial to raising those issues which are identified by his pleadings if there would otherwise be injustice to another party;
(2)this is subject to a wide power of amendment, even after evidence has been led;
(3)the adequacy of a pleading is to be considered from the answer to the question, ‘Does the pleading give fair notice of the case to be made against the other party at trial, thereby minimising the risk of injustice resulting from surprise?’;
(4)where a defect in the pleadings is not raised by a party adversely affected, it may be taken to have consented to the trial being conducted other than in accordance with proper pleadings on that point.
[5] Ibid.
Keeping those rules and principles in mind, the plaintiffs’ claim, as pleaded in the Second Statement of Claim, is as follows:
·the director of Emerald Emperor from 1 February 2012 to 16 October 2013 was Mr Ian Hillard;[6]
[6]    Second Statement of Claim, [1.3].
·the director of Kumali from 10 February 2010 to 1 February 2012 and from 12 June 2012 thereafter was Mr Bouhamdan;[7]
[7]    Second Statement of Claim, [3.2.1].
·the director of Kumali from 1 February 2012 to 12 June 2012 was Mr Hillard;[8]
[8]    Second Statement of Claim, [3.2.2].
·from 1 February 2012 to 12 June 2012, Mr Bouhamdan was a ‘shadow director’ of Kumali;[9]
[9]    Second Statement of Claim, [4].
·the Cavan property was sold by Emerald Emperor to Kumali for an ‘undervalue’ of $150,000 rather than for its true value of $300,000;[10]
·Mr Hillard owed fiduciary duties to Emerald Emperor as its director;[11]
·Mr Hillard owed statutory duties to Emerald Emperor as its director pursuant to ss 180, 181, 182 and 191 of the Corporations Act;[12]
·by causing the transfer of the Cavan property to Kumali at the undervalue alleged, Mr Hillard breached his fiduciary and statutory duties, causing a loss of not less than $150,000;[13]
·Kumali knowingly received the transfer of the Cavan property when it knew or should have known that the transfer was in breach of Mr Hillard’s fiduciary and statutory duties to Emerald Emperor;[14]
·for that reason, Kumali is liable to compensate Emerald Emperor for its loss of $150,000;[15]
·Mr Bouhamdan, as director of Kumali, knowingly assisted Mr Hillard’s breach of his fiduciary and statutory duties to Emerald Emperor;[16]
·Mr Bouhamdan is therefore also liable to compensate Emerald Emperor for its loss of $150,000;[17]
·the transfer of the Cavan property was an uncommercial transaction, as defined in s 588FB of the Corporations Act;[18]
·Emerald Emperor was insolvent at the time of the transfer, and so Kumali is liable to pay compensation of $150,000 to Mr Cooper, the liquidator, pursuant to s 588FF of the Corporations Act.[19]
[10] Second Statement of Claim, [7].
[11] Second Statement of Claim, [8].
[12] Second Statement of Claim, [9].
[13] Second Statement of Claim, [10]-[11].
[14] Second Statement of Claim, [12].
[15] Second Statement of Claim, [13].
[16] Second Statement of Claim, [14].
[17] Second Statement of Claim, [15].
[18] Second Statement of Claim, [16].
[19] Second Statement of Claim, [17].
The evidence at trial ranged, without objection, somewhat more widely than the issues defined by the Second Statement of Claim. This is evidenced by the breadth of the plaintiffs’ closing submissions. The same applies to the evidence adduced and the submissions made by the defendants in their closing submissions.
My findings will be confined to the pleaded cases of the parties. Having regard to the logistical difficulties involved, and the fact that the defendants were not legally represented, a number of issues raised on both sides need not be addressed because they are not part of their pleaded cases, and there is no injustice to either side that they be confined to their pleaded cases. I will refer to this topic again under the heading ‘Directors’ Duties to Emerald Emperor’.
The defendants contend that the property was not sold at an undervalue on the basis that:
·on 4 July 2008, about a year after the property was purchased by Emerald Emperor, a caveat was lodged on the title to the property in favour of Tyger Lilly Pty Ltd. The amount ‘secured’ by the caveat was $116,671, which they allege was advanced by Tyger Lilly to Emerald Emperor to purchase the property, giving rise to a beneficial interest in the property;
·part of the consideration for the sale to Kumali was the forgiveness of this debt to Tyger Lilly, on the basis of which the caveat was withdrawn on 15 June 2012, that is, after the contract was signed and before settlement;
·the value of the property had decreased between 2007 and 2012 because a building on the property had been demolished and rubbish had been dumped on the property;
·when all this is taken into account, the property was not sold at an undervalue;
·Mr Bouhamdan was a director of Kumali at all relevant times;
·there was no breach of fiduciary or statutory duty by Mr Hillard arising from the Cavan transaction;
·there was no ‘knowing receipt’ of the Cavan property;
·there was no ‘knowing assistance’ by Mr Bouhamdan of any breach of duty by Mr Hillard as director of Emerald Emperor
The Trial
At the time of the trial in this action, Mr Bouhamdan was a prisoner in Western Australia awaiting trial on criminal charges, which I assume, from the very little information I have, are totally unrelated to the facts of this case.
Mr Bouhamdan had previously terminated his instructions to the solicitors who had acted for him during most of the interlocutory stages of this litigation. The logistical difficulties in conducting a trial by AVL involving documentary evidence and where the second defendant was in custody in another State and not legally represented, are obvious.
It was therefore agreed that the court would travel to Perth to hear most of the evidence. The approval of the Chief Judge of the District Court of Western Australia was obtained and is gratefully acknowledged. With the assistance and cooperation of the superintendent of the prison where Mr Bouhamdan was detained, arrangements were made to bring Mr Bouhamdan to the District Court of Western Australia in Perth for each day of hearing. The assistance and cooperation of the superintendent and his staff is also gratefully acknowledged.
Mr Bouhamdan appeared at the trial with the assistance of his brother, whose name is Big Rob.[20] Mr Rob had studied law, but he had not yet been admitted as a legal practitioner. He was based in Lismore, New South Wales. He had to surmount considerable logistical difficulties to assist Mr Bouhamdan. I have acknowledged those difficulties and have made as much allowance for them as I could in the circumstances. Despite these difficulties, Mr Rob greatly assisted Mr Bouhamdan in the presentation of his case, and assisted the court by ensuring that the issues were adequately explored and presented in the best light.
[20] Mr Rob appeared as Mr Bouhamdan’s ‘McKenzie friend’ without objection from the plaintiffs. This procedure is permitted by DCR 22(2), which states: ‘A party who appears personally in proceedings before the Court may, with the Court’s permission, be assisted in court in the presentation of his or her case by a person approved by the Court’.
I also note that, since Mr Bouhamdan was still awaiting trial on the criminal charges and no findings of guilt had been made, he was entitled to the presumption of innocence. No adverse inferences have been drawn against him from his present circumstances.
Mr Rob also effectively assisted Kumali, although no formal order was made under DCR 27. Since the interests of Kumali and Mr Bouhamdan coincided so far as these proceedings are concerned, the issue of Kumali’s separate legal position did not arise.
Proposed Amendment
On 21 March 2019, the plaintiffs applied[21] to amend their Second Statement of Claim. This was not further pursued at the hearing. The application was revived in closing submissions. The amendments sought are:
·to add references to ‘Breach of Fiduciary and Statutory Duties’ and ‘Accessorial Liability’ to the Introduction;
·to add an allegation that Kumali was also liable for knowing assistance and accessorial liability in paragraph 14;
·to add a claim for compensation in the same amount claimed previously but pursuant to s 1317H of the Corporations Act.
[21] The application is FDN 24, the proposed amended Statement of Claim is Ex TJS-1 to the affidavit of Travis John Shueard sworn 21 March 2019 (FDN 25).
The plaintiffs contended that:
·it is accepted that the claim is out of time according to time limits in the Corporations Act. There is no application to extend time to make the application;
·a question of law is raised and no factual issue requiring additional evidence is called for;
·since the relevant paragraphs are denied by the defendants, no change to the Second Defence is required.
The defendants opposed the application on the basis that:
·the application to add Kumali is out of time;
·the defendants would require more time and resources to respond;
·the defendants may need to adduce further evidence;
·the defendants would need to amend their pleadings.
The principles to be applied in relation to late applications to amend were described by the High Court in Aon Risk Services Australia Ltd v Australian National University.[22] These principles were conveniently summarised by Gray J in Channel Seven Adelaide Pty Ltd v Manock[23] at [119]:
[22] (2009) 239 CLR 175.
[23] [2010] SASCFC 59.
In Aon the amendment sought during the trial was ultimately refused on an appeal to the High Court. The members of the High Court considered the terms and history of the relevant Rules of Court, before discussing the diverse issues that arise for consideration in an application to amend. The plurality - Gummow, Hayne, Crennan, Kiefel and Bell JJ - identified a number of factors that should be considered when deciding whether an amendment should be allowed. These may be summarised as follows, and will be further discussed later in these reasons:
-    the effect on other litigants;
-    the just resolution of proceedings;
-    the amending party’s capacity to meet a costs order;
-    the strain of litigation generally to litigants;
-    the nature and importance of the amendment to the party applying;
-    the point the litigation has reached; and
-    whether the party has had sufficient opportunity to plead their case earlier.
[Footnotes omitted]
In the unusual circumstances of this case, the plaintiffs’ application came too late in the proceedings. The plaintiffs had ample time to amend their pleadings prior to trial and the trial would be prolonged by the necessity to give the defendants an opportunity to prepare their case in light of any amendments. The comments of the former Chief Justice are apposite here:[24]
It might be thought a truism that “case management principles” should not supplant the objective of doing justice between the parties according to law. Accepting that proposition, JL Holdings cannot be taken as authority for the view that waste of public resources and undue delay, with the concomitant strain and uncertainty imposed on litigants, should not be taken into account in the exercise of interlocutory discretions of the kind conferred by r 502. Also to be considered is the potential for loss of public confidence in the legal system which arises where a court is seen to accede to applications made without adequate explanation or justification, whether they be for adjournment, for amendments giving rise to adjournment, or for vacation of fixed trial dates resulting in the resetting of interlocutory processes.
[Citation omitted]
[24] Aon Risk Services at [30].
In all the circumstances of this case, I refuse the application to amend.
Shadow Director
The defendants do not dispute that Mr Bouhamdan was a shadow director of Kumali (see the defendants’ closing submissions at [29.1] where it is stated that [11.6] of the plaintiffs’ submissions is not disputed). That paragraph asserts:
At all relevant times [Mr Bouhamdan] was a director of Kumali, notwithstanding the face of the records of ASIC.
This concession is appropriate in view of the following matters.
Section 9 of the Corporations Act provides that the expression ‘director of a company’ includes:
(b) unless the contrary intention appears, a person who is not validly appointed as a director if:
(i) they act in the position of a director; or
(ii) the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes.
Subparagraph (b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person’s professional capacity, or the person’s business relationship with the directors or the company or body.
In Buzzle Operations Pty Ltd (in liq) & Anor v Apple Computer Australia Pty Ltd & Anor,[25] White J said that a de facto director is a person described in sub-s (b)(i) of the definition; that is, a person who takes part in the management of a company. A person described in sub-s(b)(ii) of the definition is performing a different role. Chesterman J in Emanuel Management Pty Ltd (in liq) v Fosters Brewing Group Ltd[26] drew this distinction in the following passage at [254]:
… the plaintiffs cannot rely upon both limbs of the extended definition of director:
those who act as directors and those who, in effect, command the directors how to
act. Control over the company’s affairs may be exercised directly by those who
perform that role or indirectly by controlling those who are nominally in charge.
There is a conceptual difficulty in doing both at once.
[25] (2010) 238 FLR 384 at [233].
[26] (2003) 178 FLR 1.

There is no need to resolve the ‘conceptual difficulty’ referred to by Chesterman J in this case. The plaintiffs do not seek to conflate the two types of director here. They allege that during the time when he was not appointed a director of Kumali, that is, prior to 12 June 2012, or most importantly on 11 June 2012 when the contract for the Cavan transaction was signed, Mr Bouhamdan was a shadow director of Kumali[27] because Mr Hillard, the appointed director, was ‘accustomed to act in accordance with (his) instructions or wishes’.
[27] Second Statement of Claim, [4].
Relevantly to this case, in order to satisfy sub-s (b)(ii), it must be shown that there had been ‘habitual compliance over a period of time’ by the director(s) with the instructions or wishes of the person in order that he or she should be regarded as a shadow director.[28]
[28] Buzzle at [248].
The plaintiffs pointed to the following evidence that Mr Hillard was accustomed to act in accordance with Mr Bouhamdan’s instructions:
·the evidence of Mr Woods, Mr Bouhamdan’s then solicitor, that it was Mr Bouhamdan who instructed him in around February 2012 to install Mr Hillard as director on various corporate entities controlled by Mr Bouhamdan, in his stead;
·in this regard, in his letter dated 27 January 2016 to Mr Cooper’s firm,[29] Mr Woods explained:
[29] Part of Exhibit P15.
.Mr Ian Hillard had an active working relationship with Mr Patrick Bouhamdan and through Mr Bouhamdan had some interaction with Mr Macpherson who were business partners.
.In and around February 2012, Mr Hillard began having significant financial problems and was on the verge of personal bankruptcy following a failed property venture for which the writer acted on Mr Hillard’s behalf.
.As a result, Mr Bouhamdan requested that Mr Hillard replace him as a director on numerous companies that were in financial difficulty. One of those companies was the Company[30] of which Mr Macpherson was the director.
[30] Mr Woods’ reference to ‘the Company’ is a reference to Emerald Emperor.
.Email correspondence that the writer has been able to obtain from his previous firms reveal that a request to replace Mr Bouhamdan as a director of numerous companies began in or around February 2012.
.On 12 February 2013, the writer received an email from Mr Bouhamdan stating that Mr Hillard should have become a director of the Company in the place of Mr Macpherson some 12 months previously.
.The writer sought confirmation from the relevant parties.
.The changes were made and confirmed in an email to Mr Bouhamdan, Mr Macpherson and Mr Hillard on 20 February 2013.
·the tone of Mr Bouhamdan’s email to Mr Woods dated 9 February 2012:
I NEED TO CHANGE SOME DIRECTORSHIPS TOMORROW.
IAN WILL BECOME DIRECTOR.
CAN I GIVE YOU THE LIST IN THE MORNING?
SORRY ABOUT THE CAPS.
·the fact that when Mr Macpherson became aware that Mr Woods had not attended to the change of directorship of Emerald Emperor, he simply forwarded the email chain to Mr Bouhamdan without comment whereupon, on 12 February 2013, Mr Bouhamdan wrote to Mr Woods by email:
Drew
This is an urgent matter you said you dealt with
Ian should have been director a year ago and address changed to EELaw
Why are we having this issue now?
·the evidence of Mr Woods that, on his instructions from Mr Bouhamdan, Mr Hillard was being appointed as director of companies associated with Mr Bouhamdan because Mr Hillard was in financial trouble and likely to become bankrupt. The implication was that it was advantageous to Mr Bouhamdan to saddle Mr Hillard with the companies, which were also in financial trouble, rather than taking responsibility for them himself;
·the fact that Mr Bouhamdan directed Mr Woods to replace Mr Macpherson as director of Emerald Emperor with Mr Hillard without even needing Mr Macpherson’s consent. Mr Woods states that he consulted the relevant parties, but this was after he had received Mr Bouhamdan’s instructions;
·in an email to Mr Bouhamdan dated 19 March 2013,[31] Mr Macpherson referred to Mr Bouhamdan as ‘boss’. He referred to Mr Woods’ changes to the directorship of Emerald Emperor, saying:
[31] Part of Exhibit P22.
Hey boss directorship different
But the business address etc same
And Bruno being registered office
Will need details stop Mail coming our way
·Mr Bouhamdan forwarded this rather cryptic message to Mr Woods, saying ‘Why is this like this?’[32] Mr Woods responded that if Mr Bouhamdan wanted the registered office changed, he should advise the new address. Mr Bouhamdan responded:
[32] Ibid.
Ian’s address at redwood park or atheist [sic – Athelstone?] one or where it was.
Mr Woods responded, ‘Has been done.’ Mr Bouhamdan replied, ‘Ty’ (‘thank you’?).
Again, Mr Macpherson immediately referred a query about the registered office of Emerald Emperor to Mr Bouhamdan, who then instructed Mr Woods to change it. This was at a time when Mr Hillard was purportedly the director of Emerald Emperor. The whole exercise appears to have been carried out without even referring the issue to him;
·the plaintiffs also referred to the evidence of Mr Bouhamdan himself:
· when discussing in examination-in-chief the arrangement whereby, on his case, Tyger Lilly advanced additional money to Emerald Emperor above the $150,000 purchase price (which he described as over $100,000[33]), he ‘protected’ that money with a caveat. He commented:[34]
[33] T 243.
[34] Ibid.
A.No, Tyger Lilly was owed the money and Kumali and Tyger Lilly, I considered myself so I had another arrangement with myself.
Q.Yes.
A.So Kumali bought the property for 150 on the contract and Tyger Lilly offset the balance on the caveat.
Q.When you say 'yourself' you mean control.
A.Well two different entities, yeah.
Q.Okay but you were effectively doing deals with yourself.
A.Yeah. But most properties I bought in different entity names.
Q.You own numerous entities still today, don't you.
A.Yes. I'm not sure what's left but yes.
Q.And each of those entities held different assets for different reasons.
A.Yes.
Q.Was asset protection one of those reasons.
A.Yes.
Mr Bouhamdan made these statements in the knowledge that Mr Hillard had been appointed a director of Kumali on 1 February 2012, replacing Mr Bouhamdan, and as a director of Tyger Lilly on 1 February 2012, also replacing him. This clearly demonstrates that Mr Bouhamdan regarded Mr Hillard as a director in name only.
The plaintiffs submitted that Mr Bouhamdan was a shadow director of Kumali because:[35]
·Mr Bouhamdan performed top-level management functions for Emerald Emperor and Kumali, in particular as to changes in directorships;
·others, such as Mr Woods, considered Mr Bouhamdan to have the authority to bind these companies;
·Mr Bouhamdan was the controlling mind and will of the companies;
·the sole director of Emerald Emperor and Kumali, Mr Hillard, was used to acting on Mr Bouhamdan’s instructions in relation to the affairs of the company.
[35] Plaintiffs’ Written Closing Submissions, [63].
Having regard to the above, and taking into account the defendants’ concession, I find that Mr Bouhamdan was a shadow director of Kumali from 1 February 2012 to 12 June 2012, and a director of Kumali thereafter. The concession made by the defendants to this effect was appropriate.
Was the Cavan Property Sold at an Undervalue?
The consideration presumably paid by Kumali to Emerald Emperor at settlement for the Cavan property was $150,000. That was the price mentioned in the contract[36] and in the Memorandum of Transfer.[37]
[36] Exhibit P1, p 8.
[37] Exhibit P1, p 20.
The defendants accepted that this figure represented about one half of the value of the property in 2012.[38] They argued that it would have required about $50,000 to remove rubbish on the property, which would have detracted from its value.[39] There is no evidence as to who put the rubbish there, or who was required to remove it. There is no mention in the contract about rubbish on the property. There is no evidence to justify a reduction in the consideration on that basis.
[38] Defendants’ Written Closing Submissions, [132.1]. This concession was based on the evidence of Ms Rofe, who performed a retrospective valuation in 2017, and the report of Mr Horner, who valued the property in May 2012.
[39] Defendants’ Written Closing Submissions, [132.1]-[132.14].
Mr Bouhamdan asserted that he arranged finance on behalf of Kumali for the $150,000 purchase price through Tidswell Financial Services Ltd. He said he also contributed to the purchase by the forgiveness of a loan of ‘at least $116,671’ by Tyger Lilly to Emerald Emperor, which represented his ‘investment’[40] in the original purchase of the Cavan property by Emerald Emperor in 2007.
[40] T 283.
Mr Bouhamdan said that a written agreement in the form of an ‘unregistered mortgage’ from Emerald Emperor to Tyger Lilly was drawn up.[41] The plaintiffs called for production of the document, but it was not produced.[42] The defendants produced no other objective evidence, such as bank records, to support Mr Bouhamdan’s assertion of an ‘investment’ in the Cavan property.[43]
[41] T 333.
[42] T 284-5.
[43] Mr Bouhamdan explained that this was due to his incarceration. However, there appears to have been no reason why the records could not have been subpoenaed from the financial institutions concerned.
Mr Bouhamdan arranged for a caveat[44] in favour of Tyger Lilly to be entered on the title of the Cavan property on 11 July 2008, about one year after the Cavan transaction took place. The interest claimed on the caveat is to:
… some indefinable share or shares in the land above described having contributed a proportion of the purchase price of the land comprised in the above described Certificate of Title.
[44] Exhibit P1, pp 4-5.
Mr Bouhamdan explained that he caused the caveat to be lodged in order to ‘secure’ his investment in the Cavan property.[45] It would seem that the need for security was not urgent, otherwise the caveat would have been entered at the time of settlement.
[45] T 333.
This lack of need for security was further evidenced by the fact that Mr Bouhamdan caused the caveat to be removed on 14 June 2012, three days after the contract for the sale of the Cavan property was signed, and a day before the settlement on 15 June 2012, because, he said, he had made an ‘internal arrangement’ between Tyger Lilly and Kumali.[46] Again, no document was produced as to the nature of the ‘arrangement’ which led to the lifting of the caveat.
[46] T 338.
I accept the plaintiffs’ criticisms of Mr Bouhamdan’s evidence generally and take them into account when making findings on this issue. The plaintiffs’ submission was: [47]
He was argumentative and evasive. He was unable to produce documents to verify the majority of his evidence. He changed his evidence frequently. His evidence was often in the clear face of documents put to him and sometimes clearly untruthful.
[47] Plaintiffs Written Closing Submissions, [16.2].
I reject Mr Bouhamdan’s evidence about this. The only objective evidence to support it is the presence of the caveat at a point during Emerald Emperor’s ownership of the Cavan property. Mr Bouhamdan’s evidence is contradicted by the terms of the contract and Memorandum of Transfer for the sale and purchase by Kumali. I am persuaded that this was just another example of Mr Bouhamdan ‘doing deals’ with himself.[48] No doubt he had some purpose for placing the caveat on the title, but I do not have acceptable evidence as to what that purpose was. I find that the consideration for the sale of the Cavan property by Emerald Emperor to Kumali was $150,000. This was clearly less than the value of the property.
[48] T 243.
Directors’ Duties to Emerald Emperor
The ASIC records show that at the time of the Cavan transaction, the director of Emerald Emperor was Mr Hillard. They state that Mr Hillard replaced Mr Macpherson on 12 February 2012.[49]
[49] Exhibit P1, pp 38-42.
As I have already mentioned, this change was communicated to ASIC by Mr Woods, Mr Bouhamdan’s solicitor, but not until February 2013. In the meantime, Mr Macpherson had signed the contract and Memorandum of Transfer for the Cavan property as director of Emerald Emperor in June 2012. In doing so, he acted in the position of a director within the meaning of s 9(b)(i) of the Corporations Act, quoted above at [25]. He could be regarded as a director of Emerald Emperor for that reason.
The defendants argued that the document setting out changes to the company details bearing Mr Hillard’s signature in the ASIC record[50] was a forgery, and that his appointment was therefore invalid. I reject that assertion.
[50] Exhibit P1, p 54.
Section 1274B of the Corporations Act establishes a presumption that the ASIC record is proof of the matters stated therein ‘in the absence of proof to the contrary’. The defendants produced a copy of a driver’s licence, Exhibit D23, but in the absence of proof that it contains Mr Hillard’s signature, that does not constitute proof to the contrary of the ASIC record.
The evidence is that Mr Macpherson acted as a director of Emerald Emperor, during the relevant period in 2012, in signing the sale documents for the Cavan property. There is no evidence that Mr Hillard acted as the director during the same period.
I conclude that, notwithstanding the ASIC record, Mr Macpherson was the director of Emerald Emperor during the Cavan property sale. It was Mr Macpherson, not Mr Hillard, who owed statutory and fiduciary duties to Emerald Emperor in the context of the sale of the Cavan property. It is arguable that Mr Hillard was also a director of Emerald Emperor by virtue of s 1274B of the Corporations Act, but that cannot make him retrospectively liable for any breach of duty to the company.
For those reasons, the plaintiffs’ claim based on the allegation that Kumali knowingly received property as a result of Mr Hillard’s breaches of fiduciary and statutory duties must fail. For the same reason, the plaintiffs’ claim based on the allegation that Mr Bouhamdan knowingly assisted Mr Hillard’s breaches of those duties must also fail.
I have considered whether I should have given notice of this decision to the plaintiffs’ counsel, Mr Rowley, before reaching these conclusions. I have not done so for the following reasons:
·the plaintiffs might have sought amendments to their Statement of Claim, citing the decision in Macks v Viscariello,[51] in which the Full Supreme Court made the following observation:
[51] (2017) 130 SASR 1 at [105]-[106], cited with approval by Hinton J in Southern Waste Resource Co Pty Ltd v Adelaide Hills Region Waste Management Authority (No 3) [2019] SASC 192 at [127].
Rule 57 of the Supreme Court Civil Rules 2006 (SA) provides that the court may at any stage of proceedings order the amendment of any document. The amendment may be made on the court’s own initiative or on an application by a party and an amendment or an order for amendment may be made on such conditions as the court considers appropriate.
The observations of Bowen LJ in Cropper v Smith are most frequently cited in respect of the court’s power to allow amendments to a party’s pleadings:
[T]he objects of Courts is to decide the rights of the parties, and not to punish them for mistakes they make in the conduct of their cases … I know of no kind of error or mistake which, if not fraudulent or intended to overreach, the Court ought not to correct, if it can be done without injustice to the other party … as soon as it appears that the way in which a party has framed his case will not lead to a decision of the real matter in controversy, it is as much a matter of right on his part to have it corrected, if it can be done without injustice, as anything else in the case is a matter of right.
(Footnote omitted)
·however, the success of any such application was very unlikely. The plaintiffs always knew that the defendants denied that Mr Hillard was a director of Emerald Emperor[52] and that it was their case that the director was Mr Macpherson. Furthermore, any such amendments would have required pleading that Mr Macpherson had breached his statutory and fiduciary duties to Emerald Emperor and the giving of particulars of those breaches. Further pleading, other interlocutory steps and the calling of further evidence might have been required;
·the unusual circumstances of this case and the logistical difficulties faced by the defendants, particularly having regard to the fact that Mr Macpherson is deceased, meant that such further steps in the litigation would have caused the defendants hardship and injustice;
·there is some evidence before me concerning Mr Macpherson’s role, and his dealings with Mr Bouhamdan, but that evidence was before the court as circumstantial evidence relevant to the issue of whether Mr Bouhamdan was a shadow director of Emerald Emperor. This was an issue which was not pleaded, and which I have now ignored because it was not part of the plaintiffs’ pleaded case. The evidence about Mr Macpherson was not before the court to show that Mr Macpherson was guilty of breaching his director’s duties to Emerald Emperor, since that was not the plaintiffs’ pleaded case.
[52] See Second Defence, [2], [4].
In this context, I also refer to the factors referred to in Aon Risk Services and Manock discussed above.
For these reasons, I will proceed on the basis that the issues to be determined in this litigation are those determined by the existing pleadings.
I will therefore proceed to consider the plaintiffs’ additional cause of action, based on the argument that the Cavan property transaction was uncommercial, and insolvent, within the meaning of the Corporations Act.
Uncommercial Transactions
The plaintiffs submitted that the sale of the Cavan property was an ‘uncommercial transaction’ within the meaning of s 588FB of the Corporations Act. Section 588FB(1) states:
(1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:
(a) the benefits (if any) to the company of entering into the transaction; and
(b) the detriment to the company of entering into the transaction; and
(c) the respective benefits to other parties to the transaction of entering into it; and
(d) any other relevant matter.
Section 15AA of the Acts Interpretation Act 1901 (Cth) provides:
15AA Interpretation best achieving Act’s purpose or object
In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation.
I agree with the plaintiffs’ submission that the purpose of this legislation is to prevent a depletion of the assets of the company being wound up by transactions which occur within a specified period of the winding up, and which are at an undervalue; that is, the transaction is to the detriment of the company.[53] Such a transaction was described by Austin JA in Lewis v Cook:[54]
‘… obtaining a bargain of such magnitude that it could not be explained by normal commercial practice’, and transactions where ‘the consideration is nominal or trivial or lacks ‘a commercial quality’’
[53] Demondrille Nominees Pty Ltd v Shirlaw & Anor (1997) 25 ACSR 535.
[54] [2000] NSWSC 191 at [45].
The test of uncommerciality is to be assessed objectively according to the standard of a ‘reasonable person in the company’s circumstances’. The ‘company’s circumstances’ include the state of knowledge of the company when it entered the transaction.[55]
[55] Ibid at [46].

Applying these principles and the requirements of s 588FB(1) to the facts of this case, the issues are therefore:
(1)the consideration received by Emerald Emperor for the sale of the Cavan property was $150,000;
(2)the value of the property was $300,000;
(3)as I will presently discuss, Emerald Emperor was insolvent at the time of the transaction;
(4)the entity which stood to benefit from the transaction was Kumali, and hence Mr Bouhamdan;
(5)there was no benefit to Emerald Emperor from the transaction, in fact it suffered a detriment of $150,000 from the transaction;
(6)the consideration represented an undervalue of the property to the extent that a reasonable person in the company’s circumstances would not have entered the transaction.
I therefore conclude that the sale of the Cavan property was an uncommercial transaction within the meaning of s 588FB(1) of the Corporations Act.
Insolvent Transaction
It was further submitted that the transaction was an ‘insolvent transaction’ within the meaning of s 588FC of the Corporations Act:
588FC Insolvent transactions
A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:
(a) any of the following happens at a time when the company is insolvent:
(i) the transaction is entered into; or
…
It was submitted that Emerald Emperor was insolvent in June 2012 when the Cavan transaction was entered into.
Section 95A of the Corporations Act states:
95A Solvency and insolvency
(1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
(2) A person who is not solvent is insolvent.
The second plaintiff, Mr Cooper, is an experienced insolvency practitioner. His report is Exhibit P8. His curriculum vitae is Annexure 1 to his report. His experience and expertise are amply demonstrated therein.
He concluded:
·no adequate financial records were kept by Emerald Emperor’s officers;
·he was therefore unable to review the company’s financial statements for the purpose of analysing its working capital or profit and loss position;
·he adopted an alternative test for insolvency, known as a cash flow test, to determine whether cash resources of the company were available to the company to pay its debts as they became due and payable.[56]
[56] Exhibit P8, [4.2].
Mr Cooper’s analysis shows that Emerald Emperor had a cash flow deficiency which at 30 June 2011 was $336,519 and rose steadily to more than $1,200,000 by 30 September 2013. The principal creditor was the Australian Taxation Office.
Mr Cooper quoted Palmer J in Lewis v Doran:[57]
Where the question is retrospective insolvency, the court has the inestimable benefit of the wisdom of hindsight. One can see the whole picture, both before, as at and after the alleged date of insolvency. The court will be able to see whether as at the alleged date of insolvency the company was, or was not, actually paying all of its debts as they fell due and whether it did, or did not, actually pay all those debts which, although not due as at the alleged date of insolvency, nevertheless became due at a time which, as a matter of commercial reality and common sense, had to be considered as at the date of insolvency. By reference to what actually happened, rather than to conflicting experts’ opinions as to the implications of balance sheets, the court’s task in assessing insolvency as at the alleged date should not be very difficult.
Mr Cooper inferred that since Emerald Emperor did not have the funds to remedy its cash flow deficiencies, it was not able to secure funds from third parties in order to do so.[58]
[57] (2004) 50 ACSR 175 at [108].
[58] Exhibit P8, [5.21].
Mr Cooper pointed out that Olsson J in Brooks v Heritage Hotel Adelaide Pty Ltd[59] and Prior J in Powell v Fryer[60] both held that the cash flow test is the appropriate test to determine insolvency, although a balance sheet is also relevant. In this case, there were no balance sheets available to be considered.
[59] (1996) 20 ACSR 61 at 64.
[60] (2000) 18 ACLC 480 at 482.
Mr Cooper’s modelling shows that Emerald Emperor had a cash flow deficiency going back to at least 30 June 2011, and probably as far back as 30 June 2008.[61] Mr Cooper concluded that Emerald Emperor had been insolvent on 30 June 2011 and remained so until the winding up on 16 October 2013.
[61] Exhibit P8, [5.14], [5.17], [6.6.1].
Mr Cooper’s conclusion was bolstered by the effect of s 588E(4) of the Corporations Act, which states:
(4) Subject to subsections (5) to (7), if it is proved that the company:
(a) has failed to keep financial records in relation to a period as required by subsection 286(1); or
(b) has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2);
the company is to be presumed to have been insolvent throughout the period.
Clearly, the absence of financial records for the company is another reason to conclude that Emerald Emperor was insolvent, probably since 1 July 2008.
The defendants suggested[62] that Mr Cooper’s conclusions were contrived to ‘serve his needs to support his claim’. No evidence was produced to support this contention. It was further suggested[63] that ‘millions of dollars of property’ had been sold only days before 30 June 2011, but that Mr Cooper ‘does not provide any evidence as to where that money went’. It was not suggested how Mr Cooper could provide any such evidence since there were no financial records kept by the company. The bank records Mr Cooper had access to do not demonstrate what happened to the money. Obviously, one person in this scenario who would know where the money went is Mr Bouhamdan.
[62] Defendants’ Written Closing Submissions, [134.1.1]-[134.1.2].
[63] Ibid, [134.1.3].
The defendants submitted[64] that Mr Cooper had failed to check ‘lender (or loan) accounts’, where ‘large amounts of cash sit until needed’. I assume that this is a reference to credit which may have been available to Emerald Emperor. If funds were available to Emerald Emperor when its debts fell due, then it would be expected that Emerald Emperor might have paid them. The fact that the debts were not paid as and when they fell due leads to an inference that no such credit was available.[65]
[64] Ibid, [134.1.5].
[65] Lewis v Doran, supra, at [199] per Palmer J.
The defendants made a number of other spurious and unmeritorious submissions about what other investigations Mr Cooper might have undertaken to establish Emerald Emperor’s solvency, but these submissions basically miss the point that Mr Cooper has reached his conclusion after a cash flow analysis. That is the appropriate way to assess these matters, and the issues being raised by the defendants are irrelevant to cash flow analysis. If there had been balance sheets available, they might have been taken into account, but no such balance sheets were drawn up.
I reject the defendants’ criticisms of Mr Cooper’s methodology, and conclude that Emerald Emperor was insolvent on 30 June 2011 and remained so until the company was wound up on 16 October 2013.
That being so, then the Cavan transaction in June 2012 occurred when Emerald Emperor was insolvent and so qualifies as an ‘insolvent transaction’ within the meaning of s 588FC of the Corporations Act.
Commercial Transaction Voidable
Mr Cooper invoked the provisions of s 588FF(1)(c) of the Corporations Act.
Since the winding up of Emerald Emperor took place in October 2013, the Cavan transaction in June 2012 took place within two years of the winding up application. The plaintiffs say that the transaction is voidable pursuant to s 588FE(3) of the Corporations Act. This provides:
588FE Voidable transactions
(1)If a company is being wound up:
(a) a transaction of the company may be voidable because of any one or more of subsections (2) to (6) if the transaction was entered into on or after 23 June 1993; and
(b) …
(2) …
(3)The transaction is voidable if:
(a) it is an insolvent transaction, and also an uncommercial transaction, of the company; and
(b) it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation-back day.[66]
(4) to (6) …
[66] See s 91 Corporations Act.
The relation-back day is defined in s 9 of the Corporations Act as having the meaning given it by s 91. Section 91 gives 15 different meanings according to the circumstances of the winding up. The only category which is apt is Item 16 in the table, that is, if ‘any other case applies’. None of the categories 1 to 14 apply. Item 15 defines the relation-back day as ‘the day on which the winding up is taken, because of Division 1A of Part 5.6, to have begun’. Going to Division 1A of Part 5.6 of the Corporations Act in order to unravel this convoluted piece of drafting, one arrives at s 513A. That section provides:
513A Winding up ordered by the Court
If the Court orders under section 233, 459A, 459B or 461 that a company be wound up, the winding up is taken to have begun or commenced:
and then provides five options, (a) to (e). None of (a) to (d) are apt so option (e) applies, namely:
(e) otherwise—on the day when the order was made.
It is therefore the case that under s 588FE, the Cavan property transaction is voidable because:
·       it is an uncommercial transaction; and
·       it is an insolvent transaction; and
·       it was entered into during the two years prior to the day when the order for winding up was made, which was 16 October 2013.
The plaintiffs asserted an entitlement of the liquidator to receive $150,000 from Kumali pursuant to s 588FF(1) of the Corporations Act. The relevant subsection is s 588FF(1)(c):
(1) Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
(a) …
(b) …
(c) an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction;
(d) to (j) …
Section 588FF(3) provides:
(3) An application under subsection (1) may only be made:
(a) during the period beginning on the relation-back day and ending:
(i) 3 years after the relation-back day; or
(ii) …
(b) …
Since I have established that the relation-back day was 16 October 2013, the application was made within time, since it was contained in the original Particulars of Claim filed in the Magistrates Court on 23 August 2016,[67] within three years of the order for winding up.
[67] Defendants’ Written Closing Submissions, [3].
Section 2C of the Acts Interpretation Act 1901 (Cth) states:
2C References to persons
(1) In any Act, expressions used to denote persons generally (such as “person”, “party”, “someone”, “anyone”, “no-one”, “one”, “another” and “whoever”), include a body politic or corporate as well as an individual.
(2) Express references in an Act to companies, corporations or bodies corporate do not imply that expressions in that Act, of the kind mentioned in subsection (1), do not include companies, corporations or bodies corporate.
I can see no provision to the contrary in the Corporations Act.[68] Accordingly, the reference to ‘person’ in s 588FF(1) includes a company or ‘body corporate’. Hence, I have the power to order that Kumali, being the other party to the transaction, pay to Emerald Emperor the amount that fairly represents the benefit it received because of the transaction, namely $150,000.
[68] There is a definition of ‘person’ in s 9, but that has very restricted application, not relevant to this case.
Conclusion
There will be judgment in favour of both plaintiffs against the first defendant in the sum of $150,000. The action against the second defendant is dismissed.
I will hear the parties as to any further orders.