Ex NF Pty Ltd (in Liq) v Munneke
[2025] SASC 165
•2 October 2025
SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
EX NF PTY LTD (IN LIQ) & ANOR v MUNNEKE & ORS
[2025] SASC 165
Judgment of the Honourable Justice Bampton
CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION - FIDUCIARY AND RELATED STATUTORY DUTIES - REMEDIES AND PENALTIES FOR BREACH OF DUTY - CONSTRUCTIVE TRUST
CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - PROCEEDINGS BY OR AGAINST THE COMPANY - GENERALLY
The company in liquidation and the liquidator, the applicants, seek to recover asserted property of the company for the benefit of the company’s creditors. The applicants seek a declaration that cryptocurrency purchased using company funds is the property of the company. The applicants also seek declarations that the first respondent purchased the properties on O’Connell Street, North Adelaide (“O’Connell Street transaction”) and Ward Street, North Adelaide (“Ward Street transaction”) in breach of his statutory and fiduciary duties as director. In the alternative, the applicants seek orders setting aside the transactions as unreasonable director-related transactions pursuant to s 588FDA of the Corporations Act 2001 (Cth).
Whether the cryptocurrency bought with company funds was and remains the property of the company – whether the duty to consider the interests of creditors was enlivened when the O’Connell Street and Ward Street transactions were contemplated – whether the payment out of company funds and incurring of a liability to ANZ in the O’Connell Street transaction was a breach of the first respondent’s fiduciary and statutory duties as director – whether the payment out of company funds in the Ward Street transaction was a breach of the first respondent’s fiduciary and statutory duties as director – whether breaches were ratified by the sole shareholder – whether the O’Connell Street and Ward Street transactions were unreasonable director-related transactions.
Held:
1.The cryptocurrency was and remains the property of the company;
2.The first respondent breached his statutory and fiduciary duties by causing or allowing the payment out of the company’s funds and incurring of a liability to ANZ in the O’Connell Street transaction, and was an unreasonable director related transaction; and
3.The first respondent breached his statutory and fiduciary duties by causing or allowing the company’s funds to be used in the Ward Street transaction, and was an unreasonable director‑related transaction.
Corporations Act 2001 (Cth) ss 9, 95A, 180, 181, 182, 189, 254T, 256B, 256C, 286, 588E, 588FDA, 588FE, 588FF, 588G, 588M, 597, 1317E, 1317H, 1317S, 1318; Uniform Civil Rules 2020 (SA), referred to.
Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4) [2019] FCA 1846; Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; Angas Law Services Pty Ltd (in liq) & Anor v Carabelas & Anor (2005) 226 CLR 507; Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148; Australian Securities and Investments Commission v Mitchell & Anor (No 2) (2020) 382 ALR 425; Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd (Receivers and Managers Appointed) (In Liq) (2009) 25 VR 411; Burnett & Anor v Randwick City Council [2006] NSWCA 196 ; CEG Direct Securities Pty Ltd v Cooper as Liquidator of Runtong Investment and Development Pty Ltd (In Liq) (2025) 309 FCR 66; Connective Services Pty Ltd v Slea Pty Ltd (2019) 267 CLR 461; Crowe-Maxwell v Frost (2016) 91 NSWLR 414; Daniels v Anderson (1995) 37 NSWLR 438; De Bourbel Pty Ltd (in liq) v Distilleria Pty Ltd & Anor [2023] SASC 88; Fisher v Divine Homes Pty Ltd; Allen v Harb (2011) 85 ACSR 512; Gordon v Leon Plant Hire Pty Ltd (in liq) (2015) 16 ASTLR 185; Great Southern Finance Pty Ltd (in liq) v Rhodes (2014) 103 ACSR 137; Hanwood Pastoral Co Pty Limited v Kelly (No 2) [2022] FCA 850; Herrman v Simon (1990) 4 ACSR 81; Jones v Dunkel (1959) 101 CLR 298; Jarrett v Perpetual Trustee Co Ltd (2007) 64 ACSR 552; Kalls Enterprises Pty Ltd (in liq) v Baloglow (2007) 63 ACSR 557; Kinsela v Russell Kinsela Pty Ltd (In Liq) (1986) 4 NSWLR 722; Linton v Telnet Pty Ltd (1999) 30 ACSR 465; Macleod v The Queen (2003) 214 CLR 230; Miller v Miller & Miller (1995) 16 ACSR 73; Nicholson v Permakraft (NZ) Ltd (in liq) [1985] 1 NZLR 242; Pascoe Ltd (in liq) v Lucas (1999) 75 SASR 246; Pilmer v The Duke Group Ltd (2001) 207 CLR 165; Re CSR Ltd (2010) 183 FCR 358; Re Duomatic Ltd [1969] 2 Ch 365; Re Freehouse Pty Ltd; Jordan v Avram (1997) 26 ACSR 662; Re Pine Forests of Australia (Canberra) Pty Ltd (2010) 80 ACSR 377; Re Newark Pty Ltd [1993] 1 Qd R 409; Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425; Shum Yip Properties Development Ltd v Chatswood Investment and Development Co Pty Ltd (2002) 166 FLR 451; Taylor v Australia and New Zealand Banking Group Ltd (1998) 13 ACLR 780; Termite Resources NL (in liq) v Meadows, in the matter of Termite Resources NL (in liq) (No 2) (2019) 370 ALR 191; The Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 39 WAR 1; Walker v Wimborne (1976) 137 CLR 1; Warner (in his capacity as joint and several liquidator of Bellpac Pty Ltd (recs and mgrs apptd) (ACN 101 713 017) (in liq) & Ors v Hung & Ors (No 2) (2011) 297 ALR 56; Weaver v Harburn (2014) 103 ACSR 416; Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; Vasudevan (as Joint and Several Liquidator of Wulguru Retail Investments Pty Ltd) (in liq) v Becon Constructions (Australia) Pty Ltd (2014) 41 VR 445; Yang v Wong, Axis North Pty Ltd (Recs and Mgrs Appt) (In Liq) (No 2) [2025] FCA 693, considered.
EX NF PTY LTD (IN LIQ) & ANOR v MUNNEKE & ORS
[2025] SASC 165Civil
BAMPTON J.
Glossary
Introduction
Background and overview of the claims
Relief sought
Overview of the defencesCrossclaim
Consolidation and trial of the claims
The issues for determinationApplicants’ case
Michael Bacina
Hardcore crypto lawyer
Mr Munneke’s objection to the Bacina report
Mr Bacina’s evidence and cross-examination
Andrew Heard
The Heard report
O’Connell Street
Ward Street
Accuracy of spreadsheets
Mr Heard’s cross-examination by Mr Munneke’s counsel
Mr Heards’s cross-examination by Ms Zaccara and the respondent companies’ counsel
Derek Munneke’s case
Alan Scott
The Scott report
O’Connell Street
Ward Street
Accuracy of spreadsheetsCompliance with s 286 of the Corporations Act
Mr Scott’s cross-examination
Derek Munneke
Mr Munneke’s s 597 examination
Mr Munneke’s statement
Mr Munneke’s cross-examinationMr Munneke’s re-examination
Linda Zaccara and the respondent companies’ case
Ms Zaccara’s evidence
Ms Zaccara’s s 597 examination
Ms Zaccara’s statements
Ms Zaccara’s cross-examinationMs Zaccara’s re-examination
Assessment of the experts
Assessment of witnesses
Assessment of Mr Munneke’s evidence
Assessment of Ms Zaccara’s evidence
What did Mr Vijayadass advise?
Mr Vijayadass was not called to give evidence
Relevant principles
Insolvency
Meaning of insolvency
Presumption of insolvency
Director’s duties
Statutory duties
Section 180(1)
Section 181(1)
Section 182(1)
Interests of creditors
Section 189
Section 1317E
Section 1317HSections 1317S and 1318
Fiduciary duties
Ratification
Ability to pay dividends
Unreasonable director-related transactions
Voidable transactions
The O’Connell Street claim
Applicants’ submissions
Mr Munneke’s submissions
Ms Zaccara and 28 O’Connell Pty Ltd’s submissionsO’Connell Street findings
The cryptocurrency and Ward Street claim
Applicants’ submissions on cryptocurrency
Applicants’ alternative case
Mr Munneke’s submissions on cryptocurrency
Ms Zaccara and 106 Ward Street Pty Ltd’s submissions on cryptocurrency
Cryptocurrency discussion and findings
Applicants’ submissions on Ward Street
Mr Munneke’s submissions on Ward Street
Ms Zaccara and 106 Ward Street Pty Ltd’s submissions on Ward StreetWard Street discussion and findings
Conclusion
The O’Connell Street claim
The cryptocurrency and Ward Street claim
Cryptocurrency
Ward Street
Crossclaim
Declarations and orders
Glossary
Bitcoin (BTC) The most well-known and oldest popular type of cryptocurrency. It makes up the lion’s share of cryptocurrency trading. Bitcoin white paper The white paper published in 2008 by Satoshi Nakamoto titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. BitPay A company that maintains a list of vendors that accept payment in bitcoin for goods and services. Blockchain A distributed ledger of cryptocurrency transactions and balances that enables storage of data across many computers controlled by different parties to create a censorship-resistant or immutable record of transactions. The data, which is all publicly accessible, is organised in “blocks” added together to form a “chain”. Captology According to an internet search, the study of computers as persuasive technologies. CoinJar An Australian cryptocurrency exchange. Cryptocurrency A type of digital currency, transactions and balances of which are maintained by a decentralised system using cryptography on either a blockchain or another distributed ledger. Cryptocurrency exchange A platform on which users can purchase cryptocurrency or trade it for other assets, including fiat currencies. They may be centralised or decentralised. Cryptography The study and practice of verifying and securing data and transactions using code. Ether (ETH) The cryptocurrency on the ethereum blockchain. Unlike bitcoin, ether cannot be transacted without a trusted central party recording the transactions on a ledger. Ethereum A decentralised blockchain primarily founded by Vitalik Buterin in an attempt to resolve some of the shortcomings associated with bitcoin, including counterparty risk. Ethereum white paper The white paper published in 2014 by Vitalik Buterin titled “A Next-Generation Smart Contract and Decentralized Application Platform”. Gas The fee charged for making a transaction or deploying a smart contract on the ethereum blockchain, which is recorded and visible on the blockchain. Gas is a priced in one billionths of an ether and is paid to those who contribute computer power to the verification of transactions. Initial coin offering (ICO) A process whereby a company raises funds for new blockchain projects by offering their own cryptocurrency as an investment. Key An alphanumeric identifier (public key) or code (private key) that relates to a wallet. A public key functions as an address for a wallet, whereas a private key functions as a password, enabling the holder to access and make transactions using cryptocurrency recorded in a particular wallet. Living Room of Satoshi A cryptocurrency broker. Mainnet The primary public ethereum blockchain. Smart contracts on mainnet are open source, meaning that any person can view the underlying code. Deployment of a smart contract to mainnet is effectively permanent. Mining The process of compiling, verifying and confirming (through computer software) transactions and adding them to the blockchain in exchange for cryptocurrency, which process uses a lot of electricity. Satoshi Nakamoto The alias of the unknown person or persons who developed bitcoin and published the bitcoin white paper. Nakamoto presently holds nearly US$135 billion worth of bitcoin. Silk Road An online black market, with all transactions being conducted anonymously using bitcoin. Smart contract Automated or self-executing code that can be interacted with once deployed to a blockchain. For example, a smart contract might allow for a party to place cryptocurrency into it and hold it until a predetermined set of variables are met by a counterparty, or distribute it over time. Apparently, they are neither smart nor contracts. Testnet A separate blockchain used to test new developments in a cost and risk-free environment before deploying them to mainnet. Vitalik Buterin The primary founder of ethereum. Wallet An address or entry on the ledger (public key) that has some balance. Who controls a wallet will be unknown unless it can be discerned from identifying features. White paper A report addressing a specific topic or issue and providing a perspective or proposing a solution.
Introduction
“Buy some Bitcoin with this, won’t you love?” Linda Zaccara (“Ms Zaccara”) alleges she repeatedly said when she handed money “over the years” to her then husband, Derek Munneke (“Mr Munneke”). Mr Munneke is a software developer, who was at all material times the sole director of NextFaze Pty Ltd (“NextFaze”), a mobile and web application development business. Ms Zaccara was at all material times its sole shareholder.
In 2014, Mr Munneke used NextFaze’s funds to purchase a modest amount of cryptocurrency, including bitcoin and ethereum, the value of which has since appreciated exponentially. In 2015, he applied further NextFaze funds, along with funds drawn from a loan to NextFaze, to purchase property that is now held by 28 O’Connell Pty Ltd. Finally, in 2018, Mr Munneke sold some of the ethereum to finance the purchase of property owned by 106 Ward Street Pty Ltd.[1] Ms Zaccara was at all material times and remains the sole director and shareholder of both 28 O’Connell Pty Ltd and 106 Ward Street Pty Ltd (“the respondent companies”). The remaining cryptocurrency and its traceable proceeds, the majority of which has been liquidated, are now worth several million dollars.
[1] The pleadings refer to the third respondent as 106 Ward Pty Ltd, however, the tender book documents indicate that the name of the third respondent is 106 Ward Street Pty Ltd.
NextFaze was wound up on 15 May 2019 by order of the Federal Court, and Anthony Phillips was appointed liquidator. By these proceedings, NextFaze, now Ex NF Pty Ltd (In Liquidation) (“Ex NF”), and Mr Phillips (“the applicants”), seek to recover asserted property of Ex NF for the benefit of its creditors in respect of the above transactions.
Background and overview of the claims
NextFaze was incorporated on 15 February 2012. It continued the business of 2Moro Mobile Pty Ltd (“2Moro”), a company co-founded by Mr Munneke and which went into liquidation on 20 January 2012.
In February 2014, Mr Munneke opened an account with CoinJar (“the CoinJar account”), a cryptocurrency exchange, linked to NextFaze’s National Australia Bank (“NAB”) account[2] (“the NAB account”). In February and August 2014, by several transactions, Mr Munneke transferred a total of $3,050 from the NAB account to the CoinJar account, which was then used to purchase bitcoin. Part of the bitcoin was used by Mr Munneke to purchase another cryptocurrency, ethereum, including on behalf of Meeco Group Pty Ltd (“Meeco”), a client of NextFaze. Mr Munneke has since applied some of the ethereum and/or bitcoin to acquire other cryptocurrency.
[2] The NAB account has the account number ending in 0380. It appears it was named Nextfaze Pty Ltd Business Cheque Account until its name changed to the Nextfaze Pty Ltd Business Everyday Account in 2016. NextFaze also had a NAB account with an account number ending in 0452 named Nextfaze Pty Ltd Business Cash Maximiser (“the NAB Maximiser account”).
On 6 November 2015, the 28 O’Connell Trust, a discretionary family trust, was settled with Mr Munneke as trustee. On 19 November 2015, Mr Munneke, acting as trustee of the 28 O’Connell Trust, entered a contract to purchase commercial property at 28 O’Connell Street, North Adelaide (“O’Connell Street”) for $1.7 million. He paid a deposit of $40,000 from the NAB account.
At settlement on 10 December 2015, $1,025,911.59 was paid from NextFaze’s Australia and New Zealand Banking Group Ltd (“ANZ”) Business Premium Saver account (“the ANZ account”). NextFaze was also loaned $740,000 by ANZ (“the ANZ loan”) to fund the purchase, in respect of which NextFaze made the required repayments. NextFaze made further payments from the ANZ account totalling $60,000 to former tenants of O’Connell Street in consideration of the early termination of their leases (“the O’Connell Street transaction”).
It was alleged that the purchase of O’Connell Street and associated expenses substantially used NextFaze’s available cash resources, leaving it with a cash balance of $218,185. It is further alleged that at the time of the purchase, NextFaze had not prepared up-to-date financial records or maintained its filings with the Australian Taxation Office (“ATO”), meaning it had failed to keep records that “correctly record and explain its transactions and financial position and performance” and “would enable true and fair financial statements to be prepared and audited” as required by s 286 of the Corporations Act 2001 (Cth) (“the Corporations Act”).
It was asserted that had proper records been maintained, NextFaze would have identified that as at December 2015, it owed the following:
1.superannuation guarantee charge (“SGC”) of at least $119,240;
2.at least $244,377 in respect of goods and services tax (“GST”) and pay as you go (“PAYG”) withholding;
3.$238,913 in income tax; and
4.additional interest with the risk of ATO penalties for late filing in respect of 1, 2 and 3.
It was alleged that by the end of 2017, NextFaze’s financial situation had worsened. Having caught up with many of its outstanding tax filings, very substantial liabilities to the ATO had crystalised, including for SGC of $374,035, GST and PAYG withholding of $1,266,599, and income tax of $174,106, all of which were subject to accruing penalties and general interest charge. By early January 2018, NextFaze’s cryptocurrency holdings were worth around $2.6 million.
On 4 January 2018, Ms Zaccara entered a contract to purchase commercial property at 106 Ward Street, North Adelaide (“Ward Street”) for $1.2 million, with $100,000 payable as a deposit and settlement scheduled for 31 January 2018. The contract provided that the purchaser was Ms Zaccara and/or her nominee. On 17 January 2018, 106 Ward Street Pty Ltd was incorporated with Ms Zaccara as its sole director and shareholder.
During January 2018, 1,100 units of ethereum were sold by Mr Munneke to realise around $1.4 million as follows:
1.100 units on 11 January 2018, realising $146,850.74, which was paid into Mr Munneke’s personal Commonwealth Bank of Australia (“CBA”) account (“CBA account”), $100,000 of which was used to pay the Ward Street deposit on 15 January 2018;
2.300 units on 24 January 2018, realising $346,464, which was paid into the NAB account; and
3.700 units on 25 January 2018, realising $911,445, which was also paid into the NAB account.
On 29 January 2018, $1,135,920.08 was drawn from the NAB account to be paid as settlement monies for the purchase of Ward Street. The surplus of $121,988.92 from the cryptocurrency sales paid into the NAB account was transferred from the NAB account to the NAB Maximiser account on 29 January 2018. There is no evidence the surplus from the sale on 11 January 2018 after payment of the deposit was transferred from Mr Munneke’s CBA account into any of Ex NF’s bank accounts.
On 31 January 2018, 106 Ward Trust, a discretionary trust, was settled with 106 Ward Street Pty Ltd as trustee. Mr Munneke is a beneficiary of the 106 Ward Trust. On the same date, settlement on Ward Street occurred with 106 Ward Street Pty Ltd acting as purchaser as trustee of 106 Ward Trust and payment of the settlement monies drawn from the NAB account (“the Ward Street transaction”).
On 30 January 2019, the ATO issued a statutory demand against NextFaze for $2,742,510.84 seeking payment of outstanding GST, PAYG withholding, income tax and superannuation. On 26 March 2019, the Deputy Commissioner of Taxation (“Deputy Commissioner”) filed an application seeking an order from the Federal Court for the winding up of NextFaze.
Mr Munneke and Ms Zaccara separated in or around April 2019.
28 O’Connell Pty Ltd was registered on 9 May 2019.
As set out above, on 15 May 2019, the Federal Court granted the Deputy Commissioner’s application for the winding up of NextFaze and appointed the Mr Phillips as liquidator. I will refer to Mr Phillips as either Mr Phillips or the liquidator.
On 20 May 2019, Mr Phillips sold most of Ex NF’s business assets to AllFaze Development Services Pty Ltd (“AllFaze”) for $110,000, including GST. AllFaze also assumed leave entitlements owing to 12 employees. AllFaze is an entity controlled by Ms Zaccara. Mr Munneke continues to work as an employee of AllFaze. In his statutory report to creditors dated 31 May 2019, Mr Phillips stated that in addition to achieving a better result than would have been possible at auction, the sale had allowed for the continuation of Ex NF’s business and employment of the majority of Ex NF’s former staff.
On 1 July 2019, 28 O’Connell Pty Ltd replaced Mr Munneke as trustee of the 28 O’Connell Trust. Mr Munneke remained the registered proprietor of O’Connell Street.
On 11 July 2019, the Deputy Commissioner commenced proceedings against Mr Munneke in the District Court of South Australia for $1,515,371.03. On 9 October 2019, Mr Munneke consented to judgment for the Deputy Commissioner in the sum $1,515,371.03 plus costs.
NextFaze changed its name to Ex NF on 13 July 2019. In reciting the history of this matter, I will refer to NextFaze as Ex NF despite its name not changing until on 13 July 2019.
In his statutory report to creditors dated 14 August 2019 (“report to creditors”), Mr Phillips recorded that Mr Munneke “[had] ascribed the failure of [Ex NF] to losses incurred following the failure of several key customers in 2015 and an inability to recover from this set-back”. However, Mr Phillips referred to the following “other factors which more significantly contributed to the failure of [Ex NF]”:
On 10 December 2015, $1,025,912 in [Ex NF’s] funds were withdrawn to purchase a new trading premises for [Ex NF]. At the time of the withdrawal, this represented over 80% of [Ex NF’s] cash resources.
This purchase coincided with a material reduction in [Ex NF’s] profitability that significantly impacted on [Ex NF’s] ability to pay its outstanding tax obligations. Between 10 December 2015 and my appointment, [Ex NF’s] debt to the ATO rose from $357,929 to $2,194,825 with respect to GST, PAYG and Income tax. During 2016, [Ex NF] also ceased to meet its superannuation and payroll tax obligations.
It is clear that, since 2015, [Ex NF] has only been able to continue its operations through the non-payment of its tax and superannuation obligations.
Under the heading “Cryptocurrency”, Mr Phillips noted in his report to creditors that in January 2018, funds totalling $911,455[3] were deposited into the NAB account. He reported that Mr Munneke and Ms Zaccara had advised that these deposits represented the proceeds of the sale of cryptocurrency, but that the cryptocurrency was not the property of Ex NF, and Ex NF’s NAB account was simply used to assist in the realisation process.
[3] The sum of $346,464 was also deposited into the NAB account.
Mr Phillips examined Mr Munneke on 4 February 2021 and Ms Zaccara on 5 February 2021 pursuant to s 597 of the Corporations Act (“s 597 examination”).[4]
[4] Pursuant to s 597(14) of the Corporations Act, the transcript of an examination that is authenticated may be used in evidence against the person examined.
The applicants subsequently commenced:
1.Supreme Court action CIV-21-001837 on 3 March 2021 against Mr Munneke, Ms Zaccara and 106 Ward Street Pty Ltd seeking to recover asserted property of Ex NF for the benefit of Ex NF’s creditors in relation to cryptocurrency alleged to have been acquired with the property of Ex NF and its traceable proceeds, as well as the payment out of Ex NF’s funds to acquire Ward Street; (“the cryptocurrency and Ward Street claim”) and
2.Supreme Court action CIV-21-012859 on 18 November 2021 against Mr Munneke and 28 O’Connell Pty Ltd seeking to recover asserted property of Ex NF for the benefit of Ex NF’s creditors in relation to the payment out of Ex NF’s funds, and the entry into a commercial loan with ANZ, to acquire O’Connell Street (“the O’Connell Street claim”).
Ex NF’s priority creditors are for unpaid employee superannuation (approximately $730,000) and unpaid employee entitlements (approximately $170,000), which entitlements were met by the Federal Government under the Fair Entitlements Guarantee scheme and are to be repaid. Ex NF’s major unsecured creditors are the ATO for approximately $2.23 million in unpaid GST, PAYG and income tax dating from 2014, and associated interest and penalties; Revenue SA for approximately $250,000 in unpaid payroll tax; and ANZ for $400,000, which represents the shortfall on the ANZ loan account owing by Ex NF in respect of the purchase of O’Connell Street.[5]
[5] Liquidator’s report to creditors, Exhibit 2R4 at 5-6.
By agreement of the parties, Mr Munneke who uses the monikers “Captain of Captology” and “Captain Derek”, sold much of the remaining cryptocurrency in March 2024, yielding $3,852,555.57 which was paid into Court pending the determination of these proceedings. Mr Munneke also controls and holds the cryptographic keys to the remaining cryptocurrency that was not sold, which was valued at the time of trial at just over $500,000 as depicted in the table below.
Coin Units Price per unit
(as at 9 April 2024)
Value ETH (Ether) 13.93116430 $5,286.98 $73,653.79 SNX (Synthetix) 39627.10 $6.03 $238,951.41 BTC (Bitcoin) 1.00000000 $104,285.21 $104,285.21 CEL (Celsius) 93897.93320000 $0.32 $30,047.34 ETC (Ethereum Classic) 1201.67916000 $49.44 $59,411.02 XRP 19114.85208400 $0.93 $17,776.81 LTC (Litecoin) 24.51744153 $147.06 $3,605.53 Total $527,731.11
Relief sought
The applicants alleged that the cryptocurrency was purchased in 2014 with Ex NF’s funds and as part of Ex NF’s business such that it was, and to the extent it still exists, remains the property of Ex NF.
The applicants seek declarations that the cryptocurrency is the property of Ex NF, along with consequential orders that the funds in Court be paid out and that Mr Munneke deliver up the keys necessary for the applicants to take control of the residual cryptocurrency assets.
The applicants alleged that the purchase of O’Connell Street in the name of Mr Munneke (as trustee for the 28 O’Connell Trust) was a self-dealing transaction undertaken on Mr Munneke’s direction and entirely funded by Ex NF to its detriment. It was further alleged that the transaction was undertaken at a time when Ex NF had woefully inadequate financial records and when it was of questionable solvency. Further, Mr Munneke did not know the true state of Ex NF’s financial position and took no steps to gain such an understanding.
For these reasons, the applicants seek declarations that Mr Munneke used Ex NF’s funds to purchase O’Connell Street in breach of his fiduciary and statutory duties as a director and consequently, that O’Connell Street is held on constructive trust for Ex NF. Alternatively, the applicants seek an order setting aside the transaction as an unreasonable director-related transaction under the Corporations Act.
The applicants contended an award of damages would not provide adequate compensation to Ex NF, as O’Connell Street is held in a trust and is not available for Mr Munneke to sell. The applicants also pointed out that as the ATO entered judgment against Mr Munneke for the sum of $1,515,371.03 in October 2019, an award of equitable or statutory compensation would be unlikely to benefit the applicants.
On the basis that the ethereum used to fund the purchase of Ward Street was Ex NF’s property, it was alleged that the purchase was a self-dealing transaction undertaken on Mr Munneke’s direction and entirely funded by Ex NF. It was further alleged that the transaction was undertaken at a time when Ex NF was of questionable solvency and when its financial records remained woefully inadequate, particularly due to the failure to make filings with the ATO or meet tax obligations. It was argued that Mr Munneke was or ought to have been aware of Ex NF’s parlous financial position and appreciated that Ex NF could not lawfully fund the purchase.
The applicants seek declarations that Mr Munneke used Ex NF’s funds to purchase Ward Street for the benefit of 106 Ward Street Pty Ltd in breach of his fiduciary and statutory duties as a director and consequently, that Ward Street is held on constructive trust for Ex NF. Alternatively, the applicants seek an order for equitable compensation or damages, or an order setting aside the transaction as an unreasonable director-related transaction under the Corporations Act.
Overview of the defences
Mr Munneke contended that he and Ms Zaccara determined to purchase the cryptocurrency as a family investment and that he is presumed by law to be the owner of the cryptocurrency. He maintained that funds were used from the NAB account because it was convenient, as the NAB account had already been linked to the CoinJar account to enable Ex NF to accept payment from its clients in bitcoin. It was submitted that Ex NF, as a web and application development company, was not in the business of making speculative investments. Mr Munneke contended that the $3,050[6] in withdrawals offset incidental expenses that he and Ms Zaccara had personally incurred on an ad hoc basis on Ex NF’s behalf or represented deductions from Ms Zaccara’s loan account. Otherwise, he said the use of the funds constituted a small loan, which was later repaid. Ms Zaccara and 106 Ward Street Pty Ltd defend the cryptocurrency and Ward Street claim on the same basis, although they assert that the cryptocurrency was purchased for the benefit of only Ms Zaccara personally.
[6] Mr Munneke pleaded in his defence – revision 3 in the cryptocurrency Ward Street claim that the withdrawn sum pursued by the liquidator is $2,750 which sum excluded $300 used to purchase bitcoin as a wedding gift for Ric Santos.
In respect of the O’Connell Street claim, Mr Munneke and 28 O’Connell Pty Ltd argued that in late 2015, Ex NF had been trading profitably and had surplus cash available to it. They contended that Mr Munneke and Ms Zaccara were looking for larger premises to accommodate Ex NF’s growing business when the opportunity to acquire O’Connell Street arose. It was asserted that during the period immediately prior to 19 November 2015 and up to 10 December 2015:
1.of Ex NF’s two significant clients, Meeco had raised significant capital in 2014, and the officers of Guvera Australia Pty Ltd (“Guvera”) had informed Mr Munneke that Guvera would be publicly listed. Guvera’s Initial Public Offering was subsequently released in or about May 2016. As such, it was argued that a director in the position of Mr Munneke was entitled to believe that Ex NF’s debts were recoverable and that Ex NF was in a healthy financial position;
2.Ex NF owned plant and equipment, which had value;
3.Ms Zaccara, as the sole shareholder of Ex NF, had repeatedly provided substantial financial assistance to Ex NF since Ex NF’s inception and was willing and able to provide further financial assistance, including by borrowing against or realising assets held by her or related entities, principally her real estate portfolio;
4.while Ex NF had fallen behind with some ATO lodgements, it had engaged BDO to regularise them. The ATO was also directly involved in this process; and
5.Ex NF’s accountant, Kishen Vijayadass of BDO (“Mr Vijayadass”), advised that Ex NF had sufficient surplus cash to justify a payment to Ms Zaccara as shareholder for the purpose of purchasing commercial premises, and assisted Mr Munneke and Ms Zaccara in establishing the 28 O’Connell Trust.
Mr Munneke and 28 O’Connell Pty Ltd argued that Mr Munneke relied on Mr Vijayadass’ advice when he made a payment of Ex NF’s surplus cash to Ms Zaccara in the form of a dividend or reduction and distribution of capital. They submitted that Ex NF benefited from relocating its operations to O’Connell Street, notwithstanding that it was recorded as the borrower of the ANZ loan, given that O’Connell Street was a larger premises and Ex NF paid less than market rent over the course of five years.
It was asserted that Mr Munneke reasonably relied upon Mr Vijayadass and Ms Zaccara to advise him about, and provide him with information regarding, Ex NF’s financial, superannuation and taxation obligations, as well as to prepare documents and perform tasks in order to comply with the same. It was argued that the expert opinion (discussed below) of Alan Scott (“Mr Scott”) vindicates Ex NF as being in a sufficiently strong financial position to release the funds to Ms Zaccara at the time of the O’Connell Street purchase, contrary to the opinion of the applicants’ expert Andrew Heard (“Mr Heard”).
Mr Munneke argued he complied with his duties as a director of Ex NF at all relevant times, and that Ms Zaccara, as sole shareholder of Ex NF, agreed, ratified, and acquiesced to the release of Ex NF’s funds.
Finally, Mr Munneke, Ms Zaccara and 106 Ward Street Pty Ltd disputed that the ethereum used to purchase Ward Street was Ex NF’s property. They also denied that Ex NF was of questionable solvency at the time of the purchase of Ward Street, that Mr Munneke complied with his duties to Ex NF at all relevant times, and that if needed Ms Zaccara was able to inject funds into Ex NF to boost its working capital.
Mr Munneke, Ms Zaccara and 106 Ward Street Pty Ltd contended that if the cryptocurrency were Ex NF’s property, Ex NF was solvent, and the application of the cryptocurrency to purchase Ward Street was agreed, ratified and acquiesced to by Ms Zaccara as the sole shareholder of Ex NF, notwithstanding that the transaction was not to Ex NF’s benefit.
Crossclaim
Ms Zaccara and 106 Ward Street Pty Ltd by crossclaim seek a declaration that the cryptocurrency is held by Mr Munneke as bare trustee on trust for Ms Zaccara. They also seek a declaration that 106 Ward Street Pty Ltd is the sole and entire beneficial owner of Ward Street.
Consolidation and trial of the claims
Pursuant to an order of the Chief Justice on 15 November 2023, CIV‑21‑012859 was consolidated with CIV-21-001837. CIV-21-001837 was nominated the lead action and 28 O’Connell Pty Ltd as trustee of the 28 O’Connell Trust became the fourth respondent. His Honour further ordered that the evidence‑in‑chief of Mr Munneke and Ms Zaccara be their statements.
The pleadings in the consolidated action were not consolidated.
At trial, the applicants called lawyer and former software developer, Michael Bacina (“Mr Bacina”), who prepared an expert report dated 3 October 2023 regarding cryptocurrency and blockchains (“the Bacina report”). The applicants also called Mr Heard, a chartered accountant and registered liquidator, who prepared a report dated 8 December 2023 regarding the financial position of Ex NF at the relevant dates (“the Heard report”).
Mr Munneke called evidence from the chartered accountant and registered liquidator, Mr Scott, who provided a report dated 14 March 2024 responding to Mr Heard’s report (“the Scott report”). Mr Munneke was cross-examined on the evidence he gave during the s 597 examination and on his statement.
Ms Zaccara and the respondent companies relied on an expert report from Fred Taormina (“Mr Taormina”) concerning the rental value of O’Connell Street. Ms Zaccara was cross‑examined on the evidence she gave during the s 597 examination and her three statements.
It was agreed between the parties that only those documents referred to in closing submissions or a statement, as set out in the index provided by the applicants’ solicitor, are to be relied on.
The issues for determination
As submitted by the applicants, the objective facts as to the purchase of the cryptocurrency, O’Connell Street and Ward Street, and how those purchases were funded, are substantially not in dispute. The issues for determination are:
(a)whether the cryptocurrency was acquired as an asset of Ex NF or as a personal asset of Mr Munneke, Ms Zaccara and/or the ZALD Trust (“the ZALD Trust”);[7]
(b)whether the purchase of O’Connell Street in the name of Mr Munneke (as trustee for a discretionary family trust) was a self-dealing transaction undertaken on Mr Munneke’s direction and entirely funded by Ex NF and whether the use of Ex NF’s funds to do so was in breach of Mr Munneke’s fiduciary and statutory duties as a director, and, if so, whether that breach was in some way ratified by Ms Zaccara as shareholder; and
(c)if the cryptocurrency was an asset of Ex NF, whether the purchase of Ward Street was a self-dealing transaction undertaken on Mr Munneke’s direction and entirely funded by Ex NF and whether the use of Ex NF’s funds to do so was in breach of Mr Munneke’s fiduciary and statutory duties as a director and, if so, whether that breach was in some way ratified by Ms Zaccara as shareholder.
[7] Mr Munneke and Ms Zaccara’s family trust.
A central question is whether ratification by Ms Zaccara was legally possible, given Ex NF’s circumstances at the times of the O’Connell Street, cryptocurrency, and Ward Street transactions. The applicants disputed the claim of ratification not only by reference to the facts, but also relying upon the principle that a shareholder cannot ratify a self-dealing transaction when, having regard to Ex NF’s financial position, creditors’ interests would be jeopardised by the transaction. The applicants asserted that, in any case, ratification is no answer to the claims that the purchases were unreasonable director-related transactions as defined by the Corporations Act.
While there are three aspects to the applicants’ claims, the multimillion-dollar question for determination is whether or not the cryptocurrency is the property of Ex NF.
By way of explaining the heft of these reasons, I indicate I have replicated much of the Heard and Scott reports for convenience to assist in appreciating the financial analyses conducted by the experts. I have also included a detailed recitation of Mr Munneke and Ms Zaccara’s evidence to assist in understanding the accounts they gave in the s 597 examination in 2021, their statements received as their evidence, and their cross‑examination. In discussing Mr Munneke and Ms Zaccara’s evidence, when I refer to the cross-examination of them, I am referring to the cross-examination in the trial before me.
Applicants’ case
Michael Bacina
Hardcore crypto lawyer
To assist the Court in understanding the subject of cryptocurrency, the applicants called Mr Bacina a solicitor at Piper Alderman who has expertise in cryptocurrency law. He was formerly a software and web developer, although his experience as a developer predated the introduction of public blockchains. He is the lead partner and founder of the Blockchain Group at Piper Alderman, within the Financial Services and FinTech Group. Mr Bacina has published, lectured and presented extensively on cryptocurrency, blockchain and technology law and regulation since 2016. He told the Court that he is part of a telegram group with 187 members globally that goes by the moniker ‘Hardcore Crypto Lawyers’ and that there are a limited number of specialists in each country.
Mr Munneke’s objection to the Bacina report
Mr Munneke objected to [85] to [105] and [109] to [111] of the Bacina report. These paragraphs provide responses (“responses”) to the questions posed by the applicants’ solicitors at [26.2] to [26.4] and [27.1] to [27.4] (“the questions”) of their letter dated 29 September 2023 seeking Mr Bacina’s opinion.
Mr Munneke submitted these responses contained irrelevant speculation on Mr Bacina’s part as to the state of mind of people in the software and web development sector. He submitted that by this evidence, the applicants sought to establish Mr Munneke’s intention and motivations at the time he acquired ethereum.
Mr Munneke also submitted that [94] conveyed Mr Bacina’s interpretation of an email sent by Mr Munneke, which amounted to an irrelevant opinion on a matter of fact.
The applicants submitted that the paragraphs of the Bacina report comprised background derived from a person with industry experience and expertise. They also submitted some relevant concepts required explanation from a person with industry knowledge such as Mr Bacina.
I have determined to receive impugned responses (which were received de bene esse) into evidence with one exception, which I set out below.
The questions, insofar as they sought an opinion regarding, for example, what software and web developers might have considered or envisaged, or why they may have done something, are poorly worded, as they enquire as to the state of mind of software and web developers. Mr Bacina cannot speak to this matter.
The questions should have been expressed in terms of enquiring as to Mr Bacina’s expert opinion as informed by his experience. For example, questions at [26.2] and [26.3] would have been better expressed as follows:
26.2From your experience in information technology and cryptocurrency law, as at the time of the establishment of the ethereum blockchain, what was the power or benefit of a new blockchain which accommodated “smart contracts”?
and:
26.3What, in your opinion, was the benefit in acquiring ethereum at the time of the establishment of the ethereum blockchain?
However, I am satisfied that Mr Bacina provided his opinion in the responses founded on his area of expertise and by reference to his experience and knowledge of cryptocurrency, blockchain, and technology law.
Mr Bacina provided his opinion as to why it would have been beneficial to acquire ether at the time of the establishment of the ethereum blockchain. It is evidence for me to consider, together with all the evidence in the matter, in determining the issues in dispute. However, his comment at [94] that the rationale he identified was consistent with what Mr Munneke had said in an email dated 26 January 2018 is irrelevant opinion evidence. It is for the Court to determine the meaning of Mr Munneke’s email and whether it is consistent with other evidence.
Mr Bacina’s evidence and cross-examination
The Bacina report is received into evidence with the qualification I have just discussed. Mr Bacina gave further evidence-in-chief and was cross-examined.
Mr Bacina began his evidence by defining a series of relevant concepts. These definitions have been extracted into the glossary of terms at the commencement of my reasons. He described that cryptocurrency is an intangible digital asset, transactions of which are secured by cryptographic encryption. Mr Bacina said transactions and balances are stored on either a blockchain or another distributed ledger. He explained that use of a blockchain or other ledger enables storage of data across many computers controlled by different parties to create a censorship-resistant or immutable record of transactions.
Mr Bacina explained that cryptocurrency itself cannot be held but rather, a person can hold a private key that enables them to make transactions using crypto assets recorded in a “wallet”. He said a wallet, as distinct from a bank account or actual wallet, is an address or entry on the ledger (also called a public key) that has some balance. Mr Bacina explained that the ledger or blockchain records the type and amount of crypto assets, as well as all transactions, associated with a wallet. He said that this information is all publicly accessible, although the identity of who controls a wallet will be unknown unless it can be discerned from identifying features.
Mr Bacina gave evidence that cryptocurrency exchanges perform a similar function to any marketplace, such as those for trading shares. He explained that parties can store digital assets on the exchange’s wallet, enabling them to trade within the central environment of the exchange’s balances.
Mr Bacina said that bitcoin and ethereum are types of cryptocurrencies. He explained bitcoin is the most well-known and oldest popular cryptocurrency and makes up the lion’s share of cryptocurrency trading. He gave evidence that bitcoin can be mined by running software on a computer that verifies transactions in exchange for bitcoin.
Mr Bacina gave evidence that ethereum was founded later in an attempt to resolve some of the shortcomings associated with bitcoin, including counterparty risk. He said that unlike ethereum, bitcoin can be transacted without a trusted central party recording the transactions on a ledger. He explained that ethereum represented a very significant evolution in blockchain technology by introducing smart contracts (which is apparently not an apt name because they are generally neither smart nor contracts).
Mr Bacina described smart contracts as automated pieces of code that operate without being overseen by someone responsible for how they run. He said smart contracts can be interacted with once they are deployed to the primary public ethereum blockchain, mainnet. He explained that a party to a transaction can place a digital asset into a smart contract which will only be released when a predetermined set of variables are met by a counterparty, such as in an escrow context. He also gave examples of smart contracts allowing a digital asset to be distributed over time and lending smart contracts, which can automatically liquidate collateral in the event of a market drop.
Mr Bacina explained that gas is the fee for transactions on the ethereum blockchain including transfers of ethereum and smart contract operations; it is the fuel for ethereum, and any gas associated with a transaction is recorded and visible on the blockchain. He said that gas is priced in one-billionths of an ether and is paid to those who contribute computer power to the verification of transactions. Mr Bacina gave evidence that parties offer an amount of gas they are willing to pay. He explained that if a user wants to have a transaction completed quickly, a higher fee should be offered to render the transaction more valuable, thereby incentivising those who are running the network of verifiers. Mr Bacina said in [70] of his report that gas is generally one of a developer’s most significant costs.
Mr Bacina said that gas is also necessary for developers to deploy a smart contract to mainnet and to interact with or process a smart contract. He said that the amount of gas required to deploy a smart contract to mainnet is commensurate with its complexity. He explained that in addition to testing their own smart contracts locally on a testnet (which does not require gas), developers would be expected to conduct research in relation to other smart contracts on mainnet by interacting with them.
Mr Bacina reported, in his opinion, a benefit in purchasing ether at the time of the establishment of the ethereum blockchain would be:
… to mitigate any later increase in the price of Ether, which would hedge against potentially increased gas costs, and possibly provide both a competitive advantage over others seeking to operate smart contracts, or provide a capital gain via the sale of ETH to clients who might need it to run their own smart contracts.
Mr Bacina further reported that during the course of his legal practice a common question in the blockchain industry “is to enquire as to when a person first purchased a cryptocurrency as it serves as a measure of their time in the industry and carries some measure of status”.
In cross-examination, Mr Bacina said that deployment of a smart contract to mainnet is effectively permanent. Mr Bacina agreed that it would be sensible for a developer to advance development as far as possible in the cost-free environment of a testnet before deploying to mainnet. He also accepted that there is no basis to assume from the Meeco/NextFaze Hackathon Press Release (“the press release”) (discussed later) that the hackathon involved a live mainnet deployment as opposed to a testnet exercise.
Mr Bacina accepted that it is common for third party developers to be contracted by proponents of a blockchain project to undertake development work. However, he did not accept that gas costs associated with deployment to mainnet would properly be incurred by the principal rather than the contractor‑developer. He said that generally developers offer a whole service to clients who do not understand cryptocurrencies and blockchain, then send a bill that may include gas costs in a manner similar to disbursements.
Andrew Heard
Mr Heard is a partner in the firm Heard Phillips Lieberenz. Mr Phillips is one of his partners. The Heard report was received into evidence and Mr Heard said in cross-examination that he had not been involved in any aspect of the liquidation that related to the applicants’ claims, although he vaguely recalled giving some advice at the start of the liquidation. Having been directed to an annexure to the report to creditors, where six and a half hours’ work are attributed to him, Mr Heard accepted that he had been involved in some investigation in connection with the liquidation. He explained he had not been involved with anyone who was related to the trading of Ex NF, including Mr Phillips, while he was writing his report. Mr Heard said he had gone to great lengths to avoid Mr Phillips, including by preparing most of his report at home and spending the two days prior to giving evidence at home rather than going to the office.
Mr Heard said he knew that Mr Phillips had received funding from the Commonwealth for the purposes of the applicants’ claims but that he had not seen the funding agreement. He agreed that he shared in the profits his firm derived from liquidations. When asked whether he indirectly benefited from the funding agreement in this case, Mr Heard replied that he was paid by the applicants’ solicitor. He said he presumed that the applicants had received funding from the Commonwealth Fair Entitlements Guarantee scheme.
The applicants submitted it is not uncommon for an insolvency practitioner to give expert evidence when his or her partner is the liquidator and it is not uncommon for the liquidator himself or herself to give evidence on the topic of insolvency. It was submitted that the liquidator’s partner was one step removed from the liquidation. Further, the applicants submitted that it was not directly suggested to Mr Heard that his evidence was tailored or that he had not brought a true and impartial mind to the exercise of writing his report.
Whilst Mr Heard’s involvement in the liquidation was the subject of comment in Ms Zaccara and the respondent companies’ closing address, no complaint was ultimately made about this topic by the respondents.
The Heard report
O’Connell Street
Mr Heard was asked by the applicants’ solicitors to provide his opinion on whether Ex NF had sufficient financial resources available to it to make the payments, and assume the liability to ANZ, in respect of the purchase of O’Connell Street while retaining sufficient readily realisable assets or other financial resources to pay its debts as and when they fell due and to meet its ongoing operational requirements. In this context, he was also asked to comment on the extent to which the debts owing to Ex NF, Ex NF’s work in progress (“WIP”), and the cryptocurrency were sensitive to value fluctuation, realisability, or realisability risk. Mr Heard was asked to conduct his analysis on two alternative bases:
1. Ex NF was the owner of the cryptocurrency; and
2. Ex NF was not the owner of the cryptocurrency.
In his report, Mr Heard explained that the financial statements were prepared by Rowe Partners on a monthly basis and on a cash basis, without incorporating debtors and creditors. He set out the methodology he adopted to determine appropriately the resources available to Ex NF at the time of the O’Connell Street purchase on 10 December 2015. This included having regard to the 30 November 2015 balance sheet and the 10 December 2015 bank balances, while estimating Ex NF’s assets and liabilities, including the Estimated Realisable Value (“ERV”) of any assets. Mr Heard also said that he considered Ex NF’s profitability, which would allow him to comment on an appropriate level of working capital that Ex NF should have maintained.
Using this methodology, Mr Heard said that he estimated the financial position of Ex NF on 10 December 2015 in the following table:
Fig – 5.1.1 – Estimated Financial Position
Net Assets Crypto Owned Crypto Not Owned NOTES 30-Nov-15 Est 10/12/2015 Est 10/12/2015 Book Re-Stated Re-Stated Assets Current Assets Cash at Bank 1,290,454 218,185 218,185 A Crypto - 3,284 - B Debtors - 623,859 623,859 C WIP - 80,000 80,000 D 1,290,454 925,329 922,045 Non Current Assets Plant & Equipment 32,231 32,231 32,231 E Building Loan – 28 O’Connell Trust 1,825,912 1,825,912 F Related Parties 325,853 G 358,083 1,858,142 1,858,142 TOTAL ASSETS 1,648,537 2,783,471 2,780,187 Current Liabilities Tax Creditors & Accruals 428,761 603,395 603,395 H 428,761 603,395 603,395 Non-Current Liabilities Related Parties 103,247 45,437 45,437 G ANZ Loans 740,000 740,000 I 103,247 785,437 785,437 TOTAL LIABILITIES 532,007 1,388,832 1,388,832 NET ASSETS 1,116,530 1,394,639 1,391,355 Source: Documents in Annexure 4, Annexure 11 analysis and opinions expressed below
Mr Heard’s comments with respect to the table above are as follows:
NoteComment
AOn 10 December 2015 [Ex NF’s] combined bank balances were $218,185 (Annexures 8 and 9).[8]
B[Ex NF’s] accounts do not record on its balance sheet on 30 November 2015 any cryptocurrency. I have been provided with and adopted a schedule of cryptocurrency (Annexure 6) that values the ETH held at this date at $2,321.95 and the BTC held at this date at $962.32 (total $3,284.27).
C[Ex NF’s] accounts do not record on its balance sheet on 30 November 2015 any Debtors. I have been provided with and adopted a list of Debtors prepared on 10 December 2015 (Annexure 5), drawn from the Harvest system, which totals $623,859.35. The Debtors owing at this date were well beyond what would be considered normal trading terms. I illustrate the slow payment profile of the Debtor collections below.
D[Ex NF’s] accounts do not record on its balance sheet on 30 November 2015 any value for WIP. It is not possible to put a precise value on WIP given the way the Harvest system recorded invoicing and receipts (refer assumption 7.5). Adopting the Billing and Debtor Information spreadsheet information I have been given (Annexure 5) I have observed the monthly invoicing in the months before and after the O’Connell Street Property purchase and observe that average monthly billings were approximately $186,000 per month and the trend of billing was as below. Given [Ex NF’s] main client (Meeco Group) was being billed weekly, there is unlikely to be much unbilled WIP at any stage and for the purposes of this analysis only I have given the WIP a notional book value of $80,000.
EThe book value of plant and equipment reflects the written down value of assets purchased to be used in the ongoing trading of the business. These forms of assets are not available for sale to meet creditor claims unless in a liquidation scenario.
FOn 10 December 2015 [Ex NF] settled the purchase of the O’Connell Street Property. The funds used to purchase the property came from [Ex NF’s] bank account and for the purposes of this analysis only, I have recorded the amount as a loan to the 28 O’Connell Trust as follows.
Fig – 5.1.4 – O’Connell Street Trust Loan
[8] Mr Heard’s references to annexures are references to the annexures to the Heard report.
Source Est 10/12/2015 $40,000 Deposit paid (Source Unknown)[9] - 10/12/15 Loan Drawn 740,000 10/12/15 Settlement Paid 1,025,912 10/12/15 Lease Incentive 35,000 24/12/15 Lease Incentive 25,000 $ 1,825,912 [9] The source was the NAB account. Two internet transfers of $20,000 each were made on 19 November 2015.
Source: Documents in Annexure 8
GI have grouped together Non-Current Assets and Liabilities (non-current meaning the obligation to realise or discharge is not expected within the subsequent 12 months) accounts related to the director of [Ex NF], as set out below.
Fig – 5.1.5 – Loans
Related Party Loans Realisable Value ($)
Book Value ($) Non-Current Asset Loans – Associated Trust 325,853 - Non-Current Liability Capital Contributed 85,571 85,571 Conversion balances 57,810 - Drawings (40,134) (40,134) 103,247 45,437 With respect to the Non-Current Asset:
· Loans – Associated Trusts – I have reviewed the Non-Current Asset from July 2014 to March 2018. The loan was established earlier than July 2014 and the only loan repayments have come from manual journal entries to the Drawings Linda Z account. I have not seen evidence of, and I have assumed there was no intent to repay this loan.
With respect to the Non-Current Liabilities:
· Capital Contributed – I have reviewed the general ledgers across the 2015 to 2017 financial years (Annexure 9) and have seen that there were some deposits made into [Ex NF’s] accounts and some credits by way of manual journal entry. In my opinion these credits should have been off set against the Drawings as I have shown above.
· Conversion Balances – The ledger balance has not changed across the 2015 to 2017 financial years (Annexure 9) and given the description of the account, I assume that the balance does not reflect an obligation that is payable, rather it’s the balance left after an accountant’s unreconciled journal entry some time earlier than July 2014.
HI have calculated the amount of taxation and superannuation that was owing by [Ex NF] (if it had reported the tax and superannuation amounts unpaid) (Annexure 7). With respect to Superannuation, the amount is without regard to interest and penalties as this is calculated the date of the SGC return lodgement.
Fig 5.1.6 – Tax, Creditors & Accruals on 10 December 2015
Amounts Due Wage Deductions Activity Statement Superannuation Guarantee Income Tax Total
10 December 2015 865 244,377 119,240 238,913 603,395 Source: Annexure 7
In addition to the Tax and SGC amounts that were due on 10 December 2015, there were, accruals of $122,614, being $93,969 of December Quarter PAYG/GST (not due until February 2016) and $28,645 of Superannuation for the December quarter (also not due until February 2016).
IThe ANZ loan, drawn to settle the purchase of the O’Connell Street Property (Annexure 10).
(Footnote added)
Mr Heard stated that relying on the analysis in Fig 5.1.1 above, he considered the value of Ex NF’s assets that were able to be turned into cash quickly (i.e., excluding illiquid assets such as plant, equipment and loans not repayable) to meet the payment of debts that were overdue as detailed below:
Fig 5.1.7 – Analysis of liquid assets (assets able to be turned into cash quickly) and current liabilities.
Liquid Assets to meet Creditors Crypto Owned Crypto Not Owned ERV ERV 30-Nov-15 Est 10/12/2015 Est 10/12/2015 High Low Notes Book Re-Stated Re-Stated Liquid Assets Cash at Bank 1,290,454 218,185 218,185 218,185 218,185 Crypto - 3,284 - 3,284 - A Debtors - 623,859 623,859 499,087 490,087 B WIP - 80,000 80,000 - - C Building Loan –
28 O’Connell Trust- 1,825,912 1,825,912 - - D Related Parties 325,853 - - - - D Total Liquid Assets 1,616,307 2,751,241 2,747,956 720,557 717,273 Overdue Liabilities Tax Creditors & Accruals 428,761 603,395 603,395 603,395 603,395 E 428,761 603,395 603,395 603,395 603,395 Net Liquid Assets $1,187,546 $2,147,846 $2,144,562 $117,162 $113,878 I make the following comments with respect to the table above.
NoteComment
AThe cryptocurrency is either owned by [Ex NF] and has a realisable value equivalent to its book value or its not owned by [Ex NF] and isn’t an asset for the purposes of the calculation. Relying on the data I have been given (Annexure 6), I can see that shortly after December 2015, the value of ETH rose quickly as illustrated in the table below, however the value of the cryptocurrency before then was negligible.
This table highlights that some of the cryptocurrency has high value fluctuations and therefore in my opinion has a high Realisability Risk (i.e., you cannot be certain the value the asset will have on any given day). It is however my assumption it is easily Realisable and able to be converted into cash relatively quickly.
BI have highlighted above in Fig 5.1.2 the slow rate of collection of [Ex NF’s] Debtors. Using data from Annexure 5 from December 2015 to the end of March 2016 I can see that only $364,000 of December 2015 Debtors were collected. Whilst the November 2015 debtors do not appear to have had a high incidence of bad debt, they were very slow paying.
Accordingly, I have reduced the book value of debtors to reflect my opinion of their quick ERV to 80% of the book value in both the high/Low ERV scenario. This discount seeks to estimate a value of debtors that could be quickly recovered to meet the payment of creditors that were due for payment.
In my view the Debtors have poor Realisability (they are slow paying) but low Realisability Risk (in time, most of them pay).
CWIP ERV has been marked down to NIL because WIP must be converted into a debtor before it is able to be realised in cash and be available to meet the payment of creditor arrears.
DThe amount that I had recorded in Fig 5.1.4 above as a loan to the 28 O’Connell Trust loan has been written off with Nil ERV consistent with the assumption asked of me in paragraph 2.2 of my letter of instructions dated 1 November 2023 (Annexure 1).[10]
[10] Paragraph 2.2 of the letter of instructions provides:
2.2 Given the defences filed in the action allege that the funds deployed to acquire O’Connell St were paid out of [Ex NF] in the form of a dividend or reduction and distribution of capital to its shareholder, the inclusion in the financial statements or management accounts of any loan as an asset of [Ex NF] in this respect was an error and no repayments would have been made to [Ex NF] in respect of any such loan.
EI have reviewed the tax lodgement history of [Ex NF] to the ATO running accounts and the schedule of lodgements provided in my instructions (instructions 10.10) and note the following returns had not been lodged, up to and including the September 2015 quarter.
Fig 5.1.9 – Late Lodged Returns by November 2015
Due Date Description Date Lodged* Days Late Lodging 25/11/2014 BAS[11] for the period ending Sept 2014 23/06/2017 969 26/05/2015 BAS for the period ending Mar 2015 18/08/2017 843 25/08/2015 BAS for the period ending June 2015 21/08/2017 755 * as returns had not been lodged, the extent of debt would not have been calculated [11] “BAS” means business activity statement.
Source: Annexure 7 Tax Lodgement History
The due date for the lodgement and payment Activity Statements, Superannuation Guarantee Charge Statements and Income Tax Returns are as follows.
Fig 5.1.10 – Tax due dates
Lodgement and Payment Due Dates Activity Statement Superannuation Guarantee Income Tax 1 July to 30 September Qtr 28 October 28 November 1 October to 31 December Qt 28 February 28 February 1 January to 31 March Qtr 28 April 28 May 1 April to 30 June Qtr 28 July 28 August 30 June Financial Year 31 October
(Footnotes added)
Mr Heard reported that his analysis appears to indicate that on 10 December 2015, Ex NF only had $0.7 million of liquid assets available to it to meet the $0.6 million in overdue tax and superannuation debts.
Mr Heard commented that having regard to Ex NF’s financial statements, whilst there were minor cash flow surpluses earned by Ex NF between July 2015 and November 2015, there were no surpluses generated thereafter that could have been used to meet the payment of overdue tax and superannuation debt on 10 December 2015. This is reflected in Fig 5.1.11 below. Mr Heard stated that in his opinion, Ex NF’s trading performance in November 2015 would not have given Ex NF confidence that it could meet its tax and superannuation arrears on 10 December 2015 from trading surpluses.
In his note to Fig 5.1.11, Mr Heard noted:
“Total Payments” In the June 2016 profit and loss statements is extraordinary because the accountant passed a journal entry to bring to account $352,280.02 of PAYGW tax deductions that had not been accrued as an expense of salary and wages across the year, due to the accounts only recording the cost of salary and wage expense when net wages were paid.
Mr Heard reported that in his opinion, from December 2015 to the end of the financial year, Ex NF’s cash flow was in deficit, and Ex NF would not have had the resources to meet any creditor arrears from ongoing trading.
Relying on Fig 5.1.11, Mr Heard determined that in the 2016 financial year, Ex NF’s average overhead payments were approximately $155,000 per month. He stated that in his opinion, a prudent director would seek to keep at least two months’ overhead costs as a working capital reserve (for the illustration he modelled a conservative provision of $250,000), although this depends on the director’s risk appetite, the predictability of future cash collections, looming obligations, debtor collections, and trade terms. He said:
In [Ex NF’s] circumstances, given the slow debtor collections, keeping a working capital reserve of at least 2 months overheads would have been prudent as [Ex NF] was not aware of the tax debts that were accruing due to the non-lodgement of Activity Statements.
Mr Heard demonstrated in Fig 5.1.12 how Ex NF had insufficient resources to meet tax and superannuation arrears at the time it used its funds to purchase O’Connell Street.
Fig 5.1.12 – Available Resources
Available Resources Est 10/12/2015 ERV
HighERV
LowLiquid Assets Cash at Bank 218,185 218,185 Crypto 3,284 - Debtors 499,087 499,087 WIP - - Building Loan – 28 O’Connell Trust - - Loans – Associated Trusts - - Total Liquid Assets (X Ref Fig 5.17) 720,557 717,273 Less: Working Capital Provision (250,000) (250,000) Liquid Assets to meet Creditors 470,557 467,273 Overdue Liabilities Tax Creditors & Accruals 603,395 603,395 603,395 603,395 Net Available Resources ($132,838) ($136,122)
Mr Heard said the shortfalls of $132,838 and $136,122 set out above would have been even greater if the accruals totalling $122,614 that were due in February 2016 (comprising $93,969 of PAYG/GST and $28,645 of superannuation for the December 2015 quarter) were included.
Mr Heard turned to the ability of Ex NF to assume and meet the liability owed to ANZ. Mr Heard reported that to purchase O’Connell Street, Ex NF took out a $740,000 loan on 10 December 2015 that was on interest-only terms until 10 December 2020. The rate of interest was six percent, reconciling to an annual interest of $44,400 per annum. Mr Heard corrected this to 5.5 percent in cross‑examination.
Mr Heard stated that from his experience as an accountant and board director, to estimate the level of sustainable debt Ex NF could have serviced, it is appropriate to apply a benchmark covenant that Ex NF’s earnings before interest, taxes, depreciation, and amortisation (“EBITDA”) must be greater than 2.5 times the interest expense. He said that in his view, a lesser EBITDA would indicate a higher risk that Ex NF could not afford principal and interest obligations on loans. Using this benchmark, Mr Heard calculated that a business with an annual interest expense of $44,400 should be earning at least $110,000 EBITDA to be able to service that debt obligation.
He stated that relying on Ex NF’s financial statements, in the 2016 financial year, Ex NF’s reported 12-month EBITDA was negative $61,683. He said the fact that Ex NF was not earning an EBITDA demonstrates it was not earning a sufficient profit to meet any interest cost accruing on the ANZ loan. He noted that Ex NF’s 12-month EBITDA in the 2017 financial year (after deducting the rent expense that was journalled in) was $53,763. Mr Heard said that this figure was $56,233 less than the benchmark and only marginally more than was sufficient to meet the cost on the interest payments that were accruing on the ANZ loan.
Accordingly, Mr Heard concluded that Ex NF did not have sufficient financial resources available to it (regardless of whether it did or did not own the cryptocurrency) to make the payments, and assume the liability to ANZ, to purchase O’Connell Street in December 2015 while retaining sufficient readily realisable assets or other financial resources to pay its debts as and when they fell due and to meet its ongoing operational requirements. He gave the following reasons:
a.After the payment of commitments to settle the O’Connell Street Property purchase there was just $218,185 cash at bank, less than what I consider a prudent level of cash reserves should be for an organisation of [Ex NF’s] size.
b.Whilst the value of debtors owing to [Ex NF] was significant, they were taking nearly ½ year to collect and were therefore not liquid assets available to meet the payment of overdue debts.
c.Whilst I have estimated a notional value for WIP, the time for WIP to convert into debtors and then be collected would exceed ½ year and therefore had no realisable value for the purposes of assessing [Ex NF’s] ability to meet the payment of overdue debts.
d.[Ex NF’s] profit and loss statement (prepared on a cash basis), shows that from December 2015 to the end of the financial year [Ex NF’s] cashflow was in deficit and [Ex NF] would not have had the resources to meet any creditor arrears from trading.
e.Relying on [Ex NF’s] profit and loss statements, I consider [Ex NF] was not able to generate a sufficient level of EBITDA in 2016 or 2017 to meet the cost of the interest payments that were accruing on the ANZ loan drawn to purchase the O’Connell Street Property.
Mr Heard concluded that at the time of the O’Connell Street purchase, Ex NF was financially unstable, and its director should have been concerned about insolvency.
Ward Street
Mr Heard was asked to determine whether Ex NF had sufficient financial resources available to it to make the payments in respect of the purchase of Ward Street while still retaining sufficient readily realisable assets or other financial resources to pay its debts as and when they fell due and to meet its ongoing operational requirements. Mr Heard was again asked to comment on the extent to which the debts owing to Ex NF, Ex NF’s WIP, and the cryptocurrency were sensitive to valuation fluctuation, realisability, or realisability risk in the context of giving his opinion.
Mr Heard detailed that in answering this question, he adopted the same methodology as described in relation to the O’Connell Street analysis above, but updated to reflect Ex NF’s financial position in January 2018. He explained that using that methodology, he estimated the financial position of Ex NF on 31 January 2018 in the table Fig 5.2.1 on two alternative bases:
1.Ex NF was the owner of the cryptocurrency and lent money to 106 Ward Street Pty Ltd to purchase Ward Street, while retaining the balance of the unsold cryptocurrency; and
2.Ex NF was not the owner of the cryptocurrency.
Fig 5.2.1 – Estimated Financial Position
Net Assets Crypto Owned Crypto Not Owned NOTES 31-Jan-18 31-Jan-18 31-Jan-18 Book Re-Stated Re-Stated Assets Current Assets Cash at Bank 366,610 366,610 366,610 Crypto 1,302,100 0 A Debtors 699,840 699,840 B WIP 80,000 80,000 C 366,610 2,448,549 1,146,449 Non Current Assets Total Fixed Assets 92,960 92,960 92,960 D Building Loan – 28 O’Connell Trust 901,434 - - E Loan 106 Ward Pty Ltd - 1,235,920 - F Related Party Loans 406,773 - - G 1,401,168 1,328,880 92,960 Total Assets 1,767,777 3,777,430 1,239,409 Liabilities Current Liabilities Tax Creditors & Accruals 1,543,704 1,896,622 1,896,622 H 1,543,704 1,896,622 1,896,622 Non-Current Liabilities Related Party Loans 46,141 0 0 G ANZ Loan 740,000 740,000 I Loan D Munneke/Ex Crypto Sales (48,851) F SUSPENSE ACCOUNT (Balance Sheet) (231,626) 0 0 G (185,485) 691,149 740,000 Total Liabilities 1,358,219 2,587,771 2,636,622 Net Assets 409,558 1,189,659 (1,397,213) Source: Documents in Annexure 4, Annexure 12 analysis and opinions expressed below
Mr Heard’s notes and comments regarding Fig 5.2.1 are as follows:
NoteComment
A[Ex NF’s] accounts do not include a value for cryptocurrency owned. I have been provided with a schedule of cryptocurrency (Annexure 6) for the purpose of this analysis. The cryptocurrency had a low-cost price, however, by January 2018 cryptocurrency had experienced a price spike. The cryptocurrency remaining on 31 January 2018 after sales used to finance the Ward Street property purchase had a significant ($1,302,099.96) and variable value as highlighted in the table and graph below.
The graph above illustrates that the cryptocurrency has high value fluctuations and therefore in my opinion has a high Realisability Risk (i.e., you cannot be certain the value the asset will have on any given day). It is my assumption that it is easily Realisable.
If the cryptocurrency was owned by [Ex NF], the remaining cryptocurrency after the sale of the portion used to fund the purchase of Ward Street Property had a significant value. If the cryptocurrency was not owned by [Ex NF], its value is irrelevant for the purposes of [Ex NF’s] balance sheet.
B[Ex NF’s] accounts do not include a value for Debtors, and I have introduced this amount into the above analysis. Relying on the documents provided in Annexure 5 I can see the Debtors owing to [Ex NF] on 31 January 2018 totalled $699,840. Many of these accounts were very slow paying as illustrated by the collection profile of debtors collected after 31 January 2018 as shown below.
C[Ex NF’s] accounts do not include a value for WIP owing. It is not possible to put a precise value on WIP given the way the Harvest system recorded invoicing and receipts (refer assumption 7.5). Relying on the documents provided in Annexure 5 I can observe invoices raised by [Ex NF] in the period before and after 31 January 2018. I illustrate below a trend in declining billings over the period reviewed, with average monthly billings over the period of approx. $150,000. Given [Ex NF’s] major client at the time (Meeco Group) was being billed on a weekly basis, there is unlikely to be much unbilled WIP at any stage, and for the purposes of this analysis only, I have given WIP a notional book value of $80,000.
D The book value of plant and equipment reflects the written down value of assets purchased to be used in the ongoing trading of the business. These forms of assets are not available for sale to meet creditor claims unless in a liquidation scenario.
E The amount recorded as a loan to the 28 O’Connell Trust loan has been written off with Nil ERV consistent with the assumption asked of me in paragraph 2.2 of my letter of instructions dated 1 November 2023 (Annexure 1).
F If the cryptocurrency was owned by [Ex NF], the Ward Street Property was purchased with [Ex NF] money and the entire amount paid ($1,235,920) reflects a loan to 106 Ward Pty Ltd owed to [Ex NF] and $48,851 taken as drawings when the deposit was paid (see below).
Fig 5.2.5 – Source of Purchase Price
Ward Street Purchase Amount Applied to Ward Balance Taken Balance Retained 148,851 100,000 48,851 Part Crypto Sales – 11/1/2018 Crypto Sales – 24/1/2018 346,464 346,464 Crypto Sales – 25/1/2018 311,445 311,445 Crypto Sales – 25/1/2018 600,000 600,000 Total Receipts 1,406,760 1,357,909 48,851 - To Purchase Deposit to Trust Account – 11/1/2018 100,000 Payment 29/1/2018 1,135,920 Total Payments 1,235,920 1,235,920 - 121,989 Source: NAB Bank Statements (Annexure 8)
If the cryptocurrency was not owned by [Ex NF], and [Ex NF’s] bank account was simply used to transact receipts and payments, then monies received into the bank account from cryptocurrency sales equals disbursements out. It is worth noting that the cryptocurrency sales on 24 January 2018, should not have been recorded in the financial statements as fee revenue in January 2018.
G I have grouped together Non-Current Assets and Liabilities (non-current meaning the obligation to realise or discharge is not expected within the subsequent 12 months) that are accounts related to the director of [Ex NF], as set out below.
Fig 5.2.6 – Related Party & Suspense
Related Party Loans Realisable Value ($)
Book Value ($) Non-Current Assets Div 7A Loan – 28 O’Connell 2017 55,774 - Div 7A Loan – Linda Z 2017 98,909 - Loan Repayments – 28 O’Connell – Interest Only 23,602 - Loans – Associated Trusts 228,488 - 406,773 - Non-Current Liabilities Capital Contributed 141,750 - Conversion balances 57,810 - Drawings (153,419) - 46,141 - SUSPENSE ACCOUNT (231,626) - With respect to the Non-Current Assets:
· The Div 7A loan account balances relate to journal entries for unpaid interest on overdrawn loans charged by [Ex NF] in 2017 and I have assumed there was no intent to pay this loan.
· The Loan Repayments – 28 O’Connell were the interest charges on the ANZ loan and in 2017 these charges were set off by a manual journal for Rent Expense and I have assumed that there was no intent to repay this loan.
· I have reviewed the account Loans – Associated Trusts from July 2014 to March 2018. The loan was established earlier than July 2014 and the only loan repayments have come from manual journal entries to the Drawings Linda Z account. I have not seen evidence of, and I have assumed there was no intent to repay that loan.
The primary position of Ms Zaccara and 106 Ward Street Pty Ltd is that the cryptocurrency used to acquire Ward Street was Ms Zaccara’s property, or at least not the property of Ex NF. Accordingly, it was submitted it is only necessary to deal with the alternative that it was Ex NF’s property on a hypothetical counterfactual basis.
It was submitted Ms Zaccara, as sole shareholder of Ex NF, agreed, ratified, and acquiesced to the application of the proceeds realised on the sale of the cryptocurrency towards the purchase of Ward Street.
It was submitted Mr Heard, in his report, adopting a similar methodology to that adopted in relation to the O’Connell Street transaction, concluded that if Ex NF owned the cryptocurrency then, as at 31 January 2018, Ex NF had a surplus of net liquid assets of $191,991. It was contended Mr Heard made various assumptions adverse to Ex NF’s position and opined that Ex NF, at 31 January 2018, needed at least $250,000 in working capital. It was pointed out Mr Heard’s opinion, again, is only as to the approach he considered a prudent director should have taken (and one with which Mr Scott does not agree). It was submitted that means, at 31 January 2018, adopting Mr Heard’s methodology, an injection of funds in the amount of $58,009 was required to make up the working capital to Mr Heard’s preferred balance.
Ms Zaccara and 106 Ward Street Pty Ltd submitted, for the same reasons as put in relation to the O’Connell Street transaction, the Court can readily find that Ms Zaccara would have been both able and willing to contribute that sum to Ex NF if required to do so at that time in order to satisfy a solvency standard of the kind set by Mr Heard.
It was submitted that at the time of the 2018 cryptocurrency sale and use of the sale proceeds to purchase Ward Street, Ms Zaccara believed that she was using her own property. It was submitted on the basis that the Court should find that she genuinely believed that it was her property but that, objectively and in point of law, she was wrong in her belief, it would be unfair if she could not be heard to say that had she known the cryptocurrency was Ex NF’s property, she would have directed and authorised, in her capacity as the sole shareholder, Ex NF’s director to distribute sufficient of the proceeds of sale to her in her own right to facilitate settlement on the purchase of Ward Street.
It was argued on that alternative and counterfactual basis that it is open to the Court to apply the unanimous shareholder consent rule, both in answer to the allegation of fiduciary breach against Mr Munneke and the allegation of statutory breaches, for the same reasons as have been put in relation to the O’Connell Street transaction.
Ms Zaccara and 106 Ward Street Pty Ltd submitted the allegation that as Ex NF’s funds were used to purchase Ward Street, then Ward Street must belong to Ex NF proceeds on a false premise. It was submitted that begs the question whether, even if the ethereum did belong to Ex NF, the payment of the funds to or for the benefit or at the direction of Ms Zaccara meant that someone other than Ex NF owned Ward Street free and clear of any claim of Ex NF.
It was submitted if the cryptocurrency did not belong to Ex NF, no issue of breach of fiduciary duty as pleaded can arise. It was further submitted that if the claim of breach of fiduciary duty must be tested on the premise that Ex NF owned the cryptocurrency, then it is only fair that it be tested on the counterfactual hypothesis that Ms Zaccara has directed and authorised the release of the funds to herself or at her direction.
It was contended the allegations of a failure to undertake analysis go nowhere unless the failure is consequential, and the only truly consequential allegation pressed by the applicants is that the Ward Street transaction rendered Ex NF highly susceptible to insolvency. However, it was submitted, on the assumption that the cryptocurrency belonged to Ex NF, and accepting the proposition that if a company is near insolvency the director must have regard to the interest of creditors as well as shareholders, the applicants’ evidence falls short of establishing such a case.
It was contended in relation to the allegation that the Ward Street transaction was an unreasonable director-related transaction, it is not clear on the applicants’ case how they say this is to be tested. It was submitted if the cryptocurrency at 31 January 2018 did not belong to Ex NF, then there is no relevant transaction, and the pleaded claim is inutile. Further, it was submitted if the cryptocurrency was an asset of Ex NF, then not only did Ex NF own real property into which that asset had been converted, it also held a significant residual balance of cryptocurrency. It was submitted the value of that residual holding continued to escalate up to the point of liquidation and beyond in circumstances where the escalation in price was on a consistent, upward trend albeit with some fallbacks in price from time to time. It was submitted that cannot be ignored in an objective assessment of what was reasonable on the hypothesis that the director knew that Ex NF owned the cryptocurrency.
Ms Zaccara and 106 Ward Street Pty Ltd submitted that, in the circumstances, and given that the proceeds of the sale of the cryptocurrency were used and applied for the benefit of the sole shareholder or at her direction, a release of Ex NF’s funds to or at the direction of that sole shareholder in those circumstances was not commercially unreasonable. It was contended that if Ex NF owned the cryptocurrency, the release of the funds was a release of shareholder’s funds for the sole shareholder and there was no gift or transaction at an undervalue.
Ms Zaccara and 106 Ward Street Pty Ltd submitted that on the hypothesis that the cryptocurrency belonged to Ex NF, the applicants have not established a basis in the evidence for a finding of any actual or presumed intention to create a debt for the monies paid to 106 Ward Street Pty Ltd and no claim of unjust enrichment is pleaded or available.
Ward Street discussion and findings
As I have found, the ethereum sold to fund the purchase of Ward Street was the property of Ex NF and, as with the purchase of O’Connell Street, it was not open to Mr Munneke to make a gift of Ward Street to 106 Ward Street Pty Ltd as trustee of a trust held for his personal benefit.
By the end of 2017, having prepared belated financial statements for the years ended 30 June 2014, 2015, and 2016 and made numerous BAS and income tax returns filings, Ex NF had very substantial liabilities owing to the ATO for SGC ($374,035), GST and PAYG withholding ($1,266,599), and income tax ($174,106), all of which were subject to accruing penalties and general interest.
Ex NF continued in its failure to maintain written financial records that correctly recorded and explained its transactions and financial position and would enable true and fair financial records to be prepared and audited including by not explaining the loans to Ms Zaccara and entities controlled by her, payments made or asserted to have been made by her, the payment of Ex NF funds, the ANZ loan underlying the O’Connell Street transaction, the basis upon which Ex NF occupied O’Connell Street, the cryptocurrency sale, and the Ward Street transaction.
Rowe Partners emailed Ms Zaccara on 1 December 2017 warning that Ex NF was operating at a very large loss. Mr Munneke continued to leave tax issues to Ms Zaccara and the accountant, failing to maintain an informed oversight of Ex NF’s financial affairs. It is plainly evident from my findings that Mr Munneke’s reliance on Ms Zaccara and Rowe Partners was not reasonable as defined by s 189 of the Corporations Act.
Mr Heard’s opinion was that if Ex NF did own the cryptocurrency, there were liquid assets (at high ERV) of $2 million, which was only just sufficient to meet the claims of overdue creditors totalling $1.9 million. Mr Heard further stated there were no cash surpluses generated between 1 July 2017 and 31 March 2018 and that the trading performance to January 2018 would not have given Ex NF confidence that it could meet sundry creditors, tax, and superannuation arrears from trading surpluses.
Mr Heard’s opinion demonstrated in Fig 5.2.12 reveals that Ex NF had insufficient resources to meet tax and superannuation arrears at the time it used its funds to purchase Ward Street. He detailed that on the assumption Ex NF owned the cryptocurrency, the shortfall of $58,009 would have been even greater if the accruals totalling $135,602 that were due in February 2018 (comprising $101,048 of PAYG/GST for the December quarter and $25,554 of PAYG withholding for January 2018), plus an unquantified amount of superannuation that would have been due in April 2018, were included. Mr Heard did not factor in any CGT on the sale of the ethereum.
I accept Mr Heard’s opinion that Ex NF did not have sufficient financial resources available to it on 31 January 2018 when the payment was made to purchase Ward Street. I accept his opinion that Ex NF did not have sufficient liquid assets to pay all its liabilities that were due to be paid and to continue trading and was facing insolvency at the time of the Ward Street purchase.
As submitted by the applicants, notwithstanding this dire financial situation, on 4 January 2018, Ms Zaccara entered into a contract for her or her nominee to purchase Ward Street for $1.2 million with $100,000 payable as a deposit.
Having considered all the evidence and submissions of the parties, I am satisfised that as at 31 January 2018 Ex NF’s financial state, with outstanding tax liabilities of almost $1.9 million, was such that there was a “real and not remote risk of insolvency” enlivening the duty of Mr Munneke to consider the interests of Ex NF’s creditors.
In this matter, putting aside the penalties and general interest and any CGT on the sale of ethereum, Ex NF did not have sufficient liquid assets to pay all its liabilities that were due to be paid and to continue trading, placing Ex NF in jeopardy. Mr Munneke’s duty to consider the interests of creditors in complying with his duty to act in the best interests of Ex NF was enlivened when payment of Ex NF’s funds to purchase Ward Street was contemplated. Had he acted in compliance with his duty, he would have properly informed himself as to Ex NF’s financial position and would not have purchased Ward Street if that was going to jeopardise Ex NF’s solvency.
I am not satisfied that Ms Zaccara would have provided funds to Ex NF if required to pay tax liabilities. In relation to the O’Connell Street transaction, she was prepared to take Ex NF’s funds and expose it to the liability of the ANZ loan without settling the associated loan or ensuring financial records correctly recorded her assertion the loan was paid back. She withdrew $100,000 from the ANZ account in September 2016 for a 24-hour holiday sale, and she did not contribute funds to pay the ATO liabilities to avoid EX NF going into liquidation. Whilst she contributed $54,966.90 in June 2016, there is no record other than its deposit in the NAB account identifying what it relates to. Further, Ms Zaccara’s evidence about paying $228,000 to Ex NF was proven to be incorrect and does not engender confidence in her purported willingness to contribute funds. Ms Zaccara’s evidence about not seeing or being made aware of ATO notices of assessments and her psychological block to tax issues also do not imbue confidence on a “realistic commercial assessment” about her willingness to pay. I consider it inherently unlikely that Ms Zaccara was every going to commit her personal funds to pay, in particular, tax liabilities, noting her self-confessed “fear”, difficulty doing tax, and irrational relationship with tax.
Having considered all the evidence, I am led to the conclusion, as the liquidator reported to creditors in August 2019, that, since 2015, Ex NF was only able to continue its operations through the non-payment of its tax and superannuation obligations.
I am satisfied that by causing or allowing Ex NF’s funds to be used in the Ward Street transaction, Mr Munneke breached his statutory duties as follows:
1.Mr Munneke failed to exercise due care and diligence and breached s 180(1). A reasonable director in his position would have ensured that Ex NF was up to date with its tax filings and payments and that Ex NF maintained up-to-date financial statements. A reasonable director in his position would not have caused or allowed Ex NF’s funds to be used to purchase Ward Street without undertaking any analysis, or alternatively any proper analysis, of Ex NF’s liability in respect of income tax, BAS, and superannuation liabilities;
2.prior to causing or allowing Ex NF’s funds to be used to purchase Ward Street, Mr Munneke failed to undertake any analysis, or alternatively any proper analysis, into the appropriate reserves that would allow Ex NF to pay the amounts owing to the creditors of Ex NF and to allow Ex NF to continue to trade;
3.Mr Munneke caused Ex NF’s cash resources to be depleted and made it highly susceptible to insolvency and/or cessation of Ex NF’s operations;
4.it is plainly evident from my findings that the statutory defence, the business judgment rule prescribed by s 180(2), is not available to Mr Munneke;
5.Mr Munneke did not exercise his powers as a director in good faith and in the best interests of Ex NF or for a proper purpose and was in breach of s 181(1). It was not a proper corporate purpose for Mr Munneke to make a gift of Ex NF’s property to 106 Ward Street Pty Ltd as a trustee of a trust held for his benefit and he further caused Ex NF’s assets to be put out of the reach of the creditors of Ex NF;
6.Mr Munneke made improper use of his position as director to gain an advantage for himself and others and cause detriment to Ex NF in breach of s 182(1);
7.it is also plainly evident that Mr Munneke’s reliance on Ms Zaccara and Rowe Partners was not reasonable within the meaning of s 189 of the Corporations Act.
I am satisfied that by causing or allowing Ex NF’s funds to be used in the Ward Street transaction, Mr Munneke breached his fiduciary duties:
1.by making a gift of Ex NF’s property to 106 Ward Street Pty Ltd as trustee of a trust held for his personal benefit;
2.Ex NF obtained no corporate benefit from the Ward Street acquisition;
3.Ex NF’s assets were depleted by the Ward Street acquisition to the extent of the payments;
4.Mr Munneke’s duty to Ex NF was to ensure Ex NF property was deployed for a company purpose.
Turning to the issue of ratification, there cannot be assent or ratification unless there is full knowledge of the nature of the transaction and its consequences, it has been duly considered, and the course of action proposed is consented to.[102] I agree with the applicants’ submission that no issue of ratification arises in respect of Ward Street given Ms Zaccara was, she says, unaware that Ex NF ever held cryptocurrency. Therefore, it follows that she was never consenting to Ex NF’s cryptocurrency being deployed to purchase Ward Street.
[102] Herrman v Simon (1990) 4 ACSR 81 at 83; Jarrett v Perpetual Trustee Co Ltd (2007) 64 ACSR 552 at [123].
Regardless of Ms Zaccara’s knowledge, the interests of creditors having been enlivened clearly intervened such that the improper expropriation of Ex NF’s property in the acquisition of Ward Street was incapable of ratification by Ms Zaccara.[103] I find that Mr Munneke and Ms Zaccara did not have any idea as to what the ATO liabilities, including general interest charge and penalties, were going to be, as made clear by Ms Zaccara when she said she was shocked and so too was Mr Munneke.
[103] See Macleod v R (2003) 214 CLR 230 at [28]-[30]; Angas Law Services Pty Ltd (in liq) & Anor v Carabelas & Anor (2005) 226 CLR 507 at [24], [66]-[68]; Re New World Alliance; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 at 444D-445B.
Further, I find that the use of Ex NF’s funds to purchase Ward Street for the benefit of 106 Ward Street Pty Ltd as trustee of the 106 Ward Trust was plainly an unreasonable-director related transaction pursuant to s 588FDA of the Corporations Act. I am satisfied that:
1.it was a “transaction” within the broad meaning of s 9 of the Corporations Act;
2.the transaction involved a payment of money by Ex NF in the amount of $1,235,920.08;
3.the payment was made to Mr Munneke or for his benefit;
4.I accept the applicants’ contention that in the circumstances where, at November 2018, Ex NF owed almost $2 million to the ATO, a reasonable person in Ex NF’s position would not have entered into the Ward Street transaction which was of no benefit to Ex NF.
As discussed earlier, I have found that Ex NF is the legal owner of the cryptocurrency and Ex NF’s funds were deployed in the acquisition of Ward Street. I do not accept Mr Munneke’s contention that Ex NF had no interest in the cryptocurrency or its proceeds and, thereby, the Ward Street transaction was relevantly between the vendor and the 106 Ward Trust.
I do not accept Ms Zaccara and 106 Ward Street Pty Ltd’s submission that, in the circumstances, and given that the proceeds of the sale of the cryptocurrency were used and applied for the benefit of the sole shareholder at her direction, a release of Ex NF’s funds to or at her direction, as sole shareholder, was commercially reasonable. I also do not accept that the release of funds, where Ex NF is the owner of the cryptocurrency, was a release of the shareholder’s funds for the sole shareholder and there was no gift or transaction at an undervalue.
The Ward Street transaction is voidable within the meaning of s 588FE(6A) of the Corporations Act.
The relief against liability prescribed by ss 1317S or 1318 of the Corporations Act is not available to Mr Munneke. It only applies where a director, as an officer of a corporation, has acted honestly and having regard to the circumstances of the case ought fairly be excused. The circumstances of this matter are not such that Mr Munneke’s conduct ought fairly be excused from his breaches of the Corporations Act.
Conclusion
In conclusion, I have made the following findings in respect of each of the applicants’ claims.
The O’Connell Street claim
O’Connell Street was purchased on 10 December 2015 by the payment of $1,125,911.59 from Ex NF’s bank accounts and the $740,000 ANZ loan. At the time the O’Connell Street transaction was contemplated, Ex NF’s financial state was such that Mr Munneke should have been concerned for its solvency. There was a “real and not remote risk of insolvency” enlivening the duty of Mr Munneke to consider the interests of Ex NF’s creditors. By effecting the O’Connell Street transaction, Mr Munneke breached his fiduciary duties and statutory duties imposed by ss 180, 181, and 182 of the Corporations Act to Ex NF. The statutory defence prescribed by s 180(2) to a contravention of s 180(1), the business judgment rule, is not available to Mr Munneke. Nor can he avail himself of s 189 as his asserted reliance on Ms Zaccara and Mr Vijayadass was not reasonable. Further, Ms Zaccara could not properly excuse his breaches, and, in any event, the O’Connell Street transaction was an unreasonable director‑related transaction.
The relief against liability prescribed by ss 1317S or 1318 of the Corporations Act is not available to Mr Munneke. It only applies where a director, as an officer of a corporation, has acted honestly and having regard to the circumstances of the case ought fairly be excused. The circumstances of this matter are not such that Mr Munneke’s conduct ought fairly be excused from his breaches of the Corporations Act.
The cryptocurrency and Ward Street claim
Cryptocurrency
The bitcoin Mr Munneke purchased in February and August 2014, and the ethereum acquired using part of that bitcoin in August 2014, was acquired for Ex NF and was and remains the property of Ex NF.
Ward Street
The proceeds of the sale of ethereum belonging to Ex NF was used to purchase of Ward Street on 31 January 2018.
At the time the Ward Street transaction was contemplated, Ex NF’s financial state was such that Mr Munneke should have been concerned for its solvency. There was a “real and not remote risk of insolvency” enlivening the duty of Mr Munneke to consider the interests of Ex NF’s creditors. By causing or allowing proceeds of the sale of ethereum belonging to Ex NF to be used to purchase Ward Street, Mr Munneke breached his fiduciary duties and statutory duties imposed by ss 180, 181 and 182 of the Corporations Act to Ex NF. The statutory defence prescribed by s 180(2) to a contravention of s 180(1), the business judgment rule, is not available to Mr Munneke. Nor can he avail himself of s 189 as his asserted reliance on Ms Zaccara and Rowe Partners was not reasonable. Further, Ms Zaccara could not properly excuse the breaches, and, in any event, the Ward Street transaction was an unreasonable director‑related transaction.
The relief against liability prescribed by ss 1317S or 1318 of the Corporations Act is not available to Mr Munneke. It only applies where a director, as an officer of a corporation, has acted honestly and having regard to the circumstances of the case ought fairly be excused. The circumstances of this matter are not such that Mr Munneke’s conduct ought fairly be excused from his breaches of the Corporations Act.
Crossclaim
I dismiss the crossclaim filed by Ms Zaccara and 106 Ward Street Pty Ltd.
Declarations and orders
I will hear from the parties regarding the declarations I must make pursuant to s 1317E of the Corporations Act, the form of orders, and costs for final relief.
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