Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd (in liq); Yazbek v Gleeson as Liquidator of Atlas Construction Group Pty Ltd (in liq); Fitz Jersey Pty Ltd v Gleeson as Liquidator of Atlas Construction Group..

[2021] NSWSC 1692

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd (in liq); Yazbek v Gleeson as Liquidator of Atlas Construction Group Pty Ltd (in liq); Fitz Jersey Pty Ltd v Gleeson as Liquidator of Atlas Construction Group Pty Ltd (in liq) [2021] NSWSC 1692

Hearing dates:

30 August – 1 October 2021; further written submissions 6, 15 and 29 October 2021, 9 and 11 November 2021

Decision date:

22 December 2021

Jurisdiction:

Equity - Technology and Construction List

Before:

Stevenson J

Decision:

The Plaintiff succeeds; see [37] to [45]

Catchwords:

BUILDING AND CONSTRUCTION – building contract – adjudication – first defendant builder now in liquidation – payment claim by first defendant under Building and Construction Industry Security of Payment Act 1999 (NSW) – adjudication determination in favour of defendant – judgment entered – garnishee order served on plaintiff’s bank – adjudicated amount paid to first defendant – whether first defendant had already been paid amounts claimed in payment claim – whether claims in payment claim were payable by plaintiff to the first defendant under the building contract

CONTRACT – oral agreement made at February 2013 Meeting – subject matter of the 2013 Agreement – whether October Letter accurately set out contents of 2013 Agreement

CORPORATIONS – directors and officers – resolution by directors of the first defendant to pay a dividend immediately after first defendant received adjudicated amount following adjudication under Building and Construction Industry Security of Payment Act – first defendant now in liquidation – where liquidator has assigned certain of first defendant’s rights to the plaintiff – whether by paying the Dividends the first defendant contravened s 254T of the Corporations Act 2001 (Cth) – whether directors procured that contravention – whether first defendant’s assets exceeded its liabilities at the time of paying the Dividends – whether payment of Dividends materially prejudiced first defendant’s ability to pay its creditors – whether plaintiff was then a creditor of the first defendant

CORPORATIONS – whether payment of the Dividends was an alienation of property with intent to defraud creditors for the purposes of s 37A of the Conveyancing Act 1919 (NSW)

CORPORATIONS – whether directors acted in breach of their duties to the first defendant – whether plaintiff has suffered a loss by reason of the payment of the Dividends – whether directors liable to compensate plaintiff for any such loss

CORPORATIONS – whether the payment of the Dividends was an undue preference for the purposes of s 588FA of the Corporations Act, an uncommercial transaction for the purposes of s 588FB of the Corporations Act, an insolvent transaction for the purposes of s 588FC of the Corporations Act, an uncommercial director-related transaction for the purposes of s 588FDA of the Corporations Act and a voidable transaction for the purposes of s 588FE of the Corporations Act

CORPORATIONS – whether writing off of shareholder loans was an unreasonable director-related transaction for the purposes of s 588FDA of the Corporations Act

CORPORATIONS – whether orders should be made under s 588FF of the Corporations Act

EQUITY – tracing – whether plaintiff able to trace proceeds of Dividends into the hands of non-director defendants

Legislation Cited:

Building and Construction Industry Security of Payment Act 1999 (NSW)

Clean Energy Act 2011 (Cth)

Conveyancing Act 1919 (NSW)

Corporations Act 2001 (Cth)

Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth)

Evidence Act 1995 (NSW)

Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

Arnold v Britton [2015] AC 1619

Atlas Construction Group Pty Ltd v Fitz Jersey Pty Ltd [2017] NSWSC 72

Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052; 59 ACSR 373

Australian Securities and Investments Commission v Plymin (No 1) (2003) 46 ACSR 126; [2003] VSC 123

Beach Petroleum NL v Johnson (1993) 43 FCR 1; [1993] FCA 392

Bernard Elsey Pty Ltd v Federal Commissioner of Taxation (1969) 121 CLR 119; [1969] HCA 46

BM Sydney Building Materials Pty Ltd v AWT Building Group (Aust) Pty Ltd [2019] NSWSC 421

Box Valley Pty Ltd v Kidd [2006] NSWCA 26

Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24; (1994) 13 ACSR 504

Breen v Williams (1996) 186 CLR 71; [1996] HCA 57

Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34

Cannane v J Cannane Pty Ltd (in liq) (1998) 192 CLR 557; [1998] HCA 26

Chan v First Strategic Development Corporation Ltd (in liq) [2015] QCA 28

Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101

Connective Services Pty Ltd v Slea Pty Ltd (2019) 267 CLR 461; [2019] HCA 33

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

Cuthbertson & Richards Sawmills Pty Ltd v Thomas [1998] SCACT 58; 28 ACSR 310

Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260

DSHE Holdings (Receivers and Managers Appointed) (in liq) v Abboud (No 3); National Australia Bank Ltd v Abboud (No 4) [2021] NSWSC 673

Dungowan Manly Pty Ltd v McLaughlin [2012] NSWCA 180; 90 ACSR 62

ET-China.com International Holdings Ltd v Cheung [2019] NSWSC 1874; 142 ACSR 121

ET-China.com International Holdings Ltd v Cheung [2021] NSWCA 24; 150 ACSR 461

Exception Holdings Pty Ltd v Albarran (No 2) [2005] NSWSC 981

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22

Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd (2017) 94 NSWLR 606; [2017] NSWCA 53

Fitzgerald v Masters (1956) 95 CLR 420; [1956] HCA 53

Fox v Percy (2003) 214 CLR 118; [2003] HCA 22

Gautam v Health Care Complaints Commission [2021] NSWCA 85

Goodrich Aerospace Pty Ltd v Arsic (2006) 66 NSWLR 186; [2006] NSWCA 187

Grove v Flavel (1986) 43 SASR 410; 11 ACLR 161

Heesh v Baker [2008] NSWSC 711; 67 ACSR 192

Helton v Allen (1940) 63 CLR 691; [1940] HCA 20

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64

In the matter of Centro Properties Ltd and CPT Manager Ltd in its capacity as responsible entity of Centro Property Trust [2011] NSWSC 1171; 87 ACSR 131

In the matter of CSR Ltd (2010) 183 FCR 358; [2010] FCAFC 34

In the matter of Molopo Energy Ltd; Molopo Energy Ltd v Keybridge Capital Ltd [2014] NSWSC 1864; 104 ACSR 46

In the matter of Rossfield Group Operations Pty Ltd & Morton Holdings Pty Ltd [1981] Qd R 372; (1980) 5 ACLR 237

Ishac v David Securities Pty Ltd (No 6) (1992) 7 ACSR 199

Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; 63 ACSR 557

Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; 10 ACLR 395

Knauf Plasterboard Pty Ltd v Plasterboard West Pty Ltd (In Liq) (Receivers and Managers Appointed) (2017) 254 FCR 559; [2017] FCA 866

Lahey Constructions Pty Ltd v State of New South Wales [2021] NSWCA 69

Links Golf Tasmania Pty Ltd v Sattler (2012) 213 FCR 1; [2012] FCA 634

Linter Group Ltd (in liq) v Goldberg (1992) 7 ACSR 580

Lloyds Bank Ltd v Marcan [1973] 1 WLR 1387; 3 All ER 754

Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633; [2014] NSWCA 184

Marcolongo v Chen (2011) 242 CLR 546; [2011] HCA 3

Melbase Corporation Pty Ltd v Segenhoe Pty Ltd [1995] FCA 279; 13 ACLC 823

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37

Murphy Corporation Ltd v Acumen Design & Development (QLD) Pty Ltd [1995] 11 BCL 274

National Australia Bank Ltd v Clowes [2013] NSWCA 179

New Cap Reinsurance Corporation Ltd (in liq) v A E Grant [2008] NSWSC 1015

Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221; [1987] HCA 5

Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187; 14 ACSR 109

Pink Floyd Music Ltd v EMI Records Ltd [2010] EWCA Civ 1429; [2011] 1 WLR 770

Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd (2017) 95 NSWLR 82; [2017] NSWCA 151

Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 264 CLR 1; [2018] HCA 4

Puglia v Basol [2005] NSWSC 1271

Re Diplock’s Estate [1948] Ch 465

Regal Castings Ltd v Lightbody [2009] 2 NZLR 433

Regentcrest plc (in liq) v Cohen [2000] All ER (D) 747; [2001] 2 BCLC 80

Rejfek v McElroy (1965) 112 CLR 517; [1965] HCA 46

Sandell v Porter (1966) 115 CLR 666; [1966] HCA 28

Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) (2019) 99 NSWLR 317; [2019] NSWCA 11

Silvera v Savic (1999) 46 NSWLR 124; [1999] NSWSC 83

Smith v Starke, in the matter of Action Paintball Games Pty Ltd (in liq) (No 2) [2015] FCA 1119; 109 ACSR 145

Société d'Avances Commerciales (Société Anonyme Egyptienne) v Merchants' Marine Insurance Co (The “Palitana”) [1924] 20 Ll L Rep 140

Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd (2016) 260 CLR 340; [2016] HCA 52

Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72; 120 ACSR 130

Walker v Wimborne (1976) 137 CLR 1; [1976] HCA 7

Watson v Foxman (1995) 49 NSWLR 315

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

Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; [2012] WASCA 157

White in his capacity as joint and several liquidator of Port Village Accommodation Pty Ltd (in liq) v ACN 153 152 731 Pty Ltd (in liq) (2018) 53 WAR 234; [2018] WASCA 119

Yore Contractors Pty Ltd v Holcon Pty Ltd (1990) 2 ACSR 663

ZBB (Australia) Ltd v Allen (1991) 4 ACSR 495

Texts Cited:

T F Bathurst and S Merope, “It tolls for thee: Accessorial liability after Bell v Westpac” (2013) 87 ALJ 831

J D Heydon, Heydon on Contract (2019, Thomson Reuters)

J D Heydon, M J Leeming, P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies (5th ed, 2015, LexisNexis Butterworths)

K Mason, J W Carter, G J Tolhurst, Mason & Carter’s Restitution Law in Australia (3rd ed, 2016, LexisNexis Butterworths)

P Herzfeld and T Prince, Interpretation (2nd ed, 2020, Thomson Reuters)

R P Austin and I M Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (17th ed, 2018, LexisNexis Butterworths)

R P Austin, H A J Ford AM and I M Ramsay, Company Directors: Principles of Law and Corporate Governance (2005, LexisNexis Butterworths)

Category:

Principal judgment

Parties:

In proceedings 2017/11963:
Fitz Jersey Pty Ltd (Plaintiff)
Atlas Construction Group Pty Ltd (in liq) (First Defendant)
Robert Yazbek (Second Defendant)
Kebzay Pty Ltd (Third Defendant)
Botany Road Project Pty Ltd (Fourth Defendant)
Scott Sweeney (Fifth Defendant)
Sweenham Pty Ltd (Sixth Defendant)
Annette Yazbek (Seventh Defendant)
Kebzay Custodian No. 2 Pty Ltd (Eighth Defendant)
Castlefield Corner Pty Ltd (Ninth Defendant)
620 Botany Road Pty Ltd (Tenth Defendant)
In proceedings 2019/305131:
Robert Yazbek (First Plaintiff)
Scott Sweeney (Second Plaintiff)
Kebzay Pty Ltd (Third Plaintiff)
Sweenham Pty Ltd (Fourth Plaintiff)
Bruce Gleeson t/as Liquidator of Atlas Construction Group Pty Ltd (in liq) (First Defendant)
Fitz Jersey Pty Ltd (Second Defendant)
In proceedings 2020/87065:
Fitz Jersey Pty Ltd C/- Economos Group Pty Ltd (Plaintiff)
Bruce Gleeson t/as Liquidator of Atlas Construction Group Pty Ltd (in liq) (First Defendant)
Robert Yazbek (Second Defendant)
Scott Sweeney (Third Defendant)

Representation:

Counsel:
M Christie SC with L Shipway, B Mostafa and M Sherman (Plaintiff)
G A Sirtes SC with A R R Vincent and J Adamopoulos (Second to Tenth Defendants)
Solicitors:
Eakin McCaffery Cox (Plaintiff)
Matthews Folbigg (First Defendant)
Madison Marcus (Second to Tenth Defendants)

File Number(s):

2017/11963; 2019/305131 and 2020/87065

table of contents

The hearing

Decision

The course of events

Prior to signing the Building Contract

Discussions concerning management of units in the proposed development

The 2010 “Development Agreement”

First development application

The Building Contract

Second development application

The water table issue

2012 - the “Finishes and appliances upgrades” - the “Upgrades Agreement”

The events of 2013

The 2013 Agreement

The progress claim for the $10 million

Commencement of work on Separable Portion 2

The lack of reference to an entitlement to the Payment Claim Items

The December 2013 GST Model

The events of 2014

February 2014 correspondence with Atlas’s insurance broker

February 2014 profit forecast and summary of claims left against Fitz Jersey

May 2014 cash flow and identification of amounts left to be paid by Fitz Jersey

July 2014 cash flow

September to December 2014 - final invoices

The Exclusive Management Agency Agreement

The events of 2015

Mr Yazbek ceases to be a director of Atlas

Interim occupation certificate

Discontinuance of Jobpac

The events of 2016

The “Asper” development - Mr Yazbek’s “crisis”

Mr Sweeney’s meeting with Mr Wong

Relations restored between Mr Yazbek and Mr Sweeney

Relations between Mr Wong and Mr Yazbek break down

Fitz Jersey gives notice terminating the Exclusive Management Agency Agreement

The October Letter

The assertions in the October Letter concerning the events of February 2013

The significance of the October Letter

Mr Wong’s reply of 13 October 2016

The retainer of Mr Mort

Jobpac

The Payment Claim

Ms Holland’s email of 24 November 2016

The Payment Schedule

Mr Mort’s 1 December 2016 enquiry

The statutory declarations

Mr Sweeney’s communications with quantity surveyors

The Adjudication Application

Mr Wong’s statutory declaration

The Adjudication Response

Further advice from Mr Mort

The events of 2017

The Adjudication Determination

Commencement of the 2017 Proceedings

Issue of the Adjudication Certificate and entry of judgment

The Garnishee Order

Preparation to declare the Dividends

Mr White’s recollection

Friday 3 February 2017

The weekend of 4 and 5 February 2017

Monday 6 February 2017

The Dividends resolution

The “Holland Letter”

Tuesday 7 February 2017

The Payment of the Dividends

The Shareholders’ Loans

Events thereafter

The Liquidator’s examinations

Credit

Demeanour

The October Letter

Mr Yazbek’s evidence about the October Letter

Mr Sweeney’s evidence about the October Letter

Mr Vartuli’s evidence about the October Letter

Mr Stevens’ evidence about the October Letter

The explanations

Mr Wong has never asserted that the 2013 Agreement was as described in the October Letter

Since 11 October 2016 the accounts given by Mr Yazbek, Mr Sweeney and Mr Vartuli of the 2013 Agreement are inconsistent with the assertions in the October Letter

The responses to Mr Mort’s 1 December 2016 email

The “infamous” letter

The Payment Claim

The Adjudication Application and supporting statutory declarations

It is improbable that all the matters asserted in the October Letter concerning the Payment Claim Items were agreed or estimated in February 2013

CPI Uplift

Carbon Tax Costs

Upgrades

Early Completion Bonus

Conclusion concerning the October Letter

The 2013 Agreement

Fitz Jersey’s case

Mr Wong’s evidence about the 2013 Agreement

The accounts given by Mr Yazbek, Mr Sweeney and Mr Vartuli

Post contractual conduct

Claims for the Payment Claim Items could have been made earlier

A lack of reference in Atlas’s books to a potential claim for the Payment Claim Items

Conclusion as to the 2013 Agreement

The Building Contract issues

The 2013 Agreement

What was the date of commencement of the WUC? Did WUC include design work?

The defined terms

Clause 14.1(a)

Clause 14.3(f) the chapeau to cl 14.1

Clause 16A

Clauses 16B and 18

Clause 17

Conclusion

Was there a “Development Agreement”?

Did Separable Portion 1 and Separable Portion 2 start on the same date?

When did construction of Separable Portion 1 commence?

When did construction of Separable Portion 2 commence?

No Superintendent

Can Atlas claim on a quantum meruit basis?

Early completion bonus – entitlement – proper construction of the Building Contract

Item 7

Items 29 and 30

Conclusion on construction

Extensions of time

Extensions of time for inclement weather

Change in design of basement

Public domain works

Liquidated damages

CPI

Carbon Tax

Upgrades

Reimbursable costs

The limitation issue

The Emichrome issue

“Reimbursements” - $7,429,883.24

Council fees and charges - $10,215,839.86

Authority fees and charges - $309,412.45

Other costs - $303,461.18

Reduction in the number of units

The basement variation

Conclusions concerning the Building Contract issues

The Dividends claim

Atlas had ceased trading

The funds retained

Declared as a matter of urgency

No pressing need so far as shareholders were concerned

What was the Directors’ motivation?

The Directors’ understanding of the provisional nature of a payment under the SOPA

The advice from Mr Mort

The advice from Mr White

Section 254T of the Corporations Act

Section 254T(1)(a) – assets to exceed liabilities sufficient for the payment of the dividend

AASB 111

The consequence of the application of AASB 111

AASB 137

Section 254T(1)(a) – the payment of dividends must not materially prejudice the company’s ability to pay its creditors

Was Fitz Jersey a creditor of Atlas when the Dividends were paid?

Did the payment of the Dividends materially prejudice Atlas’s ability to pay its creditors?

The need for affirmative satisfaction

The present case

What should the Directors have done? The counterfactual

Would a declaration of dividends have been made later in any event?

Claim under s 37A of the Conveyancing Act

That there was an alienation of property

That the alienation of property was with intent to defraud creditors

That a person be thereby prejudiced

Breach of director’s duties

Duty to exercise their powers bona fide in the interests of Atlas as a whole

Duty not to permit their interests to conflict with those of Atlas

Duty not to exercise the power for an improper purpose

Are these duties fiduciary duties?

Voidable transactions under the Corporations Act

Reasonable reliance on advice

Claim under s 588FA – unfair preference

Claim under s 588FB of the Corporations Act – uncommercial transaction

Claim under s 588FDA of the Corporations Act – unreasonable director-related transaction

Claim under s 588FC of the Corporations Act – insolvent transaction

Voidable transactions – s 588FE of the Corporations Act

Article 85 of Atlas’s Constitution

Breaches of duty

The flow of funds

Relief – equitable tracing

No breach of fiduciary duty

The Dividends were “not impressed with any equitable interest”

Part of the Dividends paid to Kebzay was used by 620 Botany Road Pty Ltd to repay a loan owed to Kebzay No 3 Pty Ltd and therefore could be traced no further

Part of the Dividend paid to Sweenham was paid to Castlefield Corner Pty Ltd

Section 588FF of the Corporations Act

Relief – statutory tracing – s 588FF of the Corporations Act

Relief – damages and equitable compensation

The Shareholders’ Loans

Conclusion

Judgment

1. On 17 December 2010, the plaintiff, Fitz Jersey Pty Ltd, entered into a contract (the “Building Contract”) with the first defendant, Atlas Construction Group Pty Ltd, to construct a large mixed residential and commercial development on a property in Mascot owned by Fitz Jersey. The development was to be known as “Mascot Square” (the “Mascot Square Project”).

2. The Building Contract provided for:

1. a contract sum of $180 million; ^[1]

   1. Increased in 2013 to $190 million in the circumstances I discuss below.

2. reimbursement of the costs incurred by Atlas in respect of “design obligations”; and

3. reimbursement of a number of other items including “consultants or any design fees”, “authority fees”, “DA fees and other council charges” (the “Reimbursables”).

3. Atlas commenced work on the development in 2010. Construction was completed by January 2016. Fitz Jersey makes no complaint about the quality of the work done by Atlas. This is not a defects case.

4. Ultimately, the development comprised 500 residential apartments together with some commercial space. The Building Contract provided for work to proceed in respect of two “separable portions” each comprising a number of towers. The parties referred to these as “Separable Portion 1” and “Separable Portion 2”. In some documents the parties referred to these as “Stage 1” and “Stage 2”.

5. Fitz Jersey is a property development company controlled by Mr Kie Chie Wong and his wife Ms Ann Pin Lim. The parties referred to Ms Lim as “Mrs Wong”. I shall do the same.

6. Atlas was a building company owned and controlled by interests associated with its directors, Mr Robert Yazbek and Mr Scott Sweeney. It is now in liquidation.

3. Mr Wong and Mr Yazbek shared an extensive business relationship extending back to 1985. Prior to the Mascot Square Project, Mr Wong and Mr Yazbek had worked on a number of building projects, including the construction of Mr and Mrs Wong’s residence in Maroubra and the construction of Mr and Mrs Wong’s son’s residence in Paddington. Mr Wong and Mr Yazbek had developed a relationship of mutual respect and trust.

4. However, in 2016, Mr Wong and Mr Yazbek fell out.

5. That led, in November 2016, to Atlas serving on Fitz Jersey a payment claim (the “Payment Claim”) under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the “SOPA”) for some $10.75 million.

6. The bulk of the amount claimed in the Payment Claim was for a “CPI increase” for the amount payable in respect of Separable Portion 2 (the “CPI Uplift”), an “Early Completion Bonus”, “Carbon Tax Costs” and a claim for “Finishes and appliances upgrade” (the “Upgrades”). I will refer to these, together, as the "Payment Claim Items”.

7. On 6 January 2017, an Adjudicator made a determination under the SOPA in favour of Atlas in the sum claimed (the “Adjudication Determination”). Atlas registered the Adjudication Determination as a judgment in this Court and procured the issue of a garnishee order (the “Garnishee Order”). Atlas caused the Garnishee Order to be served on Fitz Jersey’s bank with the result that, on 3 February 2017, Atlas received the sum of some $11 million representing the amount of the Adjudication Determination together with interest and costs.

8. On 6 February 2017, Mr Yazbek and Mr Sweeney, as directors of Atlas, resolved to pay some $4 million of that $11 million to the Australian Taxation Office (ATO) and then resolved to declare dividends (the “Dividends”) which caused all but $400,000 of the balance of the proceeds of the Adjudication Determination to be paid to the shareholders of Atlas. Those shareholders were companies associated with Mr Yazbek and Mr Sweeney; Kebzay Pty Ltd and Sweenham Pty Ltd respectively. Kebzay held 90% and Sweenham 10% of the issued share capital in Atlas.

9. Fitz Jersey contends that Atlas thereby acted in breach of s 254T of the Corporations Act 2001 (Cth) and in breach of Atlas’s Constitution. Fitz Jersey also contends the Dividends constituted an alienation of property with intent to defraud creditors for the purpose of s 37A of the Conveyancing Act 1919 (NSW).

10. Fitz Jersey contends that, in resolving to declare the Dividends, Mr Yazbek and Mr Sweeney acted in breach of their duties as directors. Fitz Jersey also contends that the declaration and payment of the Dividends was a voidable transaction for the purposes of s 588FE of the Corporations Act by reason of being an unfair preference, uncommercial transaction, insolvent transaction and unreasonable director related transaction for the purposes of ss 588FA, 588FB, 588FC and 588 FDAC respectively of the Corporations Act.

11. The Dividends were paid on 8 February 2017.

12. On 6 February 2017, Mr Yazbek and Mr Sweeney also caused loans by Atlas to Kebzay and Sweenham (the “Shareholders’ Loans”) to be written off.

13. On 4 April 2018, Mr Yazbek and Mr Sweeney resolved to appoint administrators to Atlas. On 18 May 2018, the creditors of Atlas resolved to place the company into liquidation.

14. In June, July and November 2019 the Liquidator of Atlas conducted examinations (the “Liquidator’s Examination”) under s 596A of the Corporations Act of Mr Yazbek, Mr Sweeney and other persons to whom I will return.

15. On 16 September 2019, the Liquidator admitted Fitz Jersey as a creditor of Atlas in the sum of some $10.7 million. On 5 March 2020, that amount was increased to $12.8 million.

16. In December 2019, the Liquidator caused Atlas to assign to Fitz Jersey a number of causes of action against Mr Yazbek and Mr Sweeney (the “Assignments”). The Court approved the Assignments on 16 December 2019 pursuant to Corporations Act, Sch 2 - Insolvency Practice Schedule (Corporations), s 90-15(1) and ss 477(2B) and 477(2)(c) of the Corporations Act.

17. Fitz Jersey seeks to prosecute those causes of action in one of the three proceedings before the Court (the “2017 Proceedings”).

18. The effect of the Assignments is that some part of the fruits of any success Fitz Jersey has in these proceedings will be paid to Fitz Jersey, and some to the Liquidator. I will invite submissions on this question, as appropriate, once these reasons are published.

19. The defendants to the 2017 Proceedings include Mr Yazbek, Kebzay, Mr Sweeney and Sweenham. Also joined as defendants are Mr Yazbek’s wife, Mrs Annette Yazbek, and corporate entities associated with Mr Yazbek and Mr Sweeney. Fitz Jersey seeks to trace the funds represented by the Dividends into the hands of those parties.

20. It is in these proceedings that Fitz Jersey also alleges Mr Yazbek and Mr Sweeney acted in breach of their duties as directors by causing the Shareholders’ Loans to be written off.

21. Two other proceedings were heard concurrently to the 2017 Proceedings, with evidence in each being evidence in the other. The parties referred to the other two proceedings as the “2019 Proceedings” and the “2020 Proceedings”. Those proceedings involve appeals by Mr Yazbek and Mr Sweeney and by Fitz Jersey against the Liquidator’s admission of Fitz Jersey as a creditor of Atlas. Mr Yazbek and Mr Sweeney contend that Fitz Jersey should not be admitted as a creditor of Atlas at all. Fitz Jersey contends that the amount to which it should be admitted should be increased significantly.

22. In the 2019 and 2020 Proceedings, Fitz Jersey makes a number of claims concerning Atlas’s entitlements under the Building Contract (the “Building Contract Claims”). The Building Contract Claims include that Atlas was not entitled to the amounts claimed in the Payment Claim, that Fitz Jersey is entitled to liquidated delay damages (“Liquidated Damages”) against Atlas and to restitution of various costs and charges that it paid Atlas during the course of construction. These matters are relevant to the amount for which Fitz Jersey can prove in Atlas’s liquidation and to whether Atlas and Fitz Jersey have suffered damage by reason of the Dividends.

23. To a large extent, resolution of the issues in the 2017 Proceedings will resolve these issues.

24. Most of the hearing time before me was devoted to Fitz Jersey’s “Dividends Claim”.

25. At the heart of the Dividends Claim is the very serious proposition that by reason of an agreement (the “2013 Agreement”) reached between Mr Wong, Mr Yazbek, and Mr Sweeney at a meeting in February 2013 (the “February 2013 Meeting”), Atlas had already been paid for the Payment Claim Items and thus that Mr Yazbek and Mr Sweeney “did not hold a genuine belief that Atlas was entitled” to make those claims in the Payment Claim.

26. Fitz Jersey’s case is that, accordingly, Mr Yazbek and Mr Sweeney must have known, when they resolved to declare the Dividends, that by reason of s 32 of the SOPA, Fitz Jersey would ultimately be entitled to recover from Atlas the amount of the Adjudication Determination, that Fitz Jersey was thus a “creditor” of Atlas for the purposes of s 254T of the Corporations Act and that Atlas for that reason was not entitled to pay the Dividends. There is more to Fitz Jersey’s Dividends Claim than this, but this suffices for the moment and for the purpose of explaining how the Dividends Claim relates to the Building Contract Claims.

27. To resolve Fitz Jersey’s Dividends Claim, it is necessary to determine, amongst other things, whether Atlas was entitled to make the claims in the Payment Claim for the Payment Claim Items.

28. Resolution of that matter depends on, amongst other things, the ambit of the 2013 Agreement. Determination of the ambit of the 2013 Agreement depends, in turn, amongst other things, on what to make of a letter that Mr Yazbek, Mr Sweeney and a Mr David Stevens ^[2] sent to Mr and Mrs Wong on 11 October 2016 (the “October Letter”). That is because, in the October Letter, Mr Yazbek and Mr Sweeney ^[3] gave an account of the 2013 Agreement that they have since eschewed, including in their evidence before me.

    2. To whom I will return.

    3. And also Mr Stevens, but as he was not present at the February 2013 Meeting, this is of less significance.

29. Resolution of Fitz Jersey’s Dividends Claim also requires resolution of Fitz Jersey’s and Atlas’s entitlements under the Building Contract which, in turn, depends on the ambit of the 2013 Agreement.

The hearing

34. The hearing occupied 21 hearing days including 5 days devoted to submissions. Because of the COVID-19 pandemic, the proceedings were conducted virtually.

35. The proceedings were efficiently conducted by the legal teams for Fitz Jersey and Atlas. I had the benefit of comprehensive written and oral submissions at the conclusion of the hearing.

36. The legal representatives of the parties are to be congratulated on the manner in which they cooperated to ensure that a lengthy and complicated case was able to be effectively presented in the virtual courtroom.

Decision

37. The October Letter did not set out the terms of the 2013 Agreement. ^[4]

    4. See [490] to [600] below.

38. The 2013 Agreement did not deal with the Payment Claim Items. ^[5]

    5. See [601] to [665] below.

39. Under the Building Contract, Atlas was not entitled to all of the sum represented by the Adjudication Determination. ^[6]

    6. See [667] to [894] below.

40. The payment by Atlas of the Dividends contravened s 254T of the Corporations Act ^[7] and was an alienation of property intended to defraud Atlas’s creditors for the purposes of s 37A of the Conveyancing Act. ^[8]

    7. See [971] to [1081] below.

    8. See [1082] to [1097] below.

41. The declaration and payment of the Dividends was:

1. an unfair preference for the purposes of s 588FA of the Corporations Act; ^[9]

   9. See [1129] to [1134] below.

2. an uncommercial transaction for the purposes of s 588FB of the Corporations Act; ^[10]

   10. See [1135] to [1144] below.

3. an unreasonable director-related transaction for the purposes of s 588FDA of the Corporations Act; ^[11]

   11. See [1145] to [1153] below.

4. an insolvent transaction for the purposes of s 588FC of the Corporations Act; ^[12] and

   12. See [1154] to [1175] below.

5. a voidable transaction for the purposes of s 588FE of the Corporations Act. ^[13]

   13. See [1176] to [1177] below.

42. By resolving to declare the Dividends, Mr Yazbek and Mr Sweeney acted in breach of their duties as directors. ^[14]

    14. See [1183] to [1189] below

43. By causing the Shareholders’ Loans to be written off Mr Yazbek and Mr Sweeney caused Atlas to engage in an uncommercial transaction for the purposes of s 588FDA of the Corporations Act which was also voidable by reason of s 588FE of the Corporations Act. ^[15]

    15. See [1177] to [1254] below.

44. The proceeds of the Dividends may be traced as I set out below. ^[16]

    16. See [1199] to [1238] below.

45. As the assignee of the Liquidator, Fitz Jersey is entitled to orders under s 588FF of the Corporations Act having the effect that the persons who received the benefits of the voidable transactions pay Atlas an amount representing that benefit. ^[17]

    17. See [1221] to [1238] below.

The course of events

46. For the purposes of determining the ambit of the 2013 Agreement and the parties’ entitlements under the Building Contract, it is necessary to consider, in some detail, the events that led to the declaration and payment of the Dividends on 6 and 8 February 2017, as well as events thereafter.

47. In the course of recounting these matters, I will refer to the parties’ submissions on various questions as they arise. Atlas is in liquidation and played no role in these proceedings although, as I have described, a number of its causes of action have been assigned to Fitz Jersey. Thus, Atlas itself did not make any submissions in the proceedings. Although there are nine active defendants to Fitz Jersey’s claims, their defence was in substance advanced by Mr Yazbek and Mr Sweeney, the two former directors of Atlas and the defendants most closely involved the progress of the Mascot Square Project and the decision to declare the impugned Dividends. Accordingly, unless the context requires otherwise, when referring to the submissions advanced on behalf of the defendants, I will refer to the “Directors”.

Prior to signing the Building Contract

48. As I have mentioned, Mr Wong and Mr Yazbek had a business relationship which dated back to the 1980s.

49. In 2009, Mr Wong approached Mr Yazbek about the possibility of doing “another property development”. Mr Yazbek said he would see if could locate a suitable property. Thereafter, he introduced Mr Wong to the Mascot site.

50. Fitz Jersey exchanged contracts to purchase the Mascot site in February 2010. The contracts for purchase were completed in April and August 2010.

Discussions concerning management of units in the proposed development

51. In 2010, Mr Wong intended to retain all of the apartments in the development and lease them out, once they were completed. ^[18]

    18. As I set out below, by July 2011, Mr Wong had decided to sell the apartments in Separable Portion 1 and retain only those in Separable Portion 2.

52. In that context, Mr Yazbek said that in around March 2010, shortly after Fitz Jersey had exchanged contracts to purchase the Mascot site, he had this conversation with Mr Wong:

“[Mr Wong]:   How are we going to do this development?   

[Mr Yazbek]:   Would you like me to be part of the development as a developer?

[Mr Wong]:   Not this one, but the next ones because I want to keep all the apartments for this project and lease them out. I would like you to build it for me. Can you handle 300 units?

[Mr Yazbek]:   Of course, I can.

[Mr Wong]:   When I keep the 300 units, can you manage them for me?

[Mr Yazbek]:   Yes, I can, I will have to form a real estate arm of Atlas to do this and I will get my daughter involved. I will also charge project management fees for managing all this if I don’t become the builder. I usually charge 5-10% of total development cost. However, if you give me the property management and I do the construction, I won’t charge you development or project management fees or our margin for [Mr and Mrs Wong’s son’s] house. Also, it would be good that we do the managements because as the builders, we will know the whole building intricately and can manage all defects without any cost to you.

[Mr Wong]:   Ok … please build it and you can be the property managers.”

53. Mr Yazbek said he believed that, as a result of this discussion, he and Mr Wong had an understanding that Mr Yazbek, or a related entity, would manage the properties after construction and that he in turn would forgo causing Fitz Jersey to be charged a project management fee.

54. Mr Wong denied that in 2010 he asked Mr Yazbek to manage the units. Mr Wong said he did not discuss with Mr Yazbek who was going to manage the rental of any units until 2014.

55. Mr Yazbek deposed that he discussed this further with Mr Wong at the February 2013 Meeting, to which I refer below.

56. By October 2016, it was Mr Yazbek’s perception that Mr Wong had, in effect, reneged on this understanding. This appears to have contributed to their falling out in October 2016. I return to these matters below.

The 2010 “Development Agreement”

57. During the same conversation, Mr Yazbek deposed that Mr Wong said:

“Please take care of the development application on behalf of Fitz Jersey. If there are consultants that need to be paid in relation to the development application, Fitz Jersey will either pay those costs directly or reimburse Atlas”.

58. Mr Wong did not, in terms, dispute this conversation.

59. It is corroborated by Mr Sweeney’s affidavit evidence that, a short time after Fitz Jersey exchanged contracts to purchase the Mascot site, Mr Yazbek said to him:

“Now that Atlas has secured the site for KC ^[19] , we can commence work on a development application in relation to the Mascot site. I have spoken to KC and we have agreed that Fitz Jersey will reimburse Atlas in respect of all third-party costs that Atlas incurs in order to prepare and obtain a DA. In exchange, KC has agreed to appoint Atlas as the builder if the DA is successful.”

19. The parties were accustomed to referring to, and addressing, Mr Wong as “KC”.

60. I find that there was an agreement to the effect to which Mr Yazbek deposed. I will refer to this agreement as the “Development Agreement”.

61. I will return to this when considering the Building Contract issues and Fitz Jersey’s claim for reimbursement of amounts it paid Atlas prior to the date of the Building Contract.

First development application

62. During 2010, Atlas performed work relevant to the development application that it lodged with The City of Botany Bay (the “Council”) on 12 July 2010 for the project. The Directors contend that Atlas performed this work pursuant to the Development Agreement.

63. Between 4 May 2010 and 26 July 2010, Atlas sent Fitz Jersey four invoices for an amount a little under $2 million (including GST) for work described as “costs as per project cash flow”. Fitz Jersey paid these amounts, and now claims reimbursement of some of them. I return to this below.

64. The Council received a significant number of objections to the proposal. Atlas participated in meetings with the Council in late 2010 with a view to addressing those objections.

65. Development approval to the second development application was given by the Council on 3 August 2011.

The Building Contract

66. As I have said, the Building Contract was executed on 17 December 2010.

67. It is common ground that the Building Contract contained a number of terms that called for a degree of formality that the parties did not observe. For example, cl 34.2 stated that any “party becoming aware of anything which will probably cause delay to WUC ^[20] shall promptly give the Superintendent and the other party written notice of that cause and the estimated delay”. It is common ground that Fitz Jersey did not appoint a Superintendent and that clauses such as these, and other clauses requiring formalities, were not used by the parties. Mr Wong’s and Mr Yazbek’s relationship was conducted with less formality than these clauses required.

    20. Work Under Contract.

Second development application

68. A second, amended, development application was lodged with the Council on 19 April 2011.

69. The amendments involved reducing the height of the towers to be constructed and the construction of a single car park structure referrable to both Separable Portion 1 and Separable Portion 2. This had the effect that work on the basement car park, to serve both Separable Portion 1 and Separable Portion 2, would commence at the same time. It also meant that the basement car park would be constructed lower into the ground than hitherto planned. This had implications for a number of issues arising under the Building Contract, particularly because of the relatively high water table at the site.

70. The Council granted deferred approval to the second development application on 19 August 2011 and operational consent on 10 October 2011.

71. On 7 September 2011, Atlas wrote to Fitz Jersey:

“Please be advised Atlas will commence contract works at 619 Gardeners Rd Mascot on the 12th of September 2011. Stage 1 works incorporate the construction of the Basement Car Park, Ground floor podium and buildings A, B and C.”

The water table issue

72. There is a high water table in the Mascot area. This meant that work for the excavation of the basement car park involved the construction of “cut-off walls” into the ground around the perimeter of the basement to control ground water. This work commenced in October 2011. I return to the detail of this below.

2012 - the “Finishes and appliances upgrades” - the “Upgrades Agreement”

73. Works continued on the project throughout 2012. Atlas invoiced Fitz Jersey for the work done. The invoices were paid promptly.

73. By July 2012, Mr Wong had decided that, once the project was completed, he would sell the apartments in Separable Portion 1 but retain those in Separable Portion 2. Mr Yazbek deposed that “as part of that process, I considered and determined that the apartments [that Mr Wong proposed to sell] would be more attractive to both owner-occupier purchasers as well as investors if they included superior internal fixtures and finishes, including better quality tapware and appliances”.

74. These proposed improvements are the Upgrades which comprise one of the Payment Claim Items.

75. In that context, Mr Yazbek said he had this conversation with Mr and Mrs Wong:

“[Mr Yazbek]:   To give these apartments a point of difference, I think we should include upgraded internal fixtures and finishes. As you can appreciate you need different touches when selling an apartment as opposed to renting it.

[Mr Wong]:   Ok, what do you suggest?

[Mr Yazbek]:   I suggest that you upgrade the tapware to Hans Grohe which is a German product that provides a 15-year warranty and is much better quality than the tapware that is otherwise going to be installed. I also suggest you use AEG kitchen appliances, which are also German appliances and give 5-year warranties. In my view, purchasers will be more attracted to buying into a prestigious development. This will also give investors peace of mind with the warranties.

[Mr Wong]:   Ok, sounds good. What will it cost? Also, do you think we should do this for all apartments at the project?

[Mr Yazbek]:   I would estimate about $2 mill increase all up. Look, I think it would be beneficial for all apartments to have the upgrade, at least in terms of the increased warranties. If it helps, Atlas will only charge for the uplift in price between the standard products and the upgraded products.

[Mrs Wong]:   I think it is a good idea to upgrade all of the units, including the ones we are keeping, because of the additional warranties.

[Mr Wong]:   Ok, sounds good. Please go ahead for all apartments.”

77. Mr and Mrs Wong denied having such a conversation with Mr Yazbek.

78. Mr Wong said that “I did not give an instruction or instructions to use better quality or more expensive fittings or appliances” and that “Mr Yazbek did not say that the appliances and fittings were going to be ‘upgraded’ and I never discussed any such ‘upgrade’ with him”.

79. Mr Wong said that “on a number of occasions throughout the project” Mr Yazbek had said words to the effect “I am building a higher quality building. We are using things like German taps, better quality carpet, Daikin air conditioners and other good quality brands for things like washing machines” and that “I had not requested Mr Yazbek to do these things”.

80. Mrs Wong said that she did not “hear or participate in a conversation with Mr Yazbek” to the effect of that asserted by Mr Yazbek but said that “at the beginning of the Mascot project” she recalled hearing Mr Wong and Mr Yazbek having a conversation to the effect:

“[Mr Wong]:   We want good quality apartments not poor quality ones. We want these apartments to be better than Meriton apartments.

[Mr Yazbek]:   These apartments are going to be much better than Meriton. We will use better quality finishes and German appliances.”

81. Mrs Wong said:

“I did not discuss any upgrade to the appliances or fittings for the Mascot development with Mr Yazbek or Mr Sweeney during the course of the project. I was never told that there would be an ‘upgrade’ to the appliances that would be installed in the units. I did not participate in any discussion involving Mr Yazbek in which he referred to changing appliances based on warranty periods.”

82. In the October Letter, Mr Yazbek and Mr Sweeney stated:

“Furthermore, we agreed to upgrade all the finishes on the job to be AEG appliance and Hans Grohe tapwear [sic] (still not done in the market to this day). This was an additional $2m in cost at no charge. This resulted in [a] 5 year warranty for AEG and 15 year warranty for Hans Grohe. We knew you were going to keep the units and wanted to ensure that you had the most durable product.” (Emphasis added.)

83. Fitz Jersey accepted, in closing submissions, that this passage “lends some support to the notion that there was an agreement of the type claimed by Mr Yazbek for an upgrade to appliances and tapware”.

84. However, the passage also states that any such agreement was on the basis that there would be “no charge” in relation to any such upgrade.

85. As I discuss below, there is controversy as to the accuracy of other statements made by Mr Yazbek and Mr Sweeney in the October Letter. But when this passage from the October Letter is seen in its context, I see no reason to doubt that it reflects Mr Yazbek’s and Mr Sweeney’s recollection that although the “upgrades” would cost an addition $2 million they would not be charged to Fitz Jersey.

86. I will return to this when considering the October Letter in detail but, for present purposes, record my finding that, if there was an agreement about the Upgrades of the kind for which Mr Yazbek contends, that agreement included a term that there be “no charge” to Fitz Jersey for the upgrades.

87. Mr Yazbek deposed that in August 2012 he had this further conversation with Mr Wong:

“[Mr Yazbek]:   I think you should also upgrade the carpet to a premium grade carpet for the stage 1 apartments to assist with the sale of those apartments.

[Mr Wong]:   I agree with that. What about stage 2?

[Mr Yazbek]:   It’s probably not necessary, as most of these apartments are going to be rented.

[Mr Wong]:   Ok, let’s go ahead with the upgrade for stage 1 apartments only.”

88. Mr Wong denied having this conversation. He said:

“I did not instruct Mr Yazbek to upgrade the carpets. I recall attending Building A during the construction phase when the lift was still not ready for use. At that time some sections of the carpet had been laid. Mr Yazbek said words to the effect:

‘This is the type of carpet we are going to use.’

Mr Yazbek did not ever mention an upgrade to the carpet.”

89. In closing, Fitz Jersey submitted:

“Again, like with the appliances and tapware claim, though one might not expect to see a written direction from Mr Wong if he had requested such a change, one would expect to see some other Atlas documentation clearly identifying the instruction and the upgrade that would be performed. But again, there is none”.

90. Mr Yazbek and Mr Sweeney pointed to a number of emails in which carpet is referred to but, as Fitz Jersey submitted, they are equivocal as to whether there was an agreement of the kind deposed to by Mr Yazbek.

91. No reference is made to carpet in the October Letter.

92. In those circumstances, I am not satisfied that there was any agreement between Mr Yazbek and Mr Wong which would have justified Atlas making any additional charge for upgrading the carpet.

The events of 2013

The 2013 Agreement

93. The most significant event in 2013 was the February 2013 Meeting at which the 2013 Agreement was reached.

94. Mr Wong, Mr Yazbek, Mr Sweeney and Atlas’s then Chief Financial Officer, Mr Matthew Vartuli attended the meeting.

95. No participant in the meeting made a contemporaneous note of what was agreed at the February 2013 Meeting.

96. It is, however, common ground that at the meeting Mr Wong agreed to increase the contract price under the Building Contract by $10 million and that he caused Fitz Jersey to pay that extra $10 million to Atlas later in 2013. What is in dispute is what that $10 million was intended to cover.

97. In the October Letter, Mr Yazbek and Mr Sweeney purported to give an account of what was agreed at the February 2013 Meeting.

98. Before me, Fitz Jersey relied on the October Letter as setting out an accurate account of what was in fact agreed at the February 2013 Meeting. Its case that the amounts claimed by Atlas in the Payment Claim were, to Mr Yazbek’s and Mr Sweeney’s knowledge, false depends on this.

99. Mr Yazbek and Mr Sweeney dispute that what they wrote in the October Letter about the February 2013 Meeting was an accurate account of what happened and assert they wrote the letter to get Mr Wong “to the table”.

100. According to the October Letter, the extra $10 million that Mr Wong agreed be paid pursuant to the 2013 Agreement was for the Payment Claim Items, that is:

1. the CPI Uplift;

2. the Early Completion Bonus;

3. the Carbon Tax Costs; and

4. the Upgrades.

101. I will return to the October Letter below. For the reasons I later explain, my conclusion is that it does not accurately set out the terms of the 2013 Agreement. None of Mr Wong, Mr Yazbek, Mr Sweeney or Mr Vartuli in their affidavits said that it did; nor did any of them give an account of what was agreed at the February 2013 Meeting to the effect asserted in the October Letter.

102. I will return to those matters but set out here the accounts given by the participants in their affidavits as to what was said in February 2013.

103. The accounts given in their affidavits by Mr Yazbek, Mr Sweeney and Mr Vartuli, although inconsistent with the October Letter, are consistent with what was in fact claimed in the Payment Claim so far as concerns the 2013 Agreement. These accounts are also consistent with the statutory declarations each made in December 2016 in support of the subsequent Adjudication Application. I return to these matters below.

104. It is common ground that the background to what was discussed at the February 2013 Meeting included that, as a result of the revisions to the development following the approval of the second development application:

1. as I have described above, the basement car park was to be built lower than originally envisaged and thus further into the water table;

2. the total number of apartments to be built in Separable Portion 1 1 and Separable Portion 2 was to be reduced from 515 to 500; and

3. the swimming pool originally envisaged for the development was not to be built.

105. Mr Wong’s affidavit account of the meeting was that Mr Yazbek said words to the effect:

“This project is costing more than I expected. I have to spend extra money on extra steel and concrete for the car park.”

106. Mr Wong said that Mr Yazbek showed him a drawing, but that he said:

“I don’t understand that technical stuff.”

107. Mr Wong said that Mr Yazbek continued:

“With the possible introduction of the carbon tax on materials as well, everything is going to cost 5% more … I can only make about $8 million on the job.”

108. Mr Wong said that he could not recall whether, at this meeting, Mr Yazbek also said that there were other matters that were causing increased costs of the project.

109. Mr Wong said that he did not believe what Mr Yazbek had said about the amount of profit he would make on the project but that “I did not want to argue with him, and I did not want him to stop work on the project if he was unhappy. I was also concerned that if I did not offer him something extra he might find a way to compromise on the quality of the work or do something to my disadvantage.”

110. Mr Wong said that, for that reason, he asked Mr Yazbek:

“[W]hat if I offer you $10 million more on top of the $180 million to finish the whole project?”

111. Mr Wong said that “I extended my hand and Mr Yazbek shook my hand”.

112. Mr Wong said that he then asked either Mr Sweeney or Mr Vartuli:

“Can you please put the $10 million in the next invoice?”

113. Thus, on Mr Wong’s account of it in his affidavit, he made an unprompted suggestion to increase the contract price under the Building Contract by $10 million, as an extra “all up” payment to complete the job.

114. Mr Yazbek said that, about a week before the meeting he had a telephone conversation with Mr Wong:

“[Mr Yazbek]:    KC, we need to meet to talk about separable portion 2 and a variation for the basement and reduction in units.

[Mr Wong]:    No problem Robert, I will come and see you to discuss.”

115. At the meeting, Mr Yazbek said that he had this conversation with Mr Wong:

“[Mr Yazbek]:    KC, as you know there were changes between the original and the approved development applications which required Atlas to push the carpark into the basement by two and half levels, into the water table. These works have now been carried out and the costs associated with these works were in excess of $15 million more than the works initially required in the original development application. Given that we also need to make an adjustment for the loss of 15 units and the swimming pool, valued at approximately $5 million, I propose that we agree to a $10 million variation to cover the additional basement works, the loss of units and the swimming pool.

[Mr Wong]:   I agree, that is fair.”

116. Thus, on Mr Yazbek’s account of it, the additional $10 million payment was a figure calculated by reference to the anticipated extra $15 million cost of lowering the car park/basement area further into the water table, less savings of $5 million anticipated by reason of the reduction in the number of apartments and the removal of the proposed swimming pool from the development.

117. Further to the conversation that Mr Yazbek said that he had with Mr Wong in March 2010, ^[21] Mr Yazbek said that during the February 2013 Meeting, he asked Mr Wong whether Mr Wong was “happy for Atlas to now commence works on Stage 2”, that is, the works called for in relation to Separable Portion 2. As I have said, by now, Mr Wong had decided that Fitz Jersey would sell the apartments in Separable Portion 1 but retain and rent out the apartments in Separable Portion 2.

     21. See [52] above.

118. Mr Yazbek said that Mr Wong agreed and that they then had this conversation:

“Once stage 2 is underway; we should formalise our agreement for us to provide property management services in relation to the stage 2 apartments that you intend to keep. We will start to set up everything for this.”

119. Mr Yazbek said that Mr Wong said:

“Sounds good, please go ahead”.

120. Mr Yazbek said that he saw Mr Wong’s response as confirming their understanding that, once Separable Portion 2 was complete, and the apartments in it rented out, an entity associated with Mr Yazbek would manage those apartments.

121. Mr Sweeney and Mr Vartuli gave similar accounts of the February 2013 Meeting to that of Mr Yazbek.

122. Mr Sweeney said he recalled that Mr Yazbek “did most of the talking” at this meeting and that Mr Yazbek said:

“‘[T]here have been significant costs associated with the basement works due to the complexity of lowering the basement into the water table’ and ‘the additional basement costs which Atlas have exceeds $15 million. You have seen for yourself how difficult and time consuming the construction of that basement has been and Scott [Sweeney] and I are now glad it is complete’.”

123. Mr Sweeney continued:

“I also recall Robert [Yazbek] explaining to Mr Wong that Atlas had incurred an additional $800,000.00 of remediation costs. Robert advised Mr Wong that ‘Atlas would not charge him any of those costs as the agreement for demolition and remediation $1.2 million’ [sic].”

124. Mr Sweeney deposed that thereafter he heard Mr Yazbek and Mr Wong have this conversation:

“[Mr Yazbek]:    We have valued the additional basement costs to be more than $15 million, however Atlas is willing to reduce the costs of the variation to $10 million. This will also cover the difference between the unit mix from 515 to 500 units and the loss of the swimming pool.

[Mr Wong]:   Ok I agree.

[Mr Yazbek]:   Okay great. Now that you have sold your shares, ^[22] I presume that you want us to proceed with stage 2 works.

22. This was a reference to the fact that Mr Wong had recently sold shares in Fortescue Mining N L, the proceeds of which he used to fund the development.

[Mr Wong]:    Yes, let’s finish it.”

125. Mr Vartuli’s recollection of the conversation was that Mr Yazbek said to Mr Wong:

“It cost us over $15 million to build two and half levels into the basement. The works are complicated as we need to lower the basement into the water table. We also need to make an adjustment for the loss of 15 units, the swimming pool and the gym, which we have estimated to be around $5 million.”

And:

“Having said all that, we propose that Atlas and Fitz Jersey agree on a $10 million plus GST variation that incorporates the basement, reduction in units and the exclusion of the swimming pool. What do you think?”

126. Mr Vartuli said that Mr Wong then said “[o]k. I agree” and that Mr Wong then shook hands with Mr Yazbek and Mr Sweeney.

127. Mr Vartuli said that “[n]o other variations or claims were discussed [at] the 2013 Meeting while I was in the room”.

The progress claim for the $10 million

128. On 15 October 2013, Atlas sent Fitz Jersey an invoice entitled “Progress Claim No 26 – construction” for $10 million. The Progress Claim Master Sheet on the reverse side of the invoice stated that the $10 million was:

“Additional Construction Cost as agreed”.

Commencement of work on Separable Portion 2

129. In the meantime, work commenced on Separable Portion 2.

130. The Directors now accept that work on Separable Portion 2 commenced in March 2013. In the Payment Claim, Atlas contended that Separable Portion 2 had commenced in June 2013. The Directors now accept that this is not correct. This is relevant to the amount Atlas was able to claim for the CPI Uplift. I return to this below.

The lack of reference to an entitlement to the Payment Claim Items

131. A matter in dispute is whether the $10 million the subject of the 2013 Agreement was, as Mr Yazbek and Mr Sweeney asserted in the October Letter but now deny, calculated by reference to, amongst other things, the Payment Claim Items, that is the CPI Uplift, the Early Completion Bonus, the Carbon Tax Costs and the Upgrades.

132. In the course of late 2013 and during 2014, Atlas created a number of internal documents relating to the Mascot Square Project. These documents contained forecasts of the amounts payable by Fitz Jersey to Atlas but made no reference to the Payment Claim Items.

133. Mr Yazbek and Mr Sweeney gave different reasons for this.

134. Mr Yazbek said in cross-examination that he always intended Atlas would charge Fitz Jersey for the Payment Claim Items but was waiting until the end of the project to discuss these with Mr Wong.

135. On the other hand, Mr Sweeney said that “we were well aware” of Atlas’s right to charge for the Payment Claim Items but that “we hadn’t made a final decision” about charging for those items and did not make a final decision until “around about October” 2016.

136. During cross-examination, and in closing submissions, Fitz Jersey emphasised these matters. They are relevant to the terms of the 2013 Agreement. For the reasons I set out when discussing the 2013 Agreement, I do not see these matters as weighing heavily in the balance. ^[23] However, I will set out the occasions identified by Fitz Jersey as being ones on which, on its case, it would be expected that Atlas would, but did not, refer to the Payment Claim Items.

     23. See [641] to [659] below.

The December 2013 GST Model

137. The first of these is a “GST Model” that Mr Vartuli prepared on 3 December 2013. That document included the following table:

138. The model did not include any amounts for the Payment Claim Items, notwithstanding the fact that Atlas would then have been able to determine the amounts of the CPI Uplift, the Early Completion Bonus for Separable Portion 1 and the Upgrades to the apartments within Separable Portion 2.

139. In that regard, Mr Vartuli gave the following evidence:

“Q. Had you thought that the total construction cost budgeted at this point in time was higher than $190 million, you would have had that higher figure, wouldn’t you?

A. Yes.

Q. It was your understanding that if Atlas intended to charge Fitz Jersey more for construction costs, you would have taken that into account in providing the budgeted amount, wouldn’t you?

A. If it was my understanding of their intention, would it have been included in the budget amount, yes.

Q. You tried to be as accurate as you could possibly be in providing that figure, didn’t you?

A. From what I was aware – yes, from what I was aware at the time, yes.

Q. The true position is you did not provide for a figure above $190 million because you understood that Atlas didn’t intend to charge [more than] $190 million for construction costs, didn’t you?

A. No, that’s not – that’s not right.”

140. Mr Yazbek said:

“Like, this is a budget, and a budget, you know, is – to us is a budget … it’s not that accurate; it’s a budget. We’re not going to go through all the fine details. It’s a budget”.

141. Mr Yazbek said that the reason that the Payment Claim Items were not included in the budget was not because he had no intention of causing Atlas to charge for these items, but because “we were going to wait till the end of the project and sit with [Mr Wong] and work it out with him”.

142. Mr Sweeney said that the document was prepared for Fitz Jersey’s benefit and “it’s got nothing to – it’s not really to do with Atlas.” That explanation cannot be correct. The document was clearly an internal Atlas document.

The events of 2014

February 2014 correspondence with Atlas’s insurance broker

143. In February 2014, Atlas’s insurance broker, Mr Joe Gemmola from McCormick Harris, sought information as to the “actual value of work completed” for the period between 28 February 2013 to 28 February 2014. ^[24]

     24. Atlas’s insurance ran from February to February each year.

144. Mr Gemmola also asked for “the estimated value of work for the Mascot project for the 2014/15 year”.

145. On 5 February 2014, Mr Sweeney forwarded Mr Gemmola’s email to Mr Vartuli stating:

“Can you provide:

Mascot construction value of work for Feb13 to Feb14.

We then need to estimate the value of work for the next 12 months at Mascot. This will be the residual remaining for the project.”

146. Mr Vartuli replied:

“$100,800,000 from Feb 13 to Feb 14.

Residual value left in project: $31M.”

147. On 11 February 2014, Mr Sweeney wrote to Mr Gemmola:

“Please do not proceed until we meet as I want to double check figures first.

● Feb 13 to Feb 14 actual - $100,800,000 excl GST

● Estimate Feb 14 to Feb 15 - $31,000,000 excl GST

● Estimate of maintenance works - $50,000 excl GST

Rae ^[25] - as discussed can I get a summary of all actuals and estimates since the policy started in Feb 2011. Note the Feb 2014 to Feb 2015 will be the last year of the policy in relation to construction works at Mascot Square.”

25. Ms Rae Tory, an employee of McCormick Harris.

148. On 14 February 2014, Mr Sweeney wrote to Ms Tory, with a copy to Mr Gemmola and Mr Vartuli:

“Confirming the following for Mascot project.

Please advise payment for this year asap.

Revised contract value: $190,000,000

Completion of entire project due Dec 2014.

● 2011 – $12,600,000 actual

● 2012 – $45,600,000 actual

● 2013 – $100,800,000 actual

● 2014 – $31,000,000 estimate”.

149. The four figures in the bullet points totalled $190 million, being the $180 million contract price in the Building Contract together with the $10 million paid as a result of the 2013 Agreement.

150. Mr Sweeney’s email thus suggested that, as at 14 February 2014, Atlas’s estimate of the “value of work for the Mascot project for the 2014/15 year” ^[26] was $31 million on the basis of total remaining construction costs of $190 million. Mr Sweeney made no reference to the Payment Claim Items.

     26. Adopting the words from Mr Gemmola’s email of 4 February 2014.

151. Mr Sweeney said in cross-examination that:

“… this is an internal email between me and Matt [Vartuli] about an estimate for insurance. I wouldn’t have paid too much mind to it”.

And:

“It’s just an insurance estimate for the next 12 months”.

152. That led to Mr Sweeney giving this evidence:

“HIS HONOUR: Q. Was there a reason you didn’t include CPI uplift and early completion bonus in this letter?

A. I hadn’t thought about them for this letter. It was just, basically, going back to the insurer with an estimate.

MR CHRISTIE: Q. You used the word ‘just’, ‘It was just going back to the insurer with an estimate’, but you understood that the estimate was critical information relevant to the calculation of the premium, didn’t you?

A. No, I never thought about it at that stage like that. I just gave them what was left in the construction contract that we had.

Q. If the value of construction work previously done was understated, then you would be required then and there to top up the premium for the previous year, wouldn’t you?

A. Yes. Well, I think we give the actual as they go along, yes.”

153. Fitz Jersey submitted that the “obvious explanation” for Mr Sweeney’s failure to refer to the Payment Claim Items was that he understood them to have been incorporated into the 2013 Agreement.

154. Fitz Jersey made a like submission in relation to further documents, to which I refer in the following narrative of events, in which no reference was made to the Payment Claim Items. As I have said, I will return to the significance of these “omissions” when considering the 2013 Agreement. For now, in what follows, I will record the documents in question but not repeat, each time, Fitz Jersey’s “obvious explanation” submission.

February 2014 profit forecast and summary of claims left against Fitz Jersey

155. On 24 February 2014, Mr Vartuli sent an email to Mr Yazbek and Mr Sweeney:

“We have $37M left in claims for Mascot Square and approx. $40M left in costs as of the end of January 2014 (keeping in mind current surplus of cash of approx. $5M). This suggests that we may have a $2M before tax profit remaining in the Job, however, we will need to wait until the job is coming closer to the end to finalise this. Accordingly, my recommendation is no further ordinary dividends to be called until we are closer to the completion of the job.”

156. As Mr Vartuli stated, at this point there was $37 million left for Atlas to claim out of the $190 million fixed contract sum under the Building Contract.

157. Mr Vartuli was explaining to Mr Yazbek and Mr Sweeney that it looked as if there was $2 million “before tax profit remaining in the [j]ob” (being the $37 million “left in claims” plus the “current surplus of cash” of $5 million less the $40 million “left in costs”) and that for that reason “no further ordinary dividends … be called until we are closer to the completion of the job”.

158. Mr Vartuli made no mention of the Payment Claim Items.

May 2014 cash flow and identification of amounts left to be paid by Fitz Jersey

159. On 20 May 2014, Mr Vartuli sent Mr Sweeney an email headed “Program and Cash Flow” which stated:

“Total amount owing for [Mr Wong] is $29,150,000 (inc GST) or $26,500,000 (ex GST).

Please note that it would be possible to receive a lump sum payment of this.

[Mr Wong] will also need to set aside at least $9 million for the GST repayment as well.

In any case when Rob [Yazbek] is free, let’s meet and discuss.”

160. Mr Vartuli attached to his email a document called “Estimated Cash Flow January 2014 to October 2014” which included the following:

(Red box added by Fitz Jersey in closing submissions.)

161. In his email, Mr Vartuli said that the “total amount owing for [Mr Wong]” was $26.5 million ^[27] being the total of the figures in Mr Vartuli’s table for July, August, September and October 2014 for “Construction” (being construction costs) and for “Client” (that is, the Reimbursables). ^[28]

     27. Excluding GST.

     28. See [2(c)] above.

162. Mr Vartuli did not include in that amount any of the Payment Claim Items.

July 2014 cash flow

163. On 23 July 2014, Mr Vartuli sent Mr Sweeney an updated version of the “Estimated Cash Flow January 2014 to October 2014”.

164. Again, the document did not include any provision for the Payment Claim Items.

September to December 2014 - final invoices

165. On 15 September 2014, Atlas sent Fitz Jersey its final construction costs invoice for $7 million (including GST).

166. There was attached to that invoice a “Progress Claim Master Sheet” in the following form:

167. As the bottom line of that schedule shows, the invoiced amount of $7 million when added to the amount of “Previous Claims” ($1 less than $183 million) totalled the contract price of $190 million.

168. There was no reference in this final invoice to the Payment Claim Items.

169. Mr Sweeney said that the reason why there was no claim in this invoice for the Payment Claim Items was that:

“… we were waiting to the end for the variations and it was a commercial decision for Rob [Yazbek] and I whether we decided to charge part of them, all of them, we hadn’t decided yet”.

The Exclusive Management Agency Agreement

170. On 7 November 2014, Fitz Jersey entered into an “Exclusive Management Agency Agreement” with a company called Mascot Square Property Pty Ltd in relation to the 315 apartments in Separable Portion 2 that Mr Wong had decided Fitz Jersey would retain.

171. Mascot Square Property Pty Ltd, later known as Serendipity Pty Ltd, was owned as to 70% by Mr Yazbek, as to 20% by Mr Sweeney and as to 10% by Mr Stevens. Mr Stevens is a real estate agent. ^[29]

     29. As I have said, he also signed the October Letter.

172. The Exclusive Management Agency Agreement was expressed to commence on 1 October 2014 and be terminated by either party giving not less than 365 days’ notice.

173. The document entitled Mascot Square Property Pty Ltd to a management fee of 8% in relation to all rental received.

174. Mr Yazbek regarded this agreement as being of great value and as reflecting the understanding he had with Mr Wong arising from their March 2010 and February 2013 conversations to which I have referred.

175. As the terms of this document show, although Mr Yazbek said that he understood his agreement with Mr Wong was that “we’d keep the management rights indefinitely while [Mr Wong] or his family owned the property”, the arrangement as documented was more limited.

The events of 2015

176. Between March and September 2015, a number of spreadsheets dealing with cost analyses and cashflow forecasts was circulated between Mr Vartuli, Mr Sweeney and Mr Yazbek.

177. The first of these was attached to an email sent by Mr Vartuli to Mr Sweeney on 13 March 2015 and indicated that the only amount that Atlas expected to receive from Fitz Jersey was $47,986.70 which related to upgrades in relation to a particular apartment or apartments.

178. Mr Vartuli circulated a similar document on 2 June 2015. This document did not refer to the $47,986.70 referred to in the 13 March 2015 document but identified $40,000 as a cash inflow for “[i]nvoice KC floor and Miele” being a payment expected in respect of Mr and Mrs Wong’s son’s apartment.

179. There was no mention of the Payment Claim Items in these documents.

180. In March 2015, Mr Gemmola, the insurance broker, made a further enquiry of Mr Sweeney as to the “value of work to complete”. Mr Sweeney told Mr Gemmola that the value of “completed construction work” as at 28 February 2015 was $189 million.

181. On 23 June 2015, Atlas’s external accountant, Mr Peter White, a partner at Ernst & Young (later “EY”), wrote to the solicitor acting on the sale of units in Separable Portion 1 stating:

“I’m wanting to close [Atlas’s] bank account prior to 30^th June, to ensure there is minimal/no activity in the 2016 year. I’ve suggested that they ask you to open a controlled monies account for them …”.

182. Mr White said he thought Mr Vartuli “acquiesced to my suggestion” that Atlas’s bank account be closed. However, my attention was not drawn to any evidence that this in fact occurred.

Mr Yazbek ceases to be a director of Atlas

183. In around June 2015, Mr Yazbek and Mr Sweeney had a falling out. As a result, on 24 June 2015, Mr Yazbek ceased to be a director of Atlas (although his company, Kebzay, remained a 90% shareholder). Mr Yazbek returned as a director of Atlas on 27 September 2016.

Interim occupation certificate

184. By the second half of 2015, work on the Mascot Square Project was approaching completion.

185. On 14 July 2015, an interim occupation certificate for the buildings that were last to be completed was issued.

186. On 9 September 2015, the Council inspected the public domain landscaping works and certified them as being “satisfactorily complete”. The joint report of the parties’ programming experts, Ms Karen Wenham for Fitz Jersey and Mr Chris Peter for the Directors, suggests that Atlas reached practical completion for Separable Portion 2 on around 17 November 2015.

Discontinuance of Jobpac

187. Atlas used a software program called “Jobpac” which Mr Vartuli described as a “cost management software”.

188. On 6 December 2015, Mr Sweeney sent an email to Mr Vartuli:

“Are we discontinuing Jobpac?

I do not need it and I think the costs of $594 per month are excessive.

Please confirm and I will let them know”.

189. Mr Vartuli replied:

“Yes – let’s close it”.

190. Mr Vartuli agreed that the Jobpac software was necessary to make some aspects of claims against Fitz Jersey.

191. Mr Sweeney gave this evidence about Jobpac in cross-examination:

“Q. Can you describe what ‘Jobpac’ was?

A. Yes, it’s a construction accounting software.

Q. Used to record costs and expenses; isn’t that right?

A. Yes. I think it’s the full – it does financials, everything.

Q. Can I suggest that you wouldn’t shut this down until all claims on Fitz Jersey had been made; isn’t that right?

A. No, that’s not the case. That’s not related at all.

Q. I see. In any event, if you turn the page over, and go to page 16346, you did end up shutting it, didn’t you?

A. Yes.

Q. All right. Now, you can close that.

HIS HONOUR: Q. Is that because you migrated to a different [form of] accounting software?

A. Yes, we migrated to Xero because it was cheaper and the company had gotten simpler by then.

Q. Is that X-E-R-O?

A. X-E-R-O, yes.

MR CHRISTIE: Q. Didn’t you need Jobpac in order to make the claim on Fitz Jersey?

A. Didn’t we need Jobpac? We needed it for some items, yes. We needed to get access to it.

Q. Can I suggest that you would not have closed it down if you considered that you had further claims to be made against Fitz Jersey, correct?

A. That’s not correct. They are not related.

Q. I thought you just said you needed Jobpac in order to make the claim against Fitz Jersey?

A. I think they were part of the claim for works outside the boundary, which we hadn’t calculated everything there, that I needed to get that information.

Q. You can’t say they are unrelated, can you?

A. Well, there was a small part of that claim that required that information, yes.”

192. Similarly, Mr Vartuli gave this evidence:

“Q. If you thought that Atlas was owed money by Fitz Jersey, you wouldn’t have allowed Jobpac to be turned off before claiming that money from Fitz Jersey; isn’t that right?

A. No, I don’t agree with that.”

193. Shortly before service of the Payment Claim, Mr Vartuli caused Atlas to revive its subscription to Jobpac. Fitz Jersey submitted that this showed that the fact that in December 2015 Mr Sweeney caused Atlas to cease to use Jobpac bespoke Mr Sweeney’s understanding that Atlas then had no further claims on Fitz Jersey. However, in the absence of evidence as to how the Xero software, to which Atlas migrated following the shutting down of Jobpac, operated, I do not see what conclusion I can draw about this.

The events of 2016

The “Asper” development - Mr Yazbek’s “crisis”

194. In June 2016, Mr Yazbek was involved in a separate property development project in Rosebery through an associated company, Botany Road Project Pty Ltd. This development was known as the “Asper” property development

195. In his affidavit, Mr Yazbek said that the Asper development:

“… did not complete by [June 2016] time and was running behind, which put a lot of financial pressure and stress on me because the delay was impacting my ability to finance the acquisition of a number of other properties in Botany that one of my companies had exercised an option to acquire. Had this acquisition not proceeded, I would have lost approximately $5 million in deposit payments, together with significant potential profits.”

196. In cross-examination, Mr Vartuli described this as a “crisis” for Mr Yazbek.

197. In those circumstances, Mr Yazbek gave this evidence:

“Q. ... If you genuinely believed in June 2016, when the [Asper] development fell behind schedule, if you genuinely believed that you were owed further moneys by Fitz Jersey, you would have demanded those then and there, wouldn’t you?

A. I would have if I knew the amount, yes.

Q. I see. You’re saying the only reason you didn’t was because you didn’t know the amount; is that what you’re telling his Honour?

A. Yes, I had to calculate the amount.”

198. The matter was not taken further in cross-examination. Although much was made in closing submissions about Mr Yazbek’s “crisis”, in the absence of Mr Yazbek’s evidence being further explored in cross-examination, I am not prepared to draw any inferences adverse to Mr Yazbek on this account.

Mr Sweeney’s meeting with Mr Wong

199. In September 2016, Mr Sweeney arranged to have a meeting with Mr Wong.

200. Mr Sweeney deposed that the conversation was as follows:

“[Mr Sweeney]:    Robert [Yazbek] and I have had a dispute on [the Asper] project … at Roseberry. The project is behind schedule and is costing money and he has now held payment on the Asper project. Unfortunately, this issue has spilled over into the Mascot project as [Mr Yazbek] has said to a number of subcontractors that I am the sole director of Atlas and to see me for any issues with retentions that are still owed on Mascot Square.”

And:

“[Mr Sweeney]:   Robert has stopped being a director of Atlas and has told me that completion of Mascot Square is now my responsibility. Is there any way you could speak to Robert and make him see sense? I am sorry to involve you but I think he will listen to you.

[Mr Wong]:   Why will Robert not pay the retentions, I thought you made $10 million on this project?

[Mr Sweeney]:   We made a lot more than that, there is no reason for us not to pay anybody”.

201. Mr Wong’s recollection of the meeting was a little different. He deposed that the conversation was to this effect:

“Mr Sweeney:      I am going to wind up Atlas on Monday.

[Mr Wong]:       Why?

Mr Sweeney:   Robert is no longer a director of Atlas. He withdrew all the money in Atlas, and there is no money now. There are some tradesmen who can't be paid their retention. Robert told me to pay, and that I am responsible because I'm the only director now.

[Mr Wong]:       How much is the retention money?

Mr Sweeney:    It's about a million dollars, and I don't have the money. So I have to wind it up. Once I wind it up, Atlas won't be here anymore to look after everything, like any defects.

[Mr Wong]:    How much money did Robert make out of this Mascot Square project, between $40 and $50 million?

Mr Sweeney:       More.”

202. Mr Sweeney disputed saying to Mr Wong that he was “going to wind up Atlas on Monday”.

Relations restored between Mr Yazbek and Mr Sweeney

203. Evidently, at around this time, Mr Yazbek wished to resume his role as director of Atlas.

204. Thus, on 20 September 2016 Mr Sweeney, on behalf of Sweenham wrote to Mrs Yazbek referring to a “proposed circular resolution” sent to Sweenham on 19 September 2016 “proposing resolutions for the appointment of Mr Vartuli and Mr Yazbek as directors”.

205. In his letter, Mr Sweeney argued against Mr Vartuli becoming a director and complained about recommendations that Mr Vartuli made:

“… as to the appropriateness of declaring dividends, the payment of which has brought about the situation that, at the present time, [Atlas] is without funds to meet a number of debts”.

206. In cross-examination, Mr Sweeney agreed that, at this time, he was “worried about the solvency of Atlas”.

207. Nonetheless, Mr Sweeney disputed that the time of his conversation with Mr Wong was an “ideal time” to ask Mr Wong to pay the Payment Claim Items.

208. In his 20 September 2016 letter, Mr Sweeney also said:

“It is inappropriate for Mr Vartuli to be a director of [Atlas] and Sweenham believes [Atlas] may, in fact, have claims against him in relation to the way in which he has managed the preparation of accounts over the last number of years …”.

209. In the Liquidator’s Examination, Mr Sweeney accepted that this was not true.

1149. As to the matter in (c), it is obvious that no reasonable person in Atlas’s position would pay a dividend in contravention of the requirements of s 254T of the Corporations Act, let alone in circumstances where the payment constituted an alienation of property intended to defraud creditors for the purposes of s 37A of the Conveyancing Act.

1150. Further, counsel in effect accepted that if by paying the Dividends Atlas had contravened s 254T of the Corporations Act, it would follow that it had engaged in a transaction that a reasonable person in Atlas’s position would not have engaged in and thus, the requirements of (c) were also established.

1151. Thus, I had this exchange with counsel:

“HIS HONOUR: If there has been a breach of 254T, I think the calculus would be that there was a disposition to a close associate of a director, and a reasonable person in the company’s circumstances would not have contravened 254T.

MR SIRTES: Your Honour, there is no question – we are not taking the point that (1)(b) is not engaged. We accept that (1) (b) is engaged. Your Honour, if 254T has not been contravened, it would be, we would say, impossible to find that the declaration of a dividend would ever offend 588FDA.

HIS HONOUR: That is the more difficult question, yes.”

1153. I find that the payment and declaration of the Dividends was an unreasonable director-related transaction for the purposes of s 588FDA of the Corporations Act.

Claim under s 588FC of the Corporations Act – insolvent transaction

1154. Fitz Jersey also submitted that the declaration and payment of the Dividends was an “insolvent transaction” for the purpose of s 588FC of the Corporations Act.

1155. Section 588FC provides:

“Insolvent transactions

A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:

(a)  any of the following happens at a time when the company is insolvent:

(i)  the transaction is entered into; or

(ii)  an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

(b)  the company becomes insolvent because of, or because of matters including:

(i)  entering into the transaction; or

(ii)  a person doing an act, or making an omission, for the purpose of giving effect to the transaction.”

1156. I have found that the declaration and payment of the Dividends was both an unfair preference given by Atlas and an uncommercial transaction of Atlas.

1157. In order that it also be an insolvent transaction for the purpose of s 588FC it is necessary also to show that, relevantly, Atlas became insolvent “because of … the declaration and payment of the Dividends”.

1158. Section 95A of the Corporations Act provides:

“Solvency and insolvency

(1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent.

Note: A company is taken to be insolvent if the company proposes a restructuring plan to creditors (see subsection 455A(2)).”

1159. I have found that Fitz Jersey was a “creditor” of Atlas at the time that the Dividends were paid. I have found that Fitz Jersey then had an accrued right to sue Atlas for the amount due to it under the Building Contract.

1160. The expression “debt” is not defined in the Corporations Act.

1161. Although a right to general contractual damages is not a debt, a right to an amount that could be “clearly ascertainable and not a matter for assessment” may be a debt. ^[158]

      158. Box Valley Pty Ltd v Kidd [2006] NSWCA 26 at [14] (Bryson JA; Basten JA and Gzell J relevantly agreeing).

1162. The question of whether debt is incurred depends on when, in substance and commercial reality, the company is exposed to the relevant liability. ^[159]

      159. Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123 at [516]; (2003) 46 ACSR 126 (Mandie J).

1163. Fitz Jersey also had a restitutionary entitlement to recover the amount due under the Building Contract by reason of s 32(3)(b) of the SOPA which provides:

“Effect of Part on civil proceedings

…

(1) In any proceedings before a court or tribunal in relation to any matter arising under a construction contract, the court or tribunal —

(a) must allow for any amount paid to a party to the contract under or for the purposes of this Part in any order or award it makes in those proceedings, and

(b) may make such orders as it considers appropriate for the restitution of any amount so paid, and such other orders as it considers appropriate, having regard to its decision in those proceedings.”

1164. Further, as s 95A refers to a person’s inability to pay all the person’s debts, there is no reason to exclude the contingent or prospective debts. ^[160]

      160. New Cap Reinsurance Corporation Ltd (in liq) v A E Grant [2008] NSWSC 1015 at [75] (White J, as his Honour then was).

1165. I have made findings which allow it to be determined what amount was due by Atlas to Fitz Jersey under the Building Contract. In my opinion that amount was a debt.

1166. Such a debt was one which was “due and payable”, as Fitz Jersey was entitled then to sue Atlas to judgment immediately, without any intervening event occurring. ^[161] As it happened, Fitz Jersey was not in a position to do that because in February 2017 it did not have sufficient documentation to hand. That is, it could not then, as a practical matter, make its “s 32 claim” under the Building Contract. But its entitlement to do so had arisen.

      161. Melbase Corporation Pty Ltd v Segenhoe Pty Ltd [1995] FCA 279 at [55]; 13 ACLC 823 (Lindgren J).

1167. Further:

“… the notion of ‘become due’ is a legal one, and … a debt is not rendered ‘not yet due’ by reason of nothing more than the fact that the creditor has, to date, forborne from pursuing recovery”. ^[162]

162. Melbase Corporation Pty Ltd v Segenhoe Pty Ltd at [53]; followed in Exception Holdings Pty Ltd v Albarran (No 2) [2005] NSWSC 981 at [28] (Young CJ in Eq) and in Cuthbertson & Richards Sawmills Pty Ltd v Thomas [1998] SCACT 58; 28 ACSR 310 at [42] (Einfeld J).

1168. For these reasons, and consistently with my conclusion that Fitz Jersey was a creditor of Atlas at the time the Dividends were paid, my conclusion is that the amount that, based on my findings as to the Building Contract issues, can now be found to be due by Atlas to Fitz Jersey was a debt “due and payable” at that time.

1169. The payment of the Dividends left Atlas with a little over $400,000 in liquid assets. Its financial statements at FY17 showed a total equity of a little over $200,000. Atlas had no significant source of future revenue. The payment of the Dividends rendered Atlas unable to pay Fitz Jersey and thus unable to pay its debts as and when they fell due and thus insolvent.

1170. On behalf of the Directors, it was submitted that this conclusion was not open in the absence of evidence led by Fitz Jersey as to insolvency. However, although expert forensic accounting evidence as to insolvency is often helpful, the question of insolvency is ultimately one for the court. ^[163]

      163. For example, see Sandell v Porter (1966) 115 CLR 666 at [670]; [1966] HCA 28 (Barwick CJ).

1171. Further, on behalf of the Directors it was submitted that “another aspect to solvency is the company’s ability to turn to third parties for funds”. Reference was made to Mr Yazbek’s evidence that:

“It was my general practice in the management of Atlas that I did not leave large amounts of money sitting in the Atlas' bank account. This was because the funds did not earn interest and could be more profitably applied elsewhere. I was not concerned if the bank account balance was low because I could loan Atlas any money to ensure it paid its debts as and when they fell due.”

1172. However, Mr Yazbek did not give evidence of his preparedness to advance funds to Atlas for the purpose of Atlas meeting such obligations as it may be proved to have to Fitz Jersey.

1173. Further, where:

“… the financial support is being provided by a director or related entity, and in circumstances where there is no formalised agreement or understanding, what is required is cogent evidence which enables the court to conclude that there is such a degree of commitment on the part of the provider of the financial support to continue it, such that it can be said that at any point of time it was likely to be continued, with the result that, at any of those times, the company was able to pay its debts as and when they fell due.” ^[164]

164. Chan v First Strategic Development Corporation Ltd (in liq) [2015] QCA 28 at [44] (Morrison JA); cited with approval in Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72 at [83]; 120 ACSR 130 (Beazley P, Gleeson JA and Emmett AJA).

1174. There is no such evidence here.

1175. For these reasons, my conclusion is that the payment of the Dividends did render Atlas insolvent and that, accordingly, the declaration and payment of the Dividends was an insolvent transaction for the purposes of s 588FC of the Corporations Act.

Voidable transactions – s 588FE of the Corporations Act

1176. Section 588FE provides that a transaction is voidable ^[165] if, relevantly:

      165. Subject to time limits about which there is no controversy here.

1. it was an insolvent transaction of the company to which a “related entity” ^[166] was a party; ^[167]

   166. Which includes “a body corporate that is related to” Atlas – s 9 of the Corporations Act – and thus includes Kebzay and Sweenham.

   167. Section 588FE(4).

2. it was an insolvent transaction and also an uncommercial transaction; ^[168] or

   168. Section 588FE(3).

3. an unreasonable director-related transaction. ^[169]

   169. Section 588FE(6A).

1177. As I have found that the payment of the Dividends was an insolvent transaction, an uncommercial transaction and an unreasonable director-related transaction, it follows that the payment of the Dividends is a voidable transaction.

Article 85 of Atlas’s Constitution

1178. Article 85 of Atlas’s Constitution provided that “dividends may only be paid out of profits of the Company”.

1179. Fitz Jersey made numerous references in its closing submissions to Atlas having contravened Article 85 but, in the passages of its submissions directed to Article 85 did not, so far as I can make out, actually develop an argument that the Dividends were not paid out of profits.

1180. Having at one point of its closing submissions made the point that the question of “profits” was a matter to be determined in accordance with accounting standards (a matter about which Mr Leotta and Mr Westworth were agreed ^[170] ) Fitz Jersey submitted, without analysis of any accounting standards:

      170. See [980] above.

“Assuming that the payment of the Dividend contravened Atlas’s Constitution, then the Directors should be held liable for breach of contract. This issue only matters if the Directors are not held to be liable to Fitz Jersey [sic: Atlas] for damages or equitable compensation in the amount of the Dividends due to their breaches of their duties of care or fiduciary duties”.

1181. The reference in this submission to the Directors being “held liable for breach of contract” was a reference to Fitz Jersey’s submissions concerning s 140 of the Corporations Act which provides, relevantly:

“Effect of constitution and replaceable rules

(1) A company's constitution (if any) and any replaceable rules that apply to the company have effect as a contract:

(a)  between the company and each member; and

(b)  between the company and each director and company secretary; and

(c)  between a member and each other member;

under which each person agrees to observe and perform the constitution and rules so far as they apply to that person.”

1182. In the absence of a developed submission that the Dividends were not paid out of profits I do not propose to consider this point further, save to record that in Dungowan Manly Pty Ltd v McLaughlin,^[171] Bathurst CJ said that there was “some doubt as to whether the statutory contract formed by s 140 of the Act gives rise to a claim for damages for breach”. ^[172]

      171. [2012] NSWCA 180; 90 ACSR 62.

      172. At [3].

Breaches of duty

1183. I have found that the Directors caused Atlas to pay the Dividends in circumstances where:

1. Atlas’s assets did not exceed, in an amount sufficient for the payment of the Dividends, its liabilities immediately before the Dividends were declared;

2. the payment of the Dividends materially prejudiced Atlas’s ability to pay its creditors, and Fitz Jersey in particular;

3. the Directors’ motivation in declaring the Dividends was to remove funds from Atlas before Fitz Jersey could further progress the claim, the Directors’ must have understood Fitz Jersey was bound to make to recover the Garnisheed Amount;

4. Atlas thereby contravened s 254T of the Corporations Act; and

5. Atlas made an alienation of property with intent to defraud its creditors, and Fitz Jersey in particular, for the purposes of s 37A of the Conveyancing Act.

1184. It was not in Atlas’s interests that it act in contravention of s 254T or make an alienation of property with intent to defraud its creditors.

1185. I have also found that by resolving to declare the Dividends, the Directors caused Atlas to make an undue preference for the purposes of s 588FA of the Corporations Act, enter an uncommercial transaction for the purposes of s 588FB of the Corporations Act, and engage in an insolvent transaction for the purposes of s 588FC of the Corporations Act.

1186. I have also held that the Directors engaged in an unreasonable director-related transaction for the purposes of s 588FDA of the Corporations Act.

1187. It was not in Atlas’s interests that this conduct occur.

1188. It was, on the other hand, in the Directors’ interests that the events giving rise to these matters, the declaration and payment of the Dividends occur.

1189. It must follow from these conclusions that the Directors have acted in breach of their obligations:

1. to exercise their powers bona fide and in the interests of Atlas as a whole;

2. to exercise their power for a proper purpose;

3. not to exercise their powers to obtain a private advantage for themselves; and

4. not to permit their interests to conflict with those of Atlas.

1190. As I have said, there is no controversy that the latter duty was fiduciary in nature.

The flow of funds

1191. Fitz Jersey presented detailed submissions concerning the transactions and cash movements following the payment of the Dividends to Kebzay and Sweenham on 6 February 2017.

1192. Those contentions were summarised in two documents entitled “Transactions Following Payment to Kebzay Pty Ltd” and “Sweenham Transactions”. Copies of those documents (the “Kebzay Flow Chart” and “Sweenham Flow Chart” respectively) are attached.  Attachment E - Flow Charts (116734, pdf)

1193. Ultimately, in final submissions, the Directors accepted that “the calculations” in those documents were correct.

1194. The Directors also accepted the correctness of the following analysis made by Fitz Jersey concerning the proceeds of the Dividends paid to Kebzay and Sweenham.

1195. As to the dividend paid to Kebzay:

“As a result of the tracing analysis above, Fitz Jersey can trace a proportion of the dividend payment into:

(a)    the hands of [Botany Road Project Pty Ltd], through which, in economic terms, the funds flowed and which obtained the economic benefit of the trust distribution by [Kebzay Investments Pty Limited] that included almost all of the Yazbek Dividend … Fitz Jersey can identify the acquisition of a right in respect of which $6,096,584 of its value was attributable to the Yazbek Dividend.

(b)    the hands of [620 Botany Road Pty Ltd], which received at    least $5,521,065 in dividend monies, consisting of:

(i)    $627,475.00 in payments which were made to it by [Kebzay Investments Pty Ltd] between 4 April and 19 June 2017 …; and

(ii)    $4,893,590 in monies which were paid to it on 27 June 2017 …;

(c)   the hands of Kebzay Custodian No 2 [Pty Ltd], which received at least $4,893,590 in dividend monies, as a result of the transaction on 27 June 2017 …;

(d)   Mr and Mrs Yazbek’s interest in the Avalon Property (being $3,904,157.19), as a result of the contribution of:

(i)    $1,015,038.00 in traceable proceeds which were paid as part of the deposit paid on 29 September 2017 …; and

(ii)    $2,889,119.19 in traceable proceeds which were paid as part of the purchase price on or around 25 October 2017 ...”

1196. As to the dividend paid to Sweenham:

“(a)    $76,456.65 in traceable proceeds which were paid as part of the deposit paid on 30 March 2017 [in respect of Sweenham’s investment in the property purchased by Castlefield Corner Pty Ltd] …;

(b)   $454,599.48 in traceable proceeds which were paid as part of the purchase price on or around 18 May 2017 …; and

(c)   at least $19,894.79 in monies, which were paid to Castlefield [Corner Pty Ltd] between 29 May and 8 June 2017.”

1197. Fitz Jersey accepted that it is not entitled to double recovery and submitted that “this may be dealt with by an appropriate order limiting the maximum recovery”.

1198. I will invite submissions as to how that process should be undertaken.

Relief – equitable tracing

1199. In the light of this (now uncontroversial) analysis, Fitz Jersey developed detailed submissions as to how the proceeds of the Dividends could be traced:

1. so far as concerns the dividend paid to Kebzay, to Botany Road Project Pty Ltd, 602 Botany Road Pty Ltd, Kebzay Custodian No 2 Pty Ltd, Mr Yazbek, and Mrs Yazbek; and

2. so far as concerns the dividend paid to Sweenham, to Castlefield Corner Pty Ltd.

1200. Ultimately, the Directors offered only four answers to these submissions.

No breach of fiduciary duty

1201. First, the Directors submitted “as a threshold matter” that for equitable tracing to be available against an “Alleged Recipient Party”, Fitz Jersey was required to establish that the Directors had breached their fiduciary duties. ^[173]

      173. It not being an issue that tracing is available in cases where there has been a breach of fiduciary duty: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22.

1202. In Australia, the better view is that a fiduciary relationship is not a precondition for equitable tracing. ^[174]

      174. K Mason, J W Carter, G J Tolhurst, Mason & Carter’s Restitution Law in Australia (3rd ed, 2016, LexisNexis Butterworths) at [303]; J D Heydon, M J Leeming, P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies (5th ed, 2015, LexisNexis Butterworths) at [5-045].

1203. In any event, I have held that the Directors were in breach of their fiduciary duties. ^[175]

      175. See [1119] above.

The Dividends were “not impressed with any equitable interest”

1204. Second, the Directors submitted:

“… the source of the funds sought to be traced are dividend payments made by a company to its shareholders; the payments are not impressed with any equitable interest. The directors themselves did not personally receive the payments; they were made to shareholders. There are no equitable claims made against the shareholders, nor is there any declaration of constructive trust sought by the plaintiff in respect of the Dividend Payment.”

1205. That submission was not developed by reference to authority.

1206. Here, the breaching fiduciaries were Mr Yazbek and Mr Sweeney. The Dividends were the proceeds of Mr Yazbek’s and Mr Sweeney’s breach of fiduciary duty. Mr Yazbek and Mr Sweeney caused Atlas to pay the Dividends.

1207. The Dividends were received by Kebzay and Sweenham.

1208. Mrs Yazbek was the sole director of Kebzay. But Kebzay gave no consideration for the Dividends. It was a volunteer. I see no difficulty tracing the Dividends through the hands of Kebzay.

1209. Mr Sweeney was the only director of Sweenham. Sweenham knew what Mr Sweeney knew. ^[176]

      176. R P Austin, H A J Ford AM and I M Ramsay, Company Directors: Principles of Law and Corporate Governance (2005, LexisNexis Butterworths) at [14.12]; In the matter of Rossfield Group Operations Pty Ltd & Morton Holdings Pty Ltd [1981] Qd R 372; (1980) 5 ACLR 237 at 377 (Connolly J); Yore Contractors Pty Ltd v Holcon Pty Ltd (1990) 2 ACSR 663 at 670 (Cole J); Bernard Elsey Pty Ltd v Federal Commissioner of Taxation (1969) 121 CLR 119 at [121]; [1969] HCA 46 at [4] (Windeyer J); Ishac v David Securities Pty Ltd (No 6) (1992) 7 ACSR 199 at [200] (Young J); Linter Group Ltd v Goldberg (1992) 7 ACSR 580 at [634] (Southwell J).

1205. As Sweenham knew what Mr Sweeney knew, it must follow that it was knowingly involved in Mr Sweeney’s breach of fiduciary duty. For that reason, again, there is no difficulty tracing the Dividends through the hands of Sweenham.

Part of the Dividends paid to Kebzay was used by 620 Botany Road Pty Ltd to repay a loan owed to Kebzay No 3 Pty Ltd and therefore could be traced no further

1211. Fitz Jersey’s analysis, as set out in the Kebzay Flow Chart, shows that payment made from 620 Botany Road Pty Ltd to Kebzay No 3 Pty Ltd, which included money traceable from the Kebzay Dividend was in repayment of an existing loan owed by 620 Botany Road Pty Ltd to Kebzay No 3 Pty Ltd.

1212. Accordingly, the Directors submitted that Kebzay No 3 Pty Ltd was a bona fide purchaser for value without notice and that the proceeds of the Dividend could not be traced to Kebzay No 3 Pty Ltd by reason of the principles in Re Diplock’s Estate. ^[177]

      177. [1948] Ch 465.

1213. However, Mr Yazbek was the sole director of both 620 Botany Road Pty Ltd and Kebzay No 3 Pty Ltd at all relevant times. Those companies are taken to know what Mr Yazbek knew. Kebzay No 3 Pty Ltd therefore did not receive the funds without notice of Mr Yazbek’s breach of fiduciary duty.

Part of the Dividend paid to Sweenham was paid to Castlefield Corner Pty Ltd

1214. Most of the dividend paid to Sweenham was paid to Castlefield Corner Pty Ltd and used by Castlefield to purchase a property in Bondi.

1215. Mr Sweeney had only a 25% interest in Castlefield and was one of only four directors of Castlefield.

1216. There is no suggestion that the other directors or shareholders of Castlefield had any involvement in Mr Sweeney’s breach of fiduciary duty or knowledge of it.

1217. However, Castlefield is taken to know that which Mr Sweeney, as one of its directors, had a duty to tell it, ^[178] and “in ordinary circumstances, if a director knows information which is important to the affairs of the company, he is under a duty both to communicate that information to the company and to receive it”. ^[179]

      178. For example, Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260 at 293 Kirby P); Beach Petroleum NL v Johnson (1993) 43 FCR 1; [1993] FCA 392 at 570-1 (Von Doussa J) ZBB (Australia) Ltd v Allen (1991) ACSR 495 at 506-7 (Waddell CJ in Eq).

      179. Beach Petroleum NL v Johnson at [22.21].

1218. As Fitz Jersey submitted, it was important for Castlefield to know that the funds being applied for its benefit were the proceeds of Mr Sweeney’s breach of fiduciary duty because “Castlefield was entitled to expect that the funds applied by Sweenham would be Sweenham’s, not another person’s”.

1219. Mr Sweeney had a duty to inform Castlefield about these matters. It follows that Castlefield must be taken to have known that the relevant part of Sweenham’s contribution included the proceeds of Mr Sweeney’s breach of fiduciary duty.

Section 588FF of the Corporations Act

1220. In any event, if, contrary to these conclusions, any of Fitz Jersey’s claims premised on the formal rules of tracing failed, its claims for relief under s 588FF, as assignee of the Liquidator, remain.

Relief – statutory tracing – s 588FF of the Corporations Act

1221. Section 588FF provides, relevantly:

“Courts may make orders about voidable transactions

(1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:

(a)    an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;

(b)    an order directing a person to transfer to the company property that the company has transferred under the transaction;

(c)     an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction;

(d)    an order requiring a person to transfer to the company property that, in the court's opinion, fairly represents the application of either or both of the following:

(i)    money that the company has paid under the transaction;

(ii)    proceeds of property that the company has transferred under the transaction;

…

(2) Nothing in sub-section (1) limits the generality of anything else in it.

…

(4)   If the transaction is a voidable transaction solely because it is an unreasonable director-related transaction, the court may make orders under subsection (1) only for the purpose of recovering for the benefit of the creditors of the company the difference between:

(a)   the total value of the benefits provided by the company under the transaction; and

(b   the value (if any) that it may be expected that a reasonable person in the company's circumstances would have provided having regard to the matters referred to in paragraph 588FDA(1)(c).”

1222. Orders under s 588FF of the Corporations Act may be made “on the application of a company’s liquidator”.

1223. The Liquidator has assigned to Fitz Jersey his entitlement to make an application under s 588FF.

1224. Fitz Jersey accepts that, nonetheless, any relief granted should be for the payment or transfer of property to “the company”, that is Atlas, in liquidation.

1225. It has been held that:

“It is clear from the text and purpose of s 588FF(1) that the relief is intended to be restitutionary in nature, in the sense that its purpose is to recover company property, or the value thereof, that is or has been in the hands of the defendant. It is not concerned with compensation for loss or damage suffered by the company.” ^[180]

180. Weaver v Harburn at [114] (McLure P, Buss and Murphy JJA agreeing).

1226. Further, as Barrett J said in New Cap Reinsurance Corp Ltd v A E Grant: ^[181]

      181. (2009) 257 ALR 740; [2009] NSWSC 662 at [21].

“The purpose of an order under s 588FF(1)(a) for the payment of money to a company in liquidation is not to compensate or make whole that company. The section does not create a proprietary right of any kind in the company [citations omitted]. As with preference avoidance provisions in bankruptcy, the objective is to adjust the rights of creditors among themselves in such a way as to eliminate the effects of favourable treatment afforded to one or more creditors, to the exclusion of others, in the period immediately before an insolvent administration commences. As is said [in] M G R Gronow “McPhersons Law of Company Liquidation”, fifth edition (current looseleaf):

the focus [of] the relief that is available (under s 588FF(1)) where a payment or transaction is voidable under the Division is to enable the restoration to the company of money and other property that has been alienated, and to relieve it of the burden of liabilities of the kind mentioned.”

1227. The Court’s discretion is broad and is not necessarily constrained by factors that might arise in an exercise of equitable tracing.

1228. The Court’s task is to make orders that give effect to the statutory scheme under Pt 5.7B, which is concerned with the recovery of property or money for the benefit of the creditors of the company in liquidation.

1229. Fitz Jersey placed particular emphasis on the breadth of the language used in s 588FF(1)(c) which enables the Court, on the application of the liquidator, to require a person pay to the company the “benefits” the person has received “because of” the voidable transaction in question.

1230. In White in his capacity as joint and several liquidator of Port Village Accommodation Pty Ltd (in liq) v ACN 153 152 731 Pty Ltd (in liq), ^[182] the Court said (footnotes omitted):

      182. (2018) 53 WAR 234; [2018] WASCA 119 at [187]-[188] (Murphy and Mitchell JJA and Allanson J).

“The words ‘because of’ in s 588FG(1)(a) and s 588FF(1)(c) are, it may be accepted, words of causation. Although causation is essentially a question of fact determined by the application of common sense, a common sense answer must be given in the context of, and informed by, the relevant legal framework in which the question is asked.

As McLure P observed in Weaver,^[183] the relief under s 588FF(1) is intended to be restitutionary in nature. It is designed to ‘remedy depletion’ of the assets of the insolvent company, principally for the benefit of its unsecured creditors.”

183. Weaver v Harburn at [114].

1231. In my opinion, Fitz Jersey was correct to submit that the language of s 588FF(1)(c) does not require a strict application of the rules of equitable tracing. It merely requires common sense causation between the voidable transaction and the benefit received. Unlike a knowing receipt claim, it does not focus on the knowledge of a recipient.

1232. The analysis conducted by Fitz Jersey as set out above shows that each of Botany Road Projects Pty Ltd, 620 Botany Road Pty Ltd, Kebzay Custodian No 2 Pty Ltd, Mr Yazbek, Mrs Yazbek and Castlefield received “benefits” “because of” the voidable transactions to which I have referred.

1233. In their closing written submissions, the Directors made no reference to s 588FF, apart from reciting it as an element of Fitz Jersey’s claim. In those submissions, the Directors asserted that Fitz Jersey’s contentions concerning ss 588FA, 588FC and 588FDA were “unsustainable” but only because “each of them hinges on a finding that Fitz Jersey was a creditor at the time of the payments”.

1234. It was only in the Directors’ “Note in Reply” delivered following oral submissions that attention was directed to the ambit of s 588FF. In that note, the point made was that because, it was said, Fitz Jersey could not demonstrate that Atlas had suffered any loss as a result of the payment of the Dividends, its submissions concerning the breadth of s 588FF(1)(c) “adopts the conceptual lens of loss seen through the eyes of Fitz Jersey and not the liquidator of Atlas”.

1235. However, as the authorities I have set out make clear, s 588FF is not directed to recompensing any loss of the company in liquidation may have suffered but, rather, to restoring to that company assets for the benefit of its creditors.

1236. Otherwise the Directors did not challenge Fitz Jersey’s contentions concerning s 588FF nor deal with the authorities I have set out above concerning the section.

1237. Turning to the particular transactions relied on by the Directors, the process of “statutory tracing” permitted by s 588FF enables Fitz Jersey, as assignee of the Liquidator, to “trace” the benefit of the proceeds of the voidable transactions, that is the Dividends:

1. through the hands of Kebzay and Sweenham;

2. through the hands of 620 Botany Road Pty Ltd and Kebzay No 3 Pty Ltd; and

3. to Castlefield Corner Pty Ltd.

1238. I propose to invite submissions from Fitz Jersey as to the precise orders that it, as assignee of the Liquidator, proposes. I will give the Directors an opportunity to make submissions about the form of those orders.

Relief – damages and equitable compensation

1239. In its closing submissions, Fitz Jersey contended that there should be an award of “damages or equitable compensation” against Mr Yazbek and Mr Sweeney and orders for equitable compensation against Botany Road Project Pty Ltd, 620 Botany Road Pty Ltd, Kebzay Custodian No 2 Pty Ltd, Mrs Yazbek, Sweenham and Castlefield.

1240. The precise basis upon which such orders should be made was not developed in final submissions. I will invite further submissions about those questions following delivery of these reasons.

The Shareholders’ Loans

1241. I have outlined above the circumstances in which the Shareholders’ Loans were written off on 6 February 2017.

1242. The loans were written off. That is, they were forgiven.

1243. Fitz Jersey contends that the writing off of the Shareholders’ Loans was an unreasonable director-related transaction for the purposes of s 588FDA of the Corporations Act.

1244. I have set out the provisions of s 588FDA above.

1245. Relevantly to the Shareholders’ Loans issue, what must be established is:

1. a payment made by Atlas or a transfer or other disposition of Atlas’s property; ^[184]

   184. Section 588FDA(1)(a)(i)(ii).

2. to a “close associate” of Mr Yazbek and Mr Sweeney, as directors of Atlas, or to a person “on behalf of” or “for the benefit of” such a “close associate”; ^[185] and

   185. Section 588FDA(1)(b).

3. in circumstances where it might be expected that a reasonable person in the circumstances would not have entered the transaction, having regard to the benefits and detriment to Atlas in entering the transaction and the benefits to other parties to the transaction and “any other relevant matter”. ^[186]

   186. Section 588FDA(1)(c).

1246. The Directors did not contest the propositions that the writing off of the Shareholders’ Loans constituted either a payment by Atlas or a transfer or other disposition of property by Atlas to a “close associate” of one of Atlas’s directors.

1247. Debate focused on the question of whether it might be expected that a reasonable person in Atlas’s circumstances would not have entered into the transaction; that is, would not have written off the Shareholders’ Loans.

1248. In that regard, as I have set out above, it is established that:

1. the test is objective;

2. the question is what a reasonable person in the company’s position would do in the circumstances;

3. the circumstances include the facts and circumstances of, and surrounding, the transaction; and

4. the transaction can be an unreasonable director-related transaction even if there is no impropriety or breach of directors’ duties. ^[187]

   187. See fn 157 above.

1249. The Directors pointed to the fact that, as at 6 February 2017:

1. Atlas was a small proprietary company for the purposes of s 45A(2) of the Corporations Act;

2. it had only two directors who were familiar with the operations of the company;

3. it had only two shareholders who were associated with the directors;

4. it was a “non-reporting company” in accounting terms;

5. Atlas then had no substantial creditors (leaving Fitz Jersey aside and noting that the ATO was paid the amount owing to it);

6. Mr Yazbek was in the process of retiring from his role as a builder;

7. the loans were made from monies that Atlas had retained from amounts retained in relation to subcontractors; and

8. for those reasons Atlas was no longer obliged to pay those retained amounts to the subcontractors and Atlas no longer needed to call on the loans for that purpose.

1250. However:

1. there was no benefit to Atlas in entering into the transaction (it was in substance a gift made by Atlas to the shareholders);

2. there was a detriment to Atlas as a result of the transaction as it lost a chose in action against Kebzay and Sweenham of $449,085 for Kebzay and $6,000 for Sweenham; and

3. there was an obvious, and corresponding, benefit to Kebzay and Sweenham.

1251. In those circumstances, I am satisfied that a reasonable person in Atlas’s position would not have written off the loans and that, accordingly, they were unreasonable director-related transactions for the purposes of s 588FDA of the Corporations Act.

1252. In substance, the Directors answer to this aspect of Fitz Jersey’s claim was that if the Shareholders’ Loans had not been written off, they would have been paid to Kebzay and Sweenham as dividends. This appeared to be an argument that Atlas had suffered no loss by reason of the write offs.

1253. However, neither Mr Yazbek nor Mr Sweeney gave evidence that, had the Shareholders’ Loans not been written off, they would have caused dividends in corresponding amounts to have been declared in favour of Kebzay and Sweenham.

1254. In the absence of such evidence, I am not prepared to so find.

Conclusion

1255. I will give the parties an opportunity to consider these reasons and then invite submissions as to the matters I have indicated, ^[188] any further matters that require resolution and as to the orders needed to finalise the proceedings.

      188. See [22], [1198], [1238] and [1240] above.

**********

Endnotes

Amendments

14 April 2022 - Case title on coversheet amended

14 April 2022 - [43] and [791] slips corrected as per [2022] NSWSC 394

Decision last updated: 14 April 2022