In the matter of ACN 152 546 453 Pty Ltd (in liq)

Case •

[2022] NSWSC 974

•

21 July 2022

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: In the matter of ACN 152 546 453 Pty Ltd (in liq) [2022] NSWSC 974
Hearing dates: 20 May 2022
Date of orders: 21 July 2022
Decision date: 21 July 2022
Jurisdiction:Equity - Corporations List
Before: Williams J
Decision:

See paragraph [118]

Catchwords:

CORPORATIONS – directors and officers – breach of duties under ss 181 and 182 of the Corporations Act 2001 (Cth) – whether person alleged to have breached directors’ duties was a director at the time of the breaches – finding that he continued to act as a de facto director of the company after the date 14 October 2014 as at which ASIC was notified that he had resigned – finding that he was a de facto director at the time of the alleged breaches of duties – where director required to take into account the interests of the company’s creditors – where director caused the company to make a number of payments to companies he was associated with – where the company derived no benefit from those transactions – finding that director breached his duties under ss 181 and 182 of the Corporations Act

CORPORATIONS – voidable transactions – where director caused the company to make payments to a real estate agent to discharge the liability of companies associated with the director to pay the deposit under a contract to purchase a property – whether unreasonable director-related transactions within the meaning of s 588FDA of the Corporations Act – finding that transactions were unreasonable director-related transactions and therefore voidable transactions

Legislation Cited:

Corporations Act 2001 (Cth), Part 5.9, ss 9, 181, 182, 530B, 588FDA, 588FE, 588FF, 1317H and 1317K

Cases Cited:

Chameleon Mining NL v Murchison Metals Ltd [2010] FCA 1129

Corporate Affairs Commission v Drysdale (1978) 141 CLR 236

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

Grimaldi v Chameleon Mining NL (No 2); Chameleon Mining NL v Murchison Metals Ltd (2012) 200 FCR 296; [2012] FCAFC 6

Hart Security Australia Pty Ltd v Boucousis (2016) 339 ALR 659; (2016) 117 ACSR 408; [2016] NSWCA 307

Howard v Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21

In the matter of ACN 152 546 453 Pty Ltd (formerly Hemisphere Technologies Pty Ltd) (in liq) [2018] NSWSC 1002

In the matter of Australian International Yacht Club Pty Limited [2021] NSWSC 586

Kaspersky v Hemisphere [2016] NSWSC 1476

Re ACN 152 546 453 Pty Ltd (formerly Hemisphere Technologies Pty Ltd) (in liq) [2018] NSWSC 1002

Re ACN 152 546 453 Pty Ltd (formerly Hemisphere Technologies Pty Ltd) (in liq) [2020] NSWSC 270

Re Colorado Products Pty Ltd (in prov liq) (2014) 101 ACSR 233; [2014] NSWSC 789

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

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

Category:Principal judgment
Parties: Giles Geoffrey Woodgate in his capacity as special purpose liquidator of ACN 152 546 543 Pty Ltd (in liq) (First Plaintiff)
ACN 152 546 453 Pty Ltd (formerly known as Hemisphere Technologies Pty Ltd) (in liquidation) (Second Plaintiff)
Peter Phokos (Third Defendant)
Zon No 1 Pty Ltd (ACN 604 836 259) (Fourth Defendant)
Spaki Properties No. 1 Pty Ltd (ACN 604 836 393) (Fifth Defendant)
Representation:

Counsel:
P Santucci (Plaintiffs)
No appearance (Defendants)

Solicitors:
Deutsch Miller (Plaintiffs)
File Number(s): 2020/322202
Publication restriction: N/A

Judgment

Introduction

  1. The first plaintiff in these proceedings is Mr Giles Woodgate in his capacity as special purpose liquidator of the second plaintiff, ACN 152 546 453 Pty Ltd (in liquidation) (formerly Hemisphere Technologies Pty Ltd) (the Company).

  2. The Company was in the business of distributing antivirus and cyber security software. The distribution of software supplied by Kaspersky Lab UK Ltd (Kaspersky) under a distribution agreement with the Company accounted for a significant part of the Company’s business and revenue.

  3. The Company went into liquidation on 17 January 2017 in circumstances where Kaspersky had terminated the distribution agreement on 25 August 2016, the Company had sold its trade debtors and stock to Hemisphere Technologies AUS Pty Ltd (HTA) on 22 December 2016 and the Company was indebted to the Australian Taxation Office.

  4. The third defendant, Mr Peter Phokos, was the sole director of the Company at all times relevant to these proceedings until at least 14 October 2014. The plaintiffs contend that Mr Phokos continued to act as a director of the Company at all times until the winding up of the Company, notwithstanding that a notice lodged with the Australian Securities and Investments Commission (ASIC) on 19 October 2016 stated that Mr Phokos had ceased to be a director on 14 October 2014.

  5. Ms Suelen McCallum and Mr Riad Tayeh were appointed as joint and several liquidators of the Company when it was wound up voluntarily on 17 January 2017. By order of this Court made on 25 October 2021, Ms McCallum and Mr Tayeh were removed as liquidators at their own request and replaced by Mr Richard Rowley. Ms McCallum and Mr Tayeh were initially the first and second defendants in these proceedings however the matter has since settled in respect of them.

  6. On 29 June 2018, this Court made an order appointing Mr Woodgate as special purpose liquidator with powers that included investigating whether any directors of the Company had breached their statutory and/or fiduciary duties owed to the Company and commencing and pursuing any claim (including by legal proceedings) that may be available to the Company or the special purpose liquidator in respect of any such breaches of duty: Re ACN 152 546 453 Pty Ltd (formerly Hemisphere Technologies Pty Ltd) (in liq) [2018] NSWSC 1002. The powers of the special purpose liquidator were expanded by orders made on 16 March 2020 to encompass the investigation and prosecution of the claims that are now made by the plaintiffs in these proceedings: Re ACN 152 546 453 Pty Ltd (formerly Hemisphere Technologies Pty Ltd) (in liq) [2020] NSWSC 270.

  7. These proceedings were commenced on 11 November 2020. In their Amended Statement of Claim filed on 1 March 2022, the plaintiffs claim compensation from Mr Phokos in respect of the following payments that he allegedly caused the Company to make in breach of his duties owed to the Company under ss 181 and 182 of the Corporations Act 2001 (Cth) or the equivalent duties owed to the Company at general law:

  1. payments totalling $160,000 made by the Company in April 2015 to Stable Real Estate Northern Beaches Pty Ltd (the Stable Real Estate Payments and Stable Real Estate respectively) for a deposit payable by Zon No. 1 Pty Ltd (as trustee for the Zon No. 1 Trust) (Zon and the Zon Trust respectively) and Spaki Properties No. 1 Pty Ltd (as trustee for the Spaki Properties No. 1 Family Trust) (Spaki and the Spaki Trust respectively), as the purchasers under a contract for sale of property at 2 Ada Avenue, Brookvale, New South Wales (the Ada Avenue Property);

  2. payments totalling $1,214,009.08 made by the Company to Portfolio IT Pty Ltd (Portfolio IT) between 3 October 2016 and 16 January 2017, during which period Mr Phokos was the sole director and shareholder of Portfolio IT (the Portfolio IT Payments); and

  3. payments totalling $515,906.24 made by the Company to ACG Building Pty Ltd (in liq) (ACG) between 13 October 2016 and 30 November 2016, during which period Mr Phokos was the sole director and his wife Stavroula Phokos was the sole shareholder of ACG (the ACG Payments).

  1. At the time the Company paid the deposit in respect of the Ada Avenue Property, Mr Phokos was the sole director of Zon and Spaki. The plaintiffs contend that Mr Phokos was also a beneficiary of the Zon Trust and the Spaki Trust. There is no direct evidence identifying the beneficiaries of those trusts as at April 2015. There is contemporaneous documentary evidence that Mr Phokos and his wife, Mrs Stavroula Phokos, were beneficiaries of the Zon Trust and the Spaki Trust as at 22 December 2016. Zon and Spaki are the fourth and fifth defendants in these proceedings. As against Zon and Spaki, the plaintiffs claim:

  1. an order under s 588FF of the Corporations Act requiring Zon and Spaki to pay to the Company the sum of $160,000 on the basis that the payments made to Stable Real Estate were unreasonable director-related transactions and are therefore voidable under s 588FE; or

  2. alternatively, an order for equitable compensation in the sum of $160,000 on the basis that Zon and Spaki:

  1. knowingly induced or procured Mr Phokos’ breaches of fiduciary duty owed to the Company; or

  2. were accessories to Mr Phokos’ alleged breaches of fiduciary duty in in the sense that they knowingly received the $160,000 paid by the Company to Stable Real Estate.

  1. The plaintiffs’ contention that Mr Phokos continued to act as a director of the Company after 14 October 2014 is central to its claims concerning the Stable Real Estate Payments, the Portfolio IT Payments and the ACG Payments.

  2. Mr Phokos, Zon and Spaki did not file a notice of appearance or a defence in these proceedings and did not appear at the final hearing on 20 May 2022. The plaintiffs adduced evidence that throughout the course of these proceedings the defendants were served with a number of documents and informed of upcoming hearings. Such documents served on the defendants included the sealed Originating Process that commenced these proceedings and the supporting affidavit of Mr Woodgate, both filed on 11 November 2020, the Statement of Claim filed on 25 January 2021 and the Amended Statement of Claim filed on 1 March 2022. The court documents were generally served with a letter that notified the parties of the upcoming hearings. In particular, counsel for the plaintiffs drew my attention to an affidavit of service dated 10 March 2022 in which the Supreme Court orders and judgment in the proceedings dated 28 February 2022 and 1 March 2022, the Amended Statement of Claim dated 1 March 2022 and other additional evidence were all served on Mr Phokos personally. I note that the Supreme Court orders dated 1 March 2022 set the matter down for hearing on 20 May 2022 and Mr Phokos was thereby notified of the final hearing in the matter.

  3. For the reasons that follow, I have determined that:

  1. Mr Phokos continued to act as a director of the Company during the period from 14 October 2014 until the winding up of the Company;

  2. Mr Phokos breached ss 181 and 182 of the Corporations Act in causing or permitting the Company to make the Portfolio IT Payments, the ACG Payments and the Stable Real Estate Payments and the Company is entitled to compensation orders against Mr Phokos under s 1317H of the Corporations Act in respect of those payments; and

  3. the Stable Real Estate Payments were unreasonable director-related transactions that are voidable by reason of s 588FE of the Corporations Act and the Company is entitled to orders under s 588FF of the Corporations Act requiring Zon and Spaki to pay to it an amount equivalent to those payments, subject to the proviso that the Company is not to recover more than a total amount of $160,000 from Mr Phokos, Zon and/or Spaki in respect of the Stable Real Estate Payments.

Summary of evidence

  1. The substantive evidence relied on by the plaintiffs comprised three affidavits of Mr Woodgate sworn on 18 June 2021, 9 February 2022 and 9 May 2022, together with documents exhibited to those affidavits, and an affidavit of Mr Rowley sworn on 16 May 2022. The salient facts emerging from that evidence may be summarised as follows.

Establishment of the Company and its business

  1. The Company was registered on 8 August 2011 and Mr Phokos was its sole director and shareholder from 25 August 2011.

  2. Mr Kaperonis of Alpha Nu Accountants (Alpha Nu) has been the Company’s principal accountant since about October 2014.

  3. The Company, as trustee of the Hemisphere Technologies Unit Trust (Hemisphere Trust), carried on the business of distributing antivirus and cyber security software, including Kaspersky products supplied pursuant to a distribution agreement between Kaspersky and the Company dated 31 August 2011.

Payments to Stable Real Estate: April 2015

  1. On 9 April 2015, the Company paid $80,000 from its ANZ bank account to Stable Real Estate’s trust account by electronic funds transfer. The Company transferred a further $80,000 to Stable Real Estate’s trust account on 27 April 2015. Stable Real Estate issued trust account receipts for each of these payments which described them as a deposit for the Ada Avenue Property. On 29 April 2015, Zon and Spaki entered into a contract to purchase the Ada Avenue Property for $1,600,000 with a ten per cent deposit of $160,000. The contract names Stable Real Estate as the vendor’s agent.

  2. On 14 August 2018, Mr Woodgate issued a notice pursuant to s 530B(4) of the Corporations Act to Mr Phokos (in his capacity as director of Zon and Spaki) requiring production of all correspondence, invoices and payments between the Company and Zon and/or Spaki.

  3. Mr Woodgate conducted examinations of Mr Phokos and others pursuant to Pt 5.9 of the Corporations Act. On 30 July 2019, orders for production of documents were issued to each of Zon and Spaki in those examination proceedings. Those orders required production of, inter alia, documents evidencing or relating to:

  1. the purchase and financing of the Ada Avenue Property;

  2. the Stable Real Estate Payments;

  3. any loans or transactions between the Company and Zon and/or Spaki; and

  4. the receipt or payment of funds between Zon and/or Spaki and the Company.

  1. On 28 October 2019, Mr Woodgate wrote to Mr Phokos requesting the production of financial statements, tax returns and general ledgers for a partnership between Zon and Spaki.

  2. The object of the notices, orders and requests referred to above was to obtain documents that might explain the Stable Real Estate Payments made by the Company that appear to have benefitted only Zon and Spaki and the beneficiaries of the Zon Trust and the Spaki Trust.

  3. Mr Woodgate gave evidence that no such documents were produced or provided to him in response to those notices, orders and requests. Mr Woodgate’s investigations have not revealed any explanation for the use of $160,000 of the Company’s funds towards Zon and Spaki’s purchase of the Ada Avenue Property.

  4. During his Part 5.9 examination, Mr Phokos was asked about Zon and Spaki’s purchase of the Ada Avenue Property. He gave evidence that those companies were going to renovate the property and then lease it to the Company. He was unable to offer any explanation for the Stable Real Estate Payments as evidenced in the following extract of the transcript:

“Q. Do you recall why they [Zon and Spaki] were buying that property?

A. Privilege. Vaguely. Kind of.

Q. Was it an investment, was it a family home to live in, what was it?

A. It was a – privileged, an industrial entity. It’s a industrial property.

Q. What were those two companies going to do with it?

A. Privilege. Don’t know what they were going to do with it?

Q. You don’t know what they were going to do with it?

A. Renovate it.

Q. For what purpose?

A. Privilege. To lease it out.

…

Q. Who has been the tenant for that building?

A. There was – Hemisphere was, Hemisphere was supposed to be in there.

Q. Supposed to?

A. Yeah

Q. When was that?

A. Privilege. Don’t remember the dates.

Q Did they ever in fact occupy that building?

A Privilege. Yes I believe so.

Q Is that at same time as occupying the Wattle Street property?

A. Privilege. I think, I think there was a crossover period. Against don’t know the timeframe around that.

Q. Do you recall who paid the purchase price for the 2 Ada Street property?

A. No

Q. Do you recall the fact that $160,000 was paid towards a deposit by Hemisphere Technology ?

A. Privilege. No.

Q. Can you think of – can you think back in your mind as to any reason why Hemisphere Technology would’ve paid the deposit for 2 Ada Street Avenue?

A. Privilege. No.

Q. It doesn’t make sense does it?

A. Privilege. Yes and no. Don’t know.”

Demand issued by Kaspersky: December 2015

  1. In November and December 2015, Mr Kaperonis and Mr Phokos were in correspondence with Kaspersky endeavouring to negotiate a payment plan for the Company to pay amounts owing to Kaspersky.

  2. On 23 December 2015 Kaspersky wrote to the Company requiring payment of $1,789,278.09, being royalties that Kaspersky claimed were owing under the distribution agreement together with interest.

  3. On 30 December 2015, Mr Kaperonis sent an email to Mr Maxim Mitrokhin of Kaspersky advising that the Company was not in a position to make any further payments to Kaspersky in 2015, contending that the debt had been reduced to approximately $1,509,021.32 as a result of various performance rebates and returns and advising that the Company would “look to be more aggressive with our payments in February 2016 to have the account as up to date and inline as possible”. Mr Kaperonis’ email was sent from an email address and using a signature block indicating that he was an officer or employee of the Company. Mr Phokos was also a recipient of the email.

Further demand issued by Kaspersky: March 2016

  1. On 14 March 2016, Kaspersky sent a further letter to the Company requiring payment of royalties with interest (which had by then increased to a total amount of $2,181,188.31) within 14 days and preventing the Company from placing any further orders for Kaspersky products until that sum was paid in full or a payment schedule was agreed between Kaspersky and the Company.

Incorporation of HTA and involvement of Ms McCallum: 9 June 2016

  1. HTA was incorporated on 9 June 2016 with Mr Phokos as its sole director.

  2. On 16 June 2016, Ms McCallum sent an email to Mr Kaperonis asking several questions about the Company’s assets and liabilities and payments to related companies in the context of considering a potential sale of the Company’s business if the Company were to go into administration. The email contains certain statements about whether related company payments would be subject to “review”, which counsel for the special purpose liquidator submitted (and I accept) must be a reference to review by a future liquidator. Ms McCallum’s email concludes with Ms McCallum articulating her “major concern” as “making sure where the assets and liabilities are located, in order that any business sale can be protected if necessary”.

Financial position of the Company: 30 June 2016

  1. Draft financial statements of the Company for the year ended 30 June 2016 were prepared by Alpha Nu. The trading, profit and loss statement recorded a net profit before income tax of $264,066 (compared to $408,110 in the financial year ending 30 June 2015). The Company’s total assets were equal with its total liabilities of $3,088,403.

  2. Mr Woodgate’s investigations have revealed a file note of a meeting between Ms McCallum, Mr Kaperonis, a Mr Andrew Mamonities and Mr Phokos on 10 October 2016. The file note, prepared by Ms McCallum, states (my emphasis):

“Comments from Peter Phokos

-    Only stock ($8K) and debtors ($500K) left

-    Lots of fluctuations and changes in process

-    Peter had a couple of owners involved / dustup / going their own way

-    Looking to sell remaining assets, establish fair value

-    Peter was employee, resigned 2.5 years ago

-    No employees now, business effectively ceased some months ago

-   Was distributor for Kaspersky for anti-virus software etc.

History

-   Was distributor for Kaspersky for anti-virus software etc. Distribution agreement some time in 2011 – Australia and New Zealand

-   Relationship broke down, Hemisphere unable to pay all monies owing to Kaspersky

-   …

-   Distribution rights terminated in August 2016 …

-   Advised me that this removed their ability to trade. …

-   Stock worth nothing as cannot provide registration keys for software – has material effect on ongoing business and daily turnover decreasing as a result …

-   Not enough to cover fixed costs – company can’t continue to trade at this level

-   Has been trying to build up business with other vendors but nothing material as yet – Kaspersky was always the main product - the others are competitors

…

Financial Data

-   Financial statements provided for 2014 to 2016

-   2016 is draft – accountants not sure all creditors and taxes are showing

-   Other books and records advised lost in move?

-   Trade debtors and stock possibly overstated if business ceases – debts will have some disputes over security keys and ongoing support, in particular. Stock will also be affected by inability to provide registration etc

Structure

-   …

-   Hemisphere were paying monthly payments to Portfolio IT and ACG Buildings

-   Service agreements etc no longer applicable if assets sold/company closed down?

-   Due to problems with Kaspersky, management looking at selling remaining assets to new entity and working on other distribution channels for products”

  1. Mr Woodgate gave evidence that, based on that file note, he considered that current assets recorded in those draft financial statements for the 2016 financial year were likely overstated and that the Company’s current liabilities were likely understated.

  2. Mr Woodgate also gave evidence that, a current ratio (being current assets:current liabilities) and quick ratio (being current assets less stock:current liabilities) of greater than 1 was generally regarded as acceptable. Using the information in the Company’s draft financial statements for the 2016 financial year (including the 2015 financial year comparative figure), Mr Woogdate calculated that the Company had:

  1. a current ratio of 2.17 and quick ratio of 1.01 as at 30 June 2015; and

  2. a current ratio of 1.23 and quick ratio of 0.69 as at 30 June 2016 (taking the 2016 figures in the draft financial statements at face value).

  1. In Mr Woodgate’s opinion, this represented a greatly diminished liquidity position as at 30 June 2016 compared to one year earlier and the Company’s liquidity position would not have improved between 30 June 2016 and 30 September 2016. Kaspersky’s notices issued to the Company on 11 August and 25 August 2016 and Mr Phokos’ observations recorded in Ms McCallum’s file note of the 10 October 2016 point strongly to the conclusion that the Company’s financial and liquidity positions were deteriorating rather than improving in the period from 30 June to 30 September 2016.

  2. As at June 2016, the Company had not yet lodged income tax returns for the 2014 and 2015 financial years or activity statements for the quarters ending December 2013, March 2014, June 2014, September 2014, December 2014, March 2015, June 2015, September 2015 and December 2015. The Australian Taxation Office (ATO) had issued several notices to the Company about these outstanding returns and statements, warning that it would face increasing penalties and that interest was accruing. The ATO had also issued fines in relation to some of the outstanding activity statements.

Final demand issued by Kaspersky: 11 August 2016

  1. On 11 August 2016 Kaspersky issued a final letter of demand to the Company stating that its overdue and outstanding debt had increased to a total amount of $2,723,435.84. The letter demanded that the Company execute and return an enclosed Debt Settlement Agreement which required payment of the overdue amount in instalments, with the first instalment of $710,000 due on 17 August 2016 and a second instalment of $210,000 due on 19 August 2016. The Debt Settlement Agreement waived Kaspersky’s rights to charge late fees and to terminate the Company’s distribution agreement, but also provided for the termination of the Company’s exclusivity as distributor of Kaspersky products.

  2. The Company did not execute the Debt Settlement Agreement.

Kaspersky termination notice and subsequent litigation: 25 August 2016

  1. On 25 August 2016, Kaspersky gave the Company written notice of the termination of its distribution agreement. The notice required the Company to pay the amount of $2,907,864.52 said to be owing and to cease distributing and marketing Kaspersky products.

  2. Kaspersky commenced proceedings against the Company in this Court to recover the debt that it claimed was owed to it. The Company filed a cross‑claim alleging that the distribution agreement had been wrongly terminated. An interim injunction operated for the period 14 September 2016 to 19 October 2016 restraining Kaspersky from taking any action or step giving effect to its 25 August 2016 notice of termination pending the determination of the Company’s application for interim relief in arbitration proceedings. It appears that Kaspersky ceased to be restrained from acting on its termination notice from 19 October 2016: see Kaspersky v Hemisphere [2016] NSWSC 1476 (Bergin CJ in Eq); In the matter of ACN 152 546 453 Pty Ltd (formerly Hemisphere Technologies Pty Ltd) (in liq) [2018] NSWSC 1002 (Gleeson JA).

  3. The Company’s books and records made available to the special purpose liquidator included an affidavit sworn by Mr Phokos on 12 September 2016 for the purpose of the proceedings referred to above. In that affidavit, Mr Phokos deposed that he was the sole director and secretary of the Company. He set out his assessment of the difficulties the Company would face if Kaspersky were not restrained from acting on its termination notice. Mr Phokos deposed that, even after drastically reducing its expenses, the Company would not be able to survive without:

  1. “a significant injection of capital, which the company is unlikely to receive from any conventional lender, which will mean a loan from me or my building company”; and

  2. replacing the revenue that the Company had previously earned from Kaspersky within six months, which Mr Phokos considered “would be near impossible” given that companies generally “do not enter into new agreements in the months leading up to December and over the summer”.

Insolvency

  1. Mr Woodgate gave evidence that, on the basis of the following matters revealed by his investigations, he believes that the Company was insolvent from about 30 September 2016 or otherwise by 15 December 2016:

  1. Mr Woodgate’s opinion referred to at [31] above that the Company’s draft financial statements for the 2016 financial year likely overstated the value of the Company’s assets and understated its debts;

  2. Kaspersky, which made up “over 50%” of the Company’s business, had issued multiple letters of demand identifying debts allegedly owed by the Company to Kaspersky under or in connection with the distribution agreement. The total amount claimed by Kaspersky had increased to $2,907,864.52 as at 25 August 2016. The Company’s failure to pay the claimed amount, or to enter into an agreement to make the payment in instalments satisfactory to Kaspersky, resulted in Kaspersky terminating its distribution agreement on 25 August 2016. Kaspersky ceased to be restrained from acting on that termination from 19 October 2016 as referred to at [37]-[38] above;

  3. by at least 16 June 2016, consideration was being given to selling the Company’s business and/or assets and placing the Company into liquidation;

  4. the Company’s deteriorating liquidity position between 30 June and 30 September 2016, as referred to at [32]-[33] above;

  5. the information recorded in Ms McCallum’s file note of the 10 October 2016 meeting referred to at [30] above, particularly that the Company’s business had effectively ceased months ago and that it was unable to pay all moneys owing to Kaspersky; and

  6. the Company’s ongoing failure to lodge tax returns and activity statements and the fact that it was accruing interest on amounts owing to the Australian Taxation Office as referred to at [34] above.

  1. Mr Woodgate also referred to a valuation report in respect of the Company prepared by Ms McCallum on 15 December 2016 on the basis of the Company’s draft financial statements as at 30 June 2016, adjusted for material events subsequent to 30 June 2016. Noting that it was extremely unlikely that the Company would be able to continue operations, Ms McCallum prepared the valuation on the basis that the value of the Company’s business was restricted to net tangible assets on a forced sale or liquidation basis. Ms McCallum concluded that the value of the net tangible assets was $368,451 (before the costs of realisation and administration and before the claims of any creditors secured against the assets), resulting in a net asset deficiency of $2,919,840. On the basis of Ms McCallum’s valuation report, Mr Woodgate expressed the opinion that, if the Company was not insolvent by 30 September 2016, then it was insolvent by 15 December 2016.

ASIC notified of Mr Phokos’ resignation: 19 October 2016

  1. On 19 October 2016 the Company filed a “Change of Company Details” form with ASIC which stated that Mr Phokos had resigned as a director of the Company on 14 October 2014 and Mr Philip Rodou had been appointed as a director on that date, replacing Mr Phokos.

  2. In the period after 14 October 2014, Mr Phokos:

  1. corresponded with Alpha Nu purportedly in his capacity as director of the Company;

  2. was listed in the 2015 and 2016 ASIC Company Statements as a director;

  3. signed a “Memorandum of Resolution of the Director” concerning the solvency of the Company on 13 August 2015;

  4. signed a finance lease as a director of the Company on 8 September 2016; and

  5. swore an affidavit on 12 September 2016 describing himself as the sole director and secretary of the Company, as referred to at [39] above, in which he set out his assessment of the Company’s financial prospects in the wake of the termination of the Kaspersky distribution agreement as being dependent on (inter alia) ongoing financial support from him or ACG.

Portfolio IT Payments: 3 October 2016 to 16 January 2017

  1. The Company made 37 payments totalling $1,214,009.98 from its NAB and ANZ bank accounts to Portfolio IT during the period from 3 October 2016 to 16 January 2017. The payments are evidenced in the Company’s NAB bank statements (which name Portfolio IT as the recipient of the relevant payments), in the Company’s ANZ bank statements (which identify the recipient account number as Portfolio IT’s bank account with ANZ) and, in one instance, an NAB payment report that identifies Portfolio IT as the recipient of the payment.

  2. The Portfolio IT Payments were made at varying intervals (sometimes more than daily) and in varying amounts (but all in rounded sums, save for the payment made from the Company’s ANZ bank account on 12 December 2016 in the precise sum required to transfer the whole of the balance of that account to Portfolio IT: $46,000.98).

  3. A list of the Portfolio IT Payments is set out in Appendix 1 to these reasons.

  4. As I have already mentioned, Mr Phokos was the sole director and shareholder of Portfolio IT during the period in which the Company made the Portfolio IT Payments.

  5. In the examination proceedings referred to at [17] above, orders for production were issued to Mr Phokos and Portfolio IT which required production of documents relevant to the Portfolio IT Payments, including documents evidencing or otherwise relating to:

  1. any services provided to the Company by Portfolio IT;

  2. the payment of any funds by the Company to Portfolio IT; and

  3. any loan, transactions or agreements between Portfolio IT and the Company (including any purchase orders, invoices, receipts or correspondence).

  1. Mr Woodgate gave evidence that no documents were produced by Mr Phokos or Portfolio IT which explained why the Company made the Portfolio IT payments. In the course of his investigations, Mr Woodgate has not identified any evidence in the Company’s books and records that relates to any service agreement or contract between the Company and Portfolio IT that might explain the Portfolio IT Payments.

  2. Portfolio IT lodged a proof of debt in the winding up of the Company claiming an alleged debt of $1,427,156.56. The proof of debt attached an invoice addressed to the Company dated 1 October 2016 in the amount of $1,427,156.56 (including GST) for “Service Fee Arrangements – Quarter ending 30th December 2016”. The invoice does not provide any details about the nature or extent of the services said to have been provided to the Company or the basis on which the invoice amount has been calculated. Mr Woodgate has not located any other invoices or any receipts between Portfolio IT and the Company.

  3. During his public examination, Mr Phokos was asked several questions about the nature of any services provided by Portfolio IT to the Company and the reason for the Portfolio IT Payments. Mr Phokos failed to offer any meaningful description of services said to be provided by Portfolio IT and offered no cogent explanation for the Portfolio IT Payments made during a period after he had informed Ms McCallum that the Company’s business had effectively ceased (as recorded in Ms McCallum’s file note of 10 October 2016 referred to at [30] above) and even after the Company sold its assets to HTA as referred to at [69] below. The explanations that Mr Phokos purported to offer were vague, speculative and inherently improbable in the absence of any contemporaneous corroborating documents and having regard to the Company’s dire financial circumstances at the time of the Portfolio IT Payments as referred to at [29]-[41] above.

  4. When asked during the public examination what the Company’s payments to Portfolio IT and ACG were for, Mr Phokos gave the following vague answer: “I’d say the, the service provided by those two entities to Hemisphere.” Mr Phokos’ description of the services that ACG was providing to the Company was in the following vague and speculative terms: “Whether it be from a [sic] office fit-outs to events, event management, whether it be general maintenance or whether they held the, the accounts for services or products that they had access to for Hemisphere”. Mr Phokos said that the Company was paying Portfolio IT for “[s]imilar things but just different items”. Mr Phokos had earlier described the services provided by Portfolio IT to the Company as “operating services”, being “the day to day running of the organisation”. When asked to provide examples of services provided by Portfolio IT, Mr Phokos repeated his earlier vague answer in different terms without offering any specific examples: “The, geez – privilege. They were paying for services. They paid for the accounts. They paid for events on behalf of vendors and, and partners, that kind of stuff.” Mr Phokos acknowledged that, if the Company was no longer operating, then Portfolio IT would not need to continue providing services but speculated that “there may be services that Portfolio IT had already committed to” and “if there’s a liability there that falls on Portfolio IT that Hemisphere still are committed to be paying then the liability could go up or down but that will, depended on whatever you, you’re, the commit is [sic]”.

  5. In response to questions about specific payments to Portfolio IT by way of example, Mr Phokos gave answers maintaining that there was or “would have been” a basis for those payments but failed to identify the basis other than to say that “there are still commitments and, and service they still needed to provide on behalf of the company regardless of how the company was trading or not trading ‘cause there’s still commit there [sic]”.

  6. Mr Phokos said that a service agreement existed but that he did not have it. He initially said that he had “no idea” where it was and later claimed that “I believe the accountant would have had that and they sorted it out”.

  7. The plaintiffs tendered these parts of the transcript of Mr Phokos’ examination not as evidence of the truth of his answers concerning Portfolio IT but as evidence of the terms of the answers that were given and the absence of any cogent explanation articulated by Mr Phokos for the Portfolio IT Payments.

ACG Payments: 13 October 2016 to 30 November 2016

  1. The Company made 11 payments totalling $515,906.24 from its NAB bank account to ACG during the period from 13 October 2016 to 30 November 2016. ACG is identified as the recipient of each payment either in the description of the transaction on the bank statements for the Company’s NAB bank account or in NAB payment reports relating to the transaction.

  2. The ACG Payments were made at varying daily and weekly intervals (with two payments being made on 30 November 2016). All but one of the payments were for rounded amounts that varied, with $50,000 being the most common amount.

  3. A list of the ACG Payments is set out in Appendix 2 to these reasons.

  4. As I have already mentioned, Mr Phokos was the sole director and his wife was the sole shareholder of ACG during the period in which the Company made the ACG Payments.

  5. In the examination proceedings referred to at [17] above, orders for production were issued to Mr Phokos and ACG which required production of documents relevant to the ACG Payments, including documents evidencing or otherwise relating to:

  1. any services provided to the Company by ACG;

  2. the payment of any funds by the Company to ACG; and

  3. any loan, transactions or agreements between ACG and the Company (including any purchase orders, invoices, receipts or correspondence).

  1. Mr Woodgate gave evidence that no documents were produced by Mr Phokos or ACG which explained why the Company made the ACG Payments. In the course of his investigations, Mr Woodgate has not identified any evidence in the Company’s books and records that relates to any service agreement or contract between the Company and ACG that might explain the ACG Payments.

  2. ACG lodged a proof of debt in the winding up of the Company attaching an invoice addressed to the Company dated 2 December 2016 in the amount of $342,123.56 (including GST) with a description of the charges as relating to labour, forklift hire, plumbing expenses described as “Priority Plus Plumbing”, rubbish removal, gyprock, painting, construction, workshop materials and air conditioning. With four exceptions, the invoice does not identify the dates on which the labour is said to have been provided or the expenses are said to have been incurred. The exceptions relate to the forklift hire (which is said to relate to a period of five weeks between 22 October 2016 and 3 December 2016) and three rubbish removal charges (which are said to relate to removals on 24 October, 26 October and 12 November 2016). It will be recalled that, according to Ms McCallum’s file note referred to at [30] above, the Company’s business had effectively ceased some months before this work is said to have been carried out by ACG for the Company. Moreover, as the plaintiffs submitted, the invoice describes the “Job” as “2 Ada Avenue, Brookvale NSW 2100”. It will be recalled that this is the Ada Avenue Property that was purchased by Zon and Spaki.

  3. Mr Woodgate gave evidence that he caused one of his staff members to contact Priority Plumbing and request copies of their invoices issued to the Company. The managing director of Priority Plumbing advised that they had no record of a file number attributed to them in Priority Plumbing’s charge of $84,000 listed in ACG’s invoice issued to the Company. He also advised that he had no recollection of a charge in the amount of $84,000.

  4. Mr Woodgate has not located any other invoices or any receipts between ACG and the Company.

  5. I have referred at [52] above to Mr Phokos’ vague and speculative description during his public examination of services that he claimed ACG had provided to the Company. As I have already observed, there are no contemporaneous documents supporting Mr Phokos’ description, other than the invoice relating to the Ada Avenue Property referred to above. As the plaintiffs submitted, it is not clear from the available evidence whether the Company ever occupied the Ada Avenue Property. Even assuming that it did, Mr Phokos’ evidence given during his public examination did not identify any reason for the Company requiring services from ACG in relation to that property after the Company’s business effectively ceased.

  1. The plaintiffs tendered those parts of the transcript of Mr Phokos’ examination not as evidence of the truth of his answers concerning ACG but as evidence of the terms of the answers that were given and the absence of any cogent explanation articulated by Mr Phokos for the ACG Payments.

Sale of Company’s assets to HTA: 22 December 2016

  1. As referred to at [41] above, Ms McCallum issued a valuation report on 15 December 2016 which valued the Company’s assets at $368,451 with a net asset deficiency of $2,919,840. The following day, Ms McCallum sent an email to a solicitor, Ms Dora Jabbour, which was copied to Mr Kaperonis. Ms McCallum’s email stated that Mr Kaperonis’ client was “looking at liquidating the company” and explained that she was “finalising a valuation for the job this weekend in regards to the remaining assets” and that ‘[t]hey will want a sale agreement drafted up to cover off on that. Assets will be debtors, inventories and plant and equipment. Any cash at bank is to stay with the company …” In subsequent emails, Mr Kaperonis identified the Company as the company that was to be liquidated.

  2. On 19 December 2016, Mr Phokos attended to the payment of Ms Jabbour’s fees of $1,650 from the Company’s bank account.

  3. On 22 December 2016, the Company entered into an Asset Sale Agreement in which the assets of the Company were sold to HTA (the Asset Sale Agreement). The Agreement was signed by Mr Rodou on behalf of the Company and Mr Phokos on behalf of HTA. Mr Phokos was questioned about why the Company entered into the Asset Sale Agreement in the public examination. He answered that he did not believe the Company was “surviving”, although said he could not remember why the Company was not surviving.

  4. Mr Phokos ceased to be a director of HTA the same day that the Asset Sale Agreement was signed.

Voluntary winding up: 17 January 2017

  1. On 23 December 2016, the day after the Asset Sale Agreement was executed, Ms McCallum and Mr Tayeh signed a form consenting to act as the liquidators of the Company.

  2. On 17 January 2017, Mr Rodou, as sole director, resolved that the Company be wound up and appointed Mr Tayeh and Ms McCallum as joint liquidators.

  3. On 24 January 2017, Kaspersky submitted a formal proof of debt for $3,988,119.31 comprising a principal debt of $3,503,055.06 plus legal costs and interest.

  4. Mr Rowley, the general purpose liquidator, gave evidence that as at January 2017 he believed that the Company owed the Australian Taxation Office approximately $4,000,000 for unpaid PAYG withholdings, GST and superannuation charges in respect of the period from about 1 October 2013 to 17 January 2017.

Consideration and determination

Was Mr Phokos a director of the Company in the period after 14 October 2014?

  1. As referred to earlier in these reasons, all of the claims for relief against Mr Phokos, Zon and Spaki depend on the plaintiffs establishing that Mr Phokos remained a director of the Company after 14 October 2014.

  2. The applicable principles are well established. Section 9 of the Corporations Act 2001 provides as follows (my emphasis):

“director of a company or other body means:

(a)    a person who:

(i)    is appointed to the position of a director; or

(ii)    is appointed to the position of an alternate director and is acting in that capacity;

regardless of the name that is given to their position; and

(b)   unless the contrary intention appears, a person who is not validly appointed as a director if:

(i)   they act in the position of a director…”

  1. The concept of a “de facto director” is referred to in paragraph (b)(i) of that definition. A de facto director is a person who is not a director and has no lawful authority to act as director, whether due to invalidity or absence of appointment, but “who none the less occupie[s] the office of director and discharge[s] the duties attaching to that office”: Grimaldi v Chameleon Mining NL (No 2); Chameleon Mining NL v Murchison Metals Ltd (2012) 200 FCR 296; [2012] FCAFC 6 at [37] (citing Corporate Affairs Commission v Drysdale (1978) 141 CLR 236 at 242-3 and 245) and [69] (Finn, Stone and Perram J).

  2. Whether a person is a de facto director is a question of fact which depends on the nature of the functions, duties and powers performed and exercised by the person in the context of the operation and circumstances of the company. The relevant contextual considerations include the company’s size, internal practices and structure, and the perception of the alleged de facto director by third parties who deal with the company: Chameleon Mining NL v Murchison Metals Ltd [2010] FCA 1129 at [90]-[92].

  3. In examination, Mr Phokos ultimately admitted that he was acting as a director from the date of his purported formal resignation as director until at least 22 December 2016.

  4. The following passages from the transcripts of the examination of Mr Phokos were tendered as admissions and related representations (my emphasis):

“… Q. What involvement did you have with [the Company], the company of which Mr Giles Woodgate is the special purpose liquidator?

A. I was a director.

Q. When were you a director?

A. From the conception.

Q. How long did you remain a director for?

A. … Quite a few years.

Q. Do you recall when the company when into liquidation?

A. … Not the exact date, no.

Q. But you were a director up until the time the company went into liquidation?

A. … No.

Q. If I told you the company went into liquidation in about 17 January 2017 does that help jog your memory?

A. As to when its been liquidated?

Q. Yes?

A. … It jogs it if that’s what you’re saying the date was.

Q. Does it jog your memory as to when you stopped being a director of the company?

A. … It was a couple of years prior to that.

…

Q. Do you see tab 13? This is a letter from Alpha Nu to [the Company] attention to the director; do you see that?

A. … Yes, I do.

Q. It’s dated 10 August 2015; do you see that?

A. Yeah … Yes.

Q. Do you know who Alpha Nu is?

A. Yes.

Q. Who were they?

A. … They were the accountants for Hemisphere.

Q. Who did you deal with at Alpha Nu?

A. … Nicholas Kaperonis.

Q. Do you see over the page it refers to numbers 1, 2 and 3 and do you see three is ‘Officeholder’s: Name: Peter Phokos. Offices held: Director;’ do you see that?

A. … Yes.

Q. Do you accept that in about 8 August 2015 you were still a director of the company?

A. … Yes.

Q. Do you see, if you turn a few pages over—

A. In the same tab?

Q. –in the same tab at page 90 is a memorandum or resolution of the directors and it’s signed by you, Peter Phokos, on 13 August 2015; do you see that?

A. … Yes.

Q. So do you accept that you were a director of the company still on 13 August 2015?

A. … Yes.

…

[Mr Phokos was then taken to a similar letter from Alpha Nu as referred to above that identified him as a director]

Q. Do you accept that you were still a director on 8 August 2016?

A. … That’s what it says.

Q. You accept it, don’t you?

A. … Yes.

Q. If you turn over to tab 15 do you see it’s a document entitled ‘Rental Agreement’ from Finrent; do you see that at page 97 of the bundle?

A. … Yes.

Q. Down the bottom it says, ‘Customer’s signature: Peter Nicholas Phokos. Position: Director.’ Is that your signature next to it?

A. … Yes, it is.

….

Q. … in any event, you were signing this Finrent agreement as a director?

A. … Yes.

Q. If you turn over the page do you see it says the name of the applicant is Peter Nicholas Phokos and you’ve signed it on 8 September 2016; do you see that?

A. … Yes.

Q. So you accept you were still a director of the company on 9 September 2016?

A. … Yes.

…

Q. Do you recall a meeting with Suelen McCallum?

A. … Yes.

Q. In about October 2016?

A. … Yes.

Q. In October 2016 you were still a director of the company weren’t you?

A. … I believe so, yeah.

Q. That’s why you were attending, to provide instructions on behalf of the company, weren’t you?

A. … Yes.

Q. So when you gave your answer earlier today that you thought you’d resigned as a director earlier, you were mistaken, weren’t you?

A. … No, so – repeat the question?

Q. Earlier today you told me that you’d resigned as a director some years before the liquidation. Would you like to change that answer?

A. … No, I don’t want to. No.

Q. You’ve now accepted that you were a director at least up until October 2016. Do you see that that’s inconsistent with the earlier answer that you gave?

A. … Yes, I do see it’s inconsistent.

Q. Would you like to take back the earlier evidence that you gave? DO you think you were mistaken?

A. No… No, I don’t think I was mistaken.

Q. Is it the case that you jut continued to act as a director even though you might have formally resigned; is that what you’re telling us?

A. … Possibly, yes, that’s more, more likely.

Q. When did you stop continuing to act as a director?

A. … What date I wouldn’t be able to say. I don’t remember.

Q. This was October 2016. Do you recall there was an asset sale agreement at some stage?

A. … I, I do recall it.

Q. Do you recall that that happened in about December 2016?

A. … Not the exact dates but I remember it happening.

Q. In about December 2016?

A. Possibly.

Q. You were still a director of [the Company] at the time that sale went through, weren’t you?

A. Well … no, I wasn’t a director at the time.

Q. But you were acting in the position of a director, weren’t you?

A. … Possibly.

Q. You were still giving instructions to Alpha Nu as your accountants at that time, weren’t you?

A. … Still giving instructions?

Q. On behalf of [the Company]?

A. … Possibly, yes.

…

Q. [referring to the Asset Sale Agreement] You were acting as a director of the company at the time, weren’t you?

A. … Yes.”

  1. On the basis of those admissions together with the evidence of Mr Phokos’ conduct referred to at [43] above and assuming that Mr Phokos formally resigned as a director of the Company on 14 October 2014 as stated in the ASIC form referred to at [42] above, I am satisfied that Mr Phokos was a director of the Company within the meaning of paragraph (b)(i) of the definition of “director” in s 9 of the Corporations Act for the period from 14 October 2014 until 17 January 2017. A declaration to that effect in the terms sought in prayer 4 of the Amended Statement of Claim will be made.

Mr Phokos’ duties as a director of the Company

  1. Section 181 of the Corporations Act provides:

“(1)  A director or other officer of a corporation must exercise their powers and discharge their duties:

(a)  in good faith in the best interests of the corporation; and

(b)  for a proper purpose.

(2)   A person who is involved in a contravention of subsection (1) contravenes this subsection.”

  1. As Gleeson JA said in Re IW4U Pty Ltd (in liq) (2021) 150 ACSR 146; [2021] NSWSC 40 (IW4U) at [30]-[31]:

“[30] Section 181(1)(a) and (b) are the statutory expression of two separate duties owed at general law. Putting to one side the debate as to whether these duties are objective or subjective, the standards imposed are those that ‘would be expected of a person in that position by reasonable persons with knowledge of the duties, power and authority of the position’: Downer EDI Ltd v Gillies (2012) 92 ACSR 373; [2012] NSWCA 333 at [76] (Allsop P). In Chew v R (1991) 4 WAR 21 at 48; 5 ACSR 473 at 499, Malcolm CJ said that the duty of honesty or good faith has a number of aspects under the general law, being that directors (1) must exercise their powers in the interests of the company; (2) must avoid conflict between their personal interests and those of the company; (3) should not take advantage of their position to make secret profits; and (4) should not misappropriate the company’s assets for themselves.

[31]   In the context of insolvency or near insolvency, which includes a real and not remote risk that creditors will be prejudiced by the dealing in question (Kalls Enterprises Pty Ltd (in liq) v Baloglow (2007) 63 ACSR 557; [2007] NSWCA 191 at [162]), the standard under s 181(1) entails an obligation on the directors to take into account the interests of creditors, which has been described by Gummow J, as an ‘imperfect obligation’ because the creditors cannot enforce it ‘save to the extent that the company acts on its own motion or through a liquidator’: Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 at 445; 122 ALR 531 at 550; 13 ACSR 766 at 785; see also Spies v R (2000) 201 CLR 603; 173 ALR 529; 35 ACSR 500; [2000] HCA 43 at [94]; Termite Resources NL (in liq) v Meadows (2019) 370 ALR 191; 135 ACSR 45; [2019] FCA 354 at [197]–[209] (Termite Resources).”

  1. As the plaintiffs’ submissions acknowledged, several authorities have addressed the question whether a director’s conduct is to be assessed against s 181(1)(a) subjectively (so that the sub-section will be contravened if the director engaged deliberately in conduct that they knew was not in the company’s best interests) or objectively (so that the sub-section will be contravened if the law objectively considers that the conduct was not in the company’s best interests, even if the director subjectively believed they were acting in the company’s best interests): IW4U at [32] and the authorities there referred to, including Re Colorado Products Pty Ltd (in prov liq) (2014) 101 ACSR 233; [2014] NSWSC 789 (Re Colorado Products) at [420]-[421] and Hart Security Australia Pty Ltd v Boucousis (2016) 339 ALR 659; 117 ACSR 408; [2016] NSWCA 307 at [75]. The difference does not seem to me to be material in cases such as the present where the director has not adduced any evidence of any subjective belief that their conduct was in the best interests of the company.

  2. Section 182 of the Corporations Act provides:

“(1)     A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a)  gain an advantage for themselves or someone else; or

(b)  cause detriment to the corporation.

(2)   A person who is involved in a contravention of subsection (1) contravenes this subsection.”

  1. The principles applicable to s 182 were summarised by Black J in Re Colorado Products at [432]-[433]:

“[432] Section 182(1) of the Corporations Act prohibits a director, secretary, officer or employee of a corporation from improperly using his or her position to gain an advantage for himself or herself or someone else or cause detriment to the corporation. An objective standard is to be applied in determining what amounts to an ‘improper’ use of position, and impropriety is established by ‘a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case’: Byrnes at CLR 514–15 ; ALR 538 ; ACSR 560 per Brennan, Deane, Toohey and Gaudron JJ; R v Towey (1996) 21 ACSR 46 at 57 ; 132 FLR 434 at 444 per Gleeson CJ (with whom Allen and James JJ agreed). In Doyle v Australian Securities and Investments Commission (2005) 227 CLR 18 ; 223 ALR 218 ; 56 ACSR 159 ; [2005] HCA 78 , the High Court observed (at [35] ) that the relevant conduct would be improper if it amounted to:

‘[35] … a breach of the standards of conduct that would be expected of a person in [the director’s] position by reasonable persons with knowledge of the duties, powers and authority of his position as director, and the circumstances of the case, including the commercial context.’

[433] It is not necessary that the relevant director gain an advantage for himself or herself or cause a detriment to the company in order to establish a contravention of the section: Chew v R (1992) 173 CLR 626 at 633 ; 107 ALR 171 at 174 ; 7 ACSR 481 at 484 ; [1992] HCA 18 (Chew) per Mason CJ, Brennan, Gaudron and McHugh JJ. An objective test was also applied to determine whether this section was contravened in Holyoake Industries and, in Hydrocool Pty Ltd v Hepburn (No 4) (2011) 279 ALR 646 ; 83 ACSR 652 ; [2011] FCA 495 , Siopsis J followed Byrnes, in holding that impropriety for the purposes of this section was objective and did not require subjective knowledge of impropriety and followed Chew, in holding that a contravention could be established although the desired object was not achieved. In Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507 ; 215 ALR 110 ; 53 ACSR 208 ; [2005] HCA 23 at [32] , Gleeson CJ and Heydon JJ noted that, although shareholders cannot release directors from the statutory duties imposed by, relevantly, s 229 (4) of the Companies (SA) Code (which was a predecessor to s 182 of the Corporations Act), their acquiescence in a course of conduct might affect the practical content of those duties and be relevant to a question of impropriety.”

  1. Sections 181 and 182 operate concurrently with a director’s equitable duty to act in good faith and in the company’s best interests and to exercise their powers for a proper purpose and the obligations of directors as a recognised category of fiduciary not to obtain an unauthorised benefit for themselves and not to be in a position of conflict: see Howard v Commissioner of Taxation (2014) 253 CLR 83; [2014] HCA 21 at [31]-[35] (French CJ and Keane J) and [59]-[61] (Hayne and Crennan JJ); In the matter of Australian International Yacht Club Pty Limited [2021] NSWSC 586 at [45]-[49] and the authorities there referred to.

Mr Phokos’ breaches of his duties as a director of the Company: Portfolio IT Payments and ACG Payments

  1. The Portfolio IT Payments and the ACG Payments commenced in October 2016.

  2. I accept the plaintiffs’ submission that the Company’s circumstances as at October 2016 were such that the exercise of Mr Phokos’ powers as a director in good faith and for a proper purpose required him to take into account the interests of the Company’s creditors. As the evidence summarised above establishes, the Company was in dispute with its major supplier (Kaspersky) as a result of the Company’s inability to pay amounts that were either owing or that Kaspersky claimed were owing to it under the distribution agreement. In addition, the Company was in default of its taxation obligations, had effectively ceased operating and was described by Mr Phokos in his affidavit referred to at [39] above as failing financially in the wake of the breakdown of its relationship with Kaspersky. Mr Phokos and the Company were consulting a liquidator about how best to sell the Company’s remaining assets in a way that “can be protected if necessary”.

  3. Notwithstanding the production orders referred to at [48]-[49] and [60]-[61] above, there is no documentary evidence of Portfolio IT or ACG having provided any services to the Company or the Company having incurred any liability to Portfolio IT or ACG that was discharged by the Portfolio IT Payments and the ACG Payments (respectively). Mr Phokos was the sole director of the Company, Portfolio IT and ACG at the time of the Portfolio IT Payments and the ACG Payments. He had been alerted by Ms McCallum in June 2016 to the prospect of payments by the Company to Portfolio IT and ACG being the subject of review by a liquidator. If there was an explanation for the Portfolio IT Payments and the ACG Payments, it is to be expected that Mr Phokos would have given that explanation when asked about the payments in his public examination. The evidence that the Company’s business was no longer operating during the period in which the Portfolio IT Payments and ACG Payments were made and the lack of documentary evidence explaining or supporting the payments, together with the inconsistent, vague and speculative nature of the answers given by Mr Phokos in his public examination referred to at [51]-[54] and [65] above, support an inference that the Company had no indebtedness or other obligation to Portfolio IT and ACG that was discharged by the Portfolio IT Payments and the ACG Payments.

  4. The invoice attached to Portfolio IT’s proof of debt does not explain the Portfolio IT Payments – it is an amount claimed by Portfolio IT in addition to the Portfolio IT Payments that the Company made before the proof of debt was submitted. Whilst the reference to a “service agreement” in that invoice provides some evidence of the existence of a service agreement, it provides no evidence of the terms of any such service agreement and no explanation for the 36 rounded payments plus one additional payment emptying the Company’s NAB bank account that were made to Portfolio IT after the Company had ceased operations and in circumstances where it had failed to pay amounts claimed by Kaspersky and amounts owing to the ATO and was either insolvent or nearing insolvency as the evidence referred to at [40]-[41] demonstrates.

  1. Similarly, the invoice attached to ACG’s proof of debt is for an amount claimed by ACG in addition to the ACG Payments made by the Company before the proof of debt was submitted. The invoice therefore does not explain the ACG Payments and it is not necessary to make any findings about whether the Company is indebted to ACG as claimed in the proof of debt.

  2. The inference to which I have referred at [90] above is able to be drawn more readily in circumstances where Mr Phokos has been on notice of these proceedings and has not availed himself of the opportunity to appear and adduce evidence explaining the Portfolio IT Payments and the ACG Payments.

  3. For those reasons, I find that the Company had no indebtedness or other obligation to Portfolio IT and ACG that was discharged by the Portfolio IT Payments and ACG Payments and the Company derived no benefit from those payments.

  4. I infer from Mr Phokos’ role as a director of the Company and sole director of both Portfolio IT and ACG at the time of the Portfolio IT Payments and the ACG Payments that Mr Phokos either caused the Company to make those payments or was aware that those payments had been made by the Company to Portfolio IT and ACG and permitted those payments.

  5. It follows from my finding at [94] above that the Portfolio IT Payments and the ACG Payments were not in the interests of the Company (including the interests of its creditors), were not made for a proper purpose and involved Mr Phokos using his position as a director to misappropriate or permit the misappropriation of the Company’s funds to the advantage of Portfolio IT and (indirectly) for his own advantage as the sole shareholder of Portfolio IT and to the advantage of ACG and (indirectly) for the advantage of his wife as the sole shareholder of ACG. This was an improper use of his position as a director, applying the standards of conduct that would be expected of a person in Mr Phokos’ position by reasonable persons with knowledge of his duties, powers and authority as a director and with knowledge of the Company’s circumstances (particularly the facts that its business had ceased operating following the breakdown of its relationship with Kaspersky, it had failed comply with its taxation obligations and it had no debt or obligation to Portfolio IT and ACG). By causing or permitting the Portfolio IT Payments and the ACG Payments, Mr Phokos breached his statutory duties owed to the Company under s 181 and s 182 of the Corporations Act.

  6. The Company has suffered damage as a result of Mr Phokos’ contraventions of ss 181 and 182 in the total amount of the Portfolio IT Payments and ACG Payments, being $1,729,916.22, and there will be an order pursuant to s 1317H of the Corporations Act requiring Mr Phokos to compensate the Company by paying that sum to the Company. The proceedings were commenced on 11 November 2020, within the six year limitation period under s 1317K of the Corporations Act that applies to proceedings for a compensation order.

  7. It is not necessary to consider the plaintiffs’ alternative claims that Mr Phokos breached his general law duties as a director of the Company by causing or permitting it to make the Portfolio IT Payments and the ACG Payments.

Mr Phokos’ breaches of his duties as a director of the Company: Stable Real Estate Payments

  1. The Stable Real Estate Payments were made in April 2015.

  2. Notwithstanding the production orders and requests for documents referred to at [17]-[20] above, there is no documentary evidence explaining the payment by the Company of the $160,000 deposit for the Ada Avenue Property purchased by Zon and Spaki in their capacities as trustees of the Zon Trust and the Spaki Trust (respectively). Mr Phokos, who was a director of the Company and the sole director of Zon and Spaki at the time of the Stable Real Estate Payments, put forward no explanation for those payments when given the opportunity to do so during his public examination as referred to at [22] above. Even assuming that Zon and Spaki acquired the Ada Avenue Property with a view to leasing it to the Company (as suggested by Mr Phokos at one point during his public examination, contradicting an earlier answer), that does not explain the Company’s payment of the deposit for the purchase of the property by Zon and Spaki.

  3. If there was an explanation for the Stable Real Estate Payments, including any benefit derived by the Company directly or indirectly from those payments, it is to be expected that Mr Phokos would have given that explanation during his public examination. His failure to do so, together with the lack of documentary evidence explaining or supporting the payments or identifying any benefit derived by the Company from the payments, supports an inference that the Company derived no benefit from the Stable Real Estate Payments. That inference is able to be drawn more readily in circumstances where Mr Phokos has been on notice of these proceedings and has not availed himself of the opportunity to appear and adduce evidence explaining the Stable Real Estate Payments. Those payments benefitted the beneficiaries of the Zon Trust and the Spaki Trust for whose benefit Zon and Spaki acquired the Ada Avenue Property in their capacities as trustee.

  4. I infer from Mr Phokos’ role as a director of the Company and sole director of both Zon and Spaki at the time of the Stable Real Estate Payments that Mr Phokos either caused the Company to make those payments or was aware that those payments had been made by the Company to Stable Real Estate for the deposit for Zon and Spaki’s acquisition of the Ada Avenue Property and that he permitted those payments by the Company.

  5. It follows from my finding at [101] above that the Stable Real Estate Payments were not in the interests of the Company, were not made for a proper purpose and involved Mr Phokos using his position as a director to misappropriate or permit the misappropriation of the Company’s funds to the advantage of the beneficiaries of the Zon Trust and the Spaki Trust. This was an improper use of his position as a director, applying the standards of conduct that would be expected of a person in Mr Phokos’ position by reasonable persons with knowledge of his duties, powers and authority as a director and with knowledge that the Company had been failing to comply with its taxation obligations since 2013 (see [34] above) and the Company derived no benefit from paying the deposit for the Ada Avenue Property acquired by Zon and Spaki. By causing or permitting the Stable Real Estate Payments to be made by the Company, Mr Phokos breached his statutory duties to the Company under ss 181 and 182 of the Corporations Act.

  6. The Company has suffered damage as a result of Mr Phokos’ contraventions of ss 181 and 182 in the total amount of the Stable Real Estate Payments, being $160,000. There will be an order pursuant to s 1317H of the Corporations Act requiring Mr Phokos to compensate the Company by paying that sum to the Company. The proceedings were commenced on 11 November 2020, within the six year limitation period under s 1317K of the Corporations Act that applies to proceedings for a compensation order.

  7. It is not necessary to consider the plaintiffs’ alternative claims that Mr Phokos breached his general law duties as a director of the Company by causing or permitting it to make the Stable Real Estate Payments.

Claims against Zon and Spaki

  1. As referred to at [8] above, the principal basis of the plaintiffs’ claim against Zon and Spaki is that the Stable Real Estate Payments are unreasonable director‑related transactions within the meaning of s 588FDA entered into within four years prior to the relation-back day (being 17 January 2017[1] ) and therefore voidable under s 588FE(6A) of the Corporations Act. The relief sought by the plaintiffs is an order under s 588FF of the Corporations Act requiring Zon and Spaki to pay to the Company the sum of $160,000.

    1. Corporations Act, s 91 (item 23) and s 513(e).

  2. Section 588FDA of the Corporations Act relevantly provides:

“(1)   A transaction of a company is an unreasonable director‑related transaction of the company if, and only if:

(a)   the transaction is:

(i)   a payment made by the company; or

(ii)   a conveyance, transfer or other disposition by the company of property of the company; or

(iii)   the issue of securities by the company; or

(iv)   the incurring by the company of an obligation to make such a payment, disposition or issue; and

(b)   the payment, disposition or issue is, or is to be, made to:

(i)   a director of the company; or

(ii)   a close associate of a director of the company; or

(iii)   a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and

(c)   it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

(i)   the benefits (if any) to the company of entering into the transaction; and

(ii)   the detriment to the company of entering into the transaction; and

(iii)   the respective benefits to other parties to the transaction of entering into it; and

(iv)   any other relevant matter.

...”

  1. In the present case, s 588FDA(1)(a)(i) is satisfied by the evidence of the Company’s ANZ account statements and ANZ payment receipts that reveal the Company as the source of the payments and Stable Real Estate as the recipient of the payments referred to at [16] above.

  2. The plaintiffs submit, and I accept, that the requirements of s 588FDA(1)(b)(iii) are satisfied for the following reasons.

  3. First, as I have held at [81] above, Mr Phokos was a director of the Company within the meaning of s 9 of the Corporations Act at the time of the Stable Real Estate Payments in April 2015. Mrs Phokos was his “close associate” at that time within the meaning of s 588FDA(1)(b)(ii).

  4. Second, the Stable Real Estate Payments were made to the vendor’s agent to discharge the liability of Zon and Spaki to pay the deposit under their contract to purchase of the Ada Avenue Property in their capacity as trustees of the Zon Trust and the Spaki Trust. As I have mentioned at [8] above, there is no direct evidence identifying the beneficiaries of those trusts at the time of the Stable Real Estate Payments in April 2015. However, there is documentary evidence that Mr and Mrs Phokos were beneficiaries of those trusts as at 22 December 2016. I infer that they were also beneficiaries of the trusts at the time of the Stable Real Estate Payments because, in circumstances where the Company itself derived no benefit from those payments as I have found at [101] above, it is inherently improbable that Mr Phokos would otherwise have caused or permitted the payment of $160,000 of the Company’s funds towards the purchase price payable by Zon and Spaki for their acquisition of the Ada Avenue Property in their capacity as trustees of the Zon Trust and the Spaki Trust (respectively).

  5. By contributing to the acquisition of the Ada Avenue Property, the Stable Real Estate Payments enhanced the assets of the Zon Trust and the Spaki Trust available for distribution to the beneficiaries and were therefore made “for the benefit of” Mr and Mrs Phokos (and any other beneficiaries) of those trusts within the meaning of s 588FDA(1)(b)(iii). That is so, irrespective of whether the trusts were fixed trusts under which Mr and Mrs Phokos had a beneficial interest in the trust assets or discretionary trusts in respect of which Mr and Mrs Phokos had an entitlement to enforce due administration: Vasudevan v Becon Constructions (Aust) Pty Ltd [2014] VSCA 14; (2014) 41 VR 445 at [19], [21]-[26] (Nettle JA, Beach JA and McMillan AJA agreeing), cited with approval in Crowe-Maxwell v Frost [2016] NSWCA 46; (2016) 91 NSWLR 414 at [72] (Beazley P (as Her Excellency then was), Macfarlan and Gleeson JJA agreeing); IW4U at [83]-[85] (Gleeson J).

  6. The inference referred to at [111] above is able to be more readily drawn because Zon and Spaki must know the identity of the beneficiaries of the trusts in respect of which they act as trustees. Despite being on notice of these proceedings as referred to at [10] above, Zon and Spaki have taken no steps to defend the s 588FDA claim against them on the basis that the Stable Real Estate Payments were not “for the benefit of” Mr and/or Mrs Phokos.

  7. Section 588FDA(2) makes it clear that the question posed by s 588FDA(1)(c) is to be addressed by reference to the circumstances existing at the time of the transaction in question. The requirements of s 588FDA(1)(c) are satisfied in relation to the Stable Real Estate Payments in April 2015 for the reasons explained at [100]-[103] above.

  8. It is not necessary to consider the plaintiffs’ alternative claims against Zon and Spaki for knowingly inducing or procuring breaches by Mr Phokos of his fiduciary duties owed to the Company or as knowing recipients of the Stable Real Estate Payments made in breach of Mr Phokos’ fiduciary duties.

Interest

  1. The plaintiffs sought an order for the payment of interest up to judgment pursuant to s 100 of the Civil Procedure Act 2005 (NSW). There will be a direction for the plaintiffs to bring in short minutes of their proposed order in respect of interest together with a submission setting out the calculation supporting the proposed order. The question of interest will then be determined on the papers.

Costs

  1. There is no reason why costs should not follow the event in accordance with rule 42.1 of the Uniform Civil Procedure Rules 2005 (NSW). There will be an order for the defendants to pay the plaintiffs’ costs of the proceedings on the ordinary basis.

Conclusion and orders

  1. For the foregoing reasons, the orders of the Court are:

  1. Declare that the third defendant was a director of the second plaintiff within the meaning of paragraph (b)(i) of the definition of “director” in s 9 of the Corporations Act 2001 (Cth) from 14 October 2014 to 17 January 2017.

  2. Order pursuant to s 1317H of the Corporations Act 2001 (Cth) that the third defendant pay compensation to the second plaintiff in the sum $1,729,916.22 in respect of contraventions of ss 181 and 182 of the Corporations Act 2001 (Cth) by the third defendant in causing or permitting the Company to pay:

  1. amounts totalling $1,214,009.98 to Portfolio IT Pty Limited during the period from 3 October 2016 to 16 January 2017;

  2. amounts totalling $515,906.24 to ACG Building Pty Limited during the period from 13 October 2016 to 30 November 2016.

  1. Subject to order 6 below, order pursuant to s 1317H of the Corporations Act 2001 (Cth) that the third defendant pay compensation to the second plaintiff in the sum $160,000.00 in respect of contraventions of ss 181 and 182 of the Corporations Act 2001 (Cth) by the third defendant in causing or permitting the Company to pay amounts totalling $160,000 to Stable Real Estate in April 2015.

  2. Order pursuant to s 588FF of the Corporations Act 2001 (Cth) that the fourth defendant pay to the second plaintiff the sum of $160,000, subject to order 6 below.

  3. Order pursuant to s 588FF of the Corporations Act 2001 (Cth) that the fifth defendant pay to the second plaintiff the sum of $160,000, subject to order 6 below.

  4. Order that the second plaintiff is not to recover a total sum of more than $160,000 under orders 3, 4 and 5 above.

  5. Reserve for determination on the papers the plaintiffs’ application for interest under s 100 of the Civil Procedure Act 2005 (NSW). Direct the plaintiffs to bring in within 7 days a short minute of their proposed order relating to interest and a short submission setting out the calculation underlying that proposed order.

  6. Order that the plaintiffs’ costs of the proceedings be paid by the third, fourth and fifth defendants (jointly and severally) on the ordinary basis in such amount as may be agreed or assessed.

**********

Appendix 1

Date

Company’s bank account from which payment made

Recipient

Amount

3/10/2016

NAB

Portfolio IT

42,900.00

4/10/2016

ANZ

Portfolio IT

5,000.00

5/10/2016

ANZ

Portfolio IT

6,000.00

6/10/2016

ANZ

Portfolio IT

500.00

7/10/2016

ANZ

Portfolio IT

18,000.00

10/10/2016

NAB

Portfolio IT

42,900.00

13/10/2016

ANZ

Portfolio IT

30,000.00

13/10/2016

NAB

Portfolio IT

100,000.00

17/10/2016

NAB

Portfolio IT

42,900.00

18/10/2016

ANZ

Portfolio IT

30,000.00

24/10/2016

NAB

Portfolio IT

42,900.00

28/10/2016

ANZ

Portfolio IT

30,500.00

31/10/2016

NAB

Portfolio IT

42,900.00

2/11/2016

ANZ

Portfolio IT

10,000.00

3/11/2016

ANZ

Portfolio IT

5,000.00

4/11/2016

ANZ

Portfolio IT

15,000.00

7/11/2016

NAB

Portfolio IT

42,900.00

9/11/2016

ANZ

Portfolio IT

30,000.00

14/11/2016

NAB

Portfolio IT

42,900.00

15/11/2016

ANZ

Portfolio IT

30,009.00

15/11/2016

NAB

Portfolio IT

40,000.00

21/11/2016

NAB

Portfolio IT

12,000.00

21/11/2016

NAB

Portfolio IT

42,900.00

23/11/2016

NAB

Portfolio IT

70,000.00

28/11/2016

NAB

Portfolio IT

42,900.00

5/12/2016

NAB

Portfolio IT

42,900.00

6/12/2016

ANZ

Portfolio IT

4,000.00

6/12/2016

ANZ

Portfolio IT

10,000.00

12/12/2016

ANZ

Portfolio IT

46,000.98

12/12/2016

NAB

Portfolio IT

42,900.00

13/12/2016

NAB

Portfolio IT

20,000.00

19/12/2016

NAB

Portfolio IT

6,500.00

19/12/2016

NAB

Portfolio IT

52,000.00

28/12/2016

NAB

Portfolio IT

42,900.00

3/01/2017

NAB

Portfolio IT

42,900.00

9/01/2017

NAB

Portfolio IT

42,900.00

16/01/2017

NAB

Portfolio IT

42,900.00

TOTAL

$1,214,009.98

Appendix 2

Date

Recipient

Amount

13/10/2016

ACG Building

20,000.00

14/10/2016

ACG Building

50,000.00

17/10/2016

ACG Building

50,000.00

24/10/2016

ACG Building

50,000.00

26/10/2016

ACG Building

50,000.00

2/11/2016

ACG Building

150,000.00

3/11/2016

ACG Building

10,000.00

10/11/2016

ACG Building

35,906.24

17/11/2016

ACG Building

50,000.00

30/11/2016

ACG Building

20,000.00

30/11/2016

ACG Building

30,000.00

TOTAL

$515,906.24

Endnote

Decision last updated: 22 July 2022

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