In the matter of Auzhair Supplies Pty Ltd (In Liq) (No 2); In the matter of Auzhair 1 Pty Ltd
[2013] NSWSC 353
•04 March 2013
Supreme Court
New South Wales
Medium Neutral Citation: In the matter of Auzhair Supplies Pty Ltd (In Liq) (No 2); In the matter of Auzhair 1 Pty Ltd [2013] NSWSC 353 Hearing dates: 4 March 2013 Decision date: 04 March 2013 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: 2012/ 80701
Declare that the first defendant Auzhair 1 Pty Ltd holds its assets and undertaking upon trust for the plaintiff Auzhair Supplies Pty Ltd (in liquidation).
Order that Auzhair 1 account to Auzhair Supplies for such assets and undertaking by paying to Auzhair Supplies the sum of $2.
Certify that the amount by which the value of the asset and undertaking of Auzhair Supplies when transferred by Auzhair Supplies to Auzhair 1 exceed the present value of the assets and undertaking of Auzhair 1 referred to in Order 2, and inclusive of interest is $749,447.32.
Give judgment that the second, third and fourth defendants pay the plaintiff the said sum of $749,447.32.
Order that the defendants pay the plaintiff's costs.
2010/ 17300
Declare that the value of each ordinary fully paid share in the issued capital of Auzhair 1 Pty Ltd is $1.
Vacate the stay contained in paragraph 11 of the Orders made by Ward J on 3 December 2010.
Order that defendants pay plaintiffs' costs of those proceedings since 19 November 2010 save insofar as any other costs order otherwise provides.
Catchwords: CORPORATIONS - Judgment- where directors liable for equitable compensation - where transfer of assets bought about in breach of directors' fiduciary obligations - where defendant company holds assets on trust for plaintiff - whether relief should be given against directors - amount of equitable compensation Cases Cited: In the matter of Auzhair Supplies Pty Ltd (a deregistered company) and Auzhair 1 Pty Ltd - Greenaway v Auzhair 1 Pty Ltd [2010] NSWSC 1339
In the Matter of Auzhair Supplies Pty Ltd (in Liq) [2013] NSWSC 1Category: Consequential orders Parties: 2012/ 80701
2010/ 17300
Auzhair Supplies Pty Ltd (in liquidation) ACN 085 159 280 (plaintiff)
Auzhair 1 Pty Ltd (ACN 105 126 869) (first defendant)
Roy Gerace (second defendant)
Ilario Gerace (third defendant)
Domenico Gerace (fourth defendant)
Warren Thomas Greenaway (first plaintiff)
Elizabeth Gay Greenaway (second plaintiff)
Auzhair 1 Pty Ltd (first defendant)
Anna Gerace (second defendant)
Domenico Gerace (third defendant)
Fiona Gerace (fourth defendant)
Ilario Gerace (fifth defendant)
Jeanine Gerace (sixth defendant)
Roy Gerace (seventh defendant)Representation: Counsel:
JT Johnson (plaintiffs)
DPM Ash (defendants)
Solicitors:
Carroll & O'Dea (plaintiffs)
Sachs Gerace Lawyers (defendants)
File Number(s): 2012/ 80701 2010/ 17300
Judgment (ex tempore)
HIS HONOUR: In proceedings 2010/17300, Ward J on 19 November 2010 gave judgment and made orders as follows:
1. An order pursuant to s 601AH(2) of the (Cth) Corporations Act 2001 that the Australian Securities and Investments Commission reinstate the registration of Auzhair Supplies Pty Ltd ACN 085 159 280.
2. An order that, on its reinstatement, Auzhair Supplies Pty Ltd ACN 085 159 280 be wound up in insolvency.
3. An order that Murray Roderick Godfrey of RMG Partners Business Solutions be appointed Official Liquidator of Auzhair Supplies Pty Ltd ACN 085 159 280 with effect from the reinstatement of that company in accordance with Order 1 above.
4. A declaration that the plaintiffs are each the holder of one ordinary fully paid share in the issued capital of Auzhair 1 Pty Ltd.
5. An order that the register of members of Auzhair 1 Pty Ltd maintained under s 169 of the (Cth) Corporations Act 2001 be rectified to record each of the plaintiffs as the holder of one ordinary fully paid share in the issued capital of Auzhair 1 Pty Ltd.
6.An order that the Second to Seventh defendants purchase the shares of the plaintiffs in Auzhair 1 Pty Ltd at the amount representing the value of the shares as valued by an expert valuer, such valuer to be appointed by agreement between the parties or as ordered by the court.
Subsequently, on 3 December 2010, her Honour made further orders to enable the conduct of the valuation contemplated by Order 6 of those Orders. In addition, Her Honour referred the question of valuation of the shares to an Associate Judge for determination, ordered that the defendants pay the plaintiffs' costs up to and including the date of giving of judgment, and gave leave to proceed to the assessment of those costs forthwith but ordered that the enforcement of any certificate of determination be stayed until the completion of the proceedings.
On 25 January 2013, in In the Matter of Auzhair Supplies Pty Ltd (in Liq) [2013] NSWSC 1, I reached the following conclusions:
92. Auzhair 1 holds its assets and undertaking upon trust for Auzhair Supplies, and is liable to account to Auzhair Supplies for such assets and undertaking.
93. The plaintiff's cause of action against the second, third and fourth defendants was not one in respect of a fraudulent breach of trust, such as to fall within the longer limitation period allowed by (NSW) Limitation Act1969, s 47(1)(a).
94. There is no sufficient nexus between the deregistration and reinstatement of the company Auzhair Supplies and a cause of action against its directors that an order that time not run in respect of a cause of action against the directors while the company was deregistered could be supported as ancillary to its reinstatement under (Cth) Corporations Act2001, s 601AH(3).
95. Auzhair Supplies' claim against the second, third and fourth defendants was not one in respect of a breach of trust at all. Pursuant to Limitation Act, s 23, a statutory limitation period applies to this cause of action, if at all, only by analogy.
96. Auzhair Supplies' equitable claim against the directors, and the corresponding statutory causes of action under Corporations Act, ss 180 to 183, are so similar that prima facie the time limit applicable to the latter should be applied to the former. However, it would be inequitable to apply the analogous limitation period, because while it prima facie informs the application of the doctrine of laches, equity would not bar the proceedings on that account where the plaintiff was not aware of or able to enforce its rights, as from the time when the cause of action arose until the company was reinstated and a liquidator appointed, either the defendants remained in control of the plaintiff, or it had been deregistered at their instance, and the present proceedings were instituted in December 2011, promptly after those conditions came to an end. That is all the more so in the absence of evidence of prejudice to the defendants from any delay.
97. Accordingly, Auzhair Supplies' claim against the second, third and fourth defendants is not barred by statute - directly or by analogy - or by laches. The directors are liable in equity to compensate Auzhair Supplies for the loss it has suffered by reason of their breach of duty, being the amount that Auzhair Supplies is unable to recover from Auzhair 1, against which it has a proprietary remedy.
98. In principle, the appropriate relief is:
(1) A declaration that Auzhair 1 holds its assets and undertaking upon trust for Auzhair Supplies;
(2) An order that Auzhair 1 account to Auzhair Supplies for such assets and undertaking;
(3) An inquiry into the amount by which the value of the assets and undertaking of Auzhair Supplies when transferred by Auzhair Supplies to Auzhair 1 exceeded the present value of the assets and undertaking of Auzhair 1 referred to in Order 2;
(4) Judgment that the directors pay Auzhair Supplies the amount so certified;
(5) An order that the defendants pay the plaintiff's costs.
99. However, the evidence identified only the proceeds of the advance of $400,000 by the Greenaways as having been transferred to Auzhair 1. In those circumstances, as a matter of practicality it seems to me that it might be possible to give effect to my conclusions without further inquiry and expense by giving judgment jointly and severally against all defendants for $400,000 and interest. To the extent that the judgment is satisfied by Auzhair 1, that would diminish the exposure of the directors. However, this is a matter which the parties should be afforded an opportunity to address, as further evidence on the inquiry might establish that the value of what was transferred was more, or less, than $400,000.
100. I direct that the plaintiff bring in short minutes to give effect to this judgment.
The plaintiff proposes that I give judgment against each of the defendants jointly and severally for $400,000 and interest, and that the defendants pay the plaintiff's costs of the proceedings. The defendants submit that relief should be given against the first defendant Auzhair 1 only, and that the additional defendants, being the directors of Auzhair Supplies, not be the subject of any pecuniary relief. This argument is advanced on the basis that I accepted that the defendant directors believed, albeit incorrectly, that the liability to the Greenaways had been assigned, along with the assets and undertaking of Auzhair Supplies, and that the Greenaways were shareholders in the assignee and agreed to the transaction; and further, that the defendant directors had subsequently injected funds of their own into Auzhair 1. It was said that the necessary inference was that they did so in the belief that there was a valid transfer, that all parties consented, and that in those circumstances the relief proposed would inflict a double loss or penalty on them.
It seems to me that these are really arguments as to why the defendant directors should not have been held liable that were not, at least in that form, advanced in the substantive proceedings. However, I did take arguments of a similar nature into account: see paragraphs 88 and 89 of the substantive judgment. Fundamentally, although it may be that the beneficial interest that stands behind the liquidator is ultimately that of the Greenaways, they do not represent Auzhair Supplies, and the liquidator could as well be representing other creditors of that company. In those circumstances, the consent of the Greenaways to a breach of duties could not preclude the liquidator from recovering for the benefit of creditors and contributories, assets transferred to a third party in breach of duty.
The claim against the directors was the fundamental issue in the proceedings, as it was not disputed that Auzhair 1 held its assets and undertaking, such as they were, upon trust for Auzhair Supplies. Assuming that the defendant directors have injected substantial funds into Auzhair 1, there is nothing exceptional about circumstances in which defaulting directors having transferred or brought about the transfer of the assets of their old company into a new company, then inject substantial funds into their new company to sustain its business. Sometimes they will do so successfully, and sometimes not. In this case, the injection of funds appears ultimately to have not generated a valuable asset. But that, it seems to me, is no defence to an obligation to compensate the old company for the assets and undertaking the transfer of which to the new company they brought about in breach of their fiduciary obligations.
Accordingly, I do not think there is any reason to depart from the in principle approach to relief set out in paragraph 98 of the substantive judgment.
However, as to sub-paragraph (3), the plaintiff limits its claim to the $400,000 proceeds of the Greenaways' advance that were transferred to Auzhair 1 together with interest. When offered the acceptance of that amount, or the conduct at their own risk as to costs of an inquiry of the type referred to in sub-paragraph (3), the defendants indicated that they were prepared to accept the $400,000 figure. In addition, both parties accept that on the evidence available there is no reason to suppose that the present value of the assets and undertaking of Auzhair 1 exceeds $2. In those circumstances, I can conclude that the amount which would result from the inquiry referred to in sub-paragraph (3) would be $400,000 plus interest, minus $1, and that the directors should be liable for that amount.
Although the plaintiffs argue that the directors should be liable for the totality, and although on the view I take the argument really boils down only to $2, in principle it seems to me that, the claim against the directors being for equitable compensation, they are liable to compensate the company for the deficiency between the amount subtracted from the company and the present value of the assets and undertaking of Auzhair 1 which remain beneficially the property of Auzhair Supplies.
The conclusions that I have reached in that respect dispense with the need for the inquiry ordered by Ward J, as I will certify that each of the shares is worth $1. It is not in dispute that the stay granted by her Honour in respect of enforcement of the costs order should now be discharged. So far as costs incurred in the proceedings that were heard by Ward J since 19 November 2010 are concerned, in the pursuit of a valuation, it seems to me that they are necessarily the plaintiff's, as properly incurred in the attempted enforcement of the orders made in those proceedings.
Accordingly, I make the following orders:
1. Declare that the First defendant Auzhair 1 Pty Limited holds its assets and undertaking upon trust for the plaintiff Auzhair Supplies Pty Limited (in liquidation);
2. Order that Auzhair 1 account to Auzhair Supplies for such assets and undertaking by paying to Auzhair Supplies the sum of $2;
3. Certify that the amount by which the value of the asset and undertaking of Auzhair Supplies when transferred by Auzhair Supplies to Auzhair 1 exceed the present value of the assets and undertaking of Auzhair 1 referred to in Order 2, and inclusive of interest is $749,447.32;
4. Give judgment that the Second, Third and Fourth defendants pay the plaintiff the said sum of $749,447.32;
5. Order that the defendants pay the plaintiff's costs;
6. In proceedings 2010/17300 declare that the value of each ordinary fully paid share in the issued capital of Auzhair 1 Proprietary Limited is $1;
7. Vacate the stay contained in paragraph 11 of the Orders made by Ward J on 3 December 2010;
8. Order that the defendants pay the plaintiffs' costs of those proceedings since 19 November 2010 save insofar as any other costs order otherwise provides.
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Decision last updated: 07 June 2013
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