In the matter of Toppro Pty Ltd

Case •

[2016] NSWSC 1399

•

30 September 2016

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: In the matter of Toppro Pty Ltd [2016] NSWSC 1399
Hearing dates:28, 29, 30, 31 July, 14, 15, 16 September 2015
Date of orders: 30 September 2016
Decision date: 30 September 2016
Jurisdiction:Equity - Corporations List
Before: Brereton J
Decision:

Proceedings dismissed with costs

Catchwords: CORPORATIONS – management and administration – duties and liabilities of officers of corporation – directors – other officers – duty of care – duty of good faith and proper purpose - whether director and general manager in breach of duties in authorising and making payments – where payments made otherwise than in accordance with usual procedures and controls but in furtherance of strategy instigated and endorsed by sole shareholder – relevance of role and status of employee to content of duties – relevance of shareholder approval to content of duties – held, no breach established
Legislation Cited: (CTH) Corporations Act 2001, s 180, s 181, s 182
Explanatory Memorandum to the CLERP Bill 1999
Cases Cited: Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 53 ACSR 208
ASC v Gallagher (1993) 11 WAR 105; 10 ACSR 43; 11 ACLC 286
ASIC v Adler [2002] NSWSC 171
ASIC v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305; [2005] NSWSC 267
ASIC v Doyle (2001) 38 ACSR 606
ASIC v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373
Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115
Daniels v Anderson (1995) 37 NSWLR 438
Forge v ASIC (2004) 213 ALR 574; (2004) 52 ACSR 1; (2005) 23 ACLC 1010; [2004] NSWCA 448
Furs Ltd v Tomkies (1936) 54 CLR 583; 9 ALJ 419
Hogg v Cramphorn [1967] Ch 254; [1966] 3 All ER 420
Joo v Yoo [2016] NSWCA 172
Miller v Miller (1995) 16 ACSR 73
North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589
Re City Equitable Fire Insurance Co Ltd [1925] Ch 407
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; [1942] 1 All ER 378
Vrisakis v ASC (1993) 9 WAR 395; 11 ACSR 162
Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666; (1975) 1 ACLR 219
Yoo v Toppro Pty Ltd [2016] NSWSC 670
Category:Principal judgment
Parties: Toppro Pty Ltd (plaintiff)
Kee Hoon Kwon (first defendant)
Raphael Ahn (second defendant)
Representation:

Counsel:
S O’Brien (plaintiff)
J Young (first defendant)
In person (second defendant)

  Solicitors:
Alpha Lawyers (plaintiff)
Kim & Associates (first defendant)
File Number(s):2014/247347

Judgment

  1. The plaintiff Toppro carried on business as a wholesale distributor of consumer electronic goods manufactured by a Korean company Topfield Co Ltd (“Topfield Korea”), in particular personal video recorders (PVRs), to major retail outlets in Australia, including Harvey Norman and JB HiFi. The first defendant Mr Kwon was, from December 2013 until 20 June 2014, the General Manager of Toppro. The second defendant Mr Ahn was a non-executive director of Toppro between 11 December 2013 and 20 June 2014. After 12 June 2014, when Kye Hyun Suh – who had been a director since December 2008 – was removed, Mr Ahn was the sole director. Between 30 April 2012 and 20 June 2014, the sole shareholder in Toppro was Il Nam Yoo. On 20 June 2014, Ok Ja Joo obtained control of Toppro, in circumstances which were challenged by Mr Yoo – ultimately successfully – in other proceedings. [1]

    1. See Yoo v Toppro Pty Ltd [2016] NSWSC 670 (Black J); leave to appeal refused: Joo v Yoo [2016] NSWCA 172.

  2. In these proceedings, which were instituted and heard while Toppro was under the control of Ok Ja Joo, Toppro seeks to recover from the defendants moneys transferred from its account in nine payments (“the impugned payments”) made between 8 June and 17 June 2014, to Mr Kwon, to DJH Inc, and to Korea Region Management Institute (“KRMI”), totalling in all $120,896.12, on the footing that they were made and authorised by the defendants respectively as an officer and a director of Toppro, in breach of their statutory and equitable duties. For some time, [2] Mr Yoo having regained control of Toppro, it appeared that a judgment in these proceedings may not be required. However, it is now a matter of public record that Toppro is in liquidation, [3] and as the liquidator is likely to desire a result, it is appropriate that judgment now be delivered.

    2. From 26 May 2016, following the judgment of Black J at first instance, Ms Joo’s application for leave to appeal; and thereafter when leave to appeal was refused on 25 July 2016.

    3. Pursuant to a creditors’ voluntary winding up, resolved on 25 July 2016.

  3. That the impugned payments were made is not in dispute. Although it was also not in dispute that they were made otherwise than in accordance with the company’s established procedures and were not properly documented from an accounting perspective, the real issue is whether they were made bona fide for the proper purposes and in the interests of the company.

Background

  1. Mr I N Yoo acquired his shareholding in Toppro on 30 April 2012. He was approached, on behalf of Topfield Korea, by an acquaintance Joon Won Choi (who was then a director of Topfield Korea), with a proposal offering a “good chance for you to earn quick money”. Mr Choi said to him:

Toppro is a Sydney based company which turns over in excess of $10m per year distributing electronic products imported from Korea. We are looking for a person to acquire 100% of the shares in Toppro. If you have USD10,000 to invest I can let you buy all of the shares of Toppro and you can sell them in a couple of weeks for USD12,000. This way I can help you make a quick USD2,000 profit.

  1. Mr Yoo decided to go ahead, and paid $10,000. Shortly thereafter, at Mr Choi’s request, Mr Yoo executed a transfer of his shares to Wealth Wisdom Investments Ltd (“WWIL”), a British Virgin Islands company which Mr Yoo was given to understand was associated with Topfield Korea. The transfer nominated a price of $12,000, and Mr Yoo expected to be paid within three months. However nothing eventuated – in particular, he did not receive $12,000 – and, in about December 2013, he decided to retain rather than sell his shareholding. At that time, he caused Mr Ahn to be appointed a director, and Mr Kwon was first employed by Toppro as General Manager – for a term of 12 months, unless extended, and subject to an initial probationary period of six months, on an annual salary of $75,000 plus superannuation – under a contract dated 18 December 2013, which was executed on behalf of Toppro by Mr Ahn.

  2. Despite Mr Yoo being the sole beneficial shareholder, it appears that Toppro’s management was largely aligned with Topfield Korea. In about May 2014, Mr Yoo was informed by Mr Ahn that the company had made a loss of about $1.95 million in 2012-13; that the Topfield Korea products it distributed were not competitive in price or quality; and that there were a very large number of defects claims, with repairs being performed by a company called Okshop – which was operated by Ok Ja Joo, the wife of the managing director of Topfield Korea – at an excessive cost.

  3. Mr Yoo gave evidence that he began to doubt whether there was any profit for him in retaining the shares, although he also said that he was concerned that he might end up being blamed in some way if the company continued to make losses. In any event, he began to take a closer interest in the company’s affairs, and so too did Mr Ahn.

A new corporate strategy?

  1. Mr Yoo says that in late May 2014 he received a telephone call from Mr J W Choi, who said that he was planning to come to Sydney to visit Mr Yoo in early June. Mr Yoo asked him why, and Mr Choi said that he was leaving Topfield Korea, and joining his friend Mr Doo Chul Park at DJH Inc, a consultancy. In his oral evidence, Mr Yoo said that he was surprised to hear that Mr Choi was leaving Topfield Korea, and asked what was going to happen to him (Yoo); he explained that he was concerned, if Mr Choi was going to leave Topfield Korea, what sort of plan he had for Mr Yoo, in the light of the promise he had made to Mr Yoo in relation to the sale of his shareholding:

My concern was about the promise that Joon Won Choi made to me in relation to the sale of my shares. If Joon Won Choi would leave Topfield I was concerned what would happen to the shares that I had – what will I have to do with the shares? Do I have to keep them, or do I have to sell them? That was the dilemma that I had.

  1. Why Mr Choi’s departure from Topfield Korea might have implications for Mr Yoo’s shareholding, for which he had paid, was not explained, although Mr Yoo said that he was concerned whether he would be able to make a profit by retaining the shares. He denied that he was concerned that he might still be forced to transfer his shares pursuant to the 2012 transfer to WWIL. In any event, it was not suggested that between April 2012 and 20 June 2014, Mr Yoo was not the sole beneficial shareholder in Toppro.

  2. Following Mr Choi’s arrival in Australia, Mr Yoo met him at the Meriton Apartments, Macquarie Park, on the evening of Saturday, 7 June 2014. Mr Yoo said he discussed with Mr Choi some of the issues then affecting Toppro. Mr Choi told Mr Yoo that Topfield Korea claimed to be owed in excess of $5 million by Toppro. But Mr Choi also said that Topfield Korea products had many faults; that Topfield Korea was interfering with Toppro too much which made it very difficult for Toppro to operate profitably; and that many prices set by Topfield Korea were too high for Toppro to make any profit. According to Mr Yoo, Mr Choi said:

You need a plan to deal with Topfield. You have to break free of them but you will need to do it in secrecy or they will destroy your company. I know Topfield’s CEO Mr Lee very well. I know what he is like. He is utterly ruthless and he will seek to use the financial power of Topfield to tie you up in litigation for years. You should use DJH as consultants.

  1. On Sunday 8 June, Mr Yoo, and subsequently Mr Ahn, and later Mr Kwon, met Mr Choi at the Meriton Apartments. Mr Choi advised Mr Yoo that Mr Suh should be removed as a director, but that once he was removed, Topfield Korea would demand the $6 million debt. He recommended that a consultancy report be prepared. DJH’s total fee for this would be $200,000, of which $100,000 would be payable before they commenced work, and the remaining $100,000 after the final consulting report was delivered by 25 June. Although taken aback at the cost, Mr Yoo agreed to proceed.

  2. Mr Ahn had commended Mr Kwon to Mr Yoo as a reliable and trustworthy employee. Mr Kwon was told that a decision had been made to cease dealing with Topfield Korea; his impression was that that had been discussed between Mr Choi and Mr Yoo the preceding evening. Mr Kwon says that Mr Choi described to him the consulting work to be performed, and that its purpose was to “normalise” Toppro by ceasing to deal in Topfield Korea products and replacing them with other PVR products. According to Mr Kwon, Mr Choi told him that if he did not agree to this course of action, his employment would be terminated at the end of the probationary period (which was then in its last month), but if he agreed, his salary would be increased. It is likely to have been at about this time that a further contract of employment between Toppro and Mr Kwon, as General Manager, was executed by Mr Ahn on behalf of Toppro and by Mr Kwon, each signature being witnessed by Mr Yoo. [4] It was expressed to be for a term of one year, at remuneration of $180,000 per annum, plus back pay for the period from January 2014 to June 2014 of the difference between $75,000 and $180,000 per annum for that six month period.

    4. Although the contract bears the typewritten date 5 June 2014, it was probably executed later, on or about 9 June, following the conversation between Mr Choi and Mr Kwon on 8 June.

  3. Mr Yoo said that Mr Kwon was not present with him and Mr Choi at the same time; whereas Mr Kwon’s evidence was that he was for a while, although most of his conversation with Mr Choi was between them alone; while the plaintiff submitted that this inconsistency warranted rejection of both versions as fabrications, I do not agree: the inconsistency is minor. The plaintiff made a similar submission in respect of evidence of Mr Yoo and Mr Kwon to the effect that a decision had been made by 8 June 2014, based on Mr Choi’s advice, to cease dealing in Topfield Korea products, whereas Mr Ahn said that it was never decided to finish dealing with Topfield Korea products. However, I do not see any substantial inconsistency: I do not understand the evidence of Mr Yoo and Mr Kwon to be that a final decision to cease dealing with Topfield Korea had been made, let alone implemented, and Mr Ahn’s evidence was to the effect that while the possibility was being explored, a final decision had not been made or implemented.

  4. At 5.28pm on 8 June, Mr Ahn sent Mr Kwon an email:

As per the directive from our majority shareholder, I would like to ensure that all reporting of internal company matter be made ONLY to myself not to anyone else. Further to this, I would like a list all who currently has the access to our company accounts.

Please ensure that this happens in all future reporting starting immediately.

The first payment

  1. The first impugned payment, in the sum of $2,500, was made on 8 June 2014, by transfer from Toppro’s ANZ Bank account to Mr Kwon’s account.

  2. In his Amended Defence, Mr Kwon said that this payment was made to reimburse him for business expenses incurred on his personal credit card. In oral evidence in chief, he said that he was instructed by Mr Ahn to draw the funds to cover business expenses, apparently associated with Mr Choi. In cross-examination, he maintained that the payment was authorised by Mr Ahn, and supported by a bundle of receipts and an “expense form”. [5] He said that $807 of the first payment was in respect of hotel expenses for “the DJH consultants”, and that it also included the cost of a trademark application, made at the suggestion of Mr Choi. He explained that the authorisation given by Mr Ahn was not for a specific amount or payment, but generally to withdraw what was reasonable to cover the expenses for the DJH consultants.

    5. The expense form, which became Exhibit DX15, and which Mr Kwon said he prepared on 22 June, is further discussed below.

  3. Mr Ahn said in his affidavit that the payment was for “business expense”, without specifics of the actual business expense incurred. In cross-examination, while he said that he did not have a conversation with Mr Kwon specific to this particular payment, he maintained that Mr Yoo had said that he was to facilitate anything that Mr Kwon needed to do in terms of spending for the duration of the DJH consultants’ stay.

  4. The plaintiff pointed out that it was Mr Yoo’s evidence that Mr Choi paid for his own accommodation at the Meriton Apartments, and submitted that the payment could not have included accommodation. However, Mr Kwon’s expense form, and a supporting receipt, plainly establishes that it was incurred with Meriton and paid for by Mr Kwon on his personal Amex credit card. Mr Yoo may have been mistaken, or the expense may have been for extras rather than the room. The expense form, and a supporting document, also evidences a payment for ‘Trade Mark Registration’ in the sum of $937.65. Another document, entitled ‘Advanced Cash Withdrawal’, prepared by Mr Kwon and dated 10 June 2014, referred to below, also has an entry for $937.65 for ‘Trade Mark’, but it appears separately from and additional to the amount of $2,500 appearing in the first row of the document, which is referable to the first payment. When Mr Kwon was shown the Advanced Cash Withdrawal and asked whether, so far as he could tell, the payment of $937.65 related to any of the first to ninth Payments, he answered in the negative; and on the face of the Advanced Cash Withdrawal that is so. But the trade mark expense was clearly incurred – apparently in an attempt to gain some tactical leverage through registration of the names of Topfield Korea and a competitor, Humax – and paid for by Mr Kwon.

  5. Subsequently, Mr Kwon raised and submitted an invoice on his personal letterhead entitled Cornplatech Advisor & Associates, dated 13 June 2014, which referred to ‘Trademark Application – Topfield/ Humax PVR (Personal video recorder) Class 9’.

The second payment

  1. The second impugned payment, in the sum of $202.50, was made on 9 June 2014, by ATM withdrawal from Toppro’s ANZ Bank account by Mr Kwon. Mr Kwon said that the payment was to cover a taxi fare for Mr Choi. Mr Ahn said that the purpose of this payment was not made clear to him; he speculated that it was for a lunch with Mr Park, but Mr Park did not arrive in Sydney between 10 and 12 June 2014. But so far as Mr Ahn was concerned, it was covered by the earlier conversation about drawing funds to cover the DJH consultants’ expenses.

  2. Mr Kwon later raised and submitted an invoice to cover this expense, dated 13 June 2014, on Cornplatech letterhead, with the following detail:

Trademark Research – Topfield (Personal Video recorder, Digital Video recorder, Set top Box) Class” and “IP (Intellectual Property Search) – Word/Logo”

The third payment

  1. The third impugned payment, in the sum of $1,000, was also made on 9 June 2014, from Toppro’s ANZ Bank account to Mr Kwon’s account. In his Amended Defence, Mr Kwon asserted that the purpose was to pay a consulting fee to Mr Park. But Mr Park was still not in Sydney, although his associate Mr Choi was. In oral evidence in chief, Mr Kwon said that the payment was authorised by Mr Ahn, to cover the expenses of the DJH consultant while he was staying in Sydney – which he then elaborated to “consultants, plural” – Mr Park and Mr Choi.

The DJH consulting agreement

  1. On Monday, 9 June, Mr Choi, Mr Yoo and Mr Kwon met again at the Meriton Apartments. At first it seemed that Mr Kwon’s evidence was to the effect that as well as Mr Yoo and himself, both DJH consultants were present, but later it became clear that only Mr Choi was there; Mr Kwon tended to use “DJH consultants” as a generic term for either or both of them. Mr Kwon said that Mr Ahn was not present at this meeting, and that he sent Mr Ahn an email attaching the DJH consulting agreement using Mr Choi’s computer, and that Mr Ahn returned it signed; whereas Mr Ahn said that he was present, and that Mr Kwon printed out the consulting agreement.

  2. Although there are inconsistencies in the testimonial evidence, the electronic trail establishes, clearly enough, that on this occasion a consulting agreement between Toppro and DJH was executed, by Mr Ahn on behalf of Toppro and by Mr Park on behalf of DJH. It is clear (from the different time zone on emails from him) that Mr Park was still in Korea. At 1632, Mr Kwon forwarded the consultancy agreement to Mr Ahn, unsigned; the pdf attachment (which was the consultancy agreement) comprised 1047Kb. At 1636, Mr Ahn forwarded the consultancy agreement to Mr Park, with copies to Mr Ahn and Mr Kwon; the attachment still comprised 1047Kb and was thus still unsigned – not signed as Mr Kwon had initially asserted. At 1658, Mr Park returned the consultancy agreement, signed by him, to Ahn, with an invoice for USD100,000. At 1700, Mr Ahn forwarded it to Mr Kwon and Mr Yoo. At 1702, Mr Ahn responded to Mr Park, requesting an invoice in AUD. At 1707, Mr Park on behalf of DJH sent an invoice for AUD100,000 to Mr Ahn.

  3. Mr Kwon’s evidence as to the sequence of execution of the consulting agreement – which initially he said he recalled clearly – changed, when attention was drawn to the Kb count of the pdf attachments, which indicated that it had not been signed by Mr Ahn at the point when Mr Kwon had said it was. In my view, Mr Kwon was prone to reconstruct his evidence from the documents, and on this occasion was mistaken in doing so. Whether or not Mr Ahn was present is of little significance, though I favour the view that he was. The inconsistencies do not warrant an inference that the consultancy agreement did not then exist, but was created later; such a conclusion would be contrary to the contemporaneous electronic communications.

  1. The consulting agreement bore the typewritten date 9 June 2014. Clause 1 (Purpose of the contract) was as follows:

DJH shall provide advice to, undertake for and consult with Company concerning sales, management, marketing, purchasing, strategic planning, corporate organization and structure financial matters in connection with the operation of the TOPPRO’s business, expansion of services, and shall review and advise Company regarding its overall progress, needs and condition. And offer ways of normalization by analysing past and present company business and financial status.

  1. Clause 2 provided that the term of the agreement was a period of one year, to continue with mutual consent. Clause 3 (Payment of the consulting fee) was as follows:

3-1.   TOPPRO shall pay AUD 100,000 (One Hundred Thousand, Australian Dollars, GST excluded) to DJH.

3-2.   DJH shall present reports about normalization of management before 25th June, 2014.

3-3.   TOPPRO shall pay AUD 100,000 (One Hundred Thousand, Australian Dollars, GST excluded) to DJH within 10 days after collecting report about normalization of management.

3-4.   DJH shall provide all his effort to normalization of TOPPRO and TOPPRO pay additional consulting fee by hourly basis. Consulting fee shall be AUD 700 (Seven Hundreds, Australian Dollars) per hour and it should be paid by monthly settlement.

  1. Properly construed, in the light of the preceding conversations, clause 3 provided for two payments, each of $100,000: an initial “upfront” payment (clause 3-1), and a second payment after delivery of the report (clause 3-3). According to Mr Kwon, Mr Ahn instructed him to make the upfront payment the next day.

  2. Either on 8 June, but more likely on this occasion (because Mr Ahn, Mr Choi and Mr Kwon were all present), Mr Choi recommended sourcing products from Shenzhen, but DJH had no agent or connection in Shenzhen. Mr Kwon suggested that a company called KRMI, which was run by his older brother in Korea, might be able to assist, and Mr Ahn instructed him to engage KRMI to find a PVR manufacturer in Shenzhen or Hong Kong. Mr Ahn also instructed Mr Kwon to draw the necessary funds to cover expenses associated with Mr Choi (and subsequently his associate Mr Park) while they were staying in Sydney to do their consulting work.

The fourth payment

  1. The fourth impugned payment, in the sum of $2,000, was made on 10 June 2014, by EFT from Toppro’s ANZ Bank account to Mr Kwon’s account. Mr Kwon said that this payment was to reimburse him in respect of business expenses incurred on his personal credit card, including in respect of hotel accommodation and to purchase a laptop for DJH. There were discrepancies and inconsistencies as to whether the laptop was for Mr Choi or Mr Park (who arrived in Sydney between 10 and 12 June 2014 and joined Mr Choi at the Meriton Apartments), but the expense form and a supporting receipt evidences the purchase of a laptop on 11 June for $691.94, paid for by Mr Kwon’s St George Mastercard.

The fifth payment

  1. The fifth impugned payment, in the sum of $40,000 (plus a $24 processing fee), was made on 10 June 2014, from Toppro’s ANZ Bank account to DJH. Mr Kwon says that on the morning of 10 June he telephoned Mr Ahn and told him that there was not $100,000 available in the account to make the upfront payment to DJH, but only $40,000, and Mr Ahn told him to pay the $40,000.

  2. On 11 June, Mr Yoo caused Mr Suh to be removed as a director; thereafter, Mr Ahn was the sole director. Also on 11 June, Mr Kwon sent an email to Nelson Choi, expressing interest in sourcing PVRs from his company in China.

The sixth payment

  1. The sixth impugned payment, in the sum of $5,000 (plus processing fee of $24), was made on 14 June 2014, from Toppro’s ANZ Bank account to KRMI, a Korean company operated by Mr Kwon’s brother. Mr Kwon said that this payment was for consulting purposes, pursuant to Mr Ahn’s authority, given at the Meriton Apartments on 8 June, to retain KRMI to find a PVR manufacturer in Shenzen. On 8 June, it was not known what they would charge; but prior to 14 June, Mr Kwon had a conversation with his brother, and the fee was determined to be $10,000.

  2. An invoice (numbered #2014LW68) bearing the date 17 June 2014, was raised on the paper of Korea Region Management Institute for that sum, which like the invoice dated 13 June 2014 on Cornplatech letterhead relating to the second payment, it referred to “Trademark Research – Topfield (Personal Video recorder, Digital Video recorder, Set top Box) Class” and “IP (Intellectual Property Search) – Word/Logo”, with the addition “Global Sourcing Consulting – Mongolia”. It was stamped “Paid 16/6/14” by Toppro.

  3. It is beyond doubt that this invoice was prepared using the Cornplatech invoices as a template, to the point it even uses the same invoice number. Mr Kwon says that he sent a pro forma invoice to his brother, to assist him to prepare an invoice in English, and that his brother completed the details. The invoice issued by KRMI bears a seal or “chop”.

The seventh payment

  1. On 15 June, Mr Kwon booked flights for himself, Mr J W Choi and Mr Park, to Hong Kong on 18 June, with a return flight for him to Australia overnight on 21/22 June, and an onwards flight for Mr Choi and Mr Park to Korea in the early morning of 21 June.

  2. The seventh impugned payment, in the sum of $5,097.62, was made on 15 June 2014, from Toppro’s ANZ Bank account to Mr Kwon’s account. Mr Kwon said that he had a conversation with Mr Ahn in which he asked if he could withdraw money required for the business trip to Hong Kong, to cover the airline ticket and the hotel cost in Hong Kong, and also for expenses such as dinner when he would be meeting with suppliers in Hong Kong and China, and that Mr Ahn agreed. Mr Ahn said that it was covered by the original conversation in which Mr Kwon was authorised to draw reasonable expenses.

  3. On the evening of 15 June, Mr Kwon sent a further email to Nelson Choi, and on the morning of Monday, 16 June, a meeting with him was arranged for the afternoon of 20 June.

  4. Mr Kwon prepared and signed the Toppro “Advanced Cash Withdrawal Application for the business purpose”, which was dated 16 June, and contained the following:

Date

Transaction Description

Withdrawals

Withdrawal Purpose

9/06/2014

ANZ INTERNET BANKING FUNDS TFER TRANSFER 795410 TO KEE HOON KW EFFECTIVE DATE: 08 JUN 2014

$2,500.00

Business Purpose – Advanced Withdrawal

For the purpose of Trade Mark (Reimbursing)

ANZ INTERNET BANKING FUNDS TFER TRANSFER 264476 TO KEE HOON KW

$1,000.00

Business Purpose – Advanced Withdrawal

10/06/2014

ANZ INTERNET BANKING FUNDS TFER TRANSFER 513744 TO KEE HOON KW

$937.65

Trade Mark – Advanced Withdrawal

10/06/2014

WITHDRAWAL

$2,000.00

Business Purpose – Advance Withdrawal

16/06/2014

ANZ INTERNET BANKING FUNDS TFER TRANSFER 795410 TO KEE HOON KW EFFECTIVE DATE: 15 JUN 2014

$5,097.62

Business Purpose – Advanced Withdrawal

  1. It was ostensibly approved by Mr Ahn on the same day.

  2. Also on 16 June, Mr Kwon received by email a letter from Topfield Korea which purported to advise that, with effect from that day, because of a dispute about an outstanding payment, Topfield Korea would no longer distribute its product in Australia through Toppro, but instead through “Topfield Australia Pty Ltd”. Mr Kwon responded, on 17 June, that this was not in accordance with the “distributor agreement”, which required 60 days’ notice.

  3. On 17 June, a letter from Mr Kwon was forwarded, under an email captioned “Inquiry from Topfield (Australia) for OEM”, to each of Shenzhen Lizhao Electronic Technology Co Ltd, Pandic Electric (Shenzen) Ltd, and ABC (Xisheng) Electronics Co Ltd, stating that “Topfield are going to move our product … to China for OEM production, and we have a plan to set up our office in China Shenzen”, and seeking a quotation. The letter also stated “We will go to China at June 19 for a business trip, we are pleasure to receive your offer before our arrival or A.S.A.P., that will great help for us and we are consider to take a visit to your office for this project, we send our people Mr. Eric Wong and Mr. John Yim to contact with you in this couple days”. Although the letter refers to Topfield Australia, that was evidently because that name had greater market visibility than Toppro; the correspondence was clearly written in furtherance of the strategy of seeking alternative suppliers of PVRs.

  4. Also on 17 June, Mr Kwon received a letter from solicitors acting for Topfield Korea addressed to Toppro demanding payment of $6,095,482.75. He also received emails from the managing director of Topfield Korea, purporting to instruct him to get Mr Yoo to transfer his shares to Topfield Korea.

The eighth payment

  1. The eighth impugned payment, in the sum of $5,000 (plus processing fee of $24), was made on 17 June 2014, from Toppro’s ANZ Bank account to KRMI.

  2. An invoice (#2014LW68) dated 17 June, was raised on the paper of Korea Region Management Institute for that sum. Like the invoice dated 13 June 2014 on Cornplatech letterhead relating to the second payment, it referred to “Trademark Research – Topfield(Personal Video recorder, Digital Video recorder, Settop Box) Class” and “IP (Intellectual Property Search) – Word/Logo”, with the addition “Global Sourcing Consulting – CHINA Manufacturing Company”. It was stamped “Paid 17/6/14” by Toppro.

  3. Again, it is beyond doubt that this invoice was prepared using the Cornplatech invoice as a template. Again, it bears a Korean seal or “chop”.

The ninth payment

  1. The ninth impugned payment, in the sum of $60,000, was made on 17 June 2014, from Toppro’s ANZ Bank account to DJH. It was the balance of the $100,000 upfront payment to DJH. Mr Kwon says that on the afternoon of 17 June he telephoned Mr Ahn from his Toppro office, and because he was due to go on a business trip to Hong Kong on 18 June, suggested that they proceed with the payment of the remaining $60,000 of DJH’s fees, and that Mr Ahn told him to go ahead with the payment before he left; he made the payment the same day.

The Hong Kong Trip

  1. On 18 June 2014, Mr Kwon travelled to Hong Kong, with Mr Park and Mr Choi. After a few days in Tsim Sha Tsui, Mr Kwon proceeded to Shenzhen on 20 June.

  2. On Friday 20 June, Ok Ja Joo took control of Toppro. That morning, Mr Yoo telephoned Mr Kwon, who was still with Mr Choi and Mr Park in Hong Kong, and then spoke to Mr Choi. He says that he explained the situation to Mr Choi, who passed the phone to Mr Park, and that Mr Park agreed to lend Mr Yoo $50,000, and asked for his bank account details to facilitate an immediate transfer. Mr Yoo says that he did not know his bank account details, so suggested that the money be transferred to Mr Kwon’s account, as he needed the $50,000 as soon as possible to proceed with litigation to regain control of Toppro, was not near his bank, was not aware whether there was a Commonwealth Bank ATM nearby, and did not have a mobile banking app on his phone. But he then conceded that he had had a mobile banking app since 2013, and could have found his account details from it. He said:

Well, back then my judgment was that since I didn’t know where there was an ATM or any branch around me, I thought the fastest way to receive the money was to direct Kee Hoon Kwon to have the money deposit into account – into his account, because he was right there.

  1. Mr Kwon provided his bank account details to DJH. As far as he was concerned he would be “looking after” the $50,000, when received, for Mr Yoo. Mr Yoo said that he already had in mind to use part of the $50,000 to compensate Mr Kwon, whom he expected would be dismissed without any of his entitlements.

  2. Mr Kwon returned to Sydney on the morning of Sunday 22 June. On his return flight he completed the expense form, which he later printed out and signed, listing the various expenditures in respect of which he had claimed reimbursement, and supported by receipts. It amounted to a total of $9,032.21. Later, it was countersigned by Mr Ahn, but this must have been after the 20 June “coup”. Mr Ahn knew that the expenses claimed were in connection with the DJH consultants and the Hong Kong trip, but he trusted Mr Kwon and did not closely scrutinise the form or interrogate the individual expenses listed, so he was not aware of the detail of each expense claimed. Although there are some discrepancies in the evidence of Mr Kwon and Mr Ahn as to when this form was signed by Mr Ahn, I do not accept that it is other than a genuine list of expenses incurred by Mr Kwon, for which he produced supporting receipts.

  3. On Monday, 23 June, Mr Kwon used his St George Mastercard to pay the filing fee for Mr Yoo and Mr Ahn to institute proceedings against Ms Joo, to reclaim control of Toppro. Ex parte injunctive relief was obtained that day. On the same day, he received a letter dated 23 June notifying his termination with effect from 20 June from Toppro – but no termination entitlements, and Mr Yoo agreed to allow him to keep $15,000 of the money to be advanced by DJH, inter alia, to cover his personal credit card liabilities.

  4. Also on 23 June 2014, DJH paid $30,000 into Mr Kwon’s bank account, and on 26 June 2014 a further $20,000. On 24 June, $10,000 was transferred from Mr Kwon’s account to Strathfield Law. Mr Kwon also reimbursed his credit card with the $1,054 which he had paid for the filing fee, and paid $8,920.18 off his American Express card. On 25 June, Mr Kwon transferred $8,000 to Mr Yoo, and another $10,000 to Strathfield Law, who were acting for Mr Yoo in disputing the change of control. On 27 June, he transferred $7,000 to another personal account.

  5. On 30 June, he paid a further $10,000 to his brother’s company KRMI. KRMI had in fact sent two further invoices to Toppro, additional to those the subject of the sixth and eighth payments. Toppro received these invoices on or about 17 June (though they bore the date 10 June 2014, which was quite likely incorrectly replicated from the Cornplatech template), and had not paid them. Each was for $5,000 – a total of $10,000. One contained the following details:

PVR Manufacture Sourcing Research

Global Sales Marketing Consulting – Potential Suppliers in Korea – Meeting arrangement, Product Specifications, and Field Research.

  1. The second (numbered #2014LW69) was for:

PVR Manufacture Sourcing Research

Global Sales marketing Consulting – Potential Suppliers in Hong Kong/China – Magic TV, ABC (XiSheng) Electronics, Pandic Electric, Shenzen Lizhao Electronic – Meeting arrangement, Product Specifications, and Field Research and QA Test.

  1. Again, it is beyond doubt that these invoices were prepared using the Cornplatech invoices as a template. Again, they bear a Korean seal or “chop”. But significantly, the second-mentioned invoice referred to entities which corresponded with those with which Mr Kwon was to visit in Shenzhen, and was received by Toppro before he departed for Hong Kong. Mr Kwon says that he made this payment from the funds held in his account pursuant to instructions from Mr Yoo to the effect that he would soon regain control of Toppro, and in the meantime KRMI should be paid for their consulting service in connection with sourcing a replacement product.

  2. On 5 July, a further $2,000 was transferred to Strathfield Law, for “Yoo and Ahn”. On 17 July, Mr Kwon transferred a further $3,000 from his other account to Strathfield Law. Thus, of the $50,000 received from DJH, $10,000 was paid to KRMI, $25,000 to Strathfield Law (in connection with Mr Yoo’s proceedings against Ms Joo), $8,000 to Mr Yoo, and $1,054 to reimburse the filing fee, leaving just over $15,000 retained by Mr Kwon for his own use (including paying down his credit card debt).

  3. Meanwhile, on 25 June 2016, DJH had produced a “Consulting Report”, comprising 10 pages including the title page, and containing some superficial financial analysis – all of which would (at least until 20 June) have been independently ascertainable by Mr Kwon and Mr Ahn from the corporate records available to them – and making some rather banal recommendations, including an alternative product line in solvent recyclers, to replace the loss from PVRs.

  4. On 23 July 2014, Mr Kwon received from Alpha Lawyers, purporting to act for Toppro, a demand for reimbursement of $120,693.62.

  5. On or about 9 August 2014, Mr Yoo signed a document entitled “Letter of Confirmation” address “to whom it may concern” as follows:

Re: The payment transaction for the period of June 06, 2014 to June 20, 2014

The following payments have been reported in detail by Mr Kwon Ki Hoon, former General Manager of Toppro Pty Ltd (ACN: 128 764 429), to me, Mr Il Nam Yoo, former 100% shareholder of Toppro Pty Ltd in the month of June. I, Il Nam Yoo, have expressly agreed to endorse the following payments and instructed Mr Raphael Ahn, former Director of Toppro Pty Ltd to approve them.

•  09/06/14 ANZ Banking Funds TFER Transfer 795410 to Kee Hoon KW Effective Date: 08 June 2014 of the amount of $2,500.00

•  09/06/14 ANZ Internet Banking Funds TFER Transfer 264476 to Kee Hoon KW Effective Date: 08 June 2014 of the amount of $1,000.00

•  10/6/14 Withdrawal of $2,000.00

•  10/6/14 ANZ Internet Banking Funds TFER Transfer 762386 to Intl-fee $24.00 of the amount of $40,024.00

•  16/06/14 ANZ Internet Banking Funds TFER Transfer 314955 to Intl-fee $24.00 of the amount of $5,024.00

•  16/06/14 ANZ Banking Funds TFER Transfer 795410 to Kee Hoon KW Effective Date: 16 June 2014 of the amount of $5,097.62

•  17/06/14 ANZ Internet Banking Funds TFER Transfer 467990 to Intl-fee $24.00 of the amount of $5,024.00

•  17/06/14 ANZ Internet Banking Funds TFER Transfer 470316 to Intl-fee $24.00 of the amount of $60,024.00

Total amount for the business purpose: $120,693.62

Signatory: Il Nam Yoo

  1. Mr Ahn executed a letter in similar terms, save that the introduction was:

With consent with Il Nam Yoo, the owner of Toppro Pty Ltd (ACN: 128 764 429), I, Raphael Aghn, the director for the above period, confirm that I instructed Mr. Kee Hoon Kwon, a general manager to make the following transactions payment for the business purposes:

Issues

  1. Toppro contended that Mr Kwon and Mr Ahn breached their duties under (CTH) Corporations Act 2001, s 180, s 181 and s 182 (and the equivalent general law duties) – in Mr Kwon’s case by making and/or allowing the first to ninth payments to be made and/or failing to ensure that proper safeguards and controls were in place and adhered to, and in Mr Ahn’s case by directing and/or authorising those payments to be made and/or failing to ensure that proper safeguards and controls were in place and adhered to – where each of those payments was (i) not properly accounted for; (ii) not made in the ordinary course of Toppro’s business; (iii) no consideration was provided to Toppro for the payments; (iv) made to entities that were not genuine suppliers of Toppro (namely, DJH in respect of the fifth and ninth payments and KRMI in respect of the sixth and eighth payments); and (v) not made for proper business purposes. Toppro further contended that as a result of those breaches of duty, it suffered the loss of the funds expended, and claimed compensation – pursuant to Corporations Act, s 1317H, or alternatively equitable compensation – in the amount of $120,896.12, against Mr Kwon and Mr Ahn, jointly and severally.

  2. There were unquestionably manifold irregularities in respect of the impugned payments. As Toppro contended, they were not made in accordance with established internal procedures and controls, and there were no contemporaneous invoices or other supporting documentation. Moreover, some of the invoices retrospectively raised by Mr Kwon were, on his own evidence, misleading. However, while these features reasonably ground suspicion as to the purpose of the payments, mere failure to adhere to established procedures does not of itself constitute a breach of one of the relevant duties. Although the statutory duty of care and diligence is contravened if a director has not exercised a reasonable degree of care and diligence in the exercise of his or her powers or the discharge of his or her duties, even if no actual damage results, that is only so if it was reasonably foreseeable that the relevant conduct might harm the interests of the company – the corporate entity itself, being the shareholders and, where the financial position of the company is precarious, the creditors. [6] As Ipp J explained in Vrisakis (with reference to the predecessor of s 180, which then provided for criminal liability):

Under s 229(2), however, there is no reference to damage suffered by the company, and an offence may notionally be committed under that section without any damage having been sustained. The question is merely whether the defendant director has exercised a reasonable degree of care and diligence in the exercise of his powers in the discharge of his duties. Nevertheless, a criminal offence will not have been committed if an omission to take care did not carry with it a foreseeable risk of harm to the company. No act of commission or omission is capable of constituting a failure to exercise care and diligence under s 229(2) unless at the time thereof it was reasonably foreseeable that harm to the interests of the company might be caused thereby. That is because the duty of a director to exercise a reasonable degree of care and diligence cannot be defined without reference to the nature and extent of the foreseeable risk of harm to the company that would otherwise arise.

6. Vrisakis v ASC (1993) 9 WAR 395, 449–50; 11 ACSR 162, 211–13; Ipp J (as his Honour then was) (with the concurrence of Malcolm CJ); see also ASIC v Doyle (2001) 38 ACSR 606, 641; ASIC v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373, [102].

  1. Thus if the impugned payments were “not properly accounted for”, and/or were not made “in the ordinary course of the company’s business”, that would not necessarily establish a breach of duty if they were nonetheless made for a proper purpose in the interests of the company, because the interests of the company would not have been jeopardised. Moreover, in a claim for compensation such as this case, proof of loss is fundamental. If the impugned payments were made for a proper purpose in the interests of the company, then the circumstance that they were made irregularly would not have occasioned any compensable loss or damage. So the essential question in this case is whether the payments were made bona fide for the proper purposes and in the interests of the company. If they were, then a failure to adhere to the usual internal controls would not establish a breach of duty, let alone that the company suffered loss as a result.

  2. The plaintiff bears the onus of proving that the impugned payments were made improperly or negligently (which terms I use to encapsulate a breach of the relevant duties of corporate officers). The defendants’ case is that the impugned payments were made in connection with the retainer of DJH (and, ancillary thereto, KRMI), [7] in order to obtain advice and assistance in the development and implementation of a strategy to extricate Toppro from the clutches of Topfield Korea, including by sourcing alternative suppliers of product and developing a counterclaim; that given the breakdown in the relationship between Toppro and Topfield Korea, such a strategy was appropriate, and given the apparent loyalty of many Toppro employees to Topfield Korea, secrecy and subterfuge was necessary. While the plaintiff does not necessarily have to show affirmatively what was the (allegedly improper) purpose for which the payments were made, essentially where, as here, the defendants assert the purpose of the payments, the plaintiff must show either that that was not the true purpose, or that if it was, it was improper or imprudent. Essentially, the plaintiff’s case was that (1) the consultancy agreement with DJH (and the arrangements with KRMI) were not genuine retainers for consultancy work, but sham arrangements to facilitate the removal of assets from Toppro for the benefit of DJH, Mr Yoo and Mr Kwon to the detriment of Toppro and its creditors; and (2) even if the consultancy arrangements were entered into genuinely, a reasonable director or officer exercising due care would not have done so in the circumstances.

    7. While some of the payments were by way of reimbursement of Mr Kwon for expenses, that forms only about $10,000 of the claim, and those expenses were themselves in substance incurred in connection with the accommodation and entertainment of the DJH consultants, or the pursuit of the strategy they advised.

Genuine consultancy or sham?

  1. The defendants said that it was Mr Yoo, upon the advice of Mr Choi, who made the decision to engage DJH, pay their retainer and cover their expenses; and that they understood the purpose of doing so was to obtain the advice and assistance of DJH in developing a strategy to extricate Toppro from Topfield Korea, in particular by sourcing alternative suppliers of products, and formulating a counterclaim against Topfield Korea.

  2. Mr Yoo denied that the consulting arrangements were shams, intended to facilitate the provision of benefits to DJH and Mr Kwon, and maintained that he instigated them in order to address a situation in which Toppro required a plan to separate from Topfield Korea. He said that the subsequent loan back of $50,000 from DJH after 20 June was also instigated by him. Mr Yoo said that it was his decision that Toppro should retain DJH; that he instructed Mr Ahn to provide Mr Kwon with all necessary funds and authorisation to cover the expenses – “to pay for all of the tab” – for Mr Choi and Mr Park, while they were in Sydney and in Hong Kong; and that he also directed Mr Ahn to ensure that others in Toppro were not made aware of what they were doing, lest Topfield Korea found out. He says that he had never considered that someone might in 2014 seek to act upon the transfer to WWIL that he had executed in 2012. He explained:

In the scheme of things while I considered paying $200,000 to DJH and other payments associated with the business trips of Choi and Park was a lot of money, I considered it the only way in which I could access the undoubted acumen of Choi and Park and their ability to advise both on a business plan for Toppro without Topfield and how to deal with what seemed at the time the inevitable retaliation in the form of litigation from Topfield.

  1. There are undeniably circumstances that attract considerable suspicion as to the origins and purpose of the consulting arrangements, of which Mr Choi and his firm would be the chief beneficiaries.

  2. It was Mr Choi who, as an officer of Topfield Korea, had originally in 2012 introduced to Mr Yoo the opportunity to acquire the shares, but then failed to deliver the quick on-sale that had been promised, to Mr Yoo’s dissatisfaction. Then in late May 2014 he told Mr Yoo – to his concern – that he was leaving Topfield Korea, and was coming to Australia to have discussions with Mr Yoo. Inexplicably, Mr Yoo was concerned at what that might mean for him. Supposedly, Mr Choi then came to Australia of his own initiative and once here, persuaded Mr Yoo that Toppro should cease trading with Topfield Korea, source suppliers elsewhere, and retain his firm DJH as consultants for $200,000. Thus it appears that it was really Mr Choi who was the architect of the strategy, and Mr Choi’s firm DJH who was the principal beneficiary of the arrangement. Moreover, incurring expenditure of $200,000 for consulting appears extraordinary in circumstances where Mr Yoo had acquired his 100% shareholding for a mere $10,000 in 2012, in the expectation of a quick profit of a mere $2,000, and until 2014 took little interest in its affairs.

  3. Then, after the 20 June “coup”, DJH advanced $50,000 into Mr Kwon’s account – allegedly as a loan to Mr Yoo to assist him to reclaim Toppro, and of which about $27,000 was applied to fund proceedings to do so, $8,000 to Mr Yoo personally (but perhaps in reimbursement of legal costs already incurred by Mr Yoo), and $15,000 for the benefit of Mr Kwon. Why DJH would make such a loan to Mr Yoo was not explained. Mr Yoo’s explanation for the payment of the advance into Mr Kwon’s account (that he did not know and could not readily obtain his own bank account details) is difficult to believe. If the loan was to fund proceedings to reclaim Toppro, then it seems unlikely that Mr Yoo would agree that Mr Kwon could retain $15,000 of it for himself.

  4. Incredulity is enhanced by the banality of the consultancy report that was ultimately produced by DJH, which contained financial analysis that was already easily accessible and available to Mr Kwon as General Manager and Mr Ahn as director; did not address the question of a counterclaim against Topfield Korea at all; and proposed a solvent recycler (which Mr Ahn did not recognise, and was not remotely connected to the class of products offered by Toppro) as an alternative product. It does not bespeak $200,000 worth of effort, or anything like it.

  5. Mr Choi was not mentioned in either defence or in the defendants’ affidavits, only emerging in oral evidence at the hearing. Despite his pivotal role, he was not called; nor was his associate Mr Park. The explanation proffered for the failure to call those witnesses (and Mr Kwon’s brother from KRMI) was that this was a small case, in which the total claim barely exceeded $120,000; that the witnesses were located in Korea; and that calling them would have incurred disproportionate costs, in circumstances where the defendants’ resources were exhausted. While there is some force in that, there are of course alternatives to bringing the witnesses to Australia, to which resort could have been had, although they too involve expense, and with credit hotly in issue they might have been inappropriate.

  6. All those matters create a strong sense that the whole story of Mr Choi’s role and interest has not been disclosed, and even that steps were taken to obscure it.

  7. But even if that be so, it does not follow that the consulting arrangements were mere shams intended to facilitate the depletion of its assets for the benefit of Mr Choi. An alternative available explanation is that Mr Choi was a crafty businessman who saw, seized and exploited an opportunity. Moreover, there are countervailing indications, which tell in favour of the view that the retainers of DJH and KRMI were genuine.

  8. First, there was – contrary to the plaintiff’s submission – a plausible explanation and justification for such arrangements. That the relationship between Toppro and Topfield Korea was deteriorating is evidenced by the purported termination of supply on 16 June, and the demand for in excess of $6 million on 17 June 2014. While those events post-dated the decision of 9 June, they confirm that the relationship was souring. Ms Joo’s denials that there was any dispute between Toppro and Topfield Korea were falsified by evidence of other witnesses called by the plaintiff, in particular Mr Nacsimento and Ms Choi. Thus, there was good reason for Toppro to consider how to address any claim by Topfield Korea, and to contemplate alternative sources of supply for the future. While the irregularities and deceptions associated with the payments when they were made – including the absence of contemporaneous invoices and other supporting documents, and the misleading descriptions provided in the Cornplatech and KRMI invoices prepared during the period around and following 13 June – call for explanation, they are explicable by the perceived need for secrecy and subterfuge, lest Topfield Korea discover the plans that were afoot.

  9. Secondly, likewise, and contrary to the plaintiff’s submission, the consulting agreement was not unsupported by consideration; the consideration was the obligation of the consultants to provide consultancy services. And while I have referred to the banality of the consulting report, it cannot be inferred from the apparent inadequacy of what was ultimately delivered that there was no consideration when the agreement was made. Moreover, while the consulting report produced by DJH was an unimpressive product, the suggestion of a solvent recycler as an alternative product is consistent with the exploration of alternative options in the context of a requirement to remediate the losses being incurred in respect of Topfield Korea products. And the consulting report was not the only product: access to the expertise of Mr Choi and Mr Park, and their advice during the period of their visit to Australia and Hong Kong in connection with developing a counterclaim, was also obtained.

  10. Thirdly, again contrary to the plaintiff’s submission, the consulting agreement with DJH was undoubtedly in existence, and executed, on 9 June 2014, with Mr Park still in Korea; it was not fabricated at some later time. As already explained, while there were discrepancies and inconsistencies in the evidence of the meeting at Meriton Apartments on 9 June, the electronic trail clearly establishes that the consulting agreement did exist, and was forwarded between Mr Kwon, Mr Ahn and Mr Park, on 9 June.

  11. Fourthly, and importantly, Mr Kwon thereafter embarked on approaching potential suppliers in Shenzhen, through Mr Eric Wong. This is established by the emails of 15, 16 and 17 June to Nelson Choi and the Shenzhen manufacturers, and demonstrates that the strategy was in fact being pursued, and that it was a purpose of Mr Kwon’s trip with Mr Choi and Mr Park to Hong Kong. In addition, the identity of the suppliers contacted correlates with those listed on one of the KRMI invoices. This contradicts the plaintiff’s submission that there was no consideration for the payments to KRMI, and that they were not made for a proper business purpose but only to benefit Mr Kwon’s brother.

  12. Fifthly, Mr Yoo’s and Mr Ahn’s immediate response to the 20 June “coup” was not to walk away – as might have been expected if they had depleted the assets – but very promptly to launch proceedings to regain control. This tells against their conduct prior to 20 June being an attempt to denude Toppro of assets lest it falls into Topfield Korea’s hands.

  13. Sixthly, the sham argument depends significantly on the “return” of $50,000 to Mr Kwon’s account on 23 and 26 June. It was only through that transaction that either Mr Yoo or Mr Kwon could be said to have derived any benefit from the “sham”. But it is notable that the $50,000 was “returned” – by way of loan – only, but very soon, after the 20 June “coup”. This tends to indicate that it was indeed a response to the events of 20 June, and not part of the original arrangements. And when it was returned, it was applied in large part to funding an attempt to regain control of the company they had allegedly denuded of assets. It follows that the original arrangements with DJH involved no benefit for Mr Yoo or Mr Kwon personally.

  14. Seventhly, it was never distinctly put to Mr Yoo that the consultancy agreement was a sham created by him for the purpose of depleting Toppro’s assets. If this was a fundamental thesis of the plaintiff’s theory, it ought to have been so put. The closest the cross-examination came to challenging his stated purpose was the suggestion that after revealing the anticipated $5 million claim, Mr Choi offered a solution, essentially to transfer $200,000 to him and he would fix the problem:

Q. And did he say, “I will give you a share of the $200,000 in return?”.

A. INTERPRETER: No, he didn’t say that.

  1. It was not put to him that he was not genuinely engaging DJH for consultancy services, or that he was merely trying to extract assets from Toppro.

  2. Eighthly, Toppro submitted that Mr Yoo’s purpose was to “make a quick profit” through agreeing to “hand over” $200,000 to DJH, of which $50,000 was promptly returned. But it is not apparent how there is any profit for Mr Yoo in handing over $200,000 to DJH. And when it was returned, it was used in substantial part to fund litigation which had not been previously contemplated. At best, Mr Yoo saw about $8,000 – less than he had paid for the shares – and that may well have been in reimbursement of moneys already paid out for costs. Thus it is not apparent how there was any “profit” or other attraction for Mr Yoo – the sole beneficial shareholder – in that course. There is no apparent motive for Mr Yoo to embrace the strategy of retaining DJH for $200,000, other than to secure their consultancy services.

  3. Ninthly, there was even less apparent motive for Mr Ahn, who does not appear to have received the slightest benefit from the consulting arrangements or the impugned payments, to be party to a sham.

  4. There were admittedly discrepancies, inconsistencies and improbabilities in and between the evidence of the defendants’ witnesses, which raise questions as to their veracity. I have referred to some of them in the course of the narrative. [8] The above nine considerations, which have the result that I am left unpersuaded that the consulting arrangements were shams, depend more on the objective circumstances than on questions of credit and demeanour. However, ultimately I was not persuaded that any of Mr Kwon, Mr Ahn or Mr Yoo was a dishonest witness. Mr Ahn appeared to be a careful witness, who did not overstate the position. Mr Kwon’s evidence was less satisfactory. He had a tendency to reconstruct and generalise, and to give evidence of conclusions rather than of facts; I have mentioned some instances of this above. I have treated his evidence with some caution – although some of the difficulties may be attributable to interpretation of, or different conventions in, the Korean language. But on crucial issues, there was objective support for his evidence: although his explanations for individual payments emerged only in the course of his oral evidence, and were not provided in any pleading, nor in his affidavit, any suggestion of recent invention is answered by the indisputable evidence that the consulting agreement was created on 9 June 2014, and that he was contacting potential alternative suppliers between 15 and 17 June. And while his attempts to attribute particular payments to particular expenses were often problematic, the exercise was an artificial one because the payments were round sums to cover expenses, and the answers were really conclusions founded on the expense form; the important point is that the expense form was supported by vouchers which undeniably establish that he incurred the expenses. While the descriptions in the KRMI invoices are almost identical with and obviously replicated from the Cornplatech invoices, the fact that the invoices issued by KRMI bear a seal or “chop” detracts from the plaintiff’s contention that they were fashioned entirely by Mr Kwon; KRMI may well have adapted, with only minor changes, a template sent by Mr Kwon (as he said he did), with the consequence that the KRMI invoices, at least initially, included inapt detail.

    8. I have not referred in any detail to the plaintiff’s witnesses, because their evidence does not directly touch on the conversations and dealings which are central to the case.

  5. Thus, while the genesis of the strategy, and the role of Mr Choi, is suspicious, I am not comfortably satisfied that the consultancy arrangements with DJH and KRMI were shams, intended to cover and conceal a means of depleting Toppro of its assets, and I accept that the impugned payments were made in furtherance of Mr Yoo’s strategy of exploring how Toppro could be extricated from its dependence on and exposure to Topfield Korea.

Was it improper or negligent to authorise or make the impugned payments?

  1. Mr Ahn was at all material times a director of Toppro, and thus had the duties referred to in Corporations Act, s 180, s181 and s 182, and the cognate general law duties. Mr Kwon was plainly at least an employee of Toppro and thus had the duty referred to in s 182 (which applies to employees as well as to directors and other officers); and it was not disputed that, as General Manager, he was also an officer within the definition of that term in Corporations Act, s 9, and thus had the duties referred to in s 180 and s 181 also.

  2. However, the content of the duties referred to in s 180, s 181 and s 182 in a particular case is influenced by a number of factors, including – as s 180(1) expressly contemplates – the circumstances of the company, and also its constitution, and the role of the relevant officer. Relevant circumstances include the type of company, the provisions of its constitution, the size and nature of the company's business, the composition of the board, the officer’s position and responsibilities within the company, the particular function the officer is performing, the experience or skills of the particular officer, the terms on which he or she has undertaken to act, the manner in which responsibility for the business of the company is distributed between its directors, other officers and employees, and the circumstances of the specific case. [9]

    9. Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, 427; (Romer J); Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, 125 (Tadgell J); ASC v Gallagher (1993) 11 WAR 105; 10 ACSR 43; 11 ACLC 286; Daniels v Anderson (1995) 37 NSWLR 438, 504-505; ASIC v Adler [2002] NSWSC 171, [372]; ASIC v Maxwell [100]; Explanatory Memorandum to the CLERP Bill 1999 (para 6.75).

  1. In deciding whether there has been a breach of duty in exposing a company to jeopardy, the foreseeable risk of harm must be balanced against the potential benefits which could reasonably be expected to accrue to the company from that conduct. [10] Thus in Vrisakis, Ipp J explained:

Further, the mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. The management and direction of companies involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry and commerce. The legislature undoubtedly did not intend by s 229(2) to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity. Accordingly, the question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.

10. Vrisakis v ASC (1993) 9 WAR 395, 449–50; 11 ACSR 162, 211–13; Ipp J (as his Honour then was) (with the concurrence of Malcolm CJ); see also ASIC v Doyle (2001) 38 ACSR 606, 641; ASIC v Maxwell, [102].

  1. As at June 2014, Toppro was trading unprofitably, had unmet taxation obligations, and faced claims by Topfield Korea. Plainly, that was a situation which could not be ignored. A strategy to address the situation was required. Mr Choi and his firm offered such a strategy – a counterclaim for defective product, and sourcing product elsewhere, to reduce costs and improve competition. The decision to retain DJH was a reasonable if somewhat expensive response to the situation that Toppro confronted, to see whether it could be turned around.

  2. That is especially so when the decision was essentially that of the sole beneficial shareholder. The attitude of the shareholders – and a fortiori the sole shareholder – has important implications for the content of officers’ duties. That is because a fundamental purpose and rationale of those duties is to prevent self-interested dealing, constrain management and strengthen shareholder control. The shareholders in general meeting (and a fortiori the sole shareholder) can prospectively or retrospectively ratify the actions of directors of the company, though they involve negligence, breach of fiduciary duty or the exercise of the directors' powers for an improper purpose. [11] And although the shareholders of a company cannot release the directors from their statutory duties imposed by s 180, s 181 and s 182, [12] nonetheless their agreement to or acquiescence in a course of conduct can affect the practical content of those duties, including any question of whether directors acted with a reasonable degree of care and diligence, and whether they made improper use of their position. [13]

    11. North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589; Furs Ltd v Tomkies (1936) 54 CLR 583; 9 ALJ 419; Hogg v Cramphorn [1967] Ch 254, 265-266; [1966] 3 All ER 420 (Buckley J); [1970] Ch 122 (CA); Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n; [1942] 1 All ER 378; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666; (1975) 1 ACLR 219; ASIC v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373, [103].

    12. Forge v ASIC (2004) 52 ACSR 1, 81-82; ASIC v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305, 314-315; Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 53 ACSR 208, 219 [32]; ASIC v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373, [103].

    13. Angas Law Services Pty Ltd (in liq) v Carabelas, 218-219, [29]-[32]; ASIC v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373, [103]

  3. That does not mean that the concurrence of the shareholders is always an answer to a complaint of breach of duty by an officer. Shareholder ratification is not available where the transaction would constitute a fraud on the minority, or amount to misappropriation of the company’s resources, or was entered into by an insolvent company to the prejudice of creditors, or defeated a member’s personal right, or was oppressive, or where the majority in general meeting acted for the same improper purpose as had the directors. [14] While many of those exceptions reflect a concern to protect minority rights, which is irrelevant where, as here, there is but one shareholder, some are indicative of a concern for the protection of creditors. Thus I accept that – particularly where insolvency, or a change of control, is looming – directors and officers may not, even with the concurrence of shareholders, allow the assets to be depleted for no consideration or proper corporate purpose, to the detriment of the creditors or a new controller.

    14. Miller v Miller (1995) 16 ACSR 73 at 89, and the cases there cited; Forge v ASIC (2004) 213 ALR 574; (2004) 52 ACSR 1; (2005) 23 ACLC 1010; [2004] NSWCA 448 at [371]-[377] and [378]-[384].

  4. However, the present is not a case of the bare depletion of assets for no consideration or proper corporate purpose. The proper corporate purpose was to secure the provision of consulting services to aid in developing a strategy for dealing with Topfield Korea and sourcing new suppliers. The consideration was the undertaking of the consultants to provide those services. That those services might ultimately have proven less valuable than anticipated does not affect the position that the payments were made in return for their provision.

  5. In those circumstances, it is of great significance that Mr Yoo, as sole shareholder, not only agreed to, but was the sponsor of, the strategy. He concurred, prospectively and retrospectively, in the making of the impugned payments. It is true that, at the time of their 9 August letters, Mr Yoo and Mr Ahn were, at least on one then available view, no longer the shareholder and director of Toppro, and for that reason the plaintiff contended that this could not be a ratification. However, it is now settled that Mr Yoo did not cease to be the beneficial shareholder, and thus that Mr Ahn could not have been validly removed as a director. Moreover, the letters are some evidence that the impugned payments were made with the agreement of those who were the shareholder and director at the time that the payments were made. In any event, quite apart from the letters, the evidence overwhelmingly establishes that the impugned payments were made in accordance with the general intent of Mr Yoo.

  6. There is no evidence – and there was no suggestion – that there was any benefit for Mr Ahn personally in any of the impugned payment. Mr Ahn said that he regarded the impugned payments as in the best interests of the company in June 2014, and still did. He was aware that Topfield Korea products had lost any competitive edge, and that Toppro was facing a crisis, and while Mr Yoo was the prime moving force, he formed his own view that Toppro needed to change, and that it was in Toppro’s interests to explore alternatives. In his judgment, it was appropriate to retain DJH and pay their consulting fee, both because in his view as a director it was in Toppro’s interests to do so, and because the sole shareholder wanted it.

  7. Mr Kwon was not a director; while it was not in issue that he was relevantly an “officer”, his status and role as such is relevant to the content of his duties. He was directed to report only to Mr Ahn, to whom he was subordinate. He had no part in the decision to engage and pay DJH; in that respect he was directed by Mr Yoo and Mr Ahn. I do not overlook that his co-operation may initially have been secured by the threat of termination if he did not, and the promise of a substantial increase in his remuneration if he did; but even so it was not for him as an employee to second-guess the judgment and direction of Mr Yoo and Mr Ahn. While it was he who suggested KRMI when the requirement to source suppliers in Shenzhen – where DJH had no contacts – was identified, the decision and direction to use KRMI was that of Mr Yoo and Mr Ahn. Mr Kwon made the impugned payments consistently with the directions and approval of Mr Yoo and Mr Ahn – which included to look after (and pick up the tab for) the DJH consultants. It does not matter for these purposes that the authority was general, rather than specific for each payment; Mr Kwon was acting in accordance with what he (correctly) understood to be the intent of the sole shareholder Mr Yoo and the director Mr Ahn.

  8. It was suggested that there was a lack of due diligence in the engagement of DJH. No doubt there was some risk that their retainer would not ultimately justify the expenditure. But through his former association with Topfield Korea, Mr Choi was apparently well qualified, with extensive experience and contacts in the field. Mr Yoo was conscious that the consulting fee was a large amount of money, but desirous of obtaining DJH’s expertise, and decided that he wanted to proceed nonetheless. In those circumstances, reasonable care and diligence did not require that Mr Ahn conduct further due diligence in respect of DJH before implementing Mr Yoo’s wishes and strategy to retain (and pay) DJH. And it was certainly not for Mr Kwon to do so.

  9. It was also suggested that the payments to DJH were made prematurely, before they had delivered their report, but this was founded on the incorrect construction of the contract, to the effect that it provided for only one and not two payments of $100,000.

  10. Criticism was directed to some of the individual expenses in respect of which Mr Kwon was reimbursed, most notably the expenditure of in excess of $2,000 at a Karaoke bar on the evening of 13 June, for the entertainment of Mr Choi and Mr Park, along with Mr Yoo and Mr Kwon. However, entertainment of business associates is by no means inconsistent with the interests of a company, and this expenditure was plainly in accordance with the wishes of Mr Yoo, who was a participant, and apparently consistent with Korean custom to entertain business visitors.

  11. The plaintiff disputed whether the various payments to Mr Kwon in reimbursement of expenses could be reconciled with the expenses he incurred. It is plain that the amounts drawn by Mr Kwon were generally not precise reimbursements for particular expenses, but round sums to cover expenses that had been incurred or were anticipated. The endeavour to attribute particular payments to particular expenses was artificial and of little utility. However, Mr Kwon’s expense form – which as I have said was supported by receipts – evidenced cash and credit card expenditure amounting to $9,032.21, and he said that this did not capture all of his expenses associated with the DJH consultants. Calculations produced by the plaintiff – which added in the amounts paid by Mr Kwon for air fares for Mr Choi and Mr Park from Sydney to Hong Kong and from Hong Kong to Seoul – increased the total to $13,487.42. The total of the payments to Mr Kwon (the first, second, third, fourth and seventh payments) was $10,300.12. (The plaintiff sought to add to this the amount Mr Kwon applied to his AMEX account from the $15,000 he received out of the moneys advanced by DJH, but that was not reimbursement by Toppro). On that basis, he has been left out of pocket.

  12. Accordingly, having regard to the predicament in which Toppro was in early June 2014, the requirement that it develop a strategy to address that predicament, the qualifications and experience of DJH (and in particular Mr Choi) in the relevant field, and especially the wishes and intent of the sole shareholder Mr Yoo to engage DJH to secure advice and assistance to facilitate the separation from Topfield Korea, the sourcing of alternative suppliers, and the resistance of Topfield Korea’s foreshadowed claim, it was neither improper nor negligent for Mr Ahn to authorise and direct, or for Mr Kwon to make, the impugned payments, which were in furtherance of that intent.

Conclusion

  1. My conclusions may be summarised as follows.

  2. While the circumstances surrounding the decision to retain DJH for a fee of $200,000 (and the subsequent payment of $50,000 into Mr Kwon’s account), invite suspicion, I am not comfortably satisfied that the retainer of DJH was other than a genuine decision, instigated by Mr Yoo, supported by Mr Ahn, and implemented by Mr Kwon at their direction, made in response to Toppro’s then circumstances, to explore a strategy of extricating Toppro from its dependence on and vulnerability to Topfield Korea, through sourcing alternative suppliers of products and formulating a counterclaim against Topfield, and not a sham embarked upon to deplete Toppro of assets.

  3. Having regard to the predicament in which Toppro was in early June 2014, the requirement that it develop a strategy to address that predicament, the qualifications and experience of DJH (and in particular Mr Choi) in the relevant field, and especially the wishes and intent of the sole beneficial shareholder Mr Yoo to engage DJH to secure advice and assistance to facilitate the separation from Topfield Korea, the sourcing of alternative suppliers, and the resistance of Topfield Korea’s foreshadowed claim, it was neither improper nor negligent for Mr Ahn to authorise and direct, or for Mr Kwon to make, the impugned payments, which were in furtherance of that intent.

  4. I am therefore unpersuaded that Mr Ahn as a director, or Mr Kwon as an officer and employee, contravened their statutory duties of good faith or care, or their equivalent general law duties, or that any contravention caused compensable loss to Toppro.

  5. It follows that the proceedings should be dismissed. Ordinarily, that would be accompanied by a costs order, and it is not apparent that Toppro’s liquidation should affect that result. I doubt that leave under Corporations Act, s 500(2), is required, but lest it is I am minded to grant such leave, on the usual condition that the order not be enforced against the assets of the company without the further leave of the Court.

  6. The Court therefore orders that:

  1. the proceedings be dismissed;

  2. insofar as leave is required, the defendants have leave under Corporations Act, s 500(2), to proceed against the plaintiff for an order for costs, upon terms that no such order be enforced against the assets of the plaintiff without the further leave of the Court;

  3. the plaintiff pay the defendants’ costs.

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Endnotes

Decision last updated: 30 September 2016

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Cases Citing This Decision

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Cases Cited

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Statutory Material Cited

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Yoo v Toppro Pty Ltd [2016] NSWSC 670
Joo v Yoo [2016] NSWCA 172
Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052