In the matter of Training and International Certification Pty Ltd (in liq)
[2023] VSC 550
•13 September 2023
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2020 01184
IN THE MATTER of TRAINING AND INTERNATIONAL CERTIFICATION PTY LTD (In Liquidation) (ACN 051 958 500)
BETWEEN:
| TRAINING AND INTERNATIONAL CERTIFICATION PTY LTD (In Liquidation) & ANOR (according to the attached Schedule) | Plaintiffs |
| v | |
| FRITZ MANFRED BOEGEL (by his Litigation Guardian, PETER JOHN RENNIE) & ORS (according to the attached Schedule) | Defendants |
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JUDGE: | Irving AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 24 and 25 November 2022 |
DATE OF JUDGMENT: | 13 September 2023 |
CASE MAY BE CITED AS: | In the matter of Training and International Certification Pty Ltd (in liq) |
MEDIUM NEUTRAL CITATION: | [2023] VSC 550 |
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EQUITY – Money had and received – Whether recipients of misappropriated funds were knowing recipients pursuant to the first limb of Barnes v Addy (1874) LR 9 Ch App 244 – Whether subsequent transfers of funds to the third defendant are traceable in equity to the third defendant and real property purchased in part from the misappropriated funds.
CORPORATIONS – Breach of directors’ duties – Whether third defendant is a director of the company – Whether third defendant liable for contravention of ss 180, 181 and 182 of the Corporations Act 2001 (Cth) – Whether company suffered loss by reason of the third defendant’s breach of duties – Whether third defendant should be excused from liability pursuant to s 1318(1).
CORPORATIONS – Corporations Act 2001 (Cth) – Part 5.7B – Uncommercial transactions claim by liquidators under ss 588FB and 588FF – Liquidators’ claim that transfers effected for the purpose of delaying or interfering with the rights of company’s creditors under ss 588FE(5) and 588FF – Whether third defendant is entitled to rely upon statutory defence provided for in s 588FG(2).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr P Fary SC with Mr A Silver | Mills Oakley |
| For the Third Defendant | Mr J Ribbands | Maitland Lawyers |
TABLE OF CONTENTS
Introduction........................................................................................................................................ 1
The evidence relied upon by the parties....................................................................................... 1
Factual summary................................................................................................................................ 2
Misappropriation of funds............................................................................................................. 10
Did Itonic (Vic) loan the money used to purchase the Freemantle Property to the Company or to Fritz and Diane?................................................................................................................... 15
Did Fritz have the authority to effect the last two Transfers on account of Fritz being a director of the Company?...................................................................................................................... 16
Were the last two Transfers loans by the Company to Fritz?............................................ 17
Did Fritz, by virtue of him being a director of the Company, owe fiduciary duties to the Company?................................................................................................................................. 19
Did Fritz and Galactron hold the proceeds of the last two Transfers on trust for the Company on account of being ‘knowing recipients’ pursuant to the first limb of Barnes v Addy? 21
Are the last two Transfers traceable in equity to Heidi and the Macedon property?.... 22
Heidi’s breach of directors’ duties................................................................................................ 25
Was Heidi validly appointed as a director of the Company?........................................... 31
Did Heidi, by virtue of her being a director of the Company, owe the Company the duties pleaded by the Liquidators?................................................................................................... 41
Did Heidi breach those duties?.............................................................................................. 42
Did the Company suffer loss by reason of Heidi’s breach of duties?.............................. 47
If so, should Heidi be excused from all liability pursuant to s 1318(1) of the Act?........ 51
Claims under Part 5.7B of the Act................................................................................................. 51
Are the last two Transfers voidable transactions pursuant to s 588F of the Act?........... 54
If so, is Heidi entitled to rely upon the statutory defence provided for in s 588FG(2) of the Act?..................................................................................................................................................... 60
If not, what remedy is appropriate pursuant to s 588FF of the Act?................................ 62
Conclusion......................................................................................................................................... 63
HIS HONOUR:
Introduction
The second plaintiffs are the liquidators (Liquidators) of Training and International Certification Pty Ltd (Company). By this proceeding the Liquidators sought to recover money from various directors of the Company or the recipients of funds of the Company. At the time of the trial of the proceeding the Liquidators had settled their claims against the first, second and fourth defendants, leaving only their claims against the third defendant, Heidi Richards (Heidi).[1]
[1]In these reasons I have referred to Fritz Boegel, Diane Boegel and Heidi Richards as Fritz, Diane and Heidi as this was how the parties referred to these individuals in their written and oral submissions. No disrespect to any of these individuals is intended.
The Liquidators framed their claims against Heidi and a property located at 6 Dunn Street, Macedon, Victoria (Macedon Property) in the following causes of action:
(a) Misappropriation of funds;
(b) Breach of directors’ duties by Heidi; and
(c) Claims under Part 5.7B of the Corporations Act 2001 (Cth) (Act).
Prior to the trial the parties jointly formulated a series of issues for determination by the Court. These reasons are structured in accordance with the issues as identified by the parties.
The evidence relied upon by the parties
The trial was conducted on the basis of affidavit evidence.
The Liquidators relied on:
(a) the affidavit of Andrew Yeo (Yeo) sworn 6 March 2020;
(b) the affidavit of Yeo sworn 4 March 2021;
(c) the affidavit of Suzie Rule affirmed 4 May 2022;
(d) the affidavit of Yeo sworn 17 August 2022;
(e) the affidavit of Yeo sworn 21 November 2022;
(f) the affidavit of Greg Andrews dated 21 November 2022.
Heidi relied upon:
(a) the affidavit of Heidi sworn 15 May 2020;
(b) the affidavit of Heidi sworn 15 September 2022; and
(c) the affidavit of Heidi sworn 7 November 2022.
Immediately before the trial some bank documents were produced by Bendigo and Adelaide Bank under subpoena. Some of these documents also formed part of the evidence.
None of the deponents of any of the affidavits were required for cross-examination. The affidavit of Yeo sworn 17 August 2022 exhibited transcripts of public examinations conducted by the Liquidators on 11 February 2021 and 17 June 2021 and the liquidator of Itonic Holdings Pty Ltd (in liq) (Itonic Holdings) on 27 and 28 April 2016.
It was common ground that by the time of his public examination on 11 February 2021, Fritz Boegel (Fritz) was not competent to give evidence. The parties agreed that, in these circumstances, the Court could not draw any adverse inference from Fritz’s failure to give evidence in this proceeding.
Factual summary
In order to understand the facts of this case it is helpful to set out the main players and the companies involved.
The first defendant, Fritz was married to Diane Boegel (Diane), who is deceased. Fritz was executor of Diane’s deceased estate, and, in that capacity, second defendant. Heidi is the daughter of Fritz and Diane.
The Company, on the application of Itonic (Vic) Pty Ltd (in liq) (Itonic (Vic)), was placed in liquidation by order of the Federal Court of Australia on 5 October 2018.
Fritz was a director of the Company from 24 June 1991. Diane was a director of the Company from 24 June 1991 until her death on 21 June 2013. The Australian Securities and Investments Commission (ASIC) records show that Heidi was recorded as a director of the Company between 21 June 2013 and until at least 5 October 2018, being the date of the ASIC company search. Heidi disputed that she was a director of the Company. Whether or not Heidi was a director of the Company, and the circumstances in which she purportedly became a director of the Company, were central issues in the Liquidators claim that Heidi breached her duties as a director. The circumstances in which Heidi came to be registered as a director are discussed further below.
Fritz is currently the sole shareholder of the Company, although previously, shares in the Company were held by Fritz, his business partner Peter Gallagher (Gallagher) and Gallagher’s wife, as well as entities associated with Fritz and Gallagher. The ASIC company extract shows that changes to the Company’s share structure were last made in February 2008.
Itonic (Vic) was the corporate trustee of the Itonic Unit Trust. The ASIC records show Fritz and Gallagher as the directors of Itonic (Vic). Gallagher owns 4 shares in Itonic (Vic) and Fritz owns 16 shares.
Itonic Holdings was the sole unitholder of the Itonic Unit Trust. The ASIC records show that Fritz and, until her death, Diane, were directors of Itonic Holdings. The records also show that Heidi was a director of Itonic Holdings from 21 June 2013 until at least 27 March 2019, being the date of the ASIC company search. Heidi also disputes that she was a director of Itonic Holdings. The circumstances in which Heidi came to be recorded as a director are discussed further below. The shareholders of Itonic Holdings were Gallagher and his wife and Galactron Pty Ltd (Galactron), the fourth defendant in this proceeding and an entity associated with Fritz.
Fritz was a director of Galactron which was the corporate trustee of the Boegel Family Trust. Diane was a director of Galactron up until her death. Heidi’s evidence, given at her public examination by the Liquidators, was that she was a director of Galactron from 21 June 2013 to the end of 2019. Heidi also disputes that she was a director of Galactron. Again, the circumstances in which Heidi came to be recorded as a director are discussed further below. Diane and Fritz are recorded as Galactron’s shareholders.
John Hutchins (Hutchins) was Fritz’s personal accountant from 1976 and the accountant for the companies in the Itonic Group[2], through his accounting practice Harmon Partners (Harmons), until he retired in 2013. On his retirement, Kidmans Partners (Kidmans) became the accountant for the Itonic Group of companies. Tracey Brown-Thomas (Brown-Thomas) was an accountant who had worked on the Itonic Group’s accounts at both Harmons and Kidmans. Both Hutchins and Brown-Thomas were examinees at the public examinations.
[2]For the purpose of this proceeding the Itonic Group is made up of a number of companies of which Fritz Boegel was a director and majority shareholder, including Itonic Holdings Pty Ltd, Itonic Pty Ltd, Itonic (Qld) Pty Ltd, Itonic (SA) Unit Trust, Itonic (WA) Pty Ltd, Training and International Certification Pty Ltd, Galactron Pty Ltd and Idec (Australia) Pty Ltd.
The following properties are central to the proceedings:
(a) A property at Unit 12, 10 Doepel Street, North Freemantle, Western Australia (Freemantle Property) acquired by the Company; and
(b) The Macedon Property acquired by Heidi.
A number of transactions are also central to the proceeding:
(a) A loan of $2,645,845 by Itonic (Vic) to the Company which was the source of the funds the Company used to buy the Freemantle Property. Heidi disputed this was a loan to the Company and asserted it was a loan to Fritz and Diane.
(b) The series of transfers conducted between 28 August 2011 and 10 March 2014, of $2,244,413.74 from the Company’s bank accounts to Fritz and Diane and/or Galactron.
In this proceeding, the Liquidators relied on the final four of these transfers (Transfers) and the tracing of some of the funds from the final two Transfers to Heidi (the Heidi Receipts), and her use of them to purchase the Macedon Property.
As noted above, Itonic Holdings was the sole unitholder of the Itonic Unit Trust and the shares in Itonic Holdings were owned by entities associated with Fritz and Gallagher. In 2006, Itonic (Vic) as trustee for the Itonic Unit Trust sold its business for around $12,000,000. The profit on the sale of the business became a distributed but unpaid present entitlement from Itonic (Vic) to Itonic Holdings.
Gallagher’s evidence, given at his public examination by the liquidator of Itonic Holdings, was that in 2006, following the sale of Fritz and Gallaghers’ business for a sum of around $12,000,000, Gallagher, Fritz, Diane and Hutchins agreed to set up an investment vehicle with the proceeds of sale and for the shareholders of the investment vehicle to live off the income generated from investments. Gallagher said that within one month of making that agreement Fritz and/or Diane began to rapidly withdraw amounts from the proceeds of sale which, at that time, were sitting in Itonic (Vic)’s bank account. Gallagher said he only found out about the withdrawals about 18 months later when he requested that Hutchins provide him with access to Itonic (Vic)’s account. When Hutchins refused to provide access, Gallagher obtained access to Itonic (Vic)’s bank statements directly from the bank which confirmed the withdrawal of funds.
Hutchins incorporated the Company for Fritz in 1991. Prior to 2008 the Company was dormant and had no material assets or liabilities. In January 2008, the Company acquired the Freemantle Property for approximately $2,500,000. Itonic (Vic) supplied the purchase money and transaction costs of $2,645,845.
Hutchins’ evidence about the purchase of the Freemantle Property was that on Fritz’s return from a trip to Western Australia, Fritz told him he had purchased the Freemantle Property and sought Hutchins’ advice about how he could pay for it. Hutchins advised Fritz that a loan of funds from one company to another would have tax advantages for Fritz over a loan of funds from one company to Fritz. Hutchins advised Fritz to use the Company to purchase of the Freemantle Property with funds from Itonic (Vic) so that Fritz and/or Diane could avoid having to pay interest and repay the loan within a certain term which they would have had to do if Fritz and/or Diane personally borrowed the money from Itonic (Vic).
Hutchins’ evidence was that Fritz followed his advice. The funds transferred from Itonic (Vic) to the Company were recorded as a loan in Itonic (Vic)’s financial statements for the financial years ended 2008 and 2009 which were ratified by Itonic (Vic)’s directors, Fritz and Gallagher.
Hutchins said that after 2009 no further financial statements were prepared or tax returns lodged by Itonic (Vic). In relation to the Itonic (Vic)’s financial statements and tax returns, Gallagher said that after the 2009 financial year reports he refused to sign every financial statement submitted to him by the accountants because no one was able to explain why money was being taken out of Itonic (Vic).
The loan from Itonic Unit Trust via its corporate trustee Itonic (Vic) to the Company was also recorded in the Company’s financial statements for the financial years ending 2008 and 2009, which were ratified by its directors, Fritz and Diane. Fritz and Diane ratified the loan by declaring it, along with the beneficial ownership of the Freemantle Property, in the Company’s tax returns for the 2008 and 2009 financial years.
The Company did not keep accounts, finalise financial statements or lodge tax returns after the 2009 financial year.
According to Gallagher, Fritz and Diane had access to the Itonic (Vic) bank account and used money from the account to purchase motor vehicles and for other purposes. One purpose was to buy a restaurant for Fritz and Diane’s daughter and son-in-law via an interest free inter-company loan. Gallagher’s evidence was that although he was a director of Itonic (Vic), these withdrawals were not discussed with him, nor the subject of company resolutions and nor did he agree to them.
In relation to the use of funds from Itonic (Vic) by the Company to fund the purchase of the Freemantle Property, Gallagher said the money was transferred before Gallagher had any conversation with Hutchins about it. He recalled Hutchins telling him that Fritz needed a company and sending him a share transfer notice transferring his shares in the Company to Fritz. Gallagher’s evidence was that he never signed it but that he verbally agreed to transfer the shares in return for an assurance that the Gallagher family would not be worse off. He said he did not understand at this time that the Company was the owner of an apartment in Western Australia.
Fritz certified a Report as to Affairs (RATA) in the winding up in insolvency of Itonic (Vic). In his RATA Fritz listed the Company as a debtor of Itonic (Vic) in the amount of $2,635,845.[3]
[3]I note this sum differs from the loan amount pleaded by the Liquidators ($2,645,845). This difference is not material to the issues in this proceeding.
The bank statements of the Itonic Unit Trust record that on 20 February 2008 it transferred a sum of $2,455,845.03 to Shane Jacobs (Mr Jacobs) and transferred an amount of $130,000 to the Company. Mr Jacobs was a conveyancer for both the purchase and sale of the Freemantle Property. The Company’s bank statements show that on 22 February 2008 it received an amount of $130,000.
On 9 May 2018, Itonic (Vic) issued a statutory demand to the Company in the amount of $2,635,845 being a loan from Itonic (Vic) to the Company. The loan was confirmed in the affidavit in support of the statutory demand sworn by Greg Andrews, Itonic (Vic)’s liquidator, as being due and payable as at 3 May 2018.[4] Further, the loan amount was the debt Itonic (Vic) relied upon to wind up the Company in its winding up application filed in the Federal Court of Australia on 20 August 2018.
[4]The date on the jurat to Mr Andrews’ affidavit is the 3rd day of May 2108 which I have taken to be 2018.
The Company’s 2008 and 2009 tax returns record that the Company generated a small amount of income from renting the Freemantle Property but did not otherwise trade.
On 5 August 2011, the Company sold the Freemantle Property for $2,250,000. On 10 August 2011, net proceeds of sale in the amount of $2,184,022.40 were deposited into the Company’s bank account.
Between 28 August 2011 and 10 March 2014 a number of transfers were made from the proceeds of sale in addition to other funds held in the Company’s bank accounts. The following Transfers were made after Heidi was, according to the ASIC records, appointed as a director of the Company:
Date
Transaction details
Amount
Recipient
16.08.2013
Training and International Tfr To Bendigo
$50,000
Fritz and Diane
28.01.2014
Transfer To Bendigo Bank
$30,000
Fritz and Diane
21.02.2014
Account Closing Closure & Tfr to 11637029
$342,402.83
Galactron ATF The Boegel Family Trust
10.03.2014
Account Closing Redemption
$569,926.55
Fritz and Diane
The Company’s 2009 financial year tax assessment records a debt of $6,599.40 which remained unpaid as at the date of each of the Transfers. The Company’s debt to Itonic (Vic) also remained unpaid.
The Liquidators alleged that the Company did not authorise the Transfers. Heidi disputed this. Heidi said that Fritz, in his capacity as director of the Company, had the authority to approve the Transfers.
The ASIC company extract for the Company and Galactron records that on 21 June 2013, the day of Diane’s death, Heidi became a director of the Company and of Galactron.
Heidi disputed she was ever a director of these companies.
Heidi’s evidence was that she was appointed a director of the Company on 21 June 2013 following the death of her mother and notified ASIC of her resignation on 18 July 2019. Heidi said Fritz exercised total control over the Company both before and after Diane’s death. Heidi said she had no working knowledge of or interest in the Company and was not a signatory to any of the Company’s bank accounts prior to June 2013.
Heidi gave evidence in her public examination that she was not aware that she was a director of both the Company and Galactron until sometime in 2019. Heidi said that from the time she was recorded as a director until her resignation in 2019 she did not take any steps to ascertain what assets or liabilities the Company had or whether the Company was insolvent at the time of her appointment. Heidi’s evidence was that while she was recorded as a director she did not view the Company’s financial affairs, did not know what the Company did and had no dealings in respect of the Company. Heidi said she did not authorise any of the Transfers described in paragraph 37 above, which all occurred while she was recorded as a director of both the Company and Galactron.
Fritz and Gallagher’s relationship broke down from 2009 in part because of Gallagher’s discovery that Fritz was withdrawing funds from the proceeds of the sale of their business without Gallagher’s knowledge and approval.
On 23 June 2009, Itonic Holdings was placed into members’ voluntary liquidation with Hutchins appointed as liquidator. On 14 September 2012, Hutchins, as liquidator, concluded that Itonic Holdings was unable to pay its debts within a 12 month period and appointed an administrator. On 9 October 2012, the administrator prepared a report to the creditors of Itonic Holdings in which he noted:
(a) Itonic Holdings was ‘owned 80% by the Boegel “interests” and 20% by the Gallagher “interests”’;
(b) the main asset of Itonic Holdings was a loan due from the Itonic Unit Trust of approximately $9,000,000 but recovery of that loan was doubtful ‘as the Itonic Unit Trust has in turn lent these funds to other group entities and or shareholders/directors’;
(c) substantial funds had been withdrawn by shareholders since the main business of a subsidiary (ie, Itonic (Vic)) was sold in 2006 and that ‘[s]ignificant amounts of these loans are apparently irrecoverable’;
(d) the administrator was informed by Hutchins that ‘he was unable to obtain clear instructions and co-operation from the [s]hareholders & [d]irectors to enable this company and all other entities in the Group to prepare financial statements and to be wound up or deregistered’; and
(e) the estimated realisable value of the $2,635,845[5] loan to the Company was $800,000.
[5]This amount differed from the loan amount pleaded by the Liquidators, however that difference was not material to the issues in the proceeding.
Itonic Holdings was wound up in insolvency on 18 April 2013, prior to the Transfers detailed in paragraph 37 above. Itonic (Vic) was wound up in insolvency on 23 September 2015 on the application of Itonic Holdings.
In July 2015 the Company’s then accountant, Kidmans, sent a letter to Fritz enclosing draft financial statements and tax returns prepared as instructed for the financial years ended 2010, 2011 and 2012. The file notes and journals underlying the draft statements were prepared in July 2015 meaning that the treatment of the transactions for those financial years occurred well after the transactions were undertaken. The draft financial statements were never approved by the Company’s directors and no tax returns were lodged. No financial statements or draft tax returns were prepared for any financial year after 2012. What conclusions the Court could draw from these draft financial statements and tax returns was an issue in the proceeding.
Misappropriation of funds
The Liquidators’ misappropriation of funds case is as follows:
(a) A Black v S Freedman & Co (Black v Freedman)[6] trust was created at the time of the Transfers;
(b) Upon the Transfers, Fritz committed a breach of fiduciary duty and Fritz and Galactron were knowing recipients pursuant to the first limb of Barnes v Addy (Barnes v Addy);[7]
(c) The last two Transfers can be traced to Heidi and the Macedon Property.
[6](1910) 12 CLR 105.
[7](1874) LR 9 Ch App 244.
The Liquidators pleaded that there were no resolutions of the Company authorising the Transfers and that the recipients of the money the subject of the Transfers did not provide consideration to the Company for the transferred money. The Liquidators said the money the subject of the Transfers was monies had and received by Fritz and Galactron, and that Fritz and Galactron held the proceeds of the Transfers on trust for the Company.
The Liquidators’ pleaded case was at the time of each of the Transfers from the Company, Fritz and Galactron had actual or constructive knowledge that the Transfers were made in breach of Fritz’s fiduciary duties owed to the Company. Fritz’ knowledge was evidenced:
(a) by him making and/or being aware of the Transfers;
(b) by him wilfully shutting his eyes to the unlawfulness of the Transfers;
(c) by him wilfully and recklessly failing ‘to make such enquiries as an honest and reasonable person would make with respect to the receipt of money and benefit’; and
(d) as a result of Fritz being a director of the Company and his involvement in the affairs of Itonic (Vic), each of Fritz and Galactron (on account of Fritz being a director of Galactron) had knowledge of circumstances which would indicate to an honest and reasonable person that the Transfers constituted a breach of Fritz’s fiduciary duties to the Company.
The Liquidators’ tracing claim was pleaded as follows:
(a) On 21 February 2014, the sum of $342,402.83 was transferred from the Company to Galactron;
(b) On 24 February 2014, Galactron transferred the sum of $342,402.83 to an account maintained by Bendigo and Adelaide Bank Ltd held in the name of Fritz and Diane (Joint Bank Account);
(c) On 10 March 2014, the sum of $569,926.55 was transferred from the Company to the Joint Bank Account;
(d) On 4 April 2014, the sum of $1,300,000 was transferred from the Joint Bank Account to an account in the names of Fritz and Diane (Term Deposit Account);
(e) On 7 October 2015, the sum of $150,000 was transferred from the Term Deposit Account to an account in Heidi’s name (Heidi Bank Account);
(f) On 4 April 2016, the sum of $275,000 was transferred from the Term Deposit Account to the Heidi Bank Account;
(g) The $342,402.83 transferred from the Company to Galactron on 21 February 2014 and the $569,926.55 transferred from the Company to Fritz and Diane on 10 March 2014 are traceable to Heidi, via the transactions into the Joint Bank Account;
(h) Heidi was, as a result of the transfers to her on 7 October 2015 and 4 April 2016, a voluntary recipient of $425,000 from the transferred money (Heidi Receipts);
(i) On 18 March 2016, Heidi entered into a contract to purchase the Macedon Property;
(j) Heidi applied some of the Heidi Receipts to the purchase of the Macedon Property:
(i) On 18 March 2016, the sum of $88,750; and
(ii) On 28 April 2016, the sum of $181,320.36;
(k) Heidi is liable to repay the Company the sum of the Heidi Receipts;
(l) Heidi’s interest in the Macedon Property is charged with:
(i) the repayment of the $270,070.36, being those parts of the Heidi Receipts used to purchase the Macedon Property; and
(ii) 30.43% of the increase in the value of the Macedon Property, being the proportion of the purchase price paid with the Heidi Receipts;
(m) In the alternative Heidi holds 30.43% of the Macedon Property on trust for the Company.
Heidi pleaded that the Transfers were directed by Fritz in his capacity as a director of the Company and in accordance with his authority as director. Heidi said Fritz as a director had authority to lend Company funds to himself and that the absence of a resolution of the Company to that effect does not detract from Fritz’s authority. Heidi pleaded that the Company maintained loan accounts reflecting amounts that Fritz had borrowed from the Company. The loan accounts were not updated on a daily basis when each transaction was made, but rather retrospectively on an approximately annual basis when the Company’s accountant undertook the process of reconciling payments in the preparation of financial statement and tax returns.
Heidi further pleaded that she did not have any capacity, as a director or otherwise, to prevent Fritz from effecting the Transfers which occurred after she was appointed a director of the Company. Her case was that she never undertook any of the functions of a director.
Heidi pleaded that the Heidi Receipts were gifts. She admitted she used some of those funds to purchase the Macedon Property but denied she was liable to repay the Heidi Receipts to the Company or that the Macedon Property was charged with the repayment of those parts of the Heidi Receipts used towards its purchase or the proportional value of the increase in the value of the Macedon Property. Similarly, Heidi denied she holds 30.43% of the Macedon Property on trust for the Company.
Further, Heidi pleaded that the Heidi Receipts cannot be traced to her because they are presumed in equity to have been made firstly from funds to which Fritz had a legitimate entitlement.
Finally, Heidi pleaded that if the Heidi Receipts were funds to which the Company has a claim, there were no facts or circumstances which could have, or should have, put Heidi on notice as to any impropriety attached to the receipt of the funds. Heidi said that: Fritz made the gifts to her one and two years after Fritz received the money from the Company; Heidi had no knowledge of her father’s dealings with the Company; and her brother also received a monetary gift from Fritz.
In response to the issue of notice, the Liquidators denied that Heidi did not have the relevant notice. The Liquidators relied on the following to establish Heidi’s notice:
(a) On 23 June 2021, the Liquidators’ solicitor wrote to Heidi’s solicitor putting her on notice that the Heidi Receipts were traceable from the Company’s funds; and
(b) On 21 April 2022, the Liquidators’ solicitor wrote to Heidi’s solicitor attaching a proposed amended statement of claim in the form subsequently filed in the proceeding, again putting Heidi on notice that the Heidi Receipts were traceable from the Company’s funds.
The following issues were raised for determination by the Liquidators’ misappropriation of funds claim:
(a) Did Itonic (Vic) loan the money used to purchase the Freemantle Property to the Company or to Fritz and Diane?
(b) Did Fritz have the authority to effect the last two Transfers on account of Fritz being a director of the Company?
(c) Were the last two Transfers loans by the Company to Fritz?
(d) Did Fritz, by virtue of being a director of the Company, owe the Company the duties pleaded by the Liquidators?
(e) Did Fritz and Galactron hold the proceeds of the last two Transfers on trust for the Company on account of being ‘knowing recipients’ pursuant to the first limb of Barnes v Addy?
(f) Are the last two Transfers traceable in equity to Heidi and the Macedon Property?
Did Itonic (Vic) loan the money used to purchase the Freemantle Property to the Company or to Fritz and Diane?
I am satisfied that the evidence demonstrates that Itonic (Vic) loaned the Company the money used to purchase the Freemantle Property.
First, Hutchins’ evidence was that he advised Fritz that if he personally loaned money from Itonic (Vic) he would incur interest and taxation disadvantages that could be avoided if the purchase of the Freemantle Property was effected through an inter-company loan to the Company. Hutchison said Fritz followed his advice.
Second, a loan from Itonic (Vic) to the Company is supported by the contemporaneous documents. The ratified financial statements of Itonic (Vic) for the financial years ended 2008 and 2009 record the loan from Itonic (Vic) to the Company. Fritz and Diane ratified the record of the loan from Itonic (Vic) in the Company’s financial statements for the financial years ended 2008 and 2009. Similarly, Fritz and Diane declared the loan in the Company’s ratified tax returns for the 2008 and 2009 financial years, which were lodged with the Australian Taxation Office (ATO).
Third, Fritz also declared the loan as true and correct and still outstanding in his RATA in the winding up of Itonic (Vic).
Fourth, both Hutchins and Gallagher gave evidence of their conversation in early 2008 to the effect that Fritz needed a company. Gallagher recalled being sent a share transfer form, transferring his shares in the Company to Fritz which Gallagher said he did not sign. The ASIC records show Gallagher’s shares were transferred to Fritz’s interests in February 2008. This evidence was consistent with Fritz following Hutchin’s advice that the Company should purchase the Freemantle Property.
Did Fritz have the authority to effect the last two Transfers on account of Fritz being a director of the Company?
Heidi submitted that the Transfers were effected by Fritz under his authority as a director of the Company. Heidi said the Court should view the nature and effect of the Transfers in light of the fact that the transactions involved Fritz’s private business interests in the context of the operations of a private family company. Heidi said that in the absence of clear and cogent evidence, the Court should be slow to impute to Fritz any improper motive in the way in which the transactions between his private companies have been effected. Further, Heidi submitted and the Liquidators accepted, that Heidi cannot be criticised for not producing proof that might otherwise have been available but for Fritz’s incapacity.
The Liquidators submitted that Fritz did not have authority to make the Transfers.
The Company’s Articles of Association provide that the Company not have less than two directors and that the business of the Company shall be managed by the directors. From 21 June 2013, the ASIC records show the Company’s directors were Fritz and Heidi. Heidi’s evidence was that she was unaware that she was a director of the Company, Fritz having asked her to sign documents that she did not read and that she assumed related to the financial power of attorney she held for Diane at the time. Whether or not Heidi was, in these circumstances, a director of the Company is discussed below. It was not in dispute that on Heidi’s evidence Fritz must have known that Heidi was a director of the Company at the time of each of the Transfers.
A director has no implied authority to act unilaterally. While it may have been Fritz’s practice, possibly with Diane’s agreement, to act unilaterally while Fritz and Diane were the Company’s directors, there was no evidence that Fritz and Heidi, as directors of the Company, had agreed Fritz had authority to act unilaterally. Indeed such an agreement would be contrary to Heidi’s evidence that she was not aware she was a director of the Company.
There were no Company resolutions authorising the Transfers.
For these reasons I find that Fritz did not have the authority to effect the Transfers.
Were the last two Transfers loans by the Company to Fritz?
Heidi submitted that Fritz borrowed the money the subject of the Transfers from the Company, and that the money was treated as a loan by the Company. Heidi said the practice of directors borrowing from the Company occurred over a number of years and that the Company’s books and records were not always kept up to date.
Heidi relied on the draft 2012 financial statement and tax return for the Company prepared in July 2015 by Brown-Thomas of Kidmans on Fritz’s instructions. The financial statement records loans to Fritz and Diane in the order of $1,270,000.
The draft 2012 financial statement and tax return were compiled in July 2015 on Fritz’s instructions. Kidmans sent the draft tax return with the financial statement to Fritz for him to check and sign but there is no record of either being ratified by the Company’s board, signed by the directors or lodged with the ATO.
The terms of Fritz’s instructions to prepare the draft financial statement and tax return were not in evidence. Brown-Thomas’ evidence was that up until about two years after Itonic (Vic)’s business was sold, until about 2008, the Itonic Group’s in- house accountants provided Harmons with base information that was used by Harmons to prepare trial balances, balance sheets, financial statements and tax returns for the various Itonic Group companies. Brown-Thomas said that from at least the time the proceeds of the sale of the business were in Itonic (Vic)’s bank account, any money withdrawn by the directors from any of the Itonic Group companies was recorded as a director’s loan from Itonic Pty Ltd, with corresponding entries showing a loan from the Itonic Group entity that was the source of the money to Itonic Pty Ltd. Brown-Thomas was not able to say when or why this practice was first adopted other than to ‘make sure that all the money that was being taken out by the directors was recorded and kept in one place’.
During her examination Brown-Thomas was taken to a number of bank account statements and working documents prepared by the accountants for Itonic (Vic), the company that was the repository of the proceeds of the business sale. Brown-Thomas agreed that the documents recorded relatively large sums of money being paid into accounts associated with Fritz and recorded as loans payable to Itonic (Vic) by Itonic Pty Ltd. The 2008 Annual General Ledger for the Itonic Unit Trust recorded an opening balance of $7,874,000 of which $1,000,000 was a director’s loan to Gallagher, with the balance attributed to loans to the Boegel family. This was consistent with Gallagher’s evidence that by 2008 he had become alarmed at the rate at which Fritz was taking money from the proceeds of the sale of Itonic (Vic)’s business without reference to Gallagher and that he negotiated a payment of $1,000,000 in response.
In my view, little weight can be placed on the draft 2012 financial statement and tax return. It seems unlikely Fritz supplied detailed instructions as to their preparation because there is no record of such instructions. The only record appears to be in the Kidmans covering letter to Fritz enclosing the drafts which records Fritz’s instructions that the draft statement and tax return be prepared. Heidi’s evidence was that Fritz may never have received the draft documents as they were sent to a post office box that, before her death, had been maintained by Diane. There was no evidence that the documents had been returned to Kidmans undelivered.
The drafts were prepared in 2015 and the evidence of Brown-Thomas strongly suggests they were the product of the accountants trying to do their best to make sense of the Company’s bank account transactions and following a practice that had developed of recording money taken out of the Company as director loans in order to keep track of and account for these sums.
I accept that it is not uncommon in the context of a family company for a company to pay money to or on behalf of a director which is then debited to the director’s loan account or otherwise to be repaid. I also accept that the payment may often be written up as a loan or other arrangement for repayment in retrospect. As Giles JA reflected in Kalls Enterprises Pty Ltd (in liq) v Baloglow (Kalls Enterprises)[8] it is ‘not uncommon for the payment to amount to use by the director of the company’s money without attention to those matters’.
[8](2007) 63 ACSR 557, 584 [140] (Kalls Enterprises).
The effect of the evidence of Gallagher, Hutchins and Brown-Thomas was that Fritz used the proceeds of the sale of Itonic (Vic)’s business as his own money, and that the accountants used their best endeavours to record the sums the directors took from the Itonic Group entities as director loans in the books of Itonic Pty Ltd. There was no evidence that this was as a result of a resolution of the directors of each or any particular Itonic Group entity. The closest evidence of a recorded agreement to director loans was the ratification of the 2008 financial statements for the Company and the declarations signed by the directors as part of the Company’s tax return.
I find that the last two Transfers were not loans by the Company to Fritz or Galactron. It follows that the Transfers were misappropriations and were thus held by Fritz and Galactron on trust in accordance with the principles in Black v Freedman[9] that:
Where money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character. If he pays it over to another person, then it may be followed into that other person’s hands.[10]
[9](1910) 12 CLR 105.
[10]Ibid 110.
Did Fritz, by virtue of him being a director of the Company, owe fiduciary duties to the Company?
In Kalls Enterprises,[11] Giles JA (with whom Ipp and Basten JJA agreed on this point) discussed the fiduciary duties owed by directors to their corporations:
Directors are in a fiduciary relationship to the company. They must act in good faith for the benefit of the company, and “a power conferred on them cannot be exercised in order to obtain some private advantage or for a purpose foreign to the power”: Mills v Mills (1938) 60 CLR 150 at 195 per Dixon J. A person who occupies a fiduciary position “may not use that position to gain a profit or advantage for himself…without the informed consent of the person to whom he owes the duty”: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 67; 55 ALR 417 at 431; 4 IPR 291 at 305 per Gibbs CJ.
At least where the company is facing insolvency as well as considering the company’s interests the directors must consider the interests of its creditors: Walker v Winborne (1976) 137 CLR 1; 3 ACLR 529; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; 10 ACLR 359. In Grove v Flavel (1986) 43 SASR 410 at 421; 11 ACLR 161 at 170 the court said that the interests of creditors must be considered where to the knowledge of the directors there is a real and not remote risk of insolvency, and of course the risk includes the effect of the dealing in question. (Grove v Flavel was disapproved in Spies v R (2000) 201 CLR 603; 173 ALR 529; 35 ACSR 500; [2000] HCA 43 at [95] so far as it suggested a direct duty owed to and enforceably (sic) by creditors, but not as to this matter.) It is sufficient for present purposes that, in accord with the reason for regard to the interests of creditors, the company need not be insolvent at the time and the directors must consider their interests if there is a real and not remote risk that they will be prejudiced by the dealing in question.
[11]Kalls Enterprises (n 8) 589 [161]–[162].
I find that Fritz, by virtue of being a director of the Company, owed fiduciary duties to the Company, including the duty to consider the interests of the Company’s creditors.
At the time of the Transfers the financial position of the Company was that it owed Itonic (Vic) $2,645,845 and had a nominal tax liability. The Transfers were not effected in furtherance of any resolution of the Company. They were undocumented. There was no evidence of Fritz’s or Galactron’s agreement to pay interest or offer security on the advanced sums. In my view, the Transfers were effected for Fritz’s benefit and to the detriment of the Company.
The last two Transfers occurred after the administrator of Itonic Holdings had raised concerns about the Company’s ability to repay its debt to Itonic (Vic) as well as Fritz’s ability to repay his debts to Itonic (Vic). Fritz, as a director of Itonic Holdings and Itonic (Vic), must have been aware of these matters.
Accordingly, I find that the Transfers were undertaken by Fritz in breach of his fiduciary duty to the Company.
Did Fritz and Galactron hold the proceeds of the last two Transfers on trust for the Company on account of being ‘knowing recipients’ pursuant to the first limb of Barnes v Addy?
There was no dispute between the parties about the principles relevant to the first limb of Barnes v Addy. In Kalls Enterprises,[12] Giles JA succinctly set out the following:
[12]Kalls Enterprises (n 8) 579 [111]–[112].
In Barnes v Addy Lord Selbourne LC said (at 251-2):
Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son trust, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.
The liability referred to by the words “receive and become chargeable with some part of the trust property” is commonly described as liability under the first limb of Barnes v Addy, and in shorthand as “knowing receipt”. Lord Selbourne did not refer to knowledge in connection with the first limb but, as was succinctly stated by Gleeson CJ and Gummow, Callinan, Heydon and Crennan JJ in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 236 ALR 209; [2007] HCA 22 at [112], “persons who receive trust property become chargeable if it is established that they have received it with notice of the trust”.
The principles relevant to Barnes v Addy claims was considered by the Court of Appeal in GP Building Holdings Pty Ltd v Voitin.[13] I adopt the Court of Appeal’s summary.
[13][2022] VSCA 210, [9]–[21].
Fritz made or was aware of the Transfers. There was no suggestion that anyone other than Fritz was a signatory to the Company’s bank accounts at this time. As a director of the Company and his involvement in Itonic (Vic), Fritz and by extension Galactron had knowledge of circumstances that would indicate to an honest and reasonable person that the Transfers constituted a breach of Fritz’s fiduciary duty to the Company. Fritz wilfully shut his and Galactron’s eyes to the obvious unlawfulness of the Transfers. Similarly, he wilfully and recklessly failed to make such enquiries as an honest and reasonable person would make in respect of the receipt of the money the subject of the Transfers.
Fritz had either actual or constructive knowledge that the Transfers were in breach of Fritz’s fiduciary duties. By virtue of Fritz being a director of Galactron, his actual or constructive knowledge is imputed to Galactron.
I am satisfied that Fritz and Galactron held the proceeds of the last two Transfers on trust for the Company on account of being knowing recipients under the first limb of Barnes v Addy.
Are the last two Transfers traceable in equity to Heidi and the Macedon property?
The evidence revealed that the last two Transfers made their way from the Company into Fritz and Diane’s Joint Bank Account and that, via the Heidi Receipts, Heidi, as a volunteer, received $425,000 from the Joint Bank Account. It was not in dispute that Heidi used $270,070.36 of those funds to purchase the Macedon Property.
Heidi raised four arguments to refute the Liquidators’ tracing claim.
First, that the Term Deposit Account from which the Heidi Receipts came, included money not sourced from the Company, ie. the Term Deposit Account was a mixed fund. Heidi’s counsel argued that when the funds from the Transfers were intermingled with other funds belonging to Fritz, equity will presume that Fritz will thereafter spend his own money first. Counsel submitted that Re Hallett’s Estate; Knatchbull v Hallett (Re Hallett’s Estate)[14] and Heperu Pty Ltd v Belle (Heperu)[15] are authority for this principle.
[14](1879) 13 Ch D 696.
[15](2009) 76 NSWLR 230.
The rule in Re Hallett’s Estate is that where a trustee wrongfully mixes money and then makes a withdrawal from the mixed fund, the trustee is taken to have withdrawn his own money first. The purpose of the rule is to allow the beneficiary to trace into the money in the fund. The rule was considered by Allsop P in Heperu:[16]
[16]Ibid 257–258 [114]–[116].
…In examining withdrawals, it is to be assumed that withdrawals that are dissipated are taken first from the trustee’s own funds: Re Hallett’s Estate and Re Sutherland; French Caledonia Travel Service Pty Ltd (In Liq) (at 375 [43]–[65]). The obligation of a fiduciary even a defaulting one (here a thief, as constructive trustee, dealing with stolen funds) is to preserve, not dissipate, the property of others wrongly obtained. That it may not be the actual intention of the wrongful fiduciary to act with propriety does not affect equity’s concern with what he or she should do: Re Oatway; Hertslet v Oatway [1903] 2 Ch 356 at 360–361, where Joyce J said:
“[W]hen any of the money drawn out has been invested, and the investment remains in the name or under the control of the trustee, the rest of the balance having been afterwards dissipated by him, he cannot maintain that the investment which remains represents his own money alone, and that what has been spent and can no longer be traced and recovered was the money belonging to the trust. In other words, when the private money of the trustee and that which he held in a fiduciary capacity have been mixed in the same bank account, from which various payments have from time to time been made, then, in order to determine to whom any remaining balance or any investment that may have been paid for out of the account ought to be deemed to belong, the trustee must be debited with all the sums that have been withdrawn and applied to his own use so as to be no longer recoverable, and the trust money in like manner be debited with any sums taken out and duly invested in the names of the proper trustees. The order of priority in which the various withdrawals and investments may have been respectively made is wholly immaterial. I have been referring, of course, to cases where there is only one fiduciary owner or set of cestuis que trust claiming whatever may be left as against the trustee.”
This statement in Re Oatway was explained (in effect as a form of protective election) and approved by Learned Hand J, sitting as a District Court Judge, in Primeau v Granfield 184 F 480 (1911) at 484–485. See also Boscawen v Bajwa [1996] 1 WLR 328 at 366; [1995] 4 All ER 769 at 778–779; Scott v Scott (1963) 109 CLR 649 at 664; Brady v Stapleton (at 336); Stephens Travel Service International (at 346); and Jacobs’ Law of Trusts in Australia 7th ed at 675 [2707].
Any potential difficulties in dealing with the falling of the relevant account into overdraft (Hagan v Waterhouse (1991) 34 NSWLR 308 at 358–359) do not arise here. In Hagan v Waterhouse (at 358) Kearney J quoted with approval a passage from Underhill and Hayon: Law Relating to Trusts and Trustees 14th ed (1987) London, Butterworths at 756 which reflected the importance of maintaining flexible choice to the beneficiary in circumstances of mixing the beneficiary’s money with the trustee’s own and not using the rules from Re Hallett’s Estate as a means of advantaging a wrongdoer by reference to the facts as they fall out. The passage from Hagan v Waterhouse at 358 was as follows:
“His conduct prevented proper accounts from being kept so it is up to the beneficiaries to resolve the book-keeping as they wish, and it is the trustee’s own fault that his mixing of moneys prevents him from disputing such book-keeping. The beneficiaries can choose to treat withdrawals that are dissipated as representing the trustee’s money and profitable withdrawals as representing the trusts moneys….’everything is presumed against him’, Gray v Haig (1855) 20 Beav 219 at 226 per Romilly MR.”
The Court of Appeal (Priestly JA, with whom Sheller JA and Powell JA agreed) in Keefe v Law Society of New South Wales (1998) 44 NSWLR 451 at 461 specifically approved passages from Hagan v Waterhouse at 358–359, including this passage.
Where a trustee wrongfully causes funds to lose their separate existence by mixing them with his own, his interests are subordinated to those of the claimant. Re Hallett’s Estate is not authority for the proposition that a volunteer in receipt of trust funds can seek to retain those funds on the basis that the funds the volunteer received from the mixed fund are taken to be the trustee’s own money. As stated by Einstein J in Uniting Church in Australia Property Trust (NSW) v Vincent:[17]
Where a fund mixed with trust moneys is used to acquire other property, the beneficiary is entitled to charge both the fund and any property acquired from that fund… The charge may be asserted over both the fund and the property to its full value in the sense that the beneficiary must exhaust either first before recouping the full balance out of the other… The rationale for that is that until the trustee has fulfilled his fiduciary duty to restore the trust property he will not be heard to claim his own interest in the acquired property…
[17][2009] NSWSC 375, [9].
The rules applicable to the trustee, here Fritz, also apply to volunteers who derive their interest in the trust funds otherwise than for value. Lord Millett explained in Foskett v McKeown:[18]
On ordinary principles such persons are in no better position than the wrongdoer, and are liable to suffer the same subordination of their interests to those of the claimant as the wrongdoer would have been.
[18][2001] 1 AC 102, 132
Heidi’s second argument was that she believed the Heidi Receipts were a gift from Fritz. She received the Heidi Receipts in good faith with no knowledge or suspicion that the funds or any part of them was money that did not belong to Fritz and which could be traced back to the Company.
It was not part of the Liquidators’ case that Heidi received the Heidi Receipts as anything other than an honest volunteer. It is not necessary for the Liquidators to prove that Heidi had knowledge at the time she received the funds that the Company was their source or that Fritz had misappropriated those funds. For the purposes of tracing it is sufficient that Heidi retained the funds once she had notice of their source. The Liquidators put Heidi on that notice on 23 June 2021 by letter to Heidi’s solicitor and again on 21 April 2022 by serving Heidi with the proposed amended statement of claim in the form subsequently filed in this proceeding.
Third, Heidi argued that she received the Heidi Receipts on 7 October 2015 and 4 April 2016 as gifts from Fritz which was over 18 months after the funds were transferred from the Company to Galactron and Fritz and Diane. Counsel submitted the complete absence of temporal relationship between Fritz receiving the funds from the Company and his subsequent gift to Heidi meant the receipt of the funds by Heidi does not give rise to any claim based upon fraud.
I did not understand the Liquidators’ case to allege fraud on Heidi’s part. The lack of temporal connection really goes to the issue of whether Heidi was on notice, or had reason to suspect, that the money received from Fritz was misappropriated trust funds. The recipient’s lack of notice at the time the funds are received is not a bar to tracing trust funds by a beneficiary.
Heidi’s fourth argument was that the settlement between the Liquidators and the first, second and fourth defendants in this proceeding also encompassed settlement of any personal claims against Heidi.
Heidi’s counsel did not refer to the terms of any settlement deed to make good this argument. Accordingly, I am not able to accept it.
I find that the last two Transfers are traceable in equity to Heidi and the Macedon Property.
Heidi’s breach of directors’ duties
The Liquidators claimed that Fritz, Diane (until her death) and Heidi owed the following statutory and fiduciary duties to the Company by virtue of their status as officers of the Company:
(a) A duty to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(iii) were a director or officer of a corporation in the Company’s circumstances; and
(iv) occupied the office held by, and had the same responsibilities within the Company as, the director or officer;
(b) A duty to exercise their powers and discharge their duties:
(i) in good faith in the best interests of the Company; and
(ii) for a proper purpose;
(c) A duty not to improperly use their position to:
(i) gain an advantage for themselves or someone else; or
(ii) cause detriment to the Company;
(d) A duty to have regard to the interests of creditors in the exercise of their powers as directors or officers of the Company.
The Liquidators claimed that the Transfers occurred at a time when the Company was insolvent or in financial distress. The Liquidators said that the Company’s insolvency or financial distress from August and November 2011 to the date of liquidation was demonstrated by:
(a) In February 2008, Itonic (Vic) lent the Company $2,645,845;
(b) On 23 June 2009, Hutchins was appointed liquidator of Itonic Holdings by way of members’ voluntary winding up;
(c) As at 20 June 2009, Itonic (Vic) had the following related party creditors:
(v) Itonic Holdings $10,478,623
(vi) Itonic (Qld) Pty Ltd $1,950,672
(vii) Itonic (WA) Pty Ltd $1,155,207
(viii) Itonic (SA) Pty Ltd $778,457
(ix)Idec (Australia) Pty Ltd $503,665
(x) Kidmans $4,125
(d) the relevant Transfers occurred between 16 August 2013 and 10 March 2014;
(e) at the time of the Transfers, Itonic (Vic) had an obligation to repay related party creditors amounts in excess of $14 million;
(f) since 2009 and at the time of the Transfers, Fritz and Gallagher were in dispute about the repayment of the related party loans in subparagraph (c) above, the proceeds of sale available for distribution, unauthorised withdrawals of substantial funds by both Fritz and Gallagher, and were unable to agree to finalise the financial statements and tax returns for related entities;
(g) the Company’s financial position was:
(i) Assets:
1. The property the subject of the Transfers;
2. Shares in related entities of around $50,000;
3. Related party loan accounts of around $9,000;
(ii) Liabilities:
1. The Itonic (Vic) loan of $2,645,845.
(h) The inevitable consequence of the Transfers was to:
(i) put the Company in a position where it could not repay the Itonic (Vic) loan from its own funds;
(ii) divest the Company of its only substantial asset;
(iii) deprive the Company of a resource from which to repay the Itonic (Vic) loan; and
(iv) render a default under the Itonic (Vic) loan inevitable.
(i) On 14 September 2012, the members’ voluntary liquidation of Itonic Holdings was terminated and Hutchins appointed an administrator on the ground that it was insolvent or about to become insolvent;
(j) On 15 November 2012, the administration of Itonic Holdings came to an end;
(k) On 20 February 2013, a liquidator was appointed to Itonic Holdings by way of members’ voluntary liquidation;
In Featherstone v Ashala Model Agency Pty Ltd (in liq),[48] Sofronoff P considered the history of the requirement to prove the company’s purpose for entering into the transaction in s 588FE(5)(b) of the Act and stated:
In the absence of direct evidence of intention, such an intention can be inferred from the nature of the transaction and the circumstances surrounding it including the knowledge of the parties.
As Chesterman J demonstrated in R v Reid an intention to secure a result is not the same thing as knowing that that result will be the probable consequence of an intended act. However, it is uncontroversial that knowledge of circumstances that render an outcome probable or certain may nevertheless serve to prove an intention in the actor to achieve that result.
[48][2018] 3 Qd R 147, [84]–[85].
The Liquidators relied on the following matters to demonstrate the Company’s purpose in entering into the last two Transfers was to defeat, delay or interfere with the rights of any or all of its creditors on a winding up of the Company:
(a) The last two Transfers were each voluntary dispositions of Company assets by Fritz, to Fritz or a company related to Fritz, ie Galactron;
(b) It was a necessary consequence of the last two Transfers that the Company would have less available funds from which to pay its creditors, including Itonic (Vic);
(c) Each of the last two Transfers was made at a time when the Company was not trading and had no other means of meeting its obligations to Itonic (Vic);
(d) Each of the last two Transfers was made in the context of a bitter dispute between Fritz and Gallagher surrounding the withdrawal of funds from Itonic (Vic) leading both Itonic (Vic) and the Company to be wound up in insolvency;
(e) Each of the last two Transfers was made notwithstanding the administrator of Itonic Holdings had already issued a Report and Statement on 9 October 2012 in which he stated:
(xv) Recovery of the $9 million debt owed by Itonic (Vic) was doubtful;
(xvi) Reported that the loans by Itonic (Vic) to Fritz and Diane were ‘apparently irrecoverable’;
(xvii) Reported an estimated realisable value of the $2,635,845 owed by the Company to Itonic (Vic) was $800,000;
(f) Each of the last two Transfers occurred after the appointment of Mr Andrews as liquidator of Itonic Holdings in insolvency on 13 April 2013, ie, the issues surrounding Itonic (Vic)’s inability to pay Itonic Holdings and the concerns about Itonic (Vic)’s inability to recover debts from Fritz and Diane had come to a head.
I accept that taken as a whole these circumstances rendered it certain that the last two Transfers would defeat, delay or interfere with the rights of creditors on a winding up of the Company and that Fritz was well aware of them at the time the last two Transfers were made. I am satisfied on the balance of probabilities that the Company entered into the last two Transfers for that purpose. It follows that I am satisfied that the condition in s 588FE(5)(b) of the Act is met.
The Liquidators assert and Heidi admits the relation-back day in relation to the winding up of the Company is 20 August 2018. The condition in s 588FE(5)(c) is met.
Having found that the conditions in s 588FE(5)(a), (b) and (c) have been met, I am satisfied that the last two Transfers were voidable transactions.
If so, is Heidi entitled to rely upon the statutory defence provided for in s 588FG(2) of the Act?
Heidi pleaded that, if the last two Transfers were voidable pursuant to s 588FE(5) of the Act, the Court ought not proceed to make an order under s 588FF because:
(a) the funds were received by Heidi in good faith;
(b) at the time of the receipt of the funds, Heidi or a reasonable person in Heidi’s circumstances, had no reasonable grounds for suspecting insolvency;
(c) Heidi has changed her position as a consequence of relying upon the validity of her father’s gifts to her (the Heidi Receipts); and
(d) the last two Transfers were not unreasonable director-related transactions within the meaning of s 588FG(2) of the Act.
Heidi’s particulars to this aspect of her pleading stated:
Heidi had no knowledge that Fritz had purported to appoint her as a director of the [C]ompany. Heidi played no part in, and had no knowledge of, [the Transfers effected by Fritz]… Those [Transfers] were effected by Fritz and for Fritz.
Heidi had no knowledge that the [the Heidi Receipts]…might have been obtained by Fritz from the [C]ompany. Heidi had no knowledge as to the state of the [C]ompany’s finances at any time.
Heidi changed her position by relying on what she understood to be a gift from her father by purchasing a home with those funds and entering into a mortgage to complete the purchase. She made changes to her life choices and the direction in which her life took in the expectation that she had benefitted from a gift by her father.
Section 588FG(1) and (2) of the Act provide:
If no benefit or benefit received in good faith without grounds for suspecting insolvency
(1)A court is not to make under section 588FF an order materially prejudicing a right or interest of a person other than a party to the transaction if it is proved that:
(a) the person received no benefit because of the transaction; or
(b)in relation to each benefit that the person received because of the transaction:
(i) the person received the benefit in good faith; and
(ii) at the time when the person received the benefit:
(A)the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and
(B)a reasonable person in the person’s circumstances would have had no such grounds for so suspecting.
If transaction entered into for valuable consideration in good faith without grounds for suspecting insolvency
(2)A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:
(a) the person became a party to the transaction in good faith; and
(b) at the time when the person became such a party:
(i)the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and
(ii)a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and
(c)the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.
Section 588FG has two main subsections. Section 588FG(1) is directed to a person who is not a party to the relevant transaction. Section 588FG(2) is directed to a party to the transaction. As noted above, transaction is defined in the Act to be a transaction to which the Company is a party. The relevant transactions are the transfer of $342,402.83 on 21 February 2014 from the Company to Galactron and the transfer of $569,926.55 on 10 March 2014 from the Company to Fritz and Diane. Heidi is not a party to either of those transactions. Accordingly, a defence under s 588FG(2) is not available to Heidi.
In his reply submission, Heidi’s counsel purported to correct the reference to s 588FG(2) in Heidi’s written submissions, saying that it was intended to be a reference to s 588FG(1). The Liquidators’ counsel objected on the basis that Heidi had not pleaded a statutory defence under s 588FG(1).
Heidi did not plead a statutory defence under s 588FG(1) and nor did her counsel make any application to amend her defence to plead this provision at the trial.
If not, what remedy is appropriate pursuant to s 588FF of the Act?
Relief under s 588FF of the Act is intended to be restitutionary.[49]
[49]Weaver v Harburn [2014] WASC 227, [114].
The Liquidators submitted that:
(a) when Heidi obtained the Heidi Receipts, she obtained a benefit because of the voidable transactions;
(b) money that the Company paid under the voidable transactions was applied to the purchase of a portion of the Macedon Property (Macedon Traceable Property);
(c) the Macedon Traceable Property is property that, fairly represents the application of money that the Company has paid under the Transfers or proceeds of property that the Company has transferred under the Transfers within the meaning of s 588FF(1)(d) of the Act;
(d) in the alternative to the Liquidators’ tracing claim, the Court ought to order that Heidi transfer a 30.43% share in the Macedon Property to the Liquidators, that percentage being representative of the application of the Company’s money in the purchase of the Macedon Property; and
(e) the Court should also order that Heidi pay that sum of the Heidi Receipts that she retained as at 23 June 2021 or 21 April 2022.
Heidi made no submissions on this issue.
I am satisfied that, in the alternative to any order made as a consequence of the Liquidators’ tracing claim, an order reflecting the Liquidators’ submissions at paragraph 215(d) above would fairly represent the application of the portion of the money the Company paid under the voidable transaction that was used in the purchase of the Macedon Property. I am also satisfied that it would be appropriate to order that Heidi pay the balance of the sum of the Heidi Receipts, ie not including the money applied to the purchase of the Macedon Property, that she retained as at 21 April 2022, being the date the Liquidators provided her with a copy of their proposed amended statement of claim.
Conclusion
My conclusions in relation to each of the issues raised for determination can be found above. Broadly I have concluded that the Liquidators have succeeded on their misappropriation of funds claim against Heidi. While I have found that Heidi owed the Company the duties claimed by the Liquidators and that she breached her duty to exercise care and diligence, I could not be satisfied that Heidi’s breach caused the Company’s loss as pleaded by the Liquidators. I have found that the Transfers were voidable transactions pursuant to s 588FE(5) of the Act and that Heidi is not entitled to rely on the statutory defence provided by s 588FG(2) of the Act.
I request that the parties confer on the terms of final orders giving effect to these reasons. If the parties are unable to agree on the terms of those orders, the proceeding will be listed for mention.
SCHEDULE OF PARTIES
| S ECI 2020 01184 | |
| BETWEEN: | |
| TRAINING AND INTERNATIONAL CERTIFICATION PTY LTD (In Liquidation) | First Plaintiff |
| ANDREW REGINALD YEO AND GUISEPPE MICHELE RAMBALDI (as Liquidators of Training and International Certification Pty Ltd (in Liquidation) (ACN 051 958 500)) | Second Plaintiff |
| - v - | |
| | |
| | |
| HEIDI LARISSA RICHARDS | Third Defendant |
| | |
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