In the matter of ZH International Pty Ltd (in liquidation)

Case •

[2022] NSWSC 2

•

02 February 2022

No judgment structure available for this case.

Supreme Court


New South Wales

  • Amendment notes
Medium Neutral Citation: In the matter of ZH International Pty Ltd (in liquidation) [2022] NSWSC 2
Hearing dates: 3-6 and 10 August 2021
Decision date: 02 February 2022
Jurisdiction:Equity
Before: Rees J
Decision:

Defendants ordered to transfer seven properties under section 588FF(1)(b), Corporations Act 2001 (Cth). Further orders made to quantify any benefit conferred by the defendants on the company.

Catchwords:

CORPORATIONS – voidable transactions – husband and wife directors and shareholders of company – company acquires four properties – net equity in properties is $2 million – couple separate – company sued for building defects for $3 million – company insolvent – couple agree partial property settlement in respect of the properties owned by the company only – ‘asset strip’ to defeat prospective creditors –company not a party to Family Court proceedings or orders – couple discharge mortgages – company transfers properties to husband and wife.

VOIDABLE TRANSACTIONS – whether Family Court orders constituted “transaction of the company” – whether later transfer of properties by the company a “transaction” – consideration of Mateo and s. 588FF Corporations Act at [172]-[177] – whether relief sought is inconsistent with Family Court orders – consideration of Higgins and s. 90AC and 90AE, Family Law Act at [203]-[208]

SECTION 588FF – order sought to transfer property – whether to exercise discretion to make order – reliance on legal advice – how to account for benefits conferred by directors on company – insufficient evidence.

Legislation Cited:

Bankruptcy Act 1966 (Cth)

Corporations Act 2001 (Cth)

Conveyancing Act 1919 (NSW)

Civil Procedure Act 2005 (NSW)

Family Law Act 1975 (Cth)

Family Law Rules 2004 (Cth)

Cases Cited:

Ansell Ltd v Davies [2008] SASC 203; (2008) 219 FLR 329

Ascot Investments Pty Ltd v Harper (1981) 148 CLR 337; [1981] HCA 1

Australian Securities and Investments Commission v Rich [2005] NSWSC 417; (2005) 53 ACSR 752

Australian Securities and Investments Commission v Rich [2009] NSWSC 1229; (2009) 75 ACSR 1

Baxter v Obacelo Pty Ltd (2001) 205 CLR 635; 184 ALR 616; [2001] HCA 66

BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351; (2016) 117 ACSR 18

BCI Finances Pty Ltd (In Liq) v Binetter [2018] FCAFC 189; (2018) 132 ACSR 1

Bovis Lend Lease v Wily [2003] NSWSC 467

BP Australia Ltd v Brown (2003) 58 NSWLR 322; [2003] NSWCA 216

Bryant v Edenborn Pty Ltd [2020] FCA 715; (2020) 145 ACSR 20

Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17

Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47; [2011] NSWCA 109

Cantrell v North (2020) FLC 93-976; [2020] FamCAFC 175

Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83; [2007] FCAFC 185

Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corporation [1999] NSWSC 671

Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445

Coates Hire Operations Pty Ltd v D-Link Homes Pty Ltd [2011] NSWSC 1279

Combis v Jensen (No 2) (2009) 181 FCR 178; [2009] FCA 1383

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

Cummings Engineering Holdings Pty Ltd [2014] NSWSC 250

D Pty Ltd (in liq) v Calas (Trustee) [2016] FCA 1409

DJG Equities Pty Ltd [2014] NSWSC 36

Edwards v Attorney-General (NSW) (2004) 60 NSWLR 667; [2004] NSWCA 272

Fisher v Divine Homes Pty Ltd [2011] NSWSC 8; (2011) 85 ACSR 512

Grimaldi v Chameleon Mining NL (No 2) (2012) 87 ACSR 260; [2012] FCAFC 6

Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123

Hosking v Extend N Build Pty Ltd [2018] NSWCA 149; (2018) 128 ACSR 555

In the marriage of Foda (1997) 21 Fam LR 653

In the matter of Earth Civil Australia Pty Ltd [2021] NSWSC 966

In the matter of Emanuel (No 14) Pty Ltd (in liq) (1997) 24 ACSR 292

In the matter of Evolvebuilt Pty Ltd [2017] NSWSC 901

In the matter of Purcom No 34 Pty Ltd (In Liq) (No 2) [2010] FCA 624

In the matter of Western Port Holdings Pty Ltd [2021] NSWSC 232; (2021) 150 ACSR 274

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

Jones v Dunkel (1959) 101 CLR 298

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

Kazar v Kargarian [2010] FCA 1381; (2010) 81 ACSR 158

Kijurina v Taouk (2015) 105 ACSR 686; [2015] FCA 424

Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722

Lewis v Doran [2005] NSWCA 243; (2005) 54 ACSR 410

M & R Jones Shopfitting Co Pty Ltd (in liq) v National Bank of Australasia Ltd (1983) 68 FLR 282.

Matlic Pty Ltd (in liq) [2014] NSWSC 1342; (2014) 102 ACSR 602

Mingos v Federal Commissioner of Taxation (2019) 274 FCR 148; [2019] FCAFC 211

MK Floors (NSW) Pty Ltd (in liq) [2020] NSWSC 1718

New Cap Reinsurance Corp Ltd v AE Grant [2009] NSWSC 662; (2009) 72 ACSR 638

Ng v Van Der Velde [2011] FCAFC 35

Official Trustee in Bankruptcy v Higgins (Family Court of Australia, Moore J, 2 September 2002, unrep)

Official Trustee in Bankruptcy v Mateo (2003) 127 FCR 217; [2003] FCAFC 26

R v Byrnes (1995) 183 CLR 501; [1995] HCA 1

R v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 428; [1949] HCA 53

Re Dawson [1966] 2 NSWR 211

Rivarolo Holdings Pty Ltd v Casa Tua (Sales) Pty Ltd (1997) 24 ACSR 105

Roberts v Wayne Roberts Concrete Constructions Pty Ltd [2004] NSWSC 734; (2004) 50 ACSR 204

Ronchi v Portland Smelter Services Ltd [2005] VSCA 83

Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98

Slaven v Menegazzo [2009] ACTSC 94

Smith v Starke (No 2) [2015] FCA 1119; (2015) 109 ACSR 145

Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; [2001] NSWSC 621

Super Vision Resources Ltd BVI Registered No 1810534 v AC Holdings Co Pty Ltd [2020] NSWCA 319

Swan Services Pty Limited (in liq) [2016] NSWSC 1724

Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd (1995) 56 FCR 236

Trajkovski v Simpson [2019] NSWCA 52

Trinick v Forgione (2015) 239 FCR 285; [2015] FCA 642

Universal Financial Group Pty Ltd v Mortgage Elimination Services Pty Ltd (in liq) [2006] NSWSC 1132; (2006) 205 FLR 186

Van Reesema v Flavel (1992) 7 ACSR 225

Vasudevan v Becon Constructions (Australia) Pty Ltd (2014) 41 VR 445

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

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

Westgem Investments Pty Ltd v Commonwealth Bank of Australia Ltd (No 6) [2020] WASC 302

Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; (2012) 89 ACSR 1

Westpac Banking Corporation v ZH International Pty Ltd [2015] NSWSC 607

White v Shortall (2006) 68 NSWLR 650; [2006] NSWSC 1379

Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15

Zaravinos v Houvardas [2004] NSWCA 421; (2004) 32 Fam LR 490

Zhang v ZH International Pty Ltd (District Court (NSW), Sorby DCJ, 28 May 2015, unrep)

Texts Cited:

John Henry Wigmore, Wigmore on Evidence (3rd ed, 1940)

Category:Principal judgment
Parties: Alan Hayes (First Plaintiff)
ZH International Pty Ltd (in liquidation) (Second Plaintiff)
Hui Zhang (First Defendant)
Ngoc Hong Ly (Second Defendant)
V & T Vuong Pty Ltd (Third Defendant)
Representation:

Counsel:
Mr RD Glasson (Plaintiffs)
Mr MK Condon SC / Mr PF Santucci (First Defendant)
Mr E Young / Ms F McNeil (Second Defendant)

Solicitors:
Dentons Australia (Plaintiffs)
Kazi Portolesi Lawyers (First Defendant)
Harris Freidman Lawyers (Second Defendant
Than Nguyen & Partners Lawyers (Third Defendant)
File Number(s): 2019/248063

Judgment

  1. HER HONOUR: This case involves the intersection between the voidable transaction provisions of Part 5.7B of the Corporations Act 2001 (Cth) – which prevent depletion of the assets of a company by certain transactions (generally, at an undervalue) in a specified timeframe before a winding up – and orders made under section 79 of the Family Law Act 1975 (Cth), which alter the property interests of the parties to a marriage on its demise.

  2. Alan Hayes, liquidator of ZH International Pty Ltd (the Company), seeks to recover four properties transferred by the Company to its directors and shareholders, Hui (John) Zhang (the husband) and Ngoc Hon Ly (the wife). The Company’s net equity in the properties was then some $2.16 million. The properties were transferred as part of a property settlement under the Family Law Act, effected by consent orders made by a Registrar in the Local Court at Fairfield exercising jurisdiction under section 39(2) of that Act (2014 Consent Orders). The liquidator is entitled to the relief sought.

SUMMARY

  1. In 2001, the husband and wife established the Company, which acquired four properties with a view to property development. Whilst the couple made some contributions to the acquisition of the properties (albeit fairly minimal and imperfectly recorded in a Shareholder’s Loan Account), the bulk of the funds were provided by bank loans to the Company, secured by registered mortgages over the properties. The couple also owned seven properties in their own names.

  2. The Company obtained a builder’s licence and embarked upon building projects. Two projects encountered significant difficulties, both in terms of being paid and by reason of legal proceedings brought against the Company for building defects. By 2014, the Company had been experiencing cashflow problems for some time: the Company’s bank account was overdrawn, cheques were being dishonoured and bills paid by ‘round sums’ or, perhaps, using the couple’s funds. The Company faced building defects claims exceeding $3 million.

  3. The couple had separated three years’ earlier but the husband had resisted his wife’s entreaties for a property settlement. The husband now relented to agree on a partial property settlement, but only in respect of the four properties owned by the Company. The couple estimated that the Company’s net equity in the four properties was $2.23 million. The husband considered that the Company owed him over $1 million for funds expended to complete the building projects. In May 2014, an Application for Consent Orders was filed, which contained no information on the financial position of the Company beyond the estimated value of the four properties and the amount owing on the associated loans. The couple did not disclose the significant claims made against the Company for building defects which, if successful, would eclipse the Company’s net assets. Nor did the couple disclose that the Company was then insolvent or facing serious and well-defined claims: Official Trustee in Bankruptcy v Mateo (2003) 127 FCR 217; [2003] FCAFC 26 at [70]. The Company was not joined to the Family Court proceedings, nor executed the proposed orders.

  4. The 2014 Consent Orders were made by a Registrar in the Local Court at Fairfield. The couple proceeded to pay out the four mortgages secured over the Company’s properties. The Company then transferred two properties to the husband and two properties to the wife. The Shareholder’s Loan Account was apparently ‘repaid’ (albeit no accounts were prepared at the time to record either the loan balance or its repayment). But for any protective effect conferred by the 2014 Consent Orders, the transfer of the Company’s property and the repayment of the Shareholder’s Loan Account were voidable transactions, with the primary focus being to defeat the Company’s creditors.

  5. The husband continued to use the Company’s building licence, although established new companies through which to conduct further property developments and building projects. In due course, as the legal proceedings against the Company were determined, a judgment creditor issued a statutory demand which went unanswered; the Company was wound up. Mr Hayes now seeks to retrieve the Company’s assets from the couple, so that the Company’s creditors may be paid.

  6. The 2014 Consent Orders, as made by the Family Court, did not oblige the Company to do anything but were directed to the parties to the marriage. The 2014 Consent Orders did not create an equitable interest in the Company’s properties in favour of the husband and wife as the orders did not create any obligation on the Company to transfer the properties. The orders simply obliged the spouses to transfer to the other ‘all [their] rights, title and interest’ in the Company’s properties, where the spouse, in fact, had no right, title and interest in those properties. The 2014 Consent Orders did not touch upon the Shareholder’s Loan Account which, according to the orders, remained the property of the spouses. It follows that orders under section 588FF of the Corporations Act requiring the husband and wife to transfer the properties back to the Company and ‘undoing’ any repayment of the Shareholder’s Loan Account are not inconsistent with the 2014 Consent Orders.

  7. In other words, the 2014 Consent Orders, properly construed, did not effect a “transaction” of the Company. The later transfers of the properties by the Company to the husband and wife were the relevant “transactions”, as was the (much) later accounting treatment of repayment of the Shareholder’s Loan Account and advancing the excess equity to the directors and shareholders as a “Trade and other Receivables” in the sum of $991,961.42.

  8. Regrettably, this scenario is not unusual. Nor was the approach taken by the couple’s solicitor – also the Company’s solicitor – who said, “I treated it from a sort of a family law perspective …  I pretty much … treated the ZH International properties as a matrimonial asset thrown into a pool.” Further, “it wasn't perceived to be advantageous to the company in any shape or form.  It was part of a process, a family law process …” Some obvious propositions bear re-statement.

  9. First, whilst a couple may be directors and shareholders in a family company, the couple do not own the company’s assets. The company owns its assets. As shareholders, the couple are simply entitled to the rights attached to the shares as provided by the company’s constitution, such as dividends while the company is trading or a distribution of assets upon winding up: R v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 428 at 434; [1949] HCA 53; White v Shortall (2006) 68 NSWLR 650; [2006] NSWSC 1379 at [193] per Campbell J citing Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd (1995) 56 FCR 236 at 255-6 per Lockhart J. Nor are the spousal directors entitled to deal with the company’s assets as if those assets are their own: Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416 at [103]. Rather, the directors must deal with the company’s assets in accordance with their duties as directors (and as fiduciaries) and the constraints imposed by the Corporations Act. These constraints are imposed for good reason by parliament, to balance the interests of all stakeholders doing business in Australia.

  10. Second, should the couple seek a property settlement under section 79 of the Family Law Act, including in relation to a company wholly owned by a party or the parties to the marriage, then it is customary to treat the net assets of the company as being the property of the couple, after deducting the moneys owing to the company’s creditors and the costs of external administration: In the marriage of Foda (1997) 21 Fam LR 653 at 667; Roberts v Wayne Roberts Concrete Constructions Pty Ltd [2004] NSWSC 734; (2004) 50 ACSR 204 per Barrett J at [63]. In the oft-cited observation of Gibbs J in Ascot Investments Pty Ltd v Harper (1981) 148 CLR 337 at 354; [1981] HCA 1:

It can safely be assumed that the Parliament intended that the powers of the Family Court should be wide enough to prevent either of the parties to a marriage from evading his or her obligations to the other party, but it does not follow that the Parliament intended that the legitimate interests of third parties should be subordinated to the interests of a party to a marriage, or that the Family Court should be able to make orders that would operate to the detriment of third parties. There is nothing in the words of the sections that suggests that the Family Court is intended to have power to defeat or prejudice the rights, or nullify the powers, of third parties, or to require them to perform duties which they were not previously liable to perform.

  1. As Wilcox J observed in Mateo, “The Family Court may be expected to be astute to prevent the claims of an unsecured creditor from being defeated by a s 79 order”: at [93]. Likewise, Branson J noted, “it would be wrong to see s 79 of the Family Law Act as providing a means whereby the parties to a marriage … can defraud their creditors”: at [99]. More recently, in Cantrell v North (2020) FLC 93-976; [2020] FamCAFC 175 the Full Family Court reiterated, “The Court should not readily be the vehicle by which the legitimate rights of third party creditors should be defeated or delayed”: at [80]. Further at [81]:

It must be recalled that an applicant for property settlement consent orders must establish that the order is proper and satisfies s 79(2) of the Act. The obligation on parties to give accurate and full disclosure is of single importance in maintaining the integrity of the judicial process. Where the integrity of the judicial process is trammelled by giving false evidence which affects the rights of third parties, the Court must intervene.

  1. Third, should the couple seek property orders from the Family Court which bind a third party, then the third party must be accorded procedural fairness in relation to the making of such orders: section 90AE(3)(c), Family Law Act. Where the third party is a company and the proposed orders involve transferring the company’s assets, then the company “must be included as a party to the case”: rule 6.02(1), Family Law Rules 2004 (Cth). “[T]he failure to disclose and notify the creditor …, of itself, justifies the setting aside of the orders” under section 79A(1)(a) of the Family Law Act: Cantrell v North at [83]. As the interests of the company are unlikely to align with that of the husband or wife, the company should ordinarily be separately represented.

WITNESSES

  1. For the plaintiffs, evidence was given by Mr Hayes and valuer William Rees (no relation). Both were cross examined. No issues of credit arose. Mr Hayes was an experienced and knowledgeable witness who made reasonable concessions. Whilst clearly exasperated with the directors, Mr Hayes was nonetheless compassionate to the wife's situation and language difficulties. Mr Rees was an experienced valuer and impressive witness.

  2. The husband gave evidence together with his solicitor, Mark Marando. Both were cross examined. The husband was an unsatisfactory witness; his learned senior counsel wisely conceded that the husband’s evidence should be approached with caution. Whilst the husband gave evidence through a translator, it was clear that he understood English, including because he answered several questions in English. After enduring two days of cross-examination via a translator over a video link, it was annoying to learn from Mr Marando that Mr Zhang was “quite fluent with his speaking of English. Written English, most documents I do read to him." Having now reviewed the contemporaneous documents, I note that Mr Marando and his staff routinely sent the husband written communications in the English language.

  3. The husband was asked a series of Dorothy Dixers by the wife’s counsel, during which time he gave evidence with his head down, making no eye contact. His demeanour changed when cross-examined by counsel for the liquidator, when he became engaged. The husband was evasive. Some of the husband's evidence seemed unlikely (see [116]) or was inconsistent with his affidavit in this or previous proceedings. Within moments, he gave answers which were inconsistent with previous answers: see [110]. He was, on occasion, non-responsive; even the translator became frustrated with the husband’s reluctance to give a straight answer. At other times, the husband gave angry speeches. The husband had no hesitation blaming others, including by making serious and inherently improbable accusations. Ultimately, I did not accept the husband’s evidence, except where it was inherently likely, corroborated by a contemporaneous document, the evidence of another reliable witness or where the evidence he gave was against his own interests.

  1. The husband’s interactions with the liquidator, the Australian Securities & Investments Commission (ASIC) and others, more fully described in this judgment, indicate that the husband conducted himself in a cavalier manner. Mr Hayes description of their first meeting is apposite: “The first time he was so offensive in his use of language and tone of voice that it was not possible really to ask him any questions. … He was so rude and so loud that a senior member of my staff that was sitting with me was frightened of him and I had to ask [the husband] to get out of my office … he was abusive.” The husband was “much better behaved” at subsequent meetings as he wanted to get the Company’s builder’s licence back, but “was not really keen to answer questions about historical matters”.

  2. Mr Marando is a local Cabramatta solicitor who acted for the couple for twenty years. According to Mr Marando, he and the husband were “good friends” (although the husband would not be drawn on the subject) and co-investors in a land-holding company, Beauty 398 Pty Ltd. (Mr Marando is not to be confused with his brother, Roy, of Marando Real Estate, with whom the couple also had a very good relationship.) Mr Marando was also fairly agreeable to the Dorothy Dixers posed by the wife's counsel. Whilst I have generally accepted his evidence, Mr Marando was an imperfect historian. His evidence did not accord with the contemporaneous documents in several respects and I have preferred the documents where available.

  3. The wife gave evidence (also through a translator, although necessarily so) together with her daughter, Joanna Tong (the daughter). Both were cross examined. The wife seemed like a nice lady who became upset talking about her divorce. The wife did not appear to have been particularly involved in the Company’s business or knowledgeable about corporate matters. That said, the wife had given a contrary description of her role in the Family Court proceedings: see [31]. The wife had also successfully operated her own business for some years, worked in another business with her daughter, been a director of several family companies and owned a significant number of properties before these events. To suggest that the wife “just essentially did sewing” was to understate her experience and acuity. I accepted her evidence on some matters but preferred the evidence of Mr Marando on other matters: see [33] and [87].

  4. The daughter was a very nervous witness who appeared unsophisticated and commercially naïve. The daughter appears to have acted throughout in a dutiful manner to both her mother and stepfather, acting as a translator for her mother where necessary when attending meetings with Mr Marando and generally trying to assist her mother to progress her efforts to finalise her divorce. The daughter also assisted her stepfather with the administrative aspects of the Company’s business and, as she said, “I did … what I was asked to do.” The daughter was keen to support her mother in these proceedings. I have accepted her evidence on some matters, but not others (see [87]), in particular, where the financial records indicate otherwise.

RECORDS

  1. Determining with exactitude precisely what happened with the Company and the four properties is not possible given the lack of documents. This is not for want of trying on Mr Hayes’ part, who make requests for information to the husband, wife, daughter, Mr Marando, current and former accountants, banks and others (88 requests in total). As Mr Hayes observed, and is described more fully in what follows, the husband “had to be dragged kicking and screaming by ASIC and others to provide me with any information”. Further, Mr Hayes said “the company records that exist … are plainly appalling:  worst I've seen in probably 30 years of … practicing in this field of accounting.” “[T]he records are just so inadequate in so many regards. … they’re not even reconcilable”. There were no building contracts “so it’s really hard to determine in fact what the company did and what it didn’t do. There’s just no records of any significance.”

  2. Notwithstanding Mr Hayes’ efforts to obtain all available documents, including by issuing notices to produce and subpoena in these proceedings, the husband continued to produce snippets of documentation shortly before and during the hearing, which put some ‘meat on the bones’ of what Mr Hayes had been able to divine until then.

  3. An adverse inference may be drawn in respect of the absence of documentary evidence to support a party’s case, where the party might be expected to be in possession of documents to corroborate their account: Jones v Dunkel (1959) 101 CLR 298 at 320; [1959] HCA 8 per Windeyer J, citing with approval John Henry Wigmore, Wigmore on Evidence (3rd ed, 1940), vol. 2, page 162: “The failure to bring before the tribunal some circumstance, document or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party …”; Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 at [134] (Callinan J); Ronchi v Portland Smelter Services Ltd [2005] VSCA 83 at [44] (Eames JA, with whom Buchanan JA agreed); Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445; [2011] VSC 184 at [131]–[132] (Croft J); Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98 at [112] (Henry J). The husband’s senior counsel accepted that a Jones v Dunkel inference could be drawn in respect of the absence of documents which his client might be expected to have produced. I readily draw such an inference.

  4. The implications of the lack of documentary evidence on the onus of proof should not be overlooked. As I noted in In the matter of Western Port Holdings Pty Ltd [2021] NSWSC 232; (2021) 150 ACSR 274 at [41]-[42], although the onus of proof is on the liquidator, it will commonly be the case that proof is not a straightforward exercise. The directors of the company may be unwilling to give evidence in support of the liquidator’s claim. The books and records of the company may be sub-standard or incomplete. Transactions may have been entered into at a time of financial distress when proper documentation was overlooked. The company may have been poorly managed such that transactions were ill-considered or unconventional. These difficulties do not shift the onus of proof. But, where there is a paucity of evidence, the Court may draw inferences. As Gleeson J explained in BCI Finances Pty Ltd (In Liq) v Binetter(No 4) [2016] FCA 1351; (2016) 117 ACSR 18 at [125]:

All evidence “is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted”: Coshott v Prentice (2014) 221 FCR 450; [2014] FCAFC 88 at [80], quoting Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970. This maxim also bears upon the appropriateness of deciding whether a fact has been proved when only limited evidence is available. In Ho v Powell (2001) 51 NSWLR 572; [2001] NSWCA 168 at [14], [15], Hodgson JA (with whom Beazley JA agreed) said:

[I]n deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision …

In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so …

Gleeson J’s judgment was relevantly affirmed on appeal in BCI Finances Pty Ltd (In Liq) v Binetter [2018] FCAFC 189; (2018) 132 ACSR 1.

FACTS

  1. The wife hails from Vietnam and the husband from China. Both immigrated to Australia, where they met and married in 1991. The wife had a daughter from a previous relationship, Ms Tong. The couple started a textile business called “Zhang Hong Trading" and made clothing from rented premises in Fairfield. In 1995, the couple incorporated Zhang Hong Trading Pty Ltd, of which the husband and wife were directors and equal shareholders. The business was successful. (Later, the daughter also ran her own business, Armone Corporation, selling garments that were manufactured overseas, coat hangers and other textile items. The wife worked in her daughter’s business. The wife was also a director of another company, ZH Trading Pty Ltd, in 1999 and, in January 2005, became a director of ZH (Holdings) Pty Ltd, of which she was a director until February 2014.)

  2. From 2000 to 2002, the couple purchased six properties together, including the Fairfield business premises and properties in Cabramatta, Canley Vale and Fairfield. Mr Marando acted as the solicitor on the conveyances. The properties were mostly for development. Some of the properties were developed into apartments and the apartments either sold or retained as rental properties.

The Company

  1. The husband wanted to do property development through a company. In September 2001, the Company was incorporated. Presumably, the name of the Company was a combination of the couple’s initials. The husband and wife became directors and equal shareholders. The Company opened a cheque account with St George Bank, ending 0474 (the Cheque Account).

  2. The daughter was the administration manager for the Company, assisting the husband in the preparation of accounts and claims, general bookkeeping, preparing correspondence and translating correspondence. “I collated the information, … I sent emails, I did the invoices of what he's instructed, like how much to claim, how much to ask the clients to claim.  I did errands.  I put the information, and I sent that to the accountant on his instructions.”  “I did the filing, I did the emails, I did … what I was asked to do.” The daughter also maintained financial records which she sent to the company's accountants, Nelson Liu & Co, which drafted financial statements and tax returns. The daughter said she gave these to the husband, “He did not give them back to me."

  3. As to the wife’s involvement in the Company, the husband said that the wife had no role although he did discuss major matters with her, for example, if he wanted to buy a property. Against this, the husband said, “me and my wife had been actually working for this company, sometime me and my wife we've been working for 24 hours a day. We had been working very hard. Very hard."

  4. The wife said she was not involved in any part of the business of the Company, had no knowledge or experience in the work that her husband did, and did not know the details of the Company’s financial affairs. This was at odds with an affidavit filed by the wife in the Family Court where the wife deposed, “I assisted to manage the property development business and attended to the administrative tasks in respect of the property development business”; while her husband was on-site managing the builders and contractors, the wife and daughter “organised the administration side of the business".

  5. In these proceedings, the wife said that the description in the Family Court affidavits “was not what I meant”. Rather, “I know that my husband was involved in building construction, and whenever he went home, if he needs any help, I would do … I collected all of the documents, papers that he scattered around the house." The wife insisted that she was not involved in the operation and administration of the Company, “I didn't know anything about what he did." The daughter also said that her mother did not take any part in the Company's operations, “She may have opened some letters or she may have [bought] folders, things like that.”

  6. I accept that the wife’s involvement in the day-to-day operations of the Company was minimal and her primary interest was in her own textiles business and the business later conducted with her daughter. But I do not accept that the wife knew nothing about the Company. Living in the same house as the husband, it is inherently likely that she was generally aware of what the Company was doing and was consulted on property purchases, including because her signature was needed on the documents associated with the purchase and related finance. Mr Marando also said that, when the wife came into his office, matters relating to the business of the Company were discussed.

The Company buys four properties

  1. In 2003 and 2004, the Company purchased the four properties which are the subject of these proceedings. The husband and wife accept that the properties were legally and beneficially owned by the Company.

Contracts exchanged for 110 Gladstone Street

  1. On 7 February 2003, the husband paid a deposit of $830 on 110 Gladstone Street, Cabramatta. On 9 February 2003, contracts were exchanged to purchase the property for $332,000. The Cheque Account then had a balance of some $1,300 and had largely been unused since it was opened.

  2. On 14 February 2003, Marando Solicitors, sent a facsimile to the husband, “Johnny, Please make cheque of $32,370.00 to Makinson and D’Apice Solicitors.” Presumably, this was a 10% deposit less the amount already paid by the husband. On 14 February 2003, the husband obtained a bank cheque in that amount (or $32,376.50 with charges). The funds were not drawn from the Cheque Account, although $347,563.85 was deposited to the account that day, bringing the balance to $348,846.98. On 21 February 2003, Maranda Solicitors sent a letter to the couple, requesting a cheque for $10,434 for stamp duty.

Contracts exchanged for 268 Cabramatta Road

  1. On 26 February 2003, contracts were exchanged to buy 268 Cabramatta Road, Cabramatta for $300,000. A deposit of $30,000 is recorded on the contract as having been paid, although a later settlement statement indicates that only $15,000 may have been paid. A cheque for $15,000 was drawn on the Cheque Account on 27 February 2003.

  2. On 27 February 2003, the couple re-financed a property they owned in Canley Vale mortgage with the Bank of Western Australia. After discharging the existing financier and paying associated fees, $279,235.16 was paid to the couple. These funds were deposited to the Cheque Account on 14 March 2003.

  3. On 5 March 2003, Mr Marando requested a cheque for stamp duty from the Company for $8,994 for 268 Cabramatta Road. A cheque in that amount was presented on the Cheque Account on 22 April 2003, when the transfer for 268 Cabramatta Road was stamped for duty.

Completion of purchase of 110 Gladstone Street

  1. On 16 April 2003, the vendors’ solicitors for 110 Gladstone Street sent cheque directions to Mr Marando in advance of settlement on 17 April 2003. Mr Marando asked the husband to draw bank cheques for the real estate agent ($10,260.80) and the vendors ($110,000 and $178,477.95). On 17 April 2003, a bank cheque was drawn from the Cheque Account for the real estate agent ($10,267.30 with bank fees) while the cheques for the vendors were drawn from an account of “ZH Trading Pty Ltd & Zha[ng]” ending 9044, being presumably a bank account operated by the couple’s other company.

  2. On 23 April 2003, the parties agreed to extend the completion date to 28 May 2003, with the deposit to be released to the vendor forthwith. On 24 April 2003, a cheque for $10,434 was drawn on the Cheque Account, presumably for stamp duty. On 29 April 2003, the purchase of 110 Gladstone Road was completed.

  3. On 11 June 2003, the Company executed a mortgage over 110 Gladstone Road in favour of IMB Ltd, to secure an advance of $265,600. The mortgage was stamped for duty on 12 June 2003, with duty payable of $1,005. Various payments were also made from the Cheque Account on 12 June 2003, including a payment of $1,018.97, which was presumably the expenses associated with completing the loan transaction, including duty. On 13 June 2003, $262,127.90 was deposited to the Cheque Account, presumably the net advance. I note also that $300,000 was transferred out of the Cheque Account the same day for “Cheque Number 39”. It is reasonable to think that the funds obtained from the financier were used to reimburse those who had provided funds to the Company to purchase the property in the first instance, although obviously the absence of accounting records makes it difficult to say for sure.

  4. By my calculations, the deposit was paid by the husband ($33,206.50), stamp duty, mortgage duty and the agent were paid from the Cheque Account ($21,720.27 in total) and the balance paid by “ZH Trading Pty Ltd & Zha[ng]” ($288,477.95 in total). Finance was then raised from IMB Ltd, with the nett proceeds of the loan paid into the Cheque Account. That is, of the $343,4070.74 outlaid to acquire the property, only 6% came from the Cheque Account, with the balance paid by the husband or ZH Trading Pty Ltd. However, having acquired the property, finance was obtained from IMB – secured over the property – which was likely used to reimburse those who had provided the initial funds to acquire the property as $300,000 was transferred from the Cheque Account on the same day that the loan funds were received into that account. By my calculations, if the $300,000 was used for that purpose, then $21,684.45 was not reimbursed. In the ordinary course, this remaining sum could be expected to be recorded in the accounts of the Company as a shareholder’s loan.

  5. The Company had a mortgage loan account with IMB ending 0745. Loan repayments to IMB began to be made from the Cheque Account.

Completion of purchase of 268 Cabramatta Road

  1. Completion of the purchase was delayed. In June 2003, IMB Ltd approved finance of $240,000 to the Company, secured over the property. On 17 June 2003, the vendors’ solicitors for 268 Cabramatta Road sent cheque directions to Mr Marando in advance of settlement, including $284,806.02 payable to the vendors. Mr Marando forwarded cheque directions to IMB Ltd. IMB provided a bank cheque of $236,835.44 whilst the Company provided the balance of $47,048.58 from the Cheque Account on 18 June 2003, including $1,512.06 to cover Mr Marando’s fees. A mortgage was registered on title, noting that $901 had been paid in duties.

  2. The purchase was completed on 20 June 2003. The Company had a mortgage loan account with IMB Limited ending 2366. Loan repayments to IMB began to be made from the Cheque Account. By my calculations, the acquisition of this property was funded by $71,042.55 paid from the Cheque Account and the balance by IMB Ltd. There were no payments made by the couple for 268 Cabramatta Road, although it does appear that the Cheque Account included funds which came from the couple, albeit not related to the acquisition of this property.

  3. Financial statements prepared for the Company for the 30 June 2003 financial year, dated 31 July 2003, record that the Company was then trading as ZH Import and was not profitable. The husband is recorded as having made an unsecured loan to the Company of $624,139.16 (Shareholder’s Loan Account).

  4. On 15 June 2004, the Company lodged a nil income tax return for the 2002 and 2003 financial years. The company did not lodge any further tax returns for another six years. Nor did the Company lodged an annual GST return from the 2004 financial year onwards, save for 2006 and 2009.

Purchase of 87 Hughes Street

  1. The Company agreed to purchase 87 Hughes Street Cabramatta for $982,000. On 5 September 2003, the Company opened a cheque account ending 8741 with the National Australia Bank (NAB Cheque Account). The couple may well have paid the deposit (it was not obviously paid from the Cheque Account or the NAB Cheque Account).

  2. On 24 September 2003, the Company executed a mortgage over 87 Hughes Street Cabramatta in favour of the National Australia Bank, to secure an advance of $786,000. Duty was paid in the amount of $3,085, which was paid by the bank as part of the drawdown. From Mr Hayes’ review of the transfer and mortgage, he has calculated that stamp duty of $39,680 was payable. A similar sum, being $40,454.64 was drawn by bank cheque from the Cheque Account on 27 October 2003. On 28 October 2003, the transfer was stamped for duty. The loan was drawn down on 3 November 2003, being National Australia Bank home loan account ending 5710. On 22 November 2003, the purchase was completed.

  1. Given the difference between the purchase price and the amount lent by the National Australia Bank, the deposit was likely 20% or $196,400. Of the total acquisition cost of $1,022,854.60, it may be that the couple provided 19.2%, the Company provided 4% and the balance was financed.

Purchase of 112 Gladstone Street

  1. On 11 March 2004, the Company exchanged contracts to buy 112 Gladstone Street, Cabramatta for $550,000. Although the husband said that the couple paid the deposit, on 19 March 2004, the Company paid a deposit of $26,100.

  2. On 25 March 2004, Mr Marando requested $20,244 for duty payable on the contract. On 8 June 2004, Mr Marando requested bank cheques be drawn for settlement, including four bank cheques each for some $130,000 payable to each of the vendors. On 8 June 2004, the bank cheques were drawn, including a cheque for $120,000 drawn from the Cheque Account. Other cheques were drawn by the husband ($130,395.51), the husband and wife ($10,538.65) and $20,538.65 (likely stamp duty), $80,000 and $120,000 from persons unknown. The purchase was completed on 11 June 2004. No mortgage was registered on title.

  3. On 15 October 2004, the Company executed a mortgage over 112 Gladstone Road in favour of Adelaide Bank Limited, to secure an advance of $418,000. Mortgage duty of $1,613 was paid, although not obviously from the Cheque Account and perhaps formed part of the loan advance. The loan account was an Adelaide Bank account ending 1835, but the bank statements are not available until 2009. Overall, it appears that, once the loan was finalised, the couple may have contributed some $46,615 to the acquisition of this property.

  4. In December 2004, the Company refinanced the IMB loan over 268 Cabramatta Road with Adelaide Bank which advanced $365,000 (mortgage duty paid of $1,401). The Company then had an Adelaide Bank loan account ending 8038 in respect of this loan but, again, the bank statements are not available until July 2009.

Source of funds

  1. The husband said that the deposits on the four properties were paid from the couple’s savings. The wife said the deposit and costs of the purchase were paid from the couple's joint savings, using “my own money", while the balance of the purchase price was borrowed in the name of the Company by a mortgage secured against the couple’s other properties. Whilst it does appear that, for some of the properties at least, some of the monies to acquire the properties came from the couple, none of the mortgages registered on the properties suggest that the finance was also secured over the couple’s other properties.

  2. The wife also said that the income earned from Armone Corporation was paid towards “mortgage repayments on our various properties", although did not specify whether these “various properties" included properties in the name of the Company. Nor is there any documentary evidence which supported such payments.

  3. Overall, Mr Hayes estimated that the amounts paid by the couple represented some 3% of payments made by the Company in respect of the properties. Based on Mr Hayes’ analysis of the available documents, the Company paid a total of $1,426,139.68 in respect of the four properties, comprising 428 transactions. Whilst Mr Hayes accepted – by dint of documents produced by the husband shortly before or during the hearing – that the couple had used some funds belonging to them personally to pay the deposit or acquisition costs for the purchase of the four properties, Mr Hayes remained unsure where the initial equity for the property purchases came from, “it could have come from company money, it could have come from other loan funds, it could have come from Mr and Mrs Zhang ‑ I ‑ I don't know.”

  4. Thus, the couple did contribute some funds to the acquisition of the four properties, although less than asserted and probably largely reimbursed by bank finance raised against the properties. To the extent that the couple was not so reimbursed, one would expect to see – in the ordinary course – their contributions recorded in the Shareholder’s Loan Account. However, no financial statements appear to have been prepared for the Company after the 2003 financial year until seven years later: see [62].

The Company becomes a builder

  1. In 2010, the Company obtained a building and contracting licence and began doing building work. In February 2010, the Company entered into a building contract with Bronte Properties Pty Ltd to construct ten apartments and car spaces in Waverley for $3.26 million (the Bronte development). St George provided construction finance, secured by a tripartite agreement between the bank, the Company and Bronte Properties executed on 7 April 2010. Also on 7 April 2010, the Company opened a St George business account in respect of the Bronte project ending 4158 (the Bronte Account).

  2. In 2010, the Company also began work on a project in Guildford, owned by Mr and Mrs Abi-Daher, but stopped work when the client stopped paying. The Company also worked on another project in Guildford owned by Ms Naboulsi but, again, stopped work after invoices stopped being paid. In June 2010, the Company entered into building contracts with the owners of two duplexes at Fenwick Street and Marion Street, Bankstown.

  3. In November 2010, the ATO issued penalties for the Company's failure to lodge tax returns and, in January 2011, the Company lodged nil tax returns for the financial years 2004 to 2006. In June 2011, some efforts appear to have been made to get the Company's financial records in order. Draft financial statements were prepared for the 2004 to 2009 financial years by Nelson Liu & Co. The financial statements are sparse: the Company made a loss in 2004 and 2005; there is no profit and loss statement for 2006; the Company made a profit in 2007 and 2008 and a loss in 2009. The Company had negative equity every year. As at 30 June 2009, the Shareholder’s Loan Account stood at $835,592.72. From June to November 2011, the Company lodged nil tax returns for 2007, 2008 and 2009 and has not lodged a tax return since.

Problems with the Bronte development

  1. The Company experienced problems being paid for its work on the Bronte development. The husband said he told the wife about these problems. It was proposed that the Company would be paid by the developer transferring Unit 8 in the development at a price to reflect what was then owing, and expected to be owed, in order to complete the development. The wife agreed that she heard from the husband that he wanted to use Unit 8 to pay money owed to the Company.

  2. On 5 July 2011, the husband met with the developer. Mr Marando attended, as did the wife and daughter. The husband said that the wife and daughter attended as the decision to purchase Unit 8 was a major decision for the Company; the daughter was there to translate for the wife. The daughter said she sat outside with her mother until the negotiations were complete. The husband said he discussed with the wife whether or not the Company should do a deal to get Unit 8 as this was the only way to be paid “because all these people are crooks" and the wife agreed that the Company should enter into the transaction.

  3. On 11 July 2011, the Company exchanged contracts to buy Unit 8 in the Bronte development for $1.3 million, although the Company was only required to pay the purchase price less the balance then due by Bronte Developments to the Company on account of unpaid building work, then agreed to be $750,000: special condition 51. The contract was to be completed on the later of 42 days after the contract, 28 days after registration of the strata plan or 90 days after the final occupation certificate: special condition 43.1.

  4. The husband said that he and his wife funded completion of the Bronte development and obtaining the necessary certificates. “We used our money to pay for everything." Whether this is true is unclear. A trust account maintained by Mr Marando for the couple shows that monies were transferred to the Company from August 2011 to October 2011 totalling $498,720. A trust account maintained by Mr Marando for the Company also shows that $153,031 was transferred to the couple. Mr Hayes has not been able to reconcile these payments with the Shareholder’s Loan Account or the Company’s accounting records generally.

End of marriage

  1. Also at this time, the couple separated; the wife went to live with the daughter. The wife’s medical notes record that, since June 2011, she was experiencing marital problems, “in process of divorcing”. According to the wife’s later application to the Family Court of Australia, the couple finally separated on 31 July 2011. In August 2011, it would appear that Mr Marando had received instructions from the wife to obtain a divorce and, as a first step, applied for a marriage certificate. In November 2011, the daughter accompanied the wife to Mr Marando’s offices, where the wife signed an application for divorce and paid the filing fee for it to be lodged with the court. For reasons unclear, the application was not filed (and, indeed, there is no evidence that an application was ever filed).

  2. Notwithstanding the marital breakdown, the husband continued to carry on the business of the Company and the daughter continued to work in the business as administration manager. The daughter says that the husband and the wife were not speaking to each other at this time other than in respect of their separation and divorce, and she no longer spoke to her mother about the ongoing operation of the Company. The wife tried to speak to her husband about a property settlement on numerous occasions but was rebuffed, sometimes in angry terms.

Completion of Bronte development

  1. As the Bronte development neared completion, Bronte Properties agreed to further reduce the purchase price of Unit 8 to effectively fund completion of the development and procure issue of an occupation certificate. According to an affidavit later affirmed by the husband in proceedings brought by Bronte Properties against the Company (the Bronte proceedings), on 9 March 2012, the husband met with Bronte Properties’ solicitor and director, together with the wife, the daughter and Mr Marando, at which meeting the husband said Bronte Properties owed over $1 million which was needed to pay tradesmen. It was agreed that, in consideration of the Company taking steps within seven days to complete the building works and obtain an occupation certificate, the sum then owing by Bronte Developments to the Company under the building contract was agreed to be $1,032,202. Further, Bronte Properties agreed to pay $100,000 within one month of the issue of the occupation certificate in reduction of that amount.

  2. The Company lodged a caveat on the title of the Bronte property. In June 2012, an occupation certificate issued. In November 2012, Bronte Properties instructed Tyrrells Property Inspections to carry out a final inspection of the building work and report any incomplete or defective work. Whilst Tyrrells reported that the majority of the building work was of satisfactory quality, a number of issues were reported which, in Tyrrells’ opinion, a court or tribunal would require the contractor to rectify or complete.

Solvency issues

  1. From 5 December 2012 on, the Cheque Account remained overdrawn. On 17 December 2012, Bronte Properties commenced the Bronte proceedings, seeking withdrawal of the Company’s caveat over the property. The husband moved into Unit 8.

  2. As already mentioned, the Company had not been paid over $1 million owed by the Bronte developer. On 12 January 2013, cheques began to be dishonoured on the Cheque Account. From January to September 2013, Mr Hayes observed eight dishonoured cheques in respect of the Cheque Account and, from August 2013 to February 2014, ten dishonoured cheques for the Bronte Account. In Mr Hayes’ experience, multiple dishonoured cheques indicate insufficient funds available when the cheque is presented for payment, being an indication of cash flow difficulties.

  3. From June 2013 to January 2014, Mr Hayes observed 17 ‘round-sum’ payments from the Bronte Account. In his experience, the use of multiple rounded sum payments on a recurring basis is an indicator that the Company was experiencing cash flow difficulties. In his experience, when a company insolvent, it tends to discharge its debts in full by a single payment to each of its creditors at or by the due date. If a company is not solvent or facing cash flow difficulties, it often attempts to satisfy its creditors by making multiple smaller round sum payments over a period that exceeds the agreed terms of trade. A single one-off payment is a more efficient and cost-effective method of paying debts and hence is the preferred method. There was no utility in making multiple rounded payments and generally a company will only do so if it is experiencing cash flow pressure.

  4. Meanwhile, on 16 January 2013, the daughter sent an email to Mr Marando advising that she would send a list of properties which the wife wished to either refinance or keep, in negotiations with the husband. Notwithstanding that the husband and wife were in the process of getting divorced, both appeared content for Mr Marando to act for both of them in the matter.

  5. On 11 February 2013, Bronte Properties’ solicitors provided a copy of Tyrrells’ report to Mr Marando and advised that the Company had failed to complete the building contract in accordance with its terms as the work was defective and not completed in a proper and workmanlike manner. Bronte Properties was said to have incurred substantial costs in finalising the building works and rectifying the defective work in order to obtain an occupation certificate; a substantial amount of defective work still required rectification. Bronte Properties claimed to have suffered damage in that it was unable to repay its mortgage with St George Bank and proceeded to terminate the building contract. In addition, Bronte Properties noted that the Company had yet to pay the deposit on Unit 8 and purported to terminate the contract for sale as well. Further cheques were dishonoured on the Cheque Account on 12 February 2013, 12 March 2013 and 12 April 2013.

Building work in Epping

  1. On 20 March 2013, the Company entered into a building contract for a project in Epping for $500,000 plus GST. The project involved building a detached duplex; the couple intended to live in one house and rent out the other once the work was complete. The contract term was 12 months and the owners expected to move in and rent out duplex in April 2014.

  2. The project did not get off to a good start. On 8 April 2013, the building certifier issued a notice of proposed order to the Company in respect of the work, given concerns raised with the manner in which the building work was being undertaken. On 23 May 2013, Parramatta City Council issued a stop work order. A further stop work order was issued on 18 June 2013 as the retaining walls were said to have been constructed contrary to the construction certificate and to encroach on the adjoining land. On 11 July 2013, the solicitors for the owners sent a letter of demand to the Company, noting that there had been no attendance on site to comply with the Council's orders and, if the listed breaches was not remedied within ten working days, they considered themselves entitled to end the building contract.

  3. Meanwhile, the husband wanted to develop the 87 Hughes Street property which, it will be recalled, was owned by the Company. On 6 May 2013, Mr Marando met with the couple to discuss this. Mr Marando’s file note records that the wife “doesn't want to be involved + has advised JOHN already." Of this meeting, Mr Marando said “what we were trying to work out is what Hughes Street would crystallise ultimately, and which would obviously assist in further discussions in relation to the property settlement”.

  4. On 16 May 2013, Bronte Properties filed a statement of claim against the Company in the Bronte proceedings, seeking a declaration that the contract in respect of Unit 8 had been terminated. In addition, Bronte Properties sought damages for incomplete building work, alleging that the Company had abandoned the building work in late March 2012. The husband was also said to be refusing to vacate Unit 8.

The Bank proceedings

  1. On 23 May 2013, Westpac appointed receivers and managers to Bronte Properties. The bank commenced possession proceedings against the Company and the husband (the Bank proceedings). On 31 May 2013, Kunc J made orders permitting the receiver to access Unit 8 and, on 3 June 2013, the bank's solicitors wrote to Mr Marando seeking access to the property. On 12 June 2013, the Company began to ‘round-sum’ payments from the Bronte Account, which Mr Hayes said is indicative of insolvency. The Company continued to have cheques dishonoured on the Cheque Account.

  2. On 9 August 2013, the bank's solicitors sent a letter of demand to the Company noting that, following an inspection of the Bronte property and a review of Tyrrell’s report, the bank had come to the conclusion that the works had not been carried out in a proper and workmanlike manner. It was not then known whether the bank would incur a loss following the sale of the units but the bank's rights were reserved under the tripartite agreement. The Company was requested to notify its professional indemnity insurer. Mr Marando discussed the contents of the letter with the husband and provided him with a copy of Tyrrells’ report. The frequency of dishonoured cheques and ‘round-sum’ payments increased in August 2013, with eight such payments.

Epping proceedings

  1. In November 2013, the Epping clients issued a notice of breach to the Company, asserting that the Company had failed to diligently proceed with the work and had last carried out work on site on 22 May 2013. The work carried out was said to be defective and incomplete, having regard to a building report and the council’s stop work order. In January 2014, the Epping clients commenced proceedings against the Company in the District Court of New South Wales, seeking damages for breach of statutory warranties and breach of contract (the Epping proceedings).

  2. In February 2014, the bank's solicitors wrote to Mr Marando, requesting that the Company vacate the Bronte site as rectification building work was to commence in April 2014, with four months required to complete the works. The bank lodged a home owner warranty insurance claim in respect of the Company. Attached to the claim were 18 building reports in support of the claim that items of work were defective or incomplete.

  3. In March 2014, the Epping clients served a notice of termination on the Company in respect of the building contract. Westpac's solicitors continued to request access to Unit 8.

  4. Mr Marando said he told the wife about the building defects claims made by Bronte Properties and the Epping clients; the wife was concerned about her liability as a director of the Company. According to Mr Marando, the wife said she did not want to be involved in the Company anymore and wanted her name out of it; the wife was “very concerned … about her personal liability" regarding the Company. The husband, on the other hand, was “quite confident he’d meet the claim”.

  5. The wife said she “did not hear" about the defects claim made by the Epping clients and could not recall whether she was aware in May 2014 of the building defects claim in respect of the Bronte, “I couldn't remember that, because during that time I was in a mental breakdown." The wife said she did not know that the Company's assets were at risk because of claims being made against the Company for defective building work.

  6. Whilst I accept that the wife was likely experiencing some mental anguish in the course of her efforts to reach a property settlement with her husband, I do not accept that she was unaware of the building defects claims or did not appreciate the implications of those claims. I also expect that the wife’s interest in the Company and its financial position at the time of these events was greater than she acknowledged, if for no other reason than she wanted to divide up the marital assets with the husband. The wife was a 50% shareholder in the Company and was keen to extract her interest. The wife also wished to protect herself from looming director’s liabilities given the building defects claims which the Company then faced. In this regard, I have not accepted the wife’s evidence that she was unaware of these matters but have preferred the evidence of Mr Marando.

EQUITABLE COMPENSATION

  1. In the alternative to orders under section 588FF(1)(b), the plaintiffs sought equitable relief including a constructive trust and equitable compensation. The plaintiffs only sought a constructive trust should the Court not order that the properties be transferred to the Company under section 588FF(1)(b). The claim for equitable compensation was pressed, being assessed by reference to the value of the assets depleted by the defendant's wrongdoing as at the date of restoration rather than at the date of the defendant depriving the plaintiff of their use: Kijurina v Taouk at [88], referring to Re Dawson [1966] 2 NSWR 211 at 216; In the matter of Purcom No 34 Pty Ltd (In Liq) (No 2) [2010] FCA 624 at [23(3)], referring to Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 at [35]. Equitable compensation was sought in the current value of the properties (being $6.62 million as at 17 May 2021), also accounting for the benefits received by the Company (at least, the mortgage liability) but also by the directors (for example, rent received). Given the paucity of records, it was observed that calculating such an amount may be difficult.

  2. As I am prepared to make an order under section 588FF(1)(b), I understand that the claim for a constructive trust is not pressed and I will not consider it further. As I understand it, the claim for equitable compensation was pressed as the plaintiffs appeared to proceed on the basis that an order under section 588FF can only be made to reflect the value of assets at the date of the “transaction”. The text of the section does not suggest this and I note that, in New Cap Re, Barrett J made orders to capture the benefits at the time of the judgment, albeit in the context of an order under section 588FF(1)(c) rather than section 588FF(1)(b).

  3. In any event, having found that the directors breached their fiduciary duties to the Company, it follows that equitable compensation would have been appropriate comprising the current value of the properties less the secured debt repaid by the directors (if, overall, the net equity in the four properties has not been eroded or destroyed by the mortgages now registered in favour of the third defendant) less the holding costs since September 2014 (being interest expense less rental income) borne by the husband and wife. As earlier mentioned, there is insufficient evidence to quantify such compensation and, were it necessary to do so, I would have permitted the parties a further opportunity to adduce further evidence on this score.

SHAREHOLDER’S LOAN ACCOUNT

  1. In the event that the transfers were not set aside, the plaintiffs submitted that the defendants were jointly indebted to the Company for the sum of $991,961.42, being “Trade and other Receivables”. Ironically, the husband submitted that there was no factual foundation for this. There was said to be no evidence that the husband or the wife agreed to enter into a loan with the Company whereby they assumed liability to it. The wife wanted a clean break from the Company; a loan requires consent and none came from her. In light of my reasons, it is not necessary to consider this alternate claim.

ORDERS

  1. For these reasons, I make the following orders:

Transfer of properties

  1. Order pursuant to section 588FF(1)(b) of the Corporations Act 2001 (Cth) that, within 30 days, the first defendant execute and deliver to the second plaintiff (the Company) a Transfer in respect of the land contained in folio identifier 59/8029, being 268 Cabramatta Road, Cabramatta NSW.

  2. Order pursuant to section 588FF(1)(d)(ii) of the Corporations Act 2001 (Cth) that, within 30 days, the first defendant execute and deliver to the Company a Transfer in respect of each of:

  1. the land contained in folio identifier Lot 1/SP93543, being Unit 1, 87 Hughes Street, Cabramatta NSW; and

  2. the land contained in folio identifier Lot 10/SP93543, being Unit 10, 87 Hughes Street Cabramatta NSW; and

  3. the land contained in folio identifier Lot 14/SP93543, being Unit 14, 87 Hughes Street, Cabramatta NSW; and

  4. the land contained in folio identifier Lot 20/SP93543, being Unit 20, 87 Hughes Street, Cabramatta NSW.

  1. NOTE that the transfer of properties in Order 1 and Order 2 does not affect the third defendant’s interest in said properties as registered mortgagee.

  2. Order pursuant to section 588FF(1)(b) of the Corporations Act 2001 (Cth) that, within 30 days of the date of these orders, the second defendant execute and deliver to the Company a Transfer in respect of each of:

  1. the land contained in folio identifiers A/18608, being 110 Gladstone Street, Cabramatta NSW; and

  2. the land contained in folio identifiers B/18608, being 112 Gladstone Street, Cabramatta NSW.

  1. Order pursuant to section 94 of the Civil Procedure Act 2005 (NSW) that the Registrar in Equity is authorised, in default of compliance with Orders 1, 2 and 4, and on application of the plaintiffs, to execute the Transfers in favour of the Company.

  2. NOTE that the transfer of properties to the Company pursuant to Order 1, Order 2 and Order 4, and the Company’s interest in those properties, may be subject to further orders to account to the defendants for any benefits received by the Company because of the Company’s transfer of properties to the defendants in 2014 (the Benefits), as described at [214]-[230] of the judgment given by Rees J on the date of these orders (the Judgment).

  3. Defer the question of costs until determination of what further orders should be made in respect of the Benefits.

Shareholder’s Loan Account

  1. Order pursuant to section 588FF(1)(g) of the Corporations Act 2001 (Cth) that the debt which the Company owed the defendants, recorded in the Shareholder’s Loan Account, may be proved by the defendants in the winding up of the Company.

Benefits conferred by defendants on the Company

  1. Direct the defendants, by 1 March 2022, to file and serve any further evidence on which they seek to rely, in respect of the Benefits including:

  1. the current level of indebtedness secured over the properties referred to in Order 1 and Order 2;

  2. the interest paid on any loans secured over the properties referred to in Order 1 or Order 2, from May 2014 to date; and

  3. the rental income earnt (either by the Company or the defendants) and associated expenses (such as management fees, repairs and maintenance) on the properties referred to in Order 1, Order 2 or Order 4 at any time.

  1. Direct the plaintiffs, by 1 April 2022, to file and serve any evidence in reply.

  2. Direct the defendants, by 15 April 2022, to file and serve any written submissions as to the Benefits and the appropriate orders which should be made, including under section 588FF(1)(g), and whether the defendants are content for this matter to be determined on the papers or require a further hearing.

  3. Direct the plaintiffs, by 30 April 2022, to file and serve any written submissions in reply and also advise whether the plaintiffs are content for the matter to be determined on the papers or require a further hearing.

  4. Parties to notify any errors or omissions with 14 days.

Amendment Notes:   On 16 February 2022, the parties notified errors and omissions in accordance with Order 13. The principal amendment sought was to change various parts of the judgment and orders to reflect the fact that, as pleaded, the husband retained four apartments, rather than two apartments, in the Hughes Street development. The first defendant opposed these amendments. Her Honour referred the parties to the evidence of Mr Hayes, on which her Honour had relied in formulating the judgment and orders, and invited the plaintiffs to provide further evidentiary references in respect of the additional two apartments. This was done, following which the first defendant consented to the proposed amendments, which were made under the ‘slip rule’ on 25 February 2022.

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Amendments

28 February 2022 - Amendment Notes:   On 16 February 2022, the parties notified errors and omissions in accordance with Order 13. The principal amendment sought was to change various parts of the judgment and orders to reflect the fact that, as pleaded, the husband retained four apartments, rather than two apartments, in the Hughes Street development. The first defendant opposed these amendments. Her Honour referred the parties to the evidence of Mr Hayes, on which her Honour had relied in formulating the judgment and orders, and invited the plaintiffs to provide further evidentiary references in respect of the additional two apartments. This was done, following which the first defendant consented to the proposed amendments, which were made under the ‘slip rule’ on 25 February 2022.

01 March 2022 - 2nd Defendant's representation: Mr E Young and Ms F McNeil

Decision last updated: 01 March 2022

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Cases Citing This Decision

12

Changela v Dracoma Pty Ltd [2025] NSWCA 186
JM World Au Pty Ltd (in liq) v Kim [2025] NSWSC 995
JM World Au Pty Ltd (in liq) v Kim [2025] NSWSC 995
Cases Cited

86

Statutory Material Cited

6

Ansell Ltd v Davies [2008] SASC 203
Ansell Limited & Ors v Davies & Ors [2008] HCATrans 373
Ascot Investments Pty Ltd v Harper [1981] HCA 1