LCM Operations Pty Ltd v Rabah Enterprises Pty Ltd

Case •

[2023] NSWSC 590

•

02 June 2023

No judgment structure available for this case.

Supreme Court


New South Wales

  • Amendment notes
Medium Neutral Citation: LCM Operations Pty Ltd v Rabah Enterprises Pty Ltd [2023] NSWSC 590
Hearing dates: 7, 8 March 2023, last submissions 6 April 2023
Date of orders: 2 June 2023
Decision date: 02 June 2023
Jurisdiction:Equity - Commercial List
Before: Rees J
Decision:

Judgment for plaintiff.

Catchwords:

CONTRACTS — brothers undertake property development through two companies — defendant company owns land and provides funds — related company is project manager — oral agreement — project manager charges $14.8M fee for construction including cost of build — fee recorded in “financial records” of both companies — defendant claims tax deduction but does not pay fee — project manager does not remit GST on fee — project manager wound up by ATO — brothers’ explanation of arrangement logically uninviting — post-contractual conduct — claim in debt successful.

SET-OFF — whether right to set-off loans made by defendant — contractual right of set-off — principles at [182]-[184] — whether right of set-off inferred from conduct — oral agreement — post-contractual conduct — no contractual right of set-off.

RESTITUTION — Quantum meruit — principles at [208]-[210] — defendant freely accepted benefit of project manager’s services — reasonable person would have realised project manager would expect to be paid — unjust for defendant to retain benefit without making restitution.

Legislation Cited:

A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act) ss 7-1, 9-5, 9-10(2), 29-5(1), 29-10

Corporations Act 2001 (Cth) ss 286, 553C, 1305

Income Tax Assessment Act 1997 (Cth) s 6-5(4)

Cases Cited:

Advanced Holdings Pty Limited as Trustee for The Demian Trust v Commissioner of Taxation [2021] FCAFC 135; (2021) 113 ATR 508

Angelopoulos v Sabatino (1995) 65 SASR 1

Apand Pty Limited v The Kettle Chip Co (1994) 52 FCR 474

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

Australian Securities and Investments Commission v Rich [2005] NSWSC 417; (2005) 191 FLR 385

Banque Commerciale SA (EnLiqn) v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279

British Eagle International Airlines Ltd v Compagnie Nationale Air France (1975) 1 WLR 758

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

Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445; [2011] VSC 184

Commercial Factors Ltd v Maxwell Printing Ltd [1994] 1 NZLR 724

Dare v Pulham [1982] HCA 70; (1982) 148 CLR 658

Equuscorp Pty Ltd v Haxton [2012] HCA 7; (2012) 246 CLR 498

Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89

Federal Commissioner of Taxation v Cassiniti [2018] FCAF 212; (2018) 266 FCR 385

Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336

Gibson Motorsport Merchandise Pty Limited v Forbes [2005] FCA 749

Gould & Birbeck & Bacon v Mount Oxide Mines [1916] HCA 81; (1916) 22 CLR 490

Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609

HastieGroupLtd(InLiq)vMultiplexConstructions Pty Ltd (formerly Brookfield Multiplex Constructions Pty Ltd) (No 3) [2022] FCA 1280

Hegarty v Keogh (No 2) [2023] SASCA 30

In the matter of Pulse Interactive Pty Limited (in liquidation) (2019) 134 ACSR 461; [2019] NSWSC 22

In the matter of Shot One Pty Ltd (in liquidation) [2017] VSC 741

Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298

JR Consulting & Drafting Pty Ltd v Cummings (2016) 239 ALR 625

Lampson (Australia) Pty Ltd v Fortescue Metals Group Ltd (No 3) [2014] WASC 162

Leotta v Public Transport Commission of New South Wales (1976) 9 ALR 437

Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93

Lym International Pty Limited v Marcolongo (2011) 15 BPR 29,465; [2011] NSWCA 303

MannvPatersonConstructionsPtyLtd (2019) 267 CLR 560; [2019] HCA 32

National Australia Bank Ltd v Idoport Pty Ltd [2007] NSWSC 1349

Opal Maritime Agencies Pty Ltd v The Proceeds of Sale of the Vessel MV “SkulptorKonenkov” (2000) 98 FCR 519; [2000] FCA 507

Pavey&MatthewsPtyLtdv Paul [1987] HCA 5; (1987) 162 CLR 221

Payne v Parker [1976] 1 NSWLR 191

Queensland Phosphate Pty Limited v Korda and Shepard (as joint and several liquidators of Legend International Holdings Inc (in liq)) [2017] VSCA 269

Ronchi v Portland Smelter Services Ltd [2005] VSCA 83

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

Southern Textile Converters Pty Ltd v Stehar Knitting Mills Pty Ltd [1979] 1 NSWLR 692

United Dominions Corp Limited v Brian Pty Limited [1985] HCA 49; (1985) 157 CLR 1

Vasco Investment Managers Ltde v Morgan Stanley Australia Ltd [2014] VSC 455

Whitton v Regis Towers Real Estate Pty Ltd (2007) 161 FCR 20; [2007] FCAFC 125

Young v Queensland Trustees Ltd [1956] HCA 1; (1956) 99 CLR 560

Texts Cited:

S R Derham The Law of Set-Off (4th edition, 2010)

N C Seddon and R A Bigwood, Law of Contract (11th edition, 2017)

Category:Principal judgment
Parties: LCM Operations Pty Ltd (Plaintiff)
Rabah Enterprises Pty Ltd (Defendant)
Representation:

Counsel:
Mr LE Edwards / Mr J Nixon (Plaintiff)
Mr DP Robinson SC / Mr MA Collins (Defendant)

Solicitors:
Stacks Law Firm (Plaintiff)
Armstrong Legal (Defendant)
File Number(s): 2020/262271

JUDGMENT

  1. HER HONOUR: The defendant, Rabah Enterprises Pty Ltd, is sued for $14.8 million said to be owed to a related company, 316 Group Pty Ltd (in liquidation). The plaintiff sues as assignee of 316 Group’s chose in action, having purchased this right from the company’s liquidator.

  2. In short, brothers Nouredeen and Youssef Abdul-Rahman undertook a property development in Burwood, using the two companies. Nouredeen's company, Rabah, owned the land and provided funds for construction, including by way of bank finance. Nouredeen and Youssef's company, 316 Group, was the project manager.

  3. On conclusion of the development, 316 Group charged Rabah a fee for the construction of the project, comprising the cost of construction and an uplift, presumably for its services. The total fee of $14.8 million (including GST) was consistently reported by both companies in their Business Activity Statements (BAS) statements, financial statements (albeit unsigned) and Rabah’s income tax return. Whilst Rabah claimed a tax deduction for the fee, it did not pay the fee. Nor did 316 Group remit the GST; it was wound up on the application of the Australian Taxation Office (ATO). For reasons which follow, 316 Group is entitled to the fee without deduction.

EVIDENTIARY MATTERS

  1. The plaintiff relied on the evidence of portfolio manager and chartered accountant, Justin Ward, and expert witness, engineer Geoffrey Bell. Mr Bell was cross-examined and gave evidence in a careful, precise and impressive manner. I accept both of their evidence.

  2. The defendant relied on the evidence of director, Nouredeen Abdul-Rahman, and former director (and older brother), Youssef Abdul-Rahman. Without intending any disrespect, I will refer to these gentlemen and other family members by their first names. Both were cross-examined.

  3. Nouredeen was an evasive witness, who gave both unsolicited remarks and non-responsive answers. His evidence was often inconsistent. Nouredeen both maintained that he did not understand the transactions in question and accepted that he was a sophisticated businessman. Nouredeen said that he did not authorise Rabah’s accountant, Joseph Hassan, to lodge Rabah’s 2016 tax return but maintained that he ran the company. It is unlikely that an accountant would prepare and lodge a tax return on a frolic of their own. Where Nouredeen accepted that he has never given instructions to amend the tax return in question, the improbability of his evidence was heightened. I have approached his evidence with caution.

  4. Nouredeen’s evidence was often unlikely and at odds with contemporaneous documents: see [108]. For example, Nouredeen disagreed with the plain import of a BAS, in contrast to his later remark, “It’s black and white, paperwork doesn’t lie”: see [88]. Nouredeen disclaimed having seen multiple key documents before, including documents exhibited to his affidavit: see [74], [76], [87], [104], [106], [108], [120] and [126]. This evidence became increasingly unlikely.

  5. Youssef suffered from similar problems, but to a lesser extent. Youssef appeared more straightforward, although some of his evidence did not make much sense. Youssef’s evidence was also at odds with contemporaneous records (see [110]) and suffered from inconsistency (see [127] and [129]). I have approached his evidence with caution.

Jones v Dunkel

  1. The plaintiff submitted that the Court should draw an adverse inference in respect of the defendant’s failure to call its accountant, Mr Hassan, its builder, Ahmed Zeitoun, and third parties who were said to have transferred funds to 316 Group at Rabah’s direction: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 at 308 (per Kitto J). The defendant submitted that no adverse inferences should be drawn.

  2. I agree that Mr Hassan is a person who it would be natural for the defendant to call; he may be regarded as “in the camp” of the defendant or “a witness likely to be friendly to the interests of the other party”: Payne v Parker [1976] 1 NSWLR 191 at 201-202 (per Glass JA); Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336 at 343 (per Kirby P with Mahoney and Clarke JJA agreeing). Mr Hassan was a central character and the former accountant for Nouredeen, Youssef, Rabah and 316 Group. The defendant's failure to call this witness was not explained. I readily infer that Mr Hassan’s evidence would not have assisted the defendant’s case.

  3. As to third-party payors, Omar and Mahomed are Nouredeen’s brothers and ‘in his camp.’ Other third-party payors were acquainted with Nouredeen and said to have acted at his direction when transferring funds to 316 Group. It is unclear from the contemporaneous records whether some of these payments were loans and, more specifically, whether the lender was the third party or Rabah. The accounting entries which record these payments are devoid of detail. Whilst Nouredeen asserted that all of these loans were effectively from Rabah, the matter could have been clarified if the payors had given evidence. There was no explanation as to why the third-party transferors were not called, save for the principal of Metro Tipper Hire, who has since passed away. I infer that their evidence would not have assisted the defendant.

  4. As to Mr Zeitoun, it is not necessary for a party to call an unnecessary witness: Apand Pty Limited v The Kettle Chip Co (1994) 52 FCR 474 at 490 (per Lockhart, Gummow and Lee JJ). What evidence could the builder have given which would be relevant to a fact in issue? Whilst the plaintiff broadly accepted the nature of the arrangement asserted by the defendant – Rabah would pay 316 Group for construction and project management services at, effectively, cost plus 8% per annum – the defendant went further to contend that 316 Group did not, in fact, provide project management services. Rather, the purpose of the arrangement was for Youssef to obtain work experience, including by working under Mr Zeitoun. A person who could shed light on both matters is the builder. There was no explanation as to why Mr Zeitoun was not called. Where the builder was retained by Rabah, I agree that he was in the defendant’s camp. I infer that his evidence would not have assisted the defendant.

Documents

  1. A party’s failure to produce documentary evidence to corroborate their account, where they might be expected to be in possession of such documents, may also give rise to an inference that such documents as they may be expected to have would not support their account: Jones v Dunkel at 320 (per Windeyer J), citing with approval Wigmore on Evidence (3rd ed., 1940, Little, Brown and Co.), (“the failure to bring before the tribunal some circumstance, document or witness …”); Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 at [134] (per Callinan J); Ronchi v Portland Smelter Services Ltd [2005] VSCA 83 at [44] (per Eames JA, with whom Buchanan JA agreed, noting that “the Jones v Dunkel principle can equally apply to missing documents as to missing witnesses”); Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445; [2011] VSC 184 at [131]–[132] (per Croft J); Sino-Resource Imp & Exp Co Ltd v Oakland Investment Group Ltd [2018] QSC 98 at [112] (per Henry J).

  2. The plaintiff was a stranger to events and put forward a largely documentary case, based on the material it had been able to obtain via the compulsory processes of this Court and the Federal Court of Australia. The defendant produced little by way of documentation, either in discovery or evidence. The defendant submitted that this was because the arrangements were oral and there were no documents.

  3. The evidence indicated, however, that the defendant may have had records but did not collate or adduce the records. When Nouredeen was asked whether he kept any records at the time of transfers from Rabah to 316 Group, he said “I can't remember, I would've maybe had a bank slip or a deposit or maybe got a photo sent to me or an email, or maybe a bank …”. Nouredeen said he had invoices at the office or in garage storage. As to whether he had ever given these documents to his solicitors, “They never asked for them I think.”

  4. Accepting that family companies may operate with a degree of informality, the lack of documentation in this case remains stark, particularly where Rabah appears to have used a bookkeeper (see [29]) and both companies used an external accountant. Where documents concerning the defendant’s finances may have been expected to be brought forward to corroborate its defence but were not, I infer that such documents would not have assisted the defendant.

FACTS

  1. It is convenient to first set out the facts as they appear from the contemporaneous documents and then set out the defendant’s version of events at [90]. Whilst I considered the defendant’s version of events in tandem with the contemporaneous documents, the defendant's version of events can be better understood when relayed separately.

  2. Nouredeen has worked in the construction industry for many years, largely in civil contracting (quarrying and excavation, earthworks, land rehabilitation and subdivisions), including with his older brothers, Youssef and Omar. In the course of these endeavours, Nouredeen has become a director and shareholder in Lion Quarries Pty Ltd, Ultimate Haulage Pty Ltd and Lion Civil Group Pty Ltd. Nouredeen had also done some property development with Youssef and Omar.

  3. In 2010, Nouredeen was in funds and spoke to Youssef about working on another development together. Both brothers used the same accountant, Mr Hassan, who was instructed to set up a new company.

Rabah

  1. Rabah was incorporated in July 2010. Nouredeen and Youssef became directors and equal shareholders. The registered office of the company was the office of Mr Hassan. The principal place of business was Nouredeen’s home in Kembla Street, Enfield, where he lived with his de facto partner, Dounya Barbour. According to the information provided to the Australian Securities & Investments Commission (ASIC), Youssef lives there too.

  2. In August 2010, Rabah completed the purchase of a property at 316 Parramatta Road, Burwood for $2.51 million. Nouredeen paid for the property. Nouredeen and Youssef discussed Youssef paying half of the purchase price, when he was able to do so.

  3. Plans and reports were assembled in support of a development application. In July 2011, Mackenzie Architects lodged a development application for a mixed commercial and residential development on the Burwood property, with an estimated cost of $6.25 million.

  4. In September 2011, Nouredeen ceased to be a director of Rabah, leaving Youssef as the sole director.

  5. In June 2012, Burwood Council approved the development application on the basis of a Deferred Commencement Consent pursuant to clause 80(3) of the Environmental Planning and Assessment Act 1979 (NSW). Before the development consent became operative, an easement for drainage had to be obtained over a downstream property.

  6. Shortly after development consent was granted, Nouredeen became a director of Rabah again, in the place of Youssef. At this time, the defendant contended the brothers discussed a proposal for Youssef to nevertheless project manage the development, to which I will return at [91].

Construction finance

  1. In October 2012, Australia and New Zealand Banking Group Ltd (ANZ) offered to provide $10.529 million construction finance to Rabah, to be guaranteed by Nouredeen and secured by a mortgage over the Burwood property.

  2. In January 2013, Ms Barbour became a director of Rabah. Youssef’s shares in the company were transferred to Ms Barbour. Youssef said the shares were taken off him and he could not afford to buy the shares.

  3. Rabah opened a bank account with Bank of Queensland Ltd (BOQ). I note that, until Rabah opened a bank account, rates and water for the Burwood property appear to have been paid from Lion Civil’s bank account (in May/June 2012 and March 2013). Rates and water were then paid from Rabah’s bank account in June 2013 and thereafter. According to handwritten notes on Lion Civil’s September 2013 bank statement, a quantity surveyor was paid from this account in relation to the Burwood property ($23,090).

  4. The bank statements for Lion Civil are in evidence from May 2012 on, from which it appears to have been a substantial business employing a bookkeeper, “Toni”, who was regularly paid each month. The bank statements for Lion Civil and Rabah appear to have been reviewed by such a person, in the course of doing a bank reconciliation. Items are ticked and handwritten notes added including, apparently, account numbers.

316 Group

  1. On 12 February 2014, a transfer granting an easement was registered on the title of the Burwood Property. Presumably, this meant that the development consent could become operative.

  2. The same day, 316 Group was incorporated. Nouredeen and Youssef were appointed directors and became equal shareholders in 316 Group. The registered office of 316 Group was, again, Mr Hassan’s office. According to the information provided to ASIC, Nouredeen and Youssef were both still living in the same house in Kembla Street, Enfield. However, the principal place of business of 316 Group was in King Street, Enfield. I note that this address corresponds with Youssef’s address given in his affidavits in these proceedings; I expect he actually lived in King Street, Enfield. The defendant says the proposal for project management was then implemented, to which I will return at [100].

  3. Nouredeen said he was not aware that he was a director and shareholder of 316 Group until after these proceedings were commenced. This seems unlikely, where Nouredeen’s accountant, Mr Hassan, appears to have been involved in setting up 316 Group. There was no reason for Nouredeen’s role in the company to have been kept a secret from him. The fact that Nouredeen was appointed as a director and equal shareholder in the company is consistent with the brothers’ intention to work together on the Burwood project, as they had worked together on previous property developments. Nouredeen said he never participated in the management of 316 Group. I accept that Youssef ran 316 Group.

  4. On 17 February 2014, the Council issued development approval.

  5. Nouredeen said that, in March 2014, demolition and excavation work began, undertaken by himself and Lion Civil. There are no obvious bank statement entries to support this and the construction certificate for this stage of the project was not issued until May 2014. More certain, in March 2014, rates and water for the Burwood property were paid from Rabah’s bank account, together with “Burwood fuel” of $500. In April 2014, further payment was made from Rabah’s bank account to Mackenzie Architects of $15,000.

Building contract

  1. Buildrite submitted a tender – addressed to Youssef at Rabah – to construct the development for $9.256 million inclusive of GST. On 20 May 2014, Rabah entered into a building contract with Ahmed Zeitoun (trading as Buildrite), at a somewhat lower contract price of $8.7 million including GST. Noteworthy, the contact details for Rabah were those of Youssef, including his mobile telephone number and address in King Street, Enfield. Presumably, if the builder wished to communicate with the owner, he would contact Youssef.

  2. On 22 May 2014, the Council issued a construction certificate for Stage 1 of the project, being bulk excavation, shoring, piling and the basement slab. Council’s fees were paid by bank cheques drawn with funds from Lion Civil’s bank account ($21,885) and Rabah’s bank account ($329,078).

  3. On 1 June 2014, 316 Group opened its own bank account with Commonwealth Bank of Australia (CBA) ending 3410. On 16 June 2014, East St Development Pty Ltd transferred $65,000 to 316 Group’s bank account, placing it in funds. East St Development was Omar’s company. The transfer was described on both 316 Group and East St Development’s bank statements as a loan to 316 Group. 316 Group began to pay bills.

  4. In July 2014, Nouredeen and Youssef’s brother, Mohamad, transferred various amounts to 316 Group’s bank account: $15,000 on 14 July 2014 and $1,700 on 22 July 2014. The transfers were not described as loans in either the payor or payee bank statements. On 25 July 2014, a further $60,000 came into 316 Group’s bank account, described as a loan from Rabah.

  5. In August 2014, a further “Loan” was deposited to 316 Group’s bank account in the amount of $74,924.11, although the lender is not stated. A further $80,034.80 was deposited to the account by Omar, albeit not stated to be a loan. Lion Civil paid $20,146.50 to 316 Group’s bank account, with the description “KJH truck hire box”. Presumably, Lion Civil was paying a development expense.

  6. On 12 September 2014, the Council issued a construction certificate for Stage 2 of the project, being the remainder of building works.

  7. In September 2014, Lion Civil transferred $277,159.05 to 316 Group’s bank account for Lidcombe tip fees. Again, Lion Civil was presumably paying a development expense. From 22 to 29 September 2014, Mohamad progressively transferred $50,000 to 316 Group’s bank account. The deposits were not recorded as a loan in either the payor or payee’s bank statements.

Bank drawdown

  1. On 18 September 2014, the first Progress Drawdown Report was issued by ANZ’s quantity surveyor. The features of this report, which remained consistent for the ensuing seven reports, are noteworthy. First, on the cover page, the representative for Rabah was noted as Youssef. Second, the instructions recorded in the opening paragraph noted that “following the recent request from Mr Youssef Abdul-Rahman (Owner), we inspected the site … and met with Mr Youssef Abdul-Rahman.”

  2. Third, the quantity surveyor referred at various points to information provided by Youssef in respect of the project, “Mr Youssef Abdul-Rahman confirmed the following …”. Fourth, from the Second Progress Drawdown Report on, the quantity surveyor also referred to matters confirmed by Toni Nicoletti of Lion Civil Group, which presumably had some role in the development. However, from Progress Drawdown Report 5 on, Youssef also becomes the representative of Lion Civil Group.

  3. Fifth, no mention was made of Nouredeen. That is, according to the Progress Drawdown Reports at least, Youssef was Rabah’s representative (and later Lion Civil’s representative as well) who dealt with the quantity surveyor, informed the quantity surveyor when the site was ready for a further inspection, and provided information as sought.

  4. The first drawdown of the ANZ facility took place on 9 October 2014, being $2,173,981. Of this, $2.1 million was deposited to 316 Group’s account, from which bills continued to be paid. The second Progress Drawdown Report soon followed, with a second drawdown of $805,513 on 30 October 2014, which was deposited in Rabah’s ANZ transaction account.

  5. In November 2014, Nouredeen made three transfers, each of $200,000, to a Commonwealth Bank account ending 6022 with the descriptions “Loan”, “Pay loan” and “Loan” respectively. There are corresponding deposits in 316 Group’s bank account (ending 3410), with the descriptions “Pay loan back”, “316” and “Lo[an]” respectively. It is not entirely clear what these transactions effected, save that one of the transfers of $200,000 appears to have been Nouredeen repaying a loan.

  6. On 12 December 2014, the third drawdown of $956,013 was deposited into Rabah’s ANZ transaction account. Of this, $195,242 was transferred to 316 Group’s CBA account on 17 December 2014. A further $1,600,000 was transferred to 316 Group’s CBA account on 22 December 2014, comprising effectively the balance of the second and third drawdowns.

  7. I note that Nouredeen signed the three drawdown notices which are in evidence. That is, whilst the Progress Drawdown Reports and the building contract indicate that Youssef was the builder and quantity surveyor’s contact in respect of the development, Nouredeen was responsible for the financial side. This is hardly surprising, where Nouredeen and his partner owned Rabah, and Nouredeen guaranteed repayment of the ANZ facility.

  8. In December 2014, Nouredeen transferred $400,000 and $50,000 to a Commonwealth Bank account ending 6022. These transfers were also deposited to 316 Group’s CBA account, with the descriptions of “Burwood” and “Loan” respectively. At least the second transfer of $50,000 appears to have been a loan by Nouredeen to 316 Group.

Expansion of development

  1. On 22 December 2014, Ghazi Al Ali architect lodged a further development application in respect of the Burwood development, for an additional residential flat building at an estimated cost of $2,121,814.

  2. The fourth drawdown of $1,082,250 took place on 29 January 2015 and was deposited to Rabah’s ANZ transaction account. Of this, $983,158 was transferred to 316 Group on 27 February 2015. The fifth drawdown took place on 7 April 2015, in the amount of $1,083,184. The funds were deposited to 316 Group’s CBA account.

  3. On 7 April 2015, Metro Tipper Hire wrote a cheque to 316 Group in the amount of $29,885, which was deposited to 316 Group’s account. Nouredeen said this was a loan to 316 Group, made at his request. Metro Tipper Hire was owned by a friend of his, who has since passed away, “There was business between me and him at the time … he owed me some money as well, so he paid it to Rabah.” Certainly, the bank statements for the various companies in evidence contain numerous transactions involving Metro Tipper Hire. Beyond this, the bank statements shed no light on whether the deposit was a loan, or whether any loan was from Metro Tipper Hire or Rabah.

  4. On 22 May 2015, Youssef sent an email on behalf of 316 Group to the ANZ in respect of Rabah, attaching a deed of agreement for an easement. On 28 May 2015, the Council issued a further approval in respect of the development, approving a new layout of the front building, now with two business suites, 12 serviced apartments and a lift.

  5. 316 Group’s ledger for the 2016 financial year include a liability account, “Loans.” Whilst the initial “R” is recorded against all loans, this is not a reference to “Rabah” but to receipts, given how the initial is deployed elsewhere in the ledger. The opening balance for the “Loans” account on 1 July 2015 was $6,977,630.25. On 2 July 2015, a further loan of $30,000 is recorded, corresponding to a cheque deposit in 316 Group’s bank account. The lender is not identified in either the bank statement or the ledger. On 3 July 2015, Lion Civil’s bank statements records a “Loan to 316” of $100,000, which was deposited to 316 Group’s account and added to the “Loans” account in the ledger. On 28 July 2015, the sixth drawdown of $417,963 was deposited to 316 Group’s account, and added to the “Loans” account in the ledger.

  6. On 20 August 2015, the quantity surveyor reported that the project was now 90% complete following an inspection at the request of Youssef. Further, in respect of Council’s further development approval:

It was re-confirmed by Mr Abdul-Rahman that the additional approval shall be funded privately by the Developing Firm …

It is also important to note that the main rear building has reached Practical Completion. Mr Abdul-Rahman is organising with the Private Certifier, an Interim Occupation Certificate for this portion of the Development. …

…

In our meeting on 20 August 2015, Mr Abdul-Rahman verbally confirmed that the cost to complete of the overall Project (all approvals to date) shall be in the vicinity of $900,000 (excl GST).

From reading the full report, the reference to Mr Abdul-Rahman is to Youssef.

  1. It would appear that ANZ was concerned as to how the expanded development would be funded. On 21 August 2015, $1 million was transferred from a solicitor’s trust account in the name of Omar to 316 Group. The accountant, Mr Hassan, also sent an email to ANZ, copied to Nouredeen and Youssef, in respect of 316 Group, confirming that 316 Group “holds and has access to the sufficient cash balances to complete the additional 12 units granted pursuant to the s.96 approval of 28 May 2015 in addition to the funds from the ANZ Progress Drawdown Facility.” No entry was made in the “Loans” account in 316 Group’s ledger. The defendant submitted that this was an error. It may well be; the deposit was recorded as a reduction in the company’s “Investment Account.”

  2. On 28 August 2015, a construction certificate was issued in respect of the additional portions of the building. On 5 September 2015, Youssef emailed the bank, copied to the quantity surveyor, attaching a certificate of currency in respect of workers compensation insurance.

  3. On 7 September 2015, the seventh drawdown in the amount of $846,260 was deposited to 316 Group’s CBA account. This figure was not added to 316 Group’s “Loans” account in the general ledger but, like the $1 million from Omar, was recorded as a reduction in the company’s “Investment Account.”. What was recorded in the “Loans” account was a repayment of $20,000 and a journal entry increasing the “Loans” account by $5,928 (apparently in respect of PAYG wages).

Completion of development

  1. On 20 October 2015, ANZ issued a notice of default to Rabah, as the project had not reached practical completion by the required date of 30 June 2015. On 20 November 2015, Nouredeen delivered the deposited plan to New South Wales Land Registry Services. On 15 December 2015, an interim occupation certificate was issued. On 16 December 2015, Youssef emailed the strata plan to ANZ, copied to the quantity surveyor.

  2. On 18 December 2015, the final progress drawdown report was issued. The quantity surveyor advised that the project had reached practical completion and an interim occupation certificate had been obtained. The quantity surveyor also noted: (original emphasis)

Mr Youssef Rahman (Developing Firm) confirmed that he is currently organising the required Strata Insurance Policy. …

Mr Rahman also confirmed, that the lift installation for the front building is the last remaining item in obtaining the Final Occupation Certificate. … this item is expected in mid-January 2016 and forms part of the additional works which are being funded privately by the Developing Firm.

  1. In December 2015, East St Development transferred $33,000 to 316 Group’s CBA account, described as loans in the bank statements and recorded as such in 316 Group’s “Loans” account. On 9 December 2015, according to the “Loans” account, a further loan of $57,000 was made. However, according to 316 Group’s bank statement, this was a payment from Sydney Water. The defendant does not suggest this was a loan.

  2. On 23 December 2015, Nouredeen signed the final drawdown notice. The bank also restated the terms of the facility: the facility limit was now $9.888 million, to be repaid on 29 February 2016. In addition to the security already provided, the bank now required an unlimited guarantee from Lion Civil, together with individual guarantees limited to $9.888 million from Ms Barbour and Youssef.

  3. On 24 December 2015, ANZ completed the final drawdown request, paying $1,368,236 to 316 Group. The total amount drawn down then stood at $9,198,158.34. The drawdown was added to 316 Group’s “Loans” account. A further amount of $59,928 was also added on 30 December 2015 by way of journal entry, apparently for PAYG wages.

  4. On 25 January 2016, $30,000 was paid from 316 Group’s bank account in respect of “loan to east str.” Presumably, this was to repay the loans advanced by East St Development in December 2015: see [61]. However, the repayment was not recorded in 316 Group’s “Loans” account.

  5. In February 2016, the strata plan was registered, comprising 51 lots. In March 2016, Rabah completed the sale of 17 units for $15.716 million. The proceeds of sale were paid to ANZ; the facility was repaid and the ANZ accounts closed on 18 March 2016. On completion of the development, Ms Barbour ceased to be a director of Rabah.

  6. Although ANZ was repaid $9,551,894.19, no entry was made in 316 Group’s “Loans” account. Where this account appears to have recorded, albeit not consistently, bank drawdowns as an increase in the balance of this account, one might think that the repayment of these drawdowns should result in a reduction of the balance of the loan account. In that event, the balance of the “Loans” account would have been nil.

  7. In January 2016, 316 Group paid two Rabah bills, being an insurance premium for a policy held by Rabah and ASIC fees. In March 2016, 316 Group paid the water bills for each of the units in the development. Rabah transferred $194,985.41 to 316 Group’s CBA account on 17 March 2016. The defendant submits that this amount should have been recorded in the “Loans” account. I do not think that this necessarily follows. The ledger records this transaction as a sale by 316 Group, akin to the later sale of $14.8 million.

  8. The final entries in the “Loans” account is a repayment in the amount of $200,000; to whom is not stated. According to 316 Group’s bank statements, these monies were paid, perhaps as deposits, for 45 and 47 Cohors Road, “Pads.” The balance of the “Loans” account as at 30 June 2016 was $8,829,560.25. As I have endeavoured to describe, the reliability of this figure is questionable.

  9. In April 2016, Rabah obtained further finance from National Australia Bank (NAB). Rabah remains the owner of 18 lots in the Burwood development, each of which is subject to a registered mortgage in favour of either ANZ or NAB.

  10. 316 Group continued to make payments from its CBA account in respect of the development. In June 2016, 316 Group paid rates, electricity and water bills for 25 units in the Burwood development. Similar payments were made in July, August and September 2016.

316 Group March 2016 BAS

  1. Throughout the project, it is apparent that 316 Group was lodging BAS statements and receiving tax refunds, which were credited to 316 Group’s CBA account. On completion of the project, Mr Hassan brought 316 Group’s reporting obligations up to date. First, on 23 April 2016, Mr Hassan lodged 316 Group’s tax return for the 2015 financial year. The company’s main business activity was noted as “developer.” The company claimed expenses of $4,863,483 and declared a loss for the year in that amount.

  2. Next was the BAS for the quarter ending 31 March 2016. According to 316 Group’s Ledger Entries Report for the 2016 financial year, a sale was entered on 30 March 2016 for $13,454,545.46 plus $1,345,454.54 GST, totalling $14.8 million.

  3. On 24 May 2016, Mr Hassan sent an email to Youssef, attaching 316 Group’s BAS for signature. Mr Hassan advised: (emphasis added)

The company’s liability of $1,280,816 is based wholly and exclusively on the information provided by you. As instructed 316 Group Pty Ltd has charged a fee of $14,800,000 to Rab[a]h Enterprises Pty Ltd for the construction of the project, which is why the GST is so high.

  1. Youssef agreed that he gave Mr Hassan this instruction. By contrast, Nouredeen said the first time he had seen Mr Hassan’s email was in the witness box, “I just read it now in front of you. … First time I seen it.” However, the document was annexed to Nouredeen’s affidavit, “Yeah, I might have seen it during the proceedings or given it to my solicitors and not read it.”

  2. Relevantly, 316 Group’s March 2016 BAS reported:

Total sales (including GST)      $14,994,985

…

GST on sales            $1,363,180

…

Net amount           $1,280,816

  1. GST is payable on “taxable supplies”: A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act), section 7-1,. You make a taxable supply if you make the “supply” for consideration in the course an enterprise that you carry on: GST Act, section 9-5. “Supply” includes the supply of goods and services: GST Act, section 9-10(2). As such, including the fee charged to Rabah in “Total sales” is consistent with 316 Group supplying goods or services in the course of its business to Rabah for consideration. Further, for the GST on a taxable supply to be payable in respect of the March 2016 quarter, the consideration must be received in the quarter or “an invoice is issued relating to the supply”: GST Act, section 29-5(1). Where Rabah did not pay the fee, the fact that the taxable supply was included in the BAS suggests that 316 Group rendered an invoice, although Nouredeen and Youssef denied than any invoice was issued.

  2. Based on Mr Hassan’s email of 24 May 2016, the fee of $14.8 million is included in “Total sales (including GST)” recorded in the BAS. Youssef agreed that these figures reflected his instructions to Mr Hassan. He understood that the amount owing arose because 316 Group had charged a fee of $14.8 million to Rabah. Youssef agreed that he gave instructions to Mr Hassan to lodge the BAS. As to how he intended that 316 Group would pay the $1,280,816 owing in respect of the BAS, “I don’t know.” By contrast, Nouredeen said he had no control over 316 Group’s tax affairs, did not prepare the BAS and first learnt of its contents, and the instructions given by Youssef to Mr Hassan, when these proceedings commenced.

  3. While 316 Group lodged a BAS for the quarter ending 30 June 2016, no income tax return was lodged for the 2016 year. However, unsigned financial statements for 316 Group for the 2016 financial year reported:

Revenue      $13,631,804.92

…

Profit for the year   $9,834,965.35

Youssef accepted that the revenue figure included the fee that 316 Group had charged to Rabah. 

  1. The balance sheet of 316 Group included:

Receivables      $14,800,000

Youssef agreed that this reflected the fee charged by 316 Group to Rabah. 

  1. 316 Group’s balance sheet detailed “Non-Current Liabilities”, including “Financial liabilities” of $8,829,560.25. This corresponds with the balance of the “Loans” account in the general ledger. As earlier described, the figure does not appear to be particularly accurate.

Tax audit

  1. On 29 July 2016, the ATO wrote to Nouredeen, advising that Rabah had been selected for an audit in respect of its GST and income tax obligations for the 2012 to 2016 financial years. The company was asked to lodge overdue tax returns and BAS before meeting with the ATO on 22 August 2016.

  2. Two business days’ later, on 3 August 2016, Mr Hassan lodged a Change to company details Form 484 with ASIC in respect of 316 Group, advising that Nouredeen and Youssef ceased to be directors of the company, with effect from more than two years earlier, that is, on 28 June 2014. Rabih Yassin was appointed as a director in their place. Nouredeen and Youssef transferred their shares in the company to Mr Yassin, also effective two years’ earlier on 28 June 2014. The principal place of business of 316 Group became Mr Yassin’s address in Greenacre.

  1. This was a fairly obvious attempt to distance Nouredeen and Youssef from 316 Group. Although Nouredeen said he was not aware he was a director and shareholder of 316 Group until after these proceedings were commenced, it is highly likely that he became aware of this fact – at the very least – at this point in time, when Mr Hassan took active steps to remove Nouredeen from 316 Group shortly after the ATO announced its audit of Rabah.

  2. On 17 August 2016, according to the ATO’s case notes, Mr Hassan returned the ATO’s calls, advising that he was not able to be ready for the meeting on 22 August 2016. On 22 August 2016, Mr Hassan advised the ATO that Rabah had now filed its BAS for the March 2016 quarter.

Rabah’s March 2016 BAS

  1. Nouredeen said he gave Mr Hassan instructions to “fix the BAS, lodge a BAS.” Rabah’s BAS for the March 2016 quarter reported:

Total sales (including GST)      $15,716,000

GST on sales            $1,428,727

Non-capital purchases      $15,049,261

GST on purchases         $1,348,763

Net amount           $79,964

  1. “GST on purchases” of $1,348,763 is certainly large enough to include the GST on 316 Group’s fee, being $1,345,455. For Rabah to claim an “input tax credit” for such a fee, it must have a tax invoice: s 29-10, GST Act.

  2. Notwithstanding Nouredeen’s evidence that he had instructed Mr Hassan to lodge Rabah’s BAS, Nouredeen said he had no part in the lodgement of the BAS; the first time he’d seen Rabah’s BAS was during cross-examination. This is highly unlikely. Where the ATO had announced that it was auditing Rabah, I expect that the BAS would have been a matter of keen interest to Nouredeen. Further, Nouredeen said he ran Rabah from day to day and, whenever Mr Hassan needed to talk to him, Mr Hassan would call him and ask him questions; see likewise at [122]. Nouredeen’s evidence is even more unlikely, having regard to the fact that he has taken no steps to amend the BAS in the following seven years, during which time he no doubt became aware of the BAS’ contents.

  3. Somewhat curiously, Nouredeen deposed that, in April or May 2016, Rabah received a GST refund of some $1.48 million. Nouredeen said he called Mr Hassan to find out what the money was for and was told that it was “the GST you get back on the build” as Mr Hassan had finalised the accounts. Nouredeen did not accept that, rather than Rabah receiving a GST refund of $1.48 million, it owed the tax office $79,964 “I don’t think so, no. I don’t believe that’s true." Nouredeen maintained this untenable position in cross-examination: (emphasis added)

Q.   $1.48 million. Where in the accounts is that?

A.   Should be in the bank statements.

Q.   It’s not there. I checked. It’s a large amount of money—

…

A.   In a refund, I think it was. From what Joe told me, it was a refund.

Q.   You saw it in your accounts though, did you?

A.   I can’t recall now. We’re going back—

Q.   I think you gave that evidence before. Did you see it in the accounts?

A.   I can’t recall now.

Q.   Or did Joe just tell you?

A.   No, I spoke to Joe about it, and I seen it.

Q.   And you’ve seen it?

A.   Yeah.

Q.   A moment ago, you couldn’t remember but now you say you’ve seen it?

A.   I’ve seen it somewhere.

Q.   Which is it?

A.   I’ve seen it somewhere.

Q.   You’ve seen it somewhere?

A.   Yeah, either in my — it was either tax—

Q.   Did you see it on the television at home? Where did you see it?

A.   Either on a bank statement or maybe a tax piece of paper that came across my table.

Q.   You’d agree with me that it’s a lot of money, $1.48 million?

A.   Yes, it is a lot but the same time, you know, millions I was spending on a development, so really, I left this with Joe to handle.

  1. The defendant submitted that Nouredeen was likely confused and referring to Rabah’s “GST on sales” of $1,428,727. This does not explain the inconsistency with Nouredeen’s affidavit and oral evidence that Mr. Hassan told him there was a GST refund of $1,480,000. I will return to the significance of this evidence, in respect of the defendant’s version of events at [103].

The arrangement

  1. It is convenient here to set out the defendant’s version of events. In short, the defendant maintained that 316 Group was established to give Youssef work experience, so that he could get his builder’s licence. Rabah undertook the development with the builder. 316 Group did very little beyond paying invoices, with funds provided by Rabah and loans made by third parties to Rabah at Nouredeen’s direction. On completion of the development, 316 Group was to pay Rabah the amount outlaid for the construction plus 8% interest per annum.

  2. More specifically, Nouredeen said that, in June 2012, he and Youssef agreed to separate their interests in Rabah. Youssef proposed setting up a separate company to be the project manager and manage the build. With the agreement of his brother, Youssef was to work on the Burwood project with 316 Group, to get a presence in the industry and complete his practical training for the purposes of obtaining a builder’s licence. Rabah would provide funds to 316 Group as loans and 316 Group would get suppliers, labourers and contractors to send the building costs to 316 Group for payment. By these means, 316 Group would have cash flow through its books to satisfy future creditors in the event that it needed to obtain project finance. As Youssef wanted the experience in order to obtain his builder’s licence, he did not propose to charge Rabah for this service.

  3. Youssef did not agree that he could obtain work experience by working for Rabah, even though he was working with Nouredeen on the same project, “I wasn’t working with him … I was working on the development site that he owned, but not under him. … The whole idea was just for me to run money through our company so that way I could look financially stable … that was up to me to … hopefully get onto another job with what I had. … I had to sort of prove that … I had worked somewhere.” Youssef accepted, “Possibly”, that this arrangement was unlikely to have the desired result, where 316 Group’s only source of income was related company loans.

  4. The brothers discussed what 316 Group would do during the course of the development which was, according to Youssef, “just pretty much pay all the bills that came through.” To get the money to pay the bills, Youssef or the builder would call Nouredeen and say they needed money in the account. When it was suggested to Nouredeen that Youssef would not get building experience from paying invoices, Nouredeen gave the following explanation: (emphasis added)

Q.   How was Youssef going to get any experience as a builder if 316 Group just paid invoices?

A.   How was he going to get experience? Watching and learning. Watching and learning.

Q.    Paying invoices?

A.   Paying invoices, yes. He would - he was free to go and come - for him, he didn’t want to even be on the site. All this for him was just to get his licence.

Q.   You get your licence by just paying invoices, do you?

A.   Well, when you go to get your builder’s licence, they don’t ask you what you’ve done onsite or what jobs you have done. They just look at, who did you work under for 12 months to get your builder’s licence?

Q.   Who was he working under if he was running 316 Group?

A.   Under Ahmed [Zeitoun]. The company allowed him to work onsite.

…

A.   To get your builder’s licence, you have to do a 12 months practically under a builder and one of the, the discussions I had with Ahmed before I tendered the job to Ahmed was, was Youssef allowed to work under his licence so Ahmed could sign off Youssef to get his licence and he didn’t have a problem with it. … It’s like, you know, getting a licence to do something which you did nothing at all, you know.

As I understood this evidence, the necessary practical experience to obtain a builder’s licence was gained by Youssef working for Mr Zeitoun, rather than for 316 Group.

  1. In any event, Nouredeen said he discussed the matter with Mr Hassan, who suggested “everyone invoices Youssef and you can lend the money to Youssef’s company to pay the invoices. … You can charge him interest on top so there is a benefit for Rabah. At the end you can do one BAS return on the money you gave him and it cancels out so he doesn’t owe you anything and you don’t owe him anything.” Nouredeen suggested that the interest rate should be 8%. Nouredeen said he did not understand the arrangement suggested by Mr Hassan but accepted his advice. Youssef agreed with this arrangement. As a consequence, Youssef was removed as a director of Rabah.

  2. It is not entirely clear how the suggested arrangement between the brothers was going to work. Neither brother was able to explain basic features of the arrangement. As Youssef described it, “the outcome was supposed to be a nil outcome on both sides, so he wasn’t supposed to make money on me and I wasn’t supposed to make money to him. … Joe Hassan pretty much told us that Noure[deen] should charge me a fee and in regards, I charge him a – for charging – charge me a fee then somehow, it was going to eventually wipe itself out. … 316 Group was supposed to have an equal amount at the end that somehow, I don’t charge him and he doesn’t charge me. There was supposed to be a nil outcome. … I think at the – in the beginning, Noure[deen], Noure[deen] charged me, wanted to charge 8% on top of the money that he loaned to the company and then somehow or other, I was going – somehow, I’d get it to a zero fee at the end of it to balance out to zero.”

  3. Nouredeen said the arrangement with Youssef – which was to be financially neutral – was crystal clear in his mind, the way it was explained by Mr Hassan “he made is sound very clear and easy to work with.” This was inconsistent with Nouredeen’s affidavit, albeit he did not accept the inconsistency, and later said, “the deal the way Mr Hassan was going to set up, I didn’t understand.”

  4. Given that the arrangement described by Youssef was to result in a nil outcome between the brothers, Youssef could not explain why his brother was charging him 8% per annum. Youssef agreed that 316 Group’s only source of income was to ask Rabah for money. As to how it was that 316 Group could pay 8% interest on Rabah loans, Youssef said “I didn’t think about it at that time.” Nouredeen said “That’s for 316 Group to come up. Can’t speak on behalf of his company.”

  5. As to how it was intended that 316 Group would have funds to pay GST and income tax, Nouredeen also had no ready answer:

Q.   Did you ever discuss whether Rabah would lend 316 money to pay any tax liabilities?

A.    Would 316 lend money—

Q.   Yes, to 316 in order to permit it to meet its tax liabilities. Did you ever discuss that?

A.    Not with my brother, Youssef, never spoke to him about it. It's his—

Q.   As a result of the arrangement, I'm going to suggest to you, 316 Group had to pay GST and income tax. That's right, isn't it?

A.    I think so being a company, yes.

Q.   Well, how was it intended without any source of income other than loans from Rabah that 316 Group would pay those liabilities?

A.    You have to ask him that.

  1. Nouredeen said that 316 Group “should not have any tax liabilities.” When it was suggested that his evidence was very confused, Nouredeen said “I didn’t do nothing wrong from what I’ve done with payments. From what I’ve seen, I’ve never had this problem before.”

  2. Some 18 months passed between this proposal and its implementation through 316 Group. When 316 Group had opened a bank account, Youssef asked Nouredeen to start sending funds to 316 Group so that Youssef could start paying invoices to contractors and suppliers “to start getting 316 Group’s name out to the industry.” Nouredeen said that he, and other parties who he asked, transferred money to 316 Group’s account on his behalf. Omar was one of the people who transferred funds to 316 Group at Nouredeen’s request. Nouredeen said the funds were loans by Rabah to 316 Group.

  3. When the project was complete, Nouredeen and Youssef agreed that, now that ANZ had been paid, they needed to settle the account between Rabah and 316 Group. Youssef said he needed to go through the paperwork and get Mr Hassan to work it out. Whilst Youssef was not “on top” of all of the funds that Rabah had paid to 316 Group, he assumed that Mr Hassan would work it out. Youssef spoke to Mr Hassan, who said it would take time to calculate the money loaned by Rabah to 316 Group with 8% interest and to work out how much 316 Group should charge Rabah, so that both liabilities cancelled each other out. Mr Hassan said that, if Youssef wanted to do it quickly in order to lodge the BAS on time, they could estimate the figure now, lodge the tax documents, and then go through it in detail and lodge any necessary amendments later. Youssef would need to balance the books for both Rabah and 316 Group.

  4. Youssef said he prepared an estimate. He estimated that Rabah had provided about $12.5 million in loans. Youssef added 8% to that figure for interest and then a further 10% for GST. This gave him a figure of $14.85 million, which he rounded down to $14.8 million on the basis that they could lodge any amendments with the ATO once Mr Hassan had worked out the proper figures. Youssef did not work out the precise amount of funds coming from Rabah to 316 Group, as he believed he would have a chance to lodge a precise figure as an amendment. Nor was he concerned as whatever the precise figure was, as there would be a setoff between the companies and a neutral result. Youssef instructed Mr Hassan that he wanted 316 Group to charge a fee of $14.8 million to Rabah. Youssef told Mr Hassan that he needed to make the necessary entries to the records of both Rabah and 316 Group so that the companies were in a neutral position in regards to the funds loaned and the fee charged. Youssef never sent an invoice to Rabah for $14.8 million or any other sum.

  5. When Nouredeen spoke to Mr Hassan in April or May 2016 about Rabah’s GST refund of $1.48 million, Nouredeen said he understood that Mr Hassan had settled the accounts between Rabah and 316 Group. Where the suggested refund of $1,480,000 is exactly 10% of the fee charged by 316 Group to Rabah (albeit not the GST component of the fee), Nouredeen’s evidence in respect of the GST refund may be an attempt to suggest that he understood that the arrangement had been finalised sometime in April or May 2016. I will return to consider the terms of the arrangement between Rabah and 316 Group at [154].

ATO collection action

  1. On 8 September 2016, the ATO wrote to each of 316 Group and Rabah, seeking payment of the amounts reported in their respective BAS for the March 2016 quarter, being $1,292,409.88 and $79,964 respectively. Both letters were addressed to the companies at Mr Hassan’s offices. Nouredeen did not recall seeing the letter addressed to Rabah. It is inherently likely that the accountant brought these letters to the attention of his clients.

  2. On 13 October 2016, the ATO wrote to Rabah, care of Mr Hassan, advising that its audit was complete. The ATO was satisfied with the information provided, but would continue to monitor the future lodgement of BAS, paying attention to the sales of remaining units. Presumably, the ATO accepted as accurate the “Non-capital purchases” figure recorded in Rabah’s March 2016 BAS of $15,049,261, which appears to have included the fee charged by 316 Group.

  3. On 6 December 2016, the ATO wrote to Rabah again, but this time to Youssef’s address in King Street, Enfield. The fact that the ATO was now writing to Youssef’s address suggests that the ATO had been notified by someone with the requisite authority, whether Mr Hassan or Nouredeen, that this was the appropriate place to bring matters to the attention of Rabah. The ATO advised that collection action was in view given the unpaid amount reported in Rabah’s BAS, now standing at $83,774.52 (presumably by reason of the addition of interest). Nouredeen did not recall seeing this document.

  4. On 1 February 2017, the ATO attempted to garnishee 316 Group’s bank account but received only $25.98, which reduced the account to a nil balance. On 10 February 2017, the ATO issued a statutory demand to 316 Group for the Running Balance Account deficit debt in respect of amounts due for BAS and the general interest charge payable, then standing at $1,343,750.35.

  5. On 7 March 2017, the ATO informed Mr Hassan and Rabah that it had issued a garnishee notice to BOQ in respect of Rabah’s bank account, for payment of $91,990.38. Again, the letter to Rabah was addressed to King Street, Enfield. Nouredeen said he had not seen the letter from the ATO before, “No, first time.” The garnishee notice went unpaid, as Rabah’s bank account had then been closed. Nouredeen said he was not aware that Rabah was being pursued by the ATO for an unpaid tax debt in relation to its March 2016 BAS.

Liquidator appointed to 316 Group

  1. On 5 April 2017, the ATO filed an application in the Federal Court of Australia to wind up 316 Group.

  2. On 6 April 2017, the ATO’s work management activity notes record a call from Youssef in respect of Rabah’s unpaid BAS. The notes record Youssef as the authorised contact for the company, “Youssef advised he can pay in full within 4 weeks.” The ATO created a payment in full arrangement, with the amount outstanding to be paid on 4 May 2017. On 7 April 2017, the ATO wrote to Rabah at King Street, Enfield, confirming the payment plan. Inconsistently with this, Youssef said he was not involved in negotiating with the ATO about Rabah’s tax debt, then said he did not recall this and denied any inconsistency in his evidence. Nouredeen said the first time that he saw this letter was during cross-examination.

  3. On 26 April 2017, according to the ATO’s work management activity notes, Youssef spoke with the ATO again, advising that a cheque was being drawn that day to pay the outstanding sum. Noteworthy, no attempt was made by Youssef or Mr Hassan to communicate with the ATO in respect of the substantial sums then payable by 316 Group.

  4. Nouredeen said that Youssef had no authority to speak to the ATO on Rabah’s behalf; Youssef had no ongoing role with Rabah at the time. Further, no one had authority apart from himself and Mr Hassan to enter into a payment plan on behalf of Rabah. The first that Nouredeen knew that his brother has spoken to the ATO was in cross-examination. Where the contemporaneous documents consistently indicate that the ATO had been instructed to communicate with Rabah via Youssef, it rather appears that Nouredeen had delegated this matter to his brother.

  5. On 10 May 2017, the Federal Court of Australia wound up 316 Group in insolvency. Anthony Elkerton was appointed as liquidator. The next day, Youssef obtained his building licence using his work on the Burwood project as his practical training.

  6. The liquidator promptly corresponded with Mr Hassan, requesting the books and records of the company. Mr Yassin was asked to complete a Report as to the Affairs of the Company and to meet with the liquidator on 2 June 2017; there was no response. 316 Group then owed the ATO $1,372,457.22.

  7. On 29 and 31 May 2017, Mr Hassan provided the liquidator with unsigned 2016 financial statements for 316 Group and the Ledger Entries Report (referred to at [72] and [78]), with the BAS and tax return to follow. Mr Hassan advised that his firm did not hold any other records belonging to the company.

Rabah’s 2016 tax return

  1. On 13 June 2017,  Rabah lodged its income tax return for the 2016 year, which reported: 

Total income                   $14,343,913

Contractor, sub-contractor and commission expenses   $61,475

Interest expenses within Australia            $309,176

All other expenses                  $13,631,797

Total expenses                $14,002,448

Total profit                   $332,465

Tax losses of $332,465 were also deducted, resulting in “nil” taxable income for Rabah in the 2016 income year.

  1. Nouredeen said “I can only assume” that “All other expenses” included the $14.8 million fee charged by 316 Group to Rabah, less GST.  However, he preferred to describe the figure as reflecting “moneys paid to 316 from Rabah … I wouldn’t call it a fee.”  Nouredeen was reluctant to accept that, absent this deduction, Rabah’s expenses would have only been some $370,000.  Nouredeen ultimately accepted the obvious: if Rabah did not claim “All other expenses”, then the tax payable by Rabah would have been “much, much, much greater.” 

  2. Rabah’s tax return also reported “Financial and other information”, including:

Trade creditors      14,800,000

That is, the ATO was informed that Rabah owed this amount to its creditors.

  1. Consistent with Rabah’s 2016 tax return, an unsigned financial statement for Rabah for the 2016 financial year reported:

Total income         $14,334,913

…

Construction costs      $13,454,545.45

…

Total expenses      $14,002,448

Profit … before income tax   $332,464

The “Construction costs” expense is precisely the $14.8 million fee charged by 316 Group, excluding GST.

  1. Rabah’s balance sheet reported assets of some $15 million, including the land at cost ($2.51 million), “Other assets” ($8,732,500) and investments ($3,675,340). Further, the balance sheet reported the following current liabilities:

Current Liabilities

Trade creditors      $14,800,000

...

Current Tax Liabilities

Goods and services tax   $73,499.45

“Trade Creditors” corresponds with “Receivables” in 316 Group’s 2016 financial statements: see [79]. Nouredeen said the first time he had seen the document was in cross-examination.

  1. Obviously enough, the fee charged by 316 Group of $13,454,545, being $14,800,000 excluding GST, is included in “All other expenses” in Rabah’s 2016 tax return. That is, Rabah has claimed a tax deduction for the fee. Whilst Nouredeen agreed that the fee charged by 316 Group to Rabah was $14.8 million, he said he did not know whether Rabah’s tax return included this fee, did not know what was meant by “Trade creditors”, and was unclear what a creditor was either.  Nouredeen said Rabah did not owe $14.8 million but was owed $14.8 million.  Nouredeen said he did not authorise the production of the tax return and had no part in its production.  He agreed, however, that he had never given instructions for the tax return to be amended. 

  2. Both the unsigned copy of Rabah’s 2016 tax return and the ATO’s “ICP capture” (with the corresponding data entries) record that the declaration by a public officer of Rabah was given by Youssef.  Nouredeen said he has been unable to determine why this is so, where his brother had ceased to be a director and shareholder of the company. Nouredeen said that Mr Hassan should not have been speaking to anyone else in respect of Rabah financial statements and lodgements, “No-one should be speaking to Joe. Only I speak to Joe … about Rabah”.

  3. As to whether Mr Hassan had spoken to Nouredeen about Rabah’s 2016 tax return, Nouredeen said “I'm not sure, I don't know, I can't remember, I don't think so, no, 2016, the only conversation I had was I wanted to clear up all the company, the debt between both companies.” Nouredeen said he did not give Mr Hassan authority to lodge the tax return in 2016, “I needed to see what the ATO needed really, it comes down to the accountant.”

  4. Nouredeen’s evidence was difficult to believe, and I do not accept it. Rather, Rabah’s 2016 tax return was filed in accordance with the instructions of its sole director, Nouredeen, whether those instructions were given directly or by his authorised representative, Youssef, and I so find. It is apparent from the contemporaneous records that Nouredeen delegated this task to his brother: see also [127], [129] and [130]. It is also plain from Rabah’s 2016 tax return that the company claimed expenses which included the $14.8 million fee payable to 316 Group, thereby reducing its taxable income to $332,465. Absent this deduction, Rabah’s taxable income would have been far greater. Rabah’s 2016 tax return also puts beyond doubt that Rabah’s March 2016 BAS claimed a “input tax credit” for the GST on 316 Group’s fee, being $1,345,455.

Demand for payment

  1. On 14 June 2017, the liquidator of 316 Group sent a letter of demand to Rabah, noting that the books and records of 316 Group indicated that Rabah was indebted to the company in the sum of $14.8 million. Payment was sought. A follow up letter was sent on 26 June 2017. On 21 July 2017, solicitors for Rabah replied, advising they were seeking instructions. The liquidator did not hear further from the law firm or from any other entity on Rabah’s behalf.

  2. Nouredeen said the letter of demand from the liquidator was the first he knew about the $14.8 million fee. Nouredeen took the view that it was impossible that Rabah owed $14.8 million to 316 Group, “if anything Rabah was owed money from 316 Group … it’s black and white, paperwork doesn’t lie.” Nouredeen said that, on receipt of the letter of demand, he asked Mr Hassan what was going on. Mr Hassan said there was a tax bill that 316 Group owed the ATO and the liquidator believed that Rabah owed these funds. Nouredeen asked why the liquidator would think that; according to Nouredeen, Mr Hassan said, “Who knows?”. I do not accept Nouredeen’s evidence in this regard.

Second tax audit

  1. In January 2018, the ATO wrote to Youssef, advising that it was reviewing Rabah’s BAS and requested that overdue activity statements be lodged immediately. Information was sought on a range of matters, including details of purchases claimed on BAS from 1 January 2016 to 30 September 2017. Youssef said he was not aware that the ATO was conducting an audit on Rabah or 316 Group in relation to the Burwood development. This evidence is unlikely; I expect that the fact that the ATO was auditing Rabah was a matter of keen interest to both Youssef and Nouredeen and a matter on which Mr Hassan would have kept his clients fully appraised.

  2. On 22 February 2018, Mr Hassan wrote a letter addressed “To Whom It May Concern” in respect of 316 Group. Mr Hassan advised that his firm acted for the company:

We can confirm that the above named company carried on business as a construction company. We can also confirm that the company was not able to continue its trading operations due to conflicts with its developers.

  1. On 1 March 2018, Nouredeen became the sole shareholder of Rabah. On 2 March 2018, Mr Hassan supplied the ATO with the information requested in respect of Rabah; no specific response was given to the ATO’s request for details of purchases claimed on the BAS. On 6 March 2018, the ATO sought further details. Mr Hassan provided further documents, supplied by Youssef. Youssef did not recall sending the material to Mr Hassan but agreed, at odds with his earlier evidence, that he was in touch with Mr Hassan at the time of the audits and Mr Hassan mentioned things to him about the tax audit.

  2. On 29 March 2018, the ATO wrote to Youssef as the representative of Rabah, thanking him for providing the information needed for their review and advising that it was satisfied that Rabah had met its obligations. Again, presumably the ATO accepted as accurate the “Non-capital purchases” figure recorded in Rabah’s March 2016 BAS of $15,049,261, which included the fee charged by 316 Group.

Seeking records

  1. 316 Group’s liquidator gathered documents from CBA, ATO, New South Wales Land and Property Register and 316 Group’s insurance broker. Being without funds, in November 2017, the liquidator sought funding from the ATO to investigate the matter further. On 14 December 2018, it was determined at a meeting of creditors that the liquidator of 316 Group should enter into a funding agreement. Ultimately, the liquidator entered into such an agreement with the plaintiff on 16 August 2019. The creditors approved the assignment at a meeting of creditors on 12 September 2019.

  2. Given the deficiencies in the material obtained by the liquidator in the winding up of 316 Group, the plaintiff commenced proceedings in the Federal Court for the issue of summonses for examination and orders for production in relation to the examinable affairs of the company. On 19 February 2020, the Federal Court issued summonses for examination and 25 orders for production, including to Mr Yassin, Youssef, Nouredeen, Rabah, Mr Hassan and his company, ANZ, NAB, CBA, Lion Civil Group, Rahman Nominees Pty Ltd, Homebush Project Developments Pty Ltd, Ultimate Haulage Pty Ltd, Belal El Badar and Omar.

  3. Whilst the order for production addressed to Rabah were sent to its registered office in Monash, ACT, the envelope was returned to sender. Mr Ward believed there was a questionable basis for the return of the envelope, where the registered office of Rabah was also the registered office of Mr Hassan’s company, and where Mr Hassan and his company responded to orders for production served on them at the same address. I agree.

  4. In any event, Rabah did not respond to the order for production or produce any documents. Documents were produced by CBA, ANZ, Perpetual Limited, Mr Hassan and his company, Belal El Badar, Lion Civil, Ultimate Haulage and Homebush Project Developments. Mr Ward analysed the documents produced and sought further orders from the Federal Court for production by Mr Hassan and his company relevant to investigating and establishing the debt owed to 316 Group by Rabah. On 22 June 2020, the Federal Court made further orders for production addressed to Mr Hassan and his company, for the books and records of 316 Group and Rabah. Presumably in answer to these orders, the unsigned financial statement for Rabah for the 2016 financial year, bearing the date 14 July 2020, was provided: see [119].

  5. Although Mr Hassan produced documents in answer to these further orders, Mr Ward said the documents did not include all documents relevant to investigating and establishing the debt owed to 316 Group by Rabah, such as documents evidencing the terms of any arrangement between 316 Group, Rabah and ANZ in relation to the loan facility, or invoices issued by 316 Group for $14.8 million or any amount.

These proceedings

  1. These proceedings were commenced on 9 September 2020. The plaintiff sued Rabah for $14.8 million as an outstanding debt said to arise from a contract between 316 Group and Rabah for the provision of construction services in relation to the Burwood development. The contract was said to be implied from the course of conduct carried on between the parties. Rabah was said to have acknowledged that the fee was payable as a debt, in Rabah’s 2016 income tax return and BAS for the quarter ending 31 March 2016. Alternatively, the plaintiff sued in quantum meruit for a reasonable fee for the construction services provided to Rabah. By its Commercial List Response, Rabah denied the existence of a contract, the debt and the quantum meruit claim.

  2. In February 2021, the plaintiff filed a motion for discovery. On 9 April 2021, orders were made for limited discovery, being documents in respect of any contract between 316 Group and Rabah to provide services in relation to the Burwood development, documents evidencing Rabah’s acknowledgement that a fee of $14.8 million was a debt payable to 316 Group and documents referring to the value of the services provided by 316 Group. On 30 April 2021, Rabah provided discovery of 26 documents, none of which related to the matter of interest to the plaintiff. The documents did not include any verified financial records for Rabah.

  3. On 24 May 2021, Hammerschlag J noted his preliminary view that the Commercial List Response did not comply with Practice Note SC Eq 3 in that it did not disclose in any meaningful way the issues which the defendant believed were likely to arise but rather stated the general issue. His Honour gave leave to the plaintiff to file an application to strike out the Commercial List Response.

  4. In June 2021, the defendant filed an Amended Commercial List Response, which pleaded a more detailed agreement between Nouredeen and Youssef by which Rabah would appoint 316 Group to act as project manager for the Burwood development. In August 2021, the plaintiff filed an Amended Commercial List Statement, effectively re-asserting some of the suggested arrangements between 316 Group and Rabah, as pleaded in the Amended Commercial List Response, by adding those arrangements to the terms of the contract pleaded by the plaintiff.

  5. On 21 March 2022, Hammerschlag J made further orders for discovery in respect of Rabah’s March 2016 BAS, 2016 tax return and financial statements, and any amended assessments of the BAS or tax return. In addition, Rabah was required to discover documents and correspondence between Rabah and East St Developments, Metro Tipper Hire, Lion Civil Group, Mohamad and Omar in respect of moneys paid to 316 Group and the terms on which the moneys were paid.

  6. Rabah provided further discovery of six documents, including Rabah’s financial statements and income tax return for the 2016 financial year, together with its BAS for the March 2016 quarter. The further discovery did not include any documents or correspondence with East St Developments, Metro Tipper Hire, Lion Civil Group, Mohamad or Omar concerning monies paid to 316 Group.

DEBT CLAIM

  1. The plaintiff’s first claim was in debt. The plaintiff contended that 316 Group and Rabah had entered into a contract, which was either implied or could be inferred from their course of conduct. As to the terms of the contract, the plaintiff repeated some of the features of the arrangement as alleged by the defendant. Specifically, 316 Group would be appointed as project manager to provide construction and project management services to Rabah in relation to the Burwood development, including coordinating with the builder, engaging subcontractors and suppliers when necessary, managing Rabah’s payments to third parties, managing and coordinating the development and dealing with the builder and third parties. In addition, it was a term of the contract that, on completion of the development, Rabah would pay 316 Group for the construction and project management services a sum equal to the total amount of obligations incurred by 316 Group in providing those services together with interest calculated at 8% per annum.

  2. On completion of the development, 316 Group charged a fee of $14.8 million, which Rabah acknowledged as a debt payable in its 2016 tax return and March 2016 BAS. However, Rabah had not paid any part of the fee. The plaintiff advanced a claim in debt for the outstanding sum of $14.8 million due to 316 Group.

  3. In closing submissions, the plaintiff also sued by indebitatus assumpsit, being a quasi-contractual claim distinguishable from a common law claim in debt: Young v Queensland Trustees Ltd [1956] HCA 1; (1956) 99 CLR 560 at 567, 569 (per Dixon CJ, McTiernan and Taylor JJ); Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; (1987) 162 CLR 221 at 230 (per Brennan J). Where an action indebitatus assumpsit was not pleaded, it is not necessary to consider that submission further.

  4. The plaintiff relied on the March 2016 BAS and unsigned 2016 financial statements for both 316 Group and Rabah, together with Rabah’s 2016 income tax return, as evidence of a debt owed by Rabah to 316 Group as prima facie evidence of the transactions recorded, where the presumption under section 1305 of the Corporations Act 2001 (Cth) had not been displaced. These documents were “financial records” within the meaning of section 286 of the Corporations Act and therefore prima facie evidence of the transactions they record: section 1305; Advanced Holdings Pty Limited as Trustee for The Demian Trust v Commissioner of Taxation [2021] FCAFC 135; (2021) 113 ATR 508 at 552 ([169]) (per Logan, McKerracher and Perram JJ); Australian Securities and Investments Commission v Rich [2005] NSWSC 417; (2005) 191 FLR 385 at 455 [311] (per Austin J); Federal Commissioner of Taxation v Cassiniti [2018] FCAF 212; (2018) 266 FCR 385 at 405 [71]-[72] (per Logan J).

  5. The plaintiff submitted that Rabah took the benefit of the development without paying 316 Group. Rabah obtained taxation benefits, being deductions for construction "costs" incurred but not remitted, as well as GST input taxation credits. Notwithstanding the transactions recorded in the financial records of both companies, Rabah now says that it does not owe any amount to 316 Group and that the "fee" was actually repayment of amounts owed by 316 Group to Rabah. The financial records do not evidence a loan between Rabah and 316 Group. The suggestion that $14,800,000 was not a “fee” but the repayment of loans was inconsistent with the documentary evidence and the position adopted by Rabah for taxation purposes. Rather, the fee of $14,800,000 represents a debt owed to 316 Group for services supplied to Rabah pursuant to the contract between the companies. This amount can be recovered by the plaintiff as a debt owed to it as the assignee of the cause of action.

  6. As pleaded in the Amended Commercial List Response, Nouredeen and Youssef agreed that Rabah would appoint 316 Group to act as project manager for the Burwood development. The purpose of the agreement was that, as a newly formed entity, 316 Group would benefit from the exposure to the industry provided by its role as a project manager for the development, use the development as evidence of its development experience, which would allow it to tender on future opportunities. 316 Group, having no funds of its own, would receive loan funds from Rabah to allow 316 Group to pay obligations incurred. Rabah would deposit loan funds into 316 Group’s bank account until the development was completed. Interest on the loan would be 8% per annum. On completion of the project, 316 Group would repay the loan and interest in full. Further, on completion of the project, 316 Group would issue an invoice to Rabah for services rendered in a sum equal to the total amount owing at the time for the loan and interest. The principal and interest of the loan, being offset against the costs for services rendered by 316 Group to Rabah, would effectively render the transaction financially neutral at the completion of the project. 316 Group would be solely responsible for maintaining its own financial and tax affairs.

  7. Further, Rabah contended that the total principal sum disbursed to 316 Group for the loan was $11,714,850. This loan and outstanding interest was to be discharged by 316 Group on completion of the development. While 316 Group did not render an invoice on completion of the project, any amount charged could only have been charged in accordance with the agreement, with the effect that the amount was offset by the loan amounts payable to Rabah. Alternatively, if Rabah was found to owe any amount to 316 Group, then Rabah claimed a setoff against any amounts owing by 316 Group to Rabah pursuant to the loan.

  8. The defendant submitted that the plaintiff’s claim was commercially absurd: where Rabah had funded the development, why would Rabah agree to pay $14.8 million to 316 Group? It was said that the plaintiff had made no attempt to explain why a company in Rabah’s position would agree to pay $14.8 million in these circumstances. The plaintiff had not put forward any explanation of what it said was the true purpose of the contract alleged. No case of fraud against the ATO was pleaded. The absurdity was said to be demonstrated by Mr Bell’s evidence that the value of project management services was, at most, $442,680.

  9. The defendant submitted that, while the arrangement described by Nouredeen and Youssef was unorthodox, it was corroborated by the documents. Specifically, it was said that the documents evidenced that Rabah caused $11.89 million to be transferred to 316 Group. This submission was based on a schedule annexed to the defendant’s written submissions. I have already made findings in respect of each of the transactions referred to in this schedule. The total constructions costs of the development were said to be $13,454,545.46 (which I note is the $14.8 million fee exclusive of GST). The difference between these amounts was said to be the costs incurred by Rabah directly for work undertaken on the development, being demolition and excavation work in early 2014 (this is doubtful: see [34]). The defendant submitted that the total value of the loans made by Rabah to 316 Group were incorrectly recorded in the books of both companies. As a consequence, Youssef’s estimate of the offsetting liability was inaccurate.

  1. Further, the plaintiff submitted that a set-off under section 553C required mutuality, that is, that the credits, debts, or claims be between the same persons: Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609 at 623. Some of the loans were by third parties. Rabah has failed to prove that these loans were made on behalf of Rabah. Rabah’s evidence rose no higher than Nouredeen’s assertions that he arranged for funds to be transferred to 316 Group, with some ad hoc documents in respect of the $1 million from Omar. Rabah had not explained what the $1 million represented, that is, whether it a loan from Omar to Rabah or Rabah’s income. If these amounts were in the nature of income payable to Rabah, then this would be income derived by Rabah for taxation purposes when it is dealt with in any way on its behalf or as it directs: Income Tax Assessment Act 1997 (Cth), section 6-5(4). Rabah must explain whether it has returned as income any of the amounts allegedly transferred at its direction.

  2. The defendant submitted that section 553C had no relevance in the context of a set-off defence: Hastie Group Ltd (In Liq) v Multiplex Constructions Pty Ltd (formerly Brookfield Multiplex Constructions Pty Ltd) (No 3) [2022] FCA 1280 at [[243] (Middleton J). Further, the exception to set-off in section 553C(2) would not apply as it could not be said that Rabah was on notice of any insolvency. There was no basis to believe that 316 Group could not meet its GST and tax obligations, where it was in receipt of significant GST cash refunds. I agree that section 553C does not apply in the circumstances of this case, which is concerned with the debt owed to 316 Group under the terms of its agreement with Rabah, rather than determining the appropriate amount which may be admitted in a proof of debt.

Conclusion

  1. I take the pleading – set off “pursuant to the Agreement” – to mean that Rabah relies on a contractual right of set-off sourced in its agreement with 316 Group. The common law recognises a contractual right of set-off where the parties have agreed that, in certain circumstances, money owing to each of them may be automatically, or at a party's election, set-off: National Australia Bank Ltd v Idoport Pty Ltd [2007] NSWSC 1349 at [45] (per Young CJ in Eq). Contractual set-off “does the arithmetic in the sense of combining credits and debits between the parties. In the result, the liability of a party is restricted to the resulting balance”: Commercial Factors Ltd v Maxwell Printing Ltd [1994] 1 NZLR 724 at 737 (per Hammond J).

  2. Contractual rights of set-off are commonly found in bankers’ agreements with customers relating to multiple accounts and commercial contracts including, effectively, clearing house arrangements: Commercial Factors v Maxwell Printing at 373. There were few reported cases of contractual set-off: see, for example, Opal Maritime Agencies Pty Ltd v The Proceeds of Sale of the Vessel MV “Skulptor Konenkov” (2000) 98 FCR 519; [2000] FCA 507 at [161]; British Eagle International Airlines Ltd v Compagnie Nationale Air France (1975) 1 WLR 758 and Commercial Factors v Maxwell Printing.

  3. Whether there is a contractual right of set-off depends “solely upon the construction of the contract that the parties have made”: National Australia Bank v Idoport at [47]. In the absence of an express term dealing with set-off, contractual right of set-off may also arise from custom or be inferred from conduct: Southern Textile Converters Pty Ltd v Stehar Knitting Mills Pty Ltd [1979] 1 NSWLR 692, 698 (per Sheppard J); Commercial Factors v Maxwell Printing at 739 (per Hammond J); S.R Derham The Law of Set-Off (4th edition, 2010) at 16.02.

  4. Here, the alleged agreement was oral. After speaking with Mr Hassan about the proposed arrangement between Rabah and 316 Group, Nouredeen said to Youssef, “Rabah can lend the money to your company to pay for the construction. Then at the end you can issue an invoice to cancel out the loan.”

  5. Again, post-contractual conduct assists in determining whether this was a term of the contract, or to infer a contractual right of set-off from conduct. In May 2016, 316 Group charged a fee without any deduction for the amounts recorded in its “Loans” account. Rabah recognised the fee in full and without deduction of any set-off, when filing its BAS three months’ later in August 2016. Rabah made no complaint that 316 Group’s fee was incorrectly calculated or failed to take into account a set-off for Rabah’s loans. Almost a year later, in June 2017, Rabah lodged its 2016 tax return which claimed, as a deduction, 316 Group’s fee in full. No steps have been taken by Rabah in the subsequent six years to amend either the BAS or income tax return to correctly record 316 Group’s fee after set-off of Rabah’s loans.

  6. I accept that, if Nouredeen said the words he described, this may found a contractual right of set-off albeit, that the agreement was somewhat unclear. However, significant doubt attends the reliability of Nouredeen’s evidence of his conversation with Youssef (and generally). Further, the parties’ post-contractual conduct tells strongly against the existence of such an agreement. Given the contemporaneity of the entries in 316 Group and Rabah’s March 2016 BAS, the companies’ 2016 financial statements and Rabah’s 2016 tax return, these records are a more reliable guide as to what was agreed at the time, than Nouredeen’s affidavit sworn five years’ later. On balance, I am not satisfied that the parties agreed that 316 Group’s fee would be set-off against Rabah’s loans. There was no contractual right of set-off.

  7. If I am wrong about this, then quantification of any set off is problematic. Whether a particular payment to 316 Group was a loan is not always clear. The bank statements record numerous payments to and deposits by family members. As such, the significance of any single payment or deposit is not obvious in the absence of a description in the bank statement, for example, that a particular deposit was a loan to the payee. For example, in September 2015 numerous payments were made from 316 Group’s CBA account to Mohamad. Whether the payments to Mohamad were loan repayments or payment for services in respect of the development is not known.

  8. 316 Group’s unsigned financial statements and ledger do not advance matters greatly. Based on Mr Ward’s review of the draft financial statements, the ledger entries report and CBA bank statements, the transactions in the bank statements were recorded in the general ledger and the financial statements were prepared using the amounts recorded in the ledger. However, the general ledger does not provide detailed descriptions of the entries, transactions or account titles; nor do the financial statements.

  9. Specially, the Ledger Entries Report details transactions on the “Loans” account, but not the identity of the lenders. 316 Group’s balance sheet as at 30 June 2016 records financial liabilities of $8,829,560.25 but, as earlier mentioned, is likely inaccurate. In particular, whilst Nouredeen maintained that all loans made to 316 Group – whether by Rabah or third parties – were effectively Rabah loans, I am not prepared to simply accept his assertion in the absence of evidence from the third-party payors. I infer that the evidence of these third-party payors would not have assisted Rabah.

  10. The state of the evidence is insufficient to enable me to calculate the amount of any set-off, where the onus of proof in this regard is on Rabah. This defence fails. Of course, the various lenders who advanced funds to 316 Group would be entitled to submit a proof of debt to the liquidator of 316 Group in respect of their loans.

JOINT VENTURE

  1. It is not strictly necessary to determine this claim, which was put by the plaintiff in the alternative. In the event I am wrong as to the debt claim, I will consider this claim and briefly. In the Amended Commercial List Statement, the plaintiff noted Rabah’s alleged agreement between Nouredeen and Youssef. The plaintiff contended that the proper characterisation of the arrangement between the brothers was that an original incorporated joint venture via Rabah was modified such that there was an unincorporated joint venture between Rabah and 316 Group, with each brother controlling one company. As such, 316 Group and Rabah were each entitled to half of the net proceeds of the development. The plaintiff sought, in the alternative, a half share in the net proceeds of the development.

  2. The plaintiff submitted that, while there was no written joint venture agreement, Nouredeen and Youssef contracted to the joint venture on terms of the agreement for which Rabah contended. However, there was no loan from Rabah to 316 Group and no intention for 316 Group to repay money “loaned” to it. The joint venture was structured this way to justify non-payment of the invoice at the conclusion of the development. Otherwise, 316 Group would have performed work, and incurred liabilities, for no commercial benefit.

  3. The defendant submitted that there was no evidence of a joint venture, where Rabah owned the property, engaged the builder and provided all of the funding for the development. It was said to be inconceivable that Rabah would agree to give up half of the profits of the development in these circumstances, given that Youssef only attended the site for 12 hours per week and his role was to pay bills: see [204].

Conclusion

  1. As to whether there was a joint venture, in United Dominions Corp Limited v Brian Pty Limited [1985] HCA 49; (1985) 157 CLR 1, Mason, Brennan and Deane JJ considered the nature of a joint venture at 10:

The term “joint venture” … connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. … The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership: such as a company, a trust, an agency or joint ownership. The borderline between what can properly be described as a “joint venture” and what should more properly be seen as no more than a simple contractual relationship may, on occasion, be blurred.

  1. More recently in Gibson Motorsport Merchandise Pty Limited v Forbes [2005] FCA 749, Crennan J noted that the recognisable and common characteristics of joint ventures include, at [80]:

1.   Participants hold proprietary interests in the assets of the joint undertaking, often, but not necessarily, as tenants-in-common …

2.   Participants exercise joint control of the undertaking.

3.   Participants contribute to the joint undertaking, not necessarily equally; such contributions may be disparate: Canny Gabriel Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 at 327; Television Broadcasters Limited v Ashton’s Nominees Pty Ltd (No.1) (1979) 22 SASR 552.

4.   Participants in the joint undertaking enjoy rights and assume obligations, which are often several, and calculated by reference to ownership of shares and/or contributions made.

5.   Participants have a joint (or community of) interest in the performance of the undertaking’s purpose: Cummings v Lewis (1993) 41 FCR 559 at 314/315 (per Cooper J).

6.   Participants associate in the undertaking for mutual commercial gain which can be mutual profits.

  1. Her Honour noted that these characteristics could be “found in various permutations and constellations such that it is not appropriate to attempt to isolate which characteristics would be both necessary and sufficient for the constitution of a joint venture agreement” and it was always a question of fact whether any particular undertaking constituted a joint undertaking for mutual commercial gain: at [81].

  2. The arrangements between Rabah and 316 Group do not bear the recognisable and common characteristics of joint ventures described in Gibson Motorsport. Rather, Rabah and 316 Group each performed a distinct function. Rabah alone held the property. Rabah provided funds for construction. 316 Group oversaw the development. The companies, and the brothers, did not assume joint obligations. I am not satisfied there was a joint venture. The plaintiff’s alternative claim fails.

QUANTUM MERUIT

  1. It is also not strictly necessary to consider this claim, which the plaintiff brought in the alternative. I will do so briefly. Mr Bell was asked to opine on the amount of reasonable remuneration that would be payable to 316 Group, on the assumption that it was appointed by Rabah to provide project management services for the development of the Burwood property. In arriving at his opinion, Mr Bell relied on the contemporaneous documents which the plaintiff had managed to obtain with respect to the development of the property. Mr Bell then had 61 documents to hand, most of which did not specifically relate to project management services. Based on his experience, Mr Bell expected that a number of other documents would exist. Mr Bell focussed on the builder’s tender submission, the building contract, 316 Group’s bank statements and the progress drawdown reports. In particular, Schedule 2 to the building contract included labour rates, including $85 an hour plus GST for Director/Principal.

  2. Mr Bell entered the transactions from 316 Group’s bank statements into an Excel spreadsheet and sorted the payments that were identifiable as related to trade packages. He compared these payments to the budget included in the progress drawdown reports to check that the payments corresponded with the contract sum. Having established that the payments were referable to the Burwood project, Mr Bell recorded the days shown in the bank statements where it was shown that 316 Group was engaged in project management services. He then extrapolated the results for the period not covered by the bank statements, where progress was documented in the progress drawdown reports. Mr Bell then applied a rate that was appropriate to the periods where he assumed project management services were provided. Where the construction certificate was issued on 22 May 2014, Mr Bell expected that project management services were required on a fulltime basis from then onwards, until the period covered by the bank statements. In total, 93 weeks of project management services were required.

  3. In Mr Bell’s experience, project management of construction works involves long hours, typically in the order of 56 hours a week, being 5,208 hours for the project in total. Whilst the hourly rate for project management services can vary significantly depending on the nature of the project and the qualifications, skills and experience of the individuals involved, Mr Bell considered that the level of skill and experience necessary to perform these tasks would be similar to those of the builder engaged in the works. Where the builder charged $85 an hour plus GST for Director / Principal, in his opinion, this was a reasonable rate for project management services. At this rate, a reasonable fee for 316 Group was $442,680. Mr Bell accepted that the fact that Youssef was in the process of obtaining his building licence at the time may be relevant to his skill level, it was more about licencing and compliance and “doesn’t really tell me what his skill level is … only that he was seeking licencing as a builder.” Mr Bell did not attach any particular significance to this fact when carrying out his task.

  4. Mr Bell prepared a second expert report, taking into account Nouredeen’s description of the period in which 316 Group was engaged on the project and the average hours per week. Based on these assumptions, reasonable remuneration payable to 316 Group for services provided in relation to the development was $85,680 plus GST. However, Mr Bell considered that these hours were unlikely to be sufficient to satisfactorily project manage a project of this scale. While Mr Bell assumed that Youssef was working on the site to attain the hours necessary to become a licenced builder, he considered that the hourly rate which he had used remained applicable. In Mr Bell’s experience, the level of project manager in a project is usually commensurate with the level of the person responsible for the contract being administered. Absent any other information, Mr Bell used the builder’s rate in the contract, which Mr Bell considered was the best indication of what an appropriate rate was for the services of a project manager for this job.

  5. The plaintiff submitted that the Court would prefer the opinion expressed in Mr. Bell’s first report, as the assumptions in that report most accurately reflected the amount of work that would be performed by 316 Group in providing services in connection with the Development. The second report adopted assumptions based on Nouredeen’s evidence that, even though Youssef was participating in the development in order to obtain experience in the building industry, he only worked 12 hours per week.

  6. Against this, Youssef said that 316 Group did not carry out the construction of the development. Rather, Rabah engaged a builder to carry out construction services and organised for much of the work to be done. Nouredeen said that 316 Group’s role in the development involved receiving invoices from subcontractors and paying those invoices using funds provided by Rabah and attending the site during the build to provide general assistance. Youssef was the only person working for 316 Group. Nouredeen said Youssef attended the site about six days a week or 12 hours a week. Youssef also engaged a bricklayer subcontractor, but did not engage any other subcontractors. Youssef was also employed at the time as a general manager for another company, Rad-1 United Plumbing and Drainage Pty Ltd.

  7. Nouredeen said his role included engaging architects and engineers to assist with the plans and development applications, undertaking preliminary civil works – including demolition and removal of the sheds on the site, the car ovens, concrete – and excavation. Nouredeen met with the builder and gave instructions. He met with the builder and subcontractors and gave his recommendations to the builder about subcontractors. Before 316 Group became involved, Nouredeen said he made payments to suppliers or subcontractors. When ANZ advanced further funds on each drawdown, he transferred those funds to 316 Group. He also made telephone calls to make arrangements for work done by Lion Civil.

  8. According to Nouredeen, Mr Zeitoun’s role as builder included meeting with subcontractors and reviewing their tenders, engaging subcontractors and ensuring that they were paid, meeting with Nouredeen to discuss the progress of the development, making sure the build was proceeding in accordance with the plans and visiting the site, generally each day. In addition, Mr Zeitoun employed a foreman, who was on site each day from Monday to Saturday, managing the site and supervising tradespeople on site.

  9. The defendant submitted that, where both parties agree there was a contract between Rabah and 316 Group, there was no room for 316 Group to charge a fee based on quantum meruit: Mann v Paterson Constructions Pty Ltd (2019) 267 CLR 560; [2019] HCA 32 at [14]-[18] (per Kiefel CJ, Bell and Keane JJ). Mr Bell’s evidence was said not to provide a proper basis for any such fee. He made no allowance for the benefit obtained by 316 Group from being involved in the development. His first report was based on an overstated role of 316 Group. His second report overstated the qualifications and pay rate of Youssef.

Conclusion

  1. It is only necessary to consider this claim in the event that there was no agreement between Rabah and 316 Group to pay 316 Group for its project management services. If my findings in respect of the agreement are wrong, “It is the very fact that there is no genuine agreement … that provides the occasion for (and part of the circumstances giving rise to) the imposition by the law of the obligation to make restitution”: Equuscorp Pty Ltd v Haxton [2012] HCA 7; (2012) 246 CLR 498 at 529 (per French CJ, Crennan and Kiefel JJ); Pavey & Matthews Pty Ltd v Paul at 227 (per Mason and Wilson JJ).

  1. In order to establish a quantum meruit claim, it is necessary to prove that the defendant has received or retained a benefit, the benefit was obtained at the plaintiff’s expense; and, there is an element of recognised injustice that demonstrates that it would be unjust for the respondent to fail to make restitution: Hegarty v Keogh (No 2) [2023] SASCA 30 at [183] (per Livesey P, Doyle and Bleby JJA). Whether the failure to make restitution would be unjust is not determined by a subjective evaluation of what is unfair or unconscionable; there must be some qualifying or vitiating factor falling into some particular category which renders the retention of the benefit unjust: Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [150] (per Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ). The 'free acceptance' of a benefit from a service provider, where the recipient has made an express or implied request for that benefit and the service provider would expect to be paid, is one such category: see Lampson (Australia) Pty Ltd v Fortescue Metals Group Ltd (No 3) [2014] WASC 162 at [56]-[90] (per Edelman J) (noting that there remains some debate as to whether 'free acceptance' is an unjust factor where no request has been made: N C Seddon and R A Bigwood, Law of Contract (11th edition) at [26.8]).

  2. In determining whether the service provider expected to be paid, the Court is not concerned with actual state of mind of the parties but whether the recipient, as a reasonable person, should have realised that a person in the service provider's position would expect to be paid: Vasco Investment Managers Ltde v Morgan Stanley Australia Ltd [2014] VSC 455 at [347] (per Vickery J); Hegarty v Keogh (No 2) at [198]; Angelopoulos v Sabatino (1995) 65 SASR 1, 12-13 (per Doyle CJ). Further, the unenforceable contract may be relied on as evidence demonstrating whether what was done was done gratuitously: Hegarty v Keogh (No 2) at [186].

  3. Here, Rabah has freely accepted and incontrovertibly benefited from the services rendered by 316 Group. The only question is whether a reasonable person in Rabah’s position would have realised that 316 Group would expect to be paid. Nouredeen and Youssef’s evidence that 316 Group did very little is unreliable. I infer that Mr Zeitoun’s evidence would not have assisted the defendant. Rather, the contemporaneous records indicate that the company provided project management services: see [157]-[162]. 316 Group worked on the Burwood project for two years. Mr Bell’s opinion was that a project of this scale would require a project manager to work 56 hours a week for 93 weeks.

  4. Whilst the brothers said that Youssef initially did not ask for a fee for 316 Group’s services – where the benefit to the company was work experience or getting its name “out in the industry” – I have concluded that this evidence is unlikely: see [156]. After discussing the matter with Mr Hassan, the brothers agreed that 8% per annum would be charged on total loans made by Rabah to 316 Group, said to be interest. As earlier discussed, this evidence is also unlikely and makes no sense: see [163]. More likely, the additional charge by 316 Group on top of the funds provided to effect the development was the project manager’s fee for service. That is, Rabah expected to pay for 316 Group’s services.

  5. In the circumstances, I consider that 316 Group is entitled to recover reasonable remuneration for its services. That remuneration is calculated in Mr Bell’s first report, where his second report is based on the assumption that Nouredeen’s evidence is correct. That is an assumption which has not been established.

ORDERS

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

  1. Judgment in the sum of $14,800,000, together with interest calculated in accordance with section 100 of the Civil Procedure Act 2005 (NSW).

  2. Otherwise dismiss the Amended Summons.

  3. Defendant to pay the plaintiff’s costs of the proceedings.

  4. Direct the plaintiff to provide a calculation of the interest referred to in Order 1 within seven days, preferably agreed with the defendant, so that the amount of the judgment may be varied accordingly.

  5. Direct the parties to notify any errors or omissions within seven days.

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Amendments

13 June 2023 - [113] - "Family Court" amended to "Federal Court"

Decision last updated: 13 June 2023

Most Recent Citation
Cases Cited

49

Statutory Material Cited

3

Advanced Holdings Pty Limited as Trustee for the Demian Trust v Commissioner of Taxation [2021] FCAFC 135
Abigroup Contractors Pty Ltd v ABB Service Pty Ltd [2004] NSWCA 181
Angelopoulos v Sabatino [1995] SASC 5230