Newman v Hartwig
[2024] VSC 54
•23 February 2024
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2019 05814
IN THE MATTER of A.C.N. 602 135 446 PTY LTD (ACN 602 135 446) (IN LIQUIDATION) (FORMERLY KNOWN AS MINC SALLON (LAVERTON) PTY LTD)
BETWEEN:
| PHILIP NEWMAN AS LIQUIDATOR OF A.C.N. 602 135 446 PTY LTD (ACN 602 135 446) (IN LIQUIDATION) (FORMERLY KNOWN AS MINC SALLON (LAVERTON) PTY LTD) (and another according to the attached Schedule) | First Plaintiff |
| and | |
| BRETT DOUGLAS HARTWIG (and others according to the attached Schedule) | First Defendant |
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JUDGE: | Matthews J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 25 - 28 September, 2 – 5, 9 – 13, 30 October 2023, 11 December 2023 |
DATE OF JUDGMENT: | 23 February 2024 |
CASE MAY BE CITED AS: | Newman & Anor v Hartwig & Ors |
MEDIUM NEUTRAL CITATION: | [2024] VSC 54 |
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INSOLVENCY – Whether company insolvent as at three key dates – Whether reasonable grounds to suspect insolvency – Corporations Act 2001 (Cth), s 95A – Quin v Vlahos [2021] VSC 205 – Queensland Phosphate Pty Ltd v Korda [No 2] [2019] VSCA 215.
CORPORATIONS – Duty to prevent insolvent trading – Whether consenting to court orders constitutes ‘incurring a debt’ for purposes of insolvent trading provisions – Defences – Corporations Act 2001 (Cth), ss 588G, 588H, 588M.
CORPORATIONS – Voidable transactions – Unfair preferences – Uncommercial transactions – Whether group of transactions made within short timespan can lead to conclusion that each single transaction is an insolvent transaction - Whether transactions were for a creditor-defeating purpose – Defences not made out – Corporations Act 2001 (Cth), ss 588FA, 588FB, 588FC, 588FE, 588FF, 588FG.
CORPORATIONS – Duties of directors – Duty of care and diligence breached – Duty to act in good faith in best interests of the company breached – No breach of duty to act for a proper purpose – Defences not made out – United Petroleum Pty Ltd v Herbert Smith Freehills [2018] VSC 347 – Corporations Act 2001 (Cth), ss 180, 181, 1318.
EQUITY – Resulting trust – Whether the contribution to purchase price of a property was made with the company’s own funds – Constructive trust – Whether the contribution to improvement of property was made with the company’s own funds – Alternative claim for money had and received.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Ms C Nicholson | FCW Lawyers |
| For the Defendants | Mr CR Northrop | Russell Kennedy Lawyers |
TABLE OF CONTENTS
A.. Introduction.................................................................................................................................. 1
A.1... Brief synopsis....................................................................................................................... 1
A.2... Dramatis personae............................................................................................................... 1
A.3... Uncontroversial/agreed chronology................................................................................ 5
B.. The pleadings............................................................................................................................... 7
B.1... Payments made from the Net Sale Proceeds................................................................... 9
B.2... MSL’s alleged interest in the Armidale Property......................................................... 12
B.3... Allegations against Hartwig and Minc for insolvent trading..................................... 12
B.4... Alleged breaches of directors’ duties by Hartwig and Minc...................................... 15
B.5... Relief sought by the plaintiffs.......................................................................................... 16
C.. The evidence............................................................................................................................... 17
C.1... Witnesses and court book................................................................................................. 17
C.2... Assessment of witnesses................................................................................................... 20
C.2.1.. Plaintiffs’ witnesses............................................................................................... 20
C.2.1.1 ... Newman................................................................................................ 20
C.2.1.2.... Hunter................................................................................................... 20
C.2.1.3.... Erskine................................................................................................... 22
C.2.2 Defendants’ witnesses............................................................................................. 22
C.2.2.1.... Hartwig................................................................................................. 22
C.2.2.2.... Minc....................................................................................................... 23
C.2.2.3.... Ascenzo................................................................................................. 23
C.2.2.4.... Breckenridge......................................................................................... 24
C.2.2.5.... Ryan....................................................................................................... 24
C.2.2.6.... Smith...................................................................................................... 24
D.. Resolving key disputed factual matters................................................................................ 25
D.1... The Hunter Loan agreement............................................................................................ 25
D.2... Wodonga and Newcastle retention sums...................................................................... 31
D.3... The Replacement Agreement........................................................................................... 35
D.3.1.. Pleadings................................................................................................................. 35
D.3.2.. Entry into the Replacement Agreement............................................................. 37
D.3.3.. December 2015 payments by MSL to Twisse and Straightline....................... 41
D.3.4.. Retentions............................................................................................................... 44
D.3.5.. Ascenzo’s resignation as director of Kanyon and transfer of his shares....... 45
D.3.5.1.... Evidence................................................................................................ 45
D.3.5.2.... Plaintiffs’ submission.......................................................................... 51
D.3.5.3.... Defendants’ submission...................................................................... 53
D.3.5.4.... Consideration....................................................................................... 53
D3.6... Whether the existence of the Replacement Agreement is supported by Kanyon’s financial statements............................................................................................... 55
D.3.6.1.... The pleading......................................................................................... 55
D.3.6.2.... Evidence................................................................................................ 56
D3.6.3..... Plaintiffs’ submission.......................................................................... 58
Defendants’ submission...................................................................................... 59
D.3.7.. The circumstances of the dispute over the existence of the Replacement Agreement.................................................................................................................................. 59
D.3.8.. Plaintiffs’ additional submissions about the Replacement Agreement......... 60
D.3.9.. Defendants’ additional submissions about the Replacement Agreement.... 61
D.3.10Conclusion regarding the existence of the Replacement Agreement............ 61
E... MSL’s solvency........................................................................................................................... 65
E.1... Applicable principles........................................................................................................ 66
E.2... Was MSL insolvent in December 2015 or did it become insolvent by incurring the Hunter Loan?................................................................................................................................... 69
E.2.1... Evidence.................................................................................................................. 69
E.2.2.1.... Ms Erskine’s evidence......................................................................... 69
E.2.2.2.... Mr Smith’s evidence............................................................................ 76
E.2.2... Plaintiffs’ submission............................................................................................ 81
E.2.3... Defendants’ submission........................................................................................ 84
E.2.4... Consideration......................................................................................................... 86
E.3... Was MSL insolvent in June 2017 or did it become insolvent by reason of entering into the alleged voidable transactions at that time?.................................................................... 93
E.3.1... Evidence.................................................................................................................. 93
E.3.1.1.... Ms Erskine’s evidence......................................................................... 93
E.3.1.2.... Mr Smith’s evidence............................................................................ 97
E.3.2... Plaintiffs’ submission............................................................................................ 99
E.3.3... Defendants’ submission...................................................................................... 101
E.3.4... Consideration....................................................................................................... 102
E.4... Was MSL insolvent in October 2018 or did it become insolvent by reason of the making of the County Court Final Orders?.................................................................................... 105
F... The plaintiffs’ insolvent trading claims against Hartwig and Minc............................. 105
F.1... Statutory provisions and relevant applicable principles........................................... 105
F.2... Insolvent trading claim regarding the Hunter Loan in December 2015................. 110
F.2.1... Plaintiffs’ submission.......................................................................................... 111
F.2.2... Defendants’ submission...................................................................................... 112
F.2.3... Consideration....................................................................................................... 113
F.3... Insolvent trading claim regarding the consent to the making of the Final County Court Orders in 2 October 2018................................................................................................ 121
F.3.1... Plaintiffs’ submission.......................................................................................... 122
F.3.2... Defendants’ submission...................................................................................... 125
F.3.3... Consideration....................................................................................................... 126
G.. Voidable transaction claims................................................................................................... 128
G.1 Statutory provisions and relevant applicable principles............................................. 128
G.2... Defendants’ general submissions regarding the voidable transaction claims....... 133
G.3... The Horwood Payment.................................................................................................. 136
G.3.1.. The claims............................................................................................................. 136
G.3.2.. Evidence................................................................................................................ 137
G.3.3.. Plaintiffs’ submission.......................................................................................... 139
G.3.3.1.... Unfair preference............................................................................... 139
G.3.3.2.... Uncommercial transaction............................................................... 139
G.3.4.. Defendants’ submission...................................................................................... 142
G.3.5.. Consideration....................................................................................................... 144
G.3.5.1.... Unfair preference............................................................................... 144
G.3.5.2.... Uncommercial transaction............................................................... 146
G3.5.3..... Insolvent transaction......................................................................... 149
G.3.5.4.... Defences.............................................................................................. 149
G.3.5.5.... Relief in respect of the Horwood Payment.................................... 151
G.4... The Total Sallon Payment............................................................................................... 151
G.4.1.. Evidence................................................................................................................ 151
G.4.2.. Plaintiffs’ submission.......................................................................................... 153
G.4.2.1.... Unfair preference............................................................................... 154
G.4.2.2.... Uncommercial transaction............................................................... 154
G.4.2.3.... Transfer to defeat creditors.............................................................. 155
G.4.3.. Defendants’ submission...................................................................................... 156
G.4.4.. Consideration....................................................................................................... 157
G.5... The Aida Nominees Payments...................................................................................... 161
G.5.1.. Evidence................................................................................................................ 161
G.5.2.. Plaintiffs’ submission.......................................................................................... 163
G.5.3.. Defendants’ submission...................................................................................... 165
G.5.4.. Consideration....................................................................................................... 166
H.. The plaintiffs’ claims against Armidale.............................................................................. 172
H.1.. The pleadings................................................................................................................... 172
H.2.. The evidence..................................................................................................................... 176
H.3.. Plaintiffs’ submission...................................................................................................... 180
H.4.. Defendants’ submission.................................................................................................. 184
H.5.. Consideration................................................................................................................... 185
I.... Claims for breach of directors’ duties against Hartwig and Minc................................. 189
I.1.... The pleadings................................................................................................................... 189
I.2.... Statutory provisions........................................................................................................ 192
I.3.... Plaintiffs’ submission...................................................................................................... 193
I.3.1.... General submissions regarding directors’ duties in this case....................... 193
I.3.2.... Submissions regarding Hartwig and Minc...................................................... 194
I.3.3.... Specific submissions regarding Minc............................................................... 195
I.4.... Defendants’ submission.................................................................................................. 196
I.5.... Consideration................................................................................................................... 197
I.5.1.... Principles regarding s 180 of the Act................................................................ 197
I.5.2.... Principles regarding s 181 of the Act................................................................ 200
I.5.3.... Breach of duty claims regarding payments to Armidale.............................. 203
I.5.4.... Some general comments regarding the pleading, evidence and submissions regarding breach of duty claims in respect of the Alleged Breach of Duty Payments................................................................................................................................ 204
I.5.5.... Analysis regarding the claims against Hartwig and Minc for breach of s 181(1)(a) of the Act in respect of the Alleged Breach of Duty Payments......................... 206
I.5.6.... Analysis regarding the claims against Hartwig and Minc for breach of s 181(1)(b) of the Act in respect of the Alleged Breach of Duty Payments......................... 208
I.5.7.... Analysis regarding the claims against Hartwig and Minc for breach of s 180 of the Act in respect of the Alleged Breach of Duty Payments....................................... 209
I.5.8.... Defences................................................................................................................ 209
I.5.8.1...... Business judgment rule..................................................................... 209
I.5.8.2...... Section 1318 of the Act...................................................................... 210
I.5.9.... Quantum of damage........................................................................................... 211
J.... Summary of conclusions........................................................................................................ 212
HER HONOUR:
A. Introduction
A.1 Brief synopsis
This case concerns claims by the plaintiffs against:
(a) The first and second defendants, for insolvent trading and breach of directors’ duties;
(b) The third, fourth and fifth defendants, for transactions which are alleged to be voidable; and
(c) The sixth defendant, for equitable relief in respect of approximately $1.7 million in contributions to a property owned by the sixth defendant.
The defendants deny all claims made against them.
The factual matters involved in this case are complex and many of the key facts are disputed.
A.2 Dramatis personae
This case concerns the company A.C.N. 602 135 446 Pty Ltd (ACN 602 135 446), formerly known as Minc Sallon (Laverton) Pty Ltd (‘MSL’), which is now in liquidation.
Philip Newman (‘Newman’) is the liquidator of MSL, having been appointed by order of this Court on 30 January 2019. He is the first plaintiff in this proceeding.
MSL is the second plaintiff in the proceeding. From 27 April 2015 to around 5 June 2017, MSL was the registered proprietor of the property at 4 Leakes Road, Laverton (‘Laverton Property’). The Laverton Property was sold at auction on 11 April 2017 for $2.7 million. At settlement on 5 June 2017, after satisfaction of MSL’s debt as mortgagee to Westpac and selling costs, MSL received net sale proceeds in the sum of $1,347,854 (‘Net Sale Proceeds’).
Brett Douglas Hartwig (‘Hartwig’) was a director of MSL from 2 October 2014 until MSL was wound up on 30 January 2019. He is the first defendant in the proceeding. Hartwig is/was also a director of the following entities which are relevant to this proceeding:
(a) Berkeley Capital Partners Pty Ltd (‘BCP’) from 24 April 1997. BCP is the third defendant in the proceeding;
(b) Sallon Pty Ltd (‘Sallon’) as trustee for the Sallon Pension Fund from 7 June 1995. Sallon is the fourth defendant in the proceeding and is a shareholder of MSL as to 24 out of 120 shares. Hartwig, with his wife Christine Hartwig, is a shareholder of Sallon. Sallon holds 50% of the shares in BCP;
(c) East Brunswick Operations Pty Ltd (‘East Brunswick Operations’) from 24 February 2014;
(d) Kanyon Pty Ltd (‘Kanyon’), from 28 February 2012 to 17 March 2017. Kanyon is not a party to the proceeding;
(e) Armidale Nominees Pty Ltd (‘Armidale’); and
(f) Trimont Australia Pty Ltd (‘Trimont Australia’), a company which subsequently changed its name to Cornonero Pty Ltd, from 15 September 2015 to 20 November 2016.
Richard Charles Minc (‘Minc’) was also a director of MSL from 2 October 2014 until MSL was wound up on 30 January 2019. He is the second defendant in the proceeding. Minc is also:
(a) a shareholder of MSL jointly with his wife, Susan Minc, as to 96 out of 120 shares;
(b) a director of Aida Nominees Pty Ltd (‘Aida Nominees’) from 29 June 1972 and a beneficial shareholder of Aida Nominees jointly with his wife, Susan Minc. Aida Nominees is the fifth defendant in the proceeding; and
(c) a director of Armidale.
Armidale is the trustee of the Armidale Unit Trust. Armidale, in its capacity as trustee of the Armidale Unit Trust, is the sixth defendant in the proceeding. It is also the registered proprietor of 124 Taylor Street, Armidale, in the state of New South Wales, more properly described in Certificate of Title folio identifier 2/524804 (‘Armidale Property’).
Cameron Bailey Hunter (‘Hunter’) is not a party to the proceeding. He is/was:
(a) a director of Kanyon from 28 February 2012 to 20 July 2013, and from 17 March 2017;
(b) together with his wife, Natalie Ann Hunter (‘Natalie Hunter’), trustee of the CB and NA Hunter Family Trust (‘Hunter FT’), which trust, inter alia, holds 50% of the shares in BCP and is a shareholder in Kanyon; and
(c) a director of BCP from 31 December 2010 to 14 February 2019.
Bailey Hunter (‘Bailey Hunter’) is Hunter’s father and he is also not a party to the proceeding. He has been a director of Kanyon since 28 February 2012.
Silvio Ascenzo (‘Ascenzo’) is not a party to the proceeding. He is/was a director of the following entities which are relevant to this proceeding:
(a) Kanyon, from 22 February 2012 to 1 May 2016;
(b) Ascenzo Investments Pty Ltd (‘Ascenzo Investments’);
(c) Trimont Pty Ltd (‘Trimont’). Trimont was a building company which, inter alia, worked on a number of building projects of which Kanyon was the developer;
(d) Trimont Australia, from 1 June 2015;[1] and
(e) Armidale, from 14 April 2016 to 13 May 2016.
[1]The evidence does not disclose when Ascenzo ceased being a director of Trimont Australia (if he did so cease), however, the company search in evidence records him as a director as at 1 October 2021.
Peter Breckenridge (‘Breckenridge’) is not a party to the proceeding. He is/was:
(a) a director of Kanyon, from February 2012 to 23 July 2012, and from 10 March 2016 to 17 March 2017;
(b) employed as the general manager of Trimont from around 2011 to about 2015;
(c) the CEO of Trimont Australia; and
(d) a director of Armidale.
As noted above, Kanyon is not a party to the proceeding. It was formed in 2012 for property investment and development purposes.
(a) At the relevant time, the shareholders of Kanyon were:
(i) Sallon as trustee of the Hartwig Family Trust, as to 2 out of 12 shares;
(ii) Hunter and his wife Natalie Hunter as trustees for the Hunter FT, as to 2 out of 12 shares;
(iii) Wickley Nominees Pty Ltd (‘Wickley’), a company related to Bailey Hunter and to his brother, Warwick Hunter, as to 4 out of 12 shares; and
(iv) Ascenzo Investments, as to 4 out of 12 shares.
(b) The directors of Kanyon were/are:
(i) Hartwig, from 28 February 2012 to 17 March 2017;
(ii) Bailey Hunter, from 28 February 2012;
(iii) Hunter, from 28 February 2012 to 20 July 2013, and from 17 March 2017;
(iv) Ascenzo, from 22 February 2012 to 1 May 2016; and
(v) Breckenridge, from 28 February 2012 to 23 July 2012, and from 10 March 2016 to 17 March 2017.
Minc Sallon (Dandenong) Pty Ltd (‘MSD’) is not a party to the proceeding. Its directors are Hartwig and Minc. Sallon owns 24 of the 120 shares in MSD, and Minc (with his wife Susan Minc) owns 96 of the 120 shares in MSD.
A.3 Uncontroversial/agreed chronology
On 5 September 2013, Kanyon and Trimont entered into the following construction agreements:
(a) For a project at Murray Valley Highway, Barnawartha, also known as the Wodonga Logic Centre project (‘Wodonga Project’); and
(b) For a project at 787 Hunter Street, Newcastle, NSW (‘Newcastle Project’).
On 11 August 2014, a certificate of compliance was issued for the Wodonga Project.
In August 2014, Ascenzo made a statutory declaration on behalf of Trimont, stating that all contractors for the Wodonga Project had been paid.
On 22 April 2015, the sum of $1,216,898.63 was transferred from MSL’s bank account to the Carroll & O’Dea Lawyers trust account for the purchase of the Armidale Property (‘Armidale Payment’). Carroll & O’Dea Lawyers were dealing with the conveyancing for the purchase.
On 24 April 2015, Armidale settled on the purchase of the Armidale Property and was registered as proprietor on 4 May 2015.
On 27 April 2015, MSL became registered proprietor of the Laverton Property.
Trimont Australia was registered on 1 June 2015.
In June 2015, Trimont sold its business, which included the projects it was then building for Kanyon, to Trimont Australia pursuant to a business sale agreement.
On 26 June 2015, Kanyon and Trimont Australia entered into a building contract.
In July and October 2015, Ascenzo and Breckenridge made statutory declarations stating that all contractors for the Newcastle Project had been paid.
On 1 December 2015, a loan of $600,000 from Hunter, alternatively Hunter and Natalie Hunter as trustees for the Hunter FT, was agreed to be made to MSL (‘Hunter Loan’).
On 3 December 2015, the Hunter Loan was paid into MSL’s bank account.
On 18 March 2016, Hartwig and Hunter met at Giorgios in Malvern (‘Giorgios Meeting’). The events of that meeting are in dispute.
On 10 April 2017, Horwood Nominees Pty Ltd (‘Horwood Nominees’) paid the sum of $400,000 by bank cheque to MSD which was deposited into MSD’s bank account on the following day.
On 10 April 2017:
(a) Aida Nominees paid $200,000 to MSL; and
(b) $255,000 was paid by MSL to MSD.
On 11 April 2017:
(a) Aida Nominees paid $200,000 to MSL; and
(b) $200,000 was paid by MSL to MSD.
Also on 11 April 2017, the Laverton Property was sold by MSL at auction for $2,755,000. This sale settled on 5 June 2017.
From the Net Sale Proceeds, the following amounts were paid by MSL:
(a) $25,000 to Sallon on 6 June 2017 (‘First Sallon Payment’);
(b) $75,000 to East Brunswick Operations, at the direction of Sallon, on 6 June 2017 (‘EBO Payment’);
(c) $410,922.27 to Horwood Nominees on 6 June 2017 (‘Horwood Payment’);
(d) $400,000 to Aida Nominees on 6 June 2017 (‘6 June Aida Payment’);
(e) $1,100 to Sallon on 23 June 2017 (’23 June Sallon Payment’);
(f) $20,541.98 to Sallon on 29 June 2017 (’29 June Sallon Payment’); and
(g) $240,000 to Aida Nominees on 30 June 2017 (’30 June Aida Payment’).
On 22 August 2017, Hunter commenced proceeding CI-17-03879 in the County Court of Victoria against MSL for recovery of the Hunter Loan (‘County Court Proceeding’). Hunter and Natalie Hunter in their capacity as trustees of the Hunter FT were subsequently added as plaintiffs.
The trial of the County Court Proceeding commenced on 16 May 2018 and was adjourned part heard after 4 days. Hartiwg was joined as second defendant on 21 May 2018.
In June 2018, the Newcastle Project was completed by ProCon Builders.
On 1 October 2018, the trial of the County Court Proceeding resumed.
On the following day, 2 October 2018, final orders were made by consent in the County Court Proceeding against MSL in favour of the Hunters for the sum of $600,000 (‘Sum Order’) plus interest of $168,986 (‘Interest Order’) and costs to be taxed on an indemnity basis in default of agreement (‘Costs Order’), with the proceeding otherwise dismissed (together ‘County Court Final Orders’).
On 30 January 2019 (‘Appointment Date’), this Court made orders in proceeding S ECI 2018 02680 that Newman be appointed as liquidator of MSL. The winding up of MSL pursuant to s 513A of the Corporations Act 2001 (Cth) (‘Act’) commenced on that date. The relation-back day in respect of MSL pursuant to the Act is 11 December 2018 (‘Relation-Back Day’).
B. The pleadings
The current pleadings in respect of the proceeding are:
(a) The plaintiffs’ second amended statement of claim dated 28 September 2023 (‘Statement of Claim’);
(b) The second amended defence of Hartwig, BCP and Sallon dated 21 August 2023 (‘Hartwig Parties Defence’);
(c) The second amended defence of Minc and Aida Nominees dated 21 August 2023 (‘Minc Parties Defence’);
(d) The amended defence of Armidale dated 12 October 2020 (‘Armidale Defence’); and
(e) The plaintiffs’ reply dated 26 October 2020 (‘Reply’).
In many instances in the below discussion of the pleadings, I refer to the defendants collectively. This is done as a matter of convenience and so as not unnecessarily to lengthen the discussion, but it should be noted that in a number of instances, not all defendants actually make those pleadings as the allegations do not necessarily concern all of them all of the time.
What follows is a summary of key aspects of the pleadings. Where necessary, additional detail will be set out when each of the claims are discussed later in these reasons.
The plaintiffs allege that pursuant to s 588FE(4) of the Act, the relevant period for recovery of voidable transactions involving related parties is four years ending on the Relation-Back Day, being 12 December 2014 to 11 December 2018. The defendants admit this relevant period but otherwise do not admit this allegation.
The plaintiffs allege that pursuant to s 588FE(5) of the Act, the period for recovery of voidable transactions in respect of transfers to defeat creditors is 12 December 2008 to 11 December 2018. The defendants admit this relevant period but otherwise do not admit this allegation.
The plaintiffs allege, and the defendants admit (insofar as the allegation is made against them), that Hartwig, Minc, BCP, Sallon and Aida Nominees are related entities of MSL pursuant to s 9 of the Act.
B.1 Payments made from the Net Sale Proceeds
The plaintiffs allege that the Net Sale Proceeds were used to pay, among other things:
(a) statutory obligations to the Australian Taxation Office in the sum of $78,634.20;
(b) a debt owed by MSL to BCP, satisfied by way of the Horwood Payment at the direction of BCP, in order to satisfy a debt owed by BCP to Horwood Nominees;
(c) loans provided to MSL by director-related entities to acquire the Laverton Property, satisfied in part or in full by payments totalling $711,507.36, comprising:[2]
[2]I have been unable to ascertain how the payments referred to in this sub-paragraph total $711,507.36, however, I do not consider that anything turns on this.
(v) the First Sallon Payment;
(vi) the EBO Payment, at the direction of Sallon;
(vii) the 6 June Aida Payment and the 30 June Aida Payment, both in partial repayment of an outstanding loan account payable by MSL (together, the ‘Aida Nominees Payments’).
The plaintiffs allege that after accounting for the payments referred to in the preceding paragraph and other incidental payments made by MSL, the remaining surplus of the Net Sale Proceeds in the sum of $50,134.62 (‘Surplus Payment’) was distributed to or for the benefit of Sallon. The Surplus Payment is alleged to comprise:
(a) the 23 June Sallon Payment;
(b) the 29 June Sallon Payment; and
(c) the sum of $28,492.64, which is the difference between the EBO Payment of $75,000 and the amount which MSL’s books and records stated at the time as being a debt owed by MSL to Sallon of $46,507.36. In circumstances where the EBO Payment exceeded the debt owed by MSL to Sallon, the balance of the payment comprising the EBO Payment was surplus funds belonging to MSL.
I interpose here to note that a total of $121,641.98 is alleged by the plaintiffs to have been paid from the Net Sale Proceeds to or for the benefit of Sallon (‘Total Sallon Payment’). It is convenient to describe it in these terms for much of this judgment, however, it will need discussion and refinement later in these reasons.
In respect of the allegations referred to in paragraphs 46 and 47 above, the defendants admit (in paragraph 13 of their respective defences) that from the Net Sale Proceeds, MSL made the following payments totalling the sum of $1,248,564.25:
(a) the Horwood Payment;
(b) the First Sallon Payment;
(c) the EBO Payment;
(d) the 23 June Sallon Payment;
(e) the 29 June Sallon Payment;
(f) the sum of $76,000 to the Australian Taxation Office; and
(g) the Aida Nominees Payments.
In their particulars to paragraph 13 of their respective defences, the defendants say that:
(a) The payments from the Net Sale Proceeds were made in circumstances where MSL was not liable to repay, and Hartwig and Minc did not believe MSL was liable to repay, the Hunter Loan and where Hunter, alternatively the Hunter FT, was not a creditor of MSL. In their Reply, the plaintiffs deny these allegations.
(b) The purpose of the Horwood Payment was to discharge MSL’s liability to repay a loan from Horwood Nominees in the sum of $400,000.
(c) The First Sallon Payment and the EBO Payment were in part for the purpose of discharging MSL’s liability to repay a shareholder loan owing to Sallon, and in part a loan of monies from MSL which Sallon then loaned to East Brunswick Operations. In their Reply, the plaintiffs plead that MSL was not liable to repay a shareholder’s loan to Sallon and that MSL did not loan the sum of $75,000 to Sallon who then loaned it to East Brunswick Operations.
(d) The Aida Nominees Payments were made in part for the purpose of discharging MSL’s liability to repay a shareholder loan to Aida Nominees and in part a distribution of profit to shareholders. In their Reply, the plaintiffs plead that MSL was not liable to repay a shareholder’s loan to Aida Nominees as Aida Nominees was not a shareholder, and MSL was not entitled to distribute profits to Aida Nominees as it was not a shareholder.
(e) The 23 June Sallon Payment was a management fee paid by MSL to Sallon for bookkeeping, invoicing and property management. In their Reply, the plaintiffs plead that Sallon was not entitled to any management fees from MSL.
(f) The 29 June Sallon Payment was a profit return to Sallon as a shareholder.
The plaintiffs allege that the Horwood Payment, the Total Sallon Payment and the Aida Nominees Payments were each unfair preferences and/or uncommercial transactions, and are voidable. In respect of the Total Sallon Payment and the Aida Nominees Payments, the plaintiffs also allege that they were transfers to defeat creditors and are voidable. The defendants deny these allegations.
B.2 MSL’s alleged interest in the Armidale Property
The plaintiffs allege that the Armidale Payment was a contribution to the purchase of the Armidale Property such that a resulting trust in favour of MSL arises. They also allege that some $550,000[3] was contributed by MSL to Armidale for demolition works at the Armidale Property (‘Demolition Payment’), giving rise to a constructive trust in favour of MSL.
[3]By the time of trial, this amount was identified as $558,000.
The defendants deny these claims, saying, inter alia, that the Armidale Payment was not made from MSL’s own money and that there was no Demolition Payment made by MSL.
B.3 Allegations against Hartwig and Minc for insolvent trading
The plaintiffs allege that between 1 December 2015 and the Appointment Date, MSL incurred debts to several creditors and which debts remained outstanding at the date of liquidation (‘Debts’). The Debts are alleged to be owed to:
(a) Hunter, alternatively Hunter and Natalie Hunter in their capacity as trustees of the Hunter FT in the amount of $600,000 (that is, the Hunter Loan), incurred on 1 December 2015. Alternatively, the plaintiffs claim the same amount was a debt incurred on 2 October 2018 when the Sum Order was made;[4]
(b) Hunter, and Hunter and Natalie Hunter in their capacity as trustees of the Hunter FT in the amount of $168,986 incurred on 2 October 2018 (that is, the Interest Order); and
(c) Hunter, and Hunter and Natalie Hunter in their capacity as trustees of the Hunter FT for the legal costs of the County Court Proceeding (that is, the Costs Order), to be taxed but estimated to be approximately $200,000, incurred on 2 October 2018.
[4]The statement of claim was amended to include this alternate claim pursuant to leave granted on 27 September 2023.
The plaintiffs allege that these Debts were incurred at a time when MSL was insolvent or, alternatively, MSL became insolvent because of matters including the incurring of each of these Debts, or incurring debts including each of these Debts.
Hartwig and Minc admit that on or about 1 December 2015, Hunter, alternatively Hunter and Natalie Hunter as trustees for the Hunter FT, entered into the Hunter Loan, being a short-term loan with MSL for $600,000, but say that MSL ceased to be liable to repay the Hunter Loan on or about March or April 2016 as a consequence of an agreement whereby it became a liability of Kanyon (‘Replacement Agreement’). The alleged Replacement Agreement is disputed by the plaintiffs, and more will be said about this later.
Insofar as it is alleged MSL incurred the Hunter Loan on 1 December 2015, Hartwig and Minc plead that:
(a) It was not incurred at a time when MSL was insolvent and MSL did not become insolvent because it incurred the alleged debt.
(b) Hartwig and Minc had reasonable grounds to expect, and did expect, MSL was solvent and would remain solvent even if it incurred that debt or any other debts which it incurred at that time.
(c) Further and in the alternative, by reason of the Replacement Agreement, MSL was not liable to repay the Hunter Loan because it became a liability of Kanyon.
(d) Hartwig and Minc had reasonable grounds to expect, and did expect, Hunter, alternatively Hunter and Natalie Hunter as trustees for the Hunter FT, was/were not a creditor of MSL from March or April 2016 at the time when the transactions referred to in paragraphs 46 and 47 above were made.
Hartwig and Minc admit that the County Court Final Orders were made but plead that those orders included a stay on the payment of $600,000 and $168,986 for 30 days. In Reply, the plaintiffs acknowledge this stay on enforcement but plead that the Interest Order and the Costs Order were debts incurred by MSL on 2 October 2018.[5]
[5]While not specifically referred to in the Reply, I assume that the same is said of the Sum Order, given the amendment to the statement of claim to include it as an alternative claim.
Hartwig and Minc deny that the County Court Final Orders were debts incurred by MSL on 2 October 2018 for the purposes of s 588G of the Act. They say that if the County Court Final Orders were debts incurred by MSL, then:
(a) they deny those debts were incurred at a time when MSL was insolvent; or
(b) alternatively, they say MSL did not become insolvent because of matters including each of the Sum Order, the Interest Order or the Costs Order.
The plaintiffs allege that from 10 December 2015 until the Appointment Date, MSL was unable to pay all its debts as and when they became due and payable, and was insolvent within the meaning of s 95A(2) of the Act.
Hartwig and Minc deny this allegation.
The plaintiffs allege that at the time when each of the Debts were incurred:
(a) There were reasonable grounds for suspecting that MSL was insolvent or would become insolvent by incurring each of the Debts or incurring debts including each of the Debts.
(b) Hartwig and Minc were each aware that there were reasonable grounds for suspecting that MSL was insolvent or would become insolvent by incurring each of the Debts or incurring debts including each of the Debts.
(c) Further or alternatively, a reasonable person in a like position to that of Hartwig and Minc in a company in MSL’s circumstances would have been aware that there were reasonable grounds for suspecting that MSL was insolvent or would become insolvent by incurring each of the Debts or incurring debts including each of the Debts.
Hartwig and Minc deny this allegation. They say that if the Interest Order and Costs Order are debts incurred by MSL, they had reasonable grounds to expect and did expect that MSL was solvent at the time those debts were incurred and would remain solvent even if it incurred them. They say the same in respect of the Hunter Loan. Further and alternatively, Hartwig and Minc say they had reasonable grounds to believe and did believe that a competent and reliable person was responsible for providing MSL with adequate information about whether it was solvent and that the person was fulfilling that responsibility. They say that they expected, on the basis of the information provided to MSL, that it was solvent at the relevant time and would remain solvent even if it incurred the Debts. The person said to be relied upon in this regard is HLB Mann Judd.
The plaintiffs allege that Hartwig and Minc have each contravened s 588G of the Act in respect of the incurring of each of the Debts. They also allege that the persons to whom each of the Debts are owed have suffered loss and damage in relation to each of the Debts because of MSL’s insolvency and each of the Debts were wholly unsecured when the loss and damage was suffered.
Hartwig and Minc deny these allegations.
The plaintiffs allege that pursuant to s 588M of the Act, Newman is entitled to recover compensation, as a debt due to MSL, from Hartwig and Minc in an amount equal to the loss and damage arising from the Debts being incurred and which compensation is in the sum of $968,986.
Hartwig and Minc deny these allegations, save that they admit that a liquidator is entitled to recover compensation under s 588M of the Act.
B.4 Alleged breaches of directors’ duties by Hartwig and Minc
The plaintiffs allege that each of Hartwig and Minc, by causing MSL to enter into the Total Sallon Payment and the Aida Nominees Payments, and by causing MSL to make the contributions to the Armidale Property, contravened the duties owed by them as directors to MSL under ss 180 – 184 of the Act.
Hartwig and Minc deny these allegations.
B.5 Relief sought by the plaintiffs
As against Hartwig and Minc, the plaintiffs seek:
(a) a declaration that Hartwig and Minc have contravened s 588G of the Act, and an order directing Hartwig and Minc to pay compensation in the sum of $968,986 to the plaintiffs pursuant to s 588M of the Act; or
(b) alternatively, a declaration that Hartwig and Minc have contravened ss 180(1), 181(1), 182, 183 and 184 of the Act, and a compensation order pursuant to s 1317H of the Act.
As against BCP, the plaintiffs seek:
(a) an order pursuant to s 588FF(1)(a) of the Act directing BCP to pay MSL an amount of $410,922.27 (being the Horwood Payment); or
(b) alternatively, an order pursuant to s 588FF(1)(c) of the Act that BCP pay to MSL an amount that, in the Court’s opinion, fairly represents the benefits BCP received because of the Horwood Payment.
As against Sallon, the plaintiffs seek:
(a) an order pursuant to s 588FF(1)(a) of the Act directing Sallon to pay MSL an amount of $121,641.98 (being the Total Sallon Payment); or
(b) alternatively, an order pursuant to s 588FF(1)(c) of the Act that Sallon pay to MSL an amount that, in the Court’s opinion, fairly represents the benefits Sallon received because of the Total Sallon Payment.
As against Aida Nominees, the plaintiffs seek:
(a) an order pursuant to s 588FF(1)(a) of the Act directing Aida Nominees to pay MSL an amount of $640,000 (being the Aida Nominees Payments); or
(b) alternatively, an order pursuant to s 588FF(1)(c) of the Act that Aida Nominees pay to MSL an amount that, in the Court’s opinion, fairly represents the benefits Aida Nominees received because of the Aida Nominees Payments.
As against Armidale, the plaintiffs seek:
(a) a declaration that MSL has a resulting trust over the Armidale Property to the extent of its contribution to the purchase price of $1,216,898.63 (being the Armidale Payment); and
(b) a declaration that MSL has a constructive trust over the Armidale Property to the extent of its contributions to improvements to the Armidale Property in the sum of $550,000 (being the Demolition Payment); or
(c) alternatively, an order that Armidale pay MSL the sum of $1,774,898.63 within 30 days of the Court’s order; and
(d) upon default of payment of the sum of $1,774,898.63 in accordance with that order, an order that the Armidale Property be sold forthwith and that sum be paid to MSL from the net proceeds of sale.
As against all of the defendants, the plaintiffs seek interest pursuant to statute from the date of the winding up, alternatively on some other basis, and costs.
C. The evidence
C.1 Witnesses and court book
The following persons were called as witnesses by the plaintiffs:
(a) Newman;
(b) Hunter; and
(c) Robyn Erskine (‘Erskine’). Erskine is a registered liquidator and trustee in bankruptcy. She was retained by the plaintiffs to provide expert evidence.
Each of these witnesses made affidavits prior to the trial of the proceeding. At trial, the plaintiffs relied on the following affidavits of Newman and Hunter:
(a) affidavit of Newman affirmed 19 December 2019;
(b) affidavit of Newman affirmed 11 February 2022;
(c) affidavit of Hunter sworn 11 February 2022 (‘First Hunter Affidavit’);
(d) reply affidavit of Hunter sworn 11 March 2022 (‘Second Hunter Affidavit’);
(e) second reply affidavit of Hunter sworn 11 March 2022; and
(f) third reply affidavit of Hunter sworn 21 September 2023.
At trial, the plaintiffs relied on two reports of Erskine dated 22 October 2021 (‘First Erskine Report’) and 21 March 2023 (‘Second Erskine Report’).
The following persons were called as witnesses by the defendants:
(a) Hartwig;
(b) Minc;
(c) Ascenzo;
(d) Breckenridge;
(e) Brodie Ryan (‘Ryan’). At the time, Ryan was an employee of BCP; and
(f) Michael Smith (‘Smith’). Smith is a chartered accountant.
Each of these witnesses made affidavits prior to the trial of the proceeding. At trial, the defendants relied on the following affidavits of:
(a) Hartwig, affirmed 28 February 2022 (‘First Hartwig Affidavit’);
(b) Hartwig, affirmed 22 April 2022 (‘Second Hartwig Affidavit’);
(c) Minc, sworn 17 August 2023;
(d) Hartwig, affirmed 25 August 2023 (‘Third Hartwig Affidavit’);
(e) Breckenridge, sworn 25 August 2023;
(f) Ascenzo, affirmed 25 August 2023 (‘Ascenzo Affidavit’); and
(g) Ryan, affirmed 25 August 2023.
At trial, the plaintiffs relied on two reports of Smith dated 22 June 2021 (‘First Smith Report’) and 11 August 2023 (‘Second Smith Report’).
Prior to each witness being called, objections to aspects of their affidavits were heard and determined. The court book, which contained all of the affidavits relied upon, was subsequently updated so as to contain the post-objection versions of the affidavits, which versions were subsequently adopted by the witnesses.
An expert valuation of the Laverton Property prepared by Joe Phegan of Savills Valuations Pty Ltd dated 22 June 2021 (‘Savills Valuation’) for the defendants was also in evidence, however, Mr Phegan was not required to attend the trial and give evidence.
On the ninth day of the trial, the defendants sought leave to rely on the affidavit of Frederick Leonard Horwood affirmed 6 October 2023 (‘Horwood Affidavit’). The Horwood Affidavit concerned circumstances regarding the Horwood Payment and the making of the facility agency agreement between Horwood Nominees and BCP. I refused to grant such leave and gave short reasons, ex tempore, for that ruling. At that time, I indicated that I would include more fulsome reasons in this judgment, but having reviewed the transcript of my short oral ruling I do not consider it necessary to say anything further about it, other than to reiterate that my reasons for refusing the application were not based on the plaintiffs’ contention that the defendants had breached their overarching obligations under the Civil Procedure Act 2010 (Vic).
Throughout the trial, the court book was supplemented with additional documents as agreed by the parties or as ruled upon by me. All documents in the court book to which I was taken in opening submissions or which were put to witnesses were treated as tendered unless an objection to them was successfully made. Following the close of evidence, the parties provided an updated court book.
The defendants submitted that the plaintiffs’ failure to call Bailey Hunter should result in the Court making the usual Jones v Dunkel[6] inference. They say that Bailey Hunter took part in a number of relevant events and that apart from anything else, he would have been able to give evidence regarding Kanyon’s accounts, in particular those he signed. The defendants submit that the plaintiffs’ failure to call him as a witness is unexplained other than by Hunter’s assertions regarding Bailey Hunter’s medical condition. The defendants did not make any other submissions in respect of the Jones v Dunkel inference they invited me to make, being the inference that the uncalled evidence would not have assisted the plaintiffs.
[6](1959) 101 CLR 298 (‘Jones v Dunkel’).
C.2. Assessment of witnesses
C.2.1 Plaintiffs’ witnesses
C.2.1.1 Newman
I found Newman to be a truthful witness. He readily acknowledged that Hunter is funding this proceeding and that Hunter provided materials to him, but he did not appear to have been unduly influenced by Hunter in the way he has conducted the proceeding.
C.2.1.2 Hunter
The defendants submit that Hunter has pursued Hartwig relentlessly, and that during his evidence Hunter expressed strong views about Hartwig, accusing him on multiple occasions of dishonesty and worse. The defendants’ written closing submission contains an annexure listing instances of these alleged accusations. The defendants submit that Hunter’s evidence needs to be considered carefully in light of the obvious animosity felt towards Hartwig.
It was clearly the case, as Hunter acknowledged, that he and Hartwig had once been close but they had now fallen out. The defendants attempted to portray him, and get him to concede, that he was out for retribution and that this was motivating him to pursue this case (through the liquidator). Hunter denied this. In doing so, I think he downplayed the animosity (or as he put it, disappointment) he had towards Hartwig, and I am in little doubt that he does bear animosity towards Hartwig. At the very least, there have been other legal proceedings between them both in this court and the County Court, and in his evidence Hunter accused Hartwig of placing his signature on certain documents without his authorisation.
The plaintiffs acknowledge that Hunter appeared at times to be advocating for his position, but say that this is understandable given Hunter’s beliefs about Hartwig’s management of Kanyon and the multiple court proceedings they have been involved in which have all settled in favour of Hunter or his entities. The plaintiffs submit that the defendants’ attempts to discredit Hunter as a witness by portraying him as having a vendetta against Hartwig merely exposed the valid reasons Hunter has to hold his beliefs about Hartwig’s conduct.
There are some instances where I did not find Hunter’s evidence to be particularly convincing. For example, his evidence on when he first noticed Loan 9[7] (which is said to represent the Hunter Loan) in Kanyon’s accounts was vague and inconsistent. This will be dealt with later, but I think it is likely that he noticed Loan 9 earlier than he said but did not want to concede that he had.
[7]Defined in paragraph 123 below.
Hunter was not a dispassionate non-party in this proceeding. He has a direct interest in the outcome of the proceeding given that he (or the Hunter FT) is the only remaining creditor of MSL. He is also, as set out above, antagonistic to Hartwig.
For these reasons, I have approached his evidence cautiously, weighing it against the contemporaneous documents and the other oral evidence.
Notwithstanding this caution, on the key matters of the terms of the Hunter Loan, the existence of the Replacement Agreement, and the conversations he had with Hartwig on these matters, Hunter’s evidence was consistently given and appeared truthful. On these matters, Hunter’s evidence was more plausible than that of Hartwig.
C.2.1.3 Erskine
Erskine made concessions where appropriate and sought to assist the Court.
At times, Erskine appeared to be trying to find a basis to adhere to the opinions expressed in her reports in the face of alternate propositions put to her. This was particularly evident in respect of matters such as whether to take account of the fact that no demand for payment of the Hunter Loan had been made when carrying out the solvency analysis. On this, Erskine kept retreating to the date when it was due to be paid. Nonetheless, I do not think this detracted from her evidence.
C.2.2 Defendants’ witnesses
C.2.2.1 Hartwig
I would describe Hartwig as having given his oral evidence carefully, in that he appeared to have a narrative and to take care to give evidence that was consistent with that narrative. That is not to say that the narrative was necessarily false, just that Hartwig had one and he was doing his best to stick with it. So much so that when inconsistent statements made elsewhere or other materials suggesting something else were put to him, if he could not dispute these outright, he then wove them into his narrative, regardless of their plausibility. The content and circumstances of the Replacement Agreement, which I will discuss in detail later, are a prime example of this.
I did not find Hartwig to be a particularly convincing witness, as he left me with the impression of someone who was tailoring his evidence to suit his case.
I agree with the plaintiffs’ submission that Hartwig was at times evasive and non-responsive by providing vague speeches as answers which did not really relate to the questions, and that he changed his evidence when confronted with conflicting material.
C.2.2.2 Minc
Minc did not appear to have a strong recollection of details. I accept that this was likely a product of a number of things, such as:
(a) his lack of involvement in the day-to-day activities of the companies of which he was a director, in particular, MSL;
(b) his reliance on Hartwig to manage MSL’s affairs and to inform him of key matters, such that in a number of respects it was not so much not recalling details but never knowing them in the first place;
(c) the amount of time which has passed since the relevant events; and
(d) his current illness and treatment. While there was no medical evidence in respect of the latter, he was not challenged on it and I have no reason not to accept what he said about this.
Minc appeared to give his evidence honestly and to the best of his recollection.
Despite the problems with his memory, where he and Hartwig differ on particular matters and in the absence of contemporaneous documents to support Hartwig’s position, I prefer Minc’s evidence over Hartwig’s. This is for the reasons set out above regarding Hartwig, and also because Minc’s evidence came across as more genuine and less self-serving than that of Hartwig.
C.2.2.3 Ascenzo
Ascenzo was a poor witness. He obfuscated quite a bit, had a poor recollection of detail, was unclear in many of his answers, and gave a number of conflicting answers over the course of his cross-examination.
Ascenzo appeared to be careful not to give answers that contradicted his claims and his evidence in a separate proceeding which Ascenzo Investments has brought against Kanyon, Hunter and others in this Court, bearing matter number S ECI 2022 02319 (‘Ascenzo Proceeding’).[8] I had the impression that he was tailoring his evidence in this proceeding to make sure it conformed with the Ascenzo Proceeding.
C.2.2.4 Breckenridge
[8]I will explain how this is relevant later in these reasons.
It is difficult to fully assess Breckenridge as a witness as he was not challenged a great deal on cross-examination. Rather, quite a bit of his cross-examination was taken up with putting his statements and evidence from previous proceedings in which he was a party to him and confirming that the statements and evidence were correct. I can only assume that the plaintiffs’ counsel took this approach because this evidence supported (or was consistent with) aspects of the plaintiffs’ case.
C.2.2.5 Ryan
At times, Ryan appeared to be trying to protect Hartwig. For example, a number of times he was asked where he obtained instructions to make various journal entries in the accounts, and he said he could not recall, however, each time when pressed he had to concede that his instructions came from Hartwig. It is perhaps natural that he would want to protect his employer (and now co-director of BCP), however, it does detract a little from his credibility.
Apart from this, he appeared to give evidence truthfully. However, I accept the plaintiffs’ submission that Ryan had no direct knowledge of the matters in dispute. Hence his evidence carries little weight.
C.2.2.6 Smith
Smith was appropriately careful in his answers, including by making sure he understood the questions and any assumptions he was to make correctly. He did appear, at times, to be trying to find a basis to adhere to the opinions expressed in his reports. Nonetheless, Smith made concessions where appropriate.
D. Resolving key disputed factual matters
There are a number of key events or factual matters which were hotly disputed and that are necessary to make findings about, as they impact the analysis of the plaintiffs’ claims in this proceeding.
It is convenient to deal with each of those factual matters in turn.
D.1 The Hunter Loan agreement
There are aspects of the Hunter Loan which are not disputed, but other aspects are.
It is not in dispute that there was a telephone call between Hunter and Hartwig on 1 December 2015 in which Hartwig requested that Hunter lend $600,000 to MSL. Hunter and Hartwig both say that Hartwig said it would be a short-term loan of five business days at an interest rate of 10%.
It is also not in dispute that after this telephone call, Hartwig sent an email to Hunter at 3:26pm on 1 December 2015 which stated as follows:
Just a short note to confirm the details of the following short term loan to Minc/Sallon which will support/offset the Funds as currently lent by that entity into Trimont Australia Pty Ltd.
Details remain:-
Amount: $600,000
Term: Should be no longer than 5 Business days.
Interest Rate: 10% (This is as per arrangements between being paid by Trimont to Minc Sallon) …
It is common ground that on 3 December 2015, $600,000 was paid into MSL’s bank account by way of two payments of $300,000 from two different Westpac accounts. Hunter says that these accounts were in the name of Hunter and Natalie Hunter. Hartwig says that the funds were from Hunter’s entity Oscar Management Pty Ltd. In this regard, the documentary evidence supports Hunter’s version regarding the accounts, but I do not think anything much turns on this. There is no dispute that the loan was with Hunter or one of his entities and that the money was advanced by him or one of his entities.
It appears to be common ground that the Hunter Loan was due to be repaid on 10 December 2015.
There are many aspects, particularly in respect of the content of the discussion between Hunter and Hartwig on 1 December 2015, which are in dispute.
Hunter’s evidence is that Hartwig told him that MSL had paid a number of creditors on behalf of Trimont Australia, that Geoff Brady who was the majority owner of Trimont Australia had failed to put in place working capital facilities in order to fund that business and he knew Hartwig was a director of Trimont Australia. Hartwig told him that he was waiting for some bank guarantees to be put in place in order to provide that working capital facility and that he had made arrangements for MSL to pay creditors of Trimont Australia. Hartwig told him that once the bank guarantees were in place, Trimont Australia would be able to repay MSL and in return MSL would repay Hunter. Hartwig mentioned 10 per cent interest and that it would probably be in the order of five days for that facility to be put in place and therefore the loan would be short term. Hunter’s evidence is that he agreed to these terms.
Hartwig’s evidence is that he asked Hunter to assist by paying MSL $600,000 as MSL had advanced amounts in excess of $600,000 on behalf of Kanyon to Trimont, Trimont Australia and their creditors in relation to Kanyon’s Newcastle Project. He told Hunter that this would be a loan via MSL. He told Hunter that the funds should be repaid within about 5 days because he believed that when Trimont Australia provided replacement security for Trimont’s building contract retention sums, Trimont would receive back the retention monies of about $600,000. Once that occurred, the Trimont retention monies could be released by Kanyon and available to repay MSL, which would then repay Hunter. Hunter agreed to make the payment of $600,000. He asked Hunter to pay to MSL amounts that had been or were committed to be paid out of MSL’s bank account in order to pay on behalf of Trimont and Trimont Australia and then be repaid once Trimont and Trimont Australia received funds due to them and repaid MSL.
Hartwig’s evidence is that the first paragraph of his email to Hunter of 1 December 2015 (see paragraph 113 above) was expressed poorly – he says that the words “which will support/offset the Funds as currently lent by that entity into Trimont Australia Pty Ltd” referred to payments made to subcontractors of Trimont and Trimont Australia by MSL to keep the Kanyon projects moving, and that it was these loans which would be partly offset by the amount of $600,000.
From this, it can be seen that the key points of difference between Hartwig and Hunter as to the contents of their 1 December 2015 telephone conversation about the Hunter Loan are:
(a) whether Hartwig said that MSL had lent money to Trimont and Trimont Australia (Hartwig’s version) or only to Trimont Australia (Hunter’s version);
(b) whether Hartwig said that MSL had made these payments on behalf of Kanyon (Hartwig’s version) or had not mentioned Kanyon at all (Hunter’s version);
(c) whether retentions were mentioned as being the source of repayment (Hartwig’s version) or retentions were not mentioned at all (Hunter’s version).
Hunter’s evidence is that he knew, because Hartwig had told him, that by December 2015, Trimont was in a poor financial position; Trimont had no capacity to earn income to be able to repay MSL, and its business had been sold to Trimont Australia. In his affidavit, he stated that if Hartwig had mentioned to him that MSL had advanced funds to Trimont, he would not have been comfortable that the loan would be repaid. In cross-examination, he was adamant about this, stating that he was comfortable with being repaid by Trimont Australia as he knew Geoff Brady was behind it and that it would soon have its working capital facility in place, but he would not have been comfortable that Trimont would be able to repay him. On the other hand, Hartwig’s oral evidence was that he mentioned both Trimont and Trimont Australia to Hunter during the call. Hartwig also denied telling Hunter that Trimont was in a poor financial position, he says that it just had some cash flow issues.
I prefer Hunter’s evidence to Hartwig’s in relation to the content of the 1 December 2015 telephone call in respect of these three disputed aspects about the Hunter Loan, for the following reasons:
(a) Hunter’s evidence that Trimont was not mentioned in that conversation was much more convincing than Hartwig’s evidence to the contrary. It is also consistent with the content of Hartwig’s subsequent email to Hunter. Hartwig’s attempt under cross-examination to explain away his failure to mention Trimont (or Kanyon, for that matter) in that email was both unconvincing and self-serving. Hartwig’s attempted deflection of having told Hunter that Trimont was in a poor financial position by referring only to cash flow problems was consistently made by him during cross-examination but is inconsistent with prior statements Hartwig had made about Trimont. For example, during cross-examination, Hartwig confirmed that in mid-2015 various subcontractors of Trimont were yet to be paid for works completed by them. When asked whether he believed at the time that Trimont was experiencing “financial difficulties”, Hartwig instead insisted that Trimont was merely experiencing “cashflow problems”. However, when shown contradictory statements in an affidavit affirmed by him in the County Court Proceeding, Hartwig admitted that he had previously deposed that he believed, in about 2015, that Trimont was experiencing financial difficulties. While Hartwig went on to clarify that Trimont’s financial difficulties “were in relation to its cashflow”, he also suggested that the reason Trimont sold its projects to Trimont Australia was because it “didn’t have the working capital to be a builder and a developer”. Hartwig’s obfuscation and reluctance to describe what was clearly established on the facts, that Trimont was experiencing financing difficulties and in a poor financial position, renders his evidence on the topic unconvincing.
(b) Hunter’s evidence that retentions were not mentioned in that conversation was also more convincing than Hartwig’s evidence to the contrary. While I will deal with the issue of retentions in more detail later, I do not find it plausible that Hartwig linked the repayment by Kanyon to Trimont of the retentions with how MSL and then Hunter was to be repaid in that telephone call. It is significant that there is no mention of the issue in Hartwig’s subsequent email to Hunter. The defendants sought to make much of the fact that when Hartwig sent that email to Hunter, it was as a forwarding of an email from the Commonwealth Bank of Australia (‘CBA’) to Hartwig, notifying him that the paperwork was prepared for the bank guarantees to be made by GB Autos Pty Ltd (one of Geoff Brady’s entities) which would secure Trimont Australia’s working capital facilities with Westpac. The defendants also sought to make much of the fact that the forwarded email from the CBA was not included by Hunter in his affidavit evidence. In cross-examination, it was put to Hunter that because of this email, he knew that the retentions were part of the arrangement due to the reference to a bank guarantee, which he denied. He stated that the email from the CBA demonstrated to him that arrangements were being made for Trimont Australia’s working capital facilities. It is important here not to confuse or conflate two sets of bank guarantees which were under discussion at this time. The first set of bank guarantees were those referred to above from CBA to secure Trimont Australia’s working capital facilities it was establishing with Westpac. The second set of bank guarantees were to be subsequently issued by Westpac as replacement security for the retention sums. I do not accept the interpretation sought to be given to the CBA email by the defendants – it says nothing about the bank guarantees for the retention sums. Hunter’s interpretation was far more consistent with the email and the arrangements being put in place. The defendants are attempting to draw a long bow here and it is not a plausible contention.
(c) For the same reasons, I do not accept that Hartwig made the statements he says he did in this conversation about Kanyon. There simply would have been no need for Kanyon to have even been mentioned.
(d) Hunter was cross-examined about all of these aspects and his denial of Hartwig’s version was convincing and consistently given.
There also appears to be some dispute, or possibly confusion, as to who actually lent the Hunter Loan. As noted above, in the First Hartwig Affidavit, Hartwig says that he asked Hunter for the loan and that Hunter agreed, but he does not specifically say who the lender was. In the same affidavit, he says that the funds were received from Hunter’s entity Oscar Management Pty Ltd. He also says in that affidavit that after the Replacement Agreement was entered into (more about that later), the Hunter Loan was shown in Kanyon’s financial statements and records as a loan owed by Kanyon to Hunter FT as loan number 9 from the Hunter FT (‘Loan 9’). The defendants also sought to make something of the fact that in the County Court Proceeding, Hunter was initially the plaintiff claiming repayment of the Hunter Loan from MSL but he and Natalie Hunter in their capacity as trustees for the Hunter FT were later added as plaintiffs, with the alternative claim being that the Hunter Loan was to be repaid to the Hunter FT. On the other hand, Hunter consistently maintains, in his affidavit and oral evidence, that he personally was the lender of the Hunter Loan. Hunter was challenged in cross-examination about the fact that in the County Court Proceeding he had initially sworn an affidavit saying that the money he advanced to MSL had come from another account (not the two Westpac ones) in the name of Oscar Management Pty Ltd, one of his investment companies, which it now seems was incorrect. Hunter admitted it was incorrect and said he had assumed the money had come from that bank account because of a form he had found when preparing that affidavit, but now knows it was not correct. He remained adamant throughout his cross-examination that he personally had lent the money to MSL, not the Hunter FT. In cross-examination, he maintained that a number of the Hunter FT loans to Kanyon listed in Kanyon’s financial statements and records were not necessarily made by the Hunter FT and that some were made by him or other of his entities. He said that this was just how it was recorded. It is unclear to me whether this issue has any particular significance, apart perhaps from questions to do with the Replacement Agreement (which I shall address later). It seems to me that the Hunter Loan was either made by Hunter personally or by him (and Natalie Hunter) for the Hunter FT, and that the plaintiffs’ claims against the defendants in respect of the Hunter Loan do not require an answer on that, their claims having been put in the alternative anyway.
In terms of demands for repayment of the Hunter Loan, Hunter’s evidence is that he discussed the loan with Hartwig on a number of occasions throughout 2016 but he did not make a formal demand for payment until around April and/or May 2017 and that he did not make a written demand until 9 June 2017. He says that when he discussed it with Hartwig in early 2016 he was reassured that Trimont Australia’s working capital facilities were being put in place and so he was not too concerned about the repayment. Hunter said that Hartwig managed a number of loans for him prior to then, most of which typically would not be paid within the terms of the loan agreements, but he had not defaulted on any loans at that point in time. Hartwig says that Hunter never raised the Hunter Loan with him in 2016.
Hunter’s evidence is that he found out that MSL had put or was putting the Laverton Property on the market in around April 2017 and that he telephoned Hartwig about it. He says he told Hartwig that he was concerned about being repaid the Hunter Loan by MSL if it no longer had the Laverton Property, as he believed the loan was secure while MSL had a property. Hunter says that in response Hartwig told him that it made no difference to Hunter’s position as it would just mean that MSL would have the money in its bank account instead of in the property, so it would not change MSL’s ability to repay the Hunter Loan. Hartwig says this conversation never occurred.
Hunter’s evidence is that at some time in May 2017 after the Laverton Property had been sold, he spoke to Hartwig again and told him he wanted to be repaid the $600,000. Hartwig concedes that this conversation occurred.
D.2 Wodonga and Newcastle retention sums
It was not disputed that the building contracts between Kanyon and Trimont in respect of the Wodonga and Newcastle projects contained standard form provisions in respect of retention monies. If security in the form of bank guarantees was not provided, then Kanyon was entitled to withhold from each payment made on a progress claim an amount of 5% by way of a retention sum. When the project reached practical completion Kanyon would have to pay to Trimont half of the retention sum (ie, 2.5% of the building costs), followed by the other half of the retention sum once the defects liability period had expired.
It also seems to be common ground that under the business sale agreement between Trimont and Trimont Australia, Trimont Australia purchased the Newcastle retention. Therefore, Kanyon owed the Newcastle retention to Trimont Australia after that time, not Trimont.
Most other matters concerning the retentions appear to be in dispute.
A source of puzzlement for me during the trial was what I was expected to make of the issues regarding the retentions, including how it was said that they were relevant. On a number of occasions, I indicated that at some point the parties would need to make clear submissions about the retentions.
Despite the numerous references in the defences and in Hartwig’s evidence to the retention sums for the Wodonga and Newcastle projects, the defendants have not presented a coherent explanation of these either from a factual perspective or in terms of their impact on the claims made against them. Both parties spent a great deal of time at trial cross-examining witnesses about the retention sums. It is telling that the defendants’ written closing submission mentions the retentions only once, and then only in passing, and there were no mentions of retentions in the defendants’ oral closing address.
The plaintiffs’ submissions suggest that the defendants rely on the retentions for two matters, which are possibly related. The first is as an intended source of repayment of the Hunter Loan, and the second is as part of the rationale or justification for the Replacement Agreement.
In respect of the retentions, the plaintiffs submit as follows:
(a) Kanyon did not owe Trimont any retention for the Newcastle project in December 2015 or March 2016. The Newcastle retention was purchased by Trimont Australia under the business sale agreement and was owed to Trimont by Trimont Australia.
(b) In September/October 2015, Trimont received the benefit of the Newcastle retention by Trimont Australia paying Trimont’s creditors, at the request of Ascenzo.
(c) Contrary to the affidavit evidence of Hartwig and Ascenzo, both knew by December 2015, and in any case, prior to March 2016, that the Newcastle retention had been paid by Trimont Australia to Trimont, by paying third party debts owed by Trimont.
(d) Contrary to his affidavit evidence, Hartwig knew by March 2016 that Kanyon owed the Newcastle retention to Trimont Australia, not Trimont.
(e) Any retention Kanyon owed Trimont for the Wodonga Project had been accounted for in the Ascenzo Investments/Kanyon loan ledger[9] before the alleged Replacement Agreement in March 2016.
[9]According to Hartwig, Kanyon and Ascenzo Investments had an arrangement where transactions between them would be recorded in a ledger, rather than actual payments always taking place. I will refer to this as the AI/Kanyon Ledger.
(f) Contrary to the evidence of Hartwig and Ascenzo, both knew the Wodonga retention had been accounted for in the AI/Kanyon Ledger by 12 February 2016 at the latest.
(g) There was no reason to delay repayment of the Hunter Loan because, according to Hartwig, Trimont Australia’s working capital became available in late December 2015 by way of the bank guarantees and Westpac facility in the amount of $4.7 million. The bank guarantees to replace the retentions were issued in early 2016, but Trimont Australia had funds to pay Trimont the retentions just before Christmas in 2015. By contrast, Hartwig’s affidavit evidence was that during the March 2016 meeting with Hunter, Geoff Brady was yet to provide the bank guarantees. Hartwig’s explanation of the inconsistency was unhelpful and vague, and did not explain why the proposed repayment had not occurred by the end of December 2015. This was not clarified in re-examination.
(h) Further, Hartwig and Ascenzo were directors of Kanyon at the end of 2015 and beginning of 2016. Hartwig gave evidence that neither caused Kanyon to make the Newcastle retention payment to Trimont Australia after the replacement bank guarantees were in place. However, Kanyon’s bank statements show two payments to Trimont Australia in late December 2015, totalling $225,000 which Hartwig could not explain and which the plaintiffs submit may represent part payment of the retention to Trimont Australia.
I accept the plaintiffs’ submissions in respect of the Wodonga and Newcastle retentions. In particular, I find it implausible that the Wodonga and Newcastle retentions were intended to be, or were factually able to be, a source of funds to repay the Hunter Loan. It is also implausible to suggest that there was to be a series of transactions which would result in MSL receiving the amount of the retentions and using it to repay the Hunter Loan.
Put another way, for the repayment of the cash retentions to be a source of MSL repaying the Hunter Loan, transactions in relation to the retentions would have to have resulted in a flow of cash that ended up with MSL. As at about 1 December 2015:
(a) if Kanyon had to pay Trimont Australia the Newcastle cash retentions (not Trimont) upon provision of the bank guarantees, then was that going to result in a flow of funds to MSL? This is unlikely, since if Trimont Australia had to pay the Newcastle retention to Trimont, then the September 2015 letters from Ascenzo to Trimont Australia directing which of his creditors Trimont Australia should pay instead of repaying amounts owed to Trimont, which included the Newcastle retention, then there would be no flow of funds to MSL;
(b) if Kanyon had to pay Trimont the Wodonga cash retention (upon provision of the bank guarantee by Trimont Australia or otherwise), then this would not result in a flow of funds to MSL to repay the Hunter Loan. As at the end of November 2015, the AI/Kanyon Ledger recorded AI as owing $595,184.84 to Kanyon. How can it seriously be suggested that Kanyon would have paid the Wodonga retention to Trimont in cash when AI owed Kanyon more than the amount of that retention? Rather, the relevant parties would have done what actually appears to have happened (on 1 February 2016), and enter the Wodonga retention as a credit to AI in the AI/Kanyon Ledger, thus reducing the overall amount owed to Kanyon.
[85]ASIC v Maxwell, [102] (citations omitted).
In respect of the business judgment rule, Elliott J in United Petroleum v HSF summarised the principles as follows:[86]
[86]United Petroleum v HSF, [621]-[626] (citations omitted).
There must be a contravention of s 180(1) for consideration of the business judgment rule to have any application. Conduct that falls short of breaching s 180(1) will not require consideration of the business judgment rule, because it will not meet the threshold enlivening the rule.
For the business judgment rule to apply, the facts must show that the director has made an identifiable business judgment. Business judgment is defined to mean any decision to take or not take action in respect of a matter relevant to the business operations of the corporation. Business judgments include matters that are preparatory to the making of a business decision, including planning, budgeting and forecasting activities.
In relation to the requirement that a business judgment be made in good faith for a proper purpose, this requirement can be met where a decision is made to refrain from doing something.
In relation to the director informing her or himself to the extent she or he reasonably believes to be appropriate, the reasonableness of the belief should be assessed by reference to:
(1) The importance of the business judgment to be made.
(2) The time available for obtaining information.
(3) The costs related to obtaining information.
(4) The director or officer’s confidence in those exploring the matter.
(5) The state of the company’s business at that time and the nature of competing demands on the board’s attention.
(6)Whether or not material information is reasonably available to the director.
The requirement that the director inform her or himself of the subject matter of the judgment to the extent she or he reasonably believes to be appropriate does not encompass an objective requirement that the director demonstrate that she or he was reasonably informed. It may be that the director was not aware of available information, but nonetheless took active steps to become informed about the subject matter of the decision and reasonably believed her or himself to be informed.
In relation to the requirement of a rational belief that the business judgment is in the best interests of the corporation, the director’s belief will be rational if it was based on reason or reasoning (whether or not the reasoning was convincing and therefore “reasonable” in an objective sense), but it would not be a rational belief if there was no arguable reasoning process to support it.
I.5.2 Principles regarding s 181 of the Act
In relation to s 181 of the Act, the duty to exercise powers for a proper purpose and the obligation to act in good faith are separate duties.[87]
[87]Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239, [4456].
In United Petroleum v HSF, Elliott J also addressed the principles regarding s 181(1)(a) of the Act, as follows:[88]
[88]United Petroleum v HSF, [627]–[639] (citations omitted).
The board, and not the shareholders, determine what is in the best interests of the company. As stated in ANZ Executors & Trustee Company Ltd v Quintex Australia Ltd (receivers and managers appointed):
[A] shareholder’s freedom to exercise [her or his] vote as [she or he] pleases does not mean that in law [she or he] can accomplish everything that takes [her or his] fancy. The right to vote is, it is true, a species of property that can be exercised at will, and it may confer control over the affairs and property of the company; but it does not follow that the holder may always do whatever [she or he] pleases with the corporate assets. For they are the property of the company and not of the shareholder, who has no legal or equitable interest in them.
(Emphasis added.)
As Byrne J observed in Glover v Willert, the board manages the company. The directors are not obliged to act on the direction of all shareholders in general meeting.
In relation to determining the best interests of a company, the High Court has held that “[d]irectors in whom are vested the right and the duty of deciding where the company’s interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts”.
There is conflicting authority concerning the meaning of “in good faith” in s 181(1)(a).
There is a view that the requirement that there be an “absence of good faith” involves “much more than negligence”. On this view, s 181(1)(a) “is contravened only where a director engaged deliberately in conduct, knowing that it was not in the interests of the company”. This approach involves a subjective standard.
An alternative view is that the test is objective. On this view, breach of s 181(1) requires consciousness that what was being done was not in the best interests of the company, but “consciousness in this sense means knowledge of the facts that make the conduct not in the best interests of the company; it is not necessary to establish knowledge that the conduct constituted a breach of the law or was improper”.
These divergent views were considered in ASIC v Macdonald (No 11). The objective test was rejected in favour of requiring subjective dishonesty.
In this jurisdiction, the issue was considered in Mernda Developments Pty Ltd (in liq) v Alamanda Property Investments No 2 Pty Ltd (in liq). In an uncontested appeal, the Court of Appeal stated that, although there had been some debate in the past, it was generally accepted that the objective test ought to be applied.
Following this decision of the Court of Appeal, the objective test was applied to the issue of whether directors were acting in good faith in at least 3 decisions of the trial division.
However, in the more recent decision of ASIC v Flugge, Robson J, after carefully considering the authorities, and acknowledging he was bound by the Court of Appeal’s decision, applied both an objective and a subjective test to s 181(1)(a) “as held apposite by Owen J in Bell Group v Westpac and approved by the Court of Appeal in Mernda v Alamanda”. It may be his Honour intended to refer to both paragraphs (a) and (b) of s 181(1) when making this observation.
Relevantly, Owen J held that the test of “whether directors are acting bona fide in the interests of the company as a whole is largely (though by no means entirely) subjective”. His Honour continued:
The court can look objectively at the surrounding circumstances and at the impugned transaction or exercise a power. But it does so not for the purpose of deciding whether or not there was commercial justification for the decision. Rather, the objective inquiry is done to assist the court in deciding whether to accept or discount the assertions that the directors make about their subjective intentions and beliefs.
On appeal, Robson J’s decision was upheld. Further, the Court of Appeal stated that Robson J dealt comprehensively and accurately with the legal principles governing s 181. However, like Mernda Developments Pty Ltd (in liq) v Alamanda Property Investments No 2 Pty Ltd (in liq), the Court of Appeal did not have the benefit of competing submissions on this issue.
In circumstances where this court also had no competing submissions on the proper construction of s 181(1)(a) or (b), and on either approach to the proper construction of the provision no liability has been found, it is unnecessary to distil the state of the authorities on this section beyond what has already been stated.
On the question of whether the test is objective or subjective, the Court of Appeal in ASIC v Geary[89] said that:
A director or officer of a company will be in breach of this section if they, or their involvement in certain actions, did not constitute acting in good faith, or for a proper purpose, and for the benefit of the company. Although the test is objective, based on what a reasonable person in a similar position would be expected to have done in the circumstances, the subjective beliefs and intentions of the director or officer may still be relevant.[90]
[89][2018] VSC 103. This was the appeal of ASIC v Flugge to which Elliott J referred to in United Petroleum v HSF in the penultimate paragraph of the previous quotation from his Honour’s decision (see paragraph 633 above).
[90]ASIC v Geary, [409].
In respect of s 181(1)(b) of the Act, Elliott J in United Petroleum v HSF summarised the principles as follows:[91]
Directors must exercise their powers for the purpose for which they were conferred, and not for any collateral or improper purpose. Assessment of the particular conduct, therefore, involves 2 steps. First, the court must consider the nature of the power in question. Secondly, the court must examine the substantial purpose for which the power was exercised. Only then can it determine whether the purpose for which the power was exercised was a proper purpose or not.
The objective commercial justification of a director’s conduct is not determinative of purpose. It is only relevant to assessing the credibility of assertions made by the director as to her or his motivation. Honest or altruistic behaviour by a director will not prevent a finding of improper conduct on their part if that conduct was carried out for an improper or collateral purpose.
There may be more than 1 purpose underlying the exercise of the director’s powers, including how such exercise will impact upon their own interests. Accordingly, it is necessary to identify the substantial object which could be said to form the real ground for the director’s action. The issue is not whether a decision was good or bad; it is whether the director acted in breach of the duty.
The court must determine whether, but for the improper or collateral purpose, the directors would have performed the act impugned.
[91]United Petroleum v HSF, [640]–[643] (citations omitted).
In ASIC v Maxwell, Brereton J stated that:[92]
… where there is an identity of interest between the directors and the shareholders, so that in effect the directors are the shareholders, the requirement to prevent self-interested dealing, constrain management and strengthen shareholder control – which is fundamental purpose and rationale of these duties - is much less acute. That is a circumstance which can impact considerably on the content of the duties. The significance of a correspondence between the identity of the directors and the shareholders is illustrated by the circumstance that, at general law, a fully informed general meeting can prospectively or retrospectively ratify the actions of directors of the company, though they involve negligence, breach of fiduciary duty or the exercise of the directors’ powers for an improper purpose. Where the directors and the shareholders are one and the same, ratification is implicit. Although the shareholders of a company cannot release the directors from their statutory duties imposed by s 180, 181 and 182, their acquiescence in a course of conduct can affect the practical content of those duties, including any question of whether directors acted with a reasonable degree of care and diligence, and whether they made improper use of their position.
[92]ASIC v Maxwell, [103] (citations omitted).
Clearly, while the obligation to act in good faith and the duty to exercise powers for a proper purpose are separate duties, the principles in respect of them overlap to some degree, such as the discussion about the standard to apply and whether the test is objective or subjective.
I.5.3 Breach of duty claims regarding payments to Armidale
The breach of duty claim against Hartwig and Minc in respect of the payments to Armidale can be shortly disposed of.
(a) The Statement of Claim does not set out with any specificity at all how it is said that the Armidale Payment and the Demolition Payment give rise to the breach of duty claim. When one turns to the plaintiffs’ submissions about this (see paragraph 622) above, it is readily apparent that their submissions are predicated on those payments being loans to Armidale. Nowhere is it pleaded that these payments are loans.
(b) More importantly, the submission made in that paragraph is inconsistent with the pleaded case that the payments gave rise to equitable interests in the Armidale Property.
(c) Fundamentally, however, my earlier factual findings in respect of the Armidale Payment and the Demolition Payment — in particular that these were not made with MSL’s own funds (except for a relatively de minimis amount) —means that allowing MSL to make those payments was not a breach of ss 180 or 181 of the Act.
(d) Reliance on the Armidale Payment and the Demolition Payment is also inconsistent with the way the breach of duty claim was put by the plaintiffs in oral closing address,[93] which was focussed on the events of June 2017 that are completely unconnected to Armidale.
[93]See section I.3.1 above.
Accordingly, the Armidale Payment and the Demolition Payment do not provide a basis for the plaintiffs’ claim that Hartwig and Minc breached the duties they owed as directors to MSL.
I.5.4 Some general comments regarding the pleading, evidence and submissions regarding breach of duty claims in respect of the Alleged Breach of Duty Payments
While the statement of claim relevantly pleads that by causing MSL to make each of the Alleged Breach of Duty Payments, Hartwig and Minc breached their duties in ss 180 and 181 of the Act, the plaintiffs do not plead how each of those payments constitutes a breach of the duties relied upon. For example, there is no pleading as to what constitutes the lack of care and diligence, what was not in the best interests of MSL, or what was an improper or collateral purpose, beyond identifying the Alleged Breach of Duty Payments. This may not have been particularly problematic if the plaintiffs had made the position clear in their opening submissions or, perhaps, even in their closing submissions.
The parties’ submissions in respect of the breach of directors’ duties claims lacked both detail and specificity. It was difficult at times to ascertain which of s 180 or s 181, as opposed to ss 182-184, the plaintiffs’ submissions referred to. The plaintiffs did not descend, in any of their submissions, to how it was said that each of the Alleged Breach of Duty Payments were breaches of ss 180 or 181, other than in the most general of terms. The defendants did not make any reference to particular allegations or evidence when addressing the Court on these claims.
However, many of the submissions made by the parties in respect of the question of solvency, in particular whether there were reasonable grounds to suspect insolvency and the defences under both s 588H and s 588FG, seem to be relevant to the breach of duty claims.
Similarly to United Petroleum v HSF, Mernda Developments Pty Ltd (in liq) v Alamanda Property Investments No 2 Pty Ltd (in liq)[94] and ASIC v Geary, I have not had the benefit of competing submissions on the proper construction of s 181(1). Indeed, I have not had the benefit of any submissions on the topic at all. In this instance, I consider that I should apply the objective test, given the Court of Appeal’s decisions in ASIC v Geary and Mernda v Alamanda.
[94][2011] VSCA 392 (‘Mernda v Alamanda’).
Accordingly, in considering the breach of duty claims, I have done the best that I can, including by having regard to the totality of the parties’ submissions in this case, rather than just to their submissions on this topic.
Some of the evidence about particular events and what each of Hartwig and Minc knew or did is also relevant to the breach of directors’ duties claims. This evidence has already been summarised as set out earlier in these reasons, and I have taken it into account when considering these claims.
It seems to me that the gist of the defendants’ evidence related to the breach of duty claims is that in June 2017 after selling the Laverton Property, they paid out the mortgage and the statutory debts (being tax payments to the ATO) and then treated the balance of the Net Sale Proceeds as profit that could be distributed to shareholders,[95] either by repaying shareholder loans or making a profit distribution or return of capital. They took this approach because they regarded MSL as being a special purpose vehicle whose purpose (holding and earning income from the Laverton Property) had come to an end with the sale of the property. They did not consider withholding any amount from distribution to pay the Hunter Loan because they did not believe MSL was liable to pay it. In Hartwig’s case, this belief was based on his belief that Kanyon had taken on liability for the Hunter Loan under the Replacement Agreement. In Minc’s case, this belief was based on Hartwig having told him that Hunter’s money (ie, the $600,000) had just passed through MSL’s bank account. Further, while both knew Hunter had told Hartwig that he did not accept Kanyon was liable for the Hunter Loan and that MSL was, and that he wanted it repaid, nothing had been formally done by Hunter until the notice of demand dated 9 June 2017 was sent and received by MSL shortly after that date.
I.5.5 Analysis regarding the claims against Hartwig and Minc for breach of s 181(1)(a) of the Act in respect of the Alleged Breach of Duty Payments
[95]Applying a loose definition of shareholders, being the shareholders themselves or related parties/entities.
It is convenient to first address the alleged contraventions of s 181(1) of the Act.
For the Alleged Breach of Duty Payments to be a contravention of s 181(1)(a) of the Act by Hartwig and/or Minc, the plaintiffs must establish that they did not exercise their powers to cause MSL to make those payments in good faith in the best interest of MSL.
It is well established that where the company is in a precarious financial position, the best interests of the company also include the interests of its creditors.[96] This creates an obligation on directors to include consideration of the interests of creditors when considering what is in the best interests of the company.[97] The suite of inter-connected decisions made by Hartwig and Minc in June 2017 meant that MSL would be in a precarious financial position if all creditors were not paid by the time all of MSL’s assets were distributed. This is clear from my earlier findings in respect of MSL’s insolvency in June 2017.
[96]This does not involve the directors owing a duty to creditors: their duty is owed to the company. See Spies v The Queen (2000) 201 CLR 603, [90], [93].
[97]Walker v Wimborne (1976) 137 CLR 1; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; ASIC v Somerville [2009] NSWSC 934, [35]; Hausmann v Smith [2006] NSWSC 682, [12].
On the objective test, an absence of good faith requires consciousness that:
… what was being done was not in the best interests of the company, but “consciousness in this sense means knowledge of the facts that make the conduct not in the best interests of the company; it is not necessary to establish knowledge that the conduct constituted a breach of the law or was improper”.[98]
[98]United Petroleum v HSF, [631] - [632], citing ASIC v Sydney Investment House Equities Pty Ltd [2008] NSWSC 1224, [43].
As the Court of Appeal said in ASIC v Geary, the test is “objective, based on what a reasonable person in a similar position would be expected to have done in the circumstances”.[99]
[99]ASIC v Geary, [409].
In effect, when distributing the Net Sale Proceeds, Hartwig and Minc ensured that MSL paid creditors they accepted and then paid the balance to themselves or their related entities/parties. In so doing, they made conscious decisions not to pay out the Hunter Loan and accrued interest. It is clear that they had no intention of paying out the Hunter Loan when they distributed the Net Sale Proceeds, since it was undeniable that once the Net Sale Proceeds had been distributed in the way they were, there was nothing left from which the Hunter Loan could be paid and nothing was going to come in which would be a source of funds for that payment.
In circumstances where the directors intended to bring MSL’s activities to an end following the sale of the Laverton Property, it was not reasonable, in June 2017 (and even before the written demand was received), for them to disregard the Hunter Loan when distributing the sale proceeds.
Hartwig’s position was that MSL was not liable for that debt because of the Replacement Agreement. I have already found that the Replacement Agreement did not exist and that Hartwig’s belief that it did was not a reasonable one. Accordingly, the reasonable person in Hartwig’s circumstances would be expected to take proper account of the Hunter Loan in making decisions about the Alleged Breach of Duty Payments, which includes the prospect that it may well be payable by MSL and that MSL would be unable to meet all of its obligations if the Alleged Breach of Duty Payments were made. It was in MSL’s best interests for the decision-making process to include proper consideration of all of these matters.
Minc’s position was that MSL had no liability for the Hunter Loan as the $600,000 had just passed through MSL’s bank account, as that is what he was told by Hartwig. In circumstances where he knew by June 2017 that Hunter was demanding payment of the Hunter Loan, he ought to have given proper consideration to whether that demand had any substance and whether it should factor into his decisions about making the Alleged Breach of Duty Payments. This includes giving due consideration to the prospect that it may well be payable by MSL and that MSL would be unable to meet all of its obligations if those Alleged Breach of Duty Payments were made.
Accordingly, Hartwig and Minc each contravened s 181(1)(a) of the Act when they caused MSL to make the Alleged Breach of Duty Payments.
I.5.6 Analysis regarding the claims against Hartwig and Minc for breach of s 181(1)(b) of the Act in respect of the Alleged Breach of Duty Payments
For the Alleged Breach of Duty Payments to be a contravention of s 181(1)(b) of the Act by Hartwig and/or Minc, the plaintiffs must establish that the directors exercised their powers to cause MSL to make those payments for an improper or collateral purpose.
In this case, the plaintiffs’ submission did not rise above a submission that Hartwig and Minc preferred their own interests ahead of those of creditors of MSL, whose interests have to be considered for the reasons previously set out. Apart from the allegations about the same payments being creditor defeating transactions, the plaintiffs did not make any submissions specifically directed at Hartwig’s and Minc’s purpose in making the Alleged Breach of Duty Payments. There is no pleading to which I can turn to illuminate this question.
The purpose of paying out creditors of the company and then distributing profits to shareholders when the business of the company has come to an end does not seem to me to be an improper or collateral purpose. MSL’s business had come to an end with the sale of the Laverton Property and Hartwig’s and Minc’s rationale for making the Alleged Breach of Duty Payments is explicable.
Therefore, I do not consider that the evidence establishes a breach of s 181(1)(b) by either Hartwig or Minc.
I.5.7 Analysis regarding the claims against Hartwig and Minc for breach of s 180 of the Act in respect of the Alleged Breach of Duty Payments
As set out above, the content of the duty of care owed by directors of a company is akin to the common law concept of negligence. Liability arises for negligence, but not mere mistakes. As stated in United Petroleum v HSF, “in relation to decisions made in expectation of events that might happen in the future, courts are conscious that forecasting is a difficult and uncertain process, with much room for mistakes and errors of judgment, and for differences of opinion.”[100]
[100]United Petroleum v HSF, [614], referring to ASIC v Rich [2009] NSWSC 1229.
The key question which arises is this: can it be said that causing MSL to make the Alleged Breach of Duty Payments involved a failure by Hartwig and/or Minc to take reasonable care?
For all of the reasons already stated, it was incumbent upon Hartwig and Minc to give proper consideration to the Hunter Loan when distributing all of MSL’s remaining assets following the sale of the Laverton Property. MSL would have nothing left, and no further income, from which to make payment of the Hunter Loan once the Alleged Breach of Duty Payments were made from the Net Sale Proceeds. The evidence establishes that neither of them gave proper consideration to the Hunter Loan at that key time. This was a failure to take reasonable care. It was not a mere mistake or error of judgment.
I.5.8 Defences
The question then is whether either of the directors have a defence.
I.5.8.1 Business judgment rule
For the business judgment rule to function as a defence to a contravention of s 180(1) of the Act, the four matters referred to in s 180(2) must each be met.
Given what I have already said about the absence of good faith when Hartwig and Minc caused MSL to make the Alleged Breach of Duty Payments, they are not able to satisfy the first of these four matters, being s 180(2)(a).
That is enough to dispose of their reliance on the business judgment rule. However, I would note that the second of these four matters, being s 180(2)(b), is that the director does not have a material personal interest in the subject matter of the judgment. Hartwig cannot satisfy this element in respect of the Total Sallon Payment, given that he obtained a personal benefit from those transactions given his role in Sallon. Likewise, Minc cannot satisfy this element in respect of the Aida Nominees Payments.
Accordingly, Hartwig and Minc cannot rely on the business judgment rule in defence of their contravention of s 180(1) of the Act.
As noted above, the business judgment rule in s 180(2) only applies to contraventions of s 180(1) and so has no application in the context of s 181(1)(a) of the Act.
I.5.8.2 Section 1318 of the Act
The other defence relied upon by Hartwig and Minc is s 1318 of the Act.
The defendants submit that even if I found that the Replacement Agreement did not exist or did not absolve MSL from liability for the Hunter Loan, Hartwig reasonably believed that it did and so had reasonable grounds for expecting MSL to be solvent. This submission was not specifically made in respect of s 1318, but given the lack of any detailed submission by the defendants about the breach of duty claims as I have earlier commented upon, in fairness to Hartwig I think this submission ought be considered in the context of his contravention of s 180 and s 181(1)(a) of the Act.
However, my view about this submission in the earlier context of expecting solvency applies equally here: I do not consider that Hartwig’s belief in the Replacement Agreement was reasonable and I do not think it provides a basis for fairly excusing him for the breaches of duty. Accordingly, Hartwig does not have a valid defence to the claim that he contravened s 180 and s 181(1)(a) of the Act by causing MSL to make the Alleged Breach of Duty Payments.
Insofar as Minc’s defence is concerned, the issue of the Replacement Agreement is irrelevant, since he says he was not told about it. It seems to me that simple enquiries in May/June 2017 as to the actual circumstances of the making of the Hunter Loan in December 2015 would have revealed to him that the $600,000 did not just pass through MSL’s bank account and that there was actually a loan. Even Hartwig concedes that there was a loan. Discovering that this was the case ought reasonably to have caused Minc to properly consider the Hunter Loan when making the Alleged Breach of Duty Payments, rather than simply dismissing it as he did. In these circumstances, while there is nothing to suggest that Minc did not act honestly, I do not consider that it is fair to excuse him for the breaches of duty.
Accordingly, Hartwig and Minc do not have defences under s 1318 of the Act.
I.5.9 Quantum of damage
Hartwig and Minc are liable to pay the second plaintiff compensation in respect of the damage suffered by MSL by reason of their contraventions of s 180 and s 181(1)(a), as their conduct left MSL exposed to a shortfall in funds to satisfy all of its creditors.
I now turn to the quantum of that damage.
In light of the way that the plaintiffs have pleaded the breach of duty claim, the plaintiffs’ claim for compensation for damage to the second plaintiff arising from contraventions of s 180 and s 181(1)(a) of the Act is limited to $968,986, being the amount of the insolvent trading claim.
That amount comprises the principal of the Hunter Loan of $600,000, plus the Interest Order and the plaintiffs’ claims in respect of the Costs Order. No evidence was led by the defendants to contradict the plaintiffs’ evidence regarding their estimate of $200,000 as the quantum of their costs of the County Court Proceeding, and I consider that estimate to be reasonable.
However, that amount of $968,986 is not in addition to the $600,000 I have already found Hartwig liable to pay in respect of the insolvent trading claim regarding the entry into the Hunter Loan. Otherwise, there would be double recovery. As such, the quantum of damage suffered by MSL by reason of Hartwig’s and Minc’s contraventions of s 180 and s 181(1)(a) is $368,986.
J. Summary of conclusions
In respect of the insolvent trading claims against Hartwig and Minc, I have found that:
(a) Minc did not contravene s 588G of the Act in respect of MSL incurring the debt of the Hunter Loan in December 2015;
(b) Hartwig contravened s 588G of the Act in respect of MSL incurring the debt of the Hunter Loan in December 2015 and does not have a defence under s 588H, and he is liable to pay the Liquidator, as a debt due to MSL, the amount of $600,000 (being the loss or damage suffered by the creditor because of MSL’s insolvency in relation to that debt);
(c) Hartwig and Minc did not contravene s 588G of the Act in respect of the debts arising from the County Court Final Orders, as MSL consenting to the making of those orders on 2 October 2018 does not amount to the incurring of a debt for the purposes of s 588G.
In respect of the voidable transaction claims against each of BCP, Sallon and Aida Nominees, I have found that:
(a) the Horwood Payment is voidable as it is an unfair preference and an uncommercial transaction as well as an insolvent transaction. BCP has not established a defence under s 588FG, and is therefore liable to pay MSL the sum of $410,922.27, being the amount of the Horwood Payment;
(b) the payments made to or for the benefit of Sallon in June 2017 in the amount of $121,641.98 are voidable as they were unfair preferences and/or uncommercial transactions and insolvent transactions. Sallon has not established a defence under s 588FG and is therefore liable to pay MSL the sum of $121,641.98; and
(c) the Aida Nominees Payments are voidable as they were uncommercial transactions and insolvent transactions. Aida Nominees has not established a defence under s 588FG and is therefore liable to pay MSL the sum of $640,000, being the amount of those payments.
In respect of the claims against Armidale, I have found that:
(a) the Armidale Payment does not give rise to a resulting trust as, with the exception of the amount of $6,893.63, it was not made with MSL’s own funds and in respect of that amount the presumption of a resulting trust has been rebutted. The Armidale Payment gives rise to a money had and received claim in the amount of $6,893.63 as that was the only portion of the payment that was made with MSL’s own funds;
(b) the Demolition Payment does not give rise to a constructive trust and is not monies had and received by Armidale, primarily because it was not made from MSL’s own funds; and
(c) therefore, Armidale will be ordered to pay MSL the amount of $6,893.63.
In respect of the breach of directors’ duties claims against Hartwig and Minc, being the alleged breaches of s 180, s 181(1)(a) and s 181(1)(b), I have found that:
(a) Hartwig and Minc did not contravene any of those sections of the Act by causing MSL to make the Armidale Payment and the Demolition Payment;
(b) Hartwig and Minc did not contravene s 181(1)(b) of the Act by causing MSL to make the Alleged Breach of Duty Payments;
(c) Hartwig and Minc each contravened s 180 and s 181(1)(a) of the Act by causing MSL to make the Alleged Breach of Duty Payments, and they do not have valid defences to those claims; and
(d) Hartwig and Minc are therefore liable to pay the second plaintiff compensation in the amount of $968,986 for the damage caused by his contravention of s 181(1)(a) of the Act, however, due to the matters described in paragraphs 679 and 680(b) above, the amount they will be ordered to pay under this head of damage is reduced to $368,986.
I will list the matter for hearing on a date convenient to the parties so as to deal with final orders, interest, and costs.
SCHEDULE OF PARTIES
| S ECI 2019 05814 | |
| BETWEEN: | |
| PHILIP NEWMAN AS LIQUIDATOR OF A.C.N. 602 135 446 PTY LTD (ACN 602 135 446) (IN LIQUIDATION) (FORMERLY KNOWN AS MINC SALLON (LAVERTON) PTY LTD) | First Plaintiff |
| A.C.N. 602 135 446 PTY LTD (ACN 602 135 446) (IN LIQUIDATION) (FORMERLY KNOWN AS MINC SALLON (LAVERTON) PTY LTD) | Second Plaintiff |
| and | |
| BRETT DOUGLAS HARTWIG | First Defendant |
| RICHARD CHARLES MINC | Second Defendant |
| BERKELY CAPITAL PARTNERS PTY LTD (ACN 078 247 319) | Third Defendant |
| SALLON PTY LTD (ACN 069 459 927) | Fourth Defendant |
| AIDA NOMINEES PROPRIETARY LIMITED (ACN 004 941 066) | Fifth Defendant |
| ARMIDALE NOMINEES PTY LTD (ACN 605 305 360) AS TRUSTEE FOR THE ARMIDALE UNIT TRUST | Sixth Defendant |
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