O'Neill v Hanel
[2007] SADC 58
•17 May 2007
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
O'NEILL v HANEL & ANOR
[2007] SADC 58
Judgment of His Honour Judge Robertson
17 May 2007
STATUTES - ACTS OF PARLIAMENT - ENFORCEMENT OF STATUTORY RIGHTS AND REMEDIES
Claim against First Defendant under Section 197 of Corporations Act- breach of lease by trust company - company unable to meet liability for breach - not proved Plaintiff failed to mitigate loss - First Defendant a Director of trustee company - Trust Deed granted indemnity from Trust Fund to Trustee - indemnity not available as Trustee held no asssets - held that First Defendant personally liable for trustee company's liability.
Claim against Second Defendant under Section 86 of Law of Property Act - claim that a conveyance of property made with intent to defeat creditors - distribution of profits from Unit Trust to holder of the Units - distribution done by accounting entry - Unit Trust held no assets at the time - accounting entry distribution not "property" under Section.
Corporations Act 2001 s 197; Law of Property Act 1936 ss 7, 86; Bankruptcy Act 1966 s 121; Income Tax Assessment Act s 99A, referred to.
British Westinghouse Electric and Manufacturing Company Limited v Underground Electric Railways of London Limited (1912) AC 673; Barton v Deputy Federal Commissioner of Taxation (1974) 131 CLR 370; DM Cannane v J Cannane Pty Ltd (in liquidation) (1998) 192 CLR 557; PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515; Freeman v Pope (1870) 5 Ch App 538; Hanel v O'Neill [2003] SASC 409; Halsbury's Laws (4th Ed.) Vol 6 Para 1, applied.
Noakes v J Harvy Holmes & Son (1979) 26 ALR 297, considered.
O'NEILL v HANEL & ANOR
[2007] SADC 58Judge Robertson
CivilClaim Against First Defendant
The Plaintiff, Mr John O’Neill, is the Trustee for the O’Neill Family Trust No 2. He brings these proceedings in his capacity as Trustee of that Trust.
The first Defendant, Kerry Hanel (“Mr Hanel”) was, at all relevant times, the Director of Daroko Pty Ltd (“Daroko”), which company was at all relevant times the Trustee of the Daroko Unit Trust. When I refer to “Daroko” in these Reasons, I mean Daroko as the Trustee of the Daroko Unit Trust, unless otherwise expressly stated.
In early June 1999, the Plaintiff, as Trustee of the O’Neill Family Trust No 2, purchased a building on Belair Road at Hawthorn, which contained suites of offices, from Illalong Pty Ltd (“Illalong”). At that time, Daroko leased a suite of offices in the building from Illalong under a written five year Lease which commenced on 1 October 1998 (“Lease”). That Lease was assigned by Illalong to the Plaintiff at the time of the purchase of the building.
Daroko continued to occupy the suite of offices leased by it until 30 June 2001, when it vacated those offices. The Plaintiff received rent for the lease of the offices until that time. No rent has been paid since. It is not in dispute that Daroko, in vacating the office premises and failing to pay any further rent, breached the Lease.
It took the Plaintiff until 1 December 2001 to re-let the office premises which had been wrongfully vacated by Daroko. Unfortunately, after a period of about thirteen months, the new lessee suffered financial difficulties and was forced to vacate the premises. The suite of offices remained unoccupied for a further period of time whilst the Plaintiff searched for a new lessee. As a result of Daroko’s breach of the Lease, the Plaintiff suffered loss. Such loss included loss of rent, reinstatement and replacement expenses associated with the premises, agent’s expenses incurred with the re-letting of the office premises and other costs. It is not in dispute that the Plaintiff’s loss arising from Daroko’s breach of the Lease, including interest payable pursuant to the terms of the Lease, total $108,618.85.
Daroko is the Trustee of the Daroko Unit Trust. At the time that Daroko vacated the office premises, it had no assets. Indeed, it had never held any assets in its own right. Furthermore, it did not hold any assets comprising a trust fund in its capacity as the Trustee of the Daroko Unit Trust. In other words, the Daroko Unit Trust did not have any assets either. As a result, it has never had the capacity, since 30 June 2001, to satisfy any loss suffered by the Plaintiff, as a result of Daroko’s breach of the Lease.
As a result of Daroko’s inability to satisfy the loss suffered by the Plaintiff, the Plaintiff has brought these proceedings against Mr Hanel, personally. Mr Hanel was the sole Director of Daroko. The Plaintiff seeks to recover his loss by way of damages against Mr Hanel pursuant to Section 197 of the Corporations Act 2001 (“Corporations Act”). Section 197 provides for personal liability of a director of a corporation, acting as a trustee, where the corporation cannot meet any liability it has incurred, if the conditions required to establish such personal liability are present. I will refer to this Section, and the conditions which need to be present for a director to incur a personal liability, in more detail shortly.
There are two issues which arise in the proceedings brought against Mr Hanel. The first issue is whether, in fact, Daroko has such a liability as claimed by the Plaintiff. It is alleged by Mr Hanel, in his Defence, that the Plaintiff failed to mitigate his losses in not taking up the opportunity to re-let Daroko’s suite of offices to another lessee who, Mr Hanel alleges, was ready and willing to occupy the offices under the Lease, immediately after 30 June 2001. Secondly, if Daroko is liable, then whether the conditions outlined in Section 197 of the Corporations Act are present, thus leading to Mr Hanel being responsible for any liability which Daroko has to the Plaintiff.
Claim Against Second Defendant
The second part of the Plaintiff’s claim is against a company called Forcett Pty Ltd (“Forcett”), which was the Trustee of the Kerry Hanel Investment Trust. Mr Hanel was one of the Directors of Forcett. At all relevant times, Forcett owned the issued Units in the Daroko Unit Trust in its capacity as the Trustee of the Kerry Hanel Investment Trust (“Kerry Hanel Trust”). When I refer to “Forcett” in these Reasons, I mean Forcett as Trustee of the Kerry Hanel Trust, unless otherwise expressly stated. It acquired those Units in 1988. At that time, Daroko held the Master Franchise Agreement with respect to a franchise business known as “Wendy’s Supa Sundaes”(sometimes called “Wendy’s”). The Master Franchise Agreement had ten years to run at that time. The Master Franchise Agreement entitled Daroko to franchise the right to operate Wendy’s Stores within the geographical area provided by the Master Franchise Agreement.
On 9 August 2000, Daroko sold its rights and interests in the Master Franchise Agreement, and the business and assets associated thereto, to Wendy’s Super Sundaes Pty Ltd which was the company which owned the rights to the brand name throughout Australia, and was the national franchisor. Wendy’s Supa Sundaes Pty Ltd had originally appointed Daroko, as Trustee of the Daroko Unit Trust, as the franchisee under the Master Franchise Agreement. The sale was, in fact, a buy back. Wendy’s Supa Sundaes Pty Ltd wished to regain the rights it had transferred to Daroko under the Master Franchise Agreement. The purchase price paid was $560,000. A further $34,000 was paid for the sale of a motor vehicle. A sum of $586,000 arising from the sale was paid into a Term Deposit Account with the National Australia Bank (“NAB”). Those moneys were disbursed from that account largely to the NAB and the remainder to creditors of Daroko and to an associated company called Booktine Pty Ltd (“Booktine”). More detail about this transaction will be provided later in these Reasons.
In the Profit and Loss Statement of the Daroko Unit Trust for the year ended 30 June 2001, the sum of $560,000 was included as an item of income received and described as “Profit on Sale of Goodwill”. The Profit and Loss Statement for that year recorded, after taking into account income and expenditure, a net profit of $512,617. The Statement also recorded that the sum of $512,617 was distributed to the Kerry Hanel Trust. That distribution was described as “Distribution of Surplus”. The Profit and Loss Statement of the Kerry Hanel Trust for the year ended 30 June 2001 recorded a receipt of income of $512,617, which was described as “Distribution – Daroko Unit Trust”.
As I stated earlier, following the payment of the proceeds of the sale of the Master Franchise Agreement and other assets into Forcett’s Fixed Term Account in August 2000 and its subsequent disbursements from that Account, the Daroko Unit Trust did not hold any assets. As a result, it does not have the capacity to meet any liability to the Plaintiff arising from Daroko’s breach of the Lease.
In the Plaintiff’s claim against Forcett he seeks an order setting aside the distribution of $512,617 to Forcett as a conveyance of property made with intent to defraud creditors contrary to Section 86 of the Law of Property Act 1936 (as amended) (“Law of Property Act”). The Plaintiff also seeks an order that Forcett pay to Daroko the sum of $512,617.
Evaluation of the Witnesses
Before I turn to consider the events which have led to the Plaintiff instituting these proceedings, it is a convenient time to say something about the witnesses. Only the Plaintiff and Mr Hanel gave evidence. There was little conflict in the evidence given by each of them.
I thought the Plaintiff tried to tell the truth. I felt he had a reasonable memory of events. He produced a substantial number of documents. These documents assisted him in giving his evidence. He appeared to be an intelligent person. I gained the impression that at the time he acquired the Hawthorn office premises, that he had little experience in business affairs.
As with the Plaintiff, I thought that Mr Hanel tried to tell the truth. I thought he had a reasonable memory of events. He appeared to be a person more versed in business affairs than the Plaintiff, although he displayed little knowledge about financial accounts. I gained the impression that he relied upon his accountants substantially, regarding accounting matters. I felt that he was an intelligent person.
As I said earlier, there was very little conflict between the evidence of each of them. Most of the material evidence was established through contemporaneous documents.
Plaintiff’s Purchase of Belair Road Offices
I mentioned earlier that Daroko leased a suite of offices in an office building situated at Belair Road, Hawthorn. The building had been owned by Illalong, a company half owned by Mr Hanel. The building consisted of nine offices and a boardroom. The offices were all situated around a central reception and general office area. Prior to the Plaintiff acquiring the building, Daroko occupied four of the offices and the boardroom. These offices were on one side of the central open area. On the other side of the central area a firm of accountants operating under the name of Hood and Stevens, occupied three of the offices and a company called Anita Howes & Associates Pty Ltd (“Anita Howes”) occupied the remaining two. Because there was only one central office area in the building, each of the lessees shared that area and the receptionist.
Daroko occupied its offices under a written five year Lease, which term commenced on 1 October 1998 and was to expire on 30 September 2003. Both Hood and Stevens and Anita Howes had three year Leases, each expiring on 30 September 2001.
Illalong placed the property on the market for sale. The Plaintiff entered into a contract to purchase the property from Illalong on 27 April 1999. Completion of the contract occurred on 9 June 1999. At the time of completion, Illalong’s interest in the written Leases of Daroko, Anita Howes and Hood and Stevens were assigned to the Plaintiff. The Plaintiff had purchased the property as an investment.
Circumstances Leading to Daroko’s Vacation of the Offices
Daroko held the Master Franchise Agreement for Wendy’s for South Australia, Northern Territory and Mildura (“franchise area”). The original founders of Wendy’s had initially operated the Master Franchise Agreement through the Daroko Unit Trust. In 1988, Forcett acquired the Units in the Unit Trust. Mr Hanel was the driving force in Forcett and, after it had acquired the Units, he became the driving force in the Master Franchise Agreement and business operated by Daroko. Under his stewardship, the number of franchisee/operators of Wendy’s Stores in Daroko’s franchise area expanded significantly. I accept Mr Hanel’s evidence that Daroko was operating a successful and profitable business. At the time of the commencement of the five year Lease period, on 1 October 1998, the Master Franchise Agreement had five years to run with an option for a further five years. The period of the Lease was compatible with the period of the Master Franchise Agreement. The Lease was to expire on 30 September 2003. The Lease provided Daroko with a right of renewal of the Lease for a further five years after 30 September 2003.
In the early part of the year 2000, Mr Hanel received a request from Wendy’s Supa Sundaes Pty Ltd to buy back the Master Franchise Agreement and with it the business operated by Daroko under that Agreement. I accept Mr Hanel’s evidence that the request came unexpectedly and was a shock to him. He was operating a successful and profitable business. He wanted to continue with the business. I further accept his evidence that he initially resisted the overtures from Wendy’s Supa Sundaes Pty Ltd to buy the Master Franchise Agreement and the associated business. However, in the end, commercial reasons dictated that he was unable to resist the demand by Wendy’s Supa Sundaes Pty Ltd. As a result, he sold the Master Franchise Agreement and the business to Wendy’s Supa Sundaes Pty Ltd on 9 August 2000 for the sum of $560,000. I mentioned earlier, that at the same time a motor vehicle was sold to Wendy’s Supa Sundaes Pty Ltd for $34,000.
The business operated by Daroko under the Master Franchise Agreement was Daroko’s sole activity. It was a term of the Master Franchise Agreement that the franchisee not carry on any other business than that of a Wendy’s Master Franchise operator.
I accept Mr Hanel’s evidence that it was his intention to carry on business after the sale of the Wendy’s franchise. He had acquired a Master Franchise with Pure and Natural Holdings Pty Ltd, (“Pure and Natural”) which, I understand, granted franchises to enable stores to be operated under the Pure and Natural banner selling ice-cream and the like. It was his intention to build up a network of franchisees to operate Pure and Natural Stores, in the same manner in which he had successfully built up the Wendy’s franchisee/operator stores. He also operated, through one of his companies, a Pure and Natural Store at Marion. Mr Hanel also intended to continue to operate the two or three Wendy’s Stores, which he had been conducting from some time, through the company, Booktine. Clause 35.6 of the Sale and Purchase Agreement of the Master Franchise Agreement and Business, dated 9 August 2000, with Wendy’s Supa Sundaes Pty Ltd, provided that Daroko, Mr Hanel, and his wife, were entitled to engage in the Master Franchise business of Pure and Natural after the sale had been completed and to carry on and operate the Wendy’s Stores.
Two or three Wendy’s Stores were conducted by Mr Hanel through Booktine. The Master Franchise of Pure and Natural was operated by Mr Hanel through a company called Bovard Pty Ltd. Prime Enhancements Pty Ltd (“Prime Enhancements”) operated the Marion Pure and Natural store.
After the sale of the Wendy’s Master Franchise Agreement and the associated business, Mr Hanel administered the Pure and Natural business and the Wendy’s franchise stores from the office premises through the companies I have just identified. The entire suite of offices were no longer needed for the running of those businesses. To overcome this problem, one office was sub-let to Rob Leeder, an Accountant, and another to Tim Rathjen, an Accountant. The rent for the suite of offices continued to be paid after Daroko had sold its business. The rent was paid through various companies associated with Mr Hanel. The rent payable was partly met by the receipt of rent from Mr Leeder and Mr Rathjen.
In either February, or the early part of March 2001, Mr Hanel suffered a stroke. He said that his medical advice was that he should consider changing his lifestyle. The business of Pure and Natural was struggling at that time. He reached the conclusion that he should retire from business for the sake of his health. On 15 March 2001 by letter, Mr Hanel, through Daroko, advised the Plaintiff that he had suffered a stroke and that as a result of reviewing his position he proposed to vacate the suite of offices leased by Daroko, on 30 June 2001. In that letter, he advised that three offices would need to be let after he had vacated, as two offices were being rented by two accountants. He also advised Mr O’Neill, in that letter, that Daroko was, at that time, a non-trading entity with no assets and had been in that position since the sale to Wendy’s Supa Sundaes Pty Ltd.
This advice came as a surprise to the Plaintiff. I find that he was informed by Mr Hanel, some time prior to 15 March 2001, that Daroko had been required to sell its franchise of Wendy’s back to the national franchisor, Wendy’s Supa Sundaes Pty Ltd. However, at that time, there had not been any suggestion by Mr Hanel that he would not, through Daroko, honour the commitments made in the Lease. Indeed, as will be seen, I am satisfied that at the time of the sale Mr Hanel intended to continue to honour the terms of the Lease. The Plaintiff responded to this advice by indicating to Daroko that he would assist in the search for a replacement tenant and indicated his intention to seek a single tenant for all of the offices, the subject of the Lease. He also sought confirmation from Daroko, that it would cover any shortfalls in expenses regarding the re-letting of the office premises. Daroko’s response was that it was not prepared to give a commitment to cover any shortfalls.
Re-Letting of the Office Premises
The Plaintiff, in evidence, said that he was unhappy about two of the offices being let to Mr Leeder and Mr Rathjen, respectively. He said that he wanted one lessee for the suite of offices which Daroko occupied, as he felt that having a number of sub-tenants in those offices would create substantial administrative difficulties.
The Plaintiff was concerned about his investment in view of the advice that he had received from Daroko. Indeed, whilst Mr Leeder and Mr Rathjen were in occupation of part of the suite of offices, difficulties arose regarding who was responsible for the costs of the common area, which had formally been occupied as a general office and reception area. Those difficulties included issues of apportionment of the cost of power and light for this area, and other expenses for other common areas, among the remaining tenants in the building. These problems reinforced the Plaintiff’s view that the only satisfactory solution to the dilemma brought about by the intention of Daroko to vacate was to obtain one lessee for the entire suite of offices, the subject of the Lease to Daroko.
In early April 2001, the Plaintiff consulted with a number of letting agents regarding the letting of the office premises to be vacated by Daroko. After receiving submissions from these letting agents, he appointed CB Richard Ellis Pty Ltd (“Richard Ellis”) to undertake the re-letting task. The re-letting was marketed by placing signboards in front of the premises. Advertising was undertaken in “The Advertiser”. There was also advertising on Richard Ellis’ Internet Site. There were a number of enquiries received regarding these offices, from time to time, but most of these enquiries related to the leasing of the entire building and not simply those offices which were the subject of Daroko’s Lease.
During the period after Richard Ellis had been appointed the letting agents, the Plaintiff had been in consultation with Hood and Stevens. He had initially advised them by letter dated 23 April 2001, that he could not commit to a renewal of their Lease beyond the current Lease, which expired on 30 September 2001, until he was able to resolve the problems arising from Daroko’s impending vacation of its office premises. He suggested there were a number of alternatives available to him, including finding a tenant for the entire building.
On 27 June 2001, Daroko wrote to the Plaintiff advising that Hood and Stevens had agreed to take over the office premises occupied by Daroko under the Lease and to lease those offices from 1 July 2001. It appears that this letter was hand delivered to the Plaintiff’s home on 28 June 2001. On 2 July 2001, Daroko again wrote to the Plaintiff confirming that Hood and Stevens were prepared to take over the remainder of the term of the Lease and Daroko was seeking the approval of the Plaintiff to the assignment of the Lease to Hood and Stevens.
Following the receipt of the letters from Daroko of 27 June 2001 and 2 July 2001 advising that Hood and Stevens were prepared to take over Daroko’s Lease, the Plaintiff consulted with Mr Hood and Mr Stevens. A meeting was held with them on 4 July 2001. At that meeting, the Plaintiff was informed that Mr Hanel had approached them to take over Daroko’s suite of offices, but they were not interested in doing that. Indeed, the Plaintiff was advised that they would like to remain in the offices that they were currently leasing, but wished to negotiate a lower rent. By letter dated 19 July 2001, the Plaintiff advised Daroko that Hood and Stevens had indicated that they were not prepared to accept an assignment of the Lease for the Daroko suite of offices which had, by then, been vacated by Daroko.
The evidence that Hood and Stevens did not wish to take over Daroko’s Lease is supported by later correspondence. On 20 September 2001, Hood and Stevens wrote to the Plaintiff advising that at the expiration of their current Lease (which was on 30 September 2001), they wished to negotiate for a further Lease for their current office premises for two years with a right of renewal for another two years, but that the base rental needed to be reviewed and revised.
On 30 September 2001, Anita Howes vacated the two offices it was occupying. Their Lease expired on that date. Mr Rathjen, one of Daroko’s sub-tenants, vacated his office on 30 September 2001. He had been paying his rent directly to the Plaintiff since the time that Daroko vacated. There had never been any formal arrangement regarding the letting with Mr Rathjen. He was paying rent on a monthly basis.
After that time, the only lessees remaining in the premises were Hood and Stevens and the other Accountant, Mr Leeder. Hood and Stevens continued to lease their section of the office premises on a holding over basis after 30 September 2003. Mr Leeder, like Mr Rathjen, was simply renting on a monthly basis.
Throughout this period, the Letting Agents were re-attempting to re-let the Daroko suite of offices. In the end, the Plaintiff’s letting agents were able to obtain a tenant for the entire office premises which included that section of the office premises, the subject of the Daroko Lease. As a result, the Plaintiff gave notice to Hood and Stevens to vacate the premises on 1 November 2001. The evidence does not indicate how long Mr Leeder remained leasing his office. On 1 December 2001, Prime Securities Pty Ltd commenced to lease the whole of the office building at Belair Road. The term of its Lease was for five years with a right of renewal for a further five years.
Default by Prime Securities
Prime Securities Pty Ltd (“Prime Securities”) continued to lease the building for approximately thirteen months. That company began suffering financial difficulties and a Receiver was appointed. The Plaintiff was advised that Prime Securities had vacated the premises on 1 April 2003. The last payment for rent was received by the Plaintiff under the Prime Securities Lease, on 28 February 2003.
After Prime Securities had vacated the premises, there were considerable repairs which needed to be undertaken by the Plaintiff to reinstate the office building to an acceptable state for re-letting. On this occasion, the Plaintiff appointed Knight Frank as his letting agent. The office building was eventually leased to Ian Duncan, an accountant, for a term of five years, commencing on 1 April 2004. Of course, Daroko’s liability for any losses did not extend for that period as the term of its Lease expired on 30 September 2003.
Is Section 197 Applicable to Mr Hanel?
I turn now to consider the question of Section 197 of the Corporations Act. The relevant provisions of Section 197 are:
197. Directors liable for debts and other obligations incurred by corporation as trustee
(1) A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or part of the liability if the corporation:
(a)has not, and cannot, discharge the liability or that part of it; and
(b)is not entitled to be fully indemnified against the liability out of trust assets.
This is so even if the trust does not have enough assets to indemnify the trustee. The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection.
(2) The person is not liable under subsection(1) if the person would be entitled to have been fully indemnified by 1 of the other directors against the liability had all the directors of the corporation been trustee when the liability was incurred.
I have already mentioned that Mr Hanel was the sole Director of Daroko and Daroko was the Trustee of the Daroko Unit Trust.
The first issue in this claim is whether Daroko is liable to the Plaintiff for the loss of $108,618.85 suffered by the Plaintiff arising from its breach of the Lease. For a director to be liable under Section 197, the first matter to be established is that the trustee company has a liability which it has not and cannot discharge. It is not in dispute that Daroko, whilst acting as the Trustee of the Daroko Unit Trust, breached the Lease it had with the Plaintiff. It is not disputed that the Plaintiff suffered loss amounting to $108,618.85 as a result of Daroko wrongfully vacating the office premises. The issue which remains outstanding is whether Daroko is liable for that loss by way of damages. It is the case of Mr Hanel that the Plaintiff has not suffered any loss or damage as he failed to mitigate any losses arising from the breach by not assigning the Lease to Hood and Stevens, whom it is alleged were willing to take over the Daroko suite of offices from 1 July 2001.
The second issue, on the assumption that the Plaintiff has established the first limb, is whether the Plaintiff has established that Daroko is “ … not entitled to be fully indemnified against the liability out of trust assets”. (Section 197(1)(b)).
Mitigation of Loss Issue
The first issue in the claim against Mr Hanel is whether the Plaintiff has mitigated its loss arising from Daroko’s breach of the Lease. In paragraph 5 of the amended Defence, Mr Hanel pleads that Hood and Stevens were prepared to accept the assignment of the Lease on 1 July 2001 and that the Plaintiff did not consent to that assignment. He further pleads that if the Plaintiff had consented to the assignment, then the Plaintiff would have suffered no loss or, alternatively, reduced its damages substantially. There were other matters raised in paragraph 5 of the amended Defence relating to mitigation, but they are not relevant for the present purposes. There were other pleadings in the Defence relevant to the mitigation issue (paragraphs 11 and 12), but these were not pursued.
The relevant principles of mitigation of loss or damages in breach of contract are set out by Viscount Haldane L.C. in British Westinghouse Electric and Manufacturing Company Limited v Underground Electric Railways of London Limited (at 689):[1]
[1] (1912) AC 673
Subject to these observations I think that there are certain broad principles which are quite well settled. The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed.
The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps. In the words of James L.J. Dunkirk Colliery Co. v Lever (1), “The person who has broken the contract is not to be exposed to additional cost by reason of the plaintiffs not doing what they ought to have done as reasonable men, and the plaintiff not being under any obligation to do anything otherwise than in the ordinary course of business.”
As James L.J. indicates, this second principle does not impose on the plaintiff an obligation to take any step which a reasonable and prudent man would not ordinarily take in the course of his business. But when in the course of his business he has taken action arising out of the transaction, which action had diminished his loss, the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act.
After referring to the decision of Steinforth v Lyall, Viscount Haldane L.C. said:
I think that this decision illustrates a principle which has been recognized in other cases, that, provided the course taken to protect himself by the plaintiff in such an action was one which a reasonable and prudent person might in the ordinary conduct of business properly have taken, and in fact did take whether bound to or not, a jury or an arbitrator may properly look at the whole of the facts and ascertain the result in estimating the quantum of damage.
His Lordship then went on to say, considering the circumstances of the case, (at 691):
I think the principle which applies here is that which makes it right for the jury or arbitrator to look at what actually happened, and to balance loss and gain. The transaction was not res inter alios acta, but one in which the person whose contract was broken took a reasonable and prudent course quite naturally arising out of the circumstances in which he was placed by the breach.
The onus of proving that a Plaintiff has failed to mitigate loss of damages claimed to be suffered as a result of breach of contract is upon the Defendant.
The basis of defence of failure to mitigate loss and damages of Mr Hanel is that on behalf of Daroko he had arranged for Hood and Stevens to take an assignment of the Daroko Lease on 1 July 2001, and the Plaintiff failed to complete the assignment with Hood and Stevens. The only evidence to support that defence is a letter to the Plaintiff from Daroko dated 27 June 2001, in which Daroko, through Mr Hanel, states that he had spoken to Robert Stevens, of Hood and Stevens, and that Hood and Stevens had entered into an agreement with Daroko to take over the remaining period of Daroko’s Lease. This letter was followed up by the letter of 2 July 2001, in which Daroko requested the Plaintiff’s approval to the assignment of the Lease. Mr Hanel did not give any evidence about this arrangement in the course of the Trial. He was offered the opportunity of calling Mr Hood or Mr Stevens regarding this issue, but declined to do so.
I have earlier referred to the evidence of the Plaintiff that he approached Hood and Stevens after receiving those letters and he was informed that they had no intention of occupying Daroko’s suite of offices. I accept that evidence.
In a letter of 19 July 2001 from the Plaintiff to Daroko, the Plaintiff advised that Hood and Stevens were not prepared to accept an assignment of Daroko’s Lease. There was no evidence of any response by Daroko, either by correspondence or orally.
The evidence of the Plaintiff is supported by a letter of 20 September 2001 from Hood and Stevens to the Plaintiff, in which they confirmed that they wanted to continue to lease the offices that they were occupying at that time, although at a reduced rent. I find that Hood and Stevens were never prepared to occupy the suite of offices, which had been vacated, for the balance of the Daroko Lease. Mr Hanel’s defence to the Plaintiff’s claim falls at the first hurdle.
Apart from the issue of the assignment to Hood and Stevens, the evidence indicates that the Plaintiff did everything reasonably possible to re-let the Daroko offices after Daroko had vacated them. The Plaintiff commenced the task of re-letting in April 2001, by employing letting agents. The difficulty confronting the Plaintiff was that the offices in the building had a shared central reception area. I accept his evidence that the enquiries received by the Plaintiff, through the letting agents, indicated that potential lessees were more interested in letting the entire office premises than the suite of offices previously leased by Daroko. I also accept that it was a reasonable alternative strategy, in view of the difficulties that the Plaintiff had in letting only the part of the premises formerly occupied by Daroko, for the Plaintiff to also seek a lessee for the entire office building.
I have also reached the conclusion that after Prime Securities defaulted on its Lease, that during the period to 30 September 2003 (being the end of the Daroko Lease) the Plaintiff did everything reasonably possible to re-let the premises. It is clear that the only option available to him at that time was to attempt to obtain one lessee for the entire premises. In my view, it was reasonable for him to adopt this strategy and not seek simply a lessee of the Daroko offices.
The Defence of Mr Hanel, that the Plaintiff has failed to mitigate his loss and damages arising from Daroko’s breach of the Lease, fails.
As a result, the Plaintiff has established the first limb of Section 197. Daroko, whilst acting as the Trustee of the Daroko Unit Trust, has incurred a liability to the Plaintiff of $108,618.85. Daroko is liable to discharge that liability and has not, and cannot, discharge it.
The Second Limb of Section 197
I now turn to the second limb of Section 197. Is Daroko entitled or not entitled to be fully indemnified against its liability to the Plaintiff out of trust assets of Daroko? If it is the latter, then the Plaintiff will have established that the second limb also applies in these circumstances. In dealing with this issue, it is necessary to refer to the history of these proceedings.
(i) History of the Proceedings
The Plaintiff’s proceedings, which have come to this Court for determination, were initially commenced in the Magistrates Court in the latter half of 2002. At that time, the Plaintiff claimed loses of $23,132.62 by way of damages, as a result of Daroko’s breach of the Lease. There was an application brought by the Plaintiff seeking summary judgment against Mr Hanel for the amount claimed, relying upon Section 197 of the Corporations Act. It was agreed that Daroko had no assets and was unable to discharge any liability which it may have to the Plaintiff as a result of Daroko’s breach of the Lease. Mr Hanel had by then raised the defence of the Plaintiff’s failure to mitigate. The Magistrate determined that Mr Hanel was liable pursuant to Section 197 of the Corporations Act for the damages suffered by the Plaintiff and ordered that summary judgment be entered against Mr Hanel. The defence of the failure of the Plaintiff to mitigate his loss, which had been raised before the Magistrate, was not referred to in the Reasons delivered by the Magistrate.
Mr Hanel appealed against the summary judgment decision to the Full Court of the Supreme Court. On 11 December 2003, Judgment was delivered by the Full Court in Hanel v O’Neill[2], allowing the appeal and setting aside the Magistrate’s Order. In the course of hearing the Appeal, the Full Court needed to consider the question of the construction of Section 197 of the Corporations Act. The critical issue for consideration of the Full Court was the meaning of the words in subsection (1)(b) of Section 197. Justices Mullighan and Gray held, in separate Judgments, that the proper construction of subsection (1)(b) of Section 197 is that in a case where a trustee is entitled under a trust deed to full indemnity out of the trust fund for any liability incurred as a trustee, but there are insufficient assets to, in fact, provide that indemnity, then the company “ … is not entitled to be fully indemnified against the liability out of trust assets”. However, both Justices held that as the Magistrate had not considered the defence of failure to mitigate the loss raised by Mr Hanel, it was necessary for the Summary Judgment to be set aside and the matter returned to the Magistrates Court to consider that defence.
[2] [2003] SASC 409
Justice Mullighan decided that whilst Clause 21 of the Trust Deed of the Daroko Unit Trust provided for Daroko to be indemnified against liability from the Trust Fund, that as there were no assets to, in fact, meet that indemnity, then Daroko as Trustee was “ … not entitled to be fully indemnified …” within the meaning of subsection(1)(b) of Section 197. In other words, that on its proper construction, the phrase “entitled to be fully indemnified” means not only that the Trust Deed provides for the Trustee to be indemnified, but there is, in fact, a Trust Fund which provides for that indemnity.
Justice Gray also accepted that on a proper construction of the subsection, there needed to be an entitlement for a trustee to indemnity under a trust deed and that, in fact, there were assets of the trust available to allow the Trust to exercise that indemnity. Like Justice Mullighan, he was of the view that if both of those conditions were not present, then there was no “… entitlement to be fully indemnified …” within the meaning of subsection(1)(b) of Section 197. He also concluded that whilst the Trust Deed of the Daroko Unit Trust provided an indemnity to Daroko, as there were no assets held by the Daroko Unit Trust to provide that indemnity, then Daroko was not fully indemnified within the meaning of subsection(1)(b) of Section 197.
Justice Debelle expressed a different view. He was of the opinion that the proper construction of subsection (1)(b) of Section 197 was that if a trust deed provided for the trustee to be fully indemnified from the trust assets against any liability incurred whilst acting as trustee, then that is the end of the matter. He decided that in those circumstances, the trustee is fully indemnified within the meaning of subsection(1)(b) of Section 197.
Both Justice Mullighan and Justice Gray were of the view that whilst the Magistrate had applied the correct construction to Section 197(1)(b), she had failed to consider the issue of mitigation of loss. It was accepted that until this issue had been resolved, no liability of Daroko arose for which Mr Hanel, as a Director, could be liable under the Section. The defence raised by Mr Hanel regarding the Plaintiff’s failure to mitigate his loss, applied to the entire claim of the Plaintiff. Therefore, the appeal was allowed and the matter returned to the Magistrates Court.
By the time the proceedings had been returned to the Magistrates Court, the Plaintiff’s claim for damages had increased beyond the jurisdiction of that Court. The proceedings were then transferred to this Court.
Mr Riggall, Counsel for the Plaintiff, submitted that the issue of the construction of Section 197(1)(b) of the Corporations Act had been determined by the Full Court so the construction placed upon the subsection in the Full Court binds this Court. In my opinion, Mr Riggall’s submission is correct. However, if that is not the case and I need to consider the issue again, then I adopt, with respect, the construction of Section 197(1)(b) of Section 197 referred to by the Full Court. I consider it to be the proper construction.
(ii) Conclusion
On the facts I have found in these proceedings, Mr Hanel was a Director of Daroko at all relevant times. Daroko was, at all relevant times, the Trustee of of the Daroko Unit Trust. Mr Hanel was a Director of Daroko when it incurred the liability to the Plaintiff as a result of the breach of the Lease. That liability stands at $108,618.85. Daroko has not and cannot discharge that liability. Whilst Daroko is entitled, under the Trust Deed, to be indemnified for that liability from the Trust Fund, there is no Trust Fund. The Daroko Unit Trust has no assets to allow Daroko to be indemnified. Accordingly, the conditions necessary for a director to be liable under Section 197 of the Corporations Act exist. Accordingly, Mr Hanel, as a director of Daroko, is personally liable to the Plaintiff for the sum of $108,618.85. The Plaintiff is entitled to Judgment against Mr Hanel for the sum of $108,618.85.
Claim Against Forcett
(i) Outline of Claim
In the Plaintiff’s claim against Forcett he seeks to have the “Distribution of Surplus” of $512,617 by Daroko as the Trustee of the Daroko Unit Trust to Forcett as Trustee of the Kerry Hanel Trust declared void pursuant to Section 86 of the Law of Property Act.
Indeed, the Plaintiff goes further in seeking his remedy. Mr Riggall, Counsel for the Plaintiff, seeks an order directing Forcett to repay the money to Daroko. I have emphasised the word “money”. What is clear is that the “Distribution” did not, in fact, distribute cash. The entries in the Financial Accounts of each of the Trusts were accounting entries only.
Section 86 of the Law of Property Act provides:
86. (1) Every conveyance of property made with intent to defraud creditors shall be voidable at the instance of the party prejudiced thereby.
(2) This section shall not extend to any estate or interest in property conveyed for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the conveyance, notice of the intent to defraud creditors.
I mentioned earlier that on the sale of the Master Franchise Agreement and associated business for Wendy’s, that Daroko received $560,000. It also sold a motor vehicle and received the sum of $34,000. The Profit and Loss Statement of the Daroko Unit Trust for the year ended 30 June 2001 treated the receipt of $560,000 as income, describing it as “Profit on Sale of Goodwill”. The Profit and Loss Statement records other income received in that year. Furthermore, it sets out the Expenditure of the Unit Trust for that year. Following the accounting of the Income and Expenditure in the Profit and Loss Statement, it records a net profit in the Daroko Unit Trust of $512, 617. The Profit and Loss Statement also contained the following entry: “DISTRIBUTION OF SURPLUS – Distribution – K Hanel Inv. Trust $512,617”.
Forcett, as I mentioned, was the Trustee of the Kerry Hanel Trust. In the Kerry Hanel Trust’s Profit and Loss Statement for the year ended 30 June 2001, there is recorded in the “Income” items the following entry: “Distribution – Daroko Unit Trust $512,617”. It is that Distribution of $512,617 recorded in Daroko’s Profit and Loss Statement which the Plaintiff claims is void under Section 86 of the Law of Property Act as a “ … conveyance of property made with the intent to defraud creditors …”. The Plaintiff claims that he is a party “ prejudiced” by such a conveyance pursuant to the terms of Section 86.
Although the claim pursuant to Section 86 is focused on the “Distribution of Surplus” to Forcett from Daroko, most of the evidence concentrated on the sale transaction in August 2000 and distribution of those proceeds in September/October 2000. Mr Riggall criticised Daroko for not retaining some of those funds for the purpose of meeting Daroko’s liability under the Lease. In my opinion, the sale transaction and the aftermath have very limited relevance to the Plaintiff’s claim to declare the end of year “Distribution” void. However, in view of the manner in which this part of the Trial unfolded, I propose to refer in some detail to that evidence.
(ii) Financial Structure of Daroko and the Unit Trust
I mentioned earlier that the initial founders of Wendy’s operated the franchise business in South Australia and the Northern Territory and Mildura through Daroko as Trustee of the Daroko Unit Trust. In September or October of 1988, Mr Hanel decided to buy the Master Franchise Agreement and the business operated thereunder. He did this through Forcett as the Trustee of the Kerry Hanel Trust, acquiring the then Unit Holders’ Units in the Daroko Unit Trust. Mr Hanel thought that Forcett paid about $350,000 or $360,000 for the acquisition of the Units. The balance sheet of the Kerry Hanel Trust for 30 June 2001, indicates that it held 371,080 units in the Daroko Unit Trust, so it seems that Mr Hanel’s approximation of the purchase price is correct. The Units are one dollar Units. He said that initially he thought that the acquisition of the Units was financed by Esanda Finance. It was his evidence, which I accept, that after that time there were a number of variations to the financial arrangements relating to Daroko and Forcett. Mr Hanel said that at July 1999, the finances relating to the Master Franchise Agreement and the business associated with it were with the Commonwealth Bank. However, at that time it was determined that there would be a refinancing with the NAB.
It was Mr Hanel’s evidence that the NAB required the refinancing with respect to Daroko and Forcett to be undertaken through Forcett solely. He said he could not recall if that was the position with other financing prior to financing with the NAB. By letter dated 3 August 1999, NAB advised Forcett that on 30 June 1999 the NAB had discharged the liabilities to the Commonwealth Bank under the refinancing arrangement. The refinancing had been undertaken by drawing down Bills of Exchange amounting to $989,000. Following discharge of the Commonwealth Bank’s liabilities, surplus funds of little over $7,000 were credited to Forcett’s bank account.
As part of the refinancing, the NAB required guarantees and indemnities from Mr Hanel, his wife, Christine Hanel, Daroko, as Trustee of the Daroko Unit Trust, and guarantees from other companies through which Mr Hanel operated his business affairs. Among the securities required by the NAB was a first ranking registered mortgage debenture over the assets of Daroko as Trustee of the Daroko Unit Trust, a first ranking registered mortgage debenture over the assets of Forcett as Trustee of the Kerry Hanel Trust and first ranking registered mortgage debentures over the assets of two other companies operated by Mr Hanel. Each Debenture was both a fixed and floating charge. The Debenture which Daroko granted over the assets of the Daroko Unit Trust was given to secure its guarantee.
(iii) Sale of the Master Franchise and Business
I have stated on a number of occasions that the sale of the Master Franchise Agreement and associated business back to Wendy’s Supa Sundaes Pty Ltd occurred on 9 August 2000. The Sale Agreement provided that the assets, the subject of the sale, be transferred free of encumbrances. The Master Franchise Agreement and the associated business were secured by the Debenture granted to the NAB by Daroko in July 1999. As a result, it was necessary to arrange with the NAB to partially discharge the Mortgage Debenture in order to release the assets, the subject of the sale. I accept the evidence of Mr Hanel that, in turn, the NAB required the proceeds of sale to be applied in partially discharging the liability that Forcett had with the NAB.
As part of a Statement of Agreed Facts, it is agreed by the parties that a sum of $594,000 was paid into a fixed deposit account, which it is said was received from Wendy’s as a result of the sale. It would appear that figure is an error. By reference to other agreed facts, it would seem that the figure should be $584,000. It was also part of the agreed facts that Daroko received the total sum of $584,000 on 8 August 2000 and was paid into a fixed deposit account with the NAB on 9 August 2000. Those agreed facts seem to be at odds with the sale and purchase agreement for the sale of the Master Franchise Agreement and associated business, dated 9 August 2000, which indicates that the sale was completed on that date. Furthermore, the amount of $584,000 appears to be at odds with a document dated 27 August 2000 (Exhibit P7), which is addressed to the NAB and is signed by Mr Hanel and his wife, Christine Hanel. That document indicates that $586,000 was paid into a Term Deposit Account in the name of Forcett. However, whilst there are those differences, I do not think anything turns on them.
Whilst the agreed facts are that the proceeds of sale of $584,000 was received by Daroko on 8 August 2000 and paid into the Forcett account with the NAB on 9 August, there is no evidence that the amount of money was physically received by Daroko. This would have been extremely unlikely. The evidence, which I accept, is that the NAB required the proceeds of sale to be paid into a Term Deposit Account in Forcett’s name and that was done. That is the most likely scenario. It is reasonable to infer the NAB would not wish to lose control of the proceeds of sale as it had released the assets, the subject of the sale, from its Debenture security. It is accepted that upon the sale of the Daroko Unit Trust’s assets, it was entitled to receipt of the sale price. However, in fact, the evidence indicates that the funds were paid directly into the Forcett Term Deposit Account with the NAB. Again, I do not think any differences between the agreed facts and the other evidence is material. For the purpose of these Reasons, it does not matter whether Daroko took physical possession of the proceeds of sale before they were paid into the Fixed Deposit Account or not.
Mr Hanel said that he understood the NAB adopted the procedure of depositing the proceeds of sale into the Fixed Deposit Account of Forcett as a number of the Bills of Exchange, which had been the source of finance, had not matured at that time. This would seem to be a reasonable explanation for the NAB adopting this course. In any event, it is quite clear that the Forcett Fixed Deposit Account was used by the NAB as a holding account. This is evident from a document dated 27 September 2000, addressed to the NAB from Mr Hanel and Mrs Hanel (Exhibit P7) (“27 September Agreement”). In that document it was stated that the funds in the “Term Deposit” were “ … currently being held as security by National Australia Bank Ltd …”. I also find that the funds in the Term Deposit Account were not Forcett’s to do with as it wished. This was the effect of Mr Hanel’s evidence and I accept it. The statement in the 27 September Agreement that the money was held as security supports this evidence.
(iv) Disbursement of the Funds from the Forcett Account
The 27 September Agreement provided for the manner in which the funds in the Forcett Term Deposit Account were to be disbursed. The agreement and undertakings of Mr and Mrs Hanel provided that the sum of $586,000 held in the Account was to be applied in the following manner:
Immediate release of $186,000 (one hundred and eighty six thousand dollars) to be applied to regularise overdrawn accounts and to provide for other outstanding cheques currently in the system.
Release of remaining funds, $400,000 – (four hundred thousand dollars) and to be applied to the Fixed Bill Facility on the next rollover date being 30 October 2000.
It is an agreed fact that on or about 28 September 2000, the money in the fixed deposit account was paid out as follows:
To discharge the following liabilities of Daroko:
Kelly & Co $ 30,000.00
Wendy’s Sefton Plaza $ 5,000.00
Wendy’s Barossa Valley $ 8,000.00
To discharge a liability of Booktine $ 49,000.00
The remaining money to discharge liabilities of Forcett
The agreed fact does not identify the “remaining money used to discharge the liabilities of Forcett”. However, I am satisfied that most, if not all of it, was paid to the NAB to partially discharge the liability to the NAB. The sum of $400,000, as stated in the 27 September Agreement, was applied to the Fixed Bill Facility. The 27 September Agreement indicates that the sum of $400,000 was to be paid on 30 October 2000, being the next rollover date of the Fixed Bill Facility. The 27 September Agreement also provides for the Annual Amortisation of $50,000 to the Bill Line Facility. This must have been a payment to the NAB. There is no evidence that there were any other specific liabilities of Forcett at that time, other than to the NAB. I accept the evidence that Forcett was not a company operating any business. Its main activity was holding shares and units in other entities in which Mr Hanel was involved. In those circumstances, it is a reasonable inference that the remainder of the funds, after accounting for the $50,000 and the payments referred to in the agreed fact as being distributed on behalf of Daroko and to Booktine, were also received by the NAB.
I accept Mr Hanel’s evidence that those amounts which did not go directly to the NAB arose as a result of negotiations with the NAB to free up a part of the money in order that those liabilities could be met. The agreement reached with the NAB must have been in the period from 9 August 2000 (payment into the Term Deposit Account) and 27 September 2000. Those funds were used to meet outstanding liabilities of Daroko and Booktine. The $49,000 referred to in the agreed fact as being paid out to discharge liabilities of Booktine, did not mention to whom the money was distributed. The 27 September Agreement indicates that, the sum of $25,000 was for a “Shop fit allowance on Hollywood Plaza” and the sum of $24,000 was for “National Office proceeds from the sale of Mount Gambier”.
Mr Hanel explained that the $24,000 liability arose as a result of an obligation on the part of Booktine as an operator/franchisee under the Master Franchise Agreement. Booktine operated a Wendy’s Store at Mount Gambier. It was a requirement that ten percent of the sale price was to be paid to head office to cover any repairs or maintenance of the shop which may be required after the sale. I accept the evidence that the $24,000 would have been paid to Wendy’s Head Office on behalf of Booktine to meet this obligation.
I also accept Mr Hanel’s evidence that the $25,000 was paid for a shop fit-out at Booktine’s Hollywood Plaza Wendy’s Store. Mr Hanel explained that the policy of the national franchisor, Wendy’s Supa Sundaes Pty Ltd, was to change the design and presentation of Wendy’s Stores from time to time. He said that the $25,000 cost would have arisen as a result of such change.
(v) Daroko’s Liability Under the Lease
Mr Hanel said that at August 2000, he understood that Daroko had a legal obligation to meet the Lease payments under the Lease until the term expired. He also said that at the time of the sale of the business he recognised that Daroko had no other source of income, nor did it have any other assets. He said that after Daroko ceased business, it never entered his mind that the office premises at Belair Road would be vacated. He said that through Bovard he had a Master Franchise Agreement for Pure and Natural, which he hoped to build up in a similar way to that which he had done with Wendy’s. Mr Hanel said that one of his companies also operated a Pure and Natural Store at Marion. He said that Booktine was operating two Wendy’s Stores at the time. The effect of his evidence is that it was his intention that all of these businesses would continue to be administered from the office premises at Belair Road. I mentioned earlier that he had sub-let two of the offices.
As I stated earlier, Mr Hanel said that it was only after he had his stroke in the early part of 2001, and the subsequent medical advice, that he reached the decision to terminate his business interests. I accept all of this evidence.
Mr Hanel said that he handed back the Pure and Natural Master Franchise Agreement. He said that the Pure and Natural Store at Marion was closed. He said that the two Wendy’s Stores operated by Booktine were sold.
(vi) Principles of Law
It is now convenient to set out the principles relevant to the application of Section 86 of the Property Act.
The word “defraud” in Section 86 has a wider meaning than that normally understood in the law. It is intended to apply to conveyances made “with the intent to defraud defeat or delay creditors”[3]. The historical origins of Section 86 is found in the Fraudulent Conveyances Act 1571 (Elizabeth I). The onus of proving a conveyance of property is made with the intent to defraud creditors is upon the party who asserts it[4].
[3] Barton v Deputy Federal Commissioner of Taxation (1974) 131 CLR 370 at 374
[4] Noakes v J Harvy Holmes & Son (1979) 26 ALR 297 at 303
Section 86 of the Law of Property Act has a similar application to the old Section 121 of the Bankruptcy Act 1966. When considering the application of Section 121, Brennan CJ and McHugh J in DM Cannane v J Cannane Pty Ltd (in liquidation)[5] said:
Although the party impugning the disposition of property must show an actual intent to defraud creditors at the time of the disposition, the intent may be inferred (22) from the making of a disposition which, to adopt the words of Lord Hatherley LC in Freeman v Pope (23), “subtracts from the property which is the proper fund for the payment of [the] debts, an amount without which the debts cannot be paid”. The “proper fund” may consist in assets out of which future creditors as well as present creditors would be entitled to be paid a dividend in respect of what is owing to them. Therefore a subtraction of assets which, but for the impugned disposition, would be available to meet the claims of present and future creditors is material from which an inference of intent to defraud those creditors might be drawn. Whether that inference should be drawn depends upon all the circumstances of the case.
These observations are relevant to an application pursuant to Section 86 of the Law of Property Act.
[5] (1998) 192 CLR 557 at 566
Furthermore, whilst it is necessary to prove actual intent, that intent does not need to be the sole intent or the dominant intent of the conveyor of the property, the subject of the challenge.[6]
[6] Barton (supra) at 375; PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 at 526-527
(vii) Is the Distribution of Surplus Voidable?
As I stated earlier, the Plaintiff seeks to have the “Distribution” of the sum of $512,617, referred to in the Profit and Loss Statement of the Kerry Hanel Trust for the year ended 30 June 2001 and recorded as being received as a “Distribution” from the Daroko Unit Trust, declared void by virtue of Section 86 of the Law of Property Act. Furthermore, the Plaintiff seeks an order that Forcett, as the Trustee of Kerry Hanel Unit Trust, be ordered to repay to Daroko the $512,617. Much of the evidence at the hearing and the focus in the final submissions of Mr Riggall, were directed to the proceeds of the sale of the Master Franchise Agreement and associated business on either 8 or 9 August 2000, the receipt by Forcett in the Fixed Deposit Account of those proceeds and the subsequent disbursement of those moneys. However, as I have pointed out, it is not that transaction which is the subject of the Plaintiff’s Application, but the “Distribution of Surplus” of $512,617 recorded in the Profit and Loss Statement of the Daroko Unit Trust to Forcett as Trustee of the Kerry Hanel Trust.
There is a paucity of evidence regarding that entry in the Profit and Loss Statement and the subsequent entry of the “Distribution” having been received as income in the Kerry Hanel Trust. Neither Mr Hanel or Forcett were represented by Counsel. That, in itself, presented its own problems. It may have been expected, in normal circumstances, that evidence would have been given by the accountant who prepared the Profit and Loss Statement. That did not occur. Mr Hanel, as a lay person, clearly had difficulties understanding this part of the Plaintiff’s claim.
From the evidence that is available, it is clear that at 30 June 2001 the Daroko Unit Trust had no actual assets. On 8 or 9 August, Daroko sold the only asset of the Daroko Unit Trust, the proceeds were paid into the Forcett Term Deposit Account and later distributed in accordance with the 27 September Agreement.
I consider the short answer to the Plaintiff’s claim is that there has not been any property which is the subject of a conveyance within the meaning of Section 86. The ordinary meaning of the words “conveyance” and “property” have been expanded in Section 7 of the Law of Property Act. I set out hereunder those expanded meanings:
“conveyance” includes a mortgage, charge, lease, assent, vesting declaration, disclaimer, release, surrender, extinguishment and every other assurance of property or of an interest therein by any instrument, except a will; “convey” has a corresponding meaning;
“property” includes any thing in action, and any interest in real or personal property;
The “Distribution” by Daroko, as Trustee of the Daroko Unit Trust, appears to be the distribution of the “net profit” for that year. The figure of $512,617, described as a “Distribution of Surplus”, is the same figure appearing in the Profit and Loss Statement as the “net profit”. That figure was calculated by deducting from the total income for the year ended 30 June 2001 the total expenditure. The “Distribution” was, in fact, an accounting entry in the Profit and Loss Statement of the Daroko Unit Trust and the “Distribution” recorded in the Profit and Loss Statement of the Kerry Hanel Trust as part of the Income for that year was also simply an accounting entry. No funds or other assets actually moved from the Daroko Unit Trust to the Kerry Hanel Unit Trust.
In my opinion, it cannot be said that the accounting entry “Distribution of Surplus” or profits is “property” within the ordinary meaning of that word. Furthermore, in my opinion, the recording of the “Distribution of Surplus” in Daroko Unit Trust’s Profit and Loss Statement and the recording of the receipt of the “Distribution” as income in the Profit and Loss Statement of the Kerry Hanel Trust is not a “thing in action” as provided in the expanded meaning of the word “property” by Section 7. In Halsbury’s Laws of England (4th Ed), a chose or thing in action is described in the following terms:[7]
The expression “chose in action” or “thing in action” in the literal sense means a thing recoverable by action, as contrasted with a chose in possession which is a thing of which a person has not only ownership, but also actual physical possession. The meaning of the expression “chose in action” has varied from time to time, but it is now used to describe all personal rights of property which can only be claimed or enforced by action, and not by taking physical possession. It is used in respect of both corporeal and incorporeal personal property which is not in possession.
I am content to adopt that description. In my view the “Distribution of Surplus” of $512,617 is not a thing in action.
[7] Vol.6 para 1
A way to test my opinion is to ask what “property” would be returned to Daroko if there was a declaration that the “Distribution” transaction is void. The Plaintiff asks that Forcett return money amounting to $512,617, but Forcett never received that sum. It seems to me that all I could order, in light of the fact that all that took place were that accounting entries were made, is to order that the Financial Statements of the Kerry Hanel Unit Trust be amended to excise the reference to the “Distribution” from the Daroko Unit Trust of $512,617. There would also need to be a corresponding alteration in the Profit and Loss Statement of the Daroko Unit Trust to excise the “Distribution of Surplus” of $512,617. However, the position would remain the same, namely that the Daroko Unit Trust holds no assets.
The essence of a claim under Section 86 of the Law of Property Act is that there has been a conveyance of property which subtracts from the property which is available to meet the debts of a debtor[8]. Where actual property is transferred and later it is declared void as a fraud on creditors, then the property transferred is ordered to be returned to the debtor so that it can be made available to creditors. That would not be the case here. No actual asset could be returned which could be available to meet the liability of Daroko to the Plaintiff. If there had never been a “Distribution of Surplus”, as set out in the Profit and Loss Statement, the position would be the same. There were no assets to meet the liability to the Plaintiff as at 30 June 2001. What is important to understand is that the “Distribution” by Daroko, as Trustee of the Daroko Unit Trust, did not have the effect of depleting any fund available to creditors.
[8] Freeman v Pope (1870) 5 Ch App 538 at 541
The Plaintiff appears to have always regarded this transaction as sinister. I think this has been brought about by a misunderstanding of precisely what was taking place in the Profit and Loss Statement of Daroko, which recorded the “Distribution of Surplus”.
He appears to have been under the impression that there was an actual transfer of funds and that the entry in the Profit and Loss Statement of Daroko recorded that transfer. That, of course, was not the case. The Daroko Unit Trust had no assets at the time. As I have stated, it was simply an accounting entry.
What then was the purpose of recording the transaction in the Financial Accounts of both Trusts? The accountant, who prepared the accounts, was not called. I have no doubt that the reason for this was that Mr Hanel did not understand the need to do so. Mr Hanel, in his evidence, provided his understanding of the purpose of the entries. His explanation for the “Distribution of Surplus” was [249.20 to 249.29]:
"QSo in para –
AWell, let me rephrase that. Under the trust deed and under accounting things Daroko Unit Trust was required to send that money down to Forcett.
QWhen you say “send that money down” what do you mean.
AWell, what I mean is from an accounting viewpoint and a tax viewpoint it was required to distribute that money to Forcett.
QAnd that means physical transfer or some sort of accounting entry.
AJust accounting entry.”
Later, in cross-examination he said [T.264.17-264.29]:
“XXN
QDid you give any thought to the effect of treating the payment of $512,000 to Forcett as a distribution, any thought to the effect that would have on the capacity of Daroko to pay Mr O’Neill in respect of the lease.
ANo. The thought didn’t even cross my mind.
QSo you would agree that the effect of treating that as a distribution as opposed to a loan or some other form of payment, is to take the money out of the hands of Daroko completely.
AAs I said from an accounting viewpoint I didn’t see that I had any choice.
QWhat do you mean.
AThe accounting side of things –
It was Mr Hanel’s evidence that the “Distribution” did not involve the transfer of an actual asset. It was his understanding that the recording of the “Distribution” to the Kerry Hanel Trust was an accounting entry only.
The explanation by Mr Hanel indicated a degree of uncertainty. In one part of his explanation he thought that there may have been a tax purpose in the recording of the entries in the Financial Statements. In giving that explanation, he may have been close to the mark. At 30 June 2001, (as it is at present), the Income Tax Assessment Act (“Tax Act”) provides for punitive taxation rates where a trust accumulates income in a financial year. (Section 99A of the Tax Act.) The trustee of a trust which accumulates income in a financial year is required to pay tax on that income at the maximum rate of personal tax. The Australian Master Tax Guide (at page 174) states that the tax rate under Section 99A “… reflects the fact that this section was originally introduced to counter tax avoidance”. Where a trustee of a trust distributes income in a financial year to a beneficiary, the trustee avoids being taxed at the punitive rates provided by Section 99A. In those circumstances, the beneficiary is taxed on the distribution of the income at the rates applicable to the beneficiary.
Clause 13 of the Trust Deed of the Daroko Unit Trust gives the Trustee (Daroko) a discretion to distribute the net income of Trust in each financial year. The effect of Daroko, as Trustee of the Daroko Unit Trust distributing the “surplus” (net profit) to Forcett as Trustee of the Kerry Hanel Trust, is that it avoided the terms of Section 99A. Forcett was the Unit Holder of the Units in the Daroko Unit Trust and was, thus, a beneficiary. It is clear that the presence of Section 99A of the Tax Act is to encourage a trustee of a trust to distribute the net income of trust in each financial year.
In all of this, what is important to understand, as I have emphasised, is that the distribution by Daroko, and the receipt by Forcett, took place by way of accounting entries. There was no actual transfer of money or other assets. The Daroko Unit Trust had no assets.
The only asset of the Daroko Unit Trust was sold in August 2000 and the proceeds paid into the Forcett Fixed Deposit Account with the NAB. Mr Riggall, Counsel for the Plaintiff, in his written and oral submissions, appears to have sought to rely on the payment of the sale proceeds into the Forcett Account and its subsequent disbursement and the “Distribution of Surplus” in the Profit and Loss Statement of the Daroko Unit Trust in support of the Plaintiff’s application under Section 86 to have the “Distribution” declared void. I confess to having struggled with the submission. The payment of the sale proceeds into the Forcett Account is not the subject of the Plaintiff’s Section 86 application. Standing alone, on my findings, the transaction of paying the sale proceeds into the Forcett Account could never be the subject of a successful Section 86 application. The payment was made at the request of the NAB and for the benefit of the NAB. As I have said, the payment can be seen as a guarantor partially discharging the liability of the principal debtor in return for the release of the assets, the subject of the sale.
In relation to the application under Section 86 to have the “Distribution” of $512,617 declared void, I repeat what I said earlier, that the evidence relating thereto is of limited relevance. It explains the manner in which the profit of the Daroko Unit Trust was achieved in the financial year ended 30 June 2001. It also explains why the Daroko Unit Trust did not hold any assets after that time.
For the reasons I have outlined, I am of the opinion that Section 86 has no application to the “Distribution of Surplus” of $512,617, as it was not “property” which was conveyed within the meaning of the Section. Accordingly, the claim against Forcett fails.
Conclusion
With respect to the claim of the Plaintiff against Mr Hanel, there will be judgment for the Plaintiff for the sum of $108,618.85.
With respect to the claim of the Plaintiff against Forcett, there will be judgment for Forcett.
I will hear the parties on the questions of interest and costs.
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