Re FAL Healthy Beverages Pty Ltd

[2017] NSWSC 476

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

In the matter of FAL Healthy Beverages Pty Ltd and FAL Retail Pty Ltd [2017] NSWSC 476

Hearing dates:

22 February – 24 February 2017; 28 February 2017; 3 March 2017.

Decision date:

27 April 2017

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

The Defendant breached his statutory and general law directors’ and officers’ duties in respect of the transactions identified in the Plaintiffs’ Further Amended Statement of Claim (with the exception of transactions 6, 10 and 25 to Schedule B). The Defendant’s liability in respect of those transactions is not reduced by reason of the Plaintiffs’ settlement with other parties. It has not been established that the Defendant breached his directors’ or officers’ duties in respect of the alleged misapplication of funding provided for equipment and factories in Saudi Arabia and Malaysia, and the evidence would not allow the Court to make an award of damages in respect of the latter claim.

Catchwords:

CORPORATIONS – Management and administration – Duties and liabilities of officers of corporation – where Defendant was director and officer of Plaintiff companies – whether Defendant procured, made or permitted payments by companies to Defendant and entities controlled by him – whether Defendant permitted companies to incur fines – whether Defendant failed to apply certain funds of the companies for their intended purpose – whether Defendant breached directors’ duties.

 

EVIDENCE – Burden of proof, presumptions, and weight and sufficiency of evidence – where relevant facts are peculiarly within the knowledge of the Defendant or where the Defendant has greater means to produce evidence

 

DAMAGES – General principles – Difficulty of assessing damages – where evidence does not allow the Court to form a rational view as to the amount of loss suffered by the Plaintiffs – where evidence does not address potential duplication of claims for damages – whether Court should quantify the Plaintiffs’ loss

  DAMAGES – where Plaintiffs settled claims against other parties – where Defendant jointly and severally liable to some of those claims – whether Defendant entitled to set off settlement sum against his own liability to pay damages

Legislation Cited:

- Bankruptcy Act 1966 (Cth), ss 73, 77A, 153B
- Corporations Act 2001 (Cth), Pts 2.1D, 2M.2, ss 9, 180–182, 206B, 286(1), 344(1), 1317H
- Evidence Act 1995 (NSW), ss 128, 136, 140

Cases Cited:

- - Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1; 46 ACSR 504
- Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102; (2014) 48 WAR 1; 98 ACSR 615
- Angas Law Services Pty Ltd (in liq) v Carabelas [2005] HCA 23; (2005) 226 CLR 507
- Artcraft Pty Ltd v Dickson [2014] SASC 108
- Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 41 ACSR 72
- Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 3) [2005] NSWSC 1198; (2005) 56 ACSR 204
- Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023; (2016) 336 ALR 209
- Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373
- Vines v Australian Securities and Investments Commission [2007] NSWCA 75; (2007) 73 NSWLR 451; (2007) 62 ACSR 1
- Australian Securities and Investments Commission v Warrenmang Ltd [2007] FCA 973; (2007) 63 ACSR 623
- Bamford v Bamford [1970] Ch 212
- Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd (No 2) [1988] 2 All ER 880
- BCI Finances Pty Ltd (in liq) v Binetter (No 4) [2016] FCA 1351; (2016) 117 ACSR 18
- Boncristiano v Lohmann [1998] 4 VR 82
- Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336
- Chew v R (1991) 4 WAR 21; (1991) 5 ACSR 473
- Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64
- Coyte v Norman [2016] NSWSC 1242; (2016) 115 ACSR 523
- Deputy Commissioner of Taxation v Austin [1998] FCA 1034; (1998) 28 ACSR 565; 16 ACLC 1555
- Doyle v Australian Securities and Investments Commission [2005] HCA 78; (2005) 227 CLR 18
- Fodare Pty Ltd v Shearn [2011] NSWSC 479; (2011) 29 ACLC 738
- Forge v Australian Securities and Investments Commission [2004] NSWCA 448; (2004) 52 ACSR 1
- Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296
- Hampton Court Ltd v Crooks [1957] HCA 28; (1957) 97 CLR 367
- JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237
- KQ International Trading Pty Ltd v Yang [2016] VSC 146
- Krstic v Brindley [2006] NSWSC 1414
- McCrohon v Harith [2010] NSWCA 67
- Miller v Miller (1995) 16 ACSR 73
- Morris v Riverwild Management Pty Ltd [2011] VSCA 283; (2011) 38 VR 103
- Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170
- Nicholls v Michael Wilson & Partners Ltd [2012] NSWCA 383
- Parker, In the matter of Purcom No 34 Pty Limited (in liq) [2010] FCA 263; (2010) 77 ACSR 525
- Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 218; 14 ACSR 109
- Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10; (2003) 196 ALR 257
- RACV Insurance Pty Ltd v Unisys [2001] VSC 300
- Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; (2014) 101 ACSR 233
- Registrar of Aboriginal and Torres Strait Islander Corporations v Matcham (No 2) [2014] FCA 27; (2014) 97 ACSR 412
- Vigliaroni v CPS Investment Holdings Pty Ltd [2009] VSC 428; (2009) 74 ACSR 282
- Vrisakis v Australian Securities Commission (1993) 9 WAR 395
- Wilson HTM Investment Group Ltd v Pagliaro [2012] NSWSC 1068; (2012) 226 IR 75

Category:

Principal judgment

Parties:

FAL Healthy Beverages Pty Ltd (First Plaintiff)
FAL Retail Pty Ltd Pty Ltd (Second Plaintiff)
Timothy (Tim) Xenos (also known as Efthymios Xenos) (First Defendant)
EZI Group Pty Ltd (Second Defendant)
Fence All Australia Pty Ltd (Third Defendant)
Ashton Accountants & Business Advisors Pty Ltd (Fourth Defendant)
Andrew Ashton (Fifth Defendant)
ACN 111 804 383 Pty Ltd trading as Yates Beaggi Lawyers (Sixth Defendant)
Yates Amirbeaggi Pty Ltd trading as Yates Beaggi Lawyers) (Seventh Defendant)
Farshad Amirbeaggi (Eighth Defendant)

Representation:

Counsel:
J A Arnott (Plaintiffs)
M O’Connor (First Defendant)

  Solicitors:
Dentons (Plaintiffs)
Reuben George Lawyers (First Defendant)

File Number(s):

2016/80389

Judgment

1. By Further Amended Statement of Claim filed, by leave, on 24 February 2017, the Plaintiffs, FAL Healthy Beverages Pty Ltd (“FAL HB”) and FAL Retail Pty Ltd (“FAL Retail”) seek a range of relief against Mr Tim Xenos (also known as Efthymios Xenos). The relief sought by FAL HB and FAL Retail against Mr Xenos includes a compensation order under s 1317H of the Corporations Act 2001 (Cth) in respect of alleged breaches of directors’ duties under ss 180–182 of the Corporations Act; further or alternatively, equitable compensation or damages or an account of profits; and declarations that the benefit of certain funds alleged to have been obtained in breach of duty from FAL HB or FAL Retail are held on resulting or constructive trust for those entities. FAL HB and FAL Retail contend, although it is not necessary to determine, that Mr Xenos’ assets would not be sufficient to satisfy a judgment against him for the range of claims originally brought against him, and only a subset of the matters originally raised were pursued at the hearing. In particular, the Plaintiffs did not press their claims for relief in respect of losses allegedly arising from various sponsorship agreements involving FAL HB.

2. FAL HB and FAL Retail also initially brought claims against several other parties which are no longer pressed. Those claims were brought, inter alia, against the Second Defendant, EZI Group Pty Ltd (“EZI Group”), the Third Defendant, Fence All Australia Pty Ltd (“Fence All”), the Fourth Defendant, Ashton Accountants & Business Advisors Pty Ltd (“Ashton Accountants”) and the Fifth Defendant, Mr Andrew Ashton. FAL HB and FAL Retail did not pursue those proceedings against those entities where EZI Group and Fence All have been deregistered and Mr Ashton has declared bankruptcy. FAL HB and FAL Retail also brought claims against the companies trading as Yates Beaggi, a law firm, and against a principal of that firm, Mr Farshad Amirbeaggi, who are the Sixth to Eighth Defendants. FAL HB and FAL Retail subsequently settled their claims against Yates Beaggi and its principals, by deed dated 8 February 2017 (Confidential Exhibit D4) on terms of a payment of $[amount redacted] made by Yates Beaggi. Mr Xenos seeks to set off the recoveries made by FAL HB and FAL Retail against Yates Beaggi against the damages that may be ordered against him in the proceedings and I will address that question below.

3. By way of background, FAL HB carried on business as a producer, manufacturer and distributor of products including coconut water. Mr Xenos was the director of FAL HB at regular intervals after its incorporation, interrupted by periods in which his late father was the director of FAL HB. FAL Retail carries on, or carried on, business as a retailer of FAL HB products, and operates, or operated, “Cocojoy” retail stores in Bondi Junction and Parramatta. Mr Xenos’ late father was the director of FAL Retail for parts of the relevant period until 23 December 2015, and Mr Xenos was the director of FAL Retail until January 2016. FAL Holdings Arabia Co Limited (“FAL Arabia”), a company incorporated in Saudi Arabia, held 92.5% of the shares in FAL HB; Sheikh Fahad Al-Athel held 5% of the shares in FAL HB; Mr Xenos held 2.5% of the shares in FAL HB; and FAL HB held all of the shares in FAL Retail.

4. By letter dated 1 November 2013, FAL Arabia offered Mr Xenos, and he accepted, employment to establish a business operating out of Australia that would manufacture and distribute coconut water and juice products worldwide. Mr Xenos caused FAL HB to be incorporated for the conduct of that business (Ex P6, 2811). Mr Xenos was chief executive officer of FAL HB from November 2013 until January 2016. FAL Retail was incorporated in December 2014 (Ex P6, 2817) and was also under Mr Xenos’ management. At the time of his appointment as chief executive officer of FAL HB and FAL Retail, and for a considerable time thereafter, Mr Xenos was an undischarged bankrupt and was prohibited from managing FAL HB and FAL Retail under s 206B of the Corporations Act. Mr Xenos resigned from his position and FAL Arabia commenced an investigation into matters concerning the companies in January 2016.

5. I will refer below, in dealing with the particular matters in issue, to the pleading of claims for breach of contract and general law and statutory directors’ duties against Mr Xenos. Broadly, the issues for determination in the proceedings appear to be, first, whether Mr Xenos was subject to duties to FAL HB and FAL Retail under ss 180, 181 and 182 of the Corporations Act and/or fiduciary duties at general law as a director, officer or employee. Issues then arise as to whether Mr Xenos breached any such duties in respect of several payments to Fence All, EZI Group and himself identified in Schedule B to the Further Amended Statement of Claim; payments to Yates Beaggi identified in Schedule C to the Further Amended Statement of Claim; and payments to the Office of State Revenue identified in Schedule D to the Further Amended Statement of Claim. A further issue relates to whether Mr Xenos breached s 180 of the Corporations Act and the corresponding general law duty by failing to provide letters of credit to or make payments to a third party, FB Propak Pty Ltd (“FB Propak”). Questions of causation and quantification also arise and are of greater significance in respect of the issues relating to FB Propak.

The affidavit evidence led by FAL HB and FAL Retail

6. FAL HB and FAL Retail relied on the evidence of Mr Khaled Refaat, the Senior Vice President, Finance and Investments of FAL Arabia. Mr Refaat led evidence as to the background to Mr Xenos’ employment, pursuant to an offer of employment by letter dated 1 November 2013 from FAL Arabia to Mr Xenos, by which FAL Arabia advised Mr Xenos that he would be appointed as chief executive officer of FAL HB, referring to his monthly salary, a shareholding to be allocated to him in FAL HB and other aspects of his employment. That letter was countersigned by Mr Xenos (Ex P6, 511). Mr Refaat’s evidence, led without objection, was that Mr Xenos was employed to establish and manage a new business venture of FAL Arabia that would manufacture and distribute coconut water and juice products, and was later requested to assist FAL Arabia in making operational an existing juice factory it owned in Saudi Arabia. Mr Refaat also gave evidence as to FAL Arabia’s group procurement authority matrix and standard operating procedures, and as to the introduction of a financial authority and responsibility matrix that would apply to FAL HB. Those matters were ultimately of limited relevance to the narrower case run by FAL HB and FAL Retail at the hearing.

7. Mr Refaat gave evidence of the development of a proposal that FAL Arabia develop a new factory in Malaysia which would produce juice, ice cream and coffee, and of funding provided by FAL Arabia to FAL HB. I will refer to that evidence below in dealing with FAL HB’s and FAL Retail’s claim in respect of those matters. Mr Refaat also refers to the circumstances in which FAL Arabia was informed of Mr Xenos’ bankruptcy in early May 2014 and to subsequent conversations with Mr Xenos as to that matter, to which I will refer below in dealing with the claim against Mr Xenos relating to payments to Yates Beaggi.

8. By a further affidavit dated 6 December 2016, Mr Refaat responded to Mr Xenos’ affidavits dated 31 October 2016 and 6 November 2016, to which I refer below. Mr Refaat took issue with significant aspects of Mr Xenos’ evidence.

9. In cross-examination. Mr Refaat accepted that he had ultimate responsibility for approving funding recommendations for the various FAL entitles around the world, including FAL HB (T61). Mr Refaat was cross-examined as to the process of obtaining approval for such funding and acknowledged that direct requests for funding to the Chairman of the FAL Group were sometimes made and approved outside the formal process for approval of such funding (T61) and he would then be made aware of approval given in that manner after the fact (T62). Mr Refaat’s evidence was that he would not have approved a request for an expenditure approval made without following that process (T72). He accepted that FAL HB did not adopt or use the process put in place by him for expenditure approvals throughout Mr Xenos’ period as its chief executive officer, other than for the arrangements concerning equipment to be supplied by FB Propak for the Malaysian and Saudi Arabian factories (T73, 78). Mr Refaat’s evidence was that he had raised Mr Xenos’ failure to follow that process with Mr Xenos in telephone calls, during management meetings and by email and that he was not aware of Mr Xenos raising any concern with those controls with him or with the Chairman of the FAL Group (T79).

10. Mr Refaat’s evidence was that financial reports provided by Mr Xenos contained gaps and regular requests for additional information were not answered by Mr Xenos (T76); that it was impossible to determine whether expenses incurred by FAL HB were in the ordinary course of business because no breakdown of those expenses was provided by Mr Xenos, despite repeated requests (T77); and that, although monthly reporting was required, Mr Xenos only ever provided “very, very few” income statements in his period as chief executive officer, although he had made repeated requests of Mr Xenos to provide that information (T77–78). Mr Refaat’s evidence was also that FAL Arabia could not extract further details about expenses for FAL HB from staff in FAL HB’s accounts team since Mr Xenos put a system in place for all requests for information to go through him (T77). It is, of course, notable that FAL Arabia did not address these issues over a considerable period, but I accept that is plausible given distance and its reliance on Mr Xenos in respect of a business in which he claimed expertise.

11. Mr Refaat’s evidence was that funding to FAL HB was approved as needed for specific purposes, such as stock purchases, and that the only approval to acquire fixed assets that was sought by FAL HB and given was in relation to the Malaysian and Saudi Arabian factories, the equipment for which was to be acquired from FB Propak, and that the process put in place by Mr Refaat for approval of fixed asset purchases was followed as to those purchases (T78). That evidence, of course, does not suggest that FAL HB did not have at least some fixed assets, but only that it did not follow the approval process set by FAL Arabia in respect of their acquisition. Mr Refaat was also cross-examined as to the application of funds provided to FAL HB for equipment to be purchased for the factories in Malaysia and Saudi Arabia and as to his knowledge of Yates Beaggi and I will refer to that cross-examination in dealing with those matters below.

12. Mr Arnott, who appears for FAL HB and FAL Retail, submits that Mr Refaat’s evidence should be accepted by the Court. Mr Refaat’s evidence was consistent with the documentary evidence and the objective probabilities as to the matters in issue and I accept that evidence.

13. FAL HB and FAL Retail also relied on the affidavit of Ms Sarah Healey sworn 29 July 2016. Ms Healey was the financial controller of FAL HB, initially for a relatively short period from October 2015 and then for a further period after Mr Xenos’ resignation. Ms Healey gave evidence as to accounting practices at FAL HB and the accounting systems which were used, and also referred to Mr Xenos having had “super user access” to one of the accounting systems used by FAL HB, such that data could be changed or deleted without leaving a record, although that matter was in contest. Ms Healey also gave evidence as to the “NAB Connect” banking portal used by FAL HB; as to Mr Xenos’ access to a second on-line banking portal titled “Business Banking” provided by National Australia Bank Limited (“NAB”); as to preparation of cashflow reports for FAL Arabia; and she identified adjustments that she claims to have been instructed to make to those reports. That issue was ultimately not material to the narrower case pressed by FAL HB and FAL Retail.

14. Ms Healey’s evidence in cross-examination was that she worked at FAL HB initially from 6 October 2015 to 3 December 2015 (T139) and reported to Mr Tarun Chawla when he was appointed as chief financial officer of FAL HB around November 2015. Ms Healey’s evidence was that she first discovered altered transactions in the accounting records after Mr Xenos had ceased as chief executive officer of FAL HB and FAL Retail, and she then identified transactions where the audit trail disclosed an issue as to the transactions but was not provided with an answer to the issue by the third party software consultants for the accounting system (T141). Ms Healey confirmed that she had not supplied financial information to Mr Refaat or the Chairman of FAL Arabia in her role as financial controller, and did not have communications with Mr Refaat until she joined FAL HB for the second time.

15. Ms Healey was cross-examined as to the internal authorisation process for expenditures adopted by FAL HB during her employment in late 2015 (T144–145). She accepted that the general process was that, when an invoice was received, it would be provided to the relevant department head for authorisation; the department head would then authorise it by signing the invoice and approving it for payment; if the department head accepted the invoice, it was entered into the JD Edwards accounting system for the next payment run; and, if the department head did not accept the invoice, it would be escalated to the accounts department for approval. However, her evidence was that instructions were also given to enter amounts into the JD Edwards accounting system for payment of rejected invoices. Her evidence was that the accounts team were not required to check the invoice against the source document such as a purchase order or delivery docket and a payment authorisation form would not be completed and attached to the invoice. I will refer to Ms Healey’s cross-examination as to a particular payment made to Fence All in dealing with that transaction below.

6. Ms Healey’s evidence on cross-examination was also that Mr Xenos processed his own pay manually through the NAB Connect portal and that “[w]e just saw the payment leave the bank account and coded” that payment to reflect that he was being paid as a contractor and not an employee (T146). Ms Healey’s evidence was that payment of traffic penalty notices were entered manually as they were BPay transactions (T153), and, as an example, a traffic penalty notice (Ex P6, 3206) was manually entered and paid by NAB Connect and was signed off by Mr Xenos (Ex P6, 3208; T155). Mr Arnott submits that Ms Healey’s evidence should be accepted by the Court. It seems to me that Ms Healey’s evidence was consistent with the objective probabilities, and was not significantly impeached by a vigorous cross-examination by Mr O’Connor, who appears for Mr Xenos. I accept that evidence.

7. FAL HB and FAL Retail also relied on an affidavit of Mr Paul Fontanot sworn 29 July 2016. Mr Fontanot was at the relevant time a partner in the Fraud Investigation and Disputes unit of Ernst & Young, although his evidence was not led as expert evidence, but as recording the results of searches made by Ernst & Young to locate documentation relating to financial transactions of FAL HB and FAL Retail that are in issue in these proceedings. Mr Fontanot set out, in detail, the process which was adopted to locate that documentation. Mr Fontanot observed that narrations of transactions in the FAL HB bank account statements did not always correspond with the party who received the funds, and referred to an example where a payment was made to Fence All although the narrative in the bank account records recorded a payment to EZI Group. Mr Fontanot also referred to steps taken to identify other relevant information, including emails, third parties’ supporting documentation, company records such as expense claim forms and travel records and hard copy documents.

8. Mr Fontanot referred to steps which were taken to identify documentation relating to outgoing transfers from FAL HB’s bank accounts including searches of emails and correspondence to identify support for the relevant transactions. Mr Fontanot also referred to steps which had been taken to review bank statements for accounts in the name of Fence All and EZI Group which were produced on subpoena and dealings in other bank accounts. Mr Fontanot identified 111 transactions for which he had been unable to identify any documentation or information that would show the transactions were for FAL HB’s benefit, totalling $1,013,330. (That evidence was admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) as an explanation of the process adopted by Mr Fontanot, and not as proof, in itself, that any transaction was not for FAL HB’s benefit.) Mr Fontanot also referred to the identification of transfers to Fence All and EZI Group. The appendices to the exhibit to Mr Fontanot’s affidavit contained documentary evidence in respect of each of the impugned transactions, including banking records, extracts of FAL HB and FAL Retail’s accounting records, and emails. I will refer to some documents of particular relevance in dealing with particular transactions below.

9. Mr O’Connor put the process for approval of expense payments to Mr Fontanot in cross-examination. Mr Fontanot of course had no independent knowledge of the content of that process, but acknowledged that the process as put to him by Mr O’Connor was consistent with the information provided to him by Ms Healey (T119). Mr Fontanot was also cross-examined at length as to the search strategy that had been adopted by his staff and himself in identifying relevant documents, although that cross-examination seems to me to have established that the search strategy was adequately designed and comprehensive in its scope, utilising key word searches and date ranges in respect of relevant transactions (T125–126). In particular, Mr Fontanot confirmed his belief that, if documents recording the approval or authorisation of transactions existed, then he would have located them in his searches (T129).

10. Mr Arnott submits that Mr Fontanot’s evidence, or the process he adopted, was not challenged in cross examination in any serious way and that his evidence should be accepted. With no disrespect to Mr Fontanot, his evidence largely consisted of presenting, in an organised way, the documents identified by the searches he and his team had made on behalf of FAL HB and FAL Retail. There was little room for a challenge to him as to the inferences to be drawn from those documents, which was properly a matter for the Court. I address the issue of the adequacy of those searches and the documents identified from them below.

11. FAL HB and FAL Retail also relied on the affidavit of their solicitor, Mr Benjamin Allen dated 16 March 2016, which identifies email exchanges between Mr Xenos and Yates Beaggi. I will refer to relevant correspondence in addressing the claim in respect of payments to Yates Beaggi below. FAL HB and FAL Retail also relied on a further affidavit of Mr Allen dated 8 June 2016 which identified payments from FAL HB’s operating account to Yates Beaggi, and annexed associated emails and invoices. FAL HB and FAL Retail relied on a further affidavit of Mr Allen dated 29 July 2016, which identified correspondence and documents extracted from FAL HB’s servers, books and records relating to Mr Xenos’ dealings with EZI Group, Fence All and Ashton Accountants and correspondence between Mr Ashton and Mr Xenos and between Yates Beaggi and Mr Xenos in respect of Mr Xenos’ bankruptcy. Mr Allen’s evidence largely related to identifying relevant documents and he was not cross-examined.

12. FAL HB and FAL Retail also served, but did not rely on, an affidavit of the Chairman of FAL Arabia, Sheik Fahad Al-Athel.

Mr Xenos’ evidence

23. Mr Xenos relied on his affidavit dated 31 October 2016. Mr Xenos gave his account of his initial introduction to the FAL Group and referred to his signature of an offer of employment made to him by FAL Arabia. He referred to the circumstances in which FAL HB was incorporated. Mr Xenos also referred to the circumstances in which he came to be the sole signatory for FAL HB accounts with NAB and to circumstances in which FAL Arabia provided funding to FAL HB and to financial and other reporting which he claimed FAL HB made to FAL Arabia. Mr Xenos also led evidence as to FAL Group’s procurement matrix and to the circumstances in which that was not used in FAL HB. As I noted above, that matter is now of limited significance to the narrower case now pressed by FAL HB and FAL Retail. Mr Xenos also referred to licence agreements and sponsorship agreements with third parties, which are also no longer relevant to the narrower case now pressed by FAL HB and FAL Retail. In leading evidence as to discussions about supply of the juice market, Mr Xenos led evidence that EZI Group was no longer trading as at August 2014 (Xenos 31.10.16 [80]).

24. Mr Xenos’ affidavit evidence was that FAL HB’s expenditures were “within the forecast and cashflow projections approved by the Board and final sign-off by the Chairman [of FAL Arabia]”. Putting aside the fact that that statement is in the nature of a bare assertion, there was no evidence that any such a forecast, cashflow projections, board approval or sign-off by the Chairman of FAL Arabia extended to particular expenditures of the kind now challenged by FAL HB and FAL Retail, or that Mr Xenos made adequate disclosure of the nature of that funding. Mr Xenos also gave evidence as to his dealings with Yates Beaggi to which I will refer below in dealing with the claim against him in respect of payments to that firm.

25. Mr Xenos’ affidavit evidence was that he was never employed by EZI Group but that his salary from FAL HB was paid into EZI Group on a monthly basis (Xenos 31.10.16 [175]). Mr Xenos also gave evidence as to a letter provided to his trustee in bankruptcy indicating falsely that he was employed by EZI Group. His evidence was that, at the end of 2013, he needed to show his trustee in bankruptcy and his finance broker that he was working and had a history of working for the past two years; that he had previously worked for EZI Group and his salary from FAL HB was paid into EZI Group’s account; and that:

“I therefore asked Andrew Ashton, to sign the Ezi Group letter of employment which he did. I then provided this to the finance broker and [the trustee in bankruptcy]. However from August 2013, I undertook no work for Ezi Group as I was engaged full time with F[AL] HB and the FAL Group. [The trustee in bankruptcy] discovered my relationship with FAL in about April/May 2014. I was concerned at that time that my relationship with FAL would be terminated.” (Xenos 31.10.16 [175(d)]).

This is one of several instances in which Mr Xenos provided false or misleading information to his trustee in bankruptcy. Mr Xenos was cross-examined as to the misleading character of this information and his responses could only be described as incoherent. I have had regard to this matter as one of several matters that indicate that Mr Xenos is not a witness of truth and that no reliance should be placed on his evidence unless it is against his interests or corroborated by other evidence.

26. Mr Xenos also relied on his affidavit dated 6 November 2016 which described the accounting systems of FAL HB, and referred to the use of Quick Books accounting software, the engagement of Mr Andrew Ashton as FAL HB’s external accountant, the employment of a financial controller for FAL HB and the subsequent employment of additional accounting staff. Mr Xenos also referred to FAL HB’s later implementation of the JD Edwards accounting system from April 2015, although FAL HB retained Quick Books for payroll purposes. Mr Xenos also referred to an internal control process which he claimed was in place for the payment of invoices, and claimed that he was not directly or indirectly involved in the authorisation of invoices. He referred to the circumstances in which Mr Chawla was employed as chief financial officer of FAL HB and in which Ms Healey ceased employment with FAL HB. Mr Xenos claimed that invoices and statements for his expenses were given to given to a member of the accounts staff or the then financial controller, that one of those persons completed expense forms on Mr Xenos’ behalf and attached supporting documents and approved them for payment and that he was not directly involved in the authorisation or payment process for such expenses.

27. Mr Xenos’ affidavit also set out a detailed response to categories of expenditure that were challenged by FAL HB and FAL Retail, and addressed in Mr Fontanot’s affidavit, although aspects of Mr Xenos’ affidavit were inadmissible and were rejected, and many of the explanations given for particular transactions are bare assertions, inconsistent with the objective evidence or implausible. I will address those explanations in dealing with particular transactions below. I should also note that Mr Xenos, in cross-examination, indicated a lack of recollection of the nature of particular payments that significantly qualified his affidavit evidence as to the nature of those payments.

28. Mr Xenos relies on his third affidavit dated 27 February 2017, which led evidence as to matters addressed in his affidavits dated 31 October 2016 and 6 November 2016 which had not been admitted by reasons of objection as to form, as to which he had been granted leave to lead further evidence.

29. Mr Xenos accepted several matters in cross-examination that were adverse to his case, generally when there was no alternative to doing so. Mr Xenos accepted in cross-examination that, as chief executive officer of FAL HB, he was responsible for making decisions about how that company would be managed on a day-to-day basis, for managing and growing its business, for managing its financial affairs, for supervising its staff, for preparing its budgets, with the assistance of the accounting and finance team, and for making decisions about how the business was conducted, and also for managing the affairs of FAL Retail (T178). Mr Xenos’ evidence in cross-examination was that he was bankrupt between 9 August 2011 and the annulment of his bankruptcy in mid-September 2015, although he could not recall the exact date that his bankruptcy ceased in cross-examination (T180). Mr Xenos claimed in cross-examination that he had been advised by his solicitors, Yates Beaggi, that he should continue in his role as a director of and managing FAL HB and FAL Retail while he went through legal proceedings to have the bankruptcy overturned (T185). Mr Xenos’ current solicitors wrote to Yates Beaggi on 1 March 2017 requesting any documents which may record that advice or a meeting at which that advice was given, and the solicitors for Yates Beaggi responded that that firm did not have any documents recording the alleged legal advice and denying that the firm gave legal advice to Mr Xenos to the effect asserted by him (Ex P7).

30. Mr Xenos also accepted that he was, until January 2016, the sole signatory on all of FAL HB’s and FAL Retail’s bank accounts (T178) and that he also authorised payments through the NAB Connect platform (T179). Mr Xenos’ evidence, in cross-examination, was that he had internet banking access to FAL HB’s and FAL Retail’s accounts but payments were always made from NAB Connect and he denied that he processed payments from the NAB Connect system (T179). I do not accept that evidence, since there are several occasions in the detailed transactions below where Mr Xenos had informed accounting staff that he had already made the relevant payment, prior to any involvement on their part.

31. Mr Xenos also accepted that he authorised all payments conducted through NAB Connect, as sole signatory, although only in the sense that payments were recorded in his name, and he claimed that the electronic token to use the system and his password were available to members of the accounts staff (T179). I do not accept the latter evidence given the view that I have formed as to Mr Xenos’ credit. Mr Xenos also accepted that he was responsible for authorising all payments that came out of FAL HB and FAL Retail’s bank accounts as its sole signatory, although he claimed that he relied on a process involving accounts staff to do so (T178–179, 226–227). Mr Xenos accepted in cross-examination that he signed all cheques on behalf of the companies; he authorised all payments through the NAB Connect online banking platform as the sole signatory; he had NAB Connect user access for all of FAL HB and FAL Retail’s accounts and was the sole signatory for each of those accounts; and he had access to the companies’ internet banking portal besides NAB Connect (T179, T228, T239). Mr Xenos also accepted that he was the only director of FAL HB in fact until January 2016, despite the references to his late father as a director on the ASIC register (T219).

32. Mr Arnott submits that Mr Xenos’ evidence should not be accepted on contentious issues; that his conduct evidences that he is a person who does not take seriously his obligations to act truthfully and regularly engaged in the production of false documents; and that he had demonstrated himself to be a person who does not take his obligations under the law seriously, having managed FAL HB and FAL Retail as chief executive officer while a bankrupt. Mr Arnott also submits that the Court cannot be satisfied that Mr Xenos has complied properly with his oath to tell the truth. The correspondence in evidence in the proceedings indicates multiple occasions on which Mr Xenos was prepared to lie, or did lie, to advance his interests. As Mr Arnott points out, Mr Xenos appears to have provided false information that he was employed by and needed to travel for EZI Group to his trustee in bankruptcy to support travel requests (T197, 199, 202) and also to the Inspector-General in Bankruptcy and his creditors in respect of his bankruptcy.

33. For example, by a letter dated 15 December 2013, signed by Mr Ashton on behalf of EZI Group, although not signed by Mr Xenos (Ex P6, 652), EZI Group purported to offer Mr Xenos employment as sales representative, on the basis that he would be paid an annual salary of $75,000. The content of that letter appears to have been false. As I noted above, Mr Xenos’ affidavit evidence (Xenos 31.10.16 [175(d)]) was that he asked Mr Ashton to sign the letter of employment from EZI Group and that he provided that letter to a finance broker and his trustee in bankruptcy, although Mr Xenos equivocated as to those matters in cross-examination (T192–193). Mr Xenos’ evidence in cross-examination was also that he could not recall that letter, notwithstanding that he had addressed it in his affidavit evidence (T194).

34. By email dated 14 March 2014 to Yates Beaggi, copied to Mr Ashton, Mr Xenos raised the possibility that a point could be taken that Mr Tim Xenos and Mr Efthymios Xenos were not “one and the same”, although there is no doubt that Mr Xenos goes under both names (Ex P6, 717). Mr Amirbeaggi responded by rightly recognising that that proposition could give rise to a “proper fraud charge” exposing Mr Xenos to “proper jail time”. On 30 April 2014, Mr Xenos sent an email to Yates Beaggi enclosing a request for permission to travel overseas whilst bankrupt, in the form required by the Insolvency and Trustee Service Australia, which stated, falsely, that Mr Xenos’ current employer was EZI Group; stated, also falsely, that his current gross income was $60,000; and stated, also falsely, that Mr Andrew Ashton of Mode Drinks was paying for the trip. The falsity of that information was made clear by the attached itinerary which indicated that the travel was charged to FAL HB. By email dated 30 April 2014, Mr Xenos then sent a letter to his solicitors, on the letterhead of EZI Group, and addressed to his trustee in bankruptcy, signed by Mr Andrew Ashton, which falsely stated that Mr Xenos was required to travel to Asia Pacific and the Middle East as part of his work, implicitly for EZI Group and that Mr Ashton was funding the cost of the trip including accommodation.

35. Mr Xenos accepted in cross-examination (under a certificate given under s 128 of the Evidence Act) that the statement of his employer in the permission to travel overseas form (Ex P6, 876) dated 30 April 2014 was false, although he sought to maintain that the statement of his gross annual income was correct, if that was limited to income on which PAYG tax was paid and excluded consulting income (T197). Mr Xenos also accepted in cross-examination that the statement of who was paying for the trip, referring to Mr Ashton of Mode Drinks, was also false, because FAL HB (or, on Mr Xenos’ account, possibly Mr Xenos) was paying for the trip (T199–200). Mr Xenos accepted in cross-examination (again under the protection of a certificate under s 128 of the Evidence Act) that he provided the relevant letter to his solicitor, to provide to his trustee in bankruptcy, knowing that it was false, although he was not prepared to accept that he wanted the trustee in bankruptcy to think, as the letter stated, that the trip was being paid for by EZI Group (T202). Mr Xenos’ willingness to have that false information provided to his trustee in bankruptcy reinforces my view as to his credit.

36. By letter dated 28 May 2014, Yates Beaggi advised the Inspector-General in Bankruptcy that Mr Xenos’ trustee in bankruptcy’s calculations of his income were inaccurate and that his income from his business endeavours was pursuant to a contract with EZI Group with a value of $75,000 per annum from January 2014 and a copy of that contract was attached to that letter (Ex P6, Tab 64). I infer that letter was sent on Mr Xenos’ instructions and it was plainly false, whether or not Yates Beaggi were on notice of its falsity, since Mr Xenos was not employed under such a contract and derived substantially greater income from FAL HB and not EZI Group.

26. By email dated 4 July 2014, Mr Xenos requested Mr Ashton to sign a letter, on the letterhead of EZI Group, addressed to his trustee in bankruptcy, which confirmed that EZI Group or Mr Ashton was funding the cost of another overseas trip (Ex P6, 1174). Again, that confirmation was false. Mr Xenos again sent such a letter to Mr Ashton on 30 July 2014, again requesting a letter on the letterhead of EZI Group confirming similar information, which again was false. Those letters also stated that it was a condition of Mr Xenos’ employment, necessarily by EZI Group, that he consistently travelled and requested permission for that travel. Mr Xenos was not then employed by EZI Group, as he accepted in cross-examination.

27. On 11 August 2015, Mr Mitchell of Yates Beaggi sent Mr Xenos a copy of a proposed scheme of arrangement for creditors under s 73 of the Bankruptcy Act 1966 (Cth), in respect of Mr Xenos’ bankrupt estate, which referred to the establishment of a pool of funds to pay the trustees’ unpaid expenses, a Commonwealth realisation charge and creditors to a minimum of 10 cents in the dollar. That pool of funds was described as $90,000 and the source of monies as constituting a “loan from Andrew Ashton”. That description was also plainly false, since the relevant monies were sourced from FAL HB not from Mr Ashton. On 27 August 2015, Mr Mitchell sent that proposal, containing the same false information in the same terms, to Mr Xenos’ trustee in bankruptcy (Ex P6, tab 220) and I infer that he had Mr Xenos’ instructions to do so. Mr Xenos’ affidavit evidence was that he was never employed by EZI Group (Xenos 31.10.16 [175]), contrary to the information provided by EZI Group, Mr Xenos and his solicitors to his trustee in bankruptcy (T187). Mr Xenos’ affidavit evidence was also that EZI Group was no longer trading in August 2014 (Xenos 31.10.16 [80]) and his evidence in cross-examination was that it was no longer invoicing or doing any business by August 2014 (T188). Mr Xenos’ affidavit evidence was that he undertook no work for EZI Group from August 2013 (Xenos [175(d)]) although he resiled from that evidence in cross-examination, suggesting that he did consulting work for EZI Group although he was not directly employed by it (T191).

28. The documentary evidence also establishes that Mr Xenos procured the preparation of false or at least misleading invoices by Mr Ashton in order to provide a basis to pay money to an account with Fence All that he controlled, and requested Yates Beaggi to include false or at least substantially misleading and incomplete descriptions of the nature of work done in invoices relating to his personal bankruptcy which were sent for payment by FAL HB. I will refer to these matters further below.

29. By reason of all of these matters, I am satisfied that Mr Xenos is not a witness of credit and that his evidence should not be accepted unless it is adverse to his interest or otherwise corroborated by documentary evidence.

Evidentiary onus

41. Mr Arnott acknowledges that, where a plaintiff has the legal onus of proving a matter, then it must do so to the reasonable satisfaction of the court. However, Mr Arnott also submits, and I accept, that where relevant facts are peculiarly within the knowledge of the defendant or where the defendant has greater means to produce evidence relating to those facts, then provided the claimant provides sufficient evidence from which the matter can be inferred, the defendant “comes under an evidential burden, or an onus of adducing evidence”: Hampton Court Ltd v Crooks [1957] HCA 28; (1957) 97 CLR 367 at 371–2; Krstic v Brindley [2006] NSWSC 1414 at [26]; BCI Finances Pty Ltd (in liq) v Binetter (No 4) [2016] FCA 1351; (2016) 117 ACSR 18 at [122]. In BCI Finances Pty Ltd (in liq) v Binetter (No 4) above at [123], Gleeson J observed that:

“[w]here a fact is peculiarly within the knowledge of a party to litigation, slight evidence of that fact may suffice to prove the fact unless that evidence is explained away by the party with the knowledge of the fact”.

42. Mr Arnott points out that that approach was taken in Artcraft Pty Ltd v Dickson [2014] SASC 108, where Kelly J relied on unexplained deposits into various accounts in the name of a director’s wife. Mr Arnott also points to the approach taken by Sifris J in a somewhat similar case to this case, KQ International Trading Pty Ltd v Yang [2016] VSC 146, where a company brought proceedings against its former director for breach of his fiduciary and statutory duties arising out of the defendant’s alleged misappropriation of substantial funds from the company. Sifris J there found that the defendant’s evidence lacked credibility and was, in many respects, deliberately false and also observed (at [118]–[119]) that the defendant produced no documents supporting his version of events and gave no acceptable explanation for the impugned transactions. His Honour noted (at [132]) that:

“All of the transactions called for an explanation. The very person able to give the explanation failed miserably at all levels. He did not produce any relevant document, itself a startling feature of the case and in particular a case of this kind. Further, his recollection and oral evidence lacked coherence and credibility.”

43. His Honour inferred (at [91], [115]) that there was no credible explanation or justification for the transactions entered into by the defendant and the company succeeded in establishing that the defendant breached his directors’ duties under ss 181 and 182 of the Corporations Act. Mr Arnott submits that the Court should adopt the same approach with respect to the transactions entered into by Mr Xenos in the present proceedings, each of which, he submits, “call for an explanation” on the part of Mr Xenos and in respect of which no satisfactory or credible explanation has been forthcoming.

44. Mr O’Connor submits (T381) that the Court must weigh the merits of each impugned transaction on a transaction by transaction basis, and having regard to the approach identified in Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 or at least its equivalent under s 140 of the Evidence Act. Mr Arnott accepts that, where a party advances allegations of impropriety, the court must take account of the gravity of the matters alleged in deciding whether the inference should be drawn and, although the standard of proof remains proof on the balance of probabilities, the strength of the evidence necessary to establish a given fact to the civil standard may vary according to the nature of what it is sought to be proved.

45. In Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd [1992] HCA 66; (1992) 110 ALR 449 at 449–450, the plurality observed that:

“The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities. That remains so even where the matter to be proved involves criminal conduct or fraud. On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary ‘where so serious a matter as fraud is to be found’. Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct.” [citations omitted]

46. Section 140 of the Evidence Act similarly provides that, in a civil proceeding, the court must find the case of a party proved if it is satisfied that the case has been proved on the balance of probabilities and that, without limiting the matters that the court may take into account in deciding whether it is so satisfied, it is to take into account the nature of the cause of action or defence, the nature of the subject-matter of the proceeding and the gravity of the matters alleged. I approach the evidence in this matter by on that basis and having regard to the circumstances of the particular transactions.

Applicable legal principles

47. FAL HB and FAL Retail bring several of their claims against Mr Xenos for breach of his duties as a director and officer of FAL HB and FAL Retail under ss 180, 181 and 182 of the Corporations Act and at general law and as an employee at general law. FAL HB and FAL Retail claim compensation under s 1317H of the Corporations Act or as equitable compensation or damages at general law. The claim in respect of dissipation of monies provided for the Saudi Arabia and Malaysia factory equipment is brought only under s 180 of the Corporations Act and the corresponding equitable duty of care and diligence.

48. The Plaintiffs plead that Mr Xenos was from time to time, from incorporation of FAL HB and FAL Retail until 22 February 2016, either appointed as or a de facto director of each of FAL HB and FAL Retail (FASC [12]). Mr Xenos admits that he was a director of FAL HB and FAL Retail over part of the relevant period. FAL HB and FAL Retail also plead that Mr Xenos was, from November 2013 to 22 February 2016, employed as chief executive officer of those entities (FASC [12(c)]) and also that Mr Xenos acted as chief executive officer of FAL HB and FAL Retail and was closely involved in the day-to-day management of their business (FASC [19]). Mr Xenos denies, in his Defence, that he was employed by those entities and says that any purported employment was agreement was with FAL Arabia although he also denies the efficacy of his employment letter with FAL Arabia. It will not be necessary to determine that question to resolve these proceedings. Mr Xenos admits, in his Defence, that he was engaged to act as the chief executive officer of those entities and that he was closely involved in the day-to-day management of the business, but contends that matters and strategies were communicated to the Chairman of FAL Arabia who made the ultimate decision (Defence [13]).

49. FAL HB and FAL Retail plead that it was an express term of Mr Xenos’ employment agreement that Mr Xenos would comply with the terms of a financial authority and responsibility matrix introduced within the FAL Group and with a procurement authority matrix introduced within the FAL Group when acting on behalf of FAL HB and FAL Retail. Mr Xenos denies that the financial authority and responsibility matrix was implemented by FAL HB and FAL Retail; contends that it was agreed between him and the Chairman of FAL Arabia that that financial matrix was unworkable and not in the best interests of the business outside Saudi Arabia; denies that he was obliged to comply with the procurement authority matrix; and contends that there was other ongoing reporting in respect of FAL HB and FAL Retail. It is also not necessary to determine those matters, since the allegations that are pursued by FAL HB and FAL Retail against Mr Xenos will succeed or fail, for the reasons noted below, irrespective of whether he complied or did not comply with those procedures.

50. FAL HB and FAL Retail plead that there were implied terms of Mr Xenos’ employment agreement (FASC [21]) and that Mr Xenos owed fiduciary duties to FAL HB, FAL Retail and the FAL Group during the term of his directorships or employment with the FAL Group. Mr Xenos admits that he owed fiduciary duties to FAL HB and FAL Retail “to the extent that such duties are matters arising from law as a director”. FAL HB and FAL Retail also plead that Mr Xenos was an officer of FAL HB and FAL Retail for the purposes of Pt 2.1D of the Corporations Act and was subject to statutory duties under ss 180–182 of the Corporations Act (FASC [23]). Mr Xenos does not admit that he was an officer for the purposes of that Part of the Corporations Act.

51. As I have noted above, Mr Xenos was a statutory director of FAL HB and FAL Retail for part of the relevant period. The definition of the term “director” in s 9 of the Corporations Act also extends, in paragraph (b)(i) (unless the contrary intention appears), to a person who is not validly appointed as a director but who is acting in the position of director. In Deputy Commissioner of Taxation v Austin [1998] FCA 1034; (1998) 28 ACSR 565 at 569–570; 16 ACLC 1555, Madgwick J observed that, in order to establish that a person was “acting in the position of a director” so as to fall within the definition of “director” in the former s 60 of the Corporations Law, it would be necessary to show that he or she “exercises what might be called the actual (and statutorily extended) top level of management functions” and that a conclusion that a person acted in the position of a director could well be justified, if he or she acted in relation to matters of great importance for a small company, other than as an arm's length expert engaged for a limited purpose. In Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296, the Full Court of the Federal Court observed (at [66]) that whether the roles and functions performed by a person are such as to constitute that person a director for the purposes of the Corporations Act will often be a question of degree having regard to the “nature of the functions or powers which are exercised and the extent of their exercise”; the relationship of a person with a company may evolve over time into that of a de facto director (at [67]); the question is one of substance and not simply how the person has been described in or by the company (at [68]); and whether a person is a director will turn on the nature and extent of the functions he or she performs (both in and beyond the engagement) and on the constraints imposed on him or her (at [68]). The Full Court also observed that perceptions by others that the person was a director can have evidentiary significance, particularly if those perceptions were “independently formed, reasonable in the circumstances and support the appearance that the person was acting ‘under colour of office’” (at [75]).

52. It is common ground that Mr Xenos had immediate management control of FAL HB and FAL Retail during the period in which his late father was nominally the director of those entities, at least as chief executive officer, until January 2016, and Mr O’Connor opened Mr Xenos’ case on that basis (T32). Mr Xenos’ own evidence as to his role within the companies, including his dealings with third parties and control of financial functions, made clear that he exercised, and third parties and the companies’ staff would have understood him to have, executive control of the companies, subject to a somewhat distant oversight by FAL Arabia. It seems to me that there can be no doubt that Mr Xenos was a de facto director of FAL HB and FAL Retail, even in periods that he did not hold a nominal appointment as a director of those companies in that capacity, and that he was an “officer” of both companies for the purposes of the Corporations Act throughout the relevant period, and subject to both the general law and statutory duties applicable to a director and officer of a company.

53. First, FAL HB and FAL Retail bring their claim against Mr Xenos, in respect of the transactions with Fence All and EZI Group and other transactions, under s 180(1) of the Corporations Act. That section provides that a director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director or officer of a corporation in the corporation's circumstances and occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

54. The statutory duty of care and diligence under s 180 of the Corporations Act overlaps with directors’ duty of care arising at general law: Vines v Australian Securities and Investments Commission [2007] NSWCA 75; (2007) 73 NSWLR 451; (2007) 62 ACSR 1. Mr Arnott refers to the observations of Brereton J in in Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373 at [100] that:

“In determining whether a director has exercised reasonable care and diligence, as s 180(1) expressly contemplates, the circumstances of the particular corporation concerned are relevant to the content of the duty. These circumstances include the type of company, the provisions of its constitution, the size and nature of the company’s business, the composition of the board, the director’s position and responsibilities within the company, the particular function the director is performing, the experience or skills of the particular director, the terms on which he or she has undertaken to act as a director, the manner in which responsibility for the business of the company is distributed between its directors and its employees, and the circumstances of the specific case …”

55. Mr Arnott also submits that a determination whether the statutory duty of care and diligence has been contravened imports an objective inquiry; and the test is what an ordinary person, with the relevant director’s knowledge and experience, might be expected to have done in the circumstances. Mr Arnott submits that a question of breach of the duty of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question: Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 450 (Ipp J; Malcolm CJ agreeing); Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023; (2016) 336 ALR 209 at [479]. Mr Arnott submits, and I accept, that the unauthorised payment of relatively large sums of money by a director, may of itself amount to a breach of the duty of care and diligence under s 180 of the Corporations Act: Coyte v Norman [2016] NSWSC 1242; (2016) 115 ACSR 523 at [188]. Mr Arnott also submits, and I accept, that, where a transaction has the potential for conflict between a director’s interest and duty, the duty of care and diligence requires “special vigilance” and demands “scrupulous concern” on the part of those officers who become aware of that transaction to ensure that any necessary corporate approvals are obtained and safeguards put in place: Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 41 ACSR 72 at [372].

56. Mr O’Connor in turn refers to my summary of the content of the statutory duty of care and diligence, by reference to the case law, in Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; (2014) 101 ACSR 233 at [408] as follows:

“In Australian Securities Commission v Gallagher above at 52–53, Pidgeon J observed that the test whether the statutory duty of care and diligence had been contravened was an objective one, that a director need not exhibit a greater degree of skill in the performance of his or her duties than may reasonably be expected for a person of his or her knowledge and experience, in the relevant circumstances, and that it was relevant to consider the way in which the work of the company was distributed between its directors and other officers, provided that distribution was reasonable. In Australian Securities and Investments Commission v Adler above at [372] (upheld by the Court of Appeal in Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1), Santow J noted that the duties imposed by the section are essentially the same as directors' duties at general law; that, in determining whether a director had exercised reasonable care and diligence, the test was what an ordinary person, with the director's knowledge and experience, might be expected to have done in the circumstances if he or she was acting on his or her own behalf; and that the duty of care and diligence would require special vigilance in a situation of potential conflict, requiring scrupulous concern on the part of those officers who become aware of that transaction to ensure that any necessary corporate approvals are obtained and safeguards put in place. That decision has been cited with approval in recent case law, including Parker v Tucker [2010] FCA 263; (2010) 77 ACSR 525 at [70] per Gordon J and Diamond Hill Mining Pty Ltd v Huang Jim Mining Pty Ltd [2011] VSC 288; (2011) 84 ACSR 616 at [90] per Croft J.”

57. Second, FAL HB and FAL Retail bring their claim against Mr Xenos, in respect of the transactions with Fence All and EZI Group and other transactions, under s 181(1) of the Corporations Act. That section provides that a director or other officer of a corporation must exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose. That statutory duty reflects directors’ duties at general law to act in good faith in the interests of and for the benefit of the company as a whole. As Mr Arnott points out, that section is directed to preventing abuses of directors’ powers for their own or collateral purposes. Australian Securities and Investments Commission v Maxwell above at [106]. In Chew v R (1991) 4 WAR 21; (1991) 5 ACSR 473 at 499, Malcolm CJ summarised the requirements of that duty as including that directors must exercise their powers in the interests of the company, and must not misuse or abuse their power and must not misappropriate the company’s assets for themselves.

58. Mr Arnott submits, and I also accept, that the requirements under s 181(1) may be contravened if a director promotes his or her personal interest in a situation where there is a conflict, or a real or substantial possibility of a conflict, between those interests and the interests of the company; the question of whether or not there is a real sensible possibility of conflict is approached from the position of the reasonable person looking at the relevant facts and circumstances of the case; and that section may be breached by a decision that no reasonable board could consider was consistent with the company’s interests: Parker, In the matter of Purcom No 34 Pty Limited (in liq) [2010] FCA 263; (2010) 77 ACSR 525 at [72]–[73].

59. The second limb of s 181(1) of the Corporations Act requires that directors’ powers may be exercised only for the purpose for which they were conferred and not for any improper purpose: Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 218; 14 ACSR 109. The application of a company’s funds, without regard to its separate identity and without considering whether it was in the interests of the company and its members, was held to constitute a breach of that section in Vigliaroni v CPS Investment Holdings Pty Ltd [2009] VSC 428; (2009) 74 ACSR 282 at [42], where Davies J noted that, even where a director had authority to make the relevant payments, the exercise of that authority required the director to turn his mind to whether the relevant transfer of funds was in the interests of the company. Mr Arnott also submits, and I accept, that a contravention of the section may also be established if a director does not exercise his or her powers for the purpose for which they were conferred, or exercises them for an improper purpose, and the weight of authority indicates that this question is to be determined objectively by reference to what was reasonable in the circumstances: Re Colorado Products Pty Ltd (in prov liq) above at [421]. The allegation of a breach of this section of the Corporations Act is an allegation of breach of a civil penalty provision and the Court must have regard to the seriousness of the allegations in determining whether it has been established: Briginshaw v Briginshaw above at 361–362; Wilson HTM Investment Group Ltd v Pagliaro [2012] NSWSC 1068; (2012) 226 IR 75 at [102].

60. Third, FAL HB and FAL Retail bring their claim against Mr Xenos, in respect of the transactions with Fence All and EZI Group and other transactions, under s 182(1) of the Corporations Act. That section prohibits a director, secretary, officer or employee of a corporation from improperly using his or her position to gain an advantage for himself or herself or someone else, or cause detriment to the corporation. Mr Arnott submits, and I accept, that impropriety in the requisite sense is assessed by reference to an objective standard; and conduct will relevantly be improper if it amounts to “a breach of the standards of conduct that would be expected of a person in [the director's] position by reasonable persons with knowledge of the duties, powers and authority of his position as director, and the circumstances of the case, including the commercial context”: Doyle v Australian Securities and Investments Commission [2005] HCA 78; (2005) 227 CLR 18 at [35]; Re Colorado Products Pty Ltd (in prov liq) above at [432]–[433]. Mr Arnott also rightly submits that, to establish a contravention of s 182(1) of the Corporations Act, it is sufficient to establish that the conduct of the director was carried out in order to gain an advantage and it is not necessary to establish that such an advantage was actually achieved nor that the company in question actually sustained a detriment: Chew v R above at 633.

61. FAL HB and FAL Retail also brought a claim for breach of duties owed by Mr Xenos to FAL HB and FAL Retail as an employee. It is by no means clear that Mr Xenos was an employee of FAL HB or FAL Retail, since the offer of employment which he accepted was made by FAL Arabia, which is not party to these proceedings, although Mr Xenos’ remuneration (whether or not it could be properly characterised as a salary) was paid by FAL HB. It is not necessary to determine this claim since the matters on which FAL HB and FAL Retail rely would either breach both Mr Xenos’ statutory and general law duties and his duties as employee or none of those duties. There is no prospect, on the particular facts, that determination of this claim would lead to a different result from the claim for breach of director’s and officer’s statutory and general law duties on the facts that I have found.

62. Mr Xenos relies on the absence of adequate documentary support for many of the impugned transactions to contend that FAL HB and FAL Retail have not made out their case that they were improper. FAL HB and FAL Retail respond that Mr Xenos, as a director and chief executive officer of those entities, was obliged to keep (or at least to cause to be kept) proper records. FAL HB and FAL Retail rightly point out that a company is obliged under s 286(1) of the Corporations Act to keep written financial records that correctly record and explain its transactions, financial position and performance, and that would enable true and fair financial statements to be prepared and audited. They also point out that a director who fails to take all reasonable steps to comply with or to secure compliance with that obligation contravenes s 344(1) of the Corporations Act. Mr Arnott also draws attention to the observations of Barrett J in Fodare Pty Ltd v Shearn [2011] NSWSC 479; (2011) 29 ACLC 738 at [27]–[28] that:

“A cardinal rule binding on a director is that the director's personal interest must always be subordinated to that of the company and the director must account to the company for any profit or gain obtained or received by reason of the fiduciary position. It follows that, if money of the company comes into a director's hands or under a director's control, the director must put it into the company's possession so that it is [sic] can be recognised as the company's property or, if that has not been done, stand ready and able to explain why the money was not been [sic] put into the company's possession and how and why the application of it in some other way was consistent with its status as an asset of the company.

The need for records to be kept which enable receipts and payments by a company to be recognised and the reasons why moneys were received or paid by the company to be understood is not only a matter of prudent stewardship but also the product of statutory requirements to which a company is subject: Corporations Act, s 286. A director who fails to take all reasonable steps to comply with, or secure compliance with, those requirements contravenes s 344: see s 344(1). […] In a case such as the present, where there is only one director, the need to ensure that adequate records are kept should be regarded as reflected in a duty of a fiduciary kind, akin to that to which a trustee is subject […] to ensure that there is available to the company a means of being aware of what its property is and how it has been applied.”

63. Barrett J there found that the defendant had breached her duties as a director in causing the company’s monies to be applied in ways that were inconsistent with the company’s interests, and also observed (at [26]) that the company’s director “was duty bound to safeguard [the company’s] funds and to expend them only in discharge of liabilities properly incurred by the company and otherwise in pursuit of corporate purposes” and that

“[d]ue and proper discharge of the director's duties in this respect does not allow the payment of funds to herself or members of her family by way of gift benefiting the payees or the other persons for the personal benefit of the director or her family members”.

64. Barrett J there noted the absence of records and information as to the disposition of a first cheque of approximately $383,000, other than that it went into a bank account maintained by the defendant, that she then withdrew the whole and she claimed that she “paid debts that were owing and I took out of it what was owing to me” and held the director was liable for a serious breach of duty with respect to that cheque as she caused the relevant funds to be applied in ways that could not, on any objective basis, be seen as consistent with the company’s interests. His Honour reached the same result in relation to a second cheque of approximately $250,000, in relation to which there was no direct evidence of what occurred after its receipt and observed (at [31]) that the director was “required to ensure the availability of means for [the company] to see how the proceeds were applied and whether the manner of application was proper” and (at [61]) that here evidence did “nothing to counter the strong inference that she caused the money to be spent in ways that had nothing to do with the welfare of [the company]”. I will reach similar conclusions in respect of aspects of the claim against Mr Xenos below.

65. As I noted above, the relief sought by FAL HB and FAL Retail against Mr Xenos includes a compensation order under s 1317H of the Corporations Act 2001 (Cth) in respect of alleged breaches of directors’ duties under ss 180–182 of the Corporations Act and, further or alternatively, equitable compensation or damages or an account of profits. It is, of course, well-established that equitable compensation is available for breach of an equitable duty, including breach of fiduciary duty, and also for equitable non-fiduciary duties such as the equitable duty of care and skill applicable to directors: Permanent Building Society (in liq) v Wheeler above; Nicholls v Michael Wilson & Partners Ltd [2012] NSWCA 383. Section 1317H(1) of the Corporations Act in turn provides that a Court may order a person to compensate, relevantly, a corporation for damage suffered by the corporation if that person has contravened a corporation/scheme civil penalty provision (as defined) in relation to the corporation or scheme and the damage resulted from the contravention. The case law indicates that the words “resulted from” in these sections refer to damage which, as a matter of fact, was caused by the contravention and that they should be given their ordinary meaning of requiring a causal connection between the damage and the contravening conduct: Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1; 46 ACSR 504 at [709]; Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 3) [2005] NSWSC 1198; (2005) 56 ACSR 204 at [63]; Registrar of Aboriginal and Torres Strait Islander Corporations v Matcham (No 2) [2014] FCA 27; (2014) 97 ACSR 412 at [159]–[160]. No issues of controversy arise as to the application of that section in this case, if the factual and legal basis of the claims against Mr Xenos is otherwise established.

The impugned transactions in Schedule B to the Further Amended Statement of Claim

66. FAL HB and FAL Retail seek to recover the amounts of transactions engaged in with Fence All, EZI Group and Mr Xenos set out in Schedule B to the Further Amended Statement of Claim, which they contend were paid in breach of Mr Xenos’ duties to FAL HB and FAL Retail. This category involves transfers to Fence All, EZI Group and Mr Xenos totalling $502,342.33.

67. The first matter in issue was several payments to Fence All, EZI Group and Mr Xenos. These matters were raised in a somewhat indirect way in the pleading. Paragraphs 45–46 of FAL HB’s and FAL Retail’s Further Amended Statement of Claim plead allegations of Mr Xenos’ involvement in other business opportunities while employed by or a director of FAL HB and FAL Retail. FAL HB and FAL Retail plead (FASC [45(c)]) that Mr Xenos engaged in business unrelated to his work as chief executive officer of the FAL Group and FAL HB and FAL Retail, and also plead (FASC [45(d)]) that, during the time he was employed by or was a director of FAL HB and FAL Retail, Mr Xenos pursued business opportunities with the EZI Group and other entities (FASC [45(d)]). These allegations are particularised by reference, inter alia, to these payments, although the link between those particulars and the pleaded allegations is not entirely clear.

68. Paragraphs 47–48 of the Further Amended Statement of Claim approach this issue in a somewhat more direct matter, pleading that, at all relevant times, Mr Xenos had a financial interest in Fence All which is particularised by reference to his being a sole shareholder of Fence All. FAL HB and FAL Retail also plead that, between 19 November 2013 and 8 February 2016, Mr Xenos effected, or caused to be effected, transfers of funds from FAL HB to Fence All and also to other entities including EZI Group and himself. FAL HB and FAL Retail also plead that, in effecting these transfers, Mr Xenos took steps to financially benefit himself or persons other than FAL HB and FAL Retail to their detriment, and that those transfers were not authorised by or disclosed to those entities. Mr Xenos denies these allegations and, in his Defence, pleads that such payments were not made to the detriment of FAL HB or FAL Retail, were remuneration payments or reimbursements of expenses or were authorised by virtue of Mr Xenos being a director of FAL Retail. Paragraphs 65, 67 and 69 of the Further Amended Statement of Claim in turn particularise the loss or damage claimed by FAL HB and FAL Retail in respect of Mr Xenos’ alleged breach of the express and implied terms of his employment and his breach of statutory duties as including these amounts as set out in Schedule B to the Further Amended Statement of Claim.

69. FAL HB and FAL Retail also plead that Mr Xenos breached the express and implied terms of his employment contracts by reason of these matters. As I noted above, that claim may not be available to FAL HB and FAL Retail, where any such employment contract was with FAL Arabia rather than FAL HB and FAL Retail. However, it is ultimately not necessary to determine that question in order to determine these proceedings. FAL HB and FAL Retail also plead that Mr Xenos’ conduct relating to the relevant payments was in breach of his fiduciary duties, and that FAL HB and FAL Retail have suffered loss, relevantly the amount of $502,342.33 applicable to those payments. FAL HB and FAL Retail also plead that those payments amounted to breaches of statutory duty by Mr Xenos by which FAL HB and FAL Retail have suffered loss or damage. I will first set out the facts and evidence relating to that claim, then deal with the application of the legal principles that I have set out above to that claim.

70. Several of the impugned transactions set out in Schedule B to the Further Amended Statement of Claim involved payments to Fence All and EZI Group. Fence All was a residential fencing construction company incorporated in October 2010 and, at least initially, operated by Mr Xenos’ father, Denis Xenos (Ex P6, 1049). There is no suggestion that FAL HB was required to make numerous payments to Fence All in respect of its fencing business. Mr Xenos’ evidence in cross-examination was that he was a signatory to the bank accounts of Fence All, although Fence All was handed over to Mr Valentino Kovacic in June 2015, when Mr Kovacic “needed a company” (T222). Fence All has now been deregistered.

71. EZI Group was incorporated in February 2012 and Mr Ashton was a director of that company. I have referred above to several letters sent by EZI Group directed to misleading Mr Xenos’ trustee in bankruptcy, by claiming that Mr Xenos was employed by EZI Group, above, in dealing with Mr Xenos’ credit. The issue of invoices from EZI Group, after August 2014, is inconsistent with Mr Xenos’ evidence that, from at least August 2014 until it was deregistered, EZI Group “wasn’t invoicing or it wasn’t doing any business” (T188). Mr Xenos accepted in cross-examination that he was a signatory on the bank accounts of EZI Group (T223). EZI Group has now been deregistered.

72. I will refer to the transactions by the transaction numbers used in the schedules to the Further Amended Statement of Claim (and also the Plaintiffs’ opening submissions), cross-referenced to the different transaction numbers used in Mr Fontanot’s evidence which were also adopted in Mr Xenos’ affidavit dated 6 November 2016. Transaction 1 in Schedule B to the Further Amended Statement of Claim (Fontanot transaction C.1) is a payment on 28 September 2015 of $22,000 transferred to Fence All by FAL HB. This transaction originated with an email dated 22 September 2015 from Mr Xenos to Mr Ashton (Ex P6, 2864) which read as follows:

“Can you do me a favour if you think this is viable.

1.   1 invoice for say $22,000 for consulting and

2.   1 invoice for transfer of Trademarks and also transfer of license [sic] agreements for say $50K, which I can put in the system and pay over the next few months. I will pay you your GST.

What do you think?”

73. The reference in that email to Mr Xenos paying GST implied that the balance of the amount, other than the GST, would not be paid to the invoicing party. Mr Ashton responded on 22 September (Ex P6, 2864) indicating that he did not “have a problem” and would pay the GST and would put the first transaction through Ashton Accountants and the second through Ashton Accountants as well, since “we cant [sic] use Ezi group”. Mr Ashton appears to have understood the suggested transactions as involving a deception of FAL HB, since he also observed that:

“Now that your [sic] CFO [chief financial officer] and FC [financial controller] are leaving, this wont [sic] be an issue. … good timing.”

74. Mr Ashton then sent an email to Mr Xenos (Ex P6, 2865–2866) which attached an invoice dated 22 September 2015 addressed to FAL HB for “Conferences, Financial Reports, Telephone attendances for the period 1 July 2015 to 22 September 2015” in the amount of $22,000. Mr Xenos replied asking Mr Ashton “Can you please send to Ella [Do, a member of FAL HB’s accounting staff], without me seeing it”. That approach was plainly intended to mislead Ms Do, since Mr Xenos had both requested and seen the invoice. Mr Ashton responded in a manner that made clear that he had recognised the impropriety of the transaction (Ex P6, 2865) to the effect that:

“Wont [sic] she come back and query this?

Wouldn’t it be best to send it after she left?

I don’t trust accountants and when they leave they have a habit of opening their mouth … I will if you want but she will come back and say that I haven’t been there for months.”

75. An invoice was subsequently issued by Ashton Accountants addressed to FAL HB with the narrative “conferences, financial reports, telephone attendances for the period 1 July 2015 to 22 September 2015” in the amount of $22,000 inclusive of GST and paid from FAL HB’s account. That invoice was paid to Fence All, then under Mr Xenos’ control, and then dispersed to what appear to be personal expenditures associated with Mr Xenos, by a transaction of $5,500 described as “Tim Xenos Instalme” and a transaction of $16,000 described as “Xenos Loan” (Ex P6, 2868).

168. Mr Arnott points out, and I accept, that the claim brought by FAL HB and FAL Retail against Yates Beaggi was for a substantially larger amount than either the resulting settlement or the claim ultimately brought to trial against Mr Xenos. The additional claims brought against Yates Beaggi included, inter alia, claims arising from an alleged failure of that firm, in circumstances that it was providing legal services to FAL HB, including in retainers relating to other matters, to disclose to FAL HB and FAL Retail that Mr Xenos was an undischarged bankrupt who was disqualified from managing corporations by reason of s 206B of the Corporations Act. FAL HB and FAL Retail had also pleaded that the letter sent by Yates Beaggi on 8 May 2014, to which I have referred above, failed to disclose relevant information in breach of Yates Beaggi’s duty to FAL HB and FAL Retail. FAL HB and FAL Retail pleaded that, had Yates Beaggi complied with its duties, then Mr Xenos would have been removed as a director or chief executive officer of FAL HB and FAL Retail at that point, and FAL HB and FAL Retail would not have been exposed to the losses that followed. The size of the claim against Yates Beaggi is indicated by the fact that one aspect of it, relating to transactions which Mr Xenos was alleged to have undertaken without appropriate authorisation, was for at least $12 million.

169. It seems to me that the wider claims made by FAL HB and FAL Retail against Yates Beaggi were substantial and were seriously arguable, and that the recovery made by FAL HB and FAL Retail from Yates Beaggi by way of settlement should properly be attributed to those claims and to costs before any credit is allowed from that recovery against damages awarded against Mr Xenos. There is no suggestion that, after allowing for those claims and for costs, any amount would be available to reduce the damages awarded against Mr Xenos. There should be no reduction of the amount of the judgment in favour of FAL HB and FAL Retail against Mr Xenos by reason of that settlement.

Payments of traffic and other fines

170. Third, FAL HB and FAL Retail seek to recover the amounts of payments to the New South Wales Office of State Revenue with respect to traffic and other fines totalling $59,461 as set out in Schedule D to the Further Amended Statement of Claim and the parties treated these matters as in issue. I have referred above to the somewhat indirect way in which these matters were raised in the pleading, which parallels the claim in respect of the payments to Yates Beaggi. As I noted above, the claims in paragraphs 45–46 of the Further Amended Statement of Claim are particularised by reference to payments, inter alia, to the payment of these penalties, and paragraphs 65, 67 and 69 of the Further Amended Statement of Claim in turn particularise the loss or damage claimed by FAL HB and FAL Retail in respect of Mr Xenos’ alleged breach of the express and implied terms of his employment and his breach of statutory duties as including the amounts set out in Schedule D of the Further Amended Statement of Claim, being the payments in respect of penalties to the office of State Revenue. As I noted above in respect of the claims relating to payments to Yates Beaggi, the Court should determine those matters where the parties have conducted the case on the basis that they are in issue.

171. The payments in issue relate to penalty notices paid by FAL HB and FAL Retail with respect to traffic offences. Many clearly relate to speeding offences which were detected in relation to Mr Xenos’ car, although I do not need to find whether Mr Xenos was driving that car at the time. Mr Xenos explains these payments in his affidavit evidence by the bare statement that the substantial payments involved were “in respect of fines for vehicles and toll notices of F[AL] HB”. Mr Xenos’ evidence in cross-examination was that on some occasions he was the driver of the vehicle when traffic offences were issued; on some occasions he did nominate himself as driver, but the nominations were rejected by the Office of State Revenue because they were too late; and that he had not nominated himself as the driver on all occasions (T309). Mr Arnott submits, and I accept, that the losses caused by these notices have been aggravated by reason that Mr Xenos in most cases did not nominate himself or another person as the driver, resulting in a higher penalty and a further penalty for the failure to nominate.

172. By way of example, transactions 1 and 3 in Schedule D to the Further Amended Statement of Claim (Fontanot transactions G.26–G.30) include a payment on 13 October 2014 of a penalty of $1,270, referable to penalty notice for a speeding infringement by the driver of Mr Xenos’ car on 31 August 2014 (exceeding limit by over 10 km per hour on M5 Motorway between Marsh Street and Bexley Road, Arncliffe) (Ex P6, 3314) and a payment on 4 November 2014 of $1,270 also relating to a penalty notice for a speeding infringement by the driver of Mr Xenos’ car on 8 October 2014 (exceeding limit by over 10 km per hour on Eastern Distributor between Oxford Street and William Street, Darlinghurst) (Ex P6, 3309). Transaction 6 in Schedule D to the Further Amended Statement of Claim (Fontanot transaction G.19) is a payment on 24 December 2014 of $2,180 for a penalty notice for a speeding infringement by the driver of Mr Xenos’ car on 25 November 2014 (exceeding limit by over 20 km per hour on M5 Motorway between Marsh Street and Bexley Road, Arncliffe) (Ex P6, 3261). Transaction 11 in Schedule D to the Further Amended Statement of Claim (Fontanot transaction G.35) is a payment on 16 February 2015 of $545 for a penalty notice for a speeding infringement by the driver of Mr Xenos’ car on 14 January 2015 (exceeding limit by over 10 km per hour on Botany Road Rosebery between Harcourt Parade and Gardeners Road) (Ex P6, 3330). Transaction 15 in Schedule D to the Further Amended Statement of Claim (Fontanot transaction G.8) is a payment on 20 April 2015 of $4,175 for a penalty notice for a speeding infringement by the driver of Mr Xenos’ car on 9 March 2015 (exceeding limit by over 30 km per hour, again on the M5 Motorway between Marsh Street and Bexley Road, Arncliffe) (Ex P6, 3203). That amount was paid from FAL HB (Ex P6, 3204). A further penalty notice was issued for a failure to nominate the driver within the requisite timeframe in the amount of $3,610 and was also paid by FAL HB (Ex P6, 3206–3207).

173. Transaction 19 in Schedule D to the Further Amended Statement of Claim (Fontanot transaction G.27) is a payment of $1,270 on 22 June 2015 of a penalty notice for a speeding infringement again by the driver of Mr Xenos’ car on 18 April 2015 (exceeding limit by over 10 km per hour on Forest Road, Penshurst between Penshurst Street and St Georges Road) (Ex P6, 3300). Transaction 22 in Schedule D to the Further Amended Statement of Claim (Fontanot transaction G.25) is a payment on 17 August 2015 of $1,300 for a penalty notice for a speeding infringement by the driver of Mr Xenos’ car on 20 July 2015 (exceeding limit by over 10 km per hour on the Eastern Distributor between Oxford Street and William Street, Darlinghurst) (Ex P6, 3290). Several other impugned transactions are payments to the Office of State Revenue for other unidentified penalty notices.

174. Transactions 4, 7–10, 13–14, 17–18, 21, 25 and 27-29 in Schedule D to the Further Amended Statement of Claim (Fontanot transaction G.23, G.20, G.22–G.23, G.18, G.17, G.16, G.14–G.15, G.13, G.12, G.10–G.11, G.9) are payments on 26 November and 24 December 2014, 2 February, 16 March, 31 March, 3 and 4 June 2015, 12 August 2015, 17 September 2015, 2 October 2015 and 2 November 2015 of penalties for failure to nominate a driver for the relevant penalty notices.

175. Mr Arnott submits that none of these penalties was properly payable by FAL HB and FAL Retail and that they should all have been paid by Mr Xenos directly or, alternatively, by the driver of the vehicle. Mr Arnott submits that there was no corporate benefit to FAL HB and FAL Retail from paying the fines; and that payment was to their detriment because it concealed the identity of the relevant driver from the Office of State Revenue which led to the imposition of substantial additional penalties. Mr Arnott submits that Mr Xenos either authorised, procured or failed to prevent these payments from occurring and, by doing so, he breached his duties to FAL HB and FAL Retail. It is not necessary to determine whether the payment of one or two such penalties may have been consistent with a director’s or officer’s duties, where payments of penalties on this scale were, in my view, a plain contravention of such duties, whether or not Mr Xenos personally had committed the relevant traffic offences.

176. In my view, these transactions would not have been implemented or permitted by a director or chief executive officer who exercised the degree of care and diligence that a reasonable person would exercise if he or she was a director or officer of a corporation in FAL HB’s circumstances and occupied the office held by, and had the same responsibilities within FAL HB as, Mr Xenos. Mr Xenos also did not exercise his powers or discharge his duties in respect of these transactions in FAL HB’s and FAL Retail’s best interests or for a proper purpose, and Mr Xenos’ involvement with the transactions as director or officer of FAL HB involved the improper use of his position to gain an advantage at least for Fence All and to cause detriment to FAL HB and FAL Retail. FAL HB and FAL Retail are entitled to succeed in its claims against Mr Xenos under ss 180–182 of the Corporations Act and at general law in respect of these transactions. There is no evidence of adequate or specific disclosure of these transactions to the shareholders in FAL HB or FAL Retail and, specifically, to FAL Arabia or its Chairman to establish any basis for a defence of ratification.

Application of funding for Saudi Arabian and Malaysian factories

177. FAL HB and FAL Retail also seek to recover losses alleged to have resulted from an alleged misapplication of the funding provided for equipment for factories in Saudi Arabia and Malaysia, totalling EUR898,254.78. This claim is founded on an alleged breach of s 180 of the Corporations Act by Mr Xenos and it is pleaded in an abbreviated fashion as follows:

38.    In or about July 2014, Mr Xenos, on behalf of the FAL Group and/or the FAL Entities, arranged for [FAL Arabia] and [FAL Malaysian entity] to enter into three agreements with [FB Propak] for the supply and assembly of machines and goods in Malaysia.

39.    Pursuant to the Propak Agreements, FAL HB or FAL Retail were required to provide [FB Propak] with letters of credit to secure the supply of machinery and goods.

40.   By reason of Mr Xenos’ conduct, FAL HB and FAL Retail failed to provide [FB Propak] with letters of credit to secure the supply of machinery and goods or otherwise appropriately utilise funds provided to FAL Retail by FAL Arabia for the purposes of the Propak Agreements.

41.   Further, by reason of Mr Xenos’ conduct, [FAL Arabia] and [FAL Malaysian entity] remained indebted to [FB Propak] for outstanding sums pursuant to the Propak Agreements.

178. The conduct of Mr Xenos to which FAL HB and FAL Retail refer in paragraphs 40 and 41 of the Further Amended Statement of Claim is not particularised to those paragraphs, which were particularised by a list of documents without identification of any matters of fact that were to be drawn from them, and my attention was not drawn to any other particulars that were provided in respect of those paragraphs. The relevance of paragraph 41 is also somewhat unclear, since neither FAL Arabia nor FAL Foods and Beverages Malaysia is party to these proceedings; there is no suggestion that FAL HB or FAL Retail were their agents in any formal sense; and any loss that they, as distinct from FAL HB or FAL Retail, suffered cannot found a claim for damages by FAL HB or FAL Retail in these proceedings.

179. Paragraphs 64 and 66 of the Further Amended Statement of Claim in turn plead a breach of contract and a breach of fiduciary duty by Mr Xenos in respect of the matters pleaded in, inter alia, paragraphs 38–41 of the Further Amended Statement of Claim, although Mr Arnott did not press this claim on that basis in submissions. Paragraph 68 potentially extended the claim for breach of Mr Xenos’ statutory duties under ss 180–182 in respect of these matters, pleading that “some or all” of the matters pleaded in a range of paragraphs of the Further Amended Statement of Claim breached those duties. Mr Arnott limited this claim in submissions to a breach of s 180 of the Corporations Act and the corresponding general law duty.

180. Mr Arnott opened the case in respect of the claim as to FB Propak in oral submissions as follows:

“Mr Xenos was required to obtain a letter of credit for the amount [of the third instalment payable to FB Propak] the idea being the money would come into the account into Australia, be used as security to obtain the letter of credit from an Australian bank, which would then be used to pay the vendor under the contract. Mr Xenos told his superiors that he had obtained the letter of credit. In fact, he did not, and what thereafter happened was that the money that was sent here for the purposes of securing that payment was disbursed, partly to Propak, but largely to other things, such that there is a deficit left in the amount in that account that has to be made up. A further payment was made by FAL Arabia for the fourth instalment into the same account, and those funds, again, were disbursed by Mr Xenos, partly to [FB] Propak, and partly elsewhere, and this left a deficiency, after Mr Xenos’ resignation of the amount of … 898,254.78.

We say this was a breach of Mr Xenos’ duty of care this way. The contracting parties under the Propak agreements were FAL Arabia and [FB] Propak, and FAL Arabia procured FAL Retail, or FAL HB, to effectively act as its payment agent and facilitate the payments, and money was given to those entities for the specific purpose of making those payments. Those entities then disbursed the money, and the person who actually did that was Mr Xenos. This has left a deficiency that has had to be made up in some other way and that is a breach of Mr Xenos’ duties to those companies, being FAL HB and FAL Retail, to properly perform the role of payment agent that they were procured to pay.” (T27–T28).

181. This submission makes clear that the only claim made against Mr Xenos in this respect is under s 180 of the Corporations Act and the corresponding duty at general law and not for breach of the proper purposes duty under s 181 of the Corporations Act or in respect of any allegation that he conferred an improper benefit upon himself or caused detriment to FAL HB or FAL Retail under s 182 of the Corporations Act or for a breach of trust, procuring a breach of trust, or a breach of fiduciary duty owed by Mr Xenos to FAL HB or FAL Retail.

182. Mr O’Connor responded, in opening, to the claim in respect of the funds advanced for the letters of credit to be provided to FB Propak by submitting that:

“… what may become apparent from the evidence is that the funds were – well, to the extent that they were paid – were transferred to a FAL entity and they have been used by FAL for the benefit of FAL and not as opposed to transactions or any evidence that those transactions were transferred or moved elsewhere for the benefit of Mr Xenos.” (T35)

183. The matters on which the Plaintiffs rely for this claim are set out largely in Mr Refaat’s evidence and in documentation. Mr Refaat gave evidence of the development of a proposal that FAL Arabia develop a new factory in Malaysia which would produce juice, ice cream and coffee, and of funding provided by FAL Arabia to FAL HB in payments of USD 150,000 in July 2014 and USD 650,000 in August 2014 to fund construction works in Malaysia. Mr Refaat referred to steps undertaken by Mr Xenos to identify premises in Malaysia at which the factory could be built and to dealings with FB Propak for the supply of equipment and assembly of machines at the Malaysian and Saudi Arabian factories. In May 2015, FAL Arabia entered a series of agreements with FB Propak for the supply of equipment for the factories in Saudi Arabia and Malaysia (Ex P6, [182], [183] and [184]). Mr Refaat also referred to the steps that were to be taken to fund a third instalment to be paid to FB Propak, by way of commercial letters of credit, which was to involve the payment of EUR 3,961,094.31 into an account held by FAL Retail with NAB and the issue of a letter of credit by NAB in favour of FB Propak’s Australian bank. Mr Refaat also refers to further dealings with Mr Xenos and FB Propak in respect of the provision of those letters of credit.

184. On 20 May 2015 FB Propak sought immediate payment of invoices relating to the equipment, referring to difficulties with payment that had continued over several months, although I am conscious that the agreements noted above had just been executed. Mr Refaat then sent an email to Mr Xenos seeking an explanation how a claim for immediate payment had come about where the contract provided for the third payment by letter of credit (Ex P6, 1956). By email dated 27 May 2015, Mr Xenos advised Mr Refaat of a possible solution to the difficulties with obtaining letters of credit, by which NAB could open a Euro account, funds could be deposited into that account and NAB would then issue commercial letters of credit (Ex P6, 1962).

185. Mr Refaat then sought authority for a transfer of funds by FAL Arabia to FAL Retail on the basis set out in an email dated 28 May 2015 from Mr Refaat to the Chairman of FAL Arabia, which noted that FB Propak’s bank had not accepted letters of credit proposed to be issued by FAL Arabia’s bank in Saudi Arabia; that FB Propak was seeking payment for equipment prior to delivery, which would bring the total payment to 95% of the amount due to FP Propak; that FAL Arabia needed to ensure that FB Propak complied with the terms of the contracts, and did not recommend payment in advance; and that:

“We then recommend to open the [letters of credit] in Australia through our Bank with FAL[HB]. Tim [Xenos] confirmed that [FB] Propak’s Bank [Australian and New Zealand Banking Group Limited (“ANZ”)] will accept the same [letters of credits] if issued in Australia. The cost of issuance of the [letters of credit] is within the [letters of credit] fees range in [Saudi Arabia].”

That request was approved by FAL Arabia’s Chairman on that date and that approval was communicated by Mr Refaat to Mr Xenos on 28 May 2015 (Ex P6, 1965).

186. FAL Arabia subsequently transferred the amount of EUR 3,961,094.31 to FAL Retail, in an account with NAB, on 9 June 2015 (Ex P6, 1973). In his third affidavit dated 27 February 2017, Mr Xenos refers, inter alia, to a telephone conversation with a representative of FB Propak in mid-2015 and a further conversation with representatives of FAL Arabia following that conversation. Further correspondence followed between Mr Xenos and FAL Saudi Arabia as to the form of the letters of credit and, by email dated 14 July 2015, FAL Arabia advised Mr Xenos of its approval for the issue of seven letters of credit (Ex P6, 2032). By email dated 29 July 2015 (Ex P6, 2043), Mr Xenos followed up with FAL Arabia as to when the deposit payment for part of the equipment would be made and advised that:

“The equipment is now on the water, and the L[etters of] C[redit] have been issued, so equipment is almost ready.”

In cross-examination, Mr Xenos sought to explain that email as relating to the issue of draft rather than final letters of credit. I do not accept that explanation.

187. Mr Xenos accepted in cross-examination that some payments made out of the account in which monies were received from FAL Arabia to fund the letters of credit were made to FB Propak and other payments were made for other purposes on his authority, including transfers to FAL HB’s operating account and payments to external third parties (T342). Mr Xenos did not accept that the payments were not authorised on the basis that the only purpose for which the money in the account was to be used was for paying FB Propak or that he had failed to comply with the direction given by FAL Arabia to obtain a letter of credit with respect to the third instalment (T342).

187. Mr Refaat refers in his affidavit evidence to concerns which he raised with FAL Arabia’s Chairman in September 2015 about Mr Xenos and funding deviations from FAL HB’s budgets. Nonetheless, a fourth instalment in respect of the FB Propak arrangements in the amount of EUR 345,427.75 was transferred by FAL Arabia to FAL HB in December 2015 (Ex P6, 1992, 2539). Mr Refaat also refers in his affidavit evidence to the circumstances in which he later travelled to Malaysia to inspect the Malaysian factory and to matters which arose from that visit. In February 2016, it emerged that amounts forwarded by FAL Arabia had not been applied to acquire letters of credit in favour of FB Propak. FB Propak then advised FAL Arabia that Mr Xenos had claimed he could not organise a letter of credit between NAB and ANZ and that an amount of EUR 552,827.02 had been paid, on the basis that the balance would be paid down each week which had not occurred (Ex P6, 2739). A statement of account issued by FB Propak as at 1 February 2016 (Ex P6, 2760) recorded the amount of EUR 156,749.80 as outstanding in respect of the Saudi Arabian project, amounts of the third and fourth instalments of EUR 339,808.18 and EUR 149,947.25 as outstanding in respect of the Malaysian juice, ice cream and coffee roasting project and instalments three and four in the amounts of EUR 213,018.85 and EUR 38,730.70 as outstanding in respect of the Malaysian coffee capsule project. On that basis, a total amount of EUR 898,254.78 was not applied by Mr Xenos to the letters of credit or to payment to FB Propak. FAL Retail submits that its loss arises because it received money from FAL Arabia for the purpose of procuring letters of credit to pay the amounts payable under the agreements with FB Propak which was not applied for that purpose.

188. Mr Refaat was cross-examined as to the application of funds provided to FAL HB for equipment to be purchased for the factories in Malaysia and Saudi Arabia. His evidence was that, when Mr Xenos resigned in January 2016, the supply of equipment for the factories was not completed and that steps were then taken by FAL Arabia to complete the factories and obtain the equipment that had not been supplied (T85). Mr Refaat’s evidence in cross-examination was that the amount of EUR 898,254.78 that had been sent to FAL Retail, and which FB Propak advised Mr Refaat had not been paid to it, after Mr Xenos’ resignation (EX P6, 2758) was subsequently paid by FAL Arabia to FB Propak (T86).

189. Mr Arnott submits that Mr Xenos’ failure to make the payments to FB Propak in accordance with the instructions given to him was a breach s 180 of the Corporations Act and the corresponding general law duty, which was aggravated by his statement that he had procured a letter of credit when he had not, and that Mr Xenos is liable to compensate FAL Retail for the deficit of EUR 898,254.78.

190. In response to this claim, Mr O’Connor submits that there is no or insufficient evidence that funds provided to FAL Retail for the purpose of payment to FB Propak were used, in part or whole, to Mr Xenos’ benefit, or other than for the benefit of FAL HB or FAL Retail; that Mr Xenos’ evidence was that various funds provided were deposited into accounts of FAL HB and FAL Retail; and that there would be double-counting in allowing relief on this basis, if the funds that were provided to FAL Retail have been used to fund the impugned transactions involving Mr Xenos. Mr Xenos also relies on Mr Refaat’s evidence that the Malaysian factory is expected to be operational by June 2017; that the equipment to be acquired from FB Propak was ultimately supplied and will be used in the factory; and the statement of account was ultimately paid by further funds provided by FAL Arabia. Mr Xenos contends that FAL Group has had the benefit of such equipment and that the loss or damage claimed was not suffered. To some extent, that submission focuses on the position of FAL Arabia since it, or the entities that own the relevant factory, will have the benefit of the relevant equipment, albeit in circumstances that FAL Arabia may have paid for it twice, once by amounts advanced to FAL Retail and a second time by the further amounts paid to FB Propak to secure the provision of the equipment. Neither FAL Arabia nor the FAL Group entity which owns the factory is party to these proceedings, or claims any loss in them, and the only relevant question is whether any loss suffered by FAL Retail, or alternatively FAL HB, has been established.

191. The evidence does not seem to me to establish the allegation in paragraph 38 of the Further Amended Statement of Claim, that Mr Xenos, at least as distinct from FAL Arabia and its management, arranged the entry into the Propak Agreements. The allegation in paragraph 39 of the Further Amended Statement of Claim is that FAL HB or FAL Retail were required either to provide FB Propak with the letters of credit or “otherwise appropriately utilise” the funds provided for the purposes of the Propak Agreements. The pleaded breach of that obligation would therefore require not only that the letters of credit were not provided to FB Propak but also that the funds were not appropriately used for the purposes of those agreements.

192. To the extent that the allegation raised by paragraph 40 of the Further Amended Statement of Claim) involves a failure by Mr Xenos to obtain the letters of credit, there is little evidence as to why FAL Retail failed to obtain letters of credit from NAB, as Mr Xenos had suggested that it could do, secured by the funds provided by FAL Arabia, and as to whether that was a failure on Mr Xenos’ part or arose from difficulties with NAB, FB Propak or FB Propak’s bank that were not within Mr Xenos’ control. FAL HB and FAL Retail bear the evidentiary onus as to this matter and do not, for example, lead any substantive evidence as to what NAB’s or FB Propak’s banks’ requirements were or that they could have been satisfied by steps reasonably taken by FAL Retail or Mr Xenos. It does not seem to me that an unexplained failure to obtain the letters of credit speaks for itself so as to establish a breach of the statutory or general law duty of care and diligence on Mr Xenos’ part, where other explanations of that failure consistent with the exercise of care and diligence by Mr Xenos are open.

193. To the extent that the pleaded claim (in paragraph 40 of the Further Amended Statement of Claim) is a failure to “otherwise appropriately use the funds”, FAL HB and FAL Retail did not identify with any precision how monies paid to FAL Retail were applied and to which third parties payments were made from the funds or for what purpose. I will assume, without deciding, that any payment other than to FB Propak would arguably not be an appropriate use of those funds for the purposes of those agreements, even if it advanced the wider purposes of the development of the Saudi Arabian and Malaysian projects or FAL HB’s or FAL Retail’s wider business purposes. Even on that assumption, it does not follow that an application of such funds for another proper business purposes of FAL HB or FAL Retail was a breach of Mr Xenos’ duties of care and diligence under s 180 of the Corporations Act or at general law. The fact that a payment or payments were not made for the purpose that FAL Arabia intended may not establish such a breach, if they were made in the interests of FAL HB or FAL Retail. Whether that is the case would depend on the nature of the particular payments, which were not identified by FAL HB’s and FAL Retail’s submissions.

194. It seems to me that the claimed breach of Mr Xenos’ duty under s 180 of the Corporations Act and the corresponding general law duty has also not been established in respect of these matters. Against the contingency that an appellate court may take a different view as to that question, I turn now to the question of quantification of damages. I recognise that the Court must do the best it can to make a reliable assessment of damages, even where damages are difficult to assess, including where the plaintiff has failed to lead the best evidence of damages: Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 at 83, per Mason CJ and Dawson J, 125 per Deane J, 153 per Gaudron J. At the same time, the authorities indicate that damages must be proved with a degree of precision which reflects the proof that is reasonably available to the parties and, if the evidence called on behalf of a plaintiff does not provide a rational foundation for a proper estimate of damages, the Court should decline to make one: Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10; (2003) 196 ALR 257 at [38]; JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237 at 243; McCrohon v Harith [2010] NSWCA 67 at [128].

195. FAL HB’s claim was quantified on the basis that FAL Retail’s loss was all of the monies paid by FAL Arabia to FAL Retail and not paid to FB Propak. It seems to me that claim cannot be quantified on that basis where the evidence indicates that some part of those monies, the amount of which was not identified in submissions, was transferred to FAL HB’s operating account and there is no evidence those monies were not used for proper business purposes or that monies paid to third parties were also not for proper business purposes. There also seems to me to be significant force in Mr O’Connor’s submission that there is an unresolved issue of duplication between this claim and the claims brought by FAL HB and FAL Retail in respect of transfers of funds to Mr Xenos, so far as the Plaintiffs claim that the monies paid to FAL Retail for the purpose of the Saudi Arabian and Malaysian factories were disbursed for other purposes, which may include funding the impugned payments to Mr Xenos. Although I had raised the question, in submissions, of quantification of compensation on a restorative basis in the manner considered by Edelman J in Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102; (2014) 48 WAR 1; 98 ACSR 615, it seems to me that such a claim is not available where no allegation of breach of trust or breach of fiduciary duty is put in respect of the dealings with FB Propak.

196. Even if a breach of s 180 of the Corporations Act or the corresponding general law duty was established, it seems to me that FAL HB and FAL Retail would also need to establish a sufficient evidentiary basis for the Court to form a rational view as to the amount of loss suffered by FAL HB or FAL Retail by the application of funds for another legitimate business purpose and, if the funds were not applied for a legitimate purpose, would need to address the potential duplication in the damages claimed that would arise if that inappropriate utilisation was the payment out of those funds in the impugned transactions for which FAL HB and FAL Retail will recover damages under their other claims. FAL HB and FAL Retail did not adequately address those matters.

197. In these circumstances, it seems to me that FAL HB and FAL Retail have not established the pleaded breaches in respect of this claim and have also not established an evidentiary basis for the Court to quantify any loss they have suffered and this claim fails.

Orders, costs and referral to regulatory bodies

199. The parties should bring in agreed short minutes of order, including as to costs, within 14 days and, in the absence of agreement between them, their respective draft short minutes of order and short submissions as to the differences between them.

200. The matters to which I have referred above include matters that may be of concern to the Deputy Commissioner of Taxation and the Insolvency and Trustee Service Australia, so far as Mr Xenos and interests associated with him appear to have received substantial funds while he was apparently bankrupt; it appears that tax returns were not or may not have been lodged by Mr Xenos disclosing the receipt of those amounts; and it appears that false information was provided to Mr Xenos’ trustee in bankruptcy and his creditors as to the source of funds made available in respect of his discharge from bankruptcy. Subject to hearing from Mr Xenos, I propose to direct the Registrar to make a copy of this judgment available to the Deputy Commissioner of Taxation and the Insolvency and Trustee Service Australia.

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Amendments

04 May 2017 - Paragraphs 2, 165 - amounts redacted pending further application.

Decision last updated: 04 May 2017