Shot One Pty Ltd (in liq) v Day

IN THE SUPREME COURT OF VICTORIA	Not Restricted
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST

S CI 2014 00390

IN THE MATTER OF SHOT ONE PTY LTD (IN LIQUIDATION) (ACN 096 104 808)
B E T W E E N:
SHOT ONE PTY LTD (IN LIQUIDATION) (ACN 096 104 808)	First Plaintiff
ANDREW REGINALD YEO IN HIS CAPACITY AS LIQUIDATOR OF SHOT ONE PTY LTD (IN LIQUIDATION) (ACN 096 104 808)	Second Plaintiff
and
RICHARD LEONARD DAY	First Defendant
RISING ROCKET PTY LTD (ACN 102 373 633)	Second Defendant

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JUDGE:	SLOSS J
WHERE HELD:	Melbourne
DATES OF HEARING:	2, 3, 7 (Directions only), 8, 9, 10, 13 February, and 6, 7 March 2017
DATE OF JUDGMENT:	7 December 2017
CASE MAY BE CITED AS:	Shot One Pty Ltd (in liq.) & Anor v Day & Anor
MEDIUM NEUTRAL CITATION:	[2017] VSC 741

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WINDING UP – Voidable transactions – Uncommercial transactions – Relief under Corporations Act 2001 (Cth) – Liquidator seeking to have deed of settlement releasing defendants from debt claims set aside as an uncommercial transaction – Alleged debts denied by defendants – Whether company’s accounts constitute prima facie evidence of the alleged debts – Whether it may be expected that a reasonable person in the company’s circumstances would have entered into deed of settlement – Held: no uncommercial transaction – Corporations Act 2001 (Cth) s 588FB, 588FE, 588FF, 588FG and 1305(1) considered

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr L Glick QC and Ms C M Pierce	Frenkel Partners
For the Defendants	Mr J L Evans QC and Mr P R Miller	Piper Alderman

TABLE OF CONTENTS

Introduction......................................................................................................................................... 1

Deed of Settlement entered into on 23 May 2012 to settle the 2010 proceeding................. 1

Proceeding commenced by the liquidator of Shot One on 31 January 2014 seeking to set aside the Deed of Settlement........................................................................................................................ 3

During the course of the trial the issues in dispute were narrowed significantly.............. 4

The final form of the case pursued by the plaintiffs................................................................... 7

Factual background........................................................................................................................... 9

Shot One commenced the 2010 proceeding against Richard Day and Rising Rocket...... 17

Judicial mediation of the 2010 proceeding and entry into the Deed of Settlement.......... 18

Sale of the Rockley Road property........................................................................................... 26

Evidence given concerning the Rising Rocket loan account................................................... 26

Evidence given by Mr Grano.................................................................................................... 27

Evidence given by Richard Day............................................................................................... 31

Evidence given by Mr Jasper.................................................................................................... 39

Shot One’s 2005 Accounts.......................................................................................................... 46

Shot One’s 2006 Accounts.......................................................................................................... 50

Shot One’s 2007 Accounts.......................................................................................................... 52

Shot One’s 2008 Accounts.......................................................................................................... 55

Shot One’s 2009 Accounts.......................................................................................................... 60

Preparation of Shot One’s financial statements and tax returns for the financial years 2010 and 2011........................................................................................................................................................ 63

Shot One’s financial statements for 2010................................................................................. 65

Shot One’s financial statements for 2010 record the financial liability of Shot One to Cooniemoon 75

Shot One’s financial statements for 2011................................................................................. 75

Shot One’s financial statements for 2011 record the financial liability of Shot One to Cooniemoon 78

Evidence given concerning Rising Rocket’s accounts and records..................................... 78

Evidence given by Mr Yeo............................................................................................................. 79

Master schedule and property schedule................................................................................. 79

Agreed List of Issues for determination....................................................................................... 91

The ‘evaluative phase’: whether the Deed of Settlement constituted an ‘uncommercial transaction’ (Issues 3, 4, 5, and 8)......................................................................................................................... 92

Legislative background to the introduction of the ‘voidable transactions’ provisions... 93

Case law concerning setting aside ‘uncommercial transactions’......................................... 97

Issues 3 and 4: What was the value of Shot One’s loan claims against Rising Rocket as at 23 May 2012 (when the Deed of Settlement was entered into)?................................................................ 102

What was (is) the evidentiary value of the financial statements of Shot One, the general ledger of Shot One, and the ledger entry reports in respect of Shot One, in establishing the existence of a loan account between Shot One and Rising Rocket as at 23 May 2012?................................... 107

In respect of the claim of Shot One against Rising Rocket that it was indebted to Shot One as at 23 May 2012 by reason of having had loans made to it by Shot One prior to 23 May 2012, what was the value of that claim to Shot One as at 23 May 2012, taking into account the legal and procedural hurdles which existed in respect of that claim, the defences available to Rising Rocket and the likely legal costs to Shot One of pursuing that claim?................................................................... 128

The plaintiffs’ assessment of the value of the Shot One’s alleged claim against Rising Rocket for amounts loaned since 22 November 2004............................................................................. 129

The plaintiffs’ assessment of the value of Shot One’s alleged claim against Rising Rocket for amounts loaned since 23 May 2006........................................................................................................ 130

The defendants contend that the value of the alleged Rising Rocket loan as at 23 May 2012 was negligible.................................................................................................................................... 133

Limitations defence.................................................................................................................. 136

Conclusion................................................................................................................................. 140

Issue 5: Benefits to Shot One from entry into the Deed of Settlement.............................. 141

Issue 8: Was the entry into the Deed of Settlement an uncommercial transaction of Shot One? 143

Evaluation of benefits and detriments – sections 588FB(1)(a) and (b).............................. 146

The respective benefits to other parties to the transaction – section 588FB(1)(c)............ 148

Nicholas Day.............................................................................................................................. 148

Richard Day............................................................................................................................... 149

Rising Rocket............................................................................................................................. 150

Cooniemoon............................................................................................................................... 150

Any other relevant matters – section 588FB(1)(d)................................................................ 151

Transaction between ‘blood relatives’ – but no benefit intended to be conferred.......... 151

Advice given to Shot One by its lawyers at or about time transaction entered into...... 151

Conclusion................................................................................................................................. 158

Issue 9: If the Deed of Settlement is found to have been an uncommercial transaction of Shot One, has Rising Rocket established the defence under section 588FG(2) of the Act?....................... 158

The defendants became a party to the transaction in good faith (s 588FG(2)(a))............ 159

The defendants had no reasonable grounds for suspecting Shot One was insolvent or would become insolvent (s 588FG(2)(b)(i))....................................................................................................... 160

A reasonable person in the defendants’ circumstances would have had no reasonable grounds for suspecting Shot One was insolvent (s 588FG(2)(b)(ii))........................................................ 163

The defendants have provided valuable consideration under the transaction or changed their position (s 588FG(2)(c))............................................................................................................................ 164

Issue 10: If the Court has power under section 588FF of the Act in respect of the Deed of Settlement, what orders should it make?........................................................................................................ 164

The ‘determinative phase’: the extent to which Shot One has established its loan account claims against Rising Rocket’ (Issues 11 and 12)................................................................................................ 164

Issue 11: If the Deed of Settlement is set aside, has Shot One made out its claim in debt against Rising Rocket?........................................................................................................................................ 165

The plaintiffs submit that Shot One’s MYOB accounts are prima facie evidence of loans made by Shot One to Rising Rocket since 1 February 2008......................................................................... 165

The plaintiffs also rely upon work undertaken by Mr Yeo to verify payments made by Shot One to Rising Rocket............................................................................................................................. 166

The Journal Entries re-adjustment.......................................................................................... 167

The defendants contend that the Court should not accept Mr Yeo’s evidence, including as to the quantification of Rising Rocket’s indebtedness................................................................... 168

The defendants submit that Shot One’s MYOB ledger as at February 2009 is the appropriate starting point for any quantification of Rising Rocket’s indebtedness........................................... 170

Issue 12: If so, to what extent, if any, are Shot One’s claims statute-barred?.................. 171

The defendants contend that the limitations period affects the amount of the Rising Rocket loan that Shot One may seek to recover................................................................................................. 172

The plaintiffs contend that because the rental journal entry includes an adjustment for rent that accrued prior to the limitation date, some adjustment of that entry is required............ 173

Step 1 — apply the correct accounting treatment................................................................ 174

The current treatment of the rental journal entry on Shot One’s financial statements... 174

How rent should have been charged with the correct accounting treatment.................. 174

Step 2 — calculate claim using loan balances with correctly apportioned rent.............. 176

Effect of incorrect treatment on the value of a statutory limited claim............................ 176

Summary of the plaintiffs’ position........................................................................................ 177

The defendants’ response........................................................................................................ 178

Conclusion................................................................................................................................. 179

Summary of Conclusions............................................................................................................. 179

HER HONOUR:

Introduction

The central issue in dispute between the parties to this proceeding is whether a Deed of Settlement entered into between Shot One Pty Ltd (‘Shot One’) and others, at or following a judicial mediation held on 23 May 2012, relevantly constituted an ‘uncommercial’ transaction and should be set aside and declared void by this Court at the suit of the liquidator of Shot One.

By way of background, relevantly, on 9 November 2012, following the issue of a statutory demand by the Australian Taxation Office as principal creditor,[1] the Federal Court of Australia ordered that Shot One be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth) (the ‘Corporations Act’), and that the second plaintiff, Mr Andrew Reginald Yeo, be appointed as liquidator.
[1]The Australian Taxation Office lodged a proof of debt with the liquidator for approximately $1.497 million: Transcript 09/02/17, Yeo XIC, at 218.

Deed of Settlement entered into on 23 May 2012 to settle the 2010 proceeding

On 23 May 2012, some five months prior to the winding up order being made, Shot One had entered into a Deed of Settlement by which it settled a proceeding it had commenced in this Court in November 2010 seeking relief against Rising Rocket Pty Ltd (‘Rising Rocket’) and Richard Day (‘the 2010 proceeding’).[2] The Deed of Settlement was entered into following a judicial mediation conducted before Randall AsJ. The parties to the Deed of Settlement were not only Shot One, Rising Rocket and Richard Day, but also included Nicholas Day (a brother of Richard, who had replaced him as the sole director and shareholder of Shot One on 11 February 2009) and Cooniemoon Pty Ltd (‘Cooniemoon’), neither of whom were parties to the 2010 proceeding.
[2]Proceeding No. S CI 2010 06317.

The dispute between the parties to the Deed of Settlement had its origin in the purchase by Rising Rocket, a company controlled by Richard Day, in its capacity as trustee of the Rising Rocket Trust,[3] of a property known as 5/2 Rockley Road, South Yarra (the ‘Rockley Road property’) in December 2004.[4] Nicholas Day had been the architect for that development, and when the Rockley Road property was purchased, he was bankrupt and was employed by Shot One as its lead architect. Under Nicholas Day’s employment contract, Shot One was obliged to provide him with suitable accommodation, and when Rising Rocket purchased the Rockley Road property, Richard Day (then the sole director and shareholder of Shot One) envisaged that it would be suitable for use as a residence for Nicholas and his family. Nicholas acquiesced in that course, and lived there for several years. Indeed, on 23 May 2012, when the Deed of Settlement was entered into, Nicholas was still residing at the Rockley Road property.
[3]Rising Rocket was incorporated by Richard Day’s accountant, Terrence Jasper, on 1 October 2002. At the same time, he established the ‘Rising Rocket Trust’: Exhibit D6, at [79]–[80].
[4]The whole of the land in Certificate of Title volume 10813 folio 025.

When the Deed of Settlement was entered into, Cooniemoon, which is now de-registered, was a company associated with Richard Day via his son, Simon.[5] The evidence was that, from April 2003 until March 2009 Richard Day, through Cooniemoon, had invoiced Shot One for management services rendered by him to Shot One during the period of Nicholas’s bankruptcy. Not all of those invoices had been paid and Cooniemoon claimed that Shot One and/or Nicholas Day owed it some $72,000, a matter which each of Shot One and Nicholas Day disputed.[6] Under the Deed of Settlement, that dispute, amongst others, was compromised and the mutual releases given by each of the parties included ‘without limitation any claims by Nicholas or Shot One as against Cooniemoon’.[7]
[5]The Deed of Settlement records that it was executed by Richard Day ‘for and on behalf of [Cooniemoon] under authority and agency approved by Simon Day.’ See TB 1:1066.
[6]See recital J to the Deed of Settlement (TB 1:1060–1068 at 1061).
[7]Deed of Settlement: TB 1:1060–1068 at 1064 [12].

Relevantly for present purposes, the Deed of Settlement also purported to compromise a (prospective) claim against each of Rising Rocket and Richard Day in relation to loan accounts recorded in the financial records of Shot One, which to that point had not been pleaded in the 2010 proceeding but had been foreshadowed just prior to the judicial mediation. The Deed of Settlement recited, by way of ‘Introduction’, that:

I.The financial records of Shot One for the financial year ending 30 June 2011 also disclose that Rising Rocket and Richard owe Shot One loans in a total which as at the date of this deed remain outstanding (the Loans), which Rising Rocket and Richard dispute.

Clause 6 of the Deed provided that:

6.The parties agree that the matters recited under the heading ‘Introduction’ are correct. The parties adopt all the introductory remarks as representations made to each other and as part of this document.

As part of the settlement reached, mutual releases were given. The mutual releases contained in clause 12 of the Deed were expressed to cover:

12.. . . all future and existing actions, causes of action, potential causes of action, suits, rights, claims, expenses, losses proceedings and demands of whatsoever nature . . . wherever and however arising, known or unknown, which relate to, directly or indirectly, or are in anyway connected with the Proceeding or the matters raised in the Introduction above, and further includes without limitation . . . any claims as against Richard in relation to Richard’s role and tenure as a director of Shot One . . .

Proceeding commenced by the liquidator of Shot One on 31 January 2014 seeking to set aside the Deed of Settlement

On 31 January 2014, Shot One and Mr Yeo (as liquidator of Shot One) commenced the present proceeding against Richard Day and Rising Rocket (the ‘2014 proceeding’), seeking to have the Deed of Settlement declared an ‘uncommercial transaction’ and an ‘unreasonable director related transaction’ under Division 2 of Part 5.7B of the Corporations Act. There have been several iterations of the pleadings, but when the trial commenced the plaintiffs were pursuing the allegations made in their Second Further Amended Statement of Claim, which were directed to obtaining the following relief in this proceeding:

As against Richard Day and Rising Rocket
· A declaration that the Deed of Settlement is an ‘uncommercial transaction’ pursuant to section 588FB of the Corporations Act, and void as against the liquidator pursuant to section 588FE(3) of the Act;

· A declaration that the Deed of Settlement is an ‘unreasonable director related transaction’ pursuant to section 588FDA of the Corporations Act, and void as against the liquidator pursuant to section 588FE(6A) of the Act; and
· An order pursuant to section 588FF of the Corporations Act declaring the Deed of Settlement to be void at the time when it was made, or alternatively declaring the Deed of Settlement to be unenforceable.
As against Richard Day
·     Payment of the total sum of $1,082,446.94 (the ‘SO-RD Amount’) being the monies that Shot One transferred to Richard Day between April 2004 and June 2007;
·     Interest on that sum pursuant to statute;
·     Damages arising as a result of certain alleged breaches of director’s duties.
As against Rising Rocket
·     A declaration that Rising Rocket holds the Rockley Road property (and the proceeds of sale of the Rockley Road property) subject to an equitable trust, charge or lien in proportion to Shot One’s contributions to the property;
·     An order that Rising Rocket execute such deeds, instructions or other documents reasonably necessary to give effect the declaration (immediately above), or that a registrar of the Court be ordered to execute those deeds, instruments or other documents if Rising Rocket fails or refuses to execute them;
·     Further and in the alternative to the declaration (immediately above), payment of the ‘SO-RR Amount’ (being the sum of $1,172,018.39 set out in Schedule B as the ‘Net contributions to the Rockley Road property’);
·     Interest on the ‘SO-RR Amount’ pursuant to statute; and
·     Damages arising as a result of the alleged knowing involvement and alleged knowing receipt.

From the commencement of the 2014 proceeding, both Richard Day and Rising Rocket disputed the plaintiffs’ case in its entirety, and so the matter proceeded to trial.

During the course of the trial the issues in dispute were narrowed significantly

The trial commenced on 2 February 2017. After Senior Counsel for the respective parties opened their cases, the matter was referred for judicial mediation before Efthim AsJ. Following the conclusion of the mediation, Senior Counsel for the plaintiffs informed the Court that they proposed to re-formulate their case by re-pleading so as to rely solely on the forgiveness of the loan accounts of Richard Day and Rising Rocket as demonstrating that the Deed of Settlement was an ‘uncommercial transaction’ within the meaning of s 588FB of the Corporations Act or an ‘unreasonable director-related transaction’ within the meaning of s 588FDA of the Corporations Act. There being no opposition to that course, the matter was stood down to permit the pleadings to be amended.

The plaintiffs then filed their Third Further Amended Statement of Claim, in which they continued to claim the same declaratory relief as before as against both Richard Day and Rising Rocket, but the scope of the relief sought against Richard Day and Rising Rocket severally was narrowed significantly, as follows:

As against Richard Day
·     Payment of the total sum of at least $730,610 (the ‘SO-RD Loan Amount’)[8] being the monies that Shot One alleges it advanced to Richard Day by way of loan between November 2001 and 23 May 2012;
·     Interest on that sum pursuant to statute.
As against Rising Rocket
·     Payment of the total sum of at least $721,500 (the ‘SO-RR Loan Amount’)[9] being the monies that Shot One alleges it advanced to Rising Rocket by way of loan between November 2001 and 23 May 2012;
·     Interest on that sum pursuant to statute.

[8]In their Third Further Amended Statement of Claim (7 February 2017), at [26], the ‘SO-RD Loan Amount’ is pleaded as being ‘at least $730,610’.

[9]In their Third Further Amended Statement of Claim (7 February 2017), at [23], the ‘SO-RR Loan Amount’ is pleaded as being ‘at least $721,500’.

The trial resumed (or perhaps more correctly, re-commenced) on 9 February 2017, with fresh opening addresses from Senior Counsel for the respective parties, based on the revised pleadings and the parties’ Second Agreed List of Principal Issues. The plaintiffs then called their witnesses, being Mr Yeo, the liquidator, and Mr Terrence John Jasper, the accountant who performed work for each of the relevant corporate entities and for Richard Day personally. Evidence was then given on behalf of the defendants by Richard Day, Mr Samuel Marash, the solicitor who acted for Shot One at the mediation in May 2012 when the Deed of Settlement was executed, and Mr Michael Grano, the external bookkeeper who prepared the management accounts for Shot One. Nicholas Day was not called to give evidence and he did not take part in the trial.[10]
[10]The position was that the plaintiffs had, at an earlier point, foreshadowed amending the present proceeding to add Nicholas Day as a party and claim relief against him. However, they settled with Nicholas Day without the need for any formal amendment, and proposed to call him to give evidence at the trial in support of their case against Rising Rocket and Richard Day. Prior to the trial commencing, a witness outline of Nicholas Day was filed on behalf of the plaintiffs and a subpoena directed to him to give evidence was issued at their request. At the conclusion of opening submissions, and prior to the commencement of the judicial mediation before Efthim AsJ, the Court noted that the plaintiffs’ case as outlined and the documents proposed to be tendered would likely expose Nicholas Day to the risk of self-incrimination. Arrangements were then made for him to receive independent legal advice. When the trial resumed following the mediation, Senior Counsel for the plaintiffs informed the Court that Nicholas Day had received independent legal advice, and they would not be calling him to give evidence.

During the trial, the respective parties tendered a host of documents including (redacted) witness statements and documents from the court book that were referred to therein, along with a vast array of accounting documents extracted from the files of Terrence Jasper & Associates that were subpoenaed at trial. An agreed final joint tender list was prepared and submitted by the parties at the commencement of closing submissions, to which certain additional documents were later added by agreement.

By the time closing written submissions were filed, the issues in dispute between the parties had narrowed somewhat. In their written submissions, the plaintiffs informed the Court (for the first time) that they were no longer pursuing their claim that the Deed of Settlement was an ‘unreasonable director-related transaction’ of Shot One. Accordingly, it is not necessary for the Court to determine whether the Deed of Settlement was a ‘conveyance, transfer or other disposition’ of property to Richard Day for the purposes of s 588FDA of the Corporations Act (Issue 6) or whether the entry into the Deed of Settlement was an unreasonable director-related transaction of Shot One (Issue 7).

During the course of oral closing submissions, the issues in dispute were narrowed even further. At the conclusion of the defendants’ oral closing submissions, Senior Counsel for the plaintiffs informed the Court that they were no longer pursuing the claim made against Richard Day personally. Accordingly, it is no longer necessary for the Court to decide Issues 1 or 2.[11] But, as explained below, the plaintiffs’ claims against Richard Day inevitably form part of the circumstances giving rise to Shot One’s entry into the Deed of Settlement, and therefore have some contextual relevance to the issues that remain in dispute between the parties.
[11]Issues 1 and 2 were framed as follows:
Issue 1: In respect of the claim of Shot One against Ric that he was indebted to Shot One as at 23 May 2012 by reason of having had a loan debt of $730,610 as at 30 June 2008, what was the value of that claim to Shot One as at 23 May 2012, taking into account:
(1)legal and procedural hurdles which existed in respect of that claim;
(2)the defences available to Ric in respect of that claim;
(3)the likely legal costs of Shot One of pursuing that claim;
(4)the likelihood of successful recovery or money or property in respect of that claim, if judgment was obtained against Ric.
Issue 2: In particular regarding the claim of Shot One against Ric:
(1)What was (is) the evidentiary value of the financial accounts of Shot One for the financial year ended 30 June 2008, the general ledger of Shot One for the financial year ended 30 June 2008, and the ledger entry report in respect of Shot One for the financial year ended 30 June 2008, in establishing the existence of a loan account between Shot One and Ric as at 23 May 2012;
(2)Was Shot One statute-barred in pursuing its claim against Ric?

The final form of the case pursued by the plaintiffs

Against that background, it will be apparent that the final form of the case now pursued by the plaintiffs is one that relates solely to alleged indebtedness of Rising Rocket to Shot One. The plaintiffs contend that when the Deed of Settlement was executed on 23 May 2012, Shot One’s claim in debt against Rising Rocket had a ‘value’ of at least $433,961,[12] and that by entering into the Deed of Settlement, Shot One released Rising Rocket from that debt claim, and in so doing, abandoned a potentially valuable cause of action but obtained no, or merely negligible, benefits for itself. In those circumstances, and with Shot One having now been placed in liquidation, the plaintiffs submit that the Court should find that the Deed of Settlement was an ‘uncommercial transaction’ of Shot One, and order that the Deed of Settlement be set aside pursuant to s 588FB of the Corporations Act.
[12]See plaintiffs’ closing submissions, at [6]. This figure of $433,961 is arrived at by taking the sum of $751,961 (being the balance of the loan on 23 May 2012 when the Deed of Settlement was entered into) as set out in the final MYOB accounts (see plaintiffs’ closing submissions at [68]) and subtracting the sum of $318,000 being the balance as shown in the MYOB accounts on 23 May 2006 (i.e. 6 years prior).

If the Deed of Settlement is set aside, the plaintiffs then seek to have the Court determine the quantum of the indebtedness of Rising Rocket to Shot One that is recoverable in the 2014 proceeding. The plaintiffs acknowledge that ‘there may be a legitimate challenge to the quantum of the debt’[13], because the quantum of the loan account between Shot One and Rising Rocket was adjusted from time to time, but they assert that there nevertheless remained throughout ‘a core irreducible debt’ reflected by the Rising Rocket loan account and submit that, at the very least, judgment may be entered for the lowest proven amount, the plaintiffs having satisfied their burden of proof. The plaintiffs contend they have established the minimum amount of the relevant ‘irreducible’ indebtedness of Rising Rocket for the period from 1 February 2008 (i.e., six years prior to the date of issue of the 2014 proceeding) as being $201,961.[14] The plaintiffs also raise issues as to the correct accounting treatment for certain journal entry adjustments made in Shot One’s books and records concerning the Rising Rocket loan account, and their impact on limitations issues raised between the parties.
[13]See plaintiffs’ closing submissions, at [16] (emphasis in original).
[14]This claim takes, as a starting point, essentially the same approach as that adopted for the evaluative phase in that it takes the balance of the Rising Rocket loan as set out in the MYOB accounts as at 23 May 2012 of $751,961 (see plaintiffs’ closing submissions at [103]–[106]) and subtracting the balance as shown in the MYOB accounts as at 1 February 2008 (i.e. 6 years prior) of $550,000, to arrive at a base value of $201,961 (which includes the adjustments made by the amounts recorded in the Ledger Entries Report for the year ended 30 June 2009 of $325,508.43 (see TB 3:3841) (referred to as ‘the Journal Entries’)). However, the plaintiffs then seek to re-adjust the Journal Entries by reference to putative rental income to arrive at a sum of $395,380, alternatively a sum of $318,375 (see plaintiffs’ closing submissions at [110]–[118] and Transcript 06/03/17, at 728–729 (Mr Glick QC).

The defendants dispute the debt claim brought against Rising Rocket, contending that the evidence the plaintiffs rely upon in support of that claim is weak, and that there is strong evidence to the contrary from which the Court might infer that no loan amount was in fact owed by Rising Rocket as at 23 May 2012 when the Deed of Settlement. Further, the defendants submit that a substantial portion of the payments made by Shot One to Rising Rocket between February 2009 (when Richard Day resigned as a director) and May 2012 were demonstrably for rent, effectively in exchange for the continued occupation by Nicholas Day of the Rockley Road property owned by Rising Rocket, and made in circumstances where Shot One had agreed to provide suitable accommodation for him. The defendants also assert that any claim brought by Shot One will face limitations issues because when the Deed of Settlement was entered into on 23 May 2012, no claims based on the existence of the alleged loan to Rising Rocket had been pleaded by Shot One in the 2010 proceeding. Therefore, the defendants say Shot One was statute-barred from making any loan account claim that arose prior to at least 22 November 2004 (i.e., six years before the 2010 proceeding was commenced), but alternatively 23 May 2006 (i.e., six years before the Deed of Settlement was entered into). The defendants submit that when the Court has regard to all relevant matters, it cannot be said that a reasonable person standing in Shot One’s position on 23 May 2012 would not have entered into the Deed of Settlement. Further, they submit that even if the Court does set aside the Deed of Settlement the plaintiffs may not recover in respect of any loan claim which accrued to Shot One prior to 1 February 2008 (which is six years prior to commencement of the 2014 proceeding).

At the request of the Court, the parties prepared a flow chart titled ‘Analysis of the Plaintiffs’ Debt Claims’, which they provided jointly to the Court on 10 February 2017. The flow chart shows in a helpful way the logic to be applied to the anterior evaluation of the commercial merits of the Deed of Settlement (referred to by the parties as ‘the evaluative phase’) and, if that transaction be set aside, to the subsequent determination of the plaintiffs’ debt claims (referred to by the parties as ‘the determinative phase’). That document remains useful notwithstanding that several limbs of the plaintiffs’ claim are no longer being pursued.

Following the conclusion of the oral submissions, on 9 March 2017 the parties also provided an amended version of the Second Agreed List of Principal Issues, redacted to show which of the 12 issues listed remain alive for determination by the Court.

Factual background

Nicholas Day is an established and storied architect. From the late 1970s or thereabouts he conducted an architecture business, under the business name Nicholas Day Architects, catering for clients in the high-end property markets, particularly in South Yarra and Toorak.[15]
[15]Richard Day was unsure what name Nicholas Day used for his architecture practice throughout the whole of that time: Transcript 13/02/17, R Day XIC, at 468–469.

In early 2001, Richard Day, Nicholas’s older brother, approached him to discuss setting up a company to develop properties, the idea being that Nicholas would design the dwellings and Richard would manage the company and project manage the developments, with the profits being shared equally. Nicholas expressed interest in the idea, and so Richard pursued it, and on 5 March 2001, Shot One Pty Ltd was incorporated. However, only six months later, Nicholas Day was declared bankrupt and Mr Peter Goodin of Brooke Bird was appointed as his trustee in bankruptcy.[16] Once he was made bankrupt, Nicholas Day resigned as a director and shareholder of Shot One.
[16]The bankruptcy of Nicholas Day was terminated on 21 December 2006. See TB 1:578–579.

Between 5 March 2001 and 5 September 2001 (when Nicholas became bankrupt), Shot One did not purchase any properties or carry on any business. Richard Day first learned that Nicholas was in financial trouble in August or September 2001, when Nicholas told him he was going to be made bankrupt. Hitherto, Richard was unaware that Nicholas was under any financial stress.

At or around the time when he became bankrupt, Nicholas asked Richard to purchase Nicholas Day Architects from his trustee in bankruptcy. Richard Day thought it was an attractive option. He said:

By purchasing Nicholas Day Architects, Shot One would acquire a successful business. As director and shareholder of Shot One, I would benefit from that business, and would be able to derive an income stream. I saw the opportunity to purchase Nicholas Day Architects, and to ensure that it was run properly, as a good business opportunity. I thought it was a good idea for Nicholas too, because he would be able to continue to work within the business which carried his name with it, during his bankruptcy.[17]

[17]Exhibit D6, at [57].

Shortly after Nicholas was made bankrupt, Richard Day made arrangements with Nicholas’s trustee in bankruptcy for Shot One to purchase the business name Nicholas Day Architects, which he succeeded in doing for the price of $16,000, fixed by the trustee.[18] Thereafter, during the period of his bankruptcy, Shot One employed Nicholas Day as its lead architect, along with others from the architectural practice, and Shot One effectively continued the architectural practice, with Richard Day providing management services. Richard said he ensured that Shot One maintained the business name ‘Nicholas Day Architects’ because the success of the architectural practice ‘depended on the continued goodwill created by Nicholas’ name.’[19] Shot One also engaged the services of Mr Michael Grano, a bookkeeper, to attend to its bookkeeping and prepare its general ledger. Mr Grano was introduced to Richard Day by Mr Terrence Jasper, his tax accountant, but Richard said that Mr Grano contracted directly with Shot One.
[18]Richard Day said he made payment of the $16,000 from his own funds: Exhibit D6, at [65].
[19]Exhibit D6, at [66].

One of the steps undertaken by Richard Day early in Shot One’s ownership of the architectural practice was to draft an employment agreement between Nicholas and Shot One. Richard said that his goal was to ensure that Nicholas was satisfied with its terms so that he would stay and work with Nicholas Day Architects. Richard explained that this ‘was crucial to ensure the success of the business’ because without Nicholas there was probably no business.[20] However, given Nicholas’s ‘expensive lifestyle’, Richard said that he also ‘did not want Shot One to pay Nicholas too much’ and because ‘Nicholas was used to living an expensive lifestyle’ it made sense to him ‘to agree to pay Nicholas’ rental expenses, and other expenses such as school fees directly, rather than pay him income in cash.’[21] Accordingly, under this employment arrangement, Shot One agreed to pay Nicholas Day a relatively modest salary of $5,000 per month, and pay his business expenditure and certain living and other expenses, as well as providing him with suitable accommodation and a motor vehicle. Richard gave evidence that the employment agreement was signed by Nicholas, but no signed version of the agreement was available for production at the trial. An earlier draft was produced and Richard was cross-examined about the differences between that version and the executed agreement. That draft provided that the agreement was to be effective from October 2001. I am satisfied that at all relevant times an employment arrangement was in place between Shot One and Nicholas Day, along the lines of the evidence given by Richard Day, and to the effect alleged by the defendants.
[20]Exhibit D6, at [60].
[21]Exhibit D6, at [60].

When Nicholas first became an employee of Shot One, he was living in rented accommodation at 123 Domain Road, South Yarra. From about December 2001 until about April 2003, Shot One paid the rent for 123 Domain Road which was about $4,117 per month. In about July 2003, Richard negotiated a decrease in the rent and so from July 2003 the rent was $3,467 per month. In about August 2004, Nicholas moved to one of the townhouses he had designed, at 5/2 Rockley Road, South Yarra, which Richard Day had arranged for Rising Rocket to purchase, in its capacity as trustee of the Rising Rocket Trust. Richard Day said that his purpose in doing so was for Rising Rocket to acquire a rental property which it could offer to Nicholas as rental accommodation, and thereafter he could carry on the property development business that he had originally wanted Shot One to run. Nicholas agreed that the townhouse would be suitable for him and so in about July 2004, Rising Rocket procured and arranged mortgage finance from the Commonwealth Bank and then executed a contract to purchase the Rockley Road property.

In advance of the completion of the purchase of the Rockley Road property, Rising Rocket entered into a licence agreement with the vendor so that Nicholas could move in and occupy the property prior to settlement at a rental of $1,100 per week. On 1 August 2004 or thereabouts, Rising Rocket entered into a residential tenancy agreement with Nicholas Day. Under that arrangement, Rising Rocket agreed to lease the Rockley Road property to Nicholas for a rental of $3,683.33 per month. Richard Day said the rental sum was calculated in an amount sufficient to meet the mortgage repayments that Rising Rocket was required to pay to the Commonwealth Bank. Notwithstanding the entry into the residential tenancy agreement, it remained the case that Shot One was required to pay the rent, as it had when Nicholas occupied 123 Domain Road, but Richard Day said that he did not think about causing the rent to be paid regularly because he controlled both the landlord (Rising Rocket) and the entity required to pay the rent (Shot One).

Richard Day gave evidence that when Michael Grano commenced providing bookkeeping services to Shot One there was already a loan account in Shot One’s MYOB[22] ledgers with the description ‘Ric Day Loan Account’. He said:

[131]… In about early 2002, Michael Grano and I discussed how to record payments that Shot One made for Nicholas’ benefit. There was a lot of miscellaneous purchases that Shot One and Nicholas using the Shot One credit cards made for Nicholas’ benefit, other than the amounts that were invoiced through Cooniemoon. Michael Grano told me that one way of recording non-business expenses was a director’s loan account. I told Michael Grano to record Nicholas’ miscellaneous expenses in the Ric Day Loan Account and I believe that Michael Grano did so until about early 2009.[23]

[22]Mr Yeo explained that the expression ‘MYOB’, or MYOB records or accounts, refers to the computer program through which the initial transactions are entered, and then it is used later for the creation of the company’s financial statements.

[23]Exhibit D6, at [131].

On 27 July 2004, a loan account for Rising Rocket was created in Shot One’s MYOB ledgers. Richard Day said this loan account was established after discussion with Michael Grano and at his (Mr Grano’s) suggestion ‘to record the payments made to Rising Rocket or on Rising Rocket’s behalf.’[24] But, Richard Day added:

… in doing so [he] did not intend the making of payments by Shot One related to Rockley Road, and in payment of the costs of acquisition or paying down the CBA mortgage loan to be a loan to Rising Rocket. The Rising Rocket Loan Account was just a method, at a bookkeeping level, to record payments that were made by Shot One to Rising Rocket.[25]

[24]Exhibit D6, at [114].

[25]Exhibit D6, at [114] (emphasis added).

From July 2004, a number of payments were made by Shot One to, or for the benefit of, Rising Rocket. The evidence given on behalf of the plaintiffs at trial suggested that not all payments so made to or for Rising Rocket were recorded in the loan account. Mr Yeo said he had identified a number of additional payments made between Shot One and Rising Rocket that he contended were made by way of loan, albeit they were not recorded in the loan account, but it was not put to Mr Grano, the bookkeeper, that he had wrongly characterised payments and should have recorded these additional sums as loans. And Mr Jasper gave evidence to the effect that he believed all relevant payments had been captured in the accounts of Shot One.

Richard Day gave evidence that the payments made by Shot One to Rising Rocket for or in relation to the purchase of the Rockley Road property were not provided by way of a loan. In his witness statement, he said:

[115]… At the time that I authorised Shot One to make those payments, I had no intention that Rising Rocket would be required to pay them back. As at July 2004, I had owned and operated Shot One for nearly three years without payment to me of director’s fees or a wage. The Nicholas Day Architects business was obviously profitable, as the MYOB records prepared by Michael Grano showed me. As sole director and shareholder of Shot One, I was comfortable with the idea that Shot One could make these payments to Rising Rocket without ever needing the money back. I intended to tell Terry Jasper these matters when Terry prepared Shot One’s tax returns for the 2005 financial year.
[116]From time to time after June 2005, I caused Shot One to make payments to Rising Rocket’s loan account with the Commonwealth Bank. I did this to reduce Rising Rocket’s loan account from the Commonwealth Bank, and to reduce the amount of interest Rising Rocket incurred on that loan. As the sole director and sole shareholder of Shot One I authorised Shot One to make these payments. At the time that I authorised Shot One to make these payments, as with the payments from Shot One which were used to pay for the acquisition of Rockley Road, I had no intention that Rising Rocket would be required to pay them back to Shot One. I considered that the Nicholas Day Architects business and Shot One continued to be easily profitable throughout 2005 to February 2009, when I transferred my shares to Nicholas and resigned as a director, even taking into account the payments made to Rising Rocket as being non-recoverable by Shot One. Again, I intended to tell Terry Jasper these matters when Terry prepared Shot One’s tax returns for the 2005 financial year.[26]

[26]Exhibit D6, at [115]–[116] (emphasis added).

Throughout the period when he was a director of Shot One, Richard Day performed a management role with respect to the architectural business. In that role he kept the practice functioning as a business and attended to making payments on behalf of Shot One for staff wages and associated expenses such as motor vehicles and the like, including payments made by Shot One for Nicholas’s family.

Richard Day also noted that between August 2008 and 13 February 2009, he caused Rising Rocket to make a number of transfers of money back to Shot One. He does not now recall the reason why each of those transfers were made but he observed that, as Shot One did not have an overdraft facility with the Commonwealth Bank, transfers were often necessary to ensure that sufficient funds were available to pay the staff wages and Mastercard bills on time. Richard Day said that from late 2001 until March 2009, he paid the school fees for Nicholas’s two sons, and their dental fees. Initially Richard Day did not charge Shot One for his management services but from April 2003 until March 2009 he rendered invoices for his management services via Cooniemoon. Until February 2006, he calculated his management services in an amount that was effectively equal to the monies that Shot One and he were paying for the benefit of Nicholas and his two sons, by way of school and dental fees, and rent and body corporate fees. In his view, as he was actively managing the business, he was entitled to charge a fee for his services, calculated on a basis he saw fit. He had built the business and it was running profitably.

Richard Day said that from the time when Shot One bought the Nicholas Day Architects business, until 2009 when he resigned as the sole director, ‘Nicholas had no involvement at all with the financial side of the Shot One business’ save for fee negotiations with clients.[27] It was not until late 2008, when Nicholas told Richard that he would like to take over the business, that they had any discussion about such financial matters.
[27]Exhibit D6, at [69].

Nicholas Day was discharged from bankruptcy on 21 December 2006. As a condition of discharge, the trustee in bankruptcy required that Nicholas, as bankrupt, and Richard, as guarantor, sign a deed of settlement settling the debt owed for missed income contribution payments at $155,000. It appears that this sum was paid (or substantially paid) to the trustee in bankruptcy by sums withdrawn from Shot One’s bank account.

Richard Day gave evidence that from 2006, he was conscious that Shot One had not completed its income tax returns for the year ended 30 June 2004, even though it had paid and was continuing to pay on time its obligations to the Australian Tax Office in respect of PAYG withholding tax and GST, as disclosed in the Business Activity Statements lodged by Shot One. He said that he ‘raised this from time to time with Terry Jasper’, his tax accountant, but Mr Jasper did not express concern at the fact that Shot One’s income tax returns had not been lodged.[28]
[28]Exhibit D6, at [165].

On 11 February 2009, Richard Day resigned as the sole director and shareholder of Shot One and Nicholas Day became the sole director and shareholder of Shot One with effect from that day. These steps were taken consensually, with the share being transferred for only nominal consideration. Richard Day said that he considered that ‘the natural progression of Shot One and Nicholas Day Architects was for the company to pass into Nicholas’ control and ownership’ – after all, he was the face of Nicholas Day Architects and without him neither the business nor the company would be financially viable.[29] Richard Day ceased providing ‘management services’ to Shot One from that point. Thereafter, over a period of time, the brothers fell out with one another and their relationship deteriorated.
[29]Exhibit D6, at [166].

After Richard Day resigned, Nicholas Day continued to occupy the Rockley Road property and Shot One made rental payments to Rising Rocket, although Richard said that he (on behalf of Rising Rocket) had to chase Nicholas for these payments. On 28 August 2009, Nicholas Day lodged a caveat over the Rockley Road property, claiming an estate in fee simple pursuant to a constructive or resulting trust in his favour.

On or about 28 May 2010, Richard Day sent an email to Mr Jasper asking whether Shot One had any outstanding tax liability for the period up to his resignation as a director. He followed up that email with a telephone call, but was informed by Mr Jasper to the effect that he could not speak to him about Shot One’s tax affairs because Richard was no longer a director of Shot One.

On 10 June 2010, Shot One lodged a caveat over the Rockley Road property claiming an interest pursuant to a constructive trust or a resulting trust. Shortly after Richard Day became aware of this, he served Nicholas with a notice to vacate the Rockley Road property. Nicholas responded by lodging an application with the Victorian Civil and Administrative Tribunal (‘VCAT’) to set aside the notice to vacate.

Shot One commenced the 2010 proceedingagainst Richard Day and Rising Rocket

In the 2010 proceeding, Shot One claimed that in circumstances where the Rockley Road property had been purchased in the name of Rising Rocket, but all purchase monies and related expenses and outgoings such as land tax and council rates had been paid by Shot One, Richard Day had breached his fiduciary duty to Shot One and improperly used his position as a director to gain an advantage for himself or third parties to the detriment of Shot One. Shot One claimed that Rising Rocket effectively held the Rockley Road property on trust for Shot One and sought, amongst other things, a declaration that the Rockley Road property (registered in the name of Rising Rocket) was held on trust for Shot One by virtue of payments made by it to and for the benefit of Rising Rocket which were traceable to the Rockley Road property.

It appears that at some point early in 2012, prior to the judicial mediation taking place before Randall AsJ, Shot One was also asserting (but had not pleaded) that its books and records showed loans had been made to each of Richard Day and Rising Rocket that remained outstanding, a matter which each of them disputed. In addition, Richard Day and Rising Rocket also asserted that they had good grounds for bringing counterclaims against Shot One and/or Nicholas Day in the 2010 proceeding. Similarly, Cooniemoon claimed that Shot One and/or Nicholas Day owed it some $72,000, a matter which each of them disputed. At or about the same time, Rising Rocket had also instructed its solicitor to make an application to VCAT seeking possession of the Rockley Road property pursuant to a Notice to Vacate served on Nicholas Day dated 27 February 2012.

A directions hearing in the 2010 proceeding was scheduled for 27 February 2012. In advance of the directions hearing, Shot One’s solicitor, Mr Samuel Marash of Kenna Teasdale, wrote and informed Nicholas Day (as director) that they had not received any response from the solicitors acting for Rising Rocket and Richard Day in relation to arranging a mediation of the matter, and would need to inform the Court and seek directions accordingly. In his letter, Mr Marash noted that ‘we cannot force Rising Rocket or Richard Day to participate in a mediation’ and that if one cannot be conducted, ‘the only recourse for Shot One … is to pursue this matter at trial.’[30] Mr Marash continued, by reiterating that Kenna Teasdale ‘have advised Shot One that there are significant problems with its case against Rising Rocket and Richard Day’ and he then canvassed the ‘Options available to Shot One’ and gave an estimate of the likely quantum of the legal costs that would be incurred from that point up to and including a trial as being $80,000. He added:

You could expect the defendant’s costs to be roughly equal to that of Shot One. Accordingly, if Shot One is completely unsuccessful in its claim it may be out of pocket up to $200,000.[31]

[30]TB 1:919–922, at 919, Letter from Kenna Teasdale to Shot One dated 17 February 2012.

[31]TB 1:919–922, at 921.

Against this background, at the directions hearing held on 27 February 2012, Randall AsJ ordered that a judicial mediation of the 2010 proceeding take place.

Judicial mediation of the 2010 proceeding and entry into the Deed of Settlement

The mediation took place on 23 May 2012 before Randall AsJ. At the mediation, Shot One was present by its sole director and shareholder, Nicholas Day, along with its legal representatives, Mr Justin Tomlinson, barrister, instructed by Mr Marash of Kenna Teasdale Lawyers. Richard Day was present at the mediation both in his own right and also on behalf of Rising Rocket and Cooniemoon (which at that time was a company associated with his son, but is now de-registered) along with Mr Michael Lhuede of Piper Alderman as their legal representative.

In advance of the mediation, Nicholas Day had consulted with Mr Jasper and Shot One’s legal representatives in relation to the outstanding loan accounts recorded in Shot One’s books in the name of Rising Rocket and Richard Day respectively. Mr Marash gave evidence[32] to the effect that prior to the mediation, he and Nicholas Day had discussions with Mr Tomlinson about the possibility of making an amendment to Shot One’s statement of claim, and consideration was being given to pleading the issue of the outstanding loan accounts if the matter did not resolve at mediation. He said some documents that had only recently been provided by way of discovery showed that the financial records of Shot One recorded loan accounts in the name of each of Rising Rocket and Richard Day, and possibly also Cooniemoon. Mr Marash said that having only recently discovered the existence of these loan accounts, Shot One’s objective or ‘mediation strategy’ for trying to resolve the whole matter was ‘that there would be effectively an exchange or trade-off of the loan accounts in the name of Rising Rocket, Ric Day and perhaps even Cooniemoon for the [Rockley Road] property that was sought to be recovered’.[33] He explained that the ‘trade-off’ would not involve a ‘payment moving from the company to Rising Rocket’ but rather the loan accounts would effectively be deleted, ‘[a]lmost like a purchase, effectively’ as ‘consideration for the transfer’ of the Rockley Road property to Shot One.[34] But as noted earlier, these ‘loan account’ claims were not articulated in any pleading or correspondence passing between the parties.
[32]Mr Marash prepared a witness statement on behalf of the plaintiffs, but with the narrowing of the plaintiffs’ case he was not called by them. The defendants called Mr Marash as part of their case, however, and a redacted version of his witness statement was tendered (Exhibit D8). He gave some additional evidence viva voce and was then cross-examined by Mr Glick QC.
[33]Transcript 13/02/17, Marash XXN, at 550.
[34]Transcript 13/02/17, Marash XXN, at 550–551.

On the evening of 22 May 2012, following a conference with Mr Tomlinson and Nicholas Day in preparation for the mediation, Mr Marash sent an email to Nicholas Day setting out what he understood to be the basis on which Shot One was prepared to resolve the dispute, as discussed between them earlier that day. Relevantly the email stated:

Further to our conference with Justin Tomlinson earlier today, I confirm that the following was discussed to achieve a resolution of the dispute:
1.That Shot One would “purchase” the Rockley Road property from Rising Rocket for the sum of $1,800,000;
2.That you would do so by refinancing the mortgage over the Rockley Road property in the sum of approximately $1,000,000;
3.That the remaining sum of approximately $800,000 would be paid to Rising Rocket by forgiving the loan accounts owing by Rising Rocket and Richard Day (you would therefore not actually have to pay the $800,000 as it has already been paid and is represented in the loan accounts);
4.That you will pay any CGT that Rising Rocket is assessed to pay arising from the sale of the property to Shot One.
5.That you would pay Cooniemoon the sum of $57,755 ($77,755, less $20,000 already paid as set out in the agreement drawn by Mr Pointer). We have received documents from Terry Jasper that indicate Shot One owes Cooniemoon the sum of $71,071. This is approximately $6,000 less than what the agreement states you would pay and does not seem to take into account the $20,000 that you say has already been paid to Cooniemoon at, or around the time the agreement was prepared. Can you clarify with Mr Jasper the sum Shot One owes Cooniemoon and confirm with this office what you are prepared to pay to Cooniemoon to settle the debt.

Would you please provide written instructions confirming that you would be prepared to settle the dispute on the abovementioned basis prior to the mediation tomorrow. Also, we confirm that we have asked you to bring the Shot One bank account statements that evidence Shot One’s continued payment of the Rising Rocket mortgage and should show the $20,000 payment.[35]

[35]TB 1:993.

On 23 May 2012, the mediation commenced with the legal representatives making an opening statement on behalf of the respective parties. Mr Tomlinson went first, making an opening statement on behalf of Shot One. Richard Day gave evidence that in Mr Tomlinson’s opening statement on behalf of Shot One he said words to the effect that ‘Shot One had paid for Rockley Road, and therefore, it owned Rockley Road.’[36]
[36]Exhibit D6, at [252].

Mr Lhuede then made an opening statement on behalf of Richard Day and Rising Rocket. Mr Marash gave evidence that Mr Lhuede said words to the effect that:[37]

·    Richard Day and Rising Rocket disputed that they had any loan accounts with Shot One. They were aware that the financial statements of Shot One had been reconstructed since Richard Day had left the company in 2009, and contended that the reconstructed financial statements were not a true representation of the loans that were made. Further, Mr Lhuede noted that there were no written loan agreements in existence.
·    The asserted balance of the loan accounts is disputed by Richard Day and Rising Rocket. Mr Lhuede noted that the balance of the loan accounts seems to change depending on which version of the financial documents is used and he observed that this would present significant problems if this matter proceeded to a Court hearing.
·    The constructive trust argument being put forward by Shot One, namely that the Rockley Road property was being held by Rising Rocket on trust for Shot One, could not be maintained. But if the constructive trust argument were pursued, potential legal ramifications may flow for Nicholas Day. Mr Lhuede added that at the time the agreement that is said to give rise to the constructive trust was made, the sole director of Shot One and the sole director of Rising Rocket was Richard Day, and as such he is the only person who could give relevant evidence about any agreement that was made. Nicholas Day could not give any evidence in relation to the creation of a constructive trust.

[37]See TB 1:1073–1076; Transcript 13/02/17, Marash XIC, at 544–547.

At the conclusion of the opening addresses, the mediating parties separated into their respective ‘break-out’ rooms. Mr Marash said that when they came into their room, ‘Nicholas Day basically said he doesn't want to proceed with his claim’[38] but Mr Marash acknowledged that Nicholas Day did not tell him why he did not wish to proceed. Mr Marash said that in the break-out room they then went on to discuss the loan accounts, as follows:

… Following that, the loan accounts were discussed and as part of the offers that were made the effect of that was going to be that Shot One would release the loan accounts and for that reason we had only recently received information on those loan accounts the night before the mediation and I wanted Nicholas to talk with his accountant about it and I asked Nicholas to do that on a few occasions and he indicated that he didn't want to do so. In fact, he refused.
[MR EVANS:] There was a discussion with Mr Jasper between yourself, Mr Tomlinson, Nicholas Day and Mr Jasper, wasn't there, at the mediation?

---Yes, there was.[39]

[38]Transcript 13/02/17, Marash XIC, at 545.

[39]Transcript 13/02/17, Marash XIC, at 545.

Mr Marash said that the observation made by Mr Lhuede during the opening session, to the effect that if the constructive trust argument was pursued potential legal ramifications may flow for Nicholas Day, was a matter that he believes he had discussed with Nicholas Day before the mediation took place. It appears that this reference to ‘potential legal ramifications’ was a reference to the fact that if Shot One was successful in obtaining relief by way of a constructive trust over the Rockley Road property, Nicholas’s trustee in bankruptcy would likely re-assess his position in relation to the settlement reached to discharge Nicholas from bankruptcy in 2006 and then seek to claw-back the Rockley Road property from Shot One. It might also give rise to the question of whether, despite the evidence given by Nicholas Day during his bankruptcy examination in the Federal Court of Australia, there was an undisclosed ‘warehousing arrangement’ on foot.

Mr Marash was aware that the amounts recorded in the loan accounts differed depending on which version of the accounts was consulted, and that the balance of each of the loan accounts was disputed by the defendants. He said that he strongly encouraged Nicholas Day to speak with Mr Jasper, but Mr Marash said he was unsuccessful in getting him to do so. In his evidence in chief Mr Marash explained the matter as follows:

[MR EVANS:] Do you recall whether or not you had a discussion with Nicholas Day and Mr Tomlinson regarding those matters prior to the deed of settlement being executed?---I don't recall specifically discussing the matter, but I do recall saying to him, because of the matters raised by Mr Lhuede during the opening session, that I wanted him to discuss these matters and the effect of releasing the loan accounts with his accountant and his legal advisers.[40]

[40]Transcript 13/02/17, Marash XIC, at 546.

Following the break-out session, an offer was made by the defendants which was essentially that mutual releases be provided in respect of all loan accounts said to be owing, that Nicholas Day be permitted to continue to reside in the Rockley Road property for 12 months, and that each party walk away and bear their own costs. Shot One responded to that offer by suggesting some relatively minor modifications, and the parties then finalised their agreement in a Deed of Settlement dated 23 May 2012. Prior to Nicholas Day signing the Deed of Settlement, Mr Marash again told him he should speak to Mr Jasper ‘to discuss certain issues such as any tax implications arising on the release of loan accounts by [Shot One].’[41] But Nicholas said that ‘he doesn’t need to’ and that he was prepared to sign without speaking to Mr Jasper.
[41]Exhibit D8, at [68].

Following the mediation and execution of the Deed of Settlement, Mr Marash sent a letter to Shot One on or about 28 May 2012 reporting on what had taken place at the mediation, including the sequence of offers and counter-offers that were made by the respective parties, and summarising the agreement that was reached to settle the matter as follows:

1.A Residential Tenancy Lease will be entered into between Rising Rocket and Nicholas Day for a fixed term of fifteen months; $7,500 to be paid as rent per calendar month;
2.That two months bond be paid by 1 June 2012;
3.That Shot One Pty Ltd forthwith remove the caveat encumbering the Rockley Road property;
4.That Richard Day agreed he shall not issue any notice under Section 257, 258, 259 of the Residential Tenancy Act in respect of obtaining possession of the Rockley Road property prior to the expiry of the lease;
5.That all parties provide mutual releases in relation to the loan accounts, including Cooniemoon Pty Ltd and Richard Day who are not parties to the proceedings;
6.That the matter be otherwise dismissed and each party bear their own costs of and in respect of the proceeding;
7.That Rising Rocket Pty Ltd remain as the registered proprietor of the Rockley Road property; and
8.Shot One agreed to release Richard Day for any breach of Directors duties whilst he was acting as Director of Shot One Pty Ltd.[42]

[42]TB 1:1073–1076, at 1075–1076.

In his letter, Mr Marash also set out what he understood to be the reasons Shot One made its counter-offer to settle the matter, stating:

Shot One made the offer as set out above for the following reasons:
1.No evidence of any certainty had been provided which could support the value asserted by Shot One in respect of the loan accounts owing by Rising Rocket Pty Ltd and Richard Day;
2.The instructions in respect of the loan accounts seemed to change regularly and no written loan agreements are in existence.
3.The financial statements of Shot One appear to have been reconstructed since Richard Day signed off on those financial statements in or around 2009;[43]
4.The balance of the loan accounts is disputed by the Defendants and the balance of the loan accounts seems to change depending on which version of the financial documents are used. This would present significant problems if this matter proceeded to a Court hearing.

Furthermore, even if Shot One was successful in obtaining any judgment in its favour, the Trustee in Bankruptcy of Nicholas Day would almost certainly re-assess its position in relation to the settlement reached to discharge Nicholas Day from bankruptcy in 2006. It is likely the Trustee would seek to claw back the Rockley Road property from Shot One.
During the mediation Mr Tomlinson and Mr Marash suggested that you call Shot One’s accountant, Terry Jasper, to further discuss the effect of settling on the basis proposed by Shot One. However, Mr [Nicholas] Day declined to make that call as he did not consider it necessary.[44]

[43]The defendants disputed that Richard Day had relevantly ‘signed off’ on those financial statements in the relevant sense. In closing oral submissions, the plaintiffs accepted that Richard Day was not given the financial statements of Shot One and so could not have ‘signed off’ on them: see Transcript 06/03/17, at 715–716 (Mr Glick QC)

[44]TB 1:1073, at 1074–1075.

Mr Marash acknowledged that of the four matters he had listed in his letter, the first matter concerning the loan accounts was really the only one that was discussed at the mediation, it having been expressly mentioned by Mr Lhuede. The second, third and fourth listed matters were not ones that he recalled having been specifically discussed at the mediation, but he said the substance of them were matters that were mentioned by Mr Lhuede in making the defendants’ opening statement. Under cross-examination, Mr Marash was taken back to these four reasons, and it was put to him that the four points were simply surmise on his behalf, as follows:

[MR GLICK:] You believe, you surmise, if you like, that those four points each having been made by Mr Lhuede were the reason for Mr Day not wanting to go ahead?---Well, yes, in hindsight it probably should have said it was a reason because Nicholas didn't specifically say why he wasn't proceeding. It was probably trying to find or give some understanding as to why he might have given up his claim.
Completely understandable. So what you are really doing in point number 1, 2, 3 and 4 is saying to your client, Shot One, "We went to the mediation and I would understand that these are the four reasons," but they were not put by Mr [Nicholas] Day, but you understand from the context of what occurred that they are the four reasons?---Yes.[45]

[45]Transcript 13/02/17, Marash XXN, at 555–556.

In the final passages of his post-mediation letter to Shot One, Mr Marash also commented upon the outcome reached under the Deed of Settlement, describing it as being a ‘sensible one’. He stated:

Whilst the settlement of this matter did not provide the outcome that Shot One was initially hoping to achieve, we consider that the settlement reached is a sensible one given the problems with Shot One’s case and the potential consequences that may have flowed in the event the matter proceeded past Mediation. The costs involved in pursuing Shot One’s case would be significant and, as Mr Day noted, the proceedings distract him from the business of Shot One. In addition, it was highly unlikely that Shot One would have been successful in obtaining judgment against the Defendants due to the documents that were produced by the Defendants in the course of discovery, those documents being the Lease Agreement and the Employment Agreement. We confirm the proceedings were initially instituted in order to allow Shot One to negotiate a settlement with Rising Rocket and Richard Day, and to delay the removal of the caveat over the Rockley Road property such that Nicholas Day was not left without time to arrange his affairs and seek alternative accommodation for his family.[46]

[46]TB 1:1073, at 1076.

Once again, under cross-examination, Mr Marash accepted that the reference to the settlement being ‘a sensible one’ was his personal view, but he explained his position by saying:

There were problems with his case at the time. There were difficulties with the evidence that we had at the time and other difficulties. So, yes, following the settlement, looking back, it was something that could be perhaps justified.
[MR GLICK:] This is the perhaps rationalisation after the event?

---Yes.[47]

[47]Transcript 13/02/17, Marash XXN, at 556.

When it came to the loan accounts, Mr Marash also accepted that at the mediation he was not really in a position to express any view about them or how much was owing under them, adding that this was one of the reasons why he had encouraged Nicholas Day to speak further with Mr Jasper about them.

Sale of the Rockley Road property

Following the execution of the Deed of Settlement, Nicholas Day continued to reside at the Rockley Road property until about August 2013, when he vacated it. Richard Day then set about preparing the property for sale and engaging real estate agents. The Rockley Road property was sold in the first week of December 2013 for the sum of $2.32 million, with settlement to occur two weeks later.

On 17 December 2013, Mr Yeo as liquidator of Shot One lodged a caveat over the Rockley Road property. The settlement went ahead and was completed notwithstanding the caveat. The proceeds of sale, after paying out Rising Rocket’s mortgage to the Commonwealth Bank, were about $1.07 million, which sum was paid into the trust account of the defendants’ solicitors. Since then, orders have been made by the Court, from time to time, permitting the payment out of the trust account of specified sums in payment of the defendants’ legal costs and expenses.

Evidence given concerning the Rising Rocket loan account

At the trial, a substantial body of evidence was led from Mr Jasper, Shot One’s accountant, Mr Grano, its bookkeeper, and Richard Day about Shot One’s books of account and financial records. Mr Yeo also gave evidence about his investigation of Shot One’s financial records and the views he reached about what was the true or correct amount of the indebtedness of Richard Day and Rising Rocket to Shot One. At the point in the trial when the witnesses gave their evidence, the plaintiffs were pursuing claims made by Shot One in respect of both the Richard Day loan account and the Rising Rocket loan account, and there was a significant overlap between the evidence given concerning each of those claims. However, by the time the plaintiffs’ closing oral submissions were made, they had narrowed their case and they were pursuing only the claim made in respect of the Rising Rocket loan account, and it is the forgiveness of that claim that they rely upon as evidencing the alleged ‘uncommerciality’ of the Deed of Settlement transaction.

Evidence given by Mr Grano

Mr Michael Grano was called by the defendants to give evidence at the trial. Mr Grano has been practising as a bookkeeper for some 14 years. He holds a Certificate IV in Bookkeeping from Australian College and is certified as a consultant in the use of an accounting software package called ‘MYOB’.[48] In 2003 or thereabouts, Mr Grano was engaged as a subcontractor to Qualified Professional Group, a bookkeeping business affiliated with Mr Jasper’s accounting practice, for the purpose of preparing Shot One’s books and to ‘bookkeep to trial balance’ stage. Generally, this task involved ‘maintaining the general ledger of Shot One’, which is effectively a collection, or helicopter view, of sub-ledgers or journals, and attending to ‘the day to day processing of transactions, overseeing accounts payable and reconciling bank and credit card statements.’[49] Further, Mr Grano explained, maintaining the general ledger means:

… transacting in the ledger, making sure that the purchases ledger, the sales ledger, the cash disbursements, cash receipts and wages all balance to the general ledger and also balance to the bank or the credit card, and making sure that the transactions were done according to the GST legislation as well.[50]

Mr Grano was also responsible for maintaining and lodging the Group Payroll (‘PAYG’) and Business Activity Statements (‘BAS’) records and statements.

[48]MYOB (an acronym for ‘Mind Your Own Business’) is an off-the-shelf accounting software programme used for recording cash flow, payments and transactions etc.

[49]Exhibit D9, at [10].

[50]Transcript 13/02/17, Grano XXN, at 560.

Mr Grano said that to perform the bookkeeping work, ordinarily he would attend at Shot One’s office once a fortnight for about five hours. He set up an ‘in-tray’ in which Richard Day would place hard copies of paid and unpaid invoices, credit card statements, and bank statements and Mr Grano would work from the purchase documents, whether they be a tax invoice or receipt, and enter them in the ledger. In the case of Rising Rocket, Mr Grano said there were no purchases to record but if there was a transfer of funds that would be visible in the bank statements for the main cheque account or trading account, or he would receive a ‘direction’ from Richard Day, who would tell him that that particular transaction was ‘a Rising Rocket’ one.[51] On a day to day basis, if he had any queries about how a matter should be entered in the general ledger, Mr Grano said that he would speak to Mr Jasper, or one of his assistants, Mr Kirk Webster, or take instructions from Richard Day. Mr Grano said that for the entire period between about 2003 and the end of 2008 while he was engaged as Shot One’s bookkeeper, he did not have a single discussion with Nicholas Day about financial matters.
[51]Transcript 13/02/17, Grano XXN, at 562.

When Mr Grano commenced as Shot One’s bookkeeper, the accounting structure forming Shot One’s general ledger had already been set up, but he found ‘the MYOB records were not in very good shape.’[52] Mr Grano said he proceeded to ‘clean up’ the MYOB ‘to ensure that legitimate business expenses were reflected correctly in the MYOB records’ and that ‘non-business expenses were not recorded in the same manner as legitimate business expenses.’[53]
[52]Exhibit D9, at [34].
[53]Exhibit D9, at [35].

Mr Grano said he was aware that it is common for non-business expenses, whatever they may be, to be allocated to a director’s loan account in the financial records. In the case of Shot One, there was a loan account labelled ‘Ric Day Loan Account’ in existence when he started. Mr Grano said that he was told by Richard Day ‘that any expenses which could not be justified as a legitimate business expense were to be allocated to the Ric Day Loan Account’[54] and that Richard had informed him on several occasions that these expenses ‘had been incurred by Nicholas.’[55] He explained that from these discussions he ‘understood that the Ric Day Loan Account did not record that a loan was being made by Shot One to Richard’ but rather that ‘it was a method of allocating Nicholas’s non-business spending at a bookkeeping level, and that this would probably be reallocated by Terrence Jasper & Associates when it prepared Shot One’s financial statements and tax returns.’[56]
[54]Exhibit D9, at [36].
[55]Exhibit D9, at [36].
[56]Exhibit D9, at [37].

Mr Grano said that he also maintained a suspense account in the MYOB records for transactions which were not obviously business expenses. He made sure that all expenses in the suspense account were allocated by the end of each financial year, and said that ‘[a]nything that could not be allocated as a business expense at the end of the financial year would be allocated to the Ric Day Loan Account.’[57]
[57]Exhibit D9, at [42].

Mr Grano created a loan account for Rising Rocket in Shot One’s books on 27 July 2004. He does not recall the circumstances of the creation of the loan account, but does recall that ‘money would be paid out of the Shot One bank account and would be recorded in the Rising Rocket loan account in Shot One’s MYOB records.’[58] He said that the first transaction recorded was for the sum of $85,000.
[58]Exhibit D9, at [47].

Under cross-examination, Mr Grano was asked how he would record moneys going from Shot One to Rising Rocket, and the following exchange ensued:

[MR GLICK:] If you found a bank statement which recorded moneys going from Shot One to Rising Rocket, that would be on the bank statement, wouldn't it?---Correct, yes.
But that would not give you an indication of what it was for?---No.
How did you work out to put it into loan account?---Because the loan account had been set up or I had been told to set it up for Rising Rocket and there will be funds moving in and out of that over the next future period, whatever that was.
So Mr Richard Day told you that a loan account had been set up for Rising Rocket?---Yes, I think I set it up, from memory. I think I did.
Or Mr Richard Day told you to set it up, from memory?---Yes.
And he told you that moneys would be going in and out of that loan account from time to time?---Correct.
So when you saw items in the bank statements - I read a line item in the bank statement saying "debit" against the Shot One, "cash" going over to Rising Rocket, you would have asked Mr Day, "Is this the loan account," or whatever?---Initially it would have been, but then once you see it, it becomes automatic because you set it up as a reoccurring transfer in MYOB and you set it up and when you see that transaction you hit "reoccurring". I think I set up a Rising Rocket, I can't remember. But that's how you'd do it.[59]

[59]Transcript 13/02/17, Grano XXN, at 563.

Mr Grano also made clear that while he had conversations with Richard Day from time to time, he did not know what the transfers of funds to Rising Rocket were for. He maintained only the Shot One ledger, with the one trading account and the one credit card, and he did not know how Rising Rocket dealt with any particular payments. In essence, he said the position was that if a transfer was annotated on the Shot One bank statement as a Rising Rocket transfer, ‘it was a Rising Rocket transfer, and it went to the Rising Rocket loan [account]’[60] and he accepted that between 2005 and 2008 Richard Day was aware that money was going in and out of a Rising Rocket loan account with Shot One ‘because that instruction came from Ric, Mr Day.’[61]
[60]Transcript 13/02/17, Grano XXN, at 564.
[61]Transcript 13/02/17, Grano XXN, at 564, 565.

In re-examination, Mr Grano was asked whether he could recall what were the initial instructions Richard Day gave him in respect of that loan account, but he said he was unable to do so. The following exchange then ensued:

[MR EVANS:] Are you able to recall in respect of any specific payment that was recorded in that loan account what the instructions you were given were?---Well, probably initially it was along the lines of, "There's this new thing happening, Rising Rocket." Once I saw "Rising Rocket" annotated in bank statements, then it would become automatic because then I wouldn't have to ask the same question many times.
Are you able to say approximately on how many occasions during the period from 2004, and the loan account was set up in July 2004, from July 2004 until Mr Day resigned you discussed the entries to be made in the Rising Rocket loan account with Mr Day?---No.
Would you be able to put an estimate upon it?---Well, I didn't know anything about what Rising Rocket was all about and initially - and I will say it again - once I see the transaction, any transaction, that's repeated on a repeated basis, it then becomes once the direction has been given you don't have to keep going backwards and forwards all the time to ask for instructions.
So it becomes an automatic entry?---It becomes a - entry, because if it is annotated "Rising Rocket" - - -
Is that done with or without discussing the matter further with Mr Day?---Well, it's usually done without further discussion because once the knowledge is obtained by me and it has the name Rising Rocket on it, then I know what it is, and it sits in that loan account, whatever the number is.[62]

[62]Transcript 13/02/17, Grano RE-XN, at 569–570.

Mr Grano ceased providing bookkeeping services to Shot One in late January 2009. The background to this was, he said, that by January 2009, ‘things very getting very tense between Richard and Nicholas’,[63] and for the very first time Nicholas had asked him about the financials of Shot One. He provided Nicholas with a copy of Shot One’s transaction history from MYOB so that he could review the company’s spending. Nicholas Day did not say anything further to Mr Grano about the transaction history but he did receive a call from Mr Jasper at around that time informing him that Nicholas was taking over Shot One. He said that Mr Jasper told him words to the effect that ‘Nicholas feels that you are too close to Richard and it would be better if you did not come back to the NDA [Nicholas Day Architects/Shot One] office.’[64] Mr Grano did not return to the office, and as a result he did not do a handover. In February 2009, Nicholas Day replaced Richard Day as the sole director and shareholder of Shot One. Thereafter, Richard Day had virtually no involvement in Shot One.
[63]Exhibit D9, at [49].
[64]Ibid.

Evidence given by Richard Day

Richard Day was the first of the witnesses called to give evidence on behalf of the defendants. He was present in court when each of Mr Yeo and Mr Jasper gave evidence on behalf of the plaintiffs and was cross-examined, and was also aware of the evidence they had given. Notwithstanding that he was an interested party, he gave his evidence frankly, and acknowledged errors on his part, but he remained firmly of the view that the payments made by Shot One to Rising Rocket for or in relation to the purchase of the Rockley Road property were not moneys provided by way of a loan. Richard Day said that at the time he authorised Shot One to make those payments, he ‘had no intention that Rising Rocket would be required to pay them back.’[65] Relevantly, he was the sole director and shareholder of Shot One at that time, and as the Nicholas Day Architects business conducted by Shot One was profitable, he was ‘comfortable with the idea that Shot One could make these payments to Rising Rocket without ever needing the money back.’[66] Further, he said he considered that ‘the Nicholas Day Architects business and Shot One continued to be easily profitable throughout 2005 to February 2009’, when he resigned as a director and transferred his shares to Nicholas, ‘even taking into account the payments made to Rising Rocket as being non-recoverable by Shot One’, and he intended to tell Mr Jasper about these matters when he was preparing Shot One’s tax returns for the 2005 financial year.[67]
[65]Exhibit D6, at [115].
[66]Exhibit D6, at [115].
[67]Exhibit D6, at [116].

Richard Day was taken to a number of documents such as financial statements and tax returns of Shot One for the financial years 2005 through to 2008, and accompanying correspondence that wasprepared by Terrence Jasper & Associates in the period following his resignation as a director and shareholder. But it soon became clear that the only financial records of Shot One that he had ever seen were effectively the MYOB management accounts as prepared by Mr Grano. The evidence given by Mr Jasper, discussed below, with which Richard Day agreed, was to the effect that after Richard resigned as the sole director of Shot One in February 2009, he did not have any involvement in the preparation of the financial statements of Shot One. Importantly, however, in that regard it is clear that no final financial statements for Shot One for any year after financial year 2004 were prepared until after February 2009, and no financial statements at all for financial years 2006 and following were prepared until after February 2009.

Richard Day gave evidence that he never saw any version of these financial statements that were prepared for Shot One following his retirement. He acknowledged that his signature did appear on four pages of documents headed ‘Minutes of Directors’ Meeting’ of Shot One said to have been held on 30 November 2005, 30 November 2006, 30 November 2007 and 30 November 2008 respectively, but he did not recall signing them. In each case, the minutes stated in respect of Shot One’s ‘Accounts’ as follows:[68]
[68]See Exhibit P4.6 TB 4:5559–5562.

ACCOUNTS:

The Chairman tabled the financial accounts of the Company in respect of the year ended 30^th June [2005, 2006, 2007 or 2008 respectively as the case may be]. It was noted that the accounts had been prepared as a special purpose financial report in accordance with the accounting policies outlined in Note 1 to the accounts.

It was resolved the accounts be and are hereby adopted as tabled.

Richard Day confirmed that no directors meetings of Shot One were convened or held on any of those dates in respect of any of the matters described in those minutes.

Under cross-examination, Richard Day readily accepted that part of his role as managing director of Shot One was to ensure that ‘proper records were kept.’[69] He said that in hindsight, he would have to say he was not careful, but he had engaged a bookkeeper, and trusted him to do the job he was employed to do. He was aware that Mr Grano was preparing the MYOB accounts for Shot One, but initially he said that he was not aware that these accounts listed a loan account in the name of Rising Rocket as an asset of Shot One. He later corrected that answer, and agreed that he was aware that in July 2004, a loan account for Rising Rocket was created in Shot One’s MYOB ledgers and that throughout the period when he was the sole director of Shot One, the MYOB accounts for Shot One recorded a loan account in the name of Rising Rocket, with Rising Rocket as the debtor and Shot One as the creditor.
[69]Transcript 13/02/17, R Day XXN, at 480.

Richard Day did not recall ever telling Mr Jasper that the MYOB accounts for Shot One were ‘incorrect’. Richard Day understood that Mr Jasper’s staff would be preparing the statutory accounts and returns for Shot One by reference to the MYOB accounts, but he said he was not aware that he had to tell Mr Jasper’s office if the information so provided was incorrect. The following exchange illustrates the tenor of the evidence Richard Day gave whilst under cross-examination:

[MR GLICK:] …You accept proposition number 1 that the MYOB accounts, whilst you were the sole director, maintained a loan account between Shot One creditor and Rising Rocket debtor?---Correct.
You accept that that loan account, the integrity of that loan account, that is to say that they represented loans, was by you never corrected?---That's correct.
They were never written off?---That's correct.
They were never shifted to some other entry such as gifts or donations or expenses?---Not to my knowledge.
And to your knowledge nobody ever told Mr Jasper that they were not true and correct; that is, the MYOB accounts were not true and correct?---I don't know.
To your knowledge no one told him that?---That's correct.
Certainly you didn't tell him that?---That's right.
And you knew, did you not, that Mr Jasper's knowledge in preparing financial accounts was only as good as the information he received?---Yes, I did.
And you never corrected that information?---That's right. [70]

[70]Transcript 13/02/17, R Day XXN, at 486.

When the topic was re-visited a little later, Richard Day continued in the same vein:

[MR GLICK:] . . . You also accept, do you not, and you knew, did you not, that Mr Jasper would prepare such statutory accounts as he was required to prepare using primarily the Shot One MYOB accounts?---Yes, I did.
Assuming for the moment that the 2005, 6, 7 and 8 Shot One financial statements were prepared after you left?---Yes.
When you left in February 2009, you did not take a single step to correct any of the existing MYOB accounts of Shot One, did you?---That's absolutely correct.
You never told your brother Nicholas, for example, that "Nicholas, if you look at the MYOB accounts, they record loans, assets in favour of Shot One, but disregard them because they're not expected to be repaid and I don't want them repaid and they're not real loans"?---I seem to remember a conversation in the first mediation that I had with Nicholas where a similar conversation occurred.
I don't want to go to the mediation yet. I just want to be precise about my question?---In 2009, no.
Nor to Mr Jasper, obviously?---No.
I want to suggest to you that if, as you assert, in your mind you never intended the Rising Rocket loan to be repaid, it only ever remained a private thought of yours and it never was elevated beyond a private thought?---I'm not sure.
Let's test it. First, it was a thought of yours that it would not be repaid; correct? That is, the Rising Rocket loan to Shot One?---That's right.
And it was a thought that was never communicated to anyone other than - well, to anyone?---I don't recall.
You can't, sitting there and having prepared your witness statement and gone to all the detail and thought about this case and knowing how important the loan accounts are, you are unable to tell Her Honour of a single relevant person that you told this to?---Since this case started, certainly. Before this case started, no, I have not. I don't recall, I should say.
Do you understand the way that accounts would be drawn up, both at the MYOB level and the statutory account level, if an asset in the balance sheet being a loan was never intended to be a loan but was something else, a gift or whatever?---No, I do not understand that.
But you understand, don't you, that if you look at a MYOB account which records in the balance sheet item an asset being a recoverable loan - a loan that is an asset, the assumption is that it is going to be repaid?---No, I did not understand that.
What did you think a loan was?---I thought it was a place in the management accounts to record certain transactions that would then subsequently be handled by my tax accountant.
How would your tax accountant handle it if you never told him the truth?---I didn't have the conversation with him.
Why didn't you?---We never got to it.[71]

[71]Transcript 13/02/17, R Day XXN, at 490–492 (emphasis added).

Senior Counsel for the plaintiffs submitted that the Court should reject the evidence given by Richard Day (emphasised in bold above) about his understanding of the purpose of the loan accounts, but I do not propose to do so. Having seen him give evidence, and explain the way in which Shot One and Rising Rocket operated, I regard his account as credible. In my view, the notion that discussions were intended to take place between Richard Day, as director of Shot One, and Mr Jasper, its accountant, before Shot One’s accounts and returns were finalised is confirmed by both Mr Grano’s and Mr Jasper’s evidence. As noted above, Mr Grano was simply recording in Shot One’s MYOB, in the Rising Rocket loan account, the payments that were made by Shot One to Rising Rocket. That recording exercize did not require him to form a view that the payment transaction was one by way of loan. Rather, the allocation of such payments to the Rising Rocket loan account was something that happened automatically, because Mr Grano had set it up in MYOB as a ‘reocurring’ transaction. The impression Mr Grano conveyed when giving his evidence was that the Rising Rocket loan account was handled in much the same way as the Richard Day loan account, in the sense that at a bookkeeping level it was simply a method of allocating payments made to or for the benefit of Rising Rocket, and that it would probably be reallocated by Terrence Jasper & Associates when the firm prepared Shot One’s financial statements and income tax returns.

In his witness statement, Mr Jasper described the iterative process by which Shot One’s statutory accounts would be prepared. He said that following the incorporation of Shot One, from the financial year ended 30 June 2002 onwards, in the normal course of events, he would prepare draft statutory accounts for Shot One, based on the bookkeeping entries made. Mr Jasper said:

[16]It was my practice to send Ric draft accounts by email, deal with any queries he had by telephone until those queries had been resolved and then send or hand deliver final accounts to him for his signature. Before Ric signed the accounts each year, he and I went through them page by page.

…
[18]I prepared the annual statutory accounts and income tax returns of Shot One and prepared the income tax returns using the information in the management accounts of Shot One. [72]

[72]Exhibit P3, at [16], [18].

Mr Jasper’s evidence makes clear that while the information recorded in the MYOB management accounts was used in preparing the statutory accounts and income tax returns of Shot One, Mr Jasper also consulted with Richard Day in the process of finalizing them – preparing draft accounts, dealing with queries and then resolving those queries in discussion with him – before the final accounts were delivered to Richard Day for signature. What that means is that, in the ordinary course, Richard Day would have had an opportunity to discuss the draft accounts with Mr Jasper before they were finalized. Following Richard Day’s resignation from Shot One in February 2009, however, Mr Jasper informed Richard Day that he could no longer consult with him about the statutory accounts and returns, with the result that the usual consultative process did not take place, and Richard Day was effectively denied the opportunity to discuss with Mr Jasper the basis on which the payments made to Rising Rocket had been recorded by Mr Grano in the Rising Rocket loan account.

The rental payments to be made by Shot One to Rising Rocket (discussed further below in the context of the evidence given by Mr Jasper) are another example of the Rising Rocket loan account being used as a method of allocating payments and recording them in Shot One’s MYOB, but on the basis that they would likely need to be re-visited and possibly adjusted when the final accounts were being prepared by Mr Jasper.

When Richard Day initially informed Mr Jasper that Nicholas Day would be residing at the Rockley Road property, Mr Jasper told him words to the effect that ‘a commercially reasonable amount of rent would need to be paid by Nick’, in order for Rising Rocket to be able to deduct in full the interest and other property-related costs.[73] In the case of the Rising Rocket loan account, Mr Jasper said that:

[34]… The money paid from Shot One to Rising Rocket was recorded in a loan account for Rising Rocket in Shot One’s accounts with an adjustment to be done when the accounts were being prepared for the commercial amount of rent that needed to be shown as paid.[74]

[73]Exhibit P3, at [33].

[74]Exhibit P3, at [34] (emphasis added).

In other words, from the outset it was envisaged by Mr Jasper that the rental payments made by Shot One to Rising Rocket would be recorded in the MYOB management accounts, even though they were rental payments and not payments made by way of loan. Further, that when the final accounts were being prepared, some adjustment would be required to be made to the information recorded in the MYOB so as to ensure that it reflected a ‘commercial amount’ of rent.

Richard Day said he did not know why the statutory accounts for Shot One for 2004 and 2005, and the income tax returns for those years, were not lodged until 2011 or thereabouts. He said the 2006 accounts were not completed on time but he had assumed that Mr Grano would have given the MYOB accounts to Mr Jasper’s office. Richard Day said that he had a meeting with Mr Jasper in April 2009, shortly after he had resigned from Shot One, because he was ‘anxious to get the taxation up to date.’[75] However, he does not recall what was discussed at that meeting. Richard Day said that he thought that Shot One’s income tax return for the year ended 30 June 2004 had been lodged, but knew that the returns for 2005, 2006, 2007 and 2008 had not been lodged. He was also aware that once they were lodged, a ‘substantial’ tax liability would be payable to the Australian Taxation Office and under cross-examination, he agreed that he had a real concern about the unpaid tax. However, when he resigned from Shot One, there was a substantial amount of money available to pay it. Indeed, as at 11 February 2009, Shot One was trading profitably, and had net assets of over $500,000, even allowing for removal of any alleged debt owed by Richard or Rising Rocket to Shot One, and while Shot One had an unpaid tax liability in the order of $500,000, it was, as Senior Counsel for the defendant noted, fully provisioned in the accounts.[76]
[75]Transcript 13/02/17, R Day XXN, at 496.
[76]Transcript 6/3/2017, at 664 (Mr Evans QC). See also the defendants’ written closing submissions at footnote 71, where they noted:
The final version of Shot One’s financial statements for the year ended 30 June 2009 (TB 1:704.4) disclosed a value of the shares (being the value of the company) of over $1.55 million as at 30 June 2008 and 30 June 2009. This valuation included a liability for unpaid tax of $712,413 – that is, it provided for Shot One’s liability to pay this tax as part of the valuation. The value of the disputed Richard Day Loan and Rising Rocket Loan in these statements was less than $900,000 in total as at 30 June 2009 – so that even if these are treated as valueless, the value of the shares in Shot One as at 30 June 2009 was still in excess of $600,000.

Shot One submits that the Court should accept the prima facie evidence recorded in Shot One’s MYOB accounts of the existence of the loan accounts owing by Rising Rocket to Shot One as at 23 May 2012. That is, they say the prima facie evidence arising by virtue of sub-s 1305(1) of the Corporations Act has not been outweighed or rebutted having regard to the state of Shot One’s financial records in existence on 23 May 2012.

For the purposes of this ‘determinative phase’ of the case, the plaintiffs submit that as at 1 February 2008 (being six years prior to the commencement of this proceeding by the (liquidator) plaintiffs), Rising Rocket owed to Shot One an amount of $550,000.[465] The figure of $550,000 is recorded in the MYOB accounts of Shot One that were prepared and maintained by Mr Grano immediately prior to the departure of Richard Day on 11 February 2009. As at 30 June 2008, the balance of the Rising Rocket loan as shown in Shot One’s MYOB accounts had increased to $721,500.[466] This same figure was recorded as the Rising Rocket loan balance in the financial statements prepared by Mr Jasper during 2009[467] and was reflected in the income tax returns for the year ended 30 June 2008 lodged by Mr Jasper on 9 March 2011.[468]
[465]TB 3: 3663.
[466]Ibid.
[467]TB 3: 3606.
[468]TB 3: 3760-3768. (The total current assets in each case were recorded as being $2,764,885).

The balance of the Rising Rocket loan account as shown in Shot One’s MYOB accounts as at 23 May 2012, when the Deed of Settlement was entered into, was $751,961.[469] Accordingly, the plaintiffs submit that the value of the Rising Rocket loan that may be claimed by them pursuant to the MYOB accounts was the balance of the loan account at 23 May 2012 of $751,961, less the balance of the loan account at 1 February 2008 of $550,000, being the sum of $201,961. This sum includes the Journal Entries adjustment made by Shot One for the year ended 30 June 2009, which is discussed further below.

The plaintiffs also rely upon work undertaken by Mr Yeo to verify payments made by Shot One to Rising Rocket

[469]Exhibit P2.2 (TB 4:5034-5035).

In addition, the plaintiffs refer to evidence given by Mr Yeo to the effect that he has identified, from source documentation, net direct payments of $163,960.61 made by Shot One to Rising Rocket since 1 February 2008. The plaintiffs submit that this sum, which is calculated as set out below, ‘is comparable to the Rising Rocket loan’:[470]
[470]Plaintiffs’ closing submissions, at [108].

Category A[471] $310,000

Category B[472] $257,542

Category J[473] $129,550

Category N[474] ($197,623)

Category O[475] ($10,000)

Total amount verified to source documentation $489,469

Less: the Journal Entries ($325,508)

Source documentation less the journal entries $163,961
[471]Exhibit P1.3 (TB 4: 5006).
[472]Exhibit P1.4 (TB 4: 5007).
[473]Exhibit P1.6 (TB 4: 5009).
[474]Exhibit P1.10 (TB 4: 5013).
[475]Exhibit P1.11 (TB 4: 5014).

The plaintiffs submit that in circumstances where Mr Yeo has verified loans made since 1 February 2008 recorded in Shot One’s MYOB account, this supports Shot One’s claim to the amount of at least $163,960.61 according to the MYOB accounts and the source documents alone. Further, they say, the actual sum recoverable by Shot One should be higher, as the Journal Entries re-adjustment has a ‘skewing effect’.

The Journal Entries re-adjustment

The ‘Journal Entries’ refer to the amounts recorded in the Ledger Entries Report of Shot One for the year ended 30 June 2009 of $325,508.[476] The figure of $325,508 is said to be the net result of the debits at journal entries 27 ($4,548.50 accounting fees) and 33 ($1,975.00 land tax) and the credit at journal entry 35 ($332,031.33, which may be an adjustment for rent payable by Shot One on behalf of Nicholas Day).[477]
[476]See TB 3: 3841.
[477]Transcript 09/02/17, Jasper XXN, at 344; see also transcript, 07/03/17, Mr Glick QC at 783.

While the plaintiffs do not accept that Shot One was contractually liable to pay any amount by way of rental pursuant to Nicholas Day’s employment contract, they submit that if (as is the case) the Court is satisfied that Shot One was obliged to provide him with satisfactory accommodation, then the amount of $332,031 that was credited in favour of Rising Rocket is greater than the amount of rental that was payable from 1 February 2008.[478] Accordingly, the plaintiffs contend that it would be appropriate for the Court to ignore or reverse the Rising Rocket credit amount of $332,031, and instead deduct, from the balance of the Rising Rocket loan shown in Shot One’s MYOB accounts, a rental sum equivalent to the amount that would have accrued between 1 February 2008 until 23 May 2012 (when the new tenancy agreement was entered into), which they calculate as being $190,612.32 (for 51.75 months) pursuant to the rental contract, noting that $52,000 has already been paid through the Cooniemoon rental payments.[479] On this scenario, they submit that Rising Rocket would be liable to Shot One for the sum of $395,380, calculated as follows:
[478]The rental agreement between Nicholas Day and Rising Rocket provided for a rental of $3,683.33 per month, yet the credit amount of $332,031.33, if divided by 17 months from 1 February 2008 to 30 June 2009, would suggest a monthly rental amount of $19,029.91. It is also unclear whether there was a duplication of the $52,000 of rental payments made by Shot One to Cooniemoon after 1 February 2008.
[479]Plaintiffs’ outline of closing submissions, at [115].

MYOB account value $201,961

Addition of Rising Rocket Credit $332,031

Deduction of rent payable ($190,612)

Credit Cooniemoon rental payments $52,000

Total owed $395,380

Alternatively, the plaintiffs submit the Court could instead deduct a rental value equivalent to the rental income declared by Rising Rocket in its income tax returns for the period from 1 February 2008 to 23 May 2012, being $267,617.[480] On this scenario, Rising Rocket would be liable to Shot One for the sum of $318,375,[481] calculated as follows:
[480]See Exhibit P1.1 at [25]-[26]; TB 1: 1744, 1754, 1764 and 1780. In this regard, it will be recalled, however, that the evidence shows that the income tax returns for Rising Rocket (as Trustee of the Rising Rocket Trust) for the year ended 30 June 2009 were signed off by Nicholas Day, who lacked any authority to do so.
Calculation: (22,000+52,800+52,800+73,855+[(73,855/12)*10.75] = 267,616.77).
[481]These figures were adjusted by Mr Glick QC during closing oral submissions.

MYOB account value $201,961

Addition of Rising Rocket Credit $332,031

Deduction of rent payable ($267,617)

Credit Cooniemoon rental payments $52,000

Total owed $318,375

The defendants contend that the Court should not accept Mr Yeo’s evidence, including as to the quantification of Rising Rocket’s indebtedness

The defendants note that in quantifying Rising Rocket’s alleged indebtedness to Shot One, the plaintiffs seek to rely upon the evidence given by Mr Yeo, based upon his examination of the books and records of Shot One and other documents provided by Richard Day and Rising Rocket on discovery. But they submit that the evidence given by Mr Yeo, to the effect that Rising Rocket’s indebtedness to Shot One by way of loans should be quantified at $1,189,590.39,[482] is in contradiction to the most recent of Shot One’s financial records existing as at 23 May 2012, which quantify the Rising Rocket loan account at $656,809, and is inconsistent with the figures contained in every financial statement or MYOB ledger produced by Terrence Jasper & Associates for Shot One between 2003 and 2012.[483]
[482]See the summary of his evidence above under the heading ‘Evidence given by Mr Yeo’. The figure of $1,189,590.3 represents the transactions he and his team had identified as making up the Rising Rocket Loan Account.
[483]See defendants’ outline of closing submissions, [97]-[98].

In their closing written submissions, the defendants set out at least eight reasons why the Court should not accept Mr Yeo’s evidence. In particular, they point to the fact that much of the material prepared by Mr Yeo and his staff to assist the Court was prepared at a time when the plaintiffs’ claims against Rising Rocket and Richard Day were framed as claims for money had and received, and for equitable remedies pursuant to a constructive trust, whereas the claim pursued by the plaintiffs in closing submissions was directed at recovering the alleged indebtedness recorded in the Rising Rocket loan account. Further, they submitted, Mr Yeo’s quantification of the alleged Rising Rocket loan is based on his opinion (unsupported by any evidence) that each of the transactions appearing in his Exhibit P2.1 was subject to loan agreements. But whether there was relevantly a loan that is recoverable is a legal question, to be determined by the Court having regard to the evidence adduced at trial. Mr Yeo’s opinion is based upon an examination of the MYOB accounts and the bank statements of Shot One and Rising Rocket, but he ignored the journal adjustments made by Mr Jasper (that were made based on Mr Jasper’s professional opinion or on instructions from Nicholas Day as the sole director of Shot One), and did not consult Mr Grano to verify whether his recharacterisation of transactions as loans was correct.

Another reason advanced by the defendants for not accepting Mr Yeo’s evidence is that he is a party to the proceeding and thus must be regarded as interested in its outcome. In this regard, the defendants referred to Hussain v CSR Building Products Limited, where Edelman J considered expert opinion given by a liquidator plaintiff in regard to insolvency, and said:

Although there was significant cross-examination about Mr Ross’ independence and impartiality, I am satisfied that he approached his evidence honestly. But Mr Ross was not independent. Nor was he impartial. He properly accepted that he was not merely a plaintiff in these proceedings, in his capacity as liquidator, but also that he had done considerable work which would not be remunerated if the liquidators were unsuccessful in the proceedings. Although Mr Ross was honest, and although he was aware of his obligations as an expert, the conflict which he faced as both expert and party was apparent at times in his evidence.[484]

[484](2016) 246 FCR 62, at [111].

In the present case, Mr Yeo was clearly a party and he was not put forward as having given ‘expert evidence’, nor was his evidence received by the Court as ‘expert evidence’. His evidence was directed towards achieving success for Shot One in the proceeding. He gave his evidence frankly and honestly, and acknowledged errors (such as the double-counting) when they were pointed out. But as indicated earlier, and for the reasons given, I did not find his evidence, in particular his characterisation or recharacterisation of the transactions set out in Exhibit P2.1 as loans to Rising Rocket, of any real assistance.

The defendants submit that Shot One’s MYOB ledger as at February 2009 is the appropriate starting point for any quantification of Rising Rocket’s indebtedness

If, contrary to the views I have reached, the Court were to find that the sum recorded in the Rising Rocket loan account was a loan that was intended to be repayable, and that the indebtedness was never discharged or reallocated to another person (such as Nicholas Day), then the defendants submit that the starting point for any determination of the quantum payable is the Shot One MYOB ledger as at February 2009, because that MYOB ledger was maintained by Mr Grano in accordance with Richard Day’s instructions until that time. But in circumstances where Richard Day ceased to be involved with Shot One from that date, and the plaintiffs do not allege there was any agreement with Richard Day (whether in his own right or on behalf of Rising Rocket) after that date, the defendants submit that any subsequent adjustments made to the figures in the MYOB ledger should only be taken into account to the extent that they can properly be seen as admissions by Shot One against Shot One’s interest — i.e. to the extent that they have the effect of reducing the loan account liability of Rising Rocket to Shot One.[485]
[485]Defendants’ closing submissions, [102].

The defendants contend that such a quantification exercise would disclose a ‘best possible’ outcome for Shot One as being one where the Rising Rocket loan balance is $474,277, which sum is arrived at by taking the balance recorded in the final (signed) 2009 financial statements of Shot One (being $514,277),[486] less an adjustment for amounts paid by Rising Rocket to Shot One (totalling $40,000) but not credited to the loan account. They maintain that there are no other relevant transactions after this date by which it can properly be said that this loan account balance could have increased (all subsequent payments being in the nature of rent).[487] The sum of $474,277 is calculated as follows:
[486]See Shot One Financial Statement FY 2009, TB 3:3807.
[487]In essence, the defendants submit that the payments made by Shot One to Rising Rocket between 11 February 2009 and 23 May 2012, which are summarised in Exhibit P1.4 and which the plaintiffs allege form part of the Rising Rocket loan account as at 23 May 2012, were clearly payments made by Shot One which were in the nature of rent (i.e. in exchange for the continued occupation of the Rockley Road Property by Nicholas Day). Further, they say, the notion that those payments were made by way of loan, and were not payments in the nature of rent, involves the counterfactual proposition that Rising Rocket (which was under Richard’s control) was willing to allow Nicholas to occupy the Rockley Road Property for no consideration, including while Nicholas was causing Shot One to sue Richard and Rising Rocket in the 2010 proceeding. I agree that this suggestion lacks any credible basis.

$514,277

Rising Rocket loan account pursuant to most recent signed financial statements of Shot One (FY2009)

(-)$20,000

Payment on 25 September 2008

(-)$10,000

Payment on 21 January 2009

(-)$10,000

Payment on 13 February 2009

$474,277

TOTAL

Issue 12: If so, to what extent, if any, are Shot One’s claims statute-barred?

As Shot One’s claim against Rising Rocket in the 2014 proceeding is a contractual one, the relevant limitation period is six years, and so Shot One may not recover in respect of any alleged loan claim which accrued to it prior to 31 January 2008.

The defendants contend that the limitations period affects the amount of the Rising Rocket loan that Shot One may seek to recover

The defendants submit that once adjustments are made for transactions that are not within the limitation period, the amount of the alleged Rising Rocket loan that is susceptible to being claimed by Shot One is reduced to $232,009.43, calculated as follows:

FY2005:

Statute barred

FY2006:

Statute barred

FY2007:

Statute barred

FY2008:

Transactions before 31 January 2008 are statute barred

The amount debited to the Rising Rocket loan account for FY2008 in Shot One’s MYOB management accounts, during the period after 31 January 2008 is $171,500.[488]

FY2009:

Not statute barred

The amount debited to the Rising Rocket loan account for FY2009 in Shot One’s MYOB management accounts is $285,907.43. The amount credited to the Rising Rocket Loan Account for FY2009 is $167,623.[489] The net amount debited to the Rising Rocket Loan Account for FY2009 is therefore the difference between those two sums: $118,284.43. This amount should be adjusted to:

(1) exclude three payments that were in the nature of rent of $5,925 each (totalling $17,775);

(2) credit the three amounts that were paid by Rising Rocket to Shot One but not credited to the loan account (referred to above), totalling $40,000.

Therefore, the net Rising Rocket loan account for FY2009, adjusted for rent and payments made by Rising Rocket to Shot One is $60,509.43.

FY2010:

Not statute barred, but all payments made by Shot One to Rising Rocket were in the nature of rent, not loans.

FY2011:

Not statute barred, but all payments made by Shot One to Rising Rocket were in the nature of rent, not loans.

FY2012:

Not statute barred, but all payments made by Shot One to Rising Rocket were in the nature of rent, not loans.

FY2013:

Not statute barred, but all payments made by Shot One to Rising Rocket were in the nature of rent, not loans.[490]

[488]TB 3: 3663.
[489]TB 3: 3872.
[490]Defendants’ closing submissions at [115].

Following the conclusion of the hearing, the plaintiffs filed a supplementary outline of submissions, without objection from the defendants. Therein, the plaintiffs set out their analysis of the alleged distorting effect of the rental journal entry processed in the books and records of Shot One that reduces the balance owing by Rising Rocket by $332,031 on 30 June 2009, and its effect on the statutory limited claim amount.

The plaintiffs contend that because the rental journal entry includes an adjustment for rent that accrued prior to the limitation date, some adjustment of that entry is required

The plaintiffs contend that in circumstances where Rising Rocket has pleaded that the claim currently being pursued by the liquidator of Shot One is subject to a statutory limitations period commencing on 1 February 2008 (i.e., that transactions that took place before 31 January 2008 are statute barred), which is 15 months prior to the date of the rental journal entry, the rental journal entry operates to produce a ‘distorting effect’. The alleged ‘distortion’ is said to be derived from the proposition (founded solely on the evidence of Mr Jasper) that the rental journal entry records a rental amount charged for the use of the Rockley Road property (an asset of Rising Rocket) for a period commencing 1 December 2004 and ending on 30 June 2009 and, therefore, predominantly represents an expense incurred prior to the statutory limitations date of 1 February 2008. Accordingly, so the plaintiffs argue, the rental journal entry ought to be amended to take into account the effect of the fact that the rental journal entry includes an adjustment for rent that accrued prior to the limitation date.

The plaintiffs seek to demonstrate the alleged distorting effect of the rental journal entry by looking first at how the rent should have been charged to the Rising Rocket loan account using (what they submit is) the correct accounting treatment, and then by calculating what they contend is Shot One’s potentially statutory limited claim based on the corrected loan balances.

Step 1 — apply the correct accounting treatment
The current treatment of the rental journal entry on Shot One’s financial statements

The following table prepared by the plaintiffs summarises how the rent for the use of the Rockley Road property was charged to the Rising Rocket loan account in the MYOB accounts of Shot One. The Rising Rocket loan balances in the MYOB accounts match the amounts disclosed in the financial statements of Shot One on each relevant date.

Date All rent to 30 June 2009 expensed at that date Rising Rocket loan balance

30 June 2004 $   - $  -

30 June 2005 $   - $            260,500

30 June 2006 $   - $            427,000

30 June 2007 $   - $            456,000

30 June 2008 $   - $            721,500

30 June 2009 $           (332,031) $            514,276

The plaintiffs submit that the table shows that approximately 4½ years’ rent (from 1 December 2004 to 30 June 2009) was charged through the rental journal entry adjustment all at once on 30 June 2009, and that this was the predominant reason that the Rising Rocket loan balance decreased from $721,500 as at 30 June 2008 to $514,276 as at 30 June 2009.

How rent should have been charged with the correct accounting treatment

The plaintiffs submit that if Mr Jasper had been engaged by Shot One to prepare its financial statements and income tax returns in each year, rather than all at once in 2009, then the rent would have been recorded more frequently. That is, they say the rent should have been recorded more frequently (most appropriately monthly in line with the rental contract, or at least in each year's final accounts). Rising Rocket’s tax returns were declaring rental income for each financial year during this period. If the value of the rental journal were apportioned across the 4½ year period, the Rising Rocket loan balance at the end of each financial year would be reduced accordingly, except for the year ended 30 June 2009, as follows:

Date Rent expensed each financial year Increase in loan account   Rising Rocket loan balance

30 June 2004 $  - $   - $                  -

30 June 2005 $            (42,259) $   - $         218,241

30 June 2006 $             (72,443) $         166,500 $         312,298

30 June 2007 $             (72,443) $           29,000 $         268,855

30 June 2008 $             (72,443) $         265,500 $         461,912

30 June 2009 $             (72,443) $         124,807 $         514,276

As will be noted, while the balance of the Rising Rocket loan account as at 30 June 2009 is unchanged (because the total rent charged is still $332,031), the ending balance for each of the preceding years is reduced once the rent is apportioned for each year it was incurred. Just one year earlier, as at 30 June 2008, the correct loan balance has reduced from $721,500 to $461,912 because rent has been charged continuously for each year prior to 30 June 2008 instead of it all being charged in one hit at 30 June 2009. The variance between the two methods of treatment is demonstrated more clearly when the two tables are placed side-by-side and an additional column is added to track the variance, as follows:

Incorrect Treatment

Correct Treatment

Date
All rent to

30 June 2009 expensed at

that date

Rising

Rocket

loan

balance
Rent expensed each financial year Rising Rocket loan balance Variance

30 June 2004 $                 - $          - $            - $           - $            -

30 June 2005 $                 - $ 260,500 $ (42,259) $ 218,241 $ (42,259)

30 June 2006 $                 - $ 427,000 $ (72,443) $ 312,298 $ (114,702)

30 June 2007 $                 - $ 456,000 $ (72,443) $ 268,855 $ (187,145)

30 June 2008 $                 - $ 721,500 $ (72,443) $ 461,912 $ (259,588)

30 June 2009 $    (332,031) $ 514,276 $ (72,443) $ 514,276 $           0

The plaintiffs observe that under (what they contend is) the ‘correct treatment’ column it will be seen that the variance accumulates in each year until the final year (2009). The value of the distortion is therefore at its greatest at the end of the financial year prior to 2009 when the full value of the rental journal entry takes effect. After the rental journal entry is entered, the same balance of the loan account ($514,276) results under each of the treatment scenarios.

Step 2 — calculate claim using loan balances with correctly apportioned rent
Effect of incorrect treatment on the value of a statutory limited claim

The plaintiffs submit that in order to quantify Shot One’s statutory limited loan claims against Rising Rocket (both now and as at 23 May 2012) it is necessary to deduct the balance of the loan account as at 1 February 2008 and 23 May 2006 from the balance of the loan as at 23 May 2012 in order to quantify the movement in the loan. To illustrate this, the above comparison table has been reproduced below with these dates included:

Incorrect Treatment

Correct Treatment

Date
All rent to

30 June 2009 expensed at

that date

Rising

Rocket

loan

balance
Rent expensed each financial year Rising Rocket loan balance Variance

30 June 2004 $                 - $          - $            - $           - $            -

30 June 2005 $                 - $ 260,500 $ (42,259) $ 218,241 $   (42,259)

23 May 2006 $                 - $ 318,000 $ (70,934) $ 247,066 $   (70,934)

30 June 2006 $                 - $ 427,000 $ (1,509)* $ 312,298 $ (114,702)

30 June 2007 $                 - $ 456,000 $ (72,443) $ 268,855 $ (187,145)

1 Feb 2008 $                 - $ 550,000 $ (42,259) $ 320,597 $ (229,403)

30 June 2008 $                 - $ 721,500 $ (30,184)* $ 461,912 $ (259,588)

30 June 2009 $   (332,031) $ 514,276 $ (72,443) $ 514,276 $           0
* Rent charged for the balance of the financial year due to the splitting of the year into two rows

Deducting each of the Rising Rocket loan balances highlighted (by shading) above from the closing balance at 23 May 2012 produces the following results using the different accounting treatments:

Using ‘Incorrect’ Treatment figures Opening Balance Date

23-May-06 01-Feb-08

Closing balance 23 May 2012 $        751,961 $         751,961

Less: Opening Balance $      (318,000) $        (550,000)

Movement $        433,961 $        201,961

Using ‘Correct’ Treatment figures Opening Balance Date

23-May-06 01-Feb-08

Closing balance 23 May 2012 $        751,961 $           751,961

Less: Opening Balance $      (247,066) $         (320,597)

Movement $        504,895 $          431,364

Summary of the plaintiffs’ position

In summary, the plaintiffs contend that the rental journal entry adjustment distorts the ascertainment of what is the correct balance owing from time to time across the relevant period because of the incorrect treatment of rent. As the period of distortion includes the beginning of the plaintiffs' statutory limited claim period (1 February 2008), the incorrect treatment flows into the calculation of that claim, if not corrected. This is because:

•Apportioning rent on a yearly basis across the relevant period decreases the balance of the Rising Rocket loan at any given date until 30 June 2009 (Step 1).
•This in turn increases the movement in the loan between the opening and closing (23 May 2012) balances (Step 2).

If the Court accepts that the rental journal entry should be reversed because of its distorting effect, and rent is payable by Shot One, then the plaintiffs submit that the calculations contended for by them apply (see under Issue 11 above) — namely, $395,380, alternatively $318,375.

The defendants’ response

The defendants submit that it is not open to the plaintiffs to simply make a series of retrospective adjustments to the accounts of Shot One and thereby reverse the rental journal entry. Rather, they say, the position is that the rental journal entry was processed in the books and records of Shot One for the financial year ended 30 June 2009, and Shot One lodged its 2009 income tax return based on those accounts (in which the balance owing by Rising Rocket was reduced by $332,031 on 30 June 2009). Having done so, it follows that Shot One has accepted that Nicholas Day assumed liability for the $332,031 that was reallocated to him, because Mr Jasper’s evidence was that the Shot One’s tax returns would not have been lodged unless the financial statements were signed off. Further, the defendants submit, there is no evidence before the Court that the sum of $332,031 was actually a rental payment. The annotation made in the ledger entries report is ‘Reconcile loan with Rising Rocket KW Adj’, but there is no reference to a worksheet to the accounts that might explain how that figure was calculated or adopted, and Mr Jasper was not asked about it or the underlying basis on which the adjustment occurred. In closing oral submissions, Senior Counsel for the defendants acknowledged that Mr Jasper had given evidence about an adjustment that might be made in the future regarding an adjustment for a commercial amount of rent, but he said Mr Jasper was not aware about the sum of $332,031. He said:

[MR EVANS:] That was speaking of an adjustment that was to be done when the accounts were being prepared for the commercial amount of the rent that needed to be shown as paid. Then I asked Mr Jasper a further question regarding that, and he spoke of what would be intended to occur. But Mr Jasper was not asked about that entry of the 332,000, and he didn't give any evidence regarding it. What the defendants say is that, . . . it is impermissible conjecture for the court to seek to determine how that figure of 32,000 [sic] was calculated; we really do not have any evidence in respect of it at all. And the underlying basis upon which the adjustment occurred.
It really is effectively a whole degree of retrospective attack upon the accounts without ever having sought to establish the basis upon which the entry was made in the first place, and of course I hesitate to repeat myself, and of course seeking, as it were, to rewrite Shot One's accounts from the figures that were accepted by Shot One as being including that adjustment downwards.[491]
[491]Transcript 07/03/17, at 749 (Mr Evans QC).

Conclusion

The evidence shows that the rental journal entries were made by Mr Jasper (or his firm) on the basis of instructions given by Nicholas Day. The substance of the rental journal adjustment was not explored with Mr Jasper when giving evidence, and the correct treatment of the journal entries was not the subject of any impartial expert evidence at trial. Were it necessary for the Court to decide this issue, for the reasons advanced by the defendants, I would not be inclined to accede to the plaintiffs’ submission that the Court should effectively ‘rewrite’ the accounts and reverse the journal entries.

Summary of Conclusions

For the reasons set out above, I am not satisfied that, as at 23 May 2012 when the Deed of Settlement was entered into, a reasonable person in Shot One’s position would not have entered into that transaction. Shot One faced real difficulties in seeking to prove its (unpleaded) loan account claims against Rising Rocket. This was because the very existence of the alleged loan was disputed by Richard Day, who was the sole director and shareholder of each of the parties to the underlying transaction, and there was no written agreement recording the loan and its terms. Further, the books and records that Shot One relied upon to support the existence and quantum of the loan account claim had been the subject of journal entries adjustments (and re-adjustments) made on the instructions of Nicholas Day that included the writing off of the Rising Rocket loan and its reinstatement shortly prior to the judicial mediation. When these observed difficulties are viewed in conjunction with the attendant statute of limitations issues and the quantum of costs and legal expenses likely to be incurred by Shot One in adding the loan account claim into the 2010 proceeding and pursuing it through to judgment, and weighed against the benefits that accrued to Shot One as a result of entering into the Deed of Settlement, it will be seen that the settlement reached was a sensible one for Shot One. To that point, none of Shot One’s pleaded claims in the 2010 proceeding had any real prospects of success and if leave were not granted to include the foreshadowed loan account claims, Shot One would likely have been required to pay the costs of Richard Day and Rising Rocket. By settling, Shot One also put an end to it incurring any further non-recoverable legal costs and expenses on its own account, expunged its liability (of at least $71,000) to Cooniemoon, and by settling the VCAT proceeding it ensured that Nicholas Day, its lead architect, could continue to reside at the Rockley Road property for a period of 15 months and run the architectural practice free from the stress and distraction of the litigation.

In my view, this is not a case where it could be said that under the Deed of Settlement Rising Rocket was receiving a bargain of such a magnitude that it could not be explained by normal commercial practice.

In the circumstances, having regard to each of the matters to which reference is made in section 588FB(1), I am not satisfied that a reasonable person in Shot One’s circumstances would not have entered into the Deed of Settlement transaction.

I will hear the parties on the precise form of the appropriate orders, including on the question of costs.

A company . . . must keep written financial records that:

(a)correctly record and explain its transactions and financial position and performance; and

(b)would enable true and fair financial statements to be prepared and audited.

The obligation to keep financial records of transactions extends to transactions undertaken as trustee.

The meaning of the expression ‘financial records’ is addressed in the dictionary in section 9, as follows:

financial records includes:

(a)invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and

(b) documents of prime entry; and
(c) working papers and other documents needed to explain:

(i) the methods by which financial statements are made up; and

(ii) adjustments to be made in preparing financial statements.

ACCOUNTS:	The Chairman tabled the financial accounts of the Company in respect of the year ended 30^th June [2005, 2006, 2007 or 2008 respectively as the case may be]. It was noted that the accounts had been prepared as a special purpose financial report in accordance with the accounting policies outlined in Note 1 to the accounts.
It was resolved the accounts be and are hereby adopted as tabled.

Category A[471]	$310,000
Category B[472]	$257,542
Category J[473]	$129,550
Category N[474]	($197,623)
Category O[475]	($10,000)
Total amount verified to source documentation	$489,469
Less: the Journal Entries	($325,508)
Source documentation less the journal entries	$163,961

MYOB account value	$201,961
Addition of Rising Rocket Credit	$332,031
Deduction of rent payable	($190,612)
Credit Cooniemoon rental payments	$52,000
Total owed	$395,380

$514,277	Rising Rocket loan account pursuant to most recent signed financial statements of Shot One (FY2009)
(-)$20,000	Payment on 25 September 2008
(-)$10,000	Payment on 21 January 2009
(-)$10,000	Payment on 13 February 2009
$474,277	TOTAL

FY2005:	Statute barred
FY2006:	Statute barred
FY2007:	Statute barred
FY2008:	Transactions before 31 January 2008 are statute barred
The amount debited to the Rising Rocket loan account for FY2008 in Shot One’s MYOB management accounts, during the period after 31 January 2008 is $171,500.[488]
FY2009:	Not statute barred
The amount debited to the Rising Rocket loan account for FY2009 in Shot One’s MYOB management accounts is $285,907.43. The amount credited to the Rising Rocket Loan Account for FY2009 is $167,623.[489] The net amount debited to the Rising Rocket Loan Account for FY2009 is therefore the difference between those two sums: $118,284.43. This amount should be adjusted to: (1) exclude three payments that were in the nature of rent of $5,925 each (totalling $17,775); (2) credit the three amounts that were paid by Rising Rocket to Shot One but not credited to the loan account (referred to above), totalling $40,000. Therefore, the net Rising Rocket loan account for FY2009, adjusted for rent and payments made by Rising Rocket to Shot One is $60,509.43.
FY2010:	Not statute barred, but all payments made by Shot One to Rising Rocket were in the nature of rent, not loans.
FY2011:	Not statute barred, but all payments made by Shot One to Rising Rocket were in the nature of rent, not loans.
FY2012:	Not statute barred, but all payments made by Shot One to Rising Rocket were in the nature of rent, not loans.
FY2013:	Not statute barred, but all payments made by Shot One to Rising Rocket were in the nature of rent, not loans.[490]

Date	All rent to 30 June 2009 expensed at that date	Rising Rocket loan balance
30 June 2004	$ -	$ -
30 June 2005	$ -	$ 260,500
30 June 2006	$ -	$ 427,000
30 June 2007	$ -	$ 456,000
30 June 2008	$ -	$ 721,500
30 June 2009	$ (332,031)	$ 514,276

Date	Rent expensed each financial year	Increase in loan account	Rising Rocket loan balance
30 June 2004	$ -	$ -	$ -
30 June 2005	$ (42,259)	$ -	$ 218,241
30 June 2006	$ (72,443)	$ 166,500	$ 312,298
30 June 2007	$ (72,443)	$ 29,000	$ 268,855
30 June 2008	$ (72,443)	$ 265,500	$ 461,912
30 June 2009	$ (72,443)	$ 124,807	$ 514,276

Incorrect Treatment		Correct Treatment
Date	All rent to 30 June 2009 expensed at that date	Rising Rocket loan balance	Rent expensed each financial year	Rising Rocket loan balance	Variance
30 June 2004	$ -	$ -	$ -	$ -	$ -
30 June 2005	$ -	$ 260,500	$ (42,259)	$ 218,241	$ (42,259)
30 June 2006	$ -	$ 427,000	$ (72,443)	$ 312,298	$ (114,702)
30 June 2007	$ -	$ 456,000	$ (72,443)	$ 268,855	$ (187,145)
30 June 2008	$ -	$ 721,500	$ (72,443)	$ 461,912	$ (259,588)
30 June 2009	$ (332,031)	$ 514,276	$ (72,443)	$ 514,276	$ 0

Using ‘Incorrect’ Treatment figures	Opening Balance Date
Using ‘Incorrect’ Treatment figures	23-May-06	01-Feb-08
Closing balance 23 May 2012	$ 751,961	$ 751,961
Less: Opening Balance	$ (318,000)	$ (550,000)
Movement	$ 433,961	$ 201,961

Using ‘Correct’ Treatment figures	Opening Balance Date
Using ‘Correct’ Treatment figures	23-May-06	01-Feb-08
Closing balance 23 May 2012	$ 751,961	$ 751,961
Less: Opening Balance	$ (247,066)	$ (320,597)
Movement	$ 504,895	$ 431,364

[2017] VSC 741

7 December 2017