Sunburst Properties Pty Ltd (In Liq) v Agwater Pty Ltd & Ors

[2005] SASC 335

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

SUNBURST PROPERTIES PTY LTD (IN LIQ) v AGWATER PTY LTD & ORS

Judgment of The Honourable Justice Gray

2 September 2005

CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DIRECTORS AND OTHER OFFICERS - AUTHORITY AND POWERS

CORPORATIONS - CORPORATE FINANCE - SHARES - ALLOTMENT AND ISSUE

Action concerning the enforceability of a joint-sale agreement between vendors of land and water infrastructure – whether the joint-sale agreement was authorised and binding on company vendor – consideration of office of director – consideration of director’s duties when dealing with related companies – consideration of director’s duties when company insolvent or when approaching insolvency – consideration of whether joint-sale agreement enforceable – consideration of statutory assumptions contained in section 129 of the Corporations Act 2001 – consideration of transactions said to effect enforceability of the joint-sale agreement – consideration of whether such transactions illusory, void or voidable – held: directors acted within their duties in having the company enter into the joint-sale agreement – transactions said to effect enforceability, illusory void or voidable – joint-sale agreement binding and enforceable – plaintiff entitled to relief sought.

Water Resources Act 1997 (SA); Corporations Act 2001 (Cth) s 128, s 129, s 267; Law of Property Act 1936 (SA) s 15, referred to.
Walker v Wimborne (1976) 137 CLR 1; Nicholson v Permakraft (NZ) Ltd (In Liq) (1985) 3 ACLC 453; Kinsela v Russell Kinsela Pty Ltd (In Liq) (1986) 4 NSWLR 722; Angas Law Services v Carabelas [2005] HCA 23; Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 122 ALR 531; Spies v R (2000) 201 CLR 603; Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62; Equiticorp Finance Ltd (In Liq) v Bank of New Zealand (1993) 32 NSWLR 50; Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146; Briginshaw v Briginshaw (1938) 66 CLR 336, considered.

SUNBURST PROPERTIES PTY LTD (IN LIQ) v AGWATER PTY LTD & ORS
[2005] SASC 335

Civil

GRAY J

Introduction

1. This action concerns the enforceability of an agreement (“the joint-sale agreement”) between intending vendors of land and water infrastructure at Langhorne Creek. 

2. The joint-sale agreement between the vendors, the plaintiff, Sunburst Properties Pty Ltd (“Sunburst Properties”), and the first defendant, Agwater Pty Ltd (“Agwater”), provided for the sale of property and an apportionment of sale proceeds.  The issue to be determined is whether Agwater’s entry into the joint-sale agreement was an authorised or otherwise binding act of Agwater.

3. Sunburst Properties is the registered proprietor of land at Langhorne Creek.  The Bulka vineyards are situated on land known as Bulka Station.  Sunburst Properties is also said to be the holder of water licences under the Water Resources Act 1997 (SA). These licences permit water to be drawn from Lake Alexandrina. This is the only source of necessary irrigation water for the Bulka vineyards.

4. On or about 12 August 2002, Agwater became the owner of the pipeline which enabled water drawn from Lake Alexandrina to be pumped to the Bulka vineyards pursuant to water licence entitlements.  The continued ownership of the pipeline by Agwater is also an issue in these proceedings. 

5. The second defendant, Andrew Morton Garrett, has held office as a director of Agwater.  However, the term of his directorship is in issue in these proceedings. 

6. The third defendant, Averil Gay Garrett, has at relevant times held office as a director of Sunburst Properties.  The term of her directorship is not in issue.

7. Mr Garrett is a winemaker.  He is the husband of Mrs Garrett. He has been heavily involved in the Garrett Group of companies.  The Garrett Group is a name given to a number of related corporate entities and trusts.  The Garrett Group included two subgroups known as the Braidwood Group and the Sunburst Group.  The ultimate beneficiaries of the Garrett Group, including both subgroups, were members of the Garrett family.  Mr Garrett controlled those interests. 

8. During final submissions, Mr Garrett, who appeared in person, described his involvement in the Garrett Group as follows:

   Mr Garrett:My position is that I am currently the sole director of all companies. I removed Mr Marshall in December of last year [2003]. I have made an application under [action number] 57 to remove all companies from control and properly table the issues that surround the covenants. I am the controlling mind, and always have been, of all the groups of companies.

   His Honour:               I have noted your written submission in that respect and that you say that you have controlled the trusts as well at all times.

   Mr Garrett:Yes, and I represent 100% of the legal and beneficial ownership of all the entities from start to finish.

   His Honour:               Do you include J & W Holdings in that description?

   Mr Garrett:Yes, I do.  There is no question about it.  I did that for a deliberate purpose.  J & W was initially established for the racing business but it became a vehicle that I could choose to control and manipulate –

   His Honour:               The way in which J & W has acted, through the latter part of 2003, for example, have been matters you have controlled.

   Mr Garrett:        Yes.  There is no question.  I have never stood away from that.

9. The fourth defendant, Andrew Kenneth Sandow, has been an advisor to the Garrett interests and at times a director or other officer of Sunburst Properties, Agwater and other entities in the Garrett Group. 

10. The fifth and sixth defendants, John Crosby and Phillip Douglas Marshall at times were also directors of Agwater.  There is a dispute about the term during which Mr Crosby held office as a director.  The role of Mr Crosby and Mr Marshall in entities and transactions involved in these proceedings will be discussed later.

11. The seventh defendant, J & W Holdings Pty Ltd (“J & W Holdings”), claims to have held an interest in the pipeline at relevant times.  It also claims to hold a shareholding in Agwater and a registered charge over the assets of Agwater. 

12. In broad terms, Sunburst Properties’ case is that it entered into the joint-sale agreement with Agwater on 5 November 2003 for the sale of the Bulka vineyard, the water licences and the pipeline.  A division of proceeds in the event of sale was agreed.  Sunburst Properties claims to be entitled to proceed with the joint-sale both on its own behalf and on behalf of Agwater.

13. Mr Garrett, Mrs Garrett and J & W Holdings dispute this claim.  They accept that there was a purported joint-sale agreement.  However, they rely on a number of events and transactions which they say render the joint-sale agreement inoperative.  They seek to set aside the joint-sale agreement and prevent any sale.  They assert that certain events and transactions removed the capacity of Mr Crosby and Mr Marshall to act for Agwater at relevant times and in particular to have Agwater enter into the joint-sale agreement.  They say that the transactions have led to the transfer of ownership of the pipeline, so that ownership now resides with third party interests. Sunburst Properties challenges these assertions.

    Pleaded Cases

14. The proceedings have at times proved difficult to limit to the pleaded issues.  However, this judgment and reasons address the issues joined between the parties.  At times, Mr Garrett sought to conduct his case as though the pleadings did not exist.  As a result, it is necessary to outline the pleaded issues in some detail to ensure that the relevant issues are clearly identified for resolution.

    Statement of Claim

15. The amended statement of claim alleges that on or about 5 November 2003, a joint-sale agreement was reached between Sunburst Properties, under the hand of its joint and several receivers and managers, and Agwater, under the hand of Mr Crosby and Mr Marshall. It is further alleged that Mr Crosby and Mr Marshall were parties to the agreement in their personal capacities.

16. Sunburst Properties alleges that at the time of the execution of the joint-sale agreement, Mr Crosby and Mr Marshall were directors of Agwater.  Mr Garrett and Mr Sandow had, Sunburst Properties pleads, ceased to be directors of Agwater in early July 2003.  Sunburst Properties claims that shareholders of Agwater at all material times were Mr Crosby, who held nine ordinary shares, and Sunburst Properties, which held one ordinary share.  Sunburst Properties claims to be entitled to the beneficial ownership of all the issued capital of Agwater.

17. Sunburst Properties further alleges that Mr Garrett and Mr Sandow purported to cause Agwater to enter into a deed of charge on 19 November 2003 in favour of J & W Holdings.  It says that on 5 December 2003, Mr Garrett, purporting to act as a director of Agwater, caused the charge to be registered in the Australian Register of Charges against Agwater at the Australian Securities and Investments Commission.  Sunburst Properties alleges that at the time of the signing of the charge and its registration:

    -neither Mr Garrett nor Mr Sandow were directors of Agwater or had authority to cause Agwater to execute the charge;

    -Mr Garrett and/or Mr Sandow knew or ought to have known of the rights of Sunburst pursuant to the joint-sale agreement;

    -J & W Holdings, through its sole director and secretary, Daniel O’Leary, knew or ought to have known that neither Mr Garrett nor Mr Sandow had authority to cause Agwater to execute the charge;

    -J & W Holdings, through its sole director and secretary, Mr O’Leary, knew or ought to have known of the rights of Sunburst Properties pursuant to the joint-sale agreement.

18. Sunburst Properties claims that at all relevant times Agwater was not indebted to J & W Holdings.  It says that J & W Holdings provided no consideration for the charge.  Sunburst Properties alleges that J & W Holdings, Mr Garrett and Mr Sandow executed the charge with the purpose of frustrating the contractual rights of Sunburst Properties as a party to the joint-sale agreement.

19. Sunburst Properties alleges in the alternative that at all relevant times:

    -Mr Crosby and Mr Marshall each purported to be, and represented to Sunburst Properties and its receivers and managers that they were, then currently appointed directors of Agwater;

    -Australian Securities and Investment Commission (ASIC) recorded, in respect of Agwater, that Mr Crosby and Mr Marshall were the only current directors of Agwater;

    -neither of the receivers and managers of Sunburst Properties were aware of any contention that Mr Crosby and Mr Marshall were not directors of Agwater, nor that there was any question over their ability as directors to cause Agwater to enter into the joint-sale agreement;

    -there was no information or evidence publicly available or available to the receivers and managers of Sunburst Properties that suggested that Mr Crosby and Mr Marshall were not directors of Agwater, and that they could not cause Agwater to enter into the joint-sale agreement;

    -the members register of Agwater required to be kept pursuant to section 169 of the Corporations Act 2001 (Cth) recorded Mr Crosby as holding nine ordinary shares in Agwater and Sunburst Properties as holding one ordinary share in Agwater;

    -the register of directors of Agwater recorded that Mr Crosby and Mr Marshall were the only directors of Agwater

20. As a consequence, Sunburst Properties claims that it and its receivers and managers were entitled, by reason of section 129 of the Corporations Act, to make the assumption that:

    -Mr Crosby and Mr Marshall had been duly appointed as directors of Agwater;

    -Mr Crosby and Mr Marshall had authority to exercise the powers and perform the duties customarily exercised or performed by a director of a small proprietary company such as Agwater, which includes dealing with its assets;

    -Mr Crosby and Mr Marshall were properly performing their duties to Agwater; 

    -      the joint-sale agreement was duly exercised by Agwater.

21. If, contrary to the case of Sunburst Properties, Mr Garrett and Mr Sandow were directors of Agwater at the time of the execution of the charge, Sunburst Properties further alleges that, by causing Agwater to enter into the charge, Mr Garrett and Mrs Garrett caused Agwater to act in breach of its contractual obligations pursuant to the joint-sale agreement.  Sunburst Properties says this was a breach of their duties as directors. 

22. Alternatively, Sunburst Properties alleges that J & W Holdings was a “relevant person” within section 267(1) of the Corporations Act, and that J & W Holdings had within six months after the grant of the charge purported to take a step in the enforcement of the charge without the court having granted leave pursuant to section 267(3) of the Act. As a result, Sunburst Properties claims that the charge was void.

23. Mr Crosby and Mr Marshall joined with Sunburst Properties in seeking the relief sought by the amended statement of claim. 

24. After initially being party to a joint defence with Mr Garrett, Mr Sandow filed a separate amended defence supporting the claim of Sunburst Properties.

    Defences

25. Mr Garrett in his defence admits the execution of the joint-sale agreement.  However, he denies that this occurrence effected an agreement between Sunburst Properties and Agwater.  Mr Garrett asserts that Mr Crosby was not a director of Agwater at the time.  Mr Garrett pleads that Mr Crosby resigned as a director on or about 15 December 2002.  Accordingly, Mr Garrett says that Mr Crosby had no power or authority to execute the agreement on behalf of Agwater.  Although conceding that Mr Marshall was a director of Agwater at the time of the execution of the joint-sale agreement, Mr Garrett claims that Mr Marshall knew that Mr Crosby was not a director of Agwater and had no power or authority to execute the agreement on its behalf.

26. Mr Garrett denies that Sunburst Properties and Mr Crosby were shareholders in Agwater at the time of the execution of the joint-sale agreement. He says that he and Mrs Garrett held one share in Agwater on trust for the Andrew Garrett Family Trust No 2, and that J & W Holdings held a further 200,000 shares in Agwater.  Mr Garrett claims that:

    -on 20 June 2002 Mr Crosby transferred the only issued share in Agwater to Sunburst Properties;

    -on 20 June 2002 Sunburst Properties transferred the only issued share in Agwater to Mrs and Mr Garrett as trustees for the Andrew Garrett Family Trust No 1;

    -on 1 July 2003 Agwater issued 200,000 fully paid $1 shares to J & W Holdings in satisfaction of a debt due to J & W Holdings in the sum of $200,000 and 5 million options to Mrs Garrett and Mr Garrett as trustees for the Andrew Garrett Family Trust No 1;

    -on 21 August 2003 Mrs Garrett and Mr Garrett as trustees for the Andrew Garrett Family Trust No 1 transferred its share in Agwater to Mrs Garrett and Mr Garrett as trustees for the Andrew Garrett Family Trust No 2 pursuant to a share sale agreement.

27. Mr Garrett denies the allegation that the receivers and managers were entitled by reason of section 129 of the Corporations Act to make certain statutory assumptions.  Mr Garrett asserts that:

    -on at least one occasion he informed Mr Heard that Mr Crosby was not a director of Agwater and had not been a director since December 2002;

    -Mr Crosby’s resignation had been provided to the National Australia Bank Ltd (“National Australia Bank”) at or about the time it had been signed and that copies were held by Agwater and by its then solicitors;

    -the member register of Agwater recorded, or should have recorded, the shareholdings and directorships pleaded by him.

28. Mr Garrett further claims that if National Australia Bank had properly informed the receivers and managers, or if the receivers and managers had made all proper enquiries of Agwater and its then solicitors, the receivers and managers would have been aware that Mr Crosby was not in fact a director.  They should therefore have suspected that they could not make the pleaded assumptions.

29. Mr Garrett asserts that he and Mr Sandow, as directors, caused Agwater to enter into a deed of charge dated 19 November 2003 in favour of J & W Holdings.  Mr Garrett says that, as a director of Agwater, he caused the charge to be registered in the Australian Register of Charges against Agwater at ASIC.  Mr Garrett claims that:

    -on 20 December 2002 Sunburst Properties assigned to Mrs Garrett and Mr Garrett, as trustees for the Andrew Garrett Family Trust No 1, a debt due from Agwater in the sum of $2.2 million;

    -on 21 August 2003 Mrs Garrett and Mr Garrett, as trustees for the Andrew Garrett Family Trust No 1, assigned the debt to Mrs Garrett and Mr Garrett, as trustees for the Andrew Garrett Family Trust No 2;

    -on 29 August 2003 Mrs Garrett and Mr Garrett, as trustees for the Andrew Garrett Family Trust No 2, sold the debt to J & W Holdings.

30. Mr Garrett denies Sunburst Properties’ allegation that neither he nor Mr Sandow were directors of Agwater, nor did they have authority to cause Agwater to sign the charge.  He denies that he or Mr Sandow ought to have known of the rights of Sunburst Properties pursuant to the joint-sale agreement.  Mr Garrett asserts, that despite requests he made to Sunburst Properties and to Mr Crosby and Mr Marshall, he and Mr Sandow had no knowledge of the joint-sale agreement until 11 December 2003.

31. Mr Garrett asserts that at all material times prior to 30 June 2003 Agwater was indebted to J & W Holdings in the sum of $200,000, and that, as and from 29 August 2003, Agwater had been indebted to J & W Holdings in the sum of approximately $2.2 million. Mr Garrett denies that J & W Holdings gave no consideration in respect of the granting of the charge.

32. In response to the allegation that Mr Garrett and Mr Sandow executed the charge with the purpose of frustrating the contractual rights of Sunburst Properties pursuant to the joint-sale agreement, Mr Garrett repeats that he and Mr Sandow had no knowledge of the joint-sale agreement until 11 December 2003 and that Agwater had been indebted to J & W Holdings in the sum of $2.2 million from 29 August 2003.

33. Mr Garrett pleads that he owed directors duties to Agwater, but denies that he was in breach of such duties. He denies that J & W Holdings was a relevant person for the purposes of section 267 of the Corporations Act.

34. The effect of the pleadings of Mrs Garrett and J & W Holdings is to place their cases on substantially the same footing as that of Mr Garrett.

35. Agwater is a defendant to the proceedings.  As earlier observed, control of Agwater is an issue in the proceedings.  The case was fought between the Sunburst interests, represented by the receivers and managers and supported by Mr Crosby and Mr Marshall and the Garrett interests.  Mr Sandow by his defence did not oppose Sunburst’s claim.

    Reply

36. Sunburst Properties admits that on or about 20 June 2002 Mr Crosby transferred to Sunburst Properties one ordinary share in Agwater.  It says that, at the time of the said transfer, Agwater had ten ordinary shares on issue, and nine shares remained held by Mr Crosby. 

37. Sunburst Properties says that the share in Agwater, when transferred to Sunburst, became subject to a registered fixed charge granted by Sunburst in favour of National Australia Bank.  Pursuant to clause 4.3 of the charge, Sunburst was prohibited from transferring the share.  If the share was transferred as alleged, it says:

    -      the transfer was for no, or in the alternative no adequate, consideration;

    -      Mr and Mrs Garrett hold the share on trust for Sunburst;

    -      National Australia Bank did not consent to the transfer;

    -the transferred share remains subject to the charge in favour of National Australia Bank;

    -on and from the appointment of receivers and managers of the assets the subject of the charge (17 July 2003), the receivers had the control over voting and all other powers attached to the transferred share.

1. Sunburst Properties denies that J & W Holdings held or holds 200,000 shares in Agwater. Sunburst Properties claims that no meeting of directors of Agwater was held at which a resolution of directors was passed determining that such an issue take place.  It says that any issue of 200,000 shares in Agwater is void.  Further, it says that Mr Garrett and Mr Sandow were not directors of Agwater at the time of the purported issue and could not properly have caused Agwater to make the issue.  It further says that J & W Holdings provided no or no adequate consideration for the issue.  Sunburst Properties responds in similar terms to the allegation that 5 million share options were issued to Mr Garrett and Mrs Garrett as trustees for the Andrew Garrett Family Trust No 1.

2. Sunburst Properties admits that Agwater owed more than $2 million to Sunburst Properties. However, it denies that the debt was assigned to Mrs and Mr Garrett as trustees of the Andrew Garrett Family Trust.  It says that the debt was subject to the fixed charge in favour of National Australia Bank and that Sunburst Properties was prohibited from dealing with the debt.

3. If the debt was assigned to Mrs and Mr Garrett, Sunburst Properties says that:

   -      no or no adequate consideration was paid to Sunburst Properties;

   -Mr Garrett, Mrs Garrett and Mr Sandow were (knowingly) acting in breach of their duties as directors;

   -      Mrs and Mr Garrett hold the debt on trust for the Sunburst Properties;

   -      National Australia Bank did not consent to the assignment;

   -      the debt remains subject to the charge;

   -on and from the appointment of receivers and managers of the assets the subject of the charge, neither Mr or Mrs Garrett nor any other person save the receivers had control over the debt and any purported dealing with the debt is void;

   -no notice of assignment of the debt was given, contrary to section 15 of the Law of Property Act1936 (SA) and the common law.

4. If the debt was assigned to J & W Holdings as alleged, Sunburst Properties says that:

   -      J & W Holdings knew of the facts alleged;

   -      no or no adequate consideration was paid by J & W Holdings;

   -      J & W Holdings holds the debt on trust for Sunburst Properties;

   -      the debt remains subject to the charge;

   -on and from the appointment of receivers and managers any purported dealing with the debt is void;

   -no notice of assignment of the debt was given, contrary to section 15 of the Law of Property Act and the common law.

5. Sunburst Properties denies the defence advanced by Mr Garrett concerning his claimed lack of knowledge of the joint-sale agreement.  It further says that by reason of, inter alia, two facsimiles from the solicitors of Sunburst Properties to the solicitors for Mr Sandow, Mrs Garrett and Mr Garrett dated 27 November 2003, Mr Sandow, Mrs Garrett and Mr Garrett were put on notice and had actual knowledge of the prohibition on Agwater from dealing with the pipeline.

6. As earlier observed during the course of the trial, Mr Garrett sought to delve into questions and issues not raised in the pleaded cases.  His principal concern appeared to relate to a wide-sweeping allegation of fraud on the part of National Australia Bank, a number of its officers, Mr Crosby, Mr Marshall and others.  Mr Garrett did not plead these allegations or in any way particularise them.  They concerned a number of non-parties.  To allow the allegations to be advanced in these circumstances would cause obvious and unfair prejudice, with the possibility of causing grave injustices. 

7. These proceedings are concerned with the authority of Mr Crosby and Mr Marshall to enter into the joint-sale agreement on behalf of Agwater.  The proceedings do not concern the terms of a proposed sale to Colin Paech.  The parties to the joint-sale agreement and Mr Paech entered into a contract of sale and purchase.  By the time of trial, the contract had lapsed, although it was said that the contract could be revised.  Mr Paech did not seek to take any part in the proceedings.  Mr Garrett complains that the sale to Mr Paech was at an undervalue.  However, that is not an issue for determination in these proceedings. 

8. At times, Mr Garrett foreshadowed an intention to amend his counterclaim.  At one stage, he prepared a totally inadequate proposed amended counterclaim.  The document lacked the most rudimentary particularity of serious fraud allegations.  A Master of this Court refused leave to amend.  The Garrett interests lodged an appeal and then abandoned this appeal during the course of the trial.

   The Evidence

9. Sunburst Properties led evidence from Mr Sandow, Mr Crosby, Mr Marshall, Simon Illsley and Andrew Heard. In support of his case, Mr Garrett called Neil McKenzie and Christopher Fisher and recalled Mr Sandow. Mr Garrett also gave evidence.  Mrs Garrett, Mr Sandow, Mr Crosby and Mr Marshall presented no evidence.  Both Sunburst Properties and Mr Garrett tendered voluminous documentary material.  J & W Holdings were represented by a director, Stephen Piggott.  J & W Holdings tendered a number of documents but otherwise presented no evidence at trial.

   Witnesses

   Andrew Heard

10. Mr Heard was a joint administrator appointed by National Australia Bank to Sunburst Properties and other companies in the Garrett Group.  He spoke of his prior involvement in the sale of Bulka Station and the associated water infrastructure on his appointment by Bank West some years earlier.  He recounted his later involvement in the joint-sale agreement.  He was engaged to perform professional duties and did so in an appropriate manner.

11. Mr Heard’s evidence was straightforward, careful and clear.  Much of his evidence accorded with the effect of contemporaneous and unchallenged business records.  He was a witness whom I accept as credible and reliable and on whose evidence I am prepared to act.  Insofar as Mr Garrett’s evidence is inconsistent with that of Mr Heard, I reject Mr Garrett’s testimony.

12. Mr Heard’s recollection of detail was at times general through the unavailability of his original file.  The explanation he gave was that he had changed firms and left the file with the previous firm and the file could not be located.  I accept this explanation.

13. I accept Mr Heard’s evidence that at all times he believed that Mr Crosby and Mr Marshall were directors of Agwater and that they had authority to act for Agwater in Agwater’s entry into the joint-sale agreement.  I accept his evidence that the parties to the joint-sale agreement engaged in bona fide negotiation.  The terms were reached between parties at arms’ length and were fair and reasonable. 

    Mr Marshall

14. Mr Marshall became an advisor to members of the Garrett Group in early 2002.  By late 2002, he was a general business advisor and an employee of entities in the Group.  In July 2003, he took on the role as manager of the Group.  He took a position on the Board of most of the companies of the Group.  I accept Mr Marshall’s evidence.  He was a careful and clear witness.  I consider Mr Marshall to be a credible and reliable witness upon whose evidence I am prepared to act.  His evidence was supported by contemporaneous business records.  He had a good recall of events that accorded with the chronology as it unfolded through the unchallenged documentary exhibits.  I reject Mr Garrett’s criticisms of Mr Marshall’s evidence.  Insofar as the evidence of Mr Garrett and Mr Sandow is inconsistent with the evidence of Mr Marshall, I reject their testimony.  I will discuss their evidence later in these reasons.

    Mr Crosby

15. Mr Crosby was a confident articulate and impressive witness upon whose evidence I am prepared to act.  I reject Mr Garrett’s criticisms of Mr Crosby.  In particular I reject the suggestion that Mr Crosby was improperly motivated by self-interest and sought, at Mr Garrett’s expense, to acquire assets at undervalue. 

16. Mr Crosby’s expertise concerning water infrastructure and his efforts to establish Agwater explain why he would wish to continue as a director on an ongoing basis.  His evidence was corroborated by the documentary and other oral evidence led by Sunburst Properties. 

17. Later in these reasons, I find that Mr Crosby remained as a director of Agwater at all times.  I also find that he remained a shareholder but held his shares on behalf of Sunburst Properties. 

18. Mr Crosby developed the Agwater group of companies and in particular had expertise in regard to issues concerning water infrastructure.  In his dealings with the Garrett Group, it was always the intention that the pipeline and water licences would be sold to reduce debt in the Garrett Group.  The fact that efforts to obtain a buyer were unsuccessful was not the result of any lack of effort on Mr Crosby’s part.  Insofar as the evidence of Mr Garrett and Mr Sandow is inconsistent with the evidence of Mr Crosby, I reject their testimony.

    Mr Sandow

19. Mr Sandow was presented by the plaintiff and later re-presented by Mr Garrett.  Notwithstanding the obvious irregularity, I permitted the latter course, as Mr Garrett was unrepresented and claimed that he had only received relevant documents during the trial. 

20. Mr Sandow was a largely self-trained business advisor.  He had developed skills in bookkeeping, accounting and computer programming.  It is clear that he was very much “Mr Garrett’s man”.  He was prepared to do Mr Garrett’s bidding even when he thought that to do so was inappropriate or incorrect.  This was demonstrated by his evidence concerning the re-writing of the management accounts in the latter part of 2003 after a number of the companies in the Garrett Group were placed in liquidation.  Mr Sandow did not approve of this process.  Notwithstanding, his disapproval he went along with the re-writing of the accounts at Mr Garrett’s request.  However, it should be noted that he insisted that the original accounts be retained.

21. Mr Sandow’s willingness to enter into transactions in November 2003 and the back-dating of those transactions, knowing that Mr Garrett’s purpose was to do all he could to stop the joint-sale agreement with a view to frustrating National Australia Bank’s interests, also demonstrates the extent to which he was prepared to follow Mr Garrett’s instructions.  I will discuss these matters in detail later in these reasons.

22. Mr Sandow was or ought to have been well aware that he was not a duly appointed director of Agwater at material times.  Again I refer to my later findings in this respect.  His conduct in agreeing to act as though he was a director of Agwater when he was not in fact a director demonstrates the lengths he was prepared to go to assist Mr Garrett.  He appeared to be prepared to act in whatever way Mr Garrett wished or directed.  Where Mr Sandow’s evidence is inconsistent with that of Mr Heard, Mr Marshall, Mr Crosby or Mr McKenzie, I reject his evidence.

23. However, aspects of Mr Sandow’s evidence are acceptable.  I have acted on his evidence in certain discrete respects.  For example, his evidence as to Mr Garrett’s motives from time to time accords with, and supports findings, that I have made.

    Mr Illsley

24. Mr Illsley gave evidence about his role as an officer of National Australia Bank and his involvement in the financing of the Garrett companies.  I accept his evidence and I am prepared to act on it.  In most respects his evidence was supported by contemporaneous business records.

    Mr McKenzie

25. Mr McKenzie gave evidence of his advisory role in regard to the financial difficulties facing the Garrett companies.  He was a qualified accountant brought in to advise by Mr Marshall.  I accept his evidence.  Insofar the evidence of Mr Garrett and Mr Sandow conflicts with the evidence of Mr McKenzie, I reject their evidence.

    Mr Fisher

26. Mr Fisher is a finance broker involved with commercial and international loan structuring.  Mr Fisher gave evidence regarding general practice in relation to international loan structuring and indicator rates.  Reference was made to National Australia Bank’s participation in international loan structuring.  Mr Fisher’s evidence was of little or no relevance to the issues in dispute.

    Mr Garrett

27. Mr Garrett gave evidence that he became involved with National Australia Bank in about 2001 when he had the opportunity to purchase “distressed assets” under the receivership of Mr Heard.  In late 2002, Mr Garrett’s relationship with the Bank deteriorated.  Mr Garrett became poorly disposed towards the Bank and increasingly more so.

28. It was Mr Garrett’s evidence that Mr Crosby resigned as a director of Agwater in December 2002. The resignation, he said, was required by a possible purchaser of the pipeline, identified as “the Terrain interests”.

29. As earlier observed, Mr Garrett accepted that from the Garrett family’s point of view he was the controller of all relevant entities in the Garrett Group and he and his family were the beneficial owners of the entities in the Garrett Group.  This description accords with much of the evidence in the trial and was generally confirmed by much of Mr Garrett’s conduct.  I accept the description as accurate.

30. Generally, I formed an adverse view of Mr Garrett’s credibility and reliability as a witness.  I reject his evidence that Mr Crosby resigned in December 2002 or at any other time.  I reject his testimony that there was any agreement to transfer the share in Agwater from Sunburst Properties to the Andrew Garrett Family Trust.  I reject his evidence that there was any assignment of debt in December 2002 or at any other time, being a debt from Agwater to Sunburst Properties to become a debt from the Family Trust to Sunburst Properties.  I reject his testimony that he remained a director of Agwater until late 2003.  I am satisfied that the assertions of Mr Garrett in this respect were concoctions.  These matters are discussed later in these reasons in some detail.

31. Mr Garrett gave evidence that he was ill and depressed during the 2003 year to the point where he was unable to attend to business matters from time to time.  Other witnesses described erratic behaviour by Mr Garrett.  It is possible that his poor health may have added to his other difficulties at the time.

32. At times in his evidence, Mr Garrett was frank.  He acknowledged the backdating of documents in an effort to frustrate National Australia Bank’s attempts to recover its alleged debts.  Again these matters were confirmed by, and consistent with, other evidence.

    Documentary Evidence

33. As earlier observed, a vast body of documentary evidence was tendered at the trial.  Much of this documentation was not contentious and represented business records confirming contemporary events.  However, a considerable body of documentary evidence produced by or on behalf of Mr Garrett was admitted to be back dated and was of dubious accuracy.  These documents are discussed later in these reasons.

    The Garrett Group

34. During the course of the trial, reference was made to the affairs of the group of companies sometimes described as the Garrett Group.  A number of the companies relevant to these proceedings were acquired or set up by Mr Garrett to pursue interests in the wine industry.  As earlier observed, the Garrett Group included two subgroups known as the Braidwood Group and the Sunburst Group.  The entities included:

    -      Sunburst Properties Pty Ltd;

    -      Sunburst Holdings Pty Ltd;

    -      Braidwood Management Pty Ltd;

    -      Braidwood Operations Pty Ltd;

    -      Drumcalpin Wines Pty Ltd;

    -      Agwater Pty Ltd.

35. The group structure was such that beneficial ownership of the assets of the companies generally resided in Mr and Mrs Garrett through the Andrew Garrett Family Trust, or in a later formed trust, and the Andrew Garrett Family Trust No 2.

36. Sunburst Properties was incorporated in New South Wales as Braidwood Group Ltd.  On 2 May 2002, it altered its status to that of a proprietary company.  On 3 May 2002, it changed its name to Sunburst Properties.  Its principal place of business and its registered office became the Adelaide office of accountants, BDO (SA) Pty Ltd (“BDO”).  Mr Garrett was appointed a director on 26 October 2000.  Mrs Garrett was appointed a director on 4 April 2002.

37. Agwater was incorporated in Victoria in April 2001. Mr Crosby was initially its sole director and shareholder.

    Chronology of Main Events

38. The following chronology sets out the findings of fact that I make on the evidence tendered at trial.  Many of these facts were not disputed.  A number of facts were disputed and in this chronology some disputed facts are preceded by the word “purported”.  Unless separately addressed, I have not accepted any fact or event described as purported.

    July 2001 to July 2002

39. On 15 July 2001, Bank West appointed Mr Dwyer and Mr Heard as receivers and managers of Alexandrina Water Pty Ltd.  That company was a member of a group of companies known as the Vinescape Group.  It owned the vineyards known as Bulka Station and was the owner of the pipeline that supplied water from Lake Alexandrina to Bulka Station. 

40. On or about 14 February 2002, Sunburst Properties executed a fixed and floating charge in favour of National Australia Bank.  Clause 4.1 provided that the charge was to take effect as a fixed charge over, inter alia, present and future “marketable securities” and “book debts”.  Clause 4.3 imposed limitations on Sunburst Properties’ right to deal with property the subject of the charge. Sunburst Properties could not, without the consent of National Australia Bank, dispose of, part with or deal with the whole or any major part of its undertaking.  Clause 6.2 of the charge listed a series of negative undertakings.  In particular, clause 6.2(a) provided that a mortgagor may not without the consent of the Bank do or permit any act, matter or thing which would result in a contravention of clause 4.3.

41. Clause 38 listed supplementary prohibitions attaching the charging provisions to the trust assets of the Andrew Garrett Family Trust No 1.

42. By early 2002, Mr Garrett was receiving advice from Mr Marshall.  Mr Marshall introduced Mr Garrett to Mr Crosby.  Mr Crosby had a specific interest concerning the provision of water infrastructure to vineyards.  Mr Crosby at that time controlled Agwater.  As later discussed, Agwater became the nominated purchaser of the pipeline and water licences.

43. The general contemplation in early 2002 was that the pipeline once acquired by the Garrett Group would be on-sold by Mr Crosby to an entity to be formed by Mr Crosby.  However, there was to be a lease-back arrangement so that Bulka Station vineyard would have a guaranteed supply of irrigation water.  The purpose of the on-sale of the pipeline and water licences was to reduce debt and to provide working capital.

44. On the settlement of the sale of the assets from the receivers and managers of Alexandrina Water to the Garrett interests, and in particular the sale of the pipeline and water licences to Agwater, Mr Crosby was to transfer his entire shareholding in Agwater to Sunburst Properties.  There was confusion as to the number of shares held by Mr Crosby in Agwater at the time.  That confusion remains.  Evidence suggests that Mr Crosby held either one or ten shares.  Whatever the shareholding, it was the intention that the entire shareholding of Agwater would be held by Sunburst Properties.  Mr Crosby’s position was to be protected by an option to purchase the pipeline.

45. On or about 18 April 2002, Mr Garrett agreed to purchase from the receivers and managers of Alexandrina Water the pipeline and water licences.  Mr Garrett nominated Agwater to be a party to complete the sale agreement in respect of the water infrastructure. Mr Garrett also agreed to purchase the Bulka vineyards, previously owned by an entity within the Vinescape Group.  The purchaser of the vineyards was later nominated to be Sunburst Properties.  The total price to be paid for all of the assets was $2.85 million.

46. On or about 24 May 2002, Mr Garrett arranged finance with National Australia Bank.  The finance was by way of a bill facility in favour of Sunburst Properties.  Part of this facility was to be used to pay for the acquisition of Bulka Station, the pipeline and the water licences.  At the same time, Mr Garrett was refinancing a debt owed to another financier.  This refinancing was the subject of a separate bill facility from National Australia Bank in favour of Mr and Mrs Garrett as trustees of the Andrew Garrett Family Trust No 1.

1. Mr Sandow commenced bookwork for the Garrett Group in or about November 2001.  By June 2002, he appeared to have become a general advisor to Mr Garrett and an employee of entities within the Garrett Group.

2. The advances to enable the purchase from the receivers and managers of Alexandrina Water to take place were the subject of a bill facility letter of offer dated 24 May 2002 from National Australia Bank to Sunburst Properties.  National Australia Bank required Sunburst Properties to provide mortgage debenture security.  That debenture included a fixed charge in respect of, inter alia, marketable securities, which were relevantly defined to include a share in a body corporate.  Through this charge, National Australia Bank held security over the share or shares held by Sunburst Properties in Agwater.  It was a term of the debenture that Sunburst Properties was prohibited from disposing of, parting with, or dealing with any fixed-charged assets.  This term picked up the share or shares in Agwater.

3. National Australia Bank also took security over Agwater in respect of the advance of $4.12 million to Sunburst Properties.  A portion of these monies was advanced by Sunburst Properties to Agwater to enable settlement of the water infrastructure to take place.  Mr Garrett and Mr Sandow signed debenture and guarantee documentation on behalf of Agwater on 1 July 2002.

4. On or about 1 July 2002, Sunburst Properties advanced $2.503 million to Agwater to enable Agwater to settle on the contract of sale with Alexandrina Water for the water infrastructure.  This advance resulted in an indebtedness on the part of Agwater to Sunburst Properties.  These arrangements resulted in Sunburst Properties, subject to the confusion earlier referred to, becoming the sole shareholder, and the sole beneficial shareholder, of Agwater.

   July - December 2002

5. On or about 31 October 2002, the bill facility to Sunburst Properties was increased to $4.37 million.  One of the securities offered in support of this increased facility was a debenture with respect to Agwater.

6. In the latter half of 2002, the Garrett interests were seeking a purchaser for the pipeline.  Mr Crosby’s efforts to find a purchaser had been unsuccessful.  The Terrain interests entered into negotiations with the Garrett interests for the possible purchase of the pipeline.  These negotiations were ongoing through late 2002 and into the first half of 2003.  Ultimately the negotiations were unsuccessful. 

7. At this time, the Garrett group was in urgent need of the proceeds of the sale of the pipeline.  The anticipated proceeds were to be used to reduce debt to National Australia Bank and to provide working capital.  The inability to sell the pipeline was causing a liquidity crisis.  Creditors were not being paid in the ordinary course of business.

8. On or about 4 December 2002, Sunburst Properties advised National Australia Bank that actual cash flow was well short of forecast.  In the three months prior to 30 September 2002, trading losses approximated $250,000. 

9. During the course of this trial, Mr Garrett maintained that Mr Crosby resigned as a director of Agwater on 15 December 2002.  He said that documents prepared in November 2003 recorded this resignation.  Mr Crosby disputes that he resigned.  This issue will be addressed later.

10. On or about 30 December 2002, Mr Sandow, with the authority of Mr Garrett, foreshadowed to National Australia Bank the need for a temporary loan facility of $600,000.  It was intended that this was to be a short-term facility extending to the end of January 2003 or until the earlier settlement of the pipeline sale.  A property known as “Springwood Park” was offered as further security.  The letter of request advised of the Braidwood Group losing liquidity and of current cash shortages.  Payments then outstanding included Telstra ($7000) and wages to be paid up to 2 January 2003 ($66,800).

    January - June 2003

11. On or about 3 January 2003, National Australia Bank, pursuant to a bill facility, advanced the requested $600,000 to Mr and Mrs Garrett as trustees for the Andrew Garrett Family Trust.  The advance was supported by guarantees and indemnities including security over Springwood Park.

12. On or about 15 January 2003, Mr Garrett advised National Australia Bank that the $600,000 had been expended by entities within the Garrett Group. 

13. On or about 28 February 2003, entries to the general ledger of Sunburst Properties recorded that the Agwater debt to Sunburst Properties had been reduced by $821,500 to reflect the purchase by Sunburst Properties from Agwater of land in New South Wales known as the “Coleambally land”, as well as the water licences.  This purportedly reduced the Sunburst debt to $2.255 million.  On the same date, the loan account was adjusted in the books of Sunburst Properties in favour of Agwater reflecting the purported adjustments arising on the transfer of water licences from Agwater to Sunburst Properties.  Although Sunburst Properties submitted that these transactions were not properly authorised, it was nevertheless accepted that the transaction had been completed and the transfers of the land and water licences registered.  There was no attempt to undo these transactions.

14. On 30 May 2003, Minter Ellison, solicitors for entities within the Garrett Group, emailed National Australia Bank circulating final drafts relating to the proposed transaction with the Terrain interests.  The documents recorded a proposed share sale agreement of the Agwater share from Sunburst Properties to the Terrain interests.

15. In early June 2003, meetings were held between the management of the Braidwood group and accountants, BDO about the solvency of companies in the Garrett Group.

16. On or about 5 June 2003, the Terrain interests advised that they did not intend to proceed with the purchase of the pipeline from Agwater.

17. On or about 26 June 2003, National Australia Bank contacted Mr Heard with a view to a possible receivership of the Sunburst Group.  On the same date, National Australia Bank advised Mr Heard that the Agwater debenture had been inadvertently discharged.  It was accepted by all parties that the discharge of the Agwater debenture was through inadvertence.

18. By late June 2003, it was apparent that the Garrett Group was in acute financial difficulty.  Mr Garrett’s association with the Group was perceived to be a commercial disadvantage and Mr Garrett resigned from the board of Sunburst Properties as well as other companies in the Garrett Group.  Mr Sandow also resigned.  There is debate over the date of the resignations.  This will be discussed later in these reasons.

    July - October 2003

19. On 14 July 2003 National Australia Bank made demand on Sunburst Properties for amounts of $4.37 million and $1.02 million, being the amount of the bill facility loan advanced to Sunburst Properties and the amount of an overdraft loan.  National Australia Bank said that Sunburst Properties was in default of the terms and conditions of the bill facility and the overdraft loan. 

20. On 15 July 2003, Sunburst Properties resolved that administrators be appointed.  Mr Carter and Mr Heard were appointed.

21. On 17 July 2003, Mr Dwyer and Mr Heard were appointed receivers and managers of Sunburst Properties by National Australia Bank.  The appointment was an event of default under the mortgage debenture that had been executed in favour of the Bank.  National Australia Bank immediately issued a notice of appointment of Mr Dwyer and Mr Heard as receivers and managers of the assets and undertaking the subject of the debenture.  As a result of the earlier inadvertent discharge of the Agwater debenture, the Bank was not able to appoint receivers and managers to Agwater.

22. On 22 July 2003, the administrators of Braidwood Management, Sunburst Holdings, Braidwood Operations, Sunburst Properties and Drumcaplin Wine held their first meeting of creditors. 

23. On 29 August 2003, a report by the administrators of Sunburst Properties summarised the content of the return of affairs signed by Mr and Mrs Garrett and Mr Marshall.  The return estimated the deficiency of assets to liabilities at 30 June 2003 and 15 July 2003 as $3.175 million.  The voluntary administrators inferred that Sunburst Properties had traded at a loss during the year to 30 June 2003 of approximately $1 million and a deficiency of working capital of $2.7 million.  The report confirms that Sunburst Properties had cash flow problems from as early as December 2002 and that creditors had been threatening legal proceedings since that date.

24. During September 2003, Mr and Mrs Garrett requested that the administrators of the companies extend the time for the holding of the second meeting of creditors so they could propound a deed of company arrangement.  The Court granted one extension but refused the second. 

25. On 8 September 2003, Mr Garrett lodged a proof of debt for $8.61 million dollars against Sunburst Holdings and other entities.  On 10 October 2003, the creditors of the companies of the Braidwood Group resolved that Sunburst Properties and other group companies should be wound up.  The proposal for a deed of company arrangement was rejected.

26. The liquidator’s report in respect of Sunburst Properties lodged with ASIC on 21 April 2004 disclosed that Sunburst Properties had proofs of debt under consideration of $14.97 million and that the liquidators were holding no realisable assets.

27. Agwater was not placed in liquidation.  The dispute as to who were directors after July 2003 will be discussed in detail later in these reasons.  Minutes of a board meeting of Agwater on 27 October 2003 disclose that the attendees were Mr Crosby, Mr Marshall, and Mr McKenzie by invitation.  The minutes record that Agwater resolved to enter into the joint-sale agreement.  As earlier observed, this agreement related to the joint-sale of the Bulka vineyards and the water infrastructure.  The parties to the joint-sale agreement were Mr Dwyer and Mr Heard, Agwater and Mr Crosby and Mr Marshall. 

    November 2003

28. The joint-sale agreement was signed in the course of the Sunburst Properties receivership on 5 November 2003. As has been observed, the agreement provided for an apportionment of the sale proceeds between Sunburst Properties and Agwater.

29. In early November 2003, Mr Garrett became aware of the joint-sale agreement.  In evidence, Mr Garrett explained that he thought that the pipeline was being sold at a gross undervalue.  He claimed that National Australia Bank was party to a private arrangement with Mr Crosby and Mr Marshall to allow them to buy the assets at undervalue.  Mr Garrett determined to do all he could to obstruct the sale of the pipeline. 

30. During addresses, Mr Garrett confirmed his attitude in the following terms:

    His Honour:               Am I right in understanding from the evidence that at some time in early November [2003] you learnt about the existence of a proposed joint-sale of the Bulka Vineyard, the water licences and the pipeline?

    Mr Garrett:        I was informed by letter.

    His Honour:               Am I also right that by the time you felt that the National Australia Bank was dealing with you very unfairly?

    Mr Garrett:        Yes.

    His Honour:               Am I right in understanding that at that time you thought the National Australia Bank and Mr Crosby and Mr Marshall had got together to seek to allow Mr Crosby and Mr Marshall to get control [of the] pipeline [at an] under value?

    Mr Garrett:Yes.  In terms of the timing of when I started to think National Australia Bank wasn’t treating me fairly, that became more evident during that period and it was a function of what [Mr Garrett’s solicitor] was saying to me.  They were resisting everything we put up.  They couldn’t take a trick.

    His Honour:               I understand that your disenchantment with the National Australia Bank had been building for some time.

    Mr Garrett:        Yes, it commenced in November 2002.

    His Honour:               You were very cross about the fact that they wouldn’t support you in regard to your Tasmanian plans and you felt that they were very unfair about that.

    Mr Garrett:        We had a contract and we paid the deposit.

    His Honour:               What I have summarised as being your state of mind, your attitude, I have correctly understood from the evidence.

    Mr Garrett:        Indeed.

    His Honour:               Then, as I understand your evidence and your case, you resolved to act.

    Mr Garrett:        I did.

    His Honour:               The action then consisted of a series of events and transactions and documentations that occurred in November [2003] , and they were all bought about by your seeking to stop what you thought was improper conduct.

    Mr Garrett:Yes.  If the proper value had been received for the assets, then why would you stop the sale?  I wanted to be in a position where I could understand the proper value had been achieved.

    His Honour:               Your concerns were deeper than just proper value.  As I understand it, you had serious concerns that those people who you thought were advising and helping you were in fact not well-intentioned towards you.

    Mr Garrett:Correct.  It was more than that, it was absolutely clear that that’s what was happening.  Mr Crosby refused to answer my questions.  Mr Marshall refused to answer.  I had rights to that information.

    …

    His Honour:               I have the impression, and I would like your submission in this respect, that this demand that came in respect of Springwood Park in late October or very early November 2003 was, in your mind, a further indication of the bank’s unfair attitude towards you.

    Mr Garrett:Certainly.  Especially when I got to a point of providing them the funds, again unconditionally, for their demand and then they refused to take them.  This is where I have a serious issue with the Inglis principle.

    His Honour:               I have to understand your motivations for the series of November transactions.  One view of the evidence – and I understand that you probably agree with this – is that it’s built out of your belief at that time that you were being very unfairly treated by the National Australia Bank, they were acting improperly, they were putting pressure on you wherever they could, they were being unreceptive to your attempts to refinance the issues and that they were – to used the colloquial – in cahoots with Crosby and Marshall and those endeavours.

    Mr GarrettYes.

    In furtherance of these intentions, Mr Garrett took a number of steps on and after 9 November 2003. 

31. Mr Garrett and Mr Sandow signed consents to act as directors of Agwater purportedly dated 9 November 2003.

32. On or about 10 November 2003, Mr Garrett or Mr Sandow at Mr Garrett’s direction, prepared minutes purporting to be of an extraordinary general meeting of the members of Agwater held at 8am at 60 Alexandra Avenue, Rose Park.  The minutes purport to record a meeting between Mr Garrett, Mr Sandow and Mr O’Leary by invitation.  Those persons were said to represent the entire shareholding of Agwater.  The purported minutes refer to the waiving of any requirement for notice of the meeting.  They refer to Mr Crosby as having resigned as a director in July 2002.  The meeting purported to resolve that Mr Marshall and Mr Crosby be removed from the Board of Directors and that Mr Garrett and Mr Sandow be appointed in their place.  I reject the evidence that there was such a meeting.  The content of the purported minutes are inconsistent with other documents.  They are also inconsistent with the suggestion of any earlier resignation by Mr Crosby.  I am not satisfied on the balance of probabilities that any such meeting occurred.

33. On or about 11 November 2003, Mr Garrett arranged for forms to be lodged with ASIC advising of the purported members’ resolution and the appointment of Mr Garrett and Mr Sandow as directors.  Thereafter, during November 2003, Mr Garrett lodged an ASIC form 484 purporting to amend the shareholders register of Agwater.  The change of shareholder is shown as being from Sunburst Properties to the Andrew Garrett Family Trust No 1.

34. On 13 November 2003, Mr Garrett emailed Mr Crosby and Mr Marshall inviting them to attend a purported special meeting of the directors of Agwater at 11am on 14 November 2003.  The agenda was to pass annual accounts as per an attached copy for the year ending 2003.  Attached amended company accounts disclosed a purported loan to Agwater from the Andrew Garrett Family Trust in the sum of $2.287 million.  Sunburst Properties was no longer shown as a creditor of Agwater.

35. On 14 November 2003, Mr Garrett claimed that a meeting of directors of Agwater, attended by Mr Garrett and Mr Sandow, took place.  The accounts were purportedly passed at the meeting.  The minutes also purported to record the directors having resolved that Mr Crosby and Mr Marshall had been removed as directors.  Mr Garrett then emailed Mr Crosby, Mr Marshall and Mr Sandow with copies to Mr Heard, Michael Garrett, Anthony Phillips and Neil Anderson advising that at the purported special meeting of directors of the Board had resolved that Mr Crosby and Mr Marshall be removed as directors of Agwater.  I am not satisfied on the balance of probabilities that any such meeting took place.

36. On 14 November 2003, Mr Garrett requested that Mr Sandow prepare adjusted management accounts for the companies in liquidation.  The purpose of the adjustments was to seek to represent that the Andrew Garrett Family Trust was a creditor of the companies in the Group.  The adjustments involved the purported elimination of a number of inter-company loans.  Mr Sandow advised Mr Garrett against making the adjustments.  However, on Mr Garrett’s instructions, Mr Sandow made the adjustments.  Mr Garrett’s accounting adviser, Michael Garrett, also advised Mr Garrett not to make the adjustments.  I reject the evidence of Mr Garrett that these adjustments were a legitimate recording of genuine transactions.

37. On 17 November 2003, BDO lodged notification with ASIC that Mr Crosby and Mr Marshall had ceased to be directors of Agwater on 14 November 2003.  On 18 November 2003, Mr Garrett notified ASIC of a correction and now asserted that Mr Crosby’s correct resignation date was 15 December 2002.  Mr Garrett’s evidence about the Crosby resignation is riddled with inconsistencies.  His constantly changing version “smacks” of opportunism.

38. Some time during November 2003 and after 9 November 2003, documents were prepared and executed by Mr Garrett and Mr Sandow purporting to record the following transactions and events:

    -on 20 December 2002, the transfer by Sunburst Properties of its one share in Agwater to Mr and Mrs Garrett as trustees of the Andrew Garrett Family Trust No 1;

    -on 20 December 2002, the assignment by Sunburst Properties of the $2.2 million debt owed to it by Agwater to Mr and Mrs Garrett as trustees of the Andrew Garrett Family Trust No 1;

    -on 1 July 2003, the issue by Agwater of 200,000 ordinary shares to J & W Holdings;

    -on 1 July 2003, the issue by Agwater of 5 million options to acquire ordinary shares to Mr and Mrs Garrett as trustees of the Andrew Garrett Family Trust No 1;

    -on 7 July 2003, the conversion by J & W Holdings of its $200,000 loan to Agwater to 200,000 ordinary shares in Agwater;

    -on 21 August 2003, the assignment by Mr and Mrs Garrett as trustees of the Andrew Garrett Family Trust No 1 of the $2.2 million debt to themselves as trustees of the Andrew Garrett Family Trust No 2;

    -on 21 August 2003, Mr Garrett and Mr Sandow caused Agwater to grant an unregistered charge in favour of J & W Holdings;

    -on 21 August 2003, the assignment by Mr and Mrs Garrett as trustees of the Andrew Garrett Family Trust No 1 of the one Agwater share to themselves as trustees of the Andrew Garrett Family Trust No 2;

    -on 29 August 2003, the assignment by Mr and Mrs Garrett as trustees of the Andrew Garrett Family Trust No 2 of the $2.2 million debt to J & W Holdings;

    -on 19 November 2003, Mr Garrett and Mr Sandow caused Agwater to grant a registered charge in favour of J & W Holdings;

    -on 28 November 2003, Mr Garrett and Mr Sandow caused Agwater to sell the pipeline to J & W Holdings.

1. Later in these reasons I reach the conclusion that these purported transactions were either illusions, or of no effect.

2. In February 2004, pursuant to the joint-sale agreement, a contract was entered into by the parties to the joint-sale agreement for the sale of the Bulka vineyards and the pipeline to Mr Paech. The contract has expired but the parties apparently still treat it as informally “on foot”.

   Agwater Pty Ltd

   Shareholders

3. As earlier discussed, Agwater was incorporated in April 2001. Agwater was identified as a vehicle for the holding of the water infrastructure the subject of the purchase from Alexandrina Water.  As earlier observed, it was intended at the time that the pipeline would be on-sold and leased back to Sunburst Properties.

4. Mr Crosby gave evidence that in early 2002 he was the sole shareholder of Agwater and that he agreed to transfer his shareholding to Sunburst Properties.  It was his intention to attempt to find a purchaser for the pipeline, and to that end he obtained an option for the re-purchase of the shares in Agwater.  In the event, he was unable to find a purchaser and the option was never exercised. 

5. Mr Crosby gave evidence that he held ten shares in Agwater, being the issued capital, and that he intended to transfer all ten shares to Sunburst Properties.  The share register records ten shares being held by Mr Crosby.  Later documentation suggested that there was only one share in Agwater and that share was transferred to Sunburst Properties.  Mr Crosby’s position was that, whether it was one share or ten shares, Sunburst Properties held the beneficial interest in the entire shareholding and certainly the legal interest in one of the shares.

6. The share register of Agwater is an unreliable record.  At times, the register has been in the hands of Mr Crosby and Mr Marshall, at times with BDO and at times with Mr Garrett.  I have no confidence that the register has been properly maintained when in the possession of Mr Garrett.  Mr Garrett’s practice of backdating documents and his evidence generally does not allow the conclusion that the integrity of the register has been maintained.

7. On balance I am satisfied that there were ten shares held by Mr Crosby in Agwater.  It was the intention that all those shares be transferred to Sunburst Properties in or about June 2002.  Due to misunderstanding by solicitors, only one of the ten shares was transferred.  The other nine remained in the name of Mr Crosby but beneficially held by Sunburst Properties.

8. Mr Garrett submitted that the records establish that there was only one share issued in Agwater.  He claimed that Mr Crosby transferred the one share to Sunburst Properties.  I reject these contentions.  However, if I am wrong in my understanding of the shareholding position in Sunburst Properties, it is of no consequence to the determination of Sunburst Properties’ claim.  Mr Crosby accepts that Sunburst Properties was the beneficial owner of the entire shareholding.

9. Mr Garrett claimed that in December 2002 it was agreed by Sunburst Properties that it would transfer the sole share in Agwater to the Andrew Garrett Family Trust.  Mr Sandow gave evidence that he recalled something like this occurring, or of there being such an arrangement.  Nothing was done to document such an agreement at the time.  In November 2003, Mr Garrett prepared a transfer of the share in Agwater from Sunburst Properties to the Andrew Garrett Family Trust.  At the time, neither Mr Garrett nor Mr Sandow were directors of Sunburst Properties.

10. I reject the evidence of Mr Garrett and Mr Sandow that there was any sale or agreement to transfer the sole share in Agwater from Sunburst Properties to the Andrew Garrett Family Trust.  There is no acceptable documentary confirmation from the time of such a transfer.  The documentation prepared in November 2003 did not truly record an event that had occurred. 

11. In any event the documentation prepared in November 2003 had been prepared and executed by persons who were no longer directors of Sunburst Properties.  The documentation was beyond their authority and was unauthorised, and as a result the attempt was nugatory and of no effect.

12. Accordingly, as from June 2002 and at all later relevant times, the shareholding of Agwater has been held legally and beneficially as to one share by Sunburst Properties and legally as to nine shares by Mr Crosby.  Those nine shares have been held, and continue to be held, beneficially for Sunburst Properties.

    Directors

13. As earlier observed, Mr Garrett claimed that Mr Crosby resigned as a director of Agwater on 15 December 2002.  He claimed that Mr Crosby resigned at a directors’ meeting that he and Mr Sandow attended on that date.  Elsewhere, I have addressed the question of the credit of Mr Garrett.  In regard to contentious matters, I reject Mr Garrett’s evidence.  In particular, I reject his evidence as to the suggested resignation of Mr Crosby on 15 December 2002 or at any other date.  I do so for the following reasons:

    -at one point Mr Garrett claimed that Mr Crosby had resigned in June 2002.  This is inconsistent with a resignation on 15 December 2002;

    -no contemporaneous record of any resignation on 15 December 2002 has been produced;

    -minutes of a meeting of 15 December 2002 prepared by Mr Garrett show the directors attending as being Mr Marshall and Mr Garrett.  Mr Marshall had no recollection of any such meeting or of any resignation of Mr Crosby.  Mr Marshall was not a director of Agwater at the time.  Mr Garrett in evidence acknowledged that Mr Marshall did not attend the purported meeting as a director;

    -Mr Crosby continued throughout 2003 to act as a director of Agwater.  Mr Garrett in particular treated Mr Crosby as a director.  Mr Garrett gave Mr Crosby a notice of a meeting of directors to be held on 14 November 2002.  This was inconsistent with his assertion that Mr Crosby resigned on 15 December 2002;

    -minutes prepared for the purported extraordinary general meeting held of 11 November 2002 record Mr Crosby resigning as a director on that date.  This was inconsistent with the claimed resignation on 15 December 2002;

    -minutes of 14 December 2002 being the purported directors meeting to which Mr Crosby was invited to attend also record Mr Crosby resigning on this occasion on 14 December 2002;

    -also relevant are my general findings about Mr Garrett’s credit.

14. The above matters demonstrate that Mr Garrett has adopted an expedient and varied attitude towards Mr Crosby’s purported date of resignation.  No explanation has been offered as to his change of position on this topic.  His evidence lacks credit.  I reject it.  Mr Garrett asserted that in November 2003 he believed that the ASIC record was conclusive proof of directorship.  I reject this explanation.  It was, in my view, simply a statement of convenience.

15. Prior to June 2002, Mr Crosby was the sole director of Agwater.  Mr Crosby gave evidence that he, from that time, remained a director of Agwater.  He said that he did not resign at any time.  I accept and act on this evidence.  I find that he did not resign.  I find that Mr Crosby remained a director of Agwater at all relevant times.

16. As earlier discussed, in mid-2003 Mr Garrett accepted advice to resign as a director from companies in the Garrett Group.  He resigned as a director of Agwater on 2 July 2003.  Documentary evidence supports his resignation on this date.  In the course of evidence Mr Garrett suggested that he had not resigned until about 14 July 2003.  He suggested that Mr Marshall had back-dated his resignation.  I reject Mr Garrett’s evidence in this respect and find that he resigned as a director of Agwater on 2 July 2003.  I accept the evidence of Mr Crosby and Mr Marshall as to Mr Garrett’s resignation confirmed as earlier observed by documentary evidence.

17. I find that Mr Sandow resigned as a director of Agwater on 30 June 2003.  This accorded with his evidence and that of Mr Marshall. 

    The Purported Transactions – The November 2003 Documentation

18. As earlier discussed, Mr Garrett and Mr Sandow set about preparing and backdating a number of documents in November 2003.  As Mr Garrett explained in his final submission, that his purpose was to take whatever steps he could to obstruct the sale of the pipeline.  Mr Sandow understood that this was Mr Garrett’s objective. 

19. It is not possible to make finding as to precisely when in November 2003 the backdated documents were prepared.  It is probable that they were prepared after 9 November 2003.  Mr Garrett’s purpose was not only to obstruct the sale of the pipeline, it was also to take such steps as he could to remove the pipeline asset from those assets available to the creditors of the Garrett Group and in particular National Australia Bank.

20. Mr Garrett’s plan can be described as follows:

    -to create documents transferring the ownership of Agwater from Sunburst Properties to the Andrew Garrett Family Trust No 1 and then on-transfer share ownership to Andrew Garrett Family Trust No 2;

    -to record that Mr Crosby resigned as a director on 15 December 2002 being a date prior to the purported transfer of the Agwater share to Sunburst Properties and the purported transfer of the Agwater debt from Sunburst Properties to the Andrew Garrett Family Trust No 1;

    -to create a loan by J & W Holdings to Agwater and to then convert that loan to 200,000 shares;

    -to create options to acquire ordinary shares in Agwater to Mr and Mrs Garrett as trustees of the Andrew Garrett Family Trust;

    -to assign the debt owing by Agwater to the Andrew Garrett Family Trust No 1 to the Andrew Garrett Family Trust No 2;

    -to create an unregistered charge in favour of J & W Holdings;

    -to transfer the Agwater shares from Andrew Garrett Family Trust No1 to Andrew Garrett Family Trust No 2;

    -to assign the $2.2 million debt to J & W Holdings;

    -to cause Agwater to create a registered charge in favour of J & W Holdings;

    -to cause Agwater to sell the pipeline to J & W Holdings.

21. As earlier observed, the purpose of these purported transactions was to remove the pipeline asset from the reach of the creditors, in particular National Australia Bank.  To this end, Mr Garrett purported to transfer the assets from Sunburst Properties.  The pipeline was subject to direct security held by National Australia Bank. 

22. Initially, the share in Agwater was purportedly transferred to the Andrew Garrett Family Trust No 1.  However, the Andrew Garrett Family Trust No 1 had executed a negative pledge in favour of National Australia Bank.  There was a perceived need to move the assets from that Trust to the Andrew Garrett Family Trust No 2.  When it was thought that the Andrew Garrett Family Trust No 2 might be vulnerable, steps were taken to transfer the pipeline assets to another Garrett controlled entity, J & W Holdings.  A search of the public register of J & W Holdings would not reveal any Garrett interest in that entity.  By creating a registered charge in favour of J & W Holdings, it was perceived that J & W Holdings would have priority over other creditors.

23. When analysed, none of the above purported transactions can withstand challenge.  They either record purported transactions that had not occurred, were void ab initio as being fraudulent, or alternatively, voidable as a result of being entered into in breach of directors’ duties.

24. It is to be observed that Agwater was a necessary party to a number of the purported transactions.  As part of Mr Garrett’s plan, it was necessary for Agwater to grant unregistered and later registered charges in favour of J & W Holdings.  Agwater had to be a party to the sale of the pipeline to J & W Holdings.

25. The execution of the purported registered charge over the assets of Agwater occurred on 19 November 2003 and the purported sale of the pipeline on 28 November 2003.  On neither date were Mr Garrett and Mr Sandow directors of Agwater.  They had no authority to enter into the charge or sale.  Both were well aware they held no authority.  J & W Holdings and the two Trusts were under the control of Mr Garrett and the sole beneficial interests were the Garrett family.  These transactions were of no legal effect.

26. Mr Garrett and Mr Sandow were well aware they were not validly appointed directors of Agwater.  They were engaged in activities with an improper purpose.  They took all possible steps to defeat the legitimate rights and interests of National Australia Bank in regard to the assets of Agwater.

27. I am also satisfied and find that the purported transfer of the Agwater share from Sunburst Properties to the Andrew Garrett Family Trust No 1 and the transfer of the debt from Sunburst Properties to the Andrew Garrett Family Trust No 1 were undertaken without consideration.  Sunburst Properties relevantly received no or no adequate consideration.  It relinquished its sole shareholding in Agwater, and the debt due from Agwater.  As the sole shareholder of Agwater, Sunburst Properties was in control of the assets of Agwater, including the pipeline.  After the purported transactions, Agwater had a debt due from the Andrew Garrett Family Trust No 1 with no security or control.

28. I am also satisfied that there was no $200,000 loan made by J & W Holdings to Agwater on 7 July 2003 or any issue of 200,000 ordinary shares in Agwater to J & W Holdings to satisfy the loan.  Those purported transactions were entered into some time after 9 November 2003 at a time when Mr Garrett and Mr Sandow were no longer directors of Agwater.

29. I also find that the issue of 5 million options by Agwater to Mr and Mrs Garrett to acquire ordinary shares in Agwater was a purported transaction occurring after 9 November 2003 at a time when Mr Garrett and Mr Sandow were no longer directors of Agwater.

30. I find that the purported assignment of the $2.2 million debt from Mr and Mrs Garrett as trustees for the Andrew Garrett Family Trust No 1 to the Andrew Garrett Family Trust No 2 and the assignment of the Agwater share from one Trust to the other, said to have been undertaken on 21 August 2003, were in fact entered into after 9 November 2003.  I find that at that date, Mr and Mrs Garrett were well aware that these documents were linked to the other transactions being entered into in November 2003.  There had been no valid assignment of the $2.2 million debt from Sunburst Properties to the Andrew Garrett Family Trust No 1.  Accordingly, there could be no valid assignment of that debt between the two Family Trusts.

    Breach of Duty

31. As earlier observed, Mr Garrett claimed that in December 2002, Sunburst Properties transferred a share in Agwater to Mr and Mrs Garrett as trustees of the Andrew Garrett Family Trust No 1. Mr Garrett further claimed that in December 2002, Sunburst Properties assigned to Mr and Mrs Garrett, as trustees of the Andrew Garrett Family Trust No 1, a debt due to Sunburst Properties from Agwater in the sum of $2.2 million. At the dates of these purported transactions, Mr Garrett and Mr Sandow were directors of Sunburst Properties. To the extent that the transactions were otherwise valid, they were entered into by Mr Garrett and Mr Sandow in breach of their duties as directors and were voidable at the election of Sunburst Properties.

32. The duties of directors of companies forming part of corporate groups are well established. Mason J in Walker v Wimborne[1] described as “fundamental” the principle that each of the companies in a group is a separate and independent legal entity and that it is the duty of the directors of a company to consult its interests and its interest alone in deciding whether payment should be made to other companies. His Honour went on to state: [2]

    In this respect it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them. The creditor of a company, whether it be a member of a “group” of companies in the accepted sense of that term or not, must look to that company for payment. His interests may be prejudiced by the movement of funds between companies in the event that the companies become insolvent.

    [1] Walker v Wimborne (1976) 137 CLR 1.

    [2] Walker v Wimborne (1976) 137 CLR 1 at 7.

33. When a company is insolvent or nearly insolvent, the interests of the company are those of its creditors. In Nicholson v Permakraft (NZ) Ltd (In Liq),[3] Cooke J observed:[4]

    The duties of directors are owed to the company. On the facts of particular cases this may require the directors to consider inter alia the interests of creditors. For instance, creditors are entitled to consideration, in my opinion, if the company is insolvent, or near insolvent, or of doubtful solvency, or if a contemplated payment or other course of action would jeopardise its solvency.

    [3] Nicholson (1985) 3 ACLC 453.

    [4] Nicholson (1985) 3 ACLC 453 at 459.

34. In Kinsela v Russell Kinsela Pty Ltd (In Liq),[5] Street CJ (with whom the other judges agreed) said:[6]

    In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.

    [5] Kinsela v Russell Pty Ltd (In Liq) (1986) 4 NSWLR 722.

    [6] Kinsela (1986) 4 NSWLR 722 at 730.

35. In Angas Law Services v Carabelas,[7] Gummow and Hayne JJ discussed the conduct of those who controlled and owned all the shares of a corporation appropriating corporate assets.  Their Honours observed:[8]

    In oral submissions on the present appeal, the liquidator submitted that it is "a basic principle of corporate law” that its assets be dealt with for the purposes of the corporation and not for the purpose of "appropriation" by those who control and own all the issued shares.  The corporators necessarily acted improperly if they so acted as to bring about the appropriation of the company's assets as their own.  The liquidator contended that any act of "appropriation" caused by an officer of the corporation is a breach of the standard of propriety required by s 229(4) of the Code.  (The liquidator properly disavowed any reliance on the doctrine of ultra vires; this had been drastically modified in 1985 by legislation giving to companies incorporated or deemed to be incorporated under the Code "the legal capacity of a natural person").

    This proposition concerning "appropriation" is too broad.  It insufficiently allows for the significance from case to case of the commercial context, and assumes a standard of conduct that is inflexible.  The starting point must be the general duty of a director to act in the best interests of the company.  The best interests of the company will depend on various factors including solvency.  In Kinsela v Russell Kinsela Pty Ltd (In Liq), Street CJ said:

    "In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise.  If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done.  But where a company is insolvent the interests of the creditors intrude.  They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets.  It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration."

    Nothing said in Macleod v The Queen suggests the contrary.  It was decided in Macleod that the "consent" of a single shareholder company could not cure what otherwise would be a breach of s 173 of the Crimes Act 1900 (NSW). Section 173 created an offence where a director or officer of a body corporate fraudulently took or applied any of the property of the body corporate for his own use or benefit, or for any use or purpose other than that of the body corporate. Gleeson CJ, Gummow and Hayne JJ said:

    "The self-interested 'consent' of the shareholder, given in furtherance of a crime committed against the company, cannot be said to represent the consent of the company."

    [7] Angas Law Services v Carabelas [2005] HCA 23.

    [8] Angas Law Services [2005] HCA 23 at [66]-[68].

1. To say that directors owe a duty to consider the interests of creditors is not to say that the duty is enforceable at the instance of creditors. In Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler,[9] Gummow J reasoned:[10]

   It is clear that the duty to take into account the interests of creditors is merely a restriction on the right of shareholders to ratify breaches of the duty owed to the company. The restriction is similar to that found in cases involving fraud on the minority. Where a company is insolvent or nearing insolvency, the creditors are to be seen as having a direct interest in the company and that interest cannot be overridden by the shareholders. This restriction does not, in the absence of any conferral of such a right by statute, confer upon creditors any general law right against former directors of the company to recover losses suffered by those creditors ... the result is that there is a duty of imperfect obligation owed to creditors, one which the creditors cannot enforce save to the extent that the company acts on its own motion or through a liquidator.

   [9] Sycotex Pty Ltd v Baseler (19094) 122 ALR 531.

   [10] Sycotex Pty Ltd v Baseler (1994) 122 ALR 531 at 550.

2. This statement was approved by the High Court in Spies v R.[11]

   [11] Spies v R (2000) 201 CLR 603.

3. It is a breach of the duty to act in the interests of the company for directors of a company which is insolvent or nearly insolvent to remove assets from the company so that they are not available to pay the debts of the company’s creditors.

4. As has been earlier observed, by the latter half of 2002 the Garrett Group was trying to find a purchaser for the pipeline. The Group was dependent upon the proceeds of the sale of the pipeline for critical cash flow requirement.  The inability to sell the pipeline was causing a liquidity crisis and creditors were not being paid.

5. In the 12 months prior to June 2003, Braidwood Management was operating at a substantial loss. Mr Marshall recounted how by December 2002 creditors demands had reached a “frightening level”.  Braidwood Management could not pay its debts.  Its largest creditor was Sunburst Properties.

6. A letter from Minter Ellison to Mr Marshall in December 2002 asserted that Minter Ellison were owed just under $200,000 by Sunburst Properties and accounts were 12 months in arrears.  The investor Vallese was also a substantial creditor of Sunburst Properties at this time, and was recorded as such in the management accounts.  Vallese had contributed $0.5 million in cash, plant, equipment to a value of $0.5 million, and a vineyard to a value of $0.25 million prior to February 2002.  By December 2002, trade creditors of Sunburst Properties and other Garrett companies were going unpaid.

7. Mr Garrett and Mr Sandow failed to give independent consideration to the merits of the two purported transactions, the share transfer and the assignment of debt. Mr Sandow said that he “viewed the whole enterprise (comprising the Group of companies including Sunburst) as one entity rather than being separate entities, so that transfers between entities [were] part of the process”.  The totality of the evidence establishes that Mr Garrett regarded all entities in the Group, including both Sunburst Properties and Agwater, as mere manifestations of the Andrew Garrett Family Trust No 1.  Mr Garrett’s advertence to the interests of the beneficiaries of that Trust completely excluded or at the very least dominated, any advertence to the interests of Sunburst Properties and Agwater, as separate entities to whom separate duties were owed.  Mr Garrett seems never to have understood that, as a director considering any proposed transaction between two or more companies under his control, he was obliged to separately assess that proposed transaction from the standpoint of each company.

8. In Charterbridge Corp Ltd v Lloyds Bank Ltd,[12] Pennycuick J regarded it as inappropriate to hold invalid every decision in which directors have failed to consider subjectively the interests of the separate entity.  His Honour preferred an objective formulation that a director will not be in breach of duty if an intelligent and honest person in the position of the director could reasonably have believed that the transaction was for the benefit of the separate entity. 

   [12] Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62.

9. This approach would appear to be inconsistent with the statement of Mason J in Walker v Wimborne referred to earlier.[13]  In any event, no reasonable director could have believed that the transactions were in the best interests of Sunburst Properties.  The transactions were of no commercial benefit to Sunburst Properties.  They placed Sunburst Properties at a significant commercial disadvantage.

   [13] See also Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50.

10. The effect of the purported share transfer and debt assignment was that Sunburst Properties was put in immediate breach of the National Australia Bank debenture.  As has been earlier observed, the Sunburst Properties debenture was executed on 1 July 2002.  The charge was a fixed charge in respect of, among other things, marketable securities and book debts.  The definition of marketable securities in clause 9 picked up the definition in section 9 of the Corporations Act.  The statutory definition includes shares in any body corporate.

11. The interest of Sunburst Properties in the Agwater share and the debt due by Agwater to Sunburst Properties were fixed assets of Sunburst Properties.  Upon Sunburst Properties acquiring the share and debt, these assets immediately became subject to the fixed and floating charge granted in favour of National Australia Bank.  By the terms of the debenture, Sunburst Properties was prohibited from disposing of the assets without the consent of the bank.  The share transfer and debt assignment took place in clear breach of this clause.

12. Sunburst Properties lost control of Agwater, its only subsidiary, most substantial debtor and the entity that controlled the water supply to its only operating vineyards.  It gave up the possibility that if Agwater had been able to discharge its indebtedness to Sunburst Properties by sale of the pipeline then Sunburst Properties would have been in a position, in turn, to discharge its current liabilities and to reduce its non-current liabilities.

13. The purported debt assignment was executed at a time when Sunburst Properties was having difficulty meeting its debts as they fell due.  Agwater was a company that was in a position to discharge its indebtedness to Sunburst Properties, albeit by sale of the pipeline.  If Agwater had been able to discharge its indebtedness to Sunburst Properties by sale of the pipeline then Sunburst Properties would have been in a position to discharge its current liabilities and to reduce its non-current liabilities.

14. The purported transfer of the debt was therefore detrimental to the interests of the creditors of Sunburst Properties.  Those creditors were deprived of an asset that might otherwise have been available for the payment of the debts.

15. Mr Garrett defended the purported share transfer on the basis that, in substance, it was a mere change of trustee.  This submission is misconceived.  As a trustee that had incurred debts, Sunburst Properties had an implied right of indemnification out of the trust estate.  The transfer put the share in Agwater beyond its reach.

16. In the period prior to and after the receivership, Mr Garrett was in a position of conflict of interest and duty.  While his personal interest as a beneficiary of the Andrew Garrett Family Trust No 1, as he viewed it, lay in the implementation of the transactions, in putting assets beyond the reach of the Sunburst Properties debenture and the negative pledge executed by the trustees of the Family Trust, his duties as director required him to act for proper purposes, and in protection of the interests of Sunburst Properties’ creditors.

17. The evidence establishes that at the date of the purported share transfer and assignment of debt due by Agwater, Sunburst Properties was not, without recourse to further funds from National Australia Bank, able to pay its debts as they fell due in the ordinary course.  In these circumstances, the duty of Mr Garrett and Mr Sandow as directors of Sunburst Properties was to keep the company’s assets intact for the benefit of the creditors.  Mr Garrett and Mr Sandow gave no consideration to this aspect of their duty.  Sunburst Properties received no benefit from the transaction at all and at the time of the transactions, Mr Garrett acted with a conflict of interest and in breach of duty.  In these circumstances, the transactions were voidable at the election of Sunburst Properties.  By its plea, Sunburst Properties has elected to avoid the purported transactions.

    The Statutory Assumptions

18. In view of the findings that I have made regarding the directorship of Agwater, it is unnecessary to decide whether Sunburst Properties and its receivers and managers were entitled to make the statutory assumptions as pleaded.  However, it is appropriate to indicate that, had it been necessary, I would have been prepared to make such a finding.

19. By virtue of section 128(1) of the Corporations Act, a person is entitled to make the assumptions set out in section 129 in relation to dealings with a company, and the company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect. The following assumptions relevant to the present case are listed in section 129:

    …

    (2)A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company:

    (a)     has been duly appointed; and

    (b)     has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.

    …

    (4)A person may assume that the officers and agents of the company properly perform their duties to the company.

    (5)A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices.

    …

20. The assumptions listed in section 129 of the Corporations Act may operate cumulatively. Section 129(8) provides:

    Without limiting the generality of this section, the assumptions that may be made under this section apply for the purposes of this section.

21. Section 128(4) of the Corporations Act provides that:

    A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.

22. Section 128(4) appears to place the burden on the company to establish the person’s subjective knowledge or suspicion that the section 129 assumptions relied on were incorrect. That is to say, a person does not lose the benefit of the assumptions in section 129 merely because the person’s suspicions, in the circumstances, should have been aroused. In this respect, the operation of section 128(4) can be contrasted with the “put on inquiry” test that applies when a person seeks to enforce a defective contract at common law.[14]

    [14] See Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146.

23. The joint-sale agreement was purportedly entered into by Agwater under the hands of Mr Crosby and Mr Marshall. Under section 127(1) of the Corporations Act, a company may execute a document without using a common seal if the document is signed by two directors of the company.  In the present case, the operation of the assumptions referred to earlier makes up for any lack of authority in Mr Crosby and Mr Marshall to execute the agreement.  It is necessary to refer only to the evidence of Mr Heard, the receiver and manager of Sunburst Properties.

24. Mr Heard gave evidence that he instructed that a search be made of the company register concerning Agwater when it became likely that he was to be appointed to the receivership of the assets and undertakings the subject of the National Australia Bank debenture.  Mr Heard ordered a search to be conducted on 13 July 2003 and thus became aware of its contents.

25. The search of the company register revealed that Mr Crosby, Mr Marshall, Mr Garrett and Mr Sandow were directors of Agwater.  However, according to Mr Heard, he was informed at this time, probably by John Hart, that Mr Garrett and Mr Sandow had resigned from the directorship of Agwater and all the companies in the Sunburst Group.

26. On 17 July 2003, the date of his formal appointment, Mr Heard attended the offices of the Braidwood Group.  He was introduced to Mr Crosby as a director of Agwater.  Mr Marshall introduced himself as a director of the companies over which he was appointed, and also as a director of Agwater.  Mr Garrett did not attend the meeting.  However, he attended the premises a little later and Mr Heard met him when he attended.  Mr Garrett made no suggestion that he was a director of any of the entities in the Braidwood Group or of Agwater.

27. On 14 and 15 November 2003, Mr Garrett sent emails asserting that he had been appointed director of Agwater.  Mr Heard replied asking Mr Garrett to provide him with evidence that he was a director of Agwater.  He received copies of documents by which Mr Garrett purported to appoint himself director of the company.  However, these were communications occurring after the joint-sale agreement had been executed on 7 November 2003.

28. The evidence establishes that it appeared, from information provided by Agwater to ASIC, that Mr Crosby and Mr Marshall were directors of Agwater, and that Sunburst Properties and its receivers and managers, Mr Dwyer and Mr Heard, neither knew nor suspected that they had not been properly appointed.  Although the company search undertaken on Mr Heard’s instruction revealed Mr Garrett and Mr Sandow to be directors of Agwater, this fact could only be of significance if it meant that Mr Heard “knew or suspected” that Mr Crosby or Mr Marshall was not a director of Agwater.  As earlier indicated, I accept Mr Heard’s evidence that he neither knew nor suspected any such thing.  Mr Heard had been informed that Mr Garrett and Mr Sandow had resigned as directors of Agwater, and Mr Garrett made no attempt to assert that he was a director until after the execution of the joint-sale agreement.  In the circumstances, I am not satisfied that the search had the requisite effect.

29. Once it appears from information provided by a company to ASIC which is then publicly available that a person is a director or a secretary of a company, a third party can assume that the director or secretary has been duly appointed and has the authority to exercise the powers and duties customarily exercised or performed by a director of a similar company.[15] This assumes the absence of any indicators or information to the contrary. In the circumstances, Sunburst Properties and its receivers and managers were entitled by virtue of section 129(2) of the Corporations Act to assume that Mr Crosby and Mr Marshall had been duly appointed and had the authority to exercise the powers and duties customarily exercised or performed by a director of a similar company. Because they could make this assumption, Sunburst Properties and its receivers and managers were entitled by the cumulative operation of sections 129(2) and 129(4) to assume that Mr Crosby and Mr Marshall were properly performing their duties as directors, and by the cumulative operation of sections 129(2) and 129(5) to assume that the document had been duly executed.

    [15] Corporations Act 2001 (Cth) section 129(2).

    Conclusion

30. In reaching the earlier referred to findings of fact, I have done so on the balance of probabilities.  However, in making findings adverse to Mr Garrett and Mr Sandow on credit and in particular concerning Mr Garrett’s attempts to frustrate the rights of National Australia Bank including the backdating of documents and the pretence of the occurrence of certain events, I have applied the onus in accordance with the principles in Briginshaw v Briginshaw. [16]

    [16] Briginshaw v Briginshaw (1938) 66 CLR 336.

31. I am satisfied that at all relevant times, Mr Crosby and Mr Marshall were duly appointed directors of Agwater and acted as such.  In particular, I am satisfied that they acted in the course of their duties as directors in having Agwater enter into the joint-sale agreement.  In so doing, they acted in accordance with their duties as directors and in the interests of Agwater.

32. In regard to the purported transactions that Mr Garrett claims that Agwater entered into relating to the disposal of assets, I am satisfied that no such transactions occurred.  However, if, contrary to this finding, such transactions did occur, then they were not transactions in the interests of Agwater at the relevant time and were voidable at the option of Agwater.  Furthermore, I am satisfied that at the time of the purported transactions, Agwater did not receive fair consideration.  I am also satisfied that Mr Garrett and Mr Sandow acted in breach of their duties as directors if, contrary to my findings, they were in fact directors at the time.

33. If contrary to my findings, Mr Crosby and Mr Marshall were not directors of Agwater at times relevant to the entry into the joint-sale agreement, I am satisfied that section 128(1) of the Corporations Act has been properly invoked and that the receivers and managers of Sunburst Properties were entitled to make the assumption that Mr Crosby and Mr Marshall were directors of Agwater.

34. For these reasons, Sunburst Properties is entitled to the relief that has been sought.  The action is to be adjourned to enable minutes of order to be prepared in accordance with these reasons.