Universal Financial Group v Mortgage Elimination Services - [2006] NSWSC 1132

No judgment structure available for this case.

CITATION: Universal Financial Group v Mortgage Elimination Services [2006] NSWSC 1132

HEARING DATE(S): 28 - 30 March, 26 April, 10 & 11 May 2006

JUDGMENT DATE :
31 October 2006

JURISDICTION: Equity

JUDGMENT OF: Austin J

DECISION: Declarations and orders to be made under s 588FF on grounds that the deed of assignment and directions as to payment are commercial and insolvent and unreasonable director-related transactions, and therefore voidable transactions

CATCHWORDS: CORPORATIONS - winding up in insolvency - voidable transactions - meaning of "transaction" as regards directions for payment - whether directions for payment and deed of assignment are uncommercial transactions, insolvent transactions and unreasonable director-related transactions - whether breach of directors' fiduciary duty - appropriate orders

LEGISLATION CITED: Corporations Act 2001 (Cth) ss 9, 513A, 513C, 588FB, 588FC, 588FDA, 588FE, 588FF

CASES CITED: Demondrille Nominees Pty Ltd v Shirlaw (in liq) (1997) 25 ACSR 535
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672
Prentice v St George Bank Ltd (2002) 20 ACLC 923
Warman International Ltd v Dwyer (1995) 182 CLR 544
Wily v Bartercard Ltd (2000) 34 ACSR 186

PARTIES: Universal Financial Group Pty Ltd (P1)
Total Vision Financial Stratagies Pty Ltd (P2)
Daines Financial Solutions Pty Ltd (P3)
Mortgage Elimination Services Pty Ltd (in liq)(D1/XC)
Warren Donald Turner (D2/XD1)
MES Smarter Mortgage Services Pty Ltd (D3/XD2)
Commonwealth Bank of Australia Ltd (D4/XD3)
Australian Finance Group Ltd (D5/XD4)
Lawfund Australia Pty Ltd (D6/XD5)

FILE NUMBER(S): SC 4084/05

COUNSEL: J S Drummond (XC)
S Jacobs (XD1, XD2)

SOLICITORS: Hewitts (XC)
Garland Hawthorn Brahe (XD1, XD2)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

AUSTIN J

31 OCTOBER 2006

4084/05 UNIVERSAL FINANCIAL GROUP PTY LTD & 2 ORS V MORTGAGE ELIMINATION SERVICES PTY LTD (IN LIQ) & 5 ORS

JUDGMENT

1 HIS HONOUR: This judgment relates to the hearing of a cross-claim brought by a company in liquidation, the first defendant ("MES"). The cross-claim was filed after the court had made an order for the winding up of the company, and is being prosecuted in the company's name by its liquidator, Mr Alan Lewis.

2 The essential allegations in the cross-claim are that

· the first cross-defendant, Warren Turner, together with his son Matthew Turner and Lorraine Hilton, by uncommercial and insolvent transactions as defined in ss 588FB and 588FC and unreasonable director-related transactions within s 588FDA of the Corporations Act, caused each of the third, fourth and fifth cross-defendants ("CBA", "AFG" and "Lawfund") to pay commissions that were truly owing to MES to another entity, the second cross-defendant ("Smarter"), owned by Matthew Turner; and

· by another uncommercial, insolvent and unreasonable director-related transaction, Mr Turner caused MES to assign to him all its interest in proceeding No 2893 of 2003, for no or minimal consideration

· Warren Turner as a director of MES breached his fiduciary duty by causing Smarter to enter into an agreement with Lawfund.

3 The contest at the hearing of the cross-claim was between the cross-claimant, MES (represented by its liquidator), and the first two cross-defendants, Warren Turner and Smarter. I was informed from the bar table that the other three cross-defendants (CBA, AFG and Lawfund) filed submitting appearances in the sense that they abide by any order of the court.

Evidentiary problems

4 I must remark at the outset that the hearing and preparation of my judgment have been made difficult by some deficiencies in the documentary evidence. I received evidence at the hearing that was designed to establish the provenance of the documentary evidence that was placed before me, and to identify shortcomings in the evidence from the liquidator's point of view. I also received evidence about the liquidator's attempts to gain access to information, and difficulties encountered by the first and second cross-defendants because of a dispute between them and their former solicitors, who were asserting a lien over documents for unpaid costs the principal significance of this evidence is to explain why the liquidator has not tendered some evidence (such as journals and ledgers) that would normally be expected in this kind of case.

5 I have reviewed this evidence but in my view, it is unnecessary to make any particular findings about it. At this stage, the principal significance of the difficulties of both the liquidator and the solicitor for the first and second cross-defendants in putting together their documentary cases is that the court will be less willing than it might otherwise be to draw inferences adverse to a party from the absence of documentation of a kind that would normally be put into evidence.

The companies

6 MES was registered in 1992. Currently its sole director is Graham Smith, who was appointed on 23 July 2005, shortly before he decided to appoint voluntary administrators to the company. Warren Turner was a director in the period from 1992 until 23 July 2005. Lorraine Hilton was a director from 14 February 2000 until 23 July 2005. As well as being a director for a time, Ms Hilton worked as the internal accountant/bookkeeper of MES, although she is not professionally qualified as an accountant. Matthew Turner was appointed to the board in November 1995 but ceased to be a director in October 1999. At an earlier time (September 1998 to November 1998) Laurence Turner, Warren Turner's brother, was a director. The shareholders of MES are Matthew and Warren Turner, each holding one ordinary share.

7 Smarter was registered in 1999. It was initially called "Mortgage Elimination Home Loans Pty Ltd" but it changed its name to ME Smarter Mortgage Services Pty Ltd in June 2002, and to its present name in January 2003 (apparently after Members' Equity objected to its use of the initials "ME"). The sole director is Lorraine Hilton, who was appointed on 14 February 2000. She is also Smarter's internal accountant/bookkeeper, though (as already mentioned) not professionally qualified as an accountant. Matthew Turner was appointed to the board in April 1999 and ceased to be a director in May 2001. Warren Turner was appointed a director in May 2001 but ceased to hold office in November 2002. Matthew Turner holds both of the issued ordinary shares, as sole shareholder.

8 There is a business name, "MES Loans", registered under the Business Names Act 1962 (NSW) in the name of Warren Turner as proprietor. It appears that the business name was used by Mr Turner as trustee for a trust which owns the business premises to which I shall refer.

9 Life Long Planners was registered in 1981. It was originally called "Turner Life Sales Pty Ltd". Its directors are Warren Turner and Bronwyn Turner, who are the sole shareholders in equal shares. It received commission payments arising out of the business activities of MES, as I shall explain.

10 Superior Tax Services Pty Ltd was registered in December 1999. Its directors are Lorraine Hilton and Michael Unicomb. Mr Unicomb and Warren Turner are the shareholders. Ms Hilton gave evidence that the company holds the franchise of "ITP - The Income Tax Professionals" in the Newcastle and Hunter Valley region, and that she has the day-to-day conduct of the business.

11 Seahome Pty Ltd was registered in 1994. Its director is Warren Turner, appointed on 30 November 2005 when Lorraine Hilton ceased to be a director. The shareholders are Warren Turner, Lorraine Hilton, Geoffrey Vaughan, Matthew Turner and Sarah Turner. The company is subject to a deed of company arrangement. According to the evidence of Ms Hilton, Seahome was the trustee of the ITP Discretionary Trust, and it advanced funds from time to time to MES and Smarter for working capital during the period from 1 January 2004 to 30 June 2005, which were repaid.

12 Universal Financial Group Pty Ltd was registered in October 1999. It is one of the companies associated with Jay McNabb, against whom Warren Turner and MES have fought several legal proceedings. Its directors are Andrew Daines, Jay McNabb and Justin Daines. They each hold one of the three issued shares. Other companies associated with Mr McNabb are Universal Home Loans Pty Ltd (in which Warren Turner was also interested), are the other two plaintiffs in the present proceeding, Total Vision Financial Strategies Pty Ltd and Daines Financial Solutions Pty Ltd.

The business of MES

13 MES began trading in October 1995, conducting business which it described as the business of a "mortgage manager", by advising its clients on strategies for reducing their residential mortgage debts and in connection with that advice, obtaining refinancing for mortgage loans. It developed software to assist it, at a cost (according to Ms Hilton) well in excess of $100,000.

14 MES operated through a network of consultants, who operated through their own companies. Typically a consultant, who had a commission arrangement with MES, interviewed clients and filled out a client questionnaire, referred to in the evidence as a Client Data Questionnaire or "CDQ", for which the clients paid a fee. One of these documents is in evidence. It gives details of the clients, their present income and assets and their liabilities. The consultant then supplied the CDQ to MES's staff, who prepared a "Personal Master Plan" for the clients based upon the information contained in the CDQ. A sample is in evidence. The master plan purported to demonstrate how the clients could reduce and eventually eliminate mortgage debt, by taking various steps which would involve refinancing their principal and interest loan into a more flexible line of credit. The clients would pay another fee called a "program establishment fee" after they accepted the plan and a loan had been arranged and settled.

15 If the clients accepted the master plan, then an application for finance would be made to one of the mortgage facilitators with whom MES had a contractual relationship, such as AFG. Some details of those contractual relationships, which were non-exclusive, are given below. The mortgage facilitator would arrange finance with a funder such as Residential Mortgage Acceptance Corporation Ltd (“RESIMAC”) or through its own resources. The funder (if different from the facilitator) would pay upfront and trail commissions to the facilitator, who would share these with MES in agreed proportions, and MES would then share its part of the commissions with its consultants. MES would arrange for a reviewer (usually the consultant who dealt with the clients) to meet with the clients at regular intervals in the first year of the loan, to review income and expenditure patterns and make sure the clients were staying within their budget.

16 According to the evidence of Ms Hilton, the clients paid MES a fee of $440 (inclusive of GST) upon completion of the CDQ and the commission agent received $286 (inclusive of GST) out of that sum. On completion of the master plan and loan the clients paid another fee, which was eventually set at $3465, and the consultant received a portion, apparently $2035 (though not necessarily in a single payment). The consultant received 75% of the upfront commission paid to MES by the facilitator. Trail commissions were to be paid each month on the outstanding balance of the referred loan, and the consultant was to receive 75% of trail commissions paid by the facilitator to MES.

17 A software program for the CDQ database was developed by Mike Harris, whose company, Mike & Renae Harris Pty Ltd, was retained by MES to do so in about 1999 or 2000. The CDQ program produced financial plans, automatically calculated how much of the commissions received by MES fell to be disbursed to its consultants, and generated commission statements.

18 Mr Harris gave evidence that he was instructed by Laurence Turner, the brother of Warren Turner. He said that Laurence Turner asked him to incorporate into the program a system that would direct certain payments to Life Long Planners Pty Ltd, one of Warren's companies. Mr Harris said he did so.

19 As previously mentioned, MES entered into non-exclusive arrangements with mortgage facilitators to whom loan applications were referred. There is evidence of contractual relationships with State Bank of New South Wales (later Colonial State Bank and then Commonwealth Bank of Australia), Australian Finance Group Pty Ltd ("AFG"), and Lawfund Australia Ltd ("Lawfund"). In the first two cases the facilitators contracted with MES, while it appears on the face of the documents that the contract with Lawfund was made by Smarter. I shall describe the contractual relationships here, and later in this judgment I shall to deal with the evidence about the circumstances in which the agreements were made.

The agreement with CBA

20 There is in evidence an incomplete copy of an undated document entitled "Accredited Agent Agreement" between State Bank of New South Wales Ltd (whose successor is the Commonwealth Bank of Australia, "CBA") (in the agreement called "the Bank") and "the party specified in Schedule A" (called and "the Agent"). The copy is incomplete because only the odd pages are there. The place for specifying the identity of the Agent in Schedule A has been left blank but the name Mortgage Elimination Services Pty Ltd has been written by someone on the cover sheet of the document. Schedule E to the agreement is in evidence but the clause of the agreement to which that schedule relates is not. In Schedule E, Mr Turner made a statutory declaration, on 11 November 1996, that he is a director of MES, which was a party to an Accredited Agent Agreement with State Bank which was to be signed in connection with the statutory declaration.

21 Mr Nolan, the employed solicitor of the cross-claimant who has the carriage of the matter, gave sworn evidence that the agreement (as opposed to Schedule E) was signed by Mr Turner on 11 November 1996. Although that evidence is not directly supported by the copy document itself, I have decided that there are adequate grounds for me to infer that there was an agreement between State Bank and MES for loan facilitation made on about 11 November 1996.

22 There is also in evidence an undated agreement between the State Bank and "the party specified in Schedule A" (called the "User"), relating to the Bank's agreement to allow that party to use certain Bank software in relation to credit assessment. The place for specifying the identity of the User in Schedule A has been left blank, but the document has been signed by Warren and Laurence Turner under the seal of MES. Mr Nolan's evidence is that the software agreement was signed by Warren and Laurence Turner on 11 November 1996. Again, that evidence is not directly supported by the copy document itself but I shall accept it on the basis of inference from the document that is in evidence.

The agreement with AFG

23 A written agreement entitled "Commission and Software User Agreement", dated 1 June 2001, was entered into between MES (described as the "Introducer") and AFG (described as engaged in the business of finance, and residential mortgage broking/facilitation). It was signed on behalf of MES by Warren Turner as director and Lorraine Hilton as secretary.

24 The agreement dealt with two matters. First, it was an agreement under which MES would assist borrowers to prepare mortgage finance applications and refer the borrowers to AFG, which would find lenders. AFG agreed to pay MES upfront and trail commissions of various kinds for the referred business. Commissions were payable only if, in a given month or on an average basis, MES achieved certain benchmarks (essentially, finance applications settled for at least $500,000, or five or more residential mortgage finance applications settled). Second, it was an agreement by which AFG would allow MES to use its "residential mortgage comparison/qualification software" known as "Electronic Finance Broker" ("EFB Software"). MES entered into a supplementary agreement authorising AFG to generate Recipient Created Tax Invoices for the purposes of GST.

25 MES lodged documents called "Commission Claim Form/Lodgment Advice" with AFG at various times between 1 June 2001 and 5 August 2005, sample copies of which are in evidence. They identify the loan writer and the "Master Agent" (MES, in each of the samples tendered), also specifying the borrower and the type of loan. Also in evidence are some copies of Recipient Created Tax Invoices in respect of commission paid to MES by AFG.

26 The evidence includes a copy of a statement issued by AFG setting out the amounts paid to MES or on its behalf for upfront and trail commission from 1 July 2001 to 20 September 2005. According to the statement, in the period from 1 July 2001 to January 2003 upfront and trail commissions totalling $301,892.47 were paid. In the period from February 2003 to 21 September 2005 the total amount of commission was $317,209.32.

27 As explained below, a direction was purportedly given to AFG in February 2004 to pay commissions into the account of Smarter rather than the account of MES. It appears that subsequently, a new agreement was entered into with AFG, the contracting party this time being Smarter. In November 2005 AFG produced some documents in answer to a notice to produce. The documents included a "Member Agreement" between AFG and Smarter executed by Ms Hilton on behalf of Smarter on 24 June 2005. The agreement provided for Smarter to refer loan applications to AFG and for AFG to pay Smarter (or as it might direct) upfront and trail commissions calculated as agreed percentages of the corresponding commissions received by AFG from funders, provided that Smarter achieved a performance benchmark. The performance benchmark was that the average monthly amount of funds borrowed on referral from Smarter was to be at least $1 million. There was a special condition, stating: "Existing commission structure for CBA/Colonial settlements to remain as is ie commission split 90/10 all other lender commission splits to be 80/20."

28 If there was an effective new agreement between Smarter and AFG, it appears to have generated only relatively small amounts of commission. During the period from 22 September to 17 November 2005 AFG paid Smarter upfront and trail commissions totalling $4342.53 (including GST).

The agreement with Lawfund

29 Lawfund carries on the business of finance provision, mortgage origination and finance broking, together with certain other commercial activities and businesses in Australia, by providing services to a network of professional persons and organisations.

30 The documentation in respect of Lawfund includes "Membership Rules for Loan Writers", dated February 2002. The intention of the drafter of the rules seems to be that if an application for membership is accepted, there is an agreement between the member and Lawfund in accordance with the provisions of the rules, but those provisions may be amended. Under the rules, the member pays an annual membership fee, and Lawfund provides services (finance, mortgage origination, finance broking and certain other commercial activities) to the member and endeavours to obtain approval of loans for borrowers introduced by the member. Lawfund specifies introduction fees and trailer fees applicable to each of its "products" (loan facilities, financial products and other services), payable after the loan has been settled and Lawfund has received a fee from the lender.

31 The evidence includes an application for membership by Smarter, signed on behalf of Lawfund and dated 1 November 2002, and an agreement for Recipient Created Tax Invoices for GST purposes, signed (evidently by Warren Turner) for Smarter as member, and dated 31 October 2002. There is an undated document entitled "Quickline Electronic Payment Service" directed to Lawfund and evidently a Lawfund document. Adjacent to the printed words "Company Name" the name of MES has been written by hand, and adjacent to the words "Division Name" the following appears in handwriting: "T/as ME Smarter Mortgage Services Pty Ltd". The form nominates the CBA bank account of MES, No 2800-1494.

32 There is in evidence a schedule of payments made by Lawfund to Smarter for the period 21 January 2003 to 9 September 2005, showing total payments of $239,899.63 plus GST. But it appears that between 1 November 2002 and 1 March 2004 Lawfund paid commissions to the MES bank account, according to the MES bank statements.

Trading history

33 MES commenced its mortgage reduction business in 1995, with four consultants working for it. It had trading losses for the years ended June 1997, 1998 and 1999. It had about 20 consultants working for it in mid-1997, about 30 in mid-1998 and about 100 in mid-1999. As noted above, MES established a business relationship with State Bank of NSW (later Colonial State Bank, and then CBA) from 1996 onwards. CBA upfront and trail commissions were paid into MES's account No 2800-1494 up to 8 August 2005.

34 In February 1998 MES moved into new premises at 14 Garnett Rd, Green Hills (East Maitland) owned by a Turner entity, constructed (according to Mr Turner's evidence) at a cost in the order of $1.3 million. MES occupied the first floor and provision was made for offices for some of the consultants, allowing them to access client information through computer outlets.

35 Mr Turner and MES developed a significant business relationship with Jay McNabb and his companies (including Universal Financial Group Pty Ltd and Total Vision Financial Strategies Pty Ltd). Universal Financial Group Pty Ltd ("UFG") operated as an MES consultant in part of the MES building premises. By mid-2000 it was the largest consultant entity, having approximately 20 individual consultants who submitted business through UFG to MES (there being, at that time, approximately another 25 consultants who submitted business to MES directly). It submitted loan applications to Universal Home Loans Pty Ltd ("UHL"), a company of which Warren Turner and Jay McNabb were directors and in which they, directly or indirectly, held the shares. UHL arranged loan finance with RESIMAC. MES earned a profit for the year ended June 2000.

36 The relationship between Mr Turner and Mr McNabb and their respective companies broke down in late 2000. UHL came under the control of Mr McNabb. By the end of January 2001 MES had approximately 10 consultants working for it. As a result of the collapse of the HIH Insurance Group it had no professional indemnity insurance, and it would have been very expensive to arrange insurance because the company had made a claim on HIH in 1999. It suffered a trading loss for the year ended June 2001.

Ms Hilton's evidence about the transfer of business from MES to Smarter

37 In September/October 2001 Ms Hilton received complaints from clients who had not received reviews for which they had paid. She checked MES's records and established that the majority of the clients who were complaining had been introduced by UFG, and that MES had paid UFG to perform the reviews.

38 She gave evidence that in November 2001 she had a conversation with Warren Turner in which they discussed ceasing to operate under the name of MES because the name had been tarnished and had a negative image. They discussed changing the CDQ program so that the name of MES would no longer appear on the documentation, and also developing a "user-friendly" website that would allow clients to obtain information about their loans.

39 Ms Hilton gave evidence that in about November 2001 she contacted Mike Harris, who had designed the CDQ program. She said Mr Harris advised her that the CDQ program was not internet-friendly and so the website she had in mind could not be developed in conjunction with that program. Ms Hilton said she also asked Mr Harris to remove the MES name from the CDQ program and he said he could do so, but as he was very busy he would make the changes when he could get around to it. She said she repeated this request in November or early December 2003. Ms Hilton said that Mr Harris did not make the requested changes.

40 Ms Hilton also gave evidence that in November 2001 she and Mr Turner contacted Damien Tarnawsky, a computer programmer, and asked him to write a new CDQ program for Smarter. She said Mr Tarnawsky attended the premises of MES for quite some time but despite his work, the CDQ system continued to produce printed documents in the name of MES.

41 Ms Hilton said that by November 2001, UHL had not paid any trail commissions to MES, although (she claimed) it was receiving monthly commissions of about $20,000 from RESIMAC, and it had become necessary for MES to procure a new source of funds. MES therefore entered into the agreement with AFG.

42 Ms Hilton gave evidence that, as the internal accountant of MES, she formed the view, after MES had recorded a trading loss for the year to June 2001, that it would have a reasonable prospect of trading out of its financial difficulties if it could increase its number of consultants. She contacted a personnel agency for that purpose, but the personnel agency was only able to find about six consultants and only two of them stayed. By about the end of June 2002 she formed the view that MES was unable to trade out of its difficulties.

43 Smarter adopted the name "ME Smarter Mortgage Services" in June 2002. According to Ms Hilton, it began using standard form documentation in that name. The name was used on forms submitted by the client, samples of which are in evidence. The forms bear the name "ME Smarter Mortgage Services" and some but not all of them show that the name belongs to a company with an ABN. Ms Hilton said that from about June 2002 all applications for finance submitted to and dealt with by AFG were in documents bearing the name ME Smarter Mortgage Services. Upon settlement of the loan, AFG sent out a commission statement, two samples of which (dated 9 September 2004 and 26 May 2005) are exhibited to Ms Hilton's affidavit of 7 October 2005. In each case the statement is a Recipient Created Tax Invoice addressed to MES (marked to the attention of Warren Turner), stating that a specified amount has been credited to Smarter's CBA bank account No 2800-4345. Ms Hilton said that the data from the statements was entered into the CDQ program.

44 Ms Hilton claimed that as from June 2002 Smarter took over the servicing of the MES clients who were on a mortgage reduction program. The service consisted of performing reviews. But she said that "for reasons of administration" the MES account was still used. Smarter's method of processing loan applications was that the consultant sent the application direct to AFG and sent a "Commission Claim Form/Lodgment Advice" to AFG after settlement. Some samples of these forms are in evidence, for settlements in May, June and July 2002. They identify MES rather than Smarter as the "Master Agent/AFG Member". On the other hand, two sample letters written to clients upon settlement of loans, dated 18 November 2002 and 26 February 2003 respectively, used the Smarter letterhead.

Assessment of Ms Hilton's evidence on these matters

45 I have decided not to accept Ms Hilton's evidence to the effect that MES did not trade after June 2002 and that thereafter Smarter was conducting the business of a mortgage broker. While it has not been established that Ms Hilton falsified her evidence, in my view it is highly probable that her account of the transfer of business operations from MES to Smarter is an ex post facto reconstruction of arrangements which did not, at the time, adequately distinguish between the two entities and therefore did not establish or mark a transition from one to the other. Further, her evidence was unsatisfactory in ways that have caused me to accept the submission made on behalf of MES that her evidence was generally unreliable.

46 Ms Hilton was extensively cross-examined on her assertions. I agree with counsel for MES that she conceded that various documents to which she was taken did not support her contentions. The documents included:

· the business activity statements that had been signed by her;

· a lease agreement entered into by MES with Premier Financial Services on 19 February 2004;

· bank statements for account No 2800-4345, which showed little activity prior to the directions given to AFG and Lawfund in February 2004;

· commission statements and payments made to consultants, which seem to have been issued and paid for by MES.

47 Additionally, Ms Hilton was not able to explain, if Smarter was conducting a substantial business from about June 2002, some matters revealed in answer to notices to produce, such as the absence of wage records to identify employees of Smarter, the absence of BAS statements or income tax returns for Smarter, the absence of commission statements or records of payment of commission to consultants by Smarter prior to August 2005, the absence of written consultancy agreements to which Smarter was a party, and the absence of evidence of business expenditure.

48 MES tendered Warren Turner's Report as to Affairs in respect of MES dated 23 October 2005. The document identifies employees and the amounts of their claims, and lists substantial and apparently current creditors. The statement does not indicate that the company ceased to trade in mid-2002.

49 Ms Hilton said that commissions paid by AFG and Lawfund after June 2002 were paid into MES's bank account for "reasons of administration", though in my opinion, her evidence did not adequately identify the administrative issues or explain why payment into one bank account rather than another addressed them. Her evidence as to the use of documents bearing Smarter's name was not strong, because the sample documents that she provided were, as I have pointed out, limited as to time and in some cases quite recent, and it appears that concurrently documents were being used bearing the MES name. Her statement that if MES had not gone into administration and liquidation, all entries would have been "journalised" back to Smarter (Transcript page 183) does not establish that there was any change of business practice some three years earlier.

50 Ms Hilton's evidence seeking to explain why documents continued to be issued in the name of MES rather than Smarter after June 2002, namely that Mr Harris had failed to carry out her instructions to amend the CDQ database, is inconsistent with Mr Harris's denial that he ever received such a request. I prefer his evidence to the evidence of Ms Hilton.

51 Counsel for MES was particularly critical of the following passages of evidence given by Ms Hilton in cross-examination (Transcript page 174 and page 176):

52 I do not accept the submission by counsel for MES that this demonstrates that Ms Hilton was prepared to say whatever was required to obtain the result that was sought. But it does support, graphically, my view that she conducted the affairs of the companies without, at the time, paying attention to the separate corporate entities, making it likely that her firm evidence that there was a transition from MES to Smarter after June 2002 was reconstruction.

53 Ms Hilton's evidence about an agreement dated 9 July 2003 demands some attention. This is a single page document on the letterhead of MES, which purports to be an agreement by MES to sell the CDQ program to Life Long Planners as trustee for the Turner Family Trust. The document asserts that, as at 30 June 2003, MES owed Life Long Planners as trustee for the Turner Property Trust approximately $135,000 in unpaid commissions, and purports to record an agreement between the parties that the purchase price for the CDQ program is the total of all outstanding commissions. It is signed by Bronwyn and Warren Turner as directors of Life Long Planners and by Warren Turner and Lorraine Hilton as directors of MES. Attached to the document is a 30 page printout headed "Life Long Planners - Commission Entitlement to 30/06/2003" listing amounts of commission totalling $135,504.27.

54 Ms Hilton said in cross-examination that the schedule attached to the agreement was prepared by Mr Michael Harris in July 2003, contemporaneously with the document. When she was taken to a balance sheet as at 30 June 2003 which did not show a debt of over $135,000 to Life Long Planners, she claimed that the debt had been "offset by the asset of the program" (Transcript page 24), even though the agreement to sell the CDQ program was dated after the balance date. She said "it had been discussed and agreed prior to 30 June that that is what was going to happen and we were just waiting for Mr Harris to come and run the report". Although Ms Hilton did not have professional training as an accountant, it is hard to believe that a person of her experience would have thought it appropriate that a balance sheet be prepared in this fashion.

55 Mr Harris gave evidence to different effect. He said that in the week commencing 21 November 2005 he attended the premises of MES in the East Maitland to correct a malfunctioning telephone system. He said Ms Hilton approached him and asked him to print out a report showing the amounts paid to Life Long Planners up to 30 June 2003. He said he did so, and was able to identify the report in his evidence. He identified the report attached to the document dated 9 July 2003. The solicitor for the first and second cross-defendants criticised his evidence, saying that it was vague and that he was unable to recall very much at all. I reject that criticism. Although Mr Harris's evidence was in some respects not precise, I regarded him as a reliable witness who was doing his best to recollect the circumstances. Mr Harris has no interest in the outcome of this case. The general gist of his evidence, that he did not create the attachment to the sale document of 9 July 2003 in that year but only in 2005 (though he cannot be sure whether it was early November or late October) survived cross-examination. I accept that evidence.

56 The evidence of Mr Harris implies that the purported agreement for sale, though dated 9 July 2003, was not entered into earlier than October or November 2005, by which time MES was in liquidation. There is no application to set aside the purported sale of the CDQ program, but the implication of Mr Harris's evidence, that Ms Hilton caused the annexure to the document to be created years after the purported date of the transaction, raises a question about the overall reliability of her evidence.

57 Similarly, Ms Hilton's evidence about Smarter's proof of debt is troubling. The documentary evidence includes two forms of proof of debt signed by Ms Hilton as a director of Smarter, dated 30 August and 7 September 2005. Both documents claim that MES was, as at the commencement of the administration on 5 August 2005, and continued to be, indebted to Smarter in the sum of $401,213.79. Particulars were as follows:

58 The differences between the two proofs of debt are, first that, while the earlier document describes the creditor as simply Smarter, the later document describes the creditor as Smarter, as trustee for the Mortgage Elimination Home Loans Discretionary Trust; and second, the first proof of debt contained an incorrect and invalid ABN.

59 In each case the proof of debt attached invoices to support the claim for "Contract Labour" and copies of bank statements to support the claim for "Loans for Working Capital". Three invoices were attached, each seeking payment of $66,000 "to provide staff to present Mortgage Elimination Services Mortgage reduction plans to Mortgage Elimination Services clients and to perform reviews for those clients" for an identified period of 6 months (the periods being, respectively, 1 January to 30 June 2003, 1 July to 31 December 2003 and 1January to 30 June 2004). The invoices were dated, respectively, 1 July 2003, 1 January 2004 and 30 June 2004, and they all purported to be issued to MES by Smarter. The copies of bank statements attached to the proof of debt were those used by the cross-claimant's lawyers to prepare the schedules of payments to which I shall refer.

60 There were also proofs of debt lodged on behalf of

· Life Long Planners for $511,422.53, comprising loans for working capital of $14,422.53 and consultancy fees for the period from 1 October 1999 to 31 July 2003 in the sum of $497,000, for which invoices were attached bearing dates 1 July 2003 and 31 July 2003;

· Warren Turner trading as MES Loans as trustee for the Turner Property Trust in the sum of $480,441.13, partly for rent extending over a period well beyond the time at which, according to Ms Hilton, MES had ceased to trade;

· Warren and Bronwyn Turner for $79,715.

61 Ms Hilton gave evidence (Transcript page 205) that she caused the invoices to be prepared on or about the dates that they bear. But she said the invoices were not incorporated into the records of MES at that time because she believed MES had stopped trading and its accounts had only been prepared up until 30 June 2003. She said that the three invoices for Smarter were not brought into the records of MES until July 2005, but she insisted that they were recorded in Smarter's books on about the dates that they bear.

62 A printout was tendered from the MYOB records of MES for "All Journals 01/07/2003 to 14/10/2005", showing session dates indicating the date of entry of information into the system (Exhibit P15). According to the evidence, the printout was produced by Ms Hilton to the liquidator. It clearly demonstrates that the invoices attached to the proof of debt were not brought to account in the financial records of MES at any time prior to 17 August 2005. In cross-examination Ms Hilton was unable to explain why the invoices did not appear in the MYOB printout (Transcript page 217). She denied having prepared the invoices for the first time in August 2005 but it seems to me implausible that if the invoices had existed from 2003, they would not have been reflected in MES's accounts, even when the accounts were massively updated in July 2005.

The making of the agreement with Lawfund

63 Smarter entered into its agreement with Lawfund in October 2002. According to Ms Hilton, the standard form documentation used to process loan applications to Lawfund was in the name of Smarter, also bearing the name of Lawfund. Blank samples were exhibited to her affidavit of 7 October 2005. Lawfund issued Recipient Created Tax Invoices to Smarter, samples of which have been provided by Ms Hilton, bearing dates in 2003 and 2004. Ms Hilton said that she arranged for commission payments from Lawfund to be deposited to the account of MES, and she continued to pay commissions to consultants through the old CDQ program "for reasons of administration". In about April 2003 she began, on a trial basis, paying upfront commissions to consultants before receiving payment from AFG or Lawfund. She provided some samples of a document called "Authorisation to Pay Upfront" in the name of Smarter, bearing dates in April and May 2003.

64 Smarter became a member of the Mortgage Industry Association of Australia in June 2003, and in that month of obtained professional indemnity insurance for a much lower premium than had been available to MES. After the appointment of Mr Lewis as liquidator to MES, Smarter continued to occupy the premises at East Maitland, paying rent to Turner Property Trust of $1200 per month. The Trust has a mortgage in excess of $1 million and must meet monthly repayments of $6,200.

The Equity and District Court Proceedings

The Equity Proceeding

65 The breakdown of the relationship between Mr Turner and Mr McNabb in their respective companies has led to a great deal of litigation, including:

· proceeding No 2895 of 2003 in the Equity Division of this court;

· proceeding No 15 of 2002 in the District Court, Maitland (referred to in the "Plaintiffs' Chronology", presumably by mistake, as No 52 of 2002), heard by Blanch CJDC;

· proceeding No 74 of 2003 in the District Court, Maitland; and

· proceeding No 1071 of 2004 in the District Court, Sydney, heard by Charteris DCJ who delivered his judgment on 14 June 2005.

66 In proceeding No 2895 of 2003 in the Equity Division of this court, Warren Turner and MES sue UHL, Jay McNabb and Cherie McNabb. MES make certain claims in its own name, and Mr Turner makes claims either in his own name or through the entities Seahome and Life Long Planner. The amended statement of claim alleges that a business venture was entered into between Mr Turner and Mr McNabb, MES and UHL, under which UHL established a mortgage originator business with assistance from Mr Turner and MES. Disputes arose between Mr McNabb and Mr Turner and they agreed to sever their relationship, and entered into heads of agreement for a dissolution agreement. Mr Turner alleges that he entered into the heads of agreement on his own behalf and on behalf of MES and other entities associated with and controlled by him. Mr Turner and MES claim that UHL and Mr McNabb have breached the heads of agreement by failing to make payments as required by the agreement, and that Mr McNabb has made a voidable transfer of his half share in his family home to his wife. They seek payment of $300,000 plus interest, together with relief in respect of the voidable transfer under s 37A of the Conveyancing Act 1919 (NSW).

67 There is a schedule to the amended statement of claim, which shows that the principal component of the claim in the proceeding is a claim by MES for upfront and trail commissions.

68 In the present proceeding Mr Nolan gave evidence that his firm, and he personally as employed solicitor, act for the defendants in the equity proceeding. He agreed with the proposition that his clients have filed a defence, in which they assert that UFG did not refer clients to MES, but rather it referred them to UHL in a direct relationship with UHL. Mr Nolan accepted that Mr McNabb had sworn an affidavit in the equity proceeding in which he asserted that, of 210 clients who were referred to UHL, only 35 were introduced by MES and that UFG was not an agent for MES in respect of the bulk of the loans for those clients. Mr Nolan agreed that in the District Court proceedings before Judge Charteris QC (that is, I infer, proceeding No 1071 of 2004), UHL and its co-plaintiffs alleged, in seeking to recover commissions from MES, that there was a direct relationship between UFG and MES. Under cross-examination in the District Court proceeding, Mr McNabb resiled from his Supreme Court affidavit evidence and informed Judge Charteris QC that the way had been opened up for UHL and UFG to say that all loans were placed through MES. In cross-examination in the present proceeding, Mr Nolan acknowledged that Mr McNabb "had some difficulty in cross-examination" in the District Court. Mr McNabb's evidence in the District Court seems to be relevant to the prospects of success of MES and Mr Turner in the equity proceeding.

69 The court made Mareva orders in May 2003, on the application of Mr Turner and MES, and those orders were extended from time to time thereafter. But on 8 October 2004 Palmer J decided that the Mareva orders should be discharged. Mr Turner and MES have appealed from Palmer J's decision to the Court of Appeal (No 40963 of 2004). On 16 August 2005 Campbell J ordered the plaintiffs in the equity proceeding to provide security for costs in the sum of $50,000. Up to the hearing before me, the appeal to the Court of Appeal had not been heard and the order for security had not been complied with (although Ms Hilton gave evidence that she had made an application for mortgage finance secured over her home and investment property with RAMS Home Loans and intended to use part of the proceeds to satisfy the security order, and that she had received "conditional approval" for a loan from Bluestone Mortgages).

70 There are two outstanding orders for costs in the equity proceeding. There is an order in favour of Mr Turner and MES, which has been the subject of assessment and then review by the Costs Review Panel, whose certificate is dated 19 August 2005. The amount certified as the fair and reasonable amount of costs to be paid by the defendants is $74,297.72. There is an order against Mr Turner and MES, which has been assessed at $10,014, by a certificate dated 7 April 2004.

71 Mr Nolan gave evidence in cross-examination that his firm, while acting for Mr Lewis as liquidator of MES, has continued to act for the defendants in the equity proceeding. On behalf of the defendants, the firm filed a notice of motion on about 17 November 2005 to seek to have the equity proceeding dismissed for want of prosecution. Mr Turner complained to Mr Lewis, in the letter dated 11 October 2005, that Mr Lewis was in a position of a conflict of interest, but there is no application before the court for relief based upon any alleged conflict of interest of Mr Lewis or his solicitors.

72 I was informed from the bar table during final oral submissions that the equity proceeding has recently been summarily dismissed for want of prosecution. It is not clear whether MES would be able to assert its rights in another proceeding.

District Court proceeding No 15 of 2002

73 There is very little evidence about proceeding No 15 of 2002 in the District Court, Maitland, except that the plaintiff was MES and the defendants were UHL and Mr McNabb, and the case was heard in late February and early March 2004 by Blanch CJDC. The "Plaintiffs' Chronology" asserts that the proceeding was settled as against Mr McNabb on 24 February 2004, and was settled against UHL on 23 March 2004, and that on 30 March 2004 UHL paid MES $75,000 in satisfaction of terms of settlement. I can find no evidence to support these assertions in the cross-claimant's evidence in chief but there is some evidence to that effect in the cross-examination of Ms Hilton, although the settlement amount was not given.

District Court proceeding No 74 of 2003

74 In proceeding No 74 of 2003 in the District Court, Maitland, UFG sued MES and UHL claiming damages for breach of contract. It claimed from UHL $122,182.69 for damages for failure to pay upfront commissions and trailer income in respect of loans introduced by it and approved and settled by RESIMAC, and in the alternative, it claimed $97,825.27 from MES. By its defence, MES said that UFG forfeited its entitlement to trail commissions when its directors severed all dealings with MES in about January 2001. As regards upfront fees, MES said it was currently suing UHL and if it recovered fees then it would pay an agreed percentage of them to UFG.

District Court proceeding No 1071 of 2004

75 In proceeding No 1071 of 2004 in the District Court of New South Wales, UHL, Total Vision Financial Strategies Pty Ltd and Daines Financial Solutions Pty Ltd as plaintiffs sued MES as defendant, for damages for breach of contract. In the document entitled "Plaintiffs' Chronology" it is asserted that this proceeding (wrongly identified as No 1074 of 2004) commenced on 22 December 2003. I have not been able to find any evidence as to the time of its commencement in the cross-claimant's evidence in chief, but Ms Hilton acknowledged in cross-examination that UFG had served a District Court statement of claim on MES in December 2003 (Transcript page 166) and that she knew MES was facing a substantial claim. The "Plaintiffs' Chronology" also asserts that the hearing of this proceeding commenced on 21 March 2005 and concluded on 22 April 2005. Again, there is some support of this in evidence in cross-examination.

76 At least the evidence shows that, on 17 June 2005, as a result of the decision of Charteris DCJ in the proceeding, UFG obtained judgment against MES for $222,257, Total Vision Financial Strategies obtained judgment against MES for $9,244, and Daines Financial Solutions obtained judgment against MES for $14,086. MES was ordered to pay the costs of the plaintiffs. These orders were stayed on the condition that the defendant satisfy 50% of each plaintiff's verdict within 28 days and file the holding appeal within that time. The "Plaintiffs' Chronology" asserts that on 15 July 2005 MES failed to comply with the terms of the stay. While I can find no direct evidence of this, I am prepared to accept this assertion as a matter of inference from the evidence of the financial position of MES at that time.

The winding up proceeding

77 On 22 July 2005 the three District Court plaintiffs commenced the present proceeding, No 4084 of 2005, for winding up of MES, on grounds of insolvency and other grounds. MES was served with the originating process on 25 July 2005.

Directions to pay Smarter rather than MES

78 By February 2004 MES had contractual relationships with CBA and AFG, and Smarter had a contractual relationship with Lawfund, but the CDQ program bearing the name of the identifier which belonged to MES (subject to the purported assignment dated 9 July 2003) was used for all of this work, although some standard form documents used for AFG and Lawfund businesses identified Smarter as the originator. Commission income was paid into the MES bank account. It appears that in the case of Lawfund, payments were made to the bank account of MES on the basis that the company name for payment transfers was "Mortgage Elimination Services Pty Ltd T/As ME Smarter Mortgage Services Pty Ltd".

79 It also appears that commission statements were being issued to consultants in the name of MES. The evidence includes some commission statements issued by MES to Daines Turner & Associates Pty Ltd, for the periods from 1 June to 30 June 2003, 1 June to 15 June 2004, 16 June to 30 June 2004, 1 July to 31 July 2004, and 1 June to 30 June 2005. The evidence also includes some incomplete copies of bank statements for Daines Turner & Associates. On the face of it, there are some linkages between these bank statements and bank statements on MES's bank account. For example, a receipt recorded in the Daines Turner bank account on 3 July 2002 for $5,067.85 appears to match a payment of the same amount on the same day in the MES account.

80 According to submissions made on behalf of Mr Lewis, by that time Warren Turner and Ms Hilton knew that there was a substantial claim being made by UFG and its co-plaintiffs in the District Court, which, if successful, would lead to a large judgment against MES. That submission is supported by Ms Hilton's evidence that she was aware of the District Court claim as from December 2003. It seems to me very likely that Mr Turner was aware of it as well. In February 2004 steps were taken by Matthew Turner to cause AFG and Lawfund to pay commissions in future into the account of Smarter rather than the account of MES.

81 By e-mail dated 26 February 2004 to Stephen Barnes, Business Development Manager at AFG, Matthew Turner requested that all commissions be paid to Smarter at account No 2800-4345, as MES would cease to trade. On 16 March 2004 Mr Barnes instructed someone else at AFG to complete a change of details form.

82 Then on 27 February 2004 Matthew Turner sent an e-mail to Marilyn Carrero, evidently (according to Mr Nolan's evidence) of Lawfund, saying he wanted all commissions to be paid to Smarter in CBA account No 2800-4345. Ms Carrero responded saying she would forward the request to Marisa Dixon.

83 Ms Hilton gave evidence that she instructed Matthew Turner to issue the directions both to AFG and to Lawfund. She was a director of MES at the time. It emerges from her evidence of involvement in financial matters at MES generally that she had a measure of executive responsibility within MES which would permit her to give such instruction on the company's behalf. The fact that she was also a director of Smarter and was probably also acting on its behalf does not, in my opinion, derogate from the conclusion that her instruction meant that the directions given to AFG and Lawfund were given on behalf of MES. I therefore infer that Matthew Turner was acting with the authority of MES in issuing the directions.

84 A similar instruction was given with respect to commission payments by CBA, but it was given after voluntary administrators had been appointed to MES. The instruction was later revoked, in the circumstances set out below, and does not appear to have been acted upon. No claim is made by the liquidator in respect of CBA payments, except for a declaratory order.

Payments to Smarter

85 There is evidence, which I accept, that the directions given to AFG and Lawfund led to commission payments being made to Smarter. The evidence includes copies of statements of account in respect of CBA account No 2800-4345 in the name of Smarter for the period from 2 January 2004 to 29 August 2005. Relying on those statements, the cross-claimant's solicitors have prepared a schedule listing amounts received by Smarter as commission income and amounts paid out by it as loans to MES, in the period from 1 March 2004 to 26 August 2005. The schedule identifies AFG and Lawfund as paying the commissions, which are described as upfront commissions or trailer commissions, with GST shown separately. The total commission received is $313,349.92, and the total amount lent to MES is $194,931.50. There is a separate schedule which divides the commissions paid by AFG from the commissions paid by Lawfund, showing that AFG paid $178,214.18 and Lawfund paid $135,135.74. In my opinion these calculations are correct and are based on the evidence.

86 The schedules were prepared before Smarter's solicitors produced documents on 17 October 2005 in response to a notice to produce. The documents produced included "Statement Reports" for account No 2800-4345, Smarter's CBA account. One of these documents is a seven-page report dated 30 August 2005, for a period beginning on 2 January 2004 and ending on 29 August 2005. The opening balance is $1934 and the closing balance is $13,328. There is another, much shorter Statement Report for the period from 30 August to 30 September 2005, dated 5 October 2005. The opening balance is $13,328 and the closing balance is $11,372.72. Also produced were bank statements for Smarter's CBA account No 2800-4345 for periods from 2 June 2001 to 27 February 2004. The bank statements show minimal transactions for very small amounts during that period. These documents do not materially affect the overall analysis.

The deed of assignment

87 Warren Turner gave evidence that, after judgment was entered against MES in District Court proceeding No 1071 of 2004, he formed the view that there was a strong likelihood that the District Court plaintiffs would move to wind up MES and that this would, in practical terms, result in the "killing off" of MES's action in equity proceeding No 2895 of 2003. He said that MES did not have the funds to finance legal proceedings, and he decided the only possibility of the equity claim being litigated to final hearing would be if he took an assignment of the rights of MES, on such terms as to fees as he could agree with the solicitors who were acting in the matter. He accordingly negotiated a fee agreement with the solicitors.

88 By a deed dated 20 July 2005 (three days before Mr Turner resigned as a director of MES), MES assigned to Warren Turner the whole of its rights to recover any debt or amount owing from UHL and/or Mr McNabb and/or Mrs McNabb, and the whole of MES's rights or entitlements to any fruits of the equity proceeding, including any amounts that would otherwise be held by Mr Turner in trust for MES. The "consideration" stated in the deed is Mr Turner's agreement to prosecute the equity proceeding (subject to adverse legal advice) and to allocate recoveries to the payment of the costs incurred by himself and MES in respect of the proceeding and the District Court proceeding. Any surplus recovery is to be allocated 75% to MES and 25% to Turner.

89 By clause 4 the parties to the deed acknowledge that MES entered into it in anticipation of being wound up, and they acknowledge various other matters, evidently designed to rebut any assertion that the assignment is an uncommercial transaction. The acknowledgements refer to:

· the joint and several liability of MES and Mr Turner under certain adverse costs orders in the equity proceeding and the unlikelihood that anything will be available to meet that liability from the assets of MES in the winding up;

· the joint and several liability of MES and Mr Turner for their own legal costs and the unlikelihood of any amount being available in the winding up for that purpose;

· the fact that the prosecution of the equity proceeding will lead to significant further costs which MES is unlikely to be in a position to pay;

· the appreciable risk that the defendants might succeed in the equity proceeding, leading to further exposure of Mr Turner to an adverse costs order;

· the unlikelihood of a liquidator of MES being able to obtain funding to prosecute the equity proceeding, in the absence of the assignment;

· that the consideration given by Mr Turner in return for the assignment is said to be at least equal to the value of the property assigned;

· that the transactions anticipated by the deed do not contravene Part 5.7B of the Corporations Act and in particular s 588FB.

90 Mr Lewis, the liquidator, gave evidence he reviewed the books and records of MES available to him and found no company minutes recording any resolution of directors to assign MES's interest in the equity proceeding to Mr Turner. He gave evidence that, until the court determines the efficacy of the deed of assignment, he cannot make an assessment as to whether MES should continue to prosecute the equity proceeding and pay security for costs, or to participate in the appeal from Palmer J's judgment to the Court of Appeal.

The voluntary administration and winding up order

91 On 5 August 2005 Mr Smith, in his capacity as sole director of MES, appointed Glen Shannon and Jonathan McLeod as voluntary administrators.

92 A letter dated 8 August 2005, on the letterhead of MES, was signed by Warren Turner as "Director". Since the company was by that time in administration, Mr Turner had no authority to issue the letter. It was directed to Melinda Hampson, who according to Mr Nolan's evidence worked at CBA. The letter does not contain any address or any indication of the method of transmission, but it was produced by the CBA pursuant to a Notice to Produce. The subject of the letter is "current trails" paid to MES, and in the letter Mr Turner says that the existing account is closed, and provides new account details for account No 2800-4345 in the name of Smarter.

93 It appears that the first meeting of creditors of MES was held on 12 August 2005 and there was no quorum; the second meeting was held on 1 September 2005 and was adjourned to 8 September 2005, when the creditors resolved to approve a deed of company arrangement.

94 On 26 August 2005 Matthew Turner sent an e-mail to Melinda Hampson, from an e-mail address at MES. He said he was e-mailing her on behalf of his father Warren Turner in regard to the recent request for an account change. He said, "we need to cancel that request". The e-mail was produced by CBA pursuant to a Notice to Produce. Ms Hilton gave evidence that she caused the e-mail to be written. She was the director of Smarter at the time. It appears that CBA had not acted on the original instruction.

95 On 19 September 2005, Smarter gave undertakings to the court, without admissions, evidently designed to preserve in its bank account any commissions paid to it by AFG and Lawfund, subject to permitted disbursements to pay certain reasonable legal expenses. The undertaking was originally limited to expire on 10 October but it was subsequently continued to 17 October. On the latter day Barrett J made orders in terms of paras 22A, 23A and 24A in the cross-claim, upon the cross-claimant giving the usual undertaking as to damages. By those paragraphs, CBA, AFG and Lawfund are restrained from making further commission payments to Smarter's account No 2800-4345. Presumably his Honour's orders were intended to be, and operate as, interlocutory orders pending determination of the cross-claim. They are still in force.

96 On 26 September 2005 Young CJ in Eq rejected an application for an adjournment of the winding up application, made under s 440A(2) by virtue of the administration of MES, and ordered that the company be wound up and that Mr Lewis be appointed its liquidator. The order was for winding up in insolvency, since his Honour said in his ex tempore reasons for judgment that the company was clearly insolvent.

Documentary evidence of the financial affairs of MES

97 I shall briefly review the financial statements (such as they are) and bank statements of MES, that the liquidator has put into evidence, and some analyses that have been performed on behalf of the parties in reliance on documents.

Financial statements of MES

98 Ms Hilton exhibited to her affidavit of 7 October 2005 balance sheets of MES for June 1997 (printed 12 January 2004), June 1998 (printed 18 January 2004) and June 1999 (printed 19 January 2004), June 2000 (printed 28 January 2004), June 2001 (printed 28 January 2004), and June 2002 (printed 14 November 2004).

99 Mr Lewis has put together a set of financial statements for MES by drawing upon evidence filed in the equity proceeding and in the Sydney District Court proceeding. Balance sheets for MES as at June 2001, June 2002 and April 2003 were annexed to an affidavit by Ms Hilton made on 5 June 2003 in the equity proceeding, and they bear the print date 27 May 2003. Profit and loss accounts and balance sheets of MES were exhibits in the Sydney District Court proceeding, and are in evidence before me as follows:

· profit and loss accounts for the periods from July 1999 to June 2000 (printed 28 January 2004), July 2000 to June 2001 (printed 28 January 2004), July 2001 to June 2002 (printed 20 March 2005) and July 2002 to June 2003 (printed 20 March 2005);

· balance sheets as at June 2000 (printed 28 January 2004), June 2001 (printed 28 January 2004), June 2002 (printed 20 March 2005) and 30 June 2003 (printed 20 March 2005).

100 Balance sheets for MES as at June 2004, December 2004 and June 2005, bearing print dates of 19 August 2005, were annexed to the affidavit of Mr Shannon, the administrator of MES, made on 19 August 2005 and filed in this proceeding. Profit and loss accounts for MES for the period from July 2002 to June 2003, July 2003 to June 2004 and "June 2005", each printed on 17 August 2005, were sent to the liquidator's solicitors (then the plaintiffs' solicitors) by e-mail on 9 September 2005.

101 In late September or early October 2005 Ms Hilton provided to the liquidator copies of unsigned monthly profit and loss statements for the months from July 2003 to April 2004.

102 Although the balance sheets themselves do not say so, I infer that they are financial statements as at the last day of the designated months. The figures in the balance sheets for June 2001 and June 2002 printed on 27 May 2003 are quite different from the figures in the balance sheets for those times printed, respectively, on 28 January 2004 and 20 March 2005. The figures in the profit and loss account for the period from July 2002 to June 2003 printed on 20 March 2005 are quite different from the figures in the profit and loss account for that period printed on 17 August 2005.

103 It appears that the profit and loss accounts and balance sheets that have been supplied were taken from the MYOB system that was used by MES for accounting purposes. Scott Newton, a chartered accountant employed by Mr Lewis's firm, has given evidence about the operation of the MYOB system. He says that in order for changes to be made to the profit and loss account for the year ending 30 June 2003, between 20 March 2005 and 17 August 2005, either

· the records for the year ending 30 June 2003 were not "closed off" or rolled over prior to 17 August 2005 (notwithstanding prompts in the MYOB system), or

· there were available "back-up" files into which additional information has been inserted so as to make the changes between the first and second versions of the document.

104 Mr Newton has also given evidence that the MYOB data file produced by Ms Hilton has no opening balances in the balance sheet and profit and loss ledgers, something he says is highly unusual, especially for a company that has traded in prior years.

Business activity statements of MES

105 Mr Newton has put before the court monthly business activity statements ("BAS") of MES supplied to him by Ms Hilton in the period from 30 September to 5 October 2005. The statements relate to the period from January 2003 to April 2004. They imply that in the period from January 2003 to April 2004 the business activity of MES included activity leading to commission payments from CBA, AFG and Lawfund, notwithstanding that the Lawfund contract was in the name of Smarter and directions had been given the payment of AFG and Lawfund commissions to Smarter in February 2004.

Bank statements of MES and Smarter

106 Exhibited to Mr Nolan's affidavit of 14 October 2005 are bank statements for MES's bank account with CBA, No 2800-1494. They relate to periods from 2 June 2001 to 30 August 2005 (bank statements for the period 1-30 November 2004, 1-28 February 2005 and 1-31 July 2005 are missing, though there are Statement Reports apparently taken from the company's accounting system). One sees from perusing the statements that, on average, twice every month there is a deposit going into account 1294 from Colonial State Bank (CBA) indicating payments by the bank to MES of upfront and trail commissions. It is also evident from perusing the statements that, after the directions given to AFG and Lawfund in February 2004, deposits into MES's bank account from those funders ceased, although deposits continued to be made from Colonial.

Mr Newton's review

107 Mr Newton prepared a schedule (exhibit P2, page 45) which he called "Business Activity Statement/Bank Deposit Review" for the months from January 2003 to April 2004. To prepare the schedule, he reviewed in MES's bank statements for that period and classified all deposits as Lawfund commissions, or AFG commissions, or CSB (CBA) commissions, or "Unexplained Deposits/Commissions". The schedule lists the deposits in those categories for each month, together with a total. Listed against those figures are the total sales taken from the monthly BAS. In the last column of the schedule, the total commissions and total BAS sales are compared with MYOB sales. Mr Newton's evidence is that he was not given access to the sales ledgers of MES for all years, but there were sales ledgers forming part of the MYOB files sent to him by Ms Hilton on 29 September 2005, which contained balance sheets and profit and loss statements for the financial years ending June 2004 and June 2005. Therefore the last column, showing MYOB sales, begins only in July 2003 and there are no figures for January-June 2003. As Mr Newton points out in his affidavit made on 14 October 2005, though the figures are not identical, the total commissions and BAS sales generally accord with the sales ledgers found in the MYOB files for the period July 2003 to April 2004.

Ms Gollan's spreadsheet

108 Kristy Gollan is an employee of Michael Unicomb, accountant, and was previously an employee of the ITP franchise conducted by Superior Tax Services and managed by her mother, Ms Hilton. Ms Hilton gave evidence that, on about 3 November 2005, she instructed her daughter to create a spreadsheet, and she said that the document which is now Exhibit D2 is the spreadsheet her daughter prepared.

109 The spreadsheet has headings for income and expenditure, both for MES and Smarter. It appears to be intended to show that Smarter made very substantial payments to meet obligations of MES, so that if Smarter is obliged to account for commission payments belonging to MES, it should be permitted to reduce the amount for which it is liable to MES by the total amount of those payments. Indeed, counsel for the cross-defendants submitted that the document shows that, even if Smarter diverted business opportunities away from MES to itself, it made no profit. The spreadsheet is supported by a bundle of documents, comprising such things as bank statements most of which are also found elsewhere in the evidence, but they are organised so as to support the information in the spreadsheet, line by line.

110 On the basis of this work, Ms Hilton gave evidence that Smarter had expended $118,428 on the joint expenses of itself and MES. On the other hand, counsel for MES contended that a careful review of the documents to which Ms Gollan’s spreadsheet refers shows that the only source documents available to establish the payments were made by Smarter to satisfy liabilities of MES a handful of documents relating to relatively small amounts. I shall return to this issue when dealing with the question of relief.

MES's claims for relief

111 In its cross-claim, MES (in liq) challenges the directions given by Matthew Turner to AFG and Lawfund in February 2004, on the alternative grounds that they are void as:

· insolvent transactions under ss 588FC and 588FE(2) of the Corporations Act; or

· insolvent and uncommercial transactions under ss 588FB and 588FE(3);

· unreasonable director-related transactions under ss 588FDA and 588FE(6A).

MES also challenges the deed of assignment of 20 July 2005 on the same grounds.

112 In the cross-claim, MES also seeks to challenge Warren Turner's direction to CBA given on 8 August 2005. But as I have said, the direction was withdrawn on 26 August 2005, and it does not appear that CBA acted on it by making payments to Smarter that would otherwise have been made to MES. That being so, counsel for MES informed the court at the hearing that his client and did not seek relief in relation to that direction, except a declaration that the commissions to be paid by CBA are the property of MES.

113 The solicitor for the first and second cross-defendants submitted that the agreement between MES and CBA's predecessor probably came to an end some time ago, and further, that the declaration sought by MES in Order 4 in the cross-claim is too imprecise. I agree that I should not make a declaration that all upfront and trail commissions paid or to be paid by CBA to Smarter are the property of MES, but I think it is appropriate to make a declaration, to remove doubt, to the effect that on the facts presented to the court, if and to the extent that CBA has or may in future have an obligation to pay any amount for upfront or trail commissions under the CBA-MES Agreement (as defined), MES is entitled to be paid that amount to the exclusion of Smarter.

114 Part 5.7B Division 2 of the Corporations Act empowers the court to make various orders where a transaction is a "voidable transaction" as defined in s 588FE. The cross-claimant alleges that the applicable subsections of s 588FE are subsection (2) (insolvent transaction), (3) (insolvent and uncommercial transaction) and (6A) (unreasonable director-related transaction). Each of those subsections specifies that for a transaction to be voidable under its provisions, the transaction must have been entered into, or an act must have been done for the purpose of giving effect to it, within a specified period measured by reference to the relation-back day. Here the relation-back day appears to be 5 August 2005 (see the definition of "relation-back day" in s 9, and ss 513A and 513C). The deed of assignment was made on 20 July 2005, well within the periods specified in s 588FE(2), (3) and (6A). Matthew Turner's directions to AFG and Lawfund were given in February 2004, less than two years but more than six months before the relation-back day. But the directions were acted upon by AFG and Lawfund up to August 2005, and therefore acts were done within the period of six months before the relation-back day for the purpose of giving effect to the transactions constituted by the directions. Consequently the time limits specified by each of s 588FE(2), (3) and (6A) are satisfied. The substantive issue is whether those transactions are uncommercial and insolvent transactions, or insolvent transactions, or unreasonable director-related transactions.

115 The concept of an uncommercial transaction is defined in s 588FB, subsection (1) of which says:

116 According to the Explanatory Memorandum to the Corporate Law Reform Bill, 1992, paras 1034-5:

"the provision is specially aimed at preventing companies disposing of their assets or resources through transactions which result in the recipient receiving a 'gift' or obtaining a bargain of such commercial magnitude that it could not be explained by normal commercial practice."

117 Consequently, the purpose of the section is to prevent the depletion of the assets of a company which is being wound up by transactions at an under-value entered into within a specified time prior to the commencement of the winding up: Demondrille Nominees Pty Ltd v Shirlaw (in liq) (1997) 25 ACSR 535, 548 (Full Federal Court).

118 I have found it to be probable that Matthew Turner's directions to AFG and Lawfund were given with the authority of MES. Those directions are therefore transactions of the company. The deed of assignment clearly purports to be a transaction of MES, inter alia.

119 The solicitor for the first and second cross-defendants challenged the proposition that the directions to AFG and Lawfund were "transactions" for the purposes of Part 5.7B, as defined in s 9 of the Corporations Act. But in my opinion the word "transaction", which is defined in s 9 in a non-exclusive way, should be read having regard to the legislative policy underlying the voidable transactions provisions (Wily v Bartercard Ltd (2000) 34 ACSR 186 at [48]), and designates any arrangement between two or more parties which produces legal consequences, including contractual consequences, and even (as I observed in Wily v Bartercard) legal consequences under the law of equitable estoppel. By parity of reasoning, a direction which causes payments to be made to B which otherwise would be made to A is a transaction, at least when acted upon (see also Prentice v St George Bank Ltd (2002) 20 ACLC 923).

120 In my opinion the evidence provides a firm basis for inference that the primary purpose of the directions to AFG and Lawfund was to deprive MES of substantial income streams at a time when, to the knowledge of Ms Hilton and Warren Turner, the company was facing a substantial claim in the District Court in proceeding No 1071 of 2004. The evidence shows that the statement of claim in that proceeding had been served on MES, as Ms Hilton and Mr Turner were aware. The directions that were given to AFG and Lawfund lacked any proper commercial justification. I have rejected Ms Hilton's evidence that MES's business migrated to Smarter from about June 2002, and on the basis of that finding the directions in February 2004 served to separate the income stream from the operating entity. But even if that evidence were accepted, the fact is that AFG and Lawfund were making their commission payments to MES and no adequate rationale has been advanced to explain why it was necessary to redirect that income in February 2004.

121 It is plain that Matthew Turner's directions were detrimental to MES because the directions had the effect of depriving that company of the commission income from AFG and Lawfund that it had been receiving and would have continued to receive if the directions had not been given, and the company did not receive any consideration or benefit for the giving of the directions. Smarter obtained a substantial benefit from each of the directions but it was not a benefit to which it had any claim. If, in February 2004, it was reasonable for the directors of MES to cause the company to cease to trade because of its financial difficulties, as the cross-defendants allege, I would expect that a reasonable person in the company's circumstances would not have given either of the directions. They are therefore uncommercial transactions.

122 I turn to consider whether the deed of assignment is an uncommercial transaction. The matter is rendered a little more difficult by the information conveyed from the bar table during final submissions, that the equity proceeding has been summarily dismissed for want of prosecution. My analysis will proceed on the basis that, in one form or another, MES would be able to re-assert the claims that it made in the equity proceeding notwithstanding that this step has been taken. If it were unable to do so, it seems to me that the argument for the view that the deed of assignment is an uncommercial transaction is, if anything, strengthened.

123 The deed of assignment is less obviously uncommercial than the directions, by reference to the statutory criteria, but nevertheless in my view it falls on balance within the statutory definition in s 588FB(1). It was entered into just days before Mr Turner and Ms Hilton resigned as directors of MES and about two weeks before the company was placed in administration. It was signed for MES by Warren Turner and Lorraine Hilton as directors. The deed, if valid, may have kept alive the prospect of pursuit of the equity proceeding but its effect was to deprive the company and therefore its creditors of any of the benefit of recovery in the equity proceeding, except to the limited extent that the deed specified.

124 I do not think it is correct to say that MES assigned its cause of action to Mr Turner for no consideration, because Mr Turner agreed to prosecute the equity proceeding and to allocate recoveries to the payment of his and MES's costs in respect of the equity proceeding and the District Court proceeding, and to apply 75% of any surplus recovery to MES. But the economic value of these undertakings is likely in fact to be nil or very small. This is because of evidence which indicates that Mr Turner is indebted to his former solicitors in an amount of $349,785. That amount exceeds the total claim in the equity proceeding. On the basis that on its proper construction, the deed of assignment appears to authorise Mr Turner to deduct legal fees he had incurred prior to the making of the deed, he will be entitled to deduct the whole of this amount from any recovery in the proceeding. Therefore even if the equity proceeding is prosecuted with complete success and a favourable party and party costs order is made after the final hearing, it seems unlikely that there will be any or any substantial surplus available for MES.

125 Any benefits to MES under the deed are in any case very much less than MES would have obtained if it had been successful in the equity proceeding without any assignment. That is an outcome that MES might have achieved if there had been no assignment and the liquidator had decided that it was in the interests of the company and its creditors for the proceeding to be carried forward. Given the evidence of Mr McNabb's cross-examination in the District Court proceeding, there seems to me to be at least a reasonable prospect that the liquidator would have proceeded with the litigation, especially if funding were to become available through recovery of commission payments from Smarter. I do not regard the fact that Mr Lewis as liquidator has retained the solicitors acting for the McNabb interests as a ground for concluding that Mr Lewis would be likely to discontinue the proceeding. It seems to me almost inevitable that he would find it necessary to engage other solicitors to assist him to decide whether to proceed with MES's claim.

126 I find the acknowledgements in clause 4 of the deed to be unconvincing as rebuttals of the assertion that the assignment was an uncommercial transaction. The fact that MES had incurred costs that might not be recoverable in the winding up is not a justification for assigning the cause of action away from MES and preventing it from enjoying any fruits of litigation, nor for treating the unsecured creditors to whom costs are owed any more favourably than the creditors as a whole. It appears from the evidence that the liability of MES under an adverse costs order is substantially less than the liability of the defendants in the equity proceeding to MES and Mr Turner under a costs order in their favour. If MES is able to recover commission payments from Smarter, there will to that extent be a fund available to the liquidator to pursue the equity proceeding, quite apart from any external litigation funding that might be available to the liquidator. The risk that MES might fail in the proceeding and suffer an adverse costs order as a result of the final hearing does not justify pre-empting the decision of the company (either by its directors or, after a winding up order, its liquidator) by causing it to assign away its right of action. The statement in clause 4 that a liquidator would be unlikely to be able to obtain funding to prosecute the proceeding appears to be a bare assertion that does not take into account the relative strength of the claim, asserted by Mr Turner himself in his letter to Mr Lewis dated 11 October 2005, and does not take into account the prospect of recovery of commission payments from Smarter.

127 These considerations relate to the matters specified in s 588FB(1), especially the detrimental effects of the transaction on MES, the limited benefits conferred on the company, and the disadvantage of the transaction for creditors. They lead me to the view that a reasonable person in the circumstances of MES would not have entered into the deed of assignment. It is therefore an uncommercial transaction.

128 An uncommercial transaction is voidable under s 588FE(3) only if it is also an insolvent transaction, as defined in s 588FC, which says:

129 The evidence constituted by the financial statements of MES and its bank account, coupled with the evidence of Ms Hilton, is sufficient to persuade me that by February 2004 and, a fortiori, July 2005, when the transactions were entered into, MES was insolvent for the purposes of ss 588FC and 95A. I have summarised the evidence elsewhere in these reasons for judgment. It is particularly significant that Ms Hilton, who was closely familiar with the financial circumstances of the company, had reached the view by June 2002 that MES was unable to trade out of its difficulties.

130 My conclusion, therefore, is that the directions given by Matthew Turner to AFG and Lawfund in February 2004, and the deed of assignment of July 2005, are insolvent and uncommercial transactions and consequently voidable transactions under s 588FE(2) and (3). It is therefore strictly unnecessary for me to consider whether they are unreasonable director-related transactions within s 588FE(6A). It seems to me, however, that they are, for the following brief reasons. The deed of assignment is a conveyance by the company of property of the company to a director of the company, within s 588FDA(1)(a)(ii) and (b)(i). Matthew Turner's directions to AFG and Lawfund are dispositions by the company of property of the company made to a person (Smarter) for the benefit of a close associate of a director of the company (Matthew Turner), within s 588FDA(1)(a)(ii) and (b)(iii) (noting the definition of "close associate" in s 9). For the reasons given in my discussion of uncommercial transactions, it may be expected that a reasonable person in the company's circumstances would not have entered into the deed, or given the directions, having regard to the matters set out in s 588FDA(1)(c). Therefore the deed of assignment and the directions to AFG and Lawfund are unreasonable director-related transactions.

131 The court's statutory power to make orders in respect of a voidable transaction is conferred by s 588FF. Section 588FF(1) permits the court, on the application of a company's liquidator, to make one or more of various specified orders if it is satisfied that a transaction of the company is voidable because of s 588FE. In the present case the cross-claim has been brought by the company in liquidation and the company's liquidator is not a cross-claimant, and therefore relief under s 588FF is strictly not available. But since the cross-claim was prosecuted by the liquidator of MES and no point was taken about its constitution, I would be disposed to allow the liquidator to amend so as to comply with s 588FF(1) and therefore have access to the range of orders specified in that section.

132 In relation to the deed of assignment, the cross-claim seeks an order setting aside the deed as an uncommercial and insolvent transaction, or an insolvent transaction, or an unreasonable director-related transaction (Orders 1, 2 and 3). The liquidator of MES is entitled to some such relief because I have concluded that the deed of assignment is a voidable transaction, but it seems to me desirable that the relief should be framed to fall within the relevant part of s 588FF(1). In my opinion the most appropriate course is to make a declaration to the effect that the deed is a voidable transaction under s 588FE(2), (3) and (6A), coupled with an order under s 588FF(1)(h), which authorises the court to make an order declaring an agreement constituting a voidable transaction to have been void at and after the time when the agreement was made. This is not a case where, because of the intervention of third-party rights or for some other reason, a more limited order would be appropriate.

133 In relation to the direction to AFG, the cross-claim seeks a declaration that the commissions are the property of MES, declarations that the directions are uncommercial, insolvent and unreasonable director-related transactions and therefore void, and an order that Smarter pay to MES either a specified sum of money or all moneys falling within a stated description.

134 It seems to me that the correct course is first make a declaration, in view of my conclusions, to the effect that the direction to AFG is a voidable transaction under s 588FE(2), (3) and (6A). That is the foundation for the statutory jurisdiction to make orders under s 588FF(1), in a properly constituted application. Relying on that statutory jurisdiction, an order should then be made under s 588FF(1)(c) requiring Smarter to pay to MES an amount that fairly represents the benefits it has received because of the transaction. Subparagraph (c) does not seem to me to authorise the alternative form of order sought in the cross-claim, namely a mandatory order that all moneys received by Smarter as commissions from AFG under the AFG agreement be paid to MES, without quantification. That being so, the making of an order under subparagraph (c) requires consideration of the amount to be identified. I shall return to the question of quantum below.

135 MES also seeks a declaration that the commissions paid or to be paid by AFG are the property of MES. I am not persuaded that such a declaration should be made. A declaration in that form would recognise that MES has a proprietary interest in each commission payment made by AFG to Smarter, entitling MES to trace each payment and assert a proprietary right in priority to the unsecured and possibly even the secured creditors of Smarter. The basis for a proprietary claim has not been laid out in the cross-claim. There is a pleading of breach of fiduciary duty, but the allegation is limited to Warren Turner's conduct in causing Smarter and/or MES to enter into the agreement with Lawfund, which was made in the name of Smarter. The pleading with respect to Matthew Turner's direction to AFG does not establish or seek to establish that the direction constituted a breach of a fiduciary duty, or any other duty, breach of which might give rise to a proprietary interest by way of constructive trust. In any event, the evidence would not, in my view, support such a conclusion.

136 As regards the direction to Lawfund, a complication arises because the agreement with Lawfund is in the name of Smarter. The cross-claim alleges that the opportunity to enter into the agreement represented a significant business opportunity available to MES, and that Warren Turner, in his capacity as a director of MES at the time when the agreement was made, breached his fiduciary duty by causing Smarter to enter into the agreement in circumstances where his duty was to ensure that MES, whose assets were to be used in performing the agreement, received the income and the benefit from it.

137 In my opinion the ingredients of the pleaded breach of fiduciary duty have not been made out. MES submitted that the opportunity to enter into the agreement with Lawfund, which came at a time when MES was in serious financial difficulty, was a valuable business opportunity which came to them in their capacity as directors of MES (citing Spigelman CJ's observations in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 at [118]).

138 In my view this submission is not supported by the evidence. The contract was likely to lead to a significant income stream, but Ms Hilton's evidence, which I accept on this point, is that by mid-2002 she did not believe that MES could trade out of its difficulties. I cannot therefore infer that MES was the entity to whom Mr Turner and Ms Hilton would naturally allocate the contract, given that they were also directors of other companies actually or potentially in the same or similar lines of business. MES had the use of the CDQ database (though it had been purportedly sold to Life Long Planners), and it had accounting systems and consultants. But it is far from clear from the evidence that if Mr Turner and Ms Hilton made a firm and carefully executed decision to allocate the Lawfund business to another entity, they would have had any difficulty in accessing what MES had to offer. I can find no evidence that would warrant the conclusion that when the opportunity to negotiate with Lawfund arose, it arose by reason of or in the course of their office as directors of MES rather than any other entity, or in their capacity as such.

139 Consequently I shall not make the declaration sought in Order 16 of the cross-claim, namely a declaration that Smarter's interest in the Lawfund agreement is held in trust for MES. Nor shall I make the declaration sought in Order 15, namely a declaration that the commissions paid by Lawfund are the property of MES. But I have found that the direction to Lawfund is a voidable transaction and it is appropriate to make a payment order consequent upon that holding under s 588FF(1)(c), requiring Smarter to pay to MES an amount that fairly represents the benefits it has received because of the transaction. I shall address the question of quantum below.

140 The fact that the Lawfund agreement was made with Smarter rather than MES does not detract from my overall reasoning about the application of the statutory voidable transaction provisions. While in many cases there will be nothing uncommercial or unreasonable about steps being taken to restore a contracting party to its benefit under the agreement, in the present case the Lawfund agreement should not be seen in isolation. The direction given to Lawfund in February 2004 was made at a time when, according to my findings, MES was still carrying on business and was in receipt of the stream of commission payments from Lawfund. The direction had the effect of stripping MES of a substantial income stream without, in my view, any proper commercial rationale for doing so.

141 The cross-claim also seeks orders directed to CBA, AFG and Lawfund respectively, requiring them to pay MES all amounts they have withheld that are due and payable under the respective agreements, and thereafter to pay MES amounts that may become due under the agreements. My understanding is that there is no opposition on their part to such orders. In my opinion they are appropriate orders to make. They should, of course, be coupled with dissolution of the interim orders made by Barrett J.

Payment orders – quantum

142 The power of the court to make an order for payment of an amount of money in respect of a voidable transaction is a statutory power under s 588FF(1) and not a power that arises in the equitable jurisdiction. Nevertheless there is a broad analogy, in a case such as the present, between the kind of payment order the cross-claimants seeks and an order by way of account of profit for breach of fiduciary duty. In Warman International Ltd v Dwyer (1995) 182 CLR 544 the Full High Court observed (at 561) that in a case where a business is acquired in breach of fiduciary duty, it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit, and better to allow the fiduciary a proportion of the profit (especially when it appears that the profit has been generated by the skill, efforts, property and resources of the fiduciary). Their Honours warned that the stringent rule requiring a fiduciary to account for profit can be carried to extremes and that in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff.

143 It seems to me that those considerations are transportable into the statutory context with which I am concerned, although the issue before me is not about the wrongful acquisition of a business, but rather the wrongful acquisition of commission income streams. If it appears from the evidence that the recipient of the income has used it to incur expenditure which relieves the entity entitled to it from an obligation to meet outgoings, it is likely to be just and appropriate to reduce any statutory payment order by the amount of such expenditure.

144 As is demonstrated by the calculations referred to by Mr Nolan in his affidavit of 14 October 2005 (see Exhibit P1, pages 135-144) the total amount received by Smarter for commission pursuant to the directions to AFG and Lawfund is $313,349.92. Mr Nolan's work has broken that figure down into two components, $178,214.18 in respect of AFG commissions and $135,135.74 in respect of Lawfund commissions. In the cross-claim MES seeks payment orders in respect of those two latter amounts, consequent upon declarations that the directions to AFG and Lawfund respectively are voidable transactions.

145 However, the evidence shows that, while Smarter received total commissions of $313,349.92, it lent $194,931.50 to MES. To the extent that commission payments have been lent back to MES, it does not need the assistance of the court to have the benefit of those payments. There is perhaps a theoretical possibility that Smarter might seek to recover its loans, but that is a possibility that has evidently not troubled counsel for MES, who conceded in his written submissions that the amount of the loans should be deducted from the total amount of commissions received. That would mean a net payment order of $118,418.42 covering both AFG and Lawfund commissions less loans.

146 The cross-defendants say that, according to the spreadsheet prepared by Ms Gollan (Exhibits D2 and D3), Smarter has expended $118,428 in total on the joint expenses of itself and MES. They assert that these joint expenses constitute a reasonable allowance which should be deducted from any commissions recoverable by MES, leaving a net recovery of $nil. But MES contends that a careful examination of Exhibit D3 discloses that the only source documents available to establish payments made by Smarter to satisfy liabilities of MES are payments of consultants' commission (items 884, 892, 907, 910 and 890, totalling $22,372.76) and payroll (items 793, 821 and 831 totalling $6,947.74). MES points out that the payments of commission all took place after MES was placed into voluntary administration, and consequently if Smarter did indeed make payments to consultants of MES at that time, they could not have been payments authorised by MES and must therefore have been in the nature of voluntary payments.

147 I have reviewed Exhibit D3 and I agree with the submission made on behalf of MES that only the items I have identified are source documents capable of establishing payments made by Smarter to satisfy the liabilities of MES. I also agree that payments made by Smarter to consultants after the date of commencement of the voluntary administration should not be treated as payments offsetting the claims of MES, now in liquidation, against Smarter for recovery of commission. This leaves the three payroll items which were paid in May and June 2005. It seems to me that no good case has been made for disregarding them, and it is fair and appropriate that the recovery of MES be reduced by the amount of those payments. Therefore the payment order should be for ($118,418.42 -$6,947.74), that is $111,470.68.

148 The cross-claim also seeks interest under s 100 of the Uniform Civil Procedure Act 2005 (NSW). It seems to me fair that an order for payment of interest be made, in order to require Smarter to compensate MES for the benefit of having received, and retained until the time of the orders, net commission payments to which it was not entitled: see Roberts v Rodier [2006] NSWSC 1084.

Conclusions

149 It will be necessary for MES and Mr Lewis to give some thought to reconstituting the proceeding, at this late stage, so that Mr Lewis becomes the second cross-claimant, in order to attract the statutory jurisdiction under s 5808FF(1). On the assumption that this occurs, I shall make orders along the lines that I have outlined. If the proceedings are not reconstituted in that way, it will be necessary for the cross-claimant, at a supplementary hearing, to identify the source of the court's jurisdiction to make orders and to persuade me, in light of my findings to date, that such jurisdiction should be exercised as a result of purely "statutory" findings under s 588FE.

150 I shall direct the cross-claimant to prepare draft short minutes of orders, including a proposed order with respect to interest. I shall give the parties the opportunity to make submissions with respect to costs, but I should say that so far as the cross-claim is concerned, unless there is some matter to which my attention has not yet been drawn, I shall be disposed to order the first and second cross-defendants to pay the cross-claimant's costs. I shall stand the matter over to hear submissions with respect to orders and any submissions on the question of costs.

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Citations

Universal Financial Group v Mortgage Elimination Services [2006] NSWSC 1132

Most Recent Citation

Re Rococo Group Pty Ltd (in liq) [2022] VSC 167

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Cases Cited

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Statutory Material Cited

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Wily v Bartercard Ltd [2000] NSWSC 372

CITATION:	Universal Financial Group v Mortgage Elimination Services [2006] NSWSC 1132
HEARING DATE(S):	28 - 30 March, 26 April, 10 & 11 May 2006
JUDGMENT DATE :	31 October 2006
JURISDICTION:	Equity
JUDGMENT OF:	Austin J
DECISION:	Declarations and orders to be made under s 588FF on grounds that the deed of assignment and directions as to payment are commercial and insolvent and unreasonable director-related transactions, and therefore voidable transactions
CATCHWORDS:	CORPORATIONS - winding up in insolvency - voidable transactions - meaning of "transaction" as regards directions for payment - whether directions for payment and deed of assignment are uncommercial transactions, insolvent transactions and unreasonable director-related transactions - whether breach of directors' fiduciary duty - appropriate orders
LEGISLATION CITED:	Corporations Act 2001 (Cth) ss 9, 513A, 513C, 588FB, 588FC, 588FDA, 588FE, 588FF
CASES CITED:	Demondrille Nominees Pty Ltd v Shirlaw (in liq) (1997) 25 ACSR 535 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 Prentice v St George Bank Ltd (2002) 20 ACLC 923 Warman International Ltd v Dwyer (1995) 182 CLR 544 Wily v Bartercard Ltd (2000) 34 ACSR 186
PARTIES:	Universal Financial Group Pty Ltd (P1) Total Vision Financial Stratagies Pty Ltd (P2) Daines Financial Solutions Pty Ltd (P3) Mortgage Elimination Services Pty Ltd (in liq)(D1/XC) Warren Donald Turner (D2/XD1) MES Smarter Mortgage Services Pty Ltd (D3/XD2) Commonwealth Bank of Australia Ltd (D4/XD3) Australian Finance Group Ltd (D5/XD4) Lawfund Australia Pty Ltd (D6/XD5)
FILE NUMBER(S):	SC 4084/05
COUNSEL:	J S Drummond (XC) S Jacobs (XD1, XD2)
SOLICITORS:	Hewitts (XC) Garland Hawthorn Brahe (XD1, XD2)