FEDERAL COURT OF AUSTRALIA

Smith v Starke, in the matter of Action Paintball Games Pty Ltd (in liq) (No 2) [2015] FCA 1119

IN THE MATTER OF ACTION PAINTBALL GAMES PTY LTD (IN LIQUIDATION) ACN 085 205 536

THE COURT ORDERS THAT:

1.    Within 14 days of the date of this judgment, the parties file and serve a joint proposed minute of order giving effect to these reasons.

2.    The matter be listed for directions at 9.30 am on 12 November 2015.

3.    The parties have liberty to apply.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE MATTER OF ACTION PAINTBALL GAMES PTY LTD (IN LIQUIDATION) ACN 085 205 536

REASONS FOR JUDGMENT

1    The first plaintiff (“liquidator”) was appointed official liquidator of the second plaintiff (“Action Paintball” or the “company”) on about 25 May 2012, on the application of the Deputy Commissioner of Taxation (“DCT”).

2    At all relevant times, Action Paintball conducted a business of hosting members of the public to play the game of “paintball” and of selling a range of “paintball”-related products, and food and drink. The business was conducted from a property leased by Action Paintball at Rouse Hill in New South Wales (“Rouse Hill property”).

3    The first plaintiff (“liquidator”) seeks to recover 336 payments made by the second plaintiff (“Action Paintball”) totalling $501,497.68 as “unreasonable director-related transactions” under s 588FF of the Corporations Act 2001 (Cth) (“Act”). The payments were made during the period of over four years, between about 13 February 2008 and 25 May 2012. The payments were made approximately fortnightly to Perpetual Limited (“Perpetual”) to discharge the defendants’ obligations under two loan contracts between Perpetual and the defendants. Under those loan contracts, in March 2006 the defendants had borrowed a total of $1,378,000, to purchase a property at Lot 22, 3793 Old Northern Road, Canoelands, New South Wales (“Lot 22”) and for other reasons. The defendants purchased Lot 22 with the intention of developing it as a site from which Action Paintball could carry on its business.

4    The first defendant (“Mr Starke”) has been a director and the secretary of Action Paintball since its incorporation in 1998. The second defendant (“Mrs Starke”) is Mr Starke’s wife and has also been a director of Action Paintball since incorporation. Mr and Mrs Starke each hold 20,000 of the 100,000 issued shares in Action Paintball. Mr and Mrs Starke own a property, also at Canoelands, where they have lived at all relevant times (“Starke family home”). The Starke family home formed part of the security for the defendants’ borrowings from Perpetual.

5    The third defendant (“Mr Caruana”) has also been a director of Action Paintball since its incorporation. Mr Caruana holds 10,000 shares in Action Paintball. His day to day role with the business concerned equipment repairs and maintenance.

6    The fourth defendant (“Mr Whybrew”) appears to have been in charge of the day to day management of Action Paintball since incorporation. He was appointed a director of Action Paintball on 31 March 2004. The fifth defendant (“Mrs Whybrew”) is Mr Whybrew’s wife. She was a director of Action Paintball from incorporation until 31 March 2004, and was a secretary of the company from about 5 June 2009. Mrs Whybrew holds the remaining 50,000 shares in Action Paintball.

7    Lot 22 was purchased by the defendants as tenants in common, in proportions broadly corresponding with their respective shareholdings in the company. That is, the property was acquired on the basis that the Starkes hold a 40% share, Mr Caruana hold a 10% share and the Whybrews hold a 50% share.

8    The defendants deny that the payments were “unreasonable director-related transactions” within the meaning of s 588FDA of the Act. If the payments were “unreasonable director-related transactions”, the defendants say that the Court should exercise its discretion to deny the liquidator the relief sought.

Statutory framework

9    Section 588FF of the Act provides relevantly:

(1)    Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:

(a)    an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;

(b)    an order directing a person to transfer to the company property that the company has transferred under the transaction;

(c)    an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction;

(d)    an order requiring a person to transfer to the company property that, in the court’s opinion, fairly represents the application of either or both of the following:

(i)    money that the company has paid under the transaction;

(ii)    proceeds of property that the company has transferred under the transaction;

(4)    If the transaction is a voidable transaction solely because it is an unreasonable director-related transaction, the court may make orders under subsection (1) only for the purpose of recovering for the benefit of the creditors of the company the difference between:

(a)    the total value of the benefits provided by the company under the transaction; and

(b)    the value (if any) that it may be expected that a reasonable person in the company’s circumstances would have provided having regard to the matters referred to in paragraph 588FDA(1)(c).

Section 588FE(6A) provides:

(6A)    The transaction is voidable if:

(a)     it is an unreasonable director-related transaction of the company; and

(b)    it was entered into, or an act was done for the purposes of giving effect to it:

(i)    during the 4 years ending on the relation-back day; or

(ii)    after that day but on or before the day when the winding up began.

10    The parties agree that the “relation-back day” under the Act is 13 February 2012, being the date on which the DCT filed the originating process which sought that the company be wound up in insolvency.

11    Section 588FDA provides:

(1)    A transaction of a company is an unreasonable director-related transaction of the company if, and only if:

(a)     the transaction is:

(i)    a payment made by the company; or

(ii)    a conveyance, transfer or other disposition by the company of property of the company; or

(iii)     the issue of securities by the company; or

(iv)    the incurring by the company of an obligation to make such a payment, disposition or issue; and

(b)    the payment, disposition or issue is, or is to be, made to:

(i)    a director of the company; or

(ii)    a close associate of a director of the company; or

(iii)    a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and

(c)    it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

(i)    the benefits (if any) to the company of entering into the transaction; and

(ii)    the detriment to the company of entering into the transaction; and

(iii)     the respective benefits to other parties to the transaction of entering into it; and

(iv)    any other relevant matter.

(2)    To avoid doubt, if:

(a)    the transaction is a payment, disposition or issue; and

(b)    the transaction is entered into for the purpose of meeting an obligation the company has incurred; the test in paragraph (1)(c) applies to the transaction taking into account the circumstances as they exist at the time when the transaction is entered into (rather than as they existed at the time when the obligation was incurred).

(3)    A transaction may be an unreasonable director-related transaction because of subsection (1):

(a)    whether or not a creditor of the company is a party to the transaction; and

(b)    even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

Issues for determination

12    Ultimately, the defendants accepted that the disputed payments were payments made by the company within the meaning of s 588FDA(1)(a)(i), and that the payments were made to a person (Perpetual) on behalf of, or for the benefit of, a director of Action Paintball (in the case of the first to fourth defendants) or a close associate of a director of Paintball (in the case of Mrs Whybrew).

13    Although, as appears below, the disputed payments form part of a series of payments made from the time of completion of the purchase of Lot 22 in March 2006, the liquidator contended that they should be treated as individual transactions, and the defendants did not dispute this.

14    Section 588FDA(2) makes it plain that the test in s 588FDA is to be applied to the relevant transaction taking into account the circumstances as they existed when the transaction was entered into: Kazar, in the matter of Frontier Architects Pty Limited [2010] FCA 1381; (2010) 81 ACSR 158 at [23] (“Kazar”).

15    The defendants sought to justify the payments by reference to benefits which they contended were conferred on the company and the particular circumstances of the company and its business. They did not suggest that the company incurred an obligation to make the disputed payments. The evidence reveals that the parties did not give particular attention to the legal consequences of the disputed payments at the time they commenced to be made, or subsequently. As Flick J said in Kazar at [145]:

Any analysis of the facts or any attempt to attach legal significance to conduct not engaged in with any consciousness of the legal consequences of such conduct is necessarily a very uncertain process.

16    Accepting that the disputed transactions should be considered by reference to the circumstances as they existed at the time of each payment, there are two issues for determination, namely:

(1)    Whether it may be expected that a reasonable person in the company’s circumstances would not have made each of the disputed payments, having regard to the matters in s 588FDA(1)(c); and

(2)    If so, what orders should be made under s 588FF.

Evidence

Liquidator’s evidence

17    The liquidator gave evidence on behalf of the plaintiffs. Based on his examination of the financial records of the company, the liquidator’s opinions were:

(1)    The company had no legal obligation to make any of the relevant payments;

(2)    The company did not guarantee or provide any form of security interest in favour of Perpetual to secure any payments or obligations arising from the loans;

(3)    The company did not have any interest (legal or equitable) in either the Starke family home or Lot 22;

(4)    The company did not have any legally binding option or right to acquire, lease or otherwise use either the Starke family home or Lot 22;

(5)    The payments deprived the company of the use of those payments, which could otherwise have been used for the purpose of its business, such as the payment of its creditors; and

(6)    The payments reduced the debt owing by the defendants to Perpetual and thereby benefited both the defendants and Perpetual.

Defendants’ evidence

18    Each of the defendants except Mrs Starke (who was ill at the time of the hearing) gave evidence. An affidavit made by the company’s accountant, Mr Holman, was also relied upon as part of the defendants’ case. Mr Holman was not required for cross-examination and, consequently, was not available to explain some of the financial reports and tax returns which he apparently prepared.

19    After hearing cross-examination of the defendants (except Mrs Starke), I was satisfied that each of them was an honest witness, doing his or her best to give accurate evidence to the best of their recollection. I generally accept their evidence.

20    In some respects, the oral evidence was contradicted by contemporaneous records and, in those cases, I prefer the evidence of the contemporaneous records. For example, Mr Whybrew gave oral evidence that seemed to suggest that at all relevant times there were written leases between Action Paintball and Graham Trilby, but contemporaneous correspondence strongly suggests that this was not the case. Even so, disparities of that kind did not affect my positive assessment of the credibility of each of Mr Starke, Mr Caruana and Mr and Mrs Whybrew.

21    The evidence did not include minutes of meetings. The witnesses gave evidence to the effect that formal meetings of directors were not held and that decisions were made by consensus.

Facts

22    Action Paintball was registered as a corporation on or about 17 November 1998. Prior to its incorporation, Mr and Mrs Whybrew operated a business trading as “Action Paintball Games” from the Rouse Hill property.

Lease of Rouse Hill property

23    The Rouse Hill property is owned by Graham Trilby Pty Ltd (“landlord”). A substantial portion of the defendants’ evidence was directed to establishing the unsatisfactory nature of the relationship between Action Paintball and the landlord.

24    It is unnecessary to go into great detail. The evidence reveals that the directors of Action Paintball were dissatisfied with the terms on which they leased the Rouse Hill property from at least around 2003, particularly because they wanted a longer term of lease which the landlord was not willing to give. They were also dissatisfied with the rate at which rent for the property was increasing.

25    In March 2002, the landlord offered a two-year lease commencing 8 March 2002 for an annual rent of $77,000. In about July 2003, the landlord offered a two year lease commencing 8 August 2003 for an annual rent of $100,000.

26    In September 2003, the landlord wrote to Mr Whybrew complaining about the importation of fill onto the Rouse Hill property and stating that “until satisfactory amendment…has been carried out, … we are only prepared to allow a month by month tenancy of the land at the rate of $10,000 per month, i.e. $120,000 per annum”.

27    By letter dated 19 November 2003, the landlord made two proposals for Action Paintball’s occupation of the Rouse Hill property, being a three-year lease of 40 acres for a rent of $150,000 per annum (excluding outgoings) or continued occupation on a month-to-month basis with rent to be adjusted to $125,000 per annum (excluding outgoings) from 1 December 2003. By letter dated 24 November 2003, Action Paintball accepted the first proposal, saying:

…if you could look into any further extension in regard to the lease of the property for a further five to eight years at some time in the near future then that would be greatly appreciated.

28    There is an unsigned “commercial lease” between the landlord and Mr and Mrs Whybrew trading as Action Paintball for three years commencing 1 December 2003 at an annual rent of $150,000. However, the landlord refused to sign a three-year lease until fill dumped on the site was removed.

29    By letter dated 15 December 2003, the landlord requested a cheque for $13,750 “which represents the new monthly amount of rental which was due on 8 December 2003”. At this rate, the annual rental for the Rouse Hill premises was now set at $165,000 per annum. A letter dated 1 June 2004 from the landlord confirms that the rental was $165,000 from 1 December 2003.

30    By letter dated 24 June 2004, the landlord informed Action Paintball that it was on a monthly tenancy “and unless all matters are rectified immediately, your use of the land will be terminated….Please respond and bring the current rent up to date within seven (7) days otherwise we will no longer allow the tenancy to continue”.

31    From 1 July 2004 to 2010, Action Paintball paid rent for the Rouse Hill Property of about $150,000 per year including GST.

32    By letter dated 5 July 2004 from Action Paintball to the landlord, Mr Whybrew wrote relevantly:

(c)    Your office last year forwarded two separate leases, one for $100,000.00 p.a. and a later second one for $165,000.00 p.a. The rental agreement originally offered was for a five year lease for $150,000.00 p.a. Which I was instructed you would not be prepared to sign until I had removed the fill next to the powerlines. Now that I have done this you have instructed me to sign a back dated (8 months) lease and pay the back rent as well. On top of this you require the rent to increase by 6% per year. We are prepared to pay a rent increase of over 100% but I believe that the huge amount of back rent and signing of a lease that is nearly 1/3 already completed tied to an annual increase almost double the CPI is difficult to comprehend let alone fund.

(d)    We would also require since we are losing 20% of the property that the exact area you wish to take be pegged and shown on the new lease, so we may clearly identify the exact area we are leasing so that we can ascertain the impact your proposed development would have on our business and our development approval.

(e)    I do not feel that we are in breach of our lease as we have removed the imported fill and unaware of other works that required your consent.

(f)    I believe that we are currently up to date with our rent which, as you point out is expired and which is $70,000.00 p.a. At no stage have we received any notice apart from the two proposed leases regarding any increase in rent.

33    There is a letter dated 13 July 2004 from the landlord to Action Paintball which purports to attach a lease for the Rouse Hill premises “incorporating a rate of $150,000 per annum including GST for a period of three (3) years commencing from 1 December 2003.” The letter states:

…this lease is subject to the removal of fill containing contaminated material from the property and the backpayment of the variance in rent from 1 December 2003 to the date hereon within the next fourteen (14) days. Failure to adhere to such will result in termination of occupancy.

Starkes’ loan from Intech

34    The Starke family home was purchased for $250,000 in 1992.

35    In May 2001, Mr and Mrs Starke borrowed funds from Intech Credit Union Ltd (“Intech”) and mortgaged the Starke family home as security for the loan. According to Mr Starke, the money borrowed from Intech was loaned to Action Paintball and, from time to time between 2001 and 2006, Mr and Mrs Starke took other loans from Intech and lent those funds to Action Paintball. The records of Action Paintball include an account called “BB loan account” recording loans from Mr and Mrs Starke to Action Paintball. The ledger shows three advances totalling $150,000 in March and April 2005, and another advance of $20,000 on 17 January 2006.

36    From July 2005 to April 2006, Action Paintball made weekly payments of $1,000 to Intech which were recorded as debits to that account.

37    At the time of the purchase of Lot 22, the Starke family home was mortgaged to Intech to secure a loan of about $186,129.92.

38    As at 23 March 2006, the balance on the BB loan account was an amount of $149,513.99 owed by Action Paintball to the Starkes. On that day, a debit of $151,513.99 left a balance of $2,000 owed by the Starkes to Action Paintball.

Background to the purchase of Lot 22

39    The defendants gave evidence that a decision was made, sometime in around 2004, to seek alternative premises for the operation of the Action Paintball business. According to Mr Whybrew, the directors decided in about the middle of 2004 that Action Paintball should secure alternative premises as soon as possible. According to Mr Starke, the directors reached a consensus in about late 2004 that Action Paintball needed to secure alternative premises in order to secure its future. According to Mr Caruana, Mr Whybrew and Mrs Whybrew, the directors decided that the best course of action would be for Action Paintball to purchase a property so that it would be protected from disputes with a future landlord. According to Mr Holman, the defendants started to look for an alternative site in the middle of 2004.

40    After extensive searches, Lot 22 was located. According to Mr Whybrew, the directors of Action Paintball made a decision to purchase Lot 22 “if we could get the site approved by council for use as a paintball site”. In about late 2004, Mr Whybrew began taking steps to have the property approved by the council for use as a paintball site. In December 2004, a flora and fauna survey and assessment of the property was prepared at Mr Whybrew’s request.

41    A letter from Action Paintball to Hornsby Shire Council dated 20 September 2005 states that there had been meetings with the council about a proposed development of Lot 22 for use as a paintball facility as early as October 2004.

42    In May 2005, Glendinning Minto & Associates Pty Ltd, planning and development consultants, prepared a “Statement of Environmental Effects” for the construction of sheds and establishment of Lot 22 as a paintball facility. At around that time, Action Paintball lodged a development application with Hornsby Shire Council for the use of Lot 22 as a paintball facility.

43    On about 2 August 2005, Action Paintball entered into a put and call option with T Sakkal Management Pty Ltd (“Sakkal”). Sakkal was the owner of Lot 22. The option deed provided that, in consideration of an option fee of $103,000, of which $48,000 had already been paid, Sakkal granted to Action Paintball an option to purchase Lot 22 for the amount of $1.030 million. The option provided that, if the option was not exercised, the option fee would be forfeited to Sakkal. The option deed also contained an irrevocable offer by Action Paintball to purchase Lot 22. The date for exercise of the option was 10 January 2006.

44    It was not suggested by the liquidator that Mr and Mrs Whybrew did not have authority to execute the put and call option on behalf of Action Paintball. However, there is no evidence that the company had arranged finance for the purchase of Lot 22 when it entered into the option.

45    There was conflicting evidence about the payment of the $103,000 option fee. The settlement sheet for the completion of the Lot 22 purchase shows that a deposit of $103,000 was paid prior to completion. Mr Starke’s evidence was that he believed the deposit was paid by Action Paintball. Mr Whybrew’s evidence was that the Starkes paid a deposit of $51,500 for the purchase of Lot 22.

46    There are no primary records of the payment of the deposit. There is a ledger which forms part of the financial records of Action Paintball and which records two debits ($32,000 on 28 July 2005 and $23,000 on 8 August 2005), apparently to “Glenorie Partnership”. The evidence was that the “Glenorie Partnership” is a registered business name owned by the defendants. However, the name was not registered until 1 April 2012. It is not clear when the ledger was created. Mrs Whybrew, who entered some data into the company’s MYOB system on Mr Holman’s instructions, said of the “Glenorie Partnership account” that Mr Holman “made all the numbers there”. Although Mr Whybrew agreed in cross-examination that the two debits correctly recorded two payments to “T Sakkal Management”, having regard to other anomalies in the company’s financial records, mentioned below, I am not satisfied that the ledger is either contemporaneous or accurate.

47    In my view, if Mr Whybrew’s evidence and the ledger were correct, they would have been supported by Mr Starke’s evidence. On the balance of probabilities, and taking into account the terms of the option deed, Mr Starke’s evidence and the terms of the 16 February 2006 agreement described below, I find that the deposit of $103,000 was paid by Action Paintball. In making this finding, I recognise that Action Paintball’s financial reports do not record any interest in the Lot 22 property as an asset. This is another matter upon which evidence from Mr Holman may have been able to shed light.

48    In October 2005, Action Paintball retained lawyers to act for it in relation to its appeal in the Land and Environment Court of New South Wales against a decision by Hornsby Shire Council concerning Lot 22. By application dated 10 October 2005, Action Paintball commenced proceedings against the council in respect of its deemed refusal to grant development consent. The application indicates that, by this time, the following additional reports and assessments had been prepared in support of the development application:

    Flora and Fauna Survey and Assessment prepared by T.J Hawkeswood Scientific Consulting dated 6 December.

    8-part Test for Endangered Plant report prepared by T.J Hawkeswood Scientific Consulting dated 16 December.

    Traffic and Parking Assessment prepared by traffic Solutions dated 12 May 2005.

    Fire Hazard Assessment prepared by Jan Wikstrom dated 13 January 2005.

    Noise Assessment prepared by RSA Acoustics dated 1 April 2005.

    Waste Management Study and Assessment prepared by Asset Geotechnical dated 12 March 2005.

    Landscape Plan prepared by Landscape Architectural Services being drawing no. LPDA 06 – 18/1B dated August 2005.

    Plans prepared by IDRAFT Plans Pty Limited:-

(a)    Site Plan being Drawing No. 1 of 3, Issue B;

(b)    Ground Floor Plan and Mezzanine Plan being Drawing No. 2 of 3, Issue A;

(c)    Demolition, Sedimentation & Waste Management Plan being Drawing No. 3 of 3, Issue A;

    Signage Board Details prepared by IDRAFT Plans Pty Limited being Drawing No. 1 of 1, Issue A.

    Details Survey of Significant Trees Plan prepared by P.S. Graham & Associates being Reference No. S.14080A.

    Floor and Elevations Plan prepared by APEX Building Systems Pty Limited being Drawing No.: 1774/1A.

49    By notice dated 11 January 2006, Sakkal accepted Action Paintball’s irrevocable offer. The notice required payment of the balance of the deposit, suggesting that the full $103,000 had not been paid by this time. It is possible that the advance of $20,000 on 17 January 2006, recorded in the BB loan account, relates to this requirement, but I do not have sufficient evidence to reach a conclusion about this on the balance of probabilities.

50    Although efforts were made to obtain finance for Action Paintball to complete the purchase of Lot 22, these were unsuccessful. According to Mr Whybrew, this was “due to its financial position and performance and concerns regarding its capacity to service any loan”. This evidence was supported by the following affidavit evidence of Mr Holman:

In or around late 2005, [Mr Whybrew] approached me to discuss the inability of [Action Paintball] to obtain the necessary finance to purchase Lot 22. I don’t recall the exact words that were spoken or when the conversation occurred, but I do recall that [M r Whybrew] asked for assistance with obtaining finance.

After making some enquiries with my contacts in the lending industry in about late 2005, it became apparent that [Action Paintball] was not going to be able to obtain finance. Rather, it became apparent that the Directors would need to borrow funds in their own names and offer some real property as security. In order to obtain the finance, it was necessary to borrow the funds as a housing loan, rather than as a commercial loan. The main reason for this was because the loan to value ratio (“LVR”) on the available housing loans (at 80% LVR) would allow the Directors to borrow sufficient funds to purchase Lot 22. Generally, in my experience, lenders are only prepared to lend at 60% LVR on a commercial property. As there were some houses on the site at Lot 22, lenders were prepared to offer the finance as a housing loan. As [Action Paintball] is a company, it was not able to obtain a housing loan. Under the lender’s criteria, only individuals were able to obtain housing loans.

51    Mr Whybrew said that he was told by Mr Holman that “we might be able to obtain finance if he [sic] money was borrowed by the Directors personally, some real property was offered as security, and the loan was classed as a home loan rather than a commercial loan”. He said that, after discussing the matter with the other defendants (except Mrs Starke) it was agreed that “in order for [Action Paintball] to purchase a property”, the directors personally would try to secure finance to purchase a suitable property, and the Starkes would offer their home as security for the loan.

52    The other defendants gave evidence to similar effect. At an examination in April 2013, Mr Starke gave the following evidence:

Were you party to any discussion about why - that led to you buying an interest in that property?---Privilege. Yes.

Who were those discussion with or that discussion with?---Well, we discussed what was the best way to go about it and - - -

If you could attend to my question. Who were you having those discussions with?---Michael, Liz. And probably from a legal advisor. I don't know. I can't remember.

Over what period did you have those discussions?---Privilege. I don't know.

I think you were about to tell me about what the discussions were. What were the discussions that you had?---What was the best way to secure the property. Once the option had been signed, there were virtually- we were- had to go through with the purchase.

How did you come to know that you had to go through with the purchase? --Because we had a discussion with our I think tax -or solicitor. He said that there were -if we withdrew after we had had opposition, the penalties would have been horrendous.

And who was that that you had that discussion with?--I'm not quite sure. I can't remember. I can't remember whether it was our accountant or a solicitor at the time.

At that time, was there any discussion about who would use the property?---The idea was that we would purchase the property and lease it to Action Paintball, and they could develop it, the idea being that the leasing would pay -the rent -the lease- the rent from the lease would actually help pay the property off.

53    In his affidavit for these proceedings, Mr Starke said:

18.    After it became apparent that the Second Plaintiff would not be able to obtain the necessary finance to complete the Lot 22 Contract, Michael informed me that he had approached Mark Holman ("Mark"), an accountant who had acted as an accountant for the Second Plaintiff since about 1998, to see if Mark could help the Second Plaintiff obtain finance.

19.    Although I do not recall the exact dates of the conversations or the exact words that were spoken, I recall being informed by Michael that Mark Holman had advised him that the finance required to complete the Lot 22 Contract could be obtained if the Directors and Elizabeth borrowed the funds personally, and Beryl and I put up Lot 3 as security for the loan. I had a number of discussions with the Directors (including Beryl) around this time. I was initially reluctant to offer our home as security for the loan, and I recall that Beryl told me she was especially reluctant to do so.

20.    Eventually, after lengthy discussions with Beryl, we decided that we would offer our home as security. I did not think that we had any other choice, as the future of the business was at stake if we could not secure alternate premises, and I did not want to see the Directors lose their business. Accordingly, it was decided by the Directors that the Directors would borrow the necessary funds to complete the Lot 22 Contract and that Beryl and I would offer our home as security to the lender. …. After the site had been developed, it was intended that the Second Plaintiff would enter into a formal lease with the Directors.

54    Mr Caruana gave the following evidence:

9.    Because the Second Plaintiff had been unable to secure the necessary finance for the purchase of Lot 22, the Directors decided Lot 22 would be purchased by the Directors together in their personal capacities and that Bill and Beryl would offer their home as security. This decision was made after consultation with Mark Holman in about late 2005. Mark Holman is an accountant who had been providing advice and accounting work to the Second Plaintiff since about 1998. Mark Holman suggested that the Directors might be able to obtain the necessary finance if the loan was in the names of the Directors, security was offered in the form of real property, and the loan was classified as a home loan rather than a commercial loan. Ultimately, this was the structure that was used to secure Lot 22.

55    By agreement dated 16 February 2006 between Sakkal and Action Paintball, the parties agreed to rescind the put and call option provided that a new contract for the sale of Lot 22 be entered into simultaneously between Sakkal and the defendants. Under that contract, the defendants agreed to purchase Lot 22 for the sum of $1.030 million. The agreement provided that the deposit paid by Action Paintball to Sakkal “shall be transferred” to the contract between Sakkal and the defendants.

56    On the evidence above, I find that the defendants’ decision to purchase Lot 22 was made because of Action Paintball’s inability to raise funds by itself to complete the purchase. The defendants bought Lot 22 with the aim of benefiting Action Paintball in two ways: by relieving it of its contractual obligation to complete the purchase of Lot 22, and in order to make the property available to Action Paintball as the site at which the company hoped to conduct its business, subject to obtaining council approval, which it was actively seeking. The defendants did not acquire Lot 22 for their own purposes apart from the purposes of Action Paintball.

57    The evidence about how the defendants arrived at the arrangement by which Action Paintball made the disputed payments is vague to say the least. There seems never to have been any consideration that anyone apart from Action Paintball would make the payments.

58    Mr Whybrew said:

The Directors of [Action Paintball] decided that [Action Paintball] would initially make the interest only loan repayments until the site was developed. After the site had been developed, it was my intention that [Action Paintball] would enter into a formal lease of Lot 22 and that all of the company’s operations would move to that site.

59    Mr Starke said, in his affidavit:

After the site had been developed, it was intended that [Action Paintball] would enter into a formal lease with the Directors.

60    However, when asked about this statement in cross-examination, he said that did not know “at this stage”.

61    Mrs Whybrew said:

…the directors…decided that Lot 22 would be purchased by [the defendants] and that [Action Paintball] would initially make the interest-only loan repayments until the site was developed.

62    Mr Holman said:

I suggested that the monies being paid by [Action Paintball] to Perpetual Limited in relation to the loans for Lot 22, should be recorded in the MYOB accounts because it was going to be necessary for [Action Paintball] to obtain further finance in the future in order to be able to develop the site at Lot 22 for use as a paintball site and I thought that it would be beneficial and desirable to demonstrate to a potential lender that [Action Paintball] had the capacity to make the loan repayments based on its cash flow.

63    Mr Caruana gave no specific evidence on the topic.

64    There is no reason to think that the defendants would have agreed to purchase Lot 22 if they did not believe that Action Paintball would assume responsibility for repaying the loan monies obtained to finance the purchase. There was no evidence that the defendants had capacity to service the loans personally.

65    In my view, the evidence supports a conclusion that the defendants agreed to purchase Lot 22 by incurring loan obligations to Perpetual on the understanding that Action Paintball would assume that responsibility.

Completion of purchase of Lot 22

66    On about 22 March 2006, the defendants completed the purchase of Lot 22. A settlement adjustment sheet shows that the amount due on settlement was $927,347.64.

67    A letter from the defendants’ lawyers confirming the completion of the settlement records stated that, at the time of settlement, Perpetual advanced the sum of $1,367,868.20 which was disbursed as follows:

[Starke family home]

Intech Credit Union Limited                $186,129.92

1.    Compass Legal Services                     66.00

2.    Langes                             $210.00

3.    Office of State Revenue                      $42,144.00

4.    JM & L Sakkal                        $400,000.00

5.    Gells Lawyers                         $5,730.93

6.    National Australia Bank Limited                 $35.00

7.    Anderson Boemi Lawyers                     $42.64

8.    National Australia Bank Limited                 $80,394.51

9.    Bank cheque fees 5 x $10.00                 $50.00

10.    Trust cheque fees 4 x $5.00                     $20.00

Total                                $714,823.00

22 Old Northern Road

1.    National Australia Bank Limited                $446,875.49

2.    Gells Lawyers                         $3,600.00

3.    Action Paintball                        $202,564.76

4.    Bank cheque fee                         $10.00

5.    Trust cheque fee                         $10.00

Total                                $653,045.25

68    From these figures, it is apparent that the monies advanced by Perpetual were not used solely to fund the purchase of Lot 22. In particular:

    $186,129.92 was used to pay out the Starkes’ loan from Intech; and

    $202,564.76 was paid to Action Paintball.

Loan contracts with Perpetual

69    The defendants entered into two loan contracts with Perpetual. One was for a loan of $720,000 and was secured by a mortgage registered on the title of the Starke family home (“Lot 3 loan”). At the time that the loan was drawn down, two mortgage accounts were established in the names of the defendants, one with a debit balance of $520,000 (“account A”) and the other with a debit balance of $200,000 (“account B”).

70    For each account the “interest only period” was stipulated to be from the settlement date to (but not including) the five year anniversary of the settlement date. The loan contract stipulated that the defendants were required to make monthly repayments which were stated to be, for account A’s interest only period, an amount of $3,761.37 and, for account B’s interest only period, an amount of $1,446.77.

71    The second loan was for an amount of $658,000, and was secured by a mortgage registered on the title of Lot 22 (“Lot 22 loan”). At the time that the second loan was drawn down, a third mortgage account was established in the names of the defendants, (“account C”). The loan contract was in a similar form to the contract for the first loan, and stipulated that the defendants were required to make monthly repayments for the interest only period of $4,759.53.

Further efforts to develop Lot 22

72    After the purchase of Lot 22, Action Paintball continued to take steps to secure the development approval for the site. In June 2006, Action Paintball obtained a consulting engineers report in connection with Land and Environment Court proceedings between Action Paintball and Hornsby Shire Council.

73    In July 2006, Action Paintball obtained an expert noise assessment for Lot 22 from RSA Acoustics acoustic consultants.

74    On 4 October 2006, Action Paintball’s appeal to the Land and Environment Court was upheld, with the result that its development application for Lot 22 was approved subject to extensive conditions.

75    Mr Whybrew estimated that the total cost of preparing the development application and running the appeal, including legal fees and expert reports, exceeded $300,000. This cost was borne by the company.

76    Thus, the company made substantial expenditures in the expectation that, in due course, it would operate its business from Lot 22. That expectation corresponded with the expectations of the defendants, and I accept the defendants’ evidence to the effect that the expectation did not change during the period of the disputed payments.

Reasons for not moving the Action Paintball business to Lot 22

77    Mr Whybrew’s evidence, which I accept, was that the conditions placed on the development approval required significant expenditure. The directors estimated that the cost of developing Lot 22 to comply with the conditions was in the order of $2.5 million. Mr Whybrew considered that many of the conditions were unfair and impractical.

78    Mr Whybrew came to the conclusion that Action Paintball would be able to afford to develop the site over time, in particular, if he could negotiate with the council in relation to some of the conditions. However, after the global financial crisis (“GFC”) in late 2007, Action Paintball’s business became much less busy. According to Mr Whybrew, as a result of the reduced performance of the business after the GFC and because so much money had been spent on the appeal to the Land and Environment Court, Action Paintball could not afford to develop Lot 22 to meet the council’s requirements and it was decided to wait before proceeding with the development.

79    In February 2013, the development approval was modified to provide for accessible car parking, a lift to provide access to each level of the building including a covered walkway, additional windows to the eastern and western elevation, changes to the deck construction materials and roof over the deck and use of the underside of the deck for general purpose. The modified development approval documentation shows that architectural plans were prepared in May 2006, May 2012 and November 2013.

Payments made relating to the loans

80    It is not in dispute that, from the time of the purchase of Lot 22, Action Paintball made the payments to Perpetual to discharge the defendants’ obligations under the two loan contracts.

81    Regular payments were made to accounts A, B and C from March 2006. There is no evidence that anyone apart from Action Paintball made the monthly repayments under the loans.

82    The payments from March 2006 to January 2008 do not fall within the four years ending on the relation-back day and are not sought to be recovered by the liquidator.

83    Between 15 February 2008 and 18 May 2012, Action Paintball made 112 payments to each of accounts A, B and C totalling $72,795.69 to account A, $189,242.18 to account B and $239,459.81 to account C. These payments comprised the entirety of the amounts payable under the terms of the two loans during that period.

84    Under each loan, the defendants were required to pay interest only for the first five years following draw-down. Accordingly, the payments from 15 February 2008 to about March 2011 were payments of interest and the payments from about April 2011 onwards were payments of principal and interest.

85    According to the liquidator, the payments were recorded in Action Paintball’s financial records in two ways:

(1)    from 15 February 2008 to 30 June 2011, in a ledger entitled “9-1010 Interest Perpetual”; and

(2)    from 1 July 2011 to 30 June 2012, in a ledger entitled “6-2110 Rent – Glenorie”.

86    Mrs Whybrew said that she recorded the payments in this way on Mr Holman’s advice.

87    For the years ended 30 June 2008 and 2009, the payments were recorded in Action Paintball’s profit and loss statements as “other expenses”. For the years ended 30 June 2010 and 2011, the payments were recorded as “Rent Glenorie”.

88    Apart from the references in the financial records to “rent”, there was no evidence that the defendants and Action Paintball entered into a lease over Lot 22. Two of the defendants gave evidence of an intention to enter into a “formal lease” after the site had been developed. As a practical matter, there was no need for Action Paintball to enter into a lease for Lot 22. It had an expectation, shared with the owners of Lot 22 (who were also the shareholders of Action Paintball, and four of whom comprised the directors of Action Paintball), that it would obtain access to the site when the site was suitably developed.

89    Action Paintball’s payments to Perpetual reflect the original intention that Action Paintball was to be the purchaser of Lot 22, and the defendants’ intention to borrow funds to purchase Lot 22 for the benefit of Action Paintball. From the defendants’ perspective, they acted to their personal detriment by undertaking substantial loan obligations to Perpetual on the basis that the company would discharge those obligations. The Starkes acted to their additional personal detriment by permitting Perpetual to take a mortgage over the Starke family home. As the first to fourth defendants comprised the directors of Action Paintball, I conclude that they agreed (either explicitly or implicitly) on behalf of Action Paintball in about March 2006 to cause Action Paintball to meet the defendants’ obligations to Perpetual.

Occupation of Rouse Hill property after purchase of Lot 22

90    Mr Whybrew’s evidence, which I accept, was that the occupation of Rouse Hill continued to be a source of insecurity for the Action Paintball business.

91    In 2010, Mr Whybrew requested a lease term longer than 12 months. That request was declined in September 2010 and the landlord’s real estate agent also told Mr Whybrew that “at the end of the first 12 months there will be a clause in the lease allowing him to give you six (6) months notice to reclaim the property for development”. A lease containing a clause to this effect was sent to Action Paintball in December 2010. At the same time, the landlord’s solicitor informed the directors that the landlord required a bank guarantee as a security deposit of an amount equivalent to six months rent plus GST, being $90,750. By email dated 21 December 2010, Mr Whybrew complained to the landlord’s real estate agent that Action Paintball had no warning of the $90,750 security deposit and was trying to work out how to raise that amount. However, a lease was duly signed at the end of December 2010.

92    In August 2011, Mr Whybrew informed the landlord’s real estate agent that Action Paintball would like to exercise the 12 month option on the lease.

Financial position of Action Paintball from 2008 to 2012

Income tax returns

93    The company’s income tax returns disclosed the following taxable income in each of the following income years:

94    The liquidator’s report suggests that the company may have obtained an income tax benefit from the recording of the payments in its books and records, to the extent that the payments were subsequently claimed as deductions against its assessable income.

95    In about October 2011, Action Paintball owed tax debts of about $171,710.04. The company failed to comply with a creditor’s statutory demand served on Action Paintball by the DCT on about 26 October 2011. The statutory demand shows that the debt comprised:

    A running balance account deficit debt of $61,891.53 incurred over an unspecified period;

    Superannuation guarantee charges for successive quarters commencing 1 July 2007 until the quarter commencing 1 October 2009, which became payable on 2 July 2010; and

    General interest charge calculated up to and including 25 October 2011.

Other financial information

96    Action Paintball’s financial reports record revenues of approximately $5.3 million in the year ended 30 June 2008, $4.5 million in the year ended 30 June 2009, $4.2 million in the year ended 30 June 2010 and $3.6 million in the year ended 30 June 2011.

97    Other figures included in the financial records of Action Paintball, include the following:

98    In each year, the financial report discloses an amount for inventories which exceeds the figure for total equity by over $100,000. Thus, the accuracy of the total equity figures is substantially dependent upon the accuracy of the value of the inventories.

99    In the directors’ “Report as to affairs” dated 13 July 2012, required to be submitted pursuant to s 475 of the Act, the estimated realisable value of stock inventory was $33,000. During cross-examination, Mr Whybrew confirmed that stock estimate was genuine saying “We hadn’t actually done any write downs for about a couple of years, so, yes. There was quite a bit of old stock there”. Later, Mr Whybrew agreed that the carrying value of the stock in the company’s accounts was probably overstated for the five or six years prior to May 2012.

100    In the light of this evidence, I do not accept the total equity figures in the financial reports at face value. Nor do I have a basis to conclude that the MYOB net asset figures or the income tax return shareholder funds figures are reliable.

Loans from shareholders

101    The June 2006 to 2009 balance sheets printed from the MYOB accounts record as a “long-term liability” a loan from “Glenorie partnership” in the sum of $286,809.68.

102    The June 2010 balance sheet printed from the MYOB accounts shows this loan reduced to $107,319.11, and the only other substantial shareholder loan as a loan from the Starkes of $43,500. Apparently inconsistently, the 2010 financial report records unsecured shareholder loans of $248,866.

103    The June 2011 balance sheet printed from the MYOB accounts shows the “Glenorie Partnership” loan remaining at $107,319.11, while the loan from the Starkes had apparently increased to $144,000. The 2011 financial reports record unsecured shareholder loans of $298,790.

Case law on section 588FDA

104    Impropriety or other breach of a director’s duty is not an element of an unreasonable director-related transaction. The focus in s 588FDA is not the director’s conduct but the reasonableness of the company’s conduct, objectively assessed, in entering into the transaction: Weaver v Harburn [2014] WASCA 227; (2014) ACSR 416 (“Weaver”) at [79]. The test of reasonableness is what a reasonable person “in the company’s circumstances” may be expected not to do.

105    The words “it may be expected that a reasonable person” emphasise the objective nature of the inquiry: cf Tosich Constructions Pty Ltd (in liq) v Tosich (1997) 78 FCR 363 at 366-7 (“Tosich”); Lewis v Doran [2005] NSWCA 243; (2005) 219 ALR 555 (“Lewis”) at [156] concerning the interpretation of s 588FB. It must positively appear that the reasonable person would not have entered into the transaction: cf Tosich at 367; Lewis at [157].

106    In Vasudevan v Becon Constructions (Australia) Pty Ltd [2014] VSCA 14; (2014) 41 VR 445 (“Vasudevan”), at [28], Nettle JA observed that “it is apparent from the terms of s 588FDA, and also from the Explanatory Memorandum, that the very point of the section was and is to catch director related transactions of kinds not otherwise liable to avoidance as unfair preferences, uncommercial transactions or unfair loans.” His Honour referred to paragraph 3.15 of the Explanatory Memorandum, which states relevantly:

The insolvency of the company at the time of an unreasonable director-related transaction is not a relevant consideration under the proposed amendments. Accordingly, section 588FG(2) is amended to remove unreasonable director-related transactions (along with unfair loans under section 588FD currently listed) from the scope of the exemption provided under that subsection in relation to knowledge of the company’s solvency at the time the transaction was entered into.

107    In Weaver, McLure P (at [91]) expressed the view that the company’s circumstances encompass all relevant matters, starting with its status as a company and what flows from that; its controllers, shareholders, business and other activities; and the facts and circumstances of, and surrounding, the transaction. Although it is clear that the company need not be insolvent at the time of the impugned transaction for the transaction to be voidable as an “unreasonable director-related transaction”, in her Honour’s view, the relevance and/or weight to be given to the fact, or risk, of insolvency depends on the facts: Weaver at [93].

108    Normal commercial practice is relevant but not decisive on the question of what “may be expected” that a reasonable person in the company’s circumstances would do: cf Welcome Homes Real Estate Pty Ltd v Ziade Investments Pty Ltd (in liq) [2007] NSWCA 167 at [54] (Hodgson JA, Spigelman CJ and Santow JA agreeing). At [56], Hodgson JA said, in considering s 588FB, which contains relevantly similar criteria for identifying an “uncommercial transaction”, “[t]he circumstance that a transaction does not define or require benefits that are said to be expected from it, and to justify it, is a factor strongly suggesting that the transaction is not one that a reasonable person in the company’s circumstances would enter into”.

109    In Lewis, the New South Wales Court of Appeal considered a debt restructuring within a group of three companies. One company (“Holdings”) paid $4.1 million to a related company (“Constructions”), in part repayment of prior indebtedness and Constructions lent $4.1 million to a third related company. At [136], Giles JA, Hodgson JA and McColl JA agreeing, said:

Transactions at an undervalue were no doubt the primary target of the provisions, but the description of an uncommercial transaction in s 588FB (1) was not limited to such transactions. The description directed primary attention to a balancing of benefit and detriment, only in the broadest sense involving undervalue. A transaction could conceivably be one a reasonable person in the company’s circumstances would not have entered into although for full value; or it could be one a reasonable person in the company’s circumstances would have entered into although at an undervalue, for example a forced sale to overcome temporary illiquidity. For s 588FB (1), in addition to regard to benefits and detriments to the company, regard was to be had to the benefits to the other parties to the transaction. It appears to have been contemplated that a transaction detrimental to the company but beneficial to other parties to the transaction might not unreasonably be entered into. If, for example, there were no creditors and no prospect of creditors, it may be that the controller of the company could reasonably sacrifice its interests to the interests of other parties to the transaction.

110    A transaction with only derivative benefits to a company can still be for the benefit of the company: Lewis at [148]-[149].

111    In Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50, it was held that use of the funds of company A to discharge the debt of the wholly-owned subsidiary of related company B was in the interests of company A, essentially because it was necessary to retain the support of the bank the loss of which would be detrimental to, among others in the group, company A. In Linton v Telnet Pty Ltd [1999] NSWCA 33; (1999) 30 ACSR 465 at 472, Giles JA (Beazley JA and Sheppard AJA agreeing) said that a loan to a director from the funds of company A, in order to secure his services for company A and company B, could be seen as for the benefit of company A “both directly and derivatively to the extent to which [the director’s] services to [company B] ensured the supply of computers and otherwise the successful conduct of [company A’s] retailing business”.

112    The following transactions have been found to be unreasonable director-related transactions within s 588FDA:

    The purchase of a boat using company funds for a close associate: Weaver. McLure P (at [98]), Buss and Murphy JJA agreeing, concluded that, prima facie, a reasonable person in the company’s circumstances would not have made the payments, regardless of the financial health of the company. They would not have done so because it involved the director using corporate property as if it was his own (at [103]). That conclusion was fortified by the conclusion that at the time of the payments the company was in uncertain financial and commercial circumstances.

    An agreement by a company to assume joint liability for obligations owed by a director to a third party and to grant a mortgage to secure performance of the assumed liability: Vasudevan at [31];

    A contract to dispose of real property of a company for no consideration, which was found to amount “to giving away a valuable asset of the company to the son of one of the directors, because it was anticipated that in due course the company would realise its assets and have a sufficient surplus (in excess of the value of the property) available for distribution to the unitholders of the trust of which it was the trustee, and that those unit holders would somehow be able to procure a distribution in kind of the property to [the son]”: Slaven v Menegazzo [2009] ACTSC 94 at [45] (Mansfield J);

    A payment made into a home loan account of a company’s directors. The Court found that the payment was probably used to finance a home loan with which a property was purchased. The Court was “unable to find any reasonable basis for a hypothesis that there was any benefit to [the company] as distinct from the defendants personally, from that payment, or any basis for thinking that it discharged any liability of [the company] to them”: Re Lesvos Pty Ltd [2012] NSWSC 1288 at [30].

    The incurring of costs and liabilities by a company to construct a house on property owned by a close associate, in the absence of any commensurate benefit accruing to the company at the outset when the close associate thought that the house was to be built for “free”: Kazar at [152-[153];

    22 rental payments made by the company for premises owned by the director’s daughter, and occupied by the director and her domestic partner: Fielding as liquidator of Lyngray Developments Pty Ltd v Dushas [2013] QCA 55 at [5], [18], [63].

Consideration

113    I accept the defendants’ evidence that the purpose of their acquisition of Lot 22 was to make the property available to Action Paintball as the site at which the company could conduct its business, subject to obtaining Council approval. The main reason for a substantial portion of the defendants’ loans from Perpetual was to acquire Lot 22 for use by Action Paintball, and the purpose of an equivalent portion of each of the disputed payments was to enable the defendants to discharge their obligations arising from the acquisition of Lot 22 for the benefit of Action Paintball.

114    The context in which the disputed payments were made includes Action Paintball’s conduct in entering into a contract to purchase Lot 22 which it was (or at least became) unable to complete. The defendants’ decision to purchase Lot 22 may have conferred a significant benefit on the company in that it may have prevented the loss of the deposit paid by the company. However, it is not possible to reach a positive conclusion about that because the deposit was never recorded in the books of the company as an asset.

115    Other important matters of context include the fact that the defendants were the sole shareholders of Action Paintball, and the progressive weakening of the company’s financial position.

Benefits to the company of making the disputed payments

116    The plaintiffs contended that there were no benefits to Action Paintball of making the disputed payments because:

(a)    The payments did not give rise to any increase in Action Paintball’s assets or any reduction in Action Paintball’s liabilities;

(b)    Action Paintball had no lease or licence over Lot 22 and was not using the property for its business;

(c)    The payments did not satisfy any contractual obligation that Action Paintball had with respect to the Perpetual loans – it was not a borrower or a guarantor, and had no actual or contingent liability to Perpetual under the loan accounts that needed to be satisfied or relieved; and

(d)    It had no interest in Lot 22 to be protected by making the payments.

117    The defendants’ case was that the payments conferred the following benefits on the company:

(a)    The company secured Lot 22 as a site approved for use as a paintball facility from which to operate its business in the future, in circumstances where the company could not secure anything more than a short-term lease of the Rouse Hill property;

(b)    The company acquired an exercisable right (whether by way of agreement, equitable interest or estoppel) to conduct the company’s business from the site at Lot 22 by making the loan payments;

(c)    Arguably, the company acquired an equitable proprietary interest in the land, having regard to the payment of the deposit on Lot 22 by the company, and the making of payments towards principal on the loans in 2011;

(d)    Action Paintball received the benefit of the income tax deductions which it claimed for the payments;

(e)    The company received the benefit of rental income from a house situated on Lot 22;

(f)    The company received the benefit of an “interest free loan” from the defendants, being the advance of $202,564.76;

(g)    The company was isolated from the risks associated with ownership of Lot 22, including the risks associated with the borrowings from Perpetual.

118    I accept that the disputed payments did not give rise to any corresponding increase in Action Paintball’s assets as stated in the company’s financial reports, or any corresponding reduction in Action Paintball’s liabilities. The defendants did not point to any evidence to the contrary.

119    I accept that the company may have acquired an equitable interest in the Lot 22 property as a result of its payments, or a cause of action in estoppel arising out of the company’s conduct in making the payments on the assumption that Lot 22 would be made available to it as a paintball facility in due course. However, I doubt that any such interest or cause of action was a significant benefit at the time that the payments were made because the company was at all times run and owned by the defendants, all of whom acted consistently in maintaining their ownership of Lot 22 (on the one hand) and (on the other hand) all of whom intended, provided that the company could afford to meet the council’s development conditions, to make Lot 22 available for the company’s use.

120    I accept that the company benefited from the payments to the extent that they preserved the availability of Lot 22 for the company’s use, once the council’s conditions for its use were met. The cost of preserving the availability of Lot 22 for the company’s use was the cost of servicing the loans to the extent that the loan monies were applied to the purchase of Lot 22. As previously noted, there was no evidence that the defendants could have serviced the loans from their own personal funds.

121    In my view, the absence of a documented lease or licence over Lot 22 does not greatly detract from this benefit because of the common intention between the defendants and the company that the ultimate purpose of acquiring Lot 22 was for the company’s use, and because there was no practical utility for the company in a lease or licence until Lot 22 was able to be used as a paintball gaming site.

122    I accept that the fact that further substantial expenditure was required before Lot 22 could be used for paintball games is a significant factor reducing the extent of the benefit of preserving the availability of the site. It is not at all clear that, if the Rouse Hill property became available, the company could have made the necessary expenditure to enable Action Paintball to move its business to Lot 22. On the other hand, if Lot 22 was sold, then the company’s considerable expenditure on making the site suitable for use as a paintball facility would have been wasted. There was evidence that the company had gone to significant effort to locate Lot 22 as a potentially suitable paintball gaming site. There was no evidence that an alternative site was readily available.

123    The precise basis on which the disputed payments were claimed as income tax deductions was not explained by the evidence. However, the deductions would not have been claimed unless the payments had been made. The company benefited from the deductions. I accept that the deductions are benefits that the company enjoyed as a result of making the disputed payments, recognising that they were obtained because the company chose to treat the payments as deductible.

124    The evidence about rental income from the Lot 22 property was unsatisfactory. There was no documentary evidence that any rental income of the property was received by the company, and the company’s income tax returns do not separately disclose any such income. Accordingly, I do not accept that rental income from the Lot 22 property was a benefit that the company received by reason of making the disputed payments.

125    Action Paintball received $202,564.76 from the proceeds of the Perpetual loans which was treated by the company as a loan from the defendants. To the extent that the disputed payments are referable to that loan, it cannot fairly be described as “interest free” (as the defendants put it). The disputed payments partly paid for the interest on the loan which was the source of the defendants’ loan of $202,564.76 to Action Paintball. The same applies to the extent that the Perpetual loan proceeds were used to repay the company’s loan from the Starkes.

126    In the absence of any obligation to pay interest to the defendants on these two sums, I am not satisfied that the company received a benefit by making this portion of the disputed payments. However, I accept that the company’s benefits derived from the loan of $202,564.76 and the discharge of the loan from the Starkes are other relevant matters within the meaning of s 588FDA(1)(c)(iv).

Detriment to the company of making the payments

127    The plaintiffs contended that the detriment to the company was the full extent of the payments, “they being a gift with no arguable benefit, financial or otherwise, to the company”: cf Weaver at [96].

128    Further, the plaintiffs contended, the payments deprived Action Paintball of significant funds, which it could have used for the purposes of its business and, ultimately, the payment of its creditors. On the liquidator’s analysis, if Action Paintball had not made the impugned payments, the company would have had sufficient funds to pay its creditors and would not have been wound up.

129    I accept that one aspect of the detriment to the company of making the payments was the opportunity cost to the company of the payments. I accept that, by October 2011, the payments exceeded the amount in the statutory demand served by the ATO. On that basis, I accept the submission that if Action Paintball had not made the impugned payments, the company would have had sufficient funds to pay the ATO the amounts the subject of the statutory demand and could have avoided being wound up pursuant to that notice.

130    I accept that, in terms of quantum, the detriment to the company was the difference between the benefit of the payments to the company and the total amount of the payments. Looking at each individual payment, the detriment was the difference, if any, between the benefit of preserving the availability of the site by that payment and the amount of the payment.

Respective benefits to other parties to the transaction of entering into the transaction

131    The payments benefited Perpetual, as a creditor of the defendants.

132    More significantly, the payments benefited the defendants, who comprised the shareholders of the company, to the extent that they discharged the defendants’ obligations to Perpetual.

133    The plaintiffs contended that the defendants received the following additional benefits:

(a)    The defendants were relieved of the obligation to make the payments from their own funds;

(b)    The defendants were relieved of the consequences which defaulting on the loans would have brought; and

(c)    The payments had the effect of preferring the defendants’ creditor (Perpetual) over the creditors of Action Paintball.

134    The defendants contended that, as shareholders of the company, they obtained a benefit from the payments to the extent that the payments benefited the company.

135    I accept each of these contentions.

 Any other relevant matter

136    To be a relevant matter, a matter must be relevant to whether it may be expected that a reasonable person in the company’s circumstances would not have made the disputed payments.

137    The plaintiffs identified the following matters:

(a)    Action Paintball was not a borrower under the loan agreements;

(b)    Action Paintball did not guarantee or otherwise secure any of the defendants’ obligations under the loan agreements;

(c)    The loans were taken on the basis that they were residential investment loans – this gave them greater benefits in terms of borrowing capacity than would otherwise have been the case if this was a loan for the acquisition of a business property and the defendants should not now obtain greater benefit by retaining the interest paid by Action Paintball on those loans;

(d)    Action Paintball did not have any legal or equitable interest in either Lot 22 or the Starkes’ property;

(e)    Action Paintball did not have a lease or licence to use either Lot 22 or the Starkes’ property;

(f)    Action Paintball did not have any legally binding options or rights to acquire, lease or otherwise use either Lot 22 or the Starkes’ property;

(g)    The prospect of Action Paintball receiving any interest in Lot 22 was to be held off until that site had been developed, at an unknown time;

(h)    At all material times, Action Paintball conducted its business from the Rouse Hill property, for which it was paying commercial rents;

(i)    The making of the payments did not mitigate the rent that Action Paintball was paying for the Rouse Hill property, or any of its other business expenses;

(j)    The making of the payments did not secure or otherwise improve Action Paintball’s likelihood of acquiring Lot 22 (or any other premises) for the purpose of its business. The promise of Lot 22 “securing the future” of Action Paintball’s business was illusory. It received nothing for the payments that it made and in particular no interest in Lot 22 that it could enforce against a third party (such as a mortgagee seeking possession) without the concurrence of the defendants;

(k)    During the years 2008 to 2012, other than for the financial year ended 30 June 2010, there had been decreases in the net profit of Action Paintball from ordinary activities after income tax, culminating in Action Paintball making a net loss in the financial year ended 30 June 2011;

(l)    The making of the payments favoured the defendants’ personal creditors over the interests of Action Paintball and its creditors. For example, Perpetual was favoured over the DCT; and

(m)    Had the payments not have been made, the company probably would not have been wound up or, if it had been wound up, the winding up may have been terminated and the creditors of the company would have been paid.

138    The defendants identified the particular nature of the company’s business as another relevant matter. The defendants submitted:

It is clear from the evidence that the operation of a paintball business has complex and unique requirements. Of particular importance is the site from which such a business operates. With no site or no site with the appropriate infrastructure and government approvals, a paintball company such as that in the present case would be unable to operate. The evidence of the defendants speaks to the importance of this issue and when viewed in the context of the continued difficulties with the landlord at the Rouse Hill site, taking steps to secure an alternative site albeit at some cost to the company was a responsible and reasonable thing to do.

Conclusion

139    Taking all these matters into account, I am not satisfied that it may be expected that a reasonable person in the company’s circumstances would not have made any of the disputed payments. The payments were plainly made pursuant to an arrangement by which the defendants took on obligations to Perpetual primarily to secure Lot 22 for the long term benefit of Action Paintball. Accepting that the defendants and Action Paintball were entitled to make that arrangement, by which the defendants (being the company’s shareholders) were exposed to significant liabilities, it would not be expected that a reasonable person in the company’s circumstances would have simply ceased making the payments on and from February 2008. Such an action could have resulted in significant losses for the shareholders of the company arising from the likely consequent defaults on the loan agreements and consequent need to sell Lot 22. The evidence does not explain what the impact of ceasing to make the payments at any particular time would have been on the company’s shareholders. In my view, a reasonable person in the company’s position was required to consider the interests of its members as a whole before making a decision to cease making the payments: see Austin RP and Ramsay IM, Ford, Austin and Ramsay’s Principles of Corporations Law (16th ed, LexisNexis Butterworths, 2015) at [8.095].

140    That reasoning applies to all of the disputed payments made during the financial year ended 30 June 2008, in which the company’s net profit after income tax was $385,830. The company was in an apparently healthy financial situation (albeit the business had commenced to be affected by the GFC) and the directors of the company wished to maintain the availability of Lot 22 for the long-term benefit of Action Paintball, having spent a considerable amount towards developing Lot 22 and the payments would benefit all shareholders. These were reasons why a reasonable person in the company’s circumstances could have decided to make the payments.

141    I am not satisfied that I should reach a different conclusion concerning disputed payments made during the financial years ended 30 June 2009 and 30 June 2010. The financial position of the company deteriorated over those two years. However, in each year, the company made significant net profits after income tax. Even if the company’s inventories are assumed to have no significant value (a conservative assumption), then the company’s financial reports show positive net assets when non-current liabilities (shareholder loans) are excluded. The prospect of developing Lot 22 was more remote, having regard to the company’s less favourable trading since the GFC. However, the directors of the company wished to maintain the availability of Lot 22 for the long-term benefit of Action Paintball, having spent a considerable amount towards developing Lot 22, the payments would benefit all shareholders and there was a significant risk of serious detriment to the shareholders if the payments ceased. In all of those circumstances, I am not satisfied that it may be expected that a reasonable person in the company’s circumstances would not have made the disputed payments during those two financial years.

142    The financial position of the company changed materially in the financial year ended 30 June 2011. On 2 July 2010, superannuation guarantee charges became payable by the company in an amount of $110,556.94. By October 2011, those taxes had not been paid. In my view, once the company became liable to make a significant payment for superannuation guarantee charges, a reasonable person in the company’s circumstances would have considered whether the disputed payments should continue to be made. This would have required consideration of the company’s solvency and also the interests of the company’s members. By 2 July 2010, Action Paintball had been unable to take significant steps to make Lot 22 suitable for use for approximately three years. During that time, its revenues had dropped from $5.3 million in the year ended 30 June 2008, to $4.5 million in the year ended 30 June 2009 and $4.2 million in the year ended 30 June 2010. In my view, around 2 July 2010, a reasonable person in the company’s circumstances would probably have decided that it could not continue to finance the Perpetual loans and that the defendants would need to sell Lot 22.

143    However, I am not satisfied that a reasonable person in the company’s circumstances would have immediately ceased making the disputed payments. Rather, such a reasonable person would have continued to make the payments until the defendants had had a reasonable time to sell Lot 22. There is no evidence about what would have been a reasonable time in the circumstances.

144    The company’s revenues dropped to $3.5 million in the year ended 30 June 2011. There was no evidence about the seasonality of Action Paintball’s business. On the assumption, in the absence of any evidence to the contrary, that the business traded in a reasonably steady fashion, the directors of Action Paintball should have known that the business’ performance was worsening from July 2010. This would have increased the impetus for a reasonable person in the company’s circumstances to cease making the disputed payments. In my view, having regard to all the circumstances, I conclude that by 31 December 2010, a reasonable person in the company’s circumstances would have ceased to make the disputed payments.

145    Accordingly, I find that the payments made from 1 January 2011 to and 25 May 2012 were unreasonable director-related transactions subject to one qualification.

146    The qualification concerns the use of the loan proceeds to provide the loan of $202,564.76 to the company, and to pay out the loan from the Starkes to the company. To the extent that the payments are referrable to those uses of the loan proceedings, in my view, a reasonable person in the company’s circumstances would have accepted that it was appropriate for the company to pay the interest which the defendants were liable to pay for making available those funds to the company.

147    The plaintiffs argued against this conclusion for two reasons:

(a)    The loans were taken by the defendants on the basis that they were residential investment loans and not business loans. This gave the defendants greater benefits in terms of borrowing capacity than would otherwise be the case if this were a loan for the acquisition of a business property and the defendants should not now obtain greater benefit by retaining the interest paid by Action Paintball on those loans; and

(b)    It can be inferred that the loan funds were used to fund the development application appeal that was run by Action Paintball. The evidence was clear that Action Paintball paid for those proceedings. The benefit of that development application enures with the land itself, for the benefit of the defendants as owners. The benefit of that development application is ongoing, as witnessed by the recent variation of the development approval on the application of Action Paintball Rouse Hill (the entity which now operates a paintball facility at the Rouse Hill property) cancelling out any apparent benefit to Action Paintball.

148    As to the first argument, I do not accept that the defendants benefited from borrowing the funds that were used for the company’s benefit in any direct sense. I do not accept that a reasonable person in the company’s circumstances would not pay the interest on the relevant portion of the borrowing for this reason.

149    As to the second argument, there is insufficient evidence to warrant a conclusion about how the loan funds of $202,564.76 were used. I have previously found that Action Paintball paid the costs of obtaining the development approval. However, there is no satisfactory evidence about the value of that expenditure and I am not satisfied that this is a matter that could have caused a reasonable person in the company’s circumstances not to pay the interest on the relevant portion of the borrowing.

150    Accordingly, from the amount of the payments made from 1 January 2011 to and 25 May 2012 there should be a deduction for that proportion of the payments that corresponds to the proportion of the loan proceedings used to loan $202,564.76 to the company, and to pay out the loan from the Starkes to the company. In doing this deduction, it will be necessary to take into account the fact that the loan of $202,564.76 was progressively repaid.

Relief

151    In Kazar at [28], Flick J accepted that, notwithstanding the use of the term “may” in s 588FF(1), the Court does not retain a discretion to refuse to make one or other of the orders set out in s 588FF(1)(a) to (j), referring to Cashflow Finance Pty Ltd v Westpac Banking Corporation [1999] NSWSC 671 and Cussen v Sultan [2009] NSWSC 1114. In this case, the relevant kinds of orders are:

(a)    an order directing the defendants to pay to the company an amount equal to some or all of the money that the company has paid under the transactions; and

(c)    an order requiring the defendants to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that they have received because of the transactions.

152    By s 588FF(4), where a transaction is liable to avoidance solely because it is an unreasonable director-related transaction, the Court is to make an order only for the purpose of recovering for the benefit of the creditors of the company the difference between  the total value of the benefits provided by the company under the transaction, and the value (if any) that it may be expected that a reasonable person in the company’s circumstances would have provided having regard to the matters referred to in paragraph 588FDA(1)(c).

153    The defendants argued that no relief should be granted against them for the following reasons:

(a)    There are no probative valuations for evidence in respect of the properties of the defendants or any other of their assets;

(b)    There is no probative evidence before the Court as to the quantum of any liabilities of the defendants which would affect their net asset position;

(c)    The liquidator conceded the defendants’ impecuniosity at an adjournment application. He then sought to resile from that position during his examination by reference to statutory declarations prepared by the defendants about two years ago;

(d)    Reliance is purportedly placed by the liquidator upon an analysis of these financials, however, they were never put to the defendants. They are almost two years out of date;

(e)    The liquidator has placed no current evidence before the Court as to the identity of creditors or what they are owed save for a report as to affairs dated about July 2012; and

(f)    No evidence is before the Court regarding the liquidators’ fees or his legal costs, which will come out of the liquidation.

154    On the basis of the company’s report as to affairs, and in the absence of any evidence to the contrary, I am satisfied that the company’s liabilities exceed the amount of the payments which I have found to be unreasonable director-related transactions.

155    The total value of the benefits provided by Action Paintball under those transactions is the total amount of those payments.

156    In my view, the value that it may be expected that a reasonable person in the company’s circumstances would have provided having regard to the matters referred to in paragraph 588FDA(1)(c) after 31 December 2010 is nil. At that time, the company had no realistic prospect of making Lot 22 ready for use as a paintball facility, the company had substantial outstanding tax debts and defendants should have been given a reasonable opportunity to sell Lot 22.

157    I do not accept that the matters raised concerning the financial position of the defendants are relevant to the question of what is the appropriate relief under s 588FF. The starting point is the amount of the unreasonable director-related transactions: cf Kijurina (as liquidator of ET Family Pty Ltd) v Taouk [2015] FCA 424; (2015) 105 ACSR 686 at [54]. I am not satisfied that there is any consideration that would properly warrant a reduction of that amount as the sum which the defendants should be ordered to pay.

Conclusion

158    It will be necessary to for the parties to prepare short minutes of order to give effect to these reasons.

159    I will also hear submissions on costs.

Associate:

Dated:    22 October 2015