FEDERAL COURT OF AUSTRALIA

Hundy v Kashan, in the matter of ACT Land Pty Ltd (in liquidation) [2020] FCA 1101

ORDERS

THE COURT ORDERS THAT:

1.    The interlocutory application dated 9 December 2019 be dismissed.

2.    The applicant pay the respondents’ costs of and incidental to the interlocutory application, as agreed or taxed.

3.    The substantive proceeding be allocated to a docket judge.

4.    Liberty to apply to the docket judge on the giving of 72 hours’ notice.

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

REASONS FOR JUDGMENT

GRIFFITHS J:

Introduction

1    By an interlocutory application dated 9 December 2019, the applicant (who is the liquidator of ACT Land Pty Ltd) seeks summary judgment against the respondents under rule 26.01(1)(e) of the Federal Court Rules 2011 (Cth) (2011 FCRs).

2    For reasons which follow, the interlocutory application will be dismissed, with costs.

Summary of background facts

3    The substantive proceedings were commenced by way of an originating application dated 8 April 2019. The application relies on ss 180, 181, 182, 588FDA, 588FE(6A) and 588FF of the Corporations Act 2001 (Cth). The liquidator seeks to recover moneys paid to third parties by the applicant in relation to transactions which occurred prior to ACT Land being wound up, some of which the applicant claims to be unreasonable director-related transactions. The applicant contends that the first respondent (Behzad Kashan) was a de-facto or shadow director of ACT Land.

4    ACT Land carried on a property development business. Mr Kashan was a significant shareholder in that company. He was not, however, a formal director. The sole director of the company was Mr Spiros Brendas.

5    Mr Kashan is the sole director and shareholder of the second respondent (Kashan Constructions Pty Ltd). It is evident that Kashan Constructions had a business relationship with ACT Land. The third respondent (Kashan Property Solutions Pty Ltd) carries on a real estate agency business in the ACT. It trades under the name Century 21 Capital (C21). Mr Kashan’s wife is the sole director of Kashan Property Solutions. She was also the bookkeeper for ACT Land.

6    Many of the applicant’s claims relate to a residential property development which was carried out by ACT Land in Batemans Bay.

7    ACT Land was wound up on 26 September 2018, following the Company’s failure to respond to a Creditor’s Statutory Demand in the amount of $223,500. The creditor in question was said to be Mr Christopher Brown. The debt related in part to ACT Land’s failure to repay to Mr Brown a deposit in the amount of $24,000 which had been paid by him under a Contract for Sale of Land (which was later rescinded) in relation to Lot 245, being part of ACT Land’s development at Batemans Bay. Another part of the debt related to ACT Land’s failure to repay a deposit of $24,500 to Ms Tunisia Brown in respect of Lot 603 in the same development.

8    The balance of the debt the subject of Mr Brown’s statutory demand related to a claim in respect of the deposit paid to ACT Land in the amount of $175,000 for a building project on Lot 603.

9    It might also be noted that, based upon the cover page of the Contracts of Sale relating to both Lots 245 and 603, Johannessen Legal & Migration acted for both Christopher Brown and Tunisia Brown in respect of the relevant sales of land. That firm also acted for Christopher Brown in the winding up proceeding. Mr Pierre Johannessen, who appears for the applicant in the present proceeding, is a partner of that firm.

10    In proceedings ACD 74 of 2018, on 23 November 2018, the Court appointed Mr Stephen Hundy as liquidator of ACT Land. His investigations into the affairs of the Company provide the basis for the applicant’s claims in the present proceeding.

11    The primary affidavit relied upon by the applicant in support of its interlocutory application is one sworn by Mr Hundy on 8 April 2019. Although it is well established that an application for summary judgment does not require the Court to resolve disputed facts, the following facts, which are supported by Mr Hundy’s affidavit, are undisputed.

12    On 27 December 2017, Mr Kashan withdrew funds from ACT Land’s bank account in the form of a bank cheque in favour of Kashan Constructions. The bank cheque was in the amount of $200,000 and there was a bank fee of $15.00.

13    Between 31 October 2016 and 14 October 2017, while she was the bookkeeper for ACT Land, Mrs Kashan issued three invoices by Kashan Property Solutions to ACT Land and received funds for “Advance Commission” and “Commission”, totalling $158,200, in relation to blocks of land which were part of either the Batemans Bay development or another development being carried out by ACT Land in Beard in the ACT.

14    According to the statement of claim, on 29 September 2017 and 26 December 2017 ACT Land paid rent in the total amount of $25,207.65 in respect of what was said to be rent relating to premises at 2/57 Townsville Street, Fyshwick ACT. That property had been sublet by Mr Kashan since 3 April 2012 and it is the principal place of business of both Kashan Constructions and C21.

15    In their defence filed on 28 February 2020, the respondents admitted the payments by ACT Land of the three amounts (i.e. $200,015 to Kashan Constructions, $158,200 to C21 and $25,207.65 to Mr Kashan), however, the applicant’s claims as to relief were all contested.

16    It will be necessary to return to other parts of Mr Hundy’s affidavit below.

Some preliminary issues regarding the parties’ legal representation

17    Issues arose concerning the legal representation of both the applicant and the second and third respondents.

18    As noted, the applicant was represented by Mr Pierre Johannessen. At the hearing of the interlocutory application, Mr Johannessen announced his appearance for the applicant. He had also signed the two sets of written outlines of submissions which were filed on behalf of the applicant. More significantly, however, Mr Johannessen swore two affidavits in support of the interlocutory application. The first is dated 9 December 2019 and deposed to the sending of letters of demand and various failures by one or more of the respondents to comply with the Court’s case management orders. That affidavit contained a paragraph in the following terms:

The Applicant submits that in the circumstances the said Respondents have shown no willingness to defend the claims against them and have no reasonable prospect of successfully defending the claims against them in these proceedings.

19    That paragraph, which in terms is a submission, is plainly inadmissible, even in an interlocutory application.

20    Potentially of more concern were parts of Mr Johannessen’s second affidavit, dated 15 May 2020. In it Mr Johannessen deposed that, having reviewed the respondents’ affidavit in response dated 29 April 2020, he was “unable to identify any evidence substantiating the Respondents’ claims and defences in the Response”. Presumably, this proposed evidence was put forward as opinion evidence in support of the interlocutory application.

21    After Mr Johannessen indicated at the hearing that he proposed to read his two affidavits, as well as Mr Hundy’s affidavit, in support of the interlocutory application, the Court raised with him the ethical problem which that would create. This was because he was proposing to act as both advocate and witness on material issues in the proceedings. This is contrary to rule 27 of the Legal Profession (Solicitors) Conduct Rules 2015 (ACT) and a well-established line of authority to similar effect, which is reflected in cases such as R v Secretary of State for India in Council; Ex parte Ezekiel [1941] 2 KB 169; Sheahan v Northern Australia Land & Agency Co Pty Ltd (1994) 176 LSJS 257 and In the Estate of Shirley Eileen Kendall [2020] ACTSC 42.

22    The Court indicated to Mr Johannessen that he needed to make an election as to whether he wanted to appear as the applicant’s advocate or as a witness in the applicant’s case. He elected to do the former. Accordingly, the applicant placed no reliance on Mr Johannessen’s two affidavits and they were not read.

23    There was also an issue regarding legal representation in respect of the second and third respondents, which are both companies. Accordingly, without the leave of the Court, they could only be represented by a legal practitioner. This issue was raised by the Court early in the proceedings. Orders were made on three separate occasions setting a date by which the second and third respondents needed to seek leave to be represented by someone other than a legal practitioner. No such application was made until 17 April 2020, when both the second and third respondents filed applications in respect of this matter. The applications were supported respectively by an affidavit affirmed by Mr Kashan on 16 April 2020 and by Mrs Kashan also on 16 April 2020. I accept their evidence that both the second and third respondents cannot afford to retain a lawyer. I also accept that Mrs Kashan is in “very fragile health” and cannot represent the third respondent.

24    The general principles concerning the question whether the Court should permit a company to be represented by someone other than a legal practitioner are summarised in Enviro Pak Pty Ltd v New Horticulture Pty Ltd [2013] FCA 306 at [16]-[18].

25    I am satisfied that this is an appropriate case to permit Mr Kashan to represent the second and third respondents even though he is not a qualified legal practitioner. He is familiar with the affairs of both those companies. As noted above, he is landlord of the premises where both companies operate and he described himself in his affidavit dated 16 April 2020 as a “real estate agent”. It appears that he worked at C21, along with his wife. I also take into account the stage of the proceedings and the fact that the defence filed on 2 July 2019 on behalf of all three respondents was drafted by a legal practitioner, who was then retained by the three respondents. It lucidly sets out the respondents’ defences to the claims made against them. Also, if leave was not granted, the second and third respondents would be unrepresented in the case in which serious allegations are made against them and in circumstances where their defence indicates that there are issues which may need to be explored at trial. Finally, it is relevant to note that Mr Kashan is the first respondent and is entitled to appear and represent himself.

26    For all these reasons, I granted leave for Mr Kashan to represent the second and third respondents.

The claims of the parties summarised

27    The applicant’s statement of claim dated 14 May 2019 may be summarised as follows. As noted, the applicant alleges that Mr Kashan is a de-facto or shadow director of ACT Land. This allegation then provides the foundation for the applicant’s various claims as follows alleging unreasonable director-related transactions:

(a)    the payment by bank cheque authorised by Mr Kashan in the amount of $200,015 on 27 December 2017 in respect of what is recorded in ACT Land’s MYOB records as:

FOR CONTRIBUTION WORK 2 years, managing, running company, organising finances, putting deals together, extend settlement, fighting with shareholder ($100,000 per year);

(b)    the payments totalling $158,200 to Kashan Property Solutions which are recorded as payments from ACT Land for “Advance Commission” and “Commission” in respect of sales at both Batemans Bay and Beard; and

(c)    payments totalling $25,207.65 to Kashan Constructions and Kashan Property Solutions which are identified in ACT Land’s MYOB records as “rent”.

28    The applicant also alleges in its statement of claim that Mr Kashan owed ACT Land a duty of care as a de-facto or shadow director and that he breached that duty in circumstances where the transactions described above totalled $383,422.65 and the winding up application was based on a debt of $223,500. The applicant contends that, because of Mr Kashan’s breach of his duty of care, ACT Land was unable to pay this debt and was accordingly wound up.

29    In addition, the applicant contends that Kashan Property Solutions has failed to account to ACT Land for the deposits which ACT Land claims were received by Kashan Property Solutions as stakeholder under the Contracts for Sale and Purchase of Land for Lot 603 and Lot 245 respectively, in the total amount of $48,500. The applicant contends that, under cl 19.2.1 of these contracts, the deposit and any other money paid by the purchaser under the contracts must be refunded in circumstances where the contracts were rescinded on 20 August 2018 pursuant to cl 19.

30    Finally, the applicant contends that Mr Kashan (as a de-facto or shadow director) failed to discharge his duties as a director in contravention of ss 180(1), 180(2), 181 and 182 of the Corporations Act.

31    By their defence filed on 2 July 2019, the respondents admit to some factual aspects of the transactions which provide the foundation for the applicant’s various causes of action. But each of those causes of action is defended for the following primary reasons. First, the respondents do not admit that ACT Land owed the alleged debt of $223,500 which provided the foundation for the winding up application.

32    Secondly, as to the payment to Mr Kashan of $200,000, they say that the payment was made with the consent of ACT Land’s sole director, Spiros Brenda.

33    Thirdly, and in respect of the allegation of an unreasonable director-related transaction concerning that payment of $200,000, they deny that Mr Kashan was a de-facto or shadow director and, while admitting that Kashan Constructions benefitted from receipt of the payment, they deny that the payment was to the detriment of ACT Land. They say that the benefits to ACT Land of making the payment included not only discharging a liability owing to Kashan Constructions, but the payment also secured the full-time commitment and resources of each of the respondents to the successful outcome of ACT Land’s development projects. They also contend that the amount of the payment was no less than that which a reasonable person in ACT Land’s circumstances would have paid for past and future services.

34    Fourthly, as to the payments received by Kashan Property Solutions for advance commissions and commissions, the respondents admit that the payments were made but say that Kashan Property Solutions was entitled to receive those payments because of an oral agreement between Mr Brendas and Mr Kashan as representative of Kashan Property Solutions. They contend that this agreement was to the effect that Kashan Property Solutions was entitled to submit invoices for advance payment of part of the total sales commission, in order to defray the sale agent’s marketing, advertising, signage, overhead and other expenses, rather than having to bear or carry those expenses for several years. Further, Mr Kashan avers that, because of the oral agreement he reached with Mr Brendas concerning the payment of such amounts, as well as the reliance placed by Kashan Property Solutions, it would be unconscionable for ACT Land to seek to resile from that oral agreement. It is also contended that ACT Land is estopped from denying Kashan Property Solutions’ entitlement to receive those payments.

35    Fifthly, the respondents say that the oral agreement reached with Mr Brendas extended to a right by Kashan Property Solutions to receive advance commissions with respect to the Beard development. They contend that even though ACT Land was not the registered proprietor of the Beard property, it had the right to market that property pursuant to the terms of a Contract for Sale dated 30 August 2016 between CIC Developments Pty Ltd and ACT Land, as subsequently varied.

36    Further, in response to the applicant’s claim that the payment of advance commission and commission was an unreasonable director-related transaction, the respondents deny that claim and say that ACT Land benefitted because the payments not only discharged a liability owing to Kashan Property Solutions, but the payments also secured the continued full-time commitment and resources of each of the respondents to ACT Land’s development projects. In addition, they say that the amounts were no less than those which a reasonable person in ACT Land’s circumstances would have paid to Kashan Property Solutions for the past services rendered by it, as well as securing the future commitment of each of the respondents.

37    Sixthly, in response to the applicant’s claims relating to the payment of rent, the respondents say that rent payments were made with the prior express authority of Mr Brendas and were for the purpose of ACT Land having exclusive use and benefit of a designated office.

38    Seventhly, as to the applicant’s claims concerning the deposits paid in respect of Lots 245 and 603, the respondents deny that Kashan Property Solutions ever received those amounts.

39    Eighthly, the respondents deny the applicant’s claims regarding the alleged breach of Mr Kashan’s duty of care (assuming that he was a de-facto or shadow director, which is also denied), as well as the claims concerning contraventions of ss 180(1), 180(2), 181 and 182 of the Corporations Act.

The parties’ evidence summarised

40    As noted, the applicant primarily relied upon Mr Hundy’s affidavit dated 8 April 2019, to which were annexed multiple documents relating to ACT Land’s affairs as revealed by Mr Hundy’s investigation. It is notable that, while Mr Hundy deposed that, based on such materials, he came to the view that the relevant payments were unreasonable director-related transactions within the meaning of s 588FDA of the Corporations Act, he did not descend into any detail in respect of important aspects of that provision. In particular, the applicant adduced no evidence which is directed to the important issue raised by the respondents’ defence as to whether a reasonable person in ACT Land’s circumstances would not have entered into the relevant transactions having regard to the benefits and/or detriments of those transactions to ACT Land and the respective benefits to other parties arising from those transactions. The applicant was content to rely upon Mr Hundy’s evidence on these matters and the Court was urged to give determinative weight to Mr Hundy’s opinion, as liquidator, that the relevant transactions were unreasonable director-related transactions. As the Court pointed out in argument, the difficulty with this submission is that the respondents strongly contest the liquidator’s view and, in those circumstances, it is difficult to see why the issues should not proceed to a full trial.

41    Nor did the applicant provide any direct evidence to support its claim that the deposits in respect of Lots 245 and 603 were in fact paid to Kashan Property Solutions. It might also be noted that the copies of the two Contracts of Sale adduced by the applicant in respect of those parcels were incomplete.

42    Despite the Court’s orders which required the respondents to provide any evidence in the substantive proceeding by various dates, no such evidence was filed. However, the respondents did file some evidence in response to the interlocutory application for summary judgment, as required by the Court’s orders dated 25 February 2020 and 3 April 2020. The evidence was in a somewhat unusual form. That is because, on 28 February 2020, the respondents (who by then were not legally represented) filed a document titled “Defence of First, Second and Third Defendant”, which took the form of submissions and to which was attached over 100 pages of documents, primarily in the form of business records, relating to the relevant transactions.

43    A second tranche of documentary material was then filed by the respondents in the form of a document titled “Affidavit” filed on 1 May 2020. Once again, the body of that document was essentially in the form of submissions. There were approximately 20 pages of documents annexed to it.

Relevant legal principles summarised

44    It is convenient to now outline some relevant legal principles relating to summary judgment and the various provisions of the Corporations Act which are relied upon by the applicant.

(a) Summary judgment

45    The relevant principles concerning an application for interlocutory relief for summary judgment under rule 26.01 of the 2011 FCRs (or s 31A(2) of the Federal Court of Australia Act 1976 (Cth)) are well settled. They were helpfully summarised by McKerracher J in Buurabalayja Thalanyji Aboriginal Corporation v Onslow Salt Pty Ltd (No 2) [2018] FCA 978 at [3] (albeit by reference to summary judgment for a respondent party):

Without reference to all the well-known authorities, the parties agree that it is well established that the Court may give judgment for a defending party in relation to the whole or any part of a proceeding where the Court is satisfied that the prosecuting party has no reasonable prospects of successfully prosecuting the proceeding or a part of the proceeding. Further:

•    the claim need not be hopeless or bound to fail for it to have no reasonable prospects of success: s 31A of the Federal Court Act;

•    a reasonable prospect of success is one which is real, not fanciful or merely arguable: Rogers v Assets Loan Co Pty Ltd (2008) 250 ALR 82 per Logan J (at [41]);

•    there will be no prospect of success in circumstances where there is a defect in the pleadings which cannot be cured: Ship “Sam Hawk” v Reiter Petroleum Ltd (2016) 246 FCR 337 per Kenny and Besanko JJ (at [269]);

•    s 31A is amenable to resolving straightforward questions of law: Luck v University of Southern Queensland [2008] FCA 1582 per Logan J (at [16]). However, summary judgment may still be appropriate if a question raised is of some complexity: SK Foods LP v SK Foods Australia (in liq) (No 3) (2013) 214 FCR 543 per Flick J (at [115]);

•    if a prima facie case in support of summary judgment is established, the onus shifts to the opposing party to point to some factual or evidentiary issues making a trial necessary: Jefferson Ford Pty Ltd v Ford Motor Company of Australia Ltd (2008) 167 FCR 372 per Gordon J (at [127]);

•    it is clear that the legislature’s intention in enacting s 31A was to lower the bar for obtaining summary judgment, including summary dismissal, below that fixed by previous authorities: Spencer v Commonwealth of Australia (2010) 241 CLR 118 per Hayne, Crennan, Kiefel and Bell JJ; Jefferson Ford per Gordon J (at [127]);

•    s 31A permits dismissal of a proceeding where an inquiry into the merits of the issues of law demonstrates the arguments are insufficiently strong to warrant the matter going to trial: McAleer v University of Western Australia (No 3) (2008) 171 FCR 499 per Siopis J (at [39] and the cases therein cited);

•    summary dismissal will not apply to ‘a real question of law that is serious, important or difficult, involves conflicting authority, or is apparently arguable yet novel’: Nichol v Discovery Africa Ltd (2016) 343 ALR 594 per Greenwood, McKerracher and Moshinsky JJ (at [134]);

•    the moving party bears the onus of persuading the Court the application has no reasonable prospects of success. The assessment of whether a proceeding has no reasonable prospects of success necessitates the making of a value judgement in the absence of a full and complete factual matrix and argument, with a result that the provision vests a discretion in the Court. That discretion includes whether to deal with the motion at once or at some later stage in the proceedings, when the legal and factual issues have been more clearly defined: Kimber v The Owners of Strata Plan No 48216 [2017] FCAFC 226 per Logan, Kerr and Farrell JJ (at [62]) quoting with approval Eliezer v University of Sydney (2015) 239 FCR 381 per Perry J (at [37]);

•    despite the threshold for summary dismissal having been lowered, it must still be exercised with caution. The power is not to be exercised lightly: Spencer v Commonwealth per Hayne, Crennan, Kiefel and Bell JJ (at [60]);

•    the Court does not, in such an application, conduct a ‘mini trial based upon incomplete evidence to decide whether the proceedings are likely to succeed or fail at trial’. Rather, it ‘requires a critical examination of the available materials to determine whether there is a real question of law or fact that should be decided at trial’: Australian Securities and Investments Commission v Cassimatis (2013) 220 FCR 256 per Reeves J (at [46]); and

•    each application for summary judgment or summary dismissal has to be determined according to its particular circumstances. What is required is a practical judgment of the case at hand. The relevant facts and circumstances will partly depend upon the stage which the proceedings have reached. Among other things, this will affect materials available to the Court for considering the application, for example, where the pleadings have been exchanged, or discovery of documents has occurred: Cassimatis per Reeves J (at [46]).

46    Particular caution needs to be exercised in determining whether summary judgment should be given in circumstances where there are factual disputes and the evidence is not in its final form. Some relevant principles were summarised by Rares J in Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd [2006] FCA 1352; 236 ALR 720 at [43]-[45]:

… Obviously, where there is a contested application under s 31A, both parties will be present to explain their case, but not in the context of a trial. The procedure envisaged by s 31A is summary. The concept of a party having ‘no reasonable prospect of successfully prosecuting a proceeding’ has some similarity to the test at common law for determining whether a jury properly instructed could reach a verdict for the plaintiff. That test was authoritatively stated by the Judicial Committee in Hocking v Bell (1947) 75 CLR 125 at 130-1; [1948] 1 ALR 85 at 87-8 (Hocking (1947)), approving the following statement from the dissenting judgment of Latham CJ (Hocking v Bell (1945) 71 CLR 430 at 441-2 (Hocking (1945)):

If there is evidence upon which a jury could reasonably find for the plaintiff, unless that evidence is so negligible in character as to amount only to a scintilla, the judge should not direct the jury to find a verdict for the defendant, nor should the Full Court direct the entry of such a verdict. The principle upon which the section is based is that it is for the jury to decide all questions of fact, and therefore to determine which witnesses should be believed in case of a conflict of testimony. But there must be a real issue of fact to be decided, and if the evidence is all one way, so that only one conclusion can be said to be reasonable, there is no function left for the jury to perform, so that the court may properly take the matter into its own hands as being a matter of law, and direct a verdict to be entered in accordance with the only evidence which is really presented in the case. [Emphasis added]

…

I am of opinion that in assessing what reasonable prospects of success are for the purposes of s 31A, the court must be very cautious not to do a party an injustice by summarily dismissing the proceedings where, in accordance with the principles in Hocking (1947), contested evidence might reasonably be believed one way or the other so as to enable one side or the other to succeed. As soon as the evidence may have such an ambivalent character prior to a final determination, I am of opinion that then, as a matter of law, at that point there are reasonable prospects of success within the meaning of s 31A. Unless only one conclusion can be said to be reasonable, the moving party will not have discharged its onus to enliven the discretion to authorise a summary termination of the proceedings which s 31A envisages. In moving the second reading of the bill introducing s 31A (the Migration Litigation Reform Bill 2005) the Attorney-General said that it strengthened “the power of the courts to deal with unmeritorious matters by broadening the grounds on which federal courts can summarily dispose of unsustainable cases”.

47    The following two points warrant further emphasis. As Reeves J stated in Australian Securities and Investments Commission v Cassimatis [2013] FCA 641; 220 FCR 256 at [50] (after his Honour’s extensive analysis of relevant caselaw):

Finally, these authorities show that there are at least two other factors that need to be borne in mind on a summary judgment application such as this. The first is that, in all the situations outlined above, the Court has a discretion as to whether to determine the proceedings summarily, or to refer them to trial. Of course, as with any such discretion, it has to be exercised judicially: see Latoudis v Casey (1990) 170 CLR 534 at 569 per McHugh J, quoting Donald Campbell and Co Ltd v Pollak [1927] AC 732 at 811–12 per Viscount Cave LC. Secondly, while s 31A sets a lower bar, or a softened test, for the summary determination of proceedings, any such summary determination still has to be approached with caution. This is so because a trial is the usual and accepted means by which disputed questions of fact are determined in this country.

(b) Relevant provisions of Corporations Act

48    It is desirable to now set out the terms of ss 180, 181, 182 and 588FDA of the Corporations Act, upon which the applicant relies:

180    Care and diligence—civil obligation only

Care and diligence—directors and other officers

(1)    A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a)    were a director or officer of a corporation in the corporation’s circumstances; and

(b)    occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Note:    This subsection is a civil penalty provision (see section 1317E).

Business judgment rule

(2)    A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

(a)    make the judgment in good faith for a proper purpose; and

(b)    do not have a material personal interest in the subject matter of the judgment; and

(c)    inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(d)    rationally believe that the judgment is in the best interests of the corporation.

The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

Note:    This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence)—it does not operate in relation to duties under any other provision of this Act or under any other laws.

(3)    In this section:

business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.

181    Good faith—civil obligations

Good faith—directors and other officers

(1)    A director or other officer of a corporation must exercise their powers and discharge their duties:

(a)    in good faith in the best interests of the corporation; and

(b)    for a proper purpose.

Note 1:    This subsection is a civil penalty provision (see section 1317E).

Note 2:    Section 187 deals with the situation of directors of wholly-owned subsidiaries.

(2)    A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1:    Section 79 defines involved.

Note 2:    This subsection is a civil penalty provision (see section 1317E).

182    Use of position—civil obligations

Use of position—directors, other officers and employees

(1)    A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a)    gain an advantage for themselves or someone else; or

(b)    cause detriment to the corporation.

Note:    This subsection is a civil penalty provision (see section 1317E).

(2)    A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1:    Section 79 defines involved.

Note 2:    This subsection is a civil penalty provision (see section 1317E).

…

588FDA Unreasonable director related transactions

(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.

The obligation referred to in subparagraph (a)(iv) may be a contingent obligation.

Note:    Subparagraph (a)(iv)—This would include, for example, granting options over shares in the company.

(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.

49    Sub-section 588FE(6A) provides that a transaction is voidable if it is an unreasonable director related transaction of the company and it was entered into, or an act was done for the purposes of giving effect to it, during the four years ending on the “relation-back day” or, after that day, on or before the day when the winding up began.

50    The term “director” is defined in s 9 of the Corporations Act to include (unless the contrary intention appears) a person who is not validly appointed as a director but who acts in the position of a director or where the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes. It may also be noted that “close associate” is relevantly defined in s 9 as including the relative of a director. “Relative” is defined in s 9 to include a spouse. Thus, Mrs Kashan is a close associate of her husband if he is a de-facto or shadow director of ACT Land.

51    Finally, because it has been noted in several cases that s 588FDA(1)(c) substantially adopts the language used to identify an “uncommercial transaction” under s 588FB, it is desirable to set out the terms of that provision:

588FB    Uncommercial transactions

(1)    A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

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

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

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

(d)    any other relevant matter.

(2)    A transaction may be an uncommercial transaction of a company 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.

(c) Relevant principles concerning unreasonable director related transactions

52    The relevant principles may be summarised as follows (relying upon authorities such as Weaver v Harburn [2014] WASCA 227; 103 ACSR 416 per McLure P, Buss and Murphy JJA agreeing; Vasudevan v Becan Constructions (Australia) Pty Ltd [2014] VSCA 14; 41 VR 445 per Nettle JA, Beach JA and McMillan AJA agreeing; Smith v Starke, in the matter of Action Paintball Games Pty Ltd (in liq) (No 2) [2015] FCA 1119; 109 ACSR 145 per Gleeson J; Crowe-Maxwell v Frost [2016] NSWCA 46; 91 NSWLR 414 per Beazley P, Macfarlan and Gleeson JJA agreeing and D Pty Ltd (in liq) v Calas (Trustee), in the matter of D Pty Ltd (in liq) [2016] FCA 1409 per Moshinsky J):

    impropriety or breach of director’s duty is not necessary to establish an unreasonable director-related transaction;

    the inquiry under s 588FDA(1)(c) is concerned with the reasonableness of the company’s conduct, which is to be objectively assessed;

    the inquiry is conducted by reference to the company’s circumstances, including all relevant matters, such as its status as a company and what flows from that, its controllers, shareholders, business and other activities as well as the facts and circumstances relating to the relevant transaction;

    the natural and ordinary meaning of “for the benefit of” correlates with the objective of the provision, which is to prevent directors stripping benefits out of companies to their own advantage;

    normal commercial practice is a relevant, but not determinative, matter;

    a transaction of derivative benefit only can still be for the benefit of the company;

    given the similarities in the statutory terms of ss 588FDA(1)(c) and 588FB, caselaw concerning “uncommercial transactions” is relevant in identifying circumstances that may constitute “unreasonable director-related transactions”; and

    where there is limited evidence of the nature or purpose of a transaction, but the surrounding circumstances indicate it to depart from normal commercial practice and to raise inferences as to the lack of benefit to the company, detriment caused to the company or benefit which accrued to other parties may, absent some commercial explanation, give rise to an inference that the transaction was uncommercial.

Consideration and determination

53    Having regard to all the matters set out above, I am not satisfied that summary judgment should be given in the applicant’s favour. First, as the moving party, the applicant bears the onus of persuading the Court that the respondents have no reasonable prospects of success. As I have emphasised, this requires the Court to make a value judgment in the absence of a full and complete factual matrix, which effectively vests a discretion in the Court (which, of course, needs to be exercised judicially). In my view, the applicant has not established that, having regard to the pleadings and the evidence currently before the Court (which is likely to be expanded for the purposes of a final hearing and possibly affected by discovery or other compulsory processes), the respondents have no reasonable prospects of successfully defending the substantive proceeding.

54    Secondly, I consider that the respondents’ defence raises many issues of both law and fact which require further analysis and cannot be characterised at this stage of the proceeding as being unreal or fanciful. They include:

(a)    the claims that Mr Brendas authorised many of the payments which are the subject of relevant transactions;

(b)    the claims that those payments were not to the detriment of ACT Land;

(c)    the claimed benefits to ACT Land of making the payments;

(d)    the respondents’ claims regarding unconscionability and estoppel;

(e)    the respondents’ claims relating to the Beard property;

(f)    the issue of what a reasonable person in ACT Land’s circumstances would have done for the purposes of the respondents’ reliance upon s 588FDA(1)(c) of the Corporations Act; and

(g)    the respondents’ denial that the deposits regarding Lots 245 and 603 were ever received by Kashan Property Solutions. Indeed, Mr Johannessen accepted during the course of argument that the applicant could not point to any existing evidence which demonstrated that the deposits were paid to Kashan Property Solutions, other than a reference to the amount of the deposits on the front page of the incomplete Contracts of Sale.

55    Thirdly, as the evidence stands at present, it is plain that there are several disputed and potentially significant facts and it is inappropriate at this stage of the proceeding to seek to resolve those disputes. Examples include:

(a)    whether Mr Brendas authorised the relevant payments;

(b)    whether ACT Land had the right to market the Beard property and authorised Kashan Property Solutions to undertake such marketing;

(c)    the extent to which ACT Land suffered detriment or obtained benefits as a result of the relevant transactions; and

(d)    whether Kashan Property Solutions ever received the deposits in respect of Lots 245 and 603 (noting what is said in [54(g)] above).

56    Fourthly, as already emphasised, there are some gaps in the evidence adduced by the applicant in support of its interlocutory application. They include the fact that complete copies of the relevant Contracts of Sale in relation to Lots 245 and 603 were not provided in evidence. Perhaps more importantly, there is presently a lacuna in the applicant’s evidence in response to the respondents’ claims as to why the relevant transactions are not unreasonable director-related transactions. It may well be that the applicant can fill this gap with further substantive evidence for the purposes of any final hearing but that remains uncertain at this stage. The critical point is that, as matters stand at present, the issue is contested and should be determined with the benefit of full argument and relevant evidence produced for a final hearing.

57    Fifthly, while I accept that there are some shortcomings with the respondents’ evidence to date (as there also is with the applicant’s evidence), I do not consider that the respondents’ evidence is so deficient or unpersuasive that the matters in contention should not proceed to trial. As Foster J noted in Wang v Anying Group Pty Ltd [2009] FCA 1500 at [43], a respondent party is not obliged to present its whole case in order to defeat a summary judgment application, but it “must at least present a sufficient outline of the evidence in order to enable the Court to come to a preliminary view about the merits”. I am satisfied that the respondents’ evidence, when viewed in the light of the formal defence which they have filed, is adequate to demonstrate that the Court cannot be satisfied at this time that they have no reasonable prospect of successfully defending the proceeding.

58    Finally, I consider that the application of the relevant statutory provisions relied upon by the applicant raises some complex legal issues which ought not to be determined summarily but should proceed to trial.

Conclusion

59    For all these reasons, the interlocutory application will be dismissed, with costs. The substantive proceeding should now be allocated to a docket judge who will be responsible for future case management.

Associate:

Dated:    3 August 2020