Federal Court of Australia

5G Developments Pty Ltd (in liq) v Massie, in the matter of 5G Developments Pty Ltd (in liq) [2021] FCA 791

ORDERS

THE COURT ORDERS THAT:

1.    The interlocutory process filed on 24 February 2020 be dismissed.

2.    The parties file and serve written submissions of no more than three pages as follows:

(a)    in support of any costs order they contend for, within 7 days of these orders; and

(b)    in answer to any such submissions of any other party, within 7 days thereafter.

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

REASONS FOR JUDGMENT

STEWART J:

Introduction

1    This interlocutory application was filed as part of a larger dispute between 5G Developments Pty Ltd (in liquidation) (formerly known as Denham Wyndham Pty Ltd (DW)), the liquidator of 5G Developments (Alan Hayes), Hugh Massie and companies associated with Mr Massie. In the main proceeding, 5G Developments and Mr Hayes seek, among other things and against a number of defendants, orders in relation to: (a) a number of uncommercial transactions, insolvent transactions and voidable transactions within the meaning of those phrases as set out in the Corporations Act 2001 (Cth); and (b) breaches of director’s duties against Mr Massie, who is the first defendant in the main proceeding.

2    The genesis of the interlocutory application is orders that I made on 20 September 2019, for the reasons given in Re Hayes (Liquidator) v 5G Developments Pty Ltd [2019] FCA 1541, appointing Glenn Livingstone of KPMG as special purpose liquidator of 5G Developments pursuant to s 90-15 of Sch 2 of the Corporations Act (the Insolvency Practice Schedule). Mr Livingstone was appointed for the following limited purposes: (1) to receive service of a proof of debt by Denham Constructions Pty Ltd (in liquidation) (DC), and (2) to assess, to take any and all steps necessary to determine, and to determine whether 5G Developments ought to admit the proof of debt or to reject it. That arose because Mr Hayes was liquidator of DC and 5G Developments so he was not in a position to assess any proof of debt by DC in 5G Developments. I was satisfied that there was sufficient basis to the claim to justify the appointment of a special purpose liquidator but I expressly made no further findings on it.

3    On 8 October 2019, Mr Hayes as liquidator of DC submitted a proof of debt to Mr Livingstone as special purpose liquidator of 5G Developments for $25,877,154.06, which comprised various loans and interest, the details of which I deal with below.

4    On 17 December 2019, Mr Livingstone delivered his special purpose liquidator report adjudicating on DC’s proof of debt. In summary, Mr Livingstone partially admitted the claim in the amount of $12,256,028.74. Mr Livingstone rejected the balance of the claim, which was an interest amount only, because he took a different view on the interest amount being provable in the liquidation of 5G Developments. Mr Livingstone accordingly issued a ‘Notice of Rejection of Formal Proof of Debt or Claim’ which was also dated 17 December 2019.

5    By interlocutory process filed on 24 February 2020, the applicants, being Mr Massie, 5G Capital Investments Pty Ltd (5GCI), 5G Capital SPV27 Pty Ltd and SPV28 Pty Ltd, apply, in summary, for the following orders:

(1)    pursuant to r 14.1(2)(b) of the Federal Court (Corporations) Rules 2000 (Cth) that they have leave to appeal the determination by Mr Livingstone in the Notice;

(2)    pursuant to s 90-15 of the Insolvency Practice Schedule that the Notice be set aside;

(3)    pursuant to s 90-15 of the Insolvency Practice Schedule that the Formal Proof of Debt or Claim dated 8 October 2019 lodged by “DC in DW” be rejected; and

(4)    costs.

6    The respondents to the interlocutory process are Mr Livingstone, Mr Hayes and 5G Developments. Mr Livingstone is cited, obviously enough, because he was the special purpose liquidator of 5G Developments and it is his Notice to partially admit the proof of debt of DC that the applicants contend should be set aside. It is not made clear whether Mr Hayes is cited because he is liquidator of DC or because he is liquidator of 5G Developments, or both.

7    In the main proceeding, 5G Developments and Mr Hayes, in his capacity as liquidator of 5G Developments, are the first and second plaintiff respectively. Mr Massie is the first defendant, 5GCI is the second defendant, Pepperfield Holdings Pty Ltd is the third defendant, SPV27 is the fourth defendant, SPV28 is the fifth defendant and 5G Capital Management Pty Ltd is the sixth defendant. There are also cross-claims.

8    The applicants filed points of claim and Mr Hayes as liquidator of DC filed points of defence on the application. I address these documents further below.

9    These reasons concern the relief sought in the interlocutory application.

Summary of dispute

10    During the events that are material to the dispute 5G Developments was still named Denham Wyndham Pty Ltd. For that reason, and because the case was conducted in that way, in what follows I shall refer to that company as DW.

11    The central figure and main protagonist in the events that follow is Steven McGrath. Mr McGrath was the director of DC from 2 March 1999 to 24 April 2018. He was director of DW from 26 May 2005 to 26 April 2017. Mr McGrath said that from its incorporation in March 1999, DC operated a construction and property development business. In November 2004, Mr McGrath became the sole director and shareholder of DC.

12    Mr Massie did not become involved until approximately March 2015 when DW and associated companies were in financial difficulty. Mr Massie and his group of companies, the 5G Group, became involved to assist and take an interest in the principal development. As I explained in my previous judgment (at [41]-[44]), the events relevant to the claim that Mr Hayes says that DC has against DW occurred during the period when Mr McGrath was the central person in control of the relevant companies. The period after Mr Massie became involved is relevant to the claims that Mr Hayes says that DW (now 5G Developments in liquidation) has against Mr Massie and some of the companies associated with him.

13    As noted, Mr McGrath was in the business of property development and to that end he was also the director of, or associated with, a number of other companies in the Denham Group that undertook that property development.

14    It is the development of three properties that are the focus of this application and which are described in more detail below: the Pepperfield Bowral Land, Range Road, and Old South Road. DC is relevant to these properties because it was the entity that undertook the development on each of them. DW owned the Pepperfield Bowral Land and Mr McGrath owned Range Road. Some difficulty arises in digesting the factual events relevant to each property because the matters relating to each property are not siloed and a number of issues overlap; there is no linear narrative. The properties nonetheless serve as a convenient structure with reference to which the other matters can be developed.

15    The development of a retirement village on the Pepperfield Bowral Land was the main cause of financial distress for DW which, I understand, ultimately led it into insolvency and winding up. The first principal dispute in relation to this property is the way Mr McGrath structured the debts on the development to keep it going. That was by having Macquarie Bank Ltd (MBL) finance the development and bringing in DC as a guarantor pursuant to a development finance agreement. The agreement was varied a number of times by way of deeds of variation. A number of payments were made by DC to MBL pursuant to the third of those variations. Mr Massie says those payments were not made by DC as guarantor but as a principal debtor under the third deed of variation. Mr Massie submits that those payments therefore did not give rise to a debt owed to DC by DW as found by Mr Livingstone. A number of the payments made by DC to MBL are in dispute.

16    The second dispute in relation to this property concerns an adjustment made in October 2012 in DW’s financial statements for the financial year ending 30 June 2012 that moved a multi-million dollar debt that had been recorded as a loan owed by DW to DC for the development of the Pepperfield Bowral Land. The adjustment substituted Mr McGrath for DC as DW’s creditor on the liability. A corresponding adjustment was made in August 2012 in the 2012 financial year financial statements of DC. The legitimacy of the adjustment is in dispute.

17    The Range Road property is relevant for three key reasons. First, Mr McGrath alleges that the payment of the proceeds of the sale of Range Road to DC discharged DW’s multi-million dollar debt to DC and substituted him as DW’s creditor. This, as said, is in dispute.

18    Secondly, Mr McGrath says that there was a joint venture between him and DC for the development of Range Road. This is disputed. Mr Hayes says that DC paid all the money to develop the property but Mr McGrath benefitted from the funds generated from the sale. Mr Hayes contends that no such joint venture existed and Mr McGrath owed DC for the costs of the development of the property. My Hayes contends that the payment of the proceeds of the sale of Range Road was more likely a partial discharging of that debt than the discharging of DW’s debt to DC.

19    The existence of a joint venture would benefit Mr McGrath because, as I understand the contention, at least the genuine construction and development costs incurred by DC on the development would have been proper liabilities of DC for its own account rather than for Mr McGrath. That is to counter the suggestion that they were expenses paid for by DC on a property owned by Mr McGrath and thus giving rise to a corresponding liability of Mr McGrath to DC.

20    Thirdly, and relatedly, a number of personal expenses of Mr McGrath, i.e., unrelated to the development of Range Road, were apparently paid by DC and recorded in DC’s books as costs on the development project. It was submitted by Mr Hayes that this was indicative of how Mr McGrath was treating the development of Range Road as a loan account by him in the books of DC.

21    The Old South Road property is relevant for two similar reasons. First, Mr McGrath again alleges there was a joint venture between himself and DC to develop the property. This is disputed by Mr Hayes because, again, DC paid all the money to develop the property and Mr McGrath received all the funds generated from the sale. Secondly, Mr McGrath was costing a number of personal expenses to the development of Old South Road. It was submitted that this was indicative of how Mr McGrath was also treating the development of Old South Road as a loan account by him in the books of DC.

22    Mr Massie’s interest in bringing the application to set aside the admission of the proof of debt is apparently to achieve a situation where DW is not indebted to DC so that Mr Hayes as liquidator of DW discontinues his proceeding against Mr Massie and companies associated with him.

The witnesses

23    The applicants rely on affidavits of Mr Massie, Grant Arnold, Mr McGrath and Elizabeth Vangent.

24    The respondents rely on affidavits of Mr Hayes and Mr Livingstone.

25    A substantial volume of documents were also tendered, much of which is duplicated and a substantial proportion of which is irrelevant. The documents were also not arranged in any sensible order. All of that has bedevilled the preparation of these reasons.

26    Ms Vangent, Mr Massie, Mr McGrath, Mr Livingstone and Mr Hayes were cross-examined.

27    Mr McGrath, as the central person involved in the relevant events and who gave instructions to Ms Vangent, the bookkeeper, and Mr Arnold, the accountant for the Denham Group, was the most important witness. He was in the best position to assist the Court with what actually occurred. Messrs Massie, Livingstone and Hayes were not involved in those events and could give only limited assistance. Having carefully watched and listened to Mr McGrath give evidence and made notes of my observations, I have concluded that his evidence was most unsatisfactory and cannot be relied on unless it is corroborated by other evidence or is otherwise uncontentious.

28    In particular, Mr McGrath was often evasive in his answers, he was perceptively nervous and uncertain, he sought to anticipate problems in his account before the cross-examiner got to them by answering questions that had not yet been asked, and even then gave vague and unhelpful answers, and he regularly resorted to saying “I do not recall” when under pressure on matters that he would be expected to remember.

29    In certain instances Mr McGrath was plainly dishonest. For example, he gave evidence in cross-examination that a server was stolen on 24 July 2016 – because it suited his narrative to not have had access to the server after that date – whereas his affidavit and the NSW Police COPS report record him to have reported the server stolen on 24 August 2016. Also, on 8 September 2016, only a few weeks later, Mr McGrath in an email to Gavin Moss, the receiver of DC, told the story of how he had come to discover that the server was stolen on 24 August 2016. He relied on the date of 24 July 2016 in the witness box on the basis of what he said was an entry in his diary, yet he never produced the diary. I am satisfied that his evidence that the server was removed on 24 July 2016 is false and was invented to suit his narrative.

30    As another example, he sought to characterise certain expenses in a ledger in the books of DC as possibly being genuine business expenses of DC when they were clearly payments of his personal expenses such as his children’s school fees. He accepted that other expenses in the ledger were personal expenses, such as a range of payments in relation to the upkeep and husbandry of horses used by his children in competition and the costs of a private trip by him and his wife to the USA in October 2013. However, the fact of him having instructed Ms Vangent to record those expenses as business expenses of the company is dishonest and reflects the approach that he was prepared to take to the accounting entries of the companies under his control. It is also against his credit that he sought to blame Ms Vangent for the entries.

31    As a further example, when it was suggested to Mr McGrath that he had deleted files off the server that was subsequently reported stolen, he said that he would not know how to do that, yet he gave evidence of having set up a Google email with a “@denhamcon.com” domain and having regularly copied files from the server to his laptop by emailing them from his DC email address to his Google email address so that he could work “remotely”. He also gave evidence that after the server stopped working he went to the company premises to physically restart it, which is when he said that he found that it had been “stolen”. If he could set up a Google email address with a customised domain, access files on the server and email them from one email account to another in order to work remotely, and physically restart a server, there is no doubt that he could delete a file on a server, which is one of the most basic things that one can do on a computer.

The events

The Pepperfield Bowral Land

32    On 26 May 2005, DW was incorporated in order for it to buy and hold the Pepperfield Bowral Land for the business of the Denham Group of companies. Mr McGrath was the sole director and shareholder of DW at the time of incorporation. The Denham Group of companies comprised companies associated with Mr McGrath. In his affidavit, he lists 13 companies as being part of the Denham Group.

33    In July 2005, DW purchased Lots 100 and 101 Kangaloon Rd, Bowral (the Pepperfield Bowral Land) in respect of which development approval had been given for the construction of a retirement living complex.

34    On 7 July 2005, the Wyndham Estate Discretionary Trust (WEDT) was settled whereby DW held property on trust for the benefit of eligible beneficiaries, which included Mr McGrath, his family and (in effect) companies associated with him and MBL (for reasons that will be clear shortly).

35    It appears that at all relevant times DW was carrying on its business as trustee of the WEDT. DW held the Pepperfield Bowral Land and the business opportunity to develop the retirement complex on trust under the WEDT.

36    On 29 July 2005, DW “in its own right and as trustee of the WEDT” entered into an “Investment Facility and Guarantee Agreement” with MBL for the provision of finance for the construction and development on the Pepperfield Bowral Land (MBL Facility), comprising what is now known as the Pepperfield Bowral Lifestyle Resort. DC was a guarantor under this agreement, along with two other Denham Group companies and Mr McGrath. Mr McGrath said that MBL was a long-time funder of the Denham Group.

37    On 30 July 2005, relevantly the day after the MBL Facility was entered into, DC provided a loan facility to DW in a one-page document on a DC letterhead signed by Mr McGrath. It stated that DC provides to DW “a commercial loan for the purpose of developing the property as detailed in the project feasibility provided, and on the basis that [DC] secures the building contract for development.” It also says that “[DC] is to be paid a capitalised interest rate of 7.2% on the invested funds upon completion of the development, and the return of the development profit to [DW].”

38    According to the DW general ledger, DC had commenced to make loans to DW prior to entering the loan agreement, namely from 31 May 2005, including an entry for “MBL Property Operating Account”. The corresponding DC general ledger also records these loans.

39    On 24 May 2006, the MBL Facility was varied for the first time where, among other matters, the facility limit was increased and the development appears to have crystallised into “84 seniors living/self-care units and a 4 bed respite centre with community facilities” to be built in two stages. The guarantors remained the same.

40    On an unspecified date in 2007, the MBL Facility was varied for a second time where, among other matters, the facility limit was amended and the development was recorded as now being for “87 seniors’ living/self-care units with community facilities.” One of the Denham company guarantors was not a party to the variation, but the other guarantors remained.

41    In his affidavit, Mr McGrath said that in around 2010 the sale of the “villas” in the development had slowed due to the GFC and it became difficult for him to arrange for DW to meet interest payments under the MBL Facility. Mr McGrath met with representatives of MBL in order to address these financial difficulties.

42    The result was that on 6 May 2010, the MBL Facility was varied a third time by the “Third Deed of Variation of Development Finance Agreement”. The Third Deed of Variation structured the debt as follows:

(1)    Tranche 1 of $6.7 million (Tranche 1 Debt); and

(2)    Tranche 2 of $25.263 million (Tranche 2 Debt).

43    Under the Third Deed of Variation, DC is defined as a “Guarantor”. Mr McGrath and the other Denham company remained guarantors, and another Denham company was added as a guarantor. By cl 4.1(a) of the Third Deed of Variation, DC agreed to make monthly payments of $100,000 to MBL in reduction of the Tranche 1 Debt. Clause 4.3 states in effect that MBL agreed that if DC meets its obligations under cl 4.1(a), MBL will release all the guarantors from any further obligations in respect of the “Facility”, which I understand to mean the entire loan amount, subject to cl 5 of the Third Deed of Variation. Importantly, and for the first time, DC had an obligation to make payments to MBL independent of any default by DW.

44    Mr McGrath said that the short term plan was that the Tranche 1 Debt was to be repaid by monthly instalments of $100,000 by DC and the Tranche 2 Debt was to be repaid from DW’s proceeds on the sale of the retirement units on the Pepperfield Bowral Land and management fees generated from the on-going retirement village business.

45    Mr McGrath said that for a period of time DC was able to meet the $100,000 monthly payments as required by the Third Deed of Variation.

46    From 4 May 2010 to 29 June 2010, DC made four payments to MBL totalling $331,777.03 in accordance with the MBL Facility as varied. The transactions are described as “DW Business …” in a document headed the DC ‘Find Report’ which sets out a number of transactions made by DC. These payments were not recorded in the DC/DW loan account in the general ledgers of DW or DC.

47    As an aside, it is necessary to say something about the DC Find Report. There are two versions in evidence, each covering different but overlapping time periods. In the one, the description of the payments is given as “DW Business Loan” from which I infer that the description in the other of “DW Business …” is the same in the electronic file but the word “Loan” has been omitted in the printed copy because the column width was insufficient to accommodate it. That is to say, each of the payments in the DC Find Reports is a payment properly described as “DW Business Loan”.

48    Also, the payments are recorded as being to the “MBL Property Operating Account”. There is a separate MBL bank statement for that account which also records the payments that are recorded in the DC Find Reports. The statement shows that the account is an account in the name of DW for “Tranche 1”. It commenced with an advance by MBL of $6.7 million which is the amount of Tranche 1 Debt under the Third Deed of Variation. That is to say, the DC Find Reports payments are payments by DC to an MBL loan account in the name of DW for the Tranche 1 Debt recorded in the Third Deed of Variation.

49    By 27 August 2010, the DC/DW loan account in the corresponding general ledgers of both companies recorded a debt owed by DW to DC totalling $7,219,251.71.

50    In the financial year ending 30 June 2011, DC made 11 payments of $100,000 to MBL totalling $1.1 million. This amount was recorded in each of DW and DC’s general ledgers by journal entry on 30 June 2011 as $1.1 million paid on loan account and owed by DW to DC. All of these payments were given the description of “DW Business Loan” in the DC Find Report.

51    Mr Arnold explained that the payments by DC to MBL were reflected as being on loan to DW because DC was paying a liability of DW such that liability arose in DC’s favour. The financial statements were then prepared in that way and Mr McGrath as director signed them.

52    Mr McGrath said in his affidavit that in around June 2012 he decided to restructure the debts in the Denham Group which was to include DW repaying the debt owed to DC. He said this was “in order to remove the receivables of entities related to [DC] from the books of [DC] for the purpose of providing more accurate financial statements to potential clients.” Mr McGrath said that some of DC’s potential clients had been critical of the intercompany loans in the Denham Group.

53    Purportedly for that reason, at the end of August 2012 a journal entry was posted for the year ending 30 June 2012. The result of this journal entry was an adjustment whereby the DC balance sheet recorded that the $8,319,252 amount had been repaid or written off and was no longer recorded as a loan owed by DW to DC. DW’s general ledger records this adjustment as “as per PAM”, which is a reference to Pinker, Arnold & McLoughlin, the Denham Group accountants. The DC general ledger has two entries that discharged the majority of the debt: the first is described as “clear COA SPV Float Fee” for $1,274,251.71, and the second “repay loan as per SM” for $7,000,000. The debt was recorded as discharged in each company’s general ledger and balance sheet although the loan amounts in each are not quite the same. The difference of $45,000 is made up in DC’s general ledger by four payments in the year ending 30 June 2012, two by DW to DC and two by DC to DW.

54    The $8,319,252 amount moved in DW’s balance sheet from being a debt owed to DC to being a debt owed to Mr McGrath. However, the debt owed to Mr McGrath had gone up by $10,399,252 to $12,799,252 (an amount of $2,400,000 was carried forward from the previous year).

55    This extra amount can be explained as follows. The general journal transaction recorded in DW for 30 June 2012 shows that Mr McGrath’s loan account in DW was credited with the following payments:

(1)    $1,200,000, being the amount paid to MBL by DC that year;

(2)    $8,319,252, being the amount of DW’s indebtedness to DC;

(3)    $200,000, being the amount of DW’s indebtedness to Dortome Pty Ltd; and

(4)    $725,000, being the amount of DW’s indebtedness to Denham Developments Pty Ltd.

56    That is to say, $10,444,252 was credited to Mr McGrath’s loan account with corresponding debits to extinguish the identified debts. The difference between that amount and the amount of $10,399,252 by which Mr McGrath’s loan account increased that year is $45,000 which is reflected in Mr McGrath’s loan account in DW’s general ledger as being the four payments referred to at [53] above.

57    The short point is that by general journal all the debts of DW to the Denham companies DC, Dortome and Denham Developments, including the $1.2 million paid by DC to MBL in the 2012 financial year, were extinguished and credited to Mr McGrath’s loan account in DW.

58    As indicated, DC continued to make the monthly $100,000 payments to MBL after 30 June 2011.

59    In the year ending 30 June 2013, DC paid MBL another $1.2 million. Monthly from July 2012 to June 2013, the DC Find Report sets out payments made by DC to the MBL property operating account. Some of these payments are described as “DW Business Loan”, some are not described at all, but they are all nonetheless for $100,000 each month and total $1.2 million.

60    In the financial statements of DW, the balance sheet recorded that DW’s debt to Mr McGrath increased to $13,999,252 for the year ended 30 June 2013, namely by $1.2 million. Mr McGrath could not explain this apparent coincidence.

61    In the year ending 30 June 2014, DC paid MBL $900,000. Again, the DC Find Report sets out payments to the MBL property operating account. The balance sheet of DW recorded that DW’s loan to Mr McGrath had increased to $14,899,252 from the previous year, namely by $900,000. Mr McGrath could also not explain this apparent coincidence.

62    In the year ending 30 June 2015, DC paid MBL $350,000. Again, the balance sheet of DW recorded that Mr McGrath’s loan increased to $15,316,309, an increase in excess of $350,000. It was not clear what the extra amount was for. Mr McGrath had no explanation for the increase, as to the $350,000 or the additional amount.

63    The public examination of Mr McGrath that was conducted in the liquidation of DC is illuminating with respect to the above payments and purported loan from Mr McGrath to DW. The transcript is not inadmissible hearsay because Mr McGrath was a witness in the proceeding: Evidence Act 1995 (Cth), s 64(3). In the examination, he said: “I certainly don’t have a debt due from [DW] to Steve McGrath for $14 million at all”, “I can tell you I didn’t pay 100,000”, and that he “[p]ersonally didn’t pay 100,000 a month. Like, that’s definite”. When cross-examined on these statements, Mr McGrath said that he “probably never remitted the funds to [MBL].”

Range Road

64    Mr McGrath stated in his affidavit that he entered into a joint venture with DC in around June 2005 to construct a house and other buildings on land that he owned at Range Road in Mittagong.

65    Mr McGrath said that he could not locate the joint venture agreement but said that he obtained a personal bank loan for the purchase of the land at Range Road and other expenses. He also said that DC contributed by building the premises “via a simple form building contract.” He said that DC was fully paid for the building construction work it undertook by using funds generated from retained profits earned in other associated entities in the Denham Group and a bank loan he had personally with ANZ.

66    The construction project at Range Road was recorded in the books of DC as Job 50.

67    In cross-examination, Mr McGrath said that there was actually just one contract, not two as his affidavit had suggested, namely a joint venture agreement and a simple form building contract in one document. Mr McGrath accepted that by joint venture he meant, at least, an agreement to share profit and loss.

68    In this context, the following matters are relevant.

69    First, Mr McGrath could not recall, when asked, what share of the profit DC was to receive on the ultimate sale of the property.

70    Secondly, Mr McGrath and David Wright of Stening Simpson, an insurance brokerage, exchanged emails between 9 February and 4 May 2012. The emails related to queries that had been made by “Assetinsure” in respect of an annual review, presumably of insurance cover. One of the queries was, relevantly: “What are the current development projects (state if any JVs involved) and the loan amounts + which entities are providing these loans to these projects?”

71    In Mr McGrath’s reply, he said that “we have no continued developments at this time.” That is to say, he said that there were no joint ventures in the Denham Group at that time notwithstanding that on his version in court there was at that time a joint venture between him and DC with respect to Range Road (and another joint venture in respect of Old South Road, which I will come to).

72    Thirdly, Mr McGrath confirmed that none of the balance sheets of DC over the relevant period included, as an asset (or liability), an interest in a joint venture for the development of Range Road.

73    Fourthly, there was no document that supports there having been a joint venture in relation to Range Road.

74    Fifthly, while Mr McGrath “suspected” that a solicitor was engaged to prepare the joint venture agreement, he had not asked for a copy of it.

75    The expenses on Job 50 were recorded in a document headed “Job 50 Cost Detail”.

76    Mr McGrath was taken in cross-examination to the Job 50 Cost Detail. In the period 5 December 2012 to 2 December 2014, a significant number of non-business related expenses were recorded as expensed to DC, including the following entries for various amounts: “NSW Electoral Commission”, “Illawarra Equine Centre”, “Winifred West Schools” (i.e., Frensham) and “The Kings School”.

77    The Job 50 Cost Detail also showed that more or less monthly, from December 2012 to December 2014, an amount of approximately $4,000 was paid with the description “ANZ Finance.” Mr McGrath had a personal loan with the ANZ bank, so these payments may have been repayments or interest payments on that loan. He was also taken to entries described as “ANZ Bank Visa Gold – S McGrath.” These entries were for various amounts up to $15,000 and as late as December 2013. As will be seen, that was after Range Road had been sold. While Mr McGrath said these expenses may have been construction expenses, he conceded that the expenses after July 2013 when the property was sold are “probably not” construction expenses.

78    There was also an entry in Job 50 for $7,876.50 to Moss Vale Travel Pty Ltd in relation to an overseas trip that Mr McGrath accepted was a personal holiday undertaken by him and his wife.

79    Mr McGrath said in his affidavit that the entries in Job 50 were made by Ms Vangent and that “several entries in Job 50 were incorrectly allocated by Ms Vangent.” That is, “[p]ayments to schools should have either been allocated to my director’s loan account or the charitable donation account (as [DC] donated to school charity from time to time).” Ms Vangent’s evidence, which I accept, was that Mr McGrath always instructed her what job number or account code entries should be captured to.

80    With regard to Range Road eventually being sold, Mr McGrath gave evidence that he signed a contract sometime in 2012, but that the prospective purchaser did not sign a contract and contracts were not exchanged. That is to say, there was no contract for the sale of the property in 2012. Despite that, Mr McGrath sought to justify the adjustments to the June 2012 accounts on the basis of the sale of Range Road. I will return to this assertion.

81    It was not until mid-July 2013 that Range Road was sold. A letter dated 3 June 2013 from Campbell Jones Property to Mr McGrath refers to the sale of Range Road as still being at that time “prospective”. The date of the contract is not in evidence.

82    On 18 July 2013, when the sale contract settled, the net proceeds of the sale amounting to $7,199,045.18 was paid into the ANZ bank account of DC.

Old South Road

83    Mr McGrath stated in his affidavit that in around 2010 he entered into another joint venture with DC to undertake construction on land he owned at Old South Road in Alymerton.

84    He said that he obtained a personal bank loan for the purchase of Old South Road. He also said that DC contributed by building the premises “via a simple form building contract.” He further said that DC was fully paid for the building construction works it undertook by using funds generated from retained profits earned in other associated entities in the Denham Group and a bank loan he personally had with ANZ.

85    The construction project at Old South Road was known as Job 56.

86    In this context, the following matters are relevant.

87    First, on 15 February 2011, the Old South Road Trust was settled in order to purchase the Old South Road property. The trust deed was provided to Susan Owen of Crisp Legal for advice and a number of emails were exchanged. At no point in this correspondence was a joint venture mentioned. The trust deed also does not mention a joint venture. Mr McGrath’s assertions that there was nevertheless a joint venture were vague and unconvincing.

88    Secondly, in an email sent on 21 November 2011, Mr McGrath indicated to Ms Owens that the purchasing entity would be Stevden Properties Pty Ltd as trustee for the Old South Road Trust. There is then an email of 20 December 2011 from Ms Owens to Mr McGrath which states that a bank cheque is required in the sum of $677,362.31 for settlement. Mr McGrath asked Ms Vangent by email for the payment to be made by DC and to “claim the GST of $225,000.00” and that “See me will work that one out later.” Again, no joint venture was mentioned.

89    Thirdly, on 22 December 2011, the transfer was executed and Mr McGrath personally was the transferee (not Stevden). This was in circumstances where DC had paid a $112,500 deposit for the purchase of the Old South Road property, and then a year later DC paid $677,362.31 as part of the purchase price. Both payments were recorded in the Job 56 Cost Detail as expenses of DC on the project.

90    Fourthly, between 11 and 12 October 2012, Mr McGrath corresponded via email with an insurance broker in relation to obtaining insurance over a “100 acre rural property”, among other things. The policy related to Old South Road. There was no mention in the correspondence of a joint venture partner who may have had an insurable interest in the property.

91    Fifthly, a letter dated 9 November 2015 from Moisson Lawyers to Mr McGrath set out details of the settlement on the sale of Old South Road that settled on 6 November 2015. On the sale price of $2.8 million, the letter identified that after various debts were discharged, not including any debt to DC, the surplus in the amount of $291,073.73 was transferred into an ANZ bank account of Mr McGrath. That is to say, while DC outlaid the money not advanced by the bank to purchase the property and to construct a house on it, Mr McGrath received the funds on the sale of Old South Road – in what would likely be contrary to any purported joint venture agreement. Mr McGrath said in cross-examination that funds “far in excess of that were injected” into DC but gave no specifics in this regard.

92    Sixthly, Mr McGrath could not recall the terms of the profit-share under the joint venture.

93    Seventhly, there was no document indicating that such an arrangement existed.

94    As with Job 50, many transactions recorded in Job 56 turned out to be personal expenses of Mr McGrath including, for example, paying expenses on horses used by his children.

The missing server

95    Mr Massie submits that the events that follow, at least as I understand it, impugn the legitimacy of the calculations and adjudication that were made by Mr Livingstone. That is to say, he says that they make the Mr Livingstone’s conclusions conjecture.

96    In his affidavit, Mr McGrath said that a significant volume of the records of the companies in the Denham Group were contained on a server, i.e., a central computer to which other computers are linked in a network.

97    In this affidavit, Mr McGrath said that on 24 August 2016 he was working from home when his remote access to the server from his laptop ceased. Apparently the server required a physical restart. He said he then drove to the Denham Group office at Smeaton Grange to restart the server. On arrival at the office he said he noticed some unusual things such as an unlocked gate and disarmed alarm. He found that the server was missing. Mr McGrath said he then called the office of the Narellan station of the NSW Police Force in order to report the server missing.

98    In cross-examination, Mr McGrath said that he had a diary entry that recorded the apparent theft as 24 July 2016. He said that he had not seen a police report that recorded the theft as having been on 24 August 2016 (notwithstanding that it related to events that he reported and the police report was exhibited to his affidavit).

99    Even in the face of the police report and his affidavit, Mr McGrath initially maintained that the correct date was 24 July 2016 and that his affidavit was wrong. He also said that “it may be confused in my mind. It was a very difficult time.” The police report clearly recorded the date and time the event was reported as “24/08/2016 17:03”, among other notes of that date. When asked if the police report could possibly be wrong, Mr McGrath replied “you would think not.” While Mr McGrath continued to vacillate on the question of the date, he eventually conceded that he was mistaken as to the July date. Mr Massie also conceded that 24 August 2016 was “the official date” after having initially maintained that it was 25 July 2016, i.e., not even the same as the date given by Mr McGrath.

100    The correctness of the date in the police record is further corroborated by the fact that on 26 July 2016 an email was sent by YG Lifting to Mr McGrath’s Denham server email address. YG Lifting followed up again on 16 August 2016, and then Mr McGrath forwarded the email to his Google email address on 17 August 2016, attaching what appear to be invoices from this creditor. Mr McGrath conceded that on these dates YG Lifting was able to make contact with him via the server and that he was able to send material off the server on 17 August 2016.

101    Also on 17 August 2016, Mr McGrath sent emails from his Denham server email address to his Google address. Mr McGrath said this Google address was set up following the “theft of the servers”, which is obviously false given the dates.

102    On 7 September 2016, the server mysteriously ended up in the hands of Mr Hayes when three large boxes of computer equipment were anonymously delivered to his office. Mr Hayes deposed that he engaged McGrath Nicol to undertake a review of the server. Mr Hayes said he relied on the contents of the server to prepare his proof of debt.

103    Mr McGrath said that on 8 September 2016 he handed over the physical records of DC in his possession to DC’s receiver, Gavin Moss, who had been appointed on 2 September 2016.

104    An email dated 16 September 2020 from Jerry Zhan of Mistry Fallahi Lawyers (lawyers acting for Mr Massie at the time) to Mr Massie which forwarded an email dated 15 September 2020 from Rod McKemmish, who was a principal at CYTER, a forensic computer company, was tendered without objection.

105    The forwarded email from Mr McKemmish had the subject line “NSD1536/2019”, i.e., this proceeding. The email relevantly set out the following:

We have identified all usable accounting files and where necessary, removed passwords and access controls. The link below will take you to a zip file with copies of the readable accounting files contained therein.

…

As originally anticipated a large number of accounting data files had been deleted. The attached spreadsheet provides details of each accounting file. …

A review of the information in the spreadsheet shows that a large number of the accounting data files had been deleted between 28 July 2016 and 16 August 2016. Additionally if you look at the File names, it would appear that there are blocks of files that are backups. We also note that of the deleted files, a large number cannot be accessed. This suggests that the computer / server on which they were stored had been in use after the deletion occurred.

If you have any questions or would like us to walk you through the spreadsheet, let me know.

106    The forensic exercise was undertaken on the instructions of Mr Massie in respect of the missing server. Notably, the email suggests that much of the accounting data was deleted before the server was allegedly stolen.

Mr Livingstone’s report

107    Mr Livingstone’s report can be summarised as follows.

108    First, Mr Livingstone set out a brief background to the proof of debt submitted by Mr Hayes, then he set out his approach. He noted that he had had regard to a number of relevant documents, such as transaction documents, affidavits, transcripts of public examinations conducted by Mr Hayes and my previous judgment in this proceeding, among others. Further, he invited a number of relevant individuals and organisations to assist with his adjudication, some of whom did assist, some of whom did not.

109    Secondly, Mr Livingstone set out his reasoning with regard to the adjudication. This section forms most of the report and is comprised of the following sections or categories (which reflect the structure of the proof of debt submitted by Mr Hayes):

(1)    loan payments to MBL on behalf of DC – 30 June 2010 ($331,777.03);

(2)    DC Loan account with DW eliminated ($8,274,251.71);

(3)    loan payments to MBL by DC on behalf of DW – 30 June 2012 ($1,200,000);

(4)    loan payments to MBL by DC on behalf of DW – 30 June 2013 ($1,200,000);

(5)    loan payments to MBL by DC on behalf of DW – 30 June 2014 ($900,000);

(6)    loan payments to MBL by DC on behalf of DW – 30 June 2015 ($350,000); and

(7)    interest ($13,621,125.32).

110    Thirdly, Mr Livingstone set out his adjudication of the above debts. A summary of the adjudication of these debts is set out below.

Loan payments to MBL on behalf of DC – 30 June 2010

111    This category is a reference to the loan payments to MBL by DC in discharge of DW’s Tranche 1 Debt pursuant to the Third Deed of Variation in the period ended 30 June 2010.

112    Mr Livingstone concluded that DC made the payments to MBL as guarantor under the MBL Facility as amended by the deeds of variation; DC agreed to make these payments on DW’s behalf to release itself from its obligations as guarantor under the MBL Facility.

DC Loan account with DW eliminated

113    This category is a reference to other debts and expenses incurred by DW, which were recorded in the accounts of both DW and DC as loans as at 30 June 2012. DC’s claim in respect of this category is $8,274,251.71. This amount is the $8,319,252 less the $45,000 payment referred to at [53] above.

114    The report notes that the 30 June 2011 financial statements of DW and DC both record a debt owing by DW to DC at 30 June 2011 of $8,319,252. This amount was reduced to nil at 30 June 2012. The report also notes that in August 2012, a year end journal was processed on the DC loan account within DW’s records (as at 30 June 2012) which had the result of removing the loan account owing to DC and allocating it against the loan owing by Mr McGrath. The year-end journal totals $8,274,251.71.

115    Further, Mr Arnold in his public examination said that the DC loan account was not repaid, but was adjusted by way of journal entry.

116    The explanation given by Mr McGrath, namely that the proceeds of the sale of Range Road were used to repay the loan, was rejected. Mr Livingstone considered this explanation implausible because the sale of the property did not occur until July 2013, almost a year after the journal was processed. The report notes that Mr Arnold conceded that the accounts for both DW and DC for the years 30 June 2012 and 2013 were misleading in this regard.

117    Accordingly, Mr Livingstone found that the loan owing by DW to DC as at 30 June 2012 was never repaid and continued to remain owing.

Loan payments to MBL by DC on behalf of DW – 30 June 2012

118    This category is a reference to the loan payments to MBL by DC in discharge of DW’s Tranche 1 Debt pursuant to the Third Deed of Variation in the period ending 30 June 2012. DC made payments totalling $1,200,000 (10 monthly payments of $100,000 and 1 payment of $200,000) to MBL in accordance with cl 4.1(a) of the Third Deed of Variation.

119    Each of these payments was originally recorded in DW’s ledger as a loan owing to DC. However, following the year-end journal entries in August 2012 processed by Mr Arnold, the payments to MBL were recorded against Mr McGrath’s loan account. DW’s general ledger for Mr McGrath’s loan account recorded a general journal on 30 June 2012 of $1,200,000, where it is described as 12 months of $100,000 interest paid.

120    Mr Livingstone took the view that the payments by DC to MBL should be recorded in DW’s records against the DC loan account.

Loan payments to MBL by DC on behalf of DW – 30 June 2013

121    This category concerns the payments made by DC to MBL for the financial year ending 30 June 2013. The report notes that DC made payments totalling $1,200,000 (12 monthly payments of $100,000) to MBL in accordance with cl 4.1(a) of the Third Deed of Variation. Each of the payments was recorded in the general ledger of DC as a general construction expense. Each of the payments was recorded in the general ledger of DW as a loan owing to Mr McGrath.

122    Accordingly, Mr Livingstone’s view was that the payments by DC to MBL should be recorded in DW’s records against the DC loan account.

Loan payments to MBL by DC on behalf of DW – 30 June 2014

123    This category concerns those payments made by DC to MBL for the financial year ending 30 June 2014. The report notes that DC made payments totalling $900,000 to MBL in accordance with cl 4.1(a) of the Third Deed of Variation. Each of the payments was recorded in the general ledger of DC as a general construction expense. Each of the payments was recorded in the general ledger of DW as a loan owing to Mr McGrath.

124    Mr Livingstone’s view was that the payments by DC to MBL should be recorded in DW’s records against the DC loan account.

Loan payments to MBL by DC on behalf of DW – 30 June 2015

125    This category concerns those payment made by DC to MBL for the financial year ending 30 June 2015. The report notes that DC made payments totalling $350,000 to MBL in accordance with cl 4.1(a) of the Third Deed of Variation. Each of the payments was recorded in the general ledger of DC as a general construction expense. Each of the payments was recorded in the general ledger of DW as a loan owing to Mr McGrath.

126    Mr Livingstone’s view was that the payments by DC to MBL should be recorded in DW’s records against the DC loan account.

Interest

127    The interest claim was rejected in full. Mr Hayes does not dispute this rejection. It refers to the claim for interest said to be payable under the loan agreement dated 30 July 2005 between DW and DC referred to at [37] above.

128    Mr Livingstone’s view was that the entitlement to interest only crystallises on the “completion of the development and return of the development profit to the company” (emphasis in original). The report notes that the property is not specifically referred to in the agreement but that it is likely the Pepperfield Bowral Land.

129    After reviewing a valuation report of the Pepperfield Retirement Village dated 15 May 2015 that confirmed that the development was not complete, Mr Livingstone said that as the Pepperfield Retirement Village was sold as a partially completed development and as DW remained under the control of Mr Massie, he did not believe that the development profit was returned to DW. There was also no evidence before Mr Livingstone that the development had been completed and no evidence that the interest was ever charged.

130    Accordingly, Mr Livingstone was not satisfied that the interest on the DC loan account is provable in the liquidation of DW and this portion of the claim was rejected.

The applicants’ position

131    On 30 April 2020, the applicants filed points of claim. The key claims in the applicants’ points of claim can be summarised as follows:

(1)    Pursuant to the Third Deed of Variation, DC was a principal debtor to MBL for the Tranche 1 Debt.

(2)    DC made a number of payments pursuant to its obligations under the Third Deed of Variation. These payment were made by DC on account of the payment of the Tranche 1 Debt and were not paid as a loan to DW.

(3)    At the beginning of 30 June 2012, the books of DC recorded the $331,777.03 amount as part of DW’s debt to DC.

(4)    At the beginning of 30 June 2012, of the $8,319,252 recorded in the books of DC as being owed by DW to DC, not all of it was necessarily owed by DW to DC.

(5)    The adjustment to the 30 June 2012 accounts by the end of 30 June 2012 that reduced the $8,319,252 to nil ought to have been reflective of: the exclusion of payments made by DC to MBL and any personal payments relating to Mr McGrath, the inclusion of payments made by DW to DC or at its direction, and amounts paid by DC for the benefit of DW.

(6)    The proceeds of Range Road of $7.2 million in July 2013 ought to have reduced the loan owed by DW to DC.

(7)    The books of DW and DC were incorrect in respect of the balance of the loan account between these two companies as at the end of 30 June 2012.

(8)    No further transactions increased the loan account between DW and DC from July 2013.

(9)    In the event that DW did owe DC, DC was barred from recovery pursuant to s 14 of the Limitation Act 1969 (NSW).

(10)    The Notice is in error in accepting the loan as claimed and ought to be set aside.

Mr Hayes’s position

132    On 12 June 2020, Mr Hayes filed his points of defence. The defence can be summarised as follows:

(1)    The obligation of DC under the Third Deed of Variation was one of surety or guarantor.

(2)    The payments made by DC to MBL were loan advances to DW pursuant to the written loan agreement between those parties dated 30 July 2005. Alternatively, they were made pursuant to DC’s obligations as guarantor of DW’s debts to MBL, which created a liability by DW to DC for repayment of those amounts. Alternatively, they were payments made without consideration.

(3)    The books of DC did not record the $331,777.03 amount in the 30 June 2012 year.

(4)    The balance sheets of both DC and DW as at 30 June 2012 should have recorded a debt due by DW to DC of $9,806,028.74. I understand this amount to be $8,319,252 plus the MBL payments of $1.2 million for that year and the four payments from 4 May 2010 to 29 June 2010 totalling $331,777.03 less the $45,000 net repayment.

(5)    Mr Hayes denies that the proceeds of Range Road ought to have reduced the loan owed by DW to DC. Further, if the proceeds of Range Road were paid to DC by Mr McGrath, then such payment was in reduction of debts in excess of $8.1 million then owing by Mr McGrath to DC on Range Road and Old South Road and his personal expenses.

(6)    Mr Hayes admitted that the books of DW and DC were incorrect in respect of the balance of the loan account between these two companies. That was obviously not for the reasons given by the applicants.

(7)    For the year ended 30 June 2014, DC advanced $900,000 to DW, and for the year ended 30 June 2015, DC advanced $350,000 to DW.

(8)    Mr Hayes denies the application of s 14 of the Limitation Act 1969 (NSW).

(9)    Mr Hayes denies that the Notice is in error in accepting the loan as claimed and ought to be set aside.

Relevant principles

Applicants’ standing

133    The points of defence deny that Mr Massie has standing to make the application. However, in their submissions the respondents concede that Mr Massie has standing. The concession was rightly made.

134    Section 90-20 of the Insolvency Practice Schedule relevantly states that “an officer of the company” may apply for an order under s 90-15. As Mr Massie is a director of 5G Developments (DW), he has standing as an officer of DW to make the application. Because Mr Massie has standing, it is not necessary to deal with the standing of the other applicants.

Power

135    The application is brought under s 90-15(1) of the Insolvency Practice Schedule. The section states that the court “may make such orders as it thinks fit in relation to the external administration of a company.”

136    The section replaced the now repealed s 1321 of the Corporations Act. The case law in respect of the repealed provision remains relevant: Re Azmac Pty Ltd (in liq) [2020] NSWSC 204; 146 ACSR 113 at [41]-[44] per Rees J.

Leave not required

137    The applicants seek an order pursuant to r 14.1(2)(b) of the Corporations Rules that they have leave to appeal the determination by Mr Livingstone.

138    Rule 14.1 relevantly provides that:

(1)     All appeals to the Court authorised by the Corporations Act must be commenced by an originating process, or interlocutory process, stating:

(a)    the act, omission or decision complained of; and

(b)     in the case of an appeal against a decision—whether the whole or part only and, if part only, which part of the decision is complained of; and

(c)     the grounds on which the complaint is based.

(2)     Unless the Corporations Act or the Corporations Regulations otherwise provide, the originating process, or interlocutory process, must be filed within:

(a)     21 days after the date of the act, omission or decision appealed against; or

(b)     any further time allowed by the Court.

139    The process of reviewing a liquidator’s decision on a proof of debt under ss 90-15 and 90-20 of the Insolvency Practice Schedule is described as an application not an appeal. This change in nomenclature is relevant. As noted by Brennan and Dawson JJ in Tanning Research Laboratories Inc v O’Brien [1990] HCA 8; 169 CLR 332 at 340-341, proceedings instituted “though often referred to as an ‘appeal’ from the liquidator’s decision to reject, are originating proceedings which the court hears de novo.”

140    An application under s 90-20 is therefore not an appeal as contemplated by r 14.1 of the Corporations Rules and leave is not required. The prescribed procedure for making an application for an order under s 90-20 of the Insolvency Practice Schedule is by interlocutory process, which the applicants have done. See r 4.2(d) of the Corporations Rules.

141    For the same reason, in my view r 14.1(5) of the Corporations Rules does not apply such that it was not necessary for Mr Livingstone to file an affidavit as otherwise required by that rule.

Nature of the review and the onus

142    In Tanning Research, Brennan and Dawson JJ noted at 341 that:

In such a proceeding, a liquidator who defends his decision to reject a proof of debt is no longer acting in a quasi-judicial capacity; he is cast in the role of an adversary, defending the assets available for distribution against a liability which, according to the view he formed when acting quasi-judicially, is not legally enforceable. The liquidator may defend those assets against the creditor’s claim on any ground on which the company might have defended the claim had it been sued by the creditor. If the liquidator relies on those special defences which allow him to go behind a judgment, an account stated, a covenant or an estoppel in order to ascertain the true liability of the company, he is none the less in the role of an adversary. The issue in the proceeding is whether the liability referred to in the proof of debt is a true liability of the company enforceable against it. The issue is contested between the putative creditor on the one hand and the liquidator on the other; the liquidator is a party litigant.

143    This commentary aligns with the prior observation that the hearing is de novo. It is the role of the court to decide whether the liability claimed in the proof of debt is a true liability of the company enforceable against it. This general principle was elaborated on in Marsland v Gamble [2002] WASC 213 at [12] per Barker J – the court must “make its own decision on the evidence before it and not merely decide if there was error on the part of the primary decision maker”.

144    The consequence of the hearing being de novo is that the court may make its decision on evidence that was not before the liquidator: Re Jay-O-Bees Pty Ltd (in liq) [2004] NSWSC 818; 50 ASCR 565 at [60] per Campbell J; Re Young in his capacity as liquidator of Great Wall Resources Pty Ltd (in liq); Capocchiano v Young [2013] NSWSC 879 at [46] per Kunc J; Re Azmac at [42]; and Sands Contracting Pty Ltd v Cant [2021] FCA 638 at [14] per McKerracher J.

145    The question of onus is less straightforward. In the typical case a creditor will be challenging a rejection of its proof of debt by a liquidator. In the present case, a director of the company in liquidation is challenging the acceptance, or at least partial acceptance, of a proof of debt by a special purpose liquidator. In other words, the moving party is neither the creditor nor the debtor.

146    In Great Wall, Kunc J relevantly said at [46] that:

The fundamental question is whether the claim sought to be proved is a true liability of the company enforceable against it according to law. Nevertheless, the claimant bears the onus to demonstrate that the liquidator was wrong in rejecting the proof. If that onus is not discharged, the Court will not overturn the liquidator's decision. If the Court is unable to conclude either way whether the proof should be admitted, then the liquidator’s decision must stand.

147    This passage suggests that the claimant bears the onus to demonstrate that the liquidator was wrong in rejecting the proof of debt. The same approach was taken by Logan J in Re Bluechip Development Corporation (Cairns) Pty Ltd (in liq) (recs and mgrs apptd) [2013] FCA 1281 at [37] and by McKerracher J in Sands Contracting at [14].

148    Comments made by Santow J in Re Galaxy Media Pty Ltd [2001] NSWSC 917; 39 ACSR 483 are also helpful. This was a case, like the present, where the liquidator was defending their decision to admit a claim, not reject it:

[33]    Thus I agree with the submissions of the plaintiffs that the court’s task in approaching the question de novo, is to bring to bear a proper rigour in reviewing all the relevant facts in their context, to determine whether indeed the debt should have been admitted or rejected, doing so by applying legal principle to those facts afresh. However, the onus still remains on the party challenging the liquidator’s determination. The court will not upset the liquidator’s determination unless properly satisfied that that onus has been discharged, though there may well come a point where the onus shifts in an evidentiary sense.

149    In my view, that is the correct approach, namely that it is the party challenging the determination that bears the onus. This position finds further support in other authorities: Westpac Banking Corp v Totterdell (1998) 20 WAR 150 at 153-4 per Ipp J, Pidgeon and White JJ agreeing, and at 162 per White J; Re DH International Pty Ltd (in liq) [2017] NSWSC 870; 121 ACSR 585 at [83] per Gleeson JA; Hooper v Lock (in liq) [2016] FCA 298 at [142]-[145] per McKerracher; Great Wall at [46]; Sands Contracting at [14].

150    This being said, and as noted, the fundamental question is whether the claim sought to be proved is a true liability of the company enforceable against it according to law.

Consideration

DC’s payments to MBL

151    It was put by the applicants in their points of claim that pursuant to the Third Deed of Variation, DC was a principal debtor to MBL for the Tranche 1 Debt. Put another way, the applicants say that the payments made by DC to MBL were not on account of DW’s debt to MBL and therefore cannot be part of a debt owed by DW to DC.

152    DC had been a guarantor under the 29 July 2005 “Investment Facility and Guarantee Agreement”. DC remained a guarantor of DW’s obligations after the first, second and third time the facility agreement was varied.

153    The key difference under the Third Deed of Variation was that DC had an obligation to pay $100,000 per month to MBL that was independent of any default (after the Third Deed of Variation was concluded) by DW.

154    It is first helpful to consider the evolution of the obligations under the MBL Facility. Under the initial agreement DC is listed as a guarantor. Clause 15 is headed “guarantee and indemnity” and sets out the obligations of the guarantor. Clause 15 relevantly states:

15.1    The Guarantor unconditionally and irrevocably guarantees payment to the Lender of the Obligations.

15.2    If the Customer does not pay the Obligations to the Lender on time and in accordance with this Agreement the Guarantor agrees to pay the Obligations to the Lender on demand from the Lender (whether or not demand has previous been made on the Customer). A demand may be made at any time and from time to time.

155    The “Obligations” included all the obligations and liabilities of the “Customer” (DW) under the agreement. The first, second and third variations of the agreement did not disturb the terms of the guarantee.

156    Clause 3 of the Third Deed of Variation divided the total amount owing under the Facility (i.e., the facility provided to DW and guaranteed by, among others, DC) of, at that time, $31,963,000 into the two tranches identified at [42] above. There is nothing in the Third Deed of Variation to remove the liability of DW to repay the facility, i.e., the two tranches.

157    Clause 4.1 of the Third Deed of Variation states:

In consideration of the Lender entering into this Deed:

(a)     [DC] agrees to pay the Lender the sum of $6,700,000.00 (plus interest upon the balance of that sum outstanding under clause 3(b)) by equal calendar monthly instalments of not less than $100,000.00 per calendar month with the first such payment being due on 28 February 2010 and subsequent payments to be made calendar monthly thereafter. Such payments will be applied in reduction of the Tranche 1 Facility for so long as any monies are outstanding under that Tranche;

(b)    Denham Constructions Property Group Pty Ltd undertakes to pay to the Lender all proceeds paid or payable to Denham Constructions Property Group Pty Limited (up to a total maximum amount of $6,200,000.00) from its interest in Denmac Property Group Pty Limited and any subsidiary of that company (including capital and income entitlements) (DPGL Interest) upon the earlier of receipt or becoming entitled to receive such proceeds. Such payments will be applied in reduction of the Tranche 2 Facility for so long as any moneys are outstanding under that Tranche.

158    Clause 5 of the Third Deed of Variation contains a new guarantee, which is relevantly that Denham Constructions Property Group Pty Ltd (DCPG), among other guarantors excluding DC, “unconditionally and irrevocably guarantees payment to the Lender of the payments due under cl 4.1(a) of this Deed.” In other words, DCPG and the other guarantors guaranteed DC’s obligations to MBL under the Third Deed of Variation.

159    The context of the Third Deed of Variation is recorded in its recitals:

A.    On 29 July 2005 the Lender, the Customer, the Guarantor and Dormere Pty Limited entered into an Investment Facility and Guarantee Agreement (Facility Agreement).

B.    On 24 May 2006 the Lender, the Customer, Dormere Pty Limited and the Guarantor varied the Facility Agreement by a First Deed of Variation of Investment Facility and Guarantee Agreement pursuant to which the Facility Agreement was converted to a Development Finance Agreement (First Deed of Variation).

C.    The Lender, the Customer and the Guarantor then further varied the Facility Agreement by a Second Deed of Variation of Development Finance Agreement (Second Deed of Variation).

D.    Sales of the constituent parts of the Property have not proceeded as envisaged, and various Events of Default under the Facility Agreement have occurred, including, without limitation, a failure to repay the Facility upon the due date for repayment.

E.    In the interests of all Parties, and as a more commercially acceptable outcome than the Lender exercising some or all of its Securities, the Lender, the Customer, the Guarantor and the New Guarantor have agreed to further vary the Facility Agreement as set out in this Deed.

160    The question that arises is whether the payments by DC to MBL in discharge of the Tranche 1 Debt under cl 4.1(a) are claimable by DC from DW.

161    Mason CJ stated in Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; 166 CLR 245 at 254 (Deane, Dawson and Toohey JJ agreeing) that:

a contract of guarantee is, subject to any qualifications made by the particular instrument, a collateral contract to answer for the debt, default or miscarriage of another who is or is contemplated to be or to become liable to the person to whom the guarantee is given.

162    Clause 15 is such a contract of guarantee because DC’s guarantee obligation arises “if the Customer does not pay the Obligations to the Lender on time and in accordance with this Agreement.” That is to say, the obligation arose only on some event of default. No submissions were made asserting that clause 15 was not a guarantee in the sense described in Sunbird.

163    I accept, as the applicants submit, that in paying MBL DC was paying the debt that it had undertaken under cl 4.1(a) of the Third Deed of Variation, but in my assessment it only undertook that debt because it had guaranteed the debt of DW to MBL, DW had defaulted and DC’s obligation to pay had accordingly arisen. That is the expressly recorded context in the recitals of the Third Deed of Variation.

164    That DC was paying MBL to discharge DW’s debt is also apparent from the wording of cl 4.1(a) that the payments made by DC would “be applied in reduction of the Tranche 1 Facility”, i.e., to reduce DW’s Tranche 1 Debt to MBL. That that is in fact what was occurring is evidenced by the payments being credited to DW’s Tranche 1 facility account with MBL as identified at [48] above. Those payments by DC could only have been done by way of loan to DW under the existing loan agreement between those companies or were in any event claimable by DC against DW as a surety’s claim against the principal debtor for any amount paid to the creditor in discharge of the principal debtor’s debt: Israel v Foreshore Properties Pty Ltd (1980) 30 ALR 631 at 636 per Aickin J, Gibbs, Stephen, Murphy and Wilson JJ agreeing; Friend v Brooker [2009] HCA 21; 239 CLR 129 at [55] per French CJ, Gummow, Hayne and Bell JJ.

165    It is to be observed that in the books of both DC and DW in the 2011 financial year the payments by DC to MBL were treated as being on loan account between the two Denham companies as dealt with at [50]-[51] above. That is clear evidence in support of how the relevant parties, debtor and creditor, treated the payments until the disputed adjustments made to the balance sheets at the end of the 2012 financial year.

166    A further consideration is that the debt to MBL under the facility was reflected as a non-current liability (financial liability) on DW’s balance sheet in the 2011 to 2015 financial years, but not on DC’s balance sheet at all. Also, all the payments up to February 2013 were described in the DC Find Report as “DW Business Loan.”

167    There is no credible explanation as to why DC undertook the obligation to pay the Tranche 1 Debt other than because DC was the guarantor of that debt immediately prior to executing the Third Deed of Variation. DC received no benefit or consideration from MBL independent of its obligation to MBL as guarantor of DW’s debt on which DW had by then defaulted.

168    In the circumstances, I am satisfied that the payments were made in reduction of DW’s indebtedness to MBL such as to give rise to a liability of DW to DC in respect of them.

169    I therefore reject the criticisms of this aspect of Mr Livingstone’s report and conclusions.

The adjustment

170    Mr Hayes said in his affidavit that he could not find a written agreement or deed or any other document in the books of DW and DC that could explain or justify the adjustments that were made to the 30 June 2012 balance sheets of DW and DC.

171    Mr Hayes could not locate any evidence that a loan was provided by Mr McGrath to DW other than the $2.4 million owed as at 4 May 2006.

172    Mr Arnold, the Denham Group accountant, said that he prepared the 2012 financial year financial statements for DC and DW on the basis of information provided to him by Mr McGrath. He said that in mid-2012 Mr McGrath had told him that he wanted to reduce the debts owed by other companies in the Denham Group to DC to “clean up” the books of DC because the intercompany loans were affecting DC’s ability to get work. Mr McGrath said that he was going to sell Range Road to reduce the debt and asked Mr Arnold to “clean the balance sheet up.” This corresponds with Mr McGrath’s evidence described at [52] above.

173    Mr Arnold did not recall seeing any bank records, cheque stubs or other primary transactions records for the transactions recording the basis for the adjustment in the financial statements of both companies. His working papers do not reveal the basis for the adjustment other than an email from Mr McGrath on 24 August 2012 in relation to DC that Mr Arnold said that he acted on. The email stated the following:

Have reviewed the debtors / creditors for 30 June 2012 accounts

Debtors $12,232,500

Creditors $4,981,000

174    The effect of Mr McGrath’s instruction was to wipe $8,327,353 from the balance sheet of DC, of which $8,319,252 had previously been reflected as owed by DW. The effect of the adjustment was also to wipe out all 12 of the intercompany loans on DC’s balance sheet leaving “Trade Debtors” as the only item under “Trade and Other Receivables”. However, apparently the intercompany loans other than to DW were transferred to being reflected as trade debtors because the trade debtors increased from $5,236,458 the previous year to $12,232,500, i.e., an increase of nearly $7 million. In other words, the debt of DW was simply expunged and the debts of the other 11 group companies were transferred to “Trade Debtors”. DC’s balance sheet had certainly been “cleaned up”.

175    I have already identified the way in which DW’s debt to DC was dealt with in DW’s balance sheet by transferring it to Mr McGrath (at [54]-[57] above).

176    Regarding DC’s payments to MBL, Mr McGrath could not explain why after the adjustment these payments were recorded as a loan owed to him by DW. His statements regarding his ever-increasing loan give no indication why it increased in exactly the same amounts that DC paid to MBL. The entries in the DW general ledger as at 30 June 2015 are also of no assistance: for the year ended 30 June 2012, the loan entry states “Capitalise Int Paid y/e 30/6/14”, for the year ended 30 June 2013, the loan entry is described as “Development Sales”; and for the year ended 30 June 2014, the loan entry states “Capitalise Int Paid y/e 30/6/14”.

177    In respect of the substantial increases in his loan to DW after the adjustment, Mr McGrath said “I would have to speak to the accountant why that occurs. I’m not an accountant.” Mr McGrath was an experienced company director and I do not accept that he was unable to understand what appeared in the financial statements of both DW and DC.

178    I find that the increases in Mr McGrath’s loan in the exact amount of DC’s payments to MBL were not a coincidence. They were an attempt to suppress the debt DW owed to DC. Ascribing them to Mr McGrath’s loan account is fictitious. They are properly owed by DW to DC, not Mr McGrath.

179    The applicants in their points of claim say that the adjustment ought to have been reflective of the exclusion of any personal payments relating to Mr McGrath, the inclusion of payments made by DW to DC or at its direction, and amounts paid by DC for the benefit of DW. The applicants did not present any evidence in this regard. There was no attempt to say or work out what the correct figure was. This was in circumstances where Mr Massie is a qualified accountant. I find that the applicants have not established this aspect of their points of claim.

180    I am satisfied that the adjustments in the balance sheets of DC and DW for the 2012 financial year were aimed at cleaning-up DC’s balance sheet to remove the intercompany loans because that was perceived to be important to how DC’s financial position was portrayed to potential customers, and that the cleaning-up process did not reflect the reality. In short, by accounting entries the books were made to reflect the position which was not the position in truth and in fact.

181    Relevant for present purposes is DW’s loan from DC, and its transferral to being from Mr McGrath. Aside from the payments to MBL which I have already dealt with, its justification turns on how the proceeds of the sale of Range Road were dealt with, to which I now turn.

Proceeds of Range Road

182    In explaining the proceeds of Range Road, Mr McGrath said that “the repayment of [Range Road] to [DW] satisfied that debt, and I personally became the investor into [DW] which cleared up the [DC] accounts for construction work.” Mr McGrath explained that the payment of the proceeds of the sale of Range Road of $7.2 million to DW “satisfied its debt or its obligation to [DC], that’s how I understood the accounting interpretation of all that to reduce [DC]’s loan facility with [DW] which is all about the taking of [DC] not having intercompany loans on its financial statements.” He said that “I provided my funds to [DW] and [DW] satisfied its debts at [DC].”

183    In short, Mr McGrath says that the effect of what occurred is that he paid DW’s debt to DC and as a consequence he, in the place of DC, became DW’s creditor to the extent of what he paid.

184    Mr McGrath’s explanation as to the adjustment is unsatisfactory for a number reasons.

185    First, the proceeds of the sale of Range Road were not received by DC until 18 July 2013 when the sale settled, so any adjustments to the companies’ accounts to reflect this amount should not have been made until the accounts for the year ending 30 June 2014 were prepared, at least on a cash basis. Even on an accrual basis, which is the basis on which the financial statements were prepared, there was no sale agreement in the relevant financial year. It is simply fictitious to retrospectively credit a payment on the sale of a property in the books of the companies in the 2012 financial year when there was no sale contract until late in the 2013 financial year and no completed sale and proceeds realised until the 2014 financial year.

186    Secondly, the proceeds of the sale were substantially less than what was owed by DW to DC. The proceeds of the sale of Range Road that were paid to DC amounted to $7,199,045, yet DW’s debt to DC that was said to have been paid off by that payment was $10.7 million (being the reflected debt prior to the adjustment of $8.3 million plus two years’ monthly payments to MBL amounting to $2.4 million). The proceeds were thus short by $3.5 million, or, to put it differently, an additional $3.5 million of debt in respect of which no payment was received was said to have been wiped clean.

187    For those reasons, and the reasons I will come to with regard to the personal debt that Mr McGrath had to DC, I reject Mr McGrath’s explanation.

Joint ventures

188    So what was Mr McGrath’s payment to DC for? Whether or not there was a joint venture is relevant.

189    I do not accept, as testified by Mr McGrath, that there was a joint venture agreement – in the sense of the two parties having agreed to share profit or loss on a joint project or endeavour – between him and DC in respect of each of the Range Road (Job 50) and Old South Road (Job 56) properties. There are a number of reasons for that.

190    First, Mr McGrath’s evidence was unclear and inconsistent as to whether, in respect of each property, there was a simple construction contract and a joint venture contract between him and DC, or whether there was only a joint venture contract, or whether there was one contract that was a combination of both. He said that he was unable to locate a copy of any agreement for either of the properties, but said that they were drafted by solicitors. However, neither he nor, apparently, Mr Massie, sought to obtain a copy from the solicitors.

191    There is also an inconsistency between there being a joint venture agreement and a simple construction agreement; on the former the two parties would share, in some agreed proportion, the expenses and revenue and hence the profit or loss, and on the latter the one party would simply pay the other for its construction work, whether on a “cost plus”, fixed amount or some other basis. It was not explained how the two could coexist.

192    The Range Road agreement was said by Mr McGrath to have been executed by Mr Adam Hearns for DC under a power of attorney, but no explanation was offered as to why Mr Hearns did not give evidence of the agreement.

193    Secondly, Mr McGrath was unable to explain what the profit share agreement was between him and DC in respect of each property. That is a fundamental aspect of the joint venture, as accepted by Mr McGrath. The fact that he could not say what it was rather undermines his claim that there was a joint venture at all.

194    Thirdly, Mr McGrath was not able to identify any joint venture accounts from which the sharing of profit or loss could be calculated other than the Job 50 and Job 56 records of expenses. The Job 50 records do not record the capital expense of purchase or the revenue on sale of Range Road. Indeed, Mr McGrath’s explanation that the proceeds of the sale of Range Road was his to pay to DC in the reduction of DW’s debt to DC by which he is said to have substituted DC as DW’s creditor is at odds with his testimony that he and DC were in a joint venture with respect to the purchase, development and sale of that property.

195    The Job 56 record reflects payment of the deposit and part of the purchase price as dealt with at [88]-[89] above, but it does not otherwise record the costs of the purchase. It also does not reflect any credit for the proceeds of sale (dealt with at [91] above). It is therefore also not a joint venture account.

196    There simply is no credible evidence in support of Mr McGrath’s joint venture contentions, and I reject them.

197    The result of a finding that there were no joint ventures is that the costs incurred by DC on Job 50 and 56 constitute debts owed by Mr McGrath to DC that were outstanding at the time that Mr McGrath made the payment to DC from the proceeds of the sale of Range Road. The ultimate cost recorded for Job 50 was $8,097,682.49 and for Job 56 was $3,342,383.20 (including the many personal expenses of Mr McGrath already discussed).

198    On 18 July 2013, when Mr McGrath made the $7,199,045.18 payment to DC from the proceeds of the sale of Range Road, he was indebted to DC for more than $7.7 million on the Job 50 Cost Detail. This means that the proceeds of the sale of Range Road would not have discharged Mr McGrath’s debt to DC in respect of Job 50, let alone be entirely creditable to DW’s debt to DC.

199    Further, DC also paid acquisition and building costs for Old South Road on Job 56. By July 2013, when the proceeds of the sale of Range Road were received, more than $2.2 million was owed by Mr McGrath to DC on Job 56.

200    Mr McGrath gave evidence of a number of payments made by him to DC in the years 2010 to 2015. Taking the figures given by him at face value, by 18 July 2013, immediately before he paid the proceeds of the sale of Range Road to DC, he had paid $552,117 to DC. Even if that amount were to be credited to his debt to DC, the payment to DC of the Range Road proceeds would still not have extinguished the remaining debt on Job 50 alone.

201    It therefore appears most likely that the payment of the proceeds of the sale of Range Road to DC was a partial repayment of the amounts owed by Mr McGrath to DC pursuant to Job 50 or Job 56 or both rather than being a repayment of any debt DW owed to DC and then acquired by Mr McGrath. To put it another way, Mr McGrath has impermissibly attempted via the adjustment to expunge two debts with one payment: his debt to DC and DW’s debt to DC. Moreover, that payment was insufficient to settle either debt.

202    I accordingly reject the contention that any joint venture arrangements between Mr McGrath and DC in respect of the two properties meant that he was not indebted to DC for construction costs on those properties.

Limitation issue

203    The applicants claim that in the event that DW owed any amount to DC as at 30 June 2012 or the end of July 2013, the recovery of such amount was time barred by 1 July 2018 or 1 August 2019 respectively pursuant to s 14 of the Limitation Act 1969 (NSW).

204    The respondents say that no time bar applies. They advance a number of alternative arguments including that DW’s 30 June 2012 financial statement were incorrect or fraudulent and that DC’s payments to MBL were pursuant to a deed, among others.

205    At least one answer to the point is very simple. Given that Mr McGrath controlled both companies and he denies the loan, he never called in the loan amount so it cannot be said to have become due and payable. The cause of action did not accrue until, at the earliest, Mr Hayes was appointed liquidator of DC in February 2017. The result is that the there is no time bar to the claim.

Impact of the missing server

206    It is not clear on the evidence before me who removed the Denham Group server or why, but what is clear for the reasons already given is that Mr McGrath’s evidence of these events cannot be relied on.

207    Mr McGrath and by association Mr Massie rely heavily on the fact of there being financial documents missing from the server to put forward an alternative case about the flow of intercompany funds. For me to believe their version of events I would have to take Mr McGrath’s evidence as genuine and accurate. For the reasons already outlined, Mr McGrath was an unreliable witness on the important facts of the application. I therefore cannot, without corroboration, accept his version of events in relation to the movement of money in the Denham Group.

208    Mr Massie made submissions that there was a “process breakdown” in respect of the server in that the administrators appointed to DC on 16 August 2016 did not get possession of the server on their appointment. While never directly or clearly put, Mr Massie also alluded to the possibility that the content of the server was tampered with, the inference being that the documents contained therein were unreliable. He also said he did not have adequate access to the server to properly review it.

209    Mr Hayes’s affidavit of 27 October 2020 sets out the relevant timeline. First, the server went missing at the latest on 24 August 2016. Two weeks later on 7 September 2016, the server was delivered anonymously to Mr Hayes. Undoubtedly the preferred course would have been that the administrators of DC had access to the servers when they were appointed. However, aside from the deletion and overwriting of some files, the majority of which occurred before the server was removed, there is no evidence that the server was otherwise tampered with during those two weeks.

210    Mr Massie had access to the server from at least August 2020. The forensic computer expert appointed by him had given him a preliminary report on 16 September 2020 and offered to do further work if required (as set out at [104]-[106] above). The hearing of this application commenced on 29 October 2020. It seems to me that there was sufficient time to get across the material on the server and no evidence establishes the contrary.

211    Some financial material relating to the Denham Group had been deleted and overwritten with the result that the material that Mr Hayes and Mr Livingstone relied on is incomplete. There is nonetheless enough material to form a tolerably clear view of the financials of DW and DC. Even if the entire records of the Denham Group were available, I am not convinced that that would significantly change the interpretation of the financials of DC or DW (at least in respect of the issues pertinent to this application). I have done the best that I can with what is available, as I must, and the fact that not everything is available does not assist Mr Massie to discharge his onus.

Independence of liquidators

212    Mr Massie at various points challenged the independence of Mr Hayes and said he was in a position of conflict. According to Mr Massie, Mr Livingstone was thus “trapped by not a personal relationship with Mr Hayes, but by the inherent nature of Mr Hayes being the liquidator [of both DC and DW].”

213    This cannot be correct. Mr Livingstone was appointed as a special purpose liquidator to do the adjudication, rather than the actual liquidator doing it, because of the conflict of interest position that Mr Hayes would otherwise have been in. The orders I made in my previous judgment addressed this issue. I therefore do not consider that Mr Hayes or Mr Livingstone was affected by any conflict or lack of independence.

Conclusion

214    The liabilities of DW to DC set out in Mr Livingstone’s Notice are enforceable against DW; the proof of debt was to that extent properly admitted. Mr Massie has not discharged the onus on him to show error in Mr Livingstone’s conclusions. The application should accordingly be dismissed.

215    As I have not heard from the parties on costs, I will make orders directing them to file short written submissions dealing with costs which I will decide on the papers unless any party requests an oral hearing.

Associate:

Dated:    13 July 2021

SCHEDULE OF PARTIES