259 ALR 574 Reported Decision : 74 ACSR 89 77 NSWLR 110 New South Wales Supreme Court CITATION : ASIC v Somerville & Ors [2009] NSWSC 934 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 1, 2 & 3 September 2009 JUDGMENT DATE : 8 September 2009 JURISDICTION : Equity JUDGMENT OF : Windeyer AJ DECISION : Breaches of ss 181, 182 and 183 established. Involvement of solicitor established. Declarations accordingly. CATCHWORDS : CORPORATIONS – Directors – Duties – Breach – Agreements selling assets of one company to a new company – Consideration issue of "V" class shares in purchaser company carrying preferential right to dividends up to possible value of assets – Vendor company wound up shortly after agreement settled – No dividends declared on "V" class shares – Whether breach of duties of directors – Corporations Act 2001 ss 181, 182, 183 – Transactions entered into on advice of solicitor and documents implementing transactions prepared by the solicitor – No proper consideration for sale – Whether solicitor liable as involved in the contravention – Corporations Act s 79. LEGISLATION CITED : Corporations Act 2001 (Cth) ss 79, 181, 182 and 183 Legal Profession Act 2004 Part 2.6 CATEGORY : Principal judgment ASIC v Adler (2002) 41 ACSR 72 ASIC v Macdonald & Ors (No 11) [2009] NSWSC 287 ASIC v Maxwell (2006) 59 ACSR 373 ASIC v Rich (2004) 50 ASCR 500 ASIC v Sydney Investment House Equities Pty Ltd (2008) 69 ALSR 1 Australian Growth Resources Corporation Pty Limited v Reesame (1988) 13 ACLR 261 Chew v R (1992) 173 CLR 626 Giorgiani v R (1985) 156 CLR 473 CASES CITED : Jones v Dunkel (1959) 101 CLR 298 Linton v Telnet Pty Ltd (1999) 30 ACSR 465 MacNamara v Flavell (1988) 13 ACLR 619 Marchesi v Barnes [1970] VR 434 Periera v Director of Public Prosecutions (1988) 63 ALR 1 Re HIH Insurance Ltd (in prov liq); ASIC v Adler (2002) 42 ACSR 80 Rosetex Co Pty Ltd v Licata (1994) 12 ACSR 779 Sycotex Pty Ltd v Bescher (1994) 13 ACSR 766 York v Lucas (1985) 185 CLR 661 TEXTS CITED : Company Directors – Principles of Law and Corporate Governance – Austin, Ford and Ramsay, p 266 s 7.2 Australian Securities and Investments Commission (P) Timothy Donald Somerville (D1) Somerville & Co Pty Limited (D2) Nicholas Eugene Jones (D3) Simon Durant (D4) PARTIES : Calvin Bert Rowley (D5) John Lancelot Bradnam (D6) Christopher Paul Martin Jones (D7) Adam Leslie Troost (D8) John William Monsell (D9) Arthur James Wells (D10) FILE NUMBER(S) : SC 2154/08 J W J Stevenson SC & A J McInerney (P) B A J Coles QC & P M Barham (D1&2) COUNSEL : In person (D4) D L Cook (D5) P Reynolds (D8) No appearance (D3, 6, 7, 9 & 10) Conrad Gray, Solicitor (P) SOLICITORS : Boyd House & Partners (D1&2) Slater & Gordon (D5) David Frederick Carr, Lawyer (D8) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WINDEYER AJ TUESDAY, 8 SEPTEMBER 2009 2154/08 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v TIMOTHY DONALD SOMERVILLE & ORS JUDGMENT 1 HIS HONOUR: OUTLINE 2 These proceedings concern actions by the Australian Securities and Investments Commission ("ASIC") seeking declarations that the third to tenth defendants, as directors of particular companies, have acted in breach of ss 181, 182 and 183 of the Corporations Act 2001 (Cth) ("the Act") and if such breach is found, seeking certain injunctive orders and in addition disqualification orders against them. The defendant directors and the companies in which they were involved are set out hereunder. In the Amended Statement of Claim they are referred to in a particular way and I have put that name in brackets. Third Defendant Director Companies Nicholas Eugene Jones Piditty Liditty Pty Limited (1st Jones Removal Company) Jones' Removal & Storage Pty Limited (2nd Jones Removal Company) Jones' Removals Pty Limited (3rd Jones Removal Company Fourth Defendant Simon Durant Stimulus Solutions Pty Limited (the new Stimulus Company) Stimulus Solutions Management Pty Limited (the old Stimulus Company) Fifth & Sixth Defendants Calvin Bert Rowley John Lancelot Bradnam VMT Holdings Pty Limited (the VMT Company) Republicorp Pty Limited (1st Republicorp Company) Republicorp International Pty Limited (2nd Republicorp Company) Republicorp International Holdings Pty Limited later VMtech International Pty Ltd (the 3rd Republicorp Company) Seventh Defendant Christopher Paul Martin Jones Chatswood Furniture & Fine Art Pty Limited (1st Chatswood Furniture Company) Memorial Fine China Pty Limited (2nd Chatswood Furniture Company) Eighth Defendant Adam Leslie Troost B&R Storage and Distribution Pty Limited (1st Troost Transport Company) Road Sea Rail Equipment Pty Limited (2nd Troost Transport Company) Ninth & Tenth Defendants John William Monsell Arthur James Wells Star Chrome Pty Limited (1st Star Chrome Company) Star Chrome Plating Pty Limited (2nd Star Chrome Company) 3 Timothy Somerville, the first defendant, is a solicitor. He was a partner with the firm of Somerville & Co, Solicitors, up to the end of 2005. Somerville & Co Pty Limited is an incorporated legal practice within the meaning of that term pursuant to Part 2.6 of the Legal Profession Act 2004 which took over the practice of Somerville and which carries on business as Somerville & Co. Insofar as it is not necessary to distinguish between them I will refer to them as the "Somerville defendants" but otherwise I will distinguish them. Mr Somerville is a director of Somerville & Co Pty Limited. 4 ASIC claims that Somerville was personally involved in the breaches alleged against the other defendants within s 79 of the Act and is accordingly liable as such a person for the breaches alleged against the other defendants. That is because subs (2) of each of ss 181, 182 and 183 of the Act provides that "a person who is involved in a contravention of subsection (1) contravenes this subsection". 5 The third, seventh, ninth and tenth defendants have all consented to the making of declarations sought by ASIC but may have something to say on the question of disqualification. The eighth defendant although not signing any consent has indicated in written submissions that he accepts that the declarations will be made. In ASIC v Rich (2004) 50 ASCR 500 White J held that the court should not in this type of matter make declarations by consent as interests wider than those of the particular parties are involved. Thus it is necessary for the court to satisfy itself of the contraventions although the consents are evidence in the proceedings. I work on that basis. 6 I should add that it is obvious enough that the real aim of ASIC is directed against Somerville because it is his conduct in advising the other defendants upon certain actions complained of, and on the claim of ASIC, the procedure put in place as a result of that advice, which ASIC wants to see does not happen in the future. General Nature of Transactions and Conduct of which Complaint is Made 7 Each case involves the director or directors of an original company seeking advice from Somerville because the company was suffering or was about to suffer financial problems. At the relevant times each company, while not necessarily insolvent, was under threat of insolvency or at least likely to become insolvent. In each case the company, sometimes through introduction of an accountant, and sometimes direct, sought advice of Somerville as to its position and courses of action open. In each case other than one, after obtaining instructions Somerville wrote a letter of advice not in identical but in very similar terms. 8 A copy of one of these letter is annexure "A" to this judgment. No letter is in evidence in the second Republicorp transaction. The letter was written by Somerville after discussions with the relevant director or directors and sometimes in addition, the accountant or other adviser of the company. Most of the companies are sole director companies but in the VMT matter and the Star Chrome matter there were two directors. The only variations in the letters of advice were the figures as to the fee of a deed administrator and the figure for the consideration for transfer of the assets, namely the figure up to which all dividends from the new company would be paid to the old company. 9 In each of the transactions in question there then followed a course of action in which the old company ceased to trade, a new company was formed usually with a similar name, and an agreement was entered into between the old company and the new company transferring the assets of the old company to the new company. 10 Those agreements for sale and purchase were similar but there were some differences. All included clauses under which: (a) the vendor company agreed to transfer its business, or the assets of its business, to the purchaser company; (b) the consideration was the issue of 100 "V" class shares in the purchaser company carrying the right to receive all dividends declared by the company until a total of (a certain amount) was paid; (c) the vendor company would receive payments invoiced prior to the settlement and apply those to debts of the vendor company; (d) the trade creditor debts of the vendor company would remain with the vendor; (e) employees would be terminated and the purchaser company would offer re-employment on the same terms; (f) plant and equipment on lease or hire would be transferred to the purchaser and leases of premises assigned. 11 In all cases the agreement was carried into effect. In no case was a dividend paid on the "V" class shares. The result of the implementation of the agreements was that the purchaser company acquired all the assets of the vendor company; the vendor company would receive no payment unless dividends were declared by the purchaser company and none were; the purchaser company obtained the employees, premises and equipment of the vendor company free of all liabilities of the vendor company other than liabilities under lease or hire purchase agreements. As I will explain, these liabilities were not only debts to trade creditors specifically referred to in the agreement, but also taxation debts and debts for insurance premiums. 12 In all but one case, the agreement was prepared by Somerville. In the other case it was prepared by another solicitor whom the relevant directors never met. This was because Somerville did not have time at that stage. Nevertheless, the agreement was in precisely the same form as the others and there is no difficulty in drawing the inference that it would not have been provided without the involvement of Somerville. In any event, the work in bringing about what was described as the restructure was done by Somerville not by the other solicitor. 13 There were other documents required to finalise each transaction namely, as I have said, formation of a new company, sometimes change of name of the vendor company so the new company could be formed with that name, preparation of returns as to directors, officers and the like for the new company and preparation of a resolution altering the Constitution of the new company acquired as a shelf company, to bring into existence in the capital of the company the "V" class shares. Generally all of this was attended to in the office of Somerville. It is proper to say that there is little contest on any of this, the solicitor defendants having made proper admissions in their defence. 14 As the dealings in respect of each company and the individual directors must be considered separately I will deal with them describing them in the way each is referred to in the amended statement of claim. The First Nick Jones Transaction – the Piditty Liditty Transaction 15 The Deputy Commissioner of Taxation served a Creditor's Statutory Demand on Piditty on 13 March 2002 in respect of a tax debt of $56,362. This brought about discussions between Jones and Mr Richard Thorp, an advisor to Jones who discussed the matter with Somerville. Somerville met with Jones on 19 June 2002 and on 26 June 2002 issued a letter of advice in the form I have set out. Somerville arranged the incorporation of Jones' Removals & Storage Pty Limited. Mr Radman, an employed solicitor of Somerville, sent Jones documents to be signed following the incorporation. On 23 July 2002 QBE Workers Compensation (NSW) commenced proceedings for winding up of Piditty. On that day a meeting of the new company resolved upon the creation of the "V" class shares and the agreement for sale of the business was executed. On 25 July 2002 Somerville was advised of the Statutory Demand from the Taxation Department and a separate demand for $96,000 for unpaid superannuation. The QBE winding up application was fixed for hearing on 23 August 2002. Somerville advised Mr Thorp that the settlement date for the sale of the business must be brought forward from the date which had been fixed to a date prior to the return date of the winding up proceedings and the new date was fixed for 21 August 2002 when the transaction was concluded. Piditty was wound up on 23 August 2002. The figure for the "V" class share dividend was $150,000. That figure was arrived at not by valuation but by estimate of Jones. 16 The business continued under the new company. No dividends were declared. It was conceded in argument that the liquidator might have been able to take some proceedings to set aside the transaction as uncommercial or to force consideration by the company as to dividend payments but in any event that did not happen. 17 On 3 July 2006 QBE sent a Creditor's Statutory Demand to the new company, namely Jones' Removals & Storage Pty Limited, for a claimed debt of $11,705 for unpaid workers compensation premiums. By this time Somerville was conducting his business under the auspices of the second defendant. Jones contacted Somerville about this new demand and there was discussion about a restructure and a request to pay $3,500 up front on account of costs. Somerville told Jones that QBE had taken winding up proceedings listed for 9 November 2006. There were negotiations between Jones and Somerville and his advisors as to payment of the required fee by instalments. Somerville arranged an adjournment of the winding up proceedings and told an employee, David Jones, that Jones' Removal & Storage Pty Limited was insolvent, arranged the purchase of a shelf company, arranged the name of Jones' Removals Pty Limited and sent a letter of advice to Jones on 17 November 2006 in the usual terms. Somerville then prepared the agreement for sale of business which was signed on 21 November 2006. The dividend amount this time was fixed at $50,000. The second company, Jones' Removal & Storage Pty Limited, was wound up on 7 December 2006, Mr Neil Geoffrey Singleton being appointed as liquidator. Mr Jones was the sole director of each of the three companies involved in these transactions. Simon Durant – Stimulus Solutions Pty Limited, Stimulus Solutions Management Pty Limited 18 Mr Durant was the sole director of Stimulus Solutions Pty Limited. It had traded at a loss in the 2001 and 2002 tax years. It had outstanding creditors of over $200,000 as at 1 July 2002. It was apparent that if it was not then insolvent it was likely to become so. Mr John Hurley, the accountant for the company, advised Mr Durant to meet with Somerville which he did on 2 September 2002. The financial problems were discussed. The letter of advice was sent on 4 September 2002. A costs agreement relating to the restructure was sent on 3 September 2002. Somerville prepared or arranged the necessary documents for the change of name of Stimulus Solutions Pty Limited to Stimulus Solutions Management Pty Limited and thereafter for Stimulus Solutions Pty Limited to be formed as a new company. I cannot refrain from pointing out the obvious result of such name swapping is that persons dealing with the new company think they are dealing with the old one, and in fact know of no change unless they look at the ACN number which is unlikely. The agreement was signed on 16 September 2002. The "V" class figure for preferential rights to dividends was $100,000. At the end of September 2002 the Deputy Commissioner of Taxation served a Statutory Demand on the old company for a taxation debt of $136,642 and on the same date issued a penalty notice to Mr Durant under s 222AOE of the Income Tax Assessment Act 1936 for a tax debt of $105,861. Mr Radman who was a solicitor employed by Somerville advised Mr Durant that the only way he could escape personal liability under the latter notice was to place the company into liquidation. Mr Radman then spoke to Mr Martin Green who agreed to be appointed as liquidator and on 14 October 2002, before the expiration of time under the s 222AOE notice, the company was placed into liquidation under a creditors' voluntary winding up. The liquidator made some claims for recovery of $15,359 for invoices issued by the insolvent company but for amounts to be paid to the new company. He also made some claim about the sale being an uncommercial transaction. The claims were settled by payment of a total of $20,359 which really amounted to the repayment of the debts collected by the wrong company and the sum of $5,000 to bring about the settlement of any claim against the directors. No dividend on the "V" class shares was ever paid. Rowley and Bradnam – VMT Holdings Pty Limited (VMT), Republicorp Pty Limited, Republicorp International Pty Limited, Republic Corp Int Holdings Pty Limited 19 The defendants, Messrs Rowley and Bradnam, were directors of VMT. In April 2002 they arranged the incorporation of a new company, Republicorp Pty Limited, and transferred some of the assets of VMT to it. VMT had a deficiency of assets over liabilities in May 2002. Messrs Rowley and Bradnam had met Somerville before this time. They and their accountant met him in September 2002. After discussions as to requirements for restructure, Somerville gave his usual letter of advice on 18 September 2002. A costs agreement relating to restructure was signed on that day. Somerville and Rowley met again on 25 October 2002. Somerville arranged the registration of Republicorp International Pty Limited. In this case the sale agreement was from VMT and Republicorp Pty Limited as vendors to Republicorp International Pty Limited as purchaser. Somerville had advised that an earlier sale of assets from VMT to Republicorp Pty Limited might not have been effective or might not have been proper. It is of some significance that the sale agreement differed from the others in that the trade creditors' liabilities of Republicorp Pty Limited were assumed or taken over by International but not other liabilities. The liabilities of the VMT company, remained with that company. The "V" class share figure was $100,000. VMT was insolvent as a result of the sale agreement. On 3 May 2004 the Deputy Commissioner of Taxation issued a penalty notice to Rowley and Rowley told Somerville of this. Somerville contacted Mr Krejci and he and Rowley met with him as a result of which on 18 May 2004 a meeting of creditors placed VMT into a creditors' voluntary winding up. In the books of VMT, Rowley and Bradnam had loan accounts under which they owed $65,264 and $42,367 respectively to VMT. There was some explanation for this which seems to have been a device to avoid paying PAYG tax instalment deductions so that salaries were shown as loans. In any event, after negotiations the liquidator's claims were settled for $30,000 and the "V" class shares were transferred to Rowley. There had been no dividend. 20 There was a similar series of transactions in 2005 when the Deputy Commissioner of Taxation served on Rowley s 222 notices in respect of tax debts of Republicorp International Pty Limited, the total amount being about $278,000. 21 Rowley contacted Somerville again. They met, and as result an almost identical series of transactions took place. This time there was no letter of advice but Somerville arranged for Republicorp International Pty Limited to be formed. There was a costs agreement and a sale of business agreement with a "V" class share figure of $400,000. Somerville contacted Mr Warner who agreed to act as Liquidator and was appointed as such pursuant to the creditor's voluntary winding up on 25 April 2005 together with Mr Ivor Worrelll, both of them being partners of Messrs Worrellls Accountants. Some months later Mr Mooney, who was employed as a solicitor with Somerville & Co, made an offer on behalf of Rowley for the "V" Shares for sum of $15,000 and those shares were transferred to Rowley for that amount. Christopher Paul Martin Jones -Chatswood Furniture & Fine Art Pty Ltd And Memorial Fine China Pty Ltd 22 Mr Christopher Jones was the sole director of Chatswood Furniture and Fine Art Pty Ltd from August 1997 to December 2004 and held all the issued shares in that company. Since June 2003, he has been the sole director of Memorial Fine China Pty Ltd and the sole share holder in that company. In May 2003 the Deputy Commissioner of Taxation issued a Notice of Intended Legal Action to the first company claiming a tax debt of $38,267. Mr Thorp, who was an advisor to Mr Jones, contacted Somerville about a pending insolvency situation and there was a meeting between Somerville, Jones and Thorp on 2 June 2003 where a company restructure was discussed and a note was made that the creditors were to be left in the old company. On 3 June 2003 the usual letter of advice was furnished and a cost agreement was entered into on that date. Somerville instructed Corporate Network Limited to register Chatswood Furniture & Fine Art Pty Ltd as a new company. On 6 June 2003 the Deputy Commissioner of Taxation issued a Penalty Notice pursuant to s 222 of the Income Tax Assessment Act, in respect of unpaid tax debts of the first company in the of $15,255 and a Statutory Demand against the company in respect of unpaid taxes in the sum of $43,214. There was a meeting at Somerville's Office on 10 June 2003 when the Sale of Business Agreement which had been prepared by Somerville or his firm, was executed. The amount of dividends for the "V" class shares this time was $150,000. The business name for the first company was Chatswood Restorations, and after the incorporation of the second company, that became the business name for the second company. All the necessary minutes acquired after incorporation of the second company were prepared in the offices of Somerville & Co. On 23 June 2003 the first company was placed into liquidation pursuant to the resolution of creditors for a voluntary winding up and Mr Green was appointed liquidator. There is some evidence to suggest that the assets of the first company had a value of less than $8,000 and in fact that figure was paid by Jones to the Liquidator. Troost – B&R Storage and Distribution Pty Ltd & Road Sea Rail Equipment Pty Ltd 23 Mr Troost was at all relevant times the sole director of both companies. B&R Storage and Distribution was a transport, storage and distribution business. In 2002 two drivers employed by the company commenced proceedings which were transferred to the Chief Industrial Magistrate's Court seeking recovery of underpaid employee entitlements. This was a substantial claim which was expected to succeed. Mr Troost consulted Somerville about it in August 2002 and entered into a costs agreement at that stage in respect of a restructure to take place in the future. There was then some delay but in May 2003, Somerville met with Mr Troost and his accountant, Mr Meyers, and discussed the consequences if the claim of the employees' succeeded, it being thought that it would succeed, and that in the event that it did succeed, it would result in a very substantial judgment against the first company. The consequences would be that the company would immediately become insolvent and lose all its assets. There is not in evidence the letter of advice given to Mr Troost after the first meeting but it is clear that some letter was provided on 17 September 2002 because a letter from Somerville to Troost of 11 June 2003 refers to "the previous letter of advice which we provided to you on 17 September 2002". A meeting on 20 May 2003 between Somerville, Troost and Meyers dealt with new proposals as to the transfer of part of the assets to the new company and also dealt with a mortgage over a home unit property, which was owned by Mr Troost's sister, who held 50 per cent of the shares in B&R Storage and Distribution Pty Ltd. B&R Storage and Distribution Pty Limited had considerable assets in vehicles and trailers and it appears that the equity was thought to be worth about $2.5 million. Road Sea Rail Equipment Pty Limited was registered in June 2003. This was arranged by Somerville. The usual documents and resolutions for "V" class shares were prepared and executed, the figure for "V" class dividend being $2,500,000. There were further meetings between Somerville and Troost as to problems relating to stamp duty which might be incurred on transfer of those assets to the new company. It is clear from the notes which were taken, that what was sought to be achieved was the taking those assets of the vehicles and trailers out of the company so that their value would not be available to pay any judgment debt which the employees might obtain as a result of the proceedings before the Chief Industrial Magistrate. 24 Notes of subsequent meetings attended by Somerville and Troost in 2003 indicate that the position had become urgent and that Mr Troost would seek stamp duty exemption if he could. 25 The agreement for sale of business is dated 18 July 2003. This is the agreement which were referred to the transfer of the business assets only which were defined as being trucks, trailers and plant and equipment owned by the vendor. That may not have necessarily have comprised all of the assets but the intention was to take those assets out of reach of the employees if they became creditors as it seemed certain they would. The Chief Industrial Magistrate gave reasons on 24 September 2003 from which it was clear an order would be made for a very substantial sum to be paid by the employer company to the employees. Proceedings were stood over to enable a figure to be agreed upon if possible. In March 2004, there was a meeting between Troost and Somerville discussing a Statutory Demand from the Office of State Revenue ("the OSR") and the final judgment expected from the Chief Industrial Magistrate. For some reason those final orders were not made until January 2005 but were orders for payment to the two employees of the sums totalling in excess of $400,000. It is clear from notes of the meeting between Somerville and Troost on 24 March 2004 that all the assets be transferred under the sale agreement had not been transferred at that date. There was a note that vehicles which had not been transferred, should be transferred to the new company even if some of them were subsequently sold. The first company was put into Liquidation with a Mr Krejci as liquidator on 25 June 2004. Mr Troost informed a meeting of creditors that the litigation of the employees had resulted in that company being unable to meet its financial commitments. By that time any assets which he had, which would have been available to meet those commitments, had been transferred. Monsell and Wells - Star Chrome Pty Ltd & Star Chrome Patent Pty Ltd 26 The transactions involved here are more or less the same as the other ones which have already been discussed in this judgment. The first Star Chrome company was on the evidence, making operating losses for the years ending 30 June 2000 until 30 June 2004. The Deputy Commissioner of Taxation made a demand for payment of a tax debt of $82,127 on 26 February 2005 and issued a Garnishee Notice to Westpac Banking Corporation. In April 2005, Mr Monsell contacted a Mr Mooney of Somerville & Co Pty Ltd advising that the first Star Chrome Company owed $100,000 to the Australian Taxation Office and that the company's bank accounts had been frozen pursuant to the Garnishee Notice. On 3 May 2005, Mr Wells met with Mr Somerville at his office where Mr Somerville gave the usual advice as to restructure and gave the written advice on 6 May 2005. There then followed the registration of Star Chrome Plating Pty Ltd, the second Star Chrome Company, together with preparation by the Somerville defendants of the necessary minutes of meetings. On 20 May 2005 the agreement for sale of business was executed, the "V" class share dividend amount being in this case $70,000. From that date the Star Chrome Business was carried on by the second Star Chrome company. On 12 July 2005 the Deputy Commissioner of Taxation issued a Creditor's Statutory Demand to the first Star Chrome company demanding a sum of $85,080 for tax debts due and Mr Mooney of Somerville advised Mr Monsell to place the first Star Chrome company into liquidation. Mr Green agreed to carry out the liquidation for a particular fee and on 27 July 2005 the company went into liquidation pursuant to a creditors' voluntary winding up and Mr Green was appointed as liquidator. Additional Facts Concerning the Particular Transactions involving the Particular Directors Nick Jones' Transactions 27 The business of Piditty was that of furniture removalists. There was a particular clause in the sale and purchase agreements that the debts to trade creditors would remain with the vendor company. The evidence shows that Mr Jones knew the company was insolvent and in fact he thought it was worth about $5,000 thus the figure for $150,000 for the "V" class share dividend seems to have had little to do with the value of the assets transferred. Mr Jones said that the idea of the transaction was to get some money and pay the creditors back. The creditors in total amounted to about $160,000, for the most part being liabilities for tax or insurance premiums. While the agreement provided that the debts to trade creditors would remain with the vendor company it said nothing about moneys owed to other creditors but the vendor company would have remained liable in any event. There was however, one additional transaction involved in this matter in that by deed dated 24 July 2002 a debt of $80,000 owed by Piditty to Mrs Margaret Jones, the wife of Nick Jones, was dealt with. The deed provided that the new company, Jones' Removals and Storage Pty Limited, would pay the whole of that debt within three months of a demand from Mrs Jones calling for such repayment. The deed provided that the purchaser company would grant a charge over its assets to support the guarantee which it gave under the document for payment of the loan to Mrs Jones and in clause 3.2 Mrs Jones released Piditty from the loan and any claim arising under it. 28 In the transcript taken of the ASIC examination of Jones, the following appears relating to the second transaction: "Question: Whose idea was it to enter another sale of business agreement? Was it your idea or was it Mr Somerville's? Answer: Well I went to him to discuss my position and he said, 'Do it again'. I said, 'It sounds a bit rich'. But he said, 'No, it's alright'. Question: When you said 'It sounds a bit rich' what were you thinking? Answer: Well, you feel as though you are walking away from liabilities without paying, right, which I don't like doing. But the option was to stop working and have absolutely no future in making money at all so that's what I did. Either way, the only hope of getting money to these people was to continue to work. Question: In your own words what was the purpose behind this agreement? Answer: Well, I couldn't continue if they were going to wind the company up so I had to have a means of trading. I had to have a few assets that it owned to use." Mr Durant 29 The business of the Durant companies was to provide IT support services. He was the sole director and shareholder of both companies. Durant said that the figure of $100,000 was an arbitrary value because the assets of the company amounted only to furniture and some computers. He agreed at his examination that the result of the transfer was that it was a seamless transfer of the business from the vendor company to the purchaser company so that it could carry on as before. During his examination Mr Durant stated on a number of occasions that the purpose of the transaction was to get the staff and suppliers paid. It was never suggested that one of the purposes was to get the tax debt paid. The Rowley & Bradnam Companies 30 The business of the companies was the marketing and servicing of IT software products. At the time of the first transaction there was a taxation debt of about $150,000. Rowley said at his ASIC examination that the valuation of the business of $100,000 was a bit generous. So far as the second transaction was concerned, Mr Rowley explained again in the examination, that the second series of problems arose through delay in obtaining a government contract which was later obtained. There was a debt due to the Taxation Office of between $140,000 and other debts and he was told by Mr Somerville that he would have to go through the same procedure and get a new company again. Nevertheless, it could not have been said that it was ever intended to keep the second vendor company in existence because on the same date as the agreement for sale was signed Messrs Worrells were asked to call a meeting of creditors for the purpose of putting the vendor company into liquidation. Troost Companies 31 This was the agreement which provided for the sale of the business assets. It provided that the purchaser company would indemnify the vendor company in respect of any liability of the vendor company under equipment leases. Mr Somerville wrote a letter to Mr Troost on 11 June 2003 which included some advice under the heading "Protection of Trucks and Trailers" as follows: "Protection of Trucks and Trailers You have trucks, trailers and equipment owned by, or leased through B & R Storage & Distribution Pty Limited ("B & R"), with a net equity in the range of $400,000.00 to $500,000.00. As time goes by, equity in such equipment will increase, and become an even more valuable asset. B & R is a company in which 50% of the shares are held by you, and 50% held by your sister, Lisa. B & R is also the company which employs your drivers and, accordingly, is subject to the risks, including the potentiality of litigation, associated with any company employing a workforce. It is suggested that the ownership, and lease equity of the trucks and trailers should be transferred away from B & R to a new separate company, any future such equipment would be purchased or leased through such new company. The new company will be a separate company, not exposed to the risks of B & R, or the risks of Road Seal Rail Logistics Pty Limited ("Logistics"), which is the trading company. It is proposed that you will be the sole director and secretary of the new company, and that there will be an agreement between this company and Logistics, whereby the new company provides the use of the trucks and trailers to Logistics, in return for a fee. It will be necessary for the new company to pay for the equipment, including equity and leases, which it will be receiving. However, the new company will not have the cash with which to do so. Our suggestion is that the new company pay for such equipment by issuing shares to B & R. These shares would carry no voting rights, but would carry the right to receive all of the dividends of the new company over the following 5 years, until an amount equal to the value of the equity in the trucks and trailers has been paid. The amount of dividends to be paid are [sic] in the discretion of the directors. Also, the profit to be earned by the new company would depend on the agreement between the new company and Logistics. Accordingly, from a practical point of view, the payment of such dividends would be at your discretion." 32 The purpose of setting out this additional information is to show that while the transactions differed in some respects, they were to all intents and purposes transactions each of which was intended to achieve a similar result. THE LAW – STATUTORY PROVISIONS Corporations Act 2001 (Cth) 33 Sections 181(1) and (2), 182(1) and (2), 183(1) and (2) and 79: "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. (2) A person who is involved in a contravention of subsection (1) contravenes this subsection. 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. (2) A person who is involved in a contravention of subsection (1) contravenes this subsection. 183 Use of information -- civil obligations Use of information -- directors, other officers and employees (1) A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. (2) A person who is involved in a contravention of subsection (1) contravenes this subsection. 79 Involvement in contraventions A person is involved in a contravention if, and only if, the person: (a) has aided, abetted, counselled or procured the contravention; or (b) has induced, whether by threats or promises or otherwise, the contravention; or (c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention." 34 ASIC claims that each of the defendants other than the Somerville defendants contravened ss 181(1), 182(1) and 183(1) and that the Somerville defendants were persons involved in such contraventions in each case. 35 I should state that all those who appeared on the hearing accepted, and it is clearly correct, that in cases where a company is insolvent, or might be insolvent, or is nearing insolvency, that creditors have an interest in the company "which cannot be overridden by shareholders": Sycotex Pty Ltd v Bescher (1994) 13 ACSR 766 at 785. The advice of Mr Somerville in each case was that the position of the company was that it was insolvent or likely to become so, so that the directors should cease trading. It followed that the interests of creditors had to be taken into account by the directors in dealing with the assets of the company in question. 36 There was considerable debate before me as to the proper test to be applied under s 181(1) and whether the standard was objective or subjective. I am always reluctant to embark on a discussion of conflicting opinions in decisions of single judges and then to give yet another single judge decision. The decision usually cited as supporting the subjective test is Marchesi v Barnes [1970] VR 434 which has been followed more recently in ASIC v Maxwell (2006) 59 ACSR 373 and in ASIC v Macdonald & Ors (No 11) [2009] NSWSC 287 at [657]. The decision usually cited to support the objective test is that of King CJ in Australian Growth Resources Corporation Pty Limited v Reesame (1988) 13 ACLR 261. In ASIC v Sydney Investment House Equities Pty Ltd (2008) 69 ALSR 1 Hamilton J considering the present s 181(1) and taking into account s 184 held that it was an objective test. According to the learned authors of Company Directors – Principles of Law and Corporate Governance – Austin, Ford and Ramsay, the position is as set out in the following passage at p 266 of that work under s 7.2: "The issue is now clarified by the statutory formulation. This is because there is now a provision (s 184(1)) which imposes criminal sanctions for breach of the duties to act in good faith in the best interests of the corporation and for a proper purpose only if the director or other officer was 'intentionally dishonest' or reckless. In other words, the requirement specified by Gowans J in Marchesi – that a contravention requires knowledge that what is being done is not in the interests of the company and deliberate conduct in disregard of that knowledge – can lead to the imposition of criminal sanctions. This means that s 181(1) clearly applies where a director exercises powers for a purpose which the director thinks is proper but which the court judges to be improper." This seems to be supported by the decision in ASIC v Adler (2002) 41 ACSR 72. 37 Whatever the position, I consider it clear first that unless the interests of the creditors are taken into account where objective circumstances require this, then if those interests are disregarded and only the interests of shareholders considered, the directors cannot be acting in good faith; and second, this really does not matter because it is clear the requirement to exercise powers for a proper purpose is an objective test: Chew v R (1992) 173 CLR 626; Linton v Telnet Pty Ltd (1999) 30 ACSR 465 at 471; Re HIH Insurance Ltd (in prov liq); ASIC v Adler (2002) 42 ACSR 80 at [738] – [740]. Section 182 38 There are no problems with the interpretation of this section. It was considered in ASIC v Adler. The test of whether conduct is improper is objective. I consider the words "someone else" must encompass some other corporation. Section 183 39 The only question is the meaning of the word "information". The ordinary meaning of this word I consider to be to have knowledge of facts. That is the meaning ascribed to the word in the decision of the Full Court of the Supreme Court of South Australia in MacNamara v Flavell (1988) 13 ACLR 619. In Rosetex Co Pty Ltd v Licata (1994) 12 ACSR 779, Young J held that "information" meant information which it would be a breach of fiduciary duty to disclose. This might appear to limit the term to confidential information. With respect to the learned Judge, I consider the South Australian decision to be correct. Section 79 40 The case of ASIC is that the Somerville defendants were involved in the contraventions claimed by falling within subs (a) and (c) of s 79 of the Act. I consider that in accordance with Giorgiani v R (1985) 156 CLR 473, York v Lucas (1985) 185 CLR 661 and Periera v Director of Public Prosecutions (1988) 63 ALR 1 that actual knowledge is required of the elements of the principal offence but that such knowledge may in some circumstances be inferred. 41 Aiding and abetting a plan means helping or assisting or encouraging its implementation. Counselling means advising conduct (here wrongful conduct), and procuring means taking action to bring about the (improper) result in that there must be a causal connection between that action and the conduct impugned. APPLICATION OF THE LAW TO THESE TRANSACTIONS 42 In each of the transactions complained of the assets of the vendor company were transferred to the purchaser company. The only consideration was the issue of the "V" class shares. The case of ASIC is that there was no real consideration or that any consideration was illusory. In no case was there a dividend declared on the "V" class shares. Even those purchaser companies which made some payments towards debts owing by the vendor company did so out of their own assets and not by way of dividend. The declaration of dividend out of profits in small companies such as these was, judging by past trading history, unlikely and was properly, I think, described as optional or discretionary. Original creditors who were paid subsequently were either employees who continued with the new company or suppliers that the purchaser company relied upon to continue its business. Where the agreement did provide for creditors to remain the responsibility of the vendor this related only to the trade creditors, there being no reference to non trade creditors such as insurers or the Taxation authorities. This I consider indicates that there was no genuine intention to discharge liability for such non-trade creditors. The fact that settlement dates were arranged to ensure sale before winding up when the date for winding up was imminent or that winding up took place so as to avoid personal liability as a result of a s 222AOE Notice supports the conclusion there was no proper basis for the transactions other than to keep the benefit of the assets in another company without the burden of liabilities. I find there was no proper purpose in any of the impugned transactions and accordingly a breach of s 181(1). 43 The same conclusion must be reached on the claims for breach of s 182(1). In each case a director or the directors of the vendor company used their position to gain advantage for themselves or for someone else. They gained advantage for themselves as they continued to direct companies which had the use of the transferred assets and they benefited someone else, namely, the new company. In the case of Mrs Jones, they benefited her as well by preferring her interests over the interests of other creditors, but it is not clear from the pleading whether there is a complaint about this. In doing all of this they caused detriment to the vendor company by removing its assets from reach, substituting for those assets a right to dividends if such dividends were ever declared. On the assumption, probably unfounded, that the dividend figure represented a reasonable price for the assets of the vendor company, that position changes when it is realised that payment could only be made out of profits earned by the purchaser company. The fact that in some cases the figure ascribed as a value to the assets seems to have been considered to be in excess of the value of those assets indicates, I consider, that there never was any genuine intention to discharge the liability by way of dividend. 44 So far as breach of s 183(1) is concerned, the same conclusion must be reached. In each case the director or directors knew that the vendor company was insolvent or reaching insolvency, or in the case of Mr Troost, if a contingent liability became actual then the company would not be able to meet it. In fact Mr Troost's actions were entirely directed towards keeping his trucks and defeating the claims of the existing employees and possibly defeating other claims which he expected might come. Thus with the knowledge the vendor company was or was unlikely to be able to satisfy its creditors, the transfers took place to give an advantage to the directors thereby causing detriment to the vendor corporation in circumstances where the interests of creditors fell to be considered. 45 While it is possible to come to these conclusions independently of the consents, nevertheless the fact that the third, seventh, ninth and tenth defendants have consented to declarations of breach of each of the three sections as a result of the transactions impugned is, I consider, evidence to support the conclusions reached. And the fact that none of the other non Somerville defendants has given any evidence in this part of the proceedings enables the Court to infer that any evidence they might have given would not have assisted their cause on these issues: Jones v Dunkel (1959) 101 CLR 298. While the evidence of Mr Rowley on the ASIC investigation does support a desire to pay at least employee and trade creditors there was no such desire to pay the tax debts and the second transaction took place as a result of tax demands. Section 79 Claim 46 Mr Somerville was a partner in the firm of Somerville & Co, Solicitors, during the period 1 September 2002 to 21 January 2006. Mr D J Heath was also a partner during that period but nothing turns on this. As from 2 January 2006 the firm became an incorporated legal practice within the meaning of that term pursuant to Part 2.6 of the Legal Profession Act 2004. Mr Somerville and Mr Heath became at least as from 2 January 2006 legal practitioner directors of Somerville & Co Pty Limited trading as Somerville & Co. Not a great deal turns on this as most of the transactions involved here took place before 2006. The only exception I think is the second Jones transaction. For some reason Somerville & Co Pty Limited is alleged to have been involved in the final Republic Corp transaction but as nothing was done in respect of that transaction after the end of 2005 that seems to be a mistake. In the same way, allegations are made in the Amended Statement of Claim about involvement of the firm of Somerville & Co. While it is pleaded that Somerville was responsible for conduct of employees nothing really turns on this. At least as far as Mr Radman is concerned his evidence at the ASIC examination makes it clear that he did nothing in the transactions except under instructions from Somerville. 47 In each case Somerville or the company sent the letter of advice as to the position as a result of insolvency or likely insolvency and as to the only course open, namely, to enter into a sale of the business or assets agreement on the terms set out. In addition, in each case but one, Somerville prepared the agreement and I find he was responsible for the agreement in the other case in any event. In each case Somerville arranged the registration of the new company, prepared the necessary returns and resolutions for the new company "V" class shares. In the relevant transactions Somerville ensured that the sale agreements were executed and settled before winding up and where relevant that winding up took place prior to the triggering of a personal liability in a director pursuant to a s 222 Notice issued by the Deputy Commissioner of Taxation. In each case where it was necessary to have a winding up by way of a creditor's voluntary winding up, Somerville made arrangements for a particular person to consent to appointment as liquidator and agreed on the fees. 48 In terms of s 79 he advised on and recommended the transaction which breached the sections in question, he prepared or obtained all documents necessary to carry out the transaction, he arranged execution of the documents in all cases with knowledge of the relevant facts. I think it clear that he aided, abetted, counselled and by carrying out the necessary work procured the carrying out of the transaction. There was a direct causal connection between his involvement and the breach. I find the transactions would not have taken place but for his involvement. 49 I have of course carefully considered the argument of Mr Coles QC that it would be extraordinary if a solicitor just giving advice became liable under s 79 of the Act. That of course may be the position in a normal case, but that depends upon what advice was given. If advice is given the result of which brings about an action by directors in breach of the relevant sections of the Act, in other words, when advice is given by a solicitor to carry out an improper activity and the solicitor does all the work involved in carrying it out apart from signing documents, it seems to me that there can be no question as to liability. 50 Finally, Somerville gave no evidence. He is a solicitor. It is proper to draw the inference that any evidence he could have given would not have assisted his case on the liability issue: Jones v Dunkel. What has really happened here is that a scheme has been devised to bring about asset stripping but to attempt to make this seem legitimate by providing for "V" class shares. RESULT 51 It follows that most of the declarations and injunctions sought will be made. However, no argument was addressed on the declarations sought against Somerville "as a partner of Somerville & Co liable for the conduct of employees" and unless further argument is put, I would not make that declaration in any of the transactions. 52 It may be that ASIC can limit or shorten the declarations sought and having indicated the result I will adjourn for that to be considered. 53 Finally since the hearing on this part and towards the end of the preparation of this judgment Mr Bradnam contacted the Court and I will hear him before making any determinations referrable to him. ********** 11/09/2009 - Clerical error - Paragraph(s) 8 28/09/2009 - 2002 changed to 2004 in two places - Paragraph(s) 19 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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