Supreme Court New South Wales Medium Neutral Citation: The Old Kiama Wharf Company Pty Ltd (in liquidation) v Betohuwisa Investments Pty Limited & Anor [2011] NSWSC 823 Hearing dates: 12, 13, 14 & 21 July 2011 Decision date: 05 August 2011 Jurisdiction: Equity Division Before: Pembroke J Decision: See paragraph [45] Catchwords: CORPORATIONS - uncommercial transaction - whether requirement that transaction be at an undervalue - where related parties control corporate entities - whether transaction at arms length - whether transaction designed to defeat creditors - Corporations Act 2001 (Cth) Section 588FB CORPORATIONS - voidable uncommercial transaction - voidable insolvent transaction - Corporations Act 2001 (Cth) Section 588FF CORPORATIONS - directors - whether person "shadow director" - whether person "de-facto director" - Corporations Act 2001 (Cth) Section 9 DECLARATIONS - requirement for controversy - whether controversy need be ripe - effect as issue estoppel or res judicata - relevance to future proceedings Legislation Cited: Corporations Act 2001 (Cth) Crown Lands Act 1989 (NSW) Cases Cited: Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535 Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 Gardner v Diary Industry Authority (NSW) (1977) 52 ALJR 180 Lewis (as liq of Doran Constructions Pty Ltd (in liq)) & Anor v Doran & Ors (2005) 219 ALR 555 McDonald v Hanselmann (1998) 144 FLR 463 Re Cryan (1930) 152 A 675Corp Re Solfire Pty Ltd (in liq) (1997) 25 ACSR 160 Russian Commercial & Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438 Tosich Construction v Tosich (1997) 78 FCR 363 University of New South Wales v Moorhouse (1975) 133 CLR 1 Welcome Homes Real Estate Pty Limited & Ors v Ziade Investments Pty Limited & Anor [2007] NSWCA 167 Category: Principal judgment Parties: The Old Kiama Wharf Company Pty Ltd (in liquidation) - plaintiff Betohuwisa Investments Pty Limited - first defendant Warwick Colbron - second defendant Representation: Counsel: M J Cohen - for the plaintiff R Marshall - for the first defendant Warwick Colbron - litigant in person Solicitors: Norton Rose Australia - for the plaintiff Guardian Legal - for the first defendant Colbron & Associates - for the second defendant File Number(s): 2010/00211417 Judgment Introduction 1This case concerns a curious and contentious transaction between two companies - Old Kiama Wharf Company Pty Limited (OKW) and Betohuwisa Investments Pty Limited (Betohuwisa). The former is now in liquidation. It seeks an order against Betohuwisa avoiding the transaction. It wishes to have the property which was the subject of the transaction restored to it. It relies on Sections 588FB and 588FC of the Corporations Act. 2The transaction in question is a transfer of property but there were a number of preliminary steps, each of which I will shortly enumerate and explain. Those steps culminated on 30 November 2009 when OKW transferred to Betohuwisa, for a stated consideration of $475,000, the businesses known as "Cargos Wharf Restaurant" and "Barnacles Seafood Takeaway & Bistro" together with the balance of the lease from the Department of Lands on which the businesses were conducted. There are many features of the transaction which deserve scrutiny. The plaintiffs say that the transaction was "uncommercial" within the meaning of Section 588FB(1) and "insolvent" within the meaning of Section 588FC. The Old Kiama Wharf Company Pty Ltd 3A central factual question at the hearing was the ownership and effective practical control of OKW and Betohuwisa. OKW was a company whose sole director and shareholder at all times after 2004 was a Christina Jackman. Ms Jackman was also the secretary of the Company. The ASIC records show that the share she originally held was not beneficially owned by her. Despite the ASIC records, she and the second defendant, Warwick Colbron, denied their accuracy. They denied that she was not a beneficial shareholder. The other share was originally held by Mr Gary Day, an accountant, who did not give evidence. Ms Jackman said that his share was transferred to her in July 2004. 4Ms Jackman was an unimpressive witness whose evidence I am not prepared to accept except where it is against interest or reliably corroborated. She was appointed to her positions as director, secretary and shareholder of OKW without any financial training, with limited business acumen, with no experience as a company officer and no experience in the conduct of a trading business. She is and was the de facto partner of Warwick Colbron against whom the most serious allegations in the case were made. For most of her working life she was a Qantas hostess. Following her retirement from Qantas in June 2002 and after she had commenced her relationship with Warwick Colbron, she completed a restaurant licensee's course at TAFE Sydney Institute. Her address given in OKW's ASIC records is the same as that of "Colbron & Associates", namely Suite 1903, Eastpoint Tower, Edgecliff. That was also the registered address of OKW from 2002 to 2004. From 2004, the Company's registered address and principal place of business became the address in Kiama where the businesses are carried on and where Warwick Colbron also has an office. 5I formed the view that Ms Jackman's evidence was unreliable and sometimes untruthful. She was, I thought, seeking to protect her position and that of Warwick Colbron. On 10 December 2009, a little more than a week after the contentious transfer of property on 30 November, Ms Jackman, as sole director, purported to appoint a voluntary administrator to OKW. There was no evidence of a formal resolution of members as is required by Section 436A of the Corporations Act. She did so, in my view, at the direction of Warwick Colbron. On 22 December 2009, the creditors of OKW resolved to remove the administrator appointed by Ms Jackman and appoint the second plaintiff in his stead. On 27 January 2010, the creditors resolved that OKW be wound up and that the second plaintiff be appointed as liquidator. In my view, Ms Jackman did not exercise any independent judgment in relation to the conduct of the affairs of OKW. I have concluded that she acted at the direction of Warwick Colbron. She and Warwick Colbron contended that he only acted in a professional capacity in his role as a solicitor. I have rejected this implausible contention. I will return to this factual conclusion when considering the elements of the contentious transaction and the credibility of Warwick Colbron. Betohuwisa 6The position in relation to Betohuwisa is similar in important material respects to OKW. Betohuwisa was incorporated on 15 July 2009. Its role is crucial in the transaction that culminated in the transfer of property on 30 November 2009. When it was established, Betohuwisa's sole director, secretary and shareholder was Warwick Colbron's daughter, Samantha Jane Hamilton. Like the share in OKW originally issued to Ms Jackman, Mrs Hamilton's share in Betohuwisa was not beneficially held by her. 7Mrs Hamilton is an unlikely person to have been appointed as the sole director, secretary and shareholder of Betohuwisa. The only apparent reason why she might have occupied those roles is that she is her father's daughter. She did not give evidence. Her father clearly sought to shield her. However in her examination by the liquidator, she explained with clarity and obvious integrity the true position in relation to her role in Betohuwisa. 8Mrs Hamilton is and was fully occupied as the mother of her three children and as a wife to her husband. Prior to July 2009, she had no experience in the operation or setting up of a company. That included the establishment of bank accounts for a company and compliance with all applicable statutory obligations. She did what her father told her to do in order to become a director of Betohuwisa and to open bank accounts on its behalf. Neither she nor Betohuwisa had any money with which to conduct any proposed operations of the company. Her father told her that Betohuwisa would be an investment company and that it would be a good idea to purchase the business of OKW. She was unfamiliar with OKW's business and her father told her nothing about it. Although she had visited the restaurant premises, she had not been exposed to the financial affairs of the business. She did not know what its financial position was, whether it was profitable or unprofitable or whether there were any current disputes or litigation concerning it. She knew nothing of its creditors. She decided to cause Betohuwisa to purchase the business of OKW because her father said it would be a good investment. 9Mrs Hamilton acted on her father's say so in relation to each step in the transaction that culminated in the transfer of property on 30 November 2009. I have concluded that she did not exercise any informed independent judgment in relation to the conduct of the affairs of Betohuwisa. Just as with Ms Jackman in her role as sole director and shareholder of OKW, Mrs Hamilton acted at the direction of Warwick Colbron. The Transaction 10The defendants admitted that OKW was insolvent as at 30 November 2009. I am satisfied that OKW was in a precarious financial position, and almost certainly insolvent much earlier, and at least from July 2009. Ms Jackman gave the following evidence at the hearing: Q Was not the reality that, in mid to late 2009, Old Kiama Wharf was not able to meet the claims of its creditors as and when they fell due. A Yes. Q One of those creditors was, of course, Cliffshaw, which had a judgment for over $1million. A Yes. Q But a number of other creditors, trade creditors, were also making claims for money which could not be met. A Yes. Q That was the case at least from July and certainly continuing through to November 2009. A Yes. 11Cliffshaw Pty Limited (Cliffshaw) is and was OKW's major creditor. In 2001 Cliffshaw had acquired the lease and commenced the initial redevelopment of the Old Kiama Wharf and the businesses conducted from it. In 2002, it granted an option to OKW to purchase the lease and the businesses. OKW exercised the option and on 15 July 2004 Cliffshaw executed a transfer and assignment in favour of OKW. The consideration was $1,060,000, the payment of which was facilitated by vendor finance secured by a mortgage back of the lease given by OKW. In due course, OKW defaulted in payment of the consideration to Cliffshaw. In July 2006, Cliffshaw served a notice on OKW under Section 57(2)(b) of the Real Property Act. In March 2007, Cliffshaw obtained judgment against OKW for possession and for the sum of $1,270,258. From about this time OKW fell into arrears with its tax payments and failed to file BAS and tax returns. In May 2008, the Australian Taxation Office gave notice to OKW of its intention to commence a prosecution. In August 2008, Kiama Council commenced proceedings against OKW in the New South Wales Land & Environment Court seeking orders that its businesses carried on at the Old Kiama Wharf be connected to the main sewers. OKW was not able to fund the sewerage works from its cash flow. In November 2008 Bidvest Pty Ltd, a supplier to OKW, commenced proceedings against it to recover a debt $146,181. 12In February 2009, OKW defaulted in meeting a payment schedule agreed with the Australian Taxation Office. Warwick Colbron agreed that this was a "very substantial amount of money". On 16 February 2009, he wrote a letter to the solicitor for Cliffshaw that graphically revealed OKW's dire financial position. He said in that letter: "If the company was placed into insolvency the ATO claims would revert to around $1.43million and other non-compromised claims would exceed $600,000 apart from the effectively unsecured debt (estimated at around $1.4million) due to Cliffshaw". 13February 2009 is the date that the liquidator nominates as the date for commencement of OKW's insolvency. There is considerable justification for the selection of this date. I have concluded that OKW was insolvent at least from 30 June 2009. It is not necessary for me to go further. On that date Cliffshaw served a creditor's statutory demand on OKW in respect of its judgment debt. This was the event which appeared to propel Warwick Colbron to take defensive action. Within days he gave instructions to Robertson & Robertson to undertake a valuation. The letter of instruction was signed by Ms Jackman but drafted by Warwick Colbron. He alone dealt with and provided instructions to Robertson & Robertson. A fortnight later, on 15 July 2009, Betohuwisa was incorporated and Warwick Colbron's daughter, Mrs Hamilton, was drawn into the sorry sequence of events. On 17 July, she executed a deed of settlement for the establishment of the Hamilton Betohuwisa Trust. She held Betohuwisa's sole share pursuant to the terms of this trust. Warwick Colbron was a primary beneficiary of the trust, as were other family members. I infer that Warwick Colbron caused the trust to be established. 14On 21 July 2009, Kiama Council refused an application by OKW to extend Cargo's Restaurant. The following day, on 22 July, OKW filed an application to set aside Cliffshaw's statutory demand. This was, in my view, an attempted holding device. There was said to be a forbearance agreement preventing Cliffshaw from enforcing its debt. But there was no sound basis for denying the validity of Cliffshaw's statutory demand based on its judgment and in due course the application was duly dismissed. Cliffshaw had done no more than engage in negotiations designed to maximise its commercial position. Ms Jackman said that in July 2009 she did not believe that the application to set aside Cliffshaw's statutory demand would fail. I do not believe her. At best she formed a belief based upon what Warwick Colbron told her. His views were however unrealistic and implausible. 15By late July 2009, the scene was set for the various transactional steps that culminated in the transfer of OKW's property to Betohuwisa on 30 November 2009. I have formed the view that a reasonable person in OKW's circumstances, let alone an honest person, would not have entered into them. I have also formed the view that Warwick Colbron orchestrated all of the transactional steps that led to the transfer of property on 30 November 2009. This was not an arms length transaction entered into for legitimate commercial reasons. Its object was to transfer assets between two companies effectively controlled by Warwick Colbron. In one, his de facto partner was the sole director and shareholder. In the other, his daughter was the sole director and shareholder. Both women were accustomed to act, in relation to the affairs of those companies, at the direction of Warwick Colbron. The transparent reason for the transfer of assets was an attempt to safeguard them from OKW's creditors and to keep them in the Hamilton family. I will explain in what follows the steps that were taken in the endeavour to achieve this end. The Transactional Steps 16On 31 July OKW and Betohuwisa executed a deed of option granting Betohuwisa an option to purchase the businesses and the leasehold interest of OKW. The deed was executed by Ms Jackman as sole director and secretary of OKW and by Mrs Hamilton as sole director and secretary of Betohuwisa. Neither, in my view, exercised any informed independent judgment and both acted at the direction of Warwick Colbron. The purchase price was to be fixed by a valuation which Warwick Colbron instructed the firm of Robertson & Robertson to undertake. Also on 31 July 2009, Betohuwisa agreed to advance $50,000 to OKW which then gave a fixed and floating charge over its assets and undertaking in favour of Betohuwisa as security for that loan advance. Mrs Hamilton explained that Warwick Colbron provided the monies. She agreed to the advance because her father told her to do so. She did not satisfy herself that the monies were expended by OKW on improvements to the site. 17On 9 September 2009, Betohuwisa, through Mrs Hamilton exercised its option to purchase the businesses and leasehold interest of OKW. On the same date, OKW, through Ms Jackman, executed a contract for the sale of the businesses in favour of Betohuwisa. The purchase price was $475,000. This was $50,000 more than the valuation. Mrs Hamilton knew that Betohuwisa did not have any financial resources from which to pay the $475,000. She also knew that Betohuwisa had not made any arrangements as to how the purchase price would or could be funded. To this day, Betohuwisa holds the assets of OKW, consisting of the businesses and the leasehold interest, but has not paid the purchase price. 18On 30 November 2009, OKW transferred its leasehold interest and the restaurant businesses to Betohuwisa. The transfer was purportedly funded by vendor finance. Betohuwisa granted a mortgage back of its newly-acquired leasehold interest to OKW. The mortgage was said to be in consideration of OKW lending to Betohuwisa the sum of $400,000 together with any further advances. The principal sum including interest was due to be repaid to OKW in June 2010. No funds in connection with the transfer and mortgage back appear to have changed hands. The transfer of lease and mortgage were executed by Ms Jackman on behalf of OKW and by Mrs Hamilton on behalf of Betohuwisa. At the time of her examination by the liquidator of OKW, Mrs Hamilton was not even aware that Betohuwisa had given a mortgage in connection with a loan of $400,000. She did not know that Betohuwisa owed $400,000 to OKW. She had no idea whether Betohuwisa had the capacity to pay $400,000 to OKW. 19In my view, Betohuwisa never had any realistic capacity to meet the obligations to OKW to which it apparently agreed in the mortgage given on 30 November 2009. It has not done so. Once again, Ms Jackman and Mrs Hamilton either did not know or did not understand and both acted at Warwick Colbron's direction. They did not exercise any informed independent judgment. I will return later to the cash flow position of the restaurant businesses. But, as I have already mentioned, within days of the transfer and mortgage back, OKW resolved on 10 December 2009 that it was insolvent and appointed a voluntary administrator to itself. Its doomed application to set aside Cliffshaw's statutory demand had been refused on 7 December. But even putting Cliffshaw's judgment to one side, OKW was not meeting its liabilities to trade creditors and the Australian Taxation Office. Its solvency was chronic and longstanding and its liquidation was inevitable. This was the reality that drove the transaction that culminated in the transfer of assets on 30 November 2009. Warwick Colbron well knew this. I reject his evidence to the contrary. Warwick Colbron 20It is apparent from what I have already said that I have formed an adverse view of Warwick Colbron's credibility. Among many other things, he denied that he spoke to Mrs Hamilton at any material time about the purchase by Betohuwisa of the business of OKW. I do not accept this. It is so improbable as to be fanciful and is contradicted by the evidence given by Mrs Hamilton in her examination by the liquidator. She had no motive to give false evidence. Warwick Colbron did. His assertion that his "poor little daughter" was confused was most unconvincing. In many other respects, his evidence was unsatisfactory and contrary to the probabilities. Repeatedly he denied the obvious. Consistently he asserted the improbable. His explanation of his independence from OKW and Betohuwisa and his lack of involvement with the affairs of both companies, was variously inconsistent with the proved facts, the inferences from documents and the evidence given by his daughter, Mrs Hamilton at her liquidator's examination. His attempt to explain why the transfer of assets from OKW to Betohuwisa was "commercial" was unsatisfactory. That is because there could be no satisfactory explanation. The transaction was, in my view, indefensible. It did not occur as a result of the exercise of a considered business judgment by OKW's sole director, Ms Jackman, as to what was in the company's best interests. Its purpose was to defeat OKW's creditors. 21Not only was Warwick Colbron's evidence contradicted in important respects by his daughter's testimony at her liquidator's examination, but it was contradicted in other respects by the wholesale supplier, Konstantinos Dellis. I was grateful for Mr Dellis' attendance and for the evidence he gave. He was honest, direct and frank in contrast to Warwick Colbron who was dissembling. It may be that Warwick Colbron had convinced himself of the rightness of his position through constant consideration, reconstruction and re-affirmation. That I think would be a charitable view. It is not the view that I have reached. Nowhere was Warwick Colbron's evidence more implausible than when he sought to explain that he was only a solicitor giving advice to Ms Jackman. Mr Dellis' evidence convincingly gave the lie to this characterisation of Warwick Colbron's role in the conduct of the affairs of OKW. Ben Colbron & Mr Wei 22Ben Colbron replaced his sister as the sole director of Betohuwisa on 4 August 2010. This was well after the transfer of property on 30 November 2009 and after the appointment of a liquidator to wind up the affairs of OKW in January 2010. His role as an officer of OKW was therefore irrelevant to the issues that I have to decide. The defendants contended however that he had an informal role in 2009 in relation to the preparation of some of the transactional documents. This was said to support their attempt to rebut the plaintiff's contention that the transaction was uncommercial and was orchestrated by Warwick Colbron. I reject this submission. Ben Colbron's evidence was weak and inconclusive. He said he had "a hand in producing some documents". Whatever he was doing, he was, in my view, assisting his father and acting at his direction. He had no independent role and no reason to make any independent and informed judgment about the transaction. He assisted a solicitor, Mr Wei, in a manner that was opaque. He did not know what Mr Wei actually did or whether Mr Wei rendered a bill. He and Mr Wei were friends from student days. Mr Wei was present in court but did not give evidence. Ben Colbron himself had held a practising certificate but it had lapsed and was not renewed. His evidence did not advance the defendants' case and did not assist me. The Cash Flow 23I said earlier that I would return to the cash flow position of the business at the time of the transfer on 30 November 2009. The evidence included a balance sheet of Betohuwisa as at 30 September 2010 and a profit and loss statement for the period July to September 2010. This is of course after the transfer but there was no evidence to suggest any reason why Betohuwisa would have allowed the restaurant businesses to run down after their acquisition by it. One would have expected the opposite. Nor was there any evidence to suggest any material change in management or staff. 24As at 30 September 2010, Betohuwisa was trading unprofitably. Retained earnings were ($83,191) and the loss for the three month period commencing on 1 July and ending on 30 September 2010 was ($88,021). The balance sheet as at 30 September 2010 recorded a deficiency of total assets to total liabilities of ($108,512). The assets included the somewhat questionable amount of $455,000 for goodwill. The liabilities included the supposed vendor loan from OKW in the sum of $400,000. 25There was no reason to think that the likely position at 30 November 2009 was significantly different. Betohuwisa's counsel pointed to other revenue figures that showed gross takings figures with no allowance for expenses. He said they demonstrated that in the summer months at least the takings were higher than that indicated by the profit and loss statement for the period July to September 2010. Even if the takings were higher, it does not follow that the businesses were profitable. The only reliable picture that emerges from the evidence is of two struggling and unprofitable restaurant businesses that had difficulty making ends meet. However the fact of the long term Crown lease and the goodwill figure in the balance sheet explain why it might have been perceived that the assets of OKW were worth salvaging - by transfer to Betohuwisa. Valuation 26I do not regard the fact that a valuation was obtained from Robertson & Robertson as removing the uncommercial quality with which the overall transaction is tainted. As I explained, one of the first steps undertaken by Warwick Colbron after service of Cliffshaw's statutory demand on 30 June 2009 was to give instructions for a valuation to be undertaken. The valuer was not called but his valuation was in evidence. It was natural that Warwick Colbron should procure a valuation. The absence of a valuation would have been unusual and would have excited even greater suspicion in connection with a transfer between companies of which Warwick Colbron was in effective practical control. On the other hand, the fact that the purchase price was $50,000 above the valuation figure, while unusual on its face, is not itself determinative. 27Much time and evidence was devoted to the veracity of the valuation and the correctness of the monthly sales reports and profit and loss statements provided to the valuer by Warwick Colbron. A court appointed valuer expressed a different opinion based on different assumptions as to turnover and profitability. The defendants then led evidence of actual takings and till rolls that were not available to the court appointed valuer. I do not need to resolve the many subsidiary issues that arose in the context of the competing evidence concerning the valuation. I am satisfied that the transaction was both uncommercial and insolvent even though it has not been proved that the transfer was a sale at an undervalue - as the plaintiffs initially set out to do. Other features of the overall transaction have enabled me to reach the conclusion that the transfer of assets on 30 November 2009 is voidable. Uncommercial Transaction - The Facts 28The transfer of assets on 30 November 2009 had its origin in the inevitability of liquidation that faced OKW. On 30 June 2009 when Cliffshaw chose to enforce its judgment debt and serve a creditor's statutory demand on OKW, Warwick Colbron set out on a course to preserve OKW's assets from creditors. It may be that, as is often the case, he had an attachment to the businesses which had been built up under his supervision and which he had fought hard to preserve and maintain. But one of his many problems was that OKW had never paid to the original vendor (Cliffshaw) the purchase price agreed in 2004. Warwick Colbron's objective from July 2009 was to ensure that the restaurant businesses and the Crown lease were transferred to an entity that was not vulnerable to the many claims of the creditors to whom OKW was indebted. Thus he caused a transfer of OKW's assets to be made in favour of a newly established company (Betohuwisa) in which he had installed his commercially nave daughter as its sole director, secretary and shareholder. She held the company's only issued share on trust for her family and her father. Betohuwisa paid no money of its own for OKW's assets. Even if the $50,000 for sewerage works is treated as part payment, those monies were derived from Warwick Colbron. 29As to the balance of the purchase price, no money appears to have changed hands. Most of the balance of the purchase price was in the form of a notional advance of $400,000 from OKW and a mortgage back of the leasehold. The advance and mortgage back were incompletely documented. They bear the hallmark, not just of inattention to detail, but of formalism and unreality. Betohuwisa's sole director and shareholder (Mrs Hamilton) knew nothing of them. I do not think that Warwick Colbron, let alone OKW's sole director Ms Jackman, ever really intended or expected that OKW would collect or recover the $400,000 from Betohuwisa. 30At the time of the transfer to Betohuwisa, a decision on OKW's application to set aside Cliffshaw's statutory demand had not been handed down. It is reasonable to suppose that Warwick Colbron wanted the transfer to Betohuwisa to take place before any decision refusing OKW's application. In the event of the failure of OKW's application, Cliffshaw, as the major creditor, would be in a position to control the businesses and might swiftly move to appoint a liquidator. This is the very position that, for some years, Warwick Colbron had sought to prevent in his negotiations with Cliffshaw. Predictably, on 7 December 2009, OKW's application to set aside Cliffshaw's statutory demand was duly dismissed. OKW's fate was now sealed. In truth, its fate had been sealed since at least 30 June 2009. 31From 7 December 2009, and probably much earlier, neither Warwick Colbron nor Ms Jackman could have had any remaining interest in the future of OKW. Its financial position was irretrievable and had been so at least since July 2009. A few days later, on 10 December 2009, Ms Jackman purported to appoint an administrator. The appointment was irregular and undocumented. It is likely that Warwick Colbron arranged it. I doubt whether Ms Jackman understood her obligations or OKW's statutory requirements in relation to the decision. 32When in January 2011 the second plaintiff was appointed as the liquidator of OKW, he had a choice. If he perceived some commercial advantage in the retention of the restaurant businesses and the Crown lease for the benefit of creditors, or possibly the major creditor, he could, as he has chosen to do, seek orders to set aside the transaction and return OKW and Betohuwisa to the position in which they were before the transfer - indeed before any legal obligation arose by reason of the exercise of option on 9 September 2009. Alternatively he could have embraced, affirmed and sought to enforce the transaction, attempting to recover from Betohuwisa the amount of the loan and accrued interest. Alternatively, he could have sought to enforce against Betohuwisa the mortgage of the leasehold. The affirmation and enforcement of the transaction was, for understandable reasons, commercially unattractive. Given Betohuwisa's unprofitable trading, the recovery of the loan and accrued interest from it must have been problematic. Given that the mortgage security was only over the leasehold and not over the assets and undertaking of the restaurant businesses, its value must have been questionable. And given the reasonable doubts that a liquidator would have been entitled to entertain as to whether the mortgage and lease back were ever intended to operate in accordance with their terms, he was justified in not embracing them. Uncommercial Transaction - Legal Principle 33The legal issues that arise as a result of my factual findings and conclusions are whether the transaction was uncommercial and insolvent and if so, what orders should be made against Betohuwisa pursuant to Section 588FF. I have concluded that the transaction was uncommercial having regard to the principles that govern the characterisation of a transaction as uncommercial. It needs to be said at the outset that a sale need not be at an under-value in order to be characterised as uncommercial within the meaning of Section 588FB(1) of the Corporations Act. Section 558FB provides as follows: 588FB Uncommercial Transactions (1)A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company's circumstances would not have entered into the transaction, having regard to: (a)the benefits (if any) to the company of entering into the transaction; and (b)the detriment to the company of entering into the transaction; and (c)the respective benefits to other parties to the transaction of entering into it; and (d)any other relevant matter. (2)A transaction may be an uncommercial transaction of a company because of subsection (1) (a)whether or not a creditor of the company is a party to the transaction; and (b)even if the transaction is given effect to, or is required to be give effect to, because of an order of an Australian court or a direction by an agency. 34Although the most common instance of an uncommercial transaction will be one which occurs at an undervalue: ( Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535 at 548), a sale at an undervalue is not the only circumstance that will lead to the conclusion that a transaction is uncommercial. Any situation in which a reasonable person in the company's circumstances would not have entered into the transaction, even if it were for full value, justifies the conclusion that it is uncommercial: Lewis (as liq of Doran Constructions Pty Ltd (in liq)) & Anor v Doran & Ors (2005) 219 ALR 555 at 584-585 (Giles JA). 35The question posed by Section 588FB is whether a reasonable person in the company's circumstances would not have entered into the transaction. This is an objective inquiry that requires consideration of the factors listed in subsection (1), although every one of those factors will not always be applicable to the transaction in question: Tosich Construction v Tosich (1997) 78 FCR 363 at 367. 36One of the factors, either alone or in conjunction with other factors, which might indicate that a transaction is uncommercial is that it was not conducted at arms length and that the controlling minds of the corporate entities involved are identical or related: McDonald v Hanselmann (1998) 144 FLR 463 at 470; see also Welcome Homes Real Estate Pty. Limited & Ors v Ziade Investments Pty. Limited & Anor [2007] NSWCA 167 at [52] - [57]. Another circumstance is where the purpose of the transaction is to defeat creditors: Re Solfire Pty Ltd (in liq) (1997) 25 ACSR 160 at 165. 37In this case, although it has not been shown that the sale to Betohuwisa was at an undervalue, the evidence revealed a confluence of compelling factors that justify the conclusion that it was an uncommercial transaction within the meaning of Section 588FB. The benefit to OKW in entering into the transaction were negligible. The detriment was significant - depriving it of its sole assets and leaving it without any reasonable likelihood of payment from Betohuwisa. Indeed, as I have said, I really do not think that payment by Betohuwisa was contemplated. On the other hand, the benefit to the Colbron family and the Betohuwisa Family Trust were potentially substantial. They acquired effective control and ownership of OKW's trading businesses. They escaped, they thought, the significant debts and liabilities owed to OKW's trade creditors. That included trade liabilities incurred in the course of running those businesses as well as liabilities to the Australian Taxation Office and Cliffshaw. Overall, the sale entirely lacked probity. Betohuwisa's so-called investment was no more than a transparent stratagem designed to avoid OKW's creditors and preserve its assets. It was manipulated by Warwick Colbron between two companies over which he exercised effective practical control and whose sole directors in each case acted at his direction. Relief Against Betohuwisa 38I have concluded that the transaction that culminated in the transfer of OKW's assets on 30 November 2009 was uncommercial. It was also insolvent having regard to my conclusion as to OKW's solvency. Nonetheless there is a complication in the precise relief sought by the liquidator. The essential order sought is that the assets transferred to Betohuwisa on 30 November 2009 be re-transferred to OKW. OKW is now in liquidation. A potential problem therefore arises with the lease. Clause 42 provides relevantly: 42 Forfeiture (c)The Holder expressly acknowledges that this Lease may be forfeited pursuant to the provisions of section 129(1) of the CLA in the circumstances set out in that section. (d)For the purposes of this Lease the Holder will be taken not to have failed to comply with a condition covenant or provision of this Lease until a period of 28 days (or such further period as may be specified in the notice) has elapsed after the service of a notice in writing on the Holder specifying the covenant conditions or provision which the Holder has failed to comply with. (e)The Lessor and the Holder expressly acknowledges that if one or both of the events specified hereunder occurs the Holder will for the purposes of this clause and for the purpose of section 129(1) of the CLA be taken to have failed to comply with a provision of this Lease and the provision of subclause (b) shall not apply to such a default. (i)Winding up the Holder (being a company) - an order is made or a resolution is effectively passed for the winding up of the Holder (except where such winding up is for the purpose of reconstruction or amalgamation with the written consent of the Lessor which consent shall not be unreasonably withheld); or (ii)Liquidation the Holder goes into liquidation or makes an assignment for the benefit of or enters into an arrangement or composition with its creditors or stops payment or is unable to pay its debts or if execution is levied against the Holder and not discharged within 30 days. 39Section 129 of the Crown Lands Act 1989 (NSW) gives the Minister a discretion whether to declare a holding to be forfeited. Clause 42 of the lease is similarly expressed in permissive language. Counsel for the first defendant drew these provisions to my attention and suggested that they amounted to a reason for not granting relief pursuant to Section 588FF. I do not think so. I have no doubt that the liquidator is well advised and fully aware of the relevant provisions of the lease and the Crown Lands Act. If I order the re-transfer of the lease to OKW, the question whether the Minister will exercise his discretion to forfeit the holding is not something which I can predict. It may involve a number of non-legal and commercial considerations of which I am unaware. No doubt the liquidator has taken those matters into account. I do not think that I should permit the hypothetical possibility of forfeiture to affect my decision. The liquidator has established that the transaction was uncommercial and insolvent. He is therefore prima facie entitled to an order that the restaurant businesses and the leasehold be re-transferred to OKW. What may subsequently ensue as between the Minister and the liquidator should not concern me. 40The liquidator also seeks an order that Betohuwisa account for the "proceeds" of the property received since 30 November 2009. I was given no assistance in this regard. I do not know whether "proceeds" is intended to refer to gross revenue from the restaurant businesses or net income after the payment of expenses including rental due under the lease. The plaintiffs did not present a cogent case to support this claim for relief. The scanty evidence of the unprofitable trading of Betohuwisa between 1 July and 30 September 2010 suggests that any such order would be unfair and probably futile. I will not make any order for an accounting of the so-called proceeds. 41Nor did the parties address in any sufficient detail, by reference to evidence, whether in addition to the re-transfer of assets, the interests of justice required that there should be some ancillary monetary adjustment between OKW and Betohuwisa. Given that Warwick Colbron was on both sides of the transaction, my initial reaction is that matters should be left where they stand. If the parties do not agree on short minutes to reflect these reasons, I will refer to an Associate Justice any necessary accounting. Declaration Against Warwick Colbron 42The issue as against Warwick Colbron is whether I should make a declaration that he was a shadow director or a de-facto director of OKW and Betohuwisa within the meaning of Section 9 of the Corporations Act. He submits that I should not go that far. However, I have reached the view that it is appropriate that I make such a declaration. The factual issue of Warwick Colbron's effective practical control of OKW and Betohuwisa and his orchestration of the transactional steps that culminated in the transfer of OKW's assets on 30 November 2009 were front and centre in the forensic enquiry at the hearing. The findings I have made and the conclusions I have reached amply justify such a declaration. The question whether I should do so is a legal one. 43Although there is no actual claim in these proceedings against Warwick Colbron, in the sense of a claim that he has breached his duty as a director, or a claim that he is liable to pay monetary compensation, that does not prevent a declaration being made. It is clear that there need not be a cause of action in the traditional sense before a declaration is made. In Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 582, Mason CJ, Dawson, Toohey, and Gaudron JJ summarised the prerequisites for a declaration of right and referred to the principles explained in In re Judiciary and Navigation Acts (1921) 29 CLR 257; Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 at 437; Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438 at 448; University of New South Wales v Moorhouse (1975) 133 CLR 1 at 10; and Gardner v Dairy Industry Authority (NSW) (1977) 52 ALJR 180 at 188). Declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions; the person seeking relief must have "a real interest" and relief will not be granted if the question "is purely hypothetical"; if relief is claimed in relation to circumstances that [have] not occurred and might never happen, or if the Court's declaration will produce no foreseeable consequences for the parties, it may well not be granted; the subject of the declaration must relate to an actual controversy or at least to one whose seeds are "ripening": Re Cryan (1930) 152 A 675; 71 Am LR 1417. 44Further, a declaration may be given if the declaration may be of use to a party at some time in the future: Marion White Ltd v Francis [1972] 1 WLR 1423 at 1430-1, In this case, there is a practical utility to the plaintiffs in obtaining a declaration that Warwick Colbron is or was a shadow or de facto director of OKW. Not only is such a declaration justified by the facts, but if made, it will enhance and simplify future claims against Warwick Colbron. The prospect of future claims has a sound basis. In particular, a claim under Section 588G of the Corporations Act 2001 (Cth) for insolvent trading was foreshadowed in argument. I have no hesitation in making a declaration in the circumstances of this case where the controversy is ripe and where the liquidator may be reasonably expected to derive a benefit from the declaration in future claims or proceedings. Orders 45The parties should deliver to my Associate by 11 August 2011 agreed short minutes to reflect these reasons. Failing agreement, the proceedings should be listed before me in the Expedition List on 12 August 2011. If it is necessary that an account be taken, I will refer the issue to an Associate Justice for hearing and determination. The defendants should pay the plaintiffs' costs. 0o0 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 August 2011