District Court New South Wales Medium Neutral Citation: Atle Crowe-Maxwell in his capacity as liquidator of I & K Frost Pty Ltd (In Liquidation) v Frost [2014] NSWDC 153 Hearing dates: 10 July; 11, 12 August 2014 Decision date: 13 August 2014 Jurisdiction: Civil Before: P Taylor SC DCJ Decision: (1) Judgment for Mr and Mrs Frost against the plaintiffs. (2) No order as to costs. Catchwords: COMPANY IN LIQUIDATION - small family business - no distinction between company and personal expenses - claim for unreasonable director related transactions - whether payments uncommercial - approval by shareholders - solvency - onus of proof - inadequate records - payments in lien of wages Legislation Cited: Corporations Act 2001 (Cth), s 588FB, s 588FF, s 588FDA Cases Cited: Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507; [2005] HCA 23 Bird v Bird (No 4) [2012] NSWSC 648 Birtchnell v Equity Trustees Executors & Agency Co Ltd (1929) 42 CLR 384 Carabelas v Scott (2003) 177 FLR 334; [2003] SASC 389 Cashflow Finance Pty Ltd v Westpac Banking Corporation [1999] NSWSC 671 Deputy Commissioner of Taxation v Zammit [2014] NSWCA 104 Fielding v Dushas [2013] 2 Qd R 416 Gudmundsen v Carrington [2012] NSWSC 147 Hawksford v Hawksford [2005] NSWSC 463 Kazar, in the matter of Frontier Architects Pty Ltd (in liq) [2010] FCA 1381 Pascoe Ltd (in liq) v Lucas (1999) 75 SASR 246 Slaven v Menegazzo [2009] ACTSC 94 Woodgate v Fawcett [2008] NSWSC 868 Category: Principal judgment Parties: Atle Crowe-Maxwell in his capacity as liquidator of I & K Frost Pty Ltd (In Liquidation) (first plaintiff) I & K Frost Pty Ltd (In Liquidation) (second plaintiff) Ian Frost (first defendant) Kathrine Frost (second defendant) Representation: Ms S Clemmett (plaintiffs) Bridges Lawyers (plaintiffs) File Number(s): 2011/364974 Publication restriction: None Judgment A. INTRODUCTION 1In 1995 the defendants, Ian and Kathrine Frost, commenced a childcare business. It was conducted by them through a company, the second plaintiff in these proceedings. The company went into liquidation in March 2009. 2The business was conducted as if it were a business owned entirely by the defendants. The record keeping was unsatisfactory and manifested no distinction between the company's expenses and the defendants' personal expenses. 3The first plaintiff, the liquidator of the company, commenced proceedings seeking the sum of $344,596.34, and other moneys, largely being payments said to have been made by the company for the benefit of the defendants. This amount was reduced to the sum of $243,564.34 during closing submissions. B. BACKGROUND 4From about 1995, the defendants, Mr and Mrs Frost, were the directors of I & K Frost Pty Ltd ("the Company") and conducted through the Company a childcare business known as Teddy and Friends Day Care Centre, located on the residential property of Mr and Mrs Frost at Bargo, a small town about 100 kilometres south-west of Sydney between Campbelltown and Mittagong. 5While Mr Frost operated the childcare business in part of the house of Mr and Mrs Frost, Mrs Frost worked elsewhere full-time. She assisted in the childcare business during times when she was not working, such as during her vacation. Increased competition and falling enrolments from 2005 impacted on the success of the business. Mr Frost used savings and borrowings from family to continue to operate. Eventually, however, a liquidator was appointed to the Company. Since 18 August 2011 the liquidator has been the first plaintiff, Atle Crowe-Maxwell. The relation-back date derived from the date of liquidation was 19 November 2008. 6Mr Frost and Mrs Frost as directors and shareholders of the company did not keep the Company's expenses and their personal finances separate. There was no evidence that either Mr or Mrs Frost ever received a wage, but there were a number of personal expenses incurred by them, which were met by the Company, and it is those expenses that are the subject of this claim. C. CLAIM 7In the second further amended statement of claim, the liquidator and the Company sought to recover from the Frosts the sum of $343,450.85 comprising an amount of $303,746.92 which was said to be payments to the directors in the period 19 November 2004 to 13 March 2009. These payments were said to be unreasonable director-related transactions under s 588FDA of the Corporations Act 2001 (Cth) and were thus voidable transactions. Further, a sum of $39,703.93 was claimed, credit card payments said to be for the benefit of Mr and Mrs Frost. In addition, the claim sought the sum of $55,000 said to be a loan made by the Company to Mr and Mrs Frost which was not repaid or alternatively, was an entitlement arising from a constructive trust in the Frosts' home (in favour of the Company) arising from the use by the Frosts of moneys borrowed by the Company for the purpose of improving their home. 8In addition, the sum of $265,246.68 was claimed as equitable compensation for transactions in breach of directors' duties in the period 16 November 2005 to 13 March 2009, a shorter period than the earlier claim by reason of the limitation provisions. 9It is evident that there is an overlap between the claims, in particular, that the claims for equitable compensation involve transactions that are also within the claim for unreasonable director-related transactions. 10At the trial, certain aspects of the pleaded claim were not pressed. In closing submissions, the claim was reduced to the following amounts in the schedule provided by the liquidator of the Company, which stated as follows: Accommodation $ 844.95 Alcohol $ 4,612.45 Cash withdrawals $ 93,424.37 Cash fee $ 576.90 Credit card $ 35,182.52 Department store $ 5,069.01 Education $ 3,825.50 Entertainment $ 1,739.44 Fashion $ 6,865.99 Gambling $ 6,523.00 Internet shopping $ 154.53 Internet transfer $ 346.00 Medical $ 1,933.08 Pet care $ 3,268.72 Petrol $ 240.00 Pub/hotel $ 1,061.60 Restaurant/fast food $ 3,857.44 Sports $ 4,721.34 Supermarket $ 3,989.65 Technology $ 2,732.14 Tobacconist $ 35.71 Travel $ 60.00 Subtotal $181,064.34 Loan $ 51,500.00 A Frost $ 8,900.00 I & K Frost $ 2,200.00 Total $ 243,664.34 D. THE TRIAL 11Mrs Frost did not appear at the trial nor did she file an appearance or any defence. Mr Frost did file an appearance and a verified defence, although he did not appear on the first day of the trial. He sent an email to the Court, tendered by the plaintiffs in the proceedings, stating as follows: "I Ian Frost accept these issues in dispute being neither an accountant or lawyer my options of defending the claims are minimal.I ran the business as my wife Kathrine Frost worked full time .I tried my best with limited business knowledge for the business to survive and make sure my staff were paid every week be it from personal savings credit card withdrawls or borrowings.With increased competition and falling enrolments times from 2005 were extremely difficult.I never attempted to do any thing wrong as I tried to provide the best child care at an affordable price which was not enough to cover my overheads.This business was my life from 1995 and the last thing I wanted was to lose it and my job.We operated 51 weeks a year to survive and it was often in Christmas periods only myself and Kathrine working as we tried to increase our income,as with a lot of struggling small businesses my bookwork suffered as I put my head in the sand hoping things would get better which they never did and my debt snowballed.Looking back I should have received professional help,Ishould have sold the business I should have done a lot of things differently but I put the blinkers on and was only concerned with the daily operations ie cooking meals cleaning and caring for the children.I do stress the business was successful for 10 years and I should have realised from 2005 that it was a downhill struggle as I used all my savings and borrowings from family and friends to continue to operate.I I accept the rulings of the court and understand my shortfalls. Mrs Kathrine Frost has had growths surgically removed from her chest on Monday and I will not be at the court which I apologise for but I accept the rulings from the court.All these statements are true to my knowledge. Thank you Ian Frost" [errors in original] 12As the email did not request an adjournment, and as the plaintiffs pressed that I proceed, I allowed the trial to continue. 13The matter did not conclude on the first day. At the date of resumption, Mr Frost appeared and sought leave also to appear for his wife. He relied on a signed authority from his wife. However, as Mrs Frost had not complied with previous court directions to file an appearance and a defence, or even to indicate formally that she relied on the appearance and defence of Mr Frost, I accepted the plaintiffs' submissions and did not grant leave. 14The plaintiffs did not seek to distinguish between Mr and Mrs Frost in respect of orders or in respect of evidence. Consequently, all evidence in the trial was evidence against both defendants, and the position of Mrs Frost was not, in substance, distinguishable from that of Mr Frost. Thus, although Mr Frost was not granted leave to appear for his wife, that made no material change to the defendants' positions. Mr Frost's submissions on his own behalf and the evidence at the trial would be considered in respect of his wife's case also. 15The evidence for the defendants comprised the verified defence of Mr Frost with an annexure that gave an account or explanation of the various alleged expenses. Mr Frost was cross-examined on the annexure. Mr Frost also made submissions. 16Mr Frost is not a sophisticated man. He gave his evidence in a straightforward, sometimes simplistic fashion, with little detail. It was evident that he had little understanding of the legal system, and his failure to obtain a lawyer, said to be for reasons of impecuniosity, meant that there were aspects of the case against him with which he did not deal. 17In view of the absence of any legal representation and his incomplete understanding of legal rules and procedures, I was disinclined to draw adverse inferences in accordance with the rule in Jones v Dunkel so strictly as I might have done in other circumstances. 18I accept that Mr Frost gave his evidence to the best of his recollection. He readily made several concessions in respect of the expenditure. This fortified my view that he was being frank and honest with his evidence. It was not put to him in cross-examination that he was dishonest. In these circumstances, I generally accept his evidence. 19There were some occasions where Mr Frost made submissions in the nature of evidence when issues became apparent to him in the course of submissions. I was prepared to consider this material, without giving it the status of evidence delivered under oath in the witness box. E. LEGAL SUBMISSIONS 20The plaintiffs made a number of submissions in relation to the law. First, that the onus of establishing the appropriateness of the payments lay on Mr and Mrs Frost. I was referred to Hawksford v Hawksford [2005] NSWSC 463 at [54], where Campbell J stated: "The distinction between an onus of proof and an onus of adducing evidence is of particular relevance in the present situation. Where party A has the legal onus of proving a negative proposition, and relevant facts are peculiarly in the knowledge of party B or where party B has the greater means to produce evidence relating to those facts, then provided party A establishes sufficient evidence from which the negative proposition may be inferred, party B then comes under an evidential burden, or an onus of adducing evidence". 21Reference was also made to Bird v Bird (No 4) [2012] NSWSC 648, where Rein J stated at [65]: "Mona's payment of the proceeds into her own account was a prima facie breach of her obligations to Percy, the onus to establish approval of the payment of the proceeds to herself or ratification rests on the defendants". (See also Birtchnell v Equity Trustees Executors & Agency Co Ltd (1929) 42 CLR 384 at 398, and Gudmundsen v Carrington [2012] NSWSC 147 at [56]-[58]). 22The significance of the onus is dealt with later in this judgment. 23Secondly, the plaintiffs referred me to the provisions of s 588FDA. It can be noted that paragraph (1)(c) of that provision adopts the test for an "uncommercial transaction" dealt with in s 588FB, which provides: "...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. ..." 24White JA at [40] in Fielding v Dushas [2013] 2 Qd R 416 appeared to adopt with approval the comments of the primary judge in that case with respect to whether a transaction is uncommercial. The primary judge said that the full criteria in s 588FB(1): "are not considered in a vacuum but by reference to the circumstances of the company including the state of knowledge of those who were the directing mind of the company, such as its controlling director or directors. For a transaction to be uncommercial it must result in 'the recipient receiving a gift or obtaining a bargain of such magnitude that it [cannot] be explained by normal commercial practice', or where 'the consideration ... lacks a commercial quality'... The Court should examine the transaction in question very closely when considering the commerciality where that transaction involves a relative of a company's director." 25Among the authorities referred to by the plaintiffs, that which seemed most analogous or applicable to the present situation was the decision of Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507; [2005] HCA 23, and the cases there referred to. In Angas, Gleeson CJ and Heydon J referred to the decision of Pascoe Ltd (in liq) v Lucas (1999) 75 SASR 246 and, at [24], referred to: "two related but distinct lines of authority, both of which turn upon the significance of knowledge and unanimous approval by shareholders of conduct of directors. The first line of authority, exemplified by Re Duomatic Ltd, concerns cases in which, by reason of some feature of a company's internal structure, or some failure to comply with its Articles of Association, there is a potential defect in a purported exercise of corporate power. In such a case, the unanimous consent of the shareholders, even if there has been no formal resolution of a general meeting, may be as binding as a resolution in general meeting would have been. This line of authority is often invoked to meet a contention that a company is not bound by some decision or conduct by reason of administrative irregularity, failure to comply with Articles of Association, or want of authority on the part of some internal organ. The second group of cases concerns ratification by shareholders of breaches of duty by directors. They are exemplified by Bamford v Bamford. The principles were considered and applied in Winthrop Investments Ltd v Winns Ltd, and were discussed in Miller v Miller. Of particular relevance to the present case is one well accepted qualification to the capacity of shareholders to ratify or excuse directors' breaches of duty: shareholders cannot sanction improper expropriation of a company's property by the directors." 26As I have said, there was a reference to the decision of Pascoe where the Full Court of the South Australian Supreme Court in the judgment of Lander J, agreed to by the other members of the Court, said at [264]-[266], [269]-[270]: "the shareholders may authorise or affirm a decision of the directors of the company which would otherwise be voidable because it involved a breach by those directors of their fiduciary duties to the company... [265] In this case there being only one shareholder the approval by that shareholder in advance of the transaction, in my opinion, could amount to an authority by that shareholder for the company to enter into the transaction even if the entry into that transaction gave rise to a breach of fiduciary duties on the part of the director. [266] However that proposition is subject to qualification. First the company must be solvent. In my opinion, for the reasons I have already given the company was solvent. Secondly the transaction itself must be intra vires. Thirdly the directors must make full disclosure to the shareholders. Fourthly the directors must be acting in good faith. ... [269] When a company is incorporated for the sole purpose of entering into a transaction at the behest of its sole shareholder, provided that the company is at the time solvent and provided that the transaction is intra vires and the directors are not acting in bad faith the company cannot later complain about that transaction, provided of course that the directors have made full disclosure of that which is required to obtain the consent of its shareholders. [270] It is not necessary that a formal decision of the shareholders should be made; an informal consent will be sufficient; Re Duomatic Ltd (1969) 2 Ch 365. Again it follows that where the corporation has only one shareholder there is even less need for a formal meeting." See also [279]. 27Gleeson CJ and Heydon J in Angas at [25] also referred with apparent approval to the decision of Doyle CJ in the Full Court in Carabelas v Scott (2003) 177 FLR 334; [2003] SASC 389 where Doyle CJ is quoted as saying: "the informal assent by the shareholders...is sufficient to prevent [the company] complaining that ...the directors acted in breach of their duty to the company. The company was not insolvent at the time. There were no other shareholders. There was no other person with a claim to the property in question. There is no allegation that this was a dishonest or fraudulent transaction". 28In the present case, the conduct involving the transactions was undertaken by the sole shareholders and directors. Thus it seems that whatever conduct was undertaken was with the approval of the shareholders; I must infer that there was at least informal consent by the shareholders, if not express consent, by reason of the fact that they were the parties conducting the transactions. That issue does not seem to have been in dispute by the plaintiffs in this case. However, there still remains a need to consider whether there was an expropriation of the property (see Slaven v Menegazzo [2009] ACTSC 94 at [38]) and also whether the company was solvent at the time (see Woodgate v Fawcett [2008] NSWSC 868 at [104]-[106], [108]). 29Finally, the plaintiffs also submitted that the provision in the Act dealing with the remedies in s 588FF, that the Court "may" make certain orders does not entitle the Court in its discretion to refuse to make any orders. In Kazar, in the matter of Frontier Architects Pty Ltd (in liq) [2010] FCA 1381, Flick J stated at [28]: "Notwithstanding the use of the term 'may' in s 588FF(1), it has been said that the court does not retain a discretion to refuse to make one or other of the orders set forth in s 588FF(1)(a) to (j)". 30His Honour then referred to a decision of Cashflow Finance Pty Ltd v Westpac Banking Corporation [1999] NSWSC 671 where Einstein J accepted that "S 588FF more naturally reads as conferring a jurisdiction on the Court, rather than stating that there is a discretion in the court." 31However, the various orders that are available under s 588FF(1) must necessarily contemplate that some discretion is exercised as to which of the orders are appropriate in the circumstances before the Court. Those provisions, in my view, seem to allow consideration of whether the amount that should be repaid to the company should be an amount reflecting the extent to which the company has been deprived of funds or alternatively, should be an amount reflecting the extent to which the recipient has received funds. F. ISSUES 32In these circumstances, it appears that the provisions and the claim by the plaintiffs raise in general terms the following issues to be determined: (1)Were the transactions for the personal benefit of Mr and Mrs Frost. (2)Was there an expropriation of company property. (3)Were there solvency issues. (4)Were the transactions for the company's benefit. (5)What is the impact of the propositions in respect of onus of proof to which I was directed. (1) PERSONAL BENEFIT 33The schedule I set out earlier is a summation of the amounts of transactions under the categories listed. 34Mr Frost, in his evidence, was asked about the amounts and the categories and in several respects admitted that payments so categorised would properly be regarded as personal expenses of his or Mrs Frost, which were paid by the Company. However, those admissions did not extend to all categories, so that in some respects the parties were in dispute. Cash withdrawals 35The sum of $93,424.37 was calculated by the plaintiffs bearing in mind the evidence of Mr Frost that the larger amounts withdrawn were for the purpose of paying wages. The liquidator calculated the sum from all transactions involving an amount less than $800. However, Mr Frost in his evidence spoke of the larger amounts being $500 or more. 36No calculation was provided to me of the total of the amounts under $500. No particular significance should attach to the absence of that calculation. There was no strictness about which transactions related to the Company and which did not, based on the amount of the transaction. There was a degree of uncertainty as to how many of the larger cash withdrawals, or how much of the total cash withdrawals, was for personal expenditure or alternatively was for wages. 37In my view, calculating the sum of the amounts under $800 may enlarge the amount of money received for personal benefit beyond that which the evidence supports, and I think it should be reduced. 38Mr Frost accepted that over the period he would have received from $48,000 to $60,000 for personal expenses through cash withdrawals, I propose to adopt the upper range of that amount, namely $60,000. I accept that Mr Frost's evidence was honestly given. It is difficult for either party, so many years later, to properly calculate how much of these withdrawals were used for the Company's benefit or for the Frosts. Accepting an amount of $60,000 reduces the amount claimed by the plaintiffs by the sum of $33,424.37, a little more than a third. Education 39Mr Frost gave some evidence that some of the education expenses were directed to Charles Sturt University for an early learning course undertaken by Mrs Frost, who as I said was a shareholder and director and did work for some periods in the childcare business. That seems to be a reasonable connection to the Company's business suffice to justify the Company meeting the cost of this training of Mrs Frost. I allow a reduction of $1,000 for the cost of that course. Restaurant/fast food 40It was unchallenged that Mr Frost provided meals for the children at the childcare centre. He said that sometimes he needed to obtain prepared meals rather than cook them himself as he generally did (although he disclaimed any special talent in that regard). He thought that the cost of the acquired meals was of the order of $20 every two to three weeks. At $20 a month over five years the cost would be $1,200 and that is the amount I propose to allow as a reduction. Sports 41Mr Frost gave evidence that some equipment was purchased for the childcare centre including soft surfaces, balls and the like. I propose to allow the sum of $1,000 over the five-year period. Supermarket cash withdrawals 42Mr Frost said that the supermarket was sometimes used for the purpose of wages as ATM machines are limited in Bargo and the wages were always paid in cash. He did accept that most of the supermarket cash withdrawals would have been for personal expenses. I propose to allow a $1,000 reduction in that amount. Total personal expenses 43These amounts of reduction together total $37,624.37 and reduce the total sum of $181,064.34 sought by the plaintiffs in respect of the various transactions to $143,439.97. The loan payments 44The liquidator of the Company also claims an amount of $51,500 in respect of a loan. This matter did not get a great deal of attention in submissions but appears to be payments made by the Company over a 5-year period in respect of the mortgage of Mr and Mrs Frost over their residential property. There was some evidence given by Mr Frost about this payment. He asserted that it was for the use by the childcare centre of the Frosts' property. 45Where a portion of the Frosts' property is used for the childcare centre, it is reasonable that the Company should pay an amount for that use. However, it is difficult to assess what that amount that might be. There was evidence that the property was sold for $545,000 in 2009 and doing the best one can with the limited evidence, given that nine car parking spaces and various rooms were said to have been used by the childcare centre, it may be said that perhaps half of that property was available to the childcare centre. If one looks at a return on half of the $545,000, say $270,000, a sum of about $10,000 per year is a return of 3.7%. That does not seem to be an unreasonable return on premises used for a commercial purpose. I accept that there is some generality in this approach but the suggestion that a properly fitted-out childcare centre might cost the company $200 a week for its availability, does not seem to me to be excessive but rather a reasonably appropriate division of expenditure. 46I do not accept that the payments made by the Company in respect of Mr and Mrs Frost's mortgage payments exceed what is reasonably payable by the Company for the use of the property. These payments were thus not for their personal benefit but for the Company's use of a portion of the property. 47I do not accept the liquidator's claim for $51,500. Interest in property and loan for works 48The plaintiffs also claimed $55,000 by way of a loan made by the Company to Mr and Mrs Frost although there is no real evidence to support that the loan was made. What does appear from the evidence is that the Company borrowed funds and those funds were used in the following manner: "A sum of $60,000.00 was borrowed for the NAB and these funds were used for the purposes of upgrading and refurbishing the existing childcare service. The work conducted ensured the business and service adhered to DoCS and accreditation regulations and guidelines. These refurbishments included (a) Landscaping of the outdoor learning area. Retaining wall, extension of existing sandpit, softfall area and decking. (b) Kitchen upgrade. (c) Extra staff, children's wash basins and toilets. (d) Staff area including parent liaison area and staff work space. (e) Installation of safety glass to child accessible areas and a Australian safety Standard Fire door. (f) Designated nappy changing room. (g) Increased lighting and signage for staff and child safety. (h) Increased car parking to nine car spaces. (i) Child proof fencing between the main door and the car parking area. (j) Extension of the building to increase number of child care spaces to 29 children per day." 49This sum claimed of $55,000, of course is different from the sum borrowed from the National Australia Bank. The different amount may derive from the alternative way the liquidator puts the claim, which is that the loan funds were used to increase the value of the property of Mr and Mrs Frost. When the house was sold eight years after the work was done, it is said that there was an increase in value, which should be paid to the Company. 50The evidence of the increased value was in the following terms, given by the liquidator, Mr Crowe-Maxwell: "based on My Experience, the expenditure of [$60,000] would have increased the value of the Property and in the circumstances I consider that the value of the Property, over the period of fifteen (15) years, would have increased by at least $55,000.00 due to the renovations completed to the Property at the expense of the Company." 51I have some difficulties with this evidence. Mr Crowe-Maxwell accepted that he did not know what improvements were undertaken at the time he gave his evidence, let alone of the precise list of works done as indicated by items (a) to (j) in the quotation above. Mr Crowe-Maxwell makes no claim for expertise in residential valuations, as distinct from businesses. In effect, I am being asked to accept that if $60,000 was spent in an unknown way on a property in the small town of Bargo then several years later (in fact eight although Mr Crowe-Maxwell refers to 15) the value of that property would increase by $55,000, based on the opinion of a person without any expertise. 52There is no apparent assessment by Mr Crowe-Maxwell of the impact of depreciation on the improvements, or whether any of the works of which Mr Frost gave evidence would impact positively on value. I do not think I can infer that matters such as installing extra children's wash basins and toilets, a nappy changing room, signage for staff and child safety and car parking for nine cars in a small country town, would have any positive effect on the market value of the property at the time of the works, let alone when it was sold some eight years later. 53Accordingly, I do not accept that the plaintiffs are entitled to recover this amount of $55,000. I note that it is not noted on the schedule, although that may be because the schedule was not intended to cover that aspect of the liquidator's claim. In my view, the evidence shows that the amount borrowed was spent for the purpose of the childcare centre and that the facilities so obtained were used by the childcare business for some eight years after the funds were spent. I was not persuaded that there was any residual benefit to the value of the property as a result of the expenditure. Credit to Mr and Mrs Frost 54During the eight-year period of use by the childcare centre of the property improved by the works, the Company largely repaid the loan. However, there was a sum of $10,038 still owing at the time of liquidation. It appears, as at today, that the debt is no longer payable. Mr Frost said, in the course of his submissions that the final sum owing was paid from the proceeds of the sale of his home, as he was a personal guarantor for the loan. 55There was no evidence of anyone else paying off the loan. As I had evidence that it had been repaid (it was not currently a debt owing by the Company) and there was no suggestion that the liquidator had paid it (or should have paid it) given that he had not formally received proofs of debt, on the balance of probabilities I am persuaded that the debt was repaid by Mr and Mrs Frost. As I have found that that loan was for company purposes, and thus a company expense, I think Mr and Mrs Frost should be credited with the amount of repayment of the loan from the sale of their home. The exact amount repaid from the time of the sale is unclear although at 20 April 2009, about a month after liquidation, the sum was $10,038. I propose to allow that amount as a credit. 56There is another aspect of credit that must be allowed to Mr and Mrs Frost. Mrs Frost worked full-time for the Wollondilly Anglican School and her salary for several years was paid directly into the company's accounts. It was common ground that that amount totalled $80,772.50 for the period 2005 to 2009. The fact that Mrs Frost's personal salary was paid directly into the company accounts underlines the circumstance that there was no real division made by Mr and Mrs Frost between the company's business and their own. 57Subject to one matter the amount of $80,772.50 must be allowed as a credit. The one caveat is that there were some moneys transferred from the Company to the school in respect of Mr and Mrs Frost's children who attended the school. It was accepted that the amount in respect of the children's school fees was the sum of $21,279.50. Thus, it seems that the appropriate credit to be allowed to Mr and Mrs Frost is the difference between the amount received by the Company from Mrs Frost's salary ($80,772.50) and the amount paid by the Company for school fees ($21,279.50), a sum of $59,493. With the other $10,038 referred to above as repayment of the Company loan, the total credits are $69,531. Other claims 58Finally, there were the two other claims in the schedule for transactions involving, respectively, Mr A Frost and I & K Frost. The latter payment in the sum of $2,200 does not appear to be contested. Although it may have been part of the payments made in respect of the loan of the premises paid by the Company (and which I have dealt with earlier as some form of lease licence or occupation fee) evidence of this is absent and I am minded to include the sum of $2,200 as a personal amount. 59The amount paid to a Mr A Frost is evidenced to be for deposits that Mr Frost had made into the business. Mr Frost said in submissions that Mr A Frost was his father. The plaintiffs do not appear to dispute that. The evidence on this matter, the letter of Mr Frost tendered by the plaintiffs and the verified annexure to the defence, are consistent with Mr Frost's submissions that his father made substantial short-term loans to assist the business, and that the amount of $8,900 is in repayment of some of them. The payments were in the period from 2005 to 2007 and so do not seem to have any real connection with the liquidation in 2009. There was no evidence to dispute this account by Mr Frost and I accept it. Conclusion regarding personal expenses 60In the result, there seems to be a net amount of personal expenses calculated as follows: $ 143,639.97 Plus $ 2,200.00 Minus $ 69,531.00 Net Amount $ 76,312.67 (2) EXPROPRIATION OF COMPANY PROPERTY 61This case did not involve an expropriation of company property analogous to the decision in Slaven. Rather these payments seem to be in lieu of payments for services supplied by Mr Frost, albeit in a somewhat unconventional manner. I deal with this matter in more detail below. (3) SOLVENCY 62The liquidator relied on debts owed to the Commissioner of Taxation in respect of withholding tax as evidence of insolvency. Under the existing law (see eg Deputy Commissioner of Taxation v Zammit [2014] NSWCA 104) amounts of tax withheld by a company are amounts for which both the company and the directors are liable, although the amounts may not be recoverable from the directors without an appropriate notice. There is no claim before me based on insolvent trading. 63The period over which the withholding tax was payable is not clear from the evidence. It may have accrued over time and perhaps for the period from 2005. However, the non-payment of one debt (or some debts) is not sufficient to establish that the Company was insolvent at any particular time. (4) WERE TRANSACTIONS FOR THE COMPANY'S BENEFIT 64Mr Frost worked full-time in the business, and Mrs Frost worked in the business occasionally or casually. There is no record of them ever receiving any wages from the Company. This seems to have resulted from them not distinguishing between the Company's funds and their own. Mr Frost was not cross-examined on his evidence that he did all he could to keep the business surviving, that he paid his staff from "personal savings, credit card withdrawals or borrowings" and that he "used all [his] savings and borrowings from family and friends to continue to operate". 65Payment by the Company of personal expenses of approximately $15,000 per annum ($76,312.67 over five years) to Mr and Mrs Frost seems to me to be a very reasonable amount for their services and an amount that is favourable to the Company. The liquidator submitted that it cannot be established that there was an agreement for Mr Frost or Mrs Frost to be paid wages. In my view, this is not to the point. The labourer is worthy of his hire (Luke 10:7) and Mr Frost appears in this case not to have been paid, other than indirectly by the sums claimed by the liquidator. Payment by the Company of these sums does not appear to me to be of detriment to the Company, nor did these payments provide a benefit to Mr and Mrs Frost beyond their entitlement to be paid for their services. 66Whether Mr and Mrs Frost have dealt properly with their tax liabilities is a separate question, although Mr Frost submitted that he has no outstanding tax liabilities. An amount of $15,000 per year income received by two people, one working full-time, might be assumed to result in a minimal tax liability. 67In the result, the payments that were made to Mr and Mrs Frost were not uncommercial in my view. I was not persuaded that Mr and Mrs Frost received an amount that was in any respect excessive or beyond that which was reasonable for the Company to pay them for their labours. (5) ONUS OF PROOF 68I referred earlier to the question of onus. The circumstance of Mr and Mrs Frost not providing further documents in respect of these transactions is not, in my view, sufficient to overcome the need for the liquidator to prove that Mr and Mrs Frost effectively received unreasonable amounts. This was not a case like Bird where there was no explanation for the payments. Mr Frost said that he did not have any other documents of relevance, but that he had left them all with the official liquidator. He was not cross-examined to the effect that he had other documents. G. CONCLUSION 69The important question is whether the amounts that Mr and Mrs Frost received from the Company exceeded a reasonable remuneration for their work for the Company. I do not think that they did. 70Accordingly, I do not accept that there was a breach by the directors of company duties in respect of the amount paid to Mr and Mrs Frost. That is not to countenance the inadequate recordkeeping of the Frosts or determine whether that is in breach of their duty to the Company. But a breach of a director's duty by failing to keep proper records is not itself sufficient to enliven an entitlement in the liquidator to recovery of the monies paid. 71I find on the balance of probabilities that the Frosts received for their efforts less than their entitlement in wages, whereas the Company received the benefit of Mr Frost's efforts and expertise cheaply. The personal payments Mr Frost received from the Company were a financial benefit to the Company when account is taken of the work that he performed. 72For these reasons, I am of the view that there should be judgment in favour of Mr Frost. Although Mrs Frost did not put on an appearance and defence, it seems to me inappropriate that I should award judgment against her for that sole reason, when the evidence satisfies me that her position is no different to that of her husband. 73The orders of the Court are: (1)Judgment for Mr and Mrs Frost against the plaintiffs. (2)No order as to costs. ********** 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: 30 September 2014