Crusader Marine Holdings Pty Ltd (in liq) & Ors v Ballantyne & Ors [2011] QSC 152

SUPREME COURT OF QUEENSLAND CITATION: Crusader Marine Holdings Pty Ltd (in liq) & Ors v Ballantyne & Ors [2011] QSC 152 PARTIES: CRUSADER MARINE HOLDINGS PTY LTD (IN LIQ) ACN 010 959 789 (first plaintiff) and CRUSADER MARINE PTY LTD (IN LIQ) ACN 010 392 319 (second plaintiff) and MICHAEL GRIFFIN AND RAJ KHATRI (third plaintiffs) v STUART EDWARD BALLANTYNE (first defendant) and STEPHANIE GERTRUDE DAWSON (second defendant) and OCEANIC YACHT DESIGN PTY LTD ACN 070 425 384 (third defendant) and SEA MANAGEMENT CORPORATIONS SERVICES PTY LTD ACN 010 969 212 (fourth defendant) and SEA TRANSPORT SOLUTIONS PTY LTD ACN 010 482 952 (fifth defendant) and QUEENSLAND FERRIES HOLDINGS PTY LTD ACN 084 960 538 (sixth defendant) and ASD MARINE SERVICES PTY LTD ACN 010 160 040 (seventh defendant) and ISLAND TRANSPORT HOLDINGS PTY LTD ACN 010 441 148 (eighth defendant) FILE NO/S: 9585 of 2010 DIVISION: Trial Division PROCEEDING: Claim -- 1 of 45 -- 2 ORIGINATING COURT: Supreme Court of Queensland DELIVERED ON: 3 June 2011 DELIVERED AT: Brisbane HEARING DATE: 3, 4, 5, 6 May 2011 JUDGE: Applegarth J ORDER: 1. Any application by the first and second plaintiffs for leave to amend the statement of claim to plead the alternative case on breach of fiduciary duty against the first and second defendants raised in oral submissions be filed and served within 7 days. 2. If no such application is filed, then the parties submit minutes of order for judgment in the proceedings within 14 days. 3. If such an application is filed, the application be listed before Applegarth J on a date to be fixed. CATCHWORDS: CORPORATIONS – MANAGEMENT AND ADMINISTRATION – DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION – FIDUCIARY AND RELATED STATUTORY DUTIES – OF GOOD FAITH AND PROPER PURPOSE – TO ACT IN GOOD FAITH IN BEST INTEREST OF COMPANY – where Crusader Marine Pty Ltd engaged a company to manufacture boat moulds – where manufacturer of moulds claimed for money allegedly owing and claimed a lien over the moulds – where Crusader Marine Pty Ltd defended the claim on the basis that money was not owed, that the manufacturer had been overpaid and that it was entitled to a substantial set-off which exceeded the manufacturer’s claim – where directors of Crusader Marine Pty Ltd also controlled other companies in a group – where other companies in the group owed money to the Crusader companies – where inter-company loans repaid, leaving Crusader Marine Pty Ltd and its parent company Crusader Marine Holdings Pty Ltd with substantial cash assets, the moulds and no liabilities other than the potential liability to the claimant – where directors assessed the moulds as having a value that exceeded the amount of the claim – where directors distributed substantial dividends from cash assets – where the moulds in the possession of the claimant were then the only substantial assets available to meet possible judgment debt or settlement of claim – whether the moulds were of little value and known by the directors to be of little value – whether certain transactions were carried out for the purpose of removing all available assets from the companies so as to defeat the claimant – whether the directors thereby preferred their own interests to those of the companies -- 2 of 45 -- 3 CORPORATIONS – MANAGEMENT AND ADMINISTRATION – DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION – OFFICERS OF INSOLVENT CORPORATIONS – DUTY TO PREVENT INSOLVENT TRADING – REASONABLE GROUNDS TO SUSPECT COMPANY IS OR WOULD BECOME INSOLVENT – where directors eventually decided not to defend proceedings and default judgment entered against Crusader companies – where companies voluntarily wound up – whether transactions by which inter-company loans were repaid two years earlier were undertaken to divest the companies of all of their available assets – whether these and other transactions were either unfair preferences or uncommercial transactions which had the effect of causing the Crusader companies to become insolvent PROCEDURE – SUPREME COURT PROCEDURE – QUEENSLAND – PROCEDURE UNDER RULES OF COURT – PLEADING – STATEMENT OF CLAIM – where directors of company were sued for breach of duty – where claim for breach of duty based on pleaded allegations that moulds were of little value, were known to have little value and that transactions were carried out for the purpose of removing all available assets from the companies so as to defeat creditors – where these allegations not proven – whether plaintiffs should be permitted to apply for leave to amend pleading to plead breach of fiduciary duty in preferring their own interests to those of the company on a basis raised in oral submissions Corporations Act 2001 (Cth), s 95A, s 588FA, s 588FB, s 588FC Banque Commerciale S.A., En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279; [1990] HCA 11 cited Betfair Pty Ltd v Racing New South Wales (2010) 189 FCR 356; [2010] FCAFC 133 cited Bristol and West Building Society v Mothew [1998] Ch 1 cited Gould and Birbeck and Bacon v Mount Oxide Mines Ltd (in liq) (1916) 22 CLR 490; [1916] HCA 8 cited Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305 cited Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 cited Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12 cited -- 3 of 45 -- 4 COUNSEL: MD Martin for the plaintiffs NJ Thompson for the defendants SOLICITORS: Fox Bradfield for the plaintiffs Woods Prince for the defendants Introduction [1] The principal issue in this proceeding is the value in mid-2007 of certain moulds for the construction of the Crusader 1700 Semi-swath Catamaran. At that time the manufacturer of the moulds (“Wenross”) was suing Crusader Marine Pty Ltd for moneys allegedly owing. Wenross claimed the sum of $317,606.48. Crusader Marine Holdings Pty Ltd, which owned Crusader Marine Pty Ltd, was joined as a second defendant on 3 August 2007 and the same claim was made against it. The Crusader companies defended the proceeding. They asserted that no money was due, that Wenross had been overpaid by $722,546.40 and that there was an entitlement to set off this amount against any sums owed to Wenross. The Crusader companies also had potential counterclaims. Wenross was in possession of the moulds and claimed a lien over them. [2] The moulds cost the Crusader companies about $500,000 to build. The directors of the Crusader companies contend that the moulds were worth at least $350,000 in mid-2007, and that their value exceeded the commercial value of Wenross’ claim. The plaintiffs in this proceeding claim that the moulds were worth far less than the value of the Wenross claim in mid-2007. [3] This proceeding arises because on 11 July 2007 the directors of the Crusader companies declared dividends that resulted in the moulds being the only substantial asset available to meet Wenross’ claim. The Crusader companies were wound up voluntarily in mid-2009. They claim that the first and second defendants breached their fiduciary duty as directors. The liquidators of the Crusader companies seek to recover amounts paid by the companies to related entities on the basis that they were either unfair preferences or uncommercial transactions which had the effect of causing the Crusader companies to become insolvent. Background [4] The Crusader companies were part of a group of companies controlled by the first and second defendants (Mr Ballantyne and Ms Dawson). The companies in the group carried on different businesses in the marine industry. From time to time one company would advance money to another company in the group to assist it in undertaking and completing its projects. [5] Mr Ballantyne has extensive experience in the marine industry. He was a qualified navigator before gaining qualifications in Scotland as a naval architect. The company Sea Transport Solutions commenced business 36 years ago in the survey and design of small boats. Over time it developed and sold designs for larger vessels, particularly Semi-swath catamarans. The Semi-swath design was proven to be an efficient design, resulting in greater fuel efficiency and better sea-keeping performance. The designs were a success, and were sold to 45 countries. Such was the success with larger vessels that Mr Ballantyne and his co-director and wife, Ms Dawson, thought that there would be a market opportunity in developing the -- 4 of 45 -- 5 Semi-swath designs for smaller vessels. Their company, Samson Marine Pty Ltd, had sold a small marina at Thornlands, and they decided to invest the $2,000,000 proceeds in the development of a Semi-swath catamaran that would compete with other vessels in the luxury market. At the time this was a growing market, with the Australian market alone accounting for hundreds of vessels annually. The business plan was to develop a product that was cheaper to run and provided better sea-keeping performance than other vessels in that market. [6] Scale models were tank-tested at the Australian Maritime College. The tests demonstrated that the design was efficient, resulting in a saving of 55 per cent in horsepower. In addition to reduced running costs, this assisted with the capital cost because smaller engines were required. Because of its qualities the Samson Cat, as it was then called, was chosen by P & O to be the tender on its Mumbai port operations and the vessel that was built exceeded P & O’s criteria. [7] The success of the design persuaded Mr Ballantyne and Ms Dawson to proceed with the project, and the vessel was to be known as the Crusader 1700. Samson Marine Pty Ltd later changed its name to Crusader Marine Pty Ltd. [8] Mr Ballantyne and Ms Dawson met Mr Norm Watt socially because Mr Watt’s parents-in-law lived next to them. Mr Watt is the director of Wenross Pty Ltd, trading as Buchanan Advanced Composites. It had a factory in Toowoomba and experience in advanced composites. It did not have experience in boat building before the Crusader project. Despite being cautioned by his friends about using Wenross, Mr Ballantyne decided to engage it. An informal agreement styled “Heads of Agreement” was entered into between Samson Marine Pty Ltd and Wenross on 14 November 2003. Under the Heads of Agreement, Samson agreed to use Wenross for the first six vessels of its catamaran design on the basis that the “plug” (the first hull) and moulds would be done at cost, and that all five subsequent hulls would be done at cost. Samson agreed to meet the costs. Samson also agreed that the five vessels following the initial vessel were to be sold and the profit distributed 50/50 between Wenross and it. Samson also agreed that, in the event that nothing was sold after the first vessel, Wenross would receive a ten per cent profit component on the cost of the first vessel. The parties agreed that the moulds were to remain the property of Samson. [9] As matters transpired, the relationship turned out to be an unhappy one. The Crusader companies say that they received quotes in February and November 2003 totalling $641,880. Wenross invoiced $1,364,426.40, and the Crusader companies paid this amount. The project took much longer than expected, which was originally 11 months. The hull was delivered in about May 2005. There were defects with it, including blistering that had to be rectified. There were other problems, but the main problem was the way in which the aft deck had been fitted. During demonstration runs at the Sanctuary Cove Boat Show there was rain, and Mr Ballantyne explained that it ended up with a pool of water in the cockpit. The asking price for the vessel at the time was $2,200,000 and the “hot prospects walked” after seeing the pooling of water in the cockpit. Crusader had to engage another company to rectify the problem. [10] By early 2006 the parties were in dispute. Crusader provided its solicitors with a list of defects on 26 March 2006. It had yet to quantify the cost of delays. It questioned Wenross’ calculation of construction costs. Crusader’s attitude was that -- 5 of 45 -- 6 it had paid far more than Wenross had quoted, and that Wenross was not entitled to any additional money. Without prejudice negotiations failed to resolve their dispute. By then the first vessel had been sold for approximately $1,400,000, which was $800,000 less than the original sale price. On 10 April 2006 Crusader’s accountant, Mr Godwin, wrote to Crusader’s solicitors and expressed the opinion that, on the basis that the vessel had been sold at a loss, “the net asset worth of the Company may not be that much, particularly as the only remaining asset in the Company would be the moulds of unknown saleable value.” It is unclear whether the Company referred to in this passage is Crusader Marine Pty Ltd or Crusader Marine Holdings Pty Ltd. In April 2006 Crusader’s solicitors foreshadowed claims for overpayment, and claims for damages against Wenross for defects in the hull and moulds and for Wenross’ untimely or late performance. They requested delivery of the moulds. In response, Wenross’ solicitors advised that it would not deliver the moulds until the matter was resolved. [11] On 15 September 2006 Wenross commenced proceedings against Crusader Marine Pty Ltd. The claim was for $317,606.48, together with interest pursuant to s 47 of the Supreme Court Act 1995 from 13 January 2006 at nine per cent per annum (or $78.31 per day). The claim consisted of: (a) $119,510.35 being the difference between the amount invoiced and paid to it ($1,364,426.40) and an amount which was alleged to represent the cost of provision of the services by Wenross in the manufacture of the first vessel, inclusive of an appropriate apportionment of overheads; (b) $49,702.42 representing the alleged cost of storing the moulds; and (c) $148,393.70 representing a ten per cent profit component on the alleged cost of the first vessel. The claim was served on 29 September, and on 1 October 2006 Ms Dawson met Crusader’s solicitor in relation to several matters, including the dispute over the construction of the Crusader catamaran. In an email to Mr Godwin dated 2 October 2006, Ms Dawson wrote that the solicitor “raised the subject of cleaning out both the above companies, as we had spoken of some months ago”. She asked the companies’ accountant, Mr Godwin, for advice and about how the companies stood in terms of assets. [12] A defence was delivered on 24 October 2006. It raised substantive defences and also alleged that it was Crusader Marine Holdings Pty Ltd rather than Crusader Marine Pty Ltd that was the party that had dealings with Wenross. A reply was filed on 24 January 2007. [13] Mr Godwin is a certified practising accountant, and had been doing work for Mr Ballantyne, Ms Dawson and their companies for about 20 years. He also acted as a business adviser. He attended board meetings of certain companies in the group of which he was a director, and maintained the companies’ financial records. Ms Dawson was involved in the day to day administration of the companies and their management, and attended to payments of accounts. However, Mr Godwin produced monthly financial reports. He was familiar with the status of the inter-company loans. These arose because the companies were not reliant on borrowings from outside sources. Each company would have different projects. -- 6 of 45 -- 7 During the course of a project it might borrow money from a related company, and when the project was finished the loan would be repaid. Mr Godwin explained that normally this would be done before the end of the tax year or as soon as cash was available. Repayment of inter-company loans depended on the amount of cash that was available within the group. [14] On 27 February 2007 Mr Godwin wrote to Mr Ballantyne and Ms Dawson and summarised the net asset position of Crusader Marine Holdings Pty Ltd and its subsidiary Crusader Marine Pty Ltd based on the most recent accounting reports that he had in his possession. He also gave them his “thoughts on the winding up of the two Companies”. By then the marina business had been sold, and the Crusader companies were not trading. Mr Godwin reported on the amounts owed to each of the Crusader companies by other companies, and the amount that they owed to other companies, Mr Ballantyne and Ms Dawson. In respect of Crusader Marine Holdings Pty Ltd he advised that, “[a]ssuming all other assets are written off (includes the moulds) and sundry liabilities if any are paid out”, its revised balance sheet would consist of $282,047 in cash after it received a net amount of $279,700 in respect of inter-company loans. In the case of Crusader Marine Pty Ltd, and assuming that all other assets were written off and sundry liabilities if any were paid out, its revised balance sheet would consist of $370,376 in cash. This was because the net position of inter-company loans that were owed to it or which it owed would result in payment to it of $369,139. On this basis the total cash amount that would be available to the two Crusader companies was $652,423. [15] Mr Godwin’s letter contemplated the payment of a dividend to shareholders, and addressed the tax implications of such a course of action. His letter stated: “Whichever way we go it is desirable to at least settle the inter company loan amounts, (of which I notice $59500 is due to yourselves).” He noted the “need to discuss with David the timing issues”. This presumably was a reference to the companies’ solicitor at the time. His letter concluded: “Once a Company has paid out all its liabilities and disposed of its assets it can apply to the ASIC to have the Companies de registered.” [16] On 5 March 2007 Mr Godwin sent an email to Mr Ballantyne, Ms Dawson and their solicitor about a possible meeting with Ivor Worrell, whose name had been suggested by their solicitor as a source of additional advice. Mr Godwin wrote that he did not think that the winding up of the Crusader companies required “such a high profile (and expensive!) person” but that he had used Mr Worrell’s firm for more complicated liquidations involving large amounts of debt involving tax issues and continuation of business post-liquidation. Mr Godwin also wrote that a relationship with Mr Worrell “could be of an advantage if from a legal point of view we need to be sure of the timing of the voluntary winding up of the Company and the recognition by the Company of ‘contingent liabilities’ such as the legal action with BAC.” His email continued: “As we speak I have cleaned up the two Companies in respect to a number of transactions which have been outstanding, eg creditors overpayments and some collections that are not receivable, and in -- 7 of 45 -- 8 addition I have removed the moulds from the books as a worthless asset. What we are left with is Inter Company loans, which can be repaid and put the Company in a cash position, of $652423. Therefore from an accounting and physical cash position the Company will be in a clean position to be voluntary [sic] wound up and dividends paid to the shareholders.” [17] On 12 March 2007 Mr Godwin sought advice from a specialist insolvency practitioner. He explained that the companies had assets of $1,145,425 comprising net loans owed by associated companies of $652,399 and a fixed asset at book value of $493,026. The latter was a reference to the written down book value of the moulds. He advised that the Crusader companies wished to settle their loan accounts “in the normal course of business thereby injecting cash into the Company”. He advised that there was a “contingent liability off the books in the form of a court case concerning the ownership of the fixed asset and if the case went pear shape the Company would have a liability of not more than $500000”. He advised that the fixed asset was held by Wenross. He sought advice as to whether the shareholders could pay themselves an unfranked dividend from the cash amounting to $652,299, leaving the company with assets of $493,126, comprising the fixed asset and the paid up capital. His specific questions were: “1. Can they pay themselves a dividend not withstanding the contingent liability? 2. Can they then proceed to wind up the Company voluntarily buy [sic] writing off the fixed asset as valueless and repaying the capital to the shareholders? 3. By doing the above is the Company at risk and can any of the dividends by [sic] clawed back by the court?” [18] On 12 March 2007 Mr Godwin also wrote to Crusader’s solicitor, Mr David Purvis, and copied his email to Mr Ballantyne and Ms Dawson. His letter was based upon accounts which gave the moulds their written down value, with the companies having an equity position of $1,145,425. Mr Godwin reaffirmed his advice that the company was not insolvent, and as such could be wound up by a members’ voluntary winding up. His email stated: “I realise you have raised the issue of the court case and that a contingent liability may arise and further that the worse case scenario could be a liability of $500m [sic]. Even if that is the case the Company group would still not be insolvent and providing it can pay its debts within a twelve month period is in my opinion not at risk. As you conveyed to the meeting that the suggestion of stripping was not intended to wind the Company up but to put it into a position where all inter Company loans were settled, that can be done as shown above, I do not see anything un toward with that.” Mr Godwin’s advice was that he did not see a problem with the company subsequently paying a dividend from the cash, and leaving the moulds and a small -- 8 of 45 -- 9 amount of capital of $100. He endorsed Mr Purvis’ suggestion of leaving the moulds there. Mr Godwin advised that he was going to seek advice from an insolvency practitioner in Victoria. [19] The initial oral advice that he received was that the company group was solvent and that the directors may declare a dividend to themselves, but should “be mindful of the absolute liability that is expected from the legal proceedings.” His advice was that they should therefore “leave sufficient assets in kind or cash that would exceed the absolute liability after declaration of the dividend.” The advice was that by not doing so the directors could possibly leave the company in an insolvent position and it would be a matter for the liquidators to recoup any related party payments. However, that would only apply if the company was in fact left in an insolvent position. The advice was that any insolvency was dependent upon: (a) the amount of the dividend declared; and (b) the finality of the legal action. After the legal action was finalised and the company was still solvent a voluntary members’ winding up could take place. [20] Mr Godwin incorporated his report of this advice in an email he wrote on 13 March 2007 to Mr Ballantyne, Ms Dawson and their solicitor. He added his own advice that it appeared that the company could pay out “a prudent dividend” and leave the balance of cash in the company together with the book value of the moulds. He said that they would then “wait for due process through the courts”. He saw no reason why the company could not continue to pay loan moneys to other companies in the group so long as it was solvent. He suggested a dividend of around $500,000 be paid, leaving the company with the moulds and other assets totalling $645,425. He advised: “At the time legal matter is resolved and an amount is established as the absolute liability, the inter company loan is collected, the moulds sold or form part of the payment and the Company is then wound up.” Mr Godwin’s email of 13 March 2007 concluded: “Stuart [Mr Ballantyne] may need to ascertain the value of the moulds in their present condition before final figures are decided.” [21] The Victorian insolvency practitioner on 20 March 2007 confirmed his oral advice that payment of the proposed dividend was in order, provided that, at the time of paying the dividend, “the directors after proper inquiry, are satisfied that the realisable value of the remaining assets will be sufficient to cover the company’s liabilities and contingent liabilities.” He also gave advice about the necessary documents for a members’ voluntary winding up, including a declaration of solvency. Mr Ballantyne and Ms Dawson advised Mr Godwin that they were prepared to act upon his advice and the advice of the Victorian insolvency practitioner. On 17 March 2007 Mr Ballantyne had written to Mr Godwin: “we look to your guidance for subsequent payments.” On 20 March 2007 Ms Dawson thanked Mr Godwin for his advice and stated “I feel quite comfortable that if we -- 9 of 45 -- 10 follow the steps as per your advice, we’re covered whatever the outcome of the court case.” This observation suggests that the outcome of the court case was not a foregone conclusion so far as Ms Dawson was concerned. [22] In May 2007 the Crusader companies’ then solicitors provided advice in relation to disclosure in the proceedings. The June 2007 transactions [23] On 18 June 2007 Mr Godwin attached a document summarising the deposits and cheques “required to clear the inter company accounts and leave the Crusader Companies in cash $624054.17”. His email continued: “This cash will be utilised to declare dividends to you both in the new financial year which can be loaned back to Islands Transport Holdings Pty Ltd if need be.” The email gave guidance about the process of payments. It is convenient to set out the document that was attached to it. “What needs to happen in the Crusader Companies In Crusader Marine Pty Ltd:- Deposit to be received from Crusader Marine Holdings Pty Ltd 158035.24 Deposit to be received from Islands Transport Holdings Pty Ltd 55444.44 Deposit to be received from Sea Transport Solutions Pty Ltd 202465.07 Deposit to be received from Sea Transport Corp Limited 20947.25 Deposit to be received from Sea Transport QLD Pty Ltd 605.00 Deposit to be received from Steph and Stuart 500.00 Deposit to be received from ASD Marine Services Pty Ltd 305.00 Total funds in 438302.00 Cheque drawn in favour of Steph and Stuart 60000.00 Cheque drawn in favour of Oceanic Yacht Design 2767.50 Total funds out 62767.50 Net Funds required in Crusader Marine 375534.50 In Crusader Marine Holdings Pty Ltd Deposit to be received from Qld Ferries Holdings (Sea Stradbroke) 220000.00 Deposit to be received from Islands Transport Pty Ltd 580000.51 Total Funds in 800000.51 Cheque payable to Crusader Marine Pty Ltd 158035.24 Cheque payable to Oceanic Yacht Design Pty Ltd 20000.00 Cheque payable to Sea Management Corp Services Pty Ltd 153592.05 Cheque payable to Qld Ferries Holdings (Sea Stradbroke) 126974.55 -- 10 of 45 -- 11 Cheque payable to Sea Transport Solutions Pty Ltd 74879.00 Total funds out 533480.84 Net Funds required in Crusader Marine Holdings 266519.67” [24] On 22 June 2007 Mr Ballantyne and Ms Dawson caused Crusader Marine Holdings Pty Ltd to make the following payments: (a) $20,000.00 to Oceanic Yacht Design Pty Ltd; (b) $153,592.02 to Sea Management Corporations Services Pty Ltd; (c) $126,974.55 to Queensland Ferries Holdings Pty Ltd; (d) $74,879.00 to Sea Transport Solutions Pty Ltd. They also caused Crusader Marine Pty Ltd to pay $60,000 to themselves. [25] The process by which these payments were made is more fully described in the report of the liquidator. The effect of the payments made by and to the Crusader companies on 22 June 2007 was to “clean up” inter-company loans that either were owed to the Crusader companies or that those companies owed to other companies in the group. The net result of the payments made to or by the Crusader companies as a result of the June transactions was to improve the cash position of the companies. [26] The result of the June 2007 transactions was to leave the Crusader companies with cash assets in excess of $640,000. The state of the moulds in early July 2007 [27] Arrangements were made for Mr Ballantyne and other persons to inspect the moulds at Wenross’ premises in Toowoomba on 5 July 2007. Those persons included Mr Martin Lewis and Mr Steve Searle, both of whom were experienced in boat building and the use of moulds for the production of vessels. The precise purpose or purposes that Mr Ballantyne had in mind in undertaking the inspection on 5 July 2007 is not clear. It will be recalled that advice had been received about the need to undertake proper inquiries so as to be satisfied that the realisable value of the moulds was sufficient to cover the companies’ liabilities and contingent liabilities. Neither Mr Lewis nor Mr Searle were valuers. However, their expert assessment of the moulds would have been of use in assessing their value. Mr Ballantyne had substantial experience as a valuer of marine assets. [28] It appears that at least one purpose of the inspection was for Mr Ballantyne to ascertain whether the company of which Mr Lewis was General Manager, Maritimo Offshore Pty Ltd (“Maritimo”), would be interested in entering into a venture to use the moulds to produce Crusader 1700 catamarans. This was what Mr Lewis understood the purpose of the visit to be. It will be necessary to return to the issue of the value of the moulds in mid-2007 and, in particular, their value when certain dividends were declared on 11 July 2007. For present purposes it is sufficient to note that Mr Lewis provided a draft letter on 5 July 2007 which stated, amongst other things: -- 11 of 45 -- 12 “In no way have these moulds been built for any production, you may have gotten 1 or 2 vessels out but not without significant input in bogging and fairing components which is contrary to the economics of production boat building.... While we agree the Crusader design has some market potential, these moulds are at the cheap and cheerful end of the spectrum, and have never been fit for the purpose as has been represented. Should you pursue the production of this design we would recommend a new set of moulds be professionally made.” [29] Mr Lewis provided a letter dated 14 July 2007 which reported his findings in relation to the moulds that he had inspected. “a. Far too light in construction. The major moulds are about 20% of the required thickness I would look for. The laminate of the boat would exceed that of the mould and would surely distort it. (The Deck, Cockpit & Cabin moulds are already distorted.) b. Inadequate bracing of moulds. c. Finish of moulds is very poor- Too much cosmetic work would have to be done to the part produced. d. Moulds are quite weathered and will need major work, even if they were fit for the purpose, which they are not. e. You need to spend around $150k to bring them up to scratch. f. As per my verbal estimate last month for Maritimo to produce production moulds of the Crusader we would charge around $500k, but the quality would be good!” [30] Mr Searle reached a similar view. He thought the moulds were “too light in construction for use in commercial production” and their bracing was insufficient. At the time he estimated that an amount of around $125,000 to $175,000 would need to be spent to bring them up to standard. [31] Counsel for the Crusader companies at the time interpreted Mr Lewis’ initial draft letter of 5 July 2007 as indicating that the moulds were “commercially useless”, that there had been a failure by Wenross to store them properly and that they were of a poor build. He advised in an email to his instructing solicitors on 9 July 2007 that this may give rise to a claim or a counterclaim based in contract or under the Trade Practices Act. His advice was that he suspected that Wenross was not “worth powder and shot” but that a Trade Practices Act claim for misleading and deceptive conduct could give rise to a claim against the maker of a statement. His email concluded: “At the moment the security for costs is still the best option.” This apparently is a reference to a pending application for security for costs against Wenross. -- 12 of 45 -- 13 The July 2007 transactions [32] On 11 July 2007 Mr Ballantyne and Ms Dawson caused the following transactions to take place: (a) declaration of a dividend by Crusader Marine Pty Ltd in favour of Crusader Marine Holdings Pty Ltd in the sum of $375,000.00; (b) payment by Crusader Marine Pty Ltd to Crusader Marine Holdings Pty Ltd of $375,000.00; (c) declaration of a dividend by Crusader Marine Holdings Pty Ltd in favour of Mr Ballantyne of $306,000.00; (d) declaration of a dividend by Crusader Marine Holdings Pty Ltd in favour of Ms Dawson in the sum of $294,000.00; (e) payment by Crusader Marine Holdings Pty Ltd to Mr Ballantyne of $306,000.00; (f) payment by Crusader Marine Holdings Pty Ltd to Ms Dawson of $294,000.00. I shall refer to these as the July 2007 transactions. [33] At the time the July 2007 transactions took place the Crusader companies had no creditors. One or other of the companies had a contingent liability to Wenross. That liability depended upon settlement of Wenross’ claim in Wenross’ favour, or judgment being obtained by Wenross. Whether Wenross became a creditor depended upon the outcome of the proceedings. Neither Crusader company was trading at the time the July 2007 transactions occurred. Legal fees were paid out of available cash, and therefore the companies had no creditors. They retained cash of approximately $32,184.26 after the July 2007 transactions. After payment of the dividends that occurred in July 2007 the main asset of the two companies was the moulds. The further conduct of the proceedings [34] On 3 August 2007 Crusader Marine Holdings Pty Ltd was added as a second defendant in the Wenross proceedings. This was because of uncertainty as to the party with which Wenross had contracted and to whom it had supplied services. No other substantive changes were made to Wenross’ pleading. The claim made against Crusader Marine Holdings Pty Ltd was in the alternative. Crusader Marine Holdings Pty Ltd filed its defence on 10 September 2007. [35] At some stage consideration turned to whether the Crusader companies should continue to defend the proceedings, leaving Wenross to obtain judgment and to enforce it by selling the moulds that remained in its possession. Mr Ballantyne and Ms Dawson say that they believed that the moulds were worth more than $350,000 in mid-2007. -- 13 of 45 -- 14 [36] In his cross-examination, Mr Ballantyne was taken to the period in about February 2007 and afterwards when there were discussions about winding up Crusader Marine and Crusader Marine Holdings, and it was put to him that he had “formed the view by about then you weren’t going to defend these proceedings; is that right?” He answered this question: “Possibly, yes.” Ms Dawson accepted under cross-examination, by reference to an email dated 5 March 2007 that she and Mr Ballantyne had decided “at about that time” that they “really weren’t going to defend these proceedings” to which she agreed. She knew that if the proceedings were not defended then “sooner or later” there would be a default judgment. However, when regard is had to contemporaneous documents, I am not satisfied that the outcome of the case was a foregone conclusion. Ms Dawson’s email of 20 March 2007, which I have earlier quoted, referred to the fact that they were covered “whatever the outcome of the court case.” If by March Mr Ballantyne and Ms Dawson had decided not to defend the Wenross proceedings, then one would have expected it to be reflected in their instructions to the companies’ lawyers and in the conduct of the proceedings. There is no evidence of any instructions being given to those solicitors until November 2007 that the proceedings were not going to be defended. Instead, the proceedings were defended, advice was received in relation to disclosure in May 2007, Crusader Marine Holdings Pty Ltd was joined as a defendant on 3 August 2007 and it filed a defence on 12 September 2007. If Mr Ballantyne and Ms Dawson had decided to allow the default judgment to be entered in the proceedings, and had decided this in the first half of 2007, then it is odd that they permitted the proceedings to continue and for the parent company to be joined as a defendant, exposing it to the risk of judgment. I find that by mid-2007 the possibility that the proceeding against Crusader Marine Pty Ltd would not be further defended at some stage was considered by Mr Ballantyne and Ms Dawson. However, the proceedings continued and security for costs was sought against Wenross. [37] On 14 November 2007 the then-solicitors for Mr Ballantyne and Ms Dawson, Holding Redlich, wrote to them and advised that an offer by Wenross to provide security in the form of a personal guarantee should be accepted, and that an application for security for costs should not proceed. The terms of Holding Redlich’s email of 14 November 2007 indicate that it was unaware of any decision not to defend the proceedings. Its letter provided advice, and sought instructions in relation to “Next Steps”. It stated: “1. The next step required in the litigation is for you to file an Amended Defence. We will prepare that and send it to you for your approval. 2. In light of the continued persistence of the Plaintiff, you need to determine what strategy you wish to adopt. You can: (a) Continue to defend the case; (b) Consider liquidating the company; or (c) Offer to settle or otherwise negotiate to settle.” After further email correspondence, on 21 November 2007 Ms Dawson advised the solicitors by email: -- 14 of 45 -- 15 “We advise that there will be no further instruction in this matter, and subsequently [sic] request that you close the file and forward any outstanding invoices to us as soon as possible.” In response to the possible courses identified in subparagraphs (a), (b) and (c) of Holding Redlich’s 14 November 2007 letter, Ms Dawson responded: “(a) We will not be defending the case (b) We see no reason to liquidate the company given that the company does not have any unpaid creditors invoices outstanding; it has some $16,000 in the bank and has a hard asset of the vessel moulds currently valued at approx $500,000. (c) We will not be offering to settle” Having received these instructions, Mr Purvis, a partner of Holding Redlich, telephoned Ms Dawson and, whilst respecting the decision that had been reached, advised Ms Dawson about “the realities”. He stated that he had a very different attitude to the decision to take no further action in respect of the defence. He advised that if no further action was taken then judgment would be entered and, although the directors were comfortable to let the company go into liquidation, Mr Purvis advised that an independent view should be taken before they let that occur. Mr Purvis “urged caution and suggested that before they make any decision not to defend they take independent advice.” This oral advice was confirmed in a letter of advice dated 22 November 2007. He suggested that before the directors “make a decision to let this matter slide” they take advice from an independent liquidator as to the best course of action to adopt. The directors did not accept this advice. [38] Mr Ballantyne explained in his evidence the decision not to continue to defend the proceedings. He said that he was “not a great believer in feeding lawyers”. He did not see the point in spending further money defending the proceedings or counterclaiming in circumstances in which he had no reason to believe that Wenross was of substance. He was prepared for Wenross to end up with moulds that he believed were worth more than $350,000. Mr Ballantyne viewed such a result as one in which he would take responsibility for his own poor decision to deal with Wenross in the first place, which had failed to comply with budget, had been late in delivering the vessel and had produced a plug and moulds that were not of the required standard. Based upon the advice that he had received, he believed that the moulds had a value of at least $350,000. There was an additional amount of between $30,000 and $40,000 in cash in the company. He thought that it was sensible no longer to defend the proceedings and to avoid “endless legal fees”. He also was busy with other companies, and spent a long time out of the country on business. He did not have the time to devote to the proceedings and assembling evidence to defend them and to counterclaim against Wenross. [39] On 18 January 2008 Holding Redlich wrote to the directors advising in relation to outstanding requests for particulars, and disclosure by Crusader Marine Holdings Pty Ltd. It advised that because of its professional obligations to the Court, it was inappropriate for the firm to continue to remain as solicitors on the record when the directors were not providing them with instructions in relation to the matter. The -- 15 of 45 -- 16 options were either that Holding Redlich withdraw as solicitors or the directors provide them with instructions in the matter “either to push it forward to trial or to try to resolve it.” The directors were reminded that if they did not act to protect their interests and judgment was entered it would be “too late to attempt to counter any claim that the Plaintiff or liquidator may have” and the companies’ defence would be lost. On 22 April 2008 Wenross filed an application that required the defendants to show cause as to why judgment should not be entered against them in the light of non-compliance with requests to provide further and better particulars and to make disclosure. [40] On 7 May 2008 the Court ordered pursuant to r 374 of the Uniform Civil Procedure Rules that judgment be entered against the defendants in the sum of $383,859.60 ($317,606.48 plus interest of $66,253.12 calculated at 9 per cent per annum from 13 January 2006). The defendants were also ordered to pay the plaintiff’s costs of and incidental to the application and the action to be assessed on the standard basis. Post-judgment negotiations [41] Mr Godwin engaged in without prejudice communications with the solicitors for Wenross. On 5 August 2008 he advised that the companies’ legal costs in the matter to date exceeded $24,000 and that that their assets comprised only the moulds. To resolve the matter the companies were prepared to forego any ownership in the moulds, which remained in the possession of Wenross, and to arrange for use of the plans to build one more hull. This offer was made in full settlement of the judgment, interest and costs. Wenross’ solicitors responded by rejecting the offer and seeking a transfer of “the moulds, models, plans, test results and all intellectual property associated or connected with those items and the vessel”. Ms Dawson gave instructions to Mr Godwin that the directors had no intention of giving Wenross anything but the moulds. Mr Ballantyne also reacted adversely to Wenross’ proposal to transfer all intellectual property associated with both the moulds and the vessel along with the moulds themselves. On 23 August 2008 he drafted a response to Wenross’ solicitors that canvassed the advice of Mr Lewis and Mr Searle that the moulds were constructed to a very low standard, and that they had not been stored so as to protect them from the weather. This was said to highlight that Crusader had not been supplied with what it had paid for, and that claims for storing the moulds out of the weather were false. His draft reply noted that Crusader’s lawyers had suggested that legal recourse be taken against Wenross for misrepresentation, but that the Crusader companies declined to do so. His draft response continued: “Nevertheless the inspection results eliminated the thought of settlement from Crusader, and no doubt the present lack of value in these moulds is propelling your client in a grab of other items. The design and IP belongs to a separate company with different shareholders and if your client wants to purchase the design and IP, a serious offer would be considered.” Ms Dawson responded to Mr Ballantyne’s proposed strongly-worded draft letter by expressing the concern that it would be taken as an admission that there was no longer “any value” in Crusader Marine Holdings, and that the company was not solvent. Mr Godwin also thought that Mr Ballantyne’s combative draft letter was -- 16 of 45 -- 17 not the way to effect a settlement. He thought that there was scope for a more conciliatory approach. [42] In September 2008 Mr Ballantyne expressed his view to Mr Godwin that there was no point in meeting with representatives of Wenross unless something was to be paid to Wenross, and that he thought that there was some merit in Mr Godwin meeting with Wenross’ representatives. He reiterated his view, in apparent ignorance of Holding Redlich’s advice of several months earlier, that there was a basis for a counterclaim, but recognised that Wenross was “a shell, so we would be just wasting time”. [43] Mr Godwin continued negotiations and by 27 February 2009 Crusader was prepared to arrange a non-exclusive licence to Wenross for a period of four years. The licence arrangement contemplated that if and when a vessel was built there would be a two per cent royalty paid to Sea Transport Solutions. However, nothing came of this, and Wenross took steps to proceed to enforce its judgment by issuing an enforcement summons. The voluntary winding up of Crusader Marine Holdings Pty Ltd [44] On 25 June 2009 Ms Dawson and Mr Godwin met with Mr Michael Griffin of Worrells. They explained to him that the judgment had been obtained, that the judgment creditor was the only creditor (apart from possibly some small director/shareholder loans). The company had no trade creditors and no tax liabilities. Mr Griffin was told that the boat moulds “may be worth $500K”. Reference was made to the payment of the dividend from cash assets “when the company was more than solvent, and after obtaining advice” from the company’s accountant that the dividend was in order. [45] After the meeting, Mr Griffin sent documents by email to Ms Dawson. The documents consisted of a package of documents for a Creditor’s Voluntary Liquidation. There is some conflict in the evidence about what was said at the meeting on 25 June 2009. Mr Godwin says that he thought the companies were solvent in June 2009 and that what was proposed was a Members’ Voluntary Winding Up. Mr Griffin could not recall any discussion at the meeting about a Members’ Winding Up, and could not recall any discussion at the meeting relating to solvency. On the basis of what he was told at the meeting he considered that the company was insolvent. He says that if the directors had said that they were adamant that the company was solvent, then he would not have followed up the meeting by sending a Creditor’s Voluntary Liquidation package which included draft resolutions by the directors that the company was insolvent. [46] Ms Dawson and Mr Ballantyne signed on 25 June 2009 a resolution for the voluntary winding up of Crusader Marine Holdings Pty Ltd. The form was the one sent to them by Mr Griffin which stated that “the company was insolvent and that the company should be voluntarily wound up”. There was a separate resolution by the members that the company be wound up and that Mr Griffin and Mr Khatri be appointed liquidators. Ms Dawson says that she signed the resolution in that form because she understood that was the form to be used, even though she did not believe that their company was insolvent. [47] Little turns on the different recollections of witnesses about what was said at the meeting on 25 June 2009. It is possible that Ms Dawson misunderstood -- 17 of 45 -- 18 Mr Griffin’s advice at that meeting and took the view, which Mr Godwin shared, that the company was solvent but did not say as much at the meeting. I accept Mr Griffin’s evidence concerning his recollection of the meeting, which is supported by his file note and the fact that the forms were only sent to the directors of the company after the meeting. It is possible that in June 2009 Ms Dawson and Mr Godwin believed that the value of the moulds exceeded the judgment debt. They told Mr Griffin that the moulds may be worth $500,000. However, this did not make the company solvent. By June 2009 there was a liability in the form of the judgment debt, together with post-judgment interest. Without the ability to obtain possession of the moulds the company was not in a position to sell them. It was not solvent on 25 June 2009, even if Ms Dawson and Mr Godwin thought it was. [48] The statement of affairs that was completed by Ms Dawson and Mr Ballantyne on 25 June 2009 estimated the value of the moulds to be $300,000. [49] Following their appointment, the liquidators had limited cash resources in the companies with which to market the moulds. By the time of their appointment the global financial crisis was having significant effects, including devastating effects upon the luxury boat industry throughout the world. The much-reduced demand for luxury vessels had an adverse effect upon the boat-building industry and the value of the moulds. The issues [50] The Crusader companies pleaded that as at 11 July 2007 Mr Ballantyne and Ms Dawson, as directors of those companies, owed them: “a duty including a fiduciary [sic] to: (i) act in the best interests of the first and second plaintiffs; (ii) not to prefer their own interests to the detriment of the first and second plaintiffs; (iii) act with that degree of skill and care that could be expected of reasonable directors in their position”.1 This duty is admitted. The Crusader companies claim against Mr Ballantyne and Ms Dawson “damages for breach of duty including fiduciary duty in the sum of $600,000”. I take this to be intended to be, in part, a claim for equitable compensation for breach of fiduciary duty to undo the damage done and to restore to the Crusader companies the loss that its directors are alleged to have caused them. I do not read paragraph 14(f) of the statement of claim as alleging that Mr Ballantyne and Ms Dawson owed a fiduciary duty to act with that degree of skill and care that could be expected of reasonable directors. Such a proposition would be distinctly controversial. In Permanent Building Society (in liq) v Wheeler2 it was said: 1 Statement of Claim para 14(f). 2 (1994) 11 WAR 187 at 238. See also Bristol and West Building Society v Mothew [1998] Ch 1 at 17- 18; R. P. Meagher, J. D. Heydon and M. J. Leeming, Meagher, Gummow and Lehane’s Equity: Doctrine and Remedies, 4 th ed. (Chatswood: Butterworths LexisNexis, 2002) at [5-295]; P. W. Young, C. Croft and M. L. Smith, On Equity (Pyrmont: Thompson Reuters, 2009) at [7.460] to [7.510]. -- 18 of 45 -- 19 “A director’s duty to exercise reasonable care, though equitable (as well as legal) is not a fiduciary obligation.” [51] The essence of the case against Mr Ballantyne and Ms Dawson is that they preferred their own interests and the interests of some of their other companies to the interests of the Crusader companies. The plaintiffs submit that Mr Ballantyne and Ms Dawson breached their duty in preferring their own interests to those of the Crusader companies in that: “(a) they made a conscious decision not to defend proceedings against the first and second plaintiffs which they admit knew would have resulted in a liability of the first and second plaintiffs by way of a default judgment of at least $370,000 by July 2007; (b) by a series of transactions in June and July 2007 removed all but a very small amount of cash from the first and second plaintiffs; (c) they paid entities related to them namely the third–eighth defendants admitted amounts totalling $456,080.07 (referred to in the pleadings as the June 2007 payments, the July 2007 transactions, the October 2007 transaction and the June 2008 payment); (d) the only asset of value namely the moulds was not fit for the commercial production of boat [sic], were in a poor condition and required at least some form of repair; (e) the moulds had never been used to construct a boat; (f) a boat that would be constructed from the moulds had no prior sales history and would have been a new product on the market for luxury boats selling for approximately $2 million; (g) the moulds were in the possession of a creditor who was claiming a lien; (h) the intellectual property associated with any boat to be constructed from the moulds was not owned by the first and second plaintiffs.”3 [52] The companies also claim against the other defendants in respect of payments made on 22 June 2007. They claim that the sums paid to those defendants are held on trust for the Crusader companies and that an order should be made that each defendant repay the sum together with interest. The Crusader companies plead that the third to eighth defendants took the benefit of the June 2007 payments with constructive knowledge of the directors’ breaches of duty. An additional claim is made in respect of a payment of $200,000 that was made after 11 July 2007 (“the $200,000 payment”). This allegedly formed part of the total sum of $600,000 3 Plaintiffs’ written submissions, paragraph 46. -- 19 of 45 -- 20 received by the first and second defendants. Further claims are made in respect of a payment to the seventh defendant of $13,634.50 on 10 October 2007 (“the October 2007 payment”) and a payment of $7,000 to the eighth defendant on 25 June 2008 (“the June 2008 payment”). [53] The plaintiffs’ claim in respect of the June 2007 payments is that they were made for the purpose of the payment of the dividend that was declared on 11 July 2007, and that the June transactions and the July transactions, taken together, were all part of one transaction to divest the first and second plaintiffs of all available assets. The plaintiffs’ case in this regard is based upon inferences drawn from correspondence, and Mr Griffin placed particular reliance upon Mr Godwin’s letter of 27 February 2007 and his emails of 5 March and 18 June 2007. [54] The defendants submit that this conclusion should not be drawn. They reject the opinion expressed by Mr Griffin in his report on solvency that the transactions “can only have been to prefer the payment to the directors and other related entities in preference to the claim made by Wenross Pty Ltd”. The defendants’ case is that there was not a pre-ordained plan to pay all of the cash that was available to the companies after the June transactions by way of dividends to Mr Ballantyne and Ms Dawson. Their case is that there were two distinct steps. The first was the resolution of inter-company loans which occurred on or about 22 June 2007. The separate, July transactions, occurred after the value of the moulds was assessed following the inspection on 5 July 2007. This second step was taken in accordance with cautionary advice that the dividends should only be declared after an assessment of the value of the moulds occurred. [55] Finally, the plaintiff companies submit that the payment of the dividends to Mr Ballantyne and Ms Dawson was made with the intention of ensuring that Wenross would not be paid and that, in those circumstances, the payments are void pursuant to s 228 of the Property Law Act 1974 (Qld). [56] The liquidators seek to recover amounts paid by the Crusader companies to the third to eighth defendants on the basis that they were either unfair preferences or uncommercial transactions which had the effect of causing the companies to become insolvent. These claims are put forward on the basis that the calling in of the inter-company loans and the paying of the dividends “was all part of one transaction to remove cash from the first and second plaintiffs and pay money to the third-eighth defendants”. Such transactions are said to be uncommercial within the meaning of s 588FB of the Corporations Act 2001 (Cth). [57] As to insolvent transactions, the plaintiffs acknowledge that if the June 2007 transactions were viewed in isolation and simply were a matter of cleaning up inter-company loans, then those transactions did not cause the companies to become insolvent. However, the plaintiffs submit that the June 2007 transactions and the July 2007 transactions were all part of one transaction, and are insolvent transactions within the meaning of s 588FC of the Corporations Act on the grounds that the companies became insolvent by reason of those transactions. The claim that they became insolvent rests upon the propositions that the only substantial assets of the companies after the July transactions were the moulds, that the claim by Wenross was for an amount of money then due and owing, and that by March 2007 the companies were not going to further defend the Wenross proceedings. In the course of submissions it was acknowledged that in July 2007 the amount claimed by -- 20 of 45 -- 21 Wenross was not a debt then due and owing. However, the plaintiffs submit that future events should be taken into account and that the companies were not able to pay the liability that would inevitably result when a default judgment was entered. [58] The defendants submit in response that there is no basis to impugn the transactions, since they were neither an unfair preference nor uncommercial. The June transactions are submitted to have cleaned up the Crusader Group’s balance sheets so that unsecured loans were converted to cash assets. The June transactions were separate to the July transactions, and are said to have benefited the companies. Further, the defendants submit that the July transactions were not insolvent transactions. They submit that the liquidators did not discharge the burden of showing insolvency, and that the companies were not insolvent when the July transactions occurred. Wenross was not a creditor. Its claimed liability had yet to be established and, in any event, the defendants submit that in July 2007 the value of the moulds exceeded any potential liability to Wenross under a judgment or settlement at around that time. [59] The defendants pleaded, in the alternative, a statutory defence pursuant to s 588FF of the Corporations Act 2001. However, submissions in relation to this defence were not made by the defendants. [60] Finally, and in response to the companies’ reliance upon s 228 of the Property Law Act 1974, the defendants submit that there was no conveyance, and that there was no intent to defraud. [61] The substantial issues are as follows: 1. The value of the moulds; 2. The commercial value of Wenross’ claim; 3. Whether the June and July transactions were part of one transaction to divest the companies of all of their available assets; 4. Whether the directors breached their admitted duties in the respects alleged in paragraph 15 of the Statement of Claim; 5. The solvency of the companies; 6. Whether the transactions were either unfair preferences or uncommercial transactions; 7. Whether the first and second defendants authorised the payments of the dividends with intent to defraud creditors, so that the transactions are voidable pursuant to s 228 of the Property Law Act 1974. [62] A number of these issues are inter-related. The valuation of the moulds was identified as a critical issue in the opening of the plaintiffs’ case. A substantial part of the evidence concerned that topic. In their oral submissions the plaintiff companies advanced the argument that even if they failed on the valuation issue, the directors nevertheless breached their fiduciary duty by preferring their interests to those of the companies. -- 21 of 45 -- 22 [63] In determining the issues it is important not to conclude too readily the issue of the companies’ solvency in mid-2007 on the basis that, as matters transpired, they were insolvent in mid-2009. In determining issues of value, including the value of the moulds and the value of Wenross’ claims, care is required in respect of the date or dates at which such values are assessed. For example, on 21 November 2007 Ms Dawson gave instructions that the proceedings were to be no longer defended and that there were not to be attempts to settle them, and this effectively valued the Wenross claim at that date by reference to what would almost inevitably be a default judgment for its claim, interest and costs. The Wenross claim cannot be valued at the same amount at a much earlier date when the claim was being defended and there were viable defences to it, including a substantial claim for a set-off. The value of the moulds [64] The plaintiffs plead that as at 11 July 2007 “the boat moulds were of little or no value” and particularise this allegation by reference to Mr Lewis’ report dated 14 July 2007 and the oral report which Mr Searle gave in July 2007. The plaintiffs rely upon a report of Mr Behan, an Accredited Marine Surveyor. The report was commissioned by Mr Watt of Wenross in 2009. It purported to value the moulds as at 28 July 2009. Based upon an inspection of the moulds, and Mr Watt’s instructions that the moulds did not include the intellectual property, designs, specifications and laminate schedules to construct a vessel, and other instructions, Mr Behan expressed the opinion that the moulds would be “unsaleable and have no value” other than to an owner of the intellectual property. Mr Behan gave evidence and was cross-examined about an email that he wrote to Mr Watt on 3 August 20094 in which he expressed the opinion that if the intellectual property was included then the moulds would have a market value of $80,000. Mr Behan’s inspection of the moulds, and the manner in which they were stored, led him to conclude that they were in an apparently good condition. [65] Neither Mr Behan’s report, nor his oral evidence, gave a satisfactory account of the facts and analysis upon which his opinions were based. Leaving aside the implications of this upon the admissibility of his report,5 which was admitted without objection, it affects the weight which should be given to his opinions. He made no inquiry in relation to the circumstances of the sale of the original vessel. His opinion that there may not be a viable demand for this particular vessel was based largely upon a previous encounter with Mr Ballantyne at Sanctuary Cove, when Mr Ballantyne told him that he was having trouble in selling it. Mr Behan did not make inquiries in relation to tests that had been undertaken in relation to the design, including its tank testing. He did not ask Mr Ballantyne, or anyone else, about these things. Understandably, he relied upon the fact that only one such vessel had been sold. He had no idea how much it cost to build the boat. His selection of a value of $80,000 in his email was not explained, save that he looked at what was available on the internet for moulds for sale at the time6 and the price of similar-sized vessels. The comparative features of the moulds that were advertised on the internet (which were not identified) and the moulds in question were not 4 The email was not placed before the Court. 5 Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 at 743-744, [2001] NSWCA 305 at [85]. 6 Whether the time was July 2009 or July 2007 is not clear, but since his report was given on 3 August 2009 and gave a valuation dated of 28 July 2009, I infer that it was probably July 2009. -- 22 of 45 -- 23 explained. I conclude that Mr Behan’s opinions were based upon inadequate inquiries in relation to the design of the moulds that he was asked to value, the superiority of the design of the vessel that they were designed to build and the circumstances under which the original Crusader 1700 was sold. Mr Behan’s opinion was based upon an assumption that there would not be a market for the Crusader 1700. The evidence of other witnesses, particularly Mr Lewis and Mr Perry, which I accept, does not support that assumption. [66] The defendants rely upon the evidence and expert report of Mr Robert van Raay, who is an experienced valuer with substantial experience in the marine industry. His professional qualifications and professional memberships are extensive, and in the last 12 years he has undertaken substantial work in valuing vessels and other marine assets. Mr van Raay inspected the moulds on 4 April 2011. His comprehensive valuation report considered a number of valuation approaches. His market comparison approach was based, in part, upon information provided by Mr Lewis and Mr Perry and others in relation to the replacement cost of moulds and the value of moulds. Mr van Raay also adopted an income approach (or discounted cashflow approach), and a depreciated replacement cost approach. The market comparison approach yielded a figure of $350,000. The income approach yielded $500,000 and the depreciated replacement cost approach $453,000. His market comparison approach was based upon Mr Lewis’ advice about the cost required to place the moulds in the condition that they would have been in if they had been stored and manufactured in accordance with industry best practice. Based upon an average of the three approaches he assessed the market value of the Crusader 1700 moulds as at 22 June and 11 July 2007 to be $430,000. If they had been stored and manufactured to industry best practice then their value would have been $480,000. [67] Mr van Raay is a former business associate of Mr Ballantyne, and I take this into account in assessing the independence and value of his opinions. He said that he had a high regard to Mr Ballantyne. His description of the Crusader 1700 in his report was based upon Crusader’s own praise-worthy description of its vessel. However, there is no evidence that the Crusader 1700 does not have the fuel economy and sea-keeping performance which is stated in the report. Mr van Raay acknowledged in the same document that only one Crusader 1700 powered catamaran was ever constructed. His market comparison approach was based, in part, upon advice from Mr Lewis about the sale of a mould for a Black Watch 55 mono-hull for $600,000. Mr Lewis was the general manager of Black Watch and in his evidence he explained that the sale of the moulds for a 55 foot Black Watch occurred when the Black Watch company was in difficulty. It owed one of its directors $600,000 and the debt was settled by giving him the moulds. This is not reliable evidence of the market value of the moulds for the Black Watch 55. The company was in difficult financial circumstances and the “sale” was not a sale on the open market. [68] Mr van Raay also relied upon information about the moulds of the Mustang Boat business that was bought by Maritimo in November 2010. As the later evidence of Mr Lewis indicated, these moulds were included in the sale of the Mustang business, and certain values were attributed in the sale process. This reduces the reliance that can be placed upon the information concerning the sale of the Mustang moulds in reaching an opinion about the value of the Crusader 1700 moulds. -- 23 of 45 -- 24 [69] Subject to these qualifications, I consider that Mr van Raay’s opinions warrant substantial weight, and were supported by other evidence in the proceedings, particularly the evidence of Mr Lewis and Mr Perry concerning the attributes of the Crusader 1700 and the market for such a vessel in mid-2007. I was impressed by Mr van Raay’s oral evidence. The plaintiffs submit that his valuation, particularly on the income approach, was predicated on the assumption that there was a market for this boat, when there was no such market. Mr van Raay explained that there would have been a market amongst potential builders of similar-sized vessels, particularly fibreglass boat builders, and that it was an error to suggest that the moulds had no value because the boat had not established a name in the marketplace. Moreover, Mr van Raay relied upon a list of inquiries about the Crusader 1700. Evidence was given by Mr Ballantyne about these inquiries. [70] Mr van Raay’s evidence took account of what was said to be the sub-standard quality of the moulds, particularly Mr Lewis’ mid-2007 assessment that they were not constructed to a standard that would allow the kind of commercial production that Maritimo was engaged in. I consider that Mr van Raay took an appropriate approach to valuing the moulds in the light of the state of their construction and the state of the market for the Crusader 1700 at the time. He was told by Mr Lewis and other industry experts that they would take 100 to 150 “pulls” out of their moulds. Mr van Raay thought that was too high in respect of moulds for the Crusader 1700, and he valued the Crusader moulds on the basis of 50 pulls over a ten year period, not 150. He took account of the fact that the first vessel was sold at a loss, and based his valuation upon an understanding that one would expect a new vessel launched on the market to be sold at cost, or at a loss, as that boat enters the marketplace and gains market share. He took account of a comparison between the value of a presently-constructed mould, as opposed to the cost of constructing a new mould. This included the fact that an existing mould has the potential to earn income sooner. [71] The plaintiffs’ case that the Crusader 1700 moulds were of little or no value relies, to some extent, upon the contention that there was no market in mid-2007 for the Crusader 1700. Their contentions in this regard are not supported by the evidence of independent witnesses, including Mr Lewis and Mr Perry. Their evidence was to the general effect that the Crusader 1700 had outstanding qualities in terms of fuel efficiency and design, and that there was a market for such a vessel. [72] Mr Lewis is the general manager of Maritimo and he has had extensive experience in boat building, including fibreglass vessels. He inspected the moulds on 5 July 2007, and the moulds were not to the standard that Maritimo would have been interested in buying. He estimated that $150,000 would have been required to bring them up to the commercial standard required of Maritimo, which in some cases produces more than 100 boats out of a mould. He explained the extensive reinforcing and other work that would be required to put the moulds in such a condition as to produce what he described as “commercial quantities”. [73] His evidence was that the Crusader vessel was an attractive boat, particularly in less harsh conditions such as the Whitsundays. He thought that the design was attractive in the marketplace. He noted that the marketplace in mid-2007 was very different to the current marketplace which has been very depressed due to the global financial crisis. -- 24 of 45 -- 25 [74] He confirmed his opinion that it would have cost about $500,000 to produce properly the Crusader 1700 moulds in mid-2007. Although Maritimo was not interested in purchasing the moulds in mid-2007, according to Mr Lewis there were “numerous smaller operators around the place who have these types of moulds and produce boats and sell them.” Moulds were sold and arrangements were made about intellectual property issues. Mr Lewis’ evidence was that there were advantages in buying moulds compared to contracting someone else to build them. He explained: “obviously you can see what you are getting, you can see the shape of the boat, you can see somebody’s designed it, you can go and do your homework and see who it was who designed it, see what their track record is, see whether ... this is the type of boat you want to get involved with.” In the case of the Crusader 1700 moulds there would not be the cost and delay of having to build “a plug”. [75] Mr Bryan Perry has had 50 years’ experience in boat building and has concentrated upon the construction of catamarans for more than 20 years. Like Mr Lewis his business’ boats competed with the Crusader catamaran. Perry Catamarans manufactured catamarans ranging from 43 feet to 57 feet. He described the Crusader vessel as “an excellent performing vessel in every respect”. He said that it had the same performance basically as the original plugs and moulds that were used for the boat that was contracted for P & O in India and exactly the same performance potential since their underwater hull design was almost identical. He thought that the Crusader catamaran was “very much on the same par as the Perry catamarans” in terms of design and performance. In fact, the Crusader catamarans were able to achieve 30 knots whereas the Perry catamarans achieved a maximum of 24 knots. Mr Perry’s evidence was that in terms of efficiency and design, the Crusader design was “a better design than our own boat from that point of view.” This was an important feature in the marketplace due to its fuel efficiencies. According to Mr Perry, the Crusader was “probably the most efficient power cat on the water.” He felt that there was no question that there was a market for it. The market for such a vessel in 2007 was much better than it is now. Mr Perry explained that the boat building industry was badly affected as a result of the global financial crisis. His evidence was that the “pull fees” for the Perry catamarans were $50,000 for the 57 foot and $30,000 for the 43 foot. [76] Mr Alan Dowd is the Product Development Design Manager at Riviera Marine. He has extensive experience in the manufacturing of fibreglass and recreational vessels in Australia. He confirmed the impact of the global financial crisis. He explained that a few years ago Riviera was manufacturing up to 300 boats a year whereas, at present, it is manufacturing 100 boats a year. Based upon his experience, including his knowledge of the cost of Riviera Marine building moulds for a similar-sized vessel, he estimated that it would cost in the region of $500,000 to build a set of moulds for a boat the size of the Crusader 1700. The moulds that Riviera builds are expected to have a long life-cycle, and the fact that the moulds are a few years old does not significantly depreciate them, depending upon their condition. Riviera expected that with some maintenance, resealing and waxing one could take up to 200 boats out of the one set of moulds. [77] Mr Ballantyne’s evidence about the design and performance of the Crusader 1700 does not have the same independence as the evidence of other witnesses. However, I accept his evidence concerning the attributes of the Crusader 1700, its design and its performance. I accept his evidence about the market for such a vessel in mid-2007 and the number of serious inquiries that were made in respect of the -- 25 of 45 -- 26 vessel. I accept his evidence that the defects in the vessel that was manufactured by Wenross dampened the reception of the vessel and that the vessel that was sold for only $1,400,000 was sold to a purchaser who was aware of these difficulties. [78] Because of the dispute between Wenross and Crusader, Crusader was not in a position to build additional Crusader 1700s in 2006-07 and exploit the potential market. [79] I accept the evidence, particularly the evidence of Mr Lewis and Mr Perry, concerning the market for such a vessel. [80] The plaintiffs submit that the best evidence of the value of the moulds is offers that have been made in the last two years for them, particularly negotiations with Mr John Richardson. At one stage he offered $100,000 for the moulds, but there was an impasse over whether that figure included a licence, which would have been readily obtainable for the normal industry fee. I do not accept that Mr Richardson’s offers provide reliable evidence of the value of the moulds in mid-2007. His offers were made after the global financial crisis and in circumstances in which the liquidators did not actively market the moulds. [81] The plaintiffs also place reliance upon a passage of evidence given by Mr Ballantyne at a public examination on 10 December 2009. Mr Ballantyne was asked what he would be prepared to pay for the moulds as they were at that time. His answer was: “if he’s left it out in the sun and the rain without any further coverage, probably be 100,000”. I accept Mr Ballantyne’s evidence that when he was examined about that he was giving a view about what an opportunistic offer would be. In seeking to determine the moulds’ market value in mid-2007, I place little reliance upon Mr Ballantyne’s evidence about what would be an opportunistic offer for moulds in a deteriorated condition in 2009. [82] I conclude that the plaintiffs have not proven that the boat moulds were of “little or no value” in mid-2007. The assessments of Mr Lewis and Mr Searle in July 2007 do not prove this. Their contemporaneous reports, together with the evidence upon which I rely, prove that the moulds had a substantial value in mid-2007. In summary, that evidence indicates that there was a market for the vessel that the moulds would produce. The moulds had a market value because they were presently-available to produce such a vessel. According to Mr Ballantyne, it would have taken six to twelve months to manufacture a new plug to produce a new set of moulds. The moulds that were in existence in mid-2007 required rectification, including bracing, to make them suitable to produce the number of vessels which might have been required in the then-prevailing market conditions. A purchaser of the moulds would have earned income from each vessel that was built from the moulds. [83] To place the moulds in a condition that would have rendered them capable of producing the kind of commercial quantities achieved by Maritimo and Riviera may have required $150,000. However, I accept Mr Ballantyne’s evidence that the $150,000 quoted by Mr Lewis took account of the very large overheads of entities such as Maritimo. I accept Mr Ballantyne’s evidence that it may have been possible to fix up the moulds for around $70,000. [84] Without work done to improve them, the moulds were only suitable for small scale production. Mr Lewis’ evidence was that “[y]ou could have produced a few with -- 26 of 45 -- 27 them as they were”, but to achieve the commercial-scale quantities that Maritimo achieved with its moulds it would take about $150,000 to get them into the requisite condition. [85] The value of the moulds depended upon a prospective purchaser’s business plan. To place them in a condition such that a prospective purchaser could engage in the scale of commercial production required by a business such as Maritimo, then up to $150,000 may have been required. Perhaps substantially less than $150,000 would have been required if the improvements had been undertaken by a contractor with lower overheads than Maritimo. With relatively minor improvements they would have been capable of production on a less significant scale. Such a course would not have been attractive to a purchaser that intended large-scale production. [86] The cost of building a new set of moulds was in the region of $500,000. [87] Based upon the evidence, particularly the independent evidence of Mr Lewis and Mr Perry, I conclude that in mid-2007 the Crusader 1700 was an attractive design, and that the moulds had a substantial value, even with the features described by Mr Lewis and Mr Searle that required improvement. They were in a condition that permitted them to be used to produce Crusader 1700 catamarans on a small scale. With some limited improvements they were capable of producing a greater quantity of boats. More extensive improvements costing up to $150,000 would have been required to enable them to produce the type of commercial quantity undertaken by a large-scale operation comparable to Maritimo or Riviera. [88] One attraction of the moulds in mid-2007 is that they were capable of being used. A prospective purchaser would avoid the delay involved in acquiring a new set of moulds for $500,000. In mid-2007 the moulds were in a condition that enabled them to produce a relatively small number of vessels from which, in due course, new moulds could be constructed. Mr Ballantyne, Mr van Raay and Mr Lewis identified the value of their immediate availability. As Mr Ballantyne explained, a prospective purchaser of the moulds would get into production and the advantage of that was “time and cashflow”. According to Mr Ballantyne, a new set of moulds would cost $500,000 or $600,000 to build, and one would be looking at six to twelve months to do that before one started making any money. Mr Lewis explained that acquiring a new set of moulds involved some uncertainty about the result, whereas the existing set of moulds could be inspected and the design of the vessel that they produced was known. [89] Because of his reliance upon certain information concerning the sale of comparable moulds, and the subsequent evidence of Mr Lewis concerning these transactions, I do not consider that the moulds were worth as much as Mr van Raay assessed them to be. However, given their income-producing capacity, particularly if the sum of between $75,000 and $150,000 was spent on them to improve them to a state where they were capable of producing a commercial quantity of vessels, and their replacement cost of $500,000, I consider that the moulds had a market value of around $350,000 in mid-2007. [90] The plaintiffs have not proven that the moulds had little or no value. -- 27 of 45 -- 28 The commercial value of Wenross’ claim in mid-2007 [91] Mr Griffin’s report on the solvency of the companies at the time of the June and July transactions was based on: (a) Mr Behan’s report which attributed a nil value to the moulds; and (b) the view that Wenross’ claim was a liability then owing by both of the companies. For the purposes of his report, he adopted the worst case scenario that the Crusader companies were liable for at least the amount of the claim. He did not take into account the possibility of a settlement whereby Wenross would negotiate a settlement and make a deduction from its claim for money, interest and costs on account of litigation risk. [92] Mr Green, an experienced forensic accountant who provided an expert report for the defendants, gave evidence. In response to Mr Griffin’s report, he said that it was necessary to have regard to the likely commercial value of Wenross’ claim at the relevant dates. He explained in his evidence that following accounting and valuation standards one needs to assess for what sum the matter would have settled at the relevant date. He says that this is a particularly difficult exercise. The default judgment that was subsequently entered would be the appropriate value if at the relevant date the directors had decided that they were not going to defend the proceedings, do nothing further and were not going to make any offers of settlement. However, otherwise one would need to try to assess what the claim would have settled for at the relevant date. [93] The evidence does not justify the conclusion that in June or July 2007 the directors of Crusader had actually decided that they were not going to defend the proceedings, would do nothing further and would make no offers of settlement. A concession made by Ms Dawson in her evidence in chief may suggest otherwise. However, I did not gain the impression that in giving that answer she was particularly focused on March 2007 and her own words in the email of 20 March 2007 indicate that the outcome of the case was uncertain. The conduct of the proceedings and subsequent correspondence also do not support the conclusion that in early 2007 the directors had decided that they would accept a default judgment, and not make any offers of settlement. The proceedings were defended. Disclosure was progressed. The plaintiff was required to amend its claim. The correspondence indicates that as late as 21 November 2007 the solicitors for the Crusader companies anticipated receiving further instructions in relation to a pending application for security for costs, amendment of the defence and settlement negotiations. It is possible that in the first half of 2007 Mr Ballantyne and Ms Dawson were contemplating, as one possible course of action, not continuing to defend the matter. However, I am not satisfied that that decision was made at that time. [94] I do not consider that it is appropriate, in the circumstances, to value the claim made by Wenross as at June or July 2007 as having the value of the amount of the default judgment that would have been entered for it at that stage. The proceedings were being defended. -- 28 of 45 -- 29 [95] Substantial issues arose as to whether Wenross had in fact earned the amount that it claimed for the cost of the provision of its services in the manufacture of the first vessel. The Crusader companies had substantial grounds to defend that claim on the basis that the moulds and vessel that were supplied were defective and did not match the standard of performance that Wenross had promised. Crusader Marine Pty Ltd (the only defendant in the proceedings at that stage) had a substantial basis on which to claim that Wenross had been overpaid $722,546.40 compared to the quotation for its services, and pleaded a set-off to this extent. Wenross’ claim of $148,393.70 for a 10 per cent profit component was contentious. The component of $49,702.42 for the cost of storing the moulds was also disputable on the basis that the moulds were not stored, as might have been expected, in the factory but were left outside and deteriorated. Crusader Marine Pty Ltd had a viable counterclaim in relation to alleged overpayment, contractual breach and misleading and deceptive representations. [96] An issue existed as to whether Crusader Marine Pty Ltd was the proper defendant. If it was, Wenross faced potentially protracted and expensive litigation. Even if the litigation ended in success Wenross might not recover a substantial part of its claim and there inevitably would be irrecoverable legal fees. Wenross’ claim was subject to substantial litigation risks. [97] In assessing the commercial value of Wenross’ claim, regard must also be had to the litigation risks that Crusader Marine Pty Ltd faced, for those risks would have informed any settlement. The company faced irrecoverable legal fees even in the event of a successful defence. It was possible that a personal guarantee would have been sought and obtained by way of security for Crusader Marine Pty Ltd’s costs. However, that may not have been sufficient to guarantee payment of its costs in the event of success. It may have defeated Wenross’ claim, and succeeded in establishing a substantial counterclaim. However, any judgment on the counterclaim may have proved an empty judgment. [98] Defending Wenross’ claim involved legal costs and the devotion of scarce executive time, since Mr Ballantyne and Ms Dawson were occupied with the conduct of other businesses in their group. [99] There may have been a prospect of brokering a settlement between Wenross and the Crusader companies in mid-2007, by which Wenross retained the use of the moulds and was given intellectual property licences, plans and other means to enable it to build a specified number of vessels. I shall leave aside possible settlements that involved negotiations in relation to the ownership of the moulds and their use, and concentrate on a purely financial settlement which would have left Crusader Marine in possession of the moulds upon payment to Wenross of an amount in full and final settlement of Wenross’ claim and any possible counterclaim by Crusader Marine. Wenross should have been prepared to discount its claim in order to achieve a certain, financial result. If the moulds had the substantial value which Mr Ballantyne and others say that they did,7 then Crusader would have been prepared to offer a substantial amount to avoid further legal costs and to gain possession of moulds that could be used to manufacture more vessels. 7 I discount in this regard Mr Ballantyne’s draft letter of 23 August 2008 as reflecting a position that he proposed be taken for the purposes of negotiation. -- 29 of 45 -- 30 [100] I consider that a realistic commercial value on Wenross’ claim is one that discounts its claim including interest by at least 25 per cent. This is a reasonable discount to reflect the risks associated with pursuing the litigation. Wenross’ claim was $317,666.48 together with interest at nine per cent from January 2006. By June-July 2007 its claim plus interest would have been approximately $360,000. In assessing what realistic value would have been placed upon the claim in Wenross’ financial statements, and in Crusader Marine Pty Ltd’s financial statements as a contingent liability, and adopting Mr Green’s approach to the task of assessment, I consider that a figure of $270,000 should be adopted. This reflects a 25 per cent discount on a potential claim of $360,000 and each party bearing its own costs.8 [101] In conclusion, I consider that the commercial value of the claim by Wenross against Crusader Marine Holdings Pty Ltd in June or July 2007 was no more than $270,000. Were the June and July transactions part of one transaction to divest the companies of practically all of their available assets? [102] Mr Griffin’s report on solvency and his subsequent investigations led him to conclude that the only purpose of the June transactions was to effect the payment of dividends which actually took place in July 2007. His November 2007 solvency report was to the same effect, and grouped the June 2007 and July 2007 transactions together for that reason. This view was based on documents from which he inferred that the June 2007 and July 2007 transactions were part of a plan to divest the Crusader companies of practically all of their cash assets. He particularly based this conclusion on inferences that were drawn from Mr Godwin’s letter to the directors of 27 February 2007, an email from Mr Godwin to the directors on 5 March 2007 and Mr Godwin’s email to Ms Dawson of 18 June 2007. [103] Under cross-examination, Mr Griffin acknowledged that recovering unsecured loans is something that happens in most businesses, including calling up unsecured loans within a group of companies. He acknowledged that if one looked at the June transactions in isolation from the July dividend then they are “perfectly justifiable commercially”. [104] Mr Green questioned the conclusion that the objectives of the transactions, particularly the June transactions, “can only have been to prefer the payment to the directors and other related entities in preference to the claim made by Wenross Pty Ltd” as Mr Griffin contended in his solvency report. Mr Green considered that the transactions effected in June 2007 should be considered separately from the transactions conducted in July 2007 and the issue of solvency considered after each date. His reasons included the fact that the transactions in June 2007: • effectively called in moneys owing from related parties and extinguished liabilities owing to related parties and did not materially affect the net assets of either Crusader Marine Pty Ltd or Crusader Marine Holdings Pty Ltd; • resulted in a decrease in balance sheet risk, removing unsecured loans from the balance sheet and replacing those assets with an increase in cash holdings. 8 I note in passing that the cross-examination of Ms Dawson was premised on a figure of $270,000 or more being something that was likely to have been acceptable to Wenross. -- 30 of 45 -- 31 In his oral evidence Mr Green noted in connection with the June 2007 repayment of unsecured loans that it is very common for companies within a group of companies to “tidy up” their unsecured loans prior to 30 June. This may happen when a project or a company is dormant. It can also happen for tax reasons. Such an outcome can be effected by assignments of debt but, according to Mr Green, “the cleanest way to do it is obviously to call in, in cash, the funds that are owed to a company and for it to write cheques or transfer moneys out in extinguishment of liabilities it may have”. [105] The evidence from Mr Godwin, Ms Dawson and Mr Ballantyne is that the companies in their group adopted this practice, subject to sufficient funds being available. I accept their evidence in this regard. [106] As to the June 2007 transactions, I conclude that the resolution of inter-company loans occurred in the ordinary course of business, and in accordance with justifiable commercial practices. They benefited the Crusader companies by removing unsecured loans from their balance sheets and replacing those assets with an increase in cash holdings. [107] At the time the June 2007 transactions were being undertaken, the payment of dividends was in contemplation. However, the amount of the dividends to be paid to Mr Ballantyne and Ms Dawson had yet to be determined. The result of the June transactions was that the Crusader companies had more than sufficient cash to satisfy Wenross’ claim. There are slight differences in the reconciliation of amounts, but a useful point of reference, and one adopted by Mr Griffin in his evidence, was that the bank statement for Crusader Marine Pty Ltd at 30 June 2007 indicated that it had approximately $376,000, and Crusader Marine Holdings had $268,000. This was a combined amount of approximately $644,000. [108] I do not consider that the three documents particularly relied upon by Mr Griffin justify a conclusion that the June and July transactions were part of one transaction that had the aim of divesting the Crusader companies of practically all of their cash assets, let alone that they were undertaken with an intent to defeat creditors. As to the June 2007 transactions, I consider that these were appropriate, commercial transactions that were undertaken in the normal course and had the effect of strengthening the cash position of both companies. [109] Mr Godwin’s letter of 27 February 2007 offered his “thoughts on the winding up of the two Companies”. However, when the letter is read as a whole, and understood in the light of the evidence concerning the way in which companies in the group were used to pursue projects, I do not consider that the letter justifies the inference drawn by Mr Griffin. Its purpose was to identify the total amount of cash that would be available on the assumption that the companies met all of their liabilities. It was a document that calculated sums on the assumptions that all other assets would be written off and sundry liabilities paid out. It was consistent with a resolution of the Wenross claim that left the moulds with Wenross in full or partial satisfaction of its claim. In any event, the letter envisaged that the settlement of inter-company loan accounts was a separate process. As Mr Godwin wrote, “[w]hichever way we go it is desirable to at least settle the inter company loan amounts”. This does not indicate that the payment of the full amount of the companies’ cash reserves by way of dividend was a foregone conclusion. The letter concluded on the basis that the companies would only be deregistered after they had paid out all of their liabilities. -- 31 of 45 -- 32 [110] Mr Godwin’s email of 5 March 2007 is of a similar character. It recognised the need to take account of “contingent liabilities” such as the legal action by Wenross. At that stage, Mr Godwin had removed the moulds from his draft worksheet, but not from the companies’ books of account, as a “worthless asset” for the purpose of discussing with the companies’ solicitor “the impairment situation”. I accept Mr Godwin’s evidence that he was concerned that if the contingent liability came to fruition there would be sufficient assets to meet them. He relied upon Mr Ballantyne’s experience as a valuer and advice as to the value of the moulds, and the moulds remained as a valuable asset in the companies’ accounts. I consider that the email of 5 March 2007 was sent, and that the associated work done by Mr Godwin at that time was undertaken, in order to ascertain what the cash position of the company would be after inter-company loans were paid out. [111] Mr Godwin’s email of 18 June 2007 should not be viewed is isolation. The position that it summarised, namely that resolving inter-company loans would leave the Crusader companies with cash of $624,050, was accompanied by an explanation that this cash “will be utilised to declare dividends to you both in the new financial year.” It did not say that the whole of that amount would be used to declare dividends. The advice that Mr Godwin had received and the advice which he gave was that the amount of the dividend had to leave sufficient assets in kind or cash to meet any liability in the proceedings. Earlier, on 13 March 2007, he had suggested a dividend of around $500,000. The email of 18 June 2007 did not state the expected amount of the dividend. [112] The letters and emails of Mr Godwin upon which Mr Griffin places particular reliance make it clear, as does other evidence, that the payment of dividends after the resolution of inter-company loans was in contemplation in early and mid-2007. They do not prove that as at those dates, or at 22 June 2007, the directors intended that the dividend should be of a size that deprived the companies of all but a small amount of cash. The advice given to, and accepted by, the directors was that they should assess the value of the moulds and leave sufficient assets in kind or cash to cover the companies’ liabilities and contingent liabilities. At the time this advice was given the companies’ liabilities included inter-company loans. The resolution of those inter-company loans would have the effect of leaving the Crusader companies without any liabilities (save for legal fees that were paid from cash resources) and the contingent liability constituted by the Wenross claim. [113] I conclude that the June transactions were proper commercial transactions undertaken in the normal course of business. Far from diminishing the companies’ cash resources, they improved their cash position. The fact that the directors had in contemplation a declaration of dividends does not lead me to conclude that the June transactions were part of a plan to divest the companies of practically all of their cash assets. The size of any dividend had yet to be decided. The directors acted upon the advice of a specialist insolvency practitioner and Mr Godwin. In June 2007 they had yet to inspect the moulds and value them in the light of that inspection and to consider the extent of their potential liability to Wenross if the Wenross claim proceeded to judgment. [114] I decline to find that the June transactions were carried out for the purpose of removing all, or practically all, of the companies’ cash assets. -- 32 of 45 -- 33 [115] I conclude that the June payments did not constitute a breach of the admitted duties owed by Mr Ballantyne and Ms Dawson. They were not uncommercial transactions. They were not undertaken with the intent of defeating creditors. Were the July 2007 transactions in breach of fiduciary duty? [116] Paragraph 15 of the statement of claim pleads that: “By reason of the June 2007 payments, July 2007 transactions, the $200,000.00 payment, the October 2007 payment and the June 2008 payment the first and second defendants acted in breach of the duty in that:- (a) the first and second defendants knew by reason of the March 2007 advice that if a dividend was to be paid sufficient assets had to be retained by the first and second plaintiffs to meet any contingent claim arising by reason of the Supreme Court proceedings; (b) as at 13 July 2007 the only asset of the first and second plaintiffs remaining after payment of the dividends was the boat moulds together with cash sufficient to make the October 2007 payment; (c) as at 13 July 2007 the boat moulds were of little or no value; (d) by reason of their own knowledge and the matters pleaded in paragraphs 14(c) and (d) herein the defendants knew or ought to have known at all times between 22 July [sic: June] 2007 and 13 July 2007 that the moulds had little or no value; (e) further or alternatively if the first and second defendants did not know as at 13 July 2007 that the moulds were of no value they became aware of such fact on 14 July 2007 upon receipt of the reports; (f) in the premises should have immediately paid back to the first plaintiffs the dividend received by them in the sum of $600,000.00; (g) such payments and transactions were carried out for the purpose of removing all available assets from the first and second plaintiffs so as to defeat the creditors thereof including Wenross Pty Ltd.” The cross-reference in subparagraph 15(d) to paragraphs 14(c) and (d) relates to the pleaded facts that the intellectual property enabling the boat moulds to be used were not the property of the Crusader companies, and that the boat moulds were in the possession of Wenross, which was claiming a lien. I have earlier quoted the matters relied upon in the plaintiffs’ written submissions to contend that Mr Ballantyne and Ms Dawson preferred their own interest to that of the Crusader companies. -- 33 of 45 -- 34 [117] A number of the matters pleaded in paragraph 15 of the statement of claim, and contended for in the plaintiffs’ final submissions in relation to breach of fiduciary duty, have not been established. The plaintiffs have established that Mr Ballantyne and Ms Dawson knew that if a dividend was to be paid sufficient assets had to be retained by the companies to meet any contingent liability arising by reason of the Wenross proceedings. The plaintiffs have not established that the boat moulds were of little or no value. Nor have they established that Mr Ballantyne and Ms Dawson knew or ought to have known at all times between 22 June 2007 and 13 July 2007 that the moulds had little or no value. The plaintiffs’ case concerning their actual or constructive knowledge is not established by the matters pleaded in paragraphs 14(c) and (d). The fact that the intellectual property enabling the boat moulds to be used was not the property of the Crusader companies did not render them valueless. Company arrangements within the group that Mr Ballantyne and Ms Dawson controlled was for intellectual property in designs to be held by a non-trading company. The evidence indicates that a licence to use the moulds to produce boats would have been forthcoming on normal commercial terms, and that this tended to be between 1.5 per cent and 2 per cent of the sale price. Mr Ballantyne and Ms Dawson would have been prepared to negotiate such a licensing arrangement with a purchaser of the moulds. The fact that the moulds were in the possession of Wenross did not mean that they had little or no value. [118] Mr Ballantyne believed that the moulds were worth at least $350,000. He believed they had a substantial value because of the vessel’s efficiency and the potentially huge market for such a vessel. He thought that a potential purchaser would see an advantage in obtaining existing moulds, rather than taking six to twelve months to have a new set built for $500,000. The saving in time was an advantage. His evidence was that only a few weeks would be required to improve the moulds, and that the required bracing and improvements could be undertaken for substantially less than the $150,000 quoted by Mr Lewis. [119] In his evidence, Mr Ballantyne explained that he was the only person in the company who had the expertise to value the items. After inspecting them, he thought that despite their deteriorated state (a result of not being stored properly) they would be worth upwards of $350,000. He based this on the fact that about $500,000 had been paid for them. His approach admittedly was not “very scientific”. It was based upon the fact that the moulds had to have a substantial value because the Crusader 1700 was the best vessel in terms of efficiency, and had a potentially huge market. They were ready to be used and could be put into production, avoiding what would otherwise be a six to twelve month delay. I accept his evidence that he thought that the moulds could be improved for substantially less than the $150,000 figure quoted by Mr Lewis and that they could be “fixed up” by a private contractor for around half the price. I accept his evidence that he believed that a buyer would be prepared to pay $350,000 for the moulds because of the advantages that the boat had over other boats on the market and the number of serious inquiries that had been made in respect of it. [120] Ms Dawson was largely reliant upon her husband, Mr Ballantyne, in order to form a view concerning the value of the moulds. However, she was conscious of the cost involved in acquiring them and, therefore, the cost of replacement moulds. She believed, on reasonable grounds, that the moulds had a substantial value. -- 34 of 45 -- 35 [121] The plaintiffs have failed to establish their important allegations that as at 13 July 2007 the boat moulds were of little or no value, and that the defendants knew or ought to have known that they had little or no value. [122] Their alternative case is that if the defendants did not know this as at 13 July 2007, then they became aware of it on 14 July 2007 upon their receipt of Mr Lewis’ written report from Maritimo dated 14 July 2007. I do not consider that this is the case. Mr Lewis’ written report tended to confirm what had earlier been written by him in his draft letter dated 5 July 2007. It placed a figure of $150,000 on the cost of bringing the moulds up to a condition suitable for commercial production. I accept that Mr Ballantyne considered that the moulds could be improved for substantially less than $150,000. It may not be surprising that Mr Lewis’ letter encouraged Mr Ballantyne to engage Maritimo to produce entirely new moulds for which it would charge around $500,000. I accept Mr Lewis’ estimate that it would take around $150,000 to bring the existing moulds up to a similar quality that would enable them to achieve a commercial quantity. This reflects the estimate which Mr Searle gave at about the same time. For the reasons previously given, and on the basis of the quotation of $150,000, Mr Ballantyne came to the conclusion that the moulds were worth at least $350,000. This was not an unreasonable view based upon his assessment of their value, and on the advice he received from Mr Lewis and Mr Searle. [123] The plaintiffs have failed to establish that Mr Ballantyne and Ms Dawson knew or ought to have known that the moulds had little or no value either as at 13 July 2007, or after receipt of Mr Lewis’ report on 14 July 2007. [124] The plaintiffs have not proven that the value of the moulds was less than the commercial value of Wenross’ claim in July 2007. In fact, the evidence supports the conclusion that in July 2007: (a) the moulds had a market value of more than $300,000, and probably a figure in the order of $350,000; (b) the commercial value of Wenross’ claim was in the vicinity of $270,000. [125] Apart from owning the moulds, an amount of $32,184.26 remained in the companies after the payment of dividends on or about 13 July 2007. [126] The facts that after the July transactions the companies had no liabilities, and that the value of the contingent liability to Wenross might be assessed at $270,000, do not completely answer the question of whether the declaration and payment of dividends on 13 July 2007 was in breach of fiduciary duty. The fact that the companies would retain assets worth more than the value of the contingent liability did not necessarily justify the decision to declare dividends that resulted in the payment of sums totalling $600,000 to Mr Ballantyne and Ms Dawson. It might have if the directors were minded to settle the Wenross claim, and had been able to negotiate a settlement whereby Wenross retained the moulds as part of a settlement, or the moulds were sold and yielded enough to pay the negotiated settlement. However, this is not what occurred. Active steps were not taken in mid-2007 to resolve the proceedings either by settlement or submitting to default judgment. The directors must have known that if Wenross’ claim was not resolved by settlement, and if at some later stage a decision was made not to continue the defence of the -- 35 of 45 -- 36 proceedings, then default judgment would be entered against Crusader Marine Pty Ltd and also Crusader Marine Holdings Pty Ltd if it became a party to the Wenross proceedings in response to the “wrong defendant defence”. Leaving the moulds and a relatively small amount of money in the companies after 13 July 2007 was not necessarily in the best interests of the company, even if as at July 2007 the value of the moulds exceeded the value of Wenross’ claim. Such a course of action carried the risk of the outcome that eventually transpired: • the continuing expenditure of legal costs by Wenross and the Crusader companies on the proceedings; • the accruing of interest on Wenross’ claim; • the retention of the moulds in Wenross’ possession where they were not put to a productive use; • the eventual entry of default judgment in Wenross’ favour; • the appointment of liquidators in circumstances in which judgment went unsatisfied; • problems in the resolution of the matter and delay in the sale of the only substantial asset left in the company to meet Wenross’ judgment debt. [127] I am not persuaded that it was not possible, consistent with their admitted duties, for the directors to authorise payment of a substantial dividend on 13 July 2007. However, their admitted duty to act in the best interests of the companies, and not to prefer their own interests to those of the companies, was arguably breached by the declaration of dividends totalling $600,000, even if the companies were solvent at the time. The potential breach of fiduciary duty that I have identified is not one that has been pleaded. The plaintiffs’ case on breach of fiduciary duty is that pleaded in paragraph 15. The essential elements of it are that the moulds were of little or no value and were known to have little or no value as at 13 July 2007, and that the pleaded transactions were carried out for the purpose of removing all available assets from the companies so as to defeat their creditors, including Wenross. [128] The plaintiffs are bound by their pleaded case. Contrary to their pleaded case, I have found that the moulds had substantial value, and that the defendants believed, on reasonable grounds, that they had substantial value in July 2007. I decline to find that either the June 2007 payments or the July 2007 transactions were carried out for the purpose of removing all available assets from the companies so as to defeat creditors, including Wenross. The companies have not proven their pleaded case of breach of fiduciary duty in respect of the July transactions. [129] If I had been persuaded that Mr Ballantyne and Ms Dawson breached their fiduciary duties, as alleged in the statement of claim, then the appropriate remedial response would have been an order to repay the dividends that were paid, which total $600,000. -- 36 of 45 -- 37 Claims by the companies against other defendants [130] The companies claim relief against the third, fourth, fifth and sixth defendants to repay the sums of $20,000, $153,592, $74,879 and $126,974.55 respectively paid to them on 22 June 2007.9 The basis for these claims is an alleged breach of fiduciary duty in respect of the June 2007 payments and the fact that the directors who authorised those payments were also directors of the recipient companies. It is alleged that the companies received the money with constructive knowledge of the breach of fiduciary duty. However, I have declined to find that the June 2007 payments to these companies were in breach of fiduciary duty, or that they were carried out for the purpose of removing all available assets from the Crusader companies. Because the June 2007 payments were not in breach of fiduciary duty, the basis for the relief claimed against the recipients of the June 2007 payments is not established and the relief claimed against them by the companies should be dismissed. [131] A separate issue arises in relation to what is described in a statement of claim as “the $200,000 payment”. The companies plead that “on or soon after 11 July 2007 the first and second defendants made a joint payment of $200,000 from the money received by them” in the form of the dividend payments of $306,000 made to Mr Ballantyne and $294,000 paid to Ms Dawson. It is alleged that this joint payment of $200,000 was made to the fourth defendant, Sea Management Corporations Services Pty Ltd. The defence pleads that the $200,000 was paid in March 2008, and that the funds used to make such payment were unrelated to the dividend payments. The only evidence in relation to this payment appears to be a reference made by Mr Godwin in a letter dated 15 January 2010 to the fact that superannuation contributions of $200,000 were made in the tax year ended 30 June 2008. The letter goes on to say that the net amount of the dividends after payment of superannuation contributions and taxation was $226,398, and this residue was retained by the shareholders in the Crusader companies. The plaintiffs have not proven that the $200,000 payment was made on or soon after 11 July 2007. It is not alleged that the fourth defendant was knowingly concerned in the payment of dividends totalling $600,000 on or about 13 July 2007 in breach of fiduciary duty. I am not persuaded that the payment of dividends was made in breach of fiduciary duty, as alleged in the statement of claim. The date upon which the $200,000 payment was made is uncertain. It may not have been possible for the payment to be made without the receipt of funds totalling $600,000 on 13 July 2007. However, there is no satisfactory proof that the fund of $600,000 was used for the purpose of making superannuation contributions and there is evidence that the funds were used for the purposes of other companies in the group. [132] I have declined to find most of the matters pleaded in paragraph 15 of the statement of claim and, accordingly, the plaintiffs have not proven that the fourth defendant (or the other corporate defendants for that matter) had “constructive knowledge of the matters pleaded in paragraph 15”. Yet this is the basis for the claim made against the fourth defendant, namely that it holds the sum of $200,000 on trust for Crusader Marine Holdings Pty Ltd and should be ordered to pay it. Based upon my findings, the companies have not established an entitlement to such relief. 9 The prayers for relief in subparagraphs (xi) to (xiv) are in error and should refer to the fifth defendant in respect of the payment of $74,879 and the sixth defendant in respect of the sum of $126,974.55. -- 37 of 45 -- 38 Claims by the liquidators [133] The claims made by the third plaintiffs, who are the liquidators of the company, rest on the proposition that the June 2007 payments and the July 2007 transactions “were all part of one transaction to divest the first and second plaintiffs of all of its [sic: their] cash assets (including related party loans)”.10 Counsel for the plaintiffs fairly acknowledged in his submissions that for the liquidators to succeed on their claims in relation to payments to related entities they had to establish that there was “really the one transaction” and that it was preferential or uncommercial. [134] The liquidators have not established that the June payments and the July transactions were part of one transaction. They have not established that the companies were insolvent in June or July 2007. The June transactions were not uncommercial transactions. They were normal, commercial transactions and had the effect of enhancing the companies’ solvency. The plaintiffs’ submissions concede that if the June 2007 transactions simply were a matter of “cleaning up intercompany loans then those transaction [sic] did not cause the first and second plaintiffs to become insolvent”. [135] I find that the companies were not insolvent in June 2007, and I find that the June 2007 payments were not part of one transaction that had as its purpose divesting the companies of all of their cash assets. The June 2007 payments did not cause the plaintiffs to become insolvent. The liquidators’ claims in relation to the June 2007 payments as being insolvent transactions have not been established. [136] As to the July 2007 transactions, the liquidators allege that these were either unfair preferences or uncommercial transactions which had the effect of causing the Crusader companies to become insolvent. The declaration of the dividends had the effect of making Mr Ballantyne and Ms Dawson creditors of Crusader Marine Holdings Pty Ltd. The liquidators submit that the payments they received were unfair preferences within the meaning of s 588FA of the Corporations Act because they received more from the company in respect of the debt than they would receive from the company in respect of it if the payments were set aside and they were proved in a winding up of the company. The evidence concerning the companies’ administration supports this, and the defendants make no submission to the contrary. [137] The liquidators do not plead or submit that the company was insolvent when the July transactions were entered into. The issue, then, is whether by reason of the July 2007 transactions the companies became insolvent, so that the payments constituted insolvent transactions within the meaning of s 588FC. The liquidators plead that by reason of the transactions: (a) the Crusader companies “were left with no available assets of any value”; (b) the companies were subject to a “contingent claim for approximately $500,000” in the Wenross proceedings; and (c) they were thereby unable to pay their debts as and when they fell due within the meaning of s 95A of the Corporations Act. 10 Plaintiffs’ written submissions, paragraph 60. -- 38 of 45 -- 39 [138] Solvency is defined in s 95A of the Corporations Act 2001 as the ability to pay all the person’s debts, as and when they become due and payable. Future events should be taken into account (for example, a debt that will fall due in the immediate future). As at 13 July 2007 the companies had no creditors. The declarations of dividends that day were attended to by payments from current assets. Whether Wenross became a creditor depended upon the course of litigation and its resolution, either through settlement or judgment. The fact that in due course Wenross obtained a default judgment against each of the Crusader companies does not establish that either of those companies owed Wenross the claimed amount in July 2007. Counsel for the plaintiffs, on reflection, accepted the proposition that the fact that a claim eventually goes undefended, and results in a judgment, does not mean that a debt was due and owing at the time the claim was made. Instead, he submitted that the directors’ decision not to defend the proceeding meant that in a relatively short period of time there would be a judgment debt. However, I am not persuaded that in July 2007 the directors had made a decision not to defend the proceedings any longer. The proceedings were in fact defended. [139] I decline to find that the July transactions were insolvent transactions. The October 2007 payment [140] The plaintiffs plead, and the defendants admit, that on 10 October 2007 Mr Ballantyne and Ms Dawson caused Crusader Marine Pty Ltd to pay the seventh defendant, ASD Marine Services Pty Ltd, $13,634.50. ASD is the company that holds intellectual property in respect of designs, including the intellectual property for the Crusader 1700. The circumstances of the October 2007 payment were not addressed by witnesses. It did not separately feature in the parties’ submissions, perhaps understandably because it was a relatively minor part of the claim. The only evidence about it that I have located in the material is a report by the liquidators that bank statements for Crusader Marine Pty Ltd identify a transfer in that amount shown on the bank statement as an internet banking transfer. At the time of the insolvency report the liquidators stated that it was not known what justification existed for the transfer. [141] As at 10 October 2007 the proceedings were still being defended. Wenross’ claim, and its commercial value, had increased above that which I have assessed in July 2007 because of the accrual of an additional three months’ interest and the incurring of further costs. The directors of the Crusader companies had not conducted themselves so as to indicate that they were not prepared to continue to defend the proceedings and did not wish to negotiate a settlement. The companies were not insolvent as at 10 October 2007. The liquidators have not established to my satisfaction that the October 2007 payment was either an unfair preference or an uncommercial transaction that constituted insolvent transactions within the meaning of s 588FC of the Corporations Act. I am not persuaded that Crusader Marine Pty Ltd became insolvent because of the transaction. The June 2008 transaction [142] This payment relates to the payment by Crusader Marine Pty Ltd of $7,000 to the eighth defendant, Island Transport Holdings Pty Ltd, on 25 June 2008. It post-dates the obtaining of default judgment on 7 May 2008. The only evidence of which I am aware that touches upon this transaction is the liquidators’ insolvency report that -- 39 of 45 -- 40 says that an internet banking transfer on 25 June 2008 of $7,000 occurred. At the time of the report the liquidators had no further information as to the nature of the payment. This payment was not separately addressed in the parties’ submissions. [143] As at 25 June 2008 the Crusader companies had limited cash assets. One of them owned the moulds. However, the moulds could not quickly be liquidated to meet the judgment debt of $383,859.60. Crusader Marine Pty Ltd was insolvent at the time the June 2008 transaction was entered into. Alternatively, the company became insolvent because of the transaction. [144] It appears that the eighth defendant received an unfair preference within the meaning of s 588FA of the Corporations Act 2001. The defendants do not contend that the payment was made other than in respect of an unsecured debt. On the basis that the payment was made in respect of an unsecured debt, the eighth defendant received more than it would have received if the payment was set aside and it was proved in a winding up. [145] The third plaintiffs seemingly are entitled to an order against the eighth defendant that it pay $7,000 to the first plaintiff pursuant to s 588FF of the Corporations Act 2001. However, since this payment was not specifically addressed in submissions I will allow the parties to make further submissions in relation to any evidence that relates to the circumstances in which this payment was made, and whether it was made in respect of an unsecured debt. [146] My present view is that the fact that the June 2008 payment constituted payment of an unsecured debt is the subject of a deemed admission under rule 166(5) of the Uniform Civil Procedure Rules 1999. The pleaded allegation that “the eighth defendant has received more than it would have received if the payment was set aside and it proved in a winding up of the plaintiff” is denied on the basis that “the first plaintiff would have had sufficient assets to meet its proof of debt as outlined in paragraph 20 of this Defence”.11 However the matters pleaded in paragraph 20 do not specifically address the pleaded issue. They respond to a more general plea in relation to the June 2007 payments, the July 2007 transactions, the October 2007 payment and the June 2008 payment collectively. Insofar as the plea asserts that at the time the June 2008 payment was made, the companies then had sufficient assets to meet the claims of creditors, it is not established. The plaintiffs then had a creditor in the form of a judgment creditor, and the moulds, even if quickly realised, may not have yielded sufficient funds to meet the judgment debt and post-judgment interest. In any event, I consider that the eighth defendant received more than it would have received if the payment was set aside and its debt was proved in a winding up. Subject to further submissions in respect of the June 2008 payment, I consider that the third plaintiffs have established their claim that it was an undue preference which is voidable because the companies were insolvent in June 2008.12 [147] Because the specific circumstances under which the June 2008 payment was made were not the subject of evidence, I am not in a position to conclude that it was an uncommercial transaction on the basis pleaded: the relevant plea being one in relation to the June 2007 payments, the July 2007 transactions, the October 2007 payment and the June 2008 payment collectively. 11 Amended Defence filed 15 February 2011, paragraph 35. 12 The relevant plea is that by this and other payments the companies “became insolvent”, however the case was also conducted by the plaintiffs on the basis that the companies were insolvent at this date. -- 40 of 45 -- 41 [148] In summary, the third plaintiffs seemingly are entitled to an order against the eighth defendant that it pay $7,000 to the first plaintiff pursuant to s 588FF of the Corporations Act 2001 on the basis that the July 2008 payment was an unfair preference and a voidable transaction, however, I will allow the parties to make short supplementary submissions on this issue since the June 2008 payment was not separately addressed in their submissions. Statutory defence [149] Counsel for the defendants did not address the statutory defence contained in s 588FG of the Corporations Act 2001. In the absence of submissions, I decline to find that the defence is made out. The Property Law Act s 228 [150] The plaintiffs did not strongly press this claim. In any event, I have declined to find that the payment of dividends totalling $600,000 on 11 July 2008 was made with intent to defraud creditors. I find that they were not. The companies are not entitled to relief pursuant to s 228 of the Property Law Act s 228 declaring the dividend payments to be void. Conclusion [151] The plaintiff companies have not established their claims for breach of fiduciary duty on the basis pleaded by them. [152] The plaintiffs have not established their cases in relation to the value of the moulds, the value of Wenross’ claim or that the impugned transactions were carried out for the purpose of removing all available assets from the companies so as to defeat creditors, including Wenross. [153] Save for the June 2008 payment, I am not satisfied that the companies were insolvent at the date any of the impugned payments were made, or that the companies became insolvent by reason of those transactions. [154] I am not satisfied that the June 2007 payments and the July 2007 transactions were undertaken for the purpose of removing all available assets of the companies so as to defeat creditors, including Wenross Pty Ltd. The June 2007 transactions were separate, commercial transactions undertaken in the normal course of resolving inter-company loans. They had the effect of removing unsecured loans from the balance sheets of the companies and replacing them with increased cash holdings. They left the companies in a position whereby dividends might be declared in the following financial year. However, acting upon proper accounting advice, the directors of the companies had yet to decide the amount of the dividends to be declared. They did not do so until after they had assessed the value of the moulds, following the inspection on 5 July 2007. As a result of that inspection, and the written advice of Mr Lewis and the oral advice of Mr Searle, the directors of the companies assessed the value of the moulds to be at least $350,000. This was not an unreasonable view in the circumstances. The commercial value of the Wenross claim at that time was no more than $270,000. [155] I am not persuaded that the 13 July transactions were in breach of fiduciary duty on the basis that has been pleaded. The plaintiffs have not established that as at July -- 41 of 45 -- 42 2007 the boat moulds were of little or no value and that Mr Ballantyne and Ms Dawson knew or ought to have known that they had little or no value. Mr Ballantyne and Ms Dawson believed, on reasonable grounds, that the boat moulds were of substantial value. The plaintiffs have not established that the July 2007 transactions were carried out for the purpose of removing most, let alone all, available assets from the companies so as to defeat Wenross’ claim. [156] Wenross’ claim eventually succeeded in the form of a default judgment because Mr Ballantyne and Ms Dawson in November 2007 refused to follow sound advice from their then solicitors to provide instructions for the further defence of the proceedings or to negotiate a settlement. Their instructions, first given on 21 November 2007, that the companies would not be defending the case or making an offer to settle, made it inevitable that a default judgment would eventually be obtained by Wenross for its claim, interest and costs. Such a result was not inevitable in June or July 2007, and the companies were not insolvent at that time. The impugned transactions of June and July 2007 were not made with intent to defeat creditors. [157] It might be argued that leaving the companies in July 2007 with limited cash assets that were insufficient, on their own, to meet Wenross’ claim, along with moulds worth approximately $350,000 in Wenross’ possession, was a practical course which effectively secured the companies’ only potential creditor with an asset to meet the realistic value of its claim at the time. However, it can also be argued that such a course involved a breach of fiduciary duty, and that the directors’ fiduciary duty to act in the best interests of the companies and not to prefer their own interests to the interests of the companies required them to either settle Wenross’ claim or leave sufficient cash in the companies to enable any prospective judgment to be satisfied. These propositions are strongly arguable. However, they are not the basis upon which the companies’ claim for breach of fiduciary duty has been pleaded. [158] Accordingly, the companies have not established an entitlement to relief for breach of fiduciary duty, or the other relief claimed, on the basis pleaded by them. [159] The only relief to which the liquidators seemingly have established an entitlement is an order for the payment of $7,000 by the eighth defendant to the second plaintiff pursuant to s 588FF of the Corporations Act 2001, together with interest thereon from 25 June 2008. The rate of interest should reflect the default rate of interest under the applicable Practice Direction (Number 6 of 2007, which is still current), namely ten per cent. [160] Subject to hearing the parties as to costs and the form of orders, the appropriate orders would appear to be orders for the dismissal of the plaintiffs’ claims, save for the liquidators’ claim in respect of the 25 June 2008 payment of $7,000. Possible amendment [161] I should also allow the companies the opportunity to argue whether they should be granted leave at this late stage to amend their claim for breach of fiduciary duty to reflect the case put in their oral submissions, which did not reflect the way in which the case was pleaded and opened. [162] I have earlier quoted paragraph 15 of the statement of claim which pleaded the basis for claims for breach of fiduciary duty. The critical, and disputed, elements of that -- 42 of 45 -- 43 pleaded claim were that the moulds were of little or no value, that the defendants knew or ought to have known this and that the relevant “payments and transactions were carried out for the purpose of removing all available assets from the first and second plaintiffs so as to defeat the creditors thereof including Wenross Pty Ltd”. [163] Pleadings serve the interests of justice by ensuring that trials are conducted in a way that is procedurally fair. The rule that, in general, relief is confined to that available on the pleadings secures a party’s basic right to procedural fairness. A party is entitled to confine the opposing party to that party’s pleadings because the first party is entitled to come to trial to meet the issues raised on the pleadings. Accordingly, the circumstances in which a case may be decided on a basis different from that disclosed by the pleadings are limited to those in which the parties have deliberately chosen some different basis for the determination of their respective rights and liabilities.13 If a party does not seek to confine the opposing party, but allows it to raise other issues for the determination of the Court, then the Court is permitted, and possibly obliged, to decide the proceeding on the issues raised and addressed at trial.14 As Isaacs and Rich JJ stated in Gould and Birbeck and Bacon v Mount Oxide Mines Ltd (in liq): 15 “pleadings are only a means to an end, and if the parties in fighting their legal battles choose to restrict them, or to enlarge them, or to disregard them and meet each other on issues fairly fought out, it is impossible for either of them to hark back to the pleadings and treat them as governing the area of contest.” [164] In such a case, the pleadings ought to be amended in order to make the facts alleged conform to the evidence actually given and the issue thus raised to be decided.16 [165] In a case in which a party, without objection from the opposing party, raises an issue that is not pleaded then a question of procedural fairness arises as to whether the Court is permitted, or possibly obliged, to decide the issue raised. As was stated in Betfair Pty Ltd v Racing New South Wales:17 “If it were otherwise, the party who has failed to plead all of the material facts or issues upon which the party’s case relies, but has brought those material facts or issues to the attention of his or her opponent at trial, would be denied natural justice if at the end of the trial the court decided the proceeding on the pleadings without notice to that party. The first party in those circumstances would have been denied the opportunity to apply to amend those pleadings so as to formalise what was in fact addressed at the trial.” 13 Banque Commerciale S.A. ,En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 at 286-287, [1990] HCA 11 at [18]-[19] (per Mason CJ and Gaudron J), and at 288 (paragraph [1] of the judgment of Brennan J). 14 Ibid.; Betfair Pty Ltd v Racing New South Wales (2010) 189 FCR 356 at 374, [2010] FCAFC 133 at [51]. 15 (1916) 22 CLR 490 at 517, [1916] HCA 81 per Isaacs and Rich JJ. 16 Banque Commercial S.A.., En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 at 297, [1990] HCA 11 (at paragraph [15] of the judgment of Dawson J); Water Board v Moustakas (1988) 180 CLR 491 at 497, [1988] HCA 12 at [14] per Mason CJ, Wilson, Brennan and Dawson JJ. 17 Betfair Pty Ltd v Racing New South Wales (2010) 189 FCR 356 at 374, [2010] FCAFC 133 at [51]. -- 43 of 45 -- 44 [166] In this matter it is necessary to decide whether the issue of breach of fiduciary duty on a basis other than that pleaded in paragraph 15 was raised without objection from the defendants. I shall invite submissions from the parties on that issue. My present view is as follows. The case was opened by the plaintiffs on the basis of their pleaded case. This was that there was no market for the boat and the moulds were not saleable. The plaintiffs’ case, as opened, was that the moulds were not worth anything near the contingent claim and “therefore the directors breached their fiduciary duty, because they preferred their own interests to those of the company. They effectively stripped the company of its assets”. The case was that the June 2007 and July 2007 transactions were all part of a “particular plan that was put in place to remove all of the cash from these companies, pay a dividend and leave the company with nothing.” At the conclusion of the second day of the trial, counsel for the plaintiffs indicated that the claim for breach of fiduciary duty of the directors preferring their own interests was the pleaded case, namely that the directors made a conscious decision, perhaps as early as March 2007, that they were not going to defend the proceedings and they were going to take whatever cash was in these companies and leave the moulds behind, knowing that this would result in a judgment. The thing that was left in the company, namely the moulds, was said to have no value and therefore to have left the company exposed. At that stage, the plaintiffs’ case, in essence, was that the moulds had little or no value, and it did not matter whether the Wenross claim had merit or not, because a decision had been made not to defend it. [167] The plaintiffs’ written submissions on breach of fiduciary duty were, in summary, that the directors were liable for “stripping” the companies of their assets so as to defeat the claims of a creditor, Wenross.18 I have previously quoted paragraph 46 of those submissions which summarises the companies’ case on breach of fiduciary duty. [168] In the course of oral submissions counsel for the plaintiffs observed that much had been said about the value of the moulds, but on the breach of fiduciary duty case and also on the issue of insolvent transactions the issue of value did not matter that much because of “the nature of the asset”. The moulds were not something that could readily be moved, there was a very limited market for them and in June or July 2007 they were in the possession of someone else. [169] In addition, counsel submitted that it was not as if the companies did not have the money. When I raised the point that the money that was paid as dividends was needed by the directors for their other companies, counsel for the plaintiffs responded that the moneys went to companies in which the directors had an interest, and permitting the proceedings to drift rather than settle them or to submit to judgment only highlighted the inappropriateness of the first and second defendant’s behaviour as directors. [170] The final address on behalf of the plaintiffs did not abandon the pleaded case. It did, however, allude to the fact that the claim for fiduciary duty did not depend upon the findings previously sought in relation to the value of the moulds. Counsel for the defendants did not object to these issues being raised in the plaintiffs’ final address. 18 Plaintiffs’ written submissions, paragraph 3. -- 44 of 45 -- 45 [171] In the circumstances, I consider it appropriate to provide the parties with an opportunity to address: (a) The defendants’ entitlement to have the plaintiffs confined to their pleaded case. (b) The possible entitlement of the first and second plaintiffs to obtain leave to amend the statement of claim to plead the alternative case on breach of fiduciary duty raised against the first and second defendants in oral submissions. [172] If the plaintiffs seek leave to amend at this late stage then the form of the proposed amended pleading should be provided to the defendants and the defendants given the opportunity to address the question of leave, including possible prejudice, other than the obvious prejudice in relation to the costs of preparing for trial, and conducing a trial on the basis of pleaded issues upon which the defendants have largely succeeded. -- 45 of 45 --