Shadow director fail: hiding in plain sight

In the matter of ACN 152 546 453 Pty Ltd (in liq) [2022] NSWSC 974 (21 July 2022)

Williams J upheld claims by liquidators of a company for compensation against the company’s shadow director, and to recover a voidable payment against his associated entities.

This case demonstrates how a comprehensive public examination of the director allowed the judge to draw inferences in favour of the liquidators where the defendants failed to participate in the final hearing.

Hemisphere Technologies Pty Ltd (Hemisphere) distributed anti-virus and cyber security software. Hemisphere’s sole director and shareholder was Mr P.

In April 2015, Hemisphere made payments totalling $160,000 to a real estate agent that was used as a deposit by two trustee companies, “Zon” and “Spaki” to purchase a property – Mr P and his wife were beneficiaries of the trusts managed by Zon and Spaki.

By mid-2016, Hemisphere’s primary supplier terminated its distribution agreement and sued Hemisphere for unpaid debts.

In October 2016, Hemisphere filed a “Change of Company Details” form with ASIC claiming that Mr P had resigned as a director back in October 2014, and that Mr R had been appointed in his stead.

Then, over the next few months, Hemisphere made payments totalling approximately $1.2m to another company “Portfolio IT” of which Mr P was the sole director and shareholder as well as payments totalling approximately $500,000 to a different company “ACG” of which Mr P was the sole director and his wife was the sole shareholder.

Hemisphere was placed into liquidation in January 2017. Portfolio IT and ACG both submitted proofs of debt totalling approximately $1.8m.

On the application of Hemisphere’s main creditor, a special purpose liquidator (SPL) was appointed. The SPL conducted public examinations.

During those examinations, Mr P was unable to explain why Zon and Spaki received payments to pay for a property, and what that property would be for used. He also could not explain exactly what services IT Portfolio and ACG provided to Hemisphere such as to substantiate their proofs of debt, nor explain why Hemisphere nevertheless made substantial payments to those entities.

During the examinations, Mr P also admitted that he was acting as a director of Hemisphere – contrary to the notice lodged with ASIC – until at least 22 December 2016, being the date of an asset sale agreement by Hemisphere.

The liquidators and Hemisphere commenced proceedings against:

• Mr P, for breaching his directors’ duties to Hemisphere and claiming compensation under s 1317H of the Corporations Act; and

• Zon and Spaki recover the $160,000 payment on the basis that it was voidable unreasonable director‑related transaction within the meaning of s 588FDA.

Mr P, Zon and Spaki did not appear in the proceedings or submit any evidence.

Williams J agreed to grant a declaration that Mr P had been a director within the meaning of s 9 of the Corporations Act (that is, a shadow director) from the date of Mr P’s purported resignation in October 2014, until Hemisphere’s winding-up (that is, after 22 December 2016, and so capturing the last of the payments made to IT Portfolio).

Her Honour then accepted that the payments made for the property purchase by Zon and Spaki, and each of the payments to IT Portfolio and ACG were made in breach of Mr P’s director’s duties under the Corporations Act. That is, those under s 181 (to act in good faith in the company’s best interests) and s 182 (not to improperly use his position to gain an advantage).

There was no evidence about Mr P’s mental state. Therefore, her Honour said it was unnecessary to resolve a debate in the authorities about whether a contravention of s 181 is established only if a director deliberately engages in conduct knowing that it is not in the company’s best interest, or whether it is enough to prove that, objectively, the conduct was not in the company’s best interests, regardless of what the director thinks.

Her Honour ordered that Mr P make a compensatory payment to the Company of approximately $1.7m, being the total amounts paid to IT Portfolio and ACG.

Next, in respect of the payments used by Zon and Spaki for the property purchase, her Honour accepted that the payments:

• were made by Hemisphere (satisfying s 588FDA(1)(a));

• were made for the benefit of Mr P or his “close associate” being his wife who were beneficiaries of the Zon and Spaki trusts (satisfying s 588FDA(1)(b)); and

• would not have been made by a reasonable person in Hemisphere’s circumstances (satisfying s 588FDA(1)(c)).

The payments were voidable within the meaning of s 588FE (it being accepted that Hemisphere was insolvent, at least by the time of these payments). Each of Mr P, Zon and Spaki were jointly and severally liable to repay Hemisphere the sum of $160,000.