Baloglow v Kalls Enterprises Pty Limited & Ors

[2008] HCATrans 132

[2008] HCATrans 132

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S460 of 2007

B e t w e e n -

THEO BALOGLOW

Applicant

and

KALLS ENTERPRISES PTY LIMITED (IN LIQUIDATION)

First Respondent

AA AUSTRALIAN COMMERCIAL LAUNDRIES PTY  LTD

Second Respondent

CHRISTOPHER DAMIEN DARIN (IN HIS CAPACITIES AS LIQUIDATOR OF KALLS ENTERPRISES PTY LIMITED (IN LIQUIDATION) AND AA AUSTRALIAN COMMERCIAL LAUNDRIES PTY LIMITED (IN LIQUIDATION))

Third Respondent

PETER KALIAROPOULOS

Fourth Respondent

Application for special leave to appeal

GLEESON CJ
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 7 MARCH 2008, AT 12.09 PM

Copyright in the High Court of Australia

__________________

MR B.W. RAYMENT, QC:   May it please your Honours, I appear with my learned friends, MR C.P.L. LOCKE and MR D.T. KELL, for the applicant.  (instructed by Oliveri Attorneys)

MR B.W. WALKER, SC:   May it please the Court, I appear with my learned friend, MS R. GRAYCAR, for the first, second and third respondents.  (instructed by Koffels Solicitors & Barristers)

MR T.A. ALEXIS, S.C:   May it please the Court, I appear with my learned friend, MR R.J. HARDCASTLE, for the fourth respondent.  (instructed by Hazan Hollander)

GLEESON CJ:   Yes, Mr Rayment.

MR RAYMENT:   Your Honours, may I start with what might be called the Belmont Finance point which relates to paragraphs 154 to 159 of the judgment of Justice Giles dealing with the first limb of Barnes v Addy.  If what his Honour there says is correct, then in a case where the breaches of fiduciary duty that are at issue relate to breaches of fiduciary by directors of a corporation, it would seem to follow that the second limb of Barnes v Addy which covers breaches of fiduciary duty in cases of, essentially, dishonesty and subject to the Briginshaw test, it need not be resorted to and one may look only at the first limb where one needs to prove only a breach of fiduciary duty by a director and notice and that, in our respectful submission, would be a brand new departure for the law.

It also, we submit, clashes with what was said by the Full Court of the Supreme Court of Western Australia in Hancock Family Memorial Foundation v Porteous which directly decides that such a view is contrary to what was said in this Court in Daly’s Case by Justice Brennan with whom Justice Wilson agreed.  The Court of Appeal have said in the decision below that what they say about Belmont Finance is to be the law until this Court says otherwise.  If that is so, what they say about Belmont Finance is to be the law notwithstanding that there is, according to the Western Australian Full Court, a conflict with what this Court said in Daly’s Case.

The court below seemingly distinguishes Hancock on the ground that here they say there was no loan of money, just in effect of stealing or removal of assets by the directors from the company.  The Court of Appeal nowhere makes a finding, and nor could they, that Mr Baloglow knew of any such thing.  He had no notion, no information, to the effect of any such removal of assets.  That has to fall right outside any notion of accessorial liability stemming from Barnes v Addy and we submit surely such a case, even if what the Court of Appeal said about it were correct, would have to be dealt with as if there were a loan, as Mr Baloglow was entitled to assume, and did assume, and was believed by the judge with respect to it.

GLEESON CJ:   I am looking at paragraph 69 on page 76.

MR RAYMENT:   Yes, your Honour.  I was really about to come to that.  What the Court of Appeal have done there is to derive from the proposition that, to the understanding of Mr Baloglow at an earlier point of time a business was owned by AA, his knowledge or being on notice that the proceeds of sale in the later sale agreement were held on trust for that company.  It is not the only breach of duty upon which the Court of Appeal relies but, your Honours, Mr Baloglow gave evidence, which again was accepted by the judge, that he knew at an earlier point of time that AA owned that business but he also knew that AA owed $600,000 to the vendor company, Kalls Enterprises and that certainly, in our respectful submission, would not support a view that he knew of any trust of the proceeds of sale in favour of AA and, in any event, his so‑called knowledge about this matter was way out of date.  He had had nothing to do with the affairs of the company for a year and in that year a great deal had happened of which he had no knowledge. 

Your Honours, it is not, as I say, the only finding of breach of fiduciary duty upon which the Court relies.  They also refer to alleged knowledge of Mr Baloglow about the position of creditors which is similarly doubtful and contrary to the express decision of the trial judge that he was a bona fide purchaser for value without notice in this matter.

Your Honours, with respect to the transaction point, the uncommercial transaction point, the essence of the matter appears to be this.  Two judges of the Supreme Court, the trial judge and Justice Giles, discerned within the transaction, as it were, two separate elements.  One, the use of a corporation later insolvent as a banker by its directors; two, a transaction between those directors and Mr Baloglow under which a judgment debt in favour of Mr Baloglow regularly entered by the Supreme Court, in one case after a trial, was discharged by payment of almost the amount of the judgment debt, full consideration being given.  They construed the second of those matters as a transaction not of the company but of the directors of the company because the company had no part in the judgments which were entered in favour of Mr Baloglow.

GLEESON CJ:   In paragraph 197 on page 120 Justice Giles said:

It was sufficient, if with his knowledge, Mr Baloglow wilfully and recklessly failed to make the enquiries an honest and reasonable man would make about a real and not remote risk –

et cetera.

MR RAYMENT:   That means, if you know anything about the matter, apparently, if you know something which might produce a doubt about the matter, you are, as it were, moved to a higher stage of knowledge.

GLEESON CJ:   Hang on.  In paragraph 199 he says “Mr Baloglow knew that Mr Kalls was discharging his” – that is, Mr Kalls personal liability “by payment to him of AA’s money” and it was then that he went on to ask, would an honest and reasonable man have made inquiries about the effect on creditors?  But that is the knowledge that he attributes to Mr Baloglow, that is, that Mr Kalls was discharging Mr Kalls’ debt by paying Mr Baloglow AA’s money.

MR RAYMENT:   Yes.  If I am back in Barnes v Addy to answer this question, as I take it I am, what we submit about this is that, first of all, the breaches of fiduciary duty were a number which the Court of Appeal relied upon.  Secondly, this one, a finding made in the Court of Appeal and not by the trial judge not only that there was a beneficial interest in the proceeds of sale vested in AA but that Mr Baloglow knew of it – none of that was found by the trial judge – would be, we submit, contrary to the ordinary experience of appellate courts dealing with findings of fact by a trial judge.  He was cross‑examined at great length about all these kinds of matters and the judge concluded as he did at trial.

First of all the finding is very much open to doubt, in our respectful submission, that is, the finding that there is a beneficial interest.  No evidence was led about the dealings between AA and KE, and it could have been.  The liquidator decided to run this case by seeking to draw inferences from very little indeed.  The trial judge found at the end of the day that he himself, having heard that evidence, was in no position to make a finding of the kind ultimately discerned by the Court of Appeal in the matter.  There was nothing logically involved in the inference that was drawn by the Court of Appeal if only because, even if this company was the owner of the business, which was open to doubt, it owed more than the value of the business to the vendor company.

AA owns a business, let me assume, from which Mr Baloglow gets $555,000 but AA owes $600,000 to the vendor company.  You cannot infer from that fact that, without hearing any more evidence about the matter, KE holds the proceeds of sale upon trust for AA.  Mr Baloglow gave evidence which was accepted by the judge that he knew of that $600,000 debt.  He took it that it was a private matter between these two companies, the detail of which he had no information about.  That, in our respectful submission, was fully open to the trial judge to accept and was not open to be just cast aside by the Court of Appeal.

GLEESON CJ:   In order to succeed in an appeal you would need to succeed on both the Barnes v Addy and the Corporations Act questions, is that right?

MR RAYMENT:   Yes, that is certainly correct.  We lost on both points in the Court of Appeal, the second by majority, so I was seeking to come to the transaction point.  Your Honours, we submit that the view which commended itself to the majority in the Court of Appeal on the transaction point that, in effect, you could find a relevant nexus with the company if you add together all the little bits and pieces of information and come to the view that there is a relevant nexus, that view is likely to be productive of grave risk in the commercial community where you have a two‑stage transaction – a serious consequence to the community if you deal with a company in circumstances which may be largely unknown to a third party to get money and then buy from that third party property.  That cannot be at the heart of what was intended to be dealt with by this statute.

If it is, if contrary to what I have just put, that nevertheless there is jurisdiction to deal with the transaction, there must, in our respectful submission, be force given to the word “may”, that is, it must be at very best from the point of view of the other side, a discretionary matter.  You look in vain in the reasons of the majority for that point to be dealt with, let alone the discretion considered.  It was submitted to them that “may” meant “may” and there was every reason on the facts of the case why no such

discretion should be exercised.  To take a simple point, they did not even join the fiduciaries said to be in breach of duty or those who benefited from it, Mr Kaliaropoulos and that, in our respectful submission, provides reason for this Court to consider the matter even if there were no Barnes v Addy point in the case. 

We add to that that, surely if all else failed in the case, Mr Kaliaropoulos ought to have been made the subject of an order setting aside so much of the transaction as released him from a judgment debt.  He was joined in the case and the court nevertheless refused to deal with him as well and that, we submit, is bound up with this discretionary question.

Your Honours, in addition to those matters which we submit are of general public importance there was a finding essential to the notice finding of the majority in the transaction point and part of the reasoning of Justice Giles based upon inferences drawn from a letter which the Court of Appeal was told by both parties had actually not been sent to my client.  There was no evidence that it had been sent to him and we have set out in detail in the reply precisely what was said orally by Mr Forster, senior counsel for Mr Walker’s client, and in writing in our submissions to that that effect in the Court of Appeal, yet the judgment founds itself upon the receipt of that letter that we have identified in the written submissions, the importance which it played in the findings made by Justice Giles which were in turn adopted and central to the findings of notice made by the majority on the transaction point.

We submit that, generally, it is impossible to understand how the trial judge’s finding that Mr Baloglow was a person whose evidence ought to be accepted and was a bona fide purchaser for value without notice was simply put aside by the Court of Appeal without it being shown that, in any respect, the findings were glaringly improbable.  Those are our submissions, if the Court pleases.

GLEESON CJ:   Mr Walker and Mr Alexis, we do not need to hear you.

The Court of Appeal unanimously found against the applicant on what might be described as a Barnes v Addy claim and, by majority, found against the applicant on an alternative claim under the corporations legislation.  Both claims related to a sum of about $555,000 received by the applicant out of funds beneficially owned by a certain company and found to have been improperly paid in satisfaction of a personal liability to the applicant of a director of that company.

To succeed in an appeal the applicant would need to succeed on both issues.  We think there are insufficient prospects of success of an appeal to warrant a grant of special leave.  The application is dismissed with costs.

AT 12.25 PM THE MATTER WAS CONCLUDED