Cacho v Zohar

Case •

[2005] FCA 1241

•

2 SEPTEMBER 2005

FEDERAL COURT OF AUSTRALIA

Cacho v Zohar [2005] FCA 1241

EQUITY – interlocutory injunction – application by liquidator to restrain exercise of powers of purported receivers and managers of company – voidability of transactions from which powers of receiver and manager derive arguable – serious question to be tried and balance of convenience favouring relief

CORPORATIONS LAW – interlocutory relief – voidable transactions – powers of receivers and managers – whether interlocutory restraint appropriate

Corporations Act 2001 (Cth) ss 588FB, 588FC, 588FE, 588FF

Australian Broadcasting Corporation v Lenah Games Meats Pty Ltd (2001) 208 CLR 199 cited
Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 cited
Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 cited
Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535 referred to
Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363 referred to

RICARDO CACHO AS LIQUIDATOR OF PRECAST PRESTRESSED BUILDINGS PERTH PTY LTD v OREN ZOHAR, BRIAN KEITH MCMASTER and DIPLOMA CONSTRUCTION PTY LTD
WAD 219 of 2005

NICHOLSON J
2 SEPTEMBER 2005
PERTH


IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY

WAD 219 OF 2005

BETWEEN:

RICARDO CACHO
AS LIQUIDATOR OF PRECAST PRESTRESSED BUILDINGS PERTH PTY LTD
(ACN 012 746 449) (IN LIQUIDATION)
APPLICANT

AND:

OREN ZOHAR & BRIAN KEITH MCMASTER
FIRST RESPONDENTS

DIPLOMA CONSTRUCTION PTY LTD
(ACN 008 939 179)
SECOND RESPONDENT

JUDGE:

NICHOLSON J

DATE OF ORDER:

2 SEPTEMBER 2005

WHERE MADE:

PERTH

THE COURT ORDERS THAT:

1.The first respondents are restrained jointly and severally until further order of this Court and an injunction is granted restraining them by themselves, their servants, agents or otherwise from exercising or purporting to exercise any power as receivers and managers of Precast Prestressed Buildings Perth Pty Ltd (ACN 012 746 449) (In Liquidation) (‘PPB’) pursuant to a Fixed and Floating Charge granted by PPB to the second respondent on 23 April 2004 or from holding themselves out as receivers and managers over PPB.

2.There be liberty to apply on 48 hours notice.

3.The costs of the application be paid by the first and second respondents jointly and severally.

4.The applicant have leave to uplift the affidavit of R. Cacho filed 19 August 2005.

5.The matter be listed for directions before the District Registrar on 9 September 2005 at 3.00 pm.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.


IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY

WAD 219 OF 2005

BETWEEN:

RICARDO CACHO
AS LIQUIDATOR OF PRECAST PRESTRESSED BUILDINGS PERTH PTY LTD
(ACN 012 746 449) (IN LIQUIDATION)
APPLICANT

AND:

OREN ZOHAR & BRIAN KEITH MCMASTER
FIRST RESPONDENTS

DIPLOMA CONSTRUCTION PTY LTD
(ACN 008 939 179)
SECOND RESPONDENT

JUDGE:

NICHOLSON J

DATE:

2 SEPTEMBER 2005

PLACE:

PERTH

REASONS FOR JUDGMENT

  1. The applicant seeks an interlocutory injunction against the first respondents as receivers and managers appointed by the second respondent to prohibit them from exercising powers of a receiver and manger of Precast Prestressed Buildings Perth Pty Ltd (in liquidation) (‘PPB’). In its application the applicant seeks to have two transactions set aside as void as against the applicant pursuant to s 588FE and s 588FF of the Corporations Act 2001 (Cth) (‘the Act’). The first of those matters is the entry by PPB into a deed of charge in favour of the second respondent dated 23 April 2004 (‘the charge’). The second is a sale of share agreement dated 23 April 2004 (‘the share sale agreement’).

  2. The second respondent was incorporated on 20 October 1980.  On that date Mr Di Latte was appointed a director of it.  On 6 November 2002, PPB was incorporated.  On that date Mr Di Latte was also appointed a director of it, along with Mr Percoult.  On 23 April 2004, the charge was executed in favour of the second respondent.  On the same date the share sale agreement was entered into.  On that date, Mr Di Latte ceased to be a director of PPB.  The second respondent’s charge was registered by order of the Court on 3 August 2004.  On 25 October 2004, the applicant was appointed as administrator of PPB.  On 8 July 2005 he was appointed as its liquidator.  On 16 August 2005, the first respondents were appointed by the second respondent as receivers and managers of PPB.  It is not in issue that the validity of that appointment depends upon the validity of the share sale agreement and the charge.

  3. This interlocutory application is supported by an affidavit of the applicant filed on 19 August 2005 in respect of which leave has been given for it to be uplifted and substituted following the hearing of the application.  Additionally there are affidavits sworn by the applicant on 29 August 2005 and 1 September 2005 and by Mr Berkhout sworn 1 September 2005.  The respondents’ case is supported by affidavits of Mr Di Latte, sworn on 29 and 30 August 2005. 

    REQUIREMENTS FOR INTERLOCUTORY RELIEF

  4. It is not in dispute that for an interlocutory injunction to issue there must be a serious question to be tried, the balance of convenience must favour the grant of such an injunction and damages be an inadequate remedy:  Australian Broadcasting Corporation v Lenah Games Meats Pty Ltd (2001) 208 CLR 199 at 218, at [13] per Gleeson CJ; Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 per Gleeson CJ citing Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153.

    RELEVANT STATUTORY PROVISIONS

  5. The following sections are relevant to a determination of this interlocutory application:

    ‘588FB           

    (1)A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

    (a)the benefits (if any) to the company of entering into the transaction; and

    (b)the detriment to the company of entering into the transaction; and

    (c)the respective benefits to other parties to the transaction of entering into it; and

    (d)any other relevant matter.

    …
    588FC

    (1)A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:

    (a)any of the following happens at a time when the company is insolvent:

    (i)the transaction is entered into; or

    (ii)an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

    (b)the company becomes insolvent because of, or because of matters including:

    (i)entering into the transaction; or

    (ii)a person doing an act, or making an omission, for the purpose of giving effect to the transaction.

    …
    588FE

    (1)If a company is being wound up:

    (a)a transaction of the company may be voidable because of any one or more of subsections (2) to (6) if the transaction was entered into on or after 23 June 1993; and

    …

    (3)The transaction is voidable if:

    (a)it is an insolvent transaction, and also an uncommercial transaction, of the company; and

    (b)it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation-back day.

    (4)The transaction is voidable if:

    (a)it is an insolvent transaction of the company; and

    (b)a related entity of the company is a party to it; and

    (c)it was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation-back day.’

  6. The applicant relies, in particular, on s 588FE(3) and s 588FE(4) in contending that the voidability of the share sale agreement and charge is arguable. This first of all requires the applicant to establish that there is ‘an insolvent transaction’ falling within the definition of that phrase in s 588FC. That in turn invokes as a necessary part of such a description the definition of ‘uncommercial transaction’ in s 588FB.

    WHETHER INSOLVENCY ARGUABLE

  7. In my opinion the evidence before the Court clearly establishes that it is arguable that PPB was insolvent at the date of the grant of the charge and the entry into the share sale agreement.  There is evidence that at the date the charge and share sale agreement were entered into, the creditors totalled $1.131 million of which $839 860 were over 90 days.  That total included the debt to the second respondent of $348 509.  The balance sheet at that date showed a loss of $889 555 resulting from total assets of $828 181 and total liabilities of $1 717 737.  Although various other explanations advanced at the hearing may reduce the amount of the relevant indebtedness, those contentions do not exclude the arguability of insolvency. 

    WHETHER UNCOMMERCIALITY ARGUABLE

  8. The real thrust of the respondents’ case is that the granting of the charge and the entry into the share sale agreement were not uncommercial transactions. That is, it is submitted that it is not arguable that it may be expected that a reasonable person in the company’s circumstances would not have entered into those transactions having regard to the factors set out in s 588FB(1) of the Act. As the respondents’ submissions set out, it was emphasised by the Full Court in Tosich Construction Pty Ltd (in liq) v Tosich (1997) 78 FCR 363 at 367 that ‘only if the Court can conclude that a reasonable person in the company’s circumstances would not have entered into the transaction does the section make that transaction uncommercial’. In Demondrille Nominees Pty Ltd v Shirlaw (1997) 25 ACSR 535 at 548, the Full Court (Foster, Lindgren and Madgwick JJ) referred to a statement in the explanatory memorandum relating to the Act that it was transactions which were ‘a bargain of such magnitude that it could not be explained by normal commercial practice’ at which the section was aimed.

  9. Addressing the requirements of s 588FB(1), the respondents contend that the benefits to PPB of entering into the transactions was that the loans to the second respondent ceased to be repayable on demand so that PPB was given the right to make payment over 12 months. The consequence was that the second respondent had no right to demand repayment for 12 months. As to the detriment to PPB of entering into the transaction, it is said that its assets were subject to a fixed and floating charge in favour of the second respondent. In relation to the benefits to the second respondent, it is said it obtained a charge to secure any part of the debt remaining unpaid after 12 months. Therefore, it is said that there was a clear quid pro quo in the agreement and that this was not a bargain of such magnitude that could not be explained by normal commercial practice. It is submitted there is no serious question to be tried that a reasonable person in PPB’s circumstances would not have entered into the transaction. Further, there was no reason why PPB would confer an uncommercial benefit on a former officer holder of PPB.

  10. The applicant contended that a number of factors should be considered.  The first was that the second respondent does not have to prove the amount of its alleged debt.  However, I accept the respondents’ submission that the amount of the debt is not in dispute.  Next, the applicant contends that the second respondent was promoted from an unsecured creditor who may only receive a small dividend (if any) in the liquidation to a second ranking secured creditor who may get paid in full.  The respondents contend this is irrelevant, but I will return to it.  The applicant also contends that the second respondent can set off future work that it contracts PPB to perform for it and thereby obtain full value for its debt which may not otherwise have been capable of being repaid in cash which would be outside any claim under the first ranking charge of the first chargee.  The respondents contend the right to pay by set off is a benefit.  I will also return to this matter.  The applicant points to the fact that the vendor of the shares sold received a price ten times that paid on initial allotment (which the respondents accept as true) and the common director, Mr Di Latte received and indemnity against all and any liability as a director or in relation to any trade creditors of PPB (which the respondents say does not affect PPB). 

  11. The essential thrust of the submission for the applicant, made apparent in submissions in reply, was that the granting of the security and the elevation of the debtor to the status of a chargee is sufficient in itself to make the contention of uncommerciality arguable.  Further, the right of set off would have impacts on the cash flow of PPB in circumstances where there were a large number of creditors including those in the category of 90 days plus.  These two matters are those to which I said I would return.  They are at the heart of the contentions by the applicant.

  12. It may be that ultimately a Court will be satisfied as to the lack of uncommerciality in relation to the transactions concerned, particularly given the size of the debt due by PPB to the second respondent and the presence of benefits to PPB in the arrangements reflected in the transactions. It is to be noted that there is no case made here that the second respondent derived ‘an unfair preference’ within s 588FC. However, I consider that within the tests appropriate for the granting of interlocutory relief, it is open to argument that the granting of the charge and the entry into the share sale agreement were uncommercial transactions. This is because it is able to be argued that the entry to them was not reasonable in all the circumstances. Therefore, I consider that there is a serious question to be tried in relation to the contentions of voidability of those transactions.

    BALANCE OF CONVENIENCE

  13. I am also satisfied that the balance of convenience favours the grant of interlocutory relief.  It was not contended otherwise.  It would not be appropriate for the first respondents to be exercising powers of a receiver and manager in circumstances where there was a serious question to be tried in the way which I have found. 

    CONCLUSION

  14. Accordingly, I consider that the applicant is entitled to the interlocutory relief sought in terms of Pt B of the application dated 19 August 2005.  Orders will be made accordingly.  Directions should now be made to bring the application promptly to trial.

I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Nicholson.

Associate:

Dated:             2 September 2005

Counsel for the Applicant: BW Ashdown
Solicitor for the Applicant: Summerslegal
Counsel for the Respondents: MD Cuerden
Solicitor for the Respondents: Bowen Buchbinder Vilensky
Date of Hearing: 1 September 2005
Date of Judgment: 2 September 2005
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