Cooper v CEG Direct Securities Pty Ltd, in the matter of Runtong Investment and Development Pty Ltd (in liq)
[2019] FCA 1999
•27 November 2019
FEDERAL COURT OF AUSTRALIA
Cooper v CEG Direct Securities Pty Ltd, in the matter of Runtong Investment and Development Pty Ltd (in liq) [2019] FCA 1999
File number: SAD 119 of 2019 Judge: BESANKO J Date of judgment: 27 November 2019 Catchwords: CORPORATIONS — application for leave to file a further amended defence — where plaintiff seeks a declaration that certain transactions are unreasonable director-related transactions pursuant to s 588FDA of the Corporations Act 2001 (Cth) — where amendments relate to pleas of good faith, no grounds for suspecting insolvency and valuable consideration, as well as the discretion under s 588FDA — consideration of Vasudevan (as Joint and Several Liquidator of Wulguru Retail Investments Pty Ltd) (in liq) v Becon Constructions (Aust) Pty Ltd [2014] VSCA 14; (2014) 97 ACSR 627 — whether amendments have no real prospects of success Legislation: Corporations Act 2001 (Cth) ss 588FA, 588FB, 588FC, 588FD, 588FDA, 588FE, 588FF, 588FG
Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003 (Cth)
Cases cited: Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) CLR 175
Vasudevan (as Joint and Several Liquidator of Wulguru Retail Investments Pty Ltd) (in liq) v Becon Constructions (Aust) Pty Ltd [2014] VSCA 14; (2014) 97 ACSR 627
Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416
Date of hearing: 18 September 2019 Date of last submissions: 23 September 2019 Registry: South Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 29 Counsel for the Plaintiff: Mr A Narayan Solicitor for the Plaintiff: Travancore Legal & Advisory Counsel for the Defendant: Mr J Baird Solicitor for the Defendant: Ronayne Owens Lawyers ORDERS
SAD 119 of 2019 IN THE MATTER OF RUNTONG INVESTMENT AND DEVELOPMENT PTY LTD (IN LIQUIDATION)
BETWEEN: NICHOLAS DAVID COOPER AS LIQUIDATOR OF RUNTONG INVESTMENT AND DEVELOPMENT PTY LTD (IN LIQUIDATION)
Plaintiff
AND: CEG DIRECT SECURITIES PTY LTD ACN 150 878 587
Defendant
JUDGE:
BESANKO J
DATE OF ORDER:
27 NOVEMBER 2019
THE COURT ORDERS THAT:
1.The defendant’s application to file a Further Amended Defence be dismissed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
BESANKO J:
INTRODUCTION
This is an application to file a Further Amended Defence in a proceeding. The plaintiff opposes the application insofar as it seeks to raise certain matters. He does so on the basis that the matters which the defendant seeks to raise are not reasonably arguable.
The parties to the proceeding are Mr Nicholas David Cooper as liquidator of Runtong Investment and Development Pty Ltd (In Liquidation) (the liquidator) and CEG Direct Securities Pty Ltd (CEG Direct). The liquidator brings an application under s 588FDA of the Corporations Act 2001 (Cth) (the Act). This section is in Division 2 of Part 5.7B of the Act. Part 5.7B deals with the recovery of property or compensation for the benefit of creditors of insolvent companies, and Division 2 specifies transactions which are voidable transactions. The particular type of voidable transaction specified in s 588FDA is an unreasonable director‑related transaction. Section 588FF(1) empowers the Court to make one or more of a number of specified orders in relation to voidable transactions within one of ss 588FA to 588FDA and which also meet the requirements in s 588FE.
The liquidator seeks a declaration that three transactions entered into by Runtong Investment and Development Pty Ltd (Runtong) on 12 December 2014 and designated the Obligation Transaction (Guarantee and Indemnity), the Land Encumbrance Transaction (CEG Direct Mortgage) and the All Property and After Acquired Property Transaction (General Security Agreement) were unreasonable director-related transactions within s 588FDA and voidable transactions within s 588FE of the Act.
Runtong went into administration on 2 March 2018 and its creditors resolved to wind it up and appoint Mr Cooper as its liquidator on 18 June 2018. There would seem to be little doubt that if the transactions are unreasonable director-related transactions, then they are voidable transactions within s 588FE(6A).
The chief factual allegation by the liquidator as to why the three Transactions are unreasonable director-related transactions is because they “operated to relieve, or in the alternative, to defer, the Directors [of Runtong] pro tanto of their obligations to [CEG Direct] under the personal guarantees”. The guarantees were said to be guarantees of the indebtedness of two other companies to CEG Direct (see paras 18 and 13 of the Statement of Claim).
Section 588FF(1)(c) empowers the Court, inter alia, to order a person to pay the company “an amount that … fairly represents some or all of the benefits that the person has received because of the transaction”. In addition to the declaration previously described, the liquidator seeks an order that CEG Direct pay Runtong the Benefit (as defined in para 26 of the Statement of Claim) that fairly represents the benefit it received from the Transactions, or such amount that fairly represents the benefit CEG Direct received.
Section 588FF(1)(h) empowers the Court, inter alia, to order that “an agreement constituting, forming part of, or relating to, the transaction, … to have been void at … the time when the agreement was made” and the liquidator seeks an order that the Guarantee and Indemnity, the CEG Direct Mortgage and the General Security Agreement are void ab initio.
Section 588FF(1)(j) empowers the Court, inter alia, to order such agreements “to be unenforceable” and the liquidator seeks an order that the Guarantee and Indemnity, the CEG Direct Mortgage and General Security Agreement are unenforceable.
There were a couple of versions of the proposed Further Amended Defence. The version I will address is the version sent to the Court on the afternoon of 19 September 2019. The paragraphs in issue are paras 9A and 15. Paragraphs 9A and 15 of the proposed Further Amended Defence are as follows:
9A.In further answer to paragraph 20 of the Statement of Claim the defendants says that:
(a)it became a party to the transactions referred to in paragraph 20 of the Statement of Claim in good faith;
(b)at the time when it became a party:
(i)it had no reasonable grounds for suspecting that Runtong was insolvent at that time or would become insolvent by reason of entering into the transactions; and
(ii)a reasonable person in its circumstances would have had no such grounds for so suspecting; and
(c)it provided valuable consideration under the transactions and changed its position in reliance on the transactions.
Particulars
The defendant advanced the amounts totalling $16,160,200.27 referred to in paragraph 5 above in reliance upon and in consideration of Runtong’s execution of the documents specified in sub-paragraphs 3(b), (c), (d) and (e) above.
15.The defendant denies paragraph 26 of the Statement of Claim and the relief sought by the plaintiff, and in further answer says that:
(a)it became a party to the aforesaid transactions in good faith;
(b)at the time when it became a party:
(iii)it had no reasonable grounds for suspecting that Runtong was insolvent at that time or would become insolvent by reason of entering into the transactions; and
(iv)a reasonable person in its circumstances would have had no such grounds for so suspecting; and
(c)it provided valuable consideration under the transactions and changed its position in reliance on the transactions.
Particulars
The defendant advanced the amounts totalling $16,160,200.27 referred to in paragraph 5 above in reliance upon and in consideration of Runtong’s execution of the documents specified in sub-paragraphs 3(b), (c), (d) and (e) above.
Those paragraphs respond to paras 20 and 26 of the Statement of Claim which are in the following terms:
20.A reasonable person in the Company’s circumstances would not have entered into the Obligation Transaction, the Land Encumbrance Transaction and the All PAP Transaction, having regard to:
20.1the absence of benefits to the Company in entering into those transactions:
PARTICULARS
20.1.1.the Plaintiff repeats the matters set out in paragraphs 15 and 16 hereof.
20.2 the detriment to the Company in entering into those transactions;
PARTICULARS
20.2.1 the Plaintiff repeats the matters set out in paragraph 17 hereof.
20.3the respective benefits to other parties to those transactions of entering into it;
PARTICULARS
20.3.1 the Plaintiff repeats the matters set out in paragraph 18 hereof.
26.The Plaintiff says that he is entitled under s 588FF(1) of the Act to recover for the benefit of the creditors of the Company, the difference between:
26.1. the Net Proceeds; and
26.2the Built Environs Payments, being the value that it may be expected that a reasonable person in the Company’s circumstances would have provided having regard to the matters referred to in s 588FDA(1)(c) of the Act
(the Benefit).
RELEVANT LEGISLATIVE PROVISIONS AND SUBMISSIONS
Unreasonable director-related transactions are defined in s 588FDA. That section relevantly provides:
(1)A transaction of a company is an unreasonable director-related transaction of the company if, and only if:
(a) the transaction is:
(i) a payment made by the company; or
(ii)a conveyance, transfer or other disposition by the company of property of the company; or
(iii) the issue of securities by the company; or
(iv)the incurring by the company of an obligation to make such a payment, disposition or issue; and
(b)the payment, disposition or issue is, or is to be, made to:
(i) a director of the company; or
(ii) a close associate of a director of the company; or
(iii)a person on behalf of, or for the benefit of, a person mentioned in subparagraph (i) or (ii); and
(c)it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:
(i)the benefits (if any) to the company of entering into the transaction; and
(ii)the detriment to the company of entering into the transaction; and
(iii)the respective benefits to other parties to the transaction of entering into it; and
(iv) any other relevant matter.
The obligation referred to in subparagraph (a)(iv) may be a contingent obligation.
Note: Subparagraph (a)(iv) — This would include, for example, granting options over shares in the company.
(2) To avoid doubt, if:
(a) the transaction is a payment, disposition or issue; and
(b)the transaction is entered into for the purpose of meeting an obligation the company has incurred;
the test in paragraph (1)(c) applies to the transaction taking into account the circumstances as they exist at the time when the transaction is entered into (rather than as they existed at the time when the obligation was incurred).
A limitation on the Court’s powers to order relief in the case of unreasonable director-related transactions is contained in s 588FF(4) which is in the following terms:
(4)If the transaction is a voidable transaction solely because it is an unreasonable director related transaction, the court may make orders under subsection (1) only for the purpose of recovering for the benefit of the creditors of the company the difference between:
(a)the total value of the benefits provided by the company under the transaction; and
(b)the value (if any) that it may be expected that a reasonable person in the company’s circumstances would have provided having regard to the matters referred to in paragraph 588FDA(1)(c).
There is a defence in Division 2 which applies in the case of unfair preferences, uncommercial transactions and insolvent transactions, but not unfair loans and unreasonable director-related transactions. Section 588FG(2) provides as follows:
(2)A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director related transaction of the company, and it is proved that:
(a) the person became a party to the transaction in good faith; and
(b) at the time when the person became such a party:
(i)the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and
(ii)a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and
(c)the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.
It will be noticed that the pleas in paras 9A and 15 contain the three elements of this defence.
CEG Direct made the following points.
First, it noted (correctly) that the amendment, assuming it is in an appropriate form, should be allowed unless it has no real prospects of success (Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) CLR 175).
Secondly, the plea of good faith, no grounds for suspecting insolvency and valuable consideration is relevant to the determination of whether the transaction is an unreasonable director-related transaction. One of the elements of such a transaction is that it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction having regard to the benefits to the other party to the transaction of entering into it and any other relevant matter, and the plea is relevant to a consideration of these matters.
Thirdly, even if the Transactions are unreasonable director-related transactions, there is a discretion in s 588FF to withhold relief in an appropriate case and the matters pleaded in paras 9A and 15 are relevant, or may well be relevant, to the exercise of the discretion.
The liquidator made the following points.
First, the pleas in paras 9A and 15 follow the terms of s 588FG(2) and yet the section expressly states that it does not apply in the case of unfair loans and unreasonable director‑related transactions.
Secondly, the counter-balance to the fact that the defence in s 588FG(2) is not available in the case of unreasonable director-related transactions is the limit on recovery in s 588FF(4) to the difference between total value of benefits and the benefits it may be expected that a reasonable person in the company’s circumstances would have provided.
Thirdly, issues of insolvency or suspected insolvency are irrelevant to unreasonable director‑related transactions and this is made clear by the provisions themselves and the authorities which have considered them.
ANALYSIS
The unreasonable director-related transaction provisions were inserted into the Act by the Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003 (Cth). The package of sections included the definition of an unreasonable director-related transaction (s 588FDA), a time limit of four years ending on the relation-back day as defined (s 588FE(6A)), a limit on the benefit which may be recovered (s 588FF(4)) and the express exclusion in the case of such transactions of the defence in s 588FG(2).
The solvency or otherwise of the company at the time of the transaction is not an element of an unreasonable director-related transaction or of the orders which may be made under s 588FF. The operation of the provisions is ameliorated by the fact that only the unreasonable part of the benefit can be recovered (s 588FF(4)).
These points were made by Nettle JA (with whom Beach JA and McMillan AJA agreed) in Vasudevan (as Joint and Several Liquidator of Wulguru Retail Investments Pty Ltd) (in liq) v Becon Constructions (Aust) Pty Ltd [2014] VSCA 14; (2014) 97 ACSR 627. His Honour said the following (at [28] and [30]):
28I do not think that contention to be persuasive. In my view, it is apparent from the terms of s 588FDA, and also from the explanatory memorandum, that the very point of the section was and is to catch director-related transactions of kinds not otherwise liable to avoidance as unfair preferences, uncommercial transactions or unfair loans. In effect, that is the converse of a parliamentary intention to confine the operation of s 588FDA to transactions of the kind with result in the director in question receiving an equitable interest or equity in relation to the disponed property. Contrary to counsel’s submission, s 588FG(2) in effect confirms that is so by providing in substance that a court is not to avoid a voidable transaction to which the defences apply unless the transaction is an unfair loan or an unreasonable director-related transaction. The point was also made in para 3.15 of the explanatory memorandum, as follows:
The insolvency of the company at the time of an unreasonable director-related transaction is not a relevant consideration under the proposed amendments. Accordingly, section 588FG(2) is amended to remove unreasonable director-related transactions (along with unfair loans under section 588FD currently listed) from the scope of the exemption provided under that subsection in relation to knowledge of the company’s solvency at the time the transaction was entered into.
30The answer to that, however, as counsel for the liquidators submitted, is that s 588F(4) provides that, where a transaction is liable to avoidance solely because it is an unreasonable director-related transaction, the court is to make an order only for the purpose of recovering the difference between the value if any provided by the company and the value that it may be expected that a reasonable person in a company’s circumstance would have provided having regard to the benefits and detriment to the company of entering into the transaction, the benefits and detriments to other parties to the transaction, and any other relevant matter. In effect, that confers a broad degree of discretion on the court to do what is just and equitable in the particular circumstances of each case and so thereby to avoid the possibility of capricious and unfair consequences for innocent third parties. That and the limited number of cases in which the unreasonable director-related provisions have featured since their introduction are a relatively sound indication that the potential application of this legislation is not nearly as broad as Becon says it fears.
In Weaver v Harburn [2014] WASCA 227; (2014) 103 ACSR 416, McLure P (with whom Buss and Murphy JJA agreed) said (at [58]–[60]):
58Insolvency at the time, or because, of entering into the transaction is not an element of a voidable unfair loan or a voidable unreasonable director-related transaction under s 588FE. As a result, the defence in s 588FG(2) has no application to these types of voidable transactions.
59Under s 588FG(2), it is a defence to a claim for relief under s 588FF if the person became a party to the transaction in good faith; at the time they became a party, the person had no reasonable grounds for suspecting that the company was insolvent or would become insolvent because of the transaction; a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and the person provided valuable consideration or changed his or her position in reliance on the transaction.
60The 2003 Amendment Act amended s 588FG(2) to remove unreasonable director-related transactions from the scope of the defence. In that context, the explanatory memorandum notes that “[t]he insolvency of the company at the time of an unreasonable director-related transaction is a not a relevant consideration under the proposed amendments”.
It is not part of the liquidator’s case, as far as I can see, to prove the financial condition or state of Runtong at the time of the Transactions.
The first submission by CEG Direct seeks to link its state of mind at the time it entered into the Transactions and the consideration it provided under the Transactions to the expectation of a reasonable person in Runtong’s circumstances and whether that person would not have entered into the Transactions and, in particular, the benefits to CEG Direct from the Transactions and “any other relevant matter” (s 588 FDA(1)(c)(iii) and (iv)). The consideration provided under or pursuant to the Transactions would arguably fall within one of the subparagraphs of s 588FDA(1)(c), but it is pleaded in other paragraphs in the proposed Further Amended Defence (para 5). The crux of the plea in para 9A is the allegation that CEG Direct acted in good faith and its state of mind as to the solvency or otherwise of Runtong. Any other relevant matter in s 588FDA(1)(c)(iv) is any other matter relevant (or which may be relevant) to the assessment of whether it may be expected that a reasonable person in Runtong’s circumstances would not have entered into the Transactions. I am unable to see how a determination of whether CEG Direct acted in good faith and its state of mind as to the solvency or otherwise of Runtong is relevant to that assessment. I do not consider that the plea in para 9A has any real prospects of success.
The second submission by CEG Direct is that whether it was acting in good faith and its state of mind as to the solvency or otherwise of Runtong is relevant to the discretion the Court has as to the order, if any, that it makes under s 588FF(1). Section 588FF(1) uses the word “may” and it may be accepted for present purposes that the Court has a discretion under s 588FF(1). However, the relevant considerations to the exercise of the discretion are determined by the scope, subject matter and purpose of the section and its allied provisions. I am unable to see how the matters in the plea in para 15 can be determined to be matters relevant to the exercise of the discretion in the face of a voidable transaction not linked to the solvency or otherwise of the company at the time of the transaction and the subject of an express exclusion in s 588FG(2) and the limitation on the relief which can be awarded in s 588FF(4). I do not consider that the plea in para 15 has any real prospects of success.
I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko. Associate:
Dated: 27 November 2019
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