County Construction Pty Ltd (In Liq) v Hart

[2004] NSWSC 313

CITATION:	County Construction Pty Ltd (In Liq) & Anor v Hart & Anor [2004] NSWSC 313
HEARING DATE(S):	01/03/04, 02/03,04, 03/03/04, 04/03/04, 05/03/04, 08/03/04
JUDGMENT DATE:	19 May 2004
JURISDICTION:	EQUITY
JUDGMENT OF:	Cripps AJ
DECISION:	Application by the Liquidator of County Construction Pty Ltd to receiver for $1,111,149.30 from Mr & Mrs Hart as being unfair preference payments dismissed - Plaintiffs to pay defendant's costs.
CATCHWORDS:	Winding up order - Estoppel - Contract - Novation - Unfair preferences - Good faith defence.
LEGISLATION CITED:	Corporations Law s286, s289, s459, s558, s588
CASES CITED:	Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 Reichel v McGrath (1889) 14 App Cas 665 Blair & Anor v Curran (1939) 62 CLR 464 AGC (Advances) Ltd v West (1984) 5 NSWLR 590
PARTIES :	FIRST PLAINTIFF County Construction Pty Ltd (In Liquidation) SECOND PLAINTIFF Brian Raymond Silvia FIRST DEFENDANT Daryl Francis Hart SECOND DEFENDANT Jennifer Joan Hart
FILE NUMBER(S):	SC 5171 of 1999
COUNSEL:	PLAINTIFFS Mr N A Cotman SC with Mr V R W Gray DEFENDANTS Mr S D Robb QC with Mr M J Steele
SOLICITORS:	PLAINTIFFS Denes Ebner DEFENDANTS Somerville & Co

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

CRIPPS AJ

Wednesday 19 May 2004

5171/99 COUNTY CONSTRUCTION PTY LTD (in liq) AND BRIAN RAYMOND SILVIA v DARYL FRANCIS HART AND JENNIFER JOAN HART

JUDGMENT

1 HIS HONOUR: County Constructions Pty Ltd (County) (in liquidation) and Brian Raymond Silvia (the liquidator) (the plaintiffs) commenced proceedings in the Equity Court in 1999 alleging that payments made to Mr and Mrs Hart (the defendants) by County in May and June 1997 were transactions that were unfair preferences within the meaning Corporations Law. They sought consequential orders pursuant to the provisions of the Law.

2 County was the family company of Mr and Mrs Hart. At all relevant times Mr Hart was a shareholder and director. Mrs Hart was a shareholder and director although she ceased being a director in September 1998.

3 On 4 August 1998 County was served with a statutory demand for $404,546 by Kitlynx Pty Ltd (Kitlynx) pursuant to s 459E (2)(e) of the Law. County was wound up by order of the Supreme Court on 16 November 1998.

4 Kitlynx was, at all relevant times, a company owned and controlled by Mr Scheinberg. It alleged that County was liable to it for breach of a building contract for the construction of two residential projects, one at Cromer and the other at Manly which Kitlynx claimed to have been entered into between it and County on 12 October 1995. The contract was not under seal. It was signed by Mr Williamson who had previously been retained as a consultant by County. He was not a consultant as at 12 October 1995 but prior to that he had submitted to County a number of what were described as “construction and supervision” projects. Mr and Mrs Hart alleged Mr Williamson had no authority, actual or ostensible to enter into a contract on behalf of County.

5 Shortly after the statutory demand was served Mr Somerville the solicitor for Mr and Mrs Hart wrote to Mr Ebner the solicitor for Kitlynx stating that County had never entered into a contract of any description with Kitlynx. He also said Mr Hart had not ever “met, spoken to or had any association with the directors or employees” of Kitlynx. In fact, as will be seen, Mr Hart never spoke to anyone from Kitlynx and County did not undertake any building work the subject of the contract of 12 October 1995. That work was undertaken by Mr Williamson’s company County Project Constructions Pty Ltd (County Project) and all progress payments were paid to and banked by Mr Williamson to his own account or to that of County Project. The letter concluded: “However we are instructed that County Constructions Pty Ltd has not traded since June 1997, has no assets and no liabilities. Accordingly, the company will not be opposing winding-up proceedings”. As I have said on 16 November 1998 County was wound up and Mr Silvia appointed the liquidator. Kitlynx submitted a proof of debt in the sum of $404,546.

6 The debt allegedly owed by County to Kitlynx arose in or about July 1996 by reason, so it was alleged by Kitlynx, of County’s failure to perform its obligations under the building contract dated 12 October 1995 and referred to above.

7 County was a builder and held a licence pursuant to the relevant legislation. In December 1994 it purchased a property at 93 Carawa Road Cromer. It obtained development consent for the construction of four home units on the land. The buildings were completed and sold prior to the end of the financial year 1997. The Carawa Road project (which I will hereinafter refer to as Carawa Road to distinguish it from the Cromer project subject of 12 October 1995 contract) was financed by the National Australia Bank and loans from Mr and Mrs Hart. There is a dispute between the parties concerning the nature and effect of the financial arrangements entered into but for present purposes it is sufficient to note that by the end of 1997 County had repaid all the creditors Mr Hart believed were entitled to be paid. As will be seen I find that Mr Hart did not, during May and June 1997 believe County had any indebtedness in respect of work being undertaken on behalf of Kitlynx on the Cromer and Manly projects. The unfair preferences alleged by the plaintiffs are payments made to Mr and Mrs Hart in May and June 1997. After June 1997 County ceased trading. It undertook no new projects. By July 1997 it was, as Mr Cotman SC on behalf of the plaintiffs submitted, really in “de facto liquidation”. It had closed its bank account on 25 September 1997 and did not engage in any business activities thereafter.

8 The plaintiffs’ case was amended from time to time but remained, in essence, a claim that Mr and Mrs Hart received unfair preference payments in May and June 1997. In 2002 the hearing dates were vacated when the plaintiffs applied to expand their claim by alleging that the quantum of debt claimed by Kitlynx from County and which had previously been assumed to be that referred to in the notice of statutory demand was in fact greater and also to allow the plaintiffs to adduce evidence to raise the presumption of insolvency of County at the relevant time arising, so it was alleged, from County’s records not being properly maintained (see s 588 E, s 286 and s 289 (1) of the Law). On that occasion the plaintiffs were ordered to pay the costs thrown away by reason of the vacation of hearing dates previously fixed by the Court.

9 When the matter came on for hearing before me the statement of claim was further amended. As I have mentioned County had denied Mr Williamson had actual or ostensible authority to enter into a contract with Kitlynx binding County. The plaintiffs sought to amend by alleging that if this were so County was nonetheless bound because in November 1995 it ratified what was previously the unauthorised conduct of Mr Williamson. The amendment was not opposed.

10 Thus the case being advanced on the pleadings and to which evidence was directed was what I might call the statutory cause of action of the plaintiffs alleging that at the time County repaid monies to Mr and Mrs Hart it was insolvent and, accordingly, the transactions were relevantly unfair preferences.

11 After the close of the case of both parties and prior to address Mr Cotman SC on behalf of the plaintiffs sought to further amend the claim the plaintiffs made against Mr and Mrs Hart. Up until that time the issues between the parties were directed to:

· Was County indebted to Kitlynx in 1997 and if so in what amount.

· Was County in fact insolvent in May and June 1997.

· Had County kept adequate records as required by s 286 (1) of the Law and that if it had not was the presumption of insolvency arising by operation of s 588E(9) of the Law displaced.

· Were the transactions being the nine payments to Mr and Mrs Hart relevantly unfair preferences (s 588 FA(1) of the Law).

· If County was insolvent in May and June 1997 were payments received by Mr and Mrs Hart transactions in good faith and in circumstances where they had no reasonable grounds for suspecting or believing County was insolvent or would become insolvent and that a reasonable person in their circumstances would have no grounds for so suspecting or believing.

12 To the forefront of the plaintiffs’ case was the submission that Mr and Mrs Hart were, by reason of the winding-up proceedings, estopped or precluded from disputing either contractual liability of County to Kitlynx or the insolvency of County at the relevant time.

13 At the conclusion of the evidence and after the cases for the plaintiffs and the defendants had closed and just before address Mr Cotman on behalf of the plaintiffs sought leave to further amend the claim against Mr and Mrs Hart by alleging that, quite apart from any liability arising from unfair preference payments under the Law Mr and Mrs Hart had entered into a contract with County the effect of which was that if it turned out that some time after May and June 1997 County was held to be indebted to another creditor they would, in effect, postpone repayment of County’s indebtedness to them and would not insist on repayment until all creditors had been paid.

14 The application was opposed and the amendment was refused. At the time I said I would give my reasons for refusing the amendment when I published my judgment.

15 I was of the opinion that the proposed amendment would have taken the proceedings well beyond the issues identified by the parties over a number of years and would raise issues concerning matters that took place more than seven years ago and more than five years after the first claim was made on Mr and Mrs Hart concerning their potential liability to the liquidator. The justification for the amendment, Mr Cotman submitted, arose from his cross-examination of Mr Hart concerning his state of mind in May and June 1997 with respect to obligations he may have had to creditors generally. Mrs Hart was not cross-examined. It seemed to me that it would have been quite unfair to allow a contract issue (or issues) to be raised through cross-examination relied on by Mr Cotman at a time when no contract claim was pleaded and in circumstances where the cross-examination was, on its face, relevant to the question of whether Mr and Mrs Hart had attracted what I might describe as the “good faith” defence.

16 Mr Robb SC on behalf of Mr and Mrs Hart opposed the amendment and claimed his embarrassment in having to meet it should be recognised by the Court. He submitted it would have been unfair on Mr and Mrs Hart to have allowed the amendment which would necessarily have resulted in yet another adjournment. He referred to the circumstance that he was not aware of the proposed amendment until after the case for both parties had closed.

17 Prior to the application being made a claim in contract had not been raised or even hinted at. Bearing in mind the way the cross-examination proceeded there was a strong argument to the effect that it never travelled beyond Mr Hart acknowledging that he thought all other creditors of County should be paid out before he and his wife were paid out. Warming to his subject Mr Robb accused Mr Cotman of cross-examining with a view to later seeking to amend his pleadings. Mr Cotman has denied this suggestion but acceptance of that denial does not answer Mr Robb’s essential complaint. Until the application was made to amend the statement of claim a claim in contract had never been made. There must come a time in litigation when amendments applied for should be refused on the grounds that to do so would be unfair to the opposing party. In my opinion that point was reached well before Mr Cotman sought to further amend the proceedings.

18 For the above reasons I declined to allow the amendment.

The Contract Issues

19 On 12 October 1995 a document being a building contract purportedly between Kitlynx and County was entered into pursuant to which County, if bound, was to undertake building work at 594 Pittwater Road North Manly and 5 Denison Place Cromer for the sums of $119,200 and $151,750 respectively. The date for practical completion was 29 February 1996.

20 The contract contained clauses usually found in building contracts including provisions relating to the consequences of determination by the proprietor. As I have said the contract was not signed by County but was signed by Mr Williamson allegedly on County’s behalf and the document was witnessed by Mr Hart’s son.

21 The contract referred to the consequences of the failure by the builder to bring the work to practical completion by the date specified in the contract. It was provided by clause 10.10.2 that if notice were given to the builder which was not complied with the builder could become liable to pay the proprietor a sum calculated and certified by the architect (the contract deemed the proprietor and the architect to be one and the same) as liquidated damages. However the contract also provided that the proprietor would have no right to damages for delay apart from the figure referred to in the clause. The amount provided for in the liquidated damages clause was “Nil”. It is not disputed in the proceedings that so far, at least, as County was concerned the contract did not allow Kitlynx to recover damages for delay.

22 The relevance of the provision referred to above is that at a time (about May 1996) when, on any view of the matter Kitlynx knew it was dealing with County Project and not County, Kitlynx and County Project agreed to vary the contract and to provide that if the Dennison Avenue works were not brought to practical completion eight weeks from 18 May 1996 then County Project must pay Kitlynx $1200 per week as liquidated and ascertained damages until the building works had reached the stage of practical completion. It was further recorded in documents between County Project and Kitlynx that both parties had agreed to vary the contract.

“Estoppel”

23 The principal case sought to be made by the plaintiffs is that Mr and Mrs Hart are precluded from denying contractual liability to Kitlynx in the amount set out in the notice of demand issued prior to winding-up by operation of res judicata, issue estoppel, Anshun estoppel (Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589) or because it would be an abuse of process to allow them to do so (see Reichel v McGrath (1889) 14 App Cas 665.

24 The plaintiffs submit that properly understood Mr and Mrs Hart are precluded from denying that County owed Kitlynx $404,536 or that County was insolvent in November 1998 – the date upon which the winding-up order was made. It was submitted that were this Court to find that Kitlynx was not a creditor of County at the date of the winding-up or at all under the building contract dated 12 October 1995 that would necessarily mean that Kitlynx had no standing to obtain the winding-up of County by the Supreme Court and that the winding-up summons should have been dismissed. It is submitted that the Court’s decision in these proceedings and the Court’s decision in the winding-up proceedings would or might be mutually contradictory and it would be an abuse of process to allow County to dispute either that it was liable to Kitlynx in contract or that County was insolvent (at least in November 1998).

25 If I understood the submissions correctly it was that Mr and Mrs Hart were relevantly privies to County in November 1998 and Mr Silvia was relevantly privy to Kitlynx and accordingly there is a res judicata estoppel or at the very least an issue estoppel. Mr Cotman does not submit that a shareholder or director of a company is relevantly bound by final judgments binding the company. He submits, however, that where, as in the present case, the company is in every sense the alter ego of the shareholder/director the relevant privity arises and the shareholder/director will be bound by the finding against the company.

26 The scope and operation of issue estoppel was discussed by Dixon CJ in Blair & Anor v Curran (1939) 62 CLR 464 in which his Honour said:

“A judicial determination directly involving an issue of fact or law disposes once for all of the issue, so that it cannot afterwards be raised between the same parties or their privies. The estoppel covers only those matters which the prior judgment, decree or order necessarily established as the legal foundation or justification of its conclusion …. Nothing but what is legally indispensable to the conclusion is thus finally closed or precluded.”

27 The plaintiffs also submit that Mr and Mrs Hart had the opportunity in the winding-up proceedings to contest the status of Kitlynx as a creditor of County but chose not to do so and therefore should not be permitted to do so in these proceedings.

28 I leave to one side problems associated with the privity submissions. For example Mrs Hart was not a director of County at the time of winding-up and Mr Silvia, in my opinion, cannot be said to be relevantly a privy to Kitlynx because in these proceedings he is the liquidator of County and County was the opponent of Kitlynx in the winding-up.

29 However that may be I do not think County is precluded from disputing Kitlynx’s debt either by operation of res judicata, issue estoppel, the application of Anshun or that it would be an abuse of process to allow them to do so.

30 Kitlynx had the standing to seek a winding-up order if the notice of demand which it served was ignored, as it was. But that, in my opinion, does not result conclusively in a determination that Kitlynx was owed $404,536. (As will be seen, in fact, unless Kitlynx is entitled to rely on some form of estoppel the plaintiffs do not dispute that it could not hold County liable in liquidated damages which formed part of the $404,536 sum claimed).

31 In my opinion the winding-up order decided that on the relevant date in November 1998 when the winding-up order was made statutory preconditions had been established for the application of the presumption of insolvency. That presumption arose because a statutory demand had been issued and was not satisfied. The Court did not have to decide, and in fact did not decide, that County was actually indebted to Kitlynx much less that it was indebted to it for a particular amount. In the winding-up Kitlynx would have to have proved its debt to the liquidator and the liquidator would have had to determine whether or not that debt was due and payable. After all the liquidator would be responsible for getting in the assets of the company being wound-up for the purpose of distributing money to bona fide creditors.

32 The effect of s 459C(2)(a) of the Law is that the Court must presume the company is insolvent if, during or after three months ending on the day when the application was made, the company failed to comply with the statutory demand. It would also follow in my opinion that there is no estoppel preventing Mr and Mrs Hart denying Kitlynx was a creditor for no less than $2000 as has been alleged in the statement of claim or precluding them from denying the debt from County to Kitlynx was in an amount of $404,536.

33 Accordingly I reject the submission of the plaintiffs that the winding-up order precluded Mr and Mrs Hart from contesting the liability of County to Kitlynx or the solvency of County in May and June 1997 or for that matter in November 1998 finding, as I do, that the most that was established in the winding-up proceedings in November 1998 and which could not be relitigated was the presumption that County at that time was presumed to be insolvent.

34 I should mention that the estoppel or preclusion alleged to arise from the application of Anshun or Reichel was not pleaded. Nevertheless I have allowed the submissions to be raised by the plaintiffs and I reject them. My reasons for doing so will be seen when I deal with the conduct of Mr Williamson and the dealings Kitlynx had with County Project which included, inter alia, steps taken by Kitlynx to enforce what it claimed to be the contractual liability of County Project for failure to complete the Manly and Cromer projects as it was bound to do under the contract.

35 I would also add that even if Mr and Mrs Hart were precluded from denying County’s contractual indebtedness to Kitlynx they would not be estopped or precluded, on any view of the matter, from asserting the “good faith” defence given to them by s 558FG(2) of the Law. That section precludes the court from making an order under s 588FF if it is proved that the transaction was entered into in good faith at a time when the person having the benefit of the transactions had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent and that a reasonable person in their circumstances would have had no such grounds for so suspecting.

36 But having rejected the plaintiffs' claim that Mr and Mrs Hart were estopped or precluded from denying contractual liability and insolvency I now turn to the question whether the contract dated 12 October 1995 was entered into pursuant to the authority, actual or ostensible of Mr Williamson and if it were not whether it was ratified in November 1995.

Mr Williamson’s Authority

37 From July 1995 to the end of September 1995 Mr Williamson was a consultant retained to look for business for County. After September 1995 he resolved that County would no longer undertake work other than in pursuit of its own developments.

38 Neither party called Mr Williamson and no inferences adverse to either party can be drawn by his absence. On the information before me he was not an honest man and he deceived Mr Hart and Mr Ashe who was at the relevant times, the consultant retained by Kitlynx.

39 On 9 October 1995 a deed was drawn up purporting to be between County Constructions Pty Ltd, County Group Constructions Pty Ltd (referred to in the deed as a company not then in existence), Mr Williamson and Mr James. It was signed by County Constructions, Mr Williamson and Mr James. County Group Constructions Pty Ltd was intended to become Mr Williamson’s company. (It was not incorporated because, apparently, the name was not accepted. However County Project was incorporated late in 1995 and it became Mr Williamson’s company).

40 The meaning of the deed is somewhat obscure. On one view it purported to be an arrangement between Mr Hart on behalf of County, Mr Williamson on behalf of a company that was to be formed and Mr James (the holder of a builder’s licence) that in consideration of $30,000 Mr Williamson’s company would take over certain work and equipment of County.

41 On 9 October 1995 County had its offices at 56 Berry North Sydney. After the deed was signed the office was taken over by Mr Williamson. The deed described the business that was to be taken over by Mr Williamson’s company as follows:

“All assets, work in hand, office premises and associated items from County Constructions Pty Ltd .… that are on the attached “Office Inventory List, Work in Progress List and Work to be Commenced List”.


The lists attached to the deed under “OFFICE INVENTORY LIST” included office furniture, printers, bookcases, office partitions etc.

Under “WORK IN PROGRESS LIST” were nominated four projects, one at Warringah Council, another at Mona Vale and the two the subject of the present litigation being the dual-occupancy at Cromer and the dual-occupancy at North Manly.

The “WORK TO BE COMMENCED LIST” included five projects which do not appear to have any bearing on the issues for resolution in this litigation.

42 I have already referred to the contract dated 12 October 1995 signed by Mr Williamson purporting to be on behalf of County. The contract was not under the seal of County. Mr Hart has denied Mr Williamson’s authority to enter into the contract and denied that County held him out as having the authority to do so. As I have previously mentioned it is also alleged by the plaintiffs that if Mr Williamson had no authority, actual or ostensible, County, through Mr Hart ratified the contract in November 1995 – and that ratification is evidenced by a document, so it is claimed, allegedly initialled by Mr Hart in November 1995 and forwarded to Kitlynx.

43 As will be seen the November 1995 document came into existence because in April 1996 Mr Ashe on behalf of Kitlynx was concerned to know whether Kitlynx’s contract was with County or County Project. I have concluded that Mr Williamson concocted the November 1995 document and I accept Mr Hart’s evidence that although he recognised what appeared to be his initials he had not initialled the document. The three-page November 1995 document purported to be a copy of three pages of the 9 October 1995 deed. The signatures on what purported to be the copy are identical to those appearing on the October 1995 deed both as to actual signatures themselves and their position on the pages. Although Mr Williamson was giving effect to what he believed should have been the case the document was fraudulently created by him. I accept Mr Hart’s evidence that he never initialled that document or that he had any conversation with Mr Williamson concerning ratification of anything Mr Williamson had previously done.

44 As will be seen it is not necessary for me to deal with the question of ratification because I have concluded, on the balance of probabilities, that Mr Williamson was, on 12 October 1995 authorised to enter into a contract on behalf of County with Kitlynx. However Mr Hart’s denial that he signed the November 1995 three-page document was said to be relevant to his honesty and credit-worthiness. It was said to be relevant, inter alia, to whether he acted reasonably and in good faith in May and June of 1997. Mr Hart was repeatedly accused of dishonesty and lack of credit-worthiness. I record I find him to be an honest man. The circumstances that he may not remember receiving certain documents which point to the possible liability of County to Kitlynx and his belief that Kitlynx had no contractual arrangement with County derive from a bona fide view by him that that is what should have happened.

45 On behalf of Mr and Mrs Hart Mr Robb has asked me to accept Mr Hart’s evidence that Mr Williamson was never authorised to enter into the contract on behalf of County and that the document forwarded to Kitlynx in April 1996 did not support the plaintiffs’ case for ratification because the document was (as I find to be correct) a forgery.

46 Mr Robb has submitted that it would be highly unlikely that Mr Hart would have authorised Mr Williamson unilaterally to enter building contracts on County’s behalf which would have bound County, sight unseen, in circumstances where County could have no grounds for being confident that the proprietors would later consent to contracts being transferred to Mr Williamson’s company and that although under the heading “Works in Progress List” the two dual-occupancies at Cromer and North Manly it appears in fact neither could be described as “Works in Progress” because neither had been commenced as at 9 October 1995.

47 Mr Robb presented many pages of argument concerning the eleven-page deed of 9 October 1995 which he described, correctly in my opinion, as “garbled and confused”. He has submitted that I should be reluctant to treat the deed as authorising Mr Williamson unilaterally to enter into whatever contracts he wished in the name of County without County having any control over the contents of the arrangements.

48 Although recognising force in Mr Robb’s submissions I have come to the conclusion that more probably than not Mr Hart did authorise Mr Williamson to enter into the agreement of 12 October 1995. I have not overlooked Mr Robb’s submission that no evidence was produced that in the building industry it was common practice for building contracts to be entered into under the signatures of paid employees or retained consultants and that the document dated 12 October 1995 was not executed under the seal of County. However the reasons why I have reached the conclusion I have viz that more probably than not Mr Hart did authorise Mr Williamson to enter into the contract are as follows. The document signed on 9 October 1995 referred in terms to the Cromer and Manly projects. It is true that they were incorrectly referred to as “Works in Progress” in the list annexed to the deed and that statement, on any view of the matter, could not have been correct. However Mr Williamson up until October was authorised to seek work for County and it was part of County’s business until Mr Hart put an end to it in September 1995 to enter into building contracts. The contract was in fact entered into on 12 October 1995. That is three days after the deed was signed. This suggests to my mind that sometime before the 9 October Mr Hart and Mr Williamson, who were on Mr Hart’s version of events on good terms at that stage, were aware, that County would secure the Kitlynx contract. They both understood that County Project could not enter into a contract with Kitlynx because not only was the company not incorporated but it did not have a building license.

49 By December 1995 Mr Hart and Mr Williamson had fallen out for the reason, inter alia, that Mr Hart was not paid the $30,000 referred to in 9 October 1995 deed. Mr Hart was angry with Mr Williamson because in January and February 1996 Mr Williamson was entering into negotiations (or had entered into negotiations) purporting to bind County when he had no authority to do so. It caused Mr Hart considerable inconvenience and expense in untangling, as he mostly did, the adverse consequences to him of Mr Williamson’s conduct.

50 In February 1996 and after receiving legal advice Mr Hart forwarded a document to Mr Williamson in an endeavour to settle the disputes between the parties. The document was prepared on legal advice and it required Mr Williamson “to undertake and properly complete the building work at Cromer and Manly.” It was not signed by Mr Williamson but Mr Cotman has submitted that the presentation of the document amounts to a clear admission that County believed it had a contractual obligation itself with respect to the Cromer and Manly projects. I think there is force in this submission.

51 I have not overlooked Mr Robb’s submission that it would be highly unlikely that Mr Hart would have authorised Mr Williamson unilaterally to commit County to projects sight unseen. However my finding does not lead to a conclusion that Mr Williamson had the authority to bind County in the future in whichever way he wished. My finding derives essentially from the fact that the Cromer and Manly projects were referred to in the 9 October 1995 deed.

52 It has also been submitted by Mr Cotman that I should regard the circumstance that in the course of Mr Hart disengaging from projects or arrangements entered into by Mr Williamson without authority and purporting to bind County in January and February 1996 no reference is made to the Kitlynx contract. I do not attach a great deal of significance to this because at the time Kitlynx had made no claim on County (at least no claim that County had received) and, as I have said Mr Hart (erroneously but honestly) believed that County was not undertaking any work for Kitlynx. As I have said before his firm belief stated many years after the event that County had not authorised Mr Williamson to enter into the contract derived, I think, from the circumstance that he never believed his company was going to be doing any work for Kitlynx and in fact it never did. I think this has led him to interpret past events as he has but I do not think the findings I have made should be viewed as impugning his integrity or honesty.

53 Mr Cotman has also submitted that I should have regard to the circumstance that Mr Hart had denied receiving many communications from various persons (or at least maintaining he had no recollection of receiving them) in circumstances where the probabilities would dictate that he must have received some. For example it would seem to me more probable than not that he did receive a document dated 25 July 1996 which was addressed to both County and County Project and which purported to determine the contract of 12 October 1995. That contract was sent by Mr Ebner, Kitlynx’s solicitor not only to Berry Street North Sydney but also to 2 Marshall Avenue St Leonards which was Mr Hart’s home. Mr Hart, as I have said, said he has no recollection of receiving the document but I think I am bound to conclude on the probabilities he did.

54 But what I wish to make clear is that my reconstruction of events persuades me on the balance of probabilities that Mr Hart did authorise Mr Williamson to enter into a contract with Kitlynx but in the firm belief that the contract would be taken over by Mr Williamson’s company (County Project) and that County would not be doing any work on the Cromer and Manly projects and, of course, would not be receiving any monies from Kitlynx. His lack of recollection concerning the receipt and content of certain documents implying a recognition of some potential liability at least does not cause me to doubt his honesty or integrity.

55 I do not share the view that judges in some way possess mystical powers as to whether people are honest or not when giving evidence in the witness box. However an assessment of credit-worthiness and honesty is often made, as I have made in this case, in the context of the whole of the proceedings including the demeanour of witnesses and the atmosphere in the Court. I record that when I first saw the document dated November 1995 and which was said to be initialled by Mr Hart I wondered how it was that he could claim he never initialled the document and that he had had no discussions with Mr Williamson concerning its preparation. Later I was satisfied that Mr Williamson had indeed concocted the document and had fraudulently super-imposed initials from the 9 October 1995 onto to the November 1995 document. As will be seen Mr Williamson by a fraudulent means was endeavouring to give effect to what he wished to achieve namely that Kitlynx was in contractual relations with County Project.

56 As will be seen I have concluded that there was a novation in this case and that the contract entered into between County on the one hand and Kitlynx on the other became, with the agreement of all parties, a contract between County Project and Kitlynx. Conformably with the view I have formed concerning Mr Williamson’s relationship with County I have concluded that he in fact had authority of behalf of County to enter into a novation agreement. My reasons for this conclusion require me to set out the events from 1995 through to November 1998.

Summary of Events from 1995 to November 1998.

57 As I have said it was submitted, on behalf of County, that if it were established that County had entered into a contract with Kitlynx for the construction of the Cromer and Manly projects there was relevantly a novation and that the contract between County and Kitlynx became a contract between County Project and Kitlynx. That is to say I have come to the conclusion that as a result of an agreement by all relevant parties viz Kitlynx, County and County Project it was agreed that County Project would take the place of County to undertake the contractual work referred to in the contract of 12 October 1995. On my appreciation of events at the relevant time I am of the opinion that Mr Hart authorised Mr Williamson to enter into the contract and did so in the belief that as soon as Mr Williamson’s company was incorporated it would relevantly “take over” the contract and hence Mr Williamson was authorised to effect that result which, as I find, he did. It has also been submitted that even if novation were not established Kitlynx by pursuing its damages claim against County Project was precluded from pursuing the same claim against County by operation of the doctrine of election.

58 County Project was incorporated in December 1995. Mr Hart was nominated as secretary and County was allocated 35,000 ordinary shares for the purpose, I surmise, of securing Mr Hart’s entitlement to $30,000 referred to in the agreement of 9 October 1995. Mr Hart was never paid the $30,000 and he and Mr Williamson appear to have been at arm’s length since that date.

59 The first progress claim under the contract was submitted on 29 November 1995 on County’s letterhead to Kitlynx. Mr Williamson had access to County’s letterheads at Berry Street North Sydney. The second progress claim was made on 18 December 1995 and again on County’s letterhead. Both progress claims were paid by Kitlynx. The money was received by Mr Williamson and, as I would surmise, banked either to Mr Williamson’s account or County Project’s account because by that time County Project was incorporated.

60 On 1 February 1995 a progress claim was presented to Mr Ashe, the claimant being for the first time County Project. It was approved and paid by Mr Ashe on 22 February. Thereafter all claims with respect to the two properties were sent by Mr Williamson to Mr Ashe using County Project’s letterhead and progress claims were paid to County Project by Kitlynx.

61 In early April 1996 Mr Ashe wrote to Mr and Mrs Hart pointing out that Kitlynx had a contract with County but recent invoices had been received from County Project. He sought confirmation that it was “in order” to pay County Project. The letter was sent to Mr Hart ‘s residential address. He has said he has no recollection of receiving it and it would appear Mr Ashe received no reply.

62 On 18 April 1996 Mr Ashe wrote to County Project raising the same issue and on 22 April 1996 he told County Project that he was not progressing any claims unless he was satisfied that County Project was entitled to receive the money. It was because of Mr Ashe’s insistence that he needed protection should he pay the money to County Project that caused, as I find, Mr Williamson to forward to him what he claimed to be an excerpt of part of the 9 October 1995 agreement but which was, as I have said, a forgery.

63 In the deed of 9 October 1995 the relevant parties were expressed to be County Group Construction Pty Ltd and County. The deed further provided, in effect, that County Project Construction Pty Ltd (as County Group Construction Pty Ltd became) would, in effect, take over, inter alia, work in progress from County. Mr Williamson substituted for County Group Construction Pty Ltd his own entity which was County Project, and, as I said, fraudulently represented that this was the agreement originally entered into. As I have said Mr Williamson has not given evidence. I would surmise more probably than not that Mr Williamson was endeavouring by dishonest means, to assert what he believed to be true (and what Mr Hart believed to be true) namely that the Kitlynx contract should be a contract between County Project and Kitlynx and not County and Kitlynx.

64 On 1 May 1996 Tesorero Qwan on behalf of County Project wrote to Mr Ebner the solicitor for Kitlynx in which he said:

“We refer to our conversation of 30 April 1996 and confirm County Project Constructions Pty Ltd purchased the business of County Constructions Ltd pursuant to an agreement of 9 October 1995. Included in this purchase was the contract in relation to the Cromer property of your client, Ashe. It is therefore in order for you to pay County Project Constructions Pty Ltd in lieu of County Constructions Ltd”.

65 Thereafter Kitlynx continued to deal with County Project. It paid progress claims submitted by County Project.

66 County Project was behind in the completion of the work and on 3 May 1996 Kitlynx caused a notice pursuant to clause 12.2 of the contract to be served on both County Project and County warning that if the builder failed to proceed regularly and diligently it would determine the contract. The notice was sent to Berry Street North Sydney by Mr Ebner the solicitor for Kitlynx.

67 On 25 July Kitlynx purported to determine the contract. The notice of determination named both County Project and County and the copy of it was sent to Mr Hart’s residential address by certified mail and to County Project by courier. Mr Hart says he has no recollection of receiving this notice. I think, however, on the probabilities he received it. However other than purporting to determine the contract the notice said: “And further take notice that the proprietor will hereafter exercise such rights and remedies as it may have under the Contract as it may be advised.” Thereafter no claim of any kind was made on Count until 1998.

68 Meanwhile on 16 May 1996 Kitlynx wrote to County at 56 Berry Street North Sydney. Mr Hart had no recollection of seeing this letter and on balance I think he probably did not see it because it was sent to the Berry Street address which he rarely went to at that time. The letter said:

“We confirm the agreement reached on 14 May between Richard Williamson on behalf of County Project Construction Ltd and Mr Ashe on behalf of Kitlynx that if County Project Construction does not bring the building works at 5 Dennison Avenue Cromer to a stage of practical completion within eight weeks of 14 May 1996 ie by 9 July 1996 then County Project Constructions Pty Ltd must pay Kitlynx Pty Ltd $1200 per week as liquidated and ascertained damages until the said building work has reached a stage of practical completion. It is agreed that practical completion would be reached when the Warringah Council issues an occupation certificate in relation to the property.
The above would be a variation to the building contract between Kitlynx Pty Ltd and County Project Constructions Ltd No S79587 dated 12 October 1995 ….”.

69 After determining the contract Kitlynx dealt solely with County Project. It retained a company, Award Project Management Pty Ltd, Building Consultants to assist in the completion of the Cromer and North Manly developments. On Kitlynx’s behalf it lodged a complaint to the Department of Fair Trading on 10 August 1996 claiming that County Project had failed to honour its contractual obligations with Kitlynx and it made a claim for compensation. On 16 August 1996 Award wrote to the administrator of County Project holding it responsible for the cost of completing the North Manly and Cromer projects.

70 On 16 August 1996 the administrator of County Project Mr Brien reported on the affairs of County Project. He referred to the Cromer and Manly projects and to the fact that Kitlynx had made a claim against County Project. He reported:

“Initial contracts were taken in the name of County Constructions Pty Ltd until approximately December 1995 and it was not until late December that the company acquired a building licence with Mr Gregory James being the builder supervisor.”

71 It is reasonable to infer that Mr Brien got this information from Kitlynx. Mr Hart received a copy of Mr Brien’s report because he had made a claim for $30,000 which he said was owed to him by County Project pursuant to 9 October 1995 agreement.

72 On 23 August 1996 County Project was wound up. Kitlynx lodged a proof of debt for $248,186 which it said was due to it by reason of the failure of County Project to complete the North Manly and Cromer projects in accordance with its contractual obligations.

73 On 30 May 1997 the liquidator distributed a report. It annexed a list of creditors of County Project. These included an amount claimed by Kitlynx to be due to it in the sum of $248,186 and a debt owing to Mr Hart in the sum of $30,000. This letter is of singular relevance in these proceedings because accepting as I do that more probably than not Mr Hart received it its contents reflected what he believed to be the fact, that is that County Project was responsible to Kitlynx for work on the Manly and Cromer projects.

74 I have already referred to the fact that after April 1996 and until the end of 1998 no claim was made by Kitlynx against County with respect to the Cromer and Manly development projects other than the letter in May 1996 and the notice of determination on 25 July 1996.

75 Mr Scheinberg gave evidence on behalf of Kitlynx concerning his understanding of the events. He said he never believed his company had entered into a contract with County Project and that in so far as his mind was directed towards the status of County Project he thought perhaps County Project was a sub-contractor. I do not accept this evidence. It is inconsistent with the documentary evidence to which I have referred, it is inconsistent with the claim County Project made to the Builder’s Licensing Board and it is inconsistent with the claim it made against County Project when it went into liquidation. I have no doubt that Kitlynx believed that from April 1996 its contract for the Manly and Cromer projects was with County Project.

76 That is the only interpretation I can put on the letter of 16 May 1996 to which I have referred in which Mr Ashe on behalf of Kitlynx recorded that he had agreed with County Project to vary the building contract Kitlynx had with County Project by including a liquidated damages clause for delay of $1200 per week until the work had reached the stage of practical completion.

77 It has been submitted on behalf of Kitlynx that perhaps there were two contracts, one with County and one with County Project. It is, of course, possible for one person to enter into two contracts each intended to secure the performance of an obligation which might be thought to be for all practical purposes identical. For example a contract by A with B for the repayment of money lent and a contract by A with C guaranteeing the performance of B’s obligation.

78 However in the present case I do not think that Kitlynx considered itself to be contractually bound to County as well as to County Project. Other than the notices referred to above nothing was said or done by Kitlynx to suggest it was holding County responsible for the completion of the Manly and Cromer projects. I have already referred to the fact that although the notice of determination was served on both County and County Project no claim or demand was made on County until 1998. It made no claim on County until 1998 after unsuccessfully attempting to recover damages from County Project and compensation from the Building Licensing Board on account of County Project’s breach of contract. Mr Scheinberg is an experienced builder. He would know ordinarily that cheques were not made payable by the owner to the builder’s sub-contractors particularly where, as in the present case, no sub-contracting invoice had been presented to Kitlynx for payment. Mr Ashe brought things to a head in April 1996. I have reached the conclusion that in or about that time the contract between Kitlynx and County became, with the agreement of Kitlynx, County and County Project a contract for the carrying out of the relevant development work by County Project. County’s original contract with Kitlynx was extinguished and replaced by a contract between County Project and Kitlynx.

79 This conclusion ends the case for the plaintiffs.

80 Mr Robb has submitted that should I not determine in his favour the case for novation I should find that Kitlynx by continuing to deal with County Project and, in particular, agreeing with County Project to vary the original contract by altering the liquidated damages clause had elected to pursue any remedy it might have with County Project with the consequence that it thereupon, in law, forfeited an entitlement to pursue any claim against County under the contract. I need not determine this matter but it would seem to me that if there were no novation and if the contract remained between Kitlynx and County I do not think that Kitlynx was precluded from pursuing County merely because it had made the same claim against County Project (although, of course, double compensation would be denied). The cases I have been referred to in support of County’s submission appear mostly to be directed to the equitable rule that a person may not take against a will of the testator and also under it. Or cases where it has been held that a person cannot “blow hot and cold” where a person has inconsistent rights under a contract and he exercises one and he is thereafter precluded from exercising the other because it would be unfair to allow him to do so. In the present case, and on the assumptions required to be made, the submissions put in the context of two contracts are complicated by the circumstance that although both are directed to the same work the terms are different – as I have mentioned in one, there is no liquidated damages for delay and in the other, by variation, there was liquidated damages for delay. But in the light of the conclusions I have reached it is unnecessary for me to deal with this matter.

Was County Insolvent in May and June 1997

81 Aside from the primary submission that Mr and Mrs Hart are precluded, by operation of the law, from disputing the debt claimed by Kitlynx against County and the insolvency of County the plaintiffs have submitted that County was, in fact, insolvent in the relevant period viz the end of 1997 at a time when nine payments were made to Mr and Mrs Hart as repayment of loans by them to the company which were claimed to be preferential payments.

82 County acquired Carawa Street in December 1995. Pursuant to development consent granted it erected four units on the site. Between May and June 1997 they were all sold. During that time Mr and Mrs Hart were repaid monies which they believed were owing to them by County. The proceeds of sale of the units were used to discharge a liability to the National Australia Bank and which resulted in the discharge of NAB’s mortgage. The balance, in effect, after the builder’s and other expenses met was distributed to Mr and Mrs Hart.

83 On behalf of the plaintiffs it is submitted that County was insolvent at the time it made payments to Mr and Mrs Hart in May to June 1997. It also submits that because it has established that County failed to keep proper financial records fulfilling the requirements of s 286 of the Law it must be presumed to be insolvent for the relevant period.

84 The authorities to which I have referred make it clear that the test for insolvency requires the Court to determine the matter on the basis of commercial reality in the light of all known circumstances and that the answer is not necessarily determined by simply looking at financial statements as the plaintiffs would have me do in this case.

85 In the present case, as at May-June 1997 no claim had been made on County for damages much less a specific amount. The high-water mark of the plaintiffs’ case appears to be the letter of threat and notice of determination in May and July 1996. But as I have said after 1996 and until about July 1998 no claim was made against County for breach of contract with respect to the Manly and Cromer projects.

86 If County was liable to Kitlynx in the amount claimed it was relevantly insolvent when it made some of the payments to Mr and Mrs Hart in May and June 1997. However if no monies were owing to Kitlynx then, in my opinion, it has not been established that County was insolvent during that period. An attempt has been made by the liquidator to establish insolvency because on one date in May 1997 it appeared there was a deficiency of assets over liabilities on a notional balance sheet. However, in my opinion, this is a wholly artificial way of viewing the financial standing of County during the relevant period. For example, it is said that the assets included the book value of the Carawa Road development at $530,000. In fact County had executed sales contracts for three of the four townhouses for a total purchase price of a little over $900,000. As will be seen if Count had a liability to Kitlynx it would not be in the sum of $404,536 but something in the order of a little under $200,000. First because, as has been conceded by the plaintiffs, Kitlynx was not entitled, as against County to claim damages for delay that being $135,333 parcel of the amount of $404,536 claimed, secondly the claim included consulting costs $82,643 and the evidence has revealed that a little under half that amount was calculated by reference to some oral agreement between Mr Ashe and Mr Scheinberg and I am not satisfied that the amount was reasonably incurred.

87 I should also record that I do not accept the plaintiffs’ submission that assuming the contract between County and Kitlynx I should conclude that the statutory demand issued by Kitlynx on County on 31 July 1998 was relevantly a certificate of debt due by County to Kitlynx under clause 12.6 of the building contract. The statutory demand on 30 July 1998 was the forerunner to the winding-up of Kitlynx. The submission as I apprehend is that by operation of clause 12.6 the certificate is conclusive of the existence of the debt.

88 Clause 12.6 of the contract relevantly provides:

“As soon as practicable after the completion of the works the Architect shall ascertain and certify the costs properly incurred by the Proprietor under this clause, and in any other expense and/or loss caused to the Proprietor by the determination of any other liability of the Builder to the Proprietor under this Agreement. Should the total of such amounts and any amounts already paid to the Builder result in a total amount in excess of or less than that which would have been otherwise payable under this Agreement, then the difference shall be a debt payable by the Builder to the Proprietor or the Proprietor to the Builder as the case may be”.

89 In 12 October 1995 contract the parties substituted for the word Architect the word “Proprietor”. A prerequisite to the operation of clause 12.6 is that the certification should be made “as soon as practicable after the completion of the works”. The Manly development was completed in December 1996 and the Cromer development in July 1997. The statutory demand was made in July 1998. Accordingly I reject the plaintiffs’ submission. I should also observe that the evidence appears to disclose no more than that the statutory demand was prepared by Mr Scheinberg and his accountants and there is no evidence of any genuine attempt to fairly and independently determine the liability of County to Kitlynx assuming as I am asked to do that the parties were in a contractual relationship at the time. For example, the statutory demand included the sum of $135,333 for delay which, as I have mentioned earlier, is conceded by the plaintiffs not claimable against County.

90 An objective assessment in the light of all the circumstances leads me to the conclusion that as at May and June 1997 County was not insolvent in fact. Nothing had happened between July 1996 and May and June 1997 that would lead a reasonable person in the position of Mr Hart to conclude otherwise than that there was by that time no likelihood that County would be liable to Kitlynx particularly as County knew Kitlynx was making a claim for breach of contract against County Project.

91 In its amended statement of claim the plaintiffs alleged that County should be presumed to be insolvent because it contravenes requirements of the Law because it failed to keep accounting records correctly recording and explaining its transactions during the relevant period. It should be noted that by operation of s 588 E(5) the presumption does not apply if a contravention of s 289 (1) is minor or technical and that, in any event, the presumption is rebuttable (s 588 E(9)). Although a claim is made that inadequate records were kept for the years ending June 1998 and June 1999 submissions can be disposed of, in my opinion, by recording that by 30 June 1997 County had ceased to engage in any business activities at all and had closed its bank account on 25 June 1997.

92 I have already referred to the fact that County’s activities for the year ending June 1997 involved the development of the Carawa Street project. The principal construction work was undertaken by Metro Constructions which received its last payment on 6 May 1997.

93 County had its financial statements prepared by it accountants, it kept all relevant bank statements and records of its activities which included a running month-by-month record of expenditure, copies of invoices and progress claims and the like.

94 The plaintiffs have alleged that County’s failure was that it did not record or explain certain transactions but that appeared to have been all but abandoned. Its case then became that although the transactions were recorded they were recorded in total leaving the reader unable to understand what the particulars were.

95 In Mr Silvia’s first report he thought that although the accounting methods may not have been conventional they managed “in a round-about fashion” to ultimately reflect all the transactions which occurred ….. “subject to issues of transaction verification”. Mr Silvia was concerned that there was an amount of $57,000 later in cross-examination that was reduced to $37,000 and Mr Hart explained that it related to a reimbursement of miscellaneous expenditure made by him on the Cromer project. Mr Hart was not cross-examined about this and I do not accept the submission that that may have attracted a tax liability.

96 In order to assess the adequacy of books and records of the company it is necessary to have regard to the particular circumstances of that company. And these include, in the present case, that County’s accounts were written up at the end of the financial year by a competent accountant.

97 Accordingly I have come to the conclusion that the plaintiffs have not made out their case that the records were inadequate. It would also seem to me that on any view of the matter and even if I be wrong in my assessment concerning Mr Hart’s explanation as to $37,000 (and which I repeat was not the subject of cross-examination) the deficiency would not ordinarily be described as other than “minor or technical”.

98 Accordingly I have come to the conclusion that it has not been established that County was insolvent, as that expression must relevantly be understood, in May and June 1997 when Mr and Mrs Hart received the payments which are claimed by the plaintiffs to be preferential payments.

Quantum of Kitlynx’s Claim

99 I have dealt with this briefly above. I am prepared to assume that Kitlynx is able to make a claim against County in a sum a little under $200,000. It is not entitled to liquidated damages for delay and, as I have said, a somewhat arbitrary assessment appears to have been made in an amount of a little over $40,000 with respect to consulting costs.

The Financing of Carawa Street Project

100 In their claim for relief the plaintiffs alleged that Mr and Mrs Hart should pay the liquidator $1,111,149.30 being unfair preferences. In the light of my earlier conclusions and the conclusion which I am about to come to viz that I think Mr and Mrs Hart have made good their defence under s 588 FG (2) of the Law it is unnecessary for me to deal with this, but it is appropriate I think for me to express my view concerning it.

101 As I have mentioned at the outset the parties are in dispute concerning the nature and the effect of the financing transaction for the completion of the Carawa Street project. On behalf of the plaintiffs I am asked to find that the monies for the development of the Carawa Street project came from Mr and Mrs Hart and that they borrowed all the money from the NAB and on-lent it to County with the consequence that County did not have a secured creditor.

102 Mr and Mrs Hart opened an account with NAB referred to as the NAB Flexiplus Account. Monies were drawn from this account to pay the progress claims of Metro Constructions. Mr and Mrs Hart maintain that even if they are unsuccessful in all other aspects of their defence they should not be required to repay to Mr Silvia the amount paid to NAB to discharge its mortgage over the subject land. Resolution of that question depends upon an appreciation of the transaction entered into involving Mr and Mrs Hart, County and the NAB. In form the transaction appeared to be that Mr and Mrs Hart borrowed money from NAB and then on-loaned it to County. Mr and Mrs Hart secured repayment by a mortgage over their matrimonial home and County gave a mortgage to NAB over the Cromer land. Moreover County granted a guarantee and indemnity in favour of NAB.

103 I am asked to conclude that although that may have been the form of the transaction the substance was to allow County to finance a development on Cromer land and that I should regard County as the principle debtor and a consequence of this would be that on that appreciation NAB would in equity be a secured debtor of County and to the extent that NAB’s loan was discharged it was a discharge of a secured creditor. I have been referred to a decision of Hodgson J in AGC (Advances) Ltd v West (1984) 5 NSWLR 590, at 602 to 604. If I had to resolve this matter I think I would probably resolve it by reference to its form because there is nothing in its form inconsistent with what Mr and Mrs Hart wished to do. County was their company. Mr Robb has submitted that “the whole purpose of the transaction was to allow County to finance development on its Cromer land”. However it might also be said that the whole purpose of the transaction was to allow Mr and Mrs Hart, who owned County, to finance the subject development. Accordingly I would not depart from the form of the transaction although, as I have said, the question is academic because I have come to the conclusion that County had no contractual obligation to Kitlynx and that if it did it has not been established that it May and June 1997 County was insolvent at the time it repaid Mr and Mrs Hart the monies it owed them.

The Defence

104 Section 588 FG(2) of the Corporations Law provides:

“A court is not to make an order under s 588 FF an order materially prejudicing a right or interest of a person if …. It is provided 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 the time or would become insolvent as mentioned in par 588 FC(b) and
(ii) a reasonable person in the person’s circumstances would have had no such grounds of so suspecting; and
(iii) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.”

105 It is not disputed, I think, that Mr and Mrs Hart provided valuable consideration. The question is did Mr and Mrs Hart or either of them act in good faith in circumstances where they did not suspect and had no reasonable grounds for suspecting that County was insolvent at the time or would become insolvent.

106 I accept Mr Cotman’s characterisation of the conduct of Mr Hart in May and June 1997 to the effect that he affected what was referred to as a “de facto liquidation” because all the units were sold and all debts paid. Mr Hart was cross-examined concerning his good faith at the time debts were paid and I accept his evidence that he was unaware of any liability County may have had to Kitlynx. Mr Hart made it quite clear that so far as he was concerned (and I think he can be taken to be speaking on behalf of Mrs Hart) that had they become aware of any debts owing by County to any other creditor they would have paid those debts before seeking a repayment of loans made by them to County. I accept Mr Hart’s evidence that he believed that County had no contract with Kitlynx to undertake work at Cromer and Manly. I have referred to the circumstance that on balance I find he probably authorised Mr Williamson to enter into the 12 October 1995 contract but in circumstances where he believed that the contract would be taken over by Mr Williamson’s own company.

107 As I have said I think it is probable that he received the notifications of the threat and the determination of the contract in May and July 1996. But thereafter on any view of the matter no claim was made against County. The question I have to answer is were the payments made by County to Mr and Mrs Hart in good faith (as I think they were) and that, has Mr Hart established that he had no reasonable grounds for suspecting that the company was insolvent at the time or would become insolvent and whether a reasonable person in Mr Hart’s circumstances would have had no such grounds for so suspecting. Thus there is a subjective and an objective test directed to no reasonable grounds for suspecting insolvency.

108 Mr Cotman on behalf of the plaintiffs has submitted that legal wisdom should dictate that what he describes as a “de facto liquidation” is always fraught with difficulty because it might later turn out that the company was in fact insolvent when it appeared that it was not insolvent. I accept the submission concerning the risks inherent in what are described as “de facto liquidations”. However the relevant section does not call for an attribution of legal wisdom. What it requires in the present case is that Mr and Mrs Hart, claiming the benefit of the defendant have demonstrated they acted in good faith (as I have found they did) and at the time they entered into the relevant transactions they had no reasonable grounds for suspecting that County was insolvent or would become insolvent and that a reasonable person in their circumstances would have no reasonable grounds for so suspecting.

109 Mr Hart knew, and a reasonable person in his position would have known, that County had undertaken no work on behalf of Kitlynx and had received no money from Kitlynx. Mr Hart knew, and a reasonable person in his position would have known, that Kitlynx made no claim on County after 25 July 1996 and in fact vigorously pursued a claim for damages against County Project for the work the subject of the determination notice.

110 I have already referred to the report of the administrator of County Project of 16 August 1996 in which he referred to the circumstance that the contract appeared to be in the name of County until approximately December 1995 and that thereafter County Project acquired its own builder’s licence. But of more significance, is the report of Mr Brien when as liquidator he concluded in May 1997 that County Project owed Kitlynx $248,186. These reports were known to Mr and Mrs Hart because, as I have previously mentioned, Mr Hart or County was included as a creditor of County Project.

111 It was submitted on behalf of the plaintiffs that Mr Hart may have had no suspicions that any money was owing to Kitlynx but that was not a view that would have been held by a reasonable person. He relies on the notice of determination served in July almost one year earlier. As I have mentioned this notice did no more than reserving Kitlynx’s “rights”. No money claim was made and no “rights” were pursued until 1998. Accordingly I am of the opinion that the defence under s 588 FG (2) has been established.

112 My conclusions are as follows:

· That Mr and Mrs Hart are not estopped or otherwise precluded from maintaining that County had no contractual obligation to Kitlynx and they are not estopped or precluded from disputing the debt owing by County to Kitlynx assuming breach of contract is established.

· County and Kitlynx entered into a contract on 12 October 1995. However the contract between County and Kitlynx became by agreement of all relevant parties a contract between County Project and Kitlynx.

· As at May and June 1997 Kitlynx had no valid claim against County because at that time it was not a party to a contract with Kitlynx for the construction and completion of works at Manly and Cromer.

· In May and June 1997 County was not insolvent or presumed to be so.

· That if contrary to the conclusions set out above County was under a contractual liability to Kitlynx in an amount of $200,000 and by reason of that County was insolvent in May and June 1997 that Mr and Mrs Hart had established the defence open to them under s 588 FG(2) of the Law.

Accordingly I order that the claim of the plaintiffs is dismissed and the plaintiffs are to pay the defendants’ costs.


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Last Modified: 07/02/2004