Hamilton v O'Malley

[2004] NSWSC 615

CITATION:	Hamilton & Anor v O'Malley [2004] NSWSC 615
HEARING DATE(S):	29/06/04, 30/06/04, 01/07/04, 06/07/04
JUDGMENT DATE:	9 July 2004
JUDGMENT OF:	White J
DECISION:	Order that the Originating Process be dismissed. Order the plaintiffs' to pay the defendant's costs of the proceedings.
CATCHWORDS:	Corporations - Winding up - Voidable transactions - Alleged uncommercial transaction - Loan to brother or to brother's company - Proper characterisation of payment - Whether brother was the defendant's agent to receive repayment - No question of principle - s 588FG(2)(c) considered.
LEGISLATION CITED:	Corporations Act 2001 (Cth)
CASES CITED:	South Sydney District Rugby League Club Ltd v News Ltd (2000) 177 ALR 611 Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552 Garnac Grain Co. Inc v HMF Faure & Fairclough Ltd [1968] A.C. 1130 Tosich Construction Pty Ltd (In Liq) v Tosich (1997) 23 ACSR 466
PARTIES :	William James Hamilton & Another v Geraldine Dorothy O'Malley
FILE NUMBER(S):	SC 1481/03
COUNSEL:	Plaintiff: Mr J Ireland QC Defendant: Mr B Rayment QC, M Gollan
SOLICITORS:	Plaintiff: Baker & McKenzie Solicitors Defendant: M J Woods Lawyers

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WHITE J

Date

1481/03 WILLIAM JAMES HAMILTON v GERALDINE DOROTHY O’MALLEY

JUDGMENT

1 HIS HONOUR: In these proceedings the plaintiffs claim the recovery of $299,762.19 from the defendant. This was the amount which was debited to the second plaintiff’s account with its bank to procure a bank cheque of $299,756.19. On 7 September 2000 the second plaintiff provided that bank cheque for the defendant’s benefit. It was used by the defendant as part payment of the purchase price on a property which she purchased at 8/17-19 Prince Street, Cronulla.

2 The second plaintiff (“the company”) is in liquidation. The first plaintiff is its liquidator. The company was wound up by order made on 22 February 2002.

3 The plaintiff’s claim is made under ss 588FE(3) and 588FF(1) of the Corporations Act. The plaintiffs allege that the payment made on 7 September 2000 is voidable under those provisions as an insolvent and uncommercial transaction.

4 It is admitted that at the time the payment was made the company was insolvent.

5 The question therefore is whether the payment made for the defendant’s benefit on 7 September 2000 was an uncommercial transaction within the meaning of s 588FB. That section provides:

“ 588FB Uncommercial transactions
(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.
(2) A transaction may be an uncommercial transaction of a company because of subsection (1):
(a) whether or not a creditor of the company is a party to the transaction; and…”

6 If that question is answered in the plaintiff’s favour the defendant pleads a defence under s 588FG(2), which at relevant times provided as follows:

“ 588FG Transaction not voidable as against certain Persons
(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 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.”

7 At all relevant times the defendant’s brother, Mr Patrick O’Malley, was a director and shareholder of the company.

8 It is the defendant’s case that at the request of her brother she lent $400,000 to the company in October 1999 by making payments of $300,000 and $100,000 on his direction to a joint account in the name of Mr Patrick O’Malley and his wife. She says that the payment made on 7 September 2000 was by way of partial repayment of that loan.

9 The plaintiffs say that the defendant lent the money to her brother not to the company and the company had no business paying her $299,756.19 on 7 September 2000 when it was insolvent.

10 The plaintiffs’ case was elaborated on and refined during the hearing. As initially pleaded it was that:

(a) the defendant provided no consideration to the company for the payment;

(b) there was no agreement for loan between the company and the defendant;

(c) the company received no benefit for the payment;

(d) it suffered a detriment from the payment being the loss of cash of $299,762.19.

11 This allegation raised the principal issue in the proceedings of whether there was a contract of loan between the company and the defendant.

12 As a fall back position, the plaintiffs say that even if there had been a contract of loan between the company and the defendant, that loan was repaid on 23 March 2000. On that day the company drew a cheque signed by Mr Patrick O’Malley and another of its directors, Mr Steven Betts in the amount of $400,000. The cheque was drawn to PJ and LJ O’Malley or bearer. It was deposited into the joint account of PJ and LJ O’Malley (that is the defendant’s brother and his wife). The cheque butt, which was prepared by Mr Patrick O’Malley stated “Geraldine O’Malley Loan Repay”. The plaintiffs say that Mr and Mrs O’Malley received that payment as agent for the defendant. Hence the plaintiffs say that even if the original contract of loan was with the company, on 23 March 2000 that loan was repaid.

13 After 23 March 2000 there were further advances made from the joint account of Mr and Mrs O’Malley to the company. Those advances total $265,000. There were also other payments made from that account totalling $47,212 some at least of which, the defendant says, were for the company’s benefit. The plaintiffs’ case is that Mr O’Malley had no authority from his sister to make any further advances after the loan was repaid, by the $400,000 being deposited to the joint account. Accordingly the plaintiffs say that the subsequent advances to the company were made by Mr O’Malley, or by him and his wife, personally, and not as agent for the defendant. According to the plaintiffs the result is that when the payment was made to the defendant on 7 September 2000 the company was not indebted to her.

14 The difficulty in the way in which the case was originally pleaded by the plaintiffs is that even on their case $310,000 of the monies which the defendant advanced to Mr O’Malley were advanced by him to the company. If the company was not indebted to the defendant, it was indebted to Mr O’Malley, or to him and his wife, subject to any set-off the company might have against them. Even if the loan to the company was repaid on 23 March 2000, thereafter advances were made to the company and moneys were paid for its benefit so that the company became liable to Mr O’Malley, or to Mr O’Malley and his wife. Even on the plaintiffs’ case, the payment on 7 September 2000 to the defendant would operate to reduce or discharge the debt owed by the company to Mr O’Malley or to Mr and Mrs O’Malley. Therefore, on any view, it received a benefit from the payment. The detriment of loss of cash was counter-balanced by the benefit of the reduction of its liability.

15 After the case was opened, the plaintiffs sought and obtained leave to amend the statement of claim to allege that if the payment operated to reduce the company’s existing liability to Mr O’Malley, then such a payment was an uncommercial transaction because:

(a) it operated as a voidable, unfair preference given to him;

(b) he was not, as at 7 September 2000, and is not now, able to repay that preference;

(c) it deprived the company of cash which would otherwise be available to pay external creditors, in particular, a debt owed to the Australian Taxation Office for unremitted group tax; and

(d) accordingly a reasonable person in the company’s circumstances would not have entered into the transaction.

Movement of Moneys between the defendant, PJ and LJ O’Malley, and the company

16 On 8 October 1999 the defendant transferred $300,000 from her account to the joint account of PJ and LJ O’Malley. On 11 October 1999 $50,000 was transferred from the latter account to the company’s account with the Commonwealth Bank. On the same day $70,000 was deposited to the company’s account with the St. George Bank. That amount was transferred from the PJ and LJ O’Malley account. Between 13 and 25 October four transfers were made from the joint account of PJ and LJ O’Malley to the company’s account with the Commonwealth Bank. The total of the five payments was $130,000. On 26 October 1999 $100,000 was transferred from the defendant’s account to the joint account of PJ and LJ O’Malley. On 27 October $60,000 was paid by PJ and LJ O’Malley to the company.

17 Thus as at 27 October 1999 $400,000 had been paid from the defendant’s account to the joint account of PJ and LJ O’Malley. $310,000 had been paid from that account to the company. At that date the joint account had a credit balance of $91,906.18.

18 On 17 December 1999 $60,000 was withdrawn from the company’s account with the St. George Bank and deposited to the joint account of PJ and LJ O’Malley. The plaintiffs did not contend that this was a partial repayment of any loan from the defendant to the company. On 21 January 2000 $30,000 was transferred from the joint account to the company’s account with St. George. This put the company in funds to draw a cheque for $30,000. On 3 February 2000 $15,000 was transferred from the joint account to the company’s account. On 9 February 2000 a further $10,000 was so transferred.

19 On 16 March 2000 a cheque for $400,000 was drawn by the company on its account with the Commonwealth Bank in favour of PJ and LJ O’Malley or bearer. The cheque butt was filled in by Mr O’Malley. It read “Geraldine O’Malley Loan Repay”. The cheque was deposited to the PJ and LJ O’Malley joint account with the St. George Bank on 23 March 2000. The defendant’s evidence, which was not challenged and which I accept, was that she was unaware that the moneys had been transferred from the company to her brother. She said that she believed that the money was “in the company”. Mr Patrick O’Malley’s evidence was that the loan was initially to be for a short term until the end of January when the defendant expected to complete the purchase of the unit at Cronulla and would need the money. Settlement of that purchase was delayed. He expected that the defendant might call for the money back and hence transferred the money to the joint account so that it would be available for his sister when she needed it.

20 As at 28 March 2000 the company had a credit balance in its account with the Commonwealth Bank of $74,390.84 and a credit balance in its account with the St. George Bank in the amount of $15,745.32. There was a credit balance of more than $400,000 in the joint account.

21 On 28 March 2000 Mr Patrick O’Malley signing himself as a director of the company sent a facsimile to Mr Robert Knox at Aussie Home Loans. Mr Knox was a finance broker whom the defendant had engaged to arrange finance for her to enable her to purchase the unit at Cronulla. She asked Mr O’Malley to confirm to Mr Knox that she had $400,000 available. The fax said:

“Bob,
I am writing to confirm that this company is holding in Trust $400,000 (Four Hundred Thousand Dollars) on Behalf of my sister Geraldine O’Malley. These funds are available to be transferred at any time. “

22 I will return to the implications to be drawn from this fax later.

23 On 29 March and 17 April sums of $70,000 and $30,000 were transferred from the joint account of PJ and LJ O’Malley to the company’s account with St. George. On 28 April 2000 the joint account was debited with the amount $82,296. This debit was made to purchase a bank cheque which was used by the defendant to purchase a BMW motor vehicle. It is common ground that this payment was a partial repayment of the loan which the defendant had made, although the parties differed as to whether the repayment should be characterised as one made by the company or by Mr O’Malley.

24 On 8 June 2000 a further sum of $100,000 was transferred from the PJ and LJ O’Malley joint account to the company’s account with the St. George Bank

25 On 21 August 2000 the joint account was in credit in the sum of $116,953.97. On that day Mr O’Malley sent a further facsimile to Mr Knox. In it he confirmed that “This company is holding in Trust $318,000 (three hundred and eighteen thousand dollars) on behalf of my sister Geraldine O’Malley. These funds are available to be transferred at any time.”

26 On 6 September 2000 $65,000 was transferred from the joint account to the company’s account with the St. George bank. This reduced the credit balance in the joint account to $2,401.03. It increased the credit balance of the company’s account with St. George to $302,163.22.

27 Accordingly, after $400,000 had been transferred into the joint account on 23 March four payments were made in March, April, June and September from the joint account to the company’s account which totalled $265,000.

28 There are a further five payments made from the joint account totalling $47,212 which the liquidator contended should be treated as having been paid for the defendant’s benefit and which should operate to reduce the debt owed to her. The evidence does not establish that any of these payments were made to the defendant, or for her benefit, or on her direction. The largest payment was a sum of $33,956 made on 25 August 2000. That payment was made for the purchase of a motor vehicle which is registered in the company’s name. That is, it was made for the acquisition of an asset by the company. It was a payment made for the company’s benefit. It is possible that a further $2,000 paid by credit card for the purchase of that vehicle was also funded from the moneys in the joint account. The evidence does not clearly establish that one way or the other.

29 As I have said, on 7 September 2000 the St. George Bank drew a cheque payable to Westpac Corporation in the sum of $299,756.19 and debited the company’s account with $299,762.19. The bank cheque was provided to the defendant to permit her to complete the purchase of her unit at 8/17-19 Prince Street, Cronulla. The cheque was delivered to the vendor as part payment of the purchase price.

To Whom Did the Defendant Lend $400,000?

30 The defendant gave evidence that in July 1999 Mr Patrick O’Malley told her that PPT Corporation would be interested in borrowing funds from her for a short period of time. She expressed interest in the offer, provided the loan was only in the short term as her unit was due to settle on 31 January 2000. The unit was one which she had agreed to purchase, or was then proposing to purchase, off the plan. Some days later Patrick O’Malley told her that he had agreement from his other directors to offer certain terms for the loan. It would be a short term loan for three months; interest would be paid after three months at $5,000 per month for every $100,000 borrowed. If she lent $400,000 for three months she would get $60,000 in interest. She accepted the offer.

31 She also said that in August 1999 Patrick O’Malley asked if she would consider extending the loan from three months to six months and she agreed to do so. In October he told her that the company would like to arrange the loan and asked if she would deposit $300,000 into a bank account he had given her. Later in that month he asked her to lend another $100,000 to be deposited into the same account.

32 Patrick O’Malley gave evidence to similar effect. The company’s business was the supply of concrete reinforcement. He explained that the background to the loan was that the company had won a contract with Multiplex in relation to a project at Wharfs 9 and 10 at Darling Harbour. The company needed to purchase materials for the project works for which it would be later reimbursed by Multiplex. There were advantages to the company in not buying the materials on credit. However it needed short-term finance to buy the materials. He said that he told the defendant that PPT Corporation was looking to borrow funds for a short period at a better rate of interest than she would obtain from a bank on a term deposit but less than what the company would have to pay on what he called the “open mezzanine finance market”.

33 Mr Ireland QC who appeared for the plaintiffs submitted that I should reject the evidence of both the defendant and Mr O’Malley that they agreed that she would lend the moneys to the company. He submitted that I should find that she agreed to lend the moneys to her brother personally and not to the company. He pointed to the following considerations as showing that the loan was made by the defendant to her brother and not to the company.

34 First, Mr Ireland QC pointed to a document which was prepared by the finance broker, Mr Knox, on 17 August 2000. The document was Mr Knox’s background note to support the defendant’s application for a loan. Mr Knox said that he prepared the note on the basis of information which the defendant provided to him. In the document he recorded:

“She sold her ‘upmarket’ UK residence and netted $480K.
She lent her brother $400K as a short-term loan – she withdrew $83K from these funds to purchase a motor vehicle. These funds are available for this transaction.
The brother is a property developer in Sydney”.

35 The document is noteworthy not only for its describing the loan as having been made to Mr Patrick O’Malley, but also for the suggestion that the loan was made in connection with property development activities of Mr O’Malley rather than for the purposes of PPT Corporation.

36 Mr Knox however said that in preparing the document he didn’t discriminate between whether the loan from the defendant was to a company or to her brother personally. From his perspective the only point of importance was an assurance that there were funds available to meet the gap between the purchase price of the unit and the amount of the loan. He sent to the intending lender his background note and the facsimile which he had received on 28 March 2000. That facsimile, to which I will refer again later in these reasons, is only consistent with Mr Patrick O’Malley being of the view that the company was liable to pay $400,000 to the defendant being an amount, Mr O’Malley said, which the company held on her behalf.

37 I do not think any weight should be put upon Mr Knox’s evidence or on his background note. The particular issue with which I am concerned is not one which concerned him.

38 Another matter upon which the plaintiffs relied as evidence that the loan was made to Mr O’Malley personally was the accounting records for the company for the year ended 30 June 2000 and 30 June 2001 which the directors belatedly produced. In February 2002, following the liquidator’s appointment, Mr O’Malley provided to the liquidator what were described as a draft of the balance sheet and profit and loss accounts of the company and a version of the general ledger. These showed the defendant to be a creditor of the company. On no view was the purported general ledger which was produced at that time an accurate statement of the company’s dealings with the defendant. Be that as it may, on 6 June 2002 the directors provided accounts which Mr Patrick O’Malley described as the “final” accounts. As Mr Ireland QC submitted, the accounts then submitted were drawn so that the defendant was not shown to have had any dealings with the company in the year ended 30 June 2000. Instead, advances which were made to the company from funds provided by the defendant were recorded in a loan account with Mr Patrick O’Malley. Hence, it was submitted, the final position of the company’s directors was one which was in conformity with the plaintiffs’ case in the proceedings: namely that Mr O’Malley was a principal in the loan arrangements with the company involving his sister’s funds.

39 In my view these financial records are of no weight. They were not created at the time of the relevant transactions. They are not admissions made by the defendant. The explanation for the change in the accounting treatment which was given by the directors on 6 June 2002 was in the following terms:

“ P O’Malley
This account has been adjusted to reflect all of the transactions previously shown under loan account G O’Malley. This is due to the fact that in most instances sums to and from G O’Malley were forwarded the (sic) bank account of P O’Malley. A schedule detailing all transactions in respect of the ‘G O’Malley’ Loan and how they went to or from the bank accounts of P O’Malley and PPT Corporation as attached.”

40 Thus the second version of the accounts was prepared on the assumption that the existence of a debtor and creditor relationship depended upon how the cash was physically moved between bank accounts. I do not accept the correctness of that assumption.

41 A third matter to which Mr Ireland QC adverted was that the defendant lacked any knowledge of the company or its financial prospects, or who else was involved with it. She knew that there were other persons involved in the new company and that Patrick O’Malley was only one of five shareholders. She obtained no security for repayment of her loan. At least so far as she could recall, she received no document from the company confirming the terms of the loan or otherwise giving an assurance that it would be repaid by January 2000 if she then needed it, as she expected she would.

42 This is a material consideration to be taken into account in deciding whether to accept the evidence of the defendant and Mr O’Malley. However the defendant did know that her brother had had extensive experience in the building industry. Although she did not have any detail about the financial position of the company, she was told by her brother that the company was obtaining a lot of new business and was doing very well. She was prepared to trust her brother with her savings. It is not difficult to accept that she would trust his description of the company’s fortunes. She also said that her brother had had a history of working on good projects with a high profile and over achieving. He had worked for the Westfield company in senior roles including project management and, according to her understanding, had brought the projects in early, and under budget. She said that she had no reason to believe that he would not be able to similarly manage any money that she lent the company. The fact that she did not know the other shareholders or directors is not inconsistent with her trusting her brother to manage the money which she was to lend to the company.

43 Mr Ireland QC also relied upon evidence that was given by the defendant at a liquidator’s examination on 14 August 2002. On that day she was asked the following questions and gave the following answers:

“…….In the latter part of 1999 did you have a conversation with your brother Patrick O’Malley about a loan? - Yes
Did he ask you if you would lend some money? - Yes
Did he ask you initially to lend the sum of $300,000? - Yes
And then to lend the sum of $100,000? - Yes
……..
This was an arrangement made with your brother? - Yes
And no-one else? – That’s right.
……… so, in summary, the position was you had money available because you had sold your property? - Yes
You said to your brother that you were prepared to make it available to him on a temporary basis but you wanted it repaid? - Yes
You thought it would be a shorter period because it was expected that the building would be completed around January but eventually that was delayed and the money was repaid to you by your brother on settlement of the purchase as to a sum of $299,762.19? - Yes
……….
* In 1999 when you first made this money available at your brother’s request, did he tell you why he wanted the money? - No
* And you had no idea why he wanted the money? - No
………
This was just a family arrangement between you and your brother then? – Yes”

44 Mr Ireland QC submitted that this version of events was given at a time before the defendant may have appreciated the importance to her case of the identity of the borrower. It was far more likely to be correct than her evidence given at the hearing when she was conscious of the importance of that issue to her case. It was submitted, that her evidence on 14 August 2002 was only consistent with the loan being to her brother and not to the company.

45 However except for the answers to the two questions which I have asterisked, I do not think that the evidence which she gave on 14 October 2002 was inconsistent with the evidence which she gave before me. It is consistent with her agreeing with her brother to lend money to the company whom he represented. No questions were asked of her on that day which might have directed her mind to the distinction between the loan being made to her brother and being made to the company. Indeed one of the questions, with which she agreed, was that the amount of $299,762.19 was repaid to her by her brother. On the plaintiffs’ case that is a correct analysis of the position because the payment made to her by the company on her brother’s direction reduced her brother’s debt to her. However in the context of the examination, I think it simply indicates that the defendant’s mind was not directed to the distinction between an agreement made with her brother personally and an agreement made with the company through her brother.

46 Nor was she asked open questions to elicit all that she could then recall of her discussions with her brother, which may have elicited the substance of the evidence which she gave before me. On a later examination held on 18 October 2002, when the issue of the borrower’s identity was directly raised, she gave evidence which in substance was the same as the evidence she gave before me.

47 However the answers to the questions which I have asterisked are not consistent with the evidence which she gave before me. Her evidence before me was that she was told that the money was for one of the company’s particular projects. An explanation for the mostly monosyllabic answers which the defendant gave in her liquidator’s examination was that prior to it she had been advised by counsel then advising her, (not being the counsel who appeared at the hearing), that so far as possible she should answer the questions by saying nothing where possible, except by giving a yes or no answer. The inconsistency in her evidence is not such that I reject the evidence she gave to me.

48 The next, and to my mind the most significant, matter upon which Mr Ireland QC relied to show that the loan was made to Mr O’Malley personally was that the payment was made to the joint account of Mr and Mrs O’Malley and not to the company. That is not something which is necessarily inconsistent with the loan being made to the company, but it does call for an explanation. The defendant’s explanation was that she understood the money was to be used for a particular project of the company and that keeping the money in an account separate from the company’s other money was a means of having what she called “budget management” of that sum.

49 Mr Patrick O’Malley’s explanation was that before the company borrowed the money its office had been broken into and some computer and financial records were missing. As the funds came from his sister he deposited the money into his personal account to keep tight control over it until such time as each expenditure was required by the company. He was not cross-examined on this evidence. Indeed the plaintiffs relied upon it as being consistent with their position that the money was lent by the defendant to him and that he, not his sister, lent the money from time to time to the company, as money was required by it.

50 The defendant relied upon corroborating evidence in documents from other directors and officers of the company, and from members of the defendant’s family. I shall deal first with the documents relied on as corroborating the defendant’s evidence. There are six such documents.

51 The first two documents relied upon were the facsimiles sent by Mr Patrick O’Malley to Mr Knox to which I have already referred. Mr Ireland QC said that the facsimiles were simply wrong. In the facsimile of 28 March 2000 Mr O’Malley said that the company was holding $400,000 in trust on behalf of the defendant. Mr Ireland QC said that it wasn’t. The money was held by Mr O’Malley personally. The company had never declared a trust over any money.

52 I am prepared to acquit Mr O’Malley of any knowledge of the law of trusts. However the document does show that so far as he was concerned the company had dealt with the defendant and not just with him. Given that the company held only $90,136 in its own bank accounts, the document also shows that he regarded the money that was held in the joint account of himself and his wife as being held for the company. Otherwise, he could not have been of the view that the company held $400,000 on behalf of the defendant. I should add that the document is inconsistent with his being of the view that the loan from the defendant had been repaid by the transfer made on 23 March of $400,000 to the joint account. It shows that he was of the view that the loan to the defendant had not been repaid. He was not cross-examined to suggest that in writing the facsimile he was not making a statement which he believed to be true, however muddled the statement might be. I think the facsimile and the later facsimile in August are corroborative of the evidence of the defendant and Mr O’Malley.

53 The next document relied on by the defendant was a photocopy of notes at a meeting of 4 August 1999 attended by Mr O’Malley, Mr Steven Betts, a director of the company, Mr Bo Johansson, its office manager, and, for a short time, Mr Graham Betts, another director.

54 The document read in part as follows:

“Loan – G O’Malley Pat
To Company Steve
Bo
Graham
Agreement – Borrow $100K for 3 Months @ $5K per month
- Surplus $300K can also be used
Purchase of unit imminent – 1-3 Month loan to PPT Corp via P & LJ O’Malley A/C
$400K loan max Payout $15K - $60K for extended period.
The above are all in agreement to proceed.
No choice proceed with Geraldines Advance to Company – Board Minutes to be typed”

55 The document was signed by Mr O’Malley, Mr Johansson and Mr Steven Betts.

56 If the document is authentic it is powerful evidence that Mr Patrick O’Malley was authorised by the directors to agree with his sister on behalf of the company that the company would borrow up to $400,000 from her. It also shows that the loan to the company would be made by a payment to the joint account of P and LJ O’Malley. In relation to the line in the document “Loan to PPT Corp via P and LJ O’Malley A/C” Mr O’Malley said that he told the meeting that he would hold the money. The document supports the defendant’s position that money which was received from the defendant and held in the joint account was held by Mr O’Malley and his wife as agent for the company.

57 The plaintiffs suggested that the document had been tampered with. It was suggested that parts of it were created after the original document had been signed. The words “To Company” at the start of the document were, it was said, a later interlineation in a different pen. This was a serious allegation. It was not made good. I certainly cannot tell from the photocopy that the words “To Company” were written in a different pen. In the course of cross-examination of Mr O’Malley Mr Ireland QC called for the original of the document. The copy which was annexed to three of the affidavits recorded that the original was with “B & K”, a reference to Benjamin and Khoury who had acted for the company in the past, and for Mr O’Malley, and at one stage, I was told, the defendant. The document was not produced. No order was sought to require the production of the document by Benjamin and Khoury. The evidence was completed on the same day on which the call was made. If this allegation were to be made, I would have expected that the liquidator would have required the original document to be produced before the hearing so that the ink in which the document was written could be examined and, if necessary, it could be subjected to forensic examination.

58 The authenticity of the document was also attacked on the basis that it was not produced to the liquidator until 4 April 2003. The copy of the document together with a copy of the typed minutes and certain other documents were sent on that day by facsimile by Benjamin and Khoury to the liquidator’s solicitors. They were sent under cover of a letter in which Benjamin and Khoury said “We have been instructed by our client that he has recently located additional documents which may not have been previously provided to your client. We accordingly enclose a copy of such for your client’s records.”

59 The letter went on to say that originals of the documents would be produced at a conference which was arranged to take place on 7 April 2003. There was no evidence from the liquidator that the original of the handwritten notes was not produced for inspection at that meeting.

60 Mr O’Malley denied that the words “To Company” had been inserted in the document after it had been signed. I accept his denial. Mr Johansson said that the way the document was was correct. He said “The intent and the basics of the letter (sic), everything in there, is the way we discussed the matter……..” He had no reason to lie. He did not have any continuing association with Mr O’Malley after he left the company at the end of 2002. Mr Steven Betts also was “pretty sure” that the words “To Company” were there.

61 Mr Graham Betts was only briefly present at the meeting and he did not sign the document.

62 I cannot see what Mr O’Malley could have stood to gain by inserting the words “To Company” in the document. Even without those words it would be clear enough from the document that the company was the proposed borrower from the defendant.

63 There was a slight discrepancy between the evidence of Mr O’Malley, Mr Betts and Mr Johansson as to when the document was signed. Mr Johansson thought it was signed a couple of days after the meeting. Mr Betts and Mr O’Malley thought it was signed at the meeting. Nothing turns on this discrepancy.

64 In their oral evidence both Mr Steven Betts and Mr Johansson confirmed the correctness of what was stated in the document. That is to say, Mr Steven Betts and Mr Johansson said that on 4 August 1999 they agreed that the company should borrow the money from Mr O’Malley’s sister which Mr O’Malley told them was available.

65 Given the evidence of Mr Steven Betts, Mr Johansson as well as Mr O’Malley, I am satisfied as to the authenticity of the document, notwithstanding its late production.

66 The next document relied upon as corroborating the evidence of Mr O’Malley and the defendant was the typed version of the minutes produced to the liquidator on 4 April 2003. The authenticity of this document was also challenged. One would expect that board minutes would be kept in a proper register or book and be made available to the liquidator forthwith after his appointment. Neither Mr Johansson nor Mr Steven Betts had seen the document. There was no evidence that the minutes were adopted at a subsequent board meeting, although it has to be said that there was no evidence that such meetings were regularly held or that minutes were regularly taken and kept. The typed version of the minutes does not add anything of substance to the handwritten document. The differences between the two documents are slight and not such as to cause me to doubt the handwritten document. In those circumstances it is unnecessary to reach any conclusion as to the authenticity of the typed version of the document. It does not take the matter any further.

67 The next document relied upon as corroboration was an office copy of a letter dated 11 August 1999 signed by Mr O’Malley and addressed to the defendant. Mr O’Malley gave evidence that he sent the letter to the defendant. She did not recall receiving it and did not produce the original of the letter from her records.

68 In the letter Mr O’Malley said:

“We write to confirm the agreement reached regarding the advance of monies to PPT Corporation Pty Ltd.
The sum to be loaned would be $300,000.000 (sic) (Three Hundred Thousand Dollars) for a period of six Months at an interest rate of 15%.
The minimum repayment for the loan would in affect (sic) be $15,000.00 based on $4,000.00 (Five Thousand Dollars) per month on one hundred thousand dollars and the maximum payment would be $60,000.00 for the stated period.
It is also agreed that an additional sum of money would be available if required for the company’s use at rates to be agreed but generally on the terms above. This additional sum is $100,000.00 (One hundred Thousand Dollars).
This supercedes (sic) our previous discussions based on a single sum loan for a three month period.
We also confirm that accrued interest will be invested in other areas of development as agreed with yourself.
I also confirm that this agreement has been approved with other partners in the company and that funds are secured to allow the company to proceed on our first major project.
It is expected that the loans finds (sic) will be returned within the stated period.”

69 This was not one of the documents sent by Benjamin and Khoury under cover of their facsimile dated 4 April 2003.

70 The letter does not stand alone. It is consistent in main outline with the handwritten notes whose authenticity I have accepted and with the implications of the facsimiles from Mr O’Malley to Mr Knox whose authenticity is not in doubt. I accept Mr O’Malley’s evidence that the letter was sent to his sister. The fact that she did not produce it and did not recall having received it is not a sufficient ground for rejecting Mr O’Malley’s evidence that it was prepared on or about the date it bears and was sent to Ms O’Malley at that time. Clearly it corroborates her evidence and the evidence of Mr O’Malley that the contract of loan was made with the company.

71 The last document which corroborates the defendant’s and Mr O’Malley’s evidence that the loan was to the company is the cheque butt of 16 March 2000 written by Mr O’Malley. The fact that he said it was in repayment of a loan from G O’Malley, not from himself, confirms that it was his understanding that the company had borrowed the money from his sister.

72 I do not find the evidence of members of the defendant’s family as to what she told them about her intentions in making a loan to be of particular assistance. I do not think that when those discussions occurred the attention of her family members was focused on whether she would make the loan to the company, or whether she would make the loan to her brother who would use the moneys for the company.

73 However for the reasons I have given I accept her evidence and Mr O’Malley’s evidence that the contract of loan was made between her and the company for whom Mr O’Malley acted in the discussions.

Was the loan to the company repaid on 23 March 2000?

74 The plaintiffs pleaded that if the loan was made to the company it was nonetheless repaid by the payment of $400,000 by the company to the joint account of Mr and Mrs O’Malley on 23 March 2000. They said that Mr Betts wrote the cheque intending it to be repayment of the loan. Mr O’Malley wrote on the cheque butt that it was repayment of the loan. The fact that Mr O’Malley did not pay the money to his sister did not mean that the loan had not been repaid because, so it was alleged, the defendant had appointed Mr O’Malley as her agent for the purpose of all dealings with the company in connection with the loan of $400,000. He therefore had authority to receive repayment of the loan on her behalf and did so.

75 The defendant denied the agency which was alleged. She said that in his dealings with her Mr O’Malley was acting as agent for the company. He was not acting as her agent in dealing with the company. The defendant also said that if that were wrong, the alleged agency would endure after 23 March 2000 so that the later advances made to the company and payments made on the company’s behalf from the proceeds of repayment in the joint account should be characterised as fresh loans made by the defendant to the company through the agency of Mr O’Malley.

76 In response to this riposte, the plaintiffs said that the agency was limited to a short term loan expiring at the end of January and not to further loans made after March.

77 It is not necessary to trace through the consequences of a finding that Mr O’Malley was the defendant’s agent in dealing with the company. There is no evidence that he was. Mr Ireland QC submitted that the defendant understood that when the money was originally paid into the joint account, it was paid into a “holding account”, that is, that her brother received it in a holding capacity for her until it was paid over to the company. Likewise upon repayment the money was paid into a “holding account” and held for her.

78 The only evidence of the defendant that touched on the question of whether the joint account of Mr and Mrs O’Malley should be regarded as a “holding account” for monies to be held for her, was the evidence to which I have referred to in paragraph 48 above. She believed that the money was to be provided for a particular project of the company and was paid into the joint account so as to keep “budget management” over that sum.

79 For the plaintiffs to establish that there was a relationship of agency between the defendant and Mr O’Malley they would need to establish that each of them had expressly or impliedly consented to Mr O’Malley acting on the defendant’s behalf so as to affect her relations with third parties, in this case the company. The consent need not necessarily be to the relationship of principal and agent itself, but the consent of both would be required to “a state of fact upon which the law imposes the consequences which result from agency”. (South Sydney District Rugby League Club Ltd v News Ltd (2000) 177 ALR 611 at 646; Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552 at 587; Garnac Grain Co. Inc v HMF Faure & Fairclough Ltd [1968] A.C. 1130 at 1137). Neither the defendant nor Mr O’Malley expressly or impliedly consented to such a state of fact. Throughout the transaction of loan he represented the company. It was not suggested in cross-examination either to him or to the defendant that when the defendant’s moneys were received into the joint account they were held by Mr and Mrs O’Malley for the defendant. It is true that at that stage they were under his and his wife’s control. But that was not a control he was exercising on the defendant’s behalf. Mr O’Malley’s facsimiles to Mr Knox show that he considered the money in the joint account was held for the company which in turn held it on behalf of the defendant.

80 The defendant had no knowledge of the movement of $400,000 from the company’s account to the joint account. That payment was not a repayment to her. The payment from the joint account of $82,296 on 28 April 2000 was a partial repayment made by the company through Mr O’Malley of the loan. As at 7 September 2000 the company was still indebted to her for the balance of the principle sum of $400,000 together with interest of $60,000. The payment of $299,756.19 which was made at her request was a further partial repayment of the company’s loan.

81 It was common ground that if this was the position the transaction was not an uncommercial transaction.

82 This is sufficient to dispose of the proceedings. I should add however that even if I had accepted the plaintiffs’ submissions the plaintiffs still faced formidable hurdles. On the plaintiffs’ case the effect of the payment of $299,756.19 was to reduce the company’s debt to Mr O’Malley by that amount. On the plaintiffs’ case, it also reduced Mr O’Malley’s debt to his sister by that amount. Mr Rayment QC submitted that on the plaintiffs’ case the defendant was in at least as strong, if not stronger, a position than was the defendant in Tosich Construction Pty Ltd (In Liq) v Tosich (1997) 23 ACSR 466, affirmed on appeal at 78 FCR 363. There when the company was insolvent and indebted to its director it paid money to the director’s daughter on his direction. The payment reduced its working capital and also reduced the debt which the company owed to the director. If anything the case was stronger than the present because the payee received the money by way of gift from her father.

83 In this case the plaintiffs sought to differentiate the case from Tosich Constructions in that they alleged that the payment was a voidable, unfair preference given to Mr O’Malley, that he was not at the time of the payment nor subsequently in a position to repay the amount, and that the company was deprived of cash which would otherwise have been available to pay its external creditors in particular the amount it owed to the Australian Tax Office for unremitted group tax. Reference was made to the judgment of Lehane J at 23 ACSR 466 at 474 where his Honour referred to the possibility, which had not been explored in the case before his Honour, that a relevant matter under subsection 588FB(1)(d) was the relationship between insolvency, or the view of the company’s insolvency or otherwise, which a reasonable person would have taken in the company’s circumstances at the time and what such a person might be expected to have done.

84 Although the matters were raised in the pleading, no questions were directed to Mr O’Malley or the other officers of the company to establish their perceptions of the company’s financial position at the time the payment was made. Nor did the evidence support the allegation that at the time the payment was made and subsequently Mr O’Malley did not have the financial resources to repay the amount of $299,762.19 which it was alleged was a voidable preference. He was not cross-examined about his financial position. The only evidence about his financial position was that in August 1999, if the company were to borrow from the Commonwealth Bank, the only security he could offer was jointly owned property on which the Bank would advance $140,000.

85 I do not express any view at to whether the plaintiffs could have established that the transaction was an uncommercial transaction. Even if they had done so it seems to me that the defendant would have made good her defence under s 588FG(2). The “transaction” to which the defendant was a party was the payment made by the company for her benefit. However the plaintiffs accepted that she received that payment in good faith, at a time when she had no reasonable grounds for suspecting that the company was insolvent or would become insolvent, and when a reasonable person in her circumstances would have had no grounds for so suspecting. It was however submitted that she did not provide valuable consideration “under the transaction” nor did she change her position “in reliance on the transaction”.

86 Were it necessary to decide the question, I would be of the view that at least the second limb of s 588FG(2)(c) was made good. On the plaintiffs’ case, the defendant’s acceptance of the payment reduced the debt her brother owed her. That seems to me to be a change of position by her in reliance on the transaction. Mr Ireland QC submitted that because the payment to her was voidable, she did not change her position. However that assumes the avoidance of the transaction which is the very issue to which the defence under s 588FG is directed.

87 However it is not necessary to resolve those questions. For the reasons I have given the plaintiffs’ claim fails.

88 I order that the Originating Process be dismissed. I order the plaintiffs to pay the defendant’s costs of the proceedings. The exhibits may be returned after 28 days unless a notice of appeal is filed.

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Last Modified: 07/12/2004