Hughes as liquidator of Westgem Investments Pty Ltd (Receivers & Managers appointed) (in liq) v Commonwealth Bank of Australia Ltd & Ors

[2023] HCATrans 77

[2023] HCATrans 077

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth   No P32 of 2022

B e t w e e n -

BRYAN KEVIN HUGHES AS LIQUIDATOR OF WESTGEM INVESTMENTS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQ)

Applicant

and

COMMONWEALTH BANK OF AUSTRALIA LTD

First Respondent

WESTPAC ADMINISTRATION 2 LTD

Second Respondent

WESTPAC ADMINISTRATION 3 LTD

Third Respondent

Application for special leave to appeal

GAGELER J
GLEESON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 9 JUNE 2023, AT 9.29 AM

Copyright in the High Court of Australia

____________________

MR N.C. HUTLEY, SC:   If the Court pleases, I appear with my learned friend MS M. MELLOS for the applicant.  (instructed by Jackson McDonald)

MR J.A. THOMSON, SC:   May it please the Court, I appear with MR J.Y‑W. WANG on behalf of the respondents.  (instructed by King & Wood Mallesons)

GAGELER J:   Thank you, Mr Thomson.  Mr Hutley.

MR HUTLEY:   Your Honours will find sections 588FB at pages 905 and 906 of the application book.  588FB involves an assessment of what a “reasonable person”, in effect, may be expected not to do, which is enter into a transaction having regard to three specific considerations and any other relevant matter.  That reasonable person is:

in the company’s circumstances –

that, of course, does not mean that the reasonable person adopts all the views and enthusiasm held by the company and its officers – for example, Mr Saraceni’s belief as to solvency – which you will see at judgment 491 at application book 694.

GLEESON J:   Just looking at paragraph 11 of your special leave application, as I read it, you are saying a reasonable person in this situation would necessarily have valued the benefits of this transaction at zero and the detriments as something up to minus 72 million – and in fact, effectively there is no discretion about to make that assessment because of the insolvency of the company.

MR HUTLEY:   There are two ways we put it, your Honour.  The first way we put it is “any other relevant matter” includes compliance with the law, and that, for reasons which I will develop in a moment, takes one to 588G, and in fact the norm in 588G(2) is, in effect, the parallel of the reasonable person in 588FB(1).  Here, we had a – and we say, in that circumstance, the reasonable person in FB(1), if I can call him or her that, would seem that it was likely that the transaction would involve the company in insolvent trading, it being another relevant matter, would not have entered into the transaction.

GLEESON J:   Is this reasonable person a person who would have anticipated that there would be no return to unsecured creditors as at 12 September?

MR HUTLEY:   I do not need that.  What we say is a reasonable person in the position of the company would not enter into a transaction, which transaction would involve the officers of the company likely to act in breach of 588G, and you see the connection between 588G and 588FB in subparagraph (1)(a).  So, in other words, what we say – you do not even get to benefits and detriments.

If you are sitting there and you say a reasonable person in the circumstances of the company would know, or be apt to know, that.  To go to 588G(2):  a reasonable person “is aware” of circumstances, reasonable grounds, for suspecting that the company is insolvent or will become so.  We would say, then, going back to 588FB(1), that reasonable person may be expected not to enter into the transaction.

GLEESON J:   But then, why is one of the definitions of an insolvent transaction one that depends – I am sorry, a voidable transaction, one that is both uncommercial and insolvent?

MR HUTLEY:   Because you could have an uncommercial transaction which was entered into by somebody who did not have reasonable grounds to believe that the company was insolvent.  Quite easily, for example, somebody gives away an asset, and that is incurring a debt.  That person may not have any reasonable grounds for believing that the – for suspecting that the company is insolvent, that it may be an uncommercial transaction.  Certain uncommercial transactions – that is just incurring the debt.  In other words, there are different tests, but it ‑ ‑ ‑

GLEESON J:   Was that the way it was put below, that you do not get to benefits and detriments?

MR HUTLEY:   Your Honours, in that regard, your Honours can see that the way it was put at paragraph 727 of application book 776, and we referred to these in our written submissions, your Honour, and we did not understand that it was the fact that it was put that way.  But I brought how it was put – if I could hand up just two little bundles to make the point.  I am sorry, your Honours, we did not give them before, but – thank you.

If your Honours go to paragraph 727 at application book 776, and your Honours then look at paragraph 11 in the submissions in the Court of Appeal, your Honours will see the reference to 588G, at the bottom of paragraph 11 going over on to the top of page 19.  And then if your Honours go over to the transcript, which we have given you, and turn over to paragraph – the last page of the little bundle, at 488, you will see that Mr Newlinds has made this submission in the – whilst dealing with insolvency, which you can see from the earlier, in the middle two paragraphs.

GAGELER J:   What do you say about paragraph 776?

MR HUTLEY:   I am just saying that they characterised that as the way the submission was made.  It was referring to 558.  It was also referring to the incurring of the debt, which was the thing said to create the insolvency.  That is why, in effect in substance the point was there being made.  We say it is 727.

GAGELER J:   So, two questions – one is, did the decision of the Court of Appeal turn on this point?  And secondly, is there a proper factual basis in the findings at first instance for it to be run?

MR HUTLEY:   In first instance it was found that there was insolvency.   The first instance judgment found there was insolvency, and I will just give your Honours the paragraph, which I have momentarily forgotten – yes, thank you, it is paragraph 1081 in the first instance judgment.  Then in the Full Court, in the Court of Appeal, his Honour Justice Murphy found that the company was insolvent for the reasons which are set out commencing at paragraph 664 in the application book commencing there at application book 746 to 677, but particularly his Honour’s reasons from 673 to 675.  That is the finding of insolvency.

GAGELER J:   Insolvency.  Well, insolvency does not get you to a breach of 588G(2).

MR HUTLEY:   No, but the reasonable – and that was my next point.  If one goes to all the findings by Justice Murphy as to insolvency, they were all matters which were before and known to the sole director of the company, Mr Saraceni.  Your Honours will see that if your Honours go through 664 to 677, and particularly the reasonings from 673 to 675.  The company was wholly run by Mr Saraceni.  He was the sole director.  He knew everything.  And it is an objective test whether – both for 588FB and 588G.

So, we would say, if he knew those matters, those matters constituted – led to insolvency, then whether he knew it – a reasonable person, in the circumstances of the company would have reason to suspect the company either was or might be insolvent, thus satisfying the predicate for 588G(2).

GAGELER J:   I understand the argument, but can I take you back to paragraph 776?

MR HUTLEY:   Yes, your Honour.  I was going to come to that.

GAGELER J:   What is your response to that?

MR HUTLEY:   That 776 was irrelevant.  Firstly, Mr Saraceni was not sued in the suit.  In fact, he was a plaintiff in one of the suits at first instance.  That is the first point.  Secondly, this is the assessment of a reasonable person in his position.  In other words, that is why I said his belief does not matter; it is the objective circumstances which matter.  That is – if one was dependent upon, in effect, the officers, there would never be an insolvent transaction because they are, of their nature, enthusiasts.

The whole norm that comes through FB and is reflected in 588G(2) is of an objective individual in the circumstances of the company.  So, that person takes the objective circumstances and on the basis of that makes judgments in 588FB and in 588G(2).  That is the criteria of determining whether there is a breach of the law.  What we say is these two are intimately connected in the circumstances where you have a controller, such as here, who is aware of all the circumstances which the court finds involves an insolvency, and then goes on to find, in circumstances where for this transaction to work, the company has to keep trading.

Therefore, we say, objectively, the reasonable person for the 588FB assessment would say, I would not enter into this transaction, because it is apt to involve this company, trading whilst insolvent, by its sole director, who I know is seized of all the material which I am put in the circumstances of, and on the basis of which I form the view there are reasonable grounds to believe this company is insolvent – because it was insolvent on this circumstances.

We say this is a perfect vehicle for determining what we say is an important question of law; namely, the relationship between 588FB and 588G, and analysing the position of the reasonable person in both sections and their interconnectedness.

GAGELER J:   And you say there are sufficient and clear findings of fact to allow us to do that?

MR HUTLEY:   Quite.  We say that every finding of fact by Justice Murphy as to the insolvency is a finding of which one would conclude a reasonable person would conclude there were reasonable grounds to believe that the company was insolvent, or would become insolvent by the transaction, because all of them are matters known to the company.

GAGELER J:   That inference of reasonableness just was not drawn, was it?  It was not squarely addressed.

MR HUTLEY:   But, your Honour, the reasonable person – it is not the reasonableness of the decision‑maker ‑ ‑ ‑

GAGELER J:   No.

MR HUTLEY:   ‑ ‑ ‑ it is the reasonableness of this norm; in effect, this imaginary individual.

GAGELER J:   Yes.

MR HUTLEY:   And if the imaginary individual is seized of all the facts, which we say his Honour found as constituting actual insolvency, they must be, objectively, reasonable grounds to suspect you are insolvent.  There has to be.  It is impossible to draw that distinction, in our respectful submission – on the basis of common knowledge, I accept.

GLEESON J:   There is no rule that says that a company cannot enter into a transaction while insolvent.

MR HUTLEY:   Can I say, there is no rule of law, but there is a norm set out in 588FB that, if those circumstances are satisfied, a reasonable person in the position of the company would not, and we say if a reasonable person – let it be assumed that a reasonable person in the position of the company knew that to proceed with the transaction you had to bribe somebody.  We would say, well, they would not enter into the transaction.  We would say insolvent trading by a director is a civil penalty.  It leads to removal – exposes you to removal, and if it is done with knowledge, it is a criminal offence.

GLEESON J:   But this is about an assessment on the part of a reasonable person, not a decision by the director.  The reasonable person is looking at the benefits – or principally looking at the benefits and detriments of the transaction.  It is just a transaction with a bank.

MR HUTLEY:   But this is “any other relevant matter”, and that, in our respectful submission, includes complying with the law, because if it does not – if it is not a relevant matter complying with the law, we submit, it must be a relevant matter that – because a reasonable person making a decision to enter into a transaction, having regard to all those matters, would say to himself or herself, I would decline to enter into the transaction

because it will put the company officers, sole officer, apt to in breach of 588G, and a reasonable person in the circumstances of the company would not do that, in our respectful submission.

Secondly, another way of looking at it is this, from the point of view of your Honour’s analysis of benefits.  If you are looking at it at the moment preceding the objective entry into the transaction, at that stage one might say that the board did not become aware – was not aware of the insolvency.  Mr Saraceni had sworn that he did not believe it was.  But from the point of a reasonable viewer looking outside with respect to a transaction to be of benefit to the company has to be – involves the company having to continue to trade. 

Would they say it is apt to bring about a situation of what happens if the sole director, the day after this transaction is entered, into becomes aware of the fact that they are engaged in insolvent trading?  In that circumstance, the benefit is apt to evaporate because the usual consequence when a company is involving in insolvent trading – and cases have said it is what should happen – is the company is put into administration. 

So, the concept of benefit, absent a consideration of the position of the controllers in the way we have indicated is a failure to address the proper question.  The benefits are just assumed on the basis of ignoring the fact that this company may be engaging in insolvent trading, and we say that cannot be right, because, in effect, it is saying – really warranting saying – warranting or approving of the entry into a transaction which will entail or likely to entail the company to engage in insolvent trading.  So, that is how we put it, your Honours.  I see the time.

GAGELER J:   Thank you, Mr Hutley.  Mr Thomson.

MR THOMSON:   May it please the Court.  My friend has suggested that this is the perfect vehicle for a case to consider the important question of law; namely, the relationship between sections 588FB and FG.  Well, it is neither of those things.  First, there is no important question of law.  There is no case that has raised this question in the history of the Corporations Act and the similar provisions that apply, and there is no division of opinion between any court of appeal below this Court about that question.  The reason is because there is nothing there.  This is not a case of public importance.

As well, it is a case where the relationship my friend seeks to articulate does not involve any point of proper construction of the legislation.  There is no proper construction advanced in the terms of the application.  All that it gets around to saying is that there is something to do with a question about what “reasonableness” means and what “benefits” mean and consistency with the duty between 588FB and FG.  The so‑called consistency that is stated in the application – although it seems to have been moved away from here – is a consistency which omits reference to the reasonable grounds for suspecting insolvency.  So, the way the terms of the application are formed, they deal with a duty not to engage in insolvent trading, not a duty not to engage in insolvent trading where there are reasonable grounds for suspecting insolvency.

Now, the reason why this is not a perfect case for considering these questions is because there is no finding, distinctly made or otherwise, of there being reasonable grounds for suspecting insolvency.  And, in fact, that are positive findings to the contrary ‑ ‑ ‑

GAGELER J:   Was this a question explored?

MR THOMSON:   No.  One of the reasons that might be relevant is that this is an application which is made by the liquidator and the liquidator alone, but Mr Saraceni and Westgem were represented by the same counsel, and clearly were not going to make a submission that there had been insolvent trading.

In fact, there was no action brought for insolvent trading by the liquidator and the liquidator had expressed a view in the reports that there was no prospect of bringing those, and there was no evidence from the liquidator as to why the liquidator changed his view, and now pursued something similar in this application.  There is no evidence from Mr Saraceni at all.  It was not an issue that was contested at trial.  That was particularly noted by the Court of Appeal.  They said, how can we make a finding on anything to do with section 588G because it was not a true matter of contest at the trial.

Can I then take you to some of the positive findings that were made about why it was reasonable and that will not be possible to overcome on the hearing of the appeal.  If you go to paragraph 673 at page 749 ‑ ‑ ‑

GAGELER J:   Do you have just a Water Board v Moustakas point that these issues cannot be meaningfully explored on an appeal ‑ ‑ ‑

MR THOMSON:   That is right.

GAGELER J:   ‑ ‑ ‑ given the absence of a contest of fact at first instance?

MR THOMSON:   Precisely.  And the way my friend tries to get around that is he says this is a test of reasonableness and so you just look at the things that have to have been known.  But there was no contest at all about section 588G, no finding of breach of section 588G, no finding about there

being reasonable grounds for suspecting insolvency.  In fact, as I say, rather to the contrary, there seemed to be findings about what Westgem reasonably expected in terms of the question of insolvency.

GAGELER J:   You are going to take us, are you, to some pithy part ‑ ‑ ‑

MR THOMSON:   Yes, exactly.

GAGELER J:   ‑ ‑ ‑ of the judgment at first instance?

MR THOMSON:   Precisely.  If I could take you to paragraph 673 on page 749.

GLEESON J:   This is in volume 2.  This is in the Court of Appeal?

MR THOMSON:   Yes, that is right, in volume 2.  In the first five lines or so, Justice Murphy says:

Whilst the judge did not in terms find that Mr Saraceni had reasonable grounds for his confidence that repayment or refinancing could be achieved by 31 December 2010, in context, the tenor of the finding is that a reasonable person in Westgem’s position would have concluded that the prospects of recapitalisation were sufficiently substantial to justify, in all the circumstances, entering into the Restated MOFA.

It goes on and says, in fact, there was actual insolvency because it had not sufficiently matured, but on the reasonable grounds point, that is what Justice Murphy says.  And then if you go to paragraph 740 at page 783 of the judgment, there is a reference back to the paragraph I have just taken you to, and Justice Murphy says:

As noted in [673] above, in context, the tenor of the 10th of those findings is that a reasonable person in Westgem’s position would have concluded that the prospects of recapitalisation were sufficiently substantial to justify, in all the circumstances, entry into the Restated MOFA.

GAGELER J:   Thank you, Mr Thomson.

MR THOMSON:   Do you need to hear – no.

GAGELER J:   No, we do not need to hear from you further.  Mr Hutley.

MR HUTLEY:   In our respectful submission, the insolvency of the – the insolvency was at the central centre of the case.  One can see that from the liquidator’s contentions at 431, paragraph 1147, at first instance; that insolvency was central to the case, at (d).

It was what Justice Tottle was dealing with, particularly, at 1227, was, as it were, the reasons for the transaction being entered into, and what we say is, it was assessed by reference to benefits and detriments, but setting aside, totally, the question of insolvency, totally – it was just set aside as of no consideration in relation to the question of whether there was an uncommercial transaction, and that is exactly what we say was the requirement, having regard to 588G, to have regard from the point of view of the reasonable person; not the actual insolvency so much, but whether a reasonable person would think that it was insolvent, because the moment that occurred, that went to the reasonableness of the transaction for the reasons indicated.

GAGELER J:   We certainly understand the argument in theory.

MR HUTLEY:   But we say that it was raised; it was raised in the Court of Appeal and no one put that the arguments which I drew your Honour’s attention to, in argument, were not available.  We say the Court of Appeal did not deal with it.  So, we say there was no argument put that the arguments advanced by Mr Newlinds were outside the scope of the case run at trial.  And the reason why there was not, because everybody knew that the insolvency and the significance of that for the uncommercial transaction was at the centre of the case.

Now, like many things – and that is how it was put in the Court of Appeal, no one said it was outside the argument.  True it is, the Court has not addressed that, and we say that – as we have put in our written submissions – was the error by the Court of Appeal, but what they have addressed is a finding of insolvency which, having regard to its nature, has to lead to a conclusion there were reasonable grounds to suspect insolvency, because it is all objective material; no one has suggested that one word of that was something that Mr Saraceni did not know, or the company did not know.

We say, therefore, there really could not be any debate.  Once you have got to the point to the point of insolvency in those circumstances, that there were reasonable grounds to suspect insolvency from a person in the position of the company, because it just follows, as night follows day.  That is why we say it is a vehicle, the case was run, and no one suggested that it was not run.  The fact that it was not dealt with by the Court of Appeal should not be a reason as to why special leave is not granted in circumstances where the findings that have been made address all the elements of the case which are required for this Court to consider it.

Those are our submissions.

GAGELER J:   Thank you, Mr Hutley.  We are not satisfied that the case presents as a suitable vehicle for the consideration by this Court of the question of principle which the applicant seeks to raise.  Special leave to appeal is refused with costs.

AT 9.59 AM THE MATTER WAS CONCLUDED