Huon Developments Pty Ltd v Hedley Constructions Pty Ltd

[2005] QDC 373

DISTRICT COURT OF QUEENSLAND

CITATION:

Huon Developments Pty Ltd & Ors v Hedley Constructions Pty Ltd [2005] QDC 373

PARTIES:

DEAN ROYSTON McVEIGH as Liquidator of HUON DEVELOPMENTS PTY LTD (In liquidation) ACN 066 358 771
(Plaintiff)
v
HEDLEY CONSTRUCTIONS PTY LTD ACN 062 299 334
(Defendant)

FILE NO/S:

159 of 2000

DIVISION:

Trial

PROCEEDING:

Application

ORIGINATING COURT:

DELIVERED ON:

25 November 2005

DELIVERED AT:

Cairns

HEARING DATE:

17 November 2005

JUDGE:

Bradley DCJ

ORDER:

That the defendant pay to the plaintiff the sum of $68,814.42. 

I further order that the defendant pay to the plaintiff interest pursuant to the Supreme Court Act and costs as agreed or, failing agreement, as assessed.

CATCHWORDS:

CORPORATIONS LAW – INSOLVENCY – LIQUIDATION – whether plaintiff insolvent at all material times – whether plaintiff able to recover payment pursuant to to s588FE of Corporations Law – whether defendant satisfied requirements of defence in s588FG(2) in respect of payment.

Corporations Law s588FA, s588FC, s588FE, s588FG(2)

 Sims v Celcast Pty Ltd [1998] SASC 6662, considered

Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, considered

COUNSEL:

R Perry SC for the plaintiff
M D Martin for the defendant

SOLICITORS:

Miller Harris Lawyers for the plaintiff
MacDonnells Solicitors for the defendant

Facts

1. Huon Developments Pty Ltd (“Huon”) was the developer, and KEL Builders (Qld) Pty Ltd (“KEL”) was the builder, of a residential unit development at 111-113 Collins Avenue, Edge Hill, Cairns.  KEL and Indo Pacific Management Pty Ltd were the shareholders of Huon.

1. In the latter half of 1998 KEL experienced difficulties and was unable to complete the construction of the unit development.  On or about 26 October 1998, Hedley Constructions Pty Ltd (“Hedley”) and Huon entered into an agreement by which Hedley would complete the plumbing and associated works on the unit development for $285,000 (the building contract).    Hedley completed the works it was contracted to carry out, but as at March 1999 an amount of about $70,000 remained unpaid pursuant to the building contract.

1. KEL was wound up on 5 May 1999 and on 27 May 1999 its liquidator issued a Creditors’ Statutory Demand to Huon for payment of over $226,000.

1. On 16 June 1999 Huon entered into a contract (the transaction) with Hedley to sell to Hedley one of the units in the development for $155,000.  The contract provided for a deposit of $68,814.42 and Special Condition 4 of the contract provided:-

“The seller acknowledges that the deposit paid by the buyer consists exclusively of forgiveness of a debt owing to the purchaser by the seller, which debt shall not be released or forgiven until completion of the contract.”

1. Settlement of the contract was completed on 9 July 1999.

1. Huon was wound-up upon an order of the Supreme Court on 6 September 1999 pursuant to an application in that court on 5 July 1999.

Claim

1. It is claimed by the liquidator of Huon that the payment of $68,814.42 by Huon to Hedley conferred an unfair preference upon Hedley[1], that Huon was insolvent at the time the transaction was entered into or at the time an act done for the purpose of giving effect to the transaction happened[2] and that the transaction is thus voidable pursuant to the Corporations Law[3]. 

   [1]S 588FA Corporations Law

   [2]s 588FL Corporations Law

   [3]s 588FE Corporations Law

Defence

1. Hedley argues firstly, that Huon was not insolvent as at the date of the transaction and secondly, that even if Huon was insolvent as at the date of the transaction, Hedley nevertheless became a party to the transaction in good faith and had no reasonable grounds for suspecting that Huon was insolvent and a reasonable person in Hedley’s circumstances would have had no such grounds for so suspecting[4].

Was Huon insolvent as at the date of the relevant transaction?

[4]s 588FG(2) Corporations Law

Evidence

1. Both the liquidator of Huon and Hedley had appropriately qualified accountants examine the available books of account of Huon and prepare reports addressing the state of Huon’s solvency as at 27 May 1999 (the date of the statutory demand by KEL).

1. Mr Kelly (called by the plaintiff) concludes in his report dated 21 January 2005 that Huon was insolvent as at 27 May 1999 “and, in all likelihood, [was] insolvent for some time prior to 27 May 1999”.

1. On the other hand Mr Mahony for Hedley contends in his report dated 18 July 2005 that “some doubt could be cast on the conclusion reached” by Mr Kelly.

1. A report dated 16 November 2005 of Mr Kelly, in reply to Mr Mahony’s report, is in evidence and both Mr Kelly and Mr Mahony gave oral evidence in this matter. 

1. The major issue in dispute with respect to the solvency of Huon is the status of the debt allegedly owed to KEL which was the subject of KEL’s Statutory Demand on Huon.  Mr Kelly reached his conclusion that the $226,636 demanded by the liquidator for KEL was a debt due and owing as at 27 May 1999 on the basis of the Statutory Demand for payment.  In the financial accounts of Huon over the years, amounts are recorded as owing to KEL as debts.  Mr Mahony argues that the amount constituting the Statutory Demand is made up of both monies owing to KEL for contributions it made to Huon’s working capital and for monies owing to KEL under the building contract.

1. Given the failure of KEL to comply with the building contract, Mr Mahony states “it is reasonable to conclude, based on events after it went into liquidation, that Huon would have had some basis for a claim against KEL for liquidated damages” under the building contract.  Mr Mahony therefore appears to conclude that any debt pursuant to the building contract would not be due and payable.  So far as KEL’s contributions to Huon’s working capital are concerned Mahony states, “I contend that having regard to the history of the contributions and the lack of documentation and formality attached to the advances, monies are more in the nature of equity and therefore not due and payable at call in the ordinary course of business.”

1. Mr Kelly reconstructed the net asset position of Huon as at 27 May 1999 as follows:-

Assets	$ Amount
Cash On Hand	2
Cash at Bank	0
Inventory – Development Costs*	807,500
Prepayments	8,541
Total Assets	816,043
Liabilities
ANZ Bank – Loans	627,328
ANZ Bank – Overdrawn Account	1,044
Hedley Constructions Pty Ltd	68,814
KEL Builders (Qld) Pty Ltd	226,636
Other Trade Creditors	61,679
Total Liabilities	985,501
Net Asset Deficiency	169,458

*This amount being the actual sale price of the units

1. If, in accordance with his argument, the liability to KEL was not a debt then due and owing, then Mr Mahony argues, there would be no net asset deficiency as at 27 May 1999 and Huon was not in fact insolvent.  Mr Mahony also raises the suggestions that Huon may have had the ability to source additional funding and the possibility of a potential for increased profitability had Huon undertaken the sale of all the units in the unit development in the ordinary course of business.  However, there was no compelling evidence on which to base a finding that these factors would have had any effect on Huon’s solvency at the relevant time.

Finding

1. The books and records of Huon establish that the amount owing to KEL had always been treated as a debt rather than a shareholders’ contribution.  The amount was assumed to be a debt by the liquidator of KEL and there is no documentary or other evidence from either KEL or Huon to the effect that the monies were in the nature of a loan or shareholders’ advance.  There is no evidence that Huon had the ability to access funds from any other source and there is no argument about the accuracy of the other liabilities listed in Mr Kelly’s table.  Accordingly, I find that Huon was insolvent as at 27 May 1999 and at all other times relevant to the transaction.  It is not disputed that the transaction constitutes an unfair preference to Hedley.  The transaction is therefore voidable.

Does Hedley have a defence to the claim?

Statutory Defence

1. Section 588FG(2) provides a statutory defence to this claim. Section 588FG(2) reads as follows:-

“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 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 relation to the transaction.”

Evidence

1. The evidence is that –

·     Hedley did not enter into the building contract with Huon until it had sighted evidence from Huon’s financier (the ANZ Bank) that funding of $285,000 was available.

·     On 12 March 1999 Hedley made a written demand on Huon for final payment pursuant to the building contract.

·     On 31 March 1999 Hedley filed a plaint in the District Court, Cairns claiming $70,314.42 from Huon “being monies owing under a building contract”.

·     On 31 March 1999 solicitors acting on behalf of Huon wrote to Hedley denying Huon’s responsibility for the outstanding amount and asserting that the amount was owing by KEL. 

·     On 6 April 1999 Hedley responded to the solicitors for Huon requiring immediate payment in full.

·     On 27 April 1999 Hedley issued a creditor’s Statutory Demand for payment of debt to Huon for the amount of $70,314.42 (which appears not to have been served on Huon).

·     In the affidavit in support of the Statutory Demand, Thomas Hedley confirms that the amount is a debt and that payment has not been received and further, that he believes that there was no genuine dispute about the existence or the amount of the debt. 

·     In an Entry of Appearance and Defence to the District Court plaint dated 28 April 1999, Huon denied liability for the amount owing.

1. Thomas Hedley, the sole director of Hedley gave evidence that he had known the directors of KEL and Huon for about 25 years and had completed subcontract work as a plumber for KEL in the past.  Upon completion of the work pursuant to the building contract Mr Hedley waited before taking any action for payment of the amount outstanding to allow for the sale of the units. He knew that the market at the time was “a bit slow” and that there were a number of units yet to be sold.

1. Mr Hedley described the directors of Huon and KEL as “hard-nosed contractors” and “tough customers”.  In the past he had been forced to take legal action in order to receive full payment for other works, but in relation to the monies owing in this instance he always believed that he would be paid eventually. 

1. Mr Hedley was unaware that Huon had any other major creditors at the time he entered into the transaction and was of the view that Huon wouldn’t immediately pay the monies owing to Hedley rather than couldn’t.

1. It was Mr Hedley’s evidence that he “never once” believed that Huon couldn’t pay its creditors “knowing the directors of the company for as long as I did”.

The Law

1. The issue to be determined on the evidence is whether Hedley had reasonable grounds for suspecting that Huon was insolvent or whether a reasonable person in Hedley’s circumstances would have had such grounds for so suspecting.

1. Suspicion in this context was described by Kitto J in Queensland Bacon Pty Ltd v Rees[5] -

“A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to “a slight opinion, but without sufficient evidence” as Chambers’ dictionary expresses it.  Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence.  The notion which “reason to suspect” expresses in subsection (4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee actual apprehension or fear that the situation of the payer is in actual fact that which the subsection describes – a mistrust of the payer’s ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors.”

[5](1966) 115 CLR 266 at 303

1. The two requirements of s 588FG(2)(b) were discussed by the South Australian Court of Appeal in Sims v Celcast Pty Ltd[6] in the following passages:-

“Therefore, under subpar(b)(ii) the Court will be concerned with the conclusion (in terms of logic or common sense) which a reasonable person ought reasonably to have made in terms of a relevant suspicion.  Under (b)(i) the Court will assess the conclusion which ought reasonably to have been reached by a creditor who in fact has taken a particular step or steps formally or informally in the process of deductive reasoning.  In this way a particular subjective factor is introduced into (b)(i) which is absent from (b)(ii).  In another way (b)(ii) also contains a subjective factor in having regard to “the circumstances” of the creditor.  However, there is a dichotomy between the two subsections which Nathan J in the passage cited above found it unnecessary to pursue.

The other side of the coin in the above example is that the process of deduction unfortunately may have put the astute creditor “off the scent”. The fact that a creditor has in good faith lulled itself by its own deductive processes to a position which (with the benefit of hindsight) can afterwards be shown to be flawed will not avail that creditor by reliance on subpar(b)(i) if a reasonable person should have read the signs differently; subpar(b)(ii) will still remain as a hurdle for that creditor.

The circumstances of the present appeal may be an example of this lastmentioned situation.  The signs were there for a reasonable person to read.  The respondent’s officers misread the signs.  The trial Judge must have read the signs only through the eyes of the respondent’s officers rather than also through the eyes of the reasonable person (in the circumstances of the respondent or its responsible officers).  The respondent’s officers may have been overly generous in their assessment of a customer of good standing; alternatively they may have been blind to the facts which were staring at them.  The hypothetical person referred to in subpar(b)(ii) would not have allowed personal perceptions to cloud a commercial judgment.”

[6][1998] SASC 6662

1. In the present case it appears that Mr Hedley was relying on the history of his dealings with the directors of both Huon and KEL in which he had always been paid in the end, to satisfy himself that Huon was in a financial position to make good the monies owing to Hedley.  In view of KEL’s severe financial difficulties of which Mr Hedley was obviously aware, such reliance was unduly optimistic.  The sequence of events including KEL’s insolvency and the steps that Hedley itself took in its attempts to secure payment would have led a reasonable person in the circumstances to have at least some apprehension or mistrust about Huon’s true situation which would amount to a suspicion that Huon was insolvent at the time of the transaction. 

Good faith

1. An additional argument was advanced on behalf of Huon that Hedley did not enter into the transaction in good faith in that the purchase price for the unit was not one that reflected fair market value.  This argument is based partly on a file note compiled by Hedley’s then solicitor on 5 May 1999 which notes that the contract would be prepared “for the market value of say $190,000”.  The contract sale price in relation to the transaction was $155,000.

1. It is uncontested however that four other units sold after 27 May 1999 for amounts between $160,000 and $165,000 despite the budgeted sale price for those units being up to $25,000 more than the budgeted sale price for the unit sold to Hedley.  Additionally the solicitors’ file note includes the following:-

“The contract should also take into account Tom’s paying stamp duty and conveyancing fees and commission on the sale.”

1. The evidence does not therefore support an argument that the unit, the subject of the transaction, was sold for anything other than fair market value. 

Order

1. Accordingly, I find that Hedley has not established a defence pursuant to s 588FG to the claim and I order that Hedley pay to the liquidators of Huon the sum of $68,814.42.  I further order that Hedley pay to the liquidator of Huon interest pursuant to the Supreme Court Act and costs as agreed or, failing agreement, as assessed.