Iliopoulos v BM2008 Pty Ltd (In Liquidation) - [2010] FMCA 376

FEDERAL MAGISTRATES COURT OF AUSTRALIA

ILIOPOULOS v BM2008 PTY LTD (In Liquidation)

[2010] FMCA 376

BANKRUPTCY – Application to set aside bankruptcy notice – asserted cross demand – consideration of matters raised by cross demand.

Bankruptcy Act 1966, s.40(1)(g)
Corporations Act 2001
Evidence Act 1995, s.140

Brink, Re; Ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433
Guss v Johnstone (2000) 171 ALR 598

Applicant:

STEVE ILIOPOULOS

Respondent:

BM2008 PTY LTD (IN LIQUIDATION)

File Number:

MLG 232 of 2010

Judgment of:

Burchardt FM

Hearing date:

14 May 2010

Date of Last Submission:

14 May 2010

Delivered at:

Melbourne

Delivered on:

21 May 2010

REPRESENTATION

Counsel for the Applicant:

Mr D. Denton S.C. with Mr. L. Watts

Solicitors for the Applicant:

Belleli King & Associates

Counsel for the Respondent:

Mr G. Bigmore Q.C. with Mr D. Harrison

Solicitors for the Respondent:

Anderson Rice

ORDERS

The application be dismissed.
The Applicant pay the Respondent’s costs to be taxed pursuant to the Federal Court Rules if not agreed.
This order be stayed for 14 days.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 232 of 2010

STEVE ILIOPOULOS

Applicant

And

BM2008 PTY LTD (IN LIQUIDATION)

Respondent

REASONS FOR JUDGMENT

This is an application filed on 16 February 2010. It seeks to set aside a bankruptcy notice on the grounds that the applicant has a cross-claim, set-off or cross-demand pursuant to s.40(1)(g) of the Bankruptcy Act 1966 (“the Act”).
Some matters are not in issue.
First, following a hearing before the Hon E.W. Gillard Q.C. in June 2009, an Interim Award and Statement of Reasons was issued on

15 July 2009.
Mr Iliopoulos was ordered to pay over $2.3 million plus interest. There were two other respondents relevant in the proceedings, but they are of no present moment. Later orders were made as to costs, and a judgment pursuant to the arbitration was registered in the Supreme Court. Leave to appeal the decision of Mr Gillard was denied, so it is common cause that the applicant owes the respondent company over $2.5 million or thereabouts, when one bears in mind orders for solicitor client costs that were made and various forms of continuing interest. Mr Iliopoulos admits that that money is owing, and is candid that he does not want to pay, because of the cross-demand to which I have referred.
The second matter that is agreed is that the cross-demand arises from the purchase - together with the two other entities to which I have referred - by Mr Iliopoulos of shares and choses-in-action, which are really causes of action, from a Mr Sartori in November 2009. The respondent accepts, albeit for the purposes of this application only, that first: the shares and causes of action have properly vested in

Mr Iliopoulos, and second, that the claims to which they give rise could be brought despite Part IIF1A of the Corporations Act 2001. The third matter that is agreed is that the respondent accepts that the cross-demand could not have been prosecuted in the action, namely the arbitration upon which the bankruptcy notice is based. I have to say, that is about it for agreed matters.
But there is one unusual feature of the case, and that is the arbitration to which I have referred, and the very extensive reasons for judgment issued by Mr Gillard. The parties are relevantly identical and in my view in these circumstances issue estoppels arise. I note that the learned editor of Cross, in the current edition at paragraph 5025, asserts that arbitrations can give rise to issue estoppel, and the authorities quoted in that paragraph are plainly to that effect. Even if we are not concerned with issue estoppel, it is highly unlikely that any other court would reach different factual conclusions about the matters that Mr Gillard traversed. His Honour’s reasons are detailed and cogent, if I may say so with respect.
I will return to some aspects of Mr Gillard’s reasons later, but I would note for the moment, and taking this from his reasons, that on 25 June 2008 there was a sale of the respondent to interests controlled by Mr Iliopoulos. That puts the matter in fact slightly less complicatedly than it was, but for present purposes it is sufficient to describe it in that way. Things went wrong; the applicant took over on 8 August 2008 and paid $6 million which was the balance of the purchase price on that day. But a further balance was due on 8 December 2008 as a result of readjustments of stock and the like. That was not paid. On 22 December 2008 the liquidator was appointed pursuant to a member’s voluntary winding-up. It should be noted that the company was largely, but not perhaps wholly, successful in the arbitration against Mr Iliopoulos.
The applicant’s claims, which constitute the cross-claim, set-off or the cross-demand, are now set out in the amended statement of claim which is annexure B to the affidavit of Ms Sideris, sworn 14 May 2010. The claim is in the name of Mr Sartori, but Mr Iliopoulos is applying to be substituted. The issues raised, I think, can be described shortly in these terms: First, Mr Sartori owns one of three A-class shares. It is put that any other A-class shares were invalidly issued. Second, according to the statement of claim, no valid B-class shares have ever been issued, although some have purported to have been. It is put that as a result Mr Sartori, and therefore by extension

Mr Iliopoulos, owns a third of the respondent company.
Additionally to those matters which are in the statement of claim, there are three other matters raised. The first is a $1 million redundancy payment to a Ms Cox, who was the former managing director of the company for many years. The second is $1.8 million or thereabouts allegedly abstracted by former directors through what is asserted to be a sham factoring scheme. In substance of course this is an allegation of fraud and/or theft. And the third is a loan to an entity known as

PFL properties, recorded as being extant on 31 December 2007 in the balance sheet of $2.95 million. That balance sheet is annexure A to

Ms Sideris’ affidavit of 14 March 2010.
It is put that if those sums are cumulatively added to the $5.36-odd million cash that the liquidator presently has, according to his affidavit of 28 April 2010 at paragraph 13, together with the amount owed by the applicant Mr Iliopoulos, his one-third share would be a lot more than the award made by Mr Gillard. If I may say so, of course, the arithmetic is plainly correct so far as it goes. But all the assumptions that underpin it are challenged. I will turn to the issues seriatim.
Firstly, does Mr Sartori, and therefore Mr Iliopoulos, own one-third of the company? I have been referred to a number of authorities, and I have had regard to all of them.
I will just make a couple of points. First, the proposition advanced that a benevolent construction of the debtor’s affidavit should be taken originates in the case of Brink, Re; Ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433 at page 440. But it should be noted that that was in circumstances where the Court was commenting on the fact that often the debtor has but little time to prepare their affidavit for filing. Here there is no such lack of time for the position to be developed. Next, in Guss v Johnstone (2000) 171 ALR 598, in the passage quoted in the written submissions of the liquidator, the High Court said at page 606, quoting Vogel v Vogel, the following:
“In Vogel v Vogel, Latham CJ said in relation to a corresponding provision,
“The authorities show that the matter to which the court looks is this - whether it is just that the claim should be determined before the bankruptcy proceedings are allowed to continue. In other words, whether it is a claim which it is proper and reasonable to litigate”
The authorities were, in fact, reviewed by Lindgren J in a case called re Glew at paragraphs [9] - [12]. I intend to read out paragraphs 10 to 12, which are in the following terms:
“In Brink, Lockhart J said that the court is not required to undertake a preliminary trial of the counter-claim, set off or cross-demand”. But, clearly, the application of criteria above requires the court to make some kind of preliminary assessment, though obviously not to determine the counter-claim, set off or cross-demand finally. And in Guss v Johntsone -
(his Honour lists the judges - )
The High Court stated, “The state of satisfaction referred to in s.40(1)(g), and s.41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.”
Plainly, in order to satisfy the court for the purposes of s.40(1)(g), the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor. Accordingly, evidence tendered on an application to set aside, is to be tested for admissibility, not as if the proceeding were one in which the debtor’s claim was being finally determined, but by reference to the question whether the court should be satisfied that the debtor has a claim deserving to be finally determined.
Perhaps little more can be usefully said than that a debtor must satisfy the court that there is sufficient substance to the counter-claim, set off or cross-demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.”
As I say, I turn in the light of those authorities to whether Mr Sartori owns a third of the company. And I repeat, this is not the trial of the issue. It is, to quote Lindgren J in Glew, “some kind of preliminary assessment”. The following points seem to me to be relevant. The evidence of Mr Sartori may well be uncontradicted. On his affidavit material, he is the only living person who can give evidence about the critical matters with which he is concerned. However, that picture may change. It may emerge that some other person in some way was present or had the relevant knowledge. But it is plain that the critical issue is the assertion that there are three A-class shares only and no, or very few, B-class shares. Senior Counsel for Mr Iliopoulos confirmed to me that it is asserted that only three A-class shares were ever issued.
That is the pleading in the proposed amended statement of claim. However, Mr Sartori has sworn there were four A-class shares. One sees at paragraphs 10, 11 and 15 of his affidavit filed 11 May 2010, that is what he says. He has also sworn that the A-class shares would own 50 per cent of the company and B-class shares the other 50 per cent. In circumstances where the accuracy of Mr Sartori’s recollection of events in the late 1970s is clearly going to be critical, an error as to something as significant as how many A-class shares were issued seems likely to be significant.
Next, the memorandum and articles of association of the company have been put on affidavit by David Arthur Rewell, whose affidavit was filed on 26 March 2010. There is no suggestion that they have ever been altered, and no such assertion is made in the amended statement of claim. The articles of association clearly show share capital of 100,000 shares, of which 100 are A-class and 99,900 are B-class. That is clearly inconsistent with Mr Sartori’s account.
Mr Sartori’s affidavit shows that he bought one A-class share on 16 February 1991 for $2. He knew by 1985 there were four A-class shareholders, because that is what exhibit JS2 says, and he was advised that he could take his concerns further at that time. In my view, the affidavit also shows that his prosecution of such interests as he had thereafter was extremely dilatory.
In about 1993 to 1994, he became aware that B-class shares had been issued. Thereafter he took no material steps to protect the interests he now claims were so severely damaged by the issue of additional A‑class shares and by B-class shares. Mr Sartori has sold his shares - or arguably his A-class share only, and the rights to sue to enforce his position for $2,500. His share is worth between $143,000 and $628,550, according to Mr Dye. One would have to say, as a matter of impression, that Mr Sartori’s case faces some very real forensic problems.
I move on to consider the various payments that are said to, as it were, expand the scope of the proceeding that Mr Sartori would bring. First, there is the question of the payment to Ms Cox. The liquidator, who gave evidence and was cross-examined, says that he has seen payments of this order before. I confess that, to me, and I have been dealing with redundancy payments since about 1976, five years’ pay as redundancy pay seems enormous. I further accept that Mr Ladd, one of the former directors of the company, had put in place a mechanism to pay Ms Cox $1 million, as is shown by his will. But that does not mean that the payment was of necessity improper. The applicant’s case treats the

$1 million payment to Ms Cox as money in the bank for the company.
The liquidator says he is not overly keen to sue, and if I may say so, I can understand why. He has about $5.5 million dollars to hand, and he says it is being eaten up somewhat rapidly by court cases. And that seems to me to be highly likely to be true.
We have no idea what Ms Cox would say. She appears to be a shareholder, if the B-class shares originally envisaged are not wholly set aside. Any claim would necessarily involve a component of solicitor client cost. I am not prepared to accept that the claim against Ms Cox is a certainty. The letter from Messrs Belleli King dated 20 May 2010 is not, in my view, as conclusive as they assert. It is not in fact known whether the payment was “a genuine payment in respect of past services rendered to the company” or not. In my view it is impossible to evaluate in any meaningful way the chances of success in that action.
I turn to the question of the factoring scam alleged. This is said to be worth $1.8 million or thereabouts, by Ms Sideris and covers the period from 1 July 2000 till 20 June 2007 according to paragraph 22 of her affidavit sworn 14 May 2010. Senior Counsel for Mr Iliopoulos says that Ms Sideris’ evidence is uncontradicted, but there are two things that need to be borne in mind. First, Ms Sideris is clearly partisan; she has been involved with Mr Iliopoulos’ affairs for some time, and I note in passing, further, that she – and for that matter Mr Iliopoulos also were not believed by Mr Gillard when there was an important and direct conflict of evidence with Ms Cox. But if one turns to the reasons given by Mr Gillard at paragraph 58, one finds the following, I will read it out:
“The old factoring scheme operated for many years and ceased in September 2007. A driver when he completed his details form when first engaged by the vendor could indicate he wished to factor his debt. He would then complete a power of attorney in favour of Mrs Cox which enabled her to assign his debt to H.I. Investments and if he opted to do so at the end of the freight delivery he was then paid 96 % of his debt within a few days of completion. H.I. Investments made four % and the vendor charged it an administration fee which was recorded in its accounts. The scheme was a financial success for H.I. Investments which made about $100,000 plus profit each year and Mrs Cox, who had units in the trust received one third in the vicinity of approximately $30,000 each year. When the factoring scheme ceased, in September 2007, the vendor put in place an upfront payment scheme. Instead of the debt being assigned, the vendor paid the driver upon request, 96 % of his debt. For the driver who wanted his money quickly, he was prepared to sacrifice four %. He was happy to continue driving for the vendor which of course was in its interest. Evidence revealed that drivers were not necessarily loyal and this no doubt had an attraction to continue to drive for the vendor. For the vendor in addition it received the four % which was steady income as was demonstrated in the monthly accounts. However for the vendor starting up the scheme, it was necessary to inject a substantial sum of money something in the order of half a million dollars at the beginning of the scheme, to enable the drivers to be paid. No doubt over time the steady income from the customers would enable the vendor to recover the income that had to be provided up front. A stage would be reached when the income flow would repay the initial capital injected into the business to cover the initial payments.”
Those findings resonate with the evidence of Mr Dye, the liquidator. His evidence was that running a factoring scheme itself would cost money. I note that HI Investments made about $100,000 plus profit per year. That is nothing remotely like $1.8 million in seven years. Mr Gillard’s reasons tend to suggest that there was nothing improper in either the old or any new factoring scheme and once again the chances of success must be said to be debatable, both as to success in its entirety and as to the quantum of any success.
That brings me to the loan to PFL Properties of about $2.95 million that is shown in the 2007 balance sheet. I accept Mr Bigmore’s submissions that when properly analysed, that must mean up until the end of 2007, it is clear on the face of the document. There is, however, another aspect to the evidence about this, and it is the Form 520, which is exhibit SI5 to Ms Sideris’ affidavit, filed 25 March 2010. Amongst assets asserted as at 27 November 2008, there is $5.6 million in cash, and loans and advances in the order of $2.3244 million.
It should be noted that the liquidator was very clear to say that this was not his document, he disassociated himself from it entirely. We don’t know who filled it in or completed it, but it may have been filled in by the very people the applicant says are dishonest and fraudulent; it is scarcely a conclusive document. What the liquidator does say is that whatever the sum for loans to PFL Properties, or whatever the sums disclosed in the Form 520 may have been, they weren’t there when he was appointed on 22 December 2008, and I accept his evidence.
The liquidator is extremely experienced and has literally decades of experience in that capacity. He was, I would record, an impressive witness. I do not accept that there is $2.9 million available to the company as asserted. I would interpolate and say that while the liquidator is clearly very exasperated with Mr Iliopoulos – not surprisingly, perhaps when records have been withheld and there’s litigation on foot all over the place – nonetheless I accept that he was an honest witness and there is nothing to suggest he is not properly discharging his functions.
It was put by way of criticism of the liquidator that his failures to sue Ms Cox, the former directors about the scam and to recover the alleged $2.9 million was manifest and unjustifiable. I reject this. The reasoning disclosed by the liquidator in his evidence struck me as being sound on all points. It was even hinted that in some fashion, the liquidator was deliberately aiding and abetting the former directors;

I don’t accept any such case at all, if it was indeed pressed. Clearly the liquidator is doing his best in difficult circumstances.
That leads to the final aspect of the aggregate, asserted on behalf of

Mr Iliopoulos, namely the $2.5 or so million he owes to the company. It must be a question of some considerable debate as to whether that would be recoverable. I note that the liquidator’s position is that he will transfer Mr Sartori’s share to Mr Iliopoulos if he pays the amount due under the award. It would be open no doubt to Mr Iliopoulos to pay the award, take the share, and proceed relatively unencumbered with his proceeding in the Federal Court; that has not occurred.

I would make a couple of other points. I accept that Mr Sartori and therefore Mr Iliopoulos for these purposes are in a position to bring a direct action against the former directors of the company. The respondents submitted that the rule in Foss v Harbottle applied, but the actions asserted arise from asserted breaches of fiduciary duty. They assert in substance, fraud, and in particular in respect of the matters to do with Ms Cox’s redundancy payment and the factoring scam. I have been referred to the case of Pearl Coast Divers, which makes it clear the court would have an inherent power to sanction such an action, but one does have to bear in mind s.140 of the Evidence Act 1995: fraud is not a matter lightly to be assumed. Ultimately we return to what Lindgren J said in Glew at paragraph 12:
“Perhaps little more can usefully be said than that a debtor must satisfy the court that there is sufficient substance to the counterclaim settled for cross-demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.”
In my view, bearing in mind the very significant difficulties that seem to me to attend the proposed amended statement of claim, the fact that even if successful, the only present assets truly available to the company are $5.5 million, and that the various causes of action pressed or proposed against Ms Cox, the factoring scam and the loan to PFL are all attended by very considerable doubts, and finally by the fact that it is by no means clear that the debt owed by Mr Iliopoulos will ever be recoverable by the company, it is clear that in this instance, the appropriate balance is struck by not permitting the applicant to litigate in the ordinary way. It is, of course, still open to him to resist the creditor’s petition should one follow as I have no doubt it will, and I would dismiss the application with costs.

I certify that the preceding thirty (30) paragraphs are a true copy of the reasons for judgment of Burchardt FM

Associate: Ms B. Evans

Date: 21 May 2010