In the matter of BBY Limited (Receivers and Managers Appointed) (in Liquidation)

Case •

[2019] NSWSC 1271

•

01 May 2019

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: In the matter of BBY Limited (Receivers & Managers Appointed) (in Liquidation) [2019] NSWSC 1271
Hearing dates: 1 May 2019
Date of orders: 01 May 2019
Decision date: 01 May 2019
Before: Rees J
Decision:

Transaction avoided: see paragraph [34]

Catchwords: CORPORATIONS — Winding up — Voidable transactions — Insolvent transactions — Unfair preferences — Where loan to related entity — Loan repaid during relation-back period — Identification of true lender where conflicting evidence — Whether lender “creditor” of the company — Whether company insolvent at time of preference — Other elements of action admitted — Transaction avoided.
Legislation Cited: Civil Procedure Act 2005 (NSW), s 100
Corporations Act 2001 (Cth), ss 127, 588FA, 588FC, 588FE, 588FF
Income Tax Assessment Act 1936 (Cth), s 109N
Cases Cited: Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran (2005) 54 ACSR 410; [2005] NSWCA 243
Macquarie Health Corporation Limited v Federal Commissioner of Taxation (1999) 96 FCR 238; [1999] FCA 1819
Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 at 224; [2001] NSWSC 621
section 100 of the Civil Procedure Act 2005 (NSW).
Category:Principal judgment
Parties:

Ian Richard Hall and Stephen Ernest Vaughan in their capacity as liquidators of BBY Limited (Receivers and Managers Appointed) (in Liquidation) ACN 006 707 777 (First Plaintiff)
BBY Limited (Receivers and Managers Appointed) (in Liquidation) (ACN 006 707 777) (Second Plaintiff)
BBY Holdings Pty Ltd (Receivers and Managers Appointed) (in Liquidation) (ACN 075 187 432) (Third Plaintiff)

  GARF Pty Limited ACN 102 659 594 (Defendant)
Representation:

Counsel: Mr D Greenberg, solicitor (Plaintiffs)
Solicitors: Ashurst Australia (Plaintiffs)

  There was no appearance for the Defendant.
File Number(s): 2018/151973

EX TEMPORE Judgment

  1. HER HONOUR: In this matter, the liquidators of BBY Limited (Receivers and Managers Appointed) (in Liquidation) (BBY) seek an order under section 588FF(1)(a) of the Corporations Act 2001 (Cth) that the defendant, GARF Pty Limited, pay BBY $2.5 million together with interest and costs.

  2. BBY was the operating company of a group of companies referred to as the BBY Group which provided a range of financial services including stockbroking, dealing in financial products, asset management, financial management and research. Since 2004, Glenn Rosewall was a director of BBY.

  3. Mr Rosewall was also a director of the defendant, GARF Pty Limited, since that company was incorporated in 2002. He is also a 50% shareholder of the company. The defendant admits that it was a related entity of BBY at all relevant times, being a body corporate whose director and shareholder was also one of the directors of BBY.

  4. GARF Pty Ltd was at all relevant times the trustee of The Glenn A Rosewall National Private Super Fund, a superannuation fund established in 1991. Mr Rosewall was at all relevant times the sole member of the fund. This is admitted by GARF Pty Ltd in a defence filed on 15 February 2019, verified by Mr Rosewall.

  5. Mr Rosewall was also a director of BBY Staff Holdings Pty Ltd, a company incorporated in 1993.

The loan

  1. On 11 June 2014, BBY executed a share trade for a client, Mineral Resources Pty Ltd, purchasing $192 million worth of shares in Aquila Resources Limited at $3.75 cents a share. Unfortunately, the share price of Aquila Resources Limited immediately fell to $3.61 and then to $3.54 a share. The Australian Stock Exchange made margin calls of some $40 million on BBY. Emails from BBY staff with the Australian Stock Exchange and Mr Rosewall evidence a “scramble” to raise funds to pay the margin calls.

  2. Amongst the funds raised to pay the margin calls was $2.5m from the defendant, which is the subject of these proceedings. On 12 June 2014 at 5.08 pm, April Yuen of BBY sent an email to Mr Rosewall:

Please confirm I will be transferring $2.5 million from GARF Superfund, Account 553574274 to BBY Trust Account for the below purpose.

It is clear from the preceding email chain that the “below purpose” was to enable BBY to meet the margin call. Mr Rosewall, Executive Chairman of BBY, replied, “Ok”.

  1. The bank statement for “GARF Pty Limited ATF The Glenn A Rosewall National” (presumably The Glenn A Rosewall National Private Super Fund) records an internet withdrawal of $2.5 million on 12 June 2014 to BBY, and an internet deposit in the same amount on 24 June 2014 from BBY. In the intervening period, the share sale transaction had settled and the Australian Stock Exchange had returned the margin call monies to BBY.

  2. Somewhat in contradiction to this evidence is a document entitled “Unsecured Loan Agreement” dated 12 June 2014 in respect of a loan from GARF Pty Limited as trustee for the Glenn A Rosewall National Private Superfund to BBY Staff Holdings Pty Limited. The loan was for $2.5 million. The term of the loan was “no more than 14 days”. Interest was payable on the loan at the benchmark interest rate given in section 109N(2) of the Income Tax Assessment Act 1936 (Cth).

  3. Whilst the “Unsecured Loan Agreement” is dated 12 June 2014 as part of its printed text, that does not preclude the possibility that the document was prepared or executed on a date other than 12 June 2014. There is no evidence as to the provenance of the Unsecured Loan Agreement or precisely when it was prepared or executed apart from the date printed within it.

  4. The Unsecured Loan Agreement was executed by Mr Rosewall on behalf of both GARF Pty Ltd and BBY Staff Holdings Pty Limited. As BBY Staff Holdings Pty Ltd had more than one director and secretary at the time, the execution of the “Unsecured Loan Agreement” was not effective having regard to the requirement of section 127(1) of the Act:

A company may execute a document without using a common seal if the document is signed by:

(a)   2 directors of the company; or

(b)   a director and a company secretary of the company …

This has the result, it seems to me, that the document may suffer some problems if either company sought to enforce it. It does not detract from the possibility that it otherwise records a real agreement, but it does suggest that the document was prepared and executed without regard to proper formalities, and perhaps in haste.

  1. As such, there is a discrepancy between the Unsecured Loan Agreement and the emails and bank statement as to the identity of the borrower. The Unsecured Loan Agreement records the borrower as BBY Staff Holdings Pty Limited. From the other documents, it may be inferred that the borrower was BBY.

  2. Having searched the records of BBY Group, the liquidators have found no evidence that any security was ever granted to GARF Pty Limited by BBY in relation to the loan. However, if the loan was not to BBY but to BBY Staff Holdings Pty Limited, then such searches do not assist. The loan from GARF Pty Ltd to BBY Staff Holdings Pty Limited was self-evidently unsecured and described as such in the title of the document.

  3. The liquidators submit that the Court should disregard the Unsecured Loan Agreement as not reflective of the true transaction. The liquidators say that the fact that this is so is clarified by admissions made by GARF Pty Ltd in its defence. There are two relevant admissions. First, GARF Pty Limited admits that it made the sum of $2.5 million available to BBY by way of a loan through an electronic funds transfer into BBY’s bank account, and that the payment was advanced as a loan and was repayable at interest. The fact that GARF Pty Limited admits that it made the monies “available to BBY by way of loan” does not squarely clarify who the borrower was, but goes some way towards doing so.

  4. Second, the liquidators, in their Points of Claim, also pleaded that on 24 June 2016 (sic), BBY paid $2.5 million to GARF Pty Ltd in full repayment of the loan. In its defence, GARF Pty Limited admitted this so long as the date of the payment was corrected to June 2014.

The liquidation

  1. On 17 May 2015, voluntary administrators were appointed to BBY. GARF admits that this is the relation-back day under the Act. On 18 May 2015, receivers and managers were appointed to the company by St George Bank under a charge. On 22 June 2015, the voluntary administrators were appointed as liquidators of the company.

  2. It is apparent from the evidence before me that the liquidation has involved a complicated and extensive review of a number of companies, hundreds of bank accounts and a multitude of claims from numerous creditors. Judgments have already been given in this Court by Brereton J in proceedings commenced by the liquidators in 2015 seeking guidance as to how to distribute client monies held by the BBY Group in circumstances where the entitlements of clients far exceeded the remaining monies: In the matter of BBY Ltd (receivers and managers appointed) (No 2) (2018) 363 ALR 492; [2018] NSWSC 346; In the matter of BBY Ltd (receivers and managers appointed) (in liquidation) (No 3) [2018] NSWSC 1718.

  3. In November 2016, BBY Staff Holdings Pty Ltd was deregistered. Its assets presently vest in ASIC.

These proceedings

  1. On 15 May 2018, these proceedings were commenced. Although Mr Rosewall was initially a defendant, he has since become bankrupt and the proceedings against him have been discontinued.

  2. As Mr Rosewall is the sole officeholder of GARF Pty Limited, it has fallen to his trustee in bankruptcy to decide whether to cause GARF Pty Limited to defend these proceedings. On 20 March 2019, the trustee in bankruptcy advised that he did not propose to do so. As such, these proceedings are not defended but this does not absolve the liquidator from the onus of proof in establishing each of the elements required before the order sought can be made.

Voidable transaction

  1. Section 588FF(1)(a) of the Act provides that where, on the application of company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make orders including an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction. In respect of voidable transactions, the liquidators rely on section 588FE(4):

The transaction is voidable if:

(a)   it is an insolvent transaction of the company; and

(b)   a related entity of the company is a party to it; and

(c)   it was entered into, or an act was done for the purpose of giving effect to it, during the 4 years ending on the relation‑back day.

  1. GARF Pty Limited admits that the payment was made to a related entity of BBY within four years of the relation-back day. GARF Pty Limited does not otherwise admit the components of the liquidator’s claim. As such, the question for the Court is whether the repayment of the loan was an insolvent transaction of the company. In this regard, the liquidators rely on section 588FC(a), which provides:

A transaction of a company is an insolvent transaction of the company, if and only if, it is an unfair preference given by the company … and:

(a)   any of the following happens at a time when the company is insolvent:

(i)   the transaction is entered into; or

(ii)   an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

  1. As to whether the transaction amounts to an unfair preference, the liquidators rely on section 588FA(1), which provides:

A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a)   the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b)   the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; …

  1. The company referred to in section 588FA(1) is, in this case, BBY. The question is whether GARF Pty Ltd was a “creditor” as referred to in that section. As the Full Federal Court, comprising Hill, Sackville and Finn JJ, made plain in Macquarie Health Corporation Limited v Federal Commissioner of Taxation (1999) 96 FCR 238; [1999] FCA 1819 at [132]:

… To this must be added the requirement in s588FA(1) that a transaction is an unfair preference if and only if the company and the creditor are parties to the transaction.

  1. Having regard to these four items of evidence to which I have earlier referred, being the emails, the bank statement, the Unsecured Loan Agreement and the pleadings, it is for me to determine on the balance of probabilities whether GARF Pty Ltd was a creditor of BBY or not. That is, was the loan transaction correctly recorded in the Unsecured Loan Agreement or, rather, as evidenced by the contemporaneous emails and bank statements.

  2. It seems to me that the preponderance of evidence supports a finding that the loan was from GARF Pty Ltd to BBY, not BBY Staff Holdings Pty Ltd. It seems to me that any ambiguity is resolved by the admissions made by GARF Pty Ltd in its defence in these proceedings, verified by Mr Rosewall, which fairly read, amount to an admission that the loan was made by GARF Pty Ltd to BBY and repaid by BBY. I find that the Unsecured Loan Agreement was an attempt to place a character on the transaction which did not reflect the transaction at the time it was conceived and effected. It seems to me, therefore, that the requirements of section 588FA(1)(a) are satisfied. BBY and GARF Pty Ltd as creditor were parties to the transaction. BBY Staff Holdings Pty Ltd was not.

  3. As to section 588FA(1)(b), according to the liquidators’ most recent estimates, it is likely that at the conclusion of the liquidation there will be some $40 million dollars of unpaid creditors of BBY and the BBY Group comprising trade creditors, employees and sub-contractors, landlords, clients, St George Bank and related party loans. It is not entirely clear what portion of that $40 million relates to BBY alone, and it would appear that the liquidators have experienced difficulty segmenting the creditors into those of individual companies as BBY Group would appear to have been operated in a combined fashion by its former directors. That said, it is readily apparent that the unsecured creditors of BBY are unlikely to have any unsecured amounts repaid in full, or perhaps at all. Section 588FA(1)(b) is thus satisfied. Accordingly, I find that the repayment of the loan by BBY to GARF Pty Ltd meets the description of an unfair preference in section 588FA(1)(a) and (b) of the Act.

Insolvency

  1. The question there becomes whether the loan repayment on 24 June 2014 was an insolvent transaction as it was repaid when BBY was insolvent. In deciding whether a company is insolvent, the law was summarised by Giles JA (with whom Hodgson and McColl JJA agreed) in Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran (2005) 54 ACSR 410; [2005] NSWCA 243 at [93], citing Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213 at 224; [2001] NSWSC 621, who noted that insolvency is a question of fact:

… to be ascertained from a consideration of the company’s financial position taken as a whole. In considering the company’s financial position as a whole, the court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable.”

  1. Accompanying the originating process was an affidavit of Stephen Vaughan, one of the liquidators, annexing a solvency report, in which he concluded that the period of insolvency of BBY began in August 2014. Self-evidently, this is some six weeks after the transaction in question. In a supplementary affidavit filed yesterday, Mr Vaughan explained that the conclusion contained in the summary of the insolvency report was not intended to be exhaustive. Mr Vaughan pointed to aspects of the analysis which he and his staff had conducted which demonstrated consistent monthly and working capital deficiencies from January 2014 on. Mr Vaughan also provided a summary of emails from creditors to BBY, and some internal emails and text messages of BBY staff, which indicate that from January 2014, BBY had difficulties paying its external creditors, including the Australian Taxation Office, the Office of State Revenue, St George Bank, ANZ Bank and stockbrokers.

  2. It appears to me from the liquidator’s summary of contemporaneous records that BBY was, from January 2014 on, in significant financial distress and, further, BBY’s staff recognised the seriousness of the position that the company was in. The staff, in their emails, indicated a willingness to endeavour to raise funds by continuing to make trades in order to make up their losses, that is, to chase their losses.

  3. Having regard to the analysis of himself and his staff, Mr Vaughan considered that BBY was insolvent at all times between 1 January 2014 and 17 May 2015. I agree.

  4. The requirements of section 588FC(a) are thus met, that is, the repayment of the loan to GARF Pty Ltd was an insolvent transaction of BBY as it was an unfair preference given by BBY at a time when it was insolvent.

  5. It follows therefore that this was a voidable transaction under section 588FE(4). The liquidators having established the only component of the section which was disputed by GARF Pty Limited, being whether the repayment was an insolvent transaction of the company, I am prepared to make the orders sought by the liquidator which appears to me to be appropriate in the circumstances.

ORDERS

  1. I make the following orders:

  1. Pursuant to section 588FF(1)(a) of the Corporations Act 2001 (Cth). GARF Pty Limited pay BBY Limited (Receivers and Managers appointed) (in liquidation) the sum of $2,500,000 together with interest pursuant to section 100 of the Civil Procedure Act 2005 (NSW).

  2. Order GARF Pty Limited to pay the plaintiffs’ costs of the proceedings.

  3. Direct the solicitors for the plaintiffs to notify the Trustee in Bankruptcy of Glenn Rosewall of these orders and provide a copy, when available, of the ex tempore judgment delivered today in this matter.

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Decision last updated: 24 September 2019

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