Kalls Enterprises Pty Ltd (in liq) v Baloglow - [2007] NSWCA 191

No judgment structure available for this case.

Reported Decision: 63 ACSR 557

Appeal Outcome: Special leave application refused with costs by the High Court - 7 March 2008

New South Wales

Court of Appeal

CITATION: Kalls Enterprises Pty Ltd (In Liquidation) & Ors v Baloglow & Anor [2007] NSWCA 191
This decision has been amended. Please see the end of the judgment for a list of the amendments.

HEARING DATE(S): 10, 11 and 23 May 2007

JUDGMENT DATE:
9 August 2007

JUDGMENT OF: Giles JA at 1; Ipp JA at 210; Basten JA at 230

DECISION: (1) Appeal allowed; (2) Set aside orders 1, 3 and 5 in the form of orders dated 5 July 2006 recording orders made by the trial judge and in lieu thereof order: (2.1) that there be judgment for the second plaintiff against the first defendant for $555,000 plus interest as calculated by the second plaintiff and the first defendant and notified to the Registrar, or in the event of disagreement upon calculation as determined by the Court upon written submissions filed in accordance with order 3 below; and (2.2) that the first defendant pay the plaintiffs' costs; (3) Direct that the second appellant and the first respondent calculate the interest and notify the Registrar of the calculated amount within 14 days, and that in the event of disagreement upon calculation the second appellant file written submissions stating the interest for which it contends and the reasons therefor within a further 14 days and the first respondent file responsive written submisisons within a further 14 days; (4) Order that the first respondent pay the appellants' costs of the appeal and have a certificate under the Suitors Fund Act if otherwise qualified; (5) Order that the appellants pay the second respondent's costs of the appeal relating to repayment of the $5,000 paid pursuant to order 5 made by the trial judge; (6) Cross-appeal dismissed; (7) Order that the cross-appellant pay the cross-respondent's costs of the cross-appeal; (8) Reserve liberty to the appellants to apply for an order for repayment of the $5,000 referred to in order 5 made by the trial judge and variation of order 5 above, any such application to be made by notice of motion filed within 14 days accompanied by written submissions with responsive written submissions within a further 14 days; the Court's determination to be made upon the written submissions.

CATCHWORDS: CORPORATIONS LAW - voidable transaction under Pt 5.7B Corporations Law - business of either company A or company B sold - proceeds of sale paid to creditor of director of both companies - claim that a Transaction as defined which included the payment was a voidable transaction - whether one or other company party to the Transaction - whether a Transaction of the company - by majority, was a Transaction of the company - was voidable transaction. EQUITY - first limb of Barnes v Addy - whose business was it - whether loan to director who then paid creditor - whether breach by director of fiduciary duty owed to either company - whether receipt of trust property by creditor - whether creditor had knowledge of breach of fiduciary duty - business was business of company A - not loan to director - proceeds of sale to be held by company B for company A - breach of fiduciary duty owed to both companies - company B could not account to company A - money put out of reach of company A - disregard of interests of creditors of both companies - creditor knew business was business of company A and that payment meant company B could not account to company A and that money put out of reach of company A - also had knowledge from which honest and reasonable man would have thought was risk of prejudice to creditors - had knowledge of breach of fiduciary duty.

LEGISLATION CITED: Corporations Law, Pt 5.7B

CASES CITED: Australian Postal Corporation v Lutak (1991) 21 NSWLR 584;
Baden v Societe Generale Pour Favoriser le Developpement du Commerce et de L'Industrie en France SA (1993) 1 WLR 509;
Bank of Credit and Commerce International (Overseas) Ltd v Akindele (2001) Ch 437;
Barnes v Addy (1874) LR Ch App 244;
Bartercard Pty Ltd v Wily (2001) 39 ACSR 94;
Belmont Finance Corporation v Williams Furniture Ltd (No 2) (1980) 1 All ER 393;
Black v S Freedman & Co (1910) 12 CLR 105;
Creak v James Moore & Sons Pty Ltd (1912) 15 CLR 426;
Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371;
DPC Estates Pty Ltd v Grey and Consul Development Pty Ltd (1974) 1 NSWLR 443;
El Ajou v Dollar Land Holdings plc (1994) 2 All ER 685;
re Emanuel (No 14) Pty Ltd (in liquidation); Macks v Blacklaw & Shadforth Pty Ltd (1997) 24 ACSR 292;
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22;
Fink v Fink (1946) 74 CLR 127;
Farrow Finance Co Ltd (in liquidation) v Farrow Propeties Ltd (in liquidation) (1997) 26 ACSR 544;
Greater Pacific Investments Pty Ltd (in liquidation) v Australian National Industries Ltd (1996) 39 NSWLR 143;
Grove v Flavel (1986) 43 SASR 410;
Hancock Family Memorial Foundation Ltd v Porteous (1999) 151 FLR 191;
Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198;
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41;
re International Vending Machines Pty Ltd and Companies Act (1962) NSWR 1408;
Kinsela v Russell Kinsela Pty Ltd (in liquidation) (1986) 4 NSWLR 722;
re Lands Allotment Co (1894) 1 Ch 616;
Lifestyle Earls Court Pty Ltd (in liquidation) v Mentone Mansions Pty Ltd [2006] VSC 2;
Linter Group Ltd v Goldberg (1992) 7 ACSR 580;
Lipkin Gorman (a firm) v Karpnale Ltd (1991) 2 AC 548;
Macquarie Health Corporation Ltd v Commissioner of Taxation (1999) 96 FCR 238 at [133];
Mann v Sangria Pty Ltd (2001) 38 ACSR 307;
Mills v Mills (1938) 60 CLR 150;
Mulkana Corporation NL (in liquidation) v Bank of New South Wales (1983) 8 ACLR 278;
O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262;
Prentice v St George Bank (2002) 20 ACLC 923;
Robins v Incentive Dynamics Pty Ltd (in liquidation) (2003) 45 ACSR 244;
Rolled Steel Products Ltd v British Steel Corporation (1986) 1 Ch 246;
Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309;
Spies v The Queen (2000) 201 CLR 603;
Taylor's Fashions Ltd v Liverpool Trustees Co (1982) 1 QB 133;
Tosich Constructions Pty Ltd (in liquidation) v Tosich (1997) 23 ACSR 466;
V R Dye & Co v Peninsual Hotels Pty Ltd (1999) 3 VR 201;
Walker v Winborne (1976) 137 CLR 1;
Wily v Bartercard Pty Ltd (2000) 34 ACSR 186.

PARTIES: Kalls Enterprises Pty Ltd (In liquidation) - First Appellant
AA Australian Commercial Laundries Pty Ltd - Second Appellant
Christopher Damien Darin (in his capacities as Liquidator of Kalls Enterprises Pty Ltd (In Liquidation) and AA Australian Commercial Laundries Pty Ltd (In Liquidation) - Third Appellant
Theo Baloglow - First Respondent and Cross-Appellant
Peter Kaliaropoulos - Second Respondent and Cross-Respondent

FILE NUMBER(S): CA 40441/06

COUNSEL: R G Forster SC & P A Fury - Appellants
B W Rayment QC and C P Locke - First Respondent and Cross-Appellant
T Alexis SC - Second Respondent and Cross-Respondent

SOLICITORS: Koffels - Appellant
Oliveri Attorneys - First Respondent and Cross-Appellant
Hazan Hollander - Second Respondent and Cross-Respondent

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): 1841/99

LOWER COURT JUDICIAL OFFICER: Hamilton J

LOWER COURT DATE OF DECISION: 21 June 2006

LOWER COURT MEDIUM NEUTRAL CITATION: Kalls Enterprises Pty Ltd (In Liq) v Baloglow [2006] NSWSC 617 and [2006] NSWSC 1021

CA 40441/06
SC 1841/99

GILES JA
IPP JA
BASTEN JA
Thursday 9 August 2007
(addendum 28 August 2007)

KALLS ENTERPRISES PTY LTD (In liquidation) & ORS

v

BALOGLOW & ANOR

Judgment

1 GILES JA: Kalls Enterprises Pty Ltd (“KE”) sold to Decision Technology Pty Ltd (“DT”) a laundry business known as Total Quality Laundry Service (“TQLS”). Although the sale was by KE, an issue in the proceedings was whether all or most of the assets of the laundry business were owned by AA Australian Commercial Laundries Pty Ltd (“AA”).

2 The sale was settled on 19 December 1995. A cheque for $660,611.17 drawn in favour of Dowe Xenos (“Dowe”), the solicitors acting for the vendor, was endorsed by them to the trust account of Konstan & Associates (“Konstan”), the solicitors acting for Mr Theo Baloglow. After what amounted to a refund of some of the money, Mr Baloglow received $555,000 in satisfaction of a liability of Mr Con Kalls and Mr Peter Kaliaropoulos to pay him that amount. Mr Kalls was a director of each of KE and AA.

3 In April 1996 both KE and AA went into liquidation. In 1999 they and their liquidator brought proceedings in which, by the amended statement of claim filed on 11 November 2001, relief was claimed against Mr Baloglow which included -

(a) claimed by the liquidator, an order for payment of $555,000 and interest to KE, alternatively to AA; and

4 The claim to an order for payment of $555,000 was made under Pt 5.7B of the Corporations Law (“the Law”), on the ground that the $555,000 was paid under, or represented the benefit received because of, a transaction of KE or AA which was a voidable transaction as described in s 588FE of the Law. The claims to equitable compensation were on the ground that the $555,000 had been received by Mr Baloglow with knowledge that it was paid in breach of fiduciary duty under the first limb of Barnes v Addy (1874) LR Ch App 244. There were other claims in the amended statement of claim, but they are no longer relevant and need not be described.

5 Mr Balogow cross-claimed in the proceedings against Mr Kaliaropoulos for a declaration that, if he was ordered to pay $555,000 under Pt 5.7B, he could enforce a judgment for $620,000 and interest obtained against Mr Kaliaropoulos on 25 September 1995. There were other cross-claims, but they also need not be described.

6 The hearing took place before Hamilton J over eighteen days in the latter part of 2005 and the early part of 2006.

7 In reasons published on 21 June 2006 (Kalls Enterprises Pty Ltd (in liq) v Baloglow [2006] NSWSC 617) the judge held that the payment of the $555,000 was not part of the transaction of KE or AA on which the plaintiffs relied for the voidable transaction. It followed that there could not be a voidable transaction. It was not necessary for the judge to consider whether the transaction was a voidable transaction within s 588FE, whether defences available to Mr Baloglow under s 588FG had been made out, or what order should be made under s 588FF, and he did not do so. The judge held that the money was paid in breach of the fiduciary duty owed to KE by Mr Kalls, but declined to hold that it was paid in breach of Mr Kall’s fiduciary duty owed to AA. He held that in relation to the breach of fiduciary duty owed to KE Mr Baloglow did not have the knowledge of misapplication of trust property necessary for Barnes v Addy liability.

8 The claims against Mr Baloglow were accordingly dismissed, and the cross-claim against Mr Kaliaropoulos was consequentially dismissed.

9 In reasons published on 23 June 2006 (Kalls Enterprises Pty Ltd (in liq) v Baloglow [2006] NSWSC 1021) the judge held that there should be a Bullock order that the costs payable by the plaintiffs to Mr Baloglow included the costs payable by Mr Baloglow to Mr Kaliaropoulos. That order was made, together with an order that $5,000 paid into court by the plaintiffs be paid to Mr Kaliaropoulos on account of the costs payable by Mr Baloglow to Mr Kaliaropoulos.

10 KE, AA and the liquidator appealed against the dismissal of their claims, contending that the judge had erred in his holding as to the transaction and in failing to find a voidable transaction and make an order against Mr Baloglow; and further, that the judge had erred in failing to find breach of fiduciary duty owed to AA and in his finding as to Mr Baloglow’s knowledge necessary for Barnes v Addy liability. By a notice of contention Mr Baloglow contended that if there was relevantly a transaction of KE or AA, it was not a voidable transaction, that there was a defence under s 588FG, and that an order for payment should otherwise not be made; and further, that payment to him in breach of fiduciary duty owed to KE had not been proved, nor had it been proved that any money received by Mr Baloglow was “impressed with a trust in favour of KE or AA”. In substance, all issues agitated at the trial were re-agitated on appeal, including some with which the judge had not dealt.

11 The appellants also appealed against the Bullock order and sought recovery of the $5,000. Mr Baloglow cross-appealed in relation to his cross-claim against Mr Kaliaropoulos, but protectively in the event that the appeal as to the claim under Pt 5.7B was upheld. The notice of cross-appeal was inappropriately worded, but in submissions it was said that no more was sought than had been sought in the cross-claim.

12 For the reasons which follow, in my opinion the appeal against the dismissal of the plaintiffs’ claims should be upheld as to the Barnes v Addy claim but not as to the claim under Pt 5.7B. The Bullock order should consequentially be set aside; recovery of the $5,000 is not finally decided. It is not necessary to consider the cross-appeal, which should be dismissed.

Events to 2 November 1995

13 The date of 2 November 1995 is adopted because, as will later be seen, the transaction on which the plaintiffs relied for the claim under Pt 5.7B was made up of a composite of dealings commencing with the entry on that date into an agreement for the sale of the laundry business. The composite transaction must, however, be understood against earlier events, which are also relevant to the Barnes v Addy claim.

14 Prior to 22 February 1994 KE conducted the laundry business. The directors of KE were Mr Kalls and Mr Kaliaropoulos, who were brothers. Its effective controller was Mr Kalls.

15 On 22 February 1994 TQLS was sold to AA. KE and Swanhill Pty Ltd (“Swanhill”) were equal shareholders in AA, the latter company being controlled by Mr Baloglow. The directors of AA were Mr Kalls and Mr Baloglow. Under a deed dated 22 February 1994 (“the February 1994 deed”), KE and Swanhill were each to lend $600,000 to AA, in order that it could pay to KE the purchase price of $600,000 plus stock at valuation estimated to be a further $600,000. Swanhill paid its $600,000.

16 Mr Kalls had made misrepresentations to Mr Baloglow concerning the financial state of TQLS. AA did not trade successfully. By July 1994 Mr Baloglow was complaining about the misrepresentations, and was seeking to extricate himself and his company from AA. By September 1994 Mr Baloglow had withdrawn from involvement in the management and affairs of AA.

17 The judge said -

“9 After Baloglow’s departure, it would seem that TQLS was conducted by KE with funds provided by KE. There is no evidence that the sale of TQLS by KE to AA was ever formally rescinded. Nor is there any evidence of any arrangement between AA and KE as to the assets or conduct of the business. There are appearances that AA played some part in the conduct of the business, eg, by continuing to be the employer of the workers, although it would seem that KE provided the wages. AA continued to be the owner of the business name TQLS. However, whatever arrangements there were between the companies concerning these matters are under the veil of mystery drawn by the absence of any evidence, in or out of court, from Kalls, who was the effective controller of both companies at this time, so that the arrangements were known to him alone.”

18 At a later point in his reasons the judge said -

“63 ... During the hearing, the evidence as to the relations between KE and AA as to the ownership and conduct of TQLS after the departure of Baloglow and while Kalls was the controller of both companies was described as a morass. Nothing ever happened to dispel that impression. It would seem that the money to fund the operation came from Kalls via KE; there is certainly nothing to suggest that AA had the requisite funds. Perhaps the reason the employees were continued on in the name of AA was to avoid the redundancy payments that would likely have been necessary had their employment been terminated with AA and resumed with KE. The cupboard is bare of any evidence as to what arrangement was come to (presumably through the agency of Kalls on both sides) concerning these matters. However, equally it is not clear that it was to the detriment of AA that KE should take over and run with its funds a business that it would seem AA could not afford to run. Baloglow initially questioned the apparent assumption of proprietorship by KE, but desisted from any protest.”

19 On 24 February 1995 a deed was was entered into (“the February 1995 deed”), according to its recitals in order to resolve the dispute over Mr Baloglow’s complaints of misrepresentation.

20 Mr Kalls and Mr Kaliaropoulos agreed to pay $700,000 to Mr Baloglow. A first instalment of not less than $100,000 was to be paid as agreed between Mr Kalls and Mr Baloglow, and it was acknowledged that $80,000 had already been paid by Mr Kalls. The balance was to be paid in full –

“ … by 31 May, 1995 or in the event that either [AA, TQLS or assets of AA] are sold or otherwise disposed of before 31 May 1995 and completion of the sale takes place before 31 May 1995 then payment in full is to be made upon completion of such sale.”

21 It was further agreed that mortgage security should be given to Mr Baloglow by Hapana Pty Ltd (“Hapana”), a Kalls company, over its property at Marrickville, and by Mr Kalls and his wife Mrs Denise Kalls over their property at Blakehurst. Mr Kalls agreed to provide a statutory declaration that the assets of AA were not then encumbered, and not to encumber AA without first obtaining Mr Baloglow’s consent which consent was not to be withheld in the event that arrangements satisfactory to Mr Baloglow were made for the payment of the money owing to him under the deed. AA was to pay a weekly sum to Mr Baloglow, initially $2,500 and then $2,000.

22 A guarantee was given by Mr Kalls, Mr Kaliaropoulos and Mrs Kalls (notwithstanding that Mr Kalls and Mr Kaliaropoulos were primarily liable). Mr Balogow agreed to resign as a director of AA, effectively on payment of the $100,000, and Swanhill agreed to transfer its shares in AA to Mr Kalls or his nominee upon payment of the full $700,000.

23 The execution of the February 1995 deed by Mr Kaliaropoulos was by Mr Kalls as his attorney. Mr Kaliaropoulos later maintained that the execution was without his knowledge and approval. He had, however, been involved in the negotiations leading to the February 1995 deed, although perhaps not their culmination. Mrs Kalls executed the February 1995 deed herself, but later maintained that she had done so without understanding its nature and in circumstances of unfairness.

24 Mr Baloglow resigned as a director of AA on 5 May 1995. Mr Kaliaropoulos resigned as a director of KE on 8 May 1995, and Mrs Kalls was appointed as a director. Mrs Kalls was appointed as a director of AA on 15 May 1995.

25 Although Mr Baloglow resigned as a director of AA, nothing beyond the $80,000 was paid. The mortgage security was not provided, and Mr Baloglow lodged caveats with respect to the relevant properties. Most if not all of the weekly payments were not made; a number of cheques for the weekly payments were not met on presentation.

26 On 14 June 1995 Mr Baloglow brought proceedings in the Commercial Division of the Supreme Court against Mr and Mrs Kalls and Mr Kaliaropoulos, claiming the remaining $620,000 and interest. A form of consent orders in the Commercial Division proceedings dated 7 July 1995 provided for the filing of defences and affidavits, and included (the strange wording is in the original) -

“3. Defendants and Kalls Enterprises P/L and AA Australian Commercial Laundry P/L undertake to the Court to provide to the Plaintiff seven (7) days prior notice before the disposal of (other than in the ordinary course of business) or the further encumbrance of any interest owned by the Defendants or of any interest in the business known as Total Quality Laundry Services”.

27 In the second half of 1995 Mr Kalls negotiated for the sale of TQLS to DT. He did so as a sale of the laundry business by KE. As appears from the letters to which I shortly refer, Mr Baloglow initially protested over the sale by KE of what he said was AA’s laundry business, but eventually went along with a sale by KE. The reason for a sale by KE is obscure. Mr Baloglow gave evidence that Mr Kalls told him it was because KE held the equipment leases which were to be taken over by DT. The letters refer to “practical circumstances”. DT was aware of AA’s involvement but chose to contract with KE, and it may have had something to do with an order for winding up of AA on 18 May 1995 on the application of the Deputy Commission of Taxation, later set aside, and subsequent demands of the Deputy Commissioner of Taxation on AA.

28 The letters show that it was contemplated that Mr Baloglow would be paid from the purchase money from the sale of TQLS.

29 A letter dated 9 August 1995 from Konstan to Jordans, the then solicitors for Mr Kalls, headed “Re Baloglow v Con Kalls & Ors”, included -

“5. Please advise the present position in relation to the sale of the laundry. We note that the business of the laundry is owned by AA Commercial Laundries Pty Ltd. We are instructed that your client may have represented to the Liquidator and others that Kalls Enterprises Pty Ltd owns the laundry, when in fact it does not.”

30 The Liquidator was the liquidator in the winding up of AA of 18 May 1995, which had already been set aside. The reply from Jordans dated 10 August 1995 included the statement that “[t]he laundry as we understand it is owned by AA Australian Commercial Laundries Pty Ltd”, and expressed ignorance of any representations made to the Liquidator.

31 A letter from Konstan to Jordans dated 23 August 1995 again asked, “What is the position with the sale of the laundry”, and said that “the plaintiff” (that is, Mr Baloglow) elected to appoint a named solicitor (the then solicitor for Mr Kaliaropoulos) to act for the vendor on the sale.

32 An agreement for the sale of the business was entered into on 25 August 1995. The sale price was $700,000. The subsequent correspondence included contention over who should act for the vendor, but in the result Jordans did so.

33 Jordans’ letter to Konstan dated 28 August 1995 advising of the exchange of contracts included -

“As has been requested we shall notify you of any further developments in relation to settlement date. In this respect we note that we have instructions from our client to pay to your client on settlement funds in reduction of your client’s alleged claim against our client.”

34 Konstan immediately wrote to Jordans, their letter of 28 August 1995 expressing “great surprise that your client has purported to execute a Contract on the sale of the business [of?] which, as you are aware, our client is a 50% shareholder”. There was further correspondence concerning the sale by KE rather than AA, but the position as ultimately accepted was expressed in a letter from Konstan to Jordans dated 1 September 1995 and a reply dated 5 September 1995

35 The Konstan letter of 1 September 1995 included -

“In this regard we write to advise you that on our client’s instructions the agreement between our respective client’s [sic] was that the sale was to be under the name of AA Australian Commercial Laundries Pty Ltd, especially because of the floating charges over Kalls Enterprises Pty Ltd.

As you are aware AA Australian Commercial Laundries Pty Ltd is the rightful owner of the business and any sale ought to proceed with that company as vendor.

Our client, however, recognises the practical circumstances of this matter and in this regard requires as a matter of urgency that you immediately seek the advices of Messrs Dibbs Crowther & Osborne [the solicitors for DT] and thereby extinguishing Special Condition 32 and making the contract unconditional.”

36 The Jordans letter of 5 September 1995 included -

“We note your comments about the identity of the vendors with respect to the business. Please note that the name Kalls Enterprises Pty Limited was entered onto the contract at the request of the purchaser after the identity of AA Australia Commercial Laundries Pty Limited had been disclosed to the purchaser’s solicitors. As your client recognises, however, the practical circumstances of this matter led to the purchaser requesting that the sale be by Kalls Enterprises Pty Limited but that Con Kalls do all things necessary to procure the correct and proper transfer of the business of Total Quality Laundry Services to the purchaser upon completion.”

37 There were other letters from Konstan in which they stated Mr Baloglow’s position that AA owned the laundry business. No letter from Jordans controverted this position.

38 There was ongoing correspondence concerning settlement of the sale of TQLS and payment to Mr Baloglow. In a letter dated 29 August 1995 Konstan asked for an undertaking that Jordans “will advise us of each and every step of the sale” and said, “Our client also requires that we attend on settlement and receive the full amount due to our client”. Jordans did keep Konstan informed up to a point, although there were complaints by Konstan and, as will be seen, later significant default by Mr Kalls in this respect.

39 By a letter dated 30 August 1995 Jordans conveyed their “client’s” (sic) instructions that Mr Baloglow “is to attend settlement to receive payent of balance of amount outstanding, as agreed between the parties”. In the letter of 5 September 1995 they said that their client irrevocably undertook that the balance of the funds of the sale “shall be to the account of Theo Baloglow or as Theo Baloglow may direct”, and undertook to “ensure that on settlement of the sale of the business your client will receive the sum of $620,000.00 irrespective if there is a shortfall from the proceeds of the sale”. The solicitors undertook to arrange to have Konstan or Mr Baloglow attend on settlement to collect settlement money, but asked that there be contemporaneously a deed of release, transfer of shares in AA and withdrawal of caveats.

40 As between Mr Baloglow and Mr Kaliaropoulos, as a result of negotiations commencing in August 1995 terms of settlement were entered into on 7 September 1995 providing for judgment against Mr Kaliaropoulos for $620,000 plus interest, but -

“3. The plaintiff shall not seek to enforce or execute the judgment against the Third Defendant until the first occurance [sic] of either of the following -

(i) Seven (7) days after the business (the subject of the proceedings) the property at Marrickville, and the property at Blakehurst have been sold and settled, or

41 Pursuant to the terms of settlement, on 25 September 1995 Mr Baloglow obtained judgment against Mr Kaliaropoulos.

42 Konstan was rightly concerned, in the letter of 1 September 1995, that the agreement for the sale of TQLS was conditional. On 25 October 1995 DT rescinded the agreement for sale, relying on a condition concerning obtaining finance approval.

43 An application for summary judgment against Mr Kalls was pending in the Commercial Division. It was heard on 27 October 1995, on which date Bainton J ordered that there be judgment against Mr Kalls for $610,000 and interest of $29,881.64 and that Mr Kalls pay some but not all of the costs of the proceedings to that time. It seems that the judgment was for $610,000 rather than $620,000 because Mr Kalls contended that $90,000 rather than $80,000 had been paid. It further seems that summary judgment was not sought against Mrs Kalls because of her contention that she had entered into the February 1994 deed without understanding its nature and in circumstances of unfairness.

Events on and from 2 November 1995

44 According to a memorandum from counsel who appeared for Mr Kalls on 27 October 1995, with the judgment against him Mr Kalls was “working on a ‘Plan B’ in relation to his affairs generally”. Whether or not it was part of Plan B, on 2 November 1995 a second agreement for the sale of TQLS was entered into. Save for one of the special conditions and the settlement date, it was in the same terms as the first agreement.

45 In due course, but later than the contractual settlement date, settlement was arranged for 15 December 1995. On 14 December 1995 Jordans advised Konstan that they had ceased to act “due to receiving instructions contrary to our undertakings of the 5th September 1995, and to a resulting conflict with our client”. Mr Kalls instructed Dowe, who gave the solicitors for DT a direction to pay by which none of the purchase money would go to Mr Baloglow. The bulk of it, $414,000, was to go to Lefti Steel Fixers Pty Ltd, it seems another company controlled by Mr Kalls. The contrary instructions to Jordans can readily enough be inferred.

46 Konstan had not been told of the settlement. They found out about it, and advised the solicitors for DT of Mr Baloglow’s judgment against Mr Kalls and that Mr Kalls had irrevocably undertaken, through Jordans, to pay the balance of the settlement money to Mr Baloglow or Mr Baloglow’s nominee. They enclosed a copy of Jordans’ letter of 5 September 1995. The proposed settlement was called off.

47 There were discussions, and on 18 December 1995 Konstan wrote to Dowe -

(a) Con Kalls to pay to Theo Baloglow the sum of FIVE HUNDRED AND FIFTY FIVE THOUSAND DOLLARS ($555,000).

(b) Theo Baloglow to release Con Kalls and Peter Kaliaropoulos from any liability pursuant to the Judgment entered in the Supreme Court, Sydney on 27 October, 1995, together with interest and costs arising therefrom and Terms of Settlement filed 25 September, 1995, respectively.

(c) Theo Baloglow to withdraw all Caveats registered herein.

(d) Con Kalls, Peter Kaliaropoulos, Kalls Enterprises Pty Ltd and AA Australian Commercial Laundry Pty Ltd [sic] to indemnify Theo Baloglow and Swanhill Holdings Pty Ltd [sic] in respect of all claims/actions brought by alleged creditors of Total Quality Laundry Services at all times.

To give effect to this settlement, we confirm the further agreement that -

(f) The transaction between Kalls Enterprises Pty Ltd and Decision Technology Pty Ltd is not to take place without the attendance of Simon Konstantinidis of this Office.

(g) At such settlement, you are to assign all settlement cheques to the Trust Account of Konstan & Associates.

Mr Baloglow requires your undertaking in this regard.”

48 By a later letter of the same date Konstan wrote to Dowe -

Our client will release your client from any liability pursuant to the judgment entered in the Supreme Court on 27 October, 1995 and will release Peter Kaliaropoulos from any liability pursuant to the Terms of Settlement filed 25 September, 1995.

We will deliver all Withdrawals of Caveat in relation to the matter.

We of course require that your client execute a letter of indemnity as detailed in paragraph (d) of our letter 18 December 1995. We understand that all of this is acceptable to your client.

Please let us have the time and place of settlement.”

49 Settlement was arranged for 19 December 1995. Dowe gave the solicitors for DT a direction to pay the purchase money by three cheques totalling $678,933.40. One was a cheque for $660,611.17 payable to Dowe. The others were a cheque for $11,471.60 payable to Commonwealth Development Bank and a cheque for $6,850.63 payable to St George Partnership Finance Ltd (“St George”). Dowe was to provide a cheque in favour of DT for $48,933.40.

50 By a letter dated 19 December 1995 Dowe wrote to Konstan advising of the time for settlement and saying -

“Upon settlement a cheque in the amount of $678,933.40 will be handed over to us by the Purchaser’s Solicitors. We note that you require the Bank Cheque which is to be received by us to be endorsed for payment into your Trust Account. Notwithstanding the unusual nature of this transaction and after confirmation from the Law Society, and our client that this may be attended to, we confirm that we will endorse the cheque as noted above.”

51 The reference to a cheque for $678,933.40 was an error, later corrected; the cheque to Dowe was to be for $660,611.17. The letter went on to deal with cheques to be provided by Konstan. One was in favour of DT for $48,933.40 being the cheque to be provided in turn by Dowe. The others were for $56,341.87 in favour of the lessors of the premises where the laundry business was conducted and $335.90 in favour of Dowe. The letter included -

“In addition to the above, our client would require the enclosed Deed of Release and Indemnity to be signed and handed over by you at settlement. You are well aware that we have no knowledge whatsoever of the Supreme Court proceedings and as such, you may care to insert the details that have been omitted prior to execution. Please consider the contents of the Deed and advise as to whether you require any amendments.”

52 Konstan replied agreeing to the arrangements for the endorsed cheque and cheques in exchange, and suggesting amendments to the proposed deed. Save for a suggested amendment making Mr Kaliaropoulos an indemnifying party, Dowe agreed to the amendments. Konstan accepted that Mr Kaliaropoulos should not be made an indemnifying party, providing that Mrs Kalls became an indemnifying party.

53 The deed was executed and dated 19 December 1995 (“the December 1995 deed”). The parties to the December 1995 deed were Mr Baloglow, Mr Kalls, Mr Kaliaropoulos, Mrs Kalls, KE and AA. Mr Kalls and Mr Kaliaropoulos were referred to as “Kalls”.

54 The material operative provisions of the December 1995 deed were -

“1. Kalls shall pay to Baloglow upon execution of this Deed an amount of $555,000 in full and final satisfaction of the Judgment Debt.

2. Baloglow undertakes to discontinue the proceedings commenced against Denise Kalls referred to in B, herein and he further undertakes not to enforce action to recover the balance of the Judgment Debt in consideration of the payment referred to in Clause 1 herein.

3. Con Kalls, Denise Kalls, Kalls Enterprises Pty Limited and AA Australian Commercial Laundry Pty Ltd [sic] forever indemnify Baloglow and Swan Hill Holdings Pty Limited [sic] from all actions, suits, causes of action, claims, costs, damages, decrees, expenses, judgments, losses, orders, proceedings, summonses, writs and demands of any nature arising from the operation of the laundry business known as Total Quality Laundry Services. Such indemnity shall extend whether any claim or action referred to above was brought or arose either before, during or after the period that Baloglow became involved in the business, Total Quality Laundry Services. These parties agree to further indemnify Baloglow and Swanhill Holdings Pty Limited in respect of any actions, claims, suits or demands that may be brought by the purchaser, Decision Technology Pty Limited, of the laundry business known as Total Quality Laundry Services against Baloglow.

55 At the settlement on 19 December 1995 cheques were handed over and the cheque for $660,611.17 was endorsed to the trust account of Konstan, in accordance with the arrangements. The result was that the whole of the purchase money went to pay St George for arrears under equipment leases ($6,850.60), the lessors for arrears of rent ($56,341.87) and Mr Baloglow (a net $555,000). There was no express evidence, but presumably a transfer of Swanhill’s shares in AA was provided to Dowe.

56 Returning to the issue of the sale by KE rather than AA, in a letter to DT’s solicitors dated 18 December 1995 Konstan said that they were “instructed to confirm”, amongst other things, that the business sold to DT “following agreement between our respective clients is the sole property of Kalls Enterprises Pty Limited”. They went on to say that, subject to receiving “certain funds” on settlement, Mr Baloglow would “make no claim or interest in the business Total Quality Laundry Services”, and that they were “in the process of drafting this with the appropriate attestation clauses and our clients will be executing same and shall hand over the original duly executed at settlement of this matter”.

57 Mr Baloglow and his wife Mrs Fay Baloglow signed a document addressed to DT and its solicitors, apparently the document to be handed over on settlement. It read -

“1. The business sold under the Agreement for Sale of Business dated 2nd November, 1995 between Kalls Enterprises Pty Limited and Decision Technology Pty Ltd following agreement between our respective clients [sic] is the sole property of Kalls Enterprises Pty Limited.

2. Mr and Mrs Baloglow, Swanhill Pty Limited, and in so far as Swanhill’s interest in AA Laundry Services Pty Limited [sic] is concerned (herein collectively referred to as ‘Baloglow’) lay no claim to the ownership of any of the assets of Total Quality Laundry Services.

3. The Shareholders of AA Laundry Services Pty Limited are Swanhill Pty Limited and Kalls Enterprises Pty Limited, in equal shares.

58 There was no evidence of an agreement between Mr Baloglow and Mr Kalls as referred to in the solicitor’s letter and the document set out above. Mr Baloglow gave evidence at the trial to the effect as far as he was concerned the laundry business was owned by AA until 19 December 1995. He was cross-examined on the document. He denied that the statement that the business was KE’s business was false, saying that “you have to take it in its context”; the following explanation was all but incomprehensible, ending that he didn’t think he read the document, but it did not include that he had come to an agreement with Mr Kalls. I conclude that there was no such agreement.

Ownership of the assets of the laundry business

59 The appellants submitted that the judge did not expressly find whether KE or AA owned the assets sold to DT, or whether KE owned some of them and AA owned some of them. They said that the judge’s reasons proceeded on an implicit finding that KE was the owner, without analysis of the evidence, but that the correct position was that AA was the owner save for some linen which was either owned by KE or held by KE on trust for AA. An express finding was necessary, they said, so that it could be determined whether the voidable transaction was a transaction of KE, of AA or of both, and whether any breach of fiduciary duty by Mr Kalls was of a fiduciary duty owed to KE, to AA or to both. The finding was also necessary so that there could be proper consideration of matters such as the uncommerciality of the transaction when determining whether it was a voidable transaction, of Mr Baloglow’s knowledge relating to insolvency of the company whose transaction it was when addressing defences under s 588FG, and of Mr Baloglow’s actual or constructive knowledge of any breach of fiduciary duty in relation to the Barnes v Addy claim.

60 In the manner the judge disposed of the claim under Pt 5.7B, it did not matter whether the transaction was a transaction of KE or of AA. Whichever company it was, the payment of the $555,000 was not part of the transaction, and the judge did not need to go to the further matters which might have called for a finding as to ownership of the assets of the laundry business.

61 It was otherwise as to the Barnes v Addy claim. The judge considered breach of fiduciary duty owed to KE and Mr Baloglow’s knowledge as if the assets were owned by KE, or at least as if the $555,000 was KE’s money. It is not clear what regard to ownership of the assets he had in declining to hold that the $555,000 was paid in breach of Mr Kalls’ fiduciary duty owed to AA.

62 It is convenient now to consider ownership of the assets of the laundry business. Mr Baloglow submitted that the evidence – the “morass” in the judge’s [63] earlier set out – did not permit a finding. Difficulty is not a bar to making a finding (Fink v Fink (1946) 74 CLR 127 at 143), and in my view a finding should and can readily enough be made.

63 TQLS was sold by KE to AA in February 1994. It is not clear whether AA paid the full purchase money to KE. Swanhill lent its $600,000 to AA, and presumably that money found its way to KE. Whether KE lent its $600,000 to AA was not clearly shown, but in the loose manner in which the companies’ affairs were conducted there may have been an implicit set-off against the further $600,000 or thereabouts payable by AA to KE. Be that as it may, AA took over and conducted TQLS, and the assets of the laundry business must have passed to it.

64 As the judge found, there was no formal undoing of the sale, and AA continued as the employer although in later times funding came from KE. The judge’s reference to KE conducting the laundry business, see his [9] set out above, was because after about September 1994 AA did not operate a bank account, and TQLS money was paid to KE bank accounts from which TQLS liabilities were paid. This did not mean that the laundry business became KE’s business. As the judge noted, AA continued to employ the persons working in the business, and it continued as the company with which carriers of laundered goods contracted. KE obtained and used overdraft accommodation, formal or de facto, but that also did not mean that the laundry business became KE’s business.

65 Implicit in the February 1995 deed was that AA owed the assets of the laundry business. The assets of AA were not to be encumbered, acceleration of payments was in the event that AA, TQLS or assets of AA were disposed of, and the weekly payments were to be made by AA. In August-September 1995 Mr Baloglow and Mr Kalls were at one in saying that TQLS was the laundry business of AA. The sale by KE for obscure “practical circumstances” did not deny this. By the effective recognition that it was not the correct position, but one taken only because of whatever the practical circumstances were, they affirmed that it was the laundry business of AA, one which Mr Kalls had to ensure ended up with DT (see Jordans’ letter of 5 September 1995).

66 There was no agreement between Mr Kalls and Mr Baloglow as suggested in Konstan’s letter of 18 December 1995 and the document apparently handed over on settlement. The document does no credit to Mr Baloglow, and one can only wonder at the participation of all the solicitors in what occurred, but assertions contrary to the accepted correct position did not alter that position. AA became the registered holder of the business name TQLS, and remained the holder until 19 December 1995. KE was the financier for the laundry business, but in my opinion the laundry business remained the business of AA.

67 The agreement for the sale of TQLS by KE to AA was not in evidence, but according to a recital in the February 1994 deed what was sold as the business was all plant, fittings, chattels and fixtures used by KE in connection with TQLS. The assets may have changed, in particular linen which was the principal stock in trade. Additional or replacement assets would have become assets of the business. A list of the assets sold under the February 1994 deed was provided to the ANZ bank in or about February 1994, and an identical list was used in the second sale agreement of 2 November 1995. It included the same “schedule of linen”. The linen must have changed, and other plant may have changed, but it would be absurd if replacement linen or plant was not sold to DT. It is clear that the linen and plant then used in the business was to go to DT.

68 The appellants drew attention to the purchase of linen in the period between 26 September 1994 and 19 December 1995 with cheques drawn on KE’s bank accounts. The money in those accounts came substantially from the laundry business. Analyses were provided to the judge, with submissions apportioning the linen and consequentally the assets of the laundry business between KE and AA but also the submission that so far as KE paid for linen, the linen was held by it on trust for AA. In my opinion a more direct reason for the same functional result is that KE was acting as the financier for TQLS, and that the linen for which it paid was AA’s linen for which AA had to reimburse KE.

69 In my opinion, all the assets sold to DT were assets of AA. KE was named as the vendor with both KE and AA (through Messrs Kalls and Baloglow) knowing that it was not the owner of the laundry business, and the proceeds of sale payable to it would be received and held for the owner of the laundry business it purported to sell, that is, for AA. Stolen money is held on trust for the true owner (Black v S Freedman & Co (1910) 12 CLR 105 at 110; Creak v James Moore & Sons Pty Ltd (1912) 15 CLR 426 at 432; see also as to money drawn from a bank account without authority Lipkin Gorman (a firm) v Karpnale Ltd (1991) 2 AC 548 at 565-6, 572). Similarly the money obtained by selling stolen property (Australian Postal Corporation v Lutak (1991) 21 NSWLR 584 at 589). In my opinion, the money obtained by KE selling AA’s laundry business was akin to the money obtained by selling stolen property, only more obviously held on trust because KE (through Mr Kalls) acknowledged AA as the true owner. In lay terms, it was AA’s money. In legal terms, the money was held on trust for AA.

The claim under Pt 5.7B of the Law: the transaction on which the plaintiffs relied

70 Before going to the relevant provisions of the Law, it is convenient to note how the events I have described were alleged to make up the composite transaction on which the plaintiffs relied.

71 The amended statement of claim contained a lengthy and detailed recitation of events. It included paragraphs taken up as the constituents of a defined “Transaction”. I state the events in those paragraphs in summary form -

· the second agreement for the sale of TQLS (para 64);

· retention of the deposit paid under the first agreement for sale as the deposit under the second agreement for sale (para 65);

· entry into the December 1995 deed (para 73);

· an agreement or understanding at the time of the December 1995 deed that the money required by Mr Kalls and Mr Kaliaropoulos to pay the $555,000 would be obtained from the purchase money payable under the second agreement for sale and would be paid at the settlement of the sale of TQLS (para 76);

· completion of the sale of TQLS with Konstan present to collect the money (para 77);

· the payment of the purchase money by DT to KE, receipt of the cheque for $660,611.17 by Dowe on behalf of KE, endorsement by Dowe of the cheque to the trust account of Konstan and the payment by way of partial refund (paras 80-85);

· that this occurred in consequence of entry into an agreement or arrangement to that effect after Konstan on behalf of Mr Baloglow had required assignment of all cheques if the settlement was to proceed (para 86);

· receipt by Mr Baloglow of $555,000 in satisfaction of the obligation of Mr Kalls and Mr Kaliaropoulos under the December 1995 deed to pay that sum (paras 87-8); and

· some other matters in the nature of giving effect to the sale of TQLS and the December 1995 deed (paras 90-92 and 94-97);

72 It was then alleged -

“98. The acts or dealings referred to in paragraphs 64, 65, 73, 76, 77, 80 to 88, 90 to 92 and 94 to 97 together with all other acts or dealings ancillary or incidental to them jointly constitute a transaction (the “Transaction”) within the meaning of section 9 of the Corporations Act to which AA, Mr Baloglow, KE, Mr Kalls, Mrs Kalls, Mr Kaliaropoulos and Hapana were party.

73 From there the amended statement of claim made allegations going to insolvency of AA and uncommerciality as regards it, and specifically that the Transaction was an uncommercial transaction of AA (para 112) and a voidable transaction of AA (para 113). It was alleged that Mr Baloglow had received a benefit, namely the payment to him or for his benefit of the $555,000, because of the Transaction (para 116). Later in the amended statement of claim the paragraphs making up the Transaction were repeated by reference, and there were like allegations in relation to KE rather than AA, including that the Transaction was an uncommercial transaction of KE (para 178) and a voidable transaction of KE (para 179).

74 In these reasons I will use the term Transaction to refer to the transaction on which the plaintiffs relied. It would be wrong to see too much in the allegation that the Transaction was entered into on or about 2 November 1995, as if the complete Transaction then came into being. The allegation is probably explained by the provision, in s 588FE(3), that a transaction is voidable if entered into during the two years ending on the relation back day. It should be understood as an allegation that the first constituent of the Transaction occurred on or about 2 November 1995.

75 The Transaction was a transaction to which a number of persons and companies were said to be parties, including Hapana presumably because it was to receive a withdrawal of caveat under the December 1995 deed. Mr Baloglow was not said to be a third party beneficiary, but to be one of the parties to the Transaction.

The claim under Pt 5.7B of the Law: relevant provisions

76 The path to a voidable transaction in the present case was through an uncommercial transaction, which was defined in s 588FB -

588FB(1)

(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

(2)

(a) whether or not a creditor of the company is a party to the transaction; and

77 This definition picked up the definition of “transaction” in s 9, relevantly -

transaction

(a) a conveyance, transfer or other disposition by the body of property of the body; and

(b) a charge created by the body on property of the body; and

(c) a guarantee given by the body; and

(d) a payment made by the body; and

(e) an obligation incurred by the body; and

(f) a release or waiver by the body; and

(g) a loan to the body; and

and includes such a transaction that has been completed or given effect to, or that has terminated.”

78 An uncommercial transaction was then taken up in s 588FC as part of one way of being an insolvent transaction, relevantly -

588FC

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

(i) the transaction is entered into; or

(b) the company becomes insolvent because of, or because of matters including:

(i) entering into the transaction; or

79 An insolvent transaction was then made a species of a voidable transaction under s 588FE, which relevantly provided -

“ 588FE

(1) Where a company is being wound up, a transaction of the company that was entered into at or after the commencement of this Part may be voidable because of any one or more of the following subsections.

(2) …

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

80 The conjunction of an insolvent transaction and an uncommercial transaction is explained by the alternative way of being an insolvent transaction in s 588FC, through an unfair preference. In the present case, if the Transaction was an insolvent transaction it was also an uncommercial transaction.

81 If there was a voidable transaction, s 588FF provided that a court might make orders about it, relevantly -

“ 588FF (1) Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:

(a) 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;

…

(c) an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction;

…

(h) an order declaring an agreement constituting, forming part of, or relating to, the transaction, or specified provisions of such an agreement, to have been void at and after the time when the agreement was made, or at and after a specified later time;

(i) an order varying such an agreement as specified in the order and, if the Court thinks fit, declaring the agreement to have had effect, as so varied, at and after the time when the agreement was made, or at and after a specified later time;

(2)

82 Limitations upon making orders under s 588FF were imposed in s 588FG, aptly enough described as providing defences to persons against whom orders might be made. In the view I take, it is not necessary to go to s 588FF.

The claim under Pt 5.7B: the judge’s reasons

83 The judge said at [22] that the plaintiffs sought to rely on a composite transaction as being a transaction of a company. He set out in a descriptive manner in sub-paras lettered (a) to (h) elements of the transaction, generally to the effect of the events in the paragraphs in the amended statement of claim to which I have referred. The sub-paragraphs included -

the payment by Kalls to Baloglow

”(f) The payment to or for the benefit of Baloglow of the sum of $555,000 in discharge of the liability of Kalls and Kaliaropoulos under the December 1995 deed from the settlement cheque in the sum of $660,611.17 made payable to Xenos.”

84 The judge said that the transaction was alleged to have been made up of elements (a) to (h), alternatively (c) to (h). Elements (a) and (b) were the second agreement for the sale of TQLS and the retention of the deposit paid under the first agreement for sale under the second agreement for sale.

85 The judge said that for the plaintiffs to succeed “they must establish that the relevant concatenation of dealings was a single transaction and a transaction of a company”. Referring to a number of cases, his Honour said that there could be extracted from them the propositions that “transaction” in s 9 of the Law was to be given a wide meaning, that a number of separate dealings could together be regarded as constituting one transaction, but that it was vital that however the transaction was constituted it must be able to be characterised as a transaction of a company.

86 The judge continued -

“31 It is vital to the success of the case pleaded and argued by the plaintiffs that the dealing lettered (c) in their alternative summaries of the composite transaction set out in [22] and [23] above respectively be found to be part of the transaction. It is paragraph (c) that contains the allegation that Kalls paid to Baloglow the sum of $555,000 on 19 December 1995. It is significant that the plaintiffs’ allegation is in terms that this payment was made to Baloglow by Kalls and not by KE, as is clear on the facts.

87 The judge did not at this point expand on the receipt of the $555,000 by Mr Kalls from KE. He said that the cheque for $660,611.17 was received by Dowe as KE’s solicitors and endorsed by Dowe as Mr Kalls’ solicitors, and that must have been when in his view Mr Kalls received the money from KE.

88 It is evident from elsewhere in the judge’s reasons that he found that the receipt was by way of loan. In considering the Barnes v Addy claim he said at [36] that he found that “the making and receipt of the advance by KE to Kalls was in breach of Kalls’ fiduciary duties towards KE” (emphasis added), and at [63] that “unlike the case based on breach of duty towards KE, I am not prepared to find that the advance of funds to Kalls or the payment of $555,000 to Baloglow constituted a breach of trust or a breach of fiduciary duty in relation to AA” (emphasis added). This is consistent with his observations at [6], in connection with the absence of evidence from Mr Kalls, that Mr Kalls alone was privy to what arrangements were made amongst KE, Mr Kalls, Mrs Kalls and Mr Kaliaropoulos “concerning the payment by KE to Kalls of $555,000, including any arrangements as to its repayment to KE”, and his observations at [60] in considering the Barnes v Addy claim -

Hancock.

89 It may be noted that, also in considering the Barnes v Addy claim, the judge said at [36] -

advanced to Kalls or providing for its repayment

the advance or its repayment

The claim under Pt 5.7B: consideration

90 The appellants submitted that the judge was in error in saying in his [31] that the plaintiff’s allegation was in terms that the $555,000 was paid to Mr Baloglow by Mr Kalls and not by KE, an error which they said flowed from the emphasised portion of his description of element (c) in the composite transaction involving payment by Mr Kalls to Mr Baloglow. They said that the allegations in the amended statement of claim had not characterised the payment as a payment by Mr Kalls, but rather as a payment of money received by KE in satisfaction of the obligations of Mr Kalls and Mr Kaliaropoulos under the December 1995 deed; that the judge had misled himself into characterising what happened as payment by KE to Mr Kalls followed by payment by Mr Kalls to Mr Baloglow, with the consequence that he did not regard the payment by Mr Kalls to Mr Baloglow as part of a transaction of KE or AA. They said that the correct vital element was element (f) in the composite transaction.

91 There is force in the proposition that the allegations in the amended statement of claim had not characterised the payment as a payment by Mr Kalls. Their thrust was payment by KE to Mr Baloglow. But the judge’s subparas (a) to (h) reproduced the paragraphs in the plaintiffs’ written submissions in which they set out “the dealings that made up the transaction”. He can not be criticised for taking up the way in which the plaintiffs put the transaction in submissions, which was indeed in terms that the payment was by Mr Kalls.

92 The judge said also that payment to Mr Baloglow by Mr Kalls and not by KE was “clear on the facts”. This followed from his view that there had been an advance by KE to Mr Kalls, Mr Kalls then paying the money to Mr Baloglow.

93 In written and oral submissions made to the judge the plaintiffs had disclaimed a case that the $555,000 was lent by KE to Mr Kalls. Mr Baloglow had contended for that conclusion, indeed for the conclusion that the loan was to Mr Kalls and Mr Kaliaropoulos. He plainly enough did so in aid of his submissions to the effect that it had not been shown that the transaction was an uncommercial transaction, and no breach of fiduciary duty had been established, because it had not been shown that Mr Kalls was unable to repay and Mr Kaliaropoulos was able to repay.

94 It may have been that the judge saw too much in the description of element (c) in the composite transaction, and took it that payment by Mr Kalls to Mr Baloglow meant that the money had been lent to Mr Kalls. It does not follow. There could have been plain misappropriation by Mr Kalls, and dissection into payment by KE to Mr Kalls and by Mr Kalls to Mr Baloglow was in the circumstances rather artificial.

95 The appellants submitted that the judge’s view that Mr Kalls received the $555,000 from KE and then paid it to Mr Baloglow was incorrect, and that the correct view was that there was a payment by KE to Mr Baloglow which was part of a transaction of KE or AA. As a fallback position, they submitted that even if there were payment by KE to Mr Kalls by way of loan, and then payment by Mr Kalls to Mr Baloglow, the payment to Mr Baloglow via Mr Kalls was part of a transaction of KE or AA. Mr Baloglow sought to uphold that there had been a loan from KE to Mr Kalls, as had been his contention before the judge, and submitted that it was not open to the appellants now to maintain their fallback position because it was contrary to the way their case had been put in the amended statement of claim and in the conduct of the trial.

96 The parties put submissions, more generally, on whether there was a transaction of KE or AA. What is in issue is the Transaction, and in my opinion payment by KE to Mr Kalls by way of loan and by Mr Kalls to Mr Baloglow, if that were the correct view of what occurred, is not determinative of the question whether the Transaction was a transaction of KE or AA. When the judge asked whether the payment by Mr Kalls to Mr Baloglow was part of a transaction of KE or AA, he did not ask that question. As appears later in these reasons, I do not think it correct that the $555,000 was lent by KE to Mr Kalls. That is particularly material to the Barnes v Addy claim, but need not presently be explained. In my opinion, for other reasons the question should be answered no.

97 For an order pursuant to s 588FF there must be a “transaction of the company” of a particular kind. The identification of the transaction governs whether it was an uncommercial transaction, since entry into “the transaction” (s 588FB(1)) must be considered. It may govern whether it was an insolvent transaction, for example through consideration of whether the company became insolvent because of entering into “the transaction” (s 588FC(b)(i)). And it is material to the orders which may be made under s 588FF, not only because orders about payment of money are tied to what was paid under or received because of “the transaction” (s 588FF(1)(a), (b)) but also because, for example, an agreement constituting, forming part of or relating to “the transaction” can be declared void (s 588FF(1)(b)). The limitations in s 588FG are also tied in various ways to “the transaction”. The identification of the transaction is fundamental, and the transaction must be a transaction “of the company”.

98 Identification of the transaction was discussed by Bryson J in Mann v Sangria Pty Ltd (2001) 38 ACSR 307, especially at [39]-[42]. It was claimed that payments for meat were voidable transactions because they were unfair preferences. His Honour pointed out that the definition of “transaction”, if read literally, made payment alone a transaction, but that if that were so an unfair preference was inescapable; he said at [39] -

“Paring down the characterisation of the relevant transaction to such a narrow sliver involves ignoring the facts which make the payment comprehensible and which can be taken together with the payment to constitute a transaction, defensibly a transaction within the ordinary meaning of that word and within the defined meaning.”

99 Bryson J said at [41] -

“In the application of subs.588FA(1) I am required to take the step, applying the subsection to the facts, of deciding what is to be recognised as a transaction, or what are to be recognised as transactions. This point of characterisation, which is a turning point for disposing of the claim of unfair preferences, does not seem to me to be a point where the grounds of decision can be completely certain or fully articulated. In my view the transaction to which s 588FA(1) is to be applied if the purpose of the subsection is to be regarded and the connotation of the words "unfair preference" is to have an appropriate influence on its application is the whole series of events including, in each of the six cases, the order for supply of meat, its delivery, the contemporaneous delivery of the invoice, handing over a cheque or sending it on either at or soon after delivery, in five of the six cases a post-dated cheque for exactly the price, and when the post-date arrived, payment of the cheque.”

100 In the present case, the step of deciding what was to be recognised as a transaction was taken by the plaintiffs’ identification of the Transaction. At the trial the variation of elements (c) to (h), rather than all elements (a) to (h) in his [22], was put forward. The judge was called upon to decide whether the Transaction in either of these forms was a voidable transaction, not whether some other transaction was a voidable transaction.

101 For a transaction to be a transaction “of the company”, at the least the company must be a party to the transaction: see the definition of “transaction”. Being a party to a transaction will often be plain, but it is not a precise concept. The bank which provided finance to DT could be said to have been a party to the Transaction, in that providing finance was necessary for the Transaction to occur, but I do not think it would be a party for the purposes of Pt 5.7B. Being a party to a transaction requires a nature and extent of involvement, for which there is no simple test. Whether the involvement is sufficient may in some circumstances call for consideration.

102 In Pt 5.7B the words “of the company” add something. As well as being a transaction to which the company is party, which comes from there being a transaction, the transaction must warrant the description of a transaction of the company. Unless being a party to a transaction requires such involvement that the description applies without more, which does not seem to me a correct understanding, being a transaction to which the company is a party and being a transaction of the company are not co-extensive. In this I do not accept the appellants’ submission that all that was required for there to be a transaction of a company was that the transaction be one to which the company was a party, referring to Prentice v St George Bank (2002) 20 ACLC 923 at [24]. Austin J there said that it seemed to him the limitation of a transaction to one to which the company was a party was “no different from” the limitation in ss 588FC and 588FE(2) to a transaction of a company. On the facts, however, in that case the transaction did not involve any conduct or dealing by the relevant company (see especially at [45]), and I do not think his Honour’s observation can support the submission.

103 Entry into the second agreement for sale would itself be a transaction of KE within a literal reading of the definition, as would payment of money itself whether to Mr Kalls or direct to Mr Baloglow. The plaintiffs did not rely on one or other of these dealings, or any other single event, as the transaction of KE or AA, but on the Transaction with its composite of dealings. A composite transaction can be a transaction for the purposes of Pt 5.7B: re Emanuel (No 14) Pty Ltd (in liquidation); Macks v Blacklaw & Shadforth Pty Ltd (1997) 24 ACSR 292. But a composite transaction may include events or actors which are not dealings by the company or actors acting on behalf of the company, and the collection of dealings may not warrant the description of a transaction of the company. In the present case the composite transaction went beyond a single event, and included dealings not of KE or AA. Were KE or AA parties to the Transaction, and was it a transaction of KE or AA?

104 In re Emanuel (No 14) Pty Ltd (in liquidation); Macks v Blacklaw & Shadforth Pty Ltd the composite transaction was specifically the totality of dealings initiated by the company, intended to and in fact bringing about a result albeit with the participation of a third party: see at 299-300. In Wily v Bartercard Pty Ltd (2000) 34 ACSR 186 (Austin J); Bartercard Pty Ltd v Wily (2001) 39 ACSR 94 (CA) the transaction, not really a composite transaction, was found in the company’s acquiescence in an arrangement giving rise to either a contract or an estoppel. Neither case supports that being involved in or part of a composite transaction is of itself sufficient for it to be a transaction of the company. It will be a question of fact, involving an evaluative judgment again having regard to the nature and extent of involvement, whether the particular composite transaction is a transaction of the company.

105 In V R Dye & Co v Peninsula Hotels Pty Ltd (1999) 3 VR 201 Ormiston JA said at 214 that the transactions between the parties must be looked at “in a manner which accords with the commercial realities”. In Lifestyle Earls Court Pty Ltd (in liquidation) v Mentone Mansions Pty Ltd [2006] VSC 2 the commercial realities meant that there was one transaction being the composite of three related contracts for sale, which when the three contracts for sale were taken together were not an uncommercial transaction. There were not two transactions, each being one of the contracts for sale. In the same way, in deciding whether a composite transaction is a transaction of the company there must be a practical and realistic appraisal of the constituent dealings and the overall transaction.

106 In the present case the Transaction was a succession of events which, seen against the events prior to 2 November 1995, were directed to satisfaction of the initial liability of Mr Kalls and others to pay $700,000 to Mr Baloglow. In the end only $555,000 was paid, and it went to satisfy the liability of Mr Kalls and Mr Kaliaropoulos under the December 1995 deed, but that deed was part of the Transaction and itself brought partial satisfaction through reduction in the amount which had to be paid. It was contemplated, and by December 1995 the contemplation could be regarded as an intention on the part of both Mr Kalls and Mr Baloglow, that the money payable to Mr Baloglow would come from the sale of TQLS. It was sought by Mr Baloglow to have strict arrangements to make sure that he was paid. But paying Mr Baloglow was an objective of Mr Kalls and others, at the last of Mr Kalls and Mr Kaliaropoulos, and at no time did KE or AA undertake an obligation to pay. Save that they became indemnifiers under the December 1995 deed, their involvement was because the sale of TQLS was Mr Kalls’ source of money.

107 As well as acting for Mr Kalls in his dealings with Mr Baloglow, Jordans were acting for KE on the sale of TQLS. But the correspondence concerning payment to Mr Baloglow from the sale of TQLS reflected the reality that payment from that source was directed by Mr Kalls in his own interests of satisfying the liability to Mr Baloglow. The reality included that Mr Kalls endeavoured to renege on the arrangements, and to bring about payment of the money to another of his companies; a material indication, in my view, that KE and AA were no more than a source of money for Mr Kalls and that, if he could get away with it, the sale of TQLS would not be used to satisfy the liability to Mr Baloglow. Even when KE and AA were made parties to the December 1995 deed as indemnifiers in relation to TQLS and its sale to DT, that was as part of a settlement arrived at between Mr Konstantinidis and Mr Kalls recorded in the letters of 18 December 1995, and seemingly a quid pro quo offered or agreed to by Mr Kalls in return for reduction of the liability to Mr Baloglow to $555,000. This involvement also was in Mr Kalls’ own interests of satisfying the liability to Mr Baloglow.

108 In my opinion, the practical and realistic view of the Transaction is that it was a transaction of Mr Kalls, or at most of Mr Kalls and Mr Kaliaropoulos through Mr Kalls. It could be said that KE and/or AA were a party to the Transaction, but only because Mr Kalls made use of them as the source for the money he was to pay to Mr Baloglow and to provide what can be regarded as a “sweetener” in the settlement arrived at in December 1995. The Transaction included a transaction, indeed a number of transactions, of KE or AA, but the Transaction was a transaction of Mr Kalls or Mr Kalls and Mr Kaliaropoulos: I do not think that the Transaction was a transaction of KE or AA.

109 The appellants said that the Transaction had the effect of changing KE’s or AA’s rights, liabilities or property, referring to Macquarie Health Corporation Ltd v Commissioner of Taxation (1999) 96 FCR 238 at [133]. Those words were used to describe the effect of conduct engaged in by the company, and to express what was necessary rather than what was sufficient. The appellants’ submissions to the judge had included that, from the nature of an uncommercial transaction, a transaction of a company may well not effectuate any purpose of the company. They cited Tosich Constructions Pty Ltd (in liquidation) v Tosich (1997) 23 ACSR 466, in which Lehane J treated a series of steps ending with payment to the director’s daughter as a transaction. However, his Honour regarded the transaction, from the company’s point of view, as one of reducing its indebtedness to the director, not a “hiving off” of the company’s assets, and I do not think the case assists the appellants. If the transaction is, for example, the single event of a payment by the company to a third party for the benefit of the director, it will be a transaction of the company. The Transaction involved much more.

110 Accordingly, although for reasons rather different from those given by the judge, in my opinion the claim under Pt 5.7B of the Law was correctly dismissed.

The

Barnes v Addy

claim: introduction

111 In Barnes v Addy Lord Selborne LC said at 251-2 -

de son tort

cestui que trust

205 The earlier order was made on 7 March 2006. Evidence had concluded in early November 2005, there had been submissions for some days, and the hearing was adjourned with directions for the plaintiffs’ written submissions in reply. There was delay in the provision of the written submissions, and when they were received there was complaint that the written submissions (which were some 150 pages in length) were not in reply. On Mr Kaliaropoulos’ application, the judge ordered -

“ … that on or before 14 March, 2006 IMF (Australia) Limited [the plaintiffs’ litigation funder] pay into Court or as agreed between the Solicitors, $5,000, to abide any order as to costs of the Cross Defendant to the Second Cross Claim arising out of delay or the form of the Plaintiffs’ written submissions in reply.”

206 Neither a transcript of the occasion nor any judgment disclosing the reasons for making the order were before us. It appears to have been in the nature of an order that security be provided against the making of a special order in relation to costs incurred by Mr Kaliaropoulos by reason of the delay and the extent of the written submissions.

207 Since under the Bullock order the plaintiffs ended up paying Mr Kaliaropoulos’ costs, it was not necessary for the judge to consider a special costs order. Order 5 made by the judge must also be set aside, because its terms link it with the Bullock order. Ordinarily that would mean an order for repayment of $5,000. But there is the question; if the judge had not made the Bullock order, would he or should he have made a special costs order? If so, and if $5,000 is the appropriate amount, there should not be an order for repayment.

208 No submissions were made as to this. This Court is not in a position to decide whether a special costs order would or should have been made. If the judge was moved to make the order of 7 March 2006, however, he must have thought that a special costs order in that amount was a real possibility. I propose, therefore, that this Court not make an order for repayment of the $5,000 but reserve liberty to the appellants to apply for such an order.

Orders

209 I propose the orders -

1. Appeal allowed.

2.1 that there be judgment for the second plaintiff against the first defendant for $555,000 plus interest as calculated by the second plaintiff and the first defendant and notified to the Registrar, or in the event of disagreement upon calculation as determined by the Court upon written submissions filed in accordance with order 3 below; and

3. Direct that the second appellant and the first respondent calculate the interest and notify the Registrar of the calculated amount within 14 days, and that in the event of disagreement upon calculation the second appellant file written submissions stating the interest for which it contends and the reasons therefor within a further 14 days and the first respondent file responsive written submissions within a further 14 days.

4. Order that the first respondent pay the appellants’ costs of the appeal and have a certificate under the Suitors Fund Act if otherwise qualified.

5. Order that the appellants pay the second respondent’s costs of the appeal relating to repayment of the $5,000 paid pursuant to order 5 made by the trial judge.

6. Cross-appeal dismissed.

7. Order that the cross-appellant pay the cross-respondent’s costs of the cross-appeal.

210 IPP JA: I agree with the reasons of Giles JA in relation to the Barnes v Addy claim and agree with the orders proposed by his Honour. As regards the claim based on Pt 5.7B of the Corporations Law, I agree with the reasons of Basten JA and I also agree with his Honour that the orders proposed by Giles JA are dispositive of that part of the appeal, as well. I would add the following additional comments.

211 Section 588FF speaks of “a transaction of the company”. A composite transaction (that is, a series of transactions, or events, or acts, or a combination of such matters) can comprise a transaction for the purposes of Pt 5.7B.

212 As Giles JA observes, the question whether a transaction is a transaction of a company depends on the nature and extent of involvement of the company in the transaction. A transaction may be “of” more than one company or party. The mere fact that a company is a party to a contract or contracts that form part of the transaction does not necessarily make the transaction “of” that company. Whether a company is so bound up in the transaction that it is a transaction “of” the company is a question of judgment dependent on fact and degree.

213 As Giles JA observes, the Transaction (being the transaction relied on by the appellants) comprised a succession of events directed to the satisfaction of the liability of Mr Kalls and others to pay a substantial sum of money to Mr Baloglow. The underlying purpose of the Transaction was to enable the TQLS business to be used to pay a substantial sum of money to Mr Baloglow. Each event comprising the Transaction had a common element, namely, the achievement of that purpose. This common purpose connects the events sufficiently to make them one transaction (comprising the Transaction).

214 The funds used to pay Mr Baloglow were derived from the sale of TQLS. I agree with Giles JA that AA owned the TQLS business and its assets. The parties involved, including AA (through Mr Kalls) agreed (for obscure “practical circumstances”) that KE (and not AA) would sell TQLS to DT. What is not obscure is that TQLS was so sold to enable Mr Kalls to use the proceeds to pay Mr Baloglow.

215 Mr Kalls directed KE and AA to sell TQLS to DT so that his interest in satisfying his liability to Mr Baloglow could be achieved. Furthermore, Mr Kalls directed that payment of the proceeds of the sale of TQLS be made in a manner that would achieve that end. The control Mr Kalls exercised to achieve his purpose influenced the outcome of each of the events said to comprise the Transaction. This, in my view, is another factor that connects the events sufficiently to make them one transaction.

216 The Second 1995 Sale Agreement of 2 November 1995 and the December 1995 Deed were elements of the Transaction. KE was a party to both the Agreement and the Deed. AA was a party only to the December 1995 deed. Nevertheless, it must be assumed that KE would not have entered into the Second 1995 Sale Agreement without the knowledge and agreement of AA (both companies, in effect, being under the control of Mr Kalls).

217 KE’s conduct in binding itself contractually to the Second 1995 Sale Agreement and the December 1995 Deed, and AA’s conduct in agreeing to KE so binding itself to the Second 1995 Sale Agreement, and in binding itself contractually to the December 1995 Deed, were essential parts of the Transaction. The same may be said as to the manner in which the proceeds of the sale were disposed of. KE and AA must be taken to have agreed to that disposition (which led, directly, to the payment to Mr Baloglow).

218 The conduct of KE and AA were essential parts of the Transaction because, without it, the Transaction could not have achieved its object; that is to say, without the agreement as described of KE and AA, and their participation, Mr Kalls would not have been able to pay Mr Baloglow.

219 I accept that, apart from becoming indemnifiers under the December 1995 deed, the involvement of KE and AA, in reality, was to act as the source of Mr Kalls’ money to pay his obligations. The provision of the funds, however, was an element of great importance in the Transaction. KE and AA, by providing the funds, were involved to a material degree in the Transaction.

220 The fact that Mr Kalls, in directing KE and AA to act as that source, was motivated solely by his own interests of satisfying the liability to Mr Baloglow does not reduce the involvement of KE and AA in the Transaction. It was not contended that the Second 1995 Sale Agreement and the December 1995 Deed were simulated agreements. The involvement of KE and AA (direct or indirect) in them was crucial to their effect.

221 In the light of the relevant facts, I agree with Giles JA (at [145]) that it would be wrong to attribute to Mr Kalls, as the relevant directing mind of KE and AA, an intention that there should be a legally recognisable loan transaction. As his Honour observes, such an intention is at odds with Mr Kalls’ general conduct of the company’s affairs and there is nothing to support the inference that he had such an intention. I agree with his Honour (at [146]) that:

“[T]he correct conclusion is that there was no intention that the money be advanced by KE to Mr Kalls, let alone to Mr Kalls and Mr Kaliaropoulos. There was no more than use by Mr Kalls of the purchase money from the sale of TQLS for payment to Mr Baloglow”.

222 This finding, insofar as it bears on the question whether the Transaction was a transaction of KE or AA, is nothing more than a finding that these two companies were, or allowed themselves, to be used by Mr Kalls as the source of money to pay his obligations. In so doing they performed a function that had great significance to the purpose of the Transaction.

223 Accordingly, I would hold that the Transaction was a transaction of KE and AA.

224 Through Mr Kalls, KE knew that TQLS was owned by AA and AA agreed to KE selling TQLS. In these circumstances, KE is to be taken as having received and held the proceeds of the sale of TQLS in trust for AA.

225 The conclusions that no party intended that the proceeds of the sale of TQLS be advanced by KE to Mr Kalls, let alone to Mr Kalls and Mr Kaliaropoulos, and that Mr Kalls simply took the money and used it for his own purposes without regard to the corporate structures and legalities involved, is not inconsistent with the finding that KE, in selling TQLS, is to be regarded as a trustee for AA, and as holding the proceeds of the sale in trust for AA. In my opinion, the facts require such findings to be made.

226 The proceeds of sale of TQLS belonged to AA. As Giles JA observes (at [169]), Mr Kalls put the money out of AA’s reach by using it in satisfaction of his personal obligations, in his own interests, and contrary to the interests of AA. The Transaction led to the disposal of the only income-earning asset of AA and the termination of the only means by which KE was earning income. Neither KE nor AA received any consideration for agreeing to participate in the Transaction. Any claim by KE or AA for some kind of reimbursement from Mr Kalls for their losses was problematic as at the time (and thereafter) he was in a parlous financial state. The Transaction was self-evidently uncommercial.

227 I record my specific agreement with Basten JA that Mr Baloglow’s defences fail by reason of the factual findings made by Giles JA that result in Mr Baloglow’s liability to pay equitable compensation.

228 I also record my specific agreement with the comments made by Basten JA in [241] and [242].

229 It was submitted on Mr Baloglow’s behalf that, should the appeal succeed, he should have a declaration that he was entitled to enforce the judgment against Mr Kaliaropolous. Such a declaration would require this court to set aside the entire December 1995 Deed. I would not uphold such a claim for the reasons Basten JA sets out in [245] and [246].

230 BASTEN JA: I agree with the orders proposed by Giles JA and with his Honour’s reasons, except in relation to his rejection of the claim based on Part 5.7B of the Corporations Law, as in force at the relevant date. In my view that claim should also succeed. However, because it does not affect the orders based on the claim of receipt of company property in breach of the fiduciary duty owed by Mr Kalls as a director of AA and of KE, having control of that property, with knowledge of the breach of duty, my reasons can be shortly stated. I will adopt the abbreviations used by Giles JA.

231 The first step in determining the application of Part 5.7B is to identify a “transaction of a company”. The transaction must be one which, had the company acted reasonably, it would not have undertaken: s 588FB(1).

232 In its narrowest sense, the relevant transaction was not the sale of the business, TQLS, but the disposal of the proceeds of the sale in settlement of a personal debt of a director (jointly owed with another) in favour of (if viewed from the perspective of KE) a third party, or (if viewed from the perspective of AA) a 50% shareholder.

233 Neither KE nor AA obtained any benefit from that transaction; rather the owner of the business (which was, as Giles JA explains, AA) suffered a serious loss. The individuals, Messrs Kalls, Kaliaropoulos and Baloglow, obtained benefits. The transaction was clearly “uncommercial”: see s 588FB.

234 The next question is whether it was an “insolvent transaction” under s 588FC. For the reasons explained by Giles JA at [171]-[174], KE was insolvent when the transaction was entered into and AA, if not then insolvent, became insolvent by the transaction because it had debts and thereby disposed of the proceeds of the sale of its principal asset and source of income: s 588FC.

235 The commencement of winding up of each of KE and, relevantly, AA, rendered the transaction a “voidable transaction”, because entered into or given effect during the two year relation-back periods: s 588FE(1) and (3).

236 Giles JA suggests that what is lacking in this case is the element connecting “the Transaction” to KE and/or AA, so it can be said to be a transaction “of” that company: at [102] above. I agree that being a transaction “of” a particular company can be said to involve something more than the concept of a company being “party to” a transaction. It involves a different perspective. A sale may involve three companies, a vendor, a purchaser and a financier. Each is “party to” the transaction, but in order to characterise the transaction for the purposes of Part 5.7B, one needs to identify “of” which company it is a transaction, so as to assess benefits for, detriments to, insolvency of and winding up of, that company.

237 I also agree that it is critical to identify the Transaction with precision: that is at least in part because it is necessary to answer the tests posed by ss 588FB, 588FC and 588FE, but also to tailor appropriate relief under s 588FF. The Transaction in this case, as pleaded, involved a number of elements: Amended Statement of Claim, par 98. Particular elements pleaded, summarised by Giles JA at [71] above, included the sale of the TQLS business to DT. Yet there was no attempt to show that the sale itself satisfied criteria specified in Part 5.7B, nor was relief sought in relation to it. Rather the focus of the claim, at least in this Court, was the elements identified by the trial judge as (c) and (f), as set out at [83] above, without reliance upon the general background events of the period specified. The sale of the business was an essential step in the plan to obtain funds to settle an obligation of Messrs Kalls and Kaliaropoulos to Mr Baloglow, but it was not correct to see it as part of the Transaction, in relation to which relief was sought in the Court.

238 As I understand it, Giles JA also approaches the case on that basis, at [106]-[107] above. But because that approach leads him to conclude that this was a transaction in which the companies played an incidental role, it was not to be seen as a transaction “of” either company. Although his Honour said “a payment by the company to a third party for the benefit of the director … will be a transaction of the company”, this, he said, is not so in this case, because the Transaction as pleaded “involved much more”: at [109]. The additional elements must be understood as including the detailed arrangements between Messrs Kalls and Baloglow, and the incidental role of the companies, as the passive source of funds.

239 With respect that conclusion ignores the critical role of the companies in the Transaction. The Transaction involved disposition of the proceeds of sale of AA’s business. It occurred by agreement between AA’s director and 50% shareholder (Mr Kalls) and Mr Baloglow, a director of its other shareholder (Swan Holdings). A disposition of company funds by agreement between the directors and shareholders of the company, whether or not in breach of the fiduciary duties of one or both, remains a transaction “of” the company. The fact, if it be such, that the company was not expressly made a party to the agreement between those who controlled it (although the companies were each party to the deed of 19 December 1995) may mean that the agreement itself was not a transaction of the company, although I would prefer to leave that question open; but assuming the company was not party to the agreement, the disposition itself was a transaction of the company (relevantly, AA). The surrounding circumstances to which reference must be made to determine whether the transaction was “uncommercial”, “insolvent” and “voidable” need not form elements of the transaction.

240 In my view the pleader cast his or her net too widely: the relevant transaction, on a narrow view, was one by which KE paid to Mr Baloglow moneys it held on trust for AA. On a wider view, the transaction involved not merely the payment, but also the deed of 19 December 1995, pursuant to clause 1 of which the payment was to be made. Adopting either approach, the transaction was a transaction “of” both KE and AA, because it should be inferred that it occurred with the knowledge and consent, and indeed at the direction of, the directors and shareholders of both companies, each of whom was conscious that, and expressly intended, that the payment be made from the proceeds of sale of the asset of the relevant company.

241 That conclusion would raise questions as to possible relief under s 588FF and hence possible defences under s 588FG. So far as the defences under s 588FG are concerned, no specific pleading was raised by Mr Baloglow either in his defence or cross-claim identifying the facts on which he relied. In a notice of contention filed in this Court he asserted that he was “a bona fide purchaser for value without notice” under s 588FG(2). That language does not, however, reflect each of the elements of that provision. It is true that he must have become a party to the transaction in good faith and have provided valuable consideration or have changed his position in reliance on the transaction: s 588FG(2)(a) and (c). However, (b) also required that:

“(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.”

242 So far as relief is concerned, on either view of the transaction, it is appropriate to order that Mr Baloglow repay the amount received by him to the company beneficially entitled to the money, namely AA. That relief is available under s 588FA(1)(a) and is in identical terms to that which is provided as relief under the separate cause of action relied upon by Giles JA.

243 The fact that such relief may be available under the Corporations Law was relied upon by Mr Baloglow, by way of cross-claim against Mr Kaliaropoulos, to claim further consequential relief which would entitle Mr Baloglow to reinstate his entitlement to judgment against Mr Kaliaropoulos. That relief was sought in this Court by way of cross-appeal.

244 The terms by which relief was sought in the cross-appeal were apparently opportunistic, and based on the assumption that only Mr Kaliaropoulos had assets which would satisfy all, or at least a significant proportion, of the judgment debt payable by Mr Baloglow in these proceedings.

245 In order for such relief to be granted under s 588FF, the appropriate step would require an order in effect avoiding so much of the deed of 19 December 1995 as released Mr Kaliaropoulos from liability to Mr Baloglow. However, to undo part only of the agreement pursuant to which the moneys were paid (which Mr Baloglow must now repay), may itself create unfairness. The agreement included not only Mr Baloglow and Mr Kaliaropoulos and the two companies, but also Mr Kalls and his wife, Mrs Denise Kalls. If the deed were to be undone in part, it should be undone in full, so as to restore any rights of contribution or indemnity Mr Kaliaropoulos might have against other parties. However, for that to happen, both Mr Kalls and his wife would need to be party to the proceedings, which they were not, either in this Court or in the Court below.

246 Further, if the obligations arising under the deed of 19 December 1995 were discharged by the payment made to Mr Baloglow, it would follow that the judgment debt, to satisfaction of which the deed was directed, must also have been satisfied. That was not a judgment against Mr Kaliaropoulos alone, but it is that debt which is sought, in effect, to be reinstated, but against only one of several parties.

247 These considerations militate against an order of the kind sought on the cross-appeal. That conclusion, however, does not disentitle the companies under the control of the liquidator, to the order sought against Mr Baloglow. That order should, as proposed by Giles JA, accordingly be made. Other relief should not be granted in favour of Mr Baloglow.

248 Finally, as Giles JA notes, there was some confusion as to the appropriate order in relation to payment of interest on the amount claimed on behalf of the companies. If agreement cannot be reached between the parties as to the appropriate amount of interest within 14 days of delivery of judgment, each party should have a further 14 days to file written submissions setting out the amount of interest claimed and the basis upon which it is calculated.

: On 29 June 2007 the High Court issued an amendment to the reasons in Farah Constructions Pty Ltd v Say-Dee Pty Ltd published on 24 May 2007, correcting "the first limb of Barnes v Addy in para 177 to "the second limb of Barnes v Addy". Paragraph 176 of these reasons was written without knowledge of the amendment. Its second sentence should be amended accordingly, and the third and fourth sentences should be deleted.

**********

28/08/2007 - Addendum added - Paragraph(s) At end of judgment

Citations

Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191

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Statutory Material Cited

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Reported Decision:	63 ACSR 557
Appeal Outcome:	Special leave application refused with costs by the High Court - 7 March 2008

CITATION:	Kalls Enterprises Pty Ltd (In Liquidation) & Ors v Baloglow & Anor [2007] NSWCA 191 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	10, 11 and 23 May 2007
JUDGMENT DATE:	9 August 2007
JUDGMENT OF:	Giles JA at 1; Ipp JA at 210; Basten JA at 230
DECISION:	(1) Appeal allowed; (2) Set aside orders 1, 3 and 5 in the form of orders dated 5 July 2006 recording orders made by the trial judge and in lieu thereof order: (2.1) that there be judgment for the second plaintiff against the first defendant for $555,000 plus interest as calculated by the second plaintiff and the first defendant and notified to the Registrar, or in the event of disagreement upon calculation as determined by the Court upon written submissions filed in accordance with order 3 below; and (2.2) that the first defendant pay the plaintiffs' costs; (3) Direct that the second appellant and the first respondent calculate the interest and notify the Registrar of the calculated amount within 14 days, and that in the event of disagreement upon calculation the second appellant file written submissions stating the interest for which it contends and the reasons therefor within a further 14 days and the first respondent file responsive written submisisons within a further 14 days; (4) Order that the first respondent pay the appellants' costs of the appeal and have a certificate under the Suitors Fund Act if otherwise qualified; (5) Order that the appellants pay the second respondent's costs of the appeal relating to repayment of the $5,000 paid pursuant to order 5 made by the trial judge; (6) Cross-appeal dismissed; (7) Order that the cross-appellant pay the cross-respondent's costs of the cross-appeal; (8) Reserve liberty to the appellants to apply for an order for repayment of the $5,000 referred to in order 5 made by the trial judge and variation of order 5 above, any such application to be made by notice of motion filed within 14 days accompanied by written submissions with responsive written submissions within a further 14 days; the Court's determination to be made upon the written submissions.
CATCHWORDS:	CORPORATIONS LAW - voidable transaction under Pt 5.7B Corporations Law - business of either company A or company B sold - proceeds of sale paid to creditor of director of both companies - claim that a Transaction as defined which included the payment was a voidable transaction - whether one or other company party to the Transaction - whether a Transaction of the company - by majority, was a Transaction of the company - was voidable transaction. EQUITY - first limb of Barnes v Addy - whose business was it - whether loan to director who then paid creditor - whether breach by director of fiduciary duty owed to either company - whether receipt of trust property by creditor - whether creditor had knowledge of breach of fiduciary duty - business was business of company A - not loan to director - proceeds of sale to be held by company B for company A - breach of fiduciary duty owed to both companies - company B could not account to company A - money put out of reach of company A - disregard of interests of creditors of both companies - creditor knew business was business of company A and that payment meant company B could not account to company A and that money put out of reach of company A - also had knowledge from which honest and reasonable man would have thought was risk of prejudice to creditors - had knowledge of breach of fiduciary duty.
LEGISLATION CITED:	Corporations Law, Pt 5.7B
CASES CITED:	Australian Postal Corporation v Lutak (1991) 21 NSWLR 584; Baden v Societe Generale Pour Favoriser le Developpement du Commerce et de L'Industrie en France SA (1993) 1 WLR 509; Bank of Credit and Commerce International (Overseas) Ltd v Akindele (2001) Ch 437; Barnes v Addy (1874) LR Ch App 244; Bartercard Pty Ltd v Wily (2001) 39 ACSR 94; Belmont Finance Corporation v Williams Furniture Ltd (No 2) (1980) 1 All ER 393; Black v S Freedman & Co (1910) 12 CLR 105; Creak v James Moore & Sons Pty Ltd (1912) 15 CLR 426; Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371; DPC Estates Pty Ltd v Grey and Consul Development Pty Ltd (1974) 1 NSWLR 443; El Ajou v Dollar Land Holdings plc (1994) 2 All ER 685; re Emanuel (No 14) Pty Ltd (in liquidation); Macks v Blacklaw & Shadforth Pty Ltd (1997) 24 ACSR 292; Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; Fink v Fink (1946) 74 CLR 127; Farrow Finance Co Ltd (in liquidation) v Farrow Propeties Ltd (in liquidation) (1997) 26 ACSR 544; Greater Pacific Investments Pty Ltd (in liquidation) v Australian National Industries Ltd (1996) 39 NSWLR 143; Grove v Flavel (1986) 43 SASR 410; Hancock Family Memorial Foundation Ltd v Porteous (1999) 151 FLR 191; Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; re International Vending Machines Pty Ltd and Companies Act (1962) NSWR 1408; Kinsela v Russell Kinsela Pty Ltd (in liquidation) (1986) 4 NSWLR 722; re Lands Allotment Co (1894) 1 Ch 616; Lifestyle Earls Court Pty Ltd (in liquidation) v Mentone Mansions Pty Ltd [2006] VSC 2; Linter Group Ltd v Goldberg (1992) 7 ACSR 580; Lipkin Gorman (a firm) v Karpnale Ltd (1991) 2 AC 548; Macquarie Health Corporation Ltd v Commissioner of Taxation (1999) 96 FCR 238 at [133]; Mann v Sangria Pty Ltd (2001) 38 ACSR 307; Mills v Mills (1938) 60 CLR 150; Mulkana Corporation NL (in liquidation) v Bank of New South Wales (1983) 8 ACLR 278; O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262; Prentice v St George Bank (2002) 20 ACLC 923; Robins v Incentive Dynamics Pty Ltd (in liquidation) (2003) 45 ACSR 244; Rolled Steel Products Ltd v British Steel Corporation (1986) 1 Ch 246; Say-Dee Pty Ltd v Farah Constructions Pty Ltd [2005] NSWCA 309; Spies v The Queen (2000) 201 CLR 603; Taylor's Fashions Ltd v Liverpool Trustees Co (1982) 1 QB 133; Tosich Constructions Pty Ltd (in liquidation) v Tosich (1997) 23 ACSR 466; V R Dye & Co v Peninsual Hotels Pty Ltd (1999) 3 VR 201; Walker v Winborne (1976) 137 CLR 1; Wily v Bartercard Pty Ltd (2000) 34 ACSR 186.
PARTIES:	Kalls Enterprises Pty Ltd (In liquidation) - First Appellant AA Australian Commercial Laundries Pty Ltd - Second Appellant Christopher Damien Darin (in his capacities as Liquidator of Kalls Enterprises Pty Ltd (In Liquidation) and AA Australian Commercial Laundries Pty Ltd (In Liquidation) - Third Appellant Theo Baloglow - First Respondent and Cross-Appellant Peter Kaliaropoulos - Second Respondent and Cross-Respondent
FILE NUMBER(S):	CA 40441/06
COUNSEL:	R G Forster SC & P A Fury - Appellants B W Rayment QC and C P Locke - First Respondent and Cross-Appellant T Alexis SC - Second Respondent and Cross-Respondent
SOLICITORS:	Koffels - Appellant Oliveri Attorneys - First Respondent and Cross-Appellant Hazan Hollander - Second Respondent and Cross-Respondent
LOWER COURT JURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	1841/99
LOWER COURT JUDICIAL OFFICER:	Hamilton J
LOWER COURT DATE OF DECISION:	21 June 2006
LOWER COURT MEDIUM NEUTRAL CITATION:	Kalls Enterprises Pty Ltd (In Liq) v Baloglow [2006] NSWSC 617 and [2006] NSWSC 1021