Kalls Enterprises Pty Ltd (in liq) v Baloglow

This case concerned an appeal to the Court of Appeal of New South Wales regarding a transaction involving the sale of a business and the subsequent payment of the proceeds to a creditor of a director who controlled both companies involved. The liquidator of Kalls Enterprises Pty Ltd (the first plaintiff and appellant) claimed that the payment constituted a voidable transaction under Part 5.7B of the Corporations Law. The central dispute revolved around whether the business sold was that of Kalls Enterprises Pty Ltd or another company, and whether the payment to the creditor was a breach of fiduciary duty owed to either company.

The Court of Appeal was required to determine whether the transaction, specifically the payment of the proceeds of the business sale, was a transaction of Kalls Enterprises Pty Ltd. Further, the court had to consider whether the director of both companies breached fiduciary duties owed to Kalls Enterprises Pty Ltd and the other company, and if the creditor received trust property with knowledge of such a breach, thereby attracting liability under the first limb of *Barnes v Addy*. The court also had to assess whether the creditor had the requisite knowledge, including knowledge that the business belonged to Kalls Enterprises Pty Ltd, that the payment would prevent the other company from accounting to Kalls Enterprises Pty Ltd, and that the money was being put beyond the reach of Kalls Enterprises Pty Ltd's creditors.

By majority, the Court of Appeal found that the business sold was indeed the business of Kalls Enterprises Pty Ltd, and that the transaction was a transaction of that company. The court reasoned that the director had breached his fiduciary duties owed to both companies, and that the creditor had received the proceeds with sufficient knowledge of these breaches and the resulting prejudice to Kalls Enterprises Pty Ltd and its creditors. This knowledge was such that an honest and reasonable person would have suspected a risk of prejudice.

The appeal was allowed, and the orders of the trial judge were set aside. Judgment was entered for the second plaintiff (presumably the liquidator of Kalls Enterprises Pty Ltd) against the first defendant (the creditor) for $555,000 plus interest. The first defendant was ordered to pay the plaintiffs' costs of the appeal and the costs of the appeal relating to the repayment of a separate $5,000 payment were to be borne by the appellants. The cross-appeal was dismissed.